Interim Management's Discussion and Analysis
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
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS –
For the three and six months ended June 30, 2018
(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 six months ended June 30, 2018 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 Management's Discussion
and Analysis for the year ended December 31, 2017 and the unaudited condensed interim consolidated financial
statements for the three and six months ended June 30, 2018. The condensed interim consolidated financial statements
("Interim Results") and related notes have been prepared in accordance with International Financial Reporting
Standards ("IFRS") and are in compliance with IAS 34, Interim Financial Reporting. Certain non-IFRS measures are
discussed in this Interim MD&A which are clearly disclosed as such. Additional information and press releases have
been filed electronically through the System for Electronic Document Analysis and Retrieval ("SEDAR") and are available
online under the Buffalo Coal Corp. profile at www.sedar.com.
This Interim MD&A reports our activities through August 10, 2018 unless otherwise indicated. References to Q2 2018
mean the three months ended June 30, 2018, Q1 2018 mean the three months ended March 31, 2018 and Q4 2017,
Q3 2017, Q2 2017 and Q1 2017 refer to the three months ended December 31, 2017, September 30, 2017, June 30,
2017 and March 31, 2017, respectively. References to 2018 YTD mean the six months ended June 30, 2018 and 2017
YTD mean the six months ended June 30, 2017.
Unless otherwise noted all amounts are recorded in South African Rands ("R" or "Rands" or "ZAR"). References to "C$"
mean Canadian Dollars and to "US$" mean United States Dollars. Amounts stated in Canadian Dollars or US Dollars are
translated at the date of transaction, unless otherwise stated. These other amounts stated in Canadian Dollars were
translated at C$1:R10.4495 and amounts in US Dollars were translated at US$1:R13.7255.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Interim MD&A contains forward-looking information under Canadian securities legislation. Forward-looking
information includes, but is not limited to, information with respect to the Company's expected production from, and
further potential of, the Company's properties; financial and operational planning and strategic goals; the Company's
ability to raise additional funds; the timing and amount of advances under existing loan facilities; the future price of
minerals, particularly coal and overall market conditions for resource issuers; the estimation of mineral reserves and
mineral resources; conclusions of economic evaluations; the realization of mineral reserve estimates; the timing and
amount of estimated future production; costs of production; capital expenditures; success of exploration activities;
mining or processing issues; currency exchange rates; government regulation of mining operations; labour relations
and future collective agreements; and environmental risks. In general, forward-looking information can be identified
by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "budget", "scheduled",
"estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words
and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken",
"occur" or "be achieved". Forward-looking information is based on the opinions, estimates and assumptions of
management as of the date such statements are made, and the Company can give no assurance that such opinions,
estimates and assumptions are correct. Estimates regarding the anticipated timing, amount and cost of exploration,
development and production activities are based on assumptions underlying mineral reserve and mineral resource
estimates and the realization of such estimates. Capital and operating cost estimates are based on extensive research
of the Company, purchase orders placed by the Company to date, recent mining costs and other factors.
Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking information. Such factors include: risks
relating to the requirement for additional capital; production estimate risks; the price of coal; labour and employment
risks; cost estimate risks; mineral legislation risks; title to mineral holdings risks; power supply risks; risks relating to the
depletion of mineral reserves; litigation risks; South Africa country risks; infrastructure risks; environmental risks and
other hazards; risks relating to dependence on key personnel; dependence on outside parties; exploration and
development risks; risks relating to foreign mining tax regimes; insurance and uninsured risks; competition risks; the
Company's securities may experience price volatility; risks relating to owning foreign assets; currency fluctuation risks;
and the Company's directors and officers may have conflicts of interests. Although management of the Company has
attempted to identify important factors that could cause actual results to differ materially from those contained in
forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or
intended. There can be no assurance that such information will prove to be accurate, as actual results and future events
could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance
on forward-looking information. The Company does not undertake to update any forward-looking information, except
in accordance with applicable securities laws.
OVERVIEW OF THE COMPANY
BC Corp is a coal mining and supply company operating in South Africa. The Company is primary listed on the TSX Venture Exchange
("TSXV") and has a secondary listing on the Alternative Exchange ("AltX") operated by the JSE. BC Corp trades under the symbol "BUF" on
the TSXV and "BUC" on the AltX.
The Company owns 100% of the shares in Buffalo Coal Dundee Proprietary Limited ("BC Dundee"), a South African
company, with an interest in two operating coal mines in South Africa ("BC Dundee Properties"). The BC Dundee
Properties comprise the Magdalena bituminous mine ("Magdalena") and the Aviemore anthracite mine ("Aviemore").
