Bekem Metals (BKMM) 10-Q/A 2007 Q1 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A-1

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to _________

Commission File Number 0-50218

BEKEM METALS, INC.

(Exact name of registrant as specified in its charter)

Utah	87-0669131
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
170 Tchaikovsky Street, 4th Floor
Almaty, Kazkahstan	050000
(Address of principal executive offices)	(Zip Code)

+7 (7272) 582-386

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for any shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.Yes x No o

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated Filer o Accelerated Filer o Non-accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)Yes o No x

As of May 3, 2007, the registrant had 125,172,011 shares of common stock, par value $0.001, issued and outstanding.

BEKEM METALS, INC.

(An Exploration Stage Company)

FORM 10-Q/A-1

TABLE OF CONTENTS

EXPLANATORY NOTE

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December 31, 2006 (Restated)	5
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2007 and 2006, and for the Period from March 5, 2004 (Date of Inception) through March 31, 2007 (Restated)	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2007 and 2006, and for the Period from March 5, 2004 (Date of Inception) through March 31, 2007 (Restated)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Qualitative and Quantitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		28
PART II — OTHER INFORMATION
Item 1A. Risk Factors		29
Item 6. Exhibits		29
Signatures		30

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EXPLANATORY NOTE

Bekem Metals, Inc. (hereinafter referred to as “us,” “we,” the “Company” or “Bekem”) is filing this Amendment No. 1 on Form 10-Q/A-1 (the “Amendment”) to its Quarterly Report for the fiscal quarter ended March 31, 2007, which was filed with the Securities and Exchange Commission (“SEC”) on May 09, 2007 (the “Original Report”) in response to certain comments raised by the staff of the SEC. While the staff commented on several issues, as discussed in more detail herein the primary issue raised by the staff was whether the presentation of the Company as a “production stage” enterprise was proper, or whether, it would be more consistent with SEC Industry Guide 7, “Description of Property by Issuers Engaged or to Be Engaged in Significant Mining Operations” (“Industry Guide 7”) to present the Company as an “exploration stage” enterprise.

The disclosure and the financial statements included in the Original Report present us as a production stage enterprise. At the time we prepared and filed the Original Report we believed we were a production stage enterprise for a number of reasons including:

• the licenses we hold from the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan (“MEMR”) to the Kempirsai and Mamyt deposits are production licenses that require us to extract certain quantities of nickel, cobalt and brown coal in order to retain those licenses;

• the deposits have a history of commercial production during the 1980s and 1990s; and

• we had engaged in some limited mineral extraction activities in accordance with the terms of our licenses.

We also considered the fact that we had historical reserve reports prepared during the Soviet era that both the State Resources Committee and the MEMR recognized as indicative of commercially producible reserves of nickel and cobalt ores and brown coal at the Kempirsai and Mamyt deposits.

Following discussion with the staff of the SEC and further research we now agree that the determination of reserves and production stage activities made by Kazakhstani governmental authorities is not binding upon or authoritative under Industry Guide 7. We further agree with the staff’s position that until such time as we have a reserve report prepared in accordance with the standards recognized by the SEC, the Company should be presented as an exploration stage enterprise. The purpose of this Amendment is to, among other things, revise the presentation of the Original Report to present the Company as an exploration stage enterprise.

The consolidated financial statements and notes to the financial statements included in Part I, Item 1 “Financial Statements” of the Original Report are hereby revised to present the Company as an exploration stage enterprise rather than a production stage enterprise. As a result of this revision, a column for transactions from “inception to date” has been added to the statements of operations and cash flows, stripping costs have been expensed rather than capitalized, and revenues and costs of products sold have been reclassified to offset certain direct mining expenses which are included in exploratory costs, depreciation and amortization expenses were also reclassified as exploratory costs. Also, the other income (expense) as originally filed included disposals of inventory, which were reclassified as exploratory costs and revenue from services were reclassified as other income.

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As noted above, the “Consolidated Statements of Operations” has also been revised to correct the reporting of deferred compensation expense. In addition, the weighted average number of share outstanding was corrected in the “Consolidated Statements of Operations.”

The notes to the financial statements have been revised to:

• provide clarification regarding the Company’s disclosure regarding impairments of long-lived assets and long-lived assets to be disposed of;

• discuss why the Company was able to acquire its interest in Kyzl Kain Mamyt LLC at a price significantly below the fair value of its long term assets;

• clarify the restrictions on use of bank deposits;

• include Note 5 “ Restatement of Financial Statements”; and

• include Note 6 “Subsequent Events” regarding litigation between the Company and the MEMR in connection with the purported unilateral cancelation of the Company’s contracts and licenses to the Kempirsai and Mamyt deposits.

The revision resulted in increases in “Net Loss” of $135,122 during the three months ended March 31, 2007 and $0 during the three months ended March 31, 2006. The revision did not result in changes to “Basic Loss Per Common Share” during the three months ended March 31, 2007 or 2006.

Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Original Report is hereby revised to clarify that as of March 31, 2007 the Company was in the exploration stage. The disclosure in Part I, Item 2 has also been revised to address the changes in operating results resulting from the restatement of the “Consolidated Statements of Operations.” The discussion of “Critical Accounting Policies” has been revised to provide enhanced discussion and analysis of the Company’s critical accounting policies and assumptions in accordance with SEC Releases No. 33-8350, 34-48960 and FR-72.

Part I, Item 4 “Controls and Procedures” of the Original Report is hereby revised to more specifically state the conclusions of the Company’s certifying officers with respect to whether the Company’s disclosure controls and procedures were effective during the period covered in this report and to address changes to our disclosure controls and procedures.

In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, this Amendment also includes currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certification exhibits and Part II, Item 6 “Exhibits” have been revised accordingly.

This Amendment speaks only of the original filing date of the Original Report and, except for those Items disclosed in this explanatory note, is unchanged from the Original Report. This Amendment does not reflect events after the filing of the Original Report or modify or update those disclosures affected by subsequent events. Therefore, you should read this Amendment together with our other reports that update and supersede the information contained in this Amendment.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31,			December 31,
	2007			2006
	(Restated)			(Restated)
ASSETS
Current Assets
Cash	$	6,398,169		$	8,583,680
Trade accounts receivable		6,280			2,776
VAT recoverable		205,899			186,915
Inventories		204,839			185,063
Prepaid expenses and other current assets		332,916			139,293
Deferred compensation		353,119			757,920
Total Current Assets		7,501,222			9,855,647
Property, plant and mineral interests (net of accumulated
depreciation of $172,173 and $144,030)		14,419,407			13,870,563
Non-current deferred compensation		1,417,909			1,202,587
Other assets		165,086			169,130
Total Assets	$	23,503,624		$	25,097,927
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities
Accounts payable	$	615,752		$	530,665
Accrued expenses		316,252			274,739
Due to related party		297			9,644
Total Current Liabilities		932,301			815,048
Deferred tax liabilities		—			433,645
Asset retirement obligation		995,704			951,355
Total Liabilities		1,928,005			2,200,048
Commitments and Contingencies		—			—
Shareholders’ Equity (Deficit)
Preferred stock; $0.001 par value, 20,000,000 shares
authorized, no shares outstanding		—			—
Common stock; $0.001 par value, 150,000,000 shares authorized,			��
and 125,172,011 and 125,172,011 shares issued and outstanding		125,172			125,172
Additional paid-in capital		29,025,272			29,025,272
Accumulated deficit		(7,518,326	)		(6,222,349	)
Accumulated other comprehensive loss		(56,499	)		(30,216	)
Total Shareholders’ Equity (Deficit)		21,575,619			22,897,879
Total Liabilities and Shareholders’ Equity (Deficit)	$	23,503,624		$	25,097,927

