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FMC - Forbes & Manhattan Coal Corp - Condensed interim consolidated financial
statements
Forbes & Manhattan Coal Corp.
(Registration number: 002116278)
(External company registration number: 2011/011661/10)
Share code on the Toronto Stock Exchange: FMC
Share code on the JSE Limited: FMC
ISIN: CA3451171050
For the three and six months ended August 31, 2011 (presented in Canadian
dollars
UNAUDITED
Forbes & Manhattan Coal Corp.
Condensed Interim Consolidated Statements of Financial Position
As at,
(Unaudited - prepared by management)
(Presented in Canadian dollars)
Notes August 31, February 28,
2011 2011
ASSETS
Current
Cash and cash $ $
equivalents 24,218,841 15,252,651
Restricted cash
2,076,100 1,736,000
Accounts and other
receivables 13,634,282 12,410,375
Inventories 13
6,466,159 10,526,681
Prepaid expenses
79,681 60,301
46,475,063 39,986,008
Property, plant and 11
equipment 76,441,765 79,316,581
Intangibles 10
5,814,029 5,911,567
Goodwill
18,672,014 18,672,014
Other assets 12
8,341,437 5,398,825
Deferred income taxes
149,648 120,061
$ $
155,893,956 149,405,056
LIABILITIES
Current
Accounts payable and 14 $ $
accrued liabilities 11,990,630 7,031,196
Acquisition obligation 9
21,313,792 -
Other financial 15
liabilities 686,622 2,660,467
Asset retirement 16
obligation 389,753 389,177
Loans payable 17
179,493 261,934
34,560,290 10,342,774
Acquisition obligation 9
- 20,300,925
Asset retirement 16
obligation 2,837,797 2,665,329
Other financial 15
liabilities 9,966,199 11,727,930
Deferred income taxes
18,372,084 18,654,227
65,736,370 63,691,185
SHAREHOLDERS` EQUITY
Issued capital 18
98,792,926 93,672,871
Share-based payment 20
reserves 10,345,033 8,413,283
Deficit
(19,860,225) (17,434,614)
Currency translation
reserve (717,677) (535,198)
Equity attributable to the
owners of the company 88,560,057 84,116,342
Non-controlling interest 6
1,597,529 1,597,529
90,157,586 85,713,871
$ $
155,893,956 149,405,056
Commitments and contingencies 1, 6, 23
Subsequent events 24
APPROVED ON BEHALF OF THE BOARD:Signed "Stephan Theron" ,
Director Signed "David Stein" , Director
The accompanying notes are an integral part of the condensed interim
consolidated financial statements.
Forbes & Manhattan Coal Corp.
Condensed Interim Consolidated Statements of Operations and Comprehensive Income
(Loss)
(Unaudited - prepared by management)
(Presented in Canadian Dollars)
Notes For the three months ended
August 31, September
2011 30, 2010
(Note 1)
REVENUE $ $
35,242,776 6,627,239
COST OF SALES
Operating expenses
24,098,251 3,389,874
Amortization and
depletion 5,520,500 1,790,695
29,618,751 5,180,569
Gross profit
5,624,025 1,446,670
EXPENSES
Consulting and
professional fees 2,256,383 407,885
General and
administration 1,796,793 469,788
Stock based 20
compensation 92,000 7,622,500
4,145,176 8,500,173
Net income (loss) before
other items 1,478,849 (7,053,503)
OTHER ITEMS
Other income (loss)
(204,932) 151,109
Business combination
transaction costs (3,084) (1,027,235)
Accretion 9
(528,184) (639,036)
Interest income 8
(expense) (209,277) (205,990)
Foreign exchange gain
(loss) 235,778 (1,407,408)
Loss on share-based 25
payments - (2,357,221)
NET INCOME (LOSS) before
income tax 769,150 (12,539,284)
Income tax expense
(2,190,128) (804,412)
NET INCOME (LOSS) for the
period (1,420,978) (13,343,696)
Other comprehensive
income items
Unrealized gain (loss) on
foreign currency translation (1,198,282) 910,874
COMPREHENSIVE (LOSS) for $ $
the period (2,619,260) (12,432,822)
Net loss per share -
basic and diluted (0.04) (0.76)
Weighted average number
of common shares outstanding-
basic and diluted 34,865,717 17,521,600
The accompanying notes are an integral part of the condensed interim
consolidated financial statements.
Forbes & Manhattan Coal Corp.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited - prepared by management)
(Presented in Canadian Dollars)
For the three months ended For the six months ended
August 31, September August 31, September
2011 30, 2010 2011 30, 2010
(Note 1) (Note 1)
CASH PROVIDED BY
(USED IN):
OPERATING
ACTIVITIES
Net loss for $ $ $ $
the period (1,420,978) (10,986,475 (2,425,611) (11,331,588
) )
Adjustments:
Amortization
and depletion 5,520,500 1,819,911 8,448,193 1,819,911
Fair value
adjustment on 70,204 (313,693) 20,156 (313,693)
financial assets
Deferred
income taxes (300) 243,855 (30,203) 243,855
Accretion
555,547 639,036 1,119,804 639,036
Foreign
exchange (243,928) 1,408,975 (27,550) 1,408,975
Stock based
compensation 92,000 7,622,500 1,931,750 7,622,500
4,573,045 434,109 9,036,539 88,996
Net change in
non-cash working 5,957,092 (751,081) 6,067,216 (684,520)
capital
10,530,137 (316,972) 15,103,755 (595,524)
INVESTING
ACTIVITIES
Change in
accounts payable - (16,513) - -
attributable to
property
exploration
Business
combination (22,193) (29,969,030 (22,193) (29,993,586
) )
Cash acquired
on business - 3,832,045 - 3,832,045
combination
Cash acquired
on Nyah - 968,356 - 968,356
transaction
Additions to
property, plant (2,294,472) (628,494) (3,968,153) (628,494)
and equipment
Additional
contribution to (335,644) - (646,616) -
endowment policy
Investment in
held for trading - (28,292) - (28,292)
instruments
Investment in
securities (250,000) - (250,000) -
Restricted
cash (293,820) - (343,820) -
(3,196,129) (25,841,928 (5,230,782) (25,849,971
) )
FINANCING
ACTIVITIES
Change in
accounts payable 59,191 (1,517,000) 351,673 (1,517,000)
attributable to
share issue
costs
Shares issued
for cash - 38,340,409 5,460,000 38,340,409
Commitment to
issue special - (2,000,001) - (2,000,001)
warrants
Shares issue
costs (59,191) - (691,618) -
Loans payable
(2,789,764) 421,626 (5,942,495) 426,798
(2,789,764) 35,245,034 (822,440) 35,250,206
Effect of
exchange rate (108,274) 129,584 (84,343) 129,584
change on cash
and cash
equivalents
CHANGE IN CASH
AND CASH 4,544,244 9,086,134 9,050,533 8,804,711
EQUIVALENTS
CASH AND CASH
EQUIVALENTS, 19,782,871 - 15,252,651 281,423
beginning of the
period
CASH AND CASH $ $ $ $
EQUIVALENTS, end 24,218,841 9,215,718 24,218,841 9,215,718
of the period
CASH AND CASH
EQUIVALENTS
CONSIST OF:
Cash $ $ $ $
24,218,841 9,215,718 24,218,841 9,215,718
Cash $ $ $ $
equivalents - - - -
SUPPLEMENTAL
INFORMATION
Shares issued $ $ $ $
on business - 11,029,102 - 11,029,102
combination
Shares issued $ $ $ $
on Nyah - 1,716,357 - 1,716,357
transaction into
escrow
Performance $ $ $ $
shares issued - 7,196,100 - 7,196,100
into escrow
Broker $ $ $ $
warrants granted - 993,053 - 993,053
on private
placements
Interest and $ $ $ $
dividend income (209,277) (205,990) (520,848) (205,990)
Income taxes $ $ $ $
received (paid) (2,818,253) 1,788,210 (2,788,350) 1,788,210
The accompanying notes are an integral part of the condensed interim
consolidated financial statements.