The Group is currently engaged only in underground coal mining. BC Dundee indirectly holds a 70% interest in the BC
Dundee Properties through its 70% interest in Zinoju Coal Proprietary Limited ("Zinoju"), which holds all of the mineral
rights with respect to the BC Dundee Properties. The remaining 30% interest in Zinoju is held by South African Black
Economic Empowerment ("BEE") partners.
OVERVIEW OF THE PERIOD AND OUTLOOK FOR THE GROUP
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 51,125 tonnes per quarter through the Quattro scheme at
Richards Bay Coal Terminal (RBCT). Firm dates have not yet been announced by the Department of Mineral Resources
for the new application process for allocation in the Quattro system. Buffalo Coal will report when these details are
As previously reported, no overall impact is expected on export tonnages regardless of whether the Company has an
allocation under the Quattro program or not.
The API4 coal index increased steadily during the quarter averaging $100.29 per ton in the second quarter of 2018, a
very strong performance. This price level largely reflects an on-going tightness in the supply of RB1 quality coals for
The ZAR exchange rate to the US$ weakened through the quarter, having averaged R12.63 against a quarter 1 average
rate of R11.96. Rand receipts will therefore improve.
The API4 index still remains solidly in backwardation, weighing against the fixing of any long-term sales agreements.
The group's export bituminous sales are still mainly being fixed in ZAR for relatively short periods, guaranteeing cash
flow in local currency.
Domestically, the bituminous industrial market remains stable in volume terms, with little variation in the demand
predicted for 2018. Additional demand from Eskom is, however, further contributing to the previously noted tightness
in the overall domestic market. Availability remains particularly tight for sized coal fractions, causing on-going upward
pressure on pricing. This scenario is extremely positive for future sales.
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.
Demand for 2018 remains buoyant, and the Group has already placed the vast majority of planned production into the
Demand for the Group's products, particularly from the domestic consumers, continues to be positively impacted by
the fact that no new production has been forthcoming to close the availability gap after some mine closures in recent
The outlook for the remainder of 2018 is therefore very positive for both the bituminous and anthracite sectors of the
business, with both demand and pricing remaining strong.
Production and cash flow
Buffalo Coal currently has approximately 18 months life-of-mine ("LOM") reserves left to mine at its Aviemore Mine
and 5 LOM years' reserves at its Magdalena Mine, however, once the Aviemore LOM reserves have been mined out,
the operations will have to close as Magdalena Mine will not be able to carry the full overhead costs on its own.
In order to extend Aviemore's LOM to 15 years, additional capital in the order of approximately R445 million will be
required to open up a new adit at Aviemore Mine which will provide access to additional reserves to mine. Buffalo Coal
Dundee will require additional funding for the capital required to open up the new adit.
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 Mine. To facilitate the process, BC Corp appointed
a Financial Advisor, Northcott Capital to embark on a process to obtain further funding for the Company.
A bidding process commenced at the start of June 2018, which allowed interested bidders to do a high level due
diligence via a data room setup for this purpose and site visits. The Company received indicative offers at the end of
June following which a formal due diligence process commenced to give shortlisted candidates the opportunity to
obtain more detailed information in order to firm up their indicative offers. The due diligence process ends at the end
of August 2018 following which final offers have to be made.
It is uncertain at this point in time what the outcome of this process will be. As such, management has reviewed its
cash flow forecast based on current production with remaining reserves left over the next 18 months to determine
whether the company (group) will be able to meet its obligations in the normal course of business. The cash flow
forecast based on current production forecast over the next 18 months, indicates that Buffalo Coal should be able to
service all its liabilities at the end of the period.
Although the Group has implemented various restructuring initiatives, the Group continues to experience operational
challenges. The Group remains dependent upon sustaining profitable levels of operation, as well as the continued
support of Investec, RCF and other stakeholders and believes that subject to its ability to meet current forecasts, it
should be able to generate positive cash flows in the foreseeable future.
However, there is no assurance that the Company will be able to meet its covenants in the future, or that Investec will
provide future waivers, if required. These matters constitute material uncertainties which cast significant doubt as to
whether the Group can continue as a going concern.
The Group continues to be in breach of certain covenants with respect to its borrowings from Investec at June 30, 2018.
On November 22, 2016, Investec provided a forbearance letter stating that it does not intend to exercise its rights to
request early payment of the outstanding debt; however, no waiver has been provided and Investec has reserved its
right to review this decision periodically, with no obligation to keep the Company advised in this regard. Also, Investec
issued a further letter dated August 02, 2018, in terms of which Investec agreed not to exercise its acceleration rights
with respect to any existing events of default under the Investec Facility until September 28, 2018.
