| Tue 31 May 2011, 11:43 | | RDI - Rockwell Diamonds Incorporated - Audited consolidated financial |
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RDI
RDI
RDI - Rockwell Diamonds Incorporated - Audited consolidated financial
statements
ROCKWELL DIAMONDS INCORPORATED
(A company incorporated in accordance with the laws of British Columbia,
Canada)
(Incorporated number: BC0354545)
(South African registration number: 2007/031582/10)
Share code on the JSE Limited: RDI ISIN: CA77434W1032
Share code on the TSX: RDI CUSIP Number; 77434W103
Share code on the OTCBB: RDIAF
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2011, 2010 AND 2009
(Expressed in Canadian Dollar)
Management`s Responsibility for Financial Reporting
To the Shareholders and Directors of Rockwell Diamonds Inc.
The accompanying consolidated financial statements, the notes thereto and
other financial information contained in the Annual Report of Rockwell
Diamonds Inc. ("the Company") have been prepared in accordance with Canadian
generally accepted accounting principles and are the responsibility of the
management of the Company. The financial information presented elsewhere in
the Annual Report 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 accounting
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 financial 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
and the fulfilment of its responsibilities for financial reporting and
internal control. The Audit Committee, which is composed of two non-executive
directors, meets with management as well as the external auditors to ensure
that management is properly fulfilling its financial reporting esponsibilities
to the Directors who approve the consolidated financial statements. The Audit
Committee satisfies itself that each party is properly discharging its
responsibilities, reviews the quarterly and annual consolidated financial
statements and any reports by the external auditors and recommends the
appointment of the external auditors for review by the Board of Directors and
approval by the Shareholders. 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 financial reporting
issues.
The consolidated financial statements have been audited by KPMG Inc, the
independent registered Chartered Accountants, in accordance with Canadian
generally accepted auditing standards.
/s/ Dr. Mark Bristow /s/ Gerhard Jacobs
Dr. Mark Bristow Gerhard Jacobs
Director, Acting Chief Executive Officer Chief Financial Officer
May 26, 2011 May 26, 2011
Consolidated Balance Sheets
(Expressed in Canadian Dollar)
February 28, 2011 February 28, 2010
ASSETS Audited Audited
Current assets
Cash and cash equivalents (note 5) $ 4 771 124 $ 2 512 610
Accounts receivable (note 5) 4 743 034 6 260 717
Restricted cash (note 5, 18) - 4 946
Trade receivable from a related party
(note 15) 92 398 46 108
Inventories (note 6) 2 628 090 2 976 058
Taxes receivable 540 956 -
Prepayments 82 808 75 275
12 858 410 11 875 714
Non-current assets
Property, plant and equipment (note 7) 62 828 438 58 790 736
Mineral property interests (note 8) 29 565 304 30 850 998
Investment in associate (note 12) 129 660 -
Other assets and deposits (note 11) 2 042 291 827 871
Reclamation deposits (note 5, 10) 2 759 611 2 898 067
97 325 304 93 367 672
$ 110 183 714 $ 105 243 386
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities
Bank indebtedness (note 18) $ 1 787 479 $ 698 015
Accounts payable and accrued
liabilities (note 5) 6 373 382 6 458 751
Due to related parties (note 5, 15) 72 064 641 323
Taxes payable 245 228 583 194
Current portion of capital lease
obligations (note 5, 9) 142 630 3 196 189
8 620 783 11 577 472
Non-current liabilities
Capital lease obligations (note 5, 9) - 140 332
Due to related parties (note 5, 15) 424 572 414 566
Future income taxes (note 16) 14 118 000 11 545 000
Reclamation obligation (note 10) 3 814 638 3 722 984
18 357 210 15 822 882
Non-controlling interest 647 407 648 941
Shareholders` equity
Share capital (note 13) 135 989 508 127 999 040
Contributed surplus 7 079 937 6 195 051
Accumulated other comprehensive loss (6 363 878) (7 979 683)
Deficit (54 147 253) (49 020 317)
82 558 314 77 194 091
Continuance of operations and going
concern (note 1)
Contingencies (notes 19)
Subsequent events (note 20)
$ 110 183 714 $ 105 243 386
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
/s/ David James Copeland /s/ Dr. Mark Bristow
David James Copeland Dr. Mark Bristow
Director Director
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in Canadian Dollar)
Year ended Year ended Year ended
February 28, February 28, February 28,
2011 2010 2009
Revenue Audited Audited Audited
Rough diamond sales $ 42 507 747 $ 29 776 933 $ 34 330 078
Cost of sales
Cost of rough diamond sales (28 079 696) (23 790 340) (25 113 363)
Amortization and depletion (10 407 037) (9 545 727) (11 287 197)
Operating profit (loss) 4 021 014 (3 559 134) (2 070 482)
Expenses
Net reclamation obligation
recognised (utilized) (note 10) 1 809 (394 409) 1 072 389
Exploration 49 184 97 805 498 739
Foreign exchange loss (gain) 1 381 483 902 (350 485)
Interest on capital lease
obligations 119 286 969 530 1 592 001
Interest expense 329 717 576 272 3 009 680
Legal, accounting and audit 1 211 186 1 389 272 1 863 261
Office and administration 3 615 436 3 411 990 3 489 460
Shareholder communications 185 490 506 482 453 489
Stock-based compensation
(note 13(b)) 884 886 335 358 1 834 422
Travel and conferences 433 636 194 544 605 812
Transfer agent 99 416 246 866 250 878
6 931 427 7 817 612 14 319 646
Other items
Write-off of receivables - 167 414 291 063
Fair value adjustment to
investments held (note 11 (a)) 31 920 - -
Loss on disposal of equipment 296 510 36 720 364 918
Write-down or loss on disposal
of mineral property (note 8(c)) - 657 634 203 339
Other Income (193 157) (513 338) (303 399)
Interest income (101 953) (466 688) (2 672 021)
Share of profit from equity
accounted investment (note 12) (34 396) - -
Write-down of property, plant
and equipment (note 7) 284 696 23 862 2 590 958
283 620 (94 396) 474 858
Loss before income taxes 3 194 033 11 282 350 16 864 986
Current income tax expense
(note 16) - 18 946 7 000
Future income tax (recovery)
expense (note 16) 2 021 000 (2 645 000) (3 347 000)
Loss before non-controlling
interest 5 215 033 8 656 296 13 524 986
Non-controlling interest (88 097) (1 618 603) (549 024)
Loss for the year 5 126 936 7 037 693 12 975 962
Other comprehensive loss
(income) (1 615 805) (5 429 700) 13 409 383
Total comprehensive loss $ 3 511 131 $ 1 607 993 $ 26 385 345
Basic, headline and diluted loss per
common share $ 0.01 $ 0.03 $ 0.05
Weighted average number of
common shares outstanding 518 185 238 267 164 309 237 924 152
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Accumulated Comprehensive Loss and Deficit
(Expressed in Canadian Dollar)
Year ended Year ended Year ended
February 28, February 28, February 28,
2011 2010 2009
Accumulated other Audited Audited Audited
comprehensive loss
Balance at beginning
of the year $ (7 979 683) $ (13 409 383) $ -
Comprehensive income
(loss) on currency
translation of
self-sustaining operations 1 615 805 5 429 700 (13 409 383)
Balance at end of the year $ (6 363 878) $ (7 979 683) $ (13 409 383)
Deficit
Balance at beginning
of the year $ (49 020 317) $ (41 982 624) $ (29 006 662)
Loss for the year (5 126 936) (7 037 693) (12 975 962)
Balance at end of the year $ (54 147 253) $ (49 020 317) $ (41 982 624)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Shareholders` Equity
(Expressed in Canadian Dollar unless oherwise stated)
Year ended February 28, 2011
Number of shares
Share capital
Balance at beginning of the year 370 843 069 $ 127 999 040
Consideration for additional interest of
operating mines net of issue cost at $0.55
per share (note 13(c)) - -
Share purchase options exercised at $0.62 per share - -
Fair value of stock options allocated to
shares issued on exercise - -
Private placement fourth quarter, net of
issue costs at $0.065 per share (note 13(d)) - -
Rights offering at subscription price of
$0.05 per share (note 13(e)) # 92 710 767 4 583 644
Private placement, net of issue costs at
$0.065 per share (note 13(f)) # 54 631 402 3 406 824
Balance at end of the year 518 185 238 $ 135 989 508
Warrants
Balance at beginning of the year $ -
Expired broker warrants -
Balance at end of the year $ -
Contibuted surplus
Balance at beginning of the year $ 6 195 051
Stock-based compensation (note 13(b)) 884 886
Expired broker warrants -
Fair value of stock options allocated to
shares issued on exercise -
Balance at end of the year $ 7 079 937
Accumulated other comprehensive loss
Balance at beginning of the year $ (7 979 683)
Comprehensive income (loss) on currency
translation of self-sustaining operations 1 615 805
Balance at end of the year $ (6 363 878)
Deficit
Balance at beginning of the year $ (49 020 317)
Loss for the year (5 126 936)
Balance at end of the year $ (54 147 253)
TOTAL SHAREHOLDERS` EQUITY $ 82 558 314
Year ended February 28, 2010
Number of shares
Share capital
Balance at beginning of the year 238 041 569 $ 119 952 532
Consideration for additional interest of
operating mines net of issue cost at $0.55
per share (note 13(c)) - -
Share purchase options exercised at $0.62 per share 1 500 929
Fair value of stock options allocated to
shares issued on exercise - 808
Private placement fourth quarter, net of
issue costs at $0.065 per share (note 13(d)) 132 800 000 8 044 771
Rights offering at subscription price of
$0.05 per share (note 13(e)) - -
Private placement, net of issue costs at
$0.065 per share (note 13(f)) - -
Balance at end of the year 370 843 069 $ 127 999 040
Warrants
Balance at beginning of the year $ 1 693 197
Expired broker warrants (1 693 197)
Balance at end of the year $ -
Contibuted surplus
Balance at beginning of the year $ 4 167 304
Stock-based compensation (note 13(b)) 335 358
Expired broker warrants 1 693 197
Fair value of stock options allocated to
shares issued on exercise (808)
Balance at end of the year $ 6 195 051
Accumulated other comprehensive loss
Balance at beginning of the year $ (13 409 383)
Comprehensive income (loss) on currency
translation of self-sustaining operations 5 429 700
Balance at end of the year $ (7 979 683)
Deficit
Balance at beginning of the year $ (41 982 624)
Loss for the year (7 037 693)
Balance at end of the year $ (49 020 317)
TOTAL SHAREHOLDERS` EQUITY $ 77 194 091
Year ended February 28, 2009
Number of shares
Share capital
Balance at beginning of the year 223 755 854 $ 112 095 390
Consideration for additional interest of
operating mines net of issue cost at $0.55
per share (note 13(c)) 14 285 715 7 857 142
Share purchase options exercised at $0.62
per share - -
Fair value of stock options allocated to
shares issued on exercise - -
Private placement fourth quarter, net of
issue costs at $0.065 per share (note 13(d)) - -
Rights offering at subscription price of
$0.05 per share (note 13(e)) - -
Private placement, net of issue costs at
$0.065 per share (note 13(f)) - -
Balance at end of the year 238 041 569 $ 119 952 532
Warrants
Balance at beginning of the year $ 1 693 197
Expired broker warrants -
Balance at end of the year $ 1 693 197
Contibuted surplus
Balance at beginning of the year $ 2 332 882
Stock-based compensation (note 13(b)) 1 834 422
Expired broker warrants -
Fair value of stock options allocated to
