BRAZILIAN DIAMONDS LIMTIED
FINAL RESULTS FOR THE YEAR PERIOD ENDED 31 DECEMBER 2008
As with most other junior resource exploration companies, Brazilian
Diamonds Limited ("Brazilian Diamonds" or the "Company") has been
affected by the continuing uncertainties in international capital
markets which have negatively impacted the ability of junior resource
exploration companies to finance their activities. As a consequence,
as at December 31, 2008, the Company had a net working capital
deficiency of $329,000.
To manage its liquidity requirements, the Company has been reviewing
its strategic plans for the future activities of the business.
Following this review, the Directors are pleased to announce that
they have entered into preliminary agreements for the sale of the
Company's laboratory and facilities at Patos de Minas to third
parties for a total consideration of approximately Can$466,000.
In addition, the Company has also signed a preliminary agreement to
sell all its interests in Cobre Sul Mineracao Ltda. to third parties.
Cobre Sul Mineracao Ltda owns assets associated with the Company's
Santo Antonio de Bonita diamondiferous alluvial gravels project. The
consideration includes a cash payment of Can$452,000 and Can$516,000
in polished diamonds which are to be independently valued in New
York, USA and then delivered to the Company within 90 days of signing
of the sale agreement.
The gross proceeds of the transactions will be used to repay debt and
to enable the Company to advance the Canastra 1 project towards
development. The transactions both remain subject to the negotiation
of formal sale contracts with the purchasers and full details will be
announced on signing of the contracts.
The Company remains encouraged by the recent publication of the
government's inter-departmental deliberations over the finalization
of permanent boundaries for the Serra da Canastra National Park which
is located in proximity to the Canastra 1 project and the progress
made with respect to the passage of this legislation. A draft bill
(Projeto de Lei # 1448/2007) was submitted in June 2007 to the
Brazilian Congress to formally exclude the Company's projects in the
Serra da Canastra region from any new proposed Canastra National Park
boundary. The draft bill was approved by the Camara dos Deputados
(Lower House) on October 29, 2008 and has moved to the Senado (Upper
House) for final approval which is expected during 2009. The Company
has renewed the Canastra mineral licenses that it holds and is
maintaining them in good standing while waiting for trial mining
permits to be issued which is expected to follow final approval of
this legislation. The Company hopes to commence trial mining at its
Canastra 1 project once the bill has received final approval but in
the meantime the Company's projects in the Serra da Canastra region
will remain on care and maintenance..
The Company has kept its mineral licenses in the Santo Antonio do
Bonito River region in good standing and the Company hopes to
continue work on the project in the future but for the moment, the
Santo Antonio do Bonito River kimberlite exploration project remains
on care and maintenance. Licensing for the Regis and Tucano projects
in the Patos de Minas region has also been renewed and they are being
maintained in good standing while these projects will remain on care
and maintenance.
For further information contact:
Brazilian Diamonds Limited
Ken Judge, Chairman + 44 7733 001 002
Stephen Fabian, CEO + 55 31 9186 4660
Hanson Westhouse Limited (Nomad and Broker to the + 44 113 246 2610
Company)
Tim Feather/Matthew Johnson
Introduction
The following discussion of performance and financial condition
should be read in conjunction with the audited consolidated financial
statements of the Company for the year ended December 31, 2008. The
Company's financial statements are prepared in accordance with
Canadian GAAP. The accounting policies followed by the Company are
set out in note 3 to the audited consolidated financial statements.
The Company's reporting currency is Canadian dollars. The date of
this Management's Discussion and Analysis is March 25, 2009.
Description of Business
Brazilian Diamonds Limited (the "Company") is a development stage
resource company currently engaged in the acquisition, exploration
and development of kimberlite and alluvial diamond properties in
Brazil. The Company holds 23,107 hectares of alluvial and kimberlite
exploration properties in the Paranaiba and Santo Antonio do Bonito
River Basins and the Patos de Minas region as well as over 51,328
hectares of prospective exploration properties in the Serra da
Canastra Kimberlite Province including the advanced stage
diamondiferous Canastra 1 kimberlite pipe. In addition, the Company
has its own diamond laboratory used in the recovery of kimberlite
indicator minerals and in 2006 the Company received an ISO 17025
rating for the facility. Subsequent to year end this laboratory has
been sold.
The Company's head office is located in Belo Horizonte, Brazil and
the corporate office is located in Vancouver British Columbia,
Canada. Exploration headquarters are located in Patos de Minas,
Brazil.
The Company is a reporting issuer in Ontario and British Columbia,
Canada and its common shares trade on the Toronto Stock Exchange and
Alternative Investment Market ("AIM") of the London Stock Exchange
under the symbol BDY.
Corporate Developments
As at March 25, 2009, the Company owes $115,000 (December 31, 2008 -
$107,000) to SAFM Mineracao Inc., a company associated with Stephen
Fabian (director), with accrued interest based on the monthly
interest of the standard Brazilian CDB bank rate for Banco Itau
payable on demand.
As at March 25, 2009, the Company owes $84,000 (December 31, 2008 -
$32,000) to Itapiruba Internacional Ltda., a subsidiary company of
Hamilton Capital Partners Limited and Kenneth Judge (director), with
accrued interest based on the monthly interest of the standard
Brazilian CDB bank rate for Banco Itau payable on demand.
In February 2009, the Company was notified by the Toronto Stock
Exchange ("TSX") that it was reviewing the eligibility for continued
listing of the Company's shares on the TSX. The review is being
conducted under the TSX's Remedial Review Process pursuant to which
the Company has been given until June 26, 2009 to satisfy the TSX
that it meets all TSX requirements for continued listing, failing
which the Company's shares will be delisted as of July 26, 2009. The
Company is therefore considering its options in this regard, which
include applying for a transfer of its listing to the TSX Venture
Exchange or having its listing on the AIM market of the London Stock
Exchange continue as the Company's sole market for its shares. The
Company anticipates a definitive decision on the Company's course of
action being made well in advance of the TSX deadline.
In March 2008, the Company completed a private placement for gross
proceeds of $2,596,000. The Company issued 25,957,000 common shares
at a price of $0.10 per share.
Discussion of Operations
Current Year Activity
Amounts have been restated to conform to a change in accounting
policy and also a restatement due to the retroactive treatment of
future income taxes within other comprehensive income as set out in
EIC 172. See "Changes in Accounting Policies" or note 2 of the
audited consolidated financial statements for the year ended December
31, 2008.
Change in accounting policy and restatement regarding exploration
costs:
(Restated-note 2)
December 31 December 31,
2007 Write-down 2008
Coromandel 1,585 (793) 792
Patos de Minas 312 (312) -
Serra da
Canastra 1,400 (700) 700
Salvador 1 466 (466) -
Total 3,763 (2,271) 1,492
December
31
2006
As (Restated-note2) (Restated-note2)
previously December 31, December 31,
reported Adjustments 2006 2007
Coromandel 8,620 (7,035) 1,585 1,585
Patos de
Minas 2,737 (2,425) 312 312
Serra da
Canastra 7,121 (5,721) 1,400 1,400
Salvador 1 466 - 466 466
Data Sets 2,383 (2,383) - -
Other
projects 63 (63) - -
Total 21,390 (17,627) 3,763 3,763
During the year ended December 31, 2008, the Company focused the
first part of the year on exploration activities on its diamond
properties within Minas Gerais and Bahia States, Brazil and the last
quarter of the year the Company focused on reorganizing activities,
termination of some of the claims and on care and maintenance of its
properties.
Salvador 1
Salvador 1 Kimberlite Testing
The Salvador 1 kimberlite is a six hectare body partly exposed
beneath the sands and gravels of an old alluvial diamond mine in
central Bahia State, Brazil. The testing of the Salvador 1
kimberlite has involved the excavation of a number of pits, with each
pit designed to extract approximately 1,300 tonnes of kimberlite from
different parts of the kimberlite pipe.
Extraction began in the last quarter of 2007 and continued through to
September 2008. The kimberlite is multiphase with as many as six
kimberlite rock types identified in Pit 1, therefore providing
numerous challenges in evaluation process.
