Unassociated Document
Filed
Pursuant to Rule 424(b)(3) Registration No.s 333-138858,
333-133565,
333−129939 and 333-123216
PROSPECTUS
SUPPLEMENT
Number
3
to
Prospectus
dated December 5, 2006
of
CAPITAL
GOLD CORPORATION
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
This
prospectus supplement no. 3 supplements the information provided in our
prospectus dated December 5, 2006 and supplements no. 1 and 2 thereto. This
prospectus supplement should be read in conjunction with that Prospectus
and
supplements no. 1 and 2, which are to be delivered with this prospectus
supplement.
This
Prospectus Supplement includes our Quarterly Report on Form 10-QSB/A for
the
quarter ended April 30, 2007 filed with the Securities and Exchange Commission
on June 15, 2007.
The
date
of this Prospectus Supplement is June 15, 2007.
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB/A
x
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended April 30, 2007
OR
o
TRANSITION REPORT UNDER
SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from __________ to
__________.
Commission
File Number: 0-13078
CAPITAL
GOLD CORPORATION
(Exact
name of small business issuer as specified in its charter)
|
13-3180530
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
76
Beaver
Street, 26TH
floor,
New York, NY 10005
(Address
of principal executive offices)
Issuer's
telephone number: (212)
344-2785
____________________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class
|
|
Outstanding
at June 13, 2007
|
Common
Stock, par value $.0001 per share
|
|
167,942,964
|
Transitional
Small Business Format (check one);
Yes
o No x
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
The
accompanying financial statements are unaudited for the interim periods, but
include all adjustments (consisting only of normal recurring adjustments),
which
we consider necessary for the fair presentation of results for the three and
nine months ended April 30, 2007.
Moreover,
these financial statements do not purport to contain complete disclosure in
conformity with U.S. generally accepted accounting principles and should be
read
in conjunction with our audited financial statements at, and for the fiscal
year
ended July 31, 2006.
The
results reflected for the three and nine months ended April 30, 2007 are not
necessarily indicative of the results for the entire fiscal year.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
CONDENSED
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
|
|
April
30,
|
|
ASSETS
|
|
2007
|
|
Current
Assets:
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
7,545,184
|
|
Loans
Receivable - Affiliate (Note 12 and 16)
|
|
|
46,245
|
|
Prepaid
Assets
|
|
|
328,548
|
|
Marketable
Securities (Note 3)
|
|
|
80,000
|
|
Stockpiles
and Ore on Leach Pads (Note 5)
|
|
|
473,584
|
|
Inventories
(Note 4)
|
|
|
100,941
|
|
Deposits
(Note 6)
|
|
|
860,047
|
|
Other
Current Assets (Note 7)
|
|
|
1,284,117
|
|
Total
Current Assets
|
|
|
10,718,666
|
|
|
|
|
|
|
Mining
Concessions (Note 11)
|
|
|
70,104
|
|
Property
& Equipment - net (Note 8)
|
|
|
15,749,270
|
|
Intangible
Assets - net (Note 9)
|
|
|
580,267
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Other
Investments (Note 13)
|
|
|
28,052
|
|
Deferred
Financing Costs (Note 18)
|
|
|
620,756
|
|
Mining
Reclamation Bonds (Note 10)
|
|
|
35,550
|
|
Other
|
|
|
42,286
|
|
Security
Deposits
|
|
|
9,599
|
|
Total
Other Assets
|
|
|
736,243
|
|
Total
Assets
|
|
$
|
27,854,550
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
$
|
239,081
|
|
Accrued
Expenses
|
|
|
600,669
|
|
Derivative
Contracts (Note 21)
|
|
|
520,416
|
|
Total
Current Liabilities
|
|
|
1,360,166
|
|
|
|
|
|
|
Reclamation
and Remediation Liabilities (Note 14)
|
|
|
1,227,776
|
|
Note
Payable (Note 18)
|
|
|
12,000,000
|
|
Total
Long-term Liabilities
|
|
|
13,227,776
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
Common
Stock, Par Value $.0001 Per Share;
|
|
|
|
|
Authorized
250,000,000 shares; Issued and
|
|
|
|
|
Outstanding
166,308,511 Shares
|
|
|
16,631
|
|
Additional
Paid-In Capital
|
|
|
53,522,638
|
|
Deficit
Accumulated in the Development Stage
|
|
|
(36,872,071
|
)
|
Deferred
Financing Costs (Note 18)
|
|
|
(3,670,710
|
)
|
Deferred
Compensation
|
|
|
(52,500
|
)
|
Accumulated
Other Comprehensive Loss (Note 15)
|
|
|
322,620
|
|
Total
Stockholders’ Equity
|
|
|
13,266,608
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
27,854,550
|
|
The
accompanying notes are an integral part of the financial
statements.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
For
the Period
|
|
|
|
For
The Three Months Ended
|
|
September
17, 1982
|
|
|
|
April
30,
|
|
(Inception)
|
|
|
|
|
|
|
|
To
|
|
|
|
2007
|
|
2006
|
|
April
30, 2007
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Mine
Expenses
|
|
|
229,656
|
|
|
487,271
|
|
|
10,348,047
|
|
Write-Down
of Mining, Milling and Other Property and Equipment
|
|
|
-
|
|
|
-
|
|
|
1,299,445
|
|
Selling,
General and Administrative Expenses
|
|
|
970,200
|
|
|
662,803
|
|
|
14,149,822
|
|
Stocks
and Warrants issued for Services
|
|
|
51,884
|
|
|
6,586
|
|
|
9,652,331
|
|
Exploration
|
|
|
581,395
|
|
|
-
|
|
|
581,395
|
|
Depreciation
and Amortization
|
|
|
285,745
|
|
|
7,663
|
|
|
1,045,923
|
|
Total
Costs and Expenses
|
|
|
2,118,880
|
|
|
1,164,322
|
|
|
37,076,963
|
|
Loss
from Operations
|
|
|
(2,118,880
|
)
|
|
(1,164,322
|
)
|
|
(37,076,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
64,125
|
|
|
44,616
|
|
|
1,077,532
|
|
Interest
Expense
|
|
|
(275,499
|
)
|
|
-
|
|
|
(473,334
|
)
|
Miscellaneous
|
|
|
-
|
|
|
-
|
|
|
36,199
|
|
Loss
on Sale of Property and Equipment
|
|
|
-
|
|
|
-
|
|
|
(155,713
|
)
|
Gain
on Sale of Subsidiary
|
|
|
-
|
|
|
-
|
|
|
1,907,903
|
|
Option
Payment
|
|
|
-
|
|
|
-
|
|
|
70,688
|
|
Loss
on change in fair value of derivative
|
|
|
(319,061
|
)
|
|
(362,210
|
)
|
|
(1,428,992
|
)
|
Loss
on Write-Off of Investment
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Loss
on Joint Venture
|
|
|
-
|
|
|
-
|
|
|
(901,700
|
)
|
Loss
on Option
|
|
|
-
|
|
|
-
|
|
|
(50,000
|
)
|
Gain
(Loss) on Other Investments
|
|
|
-
|
|
|
-
|
|
|
(3,697
|
)
|
Loss
on Write -Off of Minority Interest
|
|
|
-
|
|
|
-
|
|
|
(150,382
|
)
|
Total
Other Income (Expense)
|
|
|
(530,434
|
)
|
|
(317,594
|
)
|
|
(81,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Minority Interest
|
|
|
(2,649,315
|
)
|
|
(1,481,916
|
)
|
|
(37,158,459
|
)
|
Minority
Interest
|
|
|
-
|
|
|
|
|
|
286,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,649,315
|
)
|
$
|
(1,481,916
|
)
|
$
|
(36,872,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
164,581,950
|
|
|
124,884,443
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
For
the Period
|
|
|
|
For
The Nine Months Ended
|
|
September
17, 1982
|
|
|
|
April
30,
|
|
(Inception)
|
|
|
|
|
|
|
|
To
|
|
|
|
2007
|
|
2006
|
|
April
30, 2007
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
|
|
|
Mine
Expenses
|
|
|
743,334
|
|
|
1,528,653
|
|
|
10,348,047
|
|
Write-Down
of Mining, Milling and Other Property and Equipment
|
|
|
-
|
|
|
-
|
|
|
1,299,445
|
|
Selling,
General and Administrative Expenses
|
|
|
2,151,362
|
|
|
1,377,104
|
|
|
14,149,822
|
|
Stocks
and Warrants issued for
Services
|
|
|
153,093
|
|
|
6,585
|
|
|
9,652,331
|
|
Exploration
|
|
|
581,395
|
|
|
-
|
|
|
581,395
|
|
Depreciation
and Amortization
|
|
|
631,797
|
|
|
27,000
|
|
|
1,045,923
|
|
Total
Costs and Expenses
|
|
|
4,260,981
|
|
|
2,939,342
|
|
|
37,076,963
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(4,260,981
|
)
|
|
(2,939,342
|
)
|
|
(37,076,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
97,815
|
|
|
85,396
|
|
|
1,077,532
|
|
Interest
Expense
|
|
|
(473,334
|
)
|
|
-
|
|
|
(473,334
|
)
|
Miscellaneous
|
|
|
-
|
|
|
-
|
|
|
36,199
|
|
Loss
on Sale of Property and Equipment
|
|
|
-
|
|
|
-
|
|
|
(155,713
|
)
|
Gain
on Sale of Subsidiary
|
|
|
-
|
|
|
-
|
|
|
1,907,903
|
|
Option
Payment
|
|
|
-
|
|
|
-
|
|
|
70,688
|
|
Loss
on change in fair value of derivative
|
|
|
(847,068
|
)
|
|
(362,210
|
)
|
|
(1,428,992
|
)
|
Loss
on Write-Off of Investment
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Loss
on Joint Venture
|
|
|
-
|
|
|
-
|
|
|
(901,700
|
)
|
Loss
on Option
|
|
|
-
|
|
|
-
|
|
|
(50,000
|
)
|
Gain
(Loss) on Other Investments
|
|
|
-
|
|
|
-
|
|
|
(3,697
|
)
|
Loss
on Write -Off of Minority Interest
|
|
|
-
|
|
|
-
|
|
|
(150,382
|
)
|
Total
Other Income (Expense)
|
|
|
(1,222,586
|
)
|
|
(276,814
|
)
|
|
(81,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Minority Interest
|
|
|
(5,483,568
|
)
|
|
(3,216,156
|
)
|
|
(37,158,459
|
)
|
Minority
Interest
|
|
|
-
|
|
|
-
|
|
|
286,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,483,568
|
)
|
$
|
(3,216,156
|
)
|
$
|
(36,872,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.04
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
143,842,574
|
|
|
105,698,556
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE
NINE MONTHS ENDED APRIL 30, 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
Accumulated
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Stage
|
|
|
|
|
|
|
|
|
|
Balance
at July 31, 2006
|
|
|
131,635,129
|
|
|
13,163
|
|
|
40,733,825
|
|
|
(31,388,503
|
)
|
|
146,493
|
|
|
(522,541
|
)
|
|
(52,500
|
)
|
|
8,929,937
|
|
Deferred
Financing Costs
|
|
|
1,150,000
|
|
|
115
|
|
|
350,635
|
|
|
-
|
|
|
-
|
|
|
(350,750
|
)
|
|
-
|
|
|
-
|
|
Deferred
Financing Costs
|
|
|
-
|
|
|
-
|
|
|
3,314,449
|
|
|
-
|
|
|
-
|
|
|
(3,314,449
|
)
|
|
-
|
|
|
-
|
|
Amortization
of Deferred Finance Costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
517,030
|
|
|
-
|
|
|
517,030
|
|
Options
and warrants issued for services
|
|
|
-
|
|
|
-
|
|
|
170,447
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
170,447
|
|
Private
Placement, Net
|
|
|
12,561,667
|
|
|
1,256
|
|
|
3,484,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,485,862
|
|
Common
Stock issued for services provided
|
|
|
679,261
|
|
|
68
|
|
|
301,182
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
301,250
|
|
Common
Stock issued upon the exercising of options and warrants
|
|
|
20,282,454
|
|
|
2,029
|
|
|
5,167,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,169,523
|
|
Unrealized
loss on marketable securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Change
in fair value on interest rate swaps
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(76,138
|
)
|
|
-
|
|
|
-
|
|
|
(76,138
|
)
|
Equity
adjustment from foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,265
|
|
|
-
|
|
|
-
|
|
|
262,265
|
|
Net
loss for the nine months ended
April
30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,483,568
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
(5,483,568
|
)
|
Balance
- April 30, 2007
|
|
|
166,308,511
|
|
$
|
16,631
|
|
$
|
53,522,638
|
|
$
|
(36,872,071
|
)
|
$
|
322,620
|
|
$
|
(3,670,710
|
)
|
$
|
(52,500
|
)
|
$
|
13,266,608
|
|
The
accompanying notes are an integral part of the financial statements.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
|
For
The Nine Months Ended
|
|
For
The Period September 17, 1982
|
|
|
|
April
30,
|
|
(Inception)
To
|
|
|
|
2007
|
|
2006
|
|
April
30, 2007
|
|
Cash
Flow From Operating Activities:
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,483,568
|
)
|
$
|
(3,216,156
|
)
|
$
|
(36,872,071
|
)
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
631,797
|
|
|
27,000
|
|
|
1,054,493
|
|
Gain
on Sale of Subsidiary
|
|
|
-
|
|
|
-
|
|
|
(1,907,903
|
)
|
Minority
Interest in Net Loss of Subsidiary
|
|
|
-
|
|
|
-
|
|
|
(286,388
|
)
|
Write-Down
of Impaired Mining, Milling and Other
|
|
|
-
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
-
|
|
|
-
|
|
|
1,299,445
|
|
Loss
on Sale of Property and Equipment
|
|
|
-
|
|
|
-
|
|
|
155,713
|
|
Loss
on change in fair value of derivative
|
|
|
662,354
|
|
|
362,210
|
|
|
1,244,278
|
|
Loss
on Write-Off of Investment
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
Loss
on Joint Venture
|
|
|
-
|
|
|
-
|
|
|
901,700
|
|
Loss
on Write-Off of Minority Interest
|
|
|
-
|
|
|
-
|
|
|
150,382
|
|
Value
of Common Stock and Warrants Issued for Services
|
|
|
471,697
|
|
|
6,585
|
|
|
13,057,312
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
Decrease in Prepaid Expenses
|
|
|
(288,474
|
)
|
|
(12,734
|
)
|
|
(309,556
|
)
|
(Increase)
Decrease in Inventory
|
|
|
(446,184
|
)
|
|
-
|
|
|
(446,184
|
)
|
(Increase)
Decrease in Other Current Assets
|
|
|
3,365,966
|
|
|
(5,104,501
|
)
|
|
(1,899,873
|
)
|
(Increase)
in Other Deposits
|
|
|
(610,047
|
)
|
|
(286,000
|
)
|
|
(878,047
|
)
|
Increase
(Decrease) in Other Assets
|
|
|
768
|
|
|
755
|
|
|
(41,900
|
)
|
(Increase)
in Security Deposits
|
|
|
-
|
|
|
-
|
|
|
(9,605
|
)
|
Increase
(Decrease) in Accounts Payable
|
|
|
(19,891
|
)
|
|
133,859
|
|
|
322,293
|
|
Increase
in Redemption Obligation
|
|
|
1,227,776
|
|
|
-
|
|
|
1,227,776
|
|
Increase
(Decrease) in Accrued Expenses
|
|
|
243,998
|
|
|
(46,317
|
)
|
|
380,927
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
|
(243,808
|
)
|
|
(8,042,665
|
)
|
|
(22,847,208
|
)
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
in Other Investments
|
|
|
(6,572
|
)
|
|
(260
|
)
|
|
(28,312
|
)
|
Purchase
of Mining, Milling and Other Property and Equipment
|
|
|
(15,031,813
|
) |
|
(238,541
|
)
|
|
(18,223,095
|
)
|
Purchase
of Concessions
|
|
|
-
|
|
|
-
|
|
|
(25,324
|
)
|
Investment
in Intangibles
|
|
|
(570,000
|
)
|
|
-
|
|
|
(588,620
|
)
|
Proceeds
on Sale of Mining, Milling and Other Property and
Equipment
|
|
|
-
|
|
|
-
|
|
|
275,638
|
|
Proceeds
From Sale of Subsidiary
|
|
|
-
|
|
|
-
|
|
|
2,131,616
|
|
Expenses
of Sale of Subsidiary
|
|
|
|
|
|
-
|
|
|
(101,159
|
)
|
Advance
Payments - Joint Venture
|
|
|
-
|
|
|
-
|
|
|
98,922
|
|
Investment
in Joint Venture
|
|
|
-
|
|
|
-
|
|
|
(101,700
|
) |
Investment
in Privately Held Company
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Net
Assets of Business Acquired (Net of Cash)
|
|
|
|
|
|
|
|
|
|
|
Investment
in Marketable Securities
|
|
|
-
|
|
|
-
|
|
|
(50,000
|
)
|
The
accompanying notes are an integral part of the financial
statements.
|
|
|
|
For
The Period
|
|
|
|
For
The Nine Months Ended
|
|
September
17, 1982
|
|
|
|
April
30,
|
|
(Inception)
|
|
|
|
|
|
|
|
To
|
|
|
|
2007
|
|
2006
|
|
April
30, 2007
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(15,608,385
|
)
|
|
(238,801
|
)
|
|
(16,664,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Advances
to Affiliate
|
|
|
(4,500
|
)
|
|
(8,076
|
)
|
|
(49,822
|
)
|
Proceeds
from Borrowing on Credit Facility
|
|
|
12,000,000
|
|
|
|
|
|
12,000,000
|
|
Proceeds
of Borrowings - Officers
|
|
|
-
|
|
|
-
|
|
|
18,673
|
|
Repayment
of Loans Payable - Officers
|
|
|
-
|
|
|
-
|
|
|
(18,673
|
)
|
Proceeds
of Note Payable
|
|
|
-
|
|
|
-
|
|
|
11,218
|
|
Payments
of Note Payable
|
|
|
-
|
|
|
-
|
|
|
(11,218
|
)
|
Proceeds
From Issuance of Common Stock, net
|
|
|
8,655,385
|
|
|
8,088,920
|
|
|
35,506,229
|
|
Commissions
on Sale of Common Stock
|
|
|
-
|
|
|
-
|
|
|
(5,250
|
)
|
Deferred
Finance Costs
|
|
|
(257,271
|
)
|
|
(140,000
|
)
|
|
(708,048
|
)
|
Expenses
of Initial Public Offering
|
|
|
-
|
|
|
-
|
|
|
(408,763
|
)
|
Capital
Contributions - Joint Venture Subsidiary
|
|
|
-
|
|
|
-
|
|
|
304,564
|
|
Purchase
of Certificate of Deposit - Restricted
|
|
|
-
|
|
|
-
|
|
|
(5,000
|
)
|
Purchase
of Mining Reclamation Bonds
|
|
|
-
|
|
|
-
|
|
|
(30,550
|
)
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
20,393,614
|
|
|
(7,940,844
|
)
|
|
46,603,360
|
|
Effect
of Exchange Rate Changes
|
|
|
262,265
|
|
|
(40,776
|
)
|
|
453,196
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) In Cash and Cash Equivalents
|
|
|
4,803,686
|
|
|
(381,398
|
)
|
|
7,545,184
|
|
Cash
and Cash Equivalents - Beginning
|
|
|
2,741,498
|
|
|
4,281,548
|
|
|
-
|
|
Cash
and Cash Equivalents - Ending
|
|
$
|
7,545,184
|
|
$
|
3,900,150
|
|
$
|
7,545,184
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid For Interest
|
|
$
|
685,735
|
|
$
|
-
|
|
$
|
685,735
|
|
Cash
Paid For Income Taxes
|
|
$
|
20,575
|
|
$
|
7,731
|
|
$
|
66,549
|
|
Non-Cash
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Issuances
of Common Stock as Commissions on Sales
of Common Stock
|
|
$
|
-
|
|
$
|
-
|
|
$
|
440,495
|
|
Issuance
of common stock and warrants as payment of financing costs
|
|
$
|
3,665,199
|
|
$
|
270,000
|
|
$
|
4,187,740
|
|
Change
in Fair Value of Derivative Instrument
|
|
$
|
76,138
|
|
$
|
-
|
|
$
|
76,138
|
|
Issuance
of Common Stock and Options/warrants as Payment for
Expenses
|
|
$
|
-
|
|
$
|
-
|
|
$
|
192,647
|
|
Issuance
of Common Stock as Payment for Mining, Milling
and Other Property and Equipment
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,500
|
|
Exercise
of Options as Payment of Accounts Payable
|
|
$
|
-
|
|
$
|
-
|
|
$
|
36,000
|
|
The
accompanying notes are an integral part of the financial
statements.
