Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
x
ANNUAL
REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED JULY 31, 2007
o
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File No. 0-13078
CAPITAL
GOLD CORPORATION
(Name
of
Small business issuer in its charter)
State
of Delaware
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13-31805030
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or organization)
|
Identification
No.)
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76
Beaver Street, 14th
Floor, New York, New York
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10005
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(Address
of principal executive offices)
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(Zip
Code)
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Issuer’s
telephone numbering: (212) 344-2785
Securities
registered under Section 12(b) of the Exchange Act: none
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$.0001 per share
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
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
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulations S-B contained in this form, and no disclosure will be contained,
to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. 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
State
issuer’s revenues (consists solely of interest income and immaterial
miscellaneous other income) for its most recent fiscal year.
$145,993.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average between the closing bid
($0.46) and asked ($0.46) price of the issuer’s Common Stock as of October 12,
2007, was $75,376,588 based upon the average between the closing bid and asked
price ($0.46) multiplied by the 163,862,148 shares of the issuer’s Common Stock
held by non-affiliates.
The
number of shares outstanding of each of the issuer’s classes of common equity as
of October 12, 2007:
171,743,648.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
Transitional
Small Business Disclosure Format: Yes o
No x
CAPITAL
GOLD CORPORATION
Form
10-KSB
July
31,
2007
Table
of Contents
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Page
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Glossary
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(ii)
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Part
I
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Item
1.
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Description
of Business.
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1
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Item
2.
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Description
of Property.
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11
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Item
3.
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Legal
Proceedings.
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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19
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Part
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities.
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19
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Item
6.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations;
Plan of Operations.
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21
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Item
7.
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Financial
Statements.
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33
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Item
8.
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Changes
in and Disagreement with Accountants on Accounting and Financial
Disclosure.
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33
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Item
8A
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Controls
and Procedures.
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33
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Item
8B
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Other
Information.
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34
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Part
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance
with Section
16(a) of the Exchange Act.
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34
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Item
10.
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Executive
Compensation.
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40
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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44
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Item
12.
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Certain
Relationships and Related Transactions.
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47
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Item
13.
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Exhibits
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48
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Item
14.
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Principal
Accountant Fees and Services
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51
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Signatures
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53
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Supplemental
Information
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54
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Financial
Statements
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F-1
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GLOSSARY
OF TECHNICAL TERMS
Reserve:
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That
part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.
Reserves
must be supported by a feasibility study done to bankable standards
that
demonstrates the economic extraction ("Bankable standards" implies
that
the confidence attached to the costs and achievements developed
in the
study is sufficient for the project to be eligible for external
debt
financing.) A reserve includes adjustments to the in-situ tonnes
and grade
to include diluting materials and allowances for losses that might
occur
when the material is mined.
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Proven
Reserve:
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Reserves
for which (a) quantity is computed from dimensions revealed in
outcrops,
trenches, workings or drill holes; grade and/or quality are computed
from
the results of detailed sampling and (b) the sites for inspection,
sampling and measurement are spaced so closely and the geologic
character
is so well defined that size, shape depth and mineral content of
reserves
are well-established.
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Probable
Reserve:
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Reserves
for which quantity and grade and/or quality are computed from information
similar to that used for proven (measured) reserves, but the sites
for
inspection, sampling, and measurement are farther apart or are
otherwise
less adequately spaced. The degree of assurance, although lower
than that
for proven reserves, is high enough to assume continuity between
points of
observation.
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Mineralized
Material
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The
term “mineralized material” refers to material that is not included in the
reserve as it does not meet all of the criteria for adequate demonstration
for economic or legal extraction.
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Non-reserves
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The
term “non-reserves” refers to mineralized material that is not included in
the reserve as it does not meet all of the criteria for adequate
demonstration for economic or legal extraction.
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Exploration
Stage
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An
“exploration stage” prospect is one which is not in either the development
or production stage.
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Development
Stage
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A
“development stage” project is one which is undergoing preparation of an
established commercially mineable deposit for its extraction but
which is
not yet in production. This stage occurs after completion of a
feasibility study.
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Production
Stage
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A
“production stage” project is actively engaged in the process of
extraction and beneficiation of mineral reserves to produce a marketable
metal or mineral product.
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ADDITIONAL
DEFINITIONS
Caliche:
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Sediment
cemented by calcium carbonate near surface.
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Diorite:
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Igneous
Rock (rock formed from magma or molten rock).
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Dore:
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Bars
of low purity precious metal (Gold & Silver) which represents final
product of a gold mine typically weighing 25 kg per
bar.
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Dikes:
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Tabular,
vertical bodies of igneous rock.
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Fissility:
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Shattered,
broken nature of rock.
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Fracture
Foliations:
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Fracture
pattern in rock, parallel orientation, resulting from
pressure.
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Heap
Leaching:
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Broken
and crushed ore on a pile subjected to dissolution of metals by leach
solution.
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Hydrometallurgical
Plant:
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A
metallurgical mineral processing plant that uses water to leach or
separate and concentrate elements or minerals.
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Intercalated:
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Mixed
in.
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Litho
static Pressure:
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Pressure
brought on by weight of overlaying rocks.
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An
area where large bodies of intrusive igneous rock exist and through
which
large amounts of mineralizing fluids rose.
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Mesothermal:
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A
class of hydrothermal ore deposit formed at medium temperatures and
a
depth over one mile in the earth’s crust.
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Extremely
fine grained siliceous igneous rock with a distribution of larger
crystals
within.
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Mudstone:
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Sedimentary
bed composed primarily of fine grained material such as clay and
silt.
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PPM:
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Part
per million.
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Pyritized:
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Partly
replaced by the mineral pyrite.
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Reverse
Circulation Drilling
(or
R.C. Drilling):
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Type
of drilling using air to recover cuttings for sampling through the
middle
of the drilling rods rather than the outside of the drill rods, resulting
in less contamination of the sampled
interval.
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Sericitized:
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Rocks
altered by heat, pressure and solutions resulting in formation of
the
mineral sericite, a very fine grained mica.
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Siltstone:
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A
sedimentary rock composed of clay and silt sized particles.
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Silicified:
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Partly
replaced by silica.
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Stockwork
Breccia:
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Earth's
crust broken by two or more sets of parallel faults converging from
different directions.
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Stockwork:
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Ore,
when not in strata or in veins but in large masses, so as to be worked
in
chambers or in large blocks.
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Surface
Mine:
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Surface
mining by way of an open pit without shafts or underground
working.
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PART
I
Item
1. Description
of Business
Sonora,
Mexico Concessions
El
Chanate
Through
a
wholly-owned subsidiary and an affiliate, Capital Gold Corporation (the
"Company," “we” or “us”) owns 100% of 16 mining concessions located in the
Municipality of Altar, State of Sonora, United States of Mexico
totaling approximately 3,543 hectares (8,756 acres or 13.7 square miles). We
have constructed an open-pit gold mining operation and we are mining two of
these concessions. We commenced mining operations in late March 2007 and
achieved gold production and revenue from operations in early August 2007.
During August and September 2007, we produced approximately 6,850 ounces of
gold
and 5,222 ounces of silver. Of this production, we sold 6,384 ounces of gold
for
proceeds amounting to approximately $4,380,000. The gold dore is being refined
for us in Mexico by Met-Mex Penoles. We sometimes refer to the operations on
these two concessions as the El Chanate Project.
In
May
2007, we completed an expanded 72-hole reverse circulation drilling campaign
to
identify additional proven and probable gold reserves at the El Chanate Project.
The 72 holes totaled approximately 8,300 meters, and were positioned to fill
in
gaps in the ore body and test the outer limits of the currently known ore zones.
We turned the assay data over to Independent Mining Consultants, Inc. (“IMC”) of
Tucson, AZ to update our ore reserve and our mine plan. On August 30, 2007,
IMC
delivered to us an updated resource block model and an updated mine plan and
mine production schedule (the “2007 Report”). The original feasibility study
(the “2003 Study”) on the El Chanate Project was prepared by M3 Engineering of
Tucson in August 2003. M3 updated the 2003 Study in October 2005 (the “2005
Study”). An August 2006 technical report from SRK Consulting, Denver, Colorado
(the “2006 Update”) further updated the feasibility study.
According
to the 2007 Report, our proven and probable reserve tonnage has increased by
approximately 98 percent from 19.9 million to 39.5 million metric tonnes with
a
gold grade of 0.66 grams per tonne (43.5 million US short tons at 0.019 ounces
per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of waste to one
tonne of ore). The updated pit design for the revised plan in the 2007 Report
is
based on a plant recovery of gold that varies by rock types, but is expected
to
average 66.8%. A gold price of US$550 (three year average as of July 31, 2007
as
determined by IMC) per ounce was used to re-estimate the reserves compared
with
a gold price of $450 per ounce used in the previous estimate.
Gold
production at El Chanate is currently near the feasibility study rate of 4,000
ounces per month. We plan to slowly start to ramp up daily tonnage levels from
7,500 tonnes per day (“tpd”) to 10,000 tpd. This should boost our gold
production toward 5,000 ounces per month (60,000 ounces per year). Initially,
we
anticipate that the increased plant throughput will not require any capital
since an additional ore crushing and stacking capacity was factored into the
original design.
With
the
recent reserve increase, we are analyzing what steps are necessary to
effectively increase production rates to 100,000 ounces per year and improve
gold recoveries by conducting further metallurgical test work at our laboratory
facilities at the mine. To this end, we have contacted Golder Engineering to
supply EPCM (engineering, procurement and construction management) services
for
leach pad expansion and to study the impact of the planned mining increase.
In
addition, we are discussing options available with the crusher manufacturer,
Excel Machinery, with regards to adding an additional secondary crusher into
the
crushing circuit, to enable the system to handle increased tonnage. We
anticipate that another crusher should move daily tonnage up closer to 14,000
tpd.
For
more
information on the El Chanate Project, please see “Item
2. Description of Property; El Chanate Properties - Sonora,
Mexico.”
Competition
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. Our
lack
of revenues and limited financial resources further hinder our ability to
acquire additional mineral properties.
Human
Resources
As
of
October 12, 2007, we had 104 full time employees and 6 temporary employees,
including our current officers and administrative personnel in the US and in
Mexico. In addition, our chief financial officer devotes approximately 85%
of
his time to us.
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 and mine development and construction plans,
costs, grade, production and recovery rates, permitting, financing needs, the
availability of financing on acceptable terms or other sources of funding,
and
the timing of additional tests, feasibility studies and environmental permitting
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 risk factors discussed below,
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.
Risk
Factors
The
risks described below should not be considered to be comprehensive and
all-inclusive. Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations. If any events
occur that give rise to the following risks, our business, financial condition,
cash flow or results of operations could be materially and adversely affected,
and as a result, the trading price of our Common Stock could be materially
and
adversely impacted. These risk factors should be read in conjunction with other
information set forth in this report, including our Consolidated Financial
Statements and the related Notes.
Risks
related to our business and operations
We
have just begun generating operating revenues. If we are unable to sustain
operating revenues, we will not be able to generate profits and our business
may
fail.
Until
recently, we had no producing properties and, historically, have operated and
continue to operate at a loss. We only commenced gold producing activities
and
started to generate revenues in August 2007. 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 have commenced revenue producing mining
operations, we cannot assure if or when revenues will cover cash flow or
generate profits.
We
just recently started to receive cash flow from operations and, historically,
have relied on external funding sources. While we believe that, with continuing
cash flow from operations, 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. 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
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
are using reconditioned equipment which could adversely affect our cost
assumptions and our ability to economically and successfully mine the
project.
We
are
using reconditioned carbon column collection equipment to recover gold and
Sinergia, our mining contractor, is using equipment that
is
not new. Such equipment is subject to the risk of more frequent breakdowns
and
need for repair than new equipment. If the equipment that we or Sinergia uses
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.
The
gold deposit we have identified at El Chanate is relatively 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 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 initial
production phase and to require more capital than anticipated. There can be
no
assurance that our operations at El Chanate will be profitable.
We
have only one project. As a result, our chances of conducting viable mining
operations are dependent upon the success of that
project.
Our
only
current properties are the El Chanate concessions. 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 nine months of 2007, the spot
price
for gold on the London Exchange has fluctuated between $608.30 and $743.00
per
ounce. During calendar 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:
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the
level of interest rates,
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·
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world
supply of gold and
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·
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stability
of exchange rates.
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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
had
not yet physically produced gold dore on March 31 and June 30, 2007, the first
two quarters ended upon which we were required to settle a forward sale of
5,285
and 7,841 ounces of gold, respectively, with Standard Bank. Rather than
modifying the original Gold Price Protection agreement with Standard Bank to
satisfy these forward sale obligations, 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 and
$274,000, respectively, due to these settlements with corresponding reductions
in our derivative liability. As we commenced gold production in August 2007, we
believe we will be able to deliver the quantity of gold required by our forward
sales on a going forward basis; however, we again opted for a cash settlement
for the quarter ended September 30, 2007 and may continue to net cash settle
these forward sale obligations if, as on September 30, 2007, it is the most
cost
effective option for us. If we are unable for any reason to produce the quantity
of gold required by our forward sales and generate sufficient cash flow to
settle these forward sales in gold or cash, we 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:
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invalidity
of governmental orders,
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·
|
uncertain
or unpredictable political, legal and economic
environments,
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·
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war
and civil disturbances,
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·
|
changes
in laws or policies,
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·
|
delays
in obtaining or the inability to obtain necessary governmental
permits,
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·
|
governmental
seizure of land or mining claims,
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|
·
|
limitations
on ownership,
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·
|
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
sell gold in U.S. dollars; however, we incur a significant amount of our
expenses in Mexican pesos. If applicable currency exchange rates fluctuate,
our
revenues and results of operations may be materially and adversely affected.
We
sell
gold 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:
|
·
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stricter
standards and enforcement,
|
|
·
|
increased
fines and penalties for non-compliance,
|
|
·
|
more
stringent environmental assessments of proposed projects and
|
|
·
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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. If we incur material losses or liabilities in excess of our
insurance coverage, our financial position could be materially and adversely
affected.
Mining
operations involve a number of risks and hazards, including:
|
·
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metallurgical
and other processing,
|
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·
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mechanical
equipment and facility performance problems.
|
Such
risks could result in:
|
·
|
damage
to, or destruction of, mineral properties or production
facilities,
|
|
·
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personal
injury or death,
|
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·
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monetary
losses and /or
|
|
·
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possible
legal liability.
|
Industrial
accidents could have a material adverse effect on our future business and
operations. While we do not have insurance coverage on our processing plant,
we
anticipate obtaining such coverage when this plant is fully commissioned. We
currently maintain general liability, auto and property insurance coverage.
We
cannot be certain that the insurance we 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 transitioned from the
pre-production to production phase of the mining contract in July 2007.
Sinergia has mobilized 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 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.
Our
ability to remain profitable long-term 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
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the
location of economic ore bodies,
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·
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development
of appropriate metallurgical processes,
|
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·
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receipt
of necessary governmental approvals and
|
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·
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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,
|
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·
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importing
and exporting gold and
|
|
·
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environmental
protection.
|
The
effect of these factors cannot be accurately predicted.
Risks
related to ownership of our stock
Our
stock price may be adversely affected if a significant amount of shares are
sold
in the public market.
As
of
October 12, 2007, approximately 80.4 million 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 18.0 million shares
of
common stock issuable upon the exercise of outstanding warrants and options
that, as of the date hereof, have not expired or been exercised. 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.
Item
2. Description
of Property
El
Chanate Properties - Sonora, Mexico
Through
our wholly-owned subsidiaries, Oro de Altar S. de R. L. de C.V. (“Oro”) and
Minera Santa Rita S. de R.L. de C.V. (“MSR”), we own 100% of the following 16
mining concessions, all of which are located in the Municipality of Altar,
State
of Sonora, United States of Mexico.
The
16
mining concessions are as follows:
|
Concession
Name
|
|
Title
No.
|
|
Hectares
|
1
|
San
Jose
|
|
200718
|
|
96.0000
|
2
|
Las
Dos Virgen
|
|
214874
|
|
132.2350
|
3
|
Rono
I
|
|
206408
|
|
82.1902
|
4
|
Rono
3
|
|
214224
|
|
197.2180
|
5
|
La
Cuchilla
|
|
211987
|
|
143.3481
|
6
|
Elsa
|
|
212004
|
|
2,035.3997
|
7
|
Elisa
|
|
214223
|
|
78.4717
|
8
|
Ena
|
|
217495
|
|
190.0000
|
9
|
Eva
|
|
212395
|
|
416.8963
|
10
|
Mirsa
|
|
212082
|
|
20.5518
|
11
|
Olga
|
|
212081
|
|
60.5890
|
12
|
Edna
|
|
212355
|
|
24.0431
|
13
|
La
Tira
|
|
219624
|
|
1.7975
|
14
|
La
Tira 1
|
|
219623
|
|
18.6087
|
15
|
Los
Tres
|
|
223634
|
|
8.000
|
16
|
El
Charro
|
|
206404
|
|
40.0000
|
|
Total
|
|
|
|
3,543.3491
|
At
the El
Chanate Project we are mining on two concessions, San Jose and Las Dos Virgens.
