Delrand Resources Limited - Managements Discussion And Analysis
Financial Condition And Results Of Operations For The Year Ended Jun 30, 201Release Date: 12/09/2016 09:50:00 Code(s): DRN
Financial Condition and Results of Operations for the year ended Jun 30, 201
Delrand Resources Limited
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: DRN ISIN Number: CA2472672062
(?Delrand? or the "Company")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2016
The following management?s discussion and analysis of financial condition and results of
operations (the ?MD&A?) has been prepared by management and provides a review of the
activities, results of operations and financial condition of Delrand Resources Limited (the
?Company? or ?Delrand?) based upon International Financial Reporting Standards
(?IFRS?). This MD&A should be read in conjunction with the audited consolidated financial
statements of the Company as at and for the years ended June 30, 2016 and 2015 (the
?Financial Statements?) as well as the notes thereto. All amounts are expressed in
Canadian dollars unless otherwise stated.
This MD&A is dated September 6, 2016. Additional information relating to the Company,
including the Company?s annual information form, is available on SEDAR at
The following MD&A contains forward-looking statements. All statements, other than
statements of historical fact, that address activities, events or developments that the
Company believes, expects or anticipates will or may occur in the future (including, without
limitation, statements relating to future plans and objectives of the Company) are forward-
looking statements. These forward-looking statements reflect the current expectations or
beliefs of the Company based on information currently available to the Company. Forward-
looking statements are subject to a number of risks and uncertainties that may cause the
actual results of the Company to differ materially from those discussed in the forward-
looking statements, and even if such actual results are realized or substantially realized,
there can be no assurance that they will have the expected consequences to, or effects on
the Company. Factors that could cause actual results or events to differ materially from
current expectations include, among other things, uncertainties relating to the availability
and costs of financing needed in the future, changes in equity markets, changes in diamond
markets, foreign currency fluctuations, political developments in the Democratic Republic of
the Congo (the "DRC"), changes to regulations affecting the Company's activities, delays in
obtaining or failure to obtain required project approvals, the uncertainties involved in
interpreting geological data and the other risks involved in the mineral exploration business.
Any forward-looking statement speaks only as of the date on which it is made and, except
as may be required by applicable securities laws, the Company disclaims any intent or
obligation to update any forward-looking statement, whether as a result of new information,
future events or results or otherwise. Although the Company believes that the assumptions
inherent in the forward-looking statements are reasonable, forward-looking statements are
not guarantees of future performance and accordingly undue reliance should not be put on
such statements due to the inherent uncertainty therein.
The Company?s business has historically been the acquisition and exploration of diamond
properties in known diamond producing areas in the DRC. However, the Company presently
does not hold any exploration permits. Delrand also has rights to iron ore exploration
properties in the DRC.
The Company is currently evaluating business opportunities.
For the year ended June 30, 2016 the Company reported a net loss of $371,411 (year
ended June 30, 2015: $4,375,171). The Company had a negative net asset value of
$1,919,339 as at June 30, 2016 (June 30, 2015: negative net asset value of $2,387,928).
The Company?s accumulated deficit as at June 30, 2016 was $128,288,756 (June 30, 2015:
$127,917,345). The Company had a working capital deficit of $604,380 as at June 30, 2016
(June 30, 2015: $2,387,928) and had a net increase in cash of $36,692 during the year
ended June 30, 2016 (year ended June 30, 2015: net decrease of $ 22,396).
While the Company?s consolidated financial statements have been prepared on the basis of
IFRS accounting principles applicable to a going concern, adverse conditions may cast
substantial doubt upon the validity of this assumption. In the event the Company is unable
to identify recoverable resources, receive the necessary permitting, or arrange appropriate
financing, the carrying value of the Company?s assets could be subject to further material
adjustment. Furthermore, the volatile global economic environment and its impact on
certain market conditions may cast significant doubts upon the validity of this assumption.
The Company?s ability to execute its work plan, meet its administrative overhead
obligations, discharge its liabilities and fulfill its commitments as they come due, is
dependent on its success in obtaining additional financing and ultimately, on attaining
future profitable operations. These conditions, along with the fact that the Company does
not have revenue-generating properties and had an accumulated deficit of $128,288,756 as
at June 30, 2016 indicate the existence of a material uncertainty that may cast significant
doubt upon the Company?s ability to continue as a going concern.
