| Wed 18 Aug 2010, 9:04 | | BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial |
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BCD
BCD
BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial
condition and results of operations for the three and six month periods ended
June 30, 2010
BRC DIAMONDCORE LTD
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2010
The following management`s discussion and analysis of financial condition and
results of operations (the "MD&A") has been prepared by management and provides
a review of the activities, results of operations and financial condition of BRC
DiamondCore Ltd. (the "Company" or "BRC") based upon Canadian generally accepted
accounting principles. This MD&A should be read in conjunction with the
unaudited interim consolidated financial statements as at and for the three and
six month periods ended June 30, 2010, as well as the notes thereto, the audited
consolidated financial statements as at and for the financial year of the
Company ended December 31, 2009 ("fiscal 2009") and the notes thereto and the
annual MD&A for fiscal 2009. All amounts are expressed in Canadian dollars
unless otherwise stated.
This MD&A is dated August 16, 2010. Additional information relating to the
Company, including the Company`s annual information form, is available on SEDAR
at www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other
than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may occur
in the future (including, without limitation, statements relating to exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on information
currently available to the Company.
Forward-looking statements are subject to a number of risks and uncertainties
that may cause the actual results of the Company to differ materially from those
discussed in the forward-looking statements, and even if such actual results are
realized or substantially realized, there can be no assurance that they will
have the expected consequences to, or effects on the Company. Factors that
could cause actual results or events to differ materially from current
expectations include, among other things, uncertainties relating to the
availability and costs of financing needed in the future, the possibility that
future exploration results will not be consistent with the Company`s
expectations, changes in equity markets, changes in diamond markets, foreign
currency fluctuations, political developments in the Democratic Republic of the
Congo (the "DRC"), changes to regulations affecting the Company`s activities,
delays in obtaining or failure to obtain required project approvals, the
uncertainties involved in interpreting geological data and the other risks
involved in the mineral exploration business. Any forward-looking statement
speaks only as of the date on which it is made and, except as may be required by
applicable securities laws, the Company disclaims any intent or obligation to
update any forward-looking statement, whether as a result of new information,
future events or results or otherwise. Although the Company believes that the
assumptions inherent in the forward-looking statements are reasonable, forward-
looking statements are not guarantees of future performance and accordingly
undue reliance should not be put on such statements due to the inherent
uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond properties
in known diamond producing areas in the DRC. The Company also has a 25%
interest in an iron ore exploration project in the northern DRC (exploration is
being funded by Rio Tinto).
For the three and six month periods ended June 30, 2010, the Company reported a
net loss of $98,794 and $385,509 respectively (compared to a net loss of
$2,061,627 and $3,544,173 respectively for the three and six month periods ended
June 30, 2009). The net asset value of the Company was $5,102,764 as at June
30, 2010 (December 31, 2009: $5,316,213).
The Company`s accumulated deficit as at June 30, 2010 was $118,227,690 (December
31, 2009: $117,842,181). The Company had a working capital deficit of $865,844
as at June 30, 2010 (December 31, 2009 - $577,386) and had a net decrease in
cash of $195,007 and $657,298 respectively during the three and six month
periods ended June 30, 2010.
While the Company`s financial statements for the first and second quarters of
2010 have been prepared on the basis of accounting principles applicable to a
going concern, adverse conditions may cast substantial doubt upon the validity
of this assumption. In the event the Company is unable to identify recoverable
resources, receive the necessary permitting, or arrange appropriate financing,
the carrying value of the Company`s assets could be subject to further material
adjustment. Furthermore, certain current market conditions including ongoing
depressed diamond carat prices have cast significant doubt upon the validity of
this assumption.
The Company`s ability to continue operations in the normal course of business is
dependent on several factors, including its ability to secure additional
funding. Management has been 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
deferred exploration expenditures 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 spent costs through a
disposition of its interests, all of which are uncertain.
