UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the quarterly period ended June 30, 2006
Commission file number: 0-26217
GREAT CHINA MINING INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 98-02031-70
- ------------------- ----------------
(State or other jurisdiction of (IRS Employee Identification No.)
incorporation or organization)
World Trade Centre, Suite 536, 999 Canada Place, Vancouver, B.C. Canada V6C 3E2
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(604) 641-1366
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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 [x] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Common Stock, $0.001 par value: 316,235,575 shares outstanding as of June 30,
2006 (latest practicable date).
Transitional Small Business Disclosure Format Yes [_] No [X]
DOCUMENTS TO BE INCORPORATED BY REFERENCE
-----------------------------------------
The following documents are incorporated by reference herein: (i) Great China
Mining, Inc.'s Form 425 filed on June 22, 2006 and (ii) Continental Minerals
Corporation Form F-4 Registration Statement filed June 30, 2006.
1
GREAT CHINA MINING INC.
FORM 10-QSB
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements F-1 - F-13
Item 2. Management's Discussion and Analysis or Plan of
Operation 8
Item 3. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND DECEMBER 31, 2005
June 30, December 31,
Stated in U.S. dollars 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,294,976 $ 421,804
Prepaid expenses and other current assets 38,465 25,358
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,333,441 447,162
Fixed assets, net (Note 4) 9,734 13,622
Investment in Highland Mining Inc. (Note 3) - -
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,343,175 $ 460,784
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payables and accrued expenses $ 50,316 $ 224,618
Stockholders' Equity
Common Stock : $0.001 Par Value
Authorized : 500,000,000
Issued and Outstanding : 316,235,575 (2005: 199,596,575) 316,235 199,596
Additional paid in capital 16,871,942 12,857,461
Agreement to issue common stock for acquisition cost (65,000,000 shares) - -
Agreement to issue common stock for finder's fee (9,639,000 shares) (Note 3 & 5) - 771,120
Accumulated Other Comprehensive Loss (15,968) (4,881)
Accumulated deficit prior to exploration stage (1,554,790) (1,554,790)
Accumulated deficit during exploration stage (12,324,560) (12,032,340)
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 3,292,859 236,166
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 3,343,175 $ 460,784
===========================================================================================================================
(See condensed notes to the consolidated financial statements)
F-2
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month and six-month periods ended June 30, 2006 and 2005 and
cumulative amounts from inception (July 1, 2003)
to June 30, 2006
(Unaudited)
Three months ended Six months ended
Cumulative June 30, June 30, June 30, June 30,
Stated in U.S. dollars from Inception 2006 2005 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ - $ - $ - $ - -$ -
Expenses
Exploration expenses 1,684,678 1,446 691,326 6,474 691,326
General and administrative 2,648,622 183,173 119,538 328,584 225,942
Finder's fees 771,120 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
5,104,420 184,619 810,864 335,058 917,268
Operating Loss (5,104,420) (184,619) (810,864) (335,058) (917,268)
Other Income and Expenses
Interest income 68,562 36,746 9,389 42,838 16,300
Equity loss (800,000) - (694,887) - (800,000)
Accounts payable written off 3,453 - - - -
Interest expenses (9,652) 1 - - (18)
Loss on disposal of fixed assets (16,009) - - - -
Fair value of potential shares to be issued
in excess of authorized share capital (6,466,494) - 3,249,080 - (4,956,997)
- ---------------------------------------------------------------------------------------------------------------------------
(7,220,140) 36,747 2,563,582 42,838 (5,740,715)
Provision for income taxes - - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net Loss Available to Common Stockholders $ (12,324,560) $ (147,872) $ 1,752,718 $ (292,220) $(6,657,983)
===========================================================================================================================
Loss per share attributable to common stockholders: $ (0.00) $ 0.01 $ (0.00) $ (0.04)
===============================================================
Weighted average number of common shares outstanding:
Basic and diluted 316,235,575 193,596,575 288,342,680 181,751,271
===============================================================
(See condensed notes to the consolidated financial statements)
F-3
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND DEFICIENCY
for the period from inception (July 1, 2003) to June 30, 2006
(Unaudited)
Accumulated Accumulated
Agreement Accumulated Deficit Deficit
Stock Additional to issue other prior to during
Common Amount At Paid In Subscription common comprehensive exploration exploration
Stated in U.S. dollars Shares Par Value Capital received stock loss stage stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July
1, 2003 (inception) 37,446,200 $ 37,446 $ 1,364,802 $ - $ - $ - $ (1,554,790) $ - $ (152,542)
Issuance of common
stock for acqui-
sition costs on
July 23, 2003 97,700,000 97,700 (97,700) - - - - - -
Issuance of common
stock for acqui-
sition costs on
July 23, 2003
- related party 6,839,000 6,839 (6,839) - - - - - -
Compensation cost
- stock options - - 210,000 - - - - - 210,000
Net loss, two months
ended August
31, 2003 - - - - - - - (312,248) (312,248)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31,
2003 141,985,200 141,985 1,470,263 - - - (1,554,790) (312,248) (254,790)
Issuance of common
stock for cash
@$0.06 on Octo-
ber 29, 2003 15,000,000 15,000 885,000 - - - - - 900,000
Issuance of common
stock for 7% finders
fee for shares issued
on October 29, 2003 1,050,000 1,050 (1,050) - - - - - -
Exercise of Series
A stock purchase
warrants @$0.10
on December 11, 2003 50,000 50 4,950 - - - - - 5,000
Exercise of Series B
stock purchase
warrants @$0.15
on December 23, 2003 250,000 250 37,250 - - - - - 37,500
Exercise of Series
A stock purchase
warrants @$0.10
on December 23, 2003 250,000 250 24,750 - - - - - 25,000
F-4
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND DEFICIENCY
for the period from inception (July 1, 2003) to June 30, 2006
(Unaudited)
Accumulated Accumulated
Agreement Accumulated Deficit Deficit
Stock Additional to issue other prior to during
Common Amount At Paid In Subscription common comprehensive exploration exploration
Stated in U.S. dollars Shares Par Value Capital received stock loss stage stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Compensation cost
- stock options - - 10,000 - - - - - 10,000
Net loss, four
months ended
December 31, 2003 - - - - - - - (380,869) (380,869)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 2003 158,585,200 158,585 2,431,163 - - - (1,554,790) (693,117) 341,841
Exercise of Series
A stock purchase
warrants @$0.10
on January 6, 2004 50,000 50 4,950 - - - - - 5,000
Exercise of Series
A stock purchase
warrants @$0.10
on January 27, 2004 2,940,000 2,940 291,060 - - - - - 294,000
Issuance of common
stock into escrow
for acquisition
of mineral property
on April 15, 2004 32,000,000 32,000 (32,000) - - - - - -
Issuance of common
stock for legal
services @$0.10
on April 12, 2004 2,800,000 2,800 277,200 - - - - - 280,000
Exercise of Series
C stock purchase
warrants @$0.08
on October 1, 2004 200,375 200 15,830 - - - - - 16,030
Cancellation of
common stock
issued for
acquisition costs
(129,700,000 shares),
finder's fee
(6,839,000 shares)
and legal costs
(2,800,000 shares)
on July 23, 2003
& April 12, 2004 (139,339,000) (139,339) (140,661) - - - - - (280,000)
Issuance of common
stock for the
partial acqui-
sition of Highland
Mining Inc. @
historical cost
on December 28,
2004 (85,000,000
