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MDA of financial condition & results of operations as at & for the three & six months ended Dec 31, 2015
Delrand Resources Limited
(Incorporated in Canada)
(Corporation number 627115-4)
Share code: DRN ISIN Number: CA2472672062
(“Delrand” or the "Company")
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS AT AND FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2015
The following management’s discussion and analysis of financial condition and results of
operations (the “MD&A”) has been prepared by management and provides a review of the
activities, results of operations and financial condition of Delrand Resources Limited (the
“Company” or “Delrand”) based upon International Financial Reporting Standards
(“IFRS”). This MD&A should be read in conjunction with the unaudited interim condensed
consolidated financial statements of the Company as at and for the three and six month
periods ended December 31, 2015 (the “Interim Financial Statements“) together with
the MD&A and the audited consolidated financial statements of the Company as at and for
the year ended June 30, 2015 as well as the notes thereto. All amounts are expressed in
Canadian dollars unless otherwise stated.
This MD&A is dated February 18, 2016. Additional information relating to the Company,
including the Company’s annual information form, is available on SEDAR at
www.sedar.com.
FORWARD-LOOKING STATEMENTS
The following MD&A contains forward-looking statements. All statements, other than
statements of historical fact, that address activities, events or developments that the
Company believes, expects or anticipates will or may occur in the future (including, without
limitation, statements relating to future plans and objectives of the Company) are forward-
looking statements. These forward-looking statements reflect the current expectations or
beliefs of the Company based on information currently available to the Company. Forward-
looking statements are subject to a number of risks and uncertainties that may cause the
actual results of the Company to differ materially from those discussed in the forward-
looking statements, and even if such actual results are realized or substantially realized,
there can be no assurance that they will have the expected consequences to, or effects on
the Company.
Factors that could cause actual results or events to differ materially from current
expectations include, among other things, uncertainties relating to the availability and costs
of financing needed in the future, the possibility that future exploration results will not be
consistent with the Company’s expectations, changes in equity markets, changes in
diamond markets, foreign currency fluctuations, political developments in the Democratic
Republic of the Congo (the "DRC"), changes to regulations affecting the Company's
activities, delays in obtaining or failure to obtain required project approvals, the
uncertainties involved in interpreting geological data and the other risks involved in the
mineral exploration business. Any forward-looking statement speaks only as of the date on
which it is made and, except as may be required by applicable securities laws, the Company
disclaims any intent or obligation to update any forward-looking statement, whether as a
result of new information, future events or results or otherwise. Although the Company
believes that the assumptions inherent in the forward-looking statements are reasonable,
forward-looking statements are not guarantees of future performance and accordingly
undue reliance should not be put on such statements due to the inherent uncertainty
therein.
COMPANY OVERVIEW
The Company’s business is the acquisition and exploration of diamond properties in known
diamond producing areas in the DRC. The Company presently does not hold any exploration
permits. Delrand also has rights to iron ore exploration properties in the DRC.
For the three and six months ended December 31, 2015, the Company reported a net gain
of $13,200 and a net loss of $96,162 (three and six months ended December, 2014: net
loss of $3,457,790 and $4,031,304 respectively). The Company had a negative net asset
value of $2,484,090 as at December 31, 2015 (June 30, 2015: negative net asset value of
$2,387,928).
The Company’s accumulated deficit as at December 31, 2015 was $128,013,507 (June 30,
2015: $127,917,345). The Company had a working capital deficit of $2,484,090 as at
December 31, 2015 (June 30, 2015: $2,387,928) and had a net decrease in cash of $4,740
during the three months and a net increase of $9,190 during the six months ended
December 31, 2015 (three and six months ended December 31, 2014: net decrease of
$65,092 and $22,661 respectively).
While the Company’s consolidated financial statements have been prepared on the basis of
IFRS accounting principles applicable to a going concern, adverse conditions may cast
substantial doubts 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 doubts upon the validity of this
assumption.
Delrand’s business is mineral exploration such that the Company’s ability to execute its
work plan, meet its administrative overhead obligations, discharge its liabilities and fulfill its
commitments as they come due, is dependent on its success in obtaining additional
financing and ultimately, on attaining future profitable operations. These conditions, along
with the fact that the Company does not have revenue-generating properties and had an
accumulated deficit of $128,013,507 as at December 31, 2015 indicate the existence of a
material uncertainty that may cast significant doubt about the Company’s ability to continue
as a going concern.
