ITEM 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION.
|
FORWARD LOOKING STATEMENTS
The information in this discussion contains
forward-looking statements. These forward-looking statements involve risks and
uncertainties, including statements regarding our capital needs, business
strategy and expectations. Any statements contained herein that are not
statements of historical facts may be deemed to be forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as may, will, should, expect, plan, intend, anticipate, believe,
estimate, predict, potential, or continue, the negative of such terms or
other comparable terminology. These statements reflect the current views of
management with respect to future events and are subject to risks, uncertainties
and other factors that may cause our actual results, performance or
achievements, or industry results, to be materially different from those
described in the forward-looking statements. Such risks and uncertainties
include those set forth under the caption Managements Discussion and Analysis
or Plan of Operation and elsewhere in this Quarterly Report. In evaluating
these statements, you should consider various factors, including the risks
discussed below, and, from time to time, in other reports we file with the
United States Securities and Exchange Commission (the SEC), including our
Annual Reports on Form 10-KSB, our Quarterly Reports on Form 10-QSB and our
Current Reports on Form 8-K.
As used in this Quarterly Report on Form 10-QSB,
the terms we, us, our, Searchlight and the Company mean Searchlight
Minerals Corp. and its subsidiaries unless otherwise indicated. All dollar
amounts in this Quarterly Report are in U.S. dollars unless otherwise
stated.
INTRODUCTION
We are an exploration stage company engaged in the
acquisition and exploration of mineral properties and slag reprocessing projects.
Our business is presently focused on our two mineral projects: (i) the Clarkdale
Slag Project, located in Clarkdale, Arizona; and (ii) the Searchlight Gold Project,
located near Searchlight, Nevada. The Clarkdale Slag Project is a precious and
base metal recovery project where we are seeking to reprocess slag material
produced from the smelting of copper ores from former mines located around Jerome,
Arizona. The Searchlight Gold Project is a 3,200 acre placer gold project.
During the quarter ended September 30, 2007, we
continued to make progress on our development of the Clarkdale Slag Project.
During the quarter, our building construction and site preparation for the
project site continued to advance and we completed the purchase of much of the
processing equipment for our first production module for the project. See Plan
of Operation Clarkdale Slag Project, below. Also during the quarter ended
September 30, 2007, we received metallurgical testing results on
chain-of-custody samples collected from the Searchlight Gold Project. A
discussion of these results is provided below under Recent Corporate
Developments.
RECENT CORPORATE DEVELOPMENTS
The following significant corporate developments
have occurred since June 30, 2007, the date of our last Quarterly
Report:
1.
|
On July 27, 2007, we appointed Harry Crockett to serve on
our compensation committee. As a result of Mr. Crocketts appointment, our
compensation committee now consists of Robert D. McDougal and Mr.
Crockett. Mr. Crockett has served on our Board of Directors since February
16, 2007.
|
|
|
2.
|
On August 20, 2007, we reported the results of additional
metallurgical testing conducted by our independent mining consultants,
Arrakis, Inc. ("Arrakis"), on chain-of-custody samples collected from the
Searchlight Gold Project. We had engaged Arrakis to perform this
additional testing following the tests completed by them in early 2007,
the results of which were reported by us on January 29, 2007. The test
results received in January, 2007 had indicated that autoclave processing
would be a reliable and consistent method of extraction. To test other
processing/extraction methods, Arrakis obtained additional
chain-of-custody samples from the Searchlight Gold Project and conducted
tests using various metallurgical methods, including mineral and organic
acid leaching combined with appropriate
|
3
oxidizers, cyanide
leaching, and autoclave leaching using chloride based lixiviant. Gravity
concentration was also examined to upgrade the feed prior to leaching. Based on
the results of these additional tests, Arrakis concluded that autoclave
processing, while more capital intensive than the alternative methods tested,
produced the most reliable and consistent results on the materials extracted
from the Searchlight Gold Project, and was likely the most suitable to
commercial sized production scales. Readers are cautioned that we have not yet
established any proven or probable mineral reserves on the Searchlight Gold
Project, and there are no assurances that we will be able to do so in the
future. We are still in the process of conducting our exploration program for
the Searchlight Gold Project as well as continuing bench and pilot testing to
optimize gold recovery into solution and extraction of the gold from the
pregnant solution.
3.
|
On October 4, 2007, we engaged DCM Structured Finance
Limited (DCMSF) of London, England, to advise and assist us on various
corporate finance matters, including advising and assisting us with
respect to seeking and obtaining financing for our Clarkdale Slag
Project.
|
DCMSF is an affiliate of
DCM Securities Limited, a company based in London, England, that specializes in
providing corporate finance advice. DCMSFs Metals & Mining Advisory Team
consists of professionals who have been involved in the metals and mining sector
for decades. Its team of professionals has extensive experience in debt
structuring, equity valuation and financial modeling along with a strong
technical understanding of the industry. DCMSF has advised and assisted a number
of mining companies on arranging and structuring various financing alternatives.
DCM Securities Limited is authorized and regulated by the Financial Services
Authority.