shares) 85,000,000 85,000 715,000 - - - - - 800,000
F-5
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND DEFICIENCY
for the period from inception (July 1, 2003) to June 30, 2006
(Unaudited)
Accumulated Accumulated
Agreement Accumulated Deficit Deficit
Stock Additional to issue other prior to during
Common Amount At Paid In Subscription common comprehensive exploration exploration
Stated in U.S. dollars Shares Par Value Capital received stock loss stage stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of agree-
ment to issue
common stock
for the partial
acquisition of
Highland Mining
Inc. on December
28, 2004 (65,000,000
shares) - - - - - - - - -
Subscription received
on December 31,
2004 for private
placement of
24,000,000 shares
@$0.05 - - - 1,200,000 - - - - 1,200,000
Issuance of Agreement
To Issue Common
Stock for finder's
fee on acquisition
of Highland Mining
Inc. @$0.08 on
December 28, 2004
(9,639,000 shares) - - - - 771,120 - - - 771,120
Legal fees incurred
for the issuance
of common stock
on December 28,
2004 in connection
with the partial
acquisition of
Highland Mining Inc. - - (20,215) - - - - - (20,215)
Net loss, year ended
December 31, 2004 - - - - - - - (1,844,826)(1,844,826)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
2004 142,236,575 142,236 3,542,327 1,200,000 771,120 - (1,554,790) (2,537,943) 1,562,950
Issuance of common
stock for cash
@$0.05 on
February 7, 2005 24,000,000 24,000 1,176,000 (1,200,000) - - - - -
Issuance of common
stock for 7%
finder's fee for
shares issued on
February 7, 2005 1,680,000 1,680 (1,680) - - - - - -
Issuance of common
stock for cash
@$0.05 on
February 8, 2005 17,000,000 17,000 833,000 - - - - - 850,000
Issuance of common
stock for cash
@$0.05 on
March 10, 2005 5,000,000 5,000 245,000 - - - - - 250,000
Issuance of common
stock for cash
@$0.05 on
March 14, 2005 2,000,000 2,000 98,000 - - - - - 100,000
Issuance of common
stock for 7%
finder's fee for
shares issued on
February 8,
March 10 & March
14, 2005 1,680,000 1,680 (1,680) - - - - - -
F-6
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND DEFICIENCY
for the period from inception (July 1, 2003) to June 30, 2006
(Unaudited)
Accumulated Accumulated
Agreement Accumulated Deficit Deficit
Stock Additional to issue other prior to during
Common Amount At Paid In Subscription common comprehensive exploration exploration
Stated in U.S. dollars Shares Par Value Capital received stock loss stage stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of Series
E stock purchase
warrants @$0.08
on November 9, 2005 3,000,000 3,000 237,000 - - - - - 240,000
Exercise of Series
E stock purchase
warrants @$0.08
on November 14, 2005 3,000,000 3,000 237,000 - - - - - 240,000
Fair value of options
and warrants - - 6,466,494 - - - - - 6,466,494
Foreign currency
translation
adjustments - - - - - (4,881) - - (4,881)
Compensation cost
- stock options - - 26,000 - - - - - 26,000
Net loss, year
ended December
31, 2005 - - - - - - - (9,494,397)(9,494,397)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 2005 199,596,575 $ 199,596 $12,857,461 $ - $ 771,120 $ (4,881) $ (1,554,790)$(12,032,340) $ 236,166
Exercise of Series
E stock purchase
warrants @$0.08
on March 16, 2006 42,000,000 42,000 3,318,000 - - - - - 3,360,000
Issuance of Common
Stock for finder's
fee on acquisition
of Highland Mining
Inc. @$0.08 on
January 27, 2006 9,639,000 9,639 761,481 - (771,120) - - - -
Issuance of common
stock for the
partial acqui-
sition of High-
land Mining Inc.
on January 27,
2006 65,000,000 65,000 (65,000) - - - - - -
Foreign currency
translation
adjustments - - - - - (11,087) - - (11,087)
Net loss, six
months ended
June 30, 2006 - - - - - - - (292,220) (292,220)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 2006 316,235,575 316,235 16,871,942 - - (15,968) (1,554,790) (12,324,560) 3,292,859
====================================================================================================================================
(See condensed notes to the consolidated financial statements )
F-7
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months period
ended June 30, 2006 and 2005
and cumulative amounts from inception (July 1, 2003)
to June 30, 2006
(Unaudited)
Cumulative
Stated in U.S. dollars from Inception 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (12,324,560) $ (292,220) $ (6,657,983)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 29,070 4,017 3,551
Equity loss 800,000 - 800,000
Compensation cost - stock options 246,000 - -
Translation adjustments (15,968) (11,087) (169)
Agreement to issued common stock for finder's fee 771,120 - -
Accounts payable written off (3,453) - -
Loss on disposal of fixed assets 16,009 - -
Change in fair value of potential shares to be issued in excess of
authorized share capital 6,466,494 - 4,956,997
Changes in assets and liabilities
Increase in prepaid expenses and other current assets (38,594) (13,236) (6,243)
Increase (Decrease) in accounts payable and accrued expenses (14,016) (174,302) 471,538
Decrease in accrued expenses - related party (1,526) - 15
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,069,424) (486,828) (432,294)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Equipment and automobile additions (57,262) - (8,681)
Proceeds on disposal of fixed assets 44,525 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (12,737) - (8,681)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Advances (repayments) - amount due to related parties (93,540) - -
Principal payments - installment loans payable (52,230) - -
Promissory note payable - related party - - (100,000)
Proceeds from the issuance of common stock 7,522,530 3,360,000 2,400,000
Subscription received - - (1,200,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 7,376,760 3,360,000 1,100,000
- ---------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 3,294,599 2,873,172 659,025
Cash and cash equivalents - beginning of period 377 421,804 900,309
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 3,294,976 $ 3,294,976 $ 1,559,334
===========================================================================================================================
Supplemental Information :
Cash paid for :
Interest $ 6,257 $ - $ 18
Income taxes - - -
Non-cash investing and financing activities :
Common stock issued for services rendered $ - $ - $ -
Common stock issued for acquisition of Highland Mining Inc. 800,000 - -
Agreement to issue common stock for acquisition of Highland Mining Inc. - - -
Agreement to issue common stock for finder's fees paid for
acquisition of Highland Mining Inc. 771,120 - -
(See condensed notes to the consolidated financial statements)
F-8
GREAT CHINA MINING INC.
(an Exploration Stage Company)
CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
================================================================================
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles in the United States
of America. However, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted or condensed pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). In the opinion of
management, all adjustments of a normal recurring nature necessary for a fair
presentation have been included. The results for interim periods are not
necessarily indicative of results for the entire year. These condensed financial
statements and accompanying notes should be read in conjunction with the
Company's annual financial statements and the notes thereto for the fiscal year
ended December 31, 2005 included in its Annual Report on Form 10-KSB, as
amended.
Going concern
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has limited
operations and has sustained substantial operating losses in recent years
resulting in a substantial accumulated deficit. In view of these matters,
realization of a major portion of the assets in the accompanying consolidated
balance sheet is dependent upon the continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements and the success of its future operations.
