| Mon 31 May 2010, 17:00 | | RDI - Rockwell Diamonds - Audited consolidated financial statements nine months |
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RDI
RDI
RDI - Rockwell Diamonds - Audited consolidated financial statements nine months
ended February 28, 2009 and February 28, 2010
ROCKWELL DIAMONDS INCORPORATED
(A company incorporated in accordance with the laws of British Columbia, Canada)
(Incorporated number: BC0354545)
(South African registration number: 2007/031582/10)
Share code on the JSE Limited: RDI ISIN: CA77434W1032
Share code on the TSX: RDI CUSIP Number; 77434W103
Share code on the OTCBB: RDIAF
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 28, 2010
CONSOLIDATED BALANCE SHEET
(Expressed in Canadian Dollars)
February 28 February 29
2010 2009
Audited Audited
$ $
ASSETS
Current assets
Cash and cash equivalents (note 5) 2,512,610 3,997,807
Accounts receivable (note 5) 6,260,717 4,572,536
Restricted cash (note 5, 17) 4,946 2,698,719
Trade receivable from a related party 46,108 49,215
(note 14)
Inventories (note 6) 2,976,058 3,719,919
Prepayments 75,275 61,775
11,875,714 15,099,971
Non-current assets
Property, plant and equipment (note 7) 58,790,736 59,569,186
Mineral property interests (note 8) 30,850,998 28,894,477
Other assets and deposits (note 11) 827,871 139,140
Reclamation deposits (note 5, 10) 2,898,067 2,659,642
93,367,672 91,262,445
105,243,386 106,362,416
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities
Bank indebtedness (note 5, 17) 698,015 3,540,880
Accounts payable and accrued liabilities 6,458,751 4,832,038
(note 5)
Due to related parties (note 14) 641,323 193,655
Taxes payable 583,194 456,046
Current portion of capital lease 3,196,189 5,440,181
obligations (note 5, 9)
11,577,472 14,462,800
Non-current liabilities
Capital lease obligations (note 5, 9) 140,332 3,284,596
Due to related parties (note 5, 14) 414,566 383,330
Future income taxes (note 15) 11,545,000 12,126,000
Reclamation obligation (note 10) 3,722,984 3,802,655
15,822,882 19,596,581
Non-controlling interest (note 8) 648,941 1,882,009
Shareholders` equity
Share capital (note 12) 127,999,040 119,952,532
Warrants (note 12(c)) - 1,693,197
Contributed surplus 6,195,051 4,167,304
Accumulated other comprehensive loss (7,979,683) (13,409,383)
Deficit (49,020,317) (41,982,624)
77,194,091 70,421,026
Continuance of operations and going
concern (note 1)
Contingencies (notes 18)
Subsequent events (note 19)
105,243,386 106,362,416
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
Dr. John Bristow Director, Chief Executive Officer
Dr. Willem Jacobs Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Expressed in Canadian Dollars)
Year ended Year ended Nine months
February 28, February 29, February 29,
2010 2009 2008
$ $ $
Revenue
Rough diamonds sales 29,776,933 34,330,078 35,863,214
Contract diamond sales - - 174,892
29,776,933 34,330,078 36,038,106
Cost of sales
Cost of rough diamonds (22,913,999) (25,113,363) (22,581,613)
sales
Cost of contract diamond - - (148,658)
sales
Amortization and depletion (9,545,727) (1,128,797) (6,533,941)
Operating profit (loss) (2,682,793) (2,070,482) 6,773,894
Expenses
Accretion of reclamation 481,932 1,072,389 464,316
obligation (note 10)
Exploration 97,805 498,739 604,169
Foreign exchange 483,902 (350,485) (751,315)
loss/(gain)
Interest on capital leases 969,530 1,592,001 1,289,385
Interest expense 576,272 3,009,680 270,976
Legal, accounting and audit 1,389,272 1,863,261 790,725
Office and administration 3,411,990 3,489,460 2,697,077
Shareholder communications 506,482 453,489 198,985
Stock-based compensation - 74,008 629,347 514,892
exploration (note 12(b))
Stock-based compensation - 261,350 1,205,075 1,311,423
administration (note 12(b))
Travel and conferences 194,544 605,812 654,705
Transfer agent 246,866 250,878 544,232
8,693,953 14,319,646 8,589,570
Other items
Write-off of accounts 167,414 291,063 18,360
receivable
Loss on disposal of 36,720 364,918 402,411
equipment
Write-down or loss on 657,634 203,339 -
disposal of mineral
property (note 8(c))
Other income (513,338) (303,399) (111,202)
Interest income (466,688) (2,672,021) (1,118,396)
Write-down of assets(note 23,862 2,590,958 -
7)
(94,396) 474,858 (808,827)
Loss before income taxes 11,282,350 16,864,986 1,006,849
Current income tax expense 18,946 7,000 179,290
(note 15)
Future income tax (2,645,000) (3,347,000) 2,261,110
(recovery) expense (note
15)
Loss before non-controlling 8,656,296 13,524,986 3,447,249
interest
Non-controlling interest (1,618,603) (549,024) 5,955,779
Loss for the period 7,037,693 12,975,962 9,403,028
Other comprehensive loss (5,429,700) 13,409,383 -
(income) (note 3(i))
Total comprehensive loss 1,607,993 26,385,345 9,403,028
(income)
Basic and diluted loss per 0.03 0.05 0.05
common share ($)
Headline loss per share 0.03 0.05 0.05
Weighted average number of 267,164,309 237,924,152 196,428,551
common shares outstanding
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF ACCUMULATED COMPREHENSIVE LOSS AND DEFECIT
(Expressed in Canadian Dollars)
Year ended Year ended Nine months
February 28, February 28, ended February
29,
2010 2009 2008
$ $ $
Accumulated other
comprehensive loss
Balance at beginning of the (13,409,383) - -
period
Comprehensive loss on 5,429,700 (13,409,383) -
currency translation of
previously integrated
operations
Balance at end of the (7,979,683) (13,409,383) -
period
Deficit
Balance at beginning of the (41,982,624) (29,006,662) (19,603,634)
period
Loss for the period (7,037,693) (12,975,962) (9,403,028)
Balance at end of the (49,020,317) (41,982,624) (29,006,662)
period
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Expressed in Canadian Dollars)
Share capital Number of shares $
Year ended Year ended
February February
28, 2010 28,2010
Balance at beginning of the 238,041,569 119,952,532
period
Consideration for additional - -
interest of operating mines net
of issue cost at $0.55 per
share (note 7(b))
Share purchase options 1,500 929
exercised at $0.62 per share
Fair value of stock options - 808
allocated to shares issued on
exercise
Private placement fourth 132,800,000 8,044,771
quarter, net of issues cost at
$0.065 per share (note 12(f))
Balance at end of the period 370,843,069 127,999,040
Warrants
Balance at the beginning of the 1,693,197
period
Expired broker warrents (1,693,197)
Balance at the end of the -
period
Contributed surplus
Balance at beginning of the 4,167,304
period
Stock-based compensation (note 33,535
11(b))
Expired broker warrants 1,693,197
Fair value of stock options (808)
allocated to shares issued on
exercise
Balance at end of the period 6,195,051
Accumulated other comprehensive
loss
Balance at beginning of the (13,409,383)
period
Comprehensive loss on currency 5,429,700
translation of previously
integrated operations
Balance at end of the period (7,979,683)
Deficit
Balance at beginning of the (41,982,624)
period
Loss for the period (7,037,693)
Balance at end of the period (49,020,317)
TOTAL SHAREHOLDERS` EQUITY 77,194,091
Share capital Number of shares $
Year ended February Year ended
28, February 28,
2009 2009
Balance at beginning of the 223,755,854 112,095,390
period
Consideration for additional 14,285,715 7,857,142
interest of operating mines
net of issue cost at $0.55
per share (note 7(b))
Share purchase options - -
exercised at $0.62 per share
Fair value of stock options
allocated to shares issued on
exercise
Private placement fourth - -
quarter, net of issues cost
at $0.065 per share (note
12(f))
Balance at end of the period 238,041,569 119,952,532
Warrants
Broker warrants issued as 1,693,197
consideration for private
placement, beginning and end
of period
Contributed surplus
Balance at beginning of the 2,332,882
period
Stock-based compensation 1,834,422
(note 11(b))
Expired broker warrants -
Fair value of stock options -
allocated to shares issued on
exercise
Balance at end of the period 4,167,304
Accumulated other
comprehensive loss
Balance at beginning of the -
period
Comprehensive loss on (13,409,383)
currency translation of
previously integrated
operations
Balance at end of the period (13,409,383)
Deficit
Balance at beginning of the (29,006,662)
period
Loss for the period (12,975,962)
Balance at end of the period (41,982,624
TOTAL SHAREHOLDERS` EQUITY 70,421,026
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in Canadian Dollars)
Year ended Year ended Nine months
February 28, February 28, ended
2010 2009 February 29,
2008
$ $ $
Cash provided by (used
in):
Operating activities
Loss for the period (7,037,693) (12,975,962) (9,403,028)
Items not affecting
cash
Accretion of 481,932 1,072,389 464,316
reclamation obligation
Amortization and 6,235,261 8,347,837 4,460,323
depletion
Amortization of capital 3,310,466 2,939,360 2,073,618
lease equipment
Write-down of rough 1,380,538
diamond inventories and
mine supplies (note 6)
Write-down of assets 23,862 2,590,958 -
Diamond sale price 1,515,099
adjustment
Write-off of accounts 167,414 291,063 18,360
receivable
Stock-based 335,358 1,834,422 1,826,315
compensation (note
12(b))
Write-down or loss on 694,354 364,918 402,411
disposal of equipment
and mineral properties
Future income tax (2,645,000) (3,347,000) 2,261,110
(recovery) expense
Asset retirement (876,341) - 230,622
obligation change of
estimates
Unrealized foreign 198,448 (768,117) (2,967,105)
exchange loss (gain)
Non-controlling (1,618,603) (549,024) 5,955,779
interest
Changes in non-cash
working capital items
Accounts receivable (3,762,497) (790,642) 1,074,612
Amounts due to and from 3,107 (2,369,910) 245,819
related parties
Inventory (320,530) (123,266) (861,169)
Prepayments (8,571) 885,083 1,758,863
Accounts payable and 1,685,554 411,826 (40,710)
accrued liabilities
Income taxes 127,148 (434,286) (787,455)
Cash provided by (used (110,694) (2,620,351) 6,712,681
in) operating
activities
Investing activities
Acquisition of - (10,652,026) -
Saxendrift Mines (Pty)
Limited
Amounts paid pursuant - (294,402) -
to acquisition
Restricted cash 2,949,919 10,636,405 -
Purchase of equipment (2,696,965) (12,687,176 (21,003,124)
and mineral properties
Proceeds received on 380,037 310,944 1,034,620
disposal of equipment
Other assets and (685,817) 3,060,972 313,337
deposits
Reclamation deposits (21,968) (842,765) (778,811)
Cash used in investing (74,794) (10,468,048) (20,433,978)
activities
Financing activities
Principal repayments (6,175,065) (6,078,521) (5,964,113)
under capital lease
obligations
Common shares and 8,045,700 - 15,709,143
warrants issued for
cash, net of issue
costs
Amounts received (paid) - - (1,559,697)
to related parties
Amounts paid pursuant - - (7,466,565)
to property acquisition
Repayment of credit (3,170,344) - -
facility
Drawdown of credit - 3,540,880 -
facility
Cash provided by (used (1,299,709) (2,537,641) 718,768
in) financing
activities
Increase (decrease) in (1,485,197) (15,626,040) (13,002,529)
cash and cash
equivalents during the
period
Cash and cash 3,997,807 19,623,847 32,626,376
equivalents, beginning
of period
Cash and cash 2,512,610 3,997,807 19,623,847
equivalents, end of
period
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. CONTINUANCE OF OPERATIONS AND GOING CONCERN
Rockwell Diamonds Inc. ("Rockwell" or the "Company") is incorporated under the
British Columbia Business Corporations Act (formerly the Company Act of British
Columbia), and is engaged in the business of diamond production and the
acquisition and exploration of natural resource properties. The Company`s
principal mineral property interests are located in South Africa.
