Tuesday, April 10, 2012 4:56:30 PM
Form 10-Q for COLORADO GOLDFIELDS INC.
6-Apr-2012
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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.
This discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three and six months ended February 29, 2012, as well as our future results. It consists of the following subsections:
? "Plan of Operation," which provides a brief summary of our consolidated results and financial position and the primary factors affecting those results, as well as a summary of our expectations for 2012;
? "Liquidity and Capital Resources," which contains a discussion of our cash flows and liquidity, investing activities and financing activities;
? "Results of Operations," which sets forth an analysis and comparison of the three and six months ended February 29, 2012 compared to the three and six months ended February 28, 2011;
? "Critical Accounting Policies," which provides an analysis of the accounting policies we consider critical because of their effect on the reported amounts of assets, liabilities, income and/or expenses in our financial statements and/or because they require difficult, subjective or complex judgments by our management; and
? "Recent Accounting Pronouncements," which summarizes recently published authoritative accounting guidance, how it might apply to us, and how it might affect our future results.
Plan of Operation
The following discussion updates our plan of operation for the foreseeable future. The discussion also summarizes the results of our operations for the three and six months ended February 29, 2012 and compares those results to the three and six months ended February 28, 2011.
During the second quarter of fiscal 2012, we continued to experience the negative effects of the financial markets upheaval, which made capital acquisition extremely difficult.
During the second quarter of fiscal 2012, we focused primarily on re-activation of the Pride of the West Mill (the "Mill"), primarily working towards amending the current reclamation permit, securing agreements for "custom" or "toll" milling, and seeking out new properties to acquire, explore and develop.
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Operations at the Pride of the West Mill:
During the second quarter of fiscal 2012, we completed revisions to our prior reclamation permit amendment application and on January 27, 2012 submitted the permit amendment application to the DRMS. The application was deemed "complete for filing" by the DRMS and a decision date was scheduled for May 1, 2012.
A key factor for re-activating the Mill is the disposal of tailings; that is, the material that remains after ore has been processed. Our original mill tailings disposal method was to move mill tailings (finely ground waste rock from which the valuable metals have been removed in the milling process) as a slurry, generally consisting of 15% solids and 85% water, to a closed, lined tailings pond. After the solids have settled and separated from the water, some of the process water is returned to the mill for re-use. The tailings pond is essentially a lake containing saturated mill tailings (liquid mud).
However, through the permit amendment process during fiscal years 2010 and 2011, and working with the Division of Reclamation Mining and Safety, we have learned that this method of tailings disposal has more challenges than originally anticipated.
In December 2010, the Colorado Division of Reclamation, Mining and Safety ("Division" or "DRMS"), accepted the parts of the amendment regarding the following.
? Mill building;
? Laboratory building;
? Ore stockpile area;
? Leach plant building;
? River protection dike;
? Procedures for custom or "toll" milling.
Since that time, we have developed a "dry stack" method of tailings disposal as part of a new permit amendment ("AM-03"), which was submitted on January 27, 2012.
According to Colorado law, the Company is required to "publish notice in a newspaper of general circulation once a week for four consecutive weeks." Further, the regulations require that the Company notify all owners of record of surface and mineral rights, holders of any recorded easements, and all owners of record of lands within 200 feet of the permit boundary and affected land via certified mail and submit proof of the notices prior to the decision date.
The Company began notice publications on February 9, 2012 in the Silverton Standard and the Miner and completed the publication requirement on March 1, 2012. Certified mail notices were completed on February 9, 2012. The comment period closed on March 21, 2012. The Division received four comments/objections during the comment period. As of the date of this report, it is uncertain whether any of the comments/objections will require a hearing before the Colorado Mined Land Reclamation Board.
As part of the Mill re-activation plan, we will be reclaiming the old tailings ponds on the property. That work is pursuant to a Technical Revision ("TR"), to the existing permit. On March 25, 2011 we filed Technical Revision 11 ("TR-11") with the DRMS. TR-11 was approved by the DRMS on June 27, 2011.
TR-11 consists of 8 work tasks that will commence immediately upon approval from the DRMS. The 8 tasks within TR-11 will address the closure of six test pits and two geotechnical drill holes located within the Upper and Lower Tailings Pond areas of the site and the relocation and final disposition of certain Waste Rock, initiates the final reclamation of the Mill Drain Pond, the Upper Tailings Pond and the Lower Tailings Pond. These were the major problem areas in the December 2010 permit amendment, and now are removed from the scope of the permit.
