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SVBL > SEC Filings for SVBL > Form 10-K on 13-Jan-2014All Recent SEC Filings

Show all filings for SILVER BULL RESOURCES, INC.

Form 10-K for SILVER BULL RESOURCES, INC.


13-Jan-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Business Overview

Silver Bull, incorporated in Nevada, is an exploration stage company, engaged in the business of mineral exploration. Our primary objective is to define sufficient mineral reserves on the Sierra Mojada Property to justify the development of a mechanized mining operation. We conduct our operations in Mexico through our wholly-owned Mexican subsidiaries, Minera Metalin and Contratistas, and through Minera Metalin's wholly-owned subsidiary, Minas. However, as noted above, we have not established any reserves at the Sierra Mojada Property, and are in the exploration stage and may never enter the development or production stage.

Our principal offices are located at 925 West Georgia Street, Suite 1908, Vancouver, BC, Canada V6C 3L2, and our telephone number is 604-687-5800.

Current Year Developments

February 2013 Offering

In February 2013, we raised net proceeds of approximately $8.1 million in a public offering of units consisting of one share of common stock and one-half of a common stock purchase warrant. We issued a total of 22,912,500 shares of common stock and warrants to purchase an additional 11,456,250 at an exercise price of $0.55 per share, expiring in August 2014.

Sierra Mojada Property

Our board of directors approved a calendar year 2013 budget of $6.5 million for the Sierra Mojada Property. Due to volatile market conditions, our board approved an updated budget for the Sierra Mojada Property in September 2013. Our updated exploration budget for the Sierra Mojada Property for the period from September 2013 to December 2013 was $0.7 million compared to $1.4 million in the original budget. The updated exploration budget focused on continued metallurgical work and the completion of a NI 43-101 preliminary economic assessment.


Mineralized Material Estimate

On December 19, 2013, JDS delivered the PEA Technical Report on the silver and zinc mineralization for the Sierra Mojada Project in accordance with NI 43-101. The PEA Technical Report includes an update on the silver and zinc mineralization which was estimated from 1,372 diamond drill holes, 25 reverse circulation drill holes, 9,025 channel samples and 2,345 long holes. At a cutoff grade of 25 grams/tonne of silver for mineralized material, the PEA Technical Report indicates mineralized material of 71.1 million tonnes at an average silver grade of 71.5 grams/tonne silver and an average zinc percentage of 1.34%. Mineralized material estimates do not include any amounts categorized as inferred resources.

"Mineralized material" as used in this Annual Report on Form 10-K, although permissible under the Securities and Exchange Commission's Industry Guide 7, does not indicate "reserves" by SEC standards. We cannot be certain that any part of the Sierra Mojada Project will ever be confirmed or converted into SEC Industry Guide 7 compliant "reserves." Investors are cautioned not to assume that all or any part of the mineralized material will ever be confirmed or converted into reserves or that mineralized material can be economically or legally extracted.

Drilling

A 4,000 meter drill program had been planned targeting what is believed to be an extension to the "high grade silver mineralization". Approximately 400 meters of underground drilling under this program has been conducted, but due to volatile market conditions, the remaining drill program has been placed on hold.

Metallurgical Studies

We have an active metallurgical program to test the recovery of the silver mineralization using the agitation cyanide leach method and recovery of the zinc mineralization using the SART process (sulfidization, acidification, recycling, and thickening).

We received results for metallurgical testing on samples taken from areas throughout the silver zone and the zinc zone. The test work on the silver zone focused on cyanide leach recovery of the silver using "Bottle Roll" tests to simulate an agitation leach system and to determine the recovery of low grade zinc that occurs in the silver zone and high grade zinc from the zinc zone that had been blended with mineralization from the silver zone to the leach solution. The silver was recovered from the cyanide leach solution using the Merrill Crowe technique and the zinc was recovered from the leach solution using the SART process. The SART Process is a metallurgical process that regenerates and recycles the cyanide used in the leaching process of the silver and zinc and allows for the recovery of zinc that has been leached by the cyanide solution. The preliminary results showed an overall average silver recovery of 73.2% with peak values of 89.0% and an overall average zinc recovery of 44% in the silver zone. Floatation test work focused on the zinc zone was completed in October 2013 and it does not appear to be a viable way to recover the zinc based on the work done to date.

Geological Mapping

A regional mapping and prospecting exploration program was completed on the Palamos Negros prospect. The aim of this program was to identify drill targets in this prospect which lies outside of the silver zone. More work is needed on this area to better understand the controls on the mineralization. Due to volatile market conditions, the potential drill program for 2013 was put on hold.

