CLIFTON STAR RESOURCES INC.
FORM 51-102F1
MANAGEMENT DISCUSSION AND ANALYSIS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2010
The following discussion and analysis, prepared as of November 29, 2010, should be read together with the unaudited consolidated financial statements for the three month period ended September 30, 2010 and related notes attached thereto, which are prepared in accordance with Canadian generally accepted accounting principles. All amounts are stated in Canadian dollars unless otherwise indicated.
The reader should also refer to the annual audited financial statements for the years ended June 30, 2010 and 2009, and the Management Discussion and Analysis for those years.
Additional information related to the Company is available for view on the Company’s website atwww.cliftonstarresources.com and on SEDAR atwww.sedar.com.
Forward Looking Statements
Certain information included in this discussion may constitute forward-looking statements. Readers are cautioned not to put undue reliance on forward-looking statements. These statements relate to future events or the Company’s future performance, business prospects or opportunities. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These forward-looking statements include statements regarding the future price of gold, the timing and amount of estimated future production, costs of production, capital expenditures, the success of exploration activities, permitting time lines, currency fluctuations, the requirements of future capital, drill results and the estimation of mineral resources and reserves. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements contained into this report should not be unduly relied upon. These statements speak only as of the date of this report. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this report. Such statements are based on a number of assump tions which may prove to be incorrect, including, but not limited to, assumptions about:
•
general business and economic conditions;
•
the supply and demand for, deliveries of, and the level and volatility of prices of gold as well as petroleum products;
•
the availability of financing for the Company’s development of the Project on reasonable terms;
•
the ability to procure equipment and operating supplies in sufficient quantities and on a timely basis;
•
the ability to attract and retain skilled staff;
These forward-looking statements involve risks and uncertainties relating to, among other things, changes in commodity and, particularly, gold prices, access to skilled mining development personnel, results of exploration and development activities, uninsured risks, regulatory changes, defects in title, availability of materials and equipment, timeliness of government approvals, actual performance of facilities, equipment and processes relative to specifications and expectations and unanticipated environmental impacts on operations. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors hereinabove. Additional risk factors are described in more detail hereinafter.Investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not o ccur. The Company cautions that the foregoing list of important factors is not exhaustive. Investors and others who base themselves on the Company's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail.The forward-looking statements contained in this report are expressly qualified by this cautionary statement.
Description of Business
Clifton Star Resources Inc. was incorporated under the laws of British Columbia. The consolidated financial statements include the accounts of the Clifton Star Resources Inc. and its wholly owned subsidiary Duquesne Gold Mines Inc. (the “Company”). The Company is primarily engaged in the acquisition and exploration of mineral properties in Canada.
These consolidated financial statements have been prepared assuming the Company will continue on a going-concern basis. The Company has incurred losses since inception and the ability of the Company to continue as a going-concern depends upon its ability to develop profitable operations and to continue to raise adequate financing. Management is actively targeting sources of additional financing through alliances with financial, exploration and mining entities, or other business and financial transactions which would assure continuation of the Company’s operations and exploration programs. In order for the Company to meet its liabilities as they come due and to continue its operations, the Company is solely dependent upon its ability to generate such financing.
There can be no assurance that the Company will be able to continue to raise funds, in which case the Company may be unable to meet its obligations. Should the Company be unable to realize its assets and discharge its liabilities in the normal course of business, the net realizable value of its assets may be materially less than the amounts recorded in these consolidated financial statements.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Overall Performance
The Company incurred a net loss of $1,222,228 (2009 – $1,366,878) during the three month period ended September 30, 2010. The decreased loss is primarily attributed to less non-cash stock-based compensation expense of $1,011,089 (2009 - $1,240,973) being recognized. During the three month period ended September 30, 2010, the Company granted 1,750,000 (2009 – 450,000) stock options. The decreased stock-based compensation is the result of granting stock options that were subject to vesting provisions whereas they were fully vested on the grant date in the comparative period.
Management fees of $48,000 (2009 - $30,000) increased as a result of the Company entering into a three year management agreement on January 1, 2009 (amended October 1, 2009) with Harry Miller the Company’s President and Director. Pursuant to the amended management agreement, the Company agreed to pay Mr. Miller $180,000 per annum, which is to be paid in quarterly instalments. Company management decided that its President should be compensated, as the Company’s business, finance and exploration activities are growing rapidly. An additional $3,000 in management fees were paid for attendance at a Board of Directors meeting in Toronto and a meeting with its joint-venture partner, Osisko.
Professional fees of $45,610 (2009 – $17,172) in the three month period ended September 30, 2010, are higher than the comparative period. Legal fees of $7,878 (2009 - $8,925) and accounting fees of $7,560 (2009 - $8,247) are lower than the comparative period. Audit fees of $30,172 (2009 - $Nil) were incurred in the current period as a result of the auditor issuing an invoice sooner than in the comparative period. Professional fees are higher primarily as a result of the audit fees and defending the Company against the statement of claim from a former employee and a consultant.
Travel and telephone expenses of $38,493 (2009 - $15,670) are higher than the comparative period. The Company’s management and consultants increased their travel activities in the current period to promote the Company in the United Kingdom, attend meetings with its joint venture partner Osisko, travel to Toronto for a Board of Directors meeting and continue work on its defense against the statement of claim described in the contingency note.
Investor relations expenses of $30,370 (2009 - $16,600) are higher than the comparative period. During the current period the Company paid Proactive Investors USA for promotional work, participated in an e-Conference on Kitco, hosted a dinner meeting for investors in New York, advertised on Mineweb and sponsored the Korelin Economics Report. During the comparative period the Company paid Bay Street Connect $5,000 per month to conduct investor relations on behalf of the Company. The Company published 3-D models of some of its mineral properties on the website operated by Corebox Online Services during the current and comparative periods.
