| Tue 6 Apr 2010, 10:34 | | BCD - BRC Diamondcore Ltd.- Consolidated financial statements for the period |
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BCD
BCD
BCD - BRC Diamondcore Ltd.- Consolidated financial statements for the period
ended December 31, 2009 and 2008
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 2009 AND
2008
Management`s Report
The consolidated financial statements, the notes thereto and other financial
information contained in the Management`s Discussion and Analysis have been
prepared in accordance with Canadian generally accepted accounting principles
and are the responsibility of the management of BRC DiamondCore Ltd. (the
"Company"). The financial information presented elsewhere in the Management`s
Discussion and Analysis is consistent with the data that is contained in the
consolidated financial statements. The consolidated financial statements, where
necessary, include amounts which are based on the best estimates and judgments
of management.
In order to discharge management`s responsibility for the integrity of the
financial statements, the Company maintains a system of internal controls.
These controls are designed to provide reasonable assurance that the Company`s
assets are safeguarded, transactions are executed and recorded in accordance
with management`s authorization, proper records are maintained and relevant and
reliable information is produced. These controls include maintaining quality
standards in hiring and training of employees, policies and procedures manuals,
a corporate code of conduct and ensuring that there is proper accountability for
performance within appropriate and well-defined areas of responsibility. The
system of internal controls is further supported by a compliance function, which
is designed to ensure that we and our employees comply with securities
legislation and conflict of interest rules.
The Board of Directors is responsible for overseeing management`s performance of
its responsibilities for financial reporting and internal control.
The Audit Committee, which is composed of non-executive directors, meets with
management as needed as well as the external auditors to ensure that management
is properly fulfilling its financial reporting responsibilities to the Directors
who approve the consolidated financial statements. The external auditors have
full and unrestricted access to the Audit Committee to discuss the scope of
their audits, the adequacy of the system of internal controls and review
reporting issues.
The consolidated financial statements for the year ended December 31, 2009 have
been audited by Deloitte & Touche LLP, Chartered Accountants and Licensed Public
Accountants, in accordance with Canadian generally accepted auditing standards.
(Signed) "Michiel C.J. de Wit"
Michiel C.J. de Wit, President
(Signed) "Brian P. Scallan"
Brian P. Scallan, Vice President, Finance
March 31, 2010
Auditors` Report
To the Shareholders of
BRC DiamondCore Ltd.
We have audited the consolidated balance sheets of BRC DiamondCore Ltd. (the
"Company") as at December 31, 2009 and 2008 and the consolidated statements of
operations and deficit, cash flows and comprehensive loss for the years then
ended. These consolidated financial statements are the responsibility of the
Company`s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2009
and 2008 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Deloitte & Touche LLP
Chartered Accountants
Licensed Public Accountants
March 31, 2010
Consolidated Balance Sheets
(expressed in Canadian dollars)
As at December 31, 2008
2009
$ $
Assets
Current assets
Cash 664,495 144,816
Prepaid expenses and other 163,175 321,587
assets
Inventory (Notes 4 and 5) - -
827,670 466,403
Non-current
Restricted cash (Note 4) - -
Mineral properties and deferred 5,808,835 5,563,254
exploration expenditures (Note
10)
Capital assets (Note 11) 141,794 502,270
Assets of discontinued - 12,580,397
operations (Note 4)
5,950,629 18,645,921
6,778,299 19,112,324
Liabilities
Current liabilities
Accounts payable and accrued 1,027,172 3,212,304
liabilities (Note 8)
Due to related parties (Note 6) 377,884 760,210
Other liabilities - -
Debt (Note 7) - 6,172,317
1,405,056 10,144,831
Non-current
Future tax liability 57,030 -
Asset retirement obligations - -
(Notes 4 and 9)
Long term lease (Notes 4 and 8) - -
Liabilities of discontinued - 6,402,259
operations (Note 4)
57,030 6,402,259
Going concern (Note 1)
Commitments, contingencies and
guarantees (Note 14)
Shareholders` equity
Capital stock (Note 12) 115,457,876 105,815,141
Contributed surplus (Notes 12(b) 7,700,518 6,934,641
and (e))
Black economic empowerment interest - 1,076,123
(Note 4)
Accumulated Deficit (117,842,181) (108,890,567)
Accumulated other comprehensive - (2,370,104)
loss (Note 12(f))
5,316,213 2,565,234
6,778,299 19,112,324
The accompanying notes are an integral part of these financial statements
Approved by the Board
(Signed) "Michiel C.J. de Wit"
Michiel C.J. de Wit, President
(Signed) "Brian P. Scallan"
Brian P. Scallan, Vice President, Finance
Consolidated Statements of Operations and Deficit
(expressed in Canadian dollars)
Years ended December 31, 2008
2009
Expenses
Consulting fees $ $
(135,938) (598,425)
Depreciation - -
Professional fees (344,888) (488,849)
General and administrative (120,488) (1,728,389)
Stock-based compensation (Note (555,520) (352,000)
12(b))
Foreign exchange gain realized - 15,479
Foreign exchange gain 67,923 821,423
unrealized
Bad debt expense (342,248) -
(1,431,159) (2,330,761)
Interest income - 34
Interest expense (166,477) (6,754)
Impairment of mineral properties - (16,788,478)
and capital assets (Notes 10 and
11)
Impairment of goodwill - (54,558,329)
Loss from continuing operations (1,597,636) (73,684,288)
before income taxes
Income taxes (Note 13) (57,030) -
Loss from continuing operations (1,654,666) -
after income taxes
Loss from discontinued operations (7,296,948) (29,317,361)
(Note 4)
Net loss for the year (8,951,614) (103,001,649)
Accumulated Deficit, beginning of (108,890,567) (5,888,918)
the year
Net loss for the year (8,951,614) (103,001,649)
Accumulated Deficit, end of the $ $
year (117,842,181) (108,890,567)
Basic and diluted loss per share $ $
from continuing operations (0.05) (3.00)
Basic and diluted loss per share $ $
(0.27) (4.20)
Weighted average number of common 32,683,251 24,546,305
shares outstanding
Going Concern (Note 1)
The accompanying notes are an integral part of these financial statements
Consolidated Statements of Cash Flows
(expressed in Canadian dollars)
Year ended Year ended
December 31, December 31,
2009 2008
$ $
Operating activities
Net loss from continuing (1,654,666) (70,321,022)
operations for the year
Items not affecting cash
Interest expense 165,674 -
Stock-based compensation 555,520 1,333,571
Impairment of long term assets - 16,788,478
Provision for taxes 57,030 -
Impairment of goodwill - 54,558,329
(876,442) 2,359,356
Net change in non-cash working
capital
Prepaid expenses and other 55,403 2,291,134
assets
Accounts payable and accrued 1,455,719 1,536,344
liabilities
Inventory - (9,905)
Cash provided by continuing 634,680 6,176,929
operations
Cash used in discontinued (2,469,357) (6,255,153)
operations
Cash provided by operating (1,834,677) (78,224)
activities
Investing activities
Capital asset disposals 445,961 -
Capital asset purchases - (167,615)
Mineral properties and (800,961) (6,814,810)
deferred exploration
expenditures
Funds received for deferred 555,379 -
exploration expenditures
(Note 18)
Cash used in investing activities 200,379 (6,982,425)
of continuing operations
Cash provided by investing 1,121,439 2,652,471
activities of discontinued
operations
Cash provided by investing 1,321,818 (4,329,954)
activities
Financing activities
Issue of common shares and 979,269 525,000
warrants (Note 12)
Increase in interest bearing - 2,500,023
liabilities (Notes 7 and 8)
Cash provided by financing 979,269 3,025,023
activities from continuing
operations
Cash provided by financing - 649,395
activities from discontinued
operations
Cash provided from financing 979,269 3,674,418
activities
Increase(decrease) in cash 466,410 (733,760)
Cash - beginning of the year 198,085 931,845
Cash - end of the year 664,495 198,085
Supplemental Information
Interest paid - 48,015
Income taxes paid - 128,493
Going Concern (Note 1)
Depreciation of capital assets of $172,121 was capitalized to mineral properties
in 2009 (2008 - $2,604,300).
