ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANS
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB, including this Management s
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements regarding future events and the
Company's future results that are subject to the safe harbors created under
the Securities Act of 1933 (the "Securities Act") and the Securities
Exchange Act of 1934 (the "Exchange Act"). These statements are based on
current expectations, estimates, forecasts, and projections about the
industry in which the Company operates and the beliefs and assumptions of
the Company's management. Words such as "expects," "anticipates," "targets,"
"goals," "projects," "intends," "plans," "believes," "seeks," "estimates,"
"continues," "may," variations of such words, and similar expressions are
intended to identify such forward-looking statements. In addition, any
statements that refer to projections of the Company's future financial
performance, the Company's anticipated growth and potentials in its
business, and other characterizations of future events or circumstances are
forward-looking statements. Readers are cautioned that these forward-looking
statements are only predictions and are subject to risks, uncertainties, and
assumptions that are difficult to predict, including those identified
elsewhere herein and in the Company's Annual Report on Form 10-KSB for the
fiscal year ended October 31, 2004 under "Risk Factors." Therefore, actual
results may differ materially and adversely from those expressed in any
forward-looking statements. The Company undertakes no obligation to revise
or update any forward-looking statements for any reason.
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OVERVIEW
The Company is an exploration stage enterprise formed under the laws of
the State of Nevada on August 20, 1993, to engage in the business of mining.
The Company currently owns one mining property located in Mexico known as
the Sierra Mojada Property (the "Property"). The Company conducts its
operations in Mexico through its wholly owned subsidiary corporation, Minera
Metalin S.A. de C.V. ("Minera Metalin").
The Property consists of eight concessions totaling 7,108 hectares (17,563
acres). The Company owns 100% of the eight concessions that comprise the
Property pursuant to purchase agreements with the previous owners. A number
of prior established concessions that are not owned by the Company are
located within the Property. The Company holds title to the concessions that
it owns subject to its obligation to maintain the concessions by conducting
work on the concessions, recording evidence of the work with the Mexican
Ministry of Mines and paying a semi-annual fee to the Mexican government.
Ownership of a concession provides the owner with exploration and
exploitation rights for minerals located within the concession, but does not
include the surface rights to the real property. Therefore, the Company will
need to negotiate the necessary agreements, as needed, with the appropriate
landowners if the Company determines that a mining operation is feasible for
the Property. The Company currently anticipates that it will build mining
infrastructure needed for the Project on land owned by the local Municipio.
Initial communications with the Municipio officials indicate that they will
be willing to negotiate the necessary agreements.
The Property is located within a historical mining district known as the
Sierra Mojada Mining District (the "District"). The District is located in
the west central part of the state of Coahuila, Mexico, near the Coahuila-
Chihuahua state border approximately 200 kilometers south of the Big Bend of
the Rio Grande River. The principal mining area extends for some 5
kilometers in an east-west direction along the base of the precipitous,
1,000 meter high, Sierra Mojada Range.
The District has high voltage electric power and is accessible from
Torreon by vehicle via 250 kilometers of paved road. There is also a well
maintained, 1100 meter, gravel airstrip in the District as well as rail
lines connecting with the National Railway at Escalon and Monclova.
Over 45 mines have produced ore from more than 50 kilometers of
underground workings spread throughout the 5 kilometer by 2 kilometer area
comprising the historic District. The Company estimates that since its
discovery in 1879, the District has produced over 10 million tons of high-
grade ore with grades in excess of 30% lead, 20% zinc, 1% copper and 1 kg
(31 ounces) silver per metric ton. The District has never had a mill to
concentrate ore, and therefore all mining conducted thus far has been
limited to selectively mining ore of sufficient grade to direct ship to
smelters. The Company believes that mill grade ore that was not mined
remains available for extraction. The Company anticipates exploring and
potentially developing the unexplored areas of the Property.
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The Sierra Mojada fault runs east and west dividing the Property into two
distinct mineral systems. The Company has determined that the mineralization
north of the fault is composed of silver, copper, zinc and lead sulfides and
the mineralization south of the fault is oxide zinc and oxide lead.