Pursuant to the Amendment agreement, the Group settled R36.6 million due to Investec under the existing Investec
Facility on March 19, 2018, of which R30.0 million reduced the aggregate amount outstanding on the Investec Facility,
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. On June 25, 2018, the
Group also settled the required principal payments of R7.5 million for each of the March and June quarters (R15 million
in total) as well as R3.1 million mine royalties due to Investec. The Group did not utilize the additional R16 million
facility that was made available by Investec (see Note 5 to the Financial Statements).
RCF loan facilities
The RCF loan is due and payable on June 30, 2019. The Company will need to arrange for an extension or otherwise
obtain other financing in order to settle this amount when it comes due as it currently does not expect to have the
means to repay this amount in full on the due date.
CONSOLIDATED OPERATIONAL RESULTS FOR Q2 2018, Q2 2017 AND Q1 2018
% % %
Operational results 2018 YTD 2017 YTD VARIATION Q2 2018 Q2 2017 VARIATION Q1 2018 VARIATION
ROM (t) 554 853 721 373 (23%) 288 055 361 046 (20%) 265 243 9%
- Aviemore (t) 243 973 226 914 8% 119 721 120 852 (1%) 124 252 (4%)
- Aviemore (t) (bought-in) 32 734 4 490 629% 23 427 2 601 801% 7 752 202%
- Magdalena (t) 277 091 448 048 (38%) 144 907 212 354 (32%) 132 184 10%
- Bituminous (t) (bought-in) 1 055 41 921 (97%) - 25 239 (100%) 1 055 (100%)
Saleable production (excluding calcine) (t) 369 750 384 241 (4%) 189 175 189 739 (0%) 180 575 5%
- Anthracite (t) 169 067 137 239 23% 85 015 71 252 19% 84 052 1%
- Anthracite (t) (bought-in) 21 507 3 088 596% 16 329 1 549 954% 5 178 215%
- Bituminous (t) 178 541 214 184 (17%) 87 831 98 307 (11%) 90 710 (3%)
- Bituminous (t) (bought-in) 635 29 730 (98%) - 18 631 (100%) 635 (100%)
Yield on plant feed (excluding calcine) (%) 66.6% 54.3% 23% 65.6% 53.9% 22% 68.1% (4%)
- Anthracite (%) 69.5% 63.0% 10% 70.4% 61.3% 15% 68.6% 3%
- Anthracite (%) (bought-in) 65.7% 68.8% (5%) 69.7% 59.6% 17% 66.8% 4%
- Bituminous (%) 64.3% 48.3% 33% 60.9% 47.3% 29% 67.8% (10%)
- Bituminous (%) (bought-in) 60.2% 70.9% (15%) N/A 73.8% N/A 60.2% N/A
Sales (t) 418 168 425 409 (2%) 210 821 195 752 8% 214 910 (2%)
- Anthracite (t) 155 042 104 836 48% 84 180 49 343 71% 70 862 19%
- Bituminous (t) 185 512 234 959 (21%) 91 198 114 141 (20%) 94 314 (3%)
- Calcine (t) 29 756 21 101 41% 12 493 6 710 86% 17 263 (28%)
- Anthracite high-ash sales (t) 47 858 64 513 (26%) 22 950 25 558 (10%) 32 471 (29%)
Sales (t) (excluding high-ash sales) 370 310 360 896 3% 187 871 170 194 10% 182 439 3%
Saleable inventory tonnes 46 428 75 223 (38%) 46 428 75 223 (38%) 44 923 3%
- Anthracite (t) 31 580 55 837 (43%) 31 580 55 837 (43%) 28 123 12%
- Bituminous (t) 13 195 12 785 3% 13 195 12 785 3% 16 800 (21%)
- Calcine (t) 1 653 6 601 (75%) 1 653 6 601 (75%) - 100%
An analysis of the operational results for Q2 2018 and 2018 YTD compared to Q2 2017 and 2017 YTD, respectively, as
well as Q2 2018 compared to Q1 2018 are discussed below:
Total ROM production for Q2 2018 and 2018 YTD decreased 20% and 23%, respectively, compared to Q2 2017 and
2017 YTD. The decreases over comparative periods were due to a combination of decreased production at Magdalena
offset marginally by improved production at Aviemore. The 9% improvement in total ROM tonnes from Q1 2018 to Q2
2018 was the result of a 10% improvement in production at Magdalena along with additional buy-ins at Aviemore offset
by lower (4%) production at Aviemore.
