TIDMECX
RNS Number : 7913M
EastCoal Inc
29 August 2013
NEWS RELEASE - August 29, 2013
EASTCOAL ANNOUNCES FISCAL SECOND QUARTER 2013 RESULTS
EastCoal Inc. (TSX-V: ECX, AIM: ECX) ("EastCoal" or the
"Company") announces its unaudited interim condensed consolidated
financial statements for the three and six months ended June 30,
2013. These are provided in two sections below:
1. Management Discussion and Analysis of East Coal; and
2. Unaudited interim condensed consolidated financial statements
for the three and six months ended June 30, 2013.
A copy of the above can be found on the Company's website:
www.eastcoal.ca
Contacts:
EastCoal Inc.
Abraham Jonker, President +1 (604) 681-8069
Cenkos Securities plc
Ken Fleming/Alan Stewart/Derrick Lee +44 (0) 131 220 6939
Tavistock Communications
Jos Simson/Emily Fenton +44 (0) 207 920 3150
About EastCoal Inc.
Neither the TSX Venture Exchange nor its Regulation Services
Provider (as that term is defined in the policies of the TSX
Venture Exchange) accepts responsibility for the adequacy or
accuracy of this release.
This press release contains projections and forward-looking
information that involve various risks and uncertainties regarding
future events. Such forward-looking information can include without
limitation statements based on current expectations involving a
number of risks and uncertainties and are not guarantees of future
performance. There are numerous risks and uncertainties that could
cause actual results to differ materially from those expressed in
the forward looking information. These and all subsequent written
and oral forward-looking information are based on estimates and
opinions on the dates they are made and are expressly qualified in
their entirety by this notice. Except as required by law, the
Company assumes no obligation to update forward-looking information
should circumstances or management's estimates or opinions
change.
Management Discussion and Analysis
For the Three and Six Months Ended June 30, 2013
This Management Discussion and Analysis ("MD&A") of EastCoal
Inc. (the "Company" or "EastCoal") provides analysis of the
Company's financial results for the three and six months ended June
30, 2013 and should be read in conjunction with the accompanying
unaudited interim condensed consolidated financial statements and
notes thereto for the three and six months ended June 30, 2013
("Financial Statements") and the Company's Annual Information Form
("AIF") all of which are available on SEDAR at www.sedar.com. The
MD&A is current as at August 29, 2013, the date of
preparation.
The June 30, 2013 financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") applicable to the preparation of interim financial
statements. All amounts are expressed in Canadian dollars, unless
otherwise stated.
Certain statements made may constitute forward-looking
statements. Such statements involve a number of known and unknown
risks, uncertainties and other factors. Actual results, performance
and achievements may be materially different from those expressed
or implied by these forward-looking statements.
1 Highlights
-- Loss of $1,233,134 for continued operations during the three
months ended June 30, 2013 (2012: $101,466). Loss from discontinued
operations during the same period of $18,365,659 mainly resulting
from further impairment of and accounting adjustments for the
Menzhinsky operation. These losses do not have any cash impact on
the Company.
-- Loss per share of $0.02 for the three month period ended June
30, 2013 (2012: $0.00), excluding losses from discontinued
operations.
-- The insolvency application process for Inter-Invest LLC
("Inter-Invest") is ongoing and it is expected that Inter-Invest
will formally enter liquidation in September 2013. Upon entering
liquidation, it is expected that the liabilities of Inter-Invest
included in the consolidated accounts totaling $18,774,000 will no
longer be recognized in the Company's financial statements
resulting in a one-off gain for accounting purposes equal to the
amount of these consolidated liabilities.
-- On June 7, 2013 the Company completed a private placement of
385,000,000 shares on a pre-consolidation basis for gross proceeds
of $7,700,000;
-- Production at the Company's Verticalnaya North Project
("VNP") commenced in late July 2013. The Company is now planning to
ramp up production to an initial 4,000 tonnes per month and then to
11,000 tonnes per month in Q4 2013 by applying conventional mining
methods and locally manufactured equipment. The delay in ramp up to
the 11,000 tonne per month level is due to the employment of mining
staff taking longer than expected but this process is now well
underway;
-- The Company is in the process of preparing an updated
technical report in compliance with the requirements of National
Instrument 43-101 ("NI43-101") for its Verticalnaya property, which
it expects to file shortly. Subject to the filing of the updated
43-101, the Company will proceed with its rights offering to
existing shareholders, though there can be no certainty on the
outcome of the rights offer. If unsuccessful the Company will have
to pursue alternative sources of funding; and;
-- On August 8, 2013 the Company consolidated its shares on a
ratio of ten (10) pre-consolidation common shares to one (1)
post-consolidation common share, consolidating the Company's
728,048,493 then issued and outstanding common shares to 72,804,849
common shares following the consolidation (the
"Consolidation").
2 Business Overview
EastCoal Inc. is quoted on the TSX Venture Exchange ("TSX-V" or
the "Exchange") and traded on AIM under the symbol "ECX". The
Company has one major asset, the Verticalnaya Mining Complex
("Verticalnaya") in South Eastern Ukraine. Verticalnaya comprises
two operations; the existing H8 Deep Mine ("Verticalnaya Mine") and
the Verticalnaya North Project ("VNP"), a newly developed incline
mine just north of the Verticalnaya Mine. In October 2010,
following a period of planning, permitting, and detailed
improvements, the Company commenced construction of the VNP as a
source of early coal production. To date, 2.7 kilometers of drift
development has been completed at VNP. These drifts access the
shallower H(11) and H(11) (B) coal seams.
Production from VNP commenced in July, 2013. Target production
from the both the Verticalnaya Mine and the VNP is circa 2.5
million tonnes per annum ("Mtpa") in aggregate of high quality
anthracite for domestic and export markets.
In 2011, the Company, after commencing to de-water the lower
levels of the Verticalnaya Mine, began rehabilitating previously
flooded roadways. The roadways are generally in good condition,
requiring only minor repair in some sections. As the water level is
lowered, the Company will re-establish a ventilation circuit and
repair the current conveyor route that will eventually transport
coal by high-speed conveyor from the deep H(8) seam to surface.
From the outset, the Company has required the introduction and
maintenance of safety procedures in line with best global industry
practice. International safety consultants have visited Ukraine
operations and their recommendations have been and are being
implemented. Safety standards are being received favorably by the
workforce. Verticalnaya Mine and VNP are categorized as non-gassy,
with low explosive risk.
As previously disclosed, on May 22, 2013 the Board resolved to
place Inter-Invest LLC ("Inter-Invest"), the wholly owned
subsidiary that owns the Menzhinsky operations into liquidation.
The insolvency application process is ongoing and it is expected
that Inter-Invest will formally enter liquidation in September
2013.
2.1 The vision
The Company's vision is to become a leading producer of high
quality coal in Ukraine.
The Company, deploying a strong and experienced team to develop
value from Verticalnaya, is the leader of western investment into
the Donbass coal basin - an area which has been identified as
having tremendous potential.
2.2 Verticalnaya
2.2.1 Introduction
Verticalnaya comprises two operations, the Verticalnaya Mine
accessing the lower level H(8) seam and VNP, an incline mine in
development accessing the upper level H(11) and H(11B) seams.
At VNP, the Company has completed the portals and in excess of
2,700 meters of drift and roadway development and commenced the
drivage of the two surface drifts to access the H(11) and H(11) (B)
seams where first coal production commenced in July 2013.
The Company is in the process of preparing an updated technical
report in compliance with the requirements of National Instrument
43-101 ("NI43-101") for its Verticalnaya property (the "Updated
Report"). This report will be made available on SEDAR at
www.sedar.com and the Company's website at www.eastcoal.ca in due
course.
The Company filed the "Amended Pre-Feasibility Study Report on
the Verticalnaya Mine, Ukraine" by IMC Group Consulting Ltd.
("IMC"), dated June 2012 (the "Previous Report") on July 9, 2012.