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Comprehensive Loss
(expressed in Canadian dollars)
Comprehensive Loss Year ended
Year ended December 31,
December 31, 2008
2009
$ $
Net loss (8,951,614) (103,001,649)
Unrealized foreign currency gain 2,370,104 (2,370,104)
(loss) on self-sustaining operation
Comprehensive loss (6,581,510) (105,371,753)
Headline earnings per share Year ended
calculation Year ended December 31,
December 31, 2008
2009
$ $
Basic loss (8,951,614) (103,001,649)
Impairment of goodwill - 54,558,329
Impairment of mineral and capital - 43 404 889
assets
Loss from discontinued operations 7,296,948
Headline loss from continuing (1,654,666) (5,038,431)
operations
Weighted average number of common 32,683,251 24,546,305
shares outstanding
Headline loss per share from (0.05) (0.21)
continuing operations
The accompanying notes are an integral part of these financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31,
2009 AND 2008
(amounts in Canadian dollars, unless otherwise specified)
Principal business activities and continuation of the business
The principal business of BRC DiamondCore Ltd. (the "Company") is the
acquisition and exploration of mineral properties in the Democratic Republic of
the Congo ("DRC"). In connection with the acquisition of Diamond Core Resources
Limited ("Diamond Core") as described in Note 3, the name of the Company was
changed from BRC Diamond Corporation to BRC DiamondCore Ltd.
For the financial years ended December 31, 2009 and 2008, only operations from
Canada and the DRC were included in the balance sheet and the statement of
operations as continuing operations and the South Africa operations are shown as
discontinued operations (see Notes 4 and 17).
These financial statements 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.
The Company has incurred a net loss of $8,951,614 in the current year (2008 -
$103,001,649). The Company`s accumulated deficit as at December 31, 2009 was
$117,842,181 (2008 - $108,890,567). The Company had a working capital deficit of
$577,386 as at December 31, 2009 and had a net increase in cash of $466,410 and
used net cash in operating activities of $1,834,677 during the year. 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.
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. Management is exploring all available options to secure additional
funding, including equity financing 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, or, alternatively, upon the Company`s ability to recover its
incurred costs through a disposition of its interests, all of which are
uncertain.
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 have cast significant doubt upon
the validity of the going concern assumption.
These financial statements do not include any additional adjustments to the
recoverability and classification of certain recorded asset amounts,
classification of certain liabilities and changes to the statement of operations
that might be necessary if the Company was unable to continue as a going
concern.
2. Significant accounting policies
Basis of consolidation
The Company`s consolidated financial statements as at December 31, 2009 include
its accounts and those of its wholly-owned subsidiary in the DRC, BRC
DiamondCore Congo SPRL. As at December 31, 2008, the Company`s financial
statements included its accounts and those of its subsidiaries, BRC Diamond
South Africa (Pty) Limited and BRC DiamondCore Congo SPRL, and up until July 3,
2009 the entities that had been acquired as part of the Diamond Core transaction
(see 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 (see Note 4) all of which were controlled through ownership of
majority voting interests. All inter-company balances and transactions 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 exploration stage, any revenues earned
reduced 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 have required
management to make significant estimates and assumptions in determining carrying
values include mineral properties, capital assets, asset retirement obligations,
future income taxes, goodwill and stock-based compensation.
Comprehensive loss, 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 carrying value approximates the fair value.
Measurement in subsequent periods depends on whether the financial instrument
has been classified as either loans and receivables, held-for-trading, held-to-
maturity, available-for-sale, or other liabilities. The classification depends
on the purpose for which the financial instruments were acquired, their
characteristics and/or management`s intent. Management determines the
classification of financial assets and financial liabilities at initial
recognition and, except in very limited circumstances, the classification is not
changed subsequent to initial recognition.
i) Loans and receivables
Loans and receivables are initially recognized at fair value, including
direct and incremental transaction costs, and are subsequently measured at
amortized cost, using the effective interest method.
ii) Held-for-trading
Financial assets and financial liabilities that are purchased and incurred
with the intention of generating income in the near term, are classified as
held-for-trading. Financial instruments included in this category are
initially recognized at fair value and transaction costs are taken directly
to earnings along with gains and losses arising from changes in fair value.