Aviemore's ROM production for Q2 2018 was 1% lower compared to Q2 2017 and 4% lower compared to Q1 2018,
mainly due to dykes encountered and community strikes taking place during Q2 2018 which resulted in two shifts being
lost. Notwithstanding the lower production in Q2 2018, Aviemore's ROM production for 2018 YTD remained 8% higher
compared to 2017 YTD, reflecting the overall good performance at Aviemore during the current year to date.
Magdalena's ROM production for Q2 2018 and 2018 YTD was 32% and 38% lower compared to Q2 2017 and 2017 YTD,
respectively, primarily as a result of difficult geological mining conditions and pit-room constraints that resulted in only
three sections being mined to date during calendar 2018 versus four sections that were mined during the comparative
periods in calendar 2017. The 10% improvement in ROM tonnes from Q1 2018 to Q2 2018 was, in large part, a result
of a team building exercise with Magdalena's underground workers which lead to an improvement in production.
In order to mitigate the loss of production at Magdalena, the Company has entered into an arrangement with a
neighbouring coal miner, to buy in approximately 6 kt of anthracite coal per month. The buy-in tonnes may increase,
subject to availability.
The overall saleable coal production for Q2 2018 and 2018 YTD was in line with its comparative periods, as a result of
improvement in overall yields from plant feed over the comparative periods which negated the decrease in ROM
production to a large extent.
Anthracite yields for Q2 2018 and 2018 YTD improved with 15% and 10%, respectively, compared to Q2 2017 and 2017
YTD. There was a 3% improvement in anthracite yields compared to Q1 2018.
Bituminous yields for Q2 2018 and 2018 YTD improved with 29% and 33%, respectively, compared to Q2 2017 and 2017
YTD. However, there was a 10% decline in the bituminous yields compared to Q1 2018.
The main reason for the overall improved yields compared to Q2 2017 and 2017 YTD, were the mining of combined
seem and Gus seem areas which had less contamination.
Overall sales of anthracite products and bituminous coal for Q2 2018 increased by 8% compared to Q2 2017, however,
decreased by 2% compared to Q1 2018. The overall sales for 2018 YTD were also 2% lower compared to 2017 YTD.
Anthracite sales for Q2 2018 and 2017 improved with 71% and 48%, respectively, compared to Q2 2017 and 2017 YTD,
mainly as a result of an increase in saleable anthracite production along with increased buy-in tonnes and sales from
inventories carried. Anthracite sales increased with 19% compared to Q1 2018 due to a significant increase in buy-in
tonnes during Q2 2018 along with additional sales from inventories carried over from Q1 2018.
Bituminous sales for Q2 2018 and 2018 YTD were 20% and 21% lower compared to Q2 2017 and 2017 YTD, respectively,
mainly due to lower production in current periods. Bituminous sales for Q2 2018 were slightly lower (3%) compared to
Q1 2018 due to lower yields achieved quarter-over-quarter.
Calcine sales and anthracite high-ash sales fluctuates from quarter to quarter, based on demand for these products.
Health and Safety
The Company's operations 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. Operating safely and responsibility is an integral part of our business strategy. We
strive to obtain an injury free workplace and to create a company culture that protects employees and visitors from
harm. 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.
As at June 30, 2018, the Group had achieved more than six thousand fatality free production shifts at
Coalfields. Aviemore Colliery achieved 1919 and Magdalena Colliery 544 fatality free production shifts.
During the six months ended June 30, 2018, the Company did not have any lost time injuries. Subsequent to June 30,
2018, there was one lost time injury reported.
CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q2 2017 AND Q1 2018
% % %
Financial results 2018 YTD 2017 YTD VARIATION Q2 2018 Q2 2017 VARIATION Q1 2018 VARIATION
Revenue (R'millions) 394.7 325.9 21% 204.3 154.4 32% 190.4 7%
Net Revenue (R'millions) (*) 384.8 313.1 23% 199.5 149.3 34% 185.3 8%
Operating profit/(loss) (R'millions) 4.6 20.1 (77%) 24.9 1.9 1209% (20.2) 223%
Adjusted EBITDA (R'millions) (*) 73.0 7.6 861% 41.6 (6.1) 782% 31.4 32%
Average selling price per ton sold (R)
(excluding high-ash sales) 1 020 845 21% 1 042 858 21% 999 4%
Cash cost of sales per ton (R)
(excluding high-ash export costs) 737 768 (4%) 738 826 (11%) 738 0%
Cash generated from/(utilized in)
operating activities (R'millions) 58.5 (2.3) 2644% 29.5 (6.6) 547% 29.0 2%
Cash (utilized in) investing activities (17.7) (23.1) (24%) (11.1) (15.5) (29%) (6.6) (68%)
Cash (used in)/generated from
financing activities (R'millions) (45.0) 21.5 (309%) (15.0) 21.5 (170%) (30.0) 50%
CAD:ZAR (average) 9.62 9.91 (3%) 9.78 9.81 0% 9.46 3%
USD:ZAR (average) 12.30 13.21 (7%) 12.64 13.20 (4%) 11.96 6%
(*) See Non-IFRS Performance Measures section of this MD&A.
