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MD#&#A#AND#CONSOLIDATED#FINANCIAL#STATEMENTS#
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YEAR#ENDING:#
DECEMBER#31,#2011!
LUCARA DIAMOND CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2011
Management’s discussion and analysis (“MD&A”) focuses on significant factors that have affected Lucara
Diamond Corp. (the “Company”) and its subsidiaries performance and such factors that may affect its
future performance. In order to better understand the MD&A, it should be read in conjunction with the
audited consolidated financial statements of the Company for the year ended December 31, 2011, which
are prepared in accordance with International Financial Reporting Standards. All amounts are expressed
in U.S. dollars unless otherwise indicated. The effective date of this MD&A is March 22, 2012.
Some of the statements in this MD&A are forward-looking statements that are subject to risk factors set
out in the cautionary note contained herein.
Additional information about the Company and its business activities is available on SEDAR at
www.sedar.com.
HIGHLIGHTS
Corporate
• Closed a CDN$60 million private placement in February 2011.
• Completed a $50 million debenture financing in early July 2011.
• The Company commenced trading on the Toronto Stock Exchange in August 2011, the Botswana
Stock Exchange in July 2011 and the NASDAQ QMX First North in Sweden in November 2011.
•
In February 2012, the Company received a commitment letter from the Bank of Nova Scotia for a
$25 million revolving term credit facility. Upon closing of the facility, the Company intends to use
the facility to fund ongoing operations primarily at the Karowe Mine in Botswana.
Karowe Mine - Botswana (formerly AK6 Diamond Project)
• Construction of the Karowe mine is expected to be substantively complete by the end of March
with commissioning scheduled for April.
• As at December 2011, the project had achieved 1,000,000 hours without a lost time injury (LTI)
and no environmental incidents have been recorded.
• The project is trending within the approved capital budget of $120 million, and expenditure to
the end of December 2011 was 71% of budget with a total of 97% of the capital budget being
committed.
• The Company commissioned an updated valuation of the Karowe diamonds recovered to date,
resulting in a 24% increase in overall modeled value to $301 per carat at a 1.5 mm cut-off size.
•
In December 2011, the Company officially renamed the AK6 Diamond Project to the Karowe Mine
to better reflect the significance of the new mine. The name Karowe means “precious stone” in
the local dialect.
• The overhead power line from the Orapa sub-station to site has been completed. The Karowe
sub-station has been commissioned providing direct access to grid power.
•
In Gaborone, the diamond sorting, sales and marketing offices have been completed and senior
diamond sorting personnel have been recruited. The installation of the security systems and
stock control systems has commenced.
Mothae Diamond Project - Lesotho
• Total diamond sales in 2011 were 16,659 carats for gross proceeds of $14.6 million (average of
$881 per carat). A sale of 7,190 carats of diamonds in December 2011 realized gross proceeds
of $6.4 million (average of $893 per carat). The December sale included a 56.62 white Type IIa,
which sold for $2.01 million – a record price for a single stone produced from Mothae.
• An upgrade to the bulk sample plant crushing circuits was completed enabling it to handle hard
fresh kimberlite which is to be mined in 2012. The diamond recovery circuit was upgraded by
interlocking of the Bourvestnik high intensity x-ray diamond recovery unit into the primary plant
material flow.
• The Mothae Project Environmental Impact Assessment study (EIA) based on the Company’s 2009
Conceptual Mining Study was completed and submitted to the Lesotho Department of
Environment. The EIA was approved by the Lesotho Department of Environment in the fourth
quarter of 2011.
• During October, a contract was awarded to ADP Project, to conduct a pre-feasibility level study in
support of preliminary economic assessment on Mothae. The objective of this study will be to
gain an increased understanding of the economic potential of the Mothae project through greater
definition of the capital and operating costs required for the development of a mine at Mothae.
• The Phase 2 delineation drilling program was initiated. The drilling program is designed to extend
the Mothae geologic model from 200 meter depth to 320 meter depth to provide sufficient detail
for modelling the internal geology of the Mothae pipe. Incorporated into the drilling program are
core holes specifically designated to collect material for ore dressing studies and core holes
specifically designated to collect geotechnical information for open pit mine design.
INTRODUCTION
The Company is a diamond development company focused in Africa. The business of the Company
consists of the acquisition, exploration, development and operation of diamond properties. The
Company’s head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock
Exchange, the Botswana Stock Exchange and NASDAQ QMX First North in Sweden under the symbol
“LUC”.
The principal assets of the Company and the focus of the Company’s development and exploration
activities are its interests in assets in Lesotho and Botswana. Following an evaluation of the exploration
work conducted to date on the Kavango Project in eastern Namibia, by the Company and its joint venture
partner, Namdeb Diamond Corporation, the Company has made a determination not to renew the
licenses. The Company continues to actively seek development and growth opportunities to bring new
projects into its portfolio.
!
DEVELOPMENT AND EXPLORATION UPDATE
The following summarizes the Company’s current land holdings:
Country
Botswana
Lesotho
Project Name and Interest Held
Boteti AK6 Diamond License
(100% interest)
Mothae Diamond Mining Lease
(75% interest)
Area (km2)
15.3
20.0
Karowe Mine, Botswana
The Company was granted a mining license in 2008 over the AK6 Diamond Project which is located in
central Botswana and is part of the Orapa/Letlhakane kimberlite district, one of the world’s most
prolific diamond producing areas. The kimberlite consists of three lobes, South, Center and North, of
which the South Lobe makes up approximately 75% of the kimberlites’ resource potential. The pipe
has an area of 4.2 hectares at the surface which expands to 7 hectares at a depth of 120 meters.
In July 2010, a formal decision was made to proceed with the construction of the AK6 diamond mine
which is estimated to require a capital investment of approximately $120 to $130 million (based on a
ZAR/USD exchange rate of R7.53), which includes the process plant and all mine site and off-site
infrastructures. In December 2011, the AK6 diamond mine was renamed to the Karowe Mine.
The project has an Indicated Resource of 51 million tonnes (“mt”) containing an estimated 8.2 million
carats (“ct”) of diamonds. The mine design delineates a Probable Reserve of 36.2 million tonnes of
ore, containing an estimated 6.3 million carats of diamonds at a 1.5mm bottom cut-off size, in an
open pit to a depth of 324 meters. The reserves will be mined over an estimated 15 year life. The
process plant has been designed at an estimated throughput rate of 2.5 million tonnes per annum
(“mtpa”). Diamond recovery is estimated at approximately 400,000 carats per year at a November
2011 diamond price of $301/ct.
Performance during the year ended December 31, 2011
In 2011, activities across engineering, procurement, construction and the development of the
operations team advanced the project significantly. By year end, engineering, procurement and
fabrication activities were essentially complete and project construction was standing at over 90%
complete. Delays to the project schedule as a result of the steel industry industrial action in July
impacted the overall project schedule and the handover to operations shifted from the end of 2011 to
early in the second quarter of 2012.
As at December 2011, the project had achieved 1,000,000 hours without a lost time injury (LTI) and
no environmental incidents have been recorded.
Environmental and community relations activities as detailed in the Environmental Management Plan
were well executed throughout the year. A competition to name the mine as it transitions into
production was well supported by the local communities and schools and Karowe (meaning “previous
stone” in the local dialect) was selected. Several community projects, including village clean-up
campaigns and health and wellness initiatives, in conjunction with the community members were
completed. Archaeological monitoring of all construction areas continued throughout the year and no
artefacts were discovered on site or at the Boteti housing sites in Letlhakane.
!
The 25km, 33kVA power-line from the Orapa sub-station to the Karowe Mine site sub-station was
completed during the last quarter of 2012 and handed over to BPC. The mine switched to grid power
in time to support commissioning activities.
The mine operations contract with Kalcon was concluded mid-year and the contractor mobilized to site
in October. The initial mine development has gone according to plan, ore boundaries match the
resource model and initial ore benches have been established. At December 31, 2011, an ore stockpile
of 230,000 tonnes [containing 87,000 carats (37.8 cpht)] had been established to support
commissioning activities with 552,000 tonnes of waste having been removed and stockpiled.
The process plant operations and maintenance contract was also concluded, and the Company’s
contractor, Minopex has site established. Minopex are working with the operations staff on process
stores and operational procedures and are also fully integrated with the commissioning planning.
The operations senior management, technical and support staff were successfully recruited as
required to support project advancement throughout the year.
In Gaborone, the sales and marketing offices were completed and the senior staff recruited. The
installation of the security systems and the stock control systems commenced in the fourth quarter.
Mothae Diamond Project, Lesotho
The Mothae project is located in northeast Lesotho and is a large low grade kimberlite which contains a
significant population of large, high value Type IIa diamonds.
Mothae Diamonds (PTY) Ltd. (“Mothae Diamonds”), a 75% owned subsidiary of the Company, holds a
100% interest in the Mothae project. The other 25% is owned by the Government of Lesotho. The
Company, through a wholly owned subsidiary, is the project operator. One half of the project interest
held by the Government (i.e. 12.5% of the project interest) is a free carried interest and the other 12.5%
will ultimately be paid for by the Government through its share of future project dividends.
In 2010, the Company commenced a trial mining program, based on results from a 100,000 tonne bulk
sample completed in 2009. The trial mining program is designed to sample and process up to an
additional 620,000 wet tonnes of kimberlite from various kimberlite domains identified within the pipe to
confirm the occurrence of high value Type IIa diamonds and to better assess the economic potential of
the Mothae kimberlite. Sealed tender diamond sales are being undertaken to establish diamond value. In
2011, diamond sales were conducted in March and December.
!
Performance during the year ended December 31, 2011
Mothae Diamonds processed 31,488 dry tonnes (36,430 wet tonnes) of kimberlite in the fourth
quarter of 2011 recovering 796.97 carats of diamond. In 2011, Mothae Diamonds processed 208,293
dry tonnes (244,532 wet tonnes) of kimberlite recovering 12,157.35 carats of diamond. Table 1
summarizes Mothae production for the trial mining program which commenced in June 2010.
Table1. Mothae Trial Mining Results as of December 31, 2011
Fiscal Period
2010
January 1 to
September 30,
2011
October 1 to
December 31,
2011
Bulk
Sample
F1D
C4A
C5A
C6A
C8A
C9A
G2A
F2A
G2B
G3A
C7A
C6B
E2A
Totals
Wet
Tonnage
1,769
33,785
58,427
8,122
58,590
47,797
40,185
59,692
25,931
34,497
21,287
11,215
3,928
405,225
Dry
Tonnage Stones Carats*
Average
Stone Size
(cts/stone)
1,592
29,649
48,542
7,296
49,152
40,370
33,691
50,181
22,689
29,874
18,425
9,592
3,471
77.65
759.23
1,120.07
260.50
1,442.13
1,940.71
1,909.78
1,979.66
1,286.89
1,654.70
403.20
348.02
45.75
344,524 29,222 13,228.29
111
1,458
3,133
529
3,522
3,841
4,256
4,083
3,022
3,722
875
572
98
0.70
0.52
0.36
0.49
0.41
0.51
0.45
0.48
0.43
0.44
0.46
0.61
0.47
0.45
Dry
Grade
(cpht)*
4.88
2.56
2.31
3.57
2.93
4.81
5.67
3.95
5.67
5.54
2.19
3.63
1.32
3.84
* All samples processed using a bottom cut-off size of 2mm; carats and sample grade represent
diamonds greater than 2mm in size.
Plant throughput was reduced in the fourth quarter of 2011 as a result of a shutdown in November to
complete upgrades to the plant crushing and diamond recovery circuits. These included integration of
a new secondary crushing circuit required to handle harder kimberlite material as mining operations
move deeper into less weathered, fresher kimberlite and interlocking of a Bourevestnik high intensity
diamond recovery unit into the main plant circuit. In December, the plant operated at a reduced
throughput as part of the commissioning of these upgrades.
Samples G3A, C7A and C6B were completed in the fourth quarter with overall results shown in Table
1. A small tonnage of sample E2A was also processed as part of the commissioning of plant upgrades.
The bulk of sample G3A was processed in the third quarter of 2011 and the sample was completed in
the fourth quarter. A total of 3,722 diamonds weighing 1,654.70 carats were recovered from 29,874
dry tonnes (34,497 wet tonnes) yielding a sample grade of 5.54 carats per hundred tonnes (cpht) and
an average stone size of 0.44 carats/stone. Recoveries included 2 stones between 10 and 20 carats,
19 stones between 5 and 10 carats and 68 stones between 2 and 5 carats. The three largest
diamonds recovered were 19.94, 11.81 and 10.97 carats.
Sample C7A yielded 875 diamonds weighing 403.20 carats from 18,425 dry tonnes (21,287 wet
tonnes) for a sample grade of 2.19 cpht. Recoveries included one diamond weighing 56.62 carats, 4
stones between 5 and 10 carats and 14 stones between 2 and 5 carats. The three largest diamonds
recovered were 56.62, 8.06 and 6.62 carats.
!
Sample C6B produced 572 diamonds weighing 348.02 carats from 9,592 dry tonnes (11,215 wet
tonnes) for a sample grade of 3.63 cpht. C6B yielded one stone larger than 10 carats, 6 stones
between 5 and 10 carats and 18 stones between 2 and 5 carats. The three largest diamonds
recovered were 10.52, 8.59 and 8.58 carats. Sample C6B comprised the remaining portion of sample
C6A which was excavated and partially processed in 2010 (Table 1). Sample C6B is that portion of the
C6 sample which was stockpiled pending upgrade of the process plant crushing circuits.
No grease table audits of x-ray recovery tailings were conducted during the quarter and diamond
grades reported above are subject to change pending audit results.
Tonnage estimates are based on daily plant weightometer readings and moisture content
measurements to determine a dry tonnage estimate. The process plant is being operated by Minopex
under contract to Mothae Diamonds and operates at a 2mm bottom cut off size for diamond recovery.
Diamond recovery and characterization work is carried out by the Mothae Diamonds diamond sorting
staff with recovery results being monitored and reported by Remote Exploration Services, also under
contract to Mothae Diamonds.
In August 2011, Mothae Diamonds acquired a Bourevestnik X-ray (high powered X-ray) diamond
recovery machine in an effort to improve recovery of low luminescent, potentially high value Type IIa
diamonds. The Bourevestnik unit was initially tested and commissioned in an audit capacity to audit
recovery tailings from the Flowsort and VE x-ray diamond recovery units in the main plant circuit. In
the fourth quarter of 2011, the Bourevestnik unit was interlocked into the main plant circuit as the
primary large diamond recovery facility, bypassing the Flowsort unit, which has been taken offline.
During the year, a primary crushing unit and a secondary crushing unit were installed and
commissioned. Both units are required to efficiently process harder kimberlite and basalt xenoliths and
in particular, to process unweathered kimberlite samples that are planned in 2012.
