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Condensed Interim Consolidated Financial Statements for the 3 and 9 months ended 30 September 2017
BUFFALO COAL CORP.
Registration number: 001891261
External company registration number: 2011/011661/10
Share code on the TSX Venture Exchange: BUF
Share code on the JSE Limited: BUC
ISIN: CA1194421014
"Buffalo Coal" or "the Company"
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three and nine months ended September 30, 2017 and September 30, 2016
(Presented in South African Rands)
Condensed Interim Consolidated Statements of Financial Position
(Presented in South African Rands)
September 30, December 31, September 30,
2017 2016 2017
(Note 1)
Notes R R C$
Assets
Non-current assets
Property, plant and equipment 295 573 305 311 730 638 27 182 039
Investment in financial assets 6 127 428 41 633 486 11 719
Other receivables - restricted 8 49 569 820 - 4 558 628
Other receivables 4 027 336 4 032 570 370 369
Long-term restricted cash 11 200 000 11 200 000 1 029 994
Total non-current assets 360 497 889 368 596 694 33 152 749
Current assets
Trade and other receivables 116 105 891 84 773 344 10 677 537
Inventories 49 013 304 35 222 250 4 507 449
Non-interest bearing receivables 1 986 305 1 902 205 182 668
Cash and cash equivalents 12 000 260 13 753 934 1 103 589
Total current assets 179 105 760 135 651 733 16 471 243
Total assets 539 603 649 504 248 427 49 623 992
Equity and liabilities
Capital and reserves
Share capital 5 1 082 396 917 1 075 881 497 99 541 314
Currency translation reserve (219 945 085) (219 945 085) (20 226 982)
Reserves 12 563 385 13 308 821 1 155 376
Accumulated retained loss (1 127 890 965) (1 095 286 547) (103 725 119)
Equity (deficiency) attributable to owners of the company (252 875 748) (226 041 314) (23 255 411)
Non-controlling interest 4 339 142 4 339 142 399 044
Total equity (deficiency) (248 536 606) (221 702 172) (22 856 367)
Non-current liabilities
RCF loan facilities 341 733 807 336 288 222 31 427 133
Conversion option liability 6 20 403 354 31 905 346 1 876 370
Asset retirement obligation 28 594 037 26 694 012 2 629 616
Total non-current liabilities 390 731 198 394 887 580 35 933 119
Current liabilities
Trade and other payables 201 280 970 158 262 414 18 510 560
Current portion of borrowings 4 187 269 838 161 016 413 17 222 042
Warrant liability 6 246 616 344 627 22 680
Current tax liability 2 958 187 8 775 360 272 046
Current portion of asset retirement obligation 5 653 446 2 664 205 519 912
Current liabilities 397 409 057 331 063 019 36 547 240
Total liabilities 788 140 255 725 950 599 72 480 359
Total equity (deficiency) and liabilities 539 603 649 504 248 427 49 623 992
Commitments and contingencies 1, 7
Approved on behalf of the Board:
Signed, "Craig Wiggill" Signed, "Robert Francis"
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
Condensed Interim Consolidated Statements of Profit or Loss and Other Comprehensive Income
(Presented in South African Rands)
9 months 3 months 9 months
ended ended ended
September 30, September 30, September 30, September 30, September 30,
2017 2016 2017 2016 2017
(Note 1)
Notes R R R R C$
Revenue 509 359 751 476 694 980 183 493 596 178 147 500 46 842 649
Cost of sales (473 415 863) (469 615 196) (155 458 428) (166 689 813) (43 537 113)
Gross profit 35 943 888 7 079 784 28 035 168 11 457 687 3 305 536
Other income/(expense) - net 3 19 718 584 72 894 137 (25 139 000) (7 757 672) 1 813 396
General and administration expenses (50 464 331) (47 472 868) (17 822 907) (15 470 769) (4 640 891)
Profit/(loss) before the undernoted 5 198 141 32 501 053 (14 926 739) (11 770 754) 478 041
Finance income 1 469 870 1 138 573 426 790 327 563 135 175
Finance expense (38 458 504) (58 143 091) (15 663 983) (14 393 277) (3 536 789)
(Loss) before income tax (31 790 493) (24 503 465) (30 163 932) (25 836 468) (2 923 573)
Income tax (1 107 529) (1 644 787) - 300 674 (101 853)
(Loss) for the period (32 898 022) (26 148 252) (30 163 932) (25 535 794) (3 025 426)
Other comprehensive loss - - - - -
Total comprehensive (loss) for the period (32 898 022) (26 148 252) (30 163 932) (25 535 794) (3 025 426)