The accompanying consolidated financial statements have been prepared on a going
concern basis in accordance with Canadian generally accepted accounting
principles (``Canadian GAAP``). The going concern basis of presentation assumes
that Rockwell will continue in operation for the foreseeable future and will be
able to realise its assets and discharge its liabilities and commitments in the
normal course of business.
For the year ended February 28, 2010 the Company incurred consolidated losses of
$7.0 million and has incurred accumulated losses to date of $49.1 million. In
response to the economic crisis that started in 2009, the Company reduced costs
in order to respond to reduced demand and prices for the Company`s diamonds. In
fiscal 2010, diamond prices have increased gradually from US$585 at the
beginning of the year to US$1,269 at February 28, 2010. Analyst forecasts as of
March 1, 2010 project prices of US$1,143 per carat in the next twelve months and
US$1,425 in the following twelve months. The Company expects to pass breakeven
point in September 2010.
At year end, the Company`s current assets exceeded its current liabilities by
$0.3 million and the Company`s total assets exceeded its total liabilities by
$77.8 million. The Company has forecasted its cash flows for the fiscal years
2011 and 2012 and these forecasts indicate that the Company will continue as a
going concern. The forecasts assume the plant operating at 85% of capacity,
prices remain at current levels, which are 33% below pre-crisis levels and the
South African Rand remains at current levels relative to the United States and
Canadian dollar.
In order to increase cash resources and fund current year losses, the Company
raised equity of $8.6 million in a private placement at the end of the current
year and a further $8.0 million subsequent to the year end.
Based on the Company`s cash resources and the above forecasts, the Company has
sufficient working capital and reserves to maintain operations through breakeven
point and sufficient cash and working capital to fund the continuing losses
until then. Accordingly, the financial statements have been prepared on the
basis of accounting policies applicable to a going concern. Future events
beyond the Company`s control may change the Company`s ability to continue as a
going concern. If the going concern concept was no longer appropriate,
significant adjustments would be required to the carrying value of assets and
liabilities and would be recorded at that time.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. These consolidated financial
statements include the accounts of the Company, its subsidiaries and its
variable interest entities where the Company has been determined to be the
primary beneficiary. All significant intercompany balances and transactions
have been eliminated upon consolidation.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue recognition
Revenue from rough diamond sales is recognized when persuasive evidence of an
arrangement exists, the significant risks and rewards of ownership of the
diamonds have been transferred to the customer, the Company`s price to the
customer is fixed or determinable and collection of the resulting receivable is
reasonably assured. Significant risks and rewards of ownership of the diamonds
normally transfer at the moment the sales tender has been awarded and finalized.
(b) Inventories
Rough diamond inventories are valued at the lower of average production cost and
net realizable value. Production costs include the cost of consumable materials,
direct labour, mine-site overhead expenses and amortization.
Supplies are valued at the lower of cost, at the average purchase cost basis,
and net realizable value. Appropriate provisions are made for redundant and
slow-moving items. Cost of items that are not ordinarily interchangeable, and
goods and services produced and segregated for specific projects, are assigned
by using a specific identification of their individual costs.
Consistent use of either first-in first-out or weighted average cost formula to
measure the cost of other inventories is applied.
Previous write-downs are reversed to the lower of cost and net realizable value
when there is a subsequent increase in the value of inventories.
(c) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated amortization
and accumulated impairment losses. Assets are amortized on a straight-line
method over the estimated useful lives of the related assets, which are as
follows:
Buildings 12 years
Processing plant and equipment 4 - 10 years
Processing plant and equipment under capital lease obligation 5 - 8 years
Office equipment 6 years
Vehicles and light equipment 5 years
Land is not amortized.
Repairs and maintenance expenditures are charged to operations as incurred.
Significant improvements and major replacements which extend the useful life of
the asset are capitalized as incurred.
(d) Mineral property interests
The amount presented for mineral property interests represents costs incurred to
date and accumulated acquisition costs, less accumulated depletion and
accumulated impairment losses. This does not necessarily reflect present or
future values.
The acquisition costs of a mineral property are capitalized until the property
is placed into production, sold, or abandoned, or when management has determined
that there has been an impairment in value. Such acquisition costs are
amortized over the estimated life of the property, based on the unit of
production method, or written off to operations if the property is abandoned,
allowed to lapse, or if there is little prospect of further work being carried
out by the Company.
Mineral property acquisition costs are measured at the cash consideration paid
and the fair market value of common shares issued for acquiring the mineral
property interest. The fair value of the consideration paid through shares is
determined based on the trading price of these shares on the effective date of
the acquisition transaction.
Exploration expenditures and option payments incurred prior to the determination
of the feasibility of mining operations are charged to operations as incurred.
Exploration expenditures incurred subsequent to the mining operations which do
not increase production or extend the life of operations are expensed in the
period incurred. All administrative expenditures that do not directly relate to
specific exploration and development activities on mineral properties are
expensed in the period incurred.
An impairment review of mineral property interests is carried out when there is
an indication that these may be impaired by comparing the carrying amount of the
interest to its estimated recoverable amount. Where the recoverable amount is
less than the carrying amount an impairment charge is included in expenses in
order to reduce the carrying amount of mineral property interest to its fair
value.
(e) Financial instruments
All financial instruments, including derivatives, are included on the Company`s
balance sheet and measured either at fair value or amortized cost. Changes in
fair value are recognized in the statements of operations or accumulated other
comprehensive income, depending on the classification of the related
instruments.
All financial assets and liabilities are recognized when the entity becomes a
party to the contract creating the asset or liability. All financial instruments
are classified into one of the following categories: held for trading, held-to-
maturity, loans and receivables, available-for-sale financial assets, or other
financial liabilities. Initial and subsequent measurement and recognition of
changes in the value of financial instruments depends on their initial
classification:
- Held-to-maturity investments, loans and receivables, and other financial
liabilities are initially measured at fair value and subsequently measured at
amortized cost. Amortization of premiums or discounts and losses due to
impairment are included in current period net earnings (loss).
- Available-for-sale financial assets are measured at fair value. Changes in
fair value are included in other comprehensive income (loss) until the gain or
loss is recognized in net earnings (loss) or if an impairment is determined to
be other than temporary.
- Held for trading financial instruments are measured at fair value. All gains
and losses are included in net earnings (loss) in the period in which they
arise.
- All derivative financial instruments are measured at fair value, even when
they are part of a hedging relationship. Changes in fair value are included in
net earnings in the period in which they arise, except for hedge transactions
which qualify for hedge accounting treatment in which case unrealized gains and
losses are recognized in other comprehensive income (loss) until realized.
In accordance with these policies, the Company has classified its financial
instruments as follows:
- Cash and cash equivalents, restricted cash and bank indebtedness are
classified as held for trading financial instruments and are measured at fair
value. Cash and cash equivalents consist of cash and highly liquid investments,
having maturity dates of three months or less from the date of purchase, that
are readily convertible to known amounts of cash.
- Accounts receivable and trade receivable from a related party are classified
as loans and receivables and are measured at fair value and subsequently
measured at amortized cost.
- Accounts payable and accrued liabilities, capital lease obligations, amounts
owing pursuant to acquisition and balances payable to related parties are
classified as other financial liabilities and are measured initially at fair
value and subsequently measured at amortized cost.
- Reclamation deposits invested in interest bearing money market linked
investments are classified as available-for-sale assets and are carried at fair
market value, with the unrealized gain or loss recorded in shareholders` equity
as a component of other comprehensive income (loss).
The Company also discloses quantitative and qualitative information that enable
users to evaluate the significance of financial instruments on the Company`s
financial performance, and the nature and extent of risks arising from financial
instruments to which the Company is exposed during the year and at the balance
sheet date. In addition, the Company discloses management`s objectives, policies
and procedures for managing these risks. These disclosures are presented in note
5.
