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Condenced consolidated interims for 3 and 6 month period ended 31 August 2013
Forbes and 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
(“Forbes Coal” or “the Company”)
CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
For the three and six months ended August 31, 2013 and 2012
(Presented in Canadian dollars)
Notes August 31, 2013 February 28, 2013
ASSETS
Current
Cash $ 1,875,992 $ 3,025,664
Restricted cash 50,000 50,000
Accounts and other receivables 22 13,928,081 13,610,214
Inventories 9 9,018,462 10,153,759
Other assets 13 2,614,642 1,879,946
Prepaid expenses 249,196 83,235
Total current assets 27,736,373 28,802,818
Property, plant and equipment 10 60,443,498 68,951,509
Intangibles 11 4,010,285 4,561,205
Goodwill 12 13,724,526 15,239,856
Other assets 13 2,444,391 3,024,084
Long-term restricted cash 1,275,960 1,421,040
Deferred income taxes 852,351 428,109
Total assets $ 110,487,384 $ 122,428,621
LIABILITIES
Current
Accounts payable and accrued liabilities 14,20 $ 21,567,025 $ 16,590,646
Other financial liabilities 15 9,447,866 10,674,912
Asset retirement obligations 16 274,146 305,317
Loans payable 22,103 24,616
Total current liabilities 31,311,140 27,595,491
Other financial liabilities 15 10,831,579 14,568,444
Asset retirement obligations 16 3,188,753 3,388,467
Deferred income taxes 7,550,963 9,852,429
Total liabilities 52,882,435 55,404,831
SHAREHOLDERS' EQUITY
Issued capital 97,342,142 97,342,142
Reserves 18 3,502,924 7,387,684
Deficit (21,390,846) (19,703,918)
Currency translation reserve (22,488,283) (18,641,130)
Equity attributable to the owners of the Company 56,965,937 66,384,778
Non-controlling interest 639,012 639,012
Total shareholders' equity 57,604,949 67,023,790
Total liabilities and shareholders' equity $ 110,487,384 $ 122,428,621
Commitments and contingencies 1, 21, 22, 23
Subsequent events 23
APPROVED ON BEHALF OF THE BOARD:
Signed “Stephan Theron” , Director Signed “Bernie Wilson” , Director
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
FORBES & MANHATTAN COAL CORP.
Consolidated Statements of Operations and Comprehensive Loss
(Presented in Canadian Dollars)
For the three months ended For the six months ended
Notes
August 31, 2013 August 31, 2012 August 31, 2013 August 31, 2012
REVENUE $ 18,648,093 $ 23,390,275 $ 39,157,781 $ 44,190,469
COST OF SALES
Operating expenses 16,798,794 18,300,528 33,598,348 34,481,480
Amortization and depletion 2,372,441 2,738,670 5,758,011 5,545,450
Stock based compensation 18 146,000 - 146,000 -
19,317,235 21,039,198 39,502,359 40,026,930
Gross profit (loss) (669,142) 2,351,077 (344,578) 4,163,539
EXPENSES
Consulting and professional fees 20 779,074 713,614 1,732,829 1,469,144
General and administration 20 1,059,209 1,762,520 2,079,638 3,210,345
Stock based compensation 18 229,600 10,516 229,790 28,782
Mineral properties investigation costs - 7,339 - 14,423
2,067,883 2,493,989 4,042,257 4,722,694
Net loss before other items (2,737,025) (142,912) (4,386,835) (559,155)
OTHER ITEMS
Other income 47,938 446,345 542,989 488,794
Net accretion and interest (expense) 8 (549,355) (407,193) (1,048,625) (989,471)
Foreign exchange gain (loss) 145 (14,713) 190 (2,255)
Unrealized (loss) on marked-to-market securities - (117,188) (20,089) (485,491)
Gain on disposition of equipment 7,458 - 7,458 -
NET LOSS before income tax (3,230,839) (235,661) (4,904,912) (1,547,578)
Income and other tax (expense) recovery (2,696,437) 10,369 (1,042,566) (268,042)
NET LOSS for the period (5,927,276) (225,292) (5,947,478) (1,815,620)
Other comprehensive loss items
Unrealized gain (loss) on foreign currency translation 3,598,054 (2,226,064) (3,847,153) (8,680,217)
COMPREHENSIVE LOSS for the period $ (2,329,222) $ (2,451,356) $ (9,794,631) $ (10,495,837)
Net loss per share - basic and diluted (0.17) (0.01) (0.17) (0.05)
Headline loss per share - basic and diluted (0.17) (0.01) (0.17) (0.05)
Weighted average number:
of common shares outstanding - basic 34,865,717 34,865,717 34,865,717 34,865,717
of common shares outstanding - diluted 34,865,717 34,865,717 34,865,717 34,865,717
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
FORBES & MANHATTAN COAL CORP.
