African Copper Plc (AIM:ACU)(TSX:ACU)(BOTSWANA:AFRICAN COPPER) -
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Period Ended 30 June 2008
The following management discussion and analysis ("MD&A") of the operating
results and financial condition of African Copper Plc ("African Copper" or the
"Company") and its subsidiaries is for the three and six months ended 30 June
2008 compared with 30 June 2007. The MD&A should be read in conjunction with the
31 December 2007 audited consolidated financial statements of the Company (the
"Financial Statements") and the related notes thereto (the "Notes"). The
Financial Statements have been prepared under the historical cost convention and
in accordance with International Financial Reporting Standards ("IFRS") (see
Note 2: Principal Accounting Policies). All amounts herein are expressed in
British Pounds Sterling unless otherwise indicated and the information is
current to 14 August 2008.
The scientific and technical information in this MD&A has been prepared under
the supervision of Mr. James Arthur, FSAIMM, the General Manager of the Mowana
Mine and a "qualified person" as defined by Canadian National Instrument 43-101.
Additional information relating to the Company, including the Company's Annual
Information Form, is available at www.africancopper.com or under the Company's
profile on the SEDAR website at www.sedar.com.
UPDATED BUSINESS OVERVIEW AND STRATEGY
African Copper is an international exploration and development company focused
on Africa. The Company is incorporated in England and Wales, and its ordinary
shares are tri-listed on the AIM market of the London Stock Exchange ("AIM"),
the Toronto Stock Exchange ("TSX") and the Botswana Stock Exchange ("BSE"). The
ordinary shares trade on AIM and the TSX under the symbol "ACU", and on the BSE
under the symbol "African Copper".
Mowana Project Development
Completion of the commissioning of the processing facility at the open-pit
Mowana Mine in Botswana has been delayed and it is expected to complete the ramp
up to commercial production in the fourth quarter of 2008. This overrun was
caused by, among other things, delays in delivery of component parts and
unexpected equipment failures of primary crusher components, delays in the
supply of fabrication materials and the integration of electrical and
instrumentation reticulation, contributing to late automation of process
controls being achieved. Hot commissioning of the crusher and mill facility has
been completed. First concentrate production occurred at the end of July and
concentrate shipment is scheduled to start by the end of August.
Revised Mine Plan
Following the resignation of Joseph Hamilton as Chief Executive Officer and the
appointment of Chris Fredericks as his replacement, the Company's board of
Directors (the "Board") directed management to review the initial mining plan
and strategy. This review is focused on maximizing and optimizing the Mowana
resources and process facilities and in particular reviewing the schedule for
the possible integration of the underground mining of the Mowana sulphide
resource. The review takes into account the expanded understanding of the Mowana
deposit gained through open-pit mining operations, the current stockpiles and
the exposed ore along approximately 1,500m of strike within the pit. Based on
its preliminary analysis, management has concluded that accessing the near-mine
satellite open-pittable resources at Thakadu and mineralization recently
identified 520 metres south of the Mowana Mine at Erasmus Winze (the "Southern
Extension") has the potential to increase the annual production profile over the
next five years and to attain processing facility capacity utilization sooner
than the trial underground mining programme envisaged by the initial mining
plan. This strategy would require the addition of Dense Media Separation ("DMS")
equipment in the first quarter of 2009 rather than in 2010 as envisaged in the
initial mine plan. Management is continuing to refine this revised mine plan and
expects to complete it in the fourth quarter of 2008. The previously announced
pre-feasibility study in respect of the viability of an underground mine at
Mowana will be completed after the revised mine plan is finalized.
Industry wide cost escalation and delays in commissioning have resulted in
increases in the costs of building and operating the Mowana Mine (see "Capital
and Operating Costs" on page 3 below). In addition, under the proposed revised
mining plan, the commissioning of DMS equipment will be accelerated along with
development expenditures for both the Thakadu and the Southern Extension areas.
As a result, the Company has determined that it will require additional working
capital and capital equipment financing (see "Liquidity and Capital Resources"
on page 12 below).
MOWANA PROJECT DEVELOPMENT
Revised Production Strategy:
The Mowana pit has an estimated seven-year mine life in the open pit and it
offers African Copper further near-term strike potential to the north and south.
African Copper intends to exploit this open pit reserve while continuing to
pursue exploration potential around and under the open pit, and in the Matsitama
Belt. The revised mine plan and production strategy will be aimed at providing
and maintaining a high grade direct feed stream and a DMS grade stream to attain
maximum mill input.
The revised production strategy envisages the following identified growth
opportunities:
1. Introduction of a 300 tonne per hour ("tph") DMS facility, scheduled to be
operational in the second quarter of 2009.
2. Supplement the highest grade available ore from Mowana through the dual
oxide-sulphide floatation concentrator with additional high grade direct feed
material sourced from a satellite open pit operation at Thakadu, subject to
permitting and granting of the requisite mining licence. As described in the
press release dated 25 July 2007, independent consultant RSG Global Consulting
("RSG") has completed a resource estimate at Thakadu. RSG reported an estimated
indicated mineral resource of 4.715 million tonnes grading 1.72% copper and an
estimated inferred mineral resource of 0.961 million tonnes at 1.29% copper. In
each case, estimated mineral resources represent a mineralized envelope based on
a 0.25% copper cut-off utilizing ordinary kriging. Contained within this
estimate was an indicated silver resource of 3.558 million tonnes grading 16 g/t
silver. These mineral resource estimates were SAMREC, JORC and NI 43-101
compliant. RSG's technical report respecting this resource estimate is dated 24
July 2007 and entitled "Database Review, Geological Modelling and Grade
Estimation of the Thakadu Copper Project" and is available on the Company's
website at www.africancopper.com and under the Company's profile on SEDAR at
www.sedar.com.
3. Supplement Mowana open pit feed with additional DMS feed mined from the
Southern Extension.
4. Integrate underground access at Mowana - at this time greater than 70% of the
known estimated mineral resource base at Mowana lies outside of the open-pit
boundary. The exploitation of near surface resources at Thakadu and the
mineralization in the Southern Extension is believed to be less capital
intensive in the short-term and provides more rapid access to mineralization
than the previously considered development of an underground trial mining
section. A pre-feasibility study will be completed on underground access once
the final revised mine plans have been completed, which is expected to be in the
fourth quarter of 2008. The pre-feasibility study will consider the effective
utilisation of near surface potential to optimise the future underground mining
strategy, which may see multiple access points into the significant strike
length of deeper sulphide mineralisation from the lower level elevations
developed during open pit extraction.
Open Pit Mining Operations:
Following the successful mobilization of the mining contractor in 2007 and the
commissioning of the truck and shovel fleet in the first quarter 2008, the
production from Mowana pit has ramped up to the required/budgeted output volumes
of approx 600,000 bench cubic metres per month. Pit infrastructure is in place
and fully integrated into mine design including establishment of surface
facilities, access roads, waste dumps and ore stockpiles.
Management believes excellent progress has been made in the preparation of the
open-pit for commercial mining activity with the load and haul operations in
2008 dropping the pit to 20m below surface. Development is progressing on
schedule on the upper benches with the 1000ml and 990ml benches complete and
current operations focused on 980ml bench. The mining level developed has
exposed ore along approximately 1,500m of strike within the pit enabling the
required ore stockpile to be built up prior to plant commissioning. Ore volumes
exposed to date within the pit are consistent with prior ore body modeling. The
tenor of mineralisation exposed shows encouraging signs of increased levels of
supergene exposure within the southern portion of the pit. As a result of the
above, at 8 August 2008 stockpiles at Mowana consisted of approximately 807,100
tonnes of ore at approximately 1% Cu%, including approximately 250,000 tonnes
grading 1.73% Cu% on the high grade stockpile.
The initial shortfall in monthly production caused by the delay in commissioning
is expected to be largely recouped in 2008, based on the grades of material on
the current stockpile that will be processed immediately, and will be
supplemented with similar tenor from ore exposed in the south of the pit for the
balance of 2008. Management anticipates that approximately 5,000 tonnes of
copper in concentrate will be produced in 2008, representing a 9% decrease from
the initial estimate.
Mine staffing has progressed well during the quarter and all senior staff
positions have been filled. The mine's organisational structure is in place and
functioning well. Shop floor and management systems are complete and in place.
Processing plant operator training has commenced which together with the cold
and hot commissioning process will prepare operators and staff for ramp up to
commercial production in the fourth quarter.
Processing:
Further metallurgical test work has been carried out during the quarter.
Laboratory scale tests have indicated the potential for improved oxide copper
recoveries through the use of a hydroxymate based reagent suite compared with
the standard sulphidization process adopted in the present plant process flow
sheets. Further test work on hydroxomates at pilot plant scale was completed,
however these results were inconclusive. It is envisaged that this test work
programme will be revisited at plant scale once a stable plant operating
environment is achieved.
Capital and Operating Costs:
Capital:
Industry wide cost escalation and delays in commissioning have resulted in
increases in the costs of building the Mowana plant. In addition, certain design
modifications were incorporated during the Mowana construction period to improve
the operational flexibility of the Mowana plant. African Copper is now
estimating that the total capital costs of the Mowana Mine, excluding mining
fleet costs, will be ZAR534.8 million (Pounds Sterling 36.3 million). The design
changes total ZAR 31.1 million (Pounds Sterling 2.1 million) and include the
introduction of a stockpile prior to secondary crushing, moving the ROM crushing
area to a new position, realignment of the Botswana Power Corporation servitude
as well as the inclusion of a full brick built metallurgical facility. Taking
into account the effect of the Pounds Sterling 2.1 million cost of the design
changes referred to above, the total capital cost estimate has increased 8.6%
over the previous estimate of ZAR 464.6 million (Pounds Sterling 31.5 million).
As discussed above, the Company is in the process of developing a revised mine
plan which is designed to increase production. Based on its preliminary
analysis, management believes that additional funding will be required for the
revised mine plan, including funding for development of Thakadu and the Southern
Extension and related infrastructure and the acquisition of the 300 tph DMS
plant.
Operating costs:
The following components of the costs which were contained in the report
entitled "National Instrument 43-101 Technical Report on the Mowana Mine
Botswana" dated November 2007 by Read, Swatman and Voight (Pty) Ltd have been
updated based on actual operations in 2008; ore and waste mining costs which
have increased from $US2.21 to $US2.61 per tonne; and transportation costs which
have increased from $US100 to $US282 per tonne. A substantial portion of the
mining cost increase relates to increased diesel fuel costs as well as increased
consumable costs such as spares, tyres and explosives and drilling costs. In
addition, smelter treatment charges decreased from $US65 to $US45 per tonne;
smelter refining charges decreased from $US0.065 to $US0.045 per pound of
copper; and processing costs have increased from $US9.26 to $US10.30 per tonne.
