Western Goldfields 10QSB 2005 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2005

o Transition report under Section 13 or 15(d) of the Exchange Act                              

For the transition period from ____________ to ____________

Commission File Number: 0-50894

Western Goldfields, Inc.

(Exact name of small business issuer as specified in its charter)

Idaho	38-3661016
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
961 Matley Lane, Suite 120 Reno, Nevada 89502
(Address of principal executive offices)
(775) 337-9433
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   xNo   o

The number of shares of common stock outstanding as of: July 31, 2005 was 38,891,809.

Transitional Small Business Disclosure Format (Check one):   Yes   o     No   x

WESTERN GOLDFIELDS, INC.

Form 10-QSB

Index

PART I.FINANCIAL INFORMATION	1
Item 1. Financial Information	1
Consolidated Balance Sheets	1
Consolidated Statements of Operations and Comprehensive Income (Loss)	2
Consolidated Statement of Stockholders’ Equity	3
Consolidated Statements of Cash Flows	4
Notes to Consolidated Financial Statements	5
Item 2. Plan of Operations	7
Item 3. Controls and Procedures	12
PART II.OTHER INFORMATION	13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 6. Exhibits	14

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

Western Goldfields, Inc

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	330,349		$	1,534,778
Accounts receivable		19,188			12,956
Inventories		889,931			1,574,249
Prepaid expenses		250,612			404,100
Deposits		1,500			4,050
TOTAL CURRENT ASSETS		1,491,580			3,530,133
Property, plant, and equipment, net of
accumulated depreciation		5,354,403			5,863,944
Construction in progress		10,853			—
Investments - remediation and reclamation		6,173,563			6,089,572
Investments - other		—			21,400
Long-term deposits		314,388			309,674
Long-term prepaid expenses		1,237,028			1,312,853
Deferred loan fees and expenses, net of amortization		48,785			208,501
TOTAL ASSETS	$	14,630,600		$	17,336,077
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	466,533		$	659,087
Accrued expenses		726,956			709,377
Accrued expenses - related party		49,325			38,043
Accrued interest		21,875			40,000
Loan payable, current portion		1,500,000			3,000,000
TOTAL CURRENT LIABILITIES		2,764,689			4,446,507
LONG-TERM LIABILITIES
Loan payable, net of current portion		—			—
Reclamation and remediation liabilities		6,358,994			6,358,994
TOTAL LONG-TERM LIABILITIES		6,358,994			6,358,994
PROVISION FOR FORWARD SALES DERIVATIVE MARKED -
TO-MARKET		294,254			678,867
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 25,000,000 shares authorized;
1,000,000 shares issued and outstanding		10,000			10,000
Common stock, $0.01 par value, 100,000,000 shares authorized;
38,891,810 and 38,721,810 shares issued
and outstanding, respectively		388,918			387,218
Additional paid-in capital		10,337,530			9,891,305
Additional paid-in capital preferred		475,000			475,000
Stock options and warrants		4,704,787			4,779,018
Accumulated deficit		(10,400,718	)		(9,003,365	)
Accumulated other comprehensive income (loss)		(302,854	)		(687,467	)
TOTAL STOCKHOLDERS' EQUITY		5,212,663			5,851,709
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	14,630,600		$	17,336,077

The accompanying notes are an integral part of these consolidated financial statements.

1

WESTERN GOLDFIELDS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
REVENUES
Gross revenue	$	3,139,880		$	2,426,685		$	5,698,487		$	5,343,414
Royalties		(284,165	)		(299,204	)		(602,977	)		(586,435	)
Net revenue		2,855,715			2,127,481			5,095,510			4,756,979
COST OF GOODS SOLD
Mine operating costs		1,575,598			1,773,648			3,161,940			3,675,746
Mine site administration		331,639			568,027			703,456			949,902
Selling, transportation, and refining		9,415			7,814			20,289			65,341
Depreciation, depletion & amortization		318,752			294,778			663,747			488,379
Inventory adjustment		695,820			(137,479	)		763,499			(656,563	)
Total cost of goods sold		2,931,224			2,506,788			5,312,931			4,522,805
GROSS PROFIT (LOSS)		(75,509	)		(379,307	)		(217,421	)		234,174
EXPENSES
General and administrative		468,289			424,603			926,989			1,087,006
Exploration - other		71,101			56,803			116,798			189,564
Total expenses		539,390			481,406			1,043,787			1,276,570
OPERATING LOSS		(614,899	)		(860,713	)		(1,261,208	)		(1,042,396	)
OTHER INCOME (EXPENSE)
Interest income		67,199			40,997			93,113			78,897
Interest expense		(40,902	)		(85,236	)		(94,293	)		(186,705	)
Gain on sale of assets		—			—			26,334			27,132
Financing expenses		(122,648	)		(10,734	)		(161,299	)		(10,734	)
Total other income (expense)		(96,351	)		(54,973	)		(136,145	)		(91,410	)
LOSS BEFORE INCOME TAXES		(711,250	)		(915,686	)		(1,397,353	)		(1,133,806	)
INCOME TAXES		—			—			—			—
NET LOSS		(711,250	)		(915,686	)		(1,397,353	)		(1,133,806	)
OTHER COMPREHENSIVE INCOME (LOSS)
Change in market value of securities		—			(21,315	)		—			(50,625	)
Provision for forward sales derivative marked-to-market		101,426			690,148			384,613			611,808
Total other comprehensive income (loss)		101,426			668,833			384,613			561,183
NET COMPREHENSIVE LOSS	$	(609,824	)	$	(246,853	)	$	(1,012,740	)	$	(572,623	)
BASIC AND DILUTED NET LOSS PER SHARE	$	(0.02	)	$	(0.02	)	$	(0.03	)	$	(0.03	)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING		38,865,421			38,258,077			38,808,688			38,215,494

