Renegy Holdings, Inc. 20-F 2010
Documents found in this filing:
FORM 20-F /A
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to _______________
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _______________
Commission file number 000-30588
BRITISH COLUMBIA, CANADA
Level 1, Wilds View, Isle of Houghton,
COMMON SHARES WITHOUT PAR VALUE
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Securities registered or to be registered pursuant to Section 12(b) of the Act.
Securities registered or to be registered pursuant to Section 12(g) of the Act
Common Shares without Par Value
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Number of outstanding shares of Rockwell's only class of capital stock as at February 28, 2009.
237,924,152 Common Shares without Par Value
Indicate by check mark if the Registrant is a well known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Yes [ ] No [X]
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b 2 of the Exchange Act.
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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If "Other" has been check in response to the previous question, by check mark which financial statement item Registrant has elected to follow:
Item 17 [X] Item 18 [ ]
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act):
Yes [ ] No [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Currency and Exchange Rates
All monetary amounts contained in this Annual Report are, unless otherwise indicated, expressed in Canadian dollars. On February 27, 2009 the Bank of Canada noon rate for Canadian Dollars was US$1.00: Cdn$1.2707 (see Item 3A for further historical Exchange Rate Information).
NOTE REGARDING FORWARD LOOKING STATEMENTS
Except for statements of historical fact, certain information contained herein constitutes "forward-looking statements" including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, as well as all projections of future results. Such forward-looking statements involved known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rockwell to be materially different from any future results, performance or achievements of Rockwell expressed or implied by such forward-looking statements. Such risks are discussed in Item 3D "Risk Factors." The statements contained in Item 4B "Business Overview", Item 5 "Operating and Financial Review and Prospects" and Item 11 "Quantitative and Qualitative Disclosures About Market Risk" are inherently subject to a variety of risks and uncertainties that could cause actual results, performance or achievements to differ significantly.
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This Annual Report on Form 20-F is being amended in response to a comment letter dated November 19, 2009 from the Securities and Exchange Commission in order to: (i) provide certain information that was inadvertently not included on the cover of the 20-F as originally filed, (ii) revise the Companys disclosure regarding changes in internal control over financial reporting, (iii) revise the certifications included in Exhibit 12.1 and 12.2 to comply with Rule 13a-14(a), (iv) provide a revised auditor report together with the report from the Companys predecessor auditor and (v) amend certain of the notes to the Companys audited financial statements.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table summarizes selected consolidated financial data for Rockwell Diamonds Inc. (the "Company" or "Rockwell" or the "Registrant") for the year ended February 28, 2009, the nine months ended February 29, 2008 and the year ended May 31, 2007, 2006 and 2005. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Cdn GAAP"). Note 17 to the financial statements included herein provides descriptions of the material measurement differences between Cdn GAAP and United States generally accepted accounting principles ("US GAAP") as they relate to the Company and a reconciliation to US GAAP of the Company's financial statements.
The information in the table was extracted from the detailed consolidated financial statements and related notes included in this annual report, and should be read in conjunction with such financial statements included elsewhere in the document and with the information appearing under the heading, "Item 5. Operating and Financial Review and Prospects."
The selected financial data is presented in Canadian dollars and in accordance with Canadian GAAP and United States GAAP.
(1) Loss from continuing operations and loss for the year are the same for all periods presented.
No cash or other dividends have been declared.
Annual Exchange Rates
Except as otherwise indicated, all dollar amounts are stated in Canadian dollars, Rockwell's reporting currency. The following table sets out the exchange rates, based on the noon rates as reported by the Bank of Canada, for the conversion of United States dollars into one Canadian dollar in effect at the end of the specified periods, the average exchange rates during such periods (based on daily noon rates as reported by the Bank of Canada) and the range of high and low exchange rates for such periods:
The following table sets out the high and low exchange rates, based on the noon rate as reported by the Bank of Canada, for the conversion of United States dollars into one Canadian dollar, for the following periods:
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
This annual report contains forward-looking statements which relate to future events or Rockwell's future performance, including its future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", or "potential" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in enumerated in this section entitled "Risk Factors", that may cause Rockwell's or the mining industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect Rockwell's current judgment regarding the direction of its business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this annual report. Except as required by applicable law, including the securities laws of the United States, Rockwell does not intend to update any of the forward-looking statements to conform these statements to actual results.
An investment in Rockwell's common stock involves a number of very significant risks. The investor should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating Rockwell and its business before purchasing shares of Rockwell's common stock. Rockwell's business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are not the only ones facing Rockwell. Additional risks not presently known to Rockwell may also impair its business operations. The investor could lose all or part of your investment due to any of these risks.
Risks Associated With Mining
There is no assurance that Rockwell can formally establish the existence of any mineral reserve on any of its properties. Until Rockwell is able to establish a mineral reserve, there can be no assurance that production from these properties will continue for any period of time and if production fails, Rockwell's business may ultimately fail.
Although Rockwell now owns and operates properties with a history of sporadic to regular diamond production, which have been subject to examination, testing and quantification through scientific exploration techniques, a reliable determination of grade is difficult in alluvial deposits. Accordingly, there is no assurance that Rockwell can formally establish the existence of any mineral reserve on any of its properties. A mineral reserve is defined by the Securities and Exchange Commission in its Industry Guide 7 (which can be viewed over the Internet at http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7) as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. The probability of an individual prospect ever having a "reserve" that meets the requirements of the Securities and Exchange Commission's Industry Guide 7 is remote. If none of our current or future mineral resource properties contains any "reserve," any funds that Rockwell spends on exploration will be lost.
Even if Rockwell discovers a mineral reserve, there can be no assurance that the related property will be developed.
Even if Rockwell eventually discovers a mineral reserve on one or more of its properties, there can be no assurance that it will be able to develop the properties into producing mines. Both mineral exploration and development involve a high degree of risk and few properties which are explored are ultimately developed into producing mines.
The commercial viability of an established mineral deposit will depend on a number of factors including, by way of example, the size, grade and other attributes of the mineral deposit, the proximity of the resource to infrastructure such as a smelter, roads and a point for shipping, government regulation and market prices. Most of these factors will be beyond Rockwell's control, and any of them could increase costs and make extraction of any identified mineral resource unprofitable.
Mineral operations are subject to applicable law and government regulation. Even if Rockwell discovers a mineral resource in a commercially exploitable quantity, these laws and regulations could restrict or prohibit the exploitation of that mineral resource. If Rockwell cannot exploit any mineral resource that it might discover on our properties, its business may fail.
Both mineral exploration and extraction require permits from various foreign, federal, state, provincial and local governmental authorities and are governed by laws and regulations, including those with respect to prospecting, mine development, mineral production, transport, export, taxation, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. There can be no assurance that Rockwell will be able to obtain or maintain any of the permits required for the continued exploration of its mineral properties or for the construction and operation of a mine on its properties at economically viable costs. If Rockwell cannot accomplish these objectives, our business could fail.
Rockwell believes that it is in compliance with all material laws and regulations that currently apply to its activities but there can be no assurance that it can continue to do so. Current laws and regulations could be amended and the Company might not be able to comply with them, as amended. Further, there can be no assurance that Rockwell will be able to obtain or maintain all permits necessary for our future operations, or that it will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, Rockwell may be delayed or prohibited from proceeding with planned exploration or development of its mineral properties.
In addition, environmental hazards unknown to Rockwell which have been caused by previous or existing owners or operators of the properties may exist on the properties in which Rockwell holds an interest. Even if Rockwell relinquishes its licenses, it will still remain responsible for any required reclamation and rehabilitation of the properties.
Mineral exploration and development are subject to particular operating risks. Rockwell does not currently insure against these risks. In the event of a cave-in or similar occurrence, Rockwell's liability may exceed its resources, which would have an adverse impact on Rockwell.
All Rockwells operations are shallow opencast which has an inherently lower risk than other deeper operations which are susceptible to cave-ins.
Mineral exploration, development and production involve many risks which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Hazards such as unusual or unexpected formations and other conditions are involved.
Rockwell's operations will be subject to all the hazards and risks inherent in the exploration, development and production of resources, including liability for pollution, cave-ins or similar hazards against which it cannot insure against or which it may elect not to insure. Any such event could result in work stoppages and damage to property, including damage to the environment. Rockwell applies international best practices principles in all areas of the operations and complies with all health, safety and mining legislation of the South African Republic. Rockwell does not currently maintain any insurance coverage against these operating hazards. The payment of any liabilities that arise from any such occurrence may have a material, adverse impact on Rockwell.
The prediction of grade can be more challenging for the type of deposit which the Company is exploiting.
In the case of alluvial diamond deposits, the prediction of grade can be challenging due to the inherent geological nature of such deposits. The alluvial diamonds are laid down by rivers flowing over uneven terrain and the diamonds vary in terms of size and quality. Individual diamonds are not evenly or uniformly distributed through out an alluvial deposit; neither are they randomly distributed. Rather, their distribution has been described as a random distribution of clusters of points. The clusters are both randomly distributed in space, and the point density of the cluster is also random. In order to determine grade under such circumstances it is necessary to process large volumes of material (bulk testing) in order to be sure that grade calculations are representative and accurate. Moreover, in the case of such deposits, drilling is only of use in the determination of gravel distribution and not diamond content, since the volume of material recovered is insufficiently representative of grade. Notwithstanding the above caution, bulk testing is a straightforward technique that is currently being applied across all of Rockwell's South African operations. Furthermore, size frequency distribution curves can be used to accurately predict the relative abundance of diamonds in terms of stone size, thus mitigating risk.
Mineral prices are subject to dramatic and unpredictable fluctuations.
Rockwell expects to derive revenues from the extraction and sale of diamonds. The prices of diamonds have fluctuated widely in recent years, and are affected by numerous factors beyond Rockwell's control including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities and increased production due to new extraction developments and improved extraction and production methods. The effect of these factors on the price of diamonds and base metals, and, therefore, the economic viability of any of Rockwell's projects, cannot accurately be predicted.
The mining industry is highly competitive and there is no assurance that Rockwell will continue to be successful in acquiring mineral claims. If Rockwell cannot continue to acquire properties to explore for mineral resources, it may be required to reduce or cease operations.
The mineral exploration, development, and production industry is largely unintegrated. Rockwell competes with other exploration companies looking for mineral resource properties and the resources that can be produced from them. However, the mining business operates in a worldwide market, and prices for minerals are derived from relatively pure market forces. Accordingly, competition to sell any metals or concentrates produced should not be an issue if metals prices warrant production
Rockwell competes with many companies possessing greater financial resources and technical facilities. This competition could adversely affect Rockwell's ability to acquire suitable prospects for exploration in the future. Accordingly, there can be no assurance that Rockwell will acquire any interest in additional mineral resource properties that might yield reserves or result in commercial mining operations.
Risks Related to Rockwell
The recoverability of the amounts shown for the Companys mineral property interests, property, plant and equipment and inventory is dependent upon the existence of economically recoverable mineral resources and future profitable production or proceeds from the disposition of the mine. The Companys continuing operations are also dependent upon the discovery and existence of economically recoverable mineral reserves, the ability of the Company to obtain the necessary financing to complete the exploration and development of its mineral property interests, and upon future profitable production or proceeds from the disposition of its mineral property interests.
Rockwell requires additional financing in order to continue in business as a going concern, the availability of which is uncertain.
The Company and its subsidiaries incurred losses of $13 million during the year ended February 28, 2009 and continue to incur losses subsequent to year end. Costs have reduced substantially, however sales are irregular. The risk that the cash and near cash resources will not be sufficient to fund the continuing losses up to break-even indicates that a material uncertainty exists which may cast substantial doubt on the ability of the Company and its subsidiaries to continue as a going concern. Based on the following, the directors believe that the Company and its subsidiaries will continue as going concerns for the year ahead:
The directors have already commenced with plans to raise finance, and the following plans have been considered to raise these funds:
The directors have started the process towards exercising either a rights offering or a private placement, and have identified and communicated with current investors and potential new investors to ensure that the desired investment is raised.
Despite the current economic challenges the directors believe that the Company will be successful in raising the additional funding as and when it will be required. The directors will be able to raise up to 25% of market capital before seeking shareholders approval, which will raise up to $4.1 million.
Some of Rockwell's directors and officers serve on the boards of other exploration companies, which could potentially give rise to conflicts of interest.
Some of Rockwell's directors and officers are engaged, and will continue to be engaged, in the search for additional business opportunities on their own behalf and on behalf of other companies. Situations may arise where these directors and officers will be in direct competition with Rockwell. Conflicts, if any, will be dealt with in accordance with the relevant provisions of the Business Corporations Act (British Columbia) and applicable law.
The loss of any of Rockwell's key management employees could have a material adverse effect on Rockwell's business.
The nature of Rockwell's business and Rockwell's ability to continue its exploration activities and to exploit any mineral reserves that it may find in the future depends, in large part, on Rockwell's ability to attract and maintain qualified key management personnel. Competition for such personnel is intense, and there can be no assurance that Rockwell will be able to attract and retain such personnel. Rockwell's development now and in the future will depend on the efforts of key management figures, such as John W. Bristow, Rockwell's Chief Executive Officer, and Desmond Morgan, Chief Financial Officer. The loss of any of these key people could have a material adverse effect on Rockwell's business. Rockwell does not currently maintain key-man life insurance on any of its key employees.
Rockwell's properties are located in the Republic of South Africa
All mineral properties are located in the Republic of South Africa. Exploration initiatives in the Democratic Republic of the Congo (the DRC) and Chile have been discontinued due to varying degrees by political instability and economic uncertainties.
Operations may be affected in varying degrees by government regulations with respect to restrictions on production, repatriation of profits, price controls, export controls, income taxes, expropriations or property, environmental legislation and mine safety.
South Africa has undergone major constitutional changes to effect majority rule, and also to effect mineral title. Accordingly, many laws may be considered relatively new, resulting in risks such as possible misinterpretation of new laws, modification of mining or exploration rights, operating restrictions, increased taxes, environmental regulation, mine safety and other risks arising out of a new sovereignty over mining, Rockwell's operations may also be affected in varying degrees by political and economic instability, terrorism, crime, extreme fluctuations in currency exchange rates and inflation.
South African government empowerment initiatives may adversely affect Rockwell's ability to obtain or maintain permits and licenses for mining rights in South Africa.
In order to address inequalities to Historically Disadvantaged Persons ("HDP") engendered by South Africa's former apartheid system, the South African Government has initiated certain government empowerment initiatives.
In October 2002, the South African government enacted the Mineral Development Act that deals with the state's policy towards the future of ownership of minerals rights and the procedures for conducting mining transactions in South Africa. The Mineral Development Act is a statute with wide-ranging objectives, including sustainable development and the promotion of equitable access to South Africa's mineral wealth by the inclusion of HDP into the industry. The Mineral Development Act came into effect in May 2004. The South African government has stated that, under the Mineral Development Act, it will be issuing permits and licenses for prospecting and mining rights to applicants using a "scorecard" approach. Applicants will need to demonstrate their eligibility for consideration based upon the number of credits accumulated in terms of quantifiable ownership transformation criteria, such as employment equity and human resource development.
Future amendments to, and interpretations of, the economic empowerment initiatives by the South African government and the South African courts could adversely affect the business of Rockwell and its results of operations and its financial condition.
Absence of dividends
Rockwell has paid no dividends on its shares since incorporation, and does not anticipate doing so in the foreseeable future.
Rockwell is subject to potentially volatile exchange rate fluctuations
Rockwell conducts operations in currencies other than Canadian dollars. Of particular significance is the fact that Rockwells operations in South Africa are almost entirely paid for in South African Rand, which has historically devalued against the United States dollar, but which recently has shown unexpected and substantial strength against most major world currencies, including the United States dollar. The strength in the South African Rand, if it continues, will negatively impact the potential profitability of Rockwells mining operations.
Rockwell expects to be a passive foreign investment company, which could have consequences for U.S. investors.
Potential investors who are U.S. taxpayers should be aware that Rockwell expects to be a passive foreign investment company ("PFIC") for the current fiscal year, that it may also have been a PFIC in prior years, and that it may also be a PFIC in subsequent years. If Rockwell is a PFIC for any year during a U.S. taxpayer's holding period, then such U.S. taxpayer generally will be required to treat any so-called "excess distribution" received on its common shares, or any gain realized upon a disposition of common shares, as ordinary income and to pay an interest charge on a portion of such distribution or gain, unless the taxpayer makes a qualified electing fund ("QEF") election or a mark-to-market election with respect to the shares of Rockwell. In certain circumstances, the sum of the tax and the interest charge may exceed the amount of the excess distribution received, or the amount of proceeds of disposition realized, by the taxpayer. A U.S. taxpayer who makes a QEF election generally must report on a current basis its share of Rockwell's net capital gain and ordinary earnings for any year in which Rockwell is a PFIC, whether or not Rockwell distributes any amounts to its shareholders.
Rockwell's stock is a penny stock. Trading of Rockwell's stock may be restricted by the SEC's penny stock regulations which may limit a stockholder's ability to buy and sell Rockwell's stock.
Because the market price for Rockwell's shares is less than US$5.00, its securities are classified as "penny stock". For transactions involving a penny stock, brokers or dealers are required to approve a previous account for penny stock transactions, which involves obtaining financial information concerning the investor and satisfying themselves that the investor has sufficient knowledge and experience to evaluate the risks associated with penny stock. The broker or dealer must also deliver certain information to investors on penny stock, including disclosure concerning the risks associated with penny stock, and must receive a written agreement from investors prior to the transactions. As a result of the penny stock restrictions, brokers or potential investors may be reluctant to trade in Rockwell's securities, which may result in less liquidity for Rockwell's stock.
NASD sales practice requirements may limit a stockholder's ability to buy and sell Rockwell's stock.
In addition to the "penny stock" rules promulgated by the Securities and Exchange Commission (see above for discussions of penny stock rules), the National Association of Securities Dealers (NASD) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy Rockwell common stock, which may limit the ability to buy and sell Rockwell stock and have an adverse effect on the market for Rockwell shares.
Rockwell has a number of outstanding share purchase options and warrants, the exercise of which could result in equity dilution.
At February 28, 2009, Rockwell had a significant number of share purchase options (7,956,168) and warrants (161,379,154). On May 9 2009, 121,779,154 share purchase warrants expired with the balance remaining on May 31 2009 being 39,600,000 exercisable at $1.00 per share expiring on November 28 2009. If exercised could likely act as an upside damper on the trading price range of Rockwell's shares. The underlying shares issuable upon exercise of these securities represent approximately 20% of Rockwell's currently issued shares.
ITEM 4. INFORMATION ON THE COMPANY
In April 2008 the Company completed the MORO acquisition, including registration and transfer of Saxendrift Mine Pty (Ltd) and the Saxendrift mining right, as well as prospecting rights in respect of the Kwartelspan, Zwemkuil-Mooidraai and part of the Remhoogte-Holsloot projects.
As at February 28, 2009, the Company was committed to pay Trans Hex for the acquisition of the remaining Niewejaarskraal mining rights and thus complete the MORO acquisition. The Company had placed $2.7 million in trust toward application of the remaining payment, to be released to Trans Hex upon the anticipated grant of Ministerial Consent to the cession of each of the Outstanding Mining Rights to the Company and registration of cession of such rights in its name.
On April 11, 2009 all the conditions precedent were met and the Company paid ZAR 18.9 million ($2.6 million) in cash to Trans Hex for the remaining Niewejaarskraal mining rights of which ZAR 16.5 million ($2.0 million) was capitalized. This action completed the Saxendrift/Remhoogte-Holsloot transaction negotiated during April 2008. The Company has no further commitments in relation to more acquisitions.
