EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
1.
ORGANIZATION AND HISTORY
Eastern
Goldfields, Inc., (the “Company" or "EGI") is the parent
company of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a corporation
organized under the laws of the Republic of South Africa. EGSA conducts all of
the Company’s business operations in South Africa through its South African
corporation subsidiaries.
Eastern
Goldfields, Inc. was originally incorporated under the laws of the State of Nevada on July 15, 1998, under the name of Fairbanks Financial, Inc. The Company was
established as a business management, marketing and consulting firm to serve
both the emerging and established business entrepreneur. Since its
incorporation, the Company has had minimal operations. It redirected its
business efforts in late 2005 and on September 23, 2005, following a change in
control, it purchased 100% of the issued and outstanding common or ordinary
stock of EGSA. On October 1, 2005, the Company’s wholly owned subsidiary, EGSA,
acquired, via a share exchange, 100% of the issued and outstanding common or
ordinary stock of Eastern Goldfields Limited. (“EGL”), a South African gold
producer and developer corporation. EGL conducts mining operations in the
Barberton Greenstone Belt area of the Mpumalanga Province, South Africa. On
October 25, 2005, the Company changed its corporate name to Eastern Goldfields,
Inc. to more accurately reflect its business operations. On May 30, 2008,
EGSA, acquired 100% of the issued and outstanding common or ordinary stock of
Barberton Mines Limited, also a South African gold producer and developer
corporation.
This
share exchange for the acquisition of EGL by EGI’s wholly owned South African
subsidiary, EGSA, was accounted for as a reverse acquisition, and, accordingly,
for financial statement purposes, EGL was considered the accounting acquiror
and the subject transaction was considered a recapitalization of EGL rather
than an acquisition by the Company. Accordingly, the historical financial statements
prior to this share exchange are those of EGL, however, the name of the
consolidated corporation going forward is Eastern Goldfields, Inc.
EGL
itself is a South African holding company which has three South African
subsidiary corporations; Makonjwaan Imperial Mining Company (Pty) Ltd.
(“MIMCO”), Eastern Goldfields Exploration (Pty) Ltd. (“EGE”) and Centurion
Mining Company (Pty) Ltd. (“Centurion”).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis
of Accounting
The consolidated financial
statements of the Company have been prepared on the accrual basis of accounting
and are in conformity with accounting principles generally accepted in the United States of America and prevailing industry practice.
The
interim consolidated financial statements of the Company and its subsidiaries
are unaudited. In the opinion of management, all necessary adjustments for a
fair presentation of these interim statements have been included. The results
reported in these interim consolidated financial statements are not necessarily
indicative of the results that may be reported for the entire year. The
accompanying interim consolidated financial statements of the Company should be
read in conjunction with the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2007.
8
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Principles
of Consolidation
The
consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. All amounts are in U.S. dollars
unless otherwise indicated. All significant intercompany balances and
transactions have been eliminated in consolidation.
Property Plant and
Mine Development
Mining
assets, including mine development and infrastructure costs and mine plant
facilities, are recorded at cost of acquisition. Expenditure incurred to
evaluate and develop new ore bodies, to define mineralization in existing ore
bodies, to establish or expand productive capacity, is capitalized until
commercial levels of production are achieved, at which times the costs are
amortized as set out below.
Mineral
rights are recorded at cost of acquisition. When there is little likelihood of
a mineral right being exploited, or the value of mineral rights have diminished
below cost, a write-down is affected against income in the period that such
determination is made.
Non-mining
assets are recorded at cost of acquisition. These assets include the assets of
the mining operation not included in the previous categories and all the assets
of the non-mining operations.
Depreciation,
depletion and amortization are determined to give a fair and systematic charge
in the income statement taking into account the nature of a particular ore body
and the method of mining of that ore body. Mining assets, including mine
development and infrastructure costs, mine plant facilities and evaluation
costs, are amortized over the life of the mine using units-of-production
method, based on estimated proved and probable ore reserves above the
infrastructure. The proven and probable reserve quantities used to calculate
depreciation, depletion and amortization do not include the proven and probable
reserve quantities attributable to stockpiled inventory.
Proved
and probable ore reserves reflect the estimated quantities of economically
recoverable reserves, which can be recovered in future from known mineral
deposits.
Certain
mining plant and equipment included in mine development and infrastructure is
depreciated on a straight-line basis over their estimated useful lives.
Other
non-mining assets are recorded at cost and depreciated on a straight-line basis
over their estimated useful lives as follows:
Vehicles
– 10 years
Furniture
and equipment – 3 years
The
carrying amounts of the group's assets are reviewed at each balance sheet date
to determine whether there is any indication of impairment. If such indication
exists, the asset's recoverable amount is estimated.
9
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings Per Share
In
February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128 Earnings Per Share which requires the Company to present basic and diluted
earnings per share for all periods presented. The computation of loss per
common share (basic and diluted) is based on the weighted average number of shares
actually outstanding during the period. Diluted earnings per share have been
calculated to give effect to the number of additional shares of common stock
that would have been outstanding if the potential dilutive instruments had been
issued for the nine months ended September 30, 2008 and 2007. The weighted
average number of outstanding shares includes the common stock as well as the A
Class Preference Shares, as the holders of the A Class Preference Shares have
the same rights and entitlements as those attached to the common stock. The
computation of dilutive loss per common share does not assume conversion,
exercise or contingent exercise of securities that would have an anti-dilutive
effect on earnings.
The
following table reconciles basic earnings per share and diluted earnings per
share and the related weighted average number of shares outstanding for the nine
months ended September 30, 2008:
DISCLOSURE FOR RECONCILIATION
OF BASIC AND DILUTED
EARNINGS PER SHARE
For the Nine Months Ended September 30, 2008
Income Shares Per-share
(
Numerator
)
(
Denominator
)
Amount
Net loss $(2,048,106) 9,377,986
$
(0.22)
BASIC EPS
Income available
to common
stockholders $(2,048,106) 9,377,986
$
(0.22)
DILUTED EPS
Income available
to common stockholders
and assumed
conversions $(2,048,106) 9,377,986
$
(0.22)
10
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
Deferred
income taxes are reported using the liability method. Deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment. As the Company is operating at a loss, no income taxes
have been provided or are currently due.
During
the year ended December 31, 2007, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income
Taxes,” by defining the confidence level that a tax position must meet in order
to be recognized in the financial statements. The Interpretation requires that
the tax effects of a position be recognized only if it is
“more-likely-than-not” to be sustained based solely on its technical merits as
of the reporting date. The “more-likely-than-not” threshold represents a
positive assertion by management that a company is entitled to the economic
benefits of a tax position. If a tax is not considered “more-likely-than-not”
it is to be sustained based solely on its technical merits. No benefits of the
tax position are to be recognized. Moreover, the more-likely-than-not threshold
must continue to be met in each reporting period to support continued
recognition of a benefit. With the adoption of FIN 48, companies are required
to adjust their financial statements to reflect only those tax positions that
are more-likely-than-not to be sustained. Any necessary adjustment upon
adoption would be recorded directly to retained earnings and reported as a
change in accounting principle at December 31, 2006.
Fair Value of
Financial Instruments
Financial
instruments consist principally of cash, short-term liabilities and long-term
debt. The estimated fair values of these instruments approximate their carrying
value.
Foreign
Currency Translation
The
Company translates the foreign currency financial statements of its foreign
operations by translating balance sheet accounts at the exchange rate on the
balance sheet date and the income statement accounts using the prevailing
exchange rates at the transaction date. Translation gains and losses are
recorded in stockholders’ equity and realized gains and losses are reflected in
operations. The Company’s functional currency is the South African Rand.
Exploration
Expenses
Exploration costs are
charged to operations as incurred.
11
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Impairment of
Long-Lived Assets
The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Inventories
As
described below, costs that are incurred in or that benefit the productive
process are accumulated as stockpiles and inventories. Stockpiles and
inventories are carried at the lower of average cost or net realizable value.
Net realizable value represents the estimated future sales price of the product
based on current and long-term metals prices, less the estimated costs to
complete production and bring the product to sale. Write-downs of stockpiles
and inventories, resulting from net realizable value impairments, are reported
as a component of
Cost of production
. The major classifications are as follows:
Stockpiles
Stockpiles
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 and carbon in-pulp inventories. In-process material is 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 In process
Precious
metals in process is gold bullion. Precious metals that result from the
Company’s 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.
Revenue
Recognition
Revenue
is recognized, net of treatment charges, from a sale when the price is
determinable, the product has been delivered, the title has been transferred to
the customer and collection of the sales price is reasonably assured.
12
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Deferred
Stripping Costs
In
general, mining costs are allocated to production costs and inventories, and
are charged to c
osts of production
when
gold is sold. However, at open pit mines with diverse grades and waste-to-ore
ratios over the mine life, the Company defers and amortizes certain mining
costs on a UOP basis over the life of the mine. These mining costs, which are
commonly referred to as “deferred stripping” costs, are incurred in mining
activities that are normally associated with the removal of waste rock. The
deferred stripping accounting method is generally accepted in the mining industry
where mining operations have diverse grades and waste-to-ore ratios; however,
industry practice does vary. Deferred stripping matches the costs of production
with the sale of such production at the Company’s operations where it is
employed, by assigning each ounce of gold with an equivalent amount of waste
removal cost.
If the
Company
were to expense stripping costs as incurred, there could be
greater volatility in the Company’s period-to-period results of operations.
