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| MMG > SEC Filings for MMG > Form 10-K on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Annual Report
• The timing of exploration activities; and
• Business strategies and development of our business plan.
Forward-looking statements also typically include words such as "anticipate",
"estimate", "expect", "potential", "could" or similar words suggesting future
outcomes. These statements are based on certain assumptions and analyses made by
us in light of our experience and our perception of historical trends, current
conditions, expected future developments and other factors we believe are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including such factors as the volatility
and level of silver and zinc prices, currency exchange rate fluctuations,
uncertainties in cash flow, expected acquisition benefits, exploration mining
and operating risks, competition, litigation, environmental matters, the
potential impact of government regulations, and other matters discussed under
the caption "Risk Factors," many of which are beyond our control. Readers are
cautioned that forward-looking statements are not guarantees of future
performance and that actual results or developments may differ materially from
those expressed or implied in the forward-looking statements.
The Company is under no duty to update any of these forward-looking statements
after the date of this report. You should not place undue reliance on these
forward-looking statements.
Going Concern - Presentation of Financial Statements
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Since its inception in
November 1993, the Company has not generated revenue and has incurred a net loss
of $47,066,815 from inception through October 31, 2008. Accordingly, the Company
has not generated cash flow from operations and has primarily relied upon
private placement of its common stock and proceeds from warrant exercises to
fund its operations. As of October 31, 2008, the Company has working capital of
$1,905,410, which may not be sufficient to operate over the next twelve months.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets, or the amounts or classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. Management's
plans with regards to these conditions are described below.
Plan of Operation
The Company is an exploration stage company, formed under the laws of the state
of Nevada on August 20, 1993, to engage in the business of mining. The Company
currently owns mining concessions, which are located in the municipality of
Sierra Mojada, Coahuila, Mexico. The Company's objective is to define sufficient
mineral reserves on the Property to justify the development of a mechanized
mining operation (the "Project"). The Company conducts its operations in Mexico
through its wholly owned Mexican subsidiaries, Minera Metalin S.A. de C.V.
("Minera") and Contratistas de Sierra Mojada S.A. de C.V. ("Contratistas").
Feasibility Study- Oxide Zinc Mineralization
The primary activity of the Company is to complete a feasibility study and to
evaluate the engineering factors and economics of mining the Oxide Zinc
Mineralization in our Sierra Mojada concessions. This task consists in part of
performing the required technical tasks and in part of properly documenting, in
accordance with generally accepted engineering guidelines: (i) norms, and
procedures; (ii) the manner in which the tasks were performed; and (iii) the
results of the ensuing analysis. Much of this work is iterative in nature and
results of one task often requires modification of the work in some other task,
and resulting modifications in the documentation of all impacted tasks. The
final feasibility study becomes a summary document that reflects the important
conclusion of detailed reports on the various technical tasks. For the format
that we are using the detailed studies are termed Complimentary Reports. The
Complimentary Reports include reports on: (i) the geology of the Sierra Mojada
area and the methods used to evaluate the mineralization; (ii) the resource
model that provides an estimate of the size and grade of the mineralized volume,
including a detailed discussion of the geostatistical methods used to create the
estimate; (iii) the geotechnical results including a detailed discussion of how
the geotechnical data were acquired and how they are interpreted; and (iv) a
hydrology report on the water supply for the area.
During fiscal 2008, the Company completed an initial scoping phase of the
feasibility study and developed a preliminary mine plan based upon the Company's
initial resource model. The preliminary mine plan anticipated using an
underground mining method that would use a long-hole end-slice panel stoping
method to perform high-volume relatively low cost mining. The preliminary mine
plan projected a minimum daily production rate of 3,000 tonnes (metric tons) per
day, and a 17 year mine life. Shortly after developing the preliminary mine
plan, the Company started working with its engineering firms to develop a more
detailed mine plan and concentrator plant study. In May 2008, the Company
selected SNC-Lavalin to prepare the detailed concentrator plant study. While
working on the detailed mine plan and concentrator plant studies, the Company
contracted with Pincock, Allen, & Holt to complete a new resource model based
upon latest drilling results and a suite of silver analysis that were not
available when the previous resource model was developed.