Consulting fees of $26,250 (2009 - $20,828) are higher than the comparative period primarily as a result of the Company requiring more time from its Chief Financial Officer. The Company also compensated its directors for attending meetings during the current period. During the comparative period the Company had a consulting agreement in effect with Limited Market Dealer.
During the three month period ended September 30, 2010, the Company earned $8,217 (2009 - $7,214) interest income which is attributed to cash held in term deposits.
At September 30, 2010, the Company had $12,866,491 (June 30, 2010 - $6,189,396) in cash. Working capital at September 30, 2010 was $12,701,287 (June 30, 2010 - $6,061,587). The Company’s financial position in the three month period ended September 30, 2010, improved significantly as a result of the exercise of stock options, agent’s options and warrants. The Company received $334,100 (2009 - $Nil) from the exercise of 128,500 (2009 – Nil) stock options, $895,994 (2009 - $Nil) from the exercise of 373,984 (2009 – Nil) agent’s options and $10,119,250 (2009 - $Nil) from the exercise of 3,508,499 (2009 – Nil) warrants in the three month period ended September 30, 2010.
The Company’s mineral property exploration activities of $Nil (2009 - $891,692) are lower than the comparative period as the Company cut-back on exploration when Osisko commenced with exploration activities to earn its 50% interest in the Duparquet project. Accounts payable at September 30, 2010 include $20,800 in non-interest bearing advances from Osisko.
On September 13, 2010, the Company paid $4,500,000 pursuant to the Beattie, Donchester and Dumico property option agreement.
Commitments
Management agreement
On January 1, 2009, the Company entered into a three year management agreement (amended October 1, 2009) with Harry Miller, the Company’s President and Director. Pursuant to the amended management agreement, the Company agreed to pay Mr. Miller $180,000 per annum which is to be paid in quarterly instalments. The Company has also agreed to compensate Mr. Miller approximately $780,000 in the event that the management agreement is terminated or there is a change in control of the Company.
Cat Lake property
The Company signed a mineral property option agreement on May 1, 2008 (amended July 22, 2008, November 24, 2008 and April 8, 2009) with 2588111 Manitoba Ltd. (“2588111”). The Cat Lake property is comprised of nine mining leases totaling 238 hectares in the Lac Dubonnet Mining District, which is approximately 193 kilometres northeast of Winnipeg, Manitoba.
Under terms of the option agreement, the Company must keep the property in good standing (currently in good standing until July 28, 2015) and incur minimum exploration expenditures of $33,000 (incurred) by July 28, 2010.
Central Duparquet
On December 15, 2008, the Company signed an option agreement whereby it may acquire a 100% interest in the Central Duparquet property. The property is comprised of 18 mineral claims totalling 293 hectares located in the Duparquet Township, Quebec. To earn its 100% interest, the Company paid $400,000 on January 13, 2009.
During the five year period following the date of execution of the agreement, the Company may sell, transfer or otherwise dispose of all or any portion of its interest in the property. A term of this disposition will be a payment to the optionor of shares of any company acquiring an interest in the property at a deemed value of $1,900,000 or $1,900,000 in cash.
On February 26, 2010, the Company entered into an agreement to acquire the 2% Net Smelter Return Royalty (“NSR”) from the optionor. As consideration for the acquisition of the NSR, the Company paid $155,000 and issued 10,000 common shares, valued at $57,400, to the optionor.
During the year ended June 30, 2010, the Company received $15,140 for Quebec Mining Exploration tax credits related to the Central Duparquet property. This amount was recorded as costs recovered for the Central Duparquet property.
Duquesne property
On June 20, 2010, the Company fulfilled all obligations under the option agreement and acquired a 100% interest in Duquesne
Pursuant to an option agreement dated September 20, 2006 (amended on May 14, 2007 and June 11, 2007), the Company issued 10,000 common shares valued at $18,500 to the optionor, paid $1,800,000 cash and incurred over $4,000,000 in exploration expenditures to acquire all of the issued shares of Duquesne Gold Mines Ltd. (“Duquesne”). Duquesne was a private Canadian mineral exploration company which owns fifty five mineral claims and one mining concession located in Destor Township, Quebec, which are known as the Duquesne Gold Project.
The optionor will retain a 3% Net Smelter Return Royalty (“NSR”) while the Company has the option to purchase from the optionor the 3% NSR in consideration for the sum of $1,000,000 for each 0.5% at any time for a total of $6,000,000.
During the year ended June 30, 2009, the Company acquired additional claims totalling 964 hectares known as the Duquesne Extension for $35,000. The Duquesne Extension adjoins the Duquesne property to the south and southwest. In addition, the Company paid $250,000 to acquire claims totalling 525 hectares known as the Lepine and Destor properties. These claims are contiguous to the northwest and east respectively of the Duquesne property. The optionor will retain a 2% Net Smelter Return Royalty.
Beattie, Donchester and Dumico properties
The Company signed three mineral property option agreements on May 1, 2008 (amended July 22, 2008, November 24, 2008 and April 8, 2009) with Beattie Gold Mines Ltd. ("Beattie”), 2699681 Canada Ltd. (“2699681”) and 2588111 Manitoba Ltd. (“2588111”) respectively with similar terms.
On October 26, 2009, the Company signed a Letter of Intent with the optionors. The Company renegotiated with the optionors to terminate the aforementioned mineral property option agreements and enter into new agreements. Before the new agreements were entered into, the Company paid $600,000 to Beattie, $300,000 to 2699681 and $600,000 to 2588111 under the old option agreements.
Beattie owns an underground mining concession. 2699681 owns, through its wholly owned subsidiary, Eldorado Gold Mines Inc., certain surface rights. 2588111 owns, through its wholly owned subsidiary, 173714 Canada Inc., certain mineral claims and mining concessions. All the mining rights, claims and concessions are located near the town of Duparquet, Quebec.
