Wrap Text
EPS - Eastern Platinum Limited - Management`s discussion and analysis of
financial conditions and results of operations for the three and twelve months
ended December 31, 2009
EASTERN PLATINUM LIMITED
(Incorporated in Canada)
(Canadian Registration number BC0722783)
(South African Registration number 2007/006318/10)
Share Code TSX: ELR ISIN: CA 2768551038
Share Code AIM: ELR ISIN: CA 2768551038
Share Code JSE: EPS ISIN: CA 2768551038
EASTERN PLATINUM LIMITED
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2009
The following Management`s Discussion and Analysis ("MD&A") is intended to
assist the reader to assess material changes in financial condition and results
of operations of Eastern Platinum Limited ("Eastplats" or the "Company") as at
December 31, 2009 and for the three and twelve months then ended in comparison
to the same periods in 2008.
In February 2009, the applicable provincial securities commissions granted the
Company exemptive relief to adopt International Financial Reporting Standards
("IFRS") with an adoption date of January 1, 2009 and a transition date of
January 1, 2008.
This MD&A should be read in conjunction with the consolidated financial
statements for the twelve months ended December 31, 2009 and supporting notes.
These consolidated financial statements have been prepared using accounting
policies in compliance with IFRS as issued by the International Accounting
Standards Board ("IASB"). A reconciliation of the previously disclosed
comparative periods` financial statements prepared in accordance with Canadian
generally accepted accounting principles to IFRS is set out in Note 25 to these
consolidated financial statements.
In this MD&A, the Company also reports certain non-IFRS measures such as EBITDA
and cash costs per ounce which are explained in Section 3.2 of this MD&A.
All monetary amounts are in U.S. dollars unless otherwise specified. The
effective date of this MD&A is March 24, 2010. Additional information relating
to the Company is available on SEDAR at www.sedar.com.
Contents of the MD&A
1. Overview
2. Highlights
2.1. Highlights for the quarter ended December 31, 2009
2.2. Highlights for the year ended December 31, 2009
3. Results of operations for the three and twelve months ended December 31, 2009
3.1. Mining operations at the Crocodile River Mine ("CRM")
3.2. CRM non-IFRS measures
3.3. Development projects
3.3.1. CRM
3.3.2. Spitzkop and Kennedy`s Vale
3.3.3. Mareesburg
3.4. Corporate and other expenses
4. Liquidity and Capital Resources
4.1. Outlook
4.2. Impairment
4.3. Share capital
4.4. Contractual obligations and commitments
5. Related party transactions
6. Critical accounting policies and estimates
6.1. Property, plant and equipment
6.2. Revenue recognition
6.3. Share-based payment
6.4. Provision for environmental rehabilitation
7. Adoption of accounting standards and accounting pronouncements under IFRS
7.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
7.2 Accounting standards issued but not yet effective
8. Risk factors
8.1. Risks associated with the mining industry
8.2. Risks associated with the current global economic uncertainty
8.3. Risks associated with foreign currencies
8.4. Risks associated with metals prices
8.5. Risks associated with foreign operations
8.6. Risks associated with granting of exploration, mining and other licenses
9. Internal control over financial reporting
10. Cautionary statement on forward-looking information
1. Overview
Eastplats is a platinum group metals ("PGM") producer engaged in the mining and
development of PGM deposits with properties located in South Africa. All of the
Company`s properties are situated on the western and eastern limbs of the
Bushveld Complex ("BC"), the geological environment that supports over 75% of
the world`s PGM mine production.
The Company`s primary operating asset is an 87.5% direct and indirect interest
in Barplats Investments Limited ("Barplats"), whose main assets are the PGM
producing Crocodile River Mine ("CRM") located on the western limb of the BC
and the non-producing Kennedy`s Vale Project located on the Eastern Limb of the
BC. The Company also has a 75.5% direct and indirect interest in Mareesburg
Platinum Project ("Mareesburg") and a 93.4% direct and indirect interest in
Spitzkop PGM Project ("Spitzkop"), both located on the Eastern Limb of the BC.
2. Highlights
2.1 Highlights for the quarter ended December 31, 2009 ("Q4 2009")
* Eastplats recorded a net profit attributable to equity shareholders of the
Company of $330,000 ($0.00 per share) compared to a net loss attributable
to equity shareholders of $230,176,000 ($0.34 loss per share) in the
fourth quarter of 2008 ("Q4 2008").
* Production at CRM was 34,000 PGM ounces, an increase of 17% compared to
29,015 PGM ounces in Q4 2008.
* EBITDA was $10,008,000 compared to negative EBITDA of $18,179,000 in Q4
2008.
* The U.S. average delivered basket price per PGM ounce was $860, an increase
of 56% compared to $550 in Q4 2008.
* The Rand average delivered basket price per PGM ounce was R6,450, an
increase of 18% compared to R5,456 in Q4 2008.
* Rand operating cash costs net of by-product credits were R4,661 per ounce,
a decrease of 19% compared to R5,734 per ounce in Q4 2008. Rand operating
cash costs were R5,296 per ounce, a decrease of 15% compared to R6,231 per
ounce in Q4 2008.
* U.S. dollar operating cash costs net of by-product credits were $621 per
ounce, a 7% increase from $578 per ounce achieved in Q4 2008. Operating
cash costs were $706 per ounce, an increase of 12% compared to the $628 per
ounce in Q4 2008.
* Head grade increased to 4.1 grams per tonne in Q4 2009 from 4.0 grams per
tonne in Q4 2008
* Average concentrator recovery increased to 79% from 76% in Q4 2008.
* Development meters decreased by 29% to 3,254 meters and on-reef development
decreased by 27% to 2,135 meters compared to Q4 2008, mainly as a result of
the planned reduction in reserve development that was initiated in November
2008.
* Stoping units increased by 19% to 55,153 square meters compared to Q4 2008.
* Run-of-mine rock ore hoisted increased by 14% to 321,393 tonnes compared to
280,933 tonnes in Q4 2008.
* Run-of-mine ore processed increased by 8% to 321,983 tonnes in Q4 2009 from
298,514 tonnes in Q4 2008.
* The Company`s Lost Time Injury Frequency Rate (LTIFR) was 3.45 in Q4 2009,
an increase of 78% compared to 1.94 in Q4 2008.
* At December 31, 2009, the Company had a cash position (including cash, cash
equivalents and short term investments) of $21,658,000 (December 31, 2008 -
$61,063,000).
2.2 Highlights for the year ended December 31, 2009
* Eastplats recorded a net profit attributable to equity shareholders of the
Company of $5,650,000 ($0.01 per share) compared to a net loss attributable
to equity shareholders of $209,381,000 ($0.31 loss per share) in the year
ended December 31, 2008.
* Production at CRM was 130,338 PGM ounces, an increase of 11% compared to
117,909 PGM ounces in 2008.
* EBITDA was $28,526,000 compared to EBITDA of $34,720,000 in 2008.
* The U.S. average delivered basket price per PGM ounce was $723, a decrease
of 42% compared to $1,255 in 2008.
* The Rand average delivered basket price per PGM ounce was R6,006, a
decrease of 40% compared to R9,956 in 2008.
* Rand operating cash costs net of by-product credits were R4,306 per ounce,
a decrease of 12% compared to R4,893 per ounce in 2008. Rand operating cash
costs were R5,286 per ounce in 2009, a decrease of 4% compared to R5,530
per ounce in 2008.
* U.S. dollar operating cash costs net of by-product credits were $521 per
ounce, a 16% decrease from $622 per ounce achieved in 2008. Operating cash
costs were $636 per ounce, a decrease of 6% compared to the $674 per ounce
in 2008.
* Head grade increased to 4.1 grams per tonne in 2009 from 4.0 grams per
tonne in 2008.