Comprehensive loss, financial instruments, hedges and equity (continued)
iii) Other liabilities
Financial liabilities, including short-term debt and accounts payable and
accrued liabilities, are classified as "other liabilities". Other
liabilities are initially recognized at fair value and are subsequently
measured at amortized cost using the effective interest method.
iv) Transaction costs
Transaction costs with respect to instruments not classified as held-for-
trading are recognized as an adjustment to the cost of the underlying
instruments and are recognized and amortized using the effective interest
method.
v) Comprehensive loss
Comprehensive loss is composed of the Company`s net loss and other
comprehensive loss. Other comprehensive loss 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 loss are disclosed in the consolidated statements of
comprehensive loss.
vi) Derivatives and hedge accounting
Derivative instruments, including embedded derivatives, are recorded at
fair value unless exempted from derivative treatment as normal purchase and
sale. All changes in their fair value are recorded in income unless cash
flow hedge accounting is used, in which case changes in fair value are
recorded in other comprehensive income. The Company does not currently
apply hedge accounting or have derivative instruments.
The Company designated its financial instruments as follows:
Financial instruments Classification Measurement
Cash Held-for- Fair value
trading
Other assets Loans and Amortized cost
receivables
Accounts payable and Loans and Amortized cost
accrued liabilities receivables
Other liabilities Other Amortized cost
liabilities
Debt Other Amortized cost
liabilities
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 any diamonds
recovered from exploration activities is offset against exploration costs.
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 recorded representing the difference
between carrying value and fair value.
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 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 judgment balancing discount and growth
rates enables management to opine whether or not the goodwill balance has been
impaired. If the carrying amount of the reporting unit exceeds the fair value,
step two requires the fair value of the reporting unit to be allocated to the
underlying assets and liabilities of that reporting unit, resulting in an
implied fair value of goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
equal to the excess is recorded in income. The Company impaired the entire
amount of goodwill that arose on the acquisition of Diamond Core in 2008
(Note 3).
Impairment of long-lived assets
The Company reviews and evaluates the carrying value of its exploration
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.
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 summarized in Note 12(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 into common shares. 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 the plan is credited to share capital.
Restricted cash
As at December 31, 2009, restricted cash to the value of $nil (2008 prior to
reclassification to discontinued operations - $308,014) was held by various
financial institutions as security for guarantees the Company had provided to
the South African Department of Minerals and Energy Affairs 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 and warrants is anti-dilutive
(See Note 12(d)).
Foreign currency translation
These consolidated financial statements are presented in Canadian dollars. The
Company`s functional currency is the Canadian dollar.
Prior to July 3, 2009 (Note 4), self-sustaining foreign operations were
translated into Canadian dollars using the current-rate method. Under this
method, assets and liabilities were translated at the rate of exchange in effect
at the balance sheet date while revenue and expense items (including depletion
and amortization) were translated at the average rates of exchange prevailing
during the year. Exchange gains and losses that resulted from the translation
were deferred and disclosed as a component of "accumulated other comprehensive
income (loss)". The operations in South Africa were considered self-sustaining
and prior to their disposal their functional currency was the South African
rand.
Foreign currency translation (continued)
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.
Changes in accounting standards
a) Financial Instruments - Disclosures
In June 2009, the Canadian Institute of Chartered Accountants ("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. See Note 16 for disclosures.
b) 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 was 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 the Company`s financial assets or liabilities.
c) 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.
d) 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.
Future accounting standards
a) 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.
b) International Financial Reporting Standards
The CICA Accounting Standards Board ("AcSB") requires all Canadian publicly
accountable entities to adopt International Financial Reporting Standards
("IFRS") for years beginning on or after January 1, 2011. The Company`s first
mandatory filing under IFRS, which will be the first quarter of 2011, will
contain IFRS-compliant information on a comparative basis, as well as
reconciliations for that quarter and as at the January 1, 2010 transition date.
Although IFRS uses a conceptual framework similar to Canadian GAAP, there are
significant differences in recognition, measurement and disclosure. The Company
has developed a plan for IFRS convergence and has started the implementation
process. Detailed analysis of the differences between IFRS and the Company`s
accounting policies and assessments of the various alternatives for first time
adoption of IFRS are in progress. Training for key employees has begun and will
continue throughout the implementation. Due to anticipated changes in IFRS
prior to transition, it is currently not possible to fully determine the impact
to the consolidated financial results.
3. Acquisition of Diamond Core Resources Limited
In July 2007, the Company and Diamond Core Resources Limited ("Diamond Core"), a
South African diamond exploration company listed on the JSE Limited, announced
the 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 Company share for
every 24.5 Diamond Core ordinary shares held. On January 14, 2008, Diamond Core
shareholder approval was obtained, and court approval was obtained on January
22, 2008. On February 11, 2008, the Company acquired all of the outstanding
Diamond Core shares and, as the consideration for this acquisition, issued
Company shares 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.
Previously in July 2005, Diamond Core acquired all of the outstanding shares of
Samadi Resources SA (Pty) Ltd ("Samadi"). As consideration for this acquisition,
Diamond Core issued ordinary shares to Samadi`s shareholders.
The terms of the acquisition agreement (the "Samadi Agreement") entered into by
Diamond Core with the Samadi shareholders with respect to this acquisition
provided for the potential issuance of additional Diamond Core ordinary shares
should certain operating profits be reached from certain of the projects
acquired by Diamond Core pursuant to the acquisition.
In anticipation of the implementation of the scheme, the Company and Diamond
Core entered into an agreement (the "Samadi Amending Agreement") with the said
Samadi shareholders pursuant to which the Samadi shareholders would, if the
relevant profit thresholds are met, be entitled to receive common shares of the
Company in substitution for the Diamond Core ordinary shares, with the number of
common shares of the Company issuable to such shareholders adjusted to reflect
the exchange ratio applicable under the terms of the scheme. Accordingly, the
number of common shares of the Company issuable to the said Samadi shareholders
under the Samadi Amending Agreement, in the same circumstances as contemplated
in the Samadi Agreement, is a maximum of 1,434,502 shares. Since the outcome and
amount of the contingency cannot be determined without reasonable doubt, no
recognition has been made for this in these financial statements.
Also in connection with the acquisition by the Company of all of the outstanding
shares of Diamond Core, 15,133,190 stock options that had been issued to
employees of Diamond Core pursuant to The Diamond Core Resources Share Trust
Deed to acquire 15,133,190 ordinary shares in Diamond Core (the "Old Options")
were substituted with new stock options of the Company (the "Replacement
Options"), so as to allow holders of Old Options to acquire the number of common
shares of the Company that is calculated by dividing the number of ordinary
shares of Diamond Core that would otherwise have been issuable upon the exercise
of the Old Options by 24.5, rounded up to the nearest whole number of Company
shares, 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.
