| Fri 1 Apr 2011, 14:42 | | BCD - Brc Diamondcore Ltd - Consolidated Financial Statements for The Years |
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BCD
BCD
BCD - Brc Diamondcore Ltd - Consolidated Financial Statements for The Years
ended December 31, 2010 and 2009
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND
2009
Management`s Report
The consolidated financial statements, the notes thereto and other financial
information contained in the Management`s Discussion and Analysis have been
prepared in accordance with Canadian generally accepted accounting principles
and are the responsibility of the management of BRC DiamondCore Ltd. (the
"Company"). The financial information presented elsewhere in the
Management`s Discussion and Analysis is consistent with the data that is
contained in the consolidated financial statements. The consolidated
financial statements, where necessary, include amounts which are based on the
best estimates and judgments of management.
In order to discharge management`s responsibility for the integrity of the
financial statements, the Company maintains a system of internal controls.
These controls are designed to provide reasonable assurance that the
Company`s assets are safeguarded, transactions are executed and recorded in
accordance with management`s authorization, proper records are maintained and
relevant and reliable information is produced. These controls include
maintaining quality standards in hiring and training of employees, policies
and procedures manuals, a corporate code of conduct and ensuring that there
is proper accountability for performance within appropriate and well-defined
areas of responsibility. The system of internal controls is further
supported by a compliance function, which is designed to ensure that we and
our employees comply with securities legislation and conflict of interest
rules.
The Board of Directors is responsible for overseeing management`s performance
of its responsibilities for financial reporting and internal control. The
Audit Committee, which is composed of non-executive directors, meets with
management as needed as well as the external auditors to ensure that
management is properly fulfilling its financial reporting responsibilities to
the Directors who approve the consolidated financial statements.
The external auditors have full and unrestricted access to the Audit
Committee to discuss the scope of their audits, the adequacy of the system of
internal controls and review reporting issues.
The consolidated financial statements for the year ended December 31, 2010
have been audited by Deloitte & Touche LLP, Chartered Accountants and
Licensed Public Accountants, in accordance with Canadian generally accepted
auditing standards.
(Signed) "Michiel C.J. de Wit"
Michiel C.J. de Wit, President
(Signed) "Brian P. Scallan"
Brian P. Scallan, Vice President, Finance
March 29, 2011
Independent Auditor`s Report
To the Shareholders of BRC DiamondCore Ltd.
We have audited the accompanying consolidated financial statements of BRC
DiamondCore Ltd. which comprise the consolidated balance sheets as at
December 31, 2010 and 2009, and the consolidated statements of operations and
deficit, comprehensive loss, and cash flows for the years then ended, and a
summary of significant accounting policies and other explanatory information.
Management`s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with Canadian generally
accepted accounting principles, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or
error.
Auditor`s Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audits to obtain reasonable assurance
about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditor`s judgment, including the
assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity`s
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
entity`s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of BRC DiamondCore Ltd. as at
December 31, 2010 and 2009, and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note 1 - Basis of
Presentation in the consolidated financial statements which indicates that
the Company incurred a net loss of $1,565,922 for the year ended December 31,
2010 and, as of that date, the Company had a working capital deficit of
$1,198,181 and accumulated deficit of $119,408,103. These conditions, along
with other matters as set forth in Note 1, indicate the existence of material
uncertainties that may cast significant doubt about the Company`s ability to
continue as a going concern.
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
March 29, 2011
Consolidated Balance Sheets (expressed in Canadian dollars)
As at December 31, 2009
$
2010
$
Assets
Current assets
Cash 126,931 664,495
Prepaid expenses and other
current assets 21,713 163,175
148,644 827,670
Non-current
Mineral properties and 5,075,041 5,808,835
deferred exploration
expenditures (Note 5)
Capital assets (Note 6) 4,100 141,794
5,227,785 6,778,299
Liabilities
Current liabilities
Accounts payable and 834,176 1,027,172
accrued liabilities
Notes payable (Note 7) 400,493 -
Taxes payable 6,127 -
Due to related parties 106,029 377,884
(Note 4)
1,346,825 1,405,056
Non-current
Long term taxes payable(Note9) - 6,598
Future income tax liabilities 15,789 50,432
(Note 9)
1,362,614 1,465,686
Shareholders` Equity
Capital stock (Note 8) 115,457,876 115,457,876
Contributed surplus (Note 8(e)) 7,815,398 7,700,518
Deficit (119,408,103) (117,842,181)
3,865,171 5,316,213
5,227,785 6,778,299
Going concern (Note 1)
Commitments, contingencies and
guarantees (Note 10)
Subsequent events (Note 14)
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board
(Signed) "Michiel C.J. de Wit"
Michiel C.J. de Wit, Director
(Signed) "Brian P. Scallan"
Brian P. Scallan, Director
Consolidated Statements of Operations and Deficit (expressed in Canadian
dollars)
Years ended December 31, 2009
$
2010
$
Expenses
Consulting fees 100,000 135,938
Professional fees 347,319 344,888
General and admini-
strative 209,778 120,488
Stock-based compensation
(Note 8(b)) 88,000 555,520
Foreign exchange (loss)
gain unrealized 3,356 67,923
Impairment of mineral
properties and deferred
exploration expenditures
(Note 5)
740,975 -
Bad debt expense 105,009 342,248
(1,594,437) (1,431,159)
Interest expense - (166,477)
Loss from continuing operations (1,594,437) (1,597,636)
before income taxes
Income tax recovery (expense) (Note 28,515 (57,030)
9)
Loss from continuing operations (1,565,922) (1,654,666)
Loss from discontinued operations - (7,296,948)
(Note 3)
Net loss for the year (1,565,922) (8,951,614)
Deficit, beginning of the year (117,842,181) (108,890,567)