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

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

					For the Period from
					March 5, 2004
		For the Three Months Ended			(Date of Inception)
		March 31,			through
		2007	2006		March 31, 2007
		(Restated)		(Restated)			(Restated)
Revenue	$	-	$	-		$	-
Operating Expenses
General and administrative expenses		1,255,862		357,538			5,510,234
Research and development costs		-		293,009			792,168
Exploratory costs		860,862		43,855			3,028,605
Accretion expense on asset retirement obligations		19,911		17,544			153,408
Grant compensation expense		189,479		-			341,062
Total Operating Expenses		2,326,114		711,946			9,825,477
Loss From Operations		(2,326,114)		(711,946)			(9,825,477)
Other Income (Expense)
Interest income		189,631		-			274,968
Interest expense		(1,018)		(64,898)			(1,677,441)
Translation adjustment		(83,724)		(43,462)			(78,106)
Exchange gain		480,132		240,055			245,398
Other income (expense)		4,003		(35,947)			25,864
Net Other Expense		589,024		95,748			(1,209,317)
Net Loss Before Minority Interest and Taxes		(1,737,090)		(616,198)			(11,034,794)
Deferred tax benefit		441,113		-			3,375,260
Loss attributed to minority interest		-		-			141,208
Net Loss	$	(1,295,977)	$	(616,198)		$	(7,518,326)
Basic Loss per Common Share	$	(0.01)	$	(0.01)
Weighted-Average Shares used in
Basic Loss per Common Share		125,172,011		100,088,888

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

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

			For the Period from
			March 5, 2004
	For the Three Months Ended		(Date of Inception)
	March 31,		through
	2007	2006	March 31, 2007
	(Restated)	(Restated)	(Restated)
Cash Flows from Operating Activities
Net loss	$          (1,295,977)	$           (616,198)	$         (7,518,326)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization	26,666	18,158	193,799
Accretion expense on asset retirement obligations	19,911	17,544	169,477
Shares issued on option modification	-	-	19,426
Loss on disposal of property and equipment	(2,673)	-	56,255
Interest expense from debt discount	-	46,734	963,231
Deferred tax benefit	(441,113)	-	(3,375,260)
Foreign currency exchange gain and translation
adjustment	124,400	289,765	(78,851)
Purchased exploration costs	-	-	251,286
Stock grant compensation expense	189,479	-	341,062
Loss recognized on minority shareholders’ interest	-	-	(141,208)
Change in operating assets and liabilities:
Trade accounts receivable	(3,954)	(1,390)	5,014
Inventories	(10,050)	(29,427)	68,334
VAT recoverable	(14,100)	-	(136,598)
Prepaid expenses and other current assets	(153,946)	(40,379)	(72,967)
Accounts payable	79,598	11,994	301,565
Accrued expenses	(552,895)	-	(640,105)
Net Cash From Operating Activities	(2,034,654)	(303,199)	(9,593,866)
Cash Flows from Investing Activities
Purchase of property and equipment	(221,699)	(469,142)	(2,840,136)
Purchase of intangible assets	(5,808)	-	(63,288)
Proceeds from disposal of property and equipment	-	-	22,941
Restricted cash	-	-	(100,000)
Notes receivable	-	-	(56,983)
Cash acquired in acquisitions	-	-	(152,180)
Change in related party receivables / payables	(8,783)	(12,340)	41,692
Net Cash From Investing Activities	(236,290)	(481,482)	(3,147,954)
Cash Flows from Financing Activities
Proceeds from notes payable	-	1,084,914	14,706,914
Payments on notes payable	-	(353,213)	(22,745,753)
Proceeds from notes payable related parties	-	100,000	4,326,912
Payments on notes payable - related parties	-	-	(4,326,912)
Issuance of shares for cash	-	-	26,728,842
Net Cash From Financing Activities	-	831,701	18,690,003
Effect of Exchange Rate Changes on Cash	85,433	(1,995)	449,986
Net Increase / (Decrease) in Cash	(2,185,511)	45,025	6,398,169
Cash at Beginning of Period	8,583,680	89,366	-
Cash at End of Period	$6,398,169	$          134,391	$            6,398,169

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

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND NATURE OF BUSINESS

Interim Financial Information — The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they are condensed and do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The accompanying financial statements should be read in conjunction with the most recent audited financial statements of Bekem Metals, Inc. included in its annual report on Form 10-KSB filed for the year ended December 31, 2006. Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Basis of Presentation

On October 24, 2005, Bekem Metals, Inc. (hereinafter referred to as “us,” “we,” the “Company”, “BMI” or “Bekem”) entered into an Acquisition Agreement with Kazakh Metals, Inc., a British Virgin Islands international business company (“KMI”), under which BMI acquired 100% of the outstanding common shares of KMI in exchange for the issuance of 61,200,000 common shares.

The KMI shareholders received 61.1% of the BMI common stock outstanding after the transaction and therefore KMI was considered the acquirer for financial reporting purposes. Accordingly, the accompanying financial statements include financial statements of KMI for all periods presented.

Brisa Equities Corporation, a British Virgin Islands holding company (“Brisa”), together with other entities its owners control, is the controlling shareholder of KMI and was also the controlling shareholder of BMI. Accordingly, the transaction was considered to be between entities under common control and did not result in a change in control of BMI. Following the transaction, entities over which the controlling shareholder maintained voting and investment control held 51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding common shares.

The acquisition of the portion of the net liabilities of BMI relating to the common shares owned by the controlling shareholder was recorded at historical cost of $(161,998). The acquisition of the common shares of BMI purchased from the minority shareholders of BMI were recorded at $345,000, which was the estimated fair value of those shares on the date of acquisition. KMI accounted for the purchase of BMI similar to a pooling.

Bekem Metals, Inc. – The consolidated financial statements include the accounts of Condesa and Kaznickel, since the date of its acquisition by Condesa, and the accounts of BMI since its acquisition by Condesa. Condesa was incorporated under the laws of the British Virgin Islands on March 5, 2004. Condesa acquired BMI in a reverse acquisition, on January 28, 2005. On July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On September 30, 2006 Bekem sold Condesa to a third party for a nominal value. Condesa is included in the consolidated financial statements from the date of acquisition and to the date of disposal.

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Kazakh Metals, Inc. – The consolidated financial statements also include the accounts of KMI and its wholly-owned subsidiary, KKM, which it acquired on May 31, 2005 in a purchase business combination.

Name Change – On February 9, 2005, the Board of Directors of EMPS Research Corporation approved, and the stockholders holding a majority of the outstanding shares of the company approved and ratified by written consent, a change in the Company’s name from EMPS Research Corporation to Bekem Metals, Inc. On March 16, 2005, the Company filed an amendment to its Articles of Incorporation to affect the change.

