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EPS
EPS
EPS - Eastern Platinum Limited - Management`s discussion and analysis of
financial conditions and results of operations for the three and twelve months
ended December 31, 2010
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA 2768551038
Share Code AIM: ELR ISIN: CA 2768551038
Share Code JSE: EPS ISIN: CA 2768551038
EASTERN PLATINUM LIMITED MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS FOR THE THREE AND TWELVE MONTHS ENDED
DECEMBER 31, 2010
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
December 31, 2010 and for the three and twelve months then ended in comparison
to the same period in 2009.
In February 2009, the applicable provincial securities commissions granted the
Company exemptive relief to adopt International Financial Reporting Standards
("IFRS") with an adoption date of January 1, 2009 and a transition date of
January 1, 2008.
This MD&A should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2010 and supporting notes. These
consolidated financial statements have been prepared using accounting policies
in compliance with IFRS as issued by the International Accounting Standards
Board ("IASB").
In this MD&A, the Company also reports certain non-IFRS measures such as EBITDA
and cash costs per ounce which are explained in Section 3.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is March 21, 2011. Additional information relating
to the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Summary of results
2.1. Summary of results for the quarter ended December 31, 2010
2.2. Summary of results for the twelve months ended December 31, 2010
3. Results of operations for the three and twelve months ended December 31, 2010
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-IFRS measures
3.3. Development projects
3.3.1. CRM
3.3.2. Eastern Limb projects
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Impairment
4.3. Share capital
4.4. Contractual obligations and commitments
5. Related party transactions
6. Critical accounting policies and estimates
6.1. Property, plant and equipment
6.2. Revenue recognition
6.3. Share-based payment
6.4. Provision for environmental rehabilitation
7. Adoption of accounting standards and accounting pronouncements under IFRS
7.1. Application of new and revised IFRSs
7.2. Accounting standards issued but not yet effective
8. Risk factors
8.1. Risks associated with the mining industry
8.2. Risks associated with foreign currencies
8.3. Risks associated with metals prices
8.4. Risks associated with foreign operations
8.5. Risks associated with granting of exploration, mining and other
licenses
8.6. Risks associated with the development of the Mareesburg PGM Project
9. Internal control over financial reporting
10. Cautionary statement on forward-looking information
1. Overview
Eastplats is a platinum group metals ("PGM") producer engaged in the mining and
development of PGM deposits with properties located in South Africa. All of the
Company`s properties are situated on the western and eastern limbs of the
Bushveld Complex ("BC"), the geological environment that supports over 75% of
the world`s PGM mine production.
The Company`s primary operating asset is an 87.5% direct and indirect interest
in Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC and
the non-producing Kennedy`s Vale Project located on the Eastern Limb of the BC.
The Company also has a 75.5% direct and indirect interest in Mareesburg Platinum
Project ("Mareesburg") and a 93.4% direct and indirect interest in Spitzkop PGM
Project ("Spitzkop"), both located on the Eastern Limb of the BC.
2. Summary of results
2.1 Summary of results for the quarter ended December 31, 2010 ("Q4 2010")
* Eastplats recorded a net profit attributable to equity shareholders of the
Company of $5,041,000 ($0.01 basic earnings per share) in Q4 2010 compared to
$330,000 ($0.00 per share) in the fourth quarter of 2009 ("Q4 2009").
* EBITDA increased 52% to $15,226,000 in Q4 2010 compared to $10,008,000 in Q4
2009.
* PGM ounces sold decreased 4% to 32,752 ounces in Q4 2010 compared to 34,000
PGM ounces in Q4 2009.
* The U.S. average delivered basket price per PGM ounce increased 23% to $1,058
in Q4 2010 compared to $860 in Q4 2009.
* The Rand average delivered price per PGM ounce increased 13% to R7,311 in Q4
2010 compared to R6,450 in Q4 2009.
* Rand operating cash costs net of by-product credits decreased 3% to R4,509 per
ounce in Q4 2010 compared to R4,661 per ounce in Q4 2009. Rand operating cash
costs increased 21% to R6,412 per ounce in Q4 2010 compared to R5,296 per ounce
in Q4 2009.
* U.S. dollar operating cash costs net of by-product credits increased 5% to
$653 per ounce in Q4 2010 compared to $621 per ounce achieved in Q4 2009. U.S.
dollar operating cash costs increased 31% to $928 per ounce in Q4 2010 compared
to the $706 per ounce in Q4 2009.
* Head grade decreased to 4.0 grams per tonne in Q4 2010 from 4.1 grams per
tonne in Q4 2009.
* Average concentrator recovery decreased to 78% in Q4 2010 compared to 79% in
Q4 2009.
* Development meters increased by 8% to 3,501 meters and on-reef development
decreased by 10% to 1,925 meters compared to Q4 2009.
* Stoping units decreased 4% to 53,044 square meters in Q4 2010 compared to
55,153 square meters in Q4 2009.
* Run-of-mine ore hoisted increased by 1% to 324,879 tonnes in Q4 2010 compared
to 321,393 tonnes in Q4 2009.
* Run-of-mine ore processed increased by 2% to 327,872 tonnes in Q4 2010
compared to 321,983 tonnes in Q4 2009.
* The Company`s Lost Time Injury Frequency Rate (LTIFR) was 3.88 in Q4 2010
compared to 3.45 in Q4 2009.
* At December 31, 2010, the Company had a cash position (including cash, cash
equivalents and short term investments) of $350,292,000 (December 31, 2009 -
$21,658,000).
2.2 Summary of results for the twelve months ended December 31, 2010 ("YE 2010")
* Eastplats recorded a net profit attributable to equity shareholders of the
Company of $13,352,000 ($0.02 per share) in YE 2010 compared to $5,650,000
($0.01 per share) in the twelve months ended December 31, 2009 ("YE 2009").
* EBITDA increased 58% to $45,099,000 in YE 2010 compared to $28,526,000 in YE
2009.
* PGM ounces sold increased 1% to 131,901 in YE 2010 compared to 130,338 PGM
ounces in YE 2009.
* The U.S. average delivered basket price per PGM ounce increased 38% to $995 in
YE 2010 compared to $723 in YE 2009.
* The Rand average delivered basket price per PGM ounce increased 21% to R7,264
in YE 2010 compared to R6,006 in YE 2009.
* Rand operating cash costs net of by-product credits increased 11% to R4,800
per ounce in YE 2010 compared to R4,306 per ounce in YE 2009. Rand operating
cash costs increased 15% to R6,099 per ounce in YE 2010 compared to R5,286 per
ounce in YE 2009.
* U.S. dollar operating cash costs net of by-product credits increased 26% to
$657 per ounce in YE 2010 compared to $521 per ounce achieved in YE 2009.
Operating cash costs increased 33% to $844 per ounce in YE 2010 compared to $636
per ounce in YE 2009.
* Head grade remained consistent at 4.1 grams per tonne during YE 2010 and 2009.
* Average concentrator recovery remained consistent at 79% in YE 2010 and 2009.
* Development meters decreased by 15% to 12,814 meters and on-reef development
decreased by 22% to 7,226 meters compared to YE 2009.
* Stoping units increased by 10% to 206,269 square meters in YE 2010 compared to
187,856 square meters in YE 2009.
* Run-of-mine ore hoisted increased by 5% to 1,288,416 tonnes in YE 2010
compared to 1,229,885 tonnes in YE 2009.
* Run-of-mine ore processed increased by 3% to 1,265,973 tonnes in YE 2010
compared to 1,225,508 tonnes in YE 2009.
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except per
share amounts) in accordance with IFRS.