shares issued on exercise -
Balance at end of the year $ 4 167 304
Accumulated other comprehensive loss
Balance at beginning of the year $ -
Comprehensive income (loss) on currency
translation of self-sustaining operations (13 409 383)
Balance at end of the year $ (13 409 383)
Deficit
Balance at beginning of the year $ (29 006 662)
Loss for the year (12 975 962)
Balance at end of the year $ (41 982 624)
TOTAL SHAREHOLDERS` EQUITY $ 70 421 026
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollar)
Year ended Year ended Year ended
February 28, February 28, February 28,
Cash provided by (used in): 2011 Audited 2010 Audited 2009 Audited
Operating activities
Loss for the year $ (5 126 936) $ (7 037 693) $ (12 975 962)
Items not affecting cash
Net reclamation obligation
recognised (utilized)
(note 10) 1 809 (394 409) 1 072 389
Amortization and depletion 10 247 569 6 235 261 8 347 837
Amortization of capital
lease equipment 159 468 3 310 466 2 939 360
Write-down of rough diamond
inventories and mine
supplies (note 6) 899 034 1 380 538 -
Write-down of assets 284 696 23 862 2 590 958
Diamond sale price
adjustment - 1 515 099 -
Write-off of accounts
receivable - 167 414 291 063
Share of profit from equity
accounted investment
(note 12) (34 396) - -
Stock-based compensation
(note 13(b)) 884 886 335 358 1 834 422
Write-down or loss on
disposal of equipment and
mineral properties 296 510 694 354 364 918
Future income tax expense
(recovery) 2 021 000 (2 645 000) (3 347 000)
Unrealized foreign exchange
(gain) loss (73 408) 198 448 (768 117)
Fair value adjustment to
investments held
(note 11 (a)) 31 920 - -
Non-controlling interest (88 097) (1 618 603) (549 024)
Changes in non-cash working
capital items
Accounts receivable 1 680 272 (3 762 497) (790 642)
Amounts due to and from
related parties (634 248) 3 107 (2 369 910)
Inventories (476 349) (320 530) (123 266)
Prepayments 5 755 (8 571) 885 083
Accounts payable and
accrued liabilities (242 916) 1 685 554 411 826
Taxes payable (899 141) 127 148 (434 286)
Cash provided by (used in)
operating activities 8 937 428 (110 694) (2 620 351)
Investing activities
Acquisition of Saxendrift
Mines (Pty) Limited - - (10 652 026)
Amounts paid pursuant to
acquisition - - (294 402)
Restricted cash 4 946 2 949 919 10 636 405
Investment in Associate (95 690) - -
Purchase of equipment and
mineral properties (11 636 472) (2 696 965) (12 687 176)
Proceeds received on
disposal of equipment 301 518 380 037 310 944
Other assets and deposits (1 234 575) (685 817) 3 060 972
Reclamation deposits 209 837 (21 968) (842 765)
Cash used in investing
activities (12 450 436) (74 794) (10 468 048)
Financing activities
Principal repayments under
capital lease obligations (3 298 941) (6 175 065) (6 078 521)
Common shares and warrants
issued for cash, net of
issue costs 7 990 468 8 045 700 -
Repayment of credit facility - (3 170 344) -
Drawdown of credit facility 1 079 995 - 3 540 880
Cash provided by (used in)
financing activities 5 771 522 (1 299 709) (2 537 641)
Increase (decrease) in cash
and cash equivalents during
the year 2 258 514 (1 485 197) (15 626 040)
Cash and cash equivalents,
beginning of year 2 512 610 3 997 807 19 623 847
Cash and cash equivalents,
end of year $ 4 771 124 $ 2 512 610 $ 3 997 807
Interest paid on facilities
during the year $ 329 717 $ 576 272 $ 3 009 680
Interest paid on capital
leases 119 286 969 530 1 592 001
Interest received 101 953 466 688 2 672 021
Income taxes paid during
the year - - 434 511
Supplemental disclosure of
non-cash investing and
financing activities:
Issuance of commons shares
as consideration for
acquisition of property
(note 8(b)) - - 7 857 143
Fair value of stock options
allocated to shares issued
upon exercise - 808 -
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2011, 2010 and 2009.
(Expressed in Canadian Dollar unless otherwise stated)
1. CONTINUANCE OF OPERATIONS AND GOING CONCERN
Rockwell Diamonds Inc. ("Rockwell" or the "Company") is incorporated under the
British Columbia Business Corporations Act (formerly the Company Act of
British Columbia), and is engaged in the business of diamond production and
the acquisition and exploration of natural resource properties. The Company`s
principal mineral property interests are located in South Africa.
The accompanying consolidated financial statements have been prepared on a
going concern basis in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP"). The going concern basis of presentation assumes
that Rockwell will continue in operation for the foreseeable future and will
be able to realise its assets and discharge its liabilities and commitments in
the normal course of business.
For the year ended February 28, 2011, the Company incurred consolidated losses
of $5.1 million and has incurred accumulated losses to date of $54.1 million
In fiscal 2011, diamond prices have increased gradually from US$1,010 for
fiscal 2010 to US$1,365 for the year ending February 28, 2011, with an average
fourth quarter sales value of US$1,430. At February 28, 2011, the Company`s
current assets exceeded its current liabilities by $4.2 million and the
Company`s total assets exceeded its total liabilities by $83.2 million. The
Company has forecasted its cash flows for the fiscal years 2012 and 2013 and
these forecasts indicate that the Company will continue as a going concern.
The forecasts assume the plant operating at 85% of capacity, prices remaining
at current levels and the South African Rand remaining at current levels
relative to the United States and Canadian Dollar.
On the performance of the last two quarters, the operations made a positive
contribution towards the cashflow. This is not sufficient to fund to planned
capital projects at Wouterspan and Tirisano. These expansion projects will be
funded by means of a planned private placement.
Based on the Company`s cash resources and the above forecasts, the Company has
sufficient working capital and reserves to maintain operations. Accordingly,
the financial statements have been prepared on the basis of accounting
policies applicable to a going concern. Future events beyond the Company`s
control may change the Company`s ability to continue as a going concern. If
the going concern concept was no longer appropriate, significant adjustments
would be required to the carrying value of assets and liabilities and would be
recorded at that time.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. These consolidated
financial statements include the accounts of the Company, its subsidiaries,
equity accounted associate and its variable interest entities where the
Company has been determined to be the primary beneficiary. All significant
intercompany balances and transactions have been eliminated upon
consolidation.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue recognition
Revenue from rough diamond sales is recognized when persuasive evidence of an
arrangement exists, the significant risks and rewards of ownership of the
diamonds have been transferred to the customer, the Company`s price to the
customer is fixed or determinable and collection of the resulting receivable
is reasonably assured. Significant risks and rewards of ownership of the
diamonds normally transfer at the moment the sales tender has been awarded and
finalized.
(b) Inventories
Rough diamond inventories are valued at the lower of average production cost
and net realizable value. Production costs include the cost of consumable
materials, direct labour, mine-site overhead expenses and amortization.
Supplies are valued at the lower of cost, at the average purchase cost basis,
and net realizable value. Appropriate provisions are made for redundant and
slow-moving items. Cost of items that are not ordinarily interchangeable, and
goods and services produced and segregated for specific projects, are assigned
by using a specific identification of their individual costs.
Consistent use of either first-in first-out or weighted average cost formula
to measure the cost of other inventories is applied.
Previous write-downs are reversed to the lower of cost and net realizable
value when there is a subsequent increase in the value of inventories.
(c) Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated amortization
and accumulated impairment losses. Assets are amortized on a straight-line
method over the estimated useful lives of the related assets, which are as
follows:
Buildings 12 years
Processing plant and equipment 4 - 10 years
Processing plant and equipment under capital lease obligation 5 - 8 years
Office equipment 6 years
Vehicles and light equipment 5 years
Land is not amortized.
Repairs and maintenance expenditures are charged to operations as incurred.
Significant improvements and major replacements which extend the useful life
of the asset are capitalized as incurred.
(d) Mineral property interests
The amount presented for mineral property interests represents costs incurred
to date and accumulated acquisition costs, less accumulated depletion and
accumulated impairment losses. This does not necessarily reflect present or
future values. The acquisition costs of mineral properties are capitalized
until the property is placed into production, sold, or abandoned, or when
management has determined that there has been an impairment in value. Such
acquisition costs are amortized over the estimated life of the property, based
on the unit of production method, or written off to operations if the property
is abandoned, allowed to lapse, or if there is little prospect of further work
being carried out by the Company. Under the unit of production method, the
yearly depreciation charge is calculated by dividing the actual resources
mined into the estimated resources at the beginning of the year and then
multiplying the resulting fraction by the net carrying value of the related
assets. Mineral resources are estimated by professional geologists and
engineers in accordance with recognized industry, professional and regulatory
standards. These estimates require inputs such as future diamond prices,
future operating costs, and various technical geological, engineering, and
construction parameters. Changes in any of these inputs could cause a
significant change in the estimated resources which, in turn, could have a
material effect on the carrying value of mineral properties. The unit of
production method results in a systematic and rational allocation of the cost
of the mineral property interests over the year the resources are utilized.
Mineral property acquisition costs are measured at the cash consideration paid
and the fair market value of common shares issued for acquiring the mineral
property interest. The fair value of the consideration paid through shares is
determined based on the trading price of these shares on the effective date of
the acquisition transaction.
Exploration expenditures and option payments incurred prior to the
determination of the feasibility of mining operations are charged to
operations as incurred. Exploration expenditures incurred subsequent to the
mining operations which do not increase production or extend the life of
operations are expensed in the year incurred. All administrative expenditures
that do not directly relate to specific exploration and development activities
on mineral properties are expensed in the year incurred.