Currency Translation – The consolidated financial statements are presented in U.S. dollars. The functional currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S. dollars at the average exchange rates during the reporting period. Non-monetary assets and liabilities of Kaznickel are translated into U.S. dollars, using historical exchange rates and monetary assets and liabilities are translated into U.S. dollars using exchange rates on the date of the financial statements. Translation differences are included in results of operations. All balance sheet accounts of KKM are translated at exchange rates on the date of the financial statements and translation differences are included in stockholders’ equity as cumulative translation adjustments.

Nature of Business

The Company is engaged in the exploration of mineral resource properties. Kaznickel owns the right to the Gornostayevskoye (“Gornostai”) nickel and cobalt deposit located in the East Kazakhstan Oblast in northeast Kazakhstan. The subsoil use contract and license is for exploration and production of cobalt and nickel ores and is valid through February 26, 2026. KKM holds exploration and production subsoil use contracts and licenses from the government of Kazakhstan to a 575,756 acre parcel, located approximately 130 kilometers northeast of Aktobe, Kazakhstan. This deposit is referred to as the Kempirsai deposit. The subsoil use contracts and licenses grant KKM the right to explore and produce nickel and cobalt from deposits located within the territory through October 12, 2011, which may be extended upon agreement between KKM and the Ministry of Energy and Minerals Resources (“MEMR”) of the Republic of Kazakhstan. KKM also holds a subsoil use contract and a license to explore and produce Mamyt brown coal from a deposit located within 40 kilometers of its cobalt and nickel deposit. This subsoil use contract and license expires on December 11, 2018 with further possible extensions. However, because our deposits are without known reserves, our operations are considered to be at the exploratory stage.

Business Condition – The Company has no proven mineral reserves that conform to U.S. accounting. The Gornostai and the Kempirsai deposits have not yet entered the development stage with respect to its mineral interests and have no production. There has been only limited revenue from the Kempirsai operations, and the Company has incurred net losses of ($1,295,977) and ($616,198) for the three months ended March 31, 2007 and 2006, respectively and ($7,518,326) for the period from March 5, 2004 (date of inception) through March 31, 2007. Current assets exceeded current liabilities by $6,568,921 at March 31, 2007. Management expects that the Company will need significant additional capital to fund construction of a processing plant in 2007-2008. The Company anticipates it will need to raise additional capital through the sale of its equity securities or debt securities. Certain shareholders of the Company have indicated a willingness to provide the Company a line of credit. The Company has no formal agreement with said shareholders to provide this line of credit and the shareholders are under no obligation to enter into any agreement or make available any funds to the Company.

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Kempirsai Exploration Stage – The Kempirsai, or KKM, operations are considered to be in the exploration stage until the company has the feasibility study.

Gornostai Exploration Stage – The Gornostai, or Kaznickel, operations are considered to be in the exploration stage. Since its inception on March 5, 2004, the Company has devoted a substantial amount of effort in raising capital, acquiring Kaznickel, and exploring the Gornostai deposit under its exploration contract. This mineral property has not yet reached development or production stage and accordingly, no revenues from production have been recorded.

NOTE 2 - CASH

The Company considers all demand deposits, money market accounts and marketable securities purchased with an original maturity of three months or less to be cash and cash equivalents. The fair value of cash and cash equivalents approximates their carrying amounts due to their short-term maturity.

Cash consists of the following:

	March 31,	December 31,
	2007	2006
Current accounts (USD)	$     635,477	$ 479,947
Current accounts (Tenge)	95,716	38,379
Bank deposit (USD)	1,132,992	8,065,354
Bank deposit (Tenge)	4,533,984	-
Total	$6,398,169	$ 8,583,680

Bank deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits earn interest from 3% to 8% annually based on the length of time the funds are left on deposit. Of the total bank deposits, $100,000 is restricted until December 20, 2007. This amount is included in other non-current assets. The remaining balances of the bank deposits are immediately available to the Company.

NOTE 3 - PROPERTY, PLANT AND MINERAL INTERESTS

Property, plant and mineral interests consist of the following:

	March 31,	December 31,
	2007	2006
Buildings	$ 2,211,348	$ 2,156,326
Machinery and equipment	3,783,914	3,474,858
Other fixed assets	70,434	69,665
Unproved mineral interests - net	8,525,884	8,313,744
	14,591,580	14,014,593
Accumulated depreciation	(172,173)	(144,030)
Net Property and Equipment	$ 14,419,407	$ 13,870,563

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Unproved mineral interests represent the acquisition costs of the mineral interests upon the purchase business combinations with Kaznickel and with KKM. The government of Kazakhstan retains the title to the property upon which the Company’s mineral rights pertain; however, the Company’s mineral interests are considered to be tangible assets.

Gornostai Deposit

Kaznickel acquired its interest in the Contract on Exploration and Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued by the MEMR dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the right to exploit the mineral property including the right to explore, develop and produce the nickel and cobalt mineral resources on the Deposit through February 26, 2026. The Company has the right to re-negotiate the contract at that time for an additional 30 years. The government of Kazakhstan retains the title to the property; however, the Company’s mineral interests are considered to be tangible assets. The Company capitalized the acquisition costs of its mineral interest upon the purchase business combination with Kaznickel. The allocated purchase price included a capitalized amount of an acquired asset retirement obligation. While the property is not in production, the asset retirement cost is depleted over the life of the contract from the date of acquisition.

The Contract provides the Company certain rights and also imposes certain obligations and commitments. The rights include exploration through February 2008, and development and production of minerals through February 26, 2026. The Company may transfer its right to third parties in accordance with Kazakh laws and regulations and has a right to renegotiate an extension of the Contract. Significant rights, obligations and commitments of the Contract include monetary commitments for exploration of $1,576,480, which have been fulfilled in 2007, and expenditures to support social projects amounting to $300,000 during the production stage. In addition, the Company was required to pay a fee of $2,000 upon award of the Contract, and a fee for the use of Kazakh owned technical data of $735,400 of which $4,179 was paid on award of the Contract and $731,221 will be due upon a finding of commercial deposits. Royalties of 0.5% of ores extracted and sold will be required. The Contract subjects the Company to pay regular income tax of 30 percent and requires an excess profits tax of 15 to 60 percent if its net profits exceed 20 percent of gross profit. Obligations also include the establishment and funding of a reclamation fund that includes the cost of removing buildings and equipment used in the Deposit area. The Company is also required to comply with Kazakh environmental laws and regulations.