Number of Issued Share-based payment
shares capital reserves
issued
Warrant Option
reserve reserve
Balance as at January 1, $ $ $
2010 2,600,000 800,160 - -
Shares issued on private
placements 100,000 500,000 - -
Stock-based compensation
- - - 104,000
Net loss for the three
months ended
March
31, 2010 - - - -
Balance as at March 31, $ $ $
2010 2,700,000 1,300,160 - 104,000
Shares issued on private
placements 14,972,368 38,017,958 - -
Shares issued on business
combination 3,938,965 11,029,102 - -
Shares issued on Nyah
transaction 1,279,384 4,073,578 - -
Performance shares issued
into escrow 2,700,000 7,196,100 - -
Stock-based compensation
- - - 426,400
Options issued on Nyah
transaction - - - 119,684
Broker warrants granted on
private placement (993,053) 993,053 -
Other comprehensive income
for
the six months ended
September 30, 2010 - - - -
Net loss for the six
months ended
September 30, 2010
- - - -
Balance at September 30, $ $ $
2010 25,590,717 60,623,845 993,053 650,084
Shares issued on public
offering 8,000,000 33,779,826 - -
Stock-based compensation
- - - 5,795,596
Shares issued on exercise
of options 75,000 426,000 - (182,250)
Broker warrants granted on
public offering - (1,156,800) 1,156,800 -
Other comprehensive loss for the
period ended
February
28, 2011 - - - -
Net loss for the period
ended
February
28, 2011 - - - -
Balance as at February 28, $ $ $
2011 33,665,717 93,672,871 2,149,853 6,263,430
Shares issued on public
offering 1,200,000 5,120,055 - -
Stock-based compensation
- - - 1,931,750
Other comprehensive loss
for
the six months ended
August 31, 2011 - - - -
Net loss for the six
months ended
August
31, 2011 - - - -
Balance as at August 31, $ $ $
2011 34,865,717 98,792,926 2,149,853 8,195,180
Balance as at January Deficit Currenc Sharehold
1, 2010 y ers`
transla equity
tion
reserve
Shares issued on
private placements
Stock-based $ $ $
compensation (36,888) - 763,272
Net loss for the three
months ended -
March 31, 2010
- - 500,0
00
- - 104,000
Balance as at March
31, 2010 (379,169) - (379,169)
Shares issued on
private placements
Shares issued on $ $ $
business combination (416,057) - 988,103
Shares issued on Nyah
transaction
Performance shares
issued into escrow - - 38,017,95
8
Stock-based
compensation - - 11,029,10
2
Options issued on Nyah
transaction - - 4,073,578
Broker warrants
granted on private - - 7,196,100
placement
Other comprehensive
income for - - 426,400
the six months
ended September 30, - - 119,684
2010
Net loss for the six
months ended - - -
September 30, 2010
- 910,874 910,874
Balance at September
30, 2010 (13,688,809) - (13,688,8
09)
Shares issued on
public offering
Stock-based $ $
compensation $(14,104,866) 910,874 49,072,99
0
Shares issued on
exercise of options
Broker warrants
granted on public - - 33,779,82
offering 6
Other comprehensive loss for the period
ended - - 5,795,596
February 28, 2011
- - 243,7
50
Net loss for the
period ended - - -
February 28, 2011
- (1,446,072) (1,446,072)
Balance as at February
28, 2011 (3,329,748) - (3,329,74
8)
Shares issued on
public offering
Stock-based $ $
compensation $(17,434,614) (535,19 84,116,34
8) 2
Other comprehensive
loss for
the six months
ended August 31, 2011 - - 5,120,055
Net loss for the six
months ended - - 1,931,750
August 31, 2011
- (182,479) (182,479)
Balance as at August
31, 2011 (2,425,611) - (2,425,61
1)
$ $
$(19,860,225) (717,677) 88,560,057
The accompanying notes are an integral part of the condensed interim
consolidated financial statements.
1. NATURE OF OPERATIONS
Forbes & Manhattan Coal Corp. (individually, or collectively with its
subsidiaries, as applicable, "Forbes Coal" or the "Company") is a coal mining
company. Forbes Coal is the continuing combined entity following a September
2010 transaction between Forbes & Manhattan (Coal) Inc. and Nyah Resources Corp.
("Nyah") whereby Nyah, a public company listed on the Toronto Venture Exchange
("TSX-V"), acquired all of the outstanding shares of the Company in exchange for
common shares of Nyah (the "Transaction"). The Transaction was accounted for as
a purchase of assets with Forbes & Manhattan (Coal) Inc. as the acquirer and
Nyah as the acquiree. As such, these condensed consolidated financial statements
are a continuation of the consolidated financial statements of Forbes &
Manhattan (Coal) Inc. Following the Transaction, the combined company is now
known as Forbes & Manhattan Coal Corp. and is listed on the TSX and Johannesburg
Stock Exchange ("JSE"). The Company`s head office is located at 65 Queen Street
West, Suite 815, Toronto, Ontario, Canada. These condensed interim consolidated
financial statements were approved by the Board of Directors on October 17,
2011.
Forbes & Manhattan (Coal) Inc. was incorporated on November 12, 2009. In July
2010, Forbes & Manhattan (Coal) Inc. completed an agreement to acquire Slater
Coal (Pty) Ltd. ("Slater Coal"), a South African company, and its interest in
its coal mines in South Africa ("Slater Coal Properties"), as more fully
described in Note 7. The Slater Coal Properties comprise the operating Magdalena
bituminous mine (the "Magdalena Property") and the Aviemore anthracite mine (the
"Aviemore Property"). Slater Coal is engaged in open-pit and underground coal
mining.
Slater Coal indirectly holds a 70% interest in the Slater Coal Properties
through its 70% interest in Zinoju Coal (Pty) Ltd. ("Zinoju") which holds all of
the mineral rights and prospecting permits with respect to the Slater Coal
Properties. The remaining 30% interest in Zinoju Coal (Pty) Ltd. is held by the
South African Black Economic Empowerment ("BEE") partners. BEE is a statutory
initiative on behalf of the South African government, enacted to increase
African access to the South African economy by increasing African ownership in
new South African enterprises.
The Company changed its year end from December 31 to February 28, effective for
the year ending February 28, 2011. The year end change was made to align the
year end of the Company with that of its subsidiary, Slater Coal. The change in
year end required the Company to have a transition year with a fourteen month
period ending February 28, 2011 with comparatives for the period from inception
(November 12, 2009) to December 31, 2009. As a result, the unaudited condensed
interim consolidated financial statements of the Company for the six months
ended August 31, 2011 are presented with comparatives for the six months ended
September 31, 2010.
The business of mining and exploring for minerals involves a high degree of risk
and there can be no assurance that current operations will result in profitable
mining operations. The recoverability of the carrying value of property, plant
and equipment, intangibles and goodwill and the Company`s continued existence
is dependent upon the preservation of its interests in the underlying
properties, the discovery of economically recoverable reserves, the achievement
of profitable operations, ability to transport and sell its coal, or the ability
of the Company to raise additional financing, if necessary, or alternatively
upon the Company`s ability to dispose of its interests on an advantageous basis.
Changes in future conditions could require material write-downs to the carrying
values. The Company`s assets may also be subject to increases in taxes and
royalties, renegotiation of contracts, currency exchange fluctuations and
restrictions, and political uncertainty.
Although the Company has taken steps to verify title to the properties on which
it is conducting its exploration, development and mining activities, these
procedures do not guarantee the Company`s title. Property title may be subject
to government licensing requirements or regulations, unregistered prior
agreements, unregistered claims, aboriginal land claims and non-compliance with
regulatory and environmental requirements.
2. BASIS OF PREPARATION
These condensed interim consolidated financial statements of the Company and its
subsidiaries were prepared in accordance with International Financial Reporting
Standards ("IFRS"), as issued by the International Accounting Standards Board
("IASB"). As these financial statements represent the Company`s initial
presentation of its results and financial position under IFRS, they were
prepared in accordance with International Accounting Standard ("IAS") 34,
Interim Financial Reporting and by IFRS 1, First-time Adoption of IFRS. These
condensed consolidated interim financial statements have been prepared in
accordance with the accounting policies the Company expects to adopt in its
February 28, 2012 financial statements. Those accounting policies are based on
the IFRS standards and International Financial Reporting Interpretations
Committee ("IFRIC") interpretations issued and outstanding as of that time. The
policies set out below were consistently applied to all the periods presented
unless otherwise noted below.
2. BASIS OF PREPARATION (Continued)
The Company`s consolidated financial statements were previously prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP").
Canadian GAAP differs in some areas from IFRS. Certain information and footnote
disclosures which are considered material to the understanding of the Company`s
interim financial statements and which are normally included in annual financial
statements prepared in accordance with IFRS are provided in notes along with
reconciliations and descriptions of the effect of the transition from Canadian
GAAP to IFRS on equity, operations, comprehensive income (loss), and the
statements of financial position and cash flows. These condensed interim
consolidated financial statements should be read in conjunction with the
Company`s condensed interim consolidated financial statements for the three
months ended May 31, 2011.
The preparation of condensed interim consolidated financial statements in
accordance with IAS 34 requires the use of certain critical accounting
estimates. It also requires management to exercise judgement in applying the
Company`s accounting policies.
3. FUTURE ACCOUNTING CHANGES
Certain new standards, interpretations, amendments and improvements to existing
standards were issued by the IASB or IFRIC that are mandatory for accounting
periods beginning after March 1, 2011 or later periods. Updates are not
applicable or are not consequential to the Company have been excluded thereof.
IFRS 9 Financial Instruments ("IFRS 9") was issued in November 2009 and
contained requirements for financial assets. This standard addresses
classification and measurement of financial assets and replaces the multiple
category and measurement models in IAS 39 for debt instruments with a new mixed
measurement model having only two categories: amortized cost and fair value
through profit or loss. IFRS 9 also replaces the models for measuring equity
instruments, and such instruments are either recognized at fair value through
profit or loss or at fair value through other comprehensive income. This
standard is required to be applied for accounting periods beginning on or after
January 1, 2013, with earlier adoption permitted. The Company is currently
assessing the impact of IFRS 9 on its financial statements.