In connection with the acquisition of Diamond Core, 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
(the Company`s shares previously traded on the TSX Venture Exchange).
Allocation of purchase price
Based on the Company`s average closing price of $7.40 per share, calculated with
reference to the share price around July 5, 2007 (date of announcement), the
Company issued 12,089,678 common shares valued at $89,463,617 to Diamond Core
shareholders holding 296,218,483 Diamond Core ordinary shares outstanding on the
same date.
The acquisition had been accounted for using the purchase method of accounting
with the Company being identified as the acquirer and Diamond Core as the
acquiree. In accordance with the purchase method of accounting, assets and
liabilities acquired from Diamond Core were measured at their individual fair
values on the date of the acquisition and the difference between these fair
values of net assets acquired and the purchase price was recorded in the
consolidated balance sheet as goodwill.
The allocation of the purchase price to the assets and liabilities acquired as
presented in the 2008 consolidated financial statements was finalized in the
fourth quarter of 2008. The revisions to the results previously reported were
not material. Venmyn Rand (Proprietary) Limited ("Venmyn") performed the fair
values of certain mineral properties based upon the exchange rates, inflation
levels, diamond prices, expected resource levels, mine life and extraction
costs prevailing at that date.
The following table summarizes the components of the total purchase price and
net assets acquired. It reflects fair-value adjustments for identifiable assets
and liabilities acquired.
$`000
Issuance of 12,089,678 common shares 89,464
of the Company
Issuance of Replacement Options 2,477
Transaction costs 2,407
Purchase price 94,348
The allocation of the purchase price to the net assets acquired is as follows:
Cash 2,270
Issuance of Replacement Options 1,253
Inventories 192
Mineral rights 14,188
Property, plant and equipment 17,051
Deferred exploration costs 8,891
Trade and other payables (2,912)
Taxation
(126)
Asset retirement obligation
(1,017)
Net assets required 39,790
Goodwill 54,558
Fair value of net assets required 94,348
The consideration and transaction costs of $94,347,641 exceeded the carrying
value of the net assets acquired by $54,558,329 which had been recorded as
goodwill.
At December 31, 2008, the fair value of the South African reporting unit, based
on undiscounted projected cash flows, was less than the carrying value. As a
result, the Company recognized an impairment of the full amount of the Diamond
Core goodwill of $54,558,329. The decrease in the fair value was primarily due
to the decline in price per carat and general economic conditions.
4. Discontinued operations - Diamond Core
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 ("River Corporate
Finance"), which had been the exclusive adviser to Diamond Core on the
transaction involving the acquisition by the Company of Diamond Core (see Note
3). The liquidation application was based on a claim in respect of the balance
allegedly owing on a success fee of US$1million. Diamond Core disputed the claim
based on performance and counter claimed against River Corporate Finance.
An application for leave to appeal the liquidation order was lodged with the
Northern Cape High Court but this was denied by the Court in early 2010. A
petition that the appeal be heard by the Supreme Court of Appeal has also been
denied. Final liquidators were appointed.
Effective July 3, 2009, as a result of the liquidation order on July 3, 2009,
the Company ceased to consolidate Diamond Core`s financial statements into those
of the Company`s.
Effective September 30, 2009, the Company disposed of all of its shares in
Diamond Core for nominal consideration plus, if the offer of compromise referred
to below is approved by the court, the Company will receive cash proceeds of
US$500,000. The terms of the sale contemplated that the purchaser enter into an
offer of compromise with the creditors of Diamond Core. The Company understands
that the purchaser is in discussions with the creditors of Diamond Core to reach
a settlement.
The Company has recorded the loss on disposition of Diamond Core as a component
of discontinued operations in these consolidated financial statements.
The following tables summarize the statements of discontinued operations with
respect to the disposition of Diamond Core as well as the assets and liabilities
held for disposal:
Discontinued Operations 2009 2008
(`000s) (`000s)
Revenue $ $
- 454
Expenses (5,483) (29,771)
Loss from discontinued (5,483) (29,317)
operations
Loss on sale (1,814) -
Net loss from discontinued $ $
operations (7,297) (29,317)
Assets and liabilities part September December
of disposal group 30, 2009 31, 2008
(`000s) (`000s)
Cash $ $
306 53
Prepaid expenses and other 71 241
assets
Inventory 139 122
Restricted cash 308
Mineral properties and 3,562 3,512
deferred exploration costs
Capital assets 6,461 8,345
Asset retirement obligations (2,421) (2,132)
Accounts payable and accrued (6,304) (4,271)
liabilities
Net assets of discontinued $ $
operations 1,814 6,178
The loss from discontinued operations is not final and is dependent on the
outcome of the possible offer of compromise referred to above.
5. Inventory
As at As at
December December
31, 2009 31, 2008
Consumables $ $
- 121,987
The entire inventory was sold as part of the discontinued operations
(see Note 4).
6. Related party transactions
The following are balances and transactions entered into by the Company with
related parties that are not disclosed elsewhere in the financial statements:
As at
As at December
December 31, 2008
31, 2009
$ $
Balances payable
Macleod Dixon LLP 49,113 744,641
D.K. Madilo 48,000 -
A.T. Kondrat 29,620 -
SFW Village 247,229 -
Banro Corporation 3,922 4,569
Scallan Project Facilitation - 13,200
(Pty) Ltd.
Sterling Portfolio Securities - 11,000
Inc.
377,884 773,410
For the
For the year
year ended
ended December
December 31, 2008
31, 2009
$ $
Transactions
Macleod Dixon LLP (a) 184,996 299,954
SFW Village (b) 247,229 99,996
AT Kondrat (c) 99,999 99,999
DK Madilo (d) 48,000 48,000
Scallan Project Facilitation - 58,091
(Pty) Ltd. (e)
Sterling Portfolio Securities 168,621 11,000
Inc. (f)
Banro Corporation (g) 6,337,991 -
7,086,836 617,040
a) During the year ended December 31, 2009, legal fees and related costs of
$184,996 (December 31, 2008 - $299,954) 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. In November 2009, as part of a debt settlement
transaction, Macleod Dixon LLP received 3,687,375 common shares of the Company
to settle $737,475 of indebtedness owed by the Company to Macleod Dixon LLP.