The results of the Saxendrift operations have been included in the consolidated financial statements since the date of acquisition on April 11, 2008. The following table summarizes the total purchase consideration of the Saxendrift assets:
The total acquisition price has been allocated to the net assets acquired and liabilities assumed of Saxendrift as follows:
The Company held a 100% interest in the Ricardo Property, a copper prospect located within the Calama Mining District, Chile that it acquired in 1998. Exploration was carried out by two companies who optioned the property in 2000 and 2004. Since that time, Rockwell has sought partners to continue exploration or to divest of the property. In July 2008, the Ricardo property was acquired by Hunter Dickinson Acquisitions Inc., a company with certain directors and officers in common with Rockwell. No significant divestitures have occurred in the years presented.
In response to the Pala call for the Meeting, The Executive Directors of Rockwell comprising David Copeland, John Bristow, and Mark Bristow issued a circular opposing the Pala Circular and presenting four Resolutions for the Meeting as follows:
At the Special General Meeting held in Vancouver on June 17th, 2009, counsel advised that Resolution #3 be removed from the meeting and vote count, and following the collation of the results it emerged that all of the proposals put forward by Pala were rejected by shareholder vote. Approximately 74% of the Companys issued and outstanding votes were voted by proxy at this meeting, and in summary 57.33% of these shareholders voted against the removal of one or more of the current Directors, 62.0% voted to continue the Shareholder Rights Plan, and 57.14% voted to direct Rockwell not to reimburse Pala costs associated with the Meeting.
Given the outcome of the votes cast by Shareholders at the Meeting Palas proposal to remove the incumbent Directors and Management of Rockwell was convincingly defeated and the Company and its Directors thus received a strong mandate to continue with the management of the Companys business.
Subsequent to this meeting Terence Janes and Greg Radke, Palas representatives on the Rockwell board, resigned from the Board of Rockwell.
B. Business Overview
On June 30, 2006, the Company entered into an Agreement-in-Principle to acquire interests and/or rights in the Holpan/Klipdam Property in South Africa, Wouterspan Property in South Africa, Kwango River Project in the DRC and Galputs Minerale Project in South Africa. Pursuant to the terms of a comprehensive agreement, (the Definitive Agreement), the Company acquired all of the shares in and claims on shareholders loan account of Durnpike, a private South African company, from eight vendors (the Vendors). Some of the underlying rights were held by the H Van Wyk Diamonds (HVWD) and Van Wyk Trust, collectively the Van Wyk Diamond Group (VWDG). For further details on these see the Notes to the Financial Statements.
Pursuant to the Definitive Agreement:
Makoenskloof property acquisition
In conjunction with the acquisition of Durnpike, HCVW had an option agreement to acquire the Makoenskloof alluvial diamond project in South Africa. As a result of the acquisition of HCVW by Durnpike, and concurrent acquisition of Durnpike by Rockwell, the Company assumed the option to purchase the Makoenskloof property. In November 2006, HCVW exercised its option to purchase the property and the company that held the mineral rights of the Makoenskloof property. The Company paid a total consideration of ZAR 19 million ($2.7 million) for the property and associated equipment.
A bulk sampling program was carried out during fiscal 2008. The property has been on care and maintenance since that time.
Middle Orange River Operations (MORO) Agreement
In March 2007, Rockwell and Trans Hex and its subsidiary THO announced that the companies had entered into an agreement whereby Rockwells wholly owned South African subsidiary, Rockwell RSA, would acquire the MORO from Trans Hex (the Transaction). Pursuant to the terms of the Transaction, Trans Hex was to transfer all its relevant mineral rights and associated assets into a new special purpose vehicle Saxendrift Mine Pty (Ltd) which Rockwell acquired via Rockwell RSA.
The MORO include:
The Transaction was substantially completed in April 2008 when the Ministerial consent to transfer the Saxendrift mining right, as well as prospecting rights in respect of the Kwartelspan, Zwemkuil-Mooidraai and part of the Remhoogte-Holsloot projects, was obtained. Cession of the Niewejaarskraal mining right occurred on March 4, 2009, and a payment of ZAR 18,901,294 ($2.4 million) plus interest of ZAR 2,381,294 ($0.3 million). Rockwell chose not to exercise the option on the Remhoogte prospecting right due to current harsh financial constraints and depressed diamond prices. All the other rights have been ceded to Saxendrift Mine (Pty) Ltd and Rockwell Resources RSA has taken ownership of the company.
On July 30, 2007, H.C. Van Wyk Diamonds acquired 100% of the shares and shareholder loans of Farhom Mining & Construction (Pty) Ltd for ZAR10 million ($1.5 million). This company holds the mineral rights over the Farhom farm which is part of the Wouterspan property. This transaction was concluded in terms of an option granted to HCVW on February 24, 2005 and later amended on July 10, 2007.
Black Economic Empowerment Holdings (BEE) in Holpan, Klipdam and Wouterspan Properties
During the year ended May 31, 2007, African Vanguard Resources (Proprietary) Limited (AVR), the holding company of Richtrau No 136 (Proprietary) Limited (Richtrau) purchased through Richtrau a 15% interest in the VWDG from the Van Wyk Trust for an amount of ZAR22.5 million ($3.4 million). During November 30, 2008 AVR indicated its commitment to increase its shareholding in the VWDG to 26% by subscribing for an additional 11% shares in each of the entities comprising the VWDG. The additional 11% stake was acquired by another subsidiary of AVR at a subscription price of ZAR 17.5 million.
The AVR group was also contractually committed to inject ZAR 10.5 million in working capital into the VWDG. Given the credit crunch, depressed economic conditions and fall in diamond prices the AVR group indicated to the Board of Directors of Rockwell RSA (the holding company of the entities in VWDG) during the fourth quarter that it was unable to make these payments and that it would pursue funding mechanisms to complete its obligations. Rockwell RSA has endeavoured to identify alternate sources of funding with a view to assist AVR to complete its investment but these attempts were, unsuccessful. Rockwell RSA has entered into discussions with AVR and the Department of Minerals and Energy with the assistance of its legal counsel to address completion of the BEE participation in the share capital of the entities comprising the VWDG.
Hunter Dickinson Services Inc.
Hunter Dickinson Services Inc. ("HDSI") provides management services to Rockwell, pursuant to a geological and administrative services agreement dated January 1, 2001. HDSI is one of the larger independent mining exploration groups in North America and employs or retains staff or service providers substantially on a full-time basis. These individuals include professional technical staff (which include accredited professional engineers and geoscientists), professionally accredited accountants and administrative, office and field support staff.
HDSI has supervised mineral exploration projects throughout Canada and internationally in Brazil, Chile, China, the United States (Nevada and Alaska), Mexico and South Africa. HDSI allocates the costs of staff input into projects based on time records of involved personnel. Costs of such personnel and third party contractors are billed to the participating public companies on a full cost recovery basis (inclusive of HDSI staff costs and overhead) for amounts that are considered by Rockwell's management to be competitive with arm's-length suppliers. The shares of HDSI are owned equally by each of the participating corporations (including Rockwell) as long as HDSI services are being provided. However, should the Company terminate the service agreement, the Company will be required to surrender its single share at the time of termination pursuant to the terms of the service agreement. HDSI is managed by certain directors of Rockwell and who are generally also directors of the other corporate participants in similar arrangements with HDSI.
C. Organizational Structure
Rockwell Diamonds Inc is based in British Columbia, Canada. It also has corporate offices located in Johannesburg, South Africa. As at August 21, 2009, Rockwell had the following subsidiaries:
The Companys legal registered office is in care of its Canadian attorneys Lang Michener LLP, Barristers & Solicitors, at Suite 1500, 1055 West Georgia Street, Vancouver, British Columbia, Canada V6E 4N7, telephone (604) 689-9111, facsimile (604) 685-7084. The South African head office of the Company is located at Level 1, Wilds View, Isle of Haughton, Cnr. Carse OGowrie and Boundary Road, Houghton Estate, Johannesburg 2198, telephone 27 (11) 481-7250, facsimile 27 (11) 481-7247. The Canadian head office of Rockwell is located at Suite 1020, 800 West Pender Street, Vancouver, British Columbia, Canada V6C 2V6, telephone (604) 684-6365, facsimile (604) 684-8092.
D. Property, Plant and Equipment
Rockwell has plant and equipment located on its Holpan, Klipdam, Wouterspan, Makoenskloof and Saxendrift properties as at February 28, 2009.
Glossary of terms
Conversion of metric units into imperial equivalents is as follows:
Mining in the Republic of South Africa
South Africa has recently undergone major constitutional changes to effect majority rule, and also to effect mineral title. Accordingly, many laws may be considered relatively new, resulting in risks such as possible misinterpretation of new laws, modification of mining or exploration rights, operating restrictions, increased taxes, environmental regulation, mine safety and other risks arising out of a new sovereignty over mining, any or all of which could have an adverse impact upon Rockwell. Rockwell's operations may also be affected in varying degrees by political and economic instability, crime, fluctuations in currency exchange rates and inflation.
Changes, if any, in mining or investment policies or shifts in political attitude in South Africa may adversely affect Rockwell's operations or likelihood of future profitability. Operations may be affected in varying degrees by government regulations with respect to, but not limited to, restrictions on production, price controls, export controls, currency remittance, income taxes, expropriation of property, foreign investment, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety.
The political situation in South Africa introduces a certain degree of risk with respect to Rockwell's activities. The Government of South Africa exercises control over such matters as exploration and mining licensing, permitting, exporting and taxation, which may adversely impact on Rockwell's ability to carry out exploration, development and mining activities. Failure to comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in loss, reduction or expropriation of entitlements or in the imposition of additional local or foreign parties as joint venture partners with existing or other interests.
The exploration and mining activities of Rockwell are subject to various South African national, provincial and local laws governing prospecting, development, production, taxes, labour standards and occupational health, mine safety, toxic substance and other matters. Exploration activities and mining are also subject to various national, provincial and local laws and regulations relating to the protection of the environment. These laws mandate, among other things, the maintenance of certain air and water quality standards, and land reclamation. These laws also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Although Rockwell's activities are currently carried out in accordance with all applicable rules and regulations, to the best of its knowledge and belief no assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner which could limit or curtail production or development. Amendments to current laws and regulations governing operations and activities of exploration, mining and milling or more stringent implementation thereof could have a material adverse effect on Rockwell's business, results of operation and financial condition.
The mining industry in South Africa, where the Company's projects are located, is subject to extensive regulation. The regulatory environment is developing, lacks clarity in a number of areas and is subject to interpretation, review and amendment as the mining industry is further developed and liberalized. In addition, the regulatory process entails a public comment process, which makes the outcome of legislation and regulatory controls uncertain and may cause delays in the regulatory process.
In October 2006, the Government of South Africa released the Mineral and Petroleum Resources Royalty Bill 2006 (the "Royalty Bill") and the Diamond Export Levy Bill 2006 (the "Export Levy Bill"). The Royalty Bill requires that companies extracting diamonds pay a royalty of 5% from the sales of those metals, payable on gross revenue.
In order to address inequalities to Historically Disadvantaged Persons ("HDP") engendered by South Africa's former apartheid system, the South African government has initiated certain government empowerment initiatives (See discussion in Risk Factors).
Basis for Unit of Production and Depletion of Mineral Resources by Rockwell
No guidelines have been established for mineral reserves in alluvial diamond deposits because diamond distribution in the deposit is not uniformly distributed. In addition, the size and quality of the diamonds (and hence the value) may vary.
Diamond resources are established by drilling on a regular pattern across an area to assess the volume of gravel units and taking several bulk samples that are processed to assess the number of diamonds, ie estimate the grade over the volume of gravel drilled. Detailed assessments of the distribution of the size and quality of diamonds in the bulk samples are also done.
Trial mining (and processing) commonly occurs after drilling to increase the comfort that the gravel unit is adequately diamondiferous to support the cost of extraction and processing.
Once mining is underway, the information from processing each year is used to inform the resource estimate, and the grade (and value per carat received) is adjusted to reflect the actual results. Depletion of mineral resources is calculated using the carats produced as the numerator and estimated carat resource available as the denominator.
HCVW1 and Klipdam
1HCVW are operations acquired from HC van Wyk, including Holpan and Wouterspan mines and Makoenskloof project.
Estimated resources available at Rockwell Mines as at February 28, 2009
Rockwells principal properties, Holpan, Klipdam and Saxendrift (which are currently in production), Wouterspan (in production in fiscal 2009 but currently on care and maintenance) and Niewejaarskraal (planned for development as funds are available) had detailed resource assessments completed at February 28 2009. These estimates took into consideration archived data from previous drilling programs, 2009 drilling and sampling if done, and results from processing and depletion from mining to that time. This work was completed by the Companys Resources Manager and reviewed by an independent expert (both are qualified persons as defined under Canadian Securities legislation). Dr Tania Marshall, PrSciNat, a qualified person who is independent of the Company, is responsible for the estimates. The details of the assessment are included in Technical Reports that were filed with the Companys year end materials in its home jurisdiction (on www.sedar.com).
The following disclosure is derived from Rockwell files and technical reports. Additional details can be found in technical reports on each property filed on www.sedar.com.
Properties in South Africa
Figure 1 shows the location of Rockwells principle properties: Holpan/Klipdam, Wouterspan and Saxendrift/Niewejaarskraal located in the Republic of South Africa ("RSA" or "South Africa").
Figure 1. Location of the Holpan/Klipdam, Wouterspan and Saxendrift/Niewejaarskraal Properties
Climate and Topography
All of Rockwells principle properties are located in central South Africa, an arid semi desert area with low relief that forms part of the high plateau (or highveld) region. Rainfall is about 200 mm per annum primarily during the summer. Winter temperatures range from 0°C at night time to approximately 14°C during the day; summer daytime temperatures may reach 45°C.
The Holpan/Klipdam Property
Location, Access and Infrastructure
The Holpan/Klipdam property is located 45 km from Kimberley in the Northern Cape Province of central South Africa.
The property has ready access to all required infrastructure. Given that the operations are located next to an irrigation canal, the operations have year-round water supply and the necessary pumping stations and water supply pipelines are in place. The property is situated on a tarred road and is 45 km from Kimberley, a modern town of 200,000 inhabitants with comprehensive mining support services, spares and supplies. Kimberley has a regional airport and air service that links to all major cities in South Africa. The property is connected to the national electricity grid and the necessary transformers and supply lines are in place.
Property Description and Ownership
The Holpan/Klipdam property consists of the adjacent Holpan 161 and Klipdam 157 farms, covering an area of 3,836 hectares. Details are provided in Table 1.
Table 1: Summary of Holpan-Klipdam landholding
The surface rights (as well as the land ownership) of the farms Holpan and Klipdam are held by HCVW and Klipdam Mining, respectively. The surface and land rights of Erf 1 of Windsorton are held by a third party with whom Rockwell has a land use agreement.
With respect to Holpan 161, royalties are paid to the State of 5% of the gross proceeds of all diamonds sold. This will be replaced by what is ultimately provided for in the Mineral and Petroleum Royalty Act once enacted, initially expected from May 1, 2009, but now deferred at the finance ministers discretion until March 2010.
In addition to the royalty, annual payments of ZAR165,000 (approximately US$20,625) per year payment to the State are owed.
Holpan and Klipdam have been the focus of intermittent mining since the early 1900s and have consistently been known for yielding large diamonds. There are regular references to this in historic records such as the work of George Beet (1931), who discusses the Broderick diamond a perfect Cape white, weighing 412.5 carats. VWDG produced in excess of 90,000 carats of diamonds from Holpan and Klipdam since 1994.
In 1994, the Van Wyk family began operations on claims on the Holpan property and shortly thereafter Sonora Gold Inc., started operating on an adjacent part of the Holpan property. In 1996, Sonora Gold Inc. acquired Klipdam Mining. Subsequently, in 1999, the company changed its name to Sonora Diamond Corporation. During this time, the Van Wyks also acted as earth-moving contractors to Sonora.
The Van Wyk operations (incorporated in the company HCVW in 2001) were initially small but, with the discovery of larger diamonds and the purchase of larger earth moving equipment, they were able to sustain and enlarge their operations. The HCVW operation grew steadily on Holpan, while the Sonora venture stuttered and eventually collapsed. Records show that, subsequent to 2000, HCVW had grown to a sizable operation on Holpan and acquired Sonora Diamonds, thereby expanding the companys presence on Holpan and Klipdam.
From 1994 to 2005 at Holpan-Klipdam, extensive mining of Rooikoppie and primary gravels took place, as well as drilling and bulk testing. A high efficiency 200 tonnes per hour (tph) Dense Media Separation (DMS) plant with X-ray Flowsort recovery and grease table final recovery apparatus began operation in August 2005 and has done most of the processing since that time. Forty-one units of Volvo and Komatsu equipment currently moves 159,000 cubic meters (m3) of gravel and overburden on a monthly basis.
Due to the significant burial depth of the Primary gravels at Holpan-Klipdam, the thickness and distribution of the alluvial gravel deposits have been investigated through systematic percussion drilling. A total of 3,243 boreholes totaling 14,486 m were drilled on the Holpan-Klipdam property between 1994 and 2005. Drill holes extended to bedrock in the majority of cases. Boreholes were spaced at 50 m intervals along traverses 100 m apart. Chip samples were collected at 1-m intervals and logged on site by a geologist. Procedures were audited in conjunction with the original field logs under the supervision of Rockwell's consultant in November 2005.
In March 2006 an independent estimate of the inferred mineral resources for Holpan and Klipdam was completed, based on operational statistics, drilling and other sampling completed to that time as 12,339,700 m3 grading 1.16 carats per 100 m3, with an average value of US$848/carat. Potential for an additional 4,800,000 m2 of gravel, that is similar, visually, to the Rooikoppie gravels, surrounds the area of the inferred resource and that this gravel feature, was also identified from the prevalent red chert clasts (pebbles) in the regolith, abandoned artisanal workings, and vegetation features discernable from aerial photography, should be evaluated to determine its diamond content. Exploration work in fiscal 2008 and fiscal 2009 was assessing this area.
Mining at the Holpan and Klipdam properties from January 2006 to March 2007 focused on the Rooikoppie gravels, and a volume of 1,889,308 m3 was mined and processed during the period. The total Holpan and Klipdam inferred mineral resources as of March 31, 2007 were estimated to be 10,450,000 m3 grading 0.95 carats per 100 m3.
During the period of April 1, 2007 and February 29, 2008, 1,591,429 m3 were mined at Holpan and Klipdam. At February 29, 2008 the total inferred mineral resources were estimated to be 8,858,000 m3 grading 0.84 carats per 100 m3.
During 2007/2008, 774 Reverse Circulation (RC) boreholes were drilled on Klipdam/Holpan for a total of 4,890.5 m. A total of 3,490 holes (16,754 m) were used in the resource estimate, the results of which are reported under Estimates of Mineralization below. The boreholes were drilled on a 100 x 50 m grid over an area of 150 ha. Since regional gravel grades are, typically, less than 0.5carat/100 m3 and average diamond sizes are typically >1carat per stone, boreholes are not sampled for diamonds. Furthermore, no other minerals or elements that can be assayed are known to show positive (or negative) relationships with diamonds in alluvial deposits, so no analytical procedures are described. Grades are estimated from actual results from mining and processing.
During the period January 2008 February 2009, some 876,972 m3 of gravel was processed from Klipdam from which 8,066.34 carats were extracted and 691,729 m3 of gravel from Holpan from which 5,073.41 carats were extracted, for a total of 1,568,701 m3 and 13,139.75 carats, with average grade recoveries of 0.91 carat/100 m3 and 0.74 carat/100 m3, respectively.
