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| MMG > SEC Filings for MMG > Form 10-Q on 17-Mar-2009 | All Recent SEC Filings |
17-Mar-2009
Quarterly Report
When we use the terms "Metalline Mining Company," the "Company," "we," "us," "our," or "Metalline," we are referring to Metalline Mining Company and its subsidiaries, unless the context otherwise requires. We have included technical terms important to an understanding of our business under "Glossary of Common Terms" in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008. Throughout this document we make statements that are classified as "forward-looking."
Cautionary Statement about Forward-Looking Statements
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be "forward-looking statements." All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that our management expects, believes or anticipates will or may occur in the future are forward-looking statements. Such forward-looking statements include discussion of such matters as:
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The amount and nature of future capital, development and exploration expenditures;
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The timing of exploration activities; and
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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," in our Form 10-K for the fiscal year ended October 31, 2008, 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 $50,428,184 through January 31, 2009. 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 January 31, 2009, the Company had working capital of
$688,262, 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
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
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.
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 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.
Resource Block Model Analysis
The Company has completed resource block model analyses of all additional and
available data on the mineral systems at Sierra Mojada. Block Models have been
completed for the Silver Polymetallic Mineralization north of the Sierra Mojada
fault and the Oxide Zinc Mineralization south of the fault. The Silver
Polymetallic block model is the first block model run on the silver, copper,
lead, zinc mineralization. The Oxide Zinc block model is an update with
additional data generated since the last Oxide Zinc block model was completed.
The additional data includes data above the previous Oxide Zinc Mineralization
and indicates that this upper horizon, which includes the historic Lead Manto,
contains silver, zinc and lead mineralization.
The results are positive and encouraging and will be the subject of a press release as soon as we have fully evaluated and properly quantified what the models have generated.
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," in our Form 10-K for the fiscal year ended October 31, 2008.
Results of Operation
For the three months ended January 31, 2009, the Company experienced a consolidated net loss of $3,361,000 or $0.08 per share, compared to a consolidated net loss of $2,013,000 or $0.05 per share during the comparable period last year. The $1,348,000 increase in consolidated net loss is primarily due to a $1,857,000 increase in foreign currency translation loss on intercompany loans to its Mexican subsidiaries. The foreign currency translation loss
Exploration and property holding costs
Exploration and property holding costs decreased $170,000 or 24% to $524,000 for the three months ended January 31, 2009 compared to $694,000 for the comparable period last year. This decrease was primarily due to a reduction in drilling and exploration costs as the Company scaled back drilling activities from five drills operating at two shifts per day to three drills operating at one shift per day. The Company scaled back its exploration activities as part of management's plans to conserve operating capital.
General and Administrative Costs
General and administrative expenses decreased $394,000 or 32% to $822,000 for the three months ended January 31, 2009 as compared to $1,216,000 for the comparable period last year. This decrease was primarily due to lower stock based compensation for options granted to officers and directors and lower professional fees. Stock based compensation for options account 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 decreased $257,000 or 40% from the comparable period in 2008 primarily due to lower stock based compensation for stock options and restricted stock grants. Stock based compensation for stock options decreased from $337,000 in 2008 to $143,000 in 2009. Stock based compensation was higher in 2008 due to an immediate vesting of 1/3 of 400,000 options granted to officers. 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 January 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 $240,000 during 2008 related to these options as compared to $106,000 in 2009. Also stock based compensation was higher in 2008 as the Company granted 38,000 shares to three key employees of our Mexican subsidiary with a total value of $83,000.
Professional fees decreased $12,000 or 4% to $308,000 for the three months ended
January 31, 2009 as compared to $320,000 for the comparable period last year.
The decrease was primarily due to lower engineering and professional fees
related to the feasibility study. The Company suspended work on the mine plan
and concentrator portions of the feasibility study in August 2008 to evaluate a
much larger scale operation in order to exploit both the Silver Polymetallic
mineralization. Lower feasibility costs were offset by $125,000 of legal costs
related to Mineros Nortenos lawsuit.
Directors' fees decreased $97,000 or 60% to $64,000 for the three months ended
January 31, 2009 as compared to $161,000 for the comparable period last year.
The decrease was primarily attributable to lower stock based compensation for
stock options and a lower average market price of shares granted to independent
directors.
Other Income (Expense)
Other Income (Expense) decreased from a $66,000 expense in 2008 to a $2,012,000 expense in 2009 primarily due to a $2,013,000 foreign currency translation loss on intercompany loans to its Mexican subsidiaries. As of January 31, 2009, the Company had an intercompany receivable of $19.5 million from Minera which is subject to exchange rate fluctuations between the U.S. Dollar and Mexican Peso.
Interest income was $89,000 lower in 2009 as compared to 2008 due to lower average investment balances and lower investment yields. During the first quarter of 2008, 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 towards the end of 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%.
Cash Flows
During the three months ended January 31, 2009, 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 $2,229,000 at October 31, 2008 to $887,000 at January 31, 2009.
During the three months ended January 31, 2009, the Company used $1,313,000 in
operating activities, principally in connection with maintaining the property
and continuation of exploration drilling program.
Capital Resources
As of January 31, 2009, the Company had cash, cash equivalents and marketable securities of $887,000. Since inception, the Company has relied primarily upon proceeds from private placements of its shares of common stock 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 the plan of operation above, the Company has suspended work on the 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.
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
On November 1, 2008, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, addresses how companies should measure fair value, when they are required to use a fair value measure for recognition or disclosure purposes under GAAP, and expands disclosures about fair value measurements. FAS 157 is applied prospectively for financial assets and liabilities measured on a recurring basis as of November 1, 2008. The adoption of SFAS 157 did not have a material impact on our financial position, results of operations, and cash flows.
In February 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Dates of FASB Statement no. 157" ("FSP 157-2") which delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP 157-2 are effective for the Company's fiscal year beginning November 1, 2009. The Company does not expect the adoption of FAS 157 for nonfinancial assets and nonfinancial liabilities will have a material impact on our financial position, results of operations, and cash flows.
On November 1, 2008, the Company adopted FAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115" ("SFAS 159"). FAS 159 provides a choice to measure many financial instruments and certain other items at fair value on specified election dates and requires disclosures about the election of the fair value option. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has chosen not to elect the fair value option for any financial or non-financial instruments as of the adoption date, thus the adoption of FAS 159 did not have an impact on the Company's financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). This statement identifies sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with GAAP in the United States. SFAS No. 162 moves the hierarchy of GAAP sources for non-governmental entities from the auditing literature to the accounting literature. This statement became effective November 15, 2008. Any effect of applying SFAS No. 162 should be reported as a change in accounting principle. SFAS 162 did not have a material impact on its financial position, results of operations, and cash flows.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.
Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. We have identified certain accounting policies that we believe are most important to the portrayal of our current financial condition and results of operations.
Property Concessions
Costs of acquiring property concessions are capitalized by project area upon purchase or staking of the associated claims. Costs to maintain the property concessions and leases are expensed as incurred. When a property concession reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves. To date no concessions have reached production stage.
Property concessions are periodically assessed for impairment of value and any diminution in value is charged to operations at the time of impairment. Should a property concession be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to property concessions sold. Capitalized costs are allocated to property concessions abandoned or sold based on the proportion of claims abandoned or sold to the claims remaining within the project area.
Deferred tax assets and liabilities
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