Corsa Coal Corp. Management’s Discussion and Analysis June 30, 2014 · 2018. 11. 19. · Corsa...

Corsa Coal Corp. Management’s Discussion and Analysis

June 30, 2014

Corsa Coal Corp. Management’s Discussion and Analysis For the six months ended June 30, 2014

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This Management’s Discussion and Analysis (“MD&A”) provides a discussion and analysis of the financial condition and results of operations of the Company for the three and six months ended June 30, 2014 and 2013 and is intended to be read in conjunction with the unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2014 and 2013 and the related notes thereto, as well as the audited consolidated financial statements for the years ended December 31, 2013 and 2012 and the related notes thereto. References in this MD&A to “Second Quarter 2014” means the three months ended June 30, 2014; “Second Quarter 2013” means the three months ended June 30, 2013; “First Half 2014” means the six months ended June 30, 2014 and “First Half 2013” means the six months ended June 30, 2013, unless otherwise noted. The consolidated financial statements have been prepared in accordance with IFRS. Unless otherwise indicated, all dollar amounts in this MD&A are expressed in United States dollars and all ton amounts are short tons (2,000 pounds per ton).

Comparative information

On July 31, 2013, Corsa Coal Corp. (the “Company” or “Corsa”) completed a transaction (the “Quintana Transaction”) with Quintana Kopper Glo Investment, LLC (“QKGI”), a portfolio company of Quintana Energy Partners LP and its affiliated investment funds (collectively “Quintana”). See “Quintana Transaction” below. The result of the Quintana Transaction was the Company becoming the legal acquirer of QKGI, QKGI becoming the legal acquiree of the Company and Quintana becoming the controlling shareholder of the Company. Under International Financial Reporting Standards (“IFRS”), QKGI was identified as the accounting acquirer and the Company was identified as the accounting acquiree resulting in the Quintana Transaction being accounted for as a reverse takeover. As a result, the Company’s consolidated financial statements are now considered a continuation of the historical QKGI consolidated financial statements. The unaudited condensed interim consolidated statements of operations and comprehensive income and cash flows for the three and six months ended June 30, 2014 include the results from the operations of QKGI and Corsa for the period from January 1 to June 30, 2014; and the unaudited condensed interim consolidated statements of operations and comprehensive income and cash flows for the three and six months ended June 30, 2013 include the results from the operations of QKGI for the periods from January 1 to June 30, 2013. The unaudited condensed interim consolidated balance sheets at June 30, 2014 and December 31, 2013 includes QKGI and Corsa.

Date This MD&A was prepared using information that is current as of August 26, 2014. Company Profile Toronto based Corsa Coal Corp.’s primary business is the mining, processing and selling of thermal and metallurgical coal, as well as actively exploring, acquiring and developing resource properties that are consistent with its existing coal business. The Company’s coal operations are conducted through its approximately 81.0% owned subsidiary, Wilson Creek Energy, LLC (“WCE”). WCE operates two divisions, Kopper Glo and Wilson Creek. Kopper Glo is based in Knoxville, Tennessee, U.S.A. and produces thermal coal from its mines in the Southern Appalachia coal region of the United States. The current production is from contour and high


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wall surface mines and an underground mine which is processed through a centrally located preparation plant. Current sales are to domestic utilities and industries. See “Kopper Glo Operations”. Wilson Creek is based in Somerset, Pennsylvania, U.S.A. and produces a high quality, low-volatile metallurgical coal from its mines in the Northern Appalachia coal region of the United States. The current production is from contour and high wall surface mines and an underground mine which is processed through a centrally located preparation plant. Current sales are to domestic and international steel producers. See “Wilson Creek Operations”. Corsa was incorporated on June 14, 2007 under the Business Corporations Act (British Columbia) and was listed on the TSX Venture Exchange (“TSX-V”) on April 17, 2008 under the symbol “CSO”. On April 27, 2011 the Company changed its name to Corsa Coal Corp. and on June 27, 2011, Corsa continued under the Canada Business Corporations Act. Strategy Corsa’s goal is to focus on niche markets within the coal industry which yield the highest scarcity value and have a delivered cost advantage to customers while maintaining a scalable mining asset base and sufficient infrastructure to achieve the Company’s expected growth. To achieve this, the Company’s strategy is to:

Operate in a safe, responsible and cost-effective manner; Secure mining assets with low permitting risk, relatively low development costs and

infrastructure in areas which are geographically positioned at a competitive advantage to key customers and export markets;

Diversify the Company’s customer base and balance between domestic and international markets; and

Maintain a well-capitalized balance sheet and sufficient liquidity to withstand any unsuspected sustained downturns in coal pricing.

See “Outlook” section for further discussion on the status of metallurgical and thermal coal markets. Financial Highlights

For the three months ended For the six months endedJune 30, June 30,

2014 2013 2014 2013 Revenue $ 24,319,000 $ 21,121,000 $ 44,162,000 $ 42,342,000 Net and comprehensive income $ 692,000 $ 361,000 $ 119,000 $ 1,170,000 Earnings per share $ (0.00) $ 0.00 $ (0.01) $ 0.00Adjusted EBITDA(1) $ 502,000 $ 4,326,000 $ 712,000 $ 8,794,000

(1) This is a non-GAAP measure. See “Non-GAAP Measures”.


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Operations Highlights

Completed the acquisition of PBS Coals Limited (“PBS”) on August 19, 2014. See “PBS Transaction”.

Sales of 315,000 tons of coal in Second Quarter 2014 and 582,000 tons in First Half 2014. See “Operating Results: Overview”.

Sales guidance of 1,700,000 tons of coal for the year ended December 31, 2014, including additional tons as a result of the PBS Transaction. See “Outlook”.

Increased production from the Casselman Mine as a result of the start-up of a continuous haulage system in January 2014. See “Results of Operations: Wilson Creek – metallurgical coal”.

Appointment of George Dethlefsen as Chief Executive Officer and Keith Dyke as Chief Operating Officer and President of Corsa. See “Director and Officer Appointments”.

Outlook The Company’s coal sales guidance for 2014 is approximately 1,700,000 tons. This consists of thermal coal sales guidance of approximately 870,000 tons and metallurgical coal sales guidance of approximately 830,000 tons with 430,000 tons expected to be sold as a result of the acquisition of PBS. See “PBS Transaction” for further details. Thermal Coal

In First Half 2014, the Company was able to actively participate in the spot market and has also scheduled spot orders for deliveries in the second half of 2014. Total sales of thermal coal in the First Half 2014 amounted to 444,000 tons. The Company is also aware of several utilities, which consume the Company’s thermal coal product, in the market securing tons for the second half of 2014 and into calendar 2015. While the thermal coal market continued to stabilize in First Half 2014, the Company has been successful in maintaining a high level of contracted sales for the future. The thermal coal sales guidance for second half of 2014 is approximately 426,000 tons, all of which has been contracted by the Company. The Company also has sales contracts in place for 500,000 tons in 2015 and 500,000 tons in 2016. The Company continues to actively market coal to domestic utilities and industries.

Metallurgical Coal In order to make a strong and stable coke for steel companies’ production of iron, low volatile coal is a necessary ingredient in the sensitive coal blend required. Unlike high volatile coal, low volatile metallurgical coal is a globally scarce commodity. Wilson Creek’s metallurgical reserve base consists entirely of premium rank low volatile coal. This unique quality gives the Company’s metallurgical coal product a secure place in the domestic and seaborne trade.

During 2013, the Company was able to demonstrate the value of its metallurgical coal to domestic and international steel producers. As a result of the positive quality and reliability of its metallurgical coal, the Company has been awarded supply agreements for 2014 and beyond. In First Half 2014, metallurgical coal sales were 138,000 tons. The metallurgical coal sales guidance for the second half of 2014 is approximately 692,000, from the newly formed combination of PBS and Wilson Creek, all of which have been contracted. The Company also has sales contracts for 150,000 tons in 2015 and 38,000 tons in 2016.

Through the acquisition of PBS, the Company gained access to a significant new customer base which has sales contracted with both domestic and international steel producers. This has further diversified the


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Company’s customer base. Corsa has historically made sales of metallurgical coal to some of PBS’ customers but a significant portion of the sales contracts acquired as part of the PBS Transaction are new customers to the Company. Corsa is working with its new customers to ensure a seamless transition for the delivery of the contracted sales of PBS and will continue to provide a reliable supply of metallurgical coal in the future.