Deferred
stripping
costs are charged to
Costs
of Production
as gold is produced and
sold using the UOP method based on estimated recoverable ounces of proven and
probable gold, using a stripping ratio calculated as the ratio of total tons to
be moved to total proven and probable ore reserves, which results in the
recognition of the costs of waste removal activities over the life of the mine
as gold is produced.
The
Company reviews and evaluates its deferred stripping costs for impairment when
events or circumstances indicate that the related carrying amounts may not be
recoverable.
As the
Company’s open pit operations are forecasted to cease by end-2008, the Company
did not measure and recognize production stage deferred stripping costs and
credits for the nine months period ended September 30, 2008.
Reclamation
and Remediation Costs (Asset Retirement Obligations)
In
August 2001, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, which
established a uniform methodology for accounting for estimated reclamation and
abandonment costs. Reclamation costs are allocated to expense over the life of
the related assets and are adjusted for changes resulting from the passage of
time and revisions to either the timing or amount of the original present value
estimate. Prior to adoption of SFAS No. 143, estimated future reclamation costs
were based principally on legal and regulatory requirements. Such costs related
to active mines are accrued and charged over the expected operating lives of
the mines using the UOP method based on proven and probable reserves. Future
remediation costs for inactive mines are accrued based on management’s best
estimate at the end of each period of the undiscounted costs expected to be
incurred at a site. Such cost estimates included, where applicable, ongoing
care, maintenance and monitoring costs. Changes in estimates at inactive mines
are reflected in earnings in the period an estimate is revised.
13
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock
Option Expense
Compensation
cost recognized in 2008 and 2007 includes: (a) compensation cost for all
share-based payments granted prior to, which have since vested as of January 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of FAS 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, which have vested based on the
grant-date fair value estimated in accordance with the provisions of FAS
123(R).
Fair Value
Accounting
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The provisions of FAS 157 were adopted January 1, 2008. In February 2008, the
FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement
No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS
157 for nonfinancial assets and nonfinancial liabilities, except for items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The provisions of FSP FAS 157-2 are
effective for the Company’s fiscal year beginning January 1, 2009.
FAS
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS 157 are described below:
Level
1 Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted
assets or liabilities;
Level
2 Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly for
substantially the full term of the asset or liability;
Level
3 Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and
unobservable (supported by little or no market activity).
The
following table sets forth the Company’s financial assets and liabilities
measured at fair value by level within the fair value hierarchy. As required
by FAS 157, assets and liabilities are classified in their entirety based on
the lowest level of output that is significant to the fair value measurement.
Fair Value at September 30, 2008
(in thousands)
Total
Level
1
Level 2
Level 3
Assets:
Cash $
305 $ 305 $ - $ -
Other
assets
24,812
24,812
_____ _____
$
25,117
$
25,117
_____
_____
Liabilities
:
None
14
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair
Value Accounting
(Continued)
The Company’s
cash and certain other assets are classified within Level 1 of the fair value
hierarchy because they are valued using quoted market prices. The cash and
certain other assets that are valued based on quoted market prices in active
markets are primarily money market securities.
The
total amount of the changes in fair value for the period was included in net
loss as a result of changes in the Company’s stock price from December 31,
2007.
In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“FAS 159”) permits entities to
choose to measure many financial instruments and certain other items at fair
value, with the objective of improving financial reporting by mitigating
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of FAS 159 were adopted January 1, 2008. The
Company did not elect the Fair Value Option for any of its financial assets or
liabilities, and therefore, the adoption of FAS 159 had no impact on the
Company’s consolidated financial position, results of operations or cash
flows.
3.
INVENTORIES
Inventories at September
30, 2008 and December 31, 2007 consist of the following:
2008
2007
|
Precious
metals in process
Stockpiles
|
$
|
220,105
219,756
|
$
|
224,333
242,921
|
|
|
$
|
439,861
|
$
|
467,254
|
15
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
4.
PROPERTY,
PLANT AND MINE DEVELOPMENT
Major classes of property, plant, and mine development
as of September 30, 2008 and December 31, 2007 are as follows:
2008
2007
|
Land
and buildings
Mining
assets
Mine
development costs
Mining
rights
Motor
vehicles
Furniture
and equipment
Metallurgical
plant
Plant
and equipment
Environmental
rehabilitation fund
|
$
|
349,661
3,303,359
25,350,375
1,085,010
86,546
173,418
4,713,162
267,780
178,462
|
$
|
91,162
5,839,151
7,344,539
1,489,488
97,738
60,099
1,735,479
214,752
331,827
|
|
Less:
accumulated depreciation
|
|
35,507,773
(12,135,337)
|
|
17,204,235
(3,826,435)
|
|
Net
property and equipment
|
$
|
23,372,436
|
$
|
13,377,800
|
Depreciation, depletion and amortization expense is $471,448
and $370,153 for the nine months ended September 30, 2008 and 2007,
respectively. Included in property, plant and mine development is Barbrook
assets at acquisition cost of $16,749,383 and accumulated depreciation of $7,275,480.
5.
SHORT
TERM LOANS
Short term loans at September
30, 2008 consist of the following:
|
Phoenix Gold Fund and Asian Investment Management Services
Ltd
Investec
Bank Limited
Kestrel
S.A.
|
$
|
3,845,830
10,008,108
1,895,943
|
|
|
$
|
15,749,881
|
There were no short term loans at December 31, 2007.
On March 28, 2008, the Company’s wholly owned subsidiary EGSA entered
into a Convertible Loan Agreement (the “Agreement”) with Phoenix Gold Fund and
Asian Investment Management Services Ltd, collectively referred to as “the Lenders”.
The Loan amounting to R32 million ($3,845,830 as of September 30, 2008)
received on April 18, 2008 is termed as pre-listing funds prior to EGSA’s
intended listing on the Johannesburg Stock Exchange within twelve months from
the date of this Agreement.
For the purposes of this Agreement, EGSA has been ascribed a value of
R432 million and the percentage shareholding that will be issued to the Lenders
in order to discharge the Loan has been calculated accordingly.
16
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
5.
SHORT
TERM LOANS
(Continued)
The loan principal can
convert into 6.9% of the total issued and outstanding shares of the ordinary
capital of EGSA after the conversion of the loan by EGSA. Conditions relating
to interest payments are as follows:
•
If EGSA is able to list its shares
with the JSE Limited (JSE) within six months of the agreement date then no
interest is due and payable.
•
If EGSA is not able to list its
ordinary shares with the JSE within six months of the agreement date then
interest will accrue at the South African Prime Lending Rate.
•
If EGSA lists its ordinary shares
with the JSE after six months but before twelve months of the agreement date,
then interest will accrue and be paid on a monthly basis until conversion or
repayment of the loan.
•
If EGSA has been unable to list
its ordinary shares with the JSE within twelve months of the agreement date,
then the lender can demand repayment of principal and accrued interest or
conversion of the debt into the corresponding ordinary shares of EGSA.
On May 27, 2008, the Company’s wholly owned subsidiary
EGSA obtained R80 million ($9,614,229 as of September 30, 2008) six month
bridging loan facility from Investec Bank Ltd. (“Investec”) for the acquisition
of Barbrook Mines Ltd. The facility is repayable 6 months after disbursement
of May 30, 2008. Interest on the facility is calculated at 3 month JIBAR plus
3% p.a., capitalized and payable quarterly. EGSA has issued a R20 million
warrant package to Investec on the execution of the Facility Documents. The
warrant package is calculated with reference to the conversion price for the
common shares of EGSA equal to 110% of the lesser of R7.00 per share or the
actual price per share achieved in the R100 million pre IPO equity raising. As
of the date of this filing the pre IPO equity raising has not taken place,
therefore, the valuation of the warrants cannot be determined. The warrants
shall be convertible, in tranches of at least R1 million into ordinary shares
of EGSA at the holder’s option at any time prior to 3 years after issue date. If
EGSA is not listed within nine months of execution of the Facility Documents,
the Investec shall be entitled to elect to receive a settlement fee from EGSA
equivalent to an independent valuation of the Warrant Package. Security for
the facility is:
•
A guarantee from the Company
secured by a pledge and cession of its shareholding in and claims against EGSA;
•
A pledge and cession over EGSA’s
shareholding in and claims against Barbrook Mines Ltd;
•
Suitable security over all of
EGSA’s bank accounts, and
•
Subordination of shareholder and
Group company loans to EGSA.
The loan balance
outstanding at September 30, 2008 includes $393,879 of accrued interest.
Also see Subsequent
Events Note 12.
17
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
5.
SHORT
TERM LOANS
(Continued)
The following disclosures
are in line with the requirements of Financial Accounting Standards Board Statement
No. 141 (“FAS 141”):
a. On May 30, 2008, EGSA purchased 100% of the
issued ordinary share capital of Barbrook Mines Limited (“Barbrook”) from Maid
'O The Mist (Proprietary) Limited, a company incorporated in the Republic of
South Africa and a subsidiary of Caledonia Mining Corporation Limited
(“Caledonia”), a company incorporated in Canada. In accordance with the sale
agreement, Caledonia also agreed to procure the sale and cession of total
amount owing by Barbrook to the Caledonia Group with effect from the closing
date.
b. The primary reason for this acquisition was
that the dormant processing plant of Barbrook will allow the Company to change
its original strategy of building a new plant at the Company’s Lily Mine site
thereby resulting in substantial reductions in capital expenditure.
c.
