CLIFTON STAR RESOURCES INC.
FORM 51-102F1
INTERIM MANAGEMENT DISCUSSION AND ANALYSIS
SIX MONTH PERIOD ENDED DECEMBER 31, 2010
The following discussion and analysis, prepared as of February 24, 2011, should be read together with the unaudited consolidated financial statements for the six month period ended December 31, 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 at www.cliftonstarresources.com and on SEDAR at www.sedar.com.
Forward Looking Statements
Clifton cautions readers regarding forward looking statements found in this document and in any other statement made by, or on the behalf of the Company. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions, which are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond Clifton’s control and many of which, regarding future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by or on the Company’s behalf. All factors should be considered carefully and readers should not place undue reliance on Clifton’s forward-looking statements . Forward-looking statements are made based on management’s beliefs, estimates and opinions on the date the statements are made. Examples of such forward-looking statements within this document include statements relating to: our objectives, our estimates regarding capital requirements, our financial position, the regulatory framework, market competition, government policy and regulations, our expectations with respect to expenses, and statements with respect to any or all of the Company’s properties.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company and/or its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although Clifton has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking statements contained in this Management Discussion and Analysis are made as of the date of this Management Discussion and Analysis based on the opinions and estimates of management.
Forward-looking statements reflect Clifton’s current views with respect to expectations, beliefs, assumptions, estimates and forecasts about our business and the industry and markets in which we operate. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict.
Assumptions underlying our expectations regarding forward-looking statements or information contained in this Management Discussion and Analysis include, among others: our ability to negotiate commercially acceptable financial terms for any potential future financing(s), our ability to comply with applicable governmental regulations and standards, our success in implementing our strategies and achieving our business objectives, our ability to raise sufficient funds from equity financings in future to support our operations, and general business and economic conditions. The foregoing list of assumptions is not exhaustive.
Persons reading this Management Discussion and Analysis are cautioned that forward-looking statements or information are only predictions, and that our actual future results or performance are subject to certain risks and uncertainties including:
•
uncertainty in the Company’s ability to fund the development of its mineral properties or the completion of further exploration programs;
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uncertainty as to actual capital costs, operating costs, production and economic returns, and uncertainty that the Company’s exploration and development activities will result in profitable mining operations;
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risks related to environmental regulation and liability;
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political and regulatory risks associated with mining and exploration;
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changes in the market price of metals and/or minerals, which in the past fluctuated widely and which could affect the Company’s operations and financial condition and its ability to raise additional financing;
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assumptions related to future price of metals;
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risks related to project cost overruns or unanticipated costs and expenses;
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mining and development risks, including risks related to accidents, equipment breakdowns, labour disputes or other unanticipated difficulties with or interruptions in production;
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the potential for delays in carrying out and completing exploration or development activities;
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uncertainty in the Company’s ability to obtain and maintain certain permits necessary to its current and anticipated operations;
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uncertainty relating to the Company’s ability to attract and retain qualified management to meet the needs of its anticipated growth, and risks relating to its ability to manage growth effectively;
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risks related to the Company’s mineral properties being subject to prior unregistered agreements, transfers or claims and other defects in title;
•
risks related to the Company’s history of financial losses, which may continue in the future;
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risks related to increased competition that could adversely affect the Company’s ability to attract necessary capital funding or acquire suitable properties for mineral exploration in the future;
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risks related to Company’s officers and directors becoming associated with other natural resource companies, which may give rise to conflicts of interest;
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dependence on general economic, market or business conditions;
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uncertainty related to additional financing requirements and access to capital;
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changes in business strategies; and
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changes in laws and regulations.
If one or more of these risks or uncertainties materializes, or if assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this Management Discussion and Analysis. These forward looking statements are made as of the date of this Management Discussion and Analysis or, in the case of documents incorporated by reference herein, as of the date of such documents, and we do not intend, and do not assume any obligation, to update these forward looking statements, except as may be required by applicable law. We cannot assure you that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and, accordingly, investors are cautioned not to put undue reliance on forward-looking statements due to their inherent uncertainty.
