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SFMI > SEC Filings for SFMI > Form 10-Q on 19-Nov-2013All Recent SEC Filings

Show all filings for SILVER FALCON MINING, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SILVER FALCON MINING, INC.


19-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Disclosure Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward looking statements ("Forward Looking Statements"). All statements other than statements of historical fact included in this report are Forward Looking Statements. In the normal course of its business, the Company, in an effort to help keep its shareholders and the public informed about the Company's operations, may from time-to-time issue certain statements, either in writing or orally, that contain or may contain Forward-Looking Statements. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company's proposed operations and whether Forward Looking Statements made by the Company ultimately prove to be accurate. Such important factors ("Important Factors") and other factors could cause actual results to differ materially from the Company's expectations are disclosed in this report. All prior and subsequent written and oral Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Important Factors described below that could cause actual results to differ materially from the Company's expectations as set forth in any Forward Looking Statement made by or on behalf of the Company.

Overview

On September 14, 2007, GoldLand acquired an interest in 174.82 acres of land on War Eagle Mountain, consisting of a 100% interest in 103 acres, and a 29.166% interest in 71.82 acres. GoldLand also has five placer claims on War Eagle Mountain from the U.S. Bureau of Land Management, each of which covers approximately 20 acres, or approximately 100 acres in total.

On October 11, 2007, GoldLand leased its mineral rights on War Eagle Mountain to us. Under the lease, we are responsible for all mining activities on War Eagle Mountain, and we are obligated to pay GoldLand annual lease payments of $1,000,000, payable on a monthly basis, a monthly non-accountable expense reimbursement of $10,000 during any month in which minerals are mined from the leased premises, and a royalty of 15% of all amounts we receive from the processing of minerals mined from tailing piles on the premises or through shafts or adits located on the premises. The lease, as amended, provides that lease payments must commence July 1, 2010. Effective October 1, 2010, GoldLand agreed to allow us to defer lease payments until December 31, 2011, and to extend the lease term by fifteen months.

On September 21, 2008, we acquired from Mineral Extraction, Inc. all mineral, mining and access rights to two mining claims on War Eagle Mountain, covering 18.877 total acres, as well as claims for four mill site locations and the Sinker Tunnel location.

We began actual operations in May 2010. Initially, as described below, actual operations consists of processing dump material left on the mine site from prior mining operations. Later, after we complete an exploration program to prove up and locate reserves on our property, and make further capital improvements to the mine site, we plan to begin mining and processing raw minerals.

Our plan to develop our mining properties into an active mine will take place in three phases.

Start-up Phase

Our initial phase involved completing construction of a mill, and using the mill to process tailings left over from prior mining operations. We were successful in our negotiations to purchase a parcel of land about half way between Highway 78 and the Sinker Tunnel entrance where we have constructed our mill. We closed on the purchase of this site in December 2009. We have purchased all of the milling equipment we need, which is currently installed and operating in Murphy, Idaho. As the mill is up and running, we plan to haul sufficient dump material, leftover from 6 prior mill sites on the mountain, during the summer months, to our mill site for processing during the summer and winter. Our testing indicates that, as a result of milling techniques used in the 1800's which failed to extract all of the gold and silver from the raw materials, there are sufficient quantities of gold and silver remaining in the dump material to justify further processing. We elected to build the mill on private property that we own, rather than BLM property, because of lower reclamation costs, even though the offsite property will entail higher transportation costs. In early 2011, we began construction of a metallurgical lab at our mill site. A temporary smelter became operational in July 2011, although we still need to complete a building to house the smelter and lab. In the Fall of 2013, we plan to install a chemical leaching facility at our mill site in order to improve the yields from our raw material.

The installation and startup of the mill and the working capital to begin transport of raw materials to the mill for processing has necessitated an investment of approximately $3.46 million, as follows:

The purchase and the preparation of property for mill use cost about $549,375;

The installation and certification of the mill cost about $517,283;

Completing the purchase mill equipment cost about $1,617,368;

Moving raw materials to stockpile at the mill in 2010 cost about $352,911;

The purchase and installation of smelter equipment;

Start-up mill salaries to the end of 2010 cost $425,238.