Processing of the kimberlite samples began in December 2007 using a
processing plant consisting of a primary disaggregation rotary pan,
followed by x-ray flowsort and grease table for the recovery of
diamonds. The processing plant has recently been augmented with a
roll crusher to better handle harder kimberlite fragments, however,
sample treatment remained slower than excavation.
Quality control and quality assurance of this evaluation process was
undertaken at the Company's certified ISO 17025 indicator mineral
processing laboratory on Patos de Minas, where concentrates were
re-examined for diamonds that may not have been recovered in
processing by the on-site plant.
By September 2008, the Company completed field operations at its pit
sample evaluation of the Salvador 1 kimberlite pipe. The Company
excavated three pits from 8 to 11m deep and processed the extracted
kimberlite in a plant built on-site. In addition, the Company
completed drill holes and conducted microdiamond tests to identify
potentially higher grade zone. Kimberlite weighing 603.5 tonnes from
Pit 1 yielded 12.44 carats of diamonds, demonstrating that the pipe
is diamondiferous although with a low abundance in the portion
tested. Preliminary results from 402 tonnes of kimberlite extracted
from Pit 3 yielded 10.44 carats of diamonds. Additional kimberlite,
mostly from the second and third pits has been shipped to the
Company's mineral processing laboratory in Patos de Minas, Brazil for
final diamond processing and quality control tests following initial
processing steps on-site. All field equipment was moved to the Santo
Antonio do Bonito project site in Minas Gerais State where the
Company was investigating the possibility of re-starting operations.
Salvador 1 Alluvial Sand and Gravel Testing
Concurrent with the kimberlite sampling and processing at Salvador 1,
a separate processing plant was used to recover diamonds from the
sands and gravels overlying the Salvador 1 kimberlite. Approximately
2,300 tonnes of sands and gravels were processed through the jig
plant, yielding 78.93 carats. The two largest recovered diamonds
weighed 3.15 and 2.65 carats respectively. The shallow overlying
alluvial sands and gravels are enriched in diamond content compared
to the kimberlite, although the volumes are smaller. The
confirmation of a diamondiferous kimberlite feeding the alluvial
deposits of central Bahia has positive implications for further
exploration within the Company's extensive land position and database
for the region.
At December 31, 2008, the Company has assessed the recoverability of
its Salvador 1 project and has recorded an asset impairment of
$466,000. The Company has closed down its testing programs and it is
unlikely that the relevant mineral licenses will be renewed. To
conserve cash reserves, the Salvador 1 project has been placed on
care and maintenance.
Coromandel Region
Santo Antonio do Bonito River
In 2008, all field equipment was consolidated at the Santo Antonio do
Bonito project site in Minas Gerais State, where the Company was
investigating the possibility of re-starting operations.
As at December 31, 2008, the Company has assessed the recoverability
of its Santo Antonio do Bonito River project and determined that no
impairment was required as the projects were written down to $nil.
The Company has kept its mineral licenses in good standing and
hopes to continue work on the project in the future. To conserve
cash reserves, the Santo Antonio do Bonito River project has been
placed on care and maintenance.
Santo Antonio do Bonito Alluvial Diamond Mining Joint Venture
In 2008, the Company's joint venture partners made a decision to
defer the next phase of studies with regards to developing a large
scale, dredge based mining operation on the Santo Antonio do Bonito
alluvial project.
As at December 31, 2008, the Company has assessed the recoverability
of its Santo Antonio do Bonito alluvial mining project and has
recorded an impairment of $793,000. The fair value of the mineral
properties of Cobre Sul Mineracao Ltda. were written down to reflect
the sale proceeds subsequent to year end.
Patos de Minas
As at December 31, 2008, the Company has assessed the recoverability
of its project in Parima and has recorded an impairment of $312,000.
Only the Regis and Tucano mineral licenses in the Patos de Minas
region have been renewed and maintained in good standing. To
conserve cash reserves, the Patos de Minas projects have been placed
on care and maintenance.
Serra da Canastra
The issue of permits to commence trial mining of the Canastra 1 pipe
has been delayed until a dispute surrounding a possible extension of
the nearby Serra da Canastra National Park boundary is resolved. New
legislation was submitted to the Brazilian Camara of Deputies (Lower
House) in June 28, 2007 which proposed the creation of a new park
boundary but excluded the Canastra 1 and nearby Canastra 1 trend.
This new legislation was approved on October 29, 2008 and the bill
will now proceed to the Senate (Upper House) for final approval which
is expected during 2009.
The Company has assessed the recoverability of its project in the
Serra da Canastra region and has recorded an asset impairment of
$700,000. All Canastra mineral licenses have been renewed and
maintained in good standing while the Company is waiting for the
trial mining permits. The Company hopes to commence trial mining at
its Canastra 1 project once approved. To conserve cash reserves, the
Serra da Canastra region projects have been placed on care and
maintenance.
Historical Information
Following the acquisition of several mineral exploration databases
from De Beers, the Company has access to the accumulated results of
more than 30 years of exploration activity in the Canastra, Santo
Antonio do Bonito and Patos de Minas regions in Minas Gerais and the
Chapada Diamantina region in Bahia. Included within the Canastra
data set are indicator mineral samples, microprobe chemical analyses,
and 19,000 line kilometres of proprietary airborne geophysics
covering the entire region. De Beers has also provided details about
35 known kimberlite occurrences and the results of ground geophysics
within the Canastra region. The Chapada Diamantina data set,
acquired in September 2006 from De Beers, includes 194,120 line
kilometres of airborne geophysics, indicator mineral samples,
microprobe analysis and mineral licenses covering the Salvador 1
kimberlite body plus five other kimberlites.
This data complements an already significant database the Company
previously acquired as a result of the purchase of De Beers'
Brazilian subsidiary Mineracao do Sul in August 2002. That
acquisition also included 40,000 hectares of mineral claims in the
Canastra area and the Canastra 1 kimberlite for which licenses are
being sought to commence trial mining. The licencing process has been
complicated by the potential expansion of a nearby National Park.
Although there is every indication that a licence will be granted to
mine Canastra 1, it is not possible to accurately estimate the
timetable for such a grant. While the Company continues to work with
various ministries of the Brazilian federal government in an effort
to hasten the process for the license grant, the Company has been
concentrating the majority of its exploration activity and resources
on its other prospective projects outside the Canastra Region.
The Company has assessed the recoverability of its data sets and has
recorded an asset impairment of $1,583,000. The Canastra data set
has value as long as the project continues. All Canastra mineral
licenses have been renewed and maintained in good standing while the
Company is waiting for trial mining permits.
During the past four years, the Company has committed significant
resources evaluating kimberlite targets in the Santo Antonio do
Bonito River Basin and Patos de Minas regions and subject to the
availability of financing, this is set to remain a part of the
Company's activities.
Salvador 1, Bahia
In 2007, the Company collected 6 replicate samples totaling 6 tonnes
from the Salvador 1 kimberlite in an attempt to confirm results from
a smaller (580 kg) sample taken in 2006. In total, 111 diamonds were
recovered from these new samples which together with original sample
tallied 120 diamonds. Preparations began in the third quarter of
2007 for the collection of six much larger samples of approximately
650 m3 each from different parts of the Salvador 1 kimberlite in
order to better assess its diamond potential. Excavation of the
first pit was completed in the fourth quarter and excavation of the
second and third pits were started. Results from the first of the
bulk sample pits identified at least six different kimberlitic rock
types or "phases".
At December 31, 2008, the Company has assessed the recoverability of
its Salvador 1 project and has recorded an asset impairment of
$466,000. The Company has closed down its testing programs and the
mineral licenses will not be renewed. To conserve cash reserves, the
Salvador 1 project has been placed on care and maintenance.
Serra da Canastra, Minas Gerais
The Company is awaiting final approval before commencing the
environmental licensing process for the development of the Canastra 1
kimberlite body for which mine feasibility work has already been
completed and the required Mines Department approvals are already in
place. The Company hopes to bring Canastra 1 into production once
the environmental licensing process is completed.