Terms of the new agreements are as follows:
i)
cash payment of $3,400,000 (paid) to Beattie, $1,700,000 (paid) to 2699681, and $3,400,000 (paid) to 2588111 which was due on December 1, 2009 was extended to June 1, 2010 and earned the Company 10% of the issued and outstanding shares of the optionors;
ii)
cash payment of $8,800,000 to Beattie, $4,400,000 to 2699681, and $8,800,000 to 2588111 due on December 1, 2012; and
iii)
cash payment of $12,000,000 to Beattie, $6,000,000 to 2699681, and $12,000,000 to 2588111 before or on December 1, 2017 will earn the Company the remaining 90% of the issued and outstanding shares of the optionors.
In the event of a change of control in the Company or an assignment of the mineral property option agreements prior to the expiry of the aforementioned options, the Company would be obligated to purchase all of the outstanding shares of the optionors as follows:
iv)
cash payment of $20,800,000 to Beattie if this event occurred after June 1, 2010 but prior to December 1, 2012, or $12,000,000 if this event occurs after December 1, 2012 but prior to December 1, 2017.
v)
cash payment of $10,400,000 to 2699681 if this event occurred after June 1, 2010 but prior to December 1, 2012, or $6,000,000 if this event occurs after December 1, 2012 but prior to December 1, 2017.
vi)
cash payment of $20,800,000 to 2588111 if this event occurred after June 1, 2010 but prior to December 1, 2012, or $12,000,000 if this event occurs after December 1, 2012 but prior to December 1, 2017.
The optionors will retain a 2% Net Smelter Royalty.
Property Option, Joint Venture Agreement and Commitment Letter
On December 10, 2009, the Company entered into a mineral property option and joint venture agreement (the “Agreement”) with Osisko Mining Corporation (“Osisko”) regarding a joint venture on the Duparquet project. The Duparquet project is comprised of the Central Duparquet, Duquesne, Beattie, Donchester and Dumico properties.
Terms of the agreement are as follows:
Osisko shall make contributions to the joint venture in the first year, which shall commence on January 1, 2010, of a minimum of $15,000,000. Thereafter, Osisko agrees:
•
To contribute $15,700,000 in earn-in payments to the joint venture in the second year, which shall commence on January 1, 2011;
•
To contribute $23,600,000 in earn-in payments to the joint venture in the third year, which shall commence on January 1, 2012; and
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To contribute $15,700,000 in earn-in payments to the joint venture in the fourth year, which shall commence on January 1, 2013.
By making such payments (a total of $70,000,000) Osisko shall earn a 50% interest in the joint venture over a period of four years. Osisko shall have the right to increase the rate of earn-in payments and accelerate the term of the option period to acquire the 50% interest under the joint venture. Earn-in payments shall be used by the joint venture to finance the activities of the joint venture.
Osisko will act as operator of the joint venture during the option period and thereafter so long as Osisko has a 50% or greater interest in the joint venture.
On December 10, 2009, Osisko also issued a commitment letter to provide the Company, financing of up to $22,500,000 for a period of 36 months under certain conditions.
(See Subsequent Events)
Other events and transactions
Stock-based compensation
During the three month period ended September 30, 2010, the Company granted 1,750,000 (2009 – 450,000) stock options. The total stock-based compensation calculated under the fair value method using the Black-Scholes option-pricing model was $3,716,663 (2009 - $640,995). The Company expensed $1,011,089 (2009 - $1,240,973) leaving an unamortized balance of $2,830,240 (2009 - $Nil) to be recognized during the next fiscal year.
Exercised stock options
During the three month period ended September 30, 2010, 128,500 stock options were exercised at $2.60 per share for total gross proceeds of $334,100. In relation to the exercise, $262,568 of contributed surplus was transferred into share capital.
Exercised agent’s options
During the three month period ended September 30, 2010, 373,984 agent’s options were exercised at prices from $2.31 to $2.45 per share for total gross proceeds of $895,994. In relation to the exercise, $584,376 of contributed surplus was transferred into share capital.
Exercised warrants
During the three month period ended September 30, 2010, 3,508,499 warrants were exercised at prices ranging from $2.70 to $2.95 per share for total gross proceeds of $10,119,250.
Expired warrants
On September 29, 2010, 4,333 warrants exercisable at $3.30 per share expired unexercised.
The following events occurred subsequent to September 30, 2010:
Share issuances
The following shares were issued subsequent to September 30, 2010 pursuant to exercise of options, agent’s options and warrants:
| |
Number of Shares |
Exercise Price |
Gross proceeds |
|
| | |
|
| |
November 2010 | 132,430 | $ 1.25 | $ 165,538 | Exercise of agent’s options |
November 2010 | 132,430 | 1.35 | 178,780 | Exercise of warrants |
November 2010 | 1,324,304 | 1.35 | 1,787,810 | Exercise of warrants |
November 2010 | 150,000 | 2.55 | 382,500 | Exercise of stock options |
November 2010 | 10,000 | 2.55 | 25,500 | Exercise of stock options |
Shareholders’ Rights Plan
On November 3, 2010, the Company announced that its Board of Directors has approved in principle the adoption of a shareholder rights plan agreement. The rights plan is being adopted to ensure the fair treatment of all of the Company’s shareholders in connection with any possible future takeover bids for the outstanding common shares of the Company. The rights plan will provide shareholders with adequate time to properly evaluate and assess a takeover bid without facing undue pressure or coercion. The rights plan is similar to the plans adopted by other Canadian companies.
The plan has not been adopted in response to, or in contemplation of, any specific proposal to acquire control of the Company. The rights plan also provides the board with additional time to consider any takeover bid and, if applicable, to explore alternative transactions in order to maximize shareholder value. The plan is not designed to prevent takeover bids that treat the Company’s shareholders fairly. Pursuant to the terms of the rights plan, any bids that meet certain criteria intended to protect the interest of all shareholders are deemed to be permitted bids. A permitted bid must be made by way of as takeover bid circular prepared in compliance with applicable securities law and, in addition to certain conditions, must remain open for 60 days. In the event a takeover bid does not meet the permitted bid requirements of the rights plan, the rights issued under the plan will entitle shareholders, other than any shareholder or sharehol ders involved in the takeover bid, to purchase additional common shares of the Company at a significant discount to the market price of the common shares at that time.