We have also made a number of improvements that we initially expected would not occur until the development phase. In particular, in 2010, the roads to the Sinker Tunnel Complex were upgraded to allow 25-ton trucks access to the site, and an area 300x400 feet was prepared to act as a staging area at the 5,200 foot level. The Sinker Tunnel was aerated in its entire length and the entrance to the Sinker Tunnel was permanently extended to avoid land or snow slides to block access to the Sinker Tunnel. Permanent drainage pipes are being laid in the tunnel as it was determined that the Sinker Tunnel is the main drain for the War Eagle complex. Exploring and shoring or rock bolting of some weak points in the top wall is underway. Permitting for exploration of the Sinker Tunnel is underway with training for underground personnel and safety measures being installed as per the latest mining rules and regulations.

We need approximately $1,900,000 in capital to complete the start-up phase, of which about $1,800,000 is attributable to working capital and $100,000 is the estimated cost of completing our permanent metallurgical lab. In addition, we estimate that our leaching facility will cost an estimated $2,000,000.

Exploration Phase

During 2010, we substantially revised the scope and cost of our exploration phase. Our exploration phase refers to a program to prove up and locate reserves on our property. We need to obtain a satisfactory estimate of the remaining reserves on the property and their location in order to develop a comprehensive plan for the full development of the mine site. The program will involve building a three dimensional map of War Eagle Mountain showing the precise location of veins, shafts and tunnels. Through exploratory drilling and core sampling, we hope to obtain as much information as possible about the location, thickness and quality of the vein systems near the main shafts, and later throughout the entire mountain. The map will be a valuable tool in analyzing the extent of the remaining reserves, mineralization trends, and other pertinent geological and mining information. The most significant change to the exploration phase contemplates a more comprehensive set of core samples, both from the surface of the mountain and from the inside of the mountain using the Sinker Tunnel, and associated costs, including locating drilling equipment at the site, and logistical costs for the crew, such as vehicles, meals, shelter on the mountain, and accommodations for a geologist, field technician and drill crew. We decided to expand the scope of the exploration phase in order to obtain a National Instrument 43-101, which is a report developed by the Canadian Securities Administrators for mining companies. A National Instrument 43-101 is necessary for listing our common stock on any exchange overseen by the Canadian Securities Authority, including the Toronto Stock Exchange.

Another aspect of the exploration phase will involve the development of a plan to use the Sinker Tunnel to mine the interior of the mountain on a year round basis. The plan will involve accessing and draining the mine shafts on the top of the mountain from the Sinker Tunnel, as well as relocating and collaring old shafts on the mountain. We estimate that the exploration phase will take about 18 months from mid-April 2013, and will cost approximately $10,000,000. We began preliminary work on the exploration phase in mid-2010.

Development Phase

The development phase involves transitioning the mine from processing tailings leftover from prior mining activities to extracting and processing raw material from the mountain, assuming that the exploration phase demonstrates that there are economically viable reserves in War Eagle Mountain. We believe that full scale mining of raw material or minerals will be profitable. In particular, historical records of mining on the site, and subsequent reports of the geology of the mountain, indicate that veins containing gold and silver extend much further vertically than could be mined when the site was last mined in the 1880's. In addition, historical records indicate that gold and silver exists in the veins in sufficient densities to warrant mining using modern extraction and milling techniques. The scope of the development phase will depend on the outcome of the exploration phase, which is designed to test the accuracy of our analysis. The development phase will not take place unless that exploration phase demonstrates that there are reserves in War Eagle Mountain that can be extracted and processed in an economically viable fashion. Our goal is to develop a drilling program that reaches as many reserves as possible at the lowest cost. Among the improvements to the mine site that we anticipate making in the development phase are:

We plan to connect the mine shafts on the top of the mountain to the Sinker Tunnel in order to provide drainage to those shafts;

We plan to install a transportation system in the Sinker Tunnel (either tire mounted trams, narrow gauge railway, or conveyor system) to move raw material or minerals out of the Sinker Tunnel for transport to our mill site; and

Additional improvements include housing, storage, food preparation facilities, generators for power, etc.

In addition to the improvements identified above, we expect that we will need to make other improvements necessary to access the highest quality mineral veins, which improvements are not known at this time but which will be identified in our National Instrument 43-101 report. In 2010, we started (and have since completed) some improvements to the mine site that were previously part of our development phase, including improving about four miles of the county road linking State Route 78 with Silver City, 1.8 miles of access road to the Sinker Tunnel Complex from the county road, and about 1.6 miles of access road to the Oro Fino vein outcrop area to permit heavier loads and year round access, as well improvements to the physical facilities at the milling location site and mine site to accommodate our workers.