(f) Site closure and reclamation obligations
The Company recognizes any statutory, contractual or other legal obligation
related to the retirement of tangible long-lived assets when such obligations
are incurred, if a reasonable estimate of fair value can be made.
These obligations are measured initially at fair value and the resulting costs
are capitalized to the carrying value of the related asset. In subsequent
periods, the liability is adjusted for the accretion of the discount and any
changes in the amount or timing of the underlying future cash flows. The asset
retirement cost is amortized to operations over the life of the asset. Changes
resulting from revisions to the timing or the amount of the original estimate of
undiscounted cash flows are recognized as an increase or a decrease in the
carrying amount of the liability, and the related asset retirement cost is
capitalized as part of the carrying amount of the related long-lived asset. In
the event the required decrease in the asset retirement cost is in excess of the
carrying value, the excess amount is recorded as a change in estimate in the
statement of operations.
Where the obligation is operational of nature and does not give rise to future
economic benefit, the capitalized cost is amortized in the period incurred. Upon
settlement of the liability, a gain or loss will be recorded if the actual cost
incurred is different from the liability recorded.
Adjustments to environmental and ongoing site reclamation expenditure at
operating mines are charged to operations in the period in which they occur.
(g) Impairment of long-lived assets
Long-lived assets, including mineral properties, property, plant and equipment,
are reviewed for impairment periodically or whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss must be recognized if the carrying amount of a
long-lived asset exceeds the sum of the undiscounted cash flows expected to
result from its use and eventual disposition. In that event, the asset must be
written down to its fair value (present value of future cash flows) and an
impairment loss is recorded in earnings. Net estimated future cash flows from
each long-lived asset are calculated based on anticipated future production,
estimated diamond prices, operating costs, capital expenditures and site
restoration expenses. The Company will determine fair value from recent
transactions involving sales of similar long-lived assets, if deemed more
appropriate in the circumstances. Management`s estimate of future cash flows is
subject to risk and uncertainties and it is reasonably possible that changes
could occur with evolving economic conditions, which may affect the
recoverability of the Company`s long-lived assets and may have a material effect
on the Company`s results of operations and financial position.
Previously recognized impairment losses are not reversed if the recoverable
amount subsequently increases.
Assets to be disposed of would be separately presented in the balance sheet and
reported at the lower of the carrying amount and the fair value less costs to
sell, and are no longer amortized.
(h) Variable interest entities
Variable interest entities ("VIE`s") are entities in which equity investors do
not have a controlling financial interest or the equity investment at risk is
not sufficient to permit the entity to finance its activities without additional
subordinated financial support provided by other parties. The Company
consolidates the accounts of VIE`s where it has been determined that the Company
is the primary beneficiary, defined as the party that receives the majority of
the expected residual returns and/or absorbs the majority of the entity`s
expected losses.
(i) Foreign currency translation
The company classifies its foreign operations as self-sustaining operations.
Self-sustaining operations are foreign operations that are financially and
operationally independent of the reporting enterprise such that the exposure to
exchange rate changes is limited to the reporting enterprise`s net investment in
the foreign operation and which have a functional currency different from the
entity. Assets and liabilities of self-sustaining operations are translated into
the reporting currency at the exchange rate in effect at the balance sheet date.
Revenue and expense items (including depreciation and amortization) are
translated into the reporting currency at the exchange rate in effect on the
dates on which such items are recognized in income during the period or
appropriate average rates.
For self-sustaining operations exchange gains or losses arising on the
translation from its functional currency to the reporting currency are presumed
not to have a direct effect on the activities of the reporting enterprise and
are incorporated in the financial statements of the reporting enterprise as a
separate component of shareholders equity. The company`s reporting currency is
the Canadian dollar.
(j) Share capital
The Company records proceeds from share issuances net of issue costs. Common
shares issued for mineral property interests are recorded at their fair market
value based upon the trading price of the shares on the Toronto Stock Exchange
("TSX") on the date of issue or as otherwise provided under the terms of the
agreement to issue the shares.
(k) Stock-based compensation
The Company has a share option plan which is described in note 12. The Company
accounts for all stock-based payments under the fair value based method.
Under the fair value based method, equity settled stock-based payments are
measured at the fair value of the option on grant date. Compensation costs are
charged to operations on a straight line basis over the relevant vesting period.
The counterpart is recognized in contributed surplus. Consideration received on
the exercise of stock options is recorded as share capital and the related
amount of contributed surplus is transferred to share capital.
(l) Income taxes
The Company uses the asset and liability method of accounting for income taxes.
Under this method, future income tax assets and liabilities are computed based
on differences between the carrying amount of assets and liabilities on the
balance sheet and their corresponding tax values, using the enacted or
substantively enacted income tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled.
Future income tax assets also result from unused loss carry forwards, resource-
related pools, and other deductions. A valuation allowance is recorded against
any future income tax assets if it is more likely that the asset will not be
realized.
(m) Loss per share
Basic income (loss) per share is calculated by dividing the loss for the period
by the weighted average number of common shares outstanding during the period.
Diluted income (loss) per share is calculated using the treasury stock method.
Under the treasury stock method, the weighted average number of common shares
outstanding used for the calculation of diluted income (loss) per share assumes
that the proceeds receivable upon exercise of dilutive Stock -based compensation
and warrants are used to repurchase common shares at the average market price
during the period.
Diluted loss per share has not been presented separately as the effect of
outstanding options and warrants would be anti-dilutive for all periods
presented.
(n) Use of estimates
The preparation of consolidated financial statements in conformity with Canadian
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as at the balance sheet
date, and the reported amounts of revenues and expenses during the reporting
period. Significant areas requiring the use of management estimates relate to
the impairment of long lived assets, rates for depletion and amortization,
determination of reclamation obligations and the assumptions used in determining
stock-based compensation expense. Actual results could differ from those
estimates.
(o) Comparative figures
Prior years` comparative figures have been reclassified to conform to the
financial statement presentation in the current year.
4. CHANGES IN ACCOUNTING POLICIES
Effective March 1, 2009, the Company adopted the following accounting standards
issued by the Canadian Institute of Chartered Accountants ("CICA"). These new
standards have been adopted with no restatement to prior period financial
statements.
(a) Section 3064 - Goodwill and Intangibles
The Canadian Accounting Standards Board ("AcSB") issued CICA Handbook Section
3064 which replaces Section 3062, Goodwill and Other Intangible Assets, and
Section 3450, Research and Development Costs. This new section establishes
revised standards for the recognition, measurement, presentation and disclosure
of goodwill and intangible assets. The Company evaluated the impact of this new
standard and concluded that this standard did not have a significant impact on
the Company`s consolidated financial statements.
(b) EIC 173 - Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
The AcSB 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 counterparties when determining the fair
value of financial assets and liabilities, including derivative financial
instruments. The standard was effective for the first quarter of fiscal 2010 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 of the Company.
(c) EIC 174 - Mining Exploration Costs
The AcSB issued EIC-174, Mining Exploration Costs, which provides guidance to
mining enterprises related to the measurement of exploration costs and the
conditions that a mining enterprise should consider when determining the need to
perform an impairment review of such costs. The accounting treatments provided
in EIC-174 have been applied in the preparation of these financial statements
and did not have an impact on the valuation of the Company`s mineral properties.
(d) Section 3862 - Financial Instruments - Disclosures
During the year, CICA Handbook Section 3862, Financial Instruments - Disclosures
was amended to require enhanced disclosures about the relative reliability of
the data, or "inputs", that an entity uses to measure the fair values of its
financial instruments. It requires financial instruments measured at fair value
to be classified into one of three levels in the "fair value hierarchy"
according to the relative reliability of the inputs used to estimate the fair
values. Refer note 5.
(e) Section 3855 - Financial Instruments - Recognition and Measurement
The CICA amended Handbook Section 3855, Financial Instruments - Recognition and
Measurement to provide additional guidance concerning the assessment of embedded
derivatives upon reclassification of a financial asset out of the held-for-
trading category, amend the definition of loans and receivables, amend the
categories of financial assets into which debt instruments are required or
permitted to be classified, amend the impairment guidance for held-to-maturity
debt instruments and require reversal of impairment losses on available-for sale
debt instruments when conditions have changed. These amendments were effective
for fiscal years beginning on or after November 1, 2008. These amendments did
not have a material impact on the Company`s consolidated financial statements.
(f) Accounting Policies Not Yet Adopted
(i) International Financial Reporting Standards ("IFRS")
The AcSB has announced its decision to replace Canadian generally accepted
accounting principles ("Canadian GAAP") with IFRS for all Canadian publicly-
listed companies. The AcSB announced that the changeover date will commence for
interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2011. The transition date for the Company to changeover to IFRS
will be January 1, 2011. Therefore, the IFRS adoption will require the
restatement for comparative purposes of amounts reported by the Company for the
year ending February 28, 2011. During the year, the Company has established a
formal project plan, allocated internal resources and engaged expert
consultants, monitored by a steering committee to manage the transition from
Canadian GAAP to IFRS reporting.
(ii) Business Combinations/Consolidated Financial Statements/Non- Controlling
Interests
The AcSB issued CICA 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 new Sections replace existing guidance on business
combinations and consolidated financial statements to harmonize Canadian
accounting for business combinations with IFRS. 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 is required to disclose that fact and apply
each of the new sections concurrently. The Company is currently evaluating the
impact of the adoption of these changes on its consolidated financial
statements.
5. CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS
(a) Capital Management
As at February 28, 2010, the Company is not subject to externally imposed
capital requirements other than its restricted cash and its overdraft facility.
Refer to note 17.
At February 28, 2010, of the $2,512,610 (2009 - $3,997,807) cash and cash
equivalents held by the Company, $1,376,073 (ZAR10,066,386) ((2009 - $3,626,750
(ZAR28,689,082)) were held in South African Rand ("ZAR"), and $1,136,537 (2009 -
$371,057) in Canadian Dollars. Cash and cash equivalents exclude cash subject to
restrictions. Refer to note 17.