As the acquisition was
completed on May 30, 2008, results of operations of Barbrook for the period
from May 31, 2008 to September 30, 2008 are included in the interim
consolidated statement of operations of the Company for the nine month period
ended September 30, 2008.
d. The cost of acquisition for the 100% of the
issued ordinary share capital of Barbrook and shareholders loan accounts was
South African Rands 70 million which approximated to $9.2 million as of the
closing date. The carrying value of the assets at December 31, 2007 has been
written down to reflect the realisable value as per the value of this
acquisition.
On August 25, 2008, the Company obtained Swiss Francs
2,200,000 six month loan from a shareholder, Kestrel SA (“Kestrel”) and for
purposes of working capital requirements. Interest on the loan is 15% p.a.
calculated on the outstanding balance and compounded monthly in arrears. As of
September 30, 2008, the draw down on the loan amounted to Swiss Francs
2,057,000 ($1,895,943) and the balance as of that date included accrued
interest of $22,620. In addition, on August 22, 2008, the Company entered into
a Common Stock Purchase Warrant Agreement with Kestrel whereby Kestrel is
entitled to purchase up to Fifty Thousand (50,000) shares of Common Stock (par
value $0.001 per share) from the Company upon payment to the Company of Five
Dollars ($5.00) per share. Warrants may be purchased at any time on or after
August 20, 2008 but all rights to purchase the Shares and to exercise this
Warrant shall expire on August 21, 2011 after which it shall become void and
all rights hereunder shall thereupon cease.
18
EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
6.
LONG
TERM LIABILITIES
September 30, 2008
December 31, 2007
|
Standard
Bank Vehicle and Asset Finance
Less:
Current portion
|
$
|
2,142,030
(125,379)
|
$
|
843,984
(202,704)
|
|
|
$
|
2,016,651
|
$
|
641,280
|
Secured banking facility against mining equipment bearing interest at
the prime bank overdraft rate less 1% and repayable in monthly installments of
South African Rands 551,474 ($66,275) and South African Rands 182,669 ($26,620)
at September 30, 2008 and December 31, 2007, respectively.
Maturities
of the liabilities are as follows:
|
For the year ending December 31:
2008
2009
2010
2011
2012
|
|
|
|
$
|
125,379
542,096
616,131
635,180
223,244
|
|
|
|
|
|
$
|
2,142,030
|
19
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
7.
RECLAMATION
AND REMEDIATION
The
Company’s mining and exploration activities are subject to various laws and
regulations governing the protection of the environment. These laws and
regulations are continually changing and are generally becoming more
restrictive. The Company conducts its operations so as to protect the public
health and environment and believes its operations are in compliance with
applicable laws and regulations in all material respects. The Company has
made, and expects to make in the future, expenditures to comply with such laws
and regulations, but cannot predict the full amount of such future
expenditures. Estimated future reclamation costs are based principally on legal
and regulatory requirements.
At September 30,
2008 $360,907 were accrued for reclamation obligations relating to currently or
recently producing mineral properties.
The
following is a reconciliation of the total liability for reclamation and
remediation:
|
Balance, December 31, 2007
Addition,
change in estimate and other
Liabilities
settled
Accretion
expense
|
$
|
329,109
31,798
-
-
|
|
Balance, September 30, 2008
|
$
|
360,907
|
8.
COMMITMENTS
A first continuing
covering bond amounting to South African Rands 200,000 ($24,035) was registered
over the property held by a subsidiary, Makonjwaan Properties Henry Nettman Two
Eight (Pty) Ltd., in lieu of financial guarantees amounting to South African
Rands 164,000 ($19,709) issued in favor of the Department of Minerals and
Energy.
During the year ended December 31, 2006, the Company entered into a
Service and Support Agreement with Cheston Minerals PTY Limited (“CML”), a
company owned by EGI’s President. This agreement covers the rental of the
Company’s South African office and use of the office equipment and supplies,
which are owned by CML. The agreement requires a monthly payment of $16,000.
The term of the agreement is one year and is renewable on an annual basis. The
Company charged $144,000 and $135,000 to operating expense for the nine month
period ended September 30, 2008 and 2007, respectively.
During the year ended December 31, 2006, the Company entered into an
Agreement for Consulting Services and Public Relations with Zenith Premier
Limited (“ZPL”), a company in which EGI’s CFO serves as a director. This
agreement covers the investor relation services to be provided by ZPL to EGI.
The agreement requires a monthly payment of $16,500 and was terminated on
August 31, 2008. The Company charged $132,000 and $148,500 to operating
expense for the nine month period ended September 30, 2008 and 2007,
respectively.
20
EASTERN GOLDFIELDS,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
9.
MINORITY
INTEREST
The current South African mining legislation promulgated under “Mineral
and Petroleum Resources Development Act of 2004 (“MPRDA”) seeks, among other
things, (i) to expand opportunities for historically disadvantaged South
Africans to enter the mineral industry and obtain benefits from the
exploitation of mineral resources; and (ii) to promote employment, social and
economic welfare as well as ecologically sustainable development. In order to
convert an old order mining right to a new order mining right the holder is
required to submit a social and labor plan. The plan should describe how it
will expand opportunities for historically disadvantaged South Africans to
enter the mineral industry.
Further, for purposes of mining right conversions effective May 1, 2004
(the effective date), the MPRDA (incorporating the Mining Charter) requires
mining company ownership for historically disadvantaged South Africans to 15%
ownership within five years and 26% ownership within 10 years of the effective
date. The transfer of ownership is to be consummated at fair market value.
Accordingly, and pursuant to the requirements of MPRDA, EGL on December
9, 2005 entered into a “Heads of Agreement” to sell 26% of its ordinary stock
to Lomshiyo Investments (Proprietary) Limited (“Lomshiyo”) for a consideration
of R9,900,000 ($1,081,600 and $1,442,728 at September 30, 2008 and December 31,
2007, respectively.) This amount is a loan to Lomshiyo and is reflected as a
reduction of equity in the Company’s September 30, 2008 consolidated balance
sheet. Lomshiyo is a South African corporation whose majority shareholders are
historically disadvantaged South Africans. The transaction closed on February
2, 2006. The ownership percentage of net assets of EGL acquired by Lomshiyo at
December 31, 2005 amounted to $1,379,142 or 26%.
The purchase of ordinary stock was financed with a note receivable
bearing an annual interest rate of the South African Prime Rate (12.075% at June
30, 2007). The note accrues interest and is payable to the Company on January
2, of each year. A total of $616,863 of accrued interest has been added to the
note receivable. The note is due and payable on December 31, 2010. The
Company’s common stock collaterizes the note receivable.
10.
STOCK
OPTIONS
Employee Stock Options
The
Company currently maintains the Eastern Goldfields, Inc. 2005 Stock Plan
(“Stock Plan”), approved by stockholders on November 26, 2005, for
executives and eligible employees. Under this Stock Plan, options to purchase
shares of stock can be granted with exercise prices not less than 100% of fair
market value of the underlying stock at the date of grant. Options granted
under the Company’s stock plan vest over periods ranging from one to three
years of the date of the grant and are exercisable over a period of time not to
exceed 10 years from grant date. At December 31, 2006, no shares were
available for future grants under the Company’s 2005 Stock Incentive Plan. Also
see Subsequent Events Note 12.
The following table summarizes annual activity for
all stock options for the nine months ended September 30, 2008 and the year
ended December 31, 2007:
21
EASTERN
GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
10.
STOCK
OPTIONS
(Continued)
Employee Stock Options
(Continued)
|
|
2008
|
|
2007
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Outstanding,
beginning
of the period
Granted
Exercised
Forfeited
and expired
|
|
850,000
-
-
-
|
|
$
|
1.50
-
-
-
|
|
|
850,000
-
-
-
|
|
$
|
1.50
-
-
-
|
|
Outstanding,
end of period
|
|
850,000
|
|
$
|
1.50
|
|
|
850,000
|
|
$
|
1.50
|
|
Options
exercisable, end of period
Weighted
average fair value of options granted during the period
|
$
|
833,000
-
|
|
$
|
1.50
|
|
$
|
833,000
-
|
|
$
|
1.50
|
The fair value of the stock options granted (and vested) during the nine month period ended September 30, 2008 and the year ended December 31, 2007, was approximately $0 and $0 or $0 and $0 per stock option, respectively, and was determined using the Black Scholes option pricing model. The factors used for the nine month period ended September 30, 2008 and the year ended December 31, 2007, were the option exercise price of $1.50 per share, a 3 year life of the options, volatility measure of 43.77% (2007 - 50%), a dividend rate of 0% and a risk free interest rate of 2.10% (2007 - 4.55%).
The
following table summarizes information about stock options outstanding at September 30,
2008, with exercise prices less than the fair market value on the date of grant
with no restrictions on exercisability after vesting:
|
|
|
Options Outstanding
|
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-
average
Remaining
Contractual
Life
(in years)
|
|
Weighted-
average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$1.50
|
|
850,000
|
|
0.6
|
|
$
|
1.50
|
|
833,000
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008,
there was approximately $86,000 of unrecognized compensation cost related to
unvested stock options. This cost is expected to be recognized over a weighted
average period of 0.6 years.
22
EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(Unaudited)
11.
CAPITAL
STOCK
Common Stock
On September 30, 2008 the Board of Directors of
Eastern Goldfields, Inc. approved an amendment to the Company’s Articles of
Incorporation to increase the authorized common stock to 160,000,000.
