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EPS - Eastern Platinum Limited - Managements discussion and analysis of
financial conditions and results of operations for the three and six months
ended June 30, 2008
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA2768551038
Share Code AIM: ELR ISIN: CA2768551038
Share Code JSE: EPS ISIN: CA2768551038
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
June 30, 2008 and for the three and six months then ended in comparison to the
same periods in 2007. This MD&A should be read in conjunction with the
unaudited consolidated financial statements for the three and six months ended
June 30, 2008 and supporting notes that have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP"). The Company reports
certain non-GAAP measures such as EBITDA and cash costs per ounce which are
explained in Section 1.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is August 14, 2008. Additional information relating
to the Company is available on SEDAR at www.sedar.com.
Overview
Eastplats is an expanding platinum group metals ("PGM") producer engaged in the
mining and development of PGM`s with properties located in various provinces in
South Africa. All of the Company`s properties are situated on the western and
eastern limbs of the Bushveld Complex ("BC"), the geological environment that
supports over 75% of the world`s PGM supply.
The Company`s primary operating asset is an 85% direct and indirect interest in
Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the eastern limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum JV ("Mareesburg") and a 93.4% direct and indirect interest in Spitzkop
PGM Project ("Spitzkop") both located on the eastern limb of the BC.
Highlights for the quarter ended June 30, 2008 ("Q2 2008")
Eastplats recorded net earnings of $12,705,000 ($0.02 per share) compared to a
net loss of $4,693,000 ($0.01 loss per share) in the second quarter of 2007
("Q2 2007"). The Company`s results improved over Q2 2007 primarily due to a
significant increase in revenues and PGM production.
- Production at the Crocodile River Mine ("CRM") increased by 21% to 30,311
PGM ounces, from 25,111 PGM ounces in Q2 2007.
- Revenues from CRM increased by 125% to $50,143,000 compared to $22,324,000
in Q2 2007.
- The average sales price per PGM ounce increased by 49% to $1,657 compared
to $1,113 in Q2 2007.
- EBITDA increased by 538% to $29,085,000 from $5,033,000 in Q2 2007.
- Operating cash costs decreased by 1% to $696 per ounce, compared to $702
per ounce in Q2 2007.
- Recovery rates improved to 73%, compared to 69% in Q2 2007, following
planned improvements to the concentrator circuit at the Crocodile River
Mine.
- Grades improved to 4.03 grams per tonne (5PGE+Au) compared to 3.97 grams
per tonne (5PGE+Au) in Q2 2007.
- Stoping units for the quarter increased by 25% to a record 44,277 square
meters, compared to 35,315 square meters in Q2 2007.
- Total underground development increased by 16% to 5,575 meters during the
quarter (4,807 meters in Q2 2007) as the Company continues to make
substantial progress in the development of the ore reserve at CRM.
- The average mining rate increased by 25% to 101,711 tonnes per month during
Q2 2008 from 81,425 tonnes per month in Q2 2007.
- At June 30, 2008, the Company had a cash position (including cash and cash
equivalents and short term investments) of $195,387,000 (December 31, 2007
- $189,856,000).
