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BCD - BRC Diamondcore Ltd - Management`s discussion and analysis of financial
condition and results of operations for the year ended December 31, 2010
BRC DIAMONDCORE LTD.
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: BCD & ISIN Number: CA05565C1095
("BRC DiamondCore" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010
The following management`s discussion and analysis of financial condition and
results of operations (the "MD&A") has been prepared by management and
provides a review of the activities, results of operations and financial
condition of BRC DiamondCore Ltd. (the "Company" or "BRC") based upon Canadian
generally accepted accounting principles. This MD&A should be read in
conjunction with the audited consolidated financial statements of the Company
as at and for the financial year ended December 31, 2010 (the "2010 Annual
Financial Statements") and the audited consolidated financial statements of
the Company as at and for the financial year ended December 31, 2009. All
amounts are expressed in Canadian dollars unless otherwise stated. This MD&A
is dated March 30, 2011. Additional information relating to the Company,
including the Company`s annual information form, is available on SEDAR at
www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other
than statements of historical fact, that address activities, events or
developments that the Company believes, expects or anticipates will or may
occur in the future (including, without limitation, statements relating to
future diamond prices, exploration results, potential mineralization and
future plans and objectives of the Company) are forward-looking statements.
These forward-looking statements reflect the current expectations or beliefs
of the Company based on information currently available to the Company.
Forward-looking statements are subject to a number of risks and uncertainties
that may cause the actual results of the Company to differ materially from
those discussed in the forward-looking statements, and even if such actual
results are realized or substantially realized, there can be no assurance that
they will have the expected consequences to, or effects on the Company.
Factors that could cause actual results or events to differ materially from
current expectations include, among other things, uncertainties relating to
the availability and costs of financing needed in the future, the possibility
that future exploration results will not be consistent with the Company`s
expectations, changes in equity markets, changes in diamond markets, foreign
currency fluctuations, political developments in the Democratic Republic of
the Congo (the "DRC"), changes to regulations affecting the Company`s
activities, delays in obtaining or failure to obtain required project
approvals, the uncertainties involved in interpreting geological data and the
other risks involved in the mineral exploration business. Any forward-looking
statement speaks only as of the date on which it is made and, except as may be
required by applicable securities laws, the Company disclaims any intent or
obligation to update any forward-looking statement, whether as a result of new
information, future events or results or otherwise. Although the Company
believes that the assumptions inherent in the forward-looking statements are
reasonable, forward-looking statements are not guarantees of future
performance and accordingly undue reliance should not be put on such
statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond
properties in known diamond producing areas in the DRC. The Company also has
a 25% interest in an iron ore exploration project in the northern DRC (the
exploration is being funded by Rio Tinto).
For the year ended December 31, 2010, the Company reported a net loss of
$1,565,922 (2009: net loss of $8,951,614). The shareholders` equity of the
Company was $3,865,171 as at December 31,2010 (2009: $5,316,213).
The Company`s deficit as at December 31, 2010 was $119,408,103 (2009:
$117,842,181). The Company had a working capital deficit of $1,198,181 as at
December 31, 2010(2009:$577,386) and had a net decrease in cash of
$537,564during 2010 (2009: increase of $466,410).
While the Company`s financial statements have been prepared on the basis of
accounting principles applicable to a going concern, adverse conditions may
cast substantial doubt upon the validity of this assumption. In the event the
Company is unable to identify recoverable resources, receive the necessary
permitting, or arrange appropriate financing, the carrying value of the
Company`s assets could be subject to material adjustment. Furthermore,
certain market conditions may cast significant doubt upon the validity of this
assumption.
The Company`s ability to continue operations in the normal course of business
is dependent on several factors, including its ability to secure additional
funding. Management has been exploring all available options to secure
additional funding, including equity financing, strategic partnerships and
disposing of non-core assets. In addition, the recoverability of amounts
shown for mineral properties and deferred exploration expenditures is
dependent upon the existence of economically recoverable reserves, the ability
of the Company to obtain financing to complete the development of the
properties where necessary, or, alternatively, upon the Company`s ability to
recover its spent costs through a disposition of its interests, all of which
are uncertain.
DRC PROJECTS
The Company`s operations consist of the exploration and evaluation of several
mineral properties for diamonds in the DRC. The Company`s exploration
activities in the DRC are focused on the Tshikapa area in the southern DRC and
the Bafwasende region in the northern DRC. See also the discussion below
under "Liquidity and Capital Resources" with respect to the Company`s interest
in an iron ore exploration project which is being funded and operated by Rio
Tinto. As a result of the economic downturn and as a cost saving measure, the
Company significantly reduced its operations in the DRC for most of 2010.
Tshikapa Project (8exploration permits)
Fieldwork, in the form of ground magnetic surveys, was conducted over the
Investors Equity Ltd exploration permit areas (permit numbers 1232 and 2521).
These were initiated during the first quarter of 2010 and were completed
during the second quarter of 2010. These blocks were surveyed along lines at
50 metre line spacing and with 50 metre station intervals. The Company has
interpreted these surveys and based on advanced geophysical modelling, has
decided that these targets do not warrant any further work.
Based on these results, the option agreement with Investors Equity Ltd over
the said two exploration permits was terminated. No further field work was
conducted during 2010 in the Tshikapa area.