The Company has assessed the recoverability of its project in the
Serra da Canastra region and has recorded an asset impairment of
$700,000. All Canastra mineral licenses have been renewed and
maintained in good standing while the Company is waiting for the
trial mining permits. The Company expects to commence trial mining
at its Canastra 1 project once approved. To conserve cash reserves,
the Serra da Canastra region projects has been placed on care and
maintenance.
Coromandel - San Antonio do Bonito River
As at December 31, 2008, the Company has assessed the recoverability
of its Santo Antonio do Bonito River project and determined that no
impairment was required as the amounts were insignificant. The
Company has kept its mineral licenses in good standing and expect to
continue work on the project in the future.
Coromandel, Minas Gerais - San Antonio do Bonito Alluvial Diamond
Mining Joint Venture
The Company with its Joint Venture partners assessed various
alternatives for the possible development of one or more alluvial
mining operations at the Santo Antonio do Bonito alluvial project.
These options included large scale dredging operations on the
broader river flat areas along the Santo Antonio do Bonito river as
well as a smaller scale operation on what are considered to be highly
prospective but narrower river terrace areas. As at September 30,
2008, the Joint Venture partners have made a decision to defer the
next phase of studies. The Company sold the mineral properties in
the Santo Antonio do Bonito which were contained alluvial resources
and its assets to a third party subsequent to the December 31, 2008
year end.
Patos de Minas, Minas Gerais
As at December 31, 2008, the Company has assessed the recoverability
of its project in Parima and has recorded an impairment of $312,000.
Only the Regis and Tucano mineral licenses in the Patos de Minas
region have been renewed and maintained in good standing. To conserve
cash reserves, the Patos de Minas projects have been placed on care
and maintenance.
Financial Performance
Current Quarter
The loss for the three months ended December 31, 2008 was $4,845,000
as compared to a loss of $1,100,000 (restated) for the same period
last year. The increase in losses over the same period last year is
due mainly to the write-down of intangible assets of $1,583,000,
mineral properties of $2,271,000 and property, plant and equipment of
$308,000.
Exploration costs decreased $728,000 and foreign exchange loss
increased $104,000 over the same period last year.
Cash and cash equivalent balances decreased by $143,000 to $83,000 at
December 31, 2008. At December 31, 2008, the Company had a working
capital deficiency $329,000 (2007 - net working capital of $377,000).
Year-to-date
The loss for the year ended December 31, 2008 was $7,965,000 as
compared to a loss of $4,349,000 (restated) for the same period last
year. The increase in losses over the same period last year is due
mainly to the write-down of intangible assets of $1,583,000, mineral
properties of $2,271,000 and property, plant and equipment of
$308,000.
The expenses decreased over the same period last year due mainly to a
decrease in exploration costs of $576,000 and stock-based
compensation of $435,000, foreign exchange loss of $79,000, investor
relations of $53,000, travel expenses of $44,000 and legal and audit
of $39,000.
Cash and cash equivalent balances decreased by $373,000 to $83,000 at
December 31, 2008. Exploration costs for the year ended December 31,
2008 was $2,453,000 (2007 - $3,029,000 restated)). At December 31,
2008, the Company had a working capital deficiency $329,000 (2007 -
net working capital of $377,000).
As at December 31, 2008, the Company has assessed the recoverability
of its Santo Antonio do Bonito River project and determined that no
impairment was required as the amounts were insignificant. The
Company has kept its mineral licenses in good standing and hopes to
continue work on the project in the future. To conserve cash
reserves, the Santo Antonio do Bonito River project has been placed
on care and maintenance.
As at December 31, 2008, the Company has assessed the recoverability
of its Santo Antonio do Bonito alluvial mining project and has
recorded an impairment of $793,000. The fair value of the mineral
properties of Cobre Sul Mineracao Ltda. were written down to reflect
the sale proceeds subsequent to year end.
As at December 31, 2008, the Company has assessed the recoverability
of its project in Parima (Patos de Minas) and has recorded an
impairment of $312,000. Only the Regis and Tucano mineral licenses
in the Patos de Minas region have been renewed and maintained in good
standing. To conserve cash reserves, the Patos de Minas projects
have been placed on care and maintenance.
The Company has assessed the recoverability of its project in the
Serra da Canastra region and has recorded an asset impairment of
$700,000. All Canastra mineral licenses have been renewed and
maintained in good standing while the Company is waiting for the
trial mining permits. The Company expects to commence trial mining
at its Canastra 1 project once approved. To conserve cash reserves,
the Serra da Canastra region projects has been placed on care and
maintenance.
At December 31, 2008, the Company has assessed the recoverability of
its Salvador 1 project and has recorded an asset impairment of
$466,000. The Company has closed down its testing programs and the
mineral licenses will not be renewed. To conserve cash reserves, the
Salvador 1 project has been placed on care and maintenance.
Results of Operations
Summary of Quarterly Results
The table below present's selected financial data for the Company's
eight most recently completed quarters. Amounts have been restated to
conform to a change in accounting policy. See "Changes in Accounting
Policies" or note 2 of the audited consolidated financial statements
for the year ended December 31, 2008.
Restated Restated Restated Restated Restated Restated Restated
($000) Dec.31, Sept.30, June 30, Mar.31, Dec.31, Sept.30, June 30, Mar. 31,
2008 2008 2008 2008 2007 2007 2007 2007
Financial
results
Net
loss(income)
for period 4,845 1,065 1,071 984 1,100 1,533 489 1,227
Comprehensive
loss (28) 231 120 367 (9) 317 345 384
Basic and
diluted loss
(income) per
share 0.02 0.01 0.00 0.01 0.01 0.01 0.00 0.01
Exploration
costs 272 666 806 709 1,000 554 669 806
Balance sheet
data
Cash and
short term
deposits 83 226 1,039 701 456 1,075 2,147 3,037
Resource
properties 1,492 3,763 3,763 3,763 3,763 3,763 3,763 3,763
Total
assets 2,945 7,505 8,730 8,539 8,835 9,015 10,343 11,449
Shareholders'
equity 2,218 7,035 8,337 8,064 8,395 8,395 9,508 9,997
Selected Annual Information
The following financial data has been prepared in accordance with
Canadian generally accepted accounting principles in Canadian
currency: Amounts have been restated to conform to a change in
accounting policy. See "Changes in Accounting Policies" or note 2 of
the audited consolidated financial statements for the year ended
December 31, 2008.
Restated Restated
($000) Year ended Year ended Year ended
December 31, December 31, December 31,
2008 2007 2006
Financial
results
Net loss
for period 7,773 3,883 15,957
Other
comprehensive
loss 690 1,037 -
Basic and
diluted loss
per share 0.04 0.03 0.11
Exploration
costs 2,453 3,029 3,606
Balance sheet
data
Cash and
cash
equivalents 83 456 4,514
Mineral
properties 1,492 3,763 3,763
Total
assets 2,945 8,835 13,568
Shareholders'
equity 2,218 8,395 11,881
Liquidity and Capital
The Company does not currently own or have an interest in any
producing mineral properties and does not derive any revenues from
operations. The Company's activities have been funded through equity
financing and loans from companies associated with two of the
Directors of the Company. While the Company remains optimistic that
it will continue to be able to utilize these sources of financing
until it develops cash flow from operations, there can be no
assurance, however, that the Company will be successful in its
efforts. If such funds are not available or other sources of finance
cannot be obtained, then the Company will attempt to curtail its
activities to a level for which funding is available or can be
obtained.
Most of the capital equipment for operations at Canastra 1 has
already been acquired and is included as part of resource properties.
The Company has minimal operating lease commitments (refer to
Contractual Commitments).
During the year ended December 31, 2008, the Company incurred a net
loss of $7,965,000 (December 31, 2007 - $4,349,000 (restated)) and at
December 31, 2008 has a net working capital deficiency of $329,000
(December 31, 2007 - net working capital of $377,000). These
liquidity issues were partly alleviated subsequent to the year end
with the sale of some mineral properties and the laboratory and
facilities at Patos de Minas for gross proceeds of approximately $1.4
million).