Contents of the MD&A
1. Results of operations for the three and six months ended June 30, 2008
1.1. Mining operations at the Crocodile River Mine ("CRM")
1.2. CRM non-GAAP measures
1.3. Development projects - CRM
1.4. Development projects - Spitzkop and Kennedy`s Vale
1.5. Development projects - Mareesburg
1.6. Corporate and other expenses
2. Liquidity and Capital Resources
2.1. Outlook
2.2. Share capital
2.3. Contractual Obligations and Commitments
3. Related party transactions
4. Adoption of new accounting standards and accounting pronouncements
5. Internal control over financial reporting
6. Cautionary statement on forward-looking information
1. Results of Operations for the three and six months ended June 30, 2008
The following table sets forth selected consolidated financial information for
the three and six months ended June 30, 2008 and 2007:
Consolidated statements of operations
(Unaudited, expressed in thousands of U.S. dollars, except share and per share
amounts)
Three months ended June 30,
2008 2007
Revenue $ 50,143 $ 22,324
Cost of operations
Production costs (21,058) (17,853)
Depletion and depreciation (4,450) 325
Mine operating earnings 24,635 4,796
Expenses
General and administrative (5,309) (5,049)
Stock-based compensation (340) (1,642)
Operating income (loss) 18,986 (1,895)
Other income (expense)
Interest income 1,855 1,493
Interest expense (1,935) (2,917)
Foreign exchange gain (loss) 71 (1,938)
Income (loss) before income
taxes
and non-controlling interests 18,977 (5,257)
Future income tax (expense)
recovery (5,532) 976
Non-controlling interests (740) (412)
Net income (loss) for the
period 12,705 (4,693)
Basic and diluted income
(loss) per share $ 0.02 $ (0.01)
Weighted average common shares
outstanding
Basic 677,772,370 604,376,451
Fully diluted 713,615,412 604,376,451
June 30, December 31,
Consolidated balance sheets
2008 2007
Total assets $ 1,038,098 $ 1,063,076
Total long-term liabilities $ 143,365 $ 155,632
Six months ended June 30,
2008 2007
Revenue $ 106,551 $ 53,656
Cost of operations
Production costs (40,808) (37,616)
Depletion and depreciation (8,812) (2,393)
Mine operating earnings 56,931 13,647
Expenses
General and administrative (9,642) (8,787)
Stock-based compensation (1,567) (14,224)
Operating income (loss) 45,722 (9,364)
Other income (expense)
Interest income 4,310 1,581
Interest expense (2,162) (3,401)
Foreign exchange gain (loss) 1,128 (2,880)
Income (loss) before income
taxes
and non-controlling interests 48,998 (14,064)
Future income tax (expense)
recovery (13,780) 1,290
Non-controlling interests (2,551) (1,858)
Net income (loss) for the period 32,667 (14,632)
Basic and diluted income (loss)
per share $ 0.05 $ (0.03)
Weighted average common shares
outstanding
Basic 673,822,281 562,481,710
Fully diluted 716,094,886 562,481,710
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts). All financial data previously reported in Canadian dollars
have been converted to U.S. dollars.
2008
June 30 March 31
Revenues $ 50,143 $ 56,408
Cost of operations (25,508) (24,112)
Mine operating earnings 24,635 32,296
Expenses (G&A and stock-based compensation) (5,649) (5,560)
Operating income (loss) 18,986 26,736
Net income (loss) $ 12,705 $ 19,962
Income (loss) per share - basic $ 0.02 $ 0.03
Income (loss) per share - diluted $ 0 .0 2 $ 0.03
2007
Dec 31 Sept 30 June 30 March 31
Revenues $ 34,126 $ 31,452 $ 22,324 $ 31,332
Cost of operations (26,095) (24,388) (17,528) (22,481)
Mine operating
earnings 8,031 7,064 4,796 8,851
Expenses (G&A and
stock-based
compensation) (18,022) (3,534) (6,691) (16,320)
Operating income
(loss) (9,991) 3,530 (1,895) (7,469)
Net income (loss) $ (10,814) $ (1,390) $ (4,693) $ (9,939)
