Management’s Discussion and Analysis
And
Consolidated Financial Statements
Year Ended December 31, 2015
LUCARA DIAMOND CORP.
MANAGEMENT’S DISCUSSION AND ANALYSIS
DECEMBER 31, 2015
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, 2015, 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
23, 2016.
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.
FINANCIAL UPDATE
Revenues: During the year the Company had sales totalling 377,136 carats for gross proceeds of
$223.8 million at an average price of $593 per carat. The Company continued to achieve strong
prices for its exceptional stone sales resulting in an average price of $31,597 per carat in 2015 for
3,114 carats sold (2014: $32,471 per carat for 4,176 carats). The regular tenders achieved an
average price of $335 per carat, an increase of 5.3% compared to 2014 which reflects the quality of
the mine’s production and an increasing proportion of south lobe ore which is known to have higher
value material.
Cash flows and operating margins: The Company’s earnings before interest, tax, depreciation
and amortization (‘EBITDA’) (see table 4 and page 7 Non-IRFS measures) for the year were $133.9
(2014: $173.4 million). The decrease in operating margins was largely due to reduction in carats sold
in 2015. The Company’s focus on cost control, which resulted in a cost per tonne treated (see table 5
and page 7 Non-IRFS measures) of $28.9 (2015 guidance: $33-$36 per tonne) contributed to the
Company achieving an EBITDA margin of 60%.
Net cash position: The Company’s year-end net cash balance was $134.8 million (2014: $100.8
million). The increase in the Company’s cash balance was due to its strong operating cash flows,
which financed the Company’s plant optimization expenditure, stripping costs and its dividend
payment to shareholders of $11.8 million during the year. The Company paid $22.4 million of
royalties and $46.7 million in taxes to the Government of Botswana of which $35.2 million was for
2015 taxes and the remainder largely for the final 2014 tax payment. The Company has a residual
2015 tax payable balance of $9.5 million, which is forecast to be paid during the first quarter of 2016.
The Company’s $50 million credit facility remains undrawn.
Earnings per share: earnings per share was $0.21 per share for the year ended December 31,
2015 (2014: earnings per share was $0.13) and $0.05 per share for the quarter ended December 31,
2015 (2014: earnings per share was $0.04).
Dividends: The Company paid its semi-annual dividend of CDN 2 cents per share on December 17,
2015 for a cumulative dividend of CDN 4 cents per share for the year. The total dividend paid in 2015
by the Company was $11.8 million.
In 2016 the Company is introducing a progressive dividend with the aim to maintain or increase the
Canadian dollar dividends per share on an annual basis. The dividends will be paid on a quarterly
basis. The Company has declared a first quarter dividend of CDN 1.5 cents per share. The dividend is
expected to be paid on March 31, 2016 to holders of securities on the record of the Company’s
common shares at the close of business on March 18, 2016. The Company anticipates that it will
declare a further three payments of CDN 1.5 cents per share in 2016 at the end of each quarter for a
total yearly dividend of CDN 6 cents per share however the declaration of all future quarterly
dividends remains in the discretion of the Board of Directors and is subject to the requirements of the
Company’s dividend policy.
OPERATIONAL UPDATE
Karowe operating performance: Karowe’s performance was in line with forecast for the year in
terms of ore and waste mined and carats recovered. Karowe recovered a total of 727 stones greater
than 10.8 carats with an average stone size of 36.7 carats per stone. (2014 recovery of 815 stones
greater than 10.8cts at an average of 29 carats per stone) A total of 47 stones greater than 100
carats were recovered (2014: 31 stones) including 20 stones greater than 200 carats (2014: 4
stones) of which 7 stones were greater than 300 carats.
Botswana Prospecting Licenses: In 2014, the Company was awarded two precious stone
prospecting licenses (PL367/2014 and PL371/2014) which are known to host the kimberlites, BK02,
AK11 and AK12, AK13 and AK14. The prospecting licenses are located within a distance of 15 km and
30 km from the Karowe Diamond mine. During the fourth quarter of 2015, the bulk sampling plant
was commissioned and the processing of kimberlite from BK02 commenced. During the fourth
quarter, the Company received environmental approvals for bulk sampling activities at AK11 and
AK12.
FINANCIAL HIGHLIGHTS
Table 1:
In millions of U.S. dollars unless otherwise noted
Three months ended
December 31
2014
2015
Year ended
December 31
2014
2015
Revenues (1)
$
65.2
$
70.5
$
223.8
$
265.5
Average price per carat sold ($/carat)
Operating expenses per carat sold ($/carat)
Operating margin per carat sold ($/carat)
693
137
556
675
89
586
593
133
460
644
115
529
Net income (loss) for the period(2)
Earnings (loss) per share (basic)
Earnings (loss) per share (diluted)
Cash on hand
(1) Revenue is presented based on cash receipts received during the period and excludes any tender proceeds received after quarter end. See
results of operations (page 3) for a reconciliation of revenue and total proceeds for tenders proceeds received after quarter end.
(2) Net loss in Q4 2014 was mainly generated by the Mothae impairment and restoration charge: $21.2 million in the period.
(16.8)
(0.04)
(0.04)
$ 100.8
77.8
0.21
0.20
$ 134.8
19.0
0.05
0.05
$ 134.8
45.7
0.13
0.13
$ 100.8
2016 OUTLOOK
This section of the MD&A provides management's production and cost estimates for 2016. 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, producing over 350,000 carats of
diamonds in 2016. Revenue is forecast between $200 and $220 million. This excludes the anticipated
sale of the two high value diamonds such as the Lesedi La Rona and the 813 carat stone held in
inventory at December 31, 2015.
Ore mined is forecast between 3.0-3.5 million tonnes and waste mined is expected to be between
13.0-14.0 million tonnes.
Karowe’s operating cash costs (see page 7 Non-IRFS measures) are expected to be between $33.50
and $36.50 per tonne of ore treated.
Capital expenditures in 2016 include modifications to the existing Large Diamond Recovery (“LDR”)
circuit and the installation of a Mega Diamond recovery (“MDR”) circuit for a total investment of
between $15 million and $18 million and sustaining capital expenditure is forecast to be
approximately $11 million. Sustaining capital includes a mill re-liner at a cost of $1.5 million and an
investment of $1.5 million for a combined sales and administrative office in Gaborone.
The Company has budgeted $3.7 million for deep drilling on the AK6 kimberlite and south lobe with
the goal of converting inferred resources below 400 metres depth to an indicated resource. An
exploration budget of up to $7.0 million is forecast for advanced bulk sampling and drilling work at
the Company’s two Botswana prospecting licenses.
The USD/Pula outlook foreign exchange rate is 10.
BUSINESS OVERVIEW
The Company is a diamond mining company focused in Africa. The business of the Company consists
of the acquisition, exploration, development and operation of diamond properties. The Company’s
head office is in Vancouver, BC, Canada and its common shares trade on the Toronto Stock
Exchange, the Nasdaq Stockholm Exchange in Sweden and the Botswana Stock Exchange under the
symbol “LUC”.
The principal assets of the Company and the focus of the Company’s operations, development and
exploration activities reside in Botswana.
