Management s Discussion & Analysis for the three months ended March 31, 2016 Dated: May 13, 2016

Transcription

1 Management s Discussion & Analysis for the three months ended March 31, 2016 Dated: May 13, of 21

2 AFRICO RESOURCES LTD. MANAGEMENT S DISCUSSION AND ANALYSIS ( MD&A ) This Management s Discussion and Analysis (the MD&A ), dated as of May 13, 2016, is for the three month period ended March 31, 2016 and should be read in conjunction with the unaudited condensed interim consolidated financial statements for the three months ended March 31, 2016 of Africo Resources Ltd. (also referred to as Africo, or the Company, or we, or our, or its or us within this MD&A), the related notes thereto (together, the Interim Financial Statements ) and with the audited annual consolidated financial statements for the year ended December 31, 2015 and the related notes thereto (together, the Annual Financial Statements ) both of which are prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and are available under Africo s company profile on SEDAR at All dollar amounts, unless otherwise indicated, are in US Dollars. This MD&A contains forward looking statements that involve numerous risks and uncertainties. The Company continually seeks to minimize its exposure to business risks, but by nature of its business and exploration activities and size, will always have some risk. These risks are not always quantifiable due to their uncertain nature. Should one or more of these risks and uncertainties, including those described under the heading Risk factors in our AIF and those set forth in this MD&A under the headings Cautionary Notes Regarding Forward-Looking Statements and Industry and Economic Factors that May Affect our Business materialize, or should underlying assumptions prove incorrect, then actual results may vary materially from those described in forward-looking statements. The Company is a reporting issuer in the Provinces of British Columbia, Alberta, and Ontario in Canada and is listed on the TSX in Canada under the symbol ARL. Additional information related to the Company, including the Company s most recent annual information form, is available on SEDAR at CURRENT SITUATION On May 13, 2016, Africo released an announcement indicating that Africo entered into a definitive agreement (the Arrangement Agreement ) with Camrose Resources Limited ( Camrose ) under which the Company would be taken private pursuant to a plan of arrangement (the Plan of Arrangement ). Camrose currently owns 63.66% of Africo s common shares ( Common Shares ). Under the Plan of Arrangement, Camrose would acquire all of the Common Shares that Camrose does not already own for cash consideration of CDN $1.00 per share. Holders of the Company s Common Shares and Options may also receive an additional aggregate amount of USD $7.5 million if certain transactions, in respect of the Company s main Kalukundi project, a development stage copper-cobalt deposit located in the Katanga Copperbelt in the Democratic Republic of Congo (DRC), are completed within 14 months following the closing of the Plan of Arrangement with Camrose. The terms and conditions of this contingent payment will be set out in an information circular of the Company, as described below. The additional amount, if paid, would be equal to approximately USD $0.27 per share. However, there can be no assurance that the additional payment will be made because this is contingent. Both the Special Committee of the Board of Directors of Africo, comprising of James Cook and George Ireland, and the Board of Directors of Africo unanimously (with Messrs. Cordero and Lauer abstaining) determined that the Plan of Arrangement is in the best interests of Africo and is fair to its shareholders. 2 of 21

3 The Special Committee of the Board of Directors of Africo has received a verbal opinion from Paradigm Capital Inc. to the effect that, as of the date of the opinion and based upon and subject to the limitations and qualifications therein, the consideration to be received for the Common Shares is fair, from a financial point of view, to the holders of the Common Shares (other than Camrose). Africo expects to receive a written opinion from Paradigm Capital Inc. prior to mailing the Management Information Circular to Africo shareholders. The implementation of the Plan of Arrangement will be subject to approval by the holders of the affected securities at a special meeting (the Special Meeting ) expected to be held on June 29, As the transaction will constitute a business combination for the purposes of Multilateral Instrument , the implementation of the Plan of Arrangement will be subject to approval by a majority of the votes cast by shareholders other than Camrose, in addition to approval by 66⅔% of the votes cast by holders of Common Shares. The transaction also will be subject to applicable Court approvals and certain closing conditions customary in transactions of this nature. The transaction is also subject to Camrose obtaining a waiver from the lenders of its parent company Eurasian Resources Group BV. Certain shareholders, holding as a group approximately 28% of the issued and outstanding common shares of Africo and 77% of the outstanding Common Shares held by the minority shareholders, have entered into voting agreements pursuant to which, among other things, they have agreed to vote their Common Shares in favour of the Plan of Arrangement. The terms and conditions of the proposed transaction will be disclosed in an information circular that will be mailed in late May 2016 to the shareholders of Africo that will be entitled to vote at the Special Meeting. It is anticipated that the transaction, if approved by Africo shareholders and the Court and if the requisite waiver and conditions are obtained and satisfied, will be completed in July of OVERVIEW Africo, through its subsidiary Société d exploitation des gisements de Kalukundi (sas) ( Swanmines ), is a mineral resource company engaged in the exploration and development of base metal mineral properties. Currently the Company has an indirect 75% interest in the Kalukundi Property which is a copper ( Cu ) and cobalt ( Co ) property, located in the Democratic Republic of the Congo ( DRC ) near Kolwezi. On April 10, 2013, the Company reported the results of the Resource Estimate undertaken by AMEC E&C Services Inc. ( AMEC ), (see Table 1 on page 3 of this MD&A), as follows: Indicated resources: Inferred resources: 30.4 million tonnes grading 2.40% Cu and 0.46% Co million tonnes grading 1.71% Cu and 0.45% Co. This assessment slightly more than doubles the resources at the Kalukundi Project that were outlined in the 2006 Technical Report. This new resource assessment also replaces the previous resource statement, which is deemed to be historical. Further reference with respect to the above, including Table 1 on page 3 of this MD&A, can be found in the section entitled Mineral Property The Kalukundi Property within this MD&A. Mineral Property The Kalukundi Property The services of AMEC were secured to undertake a resource estimate including previous drilling programs and a re-assessment and incorporation of the previous work done on the Kalukundi Property with the main objective of developing a new and enhanced resource estimate of the Company s Kalukundi Property. In a news release dated April 10, 2013, the Company reported the results of the Resource Estimate undertaken by AMEC which 3 of 21

