Exhibit 99.1
![[exhibit991001.jpg]](https://capedge.com/proxy/6-K/0001116502-08-001005/exhibit991001.jpg)
PURE NICKEL INC.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
(Unaudited)
NO AUDITOR REVIEW
The accompanying unaudited interim consolidated financial statements of the Company have been prepared by and are the responsibility of the Company’s management. The Company's independent auditor has not performed a review of these interim consolidated financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.
2
PURE NICKEL INC.
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| May 31, 2008 |
| November 30, 2007 |
| ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 7,898,368 |
| $ | 12,960,396 |
|
Short-term investments |
|
| 50,000 |
|
| — |
|
Amounts receivable |
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| 588,222 |
|
| 377,652 |
|
Prepaid expenses and deposits |
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| 42,585 |
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| 321,433 |
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| 8,579,175 |
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| 13,659,481 |
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Fixed assets (Note 4) |
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| 4,929 |
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| 27,258 |
|
Mineral properties (Note 5) |
|
| 39,240,688 |
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| 35,502,123 |
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Investments |
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| 223,425 |
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| — |
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| $ | 48,048,217 |
| $ | 49,188,862 |
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LIABILITIES AND SHAREHOLDERS‘ EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 217,842 |
| $ | 345,517 |
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Accrued liabilities |
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| 80,620 |
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| 131,559 |
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| 298,462 |
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| 477,076 |
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Share capital (Note 6) |
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| 45,213,503 |
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| 45,213,503 |
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Contributed surplus (Note 7) |
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| 11,575,829 |
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| 11,362,381 |
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Deficit |
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| (9,039,577 | ) |
| (7,864,098 | ) |
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| 47,749,755 |
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| 48,711,786 |
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| $ | 48,048,217 |
| $ | 49,188,862 |
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Nature of operations (Note 1)
Approved on behalf of the board of directors:
“Dave McPherson” |
| “Harry Blum” |
Dave McPherson, Director |
| Harry Blum, Director |
The accompanying notes are an integral part of these consolidated financial statements.
3
PURE NICKEL INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Unaudited)
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| Three Months |
| Three Months |
| Six Months |
| Six Months |
| ||||
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
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Revenues |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
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Expenses: |
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Administration and general |
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| 616,934 |
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| 2,755,543 |
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| 1,152,522 |
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| 2,905,853 |
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Exploration expenses |
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| 32,328 |
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| — |
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| 32,328 |
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| — |
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Loss before other income (expenses) |
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| (649,262 | ) |
| (2,755,543 | ) |
| (1,184,850 | ) |
| (2,905,853 | ) |
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Other income (expenses): |
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Interest income |
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| 69,265 |
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| 10,659 |
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| 196,455 |
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| 12,947 |
|
Impairment of fixed assets |
|
| (17,501 | ) |
| — |
|
| (17,501 | ) |
| — |
|
Change in fair value of investments |
|
| (178,055 | ) |
| — |
|
| (178,055 | ) |
| — |
|
Foreign exchange gain (loss) |
|
| 12,079 |
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| (361,042 | ) |
| 8,472 |
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| (361,042 | ) |
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| (114,212 | ) |
| (350,383 | ) |
| 9,371 |
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| (348,095 | ) |
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Net loss for the period |
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| (763,474 | ) |
| (3,105,926 | ) |
| (1,175,479 | ) |
| (3,253,948 | ) |
Deficit, beginning of period |
|
| (8,276,103 | ) |
| (204,840 | ) |
| (7,864,098 | ) |
| (56,818 | ) |
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Deficit, end of period |
| $ | (9,039,577 | ) | $ | (3,310,766 | ) | $ | (9,039,577 | ) | $ | (3,310,766 | ) |
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Loss per share – basic and diluted |
| $ | (0.01 | ) | $ | (0.09 | ) | $ | (0.02 | ) | $ | (0.12 | ) |
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Weighted average number of shares |
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| 67,765,559 |
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| 35,464,993 |
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| 67,765,559 |
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| 26,164,110 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
PURE NICKEL INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplementary cash flow information (Note 9)
.
The accompanying notes are an integral part of these consolidated financial statements.
5
PURE NICKEL INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
| Three Months |
| Three Months |
| Six Months |
| Six Months May 31, |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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Net loss for the period, being comprehensive |
| $ | (763,474 | ) | $ | (3,105,926 | ) | $ | (1,175,479 | ) | $ | (3,253,948 | ) |
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The accompanying notes are an integral part of these consolidated financial statements.
6
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008
(Unaudited)
1.
NATURE OF OPERATIONS
Pure Nickel Inc., formerly Nevada Star Resource Corp., (the “Company") was incorporated under the laws of British Columbia, Canada and continued in the Yukon Territory of Canada in 1998. On March 30, 2007, Pure Nickel Inc. was acquired in a reverse takeover transaction.
The Company is a mineral property exploration company and has not yet determined whether its mineral properties contain economically recoverable reserves. The recoverability of the amounts shown for mineral properties is dependent upon the confirmation of economically recoverable reserves, the ability of the Company to enter into joint ventures or obtain financing to successfully complete their development, and upon future profitable production.
2.
SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of presentation
These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles using standards for interim financial statements and do not contain all of the information required for annual financial statements. These statements follow the same accounting policies and methods of application as the most recent annual financial statements, except as described in Note 3. They are expressed in Canadian dollars and include the accounts of Pure Nickel from the date of its incorporation on May 18, 2006 and the accounts of old Nevada Star and its wholly-owned subsidiaries from March 30, 2007, the date of the reverse takeover transaction. All significant inter-company balances and transactions have been eliminated upon consolidation.
(b)
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles in Canada requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant areas requiring the use of estimates relate to the recoverability or valuation of receivables and mineral properties, the utilization of future income tax assets and the valuation of asset retirement obligations and stock-based compensation. Actual results could differ from these estimates.
(c)
Cash and cash equivalents
Cash and cash equivalents include cash on account, demand deposits and money market investments with maturities from the date of acquisition of three months or less that are readily convertible to known amounts of cash and are subject to insignificant changes in value.
(d)
Short-term investments
Short-term investments consist of highly liquid short-term interest bearing securities with a term to maturity of greater than three months on the date of purchase. Short-term investments are recorded at the lower of cost or fair value.