An impairment review of mineral property interests is carried out when there
is an indication that these may be impaired by comparing the carrying amount
of the interest to its estimated recoverable amount. Where the recoverable
amount is less than the carrying amount an impairment charge is included in
expenses in order to reduce the carrying amount of mineral property interest
to its recoverable amount.
(e) Financial instruments
All financial instruments, including derivatives, are included on the
Company`s balance sheet and measured either at fair value or amortized cost.
Changes in fair value are recognized in the statements of operations or
accumulated other comprehensive income (loss), depending on the classification
of the related instruments.
All financial assets and liabilities are recognized when the entity becomes a
party to the contract creating the asset or liability. All financial
instruments are classified into one of the following categories: held-for-
trading, held-to-maturity, loans and receivables, available-for-sale financial
assets, or other financial liabilities. Initial and subsequent measurement and
recognition of changes in the value of financial instruments depends on their
initial classification:
- Held-to-maturity investments, loans and receivables, and other financial
liabilities are initially measured at fair value and subsequently measured at
amortized cost. Amortization of premiums or discounts and losses due to
impairment are included in current year net earnings (loss).
- Available-for-sale financial assets are measured at fair value. Changes in
fair value are included in other comprehensive income (loss) until the gain or
loss is recognized in net earnings (loss) or if an impairment is determined to
be other than temporary.
- Held-for-trading financial instruments are measured at fair value. All gains
and losses are included in net earnings (loss) in the year in which they
arise.
- All derivative financial instruments are measured at fair value, even when
they are part of a hedging relationship. Changes in fair value are included in
net earnings (loss) in the year in which they arise, except for hedge
transactions which qualify for hedge accounting treatment in which case
unrealized gains and losses are recognized in other comprehensive income
(loss) until realized.
In accordance with these policies, the Company has classified its financial
instruments as follows:
- Cash and cash equivalents, restricted cash and bank indebtedness are
classified as held-for-trading financial instruments and are measured at fair
value. Cash and cash equivalents consist of cash and highly liquid
investments, having maturity dates of three months or less from the date of
purchase, that are readily convertible to known amounts of cash.
- Accounts receivable and trade receivable from a related party are classified
as loans and receivables and are measured at fair value and subsequently
measured at amortized cost.
- Accounts payable and accrued liabilities, capital lease obligations, amounts
owing pursuant to acquisition and balances payable to related parties are
classified as other financial liabilities and are measured initially at fair
value and subsequently measured at amortized cost.
- Reclamation deposits invested in interest bearing money market linked
investments are classified as available-for-sale assets and are carried at
fair market value, with the unrealized gain or loss recorded in shareholders`
equity as a component of other comprehensive income (loss).
The Company also discloses quantitative and qualitative information that
enable users to evaluate the significance of financial instruments on the
Company`s financial performance, and the nature and extent of risks arising
from financial instruments to which the Company is exposed during the year and
at the balance sheet date. In addition, the Company discloses management`s
objectives, policies and procedures for managing these risks. These
disclosures are presented in note 5.
(f) Site closure and reclamation obligations
The Company recognizes any statutory, contractual or other legal obligation
related to the retirement of tangible long-lived assets when such obligations
are incurred, if a reasonable estimate of fair value can be made.
These obligations are measured initially at fair value and the resulting costs
are capitalized to the carrying value of the related asset. In subsequent
years, the liability is adjusted for the accretion of the discount and any
changes in the amount or timing of the underlying future cash flows. The asset
retirement cost is amortized to operations over the life of the asset. Changes
resulting from revisions to the timing or the amount of the original estimate
of undiscounted cash flows are recognized as an increase or a decrease in the
carrying amount of the liability, and the related asset retirement cost is
capitalized as part of the carrying amount of the related long-lived asset. In
the event the required decrease in the asset retirement cost is in excess of
the carrying value, the excess amount is recorded as a change in estimate in
the statement of operations.
Where the obligation is operational in nature and does not give rise to future
economic benefit, the capitalized cost is amortized in the year incurred. Upon
settlement of the liability, a gain or loss will be recorded if the actual
cost incurred is different from the liability recorded.
Adjustments to environmental and ongoing site reclamation expenditure at
operating mines are charged to operations in the year in which they occur.
(g) Impairment of long-lived assets
Long-lived assets, including mineral properties, property, plant and
equipment, are reviewed for impairment periodically or whenever events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable. If an indicator for impairment was identified, the Company
considers whether the carrying amount of a long-lived asset exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual
disposition. In that event, the asset must be written down to its fair value
(present value of future cash flows) and an impairment loss is recorded in
earnings. Net estimated future cash flows from each long-lived asset are
calculated based on anticipated future production, estimated diamond prices,
operating costs, capital expenditures and site restoration expenses. The
Company will determine fair value from recent transactions involving sales of
similar long-lived assets, if deemed more appropriate in the circumstances.
Management`s estimate of future cash flows is subject to risk and
uncertainties and it is reasonably possible that changes could occur with
evolving economic conditions, which may affect the recoverability of the
Company`s long- lived assets and may have a material effect on the Company`s
results of operations and financial position.
Previously recognized impairment losses are not reversed if the recoverable
amount subsequently increases.
Assets to be disposed of would be separately presented in the balance sheet
and reported at the lower of the carrying amount and the fair value less costs
to sell, and are no longer amortized.
(h) Variable interest entities
Variable interest entities ("VIE`s") are entities in which equity investors do
not have a controlling financial interest or the equity investment at risk is
not sufficient to permit the entity to finance its activities without
additional subordinated financial support provided by other parties. The
Company consolidates the accounts of VIE`s where it has been determined that
the Company is the primary beneficiary, defined as the party that receives the
majority of the expected residual returns and/or absorbs the majority of the
entity`s expected losses.
(i) Foreign currency translation
The Company classifies its foreign operations as self-sustaining operations.
Self-sustaining operations are foreign operations that are financially and
operationally independent of the reporting enterprise such that the exposure
to exchange rate changes is limited to the reporting enterprise`s net
investment in the foreign operation and which have a functional currency
different from the entity. Assets and liabilities of self-sustaining
operations are translated into the reporting currency at the exchange rate in
effect at the balance sheet date. Revenue and expense items (including
depreciation and amortization) are translated into the reporting currency at
the exchange rate in effect on the dates on which such items are recognized in
income during the year or appropriate average rates.
For self-sustaining operations exchange gains or losses arising on the
translation from its functional currency to the reporting currency are
presumed not to have a direct effect on the activities of the reporting
enterprise and are incorporated in the financial statements of the reporting
enterprise as a separate component of shareholders` equity. The Company`s
reporting currency is the Canadian Dollar.
(j) Share capital
The Company records proceeds from share issuances net of issue costs. Common
shares issued for mineral property interests are recorded at their fair market
value based upon the trading price of the shares on the Toronto Stock Exchange
("TSX") on the date of issue.
(k) Stock-based compensation
The Company has a share option plan which is described in note 13. The Company
accounts for all stock-based payments under the fair value based method.
Under the fair value based method, equity settled stock-based payments are
measured at the fair value of the option on grant date. Compensation costs are
charged to operations on a straight-line basis over the relevant vesting
period. The counterpart is recognized in contributed surplus. Consideration
received on the exercise of stock options is recorded as share capital and the
related amount ofcontributed surplus is transferred to share capital.
(l) Income taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, future income tax assets and liabilities are
computed based on differences between the carrying amount of assets and
liabilities on the balance sheet and their corresponding tax values, using the
enacted or substantively enacted income tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Future income tax assets also result from unused tax
losses carried forward, resource-related pools and other deductions. A
valuation allowance is recorded against any future income tax assets if it is
more likely that the asset will not be realized.
(m) Loss per share
Basic income (loss) per share is calculated by dividing the net earnings
(loss) for the year by the weighted average number of common shares
outstanding during the year.
Diluted income (loss) per share is calculated using the treasury stock method.
Under the treasury stock method, the weighted average number of common shares
outstanding used for the calculation of diluted income (loss) per share
assumes that the proceeds receivable upon exercise of dilutive stock - based
compensation and warrants are used to repurchase common shares at the average
market price during the year.
Diluted loss per share has not been presented separately as the effect of
outstanding options and warrants would be anti-dilutive for all years
presented.
(n) Use of estimates
The preparation of consolidated financial statements in conformity with
Canadian generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as at the
balance sheet date, and the reported amounts of revenues and expenses during
the reporting year. Significant areas requiring the use of management
estimates relate to the impairment of long-lived assets, rates for depletion
and amortization, determination of reclamation obligations and the assumptions
used in determining stock-based compensation expense. Actual results could
differ from those estimates.
(o) Comparative figures
Prior years` comparative figures have been reclassified to conform to the
financial statement presentation in the current year.
(p) Investments in Associates
An associate is an entity over which the Company has significant influence and
that is neither a subsidiary nor an interest in a joint venture. Significant
influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those
policies. The investment in an associate is accounted for under the equity
method, where the investment is initially recognised at cost and adjusted for
the Company`s share of the changes in the net assets of the investee after the
date of acquisition, and for any impairment in value which includes access to
mineral rights identified on acquisition. If the Company`s share of losses of
an associate exceeds its interest in the associate, the Company discontinues
recognising its share of further losses. Unrealised gains and losses on
transactions between the Company and its associates are eliminated to the
extent of the Company`s interest in the associates. Accounting policies of
associates have been changed where necessary to ensure consistency with the
policies adopted by the Company.
4. CHANGES IN ACCOUNTING POLICIES
Accounting Policies Not Yet Adopted
(a) International Financial Reporting Standards ("IFRS")
The AcSB has announced its decision to replace Canadian generally accepted
accounting principles ("Canadian GAAP") with IFRS for all Canadian publicly-
listed companies. The AcSB announced that the changeover date will commence
for interim and annual financial statements relating to fiscal years beginning
on or after January 1, 2011. The transition date for the Company to changeover
to IFRS will be March 1, 2011. Therefore, the IFRS adoption will require the
restatement for comparative purposes of amounts reported by the Company for
the year ending February 28, 2011. During the year, the Company has
established a formal project plan, allocated internal resources and engaged
expert consultants, monitored by a steering committee to manage the transition
from Canadian GAAP to IFRS reporting.
(b) Business Combinations/Consolidated Financial Statements/Non-Controlling
Interests
The AcSB issued CICA Sections 1582, Business Combinations, 1601, Consolidated
Financial Statements, and 1602, Non-Controlling Interests, which superceded
current Sections 1581, Business Combinations and 1600, Consolidated Financial
Statements. These new Sections replace existing guidance on business
combinations and consolidated financial statements to harmonize Canadian
accounting for business combinations with IFRS. These sections will be applied
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
January 1, 2011. Earlier adoption is permitted. If an entity applies these
Sections before January 1, 2011, it is required to disclose that fact and
apply each of the new sections concurrently.