See Note 12.
b) Represents consulting fees for Mr. Village ($99,999) as well as a short-
term loan advanced to the Company by Mr. Village in 2009. Mr. Village is a
director of the Company and has been an officer of the Company since February
2008.
c) Represents consulting fees for Mr. Kondrat who is a non-executive director
of the Company.
d) Represents consulting fees for Mr. Madilo, who is currently an officer of
the Company and was a director of the Company until February 2008.
e) Represents consulting fees in respect of services to the Company prior to
Mr. Scallan entering into an employment contract with the Company. Mr. Scallan
is now an officer and a director of the Company and is the sole shareholder of
Scallan Project Facilitation (Pty) Ltd.
f) During 2009 and 2008, 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.
g) Banro Corporation ("Banro") owns 35,433,987 common shares of the Company,
representing a 39.63% interest in the Company. See Notes 7 and 12 for
information relating to the loan from Banro to the Company in 2009 and the debt
settlement transaction entered into between Banro and the Company in 2009.
All amounts due to related parties 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.
7. Debt
The Company had a loan facility established with RBC Dominion Securities Inc.
("RBC"), a Canadian financial institution which bore interest at prime rate plus
1% per annum. The effective interest rate for the twelve months ended December
31, 2009 was 2.68% (December 31, 2008 - 5.75%). At December 31, 2009, the
balance of this short term debt was $nil (December 31, 2008 - $6,172,317),
including accrued interest of $nil (December 31, 2008 - $307,872). This loan
facility had been utilized to fund exploration activities in the DRC and all
interest was capitalized to exploration cost.
In September 2009, Banro, the Company`s significant shareholder, who had
previously guaranteed the loan facility with RBC, advanced to the Company a loan
in the amount of $6,337,991, which was used to repay in full all of the
Company`s outstanding indebtedness to RBC.
In November 2009, the Company entered into a debt settlement agreement with
Banro pursuant to which the Company issued to Banro 31,689,955 common shares of
the Company to settle $6,337,991 of indebtedness owed by the Company to Banro
(see Note 12).
8. Lease liabilities
As at
As at December
December 31, 2008
31, 2009
$ $
Total lease liability - 649,396
Less: Current portion included in
accounts payable and accrued
liabilities- - (149,912)
- 499,484
The lease liabilities were discharged as part of the disposition of the
discontinued operations (see Note 4).
9. Asset retirement obligations
The provision for the site closure and reclamation costs related to the
Silverstreams, Paardeberg East and De Kalk projects in South Africa. These
asset retirement obligations ceased to be applicable to the Company upon the
disposition of Diamond Core (see Note 4).
As at
As at December
December 31, 2008
31, 2009
$ $
Balance at beginning of year 2,131,648 -
Foreign exchange 289,709 -
Reclamation obligation recognized - 2,131,648
Disposal of South Africa
operations (Note 4) (2,421,357 -
)
Balance at end of year - 2,131,648
10. Mineral properties
Effective September 30, 2009, the Company disposed of its entire shareholding in
Diamond Core, which held the Company`s South African diamond projects
(see Note 4).
Mineral properties in the DRC comprise eleven exploration permits in the
Tshikapa area in the Kasai province of the DRC, and 18 exploration permits north
of Bafwasende in the Orientale province of the DRC.
In order to focus the exploration program in the DRC on the most promising
areas, a number of exploration licenses in the DRC were relinquished during
2009. One new application was lodged during the 2009.
During the first quarter of 2009, the following exploration permits in the DRC
were relinquished: Acacia (5), the Company (4), Candore (5), BCM (1), Caspian
Oil and Gas (9), Kwango Mines (3), Coexco (44). In addition, during the fourth
quarter of 2009 the option agreements related to DRC exploration permits held by
Group Abba (1) and King`s Mine (1) were cancelled. The Company will keep its
focus on the following DRC exploration permits which are held by the Company
directly or by partners through option agreements: Acacia (6), Rio Tinto (14),
Bas Congo Exploration (2), the Company (3), Caspian Oil and Gas (2) and
Investors Equity Limited (2). No DRC exploration permits were relinquished in
the second and third quarters of 2009.
The Company has incurred deferred exploration expenditures and mineral property
costs, (net of write offs of $16,788,479) in the DRC and in South Africa as at
December 31, 2009 as follows:
Group
Year ended Cumulative
Year December from
ended 31, 2008 inception
December to 2009
31, 2009
$ $ $
Mineral property costs
DRC - - 2,713
South Africa - 3,511,886 -
Deferred exploration
expenditures
DRC 245,582 (8,625,241) 5,806,122
South Africa - - -
Total mineral 5,808,835
properties and deferred
exploration 245,582 (5,113,355)
expenditures
DRC
Year ended Cumulative
Year ended December 31, from
December 2008 inception
31, 2009 to 2009
$ $ $
Mineral property
costs
Claims and - - 2,713
staking
Total mineral - - 2,713
property costs
Deferred exploration
expenditures
Funds received (555,379) - (555,379)
from Rio Tinto
Administrative and 275,308 1,718,882 4,821,317
office support
Depreciation 172,121 259,011 713,750
Drilling 18,755 90,365 505,112
Field camp 102,305 1,396,864 2,924,773
expenses
Geochemistry - - 329,145
Geology - Contract - - 1,600,765
geologists
Geophysics - 267,775 2,369,677
Option fees - - 308,443
Permits and 19,057 522,905 1,867,724
surface taxes
Professional fees 42,774 461,605 656,708
Remote sensing and - - 46,729
surveying
Stock based 210,357 945,404 2,198,994
compensation
Transport cost and 14,332 877,742 3,238,206
helicopter
Profit on sale of (54,048) - (54,048)
assets
Unrealized foreign - 1,622,685 1,622,685
exchange difference
Write off - (16,788,479) (16,788,479
)
Total deferred (8,625,241) 5,806,122
exploration 245,582
expenditures
Total mineral 5,808,835
properties and 245,582 (8,625,241)
deferred exploration
expenditures
South Africa
As at December 31, 2009, the Company recognized asset impairments totaling $nil.
In 2008 the Company had recognized $19,820,064 consisting of impairments to
mineral properties ($9,640,589) and deferred exploration costs ($10,179,475)
where the carrying value of certain assets exceeded their estimated fair value.