In a press release dated September 11, 2015, the Company announced that its common
shares will begin trading on NEX, a separate board of the TSX Venture Exchange, on
September 14, 2015. The voluntary delisting of the Company?s common shares from the
Toronto Stock Exchange was effected at the close of business on September 11, 2015.
In February 2016, the Company consolidated its outstanding common shares on a two to
one basis. Immediately prior to the consolidation, the Company had 30,781,581 common
shares outstanding. Upon effecting the consolidation, the Company had 15,390,825
common shares outstanding. All share and warrant numbers in this MD&A have been
adjusted to reflect the share consolidation to provide more comparable information.
In August 2016, the Company announced that it has decided to voluntarily delist from the
Johannesburg Stock Exchange (the ?JSE?). The Company decided to take this action after
concluding that the disadvantages of maintaining its listing on the JSE (including the
additional costs and regulation associated with maintaining the listing) outweighed the
benefits to the Company and its shareholders.
RESULTS OF OPERATIONS
For the year ended June 30, 2016, the Company reported a net loss of $371,411 (or $0.03
per share), compared to a net loss of $4,375,171 (or $0.40 per share) incurred during the
year ended June 30, 2015. The higher loss in the year ended June 30, 2015 is mainly the
result of an impairment taken on mineral properties in the DRC in the amount of
$2,353,315, as well as legal fees in connection with the VoiceTrust transactions.
SELECTED ANNUAL INFORMATION
The following financial data is derived from the Company?s consolidated financial statements
for each of the three periods indicated. The Company?s presentation and functional currency
is the Canadian dollar. The following financial data is reported in accordance with IFRS.
Year Ended June Year Ended June Year Ended June
30, 2016 30, 2015 30, 2014
Net Loss $ (371,411) $ (4,375,171) $ (3,487,552)
Net Loss per share $ (0.03) $ (0.40) $ (0.32)
(basic and diluted)
Headline loss per share $ (0.03) $ (0.18) $ (0.02)
(basic and diluted)
Exploration and evaluation assets $ - $ - $ 2,333,457
Total assets $ 71,415 $ 34,131 $ 2,372,127
Total non-current liabilities $ 1,314,959 $ nil $ nil
1. Headline loss per share excludes items such as impairment of deferred exploration
expenditures and losses on disposal of assets.
2. Total non-current liabilities consist of an unsecured convertible debenture of
$1,300,000 issued to Norton Rose Fulbright Canada LLP in January 2016. The
debenture has a maturity date of June 18, 2018 and interest on the principal
outstanding from time to time accrues at an interest rate of 2.5% per annum and is
payable by Delrand on the maturity date. Interest accrued as of June 30, 2016 is
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain consolidated financial information of the Company for
each of the last eight quarters, beginning with the three months ended June 30, 2016. The
Company?s presentation and functional currency is the Canadian dollar. The financial
information is reported in accordance with IFRS.
Three Three Three Three
months months months months
ended ended ended ended
June March December September
30, 2016 31, 2016 31, 2015 30, 2015
Net loss ($'000) $(159) $(117) $13 $(109)
Net loss per share
(basic and diluted) $(0.01) $(0.01) $0.00 $(0.02)
Three Three Three Three
months months months months
ended ended ended ended
June March December September
30, 2015 31, 2015 31, 2014 30, 2014
Net loss ($'000) $(253) $(91) $(3,458) $(573)
Net loss per share
(basic and diluted) $(0.02) $(0.00) $(0.32) $(0.06)
During the three month period ended June 30, 2016, the Company recorded a net loss of
$158,649 compared to a net loss of $116,600 recorded during the three month period
ended March 31, 2016. The increase in net loss was mainly due to an increase in general
and administrative expenses which were $164,180 during the three month period ended
June 30, 2016 compared to $93,633 during the three month period ended March 31, 2016.
The increase in general and administrative expenses was partially offset by an increase in
foreign exchange gain which was $51,966 during the three month period ended June 30,
2016 compared to $11,097 during three month period ended March 31, 2016.