Table 2: Company’s current land holdings:
Country
Botswana
Botswana
Botswana
Name
Karowe Diamond License
Prospecting License No. 371/2014
Prospecting License No. 367/2014
RESULTS OF OPERATIONS
Table 3: Karowe Mine, Botswana
Interest
Held
100%
100%
100%
Area
(km2)
15.3
55.4
1.1
UNIT
Year ended
Dec-15
Q4-15
Q3-15
Q2-15
Q1-15
Q4-14
593
693
US$
US$
Carats
94,026
83,960
92,373
377,136
106,777
65.2
65.2
90.8
89.2
38.1
39.7
29.7
29.7
223.8
223.8
US$m
US$m
US$m
US$m
Carats
65.2
-
94,026
90.8
(1.6)
76,156
223.8
-
377,136
38.1
1.6
100,177
29.7
-
106,777
Sales
Revenues
Proceeds generated from sales tenders conducted
in the quarter are comprised of:
Sales proceeds received during the quarter
Q2 2015 tender proceeds received post Q2 2015
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**
Average price per carat for proceeds received
during the period***
Production
Tonnes mined (ore)
Tonnes mined (waste)
Tonnes treated
Average grade processed
Carats recovered
Costs
Operating costs per carats sold (see page 7 Non-
IRFS measures)
Capital expenditures (including capitalized waste)
Plant Optimization
Sustaining capital
Bulk Sample Plant
Capitalized waste
Total
(*) carats per hundred tonnes
(**) Average price per carat for proceeds generated during the period includes all sales tendered during the period including proceeds received post the quarter end
(***) Average price per carat for proceeds received during the period includes all sales proceeds collected during the period including proceeds received during the
quarter
3,187,222
13,890,115
2,238,974
16.3
365,690
561,287
3,243,372
603,969
14.9
90,077
1,038,901
3,143,168
567,966
15.6
89,247
722,855
4,278,605
506,538
16.9
85,714
864,180
3,224,971
560,501
18.0
100,651
Tonnes
Tonnes
Tonnes
cpht (*)
Carats
US$m
US$m
US$m
US$m
US$m
9.4
1.1
0.2
5.1
15.8
16.1
5.0
2.5
12.6
36.2
2.2
2.1
0.2
4.2
8.7
1.6
0.6
0.7
1.0
3.9
2.9
1.2
1.4
2.3
7.8
1,081
1,171
US$
108
278
278
137
693
160
130
133
412
396
593
70.5
70.5
70.5
-
104,405
104,405
675
675
757,672
2,477,687
566,681
20.1
113,950
89
16.6
2.3
2.0
1.8
22.7
OPERATIONS: KAROWE MINE
Operational performance at Karowe for 2015 was in line with forecast for the year.
Safety performance for the year was excellent with Safety and Health Lost time injury frequency rates
(‘LTIFR’) for 2015 of less than 0.4 (measured per 1,000,000 hours) (2014: 0.99).
Mining performed well, concentrating in the south lobe was ahead of forecast. Waste stripping to
access the ore body at depth progressed well and all mine face positions are in line with forecast.
Tonnes milled were in line with forecast. During the fourth quarter a total of 205 special stones
(+10.8 carats) were recovered at an average size of 52.46 carats. This included the historic Lesedi
La Rona type lla diamond as well as the second and third largest stones ever recovered at Karowe.
The study to increase the top size of diamonds recoverable by the existing Large Diamond Recovery
circuit has now moved to the engineering design phase, and a further plant upgrade to recover
exceptionally large diamonds immediately post primary crusher has commenced.
EXPLORATION AND MOTHAE
Botswana Prospecting Licenses:
In 2014, the Company was awarded two precious stone prospecting licenses (PL367/2014 and
PL371/2014) with are known to host the kimberlites, BK02, AK11 and AK12, AK13 and AK14. The
prospecting licenses are located within a distance of 15 km and 30 km from the Karowe Diamond
mine. Ground geophysical surveys were conducted over the known kimberlite occurrences within the
prospecting licenses during Q4 2014 and Q1 2015. The geophysical results confirmed the kimberlite
localities and have provided information that has been used to plan our core drilling and surface
sampling programs. Additional geophysical surveys are planned for first quarter of 2016.
Bulk sampling activities at BK02 were 50% completed as at December 31, 2015 and processing
of the surface sample was initiated during Q4 2015. The BK02 diamond results will be released once
processing of the sample is complete which is expected to be at the first half of 2016. Bulk sampling
activities at AK12 will commence in the first quarter of 2016 followed by trenching at AK11.
Environmental approvals for drilling campaigns on the Prospecting Licenses are still pending with the
Republic of Botswana Department of Environment Affairs (“DEA”).
Mothae Diamond Project, Lesotho
Following the signing of a Memorandum of understanding for the sale of the Mothae Diamond project
to Paragon Diamonds Limited (‘Paragon’), a share purchase agreement was entered into effective
July 2, 2015. During the fourth quarter, Paragon was unable to complete the share purchase
agreement and as such the Company has relinquished its 75% ownership of the project to the
Government of Lesotho. The Company is currently working with the Government of Lesotho to
finalize its plan for the rehabilitation of the project. Lucara has no remaining ownership in this
project.
SELECT FINANCIAL INFORMATION
Table 4:
Year ended December 31,
In millions of U.S. dollars unless otherwise noted
2015
2014
2013
Revenues
Operating expenses
Royalty expenses
Operating earnings (1)
Exploration expenditures
Care and maintenance
Administration
Gain on sale of exploration program diamonds
Sales and marketing
EBITDA (2)
Depletion, amortization and accretion
Finance income (expenses)
Foreign exchange gain (loss)
Impairment charge - Mothae
Restoration charge - Mothae
Current income tax expense
Deferred income tax expense
Net income for the year
Change in cash during the year
Cash on hand
Earnings per share (basic)
Earnings per share (diluted)
Per carats sold
Sales price
Operating expenses
Average grade (carats per hundred tonnes)
$
$
223.8
(50.1)
(22.4)
151.3
(1.0)
(0.6)
(13.0)
-
(2.8)
133.9
(15.0)
1.0
15.5
-
-
(44.7)
(12.9)
77.8
33.9
134.8
0.21
0.20
$
$
593
133
16.3
265.5
(47.2)
(26.6)
191.7
-
(1.2)
(12.8)
-
(4.3)
173.4
(14.6)
0.8
(19.4)
(18.8)
(2.4)
(41.6)
(31.7)
45.7
51.5
100.8
0.13
0.13
644
115
17.7
$
$
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
36.1
49.4
0.17
0.17
411
100
18.7
(1) Operating earnings is a non-IFRS measure defined as sales less operating expenses and royalty expenses.
(2) EBITDA is a non-IFRS measure defined as earnings before interest, taxation, depreciation and amortization.
Table 5: Cash operating cost per tonne ore milled
reconciliation:
In millions of U.S. dollars with the exception of tonnes milled and cash operating cost per tonne milled
Operating expenses
Capitalized production stripping costs(1)
Investment activities: other(2)
Net change rough diamond inventory(3)
Net change ore stockpile inventory(4)
Total cash operating costs for ore milled
Tonnes milled
Cash operating cost per tonne ore milled(5)
Year ended
December 31,
2014
2015
$ 50.1 $ 47.2
6.2
2.1
2.7
7.2
65.4
2,421,506
27.01
12.6
-
(1.2)
3.1
64.5
2,238,975
28.85
(1) Capitalized production stripping cost in investing activities in the audited consolidated statements of cash flows.
(2) Investment activities: other in the audited consolidated statements of cash flows relates to mobilization costs for MCC, the
Company’s mining contractor which was paid in Q4 2014 and will be amortized in future periods.
(3) Net change in rough diamond inventory for the year ended December 31, 2015 and December 31, 2014.
(4) Net change in ore stockpile inventory for the year ended December 31, 2015 and December 31, 2014.