CAPITAL
GOLD CORPORATION
(A
DEVELOPMENT STAGE ENTERPRISE)
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL
30,
2007
NOTE
1 -
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Capital Gold Corporation ("Capital Gold", "the Company", "we" or
"us") and its subsidiaries, which are wholly and majority owned as well as
the
accounts within Caborca Industrial S.A. de C.V. (“Caborca Industriale”), a
Mexican corporation 100% owned by two of the Company’s officers and directors
for mining support services. These services include, but are not limited to,
the
payment of mining salaries and related costs. Caborca Industrial bills the
Company for these services at cost. This entity is considered a variable
interest entity under accounting rules provided under FIN 46, “Consolidation of
Variable Interest Entities”.
Capital
Gold was incorporated in February 1982 in the State of Nevada. During March
2003
the Company's stockholders approved an amendment to the Articles of
Incorporation to change its name from Leadville Mining and Milling Corp. to
Capital Gold Corporation. In November 2005, the Company reincorporated in
Delaware. The Company owns rights to property located in the State of Sonora,
Mexico and the California Mining District, Lake County, Colorado and is in
the
process of completing construction and development of an open-pit gold mining
operation to mine two of its Mexican concessions. All of the Company's mining
activities are now being performed in Mexico. The Company is a development
stage
enterprise.
On
June
29, 2001, the Company exercised an option and purchased from AngloGold North
America Inc. and AngloGold (Jerritt Canyon) Corp. 100% of the issued and
outstanding stock of Minera Chanate, S.A. de C.V., a subsidiary of those two
companies (“Minera Chanate”). Minera Chanate's assets consisted of certain
exploitation and exploration concessions in the States of Sonora, Chihuahua
and
Guerrero, Mexico. We sometimes refer to these concessions as the El Chanate
Concessions.
Pursuant
to the terms of the agreement, on December 15, 2001, the Company made a $50,000
payment to AngloGold. AngloGold will be entitled to receive the remainder of
the
purchase price by way of an ongoing percentage of net smelter returns of between
2% and 4% plus 10% net profits interest (until the total net profits interest
payment received by AngloGold equals $1,000,000). AngloGold's right to a payment
of a percentage of net smelter returns and the net profits interest will
terminate at such point as they aggregate $18,018,355. In accordance with the
agreement, the foregoing payments are not to be construed as royalty payments.
Should the Mexican government or other jurisdiction determine that such payments
are royalties, we could be subject to and would be responsible for any
withholding taxes assessed on such payments.
Under
the
terms of the agreement, the Company has granted AngloGold the right to designate
one of its wholly-owned Mexican subsidiaries to receive a one time option to
purchase 51% of Minera Chanate (or such entity that owns the Minera Chanate
concessions at the time of option exercise). That Option is exercisable over
a
180 day period commencing at such time as the Company notifies AngloGold that
it
has made a good faith determination that it has gold-bearing ore deposits on
any
one of the identified group of El Chanate Concessions, when aggregated with
any
ore that the Company has mined, produced and sold from such concessions, of
in
excess of 2,000,000 troy ounces of contained gold. The exercise price would
equal twice the Company's project costs on the properties during the period
commencing on December 15, 2000 and ending on the date of such
notice.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements.
In
the opinion of the Company's management, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the condensed consolidated
financial position and results of operations and cash flows for the periods
presented.
Results
of operations for interim periods are not necessarily indicative of the results
of operations for a full year.
The
condensed consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction
of
liabilities in the normal course of business. The Company is a development
stage
enterprise and has recurring losses from operations and operating cash
constraints that raise substantial doubt about the Company's ability to continue
as a going concern. These statements should be read in conjunction with the
Company’s consolidated financial statements included within its Form 10-KSB for
the fiscal year ended July 31, 2006, as filed with the SEC on November 1,
2006.
NOTE
2 -
Equity Based Compensation
In
connection with offers of employment to the Company’s executives as well as in
consideration for agreements with certain consultants, the Company issues
options and warrants to acquire its common stock. Employee and non-employee
awards are made at the discretion of the Board of Directors.
Such
options and warrants may be exercisable at varying exercise prices currently
ranging from $0.22 to $0.41 per share of common stock with certain of these
grants becoming exercisable immediately upon grant subject to stockholder
approval. Certain grants vest for a period of five months to two years
(generally concurrent with service periods for grants to employees/consultants
-
See Note 20 - Employee and Consulting Agreements). Certain grants contain a
provision whereby they become immediately exercisable upon a change of
control.
Effective
February 1, 2006, the Company adopted the provisions of SFAS No. 123R. Under
FAS
123R, share-based compensation cost is measured at the grant date, based on
the
estimated fair value of the award, and is recognized as expense over the
requisite service period. The Company adopted the provisions of FAS 123R using
a
modified prospective application. Under this method, compensation cost is
recognized for all share-based payments granted, modified or settled after
the
date of adoption, as well as for any unvested awards that were granted prior
to
the date of adoption. Prior periods are not revised for comparative purposes.
Because the Company previously adopted only the pro forma disclosure provisions
of SFAS 123, it will recognize compensation cost relating to the unvested
portion of awards granted prior to the date of adoption, using the same estimate
of the grant-date fair value and the same attribution method used to determine
the pro forma disclosures under SFAS 123, except that forfeitures rates will
be
estimated for all options, as required by FAS 123R.
The
cumulative effect of applying the forfeiture rates is not material. FAS 123R
requires that excess tax benefits related to stock options exercises be
reflected as financing cash inflows instead of operating cash
inflows.
The
fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model. Expected volatility is based on the
historical volatility of the price of the Company stock. The risk-free interest
rate is based on U.S. Treasury issues with a term equal to the expected life
of
the option. The Company uses historical data to estimate expected dividend
yield, expected life and forfeiture rates. The estimated per share weighted
average grant-date fair values of stock options and warrants granted during
the
nine months ended April 30, 2007 and 2006, were $0.32 and $0.36, respectively.
The fair values of the options and warrants granted were estimated based on
the
following weighted average assumptions:
|
|
Nine
Months ended April 30,
|
|
|
|
2007
|
|
2006
|
|
Expected
volatility
|
|
|
82
|
%
|
|
121
|
%
|
Risk-free
interest rate
|
|
|
6.24
|
%
|
|
5.75
|
%
|
|
|
|
-
|
|
|
-
|
|
Expected
life
|
|
|
4.2
years
|
|
|
1.05
years
|
|
Stock
option and warrant activity for employees during the nine months ended April
30,
2007 is as follows:
|
|
Number
of
Options
|
|
Weighted
Average
exercise
price
|
|
Weighted
average
remaining
contracted
term
(years)
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2005
|
|
|
4,711,363
|
|
$
|
.30
|
|
|
0.30
|
|
$
|
1,277,977
|
|
Options
granted
|
|
|
4,611,363
|
|
|
.13
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
(590,909
|
)
|
|
.05
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
(3,161,363
|
)
|
|
.05
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at July 31, 2006
|
|
|
5,570,454
|
|
$
|
.16
|
|
|
1.17
|
|
$
|
702,250
|
|
Options
granted
|
|
|
550,000
|
|
$
|
.34
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
(3,570,909
|
)
|
$
|
.08
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
(549,545
|
)
|
$
|
.22
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at April 30, 2007
|
|
|
2,000,000
|
|
$
|
.33
|
|
|
1.39
|
|
$
|
167,000
|
|
Warrants
and options exercisable at April 30, 2007
|
|
|
2,000,000
|
|
$
|
.33
|
|
|
1.39
|
|
$
|
167,000
|
|
|
Unvested
stock option and warrant balances for employees at April 30, 2007
are as
follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
|
Average
|
|
remaining
|
|
|
|
|
|
Number
of Options
|
|
Exercise
price
|
|
contracted
term
(years)
|
|
|
|
Outstanding
at August 1, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
-
|
|
Options
granted
|
|
|
150,000
|
|
$
|
.32
|
|
|
1.83
|
|
|
16,500
|
|
Unvested
Options outstanding at April 30, 2007
|
|
|
150,000
|
|
$
|
.32
|
|
|
1.17
|
|
$
|
13,500
|
|
|
Stock
option and warrant activity for non-employees during the nine months
ended
April 30, 2007 is as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
|
Average
|
|
remaining
|
|
|
|
|
|
Number
of Options
|
|
Exercise
price
|
|
contracted
term
(years)
|
|
|
|
Outstanding
at July 31, 2005
|
|
|
31,902,004
|
|
$
|
.30
|
|
|
1.13
|
|
$
|
3,430,120
|
|
Options
granted
|
|
|
6,844,000
|
|
|
.28
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
(12,835,004
|
)
|
|
.29
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
(350,000
|
)
|
|
.10
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at July 31, 2006
|
|
|
25,561,000
|
|
$
|
.29
|
|
|
1.33
|
|
$
|
1,939,530
|
|
Options
granted
|
|
|
16,982,542
|
|
$
|
.33
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
(17,846,000
|
)
|
|
.29
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
_(1,375,000
|
)
|
|
.31
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at April 30, 2007
|
|
|
23,322,542
|
|
$
|
.32
|
|
|
1.72
|
|
$
|
1,988,238
|
|
Warrants
and options exercisable at April 30, 2007
|
|
|
23,322,542
|
|
$
|
.32
|
|
|
1.72
|
|
$
|
1,988,238
|
|
The
impact on the Company’s results of operations of recording equity based
compensation for the nine months ended April 30, 2007, for employees and
non-employees was approximately $427,000 and reduced earnings per share by
$0.00
per basic and diluted share.
As
of
April 30, 2007, there was $52,500 of unrecognized equity based compensation
cost
related to options granted to one executive.
NOTE
3 -
Marketable Securities
Marketable
securities are classified as current assets and are summarized as
follows:
|
|
April
30,
2007
|
|
Marketable
equity securities, at cost
|
|
$
|
50,000
|
|
|
|
$
|
80,000
|
|
NOTE
4 -
Inventories
|
|
April 30,
2007
|
|
In-process
|
|
$
|
-
|
|
Concentrate
|
|
|
- |
|
Precious
metals
|
|
|
- |
|
Materials,
supplies and other
|
|
|
100,941 |
|
|
|
$
|
100,941
|
|
NOTE
5 -
Stockpiles and Leach Pads
|
|
April 30,
2007
|
|
Current:
|
|
|
|
Stockpiles
& Ore on leach pads
|
|
$
|
473,584
|
|
|
|
|
|
|
|
|
$
|
473,584
|
|
Costs
that are incurred in or benefit the productive process are accumulated as
stockpiles, ore on leach pads and inventories. Stockpiles, Ore on leach pads
and
inventories are carried at the lower of average cost or net realizable value.
Net realizable value represents the estimated future sales price of the product
based on current and long-term metals prices, less the estimated costs to
complete production and bring the product to sale. Write-downs of stockpiles,
ore on leach pads and inventories, resulting from net realizable value
impairments, will be reported as a component of Costs
applicable to sales.
The
current portion of stockpiles, ore on leach pads and inventories is determined
based on the expected amounts to be processed within the next 12 months.
Stockpiles, ore on leach pads and inventories not expected to be processed
within the next 12 months will be classified as long-term.
NOTE
6 -
Deposits
Deposits
are classified as current assets and represent payments made on mining equipment
for the Company’s El Chanate Project in Sonora, Mexico. Deposits are summarized
as follows:
|
|
April
30,
2007
|
|
Advance
payment on Mining Contract to Sinergia (Note 14)
|
|
$
|
832,595
|
|
Other
|
|
|
27,452
|
|
Total
Deposits
|
|
$
|
860,047
|
|
NOTE
7 -
Other Current Assets
Other
current assets consist of the following:
|
|
April
30,
2007
|
|
Value
added tax to be refunded
|
|
$
|
1,045,102
|
|
Asset
held for resale
|
|
|
166,232
|
|
Other
|
|
|
72,784
|
|
Total
Other Current Assets
|
|
$
|
1,284,117
|
|
NOTE
8 -
Property and Equipment
Property
and Equipment consist of the following at April 30, 2007:
Process
equipment and facilities
|
|
$
|
12,593,830
|
|
Construction
in progress
|
|
|
1,826,925
|
|
Asset
retirement obligation
|
|
|
1,218,314
|
|
Mineral properties
|
|
|
141,242
|
|
Computer
and office equipment
|
|
|
131,500
|
|
Improvements
|
|
|
15,797
|
|
Furniture
|
|
|
14,162
|
|
|
|
|
|
|
Total
|
|
|
15,941,770
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(192,500
|
)
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
15,749,270
|
|
The
Company had open purchase orders on material and equipment regarding its
El
Chanate Project amounting to approximately $745,000 as of April 30, 2007.
Depreciation
expense for the nine months ended April 30, 2007 and 2006 was $130,645 and
$23,902, respectively.
NOTE
9 -
Intangible Assets
Intangible
assets consist of the following as of April 30, 2007:
Repurchase
of Net Profits Interest from FG
|
|
$
|
500,000
|
|
Mobilization
Payment to Mineral Contractor
|
|
|
70,000
|
|
Investment
in Right of Way
|
|
|
18,000
|
|
Less:
accumulated amortization of Right of Way and Mobilization
Payments
|
|
|
(7,733
|
)
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
580,267
|
|
On
September 13, 2006, the Company repurchased the 5% net profits interest
formerly
held by Grupo Minera FG (“FG”), and subsequently acquired by Daniel Gutierrez
Cibrian, with respect to the operations at the El Chanate mine. That net
profits
interest had originally been granted to FG in connection with the April
2004
termination of the joint venture agreement between FG and Minera Santa
Rita S.
de R.L. de C.V. (“MSR”), the Company’s wholly owned Mexican subsidiary. FG
also received a right of first refusal to carry out the works and render
construction services required to effectuate the El Chanate Project. This
right
of first refusal is not applicable where a funding source for the project
determines that others should render such works or services. FG has assigned
or
otherwise transferred to MSR all permits, licenses, consents and authorizations
(collectively, “authorizations”) for which FG had obtained in its name in
connection with the development of the El Chanate Project to the extent
that the
authorizations are assignable. To the extent that the authorizations are
not
assignable or otherwise transferable, FG has given its consent for the
authorizations to be cancelled so that they can be re-issued or re-granted
in
MSR’s name. The foregoing has been completed. The purchase price for the buyback
of the net profits interest was $500,000, and was structured as part of
the
project costs financed by the recently completed loan agreement with Standard
Bank, Plc. (See Note 18). Mr. Gutierrez retained a 1% net profits interest
in
MSR, payable only after a total $US 20 million in net profits has been
generated
from operations at El Chanate. The Company recorded this transaction on
its
balance sheet as an intangible asset under guidance provided by FAS 142
-
Goodwill
and Other Intangible Assets
to be
amortized over the period of which the asset is expected to contribute
directly
or indirectly to the Company’s cash flow. On March 23, 2007, The Company
reacquired the remaining 1% net profits interest (see Note
19).
Amortization
expense for the nine months ending April 30, 2007 and 2006 was $3,533 and
$3,098, respectively.
NOTE
10 -
Mining Reclamation Bonds
These
represent certificates of deposit that have been deposited as security for
Mining Reclamation Bonds in Colorado. They bear interest at rates varying
from
4.35% to 5.01% annually and mature at various dates through 2010.
NOTE
11 -
Mining Concessions
Mining
concessions consists of the following:
El
Charro
|
|
$
|
25,324
|
|
El
Chanate
|
|
|
44,780
|
|
Total
|
|
$
|
70,104
|
|
The
El
Chanate concessions are carried at historical cost and were acquired in
connection with the purchase of the stock of Minera Chanate (see Note
1).
MSR
acquired
an additional mining concession - El Charro. El Charro lies within the
current
El Chanate property boundaries. MSR
is
required to pay 1 1/2% net smelter royalty in connection with the El Charro
concession.
NOTE
12 -
Loans Receivable - Affiliate
Loans
receivable - affiliate consist of expense reimbursements due from a
publicly-owned corporation in which the Company has an investment. The Company's
president and chairman of the board of directors is an officer and director
of
that corporation. These loans are non-interest bearing and due on demand
(see
Note 3 & 16).
NOTE
13 -
Other Investments
Other
investments are carried at cost and consist of tax liens purchased on properties
located in Lake County, Colorado.
NOTE
14 -
Reclamations and Remediation Liabilities (Asset Retirement
Obligations)
Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either
the
timing or amount of the reclamation and abandonment costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. The Company reviews, on an annual
basis, unless otherwise deemed necessary, the asset retirement obligation
at
each mine site. As of April 30, 2007, approximately $1,228,000 was accrued
for
reclamation obligations relating to mineral properties in accordance with
SFAS
No. 143, “Accounting for Asset Retirement Obligations.”
The
following is a reconciliation of the liability for long-term asset retirement
obligations:
|
|
2007
|
|
2006
|
|
Balance
at beginning of period
|
|
$
|
-
|
|
$
|
-
|
|
Additions,
changes in estimates and other
|
|
|
1,218,314
|
|
|
-
|
|
Liabilities
settled
|
|
|
-
|
|
|
-
|
|
Accretion
expense
|
|
|
9,642
|
|
|
-
|
|
Balance
- April 30, 2007
|
|
$
|
1,227,777
|
|
$
|
-
|
|
NOTE
15 -
Other Comprehensive Income (Loss)-Supplemental Non-Cash Investing
Activities
Other
comprehensive income (loss) consists of accumulated foreign translation gains
and losses and unrealized gains and losses on marketable securities and is
summarized as follows:
Balance
- July 31, 2005
|
|
$
|
157,714
|
|
|
|
|
|
|
Equity
Adjustments from Foreign Currency Translation
|
|
|
48,779
|
|
Unrealized
Gains (loss) on Marketable Securities
|
|
|
(60,000
|
)
|
|
|
|
|
|
Balance
- July 31, 2006
|
|
|
146,493
|
|
|
|
|
|
|
Change
in fair value of derivative instrument
|
|
|
(76,138
|
)
|
Equity
Adjustments from Foreign Currency Translation
|
|
|
262,265
|
|
Unrealized
Gains (loss) on Marketable Securities
|
|
|
(10,000
|
)
|
Balance
- April 30, 2007
|
|
$
|
322,620
|
|
NOTE
16 -
Related Party Transactions
In
August
2002, the Company purchased marketable equity securities of a related company.