7
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(e)
Fixed assets
Fixed assets are recorded at cost less accumulated depreciation. Depreciation is provided for based on the estimated useful lives of the assets using the declining balance basis at the following annual rates:
Office equipment
20%
Computer hardware
30%
Computer software
100%
(f)
Mineral properties
Mineral property acquisition and exploration costs are recorded at cost. All direct and indirect costs related to the acquisition of the interests are capitalized until the properties to which they relate are placed into production, sold, or management determines that there is an impairment. These costs will be amortized on the basis of units of production produced in relation to the proven reserves available on the related property following commencement of production. Mineral properties that are sold before a property reaches the production stage have proceeds from the sale of the property credited against the cost of the property, and any excess is recognized as income.
(g)
Investments
Investments consist of warrants received as part of option agreements negotiated with venture partners. A fair value is ascribed to the warrants at the transaction date using the Black-Scholes option pricing model, and that amount is offset against capitalized mineral property expenditures. At each subsequent balance sheet date, the fair value is recalculated and any gain or loss is reported in the consolidated statement of operations and deficit.
(h)
Impairment of long-lived assets
The recoverability of long-lived assets, which include fixed assets and mineral properties, is assessed when an event occurs that indicates impairment. Recoverability is based upon factors such as future asset utilization and the future undiscounted cash flows expected to result from the use or sale of the related assets. An impairment loss is recognized in the period when it is determined that the carrying amount of the asset will not be recoverable and exceeds its fair value. At that time the carrying amount is written down to fair value.
(i)
Foreign currency translation
Revenue and expenses in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income. The Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the temporal method to translate the accounts of its integrated operations into Canadian dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at weighted average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.
8
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(j)
Loss per share
Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Outstanding stock options, warrants, agent share warrants and agent unit warrants have not been considered in the computation of diluted loss per share as the result is anti-dilutive.
(k)
Stock-based compensation
The Company has a plan for granting stock options to management, directors, employees and consultants. The Company recognizes compensation expense for this plan under the fair value based method in accordance with CICA Handbook section 3870 “Stock-Based Compensation and Other Stock-Based Payments”. Under this method, the fair value of each option grant is estimated on the date of the grant and amortized over the vesting period, with the resulting amortization credited to contributed surplus. The Company estimates the fair value of each grant using the Black-Scholes option-pricing model. Consideration paid upon the exercise of stock options is recorded as share capital.
(l)
Asset retirement obligations
The Company recognizes liabilities for statutory, contractual or legal obligations associated with the reclamation of mineral properties, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a liability for an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding asset retirement cost is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using either the unit-of-production method or the straight-line method, as appropriate. Following the initial recognition of the asset retirement obligation, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the amount or timing of the underlying cash flows needed to settle the obligation. As at May 31, 2008, the Company has not incurred any asset retirement obligations related to the exploration of its mineral properties.
(m)
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are determined based on temporary differences between the accounting and tax bases of existing assets and liabilities, and are measured by applying substantively enacted statutory tax rates expected to apply when these differences reverse. A valuation allowance is recorded against any future tax asset if it is more likely than not that the asset will not be realized.
9
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
(n)
Financial instruments
Cash equivalents and short-term investments have been classified as available-for-sale and are recorded at fair value on the balance sheet. Fair values are determined directly by reference to published price quotations in an active market. Changes in the fair value of these instruments are reflected in other comprehensive income and included in shareholders’ equity on the balance sheet.
Investments consists of warrants and are classified as held-for-trading. Fair values are determined using the Black-Scholes option pricing model. Changes in the fair value of these instruments are reflected in income and included in deficit on the balance sheet.
All other financial instruments will be recorded at cost or amortized cost, subject to impairment reviews. The criteria for assessing an other than temporary impairment remain unchanged. Transaction costs incurred to acquire financial instruments are included in the underlying balance. Regular-way purchases and sales of financial assets are accounted for on the trade date.
3.
ADOPTION OF NEW ACCOUNTING STANDARDS AND DEVELOPMENTS
(a)
Financial instruments
In December 2006, the CICA issued Section 3862 – Financial Instruments – Disclosures, which replaces section 3861 and provides expanded disclosure requirements that provide additional detail by financial asset and liability categories. The CICA also issued Section 3863 – Financial Instruments – Presentation, to enhance the understanding of financial statement users as to the significance of financial instruments with respect to financial position, performance and cash flows. Sections 3862 and 3863 apply to interim and annual financial statements for fiscal years commencing on or after October 1, 2007 – see note 11.
(b)
Capital disclosures
In December 2006, the CICA issued Section 1535 – Capital disclosures, which is effective for interim and annual financial statements commencing on or after October 1, 2007, and establishes standards for the disclosure of capital management strategies – see note 12.
(c)
General standards of financial statement presentation
In June 2007, the CICA issued amended Section 1400 – General Standards of Financial Statement Presentation. The section provides revised guidance related to management’s responsibility to assess and disclose the ability of an entity to continue as a going concern. This amended standard applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008. Early adoption is permitted. The Company will adopt the standard commencing for its interim and annual financial statements for the fiscal year ending November 30, 2009. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.
10
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
3.
ADOPTION OF NEW ACCOUNTING STANDARDS AND DEVELOPMENTS (continued)
(d)
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064 – Goodwill and Intangible Assets, which replaces Section 3062 – Goodwill and Intangible Assets, and Section 3450 – Research and Development Costs. Section 3064 establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard applies to interim and annual financial statements for fiscal years beginning on or after October 1, 2008. Early adoption is permitted. The Company will adopt the standard commencing for its interim and annual financial statements for the fiscal year ending November 30, 2009. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.
4.
FIXED ASSETS
May 31, 2008 |
| Cost |
| Accumulated |
| Net book |
| |||
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Office equipment |
| $ | 667 |
|
| 145 |
|
| 252 |
|
Computer hardware |
|
| 386 |
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| 134 |
|
| 522 |
|
Computer software |
|
| 14,776 |
|
| 10,621 |
|
| 4,155 |
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| $ | 15,829 |
| $ | 10,900 |
| $ | 4,929 |
|
November 30, 2007 |
| Cost |
| Accumulated |
| Net book |
| |||
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Mining equipment |
| $ | 7,011 |
| $ | 1,402 |
| $ | 5,609 |
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Office equipment |
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| 7,363 |
|
| 982 |
|
| 6,381 |
|
Computer hardware |
|
| 8,314 |
|
| 1,678 |
|
| 6,636 |
|
Computer software |
|
| 18,507 |
|
| 9,875 |
|
| 8,632 |
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| $ | 41,195 |
| $ | 13,937 |
| $ | 27,258 |
|
11
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
5.