2014 Exploration Program

As discussed in the "Material Changes in Financial Condition, Liquidity and Capital Resources" section below we have approved a calendar year 2014 budget of $1.8 million for the Sierra Mojada Property. The focus of the 2014 calendar year program is continuing to progress in securing additional surface rights, maintenance of our property concessions, further studying power and water alternatives and continued metallurgical work. Due to current market conditions our calendar year 2014 budget for the Sierra Mojada Project does not include plans to complete a pre-feasibility study.

Mexican Tax Reform

On December 11, 2013 the Mexican tax reform package was published in the official gazette and will apply as from January 1, 2014. There are a number of significant changes in the Mexican tax reform package. The planned corporate tax rate reductions to 29% in 2014 and 28% thereafter have been repealed and the corporate tax rate will remain at 30%. The business flat tax (IETU) has been repealed. A special mining royalty of 7.5% will apply to net profits derived by a property concession holder from the sale or transfer of extraction related activities. Net profits for the purpose of this royalty will be determined in a manner similar to the calculation of general taxable income with certain deductions not available including for investment in fixed assets and interest. In addition, owners of property concessions will be required to pay a 0.5% tax on gross income derived from the sale of gold, silver and platinum. Further, a 10% withholding tax on dividend distributions has been introduced but will not supercede treaty rates.


Gabon Property

We hold two exploration licenses, the Ndjole license and the Mitzic license, in Gabon, West Africa covering approximately 4,000 square kilometers. We believe that the Ndjole license has gold and manganese potential and the Mitzic license has iron ore potential. On December 13, 2013, we entered into a binding letter of agreement with BHK Resources, Inc. to sell all of the issued and outstanding securities of our subsidiary, Dome International Global Inc., which holds, indirectly, a 100% interest in and to the Ndjole manganese and gold licenses, for cash consideration of $1,500,000.

The proposed transaction is subject to a number of terms and conditions, including the entering into by the parties of a definitive agreement with respect to the transaction, the completion of satisfactory due diligence investigations, the completion of a financing by BHK Resources, Inc. generating minimum proceeds of $CDN 4.0 million from the sale of securities, on terms to be determined, shareholder approval by BHK Resources, Inc. and the approval of the TSX-V and other applicable regulatory authorities. Silver Bull was paid a $25,000 non-refundable deposit upon the signing of the binding letter of agreement. Prior to the closing of the transaction, we will transfer all of the issued and outstanding securities of African Resources SARL Gabon, which holds the Mitzic license, from Dome International Global Inc. to another of our subsidiaries.

Results of Operations

Year Ended October 31, 2013 Compared to Year Ended October 31, 2012

For the fiscal year ended October 31, 2013, we reported a consolidated net loss of $7,467,000 or approximately $0.05 per share, compared to a consolidated net loss of $13,360,000 or approximately $0.10 per share during the fiscal year ended October 31, 2012. The $5,893,000 decrease in the consolidated net loss was primarily due to a $5,774,000 decrease in exploration and property holding costs and a $634,000 increase in other income in the 2013 fiscal year from the 2012 fiscal year, which was partially offset by a $558,000 increase in general and administrative expenses.

Exploration and Property Holding Costs

Exploration and property holding costs decreased $5,774,000 to $5,515,000 in the 2013 fiscal year from $11,289,000 in the 2012 fiscal year. This decrease was primarily due to a significantly reduced drilling program on the Sierra Mojada Property which was partially offset by costs related to the maiden NI 43-101 preliminary economic assessment. During the 2013 fiscal year, we had a small drilling program for part of the year using our underground drill rigs; whereas, up to three external drill rigs were used in the 2012 fiscal year. As a result of this reduction in drilling, we reduced the work force at the Sierra Mojada Property. Also, we recorded a $1,271,000 concession impairment in the 2013 fiscal year as we decided not to pursue further work on certain concessions in the Sierra Mojada Property and we determined that the Ndjole license was impaired as its carrying amounts were not recoverable from its implied fair value based on the binding letter of agreement. During the 2012 fiscal year we recorded a $2,006,000 concession impairment as described below.

General and Administrative Costs

General and administrative expenses increased $558,000 to $2,649,000 in the 2013 fiscal year from $2,091,000 in the 2012 fiscal year as described below.

