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Managements Discussion and Analysis for the three and nine 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"RP.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS - QUARTERLY HIGHLIGHTS
For the three and nine months ended September 30, 2017 (Presented in South African Rands)
BASIS OF PREPARATION
The following Management's Discussion and Analysis ("MD&A") relates to the financial condition and results of
operations of Buffalo Coal Corp. and its subsidiaries ("we", "our", "us", "BC Corp", the "Company" or the "Group") for
the three and nine months ended September 30, 2017 and should be read in conjunction with the audited annual
consolidated financial statements for the years ended December 31, 2016 and December 31, 2015, the
Management's Discussion and Analysis for the year ended December 31, 2016 and the unaudited condensed interim
consolidated financial statements for the three and nine months ended September 30, 2017. The condensed interim
consolidated financial statements ("Interim Results") and related notes have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and are in compliance with IAS 34, Interim Financial Reporting.
Certain non-IFRS measures are discussed in this Interim MD&A which are clearly disclosed as such. Additional
information and press releases have been filed electronically through the System for Electronic Document Analysis
and Retrieval ("SEDAR") and are available online under the Buffalo Coal Corp. profile at www.sedar.com.
This Interim MD&A reports our activities through November 8, 2017 unless otherwise indicated. References to
FY2017 refer to the financial year ending December 31, 2017 and FY2016 refers to the financial year ended December
31, 2016. References to Q4 2017, Q3 2017, Q2 2017 and Q1 2017 mean the three months ended December 31, 2017,
September 30, 2017, June 30, 2017 and March 31, 2017 and Q4 2016, Q3 2016, Q2 2016 and Q1 2016 refer to the
three months ended December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, respectively.
Unless otherwise noted all amounts are recorded in South African Rands ("R" or "Rands"). References to "C$" mean
Canadian Dollars and to "US$" mean United States Dollars. Amounts stated in Canadian Dollars or US Dollars are
translated at the date of transaction, unless otherwise stated. These other amounts stated in Canadian Dollars were
translated at C$1:R10.8739 and amounts in US Dollars were translated at US$1:R13.5618.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Interim MD&A contains forward-looking information under Canadian securities legislation. Forward-looking
information includes, but is not limited to, information with respect to the Company's expected production from, and
further potential of, the Company's properties; financial and operational planning and strategic goals; the Company's
ability to raise additional funds; the timing and amount of advances under existing loan facilities; the future price of
minerals, particularly coal and overall market conditions for resource issuers; the estimation of mineral reserves and
mineral resources; conclusions of economic evaluations; the realization of mineral reserve estimates; the timing and
amount of estimated future production; costs of production; capital expenditures; success of exploration activities;
mining or processing issues; currency exchange rates; government regulation of mining operations; labour relations
and future collective agreements; and environmental risks. In general, forward-looking information can be identified
by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "budget", "scheduled",
"estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words
and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken",
"occur" or "be achieved". Forward-looking information is based on the opinions, estimates and assumptions of
management as of the date such statements are made and the Company can give no assurance that such opinions,
estimates and assumptions are correct. Estimates regarding the anticipated timing, amount and cost of exploration,
development and production activities are based on assumptions underlying mineral reserve and mineral resource
estimates and the realization of such estimates. Capital and operating cost estimates are based on extensive research
of the Company, purchase orders placed by the Company to date, recent mining costs and other factors.Forward-
looking information involves known and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking information. Such factors include: risks
relating to the requirement for additional capital; production estimate risks; the price of coal; labour and
employment risks; cost estimate risks; mineral legislation risks; title to mineral holdings risks; power supply risks; risks
relating to the depletion of mineral reserves; litigation risks; South Africa country risks; infrastructure risks;
environmental risks and other hazards; risks relating to dependence on key personnel; dependence on outside
parties; exploration and development risks; risks relating to foreign mining tax regimes; insurance and uninsured
risks; competition risks; the Company's securities may experience price volatility; risks relating to owning foreign
assets; currency fluctuation risks; and the Company's directors and officers may have conflicts of interests. Although
management of the Company has attempted to identify important factors that could cause actual results to differ
materially from those contained in forward-looking information, there may be other factors that cause results not to
be as anticipated, estimated or intended. There can be no assurance that such information will prove to be accurate,
as actual results and future events could differ materially from those anticipated in such information. Accordingly,
readers should not place undue reliance on forward-looking information. The Company does not undertake to update
any forward-looking information, except in accordance with applicable securities laws.