5. CAPITAL MANAGEMENT AND FINANCIAL INSTRUMENTS
(a) Capital Management
As at February 28, 2010, the Company is not subject to externally imposed
capital requirements other than its restricted cash and its overdraft
facility. Refer to note 18.
At February 28, 2011, of the $4,771,124 (February 28, 2010 - $2,512,610) cash
and cash equivalents held by the Company, $1,976,678 (February 28, 2010 -
$1,376,073) were held in South African Rand ("ZAR"), $2,785,215 (February 28,
2010 - $1,125,905) in Canadian Dollar and $9,231 (February 28, 2010 - $10,632)
in United States Dollar. Cash and cash equivalents exclude cash subject to
restrictions. Refer to note 18.
The Company`s primary objectives when managing capital are to safeguard the
Company`s ability to continue as a going concern, so that it can continue to
provide returns for shareholders, and to have sufficient funds on hand for
business opportunities as they arise. The Company considers the components of
shareholders` equity, as well as its cash and cash equivalents, and bank
indebtedness as capital. The Company`s investment policy is to invest its cash
in highly liquid short-term interest- bearing investments, having maturity
dates of three months or less from the date of acquisition, that are readily
convertible to known amounts of cash.
The Company manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk characteristics of the
underlying assets. The Company may issue new shares through private
placements, issue debt, or return capital to shareholders, in order to
maintain or adjust the capital structure.
In order to facilitate the management of its capital requirements, the Company
prepares annual expenditure budgets that are updated as necessary depending on
various factors, including successful capital deployment and general industry
conditions.
There were no changes to the Company`s approach to capital management during
the year ended February 28, 2011 and the Company expects it will be able to
raise sufficient capital resources to carry out its plans of operations for
fiscal 2012 as disclosed in note 1.
(b) Carrying Amounts and Fair Values of Financial Instruments
The fair value of a financial instrument is the price at which a party would
accept the rights and/or obligations of the financial instrument from an
independent third party. When determining the fair value of financial assets
and liabilities the Company considers its own credit risk as well as the
credit risk of its counterparties. Given the varying influencing factors, the
reported fair values are only indicators of the prices that may actually be
realized for these financial instruments. Financial instruments measured at
fair value are classified into one of three levels in the fair value hierarchy
according to the relative reliability of the inputs used to estimate the fair
values. The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or
liability either directly or indirectly; and
Level 3 - Inputs that are not based on observable market data.
It is not practicable to determine the fair value of amounts due to and from
related parties because of the related party nature of such amounts and the
absence of a secondary market for such instruments.
Notes to the Consolidated Financial Statements
For the years ended February 28, 2011, 2010 and 2009.
(Expressed in Canadian Dollar unless otherwise stated)
As at As at
February 28, February 28,
2011 2011
Assets carried at fair value Carrying Fair value
amount
Cash and equivalents $ 4,771,124 $ 4,771,124
Restricted cash - -
Reclamation deposits 2,759,611 2,759,611
$ 7,530,735 $ 7,530,735
Assets carried at amortized cost
Accounts receivable $ 4,743,034 $ 4,743,034
Liabilities carried at fair value
Bank indebtedness $ 1,787,479 $ 1,787,479
Liabilities carried at amortized cost
Accounts payable and accrued liabilities $ 6,373,382 $ 6,373,382
Capital lease obligations 142,630 142,630
$ 6,516,012 $ 6,516,012
As at As at
February 28, February 28,
2010 2010
Assets carried at fair value Carrying Fair value
amount
Cash and equivalents $ 2,512,610 $ 2,512,610
Restricted cash 4,946 4,946
Reclamation deposits 2,898,067 2,898,067
$ 5,415,623 $ 5,415,623
Assets carried at amortized cost
Accounts receivable $ 6,260,717 $ 6,260,717
Liabilities carried at fair value
Bank indebtedness $ 698,015 $ 698,015
Liabilities carried at amortized cost
Accounts payable and accrued liabilities $ 6,458,751 $ 6,458,751
Capital lease obligations 3,336,521 3,336,521
$ 9,795,272 $ 9,795,272
The following table illustrates the classification of the Company`s financial
instruments recorded at fair value within the fair value hierarchy as at
February 28, 2011:
Financial assets at fair value
February 28,
Level 1 Level 2 Level 3 2011
Cash and equivalents $ 4,771,124 - - $ 4,771,124
Restricted cash - $ - $ - -
Reclamation deposits 2,759,611 - - 2,759,611
$ 7,530,735 $ - $ - $ 7,530,735
Financial liabilities at fair value
February 28,
Level 1 Level 2 Level 3 2011
Bank indebtedness $ 1,787,479 $ - $ - $ 1,787,479
The following table illustrates the classification of the Company`s financial
instruments recorded at fair value within the fair value hierarchy as at
February 28, 2010:
Financial assets at fair value
February 28,
Level 1 Level 2 Level 3 2010
Cash and equivalents $ 2,512,610 - - $ 2,512,610
Restricted cash 4,946 $ - $ - 4,946
Reclamation deposits 2,898,067 - - 2,898,067
$ 5,415,623 $ - $ - $ 5,415,623
Financial liabilities at fair value
February 28,
2010
Level 1 Level 2 Level 3
Bank Indebtedness $ 698,015 $ - $ - $ 698,015
The carrying amounts of the Company`s other financial instruments approximate
their fair values.
(c) Financial Instrument Risk Exposure and Risk Management
The Company is exposed in varying degrees to a variety of financial instrument
related risks. The Board approves and monitors the risk management processes,
including treasury policies, counterparty limits, controlling and reporting
structures, credit risk, liquidity risk, currency risk, interest risk and
diamond price risk. The types of risk exposure and the way in which such
exposure is managed are provided as follows:
Credit Risk
Credit risk is the risk of potential loss to the Company if a counterparty to
a financial instrument fails to meet its contractual obligations. The
Company`s credit risk is primarily attributable to its liquid financial assets
including cash and equivalents, restricted cash, accounts receivable and trade
receivable from a related party. The carrying values of the Company`s cash and
cash equivalents, accounts receivable and trade receivable from a related
party represents the maximum exposure to credit risk.
The Company limits exposure to credit risk on liquid financial assets through
maintaining its cash and equivalents with high-credit quality financial
institutions. The Company does not have financial assets that are invested in
asset backed commercial paper.
The Company minimizes its credit risk by reducing credit terms to 30 days on
its sales.
The aging of receivables at the reporting date was:
February 28, 2011 February 28, 2010
Gross 2011 Impairment Gross Impairment
2011 2010 2010
Not past due
Accounts receivables $ 4,910,448 $ 167,414 $ 6,428,131 $ 167,414
Trade receivable
from a related party
- Not past due 92,398 - 46,108 -
Past due 0-30 days - - - -
Past due 31-120 days - - - -
More than one year - - - -
$ 5,002,846 $ 167,414 $ 6,474,239 $167,414
During the current year a diamond sale price adjustment of $Nil (February 28,
2010 - $1,515,098) was made against diamond revenue recognized. This diamond
sale price adjustment relates to the retainer debtor balance with respect to
an agreement between the Company and a client purchasing large diamonds. The
diamond sale price adjustment was attributable to the decline in diamond
prices subsequent to the original sale.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company raised $8.0 million in a
private placement and rights offering in the first quarter of fiscal 2011.
After taking into account cash flows from operations and the Company`s
holdings of cash and cash equivalents, the Company believes that these sources
will be sufficient to cover the operational requirements for the foreseeable
future. Capital expansion projects will be funded by means of a private
placement. (Refer to note 1). The Company`s cash and equivalents are invested
in business accounts which are available on demand for the Company`s
programmes, and which are not invested in any asset backed
deposits/investments.
The Company operates in South Africa. The Company is subject to currency
exchange controls administered by the South African Reserve Bank, that
country`s central bank. A significant portion of the Company`s funding
structure for its South African operations consists of advancing loans to its
South Africa incorporated subsidiaries and it is possible that the Company may
not be able to acceptably repatriate such funds once those subsidiaries are
able to repay the loans or repatriate other funds such as operating profits
should any develop. The repatriation of cash held in South Africa is permitted
upon the approval of the South African Reserve Bank. Cash balances in South
Africa are disclosed below.
The following are the contractual maturities of financial liabilities at
carrying values (excluding interest payments):
February 28, 2011 Carrying Contractual 2012 2013 2014
amount cash flow
Non-derivative
financial liabilities
Accounts
payable and $6,373,382 $6,373,382 $6,373,382 $ - $ -
accrued liabilities
Due to related
parties 496,636 496,636 72,064 424,572 -
Bank
indebtedness 1,787,479 1,787,479 1,787,479 - -
Capital lease
obligations 142,630 142,630 142,630 - -
February 28, 2010 Carrying Contractual 2011 2012 2013
amount cash flow
Non-derivative
financial liabilities
Accounts
payable and $6,458,751 $6,458,751 $6,458,751 $ - $ -
accrued liabilities
Due to related
parties 1,055,889 1,055,889 641,323 414,566 -
Bank indebtedness 698,015 698,015 698,015 - -
Capital lease
obligations 3,336,521 3,336,521 3,196,189 140,332 -
Currency Risk
In the normal course of business, the Company enters into transactions for the
purchase of supplies and services denominated in ZAR. In addition, the Company
has cash and certain liabilities denominated in ZAR. As a result, the Company
is subject to currency risk from fluctuations in foreign exchange rates. The
Company has not entered into any derivative or other financial instruments to
mitigate this foreign exchange risk.
The exposure of the Company`s financial assets to currency risk is as follows:
Currency February 28, 2011 February 28, 2010
South African Rand
Cash and cash equivalents $ 1,976,678 $ 1,376,073
Restricted cash - 4,946
Accounts receivable 4,743,034 6,260,717
Trade receivable from related party 92,398 46,108
Reclamation deposits 2,759,611 2,898,067
United States Dollar
Cash and cash equivalents 9,231 10,632
Total Financial Assets $ 9,580,952 $ 10,596,543
The exposure of the Company`s financial liabilities to currency risk is as
follows:
Currency February 28, 2011 February 28, 2010
South African Rand
Bank indebtedness $ 1,787,479 $ 698,015
Accounts payable and accrued 6,123,849 5,811,039
liabilities
Due to related parties 496,636 1,055,889
Capital lease obligations 142,630 3,336,521
Total Financial Liabilities $ 8,550,594 $ 10,901,464
The following exchange rates applied during the fiscal years ended February
28, 2011 and 2010:
Annual Average rate Year end spot rate
February 28, February 28, February 28, February 28,
2011 2010 2011 2010
CAD vs ZAR 0.1411 0.1386 0.1400 0.1367
Sensitivity analysis:
A 10 percent increase/decrease of the Canadian dollar against the ZAR at
February 28, 2011 would have a net gain/loss effect of $226,349 (February 28,
2010 - $ 391,238). This analysis assumes that all other variables, in
particular interest rates, remain constant.