Net loss for the year (1,565,922) (8,951,614)
Deficit, end of the year $(119,408,103 $(117,842,181)
)
Basic and diluted loss per
share (Note 8 (d))
- from continuing operations $(0.02) $(0.05)
- from discontinued $- $(0.22)
operations
- from net loss $(0.02) $(0.27)
Adjustment for headline loss $0.00 $0.22
per share
Headline loss per share $ (0.02) $(0.05)
Weighted average number of 89,408,640 32,683,251
common shares outstanding
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows (expressed in Canadian dollars)
Years ended December 31, 2010 2009
$ $
Cash flows from operating
activities
Net loss from continuing operations
for the year (1,565,922) (1,654,666)
Items not affecting cash
Interest expense - 165,674
Impairment of properties 740,975 -
Stock-based compensation 88,000 555,520
Accrued interest 493 -
Bad debt expense 105,009 -
Provision for taxes (28,515) 57,030
(659,960) (876,442)
Net change in non-cash working
capital items
Prepaid expenses and other 36,453 55,403
current assets
Accounts payable and accrued (192,996) 1,455,719
liabilities
Taxes payable (6,598) -
Cash (used for) provided from (823,101) 634,680
continuing operations
Cash used for discontinued - (2,469,357)
operations
Cash used for operating activities (823,101) (1,834,677)
Cash flows from investing
activities
Proceeds from disposal of 64,794 445,961
capital asset
Mineral properties and (338,757) (800,961)
deferred exploration
expenditure
Funds received from Rio Tinto 431,355 555,379
(Note 5)
Cash provided by investing 157,392 200,379
activities of continuing operations
Cash provided by investing - 1,121,439
activities of discontinued
operations
Cash provided by investing 157,392 1,321,818
activities
Cash flows from financing
activities
Due to related parties (271,855) -
Notes payable (Note 7) 400,000 -
Common shares and warrants - 979,269
issued, net of issuance costs
(Note 8(a))
Cash provided from financing 128,145 979,269
activities
Net (decrease) increase in cash (537,564) 466,410
Cash - beginning of year 664,495 198,085
Cash - end of year 126,931 664,495
Supplementary cash flow information
Interest paid - -
Income taxes paid - -
Amortization of capital assets 72,685
included in mineral properties
172,121
Stock based compensation included 26,880 210,357
in mineral properties
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Comprehensive Loss (expressed in Canadian dollars)
Year ended
Year ended December 31,
December 31, 2009
2010 $
$
Net loss for the year (1,565,922) (8,951,614)
Other Comprehensive Income:
Realization of cumulative foreign
currency loss on self-sustaining
operation (Note 8(f))
- 2,370,104
Comprehensive loss (1,565,922) (6,581,510)
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to the consolidated financial statements Years Ended December 31, 2010
and 2009 (amounts in Canadian dollars, unless otherwise specified)
1. Description of business and going concern
The principal business of BRC DiamondCore Ltd. (the "Company") is the
acquisition and exploration of mineral properties in the Democratic Republic
of the Congo ("DRC"). For the financial year ended December 31, 2009, only
operations from Canada and the DRC were included in the balance sheet and the
statements of operations and deficit as continuing operations and the South
Africa operations are shown as discontinued operations following the disposal
of the South Africa operations on September 30, 2009 (see Notes 3 and 13).
For the year ended December 31, 2010, the Company has incurred a net loss of
$1,565,922 (year ended December 31, 2009 - $8,951,614). The Company`s deficit
as at December 31, 2010 was $119,408,103 (December 31, 2009 - $117,842,181).
The Company had a working capital deficit of $1,198,181 as at December 31,
2010 (December 31, 2009 - $577,386) and had a net decrease in cash of
$537,564 (December 31, 2009 - increase in cash of $466,410) and used net cash
in operating activities of $823,101 (December 31, 2009 - $1,834,677) during
2010. These conditions along with other matters indicate the existence of
material uncertainties that may cast significant doubt about the Company`s
ability to continue as a going concern. While the financial statements have
been prepared on the basis of accounting principles applicable to a going
concern, adverse conditions may cast substantial doubt upon the validity of
this assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding. Management is exploring all available options to secure additional
funding, including equity financing and strategic partnerships. In addition,
the recoverability of amounts shown for mineral properties and 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 incurred costs through a
disposition of its interests, all of which are uncertain.
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 the going concern assumption.
These consolidated financial statements do not include any additional
adjustments to the recoverability and classification of certain recorded
asset amounts, classification of certain liabilities and changes to the
statements of operations and deficit that might be necessary if the Company
was unable to continue as a going concern.
2. Significant accounting policies
Basis of presentation
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP") applicable to a
going concern, which assumes that the Company will continue in operation for
a reasonable period of time and will be able to realize its assets and
discharge its liabilities in the normal course of operations.
Basis of consolidation
The Company`s consolidated financial statements as at December 30, 2010 and
2009 include its accounts and those of its wholly-owned subsidiaries in the
DRC, BRC DiamondCore Congo SPRL and South Africa, BRC Diamond South Africa.
All inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of the consolidated financial statements in conformity with
Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of any revenues and expenses during the reporting
period. Actual results could differ from those estimates. In addition to the
going concern assumption, assets and liabilities which have required
management to make significant estimates and assumptions include mineral
properties, useful lives of capital assets, asset retirement obligations,
legal contingencies, future income taxes and stock-based compensation.
Financial instruments
All financial instruments are required to be measured at fair value on
initial recognition, except for certain related party transactions. Due to
the short term nature of the Company`s financial assets and liabilities,
management believes that the carrying value approximates the fair value.