A key factor in the origin of the extensive and rich alluvial diamond deposits found in South Africa and Namibia is the existence of over 1000 diamond bearing kimberlites across southern Africa on the Kaapvaal Craton. Kimberlite emplacement was followed by liberation and entrainment of diamonds and deposition in terraces on the ancient Vaal and Orange Rivers between approximately 4.8 million years ago (Ma) and 4 Ma.
The Holpan-Klipdam deposit comprises an extensive flat-lying alluvial sequence located on the right bank of the modern Vaal River and 6 km inland from a bend in the river known as "the Horseshoe". The sequence extends across an area of approximately 5 km by 2.5 km. Economic concentrations of diamonds within the sequence are found both in the deflational "Rooikoppie" deposit and in well developed, clearly-defined palaeo-channels that were preserved by a highly resistant calcrete cap. The palaeo-channels extend over several km and are up to 500 m wide in places. At Holpan and Klipdam, the bedrock consists of Archaean Ventersdorp lavas, and shales and diamictites of the 300 to 250 million year old Dwyka Group of the Karoo Supergroup.
The Rooikoppie unit varies in thickness from a few cm up to about 2 m and has an estimated average thickness in the order of 1 m. Solution cavities up to 3 m deep in the calcretised bedrock form sharp, discontinuous depressions and are filled with the overlying Rooikoppie gravel. Since such cavities, when considered in a hydrodynamic context, have very high diamond trapping potential and are of key economic importance. Given the high incidence of pronounced solution features in the palaeo-land surface underlying the Rooikoppie (as observed in current mine workings at Holpan-Klipdam), this area is considered to be of high interest with regard to its exploration potential.
The primary gravels found in the palaeo-channels typically comprise the lower third of the sedimentary sequence and rest directly on the bedrock. The thickness of the gravel bed varies from about 1 to 6 m and average approximately 3 m thick. The primary gravels comprise a poorly sorted assemblage of large boulders (up to 45 cm in diameter at the base of the unit), cobbles and pebbles set in a sandy matrix that is considered to have been deposited by a large, middle-stage, meandering river system.
High-resolution digital aerial photographs of the Holpan-Klipdam properties clearly show the distribution of mine workings in the area, including the adjacent Leicester kimberlite pipe. Tonal darkening, seen immediately to the west of the Klipdam plant area, corresponds closely to a buried palaeo-channel as defined by exploration drilling, and is interpreted to be its surface expression.
Estimates of Mineralization
The Resources estimated to be present on Klipdam/Holpan are shown below. They were estimated by Rockwells Manager, Resources, G. Norton, (Pr. Sci. Nat.), a qualified person who is not independent of the Company and reviewed by T.R. Marshall, PhD, (Pr. Sci. Nat.), a qualified person who is independent of the Company and is responsible for the estimate.
Table 2a. Holpan and Klipdam Indicated Mineral Resources
Notes to Tables 2a and 2b:
Mining and Processing
The mining of the gravels at Holpan-Klipdam uses mechanized, shallow opencast earthmoving techniques. Topsoil (generally minimal) is removed and stored separately for use in later rehabilitation activities. The top layer of Rooikoppie gravel is then bulldozed onto stockpiles from which it is loaded into articulated dump trucks either by excavator or front-end loader for transport to the plant. The remaining Rooikoppie is then removed from the uneven calcrete substrate by means of an excavator. Calcretised overburden on top of the Primary gravel is removed so that the gravels are exposed and can be mined by bulldozers and excavators. The calcrete overburden is backfilled, side-cast or used in road-building. Care is taken to ensure the sterile excavation of the Primary gravels such that no contamination by the footwall lithologies occurs. Excavation continues to the base of the gravels where higher basal grades are expected to occur. Where the bedrock is soft, approximately 20 cm of bedrock is excavated with the gravels, so that any diamonds in the weathered rock will be recovered.
The Primary gravels are transported by truck to the diamond recovery plants. Surveying of the box cuts is undertaken on a monthly basis by the mine surveyor in order to obtain precise volumes for the Primary gravel, the suspended gravel, the calcrete and the Rooikoppie, against which diamond production could be reconciled and grade determined.
A double-18 ft rotary pan-plant system used to process gravels on Klipdam and a Dense Media Separation (DMS) plant is used on Holpan. Processing volumes (Run-of-Mine) on the two plants are approximately 350 tonnes per hour and 380 tonnes per hour, respectively.
Production and sales from Holpan and Klipdam for fiscal 2009, as well as production so far in fiscal 2010, are discussed under Results of Operations (Item 5.A).
Currently, mining is taking place concurrently on both Klipdam and Holpan.
Rockwell plans to continue operations at Holpan and Klipdam during the fiscal year. Some efficiency improvements are planned for the Klipdam Mine as well as adding an additional dewatering unit at the Holpan Mine. There are no capital costs associated with these upgrades as any fabrication work will take place within Rockwells mine workshops within existing maintenance and repair budgets.
There is a large amount of existing drill data, much of which requires analysis and integration with mining results and will take place during normal operations. No new drilling or bulk sampling is planned for Holpan and Klipdam. If, market should improve during 2009, then some 540 m of reconnaissance drilling/pitting (~360 pits) would be considered for Erf 1 Windsorton, the prospecting right adjacent (to the east) to Klipdam. The estimated cost of ZAR50,000 (US$5,500), would be derived from operations budget.
The Wouterspan Property
Location, Access and Infrastructure
The Wouterspan Property is located on the northern bank of the Orange River, about 100 km west of Douglas in the Northern Cape Province, South Africa.
The area has ready access to good infrastructure. Water is available from the Orange River. The property is directly linked to an all-weather gravel road. It is 200 km from the town of Kimberley, where comprehensive back up services for mining, spares and other supplies are available. The property is connected to the national electricity grid. Staff quarters have been built on site and transport provisions have been made for personnel to work on a two week on, four day off basis.
Property Description and Ownership
The Wouterspan project is comprised of the following individual farm portions of the farm Lanyonvale 376:
Table 3. Summary of Current Mineral and Surface Rights Holdings on Wouterspan
The first diamond discovered in South Africa was about 75 km upstream of Wouterspan on the MOR, and led to the rapid proliferation of small-scale artisanal mining activities.
Early mining concentrated on the surface deflation deposits, known as Rooikoppie gravels. Rooikoppie gravels were mined extensively between Douglas and Prieska from 1926 to 1936 and again during 1943 to 1945.
The MOR had not seen much prospecting and mining activity since that time because large areas are covered by a very hard layer of calcrete, 0.5 m 3 m thick, which limits access to the underlying gravel horizons; and the gravels contain a high percentage of banded ironstone clasts, which makes the treatment and concentration of the gravels technically difficult when using the traditional pan plant processes. More recently, the mining problem of the MOR was solved by the use of blasting and heavy earthmoving equipment to rip and remove the hard calcrete-silcrete layer. This new technology has resulted in the area being effectively explored and mined for the first time.
A number of companies have been active in the area. The MOR alluvial deposits have regularly yielded exceptional large diamonds such as a 211 carat stone recovered from a terrace on a high level terrace upstream from Wouterspan and was reportedly sold for ZAR 28 million; a 181 carat stone recovered from Terrace B on Saxendrift; a 205 carat stone recovered by Trans Hex from Saxendrift and a 175 carat stone from Trans Hexs MOR mine.
In 2005, drilling indicated an exploration target at Wouterspan of gravel in the range of 30 million tonnes. Bulk sampling returned grades in the order of 0.4 - 0.5 carats per 100 m3.
Between March 2005 and January 2006, a total of 513,892 m3 of Primary gravel and 24,013 m3 of Rooikoppie from 11 localities at Wouterspan property were tested during trial mining operations by VWDG. Bulk sampling locations were selected according to the most well-developed gravel assemblages both laterally and vertically as identified by drilling and a series of box-cuts were excavated. This work indicated that the property hosts an extensive alluvial deposit with a large average stone size within the Rooikoppie and Primary gravel units. A volume of approximately 4,481,000 m3 of Rooikoppie gravel and 43,259,000 m3 of primary gravel was indicated as exploration potential from this work.
Additional drilling was done in 2006, 2007 and 2008. An independent resource estimate was done at February 2009. Results of the estimate are shown under Estimates of Mineralization below. Since Indicated Resources are estimated, inter alia, by defining an envelope of 250 m around/ahead of the current mining face, given suitable geological conditions and drill spacing, after mining of the above gravel from a previously identified indicated resource block, a new envelope was modelled to contain an estimated 313,000 m3 of gravel derived from forward modelling, which would be added to the final depleted resource estimate. Further, a minor amount of gravel volume (some 300,000 m3) was added to the inferred resource category by limited infill drilling completed in 2008.
Large areas of the terrace are covered by diamond bearing surface deposits known as Rooikoppie gravels, often separated from the underlying primary gravel by a hard layer of calcrete The basal gravels, termed "Primary Gravels", are well exposed in the workings and shales and tillites of the Dwyka Group, together with lava are common substrates of the gravels. The bedrock displays gully and pothole features creating high diamond trapping potential. At Wouterspan, the gravels occur 20 - 30 m above the Orange River and appear to have been deposited in a braided river system. Suspended gravel deposits found between the Rooikoppie and Primary gravels have also been shown to contain diamonds.
The majority of the alluvial diamonds found in gravel deposits along the Middle Orange River (MOR) are found in two distinct gravel horizons: an upper deflation deposit called the Rooikoppie gravel and the basal Primary gravels.
The Rooikoppie unit varies in thickness from a few cm up to about 2 m and has an average thickness of about 1 m. The deposit typically rests on sand, gravel or in places a hard, semi-continuous layer of calcrete and silcrete. Solution cavities up to 2 m deep in the calcretised material form sharp, discontinuous depressions that are filled with the overlying Rooikoppie gravel.
The Primary gravel deposits comprise the lower half to one third of the sedimentary sequence and rest directly on the bedrock. These Primary gravels comprise a poorly sorted assemblage of large boulders (up to 45 cm in diameter at the base of the unit), cobbles and pebbles set in a sandy matrix that is considered to have been deposited by a large, high-energy braided system that would be readily capable of transporting diamonds. The total sequence varies from about 8 m to 18 m in thickness.
The Wouterspan alluvial deposits represent typical remnant river terraces comprising gravel sequences formed, in large part, through reworking of glacial outwash deposits and appear to have a common or similar origin as seasonal flood deposits. The secondary or younger gravels represent re-working of earlier deposits by late stage erosion and re-deposition as sheetwash flood gravels in low level terraces often associated with river damming situations and splays.
The surface deflation Rooikoppie deposits comprise a diamond-bearing lag deposit created by erosion, winnowing and removal of light components, and enrichment of heavy components including diamonds.
The lower lying terraces along the MOR (middle orange river) are farmed extensively by means of centre-pivot irrigation systems. In addition, much of the area is blanketed by younger Kalahari sands which support scattered vegetation. As a result, aerial photographs and satellite images are of limited use for delineating potential gravel target areas. Further, the mostly shale bedrock, combined with extensive post-depositional calcretisation of the gravels makes it difficult to identify bedrock channels on the terraces using geophysical surveys. Consequently, neither geophysics, nor satellite images are used extensively as primary exploration tools along the MOR.
All historic exploration has been by drilling and bulk-sampling, which are described in detail in the next two sections. No additional exploration has taken place on Wouterspan during the period October 2007 February 2009.
Estimates of Mineralization
The mineral resources at February 28, 2009 were estimated by Rockwells Manager, Resources, G. Norton, Pr.Sci.Nat., a qualified person who is not independent of the Company and reviewed by T. Marshall, PhD, Pr.Sci.Nat., a qualified person who is independent of the Company and is responsible for the estimate.
Table 4a. Wouterspan Indicated Mineral Resources
Table 4b. Wouterspan Inferred Mineral Resources
Notes to tables 4a and 4b:
At the end of November 2008, Wouterspan was put on Care & Maintenance. Mining and an upgrade of the processing plant are deferred pending an increase in the diamond price.
Location, Access and Infrastructure
The Saxendrift project is located along the south bank of the middle Orange River between Douglas and Prieska in the Northern Cape Province of South Africa, which area has been the site of intense alluvial diamond activity since the 19th century. Saxendrift Mine is situated approximately 66 km southwest of Douglas, which lies 110 km southwest of Kimberley, the administrative capital of the Northern Cape Province and the historic centre of the South African diamond mining industry. The Kwartelspan prospect is located some 4 km east of the mine property.
The Saxendrift Mine area is accessed via tarred route R357 from Douglas to Prieska. A well-maintained network of high-speed gravel roads and farm tracks provides ingress to all areas of the Saxendrift Mine and prospecting area. Rockwell has built a bridge across the Orange River to allow access between the operations on the south (Saxendrift) and north (Wouterspan) sides of the river. Water for the Saxendrift Mine is pumped from the Orange River. Power is accessed from the national power grid. To deal with power outages, maintenance is scheduled during power outages and a 1 megawatt generator was acquired to run the plant. A backup generator is retained at the administration centre in Barkley West. An unpaved airstrip and helipad are located on the property. A large, national, airport is located at Kimberley. Labour and services are available in Douglas and skilled labour and broader services are available in Kimberley.
Property Description and Ownership
Together the Saxendrift properties comprise 5,142.52 hectares as show in Table 5 below. The mining area of Saxendrift Mine constitutes 1,368.17 hectares.
Table 5. Saxendrift and Kwartelspan Property Holdings
The surface rights to the Saxendrift Mine properties are held by Rockwell. The prospecting properties are owned by third parties with whom land use agreements are negotiated. The prospecting rights on the Kwartelspan Project cover some 903.65 hectares. Both Kwartelspan and Kransfontein properties are co-owned by CEJ van Niekerk with whom Trans Hex had a surface use agreement. Although the agreement lapsed at the end of February 2008, continued payment of a surface use rental by Rockwell has kept the agreement in place until a new agreement is negotiated.
The Saxendrift area has had a long history of diamond production dating back to the mid 1920s. An estimated 96,000 carats of diamonds were extracted from the area between 1928 and 1964. Trans Hex commenced exploration and mining in the area in 2000 through a merger with GEM Diamond Mining Limited, which held the mineral rights to Saxendrift at that time.
While owned and operated by Trans Hex, Saxendrift comprised three mining areas: Brakfontein (not included in the disposal to Rockwell), Saxendrift Terrace A and Saxendrift Terrace B. From commissioning to the end of 2005, the Saxendrift Mine produced a total of 76,803 carats. The largest gem quality stone ever produced by Trans Hex a 216 carat octahedron was from the Saxendrift operation in 2001. Saxendrift also held the Trans Hex record for the highest dollar per carat price with a 9.22 -carat blue stone that was sold in 2003 for in excess of US$45,000/carat. Production on Saxendrift was achieved by open cast mining methods with processing and recovery being achieved by a combination of rotary pan plants, Dense Media Separation and Flow-sort X-ray recovery.
The Saxendrift Project was held by THO from 2000 until the sale to Rockwell in 2007/2008. Although limited mining production took place up until January 2007, the Saxendrift Mine had officially been put on care and maintenance during 2006 as a result of a variety of economic aspects.
The present Orange River between Douglas and Prieska, generally referred to as the Middle Orange River (MOR), displays a meandering channel morphology, best developed in areas underlain by the Dwyka Group. Palaeochannel depositional packages of the Orange River are preserved at different elevations above the present Orange River bed. The ages of the terraces young with decreasing elevation and, conversely, the probability of preservation decreases with increasing age and elevation. The Saxendrift deposit comprises an extensive flat lying alluvial sequence located on terraces developed on the left bank of the present Orange River, approximately 20-70 m above the Orange River.
The bedrock is well exposed in the workings and shale and tillite of the Karoo age Dwyka Group, are common. The fluvial-alluvial gravels comprise a sequence of (basal) gravels 2-4 m thick overlain by generally less than 5m of variably calcreted sands and silts and covered by a thin layer of soil and scree. The cobble-sized clasts within the gravels consist mostly of lava and quartzite with significant, if variable, amounts of Banded Iron Formation (BIF), and minor amounts of limestone, tillite, and agate. The matrix is sandy to gritty. As is usual with these types of deposits the degree of calcretisation decreases downwards, from hardpan or laminar calcrete at the surface to loosely cemented gravels at depth. The gravels are, generally, not well sorted, and are typical of braid bars that migrate through sections of river channels in response to variable water speed.
Estimates of Mineralization
Rockwell re-modelled the resources according to the Company standards, and identified differences in volumes based on an incomplete dataset supplied to Rockwell by Trans Hex, and different to that supplied to Venmyn in 2006/7. Overall, the indicated resources have increased and the inferred resources have decreased from the previous estimate.
The mineral resources at February 28, 2009 were estimated by Rockwells Manager, Resources, G. Norton, Pr.Sci.Nat., a qualified person who is not independent of the Company and reviewed by T. Marshall, PhD, Pr.Sci.Nat., a qualified person who is independent of the Company and is responsible for the estimate.
Table 6a. Saxendrift Indicated Mineral Resources
Table 6b. Saxendrift Inferred Mineral Resources
A single terrace was identified by Trans Hex to exist on the Kwartelspan prospect area. Based on drilling and bulk-sampling of Rooikoppie gravels an inferred resource was estimated as of March 2007 by the South African consulting company Venmyn.
Table 7. Kwartelspan Inferred Mineral Resources
During Trans Hexs tenure, a number of tailings-, oversize-, and rock- dumps were created. Based on visual inspection, it is thought likely that many of these might prove viable gravel resources either they were too wet to process initially, or they are full of calcreted lumps of gravel due to the mining method practiced at the time, or the BIF content is extremely high, or for various combinations of the above. Rockwell has identified each of these dumps and will sample them systematically over the 2009/2010 period to determine whether or not they should be included in the Saxendrift resource. These samples will be batch processed through the old pan-plant. Following commissioning of the new plant in late 2008, virgin gravels from Terrace A were mined and processed on a trial-production basis Rockwell will focus on reviewing and integrating drill data received from Trans Hex on the Saxendrift and Kwartelspan properties prior to planning any additional drilling programs. Supplementary geological mapping also is planned for Kwartelspan under current operational budget.
Rockwell proposes to upgrade the screening and final recovery sections of the plant at Saxendrift in fiscal 2010, using one of three fully-functional rotary screens on the Wouterspan property. There are only relocation and installation costs of some ZAR 100,000 (approximately US$12,500).
With respect to the planned upgrade of the final recovery plant which will be improved to process Saxendrift concentrate as well as that from Niewejaarskraal and Wouterspan when these properties come on-stream. Rockwell plans utilise existing, spare X-Ray FLOWSORT machines to expand the throughput capacity of the existing facility.
Location and Access
The Niewejaarskraal project (comprised on the Niewejaarskraal and Viegelandsput properties) is located along the south bank of the Orange River between Douglas and Prieska in the Northern Cape Province of South Africa Douglas lies 110 km southwest of Kimberley. Niewejaarskraal is situated approximately 66 km southwest of Douglas, some 13 km beyond Saxendrift Mine (to the south).
The Niewejaarskraal Project area is accessed via tarred route R357 from Douglas to Prieska. A well-maintained network of high-speed gravel roads and farm tracks provides ingress to all areas of the property. Water can be pumped from the Orange River. The property is connected to the national electricity grid, and the Company retains a backup generator in the Barkly West area to supplement as necessary. An unpaved airstrip and helipad is situated on the Saxendrift property, some 24 km by road from the project site. A large, national, airport is located at Kimberley.
Property Description and Ownership
The Niewejaarskraal project is comprised of the farms Niewejaarskraal 40 (two separate surveyed portions of Ptn 6 and a portion of Ptn 4, and Portion of Portion 2) and re/farm) and Portion of the Remainder Viegelandsput 39 in the Prieska district of the Northern Cape Province. The area covered by the Mining Right is 1,766.39 ha. The Surface Rights are held by Die Nuwejaarskraal Testamentere Trust (MT1601/2000) and Redivuvus Louw, with whom Rockwell has land-use agreements in place.
