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| SFEG.OB > SEC Filings for SFEG.OB > Form 10-Q on 9-Nov-2011 | All Recent SEC Filings |
9-Nov-2011
Quarterly Report
Forward-Looking Statements
This Form 10-Q may contain certain "forward-looking" statements as such term is defined in the private securities litigation reform act of 1995 and by the securities and exchange commission in its rules, regulations and releases, which represent the Company's expectations or beliefs, including but not limited to, statements concerning the Company's operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intent", "could", "estimate", "might", "Plan", "predict" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the operations of the company and its subsidiaries, volatility of stock price and any other factors discussed in this and other registrant filings with the securities and exchange commission. The company does not intend to undertake to update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate.
The following discussion summarizes the results of our operations for the three month period ended September 30, 2011, and compares those results to the three month period ended September 30, 2010. It also analyzes our financial condition at September 30, 2011. This discussion should be read in conjunction with the Management's Discussion and Analysis, including the audited financial statements for the years ended June 30, 2011, 2010 and 2009 and Notes to the financial statements, in our Form 10-K for the year ended June 30, 2011.
Overview
Santa Fe Gold Corporation ("the Company", "our" or "we") is a U.S. mining company, incorporated in August 1991 in the state of Delaware, with a general business strategy to acquire and develop mining properties amenable to low cost production. We currently are focused on: (1) continuing the ramp up of production at our Summit silver-gold property located in New Mexico during the fourth calendar quarter of 2011, (2) conducting further studies on our Ortiz gold project located in New Mexico and (3) continuing to raise working capital for operating and administrative expenses.
We commenced processing operations at the Banner Mill in March 2010. Commissioning of the mill proceeded satisfactorily and in July 2010, the mill facilities were placed into service and depreciation started to be recognized on the plant. The Company is in process of the final stages of ramping up full production from the Summit mine and increased throughput at the Banner Mill.
Basis of Presentation and Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.
The Company has incurred a net income of $702,862 for the three months ended September 30, 2011, and has a total accumulated deficit of $59,043,681and a working capital deficit of $12,403,042 at September 30, 2011, which includes non-cash derivative instrument liabilities aggregating $6,424,553 and deferred revenue of $3,159,612.
The Company has increased revenue-generating operations during the current quarter as we ramp up to commercial production at our Summit mine site and attain full throughput at our Banner Mill. To continue as a going concern, the Company is dependent on continued fund raising for project development and payment of general and administration expenses until production at the Summit mine site ramps up to full production and profitable operations are achieved. The Company has no commitment from any party to provide additional working capital and there is no assurance that such funding will be available as needed, or if available, that its terms will be favorable or acceptable to the Company.
Derivative Financial Instruments
In connection with the issuance of debt or equity instruments, we may issue options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances, may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are revalued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For warrants that are accounted for as derivative instrument liability, we determined the fair value of these warrants using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the warrants. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our consolidated financial statements.
RESULTS OF OPERATIONS
Operating Results for the Three Months Ended September 30, 2011 and 2010
We had revenues of $2,550,724 for the three months ended September 30, 2011, as compared to $776,822 for the three months ended September 30, 2010. The increase of $1,773,902 is due to increased production at the Summit mine and related shipments of precious metals concentrate, flux material and the sale of refined gold. Sales for the current quarter consisted of concentrate sales of $894,019, flux material of $739,320 and refined gold of $917,385.
The definitive gold sale agreement entered into on September 11, 2009 stipulates that we deliver the contractual production quantity in refined gold. See the Liquidity and Capital Resources section within this Item 2 for additional information. The Summit Project is not currently configured or permitted to produce refined gold. To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of $400 per ounce plus the upfront advance, representing deferred revenue, which is to be credited by the difference between the market price and the fixed price of gold for the number of ounces delivered. The revenue component of $917,385 for the delivery of refined gold is comprised of $465,731 representing sales of gold at the fixed price of $400 per ounce, and $451,654 representing the realization of deferred revenue related to the upfront cash advance.
Costs applicable to sales aggregate $1,620,490 for the three months ended September 30, 2011, as compared to $395,087 for the three months ended September 30, 2010. The increase of $1,225,403 is attributable to the costs associated with the shipments of concentrate and flux material for smelting feedstock totaling $131,993 and the cost of purchasing refined gold of $1,093,410 in order to satisfy the delivery requirements of the definitive gold sale agreement. Of this amount, approximately $301,935 is non-recurring and attributable to the completion guarantee extension as discussed in NOTE 11 to the unaudited consolidated financial statements. The Summit project is in process of completing the development of its initial targets of full production. Costs applicable to sales are higher than normally expected until full production is attained. We anticipate these costs will decrease in relation to sales once as we achieve full production at the mine and corresponding full throughput at the mill site during the fourth calendar quarter of 2011.