(Loss) attributable to:
- Owners of the parent (32 898 022) (26 148 252) (30 163 932) (25 535 794) (3 025 426)
- Non-controlling interest - - - - -
(32 898 022) (26 148 252) (30 163 932) (25 535 794) (3 025 426)
Net (loss) per share - basic and diluted (0.08) (0.08) (0.08) (0.07) (0.01)
Headline (loss) per share - basic and
diluted (0.08) (0.08) (0.07) (0.07) (0.01)
Weighted average number of common
shares outstanding:
- Basic 400 181 388 326 996 820 400 397 305 347 937 162 400 181 388
- Diluted 400 181 388 326 996 820 400 397 305 347 937 162 400 181 388
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
Condensed Interim Consolidated Statements of Changes in Equity
(Presented in South African Rands)
Attributable to owners of the Group
Reserves
Equity-
settled
non-
employee Currency Non-
No. of shares Share Option benefits BEE option Accumulated translation controlling Total equity
issued capital reserve reserve reserve retained loss reserve Total interest (deficiency)
Notes R R R R R R R R R
Balance at
December 31, 2015 280 729 049 1 038 096 502 7 653 184 - 9 073 711 (1 055 512 401) (219 945 085) (220 634 089) 4 339 142 (216 294 947)
Shares issued in
relation to RCF
convertible loan 57 000 240 19 600 805 - - - - - 19 600 805 - 19 600 805
Shares issued to STA 10 595 637 6 130 890 - - - - - 6 130 890 - 6 130 890
Stock-based
compensation - - 278 359 2 489 910 - - - 2 768 269 - 2 768 269
Stock options
expired/cancelled - - (3 772 999) - - 3 772 999 - - - -
Net loss for the
period - - - - - (26 148 252) - (26 148 252) - (26 148 252)
Balance at
September 30, 2016 348 324 926 1 063 828 197 4 158 544 2 489 910 9 073 711 (1 077 887 654) (219 945 085) (218 282 377) 4 339 142 (213 943 235)
Shares issued in
relation to RCF
convertible loan and
private placement
to RCF 41 909 400 9 563 390 - - - - - 9 563 390 - 9 563 390
Shares issued to STA 4 568 696 2 489 910 - - - - - 2 489 910 - 2 489 910
Stock-based
compensation - - (101 845) (314 620) - - - (416 465) - (416 465)
Stock options
expired/cancelled - - (1 996 879) - - 1 996 879 - - - -
Net loss for the
period - - - - - (19 395 772) - (19 395 772) - (19 395 772)
Balance at
December 31, 2016 394 803 022 1 075 881 497 2 059 820 2 175 290 9 073 711 (1 095 286 547) (219 945 085) (226 041 314) 4 339 142 (221 702 172)
Shares issued to STA 5 13 005 259 6 515 420 - - - - - 6 515 420 - 6 515 420
Stock-based
compensation - - 39 298 (491 130) - - - (451 832) - (451 832)
Stock options
expired/cancelled - - (293 604) - - 293 604 - - - -
Net loss for the
period - - - - - (32 898 022) - (32 898 022) - (32 898 022)
Balance at
September 30, 2017 407 808 281 1 082 396 917 1 805 514 1 684 160 9 073 711 (1 127 890 965) (219 945 085) (252 875 748) 4 339 142 (248 536 606)
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
Condensed Interim Consolidated Statements of Cash Flow
(Presented in South African Rands)
9 months
September 30, September 30, September 30,
2017 2016 2017
(Note 1)
R R C$
Cash flows from operating activities
Cash generated from operations 33 085 026 18 867 524 3 042 624
Interest received 1 469 870 1 138 573 135 175
Interest paid (16 147 558) (16 050 278) (1 484 991)
Taxation paid (7 234 476) (232 308) (665 310)
Net cash generated from operating activities 11 172 862 3 723 511 1 027 498
Cash flows from investing activities
Investment in financial assets (7 277 877) (3 838 737) (669 301)
Purchase of property, plant and equipment (27 604 559) (12 866 942) (2 538 620)
Proceeds from the disposal of property, plant and equipment 540 000 6 053 49 660
Movement in non-interest bearing receivables (84 100) (176 379) (7 734)
Net cash (utilized in) investing activities (34 426 536) (16 876 005) (3 165 995)
Cash flows from financing activities
Drawdowns from working capital facility 21 500 000 25 000 000 1 977 222
Repayment of working capital facility - (6 766 800) -
Repayment of term loan - (7 500 000) -
Net cash generated from financing activities 21 500 000 10 733 200 1 977 222
Net decrease in cash and cash equivalents (1 753 674) (2 419 294) (161 275)