THE OUTLOOK FOR COPPER
The beginning of the third quarter of 2008 saw copper touching a new record high
of $8,930/tonne. Although technical factors and a perceived shortage of supply
and lack of replacement projects were contributory factors, this is a notable
achievement given the weakness in the global economy and a recent decline in
Chinese demand. This would suggest good upside when the Chinese decide to
restock inventories. Given the additional factors of a very tight concentrate
market and ongoing money flows into commodities in general, management believes
there is scope for another rally in copper prices towards the end of the year or
in early 2009. On the supply side forecasts have generally seen downward
revisions amid ongoing problems, disruptions and shortages at the mine stage of
the supply chain that will keep refined output constrained for the next few
years. Recent production reports and comments from major producers justify this
pessimistic view on copper supply growth. However, despite this bullish longer
term trend, the short term outlook has become increasingly bearish due to a
seasonal build-up in inventories, a lack of Chinese buying and supply concerns.
Consensus would seem to indicate that prices could fall in the short term
followed by a possible rally that could sustain and support historically high
copper prices over the medium to longer term.
MATSITAMA
NOTE: To view a map, please visit the following link:
http://media3.marketwire.com/docs/acu815.pdf
The Matsitama prospecting licences cover a very large area of 3,800 km2 highly
prospective mineral holdings. These licences are contiguous with the Mowana
deposit discussed above.
Work in the second quarter of 2008 continued on the three main structural
corridors identified in the belt and in the Ultramafic Formations with Ni-PGM
potential, namely: Thakadu Mutsuku Corridor, Nakalakwana Hill Corridor, Lepashe
Cu-Snake Corridor and the Mosupe-Sebotha (Ni-PGM) Formations.
Results for the Regional Soil Sampling (12,000 samples) and the Nakalakwana Area
(3,000 samples) were received during the period and are currently being
interpreted. The Regional Soil Sampling covers the southern extension of the
Bushman Shear, the west part of the Lepashe Cu-Snake Corridor and western
Sebotha (Ni-PGM) Formation. The Nakalakwana Area includes the Nakalakwana Hill
prospect.
Most of the 2008 diamond drilling has tested Titan I.P. geophysical targets and
soil geochemical anomalies on grids in the Thakadu-Mutsuku Corridor. In addition
to the eight holes drilled on the Thakadu Extension Grid in the Q1, another
eight holes were drilled on the Thakadu (2-holes), Makala (2-holes), Dihudi
(2-holes) and Mutsuku (2-holes) grids. Two geochemical anomalies on the
Guba-Gaokae Grid (1-hole) in the Mosupe Formation and on the Palamela Grid
(1-hole) in the Lepashe Cu-Snake Corridor were also drill-tested.
Within the Thakadu-Mutsuku Corridor, the Thakadu deposit represents an advanced
exploration project now being integrated into the revised mine plan with a view
to supplementing Mowana Mine production. Exploration efforts have therefore been
focused on the unexplored geophysical and geochemical anomalies within 10
kilometres of the Thakadu deposits.
The third quarter of 2008 will involve the detailed compilation of the soil
data, interpretation and prioritization of targets. To date 23,103 samples have
been sent to the laboratory and 58 anomalies drilled with encouraging results. A
structural report from the drilling of the Cu-Au Nakalakwana Hill prospect is
currently being completed by RSG. On the recommendations of RSG and SRK
International a structural foliation/vegetation trace map from satellite and
air-photos has been started in order to aid in structural and anomaly
interpretation. This will add to the geological base map which is constantly
being updated from trench mapping and drilling.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires the Company to select from
possible alternative accounting principles, and to make estimates and
assumptions that determine the reported amounts of assets and liabilities at the
balance sheet date, and reported costs and expenditures during the reporting
period. Significant estimates and assumptions include those related to the
recoverability of mineral properties, estimated useful lives of capital assets,
stock compensation and financial instruments valuation assumptions and
determination as to whether costs are expensed or deferred. While management
believes that these estimates and assumptions are reasonable, actual results
could vary significantly. A summary of the critical account estimates is listed
below.
Resource Properties, Deferred Exploration and Mine Development Costs:
Exploration and evaluation costs arising following the acquisition of an
exploration licence are capitalised on a project-by-project basis, pending
determination of the technical feasibility and commercial viability of the
project. Upon demonstration of the technical and commercial feasibility of a
project, any past deferred exploration and evaluation costs related to that
project will be reclassified as mine development and infrastructure.
Capitalised deferred exploration expenditures are reviewed for impairment losses
at each balance sheet date. In the case of undeveloped properties, there may be
only inferred resources to form a basis for the impairment review. The review is
based on a status report regarding the Company's intentions for development of
the undeveloped property. The Company may periodically revise its valuation
based on additional exploration results and determine that the carrying value of
the property on the balance sheet is impaired. When such a change in estimate is
made, there may be a material effect on the balance sheet and income statement.
Based on the fact that the Board approved development of the Mowana Mine in
September 2006 the deferred exploration costs incurred to date on Mowana were
reclassified as mine development and infrastructure costs and future general and
administrative costs expensed. Mowana mine development and infrastructure costs
comprise the largest component of the Company's non-current assets and as such
the evaluation of impairment of these assets has a significant effect on the
Company's financial statements. The assessment of the carrying value involves
the study of geological and economic data (including resource estimates) and the
reliance on a number of assumptions. These estimates of resources may change
based on additional knowledge gained subsequent to the assessment. This may
include additional data available from the continued development activities of
the Mowana Mine Project, actual production data when available or the impact of
economic factors such as changes in the price of copper or the cost of
construction and development costs or the cost of components of production.
Asset Retirement Obligations:
Asset retirement obligations are future costs to retire an asset including
dismantling, remediation and ongoing treatment and monitoring of the site. The
liability is accreted over time through period charges to the Consolidated
Income Statement. In addition, the asset retirement cost is capitalised as part
of the asset's carrying value and amortized over the asset's useful life.
Subsequent to the initial recognition of the asset retirement obligation and
associated asset retirement cost, changes resulting from a revision to either
timing or amount of estimated cash flows are prospectively reflected in the year
those estimates change.
The Company estimates the total discounted amount of cash flows required to
settle its asset retirement obligations at 30 June 2008 is Pounds Sterling
1,486,244. The estimate is based on the anticipated seven year open-pit mine
life, Botswana inflation of 10% and a discount factor of 14% being the coupon on
the Botswana interest bearing borrowings. Although the ultimate amount to be
incurred is uncertain, the independent Environmental Impact Statement, completed
on the Mowana Mine by Water Surveys Botswana (Pty) Limited in September 2006,
using an assumption that mining continues to 2023, estimated the undiscounted
cost to rehabilitate the Mowana Mine site of 24.3 million Pula (Pounds Sterling
2 million).
Under the terms of the Mining Licence, by the end of the first financial year in
which copper is produced and sold, the Company must establish a trust fund to
provide for rehabilitation of the Mowana Mine site once the mine closes. The
Company will annually make contributions to this fund over the life of the mine
so that these capital contributions together with the investment income earned
will cover the anticipated costs. At the end of each financial year, the Company
will reassess the estimated remaining life of mine as well as the cost to
rehabilitate the mine site and adjust its annual contributions accordingly.
Derivative Financial Instruments:
The Company uses derivative financial instruments, in particular copper put
contracts, to manage financial risks associated with their underlying business
activities and the financing of those activities. Derivative financial
instruments are measured at their fair value. Financial assets and liabilities
are recognised on the balance sheet when the Company has become party to the
contractual obligations of the instrument. Derivative financial instruments,
which are not effective hedges, are measured at fair value, with the movement in
fair value being recognized in the consolidated income statement for the period.
Movements in the fair value of derivative financial instruments which are
considered effective hedges are recognised directly in equity.
Share Based Payments:
The Company is required to charge the Consolidated Income Statement with the
fair value of the options issued. This calculated charge amount is not based on
historical cost, but is derived based on assumptions input into an option
pricing model. The model requires that management make several assumptions as to
future events, including: an estimate of the average future hold period of
issued stock options before exercise, expiry or cancellation; future volatility
of the Company's share price in the expected hold period (using historical
volatility as a reference); and the appropriate risk-free rate of interest. The
resulting value calculated is not necessarily the value of which the holder of
the option could receive in an arm's length transaction, given there is no
market for the options and they are not transferable. The value derived from the
option pricing model is highly subjective and dependent entirely upon the input
assumptions made. The fair value of the option is either expensed or capitalised
as a deferred exploration cost depending on the nature of the employee services
received.
OVERALL FINANCIAL PERFORMANCE
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Three months ended Six months ended
30 June 30 June
Pounds Sterling Pounds Sterling
2008 2007 2008 2007
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Bank interest receivable (581,024) (785,736) (1,055,656) (1,489,411)
Corporate G&A, consultants, 312,052 147,938 458,782 423,485
salaries and benefits
Botswana G&A, consultants, 275,637 134,937 494,320 184,796
salaries and benefits
Insurance 8,408 46,667 16,715 82,509
Directors fees 16,900 16,950 33,800 33,900
Investor relations 34,550 45,429 71,794 72,785
Public company administration 23,319 35,338 69,630 77,568
Travel, accommodation 43,842 35,672 134,058 79,978
Professional fees 158,638 87,271 311,032 163,532
Depreciation - 24,731 - 41,061
Share based compensation 28,306 217,402 43,686 439,012
Interest expense 418,742 - 418,742 -
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1,320,394 792,335 2,052,559 1,598,626
Foreign exchange loss/(gain) 37,576 (56,360) 835,699 20,258
Hedging loss 814,340 - 814,340 -
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Net loss/(gain) 1,591,286 (49,761) 2,646,942 129,473
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Three Months Ended 30 June 2008
For the three-month period ended 30 June 2008, the Company recorded a net loss
of Pounds Sterling 1,591,286 (1.10p), compared with a net gain Pounds Sterling
49,761 (0.04p) in the year earlier second quarter. As evidenced in the above
table, the increased loss during the current quarter compared to the previous
year's quarter was the result of lower bank interest receivable, higher
corporate and Botswana administration costs, increased professional fees and
interest and related fees in respect of the Botswana Note Programme as described
below.
Bank interest receivable:
Bank interest receivable for the second quarter of fiscal 2008 decreased to
Pounds Sterling 581,024 from Pounds Sterling 785,736 in the second quarter of
fiscal 2007. The lower bank interest receivable related to lower average cash
balances throughout the current year quarter compared to the previous year's
first quarter as funds continued to be utilized for the Mowana Mine construction
programme.
Corporate general and administration, consultants, salaries and benefits:
During the second quarter of fiscal 2008, the Company incurred a total of Pounds
Sterling 312,052 (2007: Pounds Sterling 147,938) in corporate salaries, general
and administrative expenses. The increase was primarily related to a severance
amount of Pounds Sterling 173,040 paid during the second quarter of fiscal 2008
to Joseph Hamilton pursuant to a leaving and termination agreement between the
Company, Mr. Hamilton and Mr. Hamilton's company Pickax International
Corporation. See "Transactions with Related Parties". On 12 June 2008 Mr.
Hamilton resigned as Chief Executive Officer and from the Board of Directors.
Botswana general and administration, salaries and benefits:
During the second quarter of 2008, Botswana general administration and salary
costs increased to Pounds Sterling 275,637 compared to Pounds Sterling 134,937
for the same period in 2007. In anticipation of commercial production commencing
at the Mowana Mine, general and administration costs increased substantially
with expenditures incurred for hiring of new people and establishing
infrastructure and systems.
