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DRN - Delrand Resources Limited - Management`s discussion and analysis of
financial condition and results of operations for the year ended December 31,
2011
DELRAND RESOURCES LIMITED
(formerly BRC DIAMONDCORE LTD.)
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: DRN ISIN Number: CA2472671072
("Delrand" or the "Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2011
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") issued by the
International Accounting Standards Board. This MD&A should be read in
conjunction with the audited consolidated financial statements of the Company
as at and for the financial year end December 31, 2011 (the "Annual Financial
Statements") as well as the notes thereto. All amounts are expressed in
Canadian dollars unless otherwise stated.
This MD&A is dated March 30, 2012. Additional information relating to the
Company, including the Company`s annual information form, is available on
SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements,
other than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to
exploration results, potential mineralization and future plans and objectives
of the Company) are forward-looking statements. These forward-looking
statements reflect the current expectations or beliefs of the Company based
on information currently available to the Company. Forward-looking
statements are subject to a number of risks and uncertainties that may cause
the actual results of the Company to differ materially from those discussed
in the forward-looking statements, and even if such actual results are
realized or substantially realized, there can be no assurance that they will
have the expected consequences to, or effects on the Company. Factors that
could cause actual results or events to differ materially from current
expectations include, among other things, uncertainties relating to the
availability and costs of financing needed in the future, the possibility
that future exploration results will not be consistent with the Company`s
expectations, changes in equity markets, changes in diamond markets, foreign
currency fluctuations, political developments in the Democratic Republic of
the Congo (the "DRC"), changes to regulations affecting the Company`s
activities, delays in obtaining or failure to obtain required project
approvals, the uncertainties involved in interpreting geological data and the
other risks involved in the mineral exploration business. Any forward-
looking statement speaks only as of the date on which it is made and, except
as may be required by applicable securities laws, the Company disclaims any
intent or obligation to update any forward-looking statement, whether as a
result of new information, future events or results or otherwise. Although
the Company believes that the assumptions inherent in the forward-looking
statements are reasonable, forward-looking statements are not guarantees of
future performance and accordingly undue reliance should not be put on such
statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond
properties in known diamond producing areas in the DRC. In June 2011, the
Company effected a change in the name of the Company from BRC DiamondCore
Ltd. to Delrand Resources Limited and a consolidation (the "Consolidation")
of the outstanding common shares of the Company on a two to one basis. The
Consolidation has been reflected retrospectively to all periods presented.
The names of the Company`s subsidiaries in the DRC and South Africa are
currently unchanged.
For the year ended December 31, 2011, the Company reported a net loss of
$123,314 (December 31, 2010: $1,507,255). The net asset value of the Company
was $4,567,793 as at December 31, 2011 (December 31, 2010: $3,865,171)
The Company`s accumulated deficit as at December 31, 2011 was $119,531,417
(December 31, 2010: $119,408,103). The Company had a working capital deficit
of $533,191 as at December 31, 2011 (December 31, 2010: $1,198,181) and had a
net decrease in cash of $38,863 during 2011 (2010: decrease of $537,564).
While the Company`s 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 doubt upon the validity of
this assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding. Management has been exploring all available options to secure
additional funding, including equity financing and strategic partnerships.
In addition, the recoverability of amounts shown for exploration and
evaluation assets is dependent upon the existence of economically recoverable
reserves, the ability of the Company to obtain financing to complete the
development of the properties where necessary, or, alternatively, upon the
Company`s ability to recover its spent costs through a disposition of its
interests, all of which are uncertain.
During 2011, the Company completed the following three transactions which
have impacted the Company`s liquidity position:
1. In April 2011, the Company sold the containerized bulk sampling plant that
had been constructed for the alluvial deposits on the Kwango River in
southern DRC. The Kwango project had previously been abandoned by the
Company, with the assets fully written down, and the related licences
relinquished when it was concluded that the project would not be economically
viable. The gross proceeds from the sale of the plant were $550,977
(US$575,000). The proceeds were a gain on sale, recognized in the statement
of comprehensive loss.
2. On May 11, 2011, the Company closed a non-brokered private placement of
3,750,000 units of the Company at a price of $0.16 per unit for proceeds to
the Company of $600,000. Each such unit was comprised of one common share of
the Company and one warrant of the Company entitling the holder to purchase
one common share of the Company at a price of $0.22 for a period of three
years.
3. On May 27, 2011, the Company closed a non-brokered private placement of
1,250,000 units of the Company at a price of $0.20 per unit for proceeds to
the Company of $250,000. Each such unit was comprised of one common share of
the Company and one warrant of the Company entitling the holder to purchase
one common share of the Company at a price of $0.22 for a period of three
years. The purchasers of the units under this financing were directors and
officers of the Company.
