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 September 30th, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission file number 000-50399
BATTLE MOUNTAIN GOLD EXPLORATION CORP.
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(Exact name of small business issuer as specified in its charter)
NEVADA 86-1066675
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One East Liberty Street, 6th Floor, Suite 9 Reno, Nevada 89504
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(Address of principal executive offices)
(775) 686-6081
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(Registrant's telephone number)
N/A
---
(Former name and address)
Check whether the registrant (1) has 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 [X] No [ ]
As of October 11th, 2006, the issuer had 63,346,449 shares of common stock
issued and outstanding.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
ASSETS
------
SEPTEMBER 30, 2006
CURRENT ASSETS
- --------------
Cash - unrestricted $ 6,150
Cash - restricted 309,057
Accounts receivable 637,207
------------
Total current assets 952,414
------------
PROPERTY AND EQUIPMENT
- -----------------------
(NET OF ACCUMULATED DEPRECIATION & AMORTIZATION OF $1,366,459) 19,169,649
--------------------------------------------------------------
OTHER ASSETS
- ------------
Deposits 295
------------
Total assets $20,122,358
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable $ 50,487
Accrued interest 326,974
Bridge loan payable 4,000,000
Income tax payable 72,350
Note payable - current maturity 1,406,853
Related party payables 47,264
------------
Total current liabilities 5,903,928
------------
LONG-TERM LIABILITIES
- ---------------------
Convertible debentures 2,000,000
Note payable 4,750,068
------------
Total long-term liabilities 6,750,068
------------
Total liabilities 12,653,996
------------
COMMITMENTS AND CONTINGENCIES -
- ----------------------------- ------------
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock: 10,000,000 shares authorized ($0.001 par value)
none issued -
------------
Common stock, $.001 par value, 200,000,000 shares authorized
63,346,449 shares issued and outstanding 63,346
Additional paid-in-capital 16,906,922
Accumulated other comprehensive deficit (100,811)
Accumulated deficit (9,401,095)
------------
Total stockholders' equity 7,468,362
------------
Total liabilities and stockholders' equity $20,122,358
============
The Accompanying Notes are an Integral Part of the Financial Statements
-2-
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
ROYALTY REVENUE $ 2,433,550 $ - $ 884,276 $ -
EXPENSES
- --------
Depreciation and amortization (1,366,075) (146) (455,366) (52)
Professional and consulting (2,478,766) (278,188) (187,512) (30,220)
Travel and entertainment (31,502) (34,783) (10,559) (21,202)
Rent and office (26,835) (10,837) (10,268) (2,388)
General and administrative (1,099,019) (74,422) (99,503) (12,457)
------------ ------------ ------------ ------------
Total operating expenses (5,002,197) (398,376) (763,208) (66,319)
------------ ------------ ------------ ------------
Income / (loss) from operations (2,568,647) (398,376) 121,068 (66,319)
OTHER INCOME (EXPENSE)
- ----------------------
Interest expense (583,472) - (361,127) -
Financing fees (3,953,488) (379,912) - (379,912)
Foreign exchange loss (1,373) - (751) -
Loss on sale investments (10,082) - -
Loss on gold payment (108,640) - (45,441) -
------------ ------------ ------------ ------------
Total other expense (4,646,973) (389,994) (407,319) (379,912)
Loss before income taxes (7,215,620) (788,370) (286,251) (446,231)
Provision for income taxes (72,350) - (31,866) -
------------ ------------ ------------ ------------
Net loss $(7,287,970) $ (788,370) $ (318,117) $ (446,231)
============ ============ ============ ============
Loss per share - basic and diluted $ (0.13) $ (0.02) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average shares outstanding-
basic and diluted 55,828,027 41,196,667 63,346,449 41,030,000
============ ============ ============ ============
COMPREHENSIVE LOSS
- ------------------
Net loss per statement of operations $(7,287,970) $ (788,370) $ (318,117) $ (446,231)
Foreign currency translation adjustments 413 - 3,461 -
Unrealized loss on gold holdings and commitments (101,224) - 168,539 -
------------ ------------ ------------ ------------
Comprehensive loss $(7,388,781) $ (788,370) $ (146,117) $ (446,231)
============ ============ ============ ============
The Accompanying Notes are an Integral Part of the Financial Statements
-3-
NINE MONTHS ENDED
SEPTEMBER 30,
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (7,287,970) $(788,370)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 1,366,075 146
Non-cash compensation 1,937,042
Shares issued for services 599,850
Issuance of stock warrants 3,953,488 379,912
Foreign exchange loss 1,373
Loss on sale of investments - 10,082
Change in operating assets and liabilities
Decrease in prepaid expense 1,188
(Increase) in accounts receivable (637,207)
Increase in accounts payable 21,284
Increase in accrued interest 326,974
Increase in income tax payable 72,350
Increase in related party payable 172,421 30,245
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Net cash provided by / (used in) operating activities 526,868 (367,985)
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of property and equipment (3,319) (264)
Purchase of royalty rights (13,850,000) -
Proceeds from sale of short term investments - 25,718
Investment in mining properties (98,825) (630,794)
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Net cash used in investing activities (13,952,144) (605,340)
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from issuance of notes payable 6,907,825 -
Principal payments on related party notes payable - (148,196)
Principal payments on notes payable (852,869)
Proceeds from short term notes 4,000,000 -
Proceeds from issuance of common stock 3,439,119 744,330
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Net cash provided by financing activities 13,494,075 596,134
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Net increase (decrease) in cash and cash equivalents 68,799 (377,191)
Effect of exchange rates on cash and cash equivalents (206) -
Cash and cash equivalents at beginning of period 246,614 703,123
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Cash and cash equivalents at end of period $ 315,207 $ 325,932
============= ==========
SUPPLEMENTAL INFORMATION AND NON CASH TRANSACTIONS
- --------------------------------------------------
During the nine months ended September 30, 2006 the Company paid cash interest
of $256,498. The Company paid no interest for the nine months ended September
30, 2005.
The Company paid no income taxes during the nine months ended September 30,
2006, and 2005.
The Company issued the Chairman and CEO 750,000 shares of unregistered,
restricted common stock for the forgiveness of previously accrued operating
payables.
The Accompanying Notes are an Integral Part of the Financial Statements
-4-
BATTLE MOUNTAIN GOLD EXPLORATION CORPORATION
NOTES TO THE INTERIM FINANCIAL STATEMENTS
-----------------------------------------
September 30, 2006
(unaudited)
1. ORGANIZATION AND CHANGES IN SIGNIFICANT ACCOUNTING POLICIES
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The accompanying unaudited interim financial statements of Battle
Mountain Gold Exploration Corporation (the "Company") have been prepared by
the Company in accordance with generally accepted accounting principles in
the United States of America, pursuant to the Securities and Exchange
Commission rules and regulations. In management's opinion, all adjustments
necessary for a fair presentation of the results for the interim periods
have been reflected in the interim financial statements. The results of
operations for any interim period are not necessarily indicative of the
results for a full year. All adjustments to the financial statements are of
a normal recurring nature.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Such disclosures are
those that would substantially duplicate information contained in the most
recent audited financial statements of the Company, such as unchanged
significant accounting policies.
Management presumes that users of the interim statements have read or
have access to the audited financial statements and notes thereto included
in the Company's most recent annual report on Form 10-KSB.
BUSINESS
--------
Prior to the completion of the Company's acquisition of certain
royalty interests in mineral properties in April 2006, the Company's
primary business was mineral, specifically gold, exploration in the State
of Nevada. Based on the Company's previous focus on mineral exploration,
since its inception in January 2004, it previously reported its financial
information in accordance with Statements of Financial Accounting Standards
(SFAS) No. 7 Accounting and Reporting by Development Stage Enterprises.
Upon completion of its acquisition of certain royalty interests in
mineral properties, along with the divesture of its joint venture, Pediment
Gold LLC, the Company's primary focus has changed to acquiring and managing
precious metal royalties. The acquisition of the royalty interests resulted
in the Company no longer being considered exploration stage under SFAS No.