The accompanying notes are an integral part of these consolidated financial statements.

2

WESTERN GOLDFIELDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

	Preferred Stock				Common Stock						Additional			Stock Options						Other
	Number				Number						Paid-in			and			Accumulated			Comprehensive
	of Shares		Amount		of Shares			Amount			Capital			Warrants			Deficit			Income (Loss)			Total
Balance, December 31, 2003		—	$	—		38,149,078		$	381,491		$	10,057,384		$	3,601,478		$	(4,584,552	)	$	(792,163	)	$	8,663,638
Options issued for directors' services		—		—		—			—			—			451,095			—			—			451,095
Options issued for officers' services		—		—		—			—			—			579,998			—			—			579,998
Options issued for services by related party		—		—		—			—			—			22,500			—			—			22,500
Options issued for services by employees		—		—		—			—			—			84,628			—			—			84,628
Options issued for services by consultants		—		—		—			—			—			19,600			—			—			19,600
Common stock issued for services		—		—		109,000			1,090			86,110			—			—			—			87,200
Common stock issued for penalty		—		—		444,232			4,442			(4,442	)		—			—			—			—
Return of capital for penalty		—		—		—			—			(257,152	)		—			—			—			(257,152	)
Extension of warrants due to expire		—		—		—			—			—			5,319			—			—			5,319
Common stock issued for exercise of warrants		—		—		20,000			200			9,400			(600	)		—			—			9,000
Preferred stock and warrants issued for cash		1,000,000		10,000		—			—			475,000			15,000			—			—			500,000
Retire treasury stock		—		—		(500	)		(5	)		5			—			—			—			—
Net loss for the year ended December 31, 2004		—		—		—			—			—			—			(4,418,813	)		—			(4,418,813	)
Other comprehensive income		—		—		—			—			—			—			—			104,696			104,696
Balance, December 31, 2004		1,000,000		10,000		38,721,810			387,218			10,366,305			4,779,018			(9,003,365	)		(687,467	)		5,851,709
Options issued for directors' services (unaudited)		—		—		—			—			—			98,780			—			—			98,780
Options issued for officers' services (unaudited)		—		—		—			—			—			170,502			—			—			170,502
Options issued for services by employees (unaudited)		—		—		—			—			—			28,504			—			—			28,504
Options issued for services by consultants (unaudited)		—		—		—			—			—			2,075			—			—			2,075
Common stock issued for services (unaudited)		—		—		170,000			1,700			66,800			—			—			—			68,500
Expiration of warrants & options (unaudited)		—		—		—			—			13,125			(13,125	)		—			—			—
Extension of warrants due to expire (unaudited)		—		—		—			—			—			5,333			—			—			5,333
Surrendered warrants - Newmont (unaudited)		—		—		—			—			366,300			(366,300	)		—			—			—
Net loss for the six months ended June 30, 2005 (unaudited)		—		—		—			—			—			—			(1,397,353	)		—			(1,397,353	)
Other comprehensive income (unaudited)		—		—		—			—			—			—			—			384,613			384,613
Balance, June 30, 2005 (unaudited)		1,000,000	$	10,000		38,891,810		$	388,918		$	10,812,530		$	4,704,787		$	(10,400,718	)	$	(302,854	)	$	5,212,663

The accompanying notes are an integral part of these consolidated financial statements.