Table 1
Selected quarterly data 2010
Dec 31 Sept 30 June 30 March 31
Revenues $ 45,616 $ 38,073 $ 36,612 $ 34,699
Cost of
operations (36,272) (32,735) (32,383) (31,018)
Mine operating
earnings 9,344 5,338 4,229 3,681
Expenses (G&A
and share-based
payment) (4,382) (2,202) (2,050) (4,935)
Operating profit
(loss) 4,962 3,136 2,179 (1,254)
Net profit
attributable to
equity
shareholders of
the Company $ 5,041 $ 4,039 $ 3,448 $ 824
Earnings per
share - basic $ 0.01 $ 0.01 $ 0.01 $ 0.00
Earnings per
share - diluted $ 0.01 $ 0.01 $ 0.00 $ 0.00
Average foreign
exchange rates
South African
Rand per US
dollar 6.91 7.31 7.53 7.51
US dollar per
Canadian dollar 0.9870 0.9621 0.9727 0.9608
Period end
foreign exchange
rates
South African
Rand per US
dollar 6.59 7.00 7.66 7.33
US dollar per
Canadian dollar 1.0054 0.9718 0.9393 0.9844
Selected quarterly data 2009
Dec 31 Sept 30 June 30 March 31
Revenues $ 34,259 $ 27,365 $ 24,838 $ 24,903
Cost of operations (29,294) (26,702) (22,595) (21,402)
Mine operating earnings 4,965 663 2,243 3,501
Expenses (G&A and
share-based payment) (3,523) (2,445) (3,374) (1,768)
Operating profit (loss) 1,442 (1,782) (1,131) 1,733
Net profit attributable to
equity
shareholders of the Company $ 330 $ 1,839 $ 317 $ 3,164
Earnings per share - basic $ 0.00 $ 0.00 $ 0.00 $ 0.00
Earnings per share -
diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
Average foreign exchange
rates
South African Rand per US
dollar 7.50 7.80 8.44 9.94
US dollar per Canadian
dollar 0.9459 0.9114 0.8578 0.8038
Period end foreign
exchange rates
South African Rand per US
dollar 7.41 7.53 7.75 9.54
US dollar per Canadian
dollar 0.9515 0.9340 0.8598 0.7928
3. Results of Operations for the three and twelve months ended December 31, 2010
The following table sets forth selected consolidated financial information for
the three and twelve months ended December 31, 2010 and 2009:
Table 2
Condensed consolidated interim income statements
(Expressed in thousands of U.S. dollars, except per share amounts)
Three months ended
December 31,
2010 2009
Revenue $ 45,616 $ 34,259
Cost of operations
Production costs 30,390 24,251
Depletion and depreciation 5,882 5,043
Mine operating earnings 9,344 4,965
Expenses
General and administrative 4,698 3,385
Share-based payments (316) 138
Operating profit 4,962 1,442
Other income (expense)
Interest income 545 349
Finance costs (452) (532)
Foreign exchange gain (loss) 184 37
Profit (loss) before income taxes 5,239 1,296
Deferred income tax (expense) recovery (733) (2,311)
Net profit (loss) for the period $ 4,506 $ (1,015)
Attributable to:
Non-controlling interest $ (535) $ (1,345)
Equity shareholders of the Company 5,041 330
Net profit (loss) for the period $ 4,506 $ (1,015)
Earnings per share
Basic $ 0.01 $ 0.00
Diluted $ 0.01 $ 0.00
Weighted average number of common share
outstanding
Basic 685,633 680,682
Diluted 697,916 691,072
Condensed consolidated statements of December 31, December 31,
financial position 2010 2009
Total assets $ 1,126,975 $ 706,850
Total long-term liabilities $ 55,576 $ 53,493
Twelve months ended
December 31,
2010 2009
Revenue $ 155,000 $ 111,365
Cost of operations
Production costs 109,901 82,839
Depletion and depreciation 22,507 17,154
Mine operating earnings 22,592 11,372
Expenses
General and administrative 12,117 10,528
Share-based payments 1,452 582
Operating profit 9,023 262
Other income (expense)
Interest income 1,797 1,786
Finance costs (1,807) (1,691)
Foreign exchange gain (loss) (160) (758)
Profit (loss) before income taxes 8,853 (401)
Deferred income tax (expense) recovery 924 1,623
Net profit (loss) for the period $ 9,777 $ 1,222
Attributable to:
Non-controlling interest $ (3,575) $ (4,428)
Equity shareholders of the Company 13,352 5,650
Net profit (loss) for the period $ 9,777 $ 1,222
Earnings per share
Basic $ 0.02 $ 0.01
Diluted $ 0.02 $ 0.01
Weighted average number of common share
outstanding
Basic 683,177 680,577
Diluted 694,839 687,790
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for the eight most recently
completed quarters:
Table 3
Crocodile River Mine operations
Three months ended
2010
December 31 September 30 June 30 March 31
Key financial statistics
(dollar amounts stated
in U.S. dollars)
Sales - PGM ounces 32,752 37,798 30,820 30,531
Average delivered price
per ounce (2) $1,058 $953 $1,015 $959
Average basket price $1,250 $1,128 $1,200 $1,130
Rand average delivered
price per ounce R 7,311 R 6,966 R 7,643 R 7,202
Rand average basket price R 8,638 R 8,246 R 9,036 R 8,486
Cash costs per ounce of
PGM (1) $928 $713 $882 $841
Cash costs per ounce of
PGM,
net of chrome by-product
credits (1) $653 $625 $646 $711
Rand cash costs per
ounce of PGM (1) R 6,412 R 5,212 R 6,639 R 6,315
Rand cash costs per
ounce of PGM,
net of chrome by-product
credits (1) R 4,509 R 4,566 R 4,866 R 5,336
Key production statistics
Run-of-mine ("ROM") rock
tonnes processed 327,872 357,219 290,028 290,854
Development meters 3,501 3,299 3,202 2,812
On-reef development
meters 1,925 1,797 1,573 1,931
Stoping units (square
meters) 53,044 50,892 50,573 51,760
Concentrator recovery
from ROM ore 78% 81% 80% 78%
Chrome sold (tonnes) 89,123 50,148 76,677 75,846
Metal in concentrate
sold (ounces)
Platinum (Pt) 16,526 19,195 15,433 15,405
Palladium (Pd) 7,055 8,129 6,769 6,562
Rhodium (Rh) 2,786 3,216 2,661 2,607
Gold (Au) 117 131 108 105
Iridium (Ir) 1,183 1,323 1,077 1,106
Ruthenium (Ru) 5,085 5,804 4,772 4,746
Total PGM ounces 32,752 37,798 30,820 30,531
2009
December 31 September 30 June 30 March 31
Key financial statistics
(dollar amounts stated
in U.S. dollars)
Sales - PGM ounces 34,000 29,986 33,383 32,969
Average delivered price
per ounce (2) $860 $765 $679 $590
Average basket price $1,008 $878 $779 $676
Rand average delivered
price per ounce R 6,450 R 5,967 R 5,730 R 5,865
Rand average basket price R 7,560 R 6,848 R 6,574 R 6,720
Cash costs per ounce of
PGM (1) $706 $758 $554 $536
Cash costs per ounce of
PGM,
net of chrome by-product
credits (1) $621 $583 $494 $388
Rand cash costs per
ounce of PGM (1) R 5,296 R 5,915 R 4,673 R 5,326
Rand cash costs per
ounce of PGM,
net of chrome by-product
credits (1) R 4,661 R 4,548 R 4,169 R 3,857
Key production statistics
Run-of-mine ("ROM") rock
tonnes processed 321,983 280,777 304,354 318,394
Development meters 3,254 2,882 4,326 4,573
On-reef development
meters 2,135 1,562 2,860 2,745
Stoping units (square
meters) 55,153 36,263 51,342 45,098
Concentrator recovery
from ROM ore 79% 78% 80% 80%
Chrome sold (tonnes) 66,694 76,900 70,850 84,207
Metal in concentrate
sold (ounces)
Platinum (Pt) 17,012 15,080 16,721 16,499
Palladium (Pd) 7,444 6,613 7,406 7,399
Rhodium (Rh) 2,923 2,499 2,868 2,812
Gold (Au) 121 115 141 135
Iridium (Ir) 1,240 1,095 1,179 1,144
Ruthenium (Ru) 5,260 4,584 5,068 4,980
Total PGM ounces 34,000 29,986 33,383 32,969
(1) These are non-IFRS measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelting, refining and marketing costs,
under the Company`s primary off-take agreement.