A drilling contact was awarded to Remote Drilling Services to conduct a 5,400m delineation drilling
program. The objectives of the program are to define the internal geology of the Mothae kimberlite as
well as to extend the currently defined kimberlite volume from a depth of 200m to 320m, to collect
suitable sample material for ore dressing studies and to collect core for geotechnical evaluation.
During October 2011, a contract was awarded to ADP Projects to complete a preliminary economic
assessment of the Mothae kimberlite. The objective of this study will be to gain an increased
understanding of the economic potential of the Mothae project through greater definition of the
capital and operating costs required for the development of a mine at Mothae.
Two diamond sales were completed during the year. The first took place in March 2011 which sold a total
of 9,379 carats for gross proceeds of $8.2 million (average of $871 per carat). The second took place in
December 2011 which sold a total of 7,190 carats for gross proceeds of $6.4 million (average of $893 per
carat).
During the third quarter of 2011, Mothae Diamonds completed an Environmental Impact Assessment
(EIA) of the Mothae project based on a conceptual mining study completed by the Company in 2009. The
EIA has been submitted to and approved by the Lesotho Department of Environment.
!
Namibia
Following an evaluation of the exploration work conducted to date on the Kavango Project in eastern
Namibia by the Company and its joint venture partner, Namdeb Diamond Corporation, the Company
has made a determination not to renew the licenses which expired at October 29, 2011. The Company
is currently preparing the documentation required to formally relinquish its interest in all ten of the
prospecting licenses.
SELECT ANNUAL FINANCIAL INFORMATION
Year ended
December 31,
2011
Year ended
December 31,
2010
Five months ended
December 31,
2009
(Cdn GAAP)
$
6,618,233
8,182,622
(2,339,282)
$
$
11,578,718
4,455,697
-
591,370
2,004,577
-
18,126,567
13,309,889
12,809,199
$
0.05
$
0.06
$
0.12
$ 241,287,381
43,349,815
$
145,533,082
567,697
$ 143,872,879
18,275,048
Statement of operations data
Exploration expenditures
Operating expenses
Gain on sale of diamonds
Net loss attributable to shareholders
of the Company
Data per common share
Basic and diluted loss per common
share
Balance sheet data
Total assets
Long-term liabilities
RESULTS OF OPERATIONS
The Company’s net loss attributable to the shareholders of the company for the year ended December
31, 2011 was $18.1 million or $0.05 per share compared to a net loss for the year ended December 31,
2010 of $13.3 million or $0.06 per share. The net loss for the five months ended December 31, 2009 was
$12.8 million or $0.12 per share.
The higher net loss for the current period as compared to the two prior periods presented is primarily due
to increased expenditures relating to the trial mining program at Mothae offset by two diamond sales
during the year. In addition, the Company incurred administrative expenses associated with the
Company’s listing on the TSX, the Botswana Stock Exchange and the NASDAQ QMX First North in
Sweden, a donation to the Lundin Foundation and an overall increase in corporate development initiatives
during the year.
The operating losses are a reflection of the Company’s status as a company which is developing diamond
deposits and is not yet producing revenue. The Company currently has no main source of income
although revenue is being generated through the sale of diamonds recovered during the trial mining
program at Mothae. The Company’s goal is to develop profitable diamond mining operations at both
Mothae and Karowe and until this goal is achieved, losses are expected to continue.
!
SUMMARY OF QUARTERLY RESULTS (unaudited)
Three months
ended
Dec-11
Sept-11
Jun-11
Mar-11
Dec-10
Sep-10
June-10
Mar-10
A. Total revenues
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
B. Exploration
expenditures
C. Administration
expenses
(564,851)
3,116,383
2,866,454
1,200,247
2,688,388
2,508,938
3,841,882
2,539,510
2,254,982
1,304,914
1,845,748
2,776,978
1,821,675
815,463
890,349
928,210
D. Net loss
5,438,374
5,453,107
5,921,521
1,860,890
4,821,819
3,143,966
4,298,452
3,366,995
E. Loss per share
(basic and diluted)
0.01
0.01
0.02
0.01
0.02
0.01
0.02
0.02
Operating expenses and net loss, quarter over quarter, vary in relation to the level of activities
undertaken by the Company during the financial quarters reported. These activities include corporate
development initiatives, net exploration expenditures incurred and stock-based compensation recognized
during the quarter.
Exploration expenditures
The exploration expenditures for the past six quarters relate primarily to the on-going trial mining
program, which commenced in May 2010 at Mothae, offset in part by the value of diamonds recovered
and sold, based on management’s best estimate at the time of recovery. The difference between the
carrying value and the subsequent proceeds from the sale of diamonds is treated as a gain or loss as it is
a change in market conditions during the period. Included in exploration expenditures for the first half of
2010 is the cost to complete the definitive feasibility study of $2.7 million for the Karowe Mine. Based on
the results of the study, the project was determined to be commercially feasible in July 2010, and
pursuant to the Company’s accounting policy for mineral properties, expenditures incurred thereafter
have been capitalized.
Administration expenses
The increase in administration expenses for the three months ended December 31, 2011 compared to the
same quarter in 2010 is due primarily to the costs associated with the Company’s listing on the NASDAQ
QMX First North in Sweden and additional salaries.
Net loss
Net loss for the three months ended December 31, 2011 was $5.4 million reflecting increased
administrative expenses, financing fees and foreign exchange losses.
The net loss for the year ended December 31, 2011 was $18.7 million. This reflects the exploration and
depreciation costs at Mothae, net of two diamond sales of 16,571 carats for gross proceeds of $14.6
million. The sales included the rough diamond inventory that was held at December 31, 2010, which was
valued using the Company’s best estimate of the lower of cost and net realizable value. The Company
has recorded a gain on the sale of this inventory in the amount of $2.3 million. The remaining proceeds
from the sales have been netted against exploration expenditures.
!
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2011, the Company had cash and cash equivalents of $48.6 million and working
capital of $29.0 million, as compared to cash and cash equivalents of $32.9 million and working capital of
$31.2 million at December 31, 2010.
Cash used in operating activities for the year ended December 31, 2011 was $11.7 million, and consists
mainly of the net loss of $18.7 million adjusted for the impact of non-cash items including depreciation
expense of $2.6 million, and changes in non-cash working capital items.
Net cash from financing activities for the year ended December 31, 2011 was $107.4 million, results from
a private placement completed in February 2011, and the completion of a $50 million debenture financing
in July 2011.
Net cash used in investing activities for the year ended December 31, 2011 was $77.2 million for
expenditures primarily related to the development of the Karowe Mine. In conjunction with the
development of the Karowe Mine, the Company has purchase commitments of $11.5 million and
estimated remaining capital expenditures of approximately $35 million.
In February 2012 the Company received a commitment letter from the Bank of Nova Scotia for a $25
million revolving term credit facility. Upon closing of the facility, the Company intends to use the facility
to fund ongoing operations primarily at the Karowe Mine in Botswana. The availability of the facility is
subject to the completion of final documentation and customary conditions precedent. The two year
facility will be secured by the assets of the Company and certain of its subsidiaries. Up to $15 million may
be advanced prior to the delivery of security over the Company’s Karowe assets.
FUTURE PLANS AND OUTLOOK
Boteti Karowe Mine, Botswana
The Company expects construction of the 2.5 mtpa production facility at the Karowe mine to be complete
within the first quarter of 2012. As construction activities are completed, available systems will be
commissioned with full plant commissioning being completed in the second quarter of 2012. This will be
followed by the ramp-up to full production which will include plant optimization activities.
The Company expects the first sale of diamonds from Karowe to take place at its dedicated sales and
marketing facilities in Gaborone in the second quarter of 2012.
!
!
Mothae Diamond Project, Lesotho
The Company intends to continue with trial mining program and project evaluation through to the end of
the third quarter of 2012. In the first half of 2012, efforts will focus on mining and processing of 30,000
to 50,000 tonnes of fresh unweathered kimberlite to determine the diamond recovery characteristics of
this material which makes up the bulk of Mothae’s resource potential.
The completion of the 5,400m delineation drilling program by Remote Drilling Services is anticipated in
the second quarter of 2012 with subsequent geological modelling being carried out in the third quarter.
In addition, by the third quarter of 2012, the Company expects the completion of studies by ADP Projects
which include geologic and resource modelling of the Mothae kimberlite with associated mine design, and
detailed ore dressing studies to support process plant design. A preliminary economic assessment would
then be completed in the fourth quarter of 2012.
The Company expects ongoing diamond recoveries and periodic sales of Mothae’s diamonds during the
trial mining phase.
ADJUSTMENT OF EQUITY TRANSFER TO THE GOVERNMENT OF LESOTHO (“GOL”)
During the three months ended March 31, 2011, the Company re-evaluated its accounting for the
transfer of shares and a share option in Mothae to the GOL during 2010. Previously, the Company had
accounted for the transfer as an expropriation for no proceeds. The Company, after further review,
has now concluded that it made a share-based payment in exchange for a mining license, which is
capitalized as an intangible asset. The Company has made the following adjustments, as at and for
the year ended December 31, 2010:
• Increased mineral property costs by $3,530,120, representing the fair value of the intangible
mining rights received from the GOL as based upon the fair value of the shares in Mothae as of
June 2010;
• Increased non-controlling interest (“NCI”) by $2,263,286, representing the fair value of the
12.5% “free-carried” interest in Mothae transferred to the GOL as of June 2010;
• Increased contributed surplus by $1,266,834, representing the fair value, as of June 2010, of the
GOL’s option on the additional 12.5% interest in Mothae, which will beneficially transfer to the
GOL upon their full payment for these shares. These shares are to be paid for by the GOL on a
contingent basis, such that they are payable only from the first $1.825 million of dividends on
these shares. Management have fair valued the option on these shares by using the fair value
established for the NCI portion above and deducting the fair value of the $1.825 million,
discounted at 10% per annum for a period of approximately 6 years until the cash flows from
Mothae are estimated to be sufficient to cover the required payment; and
• Decreased the NCI by $708,049 representing the NCI share of losses of Mothae from the date of
the related Shareholder Agreement, June 23, 2010, whereby the GOL received its 12.5% free-
carried interest, to December 31, 2010. The increased allocation of the losses of Mothae for the
year ended December 31, 2010 result in an equivalent decrease in the loss attributable to the
shareholders of the parent company for the year and to the deficit at December 31, 2010.
The option on the 12.5% interest, which has been treated as contributed surplus, will continue to be
treated as contributed surplus and no attribution of the income or losses of Mothae will be recorded
until the shares have been paid for by way of future dividends. At that time the amount will be
transferred from contributed surplus to NCI and the future NCI attribution will be based on 25%.
!
Management has deemed the magnitude of the adjustment to not be material, and accordingly has
determined that a restatement of the December 31, 2010 consolidated financial statements was not
warranted.
CHANGES IN ACCOUNTING POLICIES
International Financial Reporting Standards (“IFRS”)
The Company has prepared its December 31, 2011 audited consolidated financial statements in
accordance with Canadian generally accepted accounting principles as set out in the Handbook of the
Canadian Institute of Chartered Accountants which changed to IFRS, with an effective transition date
of January 1, 2010. Subject to certain transition elections disclosed in Note 5 to the audited
consolidated financial statements, the Company has consistently applied the same accounting policies
in its opening IFRS statement of financial position at January 1, 2010 and throughout the periods
presented, as if these policies had always been in effect.
The Company’s IFRS accounting policies are disclosed in Note 3 of the audited consolidated financial
statements for the year ended December 31, 2011. Reconciliation between the Company’s financial
statements as previously reported under Canadian GAAP and current reporting under IFRS is detailed
in Note 5 of the audited consolidated financial statements.
!
NEW IFRS PRONOUNCEMENTS AND AMENDMENTS TO OTHER STANDARDS
Unless otherwise noted, the following revised standards and amendments are effective for annual periods
beginning on or after January 1, 2013 with earlier application permitted. The Company has not yet
assessed the impact of these standards and amendments or determined whether it will early adopt them.
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS
39 for debt instruments with a new mixed measurement model having only two categories:
amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring
equity instruments. Such instruments are either recognized at fair value through profit or loss or at
fair value through other comprehensive income. Where equity instruments are measured at fair
value through other comprehensive income, dividends are recognized in profit or loss to the extent
that they do not clearly represent a return of investment; however, other gains and losses (including
impairments) associated with such instruments remain in accumulated comprehensive income
indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried
forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement,
except that fair value changes due to credit risk for liabilities designated at fair value through profit
and loss are generally recorded in other comprehensive income.
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it
has power over the investee, is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12,
Consolidation—Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial
Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a
joint venture or joint operation. Joint ventures will be accounted for using the equity method of
accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities,
revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS
31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions
by Venturers.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in
other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures and also introduces significant additional
disclosure that address the nature of, and risks associated with, an entity’s interests in other entities.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and
disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price
that would be received to sell an asset, or paid to transfer a liability in an orderly transaction
between market participants, at the measurement date. Under existing IFRS, guidance on measuring
and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and does not always reflect a clear measurement basis or consistent disclosures.
a)
b)
c)
d)
e)
!
f)
g)
There have been amendments to existing standards, including IAS 27, Separate Financial
Statements (IAS 27), and IAS 28, Investments in Associates and Joint Ventures (IAS 28). IAS 27
addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated
financial statements. IAS 28 has been amended to include joint ventures in its scope and to address
the changes in IFRS 10 – 13.
IAS 19, Employee Benefits, has been amended to make significant changes to the recognition and
measurement of defined benefit pension expense and termination benefits and to enhance the
disclosure of all employee benefits. The amended standard requires immediate recognition of
actuarial gains and losses in other comprehensive income as they arise, without subsequent
recycling to net income. Past service cost (which will now include curtailment gains and losses) will
no longer be recognized over a service period but instead will be recognized immediately in the
period of a plan amendment. Pension benefit cost will be split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-service cost, settlements and
curtailments); and (ii) finance expense or income. The finance expense or income component will be
calculated based on the net defined benefit asset or liability. A number of other amendments have
been made to recognition, measurement and classification including redefining short-term and other
long-term benefits, guidance on the treatment taxes related to benefit plans, guidance on risk/cost
sharing features, and expanded disclosures.
h)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in OCI into two groups, based on whether or not items may be recycled in the future.
Entities that choose to present OCI items before tax will be required to show the amount of tax
related to the two groups separately. The amendment is effective for annual periods beginning on or
after July 1, 2012 with earlier application permitted.
CRITICAL ACCOUNTING ESTIMATES
The application of certain accounting policies requires the Company to make estimates that affect both
the amount and timing of the recording of assets, liabilities, revenues and expenses. Some of these
estimates require judgments about matters that are inherently uncertain.
Note 3 to the audited consolidated financial statements for the year ended December 31, 2011 includes a
summary of the significant accounting policies adopted by the Company. The following policies are
considered to be critical accounting policies since they involve the use of significant estimates.
