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DRN - Delrand - Management`s Discussion and Analysis of Financial Condition and
Results of Operations
DELRAND RESOURCES LIMITED
(formerly BRC DiamondCore Ltd.)
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: DRN & ISIN Number: CA2472671072
("Delrand" or "the Company")
MANAGEMENT`S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management`s discussion and analysis of financial condition and
results of operations (the "MD&A") has been prepared by management and provides
a review of the activities, results of operations and financial condition of
Delrand Resources Limited (the "Company" or "Delrand") based upon International
Financial Reporting Standards ("IFRS"). This MD&A should be read in conjunction
with the unaudited interim condensed consolidated financial statements as at and
for the three and six month periods ended June 30, 2011, as well as the notes
thereto, the audited consolidated financial statements as at and for the
financial year of the Company ended December 31, 2010 ("fiscal 2010") and the
notes thereto and the annual MD&A for fiscal 2010. All amounts are expressed in
Canadian dollars unless otherwise stated.
This MD&A is dated August 12, 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 exploration
results, potential mineralization and future plans and objectives of the
Company) are forward-looking statements. These forward-looking statements
reflect the current expectations or beliefs of the Company based on information
currently available to the Company. Forward-looking statements are subject to a
number of risks and uncertainties that may cause the actual results of the
Company to differ materially from those discussed in the forward-looking
statements, and even if such actual results are realized or substantially
realized, there can be no assurance that they will have the expected
consequences to, or effects on the Company. Factors that could cause actual
results or events to differ materially from current expectations include, among
other things, uncertainties relating to the availability and costs of financing
needed in the future, the possibility that future exploration results will not
be consistent with the Company`s expectations, changes in equity markets,
changes in diamond markets, foreign currency fluctuations, political
developments in the Democratic Republic of the Congo (the "DRC"), changes to
regulations affecting the Company`s activities, delays in obtaining or failure
to obtain required project approvals, the uncertainties involved in interpreting
geological data and the other risks involved in the mineral exploration
business. Any forward-looking statement speaks only as of the date on which it
is made and, except as may be required by applicable securities laws, the
Company disclaims any intent or obligation to update any forward-looking
statement, whether as a result of new information, future events or results or
otherwise. Although the Company believes that the assumptions inherent in the
forward-looking statements are reasonable, forward-looking statements are not
guarantees of future performance and accordingly undue reliance should not be
put on such statements due to the inherent uncertainty therein.
COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond properties
in known diamond producing areas in the DRC. In June 2011, the Company effected
a change in the name of the Company from BRC DiamondCore Ltd. to Delrand
Resources Limited and a consolidation (the "Consolidation") of the outstanding
common shares of the Company on a two to one basis. The names of the Company`s
subsidiaries in the DRC and South Africa are currently unchanged.
For the three and six month periods ended June 30, 2011, the Company reported a
net loss of $169,444 and $347,219 respectively (compared to a net loss of
$98,794 and $326,625 for the three and six month periods ended June 30, 2010).
The net asset value of the Company was $4,343,149 as at June 30, 2011 (December
31, 2010: $3,864,432)
The Company`s accumulated deficit as at June 30, 2011 was $119,752,905 (December
31, 2010: $119,405,686). The Company had a working capital deficit of $269,897
as at June 30, 2011 (December 31, 2010: $1,198,181) and had a net increase in
cash of $213,021 during the six months ended June 30, 2011.
While the Company`s financial statements for the first and second quarters of
2011 have been prepared on the basis of IFRS accounting principles applicable to
a going concern, adverse conditions may cast substantial doubt upon the validity
of this assumption. In the event the Company is unable to identify recoverable
resources, receive the necessary permitting, or arrange appropriate financing,
the carrying value of the Company`s assets could be subject to further material
adjustment. Furthermore, certain market conditions have cast significant doubt
upon the validity of this assumption.
The Company`s ability to continue operations in the normal course of business is
dependent on several factors, including its ability to secure additional
funding. Management has been exploring all available options to secure
additional funding, including equity financing and strategic partnerships. In
addition, the recoverability of amounts shown for exploration and evaluation
assets is dependent upon the existence of economically recoverable reserves, the
ability of the Company to obtain financing to complete the development of the
properties where necessary, or, alternatively, upon the Company`s ability to
recover its spent costs through a disposition of its interests, all of which are
uncertain.
During the second quarter of 2011, the Company completed the following three
transactions which have improved the Company`s liquidity position:
1. In April 2011, the Company sold the containerized bulk sampling plant that
had been constructed for the alluvial deposits on the Kwango River in southern
DRC. The Kwango project had previously been abandoned by the Company and the
related licences relinquished when it was concluded that the project would not
be economically viable. The gross proceeds from the sale of the plant were
US$575,000.
2. On May 11, 2011, the Company closed a non-brokered private placement of
7,500,000 units of the Company at a price of $0.08 per unit for proceeds to the
Company of $600,000. Each such unit was comprised of one common share of the
Company and one warrant of the Company, entitling the holder to purchase one
common share of the Company at a pre-Consolidation price of $0.11 for a period
of three years.
3. On May 27, 2011, the Company closed a non-brokered private placement of
2,500,000 units of the Company at a price of $0.10 per unit for proceeds to the
Company of $250,000. Each such unit was comprised of one common share of the
Company and one warrant of the Company entitling the holder to purchase one
common share of the Company at a pre-consolidation price of $0.11 for a period
of three years. The purchasers of the units under this financing were directors
and officers of the Company.