Income (loss) per
share - basic $ (0.02) $ - $ (0.01) $ (0.02)
Income (loss) per
share - diluted $ (0.02) $ - $ (0.01) $ (0.02)
2006
Dec 31 Sept 30
Revenues $ 25,062 $ 22,488
Cost of operations (19,842) (17,738)
Mine operating earnings 5,219 4,750
Expenses (G&A and stock-based compensation) (4,020) (3,365)
Operating income (loss) 1,199 1,385
Net income (loss) $ 6,550 $ (2,190)
Income (loss) per share - basic $ 0.01 $ -
Income (loss) per share - diluted $ 0.01 $ -
1.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for the quarters ended June 30,
2008, March 31, 2008, and the four quarters in 2007:
Crocodile River Mine operations
Three months ended
June 30, March 31, Dec 31,
2008 2008 2007
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce
data)
Revenue $ 50,143 $ 56,408 34,126
Cost of operations
Production costs (21,058) (19,750) (20,947)
Depletion and depreciation (4,450) (4,362) (5,148)
Mine operating earnings 24,635 32,296 8,031
EBITDA (1) $ 29,085 $ 36,658 $ 13,179
Sales - PGM ounces 30,311 27,825 26,632
Average realized price per
ounce (2) $ 1,657 $ 1,621 $ 1,305
Average basket price $ 1,969 $ 1,927 $ 1,551
Cash costs per ounce of PGM (1) $ 696 $ 698 $ 774
Key production statistics
Run of mine tonnes 305,134 279,036 335,263
Total tons processed 337,471 349,497 383,159
Stoping units (square meters) 44,277 38,349 37,374
Development meters 5,575 4,409 4,759
On-reef development meters 3,230 2,343 2,814
Metal in concentrate sold
(ounces)
Platinum (Pt) 15,333 13,684 13,264
Palladium (Pd) 6,777 6,201 6,013
Rhodium (Rh) 2,543 2,335 2,182
Gold (Au) 132 121 154
Iridium (Ir) 994 1,078 955
Ruthenium (Ru) 4,532 4,405 4,064
Total PGM ounces 30,311 27,825 26,632
Sept 30, June 30, March 31,
2007 2007 2007
Key financial statistics
(amounts stated in thousands of
U.S. dollars, except per ounce
data)
Revenue $ 31,452 $ 22,324 $ 31,332
Cost of operations
Production costs (20,416) (17,291) (19,763)
Depletion and depreciation (3,972) (237) (2,718)
Mine operating earnings 7,064 4,796 8,851
EBITDA (1) $ 11,036 $ 5,033 $ 11,569
Sales - PGM ounces 29,417 25,111 26,807
Average realized price per
ounce (2) $ 1,088 $ 1,113 $ 1,130
Average basket price $ 1,293 $ 1,322 $ 1,343
Cash costs per ounce of PGM (1) $ 637 $ 702 $ 704
Key production statistics
Run of mine tonnes 323,777 244,275 211,830
Total tons processed 399,022 369,453 415,112
Stoping units (square meters) 35,262 35,315 26,441
Development meters 4,868 4,807 3,687
On-reef development meters 2,570 1,767 2,391
Metal in concentrate sold
(ounces)
Platinum (Pt) 14,630 12,829 14,303
Palladium (Pd) 6,727 5,605 5,842
Rhodium (Rh) 2,418 2,002 1,782
Gold (Au) 166 137 715
Iridium (Ir) 1,056 885 787
Ruthenium (Ru) 4,420 3,654 3,378
Total PGM ounces 29,417 25,111 26,807
(1) These are non-GAAP measures as described in Section 1.2
(2) Average realized price is the average basket price, net of associated
smelter costs, under the Company`s primary off- take agreement.
Quarter ended June 30, 2008 compared to quarter ended June 30, 2007
For the quarter ended June 30, 2008, PGM sales were 30,311 ounces compared with
25,111 ounces for the quarter ended June 30, 2007. This 21% increase is
attributable to improved underground production (305,134 tonnes in Q2 2008
compared to 244,275 tonnes in Q2 2007), improved recovery rates (73% in Q2 2008
compared to 69% in Q2 2007) and an increase in grades (4.03 grams per tonne in
Q2 2008 compared to 3.97 grams per tonne in Q2 2007). Offsetting this was a 9%
decrease in tonnes processed (337,471 tonnes in Q2 2008 compared to 369,453 in
Q2 2007) as a result of the planned reduction of the treatment of low grade
tailings.