The Company recorded approximately $6,750 and $8,100 in expense reimbursements
including office rent from this entity for the nine months ended April 30,
2007
and 2006, respectively (see Notes 3 and 12).
The
Company utilizes a Mexican Corporation 100% owned by two officers/Directors
and
stockholders of the Company for mining support services. These services include
but are not limited to the payment of mining salaries and related costs. The
Mexican Corporation bills the Company for these services at cost. Mining
expenses charged by the Mexican Corporation and eliminated upon consolidation
amounted to approximately $240,000 and $85,000 for the nine months ended April
30, 2007 and 2006, respectively.
During
the nine months ended April 30, 2007 and 2006, the Company paid its V.P.
Development and Director $0 and $38,500, respectively, for professional
geologist and management services rendered to the Company. This individual
also
earned wages of $90,000 and $20,000 during the nine months ended April 30,
2007
and 2006 respectively. During the nine months ended April 30, 2007 and 2006,
the
Company paid its V.P. Exploration and Director consulting fees of $0 and
$58,500, respectively. In addition, this individual earned wages of $90,000
during the nine months ended April 30, 2007. During the nine months ended April
30, 2007 and 2006, we paid a director legal and consulting fees of $18,000
and
$0, respectively.
The
Company’s V.P. Development and Director has, since 1995, been a senior
consultant in the Minerals Advisory Group LLC, Tucson, Arizona, an entity that
provided $3,000 of services to the Company for the nine months ended April
30,
2007.
In
January 2006, the Company extended the following stock options through January
3, 2007, all of which are exercisable at $0.05 per share: Chief Executive
Officer and Director - 1,250,000 shares; Director - 500,000 shares; V.P.
Investor Relations and Director - 327,727 shares; V.P. Development and Director
- 500,000 shares; and V.P. Mine Development - 25,000 shares.
There
was not a material increase in the intrinsic value of these options at the
date
of modification as compared to the intrinsic value of the original issuance
of
these stock options on the applicable measurement date. All of these options
were exercised prior to their extended expiration.
On
February 5, 2007, Dave Loder, the General Manager of the Company’s El Chanate
Project, resigned for personal reasons unrelated to his employment with the
Company. The Company has engaged, on a temporary basis, an experienced
replacement and is actively looking for a permanent replacement. The Company
does not believe, that Mr. Loder’s departure will have a material adverse affect
on its business.
On
February 7, 2007, Robert Roningen resigned as the Company’s Secretary and, on
February 9, 2007, John Brownlie, the Company’s Vice President of Operations, was
appointed Chief Operating Officer and Jeffrey W. Pritchard, the Company’s Vice
President of Investor Relations, was appointed Secretary. Mr. Brownlie’s
appointment as the Company’s Chief Operating Officer did not result in any
changes to his compensation arrangement under his employment agreement with
the
Company.
NOTE
17 -
Stockholders' Equity
Common
Stock
At
various stages in the Company’s development, shares of the Company’s common
stock have been issued at fair market value in exchange for services or property
received with a corresponding charge to operations, property and equipment
or
additional paid-in capital depending on the nature of the services provided
or
property received.
The
Company issued 1,150,000 shares of common stock and 12,600,000 common stock
purchase warrants to Standard Bank as part of a commitment fee to entering
into
the credit facility on August 15, 2006, with its wholly-owned subsidiaries
MSR
and Oro. The Company recorded the issuance of the 1,150,000 shares of common
stock and 12,600,000 warrants as deferred financing costs of approximately
$351,000 and $3,314,000, respectively, as a reduction of stockholders' equity
on
the Company's balance sheet. The issuance of 1,150,000 shares was recorded
at
the fair market value of the Company's common stock at the closing date or
$0.305 per share. The warrants were valued at approximately $3,314,000 using
the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet (See
Note 18). The balance of deferred financing costs, net of amortization, as
of
April 30, 2007, as a reduction of stockholders' equity, was approximately
$3,670,710. Amortization expense for the nine months ended April 30, 2007,
was
$517,031.
The
Company closed two private placements in January 2007 pursuant to which it
issued an aggregate of 12,561,667 units, each unit consisting of one share
of
its common stock and a warrant to purchase ¼ of a share of its common stock for
proceeds of approximately $3,486,000, net of commissions of approximately
$283,000. The Company also received proceeds of approximately $5,170,000 during
the quarterly period ended April 30, 2007, from the exercising of an aggregate
of 20,282,454 of warrants issued in past private placements. The Warrant issued
to each purchaser in the January 2007 placements is exercisable for one share
of
common stock, at an exercise price equal to $0.40 per share. Each Warrant has
a
term of eighteen months and is fully exercisable from the date of issuance.
The
Company issued to the placement agents eighteen month warrants to purchase
up to
an aggregate of 942,125 shares of common stock at an exercise price of $0.30
per
share. Such placement agent warrants are valued at approximately $142,000 using
the Black-Scholes option pricing method.
On
March
22, 2007, the Company issued 500,000 shares of common stock to John Brownlie,
the Company’s Chief Operating Officer under the Company’s 2006 Equity Incentive
Plan. The fair value of the services provided in March 2007 amounted to $225,000
or $0.45 per share.
In
March
2007, the Company issued 65,625 shares of common stock to an independent
contractor for services provided related to the Company’s El Chanate project.
The fair value of the services provided amounted to $26,250 or $0.40 per share.
In April 2007, this independent contractor was engaged as the general manager
of
the Company’s El Chanate project for a six month term with an option for an
additional six month term, if mutually agreed upon by both parties. Pursuant
to
the agreement, the Company issued 113,636 shares of common stock with a fair
value of $50,000 or $0.44 per share at the fair market value of the Company’s
common stock on the date of the agreement. The issuance of these shares vest
over the six-month term.
Recapitalization
The
Board
of Directors recommended an amendment to the Company's Certificate of
Incorporation to increase the Company's authorized shares of capital stock
from
200,000,000 to 250,000,000 shares. This amendment was approved by the
stockholders on February 21, 2007 and the Company effected the authorized share
increase on February 26, 2007.
Warrants
and Options
On
November 30, 2006, the Company’s board of directors granted 100,000 common stock
options to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, the Company’s
independent directors. The options are to purchase shares of the Company’s
common stock at an exercise price of $0.33 per share (the closing price of
our
common stock on that date) for a period of two years. The Company utilized
the
Black-Scholes method to fair value the 300,000 options received by the directors
and recorded approximately $40,000 as equity based compensation
expense.
On
December 13, 2006, the Company issued two year options to purchase the Company’s
common stock at an exercise price of $0.36 per share to its Chief Operating
Officer, Chief Financial Officer and the Company’s Canadian counsel. These
options are for the purchase of 250,000 shares, 100,000 shares and 100,000
shares, respectively. The Company utilized the Black-Scholes method to fair
value the 450,000 options received by these individuals and recorded
approximately $61,000 as stock based compensation expense.
On
March
22, 2006, the Company issued two year options to purchase the Company’s common
stock at an exercise price of $0.45 per share to the Company’s SEC Counsel.
These options are for the purchase of 100,000 shares and were issued under
the
2006 Equity-Incentive Plan. The Company utilized the Black-Scholes Method to
fair value these options and recorded approximately $15,000 as equity based
compensation expense.
Warrant
Re-pricing
In
December 2005, the Board of Directors ratified the temporary re-pricing of
certain warrants that were issued in connection with the February 2005 private
placement from $0.30 per share to $0.20 per share exercise price. In addition,
warrants issued to the placement agent were also re-priced from $0.25 per share
to $0.20 per share exercise price. These re-pricings were in effect for the
period November 28, 2005 through January 31, 2006. All of these warrants were
either exercised or expired within the term limit.
2006
Equity Incentive Plan
The
2006
Equity Incentive Plan (the “Plan”), approved by stockholders on February 21,
2007, is intended to attract and retain individuals of experience and ability,
to provide incentive to the Company’s employees, consultants, and non-employee
directors, to encourage employee and director proprietary interests in the
Company, and to encourage employees to remain in the Company’s employ.
The
Plan
authorizes the grant of non-qualified and incentive stock options, stock
appreciation rights and restricted stock awards (each, an “Award”). A maximum of
10,000,000 shares of common stock are reserved for potential issuance pursuant
to Awards under the Plan. Unless sooner terminated, the Plan will continue
in
effect for a period of 10 years from its effective date.
The
Plan
is administered by the Company’s Board of Directors or a committee thereof. The
Plan provides for Awards to be made to such of the Company’s employees,
directors and consultants and its affiliates as the Board may select.
As
of
April 30, 2007, 1,050,000 options and shares have been granted under the
Plan.
Stock
options awarded under the Plan may vest and be exercisable at such times (not
later than 10 years after the date of grant) and at such exercise prices (not
less than Fair Market Value at the date of grant) as the Board may determine.
Unless otherwise determined by the Board, stock options shall not be
transferable except by will or by the laws of descent and distribution. The
Board may provide for options to become immediately exercisable upon a "change
in control," as defined in the Plan.
The
exercise price of an option must be paid in cash. No options may be granted
under the Plan after the tenth anniversary of its effective date. Unless the
Board determines otherwise, there are certain continuous service requirements
and the options are not transferable.
The
Plan
provides the Board with the general power to amend the Plan, or any portion
thereof at any time in any respect without the approval of the Company’s
stockholders, provided
however, that the stockholders must approve any amendment which increases the
fixed maximum percentage of shares of common stock issuable pursuant to the
Plan, reduces the exercise price of an Award held by a
director, officer or ten percent stockholder
or
extends the term of an Award held by a
director, officer or ten percent stockholder. Notwithstanding the foregoing,
stockholder approval may still be necessary to satisfy the requirements of
Section 422 of the Code, Rule 16b-3 of the Securities Exchange Act of 1934,
as
amended or any applicable stock exchange listing requirements. The Board may
amend the Plan in any respect it deems necessary or advisable to provide
eligible Employees with the maximum benefits provided or to be provided under
the provisions of the Code and the regulations promulgated thereunder relating
to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock
Options granted under it into compliance therewith. Rights under any Award
granted before amendment of the Plan cannot be impaired by any amendment of
the
Plan unless the Participant consents in writing. The Board is empowered to
amend
the terms of any one or more Awards; provided, however, that the rights under
any Award shall not be impaired by any such amendment unless the applicable
Participant consents in writing and further provided that the Board cannot
amend
the exercise price of an option, the Fair Market Value of an Award or extend
the
term of an option or Award without obtaining the approval of the stockholders
if
required by the rules of the TSX or any stock exchange upon which the common
stock is listed.
NOTE
18 -
Project Finance Facility
On
August
15, 2006, the Company entered into a credit facility (the “Credit Facility”)
involving its wholly-owned subsidiaries MSR and Oro, as borrowers, us, as
guarantor, and Standard Bank plc (“Standard Bank”), as the lender and the
offshore account holder. Under the Credit Facility, MSR and Oro have agreed
to
borrow money in an aggregate principal amount of up to US$12.5 million (the
“Loan”) for the purpose of constructing, developing and operating our El Chanate
Project (the “Mine”). The Company is guaranteeing the repayment of the loan and
the performance of the obligations under the Credit Facility. The Loan is
scheduled to be repaid in fourteen quarterly payments with the first principal
payment due after certain Mine start-up production and performance criteria
are
satisfied, which the Company believes it will occur in the first calendar
quarter of 2008. The Loan bears interest at LIBOR plus 4.00%, with LIBOR
interest periods of 1, 2, 3 or 6 months and with interest payable at the end
of
the applicable interest period.
The
Credit Facility contains covenants customary for a project financing loan,
including but not limited to restrictions (subject to certain exceptions) on
incurring additional debt, creating liens on its property, disposing of any
assets, merging with other companies and making any investments. The Company
will be required to meet and maintain certain financial covenants, including
(i)
a debt service coverage ratio of not less than 1.2 to 1.0, (ii) a projected
debt
service coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage
ratio of at least 1.6 to 1.0, (iv) a project life coverage ratio of at least
2.0
to 1.0 and (v) a minimum reserve tail. The Company will also be required to
maintain a certain minimum level of unrestricted cash, and upon meeting certain
Mine start-up production and performance criteria, MSR and Oro will be required
to maintain a specified amount of cash as a reserve for debt
repayment.
The
Loan
is secured by all of the tangible and intangible assets and property owned
by
MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
Pledge Agreement, an Account Pledge Agreement and certain other agreements
entered into in Mexico (the “Mexican Collateral Documents”). As additional
collateral for the Loan, the Company, together with its subsidiary, Leadville
Mining & Milling Holding Corporation, have pledged all of its ownership
interest in MSR and Oro. In addition to these collateral arrangements, MSR
and
Oro are required to deposit all proceeds of the Loan and all cash proceeds
received from operations and other sources in an offshore, controlled account
with Standard Bank. Absent a default under the loan documents, MSR and Oro
may
use the funds from this account for specific purposes such as approved project
costs and operating costs.
As
part
of the fee for entering into and closing the Credit Facility, the Company issued
to Standard Bank 1,150,000 shares of its restricted common stock and a warrant
for the purchase of 12,600,000 shares of our common stock at an exercise price
of $0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b)
the
date one year after the repayment of the Credit Facility. Previously, pursuant
to the mandate and commitment letter for the facility, the Company issued to
Standard Bank 1,000,000 shares of its restricted common stock and a warrant
for
the purchase of 1,000,000 shares of its common stock at an exercise price of
$0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
date one year after the repayment of the Credit Facility. The Company recorded
the issuance of the 1,000,000 shares of common stock as deferred financing
costs
of approximately $270,000 as a reduction of stockholders' equity on its balance
sheet. The issuance of these shares was recorded at the fair market value of
the
Company’s common stock at the commitment letter date or $0.27 per share. In
addition, the warrants were valued at approximately $253,000 using the
Black-Scholes option pricing model and were reflected as deferred financing
costs as a reduction of stockholders' equity on the Company’s balance sheet in
2006. The Company registered for public resale the 2,150,000 shares issued
to
Standard Bank and the 13,600,000 shares issuable upon exercise of warrants
issued to Standard Bank.
In
March
2006, The Company entered into a gold price protection arrangement with Standard
Bank to protect it against future fluctuations in the price of gold. The Company
agreed to a series of gold forward sales and call option purchases in
anticipation of entering into the Credit Facility. Under the price protection
agreement, the Company has agreed to sell a total volume of 121,927 ounces
of
gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
during the period from March 2007 to September 2010. The Company will also
purchase call options from Standard Bank on a quarterly basis during this same
period covering a total volume of 121,927 ounces of gold at a price of $535
per
ounce. While the period of the derivative contracts has commenced, the Company
does not anticipate any material adverse effect from the fact that it has not
commenced to sell gold because the price of gold is substantially above $535
per
ounce. The Company paid a fee to Standard Bank in connection with the price
protection agreement. In addition, the Company provided aggregate cash
collateral of approximately $4.3 million to secure its obligations under this
agreement. The cash collateral was returned to the Company after the Credit
Facility was executed in August 2006.
In
March
2007, the Company made a net cash settlement pursuant to the Gold Price
Protection Agreement of $184,975 to Standard Bank as the Company was unable
to
physically meet the delivery of gold as of March 31, 2007. The offset to this
payment was a reduction in the Company’s derivative liability.
As
of
April 30, 2007, the Company has drawn down a total of $12,000,000 on the Credit
Facility.
On
October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
the Company entered into interest rate swap agreements in accordance with the
terms of the Credit Facility, which requires that the Company hedge at least
50
percent of our outstanding debt under this facility. The agreements entered
into
cover $9,375,000 or 75% of the outstanding debt. Both swaps covered this same
notional amount of $9,375,000, but over different time horizons. The first
covered the six months commencing October 11, 2006 and a termination date of
March 31, 2007 and the second covering the period from March 30, 2007 with
a
termination date of December 31, 2010. We intend to use discretion in
managing this risk as market conditions vary over time, allowing for the
possibility of adjusting the degree of hedge coverage as we deem appropriate.
However, any use of interest rate derivatives will be restricted to use for
risk
management purposes (See Note 21).
NOTE
19 -
Mining, Engineering and Supply Contracts
In
early
December 2005, the Company’s wholly-owned Mexican subsidiary, MSR, which holds
the rights to develop and mine El Chanate Project, entered into a Mining
Contract with a Mexican mining contractor, Sinergia Obras Civiles y Mineras,
S.A. de C.V,("Sinergia"). The Mining Contract becomes effective if and when
MSR
sends the Contractor a formal "Notice of Award".
On
August
2, 2006, the Company amended the November 24, 2005 Mining Contract between
its
subsidiary, MSR, and Sinergia. Pursuant to the amendment, MSR's right to deliver
the Notice to Proceed to Sinergia was extended to November 1, 2006. Provided
that this Notice was delivered to Sinergia on or before that date, with a
specified date of commencement of the Work (as defined in the contract) not
later than February 1, 2007, the mining rates set forth in the Mining Contract
would still apply; subject to adjustment for the rate of inflation between
September 23, 2005 and the date of commencement of the work. As
consideration for these changes, the Company paid Sinergia $200,000 of the
requisite advance payment discussed below. On November 1, 2006, MSR delivered
the Notice of Award specifying January 25, 2007, as the date of commencement
of
Work. Based
on
a revised crushing and stacking plan and since MSR is manufacturing the leach
pad overliner material both Sinergia and MSR mutually agreed to delay mining
until the end of March 2007. Mining of the El Chanate Project initiated on
March
25, 2007.
Pursuant
to the Mining Contract, Sinergia, using its own equipment, generally is
performing all of the mining work (other than crushing) at the El Chanate
Project for the life of the mine. MSR delivered to the Contractor a mobilization
payment of $70,000 and the advance payment of $520,000. The advance payments
are
recoverable by MSR out of 100% of subsequent payments due to Sinergia under
the
Mining Contract. Pursuant to the Mining Contract, upon termination, Sinergia
would be obligated to repay any portion of the advance payment that had not
yet
been recouped. Sinergia’s mining rates are subject to escalation on an annual
basis. This escalation is tied to the percentage escalation in Sinergia’s costs
for various parts for its equipment, interest rates and labor. One of the
principals of Sinergia is one of the former principals of FG. FG was our former
joint venture partner.
On
March
23, 2007, The Company reacquired the remaining 1% net profits interest in its
Mexican affiliate, MSR from one of the successors to FG (“FG’s Successor”). FG
was the Company’s former joint venture partner. When the joint venture was
terminated in March 2004, FG received, among other things, a participation
certificate entitling it to receive 5% of the annual dividends of MSR, when
declared. The participation certificate also gave FG the right to participate,
but not to vote, in the meetings of MSR’s Board of Managers, Technical Committee
and Partners. In August 2006, the Company repurchased the participation
certificate from FG’s Successor for $500,000 with FG’s Successor retaining a 1%
net profits interest in MSR, payable only after a total $20 million in net
profits has been generated from operations at El Chanate. The Company reacquired
the remaining 1% net profits interest in consideration of our advancing $319,000
to Sinergia Obras Civiles y Mineras, S.A. de C.V. (“Sinergia”) under the mining
contract between MSR and Sinergia. FG’s Successor is a principal of
Sinergia.