4 showed that the drilling was successful in substantiating continuity in the copper and cobalt mineralisation in the Mines Series geology and also extending the depth extent of the mineralisation to a vertical depth of 320m at which it is still open ended. These resources are estimated from five of the fragments within the Kalukundi Project near Kolwezi in the DRC per Table 1 below. The new Indicated and Inferred resource assessment has been summarised as follows: Indicated resources: Inferred resources: 30.4 million tonnes grading 2.40% Cu and 0.46% Co million tonnes grading 1.71% Cu and 0.45% Co. Table 1 - Resource tonnages, grades and metal contents for the five main fragments at the Kalukundi Project, DRC. Deposit Tonnes (x1000) Copper (%) ASCu (%) Cobalt (%) Contained Cu (kt) Contained Co (kt) Indicated Kii 4, Kalukundi 5, Kesho Anticline 9, Principal 11, Total 30, Tonnes (x1000) Copper (%) ASCu (%) Cobalt (%) Contained Cu (kt) Contained Co (kt) Deposit Inferred Kii Kalukundi 3, Kesho 10, Anticline 2, Principal 8, Total 25, Notes: 1. Mineral Resources have an effective date of November 15, The qualified person for the Mineral Resources is Gordon Seibel, SME Registered Member, and an employee of AMEC. The Mineral Resource estimate was prepared by Mr. Seibel. 2. Mineral Resources are reported as undiluted. No mining recovery has been applied. 3. Acid-soluble copper (ASCu) is a sub-set of, and is not additive to, total copper (TCu). 4. There are reasonable prospects for economic extraction by constraining the resources within a conceptual economic open pit shell constructed using a long-term copper price of US$3.16/lb, cobalt price of US$9.20/lb., mining cost at US$1.77/tonne, G&A cost at US$2.50/tonne processed, a pit slope angle of 45 degrees, and variable processing costs ranging from US$25.00/tonne to US$50.00/tonne. 5. Mineral Resources are reported within the pit shell at a cut-off using a net value per tonne of US$0.01. The net value assumes the block is potentially economic after G&A and variable block processing costs have been met. 6. Processing is assumed to be on site. Transportation costs for shipping material off-site for processing are not included. 7. Copper grade shells to define the geometry of the copper mineralization were shaped manually using a cut-off grade of 0.3% Cu. Cobalt grade shells to define the geometry of the cobalt mineralization were shaped manually using a cut-off grade of 0.1% Co. 8. Tonnages are reported in metric units and grades in percent. Tonnages are rounded to the nearest thousand tonnes; grades are rounded to two decimal places. This assessment slightly more than doubles the resources at the Kalukundi Project that were outlined in the 2006 Technical Report. This new resource assessment also replaces the previous resource statement, which is deemed to be historical. This mineral resource assessment represents a major increase in the tonnage estimates for the Kalukundi Project. The detail provided by the infill drilling also increased the confidence levels on continuity of mineralisation in 4 of 21

5 the near surface environment. The resources delineated as inferred could be targeted for additional infill drilling where warranted with a view to improving the confidence levels in continuity of the geology and the grade distribution. A , compliant Technical Report was prepared by AMEC with respect to the new resource assessment. Africo electronically filed this Technical Report with regulators on or about May 23, 2013 and it is available for review at A summary of the new resource assessment prepared by AMEC is also included as Schedule A in the Company s Annual Information Form dated March 24, 2014 and is also attached to Schedule A in the Company s Annual Information Form dated March 23, 2015 which are both available for review at Development The Company has had discussions with its principal shareholder, Camrose Resources Ltd ( Camrose ), about the possibility of a joint development program with their Comide project, which is adjacent to the Kalukundi project as well as the funding of the potential joint development going forward. However, no definitive agreement has been entered into in this regard and any agreement that may be reached will also require the consent of La générale des Carrières et des mines (sarl) ( GCM ) the State Mining Company in the DRC. GCM owns 25% of the shares of Swanmines, which is the entity that owns the Kalukundi property with Africo owning a 75% indirect interest in Swanmines. There can be no assurance that the Company will be able to negotiate a joint development program or the funding of such a program or that it will be able to maintain its interest in the Kalukundi Property. As of the current date, based on the current metal markets, the state of the current equity markets and other factors, it is highly unlikely that any such joint development agreement will be able to be negotiated in the short-term. In addition, based on the trading price of Africo s shares, it is unlikely that the Company will be able to fund the development of its Kalukundi project without third party financial backing. Furthermore, the Company has discussed with GCM the possibility of deferring the program and budget proposed by MDM Engineering regarding the site establishment of a plant that the Company submitted to GCM in an effort to try and work out arrangements with Camrose on a potential joint development. To the Company s knowledge, Camrose is a wholly-owned subsidiary of Eurasian Resources Group ( ERG ), previously known as Eurasian Natural Resources Corporation ( ENRC ). There can be no assurance that GCM will agree to the deferment of the program as a result of the extensive time period that has elapsed to date. Reference is also made to pages 12, 13 and 14 of this MD&A in the section entitled Exploration and Early Development Stage Company and Risk Factors. Other Matters Management of Africo and its subsidiary Swanmines have been advised that La congolaise des mines et de développement (sarl) ( Comide ), an affiliate of Camrose and ERG, may have carried out mining operations on a portion of the Kalukundi property in the DRC without the consent and approval of Africo and Swanmines. Africo and Swanmines are currently investigating the situation in an effort to protect the value of Kalukundi for the benefit of all of the shareholders of Africo and to also reach a settlement agreement with Comide. However, there can be no assurance that a settlement agreement will be concluded. QUALIFIED PERSON The technical information within this MD&A was prepared under the supervision of Michael J. Evans, Africo s Consulting Geologist, who is a Qualified Person under National Instrument (NI ) Standards of Disclosures for Mineral Properties. 5 of 21