Consolidated Statements of Cash Flows
(Presented in Canadian Dollars)
For the three months ended For the six months ended
August 31, 2013 August 31, 2012 August 31, 2013 August 31, 2012
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss for the period $ (5,927,276) $ (225,292) $ (5,947,478) $ (1,815,620)
Adjustments:
Amortization and depletion 2,372,441 2,738,670 5,758,011 5,545,450
Fair value adjustment on financial assets 3,449 (320,908) (213,684) (331,100)
Deferred income taxes 2,921,697 (250,187) 1,067,130 (755,185)
Accretion 145,095 17,793 147,628 44,501
Unrealized foreign exchange (gain) (305) (104) (3,105) (406)
Unrealized loss on marked-to-market securities - 117,188 20,089 485,491
Stock based compensation 375,600 10,516 375,790 28,782
Gain on disposition of equipment (7,458) - (7,458) -
(116,757) 2,087,676 1,196,923 3,201,913
Net change in non-cash working capital 3,565,922 480,975 4,024,575 689,734
3,449,165 2,568,651 5,221,498 3,891,647
INVESTING ACTIVITIES
Long-term prepaid expenses - (132,462) - (244,559)
Additions to property, plant and equipment (2,566,699) (1,911,662) (3,178,991) (3,864,801)
Proceeds from disposition of equipment 30,093 - 30,093 -
Additional (contribution to) recovery from endowment policy (232,317) 718,211 (495,568) 473,740
Restricted cash - 1,557,224 - 1,544,204
(2,768,923) 231,311 (3,644,466) (2,091,416)
FINANCING ACTIVITIES
Investec loan facility - drawdowns - 5,831,288 - 5,831,288
Investec loan facility - repayments (1,092,331) (1,716,180) (2,246,678) (2,043,576)
Instalment sale agreements - repayments (118,110) (167,684) (241,391) (254,151)
Other loans drawdowns (repayments) - 4,230 - (199,105)
Change in non-current accounts receivable 1,730 378,593 3,577 961,717
Payments to BEE partners - (60,752) - (60,752)
(1,208,711) 4,269,495 (2,484,492) 4,235,421
Effect of exchange rate change on cash 652 (549,573) (242,212) (883,065)
CHANGE IN CASH (528,469) 7,069,457 (907,460) 6,035,652
CASH, beginning of the period 2,403,809 8,113,781 3,025,664 9,481,078
CASH, end of the period $ 1,875,992 $ 14,633,665 $ 1,875,992 $ 14,633,665
Reserves Currency
Number of Issued Shareholders'
Deficit translation
shares issued capital Warrant Option BEE option Treasury equity
reserve
reserve reserve reserve shares
Balance as at February 29, 2012 34,865,717 $ 98,792,926 $ 2,149,853 $ 7,812,941 $ 1,245,529 $ - $ (14,519,284) $ (6,106,530) $ 89,375,435
Stock-based compensation - - - 28,782 - - - - 28,782
Stock options expired - - - (104,012) - - 104,012 - -
Broker warrants expired - - (993,053) - - - 993,053 - -
Dividends declared to BEE partners (60,752) - (60,752)
Other comprehensive loss for the period - - - - - - - (8,680,217) (8,680,217)
Net loss for the period - - - - - - (1,815,620) - (1,815,620)
Balance as at August 31, 2012 34,865,717 $ 98,792,926 $ 1,156,800 $ 7,737,711 $ 1,245,529 $ - $ (15,298,591) $ (14,786,747) $ 78,847,628
Repurchase of shares - - - - - (286,966) - - (286,966)
Cancellation of repurchased shares (479,682) (1,450,784) - - - 286,966 1,163,818 - -
Stock-based compensation - - - 9,522 - - - - 9,522
Stock options expired - - - (1,605,078) - - 1,605,078 - -
Broker warrants expired - - (1,156,800) - - - 1,156,800 - -
Dividends declared to BEE partners - - - - - - 2,378 - 2,378
Other comprehensive loss for the period - - - - - - - (3,854,383) (3,854,383)
Net loss for the period - - - - - - (8,333,401) - (8,333,401)
Balance as at February 28, 2013 34,386,035 $ 97,342,142 $ - $ 6,142,155 $ 1,245,529 $ - $ (19,703,918) $ (18,641,130) $ 66,384,778
Stock-based compensation - - - 375,790 - - - - 375,790
Stock options expired - - - (4,260,550) - - 4,260,550 - -
Other comprehensive loss for the period - - - - - - - (3,847,153) (3,847,153)
Net loss for the period - - - - - - (5,947,478) - (5,947,478)
Balance as at August 31, 2013 34,386,035 $ 97,342,142 $ - $ 2,257,395 $ 1,245,529 $ - $ (21,390,846) $ (22,488,283) $ 56,965,937
The accompanying notes are an integral part of the consolidated financial statements.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
1) NATURE OF OPERATIONS AND GOING CONCERN
Forbes & Manhattan Coal Corp. (individually, or collectively with its subsidiaries, as applicable, “Forbes Coal” or the "Company") is a coal
mining company. The Company is listed on the Toronto Stock Exchange (“TSX”) and the Johannesburg Stock Exchange (“JSE”). The
Company’s head office is located at 65 Queen Street West, Suite 815, Toronto, Ontario, Canada. These consolidated financial statements
were approved and authorized for issue by the Board of Directors on October 11, 2013.
The Company’s subsidiary Forbes Coal (Pty) Ltd. (formerly known as Slater Coal (Pty) Ltd.) (“Forbes Coal Dundee”), a South African
company, holds an interest in coal mines in South Africa (“Forbes Coal Dundee Properties”). The Forbes Coal Dundee Properties
comprise of the operating Magdalena bituminous mine (the "Magdalena Property") and the Aviemore anthracite mine (the "Aviemore
Property"). Forbes Coal Dundee is engaged in open-pit and underground coal mining.
Forbes Coal Dundee indirectly holds a 70% interest in the Forbes Coal Dundee 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 Forbes Coal Dundee 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 access by historically disadvantaged South Africans (“HDSA”) to
the South African economy by increasing HDSA ownership in South African enterprises.
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.
The mining industry in South Africa has been experiencing tense labor relation issues including labour disruptions. The Company did
experience labour disruptions during October and November 2012 resulting in over four weeks of lost production. While the dispute has
been resolved and the disruption has ceased, if new labour disruptions were to take place at the Company’s mines, they could have further
and significant negative impacts on the operations and financial results of the Company.
These unaudited condensed interim consolidated financial statements have been prepared on the basis of accounting principles applicable
to a going concern, which assume that the Company will continue in operation for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations. The Company has a need for equity capital and financing for
operations and working capital. Because of continuing operating losses and a working capital deficiency, the Company's continuance as a
going concern is dependent upon its ability to obtain adequate financing and to reach profitable levels of operation. It is not possible to
predict whether financing efforts will be successful or if the Company will attain profitable levels of operations. These conditions indicate
the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.
During fiscal 2013 the Company experienced labour disruptions which negatively impacted its financial results and contributed to certain
debt facility covenants not being met (see Note 15). The Company has negotiated with the union and labour force and has reached
amicable and reasonable resolutions. The bank has waived the breach of the debt facility covenants to August 31, 2013.
During September 2013, the Company closed a secured USD 6 million convertible loan facility. See Note 23.
If the going concern assumption was not appropriate for these consolidated financial statements then adjustments would be necessary to
the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. Such
adjustments could be material.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
2) BASIS OF PREPARATION
These condensed interim consolidated financial statements of the Company and its subsidiary were prepared in accordance with
International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), and have been
prepared in accordance with accounting policies based on the IFRS standards and International Financial Reporting Interpretations
Committee (“IFRIC”) interpretations. The policies set out in the Company’s annual consolidated financial statements for the year ended
February 28, 2013 were consistently applied to all the periods presented unless otherwise noted below.
The preparation of condensed interim financial statements in accordance with IAS 34 requires the use of certain critical accounting
estimates. It also requires management to exercise judgment in applying the Company’s accounting policies.
These condensed interim consolidated financial statements have been prepared on a historical cost basis except for financial instruments
classified as held-for-trading, which are stated at their fair value. In addition, these condensed interim consolidated financial statements
have been prepared using the accrual basis of accounting, except for cash flow information.
Certain comparative amounts have been reclassified to conform to the current year's presentation.
3) NEW ACCOUNTING POLICIES
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 January 1, 2013 or later periods. Updates that are not applicable or are not
consequential to the Company have been excluded thereof.
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 became effective for the
Company for the period beginning on or after March 1, 2013. There was no significant impact on the consolidated financial statements as a
result of this change.
