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Management's Discussion and analysis of financial condition and results of operations
DELRAND RESOURCES LIMITED
(formerly BRC DIAMONDCORE LTD.)
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: DRN ISIN Number: CA2472671072
(“Delrand” or the "Company")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AS AT AND FOR THE THREE AND NINE MONTH PERIODS
ENDED MARCH 31, 2014
The following management?s discussion and analysis of financial condition and results of
operations (the “MD&A”) has been prepared by management and provides a review of the
activities, results of operations and financial condition of Delrand Resources Limited (the
“Company” or “Delrand”) based upon International Financial Reporting Standards (“IFRS”)
issued by the International Accounting Standards Board. This MD&A should be read in
conjunction with the unaudited interim condensed consolidated financial statements of the
Company as at and for the three and nine month periods ended March 31, 2014 (the “Interim
Financial Statements”), together with the MD&A and the audited financial statements as at
and for the year ended June 30, 2013 as well as the notes thereto. All amounts are expressed
in Canadian dollars unless otherwise stated.
This MD&A is dated May 14, 2014. Additional information relating to the Company, including
the Company?s annual information form, is available on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other than
statements of historical fact, that address activities, events or developments that the
Company believes, expects or anticipates will or may occur in the future (including, without
limitation, statements relating to exploration results, potential mineralization and future plans
and objectives of the Company) are forward-looking statements. These forward-looking
statements reflect the current expectations or beliefs of the Company based on information
currently available to the Company. Forward-looking statements are subject to a number of
risks and uncertainties that may cause the actual results of the Company to differ materially
from those discussed in the forward-looking statements, and even if such actual results are
realized or substantially realized, there can be no assurance that they will have the expected
consequences to, or effects on the Company. Factors that could cause actual results or events
to differ materially from current expectations include, among other things, uncertainties
relating to the availability and costs of financing needed in the future, the possibility that
future exploration results will not be consistent with the Company?s expectations, changes in
equity markets, changes in diamond markets, foreign currency fluctuations, political
developments in the Democratic Republic of the Congo (the "DRC"), changes to regulations
affecting the Company's activities, delays in obtaining or failure to obtain required project
approvals, the uncertainties involved in interpreting geological data and the other risks
involved in the mineral exploration business. Any forward-looking statement speaks only as
of the date on which it is made and, except as may be required by applicable securities laws,
the Company disclaims any intent or obligation to update any forward-looking statement,
whether as a result of new information, future events or results or otherwise. Although the
Company believes that the assumptions inherent in the forward-looking statements are
reasonable, forward-looking statements are not guarantees of future performance and
accordingly undue reliance should not be put on such statements due to the inherent
uncertainty therein.
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COMPANY OVERVIEW
The Company is engaged in the acquisition and exploration of diamond properties in known
diamond producing areas in the DRC. The Company also has an iron ore exploration project
in the DRC.
For the three and nine months ended March 31, 2014, the Company reported a net loss of
$74,819 and $176,383 (three and nine months ended March 31, 2013: $62,839 and
$212,137). The net asset value of the Company was $4,940,827 as at March 31, 2014 (June
30, 2013: $4,706,710).
The Company?s accumulated deficit as at March 31, 2014 was $120,231,005 (June 30, 2013:
$120,054,622). The Company had a working capital deficit of $430,891 as at March 31, 2014
(June 30, 2013: $429,967) and had a net decrease in cash of $66,294 and $68,197 during
the three and nine months ended March 31, 2014 (three and nine months ended March 31,
2013: decrease of $23,855 and $419,694 respectively).
While the Company?s financial statements have been prepared on the basis of IFRS
accounting principles applicable to a going concern, adverse conditions may cast substantial
doubt upon the validity of this assumption. In the event the Company is unable to identify
recoverable resources, receive the necessary permitting, or arrange appropriate financing,
the carrying value of the Company?s assets could be subject to further material adjustment.
Furthermore, the volatile global economic environment and its impact on certain market
conditions may cast significant doubt upon the validity of this assumption.
The Company?s ability to continue operations in the normal course of business is dependent
on several factors, including its ability to secure additional funding. Management has been
exploring all available options to secure additional funding, including equity financing and
strategic partnerships. In addition, the recoverability of amounts shown for exploration and
evaluation assets is dependent upon the existence of economically recoverable reserves, the
ability of the Company to obtain financing to perform its exploration activies or complete the
development of the properties where necessary, or, alternatively, upon the Company?s ability
to recover its spent costs through a disposition of its interests, all of which are uncertain.
In May 2014, Arnold T. Kondrat, a director of the Company, was appointed Chief Executive
Officer of the Company.
The Company also announced in May 2014 that it will be filing articles of amendment to
consolidate the outstanding common shares of the Company on a three to one basis.