IFRS 7 Financial instruments - Disclosures ("IFRS 7") was amended by the IASB in
October 2010 and provides guidance on identifying transfers of financial assets
and continuing involvement in transferred assets for disclosure purposes. The
amendments introduce new disclosure requirements for transfers of financial
assets including disclosures for financial assets that are not derecognized in
their entirety, and for financial assets that are derecognized in their entirety
but for which continuing involvement is retained. The amendments to IFRS 7 are
effective for annual periods beginning on or after July 1, 2011. The Company has
not yet determined the impact of the amendments to IFRS 7 on its financial
statements.
IFRS 10 Consolidated Financial Statements ("IFRS 10") provides a single model to
be applied in the control analysis for all investees, including entities that
currently are special purpose entities in the scope of SIC 12. In addition, the
consolidation procedures are carried forward substantially unmodified from IAS
27 Consolidated and Separate Financial Statements. This standard is effective
for annual period annual period beginning on January 1, 2013. Earlier
application is permitted. The Company has not yet determined the impact of the
amendments to IFRS 10 on its financial statements.
IFRS 11 Joint Arrangements ("IFRS 11") replaces the guidance in IAS 31 Interests
in Joint Ventures. Under IFRS 11, joint arrangements are classified as either
joint operations or joint ventures. IFRS 11 essentially carves out of previous
jointly controlled entities, those arrangements which although structured
through a separate vehicle, such separation is ineffective and the parties to
the arrangement have rights to the assets and obligations for the liabilities
and are accounted for as joint operations in a fashion consistent with jointly
controlled assets/operations under IAS 31. In addition, under IFRS 11 joint
ventures are stripped of the free choice of equity accounting or proportionate
consolidation; these entities must now use the equity method.
Upon application of IFRS 11, entities which had previously accounted for joint
ventures using proportionate consolidation shall collapse the proportionately
consolidated net asset value (including any allocation of goodwill) into a
single investment balance at the beginning of the earliest period presented. The
investment`s opening balance is tested for impairment in accordance with IAS 28
Investments in Associates and IAS 36 Impairment of Assets. Any impairment losses
are recognized as an adjustment to opening retained earnings at the beginning of
the earliest period presented. The Company intends to adopt IFRS 11 in its
financial statements for the annual period beginning on January 1, 2013. The
Company has not yet determined the impact of the amendments to IFRS 11 on its
financial statements.
3. FUTURE ACCOUNTING CHANGES (Continued)
IFRS 13 Fair Value Measurement converges IFRS and US GAAP on how to measure fair
value and the related fair value disclosures. The new standard creates a single
source of guidance for fair value measurements, where fair value is required or
permitted under IFRS, by not changing how fair value is used but how it is
measured. The focus will be on an exit price. IFRS 13 is effective for annual
periods beginning on or after January 1, 2013, with early adoption permitted.
The Company has not yet determined the impact of the amendments to IFRS 13 on
its financial statements.
4. PRINCIPLES OF CONSOLIDATION
The condensed interim consolidated financial statements comprise the financial
statements of the Company and its subsidiaries, Slater Coal, Zinoju, Nyah
Resources Inc. and Forbes and Manhattan (Coal) Inc..
Subsidiaries
Subsidiaries are entities over which the Company has control, where control is
defined as the power to govern financial and operating policies of an entity so
as to obtain benefit from its activities. Generally, control is obtained when
the Company has a shareholding of more than one half of the voting rights in its
subsidiaries. The effects of potential voting rights that are currently
exercisable are considered when assessing whether control exists. Subsidiaries
are fully consolidated from the date control is transferred to the Company, and
are de-consolidated from the date control ceases.
Business Combinations and Goodwill
On the acquisition of a subsidiary, the purchase method of accounting is used to
account for the acquisition as follows:
cost is measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange;
directly attributable transaction costs are expensed rather than included in the
acquisition purchase price;
identifiable assets acquired and liabilities assumed are measured at their fair
values at the acquisition date except for non-current assets that are classified
as held for sale in accordance with IFRS 5 `Non-current Assets Held for Sale and
Discontinued Operations`, which are recognized and measured at fair value less
costs to sell;
the excess of acquisition cost over the fair value of the identifiable net
assets acquired is recorded as goodwill;
if the acquisition cost is less than the fair value of the net assets acquired,
the difference is recognized directly in profit or loss;
the interest of non-controlling shareholders in the acquiree is initially
measured at the non-controlling shareholder`s fair value; and
the measurement of contingent consideration at fair value on the acquisition
date is performed with subsequent changes in the fair value recorded through the
consolidated statement of operations.
All material intercompany transactions are eliminated in consolidation. After
initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is not amortized and is tested for impairment
annually. For the purpose of impairment testing, goodwill acquired in a business
combination is, from the acquisition date, allocated to each of the Company`s
cash generating units that are expected to benefit from the synergies of the
combination, irrespective of whether other assets or liabilities of the acquiree
are assigned to those units. The level at which goodwill is allocated shall
represent the lowest level within the entity at which the goodwill is monitored
for internal purposes, but shall not be larger than an operating segment
determined in accordance with IFRS 8 Operating Segments. Where goodwill forms
part of a cash-generating unit and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of is included
in the carrying amount of the operation when determining the gain or loss on
disposal of the operation. Goodwill disposed of in this circumstance is measured
based on the relative values of the operation disposed of and the portion of the
cash-generating unit retained.
Transactions and non-controlling interests
Transactions with non-controlling interests are treated as transactions with
equity owners of the Company. For purchases from non-controlling interests, the
difference between the consideration paid and the non-controlling share of the
carrying value of net assets acquired is recorded in equity. Gains or losses on
disposals to non-controlling interests are similarly computed and also recorded
in equity.
5. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of these condensed interim consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
reported amounts of expenses during the reporting period. Actual outcomes could
differ from these estimates. These condensed interim consolidated financial
statements include estimates, which, by their nature, are uncertain. The impacts
of such estimates are pervasive throughout the condensed interim consolidated
financial statements, and may require accounting adjustments based on future
occurrences. Revisions to accounting estimates are recognized in the period in
which the estimate is revised and the revision affects both current and future
periods.
Information about critical judgments and estimates in applying accounting
policies that have the most significant effect on the amounts recognized in the
condensed consolidated financial statements are as follows:
Asset carrying values and impairment charges
Estimation of asset lives and related basis for depreciation, depletion and
amortization
Determination of ore reserve estimates
Recognition of deferred taxes
Capitalization of exploration, evaluation costs and development costs
Contingencies
Acquisitions and allocation of purchase price
Determination of economic viability of a project
Valuation of inventory
Warrants and stock based compensation valuation
Income tax accounts
6. PURCHASE OF SLATER COAL
a. Purchase of Slater Coal
In November 2009, the Company entered into an agreement to acquire a 100%
interest in Slater Coal. A deposit of $722,500 (ZAR 5,000,000) was made under
the terms of this agreement. Slater Coal is a private South African coal mining
company.
Slater Coal indirectly holds a 70% interest in the Slater Coal Properties
through Zinoju Coal (Pty) Ltd. ("Zinoju") which holds all of the mineral rights
and prospecting permits with respect to the Slater Coal Properties. The
remaining 30% interest in Zinoju is held by South African Black Economic
Empowerment ("BEE") partners. BEE is a statutory initiative on behalf of the
South African government, enacted to increase African access to the South
African economy by increasing African ownership in new South African
enterprises.
The funding the BEE received to purchase the shares was sourced from Slater
Coal. For accounting purposes BEE holds an option to acquire its 30% interest in
Zinoju, and a non-controlling interest has been recorded to reflect this option
related to BEE`s interest upon repayment of the loan utilized to acquire the
interest in Zinoju. The loan is being repaid from dividends issued by Zinoju.
On April 13, 2010, the Company and the shareholders of Slater Coal agreed on the
terms for the acquisition of all of the issued and outstanding common shares of
Slater Coal. Pursuant to the finalized terms of the agreement the Company is
required to pay ZAR 600,000,000 (approximately $80,900,000) in cash and common
stock to Slater Coal shareholders over a two year period:
ZAR 5,000,000 deposit ($722,500 paid on November 25, 2009);
ZAR 22,500,000 ($3,091,500 paid on June 29, 2010);
ZAR 213,750,000 ($30,006,792 paid on July 23, 2010);
Issue common shares of the Company with a value of ZAR 78,750,000 ($11,029,102)
based on $2.80 per share (issued on July 30, 2010);
Cash payment of ZAR 119,000,000 ($16,457,000 paid February 24, 2011); and
Cash payment of ZAR 140,000,000 (approximately $19,558,000) payable by March 1,
2012.
