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EPS - Eastern Platinum - Management`s Discussion And Analysis Of Financial

Release Date: 13/11/2008 17:03
Code(s): EPS
Wrap Text

EPS - Eastern Platinum - Management`s Discussion And Analysis Of Financial Conditions And Results Of Operations For The Three And Nine Months Ended September 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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2008 and for the three and nine 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 nine months ended September 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 November 13, 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 PGMs 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 September 30, 2008 ("Q3 2008") Eastplats recorded a net loss of $10,561,000 ($0.02 loss per share) compared to a net loss of $1,390,000 ($0.00 loss per share) in the third quarter of 2007 ("Q3 2007"). The Company`s net loss increased over Q3 2007 primarily due to a significant decline in the price of PGMs during Q3 2008 which resulted in negative provisional price ad justments. * Production at the Crocodile River Mine ("CRM") increased by 5% to 30,758 PGM ounces, from 29,417 PGM ounces in Q3 2007. * Negative provisional sales price adjustments of $29,416,000 were recorded in the quarter, causing revenues from CRM to decrease by 70% to $9,291,000 compared to $31,452,000 in Q3 2007. (See Table 4 for reconciliation of revenue and provisional price adjustments.) * The average realized basket price per PGM ounce was $1,193, an increase of 10% compared to $1,088 in Q3 2007, but a decrease of 28% compared to $1,657 in the second quarter of 2008. * EBITDA was negative $11,338,000 compared to $11,036,000 in Q3 2007. * Operating cash costs were $672 per ounce, an increase of 5% compared to $637 per ounce in Q3 2007, but a decrease of 3% compared to $696 per ounce in the second quarter of 2008. * Operating cash costs net of by-product credits was $521 per ounce, as the chrome recovery circuit became fully integrated at the end of the last quarter. * Recovery rates improved to 78%, compared to 72% in Q3 2007, following planned improvements to the concentrator circuit at the Crocodile River Mine. * Average grade was 3.99 grams per tonne (5PGE+Au) compared to 4.10 grams per tonne (5PGE+Au) in Q3 2007. * Stoping units for the quarter increased by 12% to 39,652 square meters, compared to 35,262 square meters in Q3 2007. * Total underground development increased by 15% to 5,599 meters during the quarter (4,868 meters in Q3 2007). * The average mining rate decreased by 1% to 106,487 tonnes per month during Q3 2008 from 107,926 tonnes per month in Q3 2007. * At September 30, 2008, the Company had a cash position (including cash, cash equivalents and short term investments) of $172,060,000 (December 31, 2007 - $189,856,000). Contents of the MD&A 1. Results of operations for the three and nine months ended September 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 nine months ended September 30, 2008 The following table sets forth selected consolidated financial information for the three and nine months ended September 30, 2008 and 2007: Table 1 Consolidated statements of operations (Unaudited, expressed in thousands of U.S. dollars, except share and per share amounts) Three months ended Sept 30, 2008 2007 Revenue $ 9,291 $ 31,452 Cost of operations Production costs (20,629) (20,416) Depletion and depreciation (4,716) (3,972) Mine operating earnings (loss) (16,054) 7,064 Expenses General and administrative (5,585) (3,480) Stock-based compensation (278) (54) Operating income (loss) (21,917) 3,530 Other income (expense) Interest income 1,975 2,188 Interest expense (659) (779) Foreign exchange gain (loss) (28) (5,344) Income (loss) before income taxes and non-controlling interests (20,629) (405) Future income tax (expense) recovery 6,363 (376) Non-controlling interests 3,705 (609) Net income (loss) for the period (10,561) (1,390) Basic and diluted income (loss) per share $ (0.02) $ (0.00) Weighted average common shares outstanding Basic 680,245,010 667,834,880 Fully diluted 680,245,010 667,834,880 Consolidated balance sheets September 30, December 31, 2008 2007 Total assets $ 969,058 $ 1,063,076 Total long-term liabilities $ 139,682 $ 155,632 Nine months ended Sept 30, 2008 2007 Revenue $ 115,842 $ 85,108 Cost of operations Production costs (61,437) (58,032) Depletion and depreciation (13,528) (6,365) Mine operating earnings (loss) 40,877 20,711 Expenses General and administrative (15,227) (12,267) Stock-based compensation (1,845) (14,278) Operating income (loss) 23,805 (5,834) Other income (expense) Interest income 6,285 3,769 Interest expense (2,821) (4,180) Foreign exchange gain (loss) 1,100 (8,224) Income (loss) before income taxes and non-controlling interests 28,369 (14,469) Future income tax (expense) recovery (7,417) 914 Non-controlling interests 1,154 (2,467) Net income (loss) for the period 22,106 (16,022) Basic and diluted income (loss) per share $ 0.03 $ (0.03) Weighted average common shares outstanding Basic 675,978,818 598,287,756 Fully diluted 705,249,374 598,287,756 Consolidated balance sheets Total assets Total long-term liabilities 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. Table 2 2008