MINERAL PROPERTIES
Six Months Ended May 31, 2008 |
| Balance, |
| Expenditures |
| Value |
| Balance, End of Period |
| ||||
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Milford Copper |
| $ | 4,128,838 |
| $ | — |
| $ | — |
| $ | 4,128,838 |
|
MAN Project |
|
| 8,835,811 |
|
| 320,220 |
|
| — |
|
| 9,156,031 |
|
Salt Chuck |
|
| 164,976 |
|
| 5,964 |
|
| — |
|
| 170,940 |
|
Fond du Lac |
|
| 4,347,657 |
|
| 58,576 |
|
| — |
|
| 4,406,233 |
|
Thompson |
|
| 602,911 |
|
| 38,036 |
|
| — |
|
| 640,947 |
|
William Lake |
|
| 17,445,139 |
|
| 3,362,930 |
|
| (401,080 | ) |
| 20,406,989 |
|
Forgues and Haut Plateau East |
|
| (30,000 | ) |
| — |
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| (30,400 | ) |
| (60,400 | ) |
Manibridge |
|
| 2,550 |
|
| 360,000 |
|
| — |
|
| 362,550 |
|
Raglan |
|
| — |
|
| 10,022 |
|
| — |
|
| 10,022 |
|
East Hudson |
|
| 4,241 |
|
| 2,184 |
|
| — |
|
| 6,425 |
|
Rainbow |
|
| — |
|
| 12,113 |
|
| — |
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| 12,113 |
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| $ | 35,502,123 |
| $ | 4,170,045 |
| $ | (431,480 | ) | $ | 39,240,688 |
|
6.
SHARE CAPITAL
(a)
Authorized Share Capital
Authorized share capital consists of unlimited common shares without par value.
(b)
Issued and Outstanding Share Capital
|
| Number of |
| Amount | |
|
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Balance, November 30, 2007 and May 31, 2008 |
| 67,765,559 |
| $ | 45,213,503 |
(c)
Ctock Options
On May 13, 2008, the shareholders approved a stock option plan that permits the Company to issue share options up to a cumulative amount that may not exceed 10% of shares outstanding. This limit includes options issued under the Company’s previous option plan. The exercise price for each option granted under the Plan is based upon the five-day weighted average market price at the date of the grant, and the term may not exceed ten years from the date of the grant of the option. The specific terms including vesting period and term of the option are set by the board of directors.
12
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
6.
SHARE CAPITAL (continued)
Stock option activity since November 30, 2007 is presented below:
|
|
| Number of shares |
| Weighted average exercise price $ |
|
|
|
|
|
|
Outstanding, November 30, 2007 |
|
| 3,650,000 |
| 0.99 |
Issued |
|
| 1,050,000 |
| 0.26 |
Cancelled |
|
| (300,000 | ) | 0.79 |
|
|
|
|
|
|
Outstanding, May 31, 2008 |
|
| 4,400,000 |
| 0.83 |
|
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|
The following table summarizes stock options outstanding and exercisable at May 31, 2008:
Options outstanding |
| Options exercisable | ||||||||
Exercise |
| Number of |
| Weighted |
| Weighted |
| Number of |
| Weighted $ |
|
|
|
|
|
|
|
|
|
|
|
0.26 |
| 950,000 |
| 2.9 |
| 0.26 |
| 750,000 |
| 0.26 |
0.31 |
| 100,000 |
| 2.7 |
| 0.31 |
| — |
| — |
0.79 |
| 300,000 |
| 1.1 |
| 0.79 |
| 300,000 |
| 0.79 |
0.90 |
| 2,225,000 |
| 1.3 |
| 0.90 |
| 2,225,000 |
| 0.90 |
1.07 |
| 100,000 |
| 2.4 |
| 1.07 |
| 100,000 |
| 1.07 |
1.30 |
| 250,000 |
| 2.0 |
| 1.30 |
| 250,000 |
| 1.30 |
1.45 |
| 100,000 |
| 2.0 |
| 1.45 |
| 100,000 |
| 1.45 |
1.50 |
| 250,000 |
| 2.0 |
| 1.50 |
| 250,000 |
| 1.50 |
1.55 |
| 125,000 |
| 2.0 |
| 1.55 |
| 125,000 |
| 1.55 |
|
|
|
|
|
|
|
|
|
|
|
|
| 4,400,000 |
| 1.8 |
| 0.83 |
| 4,100,000 |
| 0.87 |
Stock options outstanding at May 31, 2008 expire between December 19, 2008 and April 11, 2011.
13
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
6.
SHARE CAPITAL (continued)
(d)
Warrants
Warrant activity since November 30, 2007 is presented below:
|
| Number of Shares |
| Weighted Average Exercise Price $ |
|
|
|
|
|
Outstanding, November 30, 2007 and May 31, 2008 |
| 20,000,004 |
| 1.66 |
|
|
|
|
|
As at May 31, 2008, the Company has committed to issuing 500,000 warrants should it earn a 50% interest in the Exploration Syndicate, Inc. mineral properties as disclosed in Note 5(e). These are not recorded as outstanding in the above table.
(e)
Agent Share Warrants
Agent share warrant activity since November 30, 2007 is presented below:
|
| Number of Shares |
| Weighted Average Exercise Price $ |
|
|
|
|
|
Outstanding, November 30, 2007 and May 31, 2008 |
| 500,000 |
| 0.90 |
|
|
|
|
|
Agent share warrants outstanding at May 31, 2008 expire on September 30, 2008.
(f)
Agent Unit Warrants
Agent unit warrant activity since November 30, 2007 is presented below:
|
| Number of Units |
| Weighted Average Exercise Price $ |
|
|
|
|
|
Outstanding, November 30, 2007 and May 31, 2008 |
| 629,370 |
| 1.25 |
|
|
|
|
|
Agent unit warrants outstanding at May 31, 2008 expire on January 9, 2009.
14
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
7.
CONNTRIBUTED SURPLUS
|
| Three Months |
| Three Months May 31, |
| Six Months |
| Six Months |
| ||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
| $ | 11,422,309 |
| $ | — |
| $ | 11,362,381 |
| $ | — |
|
Stock-based compensation expense |
|
| 153,520 |
|
| 1,971,995 |
|
| 213,448 |
|
| 1,971,995 |
|
Fair value of agent warrants issued for services |
|
| — |
|
| 225,309 |
|
| — |
|
| 225,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
| $ | 11,575,829 |
| $ | 2,197,304 |
| $ | 11,575,829 |
| $ | 2,197,304 |
|
8.