The Company's ability to continue as a going concern is dependent
upon its ability to fund its ongoing operating costs and exploration
and development of mineral properties. These financial statements do
not reflect the adjustments to the carrying values of assets and
liabilities and the reported expenses and balance sheet
classifications that would be necessary were the going concern
assumption inappropriate, and these adjustments could be material.
Subsequent Events
a) Starting February 1, 2009, the Company will pay a monthly
corporate administration fee of $13,400 which includes office rent,
administration, accounting, corporate secretarial, chief financial
officer, investor relations and other related services to HRG
Management Ltd. HRG is a management company that provides shared
office space and staff to certain other public companies on a cost
recovery basis. The Company shares directors and officers in common
with HRG. The agreement can be terminated with sixty days written
notice.
b) On March 12, 2009, the Company signed a preliminary agreement to
sell the laboratory and facilities at Patos de Minas to third
parties. A deposit of $14,000 was received March 24, 2009 and
$452,000 is due thirty days from signing.
c) On March 12, 2009, the Company signed a preliminary agreement to
sell all the assets of Cobre Sul Mineracao Ltda. to third parties. A
cash payment of $452,000 is due within sixty days of signing and
$516,000 in polished diamonds is to be independently valued in New
York, USA and then delivered to the Company within ninety days of
signing of the sales agreement.
Contractual Commitments
Except as outlined below, the Company has no other contractual
commitments.
2009 2010 2011 Total
Photocopier $ $ $ $
leases 9 9 1 19
Off Balance Sheet Arrangements
The Company has not entered into any off-balance sheet arrangements.
Transactions with Related Parties
During the year ended September 30, 2008 and 2007, the Company
entered into the following transactions with related parties:
2008 2007
$ $
HRG Management Ltd. - Kenneth Judge (director),
Stephen L.
Fabian (director), Kerry Beamish (CFO) (note a)
Paid or accrued contractual service costs (note a) 245,000 231,000
Miscellaneous office recoveries (note b) - 28,000
Deposits made (note c) 62,000 82,000
Hamilton Capital Partners Limited ("HCPL") -
Kenneth Judge
(director)
Paid or accrued consulting fees and office rent 170,000 190,000
Sale of Hidefield shares (note d) 185,000 607,000
Massif Limited - Stephen L. Fabian
Paid or accrued management fees - (note e) 126,000 129,000
Lang Michener - David Cowan (partner)
Paid or accrued legal fees - (note f) 15,000 5,000
Hidefield Gold PLC - Kenneth Judge (director),
Francis Johnstone
(director)
Office and technical cost recoveries (note g) - 25,000
SAFM Mineracao Inc. - Stephen L. Fabian (director)
Related party demand loan and interest payable 107,000 -
(note (i))
Itapiruba Internacional Ltda. - subsidiary of HCPL
Related party demand loan and interest payable 32,000 -
(note (j))
a) During the year ended December 31, 2008, the Company paid a
monthly corporate administration fee of approximately $18,400 (2007 -
$17,000) that includes office rent, administration, accounting,
corporate secretarial, chief financial officer, investor relations
and other related services to HRG Management Ltd. ("HRG") (note
17(a)). HRG is a management company that provides shared office
space and staff to certain other public companies on a cost recovery
basis. The Company shares directors and officers in common with HRG.
The agreement can be terminated by either party with ninety days
written notice. Kenneth Judge and Stephen L. Fabian are both
directors of HRG. Kerry Beamish is the CFO of HRG.
b) At December 31, 2008, HRG owed the Company $1,000 (2007 - $17,000)
and Kenneth Judge owed the Company $10,000 (2007 - $Nil) with normal
trade terms.
c) At December 31, 2008, $62,000 (2007 - $80,000) is included in
accounts receivable, prepaids and deposits to HRG for fixed assets
and services.
d) The Company received proceeds of $185,000 on the sale of 2 million
Hidefield Gold plc shares at 4.75 pence from HCPL.
e) The Company paid or accrued management fees of $126,000 (2007 -
$129,000) to Massif Limited, a company in which Stephen L. Fabian is
interested.
f) The Company paid or accrued professional fees of $15,000 (2007 -
$5,000) to a law firm in which David Cowan, director is a partner.
g) The Company has $Nil office and technical cost recoveries (2007 -
$25,000 restated-note 2) from Hidefield Gold PLC ("HIF").
h) The Company owed $22,000 (2007 - $Nil) to directors of the
Company, $56,000 to Massif (2007 - $Nil), $98,000 to HCPL and $3,000
(2007 - $Nil) to HRG with normal trade terms.
i) The Company owed $107,000 (2007 - $Nil) to SAFM Mineracao Inc., a
company associated with Stephen Fabian, with accrued interest based
on the monthly interest rate of the standard Brazilian CDB bank rate
for Banco Itau payable on demand.
j) The Company owed $32,000 (2007 - $Nil) to Itapiruba International
Ltda., a company associated with Kenneth Judge, with accrued interest
based on the monthly interest rate of the standard Brazilian CDB bank
rate for Bancu Itau payable on demand.
Share Capital Information
The table below presents the Company's common share data as of March
25, 2009.
Exercise Number of
Price Expiry date common shares
Common shares, issued and
outstanding 194,370,722
Securities convertible into
common shares -
Options $0.65 March 29, 2009 50,000
October 26,
$0.45 2009 2,875,000
$0.41 April 5, 2011 2,175,000
$0.25 July 12, 2012 1,750,000
October 12,
$0.25 2012 100,000
201,320,722
Critical Accounting Estimates
Critical accounting estimates upon which the Company's financial
status depends are those requiring estimates of the recoverability of
its capitalized mineral property expenditures and intangible assets,
impairment of long-lived assets and the amount of future reclamation
obligations.
Mineral Properties and Development Costs
During the year ended December 31, 2008, the Company changed its
accounting policy relating to mineral property exploration
expenditures and it now expenses exploration expenditures when
incurred. See "Changes in accounting policies" or note 2 of the
consolidated financial statements for the year ended December 31,
2008 for a description and the effects of the change.
When it has been established that a mineral deposit is commercially
mineable and an economic analysis has been completed, the costs
subsequently incurred to develop a mine on the property prior to the
start of mining operations are capitalized and will be amortized
against production following commencement of commercial production,
or written off if the property is sold, allowed to lapse or
abandoned.
Although the Company has taken steps to verify title to mineral
properties in which it has an interest, in accordance with industry
standards for the current stage of exploration of such properties,
these procedures do not guarantee the Company's title. Property title
may be subject to prior agreements and non-compliance with regulatory
requirements.
Impairment of Long-lived Assets
The Company assesses the possibility of impairment in the net
carrying value of its long-lived assets when events or circumstances
indicate that the carrying amounts of the net asset may not be
recoverable. As outlined before, as of December 31, 2008 the Company
has recorded the amount of $4,097,000 related to impairment for its
mineral properties and property, plant and equipment in the extension
that it is necessary to reflect the recoverable amount.
Intangible assets
Intangible assets which consist of data sets related to the Company's
Brazilian exploration activities, are recorded at cost and are
expensed to operations. Management assess the recoverability of
intangible assets annually and at such times as events or
circumstances indicate that the carrying amounts may not be
recoverable. In the event that an impairment is identified, the
carrying value of the intangible asset is written down to its
estimated fair value.
The Company has assessed the recoverability of its intangible assets
and has recorded an asset impairment of $1,583,000. The Canastra
data set is considered to have significant value as long as the
Company's projects continue.
Asset Retirement Obligations
The Company relied on the results of a professional, engineering firm
and used the discount and inflation rate as at December 31, 2008 to
estimate the fair value of its asset retirement obligations.
Changes in Accounting Policies
Goodwill and Intangible Assets
The Company adopted the new Handbook Section 3064, "Goodwill and
Intangible Assets", which replaced Section 3062, "Goodwill and
Intangible Assets". The new standard establishes revised standards
for the recognition, measurement, presentation and disclosure of
goodwill and intangible assets. The new standard also provides
guidance for the treatment of preproduction and start-up costs and
requires that these costs be expensed as incurred.
