MD&A
and
Consolidated
Financial
Statements
Year
Ending:
December
31,
2013
LUCARA DIAMOND CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2013
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, 2013, which are prepared in accordance with International Financial Reporting
Standards (“IFRS” as issued by the International Accounting Standards Board (“IASB”). All amounts
are expressed in U.S. dollars unless otherwise indicated. The effective date of this MD&A is February
20, 2014.
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
Safety: There were no Lost Time Injury (“LTI’s”) and no reportable environmental incidents at
Karowe during the fourth quarter of 2013. Karowe’s full year Lost Time Injuries Frequency Rate
(“LTIFR”) was 0.17. LTIFR is defined as the total number of work hours lost per 200,000 work hours.
Cash flows, cash operating margins and year end diamond inventory: The Company
achieved revenue of $47.9 million ($433 per carat) from sales of 110,635 carats of diamond during
the fourth quarter of 2013 including one exceptional stone tender. This excludes revenue of $10.9
million, which was received during the quarter from Karowe’s late September tender. At an average
operating expense of $109 per carat, the cash operating margin during the quarter was $324 per
carat.
Full year sales of 438,717 carats achieved proceeds of $180.5 million, or $411 per carat. The
Company achieved a full year cash operating margin of $311 per carat based on operating expenses
of $100 per carat. Full year operating cost per tonne milled was $18 compared to budget of $23 per
tonne. Attention to cost control and the revenues from exceptional stone tenders have resulted in
the Company achieving a full year earnings before deducting interest and other financial charges,
income taxes, depreciation and amortization (“EBITDA” see page 7 Non-IFRS measures) of $102.9
million in its first full year of operations.
At year end the Company was well positioned for 2014 with a significant diamond inventory of
approximately 67,000 carats of diamond, including a selection of exceptional stones totalling over
1,000 carats. The Company expects to hold its first Exceptional Stone Tender of 2014, early in the
second quarter.
Exceptional stone tenders: The Company continued to recover large and exceptional diamonds,
resulting in an exceptional stone tender during the quarter achieving revenue of $22.9 million
($20,280 per carat). During 2013 the Company held three exceptional stone tenders achieving
revenues of $72.1 million (2,971 carats at $24,290 per carat).
Net cash position: The Company continued to achieve strong cash operating earnings of $39.0
million during the quarter and $118.6 million for the year resulting in a year-end cash balance of
$49.4 million. Management expects to use the existing cash resources to finance Karowe’s plant
upgrade capital expenditure during 2014. At year-end the Company remains debt free with the $25
million Scotiabank credit facility being undrawn.
Karowe operating performance: Karowe exceeded budget in terms of carats recovered and sold
and surpassed its initial and updated revenue forecast of $90 million and $118 million respectively
due largely to the recovery of its large and exceptional diamonds.
FINANCIAL HIGHLIGHTS
In millions of U.S. dollars unless otherwise noted
Revenues
Proceeds from quarterly sales tenders is comprised of:
Sales proceeds received during the period
September tender proceeds received in October
Total proceeds from quarterly sales tenders
Average price per carat sold (excluding September tender
proceeds received in October)
Operating expenses per carat sold
Cash operating margin per carat
Net income (loss) for the period
Income (loss) per share
Cash flow from operations (before working capital adjustments)
Cash on hand
OUTLOOK
Three months ended
December 31
Year Ended
December 31
2013
$ 58.7
47.8
10.9
58.7
433
109
324
21.3
0.05
33.9
49.4
2012
2013
2012
$ 29.1
$ 180.5
$ 41.8
29.1
-
29.1
289
84
205
(4.1)
(0.01)
3.8
13.3
180.5
-
180.5
411
100
311
65.2
0.17
99.6
49.4
41.8
-
41.8
$274
92
182
(7.5)
(0.02)
(3.8)
13.3
This section of the MD&A provides management's production and cost estimates for 2014. These are
“forward-looking statements” and subject to the cautionary note regarding the risks associated with
forward-looking statements.
Karowe Mine, Botswana
Karowe is forecast to process 2.2-2.4 million tonnes of ore and to produce and sell 400,000 to
420,000 carats of diamond in 2014. Revenue is forecast between $150 - $160 million.
Ore mined is forecast between 3.0 – 3.5 million tonnes and waste mined is expected to be between
10.0 – 11.0 million tonnes.
Karowe’s operating cash costs (see page 7 Non-IRFS measures) are expected to be between $31-$33
per tonne ore treated.
Capital expenditures include between $45-$50 million for Karowe’s plant upgrade to improve large
diamond recovery following the occurrence of exceptional stones, and to enable sustainable
processing of hard ore in the south lobe. Sustaining capital expenditures is forecast at $3.5 million.
The Company plans on holding eight diamond tenders and two exceptional stone tenders during the
year. The timing of these tenders will be based on Karowe’s production profile as well as commercial
decisions to maximize diamond revenue.
Karowe’s detailed operating performance and capital spend guidance is available on SEDAR at
www.sedar.com.
BUSINESS OVERVIEW
The Company is a diamond mining company focused in Africa. The business of the Company consists
of the acquisition, exploration, development and operation of diamond properties. The Company’s
head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock
Exchange, the NASDAQ OMX First North in Sweden and the Botswana Stock Exchange under the
symbol “LUC”.
The principal assets of the Company and the focus of the Company’s operations, development and
exploration activities are on assets in Lesotho and Botswana.
The following summarizes the Company’s current land holdings:
Country
Name
Botswana
Karowe Diamond License
Lesotho
Mothae Diamond Mining Lease
Interest
Held
100%
75%
Area
(km2)
15.3
20.0
RESULTS OF OPERATIONS
Karowe Mine, Botswana
Sales
Revenues
Proceeds generated from sales tenders conducted in the quarter
are comprised of:
Sales proceeds received during the quarter
September tender proceeds received in October
Sales proceeds received post June period end
Carats sold for proceeds generated during the period
Carats sold for revenues recognized during the period
Average price per carat for proceeds generated during the period
UNIT
Q4-13
Q3-13
Q2-13
Q1-13
Q4-12
US$m
US$m
US$m
US$m
US$m
Carats
Carats
US$
58.7
47.8
58.7
(10.9)
-
110,635
127,804
433
42.1
50.9
42.1
10.9
(2.1)
80,918
76,582
625
47.2
49.3
32.5
32.5
29.1
29.1
47.2
-
2.1
102,452
89,619
481
32.5
-
-
144,712
144,712
225
29.1
-
-
100,987
100,987
289
Production
Tonnes mined (ore)
Tonnes mined (waste)
Tonnes milled
Average grade processed
Carats recovered
Costs
Tonnes
Tonnes
Tonnes
cpht (*)
Carats
918,765
1,694,134
613,064
18.9
116,061
898,501
1,430,105
647,304
17.6
113,882
1,157,747
1,259,479
560,910
15.6
87,580
969,330
1,109,727
533,260
23.1
123,228
701,931
1,267,343
545,354
25.4
138,487
Operating costs per carats sold (see page 7 Non-IRFS measures)
Capital expenditures
US$
US$m
109
1.5
110
2.4
102
1.7
86
2.2
84
0.4
(*)
carats
per
hundred
tonnes
Operational performance at Karowe was as per forecast for the last quarter of 2013. Tonnes of
ore mined were on target, and overall waste stripping was well advanced to access the deeper
sections of the ore body in the south lobe as per the life of mine plan. The mine currently has
three months of ore exposed providing flexibility of material processed. The process plant
performed well during the quarter, and tonnes processed and carats produced were in line with
forecast.
The first full year of operations at Karowe was very successful with production and cost
targets either being met or exceeded. The 2013 year end target of 440,000 carats recovered
was surpassed.
The frequency of special stones (+10.8 carats) recovered during the quarter was significant
with 190 stones recovered with an average size of over 26 carats. This included five stones of
over 100 carats and a single 281 carat stone. The recovery of specials during 2013 far
exceeded expectations with 732 specials recovered with a total weight of over 18,000 carats
equating to 4% of annual production. Included in this were 17 stones over 100 carats and 4
stones over 200 carats.
The geological resource update was completed during the quarter, which demonstrated
superior value through the recognition of a continued presence of exceptional stones within
the centre and south lobes. This is now reflected in the size frequency distributions and an
increase in average modeled price to $394 per carat for an indicated mineral resource of 46.2
million tonnes with an average grade of 16 carats per hundred tonnes. The NI43-101 technical
report accompanying the resource update was published on February 3, 2014 and can be
found at www.sedar.com.
