Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Amendment
No. 1)
FORM
10-K/A
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED JULY 31, 2008
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File No. 0-13078
CAPITAL GOLD
CORPORATION
(Exact
name of registrant as specified in its charter)
State of Delaware
|
|
13-31805030
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or organization)
|
|
Identification
No.)
|
76 Beaver Street, 14th Floor, New York, New York
|
|
10005
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (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
¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or 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
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer,” “accelerated filer" and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
¨ Large
accelerated
filer x
Accelerated filer
¨
Non-accelerated
filer ¨
Smaller Reporting Company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
The
aggregate market value of the voting and non-voting common equity on January 31,
2008 held by non-affiliates computed by reference to the closing price of the
issuer’s Common Stock on that date, was $93,983,205 based upon the closing price
($0.70) multiplied by the 134,262,150 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 24, 2008: 192,974,824.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
Explanatory
Note
Capital
Gold Corporation is filing this Amendment No. 1 on Form 10-K/A to our annual
report on Form 10-K for the year ended July 31, 2008, originally filed on
October 29, 2008, to respond to a comment letter issued by the staff of the
Securities and Exchange Commission, or the SEC, in connection with its review of
our periodic disclosures. The following sections of this Form 10-K/A
have been amended:
Cover
page
|
Filing
status
|
|
We
have changed our filing status from “smaller reporting company” to
“accelerated filer.”
|
Part
I, Item 1
|
Business
|
|
We
have added a general description of our business and added disclosure
regarding ounces of gold sold during the fiscal year ended July 31, 2008
and average monthly production.
|
Part
I, Item 2
|
Property
|
|
We
have added additional disclosure regarding our El Chanate property, the
equipment used to mine gold, and a summary of cumulative activity with
proven and probable mineral reserves.
|
Part
II, Item 7
|
Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations
|
|
We
have added a summary of results of operations in tabular form,
consolidated our equity based compensation expense with general and
administrative expense, and enhanced our disclosure regarding debt
covenants, ore on leach pads and inventory and revenue
recognition.
|
Part
II, Item 8
|
Financial
Statements and Supplementary Financial Data
|
|
We
have included an audited statement of changes in shareholders’ equity for
the year ended July 31. 2006 and expanded the disclosure in the footnotes
to the audited financial statements to cover each of the three years ended
July 31, 2008, 2007 and 2006. We have also expanded our
footnote disclosure regarding accounts receivable, marketable securities,
ore on leach pads and inventory, long term debt, revenue recognition,
equity based compensation, related party transactions, stockholders’
equity, employee and consulting agreements, sales contracts and financial
instruments. In addition, we made certain reclassifications
that management determined were not material.
|
Part
II, Item 9A
|
Controls
and Procedures
|
|
We
revised the text regarding our evaluation of disclosure controls and
procedures. Management of the Company has requested the
Company’s independent registered public accounting firm to prepare an
attestation report regarding internal controls over financial
reporting. When such report is available, the Company will
further amend its Form 10-K for the fiscal year ended July 31,
2008.
|
Part
III, Item 11
|
Executive
Compensation
|
|
We
have expanded our Compensation Discussion and Analysis to include
additional disclosure regarding our compensation consultant, the role of
the chief executive officer and other executive officers in making
compensation decisions, the factors considered to determine executive
bonuses, equity awards granted in fiscal 2008 to officers and directors
and executive employment agreements. We also combined the
Summary Compensation Table into one table and added required footnote
disclosures.
|
Part
III, Item 13
|
Certain
Relationships and Related Transactions and Director
Independence
|
|
We
have enhanced our disclosure to name all of the parties to the related
party transactions.
|
For the
convenience of the reader, this amendment includes, in its entirety, those items
in our original filing not being amended and restated. This amendment continues
to describe conditions as of our original filing, and does not update
disclosures contained herein to reflect events that occurred at a later date.
Accordingly, this amendment should be read in conjunction with our filings made
with the Securities and Exchange Commission subsequent to the original filing of
our Form 10-K for the fiscal year ended July 31, 2008.
New
certifications of our principal executive officer and principal financial
officer are included as exhibits to this amendment.
CAPITAL
GOLD CORPORATION
Form
10-K/ A
July 31,
2008
Table of Contents
|
|
Page
|
Glossary
|
|
(iii)
|
|
Part I
|
|
|
|
|
Item
1.
|
Business.
|
1
|
Item
1A.
|
Risk
Factors.
|
2
|
Item
1B.
|
Unresolved
Staff Comments.
|
9
|
Item
2.
|
Property.
|
9
|
Item
3.
|
Legal
Proceedings.
|
18
|
Item
4.
|
Submission
of Matters to a Vote of
|
|
|
Security
Holders.
|
18
|
|
|
|
|
Part II
|
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related
|
|
|
Stockholder
Matters and Issuer
|
|
|
Purchases
of Equity Securities.
|
18
|
Item
6.
|
Selected
Financial Data.
|
22
|
Item
7.
|
Management's
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations.
|
23
|
Item
7A.
|
Quantitative
and Qualitative Disclosure
|
|
|
About
Market Risk
|
39
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
41
|
Item
9.
|
Changes
in and Disagreement with Accountants
|
|
|
on
Accounting and Financial Disclosure.
|
41
|
Item
9A
|
Controls
and Procedures.
|
41
|
Item
9B
|
Other
Information.
|
42
|
|
|
|
|
Part III
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
43
|
Item
11.
|
Executive
Compensation.
|
48
|
Item
12.
|
Security
Ownership of Certain Beneficial
|
|
|
Owners
and Management and Related
|
|
|
Stockholder
Matters.
|
59
|
Item
13.
|
Certain
Relationships and Related Transactions
|
|
|
and
Director Independence.
|
62
|
Item
14.
|
Principal
Accountant Fees and Services.
|
64
|
|
Part IV
|
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
65
|
|
|
|
Signatures |
69
|
|
|
|
Supplemental
Information |
70
|
|
|
|
Financial
Statements |
F-1
|
GLOSSARY OF TECHNICAL
TERMS
Reserve:
|
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.
|
|
|
Proven
Reserve:
|
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.
|
|
|
Probable
Reserve:
|
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.
|
|
|
Mineralized
Material
|
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.
|
|
|
Non-reserves
|
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.
|
|
|
Exploration
Stage
|
An
“exploration stage” prospect is one which is not in either the development
or production stage.
|
|
|
Development
Stage
|
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.
|
|
|
Production
Stage
|
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.
|
Caliche:
|
Sediment
cemented by calcium carbonate near surface.
|
|
|
Diorite:
|
Igneous
Rock (Rock formed from magma or molten rock).
|
|
|
Dore:
|
Bars
of low purity precious metal (Gold & Silver) which represents final
product of a gold mine typically weighing 25 kg per
bar.
|
|
|
Dikes:
|
Tabular,
vertical bodies of igneous rock.
|
|
|
Fissility:
|
Shattered,
broken nature of rock.
|
|
|
Fracture
Foliations:
|
Fracture
pattern in rock, parallel orientation, resulting from
pressure.
|
|
|
Heap
Leaching:
|
Broken
and crushed ore on a pile subjected to dissolution of metals by leach
solution.
|
|
|
Hydrometallurgical
|
|
Plant:
|
A
metallurgical mineral processing plant that uses water to leach or
separate and concentrate elements or minerals.
|
|
|
Intercalated:
|
Mixed
in.
|
|
|
Litho
static Pressure:
|
Pressure
brought on by weight of overlaying rocks.
|
|
|
Major
|
|
Intrusive
Center:
|
An
area where large bodies of intrusive igneous rock exist and through which
large amounts of mineralizing fluids rose.
|
|
|
Mesothermal:
|
A
class of hydrothermal ore deposit formed at medium temperatures and a
depth over one mile in the earth’s crust.
|
|
|
Microporphyritic
|
|
Latite:
|
Extremely
fine grained siliceous igneous rock with a distribution of larger crystals
within.
|
|
|
Mudstone:
|
Sedimentary
bed composed primarily of fine grained material such as clay and
silt.
|
|
|
PPM:
|
Part
per million.
|
|
|
Pyritized:
|
Partly
replaced by the mineral pyrite.
|
|
|
Reverse
Circulation
|
|
Drilling
(or R.C.
|
|
Drilling):
|
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.
|
Sericitized:
|
Rocks
altered by heat, pressure and solutions resulting in formation of the
mineral sericite, a very fine grained mica.
|
|
|
Siltstone:
|
A
sedimentary rock composed of clay and silt sized
particles.
|
|
|
Silicified:
|
Partly
replaced by silica.
|
|
|
Stockwork
Breccia:
|
Earth's
crust broken by two or more sets of parallel faults converging from
different directions.
|
|
|
Stockwork:
|
Ore,
when not in strata or in veins but in large masses, so as to be worked in
chambers or in large blocks.
|
|
|
Surface
Mine:
|
Surface
mining by way of an open pit without shafts or underground
working.
|
PART I
Item
1. Business
Capital Gold Corporation is engaged in
the mining, exploration and development of gold properties in
Mexico. Our primary focus is on the operation and development of the
El Chanate project, and we also conduct gold exploration in other locations in
Sonora, Mexico.
Sonora,
Mexico Concessions
El
Chanate
Through
wholly-owned subsidiaries, Capital Gold Corporation owns 100% of 16 mining
concessions located in the Municipality of Altar, State of Sonora, Republic of
Mexico totaling approximately 3,544 hectares (8,756 acres or 13.7 square
miles). We commenced mining operations on two of these concessions in
late March 2007 and achieved gold production and revenue from operations in
early August 2007. We sometimes refer to the operations on these two concessions
as the El Chanate Project. Our results of operations differ from
preceding periods because we now are realizing revenue from
operations.
On August
30, 2007, Independent Mining Consultants, Inc. (“IMC”) of Tucson, AZ 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 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.
In
September 2008, we initiated a 10 hole deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters which will target the southern extremity
of the main pit. Once this data has been compiled and analyzed, it
will be combined with results from a previous drilling campaign initiated in
December 2007 which consisted of a 26 reverse circulation holes
amounting to 4,912 meters. These drill holes were mainly
positioned to test the outer limits of the currently known ore zones within the
main pit. All data will be combined with the intention of increasing
proven and probable reserves.
We sold
39,102 ounces of gold during the fiscal year ended July 31,
2008. Gold production at El Chanate is currently at a level of
approximately 4,700 ounces of gold per month. We also produce a limited amount
of silver by-product.
For more
information on the El Chanate Project, please see “Item 2. 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 and more equipment for
exploration and development may be in a better position than us to compete for
such mineral properties. Our limited financial resources in relation
to companies with greater resources may hinder our ability to compete for and
acquire additional mineral properties.