6 SELECTED FINANCIAL INFORMATION Management is responsible for the Interim Financial Statements referred to in this MD&A, and provides officers disclosure certifications filed with Canadian provincial securities commissions. The Company s Board of Directors reviews and approves the Interim Financial Statements and MD&A. The Interim Financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting, and should be read in conjunction with Africo s Annual Financial Statements for the year ended December 31, 2014 which have been prepared in accordance with IFRS as issued by the IASB. Our significant accounting policies are presented in Note 3 of the Annual Financial Statements; we followed these accounting policies consistently throughout the year. Details of new accounting standards, effective for the reporting period beginning on or after January 1, 2016, and their effect on the financial information can be found in Note 3 of the Interim Financial Statements and within this MD&A in the section entitled New, Amended and Future IFRS Pronouncements. No material changes were noted. We have elected to capitalize all acquisition costs and expense all exploration and evaluation expenditures relating to our mineral exploration property interests. The Company s operations are in one industry, that being the exploration for copper-cobalt and other precious and base metals. Because Africo incurs the majority of its expenditures in United States ( U.S. ) dollars and since the majority of any future development costs incurred would be in U.S. dollars, it has been determined to have a U.S. dollar functional currency. The presentation currency of our Interim Financial Statements is also the U.S. dollar. The selected financial data presented below for the current and comparative periods was prepared in accordance with IFRS. The selected period information and summary of financial results in this MD&A should be read in conjunction with the Interim Financial Statements and the Annual Financial Statements. Results of Operations Although development is being considered on its Kalukundi Property, Africo is in the exploration phase and the Kalukundi Property is not currently in production. Exploration and evaluation expenses are expensed when incurred except for significant acquisition costs with respect to a given property. Administrative expenses relating to the operation of the Company s business are also expensed. Consequently, the Company s net income is not a meaningful indicator of its performance or potential. The key performance driver for the Company is the acquisition and development of prospective mineral properties. By acquiring and exploring properties of superior technical merit, the Company increases its chances of finding and developing an economic deposit. Additional financing may be required for new exploration and/or production decisions on its principal mineral property and other business initiatives. Due to the inherent nature of the mineral exploration industry, the Company will have a continuous need to secure additional funds through the issuance of equity or debt in order to support its corporate and exploration and development activities, as well as its share of obligations relating to mineral properties. Three months ended March 31, 2016 compared to the three months ended March 31, 2015 Net income and comprehensive income for the three months ended March 31, 2016 was $1,628,963 or $0.02 per share compared to a net loss and comprehensive loss of $3,867,371 or $(0.05) per share for the three months ended March , an increase of $5,496,334. Net income and comprehensive income during the three months ended March 31, 2016 is inclusive of interest and other income of $85,312 and a foreign exchange gain of $2,141,374. The net loss and comprehensive loss for the three months ended March 31, 2015 was inclusive of interest and other income of $139,819 and a foreign 6 of 21

7 exchange loss of $3,319,633. The fluctuation in foreign exchange during the current period in comparison to the prior period was due to an increase in the CDN/USD exchange rate at March 31, 2016 (CDN dollar = $ USD) from (CDN dollar = $ USD) at December 31, 2015 in comparison to the decrease in the CDN/USD exchange rate at March 31, 2015 (CDN dollar = $ USD) from (CDN dollar = $ USD) at December 31, A large portion of the Company s cash and investments are held in Canadian dollars resulting in the foreign exchange gains or losses, the majority which was unrealized. At March 31, 2016, the Company had a net balance of $45,050,442 in Canadian dollars and $11,157,064 in U.S. dollars. Individual items before other income (expenses) contributing to net income and comprehensive income for the three months ended March 31, 2016 compared to the net loss and comprehensive loss for the three months ended March 31, 2015, are as follows: Exploration and evaluation expenditures amounted to $371,244 (March 31, $445,832). Exploration and evaluation expenditures decreased during the current period in comparison to the prior period as less security costs and maintenance costs were incurred with respect to its Kalukundi property in the DRC. Management and consulting fees amounted to $132,708 (March 31, $138,461). Management and consulting fees during the current period remained consistent with the prior period. Office expenses amounted to $43,882 (March 31, $41,099). Office expenses during the current period remained consistent with the prior period. The increase was minimal and due in part to foreign exchange. Financial Position The following financial data are derived from our Interim Financial Statements: SELECTED FINANCIAL INFORMATION FROM THE STATEMENT OF FINANCIAL POSITION March 31, 2016 December 31, 2015 Total assets $66,051,963 $64,436,818 Total current liabilities $1,095,298 $1,109,116 Total non-current liabilities $210,876 $210,876 Total equity $64,745,789 $63,116,826 Cash dividends declared $- $- Total assets Total assets increased by $1,615,145 as at March 31, 2016 in comparison to December 31, 2015 as a result of the increase in cash and short-term investments. The increase in cash and short-term investments is primarily due to the foreign exchange conversion from Canadian to U.S. dollars. A large portion of the Company s cash and short-term investments are held in Canadian dollars and the Company converts these funds to U.S. dollars as the Company s presentation currency is the U.S. dollar. Current liabilities At March 31, 2016, our current liabilities consist of trade accounts payable and accrued liabilities of $1,095,298 (December 31, 2015 $1,109,116). Current liabilities as at March 31, 2016 remained consistent in comparison to December 31, of 21

