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On behalf of the Board of Mano River Resources Inc.
Luis da Silva, President and CEO
MANO RIVER RESOURCES INC.
Management's Discussion and Analysis
For the six months ended June 30, 2008
The following discussion is management's assessment and analysis of the results and financial condition of Mano River Resources Inc. (the "Company" or "Mano") and should be read in conjunction with the accompanying unaudited consolidated financial statements for the six months ended June 30, 2008 and related notes. Unless otherwise indicated all amounts are in US dollars. The date of this management's discussion and analysis is August 29, 2008.
Additional information relating to the Company is available on SEDAR at www.sedar.com or on the Company's website at www.manoriver.com.
OVERVIEW PERFORMANCE
Description of Business
Mano River Resources Inc. is an exploration and development company engaged in the exploration and development of gold, diamond and iron ore properties in Africa. The Company, through its subsidiaries, holds interests in mineral properties located in Liberia, Sierra Leone, Guinea and the Democratic Republic of Congo (DRC), with the aim of developing them to a stage where they can be exploited economically or arranging joint ventures whereby partner companies provide the funding and expertise for development and exploitation.
Forward-looking statements
Certain information included in this discussion may constitute forward-looking statements. Forward-looking statements are based on current expectations and entail various risks and uncertainties. These risks and uncertainties could cause or contribute to actual results that are materially different from those expressed or implied.
Trends
In the past few years commodity prices have increased significantly driven by burgeoning demand from Asia. However, this increased demand may result in supply difficulties in the near future. Both the capital expenditures required to build and sustain new production and the cash operating costs necessary to produce from new operations have risen substantially over the past two years. Increases in unit costs are attributable mainly to higher prices for energy, labour, equipment, consumables and contractors. Obtaining skilled geologists and other technicians is still difficult leading to higher operating costs especially for exploration companies. The current credit crunch has meant fewer companies are listing and although there is limited funding in the market, companies with highly prospective projects can still attract the investment community. The Company's majority owned subsidiary Stellar Diamonds Limited (Stellar) has had to postpone its AIM listing due to market conditions. However, Mano was able to attract investment from its highly prospective iron ore project in Liberia, despite the market difficulties, which culminated in a private placement in May 2008 raising gross proceeds of $4 million, with Severstal, a leading steel and natural resources company. The credit crunch has also negatively impacted the market value of exploration companies on world markets including both the TSX Venture Exchange (TSXV) and the London Stock Exchange's Alternative Investment Market (AIM).
Risks and Uncertainties
The Company is subject to a number of risk factors due to the fundamental nature of the exploration business in which it is engaged, the countries in which it primarily operates and not least adverse movements in commodity prices. Mano seeks to counter such risks as far as possible by selecting exploration areas on the basis of their recognised geological potential to host high grade gold, diamond and iron ore deposits. The under-explored Archaean terrain on which the Company focuses in West Africa is also subject to a second significant risk, namely, political. While the region has suffered serious civil unrest and armed conflict in the past (which is the basic reason why it remained under-explored), conditions have improved markedly in recent years.
Industry
The Company is engaged in the exploration of mineral properties, an inherently risky business, and there is no assurance that an economic mineral deposit will ever be discovered. Most exploration projects do not result in the discovery of commercially mineable ore deposits. The focus of the Company is on areas in which the geological setting is well understood by management. The technological tools employed by the Company are regularly updated to better focus our exploration efforts.
Reserve and resource estimates
The estimation of mineral resources and reserves is in part an interpretive process and the accuracy of any such estimates is a function of the quality of available data, and of engineering and geological interpretation and judgement. No assurances can be given that the volume and grade of reserves recovered, and rates of production achieved, will not be less than anticipated.
Gold and diamond prices
The price of gold is affected by numerous factors totally beyond the control of the Company, including central bank sales, producer hedging activities, the exchange rate of the U.S. dollar relative to other major currencies, demand, political and economic conditions and production levels. In addition, the price of gold has been volatile over short periods of time due to speculative activities. The prices of diamonds, and other minerals that the Company may explore for, also have the same or similar price risk factors.
Cash flows and additional funding requirements
Mano currently has no revenues from operations. The Company has historically entered into joint venture agreements with partners to share the risks and the associated cost of exploration. In addition the Company has raised finance through the sale of equity capital and the placement of unsecured convertible debentures. Although Mano has been successful in the past in obtaining finance, there is no assurance that it will be able to obtain adequate finance in the future or that such finance will be on terms advantageous to the Company. As noted above the Company successfully raised $4 million gross through a private placement with Severstal in May 2008. This agreement provides for total potential investment by Serverstal of $37.5 million into African Iron Ore Group Ltd, Mano's 80% owned subsidiary. This agreement remains subject to a number of conditions before completion and there can be no assurance that such financing will be obtained. In addition Stellar raised Pounds Sterling 4.7 million gross through a private placement during the period.
Exchange rate fluctuations
Fluctuations in currency exchange rates can significantly impact cash flows. The U.S. dollar exchange rate in particular has varied substantially over time, although in the six months to June 30 the US dollar pound exchange rate has not varied significantly. While the Company has historically raised a large proportion of its equity financing in UK pounds most of the Company's exploration costs, are denominated in U.S. dollars. Fluctuations in exchange rates may give rise to foreign currency exposure, either favourable or unfavourable, which may impact financial results. Mano does not engage in currency hedging to offset the risk of exchange rate fluctuation.