Interest Rate Risk
The Company is subject to interest rate risk with respect to its investments
in cash and cash equivalents. The Company`s policy is to invest cash at
floating rates of interest and cash reserves are to be maintained in cash
equivalents in order to maintain liquidity, while achieving a satisfactory
return for shareholders. Fluctuations in interest rates when the cash
equivalents mature impact interest income earned.
The Company has capital lease obligations with several financial institutions
as detailed in note 9. The capital leases bear interest at rates linked to the
prevailing prime rate of the relative financial institution, and are subject
to interest rate change risk.
Sensitivity analysis:
A 10 percent increase/decrease of the prime rate for the year ended February
28, 2011 would have a net loss/gain effect of $7,241 (February 28, 2010 -
$154,580). This analysis assumes that all other variables, in particular
foreign exchange rates, remain constant.
Diamond price risk
The value of the Company`s mineral resource properties is dependent on the
price and the outlook of diamonds. Diamond demand and prices fluctuate and are
affected by numerous factors beyond the control of the Company, including
worldwide economic trends, worldwide levels of diamond discovery and
production, and the level of demand for and discretionary spending on, luxury
goods such as diamonds and jewellery. Low or negative growth in the worldwide
economy, prolonged credit market disruptions or activities creating
disruptions in economic growth could result in decreased demand for diamonds,
thereby negatively affecting the price of diamonds. Similarly, a substantial
increase in the worldwide level of diamond production could also negatively
affect the price of diamonds. In each case, such developments could materially
adversely affect the Company`s results of operations.
The profitability of the Company`s operations is highly correlated to the
market price of diamonds. If diamond prices decline for a prolonged period
below the cost of production of the Company`s operating mines, it may not be
economically feasible to continue production.
6. INVENTORIES
As at As at
February 28, 2011 February 28, 2010
Rough diamond inventories $ 824,512 $ 1,283,604
Mine supplies 1,803,578 1,692,454
Total inventories $ 2,628,090 $ 2,976,058
As at February 28, 2011, rough diamond inventories were valued at net
realizable value and mine supplies at cost less accumulative impairment
charges. Mine supplies were written down by $190,700 (2010 - $ 588,927) to
$1,803,578 (2010 - $1,692,454) during the year.
The net realizable value of diamond inventories are estimated at the average
price per carat achieved for the most recent diamond tender taking into
account the variable factors of clarity, carat, shape and color. As at
February 28, 2011, rough diamond inventories were written down by $708,334
(2010 - $791,611) from cost to net realizable value.
7. PROPERTY, PLANT AND EQUIPMENT
As at February 28, 2011
Accumulated
amortization and
Cost impairments Carrying value
Land and buildings $ 7,502,768 $ 1,149,217 $ 6,353,551
Construction in progress (a) 6,282,698 - 6,282,698
Processing plant and
equipment 84,028,081 35,211,834 48,081,237
Processing plant and
equipment under capital
lease obligatio 1,017,514 621,416 1,131,108
Office equipment 1,006,922 615,659 391,263
Vehicles and light equipment 1,594,663 1,006,082 588,581
$ 101,432,646 $ 38,604,208 $62,828,438
(a) Construction in progress includes $6,149,422 relating to the construction
of the plant at Etruscan`s Blue Gum diamond operations in the Ventersdorp
region. Refer to note 20 (a) for additional information regarding the status
of this acquisition. As at February 28, 2010
Accumulated
amortization and
Cost impairments Carrying value
Land and buildings $ 7,226,428 $ 598,462 $ 6,627,966
Processing plant and
equipment 66,230,352 25,074,689 41,155,663
Processing plant and
equipment under capital
lease obligation 13,553,529 3,782,247 9,771,282
Office equipment 946,759 492,287 454,472
Vehicles and light equipment 1,675,705 894,352 781,353
$ 89,632,773 $ 30,842,037 $58,790,736
Components of property, plant and equipment are amortized over their estimated
useful life. The amortization charge for the year was $7,509,446 (2010 -
$7,018,998 and 2009 - $8,903,261). The Company`s bankers have registered two
notarial general covering bonds of ZAR10.0 million each ($1,366,998) over all
moveable assets on the property of the farm Holpan, Barkley West, Northern
Cape. In 2009 one notarial general covering bond of ZAR10.0 million
($1,366,998) was registered over moveable assets.
As at February 28, 2011, the Company completed an impairment analysis which
considered the indicators of impairment in accordance with Section 3063,
"Impairment of Long-lived Assets". The Company prepared cash flow forecasts
for the mine and development projects using price assumptions reflecting
prevailing diamond prices and analysts` consensus forecasts, current life-of-
mine plans and forecast operating cost profiles. The analysis was based on the
life of the individual mining properties, using long-term price assumptions of
US$2,000 for Saxendrift and US$1,000 for Klipdam and Holpan mines respectively
as well as a foreign exchange of US$1 to ZAR 7.0 in the next twelve months.
Sales are assumed to remain constant over the year, even though the Bank of
Montreal scale indicates increasing demand and prices. Production volumes were
set at 85% of operation production capacity with increased efficiencies on
diesel in a revised production method. Other assumptions used in determining
whether impairment existed include: (a) Inflation rate of 5%, (b) Prime
lending rate of 9%, (c) Standard finance lease periods of 36 months; (d) 8%
increase in salaries and wages; (e) Royalty payments average of 1.7%; and (f)
Electricity increases of 25%. The undiscounted estimated future cash flows
associated with these assets were higher than the carrying values.
The Company identified damaged items of property, plant and equipment which
were impaired by $164,059 to its fair value. In fiscal 2010 items of property,
plant and equipment, still in use at year end, were impaired by $23,862 (2009
- $2,590,958).
Prior to year end the Company entered into an agreement to dispose of land and
buildings at a price lower than its carrying values. As a result these items
of property, plant and equipment were adjusted to its fair value resulting in
an impairment of $120,637. Construction in progress includes projects at the
Wouterspan mine (Phase I engineering, scoping, technical data pack and
drawings) and the Tirisano mine establishment project at Ventersdorp, which
represents the planning, erection, re - configuring and commissioning of the
processing and recovery plant and mine infrastructure and establishment costs
to date. The Wouterspan design phase and the construction of phase I of the
Wouterspan project are to be completed within the 2012 fiscal year.
8. MINERAL PROPERTY INTERESTS
As at As at
February 28, 2011 February 28, 2010
H.C. Van Wyk Diamonds Ltd and Klipdam Mining
Company Ltd
Balance, beginning of year $ 22,128,231 $ 22,373,983
Acquisition 845,773 -
Future income taxation 328,912
Foreign exchange adjustments 315,219 2,042,252
Depletion of mineral properties during
the year (2,302,318) (1,630,370)
Write down of mineral property - (657,634)
H.C. Van Wyk Diamonds Ltd and Klipdam Mining 21,315,817 22,128,231
Company Ltd, end of year
Saxendrift Mine (Pty) Ltd
Balance, beginning of year 8,722,767 6,520,494
Acquisition costs - 1,703,195
Foreign exchange adjustments 121,993 733,083
Future income tax liability - 662,354
Depletion of mineral properties during
the year (595,273) (896,359)
Saxendrift Mine (Pty) Ltd, end of year 8,249,487 8,722,767
Balance, end of year $ 29,565,304 $ 30,850,998
Mineral resources are estimated by professional geologists and engineers in
accordance with recognized industry, professional and regulatory standards.
These estimates require inputs such as future diamond prices, future operating
costs, and various technical geological, engineering, and construction
parameters. Changes in any of these inputs could cause a significant change in
the estimated resources which, in turn, could have a material effect on the
carrying value of mineral properties.
The carrying value of mineral properties is also dependant on the valuation
used for the common shares and warrants of the Company issued for the
acquisition of mineral properties. The value of the common shares issued is
the price of the common shares of the Company at the date of issuance to
effect the acquisition. The Company uses the Black-Scholes pricing model to
estimate a value for the warrants issued upon the acquisition of a property.
This model, and other models which are used to value options and warrants,
require inputs such as expected volatility, expected life to exercise, and
interest rates. Changes in any of these inputs could cause a significant
change in the carrying value initially recorded for mineral properties at
acquisition dates.
(a) Acquisition of Saxendrift Mine (Pty) Ltd
On March 6, 2007, the Company and Trans Hex Group Limited ("Trans Hex")
entered into a conditional agreement whereby the Company`s wholly owned South
African subsidiary, Rockwell Resources RSA (Pty) Ltd ("Rockwell RSA"), would
acquire two open pit alluvial diamond mines and three alluvial diamond
exploration projects from Trans Hex ("the Transaction"). Trans Hex, through
its wholly-owned subsidiary, Trans Hex Operations (Pty) Ltd. ("THO"), was the
owner of two open pit alluvial diamond mines, namely Saxendrift and
Niewejaarskraal, and three alluvial diamond exploration projects, namely
Kwartelspan, Zwemkuil-Mooidraai and Remhoogte-Holsloot, which are located
along the southern bank of the Middle Orange River between Douglas and Prieska
in the Northern Cape Province of South Africa ("Northern Cape") and which are
collectively referred to as the Middle Orange River Operations and Projects
(or "MORO"). The MORO includes:
- the rights to prospect, explore and/or mine precious stones and/or other
minerals and/or metals held directly or indirectly by THO in the Saxendrift
area of the Northern Cape;
- a series of large remnant alluvial diamond terraces;
- the plant, machinery, equipment and other movable assets owned and/or used
by THO;
- certain employees of THO; and
- a rehabilitation liability which will be taken over by the Company.
On April 11, 2008 the Company completed the MORO acquisition. Registration and
transfer of Saxendrift Mine (Pty) Ltd and the Saxendrift mining right, as well
as prospecting rights in respect of the Kwartelspan, Zwemkuil-Mooidraai and
part of the Remhoogte-Holsloot projects were obtained. In March 2009, the
Niewejaarskraal mining rights were acquired.
On April 11, 2009 all the conditions precedent were met and the Company paid
ZAR17.9 million ($2.4 million) in cash to Trans Hex for the remaining
Niewejaarskraal mining rights of which ZAR12.4 million ($1.7 million) was
capitalized. This action completed the Saxendrift/Remhoogte- Holsloot
transaction negotiated during April 2008. The Company has no further
commitments in relation to more acquisitions.
The results of the operations of Saxendrift Mine (Pty) Ltd have been included
in the consolidated financial statements since the date of acquisition.