Overall Performance
Overview of the Duparquet Project
Clifton Star and Osisko Mining Corporation (“Osisko”), its joint venture partner, 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. During 2010, Osisko spent a total of $15.4 million, and thereby met their minimum requirement of $15 million of expenditures in 2010 in order to maintain their right to earn 50%.
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.
History of Operations and Drilling
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 (from mill feed of about 10.6 million tons grading 0.126 ounces of gold per ton) were produced from the Beattie Mine, 167,000 ounces from the Donchester, and 67,000 ounces 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:
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2008: 212 diamond drill holes, consisting of 72,152 meters
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2009: 183 diamond drill holes, consisting of 56,774 meters
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2010: 383 diamond drill holes, consisting of 122,803 meters
The 2010 drilling consisted of 219 holes at Beattie (69,806 meters at an average length per holes of 319 meters), 79 holes at Donchester (27,074 meters at an average length per hole of 343 meters), 16 holes at Central Duparquet (5,648 meters at an average length per hole of 353 meters), and 69 holes at Duquesne (20,275 meters at an average length per hole of 294 meters).
NI 43-101 Resources
The current NI 43-101 mineral resource estimates are as set out below for each of the properties that make up the Duparquet Project. The following data come from various reports that have been prepared by P. Bevan, P. Eng. (October 2009 and February 2011), N. Rioux, P.Geo OGQ (2010), P. Lochon, P.Eng. for Forbex Mining Resources Inc. (March of 1989, and updated 1990 by Geospex Ltd.) and V. Fillion P.Geo OGQ (November 2009). All these qualified persons are independent within the meaning of NI 43-101.
Beattie Mine Property
Tonnes | Grade | grams Au | oz Au | Category | Report |
| | | | | | |
22,501,754 | 2.15 | 48,348,125 | 1,544,402 | indicated | P. Bevan, Feb. 2011 |
14,157,500 | 2.04 | 28,948,007 | 930,684 | inferred | 0.5g/t cutoff |
Donchester Mine Property
Tonnes | Grade | g.Au | oz Au | Category | Report |
| | | | | | |
582,940 | 3.72 | 2,168,024 | 69,702 | indicated | P. Bevan, Oct. 2009 |
11,544,942 | 2.78 | 32,128,022 | 1,032,922 | inferred | 1.0 g/t cutoff |
Duquesne Mine Property
Tonnes | Grade | g.Au | oz Au | Category | Report |
| | | | | | |
1,859,200 | 3.33 | 6,191,136 | 199,161 | meas.+indic. | N.Rioux, 2010 |
1,563,100 | 5.58 | 8,722,098 | 280,643 | inferred | 3.0 g/t cutoff |
Central Duparquet Mine Property
Tonnes | Grade | g.Au | oz Au | Category | Report |
| | | | | | |
574,196 | 5.10 | 2,928,400 | 94,152 | measured | Geospex Ltd. 1990 |
1,072,413 | 2.91 | 3,122,196 | 100,379 | indicated | 1.0 g/t cutoff |
283,318 | 2.67 | 755,203 | 24,280 | inferred | |
Beattie Tailings
Tonnes | Grade | g.Au | oz Au | Category | Report |
| | | | | | |
53,760 | 1.01 | 54,729 | 1,739 | measured | V. Fillion, Nov. 2009 |
4,703,520 | 0.75 | 3,555,685 | 112,961 | indicated | 0.3 g/t Au cutoff |
2,913,600 | 0.72 | 2,114,469 | 67,400 | inferred | |
Planned 2011 Exploration Program on the Duparquet Project
The 3D modeling is ongoing, and will incorporate the results of the 2010 drilling by the Joint Venture, previous drilling by Clifton Star and others, as well as information from historical underground maps. Once the 3D modeling is complete; updated NI 43-101 resource calculations will be prepared.
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 is expected be carried out in 2011.
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 good gold recoveries with commonly utilized treatment processes.
