UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended: JUNE 30, 2004
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ____________
Commission File Number: 0-50894
WESTERN GOLDFIELDS, INC.
(Exact name of small business issuer as specified in its charter)
IDAHO 38-3661016
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
961 MATLEY LANE, SUITE 120
RENO, NEVADA 89502
(Address of principal executive offices)
(775) 337-9433
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares of common stock outstanding as of: August 30, 2004 was
38,258,077.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
WESTERN GOLDFIELDS, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations and Comprehensive Income (Loss) . 2
Consolidated Statement of Stockholders' Equity. . . . . . . . . . . . . 3
Consolidated Statements of Cash Flow. . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 5
Item 2. Plan of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 28
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . 29
Item 6. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTERN GOLDFIELDS, INC
(FORMERLY BISMARCK MINING COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited)
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash $ 2,560,217 $ 373,500
Restricted cash held by investment company - 3,897,229
Accounts receivable 53,463 17,050
Loan receivable, net of allowance of $10,000 - 40,000
Inventories 2,448,861 2,221,627
Prepaid expenses 428,212 534,440
Deposits 4,196 585,000
------------------ ------------------
TOTAL CURRENT ASSETS 5,494,949 7,668,846
Mineral Properties - -
Property, plant, and equipment, net of
accumulated depreciation 6,299,106 6,150,509
Construction in progress 222,453 13,303
Investments - remediation and reclamation 6,059,254 5,998,994
Investments - other 43,000 98,510
Long-term deposits 304,999 300,000
Long-term prepaid expenses 1,387,257 1,482,921
Deferred loan fees and expenses, net of amortization 626,522 829,041
------------------ ------------------
TOTAL ASSETS $ 20,437,540 $ 22,542,124
================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 416,631 $ 677,585
Accrued expenses 479,590 257,699
Accrued expenses - related party - 22,500
Accrued interest 54,375 65,920
Loan payable, current portion 3,000,000 3,000,000
------------------ ------------------
TOTAL CURRENT LIABILITIES 3,950,596 4,023,704
------------------ ------------------
LONG-TERM LIABILITIES
Loan payable, net of current portion 1,500,000 3,000,000
Reclamation and remediation liabilities 5,998,994 5,998,994
------------------ ------------------
TOTAL LONG-TERM LIABILITIES 7,498,994 8,998,994
------------------ ------------------
PROVISION FOR FORWARD SALES DERIVATIVE MARKED -
TO-MARKET 243,980 855,788
------------------ ------------------
COMMITMENTS AND CONTINGENCIES - -
------------------ ------------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 25,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.01 par value, 100,000,000 shares authorized;
38,258,077 and 38,149,078 shares issued
and outstanding, respectively 382,584 381,491
Additional paid-in capital 10,143,492 10,057,384
Stock options and warrants 4,167,232 3,601,478
Accumulated deficit (5,718,358) (4,584,552)
Accumulated other comprehensive income (loss) (230,980) (792,163)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 8,743,970 8,663,638
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,437,540 $ 22,542,124
================== ==================
The accompanying notes are an integral part of these financial statements.
1
WESTERN GOLDFIELDS, INC.
(FORMERLY BISMARCK MINING COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------- ----------
REVENUES
Gross revenue $ 2,426,685 $ - $ 5,343,414 $ -
Royalties (299,204) - (586,435) -
------------ ------------ ------------- ----------
Net revenue 2,127,481 - 4,756,979 -
------------ ------------ ------------- ----------
COST OF GOODS SOLD
Mine operating costs 1,773,648 - 3,675,746 -
Mine site administration 568,027 - 949,902 -
Selling, transportation, and refining 7,814 - 65,341 -
Depreciation, depletion & amortization 294,778 - 488,379 -
Inventory adjustment (137,479) - (656,563) -
------------ ------------ ------------- ----------
Total cost of goods sold 2,506,788 - 4,522,805 -
------------ ------------ ------------- ----------
GROSS PROFIT (LOSS) (379,307) - 234,174 -
------------ ------------ ------------- ----------
EXPENSES
General and administrative 424,603 126,622 1,087,006 245,774
Exploration - other 56,803 15,375 189,564 28,747
------------ ------------ ------------- ----------
Total expenses 481,406 141,997 1,276,570 274,521
------------ ------------ ------------- ----------
OPERATING LOSS (860,713) (141,997) (1,042,396) (274,521)
------------ ------------ ------------- ----------
OTHER INCOME (EXPENSE)
Interest income 40,997 - 78,897 -
Interest expense (85,236) - (186,705) -
Gain on sale of assets - 27,132 6,177
Loss on sale of investments (10,734) - (10,734) -
------------ ------------ ------------- ----------
Total other income (expense) (54,973) - (91,410) 6,177
------------ ------------ ------------- ----------
LOSS BEFORE INCOME TAXES (915,686) (141,997) (1,133,806) (268,344)
INCOME TAXES - - - -
------------ ------------ ------------- ----------
NET LOSS (915,686) (141,997) (1,133,806) (268,344)
------------ ------------ ------------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)
Change in market value of securities (21,315) 2,448 (50,625) (785)
Provision for forward sales derivative marked-to-market 690,148 - 611,808 -
------------ ------------ ------------- ----------
Total other comprehensive income (loss) 668,833 2,448 561,183 (785)
------------ ------------ ------------- ----------
NET COMPREHENSIVE LOSS $ (246,853) $ (139,549) $ (572,623) $ (269,129)
============ ============ ============ ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 38,258,077 9,165,888 38,215,494 9,112,071
============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
2
WESTERN GOLDFIELDS, INC.
(FORMERLY BISMARCK MINING COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
--------------------------- Additional Stock Options
Number Paid-in and Accumulated
of Shares Amount Capital Warrants
------------- ------------ --------------- -------------
Balance, January 1, 2002 3,333,333 $ 33,333 $ 534,324 $ -
Common stock issued for:
property at $0.45 per share 250,000 2,500 110,000 -
payables at $0.37 per share 16,667 167 18,351 -
Common stock and warrants issued for
cash at $0.30 per share 1,771,669 17,717 460,633 53,150
Adjustment and correction to outstanding shares 8,607 86 (86) -
Acquisition of Calumet Mining Company 3,500,000 35,000 13,743 -
Net loss for the year ended December 31, 2002 - - - -
Other comprehensive income - - - -
------------- ------------ --------------- -------------
Balance, December 31, 2002 8,880,276 88,803 1,136,965 53,150
Common stock and warrants issued for
services at $0.30 per share 209,166 2,092 52,000 11,687
Common stock and options issued for
services at $0.30 per share 83,334 833 20,717 4,656
Common stock issued for services at $0.30 per share 9,834 98 2,852 -
Common stock issued for services at $0.80 per share 12,000 120 7,800 -
Stock options issued for services - - - 1,500
Common stock issued for exercise of warrants at $0.45
per share, net of commission expense of $14,850 350,000 3,500 149,920 (10,500)
Common stock issued for services at $0.66 per share 30,000 300 19,500 -
Stock options issued for directors fees and other services - - - 55,000
Common stock and warrants issued for purchase of
the Mesquite Mine 3,454,468 34,545 1,755,346 1,344,485
Common stock and warrants issued in private placement
less commissions and expenses of $1,187,835 25,125,000 251,250 6,912,234 1,985,500
Warrants issued for debt financing agreement - - - 156,000
Miscellaneous adjustments of stock (5,000) (50) 50 -
-
Net loss for the year ended December 31, 2003 - - - -
Other comprehensive (loss) - - - -
------------- ------------ --------------- -------------
Balance, December 31, 2003 38,149,078 381,491 10,057,384 3,601,478
Options issued for directors' services - - - 234,004
Options issued for officers' services - - - 309,250
Options issued for services by related party - - - 22,500
Common stock issued for services at $0.80 per share 109,000 1,090 86,110 -
Miscellaneous adjustments of stock (1) 3 (2) -
Net loss for the six months ended June 30, 2004
(unaudited) - - - -
Other comprehensive income - - - -
------------- ------------ --------------- -------------
Balance, June 30, 2004 (unaudited) 38,258,077 $ 382,584 $ 10,143,492 $ 4,167,232
============= ============ =============== =============
Other
Comprehensive
Deficit Income (Loss) Total
--------------- -------------- ------------
Balance, January 1, 2002 $ (468,805) $ (96,474) $ 2,378
Common stock issued for:
property at $0.45 per share - - 112,500
payables at $0.37 per share - - 18,518
Common stock and warrants issued for
cash at $0.30 per share - - 531,500
Adjustment and correction to outstanding shares - - -
Acquisition of Calumet Mining Company - - 48,743
Net loss for the year ended December 31, 2002 (370,051) - (370,051)
Other comprehensive income - 275,474 275,474
--------------- -------------- ------------
Balance, December 31, 2002 (838,856) 179,000 619,062
Common stock and warrants issued for
services at $0.30 per share - - 65,779
Common stock and options issued for
services at $0.30 per share - - 26,206
Common stock issued for services at $0.30 per share - - 2,950
Common stock issued for services at $0.80 per share - - 7,920
Stock options issued for services - - 1,500
Common stock issued for exercise of warrants at $0.45
per share, net of commission expense of $14,850 - - 142,920
Common stock issued for services at $0.66 per share - - 19,800
Stock options issued for directors fees and other services - - 55,000
Common stock and warrants issued for purchase of
the Mesquite Mine - - 3,134,376
Common stock and warrants issued in private placement
less commissions and expenses of $1,187,835 - - 9,148,984
Warrants issued for debt financing agreement - - 156,000
Miscellaneous adjustments of stock - - -
Net loss for the year ended December 31, 2003 (3,745,696) - (3,745,696)
Other comprehensive (loss) - (971,163) (971,163)
--------------- -------------- ------------
Balance, December 31, 2003 (4,584,552) (792,163) 8,663,638
Options issued for directors' services - - 234,004
Options issued for officers' services - - 309,250
Options issued for services by related party - - 22,500
Common stock issued for services at $0.80 per share - - 87,200
Miscellaneous adjustments of stock - - 1
Net loss for the six months ended June 30, 2004
(unaudited) (1,133,806) - (1,133,806)
Other comprehensive income - 561,183 561,183
--------------- -------------- ------------
Balance, June 30, 2004 (unaudited) $ (5,718,358) $ (230,980) $ 8,743,970
=============== ============== ============
8,743,970
The accompanying notes are an integral part of these financial statements.