In
June
2006, the Company's Mexican operating subsidiary retained the contracting
services of Mexican subsidiary of M3 Engineering & Technology Corporation
("M3M") to provide EPCM (engineering procurement construction management)
services. M3M supervises the construction and integration of the various
components necessary to commence production at the El Chanate Project. The
contracted services are not to exceed $1,200,000 and the contract is based
on
the EPCM services to be provided by M3M. As of April 30, 2007, the Company
has
incurred approximately $660,000 pursuant to this contract.
On
March
2, 2007, MSR entered into a sales contract with Degussa Mexico S.A. de C.V.
to
supply sodium cyanide solid bricks for use in the heap leach process with the
El
Chanate Project. The contract period initiates April 1, 2007 and extends through
March 31, 2010 and estimates total yearly requirements at 1,000 metric tons
plus
or minus 20%. The total minimum annual commitment associated with this contract
is anticipated to be between $1,500,000 in year one and two and $1,600,000
in
year three.
NOTE
20 -
Employee and Consulting Agreements
The
Company entered into employment agreements, effective July 31, 2006, with the
following executive officers: Gifford A. Dieterle, President and Treasurer,
Roger A. Newell, Vice President of Development, Jack V. Everett, Vice President
of Exploration, and Jeffrey W. Pritchard, Vice President of Investor Relations.
On December 5, 2006, effective January 1, 2007, The Company entered into an
employment agreement with J. Scott Hazlitt, Vice President of Mine
Development.
The
agreements run for a period of three years and automatically renew for
successive one-year periods unless the Company or the executive provides the
other party with written notice of their intent not to renew at least 30 days
prior to the expiration of the then current employment period.
Mr.
Dieterle is entitled to a base annual salary of at least $180,000, Mr. Hazlitt
is entitled to a base annual salary of at least $125,000 and each of the other
executives is entitled to a base annual salary of at least $120,000. Each
executive is entitled to a bonus or salary increase in the sole discretion
of
the board of directors. In addition, Messrs. Dieterle, Newell, Everett and
Pritchard each received two year options to purchase an aggregate of 250,000
shares of the Company’s common stock at an exercise price of $0.32 per share
(the closing price on July 31, 2006).
The
Company has the right to terminate any executive’s employment for cause or on 30
days’ prior written notice without cause or in the event of the executive’s
disability (as defined in the agreements). The agreements automatically
terminate upon an executive’s death. “Cause” is defined in the agreements as (1)
a failure or refusal to perform the services required under the agreement;
(2) a
material breach by executive of any of the terms of the agreement; or (3)
executive’s conviction of a crime that either results in imprisonment or
involves embezzlement, dishonesty, or activities injurious to the Company’s
reputation. In the event that the Company terminates an executive’s employment
without cause or due to the disability of the executive, the executive will
be
entitled to a lump sum severance payment equal to one month’s salary, in the
case of termination for disability, and up to 12 month’s salary (depending upon
years of service), in the case of termination without cause.
Each
executive has the right to terminate his employment agreement on 60 days’ prior
written notice or, in the event of a material breach by the Company of any
of
the terms of the agreement, upon 30 days’ prior written notice. In the event of
a claim of material breach by the Company of the agreement, the executive must
specify the breach and our failure to either (i) cure or diligently commence
to
cure the breach within the 30 day notice period, or (ii) dispute in good faith
the existence of the material breach. In the event that an agreement terminates
due to the Company’s breach, the executive is entitled to severance payments in
equal monthly installments beginning
in the month following the executive’s termination equal to three month’ salary
plus one additional month’s salary for each year of service to the Company.
Severance payments cannot exceed 12
month’s salary.
In
conjunction with the employment agreements, the Company’s board of directors
deeming it essential to the best interests of its stockholders to foster the
continuous engagement of key management personnel and recognizing that, as
is
the case with many publicly held corporations, a change of control might occur
and that such possibility, and the uncertainty and questions which it might
raise among management, might result in the departure or distraction of
management personnel to the detriment of the company and its stockholders,
determined to reinforce and encourage the continued attention and dedication
of
members of the Company’s management to their engagement without distraction in
the face of potentially disturbing circumstances arising from the possibility
of
a change in control of the company, it entered into identical agreements
regarding change in control with the executives. Each
of
the agreements regarding change in control continues through December 31, 2009
(December 31, 2010 for Mr. Hazlitt) and extends automatically to the third
anniversary thereof unless the Company gives notice to the executive prior
to
the date of such extension that the agreement term will not be
extended.
Notwithstanding the foregoing, if a change in control occurs during the term
of
the agreements, the term of the agreements will continue through the second
anniversary of the date on which the change in control occurred. Each of the
agreements entitles the executive to change of control benefits, as defined
in
the agreements and summarized below, upon his termination of employment with
the
Company during a potential change in control, as defined in the agreements,
or
after a change in control, as defined in the agreements, when his termination
is
caused (1) by the Company for any reason other than permanent disability or
cause, as defined in the agreement (2) by the executive for good reason as
defined in the agreements or, (3) by the executive for any reason during the
30
day period commencing on the first date which is six months after the date
of
the change in control. Each executive would receive a lump sum cash payment
of
three times his base salary and outplacement benefits. Each agreement also
provides that the executive is entitled to a payment to make him whole for
any
federal excise tax imposed on change of control or severance payments received
by him.
Pursuant
to a September 1, 2006 amended consulting agreement, Christopher Chipman is
engaged as the Company’s Chief Financial Officer. Pursuant to the agreement, Mr.
Chipman devotes approximately 50% of his time to our business and receives
a
monthly fee of $10,000. The agreement runs for an initial one year period,
and
is renewable thereafter for an additional year. Mr. Chipman can terminate the
Agreement on 60 days notice. In conjunction with the amended consulting
agreement, the Company entered into a change of control agreement similar to
the
agreements entered into with other executive officers; except that Mr. Chipman’s
agreement renews annually and his benefits are based upon one times his base
annual fee. In connection with the original engagement agreement with Mr.
Chipman in March 2006, Mr. Chipman received a two year option to purchase an
aggregate of 50,000 shares of Company common stock at an exercise price of
$.34
per share. The option vested at the rate of 10,000 shares per month and are
now
fully vested.
On
May
12, 2006, the Company entered into an employment agreement with John Brownlie,
pursuant to which Mr. Brownlie serves as Vice President Operations. Mr. Brownlie
receives a base annual salary of $150,000 and is entitled to annual bonuses.
Upon his employment, he received options to purchase an aggregate of 200,000
shares of the Company’s common stock at an exercise price of $.32 per share.
50,000 options vested immediately and the balance vest upon the Company
achieving "Economic Completion" as that term is defined in the Standard Bank
Credit Facility (when the Company has commenced mining operations and has been
operating at anticipated capacity for 60 to 90 days). The term of the options
is
two years from the date of vesting. The agreement runs for an initial two year
period, and automatically renews thereafter for additional one year periods
unless terminated by either party within 30 days of a renewal date. The Company
can terminate the agreement for cause or upon 30 days notice without cause.
Mr.
Brownlie can terminate the agreement upon 60 days notice without cause or,
if
there is a breach of the agreement by the Company that is not timely cured,
upon
30 days notice. In the event that the Company terminates him without cause
or he
terminates due to the Company’s breach, he will be entitled to certain severance
payments. The Company utilized the Black-Scholes method to fair value the
200,000 options received by Mr. Brownlie. The Company recorded approximately
$70,000 as deferred compensation expense as of the date of the agreement and
recorded the vested portion or $17,500 as stock based compensation expense
for
the year ended July 31, 2006.
NOTE
21 -
Sales Contracts, Commodity and Financial Instruments
In
March
2006, the Company entered into two identically structured derivative contracts
with Standard Bank (See Note 13). Each derivative consisted of a series of
forward sales of gold and a purchase gold cap. The Company agreed to sell a
total volume of 121,927 ounces of gold forward to Standard Bank at a price
of
$500 per ounce on a quarterly basis during the period from March 2007 to
September 2010. The Company also agreed to a purchase gold cap on a quarterly
basis during this same period and at identical volumes covering a total volume
of 121,927 ounces of gold at a price of $535 per ounce. While the period of
the
derivative contracts has commenced, the Company does not anticipate any material
adverse effect from the fact that it has not commenced to sell gold because
the
price of gold is substantially above $535 per ounce. Under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
these contracts must be carried on the balance sheet at their fair value, with
changes to the fair value of these contracts reflected as Other Income or
Expense. These contracts were not designated as hedging derivatives; and
therefore, special hedge accounting does not apply.
The
first
derivative was entered into on March 1, 2006 for a premium of $550,000; and
the
second was entered into on March 30, 2006 for a premium of $250,000. The gold
price rose sharply during the period March 1, 2006 through July 31, 2006 and
was
the primary reason for the decrease in premium on the derivative contracts.
As
of April 30, 2007, the carrying value of this derivative liability was
approximately $444,000. The change in fair value on these derivative contracts
was approximately $847,000 for the nine months ended April 30, 2007. This
reduction in fair value was recorded as an other expense on the Company’s income
statement.
On
October 11, 2006, prior to the Company’s initial draw on the Credit Facility,
the Company entered into interest rate swap agreements in accordance with the
terms of the Credit Facility, which requires that the Company hedge at least
50
percent of the Company’s outstanding debt under this facility. The agreements
entered into cover $9,375,000 or 75% of the outstanding debt. Both swaps covered
this same notional amount of $9,375,000, but over different time horizons.
The
first covered the six months commencing October 11, 2006 and a termination
date
of March 31, 2007 and the second covering the period from March 30, 2007 and
a
termination date of December 31, 2010. The Company intends to use
discretion in managing this risk as market conditions vary over time, allowing
for the possibility of adjusting the degree of hedge coverage as the Company
deems appropriate. However, any use of interest rate derivatives will be
restricted to use for risk management purposes.
The
Company uses variable-rate debt to finance a portion of the El Chanate Project.
Variable-rate debt obligations expose the Company to variability in interest
payments due to changes in interest rates. As a result of these arrangements,
the Company will continuously monitor changes in interest rate exposures and
evaluate hedging opportunities. The Company’s risk management policy permits it
to use any combination of interest rate swaps, futures, options, caps and
similar instruments, for the purpose of fixing interest rates on all or a
portion of variable rate debt, establishing caps or maximum effective interest
rates, or otherwise constraining interest expenses to minimize the variability
of these effects.
The
interest rate swap agreements are accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense. No component of hedge results will be excluded from the
assessment of hedge effectiveness. The amount expected to be reclassified from
OCI to earnings during the 12 months ending July 31, 2007 from these two swaps
was determined to be immaterial. As of April 30, 2007, the Company’s derivative
liability associated with these swap agreements amounted to approximately
$76,000.
The
Company is exposed to credit losses in the event of non-performance by
counterparties to these interest rate swap agreements, but the Company does
not
expect any of the counterparties to fail to meet their obligations. To manage
credit risks, the Company selects counterparties based on credit ratings, limits
its exposure to a single counterparty under defined guidelines, and monitor
the
market position with each counterparty as required by
SFAS 133.
NOTE
22 -
Subsequent Events
On
May 1,
2007, the Company completed its final draw down on its credit facility from
Standard Bank receiving proceeds of $500,000 increasing the total outstanding
balance on the Credit Facility to $12,500,000. The Company is using and
anticipates using these proceeds for its El Chanate Project.
In
May
2007, the Company received proceeds of $233,500 from the exercising of an
aggregate of 934,000 warrants issued in past private placements.
In
May
2007, the Company received proceeds of $154,100 from the exercising of an
aggregate of 700,455 warrants issued to officers, directors and an
employee.
In
May
2007, the Company purchased an additional loader at an approximate cost of
$400,000 to reinforce Sinergia’s mining fleet and to assist in removing waste
material in other areas of the open pit mine at the Company’s El Chanate
project.
On
June
6, 2007, Jack V. Everett resigned as Vice President of Exploration and a
Director of the Company and entered into a consulting agreement with the Company
to provide mining and mineral exploration consultation services.
NOTE
23 -
New Accounting Pronouncements
The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
applying the provisions of this interpretation are required to be reported
separately as an adjustment to the opening balance of retained earnings in
the
year of adoption. The adoption of this standard did not have an impact on the
financial condition or the results of the Company’s operations.
On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of
FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of
the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions".
The
fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair
value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date.
A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may
be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a
new
election date occurs); and (c) is applied only to entire instruments and not
to
portions of instruments.
Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first
120
days of that fiscal year and also elects to apply the provisions of FASB
Statement No. 157, Fair Value Measurements.
Cautionary
Statement on Forward-Looking Statements
Certain
statements in this report constitute “forwarding-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as “believes,” “expects,” “may,” “will,” “should,” or
“anticipates” or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
All statements other than statements of historical fact, included in this report
regarding our financial position, business and plans or objectives for future
operations are forward-looking statements. Without limiting the broader
description of forward-looking statements above, we specifically note that
statements regarding exploration, costs, grade, production and recovery rates,
permitting, financing needs and the availability of financing on acceptable
terms or other sources of funding are all forward-looking in nature.
Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including but not limited to, the factors discussed below in
“Risk Factors,” which may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements and other factors
referenced in this report. We do not undertake and specifically decline any
obligation to publicly release the results of any revisions which may be made
to
any forward-looking statement to reflect events or circumstances after the
date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Results
of Operations
General
Sonora,
Mexico
Through
a
wholly-owned subsidiary and an affiliate, Capital Gold Corporation owns 100%
of
16 mining concessions located in the Municipality of Altar, State of Sonora,
Republic of Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7
square miles). We are in the final stages of completing the construction and
development of an open-pit gold mining operation to mine two of these
concessions. We sometimes refer to the planned operations on these two
concessions as the El Chanate Project. Mining operations began in late March
2007 and we hope to start receiving revenues from mining operations prior to
July 31, 2007, the end of our current fiscal year.
Engineering
Procurement and Construction Management activities at the El Chanate Project
commenced June 1, 2006. In August 2006, we completed debt financing for the
construction of the El Chanate Project and commenced construction activities.
Please see “Current
Status of El Chanate” below
for
a discussion of the current status of our El Chanate project.
We
believe that surface gold mine and facility at El Chanate will be capable of
producing about 2.6 million metric tons per year of ore from which we anticipate
recovering about 44,000 to 48,000 ounces of gold per year, over a seven year
mine life. We are following the updated feasibility study (the “2005 Study”) for
the El Chanate Project prepared by M3 Engineering of Tucson, Arizona which
was
completed in October 2005, as further updated by an August 2006 technical report
from SRK Consulting, Denver, Colorado. The original feasibility study (the
“2003
Study”) was completed by M3 Engineering in August 2003. Since completion of the
2003 Study, both the price of gold and production costs have increased and
equipment choices have broadened from those identified in the 2003
Study.
The
2005
Study includes the following changes from the 2003 Study:
· |
an
increase in the mine life from five to six
years,
|
· |
an
increase in the base gold price from $325/oz to
$375/oz,
|
· |
use
of a mining contractor,
|
· |
revised
mining, processing and support costs,
|
· |
stockpiling
of low grade material for possible processing in year six, if justified
by
gold prices at that time,
|
· |
a
reduced size for the waste rock dump and revised design of reclamation
waste dump slopes,
|
· |
a
revised process of equipment selection
and
|
· |
evaluation
of the newly acquired water well for processing the
ore.
|
In
view
of a significant rise in the gold price, in June 2006, we commissioned SRK
Consulting, Denver, Colorado, to prepare an updated Canadian Securities
Administration National Instrument 43-101 compliant technical report on our
El
Chanate Project. SRK completed this technical report in August 2006 (the “2006
Update”). The 2006 Update provided the following updated information from the
2005 Study:
· |
an
18% increase in the proven mineral reserve
tonnage,
|
· |
a
59% increase in the probable mineral reserve
tonnage
|
· |
an
increase in mine life from six to seven
years,
|
· |
an
increase in the base gold price from $375/oz to $450/oz
and
|
· |
Stockpiling
of low grade material for possible processing in year seven, if justified
by gold prices at that time.
|
Pursuant
to the 2005 Study, as updated by the 2006 Update using a $450 per ounce gold
price, our estimated mine life is seven years and the ore reserve is 490,000
ounces of gold present in the ground. Of this, we anticipate recovering
approximately 332,000 ounces of gold over a seven year life of the mine. The
targeted cash cost (which includes mining, processing and on-property general
and administrative expenses) per the 2005 Study is $259 per ounce. We believe
that cash costs may decrease as the production rate increases. Total costs
(which include cash costs as well as off-property costs such as property taxes,
royalties, refining, transportation and insurance costs and exclude financing
costs) will vary depending upon the price of gold (due to the nature of
underlying payment obligations to the original owner of the property). Total
costs are estimated in the 2005 Study to be $339 per ounce at a gold price
of
$417 per ounce (the three year average gold price as of the date of that study).
We will be working on measures to attempt to reduce costs going forward. Ore
reserves and production rates are based on a gold price of $450 per ounce,
which
is the Base Case in the 2006 Update. During the first calendar quarter of 2007,
the spot price for gold on the London Exchange has fluctuated between $608.30
and $685.75 per ounce. During 2006, the spot price for gold on the London
Exchange has fluctuated between $524.75 and $725.00 per ounce. The 2005 Study
contains the same mining rate as the 2003 Study of 7,500 metric tonnes per
day
of ore. It should be noted that, during the preliminary engineering phase of
the
project it was decided to design the crushing screening and ore stacking system
with the capability of processing 10,000 tonnes per day of ore. This will make
allowances for any possible increase in production and for operational
flexibility. It was found that the major components in the feasibility study
would be capable of handling the increase in tonnage. Design changes were made
where necessary to accommodate the increased tonnage. The 2005 Study takes
into
consideration a more modern crushing system than the one contemplated in the
2003 Study. The crushing system referred to in the 2005 Study is a new system,
that, we believe will provide more efficient processing capabilities than the
used equipment referred to in the 2003 Study. In addition, the 2005 Study
assumes a contractor will mine the ore and haul it to the crushers. In the
2003
Study, we planned to perform these functions. We have engaged a mining
contractor to perform these services.
The
2005
Study assumes a mining production rate of 2.6 million tonnes of ore per year
or
7,500 tonnes per day. The processing plant will operate 365 days per year.
The
processing plan for this open pit heap leach gold project calls for crushing
the
ore to 100% minus 3/8 inch. Carbon columns will be used to recover the
gold.
The
following Summary is extracted from the 2005 Study, as updated by the 2006
Update. Please note that the reserves as stated are an estimate of what can
be
economically and legally recovered from the mine and, as such, incorporate
losses for dilution and mining recovery. The 489,952 ounces of contained gold
represents ounces of gold contained in ore in the ground, and therefore does
not
reflect losses in the recovery process. Total gold produced is estimated to
be
331,560 ounces, or approximately 68% of the contained gold. The gold recovery
rate is expected to average approximately 68% for the entire ore body.
Individual portions of the ore body may experience varying recovery rates
ranging from about 73% to 48%. Oxidized and sandstone ore types may have
recoveries of about 73%; fault zone ore type recoveries may be about 64%; and
siltstone ore types recoveries may be about 48%.