DRC Projects
The Company`s present operations consist of the exploration and evaluation of
several mineral properties for diamonds in the DRC. During the first six months
of 2010, the Company`s exploration programs in the DRC focussed on the Tshikapa
area in the southern DRC and the Bafwasende region in the northern DRC. See
also the discussion under "Liquidity and Capital Resources" with respect to the
Company`s interest in an iron ore exploration project.
Tshikapa Project (11 exploration permits)
Fieldwork with the ground magnetic surveys conducted over the Investors Equity
Ltd exploration permit areas (permit numbers 976 and 977), which were initiated
during the first quarter of 2010, continued and were completed during the second
quarter of 2010. These blocks were surveyed along lines at 50 metre line
spacing and with 50 metre station intervals. No further field work was
conducted during the second quarter. The Company is waiting for the
interpretation of these ground magnetic surveys before embarking on a drilling
campaign.
Northern DRC Project (4 exploration permits)
Results from stream samples collected on a spacing of one sample to every 20 to
25 kmSquared over the ex-Coexco exploration permit areas continue to be reported
on by Rio Tinto`s heavy mineral laboratory in Perth, Australia. So far there
have been a few stream samples with possible kimberlitic minerals but since not
all results have been received it is too early to draw any conclusions out of
these samples. The next phase is for all the positive grains to be analysed
using an electron microprobe to obtain the mineral chemistry of these grains.
Security of Tenure
The exploration program in the DRC is focussed on two areas: one in the northern
DRC and one in the southern part of the country. Exploration permits have been
secured in both areas and are in good standing. Two exploration permit
applications are still at CAMI for consideration. BRC will keep its focus on
the following exploration permits which are held by BRC directly or by partners
through various option agreements: Acacia (6), BCE (2), BRC (3), Caspian Oil &
Gas (2), and IEL (2).
Status of Exploration Permits of BRC and Partners in the DRC - Q2 2010
Company (Project) Permits at Q2 2010
Permits KmSquared
BRC (2 - DRC north, 1 -Tshikapa) 3 1,166
Acacia (Tshikapa) 6 1,055
BCE (DRC north) 2 780
Caspian O &G (Tshikapa) 2 178
IEL (Tshikapa) 2 279
Total 15 3,458
QUALIFIED PERSON AND TECHNICAL REPORT
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project is
contained in the technical report prepared by Dr. Michiel C. J. de Wit and
Fabrice Matheys, dated March 31, 2009 and titled "National Instrument 43-101
Technical Report on the Tshikapa Project of BRC DiamondCore Ltd. in the
Democratic Republic of the Congo". A copy of this report can be obtained from
SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
For the three month period ended June 30, 2010, the Company reported a net loss
of $98,794 (or $0.00 per share), compared to a net loss of $2,061,627 (or $0.07
per share) incurred during the three month period ended June 30, 2009.
For the six month period ended June 30, 2010, the Company reported a net loss of
$385,509 (or $0.00 per share), compared to a net loss of $3,544,172 (or $0.14
per share) incurred during the six month period ended June 30, 2009.
For the three and six month periods ended June 30, 2009, there was a loss from
continuing operations of $230,178 (or $0.00 per share) and net income from
continuing operations of $57,997 (or $0.01 per share) respectively. Losses from
discontinued operations of $1,831,449 (or $0.07 per share) and $3,602,170 (or
$0.14 per share), recorded for the respective three and six month periods ended
June 30, 2009 were related to the Company`s former South African division, which
was disposed of during 2009 (see Note 3 of the interim consolidated financial
statements as at and for the three and six month periods ended June 30, 2010).
For the three and six month periods ended June 30, 2009, this former division
has been classified as a discontinued operation.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the second quarter of 2010. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2010 2010 2009 2009
2nd 1st 4th 3rd quarter
quarter quarter quarter
Net loss ($`000) $99 $287 $528 $4,879
Net loss per share (basic $0.00 $0.00 $0.01 $0.19
and diluted)
2009 2009 2008
2008
2nd 1st 4th 3rd quarter
quarter quarter quarter
Net loss ($`000) $2,062 $1,483 $90,873 $7,498
Net loss per share (basic $0.08 $0.06 $3.70 $0.31
and diluted)
During the second quarter of 2010, the Company`s net loss decreased to $98,794
compared to a net loss of $286,715 in the first quarter of 2010. Net loss
recorded during the first quarter of 2010 was significantly impacted by the
recognition of stock based compensation expense of $132,000 compared to $nil
recorded during the second quarter of 2010. General and administration costs
were also lower in the second quarter of 2010 as compared to the first quarter
of 2010.
