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Management’s Discussion and Analysis for the three and twelve months ended 31 December 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")
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three and twelve months ended December 31, 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 twelve
months ended December 31, 2017 and should be read in conjunction with the audited annual consolidated financial statements
for the years ended December 31, 2017 and December 31, 2016. The financial statements and related notes have been prepared
in accordance with International Financial Reporting Standards ("IFRS"). Certain non-IFRS measures are discussed in this 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 MD&A reports our activities through March 19, 2018 unless otherwise indicated. References to FY2017 and
FY2016 mean the financial years ended December 31, 2017 and December 31, 2016, respectively. 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, respectively and references to Q4 2016, Q3 2016, Q2 2016 and Q1 2016 mean the three months ended
December 31, 2016, September 30, 2016 , June 30, 2016 and March 31, 2016.
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:R9.8541 and
amounts in US Dollars were translated at US$1:R12.3689.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This 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.
In July 2010, the Company acquired 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. BEE is a statutory
initiative on behalf of the South African government, enacted to increase access by historically disadvantaged South Africans
("HDSA") to the South African economy by increasing HDSA ownership in South African enterprises.
Magdalena is located twenty two kilometers from the town of Dundee in KwaZulu-Natal, South Africa and encompasses
approximately 1 844 hectares. As reported in the Company's National Instrument 43-101 report, Magdalena, which until March
2015 consisted of the Magdalena underground mine and the Magdalena opencast operation, had an estimated mineable coal
resource, all in the measured resource category, of an estimated 50.29 million tonnes of in situ coal with an estimated volume of
33.52 million cubic meters as at October 1, 2012. From October 1, 2012 to December 31, 2017, 5.41 million tonnes of run of mine
("ROM") was extracted from Magdalena at an average extraction rate of 50%.
The Magdalena underground mine has an estimated total production capacity of 87 000 tonnes of bituminous coal per month.
One of the Company's two processing plants is located on the Magdalena property.
Aviemore is located eight kilometers from the town of Dundee in KwaZulu-Natal and encompasses approximately 5 592 hectares.
As reported in the Company's National Instrument 43-101 report, Aviemore had a mineable measured and indicated coal
resource of 35.35 million tonnes of in situ coal with an estimated volume of 23.57 million cubic meters as at October 1, 2012.
From October 1, 2012 to December 31, 2017, 2.43 million tonnes of ROM was extracted from Aviemore at an average extraction
rate of 55%.
The Aviemore underground mine has an estimated production capacity of 41 000 tonnes of anthracite per month.
BC Dundee's head office is located in the town of Dundee and is known as the Coalfields site. The second processing plant is
located at Coalfields, as is the Company's rail siding.
BC CORP RESOURCES
Below is an extract of the National Instrument 43-101 Resource statement dated October 1, 2012 as disseminated on SEDAR. Mr.
RA Karstel (B.Eng (Mining and Civil), M.Sc.Eng (Mineral Economics), Pr.Eng, SAIMM), a qualified person as defined in National
Instrument 43-101 has read and approved the scientific and technical information included in this table. The table sets forth the
mineable coal resource estimate for the BC Dundee Properties.
Mineable Coal Resources for the BC Dundee Properties as at October 1, 2012
Resource Resource Seam Fixed Inherent
Area Seam Seam Width Classification Width Volume RD Tonnage Ash Carbon CV moisture Sulphur Volatiles Yield
Cut-Off m Category m Mm(3) t/m(3) Mt % % MJ/Kg % % % %
Magdalena
Gus 0.8 Measured 1.90 8.48 1.5 12.72 14.89 65.79 29.46 1.23 1.62 17.76 77.52
Magdalena Alfred 0.8 Measured 2.10 10.72 1.5 16.08 15.62 66.21 30.16 1.39 1.48 16.76 79.02
Underground Combined 0.8 Measured 4.10 13.98 1.5 20.97 14.77 67.84 29.25 1.39 1.55 15.27 82.98
Total Measured 33.18 1.5 49.77 15.08 66.79 29.60 1.35 1.55 16.39 80.31
Gus 0.8 Measured 1.90 0.10 1.5 0.16 22.35 54.28 25.63 1.83 1.68 21.52 89.01
Magdalena
Opencast Alfred 0.8 Measured 2.00 0.24 1.5 0.36 26.58 51.97 23.53 1.93 1.90 19.51 95.04
Total Measured 0.34 1.5 0.52 25.30 52.67 24.16 1.90 1.83 20.12 93.22
Gus 0.8 Inferred 1.50 1.97 1.5 2.96 21.24 - 22.11 0.98 1.84 13.19 100
Hilltop Alfred 0.8 Inferred 1.60 5.64 1.5 8.46 21.07 - 22.24 0.94 1.86 13.47 100
Total Inferred 7.61 1.5 11.42 21.11 - 22.21 0.95 1.85 13.40 100
Aviemore
Aviemore Mine Gus 0.8 Measured 1.80 0.82 1.5 1.23 13.34 77.76 30.15 1.84 2.01 7.19 74.31
Total Measured 0.82 1.5 1.23 13.34 77.76 30.15 1.84 2.01 7.19 74.31
Leeuw Mining &
Exploration Gus 0.8 Indicated 1.72 9.72 1.5 14.58 13.55 77.53 29.00 2.21 1.80 6.73 63.51
Zinoju Coal
Gus 0.8 Indicated 1.72 13.03 1.5 19.54 13.46 75.51 28.93 2.59 1.60 8.28 57.00
Total Indicated 22.75 1.5 34.12 13.50 76.37 28.96 2.43 1.69 7.62 59.78
Total Measured & Indicated 23.57 1.5 35.35 13.49 76.42 29.00 2.41 1.70 7.60 60.29
Leeuw Mining & Gus 0.8 Inferred 1.72 1.09 1.5 1.63 14.97 74.78 27.29 1.77 1.41 8.50 55.98
Exploration
Zinoju Coal Gus 0.8 Inferred 1.72 8.99 1.5 13.48 14.14 74.72 28.85 2.49 1.71 8.64 59.60
Total Inferred 10.08 1.5 15.11 14.23 74.75 28.69 2.41 1.68 8.63 59.23
Notes:
1. Coal Resources are inclusive of Coal Reserves.
2. Coal Resources are inclusive of tonnes mined since the effective date of October 1, 2012.
3. Tonnes and qualities have been rounded and this may result in minor adding discrepancies.
4. The coal qualities are stated for the ash content ("Ash"), fixed carbon, calorific value ("CV"), inherent moisture, sulphur
content ("Sulphur"), volatile matter ("Volatiles") and yield.
5. The coal qualities assays were determined on an air-dried moisture basis.
6. A 15% geological loss has been applied to the Gross in situ tonnes.
7. The declared tabulation of coal resources prepared by Minxcon has been prepared in accordance with the NI 43-101
reporting code and is compliant with this Code.
8. A cut-off seam thickness of 0.8 m has been applied to the Gross in situ Coal Resource statements.
9. The Coal Resources for the Magdalena and Aviemore areas are calculated on 1.7 t/m(3) float density coal quality values and the
Hilltop Coal Resources are calculated on raw coal quality values.
10.The coal density for all areas is 1.5 t/m(3).
11.The Hilltop data received from the Client did not include fixed carbon values.
12.The mining right to Leeuw Mining & Exploration properties has been transferred to Zinoju.
From October 1, 2012 (the date of the National Instrument 43-101 Resource statement) to December 31, 2017, the following
ROM has been extracted (¹):
- Magdalena opencast (t): 689 377
- Magdalena underground (t): 4 720 645
- Aviemore (t): 2 437 036
The information above was read and approved by Mr. RA Karstel (B.Eng (Mining and Civil), M.Sc.Eng (Mineral Economics), Pr.Eng,
SAIMM), a qualified person as defined in National Instrument 43-101.
(1)At an average extraction factor of 50% for Magdalena and 55% for Aviemore mine.
CONSOLIDATED OPERATIONAL AND FINANCIAL HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 31, 2017 AND THE
QUARTER ENDED DECEMBER 31, 2017
The operational highlights and summarized financial results for the year ended December 31, 2017 and the quarter ended
December 31, 2017 are presented below as compared to the financial year ended December 31, 2016, the quarter ended
December 31, 2016 and the quarter ended September 30, 2017. The Group achieved ROM production of 1.3Mt, saleable
production (excluding calcine) of 794 kilotonne "kt" and sales (excluding discard) of 795kt for the year ended December 31, 2017.
12 months ended 3 months ended
December 31, December 31, December 31, December 31, September 30,
Operational results 2017 2016 2017 2016 2017
ROM (t) 1 341 918 1 557 824 290 381 363 650 327 821
- Aviemore (t) 487 162 496 343 119 219 130 264 141 029
- Aviemore (t) (bought-in) 23 111 - 9 053 - 7 225
- Magdalena (t) 788 361 1 061 481 162 109 233 386 178 204
- Bituminous (t) (bought-in) 43 284 - - - 1 363
Saleable production (excluding calcine) (t) 793 547 892 591 200 328 214 876 208 978
- Anthracite (t) 321 208 338 620 87 854 86 034 97 704
- Anthracite (t) (bought-in) 15 180 - 6 283 - 4 220
- Bituminous (t) 426 471 553 971 106 191 128 842 106 096
- Bituminous (t) (bought-in) 30 688 - - - 958
Yield on plant feed (excluding calcine) (%) 59.3% 56.8% 67.8% 57.2% 62.8%
- Anthracite (%) 66.1% 66.9% 69.8% 65.5% 68.5%
- Anthracite (%) (bought-in) 65.7% - 69.4% - 58.4%
- Bituminous (%) 54.3% 52.3% 66.2% 52.8% 58.5%
- Bituminous (%) (bought-in) 70.9% - - - 70.3%
Sales (t) 795 023 905 932 239 178 232 472 194 950
- Anthracite (t) 317 434 316 717 138 802 91 294 73 797
- Bituminous (t) 440 431 561 805 93 756 130 856 111 716
- Calcine (t) 37 158 27 411 6 620 10 323 9 437
Anthracite discard sales (t) 123 763 14 290 22 403 14 290 36 847
Saleable inventory tonnes 48 303 57 846 48 303 57 846 88 800
- Anthracite (t) 26 444 50 801 26 444 50 801 79 416
- Bituminous (t) 20 239 4 802 20 239 4 802 8 092
- Calcine (t) 1 620 2 243 1 620 2 243 1 292
12 months ended 3 months ended
December 31, December 31, December 31, December 31, September 30,
Financial results 2017 2016 2017 2016 2017
Revenue (R'millions) 738.1 660.6 228.8 183.9 183.5
Net Revenue (R'millions) (*) 713.4 641.2 224.1 181.0 176.5
Operating (loss)/profit (R'millions) (70.2) 33.8 (75.4) 1.3 (14.9)
Adjusted EBITDA (R'millions) (*) 98.3 11.5 65.8 (0.6) 24.9
Average selling price per ton sold (R) (excluding discard) 877 724 956 770 877
Cash cost of sales per ton (R) (excluding discard export costs) 691 629 578 646 686
Cash generated from operating activities (R'millions) 28.3 32.0 17.1 28.3 13.5
Cash (utilized in) investing activities (R'millions) (42.1) (26.4) (7.7) (9.5) (11.3)
Cash generated from/ (used in) financing activities (R'millions) 21.5 (12.3) - (23.0) -
CAD:ZAR (average) 10.26 11.10 10.74 10.43 10.51
USD:ZAR (average) 13.31 14.71 13.64 13.93 13.17
(*) See Non-IFRS Performance Measures section of this MD&A.
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 continues to utilise an export allocation of 204 500 tonnes through the Quattro scheme at Richards Bay Coal Terminal
(RBCT). Although the Department of Mineral Resources ("DMR") notified the Group in 2015 that its Quattro allocation for 2016
onwards has not been renewed, the DMR has not yet completed the process of reallocation of the full 4Mt of Quattro
allocations.