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 adopted IFRS 11 in its consolidated financial statements for the period beginning on March
1, 2013. The Company currently has no joint ventures and therefore there is no impact of IFRS 11 to the Company’s consolidated financial
statements.
IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”) requires extensive disclosures relating to a company’s interests in
subsidiaries, joint arrangements, associates, and unconsolidated structured entities. This IFRS enables users of the financial statements to
evaluate the nature and risks associated with its interests in other entities and the effects of those interests on its financial position and
performance. IFRS 12 became effective for the Company for the period beginning March 1, 2013. There was no significant impact of IFRS
12 to the Company’s consolidated financial statements
IFRS 13 Fair Value Measurement (“IFRS 13”) 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 became effective
for the Company for the period beginning March 1, 2013. Adoption of this standard had no significant impact on the Company’s
consolidated financial statements.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
3) NEW ACCOUNTING POLICIES (Continued)
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (“IFRIC 20”) provides guidance on the accounting for costs related to
stripping activity in the production phase of surface mining. When the stripping activity results in the benefit of useable ore that can be used
to produce inventory, the related costs are to be accounted for in accordance with IAS 2 Inventories; when the stripping activity results in
the benefit of improved access to ore that will be mined in future periods, the related costs are to be accounted for in accordance with
IFRIC 20 as additions to non-current assets when specific criteria are met. IFRIC 20 became effective for the Company for the period
beginning March 1, 2013. The Company is in compliance with IFRIC 20. There was no significant change to the consolidated financial
statements as a result of this change.
IAS 1 Presentation of Financial Statements (“IAS 1”), has been amended to require entities to separate items presented in other
comprehensive income (“OCI”) into two groups, based on whether or not items may be recycled in the future. Entities that choose to
present OCI items before tax will be required to show the amount of tax related to the two groups separately. The amendment became
effective for the Company for the period beginning March 1, 2013. There was no significant impact to the Company’s consolidated financial
statements as a result of this change.
4) FUTURE ACCOUNTING CHANGES
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, 2015, with earlier adoption permitted. The Company is currently assessing the impact of IFRS 9 on its consolidated
financial statements.
5) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements comprise the financial statements of the Company and its subsidiaries, Forbes Coal Dundee, Zinoju,
Corondale Prospecting and Mining Company Pty Ltd and Bowwood and Main No33 (Pty) Ltd (“Bowwood”).
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.
5) PRINCIPLES OF CONSOLIDATION (Continued)
All material intercompany transactions are eliminated on 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 with 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.
6) SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in conformity with IFRS requires the Company’s management to make judgments,
estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and related
notes to the financial statements. Although these estimates are based on management’s best knowledge of the amount, event or actions,
actual results may differ from those estimates and these differences could be material.
The areas which require management to make significant judgments, estimates and assumptions in determining carrying values and
amounts include, but are not limited to:
- Assets’ carrying values and impairment charges
In the determination of carrying values and impairment charges, management looks at the higher of recoverable amount or fair value
less costs to sell in the case of assets and at objective evidence, significant or prolonged decline of fair value on financial assets
indicating impairment. These determinations and their individual assumptions require that management make a decision based on the
best available information at each reporting period.
- Capitalization of exploration and evaluation costs
Management has determined that exploration and evaluation costs incurred during the year have future economic benefits and are
economically recoverable. In making this judgment, management has assessed various sources of information including but not
limited to the geologic and metallurgic information, history of conversion of mineral deposits to proven and probable mineral reserves,
scoping and feasibility studies, proximity of operating facilities, operating management expertise and existing permits.
- Mineral reserve estimates
The figures for mineral reserves and mineral resources are determined in accordance with National Instrument 43-101, “Standards of
Disclosure for Mineral Projects”, issued by the Canadian Securities Administrators. There are numerous uncertainties inherent in
estimating mineral reserves and mineral resources, including many factors beyond the Company’s control. Such estimation is a
subjective process, and the accuracy of any mineral reserve or mineral resource estimate is a function of the quantity and quality of
available data and of the assumptions made and judgments used in engineering and geological interpretation. Differences between
management’s assumptions including economic assumptions such as coal prices, foreign exchange rates and market conditions
could have a material effect the Company’s reserves and resources, and as a result, could also have a material effect on the
Company’s financial position and results of operation.
- Impairment of exploration and evaluation assets
While assessing whether any indications of impairment exist for exploration and evaluation assets, consideration is given to both
external and internal sources of information. Information the Company considers includes changes in the market, economic and legal
environment in which the Company operates that are not within its control that could affect the recoverable amount of exploration and
evaluation assets. Internal sources of information include the manner in which exploration and evaluation assets are being used or
are expected to be used and indications of expected economic performance of the assets. Estimates include but are not limited to
estimates of the discounted future after-tax cash flows expected to be derived from the Company’s mining properties, costs to sell the
properties and the appropriate discount rate. Reductions in metal price forecasts, increases in estimated future costs of production,
increases in estimated future capital costs, depreciation of US dollar relative to the South African Rand, reductions in the amount of
recoverable mineral reserves and mineral resources and/or adverse current economics could result in a write-down of the carrying
amounts of the Company’s assets.
- Estimation of decommissioning and restoration costs and the timing of expenditure
The cost estimates are updated annually during the life of a mine to reflect known developments, (e.g. revisions to cost estimates and
to the estimated lives of operations), and are subject to review at regular intervals. Decommissioning, restoration and similar liabilities
are estimated based on the Company’s interpretation of current regulatory requirements, constructive obligations and are measured
at fair value. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of
decommissioning, restoration or similar liabilities that may occur upon decommissioning of the mine. Such estimates are subject to
change based on changes in laws and regulations and negotiations with regulatory authorities.
- Income taxes and recoverability of potential deferred tax assets
In assessing the probability of realizing income tax assets recognized, management makes estimates related to expectations of future
taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and the likelihood
that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management
gives additional weight to positive and negative evidence that can be objectively verified. Estimates of future taxable income are
based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. The Company considers
whether relevant tax planning opportunities are within the Company’s control, are feasible, and are within management’s ability to
implement. Examination by applicable tax authorities is supported based on individual facts and circumstances of the relevant tax
position examined in light of all available evidence. Where applicable tax laws and regulations are either unclear or subject to ongoing
varying interpretations, it is reasonably possible that changes in these estimates can occur that materially affect the amounts of
income tax assets recognized. Also, future changes in tax laws could limit the Company from realizing the tax benefits from the
deferred tax assets. The Company reassesses unrecognized income tax assets at each reporting period.
- Share-Based Payments
Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-
based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques.
Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating
the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee stock option
exercise behaviors and corporate performance. Such judgments and assumptions are inherently uncertain. Changes in these
assumptions could materially affect the fair value estimates.
- Contingencies
Refer to Notes 1, 21 and 22.
