Wrap Text
Unaudited interim results
Forbes & Manhattan Coal Corp.
(Registration number: 002116278)
(External company registration number: 2011/011661/10)
Share code on the Toronto Stock Exchange: FMC
Share code on the JSE Limited: FMC
ISIN: CA3451171050
(“Forbes Coal” or “the Company”)
UNAUDITED CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Consolidated Statements of Financial Position
for the three and nine months ended November 30, 2012 and 2011
(Unaudited)
(presented in Canadian dollars)
Notes November 30, 2012 February 29, 2012
ASSETS
Current
Cash $ 3,729,429 $ 9,481,078
Restricted cash 50,000 1,984,890
Accounts and other receivables 6,481,516 12,920,590
Inventories 8 6,919,684 3,443,691
Prepaid expenses 139,728 95,613
17,320,357 27,925,862
Property, plant and equipment 9 67,206,022 81,956,437
Intangibles 10 4,483,622 5,414,498
Goodwill 11 14,877,213 17,506,375
Other assets 12 4,426,737 6,958,321
Long-term restricted cash 1,386,320 -
Long-term prepaid expenses 592,038 463,033
Deferred income taxes 1,107,080 326,754
Deposit on proposed acquisition 22 5,086,900 -
Prepaid financing costs 22 1,887,657 -
$ 118,373,946 $ 140,551,280
LIABILITIES
Current
Accounts payable and accrued liabilities 13,20 $ 11,855,313 $ 9,233,830
Other financial liabilities 14 7,180,617 3,896,001
Asset retirement obligations 15 891,898 1,053,845
Loans payable 20 24,014 27,749
19,951,842 14,211,425
Other financial liabilities 14 15,517,991 20,030,702
Asset retirement obligations 15 1,798,831 1,981,829
Deferred income taxes 10,129,292 14,312,877
47,397,956 50,536,833
SHAREHOLDERS' EQUITY
Issued capital 17 98,519,647 98,792,926
Reserves 18 8,516,930 11,208,323
Deficit (18,610,112) (14,519,284)
Currency translation reserve (18,089,487) (6,106,530)
Equity attributable to the owners of the Company 70,336,978 89,375,435
Non-controlling interest 639,012 639,012
70,975,990 90,014,447
$ 118,373,946 $ 140,551,280
Commitments and contingencies 1, 21
Subsequent events 23
APPROVED ON BEHALF OF THE BOARD:
Signed “Stephan Theron”, Director
Signed “Bernie Wilson” , Director
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(presented in Canadian dollars)
For the three months ended For the nine months ended
Notes
November 30, 2012 November 30, 2011 November 30, 2012 November 30, 2011
REVENUE $ 10,831,529 $ 31,152,094 $ 55,021,998 $ 86,002,829
COST OF SALES
Operating expenses 11,133,620 20,459,454 45,615,100 57,052,413
Amortization and depletion 1,992,563 3,907,206 7,538,013 12,355,399
Stock based compensation 18 - - - 223,000
13,126,183 24,366,660 53,153,113 69,630,812
Gross profit (2,294,654) 6,785,434 1,868,885 16,372,017
EXPENSES
Consulting and professional fees 20 1,908,775 817,472 3,377,919 3,846,055
General and administration 20 1,248,314 1,776,995 4,458,659 4,335,338
Stock based compensation 18 6,447 64,739 35,229 1,773,489
Mineral properties investigation costs 1,629 189,606 16,052 189,606
3,165,165 2,848,812 7,887,859 10,144,488
Net (loss) income before other items (5,459,819) 3,936,622 (6,018,974) 6,227,529
OTHER ITEMS
Other income 213,998 325,195 702,792 356,432
Business combination transaction costs (272,893) (2,605) (272,893) (24,223)
Accretion - (474,497) - (1,539,940)
Change in estimates on contingent acquisition liability - (119,729) - (119,729)
Interest (expense) 7 (587,882) (306,506) (1,577,353) (827,354)
Foreign exchange (loss) gain (128) 1,203,117 (2,383) 1,130,957
Unrealized (loss) gain on marked-to-market securities (26,786) 53,571 (512,277) 53,571
Loss on share-based payments pursuant to BEE transaction - (1,488,132) - (1,488,132)
NET (LOSS) INCOME before income tax (6,133,510) 3,127,036 (7,681,088) 3,769,111
Income and other tax expense 1,161,041 395,627 892,999 (2,672,059)
NET (LOSS) INCOME for the period (4,972,469) 3,522,663 (6,788,089) 1,097,052
Other comprehensive loss items
Unrealized (loss) on foreign currency translation (3,302,740) (9,254,968) (11,982,957) (9,437,447)
COMPREHENSIVE (LOSS) for the period $ (8,275,209) $ (5,732,305) $ (18,771,046) $ (8,340,395)
Net (loss) income per share - basic and diluted (0.14) 0.10 (0.19) 0.03
Headline earnings per share - basic and diluted (0.14) 0.10 (0.19) 0.03
Weighted average number:
of common shares outstanding-basic 34,836,922 34,865,717 34,856,189 34,856,990
of common shares outstanding-diluted 34,836,922 34,865,717 34,856,189 34,895,610
Consolidated Statements of Cash Flows
(Unaudited)
(Presented in Canadian Dollars)
For the three months ended For the nine months ended
November 30, 2012 November 30, 2011 November 30, 2012 November 30, 2011
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net (loss) income for the period $ (4,972,469) $ 3,522,663 $ (6,788,089) $ 1,097,052
Adjustments:
Amortization and depletion 1,992,563 3,907,206 7,538,013 12,355,399
Fair value adjustment on financial assets (139,501) (162,761) (470,601) (142,605)
Deferred income taxes (1,012,381) (1,977,140) (1,767,566) (2,007,343)
Accretion 87,506 480,412 132,007 1,600,216
Change in estimates - 119,729 - 119,729
Unrealized foreign exchange (gain) 68,959) (1,463,573) (69,365) (1,491,123)
Unrealized loss on marked-to-market securities 26,785 ( 53,571) 512,276 (53,571)
Stock based compensation 6,447 64,739 35,229 1,996,489
(4,080,009) 4,437,704 (878,096) 13,474,243
Net change in non-cash working capital 2,280,473 735,819 2,970,207 6,530,842
(1,799,536) 5,173,523 2,092,111 20,005,085
INVESTING ACTIVITIES
Deposit on proposed acquisition (5,524,418) - (5,524,418) -
Prepaid financing costs (2,039,394) - ( 2,039,394) -
Changes in accounts payable attributable to prepaid financing costs 1,915,941 - 1,915,941 -
Long-term prepaid expenses (30,734) (500,216) (275,293) (500,216)
Additions to property, plant and equipment (1,771,507) (13,486,032) (5,636,308) (17,454,185)
Additional recovery from (contribution to) endowment policy 970,802 (371,342) 1,444,542 (1,017,958)
Restricted cash (1,247,354) (12,270) 296,850 (356,090)
(7,726,664) (14,369,860) (9,818,080) (19,328,449)
FINANCING ACTIVITIES
Change in accounts payable attributable to share issue costs - - - 351,673
Shares issued for cash - - - 5,460,000
Share issue costs - - - (691,618)
Other financial liabilities (1,483,454) 583,729 2,812,719 (5,358,766)
Payments to BEE partners 1,477 - (59,275) -
Repurchase of shares under NCIB (243,365) - (243,365) -
(1,725,342) 583,729 2,510,079 (238,711)
Effect of exchange rate change on cash 347,306 ( 261,793) (535,759) (346,136)
CHANGE IN CASH (11,251,542) (8,612,608) (5,215,890) 437,925
CASH, beginning of the period 14,633,665 24,218,841 9,481,078 15,252,651
CASH, end of the period $ 3,729,429 $ 15,344,440 $ 3,729,429 $ 15,344,440
SUPPLEMENTAL INFORMATION
Interest (expense) $ (587,882) $ (306,506) $ (1,577,353) $ (827,354)
Income and other taxes received (paid) $ 19,106 $ (545,687) $ (766,905) $ (3,334,037)
Consolidated Statements of Changes in Equity
(Unaudited)
(Presented in Canadian dollars)
Number of Reserves Currency
Issued Shareholders'
shares Deficit translation
capital Warrant Option BEE option Treasury equity
issued reserve
reserve reserve reserve shares
Balance as at February 28, 2011 33,665,717 $ 93,672,871 $ 2,149,853 $ 6,263,430 $ - $ - $ (17,434,614) $ (535,198) $ 84,116,342
Shares issued on public offering 1,200,000 5,120,055 - - - - - - 5,120,055
Stock-based compensation - - - 1,996,489 - - - - 1,996,489
Stock options expired - - - (897,050) - - 897,050 - -
Settlement of BEE option - - - - 1,245,529 - (287,012) - 958,517
Other comprehensive loss for the nine months ended
November 30, 2011 - - - - - - - (9,437,447) (9,437,447)
Net income for the nine months ended
November 30, 2011 - - - - - - 1,097,052 - 1,097,052
Balance as at November 30, 2011 34,865,717 $ 98,792,926 $ 2,149,853 $ 7,362,869 $ 1,245,529 $ - $ (15,727,524) $ (9,972,645) $ 83,851,008
Shares issued on public offering - - - - - - - - -
Stock-based compensation - - - 589,266 - - - - 589,266
Stock options expired - - - (139,194) - - 139,194 - -
Dividends declared to BEE partners - - - - - - (123,849) - (123,849)
Other comprehensive income for the period ended
February 29, 2012 - - - - - - - 3,866,115 3,866,115
Net income for the period ended
February 29, 2012 - - - - - - 1,192,895 - 1,192,895
Balance as at February 29, 2012 34,865,717 $ 98,792,926 $ 2,149,853 $ 7,812,941 $ 1,245,529 $ - $ (14,519,284) $ (6,106,530) $ 89,375,435