Insurance:
The insurance expense for the three months ended 30 June 2008 reflected the cost
of directors' and officers' insurance for the period. The insurance cost for the
comparative three months ended 30 June 2007of Pounds Sterling 46,667 was higher
based on insurance advisory and review costs of the Mowana Mine construction and
delay insurance coverage.
Investor relations:
Investor relations costs decreased to Pounds Sterling 34,550 for the three-month
period ended 30 June 2008 compared with Pounds Sterling 45,429 in the same
period in 2007. The decrease was primarily due to costs paid to a public
relations firm during the three months ended 30 June 2007 which were not
required during the current year's quarter.
Public company administration:
Public company administration costs decreased to Pounds Sterling 23,319 for the
three-month period ended 30 June 2008 compared with Pounds Sterling 35,338 in
the same period in 2007. The decrease was primarily due to timing of certain
regulatory filing fees and higher costs during the third quarter of 2007 for
press release distribution and corporate presentation materials.
Travel and accommodation:
Travel, accommodation, and conference costs increased to Pounds Sterling 43,842
during the second quarter of 2008 compared to Pounds Sterling 35,672 in the
first quarter of 2007. The increase during the current year's quarter was the
result of the timing of registration expenditures for future conferences the
Company plans to attend and increased Botswana based travel costs.
Professional fees:
Professional fees increased to Pounds Sterling 158,638 during the three-month
period ended 30 June 2008 compared to Pounds Sterling 87,271 in the previous
year's quarter. The increase costs during the three months ended 30 June 2008
was related to three primary reasons: (1) legal fees incurred with respect to
the leaving and termination agreement respecting Joseph Hamilton (2) an internal
control review completed by an independent consultant as part of compliance with
Canadian securities regulations (3) costs paid to a third party consulting firm
which provided organizational systems design, reporting structures and
implementation services for the Mowana Mine.
Share-based compensation:
Share based compensation expenses for the three-month period ended 30 June 2008
of Pounds Sterling 28,306 (2007: Pounds Sterling 217,402) are non-cash expenses
and reflect the derived value of stock options vested during the quarter. An
additional amount of Pounds Sterling 7,492 (2007: Pounds Sterling 92,219) was
recorded during the second quarter of 2008 as a non-cash expenditure to deferred
exploration costs as the original grant of options was made to personnel whose
compensation is capitalized to the relevant deferred exploration property.
During the second quarter of 2008 no options were granted (2007: nil). The fair
value calculated of stock options when granted is amortized to the Income
Statement over the period in which the options vest.
Interest Expense:
On 4 April 2008, Messina Copper (Botswana) (Pty) Ltd ("Messina"), the Company's
100% owned subsidiary, completed the placing of Pula 150.0 million (Pounds
Sterling 11.2 million) notes with local Botswana institutions (the "Botswana
Bond"). The Botswana Bond is denominated in Pula and is an unsecured fixed rate
note that bears interest at 14.0% per annum and has a bullet maturity in 7
years. A fee of 2% (Pounds Sterling 250,286) of the total principal amount of
the Botswana Bond was paid to the placing agents and was capitalized as a
reduction of Interest Borrowings. This placing fee is being amoritized over the
loan life, being seven years resulting in an amortization to Note Programme
Interest Expense of Pounds Sterling 8,939 for the three months ended 30 June
2008. In addition, interest expense on the Botswana Bond for the three months
ended 30 June 2008 totalled Pounds Sterling 409,803.
Hedging loss:
The Company realized a hedging loss of Pounds Sterling 814,340 during the period
ended 30 June 2008 on put contracts settled prior to the anticipated start of
commercial production as these contracts ceased to be classified as effective
hedges. Accordingly, the losses on the April, May, June and July 2008 put
contracts were expensed in the Consolidated Profit and Loss Statement. As
described under "Critical Accounting Estimates - Derivative Financial
Instruments" in this MD&A, mark to market movements in the fair value of the put
contracts which are considered effective hedges are recognised directly in
equity.
Foreign exchange:
During the three-month period ended 30 June 2008, the Company recorded a foreign
exchange loss of Pounds Sterling 37,576 compared to a gain of Pounds Sterling
56,360 during the same period in 2007. The Company has foreign currency exposure
with respect to items denominated in foreign currencies. The Company holds and
transacts business in multiple currencies, the most significant of which are
British Pounds Sterling ("Sterling"), Botswana Pula ("Pula"), South African Rand
("Rand"), Canadian Dollar and US Dollar. As a result, the Company has exposure
with respect to items denominated in foreign currencies.
The Pounds Sterling 37,576 foreign exchange loss recorded for the three-month
period ended June 30, 2008 was primarily due to foreign exchange losses on
foreign currency cash balances of Rand held to finance planned Rand denominated
expenditures for the Mowana Mine development. During the second quarter of 2008
the Rand weakened relative to Sterling. Based on rates provided by the Bank of
England the Rand/Sterling exchange rate at 31 March 2008 was 16.16330 compared
to 15.58050 at 30 June 2008.
The Pula is considered the functional currency for the Company's Botswana
subsidiaries. Accordingly, assets and liabilities of the Botswana subsidiaries
are translated into Sterling using the exchange rates in effect at the balance
sheet dates. Translation gains and losses are included in a separate component
of shareholders' equity. During the three-month period ended 30 June 2008 the
foreign exchange translation loss recognized in shareholders' equity was Pounds
Sterling 1 million compared to the translation loss of Pounds Sterling 0.3
million during the three-month period ended 30 June 2007. During the second
quarter of 2008 the Pula weakened relative to Sterling. Based on rates provided
by the First National Bank of Botswana the Pula/Sterling exchange rate at 31
March 2008 was 13.4470 compared to 13.3125 at 30 June 2008.
Six Months Ended 30 June 2008
For the six months ended 30 June 2008, the Company recorded a net loss of Pounds
Sterling 2,646,942 (1.83p per share) compared to a loss of Pounds Sterling
129,473 (0.10p per share) for the six months ended 30 June 2007. As evidenced in
the table above, the increased loss for the current six month period compared to
the six months ended 30 June 2008 was the result of lower bank interest
receivable and increased costs related to Botswana administration, travel,
professional fees, interest, and foreign exchange and hedging losses.
The Pounds Sterling 835,699 foreign exchange loss recorded for the six-month
period ended June 30, 2008 was primarily due to foreign exchange losses on
foreign currency cash balances of Rand held to finance planned Rand denominated
expenditures for the Mowana Mine development. During the six months ended 30
June 2008 the Rand weakened relative to Sterling. Based on rates provided by the
Bank of England the Rand/Sterling exchange rate at 31 December 2007 was 13.60140
compared to 15.58050 at 30 June 2008.
CAPITAL EXPENDITURES
The most significant ongoing investing activities during the three and six month
periods ended 30 June 2008 were expenditures for the development, pre-strip
mining and construction of the Mowana Mine. In addition, capital was also spent
for exploration programmes at the Matsitama Project and in areas surrounding the
Mowana Mine.
Mowana Mine - mining development and infrastructure and mine plant and equipment
Construction and pre-strip mining activities at the Mowana Mine accelerated,
with expenditures totalling Pounds Sterling 14.7 million during the three months
ended 30 June 2008 and Pounds Sterling 24.60 million during the six months ended
30 June 2008. These expenditures were offset by depreciation of Pounds Sterling
137,057 and foreign exchange losses of Pounds Sterling 4.6 million. The foreign
exchange loss was the result of translating to Sterling the accumulated mining
development, infrastructure and mine plant and equipment balances that are
denominated in Pula in the Botswana subsidiary accounts. (See Foreign Exchange
under the Overall Financial Performance section of this MD&A).
----------------------------------------------------------------------------
For the Three-month For the Six-month
period ended period ended
30 June 2008 30 June 2008
Pounds Sterling '000 Pounds Sterling '000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance at beginning of period: 53,499 48,248
General yard and site work 567 1,385
Process plant 4,261 5,715
Owners cost 345 647
Geology - -
Mining 6,235 11,353
Capital WIP 24 347
Ancillary facilities 872 1,781
Share-based expenses 2 23
Fixed assets 1,646 2,195
Depreciation (68) (137)
Asset retirement obligation 1,212 1,294
Foreign exchange (362) (4,619)
----------------------------------------------------------------------------
Ending balance 68,232 68,232
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Mowana Mine - deferred exploration expenditures
The Company spent Pounds Sterling 368,434 (2007: Pounds Sterling 107,342) during
the three months ended 30 June 2008 and Pounds Sterling 555,141 (2007: Pounds
Sterling 185,832) during the six months ended 30 June 2008 on preparing an
underground pre-feasibility study and exploration activities in the area
surrounding the Mowana Mine in the Mowana prospecting licence area. Work during
the period included diamond drilling at the prospect to the south (within the
structure hosting mineralization), further compilation and interpretation of
geophysical surveys, geochemical orientation surveys and surface prospecting in
the vicinity of geochemical anomalies.
----------------------------------------------------------------------------
For the Three-month For the Six-month
period ended period ended
30 June 2008 30 June 2008
Pounds Sterling '000 Pounds Sterling '000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Opening balance 600 413
Geological and geophysical 45 53
Drilling and Assay 117 211
Underground prefeasibility 198 288
Administration 3 11
Salaries 17 40
Foreign exchange (12) (48)
----------------------------------------------------------------------------
Ending balance 968 968
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Matsitama Exploration Project - deferred exploration expenditures
The Company spent Pounds Sterling 392,672 (2007: Pounds Sterling 494,439) during
the three months ended 30 June 2008 and Pounds Sterling 643,976 (2007: Pounds
Sterling 775,347) during the six months ended 30 June 2008 on exploration
activities in the Matsitama prospecting licence area. The foreign exchange loss
of Pounds Sterling 368,878 was the result of translating to Sterling the
accumulated Matsitama exploration expenditures that are denominated in Pula in
the Botswana subsidiary accounts (See Foreign Exchange under the Overall
Financial Performance section of this MD&A).
----------------------------------------------------------------------------
For the Three-month For the Six-month
period ended period ended
30 June 2008 30 June 2008
Pounds Sterling '000 Pounds Sterling '000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Beginning Balance 3,792 3,909
Drilling 100 176
Assay 85 95
Geophysical 2 2
Site management and logging - -
Depreciation capitalized 4 9
Administration 226 363
Foreign exchange (24) (369)
----------------------------------------------------------------------------
Ending balance 4,185 4,185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS
The following table sets out selected financial data on the Company for the most
recently completed eight quarters, which data has been prepared in accordance
with applicable IFRS:
--------------------------------------------------------------------------
Q2 Q1 Q4 Q3
30 June 31 March 31 Dec. 30 Sept.
2008 2008 2007 2007
(Pounds (Pounds (Pounds (Pounds
Sterling) Sterling) Sterling) Sterling)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest revenues (581,024) (474,632) (701,279) (795,500)
Net loss /(gain)after tax 1,591,286 1,055,656 146,811 (393,693)
Basic loss/(earnings) per
ordinary share 1.10p 0.74p 0.11p (0.28)p
Diluted loss /(earnings) per
ordinary share 1.10p 0.74p 0.11p (0.26)p
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Q2 Q1 Q4 Q3
30 June 31 March 31 Dec. 30 Sept.
2007 2007 2006 2006
(Pounds (Pounds (Pounds (Pounds
Sterling) Sterling) Sterling) Sterling)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest revenues (785,736) (703,675) (653,176) (660,398)
Net loss /(gain)after tax (49,761) 179,234 1,521,716 679,851
Basic loss/(earnings) per
ordinary share (0.04)p 0.14p 1.17p 0.53p
Diluted loss /(earnings) per
ordinary share (0.04)p 0.14p 1.17p 0.53p
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Please review the discussion under the heading "Overall Financial Performance"
in this MD&A for an explanation of the financial results and exchange
gains/losses and related period-to-period changes for the three and six month
periods ended 30 June 2008.