Cash and cash equivalents at the beginning of the period 13 753 934 20 365 446 1 264 864
Cash and cash equivalents at the end of the period 12 000 260 17 946 152 1 103 589
The accompanying notes are an integral part of the condensed interim consolidated financial statements.
Notes to the Condensed Interim Consolidated Financial Statements
For the periods ended September 30, 2017 and September 30, 2016
(Presented in South African Rands)
1. BASIS OF PREPARATION
The unaudited condensed interim consolidated financial statements (the "Interim Results") of Buffalo Coal Corp. ("BC Corp" or the "Company")
and its subsidiaries (the "Group") for the periods ended September 30, 2017 and September 30, 2016 have been prepared in accordance with the
recognition and measurement criteria of 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 and are in compliance with IAS 34, Interim Financial Reporting. These Interim
Results were approved and authorized for issue by the Board of Directors on November 8, 2017.
The Interim Results have not been audited by the Group's external auditors. The Interim Results do not include all the information and
disclosures required in the consolidated annual financial statements and should be read in conjunction with the Group's consolidated annual
financial statements for the year ended December 31, 2016, which have been prepared in accordance with IFRS. The Group has adopted the required
new or revised accounting standards in the current period, as further set out in note 2 below, none of which had a material impact on the
Group's results.
The preparation of the Interim Results requires management to make judgments, estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities, income and expenses. In preparing these Interim Results, the significant judgments
made by management in applying the Group's accounting policies and the key sources of estimation and uncertainty were the same as those applied
to the consolidated annual financial statements for the year ended December 31, 2016.
References to "R", "Rands" mean South African Rands, "C$" mean Canadian Dollars and to "US$" mean United States Dollars. References to
Q3 2017 mean the 3 months ended September 30, 2017.
Going Concern
The Interim Results have been prepared on the basis of accounting principles applicable to a going concern, which assume that the Group 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. In prior years, in response to conditions at the time, the Group implemented various restructurings at Buffalo Coal Dundee (Pty)
Ltd ("BC Dundee") including two retrenchment processes and the conclusion of agreements with STA Coal Mining Company Proprietary Limited ("STA").
The arrangements with STA include the provision of contract mining services by STA at Magdalena ("STA Contract Mining Agreement"), the sale of
certain underground mining equipment to STA and an equity settlement arrangement ("STA Equity Settlement Agreement") in terms of which a portion
of the contract mining fees will be settled through the issuance of common shares of the Company ("Common Shares"), in order to alleviate cash flow
pressures. In addition, the Company secured additional funding from Resource Capital Fund V L.P. ("RCF") and Investec Bank Limited ("Investec") in
December 2015, of which the last tranche was drawn in March 2016. During Q2 2017, Investec agreed to release R22.0 million of undrawn Working
Capital Facility funds, which was subject to agreement being reached on the revised terms and conditions to the term loan and revolving credit
agreement (refer to note 4). Although the Group has implemented various restructuring initiatives, the Group continues to experience operational
challenges. The Group remains dependent upon sustaining profitable levels of operation, as well as the continued support of Investec, RCF and other
stakeholders and believes that subject to its ability to meet current forecasts, it should be able to generate positive cash flows in the foreseeable
future. The Company is in the process of negotiating further amendments to the term loan and revolving credit agreement with Investec.