The Company`s primary objectives when managing capital are to safeguard the
Company`s ability to continue as a going concern, so that it can continue to
provide returns for shareholders, and to have sufficient funds on hand for
business opportunities as they arise. The Company considers the components of
shareholders` equity, as well as its cash and cash equivalents, and bank
indebtedness as capital. The Company`s investment policy is to invest its cash
in highly liquid short-term interest-bearing investments, having maturity dates
of three months or less from the date of acquisition, that are readily
convertible to known amounts of cash.
The Company manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk characteristics of the
underlying assets. The Company may issue new shares through private placements,
issue debt, or return capital to shareholders, in order to maintain or adjust
the capital structure.
In order to facilitate the management of its capital requirements, the Company
prepares annual expenditure budgets that are updated as necessary depending on
various factors, including successful capital deployment and general industry
conditions.
There were no changes to the Company`s approach to capital management during the
year ended February 28, 2010 and the Company expects it will be able to raise
sufficient capital resources to carry out its plans of operations for fiscal
2011 as disclosed in note 1.
(b) Carrying Amounts and Fair Values of Financial Instruments
The fair value of a financial instrument is the price at which a party would
accept the rights and/or obligations of the financial instrument from an
independent third party. Given the varying influencing factors, the reported
fair values are only indicators of the prices that may actually be realized for
these financial instruments.
Financial instruments measured at fair value are classified into one of three
levels in the fair value hierarchy according to the relative reliability of the
inputs used to estimate the fair values. The three levels of the fair value
hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or
liability either directly or indirectly; and
Level 3 - Inputs that are not based on observable market data.
It is not practicable to determine the fair value of amounts due to and from
related parties because of the related party nature of such amounts and the
absence of a secondary market for such instruments.
Financial assets at fair value
Level 1 Level 2 Level 3 February February
28, 2010 28, 2009
Cash and equivalents 2,512,610 - - 2,512,610 3,997,807
Restricted cash 4,946 - - 4,946 2,698,719
Reclamation deposits 2,898,067 - - 2,898,067 2,659,642
5,415,623 - - 5,415,623 9,356,168
Financial liabilities at fair value
Level 1 Level 2 Level 3 February February
28,2010 28,2009
Bank Indebtedness 698,015 - - 698,015 3,540,880
The following table illustrates the classification of the Company`s financial
instruments recorded at fair value within the fair value hierarchy as at
February 28, 2010:
As at As at As at As at
February February February February
28, 2010 28, 2010 28, 2009 28, 2009
Assets carried at Carrying Fair Carrying Fair value
fair value amount value amount
Cash and equivalents 2,512,610 2,512,610 3,997,807 3,997,807
Restricted cash 4,946 4,946 2,698,719 2,698,719
Reclamation deposits 2,898,067 2,898,067 2,659,642 2,659,642
5,415,623 5,415,623 9,356,168 9,356,168
Assets carried at
amortized cost
Accounts receivable 6,260,717 6,260,717 4,572,536 4,572,536
Liabilities carried
at fair value
Bank indebtedness 698,015 698,015 3,540,880 3,540,880
Liabilities carried
at amortized cost
Accounts payable and 6,458,751 6,458,751 4,832,038 4,832,038
accrued liabilities
Capital lease 3,336,521 3,336,521 8,724,777 8,724,777
obligations
9,795,272 9,795,272 13,556,815 13,556,815
The carrying amounts of the Company`s other financial instruments approximate
their fair values. The following tables show the estimated fair values of the
financial instruments:
(c) Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of financial instrument
related risks. The Board approves and monitors the risk management processes,
including treasury policies, counterparty limits, controlling and reporting
structures, credit risk, liquidity risk, currency risk, interest risk and
diamond price risk. The types of risk exposure and the way in which such
exposure is managed are provided as follows:
Credit Risk
Credit risk is the risk of potential loss to the Company if a counterparty to a
financial instrument fails to meet its contractual obligations. The Company`s
credit risk is primarily attributable to its liquid financial assets including
cash and equivalents, restricted cash, accounts receivable and trade receivable
from a related party. The carrying values of the Company`s cash and cash
equivalents, accounts receivable and trade receivable from a related party
represents the maximum exposure to credit risk.
The Company limits exposure to credit risk on liquid financial assets through
maintaining its cash and equivalents with high-credit quality financial
institutions. The Company does not have financial assets that are invested in
asset backed commercial paper.
The Company minimizes its credit risk by reducing credit terms to 30 days on its
sales.
The aging of receivables at the reporting date was:
Gross 2010 Impairment Gross Impairment
2010 2009 2009
Not past due 6,428,131 167,414 4,863,599 291,063
Past due 0-30 days - - - -
Past due 31-120 - - - -
days
More than one year - - - -
6,428,131 167,414 4,863,599 291,063
Based on history the Company believes that, apart from the above, no other
impairment allowance is necessary in respect of trade receivables.
During the current period a diamond sale price adjustment of $1,515,098 (2009 -
$ nil) was made against diamond revenue recognized. This diamond sale price
adjustment relates to the retainer debtor balance with respect to an agreement
between the Company and a client purchasing large diamonds. The diamond sale
price adjustment was attributable to the decline in diamond prices subsequent to
the original sale. During the current period an impairment of $167 414 (2009 -
$291,063) was made against debtors. The impairment in the current year is due
to care and maintenance cost of $167,414 in relation to Entruscan, refer to note
19 (a) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company raised $8.6 million in a
private placement at the end of the current year and a further $8.0 million
subsequent to the year end. After taking into account cash flows from operations
and the Company`s holdings of cash and cash equivalents, the Company believes
that these sources will be sufficient to cover the likely requirements for the
foreseeable future. The Company`s cash and equivalents are invested in business
accounts which are available on demand for the Company`s programs, and which are
not invested in any asset backed deposits/investments.
The Company operates in South Africa. Like other foreign entities operating
there, the Company is subject to currency exchange controls administered by the
South African Reserve Bank, that country`s central bank. A significant portion
of the Company`s funding structure for its South African operations consists of
advancing loans to its South Africa incorporated subsidiaries and it is possible
the Company may not be able to acceptably repatriate such funds once those
subsidiaries are able to repay the loans or repatriate other funds such as
operating profits should any develop. The repatriation of cash held in South
Africa is permitted upon the approval of the South African Reserve Bank. Cash
balances in South Africa are disclosed below.
The following are the contractual maturities of financial liabilities at
carrying values (excluding interest payments):
February 28, 2010 Carrying Contractual 2011 2012
amount cash flow
Non-derivative financial
liabilities
Accounts payable and 6,458,751 6,458,751 6,458,751 -
accrued liabilities
Due to related parties 1,055,889 1,055,889 641,323 414,566
Bank indebtedness 698,015 698,015 698,015 -
Capital lease 3,336,521 3,336,521 3,196,189 140,332
obligations
February 28, 2009 Carrying Contractual 2010 2011
amount cash flow
Non-derivative financial
liabilities
Accounts payable and 4,832,038 4,832,038 4,832,038 -
accrued liabilities
Due to related parties 576,985 576,985 193,655 383,330
Bank indebtedness 3,540,880 3,540,880 3,540,880 -
Capital lease 8,724,777 9,537,062 6,570,081 2,860,859
obligations
Currency Risk
In the normal course of business, the Company enters into transactions for the
purchase of supplies and services denominated in South African Rand ("ZAR"). In
addition, the Company has cash and ertain liabilities denominated in ZAR. As a
result, the Company is subject to currency risk from fluctuations in foreign
exchange rates. The Company has not entered into any derivative or other
financial instruments to mitigate this foreign exchange risk.
The exposure of the Company`s financial assets to currency risk is as follows:
Currency February 28, 2010 February 28, 2009
South African Rand
Cash and cash equivalents 1,376,073 3,626,750
Restricted cash 4,946 2,698,719
Accounts receivable 6,260,717 4,572,536
Trade receivable from 46,108 49,215
related party
Reclamation deposits 2,898,067 2,659,642
United States Dollar
Cash and cash equivalents 10,632 19,649
Total Financial Assets 10,596,543 13,626,511
The exposure of the Company`s financial liabilities to currency risk is as
follows:
Currency February 28, February 29,
2010 2009
South African Rand
Bank indebtedness 698,015 3,540,880
Accounts payable and 5,811,039 4,204,699
accrued liabilities
Due to related parties 414,566 383,330
Capital lease obligations 3,336,521 8,724,777
Total Financial 10,260,141 16,853,686
Liabilities
The following exchange rates applied during the fiscal years ended February 28,
2010 and 2009:
Annual Average rate Year end spot rate
February February February February
28, 2010 28, 2009 28, 2010 28,2009
CAD vs ZAR 0.1386 0.1276 0.1367 0.1264
Sensitivity analysis:
A 10 percent increase/decrease of the Canadian dollar against the ZAR at
February 28, 2010 would have a net loss gain/loss effect of $391,238 (2009 - $
659,120). This analysis assumes that all other variables, in particular interest
rates, remain constant.
Interest Rate Risk
The Company is subject to interest rate risk with respect to its investments in
cash and cash equivalents. The Company`s policy is to invest cash at floating
rates of interest and cash reserves are to be maintained in cash equivalents in
order to maintain liquidity, while achieving a satisfactory return for
shareholders. Fluctuations in interest rates when the cash equivalents mature
impact interest income earned.
The Company has capital lease obligations with several financial institutions as
detailed in note 9. The capital leases bear interest at rates linked to the
prevailing prime rate of the relative financial institution, and are subject to
interest rate change risk.
Sensitivity analysis:
A 10 percent increase/decrease of the prime rate for the year ended February
28, 2010 would have a net loss/gain effect of $154,580 (2009 - $159,200). This
analysis assumes that all other variables, in particular foreign exchange rates,
remain constant.
Diamond price risk
The value of the Company`s mineral resource properties is dependent on the price
and the outlook of diamonds. Diamond demand and prices fluctuate and are
affected by numerous factors beyond the control of the Company, including
worldwide economic trends, worldwide levels of diamond discovery and production
and the level of demand for, and discretionary spending on, luxury goods such as
diamonds and jewellery. Low or negative growth in the worldwide economy,
prolonged credit market disruptions or activities creating disruptions in
economic growth could result in decreased demand for diamonds, thereby
negatively affecting the price of diamonds. Similarly, a substantial increase in
the worldwide level of diamond production could also negatively affect the price
of diamonds. In each case, such developments could materially adversely affect
the Company`s results of operations.