Sept 30 June 30 March 31 Revenues $ 9,291 $ 50,143 $ 56,408 Cost of operations (25,345) (25,508) (24,112) Mine operating earnings (loss) (16,054) 24,635 32,296 Expenses (G&A and stock-based compensation) (5,863) (5,649) (5,560) Operating income (loss) (21,917) 18,986 26,736 Net income (loss) $ (10,561) $ 12,705 $ 19,962 Income (loss) per share - basic $ (0.02) $ 0.02 $ 0.03 Income (loss) per share - diluted $ (0.02) $ 0.02 $ 0.03 Average foreign exchange rates South African Rand to US dollar 0.1285 0.1287 0.1328 Canadian dollar to US dollar 0.9603 0.9901 0.9955 Period end foreign exchange rates South African Rand to US dollar 0.1197 0.1280 0.1229 Canadian dollar to US dollar 0.9397 0.9807 0.9742 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 (loss) 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) Average foreign exchange rates South African Rand to US dollar 0.1478 0.1409 0.1410 0.1381 Canadian dollar to US dollar 1.0189 0.9572 0.9102 0.8536 Period end foreign exchange rates South African Rand to US dollar 0.1453 0.1454 0.1416 0.1368 Canadian dollar to US dollar 1.0088 1.0052 0.9386 0.8661 2006 Dec 31 Revenues $ 25,062 Cost of operations (19,842) Mine operating earnings (loss) 5,219 Expenses (G&A and stock-based compensation) (4,020) Operating income (loss) 1,199 Net income (loss) $ 6,550 Income (loss) per share - basic $ 0.01 Income (loss) per share - diluted $ 0.01 Average foreign exchange rates South African Rand to US dollar 0.1369 Canadian dollar to US dollar 0.8784 Period end foreign exchange rates South African Rand to US dollar 0.1418 Canadian dollar to US dollar 0.8581 1.1 Mining operations at Crocodile River Mine ("CRM") The following is a summary of CRM`s operations for the quarters ended September 30, 2008, June 30, 2008, March 31, 2008, and the four quarters in 2007: Table 3 Crocodile River Mine operations Three months ended September 30, June 30, March 31, Dec 31,
2008 2008 2008 2007 Key financial statistics (amounts stated in thousands of U.S. dollars, except per ounce data) Revenue $ 9,291 $ 50,143 $ 56,408 34,126 Cost of operations Production costs (20,629) (21,058) (19,750) (20,947) Depletion and depreciation (4,716) (4,450) (4,362) (5,148) Mine operating earnings (loss) (16,054) 24,635 32,296 8,031 EBITDA (1) $ (11,338) $ 29,085 $ 36,658 $ 13,179 Sales - PGM ounces 30,758 30,311 27,825 26,632 Average realized price per ounce (2) $ 1,193 $ 1,657 $ 1,621 $ 1,305 Average basket price $ 1,438 $ 1,969 $ 1,927 $ 1,551 Cash costs per ounce of PGM (1) $ 672 $ 696 $ 698 $ 774 Key production statistics Run of mine tonnes 319,462 305,134 279,036 335,263 Total tonnes processed 317,602 337,471 349,497 383,159 Stoping units (square meters) 39,652 44,277 38,349 37,374 Development meters 5,599 5,575 4,409 4,759 On-reef development meters 3,556 3,230 2,343 2,814 Recovery 78% 73% 78% 72% Metal in concentrate sold (ounces) Platinum (Pt) 15,393 15,333 13,684 13,264 Palladium (Pd) 6,973 6,777 6,201 6,013 Rhodium (Rh) 2,581 2,543 2,335 2,182 Gold (Au) 123 132 121 154 Iridium (Ir) 1,083 994 1,078 955 Ruthenium (Ru) 4,605 4,532 4,405 4,064 Total PGM ounces 30,758 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 (loss) 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 tonnes 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 Recovery 72% 69% 73% 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 September 30, 2008 compared to the quarter ended June 30, 2008 ("Q2 2008") The Company settles its PGM sales three to five months following the physical delivery of the concentrates. Because of the sharp decline in PGM prices in Q3 2008, concentrate deliveries made prior to Q3 2008 were settled at much lower prices than those in effect on the dates of the deliveries. As a result, negative provisional price adjustments of $29,416,000 were recorded during the quarter. These adjustments also take into account all Q3 2008 deliveries which do not settle until the fourth quarter of 2008. These deliveries have been recorded at the net basket prices as at September 30, 2008. The following table shows a reconciliation of revenue and provisional price adjustments. Table 4 Crocodile River Mine Effect of provisional price adjustments on revenues (stated in thousands