7.
The Company's current and potential future royalty interests, defined
as non-operating net revenue rights in mining projects, expect to provide
all future revenues. The Company currently does not conduct exploration or
mining activities.
USE OF ESTIMATES
----------------
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires the use of management's estimates. These estimates are
subjective in nature and involve judgments that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
-5-
liabilities at fiscal year end, and the reported amounts of revenues and
expenses during the fiscal year. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS
-------------------------
For the purpose of the statements of cash flows, all highly liquid
investments with maturities of three months or less are considered to be
cash equivalents. There were no cash equivalents as of September 30, 2006.
From time to time the Company maintains amounts on deposit with financial
institutions which exceed federally insured limits. The Company has not
experienced any significant losses in such accounts, nor does management
believe it is exposed to any significant credit risk.
RESTRICTED CASH - The Company maintains the majority of its cash
resources with Macquarie Bank Limited, its senior lender. Restricted cash
is denominated in US dollars, Canadian dollars, and gold bullion. In
accordance with the Company's loan agreements with Macquarie Bank Limited,
restricted cash is periodically released to meet the Company's working
capital obligations based on a previously agreed upon annual budget.
Additional funds are available on an as needed basis.
ROYALTY INTERESTS IN MINERAL PROPERTIES:
----------------------------------------
Acquired royalty interests in mineral properties include certain
properties in the production, development, and exploration stage. We
capitalize these royalty interests as tangible assets when they meet the
definition of mineral rights in accordance with Financial Accounting
Standards Boards (FASB) Emerging Issues Task Force Issue (EITF) No.04-02,
Whether Mineral Rights are Tangible or Intangible Assets. At September 30,
2006 all of our royalty interest meet the definition of mineral rights and
therefore, are capitalized as tangible assets.
Acquisition costs of production stage royalty interests are depleted
using the units of production method over the life of the mineral property,
which is estimated using proven and probable reserves. Development and
exploration stage royalties will be amortized in the same manner once they
become production stage assets. The carrying values of all royalty mineral
interests are periodically evaluated for impairment. The recoverability of
the carrying value of royalty interests in production and development stage
mineral properties is evaluated based upon estimated future undiscounted
net cash flows from each royalty interest property using estimates of
proven and probable reserves. We evaluate the recoverability of the
carrying value of royalty interests in exploration stage mineral properties
in the event of significant decreases in the price of gold, and whenever
new information regarding the mineral properties is obtained from the
operator that could affect the future recoverability of our royalty
interests. Impairments in the carrying value of each property are measured
and recorded to the extent that the carrying value in each property exceeds
its estimated fair value, which is generally calculated using estimated
future discounted cash flows.
Our estimate of gold prices, operator's estimates of proven and
probable reserves to our royalty properties, and operator's estimates of
operating, capital and reclamation costs are subject to certain risks and
uncertainties which may affect the recoverability of our investment in
these royalty interests in mineral properties. Although we have made our
best assessment of these factors based on current conditions, it is
possible that changes could occur, which could adversely affect the net
cash flows expected to be generated from these royalty interests. The
Company believes that no impairment of its long-lived assets occurred
during the third quarter of 2006 or existed as of September 30, 2006.
BASIS OF CONSOLIDATION
----------------------
The consolidated financial statements include the accounts of Battle
Mountain Gold Exploration Inc., and it's recently incorporated and wholly -
owned subsidiaries, BMGX(Barbados) Corporation, and Battle Mountain Gold
(Canada) Inc.
-6-
The Company's wholly owned subsidiaries hold all the currently
existing gold royalty assets. Intercompany transactions and account
balances have been eliminated in consolidation.
LONG-LIVED ASSETS
-----------------
The Company reviews the carrying amount of its long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable in accordance with SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets.
REVENUE RECOGNITION
-------------------
The Company's revenue is generated from its royalty interests in
mineral properties. Royalty revenue is recognized in accordance with the
terms of the underlying royalty agreements subject to (i) the pervasive
evidence of the existence of the arrangements; (ii) the risks and rewards
having been transferred; (iii) the royalty being fixed or determinable; and
(iv) the collectibility of the royalty being reasonably assured. For
royalty payments received in gold, royalty revenue is recorded at the
average spot price of gold for the period in which the royalty was earned.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------------------------------
The carrying value of the Company's receivables, net of the allowance
for doubtful accounts, represents their estimated net realizable value.
The Company evaluates the collectibility of accounts receivable on a
historical basis. The Company records a reserve for bad debts against
amounts due to reduce the net recognized receivable to an amount the
Company believes will be reasonably collected. The reserve is a
discretionary amount determined from the analysis of the aging of the
accounts receivables and historical experience. Based on our analysis of
payment experience, no reserve has been recorded for the period.
FOREIGN CURRENCY TRANSLATION
----------------------------
The functional currency of the Company and its subsidiaries is the
applicable local currency in accordance with SFAS No. 52, Foreign Currency
Translation. Monetary assets and liabilities of the Company and its
subsidiaries with functional currencies other than the U.S. dollar are
translated into U.S. dollars using current rates of exchange at the balance
sheet date. Non-monetary assets and liabilities are translated at
historical exchange rates. Revenues and expenses are translated at the
weighted average exchange rates in effect for the period in which the items
occur. Translation gains or losses are recorded as a separate component of
stockholders' equity and transaction gains and losses are included in other
income and expenses, net.
COMPREHENSIVE INCOME
--------------------
The Company reports comprehensive income and loss and its components
in accordance with SFAS No. 130, Reporting Comprehensive Income. The
Company's comprehensive income is comprised of net income, foreign currency
translation adjustments, and gold price fluctuations.
CONCENTRATION OF CREDIT RISK
-------------------------------
The Company's current revenue is solely generated from the production
stage royalty interests in the El Limon Mine, Williams Mine, Joe Mann Mine,
and Don Mario Mine.
-7-
RECLASSIFICATIONS
-----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications did not have an impact
on previously reported financial position, cash flows, or results of
operations.
2. DIVESTITURE OF JOINT VENTURE
-------------------------------
In accordance with the Company's current focus of acquiring and
managing its portfolio of royalty interests in mining properties, the
Company exchanged its previously obtained interest in Pediment Gold LLC
with its joint venture partner, Nevada Gold Exploration Solutions LLC
(NGXS) for the rescission of 7,800,000 previously granted and restricted
shares of Company common stock and a 1.25% net smelter royalty on any
future production, if any, of the Hot Pots and Fletcher Junction
Exploration Projects. As of the date of the transaction neither the Hot
Pots nor the Fletcher Junction Project had any proven or probable reserves.
3. RELATED PARTY TRANSACTIONS
----------------------------
On April 26, 2006 the CEO received a total of 750,000 shares of
Company common stock at $0.39 per share, the fair market value of the
Company's common stock on the date of issuance, for total consideration of
$292,500. The transaction resulted in the cancellation of accrued salary
and operating payables
On April 26, 2006 the CEO received 1,762,096 shares of common stock at
$0.39 per share for total consideration of $687,217 in accordance with the
employment agreement.
The aggregate of 2,512,096 shares of Company common stock issued to
the CEO during the nine months ended September 30, 2006 include additional
exercisable warrants of 2,512,096, each for one additional share of common
stock at $0.31 per share expiring on April 12, 2011. The Company recognized
$879,726 of non-cash compensation expense related to issuance of the
warrants.
The Company's CFO, previously engaged as a consultant, received
500,000 shares of common stock at $0.39 per share for total consideration
of $195,000 as compensation for advisory work related to the acquisition of
the royalty assets. The shares include additional exercisable warrants of
500,000, each for one additional share of common stock at $0.31 per share
expiring on April 12, 2011. The Company recognized $175,098 of non-cash
compensation expense related to issuance of the warrants.
The Company has an employment agreement with its CFO effective May 1,
2006. The initial term of the agreement is three years with a base
compensation of $125,000 per year. In addition, the CFO was granted 750,000
restricted shares of the Company's common stock, which vest equally over
the term of the agreement, beginning in May 2007.