3
WESTERN GOLDFIELDS, INC.
(FORMERLY BISMARCK MINING COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------
2004 2003
(Unaudited) (Unaudited)
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,133,806) $(268,344)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and depletion 478,595 -
Amortization of long term prepaid insurance 77,126 -
Amortization of loan fees 201,508 -
(Gain) on sale of assets and investments (16,398) (6,177)
Common stock, options and warrants issued for services 572,954 91,200
Exploration fees funded by stock 80,000 -
Common stock adjustment 1 -
(Loss) on cash management program (13,455) -
Changes in assets and liabilities:
Decrease (increase) in:
Restricted cash 3,897,229 -
Accounts receivable (36,413) -
Loan receivable 40,000 -
Inventories (799,057) -
Prepaid expenses 106,228 -
Deposits 580,804 -
Accrued interest receivable - (400)
Allowance for bad debt - 400
Increase (decrease) in:
Accounts payable (260,954) 32,039
Accrued expenses 221,891 (16,000)
Accrued expenses - related parties (22,500) -
Accrued interest expense (11,545) -
------------ -----------
Net cash provided (used) by operating activities 3,962,208 (167,282)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, including Construction
in Progress (621,013) -
Purchase of investments - remediation and reclamation (60,260) -
Increase in long-term deposits (4,999) -
Decrease in long-term prepaid insurance 18,538 -
Purchase of investments - (29,972)
Proceeds from sale of investments 7,606 39,025
Proceeds from sale of assets 407,231 -
------------ -----------
Net cash provided (used) by investing activities (252,897) 9,053
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds - 15,115
Deferred debt offering costs (22,594) -
Payments on loans (1,500,000) (25,115)
Net cash provided (used) by financing activities (1,522,594) (10,000)
Change in cash 2,186,717 (168,229)
Cash, beginning of period 373,500 209,101
------------ -----------
Cash, end of period $ 2,560,217 $ 40,872
============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 198,677 $ -
============ ===========
Income taxes paid $ - $ -
============ ===========
NON-CASH FINANCING AND
INVESTING ACTIVITIES:
Stock and warrants issued for services $ 7,200 $ 90,700
Stock options issued for services $ 565,754 $ 500
Exploration fees paid by issuance of common stock $ 80,000 $ -
Stock adjustment $ 1 $ -
4
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Western Goldfields, Inc. (hereinafter "the Company") and its wholly owned
subsidiaries are engaged in the exploration for, development of and extraction
of precious metals principally in the states of California, Nevada and Idaho.
The Company's two wholly owned subsidiaries are Calumet Mining Company and
Western Mesquite Mines, Inc.
Calumet Mining was acquired in August 2002 and was a dormant mining company.
(See Note 12.) Western Mesquite Mines was incorporated in 2003 for the
acquisition of the Mesquite Mine in California from Newmont Mining Corporation
in November 2003. (See Note 12.)
The Company was in the exploration stage through most of the year ended December
31, 2003 and all of the year ended December 31, 2002. With the acquisition of
the Mesquite Mine, the Company exited the exploration stage and became an
operating mining company. The Company's first sale of gold from its production
occurred in mid-January 2004. For the year ended December 31, 2002, the
Company's auditors expressed a going concern qualification in the Company's
audited financial statements.
In November and December 2003, the Company obtained significant additional
capital through a private placement of its stock. Management plans to use the
majority of the proceeds from the financing for operations of the Mesquite Mine,
as well as exploration and development of other properties. The Company has
demonstrated that it now has sufficient funds from anticipated operations and
investments to continue its committed operating and development plans.
The Company was originally formed on January 15, 1924, under the laws of the
State of Idaho, and in August 2002 changed its name from Bismarck Mining Company
to Western Goldfields, Inc.
The Company's year-end for reporting purposes is December 31.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in
understanding the financial statements. The financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.
ACCOUNTING METHOD
- -----------------
The Company uses the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America. The Company's
convention for closing its books is to cut-off all financial and operational
measurements at midnight on the Saturday closest to the actual end of each month
during the year and at midnight on the 31st of December each year.
PRINCIPLES OF CONSOLIDATION
- ----------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, after elimination of the inter-company accounts
and transactions. Wholly owned subsidiaries of the Company are listed in Note
14.
REVENUE RECOGNITION
- -------------------
Revenue is recognized when metal is delivered and title passes. The effect of
forward sales contracts are reflected in revenue at the date the related
precious metals are delivered or the contracts expire. Third party smelting and
refining costs are recorded as a reduction of revenue. By-product credits will
be off-set against operating expenses in the future when generated.
5
ACCOUNTS RECEIVABLE
- -------------------
The Company records its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
The Company's trade receivables are related to precious metals delivered against
a forward sales contract or a spot sale contract whose settlement has not
occurred. Settlement usually occurs in between two and fifteen business days and
is made through international metals refiners and brokers.
USE OF ESTIMATES
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of mineral reserves,
reclamation and environmental obligations, impairment of assets, useful lives
for depreciation, depletion and amortization, measurement of metal-in-process
and finished goods inventories, values of options and warrants, and valuation
allowances for future tax assets. Actual results could differ from those
estimates.
EXPLORATION COSTS
- -----------------
In accordance with accounting principles generally accepted in the United States
of America, the Company expenses exploration costs as incurred.
EXPLORATION STAGE ACTIVITIES
- ----------------------------
The Company is primarily engaged in the acquisition, exploration and development
of mining properties. On November 7, 2003, concurrent with the acquisition of
the Mesquite Mine, the Company started production of metals while studying
enhancements to the processing of the heaps and the potential commencement of
future mining operations.
CASH AND CASH EQUIVALENTS
- -------------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
RESTRICTED CASH
- ---------------
As of December 31, 2003, the Company had cash proceeds from common stock sold as
part of a private placement in November and December 2003 held by the investment
firm representing the Company. Most of the proceeds from these stock sales were
released in January and February 2004 with the remainder released in June 2004.
DERIVATIVE INSTRUMENTS
- ----------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133," SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," and SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which is effective for the Company as of
June 30, 2003. These standards establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. They require that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value.
6
A derivative may be specifically designated as a hedge of financial risk
exposures of anticipated transactions if, both at the inception of the hedge and
throughout the hedge period, the changes in fair value of the contract
substantially offset the effect of commodity price changes on the anticipated
transactions and if it is probable that the transactions will occur. The Company
regularly monitors its commodity exposures and ensures that contracted amounts
do not exceed the amounts of underlying exposures.
Realized prices under the Company's forward sales contract are recognized in
gold sales and by-product credits as the designated production is delivered to
meet commitments. The Company values gold for all cash flow hedging purposes
based upon the London Afternoon Gold Fix for each valuation date, modified by
the gold forward rate expected by the Company subject to the Company's
discounted financing costs. Management maintains estimates for each quarterly
expected forward sales values to approximate the future value of forward sales
contracts for the determination of provisions for gains or losses on
derivatives.
The income effect of the change in derivative values will be accounted for in
other comprehensive income based upon the Company's quarterly valuation of the
associated financial gain or loss. Any changes arising from the determination of
the derivative's effectiveness is accounted for as a charge to current
operations.
In the event of early settlement or redesignation of hedging transactions, gains
or losses are deferred and brought into income at the delivery dates originally
designated. Where the anticipated transactions are no longer expected to occur,
with the effect that the risk that was hedged no longer exists, unrealized gains
or losses are recognized in income at the time such a determination is made.
Cash flows arising in respect of these contracts are recognized under cash flow
from operating activities.
COMPREHENSIVE INCOME (LOSS)
- ---------------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which was issued
in June 1997. SFAS No. 130 establishes rules for the reporting and displaying of
comprehensive income and its components, but had no effect on the Company's net
loss. SFAS No. 130 requires unrealized gains and losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in comprehensive income.
COMPENSATED ABSENCES
- --------------------
Employees of the Company are entitled to paid vacation depending on length of
service. As of December 31, 2003, the Company had no liability and had not yet
hired employees. As of June 30, 2004, a liability of $27,036 for accrued
vacation has been recorded for all locations.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that this statement has no effect on the Company's financial
statements.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" (hereinafter "SFAS No. 148"). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of the statement are effective
7
for financial statements for fiscal years ending after December 15, 2002. The
Company currently reports stock issued to employees under the rules of SFAS 123.
Accordingly there is no change in disclosure requirements due to SFAS 148.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (hereinafter "SFAS No. 146"). SFAS No. 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees, and termination benefits provided
to employees that are involuntarily terminated under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 was issued in June 2002 and is
effective for activities after December 31, 2002. The Company has established a
remediation and reclamation liability to cover costs related to the exit and/or
disposal of its mining property.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(hereinafter "SFAS No. 145"), which updates, clarifies and simplifies existing
accounting pronouncements. FASB No. 4, which required all gains and losses from
the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related tax effect was rescinded. As a result, FASB
No. 64, which amended FASB No. 4, was rescinded, as it was no longer necessary.
FASB No. 44, "Accounting for Intangible Assets of Motor Carriers", established
the accounting requirements for the effects of transition to the provisions of
the Motor Carrier Act of 1980. Since the transition has been completed, FASB No.
44 is no longer necessary and has been rescinded. SFAS No. 145 amended FASB No.
13 to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company adopted SFAS No. 145 which did not have a material
effect on the financial statements of the Company at June 30, 2004 or December
31, 2003.
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company maintains its cash in several commercial accounts at major financial
institutions which includes funds included in cash and deposit accounts.
Although the financial institutions are considered creditworthy and have not
experienced any losses on their deposits, at June 30, 2004 and December 31,
2003, respectively, the Company's cash balance exceeded Federal Deposit
Insurance Corporation (FDIC) limits by $2,565,217 and $176,270.
The Company processes and sells its metal through an international metals
company. The Company reviews the credit worthiness of its metals outlets at
least annually and as of June 30, 2004 was not aware of any factor which would
impact its sales of metal and ultimate collection of receivables from such
sales.