Human
Resources
As of October 24, 2008, we had 143 full
time and 16 temporary employees working at our El Chanate mine in Sonora, Mexico
as well as eight full time employees in the US. We also utilize a
mining contractor at the El Chanate mine which had 42 personnel
onsite.
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, construction and expansion plans, costs,
grade, production and recovery rates, permitting, financing needs, the
availability of financing on acceptable terms or other sources of funding, if
needed, 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 in
Item 1A. “Risk Factors”
which may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements and other factors referenced in this
report. We do not undertake and specifically decline any obligation
to publicly release the results of any revisions which may be made to any
forward-looking statement to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Item
1A. 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
If
we are unable to sustain sufficient operating revenues, we will not be able to
generate profits and our business may fail.
Until
this past fiscal year, we had no producing properties and, historically, have
operated 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 continue to generate profits from our
properties. While we have commenced revenue producing mining
operations, we cannot assure that revenues will continue to cover cash flow
requirements.
While
we believe that we will continue to generate positive cash flow and profits from
operations, if we encounter unexpected problems, 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.
Prior to
the first fiscal quarter of 2008, we were not able to generate cash flow from
operations. While we now are generating positive cash flow and
profits, if we encounter unexpected problems and we are unable to continue to
generate positive cash flow and profits, 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. This is especially true given the current
significant instability in the financial markets. 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 ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii) a
quarterly average minimum liquidity of U.S.$500,000. 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,
enter into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit. 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.
Our
mining contractor is using reconditioned equipment which could adversely affect
our cost assumptions and our ability to economically and successfully mine the
project.
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 turn out
to be lower 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 continue to 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. 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 fiscal year ended July
31, 2008, the spot price for gold on the London Exchange has fluctuated between
$657.50 and $1,011.30 per ounce. Gold prices are affected by numerous
factors beyond our control, including:
|
·
|
the
level of interest rates,
|
|
·
|
world
supply of gold and
|
|
·
|
stability
of exchange rates.
|
Each of
these factors can cause significant fluctuations in gold prices. Such external
factors are in turn influenced by changes in international investment patterns
and monetary systems and political developments. The current
significant instability in the financial markets heightens these
fluctuations. 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
may not be successful in hedging against gold price and interest rate
fluctuations and may incur mark-to-market losses and lose money through our
hedging programs.
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 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.
To date,
rather than modifying the original Gold Price Protection agreement with Standard
Bank to satisfy these forward sale obligations, we have 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. As of September 30, 2008, we have paid Standard
Bank an aggregate of approximately $1,936,000 on the settlement of 55,325
ounces. The remaining ounces to settle with regard to this agreement
amounted to 66,602 as of September 30, 2008. We believe we will be
able to deliver the quantity of gold required by our forward sales on a going
forward basis; however, we may continue to opt to net cash settle these forward
sale obligations if it remains 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, it could have a material adverse effect on our
financial condition and cash flows.
Our
material property interests are in Mexico. Risks of doing business in a foreign
country could adversely affect our results of operations and financial
condition.
We face
risks normally associated with any conduct of business in a foreign country with
respect to our El Chanate Project in Sonora, Mexico, including various levels of
political and economic risk. The occurrence of one or more of these
events could have a material adverse impact on our efforts or operations which,
in turn, could have a material adverse impact on our cash flows, earnings,
results of operations and financial condition. These risks include
the following:
|
·
|
invalidity
of governmental orders,
|
|
·
|
uncertain
or unpredictable political, legal and economic
environments,
|
|
·
|
war
and civil disturbances,
|
|
·
|
changes
in laws or policies,
|
|
·
|
delays
in obtaining or the inability to obtain necessary governmental
permits,
|
|
·
|
governmental
seizure of land or mining claims,
|
|
·
|
limitations
on ownership,
|
|
·
|
limitations
on the repatriation of earnings,
|
|
·
|
increased
financial costs,
|
|
·
|
import
and export regulations, including restrictions on the export of gold,
and
|
|
·
|
foreign
exchange controls.
|
These
risks may limit or disrupt the project, restrict the movement of funds or impair
contract rights or result in the taking of property by nationalization or
expropriation without fair compensation.
We
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:
|
·
|
stricter
standards and enforcement,
|
|
·
|
increased
fines and penalties for
non-compliance,
|
|
·
|
more
stringent environmental assessments of proposed projects
and
|
|
·
|
a
heightened degree of responsibility for companies and their officers,
directors and employees.
|
There can
be no assurance that future changes to environmental legislation and related
regulations, if any, will not adversely affect our operations. We could be held
liable for environmental hazards that exist on the properties in which we hold
interests, whether caused by previous or existing owners or operators of the
properties. Any such liability could adversely affect our business and financial
condition.
We
have insurance against losses or liabilities that could arise from our
operations. 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:
|
·
|
metallurgical
and other processing,
|
|
·
|
mechanical
equipment and facility performance
problems.
|
Such
risks could result in:
|
·
|
damage
to, or destruction of, mineral properties or production
facilities,
|
|
·
|
personal
injury or death,
|
|
·
|
monetary
losses and /or
|
|
·
|
possible
legal liability.
|
Industrial
accidents could have a material adverse effect on our future business and
operations. We currently maintain general liability, business
interruption, 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, among other duties,
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’s 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 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 maintain long-term profitability eventually will depend on our
ability to find, explore and develop additional properties. Our
ability to acquire such additional properties could be hindered by competition.
If we are unable to acquire, develop and economically mine additional
properties, we most likely will not be able to be profitable on a long-term
basis.
Gold properties are wasting
assets. They eventually become depleted or uneconomical to continue
mining. The acquisition of gold properties and their exploration and
development are subject to intense competition. Companies with greater financial
resources, larger staffs, more experience and more equipment for exploration and
development may be in a better position than us to compete for such mineral
properties. If we are unable to find, develop and economically mine
new properties, we most likely will not be able to be profitable on a long-term
basis.
Our
ability on a going forward basis to discover additional viable and economic
mineral reserves is subject to numerous factors, most of which are beyond our
control and are not predictable. If we are unable to discover such reserves, we
most likely will not be able to be profitable on a long-term basis.
Exploration
for gold is speculative in nature, involves many risks and is frequently
unsuccessful. Few properties that are explored are ultimately developed into
commercially producing mines. As noted above, our long-term
profitability will be, in part, directly related to the cost and success of
exploration programs. Any gold exploration program entails risks
relating to
|
·
|
the
location of economic ore bodies,
|
|
·
|
development
of appropriate metallurgical
processes,
|
|
·
|
receipt
of necessary governmental approvals
and
|
|
·
|
construction
of mining and processing facilities at any site chosen for
mining.
|
The
commercial viability of a mineral deposit is dependent on a number of factors
including:
|
·
|
the
particular attributes of the deposit, such as
its
|
|
o
|
proximity
to infrastructure,
|
|
·
|
importing
and exporting gold and
|
|
·
|
environmental
protection.
|
The
effect of these factors cannot be accurately predicted.
Risks related to ownership
of our stock
The
market price of our stock may be adversely affected by market
volatility due to the current significant instability in the
financial markets.
As a
result of the current substantial instability in the financial markets, our
stock price has recently fluctuated significantly. We cannot predict
if or when current adverse economic conditions will be resolved and what the
affect this instability will continue to have on the price of our
stock.
We
do not intend to pay cash dividends in the near future.
Our Board
of Directors determine whether to pay cash dividends on our issued and
outstanding shares. The declaration of dividends would 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
1B. Unresolved Staff
Comments
None.
Item
2. 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 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.
El
Chanate is an open pit heap leach mining and processing
operation. Ore is hauled by truck from the pits to the processing
plant. 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. The equipment and facility
infrastructure that is utilized at the El Chanate mine consists of both new and
refurbished items. Management continuously analyzes production
results and considers improvements and modernizations as deemed
necessary.
Equipment
and facilities include: plant, a fleet of haul trucks, loaders and mining
support equipment. In addition, there are numerous ancillary support
facilities including warehouses, maintenance shops, roadways, administrative
offices and power and water supply systems. The equipment and
facility infrastructure that is utilized at the El Chanate mine consists of both
new and refurbished items. Management continuously analyzes
production results and considers improvements and modernizations as deemed
necessary.
In
September 2008, we initiated a 10 hole deep core drilling campaign at our El
Chanate mine consisting of 2,500 meters which will target the southern extremity
of the main pit. Once this data has been compiled and analyzed, it
will be combined with results from a previous drilling campaign initiated in
December 2007 which consisted of a 26 reverse circulation holes
amounting to 4,912 meters. These drill holes were mainly
positioned to test the outer limits of the currently known ore zones within the
main pit. All data will be combined with the intention of increasing
proven and probable reserves.
During
fiscal 2008, we identified certain restrictions related to our ADR plant
capacity which limited the amount of solution that can be
processed. We have addressed these issues by doubling the installed
pumping capacity to increase solution flow to the leach pad and added additional
carbon capacity to the system. We also purchased and installed an
additional set of carbon columns and a strip vessel to process an additional two
tonnes of carbon per strip. The installation and commissioning of these ADR
plant upgrades was completed at the end of October 2008.
The
following production summary estimate has been 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%.
|
Metric
|
|
U.S.
|
|
|
|
|
Materials
|
|
|
|
Reserves
|
|
|
|
Proven
|
26.7
Million Tonnes
@ 0.68 g/t*
|
|
29.4
Million Tons @ 0.0198 opt*
|
Probable
|
12.8 Million
Tonnes @ 0.61
g/t*
|
|
14.1 Million
Tons @ 0.0179
opt*
|
Total
Reserves
|
39.5
Million
Tonnes @ 0.66 g/t*
|
|
43.5
Million Tons @ 0.0192 opt*
|
Waste
|
24.1 Million Tonnes
|
|
26.6 Million Tons
|
Total
|
63.6
Million Tonnes
|
|
70.1
Million tons
|
|
|
|
|
Contained
Gold
|
25.89
Million grams
|
|
832,280 Oz
|
|
|
|
|
Production
|
|
|
|
Ore
Crushed**
|
2.6
Million Tonnes /Year
|
|
2.87
Million Tons/Year
|
|
7,500
Mt/d
|
|
8,267
t/d
|
|
|
|
|
Operating
Days/Year
|
365
Days per year
|
|
365
Days per year
|
Gold
Plant Average Recovery
|
66.8
%
|
|
66.8
%
|
Average
Annual Production**
|
1.35 Million
grams
|
|
43,414 Oz
|
Total
Gold Produced
|
17.29
Million grams
|
|
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. We are
currently in excess of 10,000 metric tonnes per day.