Current coal prices are below the marginal supply cost curve, the point at which coal prices for a majority of suppliers are below the marginal cost of production. Prices in the domestic metallurgical coal markets for 2014 have fallen from 2013 levels by approximately 10% and prices for export shipments in 2014 have declined approximately 5% from 2013 levels. As a result, a significant portion of the global seaborne coal production is being produced at a loss, a situation that most view as unsustainable. Producers have responded to these conditions and have increasingly shown supply discipline, cutting approximately 20 million metric tonnes of production so far this year.

Quintana Transaction

On July 31, 2013, the Company completed a transaction with QKGI, a portfolio company of Quintana Energy Partners LP and its affiliated investment funds (collectively, “Quintana”), which resulted in Corsa raising a total of $40 million by way of equity subscriptions at Cdn$0.17 per Common Share and acquiring Kopper Glo, a Tennessee-based coal producer, and Quintana having acquired a control position in Corsa. The $40 million was used to repay a $25 million credit facility outstanding at the time, transaction costs and for general corporate and growth purposes. Full details of the Quintana Transaction are included in the Company’s management discussion and analysis for the twelve months ended December 31, 2013. The Filing Statement filed in connection with the Transaction is available under Corsa’s profile at www.sedar.com. As a result of the Quintana Transaction, QKGI New Holdings LP (“New QKGI”) and QKGI Legacy Holdings LP (“Legacy QKGI”), two entities controlled by Quintana, were issued an aggregate of approximately 377.2 million Common Shares of Corsa and QKGI Legacy Holdings LP was issued approximately 230.1 million common membership units (“Redeemable Units”) of WCE. On June 30, 2014, Legacy QKGI redeemed approximately 59.8 million Redeemable Units in exchange for Common Shares of Corsa on a one to one basis. As at June 30, 2014, Quintana entities controlled approximately 170.3 million Redeemable Units and approximately 437.0 million Common Shares of Corsa. Quintana controlled entities also acquired an additional 141,786,666 Common Shares of the Company as part of the equity financing to fund the PBS Transaction. See “PBS Transaction” for further details. As at the date of issuance of this MD&A, assuming the tender for redemption of all Redeemable Units and exchange for Common Shares of Corsa, Quintana would exercise control or direction over an aggregate of 749,136,077 Common Shares, representing approximately 55.0% of Corsa’s then issued and outstanding Common Shares.


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PBS Transaction

Acquisition of PBS On August 19, 2014, the Company completed the purchase of all of the outstanding shares of PBS for $60,000,000 in cash, subject to certain adjustments (the “PBS Transaction”). Corsa also agreed to assume certain reclamation and water treatment liabilities totaling approximately $60,000,000 and fund $20,000,000 million of cash currently used as bonding collateral by PBS into escrow accounts for water treatment and certain other liabilities, to be released to a subsidiary of OAO Severstal following a customary time period and subject to adjustments. The primary purpose of the acquisition was to continue the Company’s growth strategy focusing on low-volatile metallurgical coal and to secure additional infrastructure, operating capacity and reserves of low-volatile metallurgical coal. PBS’s operations are located adjacent to the Company’s WCE operations. Based in Somerset County, Pennsylvania, PBS commenced production in 1963 and was acquired by OAO Severstal in 2008. Its current operations include 13 developed mines (3 of which are active) and two preparation plants with access to both the CSX and Norfolk Southern Railway. Collectively, these mines sold approximately 2.5 million and 1.7 million tons of premium quality low-volatile metallurgical coal in 2012 and 2013, respectively. PBS is located 60 miles from Pittsburgh and 170 miles from the Baltimore port, and its coal brands are well recognized by long-standing domestic and international customers. Its existing assets and infrastructure enable PBS to scale up to 3.5 million tons of saleable metallurgical production per year if market conditions warrant. Financing of PBS Transaction The consideration for the PBS Transaction was paid using equity financing and a new credit facility with residual proceeds from the equity financing and credit facility being used for purposes related to the PBS Transaction and growth capital:

$65,425,329 was raised through a non-brokered private placement (“Private Placement”) of Common Shares of the Company at a price of Cdn $0.15 per Common Share resulting in the issuance of 463,821,966 Common Shares of the Company (Cdn $69,573,295, based on the exchange rate of US$1.00:Cdn$1.0634, being the Bank of Canada’s noon rate on July 3, 2014); and

$25,000,000 was raised through a non-revolving term credit facility underwritten by Sprott Resource Lending Partnership (“SRL”).

Private Placement Pursuant to the private placement, Sprott Resource Partnership (“SRP”) acquired 236,963,302 Common Shares, for an aggregate price of approximately $33.4 million. As of the date of issuance of this MD&A, SRP holds approximately 19.9% of the outstanding Common Shares of the Company. SRP will have certain ongoing rights including the right to nominate one member of the Corsa board of directors, subject to certain conditions. The right to nominate one member of the Corsa board of directors will terminate if SRP, together with its affiliates, ceases to hold at least 10% or more of the outstanding Common Shares of the Company for a continuous period of at least 30 days, Quintana has provided an undertaking to vote in favor of the election of the SRP board nominee at any shareholder meeting, for so long as Quintana controlled entities own at least 20% of the outstanding Common Shares of the Company. SRP also


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entered into a registration rights agreement with Corsa which provides SRP with certain registration rights for as long as it holds at least 10% of the outstanding Common Shares of the Company. Pursuant to the private placement, QEP II acquired 128,824,387 Common Shares for an aggregate price of approximately $18.1 million and QEP II – TE acquired 12,962,279 Common Shares for an aggregate price of approximately $1.8 million. As of the date of this MD&A, Quintana exercises control or direction over 578,819,438 Common Shares of the Company, representing approximately 48.6% of the issued and outstanding Corsa Shares, and 170,316,639 Redeemable Units of WCE. Assuming the tender for redemption of all Redeemable Units and exchange for Common Shares of the Company, Quintana would exercise control or direction over an aggregate of 749,136,077 Common Shares, representing approximately 55.0% of the then issued and outstanding Common Shares of the Company. Pursuant to the private placement, Zebra Holdings and Investments S.á r.l. and Lorito Holdings S.á r.l., two corporations controlled by Lundin family trusts and current shareholders of the Company, acquired an aggregate of 70,893,332 Common Shares for an aggregate price of approximately $10 million and Bank Julius Baer & Co. Ltd. acquired 14,178,666 Common Shares for an aggregate price of approximately $2 million. Credit Facility In connection with the PBS Transaction, Corsa entered into a 5-year senior secured non-revolving term credit facility in the amount of $25 million (“Facility”). The interest rate under the Facility is ten percent (10%) per annum. For the period up to and including the second anniversary of the Facility, Corsa has the option of adding any interest payable under the Facility to the principal amount or, subject to approval of the TSX Venture Exchange (“TSXV”), satisfying any interest payment by the issuance of Common Shares of the Company (based on five day volume weighted average trading price for its Common Shares immediately prior to the last business day of the period multiplied by 105%). In addition, the Facility may be prepaid without penalty, in whole or in part, at any time after three months of interest has been paid. In consideration for the Facility, SRL issued 36.1 million Common Share purchase warrants of Corsa (“Bonus Warrants”). Each Bonus Warrant has a term of five years and is exercisable for one Common Share of the Company at an exercise price of Cdn$0.195. The Bonus Warrants issued to SRL and the Common Shares issuable thereunder are subject to resale restrictions pursuant to applicable securities laws requirements and the policies of the TSXV and will not be freely tradable until December 20, 2014. Integration of PBS operations The Company anticipates combining the Wilson Creek and PBS operations to take advantage of a newly created, centrally located management team and infrastructure that as a result of the combination will result in significant cost savings for the combined entity. Given the varying chemical characteristics of the coal assets of PBS, along with those of Wilson Creek, the Company will also be able to take advantage of coal blending opportunities to further differentiate and tailor its low-volatile metallurgical coal product to customer’s specifications. The Company is currently undergoing a detailed analysis of the combined operations in order to maximize the efficiency of the operations and ensure capital and resource allocation decisions are made on a combined basis. In addition to the Wilson Creek preparation plant that is currently being operated by Company, PBS currently operates two preparation plants, with rail access to both CSX and NS service. The combination of the infrastructure is expected to give the Company a delivered cost advantage to domestic steel producers in the Northern Appalachia area.