PROVISION FOR TAXES
- -------------------
Income taxes are provided based upon the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this approach, deferred income taxes are recorded to reflect the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end. A
valuation allowance is recorded against deferred tax assets if management does
not believe the Company has met the "more likely than not" standard imposed by
SFAS No. 109 to allow recognition of such an asset.
At June 30, 2004, the Company had net deferred tax assets (calculated at an
expected rate of 39% for 2004 and part of 2003, and 34% for all prior periods)
of approximately $855,000 principally arising from net operating loss
carryforwards for income tax purposes. The net deferred taxes are calculated
based upon both federal and state expected tax rates. As management of the
Company cannot determine that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset, a valuation allowance equal
to the net deferred tax asset has been recorded at June 30, 2004, and December
31, 2003. The significant components of the deferred tax asset at June 30, 2004,
and December 31, 2003, were as follows:
8
JUNE 30, DECEMBER 31,
2004 2003
---------------- -----------------
Net operating loss carryforward $ 2,340 ,000 $ 1,570,000
================ =================
Deferred tax asset $ 855,000 $ 555,000
Deferred tax asset valuation allowance (855,000) (555,000)
---------------- -----------------
Net tax assets $ - $ -
================ =================
At June 30, 2004, the Company has net operating loss carryforwards of
approximately $2,340,000, which expire in the years 2019 through 2024. The
Company recognized approximately $565,000 and $180,000 of losses from issuance
of restricted common stock and stock options for services during the six months
ended June 30, 2004 and fiscal 2003, respectively, which are not deductible for
tax purposes and are not included in the above calculation of deferred tax
assets. Also, the Company has recognized costs for financial statement purposes
of approximately $2,700,000 for mineral property and ore on leach pad that are
not deductible for tax purposes in 2003. The allocation of the costs to the
leach pads did result in additional tax deduction for depletion from recoveries
of gold estimated to be $205,000 as of June 30, 2004. The change in the
allowance account from December 31, 2003 to June 30, 2004 was $300,000 and from
December 31, 2002 to December 31, 2003 was $300,000. The Company has also issued
substantial amounts of new common stock in 2002 and 2003, which may have
resulted in control changes. A control change may limit the availability of the
net operating losses from periods prior to the control change. The Company also
has available limited net operating losses from prior acquisitions, which may be
available for tax purposes.
INVESTMENT IN SECURITIES
- ------------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115, the
Company's investments in securities are classified as either trading, held to
maturity, or available-for-sale. During the six months ended June 30, 2004 and
the year ended December 31, 2003 the Company did not own any securities
classified as either trading or held to maturity. However, at June 30, 2004 and
December 31, 2003 the Company did own securities classified as
available-for-sale.
Securities available-for-sale consist of debt and equity securities not
classified as trading securities or as securities to be held to maturity.
Unrealized holding gains and losses, net of tax, on securities
available-for-sale are reported as a net amount in a separate component of other
comprehensive income.
Gains and losses on the sale of securities available-for-sale are determined
using the specific identification method and are included in earnings.
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to ten years, or units-of-production
method over the estimated useful life of the property. (See Note 5.)
MINERAL PROPERTIES
- ------------------
Mineral properties are stated at cost. Depletion of mineral properties is
calculated using the units-of-production method over the estimated recoverable
ounces of gold on the property. (See Note 3.)
BASIC AND DILUTE NET LOSS PER SHARE
- ------------------------------------
Net loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding during the period. The weighted average number of
shares was calculated by taking the number of shares outstanding and weighting
them by the amount of time that they were outstanding. Basic and diluted net
loss per
9
share were the same, as the common stock equivalents outstanding would be
considered anti-dilutive. As of June 30, 2004 and December, 31, 2003
respectively, the Company had outstanding options for 2,683,334 and 358,334
shares and outstanding warrants for 24,787,515 and 24,637,515 shares.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," include cash, restricted cash,
accounts and loans receivable, prepaids, accounts payable, accrued expenses and
short-term borrowings. All instruments are accounted for on a historical cost
basis, which, due to the short maturity of these financial instruments,
approximates fair value at June 30, 2004 and December 31, 2003.
ACCOUNTING FOR STOCK OPTIONS AND WARRANTS GRANTED TO EMPLOYEES AND NONEMPLOYEES
- -------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of
accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
METAL ON LEACH PAD AND IN METAL-IN-PROCESS INVENTORY
- ----------------------------------------------------
The Company took over the Mesquite Mine on November 7, 2003 with an estimated
50,800 ounces of recoverable gold contained in mineralized ores previously
placed on impermeable, lined pads. During the periods ended June 30, 2004 and
December 31, 2003 the Company extracted 15,563 and 5,367 ounces of gold,
respectively, from the pads into metal-in-process inventory, leaving on the pads
an estimated 29,870 ounces of gold as of June 30, 2004 and 45,433 ounces of gold
as of December 31, 2003. The Company carries no value in its financial
statements for metal on the leach pads and the initial value assigned to mineral
properties for metal on the leach pads, in accordance with SEC Industry Guide 7,
has been included in exploration expense.
In the six month period ended June 30, 2004, the Company had its first sales of
gold from metal-in-process inventory generating sales of 13,679 ounces during
this six month period. There were no sales prior to January 1, 2004. Prior to
November, 2003, the Company had no production activities.
The determination of both the ultimate recovery percentage and the quantity of
metal expected over time requires the use of estimates, which are subject to
revision since they are based upon metallurgical test work. The Company expects
to continue to process and recover metal from the leach pads until no longer
considered economically feasible.
INVENTORIES:
- ------------
i) Bullion (metal refined to industry purity standards) inventory, which
includes metal held on our behalf by third parties is valued at
market.
ii) Metal-in-process inventory, which is metal in solution or in various
parts of the processing circuit, is valued at the lower of average
production cost or net realizable value. Production costs include
processing and administrative costs, which are charged to operations
and included in cost of sales on the basis of ounces of gold
recovered. Based upon actual gold recoveries and operating plans, the
Company continuously evaluates and refines estimates used in
determining the costs charged to operations and the carrying value of
costs associated with the metals in circuit.
iii) Materials and supplies inventory is stated at the lower of average
cost or net realizable value.
DEPOSITS
- --------
Under the terms of its power purchase agreement with the local power provider,
which is a quasi-public agency, the Company is required to collateralize certain
portions of the Company's obligations. The Company has collateralized these
obligations by assigning a $300,000 certificate of deposit for a period of three
years. The ultimate timing for the release of the collateralized amounts is
dependent on the credit worthiness of the Company and/or the timing and closure
of the Mesquite mine. Collateral could also be released to the extent that the
Company is able to secure
10
alternative financial assurance satisfactory to the respective agency. The
Company's management expects that the aforementioned collateral will remain in
place beyond a twelve-month period and has therefore classified these deposits
as long-term.
The Company had also advanced working capital, in the amount of $585,000, to its
management contractor to cover anticipated operating costs at the Mesquite Mine.
In May 2004, this deposit was offset against the final invoices from the
contractor upon the termination of its contract.
RECLAMATION AND REMEDIATIO COSTS
- --------------------------------
Estimated future costs are based principally on legal and regulatory
requirements. Such costs related to active mines are accrued and charged over
the expected operating lives of the mines using the units-of-production method.
Future remediation costs for inactive mines are accrued based on management's
best estimate at the end of each period of the undiscounted costs expected to be
incurred at the site. Such cost estimates include, where applicable, ongoing
care and maintenance and monitoring costs. Changes in estimates are reflected in
earnings in the period an estimate is revised.
RECLASSIFICATIONS
- -----------------
Certain reclassifications of prior year balances have been made to conform to
current year presentation.
NOTE 3 - MINERAL PROPERTIES
The Company controls the following mineral properties:
CALIFORNIA PROPERTIES
MESQUITE MINE
- -------------
In July 2003, the Company issued 111,859 shares of common stock as a deposit on
the purchase of the Mesquite Mine, in Imperial County, California. In November
2003, the Company completed this purchase and issued an additional 2,217,609
shares of common stock and 2,494,810 warrants with an exercise price of $1.00
per share. As of December 2003, the Company remained obligated to issue
additional shares and warrants under the purchase agreement. The Company issued
1,125,000 shares of common stock in January 2004, and 5,596,370 warrants for the
purchase of one share of common stock each, with an exercise price of $1.00 per
share, in March 2004, in final settlement of its obligations under this
agreement (See Note 12).
AMOUNT VALUE PER SHARE VALUE
---------- ---------------- ----------
Reclamation Obligation Assumed - - $5,998,994
Western Goldfields Common Stock 3,454,468 $ 0.52 1,789,891
Warrants - Western Goldfields stock, exercisable at $1.00
per share of common 450 days from issuance and for 5
years thereafter 2,494,810 0.18 449,066
Warrants - Western Goldfields stock, exe rcisable at $1.00
per share of common 815 days from issuance and for 5
years thereafter 5,596,370 0.16 895,419
----------
Total Consideration 9,133,370
==========
Allocation to Fixed Assets:
Property, plant and equipment, including buildings $6,471,000
Mineral properties 2,662,370
----------
$9,133,370
==========
11
The fair market value of the acquired property, plant and equipment was
determined by review by the mine operations contractor. (See Note 15.) The
remaining value was allocated to mineral properties, and expensed in December
2003 as a part of a $2,791,603 in exploration expenses.
GOLD POINT MINE
- ---------------
In September 2002, the Company acquired the Gold Point Mine mining claims from
Western Continental, Inc. in exchange for 250,000 shares of our common stock
valued at $112,500, assumption of liabilities of $5,000, mining claims valued at
$15,000, 141,875 shares of Grand Central Silver Mines valued at approximately
$28,375 and $2,500 cash. Western Continental, Inc. was controlled by William L.
Campbell, its President, who prior to August 24, 2002, also served as the
Company's President.
CALIFORNIA PROPERTIES - OTHER
- -----------------------------
In January 2003, the Company reached an agreement on the Cahuilla Gold Project
near Indio, California. This agreement with the Torres Martinez Tribe, and an
extension signed in July, 2004, gives the Company through October, 2004 the
exclusive negotiation rights and access to geologic sites for their evaluation
in advance of entering into a formal exploration/mining agreement to nearly two
square miles of property. In January 2004, the Company increased its land
position at Cahuilla by acquiring 100% of La Cuesta International, Inc.'s
interests in two separate mining leases that collectively cover approximately 70
acres adjacent to the Torres Martinez Tribal lands.