Table 8. Niewejaarskraal Mineral Rights and Permits
The first alluvial diamond discovery in South Africa was on the farm De Kalk on the banks of the Upper Orange River, some 55 km upstream from Saxendrift in 1866. Recoveries of several large diamonds over 100 carat in size led to initial enthusiastic mining of shallow Rooikoppie gravels by artisanal diggers, who flocked to the area mining diamonds from the high level terraces. Since the late 1800s, numerous properties along the middle Orange River have been prospected/mined for alluvial diamonds the majority of which have been derived from the Rooikoppie gravels.
The Niewejaarskraal Project was held by THO from 2001 until the sale to Rockwell in 2007/2008.
Trans Hex began development of the Niewejaarskraal Mine with a bulk-sampling program in mid-2001. A DMS plant was erected on site and full-scale production commenced in April 2002. This operation was suspended in late 2006.
Trans Hex commissioned Venmyn to complete mineral resource estimates in conjunction with its plans to sell the MORO properties. The March 2007 estimate showed indicated resources of 5,967,500 m3 grading 0.91 carats per 100 m3 and inferred resources of 8,080,000 m3 grading 0.73 carats per 100 m3.
Rockwell acquired the property in April 2008, subject to cessation rights from the DME which were acquired in February 2009.
The present Orange River between Douglas and Prieska, generally referred to as the Middle Orange River (MOR), displays a meandering channel morphology, best developed in areas underlain by the Dwyka Group. Palaeochannel depositional packages of the Orange River are preserved at different elevations above the present Orange River bed. The ages of the terraces young with decreasing elevation and, conversely, the probability of preservation decreases with increasing age and elevation. The Saxendrift deposit comprises an extensive flat lying alluvial sequence located on terraces developed on the left bank of the present Orange River, approximately 20-70 m above the Orange River.
The bedrock is well exposed in the workings and shale and tillite of the Karoo age Dwyka Group, are common. The fluvial-alluvial gravels comprise a sequence of (basal) gravels 2-4 m thick overlain by generally less than 5 m of variably calcreted sands and silts and covered by a thin layer of soil and scree. The cobble-sized clasts within the gravels consist mostly of lava and quartzite with significant, if variable, amounts of Banded Iron Formation (BIF), and minor amounts of limestone, tillite, and agate. The matrix is sandy to gritty. As is usual with these types of deposits the degree of calcretisation decreases downwards, from hardpan or laminar calcrete at the surface to loosely cemented gravels at depth. The gravels are, generally, not well sorted, and are typical of braid bars that migrate through sections of river channels in response to variable water speed.
The lower lying terraces along the MOR are farmed extensively by means of centre-pivot irrigation systems. In addition, much of the area is blanketed by younger Kalahari sands which support scattered vegetation. As a result, aerial photographs and satellite images are of limited use for delineating potential gravel target areas. Further, the mostly shale bedrock, combined with extensive post-depositional calcretisation of the gravels makes it difficult to identify bedrock channels on the terraces using geophysical surveys. Consequently, neither geophysics, nor satellite images are used extensively as primary exploration tools along the MOR.
Estimates of Mineralization
The mineral resources at February 28, 2009 were estimated by Rockwells Manager, Resources, G. Norton, Pr.Sci.Nat., a qualified person who is not independent of the Company and reviewed by T. R.Marshall, PhD, Pr.Sci.Nat., a qualified person who is independent of the Company, is responsible for the estimate.
Table 9. Niewejaarskraal Inferred Mineral Resources
(1) Value modelled by Rockwell for 2009.
The current plan, given the depressed state of the international diamond market and weak diamond prices is for the Niewejaarskraal mine to remain on care and maintenance for the period 2009 to 2010 due to market circumstances. However, this operation has in the past produced high value and exceptional stones and on this basis the Company plans to modernize and re-open the mine once the diamond market improves.
Item 4A Unresolved staff comments
Not applicable as the Company is a non-accelerated filer.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of Rockwell's financial condition and results of operations for the fiscal year ended February 28, 2009, the nine months ended February 29, 2008 and the fiscal year ended May 31, 2007 should be read in conjunction with the Company's consolidated financial statements and related notes included in this Annual Report on Form 20-F. The consolidated financial statements included in this Annual Report on Form 20-F were prepared in accordance with Canadian GAAP. For a reconciliation of the Canadian GAAP to US GAAP, see note 17 to the consolidated financial statements.
Rockwell is engaged in the business of alluvial diamond production. The Company is focused on acquiring additional operating diamond properties or projects that have near-term potential for alluvial diamond production, as described in detail under ITEM 4B of the Annual Report on Form 20-F
Rockwell Diamonds Inc. (Rockwell or the Company) is incorporated under the British Columbia Business Corporations Act (formerly the Company Act of British Columbia), and is engaged in the business of diamond production and the acquisition and exploration of natural resource properties. The Companys principal mineral property interests are located in South Africa.
The accompanying consolidated financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles (''GAAP''). The going concern basis of presentation assumes that Rockwell will continue in operation for the foreseeable future and will be able to realise its assets and discharge its liabilities and commitments in the normal course of business.
The Company incurred losses of $13 million during the year ended February 28, 2009 and continues to incur losses subsequent to year end. Although the Company has reduced costs substantially, sales of diamonds have also decreased. The risk that cash and working capital will not be sufficient to fund the continuing losses indicates that a material uncertainty exists which may cast substantial doubt on the ability of the Company to continue as a going concern. The directors believe that the Company will continue as a going concern for the fiscal year 2010 due to the following:
The directors have commenced plans to raise financing, and the following plans have been considered to raise these funds:
The directors have started the process towards exercising either a rights offering or a private placement, and have identified and communicated with current investors and potential new investors to ensure that the desired investment is raised.
Accordingly, the financial statements have been prepared on the basis of accounting policies applicable to a going concern. Should the Company and its subsidiaries be unsuccessful in raising the additional funds of US$4 million, they may be unable to realise their assets and discharge their liabilities in the normal course of business. If the going concern basis is not appropriate for these consolidated financial statements, then significant adjustments would be necessary in the carrying value of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.
Critical Accounting Policies
The Company's significant accounting policies are presented in note 3 of the accompanying audited consolidated financial statements for the year ended February 28, 2009. A reconciliation of material measurement differences between these principles and accounting principles generally accepted in the United States is shown in note 17. The preparation of consolidated financial statements in conformity with Canadian and US generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company evaluates its estimates on an ongoing basis and bases them on various assumptions that are believed to be reasonable under the circumstances. The Company's estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Such estimates and assumptions include the estimation of mineral resources and reserves, the carrying values of mineral properties, the carrying values of property, plant and equipment, the assumptions used in determining the reclamation obligation, and the valuation of stock-based compensation expense.
A. Results of Operations
Rockwell's annual and quarterly operating results are primarily affected by the level of operations activity associated with its mineral property interests. Economic factors such as foreign exchange fluctuations, mineral prices and regulatory development may also affect the Company's operating results and the volatility of the trading price of its common stock. To management's knowledge, there are no governmental, economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the Company's operations that are not disclosed in this Annual Report. Inflationary factors have not had a material impact on the Company's operating results for fiscal 2009, 2008 or 2007. The Company's financial position and results of operations are summarized below:
Production and Sales
The following is a comparison of the twelve months of fiscal 2009 (ending February 28, 2009) with the nine months ending February 29, 2008.
Subsequent to the year end, the production and costs for the five months ending July 31, 2009 are tabulated below:
The average cash costs of production from March 1 to July 31, 2009 (over the Companys 2010 fiscal year) for the group has been approximately US$2.64 per tonne. A combination of restructuring, efficiency and plant throughput improvements, cost control measures, and increasing production are successfully keeping monthly cash costs below the Companys target range of US$3.00 3.50 per tonne. This unit cost is expected to remain at the low end of the range as the Company continues to increase production at existing operations and improve processing plant efficiencies.
Fiscal 2009 compared to nine months ended Fiscal 2008
In December 2007, the Companys Board of Directors approved a resolution to change the Companys year end from May to February, resulting in a nine month period for the fiscal period ended February 29, 2008. The information presented below is a comparison of the twelve months year ended February 28, 2009 (fiscal 2009) and the nine months fiscal period ended February 29, 2008 (fiscal 2008).
The Company had a loss of $13 million for fiscal 2009 compared to a net loss of $9.4 million for the nine months ended February 29, 2008. The loss was due to collapse in the diamond market in the fourth quarter of fiscal 2009, along with a global credit crunch which caused a total collapse in the demand and prices of commodities, with the diamond market being badly hit. Consequently, the Company decided to shut down operations in December and January, and the Wouterspan Mine was put into care and maintenance in order to preserve its cash balances.
During fiscal 2009, the Company realized diamond sales of $34.6 million compared to $36.1 million for fiscal 2008. This decrease was a result of the economic crisis which has caused diamond prices to collapse, resulting in no sales between November 2008 and February 2009. Since February 2009, prices remain approximately 55% below those achieved prior to November 2008.
Mining costs were $25.1 million in fiscal 2009 compared with $22.7 million in fiscal 2008. In fiscal 2009, the Saxendrift mine was commissioned in February. Amortization and depletion for the year was $11.3 million compared to $6.5 million in the prior fiscal period. All commissioning and retention costs were expensed and not capitalised. Due to the economic crisis, the Company decided to restructure the Middle Orange River operations and place the Wouterspan mine on care and maintenance to conserve cash and minimize costs. As part of this restructuring drive some 143 employees were retrenched, and short term contracts for some 40 employees were not renewed. All operations were shut down over December 2008 and January 2009, with all staff paid in full during the shutdown period.
Expenses for fiscal 2009 increased to $9.7 million in comparison to $7 million incurred for fiscal 2008 ($9.3 million annualized). Management have been successful in containing costs, even though the Company experienced significant legal costs due to the unsolicited bid by Pala and also had to make restructuring and retrenchment payments during the last quarter of fiscal 2009.
Significant impairments were made as a result of the economic downturn. Impairments totalling $2.6 million were incurred for mineral rights, property plant and equipment and receivables. As the diamond market is recovering with prices anticipated to be back to 50% of pre crash prices and the appetite for larger stones returning, these investments are anticipated to regain their market value in the next eighteen months.
Fiscal 2008 Compared to Fiscal 2007
The Company had a loss of $9,403,027 for the nine month period ended February 29, 2008 compared to a net loss of $6,365,142 for the year ended May 31, 2007. The biggest component of this loss is attributable to the non-controlling interest of $5,955,779 for this year compared to the $415,159 for the year ended May 31, 2007. Of this $5,955,779 an amount of $4,463,261 related to an exchange gain as a result of the 49% non-controlling interest being held at the South African operating subsidiaries rather than at the consolidated entity level whereby they would have shared in a net foreign exchange gain of only $751,358 thereby reducing the loss by $4,095,096 to $5,307,931. The further increase in net losses during the period resulted from stock based compensation expenses recognized on stock options granted during the nine months ended February 29, 2008, lower foreign exchange gains, interest expense on the Companys capital leases, increased accretion of reclamation obligations, loss on disposal of assets and future income tax expenses which was offset by lower exploration and convertible note accretion expenses incurred in the year ended May 31, 2007. The Company recorded a loss of $0.05 per share for the nine months ended February 29, 2008, compared to a loss of $0.11 per share for the year ended May 31, 2007.
During the nine months ended February 29, 2008 the Company realized rough diamond sales of $36,038,106 of which $9,802,308 was earned during the third quarter of fiscal 2008 compared to $12,125,363 for the second quarter of fiscal 2008 and to $nil for the comparable period in the prior year. Mine site operating costs for the nine months ended February 29, 2008 amounted to $29,264,212 (three months ended February 29, 2008 - $9,768,420, three months ended November 30, 2007 - $11,712,135), which includes amortization and depletion charges of $6,533,941 (six months ended November 30, 2006 nil).
Exploration expenses (excluding stock-based compensation) decreased to $604,169 for the nine months ended February 29, 2008 compared to $1,371,351 for the year ending May 31, 2007. This decrease is due to higher exploration activities incurred during the year ended May 31, 2007 performed on the African diamond properties which included the Holpan/Klipdam property. The exploration expenses for the nine months ended February 29, 2008 were mainly incurred on the Kwango River Project in the DRC and the Ricardo property in Chile.
The Company incurred a foreign exchange gain of $751,318 for the nine months ended February 29, 2008 compared to a foreign exchange gain of $3,580,364 for the year ended May 31, 2007 due to a higher amount of South African denominated liabilities and the strengthening of the Canadian dollar. Foreign exchange gains to the amount of $11,900,802 were realized in Durnpike and in Minera Ricardo (of which the non-controlling interests share of this gain was $4,463,261), while foreign exchange losses of $11,149,484 were accounted for in Rockwell RSA, Cayman Islands and Rockwell Canada (the non-controlling interest did not share in these losses) for the period ended February 29, 2008. Because the non-controlling interest did not share in the loss, this increased the loss for the consolidated Company.
Office and administrative costs for the nine months ended February 29, 2008 amounted to $2,697,077 in comparison to $2,993,453 incurred in for the year ended May 31, 2007, the variance is primarily due to reduced consulting and salary expenses as the Company has completed its major corporate financing, acquisition, and operational management and property investigation activities. Travel and conference expenses amounted to $654,705 for the nine months ended February 29, 2008 compared to $666,194 for the year ended May 31, 2007, largely due to reduced travel as the acquisition activities have been completed. Legal, accounting and audit expenses for the nine months ended February 29, 2008 amounted to $790,725 compared to $691,759 incurred for the year ended May 31, 2007. This increase was primarily due to increased legal and accounting services related the listing on both the Johannesburg Stock Exchange and the TSX, these increases were however partially offset by reduced legal and accounting services as the Companys acquisition activities of Durnpike and HC Van Wyk have been completed.
Stock-based compensation increased to $1,826,317 for the nine months ended February 29, 2008 in comparison to $79,623 for the year ended May 31, 2007 due to an increase in the number of options granted during fiscal 2008.
B. Liquidity and Capital Resources
At February 28, 2009, the Company had cash of $4.0 million, restricted cash of $2.7 million and an overdraft balance of $3.5 million, a net balance of $3.1million, with available cash of $0.4 million and a working capital of $0.6 million, as compared to cash and cash equivalents of $19.6 million and working capital of $26.1 million at February 29, 2008.
The Company had no long-term debt at February 28, 2009, other than asset retirement obligations relating to its Klipdam, Holpan, Wouterspan mines and Saxendrift operations, and capital lease obligations relating to mining equipment with three to four year lease agreements. The Companys capital lease obligations are denominated in South African Rand (ZAR). Capital lease obligations have been presented at an exchange rate of 1 Canadian dollar = ZAR 7.8, the closing rate in effect on February 28, 2009. Since then, the South African Rand has further strengthened to 1 Canadian dollar = ZAR 7.3 by mid May 2009.
The significant decline in the prices of diamonds in recent months has had a negative impact on the Companys profitability. With the current global financial crisis and economic downturn, the Company anticipates diamond prices will remain depressed in the near term.
In light of the current economic environment, the Companys near-term goal has been to preserve its cash balance to the greatest extent possible, by minimizing operating costs and curtailing capital expenditures. In this regard, the Company is reviewing its operations with a view to optimize efficiencies, putting marginal operations on care-and-maintenance, and reducing costs wherever possible without compromising safety, health or environmental standards. Specific initiatives taken include:
The Company anticipates the cost reduction and operational efficiency measures taken by the Company along with existing cash flow from operations and the Companys holdings of cash and cash equivalents will be sufficient to fund current operations and satisfy obligations as they come due.
Although the Company has implemented the necessary plans to ensure sufficient financial liquidity in the near term, the Companys ability to repay or refinance its financial liabilities to their contractual maturities depends on a number of factors such as an improvement in diamond demand and prices and unfreezing of credit and capital markets, some of which are beyond the Companys control. There is no assurance that our expected cash flows from operations in combination with other steps being taken will allow the Company to meet these obligations as they become due.
The Company has an overdraft facility in the amount of ZAR28 million ($3.8million) available for its operations. Current operating income is being used to service this facility. This facility has an interest cost based on prime and is reviewed periodically.
As of the end of June 10, 2009, the Company has unrestricted cash of $1.4 million and has utilized $2.8 million of the $3.5 million overdraft facility to maintain its operational requirements. The cash available of $2.1 million is available to finance the shortfall in operations until the anticipated breakeven point in the market prices anticipated in September 2009.
The average expenditures in the first few months of the current 2010 fiscal year is approximately ZAR5 million per month and has been decreasing as sales have been increasing. This recovery has been slowed by the strengthening of the ZAR in relation to sales achieved in US$.
To ensure the continuation of operations, and develop existing and new opportunities, the Board of Directors of Rockwell have proposed a financing to strengthen the Companys balance sheet through a rights offering.
The Company's sources of capital are primarily equity investment and debt.
Historically, the Companys sources of funding have been cash flow from operations and the issuance of equity securities for cash, primarily through private placements to sophisticated investors and institutions. The Company has issued common share capital in each of the past few years, pursuant to private placement financings and the exercise of warrants and options. The Companys access to financing, when the financing is not transaction specific, is always uncertain. There can be no assurance of continued access to significant equity funding.
The Company's access to capital sources is dependent upon general financial market conditions, especially those that pertain to venture capital situations such as mineral exploration and development.
Recent market events and conditions, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions have had a significant material adverse impact on a number of financial institutions forcing them into bankruptcy or requiring government authorities to rescue them. These events and a general flight from risk have limited access to capital and credit for many companies. The unprecedented disruptions in the current credit and financial markets, could, among other things, impede access to capital or increase the cost of capital, which would have an adverse effect on the Companys ability to obtain, or increase its cost of obtaining, capital and financing, if required, for its operations. The Companys access to additional capital may not be available on terms acceptable to the Company or at all.
Furthermore, in recent months, worldwide securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced unprecedented declines in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. In addition, significantly higher redemptions by holders of mutual and hedge funds has forced many of such funds (including those holding the Companys securities) to sell such securities at any price. Therefore, there can be no assurance that significant fluctuations in the trading price of the Companys common shares will not occur, or that such fluctuations will not materially adversely affect the Companys ability to raise equity funding without significant dilution to its existing shareholders, or at all.
During the year ended February 28, 2009, the Company did not complete any debt financings. The Company anticipates that it has sufficient funding facilities and funds available (Ref 1.6 above) to meet its working capital requirements, provided that the diamond market recovers and sales achieve over US$917 per carat on the near future and the exchange rate remains constant. At an exchange rate of ZAR8.8 / US$1 and current volumes and grade being achieved, breakeven point is anticipated to be reached when the Sales price per carat recovers to the US$1000 US$1,100 per carat range.
The Company intends to raise additional funds and are investigating various available options at this stage to ensure adequate working capital should the recovery in the markets be delayed beyond our estimations and to complete capital projects to expand production.
Other than already described above, the Company had no other lines of credit or other sources of financing which have been arranged but as yet unused as at February 28, 2009.
The Company's financial instruments consist of cash and cash equivalents, restricted cash, amounts receivable, security deposit, reclamation deposit, accounts payable and accrued liabilities, reclamation obligation, capital leases, amounts owing pursuant to acquisition and balances receivable from or due to related parties. In addition, the Company has cash and certain liabilities denominated in South African rand. As a result, the Company is subject to foreign exchange risk from fluctuations in foreign exchange rates. The Company has not entered into any derivative or other financial instruments to mitigate this foreign exchange risk.