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The Company intends to be operating four underground mines until further expansion is warranted by market demand. The Company anticipates the PBS operation to complete 430,000 tons of metallurgical coal sales from the date of acquisition to December 31, 2014, all of which are contracted sales. These sales will be included in the results of the Company for the year ended December 31, 2014. Regulatory filings A business acquisition report is required to be filed within 75 days of the closing of the PBS Transaction. The Company will also file a technical report compliant with National Instrument 43-101 National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”), for the acquired operations of PBS which is due within 45 days of the acquisition. Both filings will be available under Corsa’s profile on www.sedar.com. Director and Officer changes

Following completion of the PBS Transaction, the Company announced the appointment of George Dethlefsen as its Chief Executive Officer. Mr. Dethlefsen is currently also a director of Corsa. As part of the transition, Mr. Dethlefsen has stepped down as Managing Director of Quintana Capital Group, an entity controlled by Quintana. Following completion of the PBS Transaction, Keith Dyke, President of Corsa, was appointed Chief Operating Officer and President and stepped down as a member of the board of directors of the Company. Pursuant to the terms of SRP’s acquisition of Common Shares under the private placement, Arthur Einav, a nominee of SRP, was appointed to the board of directors. Arthur Einav is Managing Director, General Counsel and Corporate Secretary of Sprott Resource Corp. Mr. Einav is also General Counsel of Sprott Inc. and is a director of Independence Contract Drilling, Inc., a NYSE-listed portfolio company of Sprott Resource Corp. He holds a Bachelor of Laws degree and a Masters in Business Administration from Osgoode Hall Law School and the Schulich School of Business. He also holds a Bachelor of Science degree from the University of Toronto and is a member of the Law Society of Upper Canada and the New York State Bar. Modification of WCE operating agreement

On August 19, 2014, the Company amended its operating agreement at WCE. As a result, the Redeemable Unit financial liability presented on the Company’s balance sheet will no longer qualify as a financial liability. This will significantly reduce the volatility in the Company’s income statement subsequent to Third Quarter 2014 as the Redeemable Units will no longer be required to be carried at fair value at each reporting period Overview of operations

Corsa’s coal operations are conducted through its approximately 81.0% owned subsidiary, WCE, which operates two divisions, Kopper Glo and Wilson Creek. Legacy QKGI owns approximately 19.0% of WCE.


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Kopper Glo operations The Company produces and sells high BTU, low and mid sulfur thermal coal used in power, industrial and specialty applications from its mines in the Southern Appalachia coal region of the United States. The coal mined is sold to domestic electric utilities and industries via railroad and trucking. In addition to the Company’s properties being operated in the Southern Appalachia coal region of the USA, the Company also has a significant pipeline of thermal, speciality and industrial coal development projects which it anticipates developing. These assets are currently owned by the Company’s Kopper Glo division. The Company’s Cooper Ridge project is in the Jellico seam with the coal reserves containing quality characteristics which will enable Kopper Glo to sell into the speciality and industrial markets. The Company anticipates production to commence from the Cooper Ridge project in First Quarter 2015. Preparation Plant The Kopper Glo preparation plant has a capacity of 350 tons of raw coal per hour. The thermal coal produced from the mines is trucked to the plant where it is processed or “washed” using conventional coal processing techniques and stored for shipping. The plant is located on the NS rail line (with dual NS and CSX load-out capability) in Claiborne County, Tennessee. Coal is usually shipped by rail; however, it can also be shipped by truck. The plant can load 80 to 100 car unit trains. All mines at Kopper Glo are within 7 miles of the Kopper Glo preparation plant.

Kopper Glo development projects

Kopper Glo has multiple development projects which are in various stages of permitting, as outlined in the summary table above and in addition to those presented which are not considered to be material properties at this time. Development of these projects depends on market conditions and contracted sales achieved by the Company.

The details of each of the Company’s thermal coal operations are outlined below along with the Company’s estimated of production capacity for operating properties. Disclosed information is based on the information contained in the technical reports related to such properties. Refer to “Mineral Reserves and Resources”.

Mine or Project Type of mine Status Annual production capacity(1) Back Creek Mine Surface / high wall Operating 250,000 Straight Creek Mine Surface / auger Operating 150,000 Double Mountain Deep Mine Underground Operating 600,000 Cooper Ridge Deep Project Underground Permitted N/A Clear Fork Project Surface / high wall Permit pending N/A Cumberland Gap Project Underground Not permitted N/A Rich Gap Mason Deep Project Underground Not permitted N/A Cooper Ridge Surface Project Surface / high wall Not permitted N/A

(1) Annual production capacity is based on the operations as they are currently configured as at the date of issuance of this MD&A.


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Wilson Creek operations The Company produces and sells low volatile metallurgical coal used for the production of coke from its mines in the Northern Appalachia coal region of the United States. The coal mined is sold to international and domestic steel producers, as well as other coal companies for blending, via railroad, trucking and barge. In addition to the operations currently in production, the Company has a significant pipeline of metallurgical coal development projects which it anticipates developing pending the recovery of metallurgical coal pricing. These assets are currently owned by the Company’s Wilson Creek division, and the newly acquired PBS entities (see “PBS Transaction”). The division is centrally located in and around Somerset, Pennsylvania located approximately 70 miles from Pittsburgh, Pennsylvania. Wilson Creek usually ships by rail, although shipping can be done by truck or barge. The preparation plants, in combination with those acquired at PBS, have access to both the CSX and NS rail lines and can access the Eastern Seaboard ports such as the Port of Baltimore which is 170 miles away. The location of the Wilson Creek operations is also consistent with the Company’s strategy to provide a competitively lower delivered cost to key customers, including steel mills around Pittsburgh, the Great Lakes regions and Canada.

Preparation plant The Wilson Creek preparation plant is located in Rockwood, Pennsylvania and has a nameplate capacity of 400 tons of raw coal per hour; however it is currently operating at 300 tons per hour to maximize recoveries. The metallurgical coal produced from the mines is trucked to the preparation plant where it is processed or “washed” using conventional coal processing techniques and stored for shipping. All underground mines are within 22 miles of the Wilson Creek preparation plant, with the exception of the Casselman Mine which is 31 miles.

Wilson Creek development projects Wilson Creek has multiple development projects which are in various stages of permitting, as outlined in the summary table above and in addition to those disclosed which are not considered to be material projects at this time. Development of these projects will depend on market conditions and contracted sales achieved by the Company. The details of each of the Company’s metallurgical coal operations are outlined below along with the Company’s estimates of production capacity from its underground properties. Disclosed information is based on the information contained in the technical reports related to such properties. Refer to “Mineral Reserves and Resources”.


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Mine or Project Type of mine Status Annual production capacity(5) Ankeny Mine Surface / high wall Operating N/A Semelsberger Mine Surface Operating N/A Acosta 4 Project Surface Permitted N/A Casselman Mine Underground Operating 840,000 Quecreek Mine (4) Underground Operating 415,000 Kimberly Run Mine (4) (6) Underground Operating 235,000 Barbara B Mine(4) Underground Operating 435,000 Horning D Project(4) Underground Not operating 210,000 A Seam Project (4) Underground Permitted N/A Acosta Deep Project Underground Permitted (2) N/A Keyser Project Underground Not-permitted(3) N/A

(1) The operations historically owned by PBS were acquired on August 19, 2014 by the Company (see “PBS Transaction”). As a result,

the results of operations from such assets have not been included in the Company’s results of operations for the three and six months ended June 30, 2014. The properties acquired as part of the PBS Transaction were Quecreek, Kimberly Run, Barbara B, Horning D and A Seam.

(2) The Company controls mineral rights to both the Middle Kittanning and Lower Kittanning seam for the Acosta Deep project. The Company currently holds a permit for only the Middle Kittanning seam. A permit application is in process for the Lower Kittanning seam. The mine plan for the Acosta Deep project calls for development of the Middle Kittanning seam prior to the Lower Kittanning and as a result, the Company does not anticipate any delays in development of this project resulting from a permit not being held on the Lower Kittanning portion of the mine.

(3) A permit application is in process for the Keyser project. (4) A technical report compliant with NI 43-101 has not been prepared for this property and as a result the Company is restricted from

describing certain information related to this project. (5) Annual production capacity is based on the operations as they are currently configured as at the date of this MD&A. (6) Kimberly Run is expected to deplete the reserve contained in the current permit area on or about First Quarter 2015.There are

additional reserves in an adjacent leased area which the Company intends to submit a permit for mining. Operating Results: Overview All dollar amounts are presented in thousands of dollars.