At September 30, 2006 related party payables of $47,264 consist of
accrued salaries payable to the CEO and CFO in accordance with the terms of
their respective employment agreements.
-8-
4. PROPERTY AND EQUIPMENT
------------------------
The Following Table Summarizes the net book value of the components of
our property and equipment, including our royalty interests in mineral
properties as of September 30th, 2006.
ROYALTY INTEREST IN MINERAL PROPERTIES
as of September 30th, 2006
($ in 000's)
Accumulated
Depreciation&
Gross Amortization Net
----- ------------- -----
Production stage royalty interests
Williams mine $ 3,709 (548) $ 3,161
Don Mario mine 3,460 (519) 2,941
El Limon mine 2,132 (231) 1,902
Joe Mann mine 413 (67) 345
------- -------------- ------
$ 9,714 (1,365) $ 8,349
Development Stage Royaltiess resource
Dolores resource $ 3,597 - $ 3,597
Relief Canyon mine 2,843 - 2,843
Lluvia Del Oro property 788 - 788
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$ 7,229 $ 7,229
Exploration Stage
Seguenega $ 3,587 $ 3,587
Night Hawk Lake Property -
Marmato -
Hot Pot -
Fletcher Junction -
Total royalty interests in
mineral properties $ 20,530 $ (1,365) $19,165
-------- -------------- -------
Equipment ($ in 000's) $ 6.1 $ (1.4) $ 4.7
TOTAL PROPERTY AND EQUIPMENT $20,536 $ (1,366) $19,170
The Company incurred amortization and depreciation expense of $455,366
on the property and equipment during the quarter ended September 30, 2006.
Discussed below is the status of each of our royalty interests in
mineral properties.
Williams Mine - We own a 0.72% NSR on the Williams Mine which is
--------------
located 350 kilometres east of Thunder Bay, Ontario, Canada. The NSR covers
the underground operations and a portion of the open pit operations. The
mine is jointly owned and operated by Teck Cominco Ltd. (50%) and Barrick
Gold Corporation Ltd.(50%). The mine is currently operating.
Don Mario Mine - We own a 3.0% NSR on the Don Mario Mine. The mine is
----------------
owned by Orvana Minerals Corp., and is currently operating. The Don Mario
Mine is located within the San Juan Canton, of the province of Chiquitos,
in eastern Bolivia.
-9-
El Limon/La India - We own a 3.0% NSR on the El Limon mine and La
-------------------
India resource. The mine is owned by Glencairn Gold Corporation. The El
Limon Mine is currently operating. The La India resource is currently being
explored. The El Limon Mine is located in Northwester Nicaragua,
approximately 140 kilometers form the capital Managua.
Joe Mann Mine - We own a 1% NSR on the Joe Mann mine. The mine is
---------------
owned by Campbell Resources Inc. The mine is currently operating and is
located approximately 550 km north of Montr al, Quebec.
Dolores Reserve - We own a 1.25% NSR on gold production from the
----------------
Dolores Resource. The resource is owned by Minefinders Corporation Ltd.
Construction of the mine is in process, with a start-up date expected in
the third quarter of 2007. Dolores is located in Mexico, in the state of
Chihuahua.
Relief Canyon Mine - We own a 4.0% NSR on the Relief Canyon Mine - The
--------------------
mine is owned by Newgold Inc. The mine is scheduled to re start by mid 2007
according to the mine operator, Newgold Inc. The mine is located
approximately 110 miles northeast of Reno, Nevada.
Lluvia Del Oro - We own a 3.0% NSR on the Lluvio del Oro Mine. The
----------------
property is owned by a private Mexican company. We carry our interest on
the mine as a development stage asset, since the mine was previously in
production, is currently on care and maintenance, and we anticipate a
restart of the mine within the next 12-18 months.
Seguenega Property - We own a 3.0% NSR on the Sega property. The
------------------
property is owned by Orezone Resources Inc. Orezone has spent in excess of
$5.0 million in exploration over the past 3 years. Orezone has the option
to purchase (buy back) up to two thirds of our royalty interest (i.e. from
3% to 1%) for $2.0 million, prior to starting production. The property is
located in Burkina Faso.
Night Hawk Lake Property, Marmato, Hot Pot and Fletcher Junction are
-----------------------------------------------------------------------
all early stage exploration properties. We will update as needed based on
further exploration work by the property owners.
5. NOTES PAYABLE
-------------
GOLD FACILITY
On April 25, 2006 the Company entered into an 11,750 ounce gold
facility agreement with Macquarie Bank Limited. The Company sold the gold
on the open market at $587.90 per ounce on April 10, 2006 for total
proceeds of $6,907,825. The gold facility calls for us to repay Macquarie
Bank Limited in sixteen quarterly installments of 907 ounces beginning May
15, 2006 with a final installment of 488 ounces due on May 15, 2010 for
total consideration of 15,000 ounces. Additionally, under the terms of the
Gold Facility, on each Gold Delivery Date, we are required to make an
additional and mandatory pre-delivery of Gold, determined in accordance
with and subject to the following conditions:
(a) pre-delivery of Gold under the agreement, shall only be
required on a Gold Delivery Date which:
(i) immediately follows a Financial Quarter wherein the
London Gold Price was greater than US$425/Ounce for more
than 15 days; or
(ii) occurs when a Default or Event of Default has occurred
and is continuing; and
-10-
(b) the amount of Gold to be pre-delivered shall be the Current
Gold Value of the US Dollar amount which is 50% of Free Cash Flow
for such Financial Quarter;
A mandatory pre-delivery of Gold under the agreement is to be applied
first against the then final Gold Delivery and then against the remaining
Gold Deliveries in reverse order to the order in which the Gold Deliveries
are due to be made.
As of October 10, 2006, the final installment had been reduced to 386
ounces, as a result of required Gold Facility pre-payments of 73 ounces on
June 5th, 2006 and 29 ounces on October 10, 2006.
The facility is collateralized by the acquired royalty interests in
mining properties.
BRIDGE FINANCE FACILITY
On April 25th, 2006, the Company entered into a bridge finance
facility agreement with Macquarie Bank Limited for $4,000,000. The bridge
finance facility carries a 12% annual interest rate, interest is accrued
until maturity, and the loan is due on the earlier of (i) December 31, 2006
and (ii) within 30 days after receipt of proceeds from a public offering of
the shares of the Company. The facility carries a one-time extension option
through March 31, 2007, at Macquarie Bank Limited's sole discretion. The
loan is collateralized by the acquired royalty interests in mining
properties.
SUBORDINATED EXCHANGEABLE DEBENTURE
The Company entered into a subordinated exchangeable debenture with
IAMGOLD (seller of acquired royalty interests in mining properties) for a
total of $2,000,000. The debenture carries an interest rate of 6% per annum
and is due on April 25, 2008. Principal and interest payments are due
semi-annually and may be paid in cash or in shares of common stock of the
Company. Additionally, IAMGOLD may, at any time within the period, convert
the outstanding principal and accrued interest into shares of common stock
of the Company at $0.50 per share.
The following table illustrates the Company's future obligations as of
September 30, 2006:
YEAR PRINCIPAL INTEREST TOTAL
---- --------- --------- ---------
2007 5,406,853 1,087,516 6,494,369
2008 3,597,332 657,715 4,255,047
2009 1,816,726 316,174 2,132,900
2010 1,216,996 76,383 1,293,379
Total 12,037,907 2,137,788 14,175,695
---------- --------- ----------
Note: The above table includes principal and interest on the gold loan
facility based on a gold price of $587.90 per ounce.
For the nine months ended September 30, 2006 the Company recognized an
unrealized loss on the carrying amount of its gold loan facility of
$101,224.
-11-
6. CAPITAL STOCK
--------------
On April 26, 2006 the Company issued 11,669,353 shares of common stock
at $0.31 per share to accredited investors in a private placement offering.