Quarter ended December 31, 2010 compared to the quarter ended December 31, 2009
In Q4 2010, CRM recorded a Lost Time Injury Frequency Rate ("LTIFR") of 3.88
compared to 3.45 in Q4 2009. There were seven lost time injuries in both Q4 2010
and Q4 2009. The difference in LTIFR was due to fewer man hours in Q4 2010 than
in Q4 2009.
The Company generated revenue of $45,616,000 in Q4 2010 of which $36,595,000 is
PGM revenue and $9,021,000 is chrome revenue. PGM revenues represent the amounts
recorded when PGM concentrates are physically delivered to the buyer, which are
provisionally priced on the date of delivery. The Company settles its PGM sales
three to five months following the physical delivery of the concentrates and
adjustments are made when the prices for the metal sold to the market are
established.
The Company recorded an average delivered basket price of $1,058 per PGM ounce
in Q4 2010, compared to $860 in Q4 2009 and $953 in the third quarter of 2010
("Q3 2010"). The delivered price per ounce refers to the PGM prices in effect at
the time the PGM concentrates are delivered to the smelter. As a result of
fluctuations in PGM prices, the Company recorded positive provisional price
adjustments of $3,082,000 and $5,394,000 in the three and twelve months ended
December 31, 2010, respectively, compared to positive price adjustments of
$4,537,000 and $11,027,000 in the three and twelve months ended December 31,
2009, respectively.
The following table shows a reconciliation of revenue and provisional price
adjustments.
Table 4
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended
December 31,
2010 2009
Revenue before provisional price adjustments $ 42,534 $ 29,722
Provisional price adjusments
Adjustments to revenue upon settlement of prior
periods` sales 1,706 1,065
Mark-to-market adjustment on sales not yet
settled at end of period 1,376 3,472
Revenue as reported in the income statement $ 45,616 $ 34,259
Twelve months ended
December 31,
2010 2009
Revenue before provisional price adjustments $ 149,606 $ 100,338
Provisional price adjustments
Adjustments to revenue upon settlement of prior
periods` sales 4,018 7,555
Mark-to-market adjustment on sales not yet
settled at end of period 1,376 3,472
Revenue as reported in the income statement $ 155,000 $ 111,365
PGM ounces sold decreased by 4% in Q4 2010 compared to Q4 2009 due to lower
concentrator recovery (78% in Q4 2010 compared to 79% in Q4 2009) and head grade
(4.0 grams per tonne in Q4 2010 compared to 4.1 grams per tonne in Q4 2009),
despite an increase in run-of-mine rock tonnes processed (327,872 tonnes in Q4
2010 compared to 321,983 tonnes in Q4 2009). The decrease in concentrator
recovery was the result of additional planned shutdown for modification to the
process plant. The decrease in head grade resulted from dilution due to
increased waste development at Maroelabult relating to conveyor belt extensions.
Operating cash costs, a non-IFRS measure, are incurred in Rand. Rand operating
cash costs, increased by 21% from R5,296 per ounce in Q4 2009 to R6,412 per
ounce in Q4 2010 due to a 4% decrease in ounces sold, a new South African mining
royalty and 7.5% wage increase both effective March 1, 2010, a 7% inflation rate
and a significant increase in electricity tariffs that came into effect in Q2
2010.
Operating cash costs stated in U.S. dollars increased by 31% from $706 per ounce
in Q4 2009 to $928 per ounce in Q4 2010 primarily due to an increase in actual
Rand operating cash costs combined with an 8% appreciation of the South African
Rand relative to the U.S. dollar. The average U.S. dollar-Rand exchange rate was
R6.91:$1.00 in Q4 2010 compared to R7.50:$1.00 in Q4 2009.
A reconciliation of production costs, as reported in the income statement, to
cash operating costs, is shown in Table 5 under Section 3.2 CRM non-IFRS
measures.
The Company recorded revenue for 89,123 tonnes of chrome in Q4 2010 (66,694
tonnes in Q4 2009).
Net chrome revenue recognized was $101 per tonne ($43 per tonne in Q4 2009) for
a total of $9,021,000 ($2,877,000 in Q4 2009). The net chrome revenue per tonne
received by the Company which increased by 135% compared to Q4 2009, has been
very volatile during the last two years. Global chrome prices dropped in late
2009 which led to negative price adjustments in Q4 2009 and increased in the
latter half of 2010. Q4 2010 chrome revenues of $9,021,000 reduced operating
cash costs to $653 per ounce net of by-product credits.
Quarter ended December 31, 2010 compared to the quarter ended September 30, 2010
Revenues increased by 20% compared to Q3 2010 as a result of an 11% rise in the
average delivered price per ounce, a $5,680,000 increase in chrome revenues and
a $2,843,000 increase in price adjustments, which were offset by a 13% decrease
in ounces produced in the quarter. The increase in chrome revenues was due to a
78% increase in tonnes of chrome and a 52% increase in the net price received
for chrome. The decrease in ounces produced was due to an 8% decrease in run-of-
mine ore processed (357,219 tonnes in Q3 2010 compared to 327,872 tonnes in Q4
2010), and a decrease in concentrator recovery from 81% in Q3 2010 to 78% in Q4
2010. The decrease in run-of-mine ore processed was due to a 7% decrease in
shifts worked as a result of the Christmas break while the decrease in
concentrator recovery resulted from a planned shutdown and modification to the
process plant.
Rand operating cash costs increased by 23% from R5,212 per ounce in Q3 2010 to
R6,412 per ounce in Q4 2010 primarily as a result of a 13% decrease in ounces
produced and the Q3 2010 adjustment to record chrome inventory in transit, as
discussed in greater detail in the section below. The impact of this adjustment
was a R400 decrease to cash costs per ounce in Q3 2010. As this was a one-time
adjustment, there was no corresponding decrease to cash costs in Q4 2010.
Operating cash costs stated in U.S. dollars increased by 30% from $713 per ounce
in Q3 2010 to $928 per ounce in Q4 2010 due to increases in actual Rand
operating cash costs combined with a 5% appreciation of the South African Rand
relative to the U.S. dollar. The average U.S. dollar-Rand exchange rate was
R6.91:$1.00 in Q4 2010 compared to R7.31:$1.00 in Q3 2010.
Twelve months ended December 31, 2010 compared to the twelve months ended
December 31, 2009
In YE 2010, the Company sold 131,901 PGM ounces, an increase of 1% compared to
YE 2009, primarily as a result of higher run-of-mine volumes processed in 2010
(1,265,973 tonnes processed in YE 2010 compared to 1,225,508 tonnes processed in
YE 2009). On-reef development decreased to 7,226 meters in YE 2010 compared to
9,302 meters in YE 2009.
The average delivered basket price per ounce increased from $723 in YE 2009 to
$995 in YE 2010. PGM prices have generally experienced a rising trend since
January 2009.
Operating cash costs of $844 per ounce was achieved in YE 2010, compared to $636
per ounce during the same period in 2009 due to a 13% weakening in the value of
the U.S. dollar relative to the Rand, and a 17% increase in total Rand operating
cash costs. Total Rand operating cash costs were 17% higher in YE 2010 compared
to YE 2009 due to two significant increases in electricity tariffs that came
into effect in Q3 2009 and Q2 2010, annual inflation of approximately 7%, a 7.5%
wage increase effective March 1, 2010, a new South African mining royalty tax
effective March 1, 2010, and the one-time chrome inventory adjustment recorded
in Q3 2010.