Kempirsai Deposit

Bekem acquired two contracts to explore for and extract minerals in connection with the purchase of KKM. One contract is for the exploration and extraction of nickel and cobalt ore through October 12, 2011 from deposits located in an approximately 575,756 acre site in the northwest area of the Republic of Kazakhstan approximately 130 kilometers northeast of the city of Aktobe, Kazakhstan, near the town of Badamsha, referred to as the “Kempirsai” deposit. The other contract is for the exploration and extraction of Mamyt brown coal through December 11, 2018 at a site located within 40 kilometers of the Kempirsai deposit. The contracts may be extended upon agreement between KKM and the

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Geology and Minerals Resources Committee of the Ministry of Energy and Minerals Resources of the Republic of Kazakhstan. The Kempirsai contract requires the Company to pay royalty payments equal to 2.21% of gross ore sales. The Mamyt brown coal contract requires a royalty payment equal to nine tenths of one percent (0.9%) of gross coal sales. Both contracts require the Company to pay an excess profits tax ranging from 4 to 30 percent based upon the reaching of an internal rate of return (as defined in the contracts) ranging from 22 to 30 percent. The allocated purchase price of the mineral interest included a capitalized amount of an acquired asset retirement obligation. The asset retirement cost is depleted over the life of the contract from the date of acquisition. Obligations also include the establishment and funding of a reclamation fund that includes the cost of removing buildings and equipment used. The Company is also required to comply with Kazakh environmental laws and regulations.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Concentration of Risk Relating to Foreign Mining Operations – All of the Company’s properties are located within the Republic of Kazakhstan in Central Asia. In addition to general industry risks of nickel and cobalt price fluctuations, and potential lack of economic viability of the claims, the Company has a concentration of risk related to its foreign properties and interests which are subject to political uncertainty, changes in government, unilateral renegotiation of licenses, claims or contracts, nationalization, or other uncertainties. In addition, the validity of mining claims which constitute the Company’s property holdings in Kazakhstan, may, in certain cases, be uncertain and are subject to being contested.

Kazakhstan Business Environment – Kazakhstan, as an emerging market, has a legal and regulatory infrastructure that is not as mature and stable as those usually existing in more developed free market economies. As a result, operations carried out in Kazakhstan can involve risks and uncertainties that are not typically associated with developed markets. The instability associated with the ongoing transformation process to a market economy can lead to changes in the business conditions in which the Company currently operates. Changes in the political, legal, tax or regulatory environment could adversely impact the Company’s operations.

Tax Matters – The local and national tax environment in the Republic of Kazakhstan is subject to change and inconsistent application, interpretation and enforcement. Non-compliance with Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to the imposition of fines, penalties and interest.

Environmental Matters – Extensive national, regional and local environmental laws and regulations in Kazakhstan affect the Company’s operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality provide for user fees, penalties and other liabilities for the violation of these standards and establish, in some circumstances, obligations to remediate current and former facilities and off-site locations. The Company believes it is currently in compliance with all existing Republic of Kazakhstan environmental laws and regulations. However, as new environmental laws and legislation are enacted and the old laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance in the future could require significant expenditures, which may adversely affect the Company’s operations.

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Due to the Government of the Republic of Kazakhstan – In connection with the Company’s acquisition of the exploration contract covering the Gornostai deposit, the Company is required to repay the Republic of Kazakhstan for historical costs incurred in undertaking geological and geophysical studies and infrastructure improvements. The repayment terms of this obligation will not be determined until the Company applies for and is granted a contract by the Republic of Kazakhstan to engage in commercial production. That amount is expected to be $731,221 and has not been recorded as a liability. Under the current contract, once the Company determines the property contains commercially producible reserves, and desires to commence commercial production, it must apply for such right prior to the expiration of its exploration and development rights in February 2026. The Company anticipates it will apply for a commercial production contract within the next 1-3 years. Of course, there is no guarantee when or if the Company will discover commercially producible reserves within the Gornostai deposit. Should the Company decide not to pursue a commercial production contract, then it can relinquish the Gornostai deposit to the Republic of Kazakhstan in satisfaction of this obligation.

The Company is required, under its subsoil use contracts and licenses, to submit a proposed annual work program to the MEMR for approval. Failure to meet the minimum work program requirements could cause the Company to lose its subsoil use contracts and licenses.

Operating Leases – Bekem leases approximately 400 square feet of office space located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in the United States. The Company pays annual rents of approximately $7,800 for this space pursuant to a lease agreement that expires December 31, 2007 with an option to extend the lease for an additional year.

The Company also maintains a representative office in Almaty, Kazakhstan, where it leases approximately 1,575 square feet of office space. The lease agreement expires on December 31, 2007. In April 2007, the monthly lease payment increased from $5,250 to $6,125. Under the terms of the lease agreement, the owner of the space could terminate the lease at any time and require the Company to vacate the premises.

Kaznickel LLP rents an office (approximately 1,840 square feet) in Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the Gornostai deposit. Kaznickel also rents approximately 4,450 square feet of warehouse space in Semei for $4,000 per month. Kaznickel uses this space to store test ore. These spaces are leased on a year-to-year basis. Also, Kaznickel LLP rented an office (approximately 350 square feet) in Astana, Kazakhstan, for approximately $1,600 per month. This lease agreement was terminated on August 1, 2007 and will not be renewed as Kaznickel closed its Astana office effective August 1, 2007.

In April 2007, KKM increased the size of its offices in Aktobe, Kazakhstan from 1,260 square feet to 1,900 square feet. As a result, KKM’s monthly lease payment increased from $4,000 per month to $5,400 per month. This space is leased on a year-to-year basis.

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

NOTE 5 – RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent to the issuance of the December 31, 2006 and 2005 financial statements, the Company realized that its financial statements needed to be restated to correct the reporting of mining transactions to be consistent with SEC Industry Guide 7, Description of Property by Issuers Engaged or to Be Engaged in Significant Mining Operations that defines a production stage enterprise as one that has reserves that are proven or probable as evidenced by an acceptable reserve report. The Company has not yet received its reserve report, therefore, under Industry Guide 7 it is an exploration stage enterprise. The Company had not considered itself a development or exploration stage company due to the history of production of the sites under mining licenses during the 1980s and 1990s and using the reports evidencing commercial ore bodies that were developed during the Soviet era under different methods than those currently used to support the definition of “reserves” under Industry Guide 7. The Company’s licenses granted by the MEMR for the Kempirsai and Mamyt deposits are production licenses and require the Company to extract certain quantities of nickel, cobalt and coal in order to retain the licenses, which were previously reported as production activity. The Company expects to obtain acceptable reserve reports early in 2008.

In order to comply with the reporting under Industry Guide 7, a column for transactions from “inception to date” has been added to the statements of operations and cash flows, stripping costs have been expensed rather than capitalized, and revenues and costs of products sold have been reclassified to offset certain direct mining expenses which are included in exploratory costs, depreciation and amortization expenses were also reclassified as exploratory costs. Also, the other income (expense) as originally filed included disposals of inventory, which were reclassified as exploratory costs and revenue from services were reclassified as other income. In addition, the number of weighted-average shares outstanding for the three months ended March 31, 2007 was corrected.