Total proceeds received in the private placement were $3,439,119 net of
fees of $178,380. Each share has an attached warrant exercisable into one
share of common stock at $0.31 per share expiring on April 12, 2011.
On April 26, 2006 the Company issued 2,512,096 shares of common stock
at $0.39 per share to the CEO for total consideration of $979,717 related
to previously accrued salary, operating payables, and bonuses related to
the acquisition of the royalty interests in mineral properties. Each share
has an attached warrant exercisable into one share of common stock at $0.31
per share expiring on April 12, 2011.
On April 26, 2006 the Company issued 500,000 shares of common stock at
$0.39 per share to its CFO (previously in a consulting role) for total
consideration of $195,000 in accordance with the terms of a consulting
agreement. Each share has an attached warrant exercisable into one share of
common stock at $0.31 per share expiring on April 12, 2011.
On April 26, 2006 the Company issued 1,935,000 shares of common stock
at $0.31 per share to Macquarie Bank Limited for total consideration of
$599,850 related to the payment of loan origination fees incurred during
the quarter ended June 30, 2006.
On April 26, 2006 the Company issued 12,000,000 shares of common stock
at $0.39 for total consideration of $4,680,000 related to the purchase of
royalty interests in mineral properties from IAMGOLD.
On June 30, 2006 the Company received and cancelled 7,800,000 shares
of previously issued restricted common stock related to the divesture of
its interest in Pediment Gold LLC.
7. WARRANTS
--------
The estimated fair value of warrants, using a lattice pricing model is
based on the following assumptions.
2006 2005
------ -------
Expected Dividend yield $ -0- $ -0-
Expected stock price volatility 90% 72%
Risk free interest rate 4.90% 4.00%
Expected life of warrants (years) 5.00 1.75
The following table illustrates the warrant activity as of September
30, 2006:
AS OF 9/30/2006 2005
-----------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE
-----------------------------------------------------------
Outstanding, beginning of the year 1,500,000 $ 0.25 - $ -
Issued 14,681,449 $ 0.31 1,500,000 $ 0.25
0- -
-12-
Exercised - - - -
Expired - - - -
--------------------------------------------------------
Outstanding, end of the period 16,181,449 $ 0.3045 1,500,000 $ -0.25
--------------------------------------------------------
Currently exercisable 16,181,449 $ 0.3045 1,500,000 $ 0.25
--------------------------------------------------------
Stock warrants outstanding and exercisable as of September 30th, 2006
are as follows:
Average
Weighted Remaining Number of Weighted
Number of Average Contractual Warrants Average
Range of Warrants Exercise Life Vested Exercise
Exercise Price Outstanding Price (Years) (Exercisable) Price
-------------- ----------- -------- ----------- ------------ --------
$0.25 1,500,000 $ 0.25 1.50 1,500,000 $ 0.25
$0.31 14,681,449 $ 0.31 4.75 14,681,449 $ 0.31
8. INCOME TAXES
------------
The Company has adopted FASB 109 to account for income taxes. The
Company currently has no issues that create timing differences that would
mandate deferred tax expense. Net operating losses would create possible
tax assets in future years. Due to the uncertainty as to the utilization of
net operating loss carry-forwards a valuation allowance has been made to
the extent of any tax benefit that net operating losses may generate.
The Company has incurred a taxable net loss of $2,596,789 as of
September 30, 2006 that can be carried forward to offset future earnings if
conditions of the Internal Revenue Code are met. This net operating loss
carry-forward will begin to expire in the year 2024. As of September 30,
2006 the entire future tax benefit has been offset by a valuation
allowance.
9. PRO FORMA FINANCIAL INFORMATION
----------------------------------
On April 25, 2006 the Company acquired certain royalty interests in
mineral properties. The following is pro-forma condensed operating data
which portrays the results of operations as if the transaction had occurred
at the beginning of each period presented:
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
2006 2005
------------ -----------
Net revenue $ 2,433,550 $ 1,962,888
Depreciation and
amortization (1,366,075) (1,333,948)
Operating income /
(loss) (2,568,647) (595,284)
Other expenses (4,646,973) (1,324,856)
Pro-forma net income /
(loss) (7,287,970) (1,920,140)
Pro-forma net income /
(loss) per share - basic
and diluted $ (0.13) $ (0.04)
Weighted average shares
outstanding - basic and diluted 55,828,027 41,030,000
-13-
10. LOSS PER SHARE
---------------
The Company's loss per share of common stock is based on the weighted
average number of common shares outstanding at the financial statement date
consisting of the following:
SEPT. 30,
2006
------------
BASIC LOSS PER SHARE:
Net loss (numerator) $ (7,287,970)
Shares outstanding (denominator) 55,828,027
------------
Loss per basic share $ (0.13)
============
FULLY DILUTED LOSS PER SHARE:
Net loss (numerator) $ (7,287,970)
Shares outstanding (denominator) 55,828,027
Loss per diluted share $ (0.13)
============
11. SUBSEQUENT EVENTS
------------------
On October 25th, 2006, we issued 102,940 restricted shares of common
stock to IAMGOLD Corporation, for payment of interest due on our 6%
Exchangeable Secured Subordinated Debenture. IAMGOLD Corp., elected by
written notice to us, to receive such interest payment in Common Shares.
The number of common shares issued is based on the accrued and unpaid
interest payable to IAMGOLD Corp (the debenture holder) on October 25th,
2006, which was $60,735, divided by the Weighted Average Trading Price of
our shares. The Weighted Average trading Price was calculated by dividing
the aggregate dollar trading values of our common shares for the twenty
consecutive trading days immediately preceding October 25th, 2006, by the
aggregate number of common shares traded during that same period.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS 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. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING
STATEMENTS AS A RESULT OF THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION, GENERAL ECONOMIC CONDITIONS, AND
CHANGES IN THE ASSUMPTIONS USED IN MAKING SUCH FORWARD LOOKING STATEMENTS.
With the exception of historical matters, the matters discussed in
this report are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
projections or estimates contained herein. Such forward-looking statements
include statements regarding projected production estimates from the
operators of our royalty properties, the adequacy of financial resources
and funds to cover anticipated expenditures for general and administrative
expenses as well as capital expenditures and costs associated with business
development, the potential need for additional funding for acquisitions,
our future capital commitments and our expectation that substantially all
our revenues will be derived from royalty interests. Factors that could
cause actual results to differ materially from these forward-looking
statements include, among others:
- changes in gold and other metals prices;
- the performance of our producing royalties;
- decisions and activities of the operators of our royalty
properties;
- unanticipated grade, geological, metallurgical, processing
or other problems at these properties;
- changes in project parameters as plans of the operators are
amended or refined;
- changes in estimates of reserves and mineralization by the
operators of our royalty properties;
- future financial needs;
- Economic and market conditions;
- the availability and size of acquisitions; and
other factors described elsewhere in our Annual Report on Form 10-K
and other reports filed with the Securities and Exchange Commission (the
"SEC"). Most of these factors are beyond our ability to predict or control.
We disclaim any obligation to update any forward-looking statement(s) made
herein. Readers are cautioned not to put undue reliance on forward-looking
statements in making any analysis or decision(s), whether financial,
investment, or otherwise.
GENERAL
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to provide information to assist
you in better understanding and evaluating our financial condition and
results of operations. We recommend that you read this MD&A in conjunction
with our consolidated financial statements included in Item 1 of this
Quarterly Report on Form 10-Q, as well as our 2005 Annual Report on Form
10-K.
We refer to "NSR" or Net Smelter Royalty throughout this MD&A. A Net
Smelter Royalty ("NSR") is a royalty payment made by a producer of metals,
to the royalty holder, based on a fixed percentage of gross mineral
production from the property, less a deduction of certain smelter and
refining costs, if any.
-15-
OVERVIEW
Battle Mountain Gold Exploration Corp. ("Battle Mountain", the
"Company", "we", "us", or "our"), together with its subsidiaries, is
engaged in the business of acquiring and managing precious metals
royalties. Royalties are passive (non-operating) interests in mining
projects that provide the right to revenue from the project after deducting
specified costs, if any.