(5) Cash operating cost per tonne milled for the year is a non-IFRS measure defined as the sum of operating expenses, capitalized
production stripping costs, and net change in working capital items for diamond inventories divided by the tonnes ore milled for the
period.
Revenues
During the year the Company had sales totalling 377,136 carats for gross proceeds of $223.8 million
at an average price of $593 per carat. The exceptional stone sales resulted in an average price of
$31,597 per carat from the sale of 3,114 carats in 2015 (2014: $32,471 per carat from the sale of
4,176 carats), with the remaining tenders achieving $335 per carat (2014: $318 per carat).
Operating earnings
Operating earnings before royalty payments for 2015 were $173.7 million resulting in an operating
margin (before royalties and depletion, amortization and accretion) of 78%. Operating expenses
during the year were $133 per carat, which resulted in an operating margin of $460 per carat. As
anticipated, the full year operating expenses at $133 per carat were higher than the $115 per carat in
the prior year due to the increase in processing costs to process the harder material from the south
lobe and a decrease in carats recovered in 2015 compared to the prior year.
Income tax expense
The Company’s 2015 income tax expense was $57.6 million, which consisted of a current income tax
charge of $44.7 million and a deferred income tax charge of $12.9 million for the year. The Company
is subject to a variable tax rate in Botswana that increases as profit as a percentage of revenue
increases. The lowest variable tax rate is 22% while the highest variable tax rate is 55% only if
taxable income were equal to revenue. At the Company’s 2015 performance, its tax rate for 2015 was
40%. The Company has paid $35.2 million of its current year tax expense and the remaining current
tax accrual of $9.5 million is due by April 30, 2016.
Foreign exchange
The Company recorded a foreign exchange gain of $15.5 million in 2015 compared to a loss of $19.4
million in 2014. The 2015 foreign exchange gain is largely due to the depreciating value of the pula
and its impact on the USD cash the Company retains. The 2014 foreign exchange charge was related
to Pula denominated loan between Corporate and Boteti that is not applicable in 2015. The Company
had historically reported foreign exchange losses following the weakening of the Botswana Pula which
were calculated and reported in the Company’s other comprehensive income as this loan was
reported as a net investment in a foreign operation under IAS21. In 2014 the Company no longer
reported this intercompany loan as a net investment in a foreign operation and as a result previous
foreign exchange losses reported in other comprehensive income were charged against the statement
of operations as the intercompany loan is repaid
Earnings before interest, tax, depreciation and amortization (EBITDA)
Full year EBITDA was $133.9 million compared to $173.4 million in 2014. The EBITDA is lower than
the prior year largely due to the decrease in revenues compared to the prior year.
EBITDA is a non-IFRS measure and is reconciled in the table on page 5.
Cash operating cost per tonne ore milled
The year ended December 31, 2015 cash operating cost per tonne milled was $28.9 per tonne milled
(2014: $27.01 per tonne milled) and 2015 guidance of $33-$36 per tonne milled. The higher cost
compared to the prior year is largely due to the higher costs required to process the harder ore in the
south lobe which was anticipated in the mine plan. The costs were lower than forecast due to the
depreciating pula and overall cost savings including savings on power and fuel.
Cash operating cost per tonne milled is a non-IFRS measure and is reconciled in the table on table 5
to the most directly comparable measure calculated in accordance with IFRS, which is operating
expenses.
Liquidity and Capital Resources
As at December 31, 2015, the Company had cash of $134.8 million (2014: $100.8 million).
Cash increased during the year by $33.9 million. This increase reflects cash from operating activities
of $84.8 million offset primarily by the Company’s acquisition of plant and equipment of $23.6 million,
largely for the plant optimization project and sustaining capital, $12.6 million of capitalized production
stripping costs, and payment of the Company’s regular dividend of $11.8 million. The Company
has a 2015 tax payable of $9.5 million which will be paid during the first quarter of 2016.
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.
Table 6: 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-15
Sept-15
Jun-15 Mar-15
Dec-14 Sept-14
Jun-14 Mar-14
A. Revenues
65,212
90,878
38,122
29,634
70,499
91,253
70,972
32,780
B. Administration expenses
(5,214)
(3,005)
(2,353)
(2,425)
(4,536)
(2,290)
(3,841)
(2,107)
C. Net income (loss)(1)
D. Earnings (loss) per share
(basic and diluted)
18,958
44,181
8,625
6,006
(16,819)
41,846
15,639
5,074
0.05
0.12
0.02
0.02
(0.03)
0.11
0.04
0.01
(1) Net loss in Q4 2014 was mainly generated by the Mothae impairment and restoration charge: $21.2 million in the period.
Revenues
During the three months ended December 31, 2015, the Company completed two diamond
tenders, one of which was an exceptional diamond tender. The exceptional diamond tender
generated gross proceeds of $29.7 million and the regular tender in the fourth quarter achieved
$35.3 million.
Administration expenses
During the three months ended December 31, 2015, administration expenses increased by $2.2
million with full year costs in line with the previous year.
NON-IFRS FINANCIAL MEASURES
This MD&A refers to certain financial measures, such as EBITDA, Operating costs per carats sold, and
Cash operating cost per tonne ore treated, 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.
EBITDA (see “Select 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.
Cash operating cost per tonne ore treated (see “Select Financial Information”) is the term the
Company uses to describe operating expenses per tonne treated on a cash basis. This is calculated as
cash operating cost divided by tonnes of ore treated for the period. This ratio provides the user with
the total cash costs incurred by the mine during the period per tonne of ore treated,
including waste capitalisation costs, mobilization costs and working capital movements. The most
directly comparable measure calculated in accordance with IFRS is operating expenses. A table
reconciling the two measures is presented on page 5.
RELATED PARTY TRANSACTIONS
For the year ended December 31, 2015, the Company paid $0.6 million for the year ended December
31, 2015 (2014 $0.2 million) to a charitable foundation directed by members of the Company’s
directors to carry out social programs on behalf of the Company.
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 commodity price risk, currency
risk, liquidity risk and credit risk, refer to Note 19 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 19 of the Company’s consolidated financial statements.
OUTSTANDING SHARE DATA
As at the date of this MD&A, the Company had 380,029,413 common shares outstanding, 529,889
share units and 3,141,669 stock options outstanding under its stock-based incentive plan. As at the
same date, the Company had no stock purchase warrants outstanding.
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; and 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
Unfavourable economic conditions may negatively
financial ability.
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 the Company’s costs and expenses being incurred in Botswana Pula, South African Rand,
Lesotho Loti, Canadian, U.S. dollar, and Great Britain Sterling. As a consequence, fluctuations in
exchange rates may have a significant effect on the cash flows and operating results of the Company
in either a positive or negative direction.
Mining and Processing
The Company’s business operations are subject to risks and hazards inherent in the mining industry,
including, but not limited to, unanticipated variations in grade and other geological problems, water,
power, surface conditions, metallurgical and other processing problems, mechanical equipment
performance problems, the lack of availability of materials and equipment, the occurrence of
accidents, labour force disruptions, force majeure factors, weather conditions 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(cid:0)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 that the Company holds an interest in, 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 project is located in Botswana. The country 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 labor 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 relating to mining could have a material adverse effect to the
rights and title to the interests held in Botswana 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 is located in a remote area 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, labor disputes, encountering unusual
or unexpected geologic formations or other geological or grade problems, encountering unanticipated
ground or water conditions, cave-ins, pit wall failures, flooding, rock bursts, periodic interruptions due
to inclement or hazardous weather conditions and other acts of God. Such risks could result in
damage to mineral properties or facilities, personal injury or death, environmental damage, delays in
exploration, development or mining, monetary losses and possible legal liability.