Effective July 1, 2008, a Black Economic Empowerment ("BEE") group, Liberty
Lane Investments (Pty) Ltd ("Liberty Lane") acquired a shareholding of 26% by
subscribing for shares in Saxendrift Mine (Pty) Ltd. The acquisition by
Liberty Lane was financed via loans provided by Rockwell RSA to Liberty Lane.
The Company has determined that its 74% interest in Saxendrift Mine (Pty) Ltd
qualifies as a variable interest entity ("VIE") due to certain voting
arrangements required under the Saxendrift Mine (Pty) Ltd shareholders
agreement. The Company has also determined that the Company is the primary
beneficiary of the VIE as it is most closely related to the activities and has
primary exposure to the expected losses of the VIE. Consequently, the Company
has consolidated 100% of the results of operations of Saxendrift Mine (Pty)
Ltd since the date of acquisition. Upon full repayment of the outstanding
loans by Liberty Lane, the Company will increase the non-controlling interest
to 26% and consolidate 74% of Saxendrift Mine (Pty) Ltd`s results of
operations. As at February 28, 2011, the status in relation to this
transaction and the accounting treatment remain unchanged.
(b) Acquisition of Durnpike Investments (Pty) Limited
On January 31, 2007, the Company completed the acquisition of Durnpike
Investments (Pty) Limited ("Durnpike"), a private South African company
("Acquisition"). Durnpike held interest in the Holpan, Klipdam and Wouterspan
properties in South Africa.
On March 1, 2008, the Company ratified an exchange agreement and increased its
ownership of H.C. Van Wyk Diamonds Ltd ("HCVW") and Klipdam Mining Company
Limited ("Klipdam") by 34%, resulting in an 85% interest, by issuing
14,285,715 common shares of the Company pursuant to the Definitive Agreement
and thereby reducing the non-controlling interest to 15%. On June 1, 2008, the
BEE group, African Vanguard Resources (Pty) Ltd increased its shareholding
from 15% to 26% by subscribing for an additional 11% shares in HCVW and
Klipdam, thereby reducing the Company`s interest to 74%. This additional 11%
is at a subscription price of ZAR17.5 million and is funded by Rockwell
Resources RSA (Pty) Ltd. Consequently, the Company has effectively
consolidated 85% of the results of operations of HCVW and Klipdam until the
outstanding loans by the BEE group are fully repaid, at which time the Company
will increase the non-controlling interest to 26% and effectively consolidate
74% HCVW and Klipdam`s results of operations. As at February 28, 2011, the
status in relation this transaction and the accounting treatment remain
unchanged.
(c) Kwango River Project - Democratic Republic of Congo
The Company had planned to incur US$7.0 million on a feasibility study on the
Kwango River Project with Midamines SPRL ("Midamines"), the holder of an
exploration permit in the Democratic Repulic of Congo.
During the first quarter of 2008, pursuant to an amending agreement to the
Midamines Agreement, the Company paid consideration of $600,000 to Midamines
in order to increase the size of the concession (Permit 331). As part of such
amending agreement, Midamines waived its right to payment of the
abovementioned US$1,200,000 royalty payment on December 31, 2007.
Subsequently, and pursuant to Midamines` persistent breach of material
provisions of the Midamines Agreement (coupled with its failure to remedy such
instances of breach notwithstanding notice to do so), Durnpike cancelled the
Midamines Agreement and wrote down the associated mineral properties (2010 -
$657,634, 2009 - $203,339) as well as claimed damages.
Midamines has subsequently disputed Durnpike`s entitlement to cancel the
Midamines Agreement and has demanded payment of US$1,200,000 as well as other
amounts which have not yet been determined. Refer to note 19.
(d) Acquisition of Erf 2004 Windsorton
On November 1, 2010, HCVW exercised an option in terms of an agreement with
Batla Resources (Pty) Ltd, the holder of a prospecting and mineral right and
MJA Boerdery CC, the surface owner whereby HCVW would acquire the prospect and
mining rights to Erf 2004 Windsorton (a portion of Erf 2003) for ZAR 6.0
million ($0.8 million) of which ZAR 2.0 million ($0.3 million) was paid
immediately and the balance to be paid in ten equal monthly installments
monthly thereafter. Erf 2004 is adjacent to Klipdam mine and will be explored
and bulk sampled during fiscal 2012.
9. CAPITAL LEASE OBLIGATIONS
Included in property, plant and equipment are mining equipment that the
Company acquired pursuant to three year capital lease agreements.
The Company`s capital lease obligations are with the following financial
institutions:
As at As at
February 28, 2011 February 28, 2010
Wesbank $ - $ 48,792
Komatfin 142,630 3,287,729
$ 142,630 $ 3,336,521
Capital lease obligations as detailed above are secured over plant and
equipment and are repayable, on average, in 36 monthly installments with the
final payment being on June 30, 2011. Interest is charged at rates of between
1.25% to 2.00% less than the prevailing prime rate, which is currently 9.00%,
per annum. There are no significant restrictions imposed on the lessee as a
result of the lease agreements.
Future minimum lease payments are as follows:
As at As at
February, 2011 February 28, 2010
2011 $ - $3,301,394
2012 143,997 141,544
Total minimum lease payments 143,997 3,442,938
Less: interest portion (1,367) (106,417)
Present value of capital lease obligations 142,630 3,336,521
Current portion 142,630 3,196,189
Non-current portion $ - $ 140,332
10. RECLAMATION OBLIGATION
The continuity of the provision for reclamation costs related to the Holpan,
Wouterspan, Klipdam and Saxendrift mines, are as follows:
As at As at
February 28, 2011 February 28, 2010
Holpan, Wouterspan and Klipdam Mines
Balance, beginning of year $ 2,918,102 $ 2,690,335
Changes during the year:
Net reclamation obligation (utilized)
recognized (426,066) 8,654
Foreign exchange on reclamation 73,341 219,113
Balance, end of year $ 2,565,377 $ 2,918,102
Saxendrift Mine
Balance, beginning of year $ 804,882 $ 1,112,320
Changes during the year:
Net reclamation obligation (utilized)
recognized 427,875 (403,063)
Foreign exchange on reclamation 16,504 95,625
Balance, end of year $ 1,249,261 $ 804,882
Total reclamation obligation, end of
year $ 3,814,638 $ 3,722,984
The liability is based on the disturbance of the natural physical environment
due to the alluvial mining methods that the Company engages in. The volume of
disturbance is quantified on a monthly basis by a professional surveyor
through physical observation and technical quantification in cubic meters and
is therefore not discounted. The Company does not make use of a mining
contractor and applies an internal costing rate per cubic meter which is based
on applying its own resources and equipment in doing such rehabilitation. This
costing rate represents the operating cost, including fuel, applying specific
mining fleet units to the rehabilitation process and labour usage.
The physical disturbance in the cubic meters multiplied by the costing rate
represents the rehabilitation liability at any one stage. As required by
regulatory authorities, at February 28, 2011, the Company had cash reclamation
deposits totaling $2,759,611 (February 28, 2010 - $2,898,067) comprised of
$1,686,913 (2010 - $1,238,104) for the Holpan, Wouterspan and Klipdam mine and
$1,072,698 (2010 - $1,659,963) for the Saxendrift mine. These deposits are
invested in interest bearing money market linked investments at rates ranging
from 9.5% to 11.0% per annum. These investments have been ceded as security in
favour of the guarantees the bank issued on behalf of the Company. Refer to
note 18.
11. OTHER ASSETS AND DEPOSITS
As at As at
February 28, 2011 February 28, 2010
Refundable security deposits $ 75,079 $ 152,259
Investments (a) 1,199,182 574,086
Deposits on future assets (b) - 101,526
Loans receivable(c) 768,030 -
Total other assets and deposits $ 2,042,291 $ 827,871
(a) The Company invests in investment policies with endowment benefits on
maturity of the policies. Premiums are invested on an initial lump sum and/or
monthly annuity premium basis with the insurers and invested in specific
investment plans. Policy investment value at any one time represents the value
of premiums and growth after deduction of administration and investment fees.
Withdrawals could be made against the policies before endowment against the
deduction of penalties, which is lower than the investment value. To surrender
the policy prior to maturity date will similarly attract penalties at a lower
rate, and represents the value accessible at any one stage. Fair value at any
one stage represents the surrender value of the investments. The fair value of
the policies at February 28, 2011 amounted to $3,958,793 (February 28, 2010 -
$3,472,153) of which $2,759,611 (February 28, 2010 - $2,898,067) has been
disclosed as reclamation deposits (Refer note 10).
(b) This deposit relates to deposits on motor vehicles only delivered in the
2011 fiscal year.
(c) Loans receivable represents amounts paid to Etruscan Diamonds Limited
(Refer note 20)
12. INVESTMENT IN ASSOCIATE
As at As at
February 28, 2011 February 28, 2010
Investment in associate at cost $ 95,690 $ -
Share of profit for the year 34,396 -
Foreign exchange adjustments (426) -
Balance at end of year $ 129,660 $ -
On April 21, 2010 the Company acquired a 20% shareholding in Flawless Diamonds
Trading House (Pty) Limited incorporated in the Republic of South Africa for
ZAR700,000 ($95,690) cash. Flawless is a registered diamond broker which
provides specialist diamond valuation, marketing and tender sales services to
the Company.
The Company has significant influence over the Flawless operations. It
accounts for the investment using the equity method and includes a pro-rata
share of the Flawless net income (loss) for the year.
Summarised financial information of associate As at
February 28,
2011
Financial Position
Total Assets $ 9,690,007
Total Liabilities 8,969,428
Net Assets 703,579
Nine months ended
February 28,
2011
Financial Performance
Total Revenue $ 60,383,011
Total net earnings (loss) for the year 206,374
Capital commitments and contingent liabilities of associate Nil
13. SHARE CAPITAL
(a) Authorized share capital
The Company`s authorized share capital consists of an unlimited number of
common shares, without par value, and an unlimited number of preferred shares
without par value, of which no preferred shares have been issued.
(b) Stock-based compensation
The Company has a stock-based compensation plan approved by the shareholders
that allows the Company to grant options for up to 10% of the issued and
outstanding shares of the Company at any one time, typically vesting over two
years, to its directors, employees, officers, and consultants. The exercise
price of each stock option is set by the board of directors at the time of the
grant and cannot be less than the market price (less permissible discounts) on
the Toronto Stock Exchange. Stock options have a maximum term of five years
and typically terminate 30 days following the termination of the optionee`s
employment, except in the case of retirement or death.
From time to time, the Company may grant stock options to employees,
directors, and service providers. The Company uses the Black-Scholes option
pricing model to estimate a value for these options. This model, and other
models which are used to fair value stock options, require inputs such as
expected volatility, expected life to exercise, and interest rates. Changes in
any of these inputs could cause a significant change in the stock-based
compensation expense charged in a period.