7) 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 Property, plant Other non- Total
Intangibles
assets and equipment current assets assets
February 28, 2013
Canada $ 1,255,200 $ - $ - $ 60,268 $ 1,315,468
South Africa 27,547,618 68,951,509 4,561,205 20,052,821 121,113,153
$ 28,802,818 $ 68,951,509 $ 4,561,205 $ 20,113,089 $ 122,428,621
August 31, 2013
Canada $ 448,079 $ - $ - $ 40,179 $ 488,258
South Africa 27,288,294 60,443,498 4,010,285 18,257,049 109,999,126
$ 27,736,373 $ 60,443,498 $ 4,010,285 $ 18,297,228 $ 110,487,384
All of the Company’s revenues are earned from production in South Africa.
8) NET ACCRETION AND INTEREST (EXPENSE)
Six months ended
August 31, 2013 August 31, 2012
Interest bearing borrowings $ 1,073,406 $ 1,137,148
Unwinding of provisions 142,884 44,501
Accretion and interest expense 1,216,290 1,181,649
Cash and restricted cash 167,665 192,178
Interest income 167,665 192,178
Net accretion and interest (expense) $ (1,048,625) $ (989,471)
9) INVENTORIES
August 31, 2013 February 28, 2013
Consumables $ 767,592 $ 338,164
Work in progress 1,374,113 808,126
Finished goods 6,876,757 9,007,469
$ 9,018,462 $ 10,153,759
As at August 31, 2013, $6,665,610 of inventories are presented at cost and $2,352,852 of inventories are presented at net realizable value
after recording a write-down of approximately $917,915. As at February 28, 2013, $5,988,941 of inventories are presented at cost and
$4,164,818 of inventories are presented at net realizable value after recording a write-down of approximately $734,638.
The amount of inventories recognized as an expense during the six months ended August 31, 2013 is $33,598,348 (August 31, 2012 -
$34,481,480).
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
10) PROPERTY, PLANT AND EQUIPMENT
Mining Office Land and Development Mining rights Total
assets equipment buildings costs
and fixtures
Cost as at February 28, 2013 $ 52,000,506 $ 693,332 $ 992,216 $ 6,421,292 $ 35,403,836 $ 95,511,182
Effect of foreign currency exchange difference (5,308,952) (70,785) (101,300) (655,577) (3,614,528) (9,751,142)
Additions 1,688,659 6,210 13,966 170,285 1,234,800 3,113,920
Disposals (32,847) - - - - (32,847)
Cost as at August 31, 2013 $ 48,347,366 $ 628,757 $ 904,882 $ 5,936,000 $ 33,024,108 $ 88,841,113
Accumulated depreciation, depletion and
$ (18,632,673) $ (299,978) $ (106,273) $ (560,801) $ (6,959,948) $ (26,559,673)
impairment as at February 28, 2013
Effect of foreign currency exchange difference 1,902,289 30,626 10,850 57,255 710,571 2,711,591
Charge for the period (3,450,330) (97,784) (32,771) (211,527) (767,522) (4,559,934)
Disposals 10,401 - - - - 10,401
Depreciation and depletion as at August 31, 2013 $ (20,170,313) $ (367,136) $ (128,194) $ (715,073) $ (7,016,899) $ (28,397,615)
Net book value as at February 28, 2013 $ 33,367,833 $ 393,354 $ 885,943 $ 5,860,491 $ 28,443,888 $ 68,951,509
Net book value as at August 31, 2013 $ 28,177,053 $ 261,621 $ 776,688 $ 5,220,927 $ 26,007,209 $ 60,443,498
Land and building includes a net book value balance of approximately $71,000 for a property that is not directly used in production and
operations. Office equipment includes a net book value balance of approximately $51,000 for fixtures that are not directly used in
production and operations.
11) INTANGIBLES
Richards Bay Mineral and Total
Coal Terminal prospecting
entitlements rights
Cost as at February 28, 2013 $ 4,047,787 $ 859,500 $ 4,907,287
Effect of foreign currency exchange difference (413,256) (87,750) (501,006)
Cost as at August 31, 2013 $ 3,634,531 $ 771,750 $ 4,406,281
Accumulated depreciation and depletion as at February 28, 2013 $ (331,195) $ (14,887) $ (346,082)
Effect of foreign currency exchange difference 33,814 1,520 35,334
Charge for the period (80,344) (4,904) (85,248)
Depreciation and depletion as at August 31, 2013 $ (377,725) $ (18,271) $ (395,996)
Net book value as at February 28, 2013 $ 3,716,592 $ 844,613 $ 4,561,205
Net book value as at August 31, 2013 $ 3,256,806 $ 753,479 $ 4,010,285
12) GOODWILL
Balance as at February 28, 2013 $ 15,239,856
Effect of foreign currency exchange difference (1,515,330)
Balance as at August 31, 2013 $ 13,724,526
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
13) OTHER ASSETS
August 31, 2013 February 28, 2013
Endowment policy $ 4,065,698 $ 3,778,409
Security investments 40,179 60,268
Long term investments 616,091 686,142
Long term reeivables 337,065 379,211
$ 5,059,033 $ 4,904,030
The other assets include an endowment policy held by the Company to fund payment requirements associated with its instalment 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.
August 31, 2013 February 28, 2013
Current portion $ 2,614,642 $ 1,879,946
Long-term portion 2,444,391 3,024,084
$ 5,059,033 $ 4,904,030
The table below sets forth the summary of changes in the endowment policy for the period ended August 31, 2013:
Balance as at February 28, 2013 $ 3,778,409
Effect of foreign currency exchange difference (385,751)
Current year contributions 474,827
Fair value adjustment 198,214
Balance as at August 31, 2013 $ 4,065,698
14) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
August 31, 2013 February 28, 2013
Trade payables $ 8,350,049 $ 5,003,629
Payroll and other statutory liabilities 1,667,140 832,228
Current tax payable 488,441 292,706
Unrecognized revenue 7,392,444 5,693,382
Other payables and accruals 3,668,951 4,768,701
$ 21,567,025 $ 16,590,646
15) OTHER FINANCIAL LIABILITIES
August 31, 2013 February 28, 2013
Instalment sale agreements(*) $ 2,009,882 $ 2,496,344
Third party institutional loans (**) 18,269,563 22,747,012
Total interest bearing borrowings 20,279,445 25,243,356
Less:
Current portion of instalment sale agreements (2,009,882) (2,403,690)
Current portion of third party institutional loans (7,437,984) (8,271,222)
Total current portion of interest bearing borrowings (9,447,866) (10,674,912)
Total long-term portion of interest bearing borrowings $ 10,831,579 $ 14,568,444
(*) The instalment sale agreements related liabilities are payable over periods from three to five years, at interest rates linked to prime and
are secured by mining assets with a book value of approximately $1,950,000 and an endowment policy.