El Chanate
Project
Production
Summary
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
|
|
Internal
Cutoff Grade
|
|
Break
Even Cutoff Grade
|
Basic
Parameters
|
|
|
|
|
Gold
Price
|
|
US$550/oz
|
|
US$550/oz
|
Shipping
and Refining
|
|
US$
4.14/oz
|
|
US$
4.14/oz
|
Gold
Recovery
|
|
66.8%
|
|
66.8%
|
Royalty
|
|
4%
of NSR
|
|
4%
of NSR
|
|
|
|
|
|
Operating
Costs per Tonne of Ore
|
|
$
per Tonne of Ore
|
|
$
per Tonne of Ore
|
Mining
*
|
|
0.070
|
|
1.360
|
Processing/Leach
Pad
|
|
1.980
|
|
1.980
|
G&A
|
|
0.800
|
|
0.800
|
Total
|
|
2.850
|
|
4.140
|
|
|
|
|
|
Internal
Cutoff Grade
|
|
Grams
per Tonne
|
|
Grams
per Tonne
|
Head
Grade Cutoff (66.8% recov.)
|
|
0.25
|
|
0.37
|
Recovered
Gold Grade Cutoff
|
|
0.17
|
|
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.
We
commenced production at the El Chanate property on July 31, 2007. In
the fiscal year ended July 31, 2008, we sold 39,102 ounces of
gold. Gold production at El Chanate is currently at a level of
approximately 4,700 ounces of gold per month. We have implemented steps
necessary to effectively increase production rates to approximately 70,000
ounces per year in 2009. As of August 31, 2008, we have expended
approximately $3,500,000 on the leach pad expansion and ADR plant
improvement. Management has been and anticipates that it will
continue to fund these expansion costs with its cash on hand as well as through
revenues from gold sales.
The
following table represents a summary of cumulative activity in connection with
our proven and probable mineral reserves:
Proven and probable mineral reserve (Ktonnes of
ore)
|
|
July 31,
2008
|
|
|
July 31,
2007
|
|
|
July 31,
2006
|
|
Ore
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Beginning
balance (Ktonnes)
|
|
|
38,785 |
|
|
|
19,868 |
|
|
|
19,868 |
|
Additions
|
|
|
- |
|
|
|
19,593 |
|
|
|
- |
|
Reductions
|
|
|
(3,499 |
) |
|
|
(676 |
) |
|
|
- |
|
Ending
Balance
|
|
|
35,286 |
|
|
|
38,785 |
|
|
|
19,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contained
gold
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance (thousand of ounces)
|
|
|
814 |
|
|
|
490 |
|
|
|
490 |
|
Additions
|
|
|
- |
|
|
|
342 |
|
|
|
- |
|
Reductions
|
|
|
(95 |
) |
|
|
(18 |
) |
|
|
- |
|
Ending
Balance
|
|
|
719 |
|
|
|
814 |
|
|
|
490 |
|
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 all types of 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 an 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. As of July 31, 2008, the entire advance has been
recovered.
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 acquired, 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. During the first
part of 2008, Royal Gold, Inc. acquired from Anglo Gold the right to receive
both the net smelter returns of between 2% and 4% plus and the 10% net profits
interest which terminates at such point as they aggregate
$18,018,355. As of July 31, 2008, we have incurred approximately
$1,272,000 and $728,000 in expense with regard to both the
net smelter return and net profits interest, respectively.
Under the
terms of the agreement, we had 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 was exercisable over a 180
day period commencing at such time as we notified AngloGold that we had made a
good faith determination that we had 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. In January
2008, we made a good faith determination and notified AngloGold that the drill
indicated resources at the El Chanate gold mine exceeded two million ounces of
contained gold. The term "drill indicated resources" is defined in the
agreement. A drill indicated resource number does not rise to the
level of, and should not be considered proven and probable reserves as those
terms are defined under guidelines of the Securities Exchange Commission
(“SEC”). On July 1, 2008, AngloGold notified us that it would
not be exercising its back-in right.
Saric
Properties – Sonora, Mexico
We
recently leased 12 mining concessions totaling 1,790 hectares located northwest
of Saric, Sonora. In addition, we filed and now own a claim for approximately
2,200 additional hectares adjacent to this property. These concessions and this
claim are about a sixty mile drive northeast of the El Chanate project.
Mineralization is evident throughout and is hosted by shear zones and quartz
veins in granite intrusive. A short drill program, along with geochemical work,
is currently underway.
We
continue to actively investigate other exploration projects in northern
Mexico.
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 matter
was submitted to a vote of our stockholders during the fiscal quarter ended July
31, 2008.
PART II
Item
5. Market for Registrant’s
Common Equity, Related Stockholder Matters and 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,
$.0001 par value Common Stock) are traded or will trade is in the
over-the-counter market (Bulletin Board Symbol: "CGLD"). Our stock is
not traded or quoted on any Automated Quotation System.
The following table sets forth the
range of high and low closing bid quotes of our Common Stock per quarter for the
past two fiscal years as reported by the OTC Bulletin Board (which
reflect inter-dealer prices without retail mark-up, mark-down or commission and
may not necessary represent actual transactions).
MARKET
PRICE OF COMMON STOCK
Quarter Ending
|
|
High and Low
|
|
|
|
|
|
|
|
|
July
31, 2008
|
|
|
0.70 |
|
|
|
0.60 |
|
April
30, 2008
|
|
|
0.78 |
|
|
|
0.62 |
|
January
31, 2008
|
|
|
0.81 |
|
|
|
0.60 |
|
October
31, 2007
|
|
|
0.63 |
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
July
31, 2007
|
|
|
0.47 |
|
|
|
0.38 |
|
April
30, 2007
|
|
|
0.47 |
|
|
|
0.37 |
|
January
31, 2007
|
|
|
0.41 |
|
|
|
0.31 |
|
October
31, 2006
|
|
|
0.33 |
|
|
|
0.28 |
|
Our Common Stock trades on the
Toronto Stock Exchange under the symbol "CGC." The high and low
closing prices for our Common stock for the periods indicated below are as
follows:
Period Ending
|
|
High and Low
|
|
|
|
US$/CDN$
|
|
|
US$/CDN$
|
|
Quarter
ended July 31, 2008
|
|
|
0.70/0.71 |
|
|
|
0.61/0.60 |
|
Quarter
ended April 30, 2008
|
|
|
0.83/0.83 |
|
|
|
0.62/0.62 |
|
Quarter
ended January 31, 2008
|
|
|
0.77/0.76 |
|
|
|
0.58/0.57 |
|
Quarter
ended October 31, 2007
|
|
|
0.60/0.61 |
|
|
|
0.39/0.40 |
|
|
|
|
|
|
|
|
|
|
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 |
|
(b) Holders —
The approximate number of record holders of our Common Stock, as of October 24,
2008 amounts to 2,236 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 192,974,824 as of October 24,
2008.
(c) Dividends
– We have 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.
On July
17, 2008, at the recommendation of the Compensation Committee of the Board of
Directors, our executive officers and directors were granted 515,000 shares
under our 2006 Equity Incentive Plan. The restricted shares granted vested
immediately. The fair value of the stock was $0.70 on the date of
grant resulting in our recording approximately $361,000 in equity based
compensation expense within general and administrative expense.
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,
2008.
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, 2008.
|
|
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:
|
|
|
4,665,000 |
|
|
$ |
0.56 |
|
|
|
3,225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders:
|
|
|
900,000 |
|
|
$ |
0.58 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,565,000 |
|
|
$ |
0.58 |
|
|
|
3,225,000 |
|
*Does not
include the issuance of 2,110,000 shares of restricted stock during the fiscal
year ended July 31, 2008
Performance
Graph
|
|
Total
Return To Shareholders
|
|
|
|
(Includes
reinvestment of dividends)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QUARTERLY RETURN
PERCENTAGE
|
|
|
|
|
|
|
|
|
|
Quarter
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
/ Index
|
|
|
|
|
10/31/07
|
|
|
1/31/08
|
|
|
4/30/08
|
|
|
7/31/08
|
|
Capital
Gold Corporation
|
|
|
|
|
|
36.07 |
|
|
|
10.48 |
|
|
|
-6.61 |
|
|
|
-0.77 |
|
S&P
SmallCap 600 Index
|
|
|
|
|
|
5.12 |
|
|
|
-12.65 |
|
|
|
1.20 |
|
|
|
-1.48 |
|
Peer
Group
|
|
|
|
|
|
9.32 |
|
|
|
-20.42 |
|
|
|
-4.41 |
|
|
|
17.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDEXED
RETURNS
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
Quarter
Ending
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
/ Index
|
|
8/1/07
|
|
|
10/31/07
|
|
|
1/31/08
|
|
|
4/30/08
|
|
|
7/31/08
|
|
Capital
Gold Corporation
|
|
|
100 |
|
|
|
136.07 |
|
|
|
150.32 |
|
|
|
140.39 |
|
|
|
139.31 |
|
S&P
SmallCap 600 Index
|
|
|
100 |
|
|
|
105.12 |
|
|
|
91.82 |
|
|
|
92.92 |
|
|
|
91.55 |
|
Peer
Group
|
|
|
100 |
|
|
|
109.32 |
|
|
|
87.00 |
|
|
|
83.16 |
|
|
|
97.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer
Group Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALAMOS
GOLD INC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAMMON
GOLD INC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WESTERN
GOLDFIELDS INC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
6. Selected Financial
Data.
The selected consolidated financial
data set forth below should be read in conjunction with our consolidated
financial statements, and the related notes thereto, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
included in this Annual Report. The statement of operations and
balance sheet data presented below for, and as of the end of, each of the years
in the five year period ended July 31, 2008 are derived from our audited
consolidated financial statements. Historical results are not
necessarily indicative of the results to be expected in the
future. The Selected Financial Data is in thousands except for share
and per share data.
|
|
Fiscal Year Ended July, 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statement of Operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
33,104 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Net Income (loss)
|
|
$ |
6,364 |
|
|
$ |
(7,472 |
) |
|
$ |
(4,805 |
) |
|
$ |
(2,006 |
) |
|
$ |
(2,939 |
) |
Income (loss) per share –
Basic
|
|
$ |
0.04 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
48,879 |
|
|
$ |
27,551 |
|
|
$ |
9,546 |
|
|
$ |
5,552 |
|
|
$ |
486 |
|
Long-term Debt
|
|
$ |
8,375 |
|
|
$ |
12,500 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Reclamation and Remediation
Liability
|
|
$ |
1,666 |
|
|
$ |
1,249 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Item
7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The following discussion relates to
the three fiscal years ended July 31, 2008, 2007 and 2006. 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. (000’s, except where otherwise
specifically noted).