No overall impact is expected on export tonnages, however, since supply contracts have been structured in such a way as to
utilize rail capacity allocated to those customers, irrespective of the destination terminal, and also due to the non-removal of the
Group's Quattro allocation.
Bituminous
The API4 coal index, based on an RB1 specification coal on a heat value of 6000 kcal/kg NAR shipped from RBCT, but also the
benchmark for the pricing of all Steam Coal exports from South African terminals, maintained a very satisfactory average level
US$84.35 in 2017.
The index ranged from around US$71.34 (May 2017) to US$95.53 (December 2017) and started 2018 at the December 2017
levels, although the forecast remains in backwardation as has been typical for the past several years.
Exchange rates were very volatile throughout 2017, but the Rand ended the year very strongly against the US$ at around R12.30
(compared to R13.74 in December 2016). This movement has negated a lot of the benefit of the higher US$, API4 benchmark
prices.
The API4 index remains in backwardation, continuing to reduce the desirability of fixing long term sales agreements. Most group
export bituminous sales are therefore now 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 2018. Pricing is
however expected to be substantially higher than 2017 levels since supply has tightened further due to both mine closures and a
focus on exports caused by the higher export price regime.
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 was strong with the exception of domestic sized anthracite. Recovery in the fortunes of several large
smelting industries is still awaited before demand will increase.
Demand for 2018 is buoyant, and the Group has already placed the vast majority of planned anthracite production into the
markets at significantly better prices than were achieved in 2017. Demand for the Group's products continues to be assisted by
the closure of two competing Kwa-Zulu Natal mines, and the lack of any replacement production in the form of new mines.
The outlook for 2018 is therefore positive for both the bituminous and anthracite sectors of the business, with both demand and
pricing healthier than during 2017.
Operational
Agreement with STA Coal Mining Company Proprietary Limited ("STA") to perform contract mining services at Magdalena
Zinoju and BC Dundee have signed a contract mining agreement with STA, effective October 31, 2015, for STA to mine four
sections at Magdalena on a fixed Rand per tonne contract, for an initial term of three years, with the option for a further two
year extension. As a result of this agreement, STA has employed the majority of the employees who were retrenched by BC
Dundee in terms of the October 2015 Retrenchment Process, resulting in minimal staff becoming redundant. During the 2017
financial year, the four sections were reduced to three sections due to the difficult geology at Magdalena as well as pit-room
constraints (refer to Operational Results below). The plan is to re-introduce the fourth section in July 2018 when pit-room is
available.
Zinoju, BC Dundee and STA have further entered into an agreement with BC Corp, in terms of which the Company is entitled, at
its election, to settle an agreed portion of STA's contract mining fees through the issuance of common shares of the Company
("Common Shares") to STA (the "Equity Portion"). The Equity Portion is calculated monthly based on production levels at
Magdalena, with the Common Shares priced at the higher of the 20-day volume weighted average price ("VWAP") per Common
Share, and any minimum pricing restriction applicable to the stock exchanges on which BC Corp is listed. The Common Shares are
issued to STA at the end of each calendar quarter, subject to regulatory approvals. The parties have agreed that the percentage
of Common Shares held by STA will not exceed 9.9% of BC Corp's outstanding shares at any point in time. As of the date of this
MD&A, STA owns 34 329 372 Common Shares representing approximately 8.3% of the currently issued and outstanding Common
Shares.
As of December 31, 2017, the trade payables balance includes R93.1 million (December 31, 2016: R60.5 million) owing to STA.
BEE restructuring
The Group is in the process of restructuring its BEE framework. The restructuring is aimed at expanding the structure to comply
with Broad Based Black Economic Empowerment ("BBBEE") objectives and to ensure full economic participation of all BBBEE
shareholders. Although it is not the Company's objective at this time to achieve compliance to the proposed and heavily disputed
Mining Charter 3 ("Mining Charter"), the Group would partially comply with the Mining Charter, as the Group would have BBBEE
partners holding 30% of BCD's shares.
Aviemore adit feasibility study
Based on the current Life of Mine ("LOM") 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 by
May 2020. 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 2017, and the bankable feasibility study has commenced, and is expected to be completed by end
of March 2018. External funding is required to fund the north adit expansion.
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 rehabilitation trust investment balance and the closure cost assessment. This triggered a review of the
structure of the financial provisions for rehabilitation 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 has now completed the restructuring and provided the DMR with the required guarantee of
R63.0 million. Zinoju was required to make, and made, an additional R4.1 million (excluding VAT) cash contribution in July 2017
to the insurance facility, which increased the investment to R49.0 million. The existing trust funds of
R44.9 million were dissolved and the funds transferred to Centriq Insurance Company Limited during August 2017. The shortfall
of R14.0 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.
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 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, with the SARS Commissioner ruling 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 and the Company is not pursuing the matter further.
RCF Loan Facilities
The Company has raised an aggregate US$29.0 million convertible loan from RCF. The original convertible loan facility of US$6.0
million ("RCF Original Convertible Loan") and the bridge loan facility of US$4.0 million ("RCF Bridge Loan") were entered into in
September 2013 and February 2014 respectively, and on July 3, 2014, BC Corp closed the final tranche of US$15.0 million
resulting in an aggregate US$25.0 million convertible loan facility ("RCF US$25 million Loan") ("First Amended RCF Agreement").
On March 27, 2015, BC Corp entered into a second amended and restated convertible loan agreement with RCF ("Second
Amended RCF Agreement") and secured an additional US$4.0 million loan facility which was advanced as a bridge loan ("2015
Bridge Loan"). On June 19, 2015, upon the Company receiving shareholder approval at the annual and special meeting of
shareholders, the 2015 Bridge Loan rolled over into the RCF US$25 million Loan, under the same terms and conditions except for
the amendments to the interest rate and conversion price on the full US$29.0 million facility ("RCF Convertible Loan") as set out
below.
The 2015 Bridge Loan bore interest at a rate of 15% per annum, payable on the maturity date which was the earlier of the date
on which the shareholder approval was received or June 30, 2015. No establishment fees were incurred on the 2015 Bridge Loan.
Upon receipt of the shareholder approval, interest became payable in Common Shares at a price per share equal to the 20-day
VWAP as at the date the payment was due. In addition, the interest rate on the RCF Convertible Loan was increased to 15% per
annum and the conversion price was decreased to C$0.0469, a 25% discount to the 5-day VWAP as at January 30, 2015.
On December 2, 2015, BC Corp entered into a third amended and restated convertible loan agreement with RCF ("Third
Amended RCF Agreement"), whereby RCF has agreed to convert an aggregate of US$20.0 million of the RCF Convertible Loan into
Common Shares over a two-year period at the conversion price of C$0.0469 per Common Share ("RCF Conversion"), subject to a
minimum conversion of US$10.0 million in the first year. An initial amount of US$2.0 million was converted on December 3,
2015 on the closing of the transactions with RCF and Investec as described herein ("RCF First Tranche Conversion") resulting in
56 963 752 Common Shares being issued to RCF.
The balance of the RCF Convertible Loan remained in place on terms existing at the time, other than the interest being settled
quarterly not monthly, and in respect of certain amendments to the interest provisions as detailed below:
- Prior to the date of completion of the RCF Conversion, interest will be settled through the issuance of Common Shares,
priced at the 20-day VWAP. Following the date of completion of the RCF Conversion, interest will be payable in cash
subject to BC Dundee having paid Investec its scheduled principal repayment for the prior quarter. If Investec's principal
repayment has not been made, RCF's interest will accrue until such time as Investec has been paid, subject to RCF's
election for interest to be settled through the issuance of Common Shares.
- The percentage interest rate is determined as follows:
- If the 20-day VWAP is greater than C$0.05 per Common Share then the interest rate is 15% per annum;
- If the 20-day VWAP is less than or equal to C$0.0313 per Common Share then the interest rate is 24% per annum; and
- If the 20-day VWAP is greater than C$0.0313 but less than C$0.05 per Common Share then the interest rate is
calculated as 0.0075/20-day VWAP.
In terms of the Third Amended RCF Agreement, RCF has also released all security held in respect of the RCF Convertible Loan,
including the guarantee from BC Dundee.
In addition to the above, BC Corp also entered into a subscription agreement with RCF on December 2, 2015, whereby RCF
subscribed for an additional US$2.0 million (approximately R28.7 million) in equity by way of the Private Placement. Pursuant to
the Private Placement, RCF acquired 72 272 480 Common Shares at a price of C$0.0367 per Common Share.
Effective September 30, 2016, the Company entered into an amended convertible loan agreement with RCF (the "2016
Amendment"), the terms of which were substantially agreed upon on September 30, 2016. In terms of the 2016 Amendment,
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 holiday period ends the earliest of maturity, occurrence of an event of default or lender's delivery of an
interest holiday period termination notice. Accrued interest will be payable on the maturity date in cash, or Common Shares.
As of December 31, 2017, the Company was fully drawn on the US$27.0 million (R334.0 million) RCF Convertible Loan, after the
RCF First Tranche Conversion.
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 ("Sixth
Amendment") and the undrawn working capital facility balance was made available for drawdown. The terms of the Sixth
Amendment, all of which have been fulfilled, 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.
- Investec agreed to not exercise its rights arising from events of default until July 14, 2017, and also has not done so to date.
- 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 results, the Company has drawn R79.8 million from the working capital facility.
BC Dundee was required to meet specified debt covenants at March 31, 2017 June 30, 2017, September 30, 2017 and December
31, 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, September 30, 2017 and December 31, 2017, constituting an event of default.
Due to Investec being entitled to request early payment of the outstanding debt, as a result of the events of default referred to
preceding, management has determined that the total Investec debt of R200.3 million be classified as current borrowings.
On March 19, 2018, the Company entered into a further amendment to the term loan and revolving credit agreement (refer subsequent
events). The amendment provides, among other things, for the deferral of capital repayments until June 29, 2018.
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 was withdrawn by the Avemore Trust.
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 was
withdrawn by the Avemore Trust.
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 royalty on future production, subject to a minimum monthly amount of R25 thousand per month.
The Company is complying with these terms.
STRATEGY AND FUTURE PLANS FOR THE DECEMBER 2018 FINANCIAL YEAR
The Group's long term vision is to build a high quality bituminous and metallurgical coal mining and supply company. Future
production growth is expected to improve the operation's economies of scale.
The Group will continue to pursue attractive synergistic opportunities where it is believed that such opportunities will be value
accretive to the existing business, while not removing the focus on the existing Dundee operations.
The Group is considering restructuring its current debt facilities and the option of equity participation to fund the north adit expansion.
The Company's key strategic goals for the year ending December 31, 2018 are summarized below:
General
- Continued focus on cost containment at both an operational and corporate level, and a return to profitability and
consistent positive cash generation.
- Focus on achieving production targets through forward planning and improvement of operational efficiencies.
- Explore opportunities to increase revenue by sourcing new market opportunities for both anthracite and bituminous
products.
- Increase rail and port allocation to further gain exposure to seaborne bituminous and anthracite export markets, where
feasible and profitable.
- Increase the awareness of safety to reduce the number of lost time injuries ("LTI").
- Potential restructuring of the Investec facilities (refer to Overview of the Period and Outlook for the Group above).
- Focus on obtaining additional funding in the form of equity and/or debt. This process will be facilitated by a Financial
Advisor, Northcott Capital.
Magdalena
- Working to improve production and productivity at Magdalena together with STA.
- High focus on reducing contamination of coal mined in the underground sections.
- Buy-in of coal to increase plant utilization and ultimately sales and profitability.
Aviemore
- Complete feasibility study to invest in a new adit at the mine in order to create more economical and efficient access for
the life of mine of Aviemore.