To meet these objectives, 42,000,000 Series "E" warrants were exercised at $0.08
each for cash of $3,360,000 (Note 5) and the major shareholders of the Company
have agreed to merger the Company with Continental Minerals Corporation, subject
to the shareholders' and regulatory approval (Note 6). Management believes that
actions presently taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to continue as a going
concern. The Company's ability to achieve these objectives cannot be determined
at this time.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Great China Mining (Canada), Inc. All significant
inter-company balances and transactions have been eliminated in consolidation.
Concentration of Credit Risk
The Company's operations are currently in Tibet and other areas of China. If the
Company was unable to derive any revenues from its current business operations,
it would have a significant, financially disruptive effect on the operations of
the Company. Based on the current economic environment in China, the Company
does not expect any material adverse impact to its business, financial condition
and results of operations.
Recent accounting pronouncements
Recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants
("AICPA"), and the SEC did not or are not believed by management to have a
material impact on the Company's present or future financial statements.
F-9
NOTE 2 - RELATED PARTY TRANSACTIONS
Consulting Fees - During the three-month and six-month period ended June 30,
2006, the Company incurred consulting fees of $28,132 (2005: $45,164) and
$61,922 (2005: $87,037) respectively, to certain directors and officers of the
Company.
The Company has a consulting agreement with an officer of the Company for his
consulting services at C$7,000 until January 12, 2007.
NOTE 3 - INVESTMENT IN HIGHLAND MINING INC. AND 46 OTHER MINERAL PROPERTIES
On November 5, 2004, the Company and Highland Shareholders entered into a Share
Exchange Agreement whereby the Company agreed to issue 85,000,000 of its common
shares from treasury and an Agreement to Issue Shares for issuance of 65,000,000
of the Company's common shares (issued, Note 5) in exchange for 50% of the
issued and outstanding shares of Highland held by Highland Shareholders,
pursuant to the terms and conditions hereafter set forth:
1. If Highland Shareholders are unable to enter into a binding agreement
on a share purchase and sale transaction (the "Definitive Agreement")
with Continental Minerals Corp. ("Continental"), a company listed on
the Toronto Venture Exchange, to sell and transfer the other 50% of
the issued and outstanding shares of Highland (the "Remaining Shares")
to Continental on or before March 30, 2005 (the "Outside Date"), or if
either or both Continental and Highland Shareholders decide to
terminate the Definitive Agreement pursuant to the terms and
conditions therein on or before the Outside Date, then unless Highland
Shareholders and the Company otherwise agree, Highland Shareholders
shall sell and transfer the Remaining Shares to the Company at a
nominal price, pursuant to the same terms and conditions contained
hereunder as applicable to the parties then.
2. Highland Shareholders have direct or indirect rights or options to, or
interests in, (the rights, options and interests together are called
("Additional Rights")) 25 mineral prospects (including Xietongmen
Copper-Gold Property) in Tibet, China (the "Additional Properties"),
subject to terms and conditions and regulatory requirements attached
to the Additional Rights. Highland Shareholders agreed to transfer and
assign, or shall cause to be transferred and assigned, to the Company
the Additional Rights for $1.00, subject to terms and conditions and
regulatory requirements attached thereto, and terms and conditions
herein.
The Company also issued an Agreement to Issue Shares for 9,639,000 common shares
(issued, Note 5) as finder's fee for the transaction.
Highland fully and legally owns Tianyuan Mineral Exploration Ltd. ("Tianyuan"),
as a wholly owned foreign enterprise ("WOFE") registered in Tibet, China,
incorporated pursuant to relevant Chinese laws and regulations, which holds an
exploration license covering Xietongmen Copper-Gold Property located near Xiong
Village, Xietongmen County, Shigatse area, Tibet Autonomous Region, China.
On December 23, 2004, Highland shareholders entered into an option agreement
with Continental. Continental can earn 50% interest of the issued and
outstanding shares of Highland by agreement to pay $2,000,000 to Highland
shareholders and investment of $3,000,000 and $2,000,000 by November 5, 2005 and
November 5, 2006 respectively in Highland to fund the exploration of the
Xietongmen Copper-Gold Property. Continental may earn a further 10% of the
issued and outstanding shares of Highland, through the investment of an
additional $3,000,000 by November 5, 2007 in Highland to fund exploration of the
F-10
Xietongmen Copper-Gold Property. If Continental exercises its option to earn a
further 10% equity interest in Highland by fulfilling the related terms and
conditions, the Company shareholding in Highland will be reduced to 40%. As of
the date of issuance of these financial statements, Continental has paid
Highland shareholders $2,000,000 and funded $5,000,000 for the exploration of
the Xietongmen Copper-Gold Property. Continental has informed the Company that
it has completed the additional spending of $3,000,000 in the second quarter
2006 to earn up to 60% interest in Highland.
Under the Shareholders Agreement dated December 23, 2004 between Continental,
the Company and other related parties, Continental will manage Highland and
Tianyuan during the option period. Once the option is exercised, further funding
of Highland would be proportional to interests held in the project, with a
proportionate reduction in the shareholdings of any shareholder which fails to
match the funding of the others. If the other parties' shareholdings in Highland
fall below 15%, those parties may elect to convert their holdings to an
entitlement of 12.5% of the after pay-back profit of Highland.
Net investment in Highland at June 30, 2006 follows:
Historical cost of 500,000 shares of Highland Mining Inc. $ 800,000
Equity in undistributed losses of investee company (800,000)
-------------
Investment in equity $ -
=============
In March and April 2005, the Company signed Lease and Option Agreements with
three private companies in China to acquire 60% to 80% equity interest in nine
mineral properties in Tibet, China through spending a minimum of $200,000 to
$400,000 on each of these properties each year for a two-year period. Up to June
30, 2006, total exploration expenses incurred by the Company on these four
mineral properties were $1,684,678, which can be summarized as follows:
Banongla Donggapu Tangbai Zemuduola Total
- -----------------------------------------------------------------------------------------------------
Assay $ - $ 7,951 $ 3,419 $ 2,989 $ 14,359
Drilling - 94,713 92,170 143,297 330,180
Geological survey 109,173 159,536 73,972 88,728 431,409
Geophysical - 126,461 64,488 51,680 242,629
Miscellaeous 9,074 36,223 12,484 67,256 125,037
Road construction - 77,030 - 110,102 187,132
Surface and adit work - 86,180 29,125 71,333 186,638
Travel 4,707 14,820 10,287 26,011 55,825
Wages and benefits 2,804 34,996 11,514 62,155 111,469
-------------------------------------------------------------------------
$ 125,758 $ 637,910 $ 297,459 $ 623,551 $ 1,684,678
=========================================================================
As the Company has announced to merge with Continental (Note 6), the three
surrounding properties i.e. Banongla, Donggapu and Zemuduola falling in the 10
km area of interest along with Xietongmen Property will be the scope of
properties to be merged with Continental.
The remaining non-core properties, a total of 43, have been returned back to the
respective optioners for a nominal value of $1.00 on June 28, 2006 as per the
terms of the merger agreement. Formal Termination Agreements were signed on June
28, 2006.