The Company maintains insurance against certain risks that are associated with its business in
amounts that it believes to be reasonable at the current stage of operations. There can be no
assurance that such insurance will continue to be available at economically acceptable premiums or
will be adequate to cover any future claim.
Competition
The mining industry is intensely competitive in all its phases and the Company competes with other
companies that have greater financial resources and technical capacity. The Company continues to
compete with a number of companies for the acquisition of mineral properties. The ability for the
Company to replace or increase its mineral reserves and mineral resources in the future will depend
on its ability to develop its present properties and also to select and acquire economic producing
properties or prospects for diamond extraction.
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, directors and officers are subject to the Company’s Code of Business
Conduct and Ethics and applicable corporate legislation. 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.
Personnel
The Company is depending on a relatively small number of key senior management 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 key individuals.
In addition, due to the remoteness of the Company’s Karowe mine, there is competition for
personnel. The degree to which the Company is not successful in retaining and developing employees
at its mine sites could lead to a lack of knowledge, skills and experience required to operate the mine
effectively.
Natural Disasters
The occurrence of one or more natural disasters such as a pandemic outbreak or unusually adverse
weather conditions could disrupt mining operations and have a material adverse effect on the
Company.
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, 2016 is expected to be published on May 13, 2016. In
addition, the Company’s annual general meeting of shareholders will be held on May 12, 2016 in
Vancouver, British Columbia.
NEW ACCOUNTING PRONOUNCEMENTS
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, 2015
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.
The following are new IFRS pronouncements that have been issued but are not yet effective are
listed below. The Company plans to apply the new standards or interpretations in the annual
period for which it is first required.
IFRS 9 - Financial Instruments
IFRS 9, Financial Instruments addresses the classification, measurement and recognition of
financial assets and financial liabilities. IFRS 9 requires financial assets to be classified into three
measurement categories on initial recognition: those measured at fair value through profit and
loss, those measured at fair value through other comprehensive income and those measured at
amortized cost. Investments in equity instruments are required to be measured by default at fair
value through profit or loss. However, there is an irrevocable option to present fair value changes
in other comprehensive income. Measurement and classification of financial assets is dependent
on the entity’s business model for managing the financial assets and the contractual cash flow
characteristics of the financial asset.
IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for
financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses
are recognized. An entity is required to recognize expected credit losses when financial
instruments are initially recognized and to update the amount of expected credit losses recognized
at each reporting date to reflect changes in the credit risk of the financial instruments. In addition,
IFRS 9 requires additional disclosure requirements about expected credit losses and credit risk.
The completed version of IFRS 9 is effective for annual periods beginning on or after January 1,
2018, with early adoption permitted. The Company is currently assessing the effect of this
standard and its related amendments on our financial statements.
IFRS 15 - Revenue from Contracts with Customers
The new revenue standard introduces a single, principles based, five-step model for the
recognition of revenue when control of a good or service is transferred to the customer. The five
steps are: identify the contract(s) with the customer, identify the performance obligations in the
contract, determine transaction price, allocate the transaction price and recognize revenue when a
performance obligation is satisfied. IFRS 15 also requires enhanced disclosures about revenue to
help investors better understand the nature, amount, timing and uncertainty of revenue and cash
flows from contracts with customers and improves the comparability of revenue from contracts
with customers.
IFRS 15 will be effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted. The Company is currently assessing the effect of this standard on our
financial statements.
IFRS 16 - Leases
The new Leases standard requires lessees to recognize leases traditionally recorded as operating
leases in the same manner as financing leases.
IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, with early
adoption permitted. The Company is currently assessing the effect of this standard on our
financial statements.
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, 2015
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.
Estimated recoverable reserves and resources
Mineral reserve and resource estimates are based on various assumptions relating to operating
matters. These include production costs, mining and processing recoveries, cut-off grades, long term
commodity prices and, in some cases, exchange rates, inflation rates and capital costs. Cost
estimates are based on feasibility study estimates or operating history. Estimates are prepared by
appropriately qualified persons, but will be affected by forecasted commodity prices, inflation rates,
exchange rates, capital and production costs and recoveries amongst other factors. Estimated
recoverable reserves and resources are used to determine the depreciation of property, plant and
equipment at operating mine site, in accounting for deferred stripping costs and in performing
impairment testing. Therefore, changes in the assumptions used could affect the carrying value of
assets, depreciation and impairment charges recorded in the income statement.
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
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 Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s disclosure controls and procedures. As of
December 31, 2015, the Chief Executive Officer and Chief 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
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.
Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company’s internal controls over financial reporting.
As of December 31, 2015, the Chief Executive Officer and Chief Financial Officer have each concluded
that the Company’s internal controls over financial reporting, 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.
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 reserves and resources; estimates of the Company’s
production and sales volumes for the Karowe Mine; estimated costs for capital expenditures
related to 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 most recent Annual
Information Form 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 and availability 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) and 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 23, 2016
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, 2015 and December 31, 2014 and the
consolidated statements of operations, comprehensive income, 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.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, 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.
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, 2015 and December 31, 2014 and its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
signed “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
2
LUCARA DIAMOND CORP.
CONSOLIDATED BALANCE SHEETS
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
December 31, 2015 December 31, 2014
ASSETS
Current assets
Cash and cash equivalents
Investments
VAT 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
Taxes payable (Note 14)
Current portion of restoration provisions (Note 9)
Restoration provisions (Note 9)
Deferred income taxes (Note 14)
TOTAL LIABILITIES
EQUITY
Share capital (Note 10)
Contributed surplus (Note 11)
Retained earnings/(deficit)
Accumulated other comprehensive loss
Total equity attributable to shareholders of the Company
Non-controlling interests
TOTAL EQUITY
$
134,776 $
$
$
-
3,188
35,245
173,209
115,690
51,678
3,593
344,170 $
12,987 $
9,507
2,134
24,628
14,024
48,834
87,486
286,658
5,270
40,847
(76,103)
256,672
12
256,684
TOTAL LIABILITIES AND EQUITY
$
344,170 $
The accompanying notes are an integral part of these consolidated financial statements.
Approved on Behalf of the Board of Directors:
“Marie Inkster”
Director
“William Lamb”
Director
100,839
56
5,017
32,019
137,931
122,016
52,729
4,349
317,025
12,384
13,681
2,857
28,922
15,902
43,646
88,470
286,138
4,713
(25,128)
(37,182)
228,541
14
228,555
317,025
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
$
223,846 $
265,504
2015
2014
Cost of goods sold
Operating expenses
Royalty expenses (Note 8)
Depletion, amortization and accretion
50,100
22,385
14,973
87,458
47,169
26,550
14,681
88,400
Income from mining operations
136,388
177,104
Other expenses
Administration (Note 13)
Care and maintenance
Exploration expenditures
Finance income
Foreign exchange loss (gain)
Sales and marketing
Restoration charge – Mothae project
Impairment charge – Mothae project
12,997
636
1,046
(992)
(15,475)
2,796
-
-
1,008
12,774
1,197
-
(813)
19,372
4,355
2,415
18,783
58,083
Net income before tax
135,380
119,021
Income tax expense (Note 14)
Current income tax
Deferred income tax
Net income for the year
Attributable to:
Shareholders of the Company
Non-controlling interests
Income per common share (Note 15)
Basic
Diluted
$
$
$
$
$
Weighted average common shares outstanding (Note 15)
Basic
Diluted
44,732
12,878
57,610
41,589
31,692
73,281
77,770 $
45,740
77,849 $
(79) $
47,317
(1,577)
0.21 $
0.20 $
0.13
0.13
379,516,883
380,832,368
378,198,299
380,011,269
The accompanying notes are an integral part of these consolidated financial statements.