In Q3 2010, the Company reassessed the timing of its chrome revenue recognition
and determined that it was more appropriate to recognize chrome revenues at the
time the physical chrome crossed the ship`s rail at the port of shipment. This
one-time adjustment resulted in a decrease of $3,181,000 to chrome revenues in
Q3 2010 and a corresponding decrease to production costs of $2,106,000.
3.2 CRM non-IFRS measures
The following table provides a reconciliation of EBITDA and cash operating costs
per PGM ounce to mine operating earnings and production costs, respectively:
Table 5
Crocodile River Mine non-IFRS measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
December 31,
2010 2009
Mine operating earnings $ 9,344 $ 4,965
Depletion and depreciation 5,882 $ 5,043
EBITDA (1) 15,226 10,008
Production costs as reported 30,390 24,251
Adjustments for miscellaneous costs (2) 4 (244)
Cash operating costs 30,394 24,007
Less by-product credits - chrome revenues
and adjustments (9,021) (2,877)
Cash operating costs net of by-product
credits 21,373 21,130
Ounces sold 32,752 34,000
Cash cost per ounce sold $ 928 $ 706
Cash cost per ounce sold net of by-product
credits $ 653 $ 621
Twelve months ended
December 31,
2010 2009
Mine operating earnings $ 22,592 $ 11,372
Depletion and depreciation 22,507 17,154
EBITDA (1) 45,099 28,526
Production costs as reported 109,901 82,839
Adjustments for miscellaneous costs (2) 290 62
Cash operating costs 110,191 82,901
Less by-product credits - chrome revenues and
adjustments (23,599) (15,021)
Cash operating costs net of by-product credits 86,592 67,880
Ounces sold 131,901 130,338
Cash cost per ounce sold $ 835 $ 636
Cash cost per ounce sold net of by-product
credits $ 656 $ 521
(1) EBITDA includes provisional price adjustments, chrome revenues, chrome
penalties, and foreign exchange adjustments to sales.
(2) Miscellaneous costs include costs such as housing, technical services and
planning.
The Company is of the opinion that conventional measures of performance prepared
in accordance with IFRS do not meaningfully demonstrate the ability of its
operations to generate cash flow. Therefore, the Company has included certain
non-IFRS measures in this MD&A to supplement its financial statements which are
prepared in accordance with IFRS. These non-IFRS measures do not have any
standardized meaning prescribed under IFRS, and therefore they may not be
comparable to similar measures employed by other companies.
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") for CRM. This is a
liquidity non-IFRS measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-IFRS measure which is a common
performance measure used in the precious metals industry.
3.3 Development projects
3.3.1 CRM
During the three and twelve months ended December 31, 2010, the Company spent
approximately $12,410,000 and $32,728,000, respectively, at CRM on underground
mine development, underground electrical upgrades, and ongoing underground works
at the Zandfontein vertical shaft, including the construction of dams for
underground water control. The shaft hoisting capacity is 100,000 tonnes of ore
per month plus associated waste. The shaft, along with additional decline
development, will allow access into the deeper parts of the ore body.
As a result of the higher trend in PGM prices, mine development at the shallow
Crocette ore body recommenced on April 4, 2010. The Company expects Crocette to
reach full production by the first quarter of 2013, at which time Crocette is
planned to deliver up to 40,000 tonnes of ore per month. Combined with the
mining at Zandfontein and Maroelabult, this will enable CRM to achieve its
production target of approximately 175,000 tonnes of ore per month with an
estimated head grade of 4.1 g/t (5PGE+Au). Construction power for the project is
being provided by Eskom, the South African public utility company and the
Company is in discussions with Eskom for the supply of permanent power.
3.3.2 Eastern Limb projects
Development of Mareesburg, Spitzkop and Kennedy`s Vale was put on hold in
December 2008 but rising PGM prices and the receipt of New Order Mining Rights
for both Spitzkop and Mareesburg (received in October 2009 and September 2010
respectively) have allowed the Company to move forward in Q4 2010 with the
development plans for these projects. During the three and twelve months ended
December 31, 2010, expenditures at these projects were comprised of care and
maintenance costs as well as costs for the restart of engineering and
construction planning for an open-pit mine at Mareesburg and an associated
90,000 tonne-per-month (tpm) concentrator.
The Mareesburg open-pit mine, when operating at full capacity, could result in
an increase in the Company`s annual production to approximately 325,000 ounces
by 2014, when combined with CRM. Under the current development plan, a 90,000
tpm concentrator would be located on the Kennedy`s Vale site and the planned
rapid production ramp-up at Mareesburg would allow the concentrator to ramp up
quickly to full capacity immediately upon commissioning. To accommodate future
capacity increases, the plant at Kennedy`s Vale would include the civil and
other surface infrastructure work required for an additional 90,000 tpm
processing stream and appropriate tailings facility infrastructure to process up
to 180,000 tonnes per month of ore.
Mareesburg will initially be an open-pit mining operation and consequently
require little power. A power line currently provides 800 KVA across the
Mareesburg property and this will be adequate to run administration and
workshop/maintenance facilities with any further power requirements to be
provided by on site diesel power generators.
The Company has already secured 3MVA of power for the construction phase for the
concentrator at the Kennedy`s Vale site. With respect to permanent operating
power for the concentrator and for the Spitzkop mine which is planned to be
developed after the Mareesburg open-pit mine comes on stream, the Company has
applied for 40 MVA of installed capacity, of which 20MVA would be required for
the initial 90,000 tpm plant. The Company has paid the necessary fees to
initiate the acquisition of power and Eskom has commenced the engineering work.
3.4 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg administrative
office, and costs associated with care and maintenance at the Company`s Eastern
Limb projects, Spitzkop, Kennedy`s Vale and Mareesburg.
Corporate office costs include legal and accounting, regulatory, executive
management fees, investor relations, travel and consulting fees.
G&A increased by 39% from $3,385,000 in Q4 2009 to $4,698,000 in Q4 2010 mainly
due to a Cdn$956,000 increase in bonuses paid to executive officers and
directors of the Company for the achievement of various operational and
corporate objectives, including the completion of a Cdn$348 million equity
financing in December, 2010 and the signing of a mandate letter for a US$100
million credit facility in October, 2010. G&A increased by 115% from $2,186,000
in Q3 2010 to $4,698,000 in Q4 2010 mainly due to the payment of Cdn$1,490,000
in bonuses to executive officers and directors of the Company and the accrual of
the year-end audit fees at head office and in South Africa. For the twelve
months ended December 31, G&A increased by 15% from $10,528,000 in 2009 to
$12,117,000 in 2010 mainly due to a weakening of the U.S. dollar relative to the
South African Rand, the introduction in Q1 2010 of a key skills retention plan
for the Company`s senior employees in South Africa, and a Cdn$956,000 increase
in bonuses paid to key management in Q4 2010.
Interest income recorded during the three and twelve months ended December 31,
2010 was $545,000 and $1,797,000 compared with $349,000 and $1,786,000 during
the same periods in 2009. The increase in interest income in Q4 2010 compared to
Q4 2009 was mainly due to an increase in cash balances in CRM that resulted from
the increase in revenue in 2010.
During the three and twelve months ended December 31, 2010, the Company recorded
a deferred income tax expense of $733,000 and deferred income tax recovery of
$924,000, respectively. The deferred income tax recovery was based on changes in
the Company`s net assets. The consolidated statement of financial position
reflects total deferred tax liabilities of $46,642,000 which arose primarily as
a result of the step-up to fair value of the net assets acquired on the Barplats
and Gubevu business acquisitions during the years ended June 30, 2006, June 30,
2007, and December 31, 2008.
4. Liquidity and Capital Resources
At December 31, 2010, the Company had working capital of $362,691,000 (December
31, 2009 - $31,776,000) and cash and cash equivalents and short-term investments
of $350,292,000 (December 31, 2009 - $21,658,000) in highly liquid, fully
guaranteed, bank sponsored instruments.