During the first quarter of 2010, the Company`s net loss decreased to $286,715
compared to $528,193 in the last quarter of 2009, due mainly to lower
professional fees and general and administration costs.
During the fourth quarter of 2009, the Company`s net loss was $528,193 compared
to a net loss of $90,873,000 reported during the fourth quarter of 2008. The
loss in the fourth quarter of 2009 was mainly related to the loss on the
disposition of the Company`s former South African division. The high losses of
the fourth quarter of 2008 were due mainly to the impairment of goodwill,
mineral properties and capital assets.
In the third quarter of 2009, the loss of $4,879,248 comprised a loss of
$3,143,096 attributable to discontinued operations and $1,736,152 attributable
to continued operations. The loss per share was $0.12 for discontinued
operations and $0.07 for continued operations.
During the second quarter of 2009, the Company`s net loss was $2,062,000
compared to a net loss of $1,483,000 reported during the first quarter of 2009.
The increased loss, reported in Canadian dollars, was partially as a result of a
17% appreciation in the South African rand over the second quarter. There were
additional costs associated with retrenchment of employees. During the second
quarter of 2009, the Company maintained its decision to place its former South
African bulk sampling operations on a care and maintenance basis as a result of
market conditions. Similarly, the DRC exploration activities remained on a care
and maintenance basis as a result of decreased funding for operations in the
DRC.
During the first quarter of 2009, the Company`s net loss reduced to $1,482,545
compared to a net loss of $90,873,000 reported during the fourth quarter of
2008. This change was mainly as a result of the Company`s decision to place its
operations on a care and maintenance basis as a result of decreased funding for
operations in the DRC and the low diamond prices adversely affecting the bulk
sampling operations in South Africa, which was in effect throughout the first
quarter of 2009 but for only part of the fourth quarter of 2008.
During the fourth quarter of 2008, the Company`s net loss increased to
$90,873,000 compared to a net loss of $7,498,000 reported during the third
quarter of 2008. This increase was due mainly to the impairment of goodwill,
mineral properties and capital assets.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2010, the Company had cash of $7,197 and a working capital
deficit of $865,844, compared to cash of $664,495 and a working capital deficit
of $577,386 as at December 31, 2009.
The Company has no operating revenues and is wholly reliant upon external
financing to fund its activities. There is no assurance that such financing
will be available on acceptable terms, if at all.
In 2009, the Company successfully raised funds by selling participation in its
projects or areas where it held the exploration rights. This was the case with
Rio Tinto who paid the Company $555,379.
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") in which the diamond and iron ore rights had
been controlled by the Company. Under the JV Agreement, which is in the form of
a shareholders` agreement, the Company owns 25% of the share capital of the
joint venture company which owns the DRC company that holds the Permits, with
Rio Tinto owning 75% of the share capital of the joint venture company.
Upon finalization of the transaction, Rio Tinto made further payments to the
Company amounting to US$150,000.
Under the JV Agreement, all iron ore exploration up to and including the
completion of any feasibility study 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
operator. After the completion of any feasibility study, funding for the
project is to be provided by Rio Tinto and BRC pro rata based on their
respective interests in the joint venture company.
Initial geological research and exploration indicates that the Permit areas,
which are largely unexplored using modern exploration methods, are highly
prospective for the discovery of iron ore deposits. As part of the 2010
exploration program, Rio Tinto plans to undertake a reconnaissance drill program
over the Permit areas.
The Company`s liquidity requirements are thus met through a variety of sources,
including cash on hand and equity markets.