We are utilizing four other concessions for processing mined ores. In the
future, we plan to explore some or all of these concessions to determine whether
or not further activity is warranted.
Until
August 2006, we were following an August 2003 feasibility study (the “2003
Study”) prepared by M3 Engineering of Tucson, Arizona (“M3”) as updated by M3 in
October 2005 (The “2005 Study”). The 2005 Study used a base gold price of $375
per ounce. 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”).
In
May
2007, we completed an expanded 72-hole reverse circulation drilling campaign
to
identify additional proven and probable gold reserves at the El Chanate Project.
The 72 holes totaled approximately 8,300 meters, and were positioned to fill
in
gaps in the ore body and test the outer limits of the currently known ore zones.
We turned the assay data over to Independent Mining Consultants, Inc. (“IMC”) of
Tucson, AZ to update our ore reserve and our mine plan. On August 30, 2007,
IMC
delivered to us an updated resource block model and an updated mine plan and
mine production schedule (the “2007 Report”).
According
to the 2007 Report, our proven and probable reserve tonnage has increased to
39.5 million metric tonnes with a gold grade of 0.66 grams per tonne (43.5
million US short tons at 0.019 ounces per ton). The open pit stripping ratio
is
0.6:1 (0.6 tonnes of waste to one tonne of ore). The updated pit design for
the
revised plan in the 2007 Report is based on a plant recovery of gold that varies
by rock types, but is expected to average 66.8%. A gold price of US$550 (three
year average as of July 31, 2007 as determined by IMC) per ounce was used to
re-estimate the reserves compared with a gold price of $450 per ounce used
in
the 2006 Update.
Gold
production at El Chanate is currently near the feasibility study rate of 4,000
ounces per month. We plan to slowly start to ramp up daily tonnage levels from
7,500 tonnes per day (“tpd”) to 10,000 tpd. This should boost our gold
production toward 5,000 ounces per month (60,000 ounces per year). Initially,
we
anticipate that the increased plant throughput will not require any capital
since an additional ore crushing and stacking capacity was factored into the
original design.
With
the
recent reserve increase, we are analyzing what steps are necessary to
effectively increase production rates to 100,000 ounces per year and improve
gold recoveries by conducting further metallurgical test work at our laboratory
facilities at the mine. To this end, we have contacted Golder Engineering to
supply EPCM (engineering, procurement and construction management) services
for
leach pad expansion and to study the impact of the planned mining increase.
In
addition, we are discussing options available with the crusher manufacturer,
Excel Machinery, with regards to adding an additional secondary crusher into
the
crushing circuit, to enable the system to handle increased tonnage. We
anticipate that another crusher should move daily tonnage up closer to 14,000
tpd.
The
following Summary is extracted from the 2007 Report. 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
832,280 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 555,960 ounces, or approximately 66.8% of
the
contained gold. The gold recovery rate is expected to average approximately
66.8% 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%; siltstone ore types recoveries may be about 48%
and
latite intrusive ore type recoveries may be about 50%.
El
Chanate Project
Production
Summary
|
|
Metric
|
|
U.S.
|
Materials
Reserves
Proven
Probable
Total
Reserves
Waste
Total
Contained
Gold
Production
Ore
Crushed**
Operating
Days/Year
Gold
Plant Average Recovery
Average
Annual Production**
Total
Gold Produced
|
|
26.7
Million Tonnes @ 0.68 g/t*
12.8
Million Tonnes
@
0.61
g/t*
39.5
Million Tonnes @ 0.66 g/t*
24.1
Million Tonnes
63.6
Million Tonnes
25.89
Million grams
2.6
Million Tonnes /Year
7,500
Mt/d
365
Days per year
66.8
%
1.35
Million grams
17.29
Million grams
|
|
29.4
Million Tons @ 0.0198 opt*
14.1
Million Tons
@
0.0179
opt*
43.5
Million Tons @ 0.0192 opt*
26.6
Million Tons
70.1
Million tons
832,280
Oz
2.87
Million Tons/Year
8,267
t/d
365
Days per year
66.8
%
43,414
Oz
555,960
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. The reserve estimates are based on
a recovered gold cutoff grade of 0.17 to 0.21 grams per metric tonne, depending
on the operating year, and as described below.
**
Based
on mining rate of 7,500 metric tonnes per day of ore. Does not take into account
the anticipated increase to 10,000 metric tonnes per day or more.
In
the
mineral resource block model developed, with blocks 6m (meters) x 6m x 6m 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 2 or more drill holes within a search radius of 80m x 70m x
40m and
with a relative kriging (a geostatistical calculation technique)
standard
deviation less than or equal to 0.45 were classified as Measured
(corresponding to Proven);
|
|
·
|
Blocks
with 1 hole within the search radius of 80m x 70m x 40m and with
a
relative kriging standard deviation of 0.60 or less, blocks with
2 holes
and a kriging standard deviation of 0.70 or less, blocks with 3 holes
and
a kriging standard deviation of 0.80 or less, blocks with 4 holes
and a
relative kriging standard deviation of 0.90 or less and all blocks
with 5
or more holes within the search radius were classified as Indicated
(corresponding to Probable), unless they met the above criterion
for
Proven;
|
|
·
|
Blocks
with a grade estimate that did not meet the above criteria 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 gold grade or a resource
classification.
|
The
proven and probable reserve estimates are based on a recovered gold cutoff
grade
of 0.17 to 0.21 grams/tonne, depending on the operating year. The variation
is
due to balancing the mine and plant production capacities on a year by year
basis for the plan. (A 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) and break even
cutoff grade calculations are as follows:
Cutoff
Grade Calculation
Basic
Parameters
Gold
Price
Shipping
and Refining
Gold
Recovery
Royalty
Operating
Costs per Tonne of Ore
Mining
*
Processing/Leach
Pad
G&A
Total
Internal
Cutoff Grade
Head
Grade Cutoff (66.8% recov.)
Recovered
Gold Grade Cutoff
|
Internal
Cutoff Grade
US$550/oz
US$
4.14/oz
66.8%
4%
of NSR
$
per Tonne of Ore
0.070
1.980
0.800
2.850
Grams
per Tonne
0.25
0.17
|
Break
Even Cutoff Grade
US$550/oz
US$
4.14/oz
66.8%
4%
of NSR
$
per Tonne of Ore
1.360
1.980
0.800
4.140
Grams
per Tonne
0.37
0.25
|
*
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.
Surface
Property Ownership
Anglo
Gold purchased surface property ownership, consisting of 466 Hectares in Altar,
Sonora, on January 27, 1998. The ownership was conveyed to our subsidiary,
Oro
de Altar S.A. de C.V., in 2002. MSR, one of our wholly-owned Mexican affiliates,
has a lease on the property for the purpose of mining the Chanate gold deposit.
The purchase transaction was recorded as public deed 19,591 granted by Mr.
Jose
Maria Morera Gonzalez, Notary Public 102 of the Federal District, registered
at
the Public Registry of Property of Caborca, Sonora, under number 36026, book
one, volume 169 of the real estate registry section on May 7, 1998.
General
Information and Location
The
El
Chanate Project is located in the State of Sonora, Mexico, 37 kilometers
northeast of the town of Caborca. It is accessible by paved and all weather
dirt
roads typically traveled by pickup trucks and similar vehicles. Driving time
from Caborca is approximately 40 minutes. Access from Caborca to the village
of
16 de September is over well maintained National highways. Beyond the 16 de
September village, routes to the property are currently over well traveled
gravel and sandy desert roads suitable for lightweight vehicles. We acquired
rights for service road access from the village of 16 de September, and
constructed this road.
The
project is situated on the Sonora desert in a hot and windy climate, generally
devoid of vegetation with the exception of cactus. The terrain is generally
flat
with immense, shallow basins, scattered rock outcropping and low rocky hills
and
ridges. The desert floor is covered by shallow, fine sediment, gravel and
caliche. The main body of the known surface gold covers and irregularly shaped
area of approximately 3,170 feet long by 1,590 feet wide. Several satellite
mineral anomalies exist on surfaces which have not been thoroughly explored.
Assays on chip samples taken from trenches at these locations by us indicate
the presence of gold mineralization.
In
2005,
we acquired 15 year rights of way for the current access road, and we acquired
the right to purchase 81 hectares of land near the main highway. We have use
of
the land; however, our actual purchase of the land is conditioned upon the
Ejido
(local cooperative) privatizing the land, before the acquisition is finalized.
We subsequently purchased an extension of our rights-of-way from 15 to 30 years.
In addition to this road, we acquired a water concession, and our water well
is
located within a large regional aquifer. The 2005 feasibility study indicated
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 were permitted to pump for our operations was approximately 71.3
million gallons per year (8.6 liters per second). In September 2007, and in
conjunction with the results of the 2007 Report, we acquired additional water
rights which permits us to consume up to 109.1 million gallons per year. Based
on the anticipated water consumption for the life of mine, we believe that
we
have an allocation to meet our requirements.
In
December 2005, MSR
entered
into a Mining Contract with a Mexican mining contractor, Sinergia Obras Civiles
y Mineras, S.A. de C.V. (“Contractor”). The Mining Contract, as amended, became
effective November 1, 2006 and work commenced on or about March 25, 2007 (the
“Commencement Date”). Pursuant to an amendment to the Mining Contract, the
mining rates set forth in that contract are subject to adjustment for the rate
of inflation between September 23, 2005 and the Commencement Date. We are
currently in negotiations with the Contractor on an adjustment to these rates
for the aforementioned period. Pursuant to the Mining Contract, the Contractor,
using its own equipment, is supposed to perform 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 the Contractor under the Mining Contract. Pursuant to the Mining
Contract, upon termination, the Contractor would be obligated to repay any
portion of the advance payment that had not yet been recouped. The Contractor’s
mining rates are subject to escalation on an annual basis. This escalation
is
tied to the percentage escalation in the Contractor’s costs for various parts
for its equipment, interest rates and labor. One of the principals of the
Contractor (“FG’s Successor”) is one of the former principals of Grupo Minero FG
S.A. de C.V. (“FG”). FG was our former joint venture partner. In March 2007, we
made a further advance to the Contractor of $319,000 in consideration of FG’s
successors transfer to us of his remaining interest in MSR. See the discussion
of FG in “Our
Acquisition and Ownership of the El Chanate Project”
below.
The
general El Chanate mine area has been mined for gold since the early
19th
century.
A number of old underground workings exist characterized by narrow shafts,
to a
depth of several tens of feet and connecting drifts and cross cuts. No
information exists regarding the amount of gold taken out; however, indications
are that mining was conducted on a small scale.
Geology
The
project area is underlain by sedimentary rocks of the Late Jurassic - Early
Cretaceous Bisbee Group, and the Late Cretaceous Chanate Group, which locally
are overlain by andesites of the Cretaceous El Charro volcanic complex. The
sedimentary strata are locally intruded by andesitic sills and dikes, a
microporphyritic latite and by a diorite stock. The sedimentary strata are
comprised of mudstone, siltstone, sandstone, conglomerate, shale and limestone.
Within the drilled resource area, a predecessor exploration company
differentiated two units on the basis of their position relative to the Chanate
fault. The upper member is an undifferentiated sequence of sandstone,
conglomerate and lesser mudstone that lies above the Chanate fault and it is
assigned to the Escalante Formation of the Middle Cretaceous Chanate Group.
The
lower member is comprised of mudstone with mixed in sandstone lenses and thin
limestone interbreds; it lies below the Chanate fault and is assigned to the
Arroyo Sasabe Formation of the Lower Cretaceous Bisbee Group. The Arroyo Sasabe
formation overlies the Morita Formation of the Bisbee Group. Both the Escalante
and Arroyo Sasabe formations are significantly mineralized proximal to the
Chanate fault, while the Morita Formation is barren.
The
main
structural feature of the project area is the Chanate fault, a 7 km long
(minimum) northwest-striking, variably southwest-dipping structure that has
been
interpreted to be a thrust fault. The Chanate fault is overturned
(north-dipping) at surface, and is marked by brittle deformation and shearing
which has created a pronounced fracture foliation and fissility in the host
rocks. In drill holes the fault is often marked the presence of an andesite
dike. Reports prepared by a predecessor exploration company describe the fault
as consisting of a series of thrust ramps and flats; however, geologic cross
sections which we have reviewed but did not prepare may negate this
interpretation.
Alteration/Mineralization
A
predecessor exploration company has defined a 600 meter long, 300 meter wide,
120 meter thick zone of alteration that is centered about the Chanate fault.
The
strata within this zone have been silicified and pyritized to varying degrees.
In surface outcrop the mineralized zone is distinguished by its bleached
appearance relative to unmineralized rock. The mineralized zone contains only
single digit ppm (parts per million) levels of gold. Dense swarms of veinlets
form thick, mineralized lenses, within a larger area of sub-economic but
anomalous gold concentrations. Drill hole data indicates that the mineralized
lenses are sub-horizontal to gently southwest-dipping and are grossly parallel
to the Chanate fault. The fault zone itself is also weakly mineralized, although
strata in the near hanging wall and footwall are appreciably mineralized.
Our
Acquisition and Ownership of the El Chanate Project
In
June
2001, we purchased 100% of the issued and outstanding stock of Minera Chanate,
S.A. de C.V. from AngloGold North America Inc. and AngloGold (Jerritt Canyon)
Corp. Minera Chanate’s assets at the time of the closing of the purchase
consisted of 106 exploitation and exploration concessions in the States of
Sonora, Chihuahua and Guerrero, Mexico. By June 2002, after property reviews
and
to minimize tax payments, the 106 had been reduced to 12 concessions. To cover
certain non-critical gaps between concessions, four new concessions were
located, and the number of concessions is now 16. These concessions are
contiguous, totaling approximately 3,543 hectares (8,756 acres or 13.7 square
miles). Although there are 16 concessions, we are only mining two of these
concessions at the present time. We also own outright 466 hectares (1,151 acres
or 1.8 square miles) of surface rights at El Chanate and no third party
ownership or leases exist on this fee land or the El Chanate concessions. In
the
future, assuming adequate funding is available, we plan on conducting
exploration activities on some of the other concessions.
Pursuant
to the terms of the agreement with Anglo Gold, in December 2001, we 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 a 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 subjected to and would
be responsible for any withholding taxes assessed on such payments.
Under
the
terms of the agreement, we have 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 El Chanate concessions
at
the time of option exercise). That option is exercisable over a 180 day period
commencing at such time as we notify AngloGold that we have made a good faith
determination that we have gold-bearing ore deposits on any one of the
identified groups of El Chanate concessions, when aggregated with any ore that
we have 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
our project costs on the properties during the period commencing on December
15,
2000 and ending on the date of such notice. After taking into account the
results of the 2007 Report, our total resource at El Chanate remains below
the
2,000,000 troy ounces of contained gold.
In
February 2002, MSR, one of our wholly-owned Mexican affiliates, now the leasee
of the El Chanate concessions, as discussed below, entered into a joint venture
agreement with Grupo Minero FG S.A. de C.V. (“FG”) to explore, evaluate and
develop the El Chanate concessions. Effective March 31, 2004, this joint venture
agreement was terminated. In consideration of FG’s contributions to the venture
of $457,455, we issued to FG 2,000,000 restricted shares of our common stock
valued at $800,000 and MSR issued to FG a participation certificate entitling
FG
to receive five percent of the MSR’s annual dividends, 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, we repurchased the participation certificate from
FG’s
successor (“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. We repurchased the remaining
1% net profits interest from FG’s successor in March 2007. FG’s successor 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 was not applicable where a funding source for the project determines
that others should render such works or services. As discussed above, FG’s
successor is a principal of Sinergia, our mining contractor.
FG
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 were assignable. To the extent that the authorizations
were not assignable or otherwise transferable, FG gave 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.
During
March 2002, prior to the sale of Minera Chanate and pursuant to the FG joint
venture agreement, Minera Chanate, in a series of transactions, sold all of
its
surface land and mining claims to Oro de Altar S. de R. L. de C.V. ("Oro"),
another of our wholly-owned subsidiaries. Oro, in turn, leased the foregoing
land and mining claims to Minera Santa Rita.
Item
3. Legal
Proceedings
We
are
not presently a party to any material litigation.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of our shareholders during the fourth quarter
of fiscal 2006.
PART
II
Item
5. Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities.
(a)
Marketing Information — The principal
U.S. market in which our common shares (all of which are of one class, $.0001
par value Common Stock) are traded or will trade is in the over-the-counter
market (Bulletin Board Symbol: "CGLD"). Our stock is not traded or quoted on
any
Automated Quotation System.