Exploration Properties and Commitments
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 payments of $3,400,000 (paid) to Beattie, $1,700,000 (paid) to 2699681, and $3,400,000 (paid) to 2588111 which were 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 payments 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 payments 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:
i)
cash payments 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.
ii)
cash payments 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.
(iii)
cash payments 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 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, in order to maintain its right to earn a 50% interest, Osisko agrees:
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To contribute $15,700,000 in earn-in payments to the joint venture in the second year, which shall commence on January 1, 2011;
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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.
Amendment to Joint Venture Agreement
On November 12, 2010, 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.
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.
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.
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.
Hunter property
Clifton Star currently has the right to earn a 100% interest in the Hunter property after Osisko agreed to allow this property to be excluded from the Osisko/Clifton joint venture.
Summary of 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.
On the Hunter property, one hole of 150 meters was drilled in 2010 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. In 2011, four holes have been drilled on the property to date (approximately 1500 meters), and additional holes are planned, depending upon assay results, which are expected to be available in March.
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.
Fred T. Archibald, Director of Clifton Star Resources Inc., a member of the Association of Professional Geoscientists of Ontario (APGO) and Quebec (OGQ) and a Qualified Person as defined by National Instrument 43-101Standards of Disclosure for Mineral Projects, is responsible for the preparation of, and has verified, the technical information in this interim MD&A.
Selected Annual Financial Information
The table below sets forth selected audited financial data relating to the Company for the years ended June 30, 2010, June 30, 2009 and June 30, 2008:
| | Year ended |
June 30, 2010 |
June 30, 2009 |
June 30, 2008 |
| | Current assets | $ 6,260,136 | $ 2,662,159 | $ 5,902,514 |
| | Resource properties | $ 26,372,955 | $ 19,384,946 | $ 5,079,074 |
| | Property and equipment | $ 61,870 | $ 2,533 | $ 3,618 |
| | Total assets | $ 32,694,961 | $ 22,049,638 | $ 11,985,206 |
| | Current liabilities | $ 198,549 | $ 564,989 | $ 1,186,552 |
| | Total liabilities | $ 2,387,549 | $ 2,679,989 | $ 1,337,052 |
| | Total revenue | Nil | Nil | Nil |
| | Net loss | $ (9,562,347) | $ (2,004,944) | $ (523,379) |
| | Basic loss per share | $ (0.38) | $ (0.09) | $ (0.04) |
| | Weighted Avg. shares | 25,170,068 | 21,751,739 | 13,026,767 |
Results of Operations
As Clifton Star Resources Inc. is in the exploration phase and its properties are in the early stages of exploration, none of the Company’s properties are in production. Therefore, mineral exploration expenditures are being capitalized as incurred and administrative expenses are being expensed as incurred. Consequently the Company’s net loss is not a meaningful indicator of its performance or potential.
The key performance driver for the Company is the acquisition and development of prospective mineral properties. By acquiring and exploring projects of superior technical merit, the Company increases its chances of finding and developing an economic deposit.
At this time, the Company is not anticipating profit from operations. Until such time as the Company is able to realize profits from the production and marketing of commodities from its mineral interest, the Company will report an annual deficit and will rely on its ability to obtain equity or debt financing to fund on-going operations.
Additional financing is required for additional exploration and administration costs. Due to the inherent nature of the junior mineral exploration industry, the Company will have a continuous need to secure additional funds through the issuance of equity or debt in order to support its corporate and exploration activities, as well as its share of obligations relating to mineral properties.
For the six months ended December 31, 2010 and 2009
The net loss for the six months ended December 31, 2010 was $2,754,600 or $(0.09) per share as compared to the net loss for the six months ended December 31, 2009 of $2,308,527 or $(0.10) per share.
Operating expenses for the period ended December 31, 2010 totaled $2,797,388 (2009 - $2,265,137) an increase of $532,251. The increase in operating expenses was mainly a result of the following significant operating expenditures:
•
Management fees of $137,500 (2009 - $75,000) increased as a result of the Company entering into a three year management agreement on January 1, 2009 (amended October 1, 2009 and on February 10, 2011 with effect as of October 1, 2010) with Harry Miller the Company’s President and Director. Pursuant to the amended management agreement, the Company agreed to pay Mr. Miller $250,000 per annum, which is to be paid in quarterly instalments plus an additional $30,000 lump sum payment for exceptional service with the Company for the year ended June 30, 2010.