In July 2008, the Company announced that Pincock, Allen, and Holt had completed
a new resource model on the Oxide Zinc mineralization that more than doubled the
estimated amount of zinc present in the deposit. The new resource model
increased the estimated size and zinc content of the deposit plus added a
potential estimated by-product credit for silver associated with the Oxide Zinc
Mineralization. The new resource model required the Company to take a fresh look
at the optimum mine size, mining methods, and other economic and engineering
factors. Open pit mining is possibly effective on a deposit of this size and
geometry and would likely remove the production rate constraints that are
inherent in the underground mining scenario that was previously considered. The
Company has completed a first pass evaluation of open pit mining of the new
resource model and has determined that mining and processing rates might be as
much as five times greater than the underground mining method and would result
in significant economies of scale and may allow market opportunities that are
not available with a smaller underground operation. Preliminary economic
evaluation of open pit mining suggests that it would be much more profitable.
Furthermore, an open pit mining method may allow the Company to mine the Silver
Polymetallic Mineralization, which lies adjacent to the Oxide Zinc
Mineralization on the north side of the east-west Sierra Mojada Fault. This
mineralization would be mined during stripping to access the Oxide Zinc
Mineralization. The Company has been actively evaluating the Silver Polymetallic
Mineralization, but does not have enough drill data yet, and in the right
places, to create a comprehensive resource model for this mineralization. The
Company's current drilling efforts are primarily directed at infilling and
defining the Silver Polymetallic Mineralization in order to bring the data to
the quality required for a resource model.
The Silver Polymetallic Mineralization is predominantly sulfide in nature and
would require a different processing plant to recover the contained metals. The
Company needs to gain a complete understanding of the size, grade and
metallurgical character of this potentially large silver-rich mineralization in
order to understand the impact on the economics of mining the Oxide Zinc
Mineralization by open pit. If the Silver Polymetallic Mineralization can be
exploited in the course of developing the Oxide Zinc Mineralization, there is
potentially an additional, very positive, economic impact on the overall
project.
Accordingly, the Company has suspended the mine plan and concentrator portions
of the feasibility study to evaluate a much larger scale operation in order to
exploit both the Silver Polymetallic mineralization and the now much larger
Oxide Zinc mineralization.
Test Mining
Pincock, Allen & Holt recommended a test mining program to confirm certain
mining assumptions and validate the geotechnical data associated with the
initial underground mining method. The Company worked with Pincock, Allen and
Holt to prepare a Request for Proposal and obtain bids from outside contractors
on the test mining project. While evaluating bids on the test mining project,
the Company completed the new resource model and has decided to further evaluate
an open pit mining method. Since underground mining may not be conducted, the
planned test mining program has been suspended.
Continued Improvement of the Sierra Mojada Infrastructure
The Company is continuously improving its general business capabilities in
Mexico so that it is capable of performing the ramp up in activity required by
our business objectives. During fiscal 2008, the Company made several
improvements to the Sierra Mojada infrastructure including:
• The Company purchased three additional drills and has hired and trained
additional personnel to operate this equipment. The additional diamond
drilling capabilities not only eliminated dependence on outside
contractors, but also increased our ability to quickly respond to any
additional drilling requirements for the feasibility study and has allowed
for continued exploration of the Silver Polymetallic Mineralization.
• An onsite sample laboratory was completed at Sierra Mojada and is being used to get immediate feedback on drilling results and reduce outside sampling and assaying costs. All samples that will be incorporated in mineral resource models will be assayed in duplicate by the outside laboratory.
• A water pipeline was completed to provide water for increased drilling activities, accommodate test mining and reduce our water costs.