The
following table sets forth the range of high and low closing bid quotes of
our
Common Stock per quarter for the past two fiscal years as reported by the OTC
Bulletin Board (which reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessary represent actual transactions).
MARKET
PRICE OF COMMON STOCK
Quarter
Ending |
|
High
and Low
|
|
July
31, 2007
|
|
|
0.47
|
|
|
0.38
|
|
April
30, 2007
|
|
|
0.47
|
|
|
0.37
|
|
January
31, 2007
|
|
|
0.41
|
|
|
0.31
|
|
October
31, 2006
|
|
|
0.33
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
July
31, 2006
|
|
|
0.43
|
|
|
0.32
|
|
April
30, 2006
|
|
|
0.39
|
|
|
0.33
|
|
January
31, 2006
|
|
|
0.42
|
|
|
0.28
|
|
October
31, 2005
|
|
|
0.27
|
|
|
0.17
|
|
As
of
March 22, 2006, our Common Stock began trading on the Toronto Stock Exchange
under the symbol "CGC." The high and low trading prices for our Common stock
for
the periods indicated below are as follows:
Period
Ending |
|
High
and Low
|
|
|
|
US$/CDN$
|
|
US$/CDN$
|
|
Quarter
ended July 31, 2007
|
|
|
0.50/0.54
|
|
|
0.35/0.37
|
|
Quarter
ended April 30, 2007
|
|
|
0.52/0.60
|
|
|
0.36/0.42
|
|
Quarter
ended January 31, 2007
|
|
|
0.42/0.49
|
|
|
0.27/0.31
|
|
Quarter
ended October 31, 2006
|
|
|
0.36/0.40
|
|
|
0.28/0.32
|
|
|
|
|
|
|
|
|
|
Quarter
ended July 31, 2006
|
|
|
0.49/0.55
|
|
|
0.28/0.32
|
|
March
22 2006 - April 30, 2006
|
|
|
0.44/0.50
|
|
|
0.33/0.37
|
|
(b)
Holders — The approximate number of record holders of our Common Stock, as of
October 12, 2007 amounts to 1,964 inclusive of those brokerage firms and/or
clearing houses holding our common shares for their clientele (with each such
brokerage house and/or clearing house being considered as one holder). The
aggregate number of shares of Common Stock outstanding is 171,743,648 as of
October 12, 2007.
(c)
Dividends — We had not paid or declared any cash dividends upon our Common Stock
since inception and, by reason of our present financial status and our
contemplated financial requirements, do not contemplate or anticipate paying
any
cash dividends upon our Common Stock in the foreseeable future.
In
May
2007, we issued an aggregate of 620,455 shares upon the exercise of options
by
our officers and directors for approximate gross proceeds of $137,000 as
follows: 70,455 shares to Gifford A. Dieterle, 50,000 shares to Jeffrey W.
Pritchard, and 250,000 shares each to Roger A. Newell and the wife of Robert
Roningen.
On
June
13, 2007, we issued an additional 500,000 options to Mr. Chipman under our
2006
Equity Incentive Plan. These options vested immediately and are exercisable
for
a period of two years at an exercise price of $0.384 per share.
During
the quarter ended July 31, 2007, we issued an aggregate of 1,221,000 shares
of
stock upon the exercising of common stock purchase warrants for approximate
gross proceeds of $320,000. Subsequent to the end of the quarter, we issued
an
aggregate of 3,570,500 shares of stock upon the exercising of common stock
purchase warrants for approximate gross proceeds of $1,106,000.
We
issued
the following two year options under our 2006 Equity Incentive Plan in August
2007, subsequent to the end of the quarter, with exercise prices equal to or
greater than the market price on date of issuance: 275,000 options exercisable
at $.427, 150,000 options exercisable at $.50 and 40,000 options issuable at
$.38.
All
of
the foregoing issuances were exempt from registration pursuant to the provisions
of Section 4(2) of the Securities Act of 1933.
We
did
not repurchase any of our securities during the fiscal year ended July 31,
2007.
The
following table gives information about our Common Stock that may be issued
upon
the exercise of options, warrants and rights under all of our equity
compensation plans as of July 31, 2007.
|
|
Number
of Securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average Exercise
price of Outstanding
options, warrants
and rights
|
|
Number
of securities Remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
Plan
Category
|
|
|
|
|
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders:
|
|
|
1,050,000
|
|
$
|
0.38
|
|
|
8,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders:
|
|
|
23,985,542
|
|
$
|
0.33
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,035,542
|
|
$
|
0.33
|
|
|
8,450,000
|
|
Item
6. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
You
should read the following discussion and analysis of our financial condition
and
results of operations in conjunction with our financial statements and related
notes included elsewhere in this report.
Result
of Operations
The
following discussion relates to the two fiscal years ended July 31, 2007. As
disclosed in greater detail elsewhere in this report, we commenced mining
operations and began to receive operating revenues in August 2007, shortly
after
the end of the fiscal year ended July 31, 2007.
Fiscal
year ended July 31, 2007 compared to fiscal year ended July 31,
2006
Net
Loss
Our
net
loss for the fiscal year ended July 31, 2007 was approximately $7,472,000,
an
increase of approximately $2,667,000 or 56% from the fiscal year ended July
31,
2006. As discussed below, the primary reasons for the increase in loss during
the fiscal year ended July 31, 2007 were: 1) an increase in selling, general
and
administrative expenses of approximately $625,000; 2) an increase in
depreciation and amortization expense of approximately $ 852,000;
3) an increase in exploration expenditures of approximately $808,000; 4) an
increase in losses of approximately $644,000 due to the change in fair value
of
our derivative instruments; and 5) an increase in interest expense of
approximately $792,000. These increases in loss were slightly offset by a
decrease in mine expenses of approximately $933,000 due to higher planning
and
engineering costs being expensed in the prior fiscal year. Net loss per share
was $.05 and $.04 for the fiscal year ended July 31, 2007 and 2006,
respectively.
Revenues
We
generated no revenues from mining operations during the fiscal year ended July
31, 2007 and 2006. There were de minimis non-operating revenues during the
fiscal year ended July 31, 2007 and 2006 of approximately $146,000 and
$184,000 ,
respectively. These non-operating revenues primarily represent interest
income.
Mine
Expenses
Mine
expenses during the fiscal year ended July 31, 2007 were $1,008,000, a decrease
of $933,000 or 48% from the fiscal year ended July 31, 2006. Mine expenses
were
lower in 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 fiscal year ended July 31, 2007
were $2,760,000, an increase of approximately $625,000 or 29% from the fiscal
year ended July 31, 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.
Equity
Based Compensation
Equity
based compensation during the fiscal year ended July 31, 2007 was $133,000
as
compared to $89,000 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 fiscal year ended July 31, 2007 and 2006 was approximately
$808,000 and $0, respectively. 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.
Depreciation
and Amortization
Depreciation
and amortization expense during the fiscal year ended July 31, 2007 and 2006
was
approximately $891,000 and $39,000, 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 $876,000 of the amortization expense during
the
fiscal year ended July 31, 2007.
Other
Income and Expense
Our
loss
on the change in fair value of derivative instruments during the fiscal year
ended July 31, 2007 and 2006, was approximately $1,226,000 and $582,000,
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 the second quarter 2006, and was the primary reason for
the decrease in premium on the derivative contracts. The change in fair value
during the fiscal year ended July 31, 2007 reduced the carrying value on these
derivative contracts by approximately $1,226,000, and was reflected as an other
expense during the 2007 period.
Interest
expense was approximately $792,000 for the fiscal year ended July 31, 2007
compared to $0 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 fiscal year ended July 31, 2007, we recorded equity adjustments from foreign
currency translations of approximately $205,000. These translation adjustments
are related to changes in the rates of exchange between the Mexican Peso and
the
US dollar and are included as a component of other comprehensive
income.
Liquidity
and Capital Resources; Plan of Operations
As
of
July 31, 2007, we had working capital of approximately $6,343,000, a decrease
of
$689,000 as of July 31, 2006. Cash
used
in operating activities during the fiscal year ended July 31, 2007 was
approximately $3,663,000, which primarily represents cash costs of our mining
operation at El Chanate during the fiscal year ended July 31, 2007.
Cash
used
in investing activities during the fiscal year ended July 31, 2007, amounted
to
$18,425,000, primarily from the purchase and erection of property, plant and
equipment related to our El Chanate Project. Cash provided by financing
activities during the fiscal year ended July 31, 2007 amounted to $21,367,000,
primarily from proceeds from our Credit Facility of $12,500,000 and
approximately $9,129,000 in proceeds from the sale of common stock and exercise
of warrants. With our recent reserve increase, our
plans
over the next 12 months primarily include: 1) the gradual ramp up of daily
processing rates from 7,500 tonnes per day (tpd) to 10,000 tpd which should
boost our gold production toward 5,000 ounces per month and 60,000 ounces per
year; 2) looking to effectively increase production rates to 12,500 tpd and
improve gold recoveries by conducting further metallurgical test work at our
laboratory facilities at the mine; and 3) possible exploration and/or
acquisitions in northern Mexico. We believe that the initial increase in
production to 10,000 tpd would not require any significant capital investment
since an additional ore crushing and stacking capacity had been factored into
the original design. We are analyzing what steps are necessary to effectively
increase production rates to 100,000 ounces per year. To this end, we have
contacted Golder Engineering to supply EPCM (engineering, procurement and
construction management) services for leach pad expansion and to study the
impact of the planned mining increase. In addition, we are discussing options
available with the crusher manufacturer, Excel Machinery, with regards to adding
an additional secondary crusher into the crushing circuit, to enable the system
to handle increased tonnage. We anticipate that another crusher should move
daily tonnage up closer to 14,000 tpd. The estimated cost to achieve these
increased production rates will be approximately $12,000,000 over a two year
period. Management intends to fund these expansion costs through revenues from
gold sales, obtaining additional bank financing and/or the sale of our
securities; however, we cannot assure that adequate additional funding, if
needed, will be available to fund this expansion activity.
We
commenced mining operations in late March 2007 and achieved gold production
and
revenue from operations in early August 2007. During our first two months,
we
produced approximately 6,850 ounces of gold and 5,222 ounces of silver. Of
this
production, we sold 6,384 ounces of gold for proceeds amounting to approximately
$4,380,000. We believe that our available funds in conjunction with anticipated
revenues from gold sales will be adequate to cover operating activities at
El
Chanate and general and administrative expenses for the life of mine.
January
2007 Private Placements & Warrant Exercises and post fiscal year end 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. The
Warrant issued to each purchaser in the January 2007 placements 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.
We
also
received proceeds of approximately $5,643,000 during the year ended July 31,
2007, from the exercise of an aggregate of 22,203,909 warrants issued in past
private placements. Subsequent to the fiscal year ended July 31, 2007, we
received proceeds of $1,106,000 from the exercise of an aggregate of 3,570,500
warrants issued in past private placements.
Project
Finance Credit Facility
In
August
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. Pursuant to the Credit Facility, MSR and Oro borrowed 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 are required to maintain a
specified amount of cash as a reserve for debt repayment. We believe that we
are
in compliance with these requirements to the extent that they have become
effective.
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 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. During the fiscal
year
ended July 31, 2006, 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. 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
that commenced on October 11, 2006 and terminated on March 31, 2007 and the
second covers the period from March 30, 2007 through 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 our available funds in conjunction with anticipated revenues from
gold sales will be adequate to cover operating activities at El Chanate and
general and administrative expenses for the life of the mine, if we encounter
unexpected problems we may need to raise additional capital. We also may need
to
raise additional capital for significant property acquisitions and/or
exploration activities. 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
just recently started to receive cash flow from operations and, historically,
have relied on external funding sources. While we believe that, with continuing
cash flow from operations, 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. Once we revise our new mine plan based on
the
2007 Report, we will work to extend the permits for mining and processing for
the new life of mine. We received the explosive permit from the government
in
August 2006. This permit, as extended, expires on December 31, 2007 and is
renewable annually.
We
own
properties in Leadville, Colorado for which we have previously 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 was
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 estimated the reclamation costs
for
the El Chanate site to be approximately $2,300,000; however, we are in the
process of determining the impact the increase in proven and probable reserve
tonnage will have on reclamation and remediation costs on a going forward basis.
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 each
mine
site.
Contractual
Obligations as of July 31, 2007
We
occupy
office space in New York City under a non-cancelable operating lease that
commenced on September 1, 2007 and terminates on August 31, 2012. In addition
to
base rent, the lease calls for payment of utilities and other occupancy
costs.
Approximate
future minimum payments under this lease are as follows:
Fiscal
Years Ending July 31,
|
|
|
|
|
|
|
|
2008
|
|
$
|
118,000
|
|
2009
|
|
|
128,000
|
|
2010
|
|
|
128,000
|
|
2011
|
|
|
128,000
|
|
2012
|
|
|
128,000
|
|
2013
|
|
|
11,000
|
|
|
|
|
|
|
|
|
$ |
641,000 |
|
Rent
expense under the previous office lease in New York City was approximately
$66,000 and $63,000 for the years ended July 31, 2007 and 2006,
respectively.
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. 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.
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 and 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 (“In-Process Inventory”)
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 are measured based on assays of the material
fed into the process and the projected recoveries of the respective plants.
In-process inventories are 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 include gold doré and/or gold bullion. Precious metals that
result from our mining and processing activities are 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 value
concentrate inventory at the average cost, including an allocable portion of
refinery support costs and refining depreciation. Costs are added and removed
to
the concentrate inventory based on tons of concentrate and are 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.
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.”
Deferred
Financing Costs
Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.
Intangible
Assets
Purchased
intangible assets consisting of rights of way, easements and net profit
interests are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the units of production method.
It is our policy to assess periodically the carrying amount of our purchased
intangible assets to determine if there has been an impairment to their carrying
value. Impairments of other intangible assets are determined in accordance
with
SFAS 144. There was no impairment at July 31, 2007.
Fair
Value of Financial Instruments
The
carrying value of our financial instruments, including cash and cash
equivalents, loans receivable and accounts payable approximated fair value
because of the short maturity of these instruments.
Revenue
Recognition
Revenue
is recognized, net of treatment and refining charges, from a sale when the
price
is determinable, the product has been delivered, the title has been transferred
to the customer and collection of the sales price is reasonably assured.
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
that commenced on October 11, 2006 and terminated on March 31, 2007 and the
second covers the period from March 30, 2007 through 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.
Item 7. Financial
Statements.
For
the
Financial Statements required by Item 7 see the Financial Statements included
at
the end of this Form 10-KSB.
Item
8. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures.
There
have been no changes in or disagreements with accountants with respect to
accounting and/or financial disclosure.
Item
8A. 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.
Item
8B. Other
Information.
None.
PART
III
Item
9. Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
16(a)
of the Exchange Act.
The
following table sets forth certain information concerning our directors and
executive officers:
|
|
|
|
First
|
|
|
|
|
|
|
Became
|
|
|
Name
|
|
Age
|
|
Director
|
|
Position
|
|
|
|
|
|
|
|
Gifford
A. Dieterle
|
|
75
|
|
9/82
|
|
President,
Treasurer
|
|
|
|
|
|
|
&
Chairman of the Board
|
|
|
|
|
|
|
|
John
Brownlie
|
|
58
|
|
2/07
|
|
Chief
Operating Officer, Director
|
|
|
|
|
|
|
|
Christopher
Chipman
|
|
34
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Jeffrey
W. Pritchard
|
|
49
|
|
1/00
|
|
Director,
Vice President -
|
|
|
|
|
|
|
Investor
Relations, Secretary
|
|
|
|
|
|
|
|
Robert
Roningen
|
|
72
|
|
9/93
|
|
Director,
Senior Vice President,
|
|
|
|
|
|
|
|
Roger
A. Newell
|
|
64
|
|
8/00
|
|
Director
|
|
|
|
|
|
|
|
J.
Scott Hazlitt
|
|
55
|
|
|
|
Vice
President - Mine Development
|
|
|
|
|
|
|
|
Ian
A. Shaw
|
|
67
|
|
3/06
|
|
Director
|
|
|
|
|
|
|
|
John
Postle
|
|
66
|
|
3/06
|
|
Director
|
|
|
|
|
|
|
|
Mark
T. Nesbitt
|
|
62
|
|
3/06
|
|
Director
|
Directors
are elected at the meeting of shareholders called for that purpose and hold
office until the next stockholders meeting called for that purpose or until
their resignation or death. Officers of the corporation are elected by the
directors at meetings called by the directors for its purpose.
GIFFORD
A. DIETERLE, President, Treasurer and Chairman of our Board of Directors. Mr.
Dieterle was appointed President in September 1997 and has been an officer
and
Chairman since 1981. He has a M.S. in Geology obtained from New York University.