The first several tasks were completed during the summer of 2011; however, early snowfall caused suspension of the remaining work until spring 2012.
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We believe that this new permit amendment along with the extension of the Mill mortgage to July 1, 2012, will move the business plan forward.
Operations at the Utah & Uranium Claims:
On June 13, 2011, we purchased the Pay Day and Rage claims. These claim groups consist of 63 (55 Pay Day and 8 Rage) claims. The Pay Day claim group is located in Township 32 South, Range 24 East of the Salt Lake Meridian in Sections 26, 27, 34, and 35, in San Juan County northeast of Monticello, Utah. The Rage claim group spans Stevens Canyon on the southeast flank of the Seven Sisters Buttes in Township 33 South, Range 20 East of the Salt Lake Meridian in Section 33, San Juan County, Utah.
An initial internal analysis by Company president Lee R. Rice indicates that the historical information used by others did not account for all possible sources and additional potential resource at depth. For that reason, we have engaged Allan P. Juhas, Ph.D. in Economic Geology, University of Manitoba 1973, to undertake the preparation of an NI43-101 technical report based upon the Company's exploration plan and previous work that can be verified. Dr. Juhas has over 50 years' experience in a broad spectrum of precious metals and base metals geological pursuits. He is well recognized in the industry, and prepares a number of NI43-101 reports each year.
We are in the process of constructing an N1431-01 compliant report to confirm and verify the value of these assets.
We acquired the properties in all stock transaction consisting of 125,000,000 shares of 1-year restricted Class A Common Stock and 125,000,000 shares of 2-year restricted Class A Common Stock.
Operations at the Silver Wing Mine:
In anticipation of our final acquisition of the Silver Wing Mine, we submitted a Notice of Intent to Conduct Prospecting Activities for activities at the Silver Wing Mine. The application was approved on November 18, 2011. Prior to any work commencing on at the Silver Wing Mine, we will be required to post a $25,000 financial warranty with the DRMS for reclamation costs.
Activities to be completed under this initial approval of work at the Silver Wing Mine will include re-sampling key areas of the mine by taking approximately 250 channel samples to verify records of sample data taken by prior operators and consultants. In preparation for drilling, work will also include the verification of underground mine maps, evaluation of prior underground development work and the condition of existing workings. This information will be utilized to develop an on-going core drilling program and an initial mining plan.
The approval of this project is particularly significant because it allows for an investigation to be made to determine the source of the existing mine drainage of approximately 20 gallons per minute and evaluate the potential for controlling or eliminating this discharge with an underground grouting program which could avoid the need for a discharge permit. If it is determined that the discharge cannot be eliminated, then an evaluation will be made of what actions can be taken to minimize the discharge, and assuming a permit is required, what permit conditions would be most effective and appropriate for preventing discharges of pollutants into the Animas River.
As of the date of this report, we are awaiting improved weather conditions so the work may be commenced.
Operations at the Brooklyn Mine:
We completed the 2011 exploration plan on the Brooklyn Mine during first quarter of fiscal 2012 and prepared samples during the second quarter of fiscal 2012. 178 samples have been prepared and boxed for shipment to Reno, Nevada for sample preparation. The samples will then be forwarded to a certified laboratory in Canada for analysis. 164 samples will be analyzed for geochemical components and 14 samples will be analyzed by fire assay for gold and silver.
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The overall goal of the exploration project was to confirm historic data on two major targets; including the sampling of the intersection of two veins, the Rainbow and the Gloucester. Historic sampling data indicates a probable zone of high grade gold in the intersection area. Sampling of this area has been completed. The Company is awaiting assay results.
The second major sampling project was geochemical sampling of the property. Soil and/or rock chip samples on a grid system with sample lines 125 meters apart and 50 meters between sample points have been collected. The samples will be analyzed for the presence of 48 elements. The concentration of the 48 elements within the grid enables the Company's geologists to determine the shape and course of known structures and to identify structures which are not visible from the surface.
In addition to gold and silver, previous studies in the area have identified a number of trace elements in the vicinity of orebodies. We will closely monitor the data for indications of economically important elements, which include the rare metals tellurium and indium and monazite, which are essential to many of today's green technologies. Tellurium is known to be present in Brooklyn Mine ores. Indium is known to be associated with zinc in the district.