LOSS PER SHARE
The weighted average number of shares outstanding used in the computation of loss per share was for the six months ended May 31, 2008 was 67,765,559 (May 31, 2007 – 26,164,110). Outstanding stock options, warrants, agent share warrants and agent unit warrants have not been considered in the computation of diluted loss per share as the result is anti-dilutive.
9.
SUPPLEMENTARY CASH FLOW INFORMATION
|
| Three Months |
| Three Months |
| Six Months |
| Six Months | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants received for options on mineral property |
| $ | 30,400 |
| $ | — |
| $ | 401,480 |
| $ | — |
10.
RELATED PARTY BALANCES AND TRANSACTIONS
During the six months ended May 31, 2008, the Company incurred legal expenses with a firm of which a director of the Company was a principal of $130,242 (2007 - $nil), and paid directors of the Company, and companies controlled by directors of the Company, $82,632 (2007 - $20,000) for consulting services. These transactions were in the normal course of operations and have been recorded at the exchange amounts which the parties believe to be fair value.
11.
FINANCIAL INSTRUMENTS
(a)
Fair Values of Financial Instruments
The Company has various financial instruments comprising of cash and cash equivalents, short-term investments, amounts receivable, accounts payable and accrued liabilities. The carrying values of these financial instruments approximate their fair value due to their short-term maturities. Investments include derivative financial instruments consisting of warrants to purchase common shares of another entity. Investments are recorded at fair value.
15
PURE NICKEL INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2008
(Unaudited)
11.
FINANCIAL INSTRUMENTS (continued)
(b)
Concentration of Credit Risk
The Company maintains all of its cash and cash equivalents with major financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits.
(c)
Currency Risk
As the Company operates in an international environment, some of the Company’s financial instruments and transactions are denominated in currencies other than the Canadian dollar. Fluctuation in the exchange rates between these currencies and the Canadian dollar could have a material effect on the Company’s business, financial condition and results of operations.
12.
CAPITAL MANAGEMENT
The Company's objectives in managing capital are to safeguard its ability to operate as a going concern and to generate a superior return to shareholders. The Company has no debt and does not expect to enter into debt financing. It expects to finance exploration activity through joint ventures, sales of property interests, and by raising additional share capital when market conditions are suitable. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements.
13.
SEGMENT DISCLOSURES
The Company’s property and equipment and mineral properties by geographic distribution are as follows:
May 31, 2008 |
| Canada |
| United States |
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
Fixed assets |
| $ | 4,929 |
| $ | — |
| $ | 4,929 |
|
Mineral properties |
|
| 25,784,879 |
|
| 13,455,809 |
|
| 39,240,688 |
|
|
| $ | 25,789,808 |
| $ | 13,455,809 |
| $ | 39,245,617 |
|
November 30, 2007 |
| Canada |
| United States |
| Total |
| |||
|
|
|
|
|
|
|
|
|
|
|
Fixed assets |
| $ | 27,258 |
| $ | — |
| $ | 27,258 |
|
Mineral properties |
|
| 22,372,498 |
|
| 13,129,498 |
|
| 35,502,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 22,399,756 |
| $ | 13,129,625 |
| $ | 35,529,381 |
|
16
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
MANAGEMENT DISCUSSION AND ANALYSIS
Introduction
Pure Nickel Inc. (“Pure Nickel,” the “Corporation,” “we,” “our,” “us”) is a mineral exploration company with multiple advanced nickel sulphide projects in Canada and the United States. We also seek to exploit joint venture or option agreements where appropriate to enhance shareholder value.
Pure Nickel is a reporting issuer in Ontario, British Columbia and Alberta and its common shares trade on the Toronto Stock Exchange under the symbol “NIC,” and on the Over the Counter Bulletin Board in the United States under the symbol “PNCKF”.
Second Quarter Highlights
During the quarter, we announced results from the first 7 holes of our winter drill program at the William Lake Property located in the southern portion of the Thompson Nickel Belt, Central Manitoba. The program encompassed an integrated exploration project that included diamond drilling and an 1159km VTEM airborne geophysical survey that identified numerous weak to highly conductive zones some of which were drilled.
The surface drill program consisted of a total of 7525meters in 15 holes completed on budget. The drilling was completed on five zones within the 15 km William Lake trend. Drilling results indicate significant nickel mineralization is found in 2 of the 3 zones targeted with results pending on an additional 3 zones. Highlights of the initial results include:
·
Hole 350 returned 5.15 m of 0.84% Ni, including 1.3 m of 2.11% Ni
·
Hole 351 returned 0.5 m of 1.11% Ni
·
Hole 354 returned 17.16 m of 0.51% Ni, 5.65 m of 1.02% Ni
·
Hole 355 returned 25.37 m of 0.44% Ni, 2.74 m of 1.68%, 1 m of 3.43% Ni
·
Hole 357 returned 9.1 m of 0.89% Ni, including a 3 m section of 1.0% Ni
This program has demonstrated that the William Lake trend is a prolific nickel-bearing property with continuity of mineralization.
Detailed drill results on the first 7 holes are shown on page 18. Intersection length provided is measured down hole, rather than the true width.