For the three months ended For the six months ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Clean tons sold 315,000 281,000 582,000 567,000 Clean tons produced and purchased 325,000 283,000 612,000 587,000

Coal sales $ 24,319 $ 21,121 $ 44,162 $ 42,342 Operating Expenses 28,311 18,543 51,270 37,153

(Loss) income from operations (3,992) 2,578 (7,108) 5,189 Other income (expense) 2,999 (1,224) 4,078 (2,331)Income (loss) for the period before tax (993) 1,354 (3,030) 2,858 Income tax (recovery) expense (1,685) 993 (3,149) 1,688

Net and comprehensive income $ 692 $ 361 $ 119 $ 1,170

Adjusted EBITDA (1) $ 502 $ 4,326 $ 712 $ 8,794

(1) Refer to “Non-GAAP Financial Measures”


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Second Quarter 2014 Coal Sales Coal sales were $24,319,000 in Second Quarter 2014 compared with $21,121,000 in Second Quarter 2013. The increase of $3,198,000 was primarily due to inclusion of the Wilson Creek sales in Second Quarter 2014 amounting to $9,455,000 offset by the decrease in sales of $6,257,000 at Kopper Glo. There is no comparable amount in Second Quarter 2013 for Wilson Creek given that the division was acquired on July 31, 2013. The decrease in sales at Kopper Glo was caused by a combination of the market reduction in selling prices for thermal coal as well as a decrease in tons sold. The decrease in tonnage was due to a lower level of contracted sales as well as rail transportation congestion which caused the Company to defer some thermal coal rail shipments scheduled to customers. Although the Company expects rail transportation congestion to continue into 2015, it does not anticipate that this will have a materially adverse impact on the Company’s business. Operating expenses Operating expenses were $28,311,000 in Second Quarter 2014 compared with $18,543,000 in Second Quarter 2013. The increase of $9,768,000 was due to the inclusion of the Wilson Creek operating expenses amounting to $12,307,000 in Second Quarter 2014 offset by the decrease of $3,628,000 at Kopper Glo. There is no comparable amount in Second Quarter 2013 for Wilson Creek given that the division was acquired on July 31, 2013. The decrease in operating expenses at Kopper Glo is the result of a decrease in the total tons produced and purchased offset by higher operating costs. The higher operating costs were the result of lower coal seam heights at the Double Mountain Deep Mine leading to decreases in productivity and plant recoveries. Lower coal seam heights were also experienced at the Company’s Back Creek Mine leading to decreases in productivity and increases in operating expenses. Other income (expenses) Total other income for Second Quarter 2014 was $2,999,000 compared with an expense of $1,224,000 in Second Quarter 2013, an increase of $4,223,000 mainly resulting from the increase in finance expense. In Second Quarter 2014, finance income was $3,858,000 as a result of the revaluation of the Redeemable Units of Wilson Creek which are carried at fair value at each reporting period. In Second Quarter 2013, certain units of Kopper Glo were treated as financial liabilities carried at fair value which resulted in finance expense amounting to $1,171,000. The units of Kopper Glo were extinguished on July 31, 2013. Income tax expense (recovery) The income tax recovery amounted to $1,685,000 for the Second Quarter 2014, compared to an expense of $993,000 in Second Quarter 2013. The recovery incurred for Second Quarter 2014 was the result of a $1,794,000 increase in deferred tax assets stemming mainly from taxable losses incurred by the Company. The expense incurred in 2013 reflects current tax expenses of $757,000 related to the taxable income generated by the Company in the Second Quarter 2013. Deferred tax expense amounting to $236,000 was also incurred for the Second Quarter 2013 resulting from decreases in deferred tax assets related to tangible assets.


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Net and comprehensive income Net and comprehensive income was $692,000 for Second Quarter 2014 compared with $361,000 for Second Quarter 2013, an increase of $331,000. The change in net and comprehensive income is the result of the factors impacting sales, operating expenses and other income described above. Adjusted EBITDA

Adjusted EBITDA was $502,000 in Second Quarter 2014 compared with $4,326,000 in First Half 2013. The decrease of $3,824,000 was primarily due to the decrease in Adjusted EBITDA at Kopper Glo and the inclusion of Wilson Creek. The decrease in the Adjusted EBITDA at Kopper Glo is the result of the changes in sales and operating expenses as described above. Refer to “Non-GAAP Financial Measures” for reconciliation of Adjusted EBITDA to the closest financial measure presented in the Company’s statement of operations. First Half 2014 Coal sales were $44,162,000 in First Half 2014 compared with $42,342,000 in First Half 2013. The increase of $1,820,000 was due to the inclusion of the Wilson Creek sales in First Half 2014 amounting to $14,160,000 offset by the decrease in coal sales at Kopper Glo of $12,340,000. There is no comparable amount in First Half 2013 for Wilson Creek given that the division was acquired on July 31, 2013. The decrease in sales at Kopper Glo was caused by a combination of the market reduction in selling prices for thermal coal as well as a decrease in tons sold. The decrease in tonnage was due to a lower level of contracted sales as well as rail transportation congestion which caused the Company to defer some thermal coal rail shipments scheduled to customers. Although the Company expects rail transportation congestion to continue into 2015, it does not anticipate that this will have a materially adverse impact on the Company’s business. Operating expenses Operating expenses were $51,270,000 in First Half 2014 compared with $37,153,000 in First Half 2013. The increase of $14,117,000 was due to the inclusion of the Wilson Creek operating expenses amounting to $19,711,000 offset by a decrease in operating expenses at Kopper Glo amounting to $7,654,000. There is no comparable amount in First Half for Wilson Creek given that the division was acquired on July 31, 2013. The decrease in operating expenses at Kopper Glo is the result of a decrease in the total tons produced and purchased offset by higher operating costs. The higher operating costs were the result of lower coal seam heights at the Double Mountain Deep Mine leading to decreases in productivity and plant recoveries. Lower coal seam heights were also experienced at the Company’s Back Creek Mine leading to decreases in productivity and increases in operating expenses.


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Other income (expenses) Total other income for First Half 2014 was $4,078,000 compared with an expense of $2,331,000 in First Half 2013, an increase of $6,409,000 mainly resulting from the increase in finance income. In First Half 2014, finance income was $5,086,000 as a result of the revaluation of the Redeemable Units of Wilson Creek which are carried at fair value at each reporting period. In First Half 2013, certain units of Kopper Glo were treated as financial liabilities carried at fair value which resulted in finance expense amounting to $1,171,000. The units of Kopper Glo were extinguished on July 31, 2013. Income tax expense (recovery) The income tax recovery amounted to $3,149,000 for the First Half 2014, compared to an expense of $1,688,000 in First Half 2013. The recovery incurred for First Half 2014 was the result of a $3,249,000 increase in deferred tax assets stemming mainly from taxable losses incurred by the Company. The expense incurred in 2013 reflects current tax expenses of $1,431,000 related to the taxable income generated by the Company in the First Half 2013. Deferred tax expenses amounting to $257,000 were also incurred for the First Half 2013, resulting from decreases in deferred tax assets related to tangible assets. Net and comprehensive income Net and comprehensive income was $119,000 for First Half 2014 compared with $1,170,000 for First Half 2013, a decrease of $1,051,000. The change in net and comprehensive income is the result of the factors impacting sales, operating expenses and other income described above. Adjusted EBITDA

Adjusted EBITDA was $712,000 in First Half 2014 compared with $8,794,000 in First Half 2013. The $8,082,000 decrease was due to the decrease in Adjusted EBITDA at Kopper Glo and the inclusion of Wilson Creek. The decrease in the Adjusted EBITDA at Kopper Glo is the result of the changes in sales and operating expenses as described above. Refer to “Non-GAAP Financial Measures” for reconciliation of Adjusted EBITDA to closest financial measure presented in the Company’s statement of operations.


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Results of operations: Kopper Glo – thermal coal All dollar amounts are presented in thousands of dollars.

For the three months ended For the six months ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Clean Tons sold 222,000 281,000 444,000 567,000

Underground mining 108,000 124,000 278,000 290,000 Surface mining 113,000 125,000 151,000 214,000

Total Clean Tons produced 221,000 249,000 429,000 504,000 Clean tons purchased 15,000 34,000 33,000 83,000 Plant processing recovery rate 39.2% 50.3% 42.2% 52.6%

Coal sales $ 14,864 $ 21,121 $ 30,002 $ 42,342 Cost of coal sold 11,592 14,351 23,266 29,316 Royalties 2,020 2,433 3,529 4,248 Amortization 1,303 1,759 2,704 3,589 Corporate and administrative - - - -

Total operating expenses 14,915 18,543 29,499 37,153 (Loss) income from operations (51) 2,578 503 5,189

Total Other expense (150) (1,224) (277) (2,331)(Loss) income for the period before tax (201) 1,354 226 2,858

Income tax (recovery) expense - 993 - 1,688 Net and comprehensive (loss) income $ (201) $ 361 $ 226 $ 1,170

Adjusted EBITDA (1) $ 1,263 $ 4,326 $ 3,222 $ 8,794


Operationally, Kopper Glo has managed to maintain a variable cost structure and make necessary cutbacks to maintain the profitability of the business. Kopper Glo continued to focus on its Double Mountain Deep Mine which ran into lower coal seam heights in Second Quarter 2014, leading to higher than normal operating costs during the Second Quarter 2014. Double Mountain Deep Mine accounted for 52% of total tons produced during the First Half 2014. See “Operating Results: Kopper Glo” below. Mine Production Kopper Glo coal production decreased from First Half 2013 to First Half 2014 for underground and surface mining operations. The decrease in underground mine production was the result of Double Mountain Deep mine experiencing weaker geological conditions causing the continuous mining unit to cut additional rock to move through the lowered coal seam heights in these areas. The additional rock cut caused a decrease in efficiency and decreased plant recoveries, ultimately increasing operating costs. The surface tons mined decreased as a result of the relocation of the surface and high wall miner operations from the Log Mountain Mine to the Back Creek Mine during First Quarter 2014 as well as weaker mining conditions experienced during Second Quarter 2014 by the Back Creek Mine.