In consideration for their
services, we have agreed to pay DCMSF the following commissions on any financing
received by us from a source introduced or referred to us by DCMSF (a Referred
Financing):
|
(a)
|
an advisory success fee equal to one percent (1.0%) of
the total principal amount of any Referred Financing; and
|
|
|
|
|
(b)
|
one half of one percent (0.5%) of one stock purchase
warrant for each $1.00 of the total principal amount of any Referred
Financing. Each one full stock purchase warrant issued to DCMSF under the
terms of their engagement will entitle DCMSF to purchase one share of our
common stock. The exercise price will be equal to the closing price of our
common stock on the date the engagement letter was executed by both DCMSF
and the Company. The closing price of our common stock as quoted on the
OTC Bulletin Board on October 4, 2007 was $2.87.
|
We have also agreed to
reimburse DCMSF for any properly documented, reasonable costs and expenses
incurred by it in connection with performing its duties under the engagement.
Unless otherwise agreed to in writing, the engagement will terminate upon the
earlier of our obtaining full financing for the Clarkdale Slag Project and the
date that is nine (9) months from the date of DCMSFs engagement.
4.
|
On November 13, 2007, we issued 6,134 shares of our
common stock to our non-management directors. These shares were issued
pursuant to the director compensation policy for our non- management
directors based on a price of $2.85 per share, being the closing price of
our common stock on September 28, 2007, the last trading day of our
previous fiscal quarter. Directors compensation expense and common stock
subscribed for were recorded in the amount of $18,000 as of that date. The
shares were issued under Section 4(2) of the Securities Act.
|
4
PLAN OF OPERATION
The following discussion and analysis
summarizes our plan of operation for the next twelve months, our results of
operations for the nine months ended September 30, 2007 and changes in our
financial condition from our year ended December 31, 2006. The following
discussion should be read in conjunction with the Managements Discussion and
Analysis or Plan of Operation included in our Annual Report on Form 10-KSB for
the year ended December 31, 2006.
Clarkdale Slag Project
During our second fiscal quarter ended June 30,
2007, we completed a materials study on the main slag pile located on the
Clarkdale Slag Project site. The results of this study were reported in our
Quarterly Report on Form 10-QSB filed with the SEC on August 16, 2007 and in our
amended Registration Statement on Form SB-2/A filed with the SEC on June 15,
2007.
Our plan of operation for the Clarkdale Slag
Project currently involves the following:
(a)
|
Construction and rehabilitation of buildings on the
project site that are expected to serve as the production and operations
facilities for the project;
|
|
|
(b)
|
Continue small scale pilot testing and site work to
assist with the optimization of the metallurgical flow sheet and
processing protocols for our first production module; and
|
|
|
(c)
|
Installation of our first production module.
|
We expect to complete the majority of each of the
above during the fourth quarter of 2007. The initial production module being
installed by us will consist of a full scale production and processing circuit
expected to process between 100-250 tons per day (tpd) of slag material. Our
plans for the final processing facility are expected to include a number of
additional production modules that will work simultaneously during full scale
operations. The first production module being constructed by us will be used to
optimize and test the economic feasibility of the Clarkdale Slag Project, which
is expected to occur during the first fiscal quarter of 2008. This first full
scale production module is expected to serve as a final feasibility study for
the Clarkdale Slag Project. If the operation of this first production module
proves that the Clarkdale Slag Project is economically feasible, we will seek to
begin financing the construction of additional production modules for the
project and our full scale processing facility.
Until such time as we have established economic
feasibility of the Clarkdale Slag Project through our feasibility studies and
the operation of our first full circuit production module for the slag pile,
there is no assurance that we will proceed to the construction of our proposed
processing facility. If the results from our feasibility studies and the
production results from our first production module are not sufficiently
positive to justify our proceeding with the construction of our processing
facility we will have to scale back or abandon our plans for the Clarkdale Slag
Project.
Searchlight Gold Project
In early 2007, we received the results of
metallurgical and analytical tests conducted by Arrakis on chain of custody
surface samples and bulk samples (6 tons) taken from the Searchlight Gold
Project. The results of these tests were reported by us in our Annual Report on
Form 10-KSB filed with the SEC on April 17, 2007, our Quarterly Reports on Form
10-QSB filed with the SEC on May 17, 2007 and August 16, 2007, and our amended
Registration Statement on Form SB-2/A filed with the SEC on June 15,
2007.
These results had indicated that autoclave
processing would be the most reliable and consistent method of extracting gold
from the sample materials tested. To test other processing/extraction methods,
Arrakis obtained additional chain-of-custody samples from the Searchlight Gold
Project and conducted tests using various metallurgical methods, including
mineral and organic acid leaching combined with appropriate oxidizers, cyanide
leaching, and autoclave leaching using chloride based lixiviants. Gravity
concentration was also examined to upgrade the feed prior to leaching. Based on
the results of these additional tests, Arrakis concluded that autoclave
processing, while more capital intensive than the alternative methods tested,
5
produced the most reliable and consistent results
on the materials extracted from the Searchlight Gold Project, and was likely the
most suitable to commercial sized production scales.