NEVADA AND IDAHO PROPERTIES
At December 31, 2002, Calumet Mining Company, the Company's subsidiary, held
several mining claims throughout Nevada and Idaho. They consist of four
unpatented mining claims in Sunnyslope, Nevada, two unpatented mining claims in
Koegel Hills, Nevada, two unpatented mining claims in Corral Canyon, Nevada, six
unpatented mining claims in Buckskin North (lease lapsed in 2003), Nevada, two
unpatented mining claims in Golden Lyon (lease lapsed in 2003), Nevada, nineteen
unpatented lode mining claims in Shoshone County, Idaho, in addition to a
10-year lease for 635 acres in Shoshone County, Idaho and five unpatented lode
mining claims in the Pyramid Mine near Fallon, Nevada. Due to a lack of evidence
establishing proven and probable reserves, the acquisition costs of these mines
were included in Calumet Mining Company's net loss for the period ended August
25, 2002 as an exploration expense. (See Note 14.)
In April 2004, the Company entered a non-binding letter of intent with Coolcharm
Ltd. with respect to a joint venture for the Lincoln Hill Mine, whereby
Coolcharm will invest in exploration and development of the property. Under the
agreement Coolcharm could invest up to $4,000,000 in exploration and development
expenses and earn up to 60% interest in the property.
Also in April 2004 the Company entered a non-binding letter of intent to form a
joint venture with 321 Gold for an exploration and development agreement on the
Sunny Slope Mine property. Under this agreement, 321 Gold would expend up to
$1,000,000 on the exploration and development of the property in anticipation of
earning up to a 70% interest in the property.
The Company has staked additional claims during 2003 at the Sunny Slope Mine,
increasing the unpatented mining claims to 240 acres.
The Company has staked additional claims during 2003 at the Kibby Flats Mine,
increasing the unpatented mining claims to 320 acres.
The Company has staked additional claims during 2003 at the Gold Star Mine,
increasing the unpatented mining claims to 260 acres.
12
The Company has staked additional claims during 2003 at the Koegel Hills Mine,
increasing the unpatented mining claims to 1,480 acres.
The Lincoln Hill Mine was leased in December 2002 from an officer of the Company
and his partner. This claim represents unpatented claims covering 700 acres in
the Rochester Mining District near Lovelock, Nevada.
In January 2004, the Company entered discussions regarding the acquisition of
Nevada Colca Gold, a private corporation with mineral property interests in the
western United States and Mexico.
NOTE 4 -INVENTORIES
Inventories consist of the following:
JUNE 30, DECEMBER 31,
2004 2003
---------- ---------------
Bullion $ - $ 364,334
Metal-in-process 2,291,529 1,634,966
Supplies 157,332 222,327
---------- ---------------
Inventories $2,448,861 $ 2,221,627
========== ===============
Inventories include $364,334 in bullion at December 31, 2003 which, along with
$15,764 acquired in the first quarter of 2004, were all related to the original
purchase transaction with Newmont Mining Corporation for the Mesquite Mine. This
purchased inventory was disposed of in the first quarter for the total amount of
$407,231, which resulted in a gain of $27,132. These 1,003 gold ounces of
bullion were not produced in the normal course of business and were not included
in cost of sales.
Metal-in-process inventory contained approximately 7,159 and 5,367 ounces of
gold as of June 30, 2004, and December 31, 2003, respectively. This did not
include the 1,003 ounces of gold in bullion inventory at December 31, 2003.
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property, equipment, and accumulated depreciation
at June 30, 2004:
JUNE 30, DECEMBER 31,
2004 2003
----------- --------------
Buildings $3,550,000 $ 3,550,000
Equipment 3,393,239 2,981,376
----------- --------------
6,943,239 6,531,376
Less accumulated depreciation (644,133) (380,867)
----------- --------------
Net Property and Equipment $6,299,106 $ 6,150,509
=========== ==============
Depreciation expense for the six months ended June 30, 2004 and the year ended
December 31, 2003 was $208,379 and $380,867, respectively. There was no
depreciation expense taken for the year ended December 31, 2002 as the Company
had no depreciable property. The Company evaluates the recoverability of
property and equipment when events and circumstances indicate that such assets
might be impaired. The Company determines impairment by comparing the present
value of future cash flows estimated to be generated by these assets to their
respective carrying amounts. Maintenance and repairs are expensed as incurred.
Replacements and betterments are capitalized. The cost and related reserves of
assets sold or retired are removed from the accounts, and any resulting gain or
loss is reflected in results of operations.
13
In addition, the Company had construction in progress of $222,453 and $13,303 at
June 30, 2004, and December 31, 2003, respectively. No construction took place
in 2002.
NOTE 6 - RECLAMATION AND REMEDIATION INVESTMENTS AND BONDS
The Company paid $7,388,910 for a reclamation cost policy with American
International Specialty Loans Insurance Company in conjunction with the
acquisition of the Mesquite Mine. The policy covers liability for reclamation up
to $14,000,000 and establishes a reimbursement account with an initial balance
of $5,998,994 and prepays the excess coverage with an additional premium of
$1,389,916, which is to be amortized over an eleven-year period.
The reimbursement account has a balance of $6,059,254 and $5,998,994 as of June
30, 2004 and December 31, 2003, respectively. Management's estimate of all
reclamation obligations arising from the mine purchase and subsequent operations
are exceeded by the account balance.
The following bonds are covered by this insurance arrangement:
INCEPTION CONTRACT
BOND NUMBER DATE AMOUNT OBLIGEE(S)
- ---------------------------------------------------------------------------
ESD 7315360 11/7/2003 $1,179,465 Imperial County, CA
California Department of Conservation
U.S. Bureau of Land Management
- ---------------------------------------------------------------------------
ESD 7315361 11/7/2003 $1,190,614 Imperial County, CA
California Department of Conservation
U.S. Bureau of Land Management
- ---------------------------------------------------------------------------
ESD 7315362 11/7/2003 $ 61,783 Imperial County, CA
California Department of Conservation
U.S. Bureau of Land Management
- ---------------------------------------------------------------------------
ESD 7315363 11/7/2003 $ 550,000 California Water Quality Control Board
- ---------------------------------------------------------------------------
ESD 7315358 11/7/2003 $3,984,199 U.S. Bureau of Land Management
- ---------------------------------------------------------------------------
ESD 7315359 11/7/2003 $ 50,000 CA State Lands Commission
- ---------------------------------------------------------------------------
NOTE 7 - INVESTMENTS
The Company's investments are summarized as follows:
Fair value of common stock holdings: JUNE 30, DECEMBER 31,
2004 2003
- ------------------------------------ --------- -------------
Cadence Resources Corporation $ 43,000 $ 98,510
Lucky Joe Mining Company - -
Trend Mining Company - -
--------- -------------
Total fair value 43,000 98,510
Cost 30,000 34,885
--------- -------------
Gross unrealized holding gains $ 13,000 $ 63,625
========= =============
In October, 2003, the Company sold all its interest in 250,000 common shares of
Trend Mining Company for $220,147, recognizing a loss on disposition of $29,853.
As a part of this sale, two former officers/directors purchased a total of
200,589 shares for $17,050 under similar terms to the other purchasers in the
transaction.
The Company classifies its investments as available-for-sale securities. Cadence
Resources Corporation is a related party since one of Cadence's officers is a
director of the Company. Prior to March 1, 2004, Lucky Joe Mining
14
Company and Trend Mining Company were related parties in that the Company and
the investees had one or more officers and directors in common.
NOTE 8 - LOANS RECEIVABLE
In October 2003, the Company loaned $40,000 to Trend Mining Company. The loan is
uncollateralized, non-interest bearing and due on demand.
In January 2003, the Company paid expenses on behalf of Cadence Resources
Corporation in the amount of $15,115. In June 2003, these non-interest bearing
cash advances were repaid in full.
In September 2000, Calumet Mining Company loaned Elite Logistics $36,000 at 8%
per annum, uncollateralized, payable upon demand. In February 2001, principal
and accrued interest was partially repaid in the form of securities, leaving a
balance of $10,000. An allowance for bad debt has been established for the full
amount of the loan including accrued interest.
NOTE 9 - LONG-TERM PREPAID EXPENSES
The Company has entered into insurance contracts to insure the environmental and
pollution risk up to $14 million at its Mesquite Mine project. Additionally, the
policy covers reclamation risk, above the amount covered by the investment -
remediation and reclamation account, up to $14 million associated with the
Mesquite Mine project. The policies cover risk for up to 11 years. Their costs
are being amortized against earnings monthly and are summarized below.
JUNE 30, DECEMBER 31,
2004 2003
----------- --------------
Original Policy Premiums $1,642,621 $ 1,661,159
Amortization (102,295) (25,169)
----------- --------------
Unamortized Premium Cost 1,540,326 1,635,990
Current Portion (153,069) (153,069)
----------- --------------
Long-Term Prepaid Expenses $1,387,257 $ 1,482,921
=========== ==============
NOTE 10 - LOAN PAYABLE
As part of the acquisition of the Mesquite Mine, the Company entered into a
credit facility agreement on November 5, 2003 with R.M.B. International,
(Dublin) Limited, a Republic of Ireland corporation. This two-year credit
facility agreement resulted in the Company receiving $6,000,000 for a mortgage,
security, assignment, and financing agreement. Substantially all of the assets
acquired in the Mesquite Mine are pledged and mortgaged under these agreements,
as well as most of the Company's other property. Interest is accrued on this
credit facility at LIBOR plus 6% per annum, on a monthly basis. In January and
April 2004, the Company made the first two quarterly payments of $750,000 plus
interest. The Company is obligated to pay an additional $1,500,000 of loan
principal in 2004 and the balance of $3,000,000 in 2005.
As part of the credit facility agreement, the Company entered into a gold
hedging program under which it sold forward 26,399 ounces of gold at $382.95 per
ounce, or approximately 50% of expected production of gold from the heaps. These
ounces are scheduled to be delivered on January 30, 2004 and every three months
thereafter until October 31, 2005. On each of the settlement dates, the Company
settles in cash for the difference between the sales price and the hedged price
times the number of scheduled ounces to be sold for that three month period.