3

WESTERN GOLDFIELDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2005			2004
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,397,353	)	$	(1,133,806	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation and depletion		509,541			478,595
Amortization of loan fees		159,716			201,508
(Gain) on sale of assets and investments		(26,334	)		(16,398	)
Interest accrued on investments — reclamation and remediation		(83,991	)		(60,260	)
Common stock, options and warrants issued for services		368,361			572,955
Exploration fees funded by stock		—			80,000
Cost of extending expiry date of warrants		5,333			—
(Loss) on cash management program		—			(13,455	)
Changes in assets and liabilities:
Decrease (increase) in:
Restricted cash		—			3,897,229
Accounts receivable		(6,232	)		(36,413	)
Loan receivable		—			40,000
Inventories		684,318			(799,057	)
Prepaid expenses		229,313			201,892
Deposits		(2,164	)		575,805
Increase (decrease) in:
Accounts payable		(192,554	)		(260,954	)
Accrued expenses		17,579			221,891
Accrued expenses — related parties		11,282			(22,500	)
Accrued interest expense		(18,125	)		(11,545	)
Net cash provided (used) by operating activities		258,690			3,915,487
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, including Construction
in Progress		(10,853	)		(621,013	)
Proceeds from sale of investments		47,734			7,606
Proceeds from sale of assets		—			407,231
Net cash provided (used) by investing activities		36,881			(206,176	)
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred debt offering costs		—			(22,594	)
Payments on loans		(1,500,000	)		(1,500,000	)
Net cash provided (used) by financing activities		(1,500,000	)		(1,522,594	)
Change in cash		(1,204,429	)		2,186,717
Cash, beginning of period		1,534,778			373,500
Cash, end of period	$	330,349		$	2,560,217
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid	$	111,238		$	198,677
Income taxes paid	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

4

WESTERN GOLDFIELDS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005 AND 2004

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such consolidated financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004. Operating results for the six months ended June 30, 2005 may not be indicative of the results that may be expected for the year ending December 31, 2005.

NOTE 2 - GOING CONCERN

The Company’s continued existence and plans for future growth depend on its ability to obtain the capital necessary to operate through the generation of revenue and the issuance of additional debt or equity. The Company may need to raise additional capital to fund normal operating costs and exploration and development efforts. If the Company is not able to generate sufficient revenues and cash flows or obtain additional or alternative funding, it will be unable to continue as a going concern. As disclosed in the report of independent auditors on the Company’s financial statements in the Company’s Annual Report or Form 10-KSB for the fiscal year ended December 31, 2004, the Company’s losses from operations, lack of sufficient revenue to support operational cash flows and working capital deficit raise substantial doubt regarding its ability to continue as a going concern.

NOTE 3 - INVENTORIES

Inventories consist of the following:

	June 30, 2005		December 31, 2004
	(unaudited)
Bullion	$	—	$	—
Metal-in-process		712,560		1,476,058
Supplies		177,371		98,191
	$	889,931	$	1,574,249

Metal-in-process inventory contained approximately 1,963 and 4,004 ounces of gold as of June 30, 2005, and December 31, 2004, respectively.

	June 30, 2005			December 31, 2004
	(unaudited)
Beginning Metal-in Process Inventory	$	1,476,058		$	1,634,966
Operating Costs for the Period		3,885,686			8,960,614
Depreciation, Depletion & Amortization for the Period		663,747			1,413,646
Less Cost of Metal Sales		(5,312,931	)		(10,533,168	)
	$	712,560		$	1,476,058

5

NOTE 4 - PROPERTY AND EQUIPMENT

The following is a summary of property, equipment, and accumulated depreciation at June 30, 2005 and December 31, 2004:

	June 30, 2005			December 31, 2004
	(unaudited)
Buildings	$	3,550,000		$	3,550,000
Equipment		3,465,323			3,465,323
		7,015,323			7,015,323
Less accumulated depreciation		(1,660,920	)		(1,151,379	)
Net Property and Equipment	$	5,354,403		$	5,863,944

Depreciation expense for the six months ended June 30, 2005 and the year ended December 31, 2004 was $1,648,724 and $1,151,379, respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the present value of future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

NOTE 5 - STOCK OPTIONS AND WARRANTS

The Company estimates the fair value of options and warrants using the Black-Scholes Option Price Calculation. The Company used the following assumptions in estimating fair value: the risk-free interest rate of 4%, volatility ranging from 20% to 30%, and the expected life of the options and warrants from two to ten years. The Company also assumed that no dividends would be paid on common stock. Some warrants may be exercised under the cash-less method requiring a corresponding reduction in the amount of common stock issued in relationship to its cash value at the time the warrants are exercised.

In the second quarter of 2005, the Company granted 1,423,500 options exercisable for the purchase of one share of common stock each with an exercise price when vested of $.40. These options vest over a period of 12 months.

The following is a summary of stock options:

	Shares			Weighted Average Exercise Price		Weighted Average Fair Value
Balance January 1, 2005		5,023,084		$	0.78
Granted		1,673,500			0.41
Expired		(91,334	)		—
Exercised		—			—
Outstanding at June 30, 2005		6,605,250		$	0.70
Exercisable at June 30, 2005		3,984,412		$	0.70
Weighted average fair value of options granted during the six months ended June 30, 2005						$	0.41

The above stock options have been issued under an equity compensation plan approved by the directors but not by the shareholders.

6

NOTE 6 - MATERIAL EVENTS

In June 2005, Romarco Minerals, Inc. entered into separate binding agreements with each of the Company and U.S. Gold Corporation to combine the companies and create an emerging intermediate gold producer with a portfolio of exploration projects. U.S. Gold later terminated its agreement with Romarco Minerals. The Company’s agreement with Romarco Minerals is subject to approval of a definitive merger agreement, receipt of satisfactory fairness opinions, and shareholder and regulatory approvals.