The rights plan is subject to approval by the TSX Venture Exchange and will be presented for ratification by the shareholders at the Company’s annual meeting. If ratified by the shareholders, the rights plan will have a term of three years. The rights plan is also subject to execution of definitive agreements with the Company’s transfer agent. The rights plan will be included in the management proxy circular that will be filed on SEDAR in the coming weeks and mailed to shareholders at that time.
Annual General Meeting
On November 3, 2010, the Company announced that it will hold its Annual General Meeting at 2:00 pm Pacific Standard Time on Monday, December 13, 2010 at Computershare which is located on the 3rd floor of 510 Burrard Street in Vancouver, British Columbia.
Amendment to Joint Venture Agreement
On November 12, 2010, Osisko Mining Corporation (“Osisko”) and the Company agreed to remove the Hunter mining concession from the December 10, 2009 joint venture agreement. Osisko has agreed to renounce, without compensation, to its exclusive and irrevocable option related to any rights in the Hunter mining concession granted under the joint venture agreement by the Company.
Private Placement
On November 23, 2010, the Company completed a non-brokered flow-through private placement of 182,000 flow-through shares at a price of $5.50 per share for proceeds of $1,001,000.
No finders’ fees or commissions were paid in conjunction with the private placement.
Results of Operations
The Company incurred a net loss of $1,222,228 (2009 – $1,366,878) during the three month period ended September 30, 2010. The decreased loss is primarily attributed to less non-cash stock-based compensation expense of $1,011,089 (2009 - $1,240,973) being recognized. During the three month period ended September 30, 2010, the Company granted 1,750,000 (2009 – 450,000) stock options. The decreased stock-based compensation is the result of granting stock options that were subject to vesting provisions whereas they were fully vested on the grant date in the comparative period.
OVERVIEW OF THE DUPARQUET PROJECT
Clifton Star and its Joint Venture partner (Osisko Mining Corporation) are advancing a large gold project (the “Duparquet Project”) that is located in a politically secure area of the world. The location in the province of Quebec is considered to be a major advantage when compared to the locations of other gold projects in many other jurisdictions, since the government of Quebec is mining-friendly, provides tax credits for exploration, has an extensive and experienced mining labour pool, as well as good infrastructure.
Osisko has the option to earn a 50% interest in the Duparquet Project by spending $70 million on exploration, and by advancing an additional $30 million to the project. Clifton Star has made a payment of $8.5 million to the underlying property owners, with additional payments not required until the end of 2012.
The Porcupine Destor Fault, or associated faults, pass through the Duparquet property, but this area has been relatively unexplored in the past. On the Ontario side of the Quebec-Ontario border, over 100 million ounces of gold have been mined, while only a fraction of this amount has been mined on the Quebec side where Duparquet is located.
A prior NI 43-101 technical report (completed in early September 2009) showed a resource of approximately 2.7 million ounces (in all categories) for the Beattie and Donchester portion of the Duparquet property, utilizing drilling data up to August of 2009. Approximately 2.1 million ounces of this total was classified as open-pit potential, utilizing a cut-off grade of one gram of gold per tonne. In addition to the foregoing, an NI 43-101 technical report on the Duquesne (March 2009) property established a resource of 453,000 ounces (at a cut-off grade of 2.4 grams of gold per tonne). An October 2008 report (not NI 43-101 compliant) established a resource of 285,000 ounces for the Beattie tailings deposit. A historical (not NI 43-101 compliant) open-pit potential resource of 94,000 ounces (at a 3 g/t cut-off) was estimated for the Central Duparquet property.
Since the cut-off date for the information utilized in the technical report, Clifton Star has drilled an additional 25,000 meters, and its joint venture partner has drilled approximately 123,000 meters. The results from this subsequent drilling will be combined with prior results to provide the basis for an updated NI 43-101 technical report.
HISTORY
Historically, there were several operating gold mines on the Duparquet property, as well as a processing facility on the Beattie property. Approximately 1,117,000 ounces of gold were produced from the Beattie Mine, 167,000 from the Donchester, and 67,000 from the Duquesne. These prior underground mines only focused on the high-grade narrower sections, while the current objective is to delineate open-pit deposits, as well as to re-evaluate underground targets – both of which have become much more attractive opportunities at the current gold price.
Over the period 1987 to 2007, 125 drill holes (18,471 meters) were completed. The drill programs over the past three years consisted of the following:
•
2008: 212 diamond drill holes, consisting of 72,152 meters
•
2009: 183 diamond drill holes, consisting of 56,774 meters
•
2010: 383 diamond drill holes, consisting of 122,803 meters
Note that Osisko drilled all of the 2010 holes (on behalf of the Clifton Star / Osisko Joint Venture); and by the end of 2010 it is expected to have incurred exploration expenditures of at least $15 million to keep its option in good standing. Of the 383 holes drilled in 2010, 141 were drilled (total of just over 44,000 metres) in the quarter ended September 30, 2010.