DIAMOND PROJECTS
The Company?s present operations consist of the exploration and evaluation of several mineral
properties for diamonds in the DRC. The Company?s exploration programs in the DRC are
currently focused on the Coexco and Bomili exploration permit areas in the Bafwasende region
in the northern DRC, and on the selection of targets in the Kasai provinces in the southern
DRC.
Further interpretation of the results of the very large concentrates from Coexco and the new
results from Bomili detailed sampling has permitted the reduction of the eight Coexco permits
to two permits covering one target. Applications for the renewal of these two permits have
been submitted to CAMI. In addition, the two Bomili permits have been retained as a result
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of the detailed sampling results from the work that the Company carried out in August and
December 2013. During the three months ended March 31, 2014. The Company has
completed the program to evaluate a large exploration dataset covering the Kasai provinces.
Northern DRC Project (4 exploration permits)
Results from the 2009 reconnaissance stream samples, collected over the original 44 Coexco
and two Bomili exploration permit areas, reported five ilmenites, 27 chrome spinels, one
eclogitic garnet and 15 micro-diamonds (i.e. less than 0.5 mm but larger than 0.4 mm in
size). The follow-up sampling program in 2011 over these positive areas was narrowed down
to 22 Coexco and the two Bomili exploration permits. Pursuant to the follow-up sampling
program, 490 and 97 follow-up stream samples were collected over the Coexco and Bomili
project areas, respectively, in 2012.
The number of positive samples from both the reconnaissance and follow-up stream sampling
were limited to five targets within the Coexco permit areas and two targets in the Bomili
permit areas. These seven blocks were earmarked for further detailed stream sampling, that
was conducted in Q3 of 2012. Additional detailed samples were collected over the Bomili
targets in August 2013 and more check samples were collected in December 2013 and
January 2014. Most of the August 2013 samples are available whilst those collected in
December 2013 and January 2014 have been treated and sent to the heavy mineral sorting
laboratory in South Africa, with results expected in the next quarter.
The Coexco project area is dominated by almost horizontally bedded Neoproterozoic Lindian
Group sediments (shale, sandstone and conglomerate) overlying the Archaean Mbomou
Craton. A large part of the Coexco project area is covered by a thick and mature laterite crust
masking most of the rock formations of the area. These laterites have chemically altered and
etched, and hence depressed the occurrences of kimberlitic satellite minerals significantly.
Artisanal diamond diggings were observed along several rivers and its tributaries within the
target area. The 2012 follow-up program produced 48 diamonds, 12 kimberlitic ilmenites
(picro-ilmenite), 21 chromites and 7 garnets that have a marginal mantle signature (G3 and
G5) over the reduced area all in the 0.4 to 0.7 mm fraction. Although the follow-up work
failed to focus any specific targets, the depressed distribution of the mantle minerals is due
to the thick (at least 10 metres) laterite. The abundance of diamonds which are not affected
by the chemical etching of the laterite, makes this a promising target. The conclusion from
infra-red work on the initial micro-diamonds recovered from the reconnaissance work
suggests that there are two sources, one in the north and one more to the south. Visual
observations of the diamonds recovered from the follow-up samples indicate that there is no
obvious sign of wear or breakage. The infra-red studies of the 48 diamonds recovered from
the follow-up work show derivation from a resticted number of sources. The detailed follow-
up samples have returned very large concentrates after Tetrabromoethane (SG 2.96 g/ml)
treatment with an average weight of 234.61 grams per sample. Hence the sorting of these
concentrates, by Afrid Laboratory in South Africa, was only completed during Q1 of 2014.
The results of those samples produced eight diamonds in a relatively small area covering the
two Coexco permits that have been retained. These stones will be sent for further infra-red
studies and once this is completed a section of these two remaining permit areas will be
covered by ground magnetic surveys. Any geophysical targets will then be drilled by the
Company?s diamond drill rig.
In the Bomili project area there is no cover of Neoproterozoic sediments and the permit areas
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are underlain by the same Archaean rocks of the Mbomou Craton. The follow-up program
produced no garnets, a few chromites but an abundance of ilmenite particularly in respect of
permit number PR 1174. The mineral chemistry suggests that these ilmenites have defined
two and possibly three separate kimberlite sources. These three targets on the two Delrand
permit areas were covered by detailed stream sampling in the second half of 2012. The
results of these samples have highlighted the Daikwayi, Etale, Abanza and Ekoko streams on
PR 1174 as highly anomalous. Several samples contain more than 20 ilmenite and these areas
have been identified as priority and were covered by a detailed „hammer? prospecting mission
carried out by the Company in August 2013. During this program eight samples were collected
and each contained ilmenite with “SS” surface textures – these are sculptured surfaces and
represents the mineral?s original surface indicating that these ilmenites have not travelled.
Electron microprobe analysis will be conducted on these grains to obtain its interest rating.