Environmental
Mano's exploration and development activities are subject to extensive laws and regulations governing environmental protection. The Company is also subject to various reclamation-related requirements. The Company takes extremely seriously its commitment towards the local communities and the environment in which it operates. The Company's policy is to exceed all applicable environmental regulations, wherever possible. A failure to comply may result in enforcement actions causing operations to cease or be curtailed, and may include corrective measures requiring significant capital expenditures.
Laws and regulations
Mano's exploration activities are subject to local laws and regulations governing prospecting, development, production, exports, taxes, labour standards, occupational health and safety, mine safety and other matters. Such laws and regulations are subject to change and can become more stringent, and compliance can therefore become more costly. The Company applies the expertise of its management, its advisors, its employees and contractors to ensure compliance with current laws.
Title to mineral properties
While the Company has undertaken all the customary due diligence in the verification of title to its mineral properties, this should not be construed as a guarantee of title. The properties may be subject to prior unregistered agreements or transfers and title may be affected by undetected defects.
Competition
There is constant competition from other mineral exploration companies, with operations similar to those of the Company. Many of the mining companies with which the Company competes have operations and financial resources substantially greater than those of Mano.
Dependence on management
Mano relies heavily on the business and technical expertise of its management team and there is little possibility that this dependence will decrease in the near term. In 2007 changes were made to the management and the composition of the Board which have made the Company stronger and better able to exploit the value of its exploration assets. In 2008 the financial management of the Company has been strengthened with the appointment of a CFO for Mano and a Finance Director for Stellar. Further restructuring of the finance department will continue in the second half of 2008 in order to strengthen further the financial controls within the Company. Mano has no key-man insurance.
OPERATIONS - Overview
Mano's fundamental strategy is to unlock the value of its exploration assets and increase shareholder value. The Company's exploration assets are housed in three divisions: namely gold, diamonds and iron ore.
In 2007 all diamond assets were transferred into Stellar. The intention is to list Stellar on AIM but due to market conditions this has been postponed until conditions improve. Mano currently owns 63.17% of Stellar. On the ground the key focus for the Diamond division is on progressing the two near-term production projects at Kono in Sierra Leone and at Mandala in Guinea. The 49% owned Kono joint venture project with Petra Diamonds has moved into underground trial mining with good grades achieved to date. Valuations on the stones from the first commercial tender should be announced shortly. The 100% owned Mandala alluvial project has progressed and the DMS processing plant is in-transit to Guinea.
The key asset in the Gold division is New Liberty Gold project (NLGM) in Liberia where we have been drilling in order to expand the 2007 NI 43-101 estimated gold resource of 1.4 million ounces (13.533 million tonnes of measured and indicated resources grading 3.18 g/t gold). The drill programme was completed in Q2 and in all 4,485 metres of drilling was completed. The results received to date are highly encouraging and confirm that gold mineralisation continues at depth. The Company has contracted the services of AMC Consultants (UK) Ltd to review the possible mining methods of the deposit and to establish the most appropriate future drill programme.
The Company is targeting a resource of up to 900 million tonnes at its Putu Iron Ore Project in southeastern Liberia. With increasing demand for iron ore, driven primarily by the Asian market, the impact on prices has been significant. In Q2 the Company signed certain agreements on Putu Iron Ore with Severstal and applied to convert its exploration licence into an MDA (Mineral Development Agreement) and is still waiting for the outcome of this application. A drilling programme commenced in Q2 in order to delineate the resource.
Exploration Projects - Current Developments
GOLD
2008 Drilling Programme
In Q1 2008, the Company commenced a mineral resource/reserve delineation drilling programme, focussing initially on the Larjor Zone, the first results of which are now to hand. In all, 4,485m of drilling have been completed to date under this programme. Assay results from holes drilled under the Kinjor and Marvoe zones, further to the east, are expected shortly. The programme comprises a series of close-spaced drill holes at a depth of around 200m below surface, together with two holes drilled to about 500m below surface under Larjor to test for very deep extensions to the mineralisation. Shear-controlled gold deposits of Archaean age, like New Liberty, are typically characterised by a considerable third dimension at depth, now being investigated at New Liberty for the first time.
All eight holes under Larjor intersected the sheared ultramafic schists hosting the mineralisation at New Liberty, and all of them returned indications of the presence of the gold zone. Two of the six +/-200m holes returned extremely good results, namely, intersections of 23m grading 4.85g/t gold and 31m grading 3.59 g/t gold, respectively. The remaining four returned sub-economic but nevertheless highly anomalous gold zones, the best of which was in K-121 with 27m grading 0.67 g/t gold.
The two deep holes under Larjor both intersected the ultramafic rock units at the anticipated depth i.e. some 450 to 480m vertically below surface, and both were mineralised. K120 gave the better results with 19m at 1.2 g/t gold including a 3m section grading 6.2 g/t. This is considered an extremely encouraging outcome for the potential to increase resources, given that of the 93 holes forming the basis for the 2007 Feasibility Study, none were drilled significantly deeper than 100m below surface.
IRON ORE
This quarter claimed a significant milestone for Mano's iron ore division. Not only did the drilling programme begin in earnest at the 80% owned Putu project but the Company found in Severstal, the ideal partner with the technical know-how and expertise, as well as the financial capability, to accelerate the development of this project. In advance of announcing the Severstal deal on the 23 May 2008, the Company formally indicated in writing to the Ministry of Lands Mines & Energy (MLME) its intention to convert the current exploration agreement into a 25 year Mineral Development Agreement (MDA) allowing for exploitation. The MDA was submitted to the MLME on May 14 2008. During the quarter, in consultation with the MLME, the Company & its consultants worked towards a full submission document targeting potential mining scenarios. The Company decided to change the name of the Liberian subsidiary holding the licence, from "Mano River Iron Ore Inc." to "Putu Iron Ore Mining Inc.".