As part of the Company's admission to trading on the AIM market of
the London Stock Exchange plc and in accordance with the AIM rules,
the Company filed a Competent Persons Report (the "CPR"). The CPR
discloses a 26% increase (from the Previous Report) in
JORC-compliant total resources (inclusive of reserves), and an
amended economic analysis, with a downgrade of some reserves from
proved to probable class. The financial evaluation included inter
alia a lower assumed sales price for coal, resulting in a reduction
in net present value.
Since the Company disclosed amended estimates and analysis in
the CPR and in investor materials, for NI43-101 purposes the
Previous Report is no longer current and the aggregate changes are
material changes in relation to the Company which have triggered a
requirement to file an updated technical report in compliance with
the requirements of NI43-101.
The Company has retained IMC who are in the process of preparing
and filing the Updated Report which should be available in due
course. Because of the material changes in relation to the Company
detailed in the CPR which have required an update to the Previous
Report, investors and shareholders should not place undue reliance
on the Previous Report.
Upon publication of the Updated Report, the Company will re-file
this MD&A, the MD&A for the three months ended June 30,
2013 and also re-file its Annual Information Form for the year
ended December 31, 2012 on SEDAR to reflect the changes to the
Company's technical disclosure set out in the Updated Report.
2.2.2 Location
Verticalnaya is located in the Donbass region. A number of
settlements lie in the vicinity including the towns of Lunacharsk,
Leninskiy, Volodarsk, Ustinovka and the villages of Malomedvezhje
and Fedorovka; the latter is located only 1.5 kilometers from the
mine.
EastCoal has been issued a mining license which allows the
Company to extract coal from seams H(11) , H(11) (B) , H(10) (B) ,
H(8) and H(8) (B) within the license area. This license is valid
for 20 years from the date of issue and expires on July 19,
2027.
EastCoal leases a land area totaling 23.73 Ha on which the main
mine and process facilities, rail and road infrastructure and waste
storage areas are located. The site leased for the VNP mine access
and surface facilities occupies a slightly elevated position
approximately 1.5 kilometers north-west of the main Verticalnaya
Mine site.
2.2.3 Infrastructure
The shaft mine industrial surface covers some 10.4 Ha including
3.0 Ha of approach roads. Located in a rural area it has electrical
power supply, mains water, mains sewage, and good access roads
already established.
The VNP mine and surface facilities are easily accessible by
road from the main Verticalnaya site and located nearby is a rail
line with facilities for wagon loading. A new 6 kV power supply has
been installed from the main Verticalnaya mine surface sub-station
to the VNP site.
The Verticalnaya Mine has two shafts. The materials shaft was
installed and has been operational for the transportation of men
and material since 1975. The sinking of the second shaft was
completed just prior to the mine closure in 1998 and was not fully
equipped or commissioned.
2.2.4 Mine History
Mining operations began initially during 1912 when coal was
accessed from its outcrop point on the surface via inclined drifts
locally known as "number 10 mine". In 1975, mainly for ventilation
purposes, a vertical shaft was sunk down to the then lower workings
at the -600 meters horizon, approximately 845 meters below surface.
This shaft was then used for the transportation of men and
materials. Also installed within the same shaft is a second winding
facility designed to wind out waste rock from development
drivage.
Several phases of exploration drilling have been completed by
the ministry since 1930, the most extensive phase being during the
1970s when over 200 cored boreholes were drilled in the area of the
Verticalnaya and adjacent mines.
As the mine working progressed even deeper to -1,000 meters
level, approximately 1,245 meters below surface, the government
provided capital investment for the sinking of a second shaft for
improved ventilation and also to be utilized for the winding of
material (Skip shaft). The main objective of the new shaft was to
replace the long string of conveyor belts installed along the
length of the existing inclined drifts.
In 1998, due to a lack of the investment required to complete
the new infrastructure and maintain the mine's equipment, the
managers of the Verticalnaya mine were unable to achieve the mine's
coal output target. The Verticalnaya mine was considered
unprofitable and closed and passed to the State Enterprise
Ukruglerestructurizatsiya ("UDKR"). UDKR is responsible for the
liquidation of closed mines and the management of those mines on a
care and maintenance basis to enable them to act as water pumping
stations to protect adjacent operating mines from increased water
inflows from the closed mines.
EastCoal has leased the Verticalnaya mine until 26 May 2029 from
the State Property fund. The H(8) seam was mined until the closure
of the mine in 1998. No coal was previously mined from the H(11)
(B) and H(10) (B) seams.
The original mine site has two existing vertical shafts through
which mine water is currently being pumped in order to maintain the
mine water at its current level and to protect the mine entry
workings from the flooded workings below. Access to H(8) seam will
eventually be gained when the water level is lowered by increased
pumping.
The second site, known as the Verticalnaya North Project (VNP)
site, is being used to develop two surface drifts to access the H11
seam. The VNP site is approximately 1.5 km north of the main mine
site. This work commenced in 2010, the drifts have now accessed the
H11 seam and work has commenced on the development of the East 1
and West 1 coal faces.
First coal from VNP was produced from the East 1 block in late
July 2013, three weeks later than scheduled due to a delay in
obtaining certain regulatory approvals. Initial production will be
extracted using simple mining techniques and the coal produced will
be toll treated at a wash plant adjacent to the mine. The Company
is expected to ramp up to an initial 4,000 tonnes per month
increasing to 11,000 tonnes per month during Q4 2013 applying
conventional mining methods and locally manufactured equipment.
2.2.5 Menzhinsky
As previously disclosed, the Board of Directors resolved on 22
May 2013 to place Inter-Invest into liquidation. The insolvency
application process is ongoing and it is expected that Inter-Invest
will formally enter liquidation in September 2013. The Menzhinsky
cash generating unit was recorded as a discontinued operation in
the Company's unaudited interim condensed consolidated financial
statements for the three and six months ended June 30, 2013.
2.2.6 Results of Operations
For the three months For the six months
ended ended
--------------------- ------------------------------------------------ ------------------------------------------------
In thousands of June 30, June 30, June 30, June 30,
Canadian dollars 2013 2012 2013 2012
unless otherwise
noted
===================== ======================= ======================= ======================= =======================
Expenses
General and
administrative
expenses (1,207) (722) (2,777) (1,325)
Gain on
revaluation of
derivative
liability - 650 - 989
Gain on - - 2,376 -
settlement of
debt
Other gains and
losses - - - 16
Interest income - 8 9 25
Interest
expense (26) (37) (151) (71)
Loss for the period
from continuing
operations (1,233) (101) (543) (366)
Loss for the period
from discontinued
operations (18,366) (402) (37,111) (402)
Loss for the period
before
tax $ (19,599) $ (503) $ (37,654) $ (768)
===================== ======================= ======================= ======================= =======================
General and administrative expenses increased in the six months
ended June 30, 2013 over the same period in 2012 predominantly as a
result of the recording of various corporate and consulting costs
through the income statement, which were capitalized prior to the
acquisition of Menzhinsky in Q2 2012. In addition, legal and
consulting fees increased as a result of the dual quotation of the
Company on both the TSX-V and the AIM.
The loss for the period from discontinued operations relates to
the Company's wholly owned subsidiary, Inter-Invest, which owns the
Menzhinsky Mine. The recognition of the Menzhinsky cash generating
unit as a discontinued operation follows the resolution by the
Board of directions on May 22, 2013 to place Inter-Invest into
liquidation. The assets of Inter-Invest, excluding cash, have been
impaired to a value of nil to reflect the Board's view that the
Company may not be able to gain any value from the disposal of the
assets in liquidation. As at June 30, 2013 Inter-Invest was in the
process of being placed into liquidation. Upon entering
liquidation, it is expected that the consolidated liabilities of
Inter-Invest totaling $18,774,000 will no longer be recognized in
the Company's financial statements resulting in a one-off gain for
accounting purposes.
For the three months ended June 30, 2013 the Company earned $nil
of interest on its excess cash deposits compared to $7,550 for the
same period in the prior year.
For the three months ended June 30, 2013 the Company incurred
$25,792 of financing costs compared to $37,132 for the same period
in the prior year. The decrease in financing costs was due to a
reduction in the Company's convertible debt.