6. PURCHASE OF SLATER COAL (Continued)
a. Purchase of Slater Coal (continued)
The Company currently holds 76.75% of the outstanding shares of Slater Coal and
will receive shares equivalent to 23.25% of the issued and outstanding shares
after the March 1, 2012 payment has been made. Given the fact that the final
amount of the March 1, 2012 payment is subject to Slater Coal meeting certain
production targets, the incumbent management team and a majority of the board of
directors of Slater Coal have been given a certain amount of autonomy to be able
to reach these targets.
The March 1, 2012 payment of ZAR 140 million has been recorded on the condensed
interim consolidated statements of financial position as a current acquisition
obligation (Note 9).
The Company received approval from the South African Reserve Bank ("SARB") for
the acquisition by Forbes Coal of all of the issued and outstanding shares of
Slater Coal (Pty) Ltd. ("Slater Coal"). As part of granting the approval, Forbes
Coal has agreed to undertake to list the common shares of the Company on the JSE
within 12 months. As a result on July 28, 2011, the Company began trading on the
JSE under the symbol "FMC".
b. Slater Coal financial results
Reported revenue for the 2010 comparative period of $6,627,239 (Note 25 (ii))
and related operating expense and amortization and depletion are for the period
from the date of acquisition (July 29, 2010) to September 30, 2010, being an
approximate two month period.
7. OPERATING SEGMENTS
The Company operates in Canada and South Africa. The Company`s revenue from
external customers and information about its assets by geographical location are
detailed below:
Current Mine Other non- Total
assets Properties, properties current assets
plant and assets
equipment
February
28, 2011
Canada $ $ $ $ $
14,794,690 - - - 14,794,690
South
Africa 25,191,318 79,316,581 5,911,567 24,190,900 134,610,366
$ $ $ $ $
39,986,008 79,316,581 5,911,567 24,190,900 149,405,056
August 31,
2011
Canada $ $ $ $ $
14,097,968 - - 250,000 14,347,968
South
Africa 32,377,095 76,441,765 5,814,029 26,913,099 141,545,988
$ $ $ $ $
46,475,063 76,441,765 5,814,029 27,163,099 155,893,956
All of the Company`s coal revenues are earned from production in South Africa.
8. INTEREST INCOME (EXPENSE)
Six months ended
August 31, September
2011 30, 2010
Interest bearing borrowings $ $
674,747 212,025
Unwinding discount on
rehabilitation provision 54,361 26,305
Interest expense
729,108 238,330
Cash and cash equivalents
152,070 32,340
Restricted cash
56,190 -
Interest income
208,260 32,340
Net interest income (expense) $ $
(520,848) (205,990)
9. ACQUISITION OBLIGATION
Current Long-term
Balance as at February 28, 2011 $ $
- 20,300,925
Effect of foreign currency exchange
difference - (43,502)
Reclassification due to current
maturity in March 2012 20,257,423 (20,257,423)
Accretion
1,065,443 -
Effect of foreign currency exchange
difference on accretion (9,074) -
Balance as at August 31, 2011 $ $
21,313,792 -
See Note 6 (a) for details of the acquisition obligation.
10. INTANGIBLES
Richards Bay Mineral and Total
Coal prospecting
Terminal rights
entitlements
Cost as at February 28, 2011 $ $ $
4,944,940 1,050,000 5,994,940
Effect of foreign currency exchange
difference (10,596) (2,250) (12,846)
Cost as at August 31, 2011 $ $ $
4,934,344 1,047,750 5,982,094
Depreciation, depletion and impairment $ $ $
as at February 28, 2011 (79,912) (3,460) (83,373)
Effect of foreign currency exchange
difference 171 7 178
Charge for the period
(82,401) (2,469) (84,870)
Depreciation, depletion and impairment $ $ $
as at August 31, 2011 (162,142) (5,922) (168,065)
Net book value as at February 28, 2011 $ $ $
4,865,028 1,046,540 5,911,567
Net book value as at August 31, 2011 $ $ $
4,772,202 1,041,828 5,814,029
11. PROPERTY PLANT AND EQUIPMENT
Mining Office Land Develop Mining Total
assets equipme and ment rights
nt, buildin costs
radio gs
equipme
nt,
fixture
s and
fitting
s
Cost as at $ $ $ $ $ $
February 28, 39,056, 199,854 550,582 2,433,1 43,250, 85,490,
2011 503 50 760 849
Effect of
foreign (83,693 (428) (1,180) (5,214) (92,680 (183,19
currency ) ) 5)
exchange
difference
Additions
3,767,2 110,690 72,610 - - 3,950,5
57 57
Change in
rehabilitation 125,874 - - - - 125,874
provision
Disposals
(29,613 - - - - (29,613
) )
Cost as at $ $ $ $ $ $
August 31, 42,836, 310,116 622,012 2,427,9 43,158, 89,354,
2011 328 36 080 472
Depreciation $ $ $ $ $ $
and depletion (4,238, (49,126 (19,595 - (1,867, (6,174,
as at February 477) ) ) 070) 268)
28, 2011
Effect of
foreign 9,082 105 42 - 4,001 13,230
currency
exchange
difference
Charge for the
period (4,358, (19,196 (24,194 - (2,349, (6,751,
332) ) ) 947) 669)
Depreciation $ $ $ $ $ $
and depletion (8,587, (68,217 (43,747 - (4,213, (12,912
as at August 727) ) ) 016) ,707)
31, 2011
Net book value $ $ $ $ $ $
as at February 34,818, 150,728 530,987 2,433,1 41,383, 79,316,
28, 2011 026 50 690 581
Net book value $ $ $ $ $ $
as at August 34,248, 241,899 578,265 2,427,9 38,945, 76,441,
31, 2011 601 36 064 765
Land and building includes a net book value balance of $ 95,907 for a property
that is not used in production and mine operations.
12. OTHER ASSETS
August 31, February
2011 28, 2011
Endowment policy $ $
4,090,162 3,478,609
Security investments
250,000 -
Long term investments
836,423 838,219
Long term receivables
3,164,852 1,081,997
$ $
8,341,437 5,398,825
12. The other assets consist of an endowment policy held by the Company to fund
payment requirements associated with its installment sale agreement obligations.
The total endowment policy consists of various individual policies managed in
various investment funds. The investment in this financial asset is classified
as level 3 on the fair value hierarchy as the inputs required to determine fair
value of the investment are actuarially determined and not supported by market
activity.
The table below sets forth the summary of changes in the endowment policy for
the period ended August 31, 2011:
Balance as at February $
28, 2011 3,478,609
Effect of exchange rate
change (7,454)
Current year
contributions 638,923
Fair value adjustment
(19,916)
Balance as at August $
31, 2011 4,090,162
13. INVENTORIES
August 31, February
2011 28, 2011
Consumables $ $
366,471 267,631
Work in progress
393,268 154,899
Finished goods
5,706,420 10,104,151
$ $
6,466,159 10,526,681
As at August 31, 2011, all inventories were presented at cost.
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
August 31, February
2011 28, 2011
Trade payables $ $
7,495,232 5,129,462
Payroll and other
statutory 1,051,644 389,042
liabilities
Current tax payable
1,365,845 -
Other payables and
accruals 2,077,909 1,512,692
$ $
11,990,630 7,031,196
15. OTHER FINANCIAL LIABILITIES
August 31, February
2011 28, 2011
Capital lease agreements (*) $ $
- 97,579
Installment sale agreements(*)
10,247,552 13,590,838
Third party institutional loans
(**) 405,269 699,980
Total interest bearing
borrowings 10,652,821 14,388,397
Less:
Current portion of capital
lease agreements - (97,579)
Current portion of instalment
sale agreements (547,290) (2,460,583)
Current portion of third
party institutional loans (139,332) (102,305)
Total current portion of
interest bearing borrowings (686,622) (2,660,467)
Total long-term portion of $ $
interest bearing borrowings 9,966,199 11,727,930
(*) The lease and installment sale agreements related liabilities are payable
over periods from three to five years, at interest rates linked to prime.
Installment sale related liabilities are secured by mining assets and an
endowment policy with a book value of approximately $12,900,000.
(**) The loans are repayable in monthly/yearly installments over periods from
one to five years. Both are unsecured.
The other financial liabilities are repayable as follows:
Year Amount
2012 $
686,623
2013
8,461,790
2014
1,346,357
2015
158,051
$
10,652,821
The interest rate exposure of borrowings of the Company was as follows:
Leases at floating rates $
10,247,552
Loan at rates of 8.9%
405,269
$
10,652,821
16. ASSET RETIREMENT OBLIGATION
Balance as at February 28, $
2011 3,054,506
Effect of foreign currency
exchange difference (6,545)
Accretion expense
53,715
Net additional provision
125,874
Balance as at August 31, 2011 $
3,227,550
Total asset retirement obligation as at August 31, 2011 is comprised of:
Current portion $
389,753
Long-term portion
2,837,797
$
3,227,550
The asset retirement obligation for close down rehabilitation costs reflects the
net present value of the estimated cost of restoring the environmental
disturbance that has occurred up to the condensed interim consolidated
statements of financial position date and is expected to be paid out over 1 to
10 years using a 9.5% discount rate.