* Average concentrator recovery increased to 79% from 76% in 2008.
* Development meters decreased by 26% to 15,035 meters and on-reef
development decreased by 23% to 9,302 meters compared to 2008, due to the
planned reduction in reserve development that was initiated in November
2008.
* Stoping units increased by 11% to 187,856 square meters.
* Run-of-mine ore processed increased by 4% to 1,225,508 tonnes in 2009 from
1,175,519 tonnes in 2008.
* The Company`s twelve month (LTIFR) was 2.21 in 2009, a decrease of 18%
compared to 2.70 in 2008.
The table below sets forth selected results of operations for the Company`s
eight most recently completed quarters (in thousands of U.S. dollars, except
per share amounts) in accordance with IFRS.
Table 1
Selected quarterly data 2009
Dec 31 Sept 30 June 30 March 31
Revenues $ 34,259 $ 27,365 $ 24,838 $ 24,903
Cost of operations (29,294) (26,702) (22,595) (21,402)
Mine operating earnings
(loss) 4,965 663 2,243 3,501
Expenses (G&A and
share-based payment) (3,523) (2,445) (3,374) (1,768)
Impairment of property,
plant and equipment - - - -
Operating (loss) profit 1,442 (1,782) (1,131) 1,733
Net profit (loss)
attributable to equity
shareholders of the
Company $ 330 $ 1,839 $ 317 $ 3,164
Earnings (loss) per
share - basic $ 0.00 $ 0.00 $ 0.00 $ 0.00
Earnings (loss) per
share - diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
Average foreign exchange
rates
South African Rand per
US dollar 7.50 7.80 8.44 9.94
US dollar per Canadian
dollar 0.9459 0.9114 0.8578 0.8038
Period end foreign
exchange rates
South African Rand per
US dollar 7.41 7.53 7.75 9.54
US dollar per Canadian
dollar 0.9515 0.9340 0.8598 0.7928
Selected quarterly data 2008
Dec 31 Sept 30 June 30 March 31
Revenues $ 345 $ 9,224 $ 49,317 $ 55,795
Cost of operations (19,569) (25,372) (25,538) (24,144)
Mine operating
earnings (loss) (19,224) (16,148) 23,779 31,651
Expenses (G&A and
share-based payment) (6,599) (5,996) (5,789) (5,682)
Impairment of
property, plant and
equipment (297,285) - - -
Operating (loss) profit (323,108) (22,144) 17,990 25,969
Net profit (loss)
attributable to equity
shareholders of the
Company $ (230,176) $ (10,829) $ 12,148 $ 19,476
Earnings (loss) per
share - basic $ (0.34) $ (0.02) $ 0.02 $ 0.03
Earnings (loss) per
share - diluted $ (0.34) $ (0.02) $ 0.02 $ 0.03
Average foreign
exchange rates
South African Rand per
US dollar 9.92 7.78 7.77 7.53
US dollar per Canadian
dollar 0.8252 0.9603 0.9901 0.9955
Period end foreign
exchange rates
South African Rand per
US dollar 9.29 8.35 7.81 8.14
US dollar per Canadian
dollar 0.8210 0.9397 0.9807 0.9742
3. Results of Operations for the three and twelve months ended December 31, 2009
The following table sets forth selected consolidated financial information for
the three and twelve months ended December 31, 2009 and 2008:
Condensed consolidated interim income statements
(Expressed in thousands of U.S. dollars, except per share amounts)
Table 2
Three months ended
December 31,
2009 2008
Revenue $ 34,259 $ 345
Cost of operations
Production costs 24,251 18,524
Depletion and depreciation 5,043 1,045
Mine operating earnings (loss) 4,965 (19,224)
Expenses
Impairment - 297,285
General and administrative 3,385 4,214
Share-based payments 138 2,385
Operating profit (loss) 1,442 (323,108)
Other income (expense)
Interest income 349 963
Finance costs (532) (768)
Foreign exchange gain (loss) 37 (3,255)
Profit (loss) before income taxes 1,296 (326,168)
Deferred income tax recovery (expense) (2,311) 92,530
Net profit (loss) for the period $ (1,015) $ (233,638)
Attributable to
Non-controlling interest $ (1,345) $ (3,462)
Equity shareholders of the Company 330 (230,176)
Net profit (loss) for the period $ (1,015) $ (233,638)
Earnings (loss) per share
Basic $ 0.00 $ (0.34)
Diluted $ 0.00 $ (0.34)
Weighted average number of common
share outstanding
Basic 680,682 680,506
Diluted 691,072 680,506
Twelve months ended
December 31,
2009 2008
Revenue $ 111,365 $ 114,681
Cost of operations
Production costs 82,839 79,961
Depletion and depreciation 17,154 14,662
Mine operating earnings (loss) 11,372 20,058
Expenses
Impairment - 297,285
General and administrative 10,528 19,441
Share-based payments 582 4,625
Operating profit (loss) 262 (301,293)
Other income (expense)
Interest income 1,786 8,944
Finance costs (1,691) (3,725)
Foreign exchange gain (loss) (758) (2,155)
Profit (loss) before income taxes (401) (298,229)
Deferred income tax recovery (expense) 1,623 85,113
Net profit (loss) for the period $ 1,222 $ (213,116)
Attributable to
Non-controlling interest $ (4,428) $ (3,735)
Equity shareholders of the Company 5,650 (209,381)
Net profit (loss) for the period $ 1,222 $ (213,116)
Earnings (loss) per share
Basic $ 0.01 $ (0.31)
Diluted $ 0.01 $ (0.31)
Weighted average number of common share
outstanding
Basic 680,577 677,117
Diluted 687,790 677,117
Condensed consolidated statements of December 31, December 31,
financial position 2009 2008
Total assets $ 706,850 $ 593,358
Total long-term liabilities $ 53,493 $ 44,226
3.1 Mining operations at Crocodile River Mine ("CRM")
The following is a summary of CRM`s operations for each of the quarters of 2009
and 2008:
Table 3
Crocodile River Mine operations
Three months ended
2009
December 31 September 30 June 30 March 31
Key financial
statistics
(dollar amounts
stated in U.S.
dollars)
Sales - P GM ounces 34,000 29,986 33,383 32,969
Average delivered
price per ounce (2) $860 $765 $679 $590
Average basket price $1,008 $878 $779 $676
Rand average
delivered price per
ounce R 6,450 R 5,967 R 5,730 R 5,865
Rand average basket
price R 7,560 R 6,848 R 6,574 R 6,720
Cash costs per ounce
of P GM (1) $706 $758 $554 $536
Cash costs per ounce
of P GM,
net of chrome
by-product credits
(1) $621 $583 $494 $388
Rand cash costs per
ounce of P GM (1) R 5,296 R 5,915 R 4,673 R 5,326
Rand cash costs per
ounce of P GM,
net of chrome
by-product credits
(1) R 4,661 R 4,548 R 4,169 R 3,857
Key production
statistics
Total tonnes processed 466,414 471,743 440,288 318,394
Run-of-mine ("ROM")
rock tonnes processed 321,983 280,777 304,354 318,394
Tailings tonnes
processed 144,431 190,966 135,934 -
Third party ore
processed - - - -
Development meters 3,254 2,882 4,326 4,573
On-reef development
meters 2,135 1,562 2,860 2,745
Stoping units (square
meters) 55,153 36,263 51,342 45,098
Concentrator recovery
from ROM ore 79% 78% 80% 80%
Chrome produced
(tonnes) 109,388 83,930 82,760 77,554
Metal in concentrate
sold (ounces)
Platinum (P t) 17,012 15,080 16,721 16,499
Palladium (P d) 7,444 6,613 7,406 7,399
Rhodium (Rh) 2,923 2,499 2,868 2,812
Gold (Au) 121 115 141 135
Iridium (Ir) 1,240 1,095 1,179 1,144
Ruthenium (Ru) 5,260 4,584 5,068 4,980
Total PGM ounces 34,000 29,986 33,383 32,969
2008
December 31 September 30 June 30 March 31
Key financial
statistics
(dollar amounts
stated in U.S.