17
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
Drill Hole |
| From |
| To |
| Core |
| Core |
| Nickel | |
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-350 |
| 543.95 |
| 546.37 |
| 2.42 |
| 7.94 |
| 0.55 | |
and |
| 550.37 |
| 552.94 |
| 2.57 |
| 8.43 |
| 0.64 | |
and |
| 600.70 |
| 605.85 |
| 5.15 |
| 16.90 |
| 0.84 | |
Incl. |
| 604.55 |
| 605.85 |
| 1.3 |
| 4.27 |
| 2.11 | |
and |
| 611.85 |
| 615.35 |
| 3.5 |
| 11.48 |
| 0.50 | |
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-351 |
| 347.34 |
| 347.84 |
| 0.5 |
| 1.64 |
| 1.11 | |
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-352 |
| No significant values |
|
| |||||||
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-353 |
| Drill hole did not reach target |
|
| |||||||
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-354 |
| 459.29 |
| 471.29 |
| 12 |
| 39.37 |
|
| |
and |
| 542.71 |
| 561.67 |
| 18.86 |
| 61.88 |
|
| |
Incl. |
| 542.71 |
| 551.97 |
| 9.28 |
| 30.45 |
|
| |
and |
| 569.82 |
| 583.82 |
| 14 |
| 45.93 |
|
| |
Incl. |
| 569.82 |
| 573.82 |
| 4 |
| 13.12 |
|
| |
and |
| 592.60 |
| 596.19 |
| 3.59 |
| 11.78 |
|
| |
and |
| 605.04 |
| 608.35 |
| 3.31 |
| 10.86 |
|
| |
and |
| 619.06 |
| 636.22 |
| 17.16 |
| 56.30 |
|
| |
Incl. |
| 631.06 |
| 636.22 |
| 5.16 |
| 16.93 |
|
| |
and |
| 651.36 |
| 662.42 |
| 11.06 |
| 36.29 |
|
| |
and |
| 659.36 |
| 662.42 |
| 3.06 |
| 10.04 |
|
| |
and |
| 705.85 |
| 713.50 |
| 7.65 |
| 25.10 |
|
| |
Incl. |
| 707.85 |
| 713.50 |
| 5.65 |
| 18.54 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-355 |
| 387.00 |
| 391.00 |
| 4 |
| 13.12 |
|
| |
and |
| 413.00 |
| 417.00 |
| 4 |
| 13.12 |
|
| |
and |
| 439.65 |
| 443.00 |
| 3.35 |
| 10.99 |
|
| |
and |
| 441.00 |
| 466.37 |
| 25.37 |
| 83.23 |
|
| |
Incl. |
| 457.00 |
| 459.00 |
| 2 |
| 6.56 |
|
| |
and |
| 490.00 |
| 495.64 |
| 5.64 |
| 18.50 |
|
| |
and |
| 594.86 |
| 597.60 |
| 2.74 |
| 8.99 |
|
| |
Incl. |
| 594.86 |
| 595.86 |
| 1 |
| 3.28 |
|
| |
and |
| 599.31 |
| 599.81 |
| 0.5 |
| 1.64 |
|
| |
|
|
|
|
|
|
|
|
|
|
| |
WL08-PNI-357 |
| 391.48 |
| 400.58 |
| 9.1 |
| 29.86 |
|
| |
Incl. |
| 395.58 |
| 398.58 |
| 3 |
| 9.84 |
|
| |
and |
| 477.75 |
| 481.75 |
| 4 |
| 13.12 |
|
| |
18
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
Exploration Projects
The William Lake Project is our most advanced property based on the exploration activity (primarily drilling) and results (potentially economic grade and width). The project has consistently returned economic grade/width intersections in previous drilling programs. It is located in central Manitoba, 50 kilometres north of the community of Grande Rapids.
The exploration program is designed to extend the continuity of the known mineralization that has previously been discovered by Xstrata on only one (possibly two) out of seven of the prospects and is ultimately working towards a compliant resource number.
Our current exploration started at the end of October, 2007 and is following up three mineralized intersections on prospect W56. In view of the wide spaced drilling (up to 250 metres apart) performed in the past the main objective of the program is to establish the continuity of the known mineralization to provide the confidence to work towards a mineral estimation for a 43-101 compliant resource on one or more sections. Testing for the continuity of mineralization includes drilling above and below the known zones at 50 to 100 metre step outs. For example, a 5 million tonne deposit would be a target approximately 6 metres wide, 250 metres in strike length and 1000 metres down plunge extent.
A summary of our exploration properties is set out below.
Property | Location | Claims area (approx.) | Comments |
Milford Copper | Utah | 2,830 hectares | The properties are in the permitting stage with joint venture partner Western Utah Copper. We will receive 1% of net proceeds from the first 10 million pounds of copper produced, 1.5% of net proceeds on all copper produced thereafter and 2% of net smelter proceeds on all other minerals produced. Total royalties are capped at $10 million. |
MAN | Alaska (400 km NE of Anchorage, 265 km SE of Fairbanks) | 77,000 hectares | The property is currently in the early exploration stage. Property was drilled in the summer 2007 and is regarded by the Company as one of our more important properties. Infrastructure is excellent. |
Salt Chuck | Alaska, Prince of Wales Island | 1,942 hectares | The property is currently in the early exploration stage. It is located near the historic past producing Salt Chuck mine which was active between 1919 and 1941 with a reported production of 300,000 tons of copper sulphide ore grading 0.95% Cu (copper), 2.0 g/t (grams per ton) Pd (palladium), 1.1 g/t Au (gold), and 5.7 g/t Ag (silver). |
Fond du Lac | Saskatchewan (20 km NW of Stony Rapids) | 30,640 hectares | The property is currently in the early exploration stage. The property has a historic non-compliant 43-101 estimate resource of 3,400,000 t of 0.66% Ni, 0.60% Cu, and 0.15% Co. |
Thompson | Manitoba (Thompson Nickel Belt) | 160,000 hectares | There is an option agreement pursuant to which we can earn up to a 100% interest in the property. During the second quarter, 2008, two preliminary drill holes were completed. |
William Lake | Manitoba (50 km from Grand Rapids) | 30,890 hectares | On February 21, 2008, we granted an option to Rockcliff Resources Inc. under which they may earn up a 70% interest in the Tower claims, which are located within the northern portion of the William Lake claim block. Rockcliff is required to pay $30,000 on each anniversary of the agreement to keep the option in good standing. |
19
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
Forgues and Haut Plateau East | Quebec (180 km NW of Sept Isles) | 748 hectares | We granted Manicouagan Minerals Inc. an option to earn up to a 70% interest in 39 mining claims. Manicouagan paid us $30,000 and also granted us common share purchase warrants. |
Manibridge | Manitoba (28 km SW Thompson ) | 270 hectares | We have a 50-50 joint venture agreement with Crowflight Minerals Inc. to explore for deposits. Each of us contributes properties as well as $3 million each, over a three year period to fund preliminary exploration activities. We also have an option to earn a 50% interest from Crowflight in an area surrounding the joint venture area by spending $1.5 million over a three year period. |
East Hudson | Quebec (20 km from the Hudson Bay coast) | 4,500 hectares | The property is currently in the early exploration stage. |
Rainbow | Nunavut (380 km NW of Churchill, and 612 km N of Thompson) | 12,000 hectares | The property is currently in the early exploration stage. |
Raglan SR1, POV, Nuvilik | Quebec | 51,400 hectares | The properties are currently in the early exploration stage. |
Exploration Plans for all Properties
Our 2008 exploration programs are expected to total between $8,000,000 and $9,000,000, all of which has already been funded. We will be focusing on the William Lake and MAN properties, and will continue to explore for joint venture, earn-in or other arrangements by which to advance the exploration of our properties without Pure Nickel bearing the cost of all of the work required.