17. LOANS PAYABLE
August 31, February
2011 28, 2011
Directors and officers of $ $
Slater Coal 165,066 260,297
Other
14,427 1,637
$ $
179,493 261,934
Loans are unsecured, non interest bearing, with no fixed terms of repayment.
18. ISSUED CAPITAL
Authorized unlimited number of common shares without par value:
Issued Number of Stated
shares value
Balance as at January 1, 2010 2,600,000 $
800,160
Private placement (i) 100,000
500,000
Private placement (iii) 14,972,368
41,922,630
Public offering (vii) 8,000,000
36,400,000
Issue costs -
(8,674,699)
Shares issued on business
combination (iv) 3,938,965 11,029,102
Shares issued on Nyah
transaction (v) 1,279,384 4,073,578
Performance shares issued
into escrow (vi) 2,700,000 7,196,100
Options exercised
75,000 243,750
Options exercised - valuation -
reallocation 182,250
Balance as at February 28, 33,665,717
2011 93,672,871
Public offering (vii) 1,200,000
5,460,000
Issue costs -
(339,945)
Balance as at August 31, 2011 34,865,717 $
98,792,926
18. ISSUED CAPITAL (Continued)
On July 16, 2010 the Company consolidated its share capital on the basis of ten
existing common shares of the Company for one new common share of the Company.
The number of outstanding common shares has been retroactively restated
throughout these condensed consolidated financial statements to reflect the
consolidation.
i On March 15, 2010 the Company completed a private placement financing issuing
100,000 common shares of the Company at a price of $5.00 per share for gross
proceeds of $500,000. The sole subscriber of this issuance was Aberdeen
International Inc ("Aberdeen") (see Note 22 Related Party Transactions).
ii Effective July 16, 2010, and in connection with the transaction with Nyah,
the Company amended its articles to effect consolidation of its issued and
outstanding common shares on the basis of ten existing common shares of the
Company for one new common share of the Company.
iii In July and August, 2010, the Company completed an offering of special
warrants ("Special Warrants") at a price of $2.80 per Special Warrant for gross
proceeds of $41,922,630. Each Special Warrant converted automatically and
without any further action on the part of the holder into one common share of
the Company (each an "Underlying Share") on September 21, 2010 immediately prior
to the completion of the acquisition of all of the issued and outstanding shares
of the Company by Nyah (see Note 22 Related Party Transactions).
As compensation for its services rendered in connection with the Forbes Coal
financing, the underwriters were paid a cash commission equal to 6% of the gross
proceeds of the brokered portion of the Forbes Coal financing and were issued
763,887 broker warrants exercisable to acquire the same number of common shares
of the Company at a price of $2.80 per common share for a period of 18 months
following the closing of the Slater Coal acquisition.
iv In July 2010, the Company completed the next installment for the acquisition
of Slater Coal by making a cash payment of ZAR 213,750,000 ($30,006,792) and
issuing 3,938,965 common shares of the Company at $2.80 per share valued at ZAR
78,750,000 ($11,029,102).
v On September 21, 2010 1,279,384 common shares were issued upon the completion
of the Transaction with Nyah. The common shares were assigned a value of
$4,073,578 ($3.18 per share). (See Note 22 Related Party Transactions).
vi On September 21, 2010 2,700,000 common shares were issued and put into escrow
upon the completion of the transaction with Nyah. The common shares were
assigned a value of $7,196,100 ($2.67 per share). The value was recorded in
stock based compensation expense for the period. (See Note 20).
vii On February 22, 2011, the Company closed a bought deal offering (the
"Offering") of 8,000,000 common shares (the "Offered Shares") of the Company at
a price of $4.55 per Offered Share for aggregate gross proceeds of $36,400,000.
A syndicate of underwriters have also been granted an over-allotment option to
purchase up to an additional 1,200,000 common shares of the Company at a price
of $4.55 per common share which was exercised on March 3, 2011.
As compensation for its services rendered in connection with the Forbes Coal
Offering, the underwriters were paid a cash commission equal to 6% of the gross
proceeds and were issued 480,000 broker warrants exercisable to acquire the same
number of common shares of the Company at a price of $4.55 per common share for
a period of 24 months following the closing of the Slater Coal acquisition.
19. SHARES IN ESCROW
On July 20, 2010, the shareholders of Forbes Coal on that date were issued
2,700,000 performance special warrants (the "Performance Special Warrants").
Each Performance Special Warrant was automatically exercised into one common
share of Forbes Coal (each "Performance Share" and, collectively, the
"Performance Shares") for no additional consideration immediately prior to the
completion of the Nyah acquisition, provided that such Performance Shares shall
be deposited in escrow with an escrow agent (the "Escrowed Shares"), to be
released as follows:
i. 50% of the Escrowed Shares (the "First Tranche Escrowed Shares") will be
released once the Company achieves US$22,000,000 in EBITDA from the Slater Coal
Properties over a 12 consecutive month period by July 20, 2013. In the event of
not achieving US$22,000,000 in EBITDA from Slater Coal Properties, the above
mentioned Escrowed Shares will be cancelled;
ii The remaining Escrowed Shares will be released once the Company achieves
US$35,000,000 in EBITDA from the Slater Coal Properties over a 12 consecutive
month period within a three year period following the release of the First
Tranche Escrowed Shares. For further clarity, EBITDA generated from the Slater
Coal Properties will exclude any gains or losses generated by the combined
company from the disposition of the Slater Coal Properties. In the event of not
achieving US$35,000,000 in EBITDA from Slater Coal Properties, the above
mentioned Escrowed Shares will be cancelled. (EBITDA is a non-IFRS measure and
defined as earnings before interest, taxes, depreciation and amortization).
The model used to fair value the Performance Special Warrants applies standard
Monte Carlo simulation techniques and is based on correlated one-factor
geometric Brownian motions. The key inputs used in the model include:
ZAR/USD FX: 7.3194
ZAR/CAD FX: 7.0897
Equity value of a comparable company: 3.45
API4 Coal Price: 91.81
ZAR/USD FX Volatility: 11.6%
ZAR/CAD FX Volatility: 8.1%
Volatility of a comparable company: 64.3%
20. SHARE-BASED PAYMENT RESERVES
No. of Weight Value No. of Weight Value Total
option ed of warran ed of value
s averag option ts averag warran
e s e ts
exerci exerci
se se
price price
Balance as $ $ $ $ $
at February 2,482, 3.49 6,263, 1,243, 3.48 2,149, 8,413,
28, 2011 798 430 887 853 283
Granted and
vested 962,50 3.93 1,931, - - - 1,931,
0 750 750
Balance as $ $ $ $ $
at August 3,445, 3.61 8,195, 1,243, 3.48 2,149, 10,345
31, 2011 298 180 887 853 ,033
Employee share options plan
The Company has an ownership-based compensation scheme, to be administered by
the board of directors of the Company, for directors, officers, employees and
consultants. The plan provides for the issuance of share options to acquire up
to 10% of the Company`s issued and outstanding capital. The number of shares
reserved for issuance pursuant to the grant of share options will increase as
the Company`s issued and outstanding share capital increases. In accordance with
the terms of the plan, as approved by shareholders at a previous annual general
meeting, directors, officers, employees and consultants of the Company may be
granted options to purchase common shares at an exercise price determined by the
board of directors, but which shall not be lower than the market price of the
underlying common shares at the time of grant.
20. SHARE-BASED PAYMENT RESERVES (Continued)
Each employee share option converts into one common share of the Company on
exercise. No amounts are paid or payable by the recipient on receipt of the
option. The options carry neither rights to dividends nor voting rights. Options
may be exercised at any time from the date of vesting to the date of their
expiry.
During the six months ended August 31, 2011, 962,500 (period ended February 28,
2011 - 2,435,000) share options were granted to directors, officers, employees
and consultants of the Company. These options had a grant date estimated fair
value of $1,931,750 (period ended February 28, 2011 - $8,475,849) and are to
vest immediately, over 4 quarters and over 8 quarters. The options expire five
years from the date of issue, or 30 days after the resignation of the director,
officer, employee or consultant.
