Form 10-Q for CONSTITUTION MINING CORP
14-Aug-2009
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "intend," "estimate," "may," "should," "could," "will," "plan," "future," "continue," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.
Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (i) risk that we fail to meet the requirements of the agreement under which we acquired our options, including any payments or any exploration obligations that we have regarding these properties, which could result in the loss of our right to exercise the options to acquire the mineral and mining rights underlying these properties as well as the ability to recover any consideration paid to date; (ii) risk that we cannot attract, retain and motivate qualified personnel, particularly employees, consultants and contractors for our operations in Peru; (iii) risk that we will be unable to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina and be unable to recover any consideration paid concerning these property interests; (iv) our short operating history; (v) our ability to manage business expansion; (vi) risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of mineral deposits; (vii) results of initial feasibility, pre-feasibility and feasibility studies, and the possibility that future exploration, development or mining results will not be consistent with our expectations; (viii) mining and development risks, including risks related to accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in production; (ix) the potential for delays in exploration or development activities or the completion of feasibility studies; (x) risks related to the inherent uncertainty of production and cost estimates and the potential for unexpected costs and expenses; (xi) risks related to commodity price fluctuations; (xii) the uncertainty of profitability based upon our history of losses; (xiii) risks related to failure to obtain adequate financing on a timely basis and on acceptable terms for our planned exploration and development projects; (xiv) risks related to environmental regulation and liability; (xv) risks that the amounts reserved or allocated for environmental compliance, reclamation, post-closure control measures, monitoring and on-going maintenance may not be sufficient to cover such costs; (xvi) risks related to tax assessments; (xvii) political and regulatory risks associated with mining development and exploration; (xviii) other risks and uncertainties related to our prospects, properties and business strategy; (xix) potential that stockholders may lose all or part of their investment if we are unable to compete in our industry; (xx) our dependence on key personnel; (xxi) sale of substantial amounts of our common stock that may have a depressive effect on the market price of the outstanding shares of our common stock; (xxii) possible issuance of common stock subject to options and warrants that may dilute the interest of stockholders; (xxiii) our ability to comply with Sarbanes-Oxley Act of 2002 Section 404; (xxiv) our nonpayment of dividends and lack of plans to pay dividends in the future; (xxv) future sale of a substantial number of shares of our common stock that could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital; (xxvi) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock; (xxvii) our stock price which is likely to be highly volatile because of several factors, including a relatively limited public float; and (xxviii) indemnification of our officers and directors.
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As used in this Quarterly Report, the terms "we," "us," "our," and "Constitution Mining" mean Constitution Mining Corp. and our subsidiaries, unless otherwise indicated.
Overview
We were incorporated in the state of Nevada under the name Crafty Admiral Enterprises, Ltd. on March 6, 2000. Our original business plan was to sell classic auto parts to classic auto owners all over the world through an Internet site and online store; however, we were unsuccessful in implementing the online store and were unable to afford the cost of purchasing, warehousing and shipping the initial inventory required to get the business started. As a result, we ceased operations in approximately July 2002.
During our fiscal year ended December 31, 2006, we reorganized our operations to pursue the exploration, development, acquisition and operation of oil and gas properties. On June 27, 2006, we acquired a leasehold interest in a mineral, oil and gas property located in St. Francis County, Arkansas for a cash payment of $642,006, pursuant to an oil and gas agreement we entered into on April 29, 2006 (the "Tombaugh Lease"). Shortly after acquiring the Tombaugh Lease, we suspended our exploration efforts on the property covered by the Tombaugh Lease in order to pursue business opportunities developing nickel deposits in Finland, Norway and Western Russia. On January 18, 2008, we assigned all of our right, title and interest in and to the Tombaugh Lease to Fayetteville Oil and Gas, Inc., which agreed to assume all of our outstanding payment obligations on the Tombaugh Lease as consideration for the assignment. On March 9, 2007, we changed our name to better reflect our business to "Nordic Nickel Ltd." pursuant to a parent/subsidiary merger with our wholly-owned non-operating subsidiary, Nordic Nickel Ltd., which was established for the purpose of giving effect to this name change. We were not successful pursuing business opportunities developing nickel deposits in Finland, Norway and Western Russia and again sought to reorganize our operations in November 2007.
In November 2007, we reorganized our operations and changed our name to "Constitution Mining Corp." to better reflect our current focus which is the acquisition, exploration, and potential development of mining properties. Since November 2007, we entered into agreements to secure options to acquire the mineral and mining rights underlying properties located in the Salta and Mendoza provinces of Argentina and in northeastern Peru.