The profitability of the Company`s operations is highly correlated to the market
price of diamonds. If diamond prices decline for a prolonged period below the
cost of production of the Company`s operating mines, it may not be economically
feasible to continue production.
6. INVENTORIES
As at As at
February February
28, 2010 28, 2009
Rough diamond inventories 1,283,604 1,845,986
Mine supplies 1,692,454 1,873,933
Total inventories 2,976,058 3,719,919
As at February 28, 2010, rough diamond inventories were valued at net realizable
value and mine supplies at cost less accumulative impairment charges. Obsolete
mine supplies were written down by $588,927 (2009 - $ nil) to $1,692,454 during
the year.
The net realizable value of diamond inventories are estimated at the average
price per carat achieved for the most recent diamond tender taking into account
the variable factors of clarity, carat, shape and color. As at February 28,
2010, rough diamond inventories were written down by $791,611 from cost to net
realizable value.
7. PROPERTY, PLANT AND EQUIPMENT
As at February 28,
2010
Cost Accumulated Carrying
Amortization value
and
Impairments
Land and buildings 7,226,428 598,462 6,627,966
Processing plant and 66,230,352 25,074,689 41,155,663
equipment
Processing plant and 13,553,529 3,782,247 9,771,282
equipment under capital lease
obligation
Office equipment 946,759 492,287 454,472
Vehicles and light equipment 1,675,705 894,352 781,353
89,632,773 30,842,037 58,790,736
As at February 29,
2009
Cost Accumulated Carrying
Amortization value
and
Impairments
Land and buildings 5,822,677 228,591 5,594,086
Processing plant and 52,090,193 15,102,720 36,987,473
equipment
Processing plant and 21,374,971 5,931,733 15,443,238
equipment under capital lease
obligation
Office equipment 859,678 302,618 557,060
Vehicles and light equipment 1,579,592 592,263 987,329
81,727,111 22,157,925 59,569,186
Components of property, plant and equipment are amortized over their estimated
useful life. The amortization charge for the current year was $7,018,998 (2009 -
$8,903,261).
The group`s bankers have registered two notarial general covering bonds of
ZAR10.0 million each ($1,366,998) over all moveable assets on the property of
the farm Holpan, Barkley West, Northern Cape. In 2009 one notarial general
covering bond of ZAR10.0 million ($1,366,998) was registered over moveable
assets.
As at February 28, 2010, the Company completed an impairment analysis which
considered the indicators of impairment in accordance with Section 3063,
"Impairment of Long-lived Assets" as well as EIC-126, "Accounting by Exploration
Companies for Exploration Costs" and AcG-11, "Enterprises in the Development
Stage". The Company prepared cash flow forecasts for the mine and development
projects using price assumptions reflecting prevailing diamond prices and
analysts` consensus forecasts, current life-of-mine plans and forecast operating
cost profiles. The analysis was based on the life of mining properties, using
long-term price assumptions of US$1,800, US$500 and US$800 per carat for the
Saxendrift, Klipdam and Holpan mines respectively as well as a foreign exchange
of US$1 to ZAR 7.67 in the next twelve months, reducing to US$1 to ZAR 7.00 in
the following year. Sales are assumed to remain constant over the year, even
though the BMO (Bank of Montreal) scale indicates increasing demand and prices.
Production volumes were set at 85% of operation production capacity with
increased efficiencies on diesel in a revised production method. Other
assumptions used in determining whether impairment existed include: (a)
Inflation rate of 5%, (b) Prime lending rate of 10%, (c) Standard finance lease
periods of 36 months, (d) 8% increase in salaries and wages, (e) Royalty
payments average of 1.7%, and (f) Electricity increases of 35%.
The undiscounted cash flows were greater than the carrying value of the long
lived assets and thus, a comparison to fair value was not required.
The Company identified items of property, plant and equipment for which the
carrying amount at year end was higher than its undiscounted cash flows. These
items, still in use at year end, were impaired by $23,862 (2009 - $2,590, 958)
to its fair value.
8. MINERAL PROPERTY INTERESTS
As at As at
February 28, February 28,
2010 2009
H.C. Van Wyk Diamonds Ltd and
Klipdam Mining Company Ltd
Balance, beginning of year 22,373,983 25,247,936
Acquisition costs - 55,746
Foreign exchange adjustments 2,042,252 (7,321,972)
Future income tax liability - 6,390,327
Change in future income tax rate - -201,415
Depletion of mineral properties (1,630,370) -1,796,639
during the year
Write down of mineral property (657,634) -
H.C. Van Wyk Diamonds Ltd and 22,128,231 22,373,983
Klipdam Mining Company Ltd, end of
year
Saxendrift Mine (Pty) Ltd
Balance, beginning of year 6,520,494 -
Acquisition costs 1,703,195 5,295,754
Foreign exchange adjustments 733,083 -178,144
Future income tax liability 662,354 1,990,181
Depletion of mineral properties (896,359) (587,297)
during the year
Saxendrift Mine (Pty) Ltd, end of 8,722,767 6,520,494
year
Balance, end of year 30,850,998 28,894,477
Mineral resources and reserves are estimated by professional geologists and
engineers in accordance with recognized industry, professional and regulatory
standards. These estimates require inputs such as future metal prices, future
operating costs, and various technical geological, engineering, and construction
parameters. Changes in any of these inputs could cause a significant change in
the estimated resources and reserves which, in turn, could have a material
effect on the carrying value of mineral properties.
The carrying value of mineral properties is also dependant on the valuation used
for the common shares and warrants of the Company issued for the acquisition of
mineral properties. The value of the common shares issued is the price of the
common shares of the Company at the date of issuance to effect the acquisition.
The Company uses the Black-Scholes pricing model to estimate a value for the
warrants issued upon the acquisition of a property. This model, and other
models which are used to value options and warrants, require inputs such as
expected volatility, expected life to exercise, and interest rates. Changes in
any of these inputs could cause a significant change in the carrying value
initially recorded for mineral properties at acquisition dates.
(a) Acquisition of Saxendrift Mine (Pty) Ltd
On March 6, 2007, the Company and Trans Hex Group Limited ("Trans Hex") entered
into a conditional agreement whereby the Company`s wholly owned South African
subsidiary, Rockwell Resources RSA (Pty) Ltd ("Rockwell RSA"), would acquire two
open pit alluvial diamond mines and three alluvial diamond exploration projects
from Trans Hex ("the Transaction"). Trans Hex, through its wholly-owned
subsidiary, Trans Hex Operations (Pty) Ltd. ("THO"), was the owner of two open
pit alluvial diamond mines, namely Saxendrift and Niewejaarskraal, and three
alluvial diamond exploration projects, namely Kwartelspan, Zwemkuil-Mooidraai
and Remhoogte-Holsloot, which are located along the southern bank of the Middle
Orange River between Douglas and Prieska in the Northern Cape Province of South
Africa ("Northern Cape") and which are collectively referred to as the Middle
Orange River Operations and Projects (or "MORO"). The MORO includes:
- the rights to prospect, explore and/or mine precious stones and/or other
minerals and/or metals held directly or indirectly by THO in the Saxendrift area
of the Northern Cape;
- a series of large remnant alluvial diamond terraces;
- the plant, machinery, equipment and other movable assets owned and/or used by
THO;
- certain employees of THO; and
- a rehabilitation liability which will be taken over by the Company.
On April 11, 2008 the Company completed the MORO acquisition. Registration and
transfer of Saxendrift Mine (Pty) Ltd and the Saxendrift mining right, as well
as prospecting rights in respect of the Kwartelspan, Zwemkuil-Mooidraai and part
of the Remhoogte-Holsloot projects were obtained. In March 2009, the
Niewejaarskraal mining rights were acquired.
On April 11, 2009 all the conditions precedent were met and the Company paid
ZAR17.9 million ($2.4 million) in cash to Trans Hex for the remaining
Niewejaarskraal mining rights of which ZAR12.4 million ($1.7 million) was
capitalized. This action completed the Saxendrift/Remhoogte-Holsloot transaction
negotiated during April 2008. The Company has no further commitments in relation
to more acquisitions.
The results of the operations of Saxendrift Mine (Pty) Ltd have been included in
the consolidated financial statements since the date of acquisition.
Effective July 1, 2008, a Black Economic Empowerment ("BEE") group, Liberty Lane
Investments (Pty) Ltd ("Liberty Lane") acquired a shareholding of 26% by
subscribing for shares in Saxendrift Mine (Pty) Ltd. The acquisition by Liberty
Lane was financed via loans provided by Rockwell RSA to Liberty Lane. The
Company has determined that its 74% interest in Saxendrift Mine (Pty) Ltd
qualifies as a variable interest entity ("VIE") due to certain voting
arrangements required under the Saxendrift Mine (Pty) Ltd shareholders
agreement. The Company has also determined the Company is the primary
beneficiary of the VIE as it is most closely related to the activities and has
primary exposure to the expected losses of the VIE. Consequently, the Company
has consolidated 100% of the results of operations of Saxendrift Mine (Pty) Ltd
since the date of acquisition. Upon full repayment of the outstanding loans by
Liberty Lane, the Company will increase the non-controlling interest to 26% and
consolidate 74% of Saxendrift Mine (Pty) Ltd`s results of operations. As at
February 28, 2010, the status in relation this transaction and the accounting
treatment remain unchanged.
(b) Acquisition of Durnpike Investments (Pty) Limited
On January 31, 2007, the Company completed the acquisition of Durnpike
Investments (Pty) Limited ("Durnpike"), a private South African company
("Acquisition"). Durnpike held interest in the Holpan, Klipdam and Wouterspan
properties in South Africa.