NOTE 4 - FIXED ASSETS
Fixed assets consist of the following:
Office equipment $ 1,155
Computer equipment 24,192
Computer software 1,014
---------------
26,361
Less: accumulated depreciation (16,627)
---------------
$ 9,734
===============
F-11
Depreciation charged to operations for the three-month and six-month period
ended June 30, 2006, and the period from inception to June 30, 2006, amounted to
$2,004 (2005: $1,733), $4,017 (2005: $3,551), and $29,070, respectively.
NOTE 5 - COMMON STOCK, OPTIONS AND WARRANTS
a. Common Stock
On January 27, 2006, the Company issued 65,000,000 and 9,639,000 shares against
the Agreement to Issue Shares as part of the consideration for acquisition of
50% interest in Highland and the related finder's fee, respectively (Note 3).
The historical cost of the partial acquisition of Highland, $800,000, was
recorded on the issuance of the initial 85,000,000 shares on December 28, 2004
to reflect the cost of acquisition of Highland. The 65,000,000 shares issued in
January 27, 2006 were thus recorded at zero cost.
b. Stock Options
As of June 30, 2006, there are 2,200,000 stock options outstanding; 1,000,000
exercisable at $0.10 expiring August 1, 2006 and 1,200,000 at $0.12 expiring
December 21, 2008 respectively. 5,000,000 stock options at an exercise price of
$0.40 each expired on May 31, 2005. No options were canceled, forfeited, or
exercised during the six-month period ended June 30, 2006. The weighted average
exercise price of the options outstanding and exercisable is $0.11 and the
weighted average remaining contractual life is 1.39 years.
c. Stock Purchase Warrants
The outstanding stock purchase warrants as of June 30, 2006 can be summarized as
follows:-
Number Exercise price Expiry
Warrants outstanding for each share date
Series "D" 200,375 $0.75 September 30, 2006
- ---------------------------------------------------------------------------
On March 14, 2006, 42,000,000 Series "E" warrants were exercised at $0.08 each
for cash of $3,360,000.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Mineral Properties
The Company has direct and indirect rights to earn interest in 46 mineral
properties. The Company is required by the Chinese authority to spend a
specified minimum amount on a mineral property on a yearly basis in order to
renew the exploration permit on that property. The Company has to incur
approximately $1.7 million each year for maintaining the related exploration
permits. The Company is also required to reimburse the previous exploration
expenditures incurred by the Chinese regulatory authority in a mineral property
if the Company decides to have commercial mining of that property. The Company
has to pay approximately $13.4 million to the Chinese authority if all the 46
mineral properties are put into commercial production.
Operating Leases
In December 2003, the Company entered into a lease for office space under a
non-cancelable operating lease for a term of 3 years beginning January 2004 and
expiring on December 31, 2006, with two free months rent. Future commitment for
the year 2006 is $13,500.
Consulting Agreements - See details in Note 2.
Stock Options and Warrants - See details in Note 5.
Merger with Continental
Our major shareholders have agreed to merger the Company with Continental
Minerals Corporation ("Continental"), a foreign private issuer and a publicly
traded company on the Toronto Venture Exchange, subject to shareholders' and
regulatory approval. Pursuant to the Merger Agreement, a wholly owned subsidiary
of Continental will be merged with and into Great China, with Great China
surviving the Merger and continuing as a wholly owned subsidiary of Continental.
F-12
The Merger Agreement represents our agreement with Continental to combine our
businesses and ownership of the Xietongmen property, a copper and gold property
located in Tibet, China, into one publicly traded company. We presently own a
40% interest in the Xietongmen property and Continental presently owns through
earn-in the remaining 60% interest. If the Merger is completed, Continental will
own a 100% interest in the Xietongmen property and Great China will continue as
a wholly owned subsidiary of Continental.
If the Merger is completed, each share of Great China common stock that you own
at the effective time of the Merger will be exchanged for 0.1138392 common
shares of Continental. Based on the estimated number of shares of Great China
issued and outstanding on the record date, Continental expects to issue
approximately 36,000,000 common shares to Great China stockholders in the
Merger. Continental common shares are listed in Canada on the TSX Venture
Exchange ("TSXV") under the symbol "KMK" and quoted in the United States on the
National Association of Securities Dealers Inc.'s OTC Bulletin Board ("OTCBB")
under symbol "KMKCF". On June 29, 2006 the closing price of Continental common
shares on the OTCBB was US$1.58. We estimate that immediately after the
effective time of the Merger, former shareholders of Great China will hold
common shares of Continental representing approximately 42% of the
then-outstanding common shares of Continental.
Continental has entered into agreements with holders of 212 million of the
shares of the Company ("Shareholders"), representing approximately 67% of issued
and outstanding shares of the Company, who have agreed to support a merger
whereby the Company's shares will be exchanged for Continental's shares on a
ratio of 8.7843 of the Company's shares for each Continental share. Completion
of the merger is subject to a number of conditions, including execution of
definitive merger documentation, as well as shareholders' and regulatory
approvals. Under the merger, Continental will issue approximately 36 million of
its common shares for 100% of Great China Mining plus 250,446 Continental
options at an exercise price of $0.88 to $1.05 with expiry dates from August 2,
2006 to December 2, 2008 to replace the options previously granted by the
Company. Certain of the merger shares and options will be subject to resale
restrictions as required by Canadian and US regulatory policies as well as by
agreement with certain Great China Mining shareholders.
The agreement includes the acquisition of interests in three other properties,
totaling 109 square kilometers, lying within an area of interest around the
Xietongmen property. Acquisition of these properties from Guangmin Zhu, Xiaofei
Qi and others, who are parties related to the Company, involves issuance of
1,500,000 units by Continental, with each unit consisting of one Continental
common share and one warrant exercisable at $1.59 (Canadian) per share for two
years from merger completion. As further consideration for the interests in
these properties, Continental shall pay US$3,250,000 cash, payable as to
US$1,250,000 on completion of the merger and the balance in four annual
installments of US$500,000 to property holders, not including the Company.
Pursuant to the terms of the Merger Agreement, Continental will increase its
board of directors to 11 and appoint to it three nominees from the Company. Two
of these nominees are Messrs. Zhi Wang and Jie (Jack) Yang, both of whom
currently serve as directors of the Company. As a result, Continental will issue
700,000 $1.61 options expiring February 28, 2011. Continental has also agreed to
retain Mr. Wang under an incentive arrangement and has agreed to pay a bonus of
2,500,000 units of Continental, with each unit consisting of one share and a
warrant exercisable at $1.59 each within one year of the merger, in the event
that all necessary mining permits are received in a timely manner, but in any
event, no later than March 31, 2010.
The definitive merger agreement between the Company and Continental was signed
on May 29, 2006 and the Registration Statement was filed on Form F-4 with the
SEC on June 30, 2006. Toronto Stock Exchange has given a conditional approval
prior to signing of the definitive agreements. Please refer to the our Form 425
filed with the SEC (www.sec.gov) and Form F-4 Registration Statement filed by
Continental for further details regarding the merger.