An analysis of the financial results for Q2 2018 and 2018 YTD compared to Q2 2017 and 2017 YTD, respectively, as well
as Q2 2018 compared to Q1 2018 are discussed below:
CONSOLIDATED FINANCIAL RESULTS FOR Q2 2018, Q2 2017 AND Q1 2018
% % %
R'000 2018 YTD 2017 YTD VARIATION Q2 2018 Q2 2017 VARIATION Q1 2018 VARIATION
Anthracite 163 882 88 608 85% 88 698 42 692 108% 75 229 18%
-Domestic 47 086 23 535 100% 24 005 9 152 162% 23 103 4%
-Export 116 796 65 072 79% 64 693 33 540 93% 52 126 24%
Bituminous 164 604 184 603 (11%) 86 266 92 975 (7%) 78 385 10%
-Domestic 96 532 90 126 7% 48 582 47 529 2% 47 973 1%
-Export 68 072 94 477 (28%) 37 684 45 446 (17%) 30 412 24%
Calcine 49 374 31 396 57% 20 737 10 181 104% 28 637 (28%)
Revenue (excluding high-ash sales) 377 860 304 607 24% 195 701 145 848 34% 182 251 7%
Export (high-ash) 16 616 20 877 (20%) 8 465 8 415 1% 8 174 4%
Sundry sales (slurry/discard) 270 381 (29%) 155 180 (14%) - 100%
Total Revenue 394 746 325 866 21% 204 321 154 443 32% 190 425 7%
Revenues (excluding high-ash sales) for Q2 2018 and 2018 YTD improved 34% and 24%, respectively, compared to Q2
2017 and 2017 YTD, primarily due to higher anthracite and calcine sales partially offset by lower bituminous sales.
Revenues for Q2 2018 increased 7% compared to Q1 2018 as a result of higher anthracite and bituminous sales partially
offset with lower calcine sales.
The higher anthracite revenue for Q2 2018 and 2018 YTD compared to its comparative periods was a result of increased
anthracite sales volumes along with higher anthracite sales prices over the comparative periods, together with an
increase in buy-in tonnes. The 18% increase in anthracite revenue compared to Q1 2018 was mainly the result of higher
anthracite sales volumes from the buy-in of anthracite coal.
Bituminous revenue for Q2 2018 and 2018 YTD were lower compared to its comparative periods as a result of the lower
production levels achieved at Magdalena during the current periods. Bituminous revenue improved with 10%
compared to Q1 2018 due to a combination of improved production levels at Magdalena and higher bituminous sales
Average selling prices (excluding high-ash sales) for Q2 2018 and 2018 YTD both reflected a 21% improvement
compared to its comparative periods. The average selling prices for Q2 2018 were 4% higher compared to Q1 2018. In
2018, the overall selling price per ton were higher as a result of an increase in overall market prices that resulted in the
negotiation of better selling prices in new sales contracts entered into with the Group's significant customers.
Calcine revenue was also higher over comparative periods as result of higher calcine sales volumes at better sales
prices. There was a 28% decrease in calcine sales tonnes from Q1 2018 to Q2 2018, revenue decreased with 28% in
line with the decrease in sales tonnes.
Cost of Sales
Cost of sales for Q2 2018 and 2018 YTD was 7% and 8% lower compared to Q2 2017 and 2017 YTD, respectively. Cost
of sales for Q2 2018 was 3% higher compared to Q1 2018. The Group continues to be cost conscious and 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
Cash cost of sales per ton for Q2 2018 and 2018 YTD decreased with 11% and 4%, respectively, compared to Q2 2017
and 2017 YTD. Cash cost of sales per ton for Q2 2018 remained constant compared to Q1 2018. The lower costs
compared to Q2 2017 and 2017 YTD are attributable to overall reductions in costs at the mine in order to ensure the
sustainability of the Group.
Other Income/(Expense) - net
Other income and expense comprises profit on sale of assets, foreign exchange gains/losses, discounts received,
commissions paid and fair value adjustments on financial assets and conversion option liabilities.
The R9.6 million net expense for Q2 2018 (Q2 2017: net income of R24.6 million) was mainly attributable to a fair value
adjustment gain of R44.1 million in relation to the valuation of the conversion option liability (RCF convertible loan) (Q2
2017: R13.7 million), the warrant liability (Investec warrants) and financial assets offset by a net foreign currency
exchange loss of R54.3 million (Q2 2017: gain of R9.2 million).