Fluctuations in the Company's expenditures reflect increases in corporate
administrative costs and professional fees associated with seasonal corporate
filing and regulatory activities. Specifically, the increased costs related to
the preparation of year-end audit files and annual meeting materials, as well as
the impact of year-end audit adjustments to financial statements. Other
fluctuations in quarterly expenditures relate to increasing administration costs
at the Company's Botswana subsidiary as it anticipates commercial production
commencing at the Mowana mine. Expenditures on additional personnel and
infrastructure were incurred establishing finance, human resource and safety and
health departments.
In addition, the Company maintains cash resources in foreign currencies which
have resulted in currency exposure with respect to items denominated in foreign
currencies. In particular a foreign currency gain of Pounds Sterling 253,175 was
recognized in the fourth quarter of 2007 and offset by a foreign currency loss
of Pounds Sterling 798,123 in the first quarter of 2008 on fluctuations in the
value of Sterling to Rand. During those two periods the Company held Rand to
finance planned Rand denominated expenditures for the Mowana Mine Development.
Other quarterly changes occurred as a result of hedging losses incurred on
copper put contracts. Put contracts which are deemed to be not effective hedges,
are measured at fair value, with the movement in fair value being recognized in
the consolidated income. During the fourth quarter of 2007 a loss of Pounds
Sterling 406,231 and during the second quarter of 2008 a loss of Pounds Sterling
814,340 was recognized as hedging losses.
LIQUIDITY AND CAPITAL RESOURCES
At 30 June 2008, the Company's main sources of liquidity were its cash and cash
equivalents of Pounds Sterling 12.8 million (31 December 2007 - Pounds Sterling
22.4 million), debt and project finance alternatives, equity markets and the
possible exercise of share options.
On 4 April 2008, Messina completed the Botswana Bond. Please review the
discussion under the heading "Overall Financial Performance - Interest Expense"
for further details.
As part of the 5-year mining contract (the "Moolman Contract") for the Mowana
Mine, in August 2007 Pula 50 million (Pounds Sterling 3.8 million) was lodged by
Messina in favour of Moolman Mining Botswana (Pty) Ltd. ("Moolman") as security
for Messina's obligations under the Moolman Contract. At the request of Messina,
on 29 July 2008, Moolman released such funds and Messina agreed to re-instate
such security by 30 June 2009. In consideration for the release of such funds,
Messina granted Moolman a lien over the run of mine ore, ore stockpiles and
copper concentrate at the Mowana site. Management of Messina intends to request
Moolman to waive such Pula 50 million security requirement prior to the deposit
due date in June 2009.
Industry wide cost escalation and delays in commissioning have resulted in
increased costs of building and operating the Mowana Mine (see "Capital and
Operating Costs" on page 3 above). In addition, under the proposed revised
mining plan DMS equipment will be accelerated along with development
expenditures for both the Thakadu and the Southern Extension areas. As a result,
the Company has determined that it will require additional working capital and
capital equipment financing.
Based upon financial analysis of the preliminary revised mine plan, which take
into account the increases in capital and operating costs, additional working
capital and capital equipment financing will be required. In particular, the
revised mine plan currently anticipates, among other things, the following
expenditures: (1) approximately Pounds Sterling 6.8 million to purchase
additional plant and equipment for the DMS plant; (2) required development
capital for Thakadu and the Southern Extension; and (3) the above Pounds
Sterling 3.8 million required to be deposited as security in favour of Moolman
for the duration of the Moolman Contract. Management of the Company intends to
obtain such funding via secured project debt and equity. Such funding
requirement is currently estimated to be up to Pounds Sterling 20.0 million.
This estimate will be finalized upon completion of the revised mine plan. As the
Mowana Mine is unencumbered, management believes that the Company will be able
to provide security to support any secured project debt.
The majority of the Company's current contractual obligations relate to
commitments in respect of development expenditures for the completion of
construction at the Mowana Mine and possible termination payments to Moolman
should Messina terminate the Moolman Contract early. As described above, Messina
was required to lodge Pula 50 million as security in favour of Moolman in
support of certain payment obligations in the mining contract. (See Note 5 of
the 2nd Quarter 2008 Financial Statements - Other Non-Current Assets).
At 30 June 2008, commitments under such agreements total Pounds Sterling 8.9
million:
----------------------------------------------------------------------
Total 2008 2009 2010
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
Contractual Obligations
----------------------------------------------------------------------
----------------------------------------------------------------------
Goods, services and equipment (a) 4,556 4,101 455 -
Moolman Contract (b) 3,085 3,085 - -
Matsitama exploration licences (c) 1,052 876 176 -
Lease agreements (d) 227 104 85 38
----------------------------------------------------------------------
8,920 8,166 716 38
----------------------------------------------------------------------
----------------------------------------------------------------------
(a) The Company and its subsidiaries have a number of agreements with arms-
length third parties who provide a wide range of goods and services and
equipment. The primary commitments relate to the engineering,
procurement, construction and management contract ("EPCM") for the
construction of the flotation concentrator and related housing and mine
facilities at the Mowana Mine.
(b) In the event of the optional termination of the Moolman Contract by the
Company, a maximum early termination payment of approximately Pounds
Sterling 2.6 million, which payment may be reduced, depending upon the
number of months notice given, to Pounds Sterling nil upon 6 months
notice, together with demobilization charges would be payable.
(c) Under the terms of the Company's prospecting licences Matsitama is
obliged to incur certain minimum expenditures.
(d) The Company has entered into agreements for lease premises for various
periods until 5 November 2010.
In conjunction with the off-take agreement signed for the Mowana Mine
concentrates, MRI Trading AG subscribed for 7,284,000 ordinary shares at a
subscription price of Pounds Sterling 0.70 per ordinary share. The private
placement closed on 8 February 2008.
At 30 June 2008, outstanding share options and underwriter's options represented
a total of 11,215,000 ordinary shares issuable for maximum aggregate proceeds of
Pounds Sterling 8,646,550 if and when exercised.
PROPOSED TRANSACTIONS
There are no proposed assets or business acquisitions or dispositions before the
Board for consideration.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet transactions.
TRANSACTIONS WITH RELATED PARTIES
The Company was charged Pounds Sterling 18,270 (2007 - Pounds Sterling 19,501)
for the three months ended 30 June 2008 and Pounds Sterling 38,373 (2007 -
Pounds Sterling 40,368) for the six months ended 30 June 2008 by the Summit
Resource Management Limited, a company controlled by D. Jones, a director and
the Deputy Chairman of the Company, for the provision of fully-serviced office
accommodation in Canada and reimbursed expenses. Accounts payable at 30 June
2008 were Pounds Sterling 1,588 (2007 - Pounds Sterling 3,676). The services are
provided under a one year contract that expires on 1 September 2008.
The Company entered into an agreement with Pickax International Corporation
("Pickax") and Joseph Hamilton on 1 July 2006 pursuant to which Pickax agreed to
cause Joseph Hamilton to provide services to the Company, in the capacity of
Chief Operating Officer. Pickax is a corporation controlled by Joseph Hamilton.
The agreement replaced an existing executive services agreement on materially
the same terms and conditions and was subsequently amended to reflect Mr.
Hamilton's appointment as Chief Executive Officer of the Company. On 12 June
2008 the Company signed a termination and leaving agreement (the "Leaving
Agreement") with Pickax and Joseph Hamilton who resigned as a director and Chief
Executive Officer of the Company and was paid Pounds Sterling 173,040 (inclusive
of Canadian Goods and Services Tax) for compensation of loss of office and
termination. Including the Leaving Agreement payment, the Company paid Pounds
Sterling 192,267 (2007: Pounds Sterling 41,200) during the three months ended 30
June 2008 and Pounds Sterling 233,467 (2007: Pounds Sterling 82,400) during the
six months ended 30 June 2008 to Pickax.
The Company was charged Pounds Sterling 68,137 (2007 - Pounds Sterling nil) for
the three months ended 30 June 2008 and Pounds Sterling 68,137 (2007 - Pounds
Sterling nil) for the six months ended 30 June 2008 by Aegis Instruments,
Micromine and MGE Consulting, companies controlled by Simon Bate, a director of
a subsidiary, in respect of provision of geophysical and geological consulting,
administration services and reimbursed expenses. Accounts payable at 30 June
2008 were Pounds Sterling 66,819 (2007 - Pounds Sterling nil).
These related party transactions were in the normal course of operations and
were measured at the exchange amounts.
RISKS
The exploration for and exploitation of natural resources are speculative
activities that involve a high degree of risk. The following risk factors should
be considered in assessing the Company's activities. Should any one or more of
these risks occur, it could have a material adverse effect on the business,
prospects, assets, financial position or operating results of the Company. The
risks noted below do not necessarily comprise all those faced by the Company.
Additional risks not currently known to the Company or that the Company
currently deems would not likely influence an investor's decision to purchase
securities of the Company may also impact the Company's business, prospects,
assets, financial position or operating results.
The Company currently depends significantly on a single project, the Mowana Mine
The Company's activities are focused primarily on the Mowana Mine. Any adverse
changes or developments affecting this project would have a material and adverse
effect on the Company's business, financial condition, working capital and
results of operations.
Copper price volatility may affect the production, profitability, cash flow and
financial position of the Company
The Company's revenues, if any, are expected to be derived from the extraction
and sale of copper concentrate. The price of copper has fluctuated widely,
particularly in recent years, and is affected by numerous factors beyond the
Company's control, including international, economic and political trends,
expectations of inflation, currency exchange fluctuations, interest rates,
global or regional consumption patterns, speculative activities and increased
production due to new extraction developments and improved extraction and
production methods. In recent years, the price of copper has been affected by
changes in the worldwide balance of copper supply and demand, largely resulting
from economic growth and political conditions in China and other major
developing economies. While this demand has resulted in higher prices for copper
in recent years, if Chinese economic growth slows, it could result in lower
prices for copper. The effect of these factors on the price of copper, and
therefore the current or future economic viability of the Mowana Mine and any
other of the Company's projects, cannot accurately be predicted. Any material
decrease in the prevailing price of copper for any significant period of time
would have an adverse and material impact on the economic evaluations contained
in this MD&A and on the Company's results of operations, working capital and
financial conditions, as well as the economic viability of the Company's
projects.