In December 2013 and January 2014, and based on the visual results from the August
mission, more detailed samples were collected over the high ilmenite counts and a start was
made with a ground magnetic survey over these high counts on PR 1174. The sampling
produced 21 ilmenites from 10 samples 16 of which had “SS” surfaces. Break down of the
geophysical equipment meant that only 3 lines were surveyed which was inconclusive. The
magnetometers have been sent for repairs. All ilmenites will be forwarded to the microprobe
for analysis but the Company believes that the presence of a kimberlite(s) source in the Bomili
PR 1174 is very likely. The next step will be to complete the ground geophysics over this
permit area and finalize the microprobe analyses of the ilmenites. Once the geophysics has
identified suitable drill targets, and the mineral chemistry of the ilmenites are encouraging
enough, the Company intends to commence a drilling program during this year?s dry season
to cover targets in both the Coexco and Bomil ground.
Tshikapa Project (7 exploration permits)
Delrand is continuing to pursue the possibility to exercise the option which the Company has
with Acacia in order to complete its exploration activities over the remaining six Acacia
exploration permit areas. These are the remaining permits that were part of the option
agreement and have been covered by a reconnaissance and follow-up prospecting program.
Southern DRC
Delrand negotiated an exploration agreement with Rio Tinto in order to access and interpret
a large diamond exploration dataset which Rio Tinto acquired. Delrand recognized a regional
background „noise? of kimberlitic indicator minerals which has complicated the recognition of
residual mineral anomalies. However, it has now highlighted several targets that will need to
be explored. The next step is to submit applications to the Department of Mines (CAMI) for
exploration permits (PR). However, since CAMI remains closed for new applications Rio Tinto
has suspended the agreement until such time when it will be possible to secure exploration
permits over these promising targets.
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At the same time, Delrand has reviewed its own dataset which it has built up since 2003 and
has identified several promising targets which it hopes to secure once the CAMI is in a position
to accept new applications.
Security of Tenure
The exploration program in the DRC is focused on two areas: one in the northern DRC around
Bafwasende and one in the southern part of the country south of Tshikapa. Exploration
permits have been secured in both areas and are in good standing. The Company has applied
to reduce the Coexco ground from 22 permits to two permits based on the results from the
detailed follow-up stream sampling program from 2012 through to 2014. Two exploration
permit applications are still at CAMI for consideration and Delrand is looking to make
additional applications as soon as CAMI opens for new applications. Delrand holds the
following permits directly or by partners through various option agreements: Acacia (6),
Delrand (3) and Coexco (2).
Status of Exploration Permits of Delrand and Partners in the DRC as of March 31, 2014
Permits at March 31,
Company (Project) PR Numbers 2014
Permits Km²
Delrand (DRC North) 1174, 1175 2 188
Delrand (Tshikapa) 9083 1 212
Acacia (Tshikapa) 1175,1176,1177,1180, 6 1,043
1188, 1187
Coexco (DRC North) 6898, 6906 2 257
Total 11 1,700
IRON ORE PROJECT
In May 2011, the Company announced the discovery of high grade haematite (a form of iron
ore) in its exploration areas within Province Orientale, DRC, through its then joint venture
with Rio Tinto Minerals Development Limited ("Rio Tinto"). Additional iron ore results were
announced by the Company in November 2011. The drilling results for 1,117 metres of
diamond drill holes, which are detailed below, revealed average grades from the mineralized
intercepts ranging from 62.5% to 68.5% iron. The iron ore exploration was funded and
operated by Rio Tinto.
Initial geological research and exploration had indicated that the exploration permit areas,
which hitherto had been largely unexplored using modern exploration methods, were highly
prospective for the discovery of iron ore deposits. This assessment is supported by these
initial drill results. Mapping and first pass drilling was completed on the Zatua 01 and 02
target areas with 11 diamond drill holes, one of which had to be abandoned, totaling 1,117
meters. Seven of these holes intercepted high grade haematite mineralization. The
mineralized package was not present in the remaining holes despite their central location.
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The target areas had been selected after a regional airborne magnetic survey had identified
geophysical anomalies which subsequent ground follow up indicated to be associated with
outcropping haematite mineralization. Mineralized intervals, where intercepted by a drill hole,
range in thickness from 37 meters to 121 meters with both friable and massive textures being
observed.
Analytical results were received for all seven holes with values of 62.5%-68.5% for Fe; 0.56%
to 4.78% for Al 2O3; 0.48% to 6.36% for SiO2 and 0.040% to 0.148% for P, with the elevated
high phosphorous values appearing to be associated with recent weathering. Despite limited
thicknesses in some of the holes, the results give encouragement that high-grade haematite
is present in the area. No further work has been conducted at the iron ore project since early
2012. Subsequently, Rio Tinto has withdran from the joint venture iron ore project. Delrand
has however maintained its interest in the project with a view to realizing any potential value
at a future date.