As at September 30, 2017, the Company had a shareholders' deficiency of R248.5 million (December 31, 2016: R221.7 million), a working capital
deficiency of R212.7 million (December 31, 2016: R192.7 million) and for the nine month period ended September 30, 2017, had a net loss of
R32.9 million (September 30, 2016: loss of R26.1 million). The Group continues to be in breach of certain covenants with respect to its borrowings
from Investec at September 30, 2017. The Company was in default of the scheduled R7.5 million repayments of the term loan facility at March 31, 2017,
June 30, 2017 and September 30, 2017, and default notices were received from Investec in this regard as well as the breach in covenants. On
November 22, 2016, Investec provided a forbearance letter stating that it does not intend to exercise its rights to request early payment of the
outstanding debt; however, no waiver has been provided and Investec has reserved its right to review this decision periodically, with no obligation
to keep the Company advised in this regard. There is no assurance that the Company will be able to meet its covenants in the future, or that
Investec will provide future waivers, if required. These matters constitute material uncertainties which cast significant doubt as to whether
the Group can continue as a going concern.
If the going concern assumption was not appropriate for the Interim Results of the Group then adjustments would be necessary to the carrying
values of assets and liabilities, the reported revenues and expenses and the statement of financial position classifications. Such adjustments
could be material.
Convenience rate translation
The Company's functional and presentation currency is Rands. The Canadian Dollar amounts provided in the Interim Results represent supplementary
information solely for the convenience of the reader. The financial position as of September 30, 2017 and the financial results for the nine months
period ended September 30, 2017 were translated into Canadian Dollars using a convenience translation at the rate of C$1:R10.8739, which is the
exchange rate published on Oanda.com as of September 30, 2017. Such presentation is not in accordance with IFRS and should not be construed as
a representation that the Rand amounts shown could be readily converted, realized or settled in Canadian Dollars at this or at any other rate.
2. NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS
The following standards, amendments and interpretations are issued and effective for the first time for the 9 months ended September 30, 2017:
IAS 7 - Disclosure Initiative
The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising
from financing activities. The amendment did not have a significant impact on the Group.
IAS 12 - Recognition of Deferred Tax Assets for unrealized losses
The amendments were issued to clarify the requirements for recognising deferred tax assets on unrealised losses. The amendments clarify the
accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset's tax base. They also clarify
certain other aspects of accounting for deferred tax assets.
The amendments clarify the existing guidance under IAS 12. They do not change the underlying principles for the recognition of deferred tax
assets. The amendment did not have a significant impact on the Group.
3. OTHER INCOME/(EXPENSE) - NET
9 months 3 months 9 months
ended ended ended
September 30, September 30, September 30, September 30, September 30,
2017 2016 2017 2016 2017
(Note 1)
R R R R C$
Fair value adjustment on financial assets 2 044 681 1 292 108 1 217 576 135 029 188 037
Fair value adjustment on conversion option
and warrant liability 11 702 863 86 901 627 (12 346 063) 21 794 537 1 076 240
Loss on extinguishment of debt - (50 647 288) - (50 647 288) -
Other income 2 534 568 2 631 902 (25 987) 1 111 280 233 088.46
19 718 584 72 894 137 (25 139 000) (7 757 672) 1 813 396
4. INVESTEC BORROWINGS
On December 2, 2015, BC Corp closed a second amended and restated term loan and revolving credit facility with Investec ("Second Amended Investec
Agreement"), whereby Investec agreed to extend BC Dundee's working capital facility from R30.0 million to R80.0 million, comprising two tranches
of R25.0 million each. The conditions to the first and second tranche were fulfilled and drawn in December 2015 and March 2016 respectively.
On December 18, 2015, BC Dundee entered into a third amendment to the Investec loan agreement ("Third Amendment"), in terms of which the repayment
schedule for the term loan facility was replaced with a new schedule with principal repayments commencing on March 31, 2016.