DRC Projects
DRC North Project (46 exploration permits)
The previously reported Company results of the reconnaissance stream sample
program (see the Company`s press release dated February 2, 2011), with samples
collected on a spacing of one sample to every 26 kmSquared over the 44 Coexco
and two Company exploration permit areas, had revealed the presence of
kimberlitic minerals and micro diamonds. The mineral chemistry of the
kimberlitic minerals analysed by the Rio Tinto facilities in Perth, Australia
was encouraging, so a follow-up program was formulated by the Company. The
follow-up program over the positive areas of the Coexco and Delrand 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).
The results from the initial reconnaissance stream sampling program referred to
above comprised five ilmenites, 27 chrome-spinels (including nine diamond
inclusion types), one eclogitic garnet, all of which proved to be kimberlitic,
and 15 micro-diamonds. The Company selected 16 Coexco permits, all in the
Bafwasende region of the Province Orientale in the northern DRC, as the main
target area and started the follow-up stream sampling program in January 2011.
The target area is dominated by almost horizontally-bedded Neoproterozoic
Lindian Group sediments (shale, sandstone and conglomerate) overlying what has
been referred to as the Archaean Mbomou Craton, and the whole area is covered by
a thick and mature laterite crust masking most of the rock formations of the
area.
During the second quarter of 2011, 90 stream samples were collected which
completed the follow-up program over an area of 2,300 kmSquared in extent. It
took four months for five geologists and one field officer, supported by 40
locally hired field hands, to cover the follow-up target with 490 stream
samples. The number of samples taken equates to one stream sample per
4.69kmSquared compared to one sample per 26kmSquared during the reconnaissance
phase. Each stream sample comprised of a minimum of 20 litres of minus 0.71 mm
diameter material, compared to 30 litres of minus 0.71 mm material in the
original reconnaissance material. The material was classified in the field
using minus 0.71 mm and plus 0.425 mm screens. This screened minus 0.71 mm and
plus 0.425 mm size-fraction was hand-gravitated on site. During the second
quarter of 2011, all samples were concentrated in Kinshasa, DRC using a
mechanical Armstrong Jig. The concentrates of these samples were dispatched to
the Rio Tinto heavy mineral laboratory in Perth, Australia. As of the end of the
second quarter no results had been received.
Field observations classified the majority of the sample trap-sites as good.
Whilst the reddish coloration of most concentrate is a reflection of the high
proportion of laterite in the material washed. Field observations confirm that
most of the area is covered by thick (more than 5 meters) and mature laterite,
masking evidence of any primary sources that may be present and depressing the
occurrences of kimberlitic satellite minerals such as garnet and spinel
significantly, and to a lesser degree ilmenite. Furthermore intense artisanal
diamond digging continues in the follow-up area and in particular along the
Makombe, Mopamu, Aniede, Efule, Lobilo rivers and in most of their tributaries.
Several other isolated and sporadic diggings were seen scattered within the
project area.
The two wholly-owned Delrand exploration permits, PR 1774 and 1775, also
referred to as the Bomilli project and directly to the north of the Coexco
ground, are planned to be covered by follow-up stream samples during the third
quarter of 2011.
Tshikapa Project (9 exploration permits)
During the second quarter of 2011 Delrand conducted a follow-up stream sampling
program over the two Caspian permit areas (PR 976 and 977) in the Tshikapa area.
The permits have been reduced by 50% and now cover 164kmSquared cumulatively.
Both permits have returned abundant kimberlitic minerals with surface textures
that indicate the presence of proximal primary sources. Although the area has
previously been flown with airborne magnetic surveys, it has a very busy
magnetic background complicating the picking of kimberlite-like targets. Hence a
follow-up stream sampling program over the two properties, held pursuant to the
agreement with Caspian Oil and Gas Ltd, was conducted by the Company and funded
by Rio Tinto.
The follow-up samples comprised of 20 litres of post-screened material in the
minus 0.7mm to plus 0.425mm fractions. The material was screened and hand
gravitated in the field and the field concentrates were further concentrated by
the Company`s Armstrong Jig in Kinshasa, DRC. In total 40 samples were collected
over the area on a density of 1 sample per 5 kmSquared. The concentrates from
the Armstrong jig have been sent to Rio Tinto`s heavy mineral laboratory in
Perth, Australia for sorting and mineral chemistry. Diamonds and kimberlitic
minerals (garnet and ilmenite) are especially abundant in three small drainage
basins (Matshibola, Ngombe and Kamukala) much of which is being exploited by
artisanal miners.
Security of Tenure
The Company`s diamond exploration activities in the DRC are focused 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. The Company will keep its focus on the following
exploration permits which are held by the Company directly or by partners
through various option agreements: Acacia (6), the Company (3), Caspian Oil &
Gas (2) and Coexco (44).
Status of Diamond Exploration Permits of the Company and Partners in the DRC
Company (Project) Permit Numbers
No. of KmSquared
Permits
Delrand (2 DRC North, 1174, 1175, 9083 3 961
1 Tshikapa)
Acacia (Tshikapa) 1175,1176,1177,1180, 6 1,053
1188, 1187
Caspian Oil and Gas 976, 977 2 164
(Tshikapa)
Coexco (DRC North) 6013-6016, 6018-6036, 44 7,313
6887-6906, 6909
Total 55 9,491
Iron Ore Exploration
In May 2011, the Company announced that its joint venture with Rio Tinto
Minerals Development Limited ("Rio Tinto") has discovered high grade haematite
(a form of iron ore) in its exploration areas within Province Orientale, DRC.