From 1977 until July 1993, he was Chairman, Treasurer, and Executive
Vice-President of Franklin Consolidated Mining Company. From 1965 to 1987,
he
was lecturer in geology at the City University of N.Y. (Hunter Division). Mr.
Dieterle has been Secretary-Treasurer of South American Minerals Inc. since
1997
and a director of that company since 1996.
JOHN
BROWNLIE, Chief
Operating Officer and a Director, has worked for us since May 2006 and is in
charge of supervising the construction, start-up and operation of the mine.
Mr.
Brownlie provided team management for mining projects requiring technical,
administrative, political and cultural experience over his 28 year mining
career. From 2000 to 2006, Mr. Brownlie was a consultant providing mining and
mineral related services to various companies including SRK, Oxus Mining plc
and
Cemco Inc. From 1995 to 2000, he was the General Manager for the
Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million tonne per month
heap leach plant which produced over 400,000 ounces of gold per year. From
1988
to 1995, Mr. Brownlie served as the Chief Engineer and General Manager for
Monarch Resources in Venezuela, at both the El Callao Revemin Mill and La
Camorra gold projects. Before that, was a resident of South Africa and
associated with numerous mineral projects across Africa. He is also a mechanical
engineer and fluent in Spanish.
CHRISTOPHER
M. CHIPMAN, Chief Financial Officer. Mr. Chipman has been our Chief Financial
Officer since March 1, 2006. Since November 2000, Mr. Chipman has been a
managing member of Chipman & Chipman, LLC, a consulting firm that assists
public companies with the preparation of periodic reports required to be filed
with the Securities and Exchange Commission and compliance with Section 404
of
the Sarbanes Oxley Act of 2002. The firm also provides outsourced financial
resources to clients assisting in financial reporting, forecasting and
accounting services. Mr. Chipman is a CPA and, from 1996 to 1998, he was a
senior accountant with the accounting firm of Grant Thornton LLP. Mr. Chipman
was the Controller of Frontline Solutions, Inc., a software company (March
2000
to November 2000); a Senior Financial Analyst for GlaxoSmithKline (1998-2000);
and an Audit Examiner for Wachovia Corporation (1994-1996). He received a B.A.
in Economics from Ursinus College in 1994. He is a member of the American and
Pennsylvania Institute of Certified Public Accountants. Mr. Chipman devotes
approximately 50% of his time to our business.
JEFFREY
W. PRITCHARD, Vice President - Investor Relations, Secretary and Director,
has
worked for us since 1996. He has been in the marketing/public relations field
since receiving a Bachelor’s degree from the State University of New York in
1979. Mr. Pritchard has served as the Director of Marketing for the New Jersey
Devils (1987-1990) and as the Director of Sales for the New York Islanders
(1985-1987). He also was an Executive Vice President with Long Island based
Performance Network, a marketing and publishing concern from 1990 through
1995.
ROBERT
RONINGEN, Senior Vice President and Director, has been engaged in the practice
of law as a sole practitioner and is a self-employed consultant geophysicist
in
Duluth, Minnesota. Mr. Roningen served as our Secretary until February 2007.
From 1988 to August 1993, he was an officer and director of Franklin
Consolidated Mining Company, Inc. He graduated from the University of Minnesota
in 1957 with a B.A. in geology and in 1962 with a degree in Law.
ROGER
A.
NEWELL, Director, worked for us from 2000 to September 2007. He was our Vice
President - Development until September 2007. Since October 2007, Mr. Newell
has
been an Executive Vice President of Kilimanjaro Mining Company Ltd., a private
Nevada based company involved in uranium and gold exploration in Tanzania,
Africa. From 1974 through 1977, he was a geologist with Kennecott Copper
Corporation. From 1977 through 1989, he served as Exploration Manager/Senior
Geologist for the Newmont Mining Corporation and, from 1989 through 1995, was
the Exploration Manager for Gold Fields Mining Company. He was Vice President
Development, for Western Exploration Company from 1997 through 2000. Since
1995,
he has been a senior consultant in the Minerals Advisory Group LLC, Tucson,
Arizona, a company that provides technical and engineering advice to clients
regarding mineral projects. He has been self-employed as a geologist since
2001.
He is a Fellow in the Society of Economic Geologists and a Past President of
that Society’s Foundation. . He has a M.Sc. from the Colorado School of Mines
and a Ph.D. in mining and mineral exploration from Stanford
University.
J.
SCOTT
HAZLITT, Vice President - Mine Development, has been in the mining business
since 1974. Since 2001, he has focused on development of our El Chanate
concessions. Currently, he is involved in mine expansion plans and corporate
development. He has worked primarily in reserves, feasibility, development
and mine operations. Mr. Hazlitt was a field geologist for ARCO Syncrude
Division at their CB oil Shale project in 1974 and 1975. He was a contract
geologist for Pioneer Uravan and others from 1975 to 1977. He was a mine
geologist for Cotter Corporation in 1978 and 1979, and was a mine geologist
for
ASARCO from 1979 to 1984. He served as Vice President of Exploration for Mallon
Minerals from 1984 to 1988. From 1988 to 1992, Mr. Hazlitt was a project
geologist and Mine Superintendent for the Lincoln development project. From
1992
to 1995, he was self-employed as a consulting mining geologist in California
and
Nevada. He was Mine Operations Chief Geologist for Getchell Gold from 1995
to
1999. His work experience has included precious metals, base metals, uranium,
and oil shale. Mr. Hazlitt served as mine manager at our Hopemore Mine in
Leadville, Colorado starting in November 1999. His highest educational degree
is
Master of Science from Colorado State University. He is a registered geologist
in the state of California.
IAN
A.
SHAW is a member of our Board of Directors and the Board’s Audit and
Compensation Committees. Mr. Shaw has over 32 years of experience in the
mining industry. He has been Managing Director of Shaw & Associates since
1993. Shaw & Associates is a corporate services consulting firm
specializing in corporate finance, regulatory reporting and compliance with
clients that are typically public companies in the resource industry. In the
course of providing consulting services he has accepted positions as an officer
or director with number of his clients. Positions he currently holds include
Director, since 1994, of Metallica Resources Inc., a TSX listed corporation
with
a gold mine in Mexico, and exploration properties in Chile and Alaska; Chief
Financial Officer, since 1995, of Pelangio Mines Inc., a TSX listed
corporation with an interest in a gold property in Canada and gold exploration
properties in Ghana; Vice President, Finance and CFO, since May 2005, of Unor
Inc., a TSX listed company with uranium exploration properties in Canada;
and Chief Financial Officer, since January 2007, of Olivut Resources Ltd.,
a TSX
listed corporation with diamond exploration properties in Canada. Mr. Shaw
is a
Chartered Accountant and received a B. Comm. from Trinity College at the
University of Toronto in 1964.
JOHN
POSTLE is a member of our Board of Directors and the Board’s Audit and
Compensation Committees. He is a Consulting Mining Engineer associated
with Scott Wilson Roscoe Postle Associates Inc. In 1985 he was a founding
partner of Roscoe Postle Associates Inc. which later merged with Scott Wilson
Group Plc. Mr. Postle provides mining consulting services to a number of
international financial institutions, corporations, utilities and law
firms. He worked for Cominco Ltd (1965-1970), Falconbridge Ltd (1970-1975)
and D.S. Robertson and Associates (1976-1985) and has worked at a number of
open
pit and underground mining operations in both operating and planning
capacities. Mr. Postle is a Past Chairman of the Mineral Economics
Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”),
and was appointed a Distinguished Lecturer of the CIM in 1991. In 1997, he
was awarded the CIM Robert Elver Mineral Economics Award. He is currently
Chairman of a CIM Standing Committee on Ore Reserve Definitions. Mr. Postle
is a
director of Strait Gold Corporation, a Canadian publicly traded company, and
serves as a member of that company’s audit and disclosure committees. Mr.
Postle has a B.A.Sc. Degree in Mining Engineering from the University of British
Columbia in 1965 and a M.Sc. Degree in Earth Sciences from Stanford University
in 1968.”
MARK
T.
NESBITT is a member of our Board of Directors and the Board’s Audit and
Compensation Committees. Since 1988, he has been a natural resources attorney
in
Denver, Colorado specializing in domestic and international mining transactions,
agreements, negotiations, title due diligence, corporate and general business
counsel. Mr. Nesbitt has been an Adjunct Professor at the University of Denver
School of Law's since 2001, is an active member of the Rocky Mountain Mineral
Law Foundation, having served as a Trustee from 1987 to 1993, and from 2003
to
2006, Co-chairman of the Mining Sessions at the Foundation’s international
natural resource institute in Buenos Aires, Argentina in 2007, Co-chairman
of
the Foundation's Mining Law and Investment in Latin America institute in Lima,
Peru in 2003, and Chairman of the same institute in 2003, and Chairman of the
Foundation's first Land and Permitting Special Institute in 1994. He also has
served continuously over the years on the Foundation's Special Institutes
Committee, Long Range Planning Committee, and numerous other committees. Mr.
Nesbitt is a member of the International, American, Colorado and Denver Bar
Associations, Rocky Mountain Mineral Law Foundation, International Mining
Professionals Society (Treasurer since 2000), and the Colorado Mining
Association. He is also a former Director of the Colorado Mining Association
and
past President of the Rocky Mountain Association of Mineral Landmen. He received
a B.S. degree in Geology from Washington State University in 1968 and a J.D.
from Gonzaga University School of Law in 1975.
Jack
V.
Everett, resigned as our Vice President of Exploration and a member of our
Board
of Directors on June 6, 2007. On September 10, 2007, Roger A. Newell resigned
as
our Vice President of Development. He continues to serve as a member of our
Board of Directors.
Compliance
with Section 16(a) of The Securities Exchange Act of 1934
To
our
knowledge, during the fiscal year ended July 31, 2007, based solely on a review
of such materials as are required by the Securities and Exchange Commission,
no
officer, director or beneficial holder of more than ten percent of our issued
and outstanding shares of Common Stock failed to timely file with the Securities
and Exchange Commission any form or report required to be so filed pursuant
to
Section 16(a) of the Securities Exchange Act of 1934, except that, Robert
Roningen, filed Forms 4 late for an aggregate of 24 transactions, Jack Everett,
a former Vice President, filed a Form 4 late for an aggregate of four
transactions, Jeffrey Pritchard filed a Form 4 late for one transaction and
Scott Hazlitt filed a Form 4 late for one transaction.
Meetings
And Committees Of The Board
Our
Board
of Directors is responsible for the management and direction of our company
and
for establishing broad corporate policies.
A
primary responsibility of the Board is to provide effective governance
over our
affairs for the benefit of our stockholders. In all actions taken by the Board,
the Directors are expected to exercise their business judgment in what they
reasonably believe to be the best interests of our company. In discharging
that
obligation, Directors may rely on the honesty and integrity of our senior
executives and our outside advisors and auditors.
The
Board
of Directors and the Audit Committee of the Board meet periodically throughout
the year to receive and discuss operating and financial reports presented by
our
executive officers as reports by experts and other advisors. The Board held
five
meetings during the fiscal year ended July 31, 2007 in person and
telephonically, and acted by unanimous written consent on seven occasions.
All
directors attended 75% or more of the aggregate meetings.
In
fiscal
2007, the Audit Committee, consisting of all of the non-employee members of
the
Board of Directors, met on four occasions. Representatives of our auditor were
in attendance at one meeting without management present.
Our
Board
of Directors has no standing nominating committee because this function is
handled by the Board of Directors. Nominees to the Board of Directors are
selected by the Board of Directors based on current business and industry
knowledge as well as general business knowledge.
Audit
Committee and Audit Committee Expert.
The
Audit
Committee of our Board of Directors consists of Ian A. Shaw, Committee Chairman,
John Postle and Mark T. Nesbitt. The Board of Directors has determined that
all
three members are
independent directors as (i) defined in Rule 10A-3(b)(1)(ii) under the
Securities Exchange Act of 1934 (the “Exchange Act”) and (ii) under Section
121B(2)(a) of the AMEX Company Guide (although our securities are not listed
on
the American Stock Exchange or any other national exchange). The
Audit
Committee met four times telephonically in fiscal 2007. All committee members
were present at the meetings.
Mr.
Shaw
serves
as the financial expert as defined in Securities and Exchange Commission rules
on the committee. We believe Messrs. Shaw, Postle and Nesbitt to be independent
of management and free of any relationship that would interfere with their
exercise of independent judgment as members of this committee. The principal
functions of the Audit Committee are to (i) assist the Board in fulfilling
its
oversight responsibility relating to the annual independent audit of our
consolidated financial statements, the engagement of the independent registered
public accounting firm and the evaluation of the independent registered public
accounting firm’s qualifications, independence and performance (ii) prepare the
reports or statements as may be required by the securities laws, (iii) assist
the Board in fulfilling its oversight responsibility relating to the integrity
of our financial statements and financial reporting process and our system
of
internal accounting and financial controls, (iv) discuss the financial
statements and reports with management, including any significant adjustments,
management judgments and estimates, new accounting policies and disagreements
with management, and (vi) review disclosures by independent accountants
concerning relationships with us and the performance of our independent
accountants.
Compensation
Committee.
In
May
2007, our Board of Directors established a Compensation Committee consisting
of
Messrs. Shaw, Postle and Nesbitt, our independent directors. The principal
functions of the Compensation Committee are to advise and makes recommendations
to our Board of Directors regarding matters relating to the compensation of
directors, officers and senior management. The Compensation Committee met once
telephonically in fiscal 2007. All committee members were present at the
meetings.
Communication
with the Board of Directors
Interested
parties wishing to contact the Board of Directors of the Company may do so
by
writing to the following address: Board of Directors, 76
Beaver
Street, 14th Floor, New York, NY 10005, Attn: Jeffrey W. Pritchard,
Secretary.
All
letters received will be categorized and processed by Mr. Pritchard and then
forwarded to the Company’s Board or Directors.
Changes
to Director nominee procedures
As
noted
in last year’s report, in August 2006, we amended our bylaws to require
stockholders that seek to bring business before a meeting of stockholders,
including nominations of candidates for election as directors, to provide notice
of such business to us not less than 90 days nor more than 120 days prior to
the
date of the meeting (provided that, in the event that public disclosure of
the
meeting date is first made less than 120 days prior to the meeting date, such
notice must be received by us not later than the close of business on the tenth
day following such public disclosure). With regard to nominations of persons
for
election to the Board of Directors, the notice must set forth (a) as to each
proposed nominee, (i) the name, age, business address and residence address
of
the nominee, (ii) the principal occupation or employment of the nominee, (iii)
the number of our shares owned beneficially or of record by the nominee and
(iv)
any other information relating to the nominee that would be required to be
disclosed in a proxy statement to be made in connection with solicitations
of
proxies for election of directors pursuant to Section 14 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); and (b) as to the
Stockholder giving the notice, (i) the name and record address of such
Stockholder, (ii) the number of our shares owned beneficially or of record
by
such Stockholder, (iii) a description of all arrangements or understandings
between such Stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to
be
made by such Stockholder, (iv) a representation that such Stockholder intends
to
appear in person or by proxy at the meeting to nominate the persons named in
its
notice and (v) any other information relating to such Stockholder that would
be
required to be disclosed in a proxy statement to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of
the
Exchange Act. Such notice must be accompanied by a written consent of each
proposed nominee to being named as a nominee and to serve as a director
if
elected.
Code
of Ethics
We
adopted a Code of Ethics that applies to our officers, directors and employees,
including our principal executive officer, principal financial officer and
principal accounting officer. The
Code
of Ethics is publicly available in the Management section on our Website at
www.capitalgoldcorp.com. If we make any substantive amendments to this code
of
ethics or grant any waiver, including any implicit waiver, from a provision
of
the code to our chief executive officer, principal financial officer or
principal accounting officer, we will disclose the nature of such amendment
or
waiver on that Website or in a report on Form 8-K.