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Kopper Glo coal production decreased from Second Quarter 2013 to Second Quarter 2014 for underground and surface mining operations. The decrease in tons produced was the result of the weaker mining conditions experienced at Double Mountain Deep Mine and Back Creek Mine. Purchased Coal The Company purchases coal from third parties in order to increase the amount available for processing and blending at its preparation plants. The volume of coal purchases varies with market availability, quality blending needs and requirements to balance shipments. Preparation Plant The Kopper Glo preparation plant processes coal produced from the underground mine and the high wall mining operations. The decline in recovery rates from Second Quarter and First Half 2013 to Second Quarter and First Half 2014 were the result of the weaker geological conditions experienced at Double Mountain Deep Mine. Financial Results: Kopper Glo– thermal coal Second Quarter 2014 Coal Sales Kopper Glo coal sales decreased by $6,257,000 from $21,121,000 in Second Quarter 2013 to $14,864,000 in Second Quarter 2014 as a result of the declines in tons sold and price per ton. The decrease in sales was caused by a mix of the widespread market reduction in selling prices for thermal coal as well as a decrease in tons sold. The decrease in tonnage was due to a lower level of contracted sales as well as rail transportation congestion which caused the Company to defer some thermal coal rail shipments scheduled to customers. Although the Company expects rail transportation congestion to continue into 2015, it does not anticipate that this will have a materially adverse impact on the Company’s business. Operating Expenses

Kopper Glo operating expenses were $18,543,000 in Second Quarter 2013 compared to $14,915,000 in Second Quarter 2014, a decrease of $3,628,000. The decrease was due to the decrease in the total tons produced and purchased offset by higher operating costs. The higher operating costs were the result of lower coal seam heights at the Double Mountain Deep mine leading to decreases in productivity and plant recoveries as well as the lower coal seam heights at the Company’s Back Creek Mine, which ultimately lead to higher operating costs during the Second Quarter 2014 relative to Second Quarter 2013. (Loss) income from operations The Company recorded a loss from operations of $51,000 for Second Quarter 2014 compared with income from operations of $2,578,000 for Second Quarter 2013 as a result of the changes in sales and operating expenses described above.


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Other income/(expense) Total other expenses for Second Quarter 2014 were $1,224,000 compared with $150,000 for Second Quarter 2013, an increase of $1,074,000. In Second Quarter 2013, certain units of Kopper Glo were treated as financial liabilities carried at fair value which resulted in finance expense amounting to $129,000. In addition, transaction expenses of $1,010,000 were incurred in First Half 2013 which were incurred as a result of the Quintana Transaction. There were no significant transaction expenses incurred by the Kopper Glo division during Second Quarter 2014 and no finance expense related to the revalution of the units of Kopper Glo was recorded given such units were extinguished on July 31, 2013. Income tax recovery/expense Deferred tax expenses amounting to $236,000 were incurred for the First Half 2013 resulting from decreases in deferred tax assets related to tangible assets. Current tax expense amounted to $757,000 for the First Half 2013 due to the taxable income generated by the Kopper Glo division during that time period. There was no comparable amount in 2014 as the Company began including income tax expense for the combined entity as part of the corporate division subsequent to July 31, 2013 as a result of the Quintana Transaction. Net and comprehensive income (loss) Net and comprehensive loss was $201,000 for Second Quarter 2014 compared to an income of $361,000 in Second Quarter 2013, an increase of $562,000. The change is the result of the factors impacting sales, operating expenses and other income described above. Adjusted EBITDA

Adjusted EBITDA was $1,263,000 in Second Quarter 2014 compared with $4,326,000 in Second Quarter 2013. The decrease in the Adjusted EBITDA at Kopper Glo is the result of the changes in sales and operating expenses as described above. Refer to “Non-GAAP Financial Measures” for reconciliation of Adjusted EBITDA to closest financial measure presented in the Company’s statement of operations. First Half 2014 Coal Sales Coal sales were $30,002,000 in First Half 2014 compared with $42,342,000 in First Half 2013. The decrease of $12,340,000 was due to a widespread market reduction in selling prices for thermal coal as well as a decrease in tons sold. The decrease in tonnage was due to a lower level of contracted sales as well as rail transportation congestion which caused the Company to defer some thermal coal rail shipments scheduled to customers. Although the Company expects rail transportation congestion to continue into 2015, it does not anticipate that this will have a materially adverse impact on the Company’s business. Operating expenses Operating expenses were $29,499,000 in First Half 2014 compared with $37,153,000 in First Half 2013. The decrease of $7,654,000 was due to the decrease in the total tons produced and purchased offset by higher operating costs. The higher operating costs were the result of lower coal seam heights at the Double Mountain Deep mine leading to decreases in productivity and plant recoveries as well as the


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lower coal seam heights at the Company’s Back Creek Mine, which ultimately lead to higher operating costs during the First Half 2014 relative to First Half 2013. Other expenses In First Half 2014, other expenses were $277,000 compared with $2,331,000 in First Half 2013, a decrease of $2,054,000. In First Half 2013, certain units of Kopper Glo were treated as financial liabilities carried at fair value which resulted in finance expense amounting to $1,171,000. In addition, transaction expenses of $1,010,000 were incurred in First Half 2013 which were incurred as a result of the Quintana Transaction. There were no significant transaction expenses incurred by the Kopper Glo division during Second Quarter 2014 and no finance expense related to the revalution of the units of Kopper Glo was recorded given such units were extinguished on July 31, 2013. Income tax expense (recovery) Deferred tax expenses amounting to $257,000 were incurred for the First Half 2013 resulting from decreases in deferred tax assets related to tangible assets. Current tax expense amounted to $1,431,000 for the First Half 2013 due to the taxable income generated by the Kopper Glo division during that time period. There was no comparable amount in 2014 as the Company began including income tax expense for the combined entity as part of the corporate division subsequent to July 31, 2013 as a result of the Quintana Transaction. Net and comprehensive income (loss) Net and comprehensive income was $226,000 for First Half 2014 compared with $1,170,000 in First Half 2013, a decrease of $944,000. The change is the result of the factors impacting sales, operating expenses and other income described above. Adjusted EBITDA

Adjusted EBITDA was $3,222,000 in First Half 2014 compared with $8,794,000 in First Half 2013. The decrease in the Adjust EBITDA at Kopper Glo is the result of the changes in sales and operating expenses as described above. Refer to “Non-GAAP Financial Measures” for reconciliation of Adjusted EBITDA to closest financial measure presented in the Company’s statement of operations.


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Results of operations: Wilson Creek – metallurgical coal All dollar amounts are presented in thousands of dollars.

For the three months ended For the six months ended June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013 Clean Tons sold 93,000 - 138,000 -

Underground mining 65,000 - 114,000 -Surface mining 24,000 - 36,000 -

Clean Tons produced 89,000 - 150,000 - Recovery rate 54.1% 0.0% 55.8% 0.0% Coal sales $ 9,455 $ - $ 14,160 $ - Cost of coal sold 8,694 - 14,063 -Royalties 746 - 1,150 -Amortization 2,867 - 4,498 -Corporate and administrative - - - -

Total operating expenses 12,307 - 19,711 -(Loss) income from operations (2,852) - (5,551) -

Other income (expense) (298) - (471) -Net and comprehensive income (loss) $ (3,150) $ - $ (6,022) $ -

Adjusted EBITDA (1) $ 15 $ - $ (1,048) $ -


Mine Production Production is balanced between underground and surface operations in order to diversify the sources of production for the division. Each mine possesses unique chemical characteristics and as a result surface mines are also used to a specified blend of chemical characteristics for the metallurgical coal product produced, which are determined by customer orders. Wilson Creek produced 89,000 and 150,000 for Second Quarter 2014 and First Half 2014, respectively, with the Casselman Mine accounting for 73% and 76% of production, respectively. The Company installed a continuous haulage system at the Casselman Mine in January 2014 which has favourably impacted operating costs, although productivity during the installation and training phase did decline during First Quarter 2014. The Casselman Mine experienced some weaker geological conditions during the First Quarter 2014 and towards the end of Second Quarter 2014, leading to decreased productivity and additional rock being cut during mining. This ultimately resulted in lower recoveries at the preparation plant as compared to First Quarter 2014 and higher operating costs. Favourable mining conditions were reached in July 2014 and are expected to continue. There were no comparable results for Wilson Creek given the division was acquired on July 31, 2013.