Critical Accounting Estimates and Policies
Our financial statements for the quarter ended May 31, 2008 are prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). Management makes certain estimates and relies upon certain assumptions related to reporting our assets and liabilities as well as results of operations in conformity with Canadian GAAP. Actual results will differ from these estimates and assumptions.
The most significant accounting estimates for us relate to the carrying values of its mineral property assets. Mineral properties consist of exploration and mining claims and leases. Acquisition and exploration costs are capitalized and deferred until such time as the property is put into production or the properties are disposed of either through sale or abandonment. The estimated values of all properties are assessed by management on a continual basis and if the carrying values exceed estimated recoverable values, then these costs are written down to the estimated recoverable values. If properties are put into production, the costs of acquisition and exploration are written off over the life of the property, based on the estimated economic reserves. Proceeds received from the sale of any interest in a property are first credited against the carrying value of the property, with any excess included in operations for the period. If a property is abandoned, the property and deferred exploration costs will be written off to operations as was the case during the previous year with the Fox River property.
Following are our more critical accounting policies.
20
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
Mineral Properties
Mineral property acquisition and exploration costs are recorded at cost. All direct and indirect costs related to the acquisition of the interests are capitalized until the properties to which they relate are placed into production, sold, or management determines that there is an impairment. These costs will be amortized on the basis of units of production produced in relation to the proven reserves available on the related property following commencement of production. Mineral properties that are sold before a property reaches the production stage have proceeds from the sale of the property credited against the cost of the property, and any excess is recognized as income.
Foreign Currency Translation
Revenue and expenses in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.
Our integrated foreign subsidiaries are financially or operationally dependent on us. We use the temporal method to translate the accounts of its integrated operations into Canadian dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at weighted average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.
Financial Instruments
Cash equivalents and short-term investments have been classified as available-for-sale and are recorded at fair value on the balance sheet. Fair values are determined directly by reference to published price quotations in an active market. Changes in the fair value of these instruments are reflected in other comprehensive income and included in shareholders’ equity on the balance sheet. Due to the short-term and liquid nature of cash equivalents and short-term investments, fair value approximates book value and there have been no changes in fair value.
Investments consist of warrants received as part of option agreements negotiated with venture partners. A fair value is ascribed to the warrants at the transaction date using the Black-Scholes option pricing model, and that amount is offset against capitalized mineral property expenditures. At each subsequent balance sheet date, the fair value is recalculated and any gain or loss is reported in the consolidated statement of operations and deficit. All other financial instruments are recorded at cost or amortized cost, subject to reviews for impairment.
Loss per Share
Basic loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is not calculated because adding in potentially dilutive securities would reduce the loss per share.
Stock Based Compensation
We have a plan for granting stock options to management, directors, employees and consultants. We recognize compensation expense for this plan under the fair value based method in accordance with CICA Handbook section 3870 “Stock-Based Compensation and Other Stock-Based Payments”. Under this method, the fair value of each option grant is estimated on the date of the grant and amortized over the vesting period, with the resulting amortization credited to contributed surplus. We estimate the fair value of each grant using the Black-Scholes option-pricing model. Consideration paid upon the exercise of stock options is recorded as share capital.
21
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
CHANGES IN ACCOUNTING POLICIES
Financial Instruments
Effective December 1, 2007, we adopted two new accounting standards and related amendments to other standards on financial instruments issued by the CICA. Prior periods have not been restated.
·
CICA 3862, “Financial Instruments – Disclosures”: This standard relates to the disclosures of financial instruments. It applies to interim and annual financial statements for fiscal years beginning on or after October 1, 2007.
·
CICA 3863, “Financial Instruments – Presentation:” This standard relates to the presentation of financial instruments. It applies to interim and annual financial statements for fiscal years beginning on or after October 1, 2007.
Capital Disclosures
Effective last quarter, we adopted new CICA 1535, “Capital Disclosures.” This standard relates to the disclosure of capital management strategies. It applies to interim and annual financial statements for fiscal years beginning on or after October 1, 2007.
General Standards of Financial Statement Presentation
In May 2007, the CICA issued amended Handbook Section 1400, “General Standards of Financial Statement Presentation”. The section provides revised guidance related to management’s responsibility to assess and disclose the ability of an entity to continue as a going concern. This amended standard applies to interim and annual financial statements for fiscal years beginning on or after January 1, 2008. The adoption of this standard is not expected to have a significant impact on our financial statements.
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer of the Corporation have evaluated the effectiveness of the Corporation’s disclosure controls and procedures for the quarter ended May 31, 2008 and have concluded that these disclosure controls and procedures, as defined in Multilateral Instrument 52-109F1 –Certification of Disclosure in Issuers’ Annual and Interim Filings, are effective and that material information relating to the Corporation was made known to them and was recorded, processed, summarized and reported within the time periods specified under applicable securities legislation.
Management is also responsible for the design of internal controls over financial reporting (“ICOFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with Canadian GAAP. Management has evaluated whether there were changes in ICOFR during the quarter ended May 31, 2008 that have materially affected, or are reasonably expected to materially affect, its ICOFR. No such changes were identified.
Economic Factors
Our financial performance will be directly affected by the exploration activities to be conducted on our projects, the results of those activities, and the possible development of the properties for commercial production of nickel and/or other valuable minerals. Should the results of such exploration activities warrant bringing any of the projects into commercial production, substantial additional funds would be required. Until such time as commercial production is achieved (and there can be no assurance it will be), we will continue to incur administrative costs and exploration expenditures that are either deferred or expensed, depending upon the nature of those expenditures, resulting in continuing operating losses and significant cash requirements. In the future, should the development of our mineral projects occur, then our financial performance will become more closely linked to the prices obtained for the nickel and/or oth er metals produced. Management is of the view that the previous historically high price of nickel may not be regained, however, the long-term forecast price is sufficiently attractive to justify our focus on
22
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
nickel projects. Demand for nickel and base metals is expected to remain strong for the foreseeable future, primarily due to demand from China, India and other developing areas. While this will encourage increased exploration and production, the overall growth in supply is not expected to keep pace with demand growth in the near future.
We reports our financial results in Canadian dollars although our revenues, if any, will be primarily, earned in U.S. dollars, while our costs are primarily in Canadian dollars. The Canadian dollar has shown a significant appreciation against the U.S. dollar. The main effect of the erosion in value of the U.S. dollar as against the Canadian dollar and other international currencies is to reduce the price of metals expressed in Canadian dollars relative to their expression in U.S. dollars. We take this and anticipated trends in metal prices and foreign exchange rates into consideration when evaluating our business, prospects and projects and expenditures thereon.