On December 30, 2010, the Company raised $328,890,000 net of share issue costs
through a public offering which consisted of 224,250,000 common shares, of which
195,361,476 common shares were issued at a price of Cdn$1.55 and 28,888,524
common shares were issued at a price of GBP0.9568.
The Company had no long-term debt at December 31, 2010, other than a provision
for environmental rehabilitation relating to CRM, Kennedy`s Vale and Spitzkop.
In January, 2011 the Company received formal letters of commitment to underwrite
a US$100 million corporate debt facility through Eastplats International Inc., a
subsidiary of the Company. The mandated lead arrangers are UniCredit Bank AG,
London Branch and The Standard Bank of South Africa Limited.
4.1 Outlook
The PGM industry has experienced over three years of global economic uncertainty
and market volatility. Although PGM prices in U.S. dollar terms have recovered
since the beginning of 2009, this has been significantly negated by the strength
of the Rand against the U.S. dollar. The U.S. dollar realized basket prices that
the Company is receiving have improved since the December 2008 lows, but these
prices, in Rand terms, are still 34% below those recorded in June 2008 when
basket prices reached their peak. The Company anticipates that PGM prices will
remain volatile and the Rand will remain strong against the U.S. dollar in the
short term, which impacts the income and cash flows generated by the Company as
it has U.S. dollar-based revenues and a Rand-based operating cost structure. As
a result, the Company continues to seek ways to improve its operating efficiency
and thereby minimize its operating costs, without compromising safety, health
and environmental standards.
With the rising trend in PGM prices, the Company resumed mine development at the
Crocette section at CRM in April 2010 and commenced planning for Phase 1 of the
development of its Eastern Limb projects in late 2010. Phase 1 includes the
development of an open-pit mine at Mareesburg and the construction of a 90,000
tpm concentrator located on the Kennedy`s Vale site. Concurrently with the
planning for Crocette and for Phase 1, the Company sought to raise financing to
fund these development projects.
On December 30, 2010, the Company completed a Cdn$348 million public offering,
which primary purpose was to finance the development of Phase 1. In January
2011, the Company received formal letters of commitment to underwrite a US$100
million corporate debt facility through Eastplats International Inc., a
subsidiary of the Company. The mandated lead arrangers are UniCredit Bank AG,
London Branch and The Standard Bank of South Africa Limited. The Company is
currently working on the final legal documentation for the debt facility. Upon
the closing of the debt facility, the Company will have approximately U.S.$450
million in cash, short-term investments and undrawn credit facilities available
for the development of the Mareesburg open-pit mine and the associated
concentrator, for the Crocette development, and for general corporate purposes.
To bring the rest of the Eastern Limb projects, which includes Spitzkop and
Kennedy`s Vale, into production, additional funding will be required and may
include joint venture or other third party participation in one or more of these
projects, or the public or private sales of equity or debt securities of the
Company. There can be no assurance that additional funding will be available to
the Company or, if available, that this funding will be on acceptable terms. If
adequate funds are not available, including funds generated from producing
operations, the Company may be required to delay or reduce the scope of these
development projects.
4.2 Impairment
At December 31, 2010, the Company assessed the carrying values of its mineral
properties and concluded that none of its mineral properties required further
impairment or reversal of impairment. Should market conditions and commodity
prices deteriorate or improve in the future, an impairment or reversal of
impairment of the Company`s mineral properties may be required.
4.3 Share Capital
On December 30, 2010, the Company completed a public offering which consisted of
224,250,000 common shares, of which 195,361,476 common shares were issued at a
price of Cdn$1.55 and 28,888,524 common shares were issued at a price of
GBP0.9568.
During the three months ended December 31, 2010, the Company did not grant any
stock options. Total share-based payment expense for the quarter was negative
$316,000, which takes into account the vesting of options and the reversal of
share-based payment expense previously recognized for unvested options that were
forfeited in the period. During Q4 2010, 263,335 options were forfeited at a
weighted average exercise price of Cdn$1.99 and 300,335 options were exercised
at a weighted average exercise price of Cdn$0.35.
During the twelve months ended December 31, 2010, the Company granted 2,231,000
stock options at an exercise price of Cdn$1.30. The grant date fair value was
Cdn$0.80 per share, which resulted in share- based payment expense of $1,705,000
upon issuance. Total share-based payment expense for the twelve months was
$1,452,000, which also takes into account the vesting of options and the
reversal of share- based payment expense previously recognized for unvested
options that were forfeited in the period. During the twelve months ended
December 31, 2010, 1,035,003 options were forfeited at a weighted average
exercise price of Cdn$1.82 and 2,794,995 options were exercised at a weighted
average exercise price of Cdn$0.33.
As at March 21, 2011, the Company had:
908,041,287 common shares outstanding; and
57,426,836 stock options outstanding, which are exercisable at prices ranging
from Cdn$0.32 to Cdn$3.38 and expire between 2011 and 2018.
4.4 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at December 31, 2010
were as follows:
Table 6
(in thousands of U.S. dollars)
Less than 1 More than 5
Total year 1-5 years years
Provision for
environmental
rehabilitation $ 32,694 $ - $ - $ 32,694
Capital expenditure
and purchase
commitments
contracted
at December 31, 2010
but not recognized
on the
consolidated
statement of
financial position 13,056 13,056 - -
Finance lease
obligations 3,405 3,405 - -
$ 49,155 $ 16,461 $ - $ 32,694
5. Related Party Transactions
Table 7
(Expressed in thousands of U.S. dollars, except per share amounts)
Three months ended
December 31,
2010 2009
Trading transactions
Management and consulting fees $ 1,539 $ 832
Reimbursements of expenses 102 3
Total trading transactions $ 1,641 $ 835
Compensation of key management personnel
Salaries and directors` fees $ 2,059 $ 1,185
Share-based payments - -
Total compensation of key management personnel $ 2,059 $ 1,185
Twelve months ended
December 31,
2010 2009
Trading transactions
Management and consulting fees $ 2,557 $ 1,661
Reimbursements of expenses 193 48
Total trading transactions $ 2,750 $ 1,709
Compensation of key management personnel
Salaries and directors` fees $ 3,758 $ 2,695
Share-based payments 1,627 93
Total compensation of key management personnel $ 5,385 $ 2,788
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. Other executive officers are paid
directly via salary and directors` fees. All share options are issued to the
Company`s officers and directors, and not to their companies.
Management and consulting fees increased during the three months ended December
31, 2010 due to a Cdn$956,000 increase in bonuses paid to executive officers and
directors of the Company for the achievement of various operational and
corporate objectives, including the completion of a Cdn$348 million equity
financing and the signing of a mandate letter for a US$100 million credit
facility in the last quarter of 2010. Management and consulting fees increased
during the twelve months ended December 31, 2010 due to the Cdn$956,000 increase
in bonuses paid to executive officers, additional consulting work in Q3 2010 and
a stronger Canadian dollar in YE 2010 than YE 2009. During the three and twelve
months ended December 31, 2010, reimbursements of expenses were higher due to
increased travel to South Africa as the Company prepares for the development of
its Eastern Limb projects.
Salaries and directors` fees increased during the three and twelve months ended
December 31, 2010 for the same reasons that management and consulting fees
increased in the corresponding periods. Share-based payments increased from
$93,000 during the twelve months ended December 31, 2009 to $1,627,000 during
the same period in 2010 due to the issuance of stock options in Q1 2010.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Critical Accounting Policies and Estimates
The preparation of financial statements requires management to establish
accounting policies, estimates and assumptions that affect the timing and
reported amounts of assets, liabilities, revenues and expenses. These estimates
are based upon historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, and require
judgement on matters which are inherently uncertain. A summary of the Company`s
significant accounting policies is set forth in Note 4 of the consolidated
financial statements for the year ended December 31, 2010.