Overview
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.
Our financial position was
as follows:
|
|
For the year
|
|
|
For the year
|
|
|
|
ended
|
|
|
ended
|
|
|
|
July 31,
2008
|
|
|
July 31,
2007
|
|
|
|
|
|
|
|
|
Total
debt
|
|
$ |
12,500 |
|
|
$ |
12,500 |
|
Total
stockholders’ equity
|
|
$ |
28,197 |
|
|
$ |
11,986 |
|
Cash
and cash equivalents
|
|
$ |
10,992 |
|
|
$ |
2,225 |
|
Working
capital
|
|
$ |
15,825 |
|
|
$ |
6,343 |
|
During
our fiscal year ended July 31, 2008 our debt and liquidity positions were
affected by the following:
|
·
|
Net
cash provided from continuing operations of
$6,318;
|
|
·
|
Capital
expenditures of $5,507;
|
|
·
|
Proceeds
from the issuance of common stock upon the exercising of warrants of
$7,474;
|
Looking
Forward
Certain
key factors will affect our future financial and operating results. These
include, but are not limited to, the following (000’s except for ounces and cash
cost data):
|
·
|
Fluctuations
in gold prices;
|
|
·
|
We
expect minimum fiscal 2009 gold sales of approximately
55,000 ounces;
|
|
·
|
Cash
costs per ounce sold, excluding royalties, for fiscal 2009 are expected to
be approximately $250 to $275 per ounce as the impact of industry-wide
cost pressures are expected to be slightly
higher;
|
|
·
|
We
anticipate capital expenditures of approximately $5,500 to $6,500 in
fiscal 2009 with nearly all being allocated to our El Chanate mine in
Sonora, Mexico;
|
|
·
|
Our
fiscal year 2009 expectations, particularly with respect to sales volumes
and cash costs per ounce sold, may differ significantly from actual
quarter and full fiscal year results due to variations in: ore grades and
hardness, metal recoveries, waste removed, commodity input prices, foreign
currencies and gold sale prices.
|
Result
of Operations
Fiscal year ended July 31,
2008 compared to fiscal year ended July 31, 2007
Net income for the year ended July 31,
2008 was approximately $6,364 compared to a net loss of approximately $7,472 for
the year ended July 31, 2007. The principal reason for this transition
was our realizing revenue from operations during the year ended July 31,
2008. Our first gold sale occurred in August 2007. Net
income per common share was $0.04 for the year ended July 31, 2008, on a basic
basis and $0.03 on a diluted basis. The net loss per share for the
same period in 2007 was $0.05 on a basic basis. 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 were excluded from the calculation of diluted net loss per
share for the fiscal year ended July 31, 2007 since their effect was
anti-dilutive.
Revenues & Costs
Applicable to Sales
Gold
revenue for the year ended July 31, 2008 totaled approximately
$33,104. We sold 39,102 ounces at
an average realizable price per ounce of approximately $847. Costs
applicable to sales were approximately
$10,690 for the current period. There were no metal sales for the
same period in the prior year as we had not yet realized revenue from our
operations. Our cash cost and total cost per ounce sold, excluding
Royal Gold’s 10% net profit interest, formally owned by AngloGold, was $257 and
$316, respectively, for the year ended July 31, 2008. If we factor in
this net profit interest cost for the same period, our cash cost and total cost
per ounce sold would be $276 and $335, respectively. These costs were
slightly higher than previous quarter results primarily due to the accrual of
this net profit interest which is capped at $1,000. As of July 31,
2008, we had approximately $753 accrued towards this net profits
interest. We anticipate accruing the remaining portion of the net
profit interest within this calendar year.
Revenues
from by-product sales (silver) are credited to Costs applicable to sales as
a by-product credit. Silver sales totaled 40,461 ounces at an average
price of $17.48 amounting to approximately $707 for the
year ended July 31, 2008.
Depreciation and
Amortization
Depreciation
and amortization expense during the year ended July 31, 2008 and 2007 was
approximately $3,438 and $891, respectively. The increase of
approximately $2,547 was primarily due to a full year of depreciation and
amortization charges related to the El Chanate capital costs being incurred in
the current period. The charges during the same period in the prior
year were significantly lower as most of these assets were placed in service in
April 2007. Depreciation and amortization also represents deferred
financing costs resulting from the Credit Facility we entered into with Standard
Bank. This accounted for approximately $1,088 and $876 of the
amortization expense during the years ended July 31, 2008 and 2007,
respectively.
General and Administration
Expense
General
and administrative expenses during the year ended July 31, 2008 were
approximately $5,586, an increase of approximately $2,693 or 93% from the year
ended July 31, 2007. The increase in general and administrative
expenses resulted primarily from: 1) higher salaries and wages for officers and
employees including the hiring of a controller and the awarding of cash bonuses
of approximately $1,708, 2) the granting of stock options and
restricted stock to our officers and employees under our 2006 Equity Incentive
Plan amounting to approximately $467, 3) higher investor relations
fees and travel fees of approximately $221, 4) higher accounting and
consulting fees of approximately $419 versus the same period a year earlier,
primarily due to the awarding of a cash bonus to one of our officers as well as
higher consulting fees related to compliance with internal control over
financial reporting, and 5) an increase in insurance costs of approximately $116
versus the same period a year earlier as we were not yet in full production in
the prior period. The above mentioned increases in compensation, cash
bonus awards as well as the stock option and restricted stock awards were
granted based upon recommendations from an independent report on executive
compensation. This independent report, requested by our Compensation
Committee, was obtained in order to assist us in attracting and retaining
individuals of experience and ability, to provide incentive to our employees and
directors, to encourage employee and director proprietary interests in our
company, and to encourage employees to remain in our employ.
Exploration
Expense
Exploration
expense during the years ended July 31, 2008 and 2007 was approximately $938 and
$1,816, respectively, or a decrease of $878 or 48%. The primary
reason for the decrease in exploration expense was the result of higher
engineering and planning costs related to our El Chanate Project being expensed
in the prior period as well as the costs incurred from our 72-hole reverse
circulation drilling campaign to identify additional proven and probable gold
reserves at the El Chanate Project which was completed in May
2007. The current period includes: 1) costs from our completed 26
hole reverse circulation drilling program in December 2007 amounting to 4,912
meters at El Chanate. The drill holes were mainly positioned to test
the outer limits of the currently known ore zones, and 2) cost associated with
our recently leased 12 mining concessions totaling 1,790 hectares located
northwest of Saric, Sonora. We initiated a short drill program as well as some
geochemical work related to these claims during the current
period. Also, a claim has been filed for approximately 2,200
additional hectares adjacent to this property. These concessions and this claim
are about a sixty mile drive northeast of the El Chanate
project. Mineralization is evident throughout and is hosted by shear
zones and veins in granite intrusive.
Other Income and
Expense
Our loss
on the change in fair value of derivative instruments during the year ended July
31, 2008 and 2007, was approximately $1,356 and $1,226, respectively, and was
reflected as an other expense. This was primarily due
to the change in fair value of our two identically structured derivative
contracts with Standard Bank which correlates to fluctuations in the gold
price. These contracts were not designated as hedging derivatives;
and therefore, special hedge accounting does not apply.
Interest
expense was approximately $1,207 for the year ended July 31, 2008 compared to
approximately $792 for the same period a year earlier. This increase
was mainly due to higher interest charges incurred during the current period
related to our fully outstanding credit facility with Standard
Bank. As of July 31, 2008 and 2007, there was $12,500 outstanding,
respectively, on this credit facility.
Income
Tax Expense
Income
tax expense was $3,507 during the fiscal year ended July 31, 2008, compared to
$0 in 2007 with an effective tax rate of 35% and 0%,
respectively. The factors that most significantly impact our
effective tax rate are valuation allowances related to deferred tax assets
offset partially by lower statutory tax rates in Mexico. Current income tax
expense and deferred income tax expense amounted to $2,111 and $1,396 as of July
31, 2008, respectively.
Mining
operations are primarily conducted in Mexico that has tax laws, tax incentives
and tax rates that are significantly different than those of the United
States. On October 1, 2007, the Mexican Government enacted
legislation which introduced certain tax reforms as well as a new minimum flat
tax system. This new flat tax system integrates with the regular income
tax system and is based on cash-basis net income that includes only certain
receipts and expenditures. The flat tax is set at 17.5% of cash-basis net
income as determined, with transitional rates of 16.5% and 17.0% in 2008 and
2009, respectively. If the flat tax is positive, it is reduced by the
regular income tax and any excess is paid as a supplement to the regular income
tax. If the flat tax is negative, it may serve to reduce the regular
income tax payable in that year or can be carried forward for a period of up to
ten years to reduce any future flat tax. Companies are required to
prepay income taxes on a monthly basis based on the greater of the flat tax or
regular income tax as calculated for each monthly period. Annualized
income projections indicate that we will not be liable for any excess flat tax
for calendar year 2008 and, accordingly, have recorded a Mexican income tax
provision as of July 31, 2008.
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, on
a more than likely than not basis, 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.
During
the fiscal year ended 2008, we completed a reconciliation of our U.S. book and
tax basis assets and liabilities as well as a detailed analysis of our income
taxes payable.
Based on
the uncertainty and inherent unpredictability of the factors influencing our
effective tax rate and the sensitivity of such factors to gold and other metals
prices as discussed above, the effective tax rate is expected to be volatile in
future periods.
For more
information concerning income taxes, please see Note 22 within the consolidated
financial statements contained herein.
Changes in Foreign Exchange
Rates
During the year ended July 31, 2008 and
2007, we recorded equity adjustments from foreign currency translations of
approximately $622 and $205, respectively. 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.