Item
10. Executive
Compensation
Summary
Compensation Table
The
following table sets forth the total compensation paid to or earned by our
named
executive officers, as that term is defined in Item 402(a)(2) of Regulation
S-B
as of our fiscal year ended July 31, 2007:
Name
&
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
(2)
|
|
Option
Awards
(1)
|
|
Non-Equity
Incentive
Plan
Compen-
sation
|
|
Non-
qualified
Deferred
Compen-
sation
Earnings
|
|
All
Other
Compen-
sation
($)
|
|
Total
($)
|
|
Gifford
A. Dieterle,
Director,
Chairman, Treasurer and CEO
|
|
|
2007
|
|
$
|
180,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Brownlie,
Director
and COO
|
|
|
2007
|
|
$
|
150,000
|
|
$
|
-
|
|
$
|
225,000
|
|
$
|
34,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
409,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
M. Chipman,
CFO
|
|
|
2007
|
|
$
|
118,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
79,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
197,000
|
|
(1)
|
Based
on Black Scholes Pricing Model of valuing options. Total fair value
of
option awards granted in 2007 was $113,000.
|
|
|
(2)
|
Issuance
of shares based on the fair market value of the Company’s common stock on
the date of grant.
|
Outstanding
Equity Awards At Fiscal Year-End
The
following table provides information concerning unexercised options for each
of
our named executive officers, as that term is defined in Item 402(a)(2) of
Regulation S-B as of our fiscal year ended July 31, 2007:
Name
and Principal
Position
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gifford
A. Dieterle, Director,
Chairman, Treasurer and CEO
|
|
|
250,000
|
|
|
-
|
|
|
-
|
|
$
|
0.32
|
|
|
7/31/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Brownlie, Director and COO
|
|
|
250,000
|
|
|
-
|
|
|
-
|
|
$
|
0.36
|
|
|
12/13/08
|
|
|
|
|
200,000
|
|
|
150,000
|
|
|
150,000
|
|
$
|
0.32
|
|
|
5/12/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
M. Chipman, CFO
|
|
|
50,000
|
|
|
-
|
|
|
-
|
|
$
|
0.34
|
|
|
3/1/08
|
|
|
|
|
100,000
|
|
|
-
|
|
|
-
|
|
$
|
0.36
|
|
|
12/13/08
|
|
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
$
|
0.38
|
|
|
6/13/09
|
|
Director
Compensation
The
following table sets forth the compensation paid to our directors for the fiscal
year ended July 31, 2007.
Name
|
|
Fees
Earned
or
Paid
in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
(1)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
Ian
A. Shaw, Director
|
|
$
|
12,000
|
|
|
-
|
|
$
|
13,239
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
25,239
|
|
John
Postle, Director
|
|
$
|
12,000
|
|
|
-
|
|
$
|
13,239
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
25,239
|
|
Mark
T. Nesbitt, Director
|
|
$
|
12,000
|
|
|
-
|
|
$
|
13,239
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
25,239
|
|
Robert
Roningen, Director
|
|
$
|
24,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
24,000
|
|
Notes:
|
|
(1)
Based on Black Scholes Pricing Model of valuing options. Total fair
value
of option awards granted in 2007 was
$39,717.
|
During
the fiscal year ended July 31, 2007, our Independent Directors each received
a
fee of $1,000 per month. Robert Roningen, director, received a fee of $2,000
per
month for legal and consulting services during the fiscal year ended July 31,
2007. Directors are not otherwise compensated for acting in their capacity
as
Directors. Directors are reimbursed for their accountable expenses incurred
in
attending meetings and conducting their duties. On August 29, 2007, we increased
directors’ compensation to our independent directors and to Robert Roningen by
$1,000 per month.
Employment
and Change of Control Agreements
Effective
July 31, 2006, we entered into employment agreements with the following
executive officers: Gifford A. Dieterle, our President and Treasurer, Roger
A.
Newell, our then Vice President of Development, Jack V. Everett, our then Vice
President of Exploration, and Jeffrey W. Pritchard, our Vice President of
Investor Relations. Agreements with John Brownlie, our Chief Operating Officer,
and Christopher Chipman, our Chief Financial Officer, are discussed
below.
The
agreements run for a period of three years and automatically renew for
successive one-year periods unless we or the executive provides the other party
with written notice of our or his intent not to renew at least 30 days prior
to
the expiration of the then current employment period.
Under
the
original agreements, Mr. Dieterle is entitled to a base annual salary of at
least $180,000 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 our board of directors. In addition, each
of
the executives received two year options to purchase an aggregate of 250,000
shares of our common stock at an exercise price of $0.32 per share (the closing
price on July 31, 2006).
On
August
29, 2007, based on the recommendation of the Compensation Committee of our
Board
of Directors after review of an Executive Compensation Market Analysis and
Report by an independent human
resource professional services firm, we increased the salaries of our executive
officers to be commensurate with industry standards. The new salaries are as
follows: Gifford A. Dieterle, President,
Treasurer and Chairman of the Board, $250,000; John Brownlie, Chief Operating
Officer, $225,000; Christopher Chipman, Chief Financial Officer, $175,000
(consulting fee); Jeffrey W. Pritchard, Vice President - Investor Relations
and
Secretary, $195,000; and J. Scott Hazlitt, Vice President - Mine Development,
$135,000. The salary increase for Mr. Brownlie and the consulting fee increase
for Mr. Chipman were retroactive to May 1, 2007 and the salary increase for
Mr.
Pritchard was retroactive to August 1, 2007.
We
have
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 us or our reputation.
In
the event that we terminate 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 us of any of the terms
of the agreement, upon 30 days’ prior written notice. In the event of a claim of
material breach by us 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 our
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 us. Severance
payments cannot exceed 12
month’s salary.
In
conjunction with the employment agreements, our board of directors deeming
it
essential to the best interests of our 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 our company and our stockholders, determined to reinforce
and encourage the continued attention and dedication of members of our
management to their engagement without distraction in the face of potentially
disturbing circumstances arising from the possibility of a change in control
of
our company, we entered into identical agreements regarding change in control
with the executives. Each
of
the agreements regarding change in control continues through December 31, 2009
and extends automatically to the third anniversary thereof unless we give 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
us
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 us 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.
In
May
2006, we entered into an employment agreement with John Brownlie, pursuant
to
which Mr. Brownlie originally served as Vice President Operations. Mr. Brownlie
became our Chief Operating Officer in February 2007. Mr. Brownlie now receives
a
base annual salary of $225,000 and is entitled to annual bonuses. Upon his
employment, he received options to purchase an aggregate of 200,000 shares
of
our common stock at an exercise price of $.32 per share. 50,000 options vested
immediately and the balance vest upon our achieving “Economic Completion” as
that term is defined in the loan agreement with Standard Bank plc (when we
have
commenced mining operations and have 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. We 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 us
that is not timely cured, upon 30 days notice. In the event that we terminate
him without cause or he terminates due to our breach, he will be entitled to
certain severance payments.
On
September 14, 2007, we entered into a Second Amended Engagement Agreement (the
“Engagement Agreement”) with Christopher Chipman, our Chief Financial Officer,
effective May 1, 2007. The Engagement Agreement supersedes and replaces Mr.
Chipman’s prior agreement that expired on August 31, 2007. Pursuant to the
Engagement Agreement, Mr. Chipman is engaged as our Chief Financial Officer
and
devotes approximately 85% of his time to our business. He receives a monthly
fee
of $14,583. The Engagement Agreement expires on August 31, 2009 and
automatically renews for successive one-year periods, unless either party gives
at least 30 days prior notice to the other party of its intent not to renew.
Mr.
Chipman can terminate the Engagement Agreement on 60 days prior notice. We
can
terminate the Engagement Agreement without cause on 30 days prior notice and
for
cause (as defined in the Engagement Agreement). The Engagement Agreement also
terminates upon Mr. Chipman’s disability (as defined in the Engagement
Agreement) or death. In the event that we terminate the Engagement Agreement
without cause, Mr. Chipman will be entitled to a cash termination payment equal
to his Annual Fee in effect upon the date of termination, payable in equal
monthly installments beginning in the month following his termination. In the
event the Engagement Agreement is terminated by Mr. Chipman at his election
or
due to his death or disability, Mr. Chipman will be entitled to the fees
otherwise due and payable to him through the last day of the month in which
such
termination occurs.
In
conjunction with Engagement Agreement, we entered into a change of control
agreement similar to the agreements entered into with our other executive
officers. The change of control agreement continues through August 31, 2009
and
extends automatically to the next anniversary thereof unless we give notice
to
Mr. Chipman 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 change of control agreement, the term of the agreement will
continue through the anniversary of the date on which the change in control
occurred. The change of control agreement entitles Mr. Chipman to change of
control benefits, as defined in the agreement and summarized below, upon his
termination of employment with us during a potential change in control (as
defined in the agreement) or after a change in control (as defined in the
agreement) when his termination is caused (1) by us for any reason other than
permanent disability or cause, as defined in the agreement (2) by Mr. Chipman
for good reason (as defined in the agreement) or, (3) by Mr. Chipman 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. Mr. Chipman would receive a lump sum
cash payment equal to three times his base annual fee plus three times his
bonus
award for the year immediately preceding the year of the change in control,
and
outplacement benefits. The change of control agreement also provides that Mr.
Chipman 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.
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 our common stock at an exercise price of $.34 per share. These options
are now fully vested.
Please
also see “Part
III, Item 12. Certain Relationships and Related Transactions” below.
Item
11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
following table sets forth as of October 1,
2007,
the
number and percentage of outstanding shares of Common Stock beneficially owned
by:
|
·
|
Each
person, individually or as a group, known to us to be deemed the
beneficial owners of five percent or more of our issued and outstanding
Common Stock;
|
|
·
|
each
of our Directors and the Named Executives;
and
|
|
·
|
all
of our officers and Directors as a group.
|
As
of the
foregoing date, there were no other persons, individually or as a group, known
to us to be deemed the beneficial owners of five percent or more of the issued
and outstanding Common Stock.
This
table is based upon information supplied by Schedules 13D and 13G, if any,
filed
with the Securities and Exchange Commission, and information obtained from
our
directors and named executives. For purposes of this table, a person or group
of
persons is deemed to have “beneficial ownership” of any shares of Common Stock
which such person has the right to acquire within 60 days of October
1,
2007.
For
purposes of computing the percentage of outstanding shares of Common Stock
held
by each person or group of persons named in the table, any security which such
person or persons has or have the right to acquire within such date is deemed
to
be outstanding but is not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
we
believe, based on information supplied by such persons, that the persons named
in this table have sole voting and investment power with respect to all shares
Common Stock which they beneficially own. Unless otherwise noted, the address
of
each of the principal stockholders is care of us at 76 Beaver Street,
14th
floor,
New York, NY10005.
Name
and Address of Beneficial Owner
|
|
Amount
& Nature of Beneficial Ownership
|
|
Approximate
Percentage(1)
|
|
|
|
|
|
|
|
Gifford
A. Dieterle*
|
|
|
2,762,455
|
(2)
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Robert
Roningen*
|
|
|
1,718,750
|
(3)
|
|
1.0
|
%
|
2955
Strand Road
|
|
|
|
|
|
|
|
Duluth,
MN 55804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
W. Pritchard*
|
|
|
1,006,354
|
(2)
|
|
**
|
|
|
|
|
|
|
|
|
|
Christopher
Chipman*
|
|
|
650,000
|
(2)
|
|
**
|
|
4014
Redwing Lane
|
|
|
|
|
|
|
|
Audubon,
PA 19407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger
A Newell*
|
|
|
1,577,273
|
(2)
|
|
**
|
|
1781
South Larkspur Drive
|
|
|
|
|
|
|
|
Golden,
CO 80401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Brownlie*
|
|
|
|
|
|
|
|
6040
Puma Ridge
|
|
|
|
|
|
|
|
Littleton,
CO 80124
|
|
|
950,000
|
(2)
|
|
**
|
|
|
|
|
|
|
|
|
|
Scott
Hazlitt*
|
|
|
1,025,000
|
|
|
**
|
|
9428
W. Highway 50
|
|
|
|
|
|
|
|
Salida.
CO 81201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ian
A. Shaw*
|
|
|
100,000
|
(2)
|
|
**
|
|
98
Crimson Millway
|
|
|
|
|
|
|
|
Toronto,
Ontario M2L IT6
|
|
|
|
|
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Postle*
|
|
|
100,000
|
(2)
|
|
**
|
|
2169
Constance Drive
|
|
|
|
|
|
|
|
Oakville
Ontario
|
|
|
|
|
|
|
|
Canada
L6J 5l2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
T. Nesbitt*
|
|
|
141,666
|
(2)(4)
|
|
**
|
|
1580
Lincoln St., Ste. 700
|
|
|
|
|
|
|
|
Denver
CO 80203-1501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
Precious Metal Fund
|
|
|
12,500,000
|
(5)
|
|
7.2
|
%
|
c/o
Banque Cantonale Vaoudoise
|
|
|
|
|
|
|
|
Place
St-Francois 14
|
|
|
|
|
|
|
|
1003
Lausanne, Switzerland
|
|
|
|
|
|
|
|
RAB
Special Situations
|
|
|
|
|
|
|
|
(Master)
Fund Limited
|
|
|
12,648,552
|
(6)
|
|
7.4
|
%
|
1
Adam Street
|
|
|
|
|
|
|
|
London,
WC2N 6LE, UK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPGP
|
|
|
20,270,000
|
(7)
|
|
11.8
|
%
|
17,
Avenue Matignon
|
|
|
|
|
|
|
|
75008
Paris, France
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
Bank PLC
|
|
|
15,750,000
|
(8)
|
|
8.5
|
%
|
320
Park Avenue
|
|
|
|
|
|
|
|
New
York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Van
Eck International Investors
|
|
|
10,000,000
|
(9)
|
|
5.8
|
%
|
Gold
Fund
|
|
|
|
|
|
|
|
99
Park Avenue
|
|
|
|
|
|
|
|
New
York, NY 10016
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
Van
Eck Long/Short Gold
|
|
|
|
|
|
|
|
Portfolio
Ltd.
|
|
|
|
|
|
|
|
Ogier
Fiduciary Services
|
|
|
|
|
|
|
|
PO
box 1234
|
|
|
|
|
|
|
|
Queensgate
House
|
|
|
|
|
|
|
|
South
Church Street
|
|
|
|
|
|
|
|
Georgetown
|
|
|
|
|
|
|
|
Grand
Cayman, Cayman Islands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Officers and
|
|
|
|
|
|
|
|
Directors
as a
|
|
|
|
|
|
|
|
Group
(10 persons)
|
|
|
10,031,498
|
(2)(3)(4)
|
|
5.8
|
%
|
*
Officer
and/or Director of Capital Gold.
** Less
than
1%.
(1) |
Based
upon 171,743,648 shares issued and outstanding as of October 12,
2007.
|
(2) |
For
Messrs. Dieterle, Pritchard, Chipman, Newell, Brownlie, Shaw, Postle
and
Nesbitt includes, respectively, 250,000 shares, 250,000 shares, 650,000
shares, 250,000 share, 450,000 shares, 100,000 shares, 100,000 shares
and
100,000 shares issuable upon exercise of options.
|
(3) |
Represents
shares owned by Mr. Roningen’s wife. All of the foregoing shares are
pledged as collateral for payment of a bank
note.
|
(4) |
Includes
shares owned jointly with his wife.
|
(5) |
Includes
2,500,000 shares issuable upon exercise of warrants issued in
the January
2007 Private Placements. The securities are held of record by Banque
Cantonale Vaudoise (as custodian). We have been advised that FidFund
Management SA is the Fund Manager for Strategic Precious Metal Fund
and
that various persons at the Fund Manager, including its directors,
Christian Piguet, Gino Leonardi, Ariane Ischi, Claudio Müller and Herzig
Steve, share dispositive and voting power over the shares held by
Strategic Precious Metal Fund.
|
(6) |
The
shares are held of record by Credit Suisse First Boston LLC. We have
been
advised that William P. Richards is the Fund Manager for RAB Special
Situations (Master) Fund Limited, with dispositive and voting power
over
the shares held by RAB Special Situations (Master) Fund Limited.
|
(7) |
We
have been advised that Xavier Roulet, is a natural person with voting
and
investment control over shares of our common stock beneficially owned
by
SPGP.
|
(8) |
Includes
shares issuable upon exercise of warrants to purchase an aggregate
of
13,600,000 shares. We have been advised that Standard Bank PLC’s directors
and senior management are natural persons with voting and investment
control over shares of our common stock beneficially owned by Standard
Bank PLC.
|
(9) |
Represents
shares owned by the listed stockholders. Separately, the stockholders
do
not beneficially own in excess of 5% of our outstanding shares of
Common
Stock. However, both stockholders have identified Joseph Foster as
a
natural person with voting and investment control over shares of
our
common stock beneficially owned by the stockholders. Mr. Foster is
the
portfolio manager for Van Eck Associates Corporation and Van Eck
Absolute
Return Advisers Corp., the investment advisors for, respectively,
Van Eck
International Investors Gold Fund and Van Eck Long/Short Gold Portfolio
Ltd.
|
Item
12. Certain Relationships and Related Transactions.
In
January 2006, we extended the following stock options through January 3, 2007,
all of which were exercisable at $0.05 per share: Messrs. Dieterle - 1,050,000
shares; Roningen - 500,000 shares; Pritchard - 327,727 shares; Newell - 500,000
shares; and Hazlitt - 25,000 shares. These options were exercised in 2007 for
aggregate gross proceeds of $122,000.
Upon
their engagement with us, we issued 50,000 two year options to Christopher
Chipman, our Chief Financial Officer, (March 2006) and 200,000 two year options
to John Brownlie, our Chief Operating Officer, (May 2006). Mr. Chipman’s options
are exercisable at $.34
per
share and are now fully vested. Mr.