In general, market conditions have limited the availability of funds. Given the
Company`s financial position and available resources, the Company currently
expects a need to access equity markets for financing over the next twelve
months. However, as the duration of the general economic uncertainty and its
detrimental effect on capital markets is unknown, it is difficult to determine
the long-term impact on the Company. In light of current conditions, the
Company has continued a series of measures to bring its spending in line with
the projected cash flows from its operations in order to preserve its balance
sheet and maintain its liquidity position. Management believes that based on
its current financial position and liquidity profile, the Company will need
additional financing in order to satisfy its obligations. The unaudited
consolidated financial statements of the Company as at and for the three and six
month periods ended June 30, 2010 have been prepared in accordance with Canadian
GAAP applicable to a going concern.
Contractual obligations (not on balance sheet) entered into by the Company as at
June 30, 2010 and as at December 31, 2009 were nil.
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. The Company
had expected to pay US$350,000 as an option exercise fee. 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.
Diamond Core Resources (Pty) Ltd ("Diamond Core"), which had been the holding
company of the Company`s former projects in South Africa, was subject to a
liquidation order on July 3, 2009. Effective July 3, 2009, as a result of the
said liquidation order, the Company ceased to consolidate Diamond Core`s
consolidated 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 has acquired control of the claims of the bulk of the creditors of
Diamond Core to reach a settlement. It is uncertain whether such a settlement
will be achieved, as this requires the purchaser to have Diamond Core brought
out of liquidation, and whether, therefore, the Company will receive the said
US$500,000. An application is currently before the Northern Cape High Court in
South Africa to rescind the liquidation order. The application is being opposed
by the liquidators.
MINERAL PROPERTIES AND DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures in the DRC for the three and six month periods ended June 30, 2010:
Tshikapa Other Total
(Acacia) Projects
Project
$`000 $`000 $`000
(amounts rounded to the nearest thousand)
Balance 03/31/2010 2,780
3,098 5,878
Funds received from Rio Tinto (117) - (117)
Office and sundry 37 13 50
Depreciation 14 14 28
Field camp expenses 7 - 7
Remote sensing 2 - 2
Business promotion - 8 8
Permits and surface taxes 62 - 62
Professional fees 1 2 3
Stock based compensation (1) (1) (2)
Transport and helicopter - 2 2
Foreign exchange profit 9 9 18
Subtotal - three month period ended June 14 47 61
30, 2010
Balance 06/30/2010 2,794 3,145 5,939
Tshikapa Other Total
(Acacia) Projects
Project
$`000 $`000 $`000
(amounts rounded to the nearest thousand)
Balance 12/31/2009
2,890 2,919 5,809
Funds received from Rio Tinto (287) - (287)
Office and sundry 53 113 166
Depreciation 28 28 56
Field camp expenses 10 1 11
Remote sensing 2 - 2
Business promotion - 10 10
Permits and surface taxes 73 29 102
Professional fees 2 3 5
Stock based compensation 19 19 38
Transport and helicopter 1 20 21
Foreign exchange profit 3 3 6
Subtotal - six month period ended June 30, (96) 226 130
2010
Balance 06/30/2010 2,794 3,145 5,939
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at August 16, 2010, the Company had outstanding 89,408,640
common shares, stock options to purchase an aggregate of 2,516,503 common shares
of the Company and warrants to purchase an aggregate of 20,000,000 common shares
of the Company.
RELATED PARTY TRANSACTIONS
During the three and six month periods ended June 30, 2010, legal fees and
related costs of $25,026 and $80,368 respectively (three and six months ended
June 30, 2009: $72,140 and $119,993 respectively) 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. The amount owing as at June 30, 2010 is
$90,313 and is recorded in accounts payable (December 31, 2009: $49,113).
As at June 30, 2010 an amount of $83,333 was owed to two directors and officers
of the Company representing management fees (December 31, 2009: $278,849).
During the three and six months ended June 30, 2010, management fees of $50,000
and $100,000 respectively were incurred (same respective periods in 2009:
$50,000 and $100,000).
As at June 30, 2010, an amount of $31,197 (December 31, 2009: $nil) was
advanced by a company owned by a non-executive director of the Company.