8 Non-current liabilities At March 31, 2016, our non-current liabilities consist of a provision for closure and reclamation in the amount of $210,876 (December 31, $210,876). There was no change in the amount of this provision during the current year when compared to the prior year. The Company is obliged under the mining code of the DRC and its environmental policies to rehabilitate the Kalukundi site once it ceases operations. As mining activities have not yet commenced, the rehabilitation activities would be focused on areas impacted by exploration and evaluation activities. In view of the difficulty in assessing the end of mine life given the uncertainty regarding the potential start of mine development, as of March 31, 2016 the Company has used a current cost estimate as the basis for the closure and reclamation provision of $210,876. Shareholders equity The Company did not issue any Common Shares during the three months ended March 31, Refer also to discussion in this MD&A under the heading, Outstanding Share Data. The Company has not declared any dividends since its incorporation. SUMMARY OF QUARTERLY RESULTS The following information is prepared in accordance with IFRS and is derived from and should be read in conjunction with, our unaudited condensed interim consolidated financial statements for each of the past eight quarters, as well as the Annual Financial Statements. Consistent with the preparation and presentation in our Annual Financial Statements, these unaudited quarterly results are presented in U.S. dollars. The determination of functional currency for the Company and its subsidiaries is unchanged from that which is consolidated in the Annual Financial Statements and also from the discussion within this MD&A under the heading, Selected Financial Information. Exploration and evaluation assets March 31, 2016 December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 December 31, 2014 September 30, 2014 June 30, 2014 $19,600,578 $19,600,578 $19,600,578 $19,600,578 $19,600,578 $19,600,578 $19,600,578 $20,411,304 Revenue $ - $ - $ - $ - $ - $ - $ - $ - Exploration and evaluation expenditures* Net income (loss) and comprehensive income (loss) ** $371,244 $596,601 $554,419 $399,778 $445,832 $732,283 $437,644 $706,639 $1,628,963 $(1,977,300) $(3,015,928) $1,035 $(3,867,371) $(2,687,475) $(2,528,673) $680,923 Earnings (Loss) per share: Basic *** $0.02 $(0.03) $(0.04) $0.00 $(0.05) $(0.04) $(0.04) $0.01 Diluted *** $0.02 $(0.03) $(0.04) $0.00 $(0.05) $(0.04) $(0.04) $0.01 * The fluctuations in exploration and evaluation expenditures from quarter to quarter relate to maintenance and security costs on the Company s Kalukundi property. The increased exploration and evaluation expenditures during the quarter ended June 30, 2014 in comparison to the quarter ended September 30, 2014 relates to additional security costs being incurred as a large number of artisanal miners were present on the Kalukundi property. These artisanal miners returned during the quarter ended December 31, Although the majority of the artisanal miners have been removed with the assistance of the Federal, Provincial and Municipal authorities in 8 of 21

9 the DRC, there is still some intermittent activity on the Kalukundi property from artisanal miners. We have also retained a security company to assist with the problem and to safeguard the Kalukundi property. The decrease in exploration and evaluation expenditures during the quarters ended June 30, 2015 and March 31, 2015 in comparison to the quarter ended December 31, 2014 is due to less security costs being incurred as the majority of the artisanal miners were removed from the property as previously mentioned. Exploration and evaluation expenditures increased again during the quarters ended September 30, 2015 and December 31, 2015 in comparison to June 30, 2015 due to increased security costs and additional site visits. During the quarter ended March 31, 2016, exploration and evaluation expenditures decreased once again as less security costs were incurred. ** The fluctuation in net income (loss) and comprehensive income (loss) on a quarterly basis is due in part to foreign exchange gains or losses. The Company holds significant amounts of cash and cash equivalents and short-term investments in Canadian dollars which are converted to the Company s functional and reporting currency of US dollars using the spot rate at the end of each reporting period. This can result in significant foreign exchange gains or losses at the end of each reporting period depending upon the spot rate in effect. *** Basic and diluted loss per share is the same, as the effect of potential share issuances under stock option or warrant agreements would be anti-dilutive. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2016 the Company had approximately $45.8 million in cash and cash equivalents. The Company does not have any cash flow from operations as it is an exploration stage company. Therefore, financings, as well as interest earned on current cash and investment balances, have been the sole source of funds since its inception. Short-term investments, if any, are invested in highly liquid, low risk, interest bearing instruments with original maturities greater than 3 months. The surplus funds are invested with Canadian Chartered banks and Credit Unions. At March 31, 2016, the Company had working capital of $45,056,443 (December 31, $43,427,480). In the opinion of management this working capital is sufficient to support the Company s normal operating requirements on an ongoing basis for the following year and beyond. However, as outlined earlier, in order for the Company to develop its Kalukundi property, significant debt and/or equity funding will be required. Given volatility in equity markets, global uncertainty in economic conditions, cost pressures and results of exploration activities, management constantly reviews expenditures and exploration programs and equity markets such that the Company has sufficient liquidity to support its growth strategy. During the three months ended March 31, 2016, the Company s main expenditures included the Company s exploration and evaluation activities of $371,244 (March 31, $445,832) and management and consulting fees of $132,708 (March 31, $138,461). LIQUIDITY AND CAPITAL RESOURCES OUTLOOK The Company s cash position is highly dependent on the ability to raise cash through financings and the expenditures incurred on exploration programs. Capital expenditures are not expected to have any material impact on liquidity at the present time. Management believes that in order to finance the development of the Kalukundi Property, the Company will be required to raise significant additional capital by way of debt and/or equity. 9 of 21