After a slow start, simply due to the logistics in-country, the drilling programme began to advance. The initial programme will see two angled holes drilled starting at the south-west side of the Mt Jideh ridge; concentrating initially where a rehabilitated adit sits. In the meantime, and after consultation with Severstal's geologists and our own consultants the drill programme pattern was re-visited and the new programme will see an increase in the planned metres to be drilled from 4,000 metres to approximately 5,000 metres. The drilling is now making excellent progress and is expected to be completed during Q4 2008. The objective of the drilling programme will be to prepare an initial resource estimate in accordance with NI 43-101. In conjunction with the drilling programmes, bulk sampling and test work will be undertaken in order to evaluate grades, recovery and ore characteristics.
The formal MDA application and submission was filed with the MLME. The MLME must complete their internal review before the application can be recommended for approval to the Inter-Ministerial Mineral Technical Committee that oversees the ratification of such agreements.
On May 23 2008, the Company announced it had signed certain agreements with Severstal's indirect, wholly owned Dutch subsidiary, Lybica Holding BV. Severstal is a leading Russian steel and natural resources company.
Terms of the agreement:
- Under a subscription agreement, an indirect, wholly owned subsidiary of Severstal will make an equity investment of approximately $4 million (U.S.) in Mano (at 10 pence per share) on May 29, 2008, with an option to make an additional equity investment in Mano (at 14 pence share) in due course.
- Under a share purchase and subscription agreement (SPSA), an indirect, wholly owned subsidiary of Severstal will, subject to a number of conditions pay $37.5 million for a 61.5 per cent stake in the Putu Range iron ore project held under African Iron Ore Group Ltd. (AIOG), Mano's existing 80-per-cent-owned subsidiary. In addition, the indirect, wholly owned Severstal subsidiary has agreed to enter into a facility agreement after completion of the acquistion under which it will provide AIOG with further financing of up to $15 million (U.S.). The SPSA is conditional on customary conditions to completion, on the completion of satisfactory due diligence by Severstal Resurs (which manages all Severstal's mining assets) and on Mano converting its exploration licence into a mineral development agreement.
Terms of the non-brokered private placement:
- An indirect, wholly owned subsidiary of Severstal has entered into a subscription agreement with Mano and subject to the satisfaction or waiver of various standard conditions to completion, will make an initial investment into Mano on May 29, 2008, by subscribing for 20 million common shares at 10 pence per share, raising approximately $4 million (U.S.) prior to expenses. This represents a premium of 13.7 per cent on the current share price as at May 22, 2008. Following the private placement, Severstal will hold 6.29 per cent of Mano's issued share capital.
- In addition, 20 million warrants will be granted to an indirectly, wholly owned subsidiary of Severstal at an exercise price of 14 pence, which shall be exercisable at any time over a period of 18 months from the completion of the private placement. Upon exercise of all the warrants, Severstal's holding in Mano would increase to 11.84 per cent (assuming no further issuances of common shares prior to that time) and provide the Company with a further $5.54 million (U.S.) in financing (at the exchange rate of $1.98 (U.S.) per pound sterling at close of business on May 22, 2008).
- Severstal will also have the right to appoint a nominee to the board of directors of Mano for a period of three years from the date of closing of the private placement, provided it maintains a shareholding of at least 5 per cent in Mano and thereafter provided it maintains a shareholding of at least 10 per cent in Mano. Any nominee of Severstal shall be subject to approval by the TSX Venture Exchange.
Terms of the SPSA
The SPSA provides for the acquisition by an indirect, wholly owned subsidiary of Severstal of 25 per cent of the currently issued and outstanding shares of AIOG for $12.5 million from Mano River Iron Ore Holdings Ltd., a wholly owned subsidiary of Mano, and a further 20 per cent of the issued and outstanding shares of AIOG from the minority interest parties in AIOG, for $10.0 million. It also provides for the subscription by the Severstal subsidiary for new ordinary shares in AIOG for a total price of $15 million. These acquisitions and the subscription will give the indirectly, wholly owned Severstal subsidiary a 61.5 per cent interest in AIOG on completion of the SPSA. Completion is conditional on, amongst other things, the approval of the TSX Venture Exchange, the completion of satisfactory due diligence by Severstal and Mano converting its exploration licence into an MDA.
The SPSA also envisages the provision of a loan facility, by the indirectly, wholly owned Severstal subsidiary to AIOG, of up to $15 million to finance the Putu Range iron ore project through to bankable feasibility study. The parties have undertaken to negotiate in good faith and use reasonable endeavours to enter into such facility agreement.
The Company's holding in AIOG will be 38.5 per cent on completion of these transactions. The parties have agreed to negotiate in good faith and use reasonable endeavours to enter into a shareholders' agreement to govern the relationship between the parties on or prior to completion.
The share purchase and subscription agreement between Mano and Severstal is dependent on a number of customary conditions, including Mano's successful conversion of its exploration licence into a full 25-year mineral development agreement with the government of Liberia, which is expected to take approximately four months from the date of the agreement being signed.