The development of the Mowana Mine into commercial operation on time and budget
and its economic viability cannot be guaranteed
In general, development projects have no operating history upon which to base
estimates of future cash operating costs. For development projects such as the
Mowana Mine, estimates of mineral resources and mineral reserves are, to a large
extent, based upon the interpretation of geological data obtained from drill
holes and other sampling techniques and feasibility studies. This information is
used to calculate estimates of the capital costs and cash operating costs based
upon anticipated tonnage and grades of ore to be mined and processed, the
configuration of the ore body, expected recovery rates, comparable facility and
equipment operating costs, anticipated climatic conditions and other factors.
Operating costs are dependent on the costs of various reagents, supplies, spares
and labour. While open pit mining costs can sometimes be better estimated than
underground mining costs, they are also very dependent on fuel, tyre and
maintenance costs, foreign currency exchange rates and availability of skilled
labour.
There can be no assurance that the Company will be able to complete the
development of the Mowana Mine and commence commercial production on time or on
budget due to, among other things, changes in the economics, the scope of the
pre-stripping and the size of the open pit, delays in the delivery and
installation of plant, delays caused by equipment breakdown, cost overruns and
availability of power from South Africa. Any additional failure to meet
development targets or other operational delays could have a material adverse
effect on the Company's business, working capital and financial condition.
There can be no assurance that the current personnel, systems, procedures and
controls will be adequate to support the Company's operations. Should any of
these events occur, it would have a material adverse effect on the Company's
business, financial condition, working capital and results of operations.
The capital and operating cost estimates for the Mowana Mine are estimates only
and may not reflect the actual capital and operating costs incurred by the
Company
There can be no assurance that final capital cost for the Mowana Mine will not
continue to escalate. In addition, there can be no assurance that the actual ore
and waste mining costs, transportation and processing costs incurred by the
Company will not be greater than currently estimated. Previous capital and
operating cost estimates include supplies and inputs, the cost of which the
Company has little control over. These include, but are not limited to,
transportation and handling charges, the cost of fuel, the cost of electricity,
labour costs, reagent costs, smelter charges, the price of construction
materials including steel, and the cost of mining equipment and spares. A
material increase in one or more of these supplies and inputs may materially
increase the actual capital and/or operating costs incurred by the Company. Any
material increase may cause the Mowana Mine to become economically unviable or
result in additional delays in the completion of the development of the project,
either of which would have a material adverse effect on the Company's business,
financial condition, working capital and results of operations.
No assurance can be given that additional capital, if required, will be
available at all or available on terms acceptable to the Company
The Company will require additional financing for working capital and capital
equipment finance (see "Liquidity and Capital Resources") and for any future
exploration of the Matsitama exploration project. In addition, the Company will
require additional financing for the development of the underground portion of
the mine at Mowana if the Company elects to develop the underground portion.
Failure to obtain such financing may result in a suspension or reduction of
operations or a delay or suspension of the development of the Thakadu or the
Southern Extension and/or even a loss of a property interest. The Company's only
sources of additional funds currently available until the Mowana Mine reaches
commercial production are its cash and cash equivalents of Pounds Sterling 12.8
million (31 December 2007 - Pounds Sterling 22.4 million), debt and project
finance alternatives, equity markets and the possible exercise of share options.
Additional financing may not be available when needed or if available, the terms
of such financing might not be favourable to the Company and might involve
substantial dilution to existing shareholders.
The Company may not obtain a project debt facility
If a project debt facility is obtained by the Company, or any similar debt or
project financing is entered into by the Company, the Company expects that
lenders will require that the Company commit to: restrictive covenants regarding
its business and financial operations; hedge some or all of the production from
the Mowana Mine; meet certain financial tests during the term of the facility;
provide security over all or substantially all of the assets of the Company,
including its rights to the Mowana Mine and the proceeds of sales of copper
and/or copper concentrate mined from the Mowana Mine deposit; and restrict cash
distributions by the Company until such time as the principal amount of the
facility and related facilities, if any, is repaid in full; each of which will
have a restrictive impact on the ability of the Company to manage its business,
operations and cash flows, and will materially limit the Company's ability to
pay dividends to holders of ordinary shares. The failure of the Company to
comply with any such restrictions may result in a lender enforcing its security
over the assets of the Company, which would have a material adverse impact on
the Company. Such restrictions, including any hedging programme, may also limit
the Company's ability to benefit from increases in the price of copper, which
would have a material impact on the Company's cash flows and results of
operations.
The Company's revised mining plan may not maximize or optimize the Mowana
resources and processing facilities
There can be no assurance that the revised mining plan will maximize or optimize
the Mowana resources and processing facilities. There can be no assurance that
mineralization at the Southern Extension will be economic, failing which such
material will not be available for mining under the revised mining plan. Any
delay in completing the revised mine plan could have a material adverse effect
on the Company's business, cash flows, financial condition, working capital and
results of operations.
Messina may not receive the mining licence or other permits required to exploit
the resources at Thakadu
There can be no assurance that Messina will receive the mining licence or other
permits required to exploit the resources at Thakadu. Any delay or failure in
obtaining the mining licence or other permits required would delay or prevent,
as applicable, mining of such resources under the revised mining plan and could
have a material adverse effect on the Company's business, cash flows, financial
condition, working capital and results of operations.
Future production will be subject to the normal risks of mining operations
The Company's future mining operations are subject to all of the hazards and
risks normally incidental to exploration, development and the production of
copper.
The Company's future mining activities may be subject to prolonged disruptions
due to weather conditions, hazards such as unusual or unexpected geologic
formations, flooding or other conditions that may be encountered in the drilling
and removal of material. There may be a higher than normal risk of sourcing and
hiring suitably trained plant management, operating and maintenance staff and
these people may not be readily available in Botswana or not otherwise easily
employed from within the Southern Africa region. This situation could also be
impacted by delays in obtaining necessary work and other labour permits to allow
expatriate expertise to be utilized to the extent necessary.
The Company's copper concentrate will require smelting, and such smelting
capacity may not be available or may adversely affect project economics
The production from the Mowana Mine is expected to be in the form of copper
concentrate which would be treated at third-party smelters. The availability of
smelter capacity is not guaranteed and costs of such treatment may adversely
affect the economic viability of such production.
The Company relies on key personnel and its management team and outside
contractors (including those in Botswana), and the loss of one or more of these
persons may adversely affect the Company
The Company's business is dependent on retaining the services of a small number
of key personnel of the appropriate calibre as the business develops. The
Company has entered into employment agreements with certain of its key
executives. The success of the Company is, and will continue to be, to a
significant extent, dependent on the expertise and experience of the directors
and senior management and the loss of one or more could have a materially
adverse effect on the Company.
The Company will rely heavily on sub-contractors to build, run and maintain the
Mowana Mine. The failure of a sub-contractor to perform properly its services to
the Company could delay or frustrate mining operations, and have a materially
adverse effect on the Company.
Foreign investments and operations are subject to numerous risks associated with
operating in foreign jurisdictions
The Company conducts its operations through foreign subsidiaries, and
substantially all of its assets are held in such entities. Accordingly any
limitation on the transfer of cash or other assets between the parent
corporation and such entities, or among such entities, could restrict the
Company's ability to fund its operations efficiently. Any such limitations, or
the perception that such limitations may exist in the future, could have a
material and adverse impact on the Company's business, financial condition,
working capital and operations.
In addition, operating in foreign jurisdictions exposes the Company to the
effects of political, economic or other risks, including changes in foreign laws
(whether arbitrary or not), expropriation or nationalization of property, risks
of loss due to civil strife, acts of war, insurrection or terrorism (including
the effects of such acts which occur in neighbouring states), cancellation or
renegotiation of contracts or the inability to enforce legal rights in the
foreign jurisdiction.
Government regulations may have an adverse effect on the Company
The Company, its subsidiaries, its business and its operations are subject to
various laws and regulations. The costs associated with compliance with such
laws and regulations may cause substantial delays and require significant cash
and financial expenditure, which may have a material adverse effect on the
Company's business, financial condition, working capital, results of operations,
and prospects and, in particular, the development of the Mowana Mine.
The Company's operations and its ability to hold various mineral rights require
licences, permits and authorizations and, in some cases, renewals of existing
licences, permits and authorisations from various governmental and
quasi-governmental authorities. The Company believes that it currently holds or
has applied for all necessary licences, permits and authorisations to carry on
the activities that it is currently conducting and to hold the mineral rights it
currently holds under applicable laws and regulations in effect at the present
time, and also believes that it is complying in all material respects with the
terms of such licences, permits and authorisations. However, the Company's
ability to obtain, sustain or renew such licences, permits and authorisations on
acceptable terms is subject to changes in regulations and policies and to the
discretion of the applicable governmental and quasigovernmental bodies and there
can be no assurance that the Company will be able to obtain, sustain or renew
any such licences, permits or authorisations on acceptable terms or at all.
Currency fluctuations may adversely affect the costs that the Company incurs in
its operations
Copper is sold throughout the world, principally in US Dollars. The Company's
costs are incurred primarily in Botswana Pula, and to a lesser extent in British
Pounds Sterling, South African Rand and Canadian Dollars. Changes in the
currency exchange rates of the US Dollar against the any of these currencies may
affect the actual capital and operating costs of the Projects and will affect
the results presented in the Company's financial statements and cause its
financial position to fluctuate. As well, such fluctuations may affect the cash
flow that the Company hopes to realise from its operations. Accordingly, the
Company will be exposed to exchange rate fluctuations which could have a
material adverse effect on the Company's business, financial condition, working
capital, results of operations and prospects.
Further, there is no guarantee that the Government of Botswana will not impose
restrictions on the convertibility of and obligations to remit and convert to
local currency in future. Such fluctuations in foreign currency or restrictions
on the convertibility of and obligations to remit and convert to the currency of
Botswana could have a material adverse effect on the Company's business,
financial condition, working capital, results of operations and prospects.
The prevalence of HIV/AIDS in Botswana may adversely impact the Company's
proposed mining operations
The per capita incidence of the HIV/AIDS virus in Botswana has been estimated as
being one of the highest in the world, according to public sources. As such,
HIV/AIDS remains the major healthcare challenge faced by Botswana and the
Company's operations in the country. If the number of new HIV/AIDS infections in
Botswana continues to increase and if the Government of Botswana imposes more
stringent obligations on employers related to HIV/AIDS prevention and treatment,
the Company's operations in Botswana and its profitability and financial
condition could be adversely affected.
Insurance and uninsured risks
Although the Company maintains liability insurance against certain risks in an
amount that it considers consistent with industry practice for a corporation in
the development stage, the nature of these risks is such that liabilities could
exceed policy limits or could be excluded from coverage, in which event the
Company could incur significant costs that could have a material adverse effect
upon the Company's business, financial condition, working capital and/or results
of operation. As well, there are risks against which the Company cannot insure
or against which it may elect not to insure. The potential costs that could be
associated with any liabilities not covered by insurance which may be taken out
or in excess of insurance coverage may cause substantial delays and require
significant capital outlays, adversely affecting the Company's financial
condition, working capital and/or results of operation.