The effects of the restatements are as follows:

Balance Sheet
March 31, 2007	As Previously Reported	Effect of Restatement	As Restated
Inventories	396,794	(191,955)	204,839
Non-current deferred compensation	1,584,067	(166,158)	1,417,909
Deferred tax liabilities	(29,460)	29,460	-
Accumulated deficit	7,197,141	321,185	7,518,326
Accumulated other comprehensive loss	49,031	7,468	56,499

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BEKEM METALS, INC. AND SUBSIDIARIES

(An Exploration Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007 (UNAUDITED)

Statements of Operations
For the Three Months Ended March 31, 2007
	As Previously Reported	Effect of Restatement	As Restated
Exploratory costs	(834,196)	(26,666)	(860,862)
Grant compensation expense	(97,169)	(92,310)	(189,479)
Depreciation expense	(26,666)	26,666	-
Interest income	-	189,631	189,631
Other income (expense)	193,634	(189,631)	4,003
Deferred tax benefit	483,925	(42,812)	441,113
Net Loss	(1,160,855)	(135,122)	(1,295,977)

Statements of Cash Flows
For the Three Months Ended March 31, 2007
	As Previously Reported	Effect of Restatement	As Restated
Cash Flows from Operating Activities
Net loss	(1,160,855)	(135,122)	(1,295,977)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Deferred tax benefit	(483,925)	42,812	(441,113)
Stock grant compensation expense	97,169	92,310	189,479

NOTE 6 – SUBSEQUENT EVENT

In December 2007, the Republic of Kazakhstan Ministry of Energy and Mineral Resources (“MEMR”) unilaterally terminated KKM’s contracts and licenses to explore for nickel, cobalt, brown coal, and other minerals within the Kempirsai and the Mamyt deposits on the basis that KKM had material failures in execution of the work programs associated with the contacts and licenses but did not detail those failures. In January 2008, KKM filed an action in the Court of Astana city against the MEMR challenging the legality of the unilateral termination of the KKM contracts and licenses by the MEMR for several reasons, including that the contracts and licenses had been terminated on grounds not provided for in the subsoil use contracts and legislation and there were no material failures in the execution of the work programs associated with the contracts and licenses. In February 2008, the Court of Astana city acknowledged that the unilateral termination of the contracts and licenses by the MEMR was illegitimate. The Court canceled the order of the MEMR relating to the unilateral termination of the licenses and reinstated the KKM contracts and licenses. The MEMR has appealed the Court’s decision to the Republic of Kazakhstan Supreme Court.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For a complete understanding, this Management’s Discussion and Analysis should be read in conjunction with the Financial Statements and Notes to the Financial Statements contained in this Form 10-Q and our Form 10-KSB for the year ended December 31, 2006.

Forward Looking Information and Cautionary Statement

Certain statements contained herein including, but not limited to those relating to our plan of operations, future potential revenue, future expenses, future development of our mineral properties, the development and commercial viability of our processing technology, our ability to obtain future governmental approvals, expansion of our operations, our ability to generate cash flow, future demand for nickel, cobalt and brown coal, future commodity prices, integration of new technologies into operations, credit facilities, future capital expenditures and working capital, sufficiency of future working capital, borrowings and capital resources and liquidity, expectations of timing, satisfaction of contingencies, the impact of any change in accounting policies on our financial statements, future acquisitions, management’s assessment of internal control over financial reporting, financial results, opportunities, growth, business plans and strategy and other statements that are not historical facts contained in this report are forward-looking statements. When used in this document, words like “believe,” “expect,” “project,” “intend,” “estimate,” “budget,” “plan,” “forecast,” “predict,” “may,” “will,” “could,” “should,” or “anticipate” and similar expressions or the negative thereof, or other variations thereon, or comparable terminology, or discussions of strategy that involve risk and uncertainties are also intended to identify forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, market factors, market prices (including regional basis differentials) of nickel, cobalt and brown coal, results of future exploration and extraction activities, future production and costs, unsettled political conditions, civil unrest and governmental actions, foreign currency fluctuations, and environmental and labor laws and other factors detailed herein. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements are based on current expectations. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We are engaged in the development and exploration of nickel, cobalt and brown coal deposits in the Republic of Kazakhstan. We carry out our exploration activities through our two wholly-owned subsidiaries, Kyzyl Kain Mamyt LLP (“KKM”) and Kaznickel LLP (“Kaznickel”).

The primary assets of KKM are exclusive subsoil use licenses and contracts to a 575,756 acre territory in northwestern Kazakhstan referred to herein as the Kempirsai deposit. The contract grants KKM the right to explore, extract and process nickel and cobalt ore from the Kempirsai deposit, which is comprised of the Kara-Obinskoe and Stepninskoye sections (collectively referred to as the “Kara-

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Obinskoye section”) and the Novo-Shandashinskoe section. KKM also holds a subsoil use contract to explore and produce brown coal from the Mamyt coal deposit, which is located within 40 kilometers of the Kempirsai deposit. Unless otherwise indicated by the context of the disclosure, the Kara-Obinskoye section, the Novo-Shandashinskoye section and the Mamyt deposit are collectively referred to herein as the “Kempirsai deposit.”

The primary asset of Kaznickel is an exclusive subsoil use license and contract that grants Kaznickel the exclusive right, through February 2008, unless extended, to explore for nickel, cobalt and other minerals in a 12,232 acre area in northeastern Kazakhstan known as the Gornostayevskoye (“Gornostai”) deposit. The concession further provides that if we make a commercial discovery of nickel, cobalt or other minerals within the concession territory, we can apply for and receive the exclusive rights to commercially produce and sell nickel and cobalt ore through February 2026.

The following table provides additional information regarding our subsoil use contracts:

Territory Name	Size of Territory	Primary Minerals	License Type	License or Contract #	License and Subsoil Use Contract Term
Kempirsai	575,756 acres	Nickel and cobalt ore	Production	MG #420 MG #426	Expires Oct, 12, 2011 unless extended.
Mamyt	116 acres	Brown coal	Production	MG #9-D	Expires Dec, 11 2018 unless extended.
Gornostai	12,232 acres	Nickel and cobalt ore	Exploration and Production	1349	Exploration period expires Feb. 26, 2008 unless extended. Production period expires Feb. 26, 2026 unless extended.

As noted above, our subsoil use contract for the Kempirsai nickel and cobalt deposit and Mamyt brown coal deposit grant us commercial production rights. The Kempirsai deposit was discovered in 1938 and at its peak in the late 1980’s produced almost five million tons of ore annually. Since the mid-1990’s, however, mining activity at the deposit has been insignificant.

We are currently at the exploration stage on the Gornostai deposit. To retain our subsoil use contract during exploration stage we are required to satisfy a minimum work program that is approved by the Geology Committee of the MEMR. We are currently in the third year of a three-year work program. Under this program, we are required to engage in an exploratory drilling program designed to identify and evaluate the mineral resources contained within the contract territory. In 2007, we are required to drill test holes totaling at least 12,961 meters. For 2007, we planned to drill approximately 615 test holes totaling approximately 15,700 meters during 2007. As of March 31, 2007 we have drilled a total of 9,110 meters (355 holes).

The objective of our drilling program is to complete a detailed study of the structural characteristics of what we believe to be the two largest ore bodies in the Gornostai deposit, as well as certain other ore bodies where high grade nickel deposits have been located. The drilling was conducted on a 50 x 50-100 meter grid, which will make it possible to convert indicated and inferred resources to proved and probable reserves as development of the property progresses.

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When we complete exploration of the Gornostai deposit, assuming we make commercial discoveries, we will apply to the MEMR to move to commercial production.

Should we fail to complete the minimum work program imposed by any of our subsoil use contracts in a given year, the MEMR could review the work program, request an update and amendment to the work program, impose fines and penalties upon us or even revoke our subsoil use contracts and licenses.

We currently have no processing facilities at either the Kempirsai or Gornostai deposits. We plan to construct processing facilities to process our ores at our Kempirsai deposit. Historically, pyrometallurgy has been the most common processing procedure utilized to process nickel and cobalt ores. Hydrometallurgical technology has improved to the point that it is now an acceptable alternative to pyrometallurgy for processing nickel and cobalt ores. Both technologies require large plants, costly construction and expensive equipment often requiring capital infusions of hundreds of millions of dollars.