Due to continued cash constraints, Investec was approached during the first quarter of 2016 for a deferral of the term loan facility repayment
due on March 31, 2016. On March 31, 2016, BC Dundee entered into a fourth amendment to the Investec term loan and revolving credit agreement
("Fourth Amendment") in terms of which the repayment schedule for the term loan facility was replaced with a new schedule with principal
repayments commencing on June 30, 2016.
In addition, surplus cash at each quarter-end in excess of R30.0 million will be used to reduce the R80.0 million working capital facility back
to R30.0 million and a clause was included restricting outflows of funds from BC Dundee to BC Corp between April 1, 2016 and June 30, 2016,
unless prior written consent was obtained from Investec. To date, no cash has been swept to reduce the working capital facility.
Investec was again approached for a deferral of the term loan facility repayment due on June 30, 2016. On June 30, 2016, BC Dundee entered into
a fifth amendment to the term loan and revolving credit agreement ("Fifth Amendment") in terms of which the repayment schedule for the term loan
facility was replaced with a new schedule with principal repayments commencing on September 30, 2016. Investec extended the restriction on the
outflows of funds from BC Dundee to BC Corp to September 30, 2016, unless prior written consent was obtained from Investec.
On each of September 30, 2016 and December 31, 2016 the Company made the term loan facility repayments of R7.5 million.
The Magdalena mine current LOM has a main development panel, which is Panel 417. Drilling results in Panel 417 revealed a dyke of 22 meters thick,
with a 13.5 meter down-throw. In terms of the life of mine planning for Magdalena, the mine had to develop through this dyke in order to access
the LOM block towards South-West of the reserves, to establish additional pit-room. Funding was required for this development, and Investec was
approached to make the undrawn R22.0 million Working Capital Facility available for this purpose.
On April 13, 2017, BC Dundee entered into a sixth amendment to the term loan and revolving credit agreement and the undrawn working capital
facility balance was made available for drawdown. The terms of the sixth amendment, all of which were put in place, were as follows:
- Investec will release the R22.0 million as working capital for the purpose of ensuring the Panel 417 project is completed timeously.
- The Panel 417 project implementation shall be reviewed and its completion verified by a Project Oversight Committee appointed by Investec.
The Panel 417 project was successfully completed on time and in budget to investec's satisfaction.
- Investec will review the terms and conditions of the facility after July 14, 2017, with a view to agreeing terms and conditions of an
extension of the final maturity date for a period of no less than 2 years, subject to the project having been successfully completed to Investec's satisfaction.
Since the project was completed successfully, the Company is now in the process of negotiating the 7 th amendment to the term loan and revolving credit agreement.
- Investec agreed to not exercise its rights arising from events of default until July 14, 2017, and also hasn't done so as of the date of these
Interim Results.
- A Life of Mine Royalty ("LOMR") shall be payable to Investec on all bituminous coal sales with effect from July 1, 2017, calculated at a rate
of 3.54% on all bituminous coal sold which was mined from the Magdalena reserve.
- If all amounts owing under the facility are paid on or before June 30, 2018, the Company shall pay Investec a fee equal to the greater of the
aggregate amount of the LOMR which was payable until the date of repayment, and R22.0 million, minus the aggregate amount of the LOMR which
was paid to Investec up to that date. The LOMR shall be terminated if the facilities are fully repaid before June 30, 2018.
As of the date of these Financial Statements, the Company has drawn R79.3 million (excluding R1.2 million interest owing at quarter end) from the
working capital facility.
BC Dundee was required to meet specified debt covenants at March 31, 2017 June 30, 2017 and September 30, 2017 and was in breach of certain of
these covenants at these dates. Such breach constitutes an event of default under the debt agreement whereby Investec is entitled to request
early payment of the outstanding debt. On November 22, 2016, Investec provided a forbearance letter stating that it does not intend to exercise
its rights to request early payment of the outstanding debt; however, it has reserved its right to review this decision periodically, with no
obligation to keep the Company advised in this regard.