El
Chanate Project
Production
Summary
|
|
Metric
|
|
U.S.
|
Materials
Reserves
Proven
Probable
Total
Reserves
Other
Mineralized Materials
Waste
Total
Contained
Gold
Production
Ore
Crushed
Operating
Days/Year
Gold
Plant Average Recovery
Average
Annual Production
Total
Gold Produced
|
|
11.7
Million Tonnes @ 0.811 g/t*
8.2 Million Tonnes
@
0.705g/t*
19.9
Million Tonnes @ 0.767 g/t*
0 Million Tonnes
19.9
Million Tonnes
39.7
Million Tonnes
15.24
Million grams
2.6
Million Tonnes /Year
7,500
Mt/d*
365
Days per year
67.7
%
1.35
Million grams
10.31 Million grams
|
|
12.9
Million Tons @ 0.024 opt*
9.0 Million Tons
@
0.021
opt*
21.9
Million Tons @ 0.022 opt*
0 Million Tons
21.9
Million Tons
43.8
Million tons
489,952
Oz
2.87
Million Tons/Year
8,267
t/d*
365
Days per year
67.7
%
43,414
Oz
331,560
Oz
|
* |
“g/t”
means grams per metric tonne, “opt” means ounces per ton, “Mt/d” means
metric tonnes per day and “t/d” means tons per day
and.
|
The
reserve estimates are based on a recovered gold cutoff grade of 0.20 grams
per
metric tonne as described on below.
In
the
mineral resource block model developed, with blocks 10m (meters) x 10m x 5m
high, Measured and Indicated resources (corresponding to Proven and Probable
reserves respectively when within the pit design) were classified in accordance
with the following scheme:
· |
Blocks
with 4 or more drill holes within a search radius of 40m x 40m x
25m and
inside suitable geological zones were classified as Measured
(corresponding to Proven);
|
· |
Blocks
with 3 or more holes within a search radius of 75m x 75m x 50m and
inside
suitable geological zones were classified as Indicated (corresponding
to
Probable);
|
· |
Blocks
with 1 or 2 holes within a search radius of 75m x 75m x 50m and inside
suitable geological zones were classified as Inferred (and which
was
classed as waste material in the mining reserves
estimate);
|
· |
Blocks
outside the above search radii or outside suitable geological zones
were
not assigned a classification.
|
The
proven and probable reserve estimates are based on a recovered gold internal
cutoff grade of 0.20 grams/tonne. (A constant recovered gold cutoff grade was
used for reserves calculation as the head gold grade cutoff varies with the
different ore types due to their variable gold recoveries.) The internal
(in-pit) cutoff grade was used for reserves reporting.
Cutoff
Grade Calculation
Basic
Parameters
Gold
Price
Gold
Recovery
Operating
Costs per Tonne of Ore
Royalty
(4%)
Smelting
& Refining
Mining
*
Processing
Heap
Leach Pad Development
G&A
Total
Internal
Cutoff Grade
Head
Grade Cutoff (67.7% recov.)
Recovered
Gold Grade Cutoff
|
Internal
Cutoff Grade
US$450/oz
67.7%
$
per Tonne of Ore
0.115
0.015
0.070
1.680
0.185
0.810
2.875
Grams
per Tonne
0.29
0.20
|
Break
Even Cutoff Grade
US$450/oz
67.7%
$
per Tonne of Ore
0.164
0.021
1.250
1.680
0.185
0.810
4.110
Grams
per Tonne
0.41
0.28
|
* |
The
calculation of an internal cutoff grade does not include the basic
mining
costs (which are considered to be sunk costs for material within
the
designed pit). The $0.07 per tonne cost included is the incremental
(added) cost of hauling ore over hauling waste, and which is included
in
the calculation.
|
Current
Status of El Chanate
We
have
made significant progress in the construction and commissioning of our mine
at
El Chanate. As of June 13, 2007, engineering and procurement is complete, we
have obtained all permits required to commence mining operations, all equipment
has been delivered and installed and the infrastructure support buildings have
been constructed. Mining operations began in late March 2007 and we hope to
start receiving revenues from mining operations prior to July 31, 2007, the
end
of our current fiscal year.
The
current status of the relevant areas is as follows:
Electrical
power is supplied from the National grid by CFE (Commission Federal de
Electricidad) in Caborca at 34.5 kilo volt-amps and is converted to 480 volts
at
seven transformer stations throughout the site. The transmission lines and
transformers have been installed and commissioned and approved for use by CFE.
An emergency generator has been installed adjacent to the solution ponds to
circulate the leach pad solution in the event of power interruptions. An
additional substation is being built by the local power company 20 kilometers
from the mine in the town of Altar. It will have the capability to increase
power to the mine later this year should additional power be required in the
event of additional consumption requirements for increased production or
seasonal fluctuations.
Process
water is supplied from a well owned by MSR, one of our Mexican subsidiaries.
The
well’s casing has been inspected and equipped with a new pump and electrical
hardware. The well is located nine kilometers from the mine and can supply
water
in sufficient quantity to support the mine through a new eight inch diameter
steel pipeline. While there are issues about the adequacy of water supply over
the entire life of the project, based on the anticipated water consumption
for
at least the first few years of operation, we believe that we have an allocation
to meet our requirements. The capability of acquiring additional water through
third party allocation purchase is available, as is the conservation of water
through good operational practice. If we need to obtain additional rights,
but
are unable to procure them our planned operations may be adversely affected.
See
“Our
currently permitted water rights may not be adequate for all of our total
project needs over the entire course of our anticipated mining operations.
If we
need to obtain additional rights, but are unable to procure them our planned
operations may be adversely affected”
in
“Risk Factors” below.
The
mine
access road is nine kilometers long and is capable of supporting all anticipated
traffic. The road connects with a main asphalt road (Route 2) that is maintained
by the state highways department. There are two arroyos that cross the mine
access road, both of which have concrete crossings to prevent erosion of the
road at these locations, giving year round access to the site. The internal
access roads have been constructed for the life of the mine.
The
mine
is supported by a number of infrastructure buildings all of which have been
completed. The completed buildings in or ready for use are the laboratory,
an
explosive and detonator store, a 5,000 sq. ft warehouse, the mine office, the
security guardhouse and first aid center, a lime storage building and a cyanide
and carbon storage building. The refinery building was completed in early June
2007.
The
crushing and screening plant consists of three stage crushing and closed circuit
screening. All of the equipment is new and has a design capacity of 1,000 tons
per hour (tph) for the primary crushing circuit and 400 tph for the balance
of
the crushing circuit. A 20,000 ton buffer stockpile separates the primary
crusher from the rest of the circuit allowing the crushing circuits to operate
independently of each other. The crushed ore is stacked on the leach pad by
a
series of conveyors and a radial stacker. The equipment is new and has been
commissioned and is currently stacking ore on a daily basis. Crushed ore has
been stacked to a height of eight meters in preparation for cyanide leaching
on
portions of our leach pad.
The
mining process is as follows: Ore is placed on a leach pad that is (HDPE)
plastic lined to contain the gold bearing solution and transport it via lined
launders (plastic lined earth trenches) to ponds which are double plastic lined.
The initial leach pad will consist of four panels, three of which are lined
and
ready for ore placement at this time with the fourth to be completed by mid
to
late June 2007 (the ultimate leach pad will consist of ten panels). These four
panels will allow for the stacking of approximately one year of crushed ore.
The
launder and ponds have been constructed for the mine life. We will commence
the
application of cyanide solution to the ore on the leach pad by the end of June
2007. We anticipate that gold doré (bars of semi-purified gold) production will
begin between 30 to 45 days thereafter.
The
initial supply of ore to the crushing plant and leach pad was loaded and
delivered by a group of local truckers. Sinergia, the mining contractor,
commenced mining operations on March 25, 2007, and remains in the pre-production
phase of the mining contract. Sinergia continues to mobilize portions of its
mining fleet to the site. As of May 31, 2007, we have stacked approximately
238,000 tons of ore on the leach pad. The Sinergia mining fleet is not new,
however it has been refurbished at Sinergia’s repair facility and at the
Caterpillar dealer in Hermosillo. This process has been monitored by us and
third party specialists and we believe the equipment will be suitable for
mining. Sinergia has constructed staff accommodation within an existing Ejido
(small village) adjacent to the mine site. On site power, water, and fuel supply
has been made available for Sinergia’s use as prescribed in the mining
contract.
The
gold
in the cyanide/gold solution (pregnant solution) will be recovered using
activated carbon held in tanks. The activated carbon will be transferred on
a
daily basis to a processing plant (the “ADR Plant”) that, with the use of
chemicals, will extract the gold from the pregnant solution. The gold from
the
solution will be deposited by an electrowinning (electrolysis) process and
then
dried, mixed with fluxes (substances that reduce the melting point of the
material and remove impurities in the metal) and smelted in a furnace to produce
gold doré . The solution that has been stripped of gold will gravitate to the
barren solution pond. Cyanide will be added to this and the solution will be
pumped to freshly stacked ore. The ADR Plant is not new. It has been
refurbished; all of the pumps, valves, piping, instruments and electrical
components have been replaced. The pumps and piping associated with the solution
ponds are also new. We had anticipated that the ADR Plant would be operational
and ready for use by mid April 2007. However, during a programmed visit by
our
metallurgical consultant, it was determined that additional refurbishment is
required. While the equipment is no longer manufactured, we contracted the
engineer and designer of the equipment who recommended replacement of additional
pieces of equipment to ensure ongoing reliability of the plant after start
up.
All of the recommended parts were delivered to site.
As a
result, we now believe, but cannot assure, that the ADR Plant will become
operational by the end of June 2007.
We
have
filled all key positions in finance, human resources, operations and mine
support , and the majority of the remainder of the staff is also in place.
We
forecast a total staffing complement of between 70 and 80 people. The mine
has
three towns in close proximity where the staff live. With this local
infrastructure, the staff will be bussed to site, eliminating the need for
an on
site camp. Certain duties such as security and staff transport will be
contracted. In the town of Caborca we own a house and rent an office. While
we
have constructed and are using an on-site office, we will retain an “in town”
office for the project life.
We
have
entered into a supply agreement for cyanide and have ordered consumable supplies
such as explosives and carbon. We currently have adequate supplies and plan
to
consistently maintain a three month supply of these materials on site. Wear
parts and critical spare parts have also been delivered to the mine. A fully
equipped laboratory has been constructed at the mine with the capability of
monitoring the mine operation and conducting metallurgical test work.
During
the construction and commissioning process, we have been assisted by a number
of
suppliers and consultants to ensure that the transition into full production
becomes a seamless event. Given the location of the mine, there are many local
services available to support the operation. Where we feel it is prudent to
retain critical items such as pond and water well pumps, we have done so and
we
have constructed storage facilities to store in excess of three months supply
of
reagents should we foresee supply shortages looming.
To
support the mine we have purchased a number of vehicles and support equipment
that were used during construction. The equipment consists of a 35 ton crane,
a
water truck, an ambulance, a D4 dozer, a front end loader and a forklift/tool
handler. We also have purchased a number of additional equipment such as
lighting plants, welders and small tools. In May 2007, we purchased an
additional loader at an approximate cost of $400,000 to reinforce Sinergia’s
mining fleet and to assist in removing waste material in other areas of the
open
pit mine.
In
May
2007, we completed an expanded 72-hole drilling campaign to determine additional
proven and probable gold reserves at the El Chanate Project. The 72 holes
totaled approximately 8,200 meters, and are positioned to fill in gaps in
the
ore body and test the outer limits of the currently known ore zones. We received
approximately 95% of the assays back of completed drilling and anticipate
that
all of the results will be in by the end of June 2007. The quality control
of
the drilling procedures and chain of custody of the samples were audited
by SRK
Consulting of Denver, CO. Once we have received all of the assays, we plan
on
turning that data over to a third party, and have them prepare a new resource
and reserve estimate for the El Chanate mine as well as an updated mine
plan.
Leadville,
Colorado
We
own or
lease a number of claims and properties, all of which are located in California
Mining District, Lake County, Colorado, Township 9 South, Range 79. During
the
quarter ended April 30, 2007, activity at our Leadville, Colorado properties
consisted primarily of administrative expenses. Primarily as a result of our
focus on El Chanate, we ceased activities in Leadville, Colorado. During the
year ended July 31, 2002, we performed a review of our Leadville mine and mill
improvements and determined that an impairment loss should be realized.
Therefore, we significantly reduced the carrying value of certain assets
relating to our Leadville, Colorado assets by $999,445. During the year ending
July 31, 2004, we again performed a review of our Colorado mine and mill
improvements and determined that an additional impairment loss should be
recognized. Accordingly, we further reduced the net carrying value to $0,
recognizing an additional loss of $300,000.
Three
Months Ended April 30, 2007 compared to Three Months Ended April 30,
2006
Net
Loss
Our
net
loss for the three months ended April 30, 2007 was approximately $2,649,000,
an
increase of approximately $1,167,000 or 79% from the three months ended April
30, 2006. As discussed below, the primary reasons for the increase in net loss
during the three months ended April 30, 2007 were: 1) an increase in exploration
expenditures of approximately $581,000; 2) an increase in selling, general
and
administrative expenses of approximately $307,000; and 3) an increase in
depreciation and amortization of approximately $278,000. Net loss per share
was
$.02 and $.01 for the three months ended April 30, 2007 and 2006,
respectively.
Revenues
We
generated no revenues from mining operations during the three months ended
April
30, 2007 and 2006. There were de minimis non-operating revenues during the
three
months ended April 30, 2007 and 2006 of approximately $64,000 and $45,000,
respectively. These non-operating revenues primarily represent interest
income.
Mine
Expenses
Mine
expenses during the three months ended April 30, 2007 were $230,000, a decrease
of $258,000 or 53% from the three months ended April 30, 2006. Mine expenses
were lower in the 2007 versus the same period a year earlier primarily due
to
higher engineering and planning costs related to our El Chanate Project being
expensed in the prior period.
Selling,
General and Administration Expense
Selling,
general and administrative expenses during the three months ended April 30,
2007
were $970,000, an increase of approximately $307,000 or 46% from the three
months ended April 30, 2006. The increase in selling, general and administrative
expenses resulted primarily from higher salaries and wages and higher
professional fees versus the same period a year earlier.
Stocks
and Warrants Issued for Services
Stocks
and warrants issued for services during the three months ended April 30, 2007
were $52,000 as compared to approximately $7,000 in costs for the same period
a
year earlier. The primary reasons for the increase can be attributed to the
issuance of shares of common stock to an independent contractor for services
provided related to our El Chanate project and the issuance of stock options
to
SEC counsel. In April 2007, the independent contractor was engaged as the
general manager of our El Chanate project for a six month term with an option
for an additional six month term, if mutually agreed upon by both parties.
Pursuant to the agreement, we issued an additional 113,636 shares of common
stock which vest over the six-month term.
Exploration
Expense
Exploration
expense during the three months ended April 30, 2007 was approximately $581,000.
There were no exploration expenses during the three months ended April 30,
2006.
The primary reason for the increase can be attributed to our 72-hole drilling
campaign to determine additional proven and probable gold reserves at the
El
Chanate Project. The 72 holes totaled approximately 8,200 meters, and are
positioned to fill in gaps in the ore body and test the outer limits of the
currently known ore zones. We anticipate receiving all of the assayed samples
by
the end of June 2007.
Depreciation
and Amortization
Depreciation
and amortization expense during the three months ended April 30, 2007 and 2006
was approximately $286,000 and $8,000, respectively. The primary reason for
the
increase was due to the initiation of amortization charges on deferred financing
costs resulting from the Credit Facility entered into in August 2006 with
Standard Bank Plc. This accounted for approximately $273,000 of the increase
in
the 2007 quarter versus the same period a year ago.
Other
Income and Expense
Our
loss
on the change in fair value of derivative instruments during the three months
ended April 30, 2007 and 2006, was approximately $319,000 and $362,000,
respectively. This
was
primarily due to us entering into two identically structured derivative
contracts with Standard Bank in March 2006. Each derivative consisted of a
series of forward sales of gold and a purchase gold cap. We agreed to sell
a
total volume of 121,927 ounces of gold forward to Standard Bank at a price
of
$500 per ounce on a quarterly basis during the period from March 2007 to
September 2010. We also agreed to a purchase gold cap on a quarterly basis
during this same period and at identical volumes covering a total volume of
121,927 ounces of gold at a price of $535 per ounce. While the period of the
derivative contracts has commenced, we do not anticipate any material adverse
effect from the fact that we have not commenced to sell gold because the price
of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
these contracts must be carried on the balance sheet at their fair value, with
changes to the fair value of these contracts reflected as Other
Income or Expense.
These
contracts were not designated as hedging derivatives; and therefore, special
hedge accounting does not apply.
The
first
derivative was entered into on March 1, 2006 for a premium of $550,000; and
the
second was entered into on March 30, 2006 for a premium of $250,000. The gold
price rose sharply in second quarter 2006, and was the primary reason for the
decrease in premium on the derivative contracts. The change in fair value during
the three months ended April 30, 2007 and 2006 reduced the carrying value on
these derivative contracts by approximately $319,000 and $362,000, respectively,
and was reflected as an other expense during the 2007 period.
Interest
expense was approximately $275,000 for the three months ended April 30, 2007
versus no such expense for the same period in 2006. This increase was mainly
due
to interest expense associated with outstanding balances on our draw downs
from
the Credit Facility entered into in August 2006 with Standard Bank Plc. related
to project costs for our El Chanate Project. As of May
1,
2007,
our outstanding balance on the Credit Facility was $12,500,000.
Nine
Months Ended April 30, 2007 compared to Nine Months Ended April 30,
2006
Net
Loss
Our
net
loss for the nine months ended April 30, 2007 was approximately $5,484,000,
an
increase of approximately $2,267,000 or 71% from the nine months ended April
30,
2006. As discussed below, the primary reasons for the increase in loss during
the nine months ended April 30, 2007 were: 1) an increase in selling, general
and administrative expenses of approximately $774,000; 2) an increase in
depreciation and amortization expense of approximately $605,000; 3) an increase
in exploration expenditures of approximately $581,000; 4) losses of
approximately $485,000 in the 2007 period due to the change in fair value of
our
derivative instruments; and 5) an increase in interest expense of approximately
$485,000. These increases in loss were offset by a decrease in mine expenses
of
approximately $785,000 due to higher planning and engineering costs being
expensed in the prior period. Net loss per share was $.04 and $.03 for the
nine
months ended April 30, 2007 and 2006, respectively.
Revenues
We
generated no revenues from mining operations during the nine months ended
April
30, 2007 and 2006. There were de minimis non-operating revenues during the
nine
months ended April 30, 2007 and 2006 of approximately $98,000 and $85,000,
respectively. These non-operating revenues primarily represent interest
income.
Mine
Expenses
Mine
expenses during the nine months ended April 30, 2007 were $743,000, a decrease
of $785,000 or 51% from the nine months ended April 30, 2006. Mine expenses
were
lower in the 2007 versus the same period a year earlier primarily due to higher
engineering and planning costs related to our El Chanate Project being expensed
in the prior period.
Selling,
General and Administration Expense
Selling,
general and administrative expenses during the nine months ended April 30,
2007
were $2,151,000, an increase of approximately $774,000 or 56% from the nine
months ended April 30, 2006. The increase in selling, general and administrative
expenses resulted primarily from higher salaries and wages, higher professional
and consulting fees as well as an increase in insurance costs versus the same
period a year earlier.