We are considered an exploration or exploratory stage company because we are involved in the examination and investigation of land that we believe may contain valuable minerals, for the purpose of discovering the presence of ore, if any, and its extent. There is no assurance that a commercially viable mineral deposit exists on any of the properties underlying our mineral property interests, and a great deal of further exploration will be required before a final evaluation as to the economic and legal feasibility for our future exploration is determined. We have no known reserves of any type of mineral. To date, we have not discovered an economically viable mineral deposit on any of the properties underlying our mineral property interests, and there is no assurance that we will discover one. If we cannot acquire or locate mineral deposits, or if it is not economical to recover any mineral deposits that we do find, our business and operations will be materially and adversely affected.
Our current business plan calls for investing any surplus operating capital resulting from retained earnings into bullion accounts and does not include holding retained earnings, if any, in cash or cash equivalents. In the event that commercially exploitable reserves of minerals exist on any of our property interests and we are able to make a profit, our business plan is to sell enough mineral reserves to satisfy all of our expenses and invest all retained mineral reserves in bullion accounts established in Zurich, Switzerland. The price of precious and base metals such as gold and silver has fluctuated widely in recent years, and is affected by numerous factors beyond our control, including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities and increased production due to new extraction developments and improved extraction and production methods. The effect of these factors on the price of base and precious metals, and, therefore, the change in the value of our retained earnings, if any, held in bullion accounts cannot accurately be predicted and is subject to significant fluctuation. There can be no assurance that the value of any bullion accounts established by us in the future to hold retained mineral reserves, if any, will not be adversely impacted by fluctuations in the price of base and precious metals resulting in significant losses.
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In light of the current economic environment, our management in this second quarter of fiscal 2009 determined that it was necessary to reassess the Company's current direction and proposed plans for exploration. In connection with this review, we announced that we were suspending our exploration program on the properties located in the Salta and Mendoza provinces of Argentina for at least the remainder of 2009 and would allocate our resources exclusively to pursue the exploration and development of our property interests in northeastern Peru.
We continued to monitor the current economic environment globally and within Argentina and have noted an increasing trend toward instability within Argentina. Rising and excessive inflation rates in Argentina have significantly increased the costs of the proposed operations in Argentina beyond our initial expectations. We believe, after further evaluation, that Argentinean governmental bodies are pursing policies and regulations which would adversely impact our planned operations in Argentina. We currently have a working capital deficiency and believe that it is presently not the best allocation of our resources to conduct exploration activities in two different countries. For the foregoing reasons, we have determined it to be in our best interest to seek to dispose of our interests in the properties located in the Salta and Mendoza provinces of Argentina as soon as practicable so as to prevent any default on any of these underlying option agreements.
We are reviewing our available alternatives to dispose of our interests in the Argentinean properties for value. We will continue to canvass a number of qualified parties with respect to a possible transaction and one party has requested information regarding the Atena Property. At the present time, there is no certainty that we will successfully be able to complete a disposition for value of any or all of our interests in the properties located in the Salta and Mendoza provinces of Argentina. In the event that we cannot complete a disposition of our interests in these Argentinean properties and we default on any of these underlying option agreements, our rights to acquire the underlying mineral and mining rights will revert back to Proyectos Mineros S.A. ("PMSA") (formerly Recursos Maricunga S.A.), the assignor, and we may not be entitled to recover of any consideration we have paid to date, an aggregate of 4,100,000 shares of our common stock and $70,000.
The assignor for the properties located in the Salta and Mendoza provinces of Argentina is PMSA. Dr. Willem Fuchter, our Chief Executive Officer and board member, is also the president and director of PMSA and holds a 50% ownership interest in the voting securities of PMSA. As a result of this conflict of interest, Dr. Fuchter abstained from the board of director's vote approving the decision to seek to dispose of our interests in the Argentinean properties.
Peru Property
Our properties located in Peru are in the exploration state. These properties are without known reserves and the proposed plan of exploration detailed below is exploratory in nature. These properties are described below.