of U.S. dollars) Three months ended Nine months ended Sept 30, 2008 Sept 30, 2008 Revenue before provisional price adjustments $ 38,707 $ 146,925 Provisional price adjusments Negative adjustments to revenue upon settlement (17,069) (18,225) of prior periods` sales Mark-to-market adjustment on current (12,347) (12,858) period`s sales Revenue as reported in the income statement $ 9,291 $ 115,842 PGM ounces sold were up by 2% in Q3 2008 compared to Q2 2008 as a result of increased recovery rates (78% in Q3 2008 compared to 73% in Q2 2008), and a 5% increase in the rate of underground mining (319,462 run of mine tonnes in Q3 2008 compared to 305,134 tonnes in Q2 2008), offset slightly by lower grades than those achieved in the previous quarter (3.99 g/tonne in Q3 2008 compared to 4.03 g/tonne in Q2 2008). Total tonnage processed decreased by 6% 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. Total development for the quarter was 5,599 meters, comparable to the 5,575 meters achieved in Q2 2008, and on-reef development increased by 10% to 3,556 meters from 3,230 meters in Q2 2008. The Company has 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 is expensed for accounting purposes. As expected, recovery rates increased from 73% in Q2 2008 to 78% in Q3 2008 as the concentrator achieved steady state operating conditions subsequent to its upgrades during Q2 2008. Operating cash costs, a non-GAAP measure, decreased 3% to $672 per ounce in Q3 2008 compared to $696 per ounce in Q2 2008 as total cash operating costs decreased by about 2% and ounces produced increased by about 2% compared to Q2 2008. Total cash operating costs decreased primarily as a result of cost savings achieved with operating efficiencies compared to Q2 2008. A reconciliation of production costs, as reported in the income statement, to cash operating costs, is shown under Section 1.2 below under CRM non-GAAP measures. During the quarter, the chrome recovery circuit at CRM produced commercial quantities of chrome as a by-product of PGM production. A total of 65,536 tonnes of chrome was produced in Q3 2008, of which 44,079 tonnes were sold for total proceeds of $4,640,000. Operating cash costs dropped to $521 per ounce net of by-product credits. Operating cash costs net of by-product credits is also a non-GAAP measure. The chrome recovery circuit also significantly reduced chrome penalties in the PGM concentrate from $1,719,000 in Q3 2007 to $669,000 in Q3 2008. In Q3 2008, CRM suffered eight lost time injuries (compared to five lost time injuries in Q2 2008) resulting in a Lost Time Injury Frequency Rate ("LTIFR") of 3.02 (1.85 in Q3 2007). The Company`s twelve month rolling LTIFR of 3.15 to September 30, 2008 compares favorably with other platinum producers in South Africa. Quarter ended September 30, 2008 compared to quarter ended September 30, 2007 For the quarter ended September 30, 2008, PGM sales were 30,758 ounces compared with 29,417 ounces for the quarter ended September 30, 2007. This 5% increase is attributable to improved recovery rates (78% in Q3 2008 compared to 72% in Q3 2007), increased development work (5,599 development meters in Q3 2008 compared to 4,868 meters in Q3 2007), and increased on-reef development (3,556 meters in Q3 2008 compared to 2,570 meters in Q3 2007). Offsetting this was a 20% decrease in tonnes processed (317,602 tonnes in Q3 2008 compared to 399,022 in Q3 2007) as a result of the planned reduction of the treatment of low grade tailings, and a decrease in grades (3.99 grams per tonne in Q3 2008 compared to 4.10 grams per tonne in Q3 2007). Operating cash costs increased to $672 per ounce for the quarter ended September 30, 2008 compared to $637 per ounce for the same quarter in 2007. A 38% increase in on-reef development, which is expensed for accounting purposes, and a general 10% to 12% inflationary cost increase lead to the increase in cash costs per ounce. This is offset by a 9% drop in the value of the Rand against the U.S dollar and a 5% increase in the number of ounces produced in Q3 2008 compared to Q3 2007. The average mining rate in Q3 2008 decreased to 106,487 tonnes per month from 107,926 tonnes per month in Q3 2007 as a result of reduced tonnage generated from old underground areas which have been largely depleted, with grades also decreasing to an average of 3.99 g/t (5PGE+Au) during Q3 2008 from 4.10 g/t (5PGE+Au) during Q3 2007. "5PGE+Au" is defined as platinum, palladium, rhodium, iridium, ruthenium and gold. Nine months ended September 30, 2008 ("9M 2008") compared to nine months ended September 30, 2007 ("9M 2007") In 9M 2008, the Company sold 88,894 PGM ounces, an increase of 9% compared to 9M 2007, primarily as a result of higher volumes mined in 2008 (903,632 tonnes