The drilling results for 1,032 metres of diamond drill holes, which are detailed
below, revealed grades of 65.6% to 68.2% iron. The iron ore exploration is
being funded by Rio Tinto.
Initial geological research and exploration had indicated that the exploration
permit areas, which hitherto had been largely unexplored using modern
exploration methods, were highly prospective for the discovery of iron ore
deposits. This assessment is supported by these initial results. First pass
drilling has been completed on the Zatua 1 and 2 target areas with nine diamond
drill holes totaling 1,032 meters. Six of these holes intercepted high grade
haematite mineralization.
The target areas had been selected after a regional airborne magnetic survey had
identified geophysical anomalies which subsequent ground follow up indicated to
be associated with outcropping haematite mineralization. Mineralized intervals,
where intercepted by a drill hole, range in thickness from 32 meters to 121
meters with both friable and massive textures being observed.
Analytical results have been received for the first six holes with values of
65.6%-68.2% Fe, 0.53%-2.99% Al2O3, 0.39%-2.4% SiO2 and 0.049%-0.969% P, with the
elevated high phosphorous values appearing to be associated with recent
weathering. Despite limited thicknesses in some of the holes, the results give
encouragement that high-grade haematite is present in the area.
Rio Tinto, as the operator, intends to complete the helicopter supported
reconnaissance over the remainder of the Bomokandi permit area.
QUALIFIED PERSON AND TECHNICAL REPORT
Dr. Michiel C. J. de Wit, the Company`s President and a "qualified person" as
such term is defined in National Instrument 43-101, has reviewed and approved
the technical information in this MD&A.
Additional information with respect to the Company`s Tshikapa project is
contained in the technical report prepared by Dr. Michiel C. J. de Wit and
Fabrice Matheys, dated March 31, 2009 and titled "National Instrument 43-101
Technical Report on the Tshikapa Project of BRC DiamondCore Ltd. in the
Democratic Republic of the Congo". A copy of this report can be obtained from
SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 2011, the Company reported a
net loss of $169,444 and $347,219 respectively (or $0.00 per share for both
periods), compared to a net loss of $98,794 and $326,625 (or $0.00 per share)
incurred during the respective three and six month periods ended June 30, 2010.
The increase in losses was a result of increased consulting and professional
fees ($57,725) as well as an increase in general and administrative expenses
($38,858).
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial
information of the Company for each of the last eight quarters, beginning with
the second quarter of 2011. The Company`s reporting and measurement currency is
the Canadian dollar. Only the financial information for the first and second
quarters of 2010 and 2011 are reported in accordance with IFRS. The remaining
quarters are reported in accordance with Canadian generally accepted accounting
principles.
2011 2011 2010 2010
2nd 1st 4th 3rd
quarter quarter quarter quarter
Net loss ($`000) $169 $178 $920 $260
Net loss per 0.00 0.00 $0.01 $0.00
share (basic and
diluted)
2010 2010 2009 2009
2nd 1st 4th 3rd
quarter quarter quarter quarter
Net loss ($`000) $99 $227 $528 $4,879
Net loss per $0.00 $0.00 $0.01
share (basic and $0.19
diluted)
During the second quarter of 2011, the Company`s net loss decreased to $169,444
compared to a net loss in the first quarter of $177,775. The lower loss in the
second quarter of 2011 was due to decreased consulting and professional fees as
well as a foreign exchange loss of $2,243 in the first quarter (as compared to
the $2,756 gain that occurred in the second quarter).
During the first quarter of 2011, the Company`s net loss decreased to $177,775
compared to a net loss in the fourth quarter of 2010 of $920,280. The greater
loss in the fourth quarter of 2010 was due to an impairment loss of $740,975
related to the discontinuation of the Lubao and Candore projects as well as a
write off of a receivable for rental of the Kwango plant in the amount of
$105,009.
During the fourth quarter of 2010, the Company`s net loss increased to $920,280
compared to a net loss of $260,133 in the third quarter of 2010. This increase
was primarily due to an impairment loss related to the discontinuation of the
Lubao and Candore projects of $740,975.
During the third quarter of 2010, the Company`s net loss increased to $260,133
compared to a net loss of $98,794 in the second quarter of 2010. This increase
was primarily due to an increase in professional fees which related to the
Diamond Core liquidation proceedings in South Africa. General and administrative
costs also increased in the third quarter of 2010 as a result of fees relating
to the Company`s secondary listing on the JSE Limited in South Africa.
During the second quarter of 2010, the Company`s net loss decreased to $98,794
compared to a net loss of $227,831 in the first quarter of 2010. Net loss
recorded during the first quarter of 2010 was significantly impacted by the
recognition of stock based compensation expense of $73,116 compared to $nil
recorded during the second quarter of 2010. General and administrative costs
were also lower in the second quarter of 2010 as compared to the first quarter
of 2010.
During the first quarter of 2010, the Company`s net loss decreased to $227,831
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 Resources (Pty) Ltd (which had been the holding company for the
Company`s South African operations). 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 operations (the loss per
share was $0.12 for discontinued operations and $0.07 for continued operations).
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2011, the Company had cash and cash equivalents of $339,952 and a
working capital deficit of $269,897, compared to cash and cash equivalents of
$126,931 and a working capital deficit of $1,198,181 as at December 31, 2010.
The Company has no operating revenues and is wholly reliant upon external
financing to fund its activities. There is no assurance that such financing
will be available on acceptable terms, if at all.
Rio Tinto is currently funding the exploration at the Company`s diamond projects
in the DRC and the exploration at the DRC iron ore project.