(**) The Company, through its subsidiary Forbes Coal Dundee, has secured a ZAR 230 million (approximately $24 million) loan facility from
Investec Limited (“Investec”). The loan facility consists of a five year senior secured amortizing term loan facility of up to ZAR 200 million
(approximately $21 million) and a revolving loan facility of up to ZAR 30 million (approximately $3 million). The facilities are secured
against the assets of Forbes Coal Dundee. Term loan bears interest at the 3 month JIBAR rate, plus 3%, compounded quarterly and the
revolving loan bears interest at prime interest rate less 1.5%. The interest rate has increased by 1% effective January 2013 as the earnings
before interest, taxes, depreciation and amortization of Forbes Coal Dundee fell below ZAR 100 million annually (approximately $10
million).
The loan is repayable in quarterly payments of ZAR 10,526,315 (approximately $1,100,000) commencing on March 1, 2012, with the first
capital payment made in July 2012. As at August 31, 2013, an amount of $18,269,563 (ZAR 177,546,777) is recorded as owed under this
facility and repayable as follows:
In the next Amount
12 months $ 7,437,984
13-24 months 4,332,632
25-36 months 4,332,632
37-48 months 2,166,315
$ 18,269,563
The Investec loan is issued under the following terms:
Facilities
- First ranking security over the assets of the Company, including but not limited to mortgage bonds over the Company’s immovable
property and special and general notarial bonds over the Company’s movable property; (Forbes Coal Dundee assets only).
- Subordination of all claims by the affiliates of the Company and the shareholder against the Company;
- Negative pledge over assets of the Company.
Cession in Security
- Secured property consists of bank account, insurances, trade receivables, the borrower’s shares in Zinoju Coal Proprietary Limited
Ltd, all claims by and against group companies and related rights to the preceding.
Mortgage bond
- Secured bond over the property (land and buildings) within Forbes Coal Dundee (coal fields).
General bond
- Secured bond over the property (movable) within Forbes Coal Dundee, including:
a. all the plant, equipment, machinery, office furniture, fixtures and fittings, inventory and motor vehicles;
b. every claim and indebtedness of whatever kind or nature;
c. all the rights to quotas, permits, licenses and the like;
d. all the contractual rights, including without limitation, rights in respect of insurance policies taken out by or in favor of the mortgagor,
franchise rights and rights under agency agreements or other agreements of a like nature and rights as lessee or lessor;
e. all the goodwill of the business of the mortgagor and all its rights to trademarks and trade names,
Special bond
- Secured bond over the property (movable) within Forbes Coal Dundee, that is currently used as security over the finance lease
agreements.
Covenants
This loan is a subject to a Net Debt/EBITDA, EBITDA/Net Interest and Debt/Equity covenants. As at August 31, 2013, the Company was
not in compliance with its covenants. The bank has waived the breaches that have taken place to August 31, 2013.
Investec agreed to release the security provided over the anthracite stockpile at July 31, 2013 in order for it to be pledged to Resource
Capital Fund V L.P ("RCF") in terms of the convertible loan agreement. The proceeds of this stockpile will be held in a new bank account
which is also pledged to RCF. See Subsequent Events (Note 23).
The Company made the following drawdowns on the facility: in January 2012, the Company made a drawdown for ZAR 11,140,000
(approximately $1,146,000), in February 2012 for ZAR 142,000,000 (approximately $14,612,000) and in June 2012 for ZAR 46,860,000
(approximately $4,822,000). As at August 31, 2013, both the senior term loan facility of ZAR 200,000,000 (approximately $21 million) and
the working capital facility of ZAR 30,000,000 (approximately $3 million) were fully drawn down.
See Cancelled Acquisition of Riversdale Holdings Proprietary Limited (Note 22) which discloses an additional loan facility, offered by
Investec to fund this potential acquisition.
The other financial liabilities are repayable as follows:
In the next Amount
12 months $ 9,447,866
13-24 months 4,332,632
25-36 months 4,332,632
37-48 months 2,166,315
$ 20,279,445
The interest rate exposure of borrowings of the Company was as follows:
Instalment sale agreements at floating rates $ 2,009,882
Investec loan at 9.13% 18,269,563
$ 20,279,445
16) ASSET RETIREMENT OBLIGATIONS
Balance as at February 28, 2013 $ 3,693,784
Effect of foreign currency exchange difference (377,114)
Accretion expense 5,346
Net additional provision 140,883
Balance as at August 31, 2013 $ 3,462,899
Current portion $ 274,146
Long-term portion 3,188,753
$ 3,462,899
The provision 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 consolidated statements of financial position date and is generally expected to be paid out over 16
to 26 years. South African mining companies are required by law to undertake rehabilitation works as part of their ongoing operations.
These environmental rehabilitation costs are funded by contributions into endowment policies.
The expected timing of the cash outflows in respect of the provision is generally on the closure of the various mining operations. However,
certain current rehabilitation costs are charged to this provision as and when incurred.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
17) SHARES IN ESCROW
On July 20, 2010, the shareholders of Forbes Coal 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") to be released once the Company achieves US$22,000,000 in
EBITDA from the Forbes Coal Dundee Properties over a 12 consecutive month period by July 20, 2013. During the year ended
February 29, 2012, the US$22,000,000 in EBITDA from Forbes Coal Dundee Properties was achieved and the above mentioned
Escrowed Shares were released on October 26, 2011;
ii) The remaining Escrowed Shares will be released if the Company achieves US$35,000,000 in EBITDA from the Forbes Coal
Dundee 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 Forbes Coal Dundee Properties will exclude any gains or losses
generated by the combined company from the disposition of the Forbes Coal Dundee Properties. In the event of not achieving
US$35,000,000 in EBITDA from the Forbes Coal Dundee 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 was 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%
18) RESERVES
No. of Weighted Value of No. of Weighted Value of Total value
options average options vested warrants average warrants
exercise exercise vested
price price
Balance as at February 28, 2013 2,730,000 $ 3.18 $ 7,387,684 - $ - $ - $ 7,387,684
Granted and vested 2,347,500 0.29 375,790 - - - 375,790
Expired (1,785,000) 3.43 (4,260,550) - - - (4,260,550)
Balance as at August 31, 2013 3,292,500 $ 0.98 $ 3,502,924 - $ - $ - $ 3,502,924
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.