LUCARA DIAMOND CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
2015
2014
Net income for the year
$
77,770 $
45,740
Other comprehensive income (loss)
Items that may be subsequently reclassified to net income
Change in fair value of available-for-sale securities
Currency translation adjustment
36
(38,955)
(38,919)
(29)
4,620
4,591
Comprehensive income
$
38,851 $
50,331
Comprehensive income attributable to:
Shareholders of the Company
Non-controlling interests
38,928
(77)
51,955
(1,624)
$
38,851 $
50,331
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, 2014
376,899,415 $
283,609 $
5,108 $
(45,516) $
(41,820) $
1,543 $
202,924
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Unrealized loss on investments
Free-carried non-controlling
interests
Dividends paid(1)
Net income (loss) for the year
2,469,664
-
2,529
-
(727)
332
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(95)
(26,834)
47,317
-
-
4,667
(29)
-
-
-
-
-
(47)
-
1,802
332
4,620
(29)
95
-
(1,577)
-
(26,834)
45,740
Balance, December 31, 2014
379,369,079 $
286,138 $
4,713 $
(25,128) $
(37,182) $
14 $
228,555
Balance, January 1, 2015
379,369,079 $
286,138 $
4,713 $
(25,128) $
(37,182) $
14 $
228,555
Exercise of stock options
Stock-based compensation
Effect of foreign currency
translation
Unrealized loss on investments
Free-carried non-controlling
interests
Dividends paid(2)
Net income (loss) for the year
610,334
-
520
-
(162)
703
-
-
-
-
-
-
-
-
-
-
-
-
-
16
-
-
-
-
-
(75)
(11,799)
77,849
-
-
(38,957)
36
-
-
-
-
-
2
-
75
-
(79)
358
703
(38,955)
36
-
(11,783)
77,770
Balance, December 31, 2015
379,979,413 $
286,658 $
5,270 $
40,847 $
(76,103) $
12 $
256,684
(1) On June 19, 2014, the Company paid a cash dividend of CA$ 0.02 per share. On December 18, 2014, the Company paid a cash dividend
of CA$ 0.06 per share.
(2) On June 18, 2015, the Company paid a cash dividend of CA$ 0.02 per share. On December 17, 2015, the Company paid a cash dividend
of CA$ 0.02 per share.
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 for the year
Items not involving cash and cash equivalents:
Depletion, amortization and accretion
Unrealized foreign exchange loss (gain)
Stock-based compensation
Deferred income taxes
Finance costs
Restoration charge
Impairment charge
Net changes in working capital items:
VAT receivables and other current assets
Inventories
Trade payables and other current liabilities
Taxes payable
Financing Activities
Dividends paid
Proceeds from exercise of stock options
Other
Investing Activities
Acquisition of plant and equipment
Capitalized production stripping costs
Other
2015
2014
$
77,770 $
45,740
15,383
(14,476)
703
12,878
111
-
-
92,369
1,134
(8,756)
2,871
(2,309)
85,309
(11,783)
358
-
(11,425)
(23,612)
(12,587)
-
(36,199)
15,128
23,879
332
31,692
184
2,415
18,783
138,153
(2,094)
(11,814)
(3,094)
11,908
133,059
(26,834)
1,802
(2,298)
(27,330)
(42,271)
(6,162)
(2,051)
(50,484)
Effect of exchange rate change on cash and cash
equivalents
Increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
(3,748)
33,937
100,839
134,776 $
(3,770)
51,475
49,364
100,839
Supplemental Information
Interest received
Taxes paid
Changes in trade payable and accrued liabilities related to
plant and equipment
1,831
(46,731)
739
(26,708)
(104)
(272)
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, 2015 AND 2014
(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 and three prospecting licenses
located in Botswana.
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 2000 – 885 West Georgia 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 23,
2016.
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. (See Note 12 Principal 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, 2015 AND 2014
(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:
Estimated recoverable reserves and resources – Mineral reserve and resource estimates are based
on various assumptions relating to operating matters. These include production costs, mining and
processing recoveries, cut-off grades, long term commodity prices and, in some cases, exchange
rates, inflation rates and capital costs. Cost estimates are based on feasibility study estimates or
operating history. Estimates are prepared by appropriately qualified persons, but will be affected by
forecasted commodity prices, inflation rates, exchange rates, capital and production costs and
recoveries amongst other factors. Estimated recoverable reserves and resources are used to
determine the depreciation of property, plant and equipment at operating mine site, in accounting
for deferred stripping costs and in performing impairment testing. Therefore, changes in the
assumptions used could affect the carrying value of assets, depreciation and impairment charges
recorded in the income statement.
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.
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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(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 Corporate. The Corporate office provides support to Karowe Mine with respect to
sales, 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at exchange rates of monetary assets and
liabilities denominated in currencies other than an entity’s functional currency are recognized in the
statement of operations.
Group companies
The functional currency of the significant subsidiaries of the Company are Boteti Mining (PTY) Ltd.,
which has a Pula functional currency and Mothae Diamonds (Pty) Ltd, which has a Loti functional
currency. The results and financial position of the group companies, which have a functional currency
different from the presentation currency, are translated into the presentation currency as follows:
(i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the
date of that balance sheet
(ii) Income and expenses for each statement of operation are translated at average exchange rates
(unless this average is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at the rate
on the dates of the transactions).
(iii) All resulting exchange differences are recognized in other comprehensive income as cumulative
translation adjustments.
(f) Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term
highly liquid investments with original maturities of three months or less.
(g) Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual
provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or have been transferred and the Company has transferred
substantially all risks and rewards of ownership. Financial liabilities are derecognized when the
obligation specified in the contract is discharged, cancelled or expires.
At initial recognition, the Company classifies its financial instruments in the following categories:
(i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is
classified in this category if acquired principally for the purpose of selling or repurchasing in the
short-term. Derivatives are also included in this category unless they are designated as hedges.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments in this category are recognized initially and subsequently at fair value.
Transaction costs are expensed in the consolidated statement of operations. Gains and losses
arising from changes in fair value are presented in the consolidated statement of operations
within “other gains and losses” in the period in which they arise. Non-derivative financial assets
and liabilities at fair value through profit or loss are classified as current except for the portion
expected to be realized or paid beyond twelve months of the balance sheet date, which are
classified as non-current.
(ii) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either
designated in this category or not classified in any of the other categories.
Available-for-sale investments are recognized initially at fair value plus transaction costs and are
subsequently carried at fair value. Gains or losses arising from re-measurement 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.
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.
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, 2015 AND 2014
(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 stockpile and parts and supplies, 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
Mineral property & 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, 2015 AND 2014
(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.
(l) Capitalized production stripping asset
During the production phase, mining expenditures (exploration or development costs) incurred either
to develop new ore bodies or to develop mine areas in advance of current production are capitalized
to mineral properties. Stripping costs incurred in the production phase are accounted for as variable
production costs. However, stripping costs are capitalized and recorded on the statement of financial
position as deferred stripping, a component of mineral properties, when the stripping activity provides
access to sources of reserves or resources that will be produced in future periods that would not have
otherwise been accessible in the absence of this activity. The deferred stripping costs are depleted on
a unit-of-production basis over the reserves or resources that directly benefited from the stripping
activity.