On March 1, 2008, the Company ratified an exchange agreement and increased its
ownership of H.C. Van Wyk Diamonds Ltd ("HCVW") and Klipdam Mining Company
Limited ("Klipdam") by 34%, resulting in an 85% interest, by issuing 14,285,715
common shares of the Company pursuant to the Definitive Agreement and thereby
reducing the non-controlling interest to 15%. On June 1, 2008, the empowerment
("BEE") group, African Vanguard Resources (Pty) Ltd increased its shareholding
from 15% to 26% by subscribing for an additional 11% shares in HCVW and Klipdam,
thereby reducing the Company`s interest to 74%. This additional 11% is at a
subscription price of ZAR17.5 million and is funded by Rockwell Resources RSA
(Pty) Ltd. Consequently, the Company has consolidated 85% of the results of
operations of HCVW and Klipdam until the outstanding loans by the BEE group are
fully repaid, at which time the Company will increase the non-controlling
interest to 26% and consolidate 74% HCVW and Klipdam`s results of operations.
As at February 28, 2010, the status in relation this transaction and the
accounting treatment remain unchanged.
(c) Galputs Minerale Project
As provided for in the Durnpike Acquisition Definitive Agreement, the Company
executed an agreement in relation to the acquisition of control of the mineral
rights relating to the Galputs Minerale Project ("Galputs"). In order for the
Company to fully control the Galputs minerals rights, the South African
Department of Minerals and Energy ("DME") had to give its final written approval
to transfer of the shares of Galputs from Virgilia Investments Inc. to the
Company on or before May 31, 2008. Since no written approval had been received
from the DME by May 31, 2008, the provisions of the agreement shall not be
enforced and as a result all parties have been restored to a position prior to
entering the agreement.
(d) Makoenskloof Property, South Africa
In conjunction with the acquisition of Durnpike, HCVW had an option agreement to
acquire the Makoenskloof alluvial diamond project. The Makoenskloof property is
located on the north bank of the Middle Orange River ("MOR"). As a result of the
acquisition of HCVW by Durnpike, and concurrent acquisition of Durnpike by
Rockwell, the Company assumed the option to purchase the Makoenskloof property.
In December 2007, Makoenskloof property was placed on care and maintenance in
order for management to evaluate the results of the bulk sampling activities
which had taken place up until the end of November 2007.
In April 2007 the Company, entered into an agreement in relation to its
Makoenskloof property to purchase plant and equipment in the amount of ZAR21.3
million (approximately $3.2 million) from Folmink Delwery CC. As at February
29, 2008 the Company was committed to pay the remaining consideration of ZAR2.3
million ($294,402) and completed the payment of the final consideration in
August 2008. The transaction was completed in fiscal 2009.
(e) Kwango River Project - Democratic Republic of Congo
The Company had planned to incur US$7.0 million on a feasibility study on the
Kwango River Project with Midamines SPRL ("Midamines"), the holder of an
exploration permit in the Democratic Repulic of Congo.
During the first quarter of 2008, pursuant to an amending agreement to the
Midamines Agreement, the Company paid consideration of $600,000 to Midamines in
order to increase the size of the concession (Permit 331). As part of such
amending agreement, Midamines waived its right to payment of the abovementioned
US$1,200,000 royalty payment on December 31, 2007. Subsequently, and pursuant to
Midamines` persistent breach of material provisions of the Midamines Agreement
(coupled with its failure to remedy such instances of breach notwithstanding
notice to do so), Durnpike cancelled the Midamines Agreement and wrote down
mineral properties to the value of $657,634 (2009 - $203,339) as well as claimed
damages.
Midamines has subsequently disputed Durnpike`s entitlement to cancel the
Midamines Agreement and has demanded payment of US$1,200,000 as well as other
amounts which have not yet been determined. Refer to note 18.
(f) Disposal of Minera Ricardo
During the period ended August 31, 2008, the Company sold its 100% interest in
certain mineral exploration and exploitation concessions in the Calama Mining
District in Chile known as the Ricardo Property through the sale of all its
shares in Minera Ricardo Resources Inc. S.A. ("Minera Ricardo") to Hunter
Dickinson Acquisitions Inc., a company with a director and officer in common,
for a nominal price of $1, resulting in a loss of $203,339.
9. CAPITAL LEASE OBLIGATIONS
Included in property, plant and equipment are mining equipment that the Company
acquired pursuant to three year capital lease agreements.
The Company`s capital lease obligations are with the following financial
institutions:
As at As at
February 28, February 28,
2010 2009
Stannic - 883,409
Wesbank 48,792 81,779
Nedbank - 178,092
Komatfin 3,287,729 7,581,497
3,336,521 8,724,777
Capital lease obligations as detailed above are secured over plant and equipment
and are repayable, on average, in 36 monthly installments with the final payment
being on June 30, 2011. Interest is charged at rates of between 8.00% to 12.00%
per annum linked to the prevailing prime rate of the relative financial
institution mentioned above. There are no significant restrictions imposed on
the lessee as a result of the lease agreements.
Future minimum lease payments are as follows:
As at As at
February 28, 2010 February 28, 2009
2010 - 6,570,081
2011 3,301,394 2,860,859
2012 141,544 106,122
Total minimum lease payments 3,442,938 9,537,062
Less: interest portion (106,417) (812,285)
Present value of capital 3,336,521 8,724,777
lease obligations
Current portion 3,196,189 5,440,181
Non-current portion 140,332 3,284,596
10.
RECLAMATION OBLIGATION
The continuity of the provision for reclamation costs related to the Holpan,
Wouterspan, Klipdam and Saxendrift mines, are as follows:
As at As at
February 28, February 28,
2010 2009
Holpan, Wouterspan and Klipdam Mines
Balance, beginning of year 2,690,335 1,755,820
Changes during the period:
Reclamation (expenditure (473,278) (10,274)
incurred)/obligation recognized
Foreign exchange on reclamation 219,113 -
Accretion expense 481,932 944,789
Balance, end of year 2,918,102 2,690,335
Saxendrift Mine
Balance, beginning of year 1,112,320 -
Changes during the year:
Reclamation (expenditure (403,063) 984,720
incurred)/obligation recognized
Foreign exchange on reclamation 95,625 -
Accretion expense - 127,600
Balance, end of year 804,882 1,112,320
Total reclamation obligation, end of 3,722,984 3,802,655
year
The liability is based on the disturbance of the natural physical environment
due to the alluvial mining methods that the company engages in. The volume of
disturbance is quantified on a monthly basis by a professional surveyor through
physical observation and technical quantification in cubic meters and is
therefore not discounted.
The Company does not make use of a mining contractor and applies an internal
costing rate per cubic meter which is based on applying its own resources and
equipment in doing such rehabilitation. This costing rate represents the
operating cost, including fuel, applying specific mining fleet units to the
rehabilitation process and labour usage.
The physical disturbance in the cubic meters multiplied by the costing rate
represent the rehabilitation liability at any one stage.
As required by regulatory authorities, at February 28, 2010, the Company had
cash reclamation deposits totaling $2,898,067 (2009 - $2,659,642) comprised of
$1,238,104 (2009 - $1,654,589) for the Holpan, Wouterspan and Klipdam mine and
$1,659,963 (2009 - $1,005,053) for the Saxendrift mine. These deposits are
invested in interest bearing money market linked investments at rates ranging
from 9.5% to 11.0% per annum. These investments have been ceded as security in
favour of the guarantees the bank issued on behalf of the group. Refer to note
17.
11. OTHER ASSETS AND DEPOSITS
As at As at
February February
28, 2010 28, 2009
Refundable security deposits 152,259 136,072
Investments(a) 574,086 -
Deposits on future assets(b) 101,526 -
Other assets - 3,068
Total other assets and deposits 827,871 139,140
(a) The Company invests in investment policies with endowment benefits on
maturity of the policies. Premiums are invested on an initial lump sum and/or
monthly annuity premium basis with the Insurers and invested in specific
investment plans. Policy investment value at any one time represents the value
of premiums and growth after deduction of administration and investment fees.
Withdrawals could be made against the policies before endowment against the
deduction of penalties, which is lower than the investment value. To surrender
the policy prior to maturity date will similarly attract penalties at a lower
rate, and represents the value accessible at any one stage. Fair value at any
one stage represents the surrender value of the investments. The fair value of
the policies at February 28, 2010 amounted to $3,472,153 (2009 - $2,659,642) of
which $2,898,067 (2009 - $2,659,642) has been disclosed as reclamation deposits
(refer note 10).
(b) This deposit relates to deposits on motor vehicles only delivered after year
end.
12. SHARE CAPITAL
(a) Authorized share capital
The Company`s authorized share capital consists of an unlimited number of common
shares, without par value, and an unlimited number of preferred shares without
par value, of which no preferred shares have been issued.
(b) Stock-based compensation
The Company has a stock-based compensation plan approved by the shareholders
that allows the Company to grant options for up to 10% of the issued and
outstanding shares of the Company at any one time, typically vesting over two
years, to its directors, employees, officers, and consultants. The exercise
price of each stock option is set by the board of directors at the time of the
grant and cannot be less than the market price (less permissible discounts) on
the Toronto Stock Exchange. Stock options have a maximum term of five years and
typically terminate 30 days following the termination of the optionee`s
employment, except in the case of retirement or death.
From time to time, the Company may grant stock options to employees, directors,
and service providers. The Company uses the Black-Scholes option pricing model
to estimate a value for these options. This model, and other models which are
used to fair value stock options, require inputs such as expected volatility,
expected life to exercise, and interest rates. Changes in any of these inputs
could cause a significant change in the stock-based compensation expense charged
in a period.
The continuity of stock options for the year ended February 28, 2010 is as
follows:
Exercise Feb 28, Expired/ Feb 28,
Expiry Price 2009 Granted/ Exercised cancelled 2010
date Issued
September $ 0.62 5,901,334 - (1,500) (3,334) 5,896,500
24, 2012
November $ 0.63 1,104,834 - - (3,334) 1,101,500
14, 2012
June 20, $ 0.45 950,000 - - - 950,000
2011
December $ 0.06 - 14,330,890 - (60,000) 14,270,890
7, 2014
January $ 0.07 - 600,000 - - 600,000
18, 2015
7,956,168 14,930,890 (1,500) (66,668) 22,818,890
Weighted average $0.60 $0.06 $0.62 $0.12 $0.25
exercise price
Weighted average fair value of stock options granted $0.06
during the period
As at February 28, 2010, 12,620,980 of the stock options outstanding with a
weighted average exercise price of $0.39 per share have vested with grantees.