Due to continued cash constraints, the scheduled R7.5 million repayments of the term loan facility were not made on March 31, 2017, June 30,
2017 and September 30, 2017, constituting an event of default.
Due to Investec being entitled to request early payment of the outstanding debt, as a result of the breach in covenants referred to preceding,
management has determined that the total Investec debt of R187.5 million be classified as current borrowings.
The Company is in the process of negotiating the 7th amendment to the term loan and revolving credit agreement. The 7th amendment is expected
to provide for temporary waiver of breaches in Financial Covenants and temporary deferral of capital repayments.
5. ISSUANCE OF COMMON SHARES TO STA
On February 22, 2017, June 13, 2017 and September 20, 2017, the Company issued Common Shares to STA pursuant to the STA Equity Settlement
Agreement entered into during the financial year ended December 31, 2015. An additional 4 286 908, 4 424 148 and 4 294 203 Common Shares
were issued at C$0.05 (February 22, 2017: R0.50, June 13, 2017: R0.48 and September 20, 2017:R0.54).
6. FINANCIAL INSTRUMENTS AT FAIR VALUE
The following table presents the group's financial assets and liabilities that are measured at fair value at September 30, 2017 and
December 31, 2016:
Level 1 Level 2 Level 3
R R R
September 30, 2017
Investment in financial assets 127 428 - -
Conversion option liability - 20 403 354 -
December 31, 2016
Investment in financial assets 41 633 486 - -
Conversion option liability - 31 905 346 -
Warrant liability - 344 627 -
On July 3, 2014, BC Dundee finalized a restructuring of the Investec loan facilities ("First Amended Investec Agreement"). In connection
with the First Amended Investec Agreement, Investec subscribed for 34 817 237 warrants in the Company with a strike price of C$0.1446,
the proceeds of which, if exercised, will be applied against settlement of the Investec five-year senior secured loan facility of
R50.0 million (the "Bullet Facility"). RCF has the right to acquire the warrants from Investec at agreed pricing until July 3, 2019.
The Bullet Facility and the warrants have been treated as a compound financial instrument, as the Bullet Facility could effectively be
settled through the issuance of Common Shares. Furthermore, an embedded derivative exists due to the warrants being denominated in Canadian
Dollars and the functional currency of the Company being Rands. The Bullet Facility has been recognized in two parts, a component liability
and a warrant liability. The component liability will be accreted to its face value of R40.5 million using the effective interest rate method
at approximately 35.5%.
The initial carrying value of the warrant liability was obtained using the Black-Scholes option pricing model and the following assumptions:
expected volatility of 100%, life of 5.0 years, risk-free interest rate of 1.71%, share price of C$0.095 and an expected dividend yield of 0%.
The fair value of the warrant liability at September 30, 2017 was obtained using the Black-Scholes option pricing model and the following
assumptions: expected volatility of 92.4% (based on historical volatility in the share price), life of 1.8 years, risk-free interest rate
of 1.6%, share price of C$0.015 and an expected dividend yield of 0% (year ended December 31, 2016: expected volatility of 83.9%, life of
2.5 years, risk-free interest rate of 0.8%, share price of C$0.015 and an expected dividend yield of 0%).
The RCF Convertible Loan has been recognized in two parts, a component liability and a conversion option liability. An embedded derivative
exists due to the convertible loan facility being denominated in US Dollars, the conversion feature being exercisable in Canadian Dollars and
the functional currency being Rands. The component liability will be accreted to its face value of US$27.0 million (approximately R366.2 million)
(year ended December 31, 2016: US$27.0 million (approximately R371.0 million)) using the effective interest rate method at approximately 5.3%
(year ended December 31, 2016: 5.3%).
The initial carrying value of the conversion option liability at each advance was obtained using the Black-Scholes option pricing model and the
following assumptions: expected volatility between 51% and 107% (based on historical volatility in the share price), life of between 3.9-5.0
years, risk-free interest rate of 0.5%-1.5%, share price of between C$0.035-C$0.095 and expected dividend yield of 0%.