As at June 30, 2010, an amount of $3,980 (December 31, 2009 - $3,922) was owed
to Banro Corporation ("Banro"). Banro owns 35,433,987 common shares of the
Company, representing a 39.63% interest in the Company.
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.
FUTURE ACCOUNTING STANDARDS
a) Business Combinations / Consolidated Financial Statements / Non-Controlling
Interests
In January 2009, the Canadian Institute of Chartered Accountants (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
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that
Canadian Generally Accepted Accounting Principles ("Canadian GAAP") for publicly
accountable enterprises will be converged with International Financial Reporting
Standards ("IFRS") effective in the calendar year 2011. The conversion to IFRS
will be required, for the Company, for interim and annual financial statements
beginning on January 1, 2011. IFRS uses a conceptual framework similar to
Canadian GAAP, but there are significant differences on recognition, measurement
and disclosures. The AcSB has confirmed January 1, 2011 as the date that IFRS
will replace Canadian GAAP for publicly accountable enterprises. As a result,
the Company will report under IFRS for interim and annual periods beginning
January 1, 2011, with comparative information for 2010 restated under IFRS.
Adoption of IFRS in place of Canadian GAAP will require the Company to make
certain accounting policy choices and could materially impact the reported
financial position and results of operations.
IFRS Transition Plan
During fiscal 2009, the Company completed the diagnostic phase of the project
and began a comprehensive analysis of Canadian GAAP and IFRS differences as well
as an assessment of the impact on operations, data systems and internal controls
over financial reporting. During fiscal 2010, the Company is scheduled to
complete the detailed assessment phase for all standards that affect the
transition. The Company has scheduled the solutions development and the
implementation phase on many of the IFRS issues for the third and fourth quarter
of 2010.
The Company has identified areas noted below as those expected to have the most
significant impact on the financial statements. The differences are based on
IFRS standards effective as at the date of this MD&A. The International
Accounting Standards Board ("IASB") continues to amend and add to current IFRS
standards with several projects underway. The Company`s transition plan
includes monitoring actual and anticipated changes to IFRS and related rules and
regulations and assessing the impacts of these changes on the Company and its
financial statements, including expected dates of when such impacts are
effective. Key differences identified as of the date of this MD&A are as
follows:
Impairment of Property, Plant and Equipment
Under Canadian GAAP, whenever the estimated future cash flows on an undiscounted
basis of a property is less than the carrying amount of the property, an
impairment loss is measured and recorded based on fair values. Under IFRS, IAS
36 Impairment of Assets ("IAS 36") requires an impairment charge to be
recognized if the recoverable amount, determined as the higher of the estimated
fair values less costs to sell or value in use, is less than carrying amount.
The impairment charge under IFRS is equal to the amount by which the carrying
amount exceeds the recoverable amount. The difference in testing and
determining an impairment may result in more frequent impairment charges, where
carrying values of assets may have been supported under Canadian GAAP on an
undiscounted cash flow basis, but cannot be supported on a discounted cash flow
basis.
IAS 36 also requires the reversal of any previous impairment losses where
circumstances requiring the impairment charge have changed and reversed.
Canadian GAAP does not permit the reversal of impairment losses in any
circumstance.
Property, Plant and Equipment
Under Canadian GAAP, costs incurred for property, plant and equipment on initial
recognition are allocated to significant components when practicable. Costs
incurred subsequent to the initial purchase of property, plant and equipment are
capitalized when they constitute a betterment, which occurs when the productive
capacity or useful life of an existing asset is increased or when the associated
operating costs is decreased. Otherwise, these costs are expensed. Under IAS
16 Property, Plant and Equipment, costs incurred for property, plant and
equipment on initial recognition are allocated to significant components,
capitalized and depreciated separately over the estimated useful lives of each
component. Practicability of allocating to significant components is not
considered under IFRS. Costs incurred subsequent to the initial purchase of
property, plant and equipment are capitalized when it is probable the future
economic benefits will flow to the Company over a period and the costs can be
measured reliably. Upon capitalization, the carrying amount of components
replaced, if any, are derecognized. The Company is still analyzing its
property, plant and equipment (eg. Capital assets) to determine if an opening
IFRS balance sheet adjustment is necessary.