F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information presented here should be read in conjunction with Great China
Mining Inc.'s (the "Company") financial statements and other information
included in this Form 10-QSB. The Company has presented its quarterly financial
statements, which should be read in conjunction with its annual financial
statements and the notes thereto for the financial year ended December 31, 2005
filed under Form 10-KSB.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The
forward-looking statements are based on the Company's current expectations and
are subject to certain risks, uncertainties and assumptions. The Company's
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
PLAN OF OPERATION
The Company has had no revenues from operations since inception, has not been
profitable in any of its endeavors, and faces all the risks common to companies
in their early stages of development, including under-capitalization and
uncertainty of funding sources, high initial expenditure levels and uncertain
revenue streams, an unproven business model, and difficulties in managing
growth. Our recurring losses raise substantial doubt about our ability to
continue as a going concern. Due to the "start up" nature of the Company's
business, we believe we will continue to incur losses for at least the next 12
months and will require additional cash to satisfy our operations. Historically,
the operations of the Company have been financed through private placements and
loans from shareholders. Our financial statements do not reflect any adjustments
that might result from the outcome of this uncertainty. Accordingly, there is
substantial doubt about our ability to continue as a going concern.
During the quarter ended March 31, 2006, 42,000,000 Series "E" warrants were
exercised at $0.08 each for cash of $3,360,000. Recently, the major shareholders
of the Company agreed to merger the Company with Continental Minerals
Corporation, subject to shareholders' and regulatory approval. (See further
discussion below). Management believes that actions presently taken to revise
the Company's operating and financial requirements provide the opportunity for
the Company to continue as a going concern. The Company's ability to achieve
these objectives cannot be determined at this time.
The Company's future funding requirements will depend on numerous factors, many
of which are beyond our control. As necessary, we may raise additional funds
through private or public equity investment in order to expand the range and
scope of our business operations. We may seek access to private or public equity
but there is no assurance that such additional funds will be available for the
Company to finance its operations on acceptable terms, if at all. We cannot
assure you that we will be able to raise funds through a sale or equity
transaction, or if such funding is available, that it will be on favorable
terms. Our common stock is currently traded on the over-the-counter market on an
electronic bulletin board.
The Company has no current plans to (i) purchase or sell of any plant or
equipment, (ii) change the number of employees, or (iii) incur any significant
research and development expenses.
MERGER AGREEMENT WITH CONTINENTAL MINERALS CORPORATION
Our major shareholders have agreed to merger the Company with Continental
Minerals Corporation ("Continental"), a foreign private issuer and a publicly
traded company on the Toronto Venture Exchange, subject to shareholders' and
regulatory approval. Pursuant to the Merger Agreement, a wholly owned subsidiary
of Continental will be merged with and into Great China, with Great China
surviving the Merger and continuing as a wholly owned subsidiary of Continental.
The Merger Agreement represents our agreement with Continental to combine our
businesses and ownership of the Xietongmen property, a copper and gold property
located in Tibet, China, into one publicly traded company. We presently own a
40% interest in the Xietongmen property and Continental presently owns through
earn-in the remaining 60% interest. If the Merger is completed, Continental will
own a 100% interest in the Xietongmen property and Great China will continue as
a wholly owned subsidiary of Continental.
If the Merger is completed, each share of Great China common stock that you own
at the effective time of the Merger will be exchanged for 0.1138392 common
shares of Continental. Based on the estimated number of shares of Great China
issued and outstanding on the record date, Continental expects to issue
approximately 36,000,000 common shares to Great China stockholders in the
Merger. Continental common shares are listed in Canada on the TSX Venture
Exchange ("TSXV") under the symbol "KMK" and quoted in the United States on the
National Association of Securities Dealers Inc.'s OTC Bulletin Board ("OTCBB")
under symbol "KMKCF". On June 29, 2006 the closing price of Continental common
shares on the OTCBB was US$1.58. We estimate that immediately after the
effective time of the Merger, former shareholders of Great China will hold
common shares of Continental representing approximately 42% of the
then-outstanding common shares of Continental.
Continental has entered into agreements with holders of 212 million of the
shares of the Company ("Shareholders"), representing approximately 67% of issued
and outstanding shares of the Company, who have agreed to support a merger
whereby the Company's shares will be exchanged for Continental's shares on a
ratio of 8.7843 of the Company's shares for each Continental share. Completion
of the merger is subject to a number of conditions, including execution of
definitive merger documentation (signed on June 28, 2006), as well as
shareholders' and regulatory approvals (conditional approval received from TSX).
Continental will issue 36 million shares (approximately 40% of its post-merger
issued shares) for 100% of the Company's issued and outstanding shares. The
Shareholders letters also provide that if for any reason the corporate merger
cannot be completed, they will exchange their shares with Continental on the
agreed ratio in a series of private transactions and thus assuring that
Continental can have the majority control of the Company, subject only to TSX
Venture Exchange acceptance.
Continental will also be acquiring the balance of interests in the three other
properties, totaling 109 square kilometres, which surround the Xietongmen
Property ("the Area of Interest Properties") by issuing 1.5 million shares and
1.5 million warrants to a related party of the Company. The transaction will
result in a property holdings increase from 12 to 121 square kilometers.
Please refer to our Form 425 filed with the SEC (www.sec.gov) and Form F-4
Registration Statement filed by Continental for further details regarding the
merger.
CONCENTRATION OF CREDIT RISK
The Company's operations are currently in Tibet and other areas of China. The
Company may never derive any revenues from its current business operations and
this will have a significant, financially disruptive effect on the operations of
the Company. Based on the current economic environment in China, the Company
does not expect any material adverse impact to its business, financial condition
and results of operations in these geographic locations, however the ability to
generate revenue will be dependent on the Company's ability to achieve
commercial production on some of the mineral properties or sell some of mineral
properties, of which there can be no assurance.
Updates on Mineral Properties
1) Xietongmen Copper-Gold Property
A grid drilling program, designed to systematically delineate the copper-gold
mineralization on the property is currently underway (since April 2005) and is
focused in an area measuring approximately 550 meters by 1300 meters. Ten drill
rigs are on site with the goal to systematically delineate the deposit that is
open to expansion in all lateral directions. The drill holes are located at 50
meters spacing to infill between and step out from the high-grade drill holes
and cross cut reported in 2003-to date. The drill holes are placed to confirm
continuity, structural controls and orientation of the mineralized body.
In addition to the resource definition program, initiate programs for a
feasibility study including metallurgical testing, geotechnical drilling, and
environmental and socio-economic baseline studies also started.
Statistics for Drilling program on Xietongmen up to June 30, 2006
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
Up to December Up to This quarter Up to
31, 2005 March 31, June 30, 2006
2006
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1. Drilled (meter)
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1.1 Delineation/Infill 21,332 27,474.10 11,204.10 38,678.20
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1.1 Metallurgy - - 1283.3 1283.3
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1.2 Pit Geotech - - 674 674
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1.3 Waste Geotech - - 26 26
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
1.4 Tailings Geotech - - 23.6 23.6
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
Total 21,332 27,474.10 13,211 40,685.10
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
2. Area covered 400m x900m 500m x1300m 550mx1300m 550mx1300m
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
3. Assay results reported (hole) 43 drill holes 62 drill holes 75 drill 137 drill
holes holes
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
3.1 Average mineralized length (meter) 210 200 100.5 150.3
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
3.2 Copper equivalent grade (%) 1.05 0.91* 0.63 0.83
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
3.3 Longest mineralized length (meter) 321 321 312.9 321
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
3.4 Shortest mineralized length (meter) 55.5 31.9 0 0
- ---------------------------------------------- ----------------- -------------------- ----------------- -----------------
Note *:- Copper equivalent (CuEQ) grade used in initial measured mineral
resource estimate at 0.50% CuEQ cut-off grade reported on February 8, 2006.