Year ended Cumulative
Year ended December from
December 31, 2008 inception
31, 2009 to 2009
$ $ $
Mineral property
costs
Acquisition of - 13,152,475 13,152,475
Diamond Core
Unrealized 50,483 - 50,483
foreign exchange
difference
Write off (3,562,369) (9,640,589) (13,202,958
)
Total mineral (3,511,886) 3,511,886 -
property costs
Deferred exploration
expenditures
Acquisition of - 6,505,442 6,505,442
Diamond Core
Administrative and - 2,002,163 2,002,163
office support
Depreciation - 2,345,289 2,345,289
Field camp expenses - 6,537,896 6,537,896
Geology - Contract - 99,592 99,592
geologists
Geophysics - 26,285 26,285
Insurance - 112,379 112,379
Inventory losses - (20,508) (20,508)
Permits and surface - 5,262 5,262
taxes
Professional fees - 51,159 51,159
Reconciliation - 1,669,526 1,669,526
Security - 1,771,455 1,771,455
Surveying - 66,383 66,383
Transport cost - 148,666 148,666
Unrealized foreign - (2,666,340) (2,666,340)
exchange difference
Total deferred - 18,654,649
exploration - (8,475,174) 18,654,649
expenditure (8,475,174)
Net proceeds on
diamond sales
Write off - (10,179,475
(10,179,475 )
)
Total mineral - -
properties and -
deferred exploration
expenditures
The mineral properties in South Africa were disposed of as part of the
discontinued operations (see Note 4).
11. Capital assets
As at
Dec
31,
2009
Cost Accumu- Impair-
lated ment Net
Amorti- Book
zation Value
$ $ $ $
Computer equipment 28,658 19,478 - 9,180
Exploration and 316,476 216,384 - 100,09
mining assets 2
Furniture and 18,106 14,200 - 3,906
office equipment
Vehicles 254,436 225,820 - 28,616
617,676 475,882 - 141,79
4
As at Dec
31, 2008
Cost Accumu- Impair-
lated ment Net Book
Amorti- Value
zation
$ $ $ $
Computer 293,707 102,546 - 191,161
equipment
Earthmoving 5,753,329 1,397,764 644,712 3,710,853
equipment
Exploration 457,912 195,604 35,378 226,930
and mining
assets
Furniture and 100,052 16,935 9,715 73,402
office
equipment
Land and 539,260 42,761 - 496,499
buildings
Leasehold 226,592 225,639 - 953
improvements
Processing 11,180,48 1,247,745 6,105,476 3,827,261
plant 2
Vehicles 711,451 390,490 1,065 319,896
19,262,78 3,619,484 6,796,346 8,846,955
5
During 2009, $172,171 of depreciation was included in mineral properties and
deferred exploration expenditures (see Note 10) (2008 - $2,604,300).
During 2008, the Company recognized asset impairments totalling $6,796,346
related to capital assets where the carrying value of certain assets exceeded
their estimated fair value.
12. Capital stock
a)Share capital
Number of Amount $
Shares
Balance, December 31, 2007 13,651,632 15,826,524
Shares issued for the 12,089,678 89,463,617
acquisition of Diamond Core
Shares issued for the private 350,000 525,000
placement
Outstanding at December 31, 26,091,310 105,815,141
2008
Shares issued for the private 20,000,000 1,000,000
placement
Shares issued for the debt 43,317,330 8,663,466
settlement transactions
Financing costs - (20,731)
Outstanding at December 31, 89,408,640 115,457,876
2009
As at December 31, 2009, the authorized share capital of the Company is
comprised of an unlimited number of common shares.
In November 2009, the Company completed debt settlement transactions with
certain of its creditors pursuant to which such creditors accepted common shares
of the Company, issued from treasury by the Company, in satisfaction of
indebtedness owed to them by the Company (the "Debt Settlements"). The total
number of common shares that were issued by the Company to the creditors under
the Debt Settlements was 43,317,330 shares (the "Debt Shares"), and the total
amount of Company debt settled by such share issuances was $8,663,466.
One of the creditors involved in the Debt Settlements was Banro, which held
3,744,032 (or 14.35%) of the outstanding common shares of the Company prior to
the Debt Settlements. 31,689,955 of the Debt Shares were issued to Banro
pursuant to its debt settlement agreement, such that Banro currently owns
35,433,987 (or 39.63%) of the outstanding common shares of the Company.
The Company also in November 2009 carried out a non-brokered private placement
of 20,000,000 units of the Company (the "Units") at a price of $0.05 per Unit
for proceeds to the Company of $1,000,000. Each Unit is 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. Directors of the Company purchased a total of
12,250,000 of the Units issued under this financing.
On February 11, 2008, the Company acquired all of the outstanding shares of
Diamond Core on the basis of 1 Company share for every 24.5 Diamond Core shares
resulting in the issuance by the Company of a total of 12,089,678 common shares.
This acquisition was effected by way of a scheme of arrangement under the laws
of the Republic of South Africa. See note 3.
In July 2008, the Company completed a non-brokered private placement of 350,000
common shares of the Company at a price of $1.50 per share resulting in
aggregate gross proceeds of $525,000.
b) Stock option plan
The Company has a stock option plan under which non-transferable options to
purchase common shares of the Company may be granted by the Board of Directors
to any director, officer, employee or consultant of the Company or any
subsidiary of the Company. This stock option plan contains provisions providing
that the term of an option may not be longer than five years and the exercise
price of an option shall not be lower than the last closing price of the
Company`s shares on the Toronto Stock Exchange prior to the date the stock
option is granted. Unless the Board at any time makes a specific determination
otherwise, a stock option and all rights to purchase Company shares pursuant
thereto shall expire and terminate immediately upon the optionee who holds such
stock option ceasing to be at least one of a director, officer or employee of or
consultant to the Company or a subsidiary of the Company, as the case may be.
One-quarter (1/4) of the stock options granted pursuant to the stock option plan
vest immediately on their date of grant and another one-quarter of such stock
options vest on each of the 6-month, 12-month and 18-month anniversaries of the
grant date.