Selected Financial Information
Selected financial information for the previous eight quarters is set out below.
|
| Quarter |
| Quarter |
|
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
Revenues |
| Nil |
| Nil |
|
Expenses |
| 675,213 |
| 535,588 |
|
Net income (loss) |
| (789,425 | ) | (412,005 | ) |
Net income (loss) per share |
| (0.01 | ) | (0.01 | ) |
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
|
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
|
|
|
|
|
| ||||
Revenues |
| Nil |
| Nil |
| Nil |
| Nil |
|
Expenses |
| 1,061,731 |
| 979,214 |
| 2,755,543 |
| 150,310 |
|
Net income (loss) |
| (3,514,569 | ) | (957,058 | ) | (3,105,926 | ) | (148,022 | ) |
Net income (loss) per share |
| (0.052 | ) | (0.017 | ) | (0.088 | ) | (0.036 | ) |
|
| Quarter |
| Quarter |
|
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
Revenues |
| Nil |
| Nil |
|
Expenses |
| 43,068 |
| 60,373 |
|
Net income (loss) |
| (83,822 | ) | (54,701 | ) |
Net income (loss) per share |
| (.01 | ) | (.01 | ) |
23
PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
MAY 31, 2008
Results of Operations
We received no revenues during the three months ended May 31, 2008, which is unchanged from the same period in the previous year. We do not currently generate revenues or cash flows from operations (except for interest income and some small payments that are credited to mineral resources on the balance sheet rather than being identified as revenues in our statement of operations). This was in accordance with expectations as we are an exploration stage company and expect to finance activities through joint ventures, the sale of property interests, and by raising additional share capital when market conditions are suitable.
General and administrative expenses for the three months ended May 31, 2008 were $642,885 compared to $2,755,543 for the three months ended May 31, 2007. The decrease was caused by the comparative period including $1,971,995 of stock-based compensation; the equivalent amount for the current period was $179,470. Interest income increased to $69,265 for the three months ended May 31, 2008 compared to $10,659 for the three months ended May 31, 2007 due to interest earned on funds raised through financings.
Cash used by operating activities decreased to $701,644 for the for the three months ended May 31, 2008 compared to $762,537 for the three months ended May 31, 2007. The cash flow use from loss for the quarter was reduced by stock-based compensation expense. Investing activities consumed cash of $1,957,584 for the for the three months ended May 31, 2008 compared to $2,226,656 for the three months ended May 31, 2007. During the three months ended May 31, 2008 the primary investment activity related to the William Lake property; for the three months ended May 31, 2007 the primary activity was the Fox River property.
Liquidity and Capital Resources
Currently, none of our property interests generates revenue. Our capital needs have historically been met by the issuance of securities (either through private placements, the exercise of stock options, and shares for services, property or other assets). Fluctuations in our share price will affect ability to obtain future financing, and future financing will represent dilution to existing shareholders. In addition, such price fluctuations will influence the propensity of holders of our warrants to exercise them into shares of the Corporation. By September 30, 2008, holders of the 5,500,000 warrants issued in the March 30, 2006 private placement will have to decide whether to exercise their warrants. Such an exercise could add $6,600,000 to our cash resources and will not occur if the share price remains below the exercise price of the warrants.
We had cash and equivalents plus short-term investments of $7,948,368 at May 31, 2008 compared to $12,960,396 at November 30, 2007. Working capital was $8,280,712 at May 31, 2008 compared to $13,182,405 at November 30, 2007. Current liabilities at May 31, 2008 consisted of accounts payable and accrued liabilities payable totalling $298,463 compared to $477,076 at November 30, 2007.
The exploration and development of our mineral projects will require substantial additional capital. Failure to obtain sufficient capital would result in the delay or indefinite postponement of exploration, development or production on any or all projects, and may cause loss of participating project interests. There can be no assurance that additional capital or other types of financing will be available when needed or that, if available, the terms of such financing will be favourable to the Corporation.
Management believes that the working capital on hand at May 31, 2008 will be sufficient to cover general and administrative expenses and property holding and exploration costs for the current fiscal year.
Off-Balance-Sheet Arrangements
We have not entered into any off-balance-sheet financing arrangements.
Transactions with Related Parties
During the six months ended May 31, 2008, we incurred legal expenses with a firm of which a director was a principal during the period, $130,242 (2007 - $nil) for legal services, and we paid directors and companies controlled by directors, $82,632 (2007 - $20,000) for consulting services. These transactions were in the normal
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PURE NICKEL INC.
MANAGEMENT DISCUSSION AND ANALYSIS
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course of operations and have been recorded at the exchange amounts which the parties believe to be fair value.
Proposed Transactions
We are not aware of any proposed transactions involving a proposed asset or business or business acquisition or disposition which may have a material effect on our financial condition, results of operations and cash flows. At any time, however, we may have under consideration potential transactions in such categories as part of the continuous review of our business activities and opportunities.
Share Capital
At May 31, 2008, share capital was as follows:
Issued and outstanding common shares |
| 67,765,559 |
|
Stock options |
| 4,400,000 |
|
Share purchase warrants |
| 20,000,004 |
|
Agent’s compensation and advisory warrants |
| 1,129,370 |
|
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PURE NICKEL INC.
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Risks
Selected risk factors are shown below. Additional risk factors that you should consider are set out in our Annual Information Form available atwww.sedar.com. For readers in the United States, please refer to our 20-F available atwww.sec.gov/edgar.shtml
We have a limited operating history and as a result there is no assurance we can operate profitably or with a positive cash flow.
We have a limited operating history and must be considered to be an exploration stage company. Our operations are subject to all the risks inherent in the establishment of an exploration stage enterprise and the uncertainties arising from the absence of a significant operating history. Investors should be aware of the difficulties normally encountered by mineral exploration companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the exploration of the mineral properties that the Corporation plans to undertake. These potential problems include, but are not limited to, unanticipated problems relating to exploration, and additional costs and expenses that may exceed current estimates. The amounts disbursed by us in the exploration of the mineral claims may not result in the disco very of mineral deposits. Problems such as unusual or unexpected formations of rock or land and other conditions are involved in mineral exploration and often result in unsuccessful exploration efforts. If the results of future exploration programs do not reveal viable commercial mineralization, we may decide to abandon our claims and acquire new claims for new exploration or cease operations. The acquisition of additional claims will be dependent upon us possessing capital resources at the time in order to purchase such claims. If no funding is available, we may be forced to abandon its operations. No assurance can be given that we will ever be able to operate on a profitable or cash-flow-positive basis.