•
Professional fees of $403,108 (2009 – $198,939), for the ongoing legal and accounting fees incurred in the day-to-day operations of the Company. The increase in professional fees is due to the fact that the Company incurred significant legal fees in connection with maintaining property agreements and other day-to-day corporate and legal matters.
•
Travel and telephone expenses of $84,142 (2009 - $51,519) resulting from the periodic travel and telecommunication expenses incurred by the Company’s management. The increase was due to the Company’s management and consultants increasing 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 of the current statement of claim made against the Company by a former employee and consultant which is further described in Note 11 of the interim consolidated financial statements.
•
Consulting fees of $52,593 (2009 - $63,183) are lower than the comparative period primarily as a result of the Company requiring less 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 which resulted in a significant payment being recognized. During the current period, this agreement is no longer in effect.
•
Stock-based compensation expense of $1,982,998 (2009 - $1,693,015), resulting from the fair value assigned to options vested during the period. The increase in stock-based compensation is due directly to the fact that 972,500 options vested during the current period and therefore the fair value assigned to these options has been recognized in the statement of loss and deficit.
•
Shareholder costs of $28,113 (2009 - $100,609) resulting from the dissemination of information relating to the Company’s corporate, financing and exploration activities. The decrease in shareholder costs is due to the fact that the Company is no longer incurring significant costs from a leading proxy solicitation firm.
•
Other operating costs during the six months ended December 31, 2010 totaled $108,934 (2009 - $82,872) representing 4% (2009 – 4%) of total operating expenses including amortization, filing and transfer agent fees, insurance expense, investor relations expense and office and miscellaneous expense.
For the three months ended December 31, 2010 and 2009
Net loss for the three months ended December 31, 2010 was $1,532,372 or $(0.05) per share as compared to the net loss for the three months ended December 31, 2009 of $941,649 or $(0.03) per share. Operating expenses for the three months ended December 31, 2010 totaled $1,566,961 as compared to operating expenses of $891,045 for the three months ended December 31, 2009.
Results of Operations
The following table summarizes selected financial data reported by the Company for the quarter ended December 31, 2010 and the previous seven quarters in Canadian dollars.
| |
December 31, 2010 |
September 30, 2010 |
June 30, 2010 |
March 31, 2010 |
December 31, 2009 |
September 30, 2009 |
June 30, 2009 |
March 31, 2009 |
| | | | | | | | | |
Total assets | $ 47,343,027 | $ 43,848,210 | $ 32,694,961 | $ 26,937,526 | $ 23,920,347 | $ 21,722,793 | $ 22,049,638 | $ 20,520,185 |
Working capital | $ 15,594,045 | $ 12,701,287 | $ 6,061,587 | $ 4,351,371 | $ 173,239 | $ 1,079,763 | $ 2,097,170 | $ 5,070,049 |
Shareholders’ equity | $ 44,537,366 | $ 41,445,617 | $ 30,347,412 | $ 24,789,363 | $ 20,456,421 | $ 19,243,744 | $ 19,369,649 | $ 20,297,094 |
Revenue | - | - | - | - | - | - | - | - |
Net loss | $(1,532,372) | $(1,222,228) | $ (145,615) | $(7,108,205) | $ (941,649) | $(1,366,878) | $ (140,797) | $ (531,060) |
Loss per share | $ (0.05) | $ (0.04) | $ (0.01) | $ (0.28) | $ (0.04) | $ (0.06) | $ (0.01) | $ (0.02) |
| | | | | | | | | |
Liquidity and Capital Resources
As of December 31, 2010, the Company had approximately $16 million in cash and cash equivalents. The Company does not have any cash flow from operations due to the fact that it is an exploration stage company therefore financings and joint ventures / alliance partnerships have been the sole source of funds in the past few years.