HIGHLIGHTS OF DRILLING PROGRAMS PRIOR TO 2010
Highlights of the drilling programs prior to 2010 include the following:
Hole | Intersections | Value g/t Au | Easting |
| | | | |
Beattie | | | |
B08-01 | 238.0 | 1.82 | 631787E |
B08-08 | 20.5 | 4.07 | 630050E |
B08-22 | 121.2 | 1.44 | 630733E |
B08-45 | 95.3 | 1.87 | 630441E |
B08-83 | 100.2 | 1.18 | 630104E |
B09-69 | 73.5 | 1.83 | 630036E |
B09-72 | 99.5 | 1.95 | 630801E |
B09-76 | 103.5 | 1.91 | 630828E |
B09-83 | 88.5 | 2.00 | 629999E |
B09-92 | 119.4 | 1.50 | 630923E |
B09-94 | 114.0 | 1.57 | 630922E |
| | | | |
Donchester | | | |
D08-01 | 242.5 | 1.72 | 631618E |
D08-07 | 62.2 | 2.01 | 631705E |
D08-37 | 57.7 | 3.42 | 632132E |
D08-38 | 56.0 | 1.80 | 632179E |
D08-40 | 31.3 | 1.71 | 631732E |
D09-01B | 215.1 | 1.32 | 631732E |
D09-38 | 19.7 | 2.40 | 632179E |
D09-40 | 31.3 | 1.71 | 632224E |
| | | | |
Duquesne | | | |
DQ07-21 | 5.3 | 13.86 | 644683E |
DQ08-23 | 13.4 | 5.60 | 644630E |
& | 5.3 | 9.45 | |
DQ08-27 | 14.3 | 2.92 | 644736E |
DQ08-28 | 11.3 | 5.31 | 644736E |
DQ08-50 | 3.2 | 127.5 | 644269E |
DQ08-51 | 5.5 | 6.76 | 644269E |
DQ09-09 | 17.0 | 5.31 | 642111E |
| | | | |
Dumico | | | |
DUM08-01 | 7.0 | 9.55 | 634104E |
DUM08-04 | 14.8 | 2.76 | 634172E |
DUM08-06 | 4.3 | 7.86 | 634182E |
HIGHLIGHTS OF THE 2010 DRILLING PROGRAM
Highlights of the 2010 drilling program (none of these results have been included in the prior NI 43-101 technical report) include the following. However, it should be emphasized that additional logging and assaying is ongoing and we are waiting for assay results from 184 drill holes.
Hole | Intersections | Value g/t Au | Easting |
| | | | |
Beattie/Donchester | | | |
BD10-117 | 108.5 | 4.03 | 630100E |
BD10-138 | 58.2 | 1.12 | 630700E |
BD10-167 | 38.0 | 1.51 | 630600E |
BD10-209 | 27.0 | 3.38 | 630200E |
BD10-210 | 25.5 | 3.37 | 630100E |
BD10-216 | 42.8 | 1.81 | 631100E |
BD10-228 | 42.0 | 3.78 | 629900E |
BD10-242 | 35.9 | 2.11 | 630400E |
BD10-245 | 70.5 | 1.32 | 630300E |
BD10-263 | 100.0 | 1.66 | 630200E |
BD10-264 | 177.0 | 1.46 | 630200E |
BD10-265 | 88.0 | 1.90 | 630200E |
BD10-267 | 49.3 | 2.05 | 630800E |
BD10-276 | 25.5 | 1.91 | 630400E |
BD10-282 | 70.5 | 1.94 | 630200E |
BD10-284 | 7.5 | 69.18 | 630200E |
BD10-286 | 73.5 | 1.70 | 630100E |
BD10-289 | 32.4 | 2.14 | 630300E |
BD10-298 | 53.5 | 1.67 | 630400E |
BD10-304 | 42.0 | 1.76 | 630200E |
BD10-306 | 40.5 | 1.76 | 630400E |
| | | | |
Duquesne | | | |
DQ10-26 | 3.0 | 14.86 | 642225E |
DQ10-41 | 6.80 | 2.44 | 642575E |
DQ10-46 | 28.6 | 1.50 | 645158E |
DQ10-52 | 21.0 | 3.96 | 645451E |
DQ10-61 | 15.2 | 2.71 | 645607E |
DQ10-63 | 6.4 | 4.45 | 645860E |
DQ10-76 | 13.0 | 4.93 | 645753E |
The results of all of the 2010 drilling, as well as the results of drilling from August 2009 to the end of 2009, will be incorporated into an updated NI 43-101 technical report to be completed sometime in the second quarter of calendar 2011.
PLANNED EXPLORATION PROGRAM
The core from the drilling programs is expected to be completely logged by the end of 2010, with 3D modeling continuing into 2011. Part of the 3D modeling is to incorporate historical underground maps and data. Once the 3D modeling is complete; both open pit and underground potential will be evaluated.
Sections on the Beattie property, with 50 meter spacings (vertically and horizontally), are being plotted using all of the drill hole information available, and are anticipated to be completed in the near future, after which they will be incorporated into a 3D model.
Future drilling of the syenite porphyry structure is expected to continue eastward across the Beattie-Donchester-Central Duparquet properties. In addition to the extended drilling to add to resources, detailed drilling to convert inferred resources to indicated or measured resources will be carried out.
Extended sampling (assaying portions of the drill core extending beyond the intersections that were assayed from the prior drill core) of drill core from the 2008 and 2009 exploration program is being undertaken, and extended sampling of available core from prior years is planned.
The foregoing, along with the results of ongoing metallurgical testing, will be utilized as inputs for preliminary economic evaluations of potential open-pit and underground mining operations. Preliminary metallurgical testing to date has indicated reasonable gold recoveries with commonly utilized treatment processes.
OTHER PROPERTIES
The other properties of Clifton Star are the Hunter property (to the north of, but not contiguous to, the Duparquet property), and the Cat Lake property, located in eastern Manitoba (see Subsequent Events).
On the Hunter property, one hole of 150 meters was drilled immediately east of the Hunter Shaft. The hole cored into copper-bearing sheared-rhyolites, and ended in zinc-bearing intermediate tuffs. The most significant values were over 2.0% zinc, with low copper and silver values. Previous drilling (since 1996) was carried out to locate copper-bearing zones on the west side of the Hunter Shaft; and three continuous copper-bearing zones were encountered during these programs; all associated with the contacts between rhyolites and intermediate tuffs. A drilling program by Clifton Star is expected to commence in January 2011.