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Preparation Plant The Wilson Creek preparation plant processes metallurgical coal produced by the division. Plant recoveries are sensitive to the blend of coals processed, with certain chemical characteristics impacting recovery ratios, as well as the geological conditions at the mines from which the coal being processed derived. The recovery rate is a key metric used to determine the percentage of clean coal produced from each ton of raw coal fed into the plant for processing. The recovery rate at the Wilson Creek preparation plant was 54.1% and 55.8% during the Second Quarter and First Half 2014, respectively. There were no comparable results for Wilson Creek given the division was acquired July 31, 2013. Financial Results: Wilson Creek – metallurgical coal Second Quarter and First Half 2014 Coal Sales Coal sales were $9,455,000 and $14,160,000 in Second Quarter and First Half 2014, respectively, with total tons sold of 93,000 and 138,000 for the same periods. There are no comparable amounts in 2013 given that Wilson Creek was acquired on July 31, 2013. Coal sales for Wilson Creek consist of domestic and international shipments. First Quarter 2014 was a slow contracted month for Wilson Creek but has since achieved a steady level of sales during Second Quarter 2014. See “Outlook” for further details on sales guidance for remaining 2014. Operating expenses Operating expenses amount to $12,307,000 and $19,711,000 in Second Quarter and First Half 2014, respectively, with 89,000 and 150,000 clean tons produced for the same periods, respectively. There are no comparable amounts in 2013 given that Wilson Creek was acquired on July 31, 2013. Coal production is dependent on the contracted sales of Wilson Creek. The Second Quarter and First Half 2014 included a loss incurred as the result of a $1.1 million charge for additional reclamation costs on closed mines. Adjusted EBITDA The Adjusted EBITDA amounted to $15,000 and a loss of $1,048,000 for the Second Quarter and First Half 2014, respectively. There are no comparable amounts in 2013, given that Wilson Creek was acquired on July 31, 2013. The Adjusted EBITDA was the result of the explanations relating to sales and operating expenses provided above.


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Financial Condition

as at June 30, 2014 December 31, 2013 (000’s) (000’s) Current Assets $ 20,965 $ 28,921Non-Current Assets 173,175 173,803Total Assets $ 194,140 $ 202,724 Current liabilities 19,203 21,680Non-current liabilities 36,339 51,286Total liabilities $ 55,542 $ 72,966Total equity $ 138,598 $ 129,758

The total assets of the Company at June 30, 2014 were $194,140,000 compared with $202,724,000 at December 31, 2013, a decrease of $8,584,000. The current assets of the Company at June 30, 2014 were $20,965,000 compared with $28,921,000 at December 31, 2013, a decrease of $7,956,000. The overall decrease resulted from the decrease in cash of $9,434,000, decrease in amounts receivable of $749,000, prepaid expenses of $145,000 offset by an increase in inventories of $2,372,000. Cash decreased as $2,918,000 was invested in working capital, the Company invested in mining equipment utilizing $4,183,000 of cash and also received a refund of approximately $2,458,000 of previously restricted cash for the successful negotiation of reduced collateral towards reclamation bonding. The Company also made payments towards its notes payable amounting to $1,782,000 and finance leases amounting to $2,385,000. The non-current assets of the Company at June 30, 2014 were $173,175,000 compared with $173,803,000 at December 31, 2013, a decrease of $628,000. The overall decrease was primarily due to the decrease in restricted cash of $2,458,000, the decrease in property, plant and equipment of $1,358,000 that resulted from amortization expense and disposals exceeding additions for First Half 2014 and an increase in the deferred tax asset by $3,250,000. The total liabilities of the Company at June 30, 2014 were $55,542,000 compared with $72,966,000 at December 31, 2013, a decrease of $17,424,000. The current liabilities of the Company at June 30, 2014 were $19,203,000 compared with $21,680,000 at December 31, 2013, a decrease of $2,477,000. The overall decrease was primarily due to the decreases in accounts payable of $2,025,000, current portion of notes payable of $608,000 offset by increases in current portion of finance lease obligations of $217,000, current portion of reclamation provision of $292,000 and the tax distribution payable amounting to $353,000. The non-current liabilities of the Company at June 30, 2014 were $36,339,000 compared with $51,286,000 at December 31, 2013, a decrease of $14,947,000.


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The overall decrease was due to the decrease in finance lease obligations of $240,000 resulting from the additional funding for the purchase of mobile equipment amounting to $2,363,000 offset by regularly scheduled payments, reduction in notes payable amounting to $1,078,000, and a decrease in the Redeemable Unit financial liability of $13,642,000 due to the decline in the CAD/USD exchange rate and stock price of Corsa from December 31, 2013 to June 30, 2014, both of which are variables used to determine the fair value at each reporting date, offset by Legacy QKGI’s redemption of approximately 59.8 million Redeemable Units in exchange for Common Shares of Corsa. This resulted in a reduction of the redeemable unit financial liability of $8,132,000 and offsetting increase to share capital. See “Quintana Transaction” for further details. The total equity of the Company at June 30, 2014 was $138,598,000 compared with $129,758,000 at December 31, 2013, an increase of $8,840,000 due mainly to the redemption of the Redeemable Units of Legacy QKGI described above. Liquidity and capital resources

as at June 30, 2014 December 31, 2013 Working capital $ 1,762 $ 7,241 Debt

Notes payable $ 5,067 $ 6,753 Finance lease obligations 10,996 11,019 Processing fee payable 2,258 2,208 $ 18,321 $ 19,980

Cash and unutilized debt facilities (1) $ 15,632 $ 22,066

(1) Includes the $5,000,000 line of credit available at June 30, 2014 and $2,000,000 line of credit available at December 31, 2013. Additional fundraising and impact on liquidity of the PBS Transaction

On August 19, 2014, the Company completed the PBS Transaction which raised $26,700,000 of excess capital which is to be used for matters related to the PBS Transaction, growth capital and general corporate purposes. The Company also entered into a $25,000,000 credit facility bearing interest at 10%. Such amounts are excluded from the June 30, 2014 balances included in the liquidity table above. See “PBS Transaction” for further details. As a result of the financing raised in connection with the PBS Transaction, the Company believes it has sufficient capital to execute its strategy in the near and medium term. The Company will evaluate its alternatives in accessing capital markets further in the future to allow more flexibility in the development and growth plans of the Company consistent with its strategy. Working capital

The Company had working capital of $1,762,000 at June 30, 2014 compared with $7,241,000 at December 31, 2013, a decrease of $5,479,000. The overall decrease resulted from the decrease in cash of $9,434,000, amounts receivable of $749,000, offset by increases in inventories of $2,372,000, and decreases in accounts payable and accrued liabilities of $2,025,000 and current portion of notes payable of $608,000.


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Cash flow from operations - Second Quarter and First Half 2014 During First Half 2014, the primary source of cash for the Company was sales collections of $44,901,000 (amounts receivable at December 31, 2013 plus sales for First Half 2014 less amounts receivable at June 30, 2014). During Second Quarter 2014, the primary source of cash for the Company was sales collections of $28,294,000 (amounts receivable at March 31, 2014 plus sales for First Quarter 2014 less amounts receivable at June 30, 2014). In First Half 2014, the cash used in operating activities was $3,246,000 compared with cash provided from operating activities of $3,986,000 in First Half 2013, a change of $7,232,000. The cash used in operating activities in First Half 2014 consists of $328,000 of cash used by operating activities before changes in non-cash working capital balances and $2,918,000 invested in working capital balances. Cash used in operations before changes in working capital includes cash spent on reclamation activities amounting to $1,195,000. The cash used towards working capital was to increase inventories and decrease payables compared to December 31, 2013, accounting for $2,044,000 and $1,668,000, respectively. In Second Quarter 2014, the cash provided by operating activities was $4,243,000 compared with $1,379,000 in Second Quarter 2013, a change of $2,864,000. The cash provided by operating activities in Second Quarter 2014 consists of $167,000 of cash used by operating activities before changes in non-cash working capital balances of $4,410,000. Cash used in operations before changes in working capital includes cash spent on reclamation activities amounting to $674,000. The cash provided by working capital was mainly the result of $4,191,000 of cash provided by amounts receivable due to the timing of sales towards the end of First Quarter 2014 relative to sales towards the end of Second Quarter 2014. Investing activities The cash used in investing activities in First Half 2014 was $1,668,000 compared with $1,155,000 in First Half 2013, an increase in cash used of $513,000. The increase in First Half 2014 was mainly the result of an increase in cash used for property, plant and equipment additions of $3,028,000, up from $1,155,000 in First Half 2013 to $4,183,000 in First Half 2014, offset by a refund of restricted cash of $2,458,000 and cash provided from other assets of $57,000, both of which had no comparable amounts in First Half 2013.