Our plan of operation for the Searchlight Gold
Project currently involves the following:
(a)
|
Continue metallurgical testing on small and bulk samples
taken from the Searchlight Gold Project area; and
|
|
|
(b)
|
Conduct drilling and pre-feasibility program for the
Searchlight Gold Project.
|
Current metallurgical testing for the Searchlight
Gold Project will focus on optimizing the recovery of gold during the
metallurgical process. During the fourth fiscal quarter of 2007, we intend to
continue conducting microwave digestion and autoclave testing on samples taken
from the project area, which is expected to provide additional metallurgical
data regarding the analytical protocols to be used on the project. In
conjunction with this testing, we will also continue to work on optimizing the
recovery of gold from solution as this is expected to be a key component in
determining the effectiveness of the overall metallurgical recovery process to
be used for the Searchlight Gold Project.
During the fourth fiscal quarter of 2007, we also
hope to finalize our plans with respect to the drilling and pre-feasibility
program that we intend to conduct for the Searchlight Gold Project. This program
is expected to include an 18 hole drilling program, chain-of-custody sampling
and assaying of drill hole materials, pilot plant tests and the commissioning of
an independent pre-feasibility report. We have been corresponding with the
Bureau of Land Management (the BLM) regarding the transfer of an approved plan
of operations for the drilling program. The plan of operations is currently
registered in the name of a vendor of the Searchlight Claims. The BLM has
indicated to us that they have some concerns about approving the transfer of the
plan of operation because of an outstanding debt owed to the BLM by one of our
former directors. We are currently working with the former director to resolve
these issues with the BLM as quickly as possible. Additional planned
metallurgical testing is expected to proceed as scheduled; however, if we are
unable to obtain a transfer of the plan of operations, our proposed drilling
program for the Searchlight Gold Project could be delayed.
Readers are cautioned that we have not yet
established any proven or probable mineral reserves on the Searchlight Gold
Project, and there are no assurances that we will be able to do so in the future
as we are still in the process of conducting our exploration program for the
Searchlight Gold Project.
Anticipated Cash Requirements
Our estimated expenses for the next twelve months
are as follows:
|
EXPENSE
|
COST
|
|
|
|
Administrative
Expenses
|
$2,000,000
|
Legal and Accounting
Expenses
|
$600,000
|
Consulting
Services
|
$1,000,000
|
|
|
|
Clarkdale Slag
Project
|
|
·
|
Pilot Testing/Site
Work
|
$300,000
|
·
|
First Module of
Production
|
$3,500,00
0
|
·
|
Commence
Construction of Full-Scale Processing Facility
|
$15,000,000
|
|
|
$18,800,000
|
Searchlight Gold
Project
|
|
·
|
Metallurgical
Testing Program
|
$400,000
|
·
|
Commence Drilling
and Feasibility Program
|
$300,000
|
|
|
$700,000
|
|
TOTAL
|
$23,100,000
|
6
We recorded a net loss of $2,230,810 for the nine
months ended September 30, 2007 and have an accumulated deficit of $11,759,190
since inception. As at September 30, 2007, we had cash reserves in the amount of
$8,833,969. This is less than the $23,100,000 that our management anticipates
spending on our exploration and development programs and the anticipated costs
associated with our continuing operations. Accordingly, we expect that we will
need to obtain additional financing in the near future. See Future Financings,
below.
RESULTS OF OPERATIONS
Restatements
We have restated certain items on our consolidated
balance sheets and statements of operations. On our consolidated balance sheets:
(i) mineral properties have been restated to include the market value of certain
shares issued by us under the terms of our option agreements for the mineral
claims making up the Searchlight Gold Project; and (ii) the Clarkdale Slag
Project has been restated to include deferred future income tax liability and
state income tax liability in connection with our acquisition of Transylvania
International, Inc. (TI). Our consolidated statement of operations for the
period from inception to December 31, 2006 has been restated to reclassify net
losses prior to January 1, 2005 as losses from discontinued operations. Our
consolidated statements of operations for the nine month period ended September
30, 2006 has been restated to reclassify foreign currency translation
adjustments as general and administrative expenses. Related to this issue, our
consolidated balance sheet for the period ended December 31, 2006 has been
restated to reclassify accumulated other comprehensive loss as accumulated
deficit during the exploration stage. A description of the restatements made to
our financial statements is provided at Note 15 to the consolidated financial
statements for the period ended September 30, 2007 included with this Quarterly
Report on Form 10-QSB.
Third Quarter and Nine Months
Summary
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase /
|
|
|
2007
|
|
|
2006
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(restated)
|
|
|
(Decrease)
|
|
Revenue
|
$
|
8,515
|
|
|
-
|
|
|
n/a
|
|
$
|
28,095
|
|
|
-
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
(796,946)
|
|
|
(875,181)
|
|
|
(8.9)%
|
|
|
(2,505,225)
|
|
|
(2,567,656)
|
|
|
(2.4)%
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on
|
|
-
|
|
|
-
|
|
|
n/a
|
|
|
-
|
|
|
(4,398)
|
|
|
n/a
|
|
Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
|
|
94,580
|
|
|
24,106
|
|
|
292.4%
|
|
|
246,320
|
|
|
24,106
|
|
|
921.8%
|
|
Dividend Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
$
|
(693,851)
|
|
$
|
(851,075)
|
|
|
(18.5)%
|
|
$
|
(2,230,810)
|
|
$
|
(2,547,948)
|
|
|
(12.4)%
|
|
Revenue
During the quarter ended September 30, 2007 we
received revenues of $8,515 from leases and rentals of our commercial buildings
and certain facilities acquired in connection with our acquisition of TI. The
property leases consist of: (i) a rental agreement with Clarkdale Arizona
Central Railroad for the use of certain facilities at a rate of $1,700 per
month; and (ii) lease of a commercial building space to two tenants at a rate of
$1,260 per month. The lease arrangements are on a month to month basis with no
formal agreements.