On the Cat Lake property, six holes were drilled into the main copper-nickel zone, which is associated with mineralized gabbros. Significant values of copper-nickel, with low platinum-palladium values, were encountered with widths up to 20 metres, and consistent with historical values. This is the same zone encountered by Mustang Minerals on the west and east side of the Cat Lake claims. Mustang Minerals generated an updated 43-101 mineral resource estimate on their property, and plans to build a mill in the area to process their resources.
Summary of Quarterly Results
For the Quarters Ended
| |
September 30, 2010 |
June 30, 2010 |
March 31, 2010 |
December 31, 2009 |
| | | | | |
Total assets | $43,848,210 | $32,694,961 | $26,937,526 | $23,920,347 |
Working capital | 12,701,287 | 6,061,587 | 4,351,371 | 173,239 |
Shareholders’ equity | 41,445,617 | 30,347,412 | 24,789,363 | 20,456,421 |
Income | 6,503 | 6,503 | 853 | - |
Net loss | (1,222,228) | (145,615) | (7,108,205) | (941,649) |
Earnings (loss) per share | (0.04) | (0.01) | (0.28) | (0.04) |
| | | | | |
For the Quarters Ended
| |
September 30, 2009 |
June 30, 2009 |
March 31, 2009 |
December 31, 2008 |
| | | | | |
Total assets | $21,722,793 | $22,049,638 | $20,520,185 | $21,098,107 |
Working capital | 1,079,763 | 2,097,170 | 5,070,049 | 7,939,515 |
Shareholders’ equity | 19,243,744 | 19,369,649 | 20,297,094 | 20,481,979 |
Income | 7,214 | 16,298 | 44,819 | 47,941 |
Net Income (loss) | (1,366,878) | (140,797) | (531,060) | (574,558) |
Earnings (loss) per share | (0.06) | (0.01) | (0.02) | (0.03) |
| | | | | |
Significant changes in key financial data from 2009 to 2010 can be attributed to $4,284,470 received from exercised stock options, $1,293,689 received from the exercise of agent’s options, $17,890,125 received from the exercise of warrants, recognition of $11,481,543 in stock-based compensation, the issuance of common shares for private placements totaling gross proceeds of $3,155,376 and the commencement of exploration programs on the Beattie, Cat Lake, Central Duparquet, Donchester, Dumico and Duquesne properties. During the year ended June 30, 2010, the company recovered $756,986 for Quebec Mining Exploration tax credits. The Company recognized future income tax recoveries of $300,999 in 2010 and $1,068,771 in 2009.
The Company has not paid any dividends on its common shares. The Company has no present intention of paying dividends on its common shares, as it anticipates that all available funds will be invested to finance the growth of its business.
Liquidity and Capital Resources
These consolidated financial statements have been prepared on a going concern basis which assumes that the Company will be able realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The continuing operations of the Company are dependent upon its ability to continue to raise adequate financing and to commence profitable operations in the future.
| September 30, 2010 | June 30, 2010 |
| | | |
Working capital | $12,701,287 | $6,061,587 |
Deficit | (16,005,825) | (14,783,597) |
Net cash used in operating activities during the three month period ended September 30, 2010 was $172,249 (2009 – $196,029). The cash used in operating activities consists primarily of operating costs and the change in non-cash working capital items.
Net cash provided by financing activities during three month period ended September 30, 2010 was $11,349,344 (2009 - $Nil). During the current period the Company received $10,119,250 from the exercise of 3,508,499 warrants. An additional $334,100 was received from the exercise of 128,500 stock options. The exercise of 373,984 agent’s options brought the Company $895,994 during the current period.
Net cash used in investing activities during the three month period ended September 30, 2010 was $4,500,000 (2009 - $1,077,226). The Company paid $4,500,000 (2009 - $Nil) and $Nil (2009 - $1,077,226) cash for mineral property acquisition and deferred exploration costs respectively.
There can be no assurance that the Company will be able to obtain adequate financing in the future or that the terms of such financing will be favourable. If adequate financing is not available when required, the Company may be required to delay, scale back or eliminate various programs and may be unable to continue in operation. The Company may seek such additional financing through debt or equity offerings, but there can be no assurance that such financing will be available on terms acceptable to the Company or at all. Any equity offering will result in dilution to the ownership interests of the Company’s shareholders and may result in dilution to the value of such interests.
The Company’s revenues, if any, are expected to be in large part derived from the mining and sale of precious minerals or base metals or interests related thereto. The economics of developing and producing mineral properties are affected by many factors including the cost of operations, variations in the grade of ore mined and the prices of minerals and metals. Depending on the foregoing, the Company may determine that it is impractical to continue commercial production. Prices, which have fluctuated significantly, are affected by many factors beyond the Company’s control including anticipated changes in international investment patterns and monetary systems, economic growth rates and political developments. The supply of precious minerals or base metals is related to the economics of new mine production and operating costs for existing producers, as well as the demand from financial institutions and consumers. If the market price fa lls below the Company’s full production costs and remains at such levels for any sustained period of time, the Company will experience losses and may decide to discontinue operations or other development of a project or mining at one or more of its properties.
The Company has sufficient funds to cover anticipated administrative expenses throughout the year.
It will continue to focus its exploration and development efforts on the Beattie, Central Duparquet, Donchester, Dumico and Duquesne properties with its joint venture partner Osisko.