REVIEW OF PROJECTS
Mothae Diamond Project, Lesotho
The Mothae project is located in northeast Lesotho and is a large low grade kimberlite containing a
population of large, high value Type IIa diamonds.
The Company is currently reviewing a number of development options for Mothae.
Karowe, Plant Optimization Project
Karowe’s plant optimization project to modify the process plant to treat the harder material at depth
and improve the recovery of exceptional diamonds is advancing. Orders have been completed for
some long lead items, and the project schedule is on track to be complete by year end.
SELECT ANNUAL FINANCIAL INFORMATION
In millions of U.S. dollars unless otherwise noted
Revenues
Operating expenses
Royalty expenses
Cash operating earnings (1)
Exploration and other mining costs
Administration
Gain on sale of exploration program diamonds
Sales and marketing
EBITDA (2)
Depletion, amortization and accretion
Finance income (expenses)
Foreign exchange gain (loss)
Income tax expense
Net income (loss) for the year
Total equity
Cash flow from operations (before working capital
adjustments)
Total assets
Cash on hand
Income (loss) per share (basic and
diluted)
Per carat sold
Sales price
Operating expenses
$
2013
180.5 $
(43.8)
(18.1)
118.6
(1.3)
(11.4)
0.5
(3.5)
102.9
(15.0)
(3.8)
(3.9)
(15.0)
65.2
202.9
99.6
247.2
49.4
0.17
Year ended December 31,
2011
2012
41.8 $
(14.0)
(4.2)
23.6
(12.8)
(9.5)
-
(1.5)
(0.2)
(5.9)
(3.1)
1.7
-
(7.5)
157.5
3.8
235.4
13.3
(0.02)
-
-
-
-
(6.6)
(8.2)
2.3
-
(12.5)
-
(1.9)
(4.3)
-
(18.7)
170.4
(11.7)
241.3
48.6
(0.05)
$
411 $
100
274
92
-
-
(1) Cash operating earnings is a non-IFRS measure (page 7) defined as sales less operating expenses and royalty expenses.
(2) EBITDA is a non-IFRS measure (page 7) defined as earnings before interest, taxation, depreciation and amortization.
Revenues
During the year the Company had sales totalling 438,717 carats for gross proceeds of $180.5 million
at an average price of $411 per carat. The increase in revenues of $138.7 million compared to the
prior year is due to a full year’s production and the corresponding sales as well as the sale of large
exceptional stones, which contributed $72 million to revenues. In 2012 the Company commenced
production and declared commercial production at Karowe as at July 1, 2012.
Cash operating earnings
Cash operating earnings for the year ended December 31 2013 were $118.6 million resulting in a
cash operating margin (before royalties) of 76%. Full year operating expenses at $100 per carat
resulted in a cash operating margin of $311 per carat.
Cash operating earnings is a non-IFRS measure and is reconciled in the table above.
Exploration and other mining costs
Exploration expenditures and other mining costs relating to the Mothae project were $1.3 million
during 2013 compared to $12.8 million in 2012. The decrease is due to Mothae being on care and
maintenance during the year compared to the previous year when the Company was completing its
trial mining program.
Administration expenses
Administration expenses were $11.4 million in 2013 compared to $9.5 million in 2012. The increase of
$1.9 million was due largely to accrued employee performance payments, higher professional fee
expenditures due to the preparation of the Company’s resource update and contribution to the Lundin
Foundation.
Income Tax expense
Income tax expense was $15.0 million during the year. This is mainly due to the recognition of a
deferred tax liability during the year, which resulted in a corresponding non-cash future income tax
expense of $14.9 million. The deferred tax liability relates to temporary differences between the
accounting and tax base of the Company’s property, plant and equipment, restoration provisions and
non-capital tax loss pools. The Company has applied a significant portion of its non-capital losses in
Botswana against taxable income during the year.
Earnings before interest, tax, depreciation and amortization (EBITDA)
Full year EBITDA was $102.9 million compared to a loss in the previous year of $0.2 million. This
increase was due to an additional 285,993 carats sold during the year, including three exceptional
stone tenders achieving $72.1 million and lower exploration costs following Mothae being placed on
care and maintenance during 2013.
EBITDA is a non-IFRS measure and is reconciled in the table above.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2013, the Company had cash of $49.4 million compared to cash of $13.3 million
at December 31, 2012 and $33.6 million at September 30, 2013. The December sale’s royalty
payment was not paid until January 2014.
Cash generated from operating activities before working capital movements for the year ended
December 31, 2013 was an inflow of $99.6 million. These proceeds were offset by the Company’s
repayment of its $50 million debenture as well as repayment of the outstanding balance of the
Company’s revolving credit facility of $4.5 million. In addition, the Company incurred capital
expenditures of $7.9 million, which includes payment of $2.9 million for project retentions during the
year, which had been previously accrued.
In April 2012, the Company signed a definitive agreement with the Bank of Nova Scotia for a $25
million revolving term credit facility with a maturity date of March 26, 2014, which may be extended if
both parties agree.
The facility contains financial and non-financial covenants customary for a facility of this size and
nature. As at December 31, 2013 and to date, the Company was in compliance with all financial and
non-financial covenants. The applicable interest rate of any loan advances under the facility will be
determined by the Company’s leverage ratio at that time. The Company has provided security on the
two year facility by way of a charge over the Company’s Karowe assets and a guarantee by the
Company’s subsidiaries, which hold the Karowe assets. As at December 31, 2013 the full amount
under this facility was available.
SUMMARY OF QUARTERLY RESULTS
(All amounts expressed in thousands of U.S. dollars, except per share data)
The Company’s financial statements are reported under IFRS issued by the IASB. The following table
provides highlights, extracted from the Company’s financial statements, of quarterly results for the
past eight quarters (unaudited):
Three months ended
Dec-13
Sept-13
Jun-13 Mar-13
Dec-12
Sept-12
Jun-12 Mar-12
A. Revenues
58,683
42,096
47,224
32,504
29,172
12,658
Nil
Nil
B. Exploration (expenditures)
recovery
(167)
(389)
(557)
374
(2,277)
(4,465)
(2,798)
(3,314)
C. Administration expenses
(4,871)
(1,851)
(2,761)
(1,946)
(1,798)
(2,980)
(3,392)
(1,364)
D. Net income (loss)
21,331
15,043
22,679
6,169
7,664
(3,413)
(7,606)
(4,170)
E. Earnings (loss) per share
(basic and diluted)
Revenues
0.05
0.04
0.06
0.02
0.02
(0.01)
(0.02)
(0.01)
During the three months ended December 31, 2013, the Company completed three diamond
tenders, one of which was an exceptional diamond tender. The exceptional diamond tender
generated gross proceeds of $22.9 million or $20,280 per carat. The tenders achieved winning
bids totalling $47.8 million or $433 per carat. During the three months ended December 31, 2013,
the Company received proceeds of $10.9 million (17,642 carats) from tenders completed in the
previous quarter, which had not been collected at the end of the third quarter and therefore this
revenue has have been recognized during the current period in the Company’s consolidated
statement of operations.
Exploration and other mining costs
Exploration expenditures and other mining costs relating to the Mothae project were $0.2 million
during the fourth quarter of 2013 compared to $1.3 million during the fourth quarter of 2012. The
decrease in costs follows Mothae being placed on care and maintenance.
Administration expenses
Administration expenses increased $3.0 million during the quarter when compared to the previous
three month period due largely to accrued employee performance payments, higher professional fee
expenditures due to the preparation of the Company’s resource update and contribution to the Lundin
Foundation of $0.3 million for social programs in Botswana and Lesotho.
NON-IFRS FINANCIAL MEASURES
This MD&A refers to certain financial measures, such as cash operating earnings and EBITDA, which
are not measures recognized under IFRS and do not have a standardized meaning prescribed by
IFRS. These measures may differ from those made by other corporations and accordingly may not be
comparable to such measures as reported by other corporations. These measures have been derived
from the Company’s financial statements, and applied on a consistent basis, because the Company
believes they are of assistance in the understanding of the results of operations and financial position.
Cash operating earnings (see “Select Annual Financial Information”) is the term the Company uses to
describe the cash that is generated from sales net of cost of goods sold, excluding depletion,
amortization and accretion, and excluding the effect of changes in working capital.