Share Based Payments
The Company has examined IAS 2 Share Based Payments ("IAS 2") and has determined
the following differences compared to Canadian GAAP: 1) Instalment vesting
periods - Under IAS 2, each new instalment must be treated as a separate issue
and therefore be measured at the fair value at each vesting period; 2)
Forfeitures - Management is required to estimate expected forfeitures of all
option grants. For any unvested options, the fair value will be recalculated
using IFRS guidance upon adoption.
Other Accounting Policies
The Company continues to evaluate the impact of IFRS adoption on other areas,
which may result in significant differences from current Canadian GAAP
accounting policies. The IASB has several projects slated for completion in 2010
and 2011 that may significantly impact the transition to IFRS and the financial
statements of the Company. The Company continues to monitor the IASB`s progress
on these projects and their impact on the Company`s transition plan to IFRS.
Impact on Information Systems and Technology
The adoption of IFRS may have some impact on the Company`s information systems`
requirements. The Company is assessing the need for systems upgrades or
modifications to ensure an efficient conversion to IFRS. The main drivers for
systems changes include:
- Additional information required as a result of enhanced note disclosures,
Tracking of IFRS to Canadian GAAP differences during the transition, and
- Tracking sufficient level of details within the accounting records to allow
management to maintain adherence with IFRS going forward.
- The impact and changes to systems are on-going and will be prioritized as
part of the project.
Impact on Internal Controls over Financial Reporting and Disclosure Controls and
Procedures
The adoption of IFRS may have a significant impact on the Company`s internal
controls over financial reporting ("ICFR") and disclosure controls and
procedures ("DC&P") due mainly to changes in financial reporting disclosures
requirements. IFRS requires significantly more disclosure than Canadian GAAP for
certain standards. In some cases, IFRS also requires different presentation on
the balance sheet and income statement. This will be the most significant impact
to the Company. Specifically, the increased disclosure requirements will cause
the Company to change current processes and implement new financial reporting
processes to ensure the appropriate data is collected for disclosure purposes.
During fiscal 2010, the Company will assess all entity-level, information
technology, disclosure and business process controls which may require updating
and testing to reflect changes arising from conversion to IFRS. Where material
changes are identified, these changes will be mapped and tested to ensure that
no material control deficiencies exist as a result of the Company`s conversion
to IFRS. Currently the Company does not anticipate any changes that may
materially impact its ICFR and DC&P as a result of the conversion to IFRS.
IFRS Transition Disclosures
As the Company executes its IFRS transition plan and moves from Canadian GAAP to
IFRS, the Company`s disclosure on accounting differences is expected to
increase.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the consolidated
financial statements include the Company`s estimate of the recoverable value of
its mineral properties and related deferred exploration expenditures, foreign
currency translation and stock-based compensation. All of these estimates
involve considerable judgment and are, or could be, affected by significant
factors that are out of the Company`s control.
Mineral Properties and Deferred Exploration Expenditures
The Company`s recoverability of the recorded value of its mineral properties and
associated deferred exploration expenses is based on market conditions for
minerals, any underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company to
obtain necessary financing to complete the development and future profitable
production or the proceeds of disposition thereof.
Management uses its best available information to identify the point at which a
development project is capitalized, assess resources, future costs and benefits
and, where considered necessary, engages qualified third-party professionals to
assist in the process. Changing assumptions about future commodity prices,
exchange rates, production costs and revised information on any resources may
change management`s recoverable amounts and depletion and amortization.