Mineral properties
The Company carries the acquisition costs of its mineral properties at cost less any provision for
impairment. The costs of each property will be amortized over the economic life of the property on a unit
of production basis. Costs are charged to operations when a property is abandoned or when impairment
in value, other than temporary, has been determined. Exploration costs are charged to operations as
incurred.
The Company undertakes a periodic review of the carrying values of mineral properties and whenever
events or changes in circumstances indicate that their carrying value may exceed their fair value. In
undertaking this review, management of the Company is required to make significant estimates. These
estimates are subject to various risks and uncertainties, which may ultimately have an effect on the
expected recoverability of the carrying values of the mineral properties and related expenditures.
!
Income taxes
Deferred income tax assets and liabilities are determined based on differences between the financial
statement carrying values of assets and liabilities and their respective income tax bases (“temporary
difference”), and losses carried forward. Deferred income tax assets and liabilities are measured using tax
rates that are expected to be applied to the temporary differences when they reverse, based on the laws
that have been enacted or substantively enacted by year end. The effect on deferred income tax assets
and liabilities of a change in tax rates is included in operations in the period in which the change is
substantively enacted. The amount of deferred income tax assets recognized is limited to the extent that
it is probable that future tax profits will be available against which the temporary difference can be
utilized.
Management of the Company is required to exercise judgments and make assumptions about the future
performance of the Company in determining its ability to utilize loss carry-forwards and realize the
benefits of deferred income tax assets.
Stock-based compensation
In calculating the fair value of stock options granted, management is required to make significant
estimates in relation to the future volatility of the Company’s share price and the period in which stock
options will be exercised. Selection of a volatility factor and the estimate of the expected option life will
have a significant impact on costs recognized for stock-based compensation. Estimates concerning
volatility are made with reference to historical volatility, which is not necessarily an accurate indicator of
volatility that will be experienced in the future. Management assumes that stock options will be exercised
prior to their expiry date.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2011, The Company incurred the following expenses with Namdo
Management Services Limited (“Namdo”) and Lundin Foundation (“LF”), companies related by way of
directors in common. In the prior year, the Company incurred air chartered services from Mile High
Holdings Ltd. (“Mile High”), a company associated with the Chairman of the Company. The Company
also incurred professional geological services and laboratory related expenditures from the Mineral
Services Group (“MS Group”), a company that is associated with a director of Company.
Description of services
Related party
2011
2010
Management fees
Donations
Exploration related expenditures
Aircraft charter
Namdo
LF
MS Group
Mile High
$
505,850 $
607,020
125,598
-
349,416
-
639,472
41,064
$
1,238,468 $
1,029,952
OUTSTANDING SHARE DATA
As at the date of this MD&A, the Company had 372,562,749 common shares outstanding and 11,776,300
stock options outstanding under its stock-based incentive plan. As at the same date, the Company had no
stock purchase warrants outstanding.
!
FINANCIAL INSTRUMENTS
The Company classifies financial instruments as financial assets and liabilities at fair value through profit
or loss, available-for-sale investments, loans and receivables or financial liabilities at amortized cost. The
Company’s financial instruments consist of cash and cash equivalents, investments, trade receivables and
other, trade payables and accrued liabilities, due to related parties and long-term debt.
The fair value of the Company’s investments is derived from quoted prices in active markets for identical
assets. The fair value of the Company’s long-term debt approximates their carrying amounts due to the
fact that there have been no significant changes in the Company’s own credit risk. The fair value of all
other financial instruments of the Company approximates their carrying values because of the demand
nature or short-term maturity of these investments.
CONTINGENCIES
Upon completion of the AFD Arrangement Agreement which resulted in the Company holding an
undivided 100% ownership interest in the Karowe Mine, the Company retained certain liabilities related to
legal proceedings initiated by two former directors of AFD against AFD alleging entitlement to a 3% NSR
on production from the Karowe Mine. The claim was heard in the Botswana High Court in early June,
2011. The High Court delivered its ruling in August 2011 dismissing the claims against AFD, with costs
awarded against the plaintiffs.
In September, the Company was notified that the plaintiffs, in the legal proceedings initiated against
AFD, had filed an appeal of the decision of the High Court of Botswana dismissing the plaintiff’s claims
with costs awarded in favor of AFD. At this stage the Company does not have any further details as to
the timing of when the Appeal will be heard.
The Company continues to believe that the claim is without merit as has been determined by the
Botswana High Court, and will continue to vigorously defend the claim.
RISKS AND UNCERTAINTIES
The operations of the Company are speculative due to the high risk nature of its business which includes
acquisition, financing, exploration, development and operation of diamond properties. Material risk factors
and uncertainties, which should be taken into account in assessing the Company’s activities, include, but
are not necessarily limited to, those set below. Any one or more of these risks and others could have a
material adverse effect on the Company.
No operating profit – Need for additional funds – Dilution
The Company has no history of profitable operations and has negative cash flow from operating
activities. The Company has no assurance that additional funding will be available to it for further
development and exploration of its various mineral projects, when required. Further development and
exploration depends upon the Company’s ability to obtain financing through equity or debt financing,
joint ventures or other means. While the Company has been successful in the past in obtaining financing
through the sale of equity securities, there can be no assurance that the Company will be successful in
obtaining additional financing in the amount and at the time required and, if available, that it can be
obtained on terms satisfactory to the Company. Such means of financing typically results in dilution of a
shareholder’s interest, either directly as a result of issuing equity securities or indirectly through dilution
of an interest in one of the Company’s projects.
!
Failure to obtain equity or debt financing on a timely basis may cause the Company to postpone its
exploration and development plans or forfeit rights in some of its projects.
Economic conditions
Unfavorable economic conditions may negatively impact the Company’s financial ability. Unfavorable
economic conditions could also increase the Company’s financing costs, decrease estimated income from
prospective mining operations, limit access to capital markets and negatively impact the availability of
credit facilities to the Company.
Uncertainties related to mineral resource estimates
There is a degree of uncertainty attributable to the calculation of mineral resources and corresponding
grades being mined or dedicated to future production. Until resources are actually mined and processed,
the quantity of resources and grades must be considered as estimates only. In addition, the quantity and
value of reserves or resources may vary, depending on diamond prices. Any material change in the
quantity of resources, grades or stripping ratio may affect the economic viability of the Company’s
properties. In addition, there is no assurance that recoveries in small-scale laboratory tests will be
duplicated in larger-scale tests under on-site conditions, or during production. Determining the economic
viability of a diamond project is complicated and involves a number of variables. It involves extensive
geostatistical analysis due to the highly variable nature of diamond distribution in kimberlite pipes and the
fact that both diamond grade and average diamond value play important roles in determining the viability
of any given diamond project. Since no two diamonds are exactly alike, a significant parcel of diamonds is
needed to gain confidence levels on diamond size distribution and average diamond value necessary to
make any realistic decisions regarding future development.
Diamond prices and marketability
The mining industry, in general, is intensely competitive and there is no assurance that, even if
commercial quantities of diamonds are discovered, a profitable market will exist for the sale of diamonds
produced. Factors beyond the control of the Company may affect the marketability of any diamonds
produced which cannot be accurately predicted, such as market fluctuations, and such other factors as
government regulations, including regulations relating to royalties, allowable production, importing and
exporting of diamonds and environmental protection, any combination of which may result in the
Company not receiving an adequate return on investment capital. Prices received for diamonds produced
and sold are also affected by numerous factors beyond the Company’s control such as international
economic and political trends, global or regional consumption and demand and supply patterns. There is
no assurance that the sale price of diamonds produced from any diamond deposit will be such that they
can be mined at a profit.
Licenses, permits and approvals
The Company’s operations require licenses, permits and approvals from various governmental authorities.
The Company believes that it currently holds and is presently complying in all material respects with all
necessary licenses and permits under applicable laws and regulations to conduct its current operations.
However, such licenses and permits are subject to change in various circumstances and certain permits
and approvals are required to be renewed from time to time. Additional permits or permit renewals will
need to be obtained in the future. The granting, renewal and continued effectiveness of these permits
and approvals are, in most cases, subject to some level of discretion by the applicable regulatory
authority. Certain governmental approval and permitting processes are subject to public comment and
can be appealed by project opponents, which may result in significant delays or in approvals being
withheld or withdrawn.
!
There can be no guarantee the Company will be able to obtain or maintain all necessary licenses and
permits as are required to explore and develop its properties, commence construction or operation of
mining facilities and properties under exploration or development or to maintain continued operations
that economically justify the cost.
Currency risk
The Company’s business is mainly transacted in South African Rand, Botswana Pula, Canadian dollar and
U.S. dollar currencies. As a consequence, fluctuations in exchange rates may have a significant effect on
the cash flows and operating results of the Company in either a positive or negative direction.
Mining and processing
The Company’s business operations are subject to risks and hazards inherent in the mining industry,
including, but not limited to, unanticipated variations in grade and other geological problems, water,
power, surface conditions, metallurgical and other processing problems, mechanical equipment
performance problems, the lack of availability of materials and equipment, the occurrence of accidents,
labour force disruptions, force majeure factors, weather conditions any of which can materially and
adversely affect among other things production quantities and rates, development, costs and
expenditures and production commencement dates.
The Company periodically reviews its life-of-mine planning. Significant changes in the life-of-mine plans
can occur as a result of experience obtained in the course of carrying out its mining activities, changes in
mining methods and rates, process changes, investments in new equipment and technology, diamond
price assumptions and other factors. Based on this analysis, the Company reviews its accounting
estimates and in the event of an impairment may be required to write down the carrying value of its mine
or development property. This process continues for the economic life of mines in which the Company
has an interest.
Environmental and other regulatory requirements
All phases of mining and exploration operations are subject to government regulation including
regulations pertaining to environmental protection. Environmental legislation is becoming stricter, with
increased fines and penalties for non-compliance, more stringent assessments of proposed projects and
heightened responsibility for companies and their officers, directors and employees. Operations at the
Company’s mines are subject to strict environmental and other regulatory requirements including health
and safety requirements.
Foreign operations risk
The Company’s current projects are located in Botswana and Lesotho. Each of these countries exposes
the Company to risks that may not otherwise be experienced if its operations were domestic. The risks
include, but are not limited to, environmental protection, land use, water use, health safety, labor,
restrictions on production, price controls, currency remittance and maintenance of mineral tenure and
expropriation of property. There is no assurance that future changes in taxes or such regulation in the
various jurisdictions in which the Company operates will not adversely affect the Company’s operations.
Although the operating environments in Botswana and Lesotho are considered favorable compared to
those in other developing countries, there are still political risks. These risks include, but are not limited
to terrorism, hostage taking, military repression, expropriation, extreme fluctuations in currency exchange
rates, high rates of inflation and labor unrest.
Changes in mining or investment policies or shifts in political attitudes may also adversely affect the
Company’s business.
!
Mineral exploration and development
The business of exploring for diamonds and mining is highly speculative in nature and involves significant
financial and other risks which even careful evaluation, experience and knowledge may not eliminate.
There is no certainty that expenditures made or to be made by the Company in exploring and developing
diamond properties in which it has an interest will result in the discovery of commercially mineable
deposits. Most exploration projects do not result in the discovery of commercially mineable deposits.
While discovery of a diamond bearing deposit may result in substantial rewards, few properties which are
explored are ultimately developed into producing mines. Major expenses may be required to establish
reserves by drilling and to construct mining and processing facilities at a site. There can be no guarantee
that exploration programs carried out by the Company will result in the development of profitable mining
operations.
Title matters
Any changes in the laws of Botswana or Lesotho relating to mining could have a material adverse effect
to the rights and title to the interests held in those countries by the Company. No assurance can be given
that applicable governments will not revoke or significantly alter the conditions of applicable exploration
and mining authorizations nor that such exploration and mining authorizations will not be challenged or
impugned by third parties.
Infrastructure
Exploration, development, mining and processing activities depend on the availability of adequate
infrastructure. Reliable roads, bridges, power and water supply are important determinants which affect
capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other
interference in the maintenance of provision of such infrastructure could adversely affect activities and
profitability of the Company.
Uninsured risks
The mining business is subject to a number of risks and hazards including, but not limited to,
environmental hazards, industrial accidents, labor disputes, encountering unusual or unexpected geologic
formations or other geological or grade problems, encountering unanticipated ground or water
conditions, cave-ins, pit wall failures, flooding, rock bursts, periodic interruptions due to inclement or
hazardous weather conditions and other acts of God. Such risks could result in damage to mineral
properties or facilities, personal injury or death, environmental damage, delays in exploration,
development or mining, monetary losses and possible legal liability. The Company maintains insurance
against certain risks that are associated with its business in amounts that it believes to be reasonable at
the current stage of operations. There can be no assurance that such insurance will continue to be
available at economically acceptable premiums or will be adequate to cover any future claim.
Competition
The mining industry is intensely competitive in all its phases and the Company competes with other
companies that have greater financial resources and technical capacity. Competition could adversely
affect the Company’s ability to acquire prospective properties in the future.
!
Current and future legal proceedings
Due to the nature of its business, the Company may be subject to numerous regulatory investigations,
claims, lawsuits and other proceedings in the ordinary course of its business. The results of these legal
proceedings cannot be predicted with certainty due to the uncertainty inherent in litigation, including the
effects of discovery of new evidence or advancement of new legal theories, the difficulty of predicting
decisions of judges and juries and the possibility that decisions may be reversed on appeal. There can be
no assurance that these matters will not have a material adverse effect on the Company’s business.
In April 2010, legal proceedings were initiated against African Diamonds (Plc) (“AFD”), a subsidiary
acquired by the Company in 2010, by two former directors of AFD, alleging entitlement to a 3% royalty
on production from the Karowe Mine. The claim was heard in the Botswana High Court in early June
2011. The High Court delivered its ruling in August 2011 dismissing the claims against AFD, with costs
awarded against the plaintiffs.
In September, the Company was notified that the plaintiffs, in the legal proceedings initiated against
AFD, had filed an appeal of the decision of the High Court of Botswana dismissing the plaintiff’s claims
with costs awarded in favor of AFD. At this stage the Company does not have any further details as to
the timing of when the Appeal will be heard.
Conflicts of interest
The Company’s directors and officers may serve as directors or officers, or may be associated with other
public companies or have significant shareholdings in other public companies. To the extent that such
other companies may participate in business or asset acquisitions, dispositions or ventures in which the
Company may participate, the directors and officers of the Company may have a conflict of interest in
negotiating and concluding terms respecting the transactions. If a conflict of interest arises, the Company
will rely on its code of ethics policy and applicable corporate legislation to which all directors and officers
are subject.
These provisions state that where a director has such a conflict, that director must, at a meeting of the
Company’s directors, disclose his interest and refrain from voting. In accordance with the laws of the
Province of British Columbia, the directors and officers of the Company are required to act honestly, in
good faith and in the best interests of the Company.
Key personnel
The Company is dependent on a relatively small number of key employees, the loss of any of whom could
have an adverse effect on the Company. The Company does not have key person insurance on these
individuals.