Exploration Expenditures
During the year ended December 31, 2008, the Company retrospectively
changed its accounting policy for exploration expenditures to more
appropriately align itself with policies applied by other comparable
companies at a similar stage in the mining industry. Prior to the
year ended December 31, 2008, the Company capitalized all such costs
to mineral properties on the basis of specific claim blocks or areas
of geological interest until the properties to which they relate are
placed into production, sold or management has determined there to be
impairment in value.
Exploration expenditures are now charged to operations as they are
incurred until the mineral property reaches the development stage.
Significant costs related to property acquisitions, including
allocations for undeveloped mineral interests, are capitalized until
the viability of the mineral interest is determined. When it has
been established that a mineral deposit is commercially mineable and
an economic analysis has been completed, the costs subsequently
incurred to develop a mine on the property prior to the start of
mining operations are capitalized. The impact of this change on the
previously reported December 31, 2007 consolidated financial
statements is as follows:
December
31,
2007
As
previously December 31, 2007
reported Restatement As restated
$ $ $
Intangible
assets - 2.115 2.115
Mineral
properties 24.657 (20.894) 3.763
Property,
plant and
equipment - 1.206 1.206
Amortization - 429 429
Exploration
costs - 3.029 3.029
Stock-based
compensation 161 274 435
Gain on sale
of assets - (11) (11)
-
Loss for the
year (162) (3.721) (3.883)
Loss per share 0,00 (0,03) (0,03)
Deficit at
December 31,
2007 (70.836) (17.573) (88.409)
Deficit at
December 31,
2006 (70.674) (13.852) (84.526)
* The numbers restated in this table do NOT include the adjustments
of EIC 172 following mentioned.
Capital Disclosures
Effective August 1, 2008, the Company adopted CICA Handbook Section
1535 - Capital Disclosures. Section 1535 establishes standards for
disclosing information about an entity's capital and how it is
managed. Under this standard the Company will be required to
disclose the following based on the information provided by the
entity's key management personnel:
1) qualitative information about its objectives, policies and
processes for managing capital;
2) summary quantitative data about what it manages as capital;
3) whether during the period it complied with such externally imposed
capital requirements to which it is subject; and
4) when the Company has not complied with such externally imposed
capital requirements, the consequences of such non-compliance.
The Company has included the disclosures recommended by the new
Handbook section in Note 4 to the audited consolidated financial
statements.
Financial Instruments - Disclosures and Presentation
Effective August 1, 2008, the Company adopted CICA Handbook Sections
3862 (Disclosures) and Section 3863 (Presentation). These standards
replace CICA 3861, Financial Instruments - Disclosure and
Presentation. The increase disclosures will enable users to evaluate
the significance of financial instruments for an entity's financial
position and performance, including disclosures about fair value. In
addition, disclosure is required of qualitative and quantitative
information about exposure to risks arising from financial
instruments, including specified minimum disclosures about credit
risk, liquidity risk and market risk. The quantitative disclosures
must provide information about the extent to which the entity is
exposed to risk, based on information provided by the entity's key
management personnel.
The Company has included the disclosures recommended by the new
Handbook section in Note 5 of the consolidated financial statements.
General Standards on Financial Statement Presentation
CICA Handbook Section 1400, "General Standards on Financial Statement
Presentation" ("CICA 1400"), has been amended to include requirements
to assess and disclose an entity's ability to continue as a going
concern. During the year ended December 31, 2008, the Company has
adopted the disclosure requirements of CICA 1400. The standard
requires that management make an assessment of a company's ability to
continue as a going concern and to use the going concern basis in the
preparation of the financial statements unless management either
intends to liquidate the company or to cease trading, or has no
realistic alternative but to do so. When management is aware, in
making its assessment, of material uncertainties related to events or
conditions that may cast significant doubt upon a company's ability
to continue as a going concern, those uncertainties should be
disclosed.
Income Statement Presentation of a Tax Loss Carryforward Recognized
Following an Unrealized Gain in Other Comprehensive Income
Effective September 30, 2008, the Company adopted EIC-172, "Income
Statement Presentation of a Tax Loss Carryforward Recognized
Following an Unrealized Gain in Other Comprehensive Income"
("EIC-172"). This abstract provides guidance on whether the tax
benefit from the recognition of previously unrecognized tax loss
carryforwards consequent to the recording of unrealized gains in
other comprehensive income, such as unrealized gains on
available-for-sale assets, should be recognized in net income or in
other comprehensive income. Upon adoption, EIC 172 was applied
retrospectively with restatement of prior periods resulting in a
reduction of $658,000 in "opening balance adjustment - transition
adjustment" in accumulated other comprehensive income in order to
record the future income tax liability against deficit. Future income
tax recovery in the same amount was recorded against deficit. As of
December 31, 2007, the amount of $466,000, due to the unrealized gain
reversal, was booked against accumulated other comprehensive income.
Future income tax expense in the same amount was recorded against
operations accordingly.
New Accounting Pronouncements
In 2006, the Canadian Accounting Standards Board ("AcSB") published a
new strategic plan that will significantly affect financial reporting
requirements for Canadian companies. The AcSB strategic plan
outlines the convergence of Canadian GAAP with IFRS over an expected
five-year transitional period. In February 2008, the AcSB announced
that 2011 is the changeover date for publicly listed companies to use
IFRS, replacing Canadian GAAP. The effective date is for the
Company's interim and annual financial statements for the year
beginning January 1, 2011. The transition date of January 1, 2011
will require the restatement for comparative purposes of amounts
reported by the Company for the year ended December 31, 2010. While
the Company has begun assessing the adoption of IFRS for 2011, the
financial reporting impact of the transition to IFRS cannot be
reasonably estimated at this time.
Risk
There are significant risks that might affect further development of
the Company. Although the Company has prospective diamond projects
and has demonstrated that it has the ability to obtain environmental
and trial mining permits, there is a risk that these projects will
not be economically mineable or that the required permits will be
granted in the future. Further, future market prices for diamonds
are not predictable. There is also a risk that should additional
development of the properties be required, financing may not be
obtainable. Repatriation of earnings and capital from Brazil is
subject to compliance with registration requirements. There can be no
assurance that restrictions on repatriation will not be imposed in
the future.
Management's Responsibility for Financial Statements
The information provided in this report, including the financial
statements, is the responsibility of management. In the preparation
of these statements, estimates are sometimes necessary to make a
determination of future values for certain assets or liabilities.
Management believes such estimates have been based on careful
judgments and have been properly reflected in the accompanying
financial statements.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to
senior management, including the President, Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so
that appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures was conducted as of
December 31, 2008, by and under the supervision of management,
including the CEO and the CFO. Based on this evaluation, the CEO and
the CFO have concluded that the Company's disclosure controls and
procedures, as defined by Multilateral Instrument 52-109,
Certification of Disclosure in Issuers' Annual and Interim Filings,
are effective to ensure that information required to be disclosed in
reports filed or submitted under Canadian securities legislation is
recorded, processed, summarized and reported within the time period
specified in those rules and forms and reported to senior management
so that appropriate decisions can be made regarding public
disclosure.
Internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with
Canadian GAAP. Management is responsible for establishing and
maintaining adequate internal control over financial reporting for
the Company.
An evaluation of the design of the Company's internal control over
financial reporting was conducted as of December 31, 2008, by and
under the supervision of management, including the CEO and the CFO.
Based on this evaluation, the CEO and the CFO have concluded that the
Company's design of internal control over financial reporting, as
defined by Multilateral Instrument 52-109, Certification of
Disclosure in Issuers' Annual and Interim Filings, is sufficient to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance
with Canadian GAAP.
There have been no changes in internal control over financial
reporting during the year ended December 31, 2008 that have
materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
Other information
Additional information is available on the Company's website at
www.braziliandiamonds.com or on SEDAR at www.sedar.com.