Stocks
and Warrants Issued for Services
Stocks
and warrants issued for services during the nine months ended April 30, 2007
were $153,000 as compared to $7,000 in costs for the same period a year earlier.
This increase primarily resulted from the issuance of stock options to our
independent directors, SEC counsel, and outside Canadian Counsel as well as
an
issuance of shares of common stock to an independent contractor for services
provided related to our El Chanate project.
Exploration
Expense
Exploration
expense during the nine months ended April 30, 2007 was approximately $581,000.
There were no exploration expenses during the nine months ended April 30,
2006. The primary reason for the increase can be attributed to our 72-hole
drilling campaign to determine additional proven and probable gold reserves
at
the El Chanate Project. The 72 holes totaled approximately 8,200 meters,
and are
positioned to fill in gaps in the ore body and test the outer limits of the
currently known ore zones. We anticipate receiving all of the assayed samples
by
the end of June 2007.
Depreciation
and Amortization
Depreciation
and amortization expense during the nine months ended April 30, 2007 and 2006
was approximately $632,000 and $27,000, respectively. The primary reason for
the
increase was due to amortization charges on deferred financing costs resulting
from the Credit Facility entered into in August 2006 with Standard Bank Plc.
This accounted for approximately $604,000 of the increase in the 2007 period
versus the same period a year ago.
Other
Income and Expense
Our
loss
on the change in fair value of derivative instruments during the nine months
ended April 30, 2007 and 2006, was approximately $847,000 and $362,000,
respectively. This
was
primarily due to us entering into two identically structured derivative
contracts with Standard Bank in March 2006. Each derivative consisted of a
series of forward sales of gold and a purchase gold cap. We agreed to sell
a
total volume of 121,927 ounces of gold forward to Standard Bank at a price
of
$500 per ounce on a quarterly basis during the period from March 2007 to
September 2010. We also agreed to a purchase gold cap on a quarterly basis
during this same period and at identical volumes covering a total volume of
121,927 ounces of gold at a price of $535 per ounce. While the period of the
derivative contracts has commenced, we do not anticipate any material adverse
effect from the fact that we have not commenced to sell gold because the price
of gold is substantially above $535 per ounce. Under FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”),
these contracts must be carried on the balance sheet at their fair value, with
changes to the fair value of these contracts reflected as Other
Income or Expense.
These
contracts were not designated as hedging derivatives; and therefore, special
hedge accounting does not apply.
The
first
derivative was entered into on March 1, 2006 for a premium of $550,000; and
the
second was entered into on March 30, 2006 for a premium of $250,000. The gold
price rose sharply in second quarter 2006, and was the primary reason for the
decrease in premium on the derivative contracts. The change in fair value during
the nine months ended April 30, 2007 reduced the carrying value on these
derivative contracts by approximately $847,000, and was reflected as an other
expense during the 2007 period.
Interest
expense was approximately $473,000 for the nine months ended April 30, 2007
versus no such expense for the same period in 2006. This increase was mainly
due
to interest expense associated with our outstanding balances on our draw downs
associated with the Credit Facility entered into in August 2006 with Standard
Bank Plc related to project costs for our El Chanate Project.
Changes
in Foreign Exchange Rates
During
the nine months ended April 30, 2007, we recorded equity adjustments from
foreign currency translations of approximately $262,000. These translation
adjustments are related to changes in the rates of exchange between the Mexican
Peso and the US dollar.
Liquidity
and Capital Resources; Plan of Operations
As
of
April 30, 2007, we had working capital of approximately $9,359,000, compared
to
$7,031,500 as of July 31, 2006, an increase of $2,327,500. Cash
used
in operating activities for the nine months ended April 30, 2007 was
approximately $244,000, which primarily represents cash costs of our mining
operation at El Chanate for the month of April 2007.
Cash
used
in investing activities for the nine months ending April 30, 2007, amounted
to
$15,608,000, primarily from the purchase and erection of property, plant and
equipment related to our El Chanate Project. Cash provided by financing
activities for the nine months ended April 30, 2007 amounted to $20,394,000,
primarily from proceeds from our Credit Facility of $12,000,000 and
approximately $8,655,000 in proceeds from the sale of common stock and
exercising of warrants. Our
plans
over the next 12 months primarily include: 1) completing construction of the
ADR
plant and refinery; 2) completing the logging of assays received related to
our
drilling campaign, initiated in February 2007, designed to determine if an
increase in our proven and probable gold reserves is warranted; 3) commencing
gold production; and 4) possible exploration and/or acquisitions in northern
Mexico. Mining operations at El Chanate began March 25, 2007, with revenues
anticipated to begin by the end of our fiscal year ending July 31, 2007. We
believe, but cannot assure, that we have sufficient available funds to cover
our
mining activities at El Chanate and general and administrative expenses until
revenues from gold mining operations at El Chanate reach positive cash flow.
We
also anticipate that we have sufficient funds to conduct exploration/acquisition
activities.
Historically,
we have not generated any material revenues from operations and have been in
a
precarious financial condition. Our consolidated financial statements have
been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. We have
recurring losses from operations. Our primary source of funds during the nine
months ended April 30, 2007 was from the sale and issuance of equity securities
as well as proceeds from our Credit Facility with Standard Bank for the El
Chanate Project. We anticipate that our operations and project costs through
fiscal 2007 will be funded from the proceeds from our recent private placements
and warrant exercises as well as our Credit Facility. The private placements
of
our securities and the Standard Bank Credit Facility are discussed below.
January
2007 Private Placements & Warrant Exercises and post quarter Warrant
Exercises
We
closed
two private placements in January 2007 pursuant to which we issued an aggregate
of 12,561,667 units, each unit consisting of one share of our common stock
and a
warrant to purchase ¼ of a share of our common stock for proceeds of
approximately $3,486,000, net of commissions of approximately $283,000. During
the nine months ended April 30, 2007, we also received proceeds of approximately
$5,169,523, from the exercising of an aggregate of 20,282,454 warrants issued
in
past private placements discussed below. The Warrant issued to each purchaser
in
the January 2007 Private Placement is exercisable for one share of our common
stock, at an exercise price equal to $0.40 per share. Each Warrant has a term
of
eighteen months and is fully exercisable from the date of issuance. We issued
to
the placement agents eighteen month warrants to purchase up to an aggregate
of
942,125 shares of our common stock at an exercise price of $0.30 per share.
Such
placement agent warrants are valued at approximately $142,000 using the
Black-Scholes option pricing method.
In
May
2007, we received proceeds of $233,500 from the exercising of an aggregate
of
934,000 warrants issued in past private placements and $154,100 from the
exercising of an aggregate of 700,455 warrants issued to officers, directors
and
an employee.
February
2006 Private Placements & Warrant Exercises
We
closed
two private placements in 2006 pursuant to which we issued an aggregate of
21,240,000 units, each unit consisting of one share of our common stock and
a
warrant to purchase ¼ of a share of our common stock for net proceeds of
$4,999,500, net of commissions of $310,500. We also received net proceeds of
$2,373,570, net of commissions of $206,430, from the exercising of 8,600,000
warrants in February 2006. The Warrant issued to each purchaser is exercisable
for one share of our common stock, at an exercise price equal to $0.30 per
share. Each Warrant has a term of eighteen months and is fully exercisable
from
the date of issuance. We issued to the placement agent in one of the placements
eighteen month warrants to purchase up to 934,000 shares of our common stock
at
an exercise price of $0.25 per share. Such placement agent warrants are valued
at approximately $189,000 using the Black-Scholes option pricing method.
February
2005 Private Placement
In
the
private placement that closed in February 2005, we issued 27,200,004 units,
each
unit consisting of one shares of our common stock and one common stock Purchase
Warrant for an aggregate gross purchase price of approximately $6,800,000 and
we
received approximately $6,200,000 in net proceeds. The Warrant issued to each
purchaser was originally exercisable for one share of our common stock, at
an
exercise price equal to $0.30 per share. We temporarily lowered the exercise
price of the Warrants to $0.20 per shares for the period commencing on November
28, 2005 and ending on April 30, 2006, after which time the exercise price
increased back to $0.30 per share Each Warrant had a term of two years and
was
fully exercisable from the date of issuance. These warrants, to the extent
that
they were not exercised, expired in February 2007. We issued to the placement
agent two year warrants to purchase up to 2,702,000 shares of our common stock
at an exercise price of $0.25 per share. Such placement agent warrants are
valued at approximately $414,000 using the Black-Scholes option pricing method.
All
of
the warrants issued in conjunction with this private placement were either
exercised or expired within the term limit.
Registration
of Shares
Pursuant
to our agreements with the purchasers in all of the above private placements
we
have registered the foregoing shares and shares issuable upon the exercise
of
the foregoing warrants (other than those issued in the January 2007 Private
Placement) for public resale. We plan on filing a registration statement to
register the shares issued in the January 2007 Private Placement and the shares
issuable upon exercise of the warrants issued in that placement. We also agreed
to prepare and file all amendments and supplements necessary to keep the
registration statements effective until the earlier of the date on which the
selling stockholders may resell all the registrable shares covered by the
registration statements without volume restrictions pursuant to Rule 144(k)
under the Securities Act or any successor rule of similar effect and the date
on
which the selling stockholders have sold all the shares covered by the
registration statements. If, subject to certain exceptions, sales of all shares
registered from the 2005 Private Placement cannot be made pursuant to the
registration statement, we will be required to pay to these selling stockholders
in cash or, at our option, in shares, their pro rata share of 0.0833% of the
aggregate market value of the registrable shares held by these selling
stockholders for each month thereafter until sales of the registrable shares
can
again be made pursuant to the registration statement. In this regard, we paid
$7,100 to the purchasers representing liquidated damages incurred during a
period when the registration statement was not current. The registration
statement was subsequently declared effective on January 30, 2006.
In
addition, we agreed to have our common stock listed for trading on the Toronto
Stock Exchange. If our common stock was not listed for trading on the Toronto
Stock Exchange within 180 days after February 8, 2005, we were required to
issue
to the selling stockholders from the 2005 Private Placement an additional number
of shares of our common stock that is equal to 20% of the number of shares
acquired by them in the private placement. We did not timely list our shares
on
the Toronto Stock Exchange and, in August 2005, we issued 5,440,000 shares
to
these selling stockholders. We subsequently registered these 5,440,000 shares
for public resale.
Project
Finance Credit Facility
On
August
15, 2006, we entered into a credit facility (the “Credit Facility”) involving
our wholly-owned subsidiaries MSR and Oro, as borrowers, us, as guarantor,
and
Standard Bank plc (“Standard Bank”), as the lender and the offshore account
holder. Under the Credit Facility, MSR and Oro agreed to borrow money in an
aggregate principal amount of up to US$12.5 million (the “Loan”) for the purpose
of constructing, developing and operating our El Chanate Project (the “Mine”).
We have guaranteed the repayment of the Loan and the performance of the
obligations under the Credit Facility. The Loan is scheduled to be repaid in
fourteen quarterly payments with the first principal payment due after certain
Mine start-up production and performance criteria are satisfied, which we
believe will occur in the first calendar quarter of 2008. The Loan bears
interest at LIBOR plus 4.00%, with LIBOR interest periods of 1, 2, 3 or 6 months
and with interest payable at the end of the applicable interest
period.
The
Credit Facility contains covenants customary for a project financing loan,
including but not limited to restrictions (subject to certain exceptions) on
incurring additional debt, creating liens on our property, disposing of any
assets, merging with other companies and making any investments. We are required
to meet and maintain certain financial covenants, including (i) a debt service
coverage ratio of not less than 1.2 to 1.0, (ii) a projected debt service
coverage ratio of not less than 1.2 to 1.0, (iii) a loan life coverage ratio
of
at least 1.6 to 1.0, (iv) a project life coverage ratio of at least 2.0 to
1.0
and (v) a minimum reserve tail. We are also required to maintain a certain
minimum level of unrestricted cash, and upon meeting certain Mine start-up
production and performance criteria, MSR and Oro will be required to maintain
a
specified amount of cash as a reserve for debt repayment.
The
Loan
is secured by all of the tangible and intangible assets and property owned
by
MSR and Oro pursuant to the terms of a Mortgage Agreement, a Non-Possessory
Pledge Agreement, an Account Pledge Agreement and certain other agreements
entered into in Mexico (the “Mexican Collateral Documents”). As additional
collateral for the Loan, we, together with our subsidiary, Leadville Mining
& Milling Holding Corporation, have pledged all of our ownership interest in
MSR and Oro. In addition to these collateral arrangements, MSR and Oro are
required to deposit all proceeds of the Loan and all cash proceeds received
from
operations and other sources in an offshore, controlled account with Standard
Bank. Absent a default under the loan documents, MSR and Oro may use the funds
from this account for specific purposes such as approved project costs and
operating costs.
As
part
of the fee for entering into and closing the Credit Facility, we issued to
Standard Bank 1,150,000 shares of our restricted common stock and a warrant
for
the purchase of 12,600,000 shares of our common stock at an exercise price
of
$0.317 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
date one year after the repayment of the Credit Facility. We recorded the
issuance of the 1,150,000 shares of common stock and 12,600,000 warrants as
deferred financing costs of approximately $351,000 and $3,314,000, respectively,
as a reduction of stockholders' equity on our balance sheet. The issuance of
1,150,000 shares was recorded at the fair market value of our common stock
at
the closing date or $0.305 per share. The warrants were valued at approximately
$3,314,000 using the Black-Scholes option pricing model and were reflected
as
deferred financing costs as a reduction of stockholders' equity on our balance
sheet.
Previously,
pursuant to the mandate and commitment letter for the facility, we issued to
Standard Bank 1,000,000 shares of our restricted common stock and a warrant
for
the purchase of 1,000,000 shares of our common stock at an exercise price of
$0.32 per share, expiring on the earlier of (a) December 31, 2010 or (b) the
date one year after the repayment of the Credit Facility. We recorded the
issuance of the 1,000,000 shares of common stock as deferred financing costs
of
approximately $270,000 as a reduction of stockholders' equity on our balance
sheet as of July 31, 2006. The issuance of these shares was recorded at the
fair
market value of our common stock at the commitment letter date or $0.27 per
share. In addition, the warrants were valued at approximately $253,000 using
again the Black-Scholes option pricing model and were reflected as deferred
financing costs as a reduction of stockholders' equity on our balance sheet
as
of July 31, 2006. We have registered for public resale the 2,150,000 shares
issued to Standard Bank and the 13,600,000 shares issuable upon exercise of
warrants issued to Standard Bank.
In
March
2006, we entered into a gold price protection arrangement with Standard Bank
to
protect us against future fluctuations in the price of gold. We agreed to a
series of gold forward sales and call option purchases in anticipation of
entering into the Credit Facility. Under the price protection agreement, we
have
agreed to sell a total volume of 121,927 ounces of gold forward to Standard
Bank
at a price of $500 per ounce on a quarterly basis during the period from March
2007 to September 2010. We will also purchase call options from Standard Bank
on
a quarterly basis during this same period covering a total volume of 121,927
ounces of gold at a price of $535 per ounce. We paid a fee to Standard Bank
in
connection with the price protection agreement. In addition, we provided
aggregate cash collateral of approximately $4.3 million to secure our
obligations under this agreement. The cash collateral was returned to us after
the Credit Facility was executed in August 2006.
Between
October 11, 2006 and May 1, 2007, we drew down the full amount of $12,500,000
from the Credit Facility with Standard Bank. We used substantially all of these
proceeds for the development of our El Chanate Project. We also used some of
these funds to repurchase of the 5% net profits interest formerly held by
FG.
On
October 11, 2006, prior to our initial draw on the Credit Facility, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Facility, which requires that we hedge at least 50 percent of our outstanding
debt under this facility. The agreements entered into cover $9,375,000 or 75%
of
the outstanding debt. Both swaps covered this same notional amount of
$9,375,000, but over different time horizons. The first covered the six months
commencing October 11, 2006 and a termination date of March 31, 2007 and the
second covering the period from March 30, 2007 and a termination date of
December 31, 2010. We intend to use discretion in managing this risk as
market conditions vary over time, allowing for the possibility of adjusting
the
degree of hedge coverage as we deem appropriate. However, any use of interest
rate derivatives will be restricted to use for risk management
purposes.
While
we
believe that we have adequate funds to cover our financial requirements until
such time as mining operations at the El Chanate Project generate positive
cash
flow, if we encounter unexpected problems and we are unable to generate positive
cash flow in a timely manner, we may need to raise additional capital. We also
may need to raise additional capital for property acquisition and exploration.
To the extent that we need to obtain additional capital, management intends
to
raise such funds through the sale of our securities and/or joint venturing
with
one or more strategic partners. We cannot assure that adequate additional
funding, if needed, will be available.
If
we
need additional capital and we are unable to obtain it from outside sources,
we
may be forced to reduce or curtail our operations or our anticipated exploration
activities. Please see “We
lack operating cash flow and, historically, have relied on external funding
sources. While we anticipate revenues from mining operations at El Chanate
and
we believe that we have adequate funds to permit us to reach positive cash
flow
from such operations, if we encounter unexpected problems and we are unable
to
generate positive cash flow in a timely manner, we may need to raise additional
capital. If additional capital is required and we are unable to obtain it from
outside sources, we may be forced to reduce or curtail our operations or our
anticipated exploration activities.”
in
“Risk
Factors”
below.
Environmental
and Permitting Issues
Management
does not expect that environmental issues will have an adverse material effect
on our liquidity or earnings. In Mexico, although we must continue to comply
with laws, rules and regulations concerning mining, environmental, health,
zoning and historical preservation issues, we are not aware of any significant
environmental concerns or existing reclamation requirements at the El Chanate
concessions. We received the required Mexican government permits for
construction, mining and processing the El Chanate ores in January 2004. The
permits were extended in June 2005. Pursuant to the extensions, once we file
a
notice that work has commenced, we have one year to prepare the site and
construct the mine and seven years to mine and process ores from the site.
We
filed the notice on June 1, 2006. We received the explosive permit from the
government in August 2006. This permit, as extended, expires on December 31,
2007.
We
own
properties in Leadville, Colorado for which we have recorded an impairment
loss.
Part of the Leadville Mining District has been declared a federal Superfund
site
under the Comprehensive Environmental Response, Compensation and Liability
Act
of 1980, and the Superfund Amendments and Reauthorization Act of 1986. Several
mining companies and one individual were declared defendants in a possible
lawsuit. We were not named a defendant or Principal Responsible Party. We did
respond in full detail to a lengthy questionnaire prepared by the Environmental
Protection Agency ("EPA") regarding our proposed procedures and past activities
in November 1990. To our knowledge, the EPA has initiated no further comments
or
questions.
We
do
include in all our internal revenue and cost projections a certain amount for
environmental and reclamation costs on an ongoing basis. This amount is
determined at a fixed amount of $0.13 per metric tonne of material to be mined
on a continual, ongoing basis to provide primarily for reclaiming tailing
disposal sites and other reclamation requirements. No assurance can be given
that environmental regulations will not be changed in a manner that would
adversely affect our planned operations. We have estimated the reclamation
costs
for the El Chanate site to be approximately $2,300,000. Reclamation costs are
allocated to expense over the life of the related assets (7 year mine life)
and
are periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either
the
timing or amount of the reclamation and abandonment costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation at each
mine
site.