Unlike a conventional hedge, the Company was not required to put up collateral,
and the Company is not subject to any margin requirements. Since the Company
sold gold for more than the hedged price in the periods ended January 30 and
April 30, 2004, it made payments under the hedge totaling $88,621 and reduced
revenue by corresponding
15
amounts. Further, the Company expected the payments due under the hedge, net of
the sales revenues in excess of the forward price, covering the periods ended
after June 30, 2004 to be nominal.
The Company has a long-term strategy of selling its gold production at
prevailing market prices. Under its risk management policy, the Company
periodically reviews its exposure under this hedge and adjusts its risk profile
accordingly. Furthermore, to manage a portion of its revenue risk and in order
to provide additional comfort to the lender under the credit facility the
Company entered into this forward sale. The forward sale was entered into for
the amount of gold projected at the time entered into to be needed to cover
approximately 80% of the company's operating costs at Mesquite. The Company has
concluded that this program is effective for its purpose and does not expect
that it will be ineffective during the hedge period.
In addition to the pledge, credit facility, and facility agreements associated
with the loan, the Company also entered into a deposit account control agreement
wherein the Company agreed to maintain two bank accounts with an approved bank.
These accounts will control the funds advanced for the project and the proceeds
of gold and other metal sales. Funds from these accounts can be released only
with the consent of the lender and the approved bank.
The Company's summary information for the valuation of derivatives, which
includes management's estimate of the Company's discounted financing rate and
the gold forward rate, as of June 30, 2004 and December 31, 2003 is as follows:
JUNE 30, DECEMBER 31,
2004 2003
London Afternoon Gold Fix $ 395.80 $ 417.25
Undelivered ounces of gold sold forward 19,651 26,399
Loss (Gain) recognized as other
comprehensive Income $(611,808) $ 855,788
Value of provision for forward sales derivative-
Marked-to-market $ 243,980 $ 855,788
In September 2002, Dotson Exploration Company, a related party, loaned $10,000
to the Company. The debt was uncollaterized, non-interest bearing and due on
demand. In June 2003, the loan was repaid in full.
NOTE 11 - PREFERRED STOCK
The Company has 25,000,000 shares of $0.01 par preferred stock authorized. No
shares are issued or outstanding.
NOTE 12 - COMMON STOCK
As discussed in Note 3, the Company issued 3,454,468 shares of common stock for
the purchase of the Mesquite Mine during the period between July, 2003 and
January, 2004. The initial deposit for this transaction was the issuance in July
2003 of 111,859 shares of common stock.
During the first quarter of 2004, the Company issued 100,000 shares of common
stock to satisfy its obligations under two property acquisition agreements.
In November and December, 2003, as part of a private placement raising $9.1
million after expenses, the Company issued 12,500,000 investments units. The
investment units consisted of one share of common stock, one warrant to purchase
another share of common stock at $1.00 per share, and an additional share of
common stock held in escrow. The escrowed shares were to be distributed if the
Company had not completed a listing on the Toronto Stock Exchange by the end of
February, 2004. In an attempt to satisfy this requirement, the Company entered
into a letter of intent with Tandem Resources, Ltd. for a potential merger
transaction which would have accomplished this
16
listing. In February of 2004, this letter of intent was terminated by the
Company due to complex tax and regulatory issues. The escrow agent released the
escrowed shares to the original purchasers in March 2004.
In the fourth quarter of 2003, the Company issued 30,000 shares of common stock
at $0.66 per share for a total value of $19,800 for services rendered.
In the third quarter of 2003, certain shareholders exercised warrants at $0.45
per share for 350,000 shares of common stock.
In June 2003, the Company entered into a consulting agreement, with an outside
consulting company controlled by a director, but prior to his appointment as a
director, whereby the Company issued common stock and 50,000 options to for the
purchase of common stock (with an exercise price of $1.70 per share) valued at
$31,470. (See Notes 13 and 15.) At December 31, 2003, 12,000 shares had been
issued and an additional 9,000 shares accrued under the agreement. The value of
the 9,000 shares was accrued in accounts payable at December 31, 2003 and the
shares were issued in March of 2004. In November 2003, and in conjunction with
the private placement referred to above, the Company issued an additional
125,000 shares of common stock valued at $0.80 per share and 200,000 options to
this consultant with an exercise price of $1.00 per share of common stock. (See
Note 13.)
In January 2003, the Company issued 209,166 units for services rendered. Each
unit consists of one share of common stock and a warrant exercisable for the
purchase of one share of common stock. The warrants have an exercise price of
$0.45 per share, are fully vested and can be exercised for up to two years from
the date of issuance. The common stock in this transaction was valued at $0.27
per share, and the warrants at $0.03 per warrant.
Also in January 2003, the Company issued 83,334 option units for services
rendered. Each unit consists of one share of common stock and an option
exercisable for the purchase of one share of common stock. The options have an
exercise price of $0.45 per share, are fully vested and can be exercised for up
to two years from the date of issuance. The common stock in this transaction was
valued at $0.27 per share, and the options at $0.03 per option.
In January 2003, the Company cancelled 5,000 shares of common stock valued at
par as part of a shareholder transaction. Also in 2003, the Company issued 9,834
shares of common stock for services rendered of $2,950.
In December 2002, the Company issued 1,771,669 units for $531,500 cash. Each
unit consists of one share of common stock and a warrant exercisable for the
purchase of one share of common stock. The warrants have an exercise price of
$0.45 per share, are fully vested and can be exercised for up to two years from
the date they were issued. The common stock in this transaction was valued at
$0.27 per share, and the warrants at $0.03 per warrant.
In April 2002, the Company issued 16,667 shares to a related party for
outstanding payables attributable to accounting, stock transfer and consulting
services rendered of $18,518. On August 24, 2002, the Company completed a 1 for
3 reverse split. Prior issuances presented in these financial statements have
been adjusted to reflect the split. On August 25, 2002, the Company acquired all
of the outstanding shares of Calumet Mining Company on a 1 for 2 basis by
issuing 3,500,000 shares (See Note 14). Also in August 2002, the Company issued
250,000 shares of the Company's common stock plus other consideration for a
mineral property known as the Gold Point Mine. The Company's common stock issued
as part of this transaction was valued at $112,500.
The Company made other cumulative stock corrections during 2002 in the amount of
8,607 shares.
NOTE 13 - STOCK OPTIONS AND WARRANTS
The Company estimates the fair value of options and warrants using the
Black-Scholes Option Price Calculation. The Company used the following
assumptions in estimating fair value: the risk-free interest rate of 3.5% to 5%,
volatility ranging from 30% to 60%, and the expected life of the options and
warrants from two to ten years. The Company also assumed that no dividends would
be paid on common stock. Warrants may be exercised under the cash-less method
requiring a corresponding reduction in the amount of common stock issued in
relationship to its cash value at the time the warrants are exercised.
17
In the second quarter of 2004, the Company granted 250,000 options exercisable
for the purchase of one share of common stock each with an exercise price when
vested at market value, or at between $0.50 and $2.00 per share if specified.
These options generally vest over periods of up to 60 months.
In the first quarter of 2004, the Company granted 2,075,000 options exercisable
for the purchase of one share of common stock each with an exercise price when
vested at market value, or at between $0.50 and $2.00 per share if specified.
These options generally vest over periods of up to 60 months.
In December 2003, the Company issued 13,750,000 warrants exercisable for the
purchase of one share of common stock each with an exercise price of $1.00 per
share.
As part of the purchase of the Mesquite Mine in 2003, the Company issued
8,091,180 warrants for the purchase of one share of common stock each with an
exercise price of $1.00 per share. (See Note 3.)
In June, 2003, the Company issued 50,000 options to purchase common stock for
consulting services rendered. In November 2003, the Company issued an additional
200,000 options to purchase common stock to the same consultant. (See Note 12.)
In September, 2003, the Company issued 200,000 options to a director and 75,000
to another director for services rendered. The options have an exercise price of
$0.50 per share, and are exercisable for three years. These options were valued
at $55,000.
In September, 2003, the Company issued 75,000 options to a consultant for
services rendered. The options have an exercise price of $1.50 per share, and
are exercisable for three years. These options were valued at $10,500.
In January 2003, the Company issued 209,166 warrants and 83,334 options for
services rendered. (See Note 12.)
No options were issued prior to January 1, 2003.
In December 2002, the Company issued 1,771,669 warrants as part of a sale of
securities. (See Note 12.)
18
The following is a summary of stock options:
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE FAIR VALUE
--------- ----------------- -----------------
January 1, 2003 - $ -
Granted 358,334 0.49
Exercised - -
--------- -----------------
Outstanding and exercisable at
December 31, 2003 358,334 $ 0.49
========= =================
Weighted average fair value of options
granted during the year ended
December 31, 2003 $ 0.17
=================
Balance January 1, 2004 358,334 $ 0.49
Granted 2,325,000 0.88
Exercised - -
--------- -----------------
Outstanding at June 30, 2004 2,683,334 $ 0.83
========= =================
Exercisable at June 30, 2004 1,483,334 $ 0.80
========= =================
Weighted average fair value of options
granted during the six months ended
June 30, 2004 $ 0.30
=================
The above stock options have been issued under an equity compensation plan
approved by the directors but not by the shareholders.
NOTE 14 - SUBSIDIARIES
CALUMET MINING COMPANY
- ----------------------
On August 25, 2002, the Company acquired all of the outstanding shares of
Calumet Mining Company. (See Note 12.) This was considered a merger of commonly
controlled entities because Calumet was controlled and owned in part by one of
the Company's directors. The acquisition was accounted for through the purchase
method of accounting at the book value of the net assets. Calumet was mainly a
dormant mining company with no significant transactions in 2002, other than the
information reflected in Note 3 and the acquisition of the Gold Point Mine. The
net assets acquired were as follows:
Cash $ 1,453
Investments 31,000
Bond - State of Idaho 5,000
Note receivable 10,000
Accrued interest receivable 1,133
Other assets 157
Liabilities -
-------
Total Net Assets Acquired $48,743
=======
WESTERN MESQUITE MINES, INC.
- ----------------------------
In November 2003, the Company created a wholly owned subsidiary, Western
Mesquite Mines, Inc. ("WMMI"), which entered into a $6 million credit facility
agreement with two companies. Coincident with the establishment of the credit
facility, the Company contributed to WMMI the assets at the Mesquite Mine
referred to in Note 3.