OVERVIEW OF THE COMPANY
BC Corp is a coal mining and supply company operating in South Africa. The Company is listed on the TSX Venture
Exchange ("TSXV") and the Alternative Exchange ("AltX") operated by the JSE. BC Corp trades under the symbol
"BUF" on the TSXV and "BUC" on the AltX.
The Company owns 100% of the shares in Buffalo Coal Dundee Proprietary Limited ("BC Dundee"), a South African
company, with an interest in two operating coal mines in South Africa ("BC Dundee Properties"). The BC Dundee
Properties comprise the Magdalena bituminous mine ("Magdalena") and the Aviemore anthracite mine ("Aviemore").
BC Dundee's Magdalena opencast operation reached the end of its life in March 2015 and the Group is now engaged
only in underground coal mining. BC Dundee indirectly holds a 70% interest in the BC Dundee Properties through its
70% interest in Zinoju Coal Proprietary Limited ("Zinoju"), which holds all of the mineral rights with respect to the BC
Dundee Properties. The remaining 30% interest in Zinoju is held by South African Black Economic Empowerment
("BEE") partners.
OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP
Markets
The Group supplies high energy bituminous coal and anthracite to both the export and domestic markets.
The Group has continued to utilize allocation in Richards Bay Coal Terminal ("RBCT") under the Quattro scheme for
Q3 2017.
Most export sales are structured on an FCA basis.
The overall outlook for 2017 is still very positive for both the bituminous and anthracite sectors of the business, with
both demand and pricing remaining healthier than during 2016.
Bituminous
The API4 coal index remains persistently in backwardation. Nevertheless, there is significant support in the market
keeping the short term index running in the low USD90's.
Most group export bituminous sales for 2017 have been fixed in Rand for relatively short periods, guaranteeing cash
flow in local currency.
Domestically, the bituminous market remains fairly stable in volume terms, with little variation predicted for 2017. A
shortage of sized coal persists in the domestic markets, resulting in continued upward pressure on pricing.
Anthracite
Anthracite's use as a source of carbon reductant in metallurgical processes means that the market, both domestically
and for export, does not correlate well with movements in the steam coal markets. Settlements for anthracite
supplies are therefore on an individually negotiated basis, with no real reference pricing available.
2017's anthracite demand remains strong, and all planned production is committed with only very small quantities
available for ad hoc agreements.
Investec funding
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 7th 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 this Interim MD&A, 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.
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.
Aviemore adit feasibility study
Based on the current Life of Mine model, the Aviemore mine has sufficient resources to support a mine life in excess
of 15 years. The current adit provides access to the reserves from the eastern side of the mine and is expected to
reach its limits with regards to ventilation and power supply during the next 18 to 24 months. As a result, a new adit
closer to the centre of gravity of the resource is being considered. The pre-feasibility study was successfully
completed during Q3 2017, and the bankable feasibility study has commenced and is expected to be completed by
March 2018.
Restructuring of Investments
Following the transition of financial provisions for asset retirement obligations to National Environmental
Management Act "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 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.
CONSOLIDATED OPERATIONAL RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2017 AND SEPTEMBER 30,
2016
The operational highlights for the quarter ended September 30, 2017 compared to the quarters ended September 30,
2016 and June 30, 2017 are presented below. The Group achieved run of mine ("ROM") production (excluding buy-in
tonnes) of 319 kilotonne ("kt"), saleable production (excluding calcine) of 209kt and sales of 232kt for the quarter
ended September 30, 2017.