Operating cash costs decreased to $696 per ounce for the quarter ended June 30,
2008 compared to $702 per ounce for the same quarter in 2007. A 9% drop in the
value of the Rand against the U.S dollar and a 21% increase in the number of
ounces sold contributed to a decrease in cash costs per ounce. However, this
was offset by inflationary cost increases for labour, consumables, particularly
steel, fuel related expenditures, and mine operating supplies. Labour costs
increased by 24% compared to Q2 2007, as a result of a 22% increase in the
labour force compared to the same period in 2007 and a general wage increase
awarded to mine workers in March 2008. Operating cash cost per ounce is a
non-GAAP measure. A reconciliation of production costs, as reported in the
income statement, to cash operating costs is shown under Section 1.2 below.
The average mining rate in Q2 2008 increased to 101,711 tonnes per month from
81,425 tonnes per month in Q2 2007, with grades maintaining a consistent
average of 4.03 g/t (5PGE+Au) during the quarter. "5PGE+Au" is defined as
platinum, palladium, rhodium, iridium, ruthenium and gold.
The Company continues to make significant progress with underground development
at CRM in order to generate an 18 to 24 month reserve base necessary to support
the production build up towards a target production rate of 200,000 tonnes of
ore per month. Underground development increased 16% to 5,575 meters in Q2 2008
compared with 4,807 meters in Q2 2007. The Company has also experienced a
continued improvement in mining operations as a result of increasing the level
of on-reef development which has allowed an improvement in mining flexibility
that is required to maintain the planned production build-up at the mine.
On-reef development was 3,230 meters in Q2 2008, a 16% increase over the same
quarter in 2007. Stoping units for Q2 2008 were 44,277 square meters, a record
quarterly achievement.
In Q2 2008, optimization of the recently commissioned chrome recovery circuit
commenced and consequently, the chrome penalty has been reduced to $2.6 million
from $4.6 million in Q2 2007.
Chrome revenues have increased to $3.4 million from $0.5 million over the same
period.
In Q2 2008, CRM suffered five lost time injuries (compared to six lost time
injuries in Q2 2007) resulting in a Lost Time Injury Frequency Rate ("LTIFR")
of 1.85 (3.68 in Q2 2007). The Company`s twelve month rolling LTIFR of 2.15 to
June 30, 2008 compares favorably against most of the other platinum producers
in South Africa.
Quarter ended June 30, 2008 compared to the quarter ended March 31, 2008
("Q1 2008")
PGM ounces sold were up by 9% in Q2 2008 compared to the quarter ended March
31, 2008 as a result of increased underground production (305,134 tonnes in Q2
2008 compared to 279,036 tonnes in Q1 2008 at grades similar to those achieved
in the previous quarter. Total tonnage treated decreased slightly as a result
of a planned reduction in the treatment of low grade tailings as the current
tailings area was depleted. Planning is in progress to more effectively treat
tailings from the existing dam. Underground development increased to 5,575
meters from 4,409 meters in Q1 2008, and on-reef development increased to 3,230
meters from 2,343 meters in Q1 2008.
Two significant concentrator upgrades were completed as planned during Q2 2008,
and following these upgrades, the recovery rates declined from 78% in Q1 2008
to 73% in Q2 2008 as the circuit was brought back on stream and the system was
balanced. Recoveries are expected to return to the 78% range as the
concentrator achieves steady state operating conditions.
Operating cash costs of $696 per ounce in Q2 2008 were similar to the $698 per
ounce achieved in Q1 2008 as total cash operating costs and ounces produced
both increased by about 9% compared to Q1 2008. Total cash operating costs
increased due to a 4.6% increase in wages, continuing inflationary pressures on
bulk commodity consumables, and increases in underground equipping and ore
transport as a result of higher production volumes. The increase in wages was
due to a general annual increase awarded to mine workers in March 2008 along
with a slight increase in the labour complement at the mine.