During the three month period ended March 31, 2016, the Company recorded a net loss of
$116,600 compared to a net gain of $13,200 recorded during the three month period ended
December 31, 2015. The change in the net gain to a net loss was mainly due to an increase
in general and administrative expenses during the three months ended March 31, 2016
which were $93,633 compared to ($66,431) during the three month period ended
December 31, 2015.
During the three month period ended December 31, 2015, the Company recorded a net
gain of $13,200 compared to a net loss of $109,362 recorded during the three month
period ended September 30, 2015. The change in the net loss to a net gain was mainly due
to $94,527 of debt forgiveness. In addition, there was a decrease in consulting and
professional fees which were $11,015 compared to $69,522 during the three month period
ended September 30, 2015.
During the three month period ended September 30, 2015, the Company recorded a net
loss of $109,362 compared to a net loss of $253,185 recorded during the three month
period ended June 30, 2015. The decrease in the net loss was mainly due to a decrease in
consulting and professional fees which were $69,552 compared to $188,728 during the
three month period ended June 30, 2015.
During the three month period ended June 30, 2015, the Company recorded a net loss of
$253,185 compared to a net loss of $90,682 recorded during the three month period ended
March 31, 2015. The increase in the net loss was mainly due to an increase in consulting
and professional fees which were $188,728 compared to $17,039 during the three month
period ended March 31, 2015.
During the three month period ended March 31, 2015, the Company recorded a net loss of
$90,682 compared to a net loss of $3,457,790 recorded during the three month period
ended December 31, 2014. The change in net loss was mainly due to an impairment of
deferred exploration expenditures of $2,353,315 incurred during the three month period
ended December 31, 2014, and a decrease in consulting and professional fees which were
$17,039 compared to $859,136 during the three month period December 31, 2014.
During the three month period ended December 31, 2014, the Company recorded a net loss
of $3,457,790 compared to a net loss of $573,514 that was recorded during the three
month period ended September 30, 2014. The increase in net loss was mainly due to an
impairment of deferred exploration expenditures of $2,353,315 during the three month
period ended December 31, 2014 and increased legal and consulting fees pertaining to the
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2016, the Company had cash of $45,855 and a working capital deficit of
$604,380 compared to cash of $9,163 and a working capital deficit of $2,387,928 as at
June 30, 2015.
The Company has no operating revenues and is wholly reliant upon external financing to
fund its activities. There is no assurance that such financing will be available on acceptable
terms, if at all.
In general, market conditions have limited the availability of funds. Given the Company?s
financial position and available resources, the Company currently expects a need to access
equity markets for financing over the next twelve months. In light of market conditions,
the Company initiated a series of measures to bring its spending in line with projected cash
flows from its operations, in order to preserve its balance sheet and maintain its liquidity
position. The Company believes that based on its current financial position and liquidity
profile, the Company will be able to satisfy its current and long-term obligations. The
consolidated financial statements of the Company have been prepared in accordance with
IFRS applicable to a going concern.
As at June 30, 2016 and June 30, 2015, there were no contractual obligations or other off-
balance sheet commitments entered into by the Company.
In August 2016, Delrand closed a non-brokered private placement of 300,000 common
shares of the Company at a price of $0.40 per share for gross proceeds of $120,000.
In a press release dated September 2, 2016, the Company announced a proposed non-
brokered private placement of up to 700,000 common shares of the Company at a price of
Cdn$0.50 per share for gross proceeds of up to Cdn$350,000.
In January 2016, Delrand closed (a) a non-brokered private placement of an aggregate of
4,500,000 common shares of the Company at a price of $0.16 per share for gross proceeds
of $720,000 (Arnold Kondrat, the Chief Executive Officer and a director of the Company,
acquired 3,550,000 of such shares), and (b) the issuance of a $1,300,000 unsecured
convertible debenture to its largest creditor. The debenture, which settled indebtedness to
the creditor in the amount of $1,300,000, has a maturity date of June 18, 2018 and interest
on the principal outstanding from time to time accrues at an interest rate of 2.5% per
annum and is payable by Delrand on the maturity date. The principal (and all interest
accrued and unpaid thereon) is due and payable on the maturity date, provided, however,
that Delrand may prepay the principal and accrued interest earlier, without penalty, at its
discretion. The terms of the debenture also provide that (i) the holder thereof shall have the
option to convert the outstanding principal into common shares of Delrand at a price of
$0.50 per share (the ?Conversion Price?), and (ii) within 30 days of the maturity date,
Delrand may elect to repay the outstanding principal in common shares of Delrand at the
Conversion Price, provided that the 5 day per share volume-weighted average trading price
of Delrand?s shares at that time is at least $0.50.