Caution Regarding Forward Looking Statements
Except for historical information contained in this discussion and
analysis, disclosure statements contained herein are forward-looking.
Forward-looking statements are subject to risks and uncertainties,
which could cause actual results to differ materially from those in
such forward-looking statements. Forward-looking statements are made
based on management's beliefs, estimates and opinions on the date the
statements are made and the Company undertakes no obligation to
update forward-looking statements if these beliefs, estimates and
opinions or other circumstances should change. Investors are
cautioned against attributing undue certainty to forward-looking
statements.
Consolidated Balance Sheet
(expressed in thousands of Canadian (Restated-note2)
Dollars) December 31 December 31
(unaudited) 2008 2007
$ $
Assets
Current assets
Cash and cash equivalents 83 456
Accounts receivable, prepaids and
deposits 204 240
Due from related parties 11 17
298 713
Investments 68 1,038
Intangible assets 264 2,115
Property, plant and equipment 823 1,206
Mineral properties 1,492 3,763
2,945 8,835
Liabilities
Current liabilities
Accounts payable and accrued
liabilities 309 336
Due to related parties 318 -
627 336
Hidefield options - 19
Asset retirement obligation 100 85
727 440
Shareholders' Equity
Capital stock 95,326 92,848
Warrants - 519
Contributed surplus 3,336 2,817
Deficit (96,182) (88,217)
Accumulated other comprehensive income
(loss) (262) 428
2,218 8,395
2,945 8,835
Nature of Operations and Going Concern
(note 1)
Consolidated Statements of Loss and (Restated-
Deficit note 2)
(expressed in thousands of Canadian Year ended Year ended
dollars) December 31, December 31,
2007 2007
$ $
Expenses
Amortization 398 429
Corporate administrative services 80 70
Consultants 211 217
Exploration costs 2,453 3,029
Foreign exchange loss 21 100
Insurance 45 64
Interest income (5) (73)
Investor relations 122 175
Legal and audit 125 164
Office costs 139 145
Regulatory 120 143
Salaries and management fees 126 131
Stock-based compensation - 435
Travel 29 73
(3,864) (5,102)
Other income (expenses)
Unrealized gain on Hidefield options 19 473
Realized gain on Hidefield options - 345
Gain on sale of investments 98 390
Gain on sale of assets 71 11
Write-down of intangible assets (1,583) -
Write-down of mineral properties (2,271) -
Write-down of property, plant and
equipment (243) -
Loss for the year before income taxes (7,773) (3,883)
Future income taxes expense (192) (466)
Loss for the year (7,965) (4,349)
Deficit - Beginning of year (88,217) (83,868)
Deficit - End of year (96,182) (88,217)
Loss per common share - basic and 0.04 0.03
diluted
Weighted average common shares
outstanding (000's) 188,342 168,414
Consolidated Statements of (Restated-
Comprehensive Loss note 2)
(figures in tables expressed in Year ended
thousands of Canadian dollars) Year ended December
December 31, 31,
2008 2007
$ $
Loss for the year (7,965) (4,349)
Other comprehensive loss
Portion associated with shares (77)
sold during the period -
Unrealized loss on (613)
available-for-sale securities (1,037)
Comprehensive loss for the year (8,655) (5,386)
Consolidated Statements of Cash Flows (Restated-
(figures in tables expressed in note 2)
thousands of Canadian dollars) Year ended Year ended
December 31, December 31,
2008 2007
$ $
Cash flows from operating activities
Loss for the year (7,965) (4,349)
Add (deduct) items not affecting cash
Amortization 398 429
Accretion 15 6
Future income tax expense 192 466
Gain on sale of investments (98) (390)
Gain on sale of assets (71) (11)
Stock-based compensation - 435
Write-down of intangible assets 1,583 -
Write-down of mineral properties 2,271 -
Write-down of property, plant and 243 -
equipment
Unrealized gain on Hidefield options (19) (473)
Realized gain on Hidefield - (345)
options
Changes in non-cash working capital
related to operations
Accounts receivable, prepaid and 36 (20)
deposits
Related parties receivable 6 (13)
Accounts payable and accrued (27) (435)
liabilities
Related parties payable 318 -
(3,118) (4,700)
Cash flows from financing activities
Issue of shares for private placement 2,596 -
Share issue costs (118) -
2,478 -
Cash flows from investing activities
Proceeds from disposal of property, 82 35
plant and equipment
Proceeds from exercise of Hidefield 185 607
options and shares
267 642
Decrease in cash and cash equivalents (373) (4,058)
Cash and cash equivalents - Beginning 456 4,514
of year
Cash and cash equivalents - End of year 83 456
Notes to Consolidated Financial Statements
1. Nature of Operations and Going Concern
The Company is engaged in the exploration for and development of
mineral resources. The properties of the Company are without a known
body of commercial ore, the exploration programs undertaken and
proposed constitute an exploratory search, and there is no assurance
that the Company will be successful in its search. The Company has
not earned any revenue to date from its current operations and is
therefore considered to be in the development stage. The business of
exploring for minerals and mining involves a high degree of risk, and
few properties that are explored are ultimately developed into
producing mines. Significant expenses may be required to establish
ore reserves, to develop recovery processes, and to construct mining
and processing facilities at a particular site. It is not possible to
ensure that the current exploration programs planned by the Company
will result in a profitable commercial mining operation.
These financial statements have been prepared using Canadian
generally accepted accounting principles applicable to a going
concern, which contemplates the realization of assets and settlement
of liabilities in the normal course of business as they become due.
The Company has adopted the disclosure requirements of The Canadian
Institute of Chartered Accountants ("CICA") Section 1400 - General
Standards of Financial Statement Presentation. This standard requires
that management make an assessment of a company's ability to continue
as a going concern and to use the going concern basis in the
preparation of the financial statements unless management either
intends to liquidate the company or to cease trading, or has no
realistic alternative but to do so. When management is aware, in
making its assessment, of material uncertainties related to events or
conditions that may cast significant doubt upon a company's ability
to continue as a going concern, such as those set out below, those
uncertainties should be disclosed.
During the year ended December 31, 2008, the Company incurred a net
loss of $7,965,000 (December 31, 2007 - $4,349,000 (restated)) and at
December 31, 2008 has a net working capital deficiency of $329,000
(December 31, 2007 - net working capital of $377,000). These
liquidity issues were alleviated subsequent to the year end with the
sale of some mineral properties and the laboratory and facilities at
Patos de Minas for gross proceeds of approximately $1.4 million.
The Company's ability to continue as a going concern is dependent
upon its ability to fund its ongoing operating costs and exploration
and development of mineral properties. These financial statements do
not reflect the adjustments to the carrying values of assets and
liabilities and the reported expenses and balance sheet
classifications that would be necessary were the going concern
assumption inappropriate, and these adjustments could be material.
2. Change in Accounting Policy and Adoption of Recent Accounting
Pronouncements
Goodwill and Intangible Assets
The Company adopted the new Handbook Section 3064, "Goodwill and
Intangible Assets", which replaced Section 3062, "Goodwill and
Intangible Assets". The new standard establishes revised standards
for the recognition, measurement, presentation and disclosure of
goodwill and intangible assets. The new standard also provides
guidance for the treatment of preproduction and start-up costs and
requires that these costs be expensed as incurred.
Exploration Expenditures
During the year ended December 31, 2008, the Company retrospectively
changed its accounting policy for exploration expenditures to more
appropriately align itself with policies applied by other comparable
companies at a similar stage in the mining industry. Prior to the
year ended December 31, 2008, the Company capitalized all such costs
to mineral properties on the basis of specific claim blocks or areas
of geological interest until the properties to which they relate are
placed into production, sold or management has determined there to be
impairment in value.
Exploration expenditures are now charged to operations as they are
incurred until the mineral property reaches the development stage.