Brownlie’s options are exercisable at $.32
per
share. 50,000 of Mr. Brownlie’s options vested upon issuance and the balance
vest upon our achieving “Economic Completion” as that term is defined in the
loan agreement with Standard Bank plc.
On
November 30, 2006, our board of directors granted 100,000 common stock options
to each of John Postle, Ian A. Shaw and Mark T. Nesbitt, our independent
directors. The options are to purchase shares of our 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. We 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, we issued two year options to purchase our common stock
at an
exercise price of $0.36 per share to Mr. Brownlie and Mr. Chipman. These options
are for the purchase of 250,000 shares and 100,000 shares, respectively.
We
utilized the Black-Scholes method to fair value the 350,000 options received
by
these individuals and recorded approximately $48,000 as stock based compensation
expense.
On
March
22, 2007, we issued 500,000 shares of common stock to Mr. Brownlie 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.
In
May
2007, we issued an aggregate of 620,455 shares upon the exercise of options
by
our officers and directors for gross proceeds of $ 137,000
as follows: 70,455 shares to Gifford A. Dieterle, 50,000 shares to Jeffrey
W.
Pritchard, and 250,000 shares each to Roger A. Newell and the wife of Robert
Roningen.
On
June
13, 2007, we issued two year options to purchase our common stock at an exercise
price of $0.384 per share to Mr. Chipman . These options are for the purchase
of
500,000 shares and were issued under the 2006 Equity-Incentive Plan. We utilized
the Black-Scholes Method to fair value these options and recorded approximately
$65,000 as equity based compensation expense.
During
the years ended July 31, 2006, we paid Roger Newell, our V.P. Development,
$68,500 for professional geologist and management services rendered to us.
During the years ended July 31, 2006, we paid Jack V. Everett, our V.P.
Exploration, consulting fees of $88,500. During the years ended July 31, 2007
and 2006, we paid Robert Roningen, our Senior Vice President, legal and
consulting fees of $24,000 and $8,000, respectively.
We
utilize Caborca Industrial S.A. de C.V., a Mexican corporation 100% owned by
Messrs. Dieterle and Pritchard, two of our 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 us for these
services at cost. Mining expenses charged by it amounted to approximately
$702,000 and $122,000 for the year ended July 31, 2007 and 2006 and eliminate
upon consolidation.
Item
13. Exhibits.
Exhibits
|
3.1
|
|
Certificate
of Incorporation of Company.(20)
|
|
3.2
|
|
Amendments
to Certificate of Incorporation of
Company.(17)
|
|
3.3
|
|
Certificate
of Merger (Delaware) (which amends our Certificate of
Incorporation)(20)
|
|
3.4
|
|
Amended
and Restated By-Laws of Company(14)
|
|
4.1 |
|
Specimen certificate representing our Common
Stock.(8) |
|
4.2
|
|
Form
of Warrant for Common Stock of the Company issued in February 2005
private
placement.(7)
|
|
4.3
|
|
Form
of Warrant for Common Stock of the Company issued to Standard
Bank.(9)
|
|
4.4
|
|
Form
of Warrant for Common Stock of the Company issued in February and
March
2006 private placement.(13)
|
|
4.5
|
|
Form
of Warrant for Common Stock of the Company issued in the January
2007
private placement.(16)
|
|
4.6
|
|
Form
of Placement Agent Warrant for Common Stock of the Company issued
in the
January 2007 private placement.(16)
|
|
10.2 |
|
Stock Purchase Option Agreement from AngloGold
(2) |
|
10.3 |
|
Letter of Intent with International Northair Mines
Ltd.
(2) |
|
10.4
|
|
March
30, 2002 Minera Chanate Stock Purchase and Sale and Security Agreement
(Sale by us and Holding of all of the stock of Minera Chanate) (In
Spanish).(3)
|
|
10.5
|
|
English
summary of March 30, 2002 Minera Chanate Stock Purchase and Sale
and
Security Agreement.(3)
|
|
10.6 |
|
Agreement between Santa Rita and Grupo Minero
FG.(4) |
|
10.7 |
|
Amendment to Agreement between Santa Rita and Grupo
Minero FG.(5) |
|
10.8 |
|
Termination Agreement between Santa Rita and Grupo
Minero
FG.(6) |
|
10.9 |
|
English summary of El Charro agreement.
(10) |
|
10.10 |
|
Plan and agreement of merger (reincorporation).
(11) |
|
10.11 |
|
Contract between MSR and Sinergia Obras Civiles
y
Mineras, S.A. de C.V.(12) |
|
10.12
|
|
Amendment
to Contract between MSR and Sinergia Obras Civiles y Mineras, S.A.
de C.V.
(18)
|
|
10.13
|
|
Chipman
Second Amended Engagement Agreement.
|
|
10.14
|
|
Employment
Agreement with John Brownlie. (15)
|
|
10.15
|
|
June
1, 2006 EPCM agreement between MSR and a Mexican subsidiary of M3
Engineering & Technology Corporation
(15)
|
|
10.16
|
|
Credit
Agreement dated August 15, 2006 among MSR and Oro, as the borrowers,
the
Company, as the guarantor, and Standard Bank PLC, as the lender and
the
offshore account holder. (14)
|
|
10.17
|
|
Employment
Agreement with Gifford A. Dieterle. (18)
|
|
10.18
|
|
Employment
Agreement with Jeffrey W. Pritchard. (18)
|
|
10.19 |
|
Employment Agreement with J. Scott
Hazlitt. |
|
10.20
|
|
2006
Equity Incentive Plan. (19)
|
|
10.21 |
|
Amendment to Employment Agreement with Gifford A.
Dieterle. |
|
10.22 |
|
Amendment to Employment Agreement with Jeffrey W.
Pritchard. |
|
10.23 |
|
Amendment to Employment Agreement with John
Brownlie. |
|
10.24 |
|
Amendment to Employment Agreement with J. Scott
Hazlitt. |
|
21 |
|
Subsidiaries of the Registrant.
(8) |
|
23.1
|
|
Consent
of Wolinetz, Lafazan & Company, P.C., independent registered public
accountants.
|
|
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
|
(1) |
Previously
filed as an exhibit to the Company's Registration Statement on Form
S-18
(SEC File No. 2-86160-NY) filed on or about November 10, 1983, and
incorporated herein by this
reference.
|
(2) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended January 31, 2001 filed with the Commission on or
about
March 16, 2001, and incorporated herein by this
reference.
|
(3) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended April 30, 2002 filed with the Commission on or
about
June 20, 2002, and incorporated herein by this
reference.
|
(4) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended January 31, 2002 filed with the Commission on or
about
March 25, 2002, and incorporated herein by this
reference.
|
(5) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K filed
with
the Commission on or about January 22, 2004, and incorporated herein
by
this reference.
|
(6) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with
the Commission on or about April 12, 2004, and incorporated herein
by this
reference.
|
(7) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K filed
with
the Commission on or about February 10, 2005, and incorporated herein
by
this reference.
|
(8) |
Previously
filed as an exhibit to the Company's Registration Statement on Form
SB-2
(SEC file no. 333-123216) filed with the Commission on or about March
9,
2005, and incorporated herein by this
reference.
|
(9) |
Previously
filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (SEC file no. 333-123216) filed with the Commission
on or about June 27, 2005, and incorporated herein by this
reference.
|
(10) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended April 30, 2005 filed with the Commission on or
about
June 20, 2005, and incorporated herein by this
reference.
|
(11) |
Previously
filed as Appendix B to the Company's Definitive 14A Proxy Statement
filed
with the Commission on or about October 7, 2005, and incorporated
herein
by this reference.
|
(12) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended October 31, 2005 filed with the Commission on or
about
December 15, 2005, and incorporated herein by this
reference.
|
(13) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K filed
with
the Commission on or about February 16, 2006, and incorporated herein
by
this reference.
|
(14) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K filed
with
the Commission on or about August 16, 2006, and incorporated herein
by
this reference.
|
(15) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended April 30, 2006 filed with the Commission on or
about
June 19, 2006, and incorporated herein by this
reference.
|
(16) |
Previously
filed as an exhibit to the Company's Current Report on Form 8-K filed
with
the Commission on or about January 29, 2007, and incorporated herein
by
this reference.
|
(17) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended January 31, 2007 filed with the Commission on or
about
March 19, 2007, and incorporated herein by this
reference.
|
(18) |
Previously
filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the
fiscal year ended July 31, 2006 filed with the Commission on or about
November 1, 2006, and incorporated herein by this
reference.
|
(19) |
Previously
filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for
the quarter ended October 31, 2006 filed with the Commission on or
about
December 19, 2006, and incorporated herein by this
reference.
|
(20) |
Previously
filed as an exhibit to the Company's Registration Statement on Form
SB-2
(SEC file no. 333-129939) filed with the Commission on or about November
23, 2005, and incorporated herein by this
reference.
|
Statements
contained in this Form 10-KSB as to the contents of any agreement or other
document referred to are not complete, and where such agreement or other
document is an exhibit to this Report or is included in any forms indicated
above, each such statement is deemed to be qualified and amplified in all
respects by such provisions.
Item
14. Principal
Accountant Fees And Services.
All
audit
and professional services provided by Wolinetz, Lafazan & Company, P.C.
(“WL”), Certified Public Accountants, will be approved in advance by the Audit
Committee to assure such services do not impair the auditor's independence
from
us. The total aggregate fees billed by WL were $140,000 and $135,000 for the
fiscal years ended July 31, 2007 and 2006, respectively. The following table
shows the detailed fees billed to us by WL for professional services rendered
during these fiscal years.
|
|
Amount
($)
|
|
Description
of Fees
|
|
2007
|
|
2006
|
|
Audit
Fees
|
|
$
|
130,000
|
|
$
|
128,000
|
|
Audit-Related
Fees
|
|
|
-
|
|
|
-
|
|
Tax
Fees
|
|
|
10,000
|
|
|
7,000
|
|
All
Other Fees
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,000
|
|
$
|
135,000
|
|
Audit
Fees
Represents
fees for professional services provided for the audit of our annual financial
statements, services that are performed to comply with generally accepted
auditing standards, and review of our financial statements included in our
quarterly reports and services in connection with statutory and regulatory
filings.
Audit-Related
Fees
Represents
the fees for assurance and related services that are reasonably related to
the
performance of the audit or review of our financial statements. The Board of
Directors considers WL to be well qualified to serve as our independent public
accountants.
The
Audit
Committee will pre-approve all auditing services and the terms thereof (which
may include providing comfort letters in connection with securities
underwriting) and non-audit services (other than non-audit services prohibited
under Section 10A(g) of the Exchange Act or the applicable rules of the SEC
or
the Public Company Accounting Oversight Board) to be provided to us by the
independent auditor; provided, however, the pre-approval requirement is waived
with respect to the provisions of non-audit services for us if the "de minimus"
provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied. This
authority to pre-approve non-audit services may be delegated to one or more
members of the Audit Committee, who shall present all decisions to pre-approve
an activity to the full Audit Committee at its first meeting following such
decision. The Audit Committee may review and approve the scope and staffing
of
the independent auditors' annual audit plan.
Tax
Fees
This
represents professional services rendered for tax compliance, tax advice and
tax
planning.
All
Other
Fees
WL
was
paid no other fees for professional services during the fiscal years ended
July
31, 2007 and 2006.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
|
|
CAPITAL
GOLD
CORPORATION |
|
|
|
Dated:
October 22, 2007 |
By: |
/s/ Gifford A. Dieterle |
|
Gifford
A. Dieterle,
President |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Gifford A. Dieterle
|
|
President,
|
|
October
22, 2007
|
Gifford
A. Dieterle
|
|
Treasurer,
|
|
|
|
|
and
Chairman of the Board of Directors
|
|
|
|
|
|
|
|
/s/
Christopher M. Chipman
|
|
Principal
Financial
|
|
|
Christopher
M. Chipman
|
|
and
Accounting Officer
|
|
October
22, 2007
|
|
|
|
|
|
/s/
Robert
N. Roningen |
|
Director
|
|
October 23,
2007
|
Robert
N. Roningen
|
|
|
|
|
|
|
|
|
|
/s/
John Brownlie
|
|
Director
|
|
October
22, 2007
|
John
Brownlie
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
October
, 2007
|
Roger
A. Newell
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey W. Pritchard
|
|
Director
|
|
October
22, 2007
|
Jeffrey
W. Pritchard
|
|
|
|
|
|
|
|
|
|
/s/
John Postle
|
|
Director
|
|
October
22, 2007
|
John
Postle
|
|
|
|
|
|
|
|
|
|
/s/
Ian Shaw
|
|
Director
|
|
October
22, 2007
|
Ian
Shaw
|
|
|
|
|
|
|
|
|
|
/s/
Mark T. Nesbitt
|
|
Director
|
|
October
22, 2007
|
Mark
T. Nesbitt
|
|
|
|
|
SUPPLEMENTAL
INFORMATION
Supplemental
Information to be Furnished With Reports Filed Pursuant to Section 15(d) of
the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
NOT
APPLICABLE.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The
Board of Directors and Stockholders of
Capital
Gold Corporation
New
York,
New York
We
have
audited the accompanying consolidated balance sheet of Capital Gold Corporation
and Subsidiaries (“the Company”) as of July 31, 2007, and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for each of the two years in the period ended July 31, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstance, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. Also, an audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Capital Gold
Corporation and Subsidiaries as of July 31, 2007 and the consolidated results
of
their operations and their cash flows for each of the two years in the period
ended July 31, 2007 in conformity with accounting principles generally accepted
in the United States of America.
WOLINETZ,
LAFAZAN & COMPANY, P.C.
Rockville
Centre, New York
October
12, 2007
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
BALANCE SHEET
JULY
31, 2007
|
ASSETS
|
Current
Assets:
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
2,225,482
|
|
Loans
Receivable - Affiliate (Note 12 and 16)
|
|
|
46,995
|
|
Prepaid
Expenses
|
|
|
72,216
|
|
Marketable
Securities (Note 3)
|
|
|
90,000
|
|
Stockpiles
and Ore on Leach Pads (Note 5)
|
|
|
2,996,459
|
|
Material
and Supply Inventories (Note 4)
|
|
|
174,164
|
|
Deposits
(Note 6)
|
|
|
878,694
|
|
Other
Current Assets (Note 7)
|
|
|
1,675,236
|
|
Total
Current Assets
|
|
|
8,159,246
|
|
|
|
|
|
|
Mining
Concessions (Note 11)
|
|
|
67,441
|
|
Property
& Equipment - net (Note 8)
|
|
|
18,000,285
|
|
Intangible
Assets - net (Note 9)
|
|
|
576,867
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
Other
Investments (Note 13)
|
|
|
28,052
|
|
Deferred
Financing Costs (Note 18)
|
|
|
581,420
|
|
Mining
Reclamation Bonds (Note 10)
|
|
|
35,550
|
|
Other
|
|
|
42,285
|
|
Security
Deposits
|
|
|
59,995
|
|
Total
Other Assets
|
|
|
747,302
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
27,551,141
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
Liabilities:
|
|
|
|
|
Accounts
Payable
|
|
$
|
617,216
|
|
Accrued
Expenses
|
|
|
603,063
|
|
Derivative
Contracts (Note 21)
|
|
|
595,623
|
|
Total
Current Liabilities
|
|
|
1,815,902
|
|
|
|
|
|
|
Reclamation
and Remediation Liabilities (Note 14)
|
|
|
1,249,103
|
|
Note
Payable (Note 18)
|
|
|
12,500,000
|
|
Total
Long-term Liabilities
|
|
|
13,749,103
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
Common
Stock, Par Value $.0001 Per Share;
|
|
|
|
|
Authorized
250,000,000 shares; Issued and
|
|
|
|
|
Outstanding
168,173,148 shares
|
|
|
16,817
|
|
Additional
Paid-In Capital
|
|
|
54,016,375
|
|
Accumulated
Deficit
|
|
|
(38,860,641
|
)
|
Deferred
Financing Costs (Note 18)
|
|
|
(3,438,058
|
)
|
Deferred
Compensation
|
|
|
(52,500
|
)
|
Accumulated
Other Comprehensive Income (Note 15)
|
|
|
304,143
|
|
Total
Stockholders’ Equity
|
|
|
11,986,136
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
27,551,141
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
|
|
|
|
|
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
For
The Years Ended
|
|
|
|
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
$
|
-
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
Mine
Expenses
|
|
|
1,007,789
|
|
|
1,940,805
|
|
Selling,
General and Administrative Expenses
|
|
|
2,760,085
|
|
|
2,135,493
|
|
Equity
Based Compensation
|
|
|
133,015
|
|
|
89,391
|
|
Exploration
|
|
|
808,488
|
|
|
-
|
|
Depreciation
and Amortization
|
|
|
891,104
|
|
|
38,969
|
|
Total
Costs and Expenses
|
|
|
5,600,481
|
|
|
4,204,658
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(5,600,481
|
)
|
|
(4,204,658
|
)
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
145,993
|
|
|
183,719
|
|
Interest
Expense
|
|
|
(792,146
|
)
|
|
-
|
|
Loss
on Sale of Property and Equipment
|
|
|
-
|
|
|
(201,829
|
)
|
Loss
on change in fair value of derivative
|
|
|
(1,225,504
|
)
|
|
(581,924
|
)
|
Total
Other Income (Expense)
|
|
|
(1,871,657
|
)
|
|
(600,034
|
)
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(7,472,138
|
)
|
$
|
(4,804,692
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
149,811,266
|
|
|
112,204,471
|
|
The
accompanying notes are an integral part of the financial
statements.