The Company will require significant additional insurance to cover operating
risks, as applicable. There can be no assurance that such insurance will be
available or that the terms and costs of such insurance will not adversely
affect the anticipated profitability of the Mowana Mine and, therefore, the
Company's business, financial condition, working capital and/or results of
operation.
The Company has no operating history and a history of losses and there can be no
assurance that the Company will ever be profitable
The Company has no mineral properties from which any ore has ever been extracted
and sold and its ultimate success will depend on its ability to generate cash
flow from producing properties in the future. The Company has not earned profits
to date and there is no assurance that it will do so in the future.
The success of current and future exploration activities cannot be assured
The exploration and development of mineral deposits involves significant
financial risks over a prolonged period of time, which even a combination of
careful evaluation, experience and knowledge cannot eliminate. While discovery
of a mineral structure may result in substantial rewards, few properties which
are explored are ultimately developed into producing mines. Major expenditure
may be required to establish mineral reserves by drilling and to construct
mining and processing facilities at a site. It is impossible to ensure that
pre-feasibility studies or full feasibility studies on the projects or the
current or proposed exploration programmes for the Projects will ever result in
the discovery of an economically viable mineral deposit or in a profitable
commercial mining operation.
Whether a copper deposit will be commercially viable depends on a number of
factors, some of which are the particular attributes of the deposit, such as its
size and grade, proximity to infrastructure, financing costs and governmental
regulations, including regulations relating to prices, taxes, royalties,
infrastructure, land use, importing and exporting of copper and environmental
protection. The effect of these factors cannot be accurately predicted, but the
combination of these factors may result in the Company's projects not being, or
ceasing to be, viable, which would have a material adverse effect on the
Company's business, financial condition, working capital and results of
operations.
The Company may not be able to effectively manage its growth
The Company's ability to support the anticipated growth of its business will be
substantially dependent upon, among other things, it successfully increasing and
applying additional resources to support its activities. There is no assurance
that the Company will be able to manage any future expansion successfully, and
any inability to do so would have a material adverse effect on the Company.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
receivables, payables and accrued liabilities, some of which are denominated in
Sterling, Pula, and Rand, United States dollars and Canadian dollars. These
accounts are recorded at cost which approximates their fair value at each
reporting period end value in Sterling. The Company experiences financial gains
or losses on these accounts as a result of foreign exchange movements against
Sterling. The Company is exposed to currency risk related to the exploration and
development expenditures on its Mowana and Matsitama projects since it settles
the majority of these expenditures either in local currency Pula or Rand. These
expenditures are negatively impacted by increases in value of either Pula or
Rand versus Sterling. As mine development costs are incurred and purchase
commitments made for the development of the Mowana Mine in 2008, the Company may
acquire Pula and Rand or use derivative positions to lock in these costs in
Sterling, if it believes it prudent to do so.
The Company has placed its cash and cash equivalents in short-term liquid
deposits or investments which provide a revised rate of interest upon maturity.
DISCLOSURE OF OUTSTANDING SHARE DATA
The following details the share capital structure as of the date of this MD&A.
---------------------------------------------------------------------------
Expiry date Exercise Number Number
price
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Ordinary common shares 146,858,957
Share purchase options 23 September 2014 Pounds 500,000
Sterling
0.35
12 November 2014 Pounds 675,000
Sterling
0.76
5 January 2015 Pounds 1,500,000
Sterling
0.76
14 March 2015 Pounds 90,000
Sterling
0.76
12 November 2015 Pounds 240,000
Sterling
0.76
1 August 2016 Pounds 6,860,000
Sterling
0.775
11 September 2016 Pounds 400,000
Sterling
0.775
30 November 2016 Pounds 200,000
Sterling
0.775
29 December 2016 Pounds 750,000 11,215,000
Sterling
0.775
--------
--------
FORWARD-LOOKING STATEMENTS
This MD&A contains "forward-looking information". Forward-looking information
includes, but is not limited to, statements concerning mineral resource
estimates, information with respect to the future price of copper, results of
mining operations, mining extraction and recovery rates at the Mowana Mine
project, estimates of production of copper at the Mowana Mine project, including
the anticipated revised production profile for the first five years of mining,
the potential for future expansion of the Mowana Mine project, estimations of
the life of the Mowana Mine project, the expected levels of ore on the
stockpiles at the Mowana Mine project, expected timing of the commissioning of
the process plant, the expected success of exploration activities under the open
pit at the Mowana Mine project and in the Matsitama Belt, use of mineral
resources and mineralization at Thakadu, the Southern Extension and/or
underground at the Mowana Mine project to supplement open-pit feed, the timing
of obtaining a mining licence and other required permits to exploit the
resources at Thakadu, the merit of the revised mine plan and/or an underground
mine at the Mowana Mine project, Botswana's energy self-sufficiency, government
regulation of mining operations and exploration, availability of project finance
for the revised mine plan, expectations concerning the timing of concentrate,
the timing of the completion of construction at the Mowana Mine project and
hand-over from EPCM teams to operational teams, the Company's expected ramp up
to commercial production, as well as its annual production profile of the Mowana
Mine over the next 5 years, the expected date of the pre-feasibility study,
completion of a NI 43-101 report regarding additional DMS feed mined at Mowana,
estimated capital costs, the Company's expectation of obtaining a waiver from
Moolman to provide it with the required security by June 2009, the use of
derivative positions and the impact of exchange rates and other statements which
are not historical facts.
In certain cases, forward-looking information can be identified by the use of
words such as "plans", "expects" or "does not expect", "is expected", "budget",
"scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not
anticipate", or "believes", or variations of such words and phrases or state
that certain actions, events or results "may", "could", "would", "should",
"might" or "will be taken", "occur" or "be achieved" and include the negative
variation of such phrases.
With respect to forward-looking information contained in this MD&A, the Company
has made assumptions regarding, among other things, the Company's ability to
generate sufficient cash flow from operations and access capital markets to meet
its future funding requirements, the regulatory framework in Botswana with
respect to, among other things, permits, licenses, authorizations, royalties,
taxes and environmental matters, and the Company's ability to obtain qualified
staff and equipment in a timely and cost-efficient manner to meet the Company's
demand.
Although the Company believes that its expectations reflected in forward-looking
information are reasonable, such forward-looking information involves known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or the Company's projects in
Botswana, or any of them, to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
information. Such factors include, risks related to failure to convert estimated
mineral resources to reserves, conclusions of economic evaluations, changes in
project parameters as plans continue to be refined, future prices of copper,
unexpected increases in capital or operating costs, possible variations in
mineral resources, grade or recovery rates, failure to identify mineral
resources in the Southern Extension of sufficient grade and quantity to support
the revised mine plan, failure of equipment or processes to operate as
anticipated, accidents, labour disputes and other risks of the mining industry,
delays in obtaining governmental consents, permits, licences and registrations
or financing or in the completion of development or construction activities,
political risks arising from operating in Africa, uncertainties relating to the
availability and costs and availability of financing needed in the future,
changes in equity markets, inflation, changes in exchange rates, fluctuations in
commodity prices and uninsured risks, as well as those factors discussed under
"Risks" in this MD&A.
Although the Company has attempted to identify important factors that could
cause actual actions, events or results to differ materially from those
described in forward-looking information, there may be other factors that cause
actions, events or results not to be as anticipated, estimated or intended.
There can be no assurance that forward-looking 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 forward-looking information
contained herein, unless stated otherwise, is made as of the date of this MD&A
and the Company makes no responsibility to update them or to revise them to
reflect new events or circumstances, except as required by law.
The mineral resource and mineral reserve figures referred to in this MD&A are
estimates and no assurances can be given that the indicated levels of minerals
will be produced. Such estimates are expressions of judgment based on knowledge,
mining experience, analysis of drilling results and industry practices. Valid
estimates made at a given time may significantly change when new information
becomes available. While the Company believes that the resource and reserve
estimates referred to in this MD&A are well established, by their nature
resource and reserve estimates are imprecise and depend, to a certain extent,
upon statistical inferences which may ultimately prove unreliable. If such
estimates are inaccurate or are reduced in the future, this could have a
material adverse impact on the Company. Due to the uncertainty that may be
attached to inferred mineral resources, it cannot be assumed that all or any
part of an inferred mineral resource will be upgraded to an indicated or
measured mineral resource as a result of continued exploration.
Additional information about the risks and uncertainties of the Company's
business is provided in its disclosure materials, including its Annual
Information Form, available under the Company's profile on SEDAR at
www.sedar.com.
AFRICAN COPPER PLC
UNAUDITED CONSOLIDATED FINANCIAL INFORMATION
Three and Six Months ended 30 June 2008
Expressed in Pounds Sterling
The accompanying Financial Information for the three and six months ended 30
June 2008 and 30 June 2007 have not been audited nor reviewed by the Company's
Auditors and has an effective date of 14 August 2008.
African Copper Plc
Consolidated Income Statement
For the three and six month periods ended 30 June 2008
(Unaudited)
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
30 June 30 June
2008 2007 2008 2007
----------------------------------------------------------------------------
Pounds Pounds Pounds Pounds
Sterl- Sterl- Sterl- Sterl-
ing ing ing ing
'000 '000 '000 '000
Administrative expenses (873) (551) (1,590) (1,119)
Loss on derivative financial instruments (814) - (814) -
Share based expenses (28) (217) (44) (439)
Depreciation - (25) - (41)
Exchange(loss)/gain (38) 56 (836) (20)
----------------------------------------------------------------------------
Operating loss (1,753) (737) (3,284) (1,619)
Finance income
Bank interest receivable 581 786 1,056 1,489
Interest expense (419) - (419) -
----------------------------------------------------------------------------
(Loss)/Profit before and after tax (1,591) 49 (2,647) (130)
Basic (loss)/earnings per ordinary share (1.10)p 0.04p (1.83)p (0.10)p
Diluted (loss)/earnings per ordinary share (1.10)p 0.04p (1.83)p (0.10)p
The accompanying notes are an integral part of these consolidated financial
statements.