The cash used in investing activities in Second Quarter 2014 was $2,586,000 compared with $582,000 in Second Quarter 2013, an increase in cash used of $2,004,000. The increase in cash used in Second Quarter 2014 was mainly the result of an increase in cash used for property, plant and equipment additions of $2,042,000, up from $573,000 in Second Quarter 2013 to $2,615,000 in Second Quarter 2014. The increase in capital additions was the result of First Half and Second Quarter 2014 including the operations of Wilson Creek and installation of a continuous haulage system at the Casselman Mine. The refund of restricted cash was the result of a negotiated reduction in collateral requirements for reclamation bonds.

Financing activities Cash used in financing activities was $4,520,000 in First Half 2014 compared with $1,814,000 in First Half 2013, an increase in cash used of $2,706,000. Finance lease payments were $2,385,000 in First Half 2014 and $880,000 in First Half 2013, an increase of $1,505,000. Cash used towards notes payable were


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$1,782,000 in First Half 2014 and $934,000 in First Half 2013, an increase of $848,000. Tax distributions payable used cash of $353,000 in First Half 2014, with no comparable amount in First Half 2013. Cash used in financing activities was $3,008,000 in Second Quarter 2014 compared with $887,000 in Second Quarter 2013, an increase in cash used of $2,121,000. Finance lease payments were $1,256,000 in Second Quarter 2014 and $459,000 in Second Quarter 2013, an increase of $797,000. Cash used towards notes payable were $1,419,000 in Second Quarter 2014 and $428,000 in Second Quarter 2013, an increase of $991,000. Tax distributions payable used cash of $333,000 in Second Quarter 2014, with no comparable amount in Second Quarter 2013. The increases in First Half and Second Quarter 2014 were the result of the acquisition of the Wilson Creek division whose debt repayments are included in the 2014 results but are excluded from the 2013 comparatives given the division was acquired July 31, 2013. Capital expenditures

The Company’s future spending on property, plant and equipment at its operations will be dependent on cash on hand and equipment financing that the Company obtains. In Second Half 2014, the Company anticipates that it will upgrade the capital equipment currently utilized at the PBS operations which will be funded from cash on hand as well as finance leases, where determined appropriate by the Company. The timing of development of the Company’s coal properties will be dependent on market demand.

Debt

The Company has certain covenants it is required to meet under its finance lease obligations and certain notes payable. Certain measures included in the covenant calculations are not readily identifiable from the Company’s consolidated income statement or consolidated balance sheet. These measures are considered to be Non-GAAP financial measures and as such, a further description of the covenant calculations is included in the Company’s MD&A for the twelve months ended December 31, 2013. The Company was in compliance with all covenants as at June 30, 2014.


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Contractual obligations The Company has the following contractual obligations:

Payments due by period Carrying

value as at June Less than 1 to 4 to After 5 30, 2014 Total 1 year 3 years 5 years years

Accounts payable and accruals $ 7,008 $ 7,008 $ 7,008 $ - $ - $ -

Notes payable 5,067 5,327 4,110 1,217 - - Finance lease obligations 10,996 10,998 2,888 8,077 33 - Processing fee payable 2,258 3,000 - - - 3,000 Reclamation provision 7,068 6,981 3,010 - - 3,971 Purchase commitments

on capital equipment - 1,021 1,021 - - - Operating leases and other obligations - 5,515 2,978 2,463 74 - Total $ 32,396 $ 39,850 $ 21,015 $ 11,757 $ 107 $ 6,971

Outstanding Share Data The following table sets forth the particulars of the Company’s fully diluted share capital as of the date of this MD&A.

Number of Common Shares Common Shares issued and outstanding 1,190,770,362Common Shares issuable upon exercise of stock options 52,851,667Common Shares issuable upon redemption of redeemable units 170,316,639Common Shares issuable upon exercise of stock purchase warrants 36,100,000Total 1,450,038,668

Summary of Quarterly Results The following table sets out certain information derived from the Company’s condensed interim consolidated financial statements for each of the eight most recently completed quarters. Reference is made to this MD&A under the heading “Financial Results”; the Company’s Management’s Discussion and Analysis for the year ended December 31, 2013; the Company’s Management’s Discussion and Analysis for the three months ended March 31, 2014, the Company’s Management’s Discussion and Analysis for the three and nine months ended September 30, 2013 and the QKGI Management’s Discussion and Analysis for the three and six months ended June 30, 2013 available under Corsa’s profile at www.sedar.com for a discussion of factors that have caused variations in the information presented below over the eight most recently completed quarters. The membership units of WCE held by QKGI Legacy Holdings LP are excluded from the basic weighted average number of Common Shares outstanding. The membership units of WCE held by QKGI Legacy Holdings LP are dilutive to the basic


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earnings per share and as a result are included in the weighted average number of Common Shares outstanding used in the diluted earnings per share calculation from the date of issuance.

Quarter ended Quarter ended Quarter ended Quarter ended June 30, March 31, December 31, September 30, 2014 2014 2013 2013 Revenue (000’s) $ 24,319 $ 19,843 $ 28,855 $ 30,870Net and comprehensive income loss (000’s) $ 692 $ (573) $ (3,196) $ 52,674 Net and comprehensive income loss (000’s) per basic Common Share $ - $ - $ - $ -per diluted Common Share $ - $ (0.01) $ - $ -

Quarter ended Quarter ended Quarter ended Quarter ended June 30, March 31, December 31, September 30, 2013 2013 2012 2012 Revenue (000’s) $ 21,121 $ 21,221 $ 20,577 $ 18,147Net and comprehensive income (loss) (000’s) $ 361 $ 809 $ (24) $ (208)Net and comprehensive income (loss) (000’s) per basic and diluted Common Share $ - $ - $ - $ -

Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements as of the date of this MD&A. Related party Transactions

Related party transactions include any transactions with employees, other than amounts earned as a result of their employment, transactions with companies that employees or directors either control or have significant influence over and transactions with companies who are under common control with the Company’s largest shareholder, Quintana. Transactions with related parties included in the statement of operations and comprehensive income of the Company are summarized below:

For the three months ended For the six months ended June 30, June 30, 2014 2013 2014 2013 (000’s) (000’s) (000’s) (000’s) Royalties (i) $ 1,410 $ 973 $ 2,443 $ 2,229 Mining equipment lease 244 242 481 486 Management fee (iii) - 75 - 150 $ 1,654 $ 1,290 $ 2,924 $ 2,865


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During the three and six months ended June 30, 2014, the Company paid royalties to related

parties who are commonly controlled by Quintana or employees of the Company in the amount of $1,410,000 and $2,443,000, respectively (2013 - $973,000 and $2,229,000) for coal extracted from mineral properties where the surface or mineral rights of the specific property are leased by the Company and owned by the related party.

During the three and six months ended June 30, 2014, the Company also paid lease payments

to related parties who are controlled by a director and an officer of the Company for use of mining equipment owned by the related party amounting to $244,000 and $481,000, respectively (2013 – $242,000 and $486,000). These amounts were included in cost of coal sold in the condensed interim statement of operations and comprehensive income.

During the three and six months ended June 30, 2013, the Company paid a management fee

of $75,000 and $150,000, respectively, to an affiliated entity related through common ownership. On July 31, 2013, the agreement requiring the management fee was terminated and no fee was paid during the three and six months ended June 30, 2014. These amounts were included in cost of coal sold on the condensed interim statement of operations and comprehensive income.

As of June 30, 2014, the Company had a note receivable totaling $118,000 (December 31, 2013 - $116,000) from an employee of the Company. Included in accounts payable and accrued liabilities at June 30, 2014 is $473,000 (December 31, 2013 - $555,000) due to related parties, as a result of the transactions noted above, who are employees, directors and companies controlled by Quintana. These amounts are unsecured, non-interest bearing and have payment terms consistent with those of arms-length transactions. The amounts charged to the Company for the services provided have been determined by negotiation among the parties and in certain cases, are covered by signed agreements. These transactions were in the normal course of operations and were measured at an amount indicative of an arms-length transaction which represented the amount of consideration established and agreed to by the related parties. Critical Accounting Estimates The preparation of financial statements in conformity with IFRS 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 dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual outcomes may differ from those estimates should different assumptions or conditions arise. Significant areas of estimation uncertainty that could cause a material adjustment to the carrying amounts of assets and liabilities within one year are presented below.