QUALIFIED PERSON AND TECHNICAL REPORT
Dr. Michiel C. J. de Wit, the Company's President and a “qualified person” as such term is
defined in National Instrument 43-101, has reviewed and approved the technical information
in this MD&A.
Additional information with respect to the Company's Tshikapa project is contained in the
technical report prepared by Dr. Michiel C. J. de Wit and Fabrice Matheys, dated March 31,
2009 and titled "National Instrument 43-101 Technical Report on the Tshikapa Project of BRC
DiamondCore Ltd. in the Democratic Republic of the Congo". A copy of this report can be
obtained from SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
For the three and nine months ended March 31, 2014, the Company reported a net loss of
$74,819 (or $0.00 per share) and $176,383 (or $0.00 per share), compared to a net loss of
$62,839 (or $0.00 per share) and $212,137 (or $0.00 per share) for the three and nine
months ended March 31, 2013. For the three month period ended March 31, 2014 the
increase in the net loss was mainly due to an increase in professional fees and for the nine
month period ended March 31, 2014 the decease in the net loss was mainly due to a decrease
in consulting fees.
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain unaudited consolidated financial information of the
Company for each of the last eight quarters, beginning with the three months ended March
31, 2014. The Company?s reporting and measurement currency is the Canadian dollar. The
financial information is reported in accordance with IFRS.
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Three Three Three Three
months months months months
ended ended ended ended
March December September June
31, 2014 31, 2013 30, 2013 30, 2013
Net loss ($'000) $(75) $(56) $(45) $(72)
Net loss per share
(basic and diluted) $0.00 $0.00 $0.00 $0.00
Three Three Three Three
months months months months
ended ended ended ended
March December September June
31, 2013 31, 2012 30, 2012 30, 2012
Net loss ($'000) $(63) $(75) $(74) $(141)
Net loss per share
(basic and diluted) $0.00 $0.00 $0.00 $0.00
During the three month period ended March 31, 2014, the Company recorded a net loss of
$74,819 compared to a net loss of $55,783 that was recorded during the three months ended
December 31, 2013. The increase in the net loss was mainly due to an increase in filing fees
relating to the TSX listing and tax consulting fees.
During the three month period ended December 31, 2013, the Company recorded a net loss
of $55,783 compared to a net loss of $45,781 that was recorded during the three months
ended September 30, 2013. The increase in the net loss was mainly due to an increase in
both shareholder information costs and consulting fees.
During the three month period ended September 30, 2013, the Company recorded a net loss
of $45,781 compared to a net loss of $71,639 that was recorded during the three months
ended June 30, 2013, mainly due to a reduction in consulting fees related to the departure
of a former director.
During the three month period ended June 30, 2013, the Company recorded a net loss of
$71,639 compared to a net loss of $62,839 that was recorded during the three months ended
March 31, 2013 due to higher consulting and professional fees.
During the three month period ended March 31, 2013, the Company recorded a net loss of
$62,839 compared to a net loss of $75,064 that was recorded during the three months ended
December 31, 2012. The decrease was primarily due to lower consulting fees of $22,548
which was offset by an increase in general and administrative expenses of $9,727.
During the three month period ended December 31, 2012, the Company recorded a net loss
of $75,064 which was consistent with the net loss of $74,234 that was recorded during the
three months ended September 30, 2012.
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During the three month period ended September 30, 2012, the Company recorded a net
loss of $74,234 compared to a net loss of $141,073 during the three months ended June
30, 2012. This decrease in net loss was primarily due to a decrease in consulting and
professional fees of $65,948, as audit fees were incurred in the three months ended
June 30, 2012 due to the change in year end.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2014, the Company had cash of $33,516 and a working capital deficit of
$430,891 compared to cash of $101,713 and a working capital deficit of $429,967 as at June
30, 2013.
In April 2014, the Company closed a non-brokered private placement of 2,000,000 common
shares of the Company at a price of $0.075 per share for proceeds to the Company of
$150,000. The Company intends to use the proceeds from this financing for general corporate
purposes. Arnold T. Kondrat, a director of the Company, was the purchaser of all of the said
shares and now holds 14,359,700 (or 22.49%) of the outstanding common shares of the
Company.
During the nine months ended March 31, 2014, 3,109,849 warrants were exercised at a price
of $0.132 per share. This resulted in the issuance of 3,109,849 common shares of the
Company and gross proceeds to the Company of $410,500. 2,109,849 of the shares were
issued to a director of the Company (Mr. Kondrat).
The Company has no operating revenues and is wholly reliant upon external financing to fund
its activities. There is no assurance that such financing will be available on acceptable terms,
if at all.