- Progress the exploration program and feasibility study for the expansion of Aviemore to a 1Mt per year producer, subject
to market conditions.
Wash plants
- Improve wash plant recovery rates from current levels by improving efficiencies of the wash plants and reducing
contamination at source, particularly in respect of Magdalena.
- Installation of new spirals at Coalfields washplant to improve yields.
- Investigate product upgrade potential.
- Consider tollwashing opportunities for other mining operators in the area.
Expansion opportunities
- The Company is exploring various opportunities to secure additional opencast reserves in the northern KwaZulu-Natal region.
- The Company is exploring opportunities to buy in coal at appropriate qualities and pricing to increase volumes.
OPERATIONAL RESULTS
The operational results are for the twelve months ended December 31, 2017 compared to the twelve months ended December 31, 2016.
ROM Production
Total ROM production for the year ended December 31, 2017 was 1.3Mt compared to 1.6Mt produced in the period ended
December 31, 2016, down by 13.9%.
ROM production from Magdalena operations for the year ended December 31, 2017 was 788kt, compared to
1 061kt produced in the period ended December 31, 2016, down by 25.7%. The decrease in tonnes is as a result of difficult
geological mining conditions and pit-room constraints encountered during FY2017 . 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 the year ended December 31, 2017 was 487kt compared to 496kt produced in the period
ended December 31, 2016, down by 1.9%. Aviemore continues to perform in line with historic and budgeted performance levels.
The Company also secured the buy-in of bituminous and anthracite ROM from other mines in the area. A total of 43kt and 23kt
was bought-in during the year for bituminous and anthracite respectively (year ended December 31, 2016: 0kt).
Saleable Production
Saleable coal production for the year ended December 31, 2017 was 794kt (excluding calcine) compared to 893kt in the period
ended December 31, 2016, down by 11.1%. This is in line with a decrease in ROM production and partially offset by an
improvement in the yield for bituminous.
Saleable calcine product was 35kt for the year ended December 31, 2017 compared to 27kt in the period ended December 31,
2016, a 28.2% increase. The increase is primarily as a result of an improved market demand. Towards the end of 2017, the calcine
plant was on stop for three months due to planned maintenance to the plant. It should be noted that the year-on-year increase
would have been much higher had it not been for this maintenance.
The total calculated yield from plant feed was 59.3% for the year ended December 31, 2017, compared to 56.8% for the period
ended December 31, 2016. The increase in the yield is due to an improved yield achieved on bituminous as well as very high
yields achieved on the bituminous buy-in coal, which was sourced from an open-pit operation which generally washes at a higher yield.
Sales
Total sales of bituminous coal and anthracite products (including calcine and excluding discard) for the year ended December 31,
2017 were 795kt compared to 906kt sold in the period ended December 31, 2016, a decrease of 12.2%.
Bituminous sales for the year ended December 31, 2017 were 440kt, of which 44.1% were export sales and 55.9% were domestic
sales. This compares to 562kt sold in the period ended December 31, 2016 of which 53.9% were export sales and 46.1% were
domestic sales, a decrease of 21.6% in line with a decrease in saleable production.
Anthracite sales (including calcine and excluding discard) for the year ended December 31, 2017 were 355kt, of which 71.0%
were export sales and 29.0% were domestic sales. This compares to 344kt sold in the period ended December 31, 2016 of which
77.1% were export sales and 22.9% were domestic sales, up by 3.0%.
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 124kt was sold for the year ended December 31, 2017 (year ended December 31, 2016: 14kt).
Logistics
Coal is normally transported by rail and truck to domestic customers, while export coal is transported to RBCT and the Navitrade
Terminal by rail. The Company utilizes the RBCT and Navitrade Terminals through contracts structured with customers with
export allocations at the terminals.
Health and Safety
The Company maintain 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 occupational
health, safety and the environment within which the Company operates, in order to ensure compliance and achieve zero harm.
The Company values the contribution of a health and safe 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 health, safety and the environment. The Company currently employs 573
employees, and has 479 contractors on site.
Occupational Health
The health and wellness of our employees plays a pivotal role in the Company's health and safety performance as well as
productivity. The main aim is to ensure that the mining industry milestones for occupational health are achieved and that the
Company continues to strive towards improving the health of its employees as well as interested and affected parties.
The Company has established a medical surveillance link between exposure to occupational health hazards and medical
surveillance systems. The medical surveillance is linked to the occupational health programs for noise, airborne pollutants and
thermal stress, which are directly linked to minimum standards of fitness to work. Other occupational hygiene factors are duly considered.
The Company operates its own occupational health facilities, which are staffed with highly qualified and experienced
professionals who render a high-level service to direct as well as indirect clients, whilst ensuring legal compliance as well as
compliance with in-house standards. On average, compliance is above 80% on ventilation, occupational hygiene and
occupational medicine systems.
Occupational Safety
The Group has achieved more than six thousand fatality free production shifts at Coalfields. Aviemore Colliery achieved 1679
fatality free production shifts. Magdalena Colliery had one fatal accident during April 2017. An application was lodged to the
Department of Mineral Resources to exclude this as a fatal accident due to the post mortem that depicted that the now deceased
did not pass away as a result of the injuries that he sustained during the accident. The response is still outstanding.
BCD completed the year ended December 31, 2017 with six LTIs, of which two occurred at Magdalena, two at Aviemore and two
at Coalfields. This compares to ten LTIs during the period ended December 31, 2016, which represents an improvement in the
safety performance.
The company introduced a visible felt leadership programme as part to improve the safety behaviour of our workforce and to
provide management to have one on one safety discussions with the employees at the work face.
Year LTIFR Fatal
2014 0.53 1
2015 0.35 0
2016 0.97 0
2017 0.48 1
Environmental Management
The Company endeavors to conduct its business in a manner that demonstrates its understanding of the fact that the
environment is borrowed from future generations and as such must be conserved. The Company aims to leave the environment
in a better state than it was prior to the start of operations. Compliance with legal and other requirements, environmental
management plans and requirements on water use licenses as well as managing all environmental aspects and impacts is one of
the key principles of the Company. The Company has its own in-house environmental management department focusing on the
elements of ISO 14001 and 9001, and ensuring continual improvement in compliance.
Minerals Royalty
All operations at BC Dundee are subject to South African law, including the Mineral and Petroleum Resources Royalty Act, 28 of
2008 ("Royalty Act"). In terms of the Royalty Act, all companies extracting minerals in South Africa are required to pay royalties at
a rate of between 0.5% and 7% based on gross sales, less allowable deductions, depending on the refined condition of the
mineral resources.
Coal is classified as an unrefined mineral and the percentage royalty payable is therefore calculated according to the following formula:
% royalty payable = 0.5 + [Earnings before interest and tax/(Gross sales x 9)] x 100
During the year ended December 31, 2017 royalties of R5.0 million (year ended December 31, 2016: R5.8 million) were paid in
terms of the Royalty Act.
Other Royalties
Other royalties include the LOMR payable to Investec and the royalty on future production at Aviemore payable to the Avemore
Trust. Refer to the 'Investec Funding' and 'Legal Proceedings' sections of the "Overview of the Period and Outlook for the Group".
Social Development
A key component of the Company's strategy involves social development and the enrichment of the local community, which is
carried out through the Company's social and labour plans.
The development of people, both employees and local community members, is a fundamental principle in the business strategy.
The Company provides opportunities and resources for employees to be fully developed in job disciplines that form part of the
occupational structures of the Company.
The Company's human resource development includes:
- Portable skills training for both employees and the community.
- An Adult Education and Training ("AET") project which aims to improve the literacy rate of employees and members of the
community. AET learners are offered the opportunity to become functionally literate and numerate.
- A Mathematics, Science and Accounting project which offers tutoring to Grade 10 and 12 learners in the mining
community. The Company recruits competent educators through the Department of Education to offer tuition. Through
this intervention, Grade 10 and 12 results have improved.
- An internship program for unemployed graduates.
- Bursary programs in all fields. The bursars are given the opportunity to do vacation work (where applicable), to gain
experience and do in-service training to meet graduation requirements.
- Engineering, processing and mining learnership programs.
- Experiential training for the Dannhauser Municipal area for Community Members that have completed Further Education
and Training ("FET"), to do experiential work to decide on their career paths.
The Company's local economic development projects include:
- Advancement of Small, Medium and Micro-sized Enterprises ("SMMEs") within the local community including the
development of a sewing project and various agricultural projects such as a piggery and a nursey.
- The construction of two crèches near the Aviemore mine in the Dannhauser Municipal District.
FINANCIAL RESULTS
Net Revenue
The Group restructured several of its offtake contracts during Q1 2016 from a free on board shipping ("FOB") basis to short-term
Rand denominated free carrier ("FCA") contracts, resulting in revenue not being directly comparable year on year. The Group has
therefore compared net revenue after railage, port handling and wharfage costs, which has been defined under the Non-IFRS
Performance Measures section of this MD&A. Net revenues earned during the year ended December 31, 2017 were R713.4
million compared to R641.2 million earned during the year ended December 31, 2016, an increase of 11.3%. During the year
ended December 31, 2017, the Group's sales tonnes (excluding discard) were 795kt compared to sales of 905kt for the period
ended December 31, 2016.
Net bituminous revenue for the year ended December 31, 2017 was R355.7 million, of which R191.0 million was domestic (246kt)
and R164.7 million was export (194kt), compared to R375.8 million for the year ended December 31, 2016, of which R180.1
million was domestic (259kt) and R195.7 million was export (303kt), a decrease of 5.3%.
Net anthracite revenue (including calcine but excluding discard) for the year ended December 31, 2017 was
R338.6 million, of which R115.6 million was domestic (103kt) and R223.0 million was export (252kt), compared to R262.4 million
for the year ended December 31, 2016, of which R80.7 million was domestic (79kt) and R181.7 million was export (265kt), an
increase of 29.0%.
Average selling prices for the year ended December 31, 2017 were R877 per tonne compared to an average selling price of R724
per tonne for the period ended December 31, 2016. During the year ended December 31, 2017, the overall selling price per
tonne improved due to the negotiated new contracts with the Group's significant customers.
Cost of Sales
Cost of sales for the year ended December 31, 2017 was R636.4 million (cash cost of sales of R691 per tonne sold) compared to
R641.8 million (cash cost of sales of R629 per tonne sold) for the period ended December 31, 2016, a decrease of 0.8% year on
year. The cash cost per tonne for the year 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 amortization, transportation, railage,
port handling and wharfage costs.
General and administration expenses
The Company recorded general and administration expenses of R70.0 million (R88 per tonne sold) during the year ended
December 31, 2017 compared to R62.0 million (R68 per tonne sold) during the period ended December 31, 2016, a 12.9%
increase year on year.
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, as well as an increase in insurance costs.
Other (Expense)/Income - net
During the year ended December 31, 2017, the Group recorded net other expenses amounting to R102.1 million compared to net
other income of R77.0 million for the period ended December 31, 2016. Other income and expense comprises profit/loss on sale
of assets, foreign exchange gains/losses, discounts received, insurance proceeds, impairment losses, commissions paid and fair
value adjustments on financial assets and conversion option liabilities.
The Company recorded a fair value adjustment gain of R37.8 million for the year ended December 31, 2017 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 R93.4 million for the period ended December 31, 2016.
A net foreign currency exchange gain of R31.9 million was recorded for the year ended December 31, 2017 compared to a R36.7
million gain for the period ended December 31, 2016, mainly as a result of the strengthening of the Rand in relation to the US
Dollar with regards to the RCF Convertible Loan and US Dollar denominated revenues.
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. A
resultant loss on extinguishment of debt of R50.6 million was recognized during the year ended December 31, 2016, which had
no cash flow impact on the Group. No such loss has been recognized during the year ended December 31, 2017.