DRC PROJECTS
The Company`s present operations consist of the exploration and evaluation of
several mineral properties for diamonds in the DRC. During 2011, the
Company`s exploration programs in the DRC although reduced, have focused on
the Caspian permit areas in the Tshikapa area in the southern DRC and on the
Coexco and Bomili permit areas in the Bafwasende region in the northern DRC.
Northern DRC Project (46 exploration permits)
Results from the reconnaissance stream samples, which were collected over the
44 Coexco and two Delrand exploration permit areas on a spacing of one sample
to every 20 to 25 kmSquared in 2009, received from Rio Tinto`s heavy mineral
laboratory in Perth (Australia) reported 5 ilmenites, 27 chrome spinels, 1
eclogitic garnet and 15 micro-diamonds. The Coexco ground was under `force
majeur` due to security issues since 2009 but the area was cleared of any
security risks at the end of 2010 and Coexco had the `force majeur` order
lifted early in 2011. The follow-up program over the positive areas was
restricted to 16 Coexco and the 2 Delrand exploration permit areas and the
sampling program was initiated in the first quarter of 2011. In total 490 and
97 follow-up stream samples were collected on a sample density of 1 in
4.7kmSquared and 1 in 4.1kmSquared over the Coexco and Delrand permit areas
respectively. All samples were concentrated by the Company`s mechanical jig
in Kinshasa, DRC before being consigned to Rio Tinto`s heavy mineral
laboratory in Perth. The results of these follow-up samples are scheduled to
be completed during the first quarter of 2012.
The target area is dominated by almost horizontally bedded Neoproterozoic
Lindian Group sediments (shale, sandstone and conglomerate) overlying what
has been referred to as the Mbomou Craton and which is of Archaean age. The
entire area is covered by a thick and mature laterite crust masking most of
the rock formations of the area. The laterites are prone to depress the
occurrences of kimberlitic satellite minerals significantly particular such
minerals as garnet and spinel, and to a lesser degree ilmenite. Artisanal
diamond diggings were observed among others in and along the Makombe, Mopamu,
Aniede, Efule and Lobilo Rivers and its tributaries, all within the target
area. Several other isolated and sporadic diggings were seen scattered within
the project area.
Tshikapa Project (9 exploration permits)
Detailed stream sampling was conducted over the Caspian Oil & Gas exploration
permit areas (exploration permit numbers 976 and 977) during the second
quarter of 2012. The permits have been reduced by 50% as per the applicable
DRC mining law requirements and now measure 178kmSquared. In total 40 samples
were collected over the area on a density of 1 sample per 4.5kmSquared. The
screened stream samples were concentrated using the Company`s mechanical jig
in Kinshasa, DRC before being dispatched to Rio Tinto`s heavy mineral sorting
laboratory in Perth (Australia) for sorting and the positive grains for
microprobe analysis. Diamonds and kimberlitic minerals (garnet and ilmenite)
are especially visible and abundant in samples from three small drainage
basins (Matshibola, Ngombe and Kamukala), much of which are being exploited
by artisanal miners for macro diamonds. No results have been received to
date.
Security of Tenure
The exploration program in the DRC is focussed on two areas: one in the
northern DRC around Bafwasende and one in the southern part of the country
south of Tshikapa. Exploration permits have been secured in both areas and
are in good standing. Two exploration permit applications are still at CAMI
for consideration. Delrand will keep its focus on the following exploration
permits which are held by Delrand directly or by partners through various
option agreements: Acacia (6), Delrand (3), Coexco (44) and Caspian Oil & Gas
(2).
Status of Exploration Permits of BRC and Partners in the DRC as of December
31, 2011
Company (Project) PR Numbers Permits at Q4 2011
Permits KmSquared
Delrand (2 DRC North, 1174, 1175, 9083 3 1,166
1 Tshikapa)
Acacia (Tshikapa) 1175,1176,1177,1180, 6 1,055
1188, 1187
Caspian Oil & Gas 976, 977 2 178
(Tshikapa)
Coexco 6013-6016, 6018- 44 7,313
6036, 6887-6906,
6909
Total 55 9,712
Iron Ore Exploration
In May 2011, the Company announced the discovery of high grade haematite (a
form of iron ore) in its exploration areas within Province Orientale, DRC,
through its joint venture with Rio Tinto Minerals Development Limited ("Rio
Tinto"). Additional iron ore results were announced by the Company in
November 2011. The drilling results for 1,117 metres of diamond drill holes,
which are detailed below, revealed average grades from the mineralized
intercepts ranging from 62.5% to 68.5% iron. The iron ore exploration is
being funded by Rio Tinto.
Initial geological research and exploration had indicated that the
exploration permit areas, which hitherto had been largely unexplored using
modern exploration methods, were highly prospective for the discovery of iron
ore deposits. This assessment is supported by these initial drill results.