Measurement in subsequent periods depends on whether the financial instrument
has been classified as either loans and receivables, held-for-trading, held-
to-maturity, available-for-sale, or other liabilities. The classification
depends on the purpose for which the financial instruments were acquired,
their characteristics and/or management`s intent. Management determines the
classification of financial assets and financial liabilities at initial
recognition and, except in very limited circumstances, the classification is
not changed subsequent to initial recognition. Transaction costs with respect
to instruments not classified as held-for-trading are recognized as an
adjustment to the cost of the underlying instruments and amortized using the
effective interest method.
Financial instruments are classified in the following categories. See Note 12
for additional disclosures regarding hierarchy.
Loans and receivables
Loans and receivables are initially recognized at fair value, including
direct and incremental transaction costs, and are subsequently measured at
amortized cost, using the effective interest method. The Company`s
classification of loans and receivables includes prepaid expenses and other
current assets.
Held-for-trading
Financial assets or financial liabilities that are acquired, or incurred with
the intention of generating income in the near term, are classified as held-
for-trading. Financial instruments included in this category are initially
recognized at fair value and transaction costs are taken directly to the
consolidated statements of operations and deficit along with gains and losses
arising from changes in fair value. The Company`s classification of held-for-
trading financial instruments includes cash.
Held-to-maturity
This category is for fixed maturity financial assets with fixed or
determinable payments that the Company has the positive intention and ability
to hold to maturity. Financial assets classified as held-to-maturity are
measured at amortized cost. The Company did not have any assets classified as
held-to-maturity for the year.
Available-for-sale
Available for sale financial assets are measured at fair value, with
unrealized gains and losses recognized in other comprehensive income until
the gain or loss is recognized in the statement of operations and deficit
when the asset is sold or deemed to be permanently impaired. The Company did
not have any assets classified as available-for-sale for the year.
Other liabilities
Financial liabilities, including accounts payable and accrued liabilities,
are classified as "other liabilities". All of the other liabilities are
initially recognized at fair value and are subsequently measured at amortized
cost using the effective interest method. Interest expense is recorded in
foreign exchange loss and other expenses in the statements of operations and
deficit unless it relates specifically to a development project and is
capitalized. The Company`s classification of other liabilities includes
accounts payable and accrued liabilities, notes payable and due to related
parties.
Derivatives instruments
Derivative instruments, including embedded derivatives, are recorded at fair
value unless exempted from derivative treatment as normal purchase and sale.
All changes in their fair value are recorded in the consolidated statements
of operations and deficit unless cash flow hedge accounting is used, in which
case changes in fair value are recorded in other comprehensive income. The
Company does not currently apply hedge accounting or have derivative
instruments.
Mineral Properties
Exploration costs
Exploration costs are recorded in the statements of operations and deficit
until such time as the Company has legal title to the mineral rights.
Thereafter all exploration and evaluation expenditures are capitalized until
such time as the mineral property is capable of commercial production.
Capitalized exploration costs are subject to impairment tests when facts and
circumstances suggest that the carrying amount of the assets may exceed their
recoverable amount.
Land and mineral rights
Undeveloped properties and mineral rights, upon which the Company has not
performed sufficient exploration work to determine whether sufficient
mineralization exists, are carried at original cost. Land is not amortized.
Mineral rights are amortized over the expected life of the mine from the date
on which commercial production commences. Where there is little likelihood of
a mineral right being exploited, or the value of an exploitable mineral right
has diminished below cost, a write down is recorded representing the
difference between carrying value and fair value.
Non-producing mineral properties
Costs relating to the acquisition, exploration and development of non-
producing resource properties that meet the generally accepted criteria for
deferral are capitalized until such time as either economically recoverable
reserves are established, the properties are sold or abandoned, or the value
of the particular property is impaired. These criteria include having a
clearly defined process with identifiable associated costs, establishment of
technical feasibility, an intention to process and sell the recovered
minerals to a clearly defined market, and adequate resources exist or are
expected to be available to complete the project to commercial production.
The excess of these costs over estimated recoveries is charged to operations.
The ultimate recovery of these costs depends on the discovery and development
of economic reserves or the sale of the mineral rights. The amounts shown
for non-producing resource properties do not necessarily reflect present or
future values.
In addition, the Company`s exploration opportunities in the DRC may be
subject to sovereign risks, including political and economic instability,
government regulations relating to mining, military repression, civil
disorder, foreign currency fluctuations and inflation, all or any of which
may impede the Company`s activities in this country or may result in the
impairment or loss of part or all of the Company`s interest in the
properties.
Capital assets
Capital assets of the Company are recorded at cost less accumulated
amortization less any accumulated impairment write downs. Amortization of
capital assets is recorded on a straight line basis over the following
periods:
Vehicles -four years
Furniture and office equipment -two to seven years
Computer equipment -three years
Exploration and mining assets -two to four years
The amortization methods, useful lives and residual values, if not
insignificant, are reassessed annually.
Impairment of long-lived assets
The Company reviews and evaluates the carrying value of its exploration
properties for impairment when events or circumstances indicate that the
carrying amounts of related assets or groups of assets may not be
recoverable. If the total estimated future cash flows on an undiscounted
basis are less than the carrying amount of the asset, an impairment loss is
measured and assets are written down to fair value. Future cash flows are
estimated based on the expected proceeds to be received from selling the
asset. These estimates are subject to certain risks and uncertainties that
may affect the recoverability of the Company`s investments in mineral
properties. Although the Company has made its best estimate of these factors,
it is possible that changes could occur that could further affect
management`s estimate of the recoverable amount.
Asset retirement obligations
The estimated fair value of an asset retirement obligation is recognized as a
liability in the period incurred. A corresponding amount is added to the
carrying amount of the associated asset when incurred and amortized over the
asset`s estimated useful life.
The fair value is determined based on the estimated future cash flows
required to settle the liability discounted at an adjusted discount rate. The
liability is accreted over time to its present value through charges to the
statements of operations and deficit to reflect changes in the expected
amounts and timing of cash flows. Actual expenditures incurred are charged
against the accumulated obligation. The asset retirement obligation is
reviewed by management annually and revised for changes in future estimated
costs and regulatory requirements. The Company did not have any asset
retirement obligations for the year.