Preferred Stock
On September 30, 2008, the Board of Directors of
Eastern Goldfields, Inc. approved an amendment to the Company’s Articles of
Incorporation to authorize 20,000,000 shares of Preferred Stock with a par
value of $0.001 per Share.
12.
SUBSEQUENT
EVENTS
a. On October 30,
2008, the Company received a commitment letter agreement from Investec Bank
Limited (“Investec”). Under the terms of the agreement, Investec has agreed to
extend the maturity date of the Company’s existing bridging loan (the “Existing
Loan”) from the original maturity date of November 28, 2008 to May 29, 2009
(the “Loan Extension”).
As consideration for the Loan Extension,
the Company agreed to the following:
i. To grant Investec 820,000 Common
Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s
Common Stock at an exercise price equal to the lower of $3.75 per share and the
price at which the Company raises equity capital in its next offering;
ii.
To increase the interest rate on
the Existing Loan from Jibar plus 3% to Jibar plus 4%;
iii. To confirm that the Company has sufficient working
capital for the period through the last date of the Loan Extension;
iv. To subordinate all shareholder loans to the Existing
Loan;
v. To prohibit the payment of any interest and principal
on all shareholder loans;
vi. To prohibit further indebtedness without the prior
written approval of Investec; and
vii. To provide Investec on or before the 5th calendar day
of each month, monthly management accounts and an update on the Company’s
financing strategy and provide Investec with an opportunity to review the
strategy with Investec, upon Investec’s request.
b. On October 9,
2008, the Board of Directors approved the extension of the Company's 2005 Stock
Option Plan so that, as extended, the 2005 Stock Option Plan shall not expire
until October 28, 2010.
23
MATTER OF FORWARD-LOOKING
STATEMENTS
THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDS
OR OTHER VARIATIONS OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OF
PLANS OR STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO
CAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING, BUT NOT
LIMITED TO, STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS,
COMPETITIVE CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NO
EXISTING BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLY
PREDICTIONS. NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVE
CORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED. ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVE
TO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKING
STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANT
FACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC., INCLUDING,
BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE,
BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTH IN ITEM
1A, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITED HISTORY OF
OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE COMPANY, THE
INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS, ANY
ONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIED IN SUCH
FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEW INFORMATION
AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
OR OTHER SUBSEQUENT EVENTS.
As
used herein, the term “the Company,” “we,” “us,” and “our” refer to Eastern
Goldfields, Inc., a Nevada corporation and its subsidiaries unless otherwise
noted.
Item
1A. Risk Factors.
Lack of Diversification:
Our business, assets, and operations are concentrated
in South Africa and the mining of gold. As a result, we are not diversified and
to that extent we face continuing challenges to achieve stable revenues,
profits, and cash flow while also remaining exposed to the risks associated
with this concentration.
Small
Company, Limited Resources & Need for Additional Capital
: We are a small company with limited financial
resources relative to the many competitors in our industry. In the event of
any unexpected problems or difficulties in our business and operations, we may
not have the ability to obtain sufficient additional capital on terms that are
reasonable in light of our current circumstances and market conditions.
Further, we currently estimate that we will need to raise $60,000,000 in
additional capital. We have not received any assurances that this additional
capital can be obtained or if it is obtained, that can be obtained on
reasonable terms and in a timely fashion to allow us to execute our plans.
Limited
Trading Market for Common Stock:
Our common stock is presently traded in the
over-the-counter Bulletin Board and is quoted on the “OTCBB Market”. Our stock
trades on a limited and sporadic basis and we cannot assure you that a
continuous liquid trading market will develop or, if it does develop, that it
will be sustained for any continuous period.
24
Lack
of Profits and Negative Cash Flow:
During the nine months ended September 30, 2008, we recorded a net loss of $2,048,106
compared to a net loss of $982,098 for the nine months ended September 30, 2007
and negative cash flow during both periods. While we believe that if we can
successfully implement our business plan and if market and competitive
conditions allow, we may achieve profitability and positive cash flow, however,
we can not assure you that we will achieve profitability and positive cash flow
or if we do achieve these goals, that we can sustain profitability and positive
cash flow in the future.
Extension
of Loan & Covenants Granted to Investec
: On October 30, 2008, we entered into an extension of the bridging
loan with Investec Bank Limited. Under the terms of the loan, we are obligated
to pay interest to Investec and repay all principal due to Investec on May 29,
2009. Further, and in addition to other provisions, we granted Investec
820,000 common stock purchase warrants and agreed to provide Investec with
monthly management reports. While we believe that the agreement extending the
existing bridging loan serves our long-term interests, we can not assure you
that we will be successful in repaying the loan as required.
Lack of Dividends
: Our board of directors determines whether to pay dividends on the
Company’s issued and outstanding shares. The declaration of dividends will
depend upon our future earnings (if any), our capital requirements, our financial
condition and other relevant factors. Our board of directors does not intend to
declare any dividends on our Common Stock for the foreseeable future. We
anticipate that we will retain any earnings to finance the growth of our business
and for general corporate purposes.
Competition & Lack of Diversification
: Gold properties eventually become depleted or
uneconomical to continue mining. As a result, our long-term success is
dependent on its ability to acquire, discover, develop and mine new properties.
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 the Company is unable to locate, develop and economically mine
new properties, it most likely will not be able to be profitable on a long-term
basis. In addition, all of our assets and operations are concentrated in the
mining business described in this Form 10-Q and we have no current plans to
diversify into any other business activity.
Reliance Upon Estimates & Matter of Estimated
Reserves:
Our business and the plans
described in this Form 10-Q rely in large measure upon estimates that we
received from others (including those in the Bank Feasibility Study) used in
combination with our own assessments. While we continue to evaluate the geological
information that we use, we cannot assure you that the estimates recited in
this Form 10-Q are accurate or that we will not later revise and lower our
estimated reserves which may adversely impact our financial performance.
Limited
Trading and Limited History for our Common Stock
: Our common stock trades on a limited and sporadic
basis and, as a result, there is only limited liquidity in our common stock.
Further our common stock has had only a limited trading history on the Bulletin
Board Market. As a result and given the limited trading market for our common
stock, the price of our common stock may be far more volatile and unpredictable
than the prices of common stocks and other securities that have a long and
established trading history.
Possible Rule 144 Stock Sales
: A large portion of our outstanding Common Stock is
"restricted securities" and may be sold only in compliance with Rule
144 adopted under the Securities Act of 1933 or other applicable exemptions
from registration. As revised effective February 15, 2008, Rule 144 generally
now requires that a holder of our restricted Common Stock hold these
“restricted securities” for at least six months from the date at which they
were acquired before undertaking any re-sale of the restricted Common Stock
pursuant to Rule 144. And if the holder is an “affiliate” (as defined in Rule
144(a)(1) or was an “affiliate” in the immediately preceding 90 day period),
then the holder must also satisfy certain other requirements of Rule 144. As a
result of the revision to Rule 144 that became effective February 15, 2008
(including but not limited to the shorter holding period under Rule 144(d)),
potential and actual sales of our Common Stock by our present shareholders may
have a depressive effect on the price of our Common Stock in the marketplace.
25
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Our strategy, to the extent that we are able, is to
grow our mineral reserves. At the same time, we seek to optimize our current
operations, through exploration and prudent acquisitions. During 2008, we took
the following actions:
|
|
•
|
We expanded the Lily Mine operation and success of
drilling programs to date
|
|
|
•
|
We commenced refurbishment of the Barbrook Mine
|
|
|
•
|
We continued our exploration
|
Growth and Expansion
Lily Mine
Our primary focus, to the extent that we are able, is
to develop the underground mine at Lily. Primary development of the initial
underground section began in July 2007 and we are anticipating that if current
projections hold, our first production will be in the fourth quarter of 2008.
Under these conditions, the underground tonnage will be treated at the current
Makonjwaan mill until the Barbrook Plant has been refurbished. The dormant
processing plant of the recently acquired Barbrook Mine (see discussion below),
will allow us to change the original strategy of building a new plant at the
Lily Mine site. We commenced refurbishment of the Barbrook plant by the
beginning of 2008 which may allow us to undertake operations in 2009.
The Lily Main Pit opencast operation which commenced
in 2000 was completed in September 2006. Production from the additional
discovery of open pit reserves along the eastern strike extension (Lily East
and Rosie’s Fortune) commenced immediately thereafter to give the Company a
continuous production life of mine up until December 2008.