The sediments in the District are predominantly carbonate with some
sandstone and shale and the attitudes are near horizontal. The existing
mines are dry and the rocks are competent, the thickness of the
mineralization and its attitude is amenable to high volume mechanized mining
methods and low cost production. The Company therefore believes the Property
is well-suited for development of a mining operation to extract and market
high grade ore and has been actively engaged in determining the viability of
such an operation.
The Company initiated its exploration of the Property by collecting and
analyzing historical data from previous mining operations in the District,
surveying the locations of existing mines and geological mapping and
sampling of the surface and some of the existing mines. Based on the
information gained from this work, the Company has been exploring the
sedimentary beds of tabular, nearly horizontal bodies of rock located on the
Property, which are known as "mantos." The Company initiated a diamond drill
program in January 2004, and as of April 30, 2005 the Company has drilled
277 diamond drill holes totaling over 30,000 meters of diamond drill core.
The Company has also completed over 10,000 meters of percussion drill and
channel samples of the oxide zinc mineralization at the San Salvador,
Encantada and Fronteriza mines located on the Property. These samples have
been taken from a body of mineralization extending 1,500 meters in an east-
west direction, 50 to 100 meters in a north-south direction, and 20 to 100
meters vertically.
Prior mining of oxide zinc mineralization has occurred over an area
stretching over 5 kilometers (3 miles) from the Oriental Mine located on the
east end of the District to the Vasquez Tres Mine located in the west end of
the District. Five drill holes drilled 2,000 meters west of the San Salvador
Mine intersected ore grade oxide zinc mineralization that is up to 140
meters (460 feet) thick and 10 meters (33 feet) below the surface.
The Company intends to continue the drill program to further define the
boundaries of mineralization of the Iron Oxide Manto, and to further explore
the manto on the Property known as the Smithsonite Manto. Both of these
mantos are south of the Sierra Mojada Fault and are composed of oxide zinc
mineralization. The Iron Oxide Manto, also known as the Red Zinc Manto, has
been named for its high iron oxide content and red color. The Smithsonite
Manto, also known as the White Zinc Manto, has been named for its
smithsonite (zinc carbonate) content. The white to grey color of the
Smithsonite Manto is a result of the manto mainly being composed of
limestone and smithsonite.
North of the Sierra Mojada Fault, in the western district, the Company has
channel sampled the Veta Rica, Once and San Jose Mine areas. Also north of
the Sierra Mojada Fault, in the eastern district, the Company has drilled
and channel sampled over 5,000 samples from the polymetallic mineralization
of the manto on the Property known as the Polymetallic Manto in the
Encantada and Fronteriza Mines.
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Samples from the Polymetallic Manto have contained an average of 300 grams
silver per metric ton (10 ounces silver per metric ton), 0.6% copper, 5.5%
zinc and 2.2% lead. The silver grades have ranged from approximately 10
grams to 50 kilograms (31 ounces per kilogram). One drill hole intersected
mineralization with grades averaging 11 kilograms over a thickness of 9
meters (3.28 feet per meter) and copper grades measure as high as 4%, which
indicates that the Polymetallic Manto contains very high grade silver,
copper mineralization. Work on this mineralization was put on standby in
1999 when the Company recognized the potential of the oxide zinc
mineralization as a result of a positive feasibility study conducted for the
Skorpion Mine located in Namibia, Africa, that demonstrated that the use of
the solvent extraction electro-winning ("SXEW") process could make it
profitable to mine oxide zinc deposits that would otherwise be unfeasible.
Now that the Company's work on the Property's oxide zinc mineralization is
in the feasibility study stage, the Company anticipates continued
exploration of the silver and copper content of the Polymetallic Manto.
However, the Company has not yet allocated financial resources nor
established a timeline for when it expects to initiate such additional
exploration.
In 2004, the Company retained Reserva International, LLC, an independent
contractor specializing in resource evaluation, to generate a block model
evaluation based upon the data compiled from the Company's accumulated
samples to determine the size and grade of the mineralization of the
Property. The most recent block model completed by Reserva International,
LLC for the Iron Oxide Manto and the Smithsonite Manto indicates that, with
a 5% cut off grade (using grades greater than 5%) and blocks of 5 cubic
meter dimensions, the Iron Oxide Manto contains an estimated 17.9 million
metric tons with a grade of 8.78% zinc and that the Smithsonite Manto
contains an estimated 5.4 million metric tons with a grade of 12.08% zinc.