Stock options
The Company`s stock option plan is summarized in Note 8(b). Stock-based
compensation is recorded using the fair value method of accounting for stock
options granted to directors, officers and employees whereby the weighted
average fair value of options granted is recorded as compensation expense
using the Black-Scholes option pricing model in the consolidated financial
statements. Compensation expense on stock options granted is recognized and
amortized over the vesting period, with the offset being credited to
contributed surplus, which will transfer to capital stock if the related
options are converted into common shares. Any consideration paid for shares
purchased under the plan is credited to capital stock. Any forfeitures are
recognized as they occur.
Income taxes
The Company follows the asset and liability method of accounting for income
tax accounting. Under this method, future income tax assets and liabilities
are determined based on differences between the financial reporting and tax
bases of assets and liabilities and on unclaimed losses carried forward and
are measured using the substantively enacted tax rates for the year in which
the differences are expected to reverse or losses expected to be utilized. A
valuation allowance is recorded as a reduction against any future income tax
asset to the extent that the benefit of the future tax asset is not more
likely than not to be realized.
Basic and diluted loss per share
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares and common share equivalents issued and outstanding
during the year.
Diluted loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding increased to include potentially
issuable common shares from the assumed exercise of common share purchase
options and warrants if dilutive. It is calculated using the treasury method
for options and warrants. The treasury method assumes that outstanding stock
options and share purchase warrants with an average exercise price below
market price of the underlying shares are exercised and the assumed proceeds
are used to repurchase common shares of the Company at the average market
price of the common shares for the year. Due to reported losses, diluted loss
per share data is the same as basic loss per share as the assumed exercise of
stock options and warrants is anti-dilutive (see Note 8(d)).
Foreign currency translation
The Company`s consolidated financial statements are presented in Canadian
dollars and the functional currency is the Canadian dollar.
The Company`s foreign operations are classified as integrated for foreign
currency translation purposes. Transactions in foreign currencies of
integrated foreign operations are translated into Canadian dollars at rates
of exchange at the time of such transactions. Monetary assets and liabilities
are translated at current rates of exchange with the resulting gains or
losses included in income. Non-monetary items are translated at historical
exchange rates. Revenue and expense items are translated at the average rates
of exchange, except amortization which is translated at the historical rates
of exchange applicable to the related assets. Exchange gains or losses
resulting from these translation adjustments are included in in the
statements of operations and deficit and statements of comprehensive loss for
the year. The activities in the DRC are considered integrated.
Transactions denominated in a foreign currency are translated into Canadian
dollars at the rate of exchange in effect at the time of such transactions.
Monetary assets and liabilities denominated in foreign currency are
translated at the rate of exchange at the balance sheet date. The resulting
gains and losses are included in income.
Prior to July 3, 2009 (see Note 3), the Company`s South African operations
was treated as a self-sustaining foreign operation. Self-sustaining foreign
operations were translated into Canadian dollars using the current-rate
method. Under this method, assets and liabilities were translated at the rate
of exchange in effect at the balance sheet date while revenue and expense
items (including depletion and amortization) were translated at the average
rates of exchange prevailing during the year. Exchange gains and losses that
resulted from the translation were deferred and was part of accumulated other
comprehensive income (loss). The discontinued operations in South Africa were
considered self-sustaining and prior to their disposal in 2009, their
functional currency was the South African rand.
Variable interest entities
Variable interest entities ("VIE`s") are consolidated by the Company when it
is determined that it will, as the primary beneficiary, absorb the majority
of the VIE`s expected losses or expected residual returns. The Company
currently does not have any interests in VIE`s.
Future changes in accounting standards
International Financial Reporting Standards
In February 2008, the Accounting Standards Board ("AcSB") of the CICA
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.
3. Discontinued operations - Diamond Core Resources Limited
On February 11, 2008, the Company acquired all of the outstanding shares of
Diamond Core Resources Limited ("Diamond Core"), a diamond exploration
company in South Africa. On July 3, 2009, Diamond Core, which was the holding
company for all of the Company`s South African projects, was the subject of a
final liquidation order by the Northern Cape High Court in South Africa. The
application for the liquidation was initiated by River Corporate Finance
(Pty) Limited ("River Corporate Finance"), which had been the exclusive
adviser to Diamond Core on the transaction involving the acquisition by the
Company of Diamond Core. The liquidation application was based on a claim in
respect of the balance allegedly owing on a success fee of US $1million.
Diamond Core disputed the claim based on performance and counter claimed
against River Corporate Finance.
An application for leave to appeal the liquidation order was lodged with the
Northern Cape High Court but denied by the Court in early 2010. A petition
that the appeal be heard by the Supreme Court of Appeal was also denied.
Final liquidators were appointed.
Effective July 3, 2009, as a result of the liquidation order on July 3, 2009,
the Company ceased to consolidate Diamond Core`s financial statements into
those of the Company`s.
Effective September 30, 2009, the Company disposed of all of its shares in
Diamond Core for nominal consideration plus, if the offer of compromise
referred to below is approved by the court, the Company will receive cash
proceeds of US$500,000. The terms of the sale contemplated that the purchaser
enters into an offer of compromise with the creditors of Diamond Core. The
Company understands that the purchaser reached a settlement with the majority
of the creditors of Diamond Core and had the liquidation order rescinded.
As at December 31, 2010, the Company had not received the US $500,000.
The Company had recorded the loss on disposition of Diamond Core as a
component of discontinued operations in the Company`s consolidated financial
statements.
Due to the disposition of Diamond Core, the foreign exchange loss from self
sustaining operations was reversed from accumulated comprehensive income.