10 This outlook is based on the Company s current financial position and is subject to change if opportunities become available based on current exploration program results and/or external opportunities. SIGNIFICANT ACCOUNTING POLICIES For information on the Company s accounting policies, please refer to the disclosure in Note 3 of our Annual Financial Statements. NEW, AMENDED AND FUTURE IFRS PRONOUNCEMENTS Future IFRS Pronouncements The following standards have been published and are mandatory for the Company s annual accounting periods beginning on or after January 1, 2018: IFRS 7 This standard was amended to require additional disclosures on transition from IAS 39 to IFRS 9. The Company is currently evaluating the extent of the impact of the adoption of this standard. IFRS 9 Financial Instruments IFRS 9, Financial Instruments introduces new requirements for the classification and measurement of financial assets and liabilities. The Company is currently evaluating the extent of the impact of the adoption of this standard. IFRS 15 - Revenue IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ), was issued by the IASB in May 2014 and clarifies the principles for recognizing revenue from contracts with customers. In July 2015, the IASB deferred the effective date of the standard to annual reporting periods beginning on or after January 1, 2018, with earlier application permitted. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning January 1, The Company is currently evaluating the impact of IFRS 15 on its financial statements, if any. IFRS 16 - Leases On January 13, 2016 the IASB issued IFRS 16, according to which, all leases will be on the balance sheet of lessees, except those that meet the limited exception criteria. Respectively, rent expense is to be removed and replaced by the recording of depreciation and finance expenses. The standard is effective for annual periods beginning on or after January 1, SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and expenses. Estimates and judgments are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Further information on management's judgments, estimates and 10 of 21

11 assumptions and how they impact the various accounting policies are described below and also in the relevant notes to the consolidated financial statements. Judgments In the process of applying the Company s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the consolidated financial statements: (i) Review of Asset Carrying Values and Impairment Assessment In accordance with the Company s accounting policy, each asset is evaluated every reporting period to determine whether there are any indications of impairment. If any such indication exists, a formal estimate of the recoverable amount is performed and an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount. The recoverable amount of an asset is measured at the higher of value in use and fair value less costs to sell. The most significant assets the Company assesses for impairment are exploration and evaluation assets. Judgements involved in assessing impairment of exploration and evaluation assets are discussed below. (ii) Exploration and Evaluation Assets and Expenditures The application of the Company s accounting policy for exploration and evaluation assets and expenditures requires judgment to determine whether future economic benefits are likely, from either future exploitation or sale, or whether activities have not reached a stage that permits a reasonable assessment of the existence of reserves. Resource exploration is a speculative business and involves a high degree of risk. There is no certainty that the expenditures made by the Company in the exploration of its property interests will result in discoveries of commercial quantities of minerals. Exploration for mineral deposits involves risks which even a combination of professional evaluation and management experience may not eliminate. Significant expenditures are required to locate and estimate ore reserves, and further the development of a property. Capital expenditures to bring a property to a commercial production stage are also significant. There is no assurance the Company has, or will have, commercially viable ore bodies and there is no assurance that the Company will be able to arrange sufficient financing to bring ore bodies into production. Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its estimates and assumptions on parameters available when the consolidated financial statements were prepared. However, existing circumstances and assumptions about future developments may change due to market change or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur. (i) Exploration and Evaluation Assets and Expenditures In addition to applying judgment to determine whether future economic benefits are likely to arise from the Company s exploration and evaluation assets or whether activities have not reached a stage that permits reasonable assessment of the existence of reserves, the Company has to apply a number of estimates and assumptions. The publication of a resource per National Instrument , Standards of 11 of 21

12 Disclosure for Mineral Projects ( NI ) technical report, is itself an estimation process that involves varying degrees of uncertainty depending on how the resources are classified (i.e. measured, indicated or inferred). Estimates and assumptions may change as new information becomes available. If, after deferred acquisition costs are capitalized, information becomes available suggesting the recovery of such costs is unlikely, the relevant capitalized amount is written off in the consolidated statement of loss and comprehensive loss in the period when the information becomes available. Management believes that the estimates involving its exploration and evaluation assets and expenditures are reasonable. (ii) Decommissioning, Restoration and Similar Liabilities Decommissioning, restoration and similar liabilities are estimated based on the Company s interpretation of current regulatory requirements, constructive obligations and are measured at the present value of discounted cash flows for the estimated liabilities. Fair value is determined based on the net present value of estimated future cash expenditures for the settlement of decommissioning, restoration and similar liabilities that may occur upon decommissioning of certain of the Company s assets. Such estimates are subject to change based on changes in laws and regulations and negotiations with regulatory authorities. EXPLORATION AND EARLY DEVELOPMENT STAGE COMPANY AND RISK FACTORS The Company is engaged in the business of acquiring, exploring and developing mineral properties with the expectation of locating economic deposits of minerals. There is no assurance that the Company s exploration or development programs will result in economic deposits being commercially mined. As a consequence, the risks and uncertainties and forward looking information is subject to known and unknown risks and uncertainties which are as follows, but not limited thereto: exploration and development of mining properties is highly speculative in nature and involves a high degree of risk; there are many competitors in the business, some of which have greater financial, technical and other resources; mining involves many hazards and risks in the field such as unexpected rock formations, seismic activity, cave-ins, adverse weather conditions, unstable political conditions, and many other conditions; timing delays in exploration and development and delays in funding may result in delays and postponement of projects. In addition, delays in development may result in the Company losing title to its Kalukundi Property if it is not able to comply with the time requirement in its joint venture agreement with the mining authorities in the DRC and with the state mining Company in the DRC, in particular, which owns 25% of Swanmines. Africo has a 75% equity interest in Swanmines, which owns the Kalukundi Property. Specifically, the Company was required to present to GCM a full budget for 2012 which includes a drilling plan and a plan to commence operations and construction plans. Should the Company not be able to comply with these requirements to the satisfaction of GCM, title to the Kalukundi Property may be lost without the Company receiving any compensation. In response to a request from GCM to commence mining development at Kalukundi, Africo approached MDM Engineering to put forward a site establishment plan with the objective of preparing the plant site and layout in advance of a major construction program. Following detailed discussions with the MDM Engineering team, a work program and a budget of approximately $5.8 million was compiled and submitted to GCM in respect of the plan to commence construction of a plant. This program and budget was approved by Swanmines, which includes representatives from GCM. The Company has since deferred the program and budget proposed by MDM Engineering regarding the site establishment of a 12 of 21