In general, market conditions have limited the availability of funds. Given the
Company`s financial position and available resources, the Company currently
expects a need to access equity markets for financing over the next twelve
months. In light of current conditions, the Company has continued a series of
measures to bring its spending in line with the projected cash flows from its
operations in order to preserve its financial position and maintain its
liquidity position. Management believes that based on its current financial
position and liquidity profile, the Company will be able to satisfy its current
and long-term obligations. The unaudited consolidated financial statements of
the Company as at and for the three and six months ended June 30, 2011 have been
prepared in accordance with IFRS applicable to a going concern.
Contractual obligations (not on the statement of financial position) entered
into by the Company as at June 30, 2011 and as at December 31, 2010 were nil.
The Company has an option agreement to secure an equity interest in prospective
ground held in six exploration permits in the DRC with ACACIA sprl, which has
advised the Company of its wish to modify the option agreement. The Company
continues its discussions with ACACIA sprl and is optimistic of reaching an
agreement that is satisfactory to both parties.
The Company is in a dispute with two of its previous directors and officers.
One of these individuals had applied in 2008 for a summary judgment against the
Company in the Witwatersrand Local Division of the High Court of South Africa in
respect of a dispute relating to a settlement agreement pertaining to his
departure. The application for summary judgment was dismissed and the Company
was granted leave to defend the claim. This individual has not taken further
steps to progress that matter. However, in October 2010, almost two years after
the original claim, the same former director and officer instituted fresh
proceedings against the Company. He has repeated the claim made previously, but
this time in a summons lodged before the North Gauteng High Court in South
Africa. This former director and officer is claiming that he is owed payment of
1.2 million South African rand plus interest. The other individual has referred
two disputes to the Commission for Conciliation Mediation and Arbitration in
Johannesburg, South Africa and an action to the High Court in that same
jurisdiction. He elected to withdraw an application for summary judgment. The
Company is defending these actions.
EXPLORATION AND EVALUATION EXPENDITURES
The following table provides a breakdown of the Company`s exploration and
evaluation expenditures in the DRC for the six month period ended June 30, 2011:
Tshikapa Nothern Total
DRC
Balance 12/31/2010 $ $ $
2,590,956 2,484,085 5,075,041
Opening balance
adjustments
IFRS adjustment -
Jan 1, 2010 8,624 8,624 17,248
IFRS adjustment -
Dec 31, 2010 (8,993) (8,994) (17,987)
Funds Recieved from
Rio Tinto 2010 431,355 (431,355) -
Net Adjustments
430,986 (431,725) (739)
Operating expenses
Funds Recieved from
Rio Tinto - (304,335) (304,335)
Admin and office
support 14,741 207,461 222,202
Amortization
1,730 1,731 3,461
Field camps expenses
2,371 33,888 36,259
Remote Sensing
- - -
Drilling
- - -
Geology
- 440 440
Professional fees
1,953 9,174 11,127
Business promotion
- - -
Travel & Helicopter
5,436 24,994 30,430
Stock based
compensation - - -
Permits and surface
taxes 62,132 2,618 64,750
Foreign exchange
1,163 1,163 2,326
Gain on sale of
asset - (512,768) (512,768)
Total Operating
Expenses 89,526 (535,634) (446,108)
Balance June 30,
2011 3,111,468 1,516,727 4,628,195
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of
common shares. As at August 12, 2011, the Company had outstanding 49,704,341
common shares, stock options to purchase an aggregate of 1,110,752 common shares
of the Company and warrants to purchase an aggregate of 15,000,000 common shares
of the Company.
RELATED PARTY TRANSACTIONS
Key Management Remuneration
The Company`s related parties include key management. Key management includes
executive directors and non-executive directors. The remuneration of the key
management of the Company as defined above, during the three and six months
ended June 30, 2011 and 2010 was as follows:
Three months ended Six months ended
June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010
Salaries $ 46,630 $ 91,693 $ 134,375 $ 155,846
$ 46,630 $ 91,693 $ 134,375 $ 155,846
Other Related Parties
During the three and six month periods ended June 30, 2011, legal expenses of
$37,163 and $37,163 (three and six month periods ended June 30, 2010: $nil and
$nil), incurred in connection with general corporate matters, were paid to a law
firm of which a director of the Company is a partner . As at June 30, 2011,
$37,163 (December 31, 2010: $nil) owing to this legal firm was included in
accounts payable.
As at June 30, 2011, an amount of $16,667 was owed to one director of the
Company representing consulting fees (December 31, 2010: $102,311). During the
three and six month periods ended June 30, 2011, consulting fees of $25,000 and
$50,000, respectively were incurred to the one director (three and six month
periods ended June 30, 2010: $58,330 and $83,333 to two directors).
As at June 30, 2011, an amount of $16,667 (December 31, 2010: nil) in the form
of advances of short term loans to the Company was due to a company owned by a
director of the Company.
As at June 30, 2011, an amount of $16,281 (December 31, 2010: $3,719) was owed
to Banro Corporation ("Banro"). Banro owns 17,716,994 common shares of the
Company, representing a 35.65% interest in the Company. During the year ended
December 31, 2010, a drill rig was sold to Banro by the Company for gross
proceeds of $154,964.
On May 27, 2011 the Company closed a non-brokered private placement of 2,500,000
units of the Company at a price of $0.10 per unit for proceeds of $250,000. The
purchasers of the units under the May 27, 2011 private placement were directors
and officers of the Company (see "Company Overview" above).