In a press release dated September 11, 2015, the Company announced that its common
shares will begin trading on NEX, a separate board of the TSX Venture Exchange, on
Monday, September 14, 2015. The voluntary delisting of the Company’s common shares
from the Toronto Stock Exchange was effected at the close of business on September 11,
2015.
RESULTS OF OPERATIONS
For the three and six months ended December 31, 2015, the Company reported a net gain
$13,200 (or $0.01 per share) and a net loss of $96,162 (or $0.00 per share), compared to
a net loss of $3,457,790 (or $0.16 per share) and $4,031,304 (or $0.19 per share) incurred
during the three and six months ended December 31, 2014. The higher loss in the three-
month period ended December 30, 2014 was the result of higher legal and consulting fees
in connection with VoiceTrust transactions and an impairment loss of $2,353,315 for
deferred exploration costs of the Northern DRC Project).
SUMMARY OF QUARTERLY RESULTS
The following table sets out certain consolidated financial information of the Company for
each of the last eight quarters, beginning with the three months ended December 31, 2015.
The Company’s presentation and functional currency is the Canadian dollar. The financial
information is reported in accordance with IFRS.
Three
months Three months Three months Three months
ended ended ended ended
December September June March
31, 2015 30, 2015 30, 2015 31, 2015
Net gain/(loss) ($'000) $13 $(109) $(253) $(91)
Net gain/(loss) per share
(basic and diluted) $0.01 $(0.01) $(0.01) $(0.00)
Three
months Three months Three Three
ended ended months ended months ended
December September June 30, 2014 March 31, 2014
31, 2014 30, 2014
Net loss ($'000) $(3,458) $(573) $(3,311) $(75)
Net loss per share (basic and
diluted) $0.16 $0.03 $0.16 $0.00
During the three month period ended December 31, 2015, the Company recorded a net
gain of $13,200 compared to a net loss of $109,362 recorded during the three month
period ended September 30, 2015. The decrease in the net loss to a net gain was mainly
due to $94,527 of debt forgiveness. In addition, there was a decrease in consulting and
professional fees which were $11,015 compared to $69,522 during the three month period
ended September 30, 2015.
During the three month period ended September 30, 2015, the Company recorded a net
loss of $109,362 compared to a net loss of $253,185 recorded during the three month
period ended June 30, 2015. The decrease in the net loss was mainly due to a decrease in
consulting and professional fees which were $69,552 compared to $188,728 during the
three month period ended June 30, 2015.
During the three month period ended June 30, 2015, the Company recorded a net loss of
$253,185 compared to a net loss of $90,682 recorded during the three month period ended
March 31, 2015. The increase in the net loss was mainly due to an increase in consulting
and professional fees which were $188,728 compared to $17,039 during the three month
period ended March 31, 2015.
During the three month period ended March 31, 2015, the Company recorded a net loss of
$90,682 compared to a net loss of $3,457,790 recorded during the three month period
ended December 31, 2014. The change in net loss was mainly due to an impairment of
deferred exploration expenditures of $2,353,315 incurred during the three month period
ended December 31, 2014, and a decrease in consulting and professional fees which were
$17,039 compared to $859,136 during the three month period December 31, 2014.
During the three month period ended December 31, 2014, the Company recorded a net loss
of $3,457,790 compared to a net loss of $573,514 that was recorded during the three
month period ended September 30, 2014. The increase in net loss was mainly due to an
impairment of deferred exploration expenditures of $2,353,315 during the three month
period ended December 31, 2014 and increased legal and consulting fees pertaining to the
VoiceTrust transaction.
During the three month period ended September 30, 2014, the Company recorded a net
loss of $573,514 compared to a net loss of $3,311,169 that was recorded during the three
month period ended June 30, 2014. The decrease in the net loss was due to an impairment
of deferred exploration expenditures of $3,115,554 during the three month period ended
June 30, 2014, which was partially offset by higher legal and consulting fees.
During the three month period ended June 30, 2014, the Company recorded a net loss of
$3,311,169 compared to a net loss of $74,819 that was recorded during the three month
period ended March 31, 2014. The increase in the net loss was mainly due to impairment
of deferred exploration expenditures of $3,115,554 and an increase in audit fees related to
year end reporting as well as legal and consultant fees relating to corporate activities.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2015, the Company had cash of $18,353 and a working capital deficit
of $2,484,090 compared to cash of $9,163 and a working capital deficit of $2,387,928 as at
June 30, 2015.
In July 2014, the Company closed a non-brokered arm’s length private placement of
500,000 units of the Company at a price of $0.50 per unit for gross proceeds to the
Company of $250,000. Each such unit was comprised of one common share of the
Company and one-half of one warrant of the Company, with each full warrant entitling the
holder to purchase one common share of the Company at a price of $0.75 for a period of
two years.