2) 4 Properties Surrounding Xietongmen
In conjunction with Chinese advisors and an independent consultant, the Company
instigated a work program on Banongla, Zemuduola, Donggapu and Tangbai
properties surrounding Xietongmen in 2005 and was completed by the year-end .
(Press Release June 29, 2005).
BANONGLA
- --------------------------------------------------------------------- ---------------------------------------
Allocated field work Completed as of December 31, 2005
- --------------------------------------------------------------------- ---------------------------------------
1: 25,000 geological mapping covering 69.6 sq. km 69.6 sq. km
- --------------------------------------------------------------------- ---------------------------------------
1:50,000 geochemical stream survey: 69.6 sq. km 69.6 sq. km
- --------------------------------------------------------------------- ---------------------------------------
Trenching program- 200 cu. meters 200 cu. meters
- --------------------------------------------------------------------- ---------------------------------------
DONGGAPU
The above-mentioned 18 km access road extends 7 km into Zone IV on Donggapu
property. An additional eight kilometers of road accessing Zone IV to Zone III
has been completed.
- --------------------------------------------------------------------- ---------------------------------------
Allocated field work Completed as of December 31, 2005
- --------------------------------------------------------------------- ---------------------------------------
1: 5,000 geological mapping covering 12 sq. km (Revised 10 sq. km) 10 sq. km
- --------------------------------------------------------------------- ---------------------------------------
1:10,000 geochemical soil survey: 10 sq. km 10 sq. km
- --------------------------------------------------------------------- ---------------------------------------
Geophysical IP survey covering 7 km (Revised 21.9 km) 21.9 km
- --------------------------------------------------------------------- ---------------------------------------
Trenching program- 2,000 cu. meters (Revised 5,442 cu. meters) 5,442 cu. meters
- --------------------------------------------------------------------- ---------------------------------------
Drilling program- 900 meters (Revised 642 meters) 642 meters
- --------------------------------------------------------------------- ---------------------------------------
ZEMUDUOLA
A decision was made to complete an eighteen km access road through the Zemuduola
property in order to readily access the above zones and additional anomalous
targets located on both the Zemuduola and the adjacent Donggapu property. The
road allowed mobilization of trenching and bulldozer equipment and a drill rig
as a prelude to a planned diamond-drilling program.
- --------------------------------------------------------------------- ----------------------------------------
Allocated field work Completed as of December 31, 2005
- --------------------------------------------------------------------- ----------------------------------------
1: 2,000 geological mapping covering 9 sq. km (Revised 4.5 sq. km) 4.5 sq. km
- --------------------------------------------------------------------- ----------------------------------------
Geophysical IP survey covering 9 km (Revised 10.80 km) 10.80 km
- --------------------------------------------------------------------- ----------------------------------------
Trenching program- 3,000 cu. meters (Revised 4,472 cu. meters) 4,472 cu. meters
- --------------------------------------------------------------------- ----------------------------------------
Drilling program- 1,500 meters (Revised 254 meters) 254 meters
- --------------------------------------------------------------------- ----------------------------------------
TANGBAI
- --------------------------------------------------------------------- ---------------------------------------
Allocated field work Completed as of December 31, 2005
- --------------------------------------------------------------------- ---------------------------------------
1: 25,000 geological mapping survey covering 37.9 sq. km 37.9 sq. km
- --------------------------------------------------------------------- ---------------------------------------
1:50,000 geochemical stream survey: 37.9 sq. km 37.9 sq. km
- --------------------------------------------------------------------- ---------------------------------------
Geophysical IP survey covering 12 km (Revised 10.18 km) 10.18 km
- --------------------------------------------------------------------- ---------------------------------------
Trenching program- 2,000 cu. meters (Revised 1,509 cu. meters) 1,509 cu. meters
- --------------------------------------------------------------------- ---------------------------------------
Drilling program- 393 meters 393 meters
- --------------------------------------------------------------------- ---------------------------------------
Up to year-end 2005, all the fieldwork has been completed on all of the above
properties. Assay results for the ZK801 and ZK802 drill core from the Zemuduola
property; Assay results from the ZK701,ZK801 and ZK1101 drill core from the
Donggapu property; ZK401, ZK402 AND ZK1201 drill core from the Tangbai property
and, trench samples taken from both Donggapu and Zemuduola have been analysed
and given below:-.
Great China Mining Inc. ("Great China") may earn interests in four properties
(Donggapu, Zemuduola, Banongla and Tangbai) located to the southwest of Lhasa in
south Central Tibet. The main target of exploration on the properties is a
porphyry copper - gold deposit. Exploration carried out by Great China to date
has consisted of geological mapping, geochemical and geophysical surveys,
trenching and diamond drilling. Results of this work are summarized below.
Donggapu
Four silicified and pyritized alteration zones with associated mineralization
have been identified on the Donggapu property. Zone III is the largest zone,
covering an area of 1.5 kilometers by 2.5 kilometers, and remains open to the
northwest on the Banongla Property. Drilling of this zone intersected extremely
silicified intermediate-felsic tuffs with consistent pyrite and intermittent
chalcopyrite mineralization. A 72.28 metre interval grading 0.9g/tonne gold and
0.11% copper was intersected in hole ZK1101. Channel sampling of a trench across
Zone IV resulted in values up to 38.4g/tonne Au, 2.57% Cu, 1,546 g/tonne Ag,
3.40% Pb and 1.62% Zn. The extent of this zone is not yet known.
Zemuduola
Drill testing of significant surface mineralization (2.46g/tonne Au and 0.55% Cu
over 52 meters in trench TC7) at Zone II on the Zemuduola property intersected
0.85 g/tonne Au and 0.35% Cu over 18.05 meters that included 6 meters grading
1.84g/tonne Au and 0.91% Cu. The mineralization is hosted by altered andesitic
and tuffaceous rocks. Further south, trenching and sampling of surface
mineralization in Zone I resulted in values of 1.25% copper, 1.57 g/tonne Au and
12.96 g/tonne Ag over 28 meters in trench TC1. This mineralization, dominated by
malachite, is hosted by silicified and pyritized tuff.
Banongla
Exploration on the Banongla property to date has been limited to geological
mapping and stream sediment sampling. Stream sediment anomalies occur to the
north of the Donggapu property where values range up to 22 ppb gold, 227 ppm
copper, 343 ppm lead and 533 ppm zinc. Mineralization, consisting of pyrite,
chalcopyrite and malachite together with magnetite and hematite, has been found
in the vicinity of these anomalies, and may represent an extension to the
Donggapu Zone III mineralization to the southeast. A second stream sediment
anomaly, with values in excess of 17 ppb gold and 220 ppm copper, occurs in the
south of the Banongla property, to the southeast of the Xietongmen discovery.
Tangbai
The main mineralization on the Tangbai property is associated with andesite and
intermediate-felsic tuff in two sub-parallel zones 1-1 and 1-2. The
mineralization consists dominantly of malachite and turquoise staining with
traces of chalcopyrite and is hosted by variably silicified and pyritized
volcanic rocks. Trenching of zones 1-1 and 1-2 returned up to 1.54% copper over
two meters as well as a longer, ten metre, interval grading 0.46% copper.