Repurchase of shares - - - - - (243,365) - - (243,365)
Cancellation of repurchased shares (90,356) (273,279) - - - 61,672 211,607 - -
Stock-based compensation - - - 35,229 - - - - 35,229
Stock options expired - - - (1,551,876) - - 1,551,876 - -
Broker warrants expired - - (993,053) - - - 993,053 - -
Dividends declared to BEE partners - - - - - - (59,275) - (59,275)
Other comprehensive loss for the nine months ended
November 30, 2012 - - - - - - - 11,982,957) (11,982,957)
Net loss for the nine months ended
November 30, 2012 - - - - - - (6,788,089) - (6,788,089)
Balance as at November 30, 2012 34,775,361 $ 98,519,647 $ 1,156,800 $ 6,296,294 $ 1,245,529 $(181,693) $ (18,610,112) $ (18,089,487) $ 70,336,978
Notes to the Condensed Interim Consolidated Financial Statements
November 30, 2012 and 2011
(Unaudited)
(Presented in Canadian dollars)
1)NATURE OF OPERATIONS AND GOING CONCERN
Forbes & Manhattan Coal Corp. (individually, or collectively with its subsidiaries, as applicable, “Forbes Coal” or the "Company") is a coal
mining company. The Company is listed on the Toronto Stock Exchange (“TSX”) and the Johannesburg Stock Exchange (“JSE”). The
Company’s head office is located at 65 Queen Street West, Suite 815, Toronto, Ontario, Canada. These consolidated financial statements
were approved and authorized for issue by the Board of Directors on January 11, 2012.
In July 2010, the Company completed an agreement to acquire Forbes Coal (Pty) Ltd. (formerly known as Slater Coal (Pty) Ltd.) (“Forbes
Coal Dundee”), a South African company, and its interest in its coal mines in South Africa (“Forbes Coal Dundee Properties”). The Forbes
Coal Dundee Properties comprise the operating Magdalena bituminous mine (the "Magdalena Property") and the Aviemore anthracite
mine (the "Aviemore Property"). Forbes Coal Dundee is engaged in open-pit and underground coal mining.
Forbes Coal Dundee indirectly holds a 70% interest in the Forbes Coal Dundee Properties through its 70% interest in Zinoju Coal (Pty) Ltd.
(“Zinoju”) which holds all of the mineral rights and prospecting permits with respect to the Forbes Coal Dundee Properties. The remaining
30% interest in Zinoju Coal (Pty) Ltd. is held by the South African Black Economic Empowerment ("BEE") partners. BEE is a statutory
initiative on behalf of the South African government, enacted to increase access by historically disadvantaged South Africans (“HDSA”) to
the South African economy by increasing HDSA ownership in South African enterprises.
The business of mining and exploring for minerals involves a high degree of risk and there can be no assurance that current operations will
result in profitable mining operations. The recoverability of the carrying value of property, plant and equipment, intangibles and goodwill
and the Company's continued existence is dependent upon the preservation of its interests in the underlying properties, the discovery of
economically recoverable reserves, the achievement of profitable operations, ability to transport and sell its coal, or the ability of the
Company to raise additional financing, if necessary, or alternatively upon the Company's ability to dispose of its interests on an
advantageous basis. Changes in future conditions could require material write-downs to the carrying values. The Company’s assets may
also be subject to increases in taxes and royalties, renegotiation of contracts, currency exchange fluctuations and restrictions, and political
uncertainty.
Although the Company has taken steps to verify title to the properties on which it is conducting its exploration, development and mining
activities, these procedures do not guarantee the Company’s title. Property title may be subject to government licensing requirements or
regulations, unregistered prior agreements, unregistered claims, aboriginal land claims and non-compliance with regulatory and
environmental requirements.
The mining industry in South Africa has been experiencing tense labor relation issues including labour disruptions. The Company did
experience labour disruptions during October and November 2012 resulting in over four weeks of lost production. As a result, the
Company’s revenue was lower than forecasted and also lower compared to the three and nine months ended November 30, 2011. While
the dispute has been resolved and the disruption has ceased, if new labour disruptions were to take place at the Company’s mines, they
could have further and significant negative impacts on the operations and financial results of the Company.
These unaudited condensed interim consolidated financial statements have been prepared on the basis of accounting principles applicable
to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations. The future of the Company is dependent on its ability to generate
sufficient operating cash flow from its coal mining assets to fund its ongoing development expenditures and carry out its exploration
programs. The Company's expectation is that it will generate positive earnings and cash flows in future periods, thereby making the
going concern assumption appropriate.
During the most recently completed quarter the Company experienced labour disruptions which negatively impacted its financial results
and contributed to certain debt facility covenants not being met (see Note 14). The Company has negotiated with the union and labour
force and has reached amicable and reasonable resolutions. Operations have resumed to normal. The bank has waived the breach of the
debt facility covenants.
If the going concern assumption was not appropriate for these consolidated financial statements then adjustments would be necessary to
the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Such
adjustments could be material.
2)BASIS OF PREPARATION
These condensed interim consolidated financial statements are unaudited and prepared on a condensed basis in accordance with
International Accounting Standard (“IAS”) 34, Interim Financial Reporting issued by the International Accounting Standards Board. These
condensed interim consolidated financial statements have been prepared in accordance with the accounting policies described in Note 6 of
the Company’s annual consolidated financial statements as at and for the period ended February 29, 2012. Accordingly, these condensed
interim consolidated financial statements for the three and nine month periods ended November 30, 2012 and 2011 should be read
together with the annual consolidated financial statements as at and for the periods ended February 29, 2012 and February 28, 2011.
The preparation of condensed interim consolidated financial statements in accordance with IAS 34 requires the use of certain critical
accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies.
3)FUTURE ACCOUNTING CHANGES
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or IFRIC that are
mandatory for accounting periods beginning after March 1, 2012 or later periods. Updates that are not applicable or are not consequential
to the Company have been excluded thereof.
IFRS 9 Financial Instruments (“IFRS 9”) was issued in November 2009 and contained requirements for financial assets. This standard
addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for
debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss.
IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit
or loss or at fair value through other comprehensive income. This standard is required to be applied for accounting periods beginning on or
after January 1, 2015, with earlier adoption permitted. The Company is currently assessing the impact of IFRS 9 on its financial
statements.
IFRS 10 Consolidated Financial Statements (“IFRS 10”) provides a single model to be applied in the control analysis for all investees,
including entities that currently are special purpose entities in the scope of SIC 12. In addition, the consolidation procedures are carried
forward substantially unmodified from IAS 27 Consolidated and Separate Financial Statements. This standard is effective for annual period
annual period beginning on January 1, 2013. Earlier application is permitted. The Company has not yet determined the impact of the
amendments to IFRS 10 on its financial statements.