The following table summarizes the tons milled, gold
produced and operating profit (loss) for the life of the open pit operations to
date (using the estimates that we have obtained and which, based on current
information, appear as reasonable projections):
|
Period
|
Ore Milled
|
Au Produced
|
Average Grade Produced
|
Operating Profit/(loss)
|
|
Year
|
mths
|
t
|
kg
|
oz
|
g/t
|
Oz/t
|
US$
|
|
2000/01
|
9
|
120,000
|
240
|
7,700
|
1.99
|
0.062
|
338,087
|
|
2001/02
|
12
|
154,000
|
309
|
9,900
|
2.00
|
0.063
|
647,117
|
|
2002/03
|
12
|
153,000
|
343
|
11,000
|
2.24
|
0.074
|
1,049,173
|
|
2003/04
|
12
|
131,000
|
241
|
7,700
|
1.84
|
0.057
|
(541,559)
|
|
2004
|
9
|
116,000
|
230
|
7,400
|
1.98
|
0.062
|
(743,916)
|
|
2005
|
12
|
168,000
|
398
|
12,800
|
2.37
|
0.074
|
420,522
|
|
2006
|
12
|
166,200
|
377
|
12,100
|
2.27
|
0.071
|
2,276,493
|
|
2007
|
12
|
160,000
|
322
|
10,400
|
2.01
|
0.072
|
1,010,599
|
|
2008
|
9
|
115,915
|
195
|
6,339
|
1.68
|
0.055
|
(1,562,078)
|
|
TOTAL
|
|
1,284,115
|
2,655
|
85,339
|
2.04
|
0.066
|
2,894,438
|
|
|
(1)
|
Prior
to March 31, 2004, 12 month accounting periods were from April 1 to March 31
|
|
|
(2)
|
2005
represents the first year of change to the accounting period or fiscal year
based on a calendar year.
|
If our current estimates are reasonable, we currently
anticipate a potential of about 1,500 oz may remain in the Rosie’s Fortune Pit
for extraction in the fourth of 2008. Thereafter the Company will require, as
reported in previous reports, working capital financing to meet the
requirements of its future short term business plan.
26
The extensive exploration diamond drilling programs
completed since 2005 up to the end of 2007 have successfully increased the
mineral reserves of the Lily Mine to the extent that a full Bankable
Feasibility Study has been completed giving the entire project a very positive
NPV and IRR at a conservative medium term gold price of US$800/ounce. Ninety
diamond drill holes (with deflections), totaling in excess of
28,800 meters of drilling, have increased
the confidence in the reserves.
The
discovery cost remains remarkably low at an estimated +/-US$1.50 per ounce during
this exploration period.
To the extent that we are able and provided that we
can implement our current plans, we anticipate that exploration will continue
on the mine property both from surface and later from underground as the mine
develops in depth to continue increasing the reserve potential.
There can be no assurance that we will be successful
in implementing our plans or the plan of operations described in this Form 10-Q.
We face many risks and uncertainties and we have only a limited history of
operations.
Acquisitions
If circumstances and our financial resources allow, we
intend to make strategic acquisitions in the next few years with the objective
of increasing its production to 100,000 oz/annum. We continue to investigate
potential opportunities. We cannot assure you that we will achieve these or
other goals or if we achieve them, that we can sustain any such achievement for
any period in the future.
Barbrook Mine
As previously disclosed in our Form 8-K, on February
21, 2008 we entered into an agreement to purchase Barbrook Mine. This offer
was accepted by the seller corporation, Caledonia Mining Corporation. The
acquisition was completed on May 30, 2008.
Currently
and based on the due diligence that we have completed, the Barbrook Mines
Limited holds title to a Mining Authorization covering an estimated 2,286
hectares which hosts a consolidation of numerous small mines and claims in the
historically renowned Barberton gold mining district of South Africa. Mining
at Barbrook commenced in the 1880’s. In 1996 exploration significantly
improved the definition of estimated main ore zones. Treatment of refractory
ores commenced in July 1996 and continued until July 1997. A total of 166,400
tons of sulphide ore was treated at an average rate of 14,000 tons per month.
311 kg of gold was produced at a recovered grade of 1.87g/t. Both the head
grade and metallurgical recovery achieved over this period (~40%) were below
target and the mine was put on care and maintenance pending a re-evaluation of
the mining method and metallurgical process.
Based on the information we have available and
provided that current trends continue, we believe that the Barbrook Mine looks promising.
Various metallurgical tests took place between 1997-2007 which showed that
improvements to gold recoveries are achievable. A complete re-evaluation was
done in 2002. At that date, this lead to an estimate of Proven and Probable
Ore Reserves amounting to 176,000 tons at an insitu grade of an estimated 6.0
g/t gold. All quoted Resource and Reserve estimates will be re-evaluated by
EGL’s competent staff in time as additional information becomes available. Our
estimates and projections may change and there can be no assurance that we will
not later reduce our current estimates and projections as additional
information becomes available.
The present state of the mine includes extensive (40km)
underground development above “10 Level” adit (600m amsl) up to surface. A
complete but partially operational plant remains requiring refurbishment.
Barbrook lies approximately 7km from Lily Mine on a flat well-maintained dirt
road. Our plans for the Barbrook Mine are subject to our receipt of additional
financial resources. We cannot assure that we will be successful in obtaining
additional financial resources or, if we are successful, that we can obtain
such resources on a reasonable basis given our present circumstances.
27
Prospects for the Future:
Exploration
Other
Properties
Geological exploration has continued with positive
results on the Worcester project area where continued diamond drilling has
successfully identified the continuation of the mineralized zone well below the
old workings. This exercise will be completed in the fourth quarter and all the
information assessed. However it is envisaged that this project will be taken
to pre-feasibility status in the first quarter of 2009. The Bonanza project
area and other target locations are still under investigation and proposals for
further exploration are being considered. The outcome of these exploration
programs is expected to result in the further delineation of new ore bodies
which can be developed for mining in the medium term future. To the extent
that it is possible and if we are successful, our goal is to produce an
additional 20,000 oz/annum from a second operation. While we currently believe
that this goal is feasible, we cannot assure that we will achieve this goal or
the related objectives.
We anticipate that the acquisition of Barbrook may
also add to the exploration focus for the last quarter of 2008 but we have not
made any specific determinations with respect to the extent of the amount of
exploration that may be completed in 2008 or the precise time frame for this
exploration.
Requirement for Additional Capital
Based on our current estimates and subject to later
evaluations that are to be completed by management, we anticipate that our
capital requirements can be grouped into three general areas:
|
|
•
|
Development of the Lily underground mine and refurbishment
of the Barbrook plant
|
|
|
•
|
Exploration of the company’s minerals rights
including extensions to Lily and the Worcester project area
|
|
|
•
|
Partial financing of acquisitions.
|
The development of the underground mine at Lily is of
primary importance and the capital expenditure is currently estimated at US$31 Million.
Breakdown of this estimate is as follows:
US$
million
Repayment of bridging loan (incl. interest) arranged
to acquire
100% of the shares in Barbrook Mines $12
Development of underground mine at the Lily Mine 10
Refurbish and expand Barbrook plant 5
Working capital and finance costs
4
$
31
Our current estimates and projections suggest that this
may be sufficient to allow us to develop the underground workings and the mine
infrastructure at the Lily Mine site as well as the refurbishment of the
Barbrook plant to be used for processing the Lily ore. We may change or revise
our estimates as we obtain additional information and as studies of the mine
are completed. In the event that the amount needed is increased, we may
re-evaluate our plans and delay or re-schedule capital expenditures for this
property and other properties consistent with circumstances and priorities at
that time.
Currently, we anticipate that ongoing exploration will
continue at the Worcester Mine and the other target locations within our mineral
rights. In most cases we have had encouraging results so far. But we
anticipate that we will likely need to make an estimated US $4 Million in additional
capital expenditures to achieve the exploration objectives that we have set for
the next 18 months. That estimate may change or increase if further
evaluations show that additional expenditures may be needed to fully complete
these explorations.
28
If circumstances allow and if we are successful in
obtaining additional necessary capital, we anticipate that we may develop
Barbrook underground by expanding Barbrook plant for production of a planned 28,000
oz pa starting in 2010. Currently, and subject to further confirmation, we estimate
that capital expenditures for Barbrook are as follows:
US$ million
Pre-production capital program to develop underground
workings
commencing 2009 $6
Barbrook plant expansion to accommodate Barbrook ore –
2009/10 9
Construction of BIOX plant to treat refractory ore -
2010
10
$
25
The BIOX Process is a pretreatment process for
refractory gold ores or concentrates, using naturally occurring bacteria to
break down the sulphide matrix and liberate the gold for subsequent
cyanidation. This is an alternative to the conventional processes of roasting
and pressure oxidation and offers advantages that typically include reduced
capital cost, simplicity of operation, robustness and environmental
friendliness.
If circumstances and opportunities allow, we may make
at least one other acquisition in 2008 and will require funds in order to
secure such acquisition or to provide initial support for the acquired
operation. An amount of US$10 Million has been estimated for this purpose and
this estimate may be changed as we complete further reviews in light of new
additional information.
Accordingly and to the extent that we are able, we
seek to raise additional capital of $31 million for our Lily Mine underground
development in the third quarter of 2008 and $4 million for our ongoing
exploration program and objectives. Our current capital raising strategy also
calls for us to seek an additional $25 million in new capital for developing
underground mining operations at Barbrook Mine. While we have had discussions
with several potential providers of capital, we are not in a position to
estimate the form or terms of any such financing arrangement and we cannot give
you any assurance we will successfully complete any financing arrangements or,
if we do, that the additional new capital obtained in any financing arrangement
can be raised on terms that are reasonable in light of our current
circumstances.
But, overall and if we can achieve our current
objectives, our goal is to complete financing arrangements for the Lily Mine and
our exploration program in the fourth quarter of 2008. For this we seek to
raise $25 million. Accordingly, as an interim step and as part of our capital
raising strategy, we completed:
a
.
Convertible
bond facility in March 2008 which raised US$4 million.
b. Bridging loan facility in May 2008 of
approximately US$10 million.
These interim fundings are necessary to implement our plans
prior to the main fund raising in the fourth quarter of 2008. Given the
uncertainties of the marketplace and the challenges that we face, there can be
no assurance that our efforts to raise additional new capital will be
successful or if we are successful, that we can raise additional capital on
terms that are reasonable in light of our current circumstances.