The R53.3 million net expense for 2018 YTD (2017 YTD: net income of R44.9 million) was mainly attributable to a fair
value adjustment loss of R17.4 million in relation to the valuation of the conversion option liability (RCF convertible
loan) (2017 YTD: gain of R24.0 million), the warrant liability (Investec warrants) and financial assets offset by a net
foreign currency exchange loss of R38.8 million (2017 YTD: gain of R17.4 million).
The net expense of R43.7 million for Q1 2018 was mainly attributable to a fair value adjustment loss of R57.4 million in
relation to the valuation of the conversion option liability (RCF convertible loan), the warrant liability (Investec
warrants) and financial assets, partially offset by a net foreign currency exchange gain of R15.5 million.
General and administration expenses
The Company recorded general and administration expenses for Q2 2018 and 2018 YTD that were 20% and 32% higher
compared to Q2 2017 and 2017 YTD, respectively. General and administration expenses for Q2 2018 YTD were 8%
lower compared to Q1 2018.
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 higher general and administration expenses
for Q2 2018 are mainly due to the consulting fees for the Northcott process and bankable feasibility study for the new
adit at Aviemore, increased social and labour plan expenses as well as increases in salaries and wages.
In addition to the increases noted above, the higher general and administration expenses 2018 YTD also include a R1.7
million impairment of receivables as well as a R2 million penalty provision due to the Calcine plant operating without
an Air Emissions License ("AEL") (refer Other Risks and Uncertainties). The impairment related to a customer that went
into business rescue during the quarter which resulted in R1.7 million in trade debt being written off.
Finance costs for Q2 2018 and 2018 YTD were 58% and 30% higher compared to its comparative periods. The increases
were due to royalties payable to Investec during 2018 pursuant to the 6th Amendment Agreement in terms of which a
Life of Mine Royalty ("LOMR") is 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. The 4% increase
from Q1 2018 to Q2 2018 was due to an increase in royalties driven by higher production at Magdalena during Q2
No income tax was payable during Q2 2018. An additional provision of R1 million was made in Q1 2018 with regards to
potential taxes payable (Q2 2017: Rnil).
FINANCIAL CONDITION REVIEW
A summary of the statements of financial position is shown below:
June 30, December 31, % March 31, %
R'000 2018 2017 VARIANCE 2018 VARIANCE
Property, plant and equipment 112 239 106 886 5% 111 955 0%
Other non-current assets - restricted 65 943 64 412 2% 65 023 1%
Other non-current assets 5 975 5 361 11% 5 348 12%
Trade and other receivables 96 893 121 245 (20%) 102 140 (5%)
Inventories 33 441 38 095 (12%) 28 949 16%
Cash and cash equivalents 17 280 21 429 (19%) 13 807 25%
Other current assets 2 405 2 880 (17%) 133 999 (98%)
Total assets 334 176 360 308 (7%) 199 043 68%
RCF loan facilities 376 634 314 791 20% 361 266 4%
Other borrowings 146 005 187 985 (22%) 160 261 (9%)
Trade and other payables 131 307 156 498 (16%) 135 880 (3%)
Asset retirement obligation 35 653 35 898 (1%) 40 432 (12%)
Current tax liabilities 4 199 2 901 45% 3 684 14%
Total liabilities 693 798 698 074 (1%) 701 522 (1%)
Total equity 359 622 337 765 6% 371 391 (3%)
The analysis below relates to changes from financial year end, December 31, 2017, to the six months ended June 30, 2018.
The 7% decrease in total assets was mainly due to a R24.4 million (20%) decrease in trade and other receivables, a R4.7
million (12%) decrease in inventories, a R4.1 million (19%) decrease in cash and cash equivalents partially offset by a
R5.3 million (5%) increase in property, plant and equipment.
The decrease in trade and other receivables comprised primarily of trade receivables recovered, but also included a
R1.7 million impairment of trade receivables. The impairment related to a customer that went into business rescue
during the first quarter which resulted in R1.7 million in trade debt being written off.
The decrease in inventory was mainly as a result of inventory at the end of December 2017 being sold during Q1 2018.
The increase in property, plant and equipment related to additional capital incurred over the period as well as an
increase in the asset retirement obligation at the end of Q1 2018 that resulted in a R4.8 million increase in capital.
The 20% increase in the RCF loan facilities was due to a loss of R17.1 million recognized for the six months ended June
30, 2018 on the revaluation of the conversion option liability and a foreign exchange loss of R3.3 million on translation
of the US$ denominated liability on June 30, 2018.