We seek to acquire existing royalties or to assist in the financing of
projects that are in production or near production in exchange for royalty
interests. We expect that substantially all of our revenues are and will be
derived from royalty interests. We do not conduct mining operations at this
time or expect to in the foreseeable future.
OUR ROYALTY INTERESTS IN MINERAL PROPERTIES ARE SET FORTH BELOW.
-------------------------------------------------------------------------
NOTE: THE INFORMATION AND FIGURES CONCERNING THE PROPERTIES, AS SET
FORTH BELOW, HAVE BEEN PROVIDED BY THE OWNERS/OPERATORS OF THE RESPECTIVE
MINING PROPERTIES AND WE HAVE NOT INDEPENDENTLY VERIFIED SUCH INFORMATION
OR FIGURES. THE OPERATIONS ON AND PRODUCTION FROM THE RESPECTIVE PROPERTIES
ARE SUBJECT TO ALL THE SUBSTANTIAL RISKS AND UNCERTAINTIES INHERENT IN AND
ATTENDANT TO MINING ACTIVITIES AND THE MINING INDUSTRY.
Williams Mine- We own a 0.72% Net Smelter Royalty ("NSR") on the
--------------
Williams Mine (located 350 kilometres east of Thunder bay, Ontario, Canada)
which covers the underground operations and a portion of the open pit
operations. The mine is jointly owned and operated by Teck Cominco Ltd.
(50%) and Barrick Gold Corporation Ltd. (50%) and is currently operating.
Royalty revenues are received in Canadian dollars from the Williams mine.
The mine has been operating since the fall of 1985, and is considered part
of the Hemlo operations, which also include the David Bell mine. The mill,
located at the Williams Mine, processes ore for both the Williams and David
Bell mines. The Williams mine is primarily an underground operation, with
some open pit mining. The property comprising the Williams mine includes 11
patented mining claims and 6 leased claims. The mine covers a surface area
of approximately 270 hectares, and the mine is currently one of the largest
gold mines in Canada. Over the past 5 years, the average annual gold
production from the Hemlo operations was 528,000 ounces, with 460,000 of
gold produced in 2005. The mill started production in 1985 at a rate of
3,000 tonnes per day, and currently operates at a rate of 10,000 tonnes per
day. The current mine plan calls for mining operations to continue until
2011. As of December 2005, proven and probable reserves were 17,700,000
tonnes, with a grade of 2.62 g/t.
Don Mario Mine - We own a 3.0% NSR on the Don Mario mine. The mine is
----------------
owned by Orvana Minerals Corp., and is currently operating. Royalty
payments are received in US dollars from the Don Mario mine. The Don Mario
Mine is located within the San Juan Canton, of the province of Chiquitos,
in eastern Bolivia. Access to the property is by air from the city of Santa
Cruz de la Sierra, or by road (460 road km). On January 11, 2002, Compania
Minera del Sur (Comsur), one of the largest privately held mining Companies
in Bolivia, completed the purchase of a majority interest in Orvana, and
has since been managing and supervising the exploration, development and
mining activities carried on at the Don Mario property. The Don Mario
property consists of two zones, the Lower Mineralized Zone (LMZ) and the
Upper Mineralized Zone (UMZ). The LMZ is currently being mined, while the
UMZ is the subject of a pre-feasibility study currently being completed.
The Don Mario Mine has been in operation since 2003. The mine produced
48,228 ounces of gold in 2004, and 68,769 ounces of gold in 2005. The mine
life estimate, based on the resources in the LMZ, is approximately five
years, at an assumed production rate of 75,000 ounces per year. As of
December 2005, proven and probable reserves for the LMZ were 1,017,503
tonnes, with a grade of 11.27 g/t.
Update on the Upper Mineralized Zone
-----------------------------------------
Orvana Minerals Corp., announced on October 20th, 2006, the results of
its Preliminary Feasibility Study for the Don Mario Mine's Upper
Mineralized Zone ("UMZ"). Completion of a mineral reserve estimate for the
UMZ deposit, had proven and probable reserves totaling 5.45 million tonnes
at average grades of 1.50% copper, 1.42 grams per tonne gold and 46.6 g/t
silver. The mineral reserves, according to Orvana Minerals Corp., would a
-16-
support a mine life of 7 years at a maximum production rate of 875,000
tonnes per annum. Payable metal production over the life of mine for the
UMZ deposit, would be approximately 72,500 tonnes (160 million pounds) of
copper, 236,600 ounces of gold, and 7,058,800 ounces of silver. Annual
payable metal production would average 33,800 ounces of gold, 1,000,000
ounces of silver and 10,300 tonnes of copper. Project economics were based
on $450 per ounce for gold, $7.00 per ounce silver, and $1.20 per pound
copper. Battle Mountain's 3.0% royalty covers all metals.
El Limon Mine/La India Resource - We own a 3.0% NSR on the El Limon
-----------------------------------
mine and La India resource. The mine is owned by Glencairn Gold Corporation
and is currently operating. The La India resource is currently being
explored. Royalty payments are received in gold bullion from the El Limon
mine. The mine is located in Northwestern Nicaragua, approximately 140
kilometers form the capital Managua. The property consists of 14 mining
concessions, all of which are covered by the royalty. Since 2002, the mine
has produced an average of 46,593 ounces of gold per year. Based on
publicly available information from the mine owner, current estimates on
mine life (which do not include the La India resource or any additional
resources from the property which is still being explored) is approximately
5 years. As of December 2005, the proven and probable reserves were
1,751,600 tonnes, with a grade of 5.23 g/t.
Joe Mann Mine - We own a 1% NSR on the Joe Mann mine. The mine is
---------------
owned by Campbell Resources Inc and is located approximately 550 km north
of Montr al, Quebec. The mine is currently operating. Royalty payments are
received in gold bullion from the Joe Mann Mine. As of December 2005, the
proven and probable reserves are 109,300 tons, with a grade of 0.24
ounces/ton. The mine produced approximately 29,640 ounces of gold in 2005.
Dolores Resource - We own a 1.25% NSR on gold production from the
-----------------
Dolores Resource. The resource is owned by Minefinders Corporation Ltd.
Construction of the mine is in process, with a start-up date, (according to
Minefinders), expected early in the third quarter of 2007. The Dolores
resource is located in Mexico, in the state of Chihuahua. Based on recent
publicly available data from Minefinders, the estimated annual gold
production from the Dolores mine, will be approximately 120,000 ounces per
year over an estimated mine life of over 12 years. As of July 2006, proven
and probable reserves were 71,155,000 tonnes with a grade of 0.99 g/t for
gold, and 50.7 g/t for silver.
Relief Canyon Mine - We own a 4.0% NSR on the Relief Canyon Mine - The
--------------------
mine is owned by Newgold Inc. The Relief Canyon mine is an open-pit, heap
leaching operation located approximately 110 miles northeast of Reno,
Nevada. Based on past exploration by Newgold, Inc. and others, Newgold
believes the Relief Canyon Mine presents the potential for gold bearing ore
deposits which will hopefully be validated through further exploration of
additional mining claims. As of January 31, 2006 the Relief Canyon
properties include 78 unpatented mining claims contained in about 1,000
acres. Newgold's operating plan is to place the most promising mining
targets into production during the 2007 fiscal year, and use the net
proceeds from these operations to fund expanded exploration and development
of its entire property holdings. Once Newgold has achieved environmental
compliance, they can proceed with the permits to commence full scale
exploration and mining activities. The estimated time for completing the
permitting process is between 9 months to 18 months. The mine is scheduled
to re-start by mid 2007 according to Newgold.
Seguenega Property ("Sega") - We own a 3.0% NSR on the Sega property.
----------------------------
The property is owned by Orezone Resources Inc. and is located in Burkina
Faso. This is an advanced stage exploration property. Orezone has spent in
excess of $5.0 million in exploration over the past three years. Orezone
has the option to purchase from us up to two thirds of our royalty interest
(i.e. from 3% to 1%) for $2.0 million, prior to putting the resource into
commercial production.