The following share-based payment arrangements were in existence as at August
31, 2011:
Share options
Number of Number of Grant Exercise Grant
Expiratio date
n
options options date date price estimated
outstandi exercisab fair
ng le value
17,662 17,662 20-Sep-10 27-Feb-12 $ $
7.96 12,579
2,405 2,405 20-Sep-10 27-Feb-12 $ $
7.96 1,713
36,432 36,432 20-Sep-10 31-May-12 $ $
2.39 65,512
55,276 55,276 20-Sep-10 31-May-12 $ $
13.93 27,537
11,023 11,023 20-Sep-10 4-Jan-13 $ $
7.96 12,343
260,000 260,000 15-Mar-10 15-Mar-15 $ $
2.80 1,040,746
2,100,000 2,100,000 13-Oct-10 13-Oct-15 $ $
3.25 5,103,000
825,000 825,000 24-Mar-11 24-Mar-16 $ $
4.10 1,839,750
100,000 25,000 6-Jun-11 6-Jun-16 $ $
3.00 38,750
37,500 37,500 13-Jun-11 13-Jun-16 $ $
2.77 53,250
3,445,298 3,370,298 $ $
3.61 8,195,180
Expected Expected Expected Risk-free
volatility life dividend interest
years yield rate
100% 1.44 0.00% 1.54%
100% 1.44 0.00% 1.54%
100% 1.70 0.00% 1.54%
100% 1.70 0.00% 1.54%
100% 2.29 0.00% 1.54%
100% 5.00 0.00% 2.39%
100% 5.00 0.00% 1.74%
63% 5.00 0.00% 2.15%
61% 5.00 0.00% 2.23%
61% 5.00 0.00% 2.24%
4.88
Broker warrants
Number of Number of Grant Expected
Grant Expiration Exercise date
warrants warrants date date price estimated volatility
outstanding exercisable fair
value
763,887 763,887 23- 23-Jan-12 $ $ 100%
Jul- 2.80 993,053
10
480,000 480,000 22- 22-Feb-13 $ $ 100%
Feb- 4.55 1,156,800
11
1,243,887 1,243,887 $ $
3.48 2,149,853
Expected Expected Risk-free
life dividend interest
years yield rate
1.50 0.00% 1.53%
2.00 0.00% 1.79%
1.70
21. FINANCIAL INSTRUMENTS
Details of the significant accounting policies and methods adopted (including
the criteria for recognition, the bases of measurement, and the bases for
recognition of income and expenses) for each class of financial asset and
financial liability are disclosed in Note 6 of the condensed interim
consolidated financial statements for the three months ended May 31, 2011.
The Company`s financial assets and financial liabilities as at August 31, 2011
and February 28, 2011 were as follows:
Cash, Assets / Other Total
loans and (liabiliti financial
receivable es) at assets/(li
s fair value abilities)
through
profit
February 28, 2011
Cash $ $ $ $
15,252,651 - - 15,252,651
Restricted cash
1,736,000 - - 1,736,000
Receivables
12,410,375 - - 12,410,375
Other financial assets
non-current 1,081,997 4,316,828 - 5,398,825
Accounts payable and
accrued liabilities - - 7,031,196 7,031,196
Acquisition obligation
- - 20,300,925 20,300,925
Other financial
liabilities - current - - 2,660,467 2,660,467
Other financial
liabilities - long - - 11,727,930 11,727,930
term
Loan payable $ $ $ $
- - 261,934 261,934
August 31, 2011
Cash $ $ $ $
24,218,841 - - 24,218,841
Restricted cash
2,076,100 - - 2,076,100
Receivables
13,634,282 - - 13,634,282
Other financial assets
non-current 3,164,852 5,176,585 - 8,341,437
Accounts payable and
accrued liabilities - - 11,990,630 11,990,630
Acquisition obligation
- - 21,313,792 21,313,792
Other financial
liabilities - current - - 686,622 686,622
Other financial
liabilities - long - - 9,966,199 9,966,199
term
Loan payable $ $ $ $
- - 179,493 179,493
At August 31, 2011, there are no significant concentrations of credit risk for
loans and receivables designated at fair value through the condensed interim
consolidated statement of operations and comprehensive income (loss). The
carrying amount reflected above represents the Company`s maximum exposure to
credit risk for such loans and receivables.
CAPITAL MANAGEMENT
The capital of the Company consists of common shares, warrants and options.
The Company manages and adjusts its capital structure based on available funds
in order to support the acquisition, exploration and development of mining
properties. The Company manages its capital structure and makes adjustments to
it in light of changes in economic conditions and the risk characteristics of
the underlying assets. In order to maintain or adjust its capital structure, the
Company may issue new shares, seek debt financing, or acquire or dispose of
assets. The Board of Directors does not establish quantitative return on capital
criteria for management, but rather relies on the expertise of the Company`s
management to sustain future development of the business.
The Company is not subject to any externally imposed capital requirements.
Management reviews its capital management approach on an on-going basis and
believes that this approach, given the relative size of the Company, is
reasonable. There have been no changes in the risks, objectives, policies and
procedures in 2010 or 2011.
As at August 31, 2011, the capital structure of the Company consists of equity
attributable to the owners, share based payment reserves attributable to
directors, officers, employees and consultants of the company totaling
$88,560,057 (February 28, 2011 - $84,116,342).
21. FINANCIAL INSTRUMENTS (Continued)
FINANCIAL RISK FACTORS
The Company is exposed to a variety of financial risks.
The Company`s overall management programme focuses on the unpredictability of
financial markets and seeks to minimise potential adverse effects on the
Company`s financial performance. The Company does not use derivative financial
instruments, such as forward exchange contracts, to hedge certain exposures.
a. Market risk
i. Foreign exchange risk
The Company`s functional currency is the Canadian dollar. The Company operates
internationally and is exposed to foreign exchange risk arising from various
currency exposures, primarily with respect to the South African Rand ("Rand")
and the US dollar. Foreign exchange risk arises from future commercial
transactions and recognized assets and liabilities. The Company purchased its
South African Company in Rand and is required to make future payments in Rand.
In addition, coal is priced on international markets in United States dollars
and converted to Rand to support operations in South Africa.
Management has set up a policy to require its companies to manage their foreign
exchange risk against their functional currency. Foreign exchange risk arises
when future commercial transactions or recognised assets or liabilities are
denominated in a currency that is not the entity`s functional currency.
A 10% increase in the Rand against the Company`s functional currency, the
Canadian dollar would have increased (decreased) the Company`s income by
approximately ($300,000) for the six months ended August 31, 2011. A 10%
increase in the United States dollar would have increased (decreased) the
Company`s income by $3,100,000 for the six months ended August 31, 2011.
The Company does not currently use derivative financial instruments such as
forward exchange contracts to hedge currency risk exposures.
21. FINANCIAL INSTRUMENTS (Continued)
FINANCIAL RISK FACTORS (Continued)
a. Market risk (continued)
The following assets and liabilities are presented in Canadian dollar values and
denominated in different currencies as at August 31, 2011 and February 28, 2011:
Denominated in Total
CAD ZAR AUD USD
Cash and cash
equivalents 13,786,71 1,455,408 - 10,530 15,252,651
3
Restricted cash
- 1,736,000 - - 1,736,000
Amounts
receivable 905,161 5,766,954 - 5,738,260 12,410,375
Inventories
- 10,526,68 - - 10,526,681
1
Prepaid
expenses 54,434 5,867 - - 60,301
Property, plant
and equipment - 79,316,58 - - 79,316,581
1
Mine properties
- 5,911,567 - - 5,911,567
Goodwill
18,672,01 - - - 18,672,014
4
Other assets
- 5,398,825 - - 5,398,825
Deferred income
taxes - 120,061 - - 120,061
Accounts
payable and (789,749) (6,078,92 - (162,521) (7,031,196
accrued 6) )
liabilties
Acquisition
obligation - (20,300,9 - - (20,300,92
25) 5)
Other financial
liabilities - - (2,660,46 - - (2,660,467
current 7) )
Other financial
liabilities - - (11,727,9 - - (11,727,93
long term 30) 0)
Asset
retirement - (389,177) - - (389,177)
obligation -
current
Asset
retirement - (2,665,32 - - (2,665,329
obligation - 9) )
long term
Loans payable
- (261,934) - - (261,934)
Deferred income
taxes 1,289,802 (19,944,0 - - (18,654,22
29) 7)
Net balance $ $
sheet exposure $33,918,3 $46,209,2 - 5,586,269 $85,713,87
as at February 75 27 1
28, 2011
Cash and cash
equivalents 13,134,15 11,077,88 - 6,797 24,218,841
5 9
Restricted cash
50,000 1,732,280 - 293,820 2,076,100
Amounts
receivable 501,205 12,453,68 - 679,389 13,634,282
8
Inventories
- 6,466,159 - - 6,466,159
Prepaid
expenses 73,827 5,854 - - 79,681
Property, plant
and equipment - 76,441,76 - - 76,441,765
5
Mine properties
- 5,814,029 - - 5,814,029
Goodwill
18,672,01 - - - 18,672,014
4
Other assets
250,000 8,091,437 - - 8,341,437
Deferred income
taxes - 149,648 - - 149,648
Accounts
payable and (689,643) (10,896,1 (15,084) (389,770) (11,990,63
accrued 33) 0)
liabilties
Acquisition
obligation - (21,313,7 - - (21,313,79
92) 2)
Other financial
liabilities - - (686,622) - - (686,622)
current
Other financial
liabilities - - (9,966,19 - - (9,966,199
long term 9) )
Asset
retirement - (389,753) - - (389,753)
obligation -
current
Asset
retirement - (2,837,79 - - (2,837,797
obligation - 7) )
long term
Loans payable
- (179,493) - - (179,493)
Deferred income
taxes 1,289,802 (19,661,8 - - (18,372,08
86) 4)
Net balance $ $
sheet exposure $33,281,3 $56,301,0 (15,084) 590,236 $90,157,58
as at August 60 74 6
31, 2011
ii. Interest rate risk
The Company`s interest rate risk arises from deposits held with banks and
interest-bearing liabilities. Borrowings issued at variable rates expose the
Company to cash flow interest rate risk which is partially offset by cash held
at variable rates. A 1% increase in interest rates would create additional
income of approximately $51,000 per month.