If we do not obtain additional financing, our business will fail and investors could lose their investment.
We had cash and equivalents plus short-term investments of $7,948,368 and working capital was $8,280,712 at May 31, 2008. We do not currently generate revenues or cash flows from operations (except for interest income and some small payments that are credited to mineral resources on the balance sheet rather than being identified as revenues in our statement of operations). Our business plan calls for substantial investment and cost in connection with the acquisition and exploration of our mineral properties currently under lease and option. In order to maintain certain of its property claims and joint venture agreements in good standing, we must incur certain minimum exploration expenditures annually. There can be no assurance that we will have the funds required to make such expenditures or that those expenditures will result in positive cash flow. Any direct acquisition of any of the claims under lease or option is subjec t to our ability to obtain the financing necessary to fund and carry out exploration programs on the subject properties. The requirements are substantial. There are no arrangements in place for additional financing and we can provide no assurance to investors that we will be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including market prices for minerals, and investor sentiment. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us. The most likely source of future funds presently available to us is through the sale of equity capital. Any sale of share capital will result in dilution to existing shareholders. We may require additional financing which may not be available or, if available, may not be available on favourable terms.
We have adequate funds to finance our exploration program only until the end of the current fiscal year ended November 30, 2008. We are an exploration company with an accumulated deficit of $9,065,528 as at May 31, 2008. With ongoing cash requirements for exploration, development and new operating activities, it will be necessary in the near and over the long- term to raise substantial funds from external sources. If we do not raise these funds, we will be unable to pursue our business activities, and our investors could lose their investment. If we are able to raise funds, investors could experience a dilution of their interests that would negatively affect the market value of the shares.
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Because there is no assurance that we will generate revenues, we face a high risk of business failure.
We have not earned any revenues to date and have never had positive cash flow. We do not have any interest in any revenue generating properties. Before being able to generate revenues, we will incur substantial operating and exploration expenditures without receiving any revenues. Therefore we expect to incur significant losses into the foreseeable future. If we are unable to generate significant revenues from our activities, we will not be able to earn profits or continue operations. Based upon current plans, we expect to incur significant operating losses in the future. We cannot guarantee that we will be successful in raising capital to fund these operating losses or generate revenues in the future. We can provide investors with no assurance that we will ever generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most likely fail and our inves tors could lose their entire investment.
There are no known reserves of minerals on our mineral claims and there is no assurance that we will find any commercial quantities of minerals.
We have not found any mineral reserves on our claims and there can be no assurance that any of the mineral claims under exploration contain commercial quantities of any minerals. Even if commercial quantities of minerals are identified, there can be no assurance that we will be able to exploit the reserves or, if we are able to exploit them, that it will be profitable. Substantial expenditures will be required to locate and establish mineral reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site, and substantial additional financing may be required. It is impossible to ensure that the exploration or development programs planned by us will result in a profitable commercial mining operation. The decision as to whether a particular property contains a commercial mineral deposit and should be brought into production will depend on the results of exploration programs and/or feasibility studies, and the recommendations of duly qualified engineers and geologists. Several significant factors will be considered, including, but not limited to: (i) the particular attributes of the deposit, such as size, grade and proximity to infrastructure; (ii) metal prices, which are highly cyclical; (iii) government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection; (iv) ongoing costs of production; and (v) availability and cost of additional funding. The effect of these factors cannot be accurately predicted, but the combination of these factors may result in us receiving no return or an inadequate return on invested capital.
Because of the speculative nature of the exploration of natural resource properties, there is substantial risk that our business will fail.
While the discovery of a commercially viable ore body may result in substantial rewards, few mineral properties which are explored are ultimately developed into producing mines. There is no assurance that any of the claims that we will explore or acquire will contain commercially exploitable reserves of minerals. Exploration for natural resources is a speculative venture involving substantial risk. Even a combination of careful evaluation, experience and knowledge may not eliminate such risk. Hazards such as unusual or unexpected geological formations, formation pressures, fires, power outages, labour disruptions, flooding, cave-ins, landslides, and the inability of us to obtain suitable machinery, equipment or labour are all risks involved with the conduct of exploration programs and the operation of mines.
Development and exploration activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important determinants, which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect our operations, financial condition and results of operations.
We are subject to market factors and volatility of commodity prices beyond our control.
The marketability of mineralized material that we may acquire or discover will be affected by many factors beyond our control. These factors include market fluctuations in the prices of minerals sought which are highly volatile, the proximity and capacity of natural resource markets and processing equipment, and government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting
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of minerals and environmental protection. The effect of these factors cannot be predicted, but may result in receiving a very low or negative return on invested capital. Prices of certain minerals have fluctuated widely, particularly in recent years, and are affected by numerous factors beyond our control. Future mineral prices cannot be accurately predicted. A severe decline in the price of a mineral being produced or expected to be produced by us would have a material adverse effect on us, and could result in the suspension of our exploration programs or mining operations.
Our stock price could be volatile
Market prices of securities of many public companies have experienced significant fluctuations in price which have not been related necessarily to the operating performance, underlying asset values or prospects of such companies. The market price of our common shares has been and is likely to remain volatile. Results of exploration activities, the price of nickel, future operating results, changes in estimates of our performance by securities analysts, market conditions for natural resource shares in general, and other factors beyond our control could cause a significant decline of the market price of our common shares.
Forward-Looking Statements
This Management Discussion and Analysis includes forward-looking statements concerning the future performance of the Corporation, its operations, and its financial performance and financial condition. These forward-looking statements may include, among others, statements with respect to our objectives and strategies to achieve those objectives, as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates, and intentions. When used herein, the words “believe”, “anticipate”, “may”, “should”, “intend”, “estimate”, “expect”, “project”, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These forward-looking statements are based on current expectations. The Corporation cautions that all forward-looking information is inherently unc ertain and actual results may differ materially from the assumptions, estimates, or expectations reflected or contained in the forward-looking information, and that actual future performance will be affected by a number of factors including economic conditions, technological change, regulatory change, and competitive factors, many of which are beyond the Corporation’s control.
Future events and results may vary significantly from what is expected. We are under no obligation (and we expressly disclaim any such obligation) to update or alter the forward-looking statements whether as a result of new information, future events or otherwise.
Additional Information
Additional information about Pure Nickel is available on our website atwww.purenickel.com, on the (Canadian) SEDAR website atwww.sedar.com, and on the (U.S.) EDGAR website atwww.sec.gov/edgar.shtml.
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