Related Party Transactions
During the three month period ended September 30, 2010, the Company entered into the following transactions with related parties:
a)
Paid or accrued $Nil (2009 - $24,463) in geological consulting fees to F.T. Archibald Consulting which is controlled by Fred Archibald, a director of the Company.
b)
Paid or accrued $Nil (2009 - $9,261) in geological consulting fees to Dean Rogers, a former director of the Company.
c)
Paid or accrued $15,750 (2009 - $8,328) in consulting fees to Ian Beardmore, Chief Financial Officer of the Company.
d)
Paid or accrued $1,500 (2009 - $Nil) in consulting fees to Nick Segounis, a director of the Company.
e)
Paid or accrued $3,000 (2009 - $Nil) in consulting fees to Ross Glanville, a director of the Company.
f)
Paid or accrued $1,500 (2009 - $Nil) in consulting fees to Philip Nolan, a director of the Company.
g)
Paid or accrued $1,500 (2009 - $Nil) in consulting fees to Fred Archibald, a director of the Company.
h)
Paid or accrued $11,275 (2009 - $Nil; 2008 - $Nil) in consulting fees and $6,864 (2009 - $Nil; 2008 - $Nil) to Alan Archibald, a brother of Fred Archibald who is a director of the Company.
i)
Paid or accrued $48,000 (2009 - $30,000) in management fees to Harry Miller, President and Director of the Company.
Included in accounts payable as at September 30, 2010 are $864 (2009 - $Nil) for an overpayment on the exercise of stock options and $18,455 (2009 - $Nil) for legal fees accrued to Lavery, de Billy L.L.P., a partner of which is a director of the Company.
These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Recent Accounting Pronouncements
Future changes in accounting policies
Business combinations
In January 2009, the CICA issued Handbook Sections 1582 –Business Combinations (“Section 1582”), 1601 –Consolidated Financial Statements (“Section 1601”) and 1602 –Non-controlling Interests (“Section 1602”) which replace CICA Handbook Section 1581 –Business Combinationsand 1600 –Consolidated Financial Statements. Section 1582 establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under International Financial Reporting Standards (“IFRS”). Section 1582 is applicable for the Company’s business combinations with acquisition dates on or after January 1, 2011. Early adoption of this Section is permitted. Section 1601 together with Section 1602 establishes standards for the preparation of consolidated financial statements. Early adoption of this Section is permit ted. If the Company chooses to early adopt any one of these Sections, the other two sections must also be adopted at the same time.
International Financial Reporting Standards Changeover Plan and Assessment
In February 2008, the Accounting Standards Board (“AcSB”) confirmed that International Financial Reporting Standards (“IFRS”) will replace Canadian GAAP for public accountable enterprises for fiscal years beginning on or after January 1, 2011, including comparative figures for the prior year.
The Company will transition to IFRS effective January 1, 2011 and plans to issue its first interim financial statements under IFRS for the three month period ending September 30, 2011 and a complete set of financial statements under IFRS for the year ending June 30, 2012.
A changeover plan is being established to convert to the new standards within the allotted timeline and is expected to consist of the following three key phases:
1. Phase 1 – Assess the impact;
2. Phase 2 - Design; and
3. Phase 3 - Implementation
Phase one will carry out a detailed assessment of the impact of the conversion to IFRS.
Phase two will build the tools required for the conversion based on management’s decisions about accounting options and the related disclosures.
Phase three will roll-out the designed changes. The changes will include the development of the new accounting policies and consolidation templates, the preparation of the IFRS financial statements, and related note disclosure.
The Company is going to consult external advisors to assist in the development and execution of a changeover plan to complete the transition to IFRS.
The key elements of the Company’s changeover plan will include the impact of IFRS on the following items:
•Accounting policies
•Property, Plant and Equipment (“PP&E”)
IFRS and Canadian GAAP contain the same basic principles of accounting for property, plant and equipment; however, there are some differences between them. For example, capitalization of directly attributable costs in accordance with IAS 16, Property, Plant and Equipment (“IAS 16”) may require measurement of an item of property, plant and equipment upon initial recognition to include or exclude certain previously recognized amounts under Canadian GAAP. Specifically, there may be changes in accounting for:
•The amount of capitalized overheads;
•The capitalization of major inspections that were previously expensed under Canadian GAAP;
•The capitalization of depreciation for which the future economic benefits of that asset are absorbed in the production of other assets; and
•The capitalization of borrowing costs in accordance with IAS 23, borrowing Costs.
Management does not expect this change to have an impact on the Company’s financial position.
•Impairment of Assets
IAS 36, Impairment of Assets (“IAS 36”) uses a one-step approach for testing and measuring asset impairments, with asset carrying values being compared to the higher of value in use and fair value less costs to sell. Value in use is defined as being equal to the present value of future cash flows expected to be derived from the asset in its current state. In the absence of an active market, fair value less costs to sell may also be determined using discount cash flows. The use of discount cash flows under IFRS to test and measure asset impairment differs from Canadian GAAP where undiscounted future cash flows are used to compare against the asset’s carrying value to determine if impairment exists. This may result in more frequent write-downs in the carrying value of assets under IFRS since asset carrying values that were previously supported under Canadian GAAP based on undiscounted cash flows may not be supported on discounted cash flow basis under IFRS. Ho wever, under IAS 36, previous impairment losses may be reversed where circumstances change such that the impairment has reduced. This also differs from Canadian GAAP, which prohibits the reversal of previously recognized impairment losses. Management does not expect this change to have an impact on the Company’s financial position.
•Income Taxes
IAS 12, Income Taxes (“IAS 12”) prescribes that an entity account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Therefore, where transactions and other events are recognized in earnings, the recognition of deferred tax assets or liabilities which arise from those transactions should also be recorded in earnings. For transactions that are recognized outside of the statement of earnings, either in other comprehensive income or directly in equity, any related tax effects should also be recognized outside of the statement of earnings.
The most significant impact of IAS 12 on the Company will be derived directly from the accounting policy decisions made under IAS 16. Management does not expect this change to have an impact on the Company’s financial position.
•First-Time Adoption of International Financial Reporting Standards
Under IFRS 1, First-Time Adoption of International Financial Reporting Standards (“IFRS 1”) provides the framework for the first time adoption of IFRS and specifies that an entity shall apply the principles under IFRS retrospectively. All adjustments that arise on retrospective conversion to IFRS from other GAAP should be recognized directly in retained earnings. Certain optional exemptions and mandatory exceptions to retrospective application are provided for under IFRS 1.