Anomalous gold and silver values are also present.
Three holes were drilled to target depth extensions of mineralized surface
showings in Zone 1-1 and 1-2. Samples from holes ZK401 and ZK1201 showed weakly
anomalous values with intersections of 0.1% Cu over 2.25 meters and 0.17 g/tonne
gold and 0.1% Cu over 7 meters, respectively.
Great China intends to follow up on the positive results of this work. The main
priorities for future exploration include detailed mapping and sampling of
Donggapu Zone III and IV and Zemuduola Zone I in order to define specific
targets for drilling. Further work will also be undertaken elsewhere on these
properties to follow up on geological and/or geochemical anomalies. Follow up of
the stream sediment anomalies on the Banongla property by a combination of
detailed mapping, rock sampling and soil/talus sampling is also planned. No
further exploration expenditure has been recommended for Tangbai based on the
results of the work program during the year 2005.
However, the three surrounding properties i.e. Banongla, Donggapu and Zemuduola
falling in the 10 KM area of interest along with the crown jewel - Xietongmen
would be the scope of properties to be merged with Continental Minerals as
announced in the joint press release dated April 13, 2006. The remaining
non-core properties 43 in all would be returned back to the respective optionees
for a nominal value of US$1.00 (the value at which they were acquired).
RESULTS OF OPERATIONS
Quarter Ended June 30, 2006
The Company carried out limited exploration activities during the quarter ended
June 30, 2006. The Company generated no revenue and incurred significant losses
consisting of exploration expenses of $1,446 in the period in 2006 compared to
$691,326 in the period in 2005 and general and administrative expenses of
$183,173 in the period in 2006 compared to $119,538 in the period in 2005 for a
total operating expense of $184,619 in the period in 2006 compared to $810,864in
the period in 2005.
During Month Period Ended June 30, 2006
During the six-month period ended June 30, 2006, the Company generated no
revenue and incurred significant losses consisting of exploration expenses of
$6,474 in the period in 2006 compared to $691,326 in the period in 2005 and
general and administrative expenses of $328,584 in the period in 2006 compared
to $225,942in the period in 2005 for a total operating expense of $335,058 in
the period in 2006 compared to $917,268in the period in 2005.
The Company had an operating loss of $184,619 in the period in 2006 compared to
$810,864in the period in 2005. In the quarter ended June 30, 2005, the Company
had an equity loss of $694,887, and the net loss was $147,872 for the quarter
ended June 30, 2006 compared to $1,496,362 in the same period of 2005. The net
loss per share was nominal for the quarter ended June 30, 2006 and $.01 in 2005
for the same period of 2005.
The Company had an operating loss of $335,058 for the six-month period ended
June 30, 2006 compared to $917,368 in the same period. In the six-month period
ended June 30, 2005, the Company had an equity loss of $800,000. Net loss was
$292,220 for the six-month period ended June 30, 2006 compared to $1,700,986 in
the same period of 2005. The net loss per share was nominal for the six-month
period ended June 30, 2006 and $.01 in 2005 for the same period of 2005.
The Company expects the trend of losses to continue at an increasing rate until
we can achieve commercial production on some of the mineral properties or sell
some of mineral properties, of which there can be no assurance.
Liquidity and Working Capital
During the six-month period ended June 30, 2006, the Company received $3,360,000
in cash proceeds from the exercise of 42,000,000 warrants series E.
As of June 30, 2006, the Company had total current assets of $3,333,441,
primarily consisting of cash, and total current liabilities of $50,316. The
Company has no other capital resources other than the ability to use its common
stock to achieve additional capital or exercise of the warrants or options by
the holders. Pursuant to the merger agreement with Continental, we have agreed
to US$50,000 per month for allowable operating expenses incurred for each month.
Accordingly, we believe we have sufficient resources to meet our operating
expenses for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis or plan of operation is based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our financial statements:
Contingencies - We may be subject to certain asserted and unasserted claims
encountered in the normal course of business. It is our belief that the
resolution of these matters will not have a material adverse effect on our
financial position or results of operations, however, we cannot provide
assurance that damages that result in a material adverse effect on our financial
position or results of operations will not be imposed in these matters. We
account for contingent liabilities when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated.
Income Taxes - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have considered
future market growth, forecasted earnings, future taxable income, and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. We currently have recorded a full valuation allowance against net
deferred tax assets as we currently believe it is more likely than not that the
deferred tax assets will not be realized.
Valuation Of Long-Lived Assets - We review property, plant and equipment and
other assets for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Our asset impairment
review assesses the fair value of the assets based on the future cash flows the
assets are expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from disposition of the asset (if any) are less than the
carrying value of the asset. When an impairment is identified, the carrying
amount of the asset is reduced to its estimated fair value. Deterioration of our
business in a geographic region could lead to impairment adjustments when
identified. The accounting effect of an impairment loss would be a charge to
income, thereby reducing our net profit.
RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in "Risk Factors" in our Annual Report
on Form 10-KSB for the year ended December 31, 2005, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-KSB are not the only risks facing us. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
We have sought to identify what we believe to be the most significant risks to
our business. However, we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business. These are factors that
we think could cause our actual results to differ materially from expected
results. Other factors besides those listed here could adversely affect us.
Penny Stock Risk
The Company's stock differs from many stocks, in that it is a "penny stock." The
Securities and Exchange Commission has adopted a number of rules to regulate
"penny stocks." These rules include, but are not limited to, Rules 3a5l-l,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and
Exchange Act of 1934, as amended.
Because our securities probably constitute "penny stock" within the meaning of
the rules, the rules would apply to us and our securities. The rules may further
affect the ability of owners of our stock to sell their securities in any market
that may develop for them. There may be a limited market for penny stocks, due
to the regulatory burdens on broker-dealers. The market among dealers may not be
active. Investors in penny stock often are unable to sell stock back to the
dealer that sold them the stock. The mark-ups or commissions charged by the
broker-dealers may be greater than any profit a seller may make. Because of
large dealer spreads, investors may be unable to sell the stock immediately back
to the dealer at the same price the dealer sold the stock to the investor. In
some cases, the stock may fall quickly in value. Investors may be unable to reap
any profit from any sale of the stock, if they can sell it at all.
Stockholders should be aware that, according to the Securities and Exchange
Commission Release No. 34- 29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. These patterns include:
o Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer,
o Manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases;
o "Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by
(i) Excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers, and inexperienced sales persons;
(ii) The wholesale dumping of the same securities by promoters
and broker-dealers after prices have been manipulated to a
desired level, along with the inevitable collapse of those
prices with consequent investor losses.
Furthermore, the "penny stock" designation may adversely affect the development
of any public market for the Company's shares of common stock or, if such a
market develops, its continuation. Broker-dealers are required to personally
determine whether an investment in "penny stock" is suitable for customers.
Penny stocks are securities (i) with a price of less than five dollars per
share; (ii) that are not traded on a "recognized" national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) of an issuer with net
tangible assets less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation
for less than three years), or with average annual revenues of less than
$6,000,000 for the last three years.
Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Potential investors in the Company's
common stock are urged to obtain and read such disclosure carefully before
purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for the Company's stockholders to resell their shares to third parties
or to otherwise dispose of them.