Lluvia del Oro Property - We own a 3.0% NSR on the Lluvio del Oro
--------------------------
property ("Lluvia"). The property is owned by a private Mexican
-17-
company. This former open-pit gold and silver mine is currently on care and
maintenance. In April 2006, Columbia Metals signed a letter of intent
purchase the Lluvia mine with the intent of placing the mine back into
production. Preliminary historic resource estimates show 4,600,000 tonnes
of 0.82g/t and 4,500,000 tonnes of 0.95g/t. The property currently includes
an open-pit, two leach pads, and a recovery plant.
Night Hawk Lake Property, Marmato, Hot Pot and Fletcher Junction are
all early stage exploration properties.
RECENT PRODUCTION STATISTICS FOR THE OPERATING MINES IN WHICH WE HOLD ROYALTY
- -----------------------------------------------------------------------------
INTERESTS.
- ----------
NOTE: THE INFORMATION AND FIGURES CONCERNING THE PROPERTIES, AS SET
FORTH BELOW, HAVE BEEN PROVIDED BY THE OWNERS/OPERATORS OF THE RESPECTIVE
MINING PROPERTIES AND WE HAVE NOT INDEPENDENTLY VERIFIED SUCH INFORMATION
OR FIGURES. THE OPERATIONS ON AND PRODUCTION FROM THE RESPECTIVE PROPERTIES
ARE SUBJECT TO ALL THE SUBSTANTIAL RISKS AND UNCERTAINTIES INHERENT IN AND
ATTENDANT TO MINING ACTIVITIES AND THE MINING INDUSTRY.
Williams Mine
-------------
Gold production from the Hemlo operations (which include both the
Williams Mine and David Bell Mine), was reduced versus the same period last
year as a result of poor ground control conditions, excess ground water in
the Williams pit due to heavy rains, and equipment availability. Gold
production for the three months ended September 30, 2006 was 99,000 ounces
vs 118,000 ounces for the same period a year ago. For the nine months ended
September 30, 2006, gold production was 308,000 ounces versus 359,000
ounces for the same period a year ago. Cash operating costs increased, in
part due to increased mining costs, the effect of lower production and a
weaker US dollar. (note, production data is for the combined Williams/David
Bell operations as the operators do not currently provide separate
production data for each mine.)
Don Mario Mine
--------------
The Don Mario Mine produced 18,814 ounces of gold and sold 21,918
ounces of gold during the first quarter of 2006 vs. 17,345 ounces produced
and 15,712 ounces sold in the first quarter of 2005. During the quarter
ended June 30, 2006 gold production was 19,333 vs 17 404, and gold sales
were 18,177 vs 13,820 for the same period in 2005.
El Limon Mine
-------------
Gold production at the El Limon mine during the first quarter of 2006
was 7,846 ounces, which was 4,390 ounces below the corresponding period of
2005, the result of intermittent road blockades and a lower than projected
mine grade. Gold production during the second quarter of 2006 was 9,949
ounces, vs. 9,669 ounces for the same period in 2005.
Joe Mann Mine
-------------
During the first quarter of 2006, the Joe Mann Mine produced 3,464
ounces of gold. This is below the previous quarter's production of 5,577
and 7,410 ounces for the same period of last year. During the quarter,
difficult ground conditions were encountered which result in the mining of
lower grade ore. During the second quarter of 2006, the mine produced 4,265
ounces of gold.
Update on the Dolores Resource and mine construction:
-----------------------------------------------------
The owner of the Dolores resource, Minefinders, Inc, recently reported
that based on recent exploration results, that the open-pit, fully-diluted
reserve base at its 100% owned Dolores gold and silver deposit in
Chihuahua, Mexico has increased 24.9% in contained gold reserves and an
increase of 23.5% in contained silver reserves. The Company is proceeding
rapidly with development and construction of the planned, 18,000 tonnes per
-18-
day Dolores open-pit, heap leach mine. The mine is expected to produce an
average of 6,480,000 tonnes of ore per annum, over a projected mine life of
15.5 years.
RESULTS OF OPERATIONS
Quarter EndedSeptember 30,2006, Compared to QuarterEnded September
------------------------------------------------------------------------
30,2005
-------
Our financial results are closely tied to the price of gold and
production from the mining properties in which we hold royalty interests.
For the quarter ended September 30, 2006, the price of gold averaged $619
per ounce. Revenues earned during the third quarter are comprised of
revenue from the El Limon mine, which totaled $182,105, the Don Mario mine,
with revenues of $396,490, the Williams mine, with revenues of $289,200,
and the Joe Mann mine, with revenues of $16,481. Total revenues earned
during the quarter were $884,276.
For the quarter ended September 30, 2006 we recorded a net loss of
$318,117 or $(0.01)per share as compared to net a net loss of $446,231, or
$(0.01) per share, for the quarter ended September 30, 2005.
Total operating expenses increased to $763,208 for the quarter ended
September 30, 2006, compared to $66,319 for the quarter ended September 30,
2005. The increase was due in part to the increased salaries for our CEO
and CFO as well as increased legal and accounting expenses versus the same
period last year. In addition, non-cash amortization expense related to the
newly-acquired royalty assets of $455,061 contributed to the increase in
expenses.
Professional and consulting expenses, which include salaries, fees to
external legal and accounting professionals as well as consultants,
increased to $187,512 for the three months ended September 30, 2006 from
$30,220 for the three months ended September 30, 2005. Legal, accounting
and consulting expenses of $93,541 during the quarter, which relate
primarily to the remaining legal work associated with the recent royalty
acquisition, as a well as legal and accounting expenses related to the
preparation of our SB-2 Registration Statement, (which was filed with the
SEC on October 4, 2006) and consulting expenses related to our Toronto
Stock Exchange listing application, contributed to the increase. In
addition, increased salary expense for our CEO and CFO, versus the same
period a year ago also added to the higher expense levels.
General and administrative expenses increased to $99,503 for the
quarter ended September 30, 2006, compared to $12,457 for the quarter ended
September 30, 2005. The increase was primarily due to foreign withholding
taxes of $87,915 related to royalties received from the Don Mario and El
Limon mines.
Depreciation and amortization expense for the quarter ended September
30, 2006 was $455,366 vs. $52 for the quarter ended September 30, 2005. The
increase is due primarily to the amortization of the purchase price of the
acquired royalty assets. The amortization expense is calculated using a
units of production method.
Interest expense for the quarter ended September 30, 2006 was $361,127
vs. zero during the period ending September 30, 2005. Interest expense was
comprised of cash expense of $210,355, and accrued interest expense of
$150,772. The cash portion of the interest expense relates to the August
15, 2006 payment on our gold facility, and represents the interest from May
15th to August 15, 2006 on the facility. The accrued interest is comprised
of interest related to the Gold facility (from August 15th to September
30th, 2006), as well as accrued interest on the bridge facility and the
subordinated exchangeable debenture for the quarter.
The loss on the gold facility payment of $45,441 arises as a result of
the difference in the gold price on the date of drawdown on the gold
facility (April 10, 2006) and the date of the payment of the second
quarterly repayment, (August 15th, 2006).
-19-
For the quarter ended September 30, 2006, we recorded a provision for
income taxes of $31,866 compared with zero during the three months ended
June 30, 2005. This amount relates to an estimate on taxes payable on
earnings generated by a foreign subsidiary.
The comprehensive income of $172,000 results from market price
fluctuations in our assets and liabilities that are denominated in gold
bullion and Canadian dollars.
Nine Months Ended September 30, 2006, Compared to Nine Months Ended
---------------------------------------------------------------------------
September 30, 2005
--------------------
For the nine months ended September 30, 2006, we recorded a net loss
of $7,287,970 or $(0.13) per share, as compared to a net loss of $788,370,
or $(0.02) per basic share, for the nine months ended September 30, 2005.