Share price volatility
In recent years, the securities markets have experienced a high level of price and volume volatility, and
the market price of securities of many companies, particularly those considered to be development stage
companies, have experienced wide fluctuations which have not necessarily been related to the operating
performance, underlying asset values or prospects of such companies. There can be no assurance that
such fluctuations will not affect the price of the Company’s securities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
!
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements made and contained herein in the MD&A and elsewhere constitute forward-
looking statements as defined in applicable securities laws. Generally, these forward-looking
statements can be identified by the use of forward-looking terminology such as “expects”,
“anticipates”, “believes”, “intends”, “estimates”, “potential”, “possible” and similar expressions, or
statements that events, conditions or results “will”, “may”, “could” or “should” occur or achieved.
Forward looking statements are based on the opinions and estimates of management as of the date
such statements are made, and they are subject to a number of known and unknown risks,
uncertainties and other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. The Company believes that expectations
reflected in this forward-looking information are reasonable but no assurance can be given that these
expectations will prove to be correct and such forward-looking information included in this MD&A
should not be unduly relied upon. In particular, this MD&A may contain forward looking information
pertaining to the following: the estimates of the Company’s mineral reserve and resources; estimates
of the Company’s production and sales volumes for the Karowe Mine; estimated costs to construct the
Karowe Mine, start-up, exploration and development plans and objectives, production costs,
exploration and development expenditures and reclamation costs; expectation of diamond price and
changes to foreign currency exchange rate; expectations regarding the need to raise capital; possible
impacts of disputes or litigation and other risks and uncertainties describe under Risks and
Uncertainties disclosed in the Company’s Annual Information Form.
There can be no assurance that such statements will prove to be accurate, as the Company’s results
and future events could differ materially from those anticipated in this forward-looking information as
a result of those factors discussed in or referred to under the heading “Risk Factors’ in the Company’s
Annual Information Form dated April 15, 2011 available at http://www.sedar.com, as well as changes
in general business and economic conditions, changes in interest and foreign currency rates, the
supply and demand for, deliveries of and the level and volatility of prices of rough diamonds, costs of
power and diesel, acts of foreign governments and the outcome of legal proceedings, inaccurate
geological and recoverability assumptions (including with respect to the size, grade and recoverability
of mineral reserves and resources), unanticipated operational difficulties (including failure of plant,
equipment or processes to operate in accordance with specifications or expectations, cost escalations,
unavailability of materials and equipment, government action or delays in the receipt of government
approvals, industrial disturbances or other job actions, adverse weather conditions, and unanticipated
events relating to health safety and environmental matters)
Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date the statements were made, and the Company does not assume any
obligations to update or revise them to reflect new events or circumstances, except as required by
law.
!
Management’s*Report*
!
The! accompanying! consolidated! financial! statements! of! Lucara! Diamond! Corp.! and! other!
information! contained! in! the! management’s! discussion! and! analysis! are! the! responsibility! of!
management! and! have! been! approved! by! the! Board! of! Directors.! ! The! consolidated! financial!
statements! have! been! prepared! by! management! in! accordance! with! International! financial!
reporting! standards,! and! include! some! amounts! that! are! based! on! management’s! estimates! and!
judgment.!
!
The! Board! of! Directors! carries! out! its! responsibility! for! the! consolidated! financial! statements!
principally!through!its!Audit!Committee,!which!is!comprised!solely!of!independent!directors.!!The!
Audit! Committee! reviews! the! Company’s! annual! consolidated!
financial! statements! and!
recommends!their!approval!to!the!Board!of!Directors.!!The!Company’s!auditors!have!full!access!to!
the! Audit! Committee,! with! and! without! management! being! present.! ! These! consolidated! financial!
statements!have!been!audited!by!PricewaterhouseCoopers!LLP,!Chartered!Accountants.!
!
!
!
!
!
!
(Signed))William)Lamb))
)
President!and!Chief!Executive!Officer! !
!
Vancouver,!British!Columbia,!!Canada!
March!22,!2012!
(Signed))Glenn)Kondo!
Chief!Financial!Officer!
)
!
)
March 22, 2012
s Report
Independent Auditor’s Report
Lucara Diamond Corp.
To the Shareholders of Lucara Diamond Corp.
accompanying consolidated financial statements of Lucara Diamond Corp.
We have audited the accompanying
comprise the consolidated balance sheets
and the consolidated statements of
the years ended December 31, 2011 and
summary of significant accounting policies and other explanatory information.
summary of significant accounting policies and other explanatory information
statements of operations, comprehensive loss, cash flows and
balance sheets as at December 31, 2011, December 31, 2010
Lucara Diamond Corp., which
December 31, 2010 and January 1, 2010
, cash flows and changes in equity for
the related notes, which comprise a
December 31, 2011 and December 31, 2010, and the related notes, which comprise a
tatements
esponsibility for the consolidated financial statements
Management’s responsibility for
consolidated financial
Management is responsible for the preparation and fair presentation of
Management is responsible for the preparation and fair presentation of these consolidated
and for such internal control
statements in accordance with International Financial Reporting Standards, and for such internal control
statements in accordance with
as management determines is necessary to enable the preparation of
as management determines is necessary to enable the preparation of consolidated
that are free from material misstatement, whether due to fraud or error.
that are free from material misstatement, whether due to fraud or error.
consolidated financial statements
Auditor’s responsibility
xpress an opinion on these consolidated financial statements
Our responsibility is to express an opinion on these
in accordance with Canadian generally accepted auditing standards. Those
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
in accordance with Canadian generally accepted auditing standards. Those
comply with ethical requirements and plan and perform
standards require that we comply with ethical requirements and
whether the consolidated financial statements are free
reasonable assurance about whether
misstatement.
statements are free from material
plan and perform the audits to obtain
financial statements based on our audits.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
financial statements. The procedures selected depend on the auditor’s judgment,
financial statements. The procedures selected depend on the auditor
the consolidated financial statements. The procedures selected depend on the auditor
including the assessment of the risks of material misstatement of the
including the assessment of the risks of material misstatement of the consolidated
whether due to fraud or error. In making those risk assessments, the auditor consider
whether due to fraud or error. In making those risk
relevant to the entity’s preparation and fair presentation of the
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
to design audit procedures that are appropriate in the circumstances, but not for the purpose o
to design audit procedures that are appropriate in the circumstances, but not for the purpose o
an opinion on the effectiveness of the entity’s internal control. An audit also includes
an opinion on the effectiveness
appropriateness of accounting p
management, as well as evaluating the overall presentation of the consolidated financial statement
management, as well as evaluating the overall
consolidated financial statements,
considers internal control
financial statements in order
s preparation and fair presentation of the consolidated financial statements in order
accounting estimates made by
financial statements.
accounting policies used and the reasonableness of accounting
An audit also includes evaluating the
and appropriate to provide a
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a
We believe that the audit evidence we have
basis for our audit opinion.
PricewaterhouseCoopers LLP, Chartered Accountants
PricewaterhouseCoopers LLP, Chartered Accountants
PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7
PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7
PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7
T:604 806 7000, F:604 806 7806
604 806 7806, www.pwc.com/ca
io limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member
“PwC” refers to PricewaterhouseCoopers LLP, an Ontar
firm of which is a separate legal entity.
Opinion
In our opinion, the consolidated
position of Lucara Diamond Corp.
its financial performance and
International Financial Reporting Standards.
in accordance with International Financial Reporting Standards
Lucara Diamond Corp. as at December 31, 2011, December 31, 2010 and
consolidated financial statements present fairly, in all material respects, the financial
statements present fairly, in all material respects, the financial
and January 1, 2010 and
December 31, 2011 and December 31, 2010
and its cash flows for the years ended December 31, 2011 and December 31, 2010
PricewaterhouseCoopers LLP
Signed PricewaterhouseCoopers LLP
Chartered Accountants
2
LUCARA DIAMOND CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
December 31,
2011
December 31,
2010
January 1,
2010
ASSETS
Current assets
Cash and cash equivalents (Note 21)
Investments
Loans receivable
VAT receivables and other (Note 6)
Rough diamond inventories
$
48,589,409 $
109,020
-
6,298,262
1,597,255
32,884,905
287,308
-
1,542,948
3,964,835
$
49,123,926
306,199
2,000,000
298,665
1,943,808
Plant and equipment (Note 7)
Mineral properties (Note 8)
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
Trade payables and accrued
liabilities (Note 21)
Due to related parties (Note 19)
Current portion of long-term debt (Note 9)
Due to related parties
Long-term debt (Note 9)
Restoration provisions (Note 10)
56,593,946
38,679,996
53,672,598
94,501,245
90,042,677
149,513
17,492,039
89,154,742
206,305
1,681,910
82,283,912
-
$ 241,287,381 $
145,533,082
137,638,420
$
16,635,832 $
-
10,950,493
27,586,325
-
30,864,165
12,485,650
7,284,929
167,147
-
7,452,076
-
-
567,697
$
1,170,409
113,287
-
1,283,696
9,863,306
-
360,641
TOTAL LIABILITIES
70,936,140
8,019,773
11,507,643
EQUITY
Share capital (Note 11)
Contributed surplus (Note 12)
Cumulative deficit
Accumulated other comprehensive income
(loss)
Total equity attributable to shareholders of the
Company
278,995,472
5,769,245
(104,243,885)
209,210,999
5,421,258
(84,121,453)
122,476,675
1,649,157
(13,394,287)
(13,200,175)
5,141,321
255,190
167,320,657
135,652,125
110,986,735
Non-controlling interests (Note 13)
3,030,584
1,861,184
15,144,042
TOTAL EQUITY
170,351,241
137,513,309
126,130,777
TOTAL LIABILITIES AND EQUITY
$ 241,287,381 $
145,533,082
137,638,420
Commitments (Note 23), contingencies (Note 24) and subsequent events (Note 25)
The accompanying notes are an integral part of these consolidated financial statements.
Approved on Behalf of the Board of Directors:
“Paul K. Conibear”
Director
“William Lamb”
Director
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
Exploration expenditures (Note 14)
Administration (Note 15)
Gain on sale of diamonds (Note 16)
2011
2010
$
6,618,233 $ 11,578,718
4,455,697
8,182,622
-
(2,339,282)
Loss before the following
12,461,573
16,034,415
Finance income
Finance expenses
Foreign exchange loss
(963,308)
2,817,836
4,357,791
(454,750)
38,679
12,888
Net loss for the year
$
18,673,892 $
15,631,232
Attributable to:
Shareholders of the Company
Non-controlling interests
Basic and diluted loss per common share (Note 18)
$
$
$
18,126,567
547,325
$
$
13,309,889
2,321,343
0.05 $
0.06
Weighted average common shares outstanding (Note 18)
360,019,710
223,734,936
The accompanying notes are an integral part of these consolidated financial statements.
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
2011
2010
Net loss for the year
$
18,673,892 $
15,631,232
Other comprehensive loss (income)
Change in fair value of available-for-sale securities
Currency translation adjustment
181,725
18,438,911
18,620,636
18,891
(5,210,969)
(5,192,078)
Comprehensive loss
$
37,294,528 $
10,439,154
Comprehensive loss attributable to:
Shareholders of the Company
Non-controlling interests
36,468,063
826,465
8,423,758
2,015,396
$
37,294,528 $
10,439,154
The accompanying notes are an integral part of these consolidated financial statements.
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
Cash flows from (used in):
Operating Activities
Net loss for the year
Items not involving cash and cash equivalents:
Depreciation
Foreign exchange loss
Stock-based compensation
Other
Finance costs
Interest receivable
Net changes in working capital items:
Trade receivables and other current assets
Rough diamond inventories
Trade payables and other current liabilities
Financing Activities
Proceeds from issue of shares, net of issue costs
Proceeds from long-term debt
Finance costs paid
Proceeds from exercise of stock options
Proceeds from non-controlling interest
Investing Activities
Acquisition of plant and equipment
Other
Acquisition of other assets
Cash paid in acquisition
2011
2010
$
(18,673,892) $
(15,631,232)
2,641,443
918,727
609,705
6,547
2,817,836
-
(11,679,634)
(4,059,412)
2,544,063
(388,931)
1,395,815
-
1,085,784
-
-
(186,066)
(13,335,699)
(1,246,567)
(1,865,201)
1,212,881
(13,583,914)
(15,234,586)
58,283,612
50,000,000
(1,484,536)
575,900
-
107,374,976
587,624
-
-
7,356,256
2,808,825
10,752,705
(77,191,407)
23,576
-
-
(77,167,831)
(11,372,878)
-
(206,305)
(1,224,163)
(12,803,346)
Effect of exchange rate change on cash and cash
equivalents
Increase (decrease) in cash and cash
equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Information
Interest received
Taxes paid
Changes in accounts payable and accrued liabilities
related to plant and equipment
Common shares issued for debenture (Note 11)
(918,727)
1,046,206
15,704,504
32,884,905
48,589,409 $
(16,239,021)
49,123,926
32,884,905
$
963,308
-
11,409,099
10,663,220
268,684
-
4,955,499
-
The accompanying notes are an integral part of these consolidated financial statements.
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
Number of
shares
issued and
outstanding Share capital
Contributed
surplus
Deficit
Accumulated
other
comprehensive
income (loss)
Non-
controlling
interests
Total
Balance, January 1, 2010
208,768,167 $ 122,476,675 $
1,649,157 $
(13,394,287) $
255,190 $ 15,144,042 $ 126,130,777
Shares issued, net of guarantee
fees
Shares issued for acquisition of
African Diamonds
Proceeds from non-controlling
interests
Disposition of non-controlling
interests
Stock based payment
Exercise of stock options
Stock-based compensation
Unrealized loss on investments
Effect of foreign currency
translation
Net loss for the year
12,191,200
9,863,306
-
-
80,425,726
76,127,684
1,575,193
(59,544,195)
-
-
-
-
-
-
-
-
9,863,306
(21,568,911)
(3,410,229)
2,808,825
2,808,825
-
-
1,108,957
-
-
-
-
-
-
743,334
-
-
-
-
-
1,266,834
(155,710)
1,085,784
-
2,126,918
-
-
-
-
-
-
-
-
(18,891)
5,229,338
2,263,286
-
-
-
7,356,256
3,530,120
587,624
1,085,784
(18,891)
-
-
-
(13,309,889)
4,905,022
-
305,947
(2,321,343)
5,210,969
(15,631,232)
Balance, December 31, 2010
302,494,050 $ 209,210,999 $
5,421,258 $
(84,121,453) $
5,141,321 $ 1,861,184 $ 137,513,309
Balance, January 1, 2011
302,494,050 $ 209,210,999 $
5,421,258 $
(84,121,453) $
5,141,321 $ 1,861,184 $ 137,513,309
Private placement, net of share
issue costs
Shares issued in lieu of interest
and fees (Note 8)
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Unrealized loss on investments
Free-carried non-controlling
interests (Note 13)
Net loss for the year
60,000,000
58,283,612
-
9,000,000
854,999
-
10,663,220
837,641
-
-
(261,718)
609,705
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
58,283,612
10,663,220
575,923
609,705
(18,159,771)
(181,725)
(279,140)
-
(18,438,911)
(181,725)
(1,995,865)
(18,126,567)
-
-
1,995,865
(547,325)
-
(18,673,892)
Balance, December 31, 2011
372,349,049 $ 278,995,472 $
5,769,245 $ (104,243,885) $
(13,200,175) $ 3,030,584 $ 170,351,241
The accompanying notes are an integral part of these consolidated financial statements.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
1. NATURE OF OPERATIONS
Lucara Diamond Corp. together with its subsidiaries (collectively referred to as the “Company”) is
a development stage company focused on diamond properties in Africa. The Company holds a
100% interest in the Karowe Mine (previously named AK6 Diamond Project) located in Botswana
and a 75% interest in Mothae Diamond Project located in Lesotho.