Property, plant and equipment

The useful life of property, plant and equipment is based on management’s best estimate of the useful life at the time of acquisition. The useful lives are reviewed at least annually or when other changes or circumstances warrant this review. The useful lives impact the amortization expense recorded in the statement of operations and the carrying value of the items of property, plant and equipment. Accordingly, a significant departure from management’s expectation, including the impact of any changes


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in economic, technological or regulatory circumstances beyond management’s control, may impact the carrying value of items of property, plant and equipment.

Reserve and resource estimates Coal reserve and resource estimates indicate the amount of coal that can be feasibly extracted from the Company’s mineral properties. The estimates involve the inclusion of various complex inputs requiring interpretation by qualified geological personnel such as the size, shape and depth of the mineral deposit and other geological assumptions. Other estimates include commodity prices, production costs and capital expenditure requirements. Significant departures from the estimates utilized in management’s calculations may impact the carrying value of the mineral properties, reclamation provisions and amortization expense.

Reclamation provision estimates Reclamation provisions are recognized by the Company for the estimated costs to reclaim the site at the end of mine life. The carrying amount of the reclamation provision in the financial statements is subject to various estimates including mine life, undiscounted cash flows to reclaim mineral properties, inflation and discount rates. The provision at the balance sheet date represents management’s best estimate but significant departures from management’s expectation, including the impact of any changes in economic, technological or regulatory circumstances, may impact the carrying value of the reclamation provision and associated reclamation cost asset included in property, plant and equipment.

Mineral property recoverable amount The recoverable amount for impairment testing contains inputs that could vary from management’s estimates. These inputs include estimates of the expected date mining is expected to commence, in cases where properties are not yet in production, mine life for mines in production, discount rates, reserves and resources, commodity prices, mining costs and recovery ratios.

Evaluation of exploration and evaluation costs Management makes estimates as to when a known mineral deposit would provide future benefit sufficient enough to begin capitalization of exploration and evaluation costs. Actual results as to when a project provides future benefit may vary from management’s estimate. Changes in Accounting Policies including Initial Adoption Recently Adopted Accounting Pronouncements IFRIC 21 – Levies On May 21, 2013, the IASB issued IFRIC 21 - Levies, an interpretation on the accounting for levies imposed by governments. IFRIC 21 is an interpretation of IAS 37 - Provisions, contingent liabilities and contingent assets (“IAS 37”). IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. There was no impact to the Company’s financial statements as a result of adopting this standard.


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Future accounting pronouncements IFRS 9 - Financial instruments In November 2009 and October 2010, the IASB issued IFRS 9 - Financial Instruments (“IFRS 9”), which addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of IAS 39 - Financial Instruments: Recognition and Measurement (“IAS 39”) that relate to the classification and measurement of financial instruments. IFRS 9 is effective for annual periods beginning January 1, 2018. The impact to the presentation of the Company’s financial statements upon adoption of this standard has not yet been determined and the Company does not intend to adopt during the year ended December 31, 2014. IFRS 15 – Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15 - Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 is effective for periods beginning on or after January 1, 2017 and is to be applied retrospectively. IFRS 15 clarifies the principles for recognizing revenue from contracts with customers. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning January 1, 2017. The extent of the impact of adoption of IFRS 15 has not yet been determined. Financial Instruments and Other Instruments The Company’s financial instruments consist of cash, restricted cash, amounts receivable, accounts payable and accrued liabilities, notes payable, tax distributions payable, unit repayable on demand and Redeemable Unit financial liability. Fair Value The estimated fair values of cash, restricted cash, amounts receivable, accounts payable and accrued liabilities and tax distributions payable approximate their respective carrying values. Notes payable are initially measured at fair value and subsequently carried at amortized cost less any provision for impairment. Unit repayable on demand and Redeemable Unit financial liability are revalued to fair value at each reporting period with changes in the liability recorded to finance expenses in the statement of operations. Financial Risk Management The Company is exposed to varying degrees to a variety of financial instrument related risks as described below.

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. The Company’s primary exposure to credit risk is on its bank accounts with a balance at June 30, 2014 of $10,632,000 (2013 - $20,066,000). Bank accounts are held with major banks in Canada and the USA.


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The Company’s cash held in the USA is held at several banks. A portion of the Company’s cash is held by one Canadian bank and as a result, there is a concentration of credit risk with one bank in Canada. This risk is managed by using a major bank that is a high credit quality financial institution as determined by rating agencies. The Company is also exposed to credit risk on its amounts receivable and restricted cash with a balance of $4,403,000 and $2,382,000, respectively at June 30, 2014 (2013 - $5,152,000 and $4,840,000) . Amounts receivable consist of trade receivables and sale and income taxes receivable. The Company assesses the quality of its customers, taking into account their creditworthiness and reputation, past experience and other factors. The risk on sales taxes receivable is minimal as they consist of refundable Canadian government value-added sales taxes. The Company’s amounts receivable which were due in less than 30 days amounted to 93% (2013 – 93%). The restricted cash consists of certificates of deposit and interest bearing securities invested with highly rated financial institutions.

Currency Risk As a result of the Quintana Transaction, the Company also has a corporate office in Canada and is therefore exposed to foreign exchange risk arising from transactions denominated in Canadian dollars. The Company’s cash, amounts receivable and accounts payable and accrued liabilities that are held in Canadian dollars (as at June 30, 2014 - $2,325,000, $203,000 and $870,000, respectively) are subject to fluctuation against the United States dollar. A +/- 5% change in the exchange rates between the Canadian and United States dollars would, based on the Company’s condensed interim consolidated financial statements as at June 30, 2014, have an effect on the income before taxes of approximately +/- $83,000.

Commodity Risk The value of the Company’s mineral properties is related to the price of metallurgical and thermal coal, and the outlook for these commodities, which is beyond the control of the Company.

Liquidity Risk

Liquidity risk arises through the excess of financial obligations over available financial assets due at any point in time. The Company’s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining a sufficient cash balance. As at June 30, 2014, the Company’s cash balance was $10,632,000 (December 31, 2013 - $20,066,000).

Interest Rate Risk The Company is exposed to interest rate risk as bank accounts earn interest income at variable rates. The fair value of its portfolio is relatively unaffected by changes in short-term interest rates. A change of 100 basis points in interest rates would have an effect on the income before taxes for the three and six months ended June 30, 2014 of approximately +/- $31,000 and $60,000, respectively.

Fair value hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date.


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The fair value hierarchy categorizes into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are those other than quoted market prices in active markets, which are observable for the asset or liability, either directly or indirectly such as derived from prices. Level 3 inputs are unobservable inputs for the asset or liability.

As at June 30, 2014 Level 1 Level 2

Financial assets Cash $ 10,632 $ - Restricted cash 2,382 - $ 13,014 $ - Financial liabilities Redeemable unit financial liability 23,145 - Interest rate swap - 10 $ 23,145 $ 10

The Company has no financial instruments which use Level 3 inputs. The Company’s only financial instruments classified as fair value through profit or loss, and thus required to be measured at fair value each reporting period are the Redeemable Unit financial liability and interest rate swaps. The inputs used to measure the Redeemable Unit financial liability are based on observable unadjusted market prices for identical assets and are therefore classified as a Level 1 input under the financial instruments hierarchy. The Company’s cash, restricted cash and tax distributions payable balance are also classified as a Level 1 input.

The fair value of interest rate swaps, included as part of notes payable, is determined by utilizing models with observable inputs.


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Mineral Reserves and Resources

Wilson Creek (1) The proven reserves, probable reserves, measured resources and indicated resources of metallurgical coal as of December 31, 2013 are set out in the following tables.

Reserves (2)

Mine or Project Type Proven Reserve Tons Probable Reserve Tons Total Reserve Tons (3)

Acosta Deep Project Underground 2,026,139 9,315,354 11,341,493Ankeny Mine Surface 84,471 - 84,471Casselman Mine Underground 7,955,130 305,532 8,260,662Hamer Project Surface 95,079 - 95,079Total 10,160,819 9,620,886 19,781,705

Resources (4)

Mine or Project Type Measured Resource Tons Indicated Resource

Tons Total Resource Tons

(5) Acosta 3 Project Surface 389,73

Corsa Coal Corp. Management’s Discussion and Analysis June 30, 2014 · 2018. 11. 19. · Corsa...

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