As at December 31, 2009, the Company had outstanding under the stock option plan
stock options to acquire 2,941,400 (December 31, 2008 - 3,876,400) common shares
of the Company at a weighted-average price of $2.15 (December 31, 2008 - $2.16)
per share.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:
Date of
grant
Number of Options
outstanding at exercised, Number
12/31/2008 expired or outstanding at
cancelled 12/31/09
04/14/04 210,000 210,000 -
10/06/04 50,000 50,000 -
03/04/05 16,400 - 16,400
03/18/05 225,000 - 225,000
04/29/05 225,000 - 225,000
06/29/06 200,000 - 200,000
04/09/07 300,000 - 300,000
08/03/07 230,000 50,000 180,000
08/28/08 2,420,000 625,000 1,795,000
3,876,400 935,000 2,941,400
Date of Options
grant Exercisabl
e at
12/31/09
Fair value Expiry
Exercise date of date
price grant
04/14/04 - $1.50 $1.24 04/14/09
10/06/04 - $2.00 $1.73 10/06/2009
03/04/05 16,400 $2.10 $1.78 03/04/2010
03/18/05 225,000 $2.50 $1.76 03/18/2010
04/29/05 225,000 $2.50 $2.14 04/29/2010
06/29/06 200,000 $3.75 $2.16 06/29/2011
04/09/07 300,000 $5.50 $3.25 04/09/2012
08/03/07 180,000 $8.00 $2.85 08/03/2012
08/28/08 1,346,250 $1.05 $0.77 08/28/2013
2,492,650
During 2009, the Company recognized in the statement of operations as stock-
based compensation expense $555,520 (2008 - $611,200) representing the fair
value of stock options previously granted to employees, directors and officers
under the Company`s stock option plan. An amount of $210,357 was capitalized as
deferred exploration expenditures (2008 - $1,089,250). These amounts were
credited accordingly to contributed surplus in the balance sheet.
12. Capital stock
b) Stock option plan (continued)
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: 3.075%
ii) expected volatility: 95%
iii) expected life: 5 years
iv) expected dividends: $Nil
c) Replacement options
In connection with the acquisition by the Company of all of the outstanding
shares of Diamond Core (see note 3), 15,133,190 stock options that had been
issued to employees of Diamond Core pursuant to The Diamond Core Resources Share
Trust Deed to acquire 15,133,190 ordinary shares in Diamond Core (the "Old
Options") were substituted with new stock options of the Company (the
"Replacement Options"), so as to allow holders of Old Options to acquire the
number of Company common shares 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
Company shares, 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 December 31, 2009, 460,968 of
these options had been cancelled.
d) Loss per share
The loss per share figures for 2009 and 2008 are calculated using the weighted
average number of shares outstanding during the respective accounting periods
amounting to 32,683,251 and 24,546,305 common shares, respectively. The
calculations of basic and diluted loss per share amounts are identical. All
common share options and warrants were excluded from the calculation of diluted
loss per share as their effect would have been antidilutive.
e) Contributed surplus
As at
As at December
December 31, 2008
31, 2009
$ $
Balance, beginning of the year 6,934,641 2,757,191
Options expensed 765,877 1,700,450
Options forfeited - 2,477,000
Balance, end of year 7,700,518 6,934,641
f) Accumulated other comprehensive loss
As at
As at December
December 31, 2008
31, 2009
$ $
Balance, beginning of the year (2,370,104 -
)
Unrealized foreign currency
gain 2,370,104 (2,370,104
(loss) on self sustaining )
foreign
operation in South Africa
(Note 4)
Balance, end of year - (2,370,104
)
13. Income taxes
The provision for income taxes is at an effective tax rate which differs from
the basic corporate tax rate for the following reasons:
Year ended December 31, 2009 2008
% %
Canadian basic Federal and
Provincial income tax rates 33.0 33.5
Recovery of income taxes $ $
based on statutory rates
(527,220) (34,505,552
)
Foreign rate differential - 2,291,000
Difference in future tax 349,413 -
rates
Stock option expense 183,322 565,253
Impairment of goodwill - 18,277,040
Other non deductible - 398,156
expenses
Impairment of assets - 12,489,138
Unrecognized benefit of 260,530 484,965
losses
Change in valuation (209,015) -
allowance
Income tax expense 57,030 -
The following information summarizes the principal temporary differences, unused
tax losses, and related future tax effect:
As at
As at December 31,
December 31, 2008
2009
$ $
Future tax assets
Non-capital losses 1,534,184 10,792,789
Rehabilitation provision - 596,861
Mineral properties 5,164,409 7,051,793
Net capital losses 11,613,090 100,263
Other expenses and 74,603 159,201
financing costs
Capital assets 56,280 1,968,262
Gross future tax asset 18,442,566 20,669,169
Valuation allowance (18,442,566) (20,669,169)
Net future tax asset - -
Future tax liability
Harmonization of Ontario
corporate income tax with (57,030) -
Federal
Net future income tax (57,030) -
liability
The Company has not recognized the benefit of these losses in the financial
statements. The Company concluded that the criteria of more likely than not that
the benefits of the future income tax assets would be realized prior to their
expiration had not been met.
As at December 31, 2009, the Company has available Canadian non-capital losses
of approximately $6,135,000 If not utilized, these losses will expire as
follows:
$
2010 395,000
2011 355,000
2015 615,000
2026 480,000
2027 1,818,000
2028 1,209,000
2029 1,263,000
6,135,000
14. Commitments, contingencies and guarantees
The Company is committed to the payment of the surface fees and taxes. For
2010, 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 permits in
good standing.
In addition, as at December 31, 2009, the Company had a bank guarantee of
US$4,373 (2008 - $4,373) with respect to expenses related to a mitigation and
rehabilitation plan required from holders of exploration permits under the DRC
Mining Code.
Six of the exploration permits comprising part of the Company`s Tshikapa project
in the DRC are held through an option agreement with Acacia sprl. Acacia sprl
has advised the Company of its wish to modify the option agreement. The Company
continues its discussions with Acacia sprl and is optimistic of reaching an
agreement that is satisfactory for both parties.
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.
Labour disputes
At year end the Company was in dispute with two of its previous directors. One
of those individuals applied for a summary judgment in the High Court; the
application was dismissed and the Company was granted leave to defend his claim.
The matter will now proceed in the High Court on an opposed basis. The other
individual has referred two disputes to the Commission for Conciliation
Mediation and Arbitration in Johannesburg and an action to the High Court in
that same jurisdiction. He elected to withdraw an application for summary
judgment.
The Company believes that these claims are without merit and is vigorously
defending these actions.