The Company limits exposure to credit risk on liquid financial assets through maintaining its cash and cash equivalents with high-credit quality financial institutions. The Company does not have financial assets that are invested in asset backed commercial paper. The Company's minimize its credit risk by settling the receivables on its diamond sales in the month following the sale.
The Company has capital lease obligations with several financial institutions. The capital leases bear interest at rates linked to the prevailing prime rate of the relative financial institution, and are subject to interest rate change risk.
The fair values of these financial instruments approximate their carrying values, unless otherwise noted.
Material Commitments for Capital Expenditures
At February 28, 2009 and August 21, 2009, the Company had no material commitments for capital expenditures.
C. Research and Development, Patents and License, etc.
D. Trend Information
The months from November 2008 to February 2009 were the most testing times for prices and the overall diamond industry since the Great Depression. In response, Rockwell cancelled all sales for November and December 2008, embarked on a cost cutting program and also suspended all operations for the months December 2008 and January 2009. The immediate decisions which Rockwell management took during this period assisted the Company to address the challenges of the credit crunch and related depressed diamond prices.
The diamond industrys financial stability was severely tested during this period and resulted in a few operations being liquidated as the industry and banks worked together to avoid liquidations as this would have had a detrimental ripple effect on the industry overall. However, there was a large amount of stressed sales of inventory, which created opportunities for companies with a positive cash balance.
Retailers continued their resistance to purchasing additional inventory and also reduced in-store inventory to acceptable levels while improving their levels of debt. The result of these latter actions was a worldwide cessation of trade in polished diamonds and, subsequently, rough diamonds for the months November to January. Trade resumed in February albeit very cautiously. A lower level of stressed sales continued through February and ultimately placed pressure on the values offered for rough diamonds, creating further opportunities for cash strong traders, and enabling them to purchase rough diamonds at prices that reduced the average values of their inventories. The pressure placed on rough diamond values and the high amount of opportunistic buying resulted in producers receiving around 50% below the high prices received in 2008.
Certain producers were forced to sell at these prices while Rockwell managed its operations and cash flow, and deferred selling until the latter part of February. Therefore, Rockwell diamonds were not sold at massive discounts. Rockwell also moved away from selling its entire inventory on tenders as we realized that traders were not prepared to offer good value but were attempting to purchase at prices equivalent to those last seen in the year 2000. Furthermore, the Company sold both directly to the industry and in part via tender. The combination of the postponement of diamond sales as well as using direct sales earned Rockwell better prices.
The largest producers, De Beers and Alrosa, also resisted selling at the discounted prices and introduced a slow down and cessation at the operational level. Most producers world-wide adopted a similar approach of cessation and reduction in production. Rough diamond inventory immediately reduced and, remarkably, shortages became evident in late February resulting in the increase in rough diamond prices.
The polished market was equally stressed but the diamond engagement sector of the retail industry maintained itself and saw relatively high volumes of polished 0.75 carat-2 carat stones sold, resulting in a price and demand increase for rough diamonds up to 5 carats in size. There was little demand for larger, over 5 carat rough diamonds because traders were unwilling to invest in a product that was difficult to sell unless such diamonds were highly discounted.
By the end of February 2009, rough diamond prices were 40% below the highs of 2008 (84% below the averages achieved by Rockwell in 2008 due to both price and mix). However based on the Companys own results and market research, and information gleaned from the world wide web. Polished Prices, the BMO Rough Diamond Index, and Royal Bank Canada Diamond Research publications indications are that rough diamond prices have begun to increase since that time as shown in tender prices in March and May. (The average price per carat received increased from US$318.32 in February, to US$513.43 in March and to US$584.69 in May).
Rockwell is relatively confident that rough diamond prices will continue to increase during 2009 as is supported by market experts. However the occurrence of possible further corrections in rough diamond prices through 2009 cannot be totally discounted.
The graph below provides a summary of Rockwells diamond production and prices since start-up in 2006 is indicated below. This graph is typical of alluvial diamond producers in that it shows strong fluctuations consistent with the highly varied nature of alluvial diamond mine production as compared to a primary kimberlite production prices. Because of this, predicting average prices is challenging. In respect of 2009 sales, data suggest that the overall market prices appear to be trending upwards in line with the views of market observers and experts.
E. Off-Balance Sheet Arrangements
Rockwell does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
F. Tabular Disclosure of Contractual Obligations
The Company has the following payment commitments: (a) minimum lease payments of $8.7 million, with $5.4 million payable in the next 12 months, with installments up to the year 2011 to various financial institutions for plant and equipment; (b) Remaining acquisition payment of $3.8 million to Trans Hex for the Remhoogte property following the successful acquisition of Saxendrift Mine (Pty) Ltd, though this transaction is at the election of the Company.
The following are the contractual maturities of contractual obligations (in thousands of Canadian dollars):
Other than described above and in the notes of the audited financial statements for the year ended February 28, 2009, the Company has no "Purchase Obligations" defined as any agreement to purchase goods or services that is enforceable and legally binding on the Company that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
G. Safe Harbor
The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act applies to forward-looking information provided pursuant to Item 5.E and F above.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following section sets out the names of members of the Board of Directors, all major offices and positions with the Company and any of its significant affiliates each now holds, each director's principal occupation, the period of time during which each has been a director of the Company and the number of Common Shares beneficially owned by each, directly or indirectly, or over which each exercised control or direction, as at August 21, 2009.
The information as to the number of Common Shares beneficially owned, controlled or directed is not within the knowledge of the management of the Company and has been furnished by the respective nominees as reported in their filings at www.sedi.ca. The term of office of Mr. Greg Radke and Mr. Terrance Janes expired in June 2009 when they resigned from the Board of Directors.
Effective November 21, 2008, several changes were implemented to the board of directors as a result of a recent board review of the Company's operations in light of volatile capital market conditions and investor perceptions of listed diamond entities. The changes also reflected alignment with Rockwell's black economic empowerment partner, and were made as part of an agreement with the Companys largest shareholder, Pala Investment Holdings Limited. The changes included the following:
Principal Occupations and Other Information About Rockwells Directors and Management
DAVID COPELAND, P.Eng. Chairman and Director
David Copeland is a geological engineer who graduated in economic geology from the University of British Columbia. With over 30 years of experience, Mr. Copeland has undertaken assignments in a variety of capacities in mine exploration, discovery and development throughout the South Pacific, Africa, South America and North America, including alluvial bulk sampling and alluvial start-up operations in the Northwest Territories, Canada. His principal occupation is President and Director of CEC Engineering Ltd., a consulting engineering firm that directs and co-ordinates advanced technical programs for exploration and development on behalf of companies for which Hunter Dickinson Services Inc. (formerly Hunter Dickinson Inc.) provides services. He is also a director of Hunter Dickinson Services Inc.
Mr. Copeland is, or was within the past five years, an officer and/or director of the following public companies:
DR. JOHN BRISTOW President, Chief Executive Officer, Chief Operating Officer and Director
John Bristow holds a PhD degree in geology from the University of Cape Town and has over 30 years experience in the diamond business, encompassing the exploration, evaluation, and mining of kimberlite and alluvial diamond deposits in Africa and internationally. His career began with De Beers in 1983 in Kimberley and moved to Johannesburg in 1990 where he was Manager of the Anglo American Research Laboratories, prior to establishing an independent international diamond consultancy in 1994.
He was employed by the Anglo American and De Beers Group of companies for 12 years from 1983 1994. He served as Head of International Research with De Beers in Kimberley (South Africa), and was subsequently Head of the Geology Laboratory at the Anglo American Research Laboratories in Johannesburg. Thereafter he moved to the New Projects Division of the Anglo American Research Laboratories.
In 1994 John started an international diamond consultancy, and helped establish the Minerals and Energy Policy (MEPC) Johannesburg. This non-Governmental Organization (NGO) was created to build capacity in minerals and mining skills amongst previously disadvantaged role players. In 1996 he raised Cdn$3 million for the MEPC minerals and mining capacity building program.
During 1996 1997 he served as technical director to Moonstone Diamonds (an Australian junior), and from 1996 - 1998 was diamond analyst for financial securities company Huysamer Stals - ABN Amro.
In 1998 John played a key role in creating and listing successful alluvial diamond producer Gem Diamond Mining Corporation on the Johannesburg Stock Exchange, in which Tokyo Sexwales Mvelaphanda Diamonds subsequently acquired an interest. Gem Diamonds Saxendrift mining operation consistently produced amongst the worlds highest value alluvial diamonds, and was merged with the Trans Hex Group in 2000.
From 2002 he was a Director and CEO of Kalahari Diamonds Limited and its subsidiary Sekaka Diamonds (Pty) Limited in Botswana until Kalahari was merged with Petra Diamonds in late 2005.
He has provided consulting and contracting services to the local and international minerals industry, specializing in diamonds, and has considerable local (Southern African and African) and international experience in the exploration, prospecting, evaluation and mining of kimberlites, and land and marine alluvial diamond deposits. He has wide ranging management and corporate experience, and has been active in Black Empowerment business ventures in South Africa.
Most recently he was CEO of Kalahari Diamonds plc in Botswana, which successfully merged with Petra Diamonds in 2005. Dr. Bristow is, or was within the past five years, an officer and/or director of the following public companies:
DR. MARK BRISTOW Director
Dr. Mark Bristow was appointed to the Rockwell Diamonds Inc. (Rockwell) Board of Directors in October 2006. Dr. Bristow comes to Rockwell with 20 years experience in exploration, development, project and corporate finance and management in the mining sector in Africa.
From 1992 to 1995, Dr. Bristow had executive responsibility for the exploration and new business activities of Randgold & Exploration. In August 1995 he was appointed managing director and subsequently, in October 1995, CEO of Randgold Resources, which he helped establish as Randgold & Explorations international mining and exploration subsidiary and subsequently built it into an independent, public gold mining and exploration company which is listed on the London Stock Exchange as well as NASDAQ in New York. He has held director positions on the boards of: Harmony Gold Mining Company Limited; Durban Roodepoort Deep Limited; Blyvooruitzicht Gold Mining Company Limited; Buffelsfontein Gold Mines Limited; and The Grootvlei Proprietary Mines Limited and until recently AFPLATS Plc., the AIM listed, junior Platinum company. Besides his affiliation with Randgold, Dr. Bristow was the Chairman of SOMISY (Syama) until that company was sold to Resolute in 2004. He is currently the Chairman of the SOMILO Board of Directors (Loulo Gold Mining Company), a non-executive Director of Morila Limited and a member of the President of Senegals Economic Advisory Committee as well as the President of Malis advisory council. He is also a fellow of the Geological Society of South Africa and he holds a PhD in geology from Natal University.
Dr. Bristow has been CEO of Randgold Resources, a publicly-traded company since it was incorporated in 1995. He currently is, or was within the past five years, an officer and/or director of the following public companies:
WILLIAM J. FISHER DIRECTOR
Mr. Bill Fisher, a geologist with alluvial diamond mining experience in Africa and Brazil, and broad experience in the management of Canadian publicly listed companies has joined the board as an independent director.
William (Bill) Fisher, a British geologist, spent much of his early career in diamond exploration and mining in Africa. He was a mine production geologist in Angola for de Beers, and also in Guinea, West Africa for AREDOR where he was responsible for mine control of alluvial, colluvial and open pit kimberlite operations. He was also Mine Manager of a small alluvial gold mine in northern Queensland, Australia and as CEO of Ambrex Mining, he established a diamond pilot plant in Minas Gerais, Brazil. Mr. Fisher moved to Canada in 1993 as a diamond expert. He subsequently became Vice President of Exploration for Boliden, and then CEO of GlobeStar Mining Corporation. He has been Chairman and Director of a number of publically listed Canadian companies, including Treasury Metals, and currently serves as director of PC Gold as well as CEO of Karmin Exploration. Mr. Fisher holds a Bachelor of Science degree in Geology from Kingston University, London UK and is a practicing Professional Geologist.
SANDILE ZUNGU Director
Mr. Sandile Zungu, a mechanical engineer with an MBA and a founding member of Zungu Investments Company (Proprietary) Limited ("Zico"), a diversified investment company which is the majority shareholder of Rockwell's empowerment partner Africa Vanguard Resources ("AVR"), has joined the Board as an independent director.
Sandile Zungu is founder, Chairman and majority shareholder of Zico, a broad-based black empowerment company. Mr. Zungu spent six years in engineering and production at Richards Bay Minerals, Engen Refinery, National Sorghum Breweries and South African Breweries. He subsequently joined the corporate finance division of African Merchant Bank, following which he played a key role in the formation of Sarhwu Investment Holdings growing it from a zero asset base to more than R400 million in the net asset value. Thereafter he assumed the role of Executive Director for Strategy and Empowerment at New Africa Investments Limited. He created Zico in 2002, a broad based and diversified industrial holding organization with interests in financial services, media, health care, and resources, the latter being held in AVR. AVR is Rockwell's empowerment partner and holds 26% of the prospecting and mining rights held in South Africa, with Rockwell holding the remaining 74%. Sandile completed a mechanical engineering degree at the University of Cape Town and an MBA at the Graduate School of Business, University of Cape Town.
TREVOR THOMAS, LLB Secretary
Trevor Thomas has practiced in the areas of corporate commercial, corporate finance, securities and mining law since 1995, both in private practice environment as well as in-house positions and is currently in-house legal counsel for Hunter Dickinson Services Inc. Prior to joining Hunter Dickinson Services Inc., he served as in-house legal counsel with Placer Dome Inc.
DESMOND MORGAN Chief Financial Officer
Mr Desmond Morgan is a Chartered Accountant with an Honours Degree in Accounting Sciences from the University of South Africa (UNISA). He has extensive high level and operational financial management and accounting experience in mining, manufacturing, communications, finance, mergers and acquisitions, and corporate environments.
POTENTIAL CONFLICTS OF INTEREST
Several Directors of Rockwell also serve as directors of other similar companies involved in natural resource development. Accordingly, it may occur that properties will be offered to both Rockwell and such other companies. Furthermore, those other companies may participate in the same properties as those in which Rockwell has an interest. As a result there may be situations which involve a potential conflict of interest or issues in connection with the doctrine of corporate opportunity. In that event, a financially interested director would not be entitled to vote at meetings of directors in respect of a transaction involving the Company if it evokes any such conflict. The directors will attempt to avoid dealing with such other companies in situations where conflicts or corporate opportunity issues might arise and will at all times use their best efforts to act in the best interests of Rockwell.
Named Executive Officer (NEO) means each of the following individuals:
(a) the Chief Executive Officer (CEO);
(b) the Chief Financial Officer (CFO);
(c) each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and CFO, at the end of the most recently completed financial year whose total compensation was, individually, more than $150,000 for that financial year; and
(d) each individual who would be a NEO under paragraph (c) but for the fact that the individual was neither an executive officer of the company, nor acting in a similar capacity, at February 28, 2009.
On December 12, 2007 the Board authorized the Company to change its year end from May 31 to February 28.
The following disclosure sets out the compensation that the Board intended to pay, make payable, award, grant give or otherwise provide to each NEO and director for the financial year ended February 28, 2009.
COMPENSATION DISCUSSION AND ANALYSIS
The Board had established a Compensation Committee consisting of Mr. Terence Janes, Mr. Greg Radke and Mr. Sandile Zungu. Mr. Janes, Mr. Radke and Mr. Zungu became Committee members on December 16, 2008. In June 2009 Mr. Terence Janes and Mr. Greg Radke resigned as directors of the Company and as members of the Compensation Committee. Mr. Mark Bristow, Mr. Rene Carrier, Mr. David Copeland and Mr. Cousens were former members of the Compensation Committee. The Compensation Committee recommends compensation for the directors and executive officers of the Company. See further disclosure under heading Report of Executive Compensation. The charter for the Compensation Committee plan was adopted on February 28, 2008 as part of the Companys Corporate Governance Policies and Procedures Manual (the Manual). This charter as well as the Manual are available for viewing at the Companys website at www.rockwelldiamonds.com.
The function of the Compensation Committee is to review, on an annual basis, the compensation paid to the Companys executive officers and directors, to review the performance of the Companys executive officers and to make recommendations on compensation to the Board.
The Compensation Committee periodically considers the grant of stock options. Options have been granted to the executive officers and directors and certain other service providers taking into account competitive compensation factors and the belief that options help align the interests of executive officers, directors and service providers with the interests of shareholders.
The purposes and responsibilities of the Compensation Committee with respect to compensation matters are to assist the Board of Directors in carrying out its responsibilities relating to executive and director compensation. In furtherance of this purpose, the Compensation Committee has the following duties, responsibilities and authority:
(a) The Committee shall recommend to the Board of Directors the form and amount of compensation to be paid by the Company to directors for service on the Board and on Board committees. The Committee shall review director compensation at least annually.
(b) The Committee shall annually review the Companys base compensation structure and the Company's incentive compensation, stock option and other equity-based compensation programs and recommend changes in or additions in such structure and plans to the Board of Directors as needed.
(c) The Committee shall recommend to the Board of Directors the annual base compensation of the Company's executive officers and senior managers (collectively the "Officers").
(d) The Committee shall recommend to the Board of Directors the range of increase or decrease in the annual base compensation for non-Officer personnel providing services to the Company.
(e) The Committee shall recommend to the Board of Directors annual corporate goals and objectives under any incentive compensation plan adopted by the Company for Officers and non-Officer personnel providing services to the Company, and recommend incentive compensation participation levels for Officers and non-Officer personnel providing services to the Company under any such incentive compensation plan. In determining the incentive component of compensation, the Committee will consider the Companys performance and relative shareholder return, the values of similar incentives at comparable companies and the awards given in past years.
(f) The Committee shall evaluate the performance of Officers generally and in light of annual corporate goals and objectives under any incentive compensation plan.
(g) The Committee shall periodically review with the Chairman and Chief Executive Officer their assessments of corporate officers and senior managers and succession plans, and make recommendations to the Board regarding appointment of officers and senior managers.
(h) The Committee shall provide oversight of the performance evaluation and incentive compensation of non-Officer personnel providing services to the Company.
(i) The Committee shall administer the Company's stock option and other equity based compensation plans and determines the annual grants of stock options and other equity based compensation.
(j) The Committee shall recommend to the Governance and Nominating Committee the qualifications and criteria for membership on the Committee.
Report on Executive Compensation
The Board assumes responsibility for reviewing and monitoring the long-range compensation strategy for the senior management of the Company although the Compensation Committee guides it in this role. As part of its mandate, the Board determines the type and amount of compensation for the President and Chief Executive Officer and other executive officers.
The Companys Compensation Committee receives independent competitive market information on compensation levels for executives, if necessary, in determining the level of compensation for the executive officers and directors.
Mr. Copeland does not serve the Company solely on a full-time basis, and his compensation from the Company is allocated based on the estimated amount of time spent providing services to the Company. Mr. John Bristow, Mr. Morgan and Mr. Brenner work on the Company's activities on a full-time basis. The Companys compensation policies and programs are designed to be competitive with similar junior mining exploration companies and to recognize and reward executive performance consistent with the success of the Companys business.
Philosophy and Objectives
The compensation program for the senior management of the Company is designed to ensure that the level and form of compensation achieves certain objectives, including:
(a) attracting and retaining talented,
qualified and effective executives;
In compensating its senior management, the Company has employed a combination of base salary, bonus compensation and equity participation through its stock option plan.
In the Boards view, paying base salaries which are competitive in the markets in which the Company operates is a first step to attracting and retaining talented, qualified and effective executives. The NEOs are paid a salary in order to ensure that the compensation package offered by the company is in line with that offered by other companies in our industry, and as an immediate means of rewarding the NEO for efforts expended on behalf of the company.