An impairment loss of R175.6 million was recognized for the year ended December 31, 2017 (December 31, 2016: RNil) in respect
of the impairment of property, plant and equipment, as a result of the carrying value of the BC Dundee Group properties
exceeding the estimated recoverable amounts as at December 31, 2017. At this date, management identified indicators of
impairment and determined the recoverable amount of the BC Dundee Group on a value in use basis. The main reason for the
impairment is the reduction of the LOM at Magdalena from 12 years to 5 years due to economic factors including expected
increased mining cost, reduced mining productivity (increased distance from the adit) and a change in the specification of the
coal.
The main inputs in determining the recoverable amount were as follows:
2018 - 2021
Input (Average) Long-term
Bituminous sales prices - ZAR (real) 935 885
Bituminous sales prices - US$ (real) 84 70
Anthracite sales prices - ZAR (real) 1 071 1 074
Rand:US$ Exchange rate 13.20 13.30
Pre-tax discount rate 12.25% 12.25%
The majority of bituminous sales prices were based on the median of API4 forecasts provided by international price analysts. The
API4 index is currently in backwardation and the long-term API4 index price used was US$70, compared to the current index price
in the high US$80's.
In determining the recoverable amount for the BC Dundee Group properties, no potential future buy-in opportunities were taken
into account, as the Company currently does not have any contracts in place for buy-in tonnes. The Company secured 66kt of
buy-in tonnes for both anthracite and bituminous during the year ended December 31, 2017 and will actively pursue
opportunities to buy in coal in the future.
Finance Costs/Income-net
The Group recorded net interest and accretion expense of R52.4 million during the year ended December 31, 2017 compared to
a net interest expense of R71.1 million for the period ended December 31, 2016, a decrease of 26.4%.
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 prior to
July 1, 2016 was 24%.
Taxation
The Company recorded income and other tax expense of R1.1 million during the year ended December 31, 2017 compared to an
expense of R8.2 million during the period ended December 31, 2016.
Net Profit/(loss) for the period
The net loss for the year ended December 31, 2017 was R123.7 million, compared to a net loss of R45.5 million for the period
ended December 31, 2016. Contributing to the net loss position for the current year were significant non-cash items including an
impairment loss of R175.6 million. The increased loss to the prior financial year was offset by foreign exchange gains of R31.9
million, net gains on the fair value adjustment on financial assets, conversion option liability and warrant liability of R37.8 million,
no impairment of assets being recognized for the year ended December 31, 2016 and a decrease in interest expense relating to
the RCF Convertible Loan which is due to the reduction in interest rate.
Comparison between Q4 2017 and Q4 2016
Net Revenue
Net revenues (excluding discard sales) earned during Q4 2017 were R223.7 million compared to R181.0 million earned during Q4
2016, an increase of 23.8%. During Q4 2017, the Group's sales tonnes were 239kt compared to sales of 232kt for Q4 2016.
Net bituminous revenue for Q4 2017 was R79.3 million, of which R47.9 million was domestic (59kt) and R31.4 million was export
(35kt), compared to R95.4 million for Q4 2016, of which R50.3 million was domestic (72kt) and R45.1 million was export (59kt), a
decrease of 16.9%.
Net anthracite revenue (including calcine but excluding discard) for Q4 2017 was R141.2 million, of which
R30.0 million was domestic (28kt) and R111.3 million was export (117kt), compared to R83.0 million for Q4 2016, of which R27.1
million was domestic (26kt) and R55.9 million was export (75kt), an increase of 70.2%.
Average selling prices for Q4 2017 were R956 per tonne compared to an average selling price of R770 per tonne for Q4 2016.
During Q4 2017, the overall selling price per tonne improved due to the negotiated new contracts with the Group's significant customers.
Cost of Sales
Cost of sales for Q4 2017 was R163.0 million (cash cost of sales of R578 per tonne sold) compared to R172.2 million (cash cost of
sales of R646 per tonne sold) for Q4 2016, a decrease of 5.3% quarter on quarter. The cash cost per tonne for the quarter
decreased due to the increase in saleable tonnes.
General and administration expenses
The Company recorded general and administration expenses of R19.4 million (R81 per tonne sold) during Q4 2017 compared to
R14.5 million (R62 per tonne sold) during Q4 2016, a 33.8% increase quarter on quarter. The increase in general and
administration expenses are in part due to fees incurred to prepare an updated reserve statement, as well as an increase in
insurance costs.
Other (Expense)/Income - net
During Q4 2017, the Group recorded net other expenses amounting to R121.8 million compared to net other income of R4.1
million for Q4 2016. Other income and expense comprises profit/loss on sale of assets, foreign exchange gains/losses, discounts
received, insurance proceeds, impairment losses, commissions paid and fair value adjustments on financial assets and conversion
option liabilities.
The Company recorded a fair value adjustment gain of R24.0 million for Q4 2017 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 R5.2
million for Q4 2016.
A net foreign currency exchange gain of R28.4 million was recorded for Q4 2017 compared to a R4.0 million gain for Q4 2016,
mainly as a result of the strengthening of the Rand in relation to the US Dollar with regards to the RCF Convertible Loan and US
Dollar denominated revenues.
An impairment loss of R175.6 million was recognized during Q4 2017 (Q4 2016: RNil) in respect of the impairment of property,
plant and equipment, as a result of the carrying value of the BC Dundee Group properties exceeding the estimated recoverable
amounts as at December 31, 2017. At this date, management identified indicators of impairment and determined the
recoverable amount of the BC Dundee Group on a value in use basis.
Finance Costs/Income-net
The Group recorded net interest and accretion expense of R15.4 million during Q4 2017 compared to a net interest expense of
R14.1 million for Q4 2016, an increase of 9.2%.
Taxation
The Company recorded income and other tax expense of RNil during Q4 2017 compared to an expense of R6.4 million during Q4 2016.
Net Profit/(loss) for the period
The net loss for Q4 2017 was R90.8 million, compared to a net loss of R19.4 million for Q4 2016. Contributing to the net loss
position for the current year were significant non-cash items including an impairment loss of R175.6 million. The increased loss to
the prior financial year was offset by foreign exchange gains of R28.4 million, net gains on the fair value adjustment on financial
assets, conversion option liability and warrant liability of R24.0 million and no impairment of assets being recognized during Q4
2016.
SUMMARY OF QUARTERLY FINANCIAL RESULTS
Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016
Revenue (R'000) 228 762 183 494 154 442 171 424 183 887 178 148 156 059 142 488
Cost of sales (excl depreciation and amortization)
(R'000) 142 087 140 330 145 109 143 155 164 787 150 278 147 079 122 664
Depreciation and amortization (R'000) 20 904 15 129 14 802 14 892 7 431 16 412 16 840 16 343
Operating (loss)/profit (R'000) (75 423) (14 927) 1 938 18 187 1 254 (11 771) 33 634 10 638
Adjusted EBITDA (R'000)* 65 839 24 930 (6 135) 13 689 (576) 13 530 (6 090) 4 639
Net (loss)/profit for the period (R'000) (90 791) (30 164) (6 959) 4 225 (19 395) (25 536) 11 481 (12 094)
Net (loss)/profit per share - Basic and Diluted (0.22) (0.08) (0.02) 0.01 (0.05) (0.07) 0.03 (0.04)
Cash generated from/(utilized in) operating
activities (R'000) 17 097 13 473 (6 600) 4 306 28 294 27 501 (6 035) (17 742)
Total ROM production (t) 290 381 327 821 363 389 360 327 363 650 401 440 415 655 377 079
Total sales tonnes (t) (excluding discard) 239 178 194 950 170 194 190 701 232 472 247 200 228 508 197 752
Average selling price per tonne sold (R) 956 877 858 755 745 721 683 721
Cash cost of sales per tonne (R) 578 686 826 631 668 608 644 620
Total assets (R'000) 360 308 539 603 504 037 519 243 504 248 523 727 514 994 550 256
Long-term borrowings (R'000) 345 036 390 731 360 774 380 419 368 194 374 302 524 905 578 222
(*) See Non-IFRS Performance Measures section of this MD&A.
SUMMARY OF ANNUAL INFORMATION
December 31, 2017 December 31, 2016 December 31, 2015
Revenue (R'000) 738 121 660 582 630 999
Cost of sales (excl depreciation and amortization)
(R'000) 570 681 584 808 635 286
Depreciation and amortization (R'000) 65 727 57 026 76 151
Operating (loss)/profit (R'000) (70 225) 33 755 (457 018)
Adjusted EBITDA (R'000)* 98 323 11 503 (70 952)
Net (loss) for the period (R'000) (123 689) (45 544) (561 825)
Net (loss) per share - Basic and Diluted (0.31) (0.14) (5.31)
Cash generated from/(utilized in) operating
activities (R'000) 28 270 32 018 (63 882)
Total ROM production (t) 1 341 918 1 557 824 1 732 205
Total sales tonnes (t) (excluding calcine and
discard) 757 865 892 812 915 843
Average selling price per tonne sold (R) 877 718 665
Cash cost of sales per tonne (R) 691 636 669
Total Assets (R'000) 360 308 504 248 558 289
Long-term borrowings (R'000) 345 036 368 194 569 813
(*) See Non-IFRS Performance Measures section of this MD&A.
FINANCIAL CONDITION REVIEW
A summary of the statements of financial position is shown below:
December 31, December 31,
2017 2016
R'000 R'000
Property, plant and equipment 106 886 311 731
Investments and long-term receivables 5 361 45 666
Cash and cash equivalents 21 429 13 754
Trade and other receivables 121 245 84 773
Other short-term receivables 2 880 1 902
Other receivables - restricted 53 212 -
Inventories 38 095 35 222
Restricted cash 11 200 11 200
Total assets 360 308 504 248
Trade and other payables 156 498 158 262
Total borrowings 187 985 161 361
RCF loan facilities 314 791 368 194
Other liabilities 38 800 38 134
Total liabilities 698 074 725 951
Total equity (337 766) (221 702)
Assets
Total assets were R360.3 million at December 31, 2017 compared to R504.2 million at December 31, 2016, a 28.5% decrease.
As of December 31, 2017, property, plant and equipment had decreased from December 31, 2016 mainly as a result of an
impairment of R175.6 million recorded during the current year.
The decrease in property, plant and equipment was partially offset by an increase in trade and other receivables, due to higher
sales to 30 day customers during December 2017 compared to December 2016.
Refer to "Overview of the period and outlook for the Group" where it was noted that the rehabilitation investment was
restructured during the year. 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 R698.1 million at December 31, 2017 compared to R726.0 million at December 31, 2016, a 3.8% decrease.
The most significant movement related to the increase in borrowings and a decrease in the RCF loan facilities.
The borrowings increased by R26.6 million, mainly as a result of a R21.5 million draw down made from the Investec working
capital facility.
The decrease in the RCF convertible loan was due to foreign exchange gains as a result of the strengthening of the Rand in
relation to the US Dollar as well as a gain of R30.0 million recognized on the revaluation of the conversion option liability for the
period ended December 31, 2017, which decreased the conversion option liability.
Loans and Borrowings
At December 31, 2017, the Group had outstanding debt with Investec of R200.3 million and R335.7 million (US$27.1 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 R79.8 million outstanding on the working capital facility.
The repayment schedule for the Investec loan facilities, the RCF Convertible Loan and trade and other payables, as of
December 31, 2017, excluding the effect of the fair value of the conversion liability and warrant liability, is as follows:
Not later than 1 Between 1 and 5 Greater than 5
year years years
At December 31, 2017
Borrowings(1) 200 345 633 -
RCF loan facilities(2) - 333 961 380 -
Trade and other payables (3) 156 497 655 - -
At December 31, 2016
Borrowings (1) 178 541 211 - -
RCF loan facilities(2) - 370 958 400 -
Trade and other payables(3) 158 262 414 - -
(1) Borrowings include only the capital amounts outstanding.