Exploration and mining costs were $528,954 for the three months ended September 30, 2011, as compared to $390,019 for the three months ended September 30, 2010, an increase of $138,935. The increase is attributable to expanding production operations at the Summit mine site, increased throughput at the Banner Mill and a corresponding decrease in capitalized payroll burden. The increase in costs is primarily comprised of: $137,778 related royalties; general mine and mill general operating costs of $36,876; repairs and maintenance aggregating $32,152; vehicle operating costs of $46,022 and resource and property taxes of $24,949. These increases were offset by decreases in labor burden classified to cost applicable to sales of $73,890; shop supplies aggregating $17,169; $22,776 related to exploration associated costs and property and casualty insurance of $18,741, which is classified in cost applicable to sales in the current period on measurement.
Depreciation and amortization expense increased to $658,407 for the quarter ended September 30, 2011, as compared to $572,157 for the quarter ended September 30, 2010, an increase of $86,250. The increase is attributable primarily to additional equipment purchased and put into service during the ramp up to achieve commercial production.
Other income and (expenses) for the three months ended September 30, 2011, were $1,872,232 as compared to $(2,606,181) for the comparable three months ended September 30, 2010. The increase in net other income of $4,478,413 is primarily attributable to the increase gain recognized on derivative instruments liability of $5,015,133. The increase was offset by increase in interest expense of $126,197; accretion of discounts on notes payable of $257,482 and a $152,587 loss on disposal of assets.
The increase in interest expense was due primarily to interest of $125,000 on the five million dollar working capital loan that was placed in August 2011.
We recognized a gain on derivative financial instruments of $2,887,760 for the three months ended September 30, 2011, as compared to a (loss) of $2,127,373 for the prior year's comparable period, resulting in an increased gain of $5,015,133. The non-cash gain arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The derivative financial instruments arose in connection with senior secured convertible notes and the issuance of warrants attached to stock subscriptions and warrants issued under our registered direct offerings. Otherwise, we generally do not use derivative financial instruments for other purposes, such as hedging cash flow or fair-value risks. The increase in the derivative gain for the three months ended September 30, 2011, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, the warrants previously issued under our registered direct offerings, changes in the market price of our common stock, which is a component of the calculation model, and the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.
Liquidity and Capital Resources
To continue with the deployment of our business strategies, we will require significant additional working capital. We also will require additional working capital for employment of necessary corporate personnel, and related general and administrative expenses until we reach profitable operations.
As of September 30, 2011, we have cash and cash equivalents of $1,292,439, accounts receivable for product sales of $2,054,855, a working capital deficit of $12,403,042, which includes a non-cash financial derivative liability of $6,424,553 and deferred revenue of $3,159,612, and an accumulated deficit of $59,043,681.
We are continuing to pursue a joint venture or sale of the Black Canyon mica project. Management has determined to deploy its resources in the area of precious metals based upon the current and projected market trends in this area.
On September 11, 2009, we entered into a definitive gold sale agreement with Sandstorm Resources Ltd. (TSX-V: SSL) ("Sandstorm") to sell a portion of the life-of-mine gold production (but not silver production) from our Summit silver-gold mine. Under the agreement we received an upfront cash deposit of $4.0 million, plus we will receive ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. The amount of payable gold can be reduced from 22% to 15% provided that within 36 months the Summit mine reaches certain performance levels in any consecutive 12 month period, in compliance with prefeasibility estimates, including 1) the rate of ore mined and processed must average 400 tons per day or more, and 2) payable gold production must exceed 11,500 ounces during such consecutive 12 month period. We will receive credit against the $4,000,000 upfront cash deposit for the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits will be recognized as revenue, in addition to the ongoing production payments received for gold delivered pursuant to the agreement. In certain circumstances, including failure to meet minimum production rates, interruption in production due to permitting issues and customary events of default, the agreement may be terminated. In such event, we may be required to return to Sandstorm the upfront cash deposit of $4.0 million less a credit for gold delivered up to the date of that event, which is determined using the difference between the market price and $400 per ounce for gold deliveries where the prevailing market price exceeded $400 per ounce.
On January 20, 2010, the we entered into definitive security purchase agreements with 23 institutional investors (collectively, "Purchasers") to sell an aggregate of $10.0 million of units, each unit consisting of one Share and one-half of a Warrant to purchase a Share by way of a registered direct offering. Pursuant to the transaction, we sold to the Purchasers an aggregate of 7,692,310 Shares and Warrants to purchase up to 3,846,155 additional Shares. The Warrants are exercisable at an exercise price of $1.70 per share upon issuance and have a term of five years. In connection with the placement we issued 461,539 warrants to Placement Agents, exercisable at $1.625 per share and having a term of approximately 4.9 years. These Placement Agent warrants vested six months from the date of issuance. We received net proceeds from the offering of approximately $9,375,000, after deducting placement agent fees and other offering expenses.
The securities were issued pursuant to the Company's effective S-3 Registration Statement under which the securities are registered. The units, including the Shares and Warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants were issued pursuant to a prospectus supplement dated as of January 20, 2010, which was filed with the Securities and Exchange Commission ("SEC") in connection with a takedown from the Company's shelf registration statement on Form S-3, which became effective on December 29, 2009, and the base prospectus contained in such registration statement.