IFRS 11 Joint Arrangements (“IFRS 11”) replaces the guidance in IAS 31 Interests in Joint Ventures. Under IFRS 11, joint arrangements
are classified as either joint operations or joint ventures. IFRS 11 essentially carves out of previous jointly controlled entities, those
arrangements which although structured through a separate vehicle, such separation is ineffective and the parties to the arrangement have
rights to the assets and obligations for the liabilities and are accounted for as joint operations in a fashion consistent with jointly controlled
assets/operations under IAS 31. In addition, under IFRS 11 joint ventures are stripped of the free choice of equity accounting or
proportionate consolidation; these entities must now use the equity method.
Upon application of IFRS 11, entities which had previously accounted for joint ventures using proportionate consolidation shall collapse the
proportionately consolidated net asset value (including any allocation of goodwill) into a single investment balance at the beginning of the
earliest period presented. The investment’s opening balance is tested for impairment in accordance with IAS 28 Investments in Associates
and IAS 36 Impairment of Assets. Any impairment losses are recognized as an adjustment to opening retained earnings at the beginning
of the earliest period presented. The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on
January 1, 2013. The Company has not yet determined the impact of the amendments to IFRS 11 on its financial statements.
IFRS 13 Fair Value Measurement (“IFRS 13”) converges IFRS and US GAAP on how to measure fair value and the related fair value
disclosures. The new standard creates a single source of guidance for fair value measurements, where fair value is required or permitted
under IFRS, by not changing how fair value is used but how it is measured. The focus will be on an exit price. IFRS 13 is effective for
annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company has not yet determined the impact of
the amendments to IFRS 13 on its financial statements.
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”) provides guidance on the accounting for costs related to
stripping activity in the production phase of surface mining. When the stripping activity results in the benefit of useable ore that can be used
to produce inventory, the related costs are to be accounted for in accordance with IAS 2 Inventories; when the stripping activity results in
the benefit of improved access to ore that will be mined in future periods, the related costs are to be accounted for in accordance with
IFRIC 20 as additions to non-current assets when specific criteria are met. IFRIC 20 is effective for annual periods beginning on or after
January 1, 2013, and permits early adoption. The Company is in the process of determining the impact on its financial statements.
IAS 1 Presentation of Financial Statements (“IAS 1”), has been amended to require entities to separate items presented in other
comprehensive income (“OCI”) into two groups, based on whether or not items may be recycled in the future. Entities that choose to
present OCI items before tax will be required to show the amount of tax related to the two groups separately. The amendment is effective
for annual periods beginning on or after July 1, 2012 with earlier application permitted. The Company has not yet determined the impact of
the amendments to IAS 1 on its financial statements.
4)PRINCIPLES OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries, Forbes Coal Dundee, Zinoju,
Nyah Resources Inc., Forbes and Manhattan (Coal) Inc. and Bowwood and Main No33 (Pty) Ltd (“Bowwood”).
Subsidiaries
Subsidiaries are entities over which the Company has control, where control is defined as the power to govern financial and operating
policies of an entity so as to obtain benefit from its activities. Generally, control is obtained when the Company has a shareholding of more
than one half of the voting rights in its subsidiaries. The effects of potential voting rights that are currently exercisable are considered when
assessing whether control exists. Subsidiaries are fully consolidated from the date control is transferred to the Company, and are de-
consolidated from the date control ceases.
Business Combinations and Goodwill
On the acquisition of a subsidiary, the purchase method of accounting is used to account for the acquisition as follows:
-cost is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of
exchange;
-directly attributable transaction costs are expensed rather than included in the acquisition purchase price;
-identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date except for non-current
assets that are classified as held for sale in accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’,
which are recognized and measured at fair value less costs to sell;
-the excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill;
-if the acquisition cost is less than the fair value of the net assets acquired, the difference is recognized directly in profit or loss;
-the interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholder’s fair value; and
-the measurement of contingent consideration at fair value on the acquisition date is performed with subsequent changes in the fair
value recorded through the consolidated statement of operations.
All material intercompany transactions are eliminated on consolidation. After initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is not amortized and is tested for impairment annually. For the purpose of impairment testing,
goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash generating units that
are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are
assigned to those units. The level at which goodwill is allocated shall represent the lowest level within the entity at which the goodwill is
monitored for internal purposes, but shall not be larger than an operating segment determined in accordance with IFRS 8 Operating
Segments. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill
associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal
of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the
portion of the cash-generating unit retained.
Transactions and non-controlling interests
Transactions with non-controlling interests are treated as transactions with equity owners of the Company. For purchases from non-
controlling interests, the difference between the consideration paid and the non-controlling share of the carrying value of net assets
acquired is recorded in equity. Gains or losses on disposals to non-controlling interests are similarly computed and also recorded in equity.
5)SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with IFRS requires the Company’s management to make judgments,
estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and related
notes to the financial statements. Although these estimates are based on management’s best knowledge of the amount, event or actions,
actual results may differ from those estimates and these differences could be material.
The areas which require management to make significant judgments, estimates and assumptions in determining carrying values include,
but are not limited to:
- Assets’ carrying values and impairment charges
In the determination of carrying values and impairment charges, management looks at the higher of recoverable amount or fair value
less costs to sell in the case of assets and at objective evidence, significant or prolonged decline of fair value on financial assets
indicating impairment. These determinations and their individual assumptions require that management make a decision based on the
best available information at each reporting period.
- Capitalization of exploration and evaluation costs
Management has determined that exploration and evaluation costs incurred during the year have future economic benefits and are
economically recoverable. In making this judgment, management has assessed various sources of information including but not
limited to the geologic and metallurgic information, history of conversion of mineral deposits to proven and probable mineral reserves,
scoping and feasibility studies, proximity of operating facilities, operating management expertise and existing permits.
- Mineral reserve estimates
The figures for mineral reserves and mineral resources are determined in accordance with National Instrument 43-101, “Standards of
Disclosure for Mineral Projects”, issued by the Canadian Securities Administrators. There are numerous uncertainties inherent in
estimating mineral reserves and mineral resources, including many factors beyond the Company’s control. Such estimation is a
subjective process, and the accuracy of any mineral reserve or mineral resource estimate is a function of the quantity and quality of
available data and of the assumptions made and judgments used in engineering and geological interpretation. Differences between
management’s assumptions including economic assumptions such as coal prices and market conditions could have a material effect
in the future on the Company’s financial position and results of operation.
- Impairment of mineral interests
While assessing whether any indications of impairment exist for exploration and evaluation assets, consideration is given to both
external and internal sources of information. Information the Company considers includes changes in the market, economic and legal
environment in which the Company operates that are not within its control that could affect the recoverable amount of exploration and
evaluation assets. Internal sources of information include the manner in which exploration and evaluation assets are being used or
are expected to be used and indications of expected economic performance of the assets. Estimates include but are not limited to
estimates of the discounted future after-tax cash flows expected to be derived from the Company’s mining properties, costs to sell the
properties and the appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production,
increases in estimated future capital costs, reductions in the amount of recoverable mineral reserves and mineral resources and/or
adverse current economics can result in a write-down of the carrying amounts of the Company’s exploration and evaluation assets.
- Estimation of decommissioning and restoration costs and the timing of expenditure
The cost estimates are updated annually during the life of a mine to reflect known developments, (e.g. revisions to cost estimates and
to the estimated lives of operations), and are subject to review at regular intervals. Decommissioning, restoration and similar liabilities
are estimated based on the Company’s interpretation of current regulatory requirements, constructive obligations and are measured
at fair value. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of
decommissioning, restoration or similar liabilities that may occur upon decommissioning of the mine. Such estimates are subject to
change based on changes in laws and regulations and negotiations with regulatory authorities.
- Income taxes and recoverability of potential deferred tax assets
In assessing the probability of realizing income tax assets recognized, management makes estimates related to expectations of future
taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood
that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management
gives additional weight to positive and negative evidence that can be objectively verified. Estimates of future taxable income are
based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. The Company considers
whether relevant tax planning opportunities are within the Company’s control, are feasible, and are within management’s ability to
implement. Examination by applicable tax authorities is supported based on individual facts and circumstances of the relevant tax
position examined in light of all available evidence. Where applicable tax laws and regulations are either unclear or subject to ongoing
varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of
income tax assets recognized. Also, future changes in tax laws could limit the Company from realizing the tax benefits from the
deferred tax assets. The Company reassesses unrecognized income tax assets at each reporting period.
- Share-Based Payments
Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-
based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques.
Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating
the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee stock option
exercise behaviors and corporate performance. Such judgments and assumptions are inherently uncertain. Changes in these
assumptions affect the fair value estimates.
- Allocation purchase price related to reverse acquisition, asset acquisition and business combination.