All amounts due to related parties are unsecured, non-interest bearing and due
on demand. All transactions are in the normal course of operations and are
measured at the exchange value.
NEW PRONOUNCEMENTS ADOPTED
June 30, 2011 is the Company`s second reporting period under IFRS. Accounting
standards effective for periods beginning on January 1, 2011 have been adopted
as part of the transition to IFRS.
Transition to IFRS
IFRS 1, First Time Adoption of IFRS, requires that comparative financial
information be provided. As a result, the first date at which the Company has
applied IFRS was January 1, 2010. IFRS 1 requires first-time adopters to
retrospectively apply all effective IFRS standards as of the reporting date,
which for the Company will be December 31, 2011. However, it also provides for
certain optional exemptions and certain mandatory exceptions for first-time IFRS
adoption. Prior to transition to IFRS, the Company prepared its financial
statement in accordance with Canadian GAAP.
In preparing the Company`s opening IFRS consolidated statements of financial
position, the Company has adjusted amounts reported previously in the financial
statements prepared in accordance with previous Canadian GAAP. The IFRS 1
applicable exemptions and exceptions applied in the conversion from Canadian
GAAP to IFRS are as follows:
i) Share-based payment transactions
The Company has elected not to retrospectively apply IFRS 2 to equity
instruments that were granted and that vest before the transition date. As a
result of applying this exemption, the Company will apply the provision of IFRS
2 to all outstanding equity instruments that are unvested prior to the date of
transition to IFRS.
ii) Deemed Cost of Exploration and Evaluation Assets
The Company has elected not to retrospectively apply IAS 36 to the previously
recorded impairments. Per IFRS 1, the Company has taken an election to deem all
exploration and evaluation assets at cost.
iii) Estimates
The estimates previously made by the Company under Canadian GAAP were not
revised for the application of IFRS except where necessary to reflect any
difference in accounting policy or where there was objective evidence that those
estimates were in error. As a result, the Company has not used hindsight to
create or revise estimates.
IFRS employs a conceptual framework that is similar to Canadian GAAP. However
significant differences exist in certain matters of recognition, measurement and
disclosure. While the adoption has not changed the Company`s actual cash flows,
it has resulted in changes to the Company`s consolidated statement of financial
position and statement of comprehensive loss. The statement of comprehensive
loss has been changed to comply with IAS 1 Presentation of Financial Statements.
The Canadian GAAP consolidated balance sheets as at January 1, 2010 and December
31, 2010, the consolidated statements of operations and comprehensive loss for
the three and six month periods ended June 30, 2010 as well as the consolidated
statement of cash flows for the three and six month periods June 30, 2010 have
been reconciled to IFRS, with a summary of the most significant changes in
policy as follows:
Share-Based Payments
Under IFRS 2 Share-Based Payments, each tranche of an award with different
graded vesting is accounted for as a separate award and the resulting fair value
is amortized over the vesting period of each tranche. Under Canadian GAAP, the
Company was accounting for these as a single award. In addition, under IFRS 2,
the Company is required to estimate the number of forfeitures likely to occur on
grant date and reflect this in the share-based payment expense revising for
actual experiences in subsequent periods. Under Canadian GAAP, forfeitures were
recognized as they occurred
FUTURE ACCOUNTING STANDARDS
The Company has reviewed new and revised accounting pronouncements that have
been issued but are not yet effective and determined that the following may have
an impact on the Company:
IFRS 9 Financial instruments ("IFRS 9") was issued by the IASB on November 12,
2009 and will replace IAS 39 Financial Instruments: Recognition and Measurement
("IAS 39"). IFRS 9 replaces the multiple rules in IAS 39 with a single approach
to determine whether a financial asset is measured at amortized cost or fair
value and a new mixed measurement model for debt instruments having only two
categories: amortized cost and fair value. The approach in IFRS 9 is based on
how an entity manages its financial instruments in the context of its business
model and the contractual cash flow characteristics of the financial assets.
The new standard also requires a single impairment method to be used, replacing
the multiple impairment methods in IAS 39. IFRS 9 is effective for annual
periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of IFRS 9 on its consolidated financial statements.
A revised version of IAS 24 Related party disclosures ("IAS 24") was issued by
the IASB on November 4, 2009. IAS 24 requires entities to disclose in their
consolidated financial statements information about transactions with related
parties. Generally, two parties are related to each other if one party
controls, or significantly influences, the other party. IAS 24 has simplified
the definition of a related party and removed certain of the disclosures
required by the predecessor standard. The revised standard is effective for
annual periods beginning on or after January 1, 2011. The adoption of this
issuance did not have a significant impact on the Company`s consolidated
financial statements.
IFRS 10 Consolidated Financial Statements ("IFRS 10") establishes principles for
the presentation and preparation of consolidated financial statements when an
entity controls one or more other entities. IFRS 10 supersedes IAS 27
"Consolidated and Separate Financial Statements" and SIC-12 "Consolidated -
Special Purpose Entities" and is effective for annual periods beginning on or
after January 1, 2013. Earlier application is permitted. The Company is
currently evaluating the impact of this standard on its consolidated financial
statements.
IFRS 11 Joint Arrangements ("IFRS 11") establishes principles for financial
reporting by parties to a joint arrangement. IFRS 11 supersedes the current IAS
31 "Interests in Joint Ventures" and SIC-13 "Jointly Controlled Entities - Non-
Monetary Contributions by Venturers" and is effective for annual periods
beginning on or after January 1, 2013. Earlier application is permitted. The
Company is currently evaluating the impact of this standard on its consolidated
financial statements.