dollars)
Sales - P GM ounces 29,015 30,758 30,311 27,825
Average delivered
price per ounce (2) $550 $1,193 $1,657 $1,621
Average basket price $655 $1,438 $1,969 $1,927
Rand average
delivered price per
ounce R 5,456 R 9,285 R 12,880 R 12,206
Rand average basket
price R 6,496 R 11,191 R 15,305 R 14,511
Cash costs per ounce
of P GM (1) $628 $672 $696 $698
Cash costs per ounce
of P GM,
net of chrome
by-product credits
(1) $578 $521 $696 $698
Rand cash costs per
ounce of P GM (1) R 6,231 R 5,233 R 5,411 R 5,258
Rand cash costs per
ounce of P GM,
net of chrome
by-product credits
(1) R 5,734 R 4,055 R 5,410 R 5,256
Key production
statistics
Total tonnes
processed 298,514 317,602 337,471 349,497
Run-of-mine ("ROM")
rock tonnes
processed 298,514 305,490 313,767 257,748
Tailings tonnes
processed - 12,112 23,704 88,948
Third party ore
processed - - - 2,801
Development meters 4,604 5,599 5,575 4,409
On-reef development
meters 2,922 3,556 3,230 2,343
Stoping units
(square meters) 46,459 39,652 44,277 38,686
Concentrator
recovery from ROM
ore 76% 78% 73% 78%
Chrome produced
(tonnes) 69,937 64,744 37,515 22,489
Metal in concentrate
sold (ounces)
Platinum (P t) 14,466 15,393 15,333 13,684
Palladium (P d) 6,690 6,973 6,777 6,201
Rhodium (Rh) 2,451 2,581 2,543 2,335
Gold (Au) 121 123 132 121
Iridium (Ir) 979 1,083 994 1,078
Ruthenium (Ru) 4,308 4,605 4,532 4,405
Total PGM ounces 29,015 30,758 30,311 27,825
(1) These are non-IFRS measures as described in Section 3.2
(2) Average delivered price is the average basket price at the time of delivery
of PGM concentrates, net of associated smelter costs, under the Company`s
primary off-take agreement.
Quarter ended December 31, 2009 compared to the quarter ended December 31, 2008
In Q4 2009, CRM suffered seven lost time injuries (compared to six lost time
injuries in Q4 2008) resulting in a Lost Time Injury Frequency Rate ("LTIFR")
of 3.45 (1.94 in Q4 2008).
The Company generated revenue of $34,259,000 in Q4 2009 which represents
amounts recorded when PGM concentrates are physically delivered to the buyer,
and adjustments made when final prices for these concentrates are settled. The
Company settles its PGM sales three to five months following the physical
delivery of the concentrates which are provisionally priced on the date of
delivery.
After a period of sharp declines in late 2008, PGM prices in U.S. dollar terms
have risen steadily throughout 2009. The Company recorded an average delivered
basket price of $860 per PGM ounce in Q4 2009, compared to $550 in Q4 2008.
The delivered price per ounce refers to the PGM prices in effect at the time
the PGM concentrates are delivered. As a result of the rise in prices, the
Company recorded positive provisional price adjustments of $4,537,000 and
$11,027,000 for the three and twelve months ended December 31, 2009
respectively. In comparison, PGM prices declined sharply from August through
December 2008 resulting in significant negative adjustments to the provisional
prices in Q3 and Q4 2008.
The following table shows a reconciliation of revenue and provisional price
adjustments.
Table 4
Crocodile River Mine
Effect of provisional price adjustments on revenues
(stated in thousands of U.S. dollars)
Three months ended
December 31,
2009 2008
Revenue before provisional price adjustments $ 29,722 $ 17,043
Provisional price adjusments
Adjustments to revenue upon settlement 1,065 (9,515)
of prior periods` sales
Mark-to-market adjustment on sales not yet
settled at end of period 3,472 (7,183)
Revenue as reported in the income statement $ 34,259 $ 345
Twelve months ended
December 31,
2009 2008
Revenue before provisional price adjustments $ 100,338 $ 146,745
Provisional price adjusments
Adjustments to revenue upon settlement 7,555 (24,881)
of prior periods` sales
Mark-to-market adjustment on sales not yet
settled at end of period 3,472 (7,183)
Revenue as reported in the income statement $ 111,365 $ 114,681
PGM ounces sold were up by 17% in Q4 2009 compared to Q4 2008 as a result of
increased run-of-mine rock tonnes processed (321,983 tonnes in Q4 2009 compared
to 298,514 tonnes in Q4 2008) and increased head grades (4.1 grams per tonne in
Q4 2009 compared to 4.0 grams per tonne in Q4 2008).
Total tonnage processed increased by 56% compared to Q4 2008 primarily due to
the Q2 2009 recommencement of tailings retreatment at CRM. There were 144,431
tonnes of tailings processed in Q4 2009 compared to nil in Q4 2008.
Total development for the quarter was 3,254 metres, a 29% decrease compared to
4,604 metres achieved in Q4 2008, and on-reef development was 2,135 metres, a
27% decrease compared to 2,922 metres in Q4 2008 due to the planned reduction
in reserve development that was initiated in November 2008. The current
development levels ensure that the reserves immediately available for stoping
can be maintained at about eighteen months.
Recovery rates increased from 76% in Q4 2008 to 79% in Q4 2009 as the full
effects of the upgrades to the concentrator in mid-2008 were realized in 2009.
Operating cash costs, a non-IFRS measure, are incurred primarily in Rand.
Operating cash costs increased by 12% from $628 per ounce in Q4 2008 to $706
per ounce in Q4 2009 due to a 24% devaluation of the U.S. dollar relative to
the South African Rand. The average U.S. dollar-Rand exchange rate was
R7.50:$1.00 in Q4 2009 compared to R9.92:$1.00 in Q4 2008. The corresponding
Rand operating cash costs, also a non-IFRS measure, decreased by 15% from
R6,231 per ounce in Q4 2008 to R5,296 per ounce in Q4 2009. This decrease
reflects improved production and operating efficiencies, which were partially
offset by a 10% wage increase and a 30% increase in electricity costs effective
June 1 and July 1, 2009, respectively.
A reconciliation of production costs, as reported in the income statement, to
cash operating costs, is shown under Section 3.2 under CRM non-IFRS measures.
The chrome recovery circuit at CRM was fully operational at the end of the
second quarter of 2008. As a result, penalties for excess chrome present in PGM
concentrates have been significantly reduced and commercial quantities of
chrome have been produced and sold as a by-product of PGM production. In July
2008, the Company commenced reporting cash costs net of chrome by-product
credits, also a non- IFRS measure. In Q4 2009, 109,388 tonnes of chrome were
produced and 85,347 tonnes were sold for proceeds of $2,877,000, reducing
operating cash costs net of by-product credits to $621 per ounce.
Quarter ended December 31, 2009 compared to the quarter ended September 30, 2009
PGM revenues increased by 25% compared to Q3 2009 as a result of a 13% increase
in ounces produced coupled with a 12% rise in PGM prices during the quarter. In
Q4 2009, underground mining activities and production returned to levels
achieved in the first half of 2009, following the interruption that resulted
from the illegal industrial action in July, 2009. Development meters, on-reef
development meters, and stoping units increased by 13%, 37% and 52%
respectively compared to Q3 2009. Run-of-mine ore processed increased by 15% as
35,000 tonnes of surface ore stockpiles which had accumulated in June 2009 were
processed in Q3 2009.