Personnel costs decreased $152,000 to $894,000 in the 2013 fiscal year from $1,046,000 in the 2012 fiscal year. This decrease was primarily due to a decrease in stock-based compensation expense to $273,000 in the 2013 fiscal year from $416,000 in the 2012 fiscal year as a result of stock option vesting in the 2013 fiscal year having a lower fair value than stock option vesting in the 2012 fiscal year.

Office and administrative expenses increased $102,000 to $983,000 in the 2013 fiscal year from $881,000 in the 2012 fiscal year. This increase is mainly due to increased investor relations activities and corporate travel related to the February 2013 offering described in the "Material Changes in Financial Condition; Liquidity and Capital Resources" section.

Professional fees decreased $61,000 to $404,000 in the 2013 fiscal year from $465,000 in the 2012 fiscal year. The decrease was primarily due a decrease in legal fees in the 2013 fiscal year compared to 2012 fiscal year.

Directors' fees decreased $212,000 to $359,000 for the 2013 fiscal year as compared to $571,000 for the 2012 fiscal year. This decrease was primarily due to a decrease in stock based compensation expense to $176,000 in the 2013 fiscal year from $382,000 in the 2012 fiscal year as a result of stocks options vesting in the 2013 fiscal year having a lower fair value than stock options vesting in the 2012 fiscal year.


We recorded a provision of $5,000 for uncollectible value-added taxes ("VAT") in the 2013 fiscal year compared to a recovery of $875,000 in the 2012 fiscal year. The recovery for uncollectible taxes in the 2012 fiscal year was mainly due to value added taxes collected in Mexico during the year inclusive of interest of $3,332,000 after a significant period where no collections were made. The allowance for uncollectible taxes was estimated by management based upon a number of factors including the length of time the returns have been outstanding, responses received from tax authorities, general economic conditions in Mexico and Gabon and estimated net recovery after commissions.

Other Income (Expense)

We recorded other income of $762,000 in the 2013 fiscal year compared to other income of $128,000 in the 2012 fiscal year. The significant factor was a $85,000 foreign currency transaction gain in the 2013 fiscal year, compared to a foreign currency transaction loss of $276,000 for the 2012 fiscal year and a $644,000 miscellaneous income in the 2013 fiscal year as compared to a $244,000 miscellaneous income for the 2012 fiscal year. This was partially offset by a decrease in interest and investment income to $33,000 for the 2013 fiscal year as compared to a $160,000 for the 2012 fiscal year. The decrease in interest and investment income is due to significant value added tax collections of historical returns and associated interest occurring in the 2012 fiscal year.

The miscellaneous income in the 2013 fiscal year was primarily the result of our determination that AngloGold abandoned all of its rights and benefits under two joint venture agreements. Upon AngloGold's termination of these agreements, VAT receivable outstanding at the termination of the agreements and subsequent cash collected related to this VAT receivable of $492,000 was determined to be the sole property of Silver Bull. Also, we recorded $86,000 in miscellaneous income from the gain on office and mining equipment sales at the Sierra Mojada Property. The miscellaneous income in the 2012 fiscal year was primarily the result of us receiving supporting documents that allowed us to reduce our liability for certain withholding taxes.

The foreign currency transaction gain in the 2013 fiscal year was primarily the result of the appreciation of the Central African franc ("$CFA") and the resulting impact on the intercompany loans between Silver Bull and our Gabonese subsidiaries. The foreign currency transaction loss in the 2012 fiscal year was primarily the result of the depreciation of the Central African franc and the resulting impact on the intercompany loans between Silver Bull and our Gabonese subsidiaries.

Income Tax Expense

Income tax expense decreased $43,000 to $65,000 in the 2013 fiscal year from $108,000 in the 2012 fiscal year. The decrease was primarily due to a decrease in income tax expense in Mexico in the 2013 fiscal year.

Year Ended October 31, 2012 Compared to Year Ended October 31, 2011

For the fiscal year ended October 31, 2012, we experienced a consolidated net loss of $13,360,000 or approximately $0.10 per share, compared to a consolidated net loss of $12,237,000 or approximately $0.11 per share during the fiscal year ended October 31, 2011. The $1,123,000 increase in the consolidated net loss was primarily due to a $2,916,000 increase in exploration and property holding costs in the 2012 fiscal year from the 2011 fiscal year and other income of $128,000 in the 2012 fiscal year compared to other expenses of $465,000 in the 2011 fiscal year. This was partially offset by a $875,000 recovery of uncollectible value-added taxes in the 2012 fiscal year compared to a $204,000 provision for uncollectible value added taxes in the 2011 fiscal year.