DIAMONDS
On June 19 2008, the Company reported that its 49/51 joint venture at Kono with partner Petra Diamonds had produced its first 1,000 carats of diamonds and made the following statement regarding the Kono Joint Venture:
"The exploration and trial mining operations at Kono project are progressing well and continue to deliver encouraging results. Two shafts are being developed, Pol-K and Bardu, and processing of exploration and development material to date has yielded 12,132 diamonds weighing a total of 1,049 carats.
"The first commercial tender of diamonds from the Kono project is planned for August in Johannesburg, through existing Petra marketing channels. This is likely to comprise approximately 800 carats of diamonds from the Pol-K shaft and will give an indication of the likely minimum value to be realised from this kimberlite shaft. A second, larger tender, comprising diamonds produced from the first Pol-K stope, is being scheduled for October.
"As diamond production from the trial mining stopes increases over the coming months, revenues from diamond sales are expected to generate regular cash flow to offset development expenditure."
Construction of the 100 ton per hour processing plant for the Mandala alluvial project was completed in Cape Town, South Africa, and the plant is being shipped to Guinea in Q3 2008.
At the Tongo project in Sierra Leone, a number of potentially high grade kimberlite dykes have been discovered and a 300-ton bulk sample is in the process of being collected. The objective of this bulk sampling is to determine with more confidence the grade and diamond value of these kimberlites.
In the DRC the first phase exploration over the 1,308km2 Remec Joint Venture area yielded encouraging results. A follow up programme will be conducted in Q3 2008 in order to isolate the likely source of kimberlites for the abundant indicator minerals recovered.
Updated Competent Persons Reports have been received for all diamond properties and are available on the Company's website and www.sedar.com.
CORPORATE
On May 29 2008, the Company announced that it has successfully completed a non-brokered private placement of a total of 20,000,000 new common shares at a price of 10p per share and 20,000,000 warrants at a price of 14p per share with Severstal, which was previously announced on 23 May 2008, raising gross proceeds of Pounds Sterling 2m. Admission of the Placing Shares to trading on AIM will become effective today, 30 May 2008.
On June 11 2008, the Company confirmed that all the resolutions put to shareholders at the Company's Annual General Meeting were duly passed.
On June 19 2008, the Company reported that its majority owned subsidiary Stellar Diamonds Ltd would seek to raise up to Pounds Sterling 2 million in a private placement in Q3 2008.
SELECTED FINANCIAL INFORMATION
The following selected annual financial information is derived from the audited consolidated financial statements for the three most recently completed financial years and is prepared in accordance with Canadian generally accepted accounting principles ("GAAP").
Years ended: --------------------------------------------------------------------------- US Dollars December 31 January 31 January 31 2007 2007 2006 --------------------------------------------------------------------------- Interest income 148,041 53,181 117,927 --------------------------------------------------------------------------- Dilution gain 6,207,642 - - --------------------------------------------------------------------------- Net income/(loss) 4,017,642 (959,609) (1,348,265) --------------------------------------------------------------------------- Basic and diluted income/ (loss) per share 0.014 (0.004) (0.006) --------------------------------------------------------------------------- Stock option compensation expense 190,003 513,361 397,829 --------------------------------------------------------------------------- Working capital (i)2,868,877 428,368 3,015,165 --------------------------------------------------------------------------- Total assets 45,501,911 28,866,715 22,287,420 --------------------------------------------------------------------------- Total exploration expenditures(i) 6,526,656 8,443,801 4,291,377 --------------------------------------------------------------------------- (i)After deducting negative goodwill SUMMARY OF SELECTED QUARTERLY INFORMATION The following is the selected financial information of the Company for the last eight quarters: (unaudited) --------------------------------------------------------------------------- US Dollars June 30 March 31 December 31 October 31 2008 2008 2007 2007 --------------------------------------------------------------------------- Interest income 32,676 18,225 79,784 55,272 --------------------------------------------------------------------------- Dilution gain 442,840 1,387,780 6,207,005 - --------------------------------------------------------------------------- Net income/(loss) (996,109) (745,653) 5,257,878 (466,135) --------------------------------------------------------------------------- Basic and diluted income/(loss) per share (0.003) (0.002) 0.018 (0.002) --------------------------------------------------------------------------- Total assets 51,393,067 48,617,142 45,501,911 46,105,356 --------------------------------------------------------------------------- July 31 April 30 January 31 October 31 US Dollars 2007 2007 2007 2006 --------------------------------------------------------------------------- Interest income 5,213 7,772 14,496 13,322 --------------------------------------------------------------------------- Dilution gain - - - - --------------------------------------------------------------------------- Net loss (496,668) (277,433) (139,287) (486,319) --------------------------------------------------------------------------- Basic and diluted loss per share (0.002) (0.001) (0.001) (0.002) --------------------------------------------------------------------------- Total assets 46,672,577 29,813,909 28,866,715 27,404,088 ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
During the six months ended June 30, 2008, the Company realised a net loss of $1,741,762, or $0.006 cents loss per share as compared to a loss of $774,101 or $0.003 loss per share in the six months ended July 31, 2007. Expenses for the period at $4,537,767 are up significantly over the corresponding period last year (2007: $787,086). This increase has arisen for a number of reasons:
1. Interest on the convertible debenture of $196,522 and depreciation of $155,452, did not feature in expenses for the same period last year.
2. Stock based compensation of $1,314,755 (2007:$170,656) relates to stock options granted in January 2008, which in fact relate to 2007,but were not granted last year due to an extended close period.
3. Directors fees ($212,473) and Management fees ($384,909) are higher than last year reflecting the additional cost of the independent Stellar Board and the recruitment of key management personnel in Q4, 2007 and Q1, 2008.