Operating cash costs per ounce decreased from $758 per ounce in Q3 2009 to $706
per ounce in Q4 2009 primarily as a result of the increase in ounces produced
in Q4 2009. A 4% weakening of the U.S. dollar from R7.80:$1.00 in Q3 2009 to
R7.50:$1.00 in Q4 2009 partially offset the decrease in operating cash costs.
Year ended December 31, 2009 compared to the year ended December 31, 2008
In 2009, the Company sold 130,338 PGM ounces, an increase of 11% compared to
2008. The increase was primarily a result of higher volumes mined in 2009
(1,696,839 tonnes processed in 2009 compared to 1,303,084 tonnes processed in
2008), improved recovery rates (79% in 2009 compared to 76% in 2008), and an
improvement in head grades from 4.0 grams per tonne in 2008 to 4.1 grams per
tonne in 2009. On-reef development decreased to 9,302 meters in 2009 compared
to 12,051 meters in 2008.
The average delivered basket price per ounce decreased from $1,255 in 2008 to
$723 in 2009. PGM prices reached multi-year highs in March 2008, decreased
sharply between August 2008 and December 2008, and increased steadily between
January 2009 and December 2009.
Operating cash costs of $636 per ounce were achieved in 2009, compared to $674
per ounce in 2008. The factors contributing to the improvement in operating
cash costs per ounce included an 11% increase in the PGM produced in 2009
compared to 2008, and a 2% strengthening of the U.S. dollar from R8.25:$1.00
in 2008 to R8.42:$1.00 in 2009. This was offset by a 10% wage increase
effective June 1, 2009, a year- over-year 26% increase in electricity costs,
and inefficiencies caused by the Q3 2009 industrial action at CRM.
The Company`s twelve month LTIFR of 2.21 to December 31, 2009 (December 31,
2008 - 2.70) compares favorably with other platinum producers in South Africa.
3.2 CRM non-IFRS measures
The following table provides a reconciliation of EBITDA and cash operating
costs per PGM ounce to mine operating earnings and production costs,
respectively:
Table 5
Crocodile Rive r Mine non-IFRS measures
(Expressed in thousands of U.S. dollars, except ounce and per ounce data)
Three months ended
December 31,
2009 2008
Mine operating earnings (loss) $ 4,965 $ (19,224)
Depletion and depreciation 5,043 $ 1,045
EB ITDA (1) 10,008 (18,179)
Production costs as reported 24,251 18,524
Adjustments for miscellaneous costs (2) (244) (303)
Cash operating costs 24,007 18,221
Less by-product credits - chrome revenues and
adjustments (2,877) (1,450)
Cash operating costs net of by-product credits 21,130 16,771
Ounces sold 34,000 29,015
Cash cost per ounce sold $ 706 $ 628
Cash cost per ounce sold net of by-product
credits $ 621 $ 578
Twelve months ended
December 31,
2009 2008
Mine operating earnings (loss) $ 11,372 $ 20,058
Depletion and depreciation 17,154 14,662
EB ITDA (1) 28,526 34,720
Production costs as reported 82,839 79,961
Adjustments for miscellaneous costs (2) 62 (548)
Cash operating costs 82,901 79,413
Less by-product credits - chrome revenues and
adjustments (15,021) (6,090)
Cash operating costs net of by-product credits 67,880 73,323
Ounces sold 130,338 117,909
Cash cost per ounce sold $ 636 $ 674
Cash cost per ounce sold net of by-product credits $ 521 $ 622
(1) EBITDA includes provisional price adjustments, chrome revenues, chrome
penalties, and foreign exchange adjustments to sales.
(2) Miscellaneous costs include costs such as housing, technical services and
planning.
The Company is of the opinion that conventional measures of performance
prepared in accordance with IFRS do not meaningfully demonstrate the ability of
its operations to generate cash flow. Therefore, the Company has included
certain non-IFRS measures in this MD&A to supplement its financial statements
which are prepared in accordance with IFRS. These non-IFRS measures do not have
any standardized meaning prescribed under IFRS, and therefore they may not be
comparable to similar measures employed by other companies.
In this MD&A, the Company has reported its share of earnings before interest,
depletion, depreciation, amortization and tax ("EBITDA") for CRM. This is a
liquidity non-IFRS measure which the Company believes is used by certain
investors to determine the Company`s ability to generate cash flows for
investing and other activities. The Company also reports cash operating costs
per ounce of PGM produced, another non-IFRS measure which is a common
performance measure used in the precious metals industry.
3.3 Development projects
3.3.1 CRM
During the year ended December 31, 2009, the Company spent approximately $27.8
million at CRM, primarily on continuing underground mine development,
concentrator upgrades, underground electrical upgrades, and ongoing surface and
underground works at the Zandfontein vertical shaft, including conveyor belts
for the transport of ore hoisted up the vertical shaft and construction of dams
for underground water control. The shaft hoisting capacity will be 100,000
tonnes of ore per month plus associated waste. The shaft, along with additional
decline development, will allow access into the deeper parts of the ore body.
On January 12, 2010, the Company announced that, with recent increases in PGM
prices and the reduction in operating costs achieved at CRM, mine development
at Crocette would be reactivated. At full production, Crocette is planned to
deliver up to 40,000 tons of ore per month, which will enable CRM to achieve
its production target of 175,000 tons of ore per month. Infill drilling has
confirmed the continuity of the UG2 reef at Crocette to a depth of 600m with a
dip of 18 degrees, a reef width of 1.2m and an estimated head grade of 4.1 g/t
(5PGE+Au). A commitment to provide construction power for the project has been
received from Eskom, the South African public utility company, but alternative
supplies are also being evaluated by the Company.
3.3.2 Spitzkop/Kennedy`s Vale
Development of Spitzkop and Kennedy`s Vale has been on hold since December
2008. During 2009, the bulk of the expenditures at Spitzkop/Kennedy`s Vale
related to care and maintenance costs.
Spitzkop is planned as a decline mining operation that will access high-grade
PGM resources in the UG2 reef at shallow depth without the requirement for high
capital costshaft infrastructure. Spitzkop is situated up dip of, and adjacent
to, the Kennedy`s Vale project. Kennedy`s Vale and the deeper sections of both
properties could utilize the existing twin vertical shafts. This infrastructure
would provide a significant reduction in capital costs for the development of
the deeper sections of both properties.
During 2008, work on the basic engineering at Spitzkop was completed and long
lead items such as mills and mining equipment were purchased or ordered.
Box-cuts for declines to access both the Merensky Reef and UG2 reefs were also
completed. As a result of the market environment, development of the declines
was suspended after approximately 180 metres of development and equipment
purchased is being stored for future use.
The new order mining right for Spitzkop was executed in October 2009. The
Company is currently evaluating alternatives to optimize PGM production from
this and other Eastern Limb projects.
3.3.3 Mareesburg
Work on the Mareesburg project has been on hold since December 2008. A new
order mining right application was submitted in December 2007 which supports
the Company`s intention to commence mining when PGM prices improve. An updated
feasibility study for the Mareesburg open pit is expected to be completed in
2010.
3.4 Corporate and other expenses
General and administrative expenses ("G&A") are costs associated with the
Company`s corporate head office in Vancouver and the Johannesburg
administrative office, and costs associated with care and maintenance at
Spitzkop, Kennedy`s Vale and Mareesburg. Corporate office costs include legal
and accounting, regulatory, executive management fees, investor relations,
travel and consulting fees. Given the sharp downturn in the economy in Q4 2008
and the resulting curtailment and postponement of some of the Company`s
projects, the Company made considerable efforts to reduce G&A expenses
beginning in Q4 2008. G&A decreased by 20% from $4,214,000 in Q4 2008 to
$3,385,000 in Q4 2009. Similarly, G&A decreased by 46% from $19,441,000 in the
full year 2008 to $10,528,000 2009. The decrease in G&A was due to a reduction
in certain senior level staff in Johannesburg in late 2008, and a general
reduction in corporate travel and investor relations activities.