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.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
During the six months ended August 31, 2013 2,347,500 (August 31, 2012 – nil) share options were granted to directors, officers,
employees and consultants of the Company. The fair value of these stock options was estimated to be $375,600 (August 31, 2012 - $nil)
using the Black-Scholes option pricing model and the following assumptions: expected dividend yield of 0% (August 31, 2012 – nil%);
expected life of 5 years (August 31, 2012 – nil years); expected volatility of 65% (August 31, 2012 – nil%); and a risk-free interest rate of
1.88% (August 31, 2012 – nil%), vesting immediately. During the six months ended August 31, 2013, an amount of $229,600 (August 31,
2012 – $10,516) is included in loss and comprehensive loss as stock based compensation expense related to the fair value of the portion
of options vested during the period for directors, officers and consultants engaged at the corporate level. During the six months ended
August 31, 2013, an amount of $146,000 (August 31, 2012 – $nil) is included in loss and comprehensive loss as stock based
compensation within cost of sales and is related to the fair value of the portion of options vested during the period for officers, employees
and consultants engaged at the site level. 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, 2013:
Share options
Number of Number of Grant Expiration Exercise Grant date Expected Expected Expected Risk-free
options options date date price estimated volatility life dividend interest
outstanding exercisable fair value years yield rate
vested at grant
190,000 190,000 15-Mar-10 15-Mar-15 $ 2.80 $ 760,545 100% 5.00 0.00% 2.39%
25,000 25,000 13-Oct-10 13-Oct-15 $ 3.25 $ 60,750 100% 5.00 0.00% 1.74%
160,000 160,000 24-Mar-11 24-Mar-16 $ 4.10 $ 356,800 63% 5.00 0.00% 2.15%
100,000 100,000 6-Jun-11 6-Jun-16 $ 3.00 $ 160,000 61% 5.00 0.00% 2.23%
150,000 150,000 13-Jun-11 13-Jun-16 $ 2.77 $ 220,500 61% 5.00 0.00% 2.24%
320,000 320,000 25-Jan-12 25-Jan-17 $ 1.80 $ 323,200 67% 5.00 0.00% 1.36%
2,347,500 2,347,500 13-Aug-13 13-Aug-18 $ 0.29 $ 375,600 65% 5.00 0.00% 1.88%
3,292,500 3,292,500 $ 0.98 $ 2,257,395 5.00
For the six months ended August 31, 2013, the diluted weighted average number of common shares outstanding excluded 3,292,500
options, as they were anti-dilutive.
Restricted Share Unit
The Company approved the adoption of a Restricted Share Unit (“RSU”) Incentive Plan. Upon adoption of the new plan, the Company is
authorized to grant and issue RSUs to directors and officers of the Company. Each RSU shall entitle the director or officer to receive one
common share of the Company upon completion of certain terms. The common shares will be repurchased from the open market and held
in trust for subsequent issuance. No RSU were issued as at August 31, 2013.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
19) 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
annual financial statements for the years ended February 28, 2013 and February 29, 2012.
The Company's financial assets and financial liabilities as at August 31, 2013 and February 28, 2013 were as follows:
Assets / (liabilities) at
Cash, loans and Other financial
fair value through Total
receivables assets/(liabilities)
profit
February 28, 2013
Cash $ 3,025,664 $ - $ - $ 3,025,664
Restricted cash 50,000 - - 50,000
Accounts and other receivables 13,610,214 - - 13,610,214
Other assets 379,211 4,524,819 - 4,904,030
Long-term restricted cash 1,421,040 - - 1,421,040
Accounts payable and accrued liabilities - - (16,590,646) (16,590,646)
Other financial liabilities - current - - (10,674,912) (10,674,912)
Other financial liabilities - long term - - (14,568,444) (14,568,444)
Loan payable - - (24,616) (24,616)
August 31, 2013
Cash $ 1,875,992 $ - $ - $ 1,875,992
Restricted cash 50,000 - - 50,000
Accounts and other receivables 13,928,081 - - 13,928,081
Other assets 337,065 4,721,968 - 5,059,033
Long-term restricted cash 1,275,960 - - 1,275,960
Accounts payable and accrued liabilities - - (21,567,025) (21,567,025)
Other financial liabilities - current - - (9,447,866) (9,447,866)
Other financial liabilities - long term - - (10,831,579) (10,831,579)
Loan payable - - (22,103) (22,103)
At August 31, 2013, there are no significant concentrations of credit risk for loans and receivables designated at fair value through the
consolidated statement of operations and comprehensive 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, options and other financial liabilities.
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 with the exception as discussed in Note 15.
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 significant changes in the risks, objectives, policies and procedures in the six months ended
August 31, 2013 and 2012, except for the Investec loan as discussed in Note 15. Subsequent to the six months ended August 31, 2013,
the Company has entered into a new convertible loan facility. See Note 23 for details.
As at August 31, 2013, the capital structure of the Company consists of equity attributable to the owners, reserves attributable to owners,
directors, officers, employees and consultants of the Company totaling $56,965,937 (February 28, 2013 - $66,384,778) and an interest
bearing loan of $18,269,563 (February 28, 2013 - $22,747,012).
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
FINANCIAL RISK FACTORS
The Company is exposed to a variety of financial risks.
The Company’s overall management program focuses on the unpredictability of financial markets and seeks to minimize 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 and the US dollar. Foreign exchange risk arises
from future commercial transactions and recognized assets and liabilities. The Company’s Investec loan facility is also denominated 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 (decrease) in the period average foreign exchange rate between the South African Rand and the Company’s functional
currency, the Canadian dollar, would have increased (decreased) the Company’s income by approximately $110,000 for the six months
ended August 31, 2013. A 10% increase in the period average foreign exchange rate between the United States dollar and Forbes Coal
Dundee’s functional currency, the South African Rand, would have increased (decreased) the Company’s income by approximately
$1,600,000 for the period ended August 31, 2013, as only the export portion of sales is denominated in United States dollars.