The following tables summarize the statements of discontinued operations with
respect to the disposition of Diamond Core as well as the assets and
liabilities of discontinued operations:
Year ended $
December 31, 2009 $(`000s)
Revenue -
Expenses (5,483)
Loss from discontinued operations (5,483)
Loss on sale (1,814)
Net loss from discontinued operations (7,297)
Assets and liabilities of disposal As at
group September, 30
2009
(`000s)
$
Cash 306
Prepaid expenses and other assets 71
Inventory 139
Mineral properties and deferred 3,562
exploration costs
Capital assets 6,461
Asset retirement obligations (2,421)
Accounts payable and accrued (6,304)
liabilities
Net assets of discontinued 1,814
operations
4. Related party transactions
During the year ended December 31, 2010, legal fees and related costs of $
98,017 (year ended December 31, 2009 - $184,996) incurred in connection with
general corporate matters were billed by a law firm of which one of the
partners is a director and officer of the Company. The amount owing as of
December 31, 2010 is $ 90,778 (December 2009 - $ 49,113). In November 2009,
as part of a debt settlement transaction, this law firm received 3,687,375
common shares of the Company to settle $737,475 of indebtedness owed by the
Company to this law firm (see Note 8(a)).
As at December 31, 2010, an amount of $ 102,311 was owed to one director of
the Company representing consulting fees (December 31, 2009 - $276,849, owed
to two directors). During the year ended December 31, 2010, consulting fees
of $ 100,000 were incurred to the one director (year ended December 31, 2009
- $99,999).
During 2010, Sterling Portfolio Securities Inc. advanced a short term loan to
the Company in the amount of $83,785. The officer and director of Sterling
Portfolio Securities Inc. is a director of the Company.
As at December 31, 2010, an amount of $ 3,719 (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
year ended December 31, 2010, a drill rig was sold to Banro by the Company
for gross proceeds of $154,964 (December 31, 2009 - $nil and see Note 6).
All amounts due to related parties are unsecured, non-interest bearing and
due on demand. All transactions are in the normal course of operations and
are measured at the exchange value.
5. Mineral properties and deferred exploration expenditures
Effective September 30, 2009, the Company disposed of its entire shareholding
in Diamond Core, which held the Company`s South African diamond projects (see
Note 3).
Mineral properties in the DRC comprise of nine exploration permits in the
Tshikapa area in the South Kasai province of the DRC, and forty-six
exploration permits north of Bafwasende in the Orientale Province of the DRC
(the "DRC North Project").
In January 2010, the Company announced that it had entered into an agreement
(the "Iron Ore Agreement") with Rio Tinto Minerals Development Limited ("Rio
Tinto") for the exploration for iron ore in areas within the Orientale
Province of the DRC. These areas total approximately 4,550 square kilometres
and are covered by exploration permits (the "Permits") which had been
controlled by the Company. Under the Iron Ore Agreement, which is in the
form of a shareholders` agreement, the Company owns 25% and Rio Tinto owns
75% of the capital stock of a holding company (i.e. Rio Tinto Exploration
Oriental Limited) which owns a DRC registered company (i.e. Rio Tinto
Exploration Orientale SPRL) that holds the Permits.
Under the Iron Ore Agreement, all iron ore exploration up to and including
the completion of any pre-feasibility study, as required to obtain an
exploitation permit, will be funded by Rio Tinto. The Company will not
suffer any dilution during this period, such that the Company`s 25% interest
in the properties will be maintained during this period. The exploration
will be carried out by Rio Tinto or one of its affiliates as the operator.
After the completion of the pre-feasibility study, funding for the project is
to be provided by Rio Tinto and the Company based on their proportionate
respective interests in the said holding company.
During the year ended December 31, 2010, the Company received proceeds of $
431,355 (year ended December 31, 2009 - $ 555,379) from Rio Tinto in
connection with the iron ore project and diamond exploration in the Tshikapa
area.
In order to focus the exploration program in the DRC on the most promising
areas, two exploration licenses in the DRC were relinquished during 2010
resulting in a writedown of $740,975. One new application was lodged during
2009.
During 2010, the following exploration permits in the DRC were relinquished
or cancelled: Investor`s Equity Limited (2).
The Company will keep its diamond exploration focus on the following DRC
exploration permits which are held by the Company directly or by partners
through option agreements: Acacia (6), the Company (2), Caspian Oil and Gas
(2) and Coexco (44).
During 2009, the following exploration permits in the DRC were relinquished
or cancelled: Acacia (5), the Company (4), Candore (5), BCM (1), Caspian Oil
and Gas (9), Kwango Mines (3), Group Abba (1) and King`s Mine (1).