Management reviews its estimates and assumptions on an ongoing basis using the
most current information available and considers the following to be key
accounting policies and estimates:
6.1 Property, plant and equipment
Property, plant and equipment are the most significant assets of the Company and
represent capitalized expenditures related to the development of mining
properties and related plant and equipment and the value assigned to exploration
potential on acquisition. Property, plant and equipment are recorded at cost
less accumulated depreciation and depletion. Maintenance, repairs and renewals
are charged to operations. Capitalized costs are depreciated and depleted using
either the unit-of-production method over the estimated economic life of the
mine which they relate to, or using the straight-line method over their
estimated useful lives.
All direct costs related to the acquisition, exploration and development of
mineral properties are capitalized until the properties to which they relate are
placed into production, sold, abandoned or management has determined there to be
impairment. If economically recoverable ore reserves are developed, capitalized
costs of the related property are reclassified as mining assets and amortized
using the units-of-production method following commencement of production.
The amounts shown for mineral properties do not necessarily represent present or
future values. Their recoverability is dependent upon the discovery of
economically recoverable reserves, the ability of the Company to obtain the
necessary financing to complete the development, and future profitable
production or proceeds from the disposition thereof.
The Company reviews and evaluates its mining interests for impairment or
reversal of impairment at least annually or when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
In accordance with IFRS, these evaluations consist of comparing each asset`s
carrying value with the estimated discounted future net cash flows. Impairment
is considered to exist if the total estimated future discounted cash flows are
less than the carrying amount of the assets. The resulting impairment loss is
measured and recorded based on the difference between future discounted cash
flows and book value. Future cash flows are estimated based on expected future
production, commodity prices, operating costs and capital costs. Other estimates
incorporated in the impairment evaluations include processing and mining costs,
mining tonnage, ore grades and recoveries, which are all subject to uncertainty.
In accordance with IFRS if, subsequent to impairment, an asset`s discounted
future net cash flows exceeds its book value, the impairment previously
recognized can be reversed. However, the asset`s book value cannot exceed what
its amortized book value would have been had the impairment not been recognized.
At December 31, 2010, the Company assessed the carrying values of its mineral
properties and concluded that none of its mineral properties required further
impairment or reversal of impairment. Should market conditions and commodity
prices deteriorate or improve in the future, an impairment or reversal of
impairment of the Company`s mineral properties may be required.
6.2 Revenue recognition
Revenue, based upon prevailing metal prices, is recorded in the financial
statements when title to the PGMs and chrome transfers to the customer. For
PGMs, the difference between the present value and the future value of the
current market price is recognized as interest income over the term of
settlement. The estimated revenue is recorded based on metal prices and exchange
rates on the date of shipment and is adjusted at each balance sheet date to the
metal prices on those dates. The actual amounts will be reflected in revenue
upon final settlement, which are three and five months after the date of
shipment. These adjustments reflect changes in metal prices and changes in
qualities arising from final assay calculations.
As a result of fluctuations in PGM prices, the Company recorded positive
provisional price adjustments of $3,082,000 and $5,394,000 in the three and
twelve months ended December 31, 2010, respectively, compared to positive price
adjustments of $4,537,000 and $11,027,000 in the three and twelve months ended
December 31, 2009, respectively.
6.3 Share-based payment
Share-based payment expense is calculated using the Black-Scholes option pricing
model and is recognized over the period that the employees earn the options,
with a corresponding credit to equity- settled employee benefits reserve. If and
when the stock options are ultimately exercised, the applicable amounts of
equity-settled employee benefits reserve are transferred to share capital. In
the event that unvested stock options are forfeited, any share-based payment
expense previously recognized with regards to these options is reversed in the
period of forfeiture.
During the year ended December 31, 2010, the Company`s weighted average
assumptions for the calculation included a risk-free interest rate of 1.73%,
expected life of the options of 3 years, no dividends, and an annualized
volatility of the Company`s shares of 83%. The resulting weighted average option
valuation was Cdn$0.80 per share. Share-based payment expense of $1,452,000 was
recognized during the twelve months ended December 31, 2010 (2009 - $582,000).
6.4 Provision for environmental rehabilitation
The Company recognizes liabilities for statutory, contractual or legal
obligations associated with the retirement of property, plant and equipment,
when those obligations result from the acquisition, construction, development or
normal operation of the assets. Initially, the fair value of the liability for
an asset retirement obligation is recognized in the period incurred. If the cost
estimates arise from the decommissioning of plant and other site preparation
work, the net present value is added to the carrying amount of the associated
asset and amortized over the asset`s useful life. If the cost estimates arise
from restoration costs arising from subsequent site damage that is incurred on
an ongoing basis during production, the net present value is charged to profit
and loss for the period. The liability is accreted over time through periodic
charges to operations and it is reduced by actual costs of reclamation.
The Company`s estimates of reclamation costs are based on the Company`s
interpretation of current regulatory requirements and these estimates could
change as a result of changes in regulatory requirements and assumptions
regarding the amount and timing of the future expenditures. A change in
estimated discount rates is reviewed annually or as new information becomes
available. Expenditures relating to ongoing environmental programs are charged
against operations as incurred or capitalized and amortized depending on their
relationship to future earnings.
At December 31, 2010, the expected present value of future rehabilitation costs
at CRM and Spitzkop was $8,934,000 using a discount rate of 8.29%. The
undiscounted value was approximately $32,694,000. The Company has not recorded
any future rehabilitation costs for its Mareesburg project as these costs are
currently determined to be immaterial.
7. Adoption of Accounting Standards and Accounting Pronouncements under IFRS
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s first
audited financial statements prepared in accordance with IFRS were the financial
statements for the year ended December 31, 2009. Full disclosure of the
Company`s accounting policies in accordance with IFRS can be found in Note 3 to
those financial statements. Those financial statements also include
reconciliations of the previously disclosed comparative periods financial
statements prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") to IFRS as set out in Note 25.
Effective January 1, 2010, the Company adopted a new accounting standard (IFRS 8
Operating Segments) that was issued by the International Accounting Standards
Board ("IASB"). IFRS 8 was revised and now requires disclosure of information
about segment assets. This accounting policy change was adopted on a prospective
basis with no restatement of prior period financial statements.
7.1 Application of new and revised IFRSs
Effective January 1, 2010, the Company adopted new and revised International
Financial Reporting Standards ("IFRSs") that were issued by the International
Accounting Standards Board ("IASB"). The application of these new and revised
IFRSs has not had any material impact on the amounts reported for the current
and prior years but may affect the accounting for future transactions or
arrangements.
(a) Amendments to IFRS 2 Share-based Payment - Group Cash-settled Share-based
Payment Transactions
The amendments clarify the scope of IFRS 2, as well as the accounting for group
cash- settled share-based payment transactions in the separate (or individual)
financial statements of an entity receiving the goods or services when another
group entity or shareholder has the obligation to settle the award.
(b) Amendments to IFRS 3 Business Combinations
The main amendments to IFRS 3 Business Combinations are as follows:
(i) The revised standard also applies to business combinations involving only
mutual entities and to business combinations achieved by contract alone.
(ii) The definition of a business has been amended to clarify that it can
include a set of activities and assets that are not being operated as a
business, as long as an acquirer is capable of operating the set of activities
and assets as a business.
(iii) All business combinations are accounted for by applying the acquisition
method (previously the purchase method).
(iv) The acquirer can elect to measure any non-controlling interest at fair
value at the acquisition date, or at its proportionate interest in the fair
value of the identifiable assets and liabilities of the acquiree, on a
transaction-by-transaction basis.
(v) Subsequent recognition of deferred tax assets acquired in a business
combination that did not satisfy the criteria for recognition at the acquisition
date would be recognized in profit or loss.
This standard applies prospectively to acquisitions with a date on or after the
beginning of the first annual period beginning on or after July 1, 2009.