In July 2014, the Company closed a non-brokered private placement of 250,000 units of the
Company at a price of $1.00 per unit for gross proceeds of $250,000. Each such unit was
comprised of one common share of the Company and one-half of one warrant of the
Company, with each full warrant entitling the holder to purchase one common share of the
Company at a price of $1.50 for a period of two years.
EXPLORATION AND EVALUATION ASSETS
There were no exploration and evaluation assets capitalized during the year ended June 30,
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of common
shares. As at September 6, 2016, the Company had outstanding 15,690,825 common
RELATED PARTY TRANSACTIONS
a) Key Management Remuneration
The Company?s related parties include key management. Key management includes
executive directors. The remuneration of the key management of the Company as defined
above, during the years ended June 30, 2016, and June 30, 2015, was as follows:
Year ended June 30, Year ended June 30,
Salaries $100,000 $110,000
b) Other Related Parties
As at June 30, 2016, an amount of $252,813 (June 30, 2015 - $568,764) was owing to
current directors and a former director of the Company representing advances and
As at June 30, 2016, an amount of $29,068 was owed to Banro Corporation (?Banro?)
related to shared expenses (June 30, 2015 - $93,928 was owed to Banro). Banro has a
director in common with the Company and as of December 2015 had owned common
shares of the Company representing a 7.07% interest in the Company. As at June 30, 2016,
Banro no longer owns any shares of the Company.
As at June 30, 2016, an amount of $8,823 was owed from Gentor Resources Inc. and
$8,542 was owed from Loncor Resources Inc. (both Gentor and Loncor are companies with
common directors) related to shared expenses.
FUTURE ACCOUNTING STANDARDS
Certain pronouncements were issued by the International Accounting Standards Board
(IASB) or the International Financial Reporting Interpretations Committee (IFRIC) that are
mandatory for accounting periods on or after July 1, 2016 or later periods. Many are not
applicable or do not have a significant impact to the Company and have been excluded. The
following have not yet been adopted and are being evaluated to determine their impact on
IFRS 9 ? Financial Instruments (?IFRS 9?) was issued by the IASB in November 2009 with
additions in October 2010 and May 2013 and will replace IAS 39 Financial Instruments:
Recognition and Measurement (?IAS 39?). IFRS 9 uses a single approach to determine
whether a financial asset is measured at amortized cost or fair value, replacing the multiple
rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. Most of the requirements in IAS 39 for classification
and measurement of financial liabilities were carried forward unchanged to IFRS 9, except
that an entity choosing to measure a financial liability at fair value will present the portion of
any change in its fair value due to changes in the entity?s own credit risk in other
comprehensive income, rather than within profit or loss. The new standard also requires a
single impairment method to be used, replacing the multiple impairment methods in IAS 39.
IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Earlier
adoption is permitted.
IAS 12 ? Income Taxes (?IAS 12?) was amended in January 2016 to clarify that, among
other things, unrealized losses on debt instruments measured at fair value and measured at
cost for tax purposes give rise to a deductible temporary difference regardless of whether
the debt instrument?s holder expects to recover the carrying amount of the debt instrument
by sale or by use; the carrying amount of an asset does not limit the estimation of probable
future taxable profits; and estimates for future taxable profits exclude tax deduction
resulting from the reversal of deductible temporary differences. The amendments are
effective for annual periods beginning on or after January 1, 2017. Earlier adoption is
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company?s consolidated financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Information about critical judgments in
applying accounting policies that have the most significant effect on the amounts
recognized in the financial statements include the following:
Provisions and contingencies
The amount recognized as provision, including legal, contractual and other exposures or
obligations, is the best estimate of the consideration required to settle the related liability,
including any related interest charges, taking into account the risks and uncertainties
surrounding the obligation. In addition, contingencies will only be resolved when one or
more future events occur or fail to occur. Therefore, assessment of contingencies
inherently involves the exercise of significant judgment and estimates of the outcome of
future events. The Company assesses its liabilities and contingencies based upon the best
information available, relevant tax laws and other appropriate requirements.