Exploration of Silver Polymetallic Mineralization
The Company continues to explore and evaluate the Silver Polymetallic
Mineralization which is located north and adjacent of the Oxide Zinc
Mineralization. The purpose of this work is to evaluate the mineralization
potential of the Silver Polymetallic Mineralization and to determine whether
mining of both mineral systems can be conducted. During the quarter ended
April 30, 2008, a total of 3,378.7 meters of diamond drilling was completed in
various areas of the property, mostly in pursuit of Silver Polymetallic targets.
As disclosed in a press release dated April 24, 2008, the Company recently
collected enough sample data to prepare an initial evaluation of silver and
copper content in part of the Silver Polymetallic Mineralization. A total of
8,766 meters of diamond drill, percussion drill, and channel samples, within
this sample block, were used to calculate a weighted average grade of 145 grams
silver per tonne and 0.20% copper.
As discussed above, an open pit mining method may allow the Company to mine the
Silver Polymetallic Mineralization, which lies adjacent to the Oxide Zinc
Mineralization on the north side of the east-west Sierra Mojada Fault. This
mineralization would be mined during stripping to access the Oxide Zinc
Mineralization. The Company has been actively evaluating the Silver Polymetallic
Mineralization, but does not have enough drill data yet, and in the right places
to create a comprehensive resource model for this mineralization. As resources
permit, the Company's plans to continue to evaluate the Silver Polymetallic
Mineralization using our five diamond drills, three percussion drills, channel
sampling and geologic mapping. The continuing evaluation is intended to increase
sample density and expand the core area. The Company is also in the process of
preparing a more detailed geostatistical evaluation to improve the evaluation of
the Silver Polymetallic Mineralization.
Cautionary Note
The Company is an exploration stage company and does not currently have any
known reserves and cannot be expected to have reserves unless and until a
feasibility study is completed for the Sierra Mojada concessions that shows
proven and probable reserves. There can be no assurance that the Company's
concessions contain proven and probable reserves and investors may lose their
entire investment in the Company. See "Risk Factors."
Results of Operation
For the fiscal year ended October 31, 2008, the Company experienced a
consolidated net loss of $12,320,000 or $0.31 per share, compared to a
consolidated net loss of $6,932,000 or $0.20 per share during the comparable
period last year. The $5,388,000 increase in consolidated net loss is primarily
due to a $3,686,000 foreign currency translation loss on intercompany loans to
its Mexican subsidiaries. Also contributing to the higher net loss were a
$399,000 increase in exploration and property holding costs, a $931,000 increase
in general and administrative costs, and $284,000 decrease in interest income.
Exploration and property holding costs
Exploration and property holding costs increased $399,000 or 14% to $3,235,000
for the fiscal year ended October 31, 2008 compared to $2,836,000 for the
comparable period last year. This increase was primarily due to additional
drilling and exploration costs associated with the operation of three new
drills; two which were purchased near the beginning of the fiscal year and a
third which was purchased in June 2008. The Company operated five drills for the
majority of the fiscal year and focused on in-fill drilling of the Oxide Zinc
Mineralization and continued exploration of Silver Polymetallic mineralization
north of the Sierra Mojada fault.
General and Administrative Costs
General and administrative expenses increased $931,000 or 20% to $5,508,000 for
the fiscal year ended October 31, 2008 as compared to $4,577,000 for the
comparable period last year. This increase was primarily due to higher stock
based compensation for options granted to officers and directors and an increase
in the allowance for uncollectible value-added taxes. This increase was
partially mitigated by lower professional fees. Stock based compensation for
options and warrants accounts for a significant part of general and
administrative expenses and was a primary factor for several of the fluctuations
described below.