On August 2, 2005, Western Mesquite Mines, Inc. (the “Borrower”), a wholly owned subsidiary of the Company, Calumet Mining Company, a wholly-owned subsidiary of the Company, and the Company entered into a Supplemental Agreement (the “Supplemental Agreement”) amending certain terms of the Facility Agreement (the “Facility Agreement”) with RMB International (Dublin) Limited (the “Lender”) and RMB Resources Limited (together with the Lender, “RMB”). Pursuant to the terms of the Supplemental Agreement, RMB agreed that it would not demand that the Borrower pay the base repayment amount otherwise due on July 31, 2005, and that the Borrower will make such payment on October 30, 2005. In consideration of the payment deferral, the Company paid $50,000 to the Lender.

In addition, the Supplemental Agreement amended the Facility Agreement by providing that a default under the Facility Agreement shall occur if, prior to the final repayment date under the Facility Agreement, the preliminary merger agreement between the Company and Romarco Minerals, Inc. is terminated, either the Company or Romarco announces that the merger is not proceeding or a definitive merger agreement between the Company and Romarco is not entered into before September 15, 2005.

7

Item 2.Plan of Operation

Overview

We are an independent precious metals production and exploration company with operations focused in the western United States. In early 2003 we began exploring the possibility of acquiring the Mesquite Mine from a subsidiary of Newmont Mining Corporation. In July 2003, we issued 111,859 shares of our common stock to Newmont Mining Corporation for an exclusive option to purchase the Mesquite Mine. In November 2003, the purchase of the Mesquite Mine from Newmont Mining Corporation was completed for:

·   assumption of reclamation responsibility and provision of approximately $7.8 million in reclamation bonds to various governmental authorities; which have since been reduced to $7.0 million;

·   additional shares of our common stock and warrants to purchase our common stock. As a result of the transaction, Newmont Mining Corporation acquired 3,454,468 shares of our common stock and warrants to purchase an additional 8,091,180 shares of our common stock;

·   a perpetual net smelter return royalty ranging from 0.5% to 2.0% on any newly-mined ore; and

·   a net operating cash flow royalty equal to 50% of the proceeds received, minus certain operating costs, capital expenses and other allowances and adjustments, from the sale of ore or products derived from ore that was placed on the heap leach pads as of the acquisition date.

The purchase included all existing infrastructure and permits necessary to operate the mine.

In November 2003, we obtained a $6 million credit facility in connection with the acquisition of the Mesquite Mine. In addition, in November - December 2003, we conducted a private placement of 12,500,000 units consisting of two shares of our common stock and warrants to purchase an additional share of our common stock, which resulted in aggregate net proceeds to us of approximately $9.1 million. The warrants are exercisable for a period of two years from the date of issuance for a purchase price of $1.00 per share, subject to anti-dilution adjustments.

Production from the Mesquite Mine operations during 2004 resulted in the sale of 27,357 ounces of gold. Total gold production (poured into doré bars) from the Mesquite Mine during the first six months of 2005 amounted to 12,532 ounces. Our management at the Mesquite Mine continues to optimize production schedules and leach cycle rotation in order to match gold production and sales to our forward sales commitments. During the first two quarters of 2005 the average poured gold production was 979 ounces above budget.

A bonding plan is in place through American Home Assurance Company for the operation of the Mesquite Mine whereby American Home Assurance Company provides a series of environmental insurance programs designed to cap sponsor, vendor and partner liability for reclamation and closure costs, including cost overruns that may be a result of unexpected contamination, increased costs and legislative changes. The insurance company charged an initial premium based on their estimate of the net present value of the completion of the reclamation, plus an annual fee. In exchange, the insurance company insures the reclamation and closure process and provides the surety bond. We plan to make claims against the insurance policy and funds will be released to pay for the reclamation and closure expenditures as they are incurred. Any revenue from the sale of material is to the account of the project sponsor and any profits from cost savings in the actual program versus the bonded amount are released to the sponsors when the project bonding is released.

There are two phases of the Mesquite Mine Expansion Project. The first phase is comprised of the continuing leaching operations of minerals inventoried on the pads prior to September 2001. Since we took over operations, we have implemented various programs directed at increasing recovery from the pads. These include optimizing solution management procedures to control flow and application rates as well as modifications to the solution chemistry. Over the course of the past year and into this year, our management at the mine has been able to optimize solution management within the re-leaching program. Additional modifications have been made to site infrastructure including re-commissioning of the gold refinery, construction of reagent addition pumping stations, and installation of improved flow monitoring systems.

For the second phase of the Mesquite Mine Expansion Project, we intend to develop a detailed mine plan and model to be used to conduct a definitive, “bankable” feasibility study of the expanded operation. We plan to implement this work during the second half of 2005 and the first half of 2006. Additional exploration drilling may be required to validate the previous operator's data.