The Company’s common shares are listed on the TSX, NASDAQ OMX First North and Botswana
Stock Exchanges. The Company was continued into the Province of British Columbia under the
Business Corporations Act (British Columbia) in August 2004 and its registered office is located at
Suite 2610 - 1066 West Hastings Street, Vancouver, British Columbia, V6C 3E8.
2. BASIS OF PRESENTATION AND ADOPTION OF INTERNATIONAL FINANCIAL
REPORTING STANDARDS (“IFRS”)
The Company prepared its financial statements in accordance with Canadian generally accepted
accounting principles as set out in the Handbook of the Canadian Institute of Chartered
Accountants (CICA Handbook). In 2010, the CICA Handbook was revised to incorporate IFRS as
issued by the International Accounting Standards Board (“IASB”) and require publicly accountable
enterprises to apply such standards effective for years beginning on or after January 1, 2011.
Accordingly, these are the Company’s first annual consolidated financial statements prepared in
accordance with IFRS as issued by the IASB. In these financial statements, the term “Canadian
GAAP” refers to Canadian GAAP before the adoption of IFRS.
These consolidated financial statements have been prepared in compliance with IFRS. Subject to
certain transition elections disclosed in Note 5, the Company has consistently applied the
accounting policies used in its opening IFRS balance sheet at January 1, 2010 throughout all
periods presented, as if these policies had always been in effect. Note 5 discloses the impact of
the transition to IFRS on the Company’s reported balance sheet, results of operations and cash
flows, including the nature and effect of significant changes in accounting policies from those
used in the Company’s consolidated financial statements for the year ended December 31, 2010.
These financial statements were approved by the Board of Directors for issue on March 22, 2012.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies used in the preparation of these consolidated financial
statements are as follows:
(a) Basis of measurement
These consolidated financial statements have been prepared under the historical cost convention,
except for investments in equity securities, which are measured at fair value.
Certain comparative figures have been reclassified to conform to the presentation adopted for the
current year.
(b) Consolidation
These consolidated financial statements include the accounts of the Company and all of its
subsidiaries. The Company’s significant subsidiaries include, Motapa Diamonds Inc., Motapa
Exploration Limited, Kavango Diamond Company (Pty) Ltd, Lucara Diamond Holdings (I) Inc., Boteti
Diamond Holdings Inc., Boteti Mining (PTY) Ltd, Mothae Diamond Holdings Inc., African Diamonds
(Plc), Lucara South Africa (PTY) (formerly Gondwana Diamonds (PTY)) and its 75% interest in
Mothae Diamond Proprietary Limited.
Subsidiaries are entities controlled by the Company. Control is the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are included in
the consolidated financial statements from the date control is obtained until the date control ceases.
Where the Company’s interest is less than 100%, the Company recognized non-controlling interests.
All intercompany balances, transactions, income, expenses, profits and losses, including unrealized
gains and losses have been eliminated on consolidation. Accounting policies of subsidiaries have
been changed where necessary to ensure consistency with the policies adopted by the Company.
Non-controlling interests represent the equity in a subsidiary not attributable, directly and indirectly,
to the Company and is presented separately within equity in the consolidated balance sheet,
separately from equity attributable to the shareholders of the Company. Losses within a subsidiary
continue to be attributed to the non-controlling interests even if that results in a deficit balance.
Changes in the Company’s ownership interest in subsidiaries that do not result in a loss of control
are accounted for as equity transactions.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(c) Critical accounting estimates and judgments
The preparation of consolidated financial statements requires management to use judgment in
applying its accounting policies and estimates and assumptions about the future. Estimates and
other judgments are continuously evaluated and are based on management’s experience and other
factors, including expectations about future events that are believed to be reasonable under the
circumstances. The following discusses the most significant accounting judgments and estimates
that the Company has made in the preparation of the consolidated financial statements:
Valuation of mineral properties – The Company carries the acquisition costs of its mineral properties
at cost less any provision for impairment. The Company undertakes a periodic review of the carrying
values of mineral properties and whenever events or changes in circumstances indicate that their
carrying values may exceed their fair value. In undertaking this review, management of the
Company is required to make significant estimates. These estimates are subject to various risks and
uncertainties, which may ultimately have an effect on the expected recoverability of the carrying
values of the mineral properties and related expenditures.
Utilization of tax losses – The Company is subject to income taxes in a number of jurisdictions. At
present all of the entities are making tax losses. These tax losses are only recognized to the extent
that expected future taxable profits are available.
Stock based compensation – The fair value of stock options is determined using the Black-Scholes
option pricing model and are expensed over their vesting periods. In estimating fair value,
management of the Company is required to make certain assumptions and estimates regarding the
life of the options, volatility and forfeitures rates. Changes in the assumptions used could result in
materially different results.
Decommissioning and site restoration – The Company has obligations for site restoration and
decommissioning related to its diamond properties. The future obligations for decommissioning and
site restoration activities are estimated by the Company using mine closure plans or other similar
studies which outline the requirements that will be carried out to meet the obligations. Because the
obligations are dependent on the laws and regulations of the countries in which the mines operate,
the requirements could change as a result of amendments in the laws and regulations relating to
environmental protection and other legislation affecting resource companies. As the estimate of
obligations is based on future expectations, a number of assumptions and judgments are made by
management in the determination of closure provisions. The decommissioning and site restoration
provisions are more uncertain the further into the future the mine closure activities are to be carried
out.
The Company’s policy for recording decommissioning and site restoration provisions is to establish
provisions for future mine closure costs at the commencement of mining operations based on the
present value of the future cash flows required to satisfy the obligations. The amount of the present
value of the provision is added to the cost of the related mining assets and depreciated over the life
of the mine. The provision is accreted to its future value over the life of the mine through a charge
to operating costs. Actual results could differ from estimates made by management during the
preparation of these consolidated financial statements and those differences may be material.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the
chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating
resources and assessing performance of the operating segments, has been identified as the person
that makes strategic decisions. The CEO is deemed the chief operating decision-maker of the
Company.
The Company’s primary reporting segments are based on individual diamond projects, being the
Karowe Mine and the Mothae Diamond Project and Corporate. The Corporate office provides support
to the diamond projects with respect to treasury and finance, technical support, regulatory reporting
and corporate administration.
(e) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using the
currency of the primary economic environment in which the entity operates (the “functional
currency”). The consolidated financial statements are presented in U.S. dollars. The functional
currency of the parent company, Lucara Diamond Corp., is the Canadian dollar.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at exchange rates of monetary assets and
liabilities denominated in currencies other than an entity’s functional currency are recognized in the
statement of operations.
Group companies
The functional currency of the significant subsidiaries of the Company are Boteti Mining (PTY) Ltd.,
which has a Pula functional currency and Mothae Diamonds (Pty) Ltd, which has a Loti functional
currency. The results and financial position of the group companies, which have a functional currency
different from the presentation currency, are translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the
date of that balance sheet
(ii) Income and expenses for each statement of operation are translated at average exchange rates
(unless this average is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at the rate
on the dates of the transactions).
(iii) All resulting exchange differences are recognized in other comprehensive income as cumulative
translation adjustments.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term
highly liquid investments with original maturities of three months or less.
(g) Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual
provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or have been transferred and the Company has transferred
substantially all risks and rewards of ownership. Financial liabilities are derecognized when the
obligation specified in the contract is discharged, cancelled, or expires.
At initial recognition, the Company classifies its financial instruments in the following categories:
(i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is
classified in this category if acquired principally for the purpose of selling or repurchasing in the
short-term. Derivatives are also included in this category unless they are designated as hedges.
Financial instruments in this category are recognized initially and subsequently at fair value.
Transaction costs are expensed in the consolidated statement of operations. Gains and losses
arising from changes in fair value are presented in the consolidated statement of operations
within “other gains and losses” in the period in which they arise. Non-derivative financial assets
and liabilities at fair value through profit or loss are classified as current except for the portion
expected to be realized or paid beyond twelve months of the balance sheet date, which are
classified as non-current.
(ii) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either
designated in this category or not classified in any of the other categories.
Available-for-sale investments are recognized initially at fair value plus transaction costs and are
subsequently carried at fair value. Gains or losses arising from remeasurement are recognized in
other comprehensive income except for exchange gains and losses on the translation of debt
securities, which are recognized in the consolidated statement of operations. When an available-
for-sale investment is sold or impaired, the accumulated gains or losses are moved from
accumulated other comprehensive income to the statement of operations and are included in
“other gains and losses”. Available-for-sale investments are classified as non-current, unless an
investment matures within twelve months, or management expects to dispose of it within twelve
months.
Interest on available-for-sale debt instruments, calculated using the effective interest method, is
recognized in the statement of operations as part of interest income. Dividends on available-for-
sale equity instruments are recognized in the statement of operations as dividend income when
the Company’s right to receive payment is established.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(iii) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. The Company’s loans and
receivables comprise cash and cash equivalents and trade receivables and are included in current
assets due to their short-term nature. Loans and receivables are initially recognized at the
amount expected to be received, less, when material, a discount to reduce the loans and
receivables to fair value. Subsequently, loans and receivables are measured at amortized cost
using the effective interest method less a provision for impairment.
(iv) Financial liabilities at amortized cost: Financial liabilities at amortized cost include trade payables,
bank debt and long-term debt. Trade payables are initially recognized at the amount required to
be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, trade
payables are measured at amortized cost using the effective interest method. Bank debt and
long-term debt are recognized initially at fair value, net of any transaction costs incurred and
subsequently at amortized cost using the effective interest method. These are classified as
current liabilities if payment is due within twelve months. Otherwise, they are presented as non-
current liabilities.
Impairment of financial assets
At each reporting date, the Company assesses whether there is objective evidence that a financial
asset (other than a financial asset classified as fair value through profit or loss) is impaired.
The criteria used to determine if objective evidence of an impairment loss exists include:
(i) significant financial difficulty of the obligor;
(ii) delinquencies in interest or principal payments; and
(iii) it becomes probable that the borrower will enter bankruptcy or other financial reorganization.
For equity securities, a significant or prolonged decline in the fair value of the security below its cost
is also evidence that the assets are impaired.
If such evidence exists, the Company recognizes an impairment loss, as follows:
(i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost
of the loan or receivable and the present value of the estimated future cash flows, discounted
using the instrument’s original effective interest rate. The carrying amount of the asset is reduced
by this amount either directly or indirectly through the use of an allowance account.
(ii) Available-for-sale financial assets: The impairment loss is the difference between the original cost
of the asset and its fair value at the measurement date, less any impairment losses previously
recognized in the statement of operations. This amount represents the loss in accumulated other
comprehensive income that is reclassified to net loss.
Impairment losses on financial assets carried at amortized cost and available-for-sale debt instruments
are reversed in subsequent periods if the amount of the loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized. Impairment losses on
available-for-sale equity instruments are not reversed.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Inventories
Rough diamond inventories are measured at the lower of cost and net realizable value. Cost is
determined using the weighted average method. Cost includes directly attributable mining overhead
but excludes borrowing costs.
Net realizable value represents the estimated selling price in the ordinary course of business, less all
estimated costs to completion and selling expenses.
(i) Plant and equipment
Plant and equipment are stated at cost less accumulated depreciation and impairment losses. The
cost of an asset consists of its purchase price, any directly attributable costs of bringing the asset to
its present working condition and location for its intended use and an initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is located.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow
to the Company and the cost of the item can be measured reliably.
Depreciation of each asset is calculated using the straight line or unit of production method to
allocate its cost less its residual value over its estimated useful life. The estimated useful lives of plant
and equipment are as follows:
Machinery
Plant facilities
Furniture and office equipment
5 to 10 years
based on resources on a unit of production basis
2 to 3 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance
sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s
carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount
and are recognized within “other gains and losses” in the statement of operations.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Exploration and evaluation expenditures and mineral properties
Exploration and evaluation expenditures relate to the search for mineral resources, the determination
of technical feasibility and the assessment of commercial viability of an identified resource.
Exploration and evaluation activities include:
•
•
•
•
•
Researching and analyzing historical exploration data;
Gathering exploration data through topographical, geochemical and geophysical studies;
Exploratory drilling, trenching and sampling;
Determining and examining the volume and grade of the resource; and
Surveying, transportation and infrastructure requirement
Exploration and development expenditures are expensed as incurred on mineral properties not
sufficiently advanced as to identify their development potential. When it has been established that a
mineral property is considered to be sufficiently advanced and an economic analysis has been
completed, all further expenditures for the current year and subsequent years are capitalized as
incurred. Costs associated with acquiring a mineral property are capitalized as incurred.
(k) Intangible assets
Intangible assets are initially recognized at cost and measured subsequently at cost less
accumulated amortization and impairment losses. Finite-lived intangible assets are amortized
based on resources over a unit of production basis.
(l) Impairment of non-financial assets
Assets that are subject to amortization are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the
purposes of assessing impairment, assets are grouped at the lowest levels for which there are
separately identifiable cash flows (cash-generating units). Non-financial assets that suffered
impairment are reviewed for possible reversal of the impairment at each reporting date.
(m) Provisions
Asset retirement obligations
The Company recognizes a liability for an asset retirement obligation on long-lived assets when a
present legal or constructive obligation exists, as a result of past events and the amount of the
liability is reasonably determinable. Asset retirement obligations are initially recognized and recorded
as a liability based on estimated future cash flows discounted at a credit adjusted risk free rate. This
is adjusted at each reporting period for changes to factors including the expected amount of cash
flows required to discharge the liability, the timing of such cash flows and the credit adjusted risk
free discount rate. Corresponding amounts and adjustments are added to the carrying value of the
related long-lived asset and amortized or depleted to operations over the life of the related asset.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Environmental expenditures
Environmental expenditures that relate to current operations are expensed or capitalized as
appropriate. Expenditures that relate to an existing condition caused by past operations and which
do not contribute to current or future revenue generation are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated.
Other provisions
Provisions are recognized when:
•
•
the Company has a present legal or constructive obligation as a result of a past event;
a reliable estimate can be made of the obligation.