Significant costs related to property acquisitions, including
allocations for undeveloped mineral interests, are capitalized until
the viability of the mineral interest is determined. When it has
been established that a mineral deposit is commercially mineable and
an economic analysis has been completed, the costs subsequently
incurred to develop a mine on the property prior to the start of
mining operations are capitalized. The impact of this change on the
previously reported December 31, 2007 consolidated financial
statements is as follows:
December 31,
2007 December 31,
As previously 2007
reported Restatement As restated
$ $ $
Intangible assets - 2.115 2.115
Mineral properties 24.657 (20.894) 3.763
Property, plant and
equipment - 1.206 1.206
Amortization - 429 429
Exploration costs - 3.029 3.029
Stock-based compensation 161 274 435
Gain on sale of assets - (11) (11)
-
Loss for the year (162) (3.721) (3.883)
Loss per share 0,00 (0,03) (0,03)
Deficit at December 31, 2007 (70.836) (17.573) (88.409)
Deficit at December 31, 2006 (70.674) (13.852) (84.526)
* The numbers restated in this table do NOT include the adjustments
of EIC 172 following mentioned.
Capital Disclosures
Effective August 1, 2008, the Company adopted CICA Handbook Section
1535 - Capital Disclosures. Section 1535 establishes standards for
disclosing information about an entity's capital and how it is
managed. Under this standard the Company will be required to
disclose the following based on the information provided by the
entity's key management personnel:
1) qualitative information about its objectives, policies and
processes for managing capital;
2) summary quantitative data about what it manages as capital;
3) whether during the period it complied with such externally imposed
capital requirements to which it is subject; and
4) when the Company has not complied with such externally imposed
capital requirements, the consequences of such non-compliance.
The Company has included the disclosures recommended by the new
Handbook section in Note 4 to these audited consolidated financial
statements.
Financial Instruments - Disclosures and Presentation
Effective August 1, 2008, the Company adopted CICA Handbook Sections
3862 (Disclosures) and Section 3863 (Presentation). These standards
replace CICA 3861, Financial Instruments - Disclosure and
Presentation. The increase disclosures will enable users to evaluate
the significance of financial instruments for an entity's financial
position and performance, including disclosures about fair value. In
addition, disclosure is required of qualitative and quantitative
information about exposure to risks arising from financial
instruments, including specified minimum disclosures about credit
risk, liquidity risk and market risk. The quantitative disclosures
must provide information about the extent to which the entity is
exposed to risk, based on information provided by the entity's key
management personnel.
The Company has included the disclosures recommended by the new
Handbook section in Note 5 of these consolidated financial
statements.
General Standards on Financial Statement Presentation
CICA Handbook Section 1400, "General Standards on Financial Statement
Presentation" ("CICA 1400"), has been amended to include requirements
to assess and disclose an entity's ability to continue as a going
concern. During the year ended December 31, 2008, the Company has
adopted the disclosure requirements of CICA 1400. The standard
requires that management make an assessment of a company's ability to
continue as a going concern and to use the going concern basis in the
preparation of the financial statements unless management either
intends to liquidate the company or to cease trading, or has no
realistic alternative but to do so. When management is aware, in
making its assessment, of material uncertainties related to events or
conditions that may cast significant doubt upon a company's ability
to continue as a going concern, those uncertainties should be
disclosed.
Income Statement Presentation of a Tax Loss Carryforward Recognized
Following an Unrealized Gain in Other Comprehensive Income
Effective September 30, 2008, the Company adopted EIC-172, "Income
Statement Presentation of a Tax Loss Carryforward Recognized
Following an Unrealized Gain in Other Comprehensive Income"
("EIC-172"). This abstract provides guidance on whether the tax
benefit from the recognition of previously unrecognized tax loss
carryforwards consequent to the recording of unrealized gains in
other comprehensive income, such as unrealized gains on
available-for-sale assets, should be recognized in net income or in
other comprehensive income. Upon adoption, EIC 172 was applied
retrospectively with restatement of prior periods resulting in a
reduction of $658,000 in "opening balance adjustment - transition
adjustment" in accumulated other comprehensive income in order to
record the future income tax liability against deficit. Future income
tax recovery in the same amount was recorded against deficit. As of
December 31, 2007, the amount of $466,000, due to the unrealized gain
reversal, was booked against accumulated other comprehensive income.
Future income tax expense in the same amount was recorded against
operations accordingly.
3. Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: BSG Investments Inc.
("BSGII") and its subsidiaries, Canastra Investments Holdings Inc.
("Canastra"), Mineracao do Sul Ltda. ("Mineracao"), and Parima
Mineracao Ltda. ("Parima"); Game Creek Company Ltd. ("Game Creek")and
its subsidiaries, principally Samsul Mineracao Ltda. ("Samsul") and
Cobre Sul Mineracao Ltda. ("Cobre Sul") Inter-company balances and
transactions are eliminated on consolidation. The Company's
corporate office is located in Vancouver, British Columbia, Canada.
Canastra, Mineracao, Parima and Samsul are located in Brazil. BSGII
and Game Creek are British Virgin Island incorporated companies.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenditures during the reporting period. Significant
estimates include assessment of potential impairments of the carrying
value of mineral properties, the determination of asset retirement
obligations and the determination of stock-based compensation.
Actual results could differ from those reported.
Cash and cash equivalents
Cash and cash equivalents comprise cash and short term investments
with maturities of three months or less from date of acquisition.
Cash and cash equivalents include cash balances held with major
Canadian and Brazilian banks and short-term deposits with these
banks. All cash equivalents are highly liquid, with low credit risk.
Investments
The Company's investments in equity instruments are designated as
available-for-sale measured at fair value pursuant to Section 3855 of
the CICA Handbook. Prior to January 1, 2007, investments were
carried at cost less provisions, where applicable, for impairments in
value that were other than temporary.
Mineral properties
During the year ended December 31, 2008, the Company changed its
accounting policy relating to mineral property exploration
expenditures and it now expenses exploration expenditures when
incurred (note 2).
When it has been established that a mineral deposit is commercially
mineable and an economic analysis has been completed, the costs
subsequently incurred to develop a mine on the property prior to the
start of mining operations are capitalized and will be amortized
against production following commencement of commercial production,
or written off if the property is sold, allowed to lapse or
abandoned.
Although the Company has taken steps to verify title to mineral
properties in which it has an interest, in accordance with industry
standards for the current stage of exploration of such properties,
these procedures do not guarantee the Company's title. Property title
may be subject to prior agreements and non-compliance with regulatory
requirements.
Property, plant and equipment
Property, plant and equipment are carried at cost less amounts
written off. Amortization is provided for over the estimated lives
of the related assets based on annual rates as follows:
Heavy equipment 20%
Vehicles 20 - 40%
Buildings 4%
Plant 20%
Furniture and fixtures 10%
Machine and equipment 10 - 20%
Computers 20%
Computer software 20%
straight-line over the term of the
Leasehold improvements lease
Intangible assets
Intangible assets which consist of data sets related to the Company's
Brazilian exploration activities, are recorded at cost and are
expensed to operations. Management assess the recoverability of
intangible assets annually and at such times as events or
circumstances indicate that the carrying amounts may not be
recoverable. In the event that an impairment is identified, the
carrying value of the intangible asset is written down to its
estimated fair value.
Asset retirement obligations
The fair value of a liability for an asset retirement obligation,
such as site closure and reclamation costs, is recognized in the
period in which it is incurred if a reasonable estimate of fair value
can be made. The Company is required to record the estimated present
value of future cash flows associated with site closure and
reclamation as a liability and increase the carrying value of the
related assets for that amount. Subsequently, these asset retirement
costs are expensed to operations. At the end of each period, the
liability is revised to reflect the passage of time and changes in
the estimated future cash flows underlying any initial fair value
measurements.
Financial instruments
Section 3861, "Financial Instruments - Disclosure and Presentation",
has been replaced by Section 3862, "Financial Instruments -
Disclosure", and Section 3863 - "Financial Instruments -
Presentation". These new standards require entities to disclose
quantitative and qualitative information that enables users to
evaluate the significance of financial instruments for the Company's
financial performance, and the nature and extent of risks arising
from financial instruments to which the Company is exposed during the
period and at the balance sheet date. In addition, the Company is
required to disclose management's objectives, policies and procedures
for managing these risks.