EBITDA (see “Select Annual Financial Information”) is the term the Company uses as an approximate
measure of the Company’s pre-tax operating cash flow and is generally used to better measure
performance and evaluate trends of individual assets. EBITDA comprises earnings before deducting
interest and other financial charges, income taxes, depreciation and amortization and net loss
attributable to non-controlling interests.
Operating costs per carats sold (see “Karowe Mine, Botswana”) is the term the Company uses to
describe the mining, processing and site administration costs to produce a single carat of diamond.
This is calculated as operating costs per carat of diamond sold.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2013, the Company incurred the following expenses with
Namdo Management Services Limited (“Namdo”) and Mile High Holdings Ltd. (“Mile High”),
companies related by way of directors in common. 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 former director of Company. Beginning July 1, 2013,
the MS Group is no longer a related party.
(All amounts expressed in thousands of U.S. dollars)
Description of services
Management fees
Donations
Exploration related expenditures
Aircraft charter
Related Party
Namdo
Lundin Foundation
MS Group
Mile High
December 31,
2013
December 31,
2012
$ 489
253
84
71
$ 897
$ 504
-
1,916
382
$ 2,802
FINANCIAL INSTRUMENTS
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.
In the normal course of business, the Company is inherently exposed to currency and commodity
price risk. For a discussion of certain risks and assumptions that relate to the use of derivatives,
including equity market risk, liquidity risk and credit risk, refer to Note 21 in the Company’s
consolidated financial statements. For a discussion of the methods used to value financial
instruments, as well as any significant assumptions, refer also to Note 21 of the Company’s
consolidated financial statements.
OUTSTANDING SHARE DATA
As at the date of this MD&A, the Company had 376,899,415 common shares outstanding and
4,208,334 stock options outstanding under its stock-based incentive plan. As at the same date, the
Company had no stock purchase warrants outstanding.
SUBSEQUENT EVENTS
Sale of Mothae plant
In December 2013, the Company signed a memorandum of understanding (“MOU”) with Paragon
Diamonds Ltd. (“Paragon”) for the sale of certain kimberlite processing plant and diamond recovery
assets. Under the terms of the MOU, the Company will receive consideration of:
• $0.1 million cash and 4,434,589 common shares of Paragon on signing of the asset
purchase agreement
• $0.2 million cash and 5,543,236 common shares of Paragon on commencement of
relocation of the assets from the Mothae site. The number of common shares will be
adjusted should an equity raise be completed by Paragon at a price less than £0.04.
The signing of the asset purchase agreement is anticipated by the end of February 2014.
As part of the MOU, the Company received a non-refundable deposit of US$50,000 from Paragon in
December 2013.
Litigation
Upon completion of the African Diamonds PLc (“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 2011, 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. The appeal was heard in the Appeal Court of
Botswana in January 2014 and judgment was handed down in February 2014.
The Court of Appeals, the highest court in Botswana upheld the previous ruling by the Botswana High
Court, dismissing the claim against African Diamonds, with costs awarded against the plaintiffs. The
decision is final and there is no further recourse against African Diamonds.
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.
Diamond Prices and Marketability
The mining industry, in general, is intensely competitive and there is no assurance that, a profitable
market will exist for the sale of diamonds produced. The value of the Company’s shares, its financial
results and its mining activities are significantly affected by the price and marketability of diamonds.
Numerous factors beyond the control of the Company may affect the price and marketability of any
diamonds produced which cannot be accurately predicted, such as international economic and
political trends, global or regional consumption and demand and supply patterns, increased
production of other diamond producers, especially due to the small concentration of producers and
sellers within the market. 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.
Economic Conditions
financial ability.
Unfavourable economic conditions may negatively
Unfavourable 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.
impact the Company’s
Uncertainties Related to Mineral Resource Estimates
There is a high 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, no assurance can be given to the actual quantity of mineral resources and
grades. 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 geo-statistical 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.
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
Currency fluctuations may impact the Company’s financial performance. Diamonds are sold in US
dollar with a majority of the Company’s costs and expenses being incurred in Botswana Pula, South
African Rand, Lesotho Loti, Canadian 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. In order to mitigate foreign exchange fluctuations the
Company has hedged a proportion of its Botswana pula costs for the 2014 financial year.
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, 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 (“LOM”) planning. Significant changes in the LOM
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 the 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 environmental assessments of
proposed projects and heightened responsibility for companies and their officers, directors and
employees. There can be no assurance that possible future charges in environmental regulation will
not adversely affect the Company’s operations. As well, environmental hazards may exist on a
property in which the Company holds an interest which were caused by previous or existing owners
or operators of the properties and of which the Company is not aware at present. Operations at the
Company’s mines are subject to strict environmental and other regulatory requirements, including
requirements relating to the production, handling and disposal of hazardous materials, pollution
controls and health and safety. Any failure to comply with the requirements could result in substantial
fines, delays in production, or the withdrawal of the Company’s mining licenses.
Foreign Operations Risk
The Company’s current significant 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. For example, changes to regulations in Botswana
and Lesotho relating to royalties, allowable production, importing and exporting of diamonds and
environmental protection, may result in the Company not receiving an adequate return on investment
capital.
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 labour unrest. Changes in mining or investment
policies or shifts in political attitudes in these countries may also adversely affect the Company’s
business. In addition, there may be greater exposure to a risk of corruption and bribery (including
possible prosecution under the federal Corruption of Foreign Public Officials Act). Also, in the event of
a dispute arising in foreign operations, the Company may be subject to the exclusive jurisdiction of
foreign courts and may be hindered or prevented from enforcing its rights. There is no assurance that
future changes in taxes in any of the countries in which the Company operates will not adversely
affect the Company’s operations.
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
The Karowe Mine and the Mothae Project are located in remote areas and the availability of adequate
infrastructure is critical. Reliable roads, bridges, power and water supply are important determinants,
which affect capital and operating costs. Sabotage, government or other interference in the
maintenance of provision of such infrastructure could adversely affect activities and profitability of the
Company.
Rehabilitation Funds and Mine Closure Costs
Changes in environmental laws and regulations can create uncertainty with regards to future
rehabilitation costs and affect the funding requirements. Closing a mine can have significant impact
on local communities and site remediation activities may not be supported by local stakeholders.
Actual costs realized in satisfaction of mine closure obligations may vary materially from
management’s estimates.
Community Relations
The Company’s relationships with the communities in which it operates and other stakeholders are
critical to ensure the future success of its existing operations and the construction and development
of its projects. There is an increasing level of public concern relating to the perceived effect of
mining activities on the environment and on communities impacted by such activities. Publicity
adverse to the Company’s operations, or the mining industry generally, could have an adverse effect
on the Company and may impact relationships with the communities in which the Company operates
and other stakeholders. While the Company is committed to operating in a socially responsible
manner, there can be no assurance that its efforts in this respect will mitigate this potential risk.
Uninsured Risks and Insurance Coverage
The mining business is subject to a number of risks and hazards that may not be insured including,
but not limited to, environmental hazards, industrial accidents, labour 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 predicated 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.
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 depending 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 and Future Sales by Existing Shareholders
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 or early stage production companies without a proven history of
sustainable cash flow, 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. Also, subject to
compliance with applicable securities laws, the Company’s officers, directors, significant shareholders
may sell some or all of their common shares in the future. No prediction can be made as to the
effect, if any, such future sales of common shares will have on the market price of the Company’s
securities. The future sale of a substantial number of common shares by the Company’s officers,
directors, principal shareholders and their affiliates, or the perception that such sales could occur,
could adversely affect prevailing market prices for the Company’s securities.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
FINANCIAL INFORMATION
The report for the quarter ended March 31, 2014 is expected to be published on or about May 8,
2014. In addition, the Company’s annual general meeting of shareholders will be held on May 14,
2014 in Vancouver, British Columbia.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The Company prepared its financial statements in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Note 3 of the audited consolidated financial statements for the year ended December 31, 2013
provides details of significant accounting policies and accounting policy decisions for significant or
potentially significant areas that have had an impact on our financial statements or may have an
impact in future periods.