Salaries and payroll expense increased $1,032,000 from the comparable period in
2007 primarily due to higher stock based compensation for stock options and
restricted stock grants. Stock based compensation for stock options increased
from $307,000 in 2007 to $1,029,000 in 2008. The increase in stock based
compensation during 2008 is primarily attributable to an increase in the number
of stock options granted and continued recognition of stock based compensation
for options granted during 2007. In accordance with FAS 123R, the Company
recognizes stock based compensation over the vesting period based upon the fair
value of the options at date of grant. During 2007, the Company granted options
to purchase 150,000 to the Chief Financial officer with a graded vesting period
of 2.5 years and a fair value of $841,717. The Company recorded $307,000 and
$389,000 of stock based compensation during 2007 and 2008, respectively related
to these options. During 2008, the Company granted options to purchase 600,004
shares with a fair value of $974,608 and graded vesting period ranging from
2-3 years. The Company recorded stock based compensation of $640,000 during 2008
related to these options. Also contributing to the increase in salaries and
wages during 2008, the Company granted 38,000 shares to three key employees of
our Mexican subsidiary with a total value of $83,000. The hiring of the Chief
Financial Officer in June 2007 and board approved salary increases for executive
officers on January 1, 2008 also contributed to the increase in 2008.
Professional fees decreased $470,000 from the comparable period in 2007 due to
lower stock based compensation associated with options/warrants issued to
professional consultants. During 2007, the Company recognized stock based
compensation of $1,094,000 for 600,000 warrants issued to financial consultants
whereas during 2008, the Company recognized stock based compensation of $267,000
for 150,000 stock options granted to our Mexican legal consultant. This decrease
in stock based compensation was partially mitigated by a $405,000 increase in
spending on feasibility study costs during 2008. Feasibility study costs were
higher due to engineering work on the proposed mine plan and concentration
facility.
Directors' fees also increased $145,000 from the comparable period in 2007,
primarily due to the additional cash and stock based compensation related to the
addition of a third independent director. Approximately $177,000 of this
increase is attributable to stock based compensation for options to purchase
150,000 shares granted in October 2007 with a graded vesting period of 2 years.
The higher stock based compensation from options was offset by a lower average
market price of shares granted to independent directors.
During fiscal 2008, the Company established an allowance for uncollectible
value-added taxes of $220,000 and recorded a corresponding expense on the
consolidated statement of operations. The allowance was established due to
uncertainties regarding the collectability of certain value-added taxes that
Minera Metalin paid from 2005 through 2008. See "Value Added Taxes" under note 2
to the consolidated financial statements for more details regarding the
allowance for uncollectible taxes.
Other Income (Expense)
Other Income (Expense) decreased from a $536,000 income in 2007 to a $3,535,000
loss in 2008 primarily due to a $3,686,000 foreign currency translation loss on
intercompany loans to its Mexican subsidiaries. As of October 31, 2008, the
Company had an intercompany receivable of $19.0 million from Minera which is
subject to exchange rate fluctuations between the U.S. Dollar and Mexican Peso.
Interest income was $284,000 lower in 2008 as compared to 2007 due to lower
average investment balances and lower investment yields. During 2007, the
Company invested its excess funds in auction rate securities which had an
average yield of approximately 4% to 5%. Due to large uncertainties related to
failed auctions in the auction rate securities markets, the Company sold these
investments during the first quarter of 2008 and invested its excess funds in US
Treasury bills and US Treasury based money market accounts. The average yield on
short-term treasury bills and money market funds was less than 0.1%.
Liquidity and Capital Resources
Cash Flows
During the fiscal year ended October 31, 2008, the Company utilized cash on
hand, marketable securities, and proceeds from warrant exercises to fund its
operations. As a result, cash, cash equivalents and marketable securities
decreased from $9,334,000 at October 31, 2007 to $2,229,000 at October 31, 2008.
During fiscal 2008, the Company used $6,494,000 in operating activities,
principally in connection with maintaining the property, continuation of
exploration drilling program and continued feasibility study funding. The
Company also incurred $782,000 in capital expenditures related to purchases of
mining and related service equipment. These cash outflows during 2008 were
offset by $477,000 of proceeds from exercise of warrants.