We have retained the services of an independent engineering firm to conduct a pre-feasibility study reviewing different technologies to determine the best processing technology, optimal processing capacity, construction costs and timelines, etc. to allow us to determine the type of processing facility we will construct at the Kempirsai deposit. We expect the pre-feasibility study to be completed by the end of 2007.

Results of Operations

Since inception we have generated limited revenue. We have spent millions of dollars to date and anticipate that we will spend significant additional capital before we begin to realize significant revenue from operations.

In July 2006, we realized net proceeds of approximately $26,600,000 through a private placement of our equity securities. As of March 31, 2007, we had spent approximately $20,300,000 of those funds. Approximately $12,200,000 was used to repay loans, $1,900,000 was used to meet our minimum working program obligations, approximately $2,200,000 was spent developing our hydrochlorination technology and $4,000,000 was used as working capital. At March 31, 2007, we had cash on hand of $6,398,169. We expect cash on hand will be sufficient to fund our activities through the end of the current fiscal year. We also anticipate the need to seek additional funding by the end of fiscal 2007 to continue our efforts to develop and exploit our mineral resources. There is no assurance that we will be able to obtain additional funding in the future on favorable terms, or at all. At this time, we have no commitments from any parties to provide us additional funding.

Three months ended March 31, 2007 compared to the three months ended March 31, 2006

Revenue

Because our deposits are without known reserves, we are considered to be in the exploration stage. Any revenues earned during this stage from sale of ore or brown coal are recorded against exploratory costs. During the three months ended March 31, 2006, such incidental sales amounted to $64,642. No such sales were made during the three months ended March 31, 2007.

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General and Administrative Expenses

Our general and administrative expenses during the three months ended March 31, 2007 increased to $1,255,862 from $357,538 during the first quarter 2006. This increase in general and administrative expenses in the first quarter 2007 is mainly attributable to a $542,799 increase salary and related taxes as a result of an increase in the number of personnel we employ and salary increases for existing employees, as KKM hired a number of personnel to carry out development and testing of the pilot plant, additional geologists, metallurgists and ecology supervisors. We also hired additional in-house accounting, finance, legal and information technology personnel. We do not expect to hire a significant number of additional employees until such time as operations or funding so justify. Therefore, we do not expect to experience significant increases in salaries and related taxes during the remainder of the 2007 fiscal year. Another contributing factor to the increase in general and administrative expenses was a $300,000 increase in professional fees, primarily attributable to increased legal and accounting fees and costs associated with a resource estimation prepared by a third party consulting firm. We believe this increase in professional fees was more a matter of timing and the one-time cost of the resource estimation than a trend and we expect professional fees to return to more traditional levels in upcoming quarters.

Research and Development Costs

We engaged in no research and development in connection with the development and testing of our hydrochlorination processing technology during the first quarter 2007. During the first quarter 2006 we spent $293,009 in research and development costs, primarily in connection with the development of our pilot plant. During the 2007 fiscal year we have budgeted $200,000 for testing of our pilot plant.

Exploratory Costs

As a result of our aggressive exploratory drilling program for 2007, we incurred $860,862 in exploratory costs during the three months ended March 31, 2007 compared to $43,855 during the three months ended March 31, 2006. We budgeted $1,765,000 for drilling and core sampling expenses during 2007. We have spent almost half of that amount to complete approximately 60% of our planned drilling program for the year. We expect that exploratory costs will continue to be significantly higher during the balance of 2007 fiscal year and we continue to pursue our planned drilling and core sampling program. Also, as discussed above, because our activities are considered as exploratory, the exploratory costs are reflected net of revenues earned from sale of ore or brown coal. During the three month period ended March 31, 2006, we earned revenue of $64,642. By comparison during the three month period ended March 31, 2007, we realized no revenue.

Accretion Expense

Accretion expense increased by $2,367 during the three months ended March 31, 2007 compared to the same period of 2006. Until we engage in mining and production, we believe accretion expense will continue at rates consistent with those realized during the quarter ended March 31, 2007.

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Grant Compensation Expense

During the three months ended March 31, 2007 we recognized $189,479 in grant compensation expense for restricted stock grants issued to certain officers and key employees during the fourth quarter 2006. We had no comparable expense during the three months ended March 31, 2006 because the restricted stock grants were not made until the fourth quarter of 2006.

Total Operating Expense and Loss from Operations

Our total operating expense and loss from operations increased from $711,946 during the three months ended March 31, 2006 to $2,326,114 during three months ended March 31, 2007. The principal reasons for the increase are the following:

o Increase in general and administrative expense of $898,324 mainly attributable to the increase in salary and related taxes as a result of an increase in the number of personnel we employ and salary increases for existing employees as well as due to the increase in professional fees;

o Increase in exploratory costs of $817,007 mainly due to increase scope of our drilling program;

o Increase in recognition of the stock grant compensation expenses of $189,479. By comparison, we had no comparable expense during the three months ended March 31, 2006.

We expect total operating expenses during the remainder of 2007 to be higher as compared to 2006.

Interest Income

During the three months ended March 31, 2007, we realized interest on deposits of $189,631. By comparison, during the three months ended March 31, 2006, we earned no interest on deposits. The deposit accounts in which our funds are held provide for higher rates of return, varying from 3% to 8%, the longer the funds are left on deposit, with determination of the interest rate and recognition of the interest earned at the time the funds are withdrawn or upon the maturity date of the deposit.

Interest Expense

We realized $1,018 of interest expense during the three months ended March 31, 2007. During the three months ended March 31, 2006 we realized interest expense of $64,898. The interest expense realized during the first quarter 2006 was accrued mainly on notes payable received from related and third parties in the past.

Translation Adjustment

The consolidated financial statements are presented in U.S. dollars. The functional currency of our subsidiary Kaznickel is U.S. dollars. The functional currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated into U.S. dollars at the average exchange rates during the reporting period. All balance sheet accounts of KKM are translated at exchange rates on the date of the

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financial statements and translation differences are included in stockholders’ equity as cumulative translation adjustments. However, non-monetary assets and liabilities of Kaznickel are translated into U.S. dollars, using historical or average exchange rates and monetary assets and liabilities are translated into U.S. dollars using exchange rates on the date of the financial statements where translation differences are included in results of operations.

Therefore, the translation adjustment in the consolidated financial statements represents the translation differences from translation of the Kaznickel’s financial statements. As a result, the translation adjustment is commonly, but not always, positive if the average exchange rates are lower than exchange rates on the date of the financial statements and negative if the average exchange rates are higher than exchange rates on the date of the financial statements.

As a result of the weakening of the U.S. dollar against the Kazakh tenge, a negative translation adjustment during the three months ended March 31, 2007 amounted to $83,724.

Exchange Gain/Loss

During the quarter ended March 31, 2007 we realized an exchange gain of $480,132 compared to an exchange loss of $240,055 during the quarter ended March 31, 2006. As with translation adjustment, we recognize exchange gain or loss as a result of having subsidiaries operating in foreign countries whose functional currency may or may not be the U.S. dollar. This requires us to translate results of operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars at the average exchange rate, where results of operations include exchange gains or losses on the U.S. dollar monetary assets and liabilities.