Our revenue, profitability, and future growth rate depend substantially on factors beyond our control, including our success in the commencement of mining operations, as well as economic, political, and regulatory developments and fluctuations in the market prices of minerals processed from raw material or minerals derived from our mining operations.

Results of Operations

Nine months ended September 30, 2013 and 2012

We are in the exploration stage and generated revenues of $30,902 and $82,415 in the nine months ended September 30, 2013 and 2012, respectively. During the quarter ended September 30, 2013, our revenues included $10,200 that we generated from a toll milling test program. Our revenues in the nine months ended September 30, 2013 are not representative of our revenues in the future.
Our primary operations consist of processing tailing from our mine site at the mill, and our ancillary operations consist of exploring War Eagle Mountain to evaluate and prove up its reserves. Our analysis indicates that we can profitably process tailings left from prior mining operations if we have the proper infrastructure to extract the minerals from the tailings. In May 2010, we began processing tailings from our mine site at our mill. We initially planned to process the tailings into concentrate, which would then be shipped for final processing to a smelter, which would either then either return the material to us in the form of dore bars (which would have to be shipped to a refiner for final processing) or pay us a market price for the minerals ultimately extracted from the concentrate. In October 2010, we shipped our first load of concentrate to a smelter. We subsequently decided to construct our own metallurgical lab at our milling site, and stockpiled concentrate until we had the capacity to smelt our concentrate. In 2011, we completed a temporary smelter on our mill site and began shipping dore bars in limited quantities to a refiner on a regular basis.
We expect to report increased revenues from our milling operation when our metallurgical lab and our leaching facility are completed. The leaching facility will increase the percentage of valuable minerals that are extracted from the raw materials, and the completion of the metallurgical lab will increase the rate at which we can complete dore bars for shipment to refiners. Until the metallurgical lab and leaching facility are completed, our revenues may not differ materially from what we have generated to date in 2013.

Below are some metrics that are relevant to our current operations:

In the nine months ending September 30, 2012 and 2013, we did not transport any tailings to our mill. In 2013, we decided not to transport tailings and focus our resources on completing our metallurgical lab, floatation circuit and leaching circuit which will increase our recoveries.

In the nine months ending September 30, 2012 and 2013, we processed 12,039 and 0 tons of tailings, respectively, through our mill circuit into concentrate. We have stockpiled most of the concentrate until it can be processed in our metallurgical lab. In addition to concentrate, the processed tailings have been stockpiled for further processing through the planned leaching circuit.

In the nine months ending September 30, 2012, our refiner extracted 100.698 ounces of gold and 190.534 ounces of silver. The average price per ounce was $1,666 for gold and $33.5 for silver.

In the nine months ending September 30, 2013, our refiner extracted 98.33 ounces of gold and 80.776 ounces of silver. The average price per ounce was $1,623 for gold and $33 for silver.

We reported losses from operations during the nine months ended September 30, 2013 and 2012 of ($5,325,354) and ($5,774,040), respectively. The decreased loss in 2013 as compared to 2012 was attributable to the following factors:

Consulting fees decreased from $1,999,527 in 2012 to $1,371,980 in 2013 as a result of decreased use of consultants in 2013. The material components of expenses charged to consulting services in both years were as follows:

                 Type of Services                 2013              2012

      Shareholder relations services                62,730           128,700
      Locating and due diligence services on
      future acquisition opportunities             809,879           721,800
      Legal and compliance services                 90,000            36,320
      Advice on debt and equity capital
      raising                                      427,090           945,000

Compensation expense related to Mill administrative decreased from $309,762 in 2012 to $69,703 in 2013 as a result of a reduction of payroll during the period.

Depreciation expense increased from $290,462 in 2012 to $315,000 in 2013 as a result of the acquisition of equipment to be used in our operations.

Exploration and improvement costs increased from $8,240 in 2012 to $94,129 in 2013 as a result of increased work on the Sinker Tunnel.

Lease payment fees remained the same at $750,000 in 2012 and $750,000 in 2013.

Stock compensation expense declined slightly from $1,375,726 in 2012 to $1,210,260 in 2013.