9 months ended 3 months ended
September 30, September 30, September 30, September 30, June 30,
Operational results 2017 2016 2017 2016 2017
ROM (t) 1 051 537 1 194 174 327 821 401 440 363 389
- Aviemore (t) 367 943 366 079 141 029 121 342 120 852
- Anthracite (t) (bought-in) 14 058 - 7 225 - 4 944
- Magdalena (t) 626 252 828 095 178 204 280 098 212 354
- Bituminous (t) (bought-in) 43 284 - 1 363 - 25 239
Saleable production (excluding calcine) (t) 593 219 726 656 208 978 248 660 189 739
- Anthracite (t) 233 354 265 912 97 704 83 384 69 663
- Anthracite (t) (bought-in) 8 897 - 4 220 - 3 138
- Bituminous (t) 320 280 460 744 106 096 165 276 98 307
- Bituminous (t) (bought-in) 30 688 - 958 - 18 631
Yield on plant feed (excluding calcine) (%) 56.9% 60.5% 62.8% 62.2% 53.6%
- Anthracite (%) 64.8% 70.0% 68.5% 69.0% 60.0%
- Anthracite (%) (bought-in) 63.3% - 58.4% - 63.5%
- Bituminous (%) 51.3% 56.6% 58.5% 59.3% 47.3%
- Bituminous (%) (bought-in) 70.9% - 70.3% - 73.8%
Sales (t) 555 845 673 460 194 950 247 200 170 193
- Anthracite (t) 178 632 225 423 73 797 86 131 49 342
- Bituminous (t) 346 675 430 949 111 716 152 206 114 141
- Calcine (t) 30 538 17 088 9 437 8 863 6 710
Anthracite discard sales (t) 101 360 - 36 847 - 25 558
Saleable inventory tons 88 800 80 038 88 800 80 038 75 223
- Anthracite (t) 79 416 69 413 79 416 69 413 55 837
- Bituminous (t) 8 092 9 708 8 092 9 708 12 785
- Calcine (t) 1 292 917 1 292 917 6 601
An analysis of the operational results for year to date ("YTD") and quarter ended September 30, 2017 compared to
the YTD and quarter ended September 30, 2016 is discussed below:
ROM Production
Total ROM production (excluding buy-in tonnes) for YTD to the end of September 2017 was 994kt compared to
1 194kt produced in YTD 2016, a decrease of 16.8%.
Total ROM production (excluding buy-in tonnes) for Q3 2017 was 319kt compared to 401kt produced in Q3 2016, a
decrease of 20.4%.
ROM production from Magdalena underground for YTD and Q3 2017 was 626kt and 178kt compared to 828kt
and 280kt produced in YTD and Q3 2016, a decrease of 24.4% and 36.4% respectively. The decrease in tonnes
is as a result of difficult geological mining conditions and pit-room constraints encountered during the current
year . During Q3 2017 one section moved into Panel 417, with more sections expected to move as pit-room is
created in this panel. Due to a lack of pit-room, section 4 was temporarily closed towards the end of Q3 2017,
and will commence production again as pit-room is created in Panel 417.
ROM production from Aviemore for YTD and Q3 2017 was 368kt and 141kt compared to 366kt and 121kt produced in
YTD and Q2 2016, an increase of 0.5% and 16.5% respectively. Further to the good production for the quarter, the
team needs to be congratulated for the second best extraction for the mine ever achieved during August 2017.
The Company also secured the buy-in of bituminous and anthracite ROM from other mines in the area. A total of
43kt and 14kt was bought-in YTD for bituminous and anthracite respectively.
Saleable Production
Saleable coal production for YTD and Q3 2017 was 593kt and 209kt (excluding calcine) compared to 727kt and 249kt
for YTD and Q3 2016, a decrease of 18.4% and 16.1%, which is in line with the decrease in ROM achieved. The
decrease was partially offset by additional coal bought-in during the year.
Saleable calcine product was 28.2kt and 3.2kt for YTD and Q3 2017, compared to 15.6kt and 7.7kt for YTD and Q3
2016, an increase of 80.7% for YTD and a decrease of 58.4% for Q3 2017 respectively. The YTD increase is primarily as
a result of market demand. During Q3 2017, the calcine plant was on stop for two months during the quarter due to
planned maintenance to the plant. It is expected that the plant will be operational again mid-November 2017.
The total calculated yield from plant feed was 56.9% and 62.8% for YTD and Q3 2017 compared to 60.5% and 62.2%
for YTD and Q3 2016.
Sales
Total sales of bituminous coal and anthracite products for YTD and Q3 2017 were 556kt and 195kt compared to 673kt
and 247kt sold in YTD and Q3 2016, a decrease of 17.4% and 21.1% respectively. This decrease is mainly as a result of
higher bituminous sold during 2016 because of higher production.
Bituminous sales for YTD and Q3 2017 were 347kt and 112kt, of which 46.0% and 40.8% were export sales and 54.0%
and 59.2% were domestic sales respectively, compared to 431kt and 152kt sold in YTD and Q3 2016 of which 56.4%
and 54.6% were export sales and 43.6% and 45.4% were domestic sales, a decrease of 19.5% and 26.3% in line with
the decrease in bituminous saleable production.