Six months ended June 30, 2008 ("H1 2008") compared to six months ended
June 30, 2007 ("H1 2007")
In H1 2008, the Company sold 58,136 PGM ounces, an increase of 12% compared to
H1 2007, primarily as a result of higher volumes mined in 2008 (584,170 tonnes
mined in H1 2008 compared to 456,105 tonnes mined in H1 2007), an increase in
on-reef development (5,573 meters in H1 2008 compared to 4,158 meters in
H1 2007) and improved recovery (75% in H1 2008 compared to 71% in H1 2007).
The realized price per ounce improved from $1,121 in H1 2007 to $1,642 in
H1 2008 as a result of a strong increase in PGM prices beginning in late 2007.
Operating cash costs of $697 per ounce were achieved in H1 2008, compared to
$703 per ounce in H1 2007. The cash cost per ounce of these two periods were
similar as higher total cash operating costs in 2008 were offset by an increase
in the number of ounces produced in 2008. Total cash operating costs were
higher in H1 2008 due to increased wages, and inflationary cost increases for
consumables, particularly steel, fuel related expenditures, and mine operating
supplies.
1.2 CRM non-GAAP measures
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") at CRM. This is a
liquidity non-GAAP measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-GAAP measure which is a common
performance measure used in the precious metals industry. These non-GAAP
measures do not have any standardized meaning prescribed under Canadian GAAP,
and therefore they may not be comparable to similar measures employed by other
companies.
The following table provides a reconciliation of EBITDA and cash operating
costs per ounce of PGM sold to the financial statements:
Crocodile River Mine non-GAAP measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
June 30, March 31, December 31,
2008 2008 2007
Mine operating earnings $ 24,635 $ 32,296 $ 8,031
Depletion and depreciation 4,450 4,362 5,148
EBITDA (1) 29,085 36,658 13,179
Production costs as
reported 21,058 19,750 20,947
Less overhead costs (2) 38 (323) (322)
Cash operating costs 21,096 19,427 20,625
Ounces sold 30,311 27,825 26,632
Cash cost per ounce sold $ 696 $ 698 $ 774
September 30, June 30, March 31,
2007 2007 2007
Mine operating earnings $ 7,064 $ 4,796 $ 8,851
Depletion and depreciation 3,972 (237) 2,718
EBITDA (1) 11,036 4,559 11,569
Production costs as
reported 20,416 18,154 19,763
Less overhead costs (2) (525) (525) (891)
Cash operating costs 19,891 17,629 18,872
Ounces sold 29,417 25,111 26,807
Cash cost per ounce sold $ 676 $ 702 $ 704
(1) EBITDA does not include non-operating general and administrative expenses
at CRM.
(2) Overhead costs include costs such as safety, housing, technical services
and planning.
1.3 Development projects - CRM
During the quarter ended June 30, 2008, the Company spent a total of
$10.9 million on development projects at CRM, which include the Zandfontein,
Kareespruit, and Crocette sections.
Commissioning of the existing vertical shaft, which was reequipped and
refurbished to allow for more efficient mining operations and development at
deeper levels, has been delayed until September primarily as a result of delays
in winder commissioning.
At the Crocette section, underground development is expected to intercept the
ore body by the fourth quarter of 2008. The Crocette section is anticipated to
build up to full production by the second half of 2010 with mining and
production reaching 40,000 tonnes per month or an estimated 55,000 PGM ounces
per year.
Delineation and evaluation drilling is in progress with the objective of
upgrading the current resource base. The resource upgrade drilling programme
continues at Kareespruit and the down dip extension areas of Zandfontein and
Crocette. As at June 30, 2008, 28 out of 51 planned boreholes were completed.
Drilling is updating the knowledge of the geological structures at Crocette and
Kareespruit. Updating of the geological model has commenced with the objective
of providing an updated block model and resource statement.
Preparation of the mining rights application for the Kareespruit area has
commenced. Preliminary indications are that the Kareespruit section has the
potential to become a standalone operation capable of mining up to 200,000
tonnes per month.