IFRS 12 Disclosure of Interests in Other Entities ("IFRS 12") applies to
entities that have an interest in a subsidiary, a joint arrangement, an
associate or an unconsolidated structured entity. IFRS 12 is effective for
annual periods beginning on or after January 1, 2013. Earlier application is
permitted. The Company is currently evaluating the impact of this standard on
its consolidated financial statements.
IFRS 13 Fair Value Measurements ("IFRS 13") defines fair value, sets out in a
single IFRS framework for measuring fair value and requires disclosures about
fair value measurements. IFRS 13 applies to IFRSs that require or permit fair
value measurements or disclosures about fair value measurements (and
measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements), except in specified circumstances. IFRS
13 is to be applied for annual periods beginning on or after January 1, 2013.
Earlier application is permitted. The Company is currently evaluating the
impact of this standard on its consolidated financial statements.
IFRS 7 Financial instruments: disclosures ("IFRS 7") The Accounting Standards
Board ("AcSB") approved the incorporation of the IASB`s amendments to IFRS 7
Financial Instruments: Disclosures and the related amendment to IFRS 1 First-
time Adoption of International Financial Reporting Standards into Part I of the
Handbook. These amendments were made to Part I in January 2011 and are
effective for annual periods beginning on or after July 1, 2011. Earlier
application is permitted. The amendments relate to required disclosures for
transfers of financial assets to help users of the financial statements evaluate
the risk exposures relating to such transfers and the effect of those risks on
an entity`s financial position. The Company is currently evaluating the impact
of IFRS 7 on its consolidated financial statements.
An amendment to IAS 1, Presentation of financial statements was issued by the
IASB in June 2011. The amendment requires separate presentation for items of
other comprehensive income that would be reclassified to profit or loss in the
future, such as foreign currency differences on disposal of a foreign operation,
if certain conditions are met from those that would never be reclassified to
profit or loss. The effective date is July 1, 2012 and earlier adoption is
permitted. The Company is currently evaluating the impact of this amendment on
its consolidated financial statements.
IAS 27, Separate financial statements ("IAS 27") was re-issued by the IASB in
May 2011 to only prescribe the accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity
prepares separate financial statements. The consolidation guidance will now be
included in IFRS 10. The amendments to IAS 27 are effective for annual periods
beginning on or after January 1, 2013. The Company is currently evaluating the
impact of the amendments on its consolidated financial statements
IAS 28, Investments in associates and joint ventures ("IAS 28") was re-issued by
the IASB in May 2011. IAS 28 continues to prescribe the accounting for
investments in associates, but is now the only source of guidance describing the
application of the equity method. The amended IAS 28 will be applied by all
entities that have an ownership interest with joint control of, or significant
influence over, an investee. The amendments to IAS 28 are effective for annual
periods beginning on or after January 1, 2013. The Company is currently
evaluating the impact of the amendments on its consolidated financial
statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the interim condensed consolidated financial statements in
conformity with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported
amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates. Estimates and underlying assumptions are reviewed on an
ongoing basis. Information about critical judgments in applying accounting
policies that have the most significant effect on the amounts recognized in the
interim financial statements included the following:
Provisions and contingencies
The amount recognized as provision, including legal, contractual and other
exposures or obligations, is the best estimate of the consideration required to
settle the related liability, including any related interest charges, taking
into account the risks and uncertainties surrounding the obligation. In
addition, contingencies will only be resolved when one or more future events
occur or fail to occur. Therefore assessment of contingencies inherently
involves the exercise of significant judgment and estimates of the outcome of
future events. The Company assesses its liabilities and contingencies based
upon the best information available, relevant tax laws and other appropriate
requirements.
Exploration and evaluation expenditure
The application of the Company`s accounting policy for exploration and
evaluation expenditure requires judgment in determining whether it is likely
that future economic benefits will flow to the Company, which may be based on
assumptions about future events or circumstances. Estimates and assumptions
made may change if new information becomes available. If, after expenditure is
capitalized, information becomes available suggesting that the recovery of
expenditure is unlikely, the amount capitalized is written off in the statement
of comprehensive income (loss) during the period the new information becomes
available.
Impairment
Assets, including property, plant and equipment and exploration and evaluation
assets, are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts exceed their recoverable amounts. The
assessment of the fair value often requires estimates and assumptions such as
discount rates, exchange rates, commodity prices, rehabilitation and restoration
costs, future capital requirements and future operating performance. Changes in
such estimates could impact recoverable values of these assets. Estimates are
reviewed regularly by management.
Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees by
reference to the fair value of the equity instruments at the date at which they
are granted. Estimating fair value for share-based payment transactions
requires determining the most appropriate valuation model, which is dependent on
the terms and conditions of the grant. This estimate also requires determining
the most appropriate inputs to the valuation model including the expected life
of the share option, volatility and dividend yield and making assumptions about
them. Under IFRS, the Company is required to estimate the number of forfeitures
likely to occur on grant date and reflect this in the share-based payment
expense revising for actual experiences in subsequent periods.
The fair value at grant date is determined using a Black-Scholes option pricing
model that takes into account the exercise price, the term of the option, the
impact of dilution, the share price at grant date and expected price volatility
of the underlying share, the expected dividend yield and the risk free interest
rate for the term of the option. Under IFRS, the Company is required to
estimate the number of forfeitures likely to occur on grant date and reflect
this in the share-based payment expense revising for actual experiences in
subsequent periods.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could
significantly impact on its operations and future prospects. The following
discussion pertains to certain principal risks and uncertainties but is not, by
its nature, all inclusive.