mined in 9M 2008 compared to 779,882 tonnes mined in 9M 2007), improved recovery rates (76% in 9M 2008 compared to 71% in 9M 2007), and an increase in on-reef development (9,129 meters in 9M 2008 compared to 6,728 meters in 9M 2007). The realized price per ounce improved from $1,110 in 9M 2007 to $1,485 in 9M 2008 as a result of a strong increase in PGM prices between late 2007 and July 2008. Operating cash costs of $688 per ounce were achieved in 9M 2008, compared to $681 per ounce in 9M 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 9M 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: Table 5 Crocodile River Mine non-GAAP measures (Expressed in thousands of U.S. dollars, except ounce and per ounce data) Three months ended
September 30, June 30, March 31, 2008 2008 2008 Mine operating earnings (loss) $ (16,054) $ 24,635 $ 32,296 Depletion and depreciation 4,716 4,450 4,362 EBITDA (1) (11,338) 29,085 36,658 Production costs as reported 20,629 21,058 19,750 Less overhead and miscellaneous (costs) credits (2) 40 38 (323) Cash operating costs 20,669 21,096 19,427 Less by-product credits - chrome revenues (4,640) - - Cash operating costs net of by-product credits 16,029 21,096 19,427 Ounces sold 30,758 30,311 27,825 Cash cost per ounce sold $ 672 $ 696 $ 698 Cash cost per ounce sold net of by-product credits $ 521 N/A N/A December 31, September 30, 2007 2007 Mine operating earnings (loss) $ 8,031 $ 7,064 Depletion and depreciation 5,148 3,972 EBITDA (1) 13,179 11,036 Production costs as reported 20,947 20,416 Less overhead and miscellaneous (costs) credits (2) (322) (1,677) Cash operating costs 20,625 18,739 Less by-product credits - chrome revenues - - Cash operating costs net of by-product credits 20,625 18,739 Ounces sold 26,632 29,417 Cash cost per ounce sold $ 774 $ 637 Cash cost per ounce sold net of by-product credits N/A N/A (1) EBITDA includes negative sales price adjustments, chrome revenues and chrome penalties, but does not include non- operating general and administrative expenses at CRM. (2) Overhead costs include costs such as safety, housing, technical services and planning, net of residual revenues or adjustments. During the quarter, the Company recorded a negative EBITDA of $11,338,000 as a result of negative provisional price adjustments of $29,416,000 arising from the settlement of PGM concentrate sales three to five months following their delivery dates and from the significant drop in PGM prices since June 30, 2008. Without the effect of negative price adjustments, EBITDA would have been $18,078,000. Q3 2008 was the first full quarter that CRM`s chrome recovery circuit was in full operation. As a result, chrome penalties present in PGM concentrates have been significantly reduced and commercial quantities of chrome were produced and sold as a by-product of PGM production. Cash cost per PGM ounce in Q3 2008 was $521 net of by-product credits. 1.3 Development projects - CRM During the quarter ended September 30, 2008, the Company focused on development projects at CRM, which include the Zandfontein, Kareespruit and Crocette sections. During the quarter, the existing vertical shaft was re-equipped and refurbished to allow more efficient mining and development operations to take place at deeper levels. Hoisting of mine workers commenced through the vertical shaft during the quarter. The shaft should be fully operational and hoisting ore by December 2008. At the Crocette section, underground development intersected the ore body in September 2008. However, following the recent significant downturn in the platinum group metals prices and the global economy, the development of the Crocette section will be put on care and maintenance while the Company focuses on increasing production from existing mining areas. Delineation and evaluation drilling for the quarter was focused on completing the resource upgrade drilling at Crocette, as well as deeper drilling in Zandfontein and Kareespruit project areas. As at September 30, 2008, 37 out of 51 planned boreholes were completed. All drilling is on target for completion by the fourth quarter of 2008 with assay results to follow thereafter. Planning for the 2009 exploration programme is under review, and, given the downturn in the PGM market, the programme is expected either to be postponed or to focus on areas that will allow the Company to maximize production from operating sections. The geological model has been updated with drilling up to the end of the second quarter and the revised resource estimation is expected to be released in the first half of 2009. The mining right for the Zandfontein extension and three new order prospecting rights were granted in August 2008. Preparation of the mining rights application for the Kareespruit area has commenced, and is expected to be submitted in 2009. 