Anthracite sales (including calcine) for YTD and Q3 2017 were 209kt and 83kt, of which 64.4% and 66.6% were export
sales and 35.6% and 33.4% were domestic sales compared to 243kt and 95kt sold in YTD and Q3 2016, of which
78.0% and 78.5% were export sales and 22.0% and 21.5% were domestic sales, down by 14.0% and 12.6%
respectively. The decrease in anthracite sales YTD is as a result of a decrease in saleable product. The decrease in
anthracite sales for the quarter is as a result of a shortage of trains to rail export product during the beginning of the
quarter. It is expected that this will improve significantly during Q4 2017.
The decrease in sales were offset to an extent by the conclusion of a contract to sell anthracite discard to one of the
Group's major export customers, of which 101kt and 37kt was sold YTD and during Q3 2017 (2016: Nil).
Health and Safety
The Company operates an integrated Health, Safety and Environment ("HSE") management system, established using
the OHSAS18001 and ISO14001 frameworks as well as minimum standards, and fully supports the co-existence of
safety, occupational health and the environment within which the Company operates, in order to ensure compliance
and achieve zero harm. The Company values the contribution of a safe and healthy workforce to its overall
productivity and is continually striving towards an incident and injury free workplace. The Company undertakes
training and development initiatives and related ventures on a regular basis in order to improve individual outlook on
safety, health and the environment. The Company currently employs 639 employees, and has 534 contractors on site.
The Group has achieved more than six thousand fatality free production shifts ("FFPS") at Magdalena Colliery and the
Coalfields process plant and 1 559 FFPS at Aviemore Colliery.
The Group completed Q3 2017 with six Lost Time Injuries ("LTIs") for the year, but compared with the same period
the previous year it indicates a 40% improvement in the number of LTI's.
CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2017 AND
SEPTEMBER 30, 2016
9 months ended 3 months ended
September 30, September 30, September 30, September 30, June 30,
Financial results 2017 2016 2017 2016 2017
Revenue (R'millions) 509.4 476.7 183.5 178.1 154.4
Net Revenue (R'millions) (*) 489.7 460.2 176.5 172.3 149.3
Operating profit (R'millions) 5.2 32.5 (14.9) (11.8) 1.9
Adjusted EBITDA (R'millions) (*) 32.5 12.1 24.9 13.6 (6.1)
Average selling price per ton sold (R) (excluding discard) 856 708 877 721 858
Cash cost of sales per ton (R) (excluding discard export
costs) 740 624 686 608 826
Cash (utilised in)/generated from operating activities
(R'millions) 11.2 3.7 13.5 27.5 (6.6)
Cash (utilised in) investing activities (R'millions) (34.4) (16.9) (11.3) (4.9) (15.5)
Cash generated from financing activities (R'millions) 21.5 10.7 - (14.3) 21.5
CAD:ZAR (average) 10.11 11.32 10.51 10.80 9.81
USD:ZAR (average) 13.20 14.97 13.17 14.09 13.20
(*) See Non-IFRS Performance Measures section of this MD&A.
An analysis of the financial results for the quarter ended September 30, 2017 compared to the quarter ended
September 30, 2016 is discussed below:
Net Revenue
Net revenues earned during YTD and Q3 2017 were R489.7 million and R176.5 million respectively, compared to
R460.2 million and R172.3 million earned during YTD and Q3 2016, an increase of 6.4% and 2.4%. During YTD and Q3
2017, the Group's sales were 657kt and 232kt, compared to sales of 673kt and 247kt for YTD and Q3 2016, decreased
mainly due to lower bituminous sales in line with a decrease in production, offset by 101kt and 37kt anthracite
discard sold during YTD and Q3 2017 (2016: Nil).
Net bituminous revenue for YTD and Q3 2017 was R143.1 million and R53.0 million for domestic (187 kt and 66kt)
and R133.3 million and R40.0 million for export (159kt and 46kt), compared to R129.8 million and R48.7 million for
domestic (188kt and 69kt) and R150.6 and R55.7 million for export (243kt and 83kt) for YTD and Q3 2016
respectively.
Net anthracite revenue (including calcine but excluding discard) for YTD and Q3 2017 was R85.6 million and R30.7
million for domestic (75kt and 28kt) and R111.8 million and R46.9 million for export (135kt and 55kt), compared to
R53.6 million and R21.4 million for domestic (53kt and 20kt) and R126.2 million and R46.5 million for export (189kt
and 75kt) for YTD and Q3 2016.
Anthracite discard net revenue for YTD and Q3 2017 was R15.9 million and R5.9 million (101kt and 37kt) (2016: Nil).