Exploration and evaluation expenditures
The application of the Company?s accounting policy for exploration and evaluation
expenditures requires judgment in determining whether it is likely that future economic
benefits will flow to the Company, which may be based on assumptions about future events
or circumstances. Estimates and assumptions made may change if new information
becomes available. If, after the expenditures are capitalized, information becomes available
suggesting that the recovery of expenditure is unlikely, the amount capitalized is written off
in the statement of loss and comprehensive loss during the period the new information
Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees by reference
to the estimated fair value of the equity instruments at the date at which they are granted.
Estimating fair value for share-based payment transactions requires determining the most
appropriate valuation model, which is dependent on the terms and conditions of the grant.
This estimate also requires determining the most appropriate inputs to the valuation model
including the expected life of the share option, volatility and dividend yield and making
assumptions about them.
The estimated fair value at grant date is determined using a Black-Scholes option pricing
model that takes into account the exercise price, the term of the option, the impact of
dilution, the share price at grant date and expected price volatility of the underlying share,
the expected dividend yield and the risk free interest rate for the term of the option. Under
IFRS, the Company is required to estimate the number of forfeitures likely to occur on grant
date and reflect this in the share-based payment expense, revising for actual experiences in
Functional and presentation currency
Judgment is required to determine the functional currency of each entity. These judgments
are continuously evaluated and are based on management?s experience and knowledge of
the relevant facts and circumstances.
Judgment is involved in assessing whether there is any indication that an asset or cash
generating unit may be impaired. This assessment is made based on the analysis of,
amongst other factors, changes in the market or business environment, events that have
transpired that have impacted the asset or cash generating unit, and information from
As referred to in the continuation of business note in the Financial Statements, management
uses its judgment in determining whether the Company is able to continue as a going
concern. Refer to Note 1 of the Financial Statements.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could significantly
impact its operations and future prospects. The following discussion pertains to certain
principal risks and uncertainties but is not, by its nature, all inclusive.
The only sources of future funds for further exploration programs which are presently
available to the Company are the sale of equity capital, or the offering by the Company of
an interest in any properties to be earned by another party carrying out further exploration.
There is no assurance that such sources of financing will be available on acceptable terms, if
at all. In the event that commercial quantities of minerals are found on any properties held
by the Company, the Company does not have the financial resources at this time to bring a
mine into production.
The current financial climate is characterized by volatile and uncertain times. The
uncertainty of forward looking statements is therefore greater. Diamond prices were
reduced significantly as a result of the economic downturn and the recovery could be
accompanied by volatility.
The Company?s business has been the acquisition and exploration of mineral properties in
the DRC. Assets and operations in the DRC are subject to various political, economic and
other uncertainties, including, among other things, the risks of war and civil unrest, hostage
taking, military repression, labor unrest, illegal mining, expropriation, nationalization,
renegotiation or nullification of licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing political conditions, international
monetary fluctuations, currency controls and foreign governmental regulations that favor or
require the awarding of contracts to local contractors or require foreign contractors to
employ citizens of, or purchase supplies from, a particular jurisdiction. Changes, if any, in
mining or investment policies or shifts in political attitude in the DRC may adversely affect
the Company. Operations may be affected in varying degrees by government regulations
with respect to, but not limited to, restrictions on production, price controls, export
controls, currency remittance, income taxes, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use and mine safety.
Failure to comply strictly with applicable laws, regulations and local practices relating to
mineral rights could result in loss, reduction or expropriation of entitlements. In addition, in
the event of a dispute arising from operations in the DRC, the Company may be subject to
the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of courts in Canada. The Company also may be hindered or
prevented from enforcing its rights with respect to a governmental instrumentality because
of the doctrine of sovereign immunity. It is not possible for the Company to accurately
predict such developments or changes in laws or policy or to what extent any such
developments or changes may have a material adverse effect on the Company.
The DRC is a developing nation emerging from a period of civil war and conflict. Physical
and institutional infrastructure throughout the DRC is in a debilitated condition. The DRC is
in transition from a largely state-controlled economy to one based on free market
principles, and from a non-democratic political system with a centralized ethnic power base,
to one based on more democratic principles. There can be no assurance that these changes
will be effected or that the achievement of these objectives will not have material adverse
consequences for the Company. The DRC continues to experience violence and significant
instability in parts of the country due to certain militia and criminal elements. While the
government and United Nations forces are working to support the extension of central
government authority throughout the country, there can be no assurance that such efforts
will be successful.