Summary of Annual
Results
(000’s except per share Data
and ounces sold)
|
|
For the year
|
|
|
For the year
|
|
|
For the year
|
|
|
|
ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 31,
2008
|
|
|
July 31,
2007
|
|
|
July 31,
2006
|
|
Revenues
|
|
|
33,104 |
|
|
|
- |
|
|
|
- |
|
Net
Income (loss)
|
|
|
6,364 |
|
|
|
(7,472 |
) |
|
|
(4,805 |
) |
Basic
net income (loss) per share
|
|
|
0.04 |
|
|
|
(0.05 |
) |
|
|
(0.04 |
) |
Diluted
net income (loss) per share
|
|
|
0.03 |
|
|
|
- |
|
|
|
- |
|
Gold
ounces sold
|
|
|
39,102 |
|
|
|
- |
|
|
|
- |
|
Average
price received
|
|
$ |
847 |
|
|
|
- |
|
|
|
- |
|
Cash
cost per ounce sold(1)
|
|
$ |
276 |
|
|
|
- |
|
|
|
- |
|
Total
cost per ounce sold(1)
|
|
$ |
335 |
|
|
|
- |
|
|
|
- |
|
|
(1)
|
Excluding the net
profit interest, cash and total cost per ounce sold were $257 and $316,
respectively.
|
Summary of Results of
Operations
|
|
For the year
ended
|
|
|
For the year
ended
|
|
|
For the year
ended
|
|
|
|
July 31,
2008
|
|
|
July 31,
2007(1)
|
|
|
July 31,
2006
|
|
Tonnes
of ore mined
|
|
|
3,498,612 |
|
|
|
545,089 |
|
|
|
- |
|
Tonnes
of waste removed
|
|
|
2,627,318 |
|
|
|
209,567 |
|
|
|
- |
|
Ratio
of waste to ore
|
|
|
0.75 |
|
|
|
0.38 |
|
|
|
- |
|
Tonnes
of ore processed
|
|
|
3,529,699 |
|
|
|
631,530 |
|
|
|
- |
|
Grade
(grams/tonne)
|
|
|
0.85 |
|
|
|
0.88 |
|
|
|
- |
|
Gold
(ounces)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Produced(2)
|
|
|
39,242 |
|
|
|
578 |
|
|
|
- |
|
-
Sold
|
|
|
39,102 |
|
|
|
- |
|
|
|
- |
|
(1)
Commercial
production at El Chanate commenced on July 31, 2007 and the operation was still
in its ramp up and
production results are not comparable.
(2)
Gold
produced each year does not necessarily correspond to gold sold during the year,
as there is a time
delay in the actual sale of the gold.
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, an
increase of approximately $2,667 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 general and
administrative expenses of approximately $668; 2) an increase in depreciation
and amortization expense of approximately $852; 3) an increase in exploration
expenditures of approximately $808; 4) an increase in losses of approximately
$644 due to the change in fair value of our derivative instruments; and 5) an
increase in interest expense of approximately $792. These increases
in loss were slightly offset by a decrease in mine expenses of approximately
$933 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 and $184, respectively. These non-operating revenues
primarily represent interest income.
General and Administration
Expense
General
and administrative expenses during the fiscal year ended July 31, 2007 were
$2,893, an increase of approximately $668 or 30% from the fiscal year ended July
31, 2006. The increase in 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.
Exploration
Expense
Exploration
expense during the fiscal year ended July 31, 2007 and 2006 was approximately
$1,816 and $1,941, respectively. These expenses can be attributed to
our 72-hole drilling campaign to determine additional proven and probable gold
reserves at the El Chanate Project in 2007, as well as engineering and planning
costs related to this project over both periods presented.
Depreciation and
Amortization
Depreciation
and amortization expense during the fiscal year ended July 31, 2007 and 2006 was
approximately $891 and $39, 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 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 and $582,
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; and the
second was entered into on March 30, 2006 for a premium of $250. 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, and was reflected
as an other expense during the 2007 period.
Interest
expense was approximately $792 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.
Liquidity and Capital
Resources
Operating
activities
Cash provided by operating
activities during the year ended July 31, 2008 was approximately $6,318,
which primarily represents cash flows resulting from our realization of revenue
from operations during the year ended July 31, 2008. Cash used in operating
activities for the same period a year ago was $3,663 as we had not yet
been realizing revenue from operations.
Investing
Activities
Cash used in investing
activities during the year ended July31, 2008, amounted to approximately
$5,479, primarily from the leach pad expansion and the acquisition of equipment,
including additional conveyors and ADR plant equipment, as well as additional
water rights related to our El Chanate Project. Cash used in investing activities
for the same period a year ago was approximately $18,425 which directly
related to the development of the El Chanate mine.
Financing
Activities
Cash provided by financing
activities during the year ended July 31, 2008 amounted to approximately
$7,306, primarily from the exercising of 22,994,178 warrants for gross proceeds
of approximately $7,474. Cash
provided by financing activities for the same period a year ago was
approximately $21,367 which mostly comprised of the full draw down of our credit
facility of $12,500 and proceeds received of approximately $3,486 from the
issuance of common stock in private placements and $5,643 from the issuance of
common stock upon the exercising of 22,203,909 warrants.
Term
loan and Revolving Credit Facility
On July
17, 2008, we closed in escrow pending execution of Mexican collateral documents
and certain other ministerial matters, an Amended And Restated Credit Agreement
(the “Credit Agreement”) involving our wholly-owned Mexican subsidiaries MSR and
Oro, as borrowers (“Borrowers”), us, as guarantor, and Standard Bank PLC
(“Standard Bank”), as the lender. The Mexican collateral documents
were executed on September 18, 2008, effectively closing the
loan. The Credit Agreement amends and restates the prior credit
agreement between the parties dated August 15, 2006 (the “Original Agreement”).
Under the Original Agreement, MSR and Oro could borrow, and did borrow, money in
an aggregate principal amount of up to $12,500 (the “Term Loan”) for the purpose
of constructing, developing and operating the El Chanate gold mining project in
Sonora State, Mexico. We guaranteed the repayment of the Term Loan and the
performance of the obligations under the Original Agreement.
The
Credit Agreement establishes a new senior secured revolving credit facility that
permits Borrowers to borrow up to $5,000 during the one year period after the
closing of the Credit Agreement. The Borrowers may request a borrowing of the
Revolving Commitment from time to time, provided that the Borrowers are not
entitled to request a borrowing more than once in any calendar month (each
borrowing a “Revolving Loan”). Repayment of the Revolving Loans will be secured
and guaranteed in the same manner as the Term Loan. Term Loan principal shall be
repaid quarterly commencing on September 30, 2008 and consisting of four
payments in the amount of $1,125, followed by eight payments in the amount of
$900 and two final payments in the amount of $400. There is no prepayment
fee. Principal under the Term Loan and the Revolving Loans shall bear
interest at a rate per annum equal to the LIBO Rate, as defined in the Credit
Agreement, for the applicable Interest Period plus the Applicable Margin. An
Interest Period can be one, two, three or six months, at the option of the
Borrowers. The Applicable Margin for the Term Loan and the Revolving Loans is
2.5% per annum and 2.0% per annum, respectively. The Borrowers are
required to pay a commitment fee in respect of the Revolving Commitment at the
rate of 1.5% per annum on the average daily unused portion of the Revolving
Commitment. Pursuant to the terms of the Original Credit Agreement,
Standard Bank exercised significant control over the operating accounts of MSR
located in Mexico and in the United States. Standard Bank’s control over the
accounts has been lifted significantly under the terms of the Credit Agreement,
giving the Borrowers authority to exercise primary day-to-day control over the
accounts. However, the accounts remain subject to an account pledge agreement
between MSR and Standard Bank.
Debt
Covenants
Our
Credit Facility with Standard Bank requires us, among other obligations, to meet
certain financial covenants including (i) a ratio of current assets to current
liabilities at all times greater than or equal to 1.20:1.00, (ii) a quarterly
minimum tangible net worth at all times of at least U.S.$15,000,000, and (iii) a
quarterly average minimum liquidity of U.S.$500,000. 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,
enter into hedge agreements, organize or invest in subsidiaries or make any
investments above a certain dollar limit. 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.
In
connection with the refinance proceedings, MSR, as a condition precedent to
closing, obtained a waiver letter from the Lender of any default or event of
default as a result of not being in compliance with regulations of Mexican
federal law with regard to certain filing and environmental bonding issues in
connection with the operation of mining the El Chanate concessions as well as
certain insurance requirements. MSR has not yet complied with these
regulations due to the absence of professionals in the area qualified to conduct
studies to facilitate compliance. MSR believes that the Mexican government is
aware of these barriers to compliance and that it has not enforced the
Requirements against MSR or other mining companies in Sonora. MSR has agreed to
make a commercially reasonable effort to come into compliance with these
requirements. See also “Environmental and Permitting
Issues” section below.
As of
July 31, 2008, except for the aforementioned waiver, we and our related entities
were in compliance with all debt covenants and default
provisions. For the purposes of meeting these financial covenants,
the accounts of Caborca Industrial are not required to be included in the
calculation of these covenants.
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. See also
“Debt Covenants”
above.
We
received the renewable explosive permit from the government that expires on
December 31, 2008 and is renewable annually.
We do
include in all our internal revenue and cost projections a certain amount for
environmental and reclamation costs on an ongoing basis. 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. 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 closure 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. We reviewed the estimated present value of the El
Chanate mine reclamation and abandonment costs as of July 31,
2008. This review resulted in an increase in the Asset Retirement
Obligation by approximately $293. As of July 31, 2008 and 2007,
approximately $1,666 and $1,249, respectively, was accrued for reclamation
obligations relating to mineral properties in accordance with SFAS No. 143,
“Accounting for Asset Retirement Obligations.”
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. The Division of Reclamation, Mining and Safety
of the State of Colorado (the “Division”) conducted its most recent inspection
of our Leadville Mining properties in August 2007. The Division
concluded that based upon 2007 equipment prices and labor costs, an additional
$46 was necessary to be bonded with the Division to reclaim the site to achieve
the approved post-mining land use. The total amount of the bond
sufficient to perform reclamation as of July31, 2008, is approximately $82. We
have met this bonding requirement. During our 4th fiscal
quarter ended July 31, 2008, we sold two of the Leadville Mining claims and the
mill for gross proceeds of $100 which was recorded within other income and
expense.