Capital Resources
As of October 31, 2008, the Company had cash, cash equivalents and marketable
securities of $2,229,000. Since inception, the Company has relied primarily upon
proceeds from private placement of its shares and warrant exercises as its
primary sources of financing to fund its operations. We anticipate continuing to
rely on sales of our common stock in order to continue to fund our business
operations. Issuances of additional shares will result in dilution to our
existing stockholders. There is no assurance that we will be able to complete
any additional sales of our equity securities or that we will be able arrange
for other financing to fund our planned business activities.
Capital Requirements and Liquidity; Need for Subsequent Funding
As discussed under its plan of operation above, the Company has suspended work
on mine plan and concentrator portions of the feasibility study while it gathers
additional drilling data on the Silver Polymetallic mineralization. As a result
of the Company's limited capital resources and the on-going weakness in the
capital markets, the Company has scaled back its exploration activities and
administrative costs to conserve capital while it tries to secure additional
sources of capital to fund its operations and continue exploration of the Sierra
Mojada Project. The Company has scaled back its drilling activities from five
drills operating at two shifts per day to three drills operating at one shift
per day. In addition, the Company's officers and independent directors have
agreed to defer a significant portion of their cash compensation until
sufficient capital has been raised to continue its operations. Effective
February 1, 2009, the executive officers and corporate employees entered into
salary deferral agreements for 25% to 50% of their compensation while
independent directors have agreed to defer 100% of the cash portion of their
director's fees. Management plans to continue its efforts towards reducing
administrative costs. However, without any additional funding, the Company may
not be able to fund its operations through the end of its 2009 fiscal year.
Management is exploring various sources of additional capital including
additional equity funding, joint venture participation, strategic partner and
smelter and metal trading companies willing to fund projects for a commitment of
product. The weak US and global economy combined with instability in global
financial and capital markets have currently limited the availability of this
funding. If the disruptions in the global financial and capital markets
continue, debt or equity financing may not be available to us on acceptable
terms, if at all. Equity financing, if available, may result in substantial
dilution to existing stockholders. If we are unable to fund future operations by
way of financing, including public or private offerings of equity or debt
securities, our business, financial condition and results of operations will be
adversely impacted.
Once the Company has gathered sufficient drilling data on the Silver
Polymetallic mineralization, the Company can then resume work on the feasibility
study. Following the completion of the feasibility study, the Company would then
proceed to the construction phase, which would entail construction of a mine and
related infrastructure pursuant to a mine plan developed specifically for the
Company's concessions, and construction of an extraction plant to extract metal
from the ore that would be mined. In order to proceed with the construction
phase, the Company would need to rely on additional equity or debt financing, or
the Company may seek joint venture partners or other alternative financing
sources.
Off Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
stockholders.
Recent Accounting Pronouncements
In November 2007, the Company adopted Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48"),
an interpretation of Financial Accounting Standards Statement No. 109,
"Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
an uncertain tax position taken or expected to be taken in a tax return. FIN 48
requires that the Company recognize in its financial statements the impact of
uncertain tax positions. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure. See Note 11 to the consolidated financial statements for discussion
of FIN 48 and the impact it had on the Company's financial position or results
of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Standard addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under U.S. GAAP. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 (fiscal year 2009 for the Company). In February 2008, the FASB
issued FASB Staff Position No. 157-2, "Effective Dates of FASB Statement no.
157" ("FSP 157-2"). This FASB Staff Position amends SFAS No. 157 to delay the
effective date for non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually). For items within
its scope, FSP 157-2 defers the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years
(fiscal year 2010 for the Company). The Company does not expect the adoption of
SFAS 157 will have a material impact on our financial position, results of
operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115" ("SFAS 159"). Under SFAS 159, a company may choose, at
specified election dates, to measure eligible items at fair value and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years (fiscal year 2009 for the
Company). The Company is currently assessing the impact that SFAS 159 may have
on our financial position, results of operations, and cash flows.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). This statement identifies sources of
. . .
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