Rio Tinto had previously funded exploration at the Company?s DRC North diamond project
and all of the exploration at the DRC iron ore project.
In general, market conditions have limited the availability of funds. Given the Company?s
financial position and available resources, the Company currently expects a need to access
equity markets for financing over the next twelve months. In light of current conditions, the
Company has continued a series of measures to bring its spending in line with the projected
cash flows from its operations in order to preserve its balance sheet and maintain its liquidity
position. Management believes that based on its current financial position and liquidity
profile, the Company will be able to satisfy its current and long-term obligations. The Interim
Financial Statements of the Company have been prepared in accordance with IFRS applicable
to a going concern.
As at March 31, 2014 and June 30, 2013, there were no contractual obligations (that are not
on the statement of financial position) entered into by the Company.
The Company has an option agreement to secure an equity interest in prospective ground
held in six exploration permits in the DRC with ACACIA sprl, which has advised the Company
of its wish to modify the option agreement. The Company believes it can reach an agreement
that is satisfactory to both parties.
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EXPLORATION AND EVALUATION EXPENDITURES
The following table provides a breakdown of the Company's exploration and evaluation
expenditures in the DRC for the nine months ended March 31, 2014:
Tshikapa Northern DRC Total
Balance June 30, 2013 $ 3 115 554 $ 2 024 324 $ 5 139 878
Operating expenses
Funds received from Rio Tinto - -$ 57 269 -$ 57 269
Exploration office expenses - $ 23 407 $ 23 407
Salaries - $ 100 764 $ 100 764
Consulting fees - $ 33 725 $ 33 725
Field camp expenses - $ 8 689 $ 8 689
Geochemistry - $ 11 172 $ 11 172
Professional fees - $ 6 970 $ 6 970
Travel - $ 38 487 $ 38 487
Permits and surface taxes - $ 63 827 $ 63 827
Foreign exchange - -$ 151 -$ 151
Total Operating Expenses $ - $ 229 621 $ 229 621
Balance at March 31, 2014 $ 3 115 554 $ 2 253 945 $ 5 369 499
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of common
shares. As at May 14, 2014, the Company had outstanding 63,844,492 common shares and
warrants to purchase an aggregate of 1,250,000 common shares of the Company.
RELATED PARTY TRANSACTIONS
a) Key Management Remuneration
The Company?s related parties include key management. Key management includes executive
and non-executive directors. The remuneration of the key management of the Company as
defined above, during the three and nine months ended March 31, 2014 and March 31, 2013
was as follows:
Three months ended Three months ended Nine months ended Nine months ended
March 31, 2014 March 31, 2013 March 31, 2014 March 31, 2013
Salaries $ 43 724 $ 41 497 $ 154 283 $ 186 050
$ 43 724 $ 41 497 $ 154 283 $ 186 050
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b) Other Related Parties
As at March 31, 2014, an amount of $25,000 (June 30, 2013 - $117,107 owed to one director)
was owing to one director of the Company representing consulting fees.
As at March 31, 2014, an amount of $1,013 was owed to Banro Corporation (“Banro”) related
to common expenses (June 30, 2013 - $921). Banro owns 17,716,994 common shares of
the Company, representing a 27.75% interest in the Company.
During the three and nine months ended March 31, 2014, the Company incurred common
expenses of $865 and $3,222 (three and nine months ended March 31, 2013 - $603 and
$3,982) in the DRC together with Loncor Resources Inc. (“Loncor”), a corporation with
common directors. As at March 31, 2014, an amount of $3,884 (June 30, 2013 - $8,875)
owing to Loncor was included in due to related parties in the consolidated statement of
financial position.
FUTURE ACCOUNTING STANDARDS
The Company has reviewed new and revised accounting pronouncements that have been
issued but are not yet effective and determined that the following may have an impact on the
Company:
IFRS 9, Financial instruments (“IFRS 9”) intends to replace IAS 39 Financial Instruments:
Recognition and Measurement in its entirety with IFRS 9. IFRS 9 is intended to reduce the
complexity for the classification and measurement of financial instruments. The mandatory
effective date was previously January 1, 2015 and has since been removed with the effective
date to be determined when the remaining phases of IFRS 9 are completed. Once it is
complete, the Company will be evaluating the impact the final standard is expected to have
on its consolidated financial statements.
An amendment to IAS 36, Impairment of Assets (“IAS 36”) was issued by the IASB in May
2013. The amendment reduces the circumstances in which the recoverable amount of assets
or cash-generating units are required to be disclosed, clarifies the disclosures required, and
introduces an explicit requirement to disclose the discount rate used in determining
impairment. The amendments to IAS 36 are effective for annual periods beginning on or after
January 1, 2014. The Company does not expect the standard to have a material impact on
its consolidated financial statements.