The salary to be paid to a particular NEO is determined by gathering competitive salary information on comparable companies within the industry from a variety of sources, including surveys conducted by independent consultants and national and international publications. Payment of a cash salary fits within the objective of the compensation program since it rewards the NEO for performance of his or her duties and responsibilities.
The compensation of the Chief Executive Officer is approved annually by the Board. Base salary and bonus levels are determined taking into account independent market survey data.
Bonus Incentive Compensation
The Company's objective is to achieve certain strategic objectives and milestones. The Board will consider executive bonus compensation dependent upon the Company meeting those strategic objectives and milestones and sufficient cash resources being available for the granting of bonuses. Bonuses are awarded at the discretion of the Board. The Board approves executive bonus compensation dependent upon compensation levels based on recommendations of the Compensation Committee, and such recommendations are generally based, if necessary, on survey data provided by independent consultants. There were no bonuses awarded in the financial year.
The Company has in place a share option plan dated for reference August 14, 2008 (the Plan). The Plan has been established to provide incentive to qualified parties to increase their proprietary interest in the Company, encourage the alignment of interests with its shareholders and foster their continued association with the Company.
The Company believes that encouraging its executives and employees to become Shareholders is the best way of aligning their interests with those of its Shareholders. Equity participation is accomplished through the Companys stock option plan. Stock options are granted to senior executives taking into account a number of factors, including the amount and term of options previously granted, base salary and bonuses and competitive factors. Options are generally granted to senior executives and vest on terms established by the Compensation Committee.
At least annually, the Compensation Committee reviews the grants of stock options to directors, management, employees and consultants. Options have been granted in prior years taking into account competitive compensation factors and the belief that options help align the interests of such persons with the interests of Shareholders.
The Company commenced trading on The Toronto Exchange (TSX) on February 22, 2008. The Company was previously listed on the TSX Venture Exchange (TSXV). The following graph compares the cumulative shareholder return on the Companys Common Shares for the last five fiscal years against the return of the TSXV and the S&P/TSX Composite Total Return Index based on a $100 investment on May 31, 2004. The year end of the Company was changed to February 28 in 2007.
Notes: The Company has not declared or paid a dividend on its Common Shares.
Option Based Awards
The Companys long term incentives are designed to foster and promote the long-term financial success of the Company by strengthening the ability of the Corporation to attract and retain highly competent employees, motivate performance through incentive compensation, promote greater alignment of interests between employees and shareholders in creating long-term shareholder value, and enable employees to participate in the long-term growth and financial success of the Company. Long term incentives are comprised of stock options, with approximately the same value of each being provided. The Black-Scholes method is used to value stock options. The share price on the date of grant is used to value share units. Stock options provide employees with the opportunity to participate in the growth of the Companys share price as well as benefit from the favourable tax treatment applicable to this form of compensation.
The Compensation Committee approves stock options to facilitate consideration of targeted direct compensation to senior executive officers. Options are generally granted in the last quarter of each year as part of the annual compensation review. Options are granted at other times of the year to individuals commencing employment with the Company. The exercise price for the options set in accordance with the rules of the TSX and is based on the five-day volume weighted average closing price prior to the date of grant.
Given the evolving nature of the Companys business, the Board continues to review and redesign the overall compensation plan for senior management so as to continue to address the objectives identified above.
Stock Option Plan
The Company currently has a share purchase option compensation plan dated for reference August 14, 2008, the Stock Option Plan (for the purposes of this section, the Plan) approved by the shareholders in September 15, 2008 that allows the Company to grant options up to 10% of the issued and outstanding the Shares at any one time, typically vesting over two years, to its directors, employees, officers, and consultants. The exercise price of each option can be set equal to or greater than the closing market price of the Shares on the TSX on the day prior to the date of the grant of the option, less any allowable discounts. Options have a maximum term of five years and typically terminate 30 days following the termination of the optionees employment, except in the case of retirement or death.
Material Terms of the Plan
The following is a summary of the material terms of the Plan:
The Company is of the view that the Plan provides the Company with the flexibility necessary to attract and maintain the services of senior executives and other employees and reflects in competing compensation to other companies in the industry.
The Plan also provides that:
The full text of the Plan is available for download at www.sedar.com.
SUMMARY COMPENSATION TABLE
The compensation paid to the NEOs during the Companys most recently completed financial year of February 28, 2009 is as set out below and expressed in Canadian dollars unless otherwise noted:
INCENTIVE PLAN AWARDS
Outstanding Option-based Awards
The Company only currently has an option-based awards plan and does not have any share based awards plan. The following table sets out all share-based awards and option-based awards outstanding as at February 28, 2009, for each NEO:
Incentive Plan Awards Value Vested or Earned During the Year
The following table sets out all incentive plan (value vested or earned) during the year ended February 28, 2009:
PENSION PLAN BENEFITS
The Company has no pension plans for its directors, officers or employees.
TERMINATION AND CHANGE OF CONTROL BENEFITS
The only written employment contracts between the Company and the NEOs, in place are with John Bristow, Desmond Morgan and Jeffrey Brenner. Hennie van Wyk has a consulting contract with the Company which contains a change in control provision. Under these agreements, Messrs. Bristow, Morgan, Brenner and van Wyk are required to work full time for the Company and are eligible to receive stock options and a performance based bonus at the discretion of the Compensation Committee and the Board and other standard benefits made available by the Company. In addition, under these agreements an amount equal to a minimum of 12 months salary, in the case of Mr. Bristow, and 3 months in the case of Mr. Brenner, 4 months in the case of Mr. Morgan and 3 months in the case of Mr. van Wyk is payable in the event of a termination without cause. In the event of a termination without cause or a resignation with cause within 12 months following a change of control, Mr. Bristow, Mr. Morgan, Mr. Brenner and Mr. van Wyk is entitled to receive, among other things, an amount equal to 12 months salary and accrued bonus, and all stock options held by these individuals will fully vest. Please see Summary Compensation Table.
Both these agreements define the events that could cause a resignation with cause within 12 months of a change of control. Good Cause means the occurrence of one of the following events without the Employees express written consent:
The estimated incremental payments from the Company to each of Messrs. Bristow, Morgan and Brenner on (i) termination without cause or (ii) termination without cause or resignation with cause within 12 months following a change of control, assuming the triggering event occurred on February 28, 2009, are as follows:
Except as outlined above, there are no contracts, agreements, plans or arrangements that provide for payments to an NEO at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, a change in control of the Company or a change in an NEOs responsibilities.
Director Compensation Table
Each independent director of the Company, who is not an executive officer, is paid an annual directors fee of $20,000. Each director who is a member of a committee receives either an additional $5,000 for acting as Chairperson or $3,000 for being a member of a committee.
The compensation provided to the directors, excluding a director who is included in disclosure for an NEO for the Companys most recently completed financial year of February 28, 2009 is:
The following table sets out all share-based awards and option-based awards outstanding as at February 28, 2009, for each director, excluding a director who is already set out in disclosure for a NEO for the Company:
The following table sets out all incentive plan (value vested or earned) during the year ended February 28, 2009, for each director, excluding a director who is already set out in disclosure for a NEO for the Company:
C. Board Practices
All directors were elected at the annual general meeting held in November 2007, and have a term of office expiring at the next annual general meeting of Rockwell expected to be held in November 2009. .There are no contracts or arrangements under which directors are compensated or provided benefits upon termination of employment.
1. Board of Directors
Directors are considered to be independent if they have no direct or indirect material relationship with the Company. A "material relationship" is a relationship which could, in the view of the Companys board of directors, be reasonably expected to interfere with the exercise of a directors independent judgment.
The Board facilitates its independent supervision over management in a number of ways including: by holding regular meetings without the presence of management; by retaining independent consultants; and by reviewing corporate developments with larger shareholders, analysts and potential industry partners, where it deems necessary.
The directors of the Company, except Mr. Fisher and Mr. Zungu, are not independent. The Company is taking steps to ensure that the duties generally performed by independent directors are being performed by the current directors. The Board members have extensive experience as directors of public companies and are sensitive to the related corporate governance and financial reporting obligations associated with such positions. Thus the Board members are reasonably well versed in the obligations of directors and the expectations of independence from management.
The following committees have been established by the members of Rockwells board of directors. The mandate of each committee is included in the Companys corporate governance manual and can be viewed on the Companys website (www.rockwelldiamonds.com):
The audit committee is selected annually by the directors of Rockwell at the first meeting of the Board held after Rockwell's annual general meeting. Its primary function is to review the financial statements of the Company before they are submitted to the Board for approval and the audit committee is also available to assist the Board if required with matters relating to the appointment of Rockwell's auditor and the overall scope and results of the audit, internal financial controls, and financial information for publication for various purposes.
2. Other Directorships
The section entitled Item 6 Directors, Senior Management and Employees in this Annual Report gives details of other reporting issuers of which each director is a director or officer.
3. Orientation and Continuing Education
The Company has traditionally retained experienced mining people as directors and hence the orientation needed is minimized. When new directors are appointed, they are acquainted with the Companys mineral project and the expectations of directors. Board meetings generally include presentations by the Companys senior management and project staff in order to give the directors full insight into the Companys operations.
4. Ethical Business Conduct
The Board has adopted an ethics policy which is available on the Companys website, www.rockwelldiamonds.com. The Board also understands that the fiduciary duties placed on individual directors by the Companys governing corporate legislation and the common law and the restrictions placed by applicable corporate legislation on an individual directors participation in decisions of the Board in which the director has an interest have been sufficient to ensure that the Board operates independently of management and in the best interests of the Company.
5. Nomination of Directors
The Board considers its size each year when it considers the number of directors required, taking into account the number required to carry out the Boards duties effectively and to maintain a diversity of views and experience. The Board has a Nominating and Governance Committee, though the full Board retains responsibility for the recommendation of directors to the Shareholders for election.
The Compensation Committee considers compensation for the directors and senior executive officers and submits its compensation recommendations to the Board for approval.
7. Other Board Committees
The Board has no committees other than the Audit Committee, Nominating and Governance Committee, Technical Committee and Compensation Committee.
The Board monitors the adequacy of information given to directors, communication between the Board and management and the strategic direction and processes of the Board and its committee.
The Audit Committees Charter
The audit committee has adopted a charter that sets out its mandate and responsibilities. A copy of the audit committee charter is available at www.sedar.com and the Companys website, www.rockwelldiamonds.com.
Composition of the Audit Committee
The current member of the audit committee is Messrs. William Fisher., Messrs. Terry Janes and Gregory Radke resigned from the Board of Directors on June 23, 2009 and June 18, 2009. All members are and were considered to be financially literate and are independent members of the audit committee. The Company is currently in the process of searching for new audit committee members to replace Messrs. Janes and Radke.
A member of the audit committee is independent if the member has no direct or indirect material relationship with the Company. A material relationship means a relationship which could, in the view of the Companys Board of Directors, reasonably interfere with the exercise of a members independent judgment.
Relevant Education and Experience
As a result of their education and experience, each member of the audit committee has familiarity with, an understanding of, or experience in:
A member of the audit committee is considered financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company.
Audit Committee Oversight
The audit committee has not made any recommendations to the Board to nominate or compensate any external auditor that was not adopted by the Board.
The Companys auditors, KPMG Inc., have not provided any material non-audit services.
Pre-Approval Policies and Procedures
The Company has adopted specific policies and procedures for the review and pre-approval of any services performed by its auditors. The procedures require that all proposed engagements of its auditors for audit and non-audit services be submitted to the audit committee for approval prior to the beginning of any such services. The audit committee considers such requests, and, if acceptable to a majority of the audit committee members, pre-approves such audit and non-audit services by a resolution authorizing management to engage the Companys auditors for such audit and non-audit services, with set maximum dollar amounts for each itemized service. During such deliberations, the audit committee assesses, among other factors, whether the services requested would be considered "prohibited services" as contemplated by the regulations of the US Securities and Exchange Commission, and whether the services requested and the fees related to such services could impair the independence of the auditors.
At February, 2009, Rockwell has 467 direct employees. The Company's administrative and operational functions are primarily administered in South Africa (see Item 7B).
E. Share Ownership
Security holdings of the Company's directors and senior management (as at February 28, 2009), as disclosed on www.sedi.ca.
Share Option Plan
At the Company's Annual and Extraordinary General Meeting held in August 2008, shareholders of the Company approved a Share Incentive Plan ("2007 Plan") in accordance with the policies of the TSX.
Incentive stock options may be issued to directors, officers, employees or consultants of the Company at the discretion of the board of directors, subject to an aggregate maximum of 10% of the issued capital of the Company. This type of share option plan is called a rolling plan. Pursuant to the Plan, if outstanding options are exercised, or expire, or the number of issued and outstanding common shares of the Company increases, the number of options available to grant under the Plan increases proportionately. Options can have a maximum term of five years and typically terminate 90 days following the termination of the optionee's employment or engagement, except in the case of retirement or death. Vesting of options is at the discretion of the board of directors at the time the options are granted.
The Option Plan is subject to restrictions that:
Options under the Option Plan must be granted at a price no lower than the five day volume weighted average trading price of the shares, which is calculated by dividing the total value of the securities traded for the relevant period by the total volume. Where appropriate, the TSX may exclude internal crosses and certain other special terms trades from the calculation.
The continuity of share purchase options as at May 31, 2009 is as follows:
As at May 31, 2009, 7,318,000 of the options outstanding with a weighted average exercise price of $0.60 per share have vested with grantees.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Rockwell's securities are recorded on the books of its transfer agent in registered form, however, the majority of such shares are registered in the name of intermediaries such as brokerage houses and clearing houses on behalf of their respective brokerage clients, and Rockwell does not have knowledge of or access to information about of the beneficial owners thereof. To the best of its knowledge, Rockwell is not directly or indirectly owned or controlled by a foreign government. As of February 28, 2009, Rockwell had authorized an unlimited number of common shares without par value of which 238,041,569 were issued and outstanding.
"Beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed to have beneficial ownership of any securities that such person has a right to acquire within 60 days of the fiscal period through the exercise of any option or warrant. Any security that any person has the right to acquire within 60 days is deemed outstanding for the purpose of calculating the ownership of such person, but is not deemed to be outstanding for the purpose of calculating the ownership percentage of any other person.
Under the British Columbia Securities Act insiders (generally officers, directors, and holders of 10% or more of Rockwell's shares) are required to file insider reports of changes in their ownership within ten days of a trade in Rockwell's securities. Copies of such reports are available for public inspection at the offices of the British Columbia Securities Commission, 9th Floor, 701 West Georgia Street, Vancouver, British Columbia V7Y 1L2 (phone (604) 899-6500) or at Canadian Securities Administrators website for Insiders' Disclosure, www.sedi.ca.
As at August 21, 2009 there were no current registered filed shareholding position of greater than 5%.
As of August 21, 2009, directors and officers of Rockwell in total (6 persons) own or control an aggregate of 4,912,945 common shares of the Company (2.06%) . These directors or officers do not have any different voting rights with respect to the common shares held by them. Under the British Columbia Securities Act, insiders (generally officers, directors, holders of 10% or more of the Company's shares) are required to file insider reports of changes in their ownership in the first 10 days following a trade in Rockwell's securities. Under British Columbia securities laws, insider trading information is available at www.sedi.ca
As at August 21, 2009, to the best of the Company's knowledge, the following is the geographic distribution of shareholders. Shares registered in intermediaries were assumed to be held by residents of the same country in which the clearing house was located.
To management's knowledge, there are no arrangements the operation of which may at a subsequent date result in a change of control of Rockwell.
B. Related Party Transactions
No director or senior officer, and no associate or affiliate of the foregoing persons, and no insider has or has had any material interest, direct or indirect, in any other transactions, or in any other proposed transaction, which in either such case has materially affected or will materially affect Rockwell or its predecessors during the fiscal year ended February 28, 2009 except as follows:
Related Party transactions are explained below. These arrangements and transactions have typically been established to provide professional and cost effective services and resources to Rockwell. In particular these services relate to the remote areas in which some of Rockwells operations are located and have also been established to address security and social responsibility requirements. In remote areas it is difficult to obtain key services and make purchases of certain supplies on an as needed basis. Likewise security consideration is paramount given the high value product produced by the Company.
C. Interest of Experts and Council
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 17 Financial Statements.
As of February 28, 2009, there is no material legal or arbitration proceedings against Rockwell or any of its subsidiaries, nor, to the knowledge of Rockwell, are such proceedings pending or threatened that may have or have had in the previous 12 months a material effect on Rockwell's financial position, other than as disclosed herein.
Rockwell has not paid any dividends on its outstanding common shares since its incorporation and does not anticipate that it will do so in the foreseeable future. All funds of the Company are being retained for exploration of its projects.
B. Significant Changes
There have been no significant changes to the accompanying financial statements since February 28, 2009, except as disclosed in this Annual Report on Form 20-F.
On April 11, 2008 the Company completed the acquisition of two open pit alluvial diamond mines (Saxendrift and Niewejaarskraal) then on care and maintenance, and three alluvial diamond exploration projects (Kwartelspan, Zwemkuil-Mooidraai, and Remhooget-Holsloot) referred to collectively as the Middle Orange River Operations (MORO) from Trans Hex Operations (Pty) Ltd. Registration and transfer of Saxendrift Mine Pty (Ltd) and the Saxendrift mining right, as well as prospecting rights in respect of the Kwartelspan, Zwemkuil-Mooidraai and part of the Remhoogte-Holsloot projects were obtained. In March 2009, the Niewejaarskraal mining rights occurred on March 4, 2009, subsequent to year end. Rockwell has chosen not to exercise the option on the Remhoogte prospecting right due to current harsh financial constraints and depressed diamond prices.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
The transfer of the Company's common shares is managed by its transfer agent, Computershare Trust Company of Canada of Vancouver.
B. Plan of Distribution
The shares of Rockwell trade in Canada on the TSX Venture Exchange ("TSX Venture"), under the trading symbol RDI, in South Africa on the Johannesburg Stock Exchange (JSE) and are quoted on the National Association of Securities Dealers Over-The-Counter Bulletin Board ("OTCBB").
D. Selling Shareholders
F. Expenses of the Issue
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Notice of Articles and Articles
Copies of Rockwell's memorandum and articles of incorporation, as registered with the British Columbia Registrar of Companies under Corporation No. 354545, were filed with the Company's initial registration statement on Form 20-F filed in 2000. The Business Corporations Act (British Columbia) (the "BCA") came into force on March 29, 2004. As a result, the Company Act (British Columbia) was repealed, and the Company became a "pre-existing company" subject to the provisions of the BCA. Every pre-existing company is required under the BCA to file a Transition Application containing a notice of articles with the British Columbia Registrar of Companies, as a result of which the notice of articles supersedes and replaces the company's memorandum. The Company has caused a Transition Application to be filed with the British Columbia Registrar of Companies, and its notice of articles and the related articles are being filed as exhibits to this Annual Report.
A discussion of the notice of articles and articles of Rockwell follows:
Objects and Purposes
Rockwell's Notice of Articles do not specify objects or purposes. Under British Columbia law, a British Columbia corporation has all the legal powers of a natural person; however corporations may not undertake certain limited business activities such as operating as a trust company or railroad without alterations to its form of articles and specific government consent.
Directors Powers and Limitations
Rockwell's articles do not specify a maximum number of directors (the minimum under British Columbia law for a public company is three). The articles specify that the number of directors shall be the number of directors fixed by shareholders annually or the number that are actually elected at a general shareholders meeting. The number of directors is determined annually by shareholders at the annual Shareholders meeting and all directors are elected at that time, there are no staggered directorships. Under the articles the directors are entitled between successive annual general meeting to appoint one or more additional directors but not more than one-third of the number of directors fixed at a shareholders meeting or actually elected at the preceding annual general meeting. Directors automatically retire at the commencement of each annual meeting subject to being re-elected.