The Company has no operating revenues and is wholly reliant upon external financing to
fund its activities. There is no assurance that such financing will be available on acceptable
terms, if at all.
In 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. The Company 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 consolidated financial statements of the Company have been prepared in
accordance with IFRS applicable to a going concern.
As at December 31, 2015 and June 30, 2015, there were no contractual obligations or other
off-balance sheet commitments entered into by the Company.
In a press release dated January 15, 2016, Delrand announced that (a) it had closed a non-
brokered private placement of an aggregate of 9,000,000 common shares of the Company
at a price of $0.08 per share for gross proceeds of $720,000 (Arnold Kondrat, the Chief
Executive Officer and a director of the Company, acquired 7,100,000 of such shares), and
(b) it had closed the issuance of a $1,300,000 unsecured convertible debenture to its
largest creditor. The debenture, which settled indebtedness to the creditor in the amount of
$1,300,000, has a maturity date of June 18, 2018 and interest on the principal outstanding
from time to time accrues at an interest rate of 2.5% per annum. The terms of the
debenture also provide that (i) the holder thereof shall have the option to convert the
outstanding principal into common shares of Delrand at a price of $0.25 per share (subject
to adjustment in accordance with the terms of the debenture for events such as a share
consolidation) (the “Conversion Price”), and (ii) within 30 days of the maturity date,
Delrand may elect to repay the outstanding principal in common shares of Delrand at the
Conversion Price, provided that the 5 day per share volume-weighted average trading price
of Delrand’s shares at that time is at least $0.25 (subject to adjustment in accordance with
the terms of the debenture for events such as a share consolidation).
EXPLORATION AND EVALUATION ASSETS
The following tables provides a breakdown of the Company's exploration and evaluation
assets in the DRC for the six month periods ended December 31, 2015 and December 31,
2014:
Tshikapa Northern DRC Total
Balance June 30, 2015 $- $- $-
Operating expenses
Funds received from Rio Tinto - - -
Exploration office expenses - - -
Salaries - - -
Consulting fees - - -
Field camp expenses - - -
Geochemistry - - -
Professional fees - - -
Travel - - -
Permits and surface taxes - - -
Foreign exchange - - -
Total Operating Expenses - - -
Impairment - - -
Balance December 31, 2015 $- $- $-
7
Tshikapa Northern DRC Total
Balance June 30, 2014 $- $2,331,238 $2,331,238
Operating expenses
Funds received from Rio Tinto - - -
Exploration office expenses - 2,817 2,817
Salaries - 4,176 4,176
Consulting fees - - -
Field camp expenses - - -
Geochemistry - - -
Professional fees - - -
Travel - 50 50
Permits and surface taxes - - -
Foreign exchange - 12,816 12,816
Impairment - - -
Total Operating Expenses - 19,859 19,859
Impairment - (2,351,097) (2,351,097)
Balance December 31, 2014 $- $- $-
OUTSTANDING SHARE DATA
The authorized share capital of the Company consists of an unlimited number of common
shares. As at February 18, 2016, the Company had outstanding 30,781,581 common shares
and 250,000 common share purchase warrants.
RELATED PARTY TRANSACTIONS
a) Key Management Remuneration
The Company’s related parties include key management. Key management includes
executive directors. The remuneration of the key management of the Company as defined
above, during the three and six month periods ended December 31, 2015, and December
31, 2014, was as follows:
Three months Three months Six months Six months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2015 2014 2015 2014
Salaries $25,000 $25,000 $50,000 $60,000
$25,000 $25,000 $50,000 $60,000
b) Other Related Parties
As at December 31, 2015, an amount of $760,359 (June 30, 2014 - $568,764) was owing
to current directors and a former director of the Company representing advances and
consulting fees.
As at December 31, 2015, an amount of $nil was owed to Banro Corporation (“Banro”)
related to shared expenses (June 30, 2015 - $93,928 was owed by Banro). Banro has a
director in common with the Company and during part of the reporting period had owned
1,538,998 common shares of the Company, representing a 7.07% interest in the Company.
As at December 31, 2015, Banro no longer owns any shares of the Company.
As at December 31, 2015, an amount of $1,861 (June 30, 2014 - $3,033) was owed to
Loncor Resources Inc., a corporation with common directors, related to shared expenses.
As at December 31, 2015, an amount of $1,125 (June 30, 2014 - $nil) was owed from
Gentor Resources Inc., a corporation with common directors, related to shared expenses.