|
|
|
|
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
|
|
|
|
Comprehensive
|
|
Deferred
|
|
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Accumulated
Deficit
|
|
Income/
(Loss)
|
|
|
|
|
|
|
|
Balance
at July 31, 2005
|
|
|
95,969,216
|
|
|
95,969
|
|
|
31,851,724
|
|
|
(26,583,811
|
)
|
|
157,714
|
|
|
(252,541
|
)
|
|
-
|
|
|
5,269,055
|
|
Change
in par value to $0.0001
|
|
|
-
|
|
|
(86,372
|
)
|
|
86,372
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Deferred
Financing Costs
|
|
|
1,000,000
|
|
|
100
|
|
|
269,900
|
|
|
-
|
|
|
-
|
|
|
(270,000
|
)
|
|
-
|
|
|
-
|
|
Issuance
of common stock upon warrant and option exercises,
net
|
|
|
4,825,913
|
|
|
482
|
|
|
741,338
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
741,820
|
|
Issuance
of common stock upon warrant and option exercises,
net
|
|
|
8,600,000
|
|
|
860
|
|
|
2,372,740
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
2,373,600
|
|
Private
placement, net
|
|
|
21,240,000
|
|
|
2,124
|
|
|
4,997,376
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
4,999,500
|
|
Options
and warrants issued for services
|
|
|
|
|
|
|
|
|
414,375
|
|
|
-
|
|
|
|
|
|
|
|
|
(52,500
|
)
|
|
361,875
|
|
Unrealized
loss on marketable securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
(60,000
|
)
|
|
|
|
|
-
|
|
|
(60,000
|
)
|
Equity
adjustment from foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
48,779
|
|
|
|
|
|
-
|
|
|
48,779
|
|
Net
loss for the year ended July 31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,804,692
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
(4,804,692
|
)
|
Balance
- July 31, 2006
|
|
|
131,635,129
|
|
|
13,163
|
|
|
40,733,825
|
|
|
(31,388,503
|
)
|
|
146,493
|
|
|
(522,541
|
)
|
|
(52,500
|
)
|
|
8,929,937
|
|
The
accompanying notes are an integral part of the financial statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY -
CONTINUED
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
|
|
|
|
Comprehensive
|
|
Deferred
|
|
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Accumulated
Deficit
|
|
Income/
(Loss)
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
749,682
|
|
|
-
|
|
|
749,682
|
|
Options
and warrants issued for services
|
|
|
-
|
|
|
-
|
|
|
215,670
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
215,670
|
|
Private
Placement, Net
|
|
|
12,561,667
|
|
|
1,257
|
|
|
3,484,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,485,863
|
|
Common
Stock issued for services provided
|
|
|
622,443
|
|
|
62
|
|
|
276,187
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
276,249
|
|
Common
Stock issued upon the exercising of options and warrants
|
|
|
22,203,909
|
|
|
2,220
|
|
|
5,641,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,643,223
|
|
Change
in fair value on interest rate swaps
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(47,343
|
)
|
|
-
|
|
|
-
|
|
|
(47,343
|
)
|
Equity
adjustment from foreign currency translation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
204,993
|
|
|
-
|
|
|
-
|
|
|
204,993
|
|
Net
loss for the year ended July 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,472,138
|
)
|
|
-
|
|
|
|
|
|
-
|
|
|
(7,472,138
|
)
|
Balance
at July 31, 2007
|
|
|
168,173,148
|
|
$
|
16,817
|
|
$
|
54,016,375
|
|
$
|
(38,860,641
|
)
|
$
|
304,143
|
|
$
|
(3,438,058
|
)
|
$
|
(52,500
|
)
|
$
|
11,986,136
|
|
The
accompanying notes are an integral part of the financial statements.
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
For
The
|
|
|
|
Years
Ended
|
|
|
|
July
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
Flow From Operating Activities:
|
|
|
|
|
|
Net
Loss
|
|
$
|
(7,472,138
|
)
|
$
|
(4,804,692
|
)
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
891,104
|
|
|
38,969
|
|
Accretion
of Reclamation Obligation
|
|
|
30,788
|
|
|
-
|
|
Loss
on Sale of Property and Equipment
|
|
|
-
|
|
|
201,829
|
|
Loss
on change in fair value of derivative
|
|
|
766,356
|
|
|
581,924
|
|
Value
of Common Stock and Warrants Issued for Services
|
|
|
491,919
|
|
|
361,875
|
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
(Increase)
Decrease in Prepaid Expenses
|
|
|
(32,142
|
)
|
|
(21,082
|
)
|
(Increase)
Decrease in Inventory
|
|
|
(2,458,297
|
)
|
|
-
|
|
(Increase)
Decrease in Other Current Assets
|
|
|
2,974,848
|
|
|
(5,243,003
|
)
|
(Increase)
in Other Deposits
|
|
|
(628,694
|
)
|
|
(170,000
|
)
|
(Increase)
Decrease in Other Assets
|
|
|
(49,629
|
)
|
|
755
|
|
Increase
in Accounts Payable
|
|
|
358,245
|
|
|
166,932
|
|
Increase
in Reclamation and Remediation Obligation
|
|
|
1,218,315
|
|
|
-
|
|
Increase
in Accrued Expenses
|
|
|
246,393
|
|
|
165,895
|
|
Net
Cash Used in Operating Activities
|
|
|
(3,662,932
|
)
|
|
(8,720,598
|
)
|
|
|
|
|
|
|
|
|
Cash
Flow From Investing Activities:
|
|
|
|
|
|
|
|
(Increase)
in Other Investments
|
|
|
(3,909
|
)
|
|
(260
|
)
|
Purchase
of Mining, Milling and Other Property and
|
|
|
|
|
|
|
|
Equipment
|
|
|
(17,850,734
|
)
|
|
(810,425
|
)
|
Purchase
of Intangibles
|
|
|
(570,000
|
)
|
|
(89
|
)
|
Proceeds
on Sale of Mining, Milling and Other Property
|
|
|
|
|
|
|
|
and
Equipment
|
|
|
-
|
|
|
192,000
|
|
Net
Cash Used in Investing Activities
|
|
|
(18,424,643
|
)
|
|
(618,774
|
)
|
The
accompanying notes are an integral part of the financial
statements.
|
CAPITAL
GOLD CORPORATION
|
CONSOLIDATED
STATEMENT OF CASH FLOWS - CONTINUED
|
|
|
For
The
|
|
|
|
Years
Ended
|
|
|
|
July
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
Flow From Financing Activities:
|
|
|
|
|
|
Advances
to Affiliate
|
|
|
(5,250
|
)
|
|
(10,326
|
)
|
Proceeds
from Borrowing on Credit Facility
|
|
|
12,500,000
|
|
|
|
|
Proceeds
From Issuance of Common Stock, net
|
|
|
9,129,087
|
|
|
8,114,920
|
|
Deferred
Finance Costs
|
|
|
(257,271
|
)
|
|
(350,777
|
)
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
21,366,566
|
|
|
7,753,817
|
|
Effect
of Exchange Rate Changes
|
|
|
204,992
|
|
|
45,506
|
|
Increase
(Decrease) In Cash and Cash Equivalents
|
|
|
(516,017
|
)
|
|
(1,540,049
|
)
|
Cash
and Cash Equivalents - Beginning
|
|
|
2,741,499
|
|
|
4,281,548
|
|
Cash
and Cash Equivalents - Ending
|
|
$
|
2,225,482
|
|
$
|
2,741,499
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
Paid For Interest
|
|
$
|
878,505
|
|
$
|
-
|
|
Cash
Paid For Income Taxes
|
|
$
|
22,968
|
|
$
|
15,099
|
|
Non-Cash
Financing Activities:
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants as payment of financing costs
|
|
$
|
3,665,199
|
|
$
|
270,000
|
|
Change
in Fair Value of Derivative Instrument
|
|
$
|
47,343
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
|
|
|
|
CAPITAL
GOLD CORPORATION
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
JULY
31,
2007
NOTE
1 -
Basis of Presentation
Capital
Gold Corporation ("Capital Gold", "the Company", "we" or "us") 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. The Company is engaged in the exploration,
development and production for gold and other minerals from its properties
in
Mexico. All of the Company's mining activities are being performed in Mexico.
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. These concessions are sometimes referred to 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, the Company 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.
During
the fiscal year ended July 31, 2007, The Company exited the development stage
since principal operations have commenced.
NOTE
2 -
Summary of Significant Accounting Policies
Principals
of Consolidation
The
consolidated financial statements include the accounts of Capital Gold
Corporation and its wholly owned and majority owned subsidiaries, Leadville
Mining and Milling Holding Corporation, Minera Santa Rita, S.A de R.L. de
C.V.(“MSR”) and Oro de Altar S. de R. L. de C.V. (“Oro”) 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”. All significant intercompany accounts and transactions are
eliminated in consolidation.
Cash
and Cash Equivalents
The
Company considers highly liquid investments with original maturities of three
months or less from the date of purchase to be cash equivalents. Cash and cash
equivalents include money market funds and/or short term U.S. treasury
bonds.
Marketable
Securities
The
Company accounts for its investments in marketable securities in accordance
with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Management
determines the appropriate classification of all securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. The
Company has classified its marketable equity securities as available for sale
securities and has recorded such securities at fair value. The Company uses
the
specific identification method to determine realized gains and losses.
Unrealized holding gains and losses are excluded from earnings and, until
realized, are reported as a separate component of stockholders'
equity.
Stockpiles,
Ore on Leach Pads and Inventories (“In-Process Inventory”)
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. The Company’s
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
plant. 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 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. The Company
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 are 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.
Impairment
of Long-Lived Assets
The
Company reviews and evaluates its 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
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 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. The Company’s 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. The Company reviews, on an annual
basis, unless otherwise deemed necessary, the Asset Retirement Obligation at
its
mine site in accordance with FASB FAS No. 143, “Accounting for Asset
Retirement Obligations.”
Deferred
Financing Costs
Deferred
financing costs which were included in other assets and a component of
stockholders’ equity relate to costs incurred in connection with bank borrowings
and are amortized over the term of the related borrowings.
Intangible
Assets
Purchased
intangible assets consisting of rights of way, easements and net profit
interests are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally five years or using the units of production method.
It is the Company’s policy to assess periodically the carrying amount of its
purchased intangible assets to determine if there has been an impairment to
their carrying value. Impairments of other intangible assets are determined
in
accordance with SFAS 144. There was no impairment at July 31, 2007.
Fair
Value of Financial Instruments
The
carrying value of the Company's financial instruments, including cash and cash
equivalents, loans receivable and accounts payable approximated fair value
because of the short maturity of these instruments.
Revenue
Recognition
Revenue
will be recognized, net of treatment and refining charges, from a sale when
the
price is determinable, the product has been delivered, the title has been
transferred to the customer and collection of the sales price is reasonably
assured. Revenues from by-product sales will be credited to Costs
applicable to sales
as a
by-product credit.
Foreign
Currency Translation
Assets
and liabilities of the Company's Mexican subsidiaries are translated to US
dollars using the current exchange rate for assets and liabilities. Amounts
on
the statement of operations are translated at the average exchange rates during
the year. Gains or losses resulting from foreign currency translation are
included as a component of other comprehensive income (loss).
Comprehensive
Income (Loss)
Comprehensive
income (loss) which is reported on the accompanying consolidated statement
of
stockholders' equity as a component of accumulated other comprehensive income
(loss) consists of accumulated foreign translation gains and losses and net
unrealized gains and losses on available-for-sale securities.
Income
Taxes
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.
Deferred
income tax assets and liabilities are determined based on differences between
the financial statement reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws in effect when the differences
are expected to reverse. The measurement of deferred income tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits, which
are
not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such
tax
rate changes are enacted.
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 $0.24 to $0.45 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
years ended July 31, 2007 and 2006, were $0.33 and $0.35, respectively. The
fair
values of the options and warrants granted were estimated based on the following
weighted average assumptions:
|
|
Years
ended July 31,
|
|
|
2007
|
|
2006
|
Expected
volatility
|
|
73%
|
|
95%
- 165%
|
Risk-free
interest rate
|
|
5.75%
|
|
5.75%
|
Expected
dividend yield
|
|
-
|
|
-
|
Expected
life
|
|
2.4
years
|
|
1-2
years
|
Stock
option and warrant activity for employees during the year ended July
31,
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
|
|
|
1,050,000
|
|
$
|
.36
|
|
|
-
|
|
|
-
|
|
Options
exercised
|
|
|
(3,570,909
|
)
|
$
|
.08
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
(549,545
|
)
|
$
|
.22
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at July 31, 2007
|
|
|
2,500,000
|
|
$
|
.34
|
|
|
1.20
|
|
$
|
255,000
|
|
Warrants
and options exercisable at July 31, 2007
|
|
|
2,350,000
|
|
$
|
.34
|
|
|
1.12
|
|
$
|
237,000
|
|
Unvested
stock option and warrant balances for employees at July 31, 2007
are as
follows:
|
|
|
Number
of Options
|
|
Weighted
Average
Exercise
price
|
|
Weighted
average
remaining
contracted
term
(years)
|
|
Aggregate
Intrinsic
value
|
|
Outstanding
at August 1, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
-
|
|
Options
granted
|
|
|
150,000
|
|
$
|
.32
|
|
|
0.92
|
|
|
18,000
|
|
Unvested
Options outstanding at July 31, 2007
|
|
|
150,000
|
|
$
|
.32
|
|
|
0.92
|
|
$
|
18,000
|
|
Stock
option and warrant activity for non-employees during the year ended
July
31, 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
|
|
|
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
|
|
|
(18,633,000
|
)
|
|
.29
|
|
|
-
|
|
|
-
|
|
Options
expired
|
|
|
_(1,375,000
|
)
|
|
.31
|
|
|
-
|
|
|
-
|
|
Warrants
and options outstanding at July 31, 2007
|
|
|
22,535,542
|
|
$
|
.33
|
|
|
1.48
|
|
$
|
2,577,734
|
|
Warrants
and options exercisable at July 31, 2007
|
|
|
22,535,542
|
|
$
|
.33
|
|
|
1.48
|
|
$
|
2,577,734
|
|
The
impact on the Company’s results of operations of recording equity based
compensation for the year ended July 31, 2007, for employees and non-employees
was approximately $472,000 and reduced earnings per share by $0.00 per basic
and
diluted share.
As
of
July 31, 2007, there was $52,500 of unrecognized equity based compensation
cost
related to options granted to one executive which have not yet
vested.
Prior
to
the adoption of FAS 123R, the Company applied the intrinsic value-based method
of accounting prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations including FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation an interpretation of
APB
Opinion No. 25
issued
in March 2000 (“FIN 44”), to account for its fixed plan stock options.
Under this method, compensation expense was recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise price.
SFAS No. 123, Accounting
for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. In
December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation Transition and Disclosure, an amendment of FASB
Statement No. 123.
This
Statement amended FASB Statement No. 123, Accounting
for Stock-Based Compensation,
to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation.
The
following table illustrates the effect on the net loss and net loss per share
as
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based compensation prior to February 1, 2006:
|
|
Year
Ended
July
31, 2006
|
|
Net
loss
|
|
$
|
(4,804,692
|
)
|
Add
stock-based employee compensation expense (recovery) included in
reported
net income (loss)
|
|
|
-
|
|
Deduct
total stock-based employee compensation expense
determined
under fair value based method for all awards,
net
of tax
|
|
|
(773,263
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(5,577,955
|
)
|
|
|
|
|
|
Pro
forma net loss per common share (Basic and diluted)
|
|
$
|
(.05
|
)
|
Weighted
average common shares outstanding:
Basic
and
diluted
|
|
|
112,204,471
|
|
Net
loss per common share basic and diluted
|
|
$
|
(.04
|
)
|
Reclassifications
Certain
items in these financial statements have been reclassified to conform to the
current period presentation. These reclassifications had no impact on the
Company’s results of operations, stockholders’ equity or cash
flows.