Interest income recorded during the three and twelve months ended December 31,
2009 was $349,000 and $1,786,000 respectively compared with $963,000 and
$8,944,000 during the same periods in 2008.
The decrease in interest income was due to significantly lower average cash
balances and lower interest rates throughout 2009 compared to the same period
in 2008.
During the three and twelve months ended December 31, 2009 the Company recorded
an income tax expense of $2,311,000 and a deferred income tax recovery of
$1,623,000 respectively. The deferred income tax recovery was based on changes
in the Company`s net assets. The consolidated statement of financial position
reflects total deferred tax liabilities of $42,491,000 which arose primarily as
a result of the step-up to fair value of the net assets acquired on the
Barplats and Gubevu business acquisitions during the years ended June 30, 2006,
June 30, 2007, and December 31, 2008.
4. Liquidity and Capital Resources
At December 31, 2009, the Company had working capital of $31,776,000 (December
31, 2008 - $33,778,000) and cash and cash equivalents and short-term
investments of $21,658,000 (December 31, 2008 - $61,063,000) in highly liquid,
fully guaranteed, bank sponsored instruments.
The Company had no long-term debt at December 31, 2009, other than a provision
for environmental rehabilitation relating to CRM and Spitzkop, and finance
lease obligations relating to mining vehicles with lease terms of five years
with options to purchase for a nominal amount at the conclusion of the lease.
See Contractual Obligations under Section 4.4 below.
4.1 Outlook
The sharp decline in PGM prices during the second half of 2008 had a
significantly negative impact on the Company`s profitability through early
2009. This led management to put the Company`s development projects on hold
until a sustained recovery of PGM prices took place. PGM prices in U.S.
dollar terms have recovered since the beginning of 2009, but this has been
negated by the strength of the Rand against the U.S. dollar. As a result, while
the realized basket prices that the Company is receiving have improved since
their lows of December 2008, these prices are still more than 50% below those
recorded in July 2008. In light of the current global economic uncertainty, the
Company anticipates that PGM prices and the Rand-U.S. dollar exchange rate will
remain volatile in the short term.
As a consequence of the global economic uncertainty and the possibility of
unanticipated industrial action at CRM, the Company`s near-term goal has been,
and continues to be, to preserve its cash balances to the greatest extent
possible, by finding ways to increase production and minimize operating costs
without compromising safety, health and environmental standards, and by
curtailing capital expenditures which would not result in short-term increases
in production ounces. This process began in December 2008, and, over the first
two quarters of 2009 until the industrial action took place in July 2009, the
Company was successful in achieving significant cost improvements. The Company
will continue to manage costs as a priority and expects the lower coststructure
to be maintained, provided that there are no further unanticipated disruptions
in production.
The Company has resumed mine development at the Crocette section at CRM during
the first quarter of 2010. The Company`s three primary Eastern Limb development
projects at Spitzkop, Kennedy`s Vale and Mareesburg have remained on care and
maintenance since the end of 2008. The Company is continually assessing the
status of all of these projects, with a view to determining an appropriate
development schedule given the market conditions, the Company`s current cash
balances, its ability to generate sufficient cash flows, and its ability to
obtain additional funding in the current market environment. Additional funding
will be required and may include external debt financing, joint venture or
other third party participation in one or more of the projects, or the public
or private sales of equity or debt securities of the Company.
If current market conditions persist for an extended time and PGM production
and/or prices remain at present levels or lower, then the cash flows from CRM
and current cash balances will be insufficient to advance any or all of the
Company`s development projects to commercial production. This, along with the
current tight credit markets that may result in higher financing costs, could
negatively affect the Company`s ability to obtain equity financing, external
debt financing or third party participation. There can be no assurance that
additional funding will be available to the Company or, if available, that this
funding will be on acceptable terms. If adequate funds are not available, the
Company may be required to further delay or reduce the scope of any or all of
its development projects.
4.2 Impairment
At December 31, 2008, the Company assessed the carrying values of its mineral
properties as a result of the market downturn. In late 2008, declining PGM
prices and negative market sentiment led to the Company`s market capitalization
dropping below its book value as at December 31, 2008. Based on the
then-expected PGM prices and coststructures as at December 31, 2008, management
determined that the value of the Company`s Kennedy`s Vale Project was impaired
by $297,285,000 in accordance with IFRS, and that the values of the Company`s
other mineral properties were not impaired as at December 31, 2008. The
impairment has been recorded in the year ended December 31, 2008.
At December 31, 2009, the Company assessed the carrying values of its mineral
properties and concluded that none of its mineral properties required further
impairment or a reversal of impairment. Should market conditions and commodity
prices deteriorate or improve in the future, an impairment or reversal of
impairment of the Company`s mineral properties may be required.
4.3 Share Capital
During the three months ended December 31, 2009, the Company granted 215,000
stock options at an exercise price of Cdn$0.76. The grant date fair value was
Cdn$0.45 per share, which resulted in share- based payment expense of $30,000
upon issuance. Total share-based payment expense for the quarter was $138,000,
which also takes into account the vesting of options. During Q4 2009, 175,000
options were forfeited at a weighted average exercise price of Cdn$1.23 and
471,666 options were exercised at a weighted average exercise price of
Cdn$0.32.
During the year ended December 31, 2009, the Company granted 695,000 stock
options with a weighted average exercise price of Cdn$0.57 and expiry dates of
February 11, 2014, June 30, 2014, and November 3, 2014, giving rise to
share-based payment expense of $131,000. The total share-based payment expense
for the year was $582,000, which also takes into account the vesting of
options. During the year ended December 31, 2009, 5,329,167 options were
forfeited at a weighted average exercise price of Cdn$2.00 and 535,999 options
were exercised at a weighted average exercise price of Cdn$0.32.
On March 28, 2009, the Company`s warrants that traded on the Toronto Stock
Exchange under the symbol "ELR.WT.A" expired. A total of 58,485,996 warrants
expired unexercised.
As at March 24, 2010, the Company had:
* 681,313,000 common shares outstanding; and
* 61,362,003 stock options outstanding, which are exercisable at prices
ranging from Cdn$0.32 to Cdn$3.38 and expire between 2011 and 2018.
4.4 Contractual Obligations and Commitments
The Company`s major contractual obligations and commitments at December 31,
2009 were as follows:
Table 6
(in thousands of U.S. dollars)
Less than 1
Total year
Provision for environmental rehabilitation $ 31,885 $ -
Capital expenditure and purchase commitments
contracted at December 31, 2009 but not recognized
on
the consolidated statement of financial position 4,958 4,958
Finance lease obligations 4,282 1,221
$ 41,125 $ 6,179
More than 5
1-5 years years
Provision for environmental rehabilitation $ - $ 31,885
Capital expenditure and purchase commitments
contracted at December 31, 2009 but not
recognized on
the consolidated statement of financial position - -
Finance lease obligations 3,061 -
$ 3,061 $ 31,885
5. Related Party Transactions
(Expressed in thousands of U.S. dollars, except per share amounts)
Three months ended
December 31,
2009 2008
Trading transactions
Management and consulting fees $ 832 $ 262
Reimbursements of expenses 3 26
Total trading transactions $ 835 $ 288
Compensation of key management personnel
Salaries and directors` fees $ 1,186 $ 484
Share-based payments - 1,893
Total compensation of key management personnel $ 1,186 $ 2,377
Twelve months ended
December 31,
2009 2008
Trading transactions
Management and consulting fees $ 1,661 $ 1,295
Reimbursements of expenses 48 254
Total trading transactions $ 1,709 $ 1,549
Compensation of key management personnel
Salaries and directors` fees $ 2,695 $ 2,133
Share-based payments 93 2,374
Total compensation of key management personnel $ 2,788 $ 4,507
A number of the Company`s executive officers are engaged under contract with
those officers` personal services companies. Other executive officers are paid
directly via salary and directors` fees. All share options are issued to the
Company`s officers and directors, and not to their companies.