The fair value of assets acquired and liabilities assumed and the resulting goodwill, if any, requires that management make estimates
based on the information provided by the acquiree. Changes to the provisional values of assets acquired and liabilities assumed,
deferred income taxes and resulting goodwill, if any, will be retrospectively adjusted when the final measurements are determined
(within one year of acquisition date).
Contingencies
Refer to Note 21.
6)OPERATING SEGMENTS
The Company operates in Canada and South Africa. The Company’s revenue from external customers and information about its assets by
geographical location are detailed below:
Current Property, plant Other non- Total
Intangibles
assets and equipment current assets assets
February 29, 2012
Canada $ 6,018,392 $ - $ - $ 745,681 $ 6,764,073
South Africa 21,907,470 81,956,437 5,414,498 24,508,802 133,787,207
$ 27,925,862 $ 81,956,437 $ 5,414,498 $ 25,254,483 $ 140,551,280
November 30, 2012
Canada $ 1,937,693 $ - $ - $ 406,660 $ 2,344,353
South Africa 15,382,664 67,206,022 4,483,622 28,957,285 116,029,593
$ 17,320,357 $ 67,206,022 $ 4,483,622 $ 29,363,945 $ 118,373,946
All of the Company’s revenues are earned from production in South Africa.
7)INTEREST (EXPENSE)
Nine months ended
November 30, 2012 November 30, 2011
Interest bearing borrowings $ m1,716,445 $ 1,154,173
Unwinding discount on rehabilitation provision 132,007 60,277
Interest expense 1,848,452 1,214,450
Cash 229,874 305,876
Restricted cash 41,225 81,220
Interest income 271,099 387,096
Net interest (expense) $ (1,577,353) $ (827,354)
8)INVENTORIES
November 30, 2012 February 29, 2012
Consumables $ 382,412 $ 332,536
Work in progress 1,098,407 358,917
Finished goods 5,438,865 2,752,238
$ 6,919,684 $ 3,443,691
As at November 30, 2012 and February 29, 2012 inventories are presented at costs.
The amount of inventories recognized as an expense during the three and nine months ended November 30, 2012 is $13,126,183 and
$53,153,113 respectively (November 30, 2011 - $24,366,660 and $69,630,812 respectively).
FORBES & MANHATTAN COAL CORP.
9) PROPERTY, PLANT AND EQUIPMENT
Mining Office Land and Development Mining rights Total
assets equipment, buildings costs
radio
equipment,
fixtures and
fittings
Cost as at February 29, 2012 $ 52,498,247 $ 445,080 $ 856,220 $ 6,456,305 $ 40,810,181 $ 101,066,033
Effect of foreign currency exchange difference (8,067,482) (68,396) (131,577) (992,150) (6,271,360) (15,530,965)
Additions 3,873,283 293,282 255,176 773,371 - 5,195,112
Cost as at November 30, 2012 $ 48,304,048 $ 669,966 $ 979,819 $ 6,237,526 $ 34,538,821 $ 90,730,180
Accumulated depreciation, depletion and
impairment as at February 29, 2012 $(12,427,529) $ (134,332) $ (65,805) $ (226,334) $ (6,255,596) $ (19,109,596)
Effect of foreign currency exchange difference 1,909,758 20,643 10,112 34,781 961,308 2,936,602
Charge for the period (5,821,131) (125,744) (37,157) (261,406) (1,105,726) (7,351,164)
Depreciation and depletion as at November 30, 2012 $(16,338,902) $ (239,433) $ (92,850) $ (452,959) $ (6,400,014) $ (23,524,158)
Net book value as at February 29, 2012 $ 40,070,718 $ 310,748 $ 790,415 $ 6,229,971 $ 34,554,585 $ 81,956,437
Net book value as at November 30, 2012 $ 31,965,146 $ 430,533 $ 886,969 $ 5,784,567 $ 28,138,807 $ 67,206,022
10) INTANGIBLES
Richards Bay Mineral and Total
Coal Terminal prospecting
entitlements rights
Cost as at February 29, 2012 $ 4,665,904 $ 990,750 $ 5,656,654
Effect of foreign currency exchange difference (717,016) (152,250) (869,266)
Cost as at November 30, 2012 $ 3,948,888 $ 838,500 $ 4,787,388
Accumulated depreciation, depletion and impairment as at
February 29, 2012 $ (233,176) $ (8,980) $ (242,156)
Effect of foreign currency exchange difference 35,833 1,380 37,213
Charge for the period (93,371) (5,452) (98,823)
Depreciation, depletion and impairment as at November 30, 2012 $ (290,714) $ (13,052) $ (303,766)
Net book value as at February 29, 2012 $ 4,432,728 $ 981,770 $ 5,414,498
Net book value as at November 30, 2012 $ 3,658,174 $ 825,448 $ 4,483,622
11) GOODWILL
Balance as at February 29, 2012 $ 17,506,375
Effect of foreign currency exchange difference (2,629,162)
Balance as at November 30, 2012 $ 14,877,213
12) OTHER ASSETS
November 30, 2012 February 29, 2012
Endowment policy $ 3,307,140 $ 4,967,278
Security investments 56,920 569,196
Long term investments 669,378 790,919
Long term receivables 393,299 630,928
$ 4,426,737 $ 6,958,321
The other assets include an endowment policy held by the Company to fund payment requirements associated with its instalment sale
agreement obligations. The total endowment policy consists of various individual policies managed in various investment funds. The
investment in this financial asset is classified as level 3 on the fair value hierarchy as the inputs required to determine fair value of the
investment are actuarially determined and not supported by market activity.
The table below sets forth the summary of changes in the endowment policy for the period ended November 30, 2012:
Balance as at February 29, 2012 $ 4,967,278
Effect of exchange rate change (763,330)
Current year contributions 927,612
Fair value adjustment 433,330
Policies matured (2,257,750)
Balance as at November 30, 2012 $ 3,307,140
13) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
November 30, 2012 February 29, 2012
Trade payables $ 1,380,726 $ 5,291,967
Payroll and other statutory liabilities 1,865,762 667,381
Current tax payable 1,387,438 711,369
Other payables and accruals 7,221,387 2,563,113
$ 11,855,313 $ 9,233,830
14) OTHER FINANCIAL LIABILITIES
November 30, 2012 February 29, 2012
Instalment sale agreements(*) $ 2,558,688 $ 3,435,165
Third party institutional loans (**) 20,139,920 20,491,538
Total interest bearing borrowings 22,698,608 23,926,703
Less:
Current portion of instalment sale agreements (2,335,191) (556,513)
Current portion of third party institutional loans (4,845,426) (3,339,488)
Total current portion of interest bearing borrowings (7,180,617) (3,896,001)
Total long-term portion of interest bearing borrowings $ 15,517,991 $ 20,030,702
(*) The instalment sale agreements related liabilities are payable over periods from three to five years, at interest rates linked to prime and
are secured by mining assets with a book value of approximately $2,600,000 and an endowment policy.
(**) The Company, through its subsidiary Forbes Coal Dundee, has secured a ZAR 230 million (approximately $26 million) loan facility from
Investec Limited (“Investec”). The loan facility consists of a five year senior secured amortizing term loan facility of up to ZAR 200 million
(approximately $22 million) and a revolving loan facility of up to ZAR 30 million (approximately $4 million). Both facilities are flexible in
terms of drawdowns and repayments. The facilities are secured against the assets of Forbes Coal Dundee. Term loan bears interest at the
3 month JIBAR rate, plus 3%, compounded quarterly and the revolving loan bears interest at prime interest rate less 1.5%. The interest
rate will increase by 1% if the earnings before interest, taxes, depreciation and amortization of Forbes Coal Dundee falls below ZAR 100
million annually (approximately $11 million).
The loan is repayable in quarterly payments of ZAR 10,526,315 (approximately $1,180,000) commencing on March 1, 2012, with the first
capital payment made in July 2012. As at November 30, 2012, an amount of $20,139,920 (ZAR 180,142,394) has been recorded as owed
under this facility and repayable as follows:
Year Amount
2013 $ 4,845,426
2014 4,702,916
2015 4,737,554
2016 4,677,182
2017 1,176,842
$ 20,139,920
The Investec loan is issued under the following terms:
Facilities
-First ranking security over the assets of the Company, including but not limited to mortgage bonds over the Company’s immovable
property and special and general notarial bonds over the Company’s movable property; (Forbes Coal Dundee assets only).