The fair value of the conversion option liability at September 30, 2017 was obtained using the Black-Scholes option pricing model and the following
assumptions: expected volatility of 89.7% (based on historical volatility in the share price), life of 1.8 years, risk-free interest rate of 1.6%,
share price of C$0.015 and expected dividend yield of 0% (year ended December 31, 2016: expected volatility of 90.8%, life of 2.5 years, risk-free
interest rate of 0.8%, share price of C$0.015 and expected dividend yield of 0%).
7. COMMITMENTS AND CONTINGENCIES
Director Agreement
An agreement with a director requires that payment of approximately R3.3 million be made upon the occurrence of a change of control, other than a
change of control attributable to RCF. As no triggering event has taken place, no provision has been recognised as of September 30, 2017.
STA Contract Mining Agreement
In terms of the STA Contract Mining Agreement, STA is mining at Magdalena at a fixed contract mining fee per tonne, effective October 31, 2015.
The STA Contract Mining Agreement has a three year term, and the option for a further two year extension if agreed to by all parties. In terms
of the STA Equity Settlement Agreement, a portion of the contract mining fees will be settled in Common Shares, in order to alleviate cash flow
pressures.
The STA Contract Mining agreement can be terminated on 60 days notice for which period the Company will be liable for payment for the tonnes
mined at the fixed rate per tonne.
Capital Commitments
Capital expenditures contracted for at the statement of financial position date but not recognized in the Interim Results are as follows:
September 30, December 31, September 30,
2017 2016 2017
Property, plant and equipment 9 143 109 2 919 134 840 835
In terms of Regulation 8.10 of the Mine Health and Safety Act, 29 of 1996 Regulations, the Company is required to take reasonably
practicable measures to ensure that pedestrians are prevented from being injured as a result of collisions between trackless mobile machines
and pedestrians, by way of the installation of proximity devices on specified machines. The Company is currently investigating its options
in this regard. The Company has proposed the phase in of such devices over a five year period.
Environmental and Regulatory Contingency
The Company's mining and exploration activities are subject to various laws and regulations governing the environment and mine operations.
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 continue to
comply with such laws and regulations.
Effective November 20, 2015, regulations governing financial provisions for asset retirement obligations was transitioned from the Mineral
and Petroleum Resources Development Act ("MPRDA") to the National Environmental Management Act ("NEMA"). There is currently substantial
uncertainty regarding the revised requirements for financial provisions pursuant to NEMA. Management is currently seeking clarification of the
revised requirements in order to determine the expected impact of the change, which may result in a significant increase to the asset retirement
obligation. One of the key changes in the requirements is that closure cost assessment now has to be based on a "Sudden Closure" assessment and
third party rates whereas pursuant to the MPRDA, it was based on the end of mine life and prescribed rates. Uncertainty exists around the
transitional arrangements although the implementation date of the new Act is expected to be February 20, 2019.
Outstanding Legal Proceedings
On April 20, 2015, the trustees of the Avemore Trust brought an application in the High Court of South Africa against, among others, the
South African Minister of Mineral Resources ("the Minister"), BC Dundee and Zinoju in respect of Mining Right 174 ("MR174"). In terms of the
application, the trustees of the Avemore Trust challenged the decision by the Minister, subsequent to an internal appeal process concluded
during September 2014, to grant a converted mining right to BC Dundee and to grant consent for the cession of the converted mining right
to Zinoju. Settlement was reached between the parties on May 25, 2017, and the application is now expected to be withdrawn by the Avemore
Trust. While this is expected to occur by mid-December of 2017 at the latest, it has not occurred as of the date of the approval of these
financial statements.
On August 27, 2015, notice was received from the Minister that Mining Right 301 ("MR301") had been withdrawn together with the approval by
the Regional Manager of the Environmental Management Plan in respect of MR301 (the "Ministerial Decision"). The reasons given by the Minister
for the Ministerial Decision are procedural issues in respect of the award process, in relation to an objection received from Avemore Trust in
October 2013 against the awarding of the right. On September 15, 2015, an urgent court order was granted, pending final determination, for the
Ministerial Decision to be of no force and effect, to interdict the Minister from awarding MR301 to any other party and for the Company to
continue to mine in terms of MR301. A review application was instituted by the Company in October 2015 to obtain final relief in the form of
an order setting aside the Ministerial Decision. On March 23, 2016, Avemore Trust filed a counter application for the Ministerial Decision to
be remitted for consideration by the Minister. Settlement was reached between the parties on May 25, 2017, and the application is now
expected to be withdrawn by the Avemore Trust. While this is expected to occur by mid-December of 2017 at the latest, it has not occurred as
of the date of the approval of these financial statements.