At December 31, 2010, the Company had working capital of $15,594,045. In the opinion of management this working capital is sufficient to support the Company’s general administrative and corporate operating requirements on an ongoing basis for the next 12 months and beyond.
Given volatility in equity markets, global uncertainty in economic conditions, cost pressures and results of exploration activities, management constantly reviews expenditures and exploration programs and equity markets such that the company has sufficient liquidity to support its growth strategy.
During the six months ended December 31, 2010 the main cash flow expenditures, which includes the company’s exploration activities, amounted to $5,511,885. Of this amount, administrative costs were $811,400 and the balance was for exploration activities.
Liquidity Outlook
The Company’s cash position is highly dependent on the ability to raise cash through financings and the expenditures on its exploration programs. Capital expenditures are not expected to have any material impact on liquidity.
Management believes that even with the recent financing in November 2010 and its current cash balance of $16,036,665, the Company is still dependent on external financings to fund its exploration programs. As results of exploration programs are determined and other opportunities become available to the Company, management may complete an external financing as required.
The outlook is based on the Company’s current financial position and is subject to change if opportunities become available based on current exploration program results and/or external opportunities.
At present, the Company’s operations do not generate cash inflows and its financial success is dependent on management’s ability to discover economically viable mineral deposits. The mineral exploration process can take many years and is subject to factors that are beyond the Company’s control.
In order to finance the Company’s future exploration programs and to cover administrative and overhead expenses, the Company raises money through equity sales, from the exercise of convertible securities and from optioning its resource properties. Many factors influence the Company’s ability to raise funds, including the health of the resource market, the climate for mineral exploration investment, the Company’s track record, and the experience and calibre of its management. Actual funding requirements may vary from those planned due to a number of factors, including the progress of exploration activities. Management believes it will be able to raise equity capital as required in the long term, but recognizes that there will be risks involved which may be beyond its control.
Strategy and Risk Management
Currently most of the Company’s exploration activities are being funded by its joint venture partner Osisko. Recently, 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, its exclusive and irrevocable option related to any rights in the Hunter mining concession granted under the joint venture agreement by the Company. The Company plans to continue exploring the Hunter Property in 2011.
Other Corporate and Financing Matters
Annual and Special Meeting
On December 13, 2010, the Company held its annual and special meeting. At such meeting, the shareholders of the Company approved the continuation of the Company under the Canada Business Corporations Act. The effective date of the continuation is December 29, 2010.
Shareholders’ Rights Plan
The Board of Directors of the Company approved the adoption of a shareholder rights plan agreement. The rights plan was 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 provides 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; it has a term of three years.
The plan was not 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 shareholders 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 has been submitted to the TSX Venture Exchange and was approved by the shareholders at the Company’s annual and special meeting held on December 13, 2010.
Management Agreement
On January 1, 2009, the Company entered into a three year management agreement (amended October 1, 2009 and on February 10, 2011 with effect as of October 1, 2010) with Harry Miller, the Company’s President and Director. Pursuant to the amended management agreement, the Company agreed to pay Mr. Miller $250,000 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. Mr. Miller was also awarded an extra $30,000 for exceptional service with the Company for the year ending June 30, 2010.
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 this private placement.
Related Party Transactions
During the six month period ended December 31, 2010, the Company entered into the following transactions with related parties:
a)
Paid or accrued $Nil (2009 - $49,661) 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 - $22,279) in geological consulting fees to Dean Rogers, a former director of the Company.
c)
Paid or accrued $15,750 (2009 - $38,183) in consulting fees to Ian Beardmore, Chief Financial Officer of the Company.
d)
Paid or accrued $36,000 (2009 - $Nil) in directors fees to the Company’s directors.
e)
Paid or accrued $Nil (2009 - $9,575) in consulting fees to Alan Archibald, a brother of Fred Archibald who is a director of the Company.
f)
Paid or accrued $Nil (2009 - $19,125) in consulting fees to Carl Archibald, a nephew of Fred Archibald who is a director of the Company.
g)
Paid or accrued $137,500 (2009 - $75,000) in management fees to Harry Miller, President and Director of the Company.