Provisions are measured at the present value of the expenditures expected to be required to settle
the obligation, using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the obligation. The increase in the provision due to the
passage of time is recognized as finance costs.
(n) Deferred income taxes
Deferred tax is recognized using the balance sheet method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. Deferred tax is not recognized for the following temporary
differences: the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable income, and differences relating to
investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will
not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable
temporary differences arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to the temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by
the year end.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax
liabilities and assets, and they relate to income taxes levied by the same tax authority on the same
taxable entity, or on different tax entities where there is a legal right to do so, but they intend to
settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized
simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future tax profits will be
available against which the temporary difference can be utilized. Deferred tax assets are reviewed at
each year end and are reduced to extent that is no longer probable that the related tax benefit will
be realized.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) Share capital
Common shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds.
(p) Stock-based compensation
The Company has a stock-based compensation plan, under which the entity receives services from
employees and non-employees as consideration for equity instruments (options) of the Company.
Stock options granted to employees are measured on the grant date. Stock options granted to non-
employees are measured on the date that the goods or services are received.
The fair value of the employee and non-employee services received in exchange for the grant of the
options is recognized as an expense. The total amount to be expensed is determined by reference to
the fair value of the options granted and the vesting periods. The total expense is recognized over
the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied.
The cash subscribed for the shares issued when the options are exercised is credited to share capital,
net of any directly attributable transaction costs.
(q) Loss per share
Loss per share is calculated by dividing the loss attributable to the shareholders of the Company by
the weighted average number of common shares issued and outstanding during the year. Diluted
loss per share is calculated using the treasury stock method. The effects of potential issuance of
shares under options would be anti-dilutive, and therefore, basic and diluted loss per share are the
same.
(r) Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor
are classified as operating leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the statement of operations on a straight-line basis over the
period of the lease.
(s) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying
asset are capitalized as part of the cost of that asset. Other borrowing costs not directly attributable
to a qualifying asset are expensed in the period incurred.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
4. ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
Unless otherwise noted, the following revised standards and amendments are effective for annual
periods beginning on or after January 1, 2013 with earlier application permitted. The Company has
not yet assessed the impact of these standards and amendments or determined whether it will early
adopt them.
a)
IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and
measurement of financial assets. It replaces the multiple category and measurement models in IAS
39 for debt instruments with a new mixed measurement model having only two categories:
amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring
equity instruments. Such instruments are either recognized at fair value through profit or loss or at
fair value through other comprehensive income. Where equity instruments are measured at fair
value through other comprehensive income, dividends are recognized in profit or loss to the extent
that they do not clearly represent a return of investment; however, other gains and losses (including
impairments) associated with such instruments remain in accumulated comprehensive income
indefinitely.
Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried
forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement,
except that fair value changes due to credit risk for liabilities designated at fair value through profit
and loss are generally recorded in other comprehensive income. IFRS 9 was amended further in
December 2011 and is now mandatory in 2015.
b)
c)
IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it
has power over the investee, is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over the investee. Under
existing IFRS, consolidation is required when an entity has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12,
Consolidation—Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial
Statements.
IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a
joint venture or joint operation. Joint ventures will be accounted for using the equity method of
accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities,
revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to
proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS
31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities—Non-monetary Contributions
by Venturers.
d)
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in
other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures and also introduces significant additional
disclosure that address the nature of, and risks associated with, an entity’s interests in other entities.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
4. ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
(continued)
e)
f)
g)
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and
disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price
that would be received to sell an asset, or paid to transfer a liability in an orderly transaction
between market participants, at the measurement date. Under existing IFRS, guidance on measuring
and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and does not always reflect a clear measurement basis or consistent disclosures.
There have been amendments to existing standards, including IAS 27, Separate Financial
Statements (IAS 27), and IAS 28, Investments in Associates and Joint Ventures (IAS 28). IAS 27
addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated
financial statements. IAS 28 has been amended to include joint ventures in its scope and to address
the changes in IFRS 10 – 13.
IAS 19, Employee Benefits, has been amended to make significant changes to the recognition and
measurement of defined benefit pension expense and termination benefits and to enhance the
disclosure of all employee benefits. The amended standard requires immediate recognition of
actuarial gains and losses in other comprehensive income as they arise, without subsequent
recycling to net income. Past service cost (which will now include curtailment gains and losses) will
no longer be recognized over a service period but instead will be recognized immediately in the
period of a plan amendment. Pension benefit cost will be split between (i) the cost of benefits
accrued in the current period (service cost) and benefit changes (past-service cost, settlements and
curtailments); and (ii) finance expense or income. The finance expense or income component will be
calculated based on the net defined benefit asset or liability. A number of other amendments have
been made to recognition, measurement and classification including redefining short-term and other
long-term benefits, guidance on the treatment taxes related to benefit plans, guidance on risk/cost
sharing features, and expanded disclosures.
h)
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items
presented in OCI into two groups, based on whether or not items may be recycled in the future.
Entities that choose to present OCI items before tax will be required to show the amount of tax
related to the two groups separately. The amendment is effective for annual periods beginning on or
after July 1, 2012 with earlier application permitted.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS
a) Adjustment of equity transfer to the Government of Lesotho (“GOL”)
During the year ended December 31, 2011, the Company re-evaluated its accounting for the transfer
of shares and a share option in Mothae Diamond Proprietary Limited (“Mothae”) to the GOL during
2010. Previously, the Company had accounted for the transfer as an expropriation for no proceeds.
The Company, after further review, has now concluded that it made a stock based payment in
exchange for a mining license, which is capitalized as an intangible asset. The Company has made
the following adjustments, as at and for the year ended December 31, 2010:
•
•
•
•
Increased mineral property costs by $3,530,120, representing the fair value of the intangible
mining rights received from the GOL as based upon the fair value as of June 2010 of the shares
and share option in Mothae;
Increased non-controlling interest (“NCI”) by $2,263,286, representing the fair value of the
12.5% “free-carried” interest in Mothae transferred to the GOL as of June 2010;
Increased contributed surplus by $1,266,834, representing the fair value, as of June 2010, of
the GOL’s option on the additional 12.5% interest in Mothae, which will beneficially transfer to
the GOL upon their full payment for these shares. These shares are to be paid for by the GOL
on a contingent basis, such that they are payable only from the first $1.825 million of dividends
on these shares. Management has fair valued the option on these shares by using the fair value
established for the NCI portion above and deducting the fair value of the $1.825 million,
discounted at 10% per annum for a period of approximately 6 years until the cash flows from
Mothae are estimated to be sufficient to cover the required payment; and
Decreased the NCI by $708,049 representing the NCI share of losses of Mothae from the date
of the related Shareholder Agreement, June 23, 2010 whereby the GOL received its 12.5% free-
carried interest to December 31, 2010. The increased allocation of the losses of Mothae for the
year ended December 31, 2010 result in an equivalent decrease in the loss attributable to the
shareholders of the Company for the year and to the deficit at December 31, 2010.
The option on the 12.5% interest, which has been treated as contributed surplus, will continue to be
treated as contributed surplus and no attribution of the income or losses of Mothae will be recorded
until the shares have been paid for by way of future dividends. At that time the amount will be
transferred from contributed surplus to NCI and the future NCI attribution will be based on 25%.
Management has deemed the magnitude of the adjustment to not be material and accordingly, has
determined that a restatement of the December 31, 2010 consolidated financial statements is not
warranted.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS (continued)
b) IFRS transition elections
The Company has applied the following transition exceptions and exemptions to the full retrospective
application of IFRS as follows:
•
•
•
Business combinations: In applying this exemption the Company will continue to carry forward
its previous GAAP accounting for business combinations prior to the transition date.
Stock based compensation: In applying this exemption the Company will not be required to
apply IFRS 2 to options vested before the transition date.
Cumulative translation adjustments (“CTA”): In applying this exemption the cumulative
translation differences for all foreign operations (subsidiaries, joint ventures and equity method
investments) with a functional currency different from the Company’s reporting currency (self-
sustaining foreign operations under Canadian GAAP) will be deemed to be zero at transition
(CTA balances are eliminated with offsetting entry recorded directly to retained earnings).
c) Functional currency and cumulative translation adjustment account
Under Canadian GAAP the Company determines whether a subsidiary is an integrated operation or a
self-sustaining entity which determines the method of translation into the presentation currency of
the Company. IFRS requires that an entity determine the functional currency of each subsidiary
individually, prior to consolidation into the Company’s presentation currency.
The Company has determined that the parent company and its significant subsidiaries had functional
currencies other than the U.S. dollar, which under Canadian GAAP had been classified as being
integrated operations. Those subsidiaries under Canadian GAAP were consolidated using the temporal
method (i.e. monetary assets and liabilities translated at the current rate and non-monetary assets
and liabilities at historic exchange rates with gains or losses being charged to income), whereas
under IFRS those entities with non U.S. dollar functional currencies are translated into U.S. dollars
using the current rate method (whereby all assets and liabilities are translated using the reporting
date exchange rates with any gains or losses being recorded in equity).
The net impact as at January 1, 2010, was an increase in diamond inventories of $178,848, an
increase in plant and equipment of $181,910, an increase in mineral properties of $1,455,884 and an
offsetting CTA adjustment of $1,816,642. As permitted by the exemption, the Company added this
$1,816,642 adjustment to the Canadian GAAP CTA account of $385,035 as at January 1, 2010 and
reset these amounts to nil with the offsetting credit applied to deficit in the amount of $2,201,677.
The net impact as at December 31, 2010 and for the year then ended, was an increase in diamond
inventories of $334,674, an increase in plant and equipment of $1,020,798, an increase in mineral
properties of $4,696,720, a decrease in foreign exchange loss of $12,658 and an offsetting CTA
adjustment of $6,039,534 of which $305,947 relates to non-controlling interests. As previously
discussed, $1,816,642 of this adjustment was recorded at January 1, 2010 and the balance
represents the CTA adjustment to be recorded on other comprehensive income for the year ended
December 31, 2010 in the amount of $4,222,892.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS (continued)
d) Reversal of deferred income tax liability
Under Canadian GAAP, the Company was required to record a future income tax liability on prior
assets acquisitions and such a purchase price gross up is not permitted under IFRS.
The net impact at January 1, 2010, was a decrease in mineral properties and future income tax
liability of $8,051,101.
For the year ended December 31, 2010, the impact was a decrease in mineral properties of
$8,051,101, future income tax liability of $5,391,720 and a reversal of unrealized foreign exchange
loss of $537,619 and income tax recovery of $3,197,000.
e) Reclassification of accretion to finance charges
Under Canadian GAAP, accretion was previously reflected with depreciation and depletion. Pursuant to
IFRS accretion has been reclassified to finance expenses.