4. Professional fees of $1,537,684 (2007:$422,354) included expenses related to the proposed listing of Stellar on London's AIM market such as legal, and audit and accounting services, fees to implement a new accounting and reporting system and consultancy fees.
5. Administrative and office expenses at $609,179 (2007:$4879) includes the cost of the London office not in the figures last year, additional staff costs, travel ($152,486), public relations ($73,262) and salaries and wages ($120,534).
The expenses for the period were partly off-set by:
1. A "dilution gain" amounting to $1,830,620 arising from the issue of shares by Stellar Diamonds Ltd to private investors at a price higher than the initial price at which the Company transferred the diamond properties to Stellar in 2007.
2. The non-controlling interest of $605,444 represents the minority's share of Stellar's loss for the period.
3. Interest income of $50,901 for the period is $37,916 greater than last year ($12,985).
4. An unrealised gain on the convertible debenture has been recognised in the period of $309,040.
BALANCE SHEET, LIQUIDITY AND CAPITAL RESERVES
The Company had working capital at June 30 2008, of $1,514,226 compared with $2,868,877 at 31 December 2007. The reduction in working capital of $1,354,651 is due to lower cash and cash equivalents together with higher commitments to related parties and joint venture partners.
Property, plant and equipment increased by $1,669,376 over the year end figure due primarily spent on the mine plant for Mandala Guinea.
Deferred exploration expenditure at $35,016,127 is $5.1 million above the December 31, level. Main areas of exploration spend including: $1.2 million on the Kono/Petra diamond joint venture in Sierra Leone; $1 million spent at the Putu iron ore project in Liberia; and $1.7 million in Liberia on the New Liberty Gold Mine and Kpo/MCA diamond projects; $0.2 million was spent on early stage exploration at our diamond licences in the REMEC area of the DRC; $0.2 million was spent in Sierra Leone at the Tongo project where bulk sampling is scheduled to start in the near future.
Share capital increased by $3.9 million following the successful private placement with Severstal in May 2008.
Cash outflow from operating activities during the six months ended June 30, 2008 is $2,224,310 (2007: ($750,806) after adjusting for the non-cash activities. Cash outflow on investing activities amounted to $6,826,345 and included $5,144,577 spent on exploration projects and $1,824,828 on the purchase of capital assets for the mine plant at Mandala. The comparative figure spent on investing activities during the six month period to July 31 2007, was $2,975,699.
Cash in-flow from financing activities for the period is $8,195,491 compared to $13,856,211 for the six months ended July 31 2007. Besides the $3.9 million raised by the Severstal private placement, $4.7 million was raised through a private placement of Stellar Diamonds shares.
Cash and cash equivalents at June 30, 2008 is $3.2 million down from $11.3 million in July 2007.
OTHER INFORMATION
Outstanding share data
The Company is authorised to issue an unlimited number of common shares without par value. As at August 30, 2008 there were 317,810,818 common shares outstanding.
Outstanding share options at June 30, 2008 are outlined below. This includes 9,045,000 share options granted during the period.
Exercise price Number of Per share Common Shares (Cdn$) Expiry date --------------------------------------------------- 905,000 0.100 August 14, 2008 2,720,000 0.240 March 23, 2009 2,620,000 0.215 July 25, 2010 2,980,000 0.230 July 31, 2011 600,000 0.230 March 16, 2012 300,000 0.230 May 31, 2012 9,045,000 0.200 Jan 23, 2013 --------------------------------------------------- 18,945,000 ---------------------------------------------------
As at June 30, 2008, 20,000,000 warrants were outstanding at an exercise price of 14p with an expiry date of November 29, 2009. These warrants were granted to Severstal as part of the private placement completed on May 29, 2008.
Off balance sheet arrangements
The Company does not have any off-balance sheet arrangements and does not contemplate having them in the foreseeable future.
Related party transactions
During the six months ended June 30, 2008 the Company incurred billings of $875,881 (July 30, 2007 - $188,948) from related parties for management fees, directors fees and professional services. All transactions with related parties have occurred in the normal course of operations. As at June 30, 2008 the amount due to related parties totaled $569,202. These balances have no fixed terms of repayment and have arisen from the accrued provision of services referred to above and reimbursable expenses.
Disclosure controls and procedures
Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and non-financial information regarding the Company. Management is also responsible for the design and maintenance of effective internal control over financial reporting to provide reasonable assurance regarding the integrity and reliability of the Company's financial information and the preparation of its financial statements in accordance with the Canadian generally accepted accounting principles. Management maintains appropriate information systems, procedures and controls to ensure integrity of the financial statements and maintains appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete and reliable.
Management of the Company, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and internal control procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Mano River have been detected.
However, given the nature of the business and geographical displacement, the management is committed to continuously mitigate any risks and systematically improve operating controls where and when possible in the cost effective manner.
As at June 30, 2008 management recognised the limitation of segregation of duties due to the size of the organisation. The management is mitigating such risks by introducing compensatory controls to detect and remediate control deficiencies.
OUTLOOK
The proposed listing of Stellar at the end of Q2 2008 was postponed due to the continuing downturn in the financial markets. The Company is targeting Q4 2008 for an AIM listing subject to favourable market conditions. Stellar is currently considering an interim private placement, the results of which will be announced shortly. By Q4 Stellar expects to have realised its first operating revenues, a significant milestone for the Company.