Contractual
Obligations
Our
contractual obligations as of July 31, 2008 are summarized as
follows:
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
Total
|
|
|
Less
than
1
Year
|
|
|
1 –
3
Years
|
|
|
3 –
5
Years
|
|
|
More
than
5
Years
|
|
Debt
(1)
|
|
$ |
13,500 |
|
|
$ |
5,125 |
|
|
$ |
8,375 |
|
|
$ |
- |
|
|
$ |
- |
|
Remediation
and reclamation obligations(2)
|
|
|
3,751 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,751 |
|
Operating
leases(3)
|
|
|
585 |
|
|
|
132 |
|
|
|
440 |
|
|
|
13 |
|
|
|
- |
|
Derivative
instruments(4)
|
|
|
2,626 |
|
|
|
1,177 |
|
|
|
1,449 |
|
|
|
- |
|
|
|
- |
|
Minimum
royalty payments(5)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
21,462 |
|
|
$ |
7,434 |
|
|
$ |
10,264 |
|
|
$ |
13 |
|
|
$ |
3,751 |
|
|
|
(1)
|
Amounts
represent principal ($12,500) and estimated interest payments ($1,000)
assuming no early
extinguishment.
|
(2)
|
Mining
operations are subject to extensive environmental regulations in the
jurisdictions in which they operate. Pursuant to environmental
regulations, we are required to close our operations and reclaim and
remediate the lands that operations have disturbed. The estimated
undiscounted cash outflows of these remediation and reclamation
obligations are reflected here. For more information regarding remediation
and reclamation liabilities, see Note 13 to the Consolidated Financial
Statements.
|
(3)
|
Amount
represent a non-cancelable operating lease for office space in NYC 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.
|
(4)
|
Amounts
represent the net cash settlement of 75,044 ounces of gold at $35 per
ounce.
|
(5)
|
Amount
represents the payment of the 10% net profits interest on the El Chanate
mining concessions which is capped at $1,000. This does not
include the net smelter return payments as this payment is linked to the
gold price and cannot be reasonable estimated given variable market
conditions.
|
While we
believe that our available funds in conjunction with anticipated revenues from
gold sales will be adequate to cover capital expenditures, debt service,
royalties, net cash settlements on our gold price protection agreement as well
as operating activities at El Chanate and corporate general and administrative
expenses for fiscal 2009, 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.
New
Accounting Pronouncements
Fair
Value Option
On
February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. This option is
available to all entities, including not-for-profit organizations. Most of the
provisions in Statement 159 are elective; however, the amendment to FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, applies to all entities with available-for-sale and trading
securities. Some requirements apply differently to entities that do not report
net income. The FASB's stated objective in issuing this standard is as follows:
"to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions".
The fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent reporting date. A
not-for-profit organization will report unrealized gains and losses in its
statement of activities or similar statement. The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.
Statement
159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. We elected not to adopt the fair value
option for any eligible instruments.
Noncontrolling
Interests
On
December 4, 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51.”
Statement 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. Statement 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest.
Statement
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. We believe adoption of this standard will not have an
impact on the financial condition or the results of our operations.
Derivative
Instruments and Hedging Activities
On April
21, 2008, the FASB posted a revised FASB Statement No. 133 Implementation
guidance for Issues I1, Interaction of the Disclosure Requirements of Statement
133 and Statement 47, and K4, Miscellaneous: Income Statement Classification of
Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded
from the Assessment of Hedge Effectiveness. The revisions relate to the issuance
of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. We believe adoption of this standard will not have a
material impact on the financial condition or the results of our
operations.
Hierarchy
of Generally Accepted Accounting Principles
The FASB
has issued FASB Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as
follows:
*
FASB Statements of Financial Accounting Standards and Interpretations, FASB
Statement 133 Implementation Issues, FASB Staff Positions, AICPA
Accounting Research Bulletins and Accounting Principles Board Opinions that are
not superseded by actions of the FASB, and Rules and interpretive releases of
the SEC for SEC registrants.
* FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position.
* AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
topics.
Statement
162 is effective 60 days following the SEC's approval of the PCAOB amendments to
AU Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles. Since Statement 162 is only effective for nongovernmental
entities, the GAAP hierarchy will remain in AICPA Statement on Auditing
Standards (SAS) No. 69, The
Meaning of "Present Fairly in Conformity with Generally Accepted Accounting
Principles" in the Independent Auditor's Report, for state and local
governmental entities and federal governmental entities. We believe the adoption
of this standard will not have a material impact on the financial condition or
the results of our operations.
Accounting
for Financial Guarantee Insurance Contracts
The FASB
issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts. This new standard clarifies how FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts.
Statement
163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years,
except for disclosures about the insurance enterprise's risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008. Except for the required disclosures, earlier
application is not permitted. We believe the adoption of this standard will not
have an impact on the financial condition or the results of our
operations.
Disclosure
About Off-Balance Sheet Arrangements
We do not
have any 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.
Ore on Leach Pads and
Inventories (“In-Process Inventory”)
Costs that are incurred in or benefit
the productive process are accumulated as ore on leach pads and
inventories. Ore on leach pads and inventories are carried at the
lower of average cost or market. The current portion of ore on leach
pads and inventories is determined based on the amounts to be processed within
the next 12 months. The major classifications are as follows:
Ore
on Leach Pads
The recovery of gold from certain gold
oxide 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 tonnes added to the leach pads), the grade of ore placed on the
leach pads (based on fire assay data) and a recovery percentage (based on ore
type and column testwork). It is estimated that our leach pad at El Chanate will
recover all ounces placed within a one year period from date of
placement.
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.
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.
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, 2008.
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 from the sale of gold dore when persuasive evidence of an
arrangement exists, the price is determinable, the product has been delivered to
the refinery, the title and risk of loss has been transferred to the refiner and
collection of the sales price is reasonably assured from the customer.
Sales are calculated based upon assay of the dore’s precious metal content and
its weight. The Company receives 95% of the precious metal content
contained within the dore from the refinery based upon the preliminary assay of
the Company. The Company forwards an irrevocable transfer letter to the
refinery to authorize the transfer of the precious metal content to the
customer. The sale is recorded by the Company upon the refinery pledging
the precious metal content to the customer. Revenues from by-product
sales, which consists of silver, will be credited to Costs applicable to sales as
a by-product credit. By-product sales amounted to $707, $0 and $0 for
the fiscal years ended July 31, 2008, 2007 and 2006,
respectively.
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 or
75% of the outstanding debt. Both swaps covered this same notional amount of
$9,375 , 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
7A. Quantitative and Qualitative
Disclosures About Market Risk
Metal
Price
Changes
in the market price of gold significantly affect our profitability and cash
flow. Gold prices can fluctuate widely due to numerous factors, such as demand;
forward selling by producers; central bank sales, purchases and lending;
investor sentiment; the relative strength of the U.S. dollar and global mine
production levels.
Foreign
Currency
Changes
in the foreign currency exchange rates in relation to the U.S. dollar may affect
our profitability and cash flow. Foreign currency exchange rates can
fluctuate widely due to numerous factors, such as supply and demand for foreign
and U.S. currencies and U.S. and foreign country economic conditions. Most of
our assets and operations are solely in Mexico; and therefore, we are more
susceptible to fluctuations in the Mexican peso / US dollar exchange. Our Mexico
operations sell their metal production based on a U.S. dollar gold price as is
the general, world-wide convention. Fluctuations in the local currency exchange
rates in relation to the U.S. dollar can increase or decrease profit margins to
the extent costs are paid in local currency at foreign operations. Foreign
currency exchange rates in relation to the U.S. dollar have not had a material
impact on our determination of proven and probable reserves. However, if a
sustained weakening of the U.S. dollar in relation to the Mexican peso that
impact our cost structure, were not mitigated by offsetting increases in the
U.S. dollar gold price or by other factors, profitability, cash flows and the
amount of proven and probable reserves in the applicable foreign country could
be reduced. The extent of any such reduction would be dependent on a variety of
factors including the length of time of any such weakening of the U.S. dollar,
and management’s long-term view of the applicable exchange rate. We
believe, however, that this exchange rate variability has not had a material
impact on our financial statements.
Gold
Price Protection Agreement
In March
2006, we entered into a gold price protection arrangement with Standard Bank to
protect us against future declines 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 forward sales for a total volume of 121,927 ounces of gold forward to
Standard Bank at a price of $500 per ounce. These forward sales were
to be settled quarterly over the period from March 2007 to September 2010. We
also purchased call options from Standard Bank enabling the right to purchase
gold on the same quarterly basis for the same total volume with a strike price
of $535 per ounce. Together, these forward sales and call options
serve to put a floor on our gold sales price and thereby protect us from the
effects of the market price falling below $535 per ounce, while allowing us to
enjoy the upside of higher gold prices. To date, the we have net
settled these contracts, making cash payments reflecting the difference between
the call option purchase price of $535 and the forward sale price of $500, or
$35.00 per oz on the volume prescribed by the contracts.
The total
contractual ounces to settle and cash payments remaining on the gold price
protection agreement are as follows (000’s):
Fiscal
year ending:
|
|
Ounces Remaining
|
|
|
Amount
|
|
|
|
|
|
|
|
|
2009
|
|
|
33,638 |
|
|
$ |
1,177 |
|
2010
|
|
|
33,176 |
|
|
$ |
1,161 |
|
2011
|
|
|
8,230 |
|
|
$ |
288 |
|
Total
|
|
|
75,044 |
|
|
$ |
2,626 |
|
Interest
Rate Swap Contracts
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. Although the Credit Facility requires that we hedge at least 50% of
our outstanding debt under this facility, we elected to cover $9,375 or 75% of
the outstanding debt. The termination date on our existing swap position is
December 31, 2010. However, 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. In any
case, our use of interest rate derivatives will be restricted to use for risk
management purposes.
Market
Risk Disclosures
July
31, 2008
(in
thousands)
Instruments
entered into for hedging purposes -
Type
of Derivative
|
|
Notional
Size
|
|
|
|
Fixed
Price or
Strike
Price
|
|
Underlying
Price
|
|
Termination
or
Expiration
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
$ |
6,938 |
(1)
|
|
|
|
5.30 |
% |
3 Mo. USD LIBOR
|
|
12/31/2010
|
|
$ |
(205 |
) |
Gold
Forward Sales
(2)
|
|
8,428
oz./qtr.
|
(3)
|
|
$
|
500/oz.
|
|
Price
of gold
|
|
9/30/2010
|
|
$ |
(30
,765 |
) |
Gold
Call Options (2)
|
|
8,428
oz./qtr.
|
(3)
|
|
$ |
535/oz.
|
|
Price
of gold
|
|
9/30/2010
|
|
$ |
30,039 |
|
(1) The value shown
reflects the notional as of July 31, 2008. Over the term of the swap, the
notional amortizes, dropping to approximately $656.
|
(2) These contracts
are used for hedging purposes, but hedge accounting is not
applied.
|
(3) The value shown
reflects the current notional, but these contracts amortize down to 8,230
ounces per quarter by the contract
termination.
|
As of July 31, 2008, the dollar value
of a basis point for this interest rate swap was slightly less than $900,
suggesting that a one-basis point rise (fall) of the yield curve would likely
foster an increase (decrease) in the interest rate swaps value by slightly less
than $900. Because hedge accounting is applied, the contract
serves to lock in a fixed rate of interest for the portion of the variable rate
debt equal to the swap's notional size. The swap covers only 75
percent of our variable rate exposure.
The combined gold forward sales and
long call options serve to synthesize a put option that protects us from the
market exposure to gold prices below $535 per ounce on the volume of sales
consistent with the notional size of these contracts. These contracts
covered approximately 90 percent of production during their term
ending July 31, 2008.