-Subordination of all claims by the Affiliates of the Company and the shareholder against the Company;
-Negative pledge over assets of the Company.
Cession in Security
-Secured property consists of bank account, insurances, trade receivables and related rights to the preceding.
Mortgage bond
-Secured bond over the property (land and buildings) within Forbes Coal Dundee (Coal Fields).
General bond
-Secured bond over the property (movable) within Forbes Coal Dundee, including:
a. all the plant, equipment, machinery, office furniture, fixtures and fittings, inventory and motor vehicles;
b. every claim and indebtedness of whatever kind or nature;
c. all the rights to quotas, permits, licenses and the like;
d. all the contractual rights, including without limitation, rights in respect of insurance policies taken out by or in favor of the mortgagor,
franchise rights and rights under agency agreements or other agreements of a like nature and rights as lessee or lessor;
e. all the goodwill of the business of the Mortgagor and all its rights to trademarks and trade names,
Special bond
-Secured bond over the property (movable) within Forbes Coal Dundee, that is currently used as security over the finance lease
agreements.
The Company made the following drawdowns on the facility: in January 2012, the Company made a drawdown for ZAR 11,140,000
(approximately $1,250,000), in February 2012 for ZAR 142,000,000 (approximately $15,800,000) and in June 2012 for ZAR 46,860,000
(approximately $5,240,000). As at November 30, 2012, the Company had available for drawdown facility of ZAR 30,000,000
(approximately $3,354,000).
Under terms of the loan the Company is paying a commitment fee for the available drawdown facility in the amount of ZAR 300,000
(approximately $33,000) on a quarterly basis starting March 2012.
This loan is a subject to a Net Debt/EBIDA, EBITDA/Net Interest and Debt/Equity covenants. As at November 30, 2012, the Company was
not in compliance with its Net Debt/EBIDA and EBITDA/Net Interest covenants. The bank has waived this breach.
See Proposed acquisition of Riversdale Mining Limited Note 22.
The other financial liabilities are repayable as follows:
Year Amount
2013 $ 7,180,617
2014 4,926,413
2015 4,737,554
2016 4,677,182
2017 1,176,842
$ 22,698,608
The interest rate exposure of borrowings of the Company was as follows:
Instalment sale agreements at floating rates $ 2,558,688
Investec loan at rates of 8.58% and 8.60% 20,139,920
$ 22,698,608
15) ASSET RETIREMENT OBLIGATIONS
Balance as at February 29, 2012 $ 3,035,674
Effect of foreign currency exchange difference (466,498)
Accretion expense 121,553
Balance as at November 30, 2012 $ 2,690,729
The provision for close down rehabilitation costs reflects the net present value of the estimated cost of restoring the environmental
disturbance that has occurred up to the consolidated statements of financial position date and is expected to be paid out over 5 to 10
years. South African mining companies are required by law to undertake rehabilitation works as part of their ongoing operations. These
environmental rehabilitation costs are funded by contributions into endowment policies.
The expected timing of the cash outflows in respect of the provision is on the closure of the various mining operations. However, certain
current rehabilitation costs are charged to this provision as and when incurred.
16) SHARES IN ESCROW
On July 20, 2010, the shareholders of Forbes Coal were issued 2,700,000 performance special warrants (the "Performance Special
Warrants"). Each Performance Special Warrant was automatically exercised into one common share of Forbes Coal (each "Performance
Share" and, collectively, the “Performance Shares") for no additional consideration immediately prior to the completion of the Nyah
acquisition, provided that such Performance Shares shall be deposited in escrow with an escrow agent (the "Escrowed Shares"), to be
released as follows:
i) 50% of the Escrowed Shares (the "First Tranche Escrowed Shares") will be released once the Company achieves US$22,000,000
in EBITDA from the Forbes Coal Dundee Properties over a 12 consecutive month period by July 20, 2013. During the period ended
February 29, 2012 the US$22,000,000 in EBITDA from Forbes Coal Dundee Properties was achieved and the above mentioned
Escrowed Shares were released;
ii) The remaining Escrowed Shares will be released once the Company achieves US$35,000,000 in EBITDA from the Forbes Coal
Dundee Properties over a 12 consecutive month period within a three year period following the release of the First Tranche
Escrowed Shares. For further clarity, EBITDA generated from the Forbes Coal Dundee Properties will exclude any gains or losses
generated by the combined company from the disposition of the Forbes Coal Dundee Properties. In the event of not achieving
US$35,000,000 in EBITDA from the Forbes Coal Dundee Properties, the above mentioned Escrowed Shares will be cancelled.
(EBITDA is a non-IFRS measure and defined as earnings before interest, taxes, depreciation and amortization).
The model used to fair value the Performance Special Warrants applies standard Monte Carlo simulation techniques and is based on
correlated one-factor geometric Brownian motions. The key inputs used in the model include:
ZAR/USD FX: 7.3194
ZAR/CAD FX: 7.0897
Equity value of a comparable company: 3.45
API4 Coal Price: 91.81
ZAR/USD FX Volatility: 11.6%
ZAR/CAD FX Volatility: 8.1%
Volatility of a comparable company: 64.3%
17) ISSUED CAPITAL
Issued Number of shares Stated value
Balance as at February 29, 2012 34,865,717 $ 98,792,926
Shares repurchased and cancelled under NCIB (90,356) (273,279)
Balance as at November 30, 2012 34,775,361 $ 98,519,647
Normal course issuer bid (“NCIB”)
On April 25, 2012, the Company instituted a Normal Course Issuer Bid (“NCIB”), in respect of its common shares. Pursuant to the terms of
the NCIB, and in accordance with the policies of the TSX, during the period commencing April 30, 2012 and ending on April 29, 2013, the
Company may purchase up to 5% of the issued and outstanding shares of the Company. Based on the 34,865,717 shares issued and
outstanding as at April 24, 2012 the maximum number of shares that may be purchased during the course of the NCIB are 1,743,285. All
common shares purchased under the NCIB are to be cancelled.
During the three months ended November 30, 2012, the Company purchased and cancelled 90,356 common shares at an average price of
$0.7489 per share under the NCIB approved by the TSX. Also the Company purchased and settled 265,898 common shares at an
average price of $0.5551 per share and purchased and not settled 55,428 common shares at an average price of $0.6100 under the NCIB
approved by the TSX. As at November 30, 2012, 321,326 common shares were held in treasury and 265,898 purchased and settled
shares were subsequently cancelled (See Note 23).
18) RESERVES
No. of Weighted Value of No. of Weighted Value of Treasury Total value
options average options warrants average warrants shares
exercise vested exercise vested
price price
Balance as at February 29, 2012 3,479,692 $ 3.20 $ 9,058,470 1,243,887 $ 3.48 $ 2,149,853 $ - $ 11,208,323
Vested - - 35,229 - - - - 35,229
Expired (667,311) 3.19 (1,551,876) (763,887) 2.80 (993,053) - (2,544,929)
NCIB allocation - - - - - - (181,693) (181,693)
Balance as at November 30, 2012 2,812,381 $ 3.21 $ 7,541,823 480,000 $ 4.55 $ 1,156,800 $(181,693) $ 8,516,930
Employee share options plan
The Company has an ownership-based compensation scheme, to be administered by the board of directors of the Company, for directors,
officers, employees and consultants. The plan provides for the issuance of share options to acquire up to 10% of the Company's issued
and outstanding capital. The number of shares reserved for issuance pursuant to the grant of share options will increase as the Company’s
issued and outstanding share capital increases. In accordance with the terms of the plan, as approved by shareholders at a previous
annual general meeting, directors, officers, employees and consultants of the Company may be granted options to purchase common
shares at an exercise price determined by the board of directors, but which shall not be lower than the market price of the underlying
common shares at the time of grant.
Each employee share option converts into one common share of the Company on exercise. No amounts are paid or payable by the
recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from
the date of vesting to the date of their expiry.
During the nine months ended November 30, 2012, nil (November 30, 2011 - 962,500) share options were granted to directors, officers,
employees and consultants of the Company. These options had a grant date estimated fair value of $nil (November 30, 2011 -
$1,996,489), comprised of various option grants that vest immediately, over 4 quarters and over 8 quarters. The options expire five years
from the date of issue, or 30 days after the resignation of the director, officer, employee or consultant.