Under the articles, a director who is any way directly or indirectly interested in a proposed contract or transaction with Rockwell or who holds any office or possesses any property whereby directly or indirectly a duty might be created which would conflict with his duty or interest as a director shall declare the nature and extent of such interest in such contract or transaction. A director shall not vote in respect of any such contract or transaction if the company in which he is interested and if he should vote his vote shall not be counted but shall be counted in the quorum present at the meeting. Similarly, under the BCA directors are obligated to abstain from voting on matters in which they may be financially interested after fully disclosing such interest. Directors must abstain in such circumstances both under the articles and under the BCA.
Directors must be of the age of majority (18), and meet eligibility criteria including not being mentally infirm, an undischarged bankrupt, no fraud related convictions in the previous five years and a majority of directors must be ordinarily resident in Canada. There is no mandatory retirement age either under Rockwell's articles or under the BCA.
The directors may from time to time at their discretion authorize the Company to borrow any sum of money for the purposes of the Company and may raise or secure the repayment of that sum in such manner upon such terms and conditions, in all respects, as they think fit, and in particular, and without limiting the generality of the foregoing, by the issue of bonds or debentures, or any mortgage or charge, whether specific or floating, or other security on the undertaking or the whole or any part of the property of the Company, both present and future. Directors need not own any shares of the Company in order to qualify as directors.
Rights and Restrictions attached to Shares
The directors may declare dividends and fix the date of record therefore and the date for payment thereof. No notice need be given of the declaration of any dividend.
Subject to the terms of shares with special rights or restrictions, all dividends shall be declared according to the number of shares held and no dividend shall bear interest against Rockwell.
The directors may direct payment of any dividend wholly or partly by the distribution of specific assets or of paid-up shares, bonds, debentures or other debt obligations of Rockwell, or in any one or more of those ways, and where any difficult arises in regard to the distribution, the directors may settle the same as they think expedient, and in particular may fix the value for distribution of specific assets or of paid-up shares, bonds, debentures or other debt obligations of Rockwell, or in any one or more of those ways, and, where any difficulty arises in regard to the distribution, the directors may settle the same as they think expedient, and in particular may fix the value for distribution of specific assets, and may determine the cash payments shall be made to a member upon the basis of the value so fixed in place of fractional shares, bonds, debentures or other debt obligations in order to adjust the rights of all parties, and may vest any of those specific assets in trustees upon such trusts for the persons entitled as may seem expedient to the directors.
Notwithstanding anything contained in Rockwell's articles the directors may from time to time capitalize any undistributed surplus on hand of Rockwell and may from time to time issue as fully paid and non-assessable any unissued shares or any bonds, debentures or other debt obligations of Rockwell as a dividend representing such undistributed surplus on hand or any part thereof.
Any dividend, interest or other moneys payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder, or, in the case of joint holders, to the registered address of that one of the joint holders who is first named on the register or to such person and to such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. Any one of two or more joint holders may give effectual receipts for any dividends, bonuses or other moneys payable in respect of the shares held by them as joint holders.
A transfer of a share shall not pass the right to any dividend declared thereon before the registration of the transfer in the register.
Notwithstanding any other provisions of the articles should any dividend result in any shareholders being entitled to a fractional part of a share of Rockwell, the directors shall have the right to pay such shareholders in place of that fractional share, the cash equivalent thereof calculated on the par value thereof, or in the case of shares without nominal or par value, calculated on the price or consideration for which such shares were or were deemed to be issued, and shall have the further right and complete discretion to carry out such distribution and to adjust the rights of the shareholders with respect thereto on as practical and equitable a basis as possible including the right to arrange through a fiscal agent or otherwise for the sale, consolidation or other disposition of those fractional shares on behalf of those shareholders of Rockwell.
The directors may, before declaring any dividend, set aside out of the profits of Rockwell such sums as they think proper as appropriations from income which shall at the discretion of the directors, be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which the profits of Rockwell may be properly applied, and pending such application may, either be employed in the business of Rockwell or be invested in such investments as the directors in their discretion may from time to time determine.
Changes to Rights of Common Shareholders
Changes to the articles and memorandum of Rockwell can be changed by a "special resolution", being a resolution passed by not less than 75% of the shares voted in person or by proxy at a duly convened shareholders meeting. Some corporate changes including amalgamation with another company, sale of substantially all of Rockwell's assets, re-domiciling out of the jurisdiction of British Columbia, creation of new classes of shares not only require such 75% approval but generally also give rise to a dissent right which is the right to be paid the fair value of the stockholder's shares in cash if the required special resolution is actually passed and Rockwell elects to proceed with the matter notwithstanding receipt of dissent notices. A notice of a shareholders meeting at which such an action is intended to be effected must include a prominent notice of the dissent right. Dissent provisions governed by the BCA and not by the articles of Rockwell.
Shareholders meetings are only peripherally governed by the articles of Rockwell with most shareholder protections contained in the Securities Act (British Columbia) and the BCA. The articles provide that Rockwell will hold an annual general meeting, will provide at least 21 days' notice and will provide for certain procedural matters and rules of order with respect to conduct of the meeting. The Securities Act (British Columbia) and the BCA superimpose requirements that generally provide that shareholders meetings require not less than a 60 day period from initial public notice that Rockwell makes a thorough advanced search of intermediary and brokerage registered shareholdings to ascertain location of beneficial shareholders so that materials can be sent, the form and content of information circulars and proxies and like matters typically governed by such securities legislation. This legislation specifies the disclosure requirements for various corporate actions, background information on the nominees for election for director, executive compensation paid in the previous year and full details of any unusual matters. Rockwell must hold an annual shareholders meeting within 13 months of the previous annual shareholders meeting and must present audited statements that are no more than 180 days old at that meeting.
Subject to the special rights and restrictions attached to any class of shares, Rockwell may, by a resolution of the directors and in compliance with the BCA, redeem any of its shares that have a right of redemption attached thereto at the price and upon the terms specified in such resolution and where Rockwell purposes to redeem some, but not all, of its shares of a particular class or kind, it shall not be obligated to redeem them pro rata but may redeem them in any manner the directors in their absolute discretion may deem fit.
Rockwell has no redeemable securities authorized or issued.
There are no pre-emptive rights applicable to Rockwell which provide a right to any person to participate in offerings of Rockwell's securities
All common shares of Rockwell participate ratably in any available assets in the event of a winding up or other liquidation.
No Limitation on Foreign Ownership
There are no limitations under Rockwell's Articles or in the BCA on the right of persons who are not citizens of Canada to hold or vote common shares. (See also "Exchange Controls" below.)
Dividends may be declared by the Board out of available assets and are paid rateably to holders of common shares. No dividend may be paid if Rockwell is, or would thereby become, insolvent.
Each Rockwell share is entitled to one vote on matters to which common shares ordinarily vote including the election of directors, appointment of auditors and approval of corporate changes and other matters requiring shareholder approval.
Change in Control
Rockwell has not implemented any shareholders' rights against possible take-overs. Rockwell does not have any agreements which are triggered by a take-over or other change of control. There are no provisions in its articles triggered by or affected by a change in outstanding shares which gives rise to a change in control.
Share Ownership Reporting
The articles of Rockwell do not require disclosure of share ownership. Share ownership of director nominees must be reported annually in proxy materials sent to Rockwell's shareholders. There are no requirements under British Columbia corporate law to report ownership of shares of Rockwell but the British Columbia Securities Act requires disclosure of trading by insiders including holders of 10% of voting shares within 10 days of the trade. Controlling shareholders (generally those in excess of 20% of outstanding shares) must provide seven days advance notice of share sales.
C. Material Contracts
Rockwell's material contracts are included in the exhibits list in item 19.
D. Exchange Controls
Rockwell is a Canadian corporation incorporated under the laws of British Columbia. There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements. Any such remittances to United States residents are generally subject to withholding tax. See "Taxation" below.
There is no limitation imposed by the laws of Canada or by the charter or other constituent documents of Rockwell on the right of a non-resident to hold or vote the Common Shares, other than as provided in the Investment Canada Act (Canada) (the "Investment Act"). The following discussion summarizes the material features of the Investment Act for a non-resident who proposes to acquire a controlling number of Common Shares. It is general only, it is not a substitute for independent advice from an investor's own advisor, and it does not anticipate statutory or regulatory amendments. Rockwell does not believe the Investment Act will have any affect on it or on its non-Canadian shareholders due to a number of factors including the nature of its operations and Rockwell's relatively small capitalization.
The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture (each an "entity") that is not a "Canadian" as defined in the Investment Act (a "non-Canadian"), unless after review the Director of Investments appointed by the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. The size and nature of a proposed transaction may give rise to an obligation to notify the Director to seek an advance ruling. An investment in the Common Shares by a non-Canadian other than a "WTO Investor" (as that term is defined in the Investment Act and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization) when Rockwell was not controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of Rockwell and the value of the assets of Rockwell, as determined in accordance with the regulations promulgated under the Investment Act, was $5 million or more, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada's cultural heritage or national identity, regardless of the value of the assets of Rockwell. An investment in the Common Shares by a WTO Investor, or by a non-Canadian when Rockwell was controlled by a WTO Investor, would be reviewable under the Investment Act if it was an investment to acquire control of Rockwell and the value of the assets of Rockwell, as determined in accordance with the regulations promulgated under the Investment Act, was not less than a specified amount, which for 2005 exceeds $250 million. A non-Canadian would acquire control of Rockwell for the purposes of the Investment Act if the non-Canadian acquired a majority of the Common Shares. The acquisition of less than a majority but one-third or more of the Common Shares would be presumed to be an acquisition of control of Rockwell unless it could be established that, on the acquisition, Rockwell was not controlled in fact by the acquiror through the ownership of the Common Shares.
The foregoing assumes Rockwell will not engage in the production of uranium or own an interest in a producing uranium property in Canada, or provide any financial service or transportation service, as the rules governing these businesses are different.
Certain transactions relating to the Common Shares would be exempt from the Investment Act, including
(a) an acquisition of the Common Shares by a person in the ordinary course of that person's business as a trader or dealer in securities,
(b) an acquisition of control of Rockwell in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Act, and
(c) an acquisition of control of Rockwell by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of Rockwell, through the ownership of the Common Shares, remained unchanged.
Material Canadian Federal Income Tax Consequences for United States Residents
The following, in management's understanding, summarizes the principal Canadian federal income tax consequences generally applicable to the holding and disposition of Common Shares by a holder (in this summary, a "U.S. Holder") who, at all relevant times, (a) for the purposes of the Income Tax Act (Canada) (the "Tax Act"), is not resident in Canada, deals at arm's length with Rockwell, holds the Common Shares as capital property and does not use or hold the Common Shares in the course of carrying on, or otherwise in connection with, a business in Canada, and (b) for the purposes of the Canada-United States Income Tax Convention, 1980 (the "Treaty"), is a resident solely of the United States, has never been a resident of Canada, and has not held or used (and does not hold or use) Common Shares in connection with a permanent establishment or fixed base in Canada. This summary does not apply to traders or dealers in securities, persons who acquired their Common Shares in a transaction considered for purposes of the Tax Act to be an adventure or concern in the nature of trade, limited liability companies, tax-exempt entities, insurers, financial institutions (including those to which the mark-to-market provisions of the Tax Act apply), or any other U.S. Holder to which special considerations apply.
This summary is based on the current provisions of the Tax Act including all regulations there under, the Treaty, all proposed amendments to the Tax Act, the regulations and the Treaty publicly announced by or on behalf of the Minister of Finance to the date hereof, and the current published administrative practices of the Canada Customs and Revenue Agency. It has been assumed that all currently proposed amendments will be enacted as proposed and that there will be no other relevant change in any governing law or administrative practice, although no assurances can be given in these respects. This summary does not take into account provincial, U.S., state or other foreign income tax law or practice. The tax consequences to any particular U.S. Holder will vary according to the status of that holder as an individual, trust, corporation or other entity, the jurisdictions in which that holder is subject to taxation, and generally according to that holder's particular circumstances. Accordingly, this summary is not, and is not to be construed as, Canadian tax advice to any particular U.S. Holder. U.S. Holders should consult with their own tax advisors for advice with respect to their own particular circumstances.
Dividends paid or credited or deemed to be paid or credited to a U.S. Holder by Rockwell will normally be subject to Canadian withholding tax. Under the Treaty, the rate of withholding tax on dividends paid to a U.S. Holder that beneficially owns such dividends is generally limited to 15% of the gross amount of the dividend (or 5% if the U.S. Holder is a corporation and beneficially owns at least 10% of Rockwell's voting shares). Rockwell will be required to withhold the applicable withholding tax from any such dividend and remit it to the Canadian government for the U.S. Holder's account.
A U.S. Holder is not subject to tax under the Tax Act in respect of a capital gain realized on the disposition of a Common Share provided that the share is not "taxable Canadian property" to the holder thereof. If the Common Shares are listed on a prescribed stock exchange, which currently includes the American Stock Exchange, a Common Share generally will not be taxable Canadian property to a U.S. Holder if, at any time during the 60 months preceding the disposition, the U.S. Holder or persons with whom the U.S. Holder did not deal at arm's length alone or together owned, or had an interest or option in respect of 25% or more of Rockwell's issued shares of any class or series.
A U.S. Holder whose Common Shares do constitute taxable Canadian property, and who might therefore be liable for Canadian income tax under the Tax Act on a disposition or deemed disposition of such shares, will generally be relieved from such liability under the Treaty unless the value of the shares of the Company at the time of disposition is derived principally from real property situated in Canada within the meaning of the Treaty. Management of Rockwell believes that the value of Rockwell's Common Shares is not currently derived principally from real property situated in Canada. U.S. Holders whose Common Shares are taxable Canadian property should consult their own advisors regarding filing and other Canadian federal tax considerations.
United States Tax Consequences
United States Federal Income Tax Consequences
The following is, in the opinion of Rockwell after consultation with its professional advisors, a general discussion of material United States federal income tax consequences, under current law, generally applicable to a U.S. Holder (as hereinafter defined) of common shares of Rockwell. This discussion does not address all potentially relevant federal income tax matters and it does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as those described below as excluded from the definition of a U.S. Holder. In addition, this discussion does not cover any state, local or foreign tax consequences, (see Item 10E "Taxation Material Canadian Federal Income Tax Consequences for United States Residents" above). Accordingly, holders and prospective holders of common shares of Rockwell are urged to consult their own tax advisors about the specific federal, state, local, and foreign tax consequences to them of purchasing, owning and disposing of common shares of Rockwell, based upon their individual circumstances.
The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time and which are subject to differing interpretations. This discussion does not consider the potential effects, both adverse and beneficial, of any proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.
As used herein, a "U.S. Holder" means a holder of common shares of Rockwell who is a citizen or individual resident of the United States, a corporation or partnership created or organized in or under the laws of the United States or of any political subdivision thereof, an entity created or organized in or under the laws of the United States or of any political subdivision thereof which has elected to be treated as a corporation for United States federal income tax purposes (under Treasury Regulation Section 301.7701 -3), an estate whose income is taxable in the United States irrespective of source or a trust subject to the primary supervision of a court within the United States and control of a United States fiduciary as described in Section 7701(a)(30) of the Code. This summary does not address the tax consequences to, and U.S. Holder does not include, persons subject to specific provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, individual retirement accounts and other tax-deferred accounts, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals, persons or entities that have a "functional currency" other than the U.S. dollar, shareholders subject to the alternative minimum tax, shareholders who hold common shares as part of a straddle, hedging or conversion transaction, and shareholders who acquired their common shares through the exercise of employee stock options or otherwise as compensation for services. This summary is limited to U.S. Holders who own common shares as capital assets and who own (directly and indirectly, pursuant to applicable rules of constructive ownership) no more than 5% of the value of the total outstanding stock of Rockwell. This summary does not address the consequences to a person or entity holding an interest in a shareholder or the consequences to a person of the ownership, exercise or disposition of any options, warrants or other rights to acquire common shares. In addition, this summary does not address special rules applicable to United States persons (as defined in Section 7701(a)(30) of the Code) holding common shares through a foreign partnership or to foreign persons holding common shares through a domestic partnership.
Distribution on Common Shares of Rockwell
To the extent that a distribution paid to a U.S. holder on its common stock is not an excess distribution and is not a non-taxable distribution paid from earnings and profits previously included in income by a U.S. holder that has made a QEF election, the gross amount of such distribution (including any amount deducted in respect of withholding taxes) will generally be subject to U.S. federal income tax as foreign source ordinary dividend income to the extent such a distribution is paid out of the Company's current or accumulated earnings and profits. Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holder's federal income tax liability or, alternatively, may be deducted in computing the U.S. Holder's federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below). To the extent that distributions exceed current or accumulated earnings and profits of Rockwell, they will be treated first as a return of capital up to the U.S. Holder's adjusted basis in the Common Shares and thereafter as gain from the sale or exchange of property. Preferential tax rates for long-term capital gains are applicable to a U.S. Holder which is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a U.S. Holder which is a corporation.
In the case of foreign currency received as a dividend that is not converted by the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Generally any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including the exchange for U.S. dollars, will be ordinary income or loss. However, an individual whose realized gain does not exceed $200 will not recognize that gain, provided that there are no expenses associated with the transaction that meet the requirements for deductibility as a trade or business expense (other than travel expenses in connection with a business trip) or as an expense for the production of income.
Dividends paid on the common shares of Rockwell generally will not be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder which is a corporation and which owns shares representing at least 10% of the voting power and value of Rockwell may, under certain circumstances, be entitled to a 70% (or 80% if the U.S. Holder owns shares representing at least 20% of the voting power and value of Rockwell) deduction of the United States source portion of dividends received from Rockwell (unless Rockwell qualifies as a "foreign personal holding company" or a "passive foreign investment company," as defined below). Rockwell does not anticipate that it will earn any United States income, however, and therefore does not anticipate that any U.S. Holder will be eligible for the dividends received deduction.
Under current Treasury Regulations, dividends paid on Rockwell's common shares, if any, generally will not be subject to information reporting and generally will not be subject to U.S. backup withholding tax. However, dividends and the proceeds from a sale of Rockwell's common shares paid in the U.S. through a U.S. or U.S. related paying agent (including a broker) will be subject to U.S. information reporting requirements and may also be subject to the 28% U.S. backup withholding tax, unless the paying agent is furnished with a duly completed and signed Form W-9. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a refund or a credit against the U.S. Holder's U.S. federal income tax liability, provided the required information is furnished to the IRS.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of common shares of Rockwell may be entitled, at the option of the U.S. Holder, to either receive a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and generally applies to all foreign taxes paid by (or withheld from) the U.S. Holder during that year. There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder's United States income tax liability that the U.S. Holder's foreign source income bears to his or its worldwide taxable income. In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. In addition, this limitation is calculated separately with respect to specific classes of income such as "passive income," "high withholding tax interest," "financial services income," "shipping income," and certain other classifications of income. Dividends distributed by Rockwell will generally constitute "passive income" or, in the case of certain U.S. Holders, "financial services income" for these purposes. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific, and U.S. Holders of common shares of Rockwell should consult their own tax advisors regarding their individual circumstances.
Disposition of Common Shares of Rockwell
In general, U.S. Holders will recognize gain or loss upon the sale of common shares of Rockwell equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholder's tax basis in the common shares of Rockwell. Preferential tax rates apply to long-term capital gains of U.S. Holders that are individuals, estates or trusts. In general, gain or loss on the sale of common shares of Rockwell will be long-term capital gain or loss if the common shares are a capital asset in the hands of the U.S. Holder and are held for more than one year. Deductions for net capital losses are subject to significant limitations. For U.S. Holders that are not corporations, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For U.S. Holders that are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.