Item 8. Financial Statements and
Supplementary Data.
For the
Financial Statements required by Item 8 see the Financial Statements included at
the end of this Form 10-K starting on page F-1.
Item
9.
|
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
9A. 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 not only 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 but also ensure that information required to be
disclosed is accumulated and communicated to the Chief Executive Officer and our
Chief Financial Officer to allow timely decisions regarding required disclosure.
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 report. They have concluded that, as of that date, our
disclosure controls and procedures were effective.
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.
Management’s Report on
Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Rules 13a-15(f) or
15d-15(f), under the Exchange Act. Internal control over financial reporting is
a process designed by, or under the supervision of, our principal executive and
principal financial officers and affected by our Board of Directors, management
and other personnel, and to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on its financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has assessed the effectiveness of our internal control over financial reporting
as of July 31, 2008. In making this assessment, management used the
criteria set forth in the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission Internal Control—Integrated
Framework, (COSO). Based on this assessment, management has
not identified any material weaknesses as of July 31, 2008. A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
Management
has concluded that we did maintain effective internal control over financial
reporting as of July 31, 2008, based on the criteria set forth in “Internal Control—Integrated
Framework” issued by the COSO.
This
Amendment No. 1 to Annual Report on Form 10-K/A does not include an attestation
report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management has requested that its
registered public accounting firm provide such report and, as soon as the
attestation report is available, the Company will file an amendment to its Form
10-K for the year ended July 31, 2008 to include such report.
Item
9B. Other
Information.
None.
PART III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
The
following table sets forth certain information concerning our directors and
executive officers:
|
|
|
|
|
First
|
|
|
|
|
|
|
|
Became
|
|
|
Name
|
|
Age
|
|
|
Director
|
|
Position
|
|
|
|
|
|
|
|
|
Gifford
A. Dieterle
|
|
76 |
|
|
9/82 |
|
President,
Treasurer
|
|
|
|
|
|
|
|
|
|
&
Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
John
Brownlie
|
|
59 |
|
|
2/07 |
|
Chief
Operating Officer, Director
|
|
|
|
|
|
|
|
|
|
|
Christopher
Chipman
|
|
35 |
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
W. Pritchard
|
|
50 |
|
|
1/00 |
|
Director,
Executive Vice President,
|
|
|
|
|
|
|
|
|
|
Secretary
|
|
|
|
|
|
|
|
|
|
|
Robert
Roningen
|
|
73 |
|
|
9/93 |
|
Director,
Senior Vice President,
|
|
|
|
|
|
|
|
|
|
|
Roger
A. Newell
|
|
65 |
|
|
8/00 |
|
Director
|
|
|
|
|
|
|
|
|
|
|
J.
Scott Hazlitt
|
|
56 |
|
|
|
|
|
Vice
President – Mine Development
|
|
|
|
|
|
|
|
|
|
|
Ian
A. Shaw
|
|
68 |
|
|
3/06 |
|
Director
|
|
|
|
|
|
|
|
|
|
|
John
Postle
|
|
67 |
|
|
3/06 |
|
Director
|
|
|
|
|
|
|
|
|
|
|
Mark
T. Nesbitt
|
|
63 |
|
|
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. Mr. Brownlie is also a
director of Palladon Ventures, a publicly traded mineral-related
company.
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.
JEFFREY
W. PRITCHARD, Executive Vice President, 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.
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.
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. Since June 2008, he has served as
the Chairman, CEO and President of Lake Victoria Mining Company, a U.S. public
company with exploration property 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.
IAN A.
SHAW is a member of our Board of Directors and the Board’s Audit and
Compensation Committees. Mr. Shaw has over 33 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. He recently held the position of
Director, since 1994, of Metallica Resources Inc., a TSX listed corporation with
a gold mine in Mexico, and exploration properties in Chile and Alaska. Positions
he currently holds include Director of Pelangio Exploration, Inc., since 2008, a
TSX listed corporation with an interest in gold exploration properties in Canada
and Ghana; Director of PDX Resources, Inc. (formerly Pelangio Mines, Inc.),
since 2008, a TSX listed company with an investment in a company which holds a
gold property in Canada; 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, 2008, 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 Mr. Roningen
filed forms 4 late with regard to six transactions, Mr. Brownlie filed forms 4
late with regard to two transactions and Messrs. Dieterle, Pritchard, Chipman,
Hazlitt, Shaw, Postle and Nesbit each filed a form 4 late with regard to 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, 2008 in person and telephonically, and
acted by unanimous written consent on three occasions. All directors
attended 90% or more of the aggregate meetings.
In fiscal 2008, 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 2008. 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.
Our Compensation Committee consists 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 three times telephonically in fiscal
2008. All committee members were present at the
meetings.
Communication
with the Board of Directors
Interested
parties wishing to contact our Board of Directors 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 our
Board of Directors.
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
11. Executive
Compensation
Compensation
Discussion and Analysis
Objectives
and Philosophy of Executive Compensation
The primary objectives of the
Compensation Committee with respect to executive compensation are to attract and
retain the most talented and dedicated executives possible, to tie annual and
long-term cash and stock incentives to achievement of measurable performance
objectives, and to align executives' incentives with stockholder value creation.
To achieve these objectives, the compensation committee expects to implement and
maintain compensation plans that tie a substantial portion of executives'
overall compensation to the experience level of the executive or employee, the
complexity and amount of responsibility of the employee’s job, key strategic
financial and operational goals such as the establishment and maintenance of key
strategic relationships, the development and operation of our mining projects,
the identification and possible development of additional mining properties and
the performance of our common stock price. The compensation committee evaluates
individual executive performance with the goal of setting compensation at levels
the compensation committee believes are comparable with executives in other
companies of similar size and stage of development operating in the mining
industry while taking into account our relative performance and our own
strategic goals. It is our general practice to grant equity-based
awards to executives and employees.
The
Compensation Committee engaged Mosteller & Associates, Inc. (“Mosteller”),
an independent executive compensation consulting firm, to provide advice and
assistance in the area of executive and director compensation. Mosteller
conducted a review of the total compensation of the Company’s executive officers
and prepared reports for the review of the Compensation Committee that were
subsequently used in determining the appropriate levels of compensation for each
executive officer. Specifically, in accordance with the scope directed by
the Compensation Committee, Mosteller reviewed the compensation packages paid to
the Company’s executives in 2006 and 2007, selected peer sources against which
to compare the data and analyzed comparable compensation packages using
appropriate regression analyses.
To
evaluate the Company’s compensation packages, Mosteller identified four sources
of comparison: (1) mining companies with revenues less than $10 million
and less than 100 employees that are headquartered in the northeastern United
States; (2) mining and natural resources divisions of utility companies with
revenues less than $50 million and less than 100 employees that are
headquartered in the States; (3) energy companies with revenues less than $50
million that are headquartered in the United States; and (4) a custom peer group
of mining companies that included Golden Star Resources, LTD, Miramar,
Northgate, Royal Gold, Inc., Coeur d’Alene Mines Corp., and Meridian Gold.
The Company believes that the companies in this custom peer group provide a good
basis of comparison because, similar to the Company, they are operational, are
producing product and have sizable assets and revenue streams.
Elements
of Executive Compensation
Executive
compensation consists of the following elements:
Regular
Compensation
Regular
compensation for our executives will be established based on the scope of their
responsibilities, taking into account competitive market compensation paid by
other companies for similar positions. Generally, we believe that executive base
salaries should be targeted near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Regular compensation will
be reviewed annually, and adjusted from time to time to realign salaries with
market levels after taking into account individual responsibilities, performance
and experience. This review will occur in the fourth fiscal quarter of each
year.
Compensation
to new executives is based entirely upon similar factors to those discussed
above for regular employees and executives and timing is determined solely by
needs of our company, some of which can be completely unforeseen, such as
resignations or terminations for cause.
Post-termination
compensation is fixed in the employment agreement of each executive, and
generally, post-termination payments are not offered to non-executive
employees.
The Chief
Executive Officer attends the Compensation Committee meetings as management’s
representative. No other executives participate in the compensation
process or attend the Compensation Committee meetings. The CEO evaluates
and provides performance assessments and compensation recommendations for each
of the executive officers other than himself to the Compensation
Committee. The Compensation Committee considers these recommendations in
its deliberations to set executive compensation. The Compensation
Committee reviews the compensation package of the CEO and determines the
compensation package of the CEO in an executive session that the CEO does not
attend. The CEO does not engage in
discussions with the Compensation Committee or the Compensation Committee’s
independent compensation consulting firm regarding his compensation
package.
Annual
Bonus
Our
compensation program includes eligibility for an annual performance-based cash
and/or equity- based bonus (See “2006 Equity Incentive Plan” below) in the case
of all executives and certain non-executive employees. The amount of the cash
and/or equity-based bonus will depend on the level of achievement of the
financial and operational goals and for achieving individual annual performance
objectives. These objectives will vary depending on the individual executive,
but will relate generally to strategic factors such as establishment and
maintenance of key strategic relationships, the development and operation of our
mining projects, the identification and possible development of additional
mining properties, and to financial factors such as raising capital and
improving our results of operations. Bonuses, if awarded, will generally be
determined at the sole discretion of the Board of Directors as recommended by
the compensation committee.
The
Company did not establish corporate or individual performance targets prior to,
or at the beginning of, fiscal year 2008. At the conclusion of fiscal
2008, the Compensation Committee reviewed the performance of the Company and
each executive during fiscal 2008. The Compensation Committee noted
several achievements, including, but not limited to, the increase in ore mined,
the increase in ounces produced, the increase in the proceeds from sales of gold
and silver, the increase in gold reserves, and the completion of certain capital
and plant upgrades.
All
employees, whether executives or key employees, as well as administrative staff,
will be granted bonus compensation at the same time. All efforts are
made by senior management, the compensation committee and the Board of Directors
to avoid issuances of stock as compensation that would create even the
appearance of being timed to the release of material non-public
information.
2006 Equity Incentive
Plan
The 2006
Equity Incentive Plan (the “Plan”) is intended to attract and retain individuals
of experience and ability, to provide incentive to our employees, consultants,
and non-employee directors, to encourage employee and director proprietary
interests in us, and to encourage employees to remain in our
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 our Board of Directors which has delegated the administration
to our Compensation Committee. The Plan provides for Awards to be
made to such of our employees, directors and consultants and our affiliates as
the Board may select.
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 our 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 Exchange Act 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.
Although
non-cash compensation is utilized by us to prevent placing strains on liquidity,
care is taken by management to avoid materially diluting investors.