Under IFRS 1, an entity has the option to retroactively apply IFRS 3 to all business combinations or may elect to apply the standard prospectively only to those business combinations that occur after the date of transition. The CICA Handbook Section 1582, Business Combinations and Section 1602, Non-Controlling Interests are substantially aligned with the accounting for business combinations and non-controlling interests under IFRS 3. Management does not expect this change to have an impact on the Company’s financial position.
Financial Instruments and Other Instruments
The Company’s financial instruments consist of cash, receivables and accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying values, unless otherwise noted.
(a)
Interest rate risk
The Company’s cash balance includes $12,420,000 in term deposits. The term deposits earn interest at 0.25% to 1.10% per annum. The Company does not have any interest bearing debt.
(b)
Foreign currency risk
The Company has no foreign assets and liabilities and accordingly is not exposed to significant foreign currency risk.
(c)
Price risk
The Company is exposed to price risk with respect to commodity and equity prices. Equity price risk is defined as the potential adverse impact on the Company’s earnings due to movements in individual equity prices or general movements in the level of the stock market. Commodity price risk is defined as the potential adverse impact on earnings and economic value due to commodity price movements and volatilities. The Company closely monitors commodity prices of gold and other precious metals, individual equity movements, and the stock market to determine the appropriate course of action to be taken by the Company.
Contingency
On September 19, 2007, the Company received a statement of claim from a former employee and a consultant. The compensation sought in the claim is as follows:
i)
An order requiring a director and a former director of the Company to sell 2,000,000 shares of the Company at $0.38 per share and an additional 1,000,000 shares at $0.65 per share to one of the plaintiffs for their claim that the Company breached a contract related to the Duquesne Gold Project;
ii)
In the alternative, damages for breach of contract in the sum of $5,520,000 being the amount that the plaintiffs would have realized had he been allowed to exercise this option to purchase 2,000,000 shares at $0.38 and $1,000,000 shares at $0.65 and he disposed of his shares at the current market price of $2.31;
iii)
In the alternative, damages in the sum of $5,520,000 for the tort of conversion;
iv)
An order requiring the delivery of 436,500 options exercisable at $0.20 per share to be granted to the former employee;
v)
In the alternative, damages for wrongful dismissal in the sum of $1,008,315 being the current market value of 436,500 shares of the Company;
vi)
The former employee is also seeking damages of $20,000 claiming wrongful dismissal by the Company;
vii)
Pre-judgement and post-judgement interest and the plaintiffs’ costs of this action.
The action is still only at the discovery stage and it is therefore premature to evaluate the likelihood of the outcome of the claim. The Company doesn’t believe the claims are valid and currently is defending its position.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as at September 30, 2010.
Critical Accounting Policies
The financial statements have been prepared in accordance with accounting principles generally accepted in Canada and form the basis for the following discussion and analysis of critical accounting policies and estimates. The Company makes estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities during the course of preparing these financial statements. On a regular basis, the Company evaluates estimates and assumptions including those related to the recognition of stock-based compensation.
Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable. These estimates form the basis of judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
Additional Disclosure for Venture Issuers Without Significant Revenue
As of September 30, 2010, the Company has incurred losses and accumulated a $16,005,825 deficit. The Company's primary focus for the foreseeable future will be on exploring and developing the Duparquet Project with its joint venture partner Osisko.
Additional disclosure concerning the Company’s mineral properties and deferred exploration costs is provided in Note 5 of the Company’s unaudited consolidated financial statements for the three month period ended September 30, 2010 which are available on its SEDAR page accessed throughwww.sedar.com.
Outstanding Share Data
The following table summarizes the outstanding share capital as at date of this Management Discussion and Analysis:
| | Number of shares issued or issuable |
| | | | |
Common shares | | | 34,514,345 |
Agent’s options | | | 73,170 |
Stock options | | | 4,082,000 |
Warrants | | | 731,705 |
| | | | |
Risks
Natural resources exploration, development, production and processing involve a number of business risks, some of which are beyond the Company's control. These can be categorized as operational, financial, regulatory, credit, liquidity and market risks.
·
Operational risks include finding and developing reserves economically, marketing production and services, product deliverability uncertainties, changing governmental law and regulation, hiring and retaining skilled employees and contractors and conducting operations in a cost effective and safe manner. The Company continuously monitors and responds to changes in these factors and adheres to all regulations governing its operations. Insurance may be maintained at levels consistent with prudent industry practices to minimize risks, but the Company is not fully insured against all risks, nor are all such risks insurable.
·
Financial risks include fluctuations in commodity prices, interest rates and the Canada / United States exchange rate, all of which are beyond the Company's control.
·
Regulatory risks include the possible delays in getting regulatory approval to the transactions that the Board of Directors believe to be in the best interest of the Company, and include increased fees for filings, the introduction of ever more complex reporting requirements the cost of which the Company must meet in order to maintain its exchange listing.
•
Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its payment obligations. The Company’s credit risk is limited to the carrying amount on the balance sheet and arises from the Company’s cash and receivables. The Company’s cash is held through a major bank in Canada, which is a high credit-quality financial institution. Receivables are mainly interest receivable from the bank and an amount due from a vendor for an overpayment.
•
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As at September 30, 2010, the Company had current assets of $12,914,880 to settle current liabilities of $213,593. All of the Company’s accounts payable and accrued liabilities have contractual maturities of 30 days or are due on demand and are subject to normal trade terms.
•
Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates, and commodity and equity prices.
Outlook
The Company's primary focus for the foreseeable future will be on exploring and developing the Duparquet Project with its joint venture partner Osisko.
Other Information
Additional information related to the Company is available for view on the Company’s websitewww.cliftonstarresources.com and on SEDAR atwww.sedar.com.
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