1.4 Development projects - Spitzkop and Kennedy`s Vale
During Q1, 2008, the Department of Minerals and Energy ("DME") granted amended
new order prospecting permits for Spitzkop. During the quarter ended June 30,
2008, the Company commenced work on a bulk sampling programme. The box-cuts for
both the Merensky Reef and UG2 have been blasted and cleaned and support work
is nearing completion on the Merensky box cut. Design of the mine and
concentrator continues and tender responses have been received for the
remaining long lead items for which orders will shortly be placed. Certain key
mining equipment and the grinding mills have already been delivered. No
material problems have been identified in sourcing the necessary equipment to
comply with the planned trial mining schedule. The company is awaiting feedback
from the DME with respect to the environmental scoping report submitted in
Q1 2008 as part of the new order mining right application. The Company expects
to submit the full Environmental and Impact Assessment ("EIA") during second
half of 2008.
1.5 Development projects - Mareesburg
At Mareesburg, work is continuing on updating a feasibility study and on
obtaining a new order mining right from the DME. The full EIA was submitted to
the DME in Q2 2008.
1.6 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg and CRM
administrative offices. Such costs include legal and accounting, regulatory,
executive management fees, investor relations, travel and consulting fees. G&A
for Q2 2008 is consistent with G&A for Q2 2007 with balances of $5,309,000 and
$5,049,000 respectively. For the six months ended June 30 2007 and 2008, G&A
increased from $8,787,000 to $9,642,000. This increase was mainly due to the
hiring of senior personnel in Vancouver and in Johannesburg in late 2007 to
oversee the Company`s expansion projects and operations.
During the six months ended June 30, 2008, the Company`s board of directors
granted 1,500,000 stock options to employees and a new director. All of these
options were granted in March 2008. Stock based compensation for the six months
ended June 30, 2008 was $1,567,000. The Company had a 10% rolling stock option
plan which expired on March 31, 2008. At the Company`s annual general meeting
on June 4, 2008, shareholders approved a new stock option plan which allows for
the grant of options to purchase up to a maximum of 75,000,000 common shares of
the Company.
Interest income recorded during the quarter ended June 30, 2008 was $1,855,000
compared with $1,493,000 in the same period in 2007. Interest income during the
six months ended June 30, 2008 was $4,310,000 compared with $1,581,000 in the
same period in 2007. The increase in interest income was the result of the
Company`s higher average cash balances during the three and six months ended
June 30, 2008 as compared with the same periods in 2007. The Company raised
Cdn$200 million from a financing completed in May 2007.
Interest expense is comprised primarily of interest incurred on equipment
financing in South Africa and interest on debt related to Gubevu. Interest
expense in the quarter ended June 30, 2008 was $1,935,000 compared with
$2,917,000 in the same period in 2007. Similarly, interest expense for the six
months ended June 30, 2008 was $2,162,000 compared with $3,401,000 in the same
period in 2007. The higher interest expense balances in 2007 were the result of
an accounting adjustment made to the financial statements for the year ended
June 30, 2007. The Company changed its year-end to December 31 shortly after
the June 30, 2007 fiscal year-end.
During the three and six months ended June 30, 2008, the Company recorded an
income tax expense of $5,532,000 and $13,780,000 respectively. Both of these
expenses are based on net income generated at CRM during the period. Loss carry
forwards and other tax assets were utilized such that no cash taxes were
payable. The consolidated balance sheet reflects a total future income tax
liability of $145,864,000 which arose primarily as a result of the step-up to
fair value of the net assets acquired on business acquisitions during the years
ended June 30, 2006 and June 30, 2007.
2. Liquidity and Capital Resources
At June 30, 2008, the Company had working capital of $204,378,000 (December 31,
2007 - $196,681,000) and cash and cash equivalents and short-term investments
of $195,387,000 (December 31, 2007 - $189,856,000) in highly liquid, fully
guaranteed, bank sponsored instruments. The Company is not exposed to financial
instruments involving the US residential property markets or mortgages.