(m) 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, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(n) 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.
(o) Income taxes
Income taxes are recognized in the statement of income, except where they relate to items
recognized in other comprehensive income or directly in equity, in which case the related taxes are
recognized in other comprehensive income or equity.
Current taxes receivable or payable are based on estimated taxable income for the current year at
the statutory tax rates enacted or substantively enacted less amounts paid or received on account.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) Income taxes (continued)
Deferred taxes 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 sliding tax rate that is expected at the time of reversal
and 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.
Uncertain tax positions and interest and penalties related to uncertain tax positions are accounted
for under IAS 12, the Company first determines whether it is more likely than not that a tax position
will be sustained upon examination. If a tax position meets the more-likely-than-not recognition
threshold it is then measured to determine the amount of benefit or liability to recognize in the
financial statements. The tax position is measured as the amount of benefit or liability that is likely
of being realized upon ultimate settlement. The Company assesses the validity of conclusions
regarding uncertain tax positions on a quarterly basis to determine if facts or circumstances have
arisen that might cause the Company to change their judgment regarding the likelihood of a tax
position.
(p) 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.
(q) 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, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(r) 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.
(s) 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 and share units 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.
(t) Income per share
Income per share is calculated by dividing the income attributable to the shareholders of the
Company by the weighted average number of common shares issued and outstanding during the
year. Diluted income per share is calculated using the treasury stock method.
(u) 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.
(v) 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, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
4. ADOPTION OF IFRS PRONOUNCEMENTS
The IFRS pronouncements that have been issued but are not yet effective are listed below. The
Company plans to apply the new standards or interpretations in the annual period for which it is
first required.
IFRS 9 - Financial Instruments
IFRS 9, Financial Instruments addresses the classification, measurement and recognition of
financial assets and financial liabilities. IFRS 9 requires financial assets to be classified into three
measurement categories on initial recognition: those measured at fair value through profit and
loss, those measured at fair value through other comprehensive income and those measured at
amortized cost. Investments in equity instruments are required to be measured by default at fair
value through profit or loss. However, there is an irrevocable option to present fair value changes
in other comprehensive income. Measurement and classification of financial assets is dependent
on the entity’s business model for managing the financial assets and the contractual cash flow
characteristics of the financial asset.
IFRS 9 introduces a new three-stage expected credit loss model for calculating impairment for
financial assets. IFRS 9 no longer requires a triggering event to have occurred before credit losses
are recognized. An entity is required to recognize expected credit losses when financial
instruments are initially recognized and to update the amount of expected credit losses recognized
at each reporting date to reflect changes in the credit risk of the financial instruments. In
addition, IFRS 9 requires additional disclosure requirements about expected credit losses and
credit risk.
The completed version of IFRS 9 is effective for annual periods beginning on or after January 1,
2018, with early adoption permitted. The Company is currently assessing the effect of this
standard and its related amendments on our financial statements.
IFRS 15 - Revenue from Contracts with Customers
The new revenue standard introduces a single, principles based, five-step model for the
recognition of revenue when control of a good or service is transferred to the customer. The five
steps are: identify the contract(s) with the customer, identify the performance obligations in the
contract, determine transaction price, allocate the transaction price and recognize revenue when a
performance obligation is satisfied. IFRS 15 also requires enhanced disclosures about revenue to
help investors better understand the nature, amount, timing and uncertainty of revenue and cash
flows from contracts with customers and improves the comparability of revenue from contracts
with customers.
IFRS 15 will be effective for annual periods beginning on or after January 1, 2018, with early
adoption permitted. The Company is currently assessing the effect of this standard on our
financial statements.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
4. ADOPTION OF NEW IFRS PRONOUNCEMENTS (continued)
IFRS 16 - Leases
The new Leases standard requires lessees to recognize leases traditionally recorded as operating
leases in the same manner as financing leases.
IFRS 16 will be effective for annual periods beginning on or after January 1, 2019, with early
adoption permitted. The Company is currently assessing the effect of this standard on our
financial statements.
5. VAT RECEIVABLES AND OTHER
VAT
Other
Prepayments
6. INVENTORIES
Rough diamonds
Ore stockpile
Parts and supplies
$
$
$
2015
2014
1,416 $
915
857
3,188 $
2,712
1,335
970
5,017
2015
2014
10,497 $
16,977
7,771
11,703
13,849
6,467
32,019
Inventory expensed during the year ended December 31, 2015 totaled $50.1 million (2014 – $47.2
million).
35,245 $
$
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(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, 2014
$
- $
115,930 $
1,419 $
2,707 $
120,056
Additions
Disposals and other
Impairment
Translation differences
Balance, December 31, 2014
Additions
Disposals and other
Reclassification
Translation differences
41,154
-
-
(2,473)
38,681
23,440
-
(56,725)
(2,466)
245
-
(5,171)
(9,277)
101,727
11
-
55,741
(20,864)
228
(19)
(111)
(123)
1,394
-
(28)
6
(207)
372
-
(106)
(238)
2,735
57
(6)
978
(515)
41,999
(19)
(5,388)
(12,111)
144,537
23,508
(34)
-
(24,052)
Balance, December 31, 2015
$
2,930 $
136,615 $
1,165 $
3,249 $
143,959
Accumulated depreciation
Balance, January 1, 2014
$
- $
17,192 $
855 $
1,123 $
19,170
Depletion, amortization and
accretion for the year
Disposals and other
Impairment
Translation differences
Balance, December 31, 2014
Depletion, amortization and
accretion for the year
Disposals and other
Translation differences
-
-
-
-
-
-
-
-
9,170
-
(4,746)
(1,713)
388
(13)
(75)
(89)
19,903
1,066
9,507
-
(3,937)
118
(8)
(171)
628
-
(74)
(125)
1,552
530
(5)
(286)
10,186
(13)
(4,895)
(1,927)
22,521
10,155
(13)
(4,394)
Balance, December 31, 2015
$
- $
25,473 $
1,005 $
1,791 $
28,269
Net book value
As at December 31, 2014
As at December 31, 2015
$
$
38,681 $
2,930 $
81,824 $
111,142 $
328 $
160 $
1,183 $
1,458 $
122,016
115,690
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
8. MINERAL PROPERTIES
Cost
Capitalized
production
stripping
asset
Karowe
Mine
Mothae
Diamond
Mothae
mining
license
Total
Balance, January 1, 2014
$
- $
59,869 $
15,841
$
2,568 $
78,278
Additions
Impairment
Translation differences
Balance, December 31, 2014
Additions
Revision in estimate
Translation differences
6,162
-
(370)
5,792
12,587
-
(2,125)
1,881
-
(5,040)
56,710
-
(718)
(8,423)
-
(15,502)
(339)
-
(2,487)
(81)
-
-
-
-
-
-
-
-
8,043
(17,989)
(5,830)
62,502
12,587
(718)
(10,548)
Balance, December 31, 2015
$
16,254 $
47,569 $
- $
- $
63,823
Accumulated depletion
Balance, January 1, 2014
$
- $ 6,217
$
- $ - $
6,217
Depletion for the year
Translation differences
213
(13)
4,116
(760)
Balance, December 31, 2014
200
9,573
Depletion for the year
Translation differences
947
(122)
3,313
(1,766)
-
-
-
-
-
-
-
-
-
-
4,329
(773)
9,773
4,260
(1,888)
Balance, December 31, 2015
$
1,025
$ 11,120
$
- $
- $
12,145
Net book value
As at December 31, 2014
As at December 31, 2015
$
$
5,592
15,229
$ 47,137
$ 36,449
$
$
-
-
$ - $
$ - $
52,729
51,678
a) Karowe Mine
A royalty of 10% of the sales value of diamonds produced from Karowe is payable to the
government of Botswana. During the year, the Company had a royalty expense of $22.4 million.