On
December 20, 2007, at the recommendation of the Compensation Committee, the
Company’s executive officers, directors and employees were granted 1,095,000
restricted shares under our 2006 Equity Incentive Plan (the “Plan”) as bonus
compensation. The restricted shares were granted as follows: Gifford
Dieterle – 250,000, John Brownlie – 250,000, Jeffrey Pritchard – 250,000,
Christopher Chipman – 250,000, Scott Hazlitt – 75,000 and two employees received
an aggregate of 20,000 restricted shares. The fair market value
of the restricted stock on the date of grant was $0.63. The restricted
shares granted vest equally over three years from the date of
grant.
Also on
December 20, 2007, at the recommendation of the Compensation Committee, the
Company’s executive officers and employees were granted 3,150,000 stock options
under our Plan as bonus compensation. The stock options were granted as
follows: Gifford Dieterle - 500,000 options, John Brownlie – 500,000
options, Christopher Chipman – 500,000 options, Jeffrey Pritchard – 500,000
options, Scott Hazlitt – 350,000 options, Ian Shaw – 150,000 options, John
Postle – 150,000 options, Mark Nesbitt – 150,000 options, Roger Newell – 100,000
options, Robert Roningen – 100,000 stock options, and other non-executive
employees – 150,000.
The stock options have a term of seven years and vest over five years as
follows: 20% vested upon issuance and the balance vest 20% annually
thereafter. The
exercise price of the stock options is $0.63 per share (per the Plan, the
closing price on the Toronto Stock Exchange on the trading day immediately prior
to the day of determination converted to U.S. Dollars).
The stock
options and restricted stock awarded on December 20, 2007 were granted as a
method to provide incentive compensation to the Company’s executive officers,
directors and employees. The Compensation Committee believes that the
recipients are motivated by the potential appreciation of the stock price over
time and will remain committed to the Company while the grants
vest.
On July
17, 2008, at the recommendation of the Compensation Committee, the Company’s
executive officers and directors were granted 515,000 restricted shares under
our Plan as bonus compensation for the fiscal year ended July 31, 2008.
The restricted shares were awarded as follows: Gifford Dieterle – 100,000,
John Brownlie – 100,000, Jeffrey Pritchard – 100,000, Christopher Chipman –
100,000, Scott Hazlitt – 50,000, Ian Shaw – 15,000, John Postle – 15,000, Mark
T. Nesbitt – 15,000, Roger Newell -10,000 and Robert Roningen – 10,000. The Compensation
Committee determined that because this grant constituted compensation for
services rendered, the restricted shares granted vested immediately. The
fair value of the Company’s stock was $0.70 on the date of grant. These
restricted shares were awarded as part of the Company’s bonus award and were
designed to reward the recipients for services rendered.
In the
event of a termination of continuous service (other than as a result of a change
of control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall end on the
earlier of the original expiration date or one year from the date continuous
service terminates. Upon a change of control, all unvested stock options and
unvested restricted stock grants immediately vest.
Employment
and Engagement Agreements
We 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, we entered into an employment agreement with J. Scott
Hazlitt, Vice President of Mine Development.
On June 6, 2007, Jack V. Everett
resigned as Vice President of Exploration and a Director of our company and
entered into a consulting agreement with us to provide mining and mineral
exploration consultation services.
On September 10, 2007, Roger A. Newell
resigned as Vice President of Development. He will continue to serve as a member
of our Board of Directors.
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 our common stock at an exercise price of $0.32 per share (the closing
price on July 31, 2006). These options have all been
exercised. As discussed below, these agreements have been amended to
provide for salary increases.
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 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 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 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
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 our 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 continue through December 31, 2011 and automatically renews for
successive one-year periods unless either party provides the other party with
written notice of its intent not to renew at least thirty (30) days prior to the
expiration of the then current term. 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 three times his bonus award for the prior year, as well as 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.
A “Change
of Control” is deemed to occur on the earlier of (1) the date any person is or
becomes the beneficial owner of securities representing 30% or more of the
voting power of the Company’s then outstanding securities; (2) the date on which
the following individuals cease for any reason to constitute a majority of the
number of directors then serving: (i)individuals who, as of the date of the
Change of Control Agreement, constitute the Board and (ii) any new director
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company’s
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date of
the Change of Control Agreement or whose appointment, election or nomination for
election was previously so approved or recommended; (3) the consummation of a
merger or consolidation of the Company or any direct or indirect subsidiary with
another entity, other than a transaction where the individuals serving on the
board of directors constitute at least a majority of the combined entity and the
outstanding securities continue to represent at least 50% of the combined voting
power of the combined entity or a transaction to effect a recapitalization of
the Company where no person is or becomes the holder of securities representing
30% or more of the combined voting power; (4) the approval by the stockholders
of the Company or a plan of complete liquidation or dissolution of the Company;
or (5) the sale or disposition or all or substantially all of the Company’s
assets, other than a sale or disposition to an entity of which 50% the combined
voting power is held by the Company’s stockholders.
However,
a Change in Control will not be deemed to occur if the record holders of the
Company’s stock continue to have substantially the same proportionate ownership
of the Company following such transaction or series of
transactions.
A
“Potential Change of Control” occurs when (1) the Company enters into an
agreement, the consummation of which would result in a Change in Control; (2) a
person publicly announces an intention to take or to consider taking actions,
the consummation of which would result in a Change in Control, which
announcement has not been rescinded; (3) a person becomes the beneficial owner
of securities representing 20% or more of outstanding shares of common stock of
the Company or the combined voting power of the Company’s then outstanding
securities; or (4) the Board adopts a resolution that a Potential Change of
Control exists, which resolution has not been modified.
On September 14, 2007, we entered into
a Second Amended Engagement Agreement (the “Agreement”) with Christopher
Chipman, our Chief Financial Officer, effective May 1, 2007. The
Agreement supersedes and replaces Mr. Chipman’s prior agreement that expired on
August 31, 2007. He receives a monthly fee of $14,583. Mr.
Chipman can terminate the Agreement on 60 days prior notice. We 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
we terminate 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 Agreement, we entered into a change of control agreement similar to the
agreements entered into with our other executive officers. 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. This option
has been exercised in full.
On May 12, 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 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 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 Standard Bank Credit Facility (when we have 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. 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 terminates him without cause or he terminates due to our
breach, he will be entitled to certain severance payments. We utilized the
Black-Scholes method to fair value the 200,000 options received by Mr. Brownlie.
We 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 August 29, 2007, at the
recommendation of the compensation committee, the Board increased the salaries
of our executive officers to be commensurate with industry standards and amended
their respective agreements accordingly. The new salaries were 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 were retroactive to May 1, 2007 and the salary
increase for Mr. Pritchard is retroactive to August 1, 2007.
On July 17, 2008, at the recommendation
of the compensation committee of our Board of Directors, our executive officers
were awarded salary increases effective August 1, 2008. The new salaries were as
follows: Gifford A. Dieterle, President, Treasurer and Chairman of the
Board, $287,500; John Brownlie, Chief Operating Officer, $258,750; Christopher
Chipman, Chief Financial Officer, $201,250 (consulting fee); Jeffrey W.
Pritchard, Vice President - Investor Relations and Secretary, $224,250; and J.
Scott Hazlitt, Vice President - Mine Development, $155,250.
On October 28, 2008, we entered into an
Engagement Agreement with John Brownlie, our Chief Operating
Officer. The agreement supersedes a May 12, 2006 employment agreement
between us and Mr. Brownlie. Pursuant to the Engagement Agreement,
Mr. Brownlie serves as our Chief Operating Officer and receives a base annual
fee of at least $258,750 and is entitled to annual bonuses. The
Engagement Agreement runs through August 31, 2009, 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. We previously entered into a change of control
agreement with Mr. Brownlie similar to the agreements entered into with our
other executive officers.
Compensation
of Directors
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. Non-independent directors were 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 and Roger
Newell by $1,000 per month.
On July
17, 2008, at the recommendation of the Compensation Committee, the Company’s
non-executive directors were granted 65,000
restricted shares under our Plan as bonus compensation for the fiscal year ended
July 31, 2008. The Compensation Committee determined that this grant
constituted compensation for services rendered, the restricted shares granted
vested immediately. Each independent, non-executive director, Ian Shaw,
John Postle and Mark T. Nesbitt, received 15,000 restricted shares and each
non-executive director, Roger Newell and Robert Roningen, received 10,000
restricted shares. The fair value of the Company’s stock was $0.70 on the date
of grant.
On
December 20 2007, at the recommendation of the Compensation Committee, the
Company’s non-executive directors were granted 650,000 stock options under our
Plan as bonus compensation. Each independent, non-executive director, Ian Shaw,
John Postle and Mark T. Nesbitt, received 150,000 stock options and each
non-executive director, Roger Newell and Robert Roningen, received 100,000 stock
options. The stock options have a term of seven years and vest as follows: 20%
vested upon issuance and the balance vest 20% annually thereafter. The exercise
price of the stock options is $0.63 per share (per the Plan, the closing price
on the Toronto Stock Exchange on the trading day immediately prior to the day of
determination converted to U.S. Dollars). These stock option grants were
issued as incentive based compensation. In the event of a
termination of continuous service (other than as a result of a change of
control, as defined in the Plan), unvested stock options shall terminate and,
with regard to vested stock options, the exercise period shall end on the
earlier of the original expiration date or one year from the date continuous
service terminates. Upon a change of control, all unvested stock options and
unvested restricted stock grants immediately vest.
The stock
options awarded on December 20, 2007 were granted as a method to provide
incentive compensation to the Company’s non-executive directors. The
Compensation Committee believes that the recipients are motivated by the
potential appreciation of the stock price over time and will remain committed to
the Company while the grants vest.
Conclusion
Our
compensation policies are designed to retain and motivate our senior executive
officers and to ultimately reward them for outstanding individual and corporate
performance.
Summary
Compensation Table
The
following tables set forth the total compensation paid to or earned by our named
executive officers, as that term is defined in Item 402(a)(3) of Regulation
S-K as of our fiscal years ended July 31, 2008 and 2007, respectively
(000’s):
Name
&
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
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
|
|
2008
|
|
$ |
244 |
|
|
$ |
325 |
|
|
$ |
102 |
|
|
$ |
60 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
731 |
|
|
2007
|
|
$ |
180 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
180 |
|
John
Brownlie, Director and COO
|
|
2008
|
|
$ |
275 |
|
|
$ |
318 |
|
|
$ |
102 |
|
|
$ |
112 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
807 |
|
|
2007
|
|
$ |
150 |
|
|
$ |
- |
|
|
$ |
225 |
|
|
$ |
34 |
|
|
$ |
- |
|
|
$ |
- |
|