(c) Amendments to IFRS 2 Share-based Payments and IFRS 3 Business Combinations
The amendments clarify that business combinations as defined in IFRS 3 (2008)
are outside the scope of IFRS 2, notwithstanding that they may be outside the
scope of IFRS 3. As a result, business combinations amongst entities under
common control and the contribution of a business upon the formation of a joint
venture will not be accounted for under IFRS 2.
(d) Amendments to IFRS 8 Operating Segments
The amendments clarify that disclosing segment information with respect to total
assets is only required if such information is regularly reported to the chief
operating decision maker.
(e) Amendments to IAS 7 Statement of Cash Flows
The amendments clarify that only expenditures that result in the recognition of
an asset can be classified as a cash flow from investing activities.
(f) Amendments to IAS 17 Leases
The IASB deleted guidance stating that a lease of land with an indefinite
economic life normally is classified as an operating lease, unless at the end of
the lease term title is expected to pass to the lessee. The amendments also
clarify that when a lease includes both the land and building elements, an
entity should determine the classification of each element taking into account
the fact that land normally has an indefinite economic life.
(g) Amendments to IAS 27 Consolidated and Separate Financial Statements
The main amendments to IAS 27 Consolidated and Separate Financial Statements are
as follows:
(i) Changes in a parent`s ownership interest that do not result in the loss of
control of a controlled subsidiary are accounted for as equity transactions.
Accordingly, acquisitions of additional non-controlling interests are accounted
for as equity transactions. Disposals of equity interests while retaining
control are accounted for as equity transactions.
(ii) Transactions resulting in a loss of control would cause a gain or loss to
be recognized in profit or loss.
(iii) Losses applicable to the non-controlling interests, including negative
other comprehensive income, are allocated to non-controlling interests even if
doing so causes the non-controlling interests to have a negative balance.
(h) Amendments to IAS 36 Impairment of Assets
The amendments clarify that the largest unit to which goodwill should be
allocated is the operating segments level. This amendment applies prospectively.
(i) Amendments to IAS 38 Intangible Assets
The amendments clarify that an intangible asset that is separable only together
with a related contract, identifiable asset or liability is recognized
separately from goodwill together with the related item, and that complementary
intangible assets with similar useful lives may be recognized as a single asset.
The amendments also describe valuation techniques commonly used by entities when
measuring the fair value of intangible assets acquired in a business combination
for which no active market exists. These amendments are applied prospectively.
(j) Amendments to IAS 39 Financial Instruments: Recognition and Measurement
The main amendments consist of:
(i) Additional guidance provided to help determine whether loan prepayment
penalties result in an embedded derivative that needs to be separated.
(ii) Clarification that the scope exemption is restricted to forward contracts
between an acquirer and a selling shareholder to buy or sell an acquiree that
will result in a business combination at a future acquisition date within a
reasonable period normally necessary to obtain any required approvals and to
complete the transaction.
(iii) Clarification that the gains or losses on a cash flow hedge should be
reclassified from other comprehensive income to profit or loss during the period
that the hedged forecast cash flows impact profit or loss.
The amendments apply prospectively to all unexpired contracts from the date of
adoption.
7.2 Accounting standards issued but not yet effective
(a) Effective for annual periods beginning on or after February 1, 2010
(i) Amendment to IAS 32 Financial Instruments: Presentation
Rights, options or warrants to acquire a fixed number of the Company`s equity
instruments for a fixed amount of any currency will be allowed to be classified
as equity instruments so long as the Company offers the rights, options or
warrants pro rata to all of the Company`s existing owners of the same class of
the Company`s non-derivative equity instruments.
(b) Effective for annual periods beginning on or after July 1, 2010
(i) Amendments to IFRS 3 Business Combinations
Clarification that the contingent consideration arising in a business
combination previously accounted for in accordance with IFRS 3 that is
outstanding at the adoption date continues to be accounted for in accordance
with IFRS 3.
Limiting the accounting policy choice to measure non-controlling interests upon
initial recognition at fair value or at the non-controlling interest`s
proportionate share of the acquiree`s identifiable net assets to instruments
that give rise to a present ownership interest and that currently entitle the
holder to a share of net assets in the event of liquidation.
Expansion of the guidance with regards to the attribution of the market-based
measure of an acquirer`s share-based payment awards issued in exchange for
acquiree awards.
(ii) Amendments to IAS 27 Consolidated and Separate Financial Statements
Clarification that the amendments to IAS 21 The Effects of Changes in Foreign
Exchange Rates, IAS 28 Investments in Associates, and IAS 31 Interests in Joint
Ventures resulting from IAS 27 should be applied prospectively, except for
amendments resulting from renumbering.
(c) Effective for annual periods beginning on or after January 1, 2011
(i) Amendments to IFRS 7 Financial Instruments: Disclosures
Amendment to disclosure requirements, specifically, ensuring qualitative
disclosures are made in close proximity to quantitative disclosures in order to
better enable financial statement users to evaluate an entity`s exposure to
risks arising from financial instruments.
(ii) Amendments to IAS 1 Presentation of Financial Statements
Clarification that the breakdown of changes in equity resulting from
transactions recognized in other comprehensive income is required to be
presented in the statement of changes in equity or in the notes to the financial
statements.
(iii) Amendments to IAS 24 Related Party Disclosures
Amendment of the definition for related parties.
(iv) Amendments to IAS 34 Interim Financial Reporting
Addition of further examples of events or transactions that require disclosure
and removal of references to materiality when discussing other minimum
disclosures.
(d) Effective for annual periods beginning on or after July 1, 2011
(i) Amendments to IFRS 7 Financial Instruments: Disclosures
Increase in disclosure with regards to the transfer of financial assets,
especially if there is a disproportionate amount of transfer transactions that
take place around the end of a reporting period.
(e) Effective for annual periods beginning on or after January 1, 2013
(i) New standard IFRS 9 Financial Instruments
Partial replacement of IAS 39 Financial Instruments: Recognition and Measurement
The Company has not early adopted these revised standards and is currently
assessing the impact that these standards will have on the consolidated
financial statements.
8. Risk Factors
The business of exploring for minerals and the mining and processing of those
minerals involves a high degree of risk. These activities involve significant
risks which careful evaluation, experience and knowledge may not, in some cases,
eliminate. These risks include risks associated with the mining industry, the
financial markets, metals prices and foreign operations.
8.1 Risks associated with the mining industry
The commercial viability of any mineral deposit depends on many factors, not all
of which are within the control of management. Some of the factors that will
affect the financial viability of a mineral deposit include its size, grade and
proximity to infrastructure. In addition, government regulation, taxes,
royalties, land tenure, land use, environmental protection and reclamation and
closure obligations could have a profound impact on the economic viability of a
mineral deposit.
The mining operations and the exploration and development programmes of the
Company may be disrupted by a variety of risks and hazards which are beyond the
control of the Company, including, but not limited to, geological, geotechnical
and seismic factors, fires, power outages, labour disruptions, flooding,
explosions, cave-ins, land-slides, availability of suitable or adequate
machinery and labour, industrial and mechanical accidents, environmental hazards
(including discharge of metals, pollutants or hazardous chemicals), and
political and social instability. In the past two years, the Company has
experienced power shortages and labour disruptions.
It is not always possible to obtain insurance against all risks described above
and the Company may decide not to insure against certain risks as a result of
high premiums or for other commercial reasons. The Company does not maintain
insurance against political or environmental risks, but may be required to do so
in the future. Should any uninsured liabilities arise, they could result in
increased costs, reductions in profitability, and a decline in the value of the
Company`s securities.
The Company is not able to determine the impact of potential changes in
environmental laws and regulations on its financial position due to the
uncertainty surrounding the form such changes may take. As mining regulators
continue to update and clarify their requirements for closure plans and
environmental protection laws and administrative policies are changed,
additional reclamation obligations and further security for mine reclamation
costs may be required. It is not known whether such changes would have a
material effect on the operations of the Company.