An amendment to IAS 32, Financial Instruments: presentation (“IAS 32”) was issued by the
IASB in December 2011. The amendment clarifies the meaning of „currently has a legally
enforceable right to set-off?. The amendments to IAS 32 are effective for annual periods
beginning on or after January 1, 2014. The Company does not expect the standard to have a
material impact on its consolidated financial statements.
An amendment to IAS 39, Financial Instruments: recognition (“IAS 39”) was issued by the
IASB in June 2013. The amendment clarifies that there is no need to discontinue hedge
accounting if a hedging derivative is novated, provided certain criteria are met. A novation
indicates an event where the original parties to a derivative agree that one or more clearing
counterparties replace their original counterparty to become the new counterparty to each of
the parties. The amendments to IAS 39 are effective for annual periods beginning on or after
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January 1, 2014. The Company does not expect the standard to have a material impact on
its consolidated financial statements.
In May 2013, IFRIC published IFRIC Interpretation 21, Levies (“IFRIC 21”), effective for
annual periods beginning on or after January 1, 2014. IFRIC 21 provides guidance on when
to recognize a liability for a levy imposed by a government. IFRIC 21 identifies the obligating
event for the recognition of a liability as the activity that triggers the payment of the levy in
accordance with the relevant legislation. The Company does not expect the standard to have
a material impact on its consolidated financial statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company?s consolidated financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Information about critical judgments in
applying accounting policies that have the most significant effect on the amounts recognized
in the financial statements included the following:
Provisions and contingencies
The amount recognized as provision, including legal, contractual and other exposures or
obligations, is the best estimate of the consideration required to settle the related liability,
including any related interest charges, taking into account the risks and uncertainties
surrounding the obligation. In addition, contingencies will only be resolved when one or more
future events occur or fail to occur. Therefore assessment of contingencies inherently
involves the exercise of significant judgment and estimates of the outcome of future events.
The Company assesses its liabilities and contingencies based upon the best information
available, relevant tax laws and other appropriate requirements.
Exploration and evaluation expenditure
The application of the Company?s accounting policy for exploration and evaluation expenditure
requires judgment in determining whether it is likely that future economic benefits will flow
to the Company, which may be based on assumptions about future events or circumstances.
Estimates and assumptions made may change if new information becomes available. If, after
expenditure is capitalized, information becomes available suggesting that the recovery of
expenditure is unlikely, the amount capitalized is written off in the statement of
comprehensive loss during the period the new information becomes available.
Impairment
Assets, including exploration and evaluation assets, are reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts exceed their
recoverable amounts. The assessment of the fair value often requires estimates and
assumptions such as discount rates, exchange rates, commodity prices, rehabilitation and
restoration costs, future capital requirements and future operating performance. Changes in
such estimates could impact recoverable values of these assets. Estimates are reviewed
regularly by management.
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Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees by reference
to the fair value of the equity instruments at the date at which they are granted. Estimating
fair value for share-based payment transactions requires determining the most appropriate
valuation model, which is dependent on the terms and conditions of the grant. This estimate
also requires determining the most appropriate inputs to the valuation model including the
expected life of the share option, volatility and dividend yield and making assumptions about
them.
The fair value at grant date is determined using a Black-Scholes option pricing model that
takes into account the exercise price, the term of the option, the impact of dilution, the share
price at grant date and expected price volatility of the underlying share, the expected dividend
yield and the risk free interest rate for the term of the option. Under IFRS, the Company is
required to estimate the number of forfeitures likely to occur on grant date and reflect this in
the share-based payment expense revising for actual experiences in subsequent periods.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could significantly impact
on its operations and future prospects. The following discussion pertains to certain principal
risks and uncertainties but is not, by its nature, all inclusive.
The only sources of future funds for further exploration programs which are presently
available to the Company are the sale of equity capital, or the offering by the Company of an
interest in its properties to be earned by another party carrying out further exploration. There
is no assurance that such sources of financing will be available on acceptable terms, if at all.
In the event that commercial quantities of minerals are found on the Company's properties,
the Company does not have the financial resources at this time to bring a mine into
production.
The current financial climate is characterized by volatile and uncertain times. The uncertainty
of forward looking statements is therefore greater. Diamond prices were reduced significantly
as a result of the economic downturn and the recovery could be accompanied by volatility.
All of the Company's projects are located in the DRC The assets and operations of the
Company are therefore subject to various political, economic and other uncertainties,
including, among other things, the risks of war and civil unrest, hostage taking, military
repression, labor unrest, illegal mining, expropriation, nationalization, renegotiation or
nullification of existing licenses, permits, approvals and contracts, taxation policies, foreign
exchange and repatriation restrictions, changing political conditions, international monetary
fluctuations, currency controls and foreign governmental regulations that favor or require the
awarding of contracts to local contractors or require foreign contractors to employ citizens of,
or purchase supplies from, a particular jurisdiction. Changes, if any, in mining or investment
policies or shifts in political attitude in the DRC may adversely affect the Company's
operations. Operations may be affected in varying degrees by government regulations with
respect to, but not limited to, restrictions on production, price controls, export controls,
currency remittance, income taxes, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use and mine safety.