Although very speculative, historic information has revealed enough to warrant study of a possible intrusive breccia pipe. The area surrounding the Brooklyn is known for high grade ores contained in these breccia pipes, which geologists call "spectacular." Previous investigations have shown that a number of veins radiate from the possible breccia zone. One short crosscut into the zone indicates that ore grade silver might extend to the perimeter of the zone. This prospective pipe is known as the Growler Pipe.
Upon completion of the geotechnical sample analysis, the diamond drilling plan will be prepared and application for drilling permits will be submitted to the state.
Operations at the King Solomon Mine:
We completed our 2011 exploration program on the King Solomon Mine during first quarter of 2012.
The land position surveys were completed and corner monuments were set for the King Solomon claims. Several original corners, first placed in the 1800s, were found and re-monumented, which verifies the claim locations. Specific survey control points were completed to establish and fix the location of the two principal mine portals relative to the claim boundaries and surface vein expressions.
Exploration teams entered and explored the underground workings, locating important vein structures, and taking ore samples from each. Underground workings also revealed areas that are ready to be mined along with those that will require re-habilitation and timbering.
Most importantly, sufficient data was collected to begin the construction of the 3-D model of the mine; the most efficient way to develop the surface and underground diamond drilling exploration plan.
The King Solomon Mine is located on the southern flank of King Solomon Mountain, just a few hundred yards up the mountain from the first discovery of gold in the San Juan Mountains in Little Giant Basin.
As of the date of this report, we are awaiting improved weather conditions so the work may be commenced.
Planned Acquisitions:
On October 20, 2011 we entered into a non-binding Memorandum of Understanding ("MOU"), with American Sierra Gold Corp ("American Sierra"). The MOU, which provides for customary due diligence, intends to make American Sierra a wholly owned subsidiary of Colorado Goldfields Inc. Existing shareholders of American Sierra will receive a ratio of Colorado Goldfields Class A shares in exchange for their American Sierra shares.
American Sierra Gold Corp. incorporated in Nevada on January 30, 2007. They are focused on the acquisition, exploration, development, mining, and production of precious metals, with emphasis on gold and silver. The Company's plan of operation is to conduct mineral exploration activities in order to assess whether the sites possesses mineral deposits of gold or other precious metals in commercial quantities, capable of commercial extraction. The MOU originally set February 29, 2012 as the date by which the transaction shall be completed. On February 16, 2012, the date was extended to August 31, 2012.
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Weather conditions in San Juan County, Colorado vary by season. During the winter season our activities are concentrated on analysis, planning, and development of properties in more temperate climates. Surface drilling and property exploration in San Juan County can reasonably take place between May and late October. Of course underground operations continue year-round.
Our plan of operation for fiscal 2012 is to: 1) complete all necessary permitting requirements, 2) bring the Mill into operation, 3) continue seeking funding for our operations and mining exploration program, and 4) commence custom/toll milling of ore from the companies that have entered into preliminary purchase orders with us and from our own mines.
Liquidity and Capital Resources
We were formed in early 2004 and have had limited activity until our acquisition of the option to acquire interests in the San Juan Properties. Since we have received no revenue from the production of gold or other metals, we have relied on funds received in connection with our equity and debt offerings to finance our ongoing operations. We have experienced net losses since inception, and we expect we will continue to incur losses for the next year. As of the date of this filing, we do not have any available external source of funds. We require additional capital in the near term to maintain our current operations. Although we are actively seeking additional equity and debt financing, such financing may not be available on acceptable terms, if at all.
Our financial statements have been prepared assuming that we will continue as a going concern. Since our inception in February 2004, we have not generated revenue and have incurred net losses. The Company has a working capital deficit of $2,875,778 at February 29, 2012; an incurred net loss of $2,439,740 for the six months ended February 29, 2012, and has incurred a deficit accumulated during the exploration stage of $21,643,988 for the period from February 11, 2004 (inception) through February 29, 2012. Accordingly, we have not generated cash flows from operations and have primarily relied upon advances from stockholders, promissory notes, advances from unrelated parties, and equity financing to fund our operations. These conditions (as indicated in the 2011 audit report of our Independent Registered Public Accounting Firm), raise substantial doubt about our ability to continue as a going concern.
We currently have minimal cash on hand. Accordingly, we do not have sufficient cash resources or current assets to pay our obligations, and we have been meeting many of our obligations through the issuance of our common stock to our employees, consultants and advisors as payment for goods and services. Considering the foregoing, we are dependent on additional financing to continue our operations and exploration efforts and, if warranted, to develop and commence mining operations. Our significant capital requirements for the foreseeable future include exploration commitments of $650,000 on our mining property options, payment of approximately $480,164 on a promissory note and accrued interest, which is collateralized by the Mill (due July 1, 2012), payment on notes payable to related parties including accrued interest totaling $329,667, re-activation expenses for the Mill, and our corporate overhead expenses.