We are currently in the exploration stage of our
business, have not earned any revenues from our planned mineral operations to
date. We do not anticipate earning revenues from our planned mineral operations
until
7
such time as we enter into commercial production
of the Clarkdale Slag Project, the Searchlight Gold Project or other mineral
properties we may acquire from time to time, of which there are no
assurances.
Expenses
Our operating expenses for the quarters ended
September 30, 2007 and September 30, 2006 are outlined in the table
below:
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase /
|
|
|
2007
|
|
|
2006
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
(restated)
|
|
|
(Decrease)
|
|
Mineral exploration and
|
$
|
199,961
|
|
$
|
642,226
|
|
|
(68.9)%
|
|
$
|
810,539
|
|
$
|
1,665,114
|
|
|
(51.3)%
|
|
evaluation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mineral exploration and
|
|
90,000
|
|
|
-
|
|
|
n/a
|
|
|
270,000
|
|
|
-
|
|
|
n/a
|
|
evaluation related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
|
471,209
|
|
|
231,304
|
|
|
103.7%
|
|
|
1,374,668
|
|
|
897,925
|
|
|
53.1%
|
|
General and administrative
|
|
23,017
|
|
|
-
|
|
|
n/a
|
|
|
23,017
|
|
|
-
|
|
|
n/a
|
|
related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
11,710
|
|
|
1,651
|
|
|
609.3%
|
|
|
25,952
|
|
|
4,617
|
|
|
462.1%
|
|
Interest expense
|
|
1,049
|
|
|
-
|
|
|
n/a
|
|
|
1,049
|
|
|
-
|
|
|
n/a
|
|
Total Operating Expenses
|
$
|
796,946
|
|
$
|
875,181
|
|
|
(8.9)%
|
|
$
|
2,505,225
|
|
$
|
2,567,656
|
|
|
(2.4)%
|
|
Our operating expenses for the nine months ended
September 30, 2007 decreased slightly compared to the comparative period in
2006. Our general and administrative expenses increased as a result of (i)
increased professional and administrative expenses associated with holding our
2007 annual meeting of stockholders, the acquisition of Transylvania
International, Inc., the completion of our equity financings and the preparation
of our Registration Statement on Form SB-2; (ii) increased management fees
related to the administration of the Clarkdale Slag Project site; and (iii)
increased compensation paid to our executive officers and our
directors.
Mineral exploration costs decreased as a result of
our focus on our construction efforts for the Clarkdale Slag Project during the
fiscal quarters ended June 30, 2007 and September 30, 2007.
Amounts paid to related parties for mineral
exploration and evaluation expenses during the period were paid to Nanominerals
Corp. (Nano) for technical assistance and financing related activities
provided by Nano in connection with the exploration and development of our
mineral projects. Ian R. McNeil, our Chief Executive Officer and President, and
Carl S. Ager, our Secretary and Treasurer, are each 17% shareholders of Nano.
Nano is also one of our significant shareholders. Amounts paid to related
parties for general and administrative expenses were paid to Cupit, Milligan,
Ogden & Williams, CPAs (CMOW) for accounting support services. Melvin L.
Williams, our Chief Financial Officer, is affiliated with CMOW.
Equity Compensation
Included in general and administrative expenses
for the three and nine month periods ended September 30, 2007 are compensation
expenses related to the granting of stock options of $1,312 and $144,415,
respectively. On April 30, 2007, we adopted our 2007 Stock Option Plan (the
"2007 Plan"). Under the terms of the 2007 Plan, as amended May 8, 2007, options
to purchase up to 4,000,000 shares of common stock that may be granted to our
employees, officers, directors, and eligible consultants. As at September 30,
2007, 7,246 options have been granted under the 2007 Plan with an exercise price
of $3.45 per share. The options are fully vested and expire on June 15, 2009.
During the nine months ended September 30, 2007, we issued under our 2006 Stock
Option Plan options to acquire 75,700 shares of common stock to three of our
executive officers and an employee with an exercise price of $4.04 per share.
The options are fully vested and expire on February 16, 2012.