Management and consulting fees increased during the three and twelve months
ended December 31, 2009 due to a grant of bonuses to executive officers and
certain directors at the end of the year. During the same periods,
reimbursements of expenses were lower due to reduced travel to South Africa by
the Company`s head office staff. Salaries and directors` fees increased during
the three and twelve months ended December 31, 2009 due to the addition of a
director in June 2009. Share-based payment decreased significantly in 2009 due
to the fact that, except for options granted to the new director in June 2009,
no options were granted to directors during 2009. In comparison, there was a
significant stock option issuance in December 2008.
All related party transactions were recorded at the amounts agreed upon between
the parties. Any balances payable are payable on demand without interest.
6. Critical Accounting Policies and Estimates
The preparation of financial statements requires management to establish
accounting policies, estimates and assumptions that affect the timing and
reported amounts of assets, liabilities, revenues and expenses.
These estimates are based upon historical experience and on various other
assumptions that management believes to be reasonable under the circumstances,
and require judgement on matters which are inherently uncertain. A summary of
the Company`s significant accounting policies is set forth in Note 3 of the
consolidated financial statements for the year ended December 31, 2009.
Management reviews its estimates and assumptions on an ongoing basis using the
most current information available and considers the following to be key
accounting policies and estimates:
6.1 Property, plant and equipment
Property, plant and equipment are the most significant assets of the Company
and represent capitalized expenditures related to the development of mining
properties and related plant and equipment and the value assigned to
exploration potential on acquisition. Property, plant and equipment are
recorded at cost less accumulated depreciation and depletion. Maintenance,
repairs and renewals are charged to operations. Capitalized costs are
depreciated and depleted using either the unit-of-production method over the
estimated economic life of the mine which they relate to, or using the
straight-line method over their estimated useful lives.
All direct costs related to the acquisition, exploration and development of
mineral properties are capitalized until the properties to which they relate
are placed into production, sold, abandoned or management has determined there
to be impairment. If economically recoverable ore reserves are developed,
capitalized costs of the related property are reclassified as mining assets and
amortized using the units-of-production method following commencement of
production.
The amounts shown for mineral properties do not necessarily represent present
or future values. Their recoverability is dependent upon the discovery of
economically recoverable reserves, the ability of the Company to obtain the
necessary financing to complete the development, and future profitable
production or proceeds from the disposition thereof.
The Company reviews and evaluates its mining interests for impairment at least
annually or when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. In accordance with IFRS, these
evaluations consist of comparing each asset`s carrying value with the estimated
discounted future net cash flows. Impairment is considered to exist if the
total estimated future discounted cash flows are less than the carrying amount
of the assets. The resulting impairment loss is measured and recorded based on
the difference between future discounted cash flows and book value.
Future cash flows are estimated based on expected future production, commodity
prices, operating costs and capital costs. Other estimates incorporated in the
impairment evaluations include processing and mining costs, mining tonnage, ore
grades and recoveries, which are all subject to uncertainty.
In accordance with IFRS if, subsequent to impairment, an asset`s discounted
future net cash flows exceeds its book value, the impairment previously
recognized can be reversed. However, the asset`s book value cannot exceed what
its amortized book value would have been had the impairment not been
recognized.
Based on impairment analyses, it was determined that Kennedy`s Value was
impaired by $297,285,000 at December 31, 2008. The impairment analyses at
December 31, 2009 did not result in further impairment or reversal of
impairment. The PGM prices used in these analyses were based on the average
future PGM price estimates of a number of independent industry and financial
analysts. If price and other assumptions prove to be inaccurate, or if PGM
prices significantly decrease or increase from values which existed as at
December 31, 2009 for a prolonged period, then material asset impairment
charges or reversal of impairment may be required in the future.
6.2 Revenue recognition
Revenue, based upon prevailing metal prices, is recorded in the financial
statements when title to the PGMs transfers to the customer. The difference
between the present value and the future value of the current market price is
recognized as interest income over the term of settlement. The estimated
revenue is recorded based on metal prices and exchange rates on the date of
shipment and is adjusted at each balance sheet date to the metal prices on
those dates. The actual amounts will be reflected in revenue upon final
settlement, which are three and five months after the date of shipment. These
adjustments reflect changes in metal prices and changes in qualities arising
from final assay calculations. Prices of PGMs declined sharply between August
and December 2008, resulting in the Company recording negative price
adjustments of $16,698,000 and $32,064,000 being recognized in the three months
and twelve months ended December 31, 2008, respectively. Subsequently, PGM
prices increased steadily between January 2009 and December 2009 resulting in
positive price adjustments of $4,537,000 and $11,027,000 being recognized the
three and twelve months ended December 31, 2009 respectively.
6.3 Share-based payment
Share-based payment expense is calculated using the Black-Scholes option
pricing model and is recognized over the period that the employees earn the
options, with a corresponding credit to equity- settled employee benefits
reserve. If and when the stock options are ultimately exercised, the applicable
amounts of equity-settled employee benefits reserve are transferred to share
capital. During the year ended December 31, 2009, the Company`s weighted
average assumptions for the calculation included a risk-free interest rate of
1.83%, expected life of the options of 3 years, no dividends, and an annualized
volatility of the Company`s shares of 80%. The resulting weighted average
option valuation was Cdn$0.32 per share. Share-based payment expense of
$582,000 was recognized during the year ended December 31, 2009 (2008 -
$4,625,000).
6.4 Provision for environmental rehabilitation
The Company recognizes liabilities for statutory, contractual or legal
obligations associated with the retirement of property, plant and equipment,
when those obligations result from the acquisition, construction, development
or normal operation of the assets. Initially, the fair value of the liability
for an asset retirement obligation is recognized in the period incurred. If the
cost estimates arise from the decommissioning of plant and other site
preparation work, the net present value is added to the carrying amount of the
associated asset and amortized over the asset`s useful life. If the cost
estimates arise from restoration costs arising from subsequent site damage that
is incurred on an ongoing basis during production, the net present value is
charged to profit and loss for the period. The liability is accreted over time
through periodic charges to operations and it is reduced by actual costs of
reclamation.
The Company`s estimates of reclamation costs are based on the Company`s
interpretation of current regulatory requirements and these estimates could
change as a result of changes in regulatory requirements and assumptions
regarding the amount and timing of the future expenditures. A change in
estimated discount rates is reviewed annually or as new information becomes
available. Expenditures relating to ongoing environmental programs are charged
against operations as incurred or capitalized and amortized depending on their
relationship to future earnings. At December 31, 2009, the expected present
value of future rehabilitation costs at CRM and Spitzkop was approximately $8.2
million using a discount rate of 8.39%. The undiscounted value was
approximately $31.9 million. The Company has not recorded any future
rehabilitation costs for its Mareesburg and Kennedy`s Vale projects as these
costs are currently determined to be immaterial.
7. Adoption of Accounting Standards and Pronouncements under IFRS
In 2008, the Company`s management assessed the impact of an early adoption to
IFRS and concluded that early adoption would be beneficial to shareholders. An
application for early adoption was submitted to the British Columbia and
Ontario Securities Commissions (the "Commissions") in November 2008.