We are actively seeking additional equity or debt financing, and have secured two sources of funding. However, there can be no assurance that the total funds required during the next twelve months or thereafter will be available from external sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force us to substantially curtail or cease operations and would, therefore, have a material adverse effect on our business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on our existing shareholders. All of these factors have been exacerbated by the extremely unsettled credit and capital markets presently existing.
We are dependent upon the DRMS/MLRB, approving an amendment to the existing reclamation permit for the Mill. The amendment, if approved, would cure the current cease and desist order, which was issued in 2005, and allow the Mill to become operational. The permit amendment process is lengthy and complex. We submitted an amendment to our existing reclamation permit on January 27, 2012 and the DRMS has set May 1, 2012 as the date they plan to make their decision.
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Ultimately, should the Company not be able to obtain the approval of a new permit amendment, management anticipates that the Mill will be reclaimed and liquidated.
As of February 29, 2012, we had cash of approximately $5,700, other current assets of approximately $102,500 and current liabilities of approximately $2,984,000, resulting in a working capital deficit of approximately $2,876,000. We used cash of approximately $227,000 in operating activities for the six months ended February 29, 2012. Investing activities used cash of approximately $3,000 for the six months ended February 29, 2012, and financing activities was provided with cash of approximately $224,000 received primarily from the issuance of convertible debt.
Results of Operations
Three months ended February 29, 2012 Compared to the Three Months Ended February 28, 2011
For the three months ended February 29, 2012, we incurred a net loss of approximately $1,467,000 compared to a net loss of approximately $1,383,000 for the three months ended February 28, 2011.
For the three months ended February 29, 2012 and 2011, overall mineral property and exploration costs increased $26,000 to $145,000 from $119,000 for the same period last year. The increase was due to increased expenses related to the permit for the Mill and costs associated with additional supervisory management of the Mill and mineral properties.
Professional fees decreased $49,000 from $56,000 for the three months ended February 28, 2011 to $7,000 for the three months ended February 29, 2012. The decrease was due to reduced legal expenses related to the Hennis lawsuit. (See "Part II, Item 1. Legal Proceedings".)
General and administrative costs were approximately $776,000 and $672,000 for the three months ended February 29, 2012 and 2011, respectively; an increase of $104,000. The increase is due primarily to the specific reasons presented below.
Consulting expenses were $393,000 and $454,000 for the three months ended February 29, 2012 and 2011, respectively, a decrease of $61,000. The decrease is due to the reduced use of outside services for corporate communications, economic imaging, and an increase in the use of results based compensation for services rendered.
Salaries were $133,000 and $93,000 for the three months ended February 29, 2012 and 2011, respectively, an increase of $40,000. The increase is due to higher compensation pursuant to our executive compensation agreements entered into in July, 2011. All salaries are either accrued as an unpaid liability or, paid in the form of stock awards in lieu of cash, which are exempt under Rule 16b-3. Our Chief Executive Officer and Chief Financial Officer have forgone any cash compensation since September 2008. However, compensation for amounts owed pursuant to our executive employment agreements has been fully accrued as of February 29, 2012.
Filing fees and transfer agent fees were $37,000 and $9,000 for the three months ended February 29, 2012 and February 28, 2011 respectively. The $28,000 increase was due to filing fees in the state of Nevada associated with an increase of the number of authorized Class A Common Stock shares.
Bank and brokerage fees increased to $14,600 for the three months ended February 29, 2012 from $3,500 for the three months ended February 28, 2011. The increase was due to higher costs associated with transacting the Class A Common Stock shares of the Company.
Investor relations costs were $4,500 and $80,000 for the three months ended February 29, 2012 and February 28, 2011, respectively, a 94% decrease of $75,500. The decrease was due to decreased radio media presence.
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Licenses and Permit fees increased to $4,700 from zero for the three months ended February 29, 2012 and February 28, 2011, respectively. The increase was due the required filing fee associated with the permit amendment application for the Mill.
Interest expense was $266,000 and $324,000 for the three months ended February 29, 2012 and 2011, respectively. The decrease of $58,000 is primarily related to the required accounting treatment of convertible debt derivative liabilities and the amortization of debt discounts.