As a mineral exploration company, Delrand operates at a loss and does not generate any
revenue from operations. The exploration and development of mineral deposits involve
significant financial risks over a significant period of time which even a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which are explored
are ultimately developed into producing mines. Major expenditures may be required to
establish reserves by drilling and to construct mining and processing facilities at a site. It is
impossible to ensure that exploration programs will result in a profitable commercial mining
The Company is exposed to currency risk as its principal business is conducted in foreign
currencies. Unfavorable changes in the applicable exchange rate may result in a decrease
or increase in foreign exchange gains or losses. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk.
The exploration and, if such exploration is successful, development of mineral properties is
subject to all of the hazards and risks normally incident to mineral exploration and
development, any of which could result in damage to life or property, environmental damage
and possible legal liability for any or all damage.
The natural resource industry is intensely competitive in all of its phases, and the Company
competes with many companies possessing greater financial resources and technical
facilities than itself.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
a) Fair value of financial assets and liabilities
The consolidated statements of financial position carrying amounts for cash, prepaid expenses
and other assets and accounts payable and accrued liabilities approximate their fair value due
to their short-term nature. Due to the use of subjective judgments and uncertainties in the
determination of fair values, these values should not be interpreted as being realizable in an
immediate settlement of the financial instruments.
Fair value hierarchy
The following table provides an analysis of financial instruments that are measured subsequent
to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the
fair value is observable:
- Level 1 fair value measurements are those derived from quoted prices (unadjusted)
in active markets for identical assets or liabilities;
- Level 2 fair value measurements are those derived from inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices); and
- Level 3 fair value measurements are those derived from valuation techniques that
include inputs for the asset or liability that are not based on observable market data
There were no transfers between Level 1 and Level 2 during the reporting periods. The fair
values of financial assets and liabilities carried at amortized cost are approximated by their
carrying values. Cash is ranked Level 2 as it is based on similar loans in the market.
b) Risk Management Policies
The Company is sensitive to changes in commodity prices and foreign-exchange
fluctuations. The Company?s Board of Directors has an overall responsibility for the
establishment and oversight of the Company?s risk management framework. Although
the Company has the ability to address its price-related exposures through the use of
options, futures and forward contacts, it does not generally enter into such
c) Foreign Currency Risk
Foreign currency risk is the risk that a variation in exchange rates between the Canadian
dollar and United States dollar or other foreign currencies will affect the Company?s
operations and financial results. Different portions of the Company?s transactions are
denominated in United States dollars, Congolese francs and South African rand. The
Company is also exposed to the impact of currency fluctuations on its monetary assets
and liabilities. The Company?s functional currency is the Canadian dollar. The majority
of major expenditures are transacted in US dollars. The Company maintains the majority
of its cash in Canadian dollars but it does hold balances in US dollars and South African
rand. Significant foreign exchange gains or losses are reflected as a separate
component of the consolidated statement of loss and comprehensive loss. The Company
does not use derivative instruments to reduce its exposure to foreign currency risk. See
Note 10(c) of the Financial Statements for additional details.
d) Credit Risk
Financial instruments which are potentially subject to credit risk for the Company consist
primarily of cash. Cash is maintained with several financial institutions of reputable
credit in Canada, the DRC and South Africa and may be redeemed upon demand. It is
therefore the Company?s opinion that such credit risk is subject to normal industry risks
and is considered minimal.
e) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial
obligations as they become due. The Company attempts to ensure that there is sufficient
cash to meet its liabilities when they are due and manages this risk by regularly
evaluating its liquid financial resources to fund current and long-term obligations and to
meet its capital commitments in a cost-effective manner. The key to success in
managing liquidity is the degree of certainty in the cash flow projections. If future cash
flows are fairly uncertain, the liquidity risk increases. The Company?s liquidity
requirements are met through a variety of sources, including cash and equity capital
markets. In light of market conditions, the Company initiated a series of measures to
bring its spending in line with the projected cash flows from its operations and available
project specific facilities in order to preserve its financial position and maintain its
f) Mineral Property Risk
The Company?s activities in the DRC are exposed to various levels of political risk and
uncertainties, including political and economic instability, government regulations
relating to exploration and mining, military repression and civil disorder, all or any of
which may have a material adverse impact on the Company?s activities or may result in
impairment in or loss of part or all of the Company's assets.