New
Accounting Pronouncements
We
adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48") effective January 1, 2007. The purpose
of FIN 48 is to clarify and set forth consistent rules for accounting for
uncertain tax positions in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The cumulative effect of
applying the provisions of this interpretation are required to be reported
separately as an adjustment to the opening balance of retained earnings in
the
year of adoption. The adoption of this standard did not have an impact on the
financial condition or the results of our operations.
On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of
FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of
the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions".
The
fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair
value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date.
A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may
be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a
new
election date occurs); and (c) is applied only to entire instruments and not
to
portions of instruments.
Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of the previous fiscal year provided that the entity makes that choice in the
first
120
days of that fiscal year and also elects to apply the provisions of FASB
Statement No. 157, Fair Value Measurements.
Disclosure
About Off-Balance Sheet Arrangements
On
October 11, 2006, prior to the initial draw on our Credit Facility, we
entered into interest rate swap agreements with total notional amounts of
$18,750,000 in accordance with the terms of the Credit Facility. There was
one
six month swap contract totaling $9,375,000 (75% of the outstanding debt) with
an effective date of October 11, 2006 and a termination date of March 31, 2007
and one three-year nine month swap contract totaling $9,375,000 (75% of the
outstanding debt) with an effective date of March 30, 2007 and a termination
date of December 31, 2010. These swaps were entered into for the purpose of
hedging a portion of our variable interest expenses. Although we are required
by
our lenders to hedge at least 50% of the outstanding debt, we retain the
authority to hedge a larger share of this exposure, and we will use discretion
in managing this risk as market conditions vary over time. We only issue and/or
hold derivative contracts for risk management purposes.
We
do not
have any other transactions, agreements or other contractual arrangements that
constitute off-balance sheet arrangements.
Critical
Accounting Policies
Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management’s
application of accounting policies. Critical accounting policies for us include
inventory, revenue recognition, property, plant and mine development, impairment
of long-lived assets, accounting for equity-based compensation, environmental
remediation costs and accounting for derivative and hedging activities.
Stockpiles,
Ore on Leach Pads and Inventories
Costs
that are incurred in or benefit the productive process are accumulated as
stockpiles, ore on leach pads and inventories. Stockpiles, ore on leach pads
and
inventories are carried at the lower of average cost or net realizable value.
Net realizable value represents the estimated future sales price of the product
based on current and long-term metals prices, less the estimated costs to
complete production and bring the product to sale. Write-downs of stockpiles,
ore on leach pads and inventories, resulting from net realizable value
impairments, are reported as a component of Costs
applicable to sales.
The
current portion of stockpiles, ore on leach pads and inventories is determined
based on the expected amounts to be processed within the next 12 months.
Stockpiles, ore on leach pads and inventories not expected to be processed
within the next 12 months are classified as long-term. The major
classifications are as follows:
Stockpiles
Stockpiles
represent ore that has been mined and is available for further processing.
Stockpiles are measured by estimating the number of tons added and removed
from
the stockpile, the number of contained ounces or pounds (based on assay data)
and the estimated metallurgical recovery rates (based on the expected processing
method). Stockpile ore tonnages are verified by periodic surveys. Costs are
allocated to stockpiles based on relative values of material stockpiled and
processed using current mining costs incurred up to the point of stockpiling
the
ore, including applicable overhead, depreciation, depletion and amortization
relating to mining operations, and removed at each stockpile’s average cost per
recoverable unit.
Ore
on Leach Pads
The
recovery of gold from certain gold oxide ores is achieved through the heap
leaching process. Under this method, oxide ore is placed on leach pads where
it
is treated with a chemical solution, which dissolves the gold contained in
the
ore. The resulting “pregnant” solution is further processed in a plant where the
gold is recovered. Costs are added to ore on leach pads based on current mining
costs, including applicable depreciation, depletion and amortization relating
to
mining operations. Costs are removed from ore on leach pads as ounces are
recovered based on the average cost per estimated recoverable ounce of gold
on
the leach pad.
The
estimates of recoverable gold on the leach pads are calculated from the
quantities of ore placed on the leach pads (measured tons added to the leach
pads), the grade of ore placed on the leach pads (based on assay data) and
a
recovery percentage (based on ore type). In general, leach pads recover
approximately 50% to 95% of the recoverable ounces in the first year of
leaching, declining each year thereafter until the leaching process is complete.
Although
the quantities of recoverable gold placed on the leach pads are reconciled
by
comparing the grades of ore placed on pads to the quantities of gold actually
recovered (metallurgical balancing), the nature of the leaching process
inherently limits the ability to precisely monitor inventory levels. As a
result, the metallurgical balancing process needs to be constantly monitored
and
estimates need to be refined based on actual results over time. Our operating
results may be impacted by variations between the estimated and actual
recoverable quantities of gold on its leach pads. Variations between actual
and
estimated quantities resulting from changes in assumptions and estimates that
do
not result in write-downs to net realizable value will be accounted for on
a
prospective basis.
In-process
Inventory
In-process
inventories represent materials that are currently in the process of being
converted to a saleable product. Conversion processes vary depending on the
nature of the ore and the specific processing facility, but include mill
in-circuit, leach in-circuit, flotation and column cells, and carbon in-pulp
inventories. In-process material will be measured based on assays of the
material fed into the process and the projected recoveries of the respective
plants. In-process inventories will be valued at the average cost of the
material fed into the process attributable to the source material coming from
the mines, stockpiles and/or leach pads plus the in-process conversion costs,
including applicable depreciation relating to the process facilities incurred
to
that point in the process.
Precious
Metals Inventory
Precious
metals inventories will include gold doré and/or gold bullion. Precious metals
that are received as in-kind payments of royalties are valued at fair value
on
the date title will be transferred to us. Precious metals that result from
the
Company’s mining and processing activities will be valued at the average cost of
the respective in-process inventories incurred prior to the refining process,
plus applicable refining costs.
Concentrate
Inventory
Concentrate
inventories represent gold concentrate available for shipment. We will value
concentrate inventory at the average cost, including an allocable portion of
refinery support costs and refining depreciation. Costs will be added and
removed to the concentrate inventory based on tons of concentrate and will
be
valued at the lower of average cost or net realizable value.
Materials
and Supplies
Materials
and supplies are valued at the lower of average cost or net realizable value.
Cost includes applicable taxes and freight.
Property,
Plant and Mine Development
Expenditures
for new facilities or equipment and expenditures that extend the useful lives
of
existing facilities or equipment are capitalized and depreciated using the
straight-line method at rates sufficient to depreciate such costs over the
estimated productive lives, which do not exceed the related estimated mine
lives, of such facilities based on proven and probable reserves.
Mineral
exploration costs are expensed as incurred. When it has been determined that
a
mineral property can be economically developed as a result of establishing
proven and probable reserves, costs incurred prospectively to develop the
property will be capitalized as incurred and are amortized using the
units-of-production (“UOP”) method over the estimated life of the ore body based
on estimated recoverable ounces or pounds in proven and probable reserves.
At
our surface mine, these costs would include costs to further delineate the
ore
body and remove overburden to initially expose the ore body.
Major
development costs incurred after the commencement of production will be
amortized using the UOP method based on estimated recoverable ounces or pounds
in proven and probable reserves. To the extent that these costs benefit the
entire ore body, they will be amortized over the estimated life of the ore
body.
Costs incurred to access specific ore blocks or areas that only provide benefit
over the life of that area will be amortized over the estimated life of that
specific ore block or area.
Impairment
of Long-Lived Assets
We
review
and evaluate our long-lived assets for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
An impairment is considered to exist if the total estimated future cash flows
on
an undiscounted basis are less than the carrying amount of the assets, including
goodwill, if any. An impairment loss is measured and recorded based on
discounted estimated future cash flows. Future cash flows are estimated based
on
quantities of recoverable minerals, expected gold and other commodity prices
(considering current and historical prices, price trends and related factors),
production levels and operating costs of production and capital, all based
on
life-of-mine plans. Existing proven and probable reserves and value beyond
proven and probable reserves, including mineralization other than proven and
probable reserves and other material that is not part of the measured, indicated
or inferred resource base, are included when determining the fair value of
mine
site reporting units at acquisition and, subsequently, in determining whether
the assets are impaired. The term “recoverable minerals” refers to the estimated
amount of gold or other commodities that will be obtained after taking into
account losses during ore processing and treatment. Estimates of recoverable
minerals from such exploration stage mineral interests are risk adjusted based
on management’s relative confidence in such materials. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable
cash flows that are largely independent of future cash flows from other asset
groups. Our estimates of future cash flows are based on numerous assumptions
and
it is possible that actual future cash flows will be significantly different
than the estimates, as actual future quantities of recoverable minerals, gold
and other commodity prices, production levels and operating costs of production
and capital are each subject to significant risks and uncertainties.
Reclamation
and Remediation Costs (Asset Retirement Obligations)
Reclamation
costs are allocated to expense over the life of the related assets and are
periodically adjusted to reflect changes in the estimated present value
resulting from the passage of time and revisions to the estimates of either
the
timing or amount of the reclamation and abandonment costs. The asset retirement
obligation is based on when the spending for an existing environmental
disturbance and activity to date will occur. We review, on an annual basis,
unless otherwise deemed necessary, the asset retirement obligation at our mine
site in
accordance with FASB FAS No. 143, “Accounting for Asset Retirement
Obligations.”
Equity
Based Compensation
In
connection with offers of employment to our executives as well as in
consideration for agreements with certain consultants, we issue options and
warrants to acquire our common stock. Employee and non-employee awards are
made
in the discretion of the Board of Directors.
Effective
February 1, 2006, we adopted the provisions of SFAS No. 123R. Under FAS 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. We adopted the provisions of FAS 123R using a modified
prospective application. Under this method, compensation cost is recognized
for
all share-based payments granted, modified or settled after the date of
adoption, as well as for any unvested awards that were granted prior to the
date
of adoption. Prior periods are not revised for comparative purposes. Because
we
previously adopted only the pro forma disclosure provisions of SFAS 123, we
will
recognize compensation cost relating to the unvested portion of awards granted
prior to the date of adoption, using the same estimate of the grant-date fair
value and the same attribution method used to determine the pro forma
disclosures under SFAS 123, except that forfeitures rates will be estimated
for
all options, as required by FAS 123R.
Accounting
for Derivatives and Hedging Activities
We
entered into two identically structured derivative contracts with Standard
Bank
in March 2006. Each derivative consisted of a series of forward sales of gold
and a purchase gold cap. We agreed to sell a total volume of 121,927 ounces
of
gold forward to Standard Bank at a price of $500 per ounce on a quarterly basis
during the period from March 2007 to September 2010. We also agreed to a
purchase gold cap on a quarterly basis during this same period and at identical
volumes covering a total volume of 121,927 ounces of gold at a price of $535
per
ounce. Although these contracts are not designated as hedging derivatives,
they
serve an economic purpose of protecting us from the effects of a decline in
gold
prices. Because they are not designated as hedges, however, special hedge
accounting does not apply. Derivative results are simply marked to market
through earnings, with these effects recorded in other
income
or
other
expense,
as
appropriate under FASB Statement No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“FAS 133”).
On
October 11, 2006, prior to our initial draw on the Credit Facility, we entered
into interest rate swap agreements in accordance with the terms of the Credit
Facility, which requires that we hedge at least 50 percent of our outstanding
debt under this facility. The agreements entered into cover $9,375,000 or 75%
of
the outstanding debt. Both swaps covered this same notional amount of
$9,375,000, but over different time horizons. The first covered the six months
commencing October 11, 2006 and a termination date of March 31, 2007 and the
second covering the period from March 30, 2007 and a termination date of
December 31, 2010. We intend to use discretion in managing this risk as
market conditions vary over time, allowing for the possibility of adjusting
the
degree of hedge coverage as we deem appropriate. However, any use of interest
rate derivatives will be restricted to use for risk management
purposes.
We
use
variable-rate debt to finance a portion of the El Chanate Project. Variable-rate
debt obligations expose us to variability in interest payments due to changes
in
interest rates. As a result of these arrangements, we will continuously monitor
changes in interest rate exposures and evaluate hedging opportunities. Our
risk
management policy permits us to use any combination of interest rate swaps,
futures, options, caps and similar instruments, for the purpose of fixing
interest rates on all or a portion of variable rate debt, establishing caps
or
maximum effective interest rates, or otherwise constraining interest expenses
to
minimize the variability of these effects.
The
interest rate swap agreements will be accounted for as cash flow hedges, whereby
“effective” hedge gains or losses are initially recorded in other comprehensive
income and later reclassified to the interest expense component of earnings
coincidently with the earnings impact of the interest expenses being hedged.
“Ineffective” hedge results are immediately recorded in earnings also under
interest expense. No component of hedge results will be excluded from the
assessment of hedge effectiveness.
We
are
exposed to credit losses in the event of non-performance by counterparties
to
these interest rate swap agreements, but we do not expect any of the
counterparties to fail to meet their obligations. To manage credit risks, we
select counterparties based on credit ratings, limit our exposure to a single
counterparty under defined guidelines, and monitor the market position with
each
counterparty as required by SFAS 133.
Risk
Factors
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. If any of these risks or uncertainties
actually occur, our business, financial condition or operating results could
be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
Risks
related to our business and operations
We
have not generated any operating revenues. If we are unable to commercially
develop our mineral properties, we will not be able to generate profits and
our
business may fail.
To
date,
we have no producing properties. As a result, we have historically operated
and
continue to operate at a loss. Our ultimate success will depend on our ability
to generate profits from our properties. Our viability is largely dependent
on
the successful commercial development of our El Chanate gold mining project
in
Sonora, Mexico. While we are in the process of commencing mining operations
and
we anticipate that revenues will begin prior to July 31, 2007, the end of our
current fiscal year, we cannot assure if or when revenues will cover cash flow
or generate profits.
We
lack operating cash flow and, historically, have relied on external funding
sources. While we anticipate revenues from mining operations at El Chanate
and
we believe that we have adequate funds to permit us to reach positive cash
flow
from such operations, if we encounter unexpected problems and we are unable
to
generate positive cash flow in a timely manner, we may need to raise additional
capital. If additional capital is required and we are unable to obtain it from
outside sources, we may be forced to reduce or curtail our operations or our
anticipated exploration activities.
Historically,
we have not generated cash flow from operations. We believe that we have
adequate funds to cover our financial requirements until such time as mining
operations at the El Chanate Project generate positive cash flow. In this regard
as of April 31, 2007, we have approximately $7,545,000, in cash and cash
equivalents. However, if we encounter unexpected problems and we are unable
to
generate positive cash flow in a timely manner, we may need to raise additional
capital. We also may need to raise additional capital for property acquisition
and new exploration. To the extent that we need to obtain additional capital,
management intends to raise such funds through the sale of our securities and/or
joint venturing with one or more strategic partners. We cannot assure that
adequate additional funding, if needed, will be available.
If
we
need additional capital and we are unable to obtain it from outside sources,
we
may be forced to reduce or curtail our operations or our anticipated exploration
activities.
Our
year end audited financial statements contain a “going concern” explanatory
paragraph. Our
inability to continue as a going concern would require a restatement of assets
and liabilities on a liquidation basis, which would differ materially and
adversely from the going concern basis on which our financial statements
included in this report have been prepared.
Our
consolidated financial statements for the year ended July 31, 2006 included
in
our annual report on form 10-KSB for the fiscal year then ended were prepared
on
the basis of accounting principles applicable to a going concern. Our auditors’
report on the consolidated financial statements contained therein includes
an
additional explanatory paragraph following the opinion paragraph on our ability
to continue as a going concern. A note to these consolidated financial
statements describes the reasons why there is substantial doubt about our
ability to continue as a going concern and our plans to address this issue.
Our
July 31, 2006 and April 30, 2007 consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Our inability to continue as a going concern would require a restatement of
assets and liabilities on a liquidation basis, which would differ materially
and
adversely from the going concern basis on which our consolidated financial
statements have been prepared. See, “Management's
Discussion and Analysis of Financial Condition and Results of Operations;
Liquidity and Capital Resources; Plan of Operations.”
Our
Credit Facility with Standard Bank plc imposes restrictive covenants on us.
Our
Credit Facility with Standard Bank requires us, among other obligations, to
meet
certain financial covenants including (i) a debt service coverage ratio of
not
less than 1.2 to 1.0, (ii) a projected debt service coverage ratio of not less
than 1.2 to 1.0, (iii) a loan life coverage ratio of at least 1.6 to 1.0, (iv)
a
project life coverage ratio of at least 2.0 to 1.0 and (v) a minimum reserve
tail. We are also required to maintain a certain minimum level of unrestricted
cash. In addition, the Credit Facility restricts, among other things, our
ability to incur additional debt, create liens on our property, dispose of
any
assets, merge with other companies or make any investments. A failure to comply
with the restrictions contained in the Credit Facility could lead to an event
of
default thereunder which could result in an acceleration of such indebtedness.
We
will be using reconditioned and used equipment which could adversely affect
our
cost assumptions and our ability to economically and successfully mine the
project.
We
will
be using reconditioned and used carbon column collection equipment to recover
gold. Such equipment is subject to the risk of more frequent breakdowns and
need
for repair than new equipment. If the equipment that we use breaks down and
needs to be repaired or replaced, we will incur additional costs and operations
may be delayed resulting in lower amounts of gold recovered. In such event,
our
capital and operating cost assumptions may be inaccurate and our ability to
economically and successfully mine the project may be hampered, resulting in
decreased revenues and, possibly, a loss from operations.
As
a result of the projected short mine life of seven years, if major problems
develop, we will have limited time to correct these problems and we may have
to
cease operations earlier than planned.
Pursuant
to the 2005 Study as updated by the 2006 Update, the mine life will be only
approximately seven years. If major problems develop in the project, or we
fail
to achieve the operating efficiencies or costs projected in the feasibility
study, we will have limited time to find ways to correct these problems and
we
may have to cease operations earlier than planned.
The
gold deposit we have identified at El Chanate is relatively small and low-grade.
If our estimates and assumptions are inaccurate, our results of operation and
financial condition could be materially adversely affected.
The
gold
deposit we have identified at our El Chanate Project is relatively small and
low-grade. If the estimates of ore grade or recovery rates contained in the
feasibility study turn out to be higher than the actual ore grade and recovery
rates, if costs are higher than expected, or if we experience problems related
to the mining, processing, or recovery of gold from ore at the El Chanate
Project, our results of operation and financial condition could be materially
adversely affected. Moreover, it is possible that actual costs and economic
returns may differ materially from our best estimates. It is not unusual in
the
mining industry for new mining operations to experience unexpected problems
during the start-up phase and to require more capital than anticipated. There
can be no assurance that our operations at El Chanate will be
profitable.
Our
currently permitted water rights may not be adequate for all of our total
project needs over the entire course of our anticipated mining operations.
If we
need to obtain additional rights, but are unable to procure them our planned
operations may be adversely affected.
The
2005
feasibility study indicates our average life of mine water requirements, for
ore
processing only, will be about 94.6 million gallons per year (11.4 liters per
second). The amount of water we are currently permitted to pump for our
operations is approximately 71.3 million gallons per year (8.6 liters per
second). Our currently permitted water rights may not be adequate for all of
our
total project needs over the entire course of our anticipated mining operations.