2.2.7 Development mine - Verticalnaya
The development of VNP continues as expected, although there
were delays in the development as a result of the working capital
challenges experienced during the quarter.
First coal production occurred in July 2013 and the Company's is
planning to ramp up production in Q3 and Q4 2013.
Development costs to date at Verticalnaya are as follows:
June 30, December
31,
2013 2012
Verticalnaya Coal Mine, Ukraine
Mineral property
Balance, beginning of period $ 16,417 $ 16,816
Mine license (9) (15)
Change due to foreign exchange rate fluctuations 979 (384)
--------------------------- --------------------------
Balance, end of period $ 17,387 $ 16,417
--------------------------- --------------------------
Deferred costs
Balance, beginning of period $ 31,579 $ 17,507
Lease and operating costs 4,117 13,307
Interest and accretion expense on convertible
debt 207 1,160
Change due to foreign exchange rate fluctuations 1,864 (395)
--------------------------- --------------------------
Balance, end of period $ 37,769 $ 31,579
============================================================ =========================== ==========================
Verticalnaya Coal Mine, Ukraine - Balance,
end of period $ 55,156 $ 47,996
============================================================ =========================== ==========================
3 Selected Annual Information
No cash dividends have been declared or paid since the date of
incorporation and the Company has no present intention of paying
dividends on its common shares. The Company anticipates that all
available funds will be invested to finance the growth of its
business.
Fiscal Year / $000's except 2012 2011 2010
per share amounts
---------------------------------- ---------- --------- ---------
Net Sales $ 3,988 Nil Nil
Comprehensive (loss) income $ (6,686) $ 1,370 $ 3,841
Basic and diluted income (loss)
per share $ (0.24) $ (0.10) $ (0.41)
Total Assets $ 93,322 $ 53,003 $ 31,088
Total Long-term liabilities $ 12,475 $ - $ 3,591
Cash dividends per share, common N/A N/A N/A
================================== ========== ========= =========
4 Summary of Quarterly Results
Selected financial information for each of the eight most
recently completed quarters are as follows:
$000's except per share 2013 2012 2011
-------------------------- --------- --------- -------------------------------------- ----------------
Amounts Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
-------------------------- --------- --------- -------- -------- -------- -------- -------- ------
Comprehensive (loss)
income (18,379) (16,361) (1,053) (5,469) 230 (404) (728) 2,643
Basic and diluted income
(loss) per share -
continuing operations ($0.03) $0.02 ($0.01) ($0.02) ($0.00) ($0.01) $(0.05) $0.08
Basic and diluted income
(loss) per share -
discontinued operations ($0.42) ($0.57) ($0.07) ($0.09) ($0.02) - - -
========================== ========= ========= ======== ======== ======== ======== ======== ======
On August 8, 2013 the Company consolidated its shares on a ratio
of ten (10) pre-consolidation common shares to one (1)
post-consolidation common share, consolidating the Company's
728,048,493 then issued and outstanding common shares to 72,804,849
common shares following the consolidation. The post-consolidation
number of shares has been retrospectively applied for the purpose
of calculating earnings per share.
5 Liquidity and Capital Resources
Production at Verticalnaya is forecast to ramp up over the
remainder of 2013 and 2014. Recovery of the carrying value of the
Verticalnaya assets depends on the attainment of profitable
production on time and within budget, its profitable disposition
and/or the introduction of a joint venture partner.
Due to operational failure and ongoing technical challenges the
Board of Directors resolved on May 22, 2013 to place Inter-Invest,
the wholly owned subsidiary that owns the Menzhinsky operations,
into liquidation.
The Company has experienced recurring operating losses and has
accumulated a deficit of $60,438,343 at June 30, 2013. For the six
month period ended June 30, 2013 the Company incurred a loss of
$37,654,402 and used cash in operating activities totaling
$6,426,616. The loss incurred includes losses relating to
discontinued operations of $37,111,000, of which $26,070,000
represents impairment of assets and a further $4,747,000 of loan
adjustments. The losses relating to impairment and loan adjustments
do not have a cash flow impact on the business. The Company had a
working capital deficit of $16,315,173 at June 30, 2013. The
working capital deficit includes liabilities of $18,773,534
relating to the discontinued operations. Upon entering liquidation,
it is expected that the liabilities of Inter-Invest will no longer
be recognized in the Company's financial statements. Working
capital is defined as current assets less current liabilities and
provides a measure of the Company's ability to settle liabilities
that are due within one year with assets that are also expected to
be converted into cash within one year.
The Company's continued operations are dependent upon its
ability to raise additional funding, the Verticalnaya mine being
able to increase production on budget and on time, and Inter-Invest
being successfully placed into liquidation. The Company is
currently in the process of putting together a rights offering to
existing shareholders, though there can be no certainty on the
outcome of the rights offer. The Company does not have any
financing facilities in place. Management has taken steps to
mitigate the liabilities relating to Inter-Invest and it is
expected that Inter-Invest will be placed into liquidation during
September 2013. Upon entering liquidation, it is expected that the
liabilities of Inter-Invest will no longer be recognized in the
Company's financial statements resulting in a one-off gain for
accounting purposes.
There are no assurances that the Company will be successful in
securing further equity financing as and when required. As a
result, there are material uncertainties that the entity will be
able to continue as a going concern, and realize its assets and
discharge its liabilities in the normal course of business. The
Financial Statements do not include adjustments to the amounts and
classifications of assets and liabilities that might be necessary
should the Company be unable to continue as a going concern. These
adjustments may be material.
The market capitalization of the Company on August 28, 2013 was
approximately $8.7 million (based on the closing price of the
Company's shares recorded on the TSX-V on that date), which is
significantly lower than the carrying value of the Verticalnaya
mine recorded on the Company's balance sheet at June 30, 2013.
Management believes that no impairment of the carrying value of the
Verticalnaya mine is necessary as internal valuations support the
recorded value.
Debt financing has not been used to fund the Company's property
acquisitions and development activities, apart from the convertible
debentures. The Company expects to make arrangements for debt
financing in future. The Company does not have "standby" credit
facilities, or off-balance sheet arrangements and it does not use
hedges or other financial derivatives.
At June 30, 2013, the Company held cash and cash equivalents of
$3,858,137 (2012 - $983,210); while short term investments in
Guaranteed Investment Certificates were $nil (2012 -
$10,500,000).
6 Off-Balance Sheet Arrangements
The Company does not utilize off-balance sheet arrangements.
7 Transactions with Related Parties
During the three and six months ended June 30, the Company paid
or accrued:
For the three months For the six months
ended ended
In thousands of June 30, June 30, June 30, June 30,
Canadian dollars 2013 2012 2013 2012
unless otherwise noted
Directors fees 25,000 25,000 50,000 50,000
Consulting fees to
directors
and officers -
expensed 8,826 15,255 127,351 57,315
Consulting fees to
directors
and officers -
capitalized - 122,133 - 140,175
Office rent paid or
accrued to
a company with a
director in
common 15,000 6,000 30,000 12,000
Office rent paid or
accrued to
a director - - - 2,550
======================= ======================= ======================= ======================= ==================
Included in accounts payable and accrued liabilities is a total
of $106,703 (December 31, 2012 - $151,224) due to related parties
for office costs, directors' fees, and consulting fees and
expenses. The amounts due to related parties are unsecured,
non-interest bearing and have no specific terms of repayment.
On May 31, 2013 the Company entered into a short term loan
agreement with Salida Capital International Corp for $350,000 to
fund some immediate obligations at Verticalnaya pending completion
of the private placement. The loan was repaid in June 2013
following the private placement.
8 Significant Accounting Policies and Critical Accounting Estimates
The preparation of financial statements in conformity with IFRS
requires management to make estimates and assumptions which affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial
statements and revenues and expenses for the periods reported. The
Company's accounting policies are described in Note 3 to the
December 31, 2012 audited consolidated financial statements.
9 Forward Looking Statements
This MD&A contains certain forward--looking statements.