f) Statement of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on cash flows generated by the
Company except that, under IFRS, cash flows relating to interest are classified in a consistent manner
as operating, investing or financing each period. Under Canadian GAAP, cash flows relating to interest
payments were classified as operating.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS (continued)
f) Reconciliation of consolidated balance sheets as at January 1, 2010 and December 31, 2010 and the
statement of comprehensive income for the year ended December 31, 2010 from Canadian GAAP to IFRS
CONSOLIDATED BALANCE SHEET
December 31, 2010
CDN GAAP
Adjustment
(Note 5a)
Adj #
IFRS
adjustments
IFRS
ASSETS
Current assets
Cash and cash equivalents
Investments
Loans receivable
Trade receivables and other
Rough diamond inventories
Plant and equipment
Mineral properties
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
$
32,884,905 $
287,308
-
1,542,948
34,715,161
3,630,161
16,471,241
88,979,003
206,305
$
-
-
-
-
-
- $ 32,884,905
287,308
-
-
-
1,542,948
-
-
34,715,161
-
-
3,530,120
-
(c)
(c)
(c, d)
334,674
1,020,798
(3,354,381)
-
3,964,835
17,492,039
89,154,742
206,305
$
144,001,871 $ 3,530,120
$
(1,998,909) $ 145,533,082
Trade payables and accrued liabilities
Due to related parties
Current portion of long-term debt
$
7,284,929 $
167,147
-
Due to related parties
Long-term debt
Restoration provisions
Future income taxes
TOTAL LIABILITIES
7,452,076
-
-
567,697
5,391,720
13,411,493
-
-
-
-
-
-
-
-
-
EQUITY ATTRIBUTABLE TO SHAREHOLDERS
Share capital
Contributed surplus
Cumulative deficit
Accumulated other comprehensive income
209,210,999
4,154,424
(84,384,456)
1,609,411
-
1,266,834
708,049
-
$
- $
-
-
7,284,929
167,147
-
-
7,452,076
-
-
-
(5,391,720)
-
-
567,697
-
(5,391,720)
8,019,773
-
-
(445,046)
3,531,910
209,210,999
5,421,258
(84,121,453)
5,141,321
(d)
(c)
(d)
Total equity attributable to shareholders of the
company
Non-controlling interests
TOTAL EQUITY
130,590,378
1,974,883
3,086,864
135,652,125
-
1,555,237
(c)
305,947
1,861,184
130,590,378
3,530,120
3,392,811
137,513,309
TOTAL LIABILITIES AND EQUITY
$
144,001,871 $ 3,530,120
$
(1,998,909) $ 145,533,082
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS (continued)
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the year ended December 31, 2010
CDN GAAP
Adjustment
(Note 5a)
Adj #
IFRS
adjustments
IFRS
Exploration expenditures
Administration
Gain on sale of diamonds
$ 11,617,397
4,455,697
-
Loss (gain) before the following
16,073,094
Finance income
Finance expenses
Foreign exchange loss (gain)
(454,750)
-
563,165
Loss (income) before income taxes
16,181,509
Income taxes
Net loss
Other comprehensive income in the year
Change in fair value of available-for-sale
securities
Currency translation adjustment
(3,197,000)
$ 12,984,509
18,891
(988,077)
(969,186)
Comprehensive loss (income)
$ 12,015,323 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(e)
$
(38,679) $ 11,578,718
4,455,697
-
-
-
(e)
(d)
(38,679)
16,034,415
-
38,679
(550,277)
(454,750)
38,679
12,888
(550,277)
15,631,232
(d)
3,197,000
-
$
2,646,723 $ 15,631,232
(c)
-
(4,222,892)
18,891
(5,210,969)
(4,222,892)
(5,192,078)
$
(1,576,169) $ 10,439,154
Net loss attributable to:
Shareholders of the Company
11,371,215
(708,049)
(c)
2,646,723
13,309,889
Non-controlling interests
1,613,294
708,049
-
2,321,343
$ 12,984,509 $
-
$
2,646,723 $ 15,631,232
Comprehensive loss (income) attributable to:
Shareholders of the Company
10,402,029
(708,049)
(c, d)
(1,270,222)
8,423,758
Non-controlling interests
1,613,294
708,049
(d)
(305,947)
2,015,396
$ 12,015,323 $
-
$
(1,576,169) $ 10,439,154
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
5. ADJUSTMENT AND TRANSITION TO IFRS (continued)
CONSOLIDATED BALANCE SHEET
January 1, 2010
CDN GAAP
Adj #
IFRS
adjustments
IFRS
ASSETS
Current assets
Cash and cash equivalents
Investments
Loans receivable
Trade receivables and other
Rough diamond inventories
Plant and equipment
Mineral properties
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current liabilities
$
49,123,926
306,199
2,000,000
298,665
51,728,790
1,764,960
1,500,000
88,879,129
-
$
- $ 49,123,926
-
306,199
2,000,000
-
298,665
-
-
51,728,790
(c)
(c)
(d)
178,848
181,910
(6,595,217)
-
1,943,808
1,681,910
82,283,912
-
$
143,872,879
$
(6,234,459) $ 137,638,420
Trade payables and accrued liabilities
Due to related parties
Current portion of long-term debt
$
Due to related parties
Long-term debt
Restoration provisions
Future income taxes
TOTAL LIABILITIES
1,170,409
113,287
-
1,283,696
9,863,306
-
360,641
8,051,101
$
- $
-
-
1,170,409
113,287
-
-
1,283,696
-
-
-
(8,051,101)
9,863,306
-
360,641
-
(d)
19,558,744
(8,051,101)
11,507,643
EQUITY ATTRIBUTABLE TO SHAREHOLDERS
Share capital
Contributed surplus
Cumulative deficit
Accumulated other comprehensive income
(loss)
Total equity attributable to shareholders of the
company
Non-controlling interests
TOTAL EQUITY
122,476,675
1,649,157
(15,595,964)
(c)
-
-
2,201,677
122,476,675
1,649,157
(13,394,287)
640,225
(d)
(385,035)
255,190
109,170,093
15,144,042
124,314,135
1,816,642
110,986,735
-
15,144,042
1,816,642
126,130,777
TOTAL LIABILITIES AND EQUITY
$
143,872,879
$
(6,234,459) $ 137,638,420
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
6. VAT RECEIVABLES AND OTHER
VAT
Other
Prepayments
7. PLANT AND EQUIPMENT
2011
2010
$
5,933,746 $
149,497
215,019
1,430,894
56,040
56,014
$
6,298,262 $
1,542,948
Cost
Construction
in progress
Mine and
plant
facilities
Vehicles
Furniture
and office
equipment
Total
Balance, January 1, 2010
$
- $
1,681,910 $
- $
- $ 1,681,910
Additions
Disposals and other
Translation differences
10,935,766
-
559,258
4,458,906
-
659,823
424,576
-
30,535
267,815
-
20,386
16,087,063
-
1,270,002
Balance, December 31, 2010
11,495,024
6,800,639
455,111
288,201
19,038,975
Additions
Disposals and other
Translation differences
84,164,797
-
(8,939,809)
2,412,460
-
(1,447,211)
1,017,022
-
(158,333)
2,268,944
(8,103)
(230,021)
89,863,223
(8,103)
(10,775,374)
Balance, December 31, 2011
$ 86,720,012 $
7,765,888 $ 1,313,800 $
2,319,021 $ 98,118,721
Accumulated depreciation
Balance, January 1, 2010
$
- $
- $
- $
- $
-
Depreciation, depletion for the
year
Disposals and other
Translation differences
Balance, December 31, 2010
Depreciation, depletion for the
year
Disposals and other
Translation differences
-
-
-
-
-
-
-
1,333,977
-
186,561
1,520,538
1,960
-
274
2,234
21,199
-
2,965
1,357,136
-
189,800
24,164
1,546,936
2,165,316
-
(521,490)
309,721
-
(29,572)
166,407
(690)
(19,152)
2,641,444
(690)
(570,214)
Balance, December 31, 2011
$
- $
3,164,364 $ 282,383 $
170,729 $ 3,617,476
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
7. PLANT AND EQUIPMENT (continued)
Net book value
As at January 1, 2010
$
- $
1,681,910 $
- $
- $ 1,681,910
As at December 31, 2010
$ 11,495,024 $
5,280,101 $ 452,877 $
264,037 $ 17,492,039
As at December 31, 2011
$ 86,720,012 $
4,601,524 $ 1,031,417 $
2,148,292 $ 94,501,245
Plant and equipment include interest and financing costs relating to the construction of plant and
equipment prior to the commencement of commercial production. Interest and financing costs are
capitalized only for the project for which funds have been borrowed. Interest expense capitalized in 2011
was $1,262,717 (2010 - nil).
8. MINERAL PROPERTIES
Cost
Karowe Mine
Karowe
restoration
asset
Mothae
Diamond
Mothae
mining
license
Total
Balance, January 1, 2010
$ 63,718,210 $
- $ 18,565,702
$
- $ 82,283,912
Additions
Disposals and other
Translation differences
-
-
892,049
Balance, December 31, 2010
64,610,259
-
-
-
-
99,874
-
1,817,922
3,530,120
-
530,865
3,629,994
-
3,240,836
20,483,498
4,060,985
89,154,742
Additions
Disposals and other
Translation differences
-
-
(7,901,090)
12,959,168
-
(1,166,060)
187,518
-
(2,445,156)
-
-
(746,445)
13,146,686
-
(12,258,751)
Balance, December 31, 2011
$ 56,709,169 $ 11,793,108 $ 18,225,860 $ 3,314,540 $ 90,042,677
a) Karowe Mine
In December 2009, the Company, through a newly created indirect wholly-owned subsidiary
Boteti Diamond Holdings Inc. (“Boteti Holdings”), acquired an initial 70.268% interest in the
Boteti Mining (PTY) Ltd. (“Boteti”), from De Beers Prospecting Botswana (Pty) Limited (“De
Beers”), for consideration of $49 million. The remaining interest in Boteti was held as to 28.381%
by African Diamonds PLC (“African Diamonds”) and indirectly by Wati Ventures (Pty) Ltd. (“Wati
Ventures”) as to 1.351%.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
8. MINERAL PROPERTIES (continued)
To fund the Karowe Mine acquisition, Lucara and Boteti Holdings had entered into a guarantee
and loan facility with a significant shareholder of the Company in the amount of $49.0 million. As
consideration for the guarantee, the lender was entitled to receive 12,191,200 shares in the
Company. The shares were issued in 2010 at a fair value of $9.8 million.
The net assets acquired on the acquisition of Boteti did not meet the definition of a business;
accordingly, the acquisition had been accounted for as a purchase of assets and liabilities. The
purchase price allocation is summarized as follows:
Purchase price:
Cash paid
Transaction costs
Net assets acquired
Cash and cash equivalents
Accounts receivable and prepaid expenses
Diamond inventory
Mineral properties
Accounts payable and accrued liabilities
Future income tax liability
Minority interest
$49,000,000
623,292
$49,623,992
$ 1,166,738
67,441
235,023
68,329,697
(419,336)
(4,611,528)
(15,144,043)
$49,623,992
The purchase price has been allocated to the fair value of the assets acquired and liabilities
assumed, based on management’s best estimates and taking into account all available information at
the time of acquisition.
Boteti Holdings had granted an option to African Diamonds to increase its interest in Boteti by a
further 10.268% by making a cash payment of approximately US$7.3 million, which was
exercised in April 2010. The value of the non-controlling interest in Boteti that was disposed of
was $5,229,338. This transaction has been accounted for as an equity transaction. The
$2,126,918 received in excess of the non-controlling interest has been recorded as an adjustment
to the deficit in the year ended December 31, 2010. After the exercise of the option, Boteti was
held 60% by the Company and 40% by African Diamonds. In December 2010, the Company
acquired the 40% non-controlling interest.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
8. MINERAL PROPERTIES (continued)
b) Mothae Diamond Project
In July 2006, the Company signed an option agreement with Motapa Diamonds Inc. (“Motapa”)
to acquire up to a 70% interest in the Mothae Diamond Project located in Lesotho, Africa.
Pursuant to the terms of the option agreement the Company earned a 65% interest in the
property in April 2009 by making payments to Motapa totaling $8.0 million.
On July 3, 2009, the Company acquired the remaining 35% interest in the property by acquiring
Motapa through a plan of arrangement by issuing a total of 34,455,022 shares to the
shareholders of Motapa at an exchange ratio of 0.9055 shares (“Exchange Ratio”) for each
Motapa share. In addition, the Company issued a total of 3,019,835 replacement stock options to
the Motapa stock option holders at the same exchange ratio.
Pursuant to the terms of the mining agreement, Mothae Diamonds, an indirect 75% owned
subsidiary of the Company has a 100% interest in the project. The remaining 25% of Mothae
Diamonds is held by the Government of Lesotho. One half of the project interest held by the
Government is a free carried interest and one half is funded by the Government through its share
of project dividends. During an initial pre-production test mining stage, a royalty of 4% of the
sales value of diamonds produced from Mothae will be payable to the government. At full
production the royalty will increase to 8% of diamond sales value. The mining lease is valid until
September 2019 and renewable for an additional 10 years.
In terms of IFRS 2 – Share-based payments, the granting of this equity stake classifies the
transaction as a share-based payment, as the entity is obtaining the right to mine the kimberlite
pipe in exchange for equity in the entity. The mining lease provides for the ultimate transfer of a
25% equity interest in the entity and makes no provisions for cash settlement. As such, the
share-based payment was treated and recognized as an equity settled share-based payment.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
9. LONG-TERM DEBT
In July 2011, the Company entered into a $50 million loan agreement secured by a debenture to
fund the development of the Company’s projects. The loan facility has a maturity date of
December 31, 2013 and requires quarterly repayments of $8.3 million commencing September
30, 2012. No interest is payable during the term of the facility. The facility is secured by a pledge
by the Company of the shares of the subsidiaries that control the companies that own the
projects. The facility has been issued by Zebra Holdings and Investments S.a.r.l (“Zebra”) and
Lorito Holdings S.a.r.l (“Lorito”), each an investment company owned by a trust settled by the
late Adolf H. Lundin, and not a related party of the Company.
The terms of the debenture financing also included the Company issuing an aggregate of 9
million common shares (fair value $10.7 million) to Zebra and Lorito as consideration for the
facility, in lieu of interest and fees. During the year, accretion of $2.6 million was recorded of
which $1.3 million has been capitalized in plant and equipment (Note 7).
The borrowings have been measured at fair value. The liability is measured at amortized cost
using the effective interest method, with interest expense recognized on an effective yield basis.
The effective interest rate is the rate that exactly discounts estimated future cash payments
through the expected life of the financial liability, or (where appropriate) a shorter period, to the
net carrying amount on initial recognition.
As at December 31, 2011
Current
portion
Long-term
portion
Total
Principal
Unamortized discount
$ 16,666,666
(5,716,173)
$ 33,333,334 $ 50,000,000
(8,185,342)
(2,469,169)
Total carrying value
$ 10,950,493 $ 30,864,165 $ 41,814,658
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
10. RESTORATION PROVISIONS
The Company’s restoration provisions relate to the rehabilitation of its diamond mine properties. The
provisions have been calculated based on total estimated rehabilitation costs and discounted back to
their present values. The pre-tax discount rates and inflation rates are adjusted annually and reflect
current market assessments. The Company has applied a pre-tax discount rate of 10% at December
31, 2011 and an inflation rate of 6% at December 31, 2011 at the Karowe Mine project. The
Company has applied a pre-tax discount rate of 11.0% at December 31, 2011 (10.5% at December
31, 2010) and an inflation rate of 6.0% at December 31, 2011 (6.4% at December 31, 2010) at its
Mothae Diamond Project. The rehabilitation costs are expected to be incurred in the period of 2022
to 2024. The estimated total liability for reclamation and remediation costs on an undiscounted basis
after inflation is approximately $17.5 million (December 31, 2010 - $3.2 million, December 31, 2009 -
$1.7 million).
Balance, beginning of year
$
567,697
$ 360,641
2011
2010
Settlement of obligations during the year
Fair value of obligation recorded during the year
Revisions to estimated cash flows
Accretion of liability component of obligation
Foreign currency translation adjustment
Balance, end of year
Less: Current portion
-
12,959,168
187,518
70,583
(1,299,316)
12,485,650
-
-
99,874
-
38,679
68,503
567,697
-
Long-term portion of restoration provisions
$ 12,485,650
$ 567,697
11. SHARE CAPITAL
The authorized share capital consists of an unlimited number of common shares, with no par value.
In February 2011, the Company completed a private placement of 60,000,000 common shares at
price of CAD$1.00 per share of gross proceeds of CAD$60.0 million. A fee of 5% was paid on a
portion of the private placement.
In July 2011, 9.0 million common shares with a fair value of $10.7 million were issued in lieu of
interest and fees to Zebra and Lorito as part of the issuance of the $50.0 million debenture (Note
9).
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
12. STOCK OPTIONS
The Company has one rolling stock option plan (the “Plan”) approved by the shareholders of the
Company on May 13, 2011 which reserves an aggregate of 10% of the issued and outstanding shares
of the Company for issuance upon the exercise of options granted. Vesting and terms of the option
agreement are at the discretion of the Board of Directors.
Movements in the number of stock options outstanding and their related weighted average exercise
prices are as follows:
Balance at December 31, 2009
5,704,782
$ 0.76
Number of shares issuable pursuant
to stock options
Weighted average exercise
price per share (CDN$)
Granted
Forfeited
Expired
Exercised
7,840,000
(885,825)
-
(1,108,957)
0.95
0.77
-
0.56
Balance at December 31, 2010
11,550,000
0.91
Granted
Forfeited
Expired
Exercised
1,525,000
(168,330)
(20,000)
(854,999)
0.84
0.95
0.77
0.71
Balance at December 31, 2011
12,031,671
$
0.93
Options to acquire common shares have been granted and are outstanding at December 31, 2011 as
follows:
Outstanding Options
Exercisable Options
Range of
exercise prices
CDN$
$0.00 - $0.49
$0.50 - $0.99
$1.00 - $1.49
$1.50 - $1.99
$2.00 - $2.50
Number of
options
outstanding
1,515,010
6,859,995
2,656,666
800,000
200,000
12,031,671
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CDN$
0.48
0.85
1.11
1.56
2.08
0.93
Number of
options
exercisable
1,515,010
5,529,908
2,573,331
800,000
200,000
10,618,249
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CDN$
0.48
0.85
1.11
1.56
2.08
0.94
0.52 $
0.85
0.85
0.47
0.47
0.77 $
0.52 $
1.18
0.86
0.47
0.47
0.97 $
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
12. STOCK OPTIONS (continued)
During the year ended December 31, 2011, an amount of $609,705 (2010 – $1,085,784) was
charged to operations in recognition of stock-based compensation expense, based on the vesting
schedule for the options granted.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes
option pricing model with weighted average assumptions and resulting values for grants as follows:
Assumptions:
Risk-free interest rate (%)
Expected life (years)
Expected volatility (%)
Expected dividend
Results:
2011
2010
1.12
3.00
57.95
Nil
1.68
1.76
58.48
Nil
Weighted average fair value of options granted (per option)
$
0.32 $
0.29
13. NON-CONTROLLING INTERESTS
As consideration for acquiring a mining license from the Government of Lesotho (“GOL”), the
Company granted the GOL 25% ownership in Mothae. One half of the interest held by the GOL is a
free-carried interest and the other 12.5% will ultimately be paid for by the GOL through its share of
future dividends paid by Mothae, if any.