As of January 1, 2013, the Company adopted the new and amended IFRS pronouncements in
accordance with the transitional provisions outlined in the respective standards as listed below.
a) Pronouncement affecting financial statement presentation or disclosures
i) IFRS 12, Disclosure of interests in other entities
The Company adopted IFRS 12 on January 1, 2013. IFRS 12 establishes disclosure
requirements for interests in other entities, such as subsidiaries, joint arrangements,
associates, and unconsolidated structured entities. Refer to Note 13 of the audited
consolidated financial statements for the year ended December 31, 2013 for disclosures
with regards to the Company’s subsidiaries.
ii) IFRS 13, Fair value measurement
The Company adopted IFRS 13 with prospective application from January 1, 2013. IFRS
13 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.
The adoption of IFRS 13 did not have an effect on the Company’s consolidated financial
statements.
iii) Amendment to IAS 1, Presentation of Financial Statements
The Company adopted the amendments to IAS 1 on January 1, 2013, with restrospective
application. The amendments to IAS 1 require items to be grouped within other
comprehensive income that may be reclassified to profit or loss and those that will not be
reclassified.
The adoption of the IAS 1 amendments did not have an effect on the Company’s
consolidated financial statements for the current period or prior period.
b) Pronouncements affecting accounting policies only
i) IFRS 10, Consolidated financial statements
The Company adopted IFRS 10 on January 1, 2013 with retrospective application. IFRS 10
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. IFRS 10 supercedes
IAS 27, Consolidated and Separate Financial Statements and SIC 12, Consolidation –
Special Purpose Entities.
The Company has concluded that IFRS 10 did not have an effect on the consolidated
financial statements for the current year or prior years presented as the adoption did not
result in the consolidation status of any of the subsidiaries.
ii) IFRS 11, Joint arrangements
The Company adopted IFRS 11 on January 1, 2013 with retrospective application. IFRS 11
requires a venturer to classify its interest in a joint agreement 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.
The Company has concluded that IFRS 11 did not have an effect on the consolidated
financial statements for the current year or prior years presented as the Company does
not have any joint arrangements.
iii) IFRIC 20, Stripping costs in the production phase of a surface mine
The Company adopted IFRIC 20 and applied the requirements to production stripping
costs incurred on or after January 1, 2012, in accordance with the transitional provisions.
The predecessor stripping assets recorded as of January 1, 2012, the date of the earliest
period presented, have been reviewed in accordance with IFRIC 20. IFRIC 20 sets out the
accounting for overburden waste removal (stripping) costs in the production phase of a
mine.
The Company has identified components of ore bodies to be phases, pits or sub-pits
depending on the ore body being analyzed. These components align with the view of the
mine and the plan of mining activities. Previously, the Company recorded stripping activity
relating to major expansions only. Under IFRIC 20, the Company recognizes stripping
activity assets when the following three criteria are met:
•
•
•
It is probable that the future economic benefit (improved access to the ore body)
associated with the stripping activity will flow to the entity;
The entity can identify the component of the ore body for which access has been
improved; and
The costs relating to the stripping activity associated with that component can be
measured reliably.
Stripping activity assets capitalized under IFRIC 20 are classified within mineral properties,
which is consistent with the classification of the asset these costs relate to.
These assets are amortized on a units-of-production basis over the remaining proven and
probable reserves of the respective components.
The Company completed an analysis of IFRIC 20 and did not require any adjustments to
the consolidated financial statements.
c) Pronouncements issued but not yet effective
In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9.
The IASB agreed that the mandatory effective date should no longer be annual periods
beginning on or after January 1, 2015 but rather left open pending the finalization of the
impairment and classification and measurement requirements.
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
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, 2013
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.
Depreciation, depletion and accretion
Mineral properties and plant and equipment comprise a large component of the Company’s assets
and as such, depreciation and depletion of these assets have a significant effect on the Company’s
financial statements. Upon commencement of commercial production, the Company amortizes
mineral property and mining equipment and other assets over the life of the mine based on the
depletion of the mine’s proven and probable reserves. In the case of mining equipment and other
assets, if the useful life of the asset is shorter than the life of the mine, the asset is amortized over its
expected useful life.
Proven and probable reserves are determined based on a professional evaluation using accepted
international standards for the assessment of mineral reserves. The assessment involves geological
and geophysical studies and economic data and the reliance on a number of assumptions. The
estimates of the reserves may change based on additional knowledge gained subsequent to the initial
assessment. This may include additional data available from continuing exploration, results from the
reconciliation of actual mining production data against the original reserve estimates, or the impact of
economic factors such as changes in the price of commodities or the cost of components of
production.
A change in the original estimate of reserves would result in a change in the rate of depreciation and
amortization of the related mining assets and could result in an impairment of the mining assets.
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.
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.
INTERNAL FINANCIAL REPORTING AND DISCLOSURE CONTROLS
Disclosure controls and procedures are designed to provide reasonable assurance that information
required to be disclosed by the Company in its annual filings, interim filings or other reports filed or
submitted by it under securities legislation is recorded, processed, summarized and reported within
the time periods specified in the securities legislation and include controls and procedures designed to
ensure that information required to be disclosed by the Company in its annual filings, interim filings
or other reports filed or submitted under securities legislation is accumulated and communicated to
the Company’s management, including its Chief Executive Officer and Principal Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Management, including the Chief Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures. As of
December 31, 2013, the Chief Executive Officer and Principal Financial Officer have each concluded
that the Company’s disclosure controls and procedures, as defined in NI 52-109 - Certification of
Disclosure in Issuer’s Annual and Interim Filings, are effective to achieve the purpose for which they
have been designed.
Internal controls over financial reporting are designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with IFRS.
Management is also responsible for the design of the Company’s internal control over financial
reporting in order to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with IFRS.
The Company’s internal controls over financial reporting include policies and procedures that: pertain
to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions
and disposition of assets; provide reasonable assurance that transactions are recorded as necessary
to permit preparation of the financial statements in accordance with IFRS and that receipts and
expenditures are being made only in accordance with authorization of management and directors of
the Company; and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a material effect on the financial
statements.
Because of their inherent limitations, internal controls over financial reporting can provide only
reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
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 be
achieved.
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 rates; expectations regarding the need to raise capital; possible
impacts of disputes or litigation; and other risks and uncertainties described under the heading
“Risks and Uncertainties” in the Company’s Annual Information Form dated March 27, 2013
available at http://www.sedar.com (the “AIF”).
Forward-looking statements are based on the opinions, assumptions 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. Such
assumptions include: the Company’s ability to obtain necessary financing; the Company’s
expectations regarding the economy generally, results of operations and the extent of future
growth and performance; and assumptions that the Company’s activities will not be adversely
disrupted or impeded by development, operating or regulatory risk. 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.
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 “Risks and
Uncertainties” in the Company’s AIF, 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.
February 20, 2014
Independent Auditor’s Report
To the Shareholders of Lucara Diamond Corp.
We have audited the accompanying consolidated financial statements of Lucara Diamond Corp., which
comprise the consolidated balance sheets as at December 31, 2013 and December 31, 2012 and the
consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity for
the years then ended, and the related notes, which comprise a summary of significant accounting policies
and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Lucara Diamond Corp. as at December 31, 2013 and December 31, 2012 and its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
signed “PricewaterhouseCoopers LLP”
Chartered Accountants
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
LUCARA DIAMOND CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
December 31,
2013
December 31,
2012
ASSETS
Current assets
Cash (Note 21)
Investments (Note 21)
Trade receivables and other (Note 5)
Inventories (Note 6)
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)
Current portion of long-term debt (Note 9)
Long-term debt (Note 9)
Restoration provisions (Note 10)
Future income taxes (Note 17)
TOTAL LIABILITIES
EQUITY
Share capital (Note 11)
Contributed surplus (Note 12)
Cumulative deficit
Accumulated other comprehensive loss
Total equity attributable to shareholders of the Company
Non-controlling interests (Note 13)
TOTAL EQUITY
$
49,364 $
90
3,593
21,132
74,179
100,886
72,061
62
$
247,188 $
$
15,491 $
-
15,491
-
14,515
14,258
44,264
283,609
5,108
(45,516)
(41,820)
201,381
1,543
202,924
TOTAL LIABILITIES AND EQUITY
$
247,188 $
Commitments (Note 23) and subsequent events (Note 24)
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
13,261
86
5,527
13,300
32,174
118,395
84,645
137
235,351
14,695
30,311
45,006
20,643
12,242
-
77,891
282,796
4,874
(110,740)
(21,381)
155,549
1,911
157,460
235,351
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
Revenues
$
180,507 $
41,830
2013
2012
Cost of goods sold
Operating expenses
Royalty expenses (Note 8)
Depletion, amortization and accretion
43,835
18,051
14,979
76,865
13,992
4,183
5,898
24,073
Income from mining operations
103,642
17,757
Other expenses
Exploration and other mine costs (Note 14)
Administration (Note 15)
Gain on sale of exploration program diamonds (Note 16)
Sales and marketing
Finance expenses
Foreign exchange loss (gain)
1,323
11,429
(584)
3,523
3,785
3,953
23,429
12,854
9,534
-
1,481
3,103
(1,690)
25,282
Net income (loss) before tax
80,213
(7,525)
Income tax expense (Note 17)
Current income tax
Future income tax
Net income (loss) for the year
Attributable to:
Shareholders of the Company
Non-controlling interests
Income (loss) per common share (Note 18)
Basic
Diluted
Weighted average common shares outstanding (Note 18)
Basic
Diluted
$
$
$
$
$
96
14,895
14,991
-
-
-
65,222 $
(7,525)
65,317 $
(95) $
(5,911)
(1,614)
0.17 $
0.17 $
(0.02)
(0.02)
376,392,625
376,512,990
374,621,554
374,621,554
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 thousands of U.S. Dollars, unless otherwise indicated.)