These statements relate to future events or future performance and
reflect management's expectations and assumptions regarding the
growth, results of operations, performance, prospects and
opportunities of the Company. When used in this MD&A, such
statements use words such as "may", "would", "could", "will",
"expect", "believe", "plan", "anticipate", "forecast", "estimate",
"predict", "potential", "budget", or the negative of these terms or
other similar expressions concerning matters that are not
historical fact. In particular, statements regarding the Company's
future operating plans including reactivation of the development
work on the ventilation and conveyor roadways and the expected
timing of commencement of commercial production at the Company's
Verticalnaya Mine, the expected average price of coal to be
received by the Company from any off--take arrangements, the
liquidation in Ukraine of Inter-Invest and the legal and financial
implications of the liquidation process to the Company, economic
performance and product development efforts are or involve
forward--looking statements. These statements reflect management's
expectations as of the date of such forward--looking statement
regarding the Company's future operational or financial performance
and should not be read as guarantees of future performance or
results. Forward--looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual
results or performance of the Company to be materially different
from any future results, performance or achievements expressed or
implied by the forward--looking statements, including, but not
limited to, the risk factors disclosed in the Company's AIF and in
certain documents incorporated by reference herein. Although the
Company has attempted to identify important factors that could
cause actual results, performance or achievements to differ
materially from those described in forward--looking statements,
there may be other factors that cause results, performance or
achievements not to be as anticipated, estimated or intended. There
can be no assurance that actual events, performance or results will
be consistent with these forward--looking statements and
accordingly readers should not place undue reliance on
forward--looking statements. The Company assumes no obligation to
update or revise forward--looking statements to reflect new events
or circumstances, except as required by law.
10 Outstanding Share data as at August 29, 2013:
a) Authorized and issued share capital:
Class Par Value Authorized Issued Number
Common No par value Unlimited 72,804,849
======== ============== ============ ==============
b) Summary of warrants outstanding:
Security Number Exercise Price Expiry Date
Warrants 400,000 7.00 May 31, 2014
Warrants 291,600 3.50 May 31, 2015
Warrants 4,860,000 5.50 May 31, 2015
5,551,600
========== ========== =============== =============
c) Summary of options outstanding:
Security Number Exercise Price Expiry Date
Options 197,500 3.00 September 15, 2014
Options 120,000 3.00 July 27, 2015
Options 75,000 7.00 February 4, 2016
Options 75,000 7.00 March 14, 2016
Options 75,000 7.00 July 6, 2016
Options 15,000 6.50 January 19, 2017
Options 250,000 4.10 May 31, 2017
807,500
========== ======== =============== ===================
11 Subsequent Events
11.1 Share consolidation
On August 8, 2013 the Company consolidated its shares on a ratio
of ten (10) pre-consolidation common shares to one (1)
post-consolidation common shares, consolidating the Company's
728,048,493 issued and outstanding common shares to 72,804,849
common shares following the consolidation.
The Company also consolidated its outstanding options and
warrants on a ratio of ten (10) to one (1), with the result that
each consolidated option and warrant will now entitle the holder to
acquire one common share in the capital of the Company at an
exercise price equal to ten (10) times its original exercise
price.
12 Internal Control and Disclosure Controls Over Financial
Reporting:
On November 23, 2007, the British Columbia Securities Commission
exempted Venture Issuers, such as the Company, from certifying
disclosure controls and procedures, as well as internal controls
over financial reporting as of December 31, 2007 and thereafter.
The Company is now required to file basic certificates. The Company
makes no assessment relating to establishment and maintenance of
disclosure controls and procedures as defined under National
Instrument 52-109 as at December 31, 2012.
13 Other Information:
For additional disclosures concerning the Company's general and
administrative expenses and mineral properties, please refer to the
audited consolidated annual financial statements for the year ended
December 31, 2012, which are available on the Company's website at
www.eastcoal.ca or on SEDAR at www.sedar.com.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
For the three and six months ended June 30, 2013
June 30, December
31,
2013 2012
--------------------------------------------- -------------------------- --------------------------
ASSETS
Current
Cash and cash equivalents $ 3,858 $ 4,773
Restricted cash 241 -
Short term investments - 5,000
Trade and other receivables 127 1,300
Inventory (Note 3) 498 1,769
Prepaid expenses 328 481
Assets of discontinued operations 20 -
(Note 6)
-------------------------- --------------------------
Total current assets 5,072 13,323
Non-current assets
Mineral properties (Note 4) 55,156 57,618
Non-current inventory (Note 3) - 4,992
Property, plant and equipment (Note
5) 6,180 12,115
Goodwill - 4,940
Intangibles 247 327
Reclamation bond 7 7
-------------------------- --------------------------
TOTAL ASSETS $ 66,662 $ 93,322
============================================= ========================== ==========================
LIABILITIES
Current
Trade and other payables $ 2,406 $ 8,211
Pension liabilities 7 619
Borrowings (Note 7) 200 5,298
Liabilities of discontinued operations 18,774 -
(Note 6)
21,387 14,128
Non-current liabilities
Asset retirement obligations 655 588
Borrowings (Note 7) 1,081 4,801
Deferred tax 3,081 4,114
Pension liabilities 311 2,972
TOTAL LIABILITIES 26,515 26,603
-------------------------- --------------------------
EQUITY
Share capital (Note 8) 89,191 81,626
Contributed surplus 9,968 9,364
Accumulated other comprehensive income
(loss) 1,426 (1,487)
Deficit (60,438) (22,784)
-------------------------- --------------------------
TOTAL EQUITY 40,147 66,719
-------------------------- --------------------------
TOTAL LIABILITIES AND EQUITY $ 66,662 $ 93,322
============================================= ========================== ==========================
Corporate information and going concern (Note 1)
On behalf of the Board:
(signed) John Byrne Director (signed) Abraham Jonker Director
------------------------- -----------------------
For the three months For the six months
ended ended
June 30, June 30, June 30, June 30,
2013 2012 2013 2012
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Expenses
General and
administrative
expenses (1,207) (722) (2,777) (1,325)
Gain on revaluation
of derivative
liability - 650 - 989
Gain on settlement of - - 2,376 -
debt
(Note 7)
Other gains and
losses (net) - - - 16
(1,207) (72) (401) (320)
---------------------- ---------------------- ---------------------- ----------------------
Interest income - 8 9 25
Finance expense (26) (37) (151) (71)
---------------------- ---------------------- ---------------------- ----------------------
Net interest
(expense) income (26) (29) (142) (46)
---------------------- ----------------------
Loss for the period
from continuing
operations (1,233) (101) (543) (366)
Discontinued
operations (Note
6)
Revenue 143 823 804 823
Cost of sales (2,803) (1,083) (5,768) (1,083)
Gross loss (2,660) (260) (4,964) (260)
---------------------- ---------------------- ---------------------- ----------------------
General and
administrative
expenses (1,124) (123) (1,413) (123)
Impairment (8,123) - (26,070) -
Loss on increase of
debt (4,747) - (4,747) -
Other gains and
losses (net) (1,037) 1 (1,037) 1
Net interest expense (52) (20) (110) (20)
---------------------- ---------------------- ---------------------- ----------------------
(15,083) (142) (33,377) (142)
---------------------- ---------------------- ---------------------- ----------------------
Income tax (expense)
recovery (623) - 1,230 -
Loss for the period
from discontinued
operations (Note 6) (18,366) (402) (37,111) (402)
Loss for the period $ (19,599) $ (503) $ (37,654) $ (768)
====================== ====================== ====================== ======================
Net loss per common
share (Note
12.1)
Basic and diluted
- continuing
operations ($0.03) ($0.00) ($0.01) ($0.02)
Basic and diluted
- discontinued
operations ($0.42) ($0.02) ($0.96) ($0.02)
====================== ====================== ====================== ====================== ======================
Weighted average
number of
common shares
outstanding -
basic and diluted 44,035,619 21,250,450 38,514,768 20,283,417
====================== ====================== ====================== ====================== ======================
For the three months For the six months