29
Results of Operations for the Nine Months Ended September
30, 2008 and 2007
A summary of our comparative operations, which arise
only from open pit mining operations at the Lily Mine for the nine months
period ended September 30, 2008 and September 30, 2007 were as follows:
|
|
Nine months period
ended September 30,
|
|
Three months period
ended September 30,
|
|
|
2008
|
2007
|
|
2008
|
2007
|
|
Ore Tons Milled
|
115,915
|
119,624
|
|
39,678
|
43,343
|
|
Yield
– grams per ton
|
1.81
|
1.96
|
|
1.44
|
1.91
|
|
Gold
Sold – oz
|
6,339
|
7,257
|
|
1,826
|
2,639
|
|
Gold
price - $/oz
|
$896
|
$668
|
|
$870
|
$678
|
|
|
|
|
|
|
|
|
Total
Income*
|
$6,061
|
$5,286
|
|
$1,591
|
$1,979
|
|
Cost
of Production*
|
($5,543)
|
($4,173)
|
|
($1,825)
|
($1,797)
|
|
Exploration
Costs*
|
($127)
|
($129)
|
|
$4
|
$27
|
|
Operating
Income (Loss)*
|
$391
|
$984
|
|
($230)
|
$209
|
|
Operating
Expenses, net*
|
($2,439)
|
($1,966)
|
|
($1,132)
|
($836)
|
|
Minority
Interest*
|
-
|
-
|
|
-
|
-
|
|
Net
Loss *
|
($2,048)
|
($982)
|
|
($1,362)
|
($627)
|
* Expressed in Thousands
Comparative Results of the Nine Months Ended September
30, 2008 and 2007
Revenues:
For
the 2008 period covering nine months of commercial production from January 1,
2008 to September 30, 2008 (“First Three-Quarter 2008”), we recorded revenues
of approximately $5,747,000 from sales of gold versus revenues of approximately
$5,030,000 for the nine month period from January 1, 2007 to September 30, 2007
(the “First Three-Quarter 2007”), which amounted to an increase of
approximately 14%. The principal factors affecting this increase in revenue
were as follows:
•
Although ore tons milled in the
First Three-Quarter 2008 was slightly lower than that of Three-Quarter 2007 at 115,915
tons, yield had dropped by approximately 8% resulting in lower gold
production. Accordingly, 6,339 oz. of gold was sold in First Three-Quarter
2008 as compared with 7,257 oz. of gold sold in First Three-Quarter 2007, a
drop of approximately 13%. This was primarily due to production specifically
in the third quarter which consisted of open and underground production. Tons
mined, ore and waste were significantly down as the open pit nears the end of
its life. Problems with ground water flowing into the open pit continued
causing dilution of ore and adversely affecting the extraction of ore. Development
of the underground section was not sufficiently advanced to make up for the
shortfall in ore tons.
•
However, this reduction
in production was compensated primarily by the increase in the price of gold.
Whereas, our 2007 sales averaged $668 per ounce of gold, our 2008 sales have
averaged $896 per ounce of gold; an increase in the price of gold of approximately
34%. This increase enhanced our margins and our results of operations. However,
this increase in the price of gold may or may not be a trend and if it is a
trend, we do not know if it will continue. We are not able to project gold
prices and to the extent that gold prices fall in the future, our operations,
revenues, profitability, and cash flow will be adversely and significantly
impacted for such period of time as lower price levels in the marketplace are
maintained.
30
Cost of Production:
Although ore tons milled in the First Three-Quarter 2008 was slightly
lower than that of First Three-Quarter 2007 at 115,915 tons, overall we
experienced higher cost of production. During the First Three-Quarter 2008, we
produced 6,339 oz. of gold at a cost $5,543,000, whereas, during the First Three-Quarter
2007, we produced 7,257 oz. of gold for $4,173,000. Accordingly, per ounce
cost of production for the First Three-Quarter 2008 was $874 whereas per ounce
cost of production for First Three-Quarter 2007 was $575; an increase in the
per ounce production of gold of 52%.
Principal factors affecting this increase in cost of
production were:
•
Increase in diesel price per liter
of 11.5% during the First Quarter 2008 and in comparison to diesel price in
First Quarter 2007 a 43.7% increase
•
7.5% increase in the plant hire
costs effective January 1, 2008
•
Significantly lower tons of ore
mined from the open pit as it nears the end of its life
Fuel and oil price increases generally have a negative
impact on our margins, cash flow, and profitability.
Operating Expenses for the First Three-Quarter 2008:
Our operating expenses increased to $1,954,000 in the First Three-Quarter
2008 from $1,949,000 in the First Three-Quarter 2007; an increase of
approximately 0%. Major factor affecting this was increase in interest charges
of $486,000 on the Company’s loan commitments.
Changes
in Exchange Rates:
Changes
in exchange rates did not have a significant impact on the comparability of our
results for the First
Three-Quarter 2008 versus the First Three-Quarter
2007. The average rates of exchange for the interim periods ended September
30, 2008 and September 30, 2007 were SAR 7.5913 to $1 and SAR 6.9664 to $1,
respectively – approximately 9% weakening of the South African Rand against the
US Dollar. Had the exchange rate remained the same during the First
Three-Quarter
2008 as that of First
Three-Quarter
2007, the results of our operations
arising from South African Rand transactions would have been approximately $100,000
lower.
Changes in exchange rates had a significant impact on
the comparability of our balance sheets as of September 30, 2008 versus September
30, 2007. The rates of exchange as at September 30, 2008 and September 30,
2007 were SAR 8.3210 to $1 and SAR 6.8840 to $1, respectively – approximately 21%
weakening of the South African Rand against the US Dollar. Had the exchange
rate remained the same in 2008 as that of 2007, our total South African Rand
based net assets would have been approximately $2,200,000 higher. This
variation in the main relates to:
•
o
ur property, plant and mine development costs which
would have been approximately $5,400,000 higher; and
•
our liabilities which
would have been 3,700,000 higher.
Restructuring:
On March 28, 2008 and through our subsidiary, EGSA, we entered into a
Convertible Loan Agreement. The agreement involves EGSA receiving $3,981,932
(32,000,000 SA Rands) of proceeds. The loan principal can convert into 6.9% of
the total issued and outstanding shares of ordinary capital after the
conversion of the loan by EGSA. If EGSA is able to list its shares with
Johannesburg Stock Exchange Limited (JSE) within six months of the agreement
date then no interest is due and payable. However, if EGSA is not able to list
its ordinary shares with the JSE within six months of the agreement date then
interest will accrue at the South African Prime Rate and be due and payable
immediately. If EGSA list its ordinary shares with JSE after six months due but
before twelve months of the agreement date, then interest will accrue and be
paid on a monthly basis until conversion or repayment of the loan. If, for any
reason, EGSA is unable to list its
ordinary
shares with JSE within twelve months of the agreement date, then the lender can
demand repayment of principal and accrued interest or conversion of the debt
into the corresponding shares of ordinary shares of EGSA.
On
May 27, 2008, our wholly owned subsidiary EGSA obtained R80 million ($9,614,229
as of September 30, 2008) six month bridging loan facility from Investec Bank
Ltd. (“Investec”) for the acquisition of Barbrook Mines Ltd. This facility is
repayable on May 29, 2009. Interest on the facility is calculated at 3 month
JIBAR plus 4% p.a., capitalized and payable quarterly. EGSA has issued a R20
million warrant package to Investec on the execution of the Facility Documents.
The warrant package is calculated with reference to the conversion price for
the common shares of EGSA equal to 110% of the lesser of R7.00 per share or the
actual price per share achieved in the R100 million pre IPO equity raising. The
warrants shall be convertible, in tranches of at least R1 million into ordinary
shares of EGSA at the holder’s option at any time prior to 3 years after issue
date. If EGSA is not listed within nine months of execution of the Facility
Documents, the Investec shall be entitled to elect to receive a settlement fee
from EGSA equivalent to an independent valuation of the Warrant Package.
Security for the facility is:
31
•
A guarantee from us secured by a
pledge and cession of our shareholding in and claims against EGSA;
•
A pledge and cession over EGSA’s
shareholding in and claims against Barbrook Mines Ltd;
•
Suitable security over all of
EGSA’s bank accounts, and
•
Subordination of shareholder and
Group company loans to EGSA.
On October 30, 2008, the Company received a commitment
letter agreement from Investec Bank Limited (“Investec”). Under the terms of
the agreement, Investec has agreed to extend the maturity date of the Company’s
existing bridging loan (the “Existing Loan”) from the original maturity date of
November 28, 2008 to May 29, 2009 (the “Loan Extension”).
As consideration for the Loan Extension, the Company
agreed to the following:
a.
To grant Investec 820,000 Common
Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s
Common Stock at an exercise price equal to the lower of $3.75 per share and the
price at which the Company raises equity capital in its next offering;
b.
To increase the interest rate on
the Existing Loan from Jibar plus 3% to Jibar plus 4%;
c.
To confirm that the Company has
sufficient working capital for the period through the last date of the Loan
Extension;
d.
To subordinate all shareholder
loans to the Existing Loan;
e.
To prohibit the payment of any
interest and principal on all shareholder loans;
f.
To prohibit further indebtedness
without the prior written approval of Investec; and
g.