On September 29, 2008 (the "Effective Date"), we entered into a Mineral Right Option Agreement (the "Option Agreement") with Temasek Investments Inc. ("Temasek"), a company incorporated under the laws of Panama in relation to the Peru property. Pursuant to the Option Agreement, we acquired four separate options from Temasek, each providing for the acquisition of a twenty-five percent interest in certain mineral rights in Peru described in Annex 1 of the Option Agreement (the "Mineral Rights"), pursuant to which we could potentially acquire one hundred percent of the Mineral Rights. The Mineral Rights are owned by Compa��a Minera Mara��n S.A.C. ("Minera Mara��n"). Bacon Hill Invest Inc. ("Bacon Hill"), a corporation incorporated under the laws of Panama and a wholly-owned subsidiary of Temasek, owns 999 shares of the 1,000 shares of Minera Mara��n that are issued and outstanding. Temasek owns the single remaining share of Minera Mara��n. The acquisition of each twenty-five percent interest in the Mineral Rights will occur through the transfer to us of twenty-five percent of the outstanding shares of Bacon Hill.
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A description of the Mineral Rights is set forth below:
Name Area Dept. Province District Observation
(hectares)
Aixa 2 1000 Loreto Datem del Mara�on Manseriche
Alana 10 900 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 11 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 12 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 13 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 14 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 15 800 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 16 800 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 17 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 18 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 19 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 4 900 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 5 700 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 6 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 7 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 8 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Alana 9 1000 Loreto Datem del Mara�on Manseriche Fully overlap Zona de
Amortiguamiento ANP
Bianka 5 1000 Loreto Datem del Mara�on Manseriche
Castalia 1 1000 Loreto Datem del Mara�on Manseriche
Castalia 2 1000 Loreto Datem del Mara�on Manseriche
Castalia 3 500 Loreto Datem del Mara�on Manseriche
Delfina 1 900 Amazonas Condorcanqui Nieva Partially overlap Zona
de Amortiguamiento ANP
Delfina 2 900 Amazonas Condorcanqui Nieva Partially overlap Zona
de Amortiguamiento ANP
Delfina 3 1000 Amazonas Condorcanqui Nieva Partially overlap Zona
de Amortiguamiento ANP
Delfina 4 700 Amazonas Condorcanqui Nieva Partially overlap Zona
de Amortiguamiento ANP
Delfina 5 1000 Amazonas Condorcanqui Nieva Partially overlap Zona
de Amortiguamiento ANP
Mika 1 600 Loreto Datem del Mara�on Manseriche
Mika 10 900 Loreto Datem del Mara�on Manseriche Partially overlap Zona
de Amortiguamiento ANP
Mika 2 1000 Loreto Datem del Mara�on Manseriche
Mika 3 900 Loreto Datem del Mara�on Manseriche
Mika 4 1000 Loreto Datem del Mara�on Manseriche
Mika 5 1000 Loreto Datem del Mara�on Manseriche
Mika 6 1000 Loreto Datem del Mara�on Manseriche
Mika 7 900 Loreto Datem del Mara�on Manseriche
Mika 8 1000 Loreto Datem del Mara�on Manseriche Partially overlap Zona
de Amortiguamiento ANP
Mika 9 1000 Loreto Datem del Mara�on Manseriche
Rosalba 1 900 Loreto Datem del Mara�on Manseriche
Rosalba 2 900 Loreto Datem del Mara�on Manseriche
Rosalba 3 1000 Loreto Datem del Mara�on Manseriche
Rosalba 4 1000 Loreto Datem del Mara�on Manseriche
Rosalba 5 1000 Loreto Datem del Mara�on Manseriche
- Barranca
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We may exercise the initial twenty-five percent option, which provides for the acquisition of a twenty-five percent interest in the Mineral Rights, after fulfilling the following conditions:
� Payment of $375,000 to Temasek upon execution of the Option Agreement;
� Issuance of 2,000,000 shares of our common stock to Temasek within five business days from the Effective Date; and
� Payment of an additional $375,000 to Temasek within ninety days of the Effective Date.
Since the execution of the Option Agreement, we have paid a total of $750,000 and have issued 2,000,000 shares of our common stock to Temasek in accordance with the terms of the Option Agreement, enabling us to exercise the initial twenty-five percent option and acquire a twenty-five percent interest in the Mineral Rights.
The Option Agreement provided that we may exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, after fulfilling the following conditions within six months of the Effective Date:
� Payment of an additional $1,250,000 to Temasek, and
� Issuance of 2,000,000 additional shares of our common stock to Temasek.
On May 12, 2009, we entered into an agreement with Temasek to amend the Temasek Option Agreement (the "Amended Option Agreement") in order to revise the conditions required by us to exercise the second twenty-five percent option. Under the terms of the Amended Option Agreement, we may exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, after fulfilling the following conditions:
� Issuance of 2,000,000 additional shares of our common stock to Temasek within six months from the Effective Date or as soon as practicable thereafter (which shares were issued in June 2009), and
� Payment within 12 months from the Effective Date of an additional $1,250,000 to Temasek plus interest at a rate of 5% per annum accruing from the date of the Amended Option Agreement to the date such payment is made.