Mapping and first pass drilling has been completed on the Zatua 01 and 02
target areas with 11 diamond drill holes, one of which had to be abandoned,
totaling 1,117 meters. Seven of these holes intercepted high grade haematite
mineralization. The mineralized package was not present in the remaining
holes despite their central location.
The target areas had been selected after a regional airborne magnetic survey
had identified geophysical anomalies which subsequent ground follow up
indicated to be associated with outcropping haematite mineralization.
Mineralized intervals, where intercepted by a drill hole, range in thickness
from 37 meters to 121 meters with both friable and massive textures being
observed.
Analytical results have been received for all seven holes with values of
62.5%-68.5% for Fe; 0.56% to 4.78% for Al2O3; 0.48% to 6.36% for SiO2 and
0.040% to 0.148% for P, with the elevated high phosphorous values appearing
to be associated with recent weathering. Despite limited thicknesses in some
of the holes, the results give encouragement that high-grade haematite is
present in the area.
Rio Tinto, as the operator, intends to complete the helicopter supported
reconnaissance over the remainder of the Bomokandi permit area.
QUALIFIED PERSON AND TECHNICAL REPORT
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project is
contained in the technical report prepared by Dr. Michiel C. J. de Wit and
Fabrice Matheys, dated March 31, 2009 and titled "National Instrument 43-101
Technical Report on the Tshikapa Project of BRC DiamondCore Ltd. in the
Democratic Republic of the Congo". A copy of this report can be obtained
from SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
The Company transitioned to IFRS during fiscal 2011 and restated fiscal 2010
to comply with IFRS. Details of this transition are in the "New
Pronouncements Adopted" section below.
For the year ended December 31, 2011, the Company reported a net loss of
$123,314 ($0.00 per share), compared to a net loss of $1,507,255 (or loss of
$0.03 per share) incurred during the year ended December 31, 2010. The
decrease in losses was a result of a decrease in consulting and professional
fees of $138,973, a decrease in share-based payment expense of $29,333 and a
foreign exchange gain of $8,323 (December 31, 2010: foreign exchange loss of
$3,356).
Additional reasons for the significant decrease in the loss in 2011 as
compared to 2010 were the following: a 2010 bad debt expense of $105,009
which was due to the write off of a receivable for the rental of the Kwango
plant; the impairment in 2010 of the Lubao and Candore projects that were
discontinued during 2010 for $740,975; and a gain in 2011 due to a disposal
of property plant and equipment of $430,085.
SELECTED ANNUAL INFORMATION
The following financial data is derived from the Company`s consolidated
financial statements for each of the three most recently completed financial
years. Fiscal years 2011 and 2010 have been prepared in accordance with IFRS
as issued by the International Accounting Standards Board ("IASB"). Fiscal
2009 information has not been restated to conform to IFRS and is presented in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). The Company`s reporting and measurement currency is the Canadian
dollar.
2011 2010 2009
Net loss $123,314 $1,507,255 $8,951,614
(1)
Net loss per share $0.00 $0.03 $0.27
Mineral properties - - $5,808,835
and deferred
exploration and
expenditures
Exploration and $5,121,4 $5,075,041 -
evaluation 86
Total assets $5,274,0 $5,227,785 $6,778,299
41
(1) This figure includes the loss from discontinued operations of $7,296,948
relating to the disposal by the Company of Diamond Core Resources (Pty)
Ltd ("Diamond Core"), which was the holding company for the Company`s
former South African operations. The net loss from continuing
operations for 2009 was $1,654,666, and the net loss per share from
continuing operations for 2009 was $0.05.
The Company`s net loss for 2011 was $1,383,941 lower than the loss recorded
in 2010. In 2011 the Company had a gain on disposal of property plant and
equipment for $430,085 and in 2010 the Company had an impairment of
exploration and evaluation assets of $740,975. The Company`s net loss for
2010 was significantly less than the loss recorded in 2009. In 2009, the
Diamond Core operations were sold and a loss from discontinued operations of
$7,296,948 was recorded.
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 fourth
quarter of 2011. The Company`s reporting and measurement currency is the
Canadian dollar. The financial information is reported in accordance with
IFRS.
2011 2011 2011 2011
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net income $293 $(69) $(169) $(178)
(loss) ($`000)
Net loss per 0.00 0.00 0.00 0.00
share (basic and
diluted)
2010 2010 2010 2010
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net loss ($`000) $(920) $(260) $(99) $(228)
Net loss per $0.01 $0.01 $0.00 $0.01
share (basic and
diluted)
During the fourth quarter of 2011, the Company recorded net income of
$293,117 compared to a net loss in the third quarter of 2011 of $69,212. The
income in the fourth quarter of 2011 was due to a gain on disposal of
property, plant and equipment of $430,085.