13 plant in an effort to try and work out arrangements with Camrose, which is the Company s majority shareholder, on a potential joint development with their Comide project and the funding of such development. As of the current date, based on the current metal markets, the state of the current equity markets and other factors, it is highly unlikely that any such joint development agreement will be negotiated in the near term; In addition the Company will also likely have to take steps to move the permanent residents from the Kisankala village to the site of a new village if development proceeds on the Kalukundi Property. Details of the village relocation are still to be outlined and planned in detail; It should be noted that, pursuant to the Swanmines Creation Agreement, Africo was originally required to organise financing for Kalukundi within 6 months of the provision of the relevant feasibility study, and to begin construction within 6 months thereafter. These deadlines have not been met. Failure by Africo to meet such deadlines may entitle GCM to terminate the Swanmines Creation Agreement, thereby rendering all loans from Africo to Swanmines non-refundable, and transfer Swanmines license to GCM without consideration. Although these intended deadlines were not met, to date, GCM has not issued any notices of default. Whilst Africo has no reason to believe that GCM will not remain supportive of Africo s development of the Kalukundi Project, there can be no assurance that GCM will not, in the future, if Africo does not develop or commence development of the project to GCM s satisfaction, pursue its rights under the Swanmines Creation Agreement, in which case the Company may risk losing title to the Kalukundi Project without receiving any compensation for past expenditures; there is no assurance that the Company will be able to obtain all necessary permits and approvals to conduct its affairs and there is no assurance that future tax, environmental or other legislation will not cause additional expenses, delays or postponements; there is no assurance that the Company will be able to obtain the requisite financing to bring the Kalukundi Property into production. In addition, the costs to develop the Kalukundi Property will be substantially higher than was outlined in the 2006 Technical Report due to current fuel, labour and material costs; In the event that unauthorized and artisanal mining operations continue to take place on the Kalukundi Property, the previously reported resources may be lessened and the Company may have to update its resource statement; the operations are subject to environmental regulation, a breach of which may result in imposition of enforcement actions, environmental hazards may exist on current properties which are presently unknown to the Company, and regulations and laws change over time; the Company may not be able to negotiate a plan with Comide for a joint development plan of Kalukundi and Comide s adjacent property; world prices for metals can be unstable and unpredictable and may materially affect the Company s operations as well as economic conditions which may change the demand for minerals; the securities markets for resource stocks worldwide have experienced high price and volume volatility; the Company is dependent upon the services of certain key individuals whose loss could significantly affect operations. In addition, in order for the Company to move forward with development of or work on its Kalukundi Property, the artisanal miners that from time to time illegally take ore from the 13 of 21

14 property, will have to be kept off the property. Furthermore, in the event that artisanal miners continue to invade the Kalukundi Property, the Company will likely suffer a significant loss of its ore resources; officers and directors of the Company may have potential conflicts of interest with other entities; uncertainties as to future development and implementation of future technologies; changes in accounting policies and methods may affect how the financial condition of the Company is reported; uncertainties, such as potential breaches of contracts (i.e. property agreements), could result in significant loss; The Company operates in the DRC and Canada and has a functional currency of US dollars. It is therefore exposed to foreign exchange risk arising from transactions denominated in a foreign currency. Africo s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are held in either Canadian or US dollars and are therefore subject to fluctuations in exchange rates; and Investment in the Company s shares is highly speculative and investors risk losing their entire investment; Reference is also made to Item 3.12 Risk Factors in the Company s Annual Information Form dated March 16, 2016 which is available for review at OUTSTANDING SHARE DATA Africo s authorized capital consists of an unlimited number of common shares without par value. As at May 13, 2016, the following common shares, options and share purchase warrants were outstanding: # of Shares Exercise Price Expiry Date Issued and Outstanding Common Shares 71,313,127 N/A N/A Incentive Stock Options 2,155,000 CDN $0.45 December 5, 2019 Fully Diluted 73,468,127 OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements. NATURE OF THE SECURITIES The purchase of the Company s securities involves a high degree of risk and should be undertaken only by investors whose financial resources are sufficient to enable them to assume such risks. The Company s securities should not be purchased by persons who cannot afford the possibility of the loss of their entire investment. Furthermore, an investment in the Company s securities should not constitute a major portion of an investor s portfolio. 14 of 21