(2) The RCF Convertible Loan includes only the capital amount outstanding as of December 31, 2017. Interest is assumed to be
settled in Common Shares (refer to Overview of the Period and Outlook for the Group above) and has therefore been excluded.
(3) Trade and other payables exclude non-financial liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of R166.5 million as at December 31, 2017 compared to a working capital deficit of
R192.7 million at December 31, 2016 (see Non-IFRS Performance Measures). Working capital has improved due to an increase in
trade and other receivables (refer to Financial Condition Review above).
The condensed consolidated statements of cash flows are summarized below:
12 months ended 12 months ended
December 31, December 31,
2017 2016
R'000 R'000
Net cash generated from operating activities 28 270 32 018
Net cash utilized in investing activities (42 095) (26 376)
Net cash generated from/(used in) financing activities 21 500 (12 254)
Change in cash and cash equivalents 7 675 (6 612)
Operating activities
Cash generated in operating activities during the twelve months ended December 31, 2017 was R28.3 million compared to R32.0
million generated during the twelve months ended December 31, 2016.
The net loss for the year ended December 31, 2017 was R123.7 million compared to a net loss of R45.5 million for the period
ended December 31, 2016 as discussed under the Operational results section of this MD&A. Non-cash items included in the net
loss for the period were: depreciation and amortization of R65.7 million; impairment loss of R175.6 million; net gains on the fair
value adjustment on financial assets, conversion option liability and warrant liability of R37.8 million; gain on disposal of
property, plant and equipment of R0.5 million and net unrealized foreign exchange gains of R31.9 million of which the material
items were discussed under the Financial Results section of this MD&A.
The Group's net working capital decreased by R46.3 million for the year ended December 31, 2017, in comparison to a R25.7
million increase for the financial period ended December 31, 2016.
The net change in working capital included in 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 utilized R42.1 million in cash during the year ended December 31, 2017 compared to cash utilized of R26.4
million during the year ended December 31, 2016.
During the year ended December 31, 2017, the Group spent R35.2 million on property, plant and equipment relating to
sustaining capital compared to expenditure of R21.1 million for the period ended December 31, 2016.
Financing activities
Financing activities generated R21.5 million during the year ended December 31, 2017 and utilized R12.3 million during the year
ended December 31, 2016.
During the year ended December 31, 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 year ended December 31, 2016, the Group
drew down the second tranche of R25.0 million from the Investec working capital facility, which was used for working capital
purposes, but also repaid R22.3 million of the working capital facility and R15.0 million of the term loan.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
RELATED PARTY TRANSACTIONS
During the year, the Company entered into the following transactions in the ordinary course of business with related parties:
December 31, 2017 December 31, 2016
Payments for services rendered
RCF(1) 525,133 909,173
Total 525,133 909,173
The following balances were outstanding at the end of the reporting year:
December 31, 2017 December 31, 2016
Related party payables
RCF(1) 3 279 545 2 342 508
Total 3 279 545 2 342 508
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. In addition to these
costs, the Company settled interest on the RCF Convertible Loan in Common Shares during the year ended December 31, 2016,
which amounted to R29.2 million (year ended December 31, 2017: RNil).
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 period were as follows:
December 31, 2017 December 31, 2016
Short-term benefits 11,869,627 15,902,633
Share-based payments 40,839 176,514
Total 11,910,466 16,079,147
Amounts owing to directors and other members of key management personnel were R0.9 million as of December 31, 2017
(December 31, 2016: R1.2 million).
OTHER
There are no significant other items as at December 31, 2017.
COMMITMENTS AND CONTINGENCIES
Change in Control Provision
Certain management contracts require that payments of approximately R4.8 million be made upon the occurrence of a change
of control, other than a change of control attributable to RCF and/or Investec. As no triggering event has taken place, no
provision has been recognised as of December 31, 2017.
STA Contract Mining Agreement
In terms of the STA Contract Mining Agreement, STA is mining four sections at Magdalena underground mine 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.
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.
During the year ended December 31, 2017, the contract mining fee incurred amounted to R180.9 million (December 31, 2016:
R214.4 million). As at December 31, 2017, STA owned 28 169 592 Common Shares of the Company (December 31, 2016:
15 164 333 Common Shares) representing approximately 6.9% (December 31, 2016: 3.8%) of the then issued and outstanding
Common Shares. Also, included in trade payables as of December 31, 2017 is R93.1 million (December 31, 2016: R60.5 million)
owing to STA.
Capital Commitments
Capital expenditures contracted for at the statement of financial position date but not recognized in the consolidated financial
statements are as follows:
December 31, 2017 December 31, 2016
Property, plant and equipment 7 252 129 2 919 134
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.
Avemore Trust settlement
Refer to Overview of the Period and Outlook for the Group for ongoing commitments agreed to in the settlement reach with the
Avemore Trust.
Environmental 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.
Refer to Other Risks and Uncertainties below for non-compliance with laws and regulations identified. The Company has made,
and expects to make in the future, expenditures to comply with such laws and regulations.
SUBSEQUENT EVENTS
Issuance of Share Capital
Subsequent to December 31, 2017, the Company issued additional shares to STA in settlement of a portion of the contract
mining fees for the period between July 1, 2017 and September 30, 2017, and October 1, 2017 and
December 31, 2017. An additional 3 194 097 and 2 965 683 Common Shares were issued respectively based on an agreed share
price of C$0.05.
Amendment to Investec facility
On March 19, 2018, BC Dundee entered into a further amendment to the term loan and revolving credit agreement (the "Amendment").
Pursuant to the Amendment, among other things and subject to customary terms and conditions:
- the working capital facility under the Investec Facility was increased by R16 million (the "Supplemental Credit") to
R96 million, with the aggregate Investec Facility increasing from R220 million to R236 million;
- the Supplemental Credit is available subject to the provision of a utilization report acceptable to Investec;
- the availability period of the working capital facility was extended to June 22, 2018;
- the maturity date for any amounts drawn against the Supplemental Credit will be June 29, 2018;
- BCD will immediately repay to Investec the amount of R36.6 million currently due to Investec under the existing Investec
Facility, of which R30 million reduces the aggregate amount outstanding on the Investec Facility from R200.3 million to
R170.3 million, with the remaining R6.6 million applied to the mine royalty payment in the amount of R6.1 million and the
balance of R0.5 million applied to default interest, all of which were due and payable on March 16, 2018 (this payment was
affected on March 19, 2018);
- the due date for the principal payment amount of R7.5 million due on March 31, 2018 will be extended to June 29, 2018; and
- Investec agrees not to exercise its acceleration rights with respect to any existing events of default under the Investec
Facility and will appoint a technical advisor until June 30, 2018 to provide certain monthly reports to Investec.
- The Group shall provide Investec with a certified copy of a signed mandate with Northcott Capital Limited ("Northcott"),
pursuant to which Northcott will conduct a review of the strategic options available to the Group. The Northcott mandate
will replace the current agreement with Northcott and will terminate no later than June 30, 2018.
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 financial statements.
SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements in conformity with IFRS requires the Group's management to make
judgments, estimates and assumptions about future events that affect the amounts reported in the consolidated financial
statements and related notes thereto. Although these estimates are based on management's best knowledge of the amounts,
events or actions, actual results may differ from those estimates and these differences could be material. The areas which require
management to make significant judgments, estimates and assumptions in determining the carrying values and amounts include,
but are not limited to:
Provisions
Significant judgement and use of assumptions is required in determining the Group's provisions. Management uses its best
estimates based on current knowledge in determining the amount to be recognized as a provision. Key assumptions utilized in
the determination of the rehabilitation provision, which is measured at fair value, include the estimated life of mine, estimates of
reserves and discount rates. Fair value is determined based on the net present value of estimated future cash expenditures for
the settlement of the liability that may occur upon decommissioning of the mine. Such estimates are subject to change based on
changes in laws and regulations and negotiations with regulatory authorities.
Property, plant and equipment, mineral rights and other intangible assets
The Group makes use of experience and assumptions in determining the useful lives and residual values of property, plant and
equipment, mineral rights and other intangible assets (other than goodwill). Management reviews annually whether any
indications of impairment exist. Information that the Group considers includes changes in the market, economic and legal
environment in which the Group operates as well as internal sources of information. Estimates include but are not limited to
estimates of the discounted future after-tax cash flows expected to be derived from the Company's mining properties, costs to
sell the properties and the appropriate discount rate. Reductions in coal price forecasts, increases in estimated future costs of
production, increases in estimated future capital costs, appreciation of the Rand relative to the US Dollar, reductions in the
amount of recoverable mineral reserves and mineral resources and/or adverse current economics could result in a write-down of
the carrying amounts of the Group's assets.
As of December 31, 2017, based on management's estimate of the recoverable amount of the BC Dundee Group properties, an
impairment of R175.6 million was recorded. The impairment resulted in the write down of property, plant and equipment. If the
discount rate had been 1% higher than management's estimates, the Group would have recorded a further impairment of
approximately R15.9 million. If the foreign exchange rate between the Rand and the US Dollar had been 5% higher than
management's estimates, the Group would have recorded R27.5 million less impairment at December 31, 2017. If the sales prices
had been 1% higher than management's estimates, the Group would have recorded R35.8 million less impairment at December 31, 2017,
and had the sales prices been 1% less than management's estimates, the Group would have recorded a further impairment of
approximately R40.2 million. No impairment loss was recorded at December 31, 2016.
Capitalization of exploration and evaluation costs
Management has determined that exploration and evaluation costs incurred during the year have future economic benefits and
are economically recoverable. In making this judgment, management has assessed various sources of information including but
not limited to the geological and metallurgic information, history of conversion of mineral deposits to proven and probable
mineral reserves, scoping and feasibility studies, proximity of operating facilities, operating management expertise and existing permits.
Taxes and recoverability of potential deferred tax assets
The Company is subject to income, value added, withholding and other taxes in various jurisdictions. Significant judgement is
required in determining the Company's provisions for taxes. There are many transactions and calculations for which the ultimate
tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due. The determination of the Company's income, value added,
withholding and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions.
The Company's interpretation of taxation law as applied to transactions and activities may not coincide with the interpretation of
the tax authorities. All tax related filings are subject to government audit and potential reassessment subsequent to the financial
statement reporting period. Where the final tax outcome of these matters is different from the amounts that were initially
recorded, such differences will impact the tax related accruals and deferred income tax provisions in the period in which such
determination is made.
In assessing the probability of realizing deferred tax assets recognized, management makes estimates related to expectations of
future taxable income, applicable tax planning opportunities, expected timing of reversals of existing temporary differences and
the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its
assessments, management gives additional weight to positive and negative evidence that can be objectively verified. Estimates of
future taxable income are based on forecast cash flows from operations and the application of existing tax laws in South Africa.
Share-based payments
Management determines costs for share-based payments using market-based valuation techniques. The fair value of the market-
based and performance-based share awards are determined at the date of grant using generally accepted valuation techniques.
Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include
estimating the future volatility of the stock price, expected dividend yield, future employee turnover rates and future employee
stock option exercise behaviors and corporate performance. Such judgments and assumptions are inherently uncertain. Changes
in these assumptions could materially affect the fair value estimates.
Compound financial instruments
The Group has entered into agreements in the form of foreign-currency-denominated convertible loans and warrants which are
accounted for as compound financial instruments. The fair value of the embedded derivative liabilities (conversion option liability
and warrant liability) are determined at the date of the transaction and are fair valued at each reporting date through profit or
loss using generally accepted valuation techniques. Assumptions are made and judgments are used in applying valuation techniques.
These assumptions and judgments include estimating the future volatility of the stock price, expected dividend yield and risk free
rate of return. Such judgments and assumptions are inherently uncertain. Changes in these assumptions could materially affect
the fair value estimates.