Exploration and Property Holding Costs

Exploration and property holding costs increased $2,916,000 to $11,289,000 in the 2012 fiscal year from $8,373,000 in the 2011 fiscal year primarily due to increased drilling costs due to higher drilling costs in the Parrena Adit, increased assay costs due to rush orders on certain assays and increased metallurgical costs as metallurgical work was a significant focus in the 2012 fiscal year. Also, we recorded a $2,006,000 concession impairment in the 2012 fiscal year as certain concessions in Gabon and Mexico will not be pursued and certain concessions which we plan to pursue did not have expected cash flows that supports the value of these assets before the impairment was recorded.

General and Administrative Costs

General and administrative expenses decreased $1,281,000 to $2,091,000 in the 2012 fiscal year from $3,372,000 in the 2011 fiscal year as described below.


Personnel costs decreased $323,000 to $1,046,000 in the 2012 fiscal year from $1,369,000 in the 2011 fiscal year. This decrease was primarily due to $165,000 non-recurring severance payment in the comparable period last year and lower stock based compensation, which decreased to $416,000 in the 2012 fiscal year from $587,000 in the 2011 fiscal year.

Office and administrative expenses increased $223,000 to $881,000 in the 2012 fiscal year from $658,000 in the 2011 fiscal year. This increase is mainly due to increased investor relation activities.

Professional fees decreased $124,000 to $465,000 in the 2012 fiscal year from $589,000 in the 2011 fiscal year. The decrease was primarily due to a decrease in recruitment fees paid for new employees and a decrease in accounting and tax expenses.

Directors' fees of $571,000 in the 2012 fiscal year was similar to $526,000 in the 2012 fiscal year.

We recorded a recovery of $875,000 in the 2012 fiscal year for uncollectible value-added taxes compared to a provision of $204,000 in the 2011 fiscal year. The change in management expectation of collection was mainly due to value-added tax collected in Mexico of $3,332,000 inclusive of interest related to the tax returns filed in Mexico City for calendar year 2007 to 2012. The allowance for uncollectible taxes was estimated by management based upon a number of factors including the length of time the returns have been outstanding, responses received form tax authorities, general economic conditions in Mexico and Gabon and estimated net recovery after commissions.

Other Income (Expense)

We recorded other income of $128,000 in the 2012 fiscal year compared to other expense of $465,000 in the 2011 fiscal year. We recorded interest income of $160,000 in the 2012 fiscal year compared to $37,000 in the 2011 fiscal year. This increase in interest income was mainly as a result of interest received on value added tax collection in Mexico. We recorded a foreign currency transaction loss of $276,000 in the 2012 fiscal year compared to a foreign currency transaction loss of $349,000 in the 2011 fiscal year as discussed below. Also, we recorded miscellaneous income of $243,000 in the 2012 fiscal year compared to miscellaneous expense of $153,000 in the 2011 fiscal year. During the 2012 fiscal year we received supporting documents that allowed us to reduce our liability for certain withholding taxes. This amount was accrued in 2011 fiscal year and was included in miscellaneous expense in the 2011 fiscal year.

The foreign currency transaction loss in the 2012 fiscal year was primarily the result of the depreciation of the $CFA and the resulting impact on the intercompany loans between Silver Bull and our Gabonese subsidiaries. The foreign currency transaction loss in the 2011 fiscal year was primarily the result of the depreciation of the Mexican Peso and the resulting impact on the intercompany loans between Silver Bull and our Mexican subsidiaries. In the 2012 fiscal year, foreign currency transaction gains/losses are not recorded on the intercompany loans between Silver Bull and our Mexican subsidiaries due to the change in functional currency described in the "Critical Accounting Policies" section.

Income Tax Expense

Income tax expense increased $81,000 to $108,000 in the 2012 fiscal year from $27,000 in the 2011 fiscal year. The increase was primarily due to an increase in income tax expense in Canada and Mexico in the 2012 fiscal year.

Material Changes in Financial Condition, Liquidity and Capital Resources

February 2013 Offering

On February 14, 2013, we closed the Offering of 22,912,500 units at a price of $0.40 per unit for net proceeds of $8.1 million. Each unit was comprised of one share of common stock and one-half of one common stock purchase warrant, with each whole warrant exercisable to purchase one share of common stock, at an exercise price of $0.55, for a period of 18 months from the closing of the Offering. We paid the agents on the Offering a cash commission equal to 6.0% of the gross proceeds, except for $2.5 million in units sold to purchasers arranged by us for which the agents received a 3.0% cash commission.