19
The Company guaranteed the obligations of WMMI under the agreement and issued
warrants to purchase 780,000 shares of common stock to the lenders. The warrants
are exercisable for three years from the date of the agreement for a purchase
price of $1.00 per share.
NOTE 15 - RELATED PARTY TRANSACTIONS
A director of the Company, appointed on January 23, 2004, has and has had a
separate consulting relationship with the Company, through a company he
controls, whereby his company is compensated for its consulting service at the
rate of $4,000 per month plus expenses. All invoices are paid monthly and no
amounts are recorded as payable to him or his company at June 30, 2004.
In April 2002, payables of approximately $22,500 were settled by the issuance of
16,667 shares of the Company and cash of $4,000. The amounts were for general
and administrative expenses and were advanced to the Company by its former
president.
Prior to January 1, 2004, officers of the Company were compensated for their
services as independent consultants on a monthly basis. As of June 30, 2004 and
December 31, 2003, nothing and $33,228, respectively, were accrued for these
services.
In order to complete the transition of operations, when the Company closed the
acquisition, the Company retained the services of Harrison Western Construction
Corporation to manage the Mesquite Mine for an initial period of six months.
Under the contract, Harrison Western Construction Corporation charged a
management fee of costs plus 10%. Prior to July 8, 2004, the President of
Harrison Western Construction Corporation was also a director of the Company.
Additionally, two shareholders, and former officers, of the Company purchased
from the Company the outstanding shares of Trend Mining Company that Western
Goldfields has been recognizing as an available-for-sale security. At June 30,
2004 and December 31, 2003, these persons owe the Company $11,575 and $17,050
respectively for the purchase which is reflected in accounts receivable in the
financial statements.
Other related party transactions are discussed in Notes 4, 7, 8, 10, 12, 14, and
16.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
MINING INDUSTRY
- ---------------
The Company is engaged in the exploration and development of mineral properties.
At present, the Company is in the process of preparing but does not have
feasibility studies establishing proven and probable reserves.
Although the minerals exploration and mining industries are inherently
speculative and subject to complex environmental regulations, the Company is
unaware of any pending litigation or of any specific past or prospective matters
which could impair the value of its mining claims.
CONSULTING AGREEMENTS
- ---------------------
During the period August 1, 2002 through December, 31, 2003, the Company's
President was granted compensation between $6,000 and $10,000 per month,
Secretary/Treasurer at $3,000 per month and Vice-President at $2,000 per month
in accordance with consulting service contracts. Amounts owed at December 31,
2003 and 2002 under these agreements are reflected in the accompanying balance
sheets under accrued expenses.
MINE OPERATING AGREEMENT
- ------------------------
20
In September 2003, a Company subsidiary entered into an agreement with Harrison
Western Construction Corporation for the operation of the Mesquite Gold Mine.
The agreement, which became effective with the acquisition of the Mesquite Mine,
has six-month terms that are automatically renewed unless terminated by one of
the parties. The contract was completed and terminated on May 8, 2004.
LEASE AGREEMENT
- ---------------
On April 1, 2004, the Company leased office space in Reno, Nevada to provide for
corporate offices. This lease is for a term of two years, requiring monthly
minimum lease payments of $4,444. The lease is renewable for two one-year
renewal periods at a 5% increase in base rent to $4,666 per month. The
Company's commitment as of June 30, 2004 is $26,664 for the last six months of
2004, $53,328 for 2005 and $13,332 for three months of 2006. In addition to the
minimum lease payments, the Company will pay 14% of the taxes and property
maintenance expenses. The Company paid one month's rent as a deposit of $4,444.
CONTRACT WITH THE COUNTY SANITATION DISTRICT OF LOS ANGELES
- -----------------------------------------------------------
During its ownership of the Mesquite Mine, Hanson Natural Resources, a prior
operator of the mine, entered into an agreement with the County Sanitation
District of Los Angeles County which then developed and permitted a plan to
create a 100 year landfill at the Mesquite Mine that, when completed, is
expected to be the largest residential waste disposal in the United States.
Waste is expected to be dumped on lined pads on the pediment to the southeast of
the Mesquite pits, ultimately including the southern sections of the leach pads.
The waste dumps can utilize much of the material mined at Mesquite as liner and
seal. Each cell of the landfill is expected to be sealed as it is completed.
Under the agreement with the County Sanitation District of Los Angeles County,
the Company has the right to explore, mine, extract, process, market and sell
ore, and otherwise conduct mining and processing activities, anywhere on the
property for an initial period through 2024 with automatic extensions until
2078. Much of the infrastructure at the property is likely to be retained by the
landfill after mining operations are completed and the Company has met certain
reclamation standards. Landfill operations are not expected to begin until 2008.
REGISTRATION RIGHTS AGREEMENT
- -----------------------------
During the period from November 2003 through January 2004 in connection with its
private placement, the Company agreed to certain requirements. These
requirements included the filing of a Form SB-2 registration concerning the
common stock of the private placement.
Under this agreement, if a default in the registration process occurs, the
Company could owe substantial penalties to the investors. In accordance with the
agreement for one or more reasons, if the registration is not declared effect by
the Securities and Exchange Commission by June 30, 2004, the penalty could be
enforced. The substantial penalty would be calculated as two percent of the
average closing price of the common stock in its principal market times the
investors' number of securities held per month. The Company anticipates that the
registration will be completed in the summer of 2004.
As of July 31, 2004, the Company had not completed its registration process as
required under the private placement at the end of 2003, referred to in Note 16.
As such, the company has accrued a penalty cost of approximately $500,000
through August 12, 2004 when the SB-2 was declared effective.
21
ITEM 2. PLAN OF OPERATION
OVERVIEW
We are an independent precious metals production and exploration company
focused on the western United States.
In November 2003, we obtained a $6 million credit facility in connection
with our acquisition of the Mesquite Mine. In addition, in November - December
2003, we conducted a private placement of 12,500,000 units consisting of two
shares of our common stock and warrants to purchase an additional share of our
common stock which resulted in aggregate net proceeds to us of approximately
$9.1 million. The warrants are exercisable for a period of two years from the
date of issuance for a purchase price of $1.00 per share, subject to
anti-dilution adjustments.
In early 2003 we began exploring the possibility of acquiring the Mesquite
Mine from Newmont Mining Corporation and a subsidiary of Newmont Mining
Corporation. In July 2003, we issued 111,859 shares of our common stock to
Newmont Mining Corporation for an exclusive option to purchase the Mesquite
Mine. In November 2003, we completed the purchase of the Mesquite Mine from
Newmont Mining Corporation for:
- assumption of reclamation responsibility and provision of
approximately $7.8 million in reclamation bonds to various
governmental authorities;
- additional shares of our common stock and warrants to purchase our
common stock. As a result of the transaction, Newmont Mining
Corporation owns 3,454,468 shares of our common stock and warrants to
purchase an additional 8,091,180 shares of our common stock;
- a perpetual net smelter return royalty ranging from 0.5% to 2.0% on
any newly mined ore; and
- a net operating cash flow royalty equal to 50% of the proceeds
received, minus certain operating costs, capital expenses and other
allowances and adjustments, from the sale of ore or products derived
from ore that was placed on the heap leach pads as of the acquisition
date.
The purchase included all infrastructure and permits necessary to operate the
mine.
Since we acquired the Mesquite Mine it has produced an average of 2,600
ounces of gold per month from material that previous owners had placed on the
heap leach pads. During the period from November 7, 2003 to June 30, 2004, we
produced approximately 20,838 ounces of gold, of which 7,159 ounces were held as
inventory of metal in process prior to being refined at an outside refiner.
During the first six months of 2004, we sold approximately 13,679 ounces of
gold which either had been processed by Newmont Mining Corporation under the
terms of the processing agreement or had been processed at our own gold refining
circuit. The Mesquite operations produced 15,472 ounces of gold during the first
six months of 2004 and ended with 7,159 ounces in inventory.
We completed reconstruction of the gold refining circuit in April 2004 and
terminated the processing agreement. Between April 1, 2004 and June 30, 2004, we
have produced 6,717 ounces of gold and sold 6,507 ounces for our own account.
We have negotiated a bonding plan through American Home Assurance Company
for the operation and liability of the Mesquite Mine whereby the insurance
company offers a series of environmental insurance programs designed to cap
sponsor, vendor and partner liability for reclamation and closure costs,
including cost overruns as a result of unexpected contamination, increased costs
and legislative changes. The insurance company charged us an initial premium
based on their estimate of the net present value of the completion of the
reclamation, plus an annual fee. In exchange, the insurance company insures the
reclamation and closure process and provides the surety bond. We will make
claims against the insurance policy and funds will be released to pay for the
reclamation and closure expenditures as they are incurred. Any revenues from the
sale of material is to the account of the project sponsor and any profits from
cost savings in the actual program versus the bonded amount are released to the
sponsors when the project bonding is released.
22
There are two phases of the Mesquite Mine project. The continuing
operations comprise leaching of minerals inventoried on the pads prior to
September 2001. We intend to implement a program that will seek to increase
recovery from the pads. We estimate that in 2004 we will invest approximately
$1.1 million for facilities enhancements and infrastructure improvements for the
continuing operations, of which approximately $419,364 has been spent through
June 2004.
In the second phase at the Mesquite Mine, we also intend to undertake
development of the existing heap leach pads and exploration of the other areas
of the Mesquite Mine in 2004. There can be no assurance that we will find any
minerals or reserves on ourproperties. We must conduct exploration to determine
what amount of minerals, if any, exist on our properties and if any minerals
which are found can be economically extracted and profitably processed.
We intend to contact other companies to explore joint venture possibilities
with respect to our properties. We intend to attempt to define mineralized
material on the properties that could be developed into minable reserves and to
bring reserves to production. We intend to identify and engage joint venture
candidates with funds available to support the cost of defining and developing
the properties to production. Currently, we have entered into nonbinding letters
of intent for joint venture arrangements with respect to the Lincoln Hill Mine
and the Sunny Slope Mine. However, we have not identified or contacted any other
joint venture candidates. We cannot assure you that we will be able to enter
into a joint venture arrangement for the exploration or development of our
properties, including the Lincoln Hill Mine and the Sunny Slope Mine, on terms
that are favorable to us, if at all.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2003
During the three months ended June 30, 2004, we had net revenues of
$2,127,481 from the sale of 6,507 ounces of gold produced from the Mesquite
Mine. During the three month period ended June 30, 2003 we had generated no
revenues.