The Company has incurred cumulative deferred exploration expenditures and
mineral property costs of $5,075,041, (net of write offs of $ 17,529,454,
funds received from Rio Tinto of $986,734, and gain on sale of assets of
$144,218) in the DRC as at December 31, 2010 as follows:
Year ended Cumulative
December from
31, inception
2009 to
Year ended December
December 31,
31, 2010 2010
$ $ $
Mineral property
costs
Claims and staking - - 2,713
Total mineral -
property - -
costs
Deferred exploration
expenditures
Funds received from (986,734)
Rio Tinto (431,355) (555,379)
Administrative and 5,106,870
office support 285,553 275,308
Amortization 72,685 172,121 786,435
Drilling 3,778 18,755 508,890
Field camp expenses 16,926 102,305 2,941,699
Geochemistry - - 329,145
Geology - Contract 1,603,340
geologists 2,575 -
Geophysics - - 2,369,677
Option fees - - 308,443
Permits and surface 1,974,179
taxes 106,455 19,057
Professional fees 4,812 42,774 661,520
Remote sensing and 48,789
surveying 2,060 -
Stock based 2,225,874
compensation 26,880 210,357
Transport cost and 3,261,155
helicopter 22,949 14,332
Gain on sale of (144,218)
assets (90,170) (54,048)
Unrealized foreign 1,606,718
exchange difference (15,967) -
Write off (17,529,45
(740,975) - 4)
Total deferred 5,072,328
exploration (733,794) 245,582
expenditures
Total mineral 5,075,041
properties and
deferred exploration
expenditures (733,794) 245,582
6. Capital assets
As at December 31, Cost Accumulated Net
2010 $ Amorti- Carrying
zation Value
$ $
Computer equipment 28,658 26,463 2,195
Exploration and 109,104 108,204 900
mining assets
Furniture and office 16,851 15,846 1,005
equipment
Vehicles 160.113 160,113 -
314,726 310,626 4,100
As at December 31, Cost Accumulated Net
2009 $ Amorti- Carrying
zation Value
$ $
Computer equipment 28,658 19,478 9,180
Exploration and 316,476 216,384 100,092
mining assets
Furniture and office 18,106 14,200
equipment 3,906
Vehicles 254,436 225,820 28,616
617,676 475,882 141,794
During the year ended December 31, 2010, $ 72,685 of amortization was
included in mineral properties and deferred exploration expenditures (year
ended December 31, 2009 - $172,171). In addition, during the year ended
December 31, 2010 a drill rig was sold which resulted in a gain on sale of
$90,170 (year ended December 31, 2009 - $nil). The gain on sale was
capitalized to mineral properties and deferred exploration expenditures (see
Note 5).
7. Notes Payable
During the month of December 2010, the Company entered into two promissory
notes payable ("the "Notes") in amounts of $100,000 and $300,000. The Notes
bear simple interest at a rate of 5% per annum and are unsecured and due on
demand. The fair value approximates the carrying value as at December 31,
2010.
8. Capital stock, stock option and contributed surplus
Capital stock
As at December 31, 2010, the authorized capital stock of the Company is
comprised of an unlimited number of common shares.
Number of Amount
Shares
Balance, December 31, 2008 26,091,310 $105,815,141
Shares issued for the 20,000,000 1,000,000
private placement
Shares issued for the debt 43,317,330 8,663,466
settlement transactions
Financing costs - (20,731)
Outstanding at December 89,408,640 115,457,876
31, 2010 and December 31,
2009
In November 2009, the Company completed debt settlement transactions with
certain of its creditors pursuant to which such creditors accepted common
shares of the Company, issued from treasury by the Company, in satisfaction
of indebtedness owed to them by the Company (the "Debt Settlements"). The
total number of common shares that were issued by the Company to the
creditors under the Debt Settlements was 43,317,330 shares (the "Debt
Shares"), and the total amount of Company debt settled by such share
issuances was $8,663,466.
One of the creditors involved in the Debt Settlements was Banro, which held
3,744,032 (or 14.35%) of the outstanding common shares of the Company prior
to the Debt Settlements. 31,689,955 of the Debt Shares were issued to Banro
pursuant to its debt settlement agreement, such that Banro currently owns
35,433,987 (or 39.63%) of the outstanding common shares of the Company.
The Company also in November 2009 carried out a non-brokered private
placement of 20,000,000 units of the Company (the "Units") at a price of
$0.05 per Unit for gross proceeds of $1,000,000. Each Unit is comprised of
one common share of the Company and one warrant of the Company, with each
such warrant entitling the holder to purchase one common share of the Company
at a price of $0.066 for a period of four years. Directors of the Company
purchased a total of 12,250,000 of the Units issued under this financing.
b) Stock option
The Company has a stock option plan under which non-transferable options to
purchase common shares of the Company may be granted by the Board of
Directors to any director, officer, employee or consultant of the Company or
any subsidiary of the Company. This stock option plan contains provisions
providing that the term of an option may not be longer than five years and
the exercise price of an option shall not be lower than the last closing
price of the Company`s shares on the Toronto Stock Exchange prior to the date
the stock option is granted. Unless the Board at any time makes a specific
determination otherwise, a stock option and all rights to purchase Company
shares pursuant thereto shall expire and terminate immediately upon the
optionee who holds such stock option ceasing to be at least one of a
director, officer or employee of or consultant to the Company or a subsidiary
of the Company, as the case may be. One-quarter of the stock options granted
pursuant to the stock option plan vest immediately on their date of grant and
successive quarters of such stock options vest 6 months, 12 months and 18
months after the grant date. Under the current stock option plan, there are
1,620,000 additional options that may be issued.
As at December 31, 2010, the Company had outstanding under the stock option
plan stock options to acquire 2,280,000 (December 31, 2009 - 2,941,400)
common shares of the Company at a weighted-average price of $2.42 (December
31, 2009 - $2.15) per share.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2010:
Date Number Number of
of of options
grant options expired
outstand
ing Total number
at of options
12/31/09 Number outstanding
of and
options exercisable
cancelled at 12/31/10
03/04/05 16,400 16,400 - -
03/18/05 225,000 225,000 - -
04/29/05 225,000 225,000 - -
06/29/06 200,000 - - 200,000
04/09/07 300,000 - - 300,000
08/03/07 180,000 - - 180,000
08/28/08 1,795,00 - 1,600,000
0 195,000
2,941,40 466,400 2,280,000
0 195,000
Fair Remaining
Exercise value Contractual
Date of price of Life Expiry
grant per grant (Years) date
share
03/04/05 $2.10 $1.78 - 03/04/10
03/18/05 2.50 1.76 - 03/18/10
04/29/05 2.50 2.14 - 04/29/10
06/29/06 3.75 2.16 0.5 06/29/11
04/09/07 5.50 3.25 1.3 04/09/12
08/03/07 8.00 2.85 1.6 08/03/12
08/28/08 1.05 08/28/13
0.77 1.7
During the year ended December 31, 2010, the Company recognized in the
statements of operations and deficit as stock-based compensation expense
$88,000 (year ended December 31, 2009 - $555,520) representing the fair value
of stock options previously granted to employees, directors and officers
under the Company`s stock option plan. An amount of $26,880 was capitalized
as deferred exploration expenditures (year ended December 31, 2009 -
$210,357). These amounts were credited accordingly to contributed surplus in
the balance sheet. No options were granted in the years ended December 31,
2010 and 2009. All options have vested that are currently outstanding under
the plan.