In total, 2.23 million metric tons contained zinc metal. Based on these
estimates, as well as the result of work completed on the Property by two
mining companies, North Limited and Industrias Penoles, which were
previously joint venture partners with the Company, the Company has
determined that the estimated mineralization justifies a feasibility study
of the Property.
Although the Company is of the opinion that a resource sufficient to
justify construction of a mine and SXEW plant has been defined, the Company
still must complete a feasibility study to determine whether a mining
operation may be profitably conducted on the Property. This study will
consist of a detailed engineering and economic valuation of the Property's
resources to determine the value of the mineralization on the Property and
the viability of developing a mining operation on the Property.
The Company initiated a feasibility study on the Property in 2004,
retaining Green Team Consultants International cc ("GTI"), of Johannesburg,
South Africa to complete the feasibility study. It is estimated that the
feasibility study will cost $5 million to complete. The feasibility study is
expected to include an evaluation of the metallurgy, mine plan, and
extraction method to be used on the Property as well as an economic
evaluation of the Project. The feasibility study process is based on the
estimated mineralization of the Property and is intended to identify the
economic parameters of mining and extracting zinc from the Property. Factors
that will determine the feasibility of mining zinc on the Property include
the percent of metal recovered from the ore during mining and processing,
acid consumption during leaching, mining costs for removing the
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ore and preparing it for extraction, and the costs of extracting and
refining the metal from the ore. The results will then be financially
analyzed to determine the projected rate of return and profitability of the
project. If the results of the feasibility study are positive, the Company
would then seek additional financing to raise enough capital to proceed with
the Project.
The Company selected GTI, in part, due to GTI's experience conducting a
feasibility study for the Skorpion Mine in Namibia, Africa. GTI designed,
supervised the construction, and operated the Skorpion Mine and extraction
plant through initial production and until the mine and plant were at 90% of
capacity, at which point operation of the mine and plant was turned over to
Skorpion Zinc, a subsidiary of Anglo American Corporation PLC. The Skorpion
Mine is the first, and to date only, mine in the world using the SXEW
process for extracting Super High Grade zinc (SHG zinc is 99.995% zinc) from
oxide zinc ore. The SXEW process is a hydrometallurgical process that has
about a 30% lower cost for extracting zinc than the pyrometallurgical
process used at smelters by most other mining operations around the world.
The Company anticipates that using the SXEW process will enable the Company
to extract zinc more efficiently and economically than its competitors.
GTI, as general contractor for the feasibility study, has retained TWP
Consulting (pty) Ltd. ("TWP") to prepare the mine plan as part of the
feasibility study for the Project. TWP is a large South African mining
consulting company that has worked on large mining projects in South Africa
and internationally, including the mine plan at the Skorpion Mine.
GTI has also retained Min-Tek, a South African consulting company
specializing in mineral and metallurgical research and development, to
complete the metallurgical work on the Property. Min-Tek performed the
metallurgical work for the Skorpion feasibility studies. Min-Tek's
metallurgical work for the Property has been in progress for over three
months.
In addition, GTI has retained SRK Consulting ("SRK") as the auditing
engineering firm for the feasibility study. SRK is a world-wide engineering
consulting company that was the auditing engineering firm for the
feasibility study of the Skorpion Mine.
During the six months ended April 30, 2005, principals of GTI, TWP and SRK
completed a tour of the Property, reviewed data related to the Property,
conducted underground tours of the Iron Oxide, Smithsonite and Polymetallic
Mantos, and selected surface locations for the mine and extraction plant
facilities.
The Company has had a mining operation in the Smithsonite Manto that has
been shipping zinc carbonate ore to Cameron Chemical Company, for use as a
micronutrient for the fertilizer industry. During the period ended April
30, 2005, the Company realized other income from the sale of zinc carbonate
ore mined on the Property. The Company has ceased mining zinc carbonate
ore, but anticipates continued sales in the near future from its existing
inventory of mined ore.
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RESULTS OF OPERATIONS FOR THE PERIOD ENDED APRIL 30, 2005.