In February 2009, the Commissions granted the Company exemptive relief to adopt
International Financial Reporting Standards ("IFRS") with an adoption date of
January 1, 2009 and a transition date of January 1, 2008. The Company`s first
audited financial statements prepared in accordance with IFRS are the financial
statements for the year ended December 31, 2009. Full disclosure of the
Company`s accounting policies in accordance with IFRS can be found in Note 3 to
these financial statements. These financial statements also include
reconciliations of the previously disclosed comparative periods financial
statements prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") to IFRS as set out in Note 25.
7.1 Significant differences between IFRS and Canadian GAAP in the Company`s
financial statements
During the year ended December 31, 2008, the Company recorded an impairment of
its Kennedy`s Vale ("KV") Project of $297,285,000 in accordance with IFRS, as
the discounted cash flows of the KV Project were below its carrying value. The
amount of the impairment was the difference between the discounted cash flows
and the carrying value. Deferred tax liabilities associated with the KV Project
were also written off as a result. The effect of the impairment was a decrease
in property, plant and equipment of $297,285,000, from $783,039,000 in
accordance with Canadian GAAP, to $485,754,000 in accordance with IFRS.
Impairment was not required under Canadian GAAP, as the undiscounted cash flows
of the KV Project were higher than its carrying value. Since the valuation of
the KV Project was based on a production start date of 2020, discounted and
undiscounted cash flows varied significantly, creating a difference in the
impairment determination in accordance with IFRS and in accordance with
Canadian GAAP.
Tests for impairment are based on certain assumptions on metal prices,
production rates, project start-up dates, operating costs, capital costs, and
discount rates. Should any of these assumptions change and cause an adverse
effect on the valuation of a project, additional impairment charges may be
required.
At January 1, 2008, the Company elected to eliminate its currency translation
adjustment balance in the statement of financial position, as allowed for
first-time IFRS adopters. The effect of this elimination was a decrease in the
deficit of $21,747,000, from $68,132,000 in accordance with Canadian GAAP to
$46,385,000 in accordance with IFRS.
7.2 Accounting standards issued but not yet effective
(i) Effective for annual periods beginning on or after July 1, 2009
* IFRS 2 Share Based Payments (revised) - revision of scope
* IFRS 3 Business Combinations (revised) - revision of scope and amendments
to accounting for business combinations
* IAS 27 Consolidated and Separate Financial Statements (revised) -
amendments due to IFRS 3 Business Combinations revisions
* IAS 38 Intangible Assets (revised) - amendments due to IFRS 3 Business
Combinations revisions and measuring the fair value of an intangible asset
acquired in a business combination
(ii) Effective for annual periods beginning on or after January 1, 2010
* IFRS 8 Operating Segments (revised) - disclosure of information about
segment assets
(iv) Effective for annual periods beginning on or after January 1, 2011
* IAS 24 Related Party Disclosures (revised) - clarification of the
definition of a related party
(v) Effective for annual periods beginning on or after January 1, 2013
* IFRS 9 Financial Instruments (new) - partial replacement of IAS 39. All of
IAS 39 is expected to be replaced in its entirety by the end of 2010
The Company has not early adopted these revised standards and is currently
assessing the impact that these standards will have on the consolidated
financial statements.
8. Risk Factors
The business of exploring for minerals and the mining and processing of those
minerals involve a high degree of risk. These activities involve significant
risks which careful evaluation, experience and knowledge may not, in some case,
eliminate. These risks include risks associated with the mining industry, the
financial markets, metals prices and foreign operations.
8.1 Risks associated with the mining industry
The commercial viability of any mineral deposit depends on many factors, not
all of which are within the control of management. Some of the factors that
will affect the financial viability of a mineral deposit include its size,
grade and proximity to infrastructure. In addition, government regulation,
taxes, royalties, land tenure, land use, environmental protection and
reclamation and closure obligations could have a profound impact on the
economic viability of a mineral deposit.
The mining operations and the exploration and development programmes of the
Company may be disrupted by a variety of risks and hazards which are beyond the
control of the Company, including, but not limited to, geological, geotechnical
and seismic factors, fires, power outages, labour disruptions, flooding,
explosions, cave-ins, land-slides, availability of suitable or adequate
machinery and labour, industrial and mechanical accidents, environmental
hazards (including discharge of metals, pollutants or hazardous chemicals), and
political and social instability. In the past two years, the Company has
experienced power shortages and labour disruptions.
It is not always possible to obtain insurance against all risks described above
and the Company may decide not to insure against certain risks as a result of
high premiums or for other commercial reasons.
The Company does not maintain insurance against political or environmental
risks, but may be required to do so in the future. Should any uninsured
liabilities arise, they could result in increased costs, reductions in
profitability, and a decline in the value of the Company`s securities.
The Company is not able to determine the impact of potential changes in
environmental laws and regulations on its financial position due to the
uncertainty surrounding the form such changes may take.
As mining regulators continue to update and clarify their requirements for
closure plans and environmental protection laws and administrative policies are
changed, additional reclamation obligations and further security for mine
reclamation costs may be required. It is not known whether such changes would
have a material effect on the operations of the Company.
8.2 Risks associated with the current global economic uncertainty
PGM and metals prices in general and shares of mining companies have been
particularly volatile in the past two years as a result of the global economic
uncertainty, declining confidence in financial markets, failures of financial
institutions and concerns over the availability of credit. These factors may
impact the ability of the Company to obtain equity or debt financing in the
future and, if obtained, on terms that are favourable to the Company. If market
volatility and uncertainty continue or worsen, the Company`s operations could
be adversely impacted and the value of the Company`s common shares could be
adversely affected, making accessibility to public financing even more
difficult.
8.3 Risks associated with foreign currencies
The Company currently uses the South African Rand and the Canadian dollar as
its functional currencies, and the U.S. dollar as its reporting currency.
Operations at the Company`s CRM are predominately conducted in Rand, with costs
paid in Rand and revenues received in Rand, even though PGM prices are based in
U.S. dollars. The Company does not hedge or sell forward any of its PGM
production and is therefore exposed to exchange rate fluctuations. A
deterioration of the U.S. dollar against the Rand could increase the cost of
PGM production and exploration and development costs and therefore may have an
adverse effect on the earnings of CRM. During 2009, the U.S. dollar weakened by
24% compared to December 31, 2008, causing operating costs per ounce to
increase in the absence of other cost factors.
Fluctuations in the exchange rate between the Canadian dollar and the Rand may
also have a significant impact on the Company`s results of operations and
financial condition. The Company`s assets and liabilities will be subject to
the same exchange rate fluctuations that could also have a significant effect
on the results of the Company.
The Company cannot predict the effect of exchange rate fluctuations upon future
operating results and there can be no assurance that exchange rate fluctuations
will not have a material adverse effect on its business, operating results or
financial condition.
8.4 Risks associated with metal prices
Metals prices, particularly platinum prices, have a direct impact on the
Company`s earnings and the commercial viability of the Company`s other mineral
properties. Platinum is both a precious metal and an industrial metal. The most
important industrial consumption of platinum is in automobile catalytic
converters. The current fundamentals of the PGM market are volatile. Demand has
decreased as a result of the slowdown in the auto sector in North America and
Europe, and has partially recovered as a result of Chinese consumption and
acquisition by physically-backed exchange traded funds (ETFs). Supplies are
expected to be constrained, as mining companies have cut back on marginal and
loss-making production, and have reduced development to preserve cash. Platinum
prices have experienced significant volatility in the last two years, and if
the current imbalance between supply and demand continues, price volatility can
be expected to continue. Some of the other key factors that may influence
platinum prices are policies in the most important producing countries, namely
South Africa and the Russian Federation, the amount of stockpiled platinum,
economic conditions in the main consuming countries, international economic and
political trends, fluctuations in the U.S. dollar and other currencies,
interest rates, and inflation. A decline in the market price of PGMs mined by
the Company may render ore reserves containing relatively low grades of
mineralization uneconomic and may in certain circumstances lead to a
restatement of reserves.