African Copper Plc
Consolidated Balance Sheets
--------------------------------------------------------------------------
As at As at
30 June 31 December
(unaudited) audited
2008 2007
Pounds Sterling Pounds Sterling
Note '000 '000
--------------------------------------------------------------------------
ASSETS
Property, plant and equipment 3 68,232 48,248
Deferred exploration costs 4 5,153 4,322
Other financial assets 5 3,757 4,167
--------------------------------------------------------------------------
Total non-current assets 77,142 56,737
--------------------------------------------------------------------------
CURRENT ASSETS
Other receivables and prepayments 1,813 1,903
Inventories 6 905 -
Derivative financial assets 7 66 1,841
Cash and cash equivalents 12,836 22,428
--------------------------------------------------------------------------
Total current assets 15,620 26,172
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets 92,762 82,909
--------------------------------------------------------------------------
--------------------------------------------------------------------------
EQUITY
Issued share capital 8 1,469 1,396
Share premium 81,973 76,947
Acquisition reserve 4,485 4,485
Foreign currency translation reserve (7,211) (1,207)
Hedging reserve (1,773) (812)
Retained losses (7,418) (4,843)
--------------------------------------------------------------------------
Total equity 71,525 75,966
--------------------------------------------------------------------------
LIABILITIES
Interest bearing borrowings 10 11,186 -
Asset retirement obligation 11 1,486 464
--------------------------------------------------------------------------
Total non-current liabilities 12,672 464
--------------------------------------------------------------------------
Trade and other payables 8,565 6,479
--------------------------------------------------------------------------
Total current liabilities 8,565 6,479
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total equity and liabilities 92,762 82,909
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
African Copper Plc
Consolidated Statement of Changes in Shareholders' Equity
----------------------------------------------------------------------------
Foreign
Currency
Acqui- Trans-
Share Share sition lation Hedging Retained Total
Capital Premium Reserve Reserve Reserve Loss Equity
Pounds Pounds Pounds Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling Sterling Sterling Sterling
'000 '000 '000 '000 '000 '000 '000
----------------------------------------------------------------------------
Balance at 1
January 2007 1,305 69,844 4,485 (1,979) - (5,687) 67,968
Foreign
exchange
adjustments - - - (1,089) - - (1,089)
Fair value loss
on cash flow
hedge
instruments - - - - (1,196) - (1,196)
----------------------------------------------------------------------------
Loss for the
period - - - - - (130) (130)
----------------------------------------------------------------------------
Total
recognised loss
for the period - - - (1,089) (1,196) (130) (2,415)
New share
capital
subscribed 91 7,509 - - - - 7,600
Share issue
costs - (402) - - - - (402)
Credit arising
on share
options - - - - - 638 638
----------------------------------------------------------------------------
Balance at 30
June 2007 1,396 76,951 4,485 (3,068) (1,196) (5,179) 73,389
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign
exchange
adjustments - - - 1,861 - - 1,861
Fair value loss
on cash flow
hedge
instruments - - - - 384 - 384
----------------------------------------------------------------------------
Total
recognized
income and
expense
recognized
directly in
equity - - - 1,861 384 - 2,245
----------------------------------------------------------------------------
Profit for the
period - - - - - 336 336
----------------------------------------------------------------------------
Total
recognized gain
for the
period - - - 1,861 384 336 2,581
New share
capital
subscribed - - - - - - -
Share issue
costs - (4) - - - - (4)
Credit arising
on share
options - - - - - - -
----------------------------------------------------------------------------
Balance at 31
December 2007 1,396 76,947 4,485 (1,207) (812) (4,843) 75,966
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign
exchange
adjustments - - - (6,004) - - (6,004)
Net loss on
cash flow hedge - - - - (1,096) - (1,096)
Net loss on
cashflow hedge
removed from
equity and
reported
in the income
statement 135 135
----------------------------------------------------------------------------
Total
recognized
expense
recognized
directly in
equity - - - (6,004) (961) - (6,965)
----------------------------------------------------------------------------
Loss for the
period - - - - - (2,647) (2,647)
----------------------------------------------------------------------------
Total
recognized loss
for the period - - - (6,004) (961) (2,647) (9,612)
New share
capital
subscribed 73 5,026 - - - - 5,099
Credit arising
on share
options - - - - - 72 72
----------------------------------------------------------------------------
Balance at 30
June 2008 1,469 81,973 4,485 (7,211) (1,773) (7,418) 71,525
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
African Copper Plc
Consolidated Cash Flow Statement
---------------------------------------------------------------------------
Three Months Six Months
Ended Ended
30 June 30 June
2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
---------------------------------------------------------------------------
Cash flows from operating
activities
Administration expenses (873) (551) (1,590) (1,119)
Share based expenses (28) (217) (44) (439)
Depreciation - (25) - (41)
Accrued interest (419) - (419) -
---------------------------------------------------------------------------
Operating loss from continuing
operations (1,320) (793) (2,053) (1,599)
Decrease/(increase) in receivables 434 (414) 90 (251)
Increase in inventories (905) - (905) -
(Decrease)/increase in payables (19) (7) 13 2
Share based payment expense 28 217 44 439
Depreciation - 25 - 41
Accrued interest 419 - 419 -
---------------------------------------------------------------------------
Cash used in operating activities (1,363) (972) (2,392) (1,368)
Interest received 581 786 1,056 1,489
---------------------------------------------------------------------------
Net cash (outflow)/inflow from
operating activities (782) (186) (1,336) 121
---------------------------------------------------------------------------
Cash flows from investing
activities
Payments to acquire property, plant
and equipment (4,223) (5,058) (11,688) (9,016)
Payments of deferred exploration
expenditures (381) (522) (831) (961)
Purchase of financial instruments - (3,060) - (3,060)
---------------------------------------------------------------------------
Net cash outflow from investing
activities (4,604) (8,640) (12,519) (13,037)
---------------------------------------------------------------------------
Cash flows from financing
activities
Issue of equity upon exercise of
options - - - 163
Issue of equity share capital - 7,035 5,099 7,035
---------------------------------------------------------------------------
Net cash inflow from financing
activities - 7,035 5,099 7,198
---------------------------------------------------------------------------
Net decrease in cash and cash
equivalents (5,386) (1,791) (8,756) (5,718)
Cash and cash equivalents at
beginning of the period 18,260 49,251 22,428 53,254
Exchange (loss)/profit (38) 56 (836) (20)
---------------------------------------------------------------------------
Cash and cash equivalents at end of
the period 12,836 47,516 12,836 47,516
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1. Nature of operations, going concern and adequacy of project finance
African Copper Plc ("African Copper" or the "Company") is a public limited
company incorporated and domiciled in England and listed on the AIM market of
the London Stock Exchange, the Toronto Stock Exchange and the Botswana Stock
Exchange. African Copper is a holding company of a mineral exploration and
development group of companies (the "Group"). The Group is involved in the
exploration and development of copper deposits in Botswana and is currently
developing its first copper mine at the Mowana Mine and is conducting an
exploration programme at the Matsitama Project. The Mowana Mine is located in
the northeastern portion of Botswana and the Matsitama Project is contiguous to
the southern boundary of the Mowana Mine.
Following the appointment of Chris Fredericks as Chief Executive Officer in June
2008, the Company's board of directors (the "Board") directed management to
review the initial mining plan and strategy. This review is focused on
maximizing and optimizing the Mowana resources and process facilities and in
particular reviewing the schedule for the possible integration of the
underground mining of the Mowana sulphide resource. The review takes into
account the expanded understanding of the Mowana deposit gained through open-pit
mining operations, the current stockpiles and exposed ore along approximately
1,500m of strike within the pit. Based on its preliminary analysis, management
has concluded that accessing the near-mine satellite open-pittable resources at
Thakadu and mineralization recently identified 520 metres south of the Mowana
Mine at Erasmus Winze (the "Southern Extension") has the potential to increase
the annual production profile over the next five years and to attain processing
facility capacity utilization sooner than trial underground mining. Management
is continuing to refine this revised mine plan and expects to complete it in the
fourth quarter of 2008.
As part of the 5-year mining contract (the "Moolman Contract") for the Mowana
Mine, in August 2007 Pula 50 million (Pounds Sterling 3.8 million) was lodged by
Messina Copper (Botswana) (Pty) Ltd ("Messina') in favour of Moolman Mining
Botswana (Pty) Ltd. ("Moolman") as security for Messina's obligations under the
Contract. At the request of the Company, on 29 July 2008 Moolman released such
funds and Messina agreed to re-instate such security by 30 June 2009. In
consideration for the release of such funds, Messina granted Moolman a lien over
the run of mine ore, ore stockpiles and copper concentrate at the Mowana site.
Management of Messina intends to request Moolman to waive such Pula 50 million
security requirement prior to the deposit due date in June 2009.
The Group's operations are due to move into production during the third quarter
of 2008. Industry wide cost escalation and delays in commissioning have resulted
in increased costs of building and operating the Mowana Mine (see "Capital and
Operating Costs" in the Company's Management's Discussion and Analysis for the
period ended 30 June 2008). Based upon financial analysis of the preliminary
revised mine plan, which takes into account the increases in capital and
operating costs, the Directors have concluded that additional working capital
and capital equipment financing will be required. In particular, the revised
mine plan currently anticipates, among other things, (1) approximately Pounds
Sterling 6.8 million to purchase additional plant and equipment for the DMS
plant; (2) required development capital for Thakadu and the Southern Extension;
and (3) the above Pounds Sterling 3.8 million required to be deposited as
security in favour of Moolman for the duration of the Moolman Contract. Such
funding requirement is currently estimated to be up to Pounds Sterling 20.0
million. This estimate will be finalized upon completion of the revised mine
plan.
The Directors are taking steps to meet this current funding requirement and they
intend to obtain such funding via secured project debt and equity. They believe
that the funding requirement will be met within the next 12 months. On this
basis, the Directors have concluded that the Company is a going concern. The
financial information does not include any adjustments that would result if the
Company was unable to continue as a going concern.
The address of African Copper's registered office is 100 Pall Mall, St James's
London SW1Y 5HP. These consolidated financial statements have been approved for
issue by the Board of Directors on 14 August 2008.
2. Basis of Preparation
General Information
The financial information contained in this Interim Report does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. No
statutory accounts for the period have been delivered to the Registrar of
Companies. The financial information contained in this Interim Report has not
been audited by the auditors.
The statutory accounts for year ended 31 December 2007 have been filed with the
Registrar of Companies. The auditors' report on these accounts was unqualified
and did not contain a statement under section 237(2) or 237(3) of the Companies
Act 1985.
The Group's consolidated financial information has been prepared in accordance
with accounting policies consistent with those adopted in the financial
statements for the year ended 31 December 2007 and has been drawn up in
accordance with International Accounting Standard 34, "Interim Financial
Reporting".
In the opinion of management, the accompanying interim financial information
includes all adjustments considered necessary for fair and consistent
presentation of financial statements. These interim consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes for the year ended 31 December 2007.