DRC North Project (46 exploration permits)
Results from stream samples, that were collected on a spacing of one sample to
every 20 to 25 kmSquared in 2009 over the 44 Coexco exploration permit areas
and two BRC exploration permit areas, were received from Rio Tinto`s heavy
mineral laboratory in Perth (Australia) in 2010. Several stream samples, both
on the Coexco and BRC ground, have reported positive kimberlitic minerals and
diamonds. The mineral chemistry of the kimberlitic minerals analysed by the
Rio Tinto facilities in Perth was encouraging, so a follow up program was
formulated by the Company. The follow-up program over the positive areas of
the Coexco and BRC permits was initiated by the Company in the first quarter
of 2011 and is being funded by Rio Tinto pursuant to a new joint venture
arrangement with Rio Tinto (see the Company`s press release dated February 2,
2011). This program comprises a follow-up stream sampling program over those
parts of the Coexco ground that returned positive reconnaissance samples and
some 400 samples will be collected. The eastern permits of the Coexco ground
had been under `force majeure` due to security issues since 2009. However, the
area is now cleared of any security risks and Coexco had the `force majeure`
order lifted in January 2011.
Security of Tenure
The Company`s exploration activities in the DRC are focussed on two areas: one
in the northern DRC around Bafwasende and one in the southern part of the
country south of Tshikapa. Exploration permits have been secured in both
areas and are in good standing. Two exploration permit applications are still
at CAMI for consideration. BRC will keep its focus on the following
exploration permits which are held by BRC directly or by partners through
various option agreements: Acacia (6), BRC (2), Caspian Oil & Gas (2) and
Coexco (44).
Status of Exploration Permits of BRC and Partners in the DRC
Company (Project) Permit Numbers
No. of KmSquared
Permits
BRC (DRC North) 1174, 1175 2 749
Acacia (Tshikapa) 1175,1176,1177,1180, 6 1,053
1188, 1187
Caspian O &G 976, 977 2 164
(Tshikapa)
Coexco (DRC North) 6013-6016, 6018-6036, 44 7,313
6887-6906, 6909
Total 54 9,279
QUALIFIED PERSON AND TECHNICAL REPORT
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project is
contained in the technical report prepared by Dr. Michiel C. J. de Wit and
FabriceMatheys, dated March 31, 2009 and titled "National Instrument 43-101
Technical Report on the Tshikapa Project of BRC DiamondCore Ltd. in the
Democratic Republic of the Congo". A copy of this report can be obtained from
SEDAR at www.sedar.com.
SELECTED ANNUAL INFORMATION
The following financial data has been prepared in accordance with Canadian
generally accepted accounting principles and is derived from the Company`s
audited consolidated financial statements for each of the three most recently
completed financial years. The Company`s reporting and measurement currency
is the Canadian dollar.
2010 2009 2008
Net loss $1,565,922 $8,951,614(1 $103,001,649
)
Net loss per share $0.02 $0.27 $4.20
Mineral properties $5,075,041 $5,808,835 $9,075,139
and deferred
exploration
expenditures
Total assets $5,227,785 $6,778,299 $19,112,324
(1) This figure includes the loss from discontinued operations of $7,296,948
relating to the disposal by the Company of Diamond Core Resources (Pty)
Ltd ("DiamondCore"), which was the holding company for the Company`s
former South African operations. The net loss from continuing operations
for 2009 was $1,654,666, and the net loss per share from continuing
operations for 2009 was $0.05.
The Company`s net loss for 2010 was significantly less than the loss recorded
in 2009. In 2009, the Diamond Core operations were sold and a loss from
discontinued operations of $7,296,948 was recorded. The Company`s net loss
for fiscal 2009 was significantly less than that recorded for 2008. This is
due to the substantial impairment of the goodwill that had arisen from the
purchase of Diamond Core and the impairment of the Company`s mineral
properties and capital assets that was recorded in 2008.
RESULTS OF OPERATIONS
As a result of the economic downturn and as a cost saving measure, the Company
significantly reduced its operations in the DRC for most of 2010 (see
discussion above under "Company Overview").
For the year ended December 31, 2010, the Company reported a net loss of
$1,565,922 (or $0.02 per share), compared to a net loss of $8,951,614 (or
$0.27 per share) incurred during the year ended December 31, 2009. The
decrease in the net loss for the year 2010 as compared 2009 is due to the
prior year disposal of Diamond Core and the resulting loss from discontinued
operations of $7,296,948.
Significant components of the loss in 2010 were bad debt expense of $105,009
which was due to the write off of a receivable for the rental of the Kwango
plant (2009: $342,248) and the impairment of the Lubao and Candore projects
that were discontinued during 2010 of $740,975. Other components of the loss
in 2010 included professional fees of $347,319 (2009: $344,888) and the annual
amortization of stock-based compensation of former years of $88,000 (2009:
$555,520).
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the fourth quarter of 2010. This financial information has been prepared in
accordance with Canadian generally accepted accounting principles.
The Company`s reporting and measurement currency is the Canadian dollar.
2010 2010 2010 2010
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net loss $920 $260 $99 $287
($`000)
Net loss per $0.01 $0.00 $0.00 $0.00
share (basic
and diluted)
2009 2009 2009 2009
4th 3rd 2nd 1st
quarter quarter quarter quarter
Net loss $528 $4,879 $2,062 $1,483
($`000)
Net loss per $0.27
share (basic $0.19 $0.08 $0.06
and diluted)
During the fourth quarter of 2010, the Company`s net loss increased to
$941,832 compared to a net loss of $260,133 in the third quarter of 2010.