In the gold division, the Company is reviewing its approach to NLGM following the recent drill programme. When confirmed, the objectives will be to upgrade the current 1.4M oz resource to Measured category and define a new substantial resource in the Indicated category. Following this, a new feasibility study will be prepared with the objective of taking NLGM to a production decision. The Board now has the skills to take projects like NLGM into production with a Chairman that has proven experience in successfully bringing developments to fruition and a mining engineer as CEO.
On the Putu iron ore project the Company applied for a 25 year MDA in May, 2008. This process is on-going but in the mean time the current drilling programme is continuing.
The Board is considering all options for taking the Company forward including Corporate transactions. The recently announced deal with Severstal a leading Russian steel and natural resources company gives Mano an excellent partner to take the Putu project forward to feasibility and ultimately production. The additional funds that will become available once the conditions of the deal are met will give the Company sufficient cash resources to implement its operational objectives at New Liberty.
On Behalf of the Board,
MANO RIVER RESOURCES INC.
LUIS G. CABRITA da SILVA, President and CEO
Interim Consolidated Financial Statements Mano River Resources Inc. For The Six Months Ended June 30, 2008 and Six Months ended July 31, 2007 (Stated in U.S. Dollars) (Unaudited) MANO RIVER RESOURCES INC. 6th Floor, 890 West Pender Street, Vancouver, B.C. V6C 1J9 Telephone: (604) 689-1700 Fax: (604) 687-1327
NOTICE TO READER
In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited interim consolidated financial statements for the six months ended June 30, 2008.
The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company's management.
Mano River Resources Inc. Consolidated Balance Sheet As at June 30, 2008 (Stated in U.S. dollars) --------------------------------------------------------------------------- Six months Year ended ended June 30, December 31, 2008 2007 $ $ (unaudited) (audited) --------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents 3,248,663 4,100,187 Amounts receivable 225,318 296,591 Due from joint venture partners (Note 3) 112,281 112,281 --------------------------------------------------------------------------- 3,586,262 4,509,059 Investments (Note 4) 230,590 184,090 Property, plant and equipment 3,671,496 2,002,120 Resource properties (Note 5) 8,888,592 8,888,592 Deferred exploration costs (Note 5) 35,016,127 29,918,050 --------------------------------------------------------------------------- Total Assets 51,393,067 45,501,911 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Liabilities Current liabilities Accounts payable and accrued liabilities 1,085,424 1,010,169 Interest payable on convertible debenture (Note 8) - 181,296 Due to related parties (Note 7) 569,202 174,367 Due to joint venture partners (Note 3) 417,410 274,350 --------------------------------------------------------------------------- 2,072,036 1,640,182 Convertible debenture (Note 8) 1,841,320 2,260,738 --------------------------------------------------------------------------- Total Liabilities 3,913,356 3,900,920 --------------------------------------------------------------------------- Non-controlling interest (Note 9) 9,424,017 7,147,317 --------------------------------------------------------------------------- Shareholders' equity Share capital (Note 6) 38,511,124 34,596,114 Equity component of convertible debenture (Note 8) 2,748,180 2,637,802 Contributed surplus 3,219,220 1,904,465 Accumulated other comprehensive loss (21,755) (21,755) Translation reserve 3,639 - Deficit (6,404,714) (4,662,952) --------------------------------------------------------------------------- Total shareholders' equity 38,055,694 34,453,674 --------------------------------------------------------------------------- Total Liabilities, non-controlling interest and shareholders' equity 51,393,067 45,501,911 --------------------------------------------------------------------------- Nature of operations and continuation of business (Note 1) Approved by the Board (Signed) LUIS G. CABRITA da SILVA, DIRECTOR -------------------------------------------------- Luis G. Cabrita da Silva (Signed)DAVID B. EVANS, DIRECTOR David B. Evans -------------------------------------------------- Mano River Resources Inc. Consolidated Statement of Cash Flow For the six months ended June 30, 2008 (Stated in U.S. dollars) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Three months Three months Six months Six months ended ended ended ended June 30, July 31, June 30, July 31, 2008 2007 2008 2007 $ $ $ $ (unaudited) (unaudited) (unaudited) (unaudited) --------------------------------------------------------------------------- Expenses Administrative and office expenses 420,136 3,025 609,179 4,879 Directors fees 59,446 25,899 212,473 34,399 Foreign exchange loss/(gain) 84,294 (17,386) 89,265 (35,196) Management fees 226,580 56,934 384,909 128,979 Interest on convertible debenture 102,303 - 196,522 - Professional fees 977,757 323,485 1,537,684 422,354 Stock-based compensation - 66,102 1,314,755 170,656 Transfer agent and filing fees 13,912 43,822 37,528 61,015 Depreciation 3,706 - 155,452 - --------------------------------------------------------------------------- 1,888,134 501,881 4,537,767 787,086 --------------------------------------------------------------------------- Dilution gain on shares issued by controlled company (442,840) - (1,830,620) - Unrealised gain on convertible debenture 770 - (309,040) - Interest Income (32,676) (5,213) (50,901) (12,985) --------------------------------------------------------------------------- Loss before non-controlling interest (1,413,388) (496,668) (2,347,206) (774,101) Non-controlling interest 417,279 - 605,444 - --------------------------------------------------------------------------- --------------------------------------------------------------------------- Loss and comprehensive loss (996,109) (496,668) (1,741,762) (774,101) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Basic and diluted loss per share (0.003) (0.002) (0.006) (0.003) Basic and diluted weighted average number of shares outstanding 305,063,565 297,810,818 303,102,590 297,137,116 --------------------------------------------------------------------------- Mano River Resources Inc. Consolidated Statement of Cash Flow For the six months ended June 30, 2008 (Stated in U.S. dollars) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Three Three Six Six months months months months ended ended ended ended June 30, July 31, June 30, July 31, 2008 2007 2008 2007 $ $ $ $ (unaudited) (unaudited) (unaudited) (unaudited) --------------------------------------------------------------------------- Operating Activities Loss and comprehensive loss (996,109) (496,668) (1,741,762) (774,101) Items not involving cash: Dilution gain on shares issued by controlled company (442,840) - (1,830,620) - Non-controlling interest (417,279) - (605,444) - Stock-based compensation - 66,102 1,314,755 170,656 Interest on convertible debentures 102,303 - 196,522 - Unrealised loss on convertible debt 770 - (309,040) - Depreciation of fixed assets 3,705 - 155,451 - Changes in Non-Cash Working Capital: Amounts receivable and prepaid expenses 128,990 (98,942) 105,492 (183,093) Due to related parties 313,835 (99,743) 394,835 (35,333) Accounts payable and accrued liabilities (23,828) 179,366 95,501 71,065 --------------------------------------------------------------------------- (1,330,453) (449,885) (2,224,310) (750,806) --------------------------------------------------------------------------- Investing Activities Deferred exploration expenditures (3,112,486) (1,953,789) (5,144,577) (2,621,318) Due from/(to) joint venture partners (495,590) (458,631) 143,060 (354,381) Purchase of capital assets (1,737,628) - (1,824,828) - --------------------------------------------------------------------------- (5,345,704) (2,412,420) (6,826,345) (2,975,699) --------------------------------------------------------------------------- Financing Activities Issuance of share capital (net of costs) 3,915,010 - 3,915,010 437,836 Convertible debenture - 4,641,860 - 4,641,860 Interest paid on convertible debenture (205,316) - (412,037) - Proceeds from issue of shares in subsidiary 1,026,520 8,092,790 4,692,518 8,776,515 --------------------------------------------------------------------------- 4,736,214 12,734,650 8,195,491 13,856,211 --------------------------------------------------------------------------- Foreign exchange differences on translation of overseas operations (334) - 3,640 - --------------------------------------------------------------------------- Net cash inflow (1,940,277) 9,872,345 (851,524) 10,129,706 Cash, Beginning of Period 5,188,940 1,442,881 4,100,187 1,185,520 --------------------------------------------------------------------------- Cash, End of Period 3,248,663 11,315,226 3,248,663 11,315,226 --------------------------------------------------------------------------- Mano River Resources Inc. Notes to consolidated financial statements For the six months ended June 30, 2008
1. Nature of operations
Mano River Resources Inc. ("Mano River" or "the Company") commenced operations on July 10, 1996 and is engaged in the acquisition, exploration and development of gold, iron and diamond properties. The Company is in the development stage and has no source of cash flows other than loans from related parties or equity offerings.
These consolidated financial statements are prepared on a going concern basis which assumes that the Company will be able to realise assets and discharge liabilities in the normal course of business. The Company's ability to continue on a going concern basis depends on its ability to successfully raise additional financing. If the Company cannot obtain additional financing it may be forced to realise its assets at amounts significantly lower than the current carrying value.
Uncertainty also exists with respect to the recoverability of the carrying value of certain resource properties. The ability of the Company to realise its investment in resource properties is contingent upon resolution of the uncertainties and continuing confirmation of the Company's title to the resource properties.
In August 2007, the Company changed its fiscal year end from January 31, to December 31, effective as of December 31, 2007.
2. Significant accounting policies
These financial statements have been prepared in accordance with generally accepted accounting principles in Canada and reflect the following significant accounting policies. The United States dollar has been identified as the Company's currency of measurement and is used for external reporting purposes.
(a) Principles of consolidation
These financial statements include the accounts of Mano River Resources Inc. and its principal subsidiaries, Mano Gold Investments Ltd. (formerly Mano River Resources Ltd.) including sub-group Mano River Iron Ore Holdings Ltd. ("MARIOH"), and Mano Diamonds Ltd.
African Iron Ore Ltd. is 80% owned by MARIOH. One-half of the remaining 20% is held by Eastbound Resources Ltd., a company controlled by a director of the Company.
The financial statements of entities which are controlled by the Company through voting equity interests, referred to as subsidiaries, are consolidated. Variable interest entities ("VIEs"), which include, but are not limited to, special purpose entities, trusts, partnerships, and other legal structures, as defined by the Accounting Standards Board in Accounting Guideline ("AcG") 15, Consolidation of Variable Interest Entities ("AcG 15"), are entities in which equity investors do not have the characteristics of a "controlling financial interest" or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are subject to consolidation by the primary beneficiary who will absorb the majority of the entities' expected losses and/or expected residual returns. As of June 30, 2008, the Company does not hold an interest in any VIEs.
All intercompany balances and transactions have been eliminated upon consolidation.
The shares not legally owned by the Company in the listed subsidiaries, other than African Iron Ore (Liberia) Ltd.(where the Company holds an 80% interest), and Stellar Diamonds Ltd.(Stellar), (where the Company holds 63.17%) are held by a third party company. This third party has no beneficial interest in the shares and is holding the shares for the Company's benefit until the Company and the third party agree on their ultimate distribution. As the Company retains the beneficial interest in these shares no non-controlling interest exists at June 30, 2008.