During 2004 we evaluated the expansion of the Big Chief open pit to the north, where a mineralized resource was estimated to contain 19 million tons of mineralized material. An internal scoping study was carried out to determine the viability of mining this zone on a stand-alone basis. Preliminary conclusions suggest that the optimum scenario for launching the expansion of the Mesquite operations will be through the initiation of mining activities on as large a scale as possible.

8

We are also engaged in the acquisition of advanced-level precious metal properties throughout the western United States, primarily Nevada. We believe that this area may have some of the most important geological terrain conducive to hosting world-class economic gold deposits. Our goal is to obtain precious metal projects that are favorable for project development and mine production in a cost effective, efficient manner.

We have continued with our strategy of contacting peer companies to explore joint venture possibilities and opportunities with respect to potential additional minerals developments. We have previously entered into non-binding letters of intent for joint venture arrangements with respect to the Lincoln Hill Property, and the Mining Joint Venture Agreement on the Sunny Slope Gold Project with 321 Gold. The Sunny Slope agreement covers 16 claims in Mineral County, Nevada, plus an area of interest including all lands within approximately one mile beyond the boundary of the claims.

On May 12, 2005, we filed an application and preliminary prospectus to have our common stock listed on the Toronto Stock Exchange. We have diligently advanced the application and have responded to various queries from the exchange. We anticipate final approval from the exchange during the third quarter of 2005.

In June 2005, Romarco Minerals, Inc. entered into separate binding agreements with us and U.S. Gold Corporation to combine the companies and create an emerging intermediate gold producer with a strong portfolio of exploration projects. U.S. Gold later terminated its agreement with Romarco Minerals. Our agreement with Romarco Minerals is subject to approval of a definitive merger agreement, receipt of satisfactory fairness opinions, and shareholder and regulatory approvals.

Results of Operations

Three Months Ended June 30, 2005 Compared to the Three Months Ended June 30, 2004

During the three months ended June 30, 2005, we had net revenues of $2,855,715 from the sale of 7,744 ounces of gold produced from the Mesquite Mine. During the three month period ended June 30, 2004, we had net revenue of $2,127,481 from the sale of 6,507 ounces of gold.

Mine operating costs were $1,575,598 in the three months ended June 30, 2005 compared to $1,773,648 for the three months ended June 30, 2004. During part of the second quarter of 2004 we had an outside contractor managing the mine as well as temporary employees. Mine site administration was $331,639 in the three months ended June 30, 2005 compared to $568,027 in the three months ended June 30, 2004. Depreciation, depletion and amortization were $318,752 in three months ended June 30, 2005 compared with $294,778 in the three months ended June 30, 2004. After a decrease adjustment to the inventory account of $695,820 in the three months ended June 30, 2005 compared with an adjustment in the three months ended June 30, 2004 to increase inventory by $137,479, total cost of goods sold was $2,931,224 in the three months ended June 30, 2005 compared to $2,506,788 in the three months ended June 30, 2004. We reported a gross loss of $75,509 for the three months ended June 30, 2005 compared to a gross loss of $379,307 in the three months ended June 30, 2004.

We incurred exploration expenses of $71,101 during the three months ended June 30, 2005 compared with $56,803 in the three months ended June 30, 2004. General and administrative expenses increased to $468,289 during the three months ended June 30, 2005, compared with $424,603 in the three months ended June 30, 2004 due to an increase in staff and corporate overhead. We reported an operating loss of $614,899 during the three months ended June 30, 2005 compared to an operating loss of $860,713 in the three months ended June 30, 2004.

Other income/expense totaled $96,351 during the three months ended June 30, 2005 compared with other income/expense of $54,973 in the three months ended June 30, 2004. We reported a net loss of $711,250 for the three months ended June 30, 2005 compared with a net loss of $915,686 for the three months ended June 30, 2004.

Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30, 2004.

During the six months ended June 30, 2005, we had net revenues of $5,095,510 from the sale of 14,092 ounces of gold produced from the Mesquite Mine. During the six month period ended June 30, 2004, we had net revenue of $4,756,979 from the sale of 13,679 ounces of gold.

Mine operating costs were $3,161,940 in the six months ended June 30, 2005 compared to $3,675,746 for the six months ended June 30, 2004. During part of the second quarter of 2004 we had an outside contractor managing the mine as well as temporary employees. Mine site administration was $703,456 in the six months ended June 30, 2005 compared to $949,902 in the six months ended June 30, 2004. Depreciation, depletion and amortization were $663,747 in six months ended June 30, 2005 compared with $488,379 in the six months ended June 30, 2004. After a decrease adjustment to the inventory account of $763,499 in the six months ended June 30, 2005 compared with an adjustment in the six months ended June 30, 2004 to increase inventory by $656,563, total cost of goods sold was $5,312,931 in the six months ended June 30, 2005 compared to $4,522,805 in the six months ended June 30, 2004. We reported a gross loss of $217,421 for the six months ended June 30, 2005 compared to a gross profit of $234,174 in the six months ended June 30, 2004.