The continuity of stock options for the year ended February 28, 2009 is as
follows:
Exercise Feb 29, Expired/ Feb 28,
Expiry date Price 2008 Granted Exercised cancelled 2009
March 28, $ 0.50 150,000 - - (150,000) -
2008
July 10, $ 0.68 300,000 - - (300,000) _
2010
September $ 0.62 5,903,000 - - (1,666) 5,901,334
24, 2012
November $ 0.63 1,109,000 - - (4,166) 1,104,834
14, 2012
June 20, $ 0.45 - 1,150,000 - 950,000
2011 (200,000)
7,462,000 1,150,000 - (655,832) 7,956,168
Weighted average $0.62 $0.45 $- $0.57 $0.60
exercise price
Weighted average fair value of stock options granted $0.45
during the period
As at February 28, 2009, 4,987,445 of the stock options outstanding with a
weighted average exercise price of $0.60 per share had vested with grantees.
The continuity of stock options for the nine months ended February 29, 2008 is
as follows:
Exercise May 31, Expired/ Feb 29,
Expiry date price 2007 Granted Exercised cancelled 2008
September $ 0.40 107,917 - (107,917) - -
28, 2007
February $ 0.42 190,000 - (145,000) (45,000) -
29, 2008
March 28, $ 0.50 150,000 - - - 150,000
2008
July 10, $ 0.68 - 300,000 - - 300,000
2010
September $ 0.62 - 5,905,500 - (2,500) 5,903,000
24, 2012
November $ 0.63 - 1,114,500 - (5,500) 1,109,000
14, 2012
447,917 7,320,000 (252,917) (53,000) 7,462,000
Weighted average $0.44 $0.62 $0.41 $0.45 $0.62
exercise price
Weighted average fair value of stock $0.62
options granted during the period
As at February 29, 2008, 250,000 of the stock options outstanding with a
weighted average exercise price of $0.57 per share had vested with grantees.
Using a Black-Scholes option pricing model with the assumptions noted below, the
fair values of stock options vested have been reflected in the statements of
operations as follows:
Year ended Year ended Nine Months
February 28, February 28, ended
2010 2009 February
29,
2008
Exploration and engineering 74,008 629,347 514,892
Operations and 261,350 1,205,075 1,311,423
administration
Total stock-based 335,358 1,834,422 1,826,315
compensation cost expensed
to operations, with the
offset credited to
contributed surplus
The weighted-average assumptions used to estimate the fair value of stock
options granted are as follows:
2010 2009 2008
Risk free 2.5% 4.0% 4.0%
interest rate
Expected life 4.8 years 3 years 4.8 years
Expected 140.2% 122% 111%
volatility
Expected Nil nil nil
dividends
(c) Share purchase warrants
The continuity of share purchase warrants (each warrant exercisable into one
common share) for the period ended February 28, 2010 is as follows:
Expiry date November 22, May 09, 2009 May 09,
2009 (i) (ii) 2009 (iii)
Balance, February 29, 39,600,000 116,007,154 5,772,000
2008
Issued - - -
Exercised - - -
Expired - - -
Balance, February 28, 39,600,000 116,007,154 5,772,000
2009
Issued - - -
Exercised - - -
Expired (39,600,000) (116,007,154) (5,772,000)
Balance, February 28, - - -
2010
(i) The share purchase warrants were exercisable over three years with the
option to exercise at $0.60 expiring on November 22, 2007, the option to
exercise at $0.80 expiring on November 22, 2008 and the option to exercise at
$1.00 expiring on November 22, 2009. These warrants expired unexercised on
November 22, 2009.
(ii)In May 2007, Rockwell completed a $60 million private placement financing of
116,007,154 million equity units at $0.52 each with each unit consisting of one
common share and one share purchase warrant exercisable over two years at $0.70.
These warrants expired unexercised on May 9, 2009.
(iii)In May 2007, the Company issued 5,772,000 broker warrants exercisable over
two years at $0.70 that expired on May 9, 2009. Using a Black-Scholes option
pricing model, the fair value of the 5,772,000 broker warrants granted to the
amount of $1,693,197 (2008 - $1,693,197) had been reflected in the consolidated
balance sheet in fiscal 2009. The weighted-average assumptions used to estimate
the fair value of warrants granted were an expected volatility of 97%, expected
dividends of nil, expected life of 2 years and risk free rate of 4%. These
warrants expired unexercised on May 9, 2009.
(d) Private Placement, January 2008
In January 2008 the Company completed a brokered private placement of 24,101,526
common shares at a price of $0.60 per share for total proceeds of $13,860,916,
net of issue costs. The Company issued 500,000 common shares and paid a cash
fee of $300,000 as finder`s fees relating to the private placement. All shares
issued pursuant to the private placement are subject to a hold period expiring
on March 31, 2008.
Proceeds from the financing were used to fund Rockwell`s diamond operations and
new project evaluation and development.
(e) Shares issued, March 2008
On March 1, 2008, the Company issued 14,285,715 common shares at a price of
$0.55 per share for a total of $7,857,143 to increase its ownership of HCVW and
Klipdam by 34%, resulting in a total interest holding of 85%, and thereby
reducing the non-controlling interest of HCVW and Klipdam to 15%. Refer to note
8(b).
(f) Private Placements between December 2009 to February 2010
During February 2010, the Company completed private placements of 132,800,000
common shares at $0.065 per share for a total of $8,632,000. The company paid a
cash fee of $587,229 finder`s fees relating to the private placements.
Proceeds from the financing were used to repay short term debt, finance lease
obligations and fund diamond operations.
13. LOSS PER SHARE
Year ended Year Nine months
February 28, ended ended February
February 29,
28,
Number of common shares 2010 2009 2008
Basic weighted average 267,164,309 237,924,152 196,428,551
shares outstanding:
Weighted average shares
dilution adjustments:
Dilutive stock options - - -
Common share purchase - - -
warrants
Diluted weighted average 267,164,309 237,924,152 196,428,551
shares outstanding
Weighted average shares
dilution adjustments -
exclusions(a)
Stock options 22,818,890 7,956,168 7,462,000
Common share purchase - 161,379,154 161,379,154
warrants
(a) These adjustments were excluded, as they were anti-dilutive. Diluted loss
per share has not been presented separately on the Statements of Operations as
the effect of outstanding options and warrants would be anti-dilutive.
14. RELATED PARTY BALANCES AND TRANSACTIONS
Balances payable As at As at
February 28, February
2010 28, 2009
Jeffrey B Traders CC (d) - 7,890
Jakes Tyres (i) - 5,498
Banzi Trade 26 (Pty) Ltd (h) 603 -
Hunter Dickinson Services Inc. 627,435 180,267
(a)
Seven Bridges Trading (e) 13,285 -
Current balances payable 641,323 193,655
Liberty Lane (l) 414,566 383,330
Long-term balances payable 414,566 383,330
Balances receivable
Banzi Trade 26 (Pty) Ltd (h) 46,108 19,547
Diacor CC (k) - 29,668
46,108 49,215
Year ended Year ended Nine Months
Transactions February 28 February 28 February 29
2010 2009 2008
Services rendered and expenses
reimbursed:
Hunter Dickinson Services Inc. 961,042 1,280,316 863,861
(a)
Euro-American Capital - - 14,393
Corporation (b)
CEC Engineering (c) 17,818 26,904 39,766
Jeffrey B Traders CC (d) - - 52,740
Seven Bridges Trading (e) 139,789 - 57,952
Cashmere Trading (f) - 18,808 353,736
Banzi Trade 26 (Pty) Ltd (h) 17,688 29,768 47,575
Jakes Tyres (i) - 440,283 1,141,454
AA Van Wyk (j) - - 148,658
Diacor CC (k) - 39,510 3,888
Flawless Diamonds Trading 316,081 346,768 362,255
House (g)
Sales rendered to:
Banzi Trade 26 (Pty) Ltd (h) 1,989 884 -
All related party transactions are arms length transaction in the normal course
of business.
(a) Hunter Dickinson Services Inc. ("HDSI") is a private company with a director
in common with the Company. HDSI provides geological, technical, corporate
development, administrative and management services to, and incurs third party
costs on behalf of, the Company on a full cost recovery market related basis
pursuant to an agreement dated November 21, 2008.
(b) Euro-American Capital Corporation is a private company controlled by Rene
Carrier, a former director of the Company, which provided management services to
the Company at market rates for those services. Rene Carrier resigned as a
director in November 2008.
(c) CEC Engineering Ltd. is a private company owned by David Copeland, Chairman
and a director of the Company, which provides engineering and project management
services at market rates.
(d) Jeffrey B Traders CC is a private company controlled by Jeffrey Brenner, a
former director and employee of the Company, which provided management and
specialized diamond marketing services to the Company at market rates.
(e) Seven Bridges Trading 14 (Pty) Ltd (Seven Bridges Trading) is a wholly owned
subsidiary of Randgold Resources Ltd, a public company where Mark Bristow,
a director of the Company, serves in an executive capacity. Seven Bridges
Trading provides office, conferencing, information technology, and other
administrative and management services at market rates to the Company`s South
African subsidiaries.
(f) Cashmere Trade 19 (Pty) Ltd (Cashmere Trade) is a private company owned by
Hennie Van Wyk, a former officer of the Company, which provides helicopter
services for the movement of product on an ad-hoc basis at competitive market
rates thereby providing benefits to the Company and its employees in respect of
secure transport of high value product and reduced insurance premiums.