ended ended
June 30, June 30, June 30, June 30,
2013 2012 2013 2012
------------------------------------- ----------------- ------------------- ------------------ -------------------
Loss for the period $ (19,599) $ (503) $ (37,654) $ (768)
Other comprehensive income
(loss)
Items that will be reclassified
subsequently to profit and
loss
Cumulative translation
adjustment 1,220 733 2,913 593
Other comprehensive income
(loss) for the period 1,220 733 2,913 593
----------------- ------------------- ------------------ -------------------
Comprehensive income (loss)
for the period $ (18,379) $ 230 $ (34,741) $ (175)
===================================== ================= =================== ================== ===================
Accumulated
Number Share Contributed other comprehensive Total
of shares capital surplus income (loss) Deficit Equity
---------------- --------------------- --------------------- -------------------- --------------------- ----------- ---------
Balance -
January
1, 2012 195,164 $ 57,577 $ 2,792 $ (153) $ (17,432) $ 42,784
Net loss for
the period - - - - (768) (768)
Other
comprehensive
income - - - 593 - 593
--------------------- --------------------- -------------------- --------------------- ----------- ---------
- - - 593 (768) (175)
--------------------- --------------------- -------------------- --------------------- ----------- ---------
Private
placement 48,600 12,673 4,765 - - 17,438
Share issue
costs - (2,003) - - - (2,003)
Business
combination
Issue of
shares 4,000 1,440 - - - 1,440
Granting of
options - - 315 - - 315
Equity
component
of
convertible
debenture - - 908 - - 908
Employee share
options
granted - - 583 - - 583
Balance - June
30,
2012 247,764 $ 69,687 $ 9,364 $ 440 $ (18,200) $ 61,291
================ ===================== ===================== ==================== ===================== =========== =========
Balance -
January
1, 2013 325,569 $ 81,626 $ 9,364 $ (1,487) $ (22,784) $ 66,719
Net loss for
the period - - - - (37,654) (37,654)
Other
comprehensive
income - - - 2,913 - 2,913
--------------------- --------------------- -------------------- --------------------- ----------- ---------
- - - 2,913 (37,654) (34,741)
--------------------- --------------------- -------------------- --------------------- ----------- ---------
Issue of shares 402,479 8,762 - - - 8,762
Share issue
costs - (1,197) - - - (1,197)
Issue of
convertible
debt - - 604 - - 604
Balance - June
30,
2013 728,048 $ 89,191 $ 9,968 $ 1,426 $ (60,438) $ 40,147
================ ===================== ===================== ==================== ===================== =========== =========
On August 8, 2013 the Company consolidated its shares on a ratio
of ten (10) pre-consolidation common shares to one (1)
post-consolidation common shares, consolidating the Company's
728,048,493 issued and outstanding common shares to 72,804,849
common shares following the consolidation. These financial
statements reflect the pre-consolidated figures, however, the
post-consolidation number of shares has been retrospectively
applied for the purpose of calculating loss per share.
For the six months
ended
June 30, June 30,
2013 2012
------------------------------------------------------------- ------------------------ -------------------------
OPERATING ACTIVITIES
Loss for the period $ (37,654) $ (366)
Add items not affecting cash
Depletion, depreciation and amortisation 12 (1)
Share-based compensation - 583
Gain on revaluation of derivative liability - (989)
Gain on settlement of debt (2,376) -
Accretion expense 244 115
Unrealized foreign exchange (gains) losses 63 (22)
Operating cash flows from discontinued operations 30,903 (315)
------------------------ -------------------------
(8,808) (995)
Changes in non-cash working capital balances
related to operations
Trade and other receivables 212 391
Prepaid expenses 163 64
Inventories 175 257
Trade and other payables (2,222) (2,568)
Working capital balances related to discontinued
operations 4,053 374
------------------------ -------------------------
Cash used in operating activities (6,427) (2,477)
------------------------ -------------------------
INVESTING ACTIVITIES
Mineral properties (4,866) (6,470)
Property, plant and equipment (286) (1,819)
Intangibles - (83)
Business combination - (3,275)
Reclamation bonds - 2
Restricted cash (241) -
Short term investments 5,000 (2,500)
Investing cash flows from discontinued operations 674 (485)
------------------------ -------------------------
Cash generated by (used in) investing activities 281 (14,630)
------------------------ -------------------------
FINANCING ACTIVITIES
Proceeds from issuance of shares 6,503 15,435
Repayment of debt (693) -
Financing cash flows from discontinued operations (598) -
------------------------ -------------------------
Cash generated by financing activities Net
cash from financing activities 5,212 15,435
------------------------ -------------------------
Net increase (decrease) in cash for the period (934) (1,672)
Cash and cash equivalents, beginning of period 4,773 2,655
Exchange gains/(losses) on cash and cash equivalents 39 -
------------------------ -------------------------
Cash and cash equivalents, end of period -
continuing operations $ 3,858 $ 907
Cash and cash equivalents, end of period -
discontinued operations 20 76
============================================================= ======================== =========================
Supplemental cash flow information - Note 10
1 Corporate information and going concern
EastCoal Inc. (the "Company") was incorporated on December 15,
1986 under the laws of the Province of British Columbia, CANADA.
Its principal business activity is the acquisition and development
of mineral properties and its registered address is 20(th) floor,
250 Howe Street, Vancouver, British Columbia, CANADA, V6C 3R8 and
its head office is located at Suite 130, 889 Harbourside Drive,
North Vancouver, British Columbia, CANADA, V7P 3S1.
The Company is focused on the Verticalnaya Mine located in the
Donbass Region of Ukraine. The Verticalnaya Mine is an advanced
anthracite coal project in the construction phase. Recovery of the
carrying value of the Verticalnaya assets depends on the attainment
of profitable production on time and within budget, its profitable
disposition or the introduction of a joint venture partner. Due to
operational failure and ongoing technical challenges the Board of
Directors resolved on May 22, 2013 to place Inter-Invest LLC
("Inter-Invest"), the wholly owned subsidiary that owns the
Menzhinsky operations, into liquidation.
The Company has experienced recurring operating losses and has
accumulated a deficit of $60,438,343 at June 30, 2013. For the six
month period ended June 30, 2013 the Company incurred a loss of
$37,654,402 and used cash in operating activities totaling
$6,426,616. The loss incurred includes losses relating to
discontinued operations of $37,111,000, of which $26,070,000
represents impairment of assets and a further $4,747,000 of loan
adjustments. The losses relating to impairment and loan adjustments
do not have a cash flow impact on the business. The Company had
cash and cash equivalents of $3,858,137 and a working capital
deficit of $16,315,173 at June 30, 2013. The working capital
deficit includes liabilities of $18,773,534 relating to the
discontinued operations. Upon entering liquidation, it is expected
that the liabilities of Inter-Invest will no longer be recognized
in the Company's financial statements. Working capital is defined
as current assets less current liabilities and provides a measure
of the Company's ability to settle liabilities that are due within
one year with assets that are also expected to be converted into
cash within one year.
The Company's continued operations are dependent upon its
ability to raise additional funding, the Verticalnaya mine being
able to increase production on budget and on time, and Inter-Invest
being successfully placed into liquidation. The Company is
currently in the process of putting together a rights offering to
existing shareholders, though there can be no certainty on the
outcome of the rights offer. The Company does not have any
financing facilities in place. Management has taken steps to
mitigate the liabilities relating to Inter-Invest and it is
expected that Inter-Invest will be placed into liquidation during
September 2013. Upon entering liquidation, it is expected that the
liabilities of Inter-Invest will no longer be recognized in the
Company's financial statements resulting in a one-off gain for
accounting purposes.
There are no assurances that the Company will be successful in
securing further equity financing as and when required. As a
result, there are material uncertainties that the entity will be
able to continue as a going concern, and realize its assets and
discharge its liabilities in the normal course of business. These
consolidated financial statements do not include adjustments to the
amounts and classifications of assets and liabilities that might be
necessary should the Company be unable to continue as a going
concern. These adjustments may be material.