The negative movement in the conversion option liability was mainly driven by the annualised volatility of the
Company's stock price (see Note 3 to the Financial Statements). The weakening of the Rand in relation to the US Dollar
at the end of June 30, 2018 compared to December 31, 2017, resulted in the foreign exchange loss recognised for the
six months ended June 30, 2018.
The RCF loan facility is due and payable as at June 30, 2019. Consequently, the long-term portion of the RCF loan facility
as well as the related conversion option liability has been reclassified as current as at June 30, 2018.
The 22% decrease in other borrowings was primarily due to settlement against the Investec loan facility of R30 million
in Q1 2018 and a further R15 million at the end of Q2 2018 (refer Overview of the Group and Outlook for the Group).
At June 30, 2018, the Group had outstanding debt with Investec of R154.6 million and R371.0 million (US$27.2 million)
(including accrued interest) outstanding on the RCF convertible loan. The Investec debt consists of R30.0 million
outstanding on the term loan facility, R45.5 million on the bullet facility and R79.1 million outstanding on the working
capital facility, all of which are current.
The decrease in trade and other payables was mainly attributable to the payment of 2017 accrued Investec royalties at
the end of Q1 2018 and a decrease in long outstanding amounts owing to the mining contractor at Magdalena.
Current taxes payable increased 45% as a result of an additional provision of potential taxes (C$ denominated) in Q1
CASH FLOW REVIEW
The condensed consolidated statements of cash flows are summarized below:
% % %
R'000 2018 YTD 2017 YTD VARIATION Q2 2018 Q2 2017 VARIATION Q1 2018 VARIATION
Net cash generated from/(utilized in) operating
activities 58 516 (2 295) 2650% 29 517 (6 600) 547% 28 998 2%
Net cash (utilized in) investing activities (17 665) (23 100) (24%) (11 045) (15 547) 29% (6 620) 67%
Net cash (utilized in)/generated from financing
activities (45 000) 21 500 (309%) (15 000) 21 500 (170%) (30 000) (50%)
Change in cash and cash equivalents (4 149) (3 895) 7% 3 472 (647) 637% (7 622) 146%
The improvement in cash generated from operating activities for Q2 2018 and 2018 YTD compared to cash utilised
during Q2 2017 and 2017 YTD were attributable to improved revenues and lower costs over the comparative periods.
Cash generated from operating activities for Q2 2018 was also higher compared to Q1 2018, mainly due to improved
Cash on investing activities for Q2 2018 and 2018 YTD included R11.5 million and R18.1 million, respectively, related to
capital spent on property, plant and equipment (Q2 2017: R14.2 million; 2017 YTD: R20.3 million).
Financing activities utilized R15.0 million and R45 million, respectively, during Q2 2018 and 2018 YTD to partially settle
the Investec term loan facility.
RELATED PARTY TRANSACTIONS
During Q2 2018 and 2018 YTD, the Company did not enter into any transactions with related parties in the ordinary
course of business. During Q1 2017, the Company entered into related party transactions in the ordinary course of
business with RCF¹ to the value of R37 749. No related party transactions were entered into other than in the ordinary
course of business.
The following balances were outstanding as at June 30, 2018 and December 31, 2017:
June 30, December 31,
R'000 2018 2017
Related party payables
RCF(1) 1 699 1 531
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, in addition,
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. [Mr Thomas resigned from the Board of Directors effective June 1, 2018.]
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 Q2 2018 and 2018
YTD were as follows:
R'000 2018 YTD 2017 YTD Q2 2018 Q2 2017
Short-term benefits 5 332 5 645 2 488 2 844
Share-based payments 2 36 1 9
Total 5 334 5 680 2 489 2 853
Amounts owing to directors and other members of key management personnel were R0.7 million as of June 30, 2018
(December 31, 2017: R0.9 million).
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
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 amended Environmental Management Program ("EMP")
or an amended Integrated Water Use License Application ("IWULA"). As a result, the mine needs to apply for a Section
24G retrospective Environmental Impact Analysis ("EIA"). The application was submitted on March 23, 2018 and the
mine is awaiting outcome from the DMR.
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. Initial tests have been scheduled for mid-July 2018 and a second round of tests scheduled for mid to end of August
2018. Authorisation of the Section 24G is dependent on compliant monitoring results.
The Company is currently completing specialist studies to complete these retrospective 24G environmental
applications following which the EDTEA will finalise the way forward on the 24G process. Management is awaiting the
final outcome of this process and has provided for a R2 million provision for a potential 24G penalty (included in general
and administration expenses).