The Company had no long-term debt at June 30, 2008, other than asset retirement
obligations relating primarily to its Crocodile River Mine, capital lease
obligations relating to mining vehicles with lease terms of five years with
options to purchase for a nominal amount at the conclusion of the lease, and
payments in connection with the Company`s acquisition of 42.39% of the shares
of Gubevu during the year ended June 30, 2007. See Contractual Obligations
under Section 2.3 below.
2.1 Outlook
Despite the current volatility of precious metal prices, the Company
anticipates prices of the platinum group metals to remain strong at least
through the next two years. Based on this outlook and planned production levels
at CRM, the Company expects to receive significant cash flows from CRM for the
next several years. Together with the Company`s current cash balances and cash
from the anticipated exercise of its Cdn$1.80 warrants, which expire in 2009, a
significant part of the cash required for the Company to develop the Crocette
deposit at CRM and the Spitzkop and Mareesburg projects maybe funded.
However, the Company may require additional funding in order to bring all these
projects into commercial production. Additional funding may include external
financing, joint venture or other third party participation in one or more of
the projects, or the public or private sales of equity or debt securities of
the Company.
However, if volatile global and market conditions result in a prolonged and
significant decline in PGM prices, then the cash flows from CRM and current
cash balances may be insufficient to advance any or all of the Company`s
projects to the production stage. This, along with deteriorating market
conditions, could result in the Company having difficulty in obtaining equity
financing, external financing or third party participation. There can be no
assurance that additional funding will be available to the Company or, if
available, that this funding will be on acceptable terms. If adequate funds are
not available, the Company may be required to delay or reduce the scope of any
or all of its development projects.
2.2 Share Capital
During the three months ended June 30, 2008, the Company did not grant any
stock options. During the same period, 160,000 options were exercised at a
weighted average exercise price of Cdn$1.10 for proceeds of Cdn$175,000 and
8,706,677 warrants were exercised at an exercise price of Cdn$2.00 per common
share for proceeds of Cdn$17,413,000.
During the six months ended June 30, 2008, the Company granted 1,500,000 stock
options with an exercise price of Cdn$3.38 and expiry dates of February 20,
2018 to March 27, 2018. Stock based compensation expense during this period was
$1,567,000. During the same period, 320,000 options were exercised at a
weighted average exercise price of $1.53 for proceeds of $466,000. 10,000 of
these options were exercised without cash payment under the "Share Appreciation
Rights" clause in the Stock Option Plan. 10,824,077 warrants were exercised at
a weighted average exercise price of Cdn$1.97 per common share for proceeds of
$21,367,000.
On April 25, 2008, the Company`s warrants that trade on the Toronto Stock
Exchange under the symbol "ELR.WT" expired. A total of 1,937,977 warrants
expired unexercised.
As at August 14, 2008, the Company had:
- 680,251,290 common shares outstanding;
- 47,120,000 stock options outstanding, which are exercisable at prices ranging
from Cdn$0.56 to Cdn$3.38 most of which expire between 2011 and 2018; and
- 58,485,996 share purchase warrants outstanding, which are exercisable at
Cdn$1.80 per share and expire on March 28, 2009. These warrants are traded on
the Toronto Stock Exchange under the symbol "ELR.WT.A".
2.3 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at June 30, 2008
were as follows:
(in thousands of U.S.dollars)
Less than More than
Total 1 year 1-5 years 5 years
Asset retirement
obligations $ 10,699 $ - $ - $ 10,699
Capital expenditure
contracted at June 30,
2008
but not recognized on
the balance sheet 47,358 47,358 - -
Capital lease obligations 6,343 1,318 5,025 -
Obligations related to
Gubevu acquisition 3,545 3,545 - -
$ 67,945 $52,221 $ 5,025 $ 10,699
Pursuant to the Company`s acquisition of a 42.39% interest in Gubevu Consortium
Holdings (Pty) Ltd. ("Gubevu") during the year ended June 30, 2007, the
Company entered into an agreement to pay an unrelated third party an amount
of R55.4 million that existed in the underlying Gubevu agreements as an
obligation of Gubevu. Half of this was paid in June 2008. The remaining
amount, which is due in June 2009, has been recorded at a discounted value
of $3,301,000 (27.7 million Rand) under current portion of long-term
liabilities.