(2014: $26.6 million)
b) Mothae Diamond Project
Following the signing of a Memorandum of understanding for the sale of the Mothae Diamond project
to Paragon Diamonds Limited (‘Paragon’), a share purchase agreement was entered into effective
July 2, 2015. During the fourth quarter, Paragon was unable to complete the share purchase
agreement and as such the Company has relinquished its 75% ownership of the project to the
Government of Lesotho. The Company is currently working with the Government of Lesotho to
finalize its plan for the rehabilitation of the project. Lucara has no remaining ownership in this
project.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
9. 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 8.2% at December
31, 2015 (8.4% at December 31, 2014) and an inflation rate of 4.4% at December 31, 2015 (5.3% at
December 31, 2014) at the Karowe Mine project. The Karowe rehabilitation costs are expected to
commence in the year 2022. The estimated Karowe liability for reclamation and remediation costs on
an undiscounted basis is approximately $18.0 million (December 31, 2014 - $20.1 million).
The Company’s decision to divest Mothae resulted in a present value accretion and a re-estimation of
the Mothae restoration provision (Note 8(b)). The Mothae rehabilitation costs are expected to be
incurred in 2016. The estimated Mothae liability for reclamation and remediation costs on an
undiscounted basis is approximately $2.1 million (December 31, 2014 - $2.9 million).
Balance, beginning of year
$
Revision to provisions
Changes due to discount rate changes
Accretion of liability component of obligation
Foreign currency translation adjustment
Balance, end of year
Less: Current portion
2015
18,759
-
(718)
1,277
(3,160)
16,158
2,134
2014
$ 14,515
2,415
1,881
1,484
(1,536)
18,759
2,857
Long-term portion of restoration provisions
$
14,024
$ 15,902
10. 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, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
11. SHARE BASED COMPENSATION
a.
Stock options
The Company has a new stock option plan (the ‘New Plan’) approved by the shareholders of the
Company on May 13, 2015 which reserves 20,000,000 as the aggregate number of shares issuable
upon the exercise of all Options granted under the New Plan. This new plan supersedes the
Company’s old stock option plan (the ‘Old Plan’) which was a rolling stock option plan approved by
the shareholders of the Company on May 31, 2011, which reserves 10% of the issued and
outstanding shares of the Company for issuance upon the exercise of options granted. No further
awards shall be granted under the Old Plan. However, any outstanding awards granted under the
Old Plan shall remain outstanding and shall continue to be governed by the provisions of such plan.
With regard to the New Plan, subject to the Board of Directors discretion, options granted may have
a vesting period of up to three years, with 1/3 of the options vesting 12 months from the date of
grant; 1/3 of the options vesting 24 months from the date of grant; and the remaining 1/3 vesting
36 months from the date of grant.
Movements in the number of stock options outstanding and their related weighted average exercise
prices are as follows:
Balance at December 31, 2013
4,208,334
$ 0.76
Number of shares issuable pursuant
to stock options
Weighted average exercise
price per share (CA$)
Granted
Exercised
300,000
(2,469,664)
2.11
0.80
Balance at December 31, 2014
2,038,670
0.92
Granted
Cancelled
Exercised(1)
1,770,000
(6,667)
(610,334)
2.14
0.70
0.77
Balance at December 31, 2015
(1) The weighted average share price on the exercise dates for the 2015 stock option exercises was
3,191,669
$
1.63
CA$2.13.
Options to acquire common shares have been granted and are outstanding at December 31, 2015 as
follows:
Outstanding Options
Exercisable Options
Range of
exercise prices
CA$
$0.61 - $0.70
$0.71 - $1.00
$1.01 - $2.25
Number of
options
outstanding
1,155,002
116,667
1,920,000
3,191,669
Weighted
average
remaining
contractual
life (years)
0.4217 $
1.8231
3.1689
2.1256 $
Weighted
average
exercise
price
CA$
0.73
1.78
2.16
1.63
Number of
options
exercisable
1,155,002
33,333
133,333
1,321,668
Weighted
average
remaining
contractual
life (years)
0.4217 $
1.1589
1.4411
0.5431 $
Weighted
average
exercise
price
CA$
0.73
1.71
2.25
0.90
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
11. SHARE BASED COMPENSATION (continued)
During the year ended December 31, 2015, an amount of $0.7 million (2014 – $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:
2015
2014
0.80
3.63
47.48
CA$0.02/share
semi annually
1.03
3.00
51.00
CA$0.02/share
semi annually
Weighted average fair value of options granted (per option)
$ 0.74 $ 0.68
b. Share units
The Company has a share unit (“SU”) plan that provides for the issuance of SUs. The value of a SU
at the issuance date is equal to the closing value of one Lucara common share. The SU vests in
three years and each SU entitles the recipient to receive one common share and the cumulative
dividend equivalent SU earned during the SU’s vesting period.
For the year ended December 31, 2015, the Company recognized a share-based payment charge
against income of $0.2 million (2014: $nil) for the SUs granted during the year.
Number of shares issuable pursuant
to share units
Weighted average exercise
price per share (CA$)
Balance at December 31, 2014
-
$ -
May 14, 2015 grant
June 18, 2015 dividend
December 17, 2015 dividend
520,000
5,304
4,585
Balance at December 31, 2015
529,889
$
2.07
1.96
2.29
2.07
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
12. PRINCIPAL SUBSIDIARIES
The Company had the following subsidiaries at December 31, 2015:
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, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
13. ADMINISTRATION
$
Salaries and benefits
Professional fees
Office and general
Stock exchange, transfer agent, shareholder communication
Travel
Stock based compensation
Management fees
Depreciation
Donations
2015
2014
6,213 $
1,122
1,610
1,245
730
703
342
410
622
5,822
1,972
1,904
668
945
332
457
447
227
$
12,997 $
12,774
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
14. INCOME TAXES
Current
Deferred
Income tax expense
2015
2014
$ 44,732 $ 41,589
12,878
31,692
$
57,610 $ 73,281
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 before tax
Computed income tax expense
Differences between Canadian and foreign tax rates
Non-deductible expenses and other permanent differences
Benefits from previously unrecognized tax benefits
Current tax effect of Botswana variable tax rate in excess of
2015
2014
26.00%
26.00%
135,380
119,021
35,199
(5,712)
909
(334)
30,945
(6,819)
4,493
-
Botswana standard tax rate
19,574
18,534
Deferred tax effect of Botswana variable tax rate in excess of
Botswana standard tax rate
Change in deferred benefits not recognized
Exchange rate differences
Withholding taxes
Other
4,142
1,268
600
1,964
-
15,717
3,961
5,772
322
356
$
57,610 $
73,281
The Company is subject to a variable tax rate in Botswana based on a profit and revenue ratio which
increases as profit as a percentage of revenue increases. The lowest variable tax rate is 22% while
the highest variable tax rate is 55% only if taxable income were equal to revenue. The Company
has estimated the variable tax rate for the deferred income taxes following the updated Karowe 43-
101 technical report and current financial performance. The Company recorded a deferred tax
liability during the year, which resulted in a corresponding non-cash deferred income tax expense of
$12.9 million (2014: $31.7 million).