This increase was primarily due to an impairment loss related to the
discontinuation of the Lubao and Candore projects of $740,975. As well, there
was a bad debt expense of $105,009 which was due to the write-off of a
receivable for rental of the Kwango plant.
During the third quarter of 2010, the Company`s net loss increased to $260,133
compared to a net loss of $98,794 in the second quarter of 2010. This
increase was primarily due to an increase in professional fees which related
to the Diamond Core liquidation proceedings in South Africa. General and
administrative costs also increased in the third quarter of 2010 as a result
of fees relating to the Company`s listing on the JSE Limited in South Africa.
During the second quarter of 2010, the Company`s net loss decreased to $98,794
compared to a net loss of $286,715 in the first quarter of 2010.
Net loss recorded during the first quarter of 2010 was significantly impacted
by the recognition of stock based compensation expense of $132,000 compared to
$nil recorded during the second quarter of 2010. General and administrative
costs were also lower in the second quarter of 2010 as compared to the first
quarter of 2010.
During the first quarter of 2010, the Company`s net loss decreased to $286,715
compared to $528,193 in the fourth quarter of 2009, due mainly to lower
professional fees and general and administrative costs.
During the fourth quarter of 2009, the Company`s net loss was $528,193
compared to a net loss of $4,879,248 reported during the third quarter of
2009. The loss in the fourth quarter of 2009 was mainly related to the loss
on the disposition of Diamond Core.The loss of $4,879,248 during the third
quarter of 2009 comprised a loss of $3,143,096 attributable to discontinued
operations and $1,736,152 attributable to continued operation (the loss per
share is $0.12 for discontinued operations and $0.07 for continued
operations).
During the second quarter of 2009, the Company`s net loss was $2,062,000
compared to a net loss of $1,483,000 reported during the first quarter of
2009. The increased loss, reported in Canadian dollars, was partially as a
result of a 17% appreciation in the South African rand over the second
quarter. There were additional costs associated with retrenchment of
employees. During the second quarter, the Company maintained its decision to
place its South African bulk sampling operations on a care and maintenance
basis as a result of market conditions. Similarly, the DRC exploration
activities remained on a care and maintenance basis as a result of decreased
funding for operations in the DRC.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2010, the Company had cash of $126,931 and a working
capital deficit of $1,198,181, compared to cash of $664,495 and a working
capital deficit of $577,386 as at December 31, 2009.
The Company has no operating revenues and is wholly reliant upon external
financing to fund its activities. There is no assurance that such financing
will be available on acceptable terms, if at all.
In 2009 and 2010, the Company successfully raised funds by selling
participation in its projects or areas where it held the exploration rights.
This was the case with Rio Tinto who has paid the Company a total of $986,734
during 2009 and 2010 ($431,355 in 2010 and $555,379 in 2009).
In January 2010, the Company announced that it had entered into an agreement
(the "Iron Ore Agreement") with Rio Tinto Minerals Development Limited ("Rio
Tinto") for the exploration for iron ore in areas within the Province
Orientale, in the DRC. These areas total approximately 4,550 square
kilometres and are covered by exploration permits (the "Permits") in which the
diamond and iron ore rights had been controlled by the Company. Under the
Iron Ore Agreement, which is in the form of a shareholders` agreement, the
Company owns 25% of the share capital of a holding company which owns the DRC
company that holds the Permits, with Rio Tinto owning 75% of the share capital
of the said holding company.
Under the Iron Ore Agreement, all iron ore exploration up to and including the
completion of any feasibility study will be funded by Rio Tinto. The Company
will not suffer any dilution during this period, such that the Company`s 25%
interest in the properties will be maintained during this period. The
exploration will be carried out by Rio Tinto (or one of its affiliates) as
operator. After the completion of any feasibility study, funding for the
project is to be provided by Rio Tinto and BRC pro rata based on their
respective interests in the said holding company.
Initial geological research and exploration indicates that the Permit areas,
which are largely unexplored using modern exploration methods, are highly
prospective for the discovery of iron ore deposits. As part of the 2010
exploration program, Rio Tinto is currently carrying out a reconnaissance
drill program over the Permit areas.
The Company`s liquidity requirements are thus met through a variety of
sources, including cash on hand and equity markets.
In general, market conditions have limited the availability of funds. Given
the Company`s financial position and available resources, the Company
currently expects a need to access equity markets for financing over the next
twelve months.
However, as the duration of the general economic uncertainty is unknown, it is
difficult to determine the long-term impact on the Company. In light of
current conditions, the Company has continued a series of measures to bring
its spending in line with the projected cash flows from its operations in
order to preserve its balance sheet and maintain its liquidity position.
Management believes that based on its current financial position and liquidity
profile, the Company will need additional financing in order to satisfy its
obligations. As at December 31, 2010, the consolidated financial statements
of the Company as at and for the financial year ended December 31, 2010 have
been prepared in accordance with Canadian GAAP applicable to a going concern.
Contractual obligations (not on balance sheet) entered into by the Company as
at December 31, 2010 and as at December 31, 2009 were nil.
Six of the exploration permits comprising part of the Company`s Tshikapa
project in the DRC are held through an option agreement with Acacia sprl. The
Company had expected to pay US$350,000 as an option exercise fee. Acacia sprl
has advised the Company of its wish to modify the option agreement. The
Company continues its discussions with Acacia sprl and is optimistic of
reaching an agreement that is satisfactory for both parties.
Diamond Core, which had been the holding company of the Company`s former
projects in South Africa, was subject to a liquidation order on July 3, 2009.