2013
2012
Net income (loss) for the year
$
65,222 $
(7,525)
Other comprehensive loss
Change in fair value of available-for-sale securities
Currency translation adjustment
11
(20,816)
(20,805)
(26)
(8,246)
(8,272)
Comprehensive income (loss)
$
44,417 $
(15,797)
Comprehensive income (loss) attributable to:
Shareholders of the Company
Non-controlling interests
44,878
(461)
(14,092)
(1,705)
$
44,417 $
(15,797)
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 thousands of U.S. Dollars, unless otherwise indicated.)
Cash flows from (used in):
Operating Activities
Net income (loss) for the year
Items not involving cash:
Depletion, amortization, accretion and depreciation
Foreign exchange gain
Stock-based compensation
Deferred income taxes
Finance costs
Net changes in working capital items:
VAT receivables and other current assets
Inventories
Trade payables and other current liabilities
Financing Activities
Repayments of debenture
Drawdown of revolving credit facility
Repayments of revolving credit facility
Finance costs paid
Proceeds from exercise of stock options
Investing Activities
Acquisition of plant and equipment
Other
2013
2012
$
65,222 $
(7,525)
15,402
-
517
14,895
3,527
99,563
2,060
(6,953)
3,893
98,563
(50,000)
-
(4,500)
-
530
(53,970)
(7,865)
54
(7,811)
(679)
36,103
13,261
49,364 $
9,306
(1,037)
286
-
2,779
3,809
706
(10,123)
8,505
2,897
-
9,500
(5,000)
(585)
2,620
6,535
(44,441)
7
(44,434)
(326)
(35,328)
48,589
13,261
Effect of exchange rate change on cash
Increase (decrease) in cash during the year
Cash, beginning of year
Cash, end of year
$
Supplemental Information
Interest received (paid)
Taxes paid
Changes in accounts payable and accrued liabilities
related to plant and equipment
(109)
96
311
-
(2,870)
(10,621)
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 thousands of U.S. Dollars, unless otherwise indicated.)
Number of
shares
issued and
outstanding Share capital
Contributed
surplus
Cumulative
deficit
Accumulated
other
comprehensive
loss
Non-
controlling
interests
Total
Balance, January 1, 2012
372,349,049 $
278,995 $
5,769 $
(104,244) $
(13,200) $
3,031 $
170,351
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
3,943,700
-
3,801
-
(1,181)
286
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8,155)
(26)
-
-
(91)
-
(585)
(5,911)
-
-
585
(1,614)
2,620
286
(8,246)
(26)
-
(7,525)
Balance, December 31, 2012
376,292,749 $
282,796 $
4,874 $
(110,740) $
(21,381) $
1,911 $
157,460
Balance, January 1, 2013
376,292,749 $
282,796 $
4,874 $
(110,740) $
(21,381) $
1,911 $
157,460
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Unrealized gain on investments
Free-carried non-controlling
interests (Note 13)
Net income for the year
606,666
-
-
-
-
-
813
-
-
-
-
-
(283)
517
-
-
-
-
-
-
-
-
(93)
65,317
-
-
(20,450)
11
-
-
-
-
(366)
-
93
(95)
530
517
(20,816)
11
-
65,222
Balance, December 31, 2013
376,899,415 $
283,609 $
5,108 $
(45,516) $
(41,820) $
1,543 $
202,924
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, 2013 AND 2012
(All amounts expressed in thousands of 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 diamond mining company focused on the development and operation of 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
The Company prepared its financial statements in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”). The same accounting policies have been consistently applied in all periods presented.
These financial statements were approved by the Board of Directors for issue on February 20,
2014.
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.
(b) Consolidation
These consolidated financial statements include the accounts of the Company and all of its
subsidiaries.
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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(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 judgments. These judgments 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, except Boteti Mining (PTY) Ltd. 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(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 properties, being the
Karowe Mine and the Mothae Diamond Project and Corporate. The Corporate office provides support
to the diamond properties 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(f) Cash
Cash 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(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. 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.
(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 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(h) Inventories
Inventories, which include rough diamonds, ore stock piles and consumables, are measured at the
lower of cost and net realizable value. The amount of any write-down of inventories to net realizable
value and all losses, are recognized in the period the write-down of loss occurs. 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
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(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
Long lived assets 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(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 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 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.
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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(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.
(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) Revenue recognition
Revenues from diamond sales are recognized when the risks and rewards of ownership pass to the
customer which is when proceeds are received and title is transferred to the purchaser.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(q) Royalties
Royalties and revenue-based taxes are accounted for under IAS 12 when they have the
characteristics of income tax. This is considered to be the case when they are imposed under
Government authority and the amount payable is based on taxable income – rather than based on
quantity produced or as a percentage of revenue. For such arrangements, current and deferred tax
is provided on the same basis as described above for other forms of taxation. Obligations arising
from royalty arrangements that do not satisfy these criteria are recognized as current provisions and
disclosed as part of royalty expenses. The royalties incurred by the Company are considered not to
meet the criteria to be treated as part of income tax.
(r) 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.
(s) Income (loss) per share
Income (loss) per share is calculated by dividing the income (loss) attributable to the shareholders of
the Company by the weighted average number of common shares issued and outstanding during the
year. Diluted income (loss) per share is calculated using the treasury stock method.
(t) 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.
(u) 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, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
4. ADOPTION OF NEW IFRS PRONOUNCEMENTS
As of January 1, 2013, the Company adopted the new and amended IFRS pronouncements in
accordance with the transitional provisions outlined in the respective standards as listed below.
a) Pronouncement affecting financial statement presentation or disclosures
i) IFRS 12, Disclosure of interests in other entities
The Company adopted IFRS 12 on January 1, 2013. IFRS 12 establishes disclosure
requirements for interests in other entities, such as subsidiaries, joint arrangements,
associates, and unconsolidated structured entities. Refer to Note 13 for disclosures with
regards to the Company’s subsidiaries.
ii) IFRS 13, Fair value measurement
The Company adopted IFRS 13 with prospective application from January 1, 2013. IFRS 13 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.
The adoption of IFRS 13 did not have an effect on the Company’s consolidated financial
statements.
iii) Amendment to IAS 1, Presentation of Financial Statements
The Company adopted the amendments to IAS 1 on January 1, 2013, with restrospective
application. The amendments to IAS 1 require items to be grouped within other
comprehensive income that may be reclassified to profit or loss and those that will not be
reclassified.
The adoption of the IAS 1 amendments did not have an effect on the Company’s condensed
interim consolidated financial statements for the current period or prior period.
b) Pronouncements affecting accounting policies only
i) IFRS 10, Consolidated financial statements
The Company adopted IFRS 10 on January 1, 2013 with retrospective application. IFRS 10
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. IFRS 10 supercedes IAS 27,
Consolidated and Separate Financial Statements and SIC 12, Consolidation – Special Purpose
Entities.
The Company has concluded that IFRS 10 did not have an effect on the consolidated financial
statements for the current year or prior years presented as the adoption did not result in the
consolidation status of any of the subsidiaries.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
4. ADOPTION OF NEW IFRS PRONOUNCEMENTS (continued)
ii) IFRS 11, Joint arrangements
The Company adopted IFRS 11 on January 1, 2013 with retrospective application. IFRS 11
requires a venturer to classify its interest in a joint agreement 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.