The Company has determined there is $1.9 million in uncertain tax positions as at December 31,
2015 that relates to interest on deficient tax instalments due to the Botswana tax authority. The
Company believes it is more likely than not it will receive exemption from the tax authority due to
the significant complexities of estimating the instalments as a result of the sliding tax arrangement,
hence the amount has not been recognized as at December 31, 2015.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
14. 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
Deferred income tax expense
Foreign currency translation adjustment
2015
2014
$
43,646 $ 14,258
12,878
(7,690)
31,692
(2,304)
Balance, end of year
$
48,834 $ 43,646
Deferred income tax assets and liabilities recognized
2015
2014
Deferred income tax assets
Non-capital losses
Restoration provisions
Total deferred income tax assets
Deferred income tax liabilities
Mineral properties, plant and equipment
Future withholding taxes
Unrealized foreign exchange gains
Other
Deferred income tax liabilities
Deferred income tax liabilities, net
Deferred income tax assets not recognized
Tax losses
Mineral property, plant and equipment
Other deductible temporary differences
$
$
$
$
421 $
4,821
5,242
47,432
1,368
4,646
630
54,076
48,834 $
590
5,467
6,057
47,283
-
1,573
846
49,703
43,646
2015
2014
19,711 $
38
88
19,837 $
20,305
2,104
484
22,893
As at December 31, 2015, the Company has non-capital losses for income tax purposes which expire
as follows:
2015
2016
2017
Subsequent
to 2018
No expiry
date
Canada
United Kingdom
Lesotho
$
- $
-
-
- $
-
-
- $
-
-
45,979 $
-
-
- $
4,764
22,580
Total
45,979
4,764
22,580
73,323
No tax benefit has been recorded for the Canadian, United Kingdom and Lesotho non-capital
losses.
27,344 $
45,979 $
- $
- $
- $
$
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
15. 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:
2015
2014
Income for the year – attributable to Shareholders of the
Company
$
77,849 $
47,317
Weighted average number of common shares outstanding
379,516,883
378,198,299
$
0.21 $
0.13
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 year),
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.
2015
2014
Income for the year – attributable to Shareholders of the
Company
$
77,849 $
47,317
Weighted average number of common shares outstanding
Adjustment for stock options
Adjustment for share units
Weighted average number of common shares for diluted
379,516,883
983,365
332,120
378,198,299
1,812,970
-
earnings per share
380,832,368
380,011,269
$
0.20 $
0.13
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
16. RELATED PARTY TRANSACTIONS
a) Key management compensation
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
b) Other related parties
2015
2014
3,098 $
65
473
3,636 $
3,058
77
239
3,374
$
$
For the year ended December 31, 2015, the Company paid $0.6 million for the year ended
December 31, 2015 (2014 $0.2 million) to a charitable foundation directed by members of the
Company’s directors to carry out social programs on behalf of the Company.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
17. SEGMENT INFORMATION
The Company’s primary business activity is the development and operation of diamond properties in
Africa. The Company has two operating segments: Karowe Mine and Corporate and other.
Revenues(1)
Income from mining operations
Exploration expenditures
Finance income (expenses)
Foreign exchange gain
Other expenses
Taxes
Net income (loss) for the year
Capital expenditures
Total assets
2015
Karowe Mine
Corporate
and other
Total
$
223,846
$
- $
223,846
136,338
(1,046)
1,533
14,704
(7,430)
(55,744)
50
-
(541)
771
(8,999)
(1,866)
136,388
(1,046)
992
15,475
(16,429)
(57,610)
88,355
(10,585)
77,770
(36,199)
-
(36,199)
337,920
6,250
344,170
2014
Karowe Mine
Corporate
and other
Total
Revenues(1)
$
265,504
$
- $
265,504
Income (loss) from mining operations
Care and maintenance
Finance income (expenses)
Foreign exchange gain (loss)
Other expenses
Taxes
Restoration and Impairment charges
Net income (loss) for the year
177,331
-
1,298
3,736
(8,752)
(73,281)
-
(227)
(1,197)
(485)
(23,107)
(8,378)
-
(21,198)
177,104
(1,197)
813
(19,371)
(17,130)
(73,281)
(21,198)
100,332
(54,592)
45,740
Capital expenditures
(48,352)
(81)
(48,433)
Total assets
317,025
(1) During the year ended December 31, 2015, two customers (2014: one customer) generated more than 10% of the
Company’s total revenue, representing 12% and 13% of the Company’s 2015 revenue (2014: 12%).
306,668
10,357
The geographic distribution of non-current assets is as follows:
Plant and equipment
Mineral properties
Other
2015
2014
2015
2014
2015
2014
Canada
Botswana
$
$
56 $
127 $
- $
- $
26 $
115,634
121,889
51,678
52,729
3,567
115,690 $
122,016 $
51,678 $
52,729 $
3,593 $
202
4,147
4,349
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
18. 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 and cash equivalents
Other receivables
Available for sale
Investments
LIABILITIES
Amortized cost
Trade payables and accrued liabilities
b) Fair value hierarchy
December 31,
2015
December 31,
2014
$
$
$
$
$
134,776
4
$
134,780
$
-
-
12,987
12,987
$
$
$
100,839
445
101,284
56
56
12,384
12,384
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).
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
18. FINANCIAL INSTRUMENTS (continued)
Level 1
Investments
Level 2 and Level 3 – N/A
c) Financial risk management
December 31,
2015
December 31,
2014
$
-
$
56
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, 2015, the Company is exposed to currency risk relating to U.S. dollar cash
held within the Company. Based on this exposure, a 10% change in the U.S. dollar exchange rate
would give rise to an increase/decrease of approximately $13.0 million in net income for the year.
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 and cash equivalents 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.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
18. FINANCIAL INSTRUMENTS (continued)
The Company’s estimated minimum contractual undiscounted cash flow requirements for financial
liabilities were:
December 31, 2015
Trade payables and accrued
liabilities
December 31, 2014
Trade payables and accrued
liabilities
Guarantee
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$
12,987 $
- $
- $
-
Less than 3
months
3 months
to 1 year
2-5 years Over 5 years
$
12,384 $
- $
- $
-
As part of the Company's environmental obligation related to the Karowe Mine, the Government of
Botswana required a reclamation bond for the Mine. On July 1, 2015, Standard Chartered Bank
Botswana Limited has provided Boteti Mining (Pty) Ltd, a wholly owned subsidiary, with a
reclamation bond of Botswana Pula 100.0 million ($8.9 million) with respect to the Karowe Mine.
Consequently, the Company has provided a guarantee for a maximum amount of Botswana Pula
80.0 million ($7.1 million) with Standard Chartered Bank Botswana Limited. In addition, the
Company has deposited Botswana Pula 20.0 million ($1.8 million) with Standard Chartered Bank
Botswana Limited, accounted for in non-current other assets.
Revolving credit facility
In May 2014, the Company had renewed its credit facility with the Bank of Nova Scotia. The credit
facility was increased to a $50 million revolving term credit facility with a maturity date of May 5,
2017, 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, 2015, 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 three 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, 2015, the full amount under this facility was available. As a result, the
deferred finance charges have been classified under other assets.
LUCARA DIAMOND CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(All amounts expressed in thousands of U.S. Dollars, unless otherwise indicated.)
19. 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 and its debt facility 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 and life-of-mine plans which are updated as necessary depending on various
factors, including successful capital deployment and general industry conditions. The annual and
updated budgets and life-of-mine plan are approved by the Board of Directors.
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
E: reriksson@rive6.ch
Contact: Robert Eriksson, Investor Relations
E: lucaradiamond@portland-communications.com
Louise Mason, Portland Communications