To provide Investec on or before
the 5th calendar day of each month, monthly management accounts and an update
on the Company’s financing strategy and provide Investec with an opportunity to
review the strategy with Investec, upon Investec’s request.
In the event that we breach our obligations to
Investec Bank Ltd., we could lose our wholly owned subsidiary and all of our
assets and business.
On October 28, 2008, the Company engaged IBK Capital
Corporation of Toronto ("IBK") where IBK has agreed to undertake its
best efforts to assist the Company in raising up to $10 million in the next
three months. In the event that market conditions allow and if IBK is
successful, IBK will be paid a commission on the funds raised and will receive
common stock purchase warrants. In this event, the net proceeds will be used
to fund expenditures on the development of the Lily project and for general and
corporate working capital purposes.
The Company is also under discussions with a major
broker-dealer in New York for the purpose of raising an additional $15 million.
With funds raised and positive cash flow from its
ongoing production activities, the Company believes that it will be able to
repay the existing Investec bridging loan. While the Company has not received
any commitment from the broker-dealer with respect to raising these additional
funds and there can be no assurance that the efforts of IBK Capital will be
successful, the Company remains optimistic that if market conditions allow, it
may be able to complete one or more of these planned financial transactions on
reasonable terms.
32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
The Company’s operations and its securities are
subject to a number of substantial risks, including those described below. If
any of these or other risks actually occur, the Company’s business, financial
condition and operating results, as well as the trading price or value of its
securities could be materially adversely affected. No attempt has been made to
rank these risks in the order of their likelihood or potential harm. In
addition to those general risks enumerated elsewhere in the document, any purchaser
of the Company’s common stock should also consider the following risk factors:
Risks Related to the Company’s Operations
We require additional funding which may not be
available. If we are unable to obtain necessary financing on acceptable terms,
we may have to curtail our current or planned operations.
We require additional funding to implement our
business plan. Our current open pit operations at our Lily Mine are anticipated
to terminate by December 2008. Additional capital will be required in order to
undertake underground mining operations at the Lily Mine. We also will require
still additional funding to explore our other properties. We may seek to obtain
such funding for these activities through equity or debt financing, joint
ventures or from other sources. There can be no assurances that we will be
able to raise adequate funds on acceptable terms from these or other sources
(in light of our current circumstances), which may hinder us from continuing or
expanding our operations.
Operational hazards and responsibilities could
adversely affect our operations.
Our current operational activities are subject to a
number of risks and hazards which include but not limited to the following:
|
|
•
|
environmental hazards,
|
|
|
•
|
industrial accidents
|
|
|
•
|
Labor disputes,
|
|
|
•
|
unusual or unexpected geological or operating
conditions,
|
|
|
•
|
changes in regulatory environment
|
|
|
•
|
natural phenomena such as severe weather conditions,
floods, earthquakes and
|
|
|
•
|
Other hazards
|
These occurrences could result in significant damage
to, or destruction of, mineral properties or production equipment, personal
injury or death, environmental damage, delays in mining, monetary losses and
possible legal liability. The occurrence of these operational hazards could
adversely affect our mining operations by limiting production or the closure of
the mines themselves.
We are not insured against any losses or liabilities
that could arise from our operations either because insurance is unavailable or
because the premium cost is excessive. The payment of such liabilities could
have a material adverse effect on our financial position and, depending on the
extent of such liability, could result in the total loss of our assets and
operations.
Exploration for gold involves hazards,
which could result in us incurring substantial losses and liabilities to third
parties for pollution, accidents and other hazards. We have public liability
insurance of $1,500,000, but if we incur uninsured losses or liabilities, the
funds available for the implementation of its business plan will be reduced and
our assets may be jeopardized. The payment of such liabilities may have a
material adverse effect on our financial position and, depending on the extent
of such liability, could result in the total loss of our assets and operations.
33
The Bank Feasibility Study (“BFS”) contains estimates
and assumptions regarding the feasibility of the Company’s mining operations
which may later prove to be inaccurate as additional information becomes
available
.
While we believe that the Bank Feasibility Study was
conducted in a responsible fashion and the estimates, assumptions, and
methodology of the BFS follows standards that are consistent with industry
practice, the amount of Reserves, Proven Reserves, and other projections may be
later significantly reduced as we obtain additional information. The extent of
any reduction in these estimates and their magnitude can not be known at this
time. The Company is aware that estimates in the mining industry can be subject
to dramatic changes. For these reasons, we can not assure you that we will not
later discover that our estimates need to be significantly reduced as we
complete further work on our mining properties.
Our ability to discover a viable and economic mineral
reserve on its properties is subject to numerous factors, most of which are
beyond its control and are not predictable. If the Company is unable to
discover such reserves, it most likely will not be able to establish a
profitable commercial mining operation on these properties.
Exploration for gold is speculative in nature,
involves significant financial risks and is frequently unsuccessful. Few
properties that are explored are ultimately developed into commercially
producing mines. The Company’s long-term profitability will be, in part,
directly related to the cost and success of exploration programs. The Company’s
gold exploration programs entail risks relating to the following:
|
|
•
|
location of economic ore bodies,
|
|
|
•
|
Development of appropriate metallurgical process
|
|
|
•
|
receipt of necessary government approvals, and
|
|
|
•
|
construction of mining and processing facilities at
sites chosen for mining
|
The commercial viability of a mineral deposit is
dependent on a number of factors including, but not limited to, the following:
|
|
•
|
the price of gold,
|
|
|
•
|
exchange rates,
|
|
|
•
|
the particular attributes of the deposit (i.e. size,
grade and the proximity to infrastructure)
|
|
|
•
|
financing costs,
|
|
|
•
|
taxation,
|
|
|
•
|
royalties,
|
|
|
•
|
land tenure,
|
|
|
•
|
land use,
|
|
|
•
|
water use,
|
|
|
•
|
availability and cost of power source
|
|
|
•
|
importing and exporting gold, and
|
|
|
•
|
environmental protection
|
The effect of these factors and their magnitude cannot
be accurately predicted and any one of which could adversely affect the
Company’s ability to operate. Further, we have little or no control over these
variables.
34
Our ability to become and remain profitable, should we
become profitable, will be dependent on our ability to locate, explore, develop
and mine additional properties. There is intense competition for the
acquisition of gold properties. If we are unable to accomplish this, we most
likely will not be able to be profitable on a long-term basis.
Gold properties eventually become depleted or
uneconomical to continue mining. As a result, the Company’s long-term success
is dependent in large part on its ability to acquire, discover, develop and
mine new properties. The acquisition of gold properties and their exploration
and development are subject to intense competition. There are many larger
companies with greater financial resources, larger staffs, more experience and
more equipment for exploration and development may be in a better position than
the Company to compete for such mineral properties. If we are unable to locate,
develop and economically mine new properties, we most likely will not be able
to be profitable on a long-term basis. Further, given the competition that we
face from these larger companies, we cannot assure you that we can achieve or
sustain profitability or if we do, that we can sustain it.
Our property interests are located in South Africa. The risk of doing business in a foreign country could adversely affect its
results of operations and financial condition.
We face risks normally associated with any conduct of
business in foreign countries, 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 current and future operations which, in turn,
could have a material adverse impact on its future cash flows, earnings,
results of operations and financial condition. These risks include the
following:
|
|
•
|
prevalence of various diseases at the mining sites,
|
|
|
•
|
security concerns
|
|
|
•
|
adverse weather such as rainy season
|
|
|
•
|
labor disputes
|
|
|
•
|
uncertain or unpredictable political and economic
environments,
|
|
|
•
|
war and civil disturbances,
|
|
|
•
|
changes in laws or policies,
|
|
|
•
|
mining policies,
|
|
|
•
|
monetary policies,
|
|
|
•
|
unlinking of rates of exchange to world market
prices,
|
|
|
•
|
environmental regulations,
|
|
|
•
|
labor relations,
|
|
|
•
|
return of capital,
|
|
|
•
|
taxation,
|
|
|
•
|
delays in obtaining or the inability to obtain
necessary governmental permits,
|
|
|
•
|
Governmental seizure of land or mining claims,
|
|
|
•
|
limitations on ownership,
|
|
|
•
|
Institution of laws requiring repatriation of
earnings,
|
|
|
•
|
increased financial costs,
|
|
|
•
|
import and export regulations, and
|
|
|
•
|
Establishment of foreign exchange regulations.
|
35
Any such changes may affect our current mining
operations and ability to undertake exploration activities in respect of
present and future properties in the manner currently contemplated, as well as
our ability to explore and eventually develop and operate those properties in
which we have an interest or in respect of which we have obtained exploration
rights to date. Certain changes could result in the confiscation of property by
nationalization or expropriation without fair compensation. We do not carry any
insurance for any of these risks and we have no plans to acquire any such
insurance in the future.
There are uncertainties as to title matters in the
mining industry. Any defects in such title may cause the Company to forfeit its
rights in mineral properties and could jeopardize its business operations.
There are uncertainties as to title matters in the
mining industry. If the title to or our rights of ownership in its properties,
prospects and/or claims are challenged or impugned by third parties, or the
properties, prospects and/or claims in which we
have an interest are subject to prior transfers or claims, such title defects
could cause us to loose our rights in such properties. If we lose its rights in
and to any of its mineral properties, its business operations could be
jeopardized. We may not have the financial resources to protect and
assert our legal claims in such properties.