The Company has concluded that IFRS 11 did not have an effect on the consolidated financial
statements for the current year or prior years presented as the Company does not have any
joint arrangements.
iii) IFRIC 20, Stripping costs in the production phase of a surface mine
The Company adopted IFRIC 20 and applied the requirements to production stripping costs
incurred on or after January 1, 2012, in accordance with the transitional provisions. The
predecessor stripping assets recorded as of January 1, 2012, the date of the earliest period
presented, have been reviewed in accordance with IFRIC 20. IFRIC 20 sets out the accounting
for overburden waste removal (stripping) costs in the production phase of a mine.
The Company has identified components of ore bodies to be phases, pits or sub-pits
depending on the ore body being analyzed. These components align with the view of the mine
and the plan of mining activities. Previously, the Company recorded stripping activity relating
to major expansions only. Under IFRIC 20, the Company recognizes stripping activity assets
when the following three criteria are met:
•
•
•
It is probable that the future economic benefit (improved access to the ore body)
associated with the stripping activity will flow to the entity;
The entity can identify the component of the ore body for which access has been
improved; and
The costs relating to the stripping activity associated with that component can be
measured reliably.
Stripping activity assets capitalized under IFRIC 20 are classified within mineral properties,
which is consistent with the classification of the asset these costs relate to.
These assets are amortized on a units-of-production basis over the remaining proven and
probable reserves of the respective components.
The Company completed an analysis of IFRIC 20 and did not require any adjustments to the
consolidated financial statements.
c) Pronouncements issued but not yet effective
In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9.
The IASB agreed that the mandatory effective date should no longer be annual periods
beginning on or after January 1, 2015 but rather left open pending the finalization of the
impairment and classification and measurement requirements.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
5. TRADE RECEIVABLES AND OTHER
VAT
Trade
Other
Prepayments
6. INVENTORIES
Rough diamonds
Ore stockpile
Parts and supplies
2013
2012
$
2,694 $
-
233
666
$
3,593 $
3,034
1,503
248
742
5,527
2013
2012
$
$
9,026 $
6,674
5,432
8,444
1,797
3,059
21,132 $
13,300
Inventory expensed during the year ended December 31, 2013 totaled $43.8 million (2012 – $14.0
million).
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
7. PLANT AND EQUIPMENT
Cost
Construction
in progress
Mine and
plant
facilities
Vehicles
Furniture
and office
equipment
Total
Balance, January 1, 2012
$
86,720 $
7,766 $
1,314 $
2,319 $
98,119
Additions
Disposals and other
Translation differences
Reclassification
Balance, December 31, 2012
Additions
Disposals and other
Translation differences
27,070
862
(1,256)
(113,396)
8,027
-
(2,759)
113,396
284
(2)
(54)
-
1,241
(1,129)
(70)
-
36,622
(269)
(4,139)
-
-
-
-
-
126,430
1,542
2,361
130,333
5,212
(964)
(14,748)
100
(36)
(187)
293
334
(281)
5,605
(666)
(15,216)
Balance, December 31, 2013
$
- $
115,930 $
1,419 $
2,707 $
120,056
Accumulated depreciation
Balance, January 1, 2012
$
- $
3,164 $
282 $
171 $
3,617
Depletion, amortization and
accretion for the year
Disposals and other
Translation differences
Balance, December 31, 2012
Depletion, amortization and
accretion for the year
Disposals and other
Translation differences
-
-
-
-
-
-
-
7,922
-
(334)
10,752
8,515
(33)
(2,042)
334
-
(18)
598
382
(35)
(90)
431
-
(14)
588
619
12
(96)
8,687
-
(366)
11,938
9,516
(56)
(2,228)
Balance, December 31, 2013
$
- $
17,192 $
855 $
1,123 $
19,170
Net book value
As at December 31, 2012
As at December 31, 2013
$
$
- $
- $
115,678 $
944 $
1,773 $
118,395
98,738 $
564 $
1,584 $
100,886
During the year ended December 31, 2012, the Company reduced plant and equipment by $12.8
million relating to diamonds sold during the pre-commercial production period.
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
2013 was nil (2012 – $2.5 million).
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
8. MINERAL PROPERTIES
Cost
Karowe
Mine
Mothae
Diamond
Mothae
mining
license
Total
Balance, January 1, 2012
$
68,502 $
18,226
$
3,315 $
90,043
Additions
Disposals and other
Translation differences
Balance, December 31, 2012
Additions
Disposals and other
Translation differences
-
(547)
(2,451)
65,504
2,324
(500)
(7,459)
29
-
(567)
17,688
-
(74)
(1,773)
-
-
(138)
3,177
-
-
(609)
29
(547)
(3,156)
86,369
2,324
(574)
(9,841)
Balance, December 31, 2013
$
59,869 $
15,841 $
2,568 $
78,278
Accumulated depletion
Balance, January 1, 2012
$
- $
- $
- $
-
Depletion for the year
Disposals and other
Translation differences
Balance, December 31, 2012
Depletion for the year
Disposals and other
Translation differences
1,761
-
(37)
1,724
4,896
-
(403)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balance, December 31, 2013
$
6,217 $
- $
- $
1,761
-
(37)
1,724
4,896
-
(403)
6,217
Net book value
As at December 31, 2012
As at December 31, 2013
a) Karowe Mine
$
$
63,780 $
17,688 $
53,652 $
15,841 $
3,177 $
2,568 $
84,645
72,061
A royalty of 10% of the sales value of diamonds produced from Karowe is payable to the
government of Botswana.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
8. MINERAL PROPERTIES (continued)
b) Mothae Diamond Project
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 (Note 13). 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 has been paid 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.
9. LONG-TERM DEBT
Debenture (a)
Principal
Unamortized discount
Revolving credit facility (b)
Deferred finance charges (b)
Less: Current portion
2013
2012
$
- $
-
50,000
(3,179)
-
-
-
-
4,500
(367)
50,954
(30,311)
Long-term portion of long-term debt
$
- $
20,643
a) Debenture
Through agreements in July 2011 and in July 2012, the Company secured a $50 million
debenture to fund the development of the Company’s projects. The debenture was repayable in
quarterly repayments of $8.3 million commencing March 31, 2013 and a final maturity date of
June 30, 2014. No interest was payable during the term of the facility.
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 ended December 31, 2013, accretion of $3.2
million (2012 - $5.0 million) was recorded of which nil (2012 - $2.5 million) was been capitalized
in plant and equipment (Note 7).
During the year ended December 31, 2013, the Company repaid this debenture in full and
recorded a foreign exchange loss on settlement of $2.1 million.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
9. LONG-TERM DEBT (continued)
The borrowings were measured initially at fair value. The liability was subsequently measured at
amortized cost using the effective interest method, with interest expense recognized on an
effective yield basis. The effective interest rate was 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, 2013
Current
portion
Long-term
portion
Total
Principal
Unamortized discount
Total carrying value
As at December 31, 2012
Principal
Unamortized discount
Total carrying value
$
$
$
$
$
-
-
- $
- $
-
- $
-
-
-
Current
portion
Long-term
portion
Total
33,333 $
(2,729)
16,667 $
(450)
50,000
(3,179)
30,604 $
16,217 $
46,821
b) Revolving credit facility
In April 2012, the Company signed a definitive agreement with the Bank of Nova Scotia for a $25
million revolving term credit facility with a maturity date of March 26, 2014, which may be extended
if both parties agree. Funds drawn under the revolving credit facility are due in full at maturity. The
facility contains financial and non-financial covenants customary for a facility of this size and nature.
As at December 31, 2013, the Company is in compliance with all financial and non-financial
covenants. Outstanding amounts under the facility bear interest at LIBOR or an alternative base rate
plus an applicable margin based on the Company’s leverage ratio.
The Company has provided security on the two year facility by way of a charge over the Company’s
Karowe assets and a guarantee by the Company’s subsidiaries, which hold the Karowe assets.
The Bank of Nova Scotia has first ranking security over the Karowe assets.