Mine operating costs were $1,773,648 in the three months ended June 30,
2004 compared with $0 for the three months ended June 30, 2003. Mine site
administration was $568,027 in the three months ended June 30, 2004 compared
with $0 in the three months ended June 30, 2003. Depreciation, depletion and
amortization was $294,778 in the second quarter of 2004 compared with $0 in the
second quarter of 2003. After adjusting for an increase in inventories of
$137,479 in the second quarter of 2004 compared with $0 in the second quarter of
2003, total cost of goods sold was $2,506,788 in the three months ended June 30,
2004 compared with $0 in the three months ended June 30, 2003. We reported an
operating loss of $379,307 for the three months ended June 30, 2004 compared
with $0 in the three months ended June 30, 2003. These changes reflect the
acquisition of our Mesquite Mine in November 2003.
We incurred exploration expenses of $56,803 during the three months ended
June 30, 2004 compared with $15,375 in the three months ended June 30, 2003.
This increase reflects the costs of projects to expand the Mesquite operations
and preliminary exploration activity relating to several properties we reviewed
for possible acquisition. General and administrative expenses increased to
$424,603 during the first quarter of 2004, compared with $126,622 in the first
quarter of 2003, reflecting additional corporate costs associated with the
acquisition of the Mesquite Mine in November 2003 and costs relating to
financing transactions. We reported an operating loss of $860,713 during the
three months ended June 30, 2004 compared with an operating loss of $141,997 in
the three months ended June 30, 2003.
Other expenses totaled $54,973 during the first three months of 2004
compared with $0 in the first three months of 2003. We reported a net loss of
$915,686 for the three month period ended June 30, 2004 compared with a net loss
of $141,997 for the three month period ended June 30, 2003.
23
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
During the six months ended June 30, 2004, we earned our first revenues
from operations since we emerged from dormancy in April 1999. We had net
revenues of $4,756,979 during the six months ended June 30, 2004 from the sale
of 13,679 ounces of gold produced from the Mesquite Mine.
Mine operating costs were $3,675,746 in the six months ended June 30, 2004
compared with $0 for the six months ended June 30, 2003. Mine site
administration was $949,902 in the six months ended June 30, 2004 compared with
$0 in the six months ended June 30, 2003. Selling, transportation and refining
was $65,341 and depreciation, depletion and amortization was $488,379 in the
first six months of 2004 compared with $0 and $0 respectively in the first six
months of 2003. After adjusting for an increase in inventories of $656,563 in
the first six months of 2004 compared with $0 in the six three months of 2003,
total cost of goods sold was $4,522,805 in the six months ended June 30, 2004
compared with $0 in the six months ended June 30, 2003. We reported a gross
profit of $234,274 for the six months ended June 30, 2004 compared with $0 in
the six months ended June 30, 2003. These changes reflect the acquisition of our
Mesquite Mine in November 2003.
We incurred exploration expenses of $189,564 during the six months ended
June 30, 2004 compared with $28,747 in the six months ended June 30, 2003. This
increase reflects the costs of projects to expand the Mesquite operations and
preliminary exploration activity relating to several properties we reviewed for
possible acquisition. General and administrative expenses increased to
$1,087,006 during the first half of 2004, compared with $245,774 in the first
half of 2003, reflecting additional corporate costs associated with the
acquisition of the Mesquite Mine in November 2003 as well as expenses incurred
relating to financing transactions. We reported an operating loss of $1,042,396
during the six months ended June 30, 2004 compared with an operating loss of
$274,521 in the six months ended June 30, 2003.
Other expenses totaled $91,410 during the first six months of 2004 compared
with other income of $6,177 in the first six months of 2003. We reported a net
loss of $1,133,806 for the six month period ended June 30, 2004 compared with a
net loss of $268,344 for the six month period ended June 30, 2003.
Cash received from operating activities increased to $3,962,208 during the
six months ended June 30, 2004 compared with a cash outflow of $167,282 in the
first six months of 2003. This change reflected operations at the Mesquite Mine
and the release of $3,897,229 in restricted cash relating to proceeds of our
November-December 2003 private placement. That release of funds to us was
partially offset by an increase in inventories of $799,057 during the period.
During the six months ended June 30, 2004, we used $621,013 to purchase
plant and equipment primarily related to the gold recovery circuit, a new
computerized accounting system and project expansion studies at the Mesquite
Mine and office equipment and furniture at the corporate office, compared with
$0 in the three months ended June 30, 2003. We also made the first two scheduled
repayments totaling $1,500,000 under the terms of our credit facility.
For the next four to six quarters, we expect to spend between approximately
$500,000 and $750,000 per month to operate the heap leach pad operation, a total
of approximately $453,000 for the investigation and initial enhancement of heap
leach pad processes and approximately $597,000 to complete a feasibility study
regarding the expansion of mining operations at the Mesquite Mine.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
We did not earn any revenues from operations from the period when we
emerged from dormancy in April 1999 through the year ended December 31, 2003.
Our activities during the period we emerged from dormancy in April 1999
through the nine month period ended September 30, 2003 were focused on the
acquisition of our interests in our mineral properties. We acquired interests in
fourteen properties. Each property is made up of a number claims. As of the year
ended December 31, 2003, we have conducted no exploration of our own on any of
these claims with the exception of minor surface sampling, assaying and mapping
of some of the surface veins and underground workings where accessible. From
24
the period we emerged from dormancy in April 1999 through the year ending
December 31, 2003, we have used our common stock to raise money for our property
acquisitions and for corporate expenses.
Following our acquisition of the Mesquite Mine in November 2003, gold
production was held in inventory under the terms of a carbon processing
agreement with Newmont Mining Corporation. Consequently we did not report any
revenues. We did incur mine operating costs of $1,030,102 during the year ended
December 31, 2003, compared with $0 in the twelve month period to December 31,
2002. We also incurred mine site administration costs of $166,923 and reported
depreciation, depletion and amortization of $437,941 during the year ended
December 31, 2003 compared with $0 and $0, respectively, during the year ended
December 31, 2002. These costs at the Mesquite Mine incurred during the year
ended December 31, 2003 resulted in an increase in inventories of $1,634,966
during the year from $0 in the year ended December 31, 2002. These changes
reflect the acquisition of the Mesquite Mine in November 2003.
We incurred exploration expenses of $55,447 during the year ended December
31, 2003 compared with $184,563 in the year ended December 31, 2002, reflecting
our focus during 2003 on completing the acquisition of the Mesquite Mine. When
we acquired the Mesquite Mine, we initially assigned a value of $2,731,156 to
the mineral properties for metal on the pads and had $5,000 in other claims.
However, since there is no assurance that we will be able to recover that metal
or the value of the other claims, we have recorded a non-cash exploration
expense of $2,736,156 in the year ended December 31, 2003 compared with $0 in
the prior year.
General and administrative expense increased to $767,966 for the year ended
December 31, 2003 from $103,494 for the year ended December 31, 2002. These
operating expenses included expenditures associated with exploration activities,
payments to consultants, legal and accounting fees, directors fees and general
and administrative expenses. This increase reflects our transition from a
dormant company to an active operating company. The largest increase in
expenditures occurred in payment of consulting fees reflecting the increased
activity in conducting due diligence and evaluation of the Mesquite Mine
acquisition and in the increase in corporate costs associated with raising funds
for the acquisition of the mine and other corporate purposes. Net cash provided
by financing activities in the year ended December 31, 2003 was $14,364,716
compared to $541,500 for the year ended December 31, 2002.
In the year ended December 31, 2003 other expenses increased to $186,127
from $81,994 in the year ended December 31, 2002. The increase primarily
reflects financing and interest expenses related to the financing to support the
acquisition of the Mesquite Mine. During the year ended December 31, 2003 we
reported a net loss of $3,745,696 compared with a net loss of $370,051 in the
year ended December 31, 2002.
We began our operation of the Mesquite Mine in November 2003. As a result,
our operating profile and the reasons for fluctuation in the expense amounts
between the periods prior to and following November 2003 changed significantly.
Prior to November 2003, we primarily concentrated our business on the
acquisition of properties and raising funds to advance our business. After our
acquisition of the Mesquite Mine, we intend to dedicate the majority of our
expenditures to retrieve gold from heap leach pads or from new mining and
processing at the Mesquite Mine.
LIQUIDITY AND CAPITAL RESOURCES; RECENT DEVELOPMENTS
As of June 30, 2004, there is limited historical financial information
regarding our company upon which to base an evaluation of our performance.
Expansion of operations at the Mesquite Mine and plans for further growth
of the company depend on our ability to obtain additional capital through the
issuance of additional debt or equity and through the generation of revenue.
Operating cash flows commenced in the first quarter of 2004, and therefore, we
have no historical comparative performance data.
At June 30, 2004, we had cash of $2,560,217. As of June 30, 2004, we had an
accumulated deficit of $5,718,358 and generated net revenues of $4,756,979
during the six months ended June 30, 2004 compared to an accumulated deficit of
approximately $1,107,200 with no revenues at June 30, 2003. Total current
liabilities as of June 30, 2004 were $4,231,449 as compared to $67,039 at June
30, 2003.
25
In November 2003, Western Mesquite Mines, Inc., our wholly-owned
subsidiary, entered into a $6 million credit facility agreement with RMB
International (Dublin) Limited and RMB Resources Limited. We guaranteed the
obligations of Western Mesquite Mines, Inc. under the facility agreement and
issued warrants to purchase 780,000 shares of our common stock to RMB Resources
Limited. The warrants are exercisable for a period of three years from the date
of the facility agreement for a purchase price of $1.00 per share, subject to
adjustments.