In addition, the agents received compensation warrants equal in number to 6.0% of the aggregate number of units issued under the Offering except for $2.5 million in units sold to purchasers arranged by us for which the agents received compensation warrants equal in number to 3.0% of the units sold to such purchasers. The compensation warrants have the same terms as the other warrants issued in the Offering.


Cash Flows

During the 2013 fiscal year, we primarily utilized cash and cash on equivalents to fund exploration activities at the Sierra Mojada Property and for general and administrative expenses. Additionally, during fiscal year 2013, we received net proceeds (after offering costs) of $8,095,000 in connection with the Offering. As a result of the Offering, offset by the exploration activities and general and administrative expenses, cash and cash equivalents increased from $3,201,000 at October 31, 2012 to $5,251,000 at October 31, 2013.

Cash flows used in operations for the 2013 fiscal year was $5,425,000 as compared to $9,592,000 in the 2012 fiscal year. This decrease was mainly due to the decreased exploration work at the Sierra Mojada Property in the 2013 fiscal year compared to the 2012 fiscal year which was partially offset by a decrease in net VAT collected of $614,000 in the 2013 fiscal year compared to $1,680,000 in the 2012 fiscal year.

Cash flows used in investing activity for the 2013 fiscal year was $658,000 as compared to $1,615,000 in the 2012 fiscal year. The decrease was mainly due to decreased property concession acquisition costs.

Cash flows provided by financing activities for the 2013 fiscal year was $8,127,000 as compared to $10,254,000 for the 2012 fiscal year. The majority of the cash flow provided by financing activities in the 2013 fiscal year was due to the Offering, with net proceeds of $8,095,000. The majority of the cash flow provided by financing activities in the 2012 fiscal year was due to the completion of certain registered direct offerings for net proceeds of $10,218,000.

Capital Resources

As of October 31, 2013, we had cash and cash on hand of $5,251,000 and working capital of $4,718,000 as compared to cash and cash on hand of $3,201,000 and working capital of $2,925,000 as of October 31, 2012. The increase in liquidity and working capital were primarily the result of the Offering in February 2013 which was partially offset by cash and cash equivalents used by exploration activities at the Sierra Mojada Property and general and administrative expense.

Since inception, we have relied primarily upon proceeds from sales of our equity securities and warrant exercises as our primary sources of financing to fund our operations. We anticipate that we will continue to rely on sales of our securities 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. See Note 1 to our Consolidated Financial Statements included in this Annual Report on the Form 10-K.

Capital Requirements and Liquidity; Need for Subsequent Funding

Our management and board of directors monitor our overall costs, expenses, and financial resources and, if necessary, will adjust our planned operational expenditures in an attempt to ensure we have sufficient operating capital. We continue to evaluate our costs and planned expenditures including for our Sierra Mojada Property as discussed below.

The continued exploration of the Sierra Mojada Property will require significant amounts of additional capital. In January 2014, our board of directors approved a calendar year 2014 budget of $1.8 million for the Sierra Mojada Property and a $1.8 million budget for general and administrative expenses. As of December 31, 2013, we had approximately $4.7 million in cash on hand. We will continue to evaluate our ability to raise additional capital, and we will reduce expenditures on the Sierra Mojada Property if we determine that additional capital is unavailable or available on terms that we determine are unacceptable. Also, the continued exploration and if warranted, development, of the Sierra Mojada Property ultimately will require us to raise additional capital, identify other sources of funding or identify another strategic transaction. The on-going uncertainty and volatility in the global financial and capital markets have limited the availability of funding. Debt or equity financing may not be available to us on acceptable terms, if at all. Equity financing, if available, will likely 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.


Table of Contractual Obligations

The following table summarizes our contractual obligations as of October 31,
2013:

                                                                                                More
                                                 Less Than        1 - 3         4 - 5          Than 5
Contractual Obligations             Total         1 Year          Years         Years           Years
                                                           (in thousands of $)
Operating leases                        306              88           180             38               -
Sierra Mojada concession option
purchase payments                    15,019             999        14,020              -               -
Total                                15,325           1,087        14,200             38               -

The above table assumes the Poder de Dios, Anexas a Poder de Dios and Amplicaion a Poder de Dios option purchase price is exercised on January 1, 2016 and the Nuevo Dulces Nombres and Yolanda III option purchase is exercised on August 1, 2016.

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 Adopted in the Year Ended October 31, 2013

Effective November 1, 2012, we adopted Accounting Standards Update ("ASU") 2011-04 "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This update amended explanations of how to . . .

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