Limited Operating History; Anticipated Losses; Uncertainty of Future Results
Great China Mining, Inc. has only a limited and unprofitable operating history
upon which an evaluation of the Company and its prospects can be based. The
Company's prospects must be evaluated with a view to the risks encountered by a
company in an early stage of development and with which the Company intends to
operate, and the acceptance of the Company's business model. To the extent that
such expenses are not subsequently followed by commensurate revenues, the
Company's business, results of operations and financial condition will be
materially adversely affected. If cash generated by operations is insufficient
to satisfy the Company's liquidity requirements, the Company may be required to
sell additional equity or debt securities. The sale of additional equity or
convertible debt securities would result in additional dilution to the Company's
stockholders.
Limited Public Market, Possible Volatility of Share Price
The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol GCHA. As of June 30, 2006, there were approximately
316,235,575 shares of Common Stock outstanding. There can be no assurance that a
trading market will be sustained in the future.
Potential Fluctuations in Quarterly Results
Significant variations in our quarterly operating results may adversely affect
the market price of our common stock. Our operating results have varied on a
quarterly basis during our limited operating history, and we expect to
experience significant fluctuations in future quarterly operating results. These
fluctuations have been and may in the future be caused by numerous factors, many
of which are outside of our control. We believe that period-to-period
comparisons of our results of operations will not necessarily be meaningful and
that you should not rely upon them as an indication of future performance. Also,
it is likely that our operating results could be below the expectations of
public market analysts and investors. This could adversely affect the market
price of our common stock.
Dependence on Executive Officers and Technical Personnel
The success of our business plan depends on attracting qualified personnel, and
failure to retain the necessary personnel could adversely affect our business.
Competition for qualified personnel is intense, and we may need to pay premium
wages to attract and retain personnel. Attracting and retaining qualified
personnel is critical to our business. Inability to attract and retain the
qualified personnel necessary would limit our ability to implement our business
plan successfully.
Management of Growth
The Company expects to experience significant growth in the number of employees
and the scope of its operations. In particular, the Company intends to hire
additional staff for mineral exploration and administrative support. Such
activities can result in increased responsibilities for management. The Company
expects to experience difficulty in filling its needs for qualified personnel.
The Company's future success depends upon its ability to raise adequate
financing to meet its mineral exploration and operation expenses. This need to
manage its expenses will place a significant strain on the Company's management
and operational resources. If the Company is unable to manage its expenses
effectively, the Company's business, results of operations, and financial
condition will be materially adversely affected.
Need for Additional Financing
The Company believes it has sufficient capital to meet its short-term cash
needs, including the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934. However, if losses continue
it may have to seek loans or equity placements to cover longer term cash needs
to continue operations and expansion.
No commitments to provide additional funds have been made by management or other
stockholders. Accordingly, there can be no assurance that any additional funds
will be available to the Company to allow it to cover operation expenses.
If future operations are unprofitable, it will be forced to develop another line
of business, or to finance its operations through the sale of assets it has, or
enter into the sale of stock for additional capital, none of which may be
feasible when needed. The Company has no specific management ability or
financial resources or plans to enter any other business as of this date.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
Political, Economic and Regulatory Risks in China
The market in China is monitored by the government, which could impose taxes or
restrictions at any time which would make operations unprofitable and infeasible
and cause a write-off of investment in the mineral properties. Other factors
include political policy on foreign ownership, political policy to open the
doors to foreign investors, and political policy on mineral claims and metal
prices.
There are economic risks associated with doing business in China which could
affect our operations. The Chinese economy has experienced significant growth in
the past decade, but this growth has been uneven across geographic and economic
sectors and has recently been slowing. There can be no assurance that this
growth will not continue to decrease or that the slow down will not have a
negative effect on our business. The Chinese economy is also experiencing
deflation which may continue in the future. The current economic situation may
adversely affect our ability to do business or sell minerals, if ever the
Company produces, as a result of slowing domestic demand and deflation.
The regulation of the minerals industry in China may adversely affect our
business. The China enacted regulations governing minerals extraction. Because
many Chinese laws, regulations and legal requirements with regard to foreign
investments in the minerals industry are relatively new and untested, their
interpretation and enforcement by Chinese authorities may involve significant
uncertainty. In addition, the Chinese legal system is a civil law system in
which decided legal cases have little precedential value. As a result in many
cases it is difficult to predict outcomes. We cannot predict the effect of
further developments in the Chinese legal system, particularly with regard to
the minerals industry, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement, or the preemption of local
regulations by national laws.
The restrictions on currency exchange could limit our ability to repatriate our
revenues from China. Although Chinese governmental policies were introduced in
1996 to allow greater convertibility of the Renminbi, significant restrictions
still remain. We can provide no assurance that the Chinese regulatory
authorities will not impose greater restrictions on the convertibility of the
Renminbi to western currencies. The government could refuse to allow the
exchange, or could restrict the amount or volume of exchange. Because the
majority of our future revenues may be in the form of Renminbi, any future
restrictions on currency exchange may limit our ability to utilize revenue
generated in Renminbi to fund our business activities outside China, if we ever
have any. This restriction, if it occurs, may affect our ability to pay
repatriate any profits in U.S. dollars or other acceptable currency.
A general economic downturn in China could adversely affect our business. In the
last few years the general health of the economy, in China where we have
conducted all of our operations to date, has been relatively strong and growing,
a consequence of which has been increasing capital spending by individuals and
growing companies to keep pace with rapid technological advances. To the extent
the general economic health of China declines from recent levels, or to the
extent individuals or companies fear a decline is imminent, these individuals
and companies may reduce demand for minerals. Any decline or concern about an
imminent decline could delay decisions among certain of our customers to
purchase production if we ever have any or could delay decisions by our
prospective customers to make initial commitments to purchase. Such downturn
would have a material and adverse effect on our business, prospects, operating
results and financial condition.
Other Risks and Uncertainties
The business of mineral deposit exploration and extraction involves a high
degree of risk. Few prospects that are explored are ultimately developed into
production. At present, none of Highland's prospects has a known body of
commercial ore. Other risks facing the Company include competition, reliance on
third parties and joint venture partners, environmental and insurance risks,
political and environmental instability, statutory and regulatory requirements,
fluctuations in mineral prices and foreign currency, share price volatility,
title risks, and uncertainty of additional financing.
The Company has sought to identify what it believes to be the most significant
risks to its business, but cannot predict whether or to what extent any of such
risks may be realized nor can there be any assurances that the Company has
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision with
respect to the Company's stock.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chairman have evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of June 30, 2006, the end of the period covered by this quarterly
report, and, based on this evaluation, have concluded that the disclosure
controls and procedures are effective.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's quarter ended June 30, 2006 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
31 Rule 13a-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
REPORTS ON FORM 8-K
8-K dated April 6, 2006
8-K dated April 13, 2006
8-K dated April 26, 2006
8-K dated May 4, 2006
8-K dated June 2, 2006
8-K dated June 14, 2006
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GREAT CHINA MINING, INC.
Date: July 19, 2006 By: /s/ Anthony Garson
------------------------------------
Chief Executive Officer (Principal
Executive Officer)
Date: July 19, 2006 By: /s/ Amin Amlani
------------------------------------
Chief Financial Officer (Principal
Financial Officer)