Net Loss

For the foregoing reasons, during the three months ended March 31, 2007 we experienced a net loss of $1,295,977 compared to a net loss of $616,198 during the three months ended March 31, 2006. We anticipate that we will continue to experience increasing net losses until we are able to engage in significant nickel and cobalt ore extraction, processing and sales. We do not expect to be engaged in significant ore extraction and processing prior to the 2009 fiscal year.

Liquidity and Capital Resources

Our capital resources have consisted primarily of funds we have borrowed from related and non-related parties and funds we raised through a private placement of our equity securities in July 2006. These funds, however, represent only a portion of the funds we will need to complete exploration and development and move to commercial production. As of March 31, 2007, we have $6,398,169 of the approximately $26,600,000 in net proceeds we realized from the private placement. We have used the money raised in the private offering to reduce debt, acquire equipment, continue exploration and fund operations. We anticipate the need for substantial additional capital resources. As discussed above, we are in negotiations with certain third parties for the sale of our ore, depending on the success of those negotiations, we may be able to fund our expenses through the sale of our ore. We have received indications from certain of our primary shareholders that if we are unsuccessful in negotiating ore sales contracts, they are willing to provide additional funds to us to continue

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exploration activities during 2008, most likely in the form of loans. We currently, however, do not have definitive agreements with any parties to provide us additional funding.

During the three months ended March 31, 2007 and March 31, 2006, cash was primarily used to fund operations and repay notes payable. See below for additional discussion and analysis of cash flow.

For the Three Months Ended March 31,	2007	2006
Net cash used in operating activities	$(2,034,654)	$(303,199)
Net cash used in investing activities	(236,290)	(481,482)
Net cash provided by financing activities	—	831,701
Effect of exchange rate changes on cash	85,433	(1,995)
NET (DECREASE) INCREASE IN CASH	$(2,185,511)	$45,025

During the three months ended March 31, 2007 net cash used in operating activities was $2,034,654 compared to net cash used in operating activities of $303,199 during the three months ended March 31, 2006. This increase in net cash used in operating activities is primarily attributable to increases in salary and related taxes, exploratory costs and professional fees.

During the three months ended March 31, 2007 net cash used in investing activities was $236,290. By comparison, during the three months ended March 31, 2006 we used net cash in investing activities of $481,482. We used more cash in investing activity in 2006 primarily resulting from the purchase of equipment for KKM’s pilot plant.

During the three months ended March 31, 2007 no cash was generated in financing activities compared to net cash provided by financing activities of $831,701 during the three months ended March 31, 2006. This decrease in net cash used in financing activities is explained by availability of capital from our private placement.

Plan of Operations

As of March 31, 2007, we had cash on hand of $6,398,169. As discussed above, we have budgeted to spend all of these funds in operations and development activities during the remaining nine months of 2007. Following is a brief description of how we anticipate allocating our cash on hand during the next nine months.

Drilling and Core Analysis

We will allocate approximately $900,000 to drilling and exploration. This includes drilling of approximately 6,000 meters of the South section of the Gornostai deposit. Estimated drilling costs include both direct and indirect drilling costs, including geologist fees and costs for site supervisors, geological data processors, core sample takers, topographers, site procurement specialists, etc.

Reserve Report

During the second quarter Wardell Armstrong, a qualified independent engineering firm, completed a resource estimation of our Kempirsai nickel and cobalt deposit. The resource modeling was based on previous exploration and mining of the deposit and was done as an independent audit of

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an earlier reserves and resources study conducted during the Soviet period to Soviet standards. Wardell Armstrong also completed a scoping study for the south section of the Gornostai deposit. The scoping study is our first step to evaluating the results of our drilling activities at the Gornostai property and will provide the foundation for a preliminary development feasibility study for the Gornostai deposit. We anticipate the cost of the resources estimation will be approximately $135,000.

The State Reserves Committee of the Republic of Kazakhstan recognizes that we have proven and probable reserves at the Gornostai and Kempirsai deposits, as per their standards for classification of reserves. Wardell Armstrong is in the process of estimating these reserves per JORC code standards. We expect that the minable reserves of the Kempirsai deposit will be estimated per JORC code standards in September 2007 while the minable reserves of the Gornostai deposit will be estimated after completion of the drilling program and during the preliminary stage of the feasibility study preparation.

Please note that the State Reserves Committee standards for classification of proven and probable reserves differs from the standard set forth by the U.S. Securities and Exchange Commission. None of our resources at either the Gornostai or Kempirsai deposits currently qualify for classification as “proven” or “probable” reserves under the standards of the Securities and Exchange Commission. Therefore, we have not made in this report, nor will we in subsequent reports, make any claim to proven or probable reserves until such time as our resources qualify for classification as proven or probable reserves in accordance with the standards of the Securities and Exchange Commission.

Hydrochlorination Processing Technology Testing

During the next nine months we expect to spend approximately $200,000 for continued testing at our pilot plant of the mineral concentrating capability of our proprietary hydrochlorination processing technology and to formulate required procedures, protocols and operational guidelines.

Feasibility Study

We anticipate spending approximately $940,000 for the preparation of pre-feasibility and feasibility studies for the construction of the pyrometallurgical plant at the Kempirsai deposit. This amount could increase if we retain a western consulting firm.

Field Modernization

We have allocated approximately $1,000,000 for modernization of vehicles and equipment at the Kempirsai deposit to allow us to increase our ore extracting capabilities.

Administrative Expenses

We plan to allocate approximately $2,600,000 for administrative expenses during the next nine months, which include expenses of maintaining offices in the United States and Kazakhstan, for salaries and taxes.

Professional Fees

We expect to incur approximately $170,000 in expenses for services of our financial auditors and securities attorneys during the next nine months.

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Additional Activities

As discussed above, we are currently considering alternatives to a hydrochlorination processing plant to allow us to begin to generate cash flow from the Kempirsai deposit. We do not currently have sufficient cash on hand to fund these activities, nor have we budgeted for these items in our 2007 budget. Therefore, to undertake these activities we will need to obtain additional capital either through equity or debt financing. We plan to seek this funding through private equity investments or debt financing to be obtained from banks or shareholders. We currently have no firm commitment from any party to provide us additional funding.

We are considering the economic viability of a pyrometallurgical processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we have allocated $940,000 in our 2007 budget for the preparation of pre-feasibility and feasibility studies. Assuming the results of those studies are positive, we would like to move to the design phase of a commercial pyrometallurgical plant, including obtaining detailed engineering and design for plant construction. This would include flowsheet design and pilot testing. We estimate the cost to do this will be roughly $2.5 million.