Net
Loss Per Common Share
Basic
and
diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Equivalent common shares,
consisting of stock options and warrants, which amounted to 25,035,542 and
31,131,454 shares, are excluded from the calculation of diluted net loss per
share for the fiscal year ended July 31, 2007 and 2006, respectively, since
their effect is antidilutive.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and marketable
securities. The Company maintains cash balances at financial institutions which
exceed the Federal Deposit Insurance Corporation limit of $100,000 at times
during the year.
Accounting
for Derivatives and Hedging Activities
The
Company 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. 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. Although these contracts are not designated
as hedging derivatives, they serve an economic purpose of protecting the company
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”).
The
Company entered into interest rate swap agreements in accordance with the terms
of its 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 terminated on
March
31, 2007 and the second covering the period from March 30, 2007 with a
termination date of December 31, 2010. 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.
Use
of
Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Recently
Issued 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. 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.
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.
The
impact of this statement has not been determined.
NOTE
3 -
Marketable Securities
Marketable
securities are classified as current assets and are summarized as
follows:
|
|
July
31,
2007
|
|
Marketable
equity securities, at cost
|
|
$
|
50,000
|
|
Marketable
equity securities, at fair value
(See
Notes 12 & 16)
|
|
$
|
90,000
|
|
NOTE
4 -
Material and Supplies Inventories
|
|
July
31,
2007
|
|
Materials,
supplies and other
|
|
$
|
174,164
|
|
|
|
|
|
|
Total
|
|
$
|
174,164
|
|
NOTE
5 -
Stockpiles, Ore on Leach Pads and Inventories (“In-Process
Inventory”)
|
|
July
31,
2007
|
|
Current:
|
|
|
|
Stockpiles
& Ore on leach pads
|
|
$
|
2,996,459
|
|
|
|
|
|
|
Total
|
|
$
|
2,996,459
|
|
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
and contract for the Company’s El Chanate Project in Sonora, Mexico. Deposits
are summarized as follows:
|
|
July
31,
2007
|
|
Advance
payment on Mining Contract to Sinergia (Note 19)
|
|
$
|
683,421
|
|
Equipment
deposit
|
|
|
193,000
|
|
Other
|
|
|
2,273
|
|
Total
Deposits
|
|
$
|
878,694
|
|
NOTE
7 -
Other Current Assets
Other
current assets consist of the following as of July 31, 2007:
Value
added tax to be refunded
|
|
$
|
1,474,759
|
|
Asset
held for resale
|
|
|
166,232
|
|
Other
|
|
|
34,245
|
|
Total
Other Current Assets
|
|
$
|
1,675,236
|
|
NOTE
8 -
Property and Equipment
Property
and Equipment consist of the following as of July 31, 2007:
Process
equipment and facilities
|
|
$
|
16,284,643
|
|
Asset
retirement obligation
|
|
|
1,218,314
|
|
Mining
equipment
|
|
|
863,485
|
|
Mineral properties
|
|
|
141,242
|
|
Computer
and office equipment
|
|
|
212,057
|
|
Improvements
|
|
|
15,797
|
|
Furniture
|
|
|
22,488
|
|
Total
|
|
|
18,758,026
|
|
Less:
accumulated depreciation
|
|
|
(757,741
|
)
|
Property
and equipment, net
|
|
$
|
18,000,285
|
|
Depreciation
expense for the year ended July 31, 2007 and 2006 was $720,186 and $33,838,
respectively.
NOTE
9 -
Intangible Assets
Intangible
assets consist of the following as of July 31, 2007:
Repurchase
of Net Profits Interest from FG
|
|
$
|
500,000
|
|
Mobilization
Payment to Mineral Contractor
|
|
|
70,000
|
|
Investment
in Right of Way
|
|
|
18,000
|
|
Total
|
|
|
588,000
|
|
Less:
accumulated amortization of Right of Way and Mobilization
Payments
|
|
|
(11,133
|
)
|
Intangible
assets, net
|
|
$
|
576,867
|
|
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 loan agreement with Standard Bank, Plc. (See
Note
18). Mr. Cibrian 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).
The
Right
of Way and the Mobilization Payment were recorded at cost and are being
amortized using the units of production method. Amortization expense for the
year ended July 31, 2007 and 2006 was $7,002 and $4,131, 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 as of July 31, 2007:
El
Chanate
|
|
$
|
44,780
|
|
El
Charro
|
|
|
25,324
|
|
Total
|
|
|
70,104
|
|
Less:
accumulated amortization
|
|
|
(
2,663
|
)
|
Total
|
|
$
|
67,441
|
|
The
El
Chanate concessions are carried at historical cost and are being amortized
using
the units of production method. They were acquired in connection with the
purchase of the stock of Minera Chanate (see Note 1). Amortization expense
for
the year ended July 31, 2007 and 2006 was $2,663 and $0, respectively.
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 July 31, 2007, approximately $1,249,000 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 for the year ended July 31, 2007:
Balance
at beginning of period
|
|
$
|
-
|
|
Additions,
changes in estimates and other
|
|
|
1,218,315
|
|
Liabilities
settled
|
|
|
-
|
|
Accretion
expense
|
|
|
30,788
|
|
Balance
at end of period
|
|
$
|
1,249,103
|
|
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
|
|
|
(47,343
|
)
|
Equity
Adjustments from Foreign Currency Translation
|
|
|
204,993
|
|
Unrealized
Gains (loss) on Marketable Securities
|
|
|
-
|
|
Balance
- July 31, 2007
|
|
$
|
304,143
|
|
NOTE
16 -
Related Party Transactions
In
August
2002, the Company purchased marketable equity securities of a related company.
The Company recorded approximately $9,000 and $10,350 in expense reimbursements
including office rent from this entity for the year ended July 31, 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 $702,000 and $122,000 for the year ended July 31,
2007
and 2006, respectively.
During
the years ended July 31, 2007 and 2006, the Company paid its V.P. Development
and Director $0 and $68,500, respectively, for professional geologist and
management services rendered to the Company. This individual also earned wages
of $120,000 and $50,000 during the years ended July 31, 2007 and 2006
respectively. During the years ended July 31, 2007 and 2006, the Company paid
its V.P. Exploration and Director consulting fees of $0 and $88,500,
respectively. In addition, this individual earned wages of $120,000 during
the
year ended July 31, 2007. During the year ended July 31, 2007 and 2006, the
Company paid a director legal and consulting fees of $24,000 and $8,000,
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 year ended July 31, 2006.
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 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 (see Note 23 for subsequent events).
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
July 31, 2007, as a reduction of stockholders' equity, was approximately
$3,438,058. Amortization expense for the year ended July 31, 2007, was
approximately $750,000.
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 at
$0.30 per unit for proceeds of approximately $3,486,000, net of
commissions of approximately $283,000. 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.
The
Company also received proceeds of approximately $5,643,000 during the year
ended
July 31, 2007, from the exercising of an aggregate of 22,203,909 of warrants
issued in past private placements.
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. The independent contractor and the Company mutually
agreed to terminate the contractor after three months as construction was
complete. The Company issued 56,818 shares of the Company’s common stock on the
vested portion of the 113,636 shares or 50%.
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 affected 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
its
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, 2007, 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.
On
June
13, 2007, the Company issued two year options to purchase the Company’s common
stock at an exercise price of $0.384 per share to the Company’s CFO. These
options are for the purchase of 500,000 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 $65,000 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 which has delegated the
administration to the Company’s Compensation Committee. 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
July 31, 2007, 1,550,000 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 the Company’s
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 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. As of July 31, 2007, the outstanding
amount on the credit facility was $12,500,000 and accrued interest on this
facility was approximately $100,000.
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 also is required to maintain
a certain minimum level of unrestricted cash, and upon meeting certain Mine
start-up production and performance criteria, MSR and Oro are 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 its 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 to protect
it
against future fluctuations in the price of gold and interest rate swap
agreements in October 2006 in accordance with the terms of the Credit Facility
both with Standard Bank (See Note 21 for more details on these transactions).
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 placing 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 the
Company’s 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”). 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
its
advancing $319,000 to Sinergia under the Mining Contract. 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 supervised 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. This contract was completed as of
July
31, 2007, and services provided pursuant to this contract by the contractor
through this date amounted to approximately $1,026,000 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 its 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 the Company’s 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 fully vested.
On
May
12, 2006, the Company entered into an employment agreement with John Brownlie,
pursuant to which Mr. Brownlie originally served as Vice President Operations.
Mr. Brownlie became our Chief Operating Officer in February 2007. 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.
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.
See
Note
24 - Subsequent Events for changes to executives and executive compensation
subsequent to the fiscal year ended July 31, 2007.
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 this period March 1, 2006 through July 31, 2006 and
was the primary reason for the decrease in premium on the derivative contracts.
As of July 31, 2007, the carrying value of this derivative liability was
approximately $548,000. The change in fair value on these derivative contracts
was approximately $1,226,000 for the year ended July 31, 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 terminated on
March
31, 2007 and the second covering the period from March 30, 2007 with 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 July 31, 2007, the Company’s derivative
liability associated with these swap agreements amounted to approximately
$48,000.
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 -
Income Taxes
For
income tax purposes, the Company has available net operating loss carryforwards
("NOL") as of July 31, 2007 of approximately $21,000,000 to reduce future
federal taxable income. If any of the NOL's are not utilized, they will expire
at various dates through 2026. There may be certain limitations as to the future
annual use of the NOLs due to certain changes in the Company's
ownership.
Income
tax benefit attributable to net loss differed from the amounts computed by
applying the statutory Federal Income tax rate applicable for each period as
a
result of the following:
|
|
Year
Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
Computed
"expected" tax benefit
|
|
$
|
8,103,638
|
|
$
|
5,823,176
|
|
Decrease
in tax benefit resulting from net operating loss for which no benefit
is
currently available
|
|
$
|
8,103,638
|
|
$
|
5,823,176
|
|
The
Company has deferred tax assets of approximately $8,103,638 at July 31, 2007
resulting primarily from net operating loss carryforwards. The Deferred tax
assets have been fully offset by a valuation allowance resulting from the
uncertainty surrounding their future realization. The difference between the
federal statutory rate of 34% and the Company's effective tax rate of 0% is
due
to an increase in the valuation allowance of $2,280,462 and $1,161,556 in 2007
and 2006, respectively.
NOTE
23 -
Commitments and Contingencies
Minera
Chanate Option
Under
the
terms of the Minera Chanate purchase agreement, Capital Gold has granted
AngloGold's designee to receive a one-time option to purchase 51% of Minera
Chanate (or such entity that owns the Minera Chanate concessions at time of
exercise) based upon the achievements of certain events (see Note
1).
Lease
Commitments
The
Company occupies office space in New York City under a non-cancelable operating
lease that commenced on September 1, 2007 and terminates on August 31, 2012.
In
addition to base rent, the lease calls for payment of utilities and other
occupancy costs.
Approximate
future minimum payments under this lease are as follows:
Fiscal
Years Ending July 31,
|
|
|
|
|
|
|
|
2008
|
|
$
|
118,000
|
|
2009
|
|
|
128,000
|
|
2010
|
|
|
128,000
|
|
2011
|
|
|
128,000
|
|
2012
|
|
|
128,000
|
|
2013
|
|
|
11,000
|
|
|
|
|
|
|
|
|
$ |
641,000 |
|
Rent
expense under the previous office lease in New York City was approximately
$66,000 and $63,000 for the years ended July 31, 2007 and 2006,
respectively.
Land
Easement
On
May
25, 2005, MSR entered into an agreement for an irrevocable access easement
and
an irrevocable fluids (electricity, gas, water and others) easement to land
located at Altar, Sonora, Mexico. The term of the agreement is five years,
extendable for 1-year additional terms, upon MSR’s request. The agreement would
be suspended only by force majeure or Acts of God; and extendable for the
duration of the suspension. In consideration for these easements, $18,000 was
paid upon the signing of the agreement and yearly advance payments equal to
two
annualized general minimum wages (365 X 2 general minimum wages) in force in
Altar, Sonora, Mexico, are required. These yearly payments are to be made on
September 1 of each year, using the minimum wage in effect on that day for
the
calculation of the amount payable. These payments are to be made for as long
as
the construction and production mining works and activities of MSR are being
carried out, and are to cease as soon as such works and activities are
permanently stopped.
El
Charro
In
May
2005, the Company acquired rights to the El Charro concession for approximately
$20,000 and a royalty of 1.5% of net smelter return. The Company acquired the
El
Charro concession because it is surrounded entirely by the Company’s other
concessions.
NOTE
24 -
Subsequent Events
On
August
29, 2007, the Board increased the salaries of the Company’s executive officers
to be commensurate with industry standards. The new salaries are as follows:
Gifford A. Dieterle, President, Treasurer and Chairman of the Board,
$250,000; John Brownlie, Chief Operating Officer, $225,000; Christopher Chipman,
Chief Financial Officer, $175,000 (consulting fee); Jeffrey W. Pritchard, Vice
President - Investor Relations and Secretary, $195,000; Roger A. Newell, Vice
President - Development, $135,000; and J. Scott Hazlitt, Vice President - Mine
Development, $135,000. The salary increase for Mr. Brownlie and the consulting
fee increase for Mr. Chipman are retroactive to May 1, 2007 and the salary
increase for Mr. Pritchard is retroactive to August 1, 2007. The Board also
increased directors’ compensation to the Company’s independent directors and to
Robert Roningen by $1,000 per month.
In
May
2007, the Company completed an expanded 72-hole reverse circulation drilling
campaign to identify additional proven and probable gold reserves at the El
Chanate Project. The 72 holes totaled approximately 8,300 meters, and were
positioned to fill in gaps in the ore body and test the outer limits of the
currently known ore zones. The Company turned the assay data over to Independent
Mining Consultants, Inc. (“IMC”) of Tucson, AZ to update the Company’s ore
reserve and its mine plan. On August 30, 2007, IMC delivered to the Company’s an
updated resource block model and an updated mine plan and mine production
schedule (the “2007 Report”).
According
to the 2007 Report, the Company’s proven and probable reserve tonnage has
increased by approximately 97 percent from 19.9 million to 39.5 million metric
tonnes with a gold grade of 0.66 grams per tonne (43.5 million US short tons
at
0.019 ounces per ton). The open pit stripping ratio is 0.6:1 (0.6 tonnes of
waste to one tonne of ore). The updated pit design for the revised plan in
the
2007 Report is based on a plant recovery of gold that varies by rock types,
but
is expected to average 66.8%. A gold price of US$550 (three year average as
of
July 31, 2007 as determined by IMC) per ounce was used to re-estimate the
reserves compared with a gold price of $450 per ounce used in the previous
estimate. The Company is in the process of determining the impact this increase
in proven and probable reserve tonnage will have on reclamation and remediation
costs.
On
September 10, 2007, Roger A. Newell resigned as Vice President of Development.
He will continue to serve as a member of the Company’s Board of
Directors.
On
September 14, 2007, the Company entered into a Second Amended Engagement
Agreement (the “Agreement”) with Christopher Chipman, the Company’s Chief
Financial Officer, effective May 1, 2007. The Agreement supersedes and replaces
Mr. Chipman’s prior agreement that expired on August 31, 2007. Pursuant to the
Agreement, Mr. Chipman is engaged as the Company’s Chief Financial Officer and
devotes approximately 85% of his time to its business. He receives a monthly
fee
of $14,583. The Agreement expires on August 31, 2009 and automatically renews
for successive one-year periods, unless either party gives at least 30 days
prior notice to the other party of its intent not to renew. Mr. Chipman can
terminate the Agreement on 60 days prior notice. The Company can terminate
the
Agreement without cause on 30 days prior notice and for cause (as defined in
the
Agreement). The Agreement also terminates upon Mr. Chipman’s disability (as
defined in the Agreement) or death. In the event that the Company terminates
the
Agreement without cause, Mr. Chipman will be entitled to a cash termination
payment equal to his Annual Fee in effect upon the date of termination, payable
in equal monthly installments beginning in the month following his termination.
In the event the Agreement is terminated by Mr. Chipman at his election or
due
to his death or disability, Mr. Chipman will be entitled to the fees otherwise
due and payable to him through the last day of the month in which such
termination occurs. In conjunction with the Agreement, the Company entered
into
a change of control agreement similar to the agreements entered into with the
Company’s other executive officers.
Subsequent
to the fiscal year ended July 31, 2007, we issued an aggregate of 3,570,500
shares of stock upon the exercising of common stock purchase warrants for
approximate gross proceeds of $1,106,000.
Subsequent
to July 31, 2007, during August and September 2007, the Company produced
approximately 6,850 ounces of gold and 5,222 ounces of silver. Of this
production, the Company sold 6,384 ounces of gold for proceeds amounting to
approximately $4,380,000.