The only sources of future funds for further exploration programs which are
presently available to the Company are the sale of equity capital, or the
offering by the Company of an interest in its properties to be earned by another
party carrying out further exploration. There is no assurance that such sources
of financing will be available on acceptable terms, if at all. In the event
that commercial quantities of minerals are found on the Company`s properties,
the Company does not have the financial resources at this time to bring a mine
into production.
The current financial climate is characterized by volatile and uncertain times.
The uncertainty of forward looking statements is therefore greater. Diamond
prices were reduced significantly as a result of the economic downturn and the
recovery could be accompanied by volatility.
All of the Company`s projects are located in the DRC The assets and operations
of the Company are therefore subject to various political, economic and other
uncertainties, including, among other things, the risks of war and civil unrest,
hostage taking, military repression, labor unrest, illegal mining,
expropriation, nationalization, renegotiation or nullification of existing
licenses, permits, approvals and contracts, taxation policies, foreign exchange
and repatriation restrictions, changing political conditions, international
monetary fluctuations, currency controls and foreign governmental regulations
that favor or require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. Changes, if any, in mining or investment policies or
shifts in political attitude in the DRC may adversely affect the Company`s
operations. Operations may be affected in varying degrees by government
regulations with respect to, but not limited to, restrictions on production,
price controls, export controls, currency remittance, income taxes, foreign
investment, maintenance of claims, environmental legislation, land use, land
claims of local people, water use and mine safety. Failure to comply strictly
with applicable laws, regulations and local practices relating to mineral rights
could result in loss, reduction or expropriation of entitlements. In addition,
in the event of a dispute arising from operations in the DRC, the Company may be
subject to the exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdiction of courts in Canada. The
Company also may be hindered or prevented from enforcing its rights with respect
to a governmental instrumentality because of the doctrine of sovereign immunity.
It is not possible for the Company to accurately predict such developments or
changes in laws or policy or to what extent any such developments or changes may
have a material adverse effect on the Company`s operations.
The DRC is a developing nation emerging from a period of civil war and conflict.
Physical and institutional infrastructure throughout the DRC is in a debilitated
condition. The DRC is in transition from a largely state controlled economy to
one based on free market principles, and from a non-democratic political system
with a centralized ethnic power base, to one based on more democratic
principles. There can be no assurance that these changes will be effected or
that the achievement of these objectives will not have material adverse
consequences for the Company and its operations. The DRC continues to
experience violence and significant instability in parts of the country due to
certain militia and criminal elements. While the government and United Nations
forces are working to support the extension of central government authority
throughout the country, there can be no assurance that such efforts will be
successful.
All of the Company`s properties are in the exploration stage only and none of
the properties contain a known body of commercial ore. The Company currently
operates at a loss and does not generate any revenue from operations. The
exploration and development of mineral deposits involve significant financial
risks over a significant period of time which even a combination of careful
evaluation, experience and knowledge may not eliminate. Few properties which
are explored are ultimately developed into producing mines. Major expenditures
may be required to establish reserves by drilling and to construct mining and
processing facilities at a site. It is impossible to ensure that the Company`s
exploration programs will result in a profitable commercial mining operation.
The Company is exposed to currency risk as its principal business is conducted
in foreign currencies. Unfavorable changes in the applicable exchange rate may
result in a decrease or increase in foreign exchange gains or losses. The
Company does not use derivative instruments to reduce its exposure to foreign
currency risk.
The Company`s exploration and, if such exploration is successful, development of
its properties is subject to all of the hazards and risks normally incident to
mineral exploration and development, any of which could result in damage to life
or property, environmental damage and possible legal liability for any or all
damage.
The natural resource industry is intensely competitive in all of its phases, and
the Company competes with many companies possessing greater financial resources
and technical facilities than itself.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
a)Fair value of financial assets and liabilities
The consolidated statements of financial position carrying amounts for cash and
cash equivalents, prepaid expenses and other assets, accounts payable and
accrued liabilities and notes payable approximate their fair value due to their
short-term nature. Due to the use of subjective judgments and uncertainties in
the determination of fair values these values should not be interpreted as being
realizable in an immediate settlement of the financial instruments.
The following presents the fair value and carrying value of the Company`s
financial instruments:
Classification Measurement 30-Jun- 31-Dec-
11 10
Financial
assets
Held-for- Fair value $339,952 $126,931
Cash and cash Trading
equivalents
Amortized
Prepaid expenses Loans and cost
and other assets receivables
34,410 21,713
Financial
liabilities
Accounts payable
and accrued
Other Amortized $594,645 $834,176
liabilities liabilities cost
Notes Other Amortized 400,493
payable liabilities cost -
Taxes Other Amortized 6,127
payable liabilities cost -
Due to Other Amortized 49,614 106,029
related parties liabilities cost
Fair value hierarchy
The following table provides an analysis of financial instruments that are
measured subsequent to initial recognition at fair value, grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
- Level 1 fair value measurements are those derived from quoted prices
(unadjusted) in active markets for identical assets or liabilities;
- Level 2 fair value measurements are those derived from inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived
from prices); and
- Level 3 fair value measurements are those derived from valuation techniques
that include inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
There were no transfers between Level 1 and 2 during the reporting period. The
fair values of financial assets and liabilities carried at amortized cost are
approximated by their carrying values. Cash is ranked Level 1 as the market
value is readily observable. The carrying value of cash approximates fair value
as maturities are less than three months. Notes payable is ranked Level 2 as it
is based on similar loans in the market.
b) Risk Management Policies
The Company is sensitive to changes in commodity prices and foreign-exchange.