The following share-based payment arrangements were in existence as at November 30, 2012:
Share options
Number of Number of Grant Expiration Exercise Grant date Expected Expected Expected Risk-free
options options date date price estimated volatility life dividend interest
outstanding exercisable fair value years yield rate
vested at grant
7,381 7,381 20-Sep-10 4-Jan-13 $ 7.96 $ 8,264 100% 2.29 0.00% 1.54%
190,000 190,000 15-Mar-10 15-Mar-15 $ 2.80 $ 760,545 100% 5.00 0.00% 2.39%
1,425,000 1,425,000 13-Oct-10 13-Oct-15 $ 3.25 $ 3,462,750 100% 5.00 0.00% 1.74%
605,000 605,000 24-Mar-11 24-Mar-16 $ 4.10 $ 1,349,150 63% 5.00 0.00% 2.15%
100,000 62,500 6-Jun-11 6-Jun-16 $ 3.00 $ 156,735 61% 5.00 0.00% 2.23%
150,000 150,000 13-Jun-11 13-Jun-16 $ 2.77 $ 220,500 61% 5.00 0.00% 2.24%
335,000 335,000 25-Jan-12 25-Jan-17 $ 1.80 $ 338,350 67% 5.00 0.00% 1.36%
2,812,381 2,774,881 $ 3.21 $ 6,296,294 4.99
For the three and nine months ended November 30, 2012, the diluted weighted average number of common shares outstanding excluded
2,812,381 options, as they were anti-dilutive.
BEE option
During the twelve-months period ended February 29, 2012, Forbes Coal Dundee assisted one of its BEE partners in the buying out of the
interest in Zinoju held by its other BEE partner. This resulted in the issuance of the new call option to the continuing BEE partner which
represents the issuance of an equity-settled share-based payment. The value of the new call option on the date of issue of ZAR 9,073,711
($1,245,529) was reflected as an expense in the statement of comprehensive income in fiscal 2012 as part of ‘loss on share based
payments’ and as a credit in the statement of changes in equity in the ‘share-based payment reserves’. Key assumptions utilized in the
valuation of the new option issued include a maximum maturity date of 8 years, assumption that financing repayments will be made solely
from dividends declared by Zinoju under the terms of the BEE agreement within 8 years, volatility of 33% and a risk-free interest rate of
5.20%.
Details of the transactions are provided in Note 9 of the Company’s annual consolidated financial statements as at and for the year ended
February 29, 2012.
Broker warrants
Number of Number of Grant Expiration Exercise Grant date Expected Expected Expected Risk-free
warrants warrants date date price estimated volatility life dividend interest
outstanding fair value years yield rate
exercisable at grant
480,000 480,000 22-Feb-11 22-Feb-13 $ 4.55 $ 1,156,800 100% 2.00 0.00% 1.79%
480,000 480,000 $ 4.55 $ 1,156,800 2.00
For the three and nine months ended November 30, 2012, the diluted weighted average number of common shares outstanding excluded
480,000 warrants, as they were anti-dilutive.
Treasury shares
Please refer to Notes 17 and 23 for the full description of shares repurchase activity under NCIB.
19) FINANCIAL INSTRUMENTS
Details of the significant accounting policies and methods adopted (including the criteria for recognition, the bases of measurement, and
the bases for recognition of income and expenses) for each class of financial asset and financial liability are disclosed in Note 6 of the
annual financial statements as at and for the year ended February 29, 2012.
The Company's financial assets and financial liabilities as at November 30, 2012 and February 29, 2012 were as follows:
Assets / (liabilities) at
Cash, loans and Other financial
fair value through Total
receivables assets/(liabilities)
profit
February 29, 2012
Cash $ 9,481,078 $ - $ - $ 9,481,078
Restricted cash 1,984,890 - - 1,984,890
Accounts and other receivables 12,920,590 - - 12,920,590
Other assets 630,928 6,327,393 - 6,958,321
Accounts payable and accrued liabilities - - (9,233,830) (9,233,830)
Other financial liabilities - current - - (3,896,001) (3,896,001)
Other financial liabilities - long term - - (20,030,702) (20,030,702)
Loan payable $ - $ - $ (27,749) $ 27,749)
November 30, 2012
Cash $ 3,729,429 $ - $ - $ 3,729,429
Restricted cash 50,000 - - 50,000
Accounts and other receivables 6,481,516 - - 6,481,516
Other assets 393,299 4,033,438 - 4,426,737
Long-term restricted cash 1,386,320 - - 1,386,320
Accounts payable and accrued liabilities - - (11,855,313) (11,855,313)
Other financial liabilities - current - - (7,180,617) (7,180,617)
Other financial liabilities - long term - - (15,517,991) (15,517,991)
Loan payable $ - $ - $ 24,014) $ (24,014)
At November 30, 2012, there are no significant concentrations of credit risk for loans and receivables designated at fair value through the
consolidated statement of operations and comprehensive income (loss). The carrying amount reflected above represents the Company’s
maximum exposure to credit risk for such loans and receivables.
CAPITAL MANAGEMENT
The capital of the Company consists of common shares, warrants, options and other financial liabilities.
The Company manages and adjusts its capital structure based on available funds in order to support the acquisition, exploration and
development of mining properties. The Company manages its capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Company
may issue new shares, seek debt financing, or acquire or dispose of assets. The Board of Directors does not establish quantitative return
on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the
business.
The Company is not subject to any externally imposed capital requirements with the exception as discussed in Note 14.
Management reviews its capital management approach on an on-going basis and believes that this approach, given the relative size of the
Company, is reasonable. There have been no significant changes in the risks, objectives, policies and procedures in the nine months
ended November 30, 2012 and 2011, except for the Investec loan as discussed in Note 14.
As at November 30, 2012, the capital structure of the Company consists of equity attributable to the owners, reserves attributable to
owners, directors, officers, employees and consultants of the company totaling $70,336,978 (February 29, 2012 -$89,375,435) and an
interest bearing loan of $20,139,920 (February 29, 2012 - $20,280,178).
19) FINANCIAL INSTRUMENTS
FINANCIAL RISK FACTORS
The Company is exposed to a variety of financial risks.
The Company’s overall management programme focuses on the unpredictability of financial markets and seeks to minimize potential
adverse effects on the Company’s financial performance. The Company does not use derivative financial instruments, such as forward
exchange contracts, to hedge certain exposures.
(a) Market risk
i. Foreign exchange risk
The Company’s functional currency is the Canadian dollar. The Company operates internationally and is exposed to foreign exchange risk
arising from various currency exposures, primarily with respect to the South African Rand (“Rand”) and the US dollar. Foreign exchange
risk arises from future commercial transactions and recognized assets and liabilities. The Company will purchase new South African
Company in Rand and is required to make future payments in Rand. The Company’s new Investec loan facility is also denominated in
Rand. In addition, coal is priced on international markets in United States dollars and converted to Rand to support operations in South
Africa.
Management has set up a policy to require its companies to manage their foreign exchange risk against their functional currency. Foreign
exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the
entity’s functional currency.
A 10% increase (decrease) in the period average foreign exchange rate between the South African rand and the Company’s functional
currency, the Canadian dollar, would have increased (decreased) the Company’s income by approximately $800,000 for the nine months
ended November 30, 2012. A 10% increase in the period average foreign exchange rate between the United States dollar and Forbes Coal
Dundee’s functional currency, the South African rand, would have increased (decreased) the Company’s income by approximately
$2,510,000 for the period ended November 30, 2012, as only export the part of sales is denominated in United States dollars.
A 10% change in the value of the Canadian dollar relative to the US dollar and South African rand would have an impact on net income of
approximately $1,022,000 based on the net assets of the Company at November 30, 2012.
The Company does not currently use derivative financial instruments such as forward exchange contracts to hedge currency risk
exposures.