8
Liquidity and Financial
Condition
Working Capital
|
|
At September 30, 2007
|
|
|
At December 31, 2006
|
|
|
Percentage
|
|
|
|
|
|
|
(restated)
|
|
|
Increase / (Decrease)
|
|
Current Assets
|
$
|
9,139,397
|
|
$
|
3,790,483
|
|
|
141.1%
|
|
Current Liabilities
|
|
(8,235,716)
|
|
|
(1,583,306)
|
|
|
420.2%
|
|
Working Capital
|
$
|
903,681
|
|
$
|
2,207,177
|
|
|
(59.1)%
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
Cash Flows used in Operating
Activities
|
|
$
|
(2,601,921)
|
|
$
|
(2,249,536)
|
|
Cash Flows used in
Investing Activities
|
|
|
(13,046,254)
|
|
|
(25,291)
|
|
Cash Flows provided by Financing
Activities
|
|
|
20,797,896
|
|
|
6,256,376
|
|
Net Increase in Cash
During Period
|
|
$
|
5,149,721
|
|
$
|
3,981,549
|
|
Working Capital.
The
decrease in our working capital surplus from $2,207,177 as at December 31, 2006
to $903,681 as at September 30, 2007 was primarily due to additional current
obligations related to our acquisition of Transylvania International, Inc.
(Transylvania) in February, 2007. As at September 30, 2007, our current
obligations in respect of the amounts payable to Transylvanias former
shareholder, Verde River Iron Company, in connection with the acquisition
totalled $6,990,000.
Property and Equipment.
Property and equipment increased by $2,013,893 during the quarter ended
September 30, 2007. The increase was primarily due to site improvement and
equipment at the Clarkdale Slag Project.
Income Tax Liability.
Included in long term liabilities in the accompanying restated consolidated
financials statements is a balance of $41,184,686 for deferred tax liability
relating to the Clarkdale Slag Project. A deferred income tax liability was
recorded on the excess of fair market value for the asset acquired over income
tax basis at a combined statutory federal and state rate of 38.6% with the corresponding
increase in the purchase price allocation of the assets acquired. As of September
30, 2007 and December 31, 2006, we had net operating loss carryforwards of approximately
$6,821,800 and $4,764,549, respectively for federal income taxes. The net operating
loss carryforwards expire between 2027 and 2025.
Future Financings
We recorded a net loss of $2,230,810 for the nine
months ended September 30, 2007 and have an accumulated deficit of $11,759,190
since inception. As at September 30, 2007 we had cash reserves in the amount of
$8,833,969. This is less than the $23,100,000 that our management anticipates
spending on our exploration and development programs and the anticipated costs
associated with our continuing operations. Accordingly, we expect that we will
need to obtain additional financing in the near future.
On October 4, 2007, we engaged DCM Structured
Finance Limited (DCMSF) of London, England, to advise and assist us on various
corporate finance matters, including advising and assisting us with respect to
seeking and obtaining financing for the Clarkdale Slag Project. However, we do
not, at this time, have any financing arrangements in place.
Obtaining additional financing is subject to a
number of factors, including the market prices for our mineral property and
gold. These factors may make the timing, amount, terms or conditions of
additional financing unavailable to us. Since our inception, we have used our
common stock to raise money for our operations and for our property
acquisitions. We have not attained profitable operations and are dependent upon
obtaining financing to pursue our
9
plan of operation. For these reasons, our
independent auditors believe there exists a substantial doubt about our ability
to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES
We have identified certain accounting policies,
described below, that are the most important to the portrayal of our current
financial condition and results of operations.
Use of Estimates
In preparing the consolidated financial statements
in conformity with accounting principles generally accepted in the United
States, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements and revenues and expenses
during the reported period. Actual results could differ from these
estimates.
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and our wholly-owned subsidiaries.
Significant intercompany accounts and transactions have been
eliminated.
Mineral Rights
We capitalize acquisition and option costs of
mineral property rights. The amount capitalized represents fair value at the
time the mineral rights are acquired. The accumulated costs of acquisition for
properties that are developed to the stage of commercial production will be
amortized using the unit-of-production method. We capitalize acquisition and
option costs of mineral rights as tangible assets in accordance with Emerging
Issues Task Force abstract 04-02. Upon completion of a bankable feasibility
study, the claims will be amortized using the unit-of-production method over the
life of the claim. If we do not continue with exploration after the completion
of the feasibility study, the claims will be expensed at that time.
Exploration Costs
Mineral exploration costs are expensed as
incurred.
Fixed Assets
Fixed assets are stated at cost less accumulated
depreciation. Depreciation is provided principally on the straight-line method
over the estimated useful lives of the assets, which are generally 3 to 39
years. The cost of repairs and maintenance is charged to expense as incurred.
Expenditures for property betterments and renewals are capitalized. Upon sale or
other disposition of a depreciable asset, cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in other income
(expense). We periodically evaluate whether events and circumstances have
occurred that may warrant revision of the estimated useful life of fixed assets
or whether the remaining balance of fixed assets should be evaluated for
possible impairment. We use an estimate of the related undiscounted cash flows
over the remaining life of the fixed assets in measuring their
recoverability.
10
RISKS AND UNCERTAINTIES
Actual capital costs, operating costs,
production and economic returns may differ significantly from our estimates and
there are no assurances that any future development activities will result in
profitable mining operations.
We are an exploration stage company and are still
in the process of exploring and developing our mineral projects. We do not have
any historical mineral operations upon which to base our estimates of costs.