The GOL’s equity interest is fixed and cannot be diluted by further equity issuances. As such, the
12.5% free-carried interest portion of the Company’s capital contributions into Mothae is accounted
for as an equity transaction between shareholders.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
14. EXPLORATION EXPENDITURES
December 31, 2011
Mothae
Diamond
Karowe
Mine
Test mining
Depreciation
Geology
Office and other
Resource development
Environmental impact assessment
Tailings and concentrates
Feasibility study
Diamonds recovered
$ 10,445,720 $
2,227,902
745,336
602,717
327,296
232,003
-
-
(7,935,648)
- $
354,445
-
-
-
-
-
(393,402)
-
Other
Total
- $ 10,445,720
2,582,347
-
745,336
-
614,581
11,864
327,296
-
232,003
-
-
-
(393,402)
-
(7,935,648)
-
$
6,645,326 $
(38,957) $
11,864 $
6,618,233
December 31, 2010
Mothae
Diamond
Karowe
Mine
Test mining
Depreciation
Geology
Office and other
Resource development
Environmental impact assessment
Tailings and concentrates
Feasibility study
Diamonds recovered
$
7,319,740 $
1,357,136
414,803
447,014
-
-
-
-
(1,645,085)
- $
-
-
476,238
-
-
514,494
2,669,553
-
Other
Total
- $
-
-
24,825
-
-
-
-
-
7,319,740
1,357,136
414,803
948,077
-
-
514,494
2,669,553
(1,645,085)
$
7,893,608 $ 3,660,285 $
24,825 $ 11,578,718
15. ADMINISTRATION
$
Salaries and benefits
Professional fees
Stock exchange, transfer agent, shareholder communication
Travel
Stock based compensation
Donations
Management fees
Office and general
Depreciation
2011
2010
2,006,047 $
1,762,571
1,729,076
703,773
609,705
562,505
505,850
243,999
59,096
1,226,943
492,675
241,498
667,214
1,085,784
267,400
349,416
117,739
7,028
!
$
8,182,622 $
4,455,697
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
16. GAIN ON SALE OF DIAMONDS
During the year ended December 31, 2011, Mothae Diamonds held two diamond sales and
received gross proceeds of $14.6 million. The sale included the rough diamond inventory that
was held at December 31, 2010, which was valued using the Company’s best estimate of the
lower of cost and net realizable value. The Company has recorded a gain on the sale of this
inventory in the amount of $2,339,282. The remaining proceeds from the sale have been netted
against exploration expenditures (Note 14).
17. INCOME TAXES
The provision for income taxes differs from the amount computed by applying statutory rates to net
loss before income taxes. Reasons for these differences and the related tax effects are as follows:
Basic statutory tax rate
Net loss before taxes
Computed income tax recovery
Differences between Canadian and foreign tax rates
Non-deductible expenses
Change in tax rates
Deferred benefits not recognized
Exchange rate differences
Other
2011
2010
26.5%
28.5%
18,673,892
15,631,232
4,948,581
(115,852)
(161,572)
(134,730)
(4,259,366)
(601,338)
324,277
4,454,901
(390,760)
(309,448)
(95,634)
(5,236,447)
356,452
1,220,936
$
- $
-
The Company did not recognize its deferred tax assets as it is not considered probable that they will
be utilized and has no deferred tax liabilities. The movement in deferred tax assets during the year,
without taking into consideration the offsetting balances within the same tax jurisdiction, is as
follows:
Deferred income tax assets not recognized
2011
2010
Non-capital loss carry forward
Resource pools
Share issue, finance costs and other
$
13,286,539 $
95,963
1,827,666
7,297,905
50,237
3,861,757
$
15,210,168 $ 11,209,899
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
17. INCOME TAXES (continued)
to offset
As at December 31, 2011, the Company has non-capital losses for income tax purposes in Canada,
available
(2010 –
CAD$11,041,000). These losses, if not utilized, will expire through to 2030. Future tax benefits
which may arise as a result of these non-capital losses have not been recognized in these
financial statements and have been offset by a valuation allowance.
income of approximately CAD$25,473,000
taxable
future
18. LOSS PER COMMON SHARE
a) Basic
Basic earnings per common share are calculated by dividing the net loss attributable to the
shareholders of the Company by the weighted average number of common shares outstanding
during the year:
2011
2010
Loss for the year – attributable to Shareholders of the
Company
$
18,126,567 $ 13,309,889
Weighted average number of common shares outstanding
360,019,710
223,734,936
$
0.05 $
0.06
b) Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of common
shares outstanding to assume conversion of all dilutive potential common shares. For stock options,
a calculation is done to determine the number of shares that could have been acquired at fair value
(determined as the average market share price of the Company’s outstanding shares for the period),
based on the exercise prices attached to the stock options. The number of shares calculated above
is compared with the number of shares that would have been issued assuming the exercise of stock
options.
2011
2010
Loss for the year – attributable to Shareholders of the
Company
$
18,126,567 $ 13,309,889
Weighted average number of common shares outstanding
Adjustment for stock options
Weighted average number of common shares for diluted
360,019,710
-
223,734,936
-
earnings per share
360,019,710
223,734,936
$
0.05 $
0.06
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
19. RELATED PARTY TRANSACTIONS
a) Related party expenses
The Company incurred the following expenses with Namdo Management Services Limited
(“Namdo”) and Lundin Foundation (“LF”), companies related by way of directors in common. In
the prior year, the Company incurred air chartered services from Mile High Holdings Ltd. (“Mile
High”), a company associated with the Chairman of the Company. The Company also incurred
professional geological services and laboratory related expenditures from the Mineral Services
Group (“MS Group”), a company that is associated with a director of Company.
Description of services
Related party
2011
2010
Management fees
Donations
Exploration related expenditures
Aircraft charter
Namdo
LF
MS Group
Mile High
$
505,850 $
607,020
125,598
-
349,416
-
639,472
41,064
$
1,238,468 $
1,029,952
b) Related party liabilities
The liabilities of the Company include the following amounts due to related parties:
Namdo
MS Group
c) Key management compensation
2011
2010
$
$
- $
-
- $
15,962
151,185
167,147
Key management personnel are those persons having the authority and responsibility for planning,
directing and controlling the activities of the Company, directly or indirectly. Key management
personnel include the Company’s executive officers, vice-presidents and members of its Board of
Directors.
The remuneration of key management personnel were as follows:
Salaries and wages
Short term benefits
Stock based compensation
2011
2010
$
1,253,718 $
50,679
439,100
1,033,383
43,332
916,915
$
1,743,497 $
1,993,630
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
20. SEGMENT INFORMATION
The Company’s primary business activity is the exploration and development of diamond properties
in Africa so there is only one reportable operating segment.
The geographic distribution of non-current assets is as follows:
Plant and equipment
Mineral properties
Other
2011
2010
2011
2010
2011
2010
Canada
Lesotho
Botswana
$
259,925 $
- $
- $
- $
7,766 $
4,751,648
89,489,672
5,573,411
11,918,628
21,540,400
68,502,277
24,544,483
64,610,259
141,747
-
$ 94,501,245 $ 17,492,039 $90,042,677 $ 89,154,742 $
149,513 $
-
171,879
34,426
206,305
Note 14 contains the geographic distribution of exploration expenditures.
21. FINANCIAL INSTRUMENTS
a) Measurement categories and fair values
As explained in Note 3, financial assets and liabilities have been classified into categories that
determine their basis of measurement and, for items measured at fair value, whether changes in fair
value are recognized in the consolidated statements of operations or consolidated statements of
comprehensive loss. Those categories are: fair value through profit or loss; loans and receivables;
available for sale assets; and, for liabilities, amortized cost.
The fair value of the Company’s available for sale financial instruments is derived from quoted prices
in active markets for identical assets. The fair value of the Company’s long-term debt approximates
their carrying amounts due to the fact that there have been no significant changes in the Company’s
own credit risk. The fair value of all other financial instruments of the Company approximates their
carrying values because of the demand nature or short-term maturity of these instruments.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
The Company’s financial assets and liabilities are categorized as follows:
ASSETS
Loans and receivables
Cash
Cash equivalents
Loans receivable
Other receivables
Available for sale
Investments
LIABILITIES
Amortized cost
Trade payables
Accrued liabilities
Due to related parties
Long-term debt
b) Fair value hierarchy
December 31,
2011
December 31,
2010
January 1,
2010
$
22,750,599 $
25,838,810
48,589,409
-
149,497
8,848,905
24,036,000
32,884,905
-
56,040
$
6,229,926
42,894,000
49,123,926
2,000,000
-
$
48,738,906 $
32,940,945
$
51,123,926
109,020
287,308
306,199
$
109,020 $
287,308
$
306,199
$
$
11,483,887
5,151,945
16,635,832
-
41,814,658
$
3,358,191
3,926,738
7,284,929
167,147
-
1,170,409
-
1,170,409
9,976,593
-
$
58,450,490 $
7,452,076
$
11,147,002
The following table classifies financial assets and liabilities that are recognized on the balance sheet
at fair value in a hierarchy that is based on significance of the inputs used in making the
measurements. The levels in the hierarchy are:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or
liability, either directly (that is, as prices) or indirectly (that is, derived from prices)
Level 3 - Inputs for the asset or liability that are not based on observable market data (that is,
unobservable inputs).
Level 1
Investments
Level 2 and Level 3 – N/A
December 31,
2011
December 31,
2010
January 1,
2010
$
109,020 $
287,308
$
306,199
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
c) Financial risk management
The Company’s financial instruments are exposed to certain financial risks, including currency, credit,
liquidity and price risks.
Currency risk
The Company is exposed to the financial risk related to fluctuating foreign exchange rates. The
operating results and financial position of the Company are reported in U.S. dollars. The fluctuation
of the Canadian dollar, Lesotho Maloti, Botswana Pula and South African Rand in relation to the U.S.
dollar will consequently have an impact on the financial results of the Company and will also affect
the Company’s assets, liabilities and equity. The Company has not hedged its exposure to currency
fluctuations.
At December 31, 2011, the Company is exposed to currency risk relating to funds held in Canadian
dollars of $27.0 million, South African Rand of 127.3 million and Botswana Pula of 8.7 million. Based
on this exposure, a 10% change in the Canadian/U.S. dollar, South African Rand/U.S. dollar and
Botswana Pula/U.S. dollar exchange rates would give rise to an increase/decrease of approximately
$3.1 million in Other Comprehensive Loss. There is no impact on the Statement of Operations
resulting from movements in exchange rates.
Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails
to meet its contractual obligations. The majority of the Company’s cash is held through a large
Canadian financial institution with a high investment grade rating.
The carrying amount of financial assets recorded in the financial statements, net of any allowance
for losses, represents the Company’s maximum exposure to credit risk.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they
become due. Cash flow forecasting is performed in the operating entities of the Company and
aggregated in head office which monitors rolling forecasts of the Company’s liquidity requirements to
ensure it has sufficient cash to meet operational needs at all times. Such forecasting takes into
consideration the Company’s debt financing plans.
The Company’s estimated minimum contractual undiscounted cash flow requirements for financial
liabilities were:
December 31, 2011
Trade payables and accrued
liabilities
Due to related parties
Long-term debt
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$ 16,635,832 $
-
-
- $
-
16,666,666
- $
-
33,333,334
-
-
-
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
December 31, 2010
Trade payables and accrued
liabilities
Due to related parties
Long-term debt
Interest rate risk
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$ 7,284,929 $
167,147
-
- $
-
-
- $
-
-
-
-
-
The Company’s exposure to interest rate risk results from the effects that changes in interest rates
may have on the reported value of cash and cash equivalents. There is minimal risk that the
Company would recognize any loss as a result of a decrease in the fair value of any short-term
investments included in cash and cash equivalents due to their short-term nature. Based on the
balance of cash and cash equivalents at December 31, 2011, and assuming that all other variables
remain constant, a 0.25% change in the U.S. prime rate would result in an increase/decrease of
$121,474 in the interest accrued by the Company per annum.
Equity market risk
The Company is exposed to equity price risk arising from its marketable securities, which are
classified as available-for-sale.
22. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue
as a going concern in order to pursue the development of its mineral properties and to maintain a
flexible capital structure which optimizes costs of capital at an acceptable risk.
In the management of capital, the Company considers items included in equity attributable to
shareholders to be capital.
The Company manages the capital structure and makes adjustments to it in light of changes in
economic conditions and the risk characteristics of the Company’s assets. In order to maintain or
adjust the capital structure, the Company may attempt to issue new shares or debt instruments,
acquire or dispose of assets, or to bring in joint venture partners.
In order to facilitate the management of its capital requirements, the Company prepares annual
expenditures budgets that are updated as necessary depending on various factors, including
successful capital deployment and general industry conditions. The annual and updated budgets are
approved by the Board of Directors.
The Company’s existing current capital resources will not be sufficient to finance the remaining
expenditures for the full development and construction of the Karowe Mine, test mining program on
the Mothae Project and general corporate expenses over the next twelve months. The timing and
completion of these activities are conditional on additional funds being raised either through equity
or debt.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
(All amounts expressed in U.S. Dollars, unless otherwise indicated.)
23. COMMITMENTS
In conjunction with the development of the Karowe Mine, the Company has committed to
approximately $11.5 million in additional capital expenditures.
24. CONTINGENCIES
In April 2010, legal proceedings were initiated against African Diamonds (Plc) (“AFD”), a
subsidiary acquired by the Company in 2010, by two former directors of AFD, alleging entitlement
to a 3% royalty on production from the Karowe Mine. The claim was heard in the Botswana High
Court in early June 2011. The High Court delivered its ruling in August 2011 dismissing the claims
against AFD, with costs awarded against the plaintiffs.
In September, the Company was notified that the plaintiffs, in the legal proceedings initiated
against AFD, had filed an appeal of the decision of the High Court of Botswana dismissing the
plaintiff’s claims with costs awarded in favor of AFD. At this stage the Company does not have
any further details as to the timing of when the Appeal will be heard.
25. SUBSEQUENT EVENTS
In February 2012, the Company received a commitment letter from the Bank of Nova Scotia for a
$25 million revolving term credit facility. The facility will contain financial and non-financial
covenants customary for a facility of this size and nature. The applicable interest rate of any loan
under the facility will be determined by the Company’s leverage ratio at any given time. The
availability of the facility is subject to the completion of final documentation and customary
conditions precedent. The two year facility will be secured by the assets of the Company. Up to $15
million may be advanced prior to the delivery of security over the Company’s Karowe assets.