1.4 Development projects - Spitzkop and Kennedy`s Vale During the quarter ended September 30, 2008, the Company continued work on the bulk sampling programme at Spitzkop. The box-cuts for both the Merensky Reef and UG2 have been completed and blasting of the declines is in progress. By the end of the quarter, 140 meters of decline development had taken place. Due to the current market environment, the continuation of the Merensky declines will be put on hold and under care and maintenance. Engineering design of the mine and Kennedy`s Vale concentrator is being finalized with an updated cost estimate and schedule for the project expected to be completed in the first quarter of 2009. The Company submitted a full Environmental and Impact Assessment to the Department of Minerals and Energy ("DME") during the quarter. Discussion and interaction with the DME on the Social and Labour Plan has been ongoing. 1.5 Development projects - Mareesburg At Mareesburg, work is continuing on updating the feasibility study and on obtaining a new order mining right from the DME. The feasibility study is expected to be available by the first quarter of 2009. 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 Q3 2008 is 60% higher than G&A for Q3 2007 with balances of $5,585,000 and $3,480,000 respectively. This increase was mainly due to an increase in outsourced services and insurance in South Africa. For the nine months ended September 30 2007 and 2008, G&A increased from $12,267,000 to $15,227,000. 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 combined with the increase in outsourced services and insurance costs in South Africa. During the nine months ended September 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 nine months ended September 30, 2008 was $1,845,000. 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 September 30, 2008 was $1,975,000 compared with $2,188,000 in the same period in 2007. Interest income during the nine months ended September 30, 2008 was $6,285,000 compared with $3,769,000 in the same period in 2007. The increase in interest income was the result of the Company`s higher average cash balances during the 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 Consortium Holdings (Pty) Ltd. Interest expense in the quarter ended September 30, 2008 was $659,000 compared with $779,000 in the same period in 2007. Similarly, interest expense for the nine months ended September 30, 2008 was $2,821,000 compared with $4,180,000 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 after the June 30, 2007 fiscal year-end. During the three months ended September 30, 2008 the Company recorded an income tax recovery of $6,363,000. During the nine months ended September 30, 2008, the Company recorded an income tax expense of $7,417,000. 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 net future income tax liability of $130,474,000 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 September 30, 2008, the Company had working capital of $152,553,000 (December 31, 2007 - $196,681,000) and cash and cash equivalents and short-term investments of $172,060,000 (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 September 30, 2008, other than asset retirement obligations relating primarily to its Crocodile River Mine, and 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. See Contractual Obligations under Section 2.3 below. 2.1 Outlook The significant decline in the prices of platinum group metals (PGMs) during the last four months has had a negative impact on the Company`s profitability. More recently, the strengthening of the U.S. dollar relative to the South African Rand has partially offset this negative impact. With the current global financial crisis leading to a possible economic downturn, the Company anticipates that PGM prices will remain depressed and the Rand-U.S. dollar exchange rate will remain volatile in the near term. Based on current PGM prices, the current value of the U.S. dollar, and planned production levels at CRM, the Company expects to continue to generate positive cash flows, albeit at significantly lower levels than earlier in 2008. In light of the current market environment, the Company`s near-term goal is to preserve its cash balances to the greatest extent possible, by minimizing operating costs and by curtailing capital expenditures. In that regard, the Company is currently reviewing its operations at CRM with a view to optimizing efficiencies and reducing costs wherever possible without compromising safety, health or environmental standards. The Company is also reassessing the project economics and the previously planned capital budget for the Crocette section at CRM and for the