The continuity of stock-based compensation for the year ended February 28,
2011 is as follows:
Exercise Feb 28, Granted/
Expiry date price 2010 Issued
September 24, 2012 $ 0.62 5,896,500 -
November 14, 2012 $ 0.63 1,101,500 -
June 20, 2011 $ 0.45 950,000 -
December 7, 2014 $ 0.06 14,270,890 -
January 18, 2015 $ 0.07 600,000 -
October 8,2015 $0.065 - 15,042,000
22,818,890 15,042,000
Weighted average exercise price $ 0.25 $ 0.065
Weighted average fair value of stock
options granted during the year
Expired/ Feb 28,
Expiry date Exercised cancelled 2011
September 24, 2012 - (5,000) 5,891,500
November 14, 2012 - (15,000) 1,086,500
June 20, 2011 - - 950,000
December 7, 2014 - (588,300) 13,682,590
January 18, 2015 - - 600,000
October 8,2015 - - 15,042,000
- (608,300) 37,252,590
Weighted average exercise price $ - $ 0.08 $ 0.18
Weighted average fair value
of stock options granted during the year $ 0.056
As at February 28, 2011, 17,774,072 of the stock options outstanding with a
weighted average exercise price of $0.06 per share have vested with grantees.
The continuity of stock-based compensation for the year ended February 28,
2010 is as follows:
Exercise Feb 28, Granted/
Expiry date price 2009 issued
September 24, 2012 $ 0.62 5,901,334 -
November 14, 2012 $ 0.63 1,104,834 -
June 20, 2011 $ 0.45 950,000 -
December 7, 2014 $ 0.06 - 14,330,890
January 18, 2015 $ 0.07 - 600,000
7,956,168 14,930,890
Weighted average
exercise price $ 0.60 $ 0.06
Weighted average fair
value of stock options granted
during the year
Expired/ Feb 28,
Expiry date Exercised cancelled 2010
September 24, 2012 (1,500) (3,334) 5,896,500
November 14, 2012 - (3,334) 1,101,500
June 20, 2011 - - 950,000
December 7, 2014 - (60,000) 14,270,890
January 18, 2015 - - 600,000
(1,500) (66,668) 22,818,890
Weighted average
exercise price $ 0.62 $ 0.12 $ 0.25
Weighted average fair
value of stock options granted
during the year $ 0.054
As at February 28, 2010, 12,620,980 of the stock options outstanding with a
weighted average exercise price of $0.39 per share have vested with grantees.
The continuity of stock-based compensation for the year ended February 28,
2009 is as follows:
Exercise Feb 29,
Expiry date price 2008 Granted/
issued
March 28, 2008 $ 0.50 150,000 -
July 10, 2010 $ 0.68 300,000 -
September 24, 2012 $ 0.62 5,903,000 -
November 14, 2012 $ 0.63 1,109,000 -
June 20, 2011 $ 0.45 - 1,150,000
7,462,000 1,150,000
Weighted average exercise price $ 0.62 $ 0.45
Weighted average fair
value of stock options granted
during the year
Expired/ Feb 28,
Expiry date Exercised cancelled 2009
March 28, 2008 - (150,000) -
July 10, 2010 - (300,000) -
September 24, 2012 - (1,666) 5,901,334
November 14, 2012 - (4,166) 1,104,834
June 20, 2011 - (200,000) 950,000
- (655,832) 7,956,168
Weighted average exercise price $ - $ 0.57 $ 0.60
Weighted average fair
value of stock options granted
during the year $ 0.334
As at February 28, 2009, 4,987,445 of the stock options outstanding with a
weighted average exercise price of $0.60 per share have vested with grantees.
Using a Black-Scholes option pricing model with the assumptions noted below,
the fair values of stock options vested have been reflected in the statement
of operations as follows:
Year ended Year ended Year ended
February 28, February 28, February 28,
2011 2010 2009
Exploration and engineering $ 270,674 $ 74,008 $ 629,347
Operations and administration 614,212 261,350 1,205,075
Total stock-based compensation
cost expensed to operations, with
the offset
credited to contributed surplus $ 884,886 $ 335,358 $ 1,834,422
The weighted-average assumptions used to estimate the fair value of options
granted are as follows:
Year ended February 28
2011 2010 2009
Risk free interest rate 1.9% 2.5% 4.0%
Expected life 5.0 years 4.8 years 3 years
Expected volatility 128.6% 140.2% 122%
Expected dividends nil nil nil
(c) Shares issued, March 2008
On March 1, 2008, the Company issued 14,285,715 common shares at a price of
$0.55 per share for a total of $7,857,142 (net of issue cost) to increase its
ownership of HCVW and Klipdam by 34%, resulting in a total interest holding of
85%, and thereby reducing the non-controlling interest of HCVW and Klipdam to
15%. Refer to note 8(b).
(d) Private placements between December 2009 to February 2010
During February 2010, the Company completed private placements of 132,800,000
common shares at $0.065 per share for a total of $8,632,000. The company paid
a cash fee of $587,229 finder`s fees relating to the private placements.
(e) Rights offering
On March 19, 2010 the Company completed a rights offering whereby each
registered holder of the Company`s common shares, on the record date, received
one right for each common share held. The rights offering was 100% subscribed
and applications for additional shares were received but could not be
fulfilled because they exceeded the maximum subscription quantity on offer.
Pursuant to the rights offering, Rockwell issued 92,710,767 common shares at a
subscription price of $0.05 per common share yielding gross proceeds of
approximately $4,583,644 (ZAR33.2 million).
(f) Private placement
In March 2010, the Company completed a private placement of 54,631,402 common
shares at a price of $0.065 per share for total proceeds of $3,406,824 (net of
issue cost). The Company paid a cash fee of $0.1 million finder`s fees
relating to the private placement.
Proceeds from the financing activities were used to repay short term debt,
finance lease obligations, fund diamond operations and to fund capital
developments.
14. LOSS PER SHARE
Year ended Year ended Year ended
February 28, February 28, February 28,
Number of common shares 2011 2010 2009
Basic weighted average shares
outstanding: 518,185,238 267,164,309 237,924,152
Weighted average shares
dilution adjustments:
Dilutive stock options (a) - - -
Common share purchase warrants (a) - - -
Diluted weighted average shares
outstanding 518,185,238 267,164,309 237,924,152
(a) These adjustments were excluded, as they were anti-dilutive. Diluted loss
per share has not been presented separately on the Statements of Operations
and Comprehensive Loss as the effect of outstanding options and warrants would
be anti-dilutive.
15. RELATED PARTY BALANCES AND TRANSACTIONS
As at As at
Balances payable February 28, February 28,
2011 2010
Banzi Trade 26 (Pty) Ltd (e) $ 34,385 $ 603
Hunter Dickinson Services Inc. (a) 34,113 627,435
Flawless Diamonds Trading House (d) 3,566 -
Seven Bridges Trading (c) - 13,285
Current balances payable $ 72,064 $ 641,323
Liberty Lane (g) 424,572 414,566
Long-term balances payable $ 424,572 $ 414,566
Balances receivable
Banzi Trade 26 (Pty) Ltd (e) 92,398 46,108
Current balances receivable $ 92,398 $ 46,108
Year ended Year ended Year ended
Transactions February 28, February 28, February 28,
2011 2010 2009
Services rendered and expenses
reimbursed:
Hunter Dickinson Services Inc. (a) $ 467,151 $ 961,042 $ 1,280,316
CEC Engineering (b) 23,331 17,818 26,904
Seven Bridges Trading (c) 134,483 139,789 -
Cashmere Trading (h) - - 18,808
Banzi Trade 26 (Pty) Ltd (e) 165,077 17,688 29,768
Jakes Tyres (f) - - 440,283
Diacor CC (i) - - 39,510
Flawless Diamonds Trading House (d) 420,006 316,081 346,768
Sales rendered to:
Banzi Trade 26 (Pty) Ltd (e) $ 879 $ 1,989 $ 884
All related party transactions are arms length transaction in the normal
course of business.
(a) Hunter Dickinson Services Inc. ("HDSI") is a private company with a
director in common with the Company. HDSI provides geological, technical,
corporate development, administrative and management services to, and incurs
third party costs on behalf of, the Company on a full cost recovery market
related basis pursuant to an agreement dated November 21, 2008.
(b) CEC Engineering Ltd is a private company owned by David Copeland, Chairman
and a director of the Company, which provides engineering and project
management services at market rates.
(c) Seven Bridges Trading 14 (Pty) Ltd (Seven Bridges Trading) is a wholly-
owned subsidiary of Randgold Resources Ltd, a public company where Mark
Bristow, a director of the Company, serves in an executive capacity. Seven
Bridges Trading provides office, conferencing, information technology, and
other administrative and management services at market rates to the Company`s
South African subsidiaries.
(d) Flawless Diamonds Trading House (Pty) Ltd ("Flawless Diamonds Trading
House") is a private company where certain directors, former directors and
officers of the Company, namely, Messr. Brenner, J.W. and D.M. Bristow and Van
Wyk, are shareholders. During fiscal 2011 the Company acquired a 20%
shareholding in Flawless Diamonds Trading House (Pty) Limited (refer note 12).
Flawless is a registered diamond broker which provides specialist diamond
valuation, marketing and tender sales services to the Company for a fixed fee
of 1% of turnover which is below the market rate charged by similar tender
houses.
(e) Banzi Trade 26 (Pty) Ltd ("Banzi") is 49% owned by HC van Wyk Diamonds Ltd
and 51% by Bokomoso Trust. Banzi is an empowered private company established
to provide self sustaining job creation programs to local communities as part
of the company`s Social and Labour Plan which is required in terms of the
Minerals and Petroleum Resources Development Act ("MPRDA"). Banzi provides the
Company with building materials at market rates.
(f) Jakes Tyres is a private company with former directors and officers (H C
van Wyk) in common with the Company that provides tyres, tyre repair services
and consumables at market rates to Rockwell`s remote Middle Orange River
operations.
(g) Liberty Lane is the BEE partner of the Saxendrift property and has certain
directors in common with the Company.
(h) Cashmere Trade 19 (Pty) Ltd (Cashmere Trade) is a private company owned by
Hennie Van Wyk, a former officer of the Company, which provides helicopter
services for the movement of products on an ad-hoc basis at competitive market
rates thereby providing benefits to the Company and its employees in respect
of secure transport of high value product and reduced insurance premiums.
(i) Diacor CC is a private company of which H C van Wyk, a former director and
officer of the Company, is a director from which the Company has purchased
consumable materials at market rates.