2 Basis of presentation
These interim condensed consolidated financial statements have
been prepared in accordance with IAS 34, Interim Financial
Reporting ("IAS 34") and follow the same accounting policies and
methods of application as contained in the annual financial
statements for the year ended December 31, 2012 with the exception
of those outlined below. Accordingly, they should be read in
conjunction with the Company's most recent annual financial
statements. These interim condensed consolidated financial
statements were approved by the Board of Directors on August 28,
2013.
2.1 New IFRS Pronouncements
The accounting policies adopted in the preparation of the
interim condensed consolidated financial statements are consistent
with those followed in the preparation of the Company's annual
consolidated financial statements for the year ended December 31,
2012, except for the adoption of new standards and interpretations
effective as of January 1, 2013.
IFRS 7, "Financial instruments: Disclosure" has been amended to
require additional disclosure on offsetting of financial assets and
financial liabilities.
IFRS 13, "Fair Value Measurement" sets out in a single IFRS a
framework for measuring fair value. IFRS 13 defines fair value as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. This definition of fair value
emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. In addition, IFRS 13 also requires
specific disclosures about fair value measurement.
Amendments to IAS 19, "Employee Benefits" outlines the
accounting requirements for employee benefits, including short-term
benefits (e.g. wages and salaries, annual leave), post-employment
benefits such as retirement benefits, other long-term benefits
(e.g. long service leave) and termination benefits.
There was no material impact on the consolidated financial
statements from the adoption of any of these accounting
pronouncements.
Several other new standards and amendments apply for the first
time in 2013. However, they do not impact the annual consolidated
financial statements of the Company or the interim condensed
consolidated financial statements of the Company.
2.2 Presentation of condensed consolidated interim statements
The presentation of the interim condensed consolidated
statements of financial position, the interim condensed
consolidated statements of loss and the interim condensed
consolidated statements of cash flows have changed from the year
ended December 31, 2012 as the Menzhinsky cash generating unit has
been reported as a discontinued operation following the resolution
by the Board of Directors on May 22, 2013 to place Inter-Invest,
the wholly owned subsidiary that owns the Menzhinsky operations,
into liquidation.
3 Inventory
June 30, December
2013 31, 2012
---------------------------------------- ---------------------------- ----------------------------
Consumables and spares $ 701 $ 856
Coal stockpile - 832
Coal inventory 20 81
Transferred to discontinued operations (223) -
(Note 6)
498 1,769
Non-current coal stockpile 6,168 4,992
Transferred to discontinued operations (6,168) -
(Note 6)
$ 498 $ 6,761
============================ ============================
4 Mineral properties
4.1 Verticalnaya Coal Mine, Ukraine
June 30, December
31,
2013 2012
------------------------------------------------------------ --------------------------- --------------------------
Verticalnaya Coal Mine, Ukraine
Mineral property
Balance, beginning of period $ 16,417 $ 16,816
Mine license (9) (15)
Change due to foreign exchange rate fluctuations 979 (384)
--------------------------- --------------------------
Balance, end of period $ 17,387 $ 16,417
--------------------------- --------------------------
Capitalized costs
Balance, beginning of period $ 31,579 $ 17,507
Lease and other costs 4,117 13,307
Interest and accretion expense on convertible
debt 209 1,160
Change due to foreign exchange rate fluctuations 1,864 (395)
--------------------------- --------------------------
Balance, end of period $ 37,769 $ 31,579
--------------------------- --------------------------
Verticalnaya Coal Mine, Ukraine - Balance,
end of period $ 55,156 $ 47,996
============================================================ =========================== ==========================
The Verticalnaya Coal Mine is an anthracite coal mine located on
the Eastern side of Ukraine. The Company acquired the rights to
Verticalnaya in 2009.
4.2 Menzhinsky Coal Mine, Ukraine
June 30, December
31,
2013 2012
---------------------------------------------------------- ---------------------------- ----------------------------
Menzhinsky Coal Mine, Ukraine
Mineral property
Balance, beginning of period $ 9,622 $ -
Acquisition through business combination - 9,953
Depletion (9) (31)
Change due to foreign exchange rate
fluctuations 568 (300)
Transferred to discontinued operations (Note (10,181) -
6)
========================================================== ============================ ============================
Menzhinsky Coal Mine, Ukraine - Balance,
end of period $ - $ 9,622
========================================================== ============================ ============================
5 Property, plant and equipment
Assets
Buildings Equipment Vehicles under construction Total
--------------- ---------------------- ----------------------- ----------------------- ----------------
Year ended December
31, 2012
At January 1, 2012 $ 1,132 $ 2,064 $ 256 $ 1,322 $ 4,774
Additions 99 $ 1,437 - 3,332 4,868
Business
combination 987 1,318 31 1,320 3,656
Commissioned - 3,746 - (3,746) -
Disposals - (3) - - (3)
Depreciation (118) (947) (39) - (1,104)
Change due to
foreign
exchange rate
fluctuations (43) (11) (4) (18) (76)
-------------------- --------------- ---------------------- ----------------------- ----------------------- ----------------
At December 31,
2012 $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
-------------------- --------------- ---------------------- ----------------------- ----------------------- ----------------
At December 31,
2012
Cost 2,616 9,470 487 2,210 14,783
Accumulated
depreciation (559) (1,866) (243) - (2,668)
-------------------- --------------- ---------------------- ----------------------- ----------------------- ----------------
Net book value $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
==================== =============== ====================== ======================= ======================= ================
Period ended June
30,
2013
At January 1, 2013 $ 2,057 $ 7,604 $ 244 $ 2,210 $ 12,115
Additions - 269 - 116 385
Commissioned - 5 - (5) -
Disposals - (4,145) - - (4,145)
Depreciation (70) (377) (24) - (471)
Change due to
foreign
exchange rate
fluctuations 121 349 13 132 615
Transferred to
discontinued
operations (Note
6) (910) (1,396) (13) - (2,319)
-------------------- --------------- ---------------------- ----------------------- ----------------------- ----------------
At June 30, 2013 $ 1,198 $ 2,309 $ 220 $ 2,453 $ 6,180
-------------------- --------------- ---------------------- ----------------------- ----------------------- ----------------
At June 30, 2013
Cost 1,306 3,244 289 2,453 7,292
Accumulated
depreciation (108) (935) (69) - (1,112)
Net book value $ 1,198 $ 2,309 $ 220 $ 2,453 $ 6,180
==================== =============== ====================== ======================= ======================= ================
Of the depreciation of $470,513 (2012 - $233,794) for the six
months ended June 30, 2013, $1,145 (2012 - $10,502) was charged to
the statement of loss as part of Depreciation, $337,110 (2012 -
$175,936) was capitalized to mineral properties, and $132,258 (2012
- $47,356) related to discontinued operations.
6 Discontinued Operation
On May 22, 2013 the Board of directions resolved to place
Inter-Invest, the wholly owned subsidiary of EastCoal Inc., that
owns and operated the Menzhinsky Mine and wash plant, into
administration and/or liquidation. The reason for the board
decision was the continued geological and technical challenges at
these operations and the resulting operating losses that the
Company could no longer finance. As a result, the assets of
Inter-Invest, excluding cash, have been impaired to a value of nil
to reflect the Board's view that the Company may not be able to
gain any value from the disposal of the assets in the
administration and/or liquidation process. These financial
statements do not include any future benefit from the expected
derecognizing of the liabilities relating to Inter-Invest upon its
liquidation. As at June 30, 2013 Inter-Invest was in the process of
being placed into liquidation.
Assets of discontinued operations June 30, 2013 December 31,
2012
---------------------------------- -------------- ----------------------------
Cash $ 20 -
============== ============================
Liabilities of discontinued June 30, 2013 December 31,
operations 2012
---------------------------- ----------------------- ----------------------------
Trade and other payables $ 6,236 $ -
Pension liabilities 3,552 -
Borrowings 8,986 -
18,774 -
======================= ============================
At acquisition, Inter-Invest had certain liabilities owing to a
Ukrainian financial institution. The loan is unsecured, repayable
in quarterly instalments of US$583,333 and bears no interest. As a
result of the non-payment of instalments for the quarters ended
March 31, 2013 and June 30, 2013, the Company recognised an expense
of $4,746,409, in period ended June 30, 2013 which reflects
additional payments required by Inter-Invest under the loan
agreement.