Foreign Currency Translation
The functional currency of the Company is Canadian dollars. The Company
undertakes transactions in currencies other than the Canadian dollar, including
US dollars. As part of its ongoing review of critical accounting policies and
estimates, the Company reviews the foreign currency translation method of its
foreign operations to determine if there are significant changes to economic
facts and circumstances that may indicate whether or not the foreign operations
are largely self-sufficient and the economic exposure is more closely tied to
their respective domestic currencies. Any change in translation method
resulting from this review will be accounted for prospectively. The Company had
accounted for its South African operations as self-sustaining and accounts for
its DRC operations as an integrated foreign operation.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and interest
rates, all of which are based on historical information. Future behaviors of
these parameters are beyond the Company`s control, and thus, may be
significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-Scholes
option-pricing model, based on the following factors:
(i) risk-free interest rate: 3.075% (December 31, 2009 - 3.075%)
(ii) expected volatility: 95% (December 31, 2009 - 95%)
(iii) expected life: 5 years (December 31, 2009 - 5 years)
(iv) expected dividends: $Nil (December 31, 2009 - $Nil)
CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
- to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need
arise; and
- to maintain financial flexibility in order to have access to capital in the
event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes in
economic conditions and the risk characteristics of the underlying assets.
There were no changes to the Company`s approach to capital management during the
six month period ended June 30, 2010.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not, by
its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by another
party carrying out further exploration. There is no assurance that such sources
of financing will be available on acceptable terms, if at all. In the event
that commercial quantities of minerals are found on the Company`s properties,
the Company does not have the financial resources at this time to bring a mine
into production.
The current financial climate is characterized by volatile and uncertain times.
The uncertainty of forward looking statements is therefore greater. Diamond
prices have reduced significantly as a result of the economic downturn and any
recovery could be accompanied by volatility.
All of the Company`s projects are located in the DRC The assets and operations
of the Company are therefore subject to various political, economic and other
uncertainties, including, among other things, the risks of war and civil unrest,
hostage taking, military repression, labor unrest, illegal mining,
expropriation, nationalization, renegotiation or nullification of existing
licenses, permits, approvals and contracts, taxation policies, foreign exchange
and repatriation restrictions, changing political conditions, international
monetary fluctuations, currency controls and foreign governmental regulations
that favor or require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. Changes, if any, in mining or investment policies or
shifts in political attitude in the DRC may adversely affect the Company`s
operations. Operations may be affected in varying degrees by government
regulations with respect to, but not limited to, restrictions on production,
price controls, export controls, currency remittance, income taxes, foreign
investment, maintenance of claims, environmental legislation, land use, land
claims of local people, water use and mine safety.
Failure to comply strictly with applicable laws, regulations and local practices
relating to mineral rights could result in loss, reduction or expropriation of
entitlements. In addition, in the event of a dispute arising from operations in
the DRC, the Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in Canada. The Company also may be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because
of the doctrine of sovereign immunity. It is not possible for the Company to
accurately predict such developments or changes in laws or policy or to what
extent any such developments or changes may have a material adverse effect on
the Company`s operations.
The DRC is a developing nation emerging from a period of civil war and conflict.
Physical and institutional infrastructure throughout the DRC is in a debilitated
condition. The DRC is in transition from a largely state controlled economy to
one based on free market principles, and from a non-democratic political system
with a centralized ethnic power base, to one based on more democratic
principles. There can be no assurance that these changes will be effected or
that the achievement of these objectives will not have material adverse
consequences for the Company and its operations. The DRC continues to
experience violence and significant instability in parts of the country due to
certain militia and criminal elements. While the government and United Nations
forces are working to support the extension of central government authority
throughout the country, there can be no assurance that such efforts will be
successful.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations. The
exploration and development of mineral deposits involve significant financial
risks over a significant period of time which even a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which
are explored are ultimately developed into producing mines. Major expenditures
may be required to establish reserves by drilling and to construct mining and
processing facilities at a site. It is impossible to ensure that the Company`s
exploration programs will result in a profitable commercial mining operation.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate may
result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development of
its properties is subject to all of the hazards and risks normally incident to
mineral exploration and development, any of which could result in damage to life
or property, environmental damage and possible legal liability for any or all
damage.