A 10% change in the value of the Canadian dollar relative to the US dollar and South African Rand would have an impact on net income of
approximately $631,000 based on the net assets of the Company at August 31, 2013.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
19) 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, 2013
and February 28, 2013:
Canadian operations balances (*) South African operations balances (**)
presented in CAD and denominated in presented in CAD and denominated in Total
CAD USD GBP ZAR ZAR USD
Cash $ 680,932 $ 463 $ - $ - $ 2,344,269 $ - $ 3,025,664
Restricted cash 50,000 - - - - - 50,000
Accounts and other receivables 453,959 - - - 11,735,687 1,420,568 13,610,214
Inventories - - - - 10,153,759 - 10,153,759
Other assets - current - - - - 1,879,946 - 1,879,946
Prepaid expenses 69,846 - - - 13,389 - 83,235
Property, plant and equipment - - - - 68,951,509 - 68,951,509
Intangibles - - - - 4,561,205 - 4,561,205
Goodwill - - - - 15,239,856 - 15,239,856
Other assets - long term 60,268 - - - 2,963,816 - 3,024,084
Long-term restricted cash - - - - 1,421,040 - 1,421,040
Deferred income taxes - - - - 428,109 - 428,109
Accounts payable and accrued liabilties (739,066) (2,880) (8,878) (1,709) (11,331,185) (4,506,928) (16,590,646)
Other financial liabilities - current - - - - (10,674,912) - (10,674,912)
Other financial liabilities - long term - - - - (14,568,444) - (14,568,444)
Asset retirement obligation - current - - - - (305,317) - (305,317)
Asset retirement obligation - long term - - - - (3,388,467) - (3,388,467)
Loans payable - - - - (24,616) - (24,616)
Deferred income taxes - - - - (9,852,429) - (9,852,429)
Net exposure as at February 28, 2013 $ 575,939 $ (2,417) $ (8,878) $ (1,709) $ 69,547,215 $ (3,086,360) $ 67,023,790
Cash $ 1,202 $ 472 $ - $ - $ 1,874,318 $ - $ 1,875,992
Restricted cash 50,000 - - - - - 50,000
Accounts and other receivables 157,740 - - - 12,691,354 1,078,987 13,928,081
Inventories - - - - 9,018,462 - 9,018,462
Other assets - current - - - - 2,614,642 - 2,614,642
Prepaid expenses 238,665 - - - 10,531 - 249,196
Property, plant and equipment - - - - 60,443,498 - 60,443,498
Intangibles - - - - 4,010,285 - 4,010,285
Goodwill - - - - 13,724,526 - 13,724,526
Other assets - long term 40,179 - - - 2,404,212 - 2,444,391
Long-term restricted cash - - - - 1,275,960 - 1,275,960
Deferred income taxes - - - - 852,351 - 852,351
Accounts payable and accrued liabilties (993,242) (1,805) (988) (3,255) (13,175,291) (7,392,444) (21,567,025)
Other financial liabilities - current - - - - (9,447,866) - (9,447,866)
Other financial liabilities - long term - - - - (10,831,579) - (10,831,579)
Asset retirement obligation - current - - - - (274,146) - (274,146)
Asset retirement obligation - long term - - - - (3,188,753) - (3,188,753)
Loans payable - - - - (22,103) - (22,103)
Deferred income taxes - - - - (7,550,963) - (7,550,963)
Net exposure as at August 31, 2013 $ (505,456) $ (1,333) $ (988) $ (3,255) $ 64,429,438 $ (6,313,457) $ 57,604,949
(*) Functional currency of Canadian operations is the Canadian dollar
(**) Functional currency of South African operations is the Rand
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 expense of approximately $10,000 per month.
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 $3,910,000 for the six months ended August 31, 2013.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
19) FINANCIAL INSTRUMENTS (Continued)
FINANCIAL RISK FACTORS (Continued)
(b) Credit risk
The Company's credit risk is primarily attributable to cash and accounts and other receivables. Cash consist of deposits, which have been
made with reputable financial institutions, from which management believes the risk of loss to be remote. Other receivables primarily
consist of amounts owing from coal sales. Management believes that the credit risks concentration with respect to these amounts
receivables are remote.
Restricted cash totaling $50,000 was in GIC investment with Royal Bank of Canada held as collateral against credit card limits used by the
Company. Long-term portion of restricted cash totaling $1,275,960 was on deposit with First National Bank to be released to a supplier if
payments are not made to them.
(c) Liquidity risk
As at August 31, 2013, the Company had net working capital (deficiency) of ($3,574,767) (February 28, 2013 – $1,207,327) which
includes cash and restricted cash of $1,925,992 (February 28, 2013 – $3,075,664), accounts receivable and other receivables of
$13,928,081 (February 28, 2013 – $13,610,214), inventories of $9,018,462 (February 28, 2013 – $10,153,759) and other assets of
$2,614,642 (February 28, 2013 – $1,879,946), offset by current liabilities of $31,311,140 (February 28, 2013 – $27,595,491).
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.
(d) Fair value of financial instruments
The Company has designated its 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, 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).
As at August 31, 2013, 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, 2013 and February 28, 2013:
August 31, 2013
Level 1 Level 2 Level 3
Endowment policy and investments $ 40,179 $- $4,681,789
February 28, 2013
Level 1 Level 2 Level 3
Endowment policy and investments $ 60,268 $- $4,464,551
20) RELATED PARTY DISCLOSURE
During the period, the Company entered into the following transactions in the ordinary course of business with related parties:
Purchases of goods and services for the six months ended
August 31, 2013 August 31, 2012
2227929 Ontario Inc. $ 318,134 $ 390,179
Forbes & Manhattan Inc. $ 203,400 $ 203,400
The Company shares office space with other companies who may have officers or directors in common with the Company. The costs
associated with this space, certain consulting, professional and general and administration services are administered by 2227929 Ontario
Inc.
Mr. Stan Bharti, a director of the Company, is the Executive Chairman of Forbes & Manhattan, Inc. An administration fee of $15,000 per
month was previously charged by Forbes & Manhattan, Inc. pursuant to a consulting agreement. On May 1, 2013 a consulting agreement
for administration fee of $15,000 per month by Forbes & Manhattan, Inc. was amended to include 3 months termination clause and 24
months change of control clause. Also on May 1, 2013 a consulting agreement with Mr. Stan Bharti, a director of the Company and the
Executive Chairman of Forbes & Manhattan, Inc. for a consulting fee of $15,000 per months was terminated.
The following balances were outstanding at the end of the reporting period:
Amounts owed to related parties as at
August 31, 2013 February 28, 2013
2227929 Ontario Inc. $ 58,869 $ 7,938
These amounts are unsecured, non-interest bearing with no fixed terms of repayment. 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.
Compensation of key management personnel
In accordance with IAS 24, key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Company directly or indirectly, including any directors (executive and non-executive) of the Company.
The remuneration of directors and other members of key management personnel (officers) during the period were as follows:
Six months ended
August 31, 2013 August 31, 2012
Short-term benefits $ 757,806 $ 611,447
Share-based payments 256,000 -
$ 1,013,806 $ 611,447
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
21) COMMITMENTS AND CONTINGENCIES
Management contracts
The Company is party to certain management contracts. These contracts require that additional payments of approximately $2,300,000 be
made upon the occurrence of a change of control. Minimum commitments remaining under these contracts were approximately $450,000
all due within one year.
The closing of the US$6 million convertible loan facility with RCF (Note 23) triggered the change of control provision in certain consulting
contracts. Whether certain consultants will request payment is not yet known or determinable and as such no amounts have been recorded
in the financial statements.
Instalment sale agreements payment obligations
The Company is committed to minimum amounts under instalment sale agreements for plant and equipment. Minimum commitments
remaining under these leases were $2,009,882 and are payable in the current period.
Environmental contingency
The Company’s mining and exploration activities are subject to various laws and regulations governing 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.
Guarantees and pledges
The Company and its subsidiaries have made certain guarantees and pledges in the aggregate of approximately ZAR 20 million
($2,100,000).