As at December 31, 2013, the full amount under this facility was available. As a result, the
deferred finance charges have been classified under VAT receivables and other.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
10. RESTORATION PROVISIONS
The Company’s restoration provisions relate to the rehabilitation of its diamond 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 10.8% at
December 31, 2013 (10.4% at December 31, 2012) and an inflation rate of 5.8% at December 31,
2013 (6.2% at December 31, 2012) at the Karowe Mine project. The Company has applied a pre-tax
discount rate of 9.9% at December 31, 2013 (9.9% at December 31, 2012) and an inflation rate of
6.0% at December 31, 2013 (6.1% at December 31, 2012) at its Mothae Diamond Project. The
rehabilitation costs are expected to be incurred in the period of 2022 to 2025. The estimated total
liability for reclamation and remediation costs on an undiscounted basis is approximately $15.9 million
(December 31, 2012 - $16.9 million).
Balance, beginning of year
$
Revisions to estimated cash flows
Accretion of liability component of obligation
Foreign currency translation adjustment
Balance, end of year
Less: Current portion
2013
12,242
2,250
1,628
(1,605)
14,515
-
2012
$ 12,486
(1,069)
1,284
(459)
12,242
-
Long-term portion of restoration provisions
$
14,515
$ 12,242
11. SHARE CAPITAL
The authorized share capital consists of an unlimited number of common shares, with no par value.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of 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, 2011
12,031,671
$ 0.93
Number of shares issuable pursuant
to stock options
Weighted average exercise
price per share (CDN$)
Granted
Forfeited
Expired
Exercised
150,000
(391,671)
(5,181,300)
(3,943,700)
1.03
0.90
1.13
0.70
Balance at December 31, 2012
2,665,000
0.88
Granted
Forfeited
Expired
Exercised
2,775,000
(50,000)
(575,000)
(606,666)
0.72
1.03
0.91
0.92
Balance at December 31, 2013
4,208,334
$
0.76
The weighted average share price of options exercised during the year was $1.45.
Options to acquire common shares have been granted and are outstanding at December 31, 2013 as
follows:
Outstanding Options
Exercisable Options
Range of
exercise prices
CDN$
$0.61 - $0.70
$0.71 - $0.80
$0.81 - $0.90
$0.91 - $1.00
$1.01 - $1.25
Number of
options
outstanding
2,625,000
1,033,334
-
500,000
50,000
4,208,334
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CDN$
0.70
0.80
-
0.98
1.13
0.76
2.3973 $
0.9068
-
1.3803
1.1452
1.8956 $
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
CDN$
0.70
0.80
-
0.98
1.13
0.80
2.3973 $
0.9068
-
1.0526
1.1452
1.4984 $
Number of
options
exercisable
874,909
1,033,334
-
366,665
33,333
2,308,241
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
12. STOCK OPTIONS (continued)
During the year ended December 31, 2013, an amount of $0.5 million (2012 – $0.3 million) 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:
2013
2012
1.00
3.00
52.85
Nil
1.03
3.00
51.23
Nil
Weighted average fair value of options granted (per option)
$
0.25 $
0.35
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
13. PRINCIPAL SUBSIDIARIES
The Company had the following subsidiaries at December 31, 2013:
Country of
incorporation
and place of
business
UK
Name
African
Diamonds Ltd.
Lucara
Management
Services Ltd.
UK
Lucara Diamond
Holdings (I)
Inc.
Mauritius
Mothae
Diamond
Holdings Inc.
Mauritius
Boteti Diamond
Holdings Inc.
Mauritius
Lucara Diamond
South Africa
(Pty) Ltd.
South Africa
Wati Ventures
(Pty) Ltd.
Botswana
Debwat
Exploration
(Pty) Ltd.
Botswana
Nature of
business
Intermediate
holding
company
Intermediate
services
company
Intermediate
holding
company
Intermediate
holding
company
Intermediate
holding
company
Intermediate
holding
company
Intermediate
holding
company
Intermediate
holding
company
Boteti Mining
(Pty) Ltd.
Botswana
Mining of
diamonds
Mothae
Diamonds (Pty)
Ltd.
Lesotho
Exploration of
diamond
properties
Proportion of
shares directly
held by the
Company (%)
100
Proportion of
shares held by
the group (%)
-
100
100
-
-
-
-
-
-
-
-
-
100
100
100
100
100
100
75
Proportion of
shares held by
non-
controlling
interests (%)
-
-
-
-
-
-
-
-
-
25
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in
the subsidiary undertakings held directly by the parent company do not differ from the proportion of
ordinary shares held.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
13. PRINCIPAL SUBSIDIARIES (continued)
The total non-controlling interest at December 31, 2013 is $1.5 million (2012 - $1.9 million).
As consideration for acquiring a mining license from the Government of Lesotho (“GOL”), the
Company issued the GOL 25% ownership in Mothae Diamonds (Pty) Ltd. (“Mothae Diamonds”). 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 Diamonds, if any.
The GOL’s equity interest must be kept at 25% 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
Diamonds is accounted for as an equity transaction between shareholders.
Set out below is the summarized financial information for Mothae Diamonds which has non-
controlling interests that are material to the Company.
Summarized balance sheet
2013
2012
CURRENT
Assets
Liabilities
NON-CURRENT
Assets
Liabilities
$
$
890
(77)
813
8,953
(608)
8,345
NET ASSETS
$
9,158
$
Summarized statement of operations
Revenue
Depreciation
Loss from continuing operations
Loss from discontinued operations
Other comprehensive loss
Comprehensive loss
Attributable to non-controlling interests
Dividends paid to non-controlling interests
$
$
2013
-
-
(758)
-
(2,174)
(2,932)
(367)
-
1,247
(360)
887
11,221
(761)
10,460
11,347
2012
-
(3,262)
(12,911)
-
(397)
(13,308)
(1,664)
-
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
13. PRINCIPAL SUBSIDIARIES (continued)
Summarized statement of cash flows
Cash used in operating activities
Cash generated from financing activities
Cash generated from (used in) investing activities
Effect of exchange rate on cash
$
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
2013
(538) $
742
54
(46)
212
128
340
2012
(9,746)
4,680
(1)
(43)
(5,110)
5,238
128
The information above is the amount before inter-company eliminations.
14. EXPLORATION EXPENDITURES
Test mining
Depreciation
Resource development
Geology
Office and other
Care and maintenance
Diamonds recovered
15. ADMINISTRATION
$
2013
2012
- $
-
-
-
849
474
-
7,928
3,262
1,870
652
621
-
(1,479)
$
1,323 $
12,854
2013
2012
$
Salaries and benefits
Professional fees
Office and general
Travel
Stock exchange, transfer agent, shareholder communication
Stock based compensation
Management fees
Depreciation
Donations
5,275 $
1,490
1,313
894
775
517
489
423
253
$
11,429 $
4,651
575
1,037
741
1,575
286
504
146
19
9,534
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
16. GAIN ON SALE OF EXPLORATION PROGRAM DIAMONDS
During the year ended December 31, 2013, Mothae Diamonds held a diamond sale and received
gross proceeds of $0.9 million. The sale included the rough diamond inventory that was held at
December 31, 2012, 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 $0.6 million.
During the year ended December 31, 2012, Mothae Diamonds held one diamond sale and
received gross proceeds of $1.5 million. The proceeds on this sale have been netted against
exploration expenditures (Note 14).