Spitzkop and Mareesburg projects on the Eastern Limb, with a view to determining an optimal development schedule given the Company`s current cash balances, its ability to generate sufficient cash flows, and its ability to obtain additional funding in the current market environment. Additional funding may include external debt 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. If current market conditions persist for an extended time and PGM prices remain at present levels or lower, then the cash flows from CRM and current cash balances will be insufficient to advance any or all of the Company`s development projects to commercial production. This, along with tightening credit markets that may result in higher financing costs, could negatively affect the Company`s ability to obtain equity financing, external debt 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. The Company has assessed the carrying values of its mineral properties as a result of the market downturn. In the last few months, share prices of mining companies have declined significantly, resulting in the Company`s market capitalization falling below its book value as at September 30, 2008. Based on current and expected PGM prices and cost structures, management has determined that the values of the Company`s mineral properties have not been impaired at this time. However, should current market conditions and commodity prices worsen and/or persist for a prolonged period of time, an impairment of mineral properties may be required. 2.2 Share Capital During the three months ended September 30, 2008, the Company did not grant any stock options. During the same period, 250,000 options were exercised at a weighted average exercise price of Cdn$1.70. These options were exercised without cash payment under the "Share Appreciation Rights" clause in the Stock Option Plan. During the nine months ended September 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 $1,845,000. During the same period, 570,000 options were exercised at a weighted average exercise price of $1.60 for proceeds of $466,000. 260,000 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 $Cdn21,367,000. 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 November 13, 2008, the Company had: * 680,526,454 common shares outstanding; * 46,785,000 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 September 30, 2008 were as follows: Table 6 (in thousands of U.S. dollars) Less than More than Total 1 year 1-5 years 5 years
Asset retirement obligations $ 11,031 $ - $ - $ 11,031 Capital expenditure contracted at September 30, 2008 but not recognized on the balance sheet 48,144 48,144 - - Capital lease obligations 5,927 1,227 4,700 - Obligations related to Gubevu acquisition 3,545 3,545 - - $ 68,647 $52,916 $ 4,700 $ 11,031 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 certain amounts that existed in the underlying Gubevu agreements as an obligation of Gubevu. As at June 30, 2007, the total payable was R55.4 million of which half was paid in June 2008. The remaining amount, which is due in June 2009, has been recorded at a discounted value of $3,051,000 (27.7 million Rand) and has been included in current loans in the financial statements. 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 nine months ended September 30, 2008 the Company paid $395,000 and $1,261,000 respectively for management fees, consulting fees and reimbursements of expenses to private companies controlled by officers and directors of the Company, compared to $211,000 and $1,013,000 respectively during the same three and nine month periods in 2007. The increase over the prior comparative period is mostly 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 have been engaged to ensure the timely conversion to IFRS. 5. Internal Control over Financial Reporting The Chief Executive Officer ("CEO") and the 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 September 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. During the quarter ended September 30, 2008, the Company engaged a major accounting firm to act as the Company`s internal auditors in South Africa. Other than described above, there were no changes in the Company`s internal control over financial reporting during the quarter ended September 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. November 13, 2008 Ian Rozier For further information contact: Investor Relations Website: www.eastplats.com Email: info@eastplats.com Tel: 1-(604)-685-6851, Fax: 1-(604)-685-6493 NOMAD: JSE Sponsor: Canaccord Adams Limited, London PSG Capital (Pty) Limited, Email: Ryan.Gaffney@canaccordadams.com South Africa Tel: +44 20 7050 6500 Email:anjem@psgcapital.com Tel: +27 21 887 9602
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