The accumulated other comprehensive income balance at June 30,
2013 relating to Menzhinsky was $1,362,294.
7 Borrowings
June 30, December
2013 31, 2012
---------------------------------------- ---------------------------- -----------------------
Current
Convertible debentures $ - $ 2,196
Other loans 9,186 3,102
Transferred to discontinued operations (8,986) -
(Note 6)
$ 200 $ 5,298
============================ =======================
Non-current
Convertible debentures $ 1,081 $ 3,334
Other loans - 1,467
---------------------------- -----------------------
$ 1,081 $ 4,801
============================ =======================
7.1 Convertible debentures
7.1.1 Surrey Dynamics
On November 26, 2009, the Company acquired a 49% interest in
East Coal Company from Surrey Dynamics Limited ("Surrey Dynamics")
of the United Kingdom. Consideration paid was 5,000,000 common
shares and an unsecured, three year, convertible US$3,000,000
debenture ("Original Debenture"), maturing on 26 November 2012
("Original Maturity Date").
The debenture could be converted at any time during the term
into 8.0 million common shares of the Company at a conversion price
of US$0.3739. The principal amount bore interest at the rate of 2%
over the three month USD Libor rate per annum, payable
quarterly.
As the debenture was considered to be a compound financial
instrument, the principal amount was allocated between liability
and equity components. The equity component was determined to be a
derivative liability as the conversion price of the loan is
denominated in a currency other than the Company's functional
currency. The fair value of the equity component was initially
valued at issuance at $2,476,000 using the Black-Scholes option
pricing model assuming a risk free rate of 1.88%, expected life of
3 years, volatility of 183.66% and share price of US$0.35. The debt
component was initially valued at $702,500 and was accreted up to
the principal balance over the term of the debenture using the
effective interest method.
On November 26, 2012, by way of a Supplemental Indenture (the
"Supplemental Indenture"), the Company and Surrey Dynamics amended
the Original Debenture to extend the Original Maturity Date to
December 17, 2012 at which point the Company would repay
US$1,500,000 and enter into a new debenture for US$1,500,000 plus
outstanding accrued interest on the Original Debenture (the "New
Debenture"). Further on December 14, 2012, the Company paid
US$800,000, plus a financing charge of $50,000, to Surrey Dynamics
and agreed to extend the Original Maturity Date to January 3, 2013,
at which point the Company made further payment of US$700,000 to
Surrey Dynamics.
Convertible debenture Debt Derivative Total
component liability
------------------------------ --------------------------- --------------------------- ---------------------------
Balance at January 1, 2012 $ 1,949 $ 1,146 $ 3,095
Interest accreted 1,102 - 1,102
Interest capitalised 17 - 17
Principal repayment (800) - (800)
Gain on revaluation - (1,146) (1,146)
Foreign exchange change upon
conversion of USD (72) - (72)
--------------------------- --------------------------- ---------------------------
Balance at December 31, 2012 $ 2,196 $ - $ 2,196
Interest capitalised - - -
Principal repayment (689) - (689)
Conversion to New Debenture (1,499) - (1,499)
Foreign exchange change upon
conversion of USD (8) - (8)
--------------------------- --------------------------- ---------------------------
Balance at June 30, 2013 $ - $ - $ -
============================== =========================== =========================== ===========================
On January 3, 2013, following the repayment of US$700,000 to
Surrey Dynamics, the Company and Surrey Dynamics rolled over the
outstanding balance of the Original Debenture (US$1,517,174) into a
new convertible debenture for a term of 2 years, an interest rate
of 10%, and a conversion price of $0.23 per share ("New
Debenture"). The remaining terms of the New Debenture are the same
as the Original Debenture.
Under the terms of the convertible debenture, the Company may
elect to prepay it prior to its maturity upon provision of 90 days
written notice to the holder. Should the Company choose to issue
prepayment of the debenture, Surrey Dynamics has the right to elect
to (a) receive payment in cash of the principal amount and all
unpaid accrued interest or (b) convert the principal and all unpaid
accrued interest into common shares of the Company at a conversion
price of $0.23 per share.
As the New Debenture is considered to be a compound financial
instrument, the principal amount has been allocated between
liability and equity components. The fair value of the equity
component was valued at issuance at $614,817 using the
Black-Scholes option pricing model assuming a risk free rate of
1.19%, expected life of 2 years, volatility of 80.25% and share
price of $0.22. The debt component was initially valued at $902,357
and will accrete up to the principal balance over the term of the
debenture using the effective interest method.
Convertible debenture Amount
----------------------------------- -------------------------
Proceeds on issuance of debenture 902
Interest accreted 127
Foreign exchange change upon
conversion of USD 52
-------------------------
Balance at June 30, 2013 $ 1,081
=================================== =========================
7.1.2 Aponet
On May 31, 2012, the Company acquired a 100% interest in
Inter-Invest Coal LLC ("Inter-Invest") from Aponet Enterprises
Limited ("Aponet") of Cyprus. Consideration paid was 4,000,000
common shares, $2 million cash, options to purchase 4,000,000
common shares of the Company at a price of $0.70 and an unsecured,
four-year, convertible $4,000,000 debenture. The debenture may be
converted at any time during the term into 6,153,846 common shares
of the Company at a conversion price of $0.65. The principal amount
bears interest at the rate of 2% over the three month USD Libor
rate per annum, payable quarterly.
As the debenture is considered to be a compound financial
instrument, the principal amount has been allocated between
liability and equity components. The debt component was initially
valued at $3,091,684 and will accrete up to the principal balance
over the term of the debenture using the effective interest method.
The fair value of the equity component was valued at issuance at
$908,316 using the Black-Scholes option pricing model assuming a
risk free rate of 1.34%, expected life of 4 years, volatility of
73.22% and share price of $0.36.
On March 11, 2013 the Company and Aponet agreed to amend the
conversion price of the convertible debenture in Note 7.1 from
$0.65 to $0.23 per share and to convert the debenture into
17,391,305 common shares, effective March 12, 2013. The market
price on the date of conversion was $0.06 and this resulted in a
gain on settlement of $2,375,644. Accordingly, no liability
remained at June 30, 2013.
Convertible debenture Amount
----------------------------------- ------------------------
Proceeds on issuance of debenture 3,092
Interest accreted 327
Conversion to equity (3,419)
Balance at June 30, 2013 $ -
=================================== ========================
7.2 Other loans
June 30, December
2013 31, 2012
---------------------------------------- ------------------------- -------------------------
Inter-Invest loan $ 8,986 $ 4,369
Directors' loan 200 200
Transferred to discontinued operations (8,986) -
(Note 6)
$ 200 $ 4,569
========================= =========================
7.2.1 Directors' Loan
On November 28, 2012 three of the Company's directors agreed to
provide bridging finance to the Company for general working
capital. The loan amounted to $600,000 with a term of 12 months.
The loan bore an interest rate of 12.0% per annum compounded
annually and payable at the time that the principal becomes due and
payable.
In order to secure the performance of the Company's obligations
to the lenders under the loan agreement, the Company executed GSAs,
pursuant to which the Company granted to the lenders security
interests in all present and future undertaking and property, both
real and personal located in the province of British Columbia, of
the Company, as described in the GSA.
On December 31, 2012, $400,000 plus accrued interest of $4,077
was repaid to two of the directors. As at June 30, 2013, $200,000
of the $600,000 loan was payable and is included in borrowings.
7.2.2 Salida Loan
On May 31, 2013 the Company entered into a short term loan
agreement with Salida Capital International Corp for $350,000 to
fund some immediate obligations at Verticalnaya pending completion
of the private placement. The loan was repaid in June 2013
following the private placement.