3. Related Party Transactions
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. During the three and six months
ended June 30, 2008 the Company paid $336,000 and $711,000 respectively for
management fees, consulting fees and reimbursements of expenses to private
companies controlled by officers and directors of the Company, compared to
$204,000 and $398,000 respectively during the same three and six month periods
in 2007. The increase over the prior comparative period is due to the hiring of
two executive officers in November 2007.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
4. Adoption of New Accounting Standards and Accounting Pronouncements
Effective January 1, 2008, the Company adopted four new accounting standards
that were issued by the Canadian Institute of Chartered Accountants. These
accounting policy changes were adopted on a prospective basis with no
restatement of prior period financial statements.
CICA Handbook Sections 3862 "Financial Instruments - Disclosures" and Section
3863 "Financial Instruments - Presentation" replace Section 3861 "Financial
Instruments - Disclosure and Presentation". The new standards carry forward the
presentation requirements for financial instruments and enhance the disclosure
requirements by placing increased emphasis on disclosures about the nature and
extent of risks arising from financial instruments and how the entity manages
those risks.
CICA Handbook Section 1535 requires the company to disclose (a) its objectives,
policies and processes for managing capital; (b) quantitative data about what
the entity regards as capital; (c) whether the entity has complied with any
capital requirements; and (d) if it has not complied, the consequences of such
non- compliance.
CICA Handbook Section 3031 replaced the existing inventories standard. The new
standard requires inventory to be valued on a first-in, first-out or weighted
average basis, which is consistent with the Company`s current treatment.
The Company`s South African subsidiaries prepare their financial statements in
accordance with International Financial Reporting Standards ("IFRS") and its
interpretations adopted by the International Accounting Standards Board. The
subsidiaries` statements are adjusted to Canadian GAAP for the consolidated
financial statements. In February 2008, the CICA announced that Canadian
generally accepted accounting principles (GAAP) for publicly accountable
enterprises will be replaced by International Financial Reporting Standards
(IFRS) for fiscal years beginning on or after January 1, 2011.
Companies will be required to provide IFRS comparative information for the
previous fiscal year. Accordingly the conversion from Canadian GAAP to IFRS
will be applicable to the Company`s reporting for the first quarter of 2011 for
which the current and comparative information will be prepared under IFRS. The
Company expects the transition to IFRS to impact accounting, financial
reporting, and IT systems and processes. The Company is currently assessing the
impact of the transition to IFRS. Training and additional resources will be
engaged to ensure the timely conversion to IFRS.
5. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the
Company are responsible for the design of internal control over financial
reporting within the Company in order to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with Canadian GAAP. Management
has evaluated the design of the Company`s internal control and procedures over
financial reporting as of the end of the period covered by these annual
filings, and believes the design to be sufficient to provide such reasonable
assurance.
The CEO and CFO have also evaluated the effectiveness of the Company`s
disclosure controls and procedures as of the quarter ended June 30, 2008 and
have concluded that the Company`s disclosure controls and procedures provide
reasonable assurance that material information relating to the Company,
including its consolidated subsidiaries, was made known to them and reported as
required, particularly during the period in which these annual filings were
being prepared.
Management of the Company, including the CEO and CFO, do not expect that the
Company`s disclosure controls and procedures will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
reasonable but not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to the associated costs.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
Other than described above, there were no changes in the Company`s internal
control over financial reporting during the quarter ended June 30, 2008 that
have materially affected, or are reasonably likely to affect, the Company`s
internal control over financial reporting.
6. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, are intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise, except to the extent required by applicable laws.
August 14, 2008
Ian Rozier
Date: 14/08/2008 15:24:02 Supplied by www.sharenet.co.za
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