Included in accounts payable as at December 31, 2010 is $188,313 (2009 - $44,403) 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.
Proposed Transactions
At the present time, there are no proposed transactions that are required to be disclosed.
Additional Disclosure for Venture Issuers Without Significant Revenue
Additional disclosure concerning Clifton Star Resources Inc.’s general and administrative expenses and mineral properties and deferred exploration costs is provided in the Company’sBalance Sheet and Statement of Loss and Deficit contained in its Audited Consolidated Financial Statements for the Year Ended June 30, 2010, available on the Company’s website at www.cliftonstarresources.com or on its SEDAR site page accessed through www.sedar.com.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as at December 31, 2010 or as at the date hereof.
Outstanding Share Data
Clifton Star Resources Inc.’s authorized capital is unlimited common shares without par value. As at February 22, 2011, the following common shares, stock options and share purchase warrants were outstanding:
| # of Shares | Exercise Price | Expiry Date |
Issued and Outstanding Common Shares at February 24, 2011 | 34,776,345 | | |
Share Purchase Warrants | 731,705 | $2.42 | May 6, 2011 |
Stock Options
| 100,000 200,000 300,000 1,750,000 1,500,000 400,000 50,000 | $2.55 $2.55 $2.30 $4.15 $5.35 $5.80 $5.00 | February 17, 2011 February 20,2011 September 8, 2011 September 13, 2012 January 22, 2013 January 27, 2013 December 22, 2013 |
Agent’s Options | 73,170 | $2.05 | May 6, 2011 |
Fully Diluted at February 24, 2011 | 39,881,220 | | |
Recent Canadian Accounting Pronouncements
Recent Canadian accounting pronouncements which have been issued but are not yet effective, and which may affect the Company’s financial reporting, are as follows:
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 (“IFRS”)
In February 2008 the Accounting Standards Board (“AcSB”) announced that publicly accountable enterprises are required to adopt IFRS beginning on or before January 1, 2011. The company will issue its first financial statements prepared under IFRS for the interim period ending September 30, 2011 and for the fiscal period ending June 30, 2012. Financial statement numbers for comparison purposes will be restated for presentation purposes.
The transition to IFRS will impact the Company’s accounting policies, as noted below, and to a lesser extent the information technology and data systems, internal control over financial reporting and disclosure controls and training requirements.
The Company’s transition will include the traditional 4 phases being scoping and planning, detailed assessment, implementation and review and post implementation. The scoping and planning established a project leader and team, obtaining organizational approval, identifying key areas affected, and developing a plan to implement and communicate. Phase 2, involved the identification of key accounting differences between IFRS and Canadian GAAP, a selection of the accounting policies under IFRS, transitional exemptions, quantification of financial statement impact and preparation of shell financial statements and impact on the business processes. To date the Company has completed all the items up to transition exemptions and is working on the remaining items of quantification and preparation of shell financial statements. The company has determined that there will be minimal impact on the business processes such as information systems, internal control over financial repor ting and disclosure controls and training. Phase 3 includes the implementation of the required changes necessary for IFRS compliance. Final decisions on accounting policies and IFRS 1 exemptions, preparation of the opening balance sheet at July 1, 2010, comparative fiscal 2011 and thereafter, training of personnel, and assessment and monitoring of the effectiveness of internal controls are being conducted throughout 2010. Phase 4 on post implementation will include sustainable IFRS financial information and processes for fiscal 2011 and beyond.
IFRS 1 – First time adoption of IFRS
IFRS governs the first time adoption of IFRS, which allows for certain exemptions from retrospective application.
IFRS 1 allows a company to measure property, plant and equipment at transition to fair value, which exemption can be applied on an asset by asset basis. The Company expects to use the exemption to continue to record its property, plant and equipment at cost.