During the third quarter of 2011, the Company`s net loss decreased to $69,212
compared to a net loss in the second quarter of 2011 of $169,444. The lower
loss in the third quarter of 2011 was due to decreased consulting and
professional fees as well as a foreign exchange gain of $10,478 in the third
quarter (as compared to the $2,756 gain that occurred in the second quarter).
During the second quarter of 2011, the Company`s net loss decreased to
$169,444 compared to a net loss in the first quarter of $177,775. The lower
loss in the second quarter of 2011 was due to decreased consulting and
professional fees as well as a foreign exchange loss of $2,243 in the first
quarter (as compared to the $2,756 gain that occurred in the second quarter).
During the first quarter of 2011, the Company`s net loss decreased to
$177,775 compared to a net loss in the fourth quarter of 2010 of $920,280.
The greater loss in the fourth quarter of 2010 was due to an impairment loss
of $740,975 related to the discontinuation of the Lubao and Candore projects
as well as a write off of a receivable for rental of the Kwango plant in the
amount of $105,009.
During the fourth quarter of 2010, the Company`s net loss increased to
$920,280 compared to a net loss of $260,133 in the third quarter of 2010.
This increase was primarily due to an impairment loss related to the
discontinuation of the Lubao and Candore projects of $740,975.
During the third quarter of 2010, the Company`s net loss increased to
$260,133 compared to a net loss of $98,794 in the second quarter of 2010.
This increase was primarily due to an increase in professional fees which
related to the Diamond Core liquidation proceedings in South Africa. General
and administrative costs also increased in the third quarter of 2010 as a
result of fees relating to the Company`s secondary listing on the JSE Limited
in South Africa.
During the second quarter of 2010, the Company`s net loss decreased to
$98,794 compared to a net loss of $227,831 in the first quarter of 2010. Net
loss recorded during the first quarter of 2010 was significantly impacted by
the recognition of stock based compensation expense of $73,116 compared to
$nil recorded during the second quarter of 2010. General and administrative
costs were also lower in the second quarter of 2010 as compared to the first
quarter of 2010.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2011, the Company had cash of $88,068 and a working
capital deficit of $533,191 compared to cash of $126,931 and a working
capital deficit of $1,198,181 as at December 31, 2010.
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.
Rio Tinto is currently funding the exploration at the Company`s diamond
projects in the DRC and the exploration at the DRC iron ore project.
During the second quarter of 2011, the Company completed the following two
financing transactions which positively impacted the Company`s liquidity
position:
1. On May 11, 2011, the Company closed a non-brokered private placement of
3,750,000 units of the Company at a price of $0.16 per unit for proceeds to
the Company of $600,000. Each such unit was comprised of one common share of
the Company and one warrant of the Company entitling the holder to purchase
one common share of the Company at a price of $0.22 for a period of three
years.
2. On May 27, 2011, the Company closed a non-brokered private placement of
1,250,000 units of the Company at a price of $0.20 per unit for proceeds to
the Company of $250,000. Each such unit was comprised of one common share of
the Company and one warrant of the Company entitling the holder to purchase
one common share of the Company at a price of $0.22 for a period of three
years. The purchasers of the units under this financing were directors and
officers of the Company.
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 order to fund its corporate overhead. In light of current
conditions, the Company has continued a series of measures to bring its
spending in line with the projected cash flows from its operations in order
to preserve its financial position and maintain its liquidity position.
Management 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 audited consolidated financial statements of the
Company as at and for the year ended December 31, 2011 have been prepared in
accordance with IFRS applicable to a going concern.
As at December 31, 2011 and December 31, 2010, there were no contractual
obligations (that are not on the statement of financial position) entered
into by the Company.
The Company has an option agreement to secure an equity interest in
prospective ground held in six exploration permits in the DRC with ACACIA
sprl, which has advised the Company of its wish to modify the option
agreement. The Company continues its discussions with ACACIA sprl and
believes it can reach an agreement that is satisfactory to both parties.
The Company is in a dispute with two of its previous directors and officers.
One of these individuals had applied in 2008 for a summary judgment against
the Company in the Witwatersrand Local Division of the High Court of South
Africa in respect of a dispute relating to a settlement agreement pertaining
to his departure. The application for summary judgment was dismissed and the
Company was granted leave to defend the claim. This individual has not taken
further steps to progress that matter. However, in October 2010, almost two
years after the original claim, the same former director and officer
instituted fresh proceedings against the Company. He has repeated the claim
made previously, but this time in a summons lodged before the North Gauteng
High Court in South Africa. This former director and officer is claiming
that he is owed payment of 1.2 million South African rand plus interest. The
trial date for this matter has been set down for September 10, 2012. The
other individual has referred two disputes to the Commission for Conciliation
Mediation and Arbitration in Johannesburg, South Africa and an action to the
High Court in that same jurisdiction. He elected to withdraw an application
for summary judgment. The Company is defending these actions.