Set forth below are certain material exceptions to the above-described general rules describing the United States federal income tax consequences resulting from the holding and disposition of common shares:
Passive Foreign Investment Company
United States income tax law contains rules governing "passive foreign investment companies" ("PFIC") which can have significant tax effects on U.S. Holders of foreign corporations. These rules do not apply to non-U.S. Holders. Section 1297 of the Code defines a PFIC as a corporation that is not formed in the United States if, for any taxable year, either (i) 75% or more of its gross income is "passive income," which includes interest, dividends and certain rents and royalties or (ii) the average percentage, by fair market value (or, if the corporation is not publicly traded and either is a controlled foreign corporation or makes an election, by adjusted tax basis), of its assets that produce or are held for the production of "passive income" is 50% or more. In the event that Rockwell qualifies as a PFIC for the fiscal year ending February 28, 2009 as well as in future fiscal years each U.S. Holder of Rockwell is urged to consult a tax advisor with respect to how the PFIC rules affect such U.S. Holder's tax situation.
Each U.S. Holder who holds stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to United States federal income taxation under one of three alternative tax regimes at the election of such U.S. Holder. The following is a discussion of such alternative tax regimes applied to such U.S. Holders of Rockwell. In addition, special rules apply if a foreign corporation qualifies as both a PFIC and a "controlled foreign corporation" (as defined below) and a U.S. Holder owns, actually or constructively, 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation (See more detailed discussion at "Controlled Foreign Corporation" below).
A U.S. Holder who elects to treat Rockwell as a qualified electing fund ("QEF") will be subject, under Section 1293 of the Code, to current federal income tax for any taxable year to which the election applies in which Rockwell qualifies as a PFIC on his pro rata share of Rockwell's (i) "net capital gain" (the excess of net long-term capital gain over net short-term capital loss), which will be taxed as long-term capital gain, and (ii) "ordinary earnings" (the excess of earnings and profits over net capital gain), which will be taxed as ordinary income, in each case, for the shareholder's taxable year in which (or with which) Rockwell's taxable year ends, regardless of whether such amounts are actually distributed. A U.S. Holder's tax basis in the common shares will be increased by any such amount that is included in income but not distributed.
The procedure a U.S. Holder must comply with in making an effective QEF election, and the consequences of such election, will depend on whether the year of the election is the first year in the U.S. Holder's holding period in which Rockwell is a PFIC. If the U.S. Holder makes a QEF election in such first year, i.e., a "timely" QEF election, then the U.S. Holder may make the QEF election by simply filing the appropriate documents at the time the U.S. Holder files his tax return for such first year. If, however, Rockwell qualified as a PFIC in a prior year during the U.S. Holder's holding period, then, in order to avoid the Section 1291 rules discussed below, in addition to filing documents, the U.S. Holder must elect to recognize under the rules of Section 1291 of the Code (discussed herein), (i) any gain that he would otherwise recognize if the U.S. Holder sold his stock on the qualification date or (ii) if Rockwell is a controlled foreign corporation, the U.S. Holder's pro rata share of Rockwell's post-1986 earnings and profits as of the qualification date. The qualification date is the first day of Rockwell's first tax year in which Rockwell qualified as a QEF with respect to such U.S. Holder. For purposes of this discussion, a U.S. Holder who makes (i) a timely QEF election, or (ii) an untimely QEF election and either of the above-described gain-recognition elections under Section 1291 is referred to herein as an "Electing U.S. Holder." A U.S. Holder who holds common shares at any time during a year of Rockwell in which Rockwell is a PFIC and who is not an Electing U.S. Holder (including a U.S. Holder who makes an untimely QEF election and makes neither of the above-described gain-recognition elections) is referred to herein as a "Non-Electing U.S. Holder". An Electing U.S. Holder (i) generally treats any gain realized on the disposition of his Company common shares as capital gain; and (ii) may either avoid interest charges resulting from PFIC status altogether, or make an annual election, subject to certain limitations, to defer payment of current taxes on his share of Rockwell's annual realized net capital gain and ordinary earnings subject, however, to an interest charge. If the U.S. Holder is not a corporation, any interest charge imposed under the PFIC regime would be treated as "personal interest" that is not deductible.
In order for a U.S. Holder to make (or maintain) a valid QEF election, Rockwell must provide certain information regarding its net capital gains and ordinary earnings and permit its books and records to be examined to verify such information. Rockwell intends to make the necessary information available to U.S. Holders to permit them to make (and maintain) QEF elections with respect to Rockwell. Rockwell urges each U.S. Holder to consult a tax advisor regarding the availability of, and procedure for making, the QEF election.
A QEF election, once made with respect to Rockwell, applies to the tax year for which it was made and to all subsequent tax years, unless the election is invalidated or terminated, or the IRS consents to revocation of the election. If a QEF election is made by a U.S. Holder and Rockwell ceases to qualify as a PFIC in a subsequent tax year, the QEF election will remain in effect, although not applicable, during those tax years in which Rockwell does not qualify as a PFIC. Therefore, if Rockwell again qualifies as a PFIC in a subsequent tax year, the QEF election will be effective and the U.S. Holder will be subject to the rules described above for Electing U.S. Holders in such tax year and any subsequent tax years in which Rockwell qualifies as a PFIC. In addition, the QEF election remains in effect, although not applicable, with respect to an Electing U.S. Holder even after such U.S. Holder disposes of all of his or its direct and indirect interest in the shares of Rockwell. Therefore, if such U.S. Holder reacquires an interest in Rockwell, that U.S. Holder will be subject to the rules described above for Electing U.S. Holders for each tax year in which Rockwell qualifies as a PFIC.
In the case of a Non-Electing U.S. Holder, special taxation rules under Section 1291 of the Code will apply to (i) gains realized on the disposition (or deemed to be realized by reasons of a pledge) of his Rockwell common shares and (ii) certain "excess distributions," as defined in Section 1291(b), by Rockwell.
A Non-Electing U.S. Holder generally would be required to pro rate all gains realized on the disposition of his Rockwell common shares and all excess distributions on his Rockwell common shares over the entire holding period for the common shares. All gains or excess distributions allocated to prior years of the U.S. Holder (excluding any portion of the holder's period prior to the first day of the first year of Rockwell (i) which began after December 31, 1986, and (ii) for which Rockwell was a PFIC) would be taxed at the highest tax rate for each such prior year applicable to ordinary income. The Non-Electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year. A Non-Electing U.S. Holder that is not a corporation must treat this interest charge as "personal interest" which, as discussed above, is wholly non-deductible. The balance, if any, of the gain or the excess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with respect to such balance. In certain circumstances, the sum of the tax and the PFIC interest charge may exceed the amount of the excess distribution received, or the amount of proceeds of disposition realized, by the U.S. Holder.
If Rockwell is a PFIC for any taxable year during which a Non-Electing U.S. Holder holds Rockwell common shares, then Rockwell will continue to be treated as a PFIC with respect to such Rockwell common shares, even if it is no longer definitionally a PFIC. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules discussed above for Non-Electing U.S. Holders) as if such Rockwell common shares had been sold on the last day of the last taxable year for which it was a PFIC.
Effective for tax years of U.S. Holders beginning after December 31, 1997, U.S. Holders who hold (actually or constructively) marketable stock of a foreign corporation that qualifies as a PFIC may elect to mark such stock to the market annually (a "mark-to-market election"). If such an election is made, such U.S. Holder will generally not be subject to the special taxation rules of Section 1291 discussed above. However, if the mark-to-market election is made by a Non-Electing U.S. Holder after the beginning of the holding period for the PFIC stock, then the Section 1291 rules will apply to certain dispositions of, distributions on and other amounts taxable with respect to Rockwell common shares. A U.S. Holder who makes the mark-to-market election will include in income for each taxable year for which the election is in effect an amount equal to the excess, if any, of the fair market value of the common shares of Rockwell as of the close of such tax year over such U.S. Holder's adjusted basis in such common shares. In addition, the U.S. Holder is allowed a deduction for the lesser of (i) the excess, if any, of such U.S. Holder's adjusted tax basis in the common shares over the fair market value of such shares as of the close of the tax year, or (ii) the excess, if any, of (A) the mark-to-market gains for the common shares in Rockwell included by such U.S. Holder for prior tax years, including any amount which would have been treated as a mark-to-market gain for any prior tax year but for the Section 1291 rules discussed above with respect to Non-Electing U.S. Holders, over (B) the mark-to-market losses for shares that were allowed as deductions for prior tax years. A U.S. Holder's adjusted tax basis in the common shares of Rockwell will be adjusted to reflect the amount included in or deducted from income as a result of a mark-to-market election. A mark-to-market election applies to the taxable year in which the election is made and to each subsequent taxable year, unless Rockwell common shares cease to be marketable, as specifically defined, or the IRS consents to revocation of the election. Because the IRS has not established procedures for making a mark-to-market election, U.S. Holders should consult their tax advisors regarding the manner of making such an election. No view is expressed regarding whether common shares of Rockwell are marketable for these purposes or whether the election will be available.
Under Section 1291(f) of the Code, the IRS has issued Proposed Treasury Regulations that, subject to certain exceptions, would treat as taxable certain transfers of PFIC stock by Non-Electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. Generally, in such cases the basis of Rockwell common shares in the hands of the transferee and the basis of any property received in the exchange for those common shares would be increased by the amount of gain recognized. Under the Proposed Treasury Regulations, an Electing U.S. Holder would not be taxed on certain transfers of PFIC stock, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death. The transferee's basis in this case will depend on the manner of the transfer. In the case of a transfer by an Electing U.S. Holder upon death, for example, the transferee's basis is generally equal to the fair market value of the Electing U.S. Holder's common shares as of the date of death under Section 1014 of the Code. The specific tax effect to the U.S. Holder and the transferee may vary based on the manner in which the common shares are transferred. Each U.S. Holder of Rockwell is urged to consult a tax advisor with respect to how the PFIC rules affect his or its tax situation.
Whether or not a U.S. Holder makes a timely QEF election with respect to common shares of Rockwell, certain adverse rules may apply in the event that both Rockwell and any foreign corporation in which Rockwell directly or indirectly holds shares is a PFIC (a "lower-tier PFIC"). Pursuant to certain Proposed Treasury Regulations, a U.S. Holder would be treated as owning his or its proportionate amount of any lower-tier PFIC shares, and generally would be subject to the PFIC rules with respect to such indirectly-held PFIC shares unless such U.S. Holder makes a timely QEF election with respect thereto. Rockwell intends to make the necessary information available to U.S. Holders to permit them to make (and maintain) QEF elections with respect to each subsidiary of Rockwell that is a PFIC.
Under the Proposed Treasury Regulations, a U.S. Holder who does not make a timely QEF election with respect to a lower-tier PFIC generally would be subject to tax (and the PFIC interest charge) on (i) any excess distribution deemed to have been received with respect to his or its lower-tier PFIC shares and (ii) any gain deemed to arise from a so-called "indirect disposition" of such shares. For this purpose, an indirect disposition of lower-tier PFIC shares would generally include (i) a disposition by Rockwell (or an intermediate entity) of lower-tier PFIC shares, and (ii) any other transaction resulting in a diminution of the U.S. Holder's proportionate ownership of the lower-tier PFIC, including an issuance of additional common shares by Rockwell (or an intermediate entity). Accordingly, each prospective U.S. Holder should be aware that he or it could be subject to tax even if such U.S. Holder receives no distributions from Rockwell and does not dispose of its common shares. Rockwell strongly urges each prospective U.S. Holder to consult a tax advisor with respect to the adverse rules applicable, under the Proposed Treasury Regulations, to U.S. Holders of lower-tier PFIC shares.
Certain special, generally adverse, rules will apply with respect to Rockwell common shares while Rockwell is a PFIC unless the U.S. Holder makes a timely QEF election. For example under Section 1298(b)(6) of the Code, a U.S. Holder who uses PFIC stock as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such shares.
Controlled Foreign Corporation
If more than 50% of the total combined voting power of all classes of shares entitled to vote or the total value of the shares of Rockwell is owned, actually or constructively, by citizens or residents of the United States, United States domestic partnerships or corporation, or estates or trusts other than foreign estates or trusts (as defined by Code Section 7701(a)(31)), each of which own, actually or constructively, 10% or more of the total combined voting power of all classes of shares entitled to vote of Rockwell ("United States Shareholder"), Rockwell could be treated as a controlled foreign corporation ("CFC") under Subpart F of the Code. This classification would effect many complex results, one of which is the inclusion of certain income of a CFC which is subject to current U.S. tax. The United States generally taxes United States Shareholders of a CFC currently on their pro rata shares of the Subpart F income of the CFC. Such United States Shareholders are generally treated as having received a current distribution out of the CFC's Subpart F income and are also subject to current U.S. tax on their pro rata shares of increases in the CFC's earnings invested in U.S. property. The foreign tax credit described above may reduce the U.S. tax on these amounts. In addition, under Section 1248 of the Code, gain from the sale or exchange of shares by a U.S. Holder of common shares of Rockwell which is or was a United States Shareholder at any time during the five-year period ending on the date of the sale or exchange is treated as ordinary income to the extent of earnings and profits of Rockwell attributable to the shares sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign corporation generally will not be treated as a PFIC with respect to United States Shareholders of the CFC. This rule generally will be effective for taxable years of United States Shareholders beginning after 1997 and for taxable years of foreign corporations ending with or within such taxable years of United States Shareholders. Special rules apply to United States Shareholders who are subject to the special taxation rules under Section 1291 discussed above with respect to a PFIC. Because of the complexity of Subpart F, a more detailed review of these rules is outside of the scope of this discussion. Rockwell does not believe that it currently qualifies as a CFC. However, there can be no assurance that Rockwell will not be considered a CFC for the current or any future taxable year.
F. Dividends and Paying Agents
G. Statement by Experts
H. Documents on Display
Exhibits attached to this Form 20-F are also available for viewing at the offices of Rockwell, Suite 1020 800 West Pender Street, Vancouver, British Columbia V6C 2V6 or on request of Rockwell at 604-684-6365. Copies of Rockwell's financial statements and other continuous disclosure documents required under the British Columbia Securities Act are available for viewing on the internet at www.sedar.com.
I. Subsidiary Information
The corporate structure is presented in Item 4.C of this Form 20-F.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(a) Transaction Risk and Currency Risk Management
The Company's operations do not employ financial instruments or derivatives that are market sensitive and the Company does not have financial market risks.
(b) Exchange Rate Sensitivity
In the normal course of business for its diamond operations, the Company enters into transactions for the purchase of supplies and services denominated in South African rand. As a result, the Company is subject to foreign exchange risk from fluctuations in foreign exchange rates. The Company has not entered into any derivative or other financial instruments to mitigate this foreign exchange risk.
(c) Interest Rate Risk and Equity Price Risk
The Company is equity financed and does not have any debt which would be subject to interest rate change risks.
(d) Commodity Price Risk
While the value of the Company's mineral properties can always be said to relate to the price of the commodity and the outlook for same, the Company does not have any hedging or other commodity based risks respecting its operations.
(e) Exchange Controls
The Company operates in South Africa, and like other foreign entities operating there, is subject to currency exchange controls administered by the South African Reserve Bank, the country's central bank. A significant portion of the Company's funding structure for its South African operations consists of advancing loans to its subsidiaries incorporated in South Africa. The Company's ability to repatriate such funds once those subsidiaries are able to repay the loans, or to repatriate other funds such as operating profits should any develop, may be adversely affected by such exchange controls.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer evaluated our Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 20-F. Based on this evaluation, these officers concluded that as of the end of the period covered by this Annual Report on Form 20-F, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
These disclosure controls and procedures include controls and procedures designed to ensure that such information is accumulated and communicated to our companys management, including our companys principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting as identified below under the heading Managements Report on Internal Control Over Financial Reporting.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected.
B. Managements Report on Internal Control Over Financial Reporting
Our Companys management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our company. Our companys internal control over financial reporting is designed to provide reasonable assurance, not absolute assurance, regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Canada.
Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our companys assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in Canada, and that our companys receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the design and operation of our internal control over financial reporting as of February 28, 2009 based on the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, our management concluded our internal control over financial reporting was not effective as at February 28, 2009 due to resulting material weaknesses from the aggregation of the following significant deficiencies: (i) insufficient supervision and review by key accounting personnel over routine, non-routine and complex accounting transactions; (ii) inconsistent application of documented financial reporting procedures by accounting personnel; and (iii) ineffective review of certain accounting transactions by accounting personnel.
In order to remediate the material weaknesses, the Companys management continues to enhance the effectiveness of internal controls related to its financial reporting process, including improvements to remediate the internal control deficiencies that existed as at February 28, 2009. Management has the following remediation plans in progress: (i) enhance controls around the timing and level of review of accounting schedules and calculations that support significant financial statement accounts; (ii) reinforce to accounting personnel the importance of consistent application of accounting procedures; and (iii) provide appropriate training to accounting personnel regarding the Companys period end financial reporting process and procedures.
These programs, as enhanced, are designed to reduce, although they may not eliminate, the risk of a material misstatement to a reasonable level. The remediation efforts set out above are largely dependent upon our Company securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.
Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
C. Changes in Internal Control Over Financial Reporting
There were changes in internal control over financial reporting in the year ended February 28, 2009 that have materially affected or are reasonably likely to materially affect internal control over financial reporting. However, as a result of the evaluation of our internal control over financial reporting as of February 28, 2009, conducted by our Chief Executive Officer and Chief Financial Officer, we expect to continue making such changes in response to the remediation plan.
ITEM 16. AUDIT COMMITTEE, CODE OF ETHICS, ACCOUNTANT FEES AND EXEMPTIONS
A. Audit Committee Financial Expert
A member of the audit committee is independent if the member has no direct or indirect material relationship with the Company. A material relationship means a relationship which could, in the view of the Companys Board of Directors, reasonably interfere with the exercise of a members independent judgment.
A member of the audit committee is considered financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company.
B. Code of Ethics
Rockwell has adopted a code of ethics that applies to Rockwell's chief executive officer, the chief financial officer, and other members of senior management, which can be viewed at the Companys website www.rockwelldiamonds.com.
C. Principal Accountant Fees and Services
The following table discloses the aggregate fees billed for each of the last two fiscal years for professional services rendered by the Company's audit firm for various services.
Management of the Company requests approval from the audit committee for all audit and non-audit services to be provided by the Company's auditors. The audit committee pre-approves all such services with set maximum dollar amounts for each itemized service. During such deliberations, the audit committee assesses, among other factors, whether the services requested would be considered "prohibited services" as contemplated by the US Securities and Exchange Commission, and whether the services requested and the fees related to such services could impair the independence of the auditors.
D. Exemptions from Listing Standards for Audit Committees
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
F. Change in Registrant's Certifying Accountant
On December 16, 2008 the Board of Rockwell Diamonds Inc. resolved:
In accordance with National Instrument 51 - 102 ("NI 51 - 102"):
G. Corporate Governance
H. Exemptions from Listing Standards for Audit Committees
I. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ITEM 17. FINANCIAL STATEMENTS
The following attached financial statements are incorporated herein:
ITEM 18. FINANCIAL STATEMENTS
Not applicable. See Item 17.
ITEM 19. EXHIBITS
The following Exhibits have been filed with the 40F in 2008:
The following Exhibits are filed with the Companys Annual Report on Form 20-F in the current year:
The Registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
ROCKWELL DIAMONDS INC.
Per:/s/ John Bristow
DR JOHN BRISTOW
DATED: July 6, 2010