The following assets and liabilities are presented in Canadian dollar values and denominated in different currencies as at November 30,
2012 and February 29, 2012:
Forbes Coal parent company balances (*) Forbes Coal Dundee balances (**)
denominated in denominated in Total
CAD USD ZAR ZAR USD
Cash $ 5,160,970 $ 240 $ 874,732 $ 3,445,136 $ - $ 9,481,078
Restricted cash 50,000 296,850 1,638,040 - - 1,984,890
Accounts and other receivables 420,939 - 32,672 8,675,692 3,791,287 12,920,590
Inventories - - - 3,443,691 - 3,443,691
Prepaid expenses 89,393 - 6,220 - - 95,613
Property, plant and equipment - - - 81,956,437 - 81,956,437
Intangibles - - - 5,414,498 - 5,414,498
Goodwill - - - 17,506,375 - 17,506,375
Other assets 569,196 - - 6,389,125 - 6,958,321
Long-term prepaid expenses 176,485 - 286,548 - - 463,033
Deferred income taxes - - - 326,754 - 326,754
Accounts payable and accrued liabilties (484,725) (1,237) (765,460) (7,982,408) - (9,233,830)
Other financial liabilities - current - - - (3,896,001) - (3,896,001)
Other financial liabilities - long term - - - (20,030,702) - (20,030,702)
Asset retirement obligation - current - - - (1,053,845) - (1,053,845)
Asset retirement obligation - long term - - - (1,981,829) - (1,981,829)
Loans payable - - - (27,749) - (27,749)
Deferred income taxes - - - (14,312,877) - (14,312,877)
Net exposure as at February 29, 2012 $ 5,982,258 $ 295,853 $ 2,072,752 $ 77,872,297 $ 3,791,287 $ 90,014,447
Cash $ 1,383,658 $ 497 $ 1,307,317 $ 1,037,957 $ - $ 3,729,429
Restricted cash 50,000 - - - - 50,000
Accounts and other receivables 360,306 - 295,425 5,825,785 - 6,481,516
Inventories - - - 6,919,684 - 6,919,684
Prepaid expenses 123,232 - 16,496 - - 139,728
Property, plant and equipment - - 92,555 67,113,467 - 67,206,022
Intangibles - - - 4,483,622 - 4,483,622
Goodwill - - - 14,877,213 - 14,877,213
Other assets 56,920 - - 4,369,817 - 4,426,737
Long-term restricted cash - - 1,386,320 - - 1,386,320
Long-term prepaid expenses 290,055 - 301,983 - - 592,038
Deferred income taxes - - - 1,107,080 - 1,107,080
Deposit on proposed acquisition - - 5,086,900 - - 5,086,900
Prepaid financing costs 123,453 - 1,764,204 - - 1,887,657
Accounts payable and accrued liabilties (661,660) (2) (22,237) (11,171,414) - (11,855,313)
Other financial liabilities - current - - - (7,180,617) - (7,180,617)
Other financial liabilities - long term - - - (15,517,991) - (15,517,991)
Asset retirement obligation - current - - - ( 891,898) - (891,898)
Asset retirement obligation - long term - - - (1,798,831) - (1,798,831)
Loans payable - - - (24,014) - (24,014)
Deferred income taxes - - - (10,129,292) - (10,129,292)
Net exposure as at November 30, 2012 $ 1,725,964 $ 495 $ 10,228,963 $ 59,020,568 $ - $ 70,975,990
(*) Functional currency of Forbes Coal parent company is the Canadian dollar
(**) Functional currency of Forbes Coal Dundee is the Rand
ii. Interest rate risk
The Company’s interest rate risk arises from deposits held with banks and interest-bearing liabilities. Borrowings issued at variable rates
expose the Company to cash flow interest rate risk which is partially offset by cash held at variable rates. A 1% increase in interest rates
would create additional expense of approximately $13,000 per month.
iii. Price risk
The Company is exposed to price risk with respect to commodity prices. Commodity prices fluctuate on a daily basis and are affected by
numerous factors beyond the Company's control. The supply and demand for commodities, the level of interest rates, the rate of inflation,
investment decisions by large holders of commodities including governmental reserves and stability of exchange rates can all cause
significant fluctuations in commodities prices. Such external economic factors are in turn influenced by changes in international investment
patterns and monetary systems and political developments. A 10% change in the market price of coal would have resulted in a
corresponding change in revenues of approximately $5,500,000 for the nine months ended November 30, 2012.
(b) Credit risk
The Company's credit risk is primarily attributable to cash and accounts and other receivables. Cash consist of deposits, which have been
made with reputable financial institutions, from which management believes the risk of loss to be remote. Other receivables primarily
consist of amounts owing from coal sales. Management believes that the credit risks concentration with respect to these amounts
receivables are remote.
Restricted cash totaling $50,000 was in GIC investment with Royal Bank of Canada held as collateral against credit card limits used by the
Company. Long-term portion of restricted cash totaling $1,386,320 was on deposit with First National Bank to be released to a supplier if
payments are not made to them.
(c) Liquidity risk
As at November 30, 2012, the Company had net working capital deficiency of $2,631,485 (February 29, 2012 – net working capital of
$13,714,437) which includes cash and restricted cash of $3,779,429 (February 29, 2012 – $11,465,968), accounts receivable and other
receivables of $6,481,516 (February 29, 2012 – $12,920,590), and inventories of $6,919,684 (February 29, 2012 – $3,443,691), offset by
current liabilities of $19,951,842 (February 29, 2012 – $14,211,425).
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through credit facilities. The Company
aims to maintain flexibility in funding by keeping committed credit lines available in its operating entities.
(d) Fair value of financial instruments
The Company has designated its investments and certain other assets as held-for-trading, measured at fair value. Accounts receivable,
other receivables, restricted cash and cash are classified as loans and receivables, which are measured at amortized cost. Accounts
payable and accrued liabilities, loans payable and other financial liabilities are classified as other financial liabilities, which are measured at
amortized cost.
The three levels of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included in 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 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
As at November 30, 2012, the carrying and fair value amounts of the Company's financial instruments are approximately the same due to
the limited term of these instruments. The following table illustrates the classification of the Company's financial instruments within the fair-
value hierarchy as at November 30, 2012 and February 29, 2012:
November 30, 2012
Level 1 Level 2 Level 3
Endowment policy and investments $ 56,920 $- $3,976,518
February 29, 2012
Level 1 Level 2 Level 3
Endowment policy and investments $ 569,196 $- $5,758,197
20) RELATED PARTY DISCLOSURE
During the period, the Company entered into the following transactions in the ordinary course of business with related parties:
Sales of goods and services for the nine months ended Purchases of goods and services for the nine months ended
November 30, 2012 November 30, 2011 November 30, 2012 November 30, 2011
2227929 Ontario Inc. $ - $ - $ 540,469 $ 438,881
Forbes & Manhattan Inc $ - $ - $ 305,100 $ 203,400
Stan Bharti $ - $ - $ - $ 101,700
Forbes Coal Dundee related parties $ - $ 1,944,935 $ - $ 6,165,176
The Company shares office space with other companies who may have officers or directors in common with the Company. The costs
associated with this space, certain consulting, professional and general and administration services are administered by 2227929 Ontario
Inc.
Mr. Stan Bharti, a director of the Company, is the Executive Chairman of Forbes & Manhattan, Inc. An administration fee of $15,000 per
month was previously charged by Forbes & Manhattan, Inc. pursuant to a consulting agreement. Effective September 1, 2011, the contract
with Forbes & Manhattan, Inc. was increased to $30,000 per month.
As a result of Forbes Coal Dundee acquisition, business relationships with certain parties were inherited, which were considered as related
parties up until February 29, 2012.
The following balances were outstanding at the end of the reporting period:
Amounts owed by related parties as at Amounts owed to related parties as at
November 30, 2012 November 30, 2011 November 30, 2012 November 30, 2011
2227929 Ontario Inc. $ 45,943 $ 97,376 $ - $ -
Forbes Coal Dundee related parties $ - $ 1,125,703 $ - $ 38,184
Also as a result of Forbes Coal Dundee acquisition, Forbes Coal acquired receivables and payables owed from the former Forbes Coal
Dundee shareholders and their related parties, which were considered as related parties up until February 29, 2012.
These amounts are unsecured, non-interest bearing with no fixed terms of repayment. The related party transactions are in the normal
course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the
related parties.
Compensation of key management personnel
In accordance with IAS 24, key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
The remuneration of directors and other members of key management personnel (officers) during the period were as follows:
Nine months ended
November 30, 2012 November 30, 2011
Short-term benefits $ 1,076,063 $ 1,517,103
Share-based payments - 1,674,000
$ 1,076,063 $ 3,191,103
21) COMMITMENTS AND CONTINGENCIES
Management contracts
The Company is party to certain management contracts. These contracts require that additional payments of approximately $2,000,000 be
made upon the occurrence of a change of control. As the likelihood of these events taking place is not determinable, the contingent
payments have not been reflected in these consolidated financial statements. Minimum commitments remaining under these contracts
were approximately $420,000 all due within one year.