We are looking into ways to rectify this issue and anticipate, but cannot
assure, that additional
water may be acquired by purchasing a third party’s allocation and/or water
conservation through good operational practice. If we need to obtain additional
rights, but are unable to procure them our planned operations may be adversely
affected.
We
have a limited number of prospects. As a result, our chances of conducting
viable mining operations are dependent upon the success of one
project.
Our
only
current properties are the El Chanate concessions and our Leadville properties.
At present, we are not doing any substantive work at our Leadville properties
and, in fact, have written these properties off. Accordingly, we are dependent
upon the success of the El Chanate concessions.
Gold
prices can fluctuate on a material and frequent basis due to numerous factors
beyond our control. If and when we commence production, our ability to generate
profits from operations could be materially and adversely affected by such
fluctuating prices.
The
profitability of any gold mining operations in which we have an interest will
be
significantly affected by changes in the market price of gold. Gold prices
fluctuate on a daily basis. During the first calendar quarter of 2007, the
spot
price for gold on the London Exchange has fluctuated between $608.30 and $685.75
per ounce and, during 2006, the spot price for gold on the London Exchange
fluctuated between $524.75 and $725.00 per ounce. Gold prices are affected
by
numerous factors beyond our control, including:
· |
the
level of interest rates,
|
· |
world
supply of gold and
|
· |
stability
of exchange rates.
|
Each
of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. The price of gold has
historically fluctuated widely and, depending on the price of gold, revenues
from mining operations may not be sufficient to offset the costs of such
operations.
We
have
entered into metals trading transactions to hedge against fluctuations in gold
prices, using call option purchases and forward sales, and have entered into
various interest rate swap agreements. The terms of our Credit Facility with
Standard Bank require that we utilize various price hedging techniques to hedge
a portion of the gold we plan to produce at the El Chanate Project and hedge
at
least 50% of our outstanding loan balance. There can be no assurance that we
will be able to successfully hedge against gold price and interest rate
fluctuations.
Further,
there can be no assurance that the use of hedging techniques will always be
to
our benefit. Hedging instruments that protect against metals market price
volatility may prevent us from realizing the full benefit from subsequent
increases in market prices with respect to covered production, which would
cause
us to record a mark-to-market loss, decreasing our revenues and profits. Hedging
contracts also are subject to the risk that the other party may be unable or
unwilling to perform its obligations under these contracts. Any significant
nonperformance could have a material adverse effect on our financial condition,
results of operations and cash flows.
We
were
not in production on March 30, 2007, the first date upon which we were required
to settle a forward sale of 5,285 oz of gold with Standard Bank. Rather than
modifying the original Gold Price Protection agreement with Standard Bank to
satisfy this forward sale obligation, we opted for a net cash settlement between
the call option purchase price of $535 and the forward sale price of $500,
or
$35.00 per oz. We paid Standard Bank approximately $185,000 due to this
settlement with a corresponding reduction in our derivative liability. Going
forward, we expect to settle our forward sales at a time when the El Chanate
Project is in production. If we are unable for any reason to deliver the
quantity of gold required by our forward sales, we may need to net cash settle
these forward sales as we did on March 30, 2007, by paying Standard Bank the
difference between the call option purchase price and the forward sale price.
We
will not be able to deliver the quantity of gold required by our forward sale
as
of June 30, 2007, and therefore, will be required to net cash settle this
forward sale or amend the gold price protection agreement. The approximate
cost
of a net cash settlement would be $275,000; however, we believe we will be
able
to deliver the quantity of gold required by our forward sales on a going forward
basis. Continued financial settlement in cash of the forward sales could have
a
material adverse effect on our financial condition and cash flows.
Our
material property interests are in Mexico. Risks of doing business in a foreign
country could adversely affect our results of operations and financial
condition.
We
face
risks normally associated with any conduct of business in a foreign country
with
respect to our El Chanate Project in Sonora, Mexico, including various levels
of
political and economic risk. The occurrence of one or more of these events
could
have a material adverse impact on our efforts or operations which, in turn,
could have a material adverse impact on our cash flows, earnings, results of
operations and financial condition. These risks include the
following:
· |
invalidity
of governmental orders,
|
· |
uncertain
or unpredictable political, legal and economic
environments,
|
· |
war
and civil disturbances,
|
· |
changes
in laws or policies,
|
· |
delays
in obtaining or the inability to obtain necessary governmental
permits,
|
· |
governmental
seizure of land or mining claims,
|
· |
limitations
on ownership,
|
· |
limitations
on the repatriation of earnings,
|
· |
increased
financial costs,
|
· |
import
and export regulations, including restrictions on the export of gold,
and
|
· |
foreign
exchange controls.
|
These
risks may limit or disrupt the project, restrict the movement of funds or impair
contract rights or result in the taking of property by nationalization or
expropriation without fair compensation.
We
anticipate selling gold in U.S. dollars; however, we incur a significant amount
of our expenses in Mexican pesos. If and when we sell gold, if applicable
currency exchange rates fluctuate our revenues and results of operations may
be
materially and adversely affected.
If
and
when we commence sales of gold, such sales will be made in U.S. dollars. We
incur a significant amount of our expenses in Mexican pesos. As a result, our
financial performance would be affected by fluctuations in the value of the
Mexican peso to the U.S. dollar.
Changes
in regulatory policy could adversely affect our exploration and future
production activities.
Any
changes in government policy may result in changes to laws
affecting:
· |
environmental
regulations,
|
· |
repatriation
of income and/or
|
Any
such
changes may affect our ability to undertake exploration and development
activities in respect of future properties in the manner currently contemplated,
as well as our ability to continue to explore, develop and operate those
properties in which we have an interest or in respect of which we have obtained
exploration and development rights to date. The possibility, particularly in
Mexico, that future governments may adopt substantially different policies,
which might extend to expropriation of assets, cannot be ruled out.
Compliance
with environmental regulations could adversely affect our exploration and future
production activities.
With
respect to environmental regulation, future environmental legislation could
require:
· |
stricter
standards and enforcement,
|
· |
increased
fines and penalties for non-compliance,
|
· |
more
stringent environmental assessments of proposed projects and
|
· |
a
heightened degree of responsibility for companies and their officers,
directors and employees.
|
There
can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect our operations. We could be
held
liable for environmental hazards that exist on the properties in which we hold
interests, whether caused by previous or existing owners or operators of the
properties. Any such liability could adversely affect our business and financial
condition.
We
have insurance against losses or liabilities that could arise from our
operations with the exception of our processing plant which is not yet
operational. We will obtain this insurance when required. If we incur material
losses or liabilities in excess of our insurance coverage, our financial
position could be materially and adversely affected.
We
are in
the process of commencing mining operations. Mining operations involve a number
of risks and hazards, including:
· |
metallurgical
and other processing,
|
· |
mechanical
equipment and facility performance problems.
|
Such
risks could result in:
· |
damage
to, or destruction of, mineral properties or production
facilities,
|
· |
personal
injury or death,
|
· |
monetary
losses and /or
|
· |
possible
legal liability.
|
Industrial
accidents could have a material adverse effect on our future business and
operations. We currently maintain general liability, auto and property insurance
coverage. While we do not have insurance coverage on our processing plant,
we
anticipate obtaining such coverage when this plant is fully commissioned. We
cannot be certain that the insurance we have (and will have) in place will
cover
all of the risks associated with mining or that we will be able to maintain
insurance to cover these risks at economically feasible premiums. We also might
become subject to liability for pollution or other hazards which we cannot
insure against or which we may elect not to insure against because of premium
costs or other reasons. Losses from such events may have a material adverse
effect on our financial position.
Calculation
of reserves and metal recovery dedicated to future production is not exact,
might not be accurate and might not accurately reflect the economic viability
of
our properties.
Reserve
estimates may not be accurate. There is a degree of uncertainty attributable
to
the calculation of reserves, resources and corresponding grades being dedicated
to future production. Until reserves or resources are actually mined and
processed, the quantity of reserves or resources and grades must be considered
as estimates only. In addition, the quantity of reserves or resources may vary
depending on metal prices. Any material change in the quantity of reserves,
resource grade or stripping ratio may affect the economic viability of our
properties. In addition, there can be no assurance that mineral recoveries
in
small scale laboratory tests will be duplicated in large tests under on-site
conditions or during production.
We
are dependent on the efforts of certain key personnel and contractors to develop
our El Chanate Project. If we lose the services of these personnel and
contractors and we are unable to replace them, our planned operations at our
El
Chanate Project may be disrupted and/or materially adversely
affected.
We
are
dependent on a relatively small number of key personnel, including but not
limited to John Brownlie, Chief Operating Officer, who oversees the El Chanate
Project, the loss of any one of whom could have an adverse effect on us. We
are
also dependent upon Sinergia to provide mining services. Sinergia commenced
mining operations on March 25, 2007, and remains in the pre-production phase
of
the mining contract. Sinergia continues to mobilize portions of its mining
fleet
to the site; however, its mining fleet is not new. If we lose the services
of
our key personnel, or if Sinergia is unable to effectively mobilize and maintain
its fleet, our planned operations at our El Chanate Project may be disrupted
and/or materially adversely affected.
There
are uncertainties as to title matters in the mining industry. We believe that
we
have good title to our properties; however, any defects in such title that
cause
us to lose our rights in mineral properties could jeopardize our planned
business operations.
We
have
investigated our rights to explore, exploit and develop our concessions in
manners consistent with industry practice and, to the best of our knowledge,
those rights are in good standing. However, we cannot assure that the title
to
or our rights of ownership in the El Chanate concessions will not be challenged
or impugned by third parties or governmental agencies. In addition, there can
be
no assurance that the concessions in which we have an interest are not subject
to prior unregistered agreements, transfers or claims and title may be affected
by undetected defects. Any such defects could have a material adverse effect
on
us.
Should
we successfully commence mining operations in Mexico, our ability to remain
profitable long term, should we become profitable, eventually will depend on
our
ability to find, explore and develop additional properties. Our ability to
acquire such additional properties will be hindered by competition. If we are
unable to acquire, develop and economically mine additional properties, we
most
likely will not be able to be profitable on a long-term
basis.
Gold
properties are wasting assets. They eventually become depleted or uneconomical
to continue mining. The acquisition of gold properties and their exploration
and
development are subject to intense competition. Companies with greater financial
resources, larger staffs, more experience and more equipment for exploration
and
development may be in a better position than us to compete for such mineral
properties. If we are unable to find, develop and economically mine new
properties, we most likely will not be able to be profitable on a long-term
basis.
Our
ability on a going forward basis to discover additional viable and economic
mineral reserves is subject to numerous factors, most of which are beyond our
control and are not predictable. If we are unable to discover such reserves,
we
most likely will not be able to be profitable on a long-term
basis.
Exploration
for gold is speculative in nature, involves many risks and is frequently
unsuccessful. Few properties that are explored are ultimately developed into
commercially producing mines. As noted above, our long-term profitability will
be, in part, directly related to the cost and success of exploration programs.
Any gold exploration program entails risks relating to
· |
the
location of economic ore bodies,
|
· |
development
of appropriate metallurgical processes,
|
· |
receipt
of necessary governmental approvals and
|
· |
construction
of mining and processing facilities at any site chosen for mining.
|
The
commercial viability of a mineral deposit is dependent on a number of factors
including:
· |
the
particular attributes of the deposit, such as its
|
·
|
proximity to infrastructure,
|
· |
importing
and exporting gold and
|
· |
environmental
protection.
|
The
effect of these factors cannot be accurately predicted.
Risks
related to ownership of our stock
There
is a limited market for our common stock. If a substantial and sustained market
for our common stock does not develop, our stockholders may have difficulty
selling, or be unable to sell, their shares.
Our
common stock is tradable in the United States in the over-the-counter market
and
is quoted on the Over-The-Counter Bulletin Board and our shares of common stock
trade on the Toronto Stock Exchange. There is only a limited market for our
common stock and there can be no assurance that this market will be maintained
or broadened. If a substantial and sustained market for our common stock does
not develop, our stockholders may have difficulty selling, or be unable to
sell,
their shares.
Our
stock price may be adversely affected if a significant amount of shares are
sold
in the public market.
As
of
June 11, 2007, approximately 82,712,341 shares of our common stock, constituted
"restricted securities" as defined in Rule 144 under the Securities Act of
1933.
We have registered more than half of these shares for public resale. In
addition, we have registered 23,906,542
shares
of common stock issuable upon the exercise of outstanding warrants and options.
We also have agreed to register the shares issued in the January 2007 Private
Placements and the shares issuable upon exercise of warrants issued pursuant
to
these placements. All of the foregoing shares, assuming exercise of all of
the
above options and warrants, would represent in excess of 50% of the then
outstanding shares of our common stock. Registration
of the shares permits the sale of the shares in the open market or in privately
negotiated transactions without compliance with the requirements of Rule 144.
To
the extent the exercise price of the warrants or options is less than the market
price of the common stock, the holders of the warrants are likely to exercise
them and sell the underlying shares of common stock and to the extent that
the
exercise prices of these securities are adjusted pursuant to anti-dilution
protection, the securities could be exercisable or convertible for even more
shares of common stock. We
also
may
issue
shares
to be used to meet our capital requirements or use shares to compensate
employees, consultants and/or directors. We are unable to estimate the amount,
timing or nature of future sales of outstanding common stock. Sales of
substantial amounts of our common stock in the public market could cause the
market price for our common stock to decrease. Furthermore, a decline in the
price of our common stock would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
We
do not intend to pay cash dividends in the near future.
Our
board
of directors determines whether to pay cash dividends on our issued and
outstanding shares. The declaration of dividends will depend upon our future
earnings, our capital requirements, our financial condition and other relevant
factors. Our board does not intend to declare any dividends on our shares for
the foreseeable future. We anticipate that we will retain any earnings to
finance the growth of our business and for general corporate purposes.
Provisions
of our Certificate of Incorporation, By-laws and Delaware law could defer a
change of our management which could discourage or delay offers to acquire
us.
Provisions
of our Certificate of Incorporation, By-laws and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
different series of shares of common stock without any vote or further action
by
our stockholders and our Board of Directors has the authority to fix and
determine the relative rights and preferences of such series of common stock.
As
a result, our Board of Directors could authorize the issuance of a series of
common stock that would grant to holders the preferred right to our assets
upon
liquidation, the right to receive dividend payments before dividends are
distributed to the holders of other common stock and the right to the redemption
of the shares, together with a premium, prior to the redemption of other series
of our common stock.
If
our common stock is deemed to be a "penny stock," trading of our shares would
be
subject to special requirements that could impede our stockholders' ability
to
resell their shares.
Generally,
"penny stocks" as that term is defined in Rule 3a51-1 of the Securities and
Exchange Commission are stocks:
i. |
with
a price of less than five dollars per share;
|
· |
that
are not traded on a recognized national exchange;
or
|
ii. |
of
issuers with net tangible assets equal to or less than
|
· |
-$2,000,000
if the issuer has been in continuous operation for at least three
years;
or
|
· |
-$5,000,000
if in continuous operation for less than three years,
or
|
· |
of
issuers with average revenues of less than $6,000,000 for the last
three
years.
|
Our
common stock is not currently a penny stock because we have net tangible assets
of more than $2,000,000. Should our net tangible assets drop below $2,000,000
and we do not meet any of the other criteria for exclusion of our common stock
from the definition of penny stock, our common stock will be a penny
stock.
Section
15(g) of the Exchange Act, and Rule 15g-2 of the Securities and Exchange
Commission, require broker-dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain
a
manually signed and dated written receipt of the document before effecting
any
transaction in a penny stock for the investor's account. Moreover, Rule 15g-9
of
the Securities and Exchange Commission requires broker-dealers in penny stocks
to approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer:
i. |
to
obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives;
|
ii. |
to
determine reasonably, based on that information, that transactions
in
penny stocks are suitable for the investor and that the investor
has
sufficient knowledge and experience as to be reasonably capable of
evaluating the risks of penny stock transactions;
|
iii. |
to
provide the investor with a written statement setting forth the basis
on
which the broker-dealer made the determination in (ii) above; and
|
iv. |
to
receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor's financial situation,
investment experience and investment objectives.
|
Should
our common stock be deemed to be a penny stock, compliance with the above
requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of
them.
Item
3. Controls
and Procedures.
The
term
"disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
term refers to the controls and procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized, and
reported within the required time periods. Our Chief Executive Officer and
our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this quarterly
report. They have concluded that, as of that date, our disclosure controls
and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange
Act.
No
change
in our internal control over financial reporting occurred during the period
covered by this report that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings.
None.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
We
received proceeds of approximately $4,242,000 during the quarterly period ended
April 30, 2007, from the exercising of an aggregate of 14,140,000 of warrants
issued in past private placements.
On
March
22, 2007, we issued 500,000 shares of common stock to John Brownlie, our
Chief
Operating Officer under our 2006 Equity Incentive Plan. The fair value of
the
services provided in March 2007 amounted to $225,000 or $0.45 per share.
On
June
13, 2007, we issued 500,000 options to Christopher Chipman, our Chief Financial
Officer, under our 2006 Equity Incentive Plan. The options vested immediately
and are exercisable for a period of two years at an exercise price of $0.384
per
share.
In
March
2007, we issued 65,625 shares of common stock to an independent contractor
for
services provided related to the Company’s El Chanate project. The fair value of
the services provided amounted to $26,250 or $0.40 per share. In April 2007,
this independent contractor was engaged as the general manager of the Company’s
El Chanate project for a six month term with an option for an additional six
month term, if mutually agreed upon by both parties. Pursuant to the agreement,
the Company issued 113,636 shares of common stock with a fair value of $50,000
or $0.44 per share at the fair market value of the Company’s common stock on the
date of the agreement. The issuance of these shares vest over the six-month
term.
In
May
2007, subsequent to the end of our third fiscal quarter, we received proceeds
of
$233,500 from the exercising of an aggregate of 934,000 warrants issued in
past
private placements and $154,100 from the exercising of an aggregate of 700,455
warrants issued to officers, directors and an employee.
All
of
the foregoing securities were issued pursuant to exemptions from registration
provided by Section 4(2) of the Securities Act of 1933.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4 Submission
of Matters to a Vote of Security Holders.
We
held
our Annual Meeting of Stockholders on February 21, 2007. For information on
the
results of that meeting, please see our Current Report on Form 8-K filed with
the SEC on February 26, 2007.
Item
5. Other
Information.
In
May
2007, our Board of Directors established a Compensation Committee to administer
our 2006 Equity Incentive Plan, establish a compensation philosophy and
determine the compensation for our executive officers and senior management.
The
Committee consists of Messrs. Shaw, Postle and Nesbitt, our three independent
directors.
On
June
6, 2007, Jack V. Everett resigned as our Vice President of Exploration and
a
member of our Board of Directors. Mr. Everett continues with us in a consulting
capacity. In this regard, we entered into a consulting agreement with him,
pursuant to which he is providing mining and mineral exploration consultation
services.
Item
6. Exhibits.
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer.
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial Officer.
|
|
32.1
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer.
|
|
32.2
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial Officer.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.
|
|
|
|
CAPITAL
GOLD CORPORATION
Registrant
|
|
|
|
|
By: |
/s/
Gifford A. Dieterle |
|
Gifford A. Dieterle
President/Treasurer
|
Date:
June 15, 2007