Average selling prices (excluding discard) for YTD and Q3 2017 were R856 and R877 per tonne compared to an
average selling price of R708 and R721 per tonne for YTD and Q3 2016. In 2017, the overall selling price per tonne
improved due to the negotiations of new contracts with the Group's significant customers.
Cost of Sales
Cost of sales for YTD and Q3 2017 was R473.4 million and R155.5 million (cash cost of sales of R740 and R686 per
tonne sold) compared to R469.6 million and R166.7 million (cash cost of sales of R624 and R608 per tonne sold) for
YTD and Q3 2016, an increase of 0.8% YTD and a decrease of 6.7% for Q3 2017. The cash cost per tonne for Q3
increased due to the decrease in saleable tonnes. The Group continues to be cost conscious in ensuring expenditure
is kept to a minimum in order to ensure the sustainability of the Group.
Cost of sales includes mining and processing costs, salaries and wages, depreciation and amortisation, transportation,
railage, port handling and wharfage costs.
General and administration expenses
The Company recorded general and administration expenses of R50.5 million and R17.8 million during YTD and Q3
2017 (R91 per tonne sold for both YTD and Q3 2017) compared to R47.5 million and R15.5 million during YTD and Q3
2016 (R70 and R63 per tonne sold for YTD and Q3 2016 respectively), an 6.3% and 14.8% increase for YTD and quarter
respectively.
The expenses include general and administration expenses relating to BC Dundee's head office at Coalfields and the
Company's corporate office in Centurion including Canadian expenses. The increase in general and administration
expenses are in part due to fees incurred to prepare an updated resource and reserve statement.
Other Income - net
During YTD and Q3 2017, the Group recorded net other income of R19.7 million and net other expenses amounting to
R25.1 million respectively, compared to net other income of R72.9 million and net other expenses of R7.8 million
during YTD and Q3 2016, a decrease of 73.0% and increase of 221.8% respectively. Other income and expense
comprises profit on sale of assets, foreign exchange gains/losses, discounts received, commissions paid and fair value
adjustments on financial assets and conversion option liabilities.
The Company recorded a fair value adjustment gain of R13.7 million for YTD 2017 (Q3 2017: loss of R11.1 million) in
relation to the valuation of the conversion option liability (RCF convertible loan), the warrant liability (Investec
warrants) and financial assets compared to a gain of R88.2 million YTD 2016 (Q3 2016: gain of R21.9 million).
A net foreign currency exchange gain of R3.4 million (Q3 2017: loss of R14.0 million) was recorded for YTD 2017,
compared to a R32.7 million net foreign currency exchange gain for YTD 2016 (Q3 2016: gain of R19.8 million).
In accordance with IAS 39, Financial Instruments: Recognition and Measurement, the terms of the 2016 Amendment
to the RCF loan were considered substantially different to the RCF convertible loan agreement, as amended on
December 2, 2015. Consequently, IAS 39 required an extinguishment of the RCF convertible loan and the recognition
of a new financial liability during Q3 2016. A resultant loss on extinguishment of debt of R50.6 million was recognised
during Q3 2016, which had no cash flow impact on the Group (YTD 2017:Nil).
Finance Costs/Income - net
The Group recorded net interest and accretion expense of R37.0 million and R15.2 million during YTD and Q3 2017
compared to a net interest and accretion expense of R57.0 million and R14.1 million for YTD and Q3 2016, a decrease
of 35.1% and 7.8% respectively.
The decrease is due to the new terms subsequent to the 2016 Amendment of the RCF loan. RCF agreed to an interest
holiday beginning July 1, 2016, with a reduction in the interest rate to 1.29% during the interest holiday period. The
interest rate during the comparative period was 24%.
FINANCIAL CONDITION REVIEW
A summary of the statements of financial position is shown below:
September 30, December 31,
2017 2016
R'000 R'000
Property, plant and equipment 295 573 311 731
Investments and long-term receivables 4 155 45 666
Cash and cash equivalents 12 000 13 754
Trade and other receivables 116 106 84 773
Other short-term receivables 1 986 1 902
Other receivables - restricted 49 570 -
Inventories 49 013 35 222
Restricted cash 11 200 11 200
Total assets 539 603 504 248
Trade and other payables 201 281 158 262
Total borrowings 187 516 161 361
RCF loan facilities 362 137 368 194
Other liabilities 37 206 38 134
Total liabilities 788 140 725 951
Total equity (248 537) (221 703)
Assets
Total assets were R539.6 million at September 30, 2017 compared to R504.2 million at December 31, 2016, a 7.0%
increase. The most significant movement in assets related to inventories and trade and other receivables.