Decisions about the development of our mineral properties will ultimately be
based upon feasibility studies. Feasibility studies derive cost estimates based
primarily upon:
-
anticipated tonnage, grades and metallurgical characteristics
of the ore to be mined and processed;
-
anticipated recovery rates of gold and other metals from the
ore;
-
cash operating costs of comparable facilities and equipment;
and
-
anticipated weather/climate conditions.
Capital and operating costs, production and
economic returns, and other estimates contained in our final feasibility
studies, may differ significantly from our current estimates. There is no
assurance that our actual capital and operating costs will not exceed our
current estimates. In addition, delays to construction schedules may negatively
impact the net present value and internal rates of return for our mineral
properties. There are no assurances that actual recoveries of base and precious
metals or other minerals processed from our mineral projects will be
economically feasible or that actual costs will match our pre-feasibility
estimates.
Feasibility estimates typically underestimate
future capital and operating costs. We are still developing our metallurgy
analysis and flow sheets for the Clarkdale Slag Project. If the results from our
feasibility studies on the Clarkdale Slag Project and the production results
from the operation of our first production module are not sufficiently positive
for us to proceed with the construction of our proposed processing facility we
will have to scale back or abandon our proposed operations on the Clarkdale Slag
Project.
We lack an operating history and have losses
which we expect to continue into the future. As a result, we may have to suspend
or cease exploration activities and if we do not obtain additional financing,
our business will fail.
We were incorporated on January 12, 1999 and since
that time were engaged in the business of biotechnology research and
development. In February, 2005, we changed our business to mineral exploration.
We have a limited history upon which an evaluation of our future success or
failure can be made. Our ability to achieve and maintain profitability and
positive cash flow is dependent upon, among other things:
-
our ability to locate a profitable mineral property;
-
positive results from our feasibility studies on the
Searchlight Gold Project and the Clarkdale Slag
Project;
-
positive results from the operation of our initial test
module on the Clarkdale Slag Project; and
-
our ability to generate revenues.
Our plan of operation calls for significant
expenses in connection with the exploration of the Searchlight Gold Project and
drilling and sampling activities on the Clarkdale Slag Project which will
require us to obtain additional financing. We recorded a net loss of $2,230,810
for the nine months ended September 30, 2007 and have an accumulated deficit of
$11,759,190 as at September 30, 2007. As at September 30, 2007, we had cash
reserves totaling $8,833,969. Over the next twelve months, our management
anticipates that the minimum cash requirements for funding our proposed
exploration program and our continued operations will be $23,100,000.
Accordingly we do not have sufficient funds to meet our planned expenditures
over the next twelve months and will need to obtain further financing to fund
our operations.
11
Obtaining additional financing is subject to a
number of factors, including the market prices for the mineral property and base
and precious metals. These factors may make the timing, amount, terms or
conditions of additional financing unavailable to us. Since our inception, we
have used our common stock to raise money for our operations and for our
property acquisitions. We have not attained profitable operations and are
dependent upon obtaining financing to pursue our plan of operation. For these
reasons, our independent auditors believe there exists a substantial doubt about
our ability to continue as a going concern.
If the results from our feasibility studies and
the production results from the operation of our first production module are not
sufficiently positive for us to proceed with the construction of our processing
facility we will have to scale back or abandon our proposed operations on the
Clarkdale Slag Project.
During the fourth fiscal quarter of 2007, we
intend to continue small scale pilot testing and site work for the Clarkdale
Slag Project and complete the installation of our first production module for
the project. Our first production module for the Clarkdale Slag Project will
consist of a full scale production and processing cycle. This first production
module is expected to become operational during the first fiscal quarter of 2008
and be used as a final test of the economic feasibility of the Clarkdale Slag
Project. If the operation of this first production module proves that the
Clarkdale Slag Project is economically feasible, we will seek to begin financing
the construction of additional production modules and our full scale processing
facility.
However, if the results of our pre-feasibility
studies on the Clarkdale Slag Project and the production results from the
operation of first production module are not positive, we will have to scale
back or abandon our proposed operations on the Clarkdale Slag Project. There is
no assurance that actual recoveries of base and precious metals or other
minerals re-processed from the slag pile will be economically feasible. If metal
recoveries are less than projected, then our metal sales will be less than
anticipated and may not equal or exceed the cost of mining and recovery in which
case our operating results and financial condition will be adversely
affected.
If we are unable to achieve projected mineral
recoveries from our test mining activities at the Clarkdale Slag Project and
Searchlight Gold Project, then our financial condition will be adversely
affected.
As we have not established any reserves on either
our Clarkdale Slag Project or Searchlight Gold Project to date, there is no
assurance that actual recoveries of minerals from material mined during test
mining activities will equal or exceed our exploration costs on our mineral
properties. To date we have completed only a limited amount of drilling and
sampling on Clarkdale Slag Project site and the process testing of results has
been limited to small pilot plants and bench scale testing. There is no
assurance that if the Company moves to production scale from pilot plant scale
that the Companys production results will match pre-feasibility estimates. If
mineral recoveries are less than projected, then our sales of minerals will be
less than anticipated and may not equal or exceed the cost of exploration and
recovery in which case our operating results and financial condition will be
adversely affected.