Summary of Material Contractual Commitments

The following table lists our significant commitments as of March 31, 2007:

	Payments Due by Fiscal Year
Contractual Commitments	Total		Less than one year			2-3 years			4-5 years			After 5 years
Monetary commitments for exploration	$	686,450	$	686,450		$	-0	-	$	-0	-	$	-0	-
Due to the government of Republic of Kazakhstan(1)		731,221		-0	-		731,221			-0	-		-0	-
Training		39,300		39,300						-0	-		-0	-
Social projects(2)		417,906		-0	-		-0	-		300,000			117,906
Asset retirement obligation(3)		951,333		-0	-		-0	-		-0	-		951,333
Operating leases		203,050		203,050			-0	-		-0	-		-0	-
Total	$	3,029,260	$	928,800		$	731,221		$	300,000		$	1,069,239

⁽¹⁾ In connection with our acquisition of the exploration contract covering the Gornostai deposit, we are required to repay the Republic of Kazakhstan for historical costs incurred by it in undertaking geological and geophysical studies and infrastructure improvements. The repayment terms of this obligation will not be determined until such time as we apply for and are granted a contract to engage in commercial production by the Republic of Kazakhstan. Under our current contract once we determine the property contains commercially producible reserves, if we wish to commence commercial production, we must apply for such right prior to the expiration of our exploration rights in February 2008, unless we extend our exploration period. We anticipate that we will apply for a commercial production contract within the next 1-3 years. Of course, there is no guarantee when or if we will discover commercially producible reserves within the Gornostai deposit. Should we decide not to pursue a commercial production contract, we can relinquish the Gornostai deposit to the Republic of Kazakhstan in satisfaction of this obligation.

⁽²⁾ Under the terms of our subsoil use contracts, we are required to make funding for social projects relating to employees of KKM, including improvements to living conditions, etc., in the amount of $117,906. We have already satisfied approximately $97,000 of this obligation during 2007 by transferring an idle building to the Badamsha village administration. We are also required to donate $300,000 for the ongoing development of Astana and Kurchatov, which are cities in Kazakhstan.

⁽³⁾ Under the terms of our subsoil use contracts, we are required to remove all operating equipment and remediate the property. This remediation work can be done during the term of the subsoil use contract or upon completion of the terms of the contract.

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As discussed above, to maintain our rights to the Gornostai, Kempirsai and Mamyt deposits we must satisfy the minimum work program requirements of the MEMR. Should we fail to complete the minimum work program in some year, the MEMR could review the work program, request an update and amendment to the work program, impose fines and penalties upon us or even revoke our subsoil use contracts and licenses.

Off-Balance Sheet Financing Arrangements

As of March 31, 2007 we had no off-balance sheet financing arrangements.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses and revenues, to the extent we generated revenue during the periods presented. Actual results could differ from these estimates. Our significant accounting policies require us to make difficult, subjective or complex judgments or estimates. We consider an accounting estimate to be critical if (1) the accounting estimate requires us to make assumption about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimates that are reasonably likely to occur from period to period, or use different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

There are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Management has discussed the development of these critical accounting estimates with our board of directors and they have reviewed the foregoing disclosure.

Use of Estimates – In connection with the preparation of our financial statements, we are required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. One of the significant areas requiring the use of management estimates and assumptions relates to environmental reclamation and closure obligations. Under our licenses with the Republic of Kazakhstan, following completion of exploration and mining activities we are required to reclaim our licensed territories. To prepare our financial statements in accordance with accounting principles generally accepted in the United States of America we are required to account for this obligation. The determination of the amount of the mine retirement and environmental reclamation obligation the Republic of Kazakhstan will impose upon us, however, has not yet been determined. The determination of the mine retirement and environmental reclamation obligation is based, in significant part, on the size of each deposit. Because we are still exploring our Gornostai property and do not yet know the full extent of the Gornostai deposit, the mine retirement and environmental reclamation obligation has not yet been set by the Republic of Kazakhstan. While we base our estimate of this obligation on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from our estimate.

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Income Taxes – While we are a Utah corporation, our primary operations are in the Republic of Kazakhstan. The Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code. The tax code and the application of tax laws in the Republic of Kazakhstan are still developing and may not be uniformly applied in all instances.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Our primary market risks are fluctuations in commodity prices and foreign currency exchange rates. We do not currently use derivative commodity instruments or similar financial instruments to attempt to hedge commodity price risks associated with future crude oil production.

Commodity Price Risk

Our revenues, profitability and future growth will depend substantially on prevailing prices for nickel and cobalt. If and when we commence commercial production, commodity prices will affect the amount of cash flow available for capital expenditures and our ability to either borrow or raise additional capital. Price will also affect our ability to produce, transport and market the nickel and cobalt we produce.

Historically, nickel and cobalt prices have been subject to significant volatility in response to changes in supply, market uncertainty and a variety of other factors beyond our control. Nickel and cobalt are likely to continue to be volatile in the future and this volatility makes it difficult to predict future price movements with any certainty. Any declines in nickel and cobalt prices would reduce the revenues we could earn when we begin commercial production, and could also reduce the amount of nickel and cobalt that we can produce economically. As a result, this could have a material adverse effect on our business, financial condition and results of operations.

Foreign Currency Risk

Our functional currency is the U.S. dollar. Our Kazakhstani subsidiary Kaznickel uses the U.S. dollar as its functional currency and KKM uses the Kazakh tenge as its functional currencies. To the extent that business transactions in Kazakhstan are denominated in the Kazakh Tenge we are exposed to transaction gains and losses that could result from fluctuations in the U.S. Dollar—Kazakh Tenge exchange rate. When the U.S. dollar strengthens in relation to the Kazakh Tenge, the U.S. dollar-reported expenses will decrease. We do not engage in hedging transactions to protect us from such risk.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain 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, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

Subsequent to the filing of the Original Report, and in connection with the comments of the staff of the SEC, we determined that we had erroneously presented the Company as being in the “production stage” rather than the “exploration stage.” As a result of this error, the Company is filing this Amendment to restate its consolidated financial statements for the periods ended March 31, 2007 and 2006. Our management and our board of directors determined on February 5, 2008, with respect to the annual reports for the fiscal years ended December 31, 2006 and 2005 and the fiscal quarters beginning January 1, 2006 through September 30, 2007, that we had a material weakness in internal control over financial reporting because the controls did not identify the error on a timely basis.

In connection with the restatement referred to above, the Company, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period covered by this report, which included consideration of the required restatement. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report and that we had a material weakness in its internal control over financial reporting because the controls did not identify the error on a timely basis.

In light of this conclusion, the Company performed additional analysis and procedures to ensure its consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

Management had previously concluded that our disclosure controls and procedures were effective as of March 31, 2007 and reported that there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2007 that materially affected, or was reasonably likely to materially affect, the internal control over financial reporting. However, in connection with the restatements of the Company’s consolidated financial statements for the fiscal periods ended March 31, 2007 and 2006, as fully described in Note 5 of this Amendment, management determined that the material weakness described above existed as of March 31, 2007 and has, as a result, effected material changes to the Company’s internal control over financial reporting subsequent to the period covered by this report. Management has implemented new policies requiring our internal accounting staff and management to receive ongoing training on accounting for mineral properties in accordance with generally accepted accounting principles in the United

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States and Industry Guide 7. Management believes these additional policies will provide additional and enhanced internal control over financial reporting and improve the ability of management to identify any potential errors prior to and during the Company’s consolidated financial statement close process and prevent recurrence of future errors of this nature.

PART II -- OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

Item 6. Exhibits

Exhibits. The following exhibits are included as part of this report:

Exhibit 31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf, thereunto duly authorized.

BEKEM METALS, INC.

Date: April 2, 2008	/s/ Yermek Kudabayev
	Yermek Kudabayev Chief Executive Officer

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