IFRS 1 allows a company to elect not to apply the provisions of IFRIC 1, Changes in Existing Decommission, Restoration and Similar Liabilities, for changes to those liabilities before the date of transition to IFRS. When the Company applies this exemption, it would determine the reclamation obligation at the transition date, discount those back to the dates when they first arose, and depreciate these amounts forward to the transition date to determine the amount to be included in the depreciated cost of assets.
IFRS 1 allows a first time adopter of IFRS to apply IFRS 2 to all equity instruments that were granted before November 7, 2002 or were granted after that date but vested before the Company’s transition date. This basically allows the Company to retrospectively apply IFRS 2. The company plans to elect for this exemption and apply this retrospectively only for share based payments which were granted after November 7, 2002 and had not vested at the transition date.
IFRS allows certain other exemptions but the Company expects that these will be immaterial to the Company’s financial statements.
IFRS and Canadian GAAP Differences
An analysis of the Company’s differences between IFRS and Canadian GAAP has determined a number of differences, some of which will not have a material difference to the Company’s financial statements. There may be other differences which could arise over time but have not been determined to be material currently. The differences which could have a material difference are as follows.
Reclamation and Closure Cost Obligations
Under IFRS the Company’s obligation for closure and reclamation is based on management’s best estimate of such future expenditures discounted for the country specific risk free rates. Under Canadian GAAP the obligation is determined based on the fair value of future estimated expenses using quoted market prices and discounted using the Company’s current credit adjusted risk free rate. The change in accounting policy is not expected to have a material impact on the financial statements.
Impairment of Mining Interests
Under IFRS impairment is a one-step process whereby the carrying amount is compared to the recoverable amount which is calculated as the estimated discounted future pre-tax cash flows or fair value less costs to sell. Under Canadian GAAP there is a two step process whereby the Company must first compare the net realizable value to the carrying value and if net realizable value is less then carrying value management must discount the cash flows to calculate impairment. The change in accounting policy is not expected to have a material impact on the financial statements.
Share Based Payments (Stock Based Compensation under Canadian GAAP)
When stock options vest at different periods under IFRS each grant is treated as an individual grant vest on a straight line basis over each individual vesting period. Under Canadian GAAP the entire grant of stock options is currently being treated as a pool and vest on a straight line basis over the vesting period. The Company is currently quantifying the effect of the change in accounting policy on its financial statements.
In addition, under IFRS the Company must make an estimate of stock options that are forfeited before they vest whereas under Canadian GAAP the Company can make estimates of forfeiture. The change in accounting policy is not expected to have a material impact on the financial statements.
Financial Instruments
Fair Value
The Company designated its cash as held-for-trading, which are measured at fair value. Receivables have been designated as loans and receivables, which are initially recorded at fair value, net of transaction costs incurred, and subsequently at amortized cost using the effective interest rate method. Accounts payable and accrued liabilities are classified as other financial liabilities, which are measured at amortized cost.
As of December 31, 2010, the balance sheet carrying amounts of these financial instruments closely approximate their fair value, and the Company held no derivative instruments.
Fair value estimates are made at the balance sheet date, based on relevant market information and other information about the financial instruments. Fair values are determined directly by reference to published price quotations in an active market, when available, or by using a valuation technique that uses inputs observed from the markets.
The following provides a comparison of carrying and fair value amounts of each classification of financial instruments as at December 31, 2010:
| | | | December 31, 2010 | | June 30, 2010 |
| | Held-for-trading | $ | 16,036,665 | $ | 6,189,396 |
| | Loans and receivables | $ | 108,038 | $ | 14,695 |
| | Other financial liabilities | $ | 616,661 | $ | 198,549 |
During the fiscal year ended June 30, 2010, the Company adopted the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate fair value. The financial instrument from the above schedule, which is covered by the new hierarchy disclosures, is cash. Cash is classified as Level 1 which have unadjusted quoted market prices in active markets for identical assets or liabilities.
Financial Risk Management
The Company’s activities expose it to a variety of financial risks including credit risk, interest rate risk and liquidity risk.