8 Share capital
8.1 Share issue
On January 3, 2013, the Company issued 88,271 common shares
priced at $.193675 per share as full settlement for $17,095.89 of
accrued interest due pursuant to the terms of a $2,000,000 loan
provided by Salida Capital LP to the Company.
On June 7, 2013, the Company issued 351,900,000 common shares
through a private placement priced at $.02 per share, and separate
to the placing, certain directors of the Company subscribed for an
aggregate 33,100,000 shares priced at $.02 per share. The aggregate
gross proceeds of the Fundraising were $7,700,000.
Fees relating to the private placement were $1,196,605 and
included cash commissions totalling $1,000,000 and a fee of $78,065
paid to Cenkos Securities Plc. Cenkos also subscribed for
50,000,000 shares in the private placement.
8.2 Conversion of Convertible Debt
On March 12, 2013, the Company reached an agreement with Aponet
Enterprises Limited to amend the $0.65 conversion price of its US$4
million debenture, issued as part of the acquisition of Inter
Invest, to CDN$0.23, and to convert the debenture into 17,391,305
common shares of EastCoal Inc. effective on that date. The closing
market price of the Company's shares on the day of the conversion
was $0.06.
8.3 Warrants
At June 30, 2013 and December 31, 2012 the following share
purchase warrants were outstanding:
Expiry Date Exercise June 30, 2013 December 31,
Price 2012
-------------- --------- -------------- -------------
May 31, 2014 $0.70 4,000,000 4,000,000
May 31, 2015 $0.35 2,916,000 2,916,000
May 31, 2015 $0.55 48,600,000 48,600,000
-------------- --------- -------------- -------------
55,516,000 55,516,000
============== ========= ============== =============
8.4 Stock options
The Company has established a stock option plan (the "Plan") to
provide incentives to employees, directors, officers, and
consultants to carry out the business of the Company. The Board of
Directors may grant up to a total of 25,009,244 options, not to
exceed 20% of the issued and outstanding capital stock to
employees, directors, officers, and consultants. The maximum term
of any option is ten years. The exercise price of an option is
fixed at the time of grant and is not less than the closing price
on the TSX-V on the last trading day preceding the grant date, less
any discounts permitted by the TSX-V.
At June 30, 2013, a total of 8,075,000 options had been granted
to directors, officers, employees and consultants under the Plan,
and were outstanding as summarized below:
June 30, 2013 December 31, 2012
-----------------------------------
Number Weighted Number Weighted
of Shares Average of Shares Average
Exercise Exercise
Price Price
--------------------- --------------------- -------------------- ------------- --------------------
Opening balance 10,575,000 $ 0.45 7,225,000 $ 0.48
Granted - - 3,650,000 0.42
Expired (2,500,000) 0.46 (300,000) 0.75
--------------------- -------------------- ------------- --------------------
Ending balance 8,075,000 $ 0.45 10,575,000 $ 0.45
--------------------- --------------------- -------------------- ------------- --------------------
Options exercisable 8,075,000 $ 0.45 10,575,000 $ 0.45
===================== ===================== ==================== ============= ====================
All stock options have exercise prices that are higher or equal
to market prices at the date of grant.
Number Number
Expiry Date Outstanding Exercisable
---------------- --------------------------- -----------------------------
September 15,
2014 1,975,000 1,975,000
July 27, 2015 1,200,000 1,200,000
February 4,
2016 750,000 750,000
March 14, 2016 750,000 750,000
July 6, 2016 750,000 750,000
January 19,
2017 150,000 150,000
May 31, 2017 2,500,000 2,500,000
---------------- --------------------------- -----------------------------
8,075,000 8,075,000
================ =========================== =============================
9 Related party transactions
During the period ended June 30, 2013, the Company paid or
accrued $30,000 (2012 - $14,550) to a related party for office
costs, of which $30,000 (2012 - $12,000) was paid or accrued to a
company with a director in common and $nil (2012 - $2,550) was paid
to a director.
Consulting fees totalling $127,351 (2012 - $197,490) were paid
or accrued to directors and officers of the Company, of which $nil
(2012 - $140,175) was capitalized to the Verticalnaya mine project
and $127,351 (2012 - $57,315) was expensed.
Included in accounts payable and accrued liabilities is a total
of $106,703 (December 31, 2012 - $151,224) due to related parties
for office costs, directors' fees, and consulting fees and
expenses. Excluding interest payable in accordance with the
director's loan (Note 7.2.1), the amounts due to related parties
are unsecured, non-interest bearing and have no specific terms of
repayment.
On May 31, 2013 the Company entered into a short term loan
agreement with its major shareholder, Salida Capital International
Corp for $350,000 (Note 7.2.2). The loan was repaid in June.
10 Supplemental cash flow information
For the six months ended
June 30, 2013 June 30, 2012
---------------------------------------------- ----------------------------- -----------------------------
Cash paid during the period for:
Interest paid $ 77 $ 539
Interest received 10 43
Income taxes paid - -
Non-cash financing and investing
activities:
Share-based compensation included - -
in mine/deferred costs
Mine/deferred costs included in accounts
payable - 495
Share issuance costs included in - -
accounts payable
11 Segmented information
The Company's Verticalnaya and Menzhinsky mines are operated as
separate business units and are considered to be distinct operating
segments based on geographic location. The Company's identifiable
property, plant and equipment are located primarily in Ukraine.
Geographic information is as follows:
For the three months For the six months ended
ended
June 30, June 30, June 30, June 30,
2013 2012 2013 2012
--------------------------- ----------------------- --------------------------------- ------------------------- -------------------------
Loss for the period
Verticalnaya $ (43) $ (18) $ (82) $ (34)
Corporate (1,190) (84) (461) (333)
Discontinued
operations
(Note 6) (18,366) (401) (37,111) (401)
----------------------- --------------------------------- ------------------------- -------------------------
(19,599) (503) $ (37,654) (768)
=========================== ======================= ================================= ========================= =========================
June 30, December
2013 31, 2012
---------------------------------------- ---------------------------- ------------------------------
Mineral properties
Verticalnaya $ 55,156 $ 47,996
Menzhinsky - 9,622
55,156 57,618
============================ ==============================
Coal Stockpile - Menzhinsky
(long term) $ - $ 4,992
Property, plant & equipment
Verticalnaya $ 6,170 $ 5,886
Menzhinsky - 6,222
Corporate 10 7
---------------------------- ------------------------------
6,180 12,115
============================ ==============================
Intangibles
Verticalnaya $ 5 $ 6
Menzhinsky - 70
Corporate 242 251
---------------------------- ----------------------------
247 327
============================ ============================
Goodwill - Menzhinsky $ - $ 4,940
Reclamation bond - Corporate $ 7 $ 7
Current assets
Verticalnaya $ 783 $ 1,309
Menzhinsky - 2,933
Corporate 4,269 9,081
Discontinued operations 20 -
(Note 6)
---------------------------- ----------------------------
5,072 13,323
============================ ============================
Total assets
Verticalnaya $ 62,114 $ 55,198
Menzhinsky - 28,778
Corporate 4,528 9,346
Discontinued operations 20 -
(Note 6)
---------------------------- ----------------------------
66,662 93,322
============================ ============================
Total liabilities
Verticalnaya $ 5,361 $ 5,962
Menzhinsky $ - $ 12,242
Corporate 2,380 8,399
Discontinued operations 18,774 -
----------------------- ----------------------------
$ 26,515 $ 26,603
============================== ======================= ============================
12 Subsequent Events
12.1 Share consolidation
On August 8, 2013 the Company consolidated its shares on a ratio
of ten (10) pre-consolidation common shares to one (1)
post-consolidation common shares, consolidating the Company's
728,048,493 issued and outstanding common shares to 72,804,849
common shares following the consolidation.
The Company also consolidated its outstanding options and
warrants on a ratio of ten (10) to one (1), with the result that
each consolidated option and warrant will now entitle the holder to
acquire one common share in the capital of the Company at an
exercise price equal to ten (10) times its original exercise
price.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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