The Company`s Board of Directors has overall responsibility for the
establishment and oversight of the Company`s risk management framework. Although
the Company has the ability to address its price-related exposures through the
use of options, futures and forward contacts, it does not generally enter into
such arrangements.
c) Foreign Currency Risk
Foreign currency risk is the risk that a variation in exchange rates between the
Canadian dollar and United States dollar or other foreign currencies will affect
the Company`s operations and financial results. A portion of the Company`s
transactions are denominated in United States dollars, Congolese francs and
South African rand. The Company is also exposed to the impact of currency
fluctuations on its monetary assets and liabilities. The Company`s functional
currency is the Canadian dollar. The majority of major expenditures are
transacted in US dollars. The Company maintains the majority of its cash in
Canadian dollars but it does hold balances in US dollars. Significant foreign
exchange gains or losses are reflected as a separate component of the
consolidated statement of comprehensive loss. The Company does not use
derivative instruments to reduce its exposure to foreign currency risk.
d) Credit Risk
Financial instruments which are potentially subject to credit risk for the
Company consist primarily of cash. Cash is maintained with several financial
institutions of reputable credit in Canada, the DRC and South Africa and may be
redeemed upon demand. It is therefore the Company`s opinion that such credit
risk is subject to normal industry risks and is considered minimal.
e) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due. The Company attempts to ensure that
there is sufficient cash to meet its liabilities when they are due and manages
this risk by regularly evaluating its liquid financial resources to fund current
and long-term obligations and to meet its capital commitments in a cost-
effective manner. The key to success in managing liquidity is the degree of
certainty in the cash flow projections. If future cash flows are fairly
uncertain, the liquidity risk increases. The Company`s liquidity requirements
are met through a variety of sources, including cash and cash equivalents,
existing credit facilities and equity capital markets. In light of market
conditions, the Company initiated a series of measures to bring its spending in
line with the projected cash flows from its operations and available project
specific facilities in order to preserve its financial position and maintain its
liquidity position.
f) Mineral Property Risk
The Company`s operations in the DRC are exposed to various levels of political
risk and uncertainties, including political and economic instability, government
regulations relating to exploration and mining, military repression and civil
disorder, all or any of which may have a material adverse impact on the
Company`s activities or may result in impairment in or loss of part or all of
the Company`s assets.
g) Market Risk
Market risk is the potential for financial loss from adverse changes in
underlying market factors, including foreign-exchange rates, commodity prices,
interest rates and stock based compensation costs. The Company manages the
market risk associated with commodity prices by establishing and monitoring
parameters that limit the types and degree of market risk that may be
undertaken.
h)Interest rate risk
Interest rate risk is the potential impact on any Company earnings due to
changes in bank lending rates and short term deposit rates. The Company is not
exposed to significant interest rate risk other than cash flow interest rate
risk on its cash. The Company does not use derivative instruments to reduce its
exposure to interest rate risk. A fluctuation of interest rates of 1% would not
affect significantly the fair value of cash.
i) Title risk
Title to mineral properties involves certain inherent risks due to the
difficulties of determining the validity of certain claims as well as the
potential for problems arising from the frequently ambiguous conveyancing
history characteristic of many mining properties. Although the Company has
investigated title to all of its mineral properties for which it holds
concessions or other mineral licenses, the Company cannot give any assurance
that title to such properties will not be challenged or impugned and cannot be
certain that it will have valid title to its mineral properties. The Company
relies on title opinions by legal counsel who base such opinions on the laws of
countries in which the Company operates.
j) Country risk
The DRC is a developing country and as such, the Company`s exploration projects
in the DRC could be adversely affected by uncertain political or economic
environments, war, civil or other disturbances, a changing fiscal regime and by
DRC`s underdeveloped industrial and economic infrastructure.
The Company`s operations in the DRC may be affected by economic pressures on the
DRC. Any changes to regulations or shifts in political attitudes are beyond the
control of the Company and may adversely affect its business. Operations may be
affected in varying degrees by factors such as DRC government regulations with
respect to foreign currency conversion, production, price controls, export
controls, income taxes or reinvestment credits, expropriation of property,
environmental legislation, land use, water use and mine safety.
There can be no assurance that policies towards foreign investment and profit
repatriation will continue or that a change in economic conditions will not
result in a change in the policies of the DRC government or the imposition of
more stringent foreign investment restrictions. Such changes cannot be
accurately predicted.
k) Capital Management
The Company manages its cash, common shares, warrants and stock options as
capital. The Company`s main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of
capital at an acceptable level of risk while providing an appropriate
return to its shareholders;
- to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business;
- to safeguard the Company`s ability to obtain financing; and
- to maintain financial flexibility in order to have access to capital in the
event of future acquisitions.
The Company manages its capital structure and makes adjustments to it in
accordance with the objectives stated above, as well as responds to changes in
economic conditions and the risk characteristics of the underlying assets.
There were no significant changes to the Company`s approach to capital
management during the period ended June 30, 2011.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
June 30, 2011 December 31, 2010
Cash and cash $ $ 126,931
equivalents 339,952
Share capital $ $ 115,457,876
116,283,812
Deficit $ $ (119,405,686)
(119,752,905)
18 August 2011
Sponsor
Arcay Moela Sponsors (Proprietary) Limited
Date: 18/08/2011 17:45:03 Supplied by www.sharenet.co.za
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