Mill operating expenses increased from $329,691 in 2012 to $346,556 in 2013. We began capitalizing certain operating costs in the fourth quarter of 2011 and continued until the third quarter of 2012.

General and administrative expenses increased to $1,198,628 in 2013 as compared to $793,047 in 2012 as a result of decreased expenses related to the mill general and administrative expenses offset by compensation expense accruals.

We reported net losses during the nine months ended September 30, 2013 and 2012 of ($6,786,624) and ($8,144,629), respectively. The decreased loss in 2013 as compared to 2012 was largely attributable to lower debt conversion expenses in 2013 of $764,723, as compared to $2,077,175 in 2012, and by a decrease in the loss from operations, offset by an increase in interest expense resulting from higher levels of interest bearing debt in 2013 and additional interest fees on the Iliad note. In particular, interest expense increased from $293,414 in 2012 to $696,547 in 2013.

Three months ended September 30, 2013 and 2012

We are in the exploration stage and generated revenues of $10,200 and $7,161 in the three months ended September 30, 2013 and 2012, respectively. During the quarter ended September 30, 2013, all of our revenues were generated from a toll milling test program. Our revenues in the three months ended September 30, 2013 are not representative of our revenues in the future. Our primary operations consist of processing tailing from our mine site at the mill, and our ancillary operations consist of exploring War Eagle Mountain to evaluate and prove up its reserves. Our analysis indicates that we can profitably process tailings left from prior mining operations if we have the proper infrastructure to extract the minerals from the tailings. In May 2010, we began processing tailings from our mine site at our mill. We initially planned to process the tailings into concentrate, which would then be shipped for final processing to a smelter, which would either then either return the material to us in the form of dore bars (which would have to be shipped to a refiner for final processing) or pay us a market price for the minerals ultimately extracted from the concentrate.
In October 2010, we shipped our first load of concentrate to a smelter. We subsequently decided to construct our own metallurgical lab at our milling site, and stockpiled concentrate until we had the capacity to smelt our concentrate.
In 2011, we completed a temporary smelter on our mill site and began shipping dore bars in limited quantities to a refiner on a regular basis. We expect to report increased revenues from our milling operation when our metallurgical lab and our leaching facility are completed. The leaching facility will increase the percentage of valuable minerals that are extracted from the raw materials, and the completion of the metallurgical lab will increase the rate at which we can complete dore bars for shipment to refiners. Until the metallurgical lab and leaching facility are completed, our revenues may not differ materially from what we have generated to date in 2012.

Below are some metrics that are relevant to our current operations:

In the three months ending September 30, 2012 and 2013, we did not transport any tailings to our mill. In 2013, we decided not to transport tailings and focus our resources on completing our metallurgical lab, floatation circuit and leaching circuit which will increase our recoveries.

In the three months ending September 30, 2012 and 2013, we processed 1,119 and 0 tons of tailings, respectively, through our mill circuit into concentrate. We have stockpiled most of the concentrate until it can be processed in our metallurgical lab. In addition to concentrate, the processed tailings have been stockpiled for further processing through the planned leaching circuit.

In the three months ending September 30, 2012, our refiner did not extract precious metals.

We reported losses from operations during the three months ended September 30, 2013 and 2012 of ($1,483,129) and ($1,737,624), respectively. The increased loss in 2013 as compared to 2012 was attributable to the following factors:

Consulting fees decreased from $443,657 in 2012 to $253,907 in 2013 as a result of decreased use of consultants in 2013. The material components of expenses charged to consulting services in both years were as follows:

                 Type of Services                 2013              2012

      Shareholder relations services                 6,000            86,700
      Locating and due diligence services on
      future acquisition opportunities             188,846           158,800
      Legal and compliance services                 39,000                 -
      Investment banking                                 -           105,100

Compensation expense related to Mill administrative decreased from $89,071 in 2012 to $4,520 as a result of a reduction of payroll during the quarter.

Depreciation expense increased from $97,778 in 2012 to $105,000 in 2013 as a result of the acquisition of equipment to be used in our operations.

Exploration and improvement costs decreased from $6,576 in 2012 to $1,092 in 2013 as a result of decreased work on the Sinker Tunnel.

Lease payment fees remained the same at $250,000 in 2012 and $250,000 in 2013.

Stock compensation expense declined slightly from $458,575 in 2012 to $337,092 in 2013.