Prices for platinum and most of the other PGMs increased to all-time highs in
early 2008, and as a result, the Company achieved record margins for its PGM
sales during the first two quarters of that year. While PGM prices have
increased steadily throughout 2009, the weakening of the U.S. dollar has had an
offsetting effect against the increasing PGM prices. There is no assurance that
PGM prices will return to its 2008 highs in the future.
The marketability of metals is also affected by numerous other factors beyond
the control of the Company, including but not limited to government regulations
relating to price, royalties, allowable production and importing and exporting
of minerals, the effect of which cannot accurately be predicted.
8.5 Risks associated with foreign operations
The Company`s investments in South Africa carry certain risks associated with
different political and economic environments. South Africa has recently
undergone major constitutional changes to effect majority rule, and mineral
title. Accordingly, all laws may be considered relatively new, resulting in
risks such as possible misinterpretation of new laws, unilateral modification
of mining or exploration rights, operating restrictions, increased taxes,
environmental regulation, mine safety and other risks arising out of a new
sovereignty over mining, any or all of which could have an adverse impact upon
the Company.
The Company`s operations may also be affected in varying degrees by political
and economic instability, terrorism, crime, extreme fluctuations in currency
exchange rates, and inflation.
The Government of South Africa has promulgated the Mineral and Petroleum
Resources Royalty Act, 2008. This act allows for a revenue-based royalty on
South African mining companies with an effective date of March 1, 2010. The
royalty rate for unrefined minerals is based on a formula that references EBIT
margins and is estimated to be approximately 2.7% of gross mining revenues.
This will have an impact on CRM`s earnings beginning in 2010.
8.6 Risks associated with granting of exploration, mining and other licenses
The Government of South Africa exercises control over such matters as
exploration and mining licensing, permitting, exporting and taxation, which may
adversely impact on the Company`s ability to carry out exploration, development
and mining activities. Failure to comply strictly with applicable laws,
regulations and local practices relating to mineral right applications and
tenure, could result in loss, reduction or expropriation of entitlements, or
the imposition of additional local or foreign parties as joint venture partners
with carried or other interests.
The Company`s exploration and mining activities are dependent upon the grant of
appropriate licences, concessions, leases, permits and regulatory consents
which may be granted for a defined period of time, or may not be granted, or
may be withdrawn or made subject to limitations. There can be no assurance that
such authorizations will be renewed following expiry or granted (as the case
may be) or as to the terms of such grants or renewals. There is also no
assurance that the issue of a reconnaissance, prospecting or exploration
licence will ensure the subsequent issue of a mining licence. All `old order`
mineral rights in South Africa are subject to conversion into `new order`
mineral rights. A new order prospecting right for the Mareesburg PGM Project,
and a new order mining right for the Spitzkop PGM Project have been issued by
the Department of Minerals and Energy ("DME"). Spitzkop received its new order
mining right in October 2009. CRM has been awarded one additional new order
mining right on January 29, 2009 which allows for extension of the Maroelabult
Mining operations and now holds a total of 6 new order mining rights. The
Kennedy`s Vale Project and CRM now hold a total of 21 new order prospecting
rights. Two new order prospecting right applications and one application for
the renewal of a new order prospecting right have been lodged for CRM and are
still pending approval. Application for new order mining rights for Mareesburg
has been made in the appropriate manner and the application is currently being
processed by the DME. Communication with the relevant DMR offices indicated
that this right will be executed the first half of 2010. The Company and its
independent South African legal counsel are not aware of any reasons why the
new order mining right would not be issued by the DME.
9. Internal Control over Financial Reporting
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
the Company, together with the Company`s management, are responsible for the
information disclosed in this MD&A and in the Company`s other external
disclosure documents. For the years ended December 31, 2009 and 2008, the CEO
and the CFO have designed, or caused to be designed under their supervision,
the Company`s disclosure controls and procedures ("DCP") to provide reasonable
assurance that material information relating to the Company and its
consolidated subsidiaries has been disclosed in accordance with regulatory
requirements and good business practices and that the Company`s DCP will enable
the Company to meet its ongoing disclosure requirements.
The CEO and CFO have evaluated the effectiveness of the Company`s disclosure
controls and procedures and have concluded that the design and operation of the
Company`s DCP were effective as of December 31, 2009 and that the Company has
the appropriate DCP to ensure that information used internally by management
and disclosed externally is, in all material respects, complete and reliable.
The CEO and the CFO are also responsible for the design of the internal
controls over financial reporting ("ICFR") within the Company in order to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards ("IFRS"). During 2008 and
2009, the Company engaged an international accounting firm to act as the
Company`s internal auditors for its South African operations.
Under the supervision, and with the participation, of the CEO and the CFO,
management conducted an evaluation of the effectiveness of the Company`s ICFR
based on the framework in the Internal Control - Integrated Framework developed
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, the CEO and the CFO concluded that the design and
operation of the Company`s ICFR were effective as at December 31, 2009.
The scope of the Company`s design of DCP and ICFR excluded Gubevu Consortium
Holdings (Pty) Ltd., a subsidiary which is accounted for as a special purpose
entity under IFRS (previously a variable interest entity under Canadian
generally accepted accounting principles). During the design and evaluation of
the Company`s ICFR, management identified certain non-material deficiencies, a
number of which have been addressed or are in the process of being addressed in
order to enhance the Company`s processes and controls. The Company employs
entity level and compensating controls to mitigate any deficiencies that may
exist in its process controls. Management intends to continue to further
enhance the Company`s ICFR.
The Company`s management, including its CEO and CFO, believe that any DCP and
ICFR, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
they cannot provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been prevented or detected. These
inherent limitations include the realities that judgments in decision making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by unauthorized override
to the future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Accordingly, because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and not be detected.
There have been no changes in the Company`s ICFR during the year ended December
31, 2009 that have materially affected, or are reasonably likely to materially
affect, the Company`s ICFR.
10. Cautionary Statement on Forward-Looking Information
This MD&A, which contains certain forward-looking statements, is intended to
provide readers with a reasonable basis for assessing the financial performance
of the Company. All statements, other than statements of historical fact, are
forward-looking statements. The words "believe", "expect", "anticipate",
"contemplate", "target", "plan", "intends", "continue", "budget", "estimate",
"may", "will", "schedule" and similar expressions identify forward looking
statements. Forward-looking statements are necessarily based upon a number of
estimates and assumptions that, while considered reasonable by the Company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies. Known and unknown factors could cause actual
results to differ materially from those projected in the forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
currency markets such as Canadian dollar, South African Rand and U.S. dollar,
fluctuations in the prices of PGM and other commodities, changes in government
legislation, taxation, controls, regulations and political or economic
developments in Canada, the United States, South Africa, or Barbados or other
countries in which the Company carries or may carry on business in the future,
risks associated with mining or development activities, the speculative nature
of exploration and development, including the risk of obtaining necessary
licenses and permits, and quantities or grades of reserves. Many of these
uncertainties and contingencies can affect the Company`s actual results and
could cause actual results to differ materially from those expressed or implied
in any forward-looking statements made by, or on behalf of, the Company.
Readers are cautioned that forward-looking statements are not guarantees of
future performance. There can be no assurance that such statements will prove
to be accurate and actual results and future events could differ materially
from those acknowledged in such statements. Specific reference is made to the
Company`s most recent Annual Information Form on file with Canadian provincial
securities regulatory authorities for a discussion of some of the factors
underlying forward-looking statements.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future
events or otherwise, except to the extent required by applicable laws.
March 24, 2010
Ian Rozier
Date: 31/03/2010 16:44:01 Supplied by www.sharenet.co.za
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