EXPLORATION AND EVALUATION EXPENDITURES
The following table provides a breakdown of the Company`s exploration and
evaluation expenditures in the DRC for the year ended December 31, 2011:
Tshikapa Northern Total
DRC
Balance 12/31/2010 $ $ $
2,590,956 2,484,085 5,075,041
Opening balance
adjustments
IFRS adjustment - Jan
1, 2010 8,960 8,960 17,920
IFRS adjustment - Dec (17,920)
31, 2010 (8,960) (8,960)
Net Adjustments
- - -
Operating expenses
Funds Received from (367,256) (367,256)
Rio Tinto -
Admin and office 291,595
support 23,761 267,834
Amortization 2,050 2,051 4,101
37,726
Field camps 6,054 43,780
expenses
-
Geology 445 445
Professional fees 3,461 9,286 12,747
54,734
Travel 5,597 49,137
62,897
Permits and surface 22,534 85,431
taxes
Foreign exchange 4,926 4,926 9,852
-
Gain on sale of asset (88,984) (88,984)
Total Operating
Expenses 19,762 26,683 46,445
Balance December 31,
2011 2,610,718 2,510,768 5,121,486
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number
of common shares. As at March 30, 2012, the Company had outstanding
49,704,341 common shares, stock options to purchase an aggregate of 1,061,771
common shares of the Company and warrants to purchase an aggregate of
15,000,000 common shares of the Company.
RELATED PARTY TRANSACTIONS
Key Management Remuneration
The Company`s related parties include key management. Key management
includes directors (executive and non-executive), the President and the Vice
President, Finance. The remuneration of the key management of the Company as
defined above, during the years ended December 31, 2011 and 2010 was as
follows:
Years ended
December 31, December 31,
2011 2010
Salaries $ 270,310 $ 301,907
Other Related Parties
During the year ended, December 31 2011, legal expenses of $31,697 (year
ended December 31, 2010: $98,017), incurred in connection with general
corporate matters, were paid to a law firm of which a director and officer of
the Company was a partner until February 2011. As at December 31, 2011,
$56,338 (December 31, 2010 - $90,778) owing to this legal firm was included
in accounts payable.
As at December 31, 2011, an amount of $133,333 was owed to two directors of
the Company representing consulting fees (December 31, 2010: $102,311).
During the year ended December 31, 2011, consulting fees of $200,000 were
incurred to the two directors (year ended December 31, 2010: $200,000 to the
two directors).
As at December 31, 2011, an amount of $11,313 (December 31, 2010: $3,719) was
owed to Banro Corporation ("Banro"). Banro owns 17,716,994 common shares of
the Company, representing a 35.64% interest in the Company. During the year
ended December 31, 2010, a drill rig was sold to Banro by the Company for
gross proceeds of $154,964.
On May 27, 2011 the Company closed a non-brokered private placement of
1,250,000 units of the Company at a price of $0.20 per unit for proceeds of
$250,000. The purchasers of the units under this private placement were
directors and officers of the Company (see "Liquidity and Resources" above).
All amounts due to related parties are unsecured, non-interest bearing and
due on demand. All transactions are in the normal course of operations and
are measured at the exchange value.
NEW PRONOUNCEMENTS ADOPTED
The year ended December 31, 2011 was the Company`s first annual reporting
period under IFRS. Accounting standards effective for periods beginning on
January 1, 2011 have been adopted as part of the transition to IFRS.
Transition to IFRS
IFRS 1, First Time Adoption of IFRS, requires that comparative financial
information be provided. As a result, the first date at which the Company
has applied IFRS was January 1, 2010. IFRS 1 requires first-time adopters to
retrospectively apply all effective IFRS standards as of the reporting date,
which for the Company will be December 31, 2011. However, it also provides
for certain optional exemptions and certain mandatory exceptions for first-
time IFRS adoption. Prior to transition to IFRS, the Company prepared its
financial statement in accordance with Part V of the Canadian GAAP.
In preparing the Company`s opening IFRS consolidated statements of financial
position, the Company has adjusted amounts reported previously in the
financial statements prepared in accordance with previous Canadian GAAP. The
IFRS 1 applicable exemptions and exceptions applied in the conversion from
Canadian GAAP to IFRS are as follows:
i) Share-based payment transactions
The Company has elected not to retrospectively apply IFRS 2, Share based
payments ("IFRS 2") to equity instruments that were granted and that
vest before the transition date. As a result of applying this exemption,
the Company has applied the provision of IFRS 2 retrospectively to all
outstanding equity instruments that were unvested as of to the date of
transition to IFRS.
ii) Deemed Cost of Exploration and Evaluation Assets
The Company has elected to measure its exploration and evaluation assets
at the date of transition to IFRS at the amount determined under
Canadian GAAP. Per IFRS 1, the Company has tested these assets for
impairment at the date of transition to IFRS in accordance with IFRS 6.
iii) Estimates
The estimates previously made by the Company under Canadian GAAP were
not revised for the application of IFRS except where necessary to
reflect any difference in accounting policy or where there was objective
evidence that those estimates were in error. As a result, the Company
has not used hindsight to create or revise estimates.