FUTURE ACCOUNTING STANDARDS
Certain pronouncements were issued by the IASB or the IFRIC that are mandatory for
accounting periods on or after January 1, 2015 or later periods. Many are not applicable or
do not have a significant impact to the Company and have been excluded. The following
have not yet been adopted and are being evaluated to determine their impact on the
Company.
IFRS 9 – Financial Instruments (“IFRS 9”) was issued by the IASB in November 2009 with
additions in October 2010 and May 2013 and will replace IAS 39 Financial Instruments:
Recognition and Measurement (“IAS 39”). IFRS 9 uses a single approach to determine
whether a financial asset is measured at amortized cost or fair value, replacing the multiple
rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial
instruments in the context of its business model and the contractual cash flow
characteristics of the financial assets. Most of the requirements in IAS 39 for classification
and measurement of financial liabilities were carried forward unchanged to IFRS 9, except
that an entity choosing to measure a financial liability at fair value will present the portion of
any change in its fair value due to changes in the entity’s own credit risk in other
comprehensive income, rather than within profit or loss. The new standard also requires a
single impairment method to be used, replacing the multiple impairment methods in IAS 39.
IFRS 9 is effective for annual periods beginning on or after January 1, 2018. Earlier
adoption is permitted.
IAS 1 – Presentation of Financial Statements (“IAS 1”) was amended in December 2014 in
order to clarify, among other things, that information should not be obscured by
aggregating or by providing immaterial information, that materiality consideration apply to
all parts of the financial statements and that even when a standard requires a specific
disclosure, materiality considerations do apply. The amendments are effective for annual
periods beginning on or after January 1, 2016. Earlier adoption permitted.
IAS 27 – Separate Financial Statements (“IAS 27”) was amended in August 2014 to
reinstate the equity method as an accounting option for investments in subsidiaries, joint
ventures and associates in an entity’s separate financial statements. The amendments are
effective for annual periods beginning on or after January 1, 2016. Earlier adoption
permitted.
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 include 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 expenditures
The application of the Company’s accounting policy for exploration and evaluation
expenditures 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 the expenditures are capitalized, information becomes available
suggesting that the recovery of expenditure is unlikely, the amount capitalized is written off
in the statement of loss and comprehensive loss during the period the new information
becomes available.
Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees by reference
to the estimated 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 estimated 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.
Functional and presentation currency
Judgment is required to determine the functional currency of each entity. These judgments
are continuously evaluated and are based on management’s experience and knowledge of
the relevant facts and circumstances.
Impairment
Judgment is involved in assessing whether there is any indication that an asset or cash
generating unit may be impaired. This assessment is made based on the analysis of,
amongst other factors, changes in the market or business environment, events that have
transpired that have impacted the asset or cash generating unit, and information from
internal reporting.
Going concern
As referred to in the continuation of business note in the Interim Financial Statements,
management uses its judgment in determining whether the Company is able to continue as
a going concern. Refer to Note 1 of the Interim Financial Statements.
RISKS AND UNCERTAINTIES
The Company is subject to a number of risks and uncertainties that could significantly
impact 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 any 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 any properties held
by the Company, 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.
The Company’s business is the acquisition and exploration of mineral properties in the DRC.
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 licenses, permits, approvals and contracts,
taxation policies, foreign exchange and repatriation restrictions, changing political
conditions, international monetary fluctuations, currency controls and foreign governmental
regulations that favor or require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of, or purchase supplies from, a particular
jurisdiction. Changes, if any, in mining or investment policies or shifts in political attitude in
the DRC may adversely affect the Company's operations. Operations may be affected in
varying degrees by government regulations with respect to, but not limited to, restrictions
on production, price controls, export controls, currency remittance, income taxes, foreign
investment, maintenance of claims, environmental legislation, land use, land claims of local
people, water use and mine safety. Failure to comply strictly with applicable laws,
regulations and local practices relating to mineral rights could result in loss, reduction or
expropriation of entitlements. In addition, in the event of a dispute arising from operations
in the DRC, the Company may be subject to the exclusive jurisdiction of foreign courts or
may not be successful in subjecting foreign persons to the jurisdiction of courts in Canada.
The Company also may be hindered or prevented from enforcing its rights with respect to a
governmental instrumentality because of the doctrine of sovereign immunity. It is not
possible for the Company to accurately predict such developments or changes in laws or
policy or to what extent any such developments or changes may have a material adverse
effect on the Company's operations.