Effective July 3, 2009, as a result of the said liquidation order, the Company
ceased to consolidate Diamond Core`s consolidated financial statements into
those of the Company`s. Effective September 30, 2009, the Company disposed of
all of its shares in Diamond Core for nominal consideration plus, if the offer
of compromise referred to below is approved by the court, the Company is to
receive cash proceeds of US$500,000. The terms of the sale contemplated that
the purchaser would enter into an offer of compromise with the creditors of
Diamond Core.
As a result of the purchaser acquiring control of the claims of the bulk of
the creditors of Diamond Core and security having been tendered by the
purchaser for the balance of the alleged claims against Diamond Core, the
Northern Cape High Court in South Africa rescinded the liquidation order.
There are certain legal and administrative matters to be attended to before
the US$500,000 may be available to the Company, such that receipt by the
Company of the US$500,000 is uncertain.
The Company is in dispute with two of its previous directors and officers.
One of these individuals had applied in 2008 for a summary judgment against
the Company in the Witwatersrand Local Division of the High Court of South
Africa in respect of a dispute relating to a settlement agreement pertaining
to his departure. The application for summary judgment was dismissed and the
Company was granted leave to defend the claim. This individual has not taken
further steps to progress that matter. However, in October 2010, almost two
years after the original claim, the same former director and officer
instituted fresh proceedings against the Company. He has repeated the claim
made previously, but this time in a summons lodged before the North Gauteng
High Court in South Africa. This former director and officer is claiming he
is owed payment of 1.2 million South African rand plus interest. The other
individual has referred two disputes to the Commission for Conciliation
Mediation and Arbitration in Johannesburg, South Africa and an action to the
High Court in that same jurisdiction. He elected to withdraw an application
for summary judgment. The Company is defending all these actions.
MINERAL PROPERTIES AND DEFERRED EXPLORATION EXPENDITURES
The following table provides a breakdown of the Company`s deferred exploration
expenditures in the DRC for the year ended December 31, 2010:
DRC
Lubao Tshikapa Tshikapa Other Total
Project (Acacia) (Candore) Pro-
Project Project jects
$`000 $`000 $`000 $`000 $`000
(amounts
rounded to
the nearest
thousand)
Balance 326 2,893 415 2,175 5,809
12/31/2009
Administrat - (360) - 213 (147)
ive and
office
support (1)
Depreciatio - 36 - 36 72
n
Field camp - 13 - 4 17
expenses
Drilling - - - 4 4
Geology - - 3 - - 3
contract
geologists
Permits and - 78 - 29 107
surface
taxes
Professiona - 2 - 3 5
l fees
Profit on - (90) - - (90)
sale of
assets
Remote - 2 - - 2
sensing
Stock based - 20 - 7 27
compensatio
n
Transport - 2 - 21 23
and
helicopter
Foreign - (8) - (8) (16)
exchange
profit
Subtotal - - (302) - 309 7
2010
Writeoff (326) - (415) - (741)
Balance - 2,591 - 2,484 5,075
12/31/2010
(1) This balance includes $431 of funds received from Rio Tinto in
association with the Tshikapa project.
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at March 30, 2011, the Company had outstanding 89,408,640
common shares, stock options to purchase an aggregate of 2,421,503 common
shares of the Company and warrants to purchase an aggregate of 20,000,00
common shares of the Company.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2010, legal fees and related costs of $
98,017 (year ended December 31, 2009 - $184,996) incurred in connection with
general corporate matters were billed by a law firm of which one of the
partners is a director and officer of the Company. The amount owing as of
December 31, 2010 is $ 90,778 (December 2009 - $ 49,113). In November 2009,
as part of a debt settlement transaction, this law firm received 3,687,375
common shares of the Company to settle $737,475 of indebtedness owed by the
Company to this law firm (see Note 8(a) of the Annual Financial Statements).
As at December 31, 2010, an amount of $102,311 was owed to one director of the
Company representing consulting fees (December 31, 2009 - $276,849, owed to
two directors). During the year ended December 31, 2010, consulting fees of $
100,000 were incurred to the one director (year ended December 31, 2009 -
$99,999).
During 2010, Sterling Portfolio Securities Inc. advanced a short term loan to
the Company in the amount of $83,785. The officer and director of Sterling
Portfolio Securities Inc. is a director of the Company.
As at December 31, 2010, an amount of $ 3,719 (December 31, 2009 - $3,922) was
owed to Banro Corporation ("Banro"). Banro owns 35,433,987 common shares of
the Company, representing a 39.63% interest in the Company. During the year
ended December 31, 2010, a drill rig was sold to Banro by the Company for
gross proceeds of $154,964 (December 31, 2009 - $nil).
All amounts due to related parties are unsecured, non-interest bearing and due
on demand. All transactions are in the normal course of operations and are
measured at the exchange value.
FUTURE ACCOUNTING STANDARDS
a) International Financial Reporting Standards
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that
Canadian generally accepted accounting principles ("Canadian GAAP") for
publicly accountable enterprises will be converged with International
Financial Reporting Standards ("IFRS") effective in the calendar year 2011.
The conversion to IFRS will be required, for the Company, for interim and
annual financial statements beginning on January 1, 2011. IFRS uses a
conceptual framework similar to Canadian GAAP, but there are significant
differences on recognition, measurement and disclosures. The AcSB has
confirmed January 1, 2011 as the date that IFRS will replace Canadian GAAP for
publicly accountable enterprises. As a result, the Company will report under
IFRS for interim and annual periods beginning January 1, 2011, with
comparative information for 2010 restated under IFRS. Adoption of IFRS in
place of Canadian GAAP will require the Company to make certain accounting
policy choices and could materially impact the reported financial position and
results of operations.