On December 29, 2010, we entered into a definitive security purchase agreements with three institutional investors to sell an aggregate of $2 million of units, each unit consisting of one share and one-half warrant per share to purchase a share by way of the placement. Under the agreement, we sold 1,666,668 shares and warrants to purchase 833,334 additional shares of our common stock. The warrants will be exercisable at an exercise price of $1.50 per share immediately upon the issuance of the stock and will expire five years from the date they are first exercisable. In connection with the transaction, we paid the Placement Agent a fee of $136,000 and issued 100,000 warrants exercisable at $1.50 per share which have an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. We received $1,864,001 net cash proceeds from the placement.
The units, including the shares and warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants are issued pursuant to the prospectus supplement dated as of December 29, 2010, which was filed with the Securities and Exchange Commission ("SEC") in connection with a takedown from the Company's shelf registration statement on Form S-3 (File No. 333-163112), which became effective on December 29, 2009, and the base prospectus contained in such registration statement.
On March 29, 2011, we amended the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. In exchange for the amended completion guarantee date, we agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $727,300 based upon the closing gold price on March 31, 2011. Under the terms of the amendment the delivery is to be made prior to June 30, 2011.
On June 28, 2011, we entered into Amendment 2 for the definitive gold sale agreement. The amendment extended the delivery date for the additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011 until October 15, 2011. In exchange for the deferred delivery date we agreed to pay a per diem of 3 ounces of gold for each day the additional 700 ounces of gold under Amendment 1 remain outstanding past June 30, 2011 until the actual date of delivery, no later than October 15, 2011. Based upon the sale terms of the agreement, we recorded an accrued liability of $773,850 for 700 ounces of gold based upon the closing gold price on June 30, 2011. On August 9, 2011 the Company satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The net cost of delivering the gold after receiving payment from Sandstorm of $400 per ounce delivered was $1,075,785. In order to recognize the final cost of delivering the gold, the accrued liability of $773,850 at June 30, 2011 was adjusted by an additional $301,935 and recognized during the quarter as a non-recurring component of costs applicable to sales.
On August 2, 2011, we entered into a financing agreement for $5 million senior secured loan for working capital. The loan bears interest at 15% per annum payable in monthly installments in arrears. The loan has a term of six months and may be repaid at any time without penalty. The senior obligations are secured by a first priority lien on the stock of our subsidiaries and on liens covering substantially all of the assets of the Company, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. In connection with the loan, we issued warrants to purchase 500,000 shares of our common stock. The warrants have an exercise price of $1.00 per share and a term of five years.
We are actively exploring a number of financing options to procure funding necessary to repay the $5 million senior secured loan, to complete the $10 million Columbus Silver transaction and to provide additional working capital.
Factors Affecting Future Operating Results
We continue to deploy our plan to place the Company on an improved financial footing. In addition to the significant capital raisings in 2010 and the $5 million working capital facility in 2011, we plan to continue to raise capital as may be required to provide for operations on our various property sites, complete the Columbus Silver Corporation acquisition and repay the $5 million working capital facility. We plan to procure capital with a long term financing arrangements and/or equity placements. If we continue to secure required financing on acceptable terms, we believe we will be in a position to execute our business plan on our property sites.
We originally entered into a non-binding Memorandum of Understanding on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) ("Columbus Silver"), pursuant to which the we will acquire all the outstanding shares of common stock of Columbus Silver in exchange for the Company's common stock. The contemplated exchange ratio is one share of Santa Fe common stock for every 5.82515 shares of Columbus Silver's common stock. It is contemplated that we would issue a total of 8,787,527 shares in the transaction, the value of which shares will be determined by the closing market price of the Company's common stock on the effective closing date of the contemplated transaction. Following completion of the transaction, it is estimated we would be owned 91.37% by current Company shareholders and 8.63% by Columbus Silver shareholders. In accordance with the Memorandum of Understanding, we purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058. Proceeds of the issuance were used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. On January 27, 2011, we advanced $200,000 to Columbus Silver in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with a Memorandum of Understanding ("MOU") dated September 23, 2010, in contemplation of a business combination (the "Transaction"). In the event that either party to the MOU informs the other that it will not proceed with the Transaction, either the maker or the Holder will have the ability, by providing written notice to the other, to require that the Maker apply to the TSX Venture Exchange to have the entire outstanding principal amount and accrued unpaid interest of this Note paid in common shares of the Maker pursuant to Exchange Policy 4.3, Shares for Debt, or its successor policy or instrument. Currently the Company is negotiating a revocation of cease trade orders against the Company issued by the British Columbia and Ontario Securities Commission in 2003 after the Company did not make required regulatory filings. Until the cease trade orders are revoked, steps cannot be taken to consummate the proposed transaction by us.
Off-Balance Sheet Arrangements
During the three months ended September 30, 2011, we did not engage in any off-balance sheet arrangements defined in Item 303(a) (4) of the SEC's Regulation S-K.
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