Western Mesquite Mines, Inc. commenced making principal and interest
payments under this loan in January 2004. Western Mesquite Mines, Inc. made its
first two principal payments under the facility agreement of $750,000 at the end
of April and January 2004. Borrowings under the facility agreement bear interest
at a base interest rate of LIBOR plus 6 percent. We believe that we will be able
to service this obligation through cash flow and cash reserves. Borrowings under
the facility agreement also bear interest at a variable interest rate of:
- 20% of amounts based on cash flow calculations to and including the
date which the agent under the facility agreement determines that the
internal rate of return of Western Mesquite Mines, Inc. has equaled or
exceeded 20 percent; and then
- 10% of amounts based on cash flow calculations until economic
exhaustion of gold production from the materials currently located on
the heap leach facilities on the project areas described in the
facility agreement.
Western Mesquite Mines, Inc. may prepay all or part of the outstanding
principal on any quarterly date after January 2004 and before the final
repayment date in an amount of not less than $200,000. If Western Mesquite
Mines, Inc. does not make a quarterly payment, it must pay an additional amount
of not less than $750,000 on the next quarterly payment date as a reduction in
principal. It is an event of default under the facility agreement if Western
Mesquite Mines, Inc. fails to pay an amount of not less than $750,000 on two
consecutive quarterly payment dates. In addition, Western Mesquite Mines, Inc.
must pay 50% of its excess cash flow for each quarter as a prepayment of
principal.
Our credit facility also restricts us from making expenditures that have
not been approved by the credit facility agent. Under the facility agreement, we
have agreed with the credit facility agent on a corporate budget as well as a
detailed operating budget for the Mesquite Mine. We provide the credit facility
agent with monthly reports that reconcile the actual results with that budget.
If we wish to make material expenditures not agreed to in the budget, we have to
seek the credit facility agent's prior approval. In particular, the facility
agreement provides that we may not dispose of, or create any encumbrance over,
any assets other than in the normal course of business, or incur indebtedness in
excess of $250,000.
In January 2004, we closed a private placement we conducted in November -
December 2003 of 12,500,000 units at a price of $0.80 per unit. Units consisted
of one share of our common stock, a warrant to purchase one share of our common
stock exercisable for two years at an exercise price of $1.00 per share and the
right to receive one share of our common stock issued in escrow under certain
circumstances. Each purchaser of a unit in the private placement was entitled to
receive the additional escrow share per unit purchased if we did not close a
transaction with another company before February 28, 2004 which resulted in the
listing of the resulting company's securities on the Toronto Stock Exchange. We
entered into a letter of intent with Tandem Resources, Ltd. for a potential
merger transaction to satisfy this condition of the private placement, but we
terminated the letter of intent in February 2004 due to potential tax and
regulatory issues associated with the transaction. The escrow agent released the
escrowed shares to the purchasers in March 2004.
We also agreed to register under the Securities Act of 1933, as amended,
the shares of common stock issued in the private placement, issued upon exercise
of the warrant issued in the private placement and shares of any resulting
entity in a merger transaction. In addition, we agreed under certain
circumstances, upon the request of the holders, to include those shares of our
common stock in a securities registration that we undertake on our behalf or on
behalf of others. by June 30, 2004. In the agreements, we agreed to pay
penalties to the investors based on 2% of the average closing sale price of our
common stock for each 30 days following June 30, 2004 in which this registration
statement is not effective. The Securities and Exchange Commission declared our
SB-2 registration statement effective on August 12, 2004, and we have incurred
penalties of approximately $500,000. We have
26
offered to settle the penalties with shares of our common stock at $0.50 per
share. We anticipate that the majority of our shareholders entitled to the
penalty payment will accept stock in lieu of cash.
Except for the Mesquite Mine, none of our properties has commenced
commercial production, and we have no history of earnings or cash flow from our
operations. While we may attempt to generate additional working capital through
the operation, development, sale or possible joint venture development of our
properties, there is no assurance that any such activity will generate funds
that will be available for operations.
Our operations of the Mesquite Mine operations began in November 2003. We
accumulated a work-in-progress inventory 5,367 ounces of gold during operations
in November and December 2003, produced an additional 15,472 ounces and sold
13,679 ounces during the first half of 2004, leaving a balance of 7,159 ounces
of gold in inventory as June 30, 2004. We experienced decreasing daily
production during November and early December. We immediately implemented
changes to bring production up to approximately 3,000 ounces per month during
the first three months of 2004, and production has since declined to
approximately 2,100 ounces per month during the second quarter of 2004. We have
implemented programs at the mine to reduce and control monthly expenditures with
the objective of reducing the operating cash cost.
We had no sales in 2003 as metal was being built up in circuits at the
Mesquite Mine and at the processing facility. Sales of metal will be recorded at
both the spot price and under the forward sales agreement in 2004, with the
related costs charged from inventory to cost of goods sold.
As part of our credit facility agreement, we entered into a cash flow
hedging program under which we sold forward through RMB International (Dublin)
Limited 26,399 ounces of gold at $382.95 per ounce, or approximately 50% of
expected production of gold from the heaps. These ounces were scheduled for
delivery beginning January 30, 2004 and every three months thereafter until
October 30, 2005 as follows: 2,380, 4,368, 3,733, 3,324, 3,577, 3,523, 2,897 and
2,597 ounces. On each of the settlement dates, we settle in cash for the
difference between the sales price and the hedged price times the number of
scheduled ounces to be sold for that three month period. Unlike a conventional
hedge, we were not required to put up collateral, and we are not subject to any
margin requirements. Since we sold gold for more than the hedged price in the
periods ended April 30 and January 30, 2004, we made a payment under the hedge
of $24,242 as of April 30, 2004 and $64,379 as of January 30, 2004 and reduced
revenue by corresponding amounts. As of June 30, 2004, we have paid
approximately $88,621 to RMB International (Dublin) Limited under this agreement
and have 19,651 ounces of gold outstanding subject to this hedge facility.
We have a long-term strategy of selling our gold production at prevailing
market prices. Under our risk management policy, we periodically review our
exposure under this hedge and adjust our risk profile accordingly. Furthermore,
to manage a portion of our revenue risk and provide additional comfort to the
lender under our facility agreement, we entered into this forward sale. We
believe this program to be effective for its purpose and do not expect that it
will be ineffective during the hedge period.
Our calculation of the derivative effects of the forward sales contract as
of June 30, 2004 and December 31, 2003 is as follows.
JUNE 30, 2004 DECEMBER 31, 2003
Afternoon Fix on the London Metal Exchange $ 395.80 $ 417.25
Undelivered ounces of gold sold forward 19,651 26,399
(Gain) Loss recognized as other comprehensive income $ (611,808) $ 855,788
Value of provision for forward sales derivative - marked-to-
market $ 243,980 $ 855,788
We are currently spending approximately $75,000 per month for our ongoing
corporate functions. In addition, we plan to spend between $300,000 and $500,000
over the next 12 months to advance our current portfolio of properties or to
acquire and advance other strategically important projects. We have not budgeted
specific amounts for exploration or development for any of our properties.
27
As of June 30, 2004, we believe that we have sufficient working capital to
make the royalty payments required on our properties, to conduct preliminary
exploration programs and to satisfy our cash requirements for the next twelve
months. Our credit facility restricts us from making expenditures that have not
been approved by the credit facility agent. We may need to obtain additional
funds, either through equity offerings or debt, to fund our general and
administrative expenses, make the advance royalty payments required on our
properties and conduct exploration programs on our properties. Failure to obtain
such additional financing will result in the loss by us of our interests in our
mineral properties. We have no agreements or understandings with any person for
additional financing.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
FORWARD LOOKING STATEMENTS
This report contains several "forward-looking statements." Forward-looking
statements are those that use words such as "believe," "expect," "anticipate,"
"intend," "plan," "may," "will," "likely," "should," "estimate," "continue,"
"future" or other comparable expressions. These words indicate future events and
trends. Forward-looking statements are our current views with respect to future
events and financial performance. These forward-looking statements are subject
to many assumptions, risks and uncertainties, many of which are beyond our
control, that could cause actual results to differ significantly from historical
results or from those we anticipated. The most significant risks are detailed
from time to time in our filings and reports with the Securities and Exchange
Commission.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Principal Executive Officer
and Principal Accounting Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as
of the end of the period covered by this report. Based on such evaluation, our
Principal Executive Officer and Principal Accounting Officer have concluded
that, as of the end of such period, our disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act.
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
28
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2004, we issued warrants to purchase 150,000 shares of our common
stock to Harrison Western Construction Company in connection with the management
contract for the Mesquite Mine. The warrants are exercisable for $1.00 per share
for a period of three years. Kenneth A. Brunk is the President and CEO of
Harrison Western Construction Company. Mr. Brunk resigned from our board of
directors in July 2004. The warrants were valued at $22,500.
In May 2004, Gerald B. Ruth joined our board of directors. In connection
with his joining our board of directors, we issued to Mr. Ruth the following
options to purchase shares of our common stock, in each case exercisable for a
five year period from the date of vesting:
- 75,000 shares exercisable immediately at an exercise price of $0.50
per share;
- 75,000 shares exercisable after six months from the date of grant at
an exercise price of $0.75 per share;
- 50,000 shares exercisable after 15 months from the date of grant at an
exercise price of $1.00 per share; and
- 50,000 shares exercisable after 20 months from the date of grant at an
exercise price of $1.00 per share.
The options granted to Mr. Ruth were valued at $48,000.
These transactions did not involve any underwriters, underwriting discount
or commissions, or any public offering, and we believe that the transaction was
exempt from the registration by virtue of Section 4(2) of the Securities Act of
1933, as amended. The investors represented their intentions to acquire the
securities for investment purposes only and not with a view to or for sale in
connection with any distribution thereof. The investors had adequate access,
through their relationships with us, to information about us.
ITEM 6. EXHIBITS
Number Description
-------- -----------
31.1 Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-
Oxley Act of 2002
31.2 Certification of Principal Accounting Officer pursuant to Section 302(a) of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer of Periodic Report Pursuant to Section 906
of Sarbanes-Oxley Act of 2002
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WESTERN GOLDFIELDS, INC.
Date: August 31, 2004 /s/ Thomas K. Mancuso
------------------------------
Thomas K. Mancuso
President
Principal Executive Officer
Date: August 31, 2004 /s/ Mark C. Shonnard
------------------------------
Mark C. Shonnard
Treasurer and Secretary
Principal Accounting Officer
EXHIBIT INDEX
Number Description
- ------ -----------
31.1 Certification of Principal Executive Officer pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer of Periodic Report
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer of Periodic Report
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002