IFRS employs a conceptual framework that is similar to Canadian GAAP.
However significant differences exist in certain matters of recognition,
measurement and disclosure. While the adoption has not changed the Company`s
actual cash flows, it has resulted in changes to the Company`s consolidated
statement of financial position and statement of comprehensive loss. The
statement of comprehensive loss has been changed to comply with IAS 1
Presentation of Financial Statements. The Canadian GAAP consolidated balance
sheets as at January 1, 2010 and December 31, 2010, the consolidated
statements of operations and comprehensive loss for the year ended December
31, 2010 as well as the consolidated statement of cash flows for the year
ended December 30, 2010 have been reconciled to IFRS, with a summary of the
most significant changes in policy as follows:
Share-Based Payments
Under IFRS 2 Share-Based Payments, each tranche of an award with different
graded vesting is accounted for as a separate award and the resulting fair
value is amortized over the vesting period of each tranche. Under Canadian
GAAP, the Company was accounting for these as a single award. In addition,
under IFRS 2, 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 subsequent periods. Under
Canadian GAAP, forfeitures were recognized as they occurred
FUTURE ACCOUNTING STANDARDS
The Company has reviewed new and revised accounting pronouncements that have
been issued but are not yet effective and determined that the following may
have an impact on the Company:
IFRS 9 Financial instruments ("IFRS 9") was issued by the IASB on November
12, 2009 and will replace IAS 39 Financial Instruments: Recognition and
Measurement ("IAS 39"). IFRS 9 replaces the multiple rules in IAS 39 with a
single approach to determine whether a financial asset is measured at
amortized cost or fair value and a new mixed measurement model for debt
instruments having only two categories: amortized cost and fair value. 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. 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, 2013. The Company is currently evaluating the impact of IFRS
9 on its consolidated financial statements.
IFRS 10 Consolidated Financial Statements ("IFRS 10") establishes principles
for the presentation and preparation of consolidated financial statements
when an entity controls one or more other entities. IFRS 10 supersedes IAS 27
"Consolidated and Separate Financial Statements" and SIC-12 "Consolidated -
Special Purpose Entities" and is effective for annual periods beginning on or
after January 1, 2013. Earlier application is permitted. The Company is
currently evaluating the impact of this standard on its consolidated
financial statements.
IFRS 11 Joint Arrangements ("IFRS 11") establishes principles for financial
reporting by parties to a joint arrangement. IFRS 11 supersedes the current
IAS 31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities
- Non-Monetary Contributions by Venturers" and is effective for annual
periods beginning on or after January 1, 2013. Earlier application is
permitted. The Company is currently evaluating the impact of this standard on
its consolidated financial statements.
IFRS 12 Disclosure of Interests in Other Entities ("IFRS 12") applies to
entities that have an interest in a subsidiary, a joint arrangement, an
associate or an unconsolidated structured entity. IFRS 12 is effective for
annual periods beginning on or after January 1, 2013. Earlier application is
permitted. The Company is currently evaluating the impact of this standard on
its consolidated financial statements.
IFRS 13 Fair Value Measurements ("IFRS 13") defines fair value, sets out in a
single IFRS framework for measuring fair value and requires disclosures about
fair value measurements. IFRS 13 applies to IFRSs that require or permit fair
value measurements or disclosures about fair value measurements (and
measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except in specified circumstances.
IFRS 13 is to be applied for annual periods beginning on or after January 1,
2013. Earlier application is permitted. The Company is currently evaluating
the impact of this standard on its consolidated financial statements.
An amendment to IAS 1, Presentation of financial statements was issued by the
IASB in June 2011. The amendment requires separate presentation for items of
other comprehensive income that would be reclassified to profit or loss in
the future, such as foreign currency differences on disposal of a foreign
operation, if certain conditions are met from those that would never be
reclassified to profit or loss. The effective date is July 1, 2012 and
earlier adoption is permitted. The Company is currently evaluating the impact
of this amendment on its consolidated financial statements.
An amendment to IAS 12, Income Taxes ("IAS 12") was issued by the IASB in
June 2011. The amendment requires that deferred tax on non-depreciable assets
should always be measured on a sale basis. The amendments to IAS 12 are
effective for annual periods beginning on or after January 1, 2012. The
Company is currently evaluating the impact of the amendments on its
consolidated financial statements.
IAS 19, Employee Benefits ("IAS 19") was re-issued by the IASB in June 2011.