For the nine months ended September 30 2006, total royalty revenues
were $2,433,550, which consisted of $807,058 from our royalty on the
Williams mine, $1,088,771 from our royalty on the Don Mario mine, $463,092
from our royalty on the EL Limon mine, and $74,629 from our royalty on the
Joe Mann mine. We did not have any royalty income for the period ending
September 30th, 2005.
Total operating expenses increased to $5,002,197 for the nine months
ended September 30, 2006, compared to $398,376 for the nine months ended
September 30, 2005. The increase was primarily due to several non-cash,
non-recurring expenditures related to the acquisition of the IAMGOLD gold
royalty assets which occurred during the second quarter of 2006, in
addition to the non-cash amortization expense related to the newly acquired
royalty assets.
Professional and consulting expenses, which include salaries, fees to
external legal and accounting professionals as well as consultants,
increased to $2,478,766 for the nine months ended September 30, 2006 from
$278,188 for the nine months ended September 30, 2005, primarily as a
result of non-cash compensation expenses of $1,937,042. This expense
consists of the value of shares and warrants issued to our CEO for accrued
salary and payables owed to him, as well as a transaction bonus due to him,
under his employment agreement. In addition, the non-cash compensation
expense includes the value of the shares and warrants issued to a
consultant, for advisory services provided to the company with respect to
the royalty acquisition. Legal and accounting expenses of $226,361 during
the period, which relate primarily to the royalty acquisition, Pediment
sale transaction and preparation of our SB-2 Registration Statement, also
contributed to the increase. The remaining increase in expenses includes
the increased salary expense for our CEO under a new employment agreement,
as well as salary expenses for our recently hired CFO.
General and administrative expenses increased to $1,099,019 for the
period ended September 30, 2006, compared to $74,422 for the period ended
September 30, 2005. The increase was primarily due to one time cash and non
cash bank charges relating to the financing of the royalty acquisition
which occurred during the second quarter. Total bank charges were $832,864
of which $599,850 were non cash charges, related to the value of the shares
issued for fees for the bridge loan facility. Other expenses include
foreign withholding taxes of $229,263 related to royalties received from
the Don Mario and El Limon mines. Withholding taxes are taken at the source
by the country where the operations are based.
Depreciation and amortization expense for the nine months ended
September 30, 2006 was $1,366,075 vs. $146 for the nine months ended
September 30, 2005. The increase is due primarily to the amortization of
the purchase price of the acquired royalty assets. The amortization expense
is calculated using a units of production method.
Interest expense for the period ended September 30, 2006 was $583,472,
vs zero during the period ending September 30, 2005. Interest expense was
comprised of cash expense of $256,498, and accrued interest of $326,974.
The cash portion of the interest expense relates to the August 15, 2006
payment of our gold loan facility, and represents the interest accrued from
May 15, 2006 to August 15th 2006 on the facility. The accrued interest is
comprised of accrued interest related to the gold facility (from August
15th to September 30th, 2006), as well as accrued interest on the bridge
facility and the subordinated exchangeable debenture for the period.
-20-
The loss on gold loan payment of $108,640 arises as a result of the
difference in the gold price on the date of drawdown on the Gold loan
(April 10, 2006) and the date of the payment.
For the period ended September 30, 2006, we recorded a provision for
income taxes of $72,350 compared with zero during the period ended
September 30, 2005. This amount relates to an estimate on taxes payable on
earnings generated by a foreign subsidiary.
The comprehensive loss of $100,811 results from market price
fluctuations in our assets and liabilities that are denominated in gold
bullion and Canadian dollars.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, we had current assets of $952,414 compared to
current liabilities of $5,903,928. $4,000,000 of the current liabilities is
from the bridge facility, which comes due on December 31, 2006. The
facility carries a one-time extension option through March 31, 2007, which
is at Macquarie Bank Limited's sole discretion. Cash on hand of $315,207
consisted of approximately $309,057 held in restricted accounts with our
senior lender, with the remaining cash held directly by the Company. Cash
held with our senior lender is in US dollars, Canadian dollars and gold
bullion. Cash held by the Company is held in both US and Canadian dollars.
Under the terms of our Gold facility agreement, cash is released from the
accounts to cover previously agreed upon corporate expenses, which are part
of our annual budget. Accounts receivable consist entirely of royalties
earned but not yet received as of the quarter end. Cash generated from
operations was $526,868 for the nine months ended September 30, 2006.
During the quarter ended September 30, 2006, liquidity needs were met
from royalty revenues, and our available cash resources.
We believe that our current financial resources and funds generated
from operations will be adequate to cover anticipated expenditures for
operating expenses, and capital expenditures for the foreseeable future.
Additional capital will be required to repay our obligations under the
bridge facility. We will be seeking additional financing in the near
future.
GOLD FACILITY
On April 25, 2006 the Company entered into an 11,750 ounce gold
facility agreement with Macquarie Bank Limited. The Company sold the gold
on the open market at $587.90 per ounce on April 10, 2006 for total
proceeds of $6,907,825. The gold facility calls for us to repay Macquarie
Bank Limited in sixteen quarterly installments of 907 ounces beginning May
15, 2006 with a final installment of 488 ounces due on May 15, 2010 for
total consideration of 15,000 ounces. Additionally, under the terms of the
Gold Facility, on each Gold Delivery Date, we are required to make an
additional and mandatory pre-delivery of Gold, determined in accordance
with and subject to the following conditions:
(a) pre-delivery of Gold under the agreement, shall only be
required on a Gold Delivery Date which:
(i)immediately follows a Financial Quarter wherein the
London Gold Price was greater than US$425/Ounce for more than 15
days; or
(ii)occurs when a Default or Event of Default has occurred
and is continuing; and
(iii) the amount of Gold to be pre-delivered shall be the
Current Gold Value of the US Dollar amount which is 50% of Free
Cash Flow for such Financial Quarter;
-21-
A mandatory pre-delivery of Gold under the agreement is to be applied
first against the then final Gold Delivery and then against the remaining
Gold Deliveries in reverse order to the order in which the Gold Deliveries
are due to be made.
As of October 10, 2006, the final installment had been reduced to 386
ounces, as a result of required Gold Facility pre-payments of 73 ounces on
June 5th, 2006 and 29 ounces on October 10, 2006.
The facility is collateralized by the acquired royalty interests in
mining properties.
BRIDGE FINANCE FACILITY
On April 25th, 2006, the Company entered into a bridge finance
facility agreement with Macquarie Bank Limited for $4,000,000. The bridge
finance facility carries a 12% annual interest rate, interest is accrued
until maturity, and the loan is due on the earlier of (i) December 31, 2006
and (ii) within 30 days after receipt of proceeds from a public offering of
the shares of the Company. The facility carries a one-time extension option
through March 31, 2007, at Macquarie Bank Limited's sole discretion. The
loan is collateralized by the acquired royalty interests in mining
properties. Our current operations are not sufficient to meet this
obligation. We are seeking additional financing to refinance the above
obligation.
SUBORDINATED EXCHANGEABLE DEBENTURE
The Company entered into a subordinated exchangeable debenture with
IAMGOLD (seller of acquired royalty interests in mining properties) for a
total of $2,000,000. The debenture carries an interest rate of 6% per annum
and is due on April 25, 2008. Principal and interest payments are due
semi-annually and may be paid in cash or in shares of common stock of the
Company. Additionally, IAMGOLD may, at any time within the period, convert
the outstanding principal and accrued interest into shares of common stock
of the Company at $0.50 per share.
The following table illustrates our future obligations as of September
30, 2006
OBLIGATION CURRENT 1-3 YEARS 4 YEARS
---------- ------- --------- -------
Gold loan facility (1) 1,406,853 4,631,054
Bridge loan facility (2) 4,240,000
Convertible debenture (3) 121,469 2,122,147
Total 5,768,322 6,753,201
(1) Assumes a spot gold price of $587.90 per ounce and is
payable in gold quarterly. Total remaining obligation is
13,084 ounces.