21. FINANCIAL INSTRUMENTS (Continued)
FINANCIAL RISK FACTORS (Continued)
a. Market risk (continued)
iii. Price risk
The Company is exposed to price risk with respect to commodity prices. Commodity
prices fluctuate on a daily basis and are affected by numerous factors beyond
the Company`s control. The supply and demand for commodities, the level of
interest rates, the rate of inflation, investment decisions by large holders of
commodities including governmental reserves and stability of exchange rates can
all cause significant fluctuations in commodities prices. Such external economic
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. A 10% change in the market
price of coal would have resulted in a corresponding change in revenues of
approximately $5,500,000 for the six months ended August 31, 2011.
b. Credit risk
The Company`s credit risk is primarily attributable to cash and cash equivalents
and accounts and other receivables. Cash equivalents consist of guaranteed
investment certificates and bankers acceptances, which have been invested with
reputable financial institutions, from which management believes the risk of
loss to be remote. Other receivables primarily consist of goods and services tax
due from the Federal Government of Canada and amounts owing from coal sales.
Management believes that the credit risks concentration with respect to these
amounts receivables are remote.
Restricted cash totaling $2,076,100 was primarily on deposit with the First
National Bank, to be released to a supplier if payments are not made to them, in
GIC investment with Royal Bank of Canada held as collateral against credit card
limits used by the Company and in a lawyer`s trust account.
c. Liquidity risk
As August 31, 2011, the Company had net working capital of $11,914,773 (February
28, 2011 - $29,643,234) which included cash and cash equivalents and restricted
cash of $26,294,941 (February 28, 2011 - $16,988,651), accounts receivable and
other receivables of $13,634,282 (February 28, 2011 - $12,410,375), and
inventories of $6,466,159 (February 28, 2011 - $10,526,681), offset by current
liabilities of $34,560,290 (February 28, 2011 - $10,342,774).
Prudent liquidity risk management implies maintaining sufficient cash and the
availability of funding through credit facilities. The Company aims to maintain
flexibility in funding by keeping committed credit lines available in its
operating entities Undrawn committed borrowing are available at all times so
that the Company does not breach borrowing limits or covenants (where
applicable) on any of its borrowing facilities.
d. Fair value of financial instruments
The Company has designated its cash equivalents, investments and certain other
assets as held-for-trading, measured at fair value. Accounts receivable, other
receivables, restricted cash and cash are classified as loans and receivables,
which are measured at amortized cost. Accounts payable and accrued liabilities,
acquisition obligation, loans payable and other financial liabilities are
classified as other financial liabilities, which are measured at amortized cost.
The three levels of the fair value hierarchy are as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets
or liabilities;
Level 2 - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
Level 3 - Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
21 FINANCIAL INSTRUMENTS (Continued)
FINANCIAL RISK FACTORS (Continued)
d Fair value of financial instruments (continued)
As at August 31, 2011, the carrying and fair value amounts of the Company`s
financial instruments are approximately the same due to the limited term of
these instruments. The following table illustrates the classification of the
Company`s Financial Instruments within the fair-value hierarchy as at August 31,
2011 and February 28, 2011:
August 31, 2011
Level 1 Level 2 Level 3
Endowment policy and investments $ 250,000 $ - $4,926,585
February 28, 2011
Level 1 Level 2 Level 3
Endowment policy and investments $ - $ - $4,316,828
22. RELATED PARTY DISCLOSURE
In March 2010, a company with common directors solely participated in two
private placements of common shares of the Company (Note 18 (i)).
The Transaction with Nyah was a related party transaction because at the time of
the Transaction certain directors and officers of the Company were also
directors, officers and shareholders of Nyah.
During the Special Warrants offering (Note 18 (iii)) certain directors, officers
and a company with common directors subscribed to Special Warrants, which
subsequently were converted into common shares of the Company.
The Company shares its premises with other companies that have common directors
and officers and the Company reimburses the related companies for its
proportional share of the expenses. At August 31, 2011 an amount of $23,516
(February 28, 2011 - $nil) was prepaid and $nil (February 28, 2011 - $33,718)
was payable in relation to these expenses. These amounts are unsecured, non-
interest bearing with no fixed terms of repayment.
As a result of the Nyah transaction, Forbes Coal acquired a receivable of
$1,015,574 which consisted primarily of a receivable from Valencia Ventures Inc.
("Valencia") in the amount of $1,000,000 for the sale of the Agnew Lake Project.
In October 2010, $500,000 of this amount was received from Valencia and in July
2011 the second payment of $250,000 was received in form of the shares of
Valencia. Mr. Stan Bharti is a director of Valencia. Valencia and the Company
have certain directors and or officers in common. Also as a result of the Nyah
transaction Forbes Coal acquired a payable in the amount of $100,000 payable to
Forbes & Manhattan Inc., a company of which Stan Bharti is an officer and
director, which was paid in full as at February 28, 2011.
As a result of Slater Coal acquisition, Forbes Coal acquired receivables and
payables in the net amount of $121,394 owed from the former Slater Coal
shareholders and their related parties to the Company. As at the date of these
condensed interim consolidated financial statements an amount of $165,066 in
loans payable to directors and officers of Slater Coal was recorded. Also an
amount of $777,347 in loans receivable from directors and officers of Slater
Coal was recorded.
Also as a result of Slater Coal acquisition, business relationships with certain
related parties were inherited which resulted in total transactions for six
months being for services purchased being $2,166,000 and for sales of goods
being $1,389,000.
The related party transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
22. RELATED PARTY DISCLOSURE (Continued)
Compensation of key management personnel
The remuneration of directors and other members of key management personnel
during the period were as follows:
Six months ended
August 31, 2011 September 30,2011
Short term benefits 880,479 1,650,833
Share based payments 1 672 125 -
552 604 1 650 833
23. COMMITMENTS AND CONTINGENCIES
Management contracts
The Corporation is party to certain management contracts. These contracts
require that additional payments of approximately $2,230,000 be made upon the
occurrence of a change of control. As the likelihood of these events taking
place is not determinable, the contingent payments have not been reflected in
these condensed consolidated financial statements. Minimum commitments remaining
under these contracts were approximately $475,000 all due within one year.
Installment sale agreements payment obligations
The Company is committed to minimum amounts under installment sale agreements
for plant and equipment. Minimum commitments remaining under these leases were
$10,247,552 over the following years:
Year Amount
2012 $
547,290
2013
8,322,458
2014
1,219,753
2015
158,051
$
10,247,552
Environmental contingency
The Company`s mining and exploration activities are subject to various federal,
provincial and international laws and regulations governing of the environment.
These laws and regulations are continually changing and generally becoming more
restrictive. The Company believes its operations are materially in compliance
with all applicable laws and regulations. The Company has made, and expects to
make in the future, expenditures to comply with such laws and regulations.
Throughput, transportation and sales contracts
The Corporation is party to certain throughput, transportation and sales
contracts. As the likelihood of full non-performance by the Company on these
contracts is not determinable, the contingent payments have not been reflected
in these condensed consolidated financial statements.
24. SUBSEQUENT EVENTS
No material events occurred subsequent to the period end.
25. TRANSITION TO IFRS
The Company`s financial statements for the year ending February 28, 2012 will be
the first annual financial statements that comply with IFRS and these condensed
interim financial statements were prepared as described in Note 2, including the
application of IFRS 1. IFRS 1 requires an entity to adopt IFRS in its first
annual financial statements prepared under IFRS by making an explicit and
unreserved statement in those financial statements of compliance with IFRS. The
Company will make this statement when it issues its 2012 annual financial
statements.
IFRS 1 also requires that comparative financial information be provided. As a
result, the first date at which the Company has applied IFRS was January 1, 2010
(the "Transition Date"). IFRS 1 requires first-time adopters to retrospectively
apply all effective IFRS standards as of the reporting date, which for the
Company will be February 28, 2012. However, it also provides for certain
optional exemptions and certain mandatory exceptions for first time IFRS
adopters.
Initial elections upon adoption
Set forth below are the IFRS 1 applicable exemptions and exceptions applied in
the conversion from Canadian GAAP to IFRS.
IFRS Exemption Applied
Share-based payments - IFRS 2, Share-based Payments, encourages application of
its provisions to equity instruments granted on or before November 7, 2002, but
permits the application only to equity instruments granted after November 7,
2002 that had not vested by the Transition Date. The Company elected to avail
itself of the exemption provided under IFRS 1 and applied IFRS 2 for all equity
instruments granted after November 7, 2002 that had not vested by its Transition
Date
Business combinations and Consolidated and Separate Financial Statements, IFRS 1
provides the option to apply IFRS 3, Business Combinations, retrospectively or
prospectively from the Transition Date. The Company has elected to apply IFRS 3
prospectively. The Company did not apply IFRS 3 retrospectively to business
combinations that occurred prior to its Transition Date and such business
combinations have not been restated. In accordance with IFRS 1, if a Company
elects to apply IFRS 3 Business Combinations retrospectively, IAS 27
Consolidated and Separate Financial Statements must also be applied
retrospectively. As the Company elected to apply IFRS 3 prospectively, the
Company has also elected to apply IAS 27 prospectively.