The natural resource industry is intensely competitive in all of its phases, and
the Company competes with many companies possessing greater financial resources
and technical facilities than itself.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair value of financial instruments
The Company has classified financial instruments as follows:
As at
As at December 31,
June 30, 2009
2010
$ $
Financial assets
Held-for-trading, measured
at fair value
Cash 7,197 664,495
Loans and receivables,
measured at amortized cost
Prepaid expenses and other 126,569 163,675
assets
Financial liabilities
Other liabilities, measured
at amortized cost
Bank indebtedness 7,686 -
Accounts payable and 873,413 1,027,172
accrued liabilities
Due to related parties 118,511 377,884
The balance sheet carrying amounts for cash, prepaid expenses and other assets,
bank indebtedness, accounts payable and accrued liabilities and due to related
parties 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
June 30, 2010 Level 1
Assets:
Cash $ 7,197 - -
b)Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange and
interest rates. The Company`s board of directors has overall responsibility for
the establishment and oversight of the Company`s risk management framework.
Although the Company has the ability to address its price-related exposures
through the use of options, futures and forward contracts, it does not generally
enter into such arrangements. Similarly, derivative financial instruments are
not used to reduce these financial risks.
c)Credit risk
Financial instruments which are potentially subject to credit risk for the
Company consist primarily of cash. Cash is maintained with several financial
institutions of reputable credit and may be redeemed upon demand. It is
therefore the Company`s opinion that such credit risk is subject to normal
industry risks and is considered minimal.
d)Liquidity risk
Liquidity risk arises from the Company`s financial obligations and in the
management of its assets, liabilities and optimal capital structure. The Company
manages this risk by regularly evaluating its liquid financial resources to fund
its current and long term obligations and to meet its capital commitments in a
cost effective manner. The main factors that affect liquidity include working
capital requirements, future capital expenditure requirements, 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 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.
The Company`s unaudited interim consolidated financial statements as at and for
the three and six month periods ended June 30, 2010 have been prepared in
accordance with Canadian GAAP applicable to a going concern (see Note 1 to such
statements).
e)Currency risk
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Monetary assets and liabilities denominated in foreign
currencies are translated from US dollars and Congolese francs into Canadian
dollars. Unfavourable changes in the applicable exchange rate may result in a
decrease or increase in foreign exchange gains or losses. The Company does not
use derivative instruments to reduce its exposure to foreign currency risk.
For the three and six month periods ended June 30, 2010, 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 $296,965 decrease
and increase in the value of mineral properties and deferred exploration
expenditures in the DRC.
f)Interest rate risk
Interest rate risk is the potential impact on the Company`s financial condition
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
Bank indebtedness Variable interest rate
Accounts payable and accrued liabilities Non-interest bearing
g)Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or currency
exchange rates. The Company manages the market risk associated with commodity
prices by establishing and monitoring parameters that limit the types and degree
of market risk that may be undertaken.
h)Title risk
Title to mineral properties involves certain inherent risks due to the
difficulties of determining the validity of certain claims as well as the
potential for problems arising from the frequently ambiguous conveyancing
history characteristic of many mining properties. Although the Company has
investigated title to all of its mineral properties for which it holds 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 local laws of the jurisdiction in which
the Company operates.
i)Country risk
The DRC is a developing country and as such, the Company`s exploration projects
in the DRC could be adversely affected by uncertain political or economic
environments, war, civil or other disturbances, and a changing fiscal regime and
by DRC`s underdeveloped industrial and economic infrastructure.
The Company`s operations in the DRC may be effected by economic pressures on the
DRC. Any changes to regulations or shifts in political attitudes are beyond the
control of the Company and may adversely affect its business. Operations may be
affected in varying degrees by such factors as DRC government regulations with
respect to currency conversion, production, price controls, export controls,
income taxes or reinvestment credits, expropriation of property, environmental
legislation, land use, water use and mine safety.
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not
result in a change in the policies of the DRC government or the imposition of
more stringent foreign investment restrictions. Such changes cannot be
accurately predicted.
JOHANNESBURG
18 August 2010
SPONSOR
Arcay Moela Sponsors (Proprietary) Limited
Date: 18/08/2010 09:04:01 Produced by the JSE SENS Department.
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