Because our management does not have formal
training specific to the technicalities of mineral exploration, there is a
higher risk our business will fail.
Our executive officers and directors do not have
any formal training as geologists or in the technical aspects of management of a
mineral exploration company. With no direct training or experience in these
areas, our management may not be fully aware of the specific requirements
related to working within this industry. Our management's decisions and choices
may not take into account standard engineering or managerial approaches mineral
exploration companies commonly use. Consequently, our operations, earnings, and
ultimate financial success could suffer irreparable harm due to management's
lack of experience in this industry.
Because of the unique difficulties and
uncertainties inherent in mineral exploration ventures, we face a high risk of
business failure.
Investors should be aware of the difficulties
normally encountered by new mineral exploration companies and the high rate of
failure of such enterprises. The likelihood of success must be considered in
light of the problems, expenses, difficulties, complications and delays
encountered in connection with the exploration of
12
the mineral properties that we plan to undertake.
These potential problems include, but are not limited to, unanticipated problems
relating to exploration, and additional costs and expenses that may exceed
current estimates. The expenditures to be made by us in the exploration of the
mineral claim may not result in the discovery of mineral deposits. If funding is
not available, we may be forced to abandon our operations.
Because we anticipate our operating expenses
will increase prior to our earning revenues, we may never achieve profitability.
Prior to completion of our exploration stage, we
anticipate that we will incur increased operating expenses without realizing any
revenues. We therefore expect to incur significant losses into the foreseeable
future. We recognize that if we are unable to generate significant revenues from
the exploration of the Searchlight Gold Project or the Clarkdale Slag Project,
we will not be able to earn profits or continue operations. There is no history
upon which to base any assumption as to the likelihood that we will prove
successful, and we can provide no assurance that we will generate any revenues
or ever achieve profitability. If we are unsuccessful in addressing these risks,
our business will most likely fail.
If the price of base and precious metals
declines, our financial condition and ability to obtain future financings will
be impaired.
The price of base and precious metals is affected
by numerous factors, all of which are beyond our control. Factors that tend to
cause the price of base and precious metals to decrease include the following:
|
(a)
|
Sales or leasing of base and precious metals by
governments and central banks;
|
|
|
|
|
(b)
|
A low rate of inflation and a strong US dollar;
|
|
|
|
|
(c)
|
Speculative trading;
|
|
|
|
|
(d)
|
Decreased demand for base and precious metals in
industrial, jewelry and investment uses;
|
|
|
|
|
(e)
|
High supply of base and precious metals from production,
disinvestment, scrap and hedging;
|
|
|
|
|
(f)
|
Sales by base and precious metals producers and foreign
transactions and other hedging transactions; and
|
|
|
|
|
(g)
|
Devaluing local currencies (relative to base and precious
metals price in US dollars) leading to lower production costs and higher
production in certain major base and precious metals producing
regions.
|
Our business is dependent on the price of base and
precious metals. We have not undertaken hedging transactions in order to protect
us from a decline in the price of base and precious metals. A decline in the
price of base and precious metals may also decrease our ability to obtain future
financings to fund our planned exploration programs.
Because of the inherent dangers involved in
mineral exploration, there is a risk that we may incur liability or damages as
we conduct our business.
The search for valuable minerals involves numerous
hazards. As a result, we may become subject to liability for such hazards,
including pollution and other hazards against which we cannot insure or against
which we may elect not to insure. At the present time we have no coverage to
insure against these hazards. The payment of such liabilities may have a
material adverse effect on our financial position.
If we are unable to re-process minerals from
our Clarkdale Slag Project economically, then our financial condition and our
revenues will be adversely affected.
Until such time as we have established economic
feasibility of the Clarkdale Slag Project through our feasibility studies and
the operation of our one unit module of production from the slag pile, there is
no assurance that we will proceed to the construction of a proposed processing
facility. If the results from our pre-feasibility studies and the production
results from the operation of our one unit module are not sufficiently
13
positive for us to proceed with the construction
of our proposed processing facility we will have to scale back or abandon our
proposed operations on the Clarkdale Slag Project. There is no assurance that
actual recoveries of base and precious metals or other minerals re-processed
from the slag pile will be economically feasible. If metal recoveries are less
than projected, then our metal sales will be less than anticipated and may not
equal or exceed the cost of mining and recovery in which case our operating
results and financial conditions will be adversely affected.
As we undertake exploration of the Searchlight
Gold Project, we will be subject to compliance with government regulation that
may increase the anticipated cost of our exploration program.
There are several governmental regulations that
materially restrict mineral exploration. We will be subject to the laws of the
State of Nevada and applicable federal laws as we carry out our exploration
program on the Searchlight Gold Project. We are required to obtain work permits,
post bonds and perform remediation work for any physical disturbance to the land
in order to comply with these laws. While our planned exploration program
budgets for regulatory compliance, there is a risk that new regulations could
increase our costs of doing business and prevent us from carrying out our
exploration program.
If we become subject to increased environmental
laws and regulation, our operating expenses may increase.