15. Capital management
The Company manages its cash, common shares, warrants and stock options as
capital.
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
year ended December 31, 2009.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
16. Financial instruments and risk management
a) Fair value of financial instruments
The Company has classified financial instruments as follows:
As at
As at December
December 31, 2008
31, 2009
$ $
Financial assets
Held-for-trading, measured at fair
value
Cash 664,495 144,816
Restricted Cash - -
Loans and receivables, measured at
amortized cost
Prepaid expenses and other assets 163,175 321,587
Financial liabilities
Other liabilities, measured at
amortized cost
Accounts payable and accrued 1,027,17 3,212,30
liabilities 2 4
Due to related parties 377,884 760,210
Debt - 6,172,31
7
b) Fair value of financial instruments
The balance sheet carrying amounts for cash, prepaid expenses and other assets,
accounts payable and accrued 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.
The fair value hierarchy established by CICA Section 3862 "Financial Instruments
- Disclosures" establishes three levels to classify the inputs to valuation
techniques used to measure fair value.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices for identical assets or liabilities in
active markets.
Level 2 - Inputs other than quoted prices included with Level 1 that are
observable for the asset or liability, either directly or indirectly, including:
* Quoted prices for similar assets/liabilities in active markets;
* Quoted prices for identical or similar assets in non-active markets (few
transactions, limited information, non-current prices, high variability
over time);
* Inputs other than quoted prices that are observable for the asset/liability
(e.g. interest rates, yield curves, volatilities, default rates, etc.); and
* Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market
data.
The Company`s assets are measured as follows:
Cash - The carrying value of cash approximates fair value as maturities are less
than three months.
Fair Value Measurements at Reporting Date Using:
Level 2 Level 3
December 31, Level 1
2009
Assets:
$ -- -
Cash 664,495
c) 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.
d) 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.
e) 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, 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, existing credit facilities, leases, and debt and
equity markets.
Because the duration of the current general economic uncertainty and its
detrimental effect on credit and capital markets is unknown, it is difficult to
determine the long-term impact on the Company.
In light of current market conditions, the Company has initiated a series of
measures to bring its spending in line with the projected cash flows from its
operations and available project specific facilities in order to preserve its
balance sheet and maintain its liquidity position.
As at December 31, 2009, these consolidated financial statements have been
prepared in accordance with Canadian GAAP applicable to a going concern (see
Note 1).
f) 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 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 year ended December 31, 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 $255,680 decrease and increase in the value
of mineral properties and deferred exploration expenditures in the DRC.
g) 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
h) 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.
i) 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 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 mineral properties. The Company
relies on title opinions by legal counsel who base such opinions on the laws of
countries in which the Company operates.
j) 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.
17. Segmented information
The Company`s reportable segments have been determined at the level where
decisions are made on the allocation of resources and capital, and where
internal financial statements are available, which is essentially the different
geographic regions. The South African segment comprised the exploration,
development, mining, processing and marketing of its diamonds in South Africa.
The DRC segment represents the Company`s exploration activities in the DRC. The
Canadian segment comprises its general corporate activities.
Prior to their disposal, as the South African operations were in the development
stage, all the direct costs incurred for projects that initialised bulk sampling
activities were capitalized, and revenue earned from the sale of diamonds
reduced the deferred capitalized costs. For the DRC, its exploration costs are
capitalized. Canadian corporate costs are expensed to the statement of
operations and deficit. Further discrete segment information is provided in Note
10.
The Company carries on business in the following geographic areas:
As at December 31, 2009 Group
Canada South
DRC Africa
$ $ $ $
Net operating loss -
(1,431,159) (1,431,159) -
Interest income -
- - -
Interest expense -
(166,477) (166,477) -
Income tax expense -
(57,030) (57,030) -
Loss from continuing -
operations after tax - -
(1,654,666) (1,654,666)
-
Loss from discontinued -
operations - (7,296,9
(7,296,948) 48)
- -
Net loss -
8,951,614 8,951,614 -
Segment assets 107,692
6,778,299 601,793 6,068,81
4
Mineral properties and
capital assets -
5,950,629 5,950,62
- 9
Segment liabilities 556,697 -
1,462,086 905,389
As at December 31, 2008 Group
Canada South
DRC Africa
$ $ $ $
Net operating loss 73,677,568 -
60,018,696 13,658,8
72
Interest income -
(34) (34) -
Interest expense -
6,754 6,754 -
Loss from continuing
operations after tax 73,684,288 13,658,8 -
60,025,416 72
Loss from discontinued
operations 29,317,3
29,317,361 - 61
-
Net loss -
103,001,649 60,025,416 13,658,8
72
Segment assets -
6,531,927 177,766 6,354,16
1
Mineral properties
and capital assets -
6,065,524 6,065,52
- 4
Assets of discontinued
operations 12,580,3
12,580,397 - 97
-
Segment liabilities 139,561 -
10,144,831 10,005,270
Liabilities of discontinued
operations 6,402,25
6,402,259 - 9
-
18. Subsequent event
In January 2010, the Company announced that it had entered into an agreement
(the "JV Agreement") with Rio Tinto Minerals Development Limited ("Rio Tinto")
for the exploration for iron ore in areas within the Province Orientale, in the
DRC. These areas total approximately 4,550 square kilometres and are covered by
exploration permits (the "Permits") which had been controlled by the Company.
Under the JV Agreement, which is in the form of a shareholders` agreement, the
Company owns 25% and Rio Tinto 75% of the share capital of a holding company
which owns a DRC registered company that holds the Permits.
The Company has received total proceeds of $555,379 from Rio Tinto in order to
assist with future expenditures towards the iron ore exploration.
Under the JV Agreement, all iron ore exploration up to and including the
completion of any pre-feasibility study (as required to obtain an exploitation
permit) will be funded by Rio Tinto. The Company will not suffer any dilution
during this period, such that the Company`s 25% interest in the properties will
be maintained during this period. The exploration will be carried out by Rio
Tinto (or one of its affiliates) as the operator.
After the completion of the pre-feasibility study, funding for the project will
be provided by Rio Tinto and the Company based on their proportionate respective
interests in the said holding company.
JOHANNESBURG
06 April 2010
Sponsor
Arcay Moela Sponsors (Proprietary) Limited
Date: 06/04/2010 10:34:01 Produced by the JSE SENS Department.
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