(b) Non-controlling interests
Non-controlling interests exist in less than wholly-owned subsidiaries of the Company and represent the outside interest's share of the carrying values of the subsidiaries. When the subsidiary company issues its own shares to outside interests, a dilution gain or loss arises as a result of the difference between the Company's share of the proceeds and the carrying value of the underlying equity.
(c) Cash
Cash and cash equivalents include cash, and those short-term money market instruments that are readily convertible to cash with an original term of less than 90 days.
(d) Property, plant and equipment
Property, plant and equipment is comprised of office furniture, automobiles and various equipment used in the field, that are stated at cost and depreciated at 30% per annum on a declining balance basis.
(e) Long-term investments
Investments are recorded at cost, subject to a provision for any impairment that is determined to be other than temporary.
(f) Resource properties and deferred exploration costs
The Company follows the method of accounting for its mineral properties whereby all costs related to acquisition, exploration and development are capitalised by property. The carrying value of pre-production and exploration properties is reviewed periodically and either written off when it is determined that the expenditures will not result in the discovery of economically recoverable mineral reserves or transferred to producing mining property, plant and equipment when commercial development commences.
The recoverability of amounts shown for pre-production and exploration properties is dependent upon the discovery of economically recoverable mineral reserves, confirmation of the Company's interest in the underlying mineral claims, the ability of the Company to finance the development of the properties and on the future profitable production or proceeds from the disposition thereof.
The success and ultimate recovery of the Company's exploration costs of its mineral exploration properties is influenced by significant financial risks, legal and political risks, commodity prices, and the ability of the Company to discover economically recoverable mineral reserves and to bring such reserves into future profitable production.
(g) Measurement uncertainty
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant balances and transactions affected by management estimates include the valuation of investments, resource properties, deferred exploration costs, future income tax and stock-based compensation. Actual results could differ from those estimates.
The amounts used to estimate fair values of stock options issued are based on estimates of future volatility of the Company's share price, expected lives of the options, expected dividends to be paid by the Company and other relevant assumptions.
By their nature, these estimates are subject to measurement uncertainty and the effect of changes in such estimates on the consolidated financial statements of future periods could be significant.
(h) Loss per share
The basic loss per share is computed by dividing the loss and comprehensive loss by the weighted average number of common shares outstanding during the year. The diluted loss per share reflects the potential dilution by including other common share equivalents, such as outstanding stock options and share purchase warrants, in the weighted average number of common shares outstanding during the year. Options and warrants as disclosed in Note 6 are anti-dilutive and therefore have not been taken into account in the per share calculations.
(i) Foreign currency translation
The Company's foreign currency transactions and the financial position and results of operations of the Company's integrated subsidiaries are translated into U.S. dollars using the temporal method. Under this method, monetary assets and liabilities are translated at the rate in effect at the balance sheet date. Other balance sheet items, revenues and expenses are translated at the rates prevailing on the respective transaction dates.
(j) Stock-based compensation
The Company follows Canadian Institute of Chartered Accountants Handbook Section 3870, Stock-Based Compensation, which requires that all stock-based awards made to non-employees and employees be measured and recognised using a fair value based method. Accordingly, the fair value of options at the date of grant is accrued and charged to operations, with an offsetting credit to contributed surplus, on a straight-line basis over the vesting period. If the stock options are ultimately exercised, the applicable amounts of contributed surplus is transferred to share capital.
(k) Joint ventures
The Company has entered into certain joint venture agreements whereby the Company earns or allows a third party to earn an interest in certain mineral properties. These joint venture agreements generally provide for the acquiring party to incur exploration costs to earn an interest. Currently certain joint ventures in which the Company has an interest are used to hold the property interest solely; while certain others have operations or exploration programs conducted by the joint venture.
(l) Income taxes
The Company accounts for income taxes whereby future income tax assets and liabilities are computed based on differences between the carrying amount of assets and liabilities on the balance sheet and their corresponding tax values using the enacted income tax rates at each balance sheet date. Future income tax assets also result from unused loss carryforwards and other deductions. The valuation of future income tax assets is reviewed annually and adjusted, if necessary, by use of a valuation allowance to reflect the estimated realisable amount.
3. Due to/from joint venture partners
During the six month period ended June 30, 2008, certain exploration and development expenditures were carried out by joint venture partners.
The amount owing to Petra Diamonds as at June 30, 2008, who is the operator of the Kono joint venture diamond project in Sierra Leone, is $417,410.
As at June 30, 2008 the amount due from joint venture partners amounted to $112,281.
4. Investments June 30, July 31, 2008 2007 $ $ ---------------------------------------------------------------- Mifergui-Nimba 230,590 184,090 ---------------------------------------------------------------- ----------------------------------------------------------------
The Mifergui-Nimba investment consists of 8,654 shares representing a 3.7% interest in a Guinean company that holds an interest in a mining license over a Guinean iron ore property. The company is a private company with no available market value. Management has reviewed the carrying value at June 30, 2008 and do not consider that there has been any indication of impairment.
5. Resource properties and deferred exploration costs June 30, July 31, 2008 2007 $ $ (unaudited) (unaudited) ----------------------------------------------------------------------- Acquisition costs: Liberia, West Africa: Bea 210,000 210,000 Kpo 110,000 110,000 Sierra Leone, West Africa: Pampana, Sonfon and Nimini South 1,695,000 1,695,000 Guinea, West Africa Missamana/Gueliban 1,940,000 1,940,000 Bouro/ Mandala 4,933,592 4,933,592 ----------------------------------------------------------------------- Closing balances 8,888,592 8,888,592 ----------------------------------------------------------------------- -----------------
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