Credit Risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company deposits its cash and cash equivalents with high credit quality major Canadian financial institutions as determined by ratings agencies, with original maturities of less than 90 days. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the maximum exposure to credit risk.
Interest Rate Risk
The Company’s cash balance includes $15,671,000 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.
Liquidity Risk
Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. The Company attempts to manage liquidity risk by maintaining sufficient cash and cash equivalent balances. Liquidity requirements are managed based on expected cash flows to ensure that there is sufficient capital in order to meet short-term obligations. As of December 31, 2010, the Company had a cash balance of $16,036,665 (June 30, 2010 - $6,189,396) to settle current liabilities of $616,661 (June 30, 2010 - $198,549). The Company also had flow-through commitments of $996,650 (June 30, 2010 - $Nil).
Capital Management
In the management of capital, the Company considers shareholders’ equity. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support exploration and development of mineral properties. The Board of Directors has not established quantitative capital structure criteria management, but will review on a regular basis the capital structure of the Company to ensure its appropriateness to the stage of development of the business.
The Company’s objectives when managing capital are:
•
To maintain and safeguard its accumulated capital in order to provide an adequate return to shareholders by maintaining a sufficient level of funds, to support continued evaluation and maintenance at the Company’s existing properties, and to acquire, explore, and develop other precious and base metal deposits.
•
To invest cash on hand in highly liquid and highly rated financial instruments with high credit quality issuers, thereby minimizing the risk and loss of principal.
•
To obtain the necessary financing to complete exploration and development of its properties, if and when it is required.
The properties in which the Company currently holds an interest in are in the exploration stage and the Company is dependent on external financing to fund its activities. In order to carry out planned exploration and development and pay for administrative costs, the Company will utilize its existing working capital and raise additional amounts as needed.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
In order to facilitate the management of capital and development of its mineral properties, the Company prepares annual expenditure budgets, which are updated as necessary and are reviewed and approved by the Company’s Board of Directors. In addition, the Company may issue new equity, incur additional debt, option its mineral properties for cash and/or expenditure commitments from optionees, enter into joint venture arrangements, or dispose of certain assets. When applicable, the Company’s investment policy is to hold cash in interest bearing accounts at high credit quality financial institutions to maximize liquidity. In order to maximize ongoing development efforts, the Company does not pay dividends. The Company expects to continue to raise funds, from time to time, to continue meeting its capital management objectives.
There were no changes in the Company’s approach to capital management during the period ended December 31, 2010 compared to the year ended June 30, 2010. The Company is not subject to externally imposed capital requirements.
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. The parties involved have agreed to utilize the services of a mediator. The meeting will be held in the summer of 2011.
Recent Developments and Outlook
The Company expects to obtain financing in the future primarily through further equity financing, as well as through joint venturing and/or optioning out its properties to qualified mineral exploration companies. There can be no assurance that the Company will succeed in obtaining additional financing, now or in the future. Failure to raise additional financing on a timely basis could cause the Company to suspend its operations and eventually to forfeit or sell its interest in its resource properties.
Corporate Governance
The Board of Directors of Clifton Star Resources Inc. comprises of six directors, three of whom are considered to be independent.
Subsequent Events
Subsequent to December 31, 2010, 50,000 incentive stock options with a strike price of $2.55 were exercised.
Approval
The Board of Directors of Clifton Star Resources Inc. have approved the disclosure contained in this interim MD&A. A copy of this interim MD&A will be provided to anyone who requests it.
Additional Information
Additional Information relating to Clifton Star Resources Inc. is on SEDAR at www.sedar.com or by contacting:
Clifton Star Resources Inc.
Rogers Building
Suite 836 – 470 Granville Street
Vancouver, BC Canada
V6C 1V5
Tel: (604) 688-4706
www.cliftonstarresources.com
Email: mailto:info@cliftonstarresources.com
Attention: Harry Miller, President and Chief Executive Officer
/s/ “Harry Miller”
/s/ “Ian Beardmore”
Harry Miller
Ian Beardmore
President and Chief Executive Officer
Chief Financial Officer