c) Replacement options
In connection with the acquisition by the Company of all of the outstanding
shares of Diamond Core on February 11, 2008, 617,710 (the "Replacement
Options") stock options were issued by the Company to employees of Diamond
Core to substitute 15,133,190 stock options in Diamond Core. At December 31,
2010, 476,207 of the Replacement Options had been cancelled (December 31,
2009 - 460,968).
d) Loss per share
The loss per share figures for the year ended December 31, 2010 and 2009 are
calculated using the weighted average number of shares outstanding during the
respective years amounting to 89,408,640 and 32,683,251 common shares,
respectively. Total stock options as at December 31, 2010 of 2,280,000
(December 31, 2009 - 2,941,400) and warrants of 20,000,000 (December 31, 2009
- 20,000,000) were excluded from the calculation of diluted loss per share as
their effect would have been antidilutive.
e) Contributed surplus
As at December 31, 2009
2010
Balance, beginning of the
year $7,700,518 $6,934,641
Options vested 114,880 765,877
Balance, end of year $7,815,398 $7,700,518
f) Accumulated Other Comprehensive Loss
As at December 31, 2009
2010
Balance, beginning of the $- $(2,370,104)
year
Reversal of foreign
currency
loss on self-sustaining - 2,370,104
foreign operation (Note 3)
Balance, end of year $- $-
9. Income taxes
The provision for income taxes is at an effective tax rate which differs from
the basic corporate tax rate for the following reasons:
Year ended December 31, 2010 2009
Canadian basic Federal and
Provincial income tax rates 31.0% 33.0%
Recovery of income taxes
based on statutory rates $(494,275) $(527,220)
Foreign rate differential 10,560 -
Difference in future tax
rates 39,627 349,413
Stock option expense 27,280 183,322
Unrecognized benefit of
losses 416,808 260,530
Change in valuation
allowance (28,515) (209,015)
Income tax (recovery) $(28,515) $57,030
expense
The following information summarizes the principal temporary differences,
unused tax losses, and related future tax effect:
As at December 31, 2009
2010
Future income tax assets
Non-capital losses carry
forward $836,942 $1,534,184
Mineral properties 5,386,647 5,164,409
Net capital losses 11,570,056 11,613,090
Other expenses and
financing 97,750 74,603
costs
Capital assets 56,280 56,280
17,947,675 18,442,566
Less: valuation allowance (17,947,675 (18,442,566)
)
Total future income tax $- $-
assets
Future income tax
liabilities
Harmonization of Ontario
corporate income tax with $(15,789) $(57,030)
Federal
Total future income tax
liabilities (15,789) (57,030)
Future income tax $ (15,789) $(57,030)
liabilities - net
The Company has not recognized the benefit of these losses in the financial
statements. The Company concluded that the criteria of more likely than not
that the benefits of the future income tax assets would be realized prior to
their expiration had not been met.
The Company has net capital losses in the amount of $92,560,445 that do not
expire.
As at December 31, 2010, the Company has available Canadian gross non-capital
losses of approximately $ 3,349,000 which can be applied against future
years` taxable income. If not utilized, these losses will expire as follows:
2027 $372,000
2028 1,059,000
2029 960,000
2030 958,000
$3,349,000
10. Commitments, contingencies and guarantees
The Company is committed to the payment of the surface fees and taxes. For
the year ended December 31, 2010, these fees and taxes are estimated to be
approximately $109,409 (US$ 110,000) compared to $126,117 US$(120,000)
incurred in the year ended December 31, 2009. The surface fees and taxes are
required to be paid annually under the DRC Mining Code in order to keep
exploration permits in good standing.
In addition, as at December 31, 2010, the Company had a bank guarantee of US$
nil (December 31, 2009 - $4,373) with respect to expenses related to a
mitigation and rehabilitation plan required from holders of exploration
permits under the DRC Mining Code.
Six of the exploration permits comprising part of the Company`s Tshikapa
project in the DRC are held through an option agreement with Acacia SPRL.
Acacia SPRL has advised the Company of its wish to modify the option
agreement. The Company continues its discussions with Acacia SPRL and is
optimistic of reaching an agreement that is satisfactory for both parties.
In addition to the above matters, the Company and its subsidiaries are also
subject to routine legal proceedings and tax audits. The Company does not
believe that the outcome of any of these matters, individually or in
aggregate, would have a material adverse effect on its consolidated losses,
cash flow or financial position.
Labour disputes
The Company is in dispute with two of its previous directors and officers.
One of the individuals 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. This former director and officer is claiming he
is owed payment of 1.2 million South African rand plus interest. The other
individual has referred two disputes to the Commission for Conciliation
Mediation and Arbitration in Johannesburg, South Africa and an action to the
High Court in that same jurisdiction. He elected to withdraw an application
for summary judgment. The Company is defending all these actions.
11. Capital management
The Company manages its cash, common shares, warrants and stock options as
capital.