Instalment sale agreements payment obligations
The Company is committed to minimum amounts under instalment sale agreements for plant and equipment. Minimum commitments
remaining under these leases were $2,558,688 over the following years:
Year Amount
2013 $ 2,335,191
2014 223,497
$ 2,558,688
Environmental contingency
The Company’s mining and exploration activities are subject to various federal, provincial and international laws and regulations governing
the environment. These laws and regulations are continually changing and generally becoming more restrictive. The Company believes its
operations are materially in compliance with all applicable laws and regulations. The Company has made, and expects to make in the
future, expenditures to comply with such laws and regulations.
Throughput, transportation and sales contracts
The Company is party to certain throughput, transportation and sales contracts. As the likelihood of full non-performance by the Company
on these contracts is not determinable, the contingent payments have not been reflected in these consolidated financial statements.
Existing Investec loan facility
Please refer to Note 14.
Sale, transfer and cession of a notarial mining right to Zinoju
Zinoju has entered into an agreement for the purchase of a prospecting right, for a total consideration of ZAR 14 million (approximately
$1.6 million). A payment of ZAR 2 million (approximately $0.2 million) of the purchase consideration has been paid to the seller and has
been capitalized. The seller holds an undivided 100% interest in the prospecting right and is in the process of applying for the effective
conversion of the prospecting right into a mining right, by virtue of an application for a mining right.
In order for the sale agreement to be effective, two conditions need to be met, which are still outstanding as at November 30, 2012:
1. The granting of the mining right; and
2. Zinoju obtaining the written consent of the Minister as required by the Mineral and Petroleum Titles Registration Office contemplated
in s2 of the Mining Titles Registration Act, 1967 (the “Assignment Approval”).
Should the conditions not be met and no extension is applied, then the sale and assignment of the mining right as provided in the
agreement shall cease forthwith to be any force or effect. Notwithstanding the above, if application for the mining right is approved but the
sale agreement ceases to be of any force or effect in consequence of the assignment approval not being granted, the seller will appoint
Zinoju as their contractor to undertake the mining operations in respect of the coal on the prospecting area in pursuance of the mining
right, which extracted coal shall be sold exclusively, and on consignment, to Zinoju. The Company is currently in the process of achieving
these conditions.
Should the sales agreement lapse in consequence of the non-fulfilment of the conditions above, the money deposited by Zinoju will be
reimbursed to Zinoju. Where the contractorship and supply agreement comes into effect, the deposit will not be refundable to Zinoju but
will be taken into account in determining the net amount payable per ton of coal extracted and sold pursuant to the contractorship and
supply agreement.
22) PROPOSED ACQUISITION OF RIVERSDALE MINING LIMITED
Proposed acquisition
On September 24, 2012, the Company and Rio Tinto PLC ("Rio Tinto") announced that they entered into a definitive agreement whereby
the Company will acquire 100% ownership of the shares and shareholder claims of Riversdale Mining Limited in Riversdale Holdings
(Proprietary) Limited ("RHPL") (the ”Acquisition”).
Forbes Coal will, as a result, acquire RHPL's 74% interest in the Zululand Anthracite Colliery ("ZAC"), a current producing anthracite mine,
and RHPL's 74% interest in the Riversdale Anthracite Colliery ("RAC"), an undeveloped anthracite resource. The balance of 26% of each
of ZAC and RAC is owned by BEE Partners. Both properties are located in the Kwa-Zulu Natal province of South Africa and are located
approximately 230 kilometres from Forbes Coal Dundee’s Properties.
The base consideration payable by the Company for the transaction is estimated to be ZAR 440 million (approximately $49.2 million), via a
structured deal with a fixed payment of ZAR 315 million (approximately $35.2 million) payable on closing, and two additional variable
payments each estimated to be ZAR 62.5 million (approximately $7.0 million each). The first variable payment will be based on saleable
production levels for the twelve months ending June 30, 2013 and the second variable payment is based on saleable production levels for
the twelve months ending June 30, 2014. In addition to these payments, Forbes Coal will also pay an annual revenue share of 10% on any
incremental revenue above ZAR 850 million (approximately $95.0 million), to be adjusted for inflation, until June 30, 2025.
Pursuant to the terms of the agreement the Company is required to pay ZAR 440 million (approximately $49,192,000) in cash to Rio Tinto
as follows:
-ZAR 5,000,000 deposit (approximately $559,000 paid on July 26, 2012);
-ZAR 40,500,000 deposit (approximately $4,527,900 paid on September 25, 2012);
-ZAR 269,500,000 (approximately $30,130,100) on closing;
-ZAR 62,500,000 (approximately $6,987,500) first variable payment;
-ZAR 62,500,000 (approximately $6,987,500) second variable payment;
The closing of this transaction is a subject to various regulatory and other conditions and approvals.
Loan facility
Investec is underwriting the funding for the Acquisition, by the way of the provision of guarantees of ZAR 394.5 million (approximately
$44.1 million) to Riversdale Mining Limited, and ultimately by providing debt funding for the same amount, for the payment of the purchase
consideration.
The debt has been structured as a loan facility to Forbes Coal Dundee which will then advance the funds to Bowwood, a newly
incorporated entity, which is a wholly owned subsidiary of the Company, and will purchase the shares and claims in RHPL.
In terms of the agreement with Investec, various assets have been pledged as security for transaction guarantees. These include the
following:
- Forbes Coal Dundee has pledged to Investec all its shares and ceded as a security to Investec all its secured property, in each case
individually and collectively with all the other relevant secured property, as continuing general converting collateral security. The
secured property means collectively, the bank accounts, insurances, trade receivables, any report provider claims, the relevant
documents, the shares, the claims and the related rights and all of the cedent’s rights and interests therein and thereto and claims
against any person in respect thereof of whatsoever nature and howsoever arising, and , individually, any property forming part thereof.
This therefore includes Forbes Coal Dundee’s interests in Zinoju.
- Forbes & Manhattan (Coal) Inc. has pledged to Investec all the relevant shares and ceded as a security to Investec all the relevant
secured property, in each case individually and collectively with all the relevant secured property, as continuing general covering
collateral security. The secured property means collectively, the shares, the claims, the acquisition documents and the related rights
and all of the pledgor’s rights and interests therein and thereto and claims against any person in respect thereof whatsoever nature and
howsoever arising, and individually, any property forming part thereof, where shares are defined as being all of the following shares
and securities of which the pledgor is or becomes the legal or beneficial owner for time to time or which may be issued or transferred to
it in future:
-all the shares of any class in their share capital of each relevant subsidiary;
-all other securities in the capital of each relevant subsidiary; and
-any securities issued in substitution or exchange for the securities above.
- Zinoju has issued an undertakings letter in terms of which it has agreed to comply with its mining rights and to uphold and timeously
comply in full with all its obligations to Forbes Coal Dundee under the mining contract between the parties. It has also undertaken to
ensure that it takes all appropriate steps within its control or open to it which are required from time to time for the maintenance, care,
preservation and protection of all mining rights held by it.
- The Company has agreed to grant as security for the secured obligations a pledge over its shares in Forbes & Manhattan (Coal) Inc. to
Investec.
- A subordination agreement has been entered into in terms of which the various Company’s legal entities subordinate any inter-group
loans in favour of Investec.
- Bowwood has agreed to be an additional guarantor and to be bound by the terms of this agreement as an additional guarantor.
As at November 30, 2012, various regulatory conditions precedent to the acquisition agreement are still outstanding. Once the conditions
are met Rio Tinto will be able to request payment under the transaction guarantees. Accordingly, no liability exists to Investec in respect of
the transaction guarantees, other than in respect of the front–end fee. Pursuant to the loan agreement, the Company must pay to the
lender a front–end fee equal to 4% of the guarantee facility amount. This fee of ZAR 15,780,000 (approximately $1,764,204) has been
accrued in full on the closing date of the guarantee facility agreement.
As at November 30, 2012, the Company incurred the following costs related to the loan facility:
- Investec front-end fee - $1,764,204
- Consulting and legal fees - $123,453
See additional securities in respect of the Investec term loan facility and revolving loan facility as disclosed in Note 14.
23) SUBSEQUENT EVENTS
Subsequent to November 30, 2012, 265,898 common shares previously purchased and settled under the NCIB at an average price of
$0.5551 per share were cancelled. Also subsequent to November 30, 2012 the Company purchased, settled and cancelled under the
NCIB an additional 123,428 common shares.
Subsequent to November 30, 2012, 7,381 common stock share options expired.
Johanesburg
18 January 2013
Sponsor
Sasfin Capital
(A Division of Sasfin Bank Limited)
Date: 18/01/2013 04:39:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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