We incurred exploration expenses of $116,798 during the six months ended June 30, 2005 compared with $189,564 in the six months ended June 30, 2004. General and administrative expenses decreased to $926,989 during the six months ended June 30, 2005, compared with $1,087,006 in the six months ended June 30, 2004. We reported an operating loss of $1,261,208 during the six months ended June 30, 2005 compared to an operating loss of $1,042,396 in the six months ended June 30, 2004.

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Other income/expense totaled $136,145 during the six months ended June 30, 2005 compared with other income/expense of $91,410 in the six months ended June 30, 2004. We reported a net loss of $1,397,353 for the six months ended June 30, 2005 compared with a net loss of $1,133,806 for the six months ended June 30, 2004.

Liquidity and Capital Resources; Recent Developments

As of June 30, 2005 there is limited historical financial information upon which to base an evaluation on our performance. We began our operation of the Mesquite Mine in November 2003. As a result, our operating profile and the reasons for fluctuation in the expense amounts between the periods prior to and following November 2003 changed significantly. Prior to November 2003, we primarily concentrated our business on the acquisition of propertiesand raising funds to advance our business. After our acquisition of the Mesquite Mine, we intend to dedicate the majority of our expenditures to retrieve gold from heap leach pads or from new mining and processing at the Mesquite Mine.

The expansion of operations at the Mesquite Mine, and plans for our future growth depend on our ability to obtain additional capital through the issuance of additional debt or equity and through the generation of revenue. Operating cash flows commenced in the first quarter of 2004, and therefore, we have no historical comparative performance data.

As of June 30, 2005, the cash balance was $330,349. As of June 30, 2005, we had an accumulated deficit of $10,400,718. As of June 30, 2005, we had a working capital deficit of $1,273,109.

In November 2003, Western Mesquite Mines, Inc., our wholly-owned subsidiary, entered into a $6 million credit facility agreement with RMB International (Dublin) Limited and RMB Resources Limited. We guaranteed the obligations of Western Mesquite Mines, Inc. under the facility agreement and issued warrants to purchase 780,000 shares of our common stock to RMB Resources Limited. The warrants are exercisable for a period of three years from the date of the facility agreement for a purchase price of $1.00 per share, subject to adjustments.

Western Mesquite Mines, Inc. commenced making principal and interest payments under this loan in January 2004. Western Mesquite Mines, Inc. made six principal payments under the facility agreement of $750,000 at the end of January, April, July and October 2004 and at the end of January and April 2005. Borrowings under the facility agreement bear interest at a base interest rate of LIBOR plus 6 percent. The facility agreement also provides for contingent additional interest if cash flows from the gold production from the materials currently located on the heap facilities in the project areas described in the facility agreement exceed certain defined levels. No additional interest has been paid under this facility to date.

Western Mesquite Mines, Inc. may prepay all or part of the outstanding principal on any quarterly date after January 2004 and before the final repayment date in an amount of not less than $200,000. If Western Mesquite Mines, Inc. does not make a quarterly payment, it must pay an additional amount of not less than $750,000 on the next quarterly payment date as a reduction in principal. It is an event of default under the facility agreement if Western Mesquite Mines, Inc. fails to pay an amount of not less than $750,000 on two consecutive quarterly payment dates. In addition, Western Mesquite Mines, Inc. must pay 50% of its excess cash flow for each quarter as a prepayment of principal.

Our credit facility also restricts us from making expenditures that have not been approved by the credit facility agent. Under the facility agreement, we have agreed with the credit facility agent on a corporate budget as well as a detailed operating budget for the Mesquite Mine. We provide the credit facility agent with monthly reports that reconcile the actual results with that budget. If we wish to make material expenditures not agreed to in the budget, we have to seek the credit facility agent’s prior approval. In particular, the facility agreement provides that we may not dispose of, or create any encumbrance over, any assets other than in the normal course of business, or incur indebtedness in excess of $250,000.

On August 2, 2005, we and our wholly-owned subsidiaries entered into a supplemental agreement amending certain terms of the facility agreement. Pursuant to the terms of the supplemental agreement, the lenders agreed that they would not demand that payment of the base repayment amount otherwise due on July 31, 2005, and that Western Mesquite Mines, Inc. will make the payment on October 30, 2005. We paid $50,000 in consideration of the payment deferral.

In addition, the supplemental agreement amended the facility agreement by providing that a default under the facility agreement shall occur if, prior to the final repayment date under the facility agreement, our preliminary merger agreement with Romarco Minerals, Inc. is terminated, either we or Romarco announce that the merger is not proceeding or a definitive merger agreement between us and Romarco is not entered into before September 15, 2005.