8.2 Risks associated with foreign currencies
The Company currently uses the South African Rand and the Canadian dollar as its
functional currencies, and the U.S. dollar as its presentation currency.
Operations at the Company`s CRM are predominately conducted in Rand, with costs
paid in Rand and revenues received in Rand, even though PGM prices are based in
U.S. dollars. The Company does not hedge or sell forward any of its PGM
production and is therefore exposed to exchange rate fluctuations. A
deterioration of the U.S. dollar against the Rand could increase the cost of PGM
production and exploration and development costs and therefore may have a
material adverse effect on the earnings of CRM. During 2010, the average U.S.
dollar to Rand exchange rate weakened by 13% compared to 2009, causing U.S.
dollar operating costs per ounce to increase in the absence of other cost
factors.
Fluctuations in the exchange rate between the Canadian dollar and the Rand may
also have a significant impact on the Company`s results of operations and
financial condition. The Company`s assets and liabilities will be subject to the
same exchange rate fluctuations that could also have a significant effect on the
results of the Company.
The Company cannot predict the effect of exchange rate fluctuations upon future
operating results and there can be no assurance that exchange rate fluctuations
will not have a material adverse effect on its business, operating results or
financial condition.
8.3 Risks associated with metal prices
Metal prices, particularly platinum prices, have a direct impact on the
Company`s earnings and the commercial viability of the Company`s other mineral
properties. Platinum is both a precious metal and an industrial metal. The most
important industrial consumption of platinum is in automobile catalytic
converters. Demand has recovered in 2010 as a result of the recovery of the auto
sector and acquisition by physically-backed exchange traded funds (ETFs).
Supplies are expected to increase, as cash becomes available to mining companies
and development recommences. Some of the other key factors that may influence
platinum prices are policies in the most important producing countries, namely
South Africa and the Russian Federation, the amount of stockpiled platinum,
economic conditions in the main consuming countries, international economic and
political trends, fluctuations in the U.S. dollar and other currencies, interest
rates, and inflation. A decline in the market price of PGMs mined by the Company
may render ore reserves containing relatively low grades of mineralization
uneconomic and may in certain circumstances lead to a restatement of reserves.
Prices for platinum and most of the other PGMs reached all-time highs in early
2008, and as a result, the Company achieved record margins for its PGM sales
during the first two quarters of that year. While PGM prices have increased
steadily since the beginning of 2009, the weakening of the U.S. dollar over the
same period has had an offsetting effect against the increasing PGM prices.
There is no assurance that PGM prices will return to its 2008 highs in the
future.
The marketability of metals is also affected by numerous other factors beyond
the control of the Company, including but not limited to government regulations
relating to price, royalties, allowable production and importing and exporting
of minerals, the effect of which cannot accurately be predicted.
8.4 Risks associated with foreign operations
The Company`s investments in South Africa carry certain risks associated with
different political and economic environments. Since 1994, South Africa has
undergone major constitutional changes to effect majority rule, and mineral
title. Accordingly, all laws may be considered relatively new, resulting in
risks such as possible misinterpretation of new laws, unilateral modification of
mining or exploration rights, operating restrictions, increased taxes,
environmental regulation, mine safety and other risks arising out of a new
sovereignty over mining, any or all of which could have an adverse impact upon
the Company. The Company`s operations may also be affected in varying degrees by
political and economic instability, terrorism, crime, extreme fluctuations in
currency exchange rates, and inflation.
The Government of South Africa has promulgated the Mineral and Petroleum
Resources Royalty Act, 2008. This act allows for a revenue-based royalty on
South African mining companies which came into effect on March 1, 2010. The
royalty rate for unrefined minerals is based on a formula that references EBIT
margins and is estimated to be approximately 1% of gross mining revenues.
8.5 Risks associated with granting of exploration, mining and other licenses
The Government of South Africa exercises control over such matters as
exploration and mining licensing, permitting, exporting and taxation, which may
adversely impact on the Company`s ability to carry out exploration, development
and mining activities. Failure to comply strictly with applicable laws,
regulations and local practices relating to mineral right applications and
tenure, could result in loss, reduction or expropriation of entitlements, or the
imposition of additional local or foreign parties as joint venture partners with
carried or other interests.
The Company`s exploration and mining activities are dependent upon the grant of
appropriate licences, concessions, leases, permits and regulatory consents which
may be granted for a defined period of time, or may not be granted, or may be
withdrawn or made subject to limitations. There can be no assurance that such
authorizations will be renewed following expiry or granted (as the case may be)
or as to the terms of such grants or renewals. There is also no assurance that
the issue of a reconnaissance, prospecting or exploration licence will ensure
the subsequent issue of a mining licence. All `Old Order` mineral rights in
South Africa are subject to conversion into `New Order` mineral rights. New
Order Mining Rights for the Spitzkop and Mareesburg Projects were issued by the
Department of Mineral Resources ("DMR") in October 2009 and September 2010,
respectively.
CRM was awarded one additional New Order Mining Right in January 2009, which
allows for extension of the Maroelabult mining operations. CRM now holds a total
of 15 New Order Prospecting Rights and 5 New Order Mining Rights. The Kennedy`s
Vale Project and CRM now hold a combined total of 20 New Order Prospecting
Rights.
8.6 Risks associated with the development of the Mareesburg PGM Project
A portion of the proceeds from the recently completed Cdn$348 million financing
will be used to develop an open-pit mining operation at the Mareesburg Project.
The Company`s decision to carry out this development was based on internal
scoping studies and cash flow models. The Company did not commission an
independent economic analysis in respect of its decision to proceed with this
development. If the Company`s internal scoping studies or cash flow models prove
to be inaccurate or incomplete, the expected developments and returns from the
Mareesburg Project could be lower or even negative, and the Company`s financial
condition and results of operations could be materially adversely affected.
9. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the years ended December 31, 2010 and 2009, the CEO
and the CFO have designed, or caused to be designed under their supervision, the
Company`s disclosure controls and procedures ("DCP") to provide reasonable
assurance that material information relating to the Company and its consolidated
subsidiaries has been disclosed in accordance with regulatory requirements and
good business practices and that the Company`s DCP will enable the Company to
meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures and have concluded that the design and operation of the
Company`s DCP were effective as of December 31, 2010 and that the Company has
the appropriate DCP to ensure that information used internally by management and
disclosed externally is, in all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal controls
over financial reporting ("ICFR") within the Company in order to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
International Financial Reporting Standards ("IFRS"). During 2010, the Company
used the services of an international accounting firm to act as the Company`s
internal auditors for its South African operations. Under the supervision, and
with the participation, of the CEO and the CFO, management conducted an
evaluation of the effectiveness of the Company`s ICFR based on the framework in
the Internal Control - Integrated Framework developed by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on that
evaluation, the CEO and the CFO concluded that the design and operation of the
Company`s ICFR were effective as at December 31, 2010.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Investment Holdings (Pty) Ltd., a subsidiary which is accounted for as a special
purpose entity under IFRS. During the design and evaluation of the Company`s
ICFR, management identified certain non-material deficiencies, a number of which
have been addressed or are in the process of being addressed in order to enhance
the Company`s processes and controls. The Company employs entity level and
compensating controls to mitigate any deficiencies that may exist in its process
controls. Management intends to continue to further enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, they
cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by unauthorized override to the
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Accordingly,
because of the inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the year ended December
31, 2010 that have materially affected, or are reasonably likely to materially
affect, the Company`s ICFR.
10. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, is intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company. Readers
are cautioned that forward-looking statements are not guarantees of future
performance. There can be no assurance that such statements will prove to be
accurate and actual results and future events could differ materially from those
acknowledged in such statements. Specific reference is made to the Company`s
most recent Annual Information Form on file with Canadian provincial securities
regulatory authorities for a discussion of some of the factors underlying
forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise, except to the extent required by applicable laws.
March 21, 2011
Ian Rozier
Date: 24/03/2011 08:52:00 Produced by the JSE SENS Department.
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