As of September 30, 2017, the trade and other receivables increased from December 31, 2016 due to higher sales to
30-day customers during September 2017 compared to December 2016.
As of September 30, 2017, inventory had increased from December 31, 2016 mainly as a result of an increase in
anthracite sized product. Most of the inventory is committed under sales agreements, of which the majority will be
railed during Q4 2017.
The increase in inventory and trade and other receivables was partially offset by the decrease in property, plant and
equipment, mainly as a result of depreciation recognised during the current year.
Refer to "Overview of the period and outlook for the Group" where it was noted that the rehabilitation investment
was restructured during the quarter. 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.
Liabilities
Total liabilities were R788.1 million at September 30, 2017 compared to R726.0 million at December 31, 2016, an
8.6% increase.
The most significant movement related to the increase in trade and other payables and borrowings.
The trade and other payables increased by R43.0 million due to an increase in the amounts owing to the mining
contractor at Magdalena.
The borrowings increased by R26.2 million, mainly as a result of a R21.5 million draw down made from the Investec
working capital facility.
At September 30, 2017, the Group had outstanding debt with Investec of R201.0 million and R369.9 million (US$27.3
million) (including accrued interest) outstanding on the RCF convertible loan. The Investec debt consists of R75.0
million outstanding on the term loan facility, R45.5 million on the bullet facility and R80.5 million outstanding on the
working capital facility (R1.2 million interest outstanding on the R79.3 million working capital facility was only settled
after quarter end).
CASH FLOW REVIEW
The condensed consolidated statements of cash flows are summarised below:
9 months ended
September 30, September 30,
2017 2016
R'000 R'000
Net cash utilised in operating activities 11 173 3 724
Net cash utilised in investing activities (34 427) (16 876)
Net cash generated from financing activities 21 500 10 733
Change in cash and cash equivalents (1 754) (2 419)
Operating activities
Cash generated from operating activities during the nine months ended September 30, 2017 was R11.2 million
compared to R3.7 million generated during the nine months ended September 30, 2016.
The net loss for the nine months ended September 30, 2017 was R32.9 million compared to a net loss of R26.1 million
for the nine months ended September 30, 2016. Included in the loss for the nine months ended September 30, 2017
is interest paid of R16.1 million (nine months ended September 30, 2016: R16.1 million). Non-cash items included in
the net loss for the period were: depreciation and amortisation of R44.8 million (nine months ended September 30,
2016: R49.6 million); net gains on the fair value adjustment on financial assets, conversion option liability and warrant
liability of R13.7 million (nine month ended September 30, 2016: R88.2million), net unrealized foreign exchange gains
of R3.4 million (nine months ended September 30, 2016: R32.7 million), and loss on extinguishment of debt of RNil
(nine months ended September 30, 2016: R50.6 million).
The Group's net working capital decreased by R4.6 million for the nine months ended September 30 2017, in
comparison to a R0.3 million decrease for the nine months ended September 30, 2016.
The net change in working capital reported on the cash flow statement identifies the changes in trade and other
receivables, inventory and trade and other liabilities that occurred during the period. An increase in a liability (or a
decrease in an asset) is a source of funds; while a decrease in a liability (or an increase in an asset) is a use of funds.
Investing activities
Investing activities utilised R34.4 million in cash during the nine months ended September 30, 2017 compared to cash
utilised of R16.9 million during the nine months ended September 30, 2016.
During the nine months ended September 30, 2017, the Group spent R27.6 million on property, plant and equipment
relating to sustaining capital compared to expenditure of R12.9 million for the nine months ended September 30,
2016.
Financing activities
Financing activities generated R21.5 million during the nine months ended September 30, 2017 and R10.7 million
during the nine months ended September 30, 2016.
During the nine months ended September 30, 2017, the Group drew down R21.5 million from the Investec working
capital facility, which was used for the Panel 417 development and working capital purposes. During the nine months
ended September 30, 2016, R18.2 million was drawn from the Investec working capital facility and used for working
capital purposes, and a R7.5 million capital repayment was made on the Investec term loan.
RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2017 and September 30, 2016, the Company entered into the
following transactions in the ordinary course of business with related parties:
9 months ended 3 months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016
Payments for services rendered
RCF (1) 52 184 319 368 14 435 28 859
The following balances were outstanding as at September 30, 2017 and September 30, 2016:
September 30, September 30,
2017 2016
Related party payables
RCF (1) 1 678 401 1 197 410
These amounts are unsecured, non-interest bearing with no fixed terms of repayment.
(1) RCF is a related party to the Company as a result of owning a controlling investment in the Company and having a
representative, Mr. David Thomas on the Board of Directors of the Company. As set out in the Third Amended RCF
Agreement, RCF has invoiced the Company for costs incurred relating to the loan facilities, which are disclosed above.
Compensation of key management personnel
In accordance with IAS 24 - Related-Party Disclosures, key management personnel are those persons having authority
and responsibility for planning, directing and controlling the activities of the Company directly or indirectly, including
any directors (executive and non-executive) of the Company.
The remuneration of directors and other key members of management personnel (officers) during the 3 months
ended September 30, 2017 and September 30, 2016 were as follows:
9 months ended 3 months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016
Short-term benefits 8 729 241 11 364 302 3 084 587 3 554 270
Share-based payments 39 295 428 276 3 498 52 471
Total 8 768 536 11 792 578 3 088 086 3 606 741
Amounts owing to directors and other members of key management personnel were R0.3 million as of September 30,
2017 (September 30, 2016: Negligible amount).
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 interim results.
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 interim results.
Settlement with the Avemore Trust was reached on the following terms:
- R2.0 million on settlement of historic issues as well as an additional R280.0k (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 R25k.
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.
OTHER RISKS AND UNCERTAINTIES
Investing in the Company involves risks that should be carefully considered. The business of the Company is
speculative due to the high-risk nature of coal mining and exploration. Investors should be aware that there are
various risks, that could have a material adverse effect on, among other things, the operating results, earnings,
properties, business and condition (financial or otherwise) of the Company. Refer to the annual Management's
Discussion and Analysis for the year ended December 31, 2016 for a list of the Company's risks and uncertainties.
The current operational adit at Magdalena does not have an Environmental Management Program ("EMP") or
Integrated Water Use License Application ("IWULA"). As a result the mine needs to apply for a Section 24G
retrospective Environmental Impact Analysis ("EIA"). Also, the Calcine Plant has been operating without an Air
Emission License ("AEL"), but to comply with legislation, a full scoping and EIA report should be undertaken. The
Company is currently completing specialist studies to complete these environmental applications.
On June 15, 2017, the Minister of the DMR ("the Minister") published an amended Mining Charter ("Mining Charter")
for implementation. The revised mining charter was not clearly drafted and is ambiguous in many areas, allowing for
a number of significantly different interpretations. The Chamber of Mines ("the Chamber"), representing 90% of the
South African mining industry by value, believes the new Mining Charter is unworkable and was formulated without
taking the Chamber's views into account, and is further of the opinion that the charter is not going to survive in its
present form. Unless the Minister agrees to reopen negotiations, the charter will be challenged on several legal
grounds, one of which is the lack of consultation with stakeholders in the industry.
The Chamber applied for an urgent interdict on the Mining Charter. On July 14, 2017, the Minister gave a written
undertaking that the Minister and the DMR, will not implement or apply the provisions of the Reviewed Mining
Charter in any way, pending judgment in the urgent interdict application brought by the Chamber.
Also, on July 19, 2017 a notice was published in the Government Gazette by the Minister on his intention to suspend
the processing of the new section 11 of the Mineral and Petroleum Resources Development Act ("MPRDA"). The
notice also includes a restriction on the processing of the applications for renewal of a prospecting right and renewal
of a mining right. On July 25, 2017, the Chamber of Mines lodged an urgent interdict in the Pretoria High Court to
prevent the Minister from restricting the granting of any new application for prospecting rights and mining rights. On
August 3, 2017, the DMR formally agreed not to pursue the contemplated suspension of the processing of section 11
applications, new mining and prospecting rights applications and renewals of existing rights.
The Chamber's legal advice is that the notice constitutes an unlawful action for a number of reasons including the
damaging impact of the notice itself and its proposed further action on the mining sector, and that the minister acted
'ultra vires' or beyond his powers under the MPRDA and unconstitutionally by issuing the notice.