Mill operating expenses decreased from $185,383 in 2012 to $126,343 in 2013. We began to slow operations during the quarter.

General and administrative expenses increased to $415,375 in 2013 as compared to $213,735 in 2012 as a result decreased expenses related to the new mill operations offset by compensation expense accruals.

We reported net losses during the three months ended September 30, 2013 and 2012 of ($2,195,301) and ($1,897,227), respectively. The increased loss in 2013 as compared to 2012 was attributable higher debt conversion expenses in 2013 of $441,297, as compared to $20,548 in 2012 and higher interest expense in 2013 of $270,875 as compared to $139,055 in 2012 resulting from higher levels of interest bearing debt in 2013 and additional interest fees on the Iliad note, offset by a decrease in the loss from operations.

Liquidity and Sources of Capital

The following table sets forth the major sources and uses of cash for the nine
months ended September 30, 2012 and 2013:

                                            Nine months ended September 30,
                                             2012                   2013
   Net cash provided by (used) in
   operating activities                 $   (2,356,654)            $   (540,320)
   Net cash provided by (used) in
   investing activities                       (227,143)                 (45,410)
   Net cash provided by (used) in
   financing activities                       2,650,251                  614,830
   Net (decrease) increase in
   unrestricted cash and cash
   equivalents                            $      66,454              $    29,100

Comparison of 2013 and 2012

In the nine months ended September 30, 2013 and 2012, we financed our operations primarily through the issuance of convertible notes and the issuance of common stock for services.

Operating activities used ($540,320) of cash in 2013, as compared to ($2,356,654) of cash in 2012. Major non-cash items that affected our cash flow from operations in 2013 were non-cash charges of $581,438 for depreciation and amortization, non-cash debt conversion costs of $764,723, $1,387,565 for the value of common stock issued for services, and $1,434,237 for the value of common stock issued for compensation. Other non-cash items include changes in operating assets and liabilities of $1,776,644, most of which resulted from an increase in prepaid expenses of ($134,994), an increase in payroll liabilities of $700,471, an decrease in due from related parties of $801,238 and accrued interest of $408,886.

Major non-cash items that affected our cash flow from operations in 2012 were non-cash charges of $419,038 for depreciation and amortization, non-cash debt conversion costs of $2,077,175, $1,894,636 for the value of common stock issued for services and $1,834,302 for the value of common stock issued for compensation. Other non-cash items include changes in operating assets and liabilities of ($1,452,288), most of which resulted from an increase in prepaid expenses of ($475,726), an increase in due from related party of ($712,802) and an increase in accrued payroll of $50,376, offset by a reduction of ($248,770) of accounts payable and accrued expenses.

Investing activities used ($227,143) of cash in 2012, as compared to ($45,410) of cash in 2013. The decrease in cash used in investing activities was attributable to lower expenditures for equipment and improvements to our mill property.

Financing activities supplied $2,650,251 of cash in 2012 as compared to $614,830 of cash in 2013. Substantially all of the cash supplied in both years derived from the issuance of notes, net of sums spent to repay notes. In 2012, we issued $2,758,842 in notes, as compared to 2013 when we issued $650,830 of notes.

Liquidity

Our balance sheet as of September 30, 2013 reflects current assets of $2,593,176, current liabilities of $4,360,972, and working capital deficit of ($1,767,796).

We will need substantial capital over the next year. We project that we will need about $1,900,000 of working capital pending the building of a leaching unit, about $2,000,000 to build a leaching unit to improve the yields from our tailings, and about $10,000,000 to complete the exploration phase. In addition, we financed a lot of prior activities by the issuance of convertible notes that mature two years after their issuance.

As of September 30, 2013, we had the following debts that mature in the near future:

$1,490,744 in two year notes payable, of which $888,614 is due within one year of September 30, 2013. As of November 1, 2013, we had failed to pay all interest owed on the notes, and we are in default thereunder. We do not face any legal action from any of the note holders at this time;

$183,874 owed to Iliad Research & Trading, LP, which requires monthly payments of $47,208.33 per month, plus the amount of accrued interest on the note. As of November 1, 2013, we were not in default to Iliad;

$759,640 owed to JMJ Financial, consisting of one note for $315,000 which provides for payment of all principal and interest owed on December 4, 2013, and another note for $525,000 which provides for payment of all principal and . . .

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