On June 29, 2009, we issued 2,000,000 shares of common stock to Temasek and its designees as partial consideration for the exercise of the second twenty-five percent option to acquire an aggregate fifty percent interest in the Mineral Rights. We will be able to exercise the second twenty-five percent option, resulting in the acquisition of an aggregate fifty percent interest in the Mineral Rights, if on or before September 29, 2009, we pay $1,250,000 to Temasek, plus interest at a rate of 5% per annum accruing from May 12, 2009, the date of the Amended Option Agreement, to the date that payment is made. We will require additional financing in order to be able to exercise the second twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the second twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the second twenty-five percent option. In the event that we are unable to secure additional financing in order to be able to exercise the second twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to our twenty-five percent interest.
We may exercise the third twenty-five percent option, resulting in our acquisition of a seventy-five percent interest in the Mineral Rights, after fulfilling the following conditions within twelve months of the Effective Date (September 29, 2009):
� Payment of an additional $3,000,000 to Temasek, and
� Issuance of 2,000,000 additional shares of our common stock to Temasek.
We will require additional financing in order to be able to exercise the third twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the third twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the third twenty-five percent option. In the event that we have exercised the second twenty-five percent option, but are unable to secure sufficient financing in order to be able to exercise the third twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to a fifty percent interest.
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We may exercise the fourth twenty-five percent option, resulting in our acquisition of a one hundred percent interest in the Mineral Rights, after fulfilling the following conditions within eighteen months of the Effective Date (March 29, 2010):
� Payment of an additional $5,000,000 to Temasek, and
� Issuance of 4,000,000 additional shares of our common stock to Temasek.
We will require additional financing in order to be able to exercise the fourth twenty-five percent option. There can be no assurance that we will be successful in securing the necessary funding to exercise the fourth twenty-five percent option. Provided we are successful in securing additional financing, we intend to exercise the fourth twenty-five percent option. In the event that we have exercised the third twenty-five percent option, but are unable to secure sufficient financing in order to be able to exercise the fourth twenty-five percent option in the time frame set forth above, our ownership interest in the Mineral Rights may be limited to a seventy-five percent interest.
Upon our fulfillment of the conditions set forth above resulting in our acquisition of a one hundred percent interest in the Mineral Rights, Temasek will hold its single share of Minera Mara��n in trust for our sole benefit and hold the share strictly in accordance with our instructions.
In the event that we acquired a one hundred percent interest in the Mineral Rights, Temasek is entitled to an annual 2.5% net returns royalty related to the Mineral Rights. However, if we pay Temasek $2,000,000 within ninety days of our acquisition of a one hundred percent interest in the Mineral Rights, Temasek will only be entitled to an annual 1.0% net returns royalty related to the Mineral Rights.
If we exercise the second twenty-five percent option, resulting in our acquisition of a fifty percent interest in the Mineral Rights, but we fail to acquire a one hundred percent interest in the Mineral Rights, the Option Agreement provides that we and Temasek will form a joint venture for the purpose of placing the Peru Property into commercial production. In the event that this condition is satisfied and we enter into a joint venture agreement with Temasek, our responsibilities under the joint venture would include developing a feasible mining project and all necessary facilities and Temasek shall retain a carried free interest in the mining rights. If we enter into a joint venture with Temasek, but do not develop a feasible mining project within three years of the Effective Date (September 29, 2011), we will be required to pay Temasek an advance minimum mining royalty of $500,000 per year, which will be deducted from Temasek's net return royalty on the Mineral Rights.
Proposed Exploration Program
Shortly after our acquisition of the Peru property in September 2008, we commenced the initial stages of our exploration and development program and have carried out the following activities:
� Completed an initial social base line study to document all surface rights owners and people resident in the project area;
� Implemented a community relations program to inform local communities of the project and what potential opportunities that may exist for community involvement in the implementation phases of the development program;
� Submitted a Declaraci�n de Impacto Ambiental to the Ministry of Mines and Energy in Peru and received approval to start the exploration;
� Completed the field work for the Evaluaci�n de Impacto Ambiental semidetallado which, if approved by the Peruvian Ministry of Mines & Energy, will allow us to undertake extensive drilling and bulk sampling programs;
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