In January 2004, we closed a private placement we conducted in November - December 2003 of 12,500,000 units at a price of $0.80 per unit. Units consisted of one share of our common stock, a warrant to purchase one share of our common stock exercisable for two years at an exercise price of $1.00 per share and the right to receive one share of our common stock issued in escrow under certain circumstances. Each purchaser of a unit in the private placement was entitled to receive the additional escrow share per unit purchased if we did not close a transaction with another company before February 28, 2004 which resulted in the listing of the resulting company’s securities on the Toronto Stock Exchange. We entered into a letter of intent with Tandem Resources, Ltd. for a potential merger transaction to satisfy this condition of the private placement, but we terminated the letter of intent in February 2004 due to potential tax and regulatory issues associated with the transaction. The escrow agent released the escrowed shares to the purchasers in March 2004.

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We also agreed to register under the Securities Act of 1933, as amended, the shares of common stock issued in the private placement, issued upon exercise of the warrants issued in the private placement and shares of any resulting entity in a merger transaction. In addition, we agreed under certain circumstances, upon the request of the holders, to include those shares of our common stock in a securities registration that we undertake on our behalf or on behalf of others by June 30, 2004. In the agreements, we agreed to pay certain amounts to the holders based on 2% of the average closing sale price of our common stock for each 30 days following June 30, 2004 in which the registration statement is not effective. The Securities and Exchange Commission declared our SB-2 registration statement effective on August 12, 2004, and these amounts totaled $479,267. We have offered to satisfy the payment of these amounts with shares of our common stock and have issued 446,398 shares of our common stock to these holders to satisfy $223,299 of this obligation.

In December 2004, we closed a private placement of 1,000,000 shares of our Series "A-1" Convertible Preferred Stock and warrants to purchase up to 500,000 shares of our Series "A-1" Convertible Preferred Stock for an aggregate purchase price of $500,000.   We entered in a registration rights agreement with the investor whereby we agreed to prepare and file a registration statement with the Securities and Exchange Commission with respect to the common stock issuable upon conversion of the Series "A-1" Convertible Preferred Stock.  We filed a registration statement on Form SB-2 in January 2005.

Except for the Mesquite Mine, none of our properties has commenced commercial production. While we may attempt to generate additional working capital through the operation, development, sale or possible joint venture development of our properties, there is no assurance that any such activity will generate funds that will be available for operations.

Our operations of the Mesquite Mine began in November 2003. We accumulated metal-in-process inventory during 2003 and produced 2,593 ounces of poured gold during operations in December 2003, produced an additional 27,398 ounces and sold 27,357 ounces during 2004, and kept in inventory 5,593 ounces at an outside refiner for deliveries of gold under our forward sales contract at the end of January 2005. Production for the first quarter 2005 was 556 ounces higher than budget. We have implemented programs at the mine to reduce and control monthly expenditures with the objective of reducing the operating cash cost.

Sales of metal will be recorded at both the spot price and under the forward sales agreement in 2004, with the related costs charged from inventory to cost of goods sold.

As part of our credit facility agreement, we entered into a cash flow hedging program under which we sold forward through RMB International (Dublin) Limited 26,399 ounces of gold at $382.95 per ounce, or approximately 50% of expected production of gold from the heaps. These ounces were scheduled for delivery beginning January 30, 2004 and every three months thereafter until October 30, 2005 as follows: 2,380, 4,368, 3,733, 3,324, 3,577, 3,523, 2,897 and 2,597 ounces. On each of the settlement dates, we settle in cash for the difference between the sales price and the hedged price times the number of scheduled ounces to be sold for that three month period. Unlike a conventional hedge, we were not required to put up collateral, and we are not subject to any margin requirements. Since we sold gold for more than the hedged price in the following periods and made the following payments under the hedging program and reduced revenue by corresponding amounts: $64,379 as of January 31, 2004; $24,242 as of April 30, 2004; $31,544 as of July 31, 2004; $141,602 as of October 29, 2004, $185,838 as of January 29, 2005, and $140,218 as of April 29, 2005. As of April 29, 2005, we paid approximately $587,824 to RMB International (Dublin) Limited under this agreement and had 5,494 ounces of gold outstanding subject to this hedge facility.

We have a long-term strategy of selling our gold production at prevailing market prices. Under our risk management policy, we periodically review our exposure under this hedge and adjust our risk profile accordingly. Furthermore, to manage a portion of our revenue risk and provide additional comfort to the lender under our facility agreement, we entered into this forward sale. We believe this program to be effective for its purpose and do not expect that it will be ineffective during the hedge period.

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Our calculation of the derivative effects of the forward sales contract as of June 30, 2005 and December 31, 2004 is as follows:

	June 30, 2005			December 31, 2004
Afternoon Fix on the London Metal Exchange	$	437.10		$	438.00
Undelivered ounces of gold sold forward		5,494			12,594
(Gain) Loss recognized as other comprehensive income		($384,613	)	$	(176,921	)
Value of provision for forward sales derivative - marked-to-market	$	294,254		$	678,867

We are currently spending approximately $100,000 per month for our ongoing corporate functions. In addition, we plan to spend between $300,000 and $500,000 over the next 12 months to advance our current portfolio of properties or to acquire and advance other strategically important projects. We have not budgeted specific amounts for exploration or development for any of our properties.

