| Thu 11 Nov 2010, 9:29 | | BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial |
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BCD
BCD
BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial
condition and results of operations for the three and nine month periods ended
September 30, 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 NINE MONTH PERIODS ENDED SEPTEMBER 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
nine month periods ended September 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 November 5, 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 and commodity
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 (the exploration
is being funded by Rio Tinto).
For the three and nine month periods ended September 30, 2010, the Company
reported a net loss of $260,133 and $645,642 respectively (compared to a net
loss of $4,879,248 and $8,423,420 respectively for the three and nine month
periods ended September 30, 2009). The net assets of the Company were
$4,842,697 as at September 30, 2010 (December 31, 2009: $5,316,213).
The Company`s accumulated deficit as at September 30, 2010 was $118,487,823
(December 31, 2009: $117,842,181). The Company had a working capital deficit of
$900,552 as at September 30, 2010 (December 31, 2009 - $577,386) and had a net
increase in cash of $82,833 and a net decrease in cash of $574,465 respectively
during the three and nine month periods ended September 30, 2010.
While the Company`s financial statements have been prepared on the basis of
accounting principles applicable to a going concern, adverse conditions may cast
substantial doubt upon the validity of this assumption. In the event the
Company is unable to identify recoverable resources, receive the necessary
permitting, or arrange appropriate financing, the carrying value of the
Company`s assets could be subject to material adjustment. Furthermore, certain
market conditions may 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 nine
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, 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
third quarter of 2010. The Company has interpreted these surveys and one target
warrants further work.
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 Coexco exploration permit areas have been received from
Rio Tinto`s heavy mineral laboratory in Perth, Australia. Several stream samples
have reported kimberlitic minerals and diamonds. The next phase is for all the
positive grains to be analysed using an electron microprobe to obtain the
mineral chemistry of these grains. The Coexco ground has been under `force
majeur` due to security issues on the eastern border of the permit areas since
2008. However, the area is now cleared of any risks and the Company with Coexco
is in the process of lifting the `force majeur` (and negotiating a new option
agreement) in order to start a follow up program.
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), Bas Congo Exploration ("BCE")
(2), BRC (3), Caspian Oil & Gas (2), and Investors Equity Limited ("IEL") (2).
BRC is also currently participating in negotiations for a new option agreement
with Coexco over exploration permits held by Coexco as referred to above (the
previous option agreement between BRC and Coexco had been cancelled).
Status of Exploration Permits of BRC and Partners in the DRC - Q3 2010
Company (Project) Permits at Q3 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 September 30, 2010, the Company reported a net
loss of $260,133 (or $0.00 per share), compared to a net loss of $4,879,248 (or
$0.19 per share) incurred during the three month period ended September 30,
2009.
For the nine month period ended September 30, 2010, the Company reported a net
loss of $645,642 (or $0.01 per share), compared to a net loss of $8,423,420 (or
$0.33 per share) incurred during the nine month period ended September 30, 2009.
For the three and nine month periods ended September 30, 2009, there was a loss
from continuing operations of $1,736,152 (or $0.07 per share) and $1,336,798 (or
$0.04 per share) respectively. Losses from discontinued operations of
$3,143,096 (or $0.12 per share) and $7,086,620 (or $0.29 per share), recorded
for the respective three and nine month periods ended September 30, 2009 were
related to the Company`s former South African division, which was disposed of
during 2009 (see Note 3 of the interim consolidated financial statements as at
and for the three and nine month periods ended September 30, 2010). For the
three and nine month periods ended September 30, 2009, this former division has
been classified as a discontinued operation.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the third quarter of 2010. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles. The
Company`s reporting and measurement currency is the Canadian dollar.
2010 2010 2010 2009
3rd 2nd 1st 4th
quarter quarter quarter quarter
Net loss ($`000) $260 $99 $287 $528
Net loss per share (basic $0.00 $0.00 $0.00 $0.01
and diluted)
2009 2009 2009 2008
3rd 2nd 1st 4th
quarter quarter quarter quarter
Net loss ($`000) $4,879 $2,062 $1,483 $90,873
Net loss per share (basic $3.70
and diluted)
$0.19 $0.08 $0.06
During the third quarter of 2010, the Company`s net loss increased to $260,133
compared to a net loss of $98,794 in the second quarter of 2010. This was
primarily due to an increase in professional fees which related to the Diamond
Core Resources (Pty) Ltd liquidation proceedings in South Africa. General and
administrative costs also increased in the third quarter of 2010 as a result of
fees relating to the Company`s listing on the JSE Limited in South Africa.
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 administrative 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 administrative costs.
During the fourth quarter of 2009, the Company`s net loss was $528,193 compared
to a net loss of $4,879,248 reported in the third quarter of 2009. 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 loss of $4,879,248 during the
third quarter of 2009 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. The high losses of the fourth quarter of 2008 were due mainly to the
impairment of goodwill, mineral properties and capital assets.
During the fourth quarter of 2008, the Company placed its operations on a care
and maintenance basis due to decreased funding for operations in the DRC and the
low prices diamond prices adversely affecting the bulk sampling operations in
South Africa.
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2010, the Company had cash of $90,030 and a working capital
deficit of $900,552, 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 and 2010, 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 has paid the Company a total of $956,503 during 2009 and
the first nine months of 2010 ($401,124 in 2010 and $555,379 in 2009).