Settlement with the Avemore Trust was reached on the following terms:
- R2.0 million on settlement of historic issues as well as an additional R280 thousand (being VAT on the amount of R2.0 million).
- 17.5k litres of water to be stored to allow the continued use of the borehole on the property.
- R2.50/tonne on future production, subject to a minimum monthly amount of R25 thousand per month.
South African Revenue Service ("SARS") Correspondence
During the year ended December 31, 2016, BC Dundee received a letter of demand from SARS with regards to an investigation conducted by them
on diesel refunds claimed by BC Dundee under the South African Customs and Excise Act, 91 of 1964. As per the notification, the SARS Commissioner
has disallowed diesel refunds in the amount of R14.7 million (including interest and penalties) for the period December 2012 to February 2016.
The Company applied to SARS to suspend payment, however this request was denied. As per a request received from SARS, payment was made in three
equal instalments of R4.9 million between March 2017 and May 2017. The Company has requested an Alternative Dispute Resolution ("ADR") to defend
its case, however SARS responded that the case isn't suited for ADR, and should be referred to the High Court. The Company has decided not to pursue
the case in the High Court.
During the year ended December 31, 2016, Zinoju received correspondence from SARS after conducting an audit of the 2012 to 2014 tax returns,
disallowing an expense claimed in the 2012 tax return. The total exposure is approximately R3.0 million plus penalties of R1.5 million and interest
of R1.9 million. The Company raised an objection to SARS disputing the penalties and interest levied, however the objection was disallowed. The
Company then lodged an appeal to the SARS Commissioner to defend its case. During Q3 2017, notice was received from SARS that the appeal had been
referred to an ADR hearing. The hearing was held during September 2017, but the SARS Commissioner ruled against the Company. During August and
September 2017, SARS advised that they have offset VAT refunds of R6.4 million due to Zinoju against this tax liability. As a result, the liability
has been settled in full.
8. RESTRUCTURING OF INVESTMENTS
Following the transition of financial provisions for asset retirement obligations to NEMA, Zinoju performed a closure cost assessment for
financial provisions based on sudden closure, which resulted in a shortfall between the Trust investment balance and the closure cost
assessment. This triggered a review of the structure of the financial provisions in Zinoju.
After careful consideration of the alternative structures, it was proposed that Zinoju amend their method of financial provisioning from a
Trust fund method to an Insurance solution. The ultimate goal is to ensure that Zinoju provide the DMR with the required financial guarantees
for the mining rehabilitation liability calculated in terms of NEMA.
The Company have now completed the restructuring and provided the DMR with the required guarantee of R63.0 million. Zinoju was required to make
an additional R4.1 million (excluding VAT) cash contribution in July 2017 to the insurance facility, which increased the investment to
R49.6 million. The existing 37A Trust funds of R49.6 million was dissolved and the funds transferred to Centriq Insurance Company limited
("Centriq") during August 2017. The shortfall of R13.4 million will be funded over the Life of Mine through the growth in the investment,
resulting in no further cash contributions required for the R63.0 million financial guarantees issued to the DMR, provided there are no changes
to the closure cost liability.
The funds have been reclassified as 'other receivables - restricted' for accounting purposes due to the fact that the funds will always revert
to Zinoju for rehabilitation purposes.
9. SUBSEQUENT EVENTS
Other Matters
Except for the matters discussed above, no other matters which management believes are material to the financial affairs of the Company have
occurred between the statement of financial position date and the date of approval of the Interim Results.
November 9, 2017
Designated Adviser: Questco Corporate Advisory Proprietary Limited
Date: 09/11/2017 04:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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