Our credit facility restricts us from making expenditures that have not been approved by the credit facility agent. We may need to obtain additional funds, either through equity offerings or debt, to fund our general and administrative expenses, make the advance royalty payments required on our properties and conduct exploration programs on our properties. Failure to obtain such additional financing will result in the loss by us of our interests in our mineral properties. These conditions raise doubt as to our ability to continue as a going concern. Management’s plans for the continuation of our company as a going concern include financing our operations through issuance of our common stock and the eventual profitable development of our mining properties. We have commenced the process for an offering of our securities in Canada and the listing of our common stock on the Toronto Stock Exchange. The terms of the offering, including the amount to be raised, have not been finalized. There are no assurances, however, with respect to the future success of these plans. The financial statements do not contain any adjustments which might be necessary if we are unable to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Forward Looking Statements

This report contains several “forward-looking statements.” Forward-looking statements are those that use words such as “believe,”“expect,”“anticipate,”“intend,”“plan,”“may,”“will,”“likely,”“should,”“estimate,”“continue,”“future” or other comparable expressions. These words indicate future events and trends. Forward-looking statements are our current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks and uncertainties, many of which are beyond our control, that could cause actual results to differ significantly from historical results or from those we anticipated. The most significant risks are detailed from time to time in our filings and reports with the Securities and Exchange Commission.

Item 3.Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Principal Executive Officer and Principal Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.Legal Proceedings

None

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On April 26, 2005 we issued 35,000 shares of our common stock to Lane Griffin and Mountain Gold Exploration, Inc. for work commitments required under the Exploration and Mining Lease Agreement we entered into. On the same date we issued 25,000 shares of our common stock to Proteus Capital Corp., a corporation owned and controlled by Douglas Newby, Executive Vice-President, in consideration for the negotiation of a subscription agreement with RAB Special Solutions, LP.

Name	Number of Common Shares		Exercise Price		Vesting Date		Value
Lane Griffin		35,000	$	0.40		4/26/2005	$	14,000
Mountain Gold Exploration		35,000	$	0.40		4/26/2005		14,000
Proteus Capital Corp.		25,000	$	0.40		4/26/2006		10,000
Total		95,000					$	38,000

During the quarter ended June 30, 2005 we issued options to purchase shares of our common stock as follows:

Name	Number of Common Shares		Exercise Price		Vesting Date		Value
Thomas K. Mancuso		100,000	$	0.40		4/15/2005	$	12,000
Thomas K. Mancuso		100,000	$	0.40		4/15/2006		9,000
Thomas E. Callicrate		100,000	$	0.40		4/15/2005		12,000
Thomas E. Callicrate		100,000	$	0.40		4/15/2006		9,000
Lawrence J. O’Connor		100,000	$	0.40		4/15/2005		12,000
Lawrence J. O’Connor		100,000	$	0.40		4/15/2006		9,000
Becky Corigliano		100,000	$	0.40		4/15/2005		12,000
Becky Corigliano		100,000	$	0.40		4/15/2006		9,000
James Mancuso		75,000	$	0.40		4/15/2005		9,000
James Mancuso		75,000	$	0.40		4/15/2006		6,750
Douglas J. Newby		75,000	$	0.40		4/15/2005		9,000
Douglas J. Newby		75,000	$	0.40		4/15/2006		6,750
Gerald B. Ruth		75,000	$	0.40		4/15/2005		9,000
Gerald B. Ruth		75,000	$	0.40		4/15/2006		6,750
Employees		86,750	$	0.40		4/15/2005		10,410
Employees		86,750	$	0.40		4/15/2006		7,808
Total		1,423,500					$	149,468

The options issued to officers, directors and employees are exercisable for five year periods from their respective vesting dates.

These transactions did not involve any underwriters, underwriting discount or commissions, or any public offering, and we believe that the transactions were exempt from the registration by virtue of Section 4(2) of the Securities Act of 1933, as amended. The investors represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The investors had adequate access, through their relationships with us, to information about us.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

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Item 6.Exhibits

NumberDescription

10.1 Supplemental Agreement, dated August 2, 2005, among Western Mesquite Mines, Inc., Western Goldfields, Inc., Calumet Mining Company, RMB International (Dublin) Limited and RMB Resources Limited

31.1 Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2 Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2 Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

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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.

	WESTERN GOLDFIELDS, INC.
Date: August 12, 2005	By:	/s/ Thomas K. Mancuso
		Thomas K. Mancuso President Principal Executive Officer

	COMPANY NAME CORPORATION
Date: August 12, 2005	By:	/s/ Becky Corigliano
		Becky Corigliano Treasurer and Secretary Principal Accounting Officer

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EXHIBIT INDEX

NumberDescription

10.1 Supplemental Agreement, dated August 2, 2005, among Western Mesquite Mines, Inc., Western Goldfields, Inc., Calumet Mining Company, RMB International (Dublin) Limited and RMB Resources Limited

31.1 Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2 Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2 Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002