IAS continues to prescribe the accounting for employee benefits, but
amendments make the OCI presentation changes in respect of pensions (and
similar items) only, but all other long term benefits are required to be
measured in the same way even though changes in the recognised amount are
fully reflected in profit or loss. Also changed in IAS 19 is the treatment
for termination benefits, specifically the point in time when an entity would
recognise a liability for termination benefits. The amendments to IAS 19 are
effective for annual periods beginning on or after January 1, 2013. The
Company is currently evaluating the impact of the amendments on its
consolidated financial statements.
IAS 27, Separate financial statements ("IAS 27") was re-issued by the IASB in
May 2011 to only prescribe the accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. The consolidation guidance will now
be included in IFRS 10. The amendments to IAS 27 are effective for annual
periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of the amendments on its consolidated financial
statements.
IAS 28, Investments in associates and joint ventures ("IAS 28") was re-issued
by the IASB in May 2011. IAS 28 continues to prescribe the accounting for
investments in associates, but is now the only source of guidance describing
the application of the equity method. The amended IAS 28 will be applied by
all entities that have an ownership interest with joint control of, or
significant influence over, an investee. The amendments to IAS 28 are
effective for annual periods beginning on or after January 1, 2013. The
Company is currently evaluating the impact of the amendments on its
consolidated financial statements.
IFRIC 20, Stripping costs in the production phase of a surface mine ("IFRIC
20") was issued by the IASB in October 2011 clarifying the requirements for
accounting for stripping costs in the production phase of a surface mine. The
interpretation is effective for annual periods beginning on or after January
1, 2013. The Company is currently evaluating the impact of the interpretation
on its consolidated financial statements.
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 included 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 expenditure
The application of the Company`s accounting policy for exploration and
evaluation expenditure 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 expenditure
is capitalized, information becomes available suggesting that the recovery of
expenditure is unlikely, the amount capitalized is written off in the
statement of comprehensive income (loss) during the period the new
information becomes available.
Impairment
Assets, including property, plant and equipment and exploration and
evaluation assets, are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts exceed their recoverable
amounts. The assessment of the fair value often requires estimates and
assumptions such as discount rates, exchange rates, commodity prices,
rehabilitation and restoration costs, future capital requirements and future
operating performance. Changes in such estimates could impact recoverable
values of these assets. Estimates are reviewed regularly by management.
Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees
by reference to the 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 stock option, volatility and dividend yield and making
assumptions about them.
The 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 subsequent periods.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not,
by its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by
another party carrying out further exploration. There is no assurance that
such sources of financing will be available on acceptable terms, if at all.
In the event that commercial quantities of minerals are found on the
Company`s properties, the Company does not have the financial resources at
this time to bring a mine into production.
The current financial climate is characterized by volatile and uncertain
times. The uncertainty of forward looking statements is therefore greater.
Diamond prices were reduced significantly as a result of the economic
downturn and the recovery could be accompanied by volatility.
All of the Company`s projects are located in the DRC The assets and
operations of the Company are therefore subject to various political,
economic and other uncertainties, including, among other things, the risks of
war and civil unrest, hostage taking, military repression, labor unrest,
illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts,
taxation policies, foreign exchange and repatriation restrictions, changing
political conditions, international monetary fluctuations, currency controls
and foreign governmental regulations that favor or require the awarding of
contracts to local contractors or require foreign contractors to employ
citizens of, or purchase supplies from, a particular jurisdiction. Changes,
if any, in mining or investment policies or shifts in political attitude in
the DRC may adversely affect the Company`s operations. Operations may be
affected in varying degrees by government regulations with respect to, but
not limited to, restrictions on production, price controls, export controls,
currency remittance, income taxes, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use
and mine safety. Failure to comply strictly with applicable laws,
regulations and local practices relating to mineral rights could result in
loss, reduction or expropriation of entitlements. In addition, in the event
of a dispute arising from operations in the DRC, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in Canada. The
Company also may be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of
sovereign immunity. It is not possible for the Company to accurately predict
such developments or changes in laws or policy or to what extent any such
developments or changes may have a material adverse effect on the Company`s
operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in
a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one
based on more democratic principles. There can be no assurance that these
changes will be effected or that the achievement of these objectives will not
have material adverse consequences for the Company and its operations. The
DRC continues to experience violence and significant instability in parts of
the country due to certain militia and criminal elements. While the
government and United Nations forces are working to support the extension of
central government authority throughout the country, there can be no
assurance that such efforts will be successful.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations. The
exploration and development of mineral deposits involve significant financial
risks over a significant period of time which even a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which
are explored are ultimately developed into producing mines. Major
expenditures may be required to establish reserves by drilling and to
construct mining and processing facilities at a site. It is impossible to
ensure that the Company`s exploration programs will result in a profitable
commercial mining operation.