Our exploration operations are regulated by both
US Federal and Nevada and Arizona state environmental laws that relate to the
protection of air and water quality, hazardous waste management and mine
reclamation. These regulations will impose operating costs on us. If the
regulatory environment for our operations changes in a manner that increases the
costs of compliance and reclamation, then our operating expenses may increase.
This would result adversely affect our financial condition and operating
results.
We have no known mineral reserves and if we
cannot find any, we will have to cease operations.
We have no mineral reserves. Mineral exploration
is highly speculative. It involves many risks and is often non-productive. Even
if we are able to find mineral reserves on our property our production
capability is subject to further risks including:
-
Costs of bringing the property into production including
exploration work, preparation of production
feasibility
studies, and construction of production facilities;
-
Availability and costs of financing;
-
Ongoing costs of production; and
-
Environmental compliance regulations and restraints.
The marketability of any minerals acquired or
discovered may be affected by numerous factors which are beyond our control and
which cannot be accurately predicted, such as market fluctuations, the lack of
milling facilities and processing equipment near the Searchlight Gold Project,
the success of our drilling and sampling activities on the Clarkdale Slag
Project and such other factors as government regulations, including regulations
relating to allowable production, exporting of minerals, and environmental
protection. If we do not find a mineral reserve or if we cannot explore the
mineral reserve, either because we do not have the money to do it or because it
will not be economically feasible to do it, we will have to cease
operations.
As we undertake exploration of our mineral
claims, we will be subject to compliance with government regulation that may
increase the anticipated cost of our exploration program.
There are several governmental regulations that
materially restrict mineral exploration. We are required to obtain work permits,
post bonds and perform remediation work for any physical disturbance to the land
in order to comply with these laws. If we enter the production phase, the cost
of complying with permit and regulatory environment laws will be greater because
the impact on the project area is greater. Permits and regulations will control
all aspects of the production program if the project continues to that stage.
Examples of regulatory requirements include:
|
(a)
|
Water discharge will have to meet drinking water
standards;
|
|
|
|
|
(b)
|
Dust generation will have to be minimal or otherwise
re-mediated;
|
14
|
(c)
|
Dumping of material on the surface will have to be
re-contoured and re-vegetated with natural vegetation;
|
|
|
|
|
(d)
|
An assessment of all material to be left on the surface
will need to be environmentally benign;
|
|
|
|
|
(e)
|
Ground water will have to be monitored for any potential
contaminants;
|
|
|
|
|
(f)
|
The socio-economic impact of the project will have to be
evaluated and if deemed negative, will have to be re-mediated; and
|
|
|
|
|
(g)
|
There will have to be an impact report of the work on the
local fauna and flora including a study of potentially endangered
species.
|
There is a risk that new regulations could
increase our costs of doing business and prevent us from carrying out our
exploration program. We will also have to sustain the cost of reclamation and
environmental remediation for all exploration work undertaken. Both reclamation
and environmental remediation refer to putting disturbed ground back as close to
its original state as possible. Other potential pollution or damage must be
cleaned-up and renewed along standard guidelines outlined in the usual permits.
Reclamation is the process of bringing the land back to its natural state after
completion of exploration activities. Environmental remediation refers to the
physical activity of taking steps to remediate, or remedy, any environmental
damage caused. The amount of these costs is not known at this time as we do not
know the extent of the exploration program that will be undertaken beyond
completion of the recommended work program. If remediation costs exceed our cash
reserves we may be unable to complete our exploration program and have to
abandon our operations.
We may conduct further offerings in the future
in which case investors shareholdings will be diluted.
Since our inception we have relied on sales of our
common stock to fund our operations. We may conduct further equity offerings in
the future to finance our current projects or to finance subsequent projects
that we decide to undertake. If common stock is issued in return for additional
funds, the price per share could be lower than that paid by our current
stockholders. We anticipate continuing to rely on sales of our common stock in
order to fund our business operations. If we issue additional stock, investors
percentage interest in us will be lower. This condition is often referred to as
"dilution". The result of this could reduce the value of investors
stock.
Because our stock is a penny stock,
stockholders will be more limited in their ability to sell their
stock.
Our common stock is considered to be a penny
stock since it does not qualify for one of the exemptions from the definition
of penny stock under Section 3a51-1 of the Securities Exchange Act of 1934
(the Exchange Act). Our common stock is a penny stock because it meets one
or more of the following conditions (i) the stock trades at a price less than
$5.00 per share; (ii) it is not traded on a recognized national exchange;
(iii) it is not quoted on the Nasdaq Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company that has been in
business less than three years with net tangible assets less than $5
million.
The principal result or effect of being designated
a penny stock is that securities broker-dealers participating in sales of our
common stock will be subject to the penny stock regulations set forth in Rules
15-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2
requires broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document at least two business days
before effecting any transaction in a penny stock for the investor's account.
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-
15
dealer made the determination in (ii) above; and
(iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor's financial situation,
investment experience and investment objectives. Compliance with these
requirements may make it more difficult and time consuming for holders of our
common stock to resell their shares to third parties or to otherwise dispose of
them in the market or otherwise.