In the event that we breach our obligations to
Investec, we may lose our wholly-owned subsidiary EGSA and thereby lose all of
our assets.
While we believe that the financing arrangement with
Investec was prudent and appropriate, we have incurred a risk that in the event
that we breach our obligations to Investec, Investec has the right to our
wholly owned subsidiary, EGSA, and in that event we could lose all of our
assets and business.
Our current and planned operations require permits and
licenses from various governmental authorities. If we are unable to obtain and
maintain such requisite permits, licenses and approvals, our business
operations and ability to become profitable may be adversely affected.
Our current and planned operations require permits and
licenses from various governmental authorities. Such permits and licenses are
subject to change in regulations and in various operating circumstances. We cannot
assure you that we will be able to obtain or maintain in force all necessary
permits and licenses that may be required to conduct exploration or commence
construction or operation of mining facilities at properties to be explored or
to maintain continued operations at economically justifiable costs. Further,
certain of our mineral rights and interests are subject to government
approvals. In all such cases such approvals are, as a practical matter, subject
to the discretion of the South African government or governmental officials. No
assurance can be given that we will be successful in obtaining any or all of
such approvals. Our inability to obtain and maintain the requisite permits,
licenses and approvals could materially and adversely affect our operations and
ability to become profitable.
Gold prices can fluctuate on a material and frequent
basis due to numerous factors beyond the Company’s control. Our ability to
generate profits from operations could be materially and adversely affected by
such fluctuating prices.
The profitability of our current and future gold
mining operations is significantly affected by changes in the market price of
gold. Between January 1, 2006 and September 30, 2008, the “fixed price” for
gold on the London Exchange has fluctuated between $524.75 and $1,011.25 per
ounce. Gold prices fluctuate on a daily basis and are affected by numerous
factors beyond our control, including:
|
|
•
|
Level of interest rates,
|
|
|
•
|
rate of inflation,
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•
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central bank sales, and
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•
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world supply of gold
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36
Each of these factors can cause significant
fluctuations in gold prices. Such external factors are in turn influenced by
changes in international investment patterns and monetary systems and political
developments. The price of gold has historically fluctuated widely and,
depending on the price of gold, revenues from mining operations may not be
sufficient to offset the costs of such operations. We have no means of
controlling or influencing any of these factors and there is no likelihood that
we will achieve any such control or influence in the future.
Gold is sold in South Africa in South African Rands. If applicable currency exchange rates fluctuate our revenues and results of
operations may be materially and adversely affected.
All of the gold that we produce is sold is required to
be sold to The Rand Refinery Ltd. which is a South African corporation and the
world’s largest gold refinery. Such sales are paid for with South African
Rands. We also incur a significant amount of our expenses which are payable in
South African Rands. As a result of the required utilization of the South
African Rand, our financial performance is affected by fluctuations in the
value of the South African Rand to the U.S. Dollar. At the present time, we
have no plan or policy to utilize forward contracts or currency options to
minimize this exposure, and even if these measures are implemented there can be
no assurance that such arrangements will be available, be cost effective or be
able to fully offset such future currency risks.
Dependence upon Key Executives and Employees
Our success depends to a great extent upon the
continued successful performance of key executives and employees in general and
specifically Mr. Michael McChesney. Mr. McChesney is presently employed by us
as our President and Chief Executive Officer. Mr. McChesney also serves as one
of
our directors. If Mr. McChesney and
certain other present key executives and employees are unable to perform their
duties for any reason, our ability to operate in South Africa will be
materially adversely effected. We do not have a key man life insurance policy
on the life of Mr. McChesney or any other key executives and employees and we
have no present plans to acquire any such policies.
37
Item 4. Controls and Procedures.
Evaluation of
Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (“Exchange Act”), means controls and other procedures of a company that
are designed to ensure that information required to be disclosed by the company
in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures also include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company's management, including its principal executive and principal
financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
as of September 30, 2008, that our disclosure controls and procedures are
effective to a reasonable assurance level of achieving such objectives.
However, it should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
Management’s Report
on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed 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. The internal controls for the Company are provided by
executive management’s review and approval of all transactions. Our
internal control over financial reporting also includes those policies and
procedures that:
(1)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
(2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. GAAP, and
that our receipts and expenditures are being made only in accordance with the
authorization of our management; and
(3)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the 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 the 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
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of these
controls.
Based
on this assessment, management has concluded that as of December 31, 2007, our
internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
38
This
annual report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
Changes in Internal
Control over Financial Reporting
There
were no changes in our internal control over financial reporting during our
fiscal quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
39
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company’s recently acquired subsidiary, Barbrook
Mines, was subject to several claims brought against it by creditors during
2006 and 2007 fiscal years. These claims, which had been accrued for at 2007
year end, were in the main settled and the matters finalized. In the matter
with Sentinel Corporate Solutions (Pty) Limited, Sentinel has issued summons
against Barbrook for R1,108,061 (approximately US$133,000) in respect of
amounts payable, which are accrued for, in respect of a labor contract.
Barbrook has instituted an action against Sentinel for R7,456,465 (approximately
US$896,000) in respect of damages incurred when the labor force set fire to the
Barbrook administration building. Both matters with Sentinel are presently
still being defended and are not yet finalized.
Other than the matter discussed above, we are not a party to any pending legal proceedings, and no such
proceedings are known to be threatened or contemplated.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
On
March 28, 2008, our subsidiary, EGSA, entered into a Convertible Loan Agreement
which was completed without the use of an underwriter. The transaction and the
agreements were completed directly without any intermediary.
Through
our subsidiary, EGSA, we received net proceeds of $3,981,932 (32,000,000 SA
Rands) (based on current exchange rates).
In
entering into the transaction with the Lender, we received assurances that:
(1)
the Lender had received information, business and financial documents, and other
disclosures regarding the Company, EGSA, and management equivalent to that
found in a registration statement;
(2)
the Lender had a full and unrestricted opportunity to ask questions of the
Company’s and EGSA’s officers and directors and to receive answers to all such
questions;
(3)
the Lender is an Accredited Investor who is experienced and sophisticated in
investment transactions made with small public companies;
(4)
the Lender understood that it acquired the Convertible Loan (and subsequently,
any shares of EGSA’s common stock thereby) as “restricted securities,” for
investment purposes only and not with a view toward their resale; and
(5)
the transaction with the Lender was not the product of any general solicitation
or advertising but was the result of a pre-existing business relationship.
On
this basis, we relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933.
All
of the proceeds were and are to be used by EGSA to increase its working capital
and for capital expenditures.
The
loan principal can convert into 6.9% of the total issued and outstanding shares
of ordinary capital (of EGSA) after the conversion of the loan by EGSA. If
EGSA is able to list its shares with the Johannesburg Stock Exchange Limited
(JSE) within six months of the agreement date then no interest is due and
payable. If EGSA is not able to list its ordinary shares with the JSE within
six months of the agreement date then interest will accrue at the South African
Prime Rate. If EGSA list its ordinary shares with JSE after six months but
before twelve months of the agreement date, then interest will accrue and be
paid on a monthly basis until conversion or repayment of the loan. If EGSA has
been unable to list its ordinary shares with JSE within twelve months of the
agreement date, then the lender can demand repayment of principal and accrued
interest or conversion of the debt into the corresponding shares of ordinary
shares of EGSA.
40
On
October 30, 2008, we received a commitment letter agreement from Investec Bank
Limited (“Investec”). Under the terms of the agreement, Investec has agreed to
extend the maturity date of our existing bridging loan (the “Existing Loan”)
from the original maturity date of November 28, 2008 to May 29, 2009 (the “Loan
Extension”).
As consideration for the Loan
Extension, the Company agreed to the following:
(1)
To grant Investec 820,000 Common
Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s
Common Stock at an exercise price equal to the lower of $3.75 per share and the
price at which the Company raises equity capital in its next offering;
(2)
To increase the interest rate on
the Existing Loan from Jibar plus 3% to Jibar plus 4%;
(3)
To confirm that the Company has
sufficient working capital for the period through the last date of the Loan
Extension;
(4)
To subordinate all
shareholder loans
to the Existing
Loan;
(5)
To prohibit the payment of any
interest and principal on all shareholder loans;
(6)
To prohibit further indebtedness
without the prior written approval of Investec; and
(7)
To provide Investec on or before
the 5
th
calendar day of each month, monthly management accounts and
an update on the Company’s financing strategy and provide Investec with an
opportunity to review the strategy with Investec, upon Investec’s request.
We
did not use an underwriter or pay any fees or commissions to any third party in
connection with the Loan Extension. All of the Warrants granted to Investec
were granted pursuant to the exemption provided by Section 4(2) of the
Securities Act of 1933 pursuant to the representations and assurances that the
Company received from Investec and the due diligence conducted by Investec.
The Warrants were issued to Investec with a restricted securities legend and
Investec agreed that it was acquiring the Warrants for investment purposes
only.
41
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security
Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
Regulation
S-B
Number Exhibit
31.1 Rule
13a-14(a) Certification of Chief Executive Officer
31.2 Rule
13a-14(a) Certification of Chief Financial Officer
32.1 Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Chief Executive Officer
32.2 Certification Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief
Financial Officer
42
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EASTERN GOLDFIELDS, INC.
Date: November 18, 2008 BY:____________________________
MICHAEL MCCHESNEY
Chief Executive Officer
Date: November 18, 2008 BY:____________________________
TAMER MUFTIZADE
Chief Financial Officer
43