15 DIVIDENDS Africo has no earnings or dividend record and is unlikely to pay any dividends in the foreseeable future as it intends to employ available funds for mineral exploration and development. Any future determination to pay dividends will be at the discretion of the Board of Directors of Africo and will depend on Africo s financial condition, results of operations, capital requirements and such other factors as the Board of Directors of Africo deem relevant. COMMITMENTS (a) Effective May 1, 2016, the Company entered into a verbal sub-lease agreement (to be finalized via written agreement) for office space at approximately CDN $3,900 per month (CDN $46,800 annually). The sublease is effectively a month to month lease however, should the Company wish to discontinue use of the premises, 6 months written notice must be provided. The head-lease expires on April 30, (b) In accordance with the mining code in the DRC, the Company is required to provide a financial guarantee in connection with the future environmental rehabilitation of its Kalukundi Property. The financial guarantee is to be provided by making annual instalments in the form of cash. GCM has accepted the following payment plan and the Company is required to make the following remaining payments: 2016 $ 107, $ 125, $ 142, $ 158, $ 175,549 In the event that the cost of rehabilitation work on the property is less than the financial guarantee the Company shall be entitled to a reimbursement of such amount. RELATED PARTY TRANSACTIONS (a) Related Parties The Company s related parties consist of a majority shareholder, a company controlled by the majority shareholder, directors and companies owned by executive officers. The nature of the Company s relationships with its related parties is as follows: Nature of Relationship Camrose Resources Limited * Majority Shareholder Comide S.P.R.L. * Consulting Directors Directorship L. M. Okada Ltd. Management 143 Investments Ltd. Management * Companies controlled by Eurasian Resources Group (formerly ENRC) as to 100%. The Company incurred fees and expenses in the normal course of operations in connection with companies owned by key management. Details are as follows: Three Months Ended March 31, 2016 Three Months Ended March 31, 2015 Management fees $ 88,753 $ 102,214 $ 88,753 $ 102, of 21

16 Management Fees The Company paid or accrued fees to a private company controlled by a director of the Company for management services performed outside of his capacity as a director. The total amount paid or accrued during the three months ended March 31, 2016 was $66,895 (March 31, $78,529). The Company also paid fees to a private company controlled by an officer of the Company for consulting services. The total amount paid during the three months ended March 31, 2016 was $21,858 (March 31, $23,685). (b) Compensation of Key Management Personnel The remuneration of directors and members of key management personnel during the three month periods ended March 31, 2016 and 2015 were as follows: Name Personal Corporation Nature of Fees Note Three Months Ended March 31, 2016 Three Months Ended March 31, 2015 James Cook N/A Director s Fees (i) $ 5,829 $ 7,250 Beat Ehrensberger N/A Director s Fees (i) - 6,043 Charles Forster N/A Director s Fees (i) - 6,043 George Ireland N/A Director s Fees (i) 5,829 6,043 Jonathan Cordero N/A Director s Fees (i) 5,829 - Edward Lauer N/A Director s Fees (i) 5,464 - Chris Theodoropoulos 143 Investments Ltd. Management (i) 66,895 78,529 Larry Okada LM Okada Ltd. Management (i) 21,858 23,685 Total Remuneration $ 111,704 $ 127,593 (i) During the three months ended March 31, 2016, the Company paid or accrued directors fees totaling $22,951 (March 31, $25,379). Also, management and directors fees include management fees disclosed in Note (a) above. Amounts due to related parties are unsecured, non-interest bearing and due on demand. Accounts payable and accrued liabilities at March 31, 2016 included $35,805 (December 31, 2015 $22,759) which was due to directors and a private company controlled by a director of the Company. Key management personnel were not paid post-employment benefits, termination benefits or other longterm benefits during the three month periods ended March 31, 2016 and (c) Loan to Related Party On October 10, 2012, the Company loaned $963,203 or CDN $944,595 to a director and officer of the Company to acquire a block shares from a minority shareholder. The loan bore interest at 5% per annum and was secured by the block of shares. The block of shares could not be sold, exchanged or pledged unless the loan was repaid. As at March 31, 2016, the entire loan, principal and interest, has been repaid. 16 of 21

17 PROPOSED TRANSACTIONS At the present time, there are no proposed transactions that are required to be disclosed other than the transaction with Camrose which has been disclosed within this MD&A on Page 2. LEGAL MATTERS Africo is not currently, and has not at any time during our most recently completed financial year, been party to, nor has any of its property interests been the subject of, any material legal proceedings or regulatory actions. FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. Financial Assets The Company classifies its financial assets in the following category: Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as current assets or non-current assets based on their maturity date. Loans and receivables are carried at amortized cost less any impairment. Loans and receivables comprise cash and cash equivalents, short-term investments and trade and other receivables. Financial Liabilities The Company classifies its financial liabilities in the following category: Borrowings and Other Financial Liabilities Borrowings and other financial liabilities are non-derivatives and are recognized initially at fair value, net of transactions costs incurred and are subsequently stated at amortized cost. Any difference between the amounts originally received, net of transaction costs, and the redemption value is recognized in the statement of income (loss) over the period to maturity using the effective interest method. Borrowings and other financial liabilities are classified as current or non-current based on their maturity date. Financial liabilities include trade accounts payable and accrued liabilities. Risks Associated with Financial Instruments The Company s activities expose it to a variety of financial risks including credit risk, liquidity risk, currency risk and interest rate risk. 17 of 21