g) Market Risk
Market risk is the potential for financial loss from adverse changes in underlying market
factors, including foreign-exchange rates, commodity prices, interest rates and stock
based compensation costs.
h) Interest rate risk
Interest rate risk is the potential impact on any Company earnings due to changes in
bank lending rates and short term deposit rates. The Company is not exposed to
significant interest rate risk other than cash flow interest rate risk on its cash. The
Company does not use derivative instruments to reduce its exposure to interest rate risk.
A fluctuation of interest rates of 1% would not affect significantly the fair value of cash.
i) Country risk
The DRC is a developing country and as such, the Company?s activities in the DRC could
be adversely affected by uncertain political or economic environments, war, civil or other
disturbances, a changing fiscal regime and by DRC?s underdeveloped industrial and
The Company?s activities in the DRC may be affected by economic pressures on the DRC.
Any changes to regulations or shifts in political attitudes are beyond the control of the
Company and may adversely affect its business. Operations may be affected in varying
degrees by factors such as DRC government regulations with respect to foreign currency
conversion, production, price controls, export controls, income taxes or reinvestment
credits, expropriation of property, environmental legislation, land use, water use and
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not result in a
change in the policies of the DRC government or the imposition of more stringent foreign
investment restrictions. Such changes cannot be accurately predicted.
j) Capital Management
The Company manages its cash, common shares and any stock options as capital. The
Company?s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of capital at an
acceptable level of risk while providing an appropriate return to its shareholders;
- to maintain a sufficient capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the business;
- to safeguard the Company?s ability to obtain financing; and
- to maintain financial flexibility in order to have access to capital in the event of future
The Company manages its capital structure and makes adjustments to it in accordance
with the objectives stated above, as well as responds to changes in economic conditions
and the risk characteristics of the underlying assets.
There were no significant changes to the Company?s approach to capital management
during the year ended June 30, 2016.
Neither the Company nor its subsidiary is subject to externally imposed capital
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that all
relevant information is gathered and reported to senior management, including the
Company?s Chief Executive Officer and Vice President, Finance, on a timely basis so that
appropriate decisions can be made regarding public disclosure. As at June 30, 2016, the
Company's Chief Executive Officer and Vice President, Finance evaluated or caused to be
evaluated under their supervision the effectiveness of the Company?s disclosure controls
and procedures as required by Canadian securities laws. Based on that evaluation, the Chief
Executive Officer and Vice President, Finance have concluded that, as of June 30, 2016, the
Company's disclosure controls and procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal controls have been designed to provide reasonable assurance regarding the
reliability of the Company?s financial reporting and the preparation of financial statements
together with the other financial information for external purposes in accordance with IFRS.
As at June 30, 2016, the Company?s Chief Executive Officer and Vice President, Finance
evaluated or caused to be evaluated under their supervision, the effectiveness of the
Company?s internal control over financial reporting as required by Canadian securities laws.
Based on that evaluation, the Chief Executive Officer and Vice President, Finance have
concluded that, as of June 30, 2016, the Company?s internal control over financial reporting
The Company is required under Canadian securities laws to disclose herein any change in
the Company?s internal control over financial reporting that occurred during the Company?s
most recent interim period that has materially affected, or is reasonably likely to materially
affect, the Company?s internal control over financial reporting. No changes were identified in
the Company?s internal control over financial reporting during the year ended June 30,
2016, that have materially affected, or are reasonably likely to materially affect, the
Company?s internal control over financial reporting.
It should be noted that a control system, including the Company?s disclosure and internal
controls and procedures, no matter how well conceived can provide only reasonable, but not
absolute, assurance that the objective of the control system will be met and it should not be
expected that the disclosure and internal controls and procedures will prevent all errors or
12 September 2016
Arbor Capital Sponsors Proprietary Limited
Date: 12/09/2016 09:50:00 Supplied by www.sharenet.co.za
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