The DRC is a developing nation emerging from a period of civil war and conflict. Physical
and institutional infrastructure throughout the DRC is in a debilitated condition. The DRC is
in transition from a largely state-controlled economy to one based on free market
principles, and from a non-democratic political system with a centralized ethnic power base,
to one based on more democratic principles. There can be no assurance that these changes
will be effected or that the achievement of these objectives will not have material adverse
consequences for the Company and its operations. The DRC continues to experience
violence and significant instability in parts of the country due to certain militia and criminal
elements. While the government and United Nations forces are working to support the
extension of central government authority throughout the country, there can be no
assurance that such efforts will be successful.
As a mineral exploration company, Delrand 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 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 exploration and, if such exploration is successful, development of mineral 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:
Fair value hierarchy
The following table provides an analysis of financial instruments that are measured subsequent
to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the
fair value is observable:
- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in
active markets for identical assets or liabilities;
- Level 2 fair value measurements are those derived from inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either directly (i.e.
as prices) or indirectly (i.e. derived from prices); and
- Level 3 fair value measurements are those derived from valuation techniques that
include inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
There were no transfers between Level 1 and 2 during the reporting periods. The fair values of
financial assets and liabilities carried at amortized cost are approximated by their carrying
values.
b) Risk Management Policies
The Company is sensitive to changes in commodity prices and foreign-exchange
fluctuations. The Company’s Board of Directors has an 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 loss and comprehensive loss. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk. See Note 10(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.
e) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial
obligations as they become due. The Company attempts to ensure that there is sufficient
cash to meet its liabilities when they are due and manages this risk by regularly
evaluating its liquid financial resources to fund current and long-term obligations and to
meet its capital commitments in a cost-effective manner. The key to success in
managing liquidity is the degree of certainty in the cash flow projections. If future cash
flows are fairly uncertain, the liquidity risk increases. The Company’s liquidity
requirements are met through a variety of sources, including cash and 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 activities 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 investigates title to any mineral properties that it may
hold, the Company cannot give any assurance that title will not be challenged or
impugned and cannot be certain that it will have valid title to any mineral properties that
it may hold. 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 activities in the DRC could
be adversely affected by uncertain political or economic environments, war, civil or other
disturbances, a changing fiscal regime and by DRC’s underdeveloped industrial and
economic infrastructure.
The Company’s activities 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 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 sufficient 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 three months ended December 31, 2015.
Neither the Company nor its subsidiary is subject to externally imposed capital
requirements.
SEGMENTED INFORMATION
The Company has one operating segment: the acquisition and exploration of mineral
properties located in the DRC. The activities of the Company are located in two
geographic locations, Canada and the DRC. Geographic segmentation of non-current
assets is as follows:
As at December 31, 2015
Exploration and
evaluation Total Non-current Assets
DRC - -
Canada - -
As at June 30, 2015
Exploration and
evaluation Total Non-current Assets
DRC - -
Canada - -
$- $-
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance that all
relevant information is gathered and reported to senior management, including the
Company’s Chief Executive Officer and Vice President, Finance, on a timely basis so that
appropriate decisions can be made regarding public disclosure. As at June 30, 2015, the
Company's Chief Executive Officer and Vice President, Finance evaluated or caused to be
evaluated under their supervision the effectiveness of the Company’s disclosure controls
and procedures as required by Canadian securities laws. Based on that evaluation, the Chief
Executive Officer and Vice President, Finance concluded that, as of June 30, 2015, the
Company's disclosure controls and procedures were effective.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal controls have been designed to provide reasonable assurance regarding the
reliability of the Company’s financial reporting and the preparation of financial statements
together with the other financial information for external purposes in accordance with IFRS.
As at June 30, 2015, the Company’s Chief Executive Officer and Vice President, Finance
evaluated or caused to be evaluated under their supervision, the effectiveness of the
Company’s internal control over financial reporting as required by Canadian securities laws.
Based on that evaluation, the Chief Executive Officer and Vice President, Finance concluded
that, as of June 30, 2015, the Company’s internal control over financial reporting was
effective.
The Company is required under Canadian securities laws to disclose herein any change in
the Company’s internal control over financial reporting that occurred during the Company’s
most recent interim period that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting. No changes were identified in
the Company’s internal control over financial reporting during the six months ended
December 31, 2015, that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
It should be noted that a control system, including the Company’s disclosure and internal
controls and procedures, no matter how well conceived can provide only reasonable, but not
absolute, assurance that the objective of the control system will be met and it should not be
expected that the disclosure and internal controls and procedures will prevent all errors or
fraud.
Johannesburg
19 February 2016
Sponsor
Arbor Capital Sponsors Proprietary Limited
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