Fair Value
The Company classifies its financial assets as either held for
trading, available-for-sale, or loans and receivables. Financial
liabilities are classified as either held for trading, or loans and
payables.
Held for trading financial assets and liabilities are recorded at
fair values as determined by active market prices and valuation
models, as appropriate. Valuation models require the use of
assumptions concerning the amount and timing of estimated future cash
flows and discount rates. In determining these assumptions, the
Company uses readily observable market inputs where available or,
where not available, inputs generated by the Company. Changes in
fair value of held for trading financial instruments are recorded in
operations.
Available-for-sale financial assets are recorded at fair value as
determined by active market prices. Unrealized gains and losses on
available-for-sale investments are recognized in other comprehensive
income (loss). If a decline in fair value is deemed to be other than
temporary, the unrealized loss is recognized in operations.
Loans and receivables are recorded initially at fair value, net of
transaction costs incurred, and subsequently at amortized cost using
the effective interest rate method.
The fair values of the Company's held for trading financial
liabilities, such as accounts payable and accrued liabilities and
assets retirement obligations were likely below carrying values due
to the liquidity issues of the Company, as indicated by the $329,000
working capital deficiency at December 31, 2008. However, the
subsequent sale of the laboratory and facilities at Patos de Minas
and the asset sale of Cobre Sul Mineracao Ltda. alleviated the
liquidity issues and the fair values of the trading financial assets
and liabilities, subsequently approximate their carrying values. The
fair values of the Company's held for trading financial assets, such
as GST and other receivables, approximate their carrying values at
December 31, 2008.
The Company's available-for-sale investments are measured at fair
values with gains and losses of a temporary nature recorded in other
comprehensive income (loss).
Stock-based compensation
The Company uses the fair value method of accounting for all
stock-based compensation, including options granted under the
Company's incentive stock option plan. Compensation expense for
options granted is determined based on the estimated fair values of
the stock options at the time of grant, the cost of which is
recognized over the vesting periods of the respective options.
Stock-based compensation expense is recorded as a charge to
operations with a corresponding credit to contributed surplus.
Consideration paid for shares on the exercise of options is credited
to share capital.
Loss per share
Loss per share is calculated based on the weighted average number of
shares issued and outstanding during the year. Basic and diluted loss
per share are the same for the periods reported, as the effect of
potential issuances of shares under warrant or share option
agreements would be anti-dilutive.
Future Income taxes
Future income taxes are recorded using the asset and liability method
whereby future income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Future tax assets and
liabilities are measured using enacted or substantively enacted tax
rates expected to apply when the asset is realized or the liability
settled. The effect on future tax assets and liabilities of a change
in tax rates is recognized in income in the period that substantive
enactment or enactment occurs. To the extent that the Company does
not consider it to be more likely than not that a future tax asset
will be recovered, it provides a valuation allowance against the
excess.
Foreign Currency Translation
The Company's subsidiaries are integrated foreign operations and are
translated into Canadian dollars using the temporal method. Monetary
items are translated at the exchange rate in effect at the balance
sheet date; non-monetary items are translated at historical exchange
rates. Income and expense items are translated at the average
exchange rate for the period. Exchange gains and losses arising on
currency translation are credited or charged to earnings.
4. Capital management
The Company's objectives when managing capital are to safeguard the
Company's ability to continue as a going concern in order to pursue
the development of its mineral properties and to maintain a flexible
capital structure for its projects for the benefit of its
stakeholders. As the Company is in the exploration stage, its
principal source of funds is from the issuance of common shares.
In the management of capital, the Company includes the components of
shareholders' equity as well as cash and cash equivalents,
receivables and investment balances.
The Company manages the capital structure and makes adjustments to it
in light of changes in economic conditions and the risk
characteristics of the underlying assets. To maintain or adjust the
capital structure, the Company may attempt to issue new shares, enter
into joint venture property arrangements, acquire or dispose of
assets or adjust the amount of cash and cash equivalents and
investments.
In order to facilitate the management of its capital requirements,
the Company prepares annual expenditure budgets that are updated as
necessary depending on various factors, including successful capital
deployment and general industry conditions. The annual and updated
budgets are approved by the Board of Directors.
The Company's investment policy is to invest its cash in highly
liquid short-term interest-bearing investments with maturities three
months or less from the original date of acquisition, selected with
regards to the expected timing of expenditures from continuing
operations.
The Company is uncertain as to whether its current capital resources
will be sufficient to carry its exploration and development plans and
operations through its current operating period and, accordingly,
management is reviewing the timing and scope of current exploration
and development plans and is also pursuing other financing
alternatives to fund the Company's operations.
5. MANAGEMENT OF FINANCIAL RISK
The Company's financial instruments are exposed to certain financial
risks. The risk exposures and the impact on the Company's financial
instruments are summarized below.
Foreign Currency Risk
The Company's functional currency is the Canadian dollar. The
Company's operations, however, are located in Brazil where many
exploration and administrative expenses are incurred in the local
currency, the Brazilian Real. The Company's ability to advance funds
to Brazil (for capital investment or operations) is subject to
changes in the valuation of the Real as well as rules and regulations
of the Brazilian government. Fluctuations in the value of the Real
may have an adverse affect on the operations and operating costs of
the Company.
Interest Rate and Credit Risk
The Company has neither significant cash balances nor credit risk
arising from operations.
Accounts and other receivable consist of goods and services tax due
from the Federal Government of Canada, amounts due from related
parties with normal trade terms, and funds advanced for exploration.
Management believes that the credit risk concentration with respect
to receivables is remote.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they fall due. The Company has an
insignificant cash balance and significant interest-bearing debt to
related parties. At December 31, 2008, the Company has a net working
capital deficiency of $329,000 (December 31, 2007 - net working
capital of $377,000 (restated)). These liquidity issues were
alleviated subsequent to the year end with the sale of the laboratory
and facilities at Patos de Minas and the asset sale of Cobre Sul
Mineracao Ltda. for gross proceeds of approximately $1.4 million.
Commodity Price Risk
The Company's ability to raise capital to fund exploration or
development activities is subject to risks associated with
fluctuations in the market prices of diamonds. The Company closely
monitors commodity prices to determine the appropriate course of
action to be taken by the Company.
Sensitivity Analysis
The Company has designated its investments as available-for-sale,
which are measured at fair value. Accounts receivable are classified
as loans and receivables, which are measured at amortized cost.
Accounts payable and accrued liabilities are classified as loans and
payables, which are measured at amortized cost.
As of December 31, 2008, the carrying amount of accounts receivable
and payable approximates fair market value.
The movements below may impact the Company's operation as follows:
a) Cash and cash equivalents include deposits which are at variable
interest rates. Sensitivity to a plus or minus 1% change in rates
would affect net loss by $1,000.
b) The Company holds balances in foreign currencies which may give
rise to exposure to foreign exchange risk. Sensitivity to a plus or
minus 1% change in rates would affect net loss by $500.
c) Price risk is remote since the Company is currently not a
producing entity.
6. INVESTMENTS
December 31, 2008
Number of Carrying
Shares Value Fair Value % Holding
Hidefield Gold plc 7,625,000 $ 331 $ 68 2.74%
December 31, 2007
Number of Carrying
Shares Value Fair Value % Holding
Hidefield Gold plc 9,625,000 $ 418 $ 1,038 3.5%
a) During the year ended December 31, 2008, the Company recognized an
unrealized loss, net of future income tax of $613,000 (2007 -
$1,037,000) on marketable securities designated as available-for-sale
in other comprehensive loss.
b) On February 8, 2008, the Company sold 2,000,000 Hidefield Gold plc
("Hidefield") shares at a price of 4.75 pence per share for a total
of $185,000 to Hamilton Capital Partners Limited and recorded a gain
of $98,000.
c) On January 25, 2008, the Company's 7,125,000 Hidefield options
expired and the $19,000 unrealized fair value of the Hidefield
options was written off.
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solely responsible for the content of this announcement.