Mineral reserve estimates
The figures for mineral reserves and mineral resources are determined in accordance with National Instrument 43-101,
"Standards of Disclosure for Mineral Projects", issued by the Canadian Securities Administrators. There are numerous
uncertainties inherent in estimating mineral reserves and mineral resources, including many factors beyond the Group's control.
Such estimation is a subjective process, and the accuracy of any mineral reserve or mineral resource estimate is a function of the
quantity and quality of available data and of the assumptions made and judgments used in engineering and geological
interpretation.
Incorrect assumptions by management, including economic assumptions such as coal prices, foreign exchange rates and market
conditions could have a material effect on the Group's reserves and resources, and as a result, could also have a material effect
on the Group's financial position and results of operation.
Going concern assumption
The consolidated financial statements 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. If the going concern assumption was not appropriate for these
consolidated financial statements then adjustments would be necessary to the carrying values of assets and liabilities, the
reported revenues and expenses, and the statement of financial position classifications. Such adjustments could be material.
NEW ACCOUNTING POLICIES
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the International
Accounting Standards Board ("IASB") or International Financial Reporting Interpretations Committee ("IFRIC") that are mandatory
for accounting periods beginning after January 1, 2017 or later periods.
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 Group does not anticipate that the application of these amendments will have a
significant impact on the Group's consolidated financial statements.
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 Group does not anticipate that the application of these amendments will have a significant impact on
the Group's consolidated financial statements.
Future Accounting Changes
The following standards, amendments and interpretations are issued but not yet effective for the December 31, 2017 financial
year-end:
IFRS 9 -'Financial Instruments' - effective January 1, 2018
IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9
was subsequently amended in October 2010 to include requirements for the classification and measurement of financial
liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another
revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited
amendments to the classification and measurement requirements by introducing a 'fair value through other comprehensive
income' ("FVTOCI") measurement category for certain simple debt instruments.
All recognized financial assets that are within the scope of IAS 39, Financial Instruments: Recognition and Measurement are
required to be subsequently measured at amortized cost or fair value. In addition, entities may make an irrevocable election to
present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive
income, with only dividend income generally recognized in profit or loss.
With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the
amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is
presented in other comprehensive income ("OCI"), unless the recognition of the effects of changes in the liability's credit risk in
OCI would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability's
credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in fair value of the
financial liability designated as fair value through profit or loss is presented in profit or loss.
In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit
loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in
those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.
The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in
IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically
broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items
that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of
an 'economic relationship'. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure
requirements about an entity's risk management activities have also been introduced.
The Group does not anticipate that the application of IFRS 9 will have a significant impact on the Group's consolidated financial statements.
IFRS 15 - 'Revenue from Contracts with Customers' - effective January 1, 2018
IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18, Revenue; IAS 11,
Construction Contracts and the related Interpretations when it becomes effective.
The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when 'control' of the
goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance
has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.
The Group does not anticipate that the application of IFRS 15 will have a significant impact on the Group's consolidated financial statements.
IFRS 16 - 'Leases' - effective January 1, 2019
IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both
lessors and lessees. It will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it
becomes effective.
IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer.
Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting and
is replaced by a model where a right-of-use asset and a corresponding liability have to be recognized for all leases by lessees
except for short-term lessees and leases of low value assets.
The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and
impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present
value of the lease payments. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of
lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease
payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split
into a principal and interest portion which will be presented as financing and operating cash flows respectively. It is not
practicable to provide a reasonable estimate of the effect of IFRS 16 until the Group undertakes a detailed review.
IFRS 2 - Share-based payments - effective January 1, 2018
This amendment clarifies the measurement basis for cash-settled, share-based payments and the accounting for modifications
that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will
require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the
employee's tax obligation associated with a share-based payment and pay that amount to the tax authority.
IFRIC 22 - Foreign Currency Transactions and Advance Consideration - effective January 1, 2018
IFRIC 22 was issued in December 2016 and addresses foreign currency transactions or parts of transactions where there is
consideration that is denominated in a foreign currency; a prepaid asset or deferred income liability is recognized in respect of
that consideration, in advance of the recognition of the related asset, expense or income; and the prepaid asset or deferred
income liability is non-monetary. The interpretation committee concluded that the date of the transaction, for purposes of
determining the exchange rate, is the date of initial recognition of the non-monetary prepaid asset or deferred income liability.
Earlier adoption is permitted.
The Group does not anticipate that the application of IFRIC 22 will have a significant impact on the Group's consolidated financial statements.
IFRIC 23 - Uncertainty over Income Tax Treatments - effective January 1, 2019
IFRIC 23 provides a framework to consider, recognise and measure the accounting impact of tax uncertainties. The Interpretation
provides specific guidance in several areas where previously IAS 12 was silent. The Interpretation also explains when to
reconsider the accounting for a tax uncertainty. Most entities will have developed a model to account for tax uncertainties in the
absence of specific guidance in IAS 12. These models might, in some circumstances, be inconsistent with IFRIC 23 and the impact
on tax accounting could be material. Management should assess the existing models against the specific guidance in the
Interpretation and consider the impact on income tax accounting.
FINANCIAL INSTRUMENTS
Details of the significant accounting policies and methods adopted (including the criteria for recognition, the bases of
measurement, and the bases for recognition of income and expenses of the Group) for each class of financial asset and financial
liability are disclosed in Note 2 of the annual consolidated financial statements for the years ended December 31, 2017 and
December 31, 2016.
The Company's financial assets and financial liabilities as at December 31, 2017 and December 31, 2016 were as follows:
Financial instruments Loans and Fair value Liabilities at Other Total
receivables through profit fair value liabilities at
or loss through profit amortized
or loss cost
December 31, 2017
Trade and other receivables (excluding
non-financial assets) 112 874 844 - - - 112 874 844
Investments in financial assets - 181 465 - - 181 465
Cash (excluding restricted cash) 21 428 994 - - - 21 428 994
Non-interest bearing receivables 2 015 578 - - - 2 015 578
Investec borrowings - - - (187 955 977) (187 955 977)
RCF loan facilities - - (28 289) (314 762 527) (314 790 816)
Trade and other payables (excluding
non-financial liabilities) - - - (152 217 953) (152 217 953)
Financial instruments Loans and Fair value Liabilities at Other Total
receivables through profit fair value liabilities at
or loss through profit amortized
or loss cost
December 31, 2016
Trade and other receivables (excluding
non-financial assets) 74 865 191 - - - 74 865 191
Investments in financial assets - 41 633 486 - - 41 633 486
Cash (excluding restricted cash) 13 753 934 - - - 13 753 934
Non-interest bearing receivables 1 902 205 - - - 1 902 205
Investec borrowings - - - (161 016 413) (161 016 413)
RCF loan facilities - - (31 905 346) (336 288 222) (368 193 568)
Trade and other payables (excluding
non-financial liabilities) - - - (119 837 547) (119 837 547)
CAPITAL MANAGEMENT
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to
provide returns for shareholders and benefits for other stakeholders. In order to maintain or adjust the capital structure, the
Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to
reduce debt.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net
debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown
in the consolidated statements of financial position) less cash and cash equivalents. Total capital is calculated as "equity" as
shown in the consolidated statements of financial position plus net debt.
The gearing ratios at December 31, 2017 and December 31, 2016 were as follows:
December 31, December 31,
2017 2016
Total borrowings 502 776 300 529 554 608
Less: cash and cash equivalents (21 428 994) (13 753 934)
Net debt 481 347 306 515 800 674
Total equity (337 765 527) (221 702 172)
Total capital 143 581 779 294 098 502
Gearing ratio 335% 175%
Included within total borrowings is a convertible loan of R334.0 million (period ended December 31, 2016: R371.0 million). The
Company's capital management objectives, policies and processes have remained unchanged during the year ended December
31, 2017 except for the Investec facilities. Refer to Overview of the Period and Outlook for the Group for changes to the Investec
term loan and revolving credit agreement.
The Company is not subject to any externally imposed capital requirements with the exception of the RCF Convertible Loan, the
Investec facilities and the capital requirements of the TSXV which requires adequate working capital or financial resources of the
greater of (i) C$50 000 and (ii) an amount required in order to maintain operations and cover general and administrative
expenses for a period of six months.
As of December 31, 2017, the Company may not be compliant with the policies of the TSXV. The impact of this violation is not
known and is ultimately dependent on the discretion of the TSXV.
FINANCIAL RISK FACTORS
The Group's activities expose it to a variety of financial risks such as foreign exchange risk, price risk, cash flow interest rate risk,
credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Group's financial performance.
Risk management is carried out by head office management under policies approved by the Board of Directors. The Group
identifies, evaluates and manages financial risks in close co-operation with the Group's subsidiaries.
Market risk
(a) Foreign exchange risk
The Company's functional currency is the Rand. The Group operates internationally and is exposed to foreign exchange risk
arising from currency exposures with respect to the US Dollar and Canadian Dollar. The Group's foreign exchange risk arises
primarily from the sale of coal, based on the API 4 coal price index in US Dollars to foreign customers, external loans
denominated in US Dollars and translation differences arising from the translation of share capital and other equity items.
At December 31, 2017, a 10% increase/(decrease) in the period average foreign exchange rate between the Canadian Dollar and
the Rand would have increased/(decreased) the Group's profit or loss by approximately R0.4 million (period ended December 31,
2016: R3.5 million).
A 10% increase/(decrease) in the period end foreign exchange rate between the US Dollar and the Rand would have
increased/(decreased) the Group's profit or loss by approximately R33.2 million (period ended December 31, 2016: R36.4 million).
(b) Price risk
The Group is exposed to commodity price risk, primarily due to fluctuations in the API 4 coal price index, by which foreign coal
sales are priced. Commodity prices fluctuate on a daily basis and are affected by numerous factors beyond the Group's control.
The supply and demand for commodities, the level of interest rates, the rate of inflation, investment decisions by large holders of
commodities including governmental reserves and stability of exchange rates can all cause significant fluctuations in commodity
prices. Such external economic factors are in turn influenced by changes in international investment patterns and monetary
systems and political developments.
At December 31, 2017, a 10% change in the API 4 coal price index would have resulted in a corresponding change in export coal
revenue of approximately R3.1 million (period ended December 31, 2016: R2.1 million).
(c) Cash flow interest rate risk
The Group's interest rate risk arises from deposits held with banks and interest-bearing liabilities. Borrowings issued at variable
rates expose the Group to cash flow interest rate risk which is partially offset by cash held at variable rates. During the current
and prior financial year the Group's borrowings at variable rates were denominated in South African Rands.
Based on the simulations performed, the impact on profit or loss of a 1% shift of interest rates on borrowings would be a
maximum increase/(decrease) in profit or loss of R1.6 million (period ended December 31, 2016: R1.4 million).
Credit risk
Credit risk is managed at a Group level, except in respect of trade receivables which are managed at an operational level.
Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, as well as credit exposures to
customers, including outstanding receivables and committed transactions. The Group only transacts with high quality financial institutions.
Risk control assesses the credit quality of customers, taking into account their financial position, past experience and other
factors. The utilization of credit limits is regularly monitored. No credit limits were exceeded during the reporting period, and
management does not expect any losses from non-performance by these counterparties.
Restricted cash totaling R11.2 million was on deposit with First National Bank ("FNB") to be released to the relevant
counterparties if payments are not made to them.
Liquidity risk
Cash flow forecasting is performed by Group finance. Group finance monitors rolling forecasts of the Group's liquidity
requirements to ensure it has sufficient cash to meet operational needs. Such forecasting takes into consideration the Group's
debt/equity financing plans, covenant compliance and external legal requirements. Refer to the Financial Condition Review
section for an analysis of the Group's non-derivative financial liabilities disclosed in maturity groupings based on the remaining
period at the consolidated statement of financial position date to the contractual maturity date. The amounts disclosed in the
table are the contractual undiscounted cash flows.