The Company`s main objectives when managing its capital are:
* to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
* to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business;
* to safeguard the Company`s ability to obtain financing; 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 significant changes to the Company`s approach to capital
management during the year ended December 31, 2010.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
December 31, December 31,
2010 2009
Shareholders` equity $3,865,171 $5,316,213
Cash $126,931 $664,495
12. Financial instruments and risk management
a) Fair value and carrying value of financial instruments
The following presents the fair value and carrying value of the Company`s
financial instruments:
Measure- December
ment December 31,
Classi- 31, 2009
fication
2010
Financial
assets
Held-for-
Cash Trading Fair
value $126,931 $664,495
Prepaid Amortized
expenses and cost
other current Loans
assets and
receiv-
ables 21,713 163,175
Financial
liabilities
Accounts Amortized
payable and Other cost
accrued liabili-
liabilities ties 834,176 1,027,172
Taxes payable Other
liabili- Amortized
ties cost 6,127 -
Notes payable Other
liabili- Amortized
ties cost 400,493 -
Due to related Other
parties liabili- Amortized
ties cost 106,029 377,884
The balance sheet carrying amounts for cash, other current assets, accounts
payable and accrued liabilities approximate fair value due to their short-
term nature as at December 31, 2010 and 2009. 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 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
Notes payable - The carrying value of the notes payable approximates fair
value as the notes were issued within 10 days of the end of the year.
Fair Value Measurements at Reporting Date Using:
Level 2 Level 3
December 31, 2010 Level 1
Assets:
Cash $ 126,931 - -
Notes payable $- $400 493 -
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 in Canada, the DRC and South Africa 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 and equity markets. Because the duration of the
current general economic uncertainty and its effect on credit and capital
markets is unknown, it is difficult to determine the long-term impact on the
Company. In light of market conditions, the Company initiated a series of
measures to bring its spending in line with the projected cash flows from its
operations and available project specific facilities in order to preserve its
balance sheet and maintain its liquidity position.
As at December 31, 2010, these consolidated financial statements have been
prepared in accordance with Canadian GAAP applicable to a going concern (see
Note 1).
e) Foreign currency risk
The Company is exposed to foreign currency risk as its principal business is
conducted in US dollars, Canadian dollars, South African rand and Congolese
francs. Monetary assets and liabilities denominated in foreign currencies are
translated from US dollars and into Canadian dollars. The Company`s
functional currency is the Canadian dollar. The majority of major
expenditures are transacted in US dollars. The Company maintains the
majority of its cash in Canadian dollars but it does hold balances in US
dollars. Unfavourable changes in the applicable exchange rate may result in a
decrease or increase in foreign exchange gains or losses. The Company does
not use derivative instruments to reduce its exposure to foreign currency
risk.
For the year ended December 31, 2010, everything else being equal, a 5%
increase or decrease in the exchange rate between the Canadian dollar and the
US dollars would have resulted in a respective $253,752 decrease and increase
in the value of mineral properties and deferred exploration expenditures.
f) Interest rate risk
Interest rate risk is the potential impact on any Company earnings due to
changes in bank lending rates and short term deposit rates. The Company is
not exposed to significant interest rate risk other than cash flow interest
rate risk on its cash and notes payable. The Company does not use derivative
instruments to reduce its exposure to interest rate risk. A fluctuation of
interest rates of 1% would not affect significantly the fair value of cash.
The notes payable held by the Company are due on demand; however, the
interest rates are not expected to change.
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 foreign
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
concessions or other mineral licenses, the Company cannot give any assurance
that title to such properties will not be challenged or impugned and cannot
be certain that it will have valid title to its mineral properties. The
Company relies on title opinions by legal counsel who base such opinions on
the laws of countries in which the Company operates.
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 factors such as DRC
government regulations with respect to foreign 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.
13. Segmented information
The Company`s reportable segments have been determined at the level where
decisions are made on the allocation of resources and capital, and where
internal financial statements are available, which is essentially the
different geographic regions. The DRC segment represents the Company`s
exploration activities in the DRC. The Canadian segment comprises its general
corporate activities. The South African segment was discontinued in 2009 and
was comprised of exploration, development, mining, processing and marketing
of diamonds in South Africa.
For the DRC, exploration costs are capitalized. Canadian corporate costs are
expensed to the statements of operations and deficit.
The Company carries on business in the following geographic areas:
As at
December 31, 2010 South
Canada DRC Africa Total
$ $ $ $
Loss from con- (748,456) (740,975) (105,006) (1,594,437)
tinuing opera-
tions before
interest expense
and income taxes
Interest expense - -
Income tax 28,515 - 28,515
recovery
Loss from con- (748,456) (740,975) (105,006) (1,594,437)
tinuing opera-
tions after income
taxes
Loss from Loss - - - -
from dis-continued
opera-tions
Net loss (719,941) (740,975) (105,006) (1,565,922)
Total assets 124,228 5,100,870 2,687 5,227,785
Capital assets - 4,100 4,100
Mineral pro- - 5,075,041 5,075,041
perties
As at
December 31, 2009 South Total
Canada DRC Africa
$ $ $ $
Loss from con-tinuing opera- (1,431,159) - - (1,431,159)
tions before interest
expense and income taxes
Interest expense (166,477) (166,477)
Income tax expense (57,030) (57,030)
Loss from con-tinuing opera- (1,654,666) - - (1,654,666)
tions after income taxes
Loss from Loss from discon- - - (7,296,948) (7,296,948)
tinued opera-tions
Net loss (8,951,614) (8,951,614)
Total assets 601,793 6,068,814 107,692 6,778,299
Capital assets - 141,794 - 141,794
Mineral pro-perties - 5,808,835 - 5,808,835
14. Subsequent events
The Company announced in February 2011 that it has entered into a new joint
venture arrangement with Rio Tinto, whereby Rio Tinto will fund the proposed
new exploration program over the DRC North Project up to and including a pre-
feasibility study (assuming on-going satisfactory results). At that stage,
the Company would have a 30% interest in the DRC North Project. Thereafter,
funding would be in proportion to equity.
JOHANNESBURG
1 APRIL 2011
SPONSOR
ARCAY MOELA SPONSORS (PROPRIETARY) LIMITED
Date: 01/04/2011 14:42:12 Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