18 Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. Africo deposits its cash and cash equivalents with high credit quality major Canadian financial institutions as determined by ratings agencies. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the maximum exposure to credit risk. Liquidity Risk Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. The Company attempts to manage liquidity risk by maintaining sufficient cash and cash equivalent balances. Liquidity requirements are managed based on expected cash flows to ensure that there is sufficient capital in order to meet short-term obligations. As of March 31, 2016, the Company had cash and cash equivalents of $45,845,904 (December 31, $44,196,833) to settle accounts payable and accrued liabilities of $1,095,298 (December 31, $1,109,116). Currency Risk The Company operates in the DRC and Canada and has a functional currency of US dollars. It is therefore exposed to foreign exchange risk arising from transactions denominated in a foreign currency. Some of Africo s cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued liabilities are held in Canadian dollars and are therefore subject to fluctuation against the US dollar. The Company had the following balance in Canadian dollars as at March 31, 2016: March 31, 2016 Cash and cash equivalents in CDN dollars $ 45,050,442 Equivalent in US dollars $ 34,688,840 US dollar denominated cash and cash equivalents held by the Company and its wholly owned subsidiaries 11,157,064 Total cash and cash equivalents and short-term investments in US dollars $ 45,845,904 As of March 31, 2016, a 1% increase (decrease) in the US to Canadian exchange rates on that date would have resulted in a decrease (increase) to the net loss of approximately CDN $450,500 with respect to the net balance of CDN $45,050,442 above. Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. Cash and cash equivalents and short-term investments include deposits which are at variable interest rates. For the three months ended March 31, 2016, a plus or minus 0.5% change in market interest rates would affect the Company s interest earned on cash and cash equivalents and short-term investments by approximately CDN $225,250 with respect to the net balance of CDN $45,050,442 above. MANAGEMENT OF CAPITAL In the management of capital, the Company considers shareholders equity. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the 18 of 21

19 exploration and development of mineral properties. The Board of Directors has not established quantitative capital structure criteria for management, but will review on a regular basis the capital structure of the Company to ensure its appropriateness to the stage of development of the business. The Company s objectives when managing capital are: To maintain and safeguard its accumulated capital in order to provide an adequate return to shareholders by maintaining a sufficient level of funds, to support continued evaluation and maintenance at the Company s existing properties, and to acquire, explore, and develop other precious and base metal deposits. To invest cash on hand in highly liquid and highly rated financial instruments with high credit quality issuers, thereby minimizing the risk and loss of principal. To obtain the necessary financing to complete exploration and development of its properties, if and when it is required. The property in which the Company currently has a 75% interest is in the exploration and evaluation stage and the Company is dependent on external financing to take the project into development. In order to carry out planned exploration and development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. In order to facilitate the management of capital and development of its principal mineral property, the Company prepares annual expenditure budgets, which are updated as necessary and are reviewed and approved by the Company s Board of Directors. In addition, the Company may issue new equity, incur debt, option its principal mineral property for cash and/or expenditure commitments from optionees, enter into joint venture arrangements, or dispose of certain assets. The Company s investment policy is to hold cash in interest bearing accounts at high credit quality financial institutions to maximize liquidity. In order to maximize ongoing development efforts, the Company does not pay dividends. The Company expects to continue to raise funds, from time to time, to continue meeting its capital management objectives. There were no changes in the Company's approach to capital management during the three months ended March 31, 2016 as compared to the year ended December 31, The Company is not subject to externally imposed capital requirements. MANAGEMENT S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The preparation and presentation of the accompanying financial statements, MD&A and all financial information in the financial statements are the responsibility of management and have been approved by the Board of Directors following the report and recommendation of the Audit Committee. The financial statements have been prepared in accordance with IFRS. Financial statements by nature are not precise since they include amounts based upon estimates and judgments. When alternative treatments exist, management has chosen those it deems to be the most appropriate in the circumstances. Management, under the supervision of and with the participation of the CEO and the CFO, have a process in place to evaluate disclosure controls and procedures and internal control over financial reporting as required by Canadian securities regulations. The CEO and CFO will certify the annual filings with the CSA as required in Canada by National Instrument ( NI ) (Certification of Disclosure in an Issuer s Annual and Interim Filings). The Board of Directors is responsible for overseeing management and to consider whether they have 19 of 21

20 fulfilled their responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee which is independent from management. The Audit Committee is appointed by the Board of Directors and reviews the financial statements and MD&A; considers the report of the external auditors; considers and approves the fees and expenses for the audit services; and recommends the independent auditors to the Board for the appointment by the shareholders. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, our internal control over financial reporting and financial reporting matters. The Audit Committee reports its findings to the Board of Directors for consideration when approving the financial statements for issuance to the shareholders. Management is responsible for establishing and maintaining adequate internal control over financial reporting. CONTROLS AND PROCEDURES Internal Control Over Financial Reporting The Company s management is responsible for establishing adequate internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company s management has evaluated the effectiveness of the design and operation of the Company s internal control over financial reporting as of the period covered by this report. Based on the result of the assessment, the Company s Chief Executive Officer and Chief Financial Officer have concluded that the Company s internal controls over financial reporting are effective. Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, as appropriate in order to permit timely decisions regarding public disclosure. Management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company s disclosure controls and procedures, as defined in National Instrument Certification of Disclosure in Issuer s Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports that are filed or submitted under Canadian securities legislation are recorded, processed, summarized and reported within the time period specified in those rules. CORPORATE GOVERNANCE Composition of the Board of Directors The Board of Directors of Africo is at present comprised of five directors. FORWARD LOOKING STATEMENTS The Company s Interim Financial Statements for the three months ended March 31, 2016 and this accompanying MD&A contain certain statements that may be deemed forward-looking statements. All statements in this document, other than statements of historical fact, that address events or developments that the Company expects to occur, are forward looking statements. Forward looking statements are statements that are not historical facts 20 of 21