IFRS Transition Plan
During fiscal 2009, the Company completed the diagnostic phase of the project
and began a comprehensive analysis of Canadian GAAP and IFRS differences as
well as an assessment of the impact on operations, data systems and internal
controls over financial reporting. During fiscal 2010, the Company completed
the majority of the detailed assessment phase for all standards that affect
the transition. The Company has scheduled the solutions development and the
implementation phase on many of the IFRS issues for the first quarter of 2011.
The Company has identified areas noted below as those expected to have the
most significant impact on the financial statements. The differences are
based on IFRS standards effective as at the date of this MD&A. The
International Accounting Standards Board ("IASB") continues to amend and add
to current IFRS standards with several projects underway. The Company`s
transition plan includes monitoring actual and anticipated changes to IFRS and
related rules and regulations and assessing the impacts of these changes on
the Company and its financial statements, including expected dates of when
such impacts are effective. Key differences identified as of the date of this
MD&A are as follows:
Impairment of Property, Plant and Equipment
Under Canadian GAAP, whenever the estimated future cash flows on an
undiscounted basis of a property is less than the carrying amount of the
property, an impairment loss is measured and recorded based on fair values.
Under IFRS, IAS 36 Impairment of Assets ("IAS 36") requires an impairment
charge to be recognized if the recoverable amount, determined as the higher of
the estimated fair values less costs to sell or value in use, is less than
carrying amount. The impairment charge under IFRS is equal to the amount by
which the carrying amount exceeds the recoverable amount. The difference in
testing and determining an impairment may result in more frequent impairment
charges, where carrying values of assets may have been supported under
Canadian GAAP on an undiscounted cash flow basis, but cannot be supported on a
discounted cash flow basis.
IAS 36 also requires the reversal of any previous impairment losses where
circumstances requiring the impairment charge have changed and reversed.
Canadian GAAP does not permit the reversal of impairment losses in any
circumstance.
Property, Plant and Equipment
Under Canadian GAAP, costs incurred for property, plant and equipment on
initial recognition are allocated to significant components when practicable.
Costs incurred subsequent to the initial purchase of property, plant and
equipment are capitalized when they constitute a betterment, which occurs when
the productive capacity or useful life of an existing asset is increased or
when the associated operating costs is decreased. Otherwise, these costs are
expensed. Under IAS 16 Property, Plant and Equipment, costs incurred for
property, plant and equipment on initial recognition are allocated to
significant components, capitalized and depreciated separately over the
estimated useful lives of each component. Practicability of allocating to
significant components is not considered under IFRS. Costs incurred
subsequent to the initial purchase of property, plant and equipment are
capitalized when it is probable the future economic benefits will flow to the
Company over a period and the costs can be measured reliably. Upon
capitalization, the carrying amount of components replaced, if any, are
derecognized. The Company is still analyzing its property, plant and
equipment (eg. Capital assets) to determine if an opening IFRS balance sheet
adjustment is necessary.
Share Based Payments
The Company has examined IAS 2 Share Based Payments ("IAS 2") and has
determined the following differences compared to Canadian GAAP:
1) Instalment vesting periods - Under IAS 2, each new instalment must be
treated as a separate issue and therefore be measured at the fair value at
each vesting period.
2) Forfeitures - Management is required to estimate expected forfeitures of
all option grants. For any unvested options, the fair value will be
recalculated using IFRS guidance upon adoption.
Other Accounting Policies
The Company continues to evaluate the impact of IFRS adoption on other areas,
which may result in significant differences from current Canadian GAAP
accounting policies. The IASB has several projects slated for completion in
2011 that may significantly impact the transition to IFRS and the financial
statements of the Company. The Company continues to monitor the IASB`s
progress on these projects and their impact on the Company`s transition plan
to IFRS.
Management expects to complete the Company`s first interim consolidated
financial statements prepared under IFRS for the three months ended March 31,
2011 with no significant issues or delay.
Impact on Information Systems and Technology
The adoption of IFRS may have some impact on the Company`s information
systems` requirements. The Company is assessing the need for systems upgrades
or modifications to ensure an efficient conversion to IFRS. The main drivers
for systems changes include:
- Additional information required as a result of enhanced note disclosures,
- Tracking of IFRS to Canadian GAAP differences during the transition, and
- Tracking sufficient level of details within the accounting records to
allow management to maintain adherence with IFRS going forward.
The impact and changes to systems are on-going and will be prioritized as part
of the project.
Impact on Internal Controls over Financial Reporting and Disclosure Controls
and Procedures
The adoption of IFRS may have a significant impact on the Company`s internal
controls over financial reporting ("ICFR") and disclosure controls and
procedures ("DC&P") due mainly to changes in financial reporting disclosures
requirements. IFRS requires significantly more disclosure than Canadian GAAP
for certain standards. In some cases, IFRS also requires different
presentation on the balance sheet and income statement. This will be the most
significant impact to the Company. Specifically, the increased disclosure
requirements will cause the Company to change current processes and implement
new financial reporting processes to ensure the appropriate data is collected
for disclosure purposes. Currently the Company does not anticipate any changes
that may materially impact its ICFR and DC&P as a result of the conversion to
IFRS.