16. INCOME TAXES
Income tax expense (recovery) differs from the amount which would result from
applying the statutory income tax rates in 2011 of 28.18% (2010 - 29.76%, 2009
- 30.75%) for the following reasons:
Year ended Year ended Nine months
February 28 February 28 ended
February28
2011 2010 2009
Loss before income taxes
and non-controlling
interest $ (3,194,033) $ (11,282,350) $ (16,864,986)
Expected income tax
recovery $ (900,000) $ (3,357,000) $ (5,186,000)
Difference in foreign
tax rates 13,000 156,000 (253,000)
Permanent differences 369,000 912,000 1,232,000
Change in tax rate 47,000 (195,946) 671,000
Change in valuation allowance 1,932,000 (185,000) (390,000)
Other non-deductible items 560,000 6,000 586,000
Net income tax recovery
(expense) $ 2,021,000 $ (2,626,054) $ (3,340,000)
As at February 28, 2011 and 2010, the estimated tax effect of the significant
components within the Company`s future tax assets and liabilities are as
follows:
As at As at
February 28 February 28
2011 2010
Future income tax asset (liability)
Resource allowances $ 1,173,000 $ 1,173,000
Loss carry forwards 7,595,000 7,332,000
Other 1,454,000 2,057,000
Total 10,222,000 10,562,000
Less: valuation allowance (8,312,000) (6,380,000)
1,910,000 4,182,000
Mineral properties (8,278,000) (8,638,000)
Equipment (7,750,000) (7,089,000)
Net future tax liability $ (14,118,000) $ (11,545,000)
At February 28, 2011, the Company had available for deduction against future
taxable income non- capital losses in Canada of approximately $21,112,000
(2010 - $18,380,000). These losses, if not utilized, will expire in various
years ranging from 2014 to 2031. Subject to certain restrictions, the Company
also had Canadian resource expenditures of approximately $4,691,000 (2010 -
$4,691,000), which are available to reduce taxable income in future years.
The Company has losses in South Africa of $8,223,000 (2010 - $9,773,000 )
which are available for deduction against future taxable income.
The valuation allowance is a full valuation allowance against the net Future
Income Tax Allowance ("FITA") under Canadian Tax Law. The FITA in primarily
arises from the resource pools carried forward and the losses carried forward.
The rationale for placing a full valuation allowance against these FITAs is as
follows:
- The Company has cumulative losses in recent years;
- The Company has a history of tax losses expiring unused; and
- The Company `s resource pools are not likely to be utilized as the Company
would only be able to use its resource pools to offset income from the mine
from which the expenses were incurred.
17. SEGMENTED INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operation decision maker, or decision- making group, in deciding how to
allocate resources and in assessing performance. All of the Company`s
operations are within the mineral exploration and diamond mining sector. The
Company`s resource properties are currently located only in the Northern Cape
region of the Republic of South Africa.
For the year ended
February 28, 2011 Canada Chile South Africa Total
External revenue $ - $ - $ 42,507,747 $ 42,507,747
Loss for the year (2,251,967) - (2,874,969) (5,126,936)
Total assets 2,552,926 - 107,630,788 110,183,714
Mineral property
interests - - 29,565,304 29,565,304
Property, plant and - - 62,828,438 62,828,438
equipment
For the year ended
February 28, 2010 Canada Chile South Africa Total
External revenue $ - $ - $ 29,776,933 $ 29,776,933
Loss for the year (2,767,485) - (4,270,208) (7,037,693)
Total assets 1,232,734 - 104,010,652 105,243,386
Mineral property
interests - - 30,850,998 30,850,998
Property, plant and - - 58,790,736 58,790,736
equipment
For the year ended
February 28, 2009 Canada Chile South Africa Total
External revenue $ - $ - $ 34,330,078 $ 34,330,078
Loss for the year (5,590,213) (135,528) (7,250,221) (12,975,962)
Total assets 575,275 - 105,787,141 106,362,416
Mineral property
interests - - 28,894,477 28,894,477
Property, plant and - - 59,569,186 59,569,186
equipment
18. BANK INDEBTEDNESS AND RESTRICTED CASH
Consistent with the prior financial year, the Company has an overdraft
facility in the amount of ZAR28.0 million ($3.9 million) available for its
operations (current balance of $1,787,479). This facility has an interest cost
of prime (currently 9% per annum) plus 0.6%. The security for the ZAR28.0
million consists of 2 notorial bonds of ZAR10.0 million ($1.4 million) each
over loose assets and property of the farm Holpan.
At February 28, 2011 HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd and
Saxendrift Mine (Pty) Ltd held guarantees with the bank towards Eskom
(Electricity Provider) of ZAR4,856,100 ($679,850) and the Department of
Minerals and Energy (DME) of ZAR21,367,228 ($2,759,611) towards rehabilitation
expenses.
At February 28, 2010 HC van Wyk Diamonds Ltd, Klipdam Mining Company Ltd and
Saxendrift Mine (Pty) Ltd held guarantees with the bank towards Eskom
(Electricity Provider) of ZAR1,419,660 ($194,059) and the Department of
Minerals and Energy (DME) of ZAR21,200,228 ($2,898,067) towards rehabilitation
expenses.
Restricted cash of $Nil (2010 - $4,946) relates to monies held in trust by the
group`s lawyers.
19. CONTINGENCIES
Kwango River Project, Democratic Republic of Congo
Rockwell`s subsidiary, Durnpike Investments (Proprietary) Limited`s
("Durnpike") interest in the Kwango River project that was constituted by an
agreement ("Midamines Agreement") which was concluded between Durnpike and
Midamines SPRL ("Midamines"), the holder of the permit for the Kwango River
Project, during 2006, in terms of which Durnpike was to act as independent
contractor on behalf of Midamines to manage and carry out exploration
activities and potentially, mining activities. Durnpike was entitled to an 80%
share of the net revenue from the sale of any diamonds produced from the
contract area.
Under the Midamines Agreement, Durnpike agreed to certain minimum royalty
payments being made to Midamines, and Midamines undertook certain obligations
in favour of Durnpike, including that of procuring and facilitating Durnpike`s
access to the Kwango River Project site. The royalties took the form of a
series of recurring annual minimum royalty payments of US$1.2 million per
annum, as escalated in accordance with the Midamines Agreement (commencing on
December 31, 2007). During the first quarter of 2008, pursuant to an amendment
to the Midamines Agreement (contained in the Fifth Addendum thereto), Durnpike
paid consideration of US$600,000 to Midamines as compensation for access to
the entire concession area (Permit 331), as opposed to the limited contract
area. As part of such amendment, Midamines waived its right to payment of the
above mentioned US$1.2 million royalty payment due on December 31, 2007.
Subsequently, and pursuant to Midamines` persistent breach of material
provisions of the Midamines Agreement coupled with its failure to remedy such
instances of breach not withstanding notice to do so, Durnpike and/or Rockwell
cancelled the Midamines Agreement and/or the Fifth Addendum thereto. Midamines
thereafter disputed the entitlement of Durnpike and/or Rockwell to cancel the
Midamines Agreement. It has referred to arbitration a dispute against Durnpike
and Rockwell, in which it claims payment by Rockwell and Durnpike of
compensation in the amount of US$41.8 million (while reserving the right to
increase the claim to US$68.073 million if the DRC authorities cancel
Midamines` permit for the Kwango Project) plus interest. Durnpike and/or
Rockwell have defended the claim and have, in turn, instituted a counter-claim
in the estimated and provisional amounts of approximately ZAR25.4 million for
equipment purchased to undertake exploration and feasibility work, C$1.6
million for start-up and acquisition costs in the DRC, and US$20 million
(while reserving the right to increase the counter-claim to at least $164.3
million) as an initial estimate of possible lost earnings.
Comprehensive documentation has been filed by the parties and arbitration
proceedings are pending in Belgium.
20. SUBSEQUENT EVENTS
(a) Etruscan Diamonds Limited
On September 9, 2010 Rockwell Resources RSA (Pty) Ltd has signed a sale of
shares and claims agreement with Etruscan Diamonds Bermuda Limited, Etruscan
Diamonds Limited and Etruscan Resources Inc. whereby the Company proposes to
purchase Etruscan`s Blue Gum diamond operation in the Ventersdorp region of
South Africa. The acquisition is for 74% of the operation with the balance
owned pursuant to South Africa`s BEE regime. The price to be paid to Etruscan
is an amount not exceeding ZAR33.5 million (approximately $4.7 million)
payable in Rockwell shares valued at $0.068 each. The Company will also assume
certain non-material property maintenance obligations effective immediately
and other financial obligations upon completion of the acquisition. The
Company is still awaiting transfer of the mineral right, which is a suspensive
condition, to proceed with the transaction. No recognition has been given to
this future transaction in these consolidated financial statements.
(b) Holpan/ Klipdam operations
The Holpan operation was faced with significant challenges resulting from
heavy and unseasonal rainfall during the fourth quarter. As a result, the
deposit was saturated and the plant`s ability to produce at its full designed
capacity was negatively affected. This, in turn, led to higher unit costs due
to lower efficiencies and rendered the mine to be unprofitable in the fourth
quarter. In order to address these issues and return the mine to profitability
in fiscal 2012, Rockwell entered into negotiations during fiscal 2011 with the
recognised trade union to implement full calendar operations (continuous
operations); however, the Company was unable to reach an agreement. Management
is in the process of restructuring the Holpan and Klipdam operations, which
are adjacent to each other. In its first step to rationalise the two
operations, notice was given to the Union on April 5, 2011, that Management is
placing the Holpan operation on care and maintenance. A process has commenced
to consolidate the operations of Holpan and Klipdam, which will result in a
mine with a combined life of four years. The target date for completion of the
revised mine plan is the end of June 2011.
Independent Auditor`s Report
To the Shareholders of Rockwell Diamonds Inc.
We have audited the accompanying consolidated financial statements of Rockwell
Diamonds Inc, which comprise the consolidated balance sheets as at February
28, 2011 and 2010, and the consolidated statements of operations and
comprehensive loss, accumulated comprehensive loss and deficit, shareholders`
equity and cash flows for each of the years in the three-year period ended
February 28, 2011, and notes, comprising 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.
Auditors` 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 audit 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 our 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, we consider
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 in our audits 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 consolidated financial position of Rockwell Diamonds
Inc. as at February 28, 2011 and 2010, and its consolidated results of
operations and its consolidated cash flows for each of the years in the three-
year period ended February 28, 2011 in accordance with Canadian generally
accepted accounting principles.
/s/ KPMG Inc.
Registered Auditors
Johannesburg South Africa
May 30, 2011
Sponsor
Sasfin Capital
(A division of Sasfin Bank Limited)
Date: 31/05/2011 11:43:01 Produced by the JSE SENS Department.
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