Failure to comply strictly with applicable laws, regulations and local practices relating to
mineral rights could result in loss, reduction or expropriation of entitlements. In addition, in
the event of a dispute arising from operations in the DRC, the Company may be subject to
the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of courts in Canada. The Company also may be hindered or
prevented from enforcing its rights with respect to a governmental instrumentality because
of the doctrine of sovereign immunity. It is not possible for the Company to accurately predict
such developments or changes in laws or policy or to what extent any such developments or
changes may have a material adverse effect on the Company's operations.
The DRC is a developing nation emerging from a period of civil war and conflict. Physical and
13
institutional infrastructure throughout the DRC is in a debilitated condition. The DRC is in
transition from a largely state controlled economy to one based on free market principles,
and from a non-democratic political system with a centralized ethnic power base, to one
based on more democratic principles. There can be no assurance that these changes will be
effected or that the achievement of these objectives will not have material adverse
consequences for the Company and its operations. The DRC continues to experience violence
and significant instability in parts of the country due to certain militia and criminal elements.
While the government and United Nations forces are working to support the extension of
central government authority throughout the country, there can be no assurance that such
efforts will be successful.
All of the Company's properties are in the exploration stage only and none of the properties
contain a known body of commercial ore. The Company currently operates at a loss and does
not generate any revenue from operations. The exploration and development of mineral
deposits involve significant financial risks over a significant period of time which even a
combination of careful evaluation, experience and knowledge may not eliminate. Few properties
which are explored are ultimately developed into producing mines. Major expenditures may be
required to establish reserves by drilling and to construct mining and processing facilities at a
site. It is impossible to ensure that the Company's exploration programs will result in a profitable
commercial mining operation.
The Company is exposed to currency risk as its principal business is conducted in foreign
currencies. Unfavorable changes in the applicable exchange rate may result in a decrease or
increase in foreign exchange gains or losses. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk.
The Company's exploration and, if such exploration is successful, development of its properties
is subject to all of the hazards and risks normally incident to mineral exploration and
development, any of which could result in damage to life or property, environmental damage
and possible legal liability for any or all damage.
The natural resource industry is intensely competitive in all of its phases, and the Company
competes with many companies possessing greater financial resources and technical facilities
than itself.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
a) Fair value of financial assets and liabilities
The consolidated statements of financial position carrying amounts for cash, prepaid expenses
and other assets and accounts payable and accrued liabilities approximate their fair value due
to their short-term nature. Due to the use of subjective judgments and uncertainties in the
determination of fair values these values should not be interpreted as being realizable in an
immediate settlement of the financial instruments.
The following presents the fair value and carrying value of the Company's financial instruments:
14
Fair value hierarchy
The following table provides an analysis of financial instruments that are measured subsequent
to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the
fair value is observable:
- Level 1 fair value measurements are those derived from quoted prices (unadjusted)
in active markets for identical assets or liabilities;
- Level 2 fair value measurements are those derived from inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices); and
- Level 3 fair value measurements are those derived from valuation techniques that
include inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
The fair values of financial assets and liabilities carried at amortized cost are approximated
by their carrying values. Cash is ranked level 2 as it is based on similar loans in the market.
b) Risk Management Policies
The Company is sensitive to changes in commodity prices and foreign-exchange. The
Company?s Board of Directors has overall responsibility for the establishment and
oversight of the Company?s risk management framework. Although the Company has the
ability to address its price-related exposures through the use of options, futures and
forward contacts, it does not generally enter into such arrangements.
c) Foreign Currency Risk
Foreign currency risk is the risk that a variation in exchange rates between the Canadian
dollar and United States dollar or other foreign currencies will affect the Company?s
operations and financial results. Different portions of the Company?s transactions are
denominated in United States dollars, Congolese francs and South African rand. The
Company is also exposed to the impact of currency fluctuations on its monetary assets
and liabilities. The Company?s functional currency is the Canadian dollar. The majority of
major expenditures are transacted in US dollars. The Company maintains the majority of
its cash in Canadian dollars but it does hold balances in US dollars. Significant foreign
exchange gains or losses are reflected as a separate component of the consolidated
statement of comprehensive loss. The Company does not use derivative instruments to
reduce its exposure to foreign currency risk. See Note 9(c) of the Interim Financial
Statements for additional details.
d) Credit Risk
Financial instruments which are potentially subject to credit risk for the Company consist
primarily of cash. Cash is maintained with several financial institutions of reputable credit
in Canada, the DRC and South Africa and may be redeemed upon demand. It is therefore
the Company?s opinion that such credit risk is subject to normal industry risks and is
considered minimal.