Six months ended April 30, 2005 compared to the six months ended April 30,
2004:
During the six months ended April 30, 2005, the Company realized other
income of $202,786 from the sale of zinc carbonate ore from the Company's
San Salvadore mine located on the Property, in accordance with a contract
with Cameron Chemicals Inc., Norfolk, Virginia. Costs associated with the
sale of the ore totaled $201,427 for the six-month period ended April 30,
2005. There were ore sales of $241,334 in the six-month period ended
April 30, 2004. General and administrative expenses increased to $2,271,097
for the six-month period ended April 30, 2005 as compared to $1,191,371 for
the six-month period ended April 30, 2004. The increase is primarily due to
an increase in exploration expenditures of $176,892, an increase in
consulting and professional services of $526,447, and an increase of
$260,418 in payroll and related expenses. For the six months ended April 30,
2005, the Company experienced a loss of $2,243,748, or $0.11 per share,
compared to a loss of $1,056,698, or $0.07 per share, during the comparable
period in the previous year.
Six months ended April 30, 2004 compared to the six months ended April 30,
2003:
During the six months ended April 30, 2004, the Company realized other
income of $241,334 from the sale of zinc carbonate ore from the Company's
San Salvadore mine, in accordance with a contract with Cameron Chemicals
Inc., Norfolk, Virginia. Costs associated with the sale of the ore totaled
$134,699 for the six-month period ended April 30, 2004. There were ore sales
of $200,978 in the six-month period ended April 30, 2003. General and
administrative expenses increased to $1,191,371 for the six-month period
ended April 30, 2004 as compared to $646,892 for the six-month period ended
April 30, 2003. The increase is primarily due to an increase in office and
administrative expenses of $71,126 and a $558,289 increase in exploration
expenditures. These increases were partially offset by an $89,670 decrease
in professional services. For the six months ended April 30, 2004, the
Company experienced a loss of $1,056,689, or $0.07 per share, compared to a
loss of $570,896, or $0.05 per share, during the comparable period in the
previous year.
LIQUIDITY AND CAPITAL RESOURCES.
The Company financed its obligations during the fiscal year ended October
31, 2004 by selling 7,580,150 shares of its common stock at an average price
of $1.00 per share, less issuance costs of $698,863. Due to the Company's
substantial losses and mineral revenues, the Company's independent certified
public accountants included a paragraph in the Company's 2004 financial
statements relative to a going concerning uncertainty.
In order to maintain operations, the Company will have to raise additional
capital through loans or through the sale of securities. If the Company is
unable to raise additional capital, it may have to cease operations. The
Company's plan of operation, subject to maintaining sufficient funds, calls
for drilling and sampling of the Sierra Mojado Property's Red Zinc Manto to
define an ore reserve and continued exploration of the silver and copper
content of the Polymetallic Manto.
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CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2005 WERE AS FOLLOWS:
During the six-month period ended April 30, 2005, the Company's cash
position decreased by $793,824 in cash and by $650,000 in marketable
securities, primarily due to expenditures related to the drilling program
being conducted by the Company on the Property. During the six-month
period, $600,000 in marketable securities were reclassified as cash and cash
equivalents. Also during this period, the Company used $819,121 in operating
activities, principally in connection with the current drilling program. In
addition, the Company expended $7,598 for additional mining equipment.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.153 (hereinafter "SFAS
No.153"). This statement addresses the measurement of exchanges of
nonmonetary assets. The guidance in APB Opinion No.29, "Accounting for
Nonmonetary Transactions," is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. SFAS No.153 amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This statement is effective for
financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during
fiscal years beginning after the date of this statement is issued.
Management believes the adoption of this statement will not impact the
financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.152, which amends SFAS
Statement No.66, "Accounting for Sales of Real Estate," to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This statement also
amends SFAS No.67, "Accounting for Costs and Initial Rental Operations of
Real Estate Projects," to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects, does not
apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This statement
is effective for financial statements for fiscal years beginning after June
15, 2005. Management believes the adoption of this statement will not impact
the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.151, "Inventory Costs - an
amendment of ARB No.43, Chapter 4" (hereinafter "SFAS No. 151"). This
statement amends the guidance in ARB No.43, Chapter 4, "Inventory Pricing,"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Under some
circumstances, SFAS No.151 mandates that items such as idle facility
expense, excessive spoilage, double
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freight, and re-handling costs be recognized as current-period charges. In
addition, this statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management
believes the adoption of this statement will not impact the financial
statements of the Company.
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