IFRS Transition Disclosures
As the Company executes its IFRS transition plan and moves from Canadian GAAP
to IFRS, the Company`s disclosure on accounting differences is expected to
increase.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates used in the preparation of the consolidated
financial statements include the Company`s estimate of the recoverable value
of its mineral properties and related deferred exploration expenditures,
useful life of capital assets, future income taxes, legal contingencies,
foreign currency translation and stock-based compensation. All of these
estimates involve considerable judgment and are, or could be, affected by
significant factors that are out of the Company`s control.
Mineral Properties and Deferred Exploration Expenditures
The Company`s recoverability of the recorded value of its mineral properties
and associated deferred exploration expenses is based on market conditions for
minerals, any underlying mineral resources associated with the properties and
future costs that may be required for ultimate realization through mining
operations or by sale. The Company is in an industry that is dependent on a
number of factors including environmental, legal, and political risks, the
existence of economically recoverable reserves, the ability of the Company to
obtain necessary financing to complete the development and future profitable
production or the proceeds of disposition thereof.
Management uses its best available information to identify the point at which
a development project is capitalized, assess resources, future costs and
benefits and, where considered necessary, engages qualified third-party
professionals to assist in the process. Changing assumptions about future
commodity prices, exchange rates, production costs and revised information on
any resources may change management`s recoverable amounts and depletion and
amortization.
Foreign Currency Translation
The functional currency of the Company is Canadian dollars. The Company
undertakes transactions in currencies other than the Canadian dollar,
including US dollars and the South African rand.
As part of its ongoing review of critical accounting policies and estimates,
the Company reviews the foreign currency translation method of its foreign
operations to determine if there are significant changes to economic facts and
circumstances that may indicate whether or not the foreign operations are
largely self-sufficient and the economic exposure is more closely tied to
their respective domestic currencies. Any change in translation method
resulting from this review will be accounted for prospectively. The Company
had accounted for its South African operations as self-sustaining and accounts
for the DRC operations as an integrated foreign operation.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to determine the fair
value of stock options granted. This model requires the Company to make
reasonable assumptions in order to derive parameters such as the expected
volatility of the Company`s shares, the expected life of the option and
interest rates, all of which are based on historical information. Future
behaviors of these parameters are beyond the Company`s control, and thus, may
be significantly different from the Company`s estimates.
The values of all stock options granted were estimated, using the Black-
Scholes option-pricing model, based on the following factors:
(i) risk-free interest rate: 3.075%
(ii) expected volatility: 95%
(iii) expected life: 5 years
(iv) expected dividends: $Nil
CAPITAL MANAGEMENT
The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at acceptable risk while providing an appropriate return to its
shareholders;
- to maintain a strong capital base so as to maintain investor, creditor
and market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing should the need
arise; and
- to maintain financial flexibility in order to have access to capital in
the event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes in
economic conditions and the risk characteristics of the underlying assets.
There were no changes to the Company`s approach to capital management during
the year ended December 31, 2010.
December 31, December 31,
2010 2009
Shareholders` equity $3,865,171 $5,316,213
Cash 126,931 664,495
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not,
by its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by
another party carrying out further exploration. There is no assurance that
such sources of financing will be available on acceptable terms, if at all.
In the event that commercial quantities of minerals are found on the Company`s
properties, the Company does not have the financial resources at this time to
bring a mine into production.
The current financial climate is characterized by volatile and uncertain
times. The uncertainty of forward looking statements is therefore greater.
Diamond prices reduced significantly as a result of the economic downturn and
any recovery could be accompanied by volatility.
All of the Company`s projects are located in the DRC The assets and
operations of the Company are therefore subject to various political, economic
and other uncertainties, including, among other things, the risks of war and
civil unrest, hostage taking, military repression, labor unrest, illegal
mining, expropriation, nationalization, renegotiation or nullification of
existing licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing political conditions,
international monetary fluctuations, currency controls and foreign
governmental regulations that favor or require the awarding of contracts to
local contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction. Changes, if any, in mining
or investment policies or shifts in political attitude in the DRC may
adversely affect the Company`s operations. Operations may be affected in
varying degrees by government regulations with respect to, but not limited to,
restrictions on production, price controls, export controls, currency
remittance, income taxes, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use
and mine safety. Failure to comply strictly with applicable laws, regulations
and local practices relating to mineral rights could result in loss, reduction
or expropriation of entitlements. In addition, in the event of a dispute
arising from operations in the DRC, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in
subjecting foreign persons to the jurisdiction of courts in Canada. The
Company also may be hindered or prevented from enforcing its rights with
respect to a governmental instrumentality because of the doctrine of sovereign
immunity. It is not possible for the Company to accurately predict such
developments or changes in laws or policy or to what extent any such
developments or changes may have a material adverse effect on the Company`s
operations.
The DRC is a developing nation emerging from a period of civil war and
conflict. Physical and institutional infrastructure throughout the DRC is in
a debilitated condition. The DRC is in transition from a largely state
controlled economy to one based on free market principles, and from a non-
democratic political system with a centralized ethnic power base, to one based
on more democratic principles.
There can be no assurance that these changes will be effected or that the
achievement of these objectives will not have material adverse consequences
for the Company and its operations. The DRC continues to experience violence
and significant instability in parts of the country due to certain militia and
criminal elements. While the government and United Nations forces are working
to support the extension of central government authority throughout the
country, there can be no assurance that such efforts will be successful.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations. The
exploration and development of mineral deposits involve significant financial
risks over a significant period of time which even a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which
are explored are ultimately developed into producing mines. Major
expenditures may be required to establish reserves by drilling and to
construct mining and processing facilities at a site. It is impossible to
ensure that the Company`s exploration programs will result in a profitable
commercial mining operation.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate
may result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development
of its properties is subject to all of the hazards and risks normally incident
to mineral exploration and development, any of which could result in damage to
life or property, environmental damage and possible legal liability for any or
all damage.