IFRS Mandatory Exceptions
Estimates - Hindsight is not used to create or revise estimates. The estimates
previously made by the Company under Canadian GAAP were not revised for
application of IFRS except where necessary to reflect any difference in
accounting policies.
Reconciliations of Canadian GAAP to IFRS
IFRS 1 requires an entity to reconcile its equity, comprehensive income (loss)
and cash flows for prior periods. The changes made to the condensed interim
consolidated statements of financial position and condensed interim consolidated
statements of comprehensive income (loss) have resulted in reclassifications of
various amounts on the statements of cash flows. However, as there have been no
changes to the net cash flows, no reconciliations have been presented.
Adjustments on transition to IFRS:
In addition to the exemptions and exceptions discussed above, the following
narratives explain the significant differences between the previous historical
Canadian GAAP accounting policies and the current IFRS policies applied by the
Company. Please refer to the Company`s May 31, 2011 condensed interim
consolidated financial statements for a complete description of the accounting
policies used.
25. TRANSITION TO IFRS (Continued)
a. Share-based compensation - Forfeitures
Canadian GAAP - Forfeitures of awards are recognized as they occur.
IFRS - An estimate is required of the number of awards expected to vest, which
is revised if subsequent information indicates that actual forfeitures are
likely to differ from the estimate. No adjustments were required.
b. Reverse Acquisition
Canadian GAAP - The reverse acquisition was treated as a capital transaction
with the cost of the transaction measured at the fair value of the consideration
given or the assets acquired, whichever is more reliably measured. As the
valuation of the consideration is calculated using the Black-Scholes option
pricing model which requires assumptions to be used, the Company measured the
transaction based on the fair value of the net assets acquired, which was in a
deficit position and therefore, recorded the transaction directly into deficit.
IFRS - The substance of the transaction is a reverse acquisition of a non-
operating company which does not constitute a business combination as Nyah does
not meet the definition of a business. The transaction is accounted for as a
capital transaction with the consideration paid by the Company measured with the
excess over the fair value of the assets being recognized in the statement of
operations and comprehensive income (loss). As the purchase price paid exceeded
the fair value of the identified net assets acquired, the difference was
recorded in the statement of operations and comprehensive income (loss).
Impact on Condensed Interim Consolidated Statements of Financial Position and
Statements of Operations
September
30, 2010
Share capital $
2,537,221
Loss on share-based $
payments (2,537,221)
c. Deferred Income Taxes
Canadian GAAP - Future income tax liabilities are presented as either current or
long term.
IFRS - Deferred income tax liabilities are presented as long-term.
Transitional reconciliations
The reconciliations between the previously reported financial results under
Canadian GAAP and the current reported financial results under IFRS are provided
as follows:
i Reconciliation of the condensed interim consolidated statement of financial
position as at September 30, 2010;
ii Reconciliation of the condensed interim consolidated statement of
operations and comprehensive income (loss) for the six months ended
September 30, 2010;
iii Reconciliation of the condensed interim consolidated statement of
operations and comprehensive income (loss) for the three months ended
September 30, 2010;
25. TRANSITION TO IFRS (Continued)
i Reconciliation of the condensed interim consolidated statement of financial
position as at September 30, 2010
Canadian GAAP accounts Note Canadian IFRS IFRS
25 GAAP adjustments balances
balances
ASSETS
Current
Cash and cash equivalents $ $ $
9,215,718 - 9,215,718
Restricted cash
3,145,973 - 3,145,973
Accounts and other
receivables 7,541,503 - 7,541,503
Inventories
6,863,597 - 6,863,597
Prepaid expenses
42,617 - 42,617
26,809,408 - 26,809,408
Property, plant and equipment
33,921,183 - 33,921,183
Mineral property and rights
68,745,687 - 68,745,687
Investment property
116,954 - 116,954
Goodwill
1,400,558 - 1,400,558
Other assets
4,212,993 - 4,212,993
Deferred income taxes
72,327 - 72,327
$ $ $
135,279,110 - 135,279,110
LIABILITIES
Current
Accounts payable and accrued $ $ $
liabilities 5,958,648 - 5,958,648
Acquisition obligation
21,983,266 - 21,983,266
Other financial liabilities
1,936,408 - 1,936,408
Loans payable
1,153,389 - 1,153,389
31,031,711 - 31,031,711
Acquisition obligation
20,052,969 - 20,052,969
Asset retirement obligation
1,792,156 - 1,792,156
Other financial liabilities
7,759,910 - 7,759,910
Deferred income taxes
25,569,374 - 25,569,374
86,206,120 - 86,206,120
SHAREHOLDERS` EQUITY
Share capital b
58,266,624 2,357,221 60,623,845
Warrants
993,053 - 993,053
Contributed surplus
650,084 - 650,084
Deficit b
(11,747,645) (2,357,221) (14,104,866)
Currency translation reserve
910,874 - 910,874
Equity attributable to the
owners of the company 49,072,990 - 49,072,990
$ $ $
135,279,110 - 135,279,110
25. TRANSITION TO IFRS (Continued)
ii Reconciliation of the condensed interim consolidated statement of operations
and comprehensive income (loss) for the six months ended September 30, 2010
Canadian GAAP accounts Note Canadian IFRS IFRS
25 GAAP adjustments balances
balances
REVENUE $ $ $
6,627,239 - 6,627,239
COST OF SALES
Operating expense
3,389,874 - 3,389,874
Amortization and depletion
1,790,695 - 1,790,695
5,180,569 - 5,180,569
Gross profit
1,446,670 - 1,446,670
EXPENSES
Consulting and professional
fees 442,869 - 442,869
General and administration
700,081 - 700,081
Stock based compensation
7,622,500 - 7,622,500
Mineral properties
investigation costs 78,573 - 78,573
8,844,023 - 8,844,023
Net loss before other items
(7,397,353) - (7,397,353)
OTHER ITEMS
Other income
151,109 - 151,109
Business combination
transaction costs (1,027,235) - (1,027,235)
Accretion
(639,036) - (639,036)
Interest income (expense)
(205,990) - (205,990)
Foreign exchange gain (loss)
(1,408,671) - (1,408,671)
Loss on share-based payments b
- (2,357,221) (2,357,221)
NET LOSS before income tax
(10,527,176) (2,357,221) (12,884,397)
Income tax expense
(804,412) - (804,412)
NET LOSS for the period
(11,331,588) (2,357,221) (13,688,809)
Other comprehensive income
items
Unrealized gain on foreign
currency translation 910,874 - 910,874
COMPREHENSIVE LOSS for the $ $ $
period (10,420,714) (2,357,221) (12,777,935)
Net loss per share - basic and
diluted (2.23) (0.46) (2.69)
Weighted average number
of common shares outstanding -
basic and diluted 5,091,652 5,091,652 5,091,652
25 TRANSITION TO IFRS (Continued)
iii Reconciliation of the condensed interim consolidated statement of operations
and comprehensive income (loss) for the three months ended September 30, 2010
Canadian GAAP accounts Note Canadian IFRS IFRS
25 GAAP adjustments balances
balances
REVENUE $ $ $
6,627,239 - 6,627,239
COST OF SALES
Operating expense
3,389,874 - 3,389,874
Amortization and depletion
1,790,695 - 1,790,695
5,180,569 - 5,180,569
Gross profit
1,446,670 - 1,446,670
EXPENSES
Consulting and professional
fees 387,529 - 387,529
General and administration
469,788 - 469,788
Stock based compensation
7,622,500 - 7,622,500
Mineral properties
investigation costs 20,356 - 20,356
8,500,173 - 8,500,173
Net loss before other items
(7,053,503) - (7,053,503)
OTHER ITEMS
Other income
151,109 - 151,109
Business combination
transaction costs (1,027,235) - (1,027,235)
Accretion
(639,036) - (639,036)
Interest income (expense)
(205,990) - (205,990)
Foreign exchange gain (loss)
(1,407,408) - (1,407,408)
Loss on share-based payments b
- (2,357,221) (2,357,221)
NET LOSS before income tax
(10,182,063) (2,357,221) (12,539,284)
Income tax expense
(804,412) - (804,412)
NET LOSS for the period
(10,986,475) (2,357,221) (13,343,696)
Other comprehensive income
items
Unrealized gain on foreign
currency translation 910,874 - 910,874
COMPREHENSIVE LOSS for the $ $ $
period (10,075,601) (2,357,221) (12,432,822)
Net loss per share - basic and
diluted (0.63) (0.13) (0.76)
Weighted average number
of common shares outstanding -
basic and diluted 17,521,600 17,521,600 17,521,600
Sasfin Capital a division of Sasfin Bank Limited
18 October 2011
Date: 18/10/2011 13:01:01 Supplied by www.sharenet.co.za
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