(g) Flawless Diamonds Trading House (Pty) Ltd ("Flawless Diamonds Trading
House") is a private company where certain directors, former directors and
officers of the Company, namely, Messr. Brenner, J W and D M Bristow and Van
Wyk, are shareholders of. Flawless is a registered diamond broker which
provides specialist diamond valuation, marketing and tender sales services to
the Company for a fixed fee of 1% of turnover which is below the market rate
charged by similar tender houses.
(h) Banzi Trade 26 (Pty) Ltd ("Banzi") is 49% owned by HC van Wyk Diamonds Ltd
and 51% by Bokomoso Trust. Banzi is an empowered private company established to
provide self sustaining job creation programs to local communities as part of
the company`s Social and Labour Plan which is required in terms of the Minerals
and Petroleum Resources Development Act ("MPRDA"). Banzi provides the Company
with buildings materials at market rates.
(i) Jakes Tyres is a private company with former directors and officers (H C van
Wyk) in common with the Company that provides tyres, tyre repair services and
consumables at market rates to Rockwell`s remote Middle Orange River operations.
(j) AA Van Wyk is a private company owned by a party related to a former
directors and officer of the Company, which provided contract mining services at
market rates.
(k) Diacor CC is a private company of which H C van Wyk, a former director and
officer of the Company, is a director from which the Company has purchased
consumable materials at market rates.
(l) Liberty Lane is the BEE partner of the Saxendrift property and has certain
directors in common with the Company.
15. INCOME TAXES
Income tax expense (recovery) differs from the amount which would result from
applying the statutory income tax rates in 2010 of 29.76% (2009 - 30.75%,
2008 - 33.55%) for the following reasons:
Year ended Year ended Nine months
February 28 February 28 ended
February 29
2010 2009 2008
Loss before income taxes and (11,282,350) (16,864,986) (1,006,849)
non-controlling interest
Expected income tax recovery (3,357,000) (5,186,000) (338,000)
Difference in foreign tax 156,000 (253,000) 298,000
rates
Permanent differences 912,000 1,232,000 1,200,000
Change in tax rate (195,946) 671,000 440,000
Change in valuation (185,000) (390,000) (477,000)
allowance
Other non-deductible items 6,000 586,000 1,317,400
Net income tax expense (2,626,054) (3,340,000) 2,440,400
(recovery)
As at February 28, 2010 and 2009, the estimated tax effect of the significant
components within the Company`s future tax assets and liabilities are as
follows:
As at As at
February 28 February 28
2010 2009
Future income tax asset
(liability)
Resource allowances 1,173,000 1,409,000
Loss carry forwards 7,332,000 4,767,000
Other 2,057,000 2,005,000
Total 10,562,000 8,181,000
Less: valuation allowance (6,380,000) (6,567,000)
4,182,000 1,614,000
Mineral properties (8,638,000) (8,090,000)
Equipment (7,089,000) (5,650,000)
Net future tax asset (11,545,000) (12,126,000)
(liability)
At February 28, 2010, the Company had available for deduction against future
taxable income non-capital losses in Canada of approximately $18,380,000 (2009 -
$16,394,000). These losses, if not utilized, will expire in various years
ranging from 2014 to 2030. Subject to certain restrictions, the Company also
had Canadian resource expenditures of approximately $4,691,000 (2009 -
$5,635,000), which are available to reduce taxable income in future years.
The Company has losses in South Africa of $9,773,000 (2009 - $2,000,000) which
are available for deduction against future taxable income.
The valuation allowance is a full valuation allowance against the net Future
Income Tax Allowance ("FITA") under Canadian Tax Law. The FITA in primarily
arises from the resource pools carried forward and the losses carried forward.
The rationale for placing a full valuation allowance against these FITAs is as
follows:
- The Company has cumulative losses in recent years;
- The Company has a history of tax losses expiring unused; and
- The Company`s resource pools are not likely to be utilized as the Company
would only be able to use its resource pools to offset income from the mine from
which the expenses were incurred.
16. SEGMENTED INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operation decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. All of the Company`s
operations are within the mineral exploration and diamond mining sector. The
Company`s resource properties are currently only located in the Northern Cape
region of the Republic of South Africa.
For the year Canada Chile South Total
ended February Africa
28, 2010
External revenue - - 29,776,933 29,776,933
Loss for the year (2,767,485) - (4,270,208) (7,037,693)
Total assets 1,232,734 - 104,010,652 105,243,386
Mineral property - - 30,850,998 30,850,998
interests
Property, plant - - 58,790,736 58,790,736
and equipment
For the year ended Canada Chile South Total
February 28, 2009 Africa
External revenue - - 34,330,078 34,330,078
Loss for the year (5,590,213) (135,528) (7,250,221) (12,975,962)
Total assets 575,275 - 105,787,141 106,362,416
Mineral property - - 28,894,477 28,894,477
interests
Property, plant - - 59,569,186 59,569,186
and equipment
For the nine Canada Chile South Total
months ended Africa
February 29, 2008
External revenue - - 36,038,106 36,038,106
Loss for the (3,393,226) (92,767) (5,917,035) (9,403,028)
period
Total assets 4,002,546 70,133. 129,620,445 133,693,124
Mineral property - 1 25,247,936 25,247,937
interests
Property, plant - - 64,831,636 64,831,636
and equipment
17. BANK INDEBTEDNESS AND RESTRICTED CASH
Consistent with the prior financial year, the Company has an overdraft facility
in the amount of ZAR28.0 million ($3.8 million) available for its operations
(current balance $698,015). This facility has an interest cost of prime
(currently 10% per annum) plus 0.6% and has a notarial bond over assets of
ZAR10.0 million ($1.3 million). The security for the ZAR28.0 million consists
of 2 notorial mortgage assets and property of the farm Holpan.
HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd, Saxendrift Mine (Pty) Ltd
holds guarantees by the bank towards Eskom (Electricity Provider) of
ZAR1,419,660 ($194,059) and the Department of Minerals and Energy (DME) of
ZAR21,200,228 ($2,898,067) towards rehabilitation expenses. In fiscal 2009 HC
van Wyk Diamonds Ltd, Klipdam Mining Company Ltd and Saxendrift Mine (Pty) Ltd
held guarantees by the bank towards Eskom (Electricity Provider) of ZAR1,225,300
($154,886) and the Department of Minerals and Energy (DME) of ZAR11,576,104
($1,463,292) towards rehabilitation expenses.
Restricted cash of $4,946 (2009 - $2,698,719) relates to monies held in trust by
the Company`s lawyers.
18. CONTINGENCIES
During the first quarter of 2008, pursuant to an amendment to the Midamines
Agreement, Durnpike paid consideration of US$600,000 to Midamines as
compensation for access to the entire concession area (Permit 331), as opposed
to the limited contract area. As part of such amendment, Midamines waived its
right to payment of the abovementioned US$1.2 million royalty payment due on
December 31, 2007.
Subsequently, and pursuant to Midamines` persistent breach of material
provisions of the Midamines Agreement (coupled with its failure to remedy such
instances of breach notwithstanding notice to do so), Durnpike and/or Rockwell
cancelled the Midamines Agreement. Midamines thereafter disputed the
entitlement of Durnpike and/or Rockwell to cancel the Midamines Agreement. It
has referred to arbitration a dispute against Durnpike and Rockwell, in which it
claims payment of an estimated and provisional amount of $41.8 million. Durnpike
and/or Rockwell have, in turn, instituted a counter-claim in the estimated and
provisional amounts of approximately ZAR25.4 million for equipment purchased by
Rockwell to undertake exploration and feasibility work, $1.6 million for start-
up and acquisition costs in the DRC, and US$20.0 million (while reserving the
right to increase the counter-claim to at least $164.9 million) as an initial
estimate of possible lost earnings.
Comprehensive documentation has been filed by the parties and arbitration
proceedings are pending in Belgium. The Company remains of the view that the
claim against it is without merit and will vigorously defend against it.
19. SUBSEQUENT EVENTS
(a) Etruscan Diamonds Limited
The Company has signed a term sheet with Etruscan diamonds Limited whereby the
Company proposes to purchase Etruscan`s Blue Gum diamond operation in the
Ventersdorp region, South Africa. The acquisition is for 74% of the operation
with the balance owned pursuant to South Africa`s Black Economic Empowerment
regime. The price to be paid to Etruscan is an amount not exceeding ZAR33.5
million (approximately $4.7 million) payable in Rockwell shares valued at $0.068
each. The Company will also assume certain non-material property maintenance
obligations effective immediately and other financial obligations upon
completion of the acquisition.
(b) Rights Offering
On March 19, 2010 the Company completed a rights offering whereby each
registered holder of the Company`s common shares on the record date received one
right for each common share held. The rights offering was 100% subscribed and
applications for additional shares were received but could not be fulfilled
because they exceeded the maximum. Pursuant to the rights offering, Rockwell
issued 92.7 million common shares at a subscription price of $0.05 per common
share yielding gross proceeds of approximately $4.6 million (ZAR33.2 million).
The Company plans to use the funds to modernize and re-commission the Wouterspan
operation which was placed on care and maintenance in January 2009, and identify
value add merger and acquisition targets such as the recently announced Etruscan
acquisition.
(c) Private placement
In March 2010, the company completed a private placement of 53.0 million common
shares at a price of $0.065 per share for total proceeds of $3.4 million. The
company paid a cash fee of $0.1 million finder`s fees relating to the private
placement.
Proceeds from the financing will be used to fund working capital on the mining
operations.
(d) Flawless Diamonds Trading House (Pty) Limited
On April 21, 2010 the Company acquired a 20% shareholding in Flawless Diamonds
Trading House (Pty) Limited from Hennie van Wyk for the amount of $95,686.
Flawless is a registered diamond broker which provides specialist diamond
valuation, marketing and tender sales services to the Company.
NOTICE OF THE ANNUAL GENERAL MEETING AND POSTING OF ANNUAL REPORT
The annual report will be posted to shareholders on 13 July 2010.
Notice of the annual general meeting will be advised in due course.
31 May 2010
Sponsor
Sasfin Capital
(A division of Sasfin Bank Limited)
Date: 31/05/2010 17:00:01 Produced by the JSE SENS Department.
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