Fair value estimation
Financial instruments carried at fair value are assigned to different levels of the fair value hierarchy, by valuation method. The
different levels have been defined as follows:
- Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).
- Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is,
as prices) or indirectly (that is, derived from prices) (level 2).
- Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs) (level 3).
The following table presents the Group's financial assets and liabilities that are measured at fair value at December 31, 2017 and
December 31, 2016:
Level 1 Level 2 Level 3
R R R
December 31, 2017
Investment in financial assets 181 465 - -
Other receivables - restricted - 53 211 988 -
Conversion option liability - 28 290 -
Warrant liability - 29 507 -
December 31, 2016
Investment in financial assets 41 633 486 - -
Conversion option liability - 31 905 346 -
Warrant liability - 344 627 -
GOING CONCERN
The consolidated financial statements 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 BC Dundee including two retrenchment processes and the conclusion of agreements with
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, in order to alleviate cash flow pressures. In addition, the Company secured additional funding from RCF and 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 Overview of the Period and Outlook for the Group above). Although the
Group has implemented various restructuring initiatives, the Group continues to experience operational challenges. The Group
also 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.
A new adit is being considered at Aviemore in order to access the remainder of the reserve. This is due to the current adit
reaching its limits by 2020, and will extend the LOM to 2033. The Group's ability to continue long term operations and ultimately
continue as a going concern, is dependent on its ability to secure funding required for the adit expansion at Aviemore.
If the going concern assumption was not appropriate for the annual consolidated financial statements 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.
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, including those
discussed below, 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.
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").
The Company's Calcine plant has been operating without an AEL, and this has necessitated that a Section 24G application be
submitted to the Economic Development, Tourism and Environmental Affairs ("EDTEA"). The Section 24G application relates to
the commencement of certain listed activities which have commenced at the Calcine plant at Coalfields, prior to obtaining
environmental authorization ("EA"). To comply with legislation, a full scoping and EIA report should be undertaken. With the aim
to continually strive to be compliant with the operations of the Calcine plant, the Company approached the EDTEA for AEL. Once
the plant has been refurbished it was agreed with EDTEA that stack tests will be carried out and the results submitted. Once the
results are submitted, EDTEA will issue a fine, and once paid, the EA will be issued. On approval of the EA, an AEL can then be
obtained in compliance with the Air Quality Act.
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 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.
Following the appointment of a new President for South Africa in February 2018, the Presidency has been in discussion with the
Chamber of Mines to resolve the impasse over the Mining Charter and to facilitate a process of developing a new Mining Charter
that all stakeholders can support and defend.
The Chamber, on behalf of its members, has agreed jointly with the DMR to postpone its court application in respect of the
Reviewed Mining Charter, which was due to be heard in the High Court on February 19, 2018 to February 21, 2018.
The postponement serves to allow parties the space to engage and find an amicable solution.
Additional Capital
The continued sustainability of the BC Dundee Properties, including the expansion of mining operations and the continued
sustainability of the Group, may require additional working capital and capital expenditures and therefore require additional
financing. Failure to obtain sufficient financing may result in a delay or indefinite postponement of development or production on
the BC Dundee Properties. Additional financing may not be available when needed or if available, the terms of such financing
might not be favorable and might involve substantial dilution to shareholders. Failure to raise capital when needed may have a
material adverse effect on the Company's business, financial condition and results of operations.
Production Estimates
BC Corp has prepared estimates of future coal production for its existing mines. BC Corp cannot give any assurance that it will
achieve its production estimates. The failure by BC Corp to achieve its production estimates could have a material adverse effect
on any or all of its future cash flows, profitability, results of operations and financial conditions. The realization of production
estimates is dependent on, among other things, the accuracy of mineral reserve and resource estimates, the accuracy of
assumptions regarding coal quality and recovery rates, ground conditions (including hydrology), geological conditions, the
physical characteristics of the coal, the presence or absence of particular metallurgical characteristics, and the accuracy of the
estimated rates and costs of mining and processing.
Actual production may vary from estimates for a variety of reasons, including the actual coal mined varying from estimates of
quality or tonnage; dilution, metallurgical and other characteristics (whether based on representative samples of coal or not);
short-term operating factors such as the need for sequential development of production panels and the processing of new or
adjacent coal qualities from those planned; mine failures or section failures; industrial accidents; natural phenomena such as
inclement weather conditions, floods, droughts, rock slides and earthquakes; encountering unusual or unexpected geological
conditions; changes in power costs and potential power shortages; shortages of principal supplies needed for mining operations
including explosives, fuels, chemical reagents, water, equipment parts, stonedust, magnetite and lubricants; plant and equipment
failure; the inability to process certain types of coals; labour shortages or strikes; and restrictions or regulations imposed by
government agencies or other changes in the regulatory environment.
Such occurrences could also result in damage to mineral properties or mines, interruptions in production, injury or death to
persons, damage to property of BC Corp or others, monetary losses and legal liabilities in addition to adversely affecting coal
production. These factors may cause a coal reserve that has been mined profitably in the past to become unprofitable, forcing BC
Corp to cease production.
Price of Coal
The Company's profits are directly related to the cost of production, and volume and price of coal sold. Price volatility could have
a significant impact on the future revenues and profitability of the Company.
Coal demand and price are determined by numerous factors that are beyond the control of the Company including the demand
for electricity: the supply and demand for domestic and foreign coal; interruptions due to transportation delays; air emission
standards for coal-fired power plants; regulatory, administrative and judicial decisions; the price and availability of alternative
fuels, including the effects of technology developments; the effect of worldwide energy conservation efforts, future limitations
on utilities' ability to use coal as an energy source due to the regulation and/or taxation of greenhouse gases; proximity to,
capacity of, and cost of transportation facilities; and political and economic conditions and production costs in major coal
producing regions. The combined effects of any or all of these factors on coal price or volume are impossible for the Company to
predict. If realized coal prices fall below the full cost of production and remain at such level for any sustained period, the
Company will experience losses, which may be significant and as a result the Company may decide to discontinue affected
operations forcing it to incur closure or care and maintenance costs, as the case may be.
Labour and Employment Matters
While the Company believes that it has good relations with both its unionized and non-unionized employees, production at the
Company's mining operations is dependent upon the efforts of the Company's employees and those of its contractors. Relations
between the Company and its employees may be impacted by changes in the scheme of labour relations that may be introduced
by the relevant governmental authorities in whose jurisdictions the Company carries on business.
During the 2017 year, BC Corp completed wage negotiations with the unions for the forthcoming financial year.
Estimates
Capital and operating cost estimates made in respect of BC Corp's mines and development projects may not prove accurate.
Capital and operating cost estimates are based on the interpretation of geological data, feasibility studies, anticipated climatic
conditions, other factors and assumptions regarding foreign exchange currency rates and domestic inflation.
Any such events could affect the ultimate accuracy of such estimates; unanticipated changes in quality and tonnage of coal to be
mined and processed; incorrect data on which engineering assumptions are made; delay in construction schedules, unanticipated
transportation costs; the accuracy of major equipment and construction cost estimates; labour issues; changes in government
regulation (including regulations regarding prices, cost of consumables and capital goods, royalties, duties, taxes, permitting and
restrictions on production quotas on exportation of minerals) and title claims.
Mineral Legislation
The business of mineral exploration, development, mining and processing is subject to various national and local laws and plans
relating to permitting and maintenance of titles, environmental consents, employee relations, health and safety, royalties, land
acquisitions and other matters. There is a risk that the necessary permits, consents, authorizations and agreements to implement
planned exploration, development or mining may not be obtained under conditions or within the time frames that make such
plans economic, that applicable laws, regulations or the governing authorities will change or that such changes will result in
additional material expenditures or time delays. In addition, mining legislation in South Africa, including the Mineral and
Petroleum Resources Development Act, 28 of 2004 ("MPRDA") is currently under review and the proposed amendments, if
passed by Government, could have a material impact on the Company's operations.
Compliance with regulation 8.10 of the Mine Health and Safety Act, 29 of 1996 may require significant capital outlay on behalf of
the Company and may cause material changes or delays in the Company's intended activities. Management is currently assessing
options to comply with the regulation. These regulations could have a material impact on the Company's operations.
Title to Mineral Holdings
BC Corp requires licenses and permits from various governmental authorities. BC Corp believes that it holds all necessary licenses
and permits under applicable laws and regulations in respect of the BC Dundee Properties and that it is presently complying in all
material respects with the terms of such licenses and permits. Such licenses and permits, however, are subject to change in
various circumstances. There can be no guarantee that the Company will be able to obtain or maintain all necessary licenses and
permits that may be required to explore and develop or mine its properties. The validity of ownership of property holdings can be
uncertain and may be contested. Although BC Dundee has attempted to acquire satisfactory title to its properties, risk exists that
some titles, particularly titles to undeveloped properties, may be defective.
Refer to Legal proceedings in Overview of the Period and Outlook for the Group section above, with regards to the settlement of
legal processes in respect of MR174 and MR301.
Power Supply
The supply of electric power is not guaranteed in South Africa. Currently the public supply is sufficient to power all of the
operations at the BC Dundee Properties; however South African power supply is limited, with limited reserve capacity. In the
2015 Financial Year, the country had been plagued with a shortage of supply, which has led to sporadic "loadshedding" of power
in certain areas of the country. This situation improved in the later part of 2016 and through 2017. This has and could continue
to negatively affect the production at the mines in terms of lost production and increased costs. The Company has procured
diesel power generators for backup power to the various sub-stations that have been installed on the surface and underground
at the BC Dundee Properties.
Additionally, any production expansion plan for the BC Dundee operations would be dependent on additional electrical supply,
and the majority of new build projects in the country are behind schedule. While the Company has taken steps to meet the need
for additional supply of electricity from the public utility (Eskom), there can be no assurance that the BC Dundee Properties will
not be negatively affected by the power supply situation on either an operating or cost basis, or both.
Depletion of Mineral Reserves
The Company must continually replace mining reserves depleted by production to maintain production levels over the long-term.
There is no assurance that the Company's exploration programs will result in any new commercial mining operations or yield new
reserves to replace or expand current reserves.
Litigation
All industries, including the mining industry, are subject to legal claims, with and without merit. Legal proceedings may arise from
time to time in the course of the Company's business. Such litigation may be brought against the Company or one or more of its
subsidiaries in the future from time to time or the Company or one or more of its subsidiaries may be subject to another form of
litigation. Defense and settlement costs of legal claims can be substantial, even with respect to claims that have no merit. As of
the date hereof, except as disclosed in the Overview of the Period and Outlook for the Group section above, no other material
claims have been brought against the Company, nor has the Company received an indication that any claims are forthcoming.
Due to the inherent uncertainty of the litigation process, the process of defending such claims (or any other claims that may be
brought against the Company) could take away from management time and effort and the resolution of any particular legal
proceeding to which the Company or one or more of its subsidiaries may become subject could have a material effect on the
Company's financial position and results of operations.
South Africa Country Risks
The operations of the Company are subject to risks normally associated with the conduct of business in South Africa. Risks may
include, among others highlighted herein, problems relating to labour disputes, delays or invalidation of governmental orders
and permits, corruption and fraud, uncertain political and economic environments, civil disturbances and crime, arbitrary
changes in laws or policies, foreign taxation and exchange controls, opposition to mining from environmental or other non-
governmental organizations or changes in the political attitude towards mining, limitations on foreign ownership, limitations on
repatriation of earnings, infrastructure limitations and increased financing costs.
There have been recent calls in South Africa for the nationalization and expropriation without compensation of domestic mining
assets. Any such development would have a significant adverse effect on the Company.
The labour situation in South Africa has been unstable across the mining industry, and in particular in the platinum industry and
in the metal and engineering sector. There is a risk that this instability extends into other sectors, including the coal sector. There
have also been retrenchments carried out by numerous companies across the industry.