Operating commitments
The Company is party to an off-take agreement, terminating December 31, 2013 that requires the Company to deliver 800,000 metric tons
of coal during 2013 on a price based upon the market price of coal. As at August 31, 2013, the remaining requirement is 574,890 tonnes.
The Company is party to an agreement, terminating December 31, 2013 that requires the Company to export 60,000 metric tons of coal
per month through the Navitrade Terminal. Should this requirement not be met, a penalty of ZAR 90 ($9) per ton is payable on the
difference between the actual number of tons shipped and the minimum commitment.
Outstanding legal proceedings
Sasfin Bank Limited has claimed advisory fees in relation to the successful conclusion of the Riversdale Mining Acquisition in the amount
of ZAR 5,660,000 ($580,000). The Company believes the claim is without merit and intends to defend itself against this claim. No amount
has been provided for related to this claim in these condensed interim consolidated financial statements.
Existing Investec loan facility
Please refer to Note 15.
Sale, transfer and cession of a notarial mining right to Zinoju
Zinoju entered into an agreement to acquire a prospecting right, for a total consideration of ZAR 14 million (approximately $1.4 million), of
which ZAR 2 million, was paid as a deposit and the balance of ZAR12 million was paid by Zinoju to the seller in June 2013, on fulfilment of
the conditions below:
1. The granting of a mining right; and
2. Zinoju obtaining the written consent of the Minister as required in terms of section 11 of the Mineral and Petroleum Resources
Development Act, 2002 (the “Assignment Approval”).
The mining right is included in property, plant and equipment as at August 31, 2013.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
22) CANCELLED ACQUISITION OF RIVERSDALE HOLDINGS PROPRIETARY LIMITED
Proposed acquisition of Riversdale Holdings Proprietary Limited
On September 24, 2012, the Company and Rio Tinto PLC ("Rio Tinto") announced that they entered into a definitive agreement whereby
the Company was expected to acquire 100% ownership of the shares and shareholder claims of Riversdale Mining Limited (“RML”) in
Riversdale Holdings (Proprietary) Limited ("RHPL") (the ”Acquisition”), as a result of which, the Company would have acquired RHPL's
74% interest in the Zululand Anthracite Colliery ("ZAC"), a current producing anthracite mine, and RHPL's 74% interest in the Riversdale
Anthracite Colliery ("RAC"), an undeveloped anthracite resource.
Cancellation of proposed acquisition
In February 2013, the Company notified RML of the cancellation of the agreement between the Company and RML for the acquisition by
the Company of 100% of the shares and shareholder claims of RHPL.
Subsequent to the parties entering into the agreement in September 2012, and pending fulfillment of the conditions precedent contained in
the agreement, the performance of ZAC deteriorated materially. This deterioration, the Company believes, was attributable to a material
breach by RML of its obligations under the agreement and the Company cancelled the contract. The cancellation took place by written
notice from the Company to RML on February 1, 2013. RML has denied being in breach of the agreement. RML has also alleged damages
have been suffered by RML as a result of the termination of the agreement.
Flowing from the cancelation of the agreement between the company and RML two disputes have been declared with the company
seeking the return of the ZAR 45,500,000 ($4,681,950) held in escrow in the one matter and both the Company and RML seeking
damages resulting from the cancelation in the other. Arbitrators have been appointed and it is expected that pleadings will filed in due
course.
The deposits made totalling ZAR 45,500,000 ($4,681,950) are expected to be recovered and are included on the consolidated statements
of financial position as at August 31, 2013 in the line item accounts and other receivables.
Loan facility
Investec had agreed to underwrite the funding for the Acquisition, by the way of the provision of guarantees of ZAR 394.5 million
(approximately $40.5 million) to Riversdale Mining Limited, and ultimately by providing debt funding for the same amount, for the payment
of the purchase consideration.
As at August 31, 2013, no liability existed to Investec in respect of the transaction guarantees. The transaction guarantees expired on May
31, 2013.
See additional securities in respect of the Investec term loan facility and revolving loan facility as disclosed in Note 15.
23) SUBSEQUENT EVENTS
On September 4, 2013, the Company closed the secured US$6 million convertible loan facility from RCF (the "Transaction"). The loan
facility is to be used for general working capital in relation to Forbes Coal's operations and exploration properties in Dundee, South Africa.
The principal on the loan facility is convertible into common shares of Forbes Coal at a price of C$0.36 per common share.
Prior to receipt of shareholder approval, the loan had an interest rate of 10% per annum, payable on each calendar quarter. Upon receipt
of shareholder approval on September 11, 2013, the interest rate decreased to 8% per annum.
As a result of the Transaction, RCF received a 3% establishment fee payable in cash or common shares. Following shareholder approval,
517,450 common shares at a price of C$0.36 per share were issued on September 19, 2013 to satisfy the establishment fee.
The issuance of common shares to RCF upon conversion of the loan, interest payments and for the establishment fee were subject to
shareholder approval which was received at the annual and special meeting that was held on September 11, 2013. Pursuant to the policies
of the TSX and Multilateral Instrument 61-101 ("MI 61-101"), RCF did not vote on the resolution approving the issuances of the common
shares to RCF under the Transaction.
FORBES & MANHATTAN COAL CORP.
Notes to the Condensed Interim Consolidated Financial Statements
August 31, 2013 and 2012
(Presented in Canadian dollars)
Provided that the loan is outstanding and RCF holds common shares or the right to acquire common shares equal to at least 15% of the
issued and outstanding common shares of Forbes Coal, RCF has the right to participate in any future financings by Forbes Coal on a pro
rata basis to its partially diluted shareholding. In addition, provided that the loan is outstanding or if RCF holds common shares or the right
to acquire common shares equal to at least 15% of the issued and outstanding common shares, RCF will have the right to nominate one
individual to the board of directors.
Prior to the Transaction RCF owned 6,867,443 (19.97%) of the issued and outstanding common shares of Forbes Coal on a non-diluted
basis. Assuming an exchange rate of C$1.00 = US$1.00 and a 20-day VWAP of C$0.32 (being the 20 day VWAP as of August 9, 2013), if
RCF converts the entire amount of the loan, receives the establishment fee in common shares, and receives all interest payments under
the loan in common shares, RCF will be issued an aggregate of 21,427,284 common shares. Assuming no other issuances of shares by
Forbes Coal, this would result in RCF holding an aggregate of 28,294,767 (50.1%) of the issued and outstanding common shares of
Forbes Coal.
The closing of the US$6 million convertible loan facility with RCF triggered the change of control provision in certain consulting
contracts. Whether certain consultants will request payment is not yet known or determinable and as such no amounts have been recorded
in the financial statements.
16 October 2013
Johannesburg
Sponsor
Sasfin Capital (a division of Sasfin Bank Limited)
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