(2) Includes interest at 12% per annum and is payable
December 2006.
(3) Includes interest at 6% per annum and may be converted
to 4,000,000 shares of company common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flow are significantly impacted by changes in
the market price of gold. Gold prices can fluctuate widely and are affected
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by numerous factors, such as demand, production levels, economic policies
of central banks, producer hedging, world political and economic events,
and the strength of the U.S. dollar relative to other currencies.
The volatility in the gold price is illustrated by the following
table, which sets forth, for the periods indicated, the high and low prices
in U.S. dollars per ounce of gold, based on the London PM fix.
Gold Price Per Ounce ($)
YEAR HIGH LOW
---- --------- ---------
1997 $ 367 $ 283
1998 313 273
1999 326 253
2000 312 263
2001 293 256
2002 349 278
2003 416 320
2004 454 375
2005 447 411
2006 (up to June 30, 2006) 725 525
We are also subject to risks arising from the performance of the
owners/operators of the mines and properties in which we have royalty
interests.
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RISK FACTORS
OUR AUDITORS PREVIOUSLY ISSUED GOING CONCERN OPINIONS ON OUR FINANCIAL
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STATEMENTS
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In its reports dated March 11, 2006 and April 18, 2005, Chisholm,
Bierwolf & Nilson, LLC, expressed an opinion that there is substantial
doubt about our ability to continue as a going concern based on our history
of operating losses since inception, our lack of operating revenues and our
dependence on third-party financing. Our financial statements do not
include any adjustments that might result from the outcome of that
uncertainty. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. In spite of our
recent financing activities, and availability of certain cash resources,
our continuation as a going concern will continue to be dependent upon
future events, including third party debt and equity financing and revenues
generated from our acquired royalty assets. If we are unable to continue as
a going concern, investors may lose their entire investment.
WE HEAVILY DEPEND ON MARK KUCHER.
---------------------------------
The success of the Company depends upon the personal efforts and
abilities of Mark Kucher. Mark Kucher serves as the sole director and the
Company's Chief Executive Officer, pursuant to an employment agreement. Mr.
Kucher and the Company may voluntarily terminate the employment agreement
at any time. The loss of Mr. Kucher could have a material adverse effect on
our business, results of operations or financial condition. In addition,
the absence of Mr. Kucher will force us to seek a replacement who may have
less experience or who may not understand our business as well, or we may
not be able to find a suitable replacement.
WE ARE INVOLVED IN AN INDUSTRY THAT IS INHERENTLY SPECULATIVE AND
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RISKY.
-----
Historically, we have been involved in mineral exploration which is
subject to risks related to a substantial or extended decline in prices of
mineral commodities, property acquisition complexities, and restrictive
and/or changing political, social and/or environmental laws and
regulations. However, since we have discontinued all mineral exploration
activities, in the future, we expect to derive a majority of our revenues
from royalty interests we hold in the mining industry. Because of the
inherently speculative and risky nature of the mining industry, our Company
could be negatively impacted by many factors in the mining industry, and
specifically the mining companies, mining properties and ventures upon
which we rely to derive our royalty payments. Such factors may include:
political risk in the countries in which the properties are located from
which we derive royalty payments, labor disputes at the mine sites at such
properties, a decline in the price of gold, significant environmental or
regulatory restrictions, insufficient reserves, and natural disasters such
as floods or earthquakes, among other factors, and as a result investors
could lose their entire investment.
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Risks Relating to Our Common Stock
---------------------------------------
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS BEEN VOLATILE.
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The market price of our common stock historically has fluctuated
significantly based on, but not limited to, such factors as: general stock
market trends, announcements of developments related to our business,
actual or anticipated variations in our operating results, our inability to
generate revenues, and conditions and trends in the mining industry,
including the mineral exploration, development and production segments of
such industry.
Our common stock is traded on the over-the-counter Bulletin Board. In
recent years the stock market in general has experienced extreme price
fluctuations that have often been unrelated to the operating performance of
the affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated or disproportionate to
our operating performance. These market fluctuations, as well as general
economic, political and market conditions, such as recessions or interest
rates may adversely affect the market price of our common stock.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE
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SECURITIES AND EXCHANGE COMMISSION WHICH LIMITS THE TRADING MARKET IN OUR
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COMMON STOCK, MAKES TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY
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REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK.
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Our common stock is considered a "penny stock" as defined in Rule
3a51-1 promulgated by the Securities and Exchange Commission (the
"Commission" or the "SEC") under the Exchange Act. In general, a security
which is not quoted on NASDAQ or has a market price of less than $5 per
share where the issuer does not have in excess of $2,000,000 in net
tangible assets is considered a penny stock. The Commission's Rule 15g-9
regarding penny stocks impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally persons with net worth in
excess of $1,000,000 or an annual income exceeding $200,000 or $300,000
jointly with their spouse). For transactions covered by the rules, the
broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Thus, the rules affect the ability of broker-dealers to
sell our common stock should they wish to do so because of the adverse
effect that the rules have upon liquidity of penny stocks. Unless the
transaction is exempt under the rules, under the Securities Enforcement
Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting
customer transactions in penny stocks are required to provide their
customers with (i) a risk disclosure document; (ii) disclosure of current
bid and ask quotations if any; (iii) disclosure of the compensation of the
broker-dealer and its sales personnel in the transaction; and (iv) monthly
account statements showing the market value of each penny stock held in the
customer's account. As a result of the penny stock rules the market
liquidity for our common stock may be adversely affected by limiting the
ability of broker-dealers to sell our common stock and the ability of
purchasers to resell our common stock.
In addition, various state securities laws impose restrictions on
transferring "penny stocks" and as a result, investors in our common stock
may have their ability to sell their shares of the common stock impaired.
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THE COMPANY HAS NOT PAID ANY CASH DIVIDENDS.
--------------------------------------------
The Company has paid no cash dividends on its common stock to date and
it is not anticipated that any cash dividends will be paid to holders of
the Company's common stock in the foreseeable future. While the Company's
dividend policy will be based on the operating results and capital needs of
the business, it is anticipated that any earnings will be retained to
finance the future expansion of the Company.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared
in accordance with accounting principals 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 (if any) and expenses, and related disclosure of any
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates. We base our estimates on various assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis
for making judgments about 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.
We estimated the financing fees related to the issuance of warrants
and options to purchase our common stock using a lattice pricing model
using various volatility assumptions.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly
report (the "Evaluation Date"), have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are adequately
designed to ensure that material information required to be disclosed
by the Company in the reports that it files or submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms.
(b) There were no changes in our internal control over financial
reporting during our most recent fiscal quarter that materially
affected, or were reasonably likely to materially affect, our internal
control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, and its property is not the subject of,
any pending legal proceeding, except an action filed by a former officer
and director in the Second Judicial District Court of the State of Nevada,
Case No. CV06-02210, seeking to enforce alleged rights he claims to certain
options to purchase shares of restricted Common Stock of the Company,
pursuant to a Stock Option Agreement and a Stock Option Plan, and
unspecified damages. The Company has not yet filed an answer to the
Complaint, but plans to vigorously defend the action.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the current quarter ended September 30, 2006 no securities were
issued pursuant to exemptions from registration under the Securities Act.
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
a) Exhibits
Exhibit No. Description
31.1* Certificate of the Chief Executive Officer
pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
31.2* Certificate of the Chief Financial Officer
pursuant Section 302 of the Sarbanes-Oxley
Act of 2002
32.1* Certificate of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2* Certificate of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Filed Herein.
b) Reports on Form 8-K
During the quarter for which this report is filed, the Company filed a
report on Form 8-k on July 21st, 2006.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned officers, thereunto duly authorized.
DATED: November 10, 2006 BATTLE MOUNTAIN GOLD EXPLORATION CORP.
By: /s/ Mark Kucher
---------------------
Mark Kucher,
Chief Executive Officer
By: /s/ David Atkinson
----------------------
David Atkinson
Chief Financial Officer
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