HIV is prevalent in Southern Africa and tuberculosis is prevalent in the KwaZulu-Natal Province of South Africa, where the
Company's operations are situated. Employees of the Company may have or could contract either of these potentially deadly
illnesses. The prevalence of HIV and tuberculosis could cause substantial lost employee man-hours and may influence the
Company's ability to source skilled labour. The above risks may limit or disrupt the Company's business activities.
The Company's mining operations must remain compliant with South African mining laws, including, inter alia, the MPRDA and
the Mining Charter, the conditions imposed by the licenses held by the Company, and the BEE participation requirements.
However, no assurance can be given that the Company will be able to meet the objectives of South African mining laws going
forward, including the 26% HDSA ownership objective and compliance with the requirements of the Mining Charter. There is also
no guarantee that the interests of the Company will be wholly aligned with the interests of its (direct or indirect) BEE shareholders.
Infrastructure
Mining, processing, development and exploration activities depend, to one degree or another, on adequate infrastructure.
Reliable roads, bridges, power sources and water supply are important determinants that affect capital and operating costs.
Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such
infrastructure could adversely affect the Company's operations, financial condition and results of operations.
Environmental Risks and Other Hazards
All phases of the Company's operations will be subject to environmental regulation in South Africa. Environmental legislation in
many countries is evolving and the trend has been toward stricter standards and enforcement, increased fines and penalties for
non-compliance, more stringent environmental assessments of proposed projects and increasing responsibility for companies
and their officers, directors and employees.
Compliance with environmental laws and regulations may require significant capital outlays on behalf of the Company and may
cause material changes or delays in the Company's intended activities. There can be no assurance that future changes in
environmental regulations and the manner in which the regulatory authorities enforce these regulations will not adversely affect
the Company's business, and it is possible that future changes in these laws or regulations could have a significant adverse impact
on some portion of the Company's business, causing the Company to re-evaluate those activities at that time.
Mining involves various other types of risks and hazards, including: industrial accidents; processing problems; unusual or
unexpected geological structures; structural cave-ins or slides; flooding; fires; and periodic interruptions due to inclement or
hazardous weather conditions. These risks could result in damage to, or destruction of, mineral properties, production facilities
or other properties, personal injury, delays in mining, increased production costs, monetary losses and possible legal liability.
Dependence on Key Personnel
The Company is dependent on a relatively small number of key personnel. The Company currently does not have key person
insurance on these individuals. Due to the Company's relatively small size, the loss of these persons or the Company's inability to
attract and retain additional highly skilled employees required for the operation of the Company's activities may have a material
adverse effect on the Company's business or future operations.
Dependence on Outside Parties
The Company has relied upon consultants, engineers, contractors and others and intends to rely on these parties for exploration,
extraction, development, construction and operating expertise. Substantial expenditures are required to develop coal properties,
to establish mineral reserves through drilling, to carry out environmental and social impact assessments, to develop processes to
extract coal and, in the case of new properties, to develop the exploration and infrastructure at any particular site. If such parties'
work is deficient or negligent or is not completed in a timely manner, it could have a material adverse effect on the Company.
Effective October 31, 2015, STA is mining the sections at Magdalena. The Company retains legal and operational responsibilities
for these mining operations and must maintain adequate oversight and involvement to ensure compliance and optimum
performance by STA.
Exploration and Development
The exploration and development of coal deposits involves significant risks, which even a combination of careful evaluation,
experience and knowledge may not eliminate. While the discovery of a mineable deposit may result in substantial rewards, few
properties that are explored are ultimately developed into producing mines.
Major expenses may be required to establish additional reserves, to develop metallurgical processes and to construct mining and
processing facilities at a particular site. It is impossible to ensure that the current exploration programs planned by the Company
will result in profitable commercial mining operations, and significant capital investment is required to achieve commercial
production from successful exploration efforts. There is no certainty that exploration expenditures made by the Company will
result in discoveries of commercial mineable quantities. Exploration for coal is highly speculative, involves substantial
expenditures, and is frequently non-productive.
Tax and Foreign Mining Tax Regimes
The Company is subject to income, value added, withholding and other taxes in various jurisdictions. Significant judgment is
required in determining the Company's provisions for taxes. There are many transactions and calculations for which the ultimate
tax determination is uncertain during the ordinary course of business. The Company recognizes liabilities for anticipated tax audit
issues based on estimates of whether additional taxes will be due. The determination of the Company's income, value added,
withholding and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions.
The Company's interpretation of taxation law as applied to transactions and activities may not coincide with the interpretation of
the tax authorities. All tax related filings are subject to government audit and potential reassessment subsequent to the financial
statement reporting period. Where the final tax outcome of these matters is different from the amounts that were initially
recorded, such differences will impact the tax related accruals and deferred income tax provisions in the period in which such
determination is made.
Mining tax regimes in foreign jurisdictions are subject to differing interpretations and are subject to constant change. The
Company's interpretation of taxation law as applied to its transactions and activities may not coincide with that of the tax
authorities. As a result, transactions may be challenged by tax authorities and the Company's operations may be assessed, which
could result in significant additional taxes, penalties and interest. In addition, proposed changes to mining tax regimes in foreign
jurisdictions could result in significant additional taxes payable by the Company, which would have a negative impact on the
financial results of the Company.
Insurance and Uninsured Risks
The Company's business is subject to a number of risks and hazards generally, including: adverse environmental conditions;
industrial accidents; labour disputes; unusual or unexpected geological conditions; ground or slope failures; cave-ins; changes in
the regulatory environment; and natural phenomena such as inclement weather conditions, floods and earthquakes. Such
occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental
damage to the Company's properties or the properties of others, delays in mining, monetary losses and possible legal liability.
The businesses and properties of the Company are insured against loss or damage, subject to a number of limitations and
qualifications. Such insurance will not cover all the potential risks associated with a mining company's operations. The Company
may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not
continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as
environmental pollution or other hazards as a result of exploration and production is not generally available to the Company or
to other companies in the mining industry on acceptable terms.
The Company might also become subject to liability for pollution or other hazards that may not be insured against or that the
Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the
Company to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.
Competition
The mining industry is intensely competitive. Significant competition exists for the acquisition of properties producing or capable
of producing coal. The Company may be at a competitive disadvantage in acquiring additional mining properties because it must
compete with other individuals and companies, many of which have greater financial resources, operational experience and
technical capabilities than the Company. The Company may also encounter increasing competition from other mining companies
in its efforts to hire experienced mining professionals. Increased competition could adversely affect the Company's ability to
attract necessary capital funding or acquire suitable producing properties or prospects for mineral exploration in the future.
The Company's Securities May Experience Price Volatility
Securities markets have a high level of price and volume volatility, and the market price of securities of many companies have
experienced wide fluctuations in price that have not necessarily been related to the operating performance, underlying asset
values or prospects of such companies. Factors unrelated to the financial performance or prospects of the Company include
macroeconomic developments in North America and globally, and market perceptions of the attractiveness of particular
industries. There can be no assurance that continued fluctuations in coal prices will not occur. As a result of any of these factors,
the market price of the securities of the Company may not accurately reflect the longer term value of the Company.
As of the date of this MD&A, RCF owns 347 945 097 Common Shares representing approximately 84.1% of the currently issued
and outstanding Common Shares. Assuming RCF converts the remaining US$27.0 million RCF Convertible Loan before June 30,
2019, interest on the RCF Convertible Loan is settled quarterly in Common Shares at an interest rate of 1.29% per annum for the
full term and STA is issued Common Shares on a quarterly basis for the Equity Portion until such time as STA holds 9.9% of the
Company, however STA is estimated to hold 4.2%, and RCF would hold 93.0% of the issued and outstanding Common Shares on
June 30, 2019 on a fully diluted basis. This excludes the effects of potential dilution of the exercise of the Investec warrants,
which are currently out of the money.
There is a risk that the Company's securities will not trade on the open market due to a majority holding by one entity.
Foreign Assets
All of the assets of the Company are located in jurisdictions outside of Canada. As a result, it may be difficult for shareholders
resident in Canada or other jurisdictions to enforce judgments obtained against the Company in Canada.
Currency Fluctuations
Currency fluctuations may affect the Company's costs and margins. Adverse fluctuations in the South African Rand relative to the
US Dollar and the Canadian Dollar and other currencies could materially and adversely affect the Company's profitability, results
of operation and financial position.
The Company's Directors and Officers may have Conflicts of Interests
Certain of the Company's directors and officers also serve as directors and/or officers of other companies involved in natural
resource exploration, development and production and as directors and/or officers of RCF being the major shareholder of the
Company. Consequently there exists the possibility that such directors may be in a position of conflict in respect of proposed
transactions or the operation of the Company.
The directors and officers of the Company are required by law to act honestly and in good faith with a view to the best interests
of the Company and to disclose any interests that they may have in any project or opportunity of the Company. If a conflict of
interest arises at a meeting of the Board of Directors of the Company, any director in a conflict will be required to disclose his or
her interest and abstain from voting on such matter.
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 standardized 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.
December 31, December 31,
2017 2016
R'000 R'000
Current assets
Cash and cash equivalents 21 429 13 754
Trade and other receivables 121 245 84 773
Inventories 38 095 35 222
Non-interest bearing receivables 2 880 1 902
183 650 135 651
Current liabilities
Trade and other payables (excluding provisions) 156 498 158 262
Current portion of borrowings 187 986 161 361
Current Tax Liabilities 2 901 8 775
347 385 328 398
Net working capital (163 735) (192 747)
Adjusted EBITDA
Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortization 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:
12 months ended 3 months ended
December 31, December 31, December 31, December 31, September 30,
R'000 2017 2016 2017 2016 2017
Operating profit/(loss) for the period (70 225) 33 755 (75 423) 1 254 (14 927)
Depreciation and amortization 65 727 57 026 20 904 7 431 15 129
Impairment of receivables (483) 1 (91) - (389)
Impairment of property, plant and equipment 175 624 - 175 624 - -
Fair value adjustments of financial assets and
conversion option liability (37 767) (93 363) (24 019) (5 169) 11 128
Stock-based compensation 41 177 2 (102) 3
Foreign exchange (gains)/losses (34 594) (36 740) (31 158) (3 990) 13 985
Adjusted EBITDA 98 323 11 503 65 839 (576) 24 929
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 year on year. Below is a reconciliation of
revenue as disclosed in the Consolidated Financial Statements for the years ended December 31, 2017 and December 31, 2016 to
net revenue which excludes all railage, port handling and wharfage related costs:
12 months ended 3 months ended
December 31, December 31, December 31, December 31, September 30,
R'000 2017 2016 2017 2016 2017
Revenue 738 121 660 582 228 762 183 887 183 494
Railage, port handling and wharfage 24 757 19 398 4 703 2 880 6 979
Net revenue 713 364 641 184 224 059 181 007 176 515
Headline loss per share
Headline 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 loss for the periods to headline loss is disclosed below:
12 months ended 12 months ended
December 31, December 31,
2017 2016
(Loss) for the period (123 688 974) (45 544 024)
Net (profit)/loss on disposal of property, plant and equipment (452 436) 4 008 157
Headline (loss) for the period (124 141 410) (41 535 867)
Headline (loss) per share - basic and diluted (0.31) (0.12)
SUMMARY OF SECURITIES AS AT MARCH 19, 2018
As at March 19, 2018 the following Common Shares, Common Share purchase options and share purchase warrants were issued
and outstanding:
- 413 968 061 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 1.95 years;
- 34 817 237 warrants with a strike a 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 Chief Executive Officer
Graham du Preez Chief Financial Officer and Corporate Secretary
March 22, 2018
Sponsor: Questco Proprietary Limited
Date: 22/03/2018 08:46:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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