15
e) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations
as they become due. The Company attempts to ensure that there is sufficient cash to
meet its liabilities when they are due and manages this risk by regularly evaluating its
liquid financial resources to fund current and long-term obligations and to meet its capital
commitments in a cost-effective manner. The key to success in managing liquidity is the
degree of certainty in the cash flow projections. If future cash flows are fairly uncertain,
the liquidity risk increases. The Company?s liquidity requirements are met through a
variety of sources, including cash, credit facilities and equity capital markets. In light of
market conditions, the Company initiated a series of measures to bring its spending in line
with the projected cash flows from its operations and available project specific facilities in
order to preserve its financial position and maintain its liquidity position.
f) Mineral Property Risk
The Company?s operations in the DRC are exposed to various levels of political risk and
uncertainties, including political and economic instability, government regulations relating
to exploration and mining, military repression and civil disorder, all or any of which may
have a material adverse impact on the Company?s activities or may result in impairment
in or loss of part or all of the Company's assets.
g) Market Risk
Market risk is the potential for financial loss from adverse changes in underlying market
factors, including foreign-exchange rates, commodity prices, interest rates and stock based
compensation costs.
h) Interest rate risk
Interest rate risk is the potential impact on any Company earnings due to changes in bank
lending rates and short term deposit rates. The Company is not exposed to significant
interest rate risk other than cash flow interest rate risk on its cash. The Company does not
use derivative instruments to reduce its exposure to interest rate risk. A fluctuation of
interest rates of 1% would not affect significantly the fair value of cash.
i) Title risk
Title to mineral properties involves certain inherent risks due to the difficulties of
determining the validity of certain claims as well as the potential for problems arising from
the frequently ambiguous conveyancing history characteristic of many mining properties.
Although the Company has investigated title to all of its mineral properties for which it
holds concessions or other mineral licenses, the Company cannot give any assurance that
title to such properties will not be challenged or impugned and cannot be certain that it will
have valid title to its mineral properties. The Company relies on title opinions by legal
counsel who base such opinions on the laws of countries in which the Company operates.
j) Country risk
The DRC is a developing country and as such, the Company?s exploration projects in the
DRC could be adversely affected by uncertain political or economic environments, war, civil
or other disturbances, a changing fiscal regime and by DRC?s underdeveloped industrial
and economic infrastructure.
16
The Company?s operations in the DRC may be affected by economic pressures on the DRC.
Any changes to regulations or shifts in political attitudes are beyond the control of the
Company and may adversely affect its business. Operations may be affected in varying
degrees by factors such as DRC government regulations with respect to foreign currency
conversion, production, price controls, export controls, income taxes or reinvestment
credits, expropriation of property, environmental legislation, land use, water use and mine
safety.
There can be no assurance that policies towards foreign investment and profit repatriation
will continue or that a change in economic conditions will not result in a change in the
policies of the DRC government or the imposition of more stringent foreign investment
restrictions. Such changes cannot be accurately predicted.
k) Capital Management
The Company manages its cash, common shares and warrants as capital. The Company?s
main objectives when managing its capital are:
- to maintain a flexible capital structure which optimizes the cost of capital at an
acceptable level of risk while providing an appropriate return to its shareholders;
- to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the business;
- to safeguard the Company?s ability to obtain financing; and
- to maintain financial flexibility in order to have access to capital in the event of future
acquisitions.
The Company manages its capital structure and makes adjustments to it in accordance
with the objectives stated above, as well as responds to changes in economic conditions
and the risk characteristics of the underlying assets.
There were no significant changes to the Company?s approach to capital management
during the nine months ended March 31, 2014.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital
requirements.
17
SEGMENTED INFORMATION
The Company has one operating segment: the acquisition, exploration and development
of mineral properties located in the DRC. The operations of the Company are located in
two geographic locations, Canada and the DRC. Geographic segmentation of non-current
assets is as follows:
As at March 31, 2014
Exploration and
evaluations Total Assets
DRC $ 5 371 718 $ 5 418 735
Canada - -
$ 5 371 718 $ 5 418 735
As at June 30, 2013
Exploration and
evaluations Total Assets
DRC $ 5 142 097 $ 5 269 589
Canada - -
$ 5 142 097 $ 5 269 589
As at March 31, 2014 As at June 30, 2013
Cash $ 33 516 $ 101 713
Share capital $ 117 012 188 $ 116 601 688
Deficit -$ 120 231 005 -$ 120 054 622
Contributed surplus $ 8 159 644 $ 8 159 644
Johannesburg 20 May 2014
Sponsor
Arcay Moela Sponsors Proprietary Limited
Date: 20/05/2014 11:33:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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