3. Property, Plant and Equipment
---------------------------------------------------------------------------
Mine
Develop
-ment Mine
and Plant
Infrastru and Other
-cture Equipment Assets Total
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cost
----
----
Balance at 1 January 2007 13,259 387 467 14,113
Additions 32,376 - 2,204 34,580
Exchange adjustments (150) (5) (6) (161)
---------------------------------------------------------------------------
Balance at 31 December 2007 45,485 382 2,665 48,532
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance at 1 January 2008 45,485 382 2,665 48,532
Additions 23,344 - 1,281 24,625
Exchange adjustments (4,310) (38) (182) (4,530)
---------------------------------------------------------------------------
Balance at 30 June 2008 64,519 344 3,764 68,627
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Depreciation and impairment losses
----------------------------------
----------------------------------
Balance at 1 January 2007 - - (149) (149)
Depreciation charge for the year - - (137) (137)
Exchange adjustments - - 2 2
---------------------------------------------------------------------------
Balance at 31 December 2007 - - (284) (284)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance at 1 January 2008 - - (284) (284)
Depreciation charge for the period (4) - (133) (137)
Exchange adjustments - - 26 26
---------------------------------------------------------------------------
Balance at 30 June 2008 (4) - (391) (395)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Carrying amounts
----------------
----------------
Balance at 1 January 2007 13,259 387 318 13,964
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance at 31 December 2007 45,485 382 2,381 48,248
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Balance at 1 January 2008 45,485 382 2,381 48,248
---------------------------------------------------------------------------
Balance at 30 June 2008 64,515 344 3,373 68,232
---------------------------------------------------------------------------
---------------------------------------------------------------------------
4. Deferred Exploration Costs
------------------------------------------------------------------------
Pounds Sterling '000
------------------------------------------------------------------------
Cost
----
----
Balance at 1 January 2007 2,007
Additions 2,347
Exchange adjustments (32)
Balance at 31 December 2007 4,322
------------------------------------------------------------------------
Balance at 1 January 2008 4,322
Additions 1,248
Exchange adjustments (417)
------------------------------------------------------------------------
Balance at 30 June 2008 5,153
------------------------------------------------------------------------
Impairment loss
During the period the Company did not recognize any provision for impairment
against any of its deferred exploration assets
5. Other Non-Current Assets
-------------------------------------------------------------------------
30 June 31 December
2008 2007
Pounds Pounds
Sterling '000 Sterling '000
-------------------------------------------------------------------------
Bank guarantee 3,757 4,167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As part of the Moolman Contract for the Mowana Mine, in August 2007 Botswana
Pula 50 million was lodged by Messina in favour of Moolman as security for
Messina's obligations under the Contract. At the request of the Company, on 29
July 2008 Moolman released such funds and Messina agreed to re-instate such
security by 30 June 2009. In consideration for the release of such funds,
Messina granted Moolman a lien over the run of mine ore, ore stockpiles and
copper concentrate at the Mowana site.
6. Inventories
-------------------------------------------------------------------------
30 June 31 December
2008 2007
Pounds Pounds
Sterling '000 Sterling '000
-------------------------------------------------------------------------
Stockpile Inventories 638 -
Consumables 267 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Inventories 905 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Derivative Financial Assets
----------------------------------------------------------------------------
30 June 31 December
2008 2007
Pounds Pounds
Sterling Sterling
'000 '000
----------------------------------------------------------------------------
Copper put contracts designated as a cash flow hedge 66 1,383
Copper put contracts designated as fair value through
income statement - 458
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Derivative Financial Assets 66 1,841
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Share Capital
----------------------------------------------------------------------------
Pounds
Sterling
No. of shares '000
----------------------------------------------------------------------------
Authorised
At 31 December 2005 and 31 December 2006
Ordinary shares of 1p each 495,000,000 4,950
Redeemable preference shares of Pounds Sterling 1 each 50,000 50
----------------------------------------------------------------------------
Issued:
Balance at 1 January 2007 130,507,185 1,305
Ordinary shares issued on private placement 8,367,772 84
Ordinary shares issued on exercise of options 700,000 7
----------------------------------------------------------------------------
Balance at 31 December 2007 139,574,957 1,396
Ordinary shares issued on Private placement 7,284,000 73
----------------------------------------------------------------------------
Balance at 30 June 2008 146,858,957 1,469
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shares issued
During 2007, a total of 9,067,772 ordinary shares were issued for net cash
consideration of Pounds Sterling 7,194,078 from the following:
(i) On 29 March 2007 a total of 700,000 ordinary shares were issued for net cash
consideration of Pounds Sterling 163,961 from the exercise of 350,000 share
options to purchase ordinary shares of the Company at Can$0.25 each and 350,000
share options to purchase ordinary shares of the Company at 35p each. These
share options were options originally granted under the Mortbury Limited option
plan.
(ii) On 25 June 2007, a total of 8,367,772 ordinary shares were issued at a
price of 11 Botswana Pula (approximately Pounds Sterling 0.89 and C$1.89) per
ordinary share, raising total gross proceeds of 92,045,492 Botswana Pula
(approximately Pounds Sterling 7.4 million). The Company paid a capital raising
fee in cash to Capital Corporate Finance (Pty) Ltd. (Gaborone, Botswana) equal
to 5% (exclusive of taxes) of the proceeds raised pursuant to the private
placement.
On 8 February 2008, a total of 7,284,000 ordinary shares at a price of Pounds
Sterling 0.70 per ordinary shares, raising total net proceeds of Pounds Sterling
5,098,800. This private placement was completed as part of the finalization of a
comprehensive off-take agreement for the Mowana Mine concentrates.
9. Share based payments
African Copper has established a share option scheme with the purpose of
motivating and retaining qualified management and to ensure common goals for
management and the shareholders. Under the African Copper share plan each option
gives the right to purchase one African Copper ordinary share. For options
granted the vesting period is generally up to three years. If the options remain
unexercised after a period of 10 years from the date of grant, the options
expire. Furthermore, options are forfeited if the employee leaves the Company.
In 2005 all options were granted at 76p and in 2006 and 2007 all options were
granted at 77.5p.
As at 30 June 2008, ordinary share options held by directors and employees were
as follows:
---------------------------------------------------------------------
Outstanding Weighted average Exercisable
Exercise price Number of remaining contractual Number of
(Pounds Sterling) Options life (years) Options
---------------------------------------------------------------------
0.35 500,000 6.48 500,000
0.76 2,505,000 6.84 2,485,000
0.775 8,210,000 8.39 6,923,331
---------------------------------------------------------------------
11,215,000 9,908,331
---------------------------------------------------------------------
---------------------------------------------------------------------
During the periods ended 2008 and 2007, director and employee stock options were
granted, exercised and cancelled as follows:
----------------------------------------------------------------------------
Weighted average
exercise price
in Pounds Sterling per
share Options
----------------------------------------------------------------------------
At 1 January 2007 0.73 13,319,872
Granted 0.775 200,000
Forfeited 0.77 (1,404,872)
Exercised 0.23 (700,000)
----------------------------------------------------------------------------
At 31 December 2007 0.76 11,415,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Granted - -
Forfeited 0.775 (200,000)
Exercised - -
----------------------------------------------------------------------------
At 30 June 2008 0.75 11,215,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at the end of the period 0.75 9,908,331
The total expense in respect of share based payments for the period was Pounds
Sterling 72,491(2007: Pounds Sterling 637,967), of which Pounds Sterling 43,686
(2007:Pounds Sterling 439,012) was recorded as an expense in the income
statement and Pounds Sterling 28,805 (2007: Pounds Sterling 198,955) was
capitalised as part of deferred exploration costs.
10. Interest bearing borrowings
On 4 April 2008 Messina, the Company's wholly-owned subsidiary, completed the
private placement of Botswana Pula 150 million (Pounds Sterling 11.2 million) of
fixed rate unsecured notes. The notes have been priced at 14.0 percent annual
interest with a maturity of 7 years
11. Asset retirement obligations
The Company estimates the total discounted amount of cash flows required to
settle its asset retirement obligations at 30 June 2008 is Pounds Sterling
1,486,243 (2007 - Pounds Sterling 464,078). The estimate is based on the
estimated 7 year open pit mine life, Botswana inflation estimate of 10% and a
discount factor of 14% being the coupon on the Botswana interest bearing
borrowings. Although the ultimate amount to be incurred is uncertain, the
independent Environmental Impact Statement, completed on the Mowana Mine by
Water Surveys Botswana (Pty) Limited in September 2006, using an assumption that
mining continues to 2023, estimated the undiscounted cost to rehabilitate the
Mowana Mine site of 24.3 million Botswana Pula.
Under the terms of the Mining Licence, by the end of the first financial year in
which copper is produced and sold, the Company must establish a trust fund to
provide for rehabilitation of the Mowana Mine site once the mine closes. The
Company will annually make contributions to this fund over the life of the mine
so that these capital contributions together with the investment income earned
will cover the anticipated costs. At the end of each financial year the Company
will reassess the estimated remaining life of mine as well as the cost to
rehabilitate the mine site and adjust its annual contributions accordingly.
12. Commitments
The majority of the Company's contractual obligations relate to commitments in
respect of development expenditures for the completion of construction at the
Mowana Mine and termination payments to the mining contractor at the Mowana Mine
should the Company terminate the mining contract early. In respect of this
mining contract, the Company's subsidiary was required to obtain a bank
guarantee in support of certain payment obligations in the mining contract. (See
Note 5 - Other Non-Current Assets). At 30 June 2008 the Company's subsidiary
holds a bank guarantee of Pounds Sterling 3.8 million (50 million Botswana Pula)
in respect of these payment obligations.
At 30 June 2008, commitments under such agreements total Pounds Sterling 8.9
million:
-------------------------------------------------------------------------
Contractual Obligations Total 2008 2009 2010
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
-------------------------------------------------------------------------
Goods, services and equipment (a) 4,556 4,101 455 -
Mining contract (b) 3,085 3,085 - -
Matsitama exploration licences (c) 1,052 876 176 -
Lease agreements (d) 227 104 85 38
-------------------------------------------------------------------------
8,920 8,166 716 38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(a) The Company and its subsidiaries have a number of agreements with arms-
length third parties who provide a wide range of goods and services and
equipment. The primary commitments relate to the engineering,
procurement, construction and management contract ("EPCM") for the
construction of the flotation concentrator and related housing and mine
facilities at the Mowana Mine.
(b) In the event of the optional termination of the Moolman Mining Botswana
(Pty) Ltd. mining contract by the Company, a maximum early termination
payment of approximately Pounds Sterling 2.6 million, which payment may
be reduced, depending upon the number of months notice given, to Pounds
Sterling nil upon 6 months notice, together with demobilization charges
would be payable.
(c) Under the terms of the Company's prospecting licences Matsitama is
obliged to incur certain minimum expenditures.
(d) The Company has entered into agreements for lease premises for various
periods until 5 November 2010.
13. Related party transactions
The following amounts were paid to companies in which directors of the group
have an interest and were incurred in the normal course of operations and are
recorded at their exchange amount;
----------------------------------------------------------------------------
Balance
Six Months Ended Outstanding at
30 30 30 31
June June June Dec
2008 2007 2008 2007
Pounds Pounds Pounds Pounds
Sterling Sterling Sterling Sterling
'000 '000 '000 '000
----------------------------------------------------------------------------
Amount paid to Summit Resource
Management Limited, a company
controlled by D Jones, for the
provision of fully serviced office
accommodation in Canada and
reimbursed expenses 38 40 2 4
On 1 July 2006 the Company entered into
an agreement with Pickax International
Corporation ("Pickax") to provide the
services of Mr. Joseph Hamilton, a
director and Chief Executive Officer
of the Company. On 12 June 2008 the
Company signed a Leaving Agreement (the
"Agreement") with Pickax and Joseph
Hamilton who resigned as a director
and CEO of the Company and was paid
Pounds Sterling 173,040 (inclusive of
Canadian Goods & Services Tax) for
compensation of loss of office and
termination 233 82 - -
Amount paid to Aegis Instruments,
Micromine and MGE Consulting, companies
controlled by a director of a
subsidiary, in respect of provision of
geophysical and geological consulting,
administration services and
reimbursed expenses 68 - 67 -
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