17. INCOME TAXES
Income tax expense differs from the amount that would result from applying the Canadian federal
and provincial income tax rates to net income before tax. These differences result from the following
items:
Basic statutory tax rate
Net income (loss) before tax
Computed income tax expense (recovery)
Differences between Canadian and foreign tax rates
Non-deductible expenses and other permanent differences
Change in future tax rates
Benefits from previously unrecognized tax benefits
Change in deferred benefits not recognized
Exchange rate differences
Other
2013
2012
25.75%
25.00%
80,213
(7,525)
20,655
(3,962)
1,331
(376)
(8,458)
4,461
1,144
196
(1,881)
(749)
71
847
-
1,104
655
(47)
$
14,991 $
-
Income tax expense is derived from income generated at the Company’s Karowe Mine. The
Company recorded a deferred tax liability during the year, which resulted in a corresponding non-
cash future income tax expense of $14.9 million. The deferred tax liability relates to temporary
differences between the accounting and tax base of the Company’s property, plant and equipment,
restoration provisions and non-capital tax loss pools. The Company has applied a significant portion
of its non-capital losses in Botswana against taxable income during the year.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
17. INCOME TAXES (continued)
The movement in deferred tax liabilities during the year, without taking into consideration the
offsetting balances within the same tax jurisdiction, is as follows:
Balance, beginning of year
$
-
$
Future income tax expense
Foreign currency translation adjustment
14,895
(637)
Balance, end of year
$ 14,258
$
-
-
-
-
2013
2012
Deferred income tax assets not recognized
2013
2012
Tax losses
Mineral property, plant and equipment
Other deductible temporary differences
$
19,229 $
58
1,045
26,383
97
601
$
20,332 $
27,081
As at December 31, 2013, the Company has non-capital losses for income tax purposes which expire
as follows:
2014
2015
2016
Subsequent
to 2017
No expiry
date
Canada
United Kingdom
Botswana
Lesotho
$
11 $
-
-
-
- $
-
-
-
- $
-
-
-
49,949 $
-
-
-
- $
5,085
30,533
22,245
Total
49,960
5,085
30,533
22,245
$
11 $
- $
- $
49,949 $
57,863 $
107,823
No tax benefit has been recorded for the majority of the Canadian and Lesotho non-capital losses
while a tax benefit has been recorded for the Botswana non-capital losses.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
18. INCOME PER COMMON SHARE
a) Basic
Basic earnings per common share are calculated by dividing the net income attributable to the
shareholders of the Company by the weighted average number of common shares outstanding
during the year:
2013
2012
Income (loss) for the year – attributable to Shareholders of
the Company
$
65,317 $
(5,911)
Weighted average number of common shares outstanding
376,392,625
374,621,554
$
0.17 $
(0.02)
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.
2013
2012
Income (loss) for the year – attributable to Shareholders of
the Company
$
65,317 $
(5,911)
Weighted average number of common shares outstanding
Adjustment for stock options
Weighted average number of common shares for diluted
376,392,625
120,365
374,621,554
-
earnings per share
376,512,990
374,621,554
$
0.17 $
(0.02)
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of 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”), Mile High Holdings Ltd. (“Mile High”) and Lundin Foundation (“LF”), companies
related by way of directors in common. 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. Beginning July 1, 2013, the MS Group is
no longer a related party.
Description of services
Related party
2013
Management fees
Donations
Exploration related expenditures
Aircraft charter
Namdo
LF
MS Group
Mile High
$
$
489 $
253
84
71
897 $
2012
504
-
1,916
382
2,802
b) Related party liabilities
The liabilities of the Company include the following amounts due to related parties:
Namdo
MS Group
c) Key management compensation
2013
2012
$
$
- $
-
- $
38
54
92
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
2013
2012
2,142 $
49
402
2,593 $
1,408
112
186
1,706
$
$
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
20. SEGMENT INFORMATION
The Company’s primary business activity is the development and operation of diamond properties in
Africa. The Company has three operating segments: Karowe Mine, Mothae Diamond Project and
Corporate and other.
2013
Karowe
Mine
Mothae
Diamond
Project
Corporate
and other
Total
Revenues
$
180,507 $
-
$
- $
180,507
Income from mining operations
Exploration expenditures
Gain on sale of exploration program diamonds
Finance expenses
Other income (expenses)
Net income before tax for the year
Capital expenditures
Total assets
103,899
-
-
96
(4,836)
99,159
(7,822)
-
(1,323)
584
(67)
48
(257)
-
-
(3,814)
(14,117)
103,642
(1,323)
584
(3,785)
(18,905)
(758)
(18,188)
80,213
-
(43)
(7,865)
222,031
19,845
5,312
247,188
2012
Karowe
Mine
Mothae
Diamond
Project
Corporate
and other
Total
Revenues
$
41,830 $
-
$
- $
41,830
Income from mining operations
Exploration expenditures
Gain on sale of exploration program diamonds
Finance expenses
Other income (expenses)
17,849
-
-
155
(2,350)
-
(12,854)
-
(72)
15
(92)
-
-
(3,186)
(6,990)
17,757
(12,854)
-
(3,103)
(9,325)
Net loss before tax for the year
15,654
(12,911)
(10,268)
(7,525)
Capital expenditures
(44,441)
-
-
(44,441)
Total assets
207,037
12,468
15,846
235,351
The geographic distribution of non-current assets is as follows:
Plant and equipment
Mineral properties
Other
2013
2012
2013
2012
2013
2012
Canada
Lesotho
Botswana
$
$
142 $
486
100,258
100,886 $
209 $
1,369
116,817
118,395 $
- $
18,408
53,653
72,061 $
- $
20,865
63,780
84,645 $
- $
62
-
62 $
-
137
-
137
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
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.
The Company’s financial assets and liabilities are categorized as follows:
ASSETS
Loans and receivables
Cash
Trade receivables
Other receivables
Available for sale
Investments
LIABILITIES
Amortized cost
Trade payables
Accrued liabilities
Long-term debt
December 31,
2013
December 31,
2012
$
$
49,364
-
233
$
49,597
$
$
$
$
$
90
90
9,169
6,322
15,491
-
$
15,468
$
13,261
1,503
248
15,012
86
86
7,429
7,266
14,695
50,954
65,649
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
b) Fair value hierarchy
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
c) Financial risk management
December 31,
2013
December 31,
2012
$
90
$
86
The Company’s financial instruments are exposed to certain financial risks, including commodity
price, currency, credit, liquidity and price risks.
Commodity price risk
The Company is subject to commodity price risk. Diamonds are not a homogenous product and the
price of rough diamonds is not monitored on a public index system. The fluctuation of prices is
related to certain features of diamonds such as quality and size. Diamond prices are marketed in
U.S. dollars and long term U.S. dollar per carat prices are based on external market consensus
forecasts. The Company does not have any financial instruments that may fluctuate as a result of
commodity price movements.
Currency risk
The Company is exposed to the financial risk related to fluctuating foreign exchange rates. All sales
revenues are denominated in U.S. dollars, while directly related costs are denominated in Botswana
Pula. At December 31, 2013, the Company is exposed to currency risk relating to U.S. dollar cash
held within the Company’s Botswana entity. Based on this exposure, a 10% change in the Botswana
Pula/U.S. dollar exchange rate would give rise to an increase/decrease of approximately $3.6 million
in net income for the year.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
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. Considering the nature of the
Company’s ultimate customers and the relevant terms and conditions entered into with such
customers, the Company believes that credit risk is limited as customers pay on receipt of goods.
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, 2013
Trade payables and accrued
liabilities
Long-term debt
December 31, 2012
Trade payables and accrued
liabilities
Long-term debt
Interest rate risk
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$
15,491 $
-
- $
-
- $
-
-
-
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$
14,695 $
- $
- $
-
33,333
21,167
-
-
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. 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
due to their short-term nature. Based on the balance of cash at December 31, 2013, 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 $0.1 million in the interest accrued by the Company per annum.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
21. FINANCIAL INSTRUMENTS (continued)
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.
23. COMMITMENTS
In conjunction with the building and commissioning of a plant upgrade at the Karowe Mine, the
Company has committed to approximately $1.2 million in capital expenditures.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
24. SUBSEQUENT EVENTS
(a) Sale of Mothae plant
In December 2013, the Company signed a memorandum of understanding (“MOU”) with Paragon
Diamonds Ltd. (“Paragon”) for the sale of certain kimberlite processing plant and diamond recovery
assets. Under the terms of the MOU, the Company will receive consideration of:
• $0.1 million cash and 4,434,589 common shares of Paragon on signing of the asset
purchase agreement
• $0.2 million cash and 5,543,236 common shares of Paragon on commencement of relocation
of the assets from the Mothae site. The number of common shares will be adjusted should
an equity raise be completed by Paragon at a price less than £0.04.
The signing of the asset purchase agreement is anticipated by the end of February 2014.
As part of the MOU, the Company received a non-refundable deposit of US$50,000 from Paragon in
December 2013.
(b) Litigation
Upon completion of the African Diamonds plc (“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 2011, 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. The appeal was heard in the
Appeal Court of Botswana in January 2014 and judgment was handed down in February 2014.
The Court of Appeals, the highest court in Botswana upheld the previous ruling by the Botswana
High Court, dismissing the claim against African Diamonds, with costs awarded against the
plaintiffs. The decision is final and there is no further recourse against African Diamonds.
Lucara
Diamond
Corp.
Vancouver
Corporate
Office:
Suite
2000
885
West
Georgia
Street
Vancouver,
BC
Canada
V6C
3E8
T:
604
689
7842
F:
604
689
4250
E:
sophias@namdo.com
Contact:
Sophia
Shane,
Investor
Relations