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.
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 is currently carrying out 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
nine month periods ended September 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
September 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 is to receive cash proceeds of
US$500,000. The terms of the sale contemplated that the purchaser would enter
into an offer of compromise with the creditors of Diamond Core. As a result of
the purchaser acquiring control of the claims of the bulk of the creditors of
Diamond Core and security having been tendered by the purchaser for the balance
of the alleged claims against Diamond Core, the Northern Cape High Court in
South Africa has rescinded the liquidation order. There are certain legal and
administrative matters to be attended to before the US $500,000 may be available
to the Company, such that receipt by the Company of the US $500,000 is
uncertain.
As referred to in the Company`s annual financial statements for the year ended
December 31, 2009, a former director and officer of the Company had applied for
a summary judgment against the Company in the Witwatersrand Local Division of
the High Court of South Africa in respect of a dispute relating to a settlement
agreement pertaining to his departure. The application for summary judgment was
dismissed and the Company was granted leave to defend the claim. This
individual has not taken further steps to progress that matter. However, in
October 2010, almost two years after the original claim, the same former
director and officer instituted fresh proceedings against the Company. He has
repeated the claim made previously, but this time in a summons lodged before the
North Gauteng High Court in South Africa. The former director and officer is
claiming he is owed payment of 1.2 million South African rand plus interest. As
in the previous matter, the Company is defending this action. The other former
director of the Company referred to in the 2009 annual financial statements,
continues to threaten to proceed with action against the Company, but to date
has not served papers on the Company, and consequently the Company is unable to
estimate the quantum of any such possible claim. Any action he may institute
will be defended by the Company.
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 nine month periods ended September 30,
2010:
Tshikapa Other Total
Project Projects
$`000 $`000 $`000
(amounts rounded to the nearest thousand)
Balance 06/30/2010 2,794 3,145 5,939
Funds received from Rio Tinto (114) - (114)
Office and sundry 19 22 41
Depreciation 5 5 10
Field camp expenses 3 - 3
Remote sensing - - -
Geology 5 - 5
Business promotion - - -
Permits and surface taxes 5 - 5
Professional fees - - -
Stock based compensation 1 1 2
Transport and helicopter - 1 1
Foreign exchange profit (6) (6) (12)
Gain on sale of asset (90) - (90)
Subtotal - three month period ended September (172) 23 (149)
30, 2010
Balance 09/30/2010 2,622 3,168 5,790
Tshikapa Other Total
Project Projects
$`000 $`000 $`000
(amounts rounded to the nearest
thousand)
Balance 12/31/2009 2,890 2,919 5,809
Funds received from Rio Tinto (401) - (401)
Office and sundry 72 135 207
Depreciation 33 33 66
Field camp expenses 13 1 14
Remote sensing 2 - 2
Geology 5 - 5
Business promotion - 10 10
Permits and surface taxes 78 29 107
Professional fees 2 3 5
Stock based compensation 20 20 40
Transport and helicopter 1 21 22
Foreign exchange profit (3) (3) (6)
Gain on sale of asset (90) - (90)
Subtotal - nine month period (268) 249 (19)
ended September 30, 2010
Balance 09/30/2010 2,622 3,168 5,790
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at November 5, 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 nine month periods ended September 30, 2010, legal fees and
related costs of $14,808 and $95,176 respectively (three and nine months ended
September 30, 2009: $74,346 and $194,990 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 September 30,
2010 is $102,937 and is recorded in accounts payable (December 31, 2009:
$49,113).
As at September 30, 2010 an amount of $143,747 was owed to two directors of the
Company representing consulting fees and an advance (December 31, 2009:
$278,849). During the three and nine months ended September 30, 2010,
consulting fees of $50,000 and $150,000 respectively were incurred (same
respective periods in 2009: $50,000 and $150,000).
As at September 30, 2010, an amount of $66,611 (December 31, 2009: $nil) was
advanced by a company owned by a non-executive director of the Company.
As at September 30, 2010, an amount of $3,848 (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. During the three months
ended September 30, 2010, a drill rig was sold to Banro by the Company for gross
proceeds of $154,964.
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
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 scheduled the solutions development and the
implementation phase on many of the IFRS issues for the 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
nine month period ended September 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
September 31, 2009
30, 2010
$ $
Financial assets
Held-for-trading, measured at fair value
Cash 99,030 664,495
Loans and receivables, measured at amortized cost
Prepaid expenses and other assets 130,371 163,175
Financial liabilities
Other liabilities, measured at amortized cost
Accounts payable and accrued liabilities 906,747 1,027,172
Due to related parties 214,206 377,884
The balance sheet carrying amounts for cash, prepaid expenses and other
assets, accounts payable and accrued liabilities and amounts 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
September 30, 2010 Level 1
Assets:
Cash $90,030 -- -
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, cash flow obtained
pursuant to joint venture agreements, leases, and debt and equity markets.
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 nine month periods ended September 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 nine month periods ended September 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
$289,492 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
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
11 November 2010
SPONSOR
Arcay Moela Sponsors (Proprietary) Limited
Date: 11/11/2010 09:29:01 Produced by the JSE SENS Department.
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