The natural resource industry is intensely competitive in all of its phases,
and the Company competes with many companies possessing greater financial
resources and technical facilities than itself.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a) Fair value and carrying value of financial instruments
The Company has classified financial instruments as follows:
Measure- December
ment December 31,
Classi- 31, 2010 2009
fication
Financial
assets
Held-for
Cash Trading Fair
value $126,931 $664,495
Prepaid Loans Amor-
expenses and and tized
other current receiv- cost
assets ables 21,713 163,175
Financial
liabilities
Accounts Amor-
payable and Other tized
accrued liabi- cost
liabilities lities $834,176 $1,027,172
Taxes payable Other Amor-
liabi- tized
lities cost 6,127 -
Notes payable Other Amor-
liabi- tized
lities cost 400,493 -
Due to Other Amor-
related liabi- tized
parties lities cost 106,029 377,884
The balance sheet carrying amounts for cash, prepaid expenses and other
current assets, accounts payable and accrued liabilities approximate fair
value due to their short-term nature. Due to the use of subjective judgments
and uncertainties in the determination of fair values these values should not
be interpreted as being realizable in an immediate settlement of the financial
instruments.
The fair value hierarchy established by CICA Section 3862 "Financial
Instruments - Disclosures" establishes three levels to classify the inputs to
valuation techniques used to measure fair value.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices for identical assets or liabilities in
active markets.
Level 2 - Inputs other than quoted prices included with Level 1 that are
observable for the asset or liability, either directly or indirectly,
including:
- Quoted prices for similar assets/liabilities in active markets;
- Quoted prices for identical or similar assets in non-active markets (few
transactions, limited information, non-current prices, high variability
over time);
- Inputs other than quoted prices that are observable for the
asset/liability (e.g. interest rates, yield curves, volatilities, default
rates, etc.); and
- Inputs that are derived principally from or corroborated by other
observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market
data.
The Company`s assets are measured as follows:
Cash - The carrying value of cash approximates fair value as maturities are
less than three months.
Notes payable - The carrying value of the notes payable approximates fair
value as the notes were issued within 10 days of the year.
Fair Value Measurements at Reporting Date Using:
Level 2 Level 3
December 31, Level 1
2010
Assets:
Cash $126,931 - -
Notes payable - $400 493 -
b) Risk management policies and hedging activities
The Company is sensitive to changes in commodity prices, foreign exchange
and interest rates. The Company`s board of directors has overall
responsibility for the establishment and oversight of the Company`s risk
management framework. Although the Company has the ability to address its
price-related exposures through the use of options, futures and forward
contracts, it does not generally enter into such arrangements. Similarly,
derivative financial instruments are not used to reduce these financial
risks.
c) Credit risk
Financial instruments which are potentially subject to credit risk for
the Company consist primarily of cash. Cash is maintained with several
financial institutions of reputable credit and may be redeemed upon
demand. It is therefore the Company`s opinion that such credit risk is
subject to normal industry risks and is considered minimal.
d) Liquidity risk
Liquidity risk arises from the Company`s financial obligations and in the
management of its assets, liabilities and optimal capital structure. The
Company manages this risk by regularly evaluating its liquid financial
resources to fund its current and long term obligations and to meet its
capital commitments in a cost effective manner. The main factors that
affect liquidity include working capital requirements, future capital
expenditure requirements, the Company`s credit capacity and expected
future debt and equity capital market conditions.
The Company`s liquidity requirements are met through a variety of
sources, including: cash on hand, existing credit facilities, cash flow
obtained pursuant to joint venture agreements, leases, and debt and
equity markets.
Because the duration of the current general economic uncertainty and its
detrimental effect on credit and capital markets is unknown, it is
difficult to determine the long-term impact on the Company.
In light of market conditions, the Company initiated a series of measures
to bring its spending in line with the projected cash flows from its
operations and available project specific facilities in order to preserve
its balance sheet and maintain its liquidity position.
As at December 31, 2010, the 2010 Annual Financial Statements have been
prepared in accordance with Canadian GAAP applicable to a going concern
(see Note 1 to such statements).
e) Foreign currency risk
The Company is exposed to currency risk as its principal business is
conducted in foreign currencies. Monetary assets and liabilities
denominated in foreign currencies are translated from US dollars and
Congolese francs into Canadian dollars. Unfavourable changes in the
applicable exchange rate may result in a decrease or increase in foreign
exchange gains or losses. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk.
For the year ended December 31, 2010, everything else being equal, a 5%
increase or decrease in the exchange rate between the Canadian dollar and
the US dollar would have resulted in a respective $253,752 decrease and
increase in the value of mineral properties and deferred exploration
expenditures in the DRC.
f) Interest rate risk
Interest rate risk is the potential impact on any Company earnings due to
changes in bank lending rates and short term deposit rates.