On June 15, 2018 the DMR published the draft Mining Charter 2018. Parties were given 30 days to respond to the draft.
The deadline has subsequently been extended to the end of August 2018.
The draft Mining Charter 2018 includes a 30% black ownership target on new mining rights, with shares allocated for
communities, organised labour and black entrepreneurs. Some of the elements of the Mining Charter do not promote
competitiveness. Without competitiveness, investment in new exploration and mining will be limited and the current
mining sector will continue to decline, to the detriment of all citizens.
Further, the Mining Charter contains elements that are unconstitutional and contrary to South African Company Law
such as the free carried interest of 5% allocated to each of labour and communities. Given South Africa's mature mining
sector, a 10% total free carried interest on new mining rights will materially undermine investment, by pushing up
investment hurdle rates and ensuring that many potentially new projects become unviable. Imposition of a free carried
interest is a public policy choice, which must be weighed against the critical need to attract investment for growth and
The draft Mining Charter 2018 also includes a 1% EBITDA target to communities and labour and topping up existing
right holders BEE ownership to 30% within five years.
Also, despite a High Court declaratory order judgement and an agreement with the DMR, the issue of recognising the
continuing consequences of previous BEE deals on existing rights, including for renewals, has not been properly
captured in the Mining Charter.
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:
The Group's offtake contracts are a mixture of free-on-board shipping ("FOB") and free carrier ("FCA") contracts,
resulting in revenue not being directly comparable quarter on quarter. Below is a reconciliation of revenue as disclosed
in the Interim Results for Q2 2018, Q1 2017 and Q1 2018 to net revenue which excludes all railage, port handling and
wharfage related costs:
R'000 2018 YTD 2017 YTD Q2 2018 Q2 2017 Q1 2018
Revenue 394 746 325 866 204 321 154 443 190 425
Less: Railage, port handling and wharfage cost (9 940) (12 721) (4 835) (5 191) (5 105)
Net revenue 384 806 313 145 199 486 149 252 185 320
Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortisation and adding back the
following: Impairment or reversal of an impairment of an asset, fair value adjustments to financial instruments, stock-
based compensation, foreign exchange gains and losses, and non-recurring transaction expenses or income.
The reconciliation of operating profit to adjusted EBITDA is as follows:
R'000 2018 YTD 2017 YTD Q2 2018 Q2 2017 Q1 2018
Operating profit/(loss) for the period 4 639 20 125 24 873 1 938 (20 235)
Depreciation and amortization 12 030 29 694 6 482 14 802 5 548
Impairment of receivables 1 668 (3) - - 1 668
Fair value adjustments of financial assets
and conversion option liability 15 856 (24 876) (44 113) (13 728) 59 969
Stock-based compensation 2 36 1 9 1
Foreign exchange gains 38 807 (17 421) 54 338 (9 156) (15 531)
Adjusted EBITDA 73 001 7 555 41 581 (6 135) 31 420
Working capital includes current assets and current liabilities, excluding provisions and non-financial instruments.
June 30, December 31, March 31,
R'000 2018 2017 2018
Cash and cash equivalents 17 280 21 429 13 807
Trade and other receivables 96 893 121 245 102 140
Inventories 33 441 38 095 28 949
Non-interest bearing receivables 1 540 2 880 2 045
Taxation receivable 865 - 865
150 019 183 650 147 806
Trade and other payables (excluding provisions) 131 307 156 498 135 880
Current portion of borrowings 145 639 187 986 158 914
Current tax liability 4 199 2 901 3 684
281 145 347 385 298 478
Net working capital (131 126) (163 735) (150 671)
Headline profit & (loss) per share
Headline profit & (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
Reconciliation of profit/(loss) for the periods to headline profit/(loss) is disclosed below:
R'000 2018 YTD 2017 YTD Q2 2018 Q2 2017 Q1 2018
(Loss)/profit for the period (24 442) (2 734) 10 399 (6 959) (34 842)
Net (profit) on disposal of property, plant and equipment - (1 281) - (1 281) -
Headline (loss)/profit for the period (24 442) (4 016) 10 399 (8 240) (34 842)
Headline (loss)/profit per share - basic and diluted (0.06) (0.01) 0.03 (0.02) (0.08)
SUMMARY OF SECURITIES AS AT AUGUST 10, 2018
As at August 10, 2018 the following Common Shares, Common Share purchase options and share purchase warrants
were issued and outstanding:
- 416 582 594 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 1.51 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
Rowan Karstel Chief Executive Officer
Graham du Preez Interim Chief Financial Officer and Corporate Secretary
August 10, 2018
Sponsor: Questco Corporate Advisory Proprietary Limited
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