NON-IFRS PERFORMANCE MEASURES
The Company has included in this document certain non-IFRS performance measures that are detailed below. These
non-IFRS performance measures do not have any standardised meaning prescribed by IFRS and, therefore, may not
be comparable to similar measures presented by other companies. The Company believes that, in addition to
conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the
Company's performance. Accordingly, they are intended to provide additional information and should not be
considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The
definition for these performance measures and reconciliation of the non-IFRS measures to reported IFRS measures
are as follows:
Working Capital
Working capital includes current assets and current liabilities, excluding provisions and non-financial instruments.
September 30, December 31,
2017 2016
R'000 R'000
Current assets
Cash and cash equivalents 12 000 13 754
Trade and other receivables 116 106 84 773
Inventories 49 013 35 222
Non-interest-bearing receivables 1 986 1 902
179 105 135 651
Current liabilities
Trade and other payables (excluding provisions) 201 281 158 262
Current portion of borrowings 187 516 161 361
Current tax liability 2 958 8 775
391 755 328 398
Net working capital (212 650) (192 747)
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortisation and adding back the
following: Impairment or reversal of an impairment of an asset, fair value adjustments to financial instruments, stock-
based compensation, foreign exchange gains and losses, and non-recurring transaction expenses or income.
The reconciliation of operating loss to adjusted EBITDA is as follows:
9 months ended 3 months ended
September 30, September 30, September 30, September 30, June 30,
R'000 2017 2016 2017 2016 2017
Operating profit/(loss) for the period 5 198 32 501 (14 927) (11 771) 1 938
Depreciation and amortisation 44 823 49 595 15 129 16 412 14 802
Impairment of receivables (392) 1 (389) 1 -
Fair value adjustments of financial assets and conversion
option liability (13 748) (88 194) 11 128 (21 930) (13 728)
Loss on extinguishment of debt - 50 647 - 50 647 -
Stock-based compensation 39 278 3 52 9
Foreign exchange (gains)/losses (3 436) (32 716) 13 985 (19 849) (9 156)
Adjusted EBITDA 32 484 12 112 24 929 13 562 (6 135)
Net Revenue
The Group restructured several of its offtake contracts during FY2016 from an FOB shipping basis to short-term Rand
denominated FCA contracts, resulting in revenue not being directly comparable quarter on quarter. Below is a
reconciliation of revenue as disclosed in the Interim Results for the quarters ended September 30, 2017 and
September 30, 2016 to net revenue which excludes all railage, port handling and wharfage related costs:
9 months ended 3 months ended
September 30, September 30, September 30, September 30, June 30,
R'000 2017 2016 2017 2016 2017
Revenue 509 360 476 695 183 494 178 147 154 442
Railage, port handling and wharfage 19 700 16 518 6 979 5 897 5 191
Net revenue 489 660 460 177 176 515 172 250 149 251
Headline profit and (loss) per share
Headline profit and (loss) is a profit measure required for JSE-listed companies as defined by the South African Institute
of Chartered Accountants. Headline loss per share is a basis for measuring earnings per share which accounts for all
the profits and losses from operational, trading, and interest activities, that have been discontinued or acquired at
any point during the year. Excluded from this figure are profits or losses associated with the sale or termination of
discontinued operations, fixed assets or related businesses, or from any permanent devaluation or write off of their
values.
Reconciliation of profit and (loss) for the periods to headline profit and ( loss) is disclosed below:
9 months ended 3 months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016
(Loss) for the period (32 898 022) (26 148 252) (30 163 932) (25 535 794)
Net (profit)/loss on disposal of property, plant and equipment (481 436) (6 053) 800 000 -
Headline (loss) for the period (33 379 458) (26 154 305) (29 363 932) (25 535 794)
Headline (loss) per share - basic and diluted (0.08) (0.08) (0.07) (0.07)
SUMMARY OF SECURITIES AS AT NOVEMBER 8, 2017
As at November 8, 2017 the following Common Shares, Common Share purchase options and share purchase
warrants were issued and outstanding:
- 407 808 281 Common Shares;
- 3 343 303 Common Share purchase options with exercise prices ranging from C$0.0387-C$0.29 with a
weighted average remaining contractual life of 2.28 years;
- 34 817 237 warrants with a strike price of C$0.1446 maturing on July 3, 2019.
LIST OF DIRECTORS AND OFFICERS
Craig Wiggill Director, Chairman of the Board of Directors
Robert Francis Director
Edward Scholtz Director
David Thomas Director
Rowan Karstel Interim Chief Executive Officer
Graham du Preez Interim Chief Financial Officer and Corporate Secretary
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').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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