The Company`s exposure to interest rate risk is as follows:
Cash Variable interest rate
Other assets Non-interest bearing
Notes payable Fixed interest rate
Accounts payable and accrued
liabilities Non-interest bearing
g) Market risk
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in commodity prices, interest rates or
currency exchange rates. The Company manages the market risk associated
with commodity prices by establishing and monitoring parameters that
limit the types and degree of market risk that may be undertaken.
h) Title risk
Title to mineral properties involves certain inherent risks due to the
difficulties of determining the validity of certain claims as well as the
potential for problems arising from the frequently ambiguous conveyancing
history characteristic of many mining properties. Although the Company
has investigated title to all of its mineral properties for which it
holds concessions or other mineral licenses, the Company cannot give any
assurance that title to such properties will not be challenged or
impugned and cannot be certain that it will have valid title to its
mineral properties. The Company relies on title opinions by legal
counsel who base such opinions on the laws of countries in which the
Company operates.
i) Country risk
The DRC is a developing country and as such, the Company`s exploration
projects in the DRC could be adversely affected by uncertain political or
economic environments, war, civil or other disturbances, and a changing
fiscal regime and by DRC`s underdeveloped industrial and economic
infrastructure.
The Company`s operations in the DRC may be effected by economic pressures
on the DRC. Any changes to regulations or shifts in political attitudes
are beyond the control of the Company and may adversely affect its
business. Operations may be affected in varying degrees by such factors
as DRC government regulations with respect to currency conversion,
production, price controls, export controls, income taxes or reinvestment
credits, expropriation of property, environmental legislation, land use,
water use and mine safety.
There can be no assurance that policies towards foreign investment and
profit repatriation will continue or that a change in economic conditions
will not result in a change in the policies of the DRC government or the
imposition of more stringent foreign investment restrictions. Such
changes cannot be accurately predicted.
SEGMENTED INFORMATION
The Company`s reportable segments have been determined at the level where
decisions are made on the allocation of resources and capital, and where
internal financial statements are available, which is essentially the
different geographic regions. The DRC segment represents the Company`s
exploration activities in the DRC. The Canadian segment comprises its general
corporate activities. The South African segment was discontinued in 2009 and
was comprised of exploration, development, mining, processing and marketing of
its diamonds in South Africa.
For the DRC, exploration costs are capitalized. Canadian corporate costs are
expensed to the statement of operations and deficit. Further discrete segment
information is provided in Note 13 to the 2010 Annual Financial Statements.
The Company carries on business in the following geographic areas:
As at
December
31, South
2010 Canada DRC Africa Total
$ $ $ $
Loss from (748,456) (740,975) (105,006) (1,594,437)
continuing
operations
before
interest
expense and
income
taxes
Interest - -
expense
Income tax 28,515 - 28,515
recovery
Loss from (748,456) (740,975) (105,006) (1,594,437)
continuing
operations
after
income
taxes
Loss from - - - -
Loss from
discon-
tinued
operations
Net loss (719,941) (740,975) (105,006) (1,565,922)
Total 124,228 5,100,870 2,687 5,227,785
assets
Capital - 4,100 4,100
assets
Mineral - 5,075,041 5,075,041
properties
As at
December
31, South
2009 Canada DRC Africa Total
$ $ $ $
Loss from (1,431,159) - - (1,431,159)
con-
tinuing
opera-
tions
before
interest
expense
and
income
taxes
Interest (166,477) (166,477)
expense
Income (57,030) (57,030)
tax
expense
Loss from (1,654,666) - - (1,654,666)
continuin
g
operation
s after
income
taxes
Loss from - - (7,296,948) (7,296,948)
Loss from
discontin
ued opera-
tions
Net loss (8,951,614) (8,951,614)
Total 601,793 6,068,814 107,692 6,778,299
assets
Capital - 141,794 - 141,794
assets
Mineral - 5,808,835 - 5,808,835
pro-
perties
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to senior
management, including the Company`s President and Vice President, Finance, on
a timely basis so that appropriate decisions can be made regarding public
disclosure. As at December 31, 2010, the Company`s President and Vice
President, Finance evaluated or caused to be evaluated under their supervision
the effectiveness of the Company`s disclosure controls and procedures as
required by Canadian securities laws. Based on that evaluation, the President
and Vice President, Finance have concluded that, as of December 31, 2010, the
Company`s disclosure controls and procedures were effective. No material
weaknesses have been identified.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal controls have been designed to provide reasonable assurance regarding
the reliability of the Company`s financial reporting and the preparation of
financial statements together with the other financial information for
external purposes in accordance with Canadian GAAP. As at December 31, 2010,
the Company`s President and Vice President, Finance evaluated or caused to be
evaluated under their supervision, the effectiveness of the Company`s internal
control over financial reporting as required by Canadian securities laws.
Based on that evaluation, the President and Vice President, Finance have
concluded that, as of December 31, 2010, the Company`s internal control over
financial reporting was effective. No material weaknesses have been
identified.
The Company is required under Canadian securities laws to disclose herein any
change in the Company`s internal control over financial reporting that
occurred during the Company`s most recent interim period that has materially
affected, or is reasonably likely to materially affect, the Company`s internal
control over financial reporting. No changes were identified in the Company`s
internal control over financial reporting during the quarter ended December
31, 2010, that have materially affected, or are reasonably likely to
materially affect, the Company`s internal control over financial reporting.
It should be noted that a control system, including the Company`s disclosure
and internal controls and procedures, no matter how well conceived can provide
only reasonable, but not absolute, assurance that the objective of the control
system will be met and it should not be expected that the disclosure and
internal controls and procedures will prevent all errors or fraud.
JOHANNESBURG
01 April 2011
SPONSOR
Arcay Moela Sponsors (Proprietary) Limited
Date: 01/04/2011 14:43:01 Supplied by www.sharenet.co.za
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