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Unfavorable changes in the applicable
exchange rate may result in a decrease or increase in foreign exchange gains
or losses. The Company does not use derivative instruments to reduce its
exposure to foreign currency risk.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally
incident to mineral exploration and development, any of which could result in
damage to life or property, environmental damage and possible legal liability
for any or all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
FINANCIAL 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, accounts payable and accrued liabilities
and notes payable 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.
The following presents the fair value and carrying value of the Company`s
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 (unobservable inputs).
There were no transfers between Level 1 and 2 during the reporting period.
The fair values of financial assets and liabilities carried at amortized cost
are approximated by their carrying values. Cash is ranked Level 1 as the
market value is readily observable. The carrying value of cash approximates
fair value as maturities are less than three months. Notes payable 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.
The Company`s Board of Directors has overall responsibility for the
establishment and oversight of the Company`s risk management framework.
Although the Company has the ability to address its price-related exposures
through the use of options, futures and forward contacts, it does not
generally enter into such arrangements.
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. Significant foreign exchange gains or losses are reflected as a
separate component of the consolidated statement of comprehensive loss. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk. See Note 14 (c) of the Annual 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, existing
credit facilities 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
liquidity position.
f) Mineral Property Risk
The Company`s operations 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. The Company
manages the market risk associated with commodity prices by establishing and
monitoring parameters that limit the types and degree of market risk that may
be undertaken.
h) 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) Title risk
Title to mineral properties involves certain inherent risks due to the
difficulties of determining the validity of certain claims as well as the
potential for problems arising from the frequently ambiguous conveyancing
history characteristic of many mining properties. Although the Company has
investigated title to all of its mineral properties for which it holds
concessions or other mineral licenses, the Company cannot give any assurance
that title to such properties will not be challenged or impugned and cannot
be certain that it will have valid title to its mineral properties. The
Company relies on title opinions by legal counsel who base such opinions on
the laws of countries in which the Company operates.
j) Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely affected by uncertain political or
economic environments, war, civil or other disturbances, a changing fiscal
regime and by DRC`s underdeveloped industrial and economic infrastructure.
The Company`s operations 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 mine safety.
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not
result in a change in the policies of the DRC government or the imposition of
more stringent foreign investment restrictions. Such changes cannot be
accurately predicted.
k) Capital Management
The Company manages its cash, common shares, warrants and stock options as
capital. The Company`s main objectives when managing its capital are:
* to maintain a flexible capital structure which optimizes the cost
of capital at an acceptable level of risk while providing an
appropriate return to its shareholders;
* to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development of
the business;
* to safeguard the Company`s ability to obtain financing; and
* to maintain financial flexibility in order to have access to
capital in the event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes
in economic conditions and the risk characteristics of the underlying assets.
There were no significant changes to the Company`s approach to capital
management during the year ended December 31, 2011.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
December 31, December 31, January 1, 2010
2011 2010
Cash $ 88,068 $ 126,931 $ 664,495
Share $115,939,566 $ 115,457,876 $ 115,457,876
capital
Deficit $(119,408,103) $(117,900,848)
$(119,531,417)
Contributed $ 8,159,644 $ 7,815,398 $ 7,777,105
surplus
SEGMENTED INFORMATION
The Company has one operating segment: the acquisition, exploration and
development of mineral properties located in the DRC. The operations of the
Company are located in two geographic locations, Canada and the DRC.
Geographic segmentation of non-current assets is as follows:
December 31,
2011
Property, plant Exploration and Total Assets
and equipment evaluation
DRC $0 $5,121,486 $5,121,486
Canada - - -
$0 $5,121,486 $5,121,486
December 31,
2010
Property, plant Exploration and Total Assets
and equipment evaluation
DRC $4,100 $5,075,041 $5,079,141
Canada - - -
$4,100 $5,075,041 $5,079,141
January 1,
2010
Property, plant Exploration and Total Assets
and equipment evaluation
DRC $141,794 $5,826,755 $5,968,549
Canada - - -
$141,794 $5,826,755 $5,968,549
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 President and Vice President, Finance, on
a timely basis so that appropriate decisions can be made regarding public
disclosure. As at December 31, 2011, the Company`s President 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 President and Vice President, Finance have concluded that, as
of December 31, 2011, the Company`s disclosure controls and procedures were
effective. No material weaknesses have been identified.
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 December
31, 2011, the Company`s President 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 President and Vice President,
Finance have concluded that, as of December 31, 2011, the Company`s internal
control over financial reporting was effective. No material weaknesses have
been identified.
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
December 31, 2011, 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
fraud.
Sponsor
Arcay Moela Sponsors (Proprietary) Limited
08 May 2012
Date: 08/05/2012 17:08:00 Supplied by www.sharenet.co.za
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