Six months ended February 29, 2012 Compared to the Six Months Ended February 28, 2011
For the six months ended February 29, 2012, we incurred a net loss of approximately $2,440,000 compared to a net loss of approximately $2,770,000 for the six months ended February 28, 2011.
For the six months ended February 29, 2012 and February 28, 2011, overall mineral property and exploration costs increased $83,000 to $333,000 from $250,000 for the same period last year. The increase was due to increased expenses related to the permit for the Mill and costs associated with additional supervisory management of the Mill and mineral properties.
Professional fees decreased $45,000 from $171,000 for the six months ended February 28, 2011 to $126,000 for the six months ended February 29, 2012. The decrease was due to reduced legal expenses related to the Hennis lawsuit. (See "Part II, Item 1. Legal Proceedings".)
General and administrative costs were approximately $1,000,000 and $1,200,000 for the six months ended February 29, 2012 and February 28,2011, respectively; a decrease of $200,000. The decrease is due primarily to the specific reasons presented below.
Consulting expenses were $524,000 and $653,000 for the six months ended February 29, 2012 and February 28, 2011, respectively, a decrease of $129,000. The decrease is due to the reduced use of outside services for corporate communications, economic imaging, and an increase in the use of results based compensation for services rendered.
Salaries were $244,000 and $186,000 for the six months ended February 29, 2012 and February 28, 2011, respectively, an increase of $58,000. The increase is due to higher compensation pursuant to our executive compensation agreements entered into in July, 2011. All salaries are either accrued as an unpaid liability or, paid in the form of stock awards in lieu of cash, which are exempt under Rule 16b-3. Our Chief Executive Officer and Chief Financial Officer have forgone any cash compensation since September 2008. However, compensation for amounts owed pursuant to our executive employment agreements has been fully accrued as of February 29, 2012.
Filing fees and transfer agent fees were $41,000 and $16,000 for the six months ended February 29, 2012 and February 28, 2011 respectively. The $25,000 increase was due to filing fees in the state of Nevada associated with an increase of the number of authorized Class A Common Stock shares.
Bank and brokerage fees increased to $21,600 for the six months ended February 29, 2012 from $16,000 for the six months ended February 28, 2011. The increase was due to higher costs associated with transacting the Class A Common Stock shares of the Company.
6-Apr-2012
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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.
This discussion addresses matters we consider important for an understanding of our financial condition and results of operations as of and for the three and six months ended February 29, 2012, as well as our future results. It consists of the following subsections:
? "Plan of Operation," which provides a brief summary of our consolidated results and financial position and the primary factors affecting those results, as well as a summary of our expectations for 2012;
? "Liquidity and Capital Resources," which contains a discussion of our cash flows and liquidity, investing activities and financing activities;
? "Results of Operations," which sets forth an analysis and comparison of the three and six months ended February 29, 2012 compared to the three and six months ended February 28, 2011;
? "Critical Accounting Policies," which provides an analysis of the accounting policies we consider critical because of their effect on the reported amounts of assets, liabilities, income and/or expenses in our financial statements and/or because they require difficult, subjective or complex judgments by our management; and
? "Recent Accounting Pronouncements," which summarizes recently published authoritative accounting guidance, how it might apply to us, and how it might affect our future results.
Plan of Operation
The following discussion updates our plan of operation for the foreseeable future. The discussion also summarizes the results of our operations for the three and six months ended February 29, 2012 and compares those results to the three and six months ended February 28, 2011.
During the second quarter of fiscal 2012, we continued to experience the negative effects of the financial markets upheaval, which made capital acquisition extremely difficult.
During the second quarter of fiscal 2012, we focused primarily on re-activation of the Pride of the West Mill (the "Mill"), primarily working towards amending the current reclamation permit, securing agreements for "custom" or "toll" milling, and seeking out new properties to acquire, explore and develop.
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Operations at the Pride of the West Mill:
During the second quarter of fiscal 2012, we completed revisions to our prior reclamation permit amendment application and on January 27, 2012 submitted the permit amendment application to the DRMS. The application was deemed "complete for filing" by the DRMS and a decision date was scheduled for May 1, 2012.
A key factor for re-activating the Mill is the disposal of tailings; that is, the material that remains after ore has been processed. Our original mill tailings disposal method was to move mill tailings (finely ground waste rock from which the valuable metals have been removed in the milling process) as a slurry, generally consisting of 15% solids and 85% water, to a closed, lined tailings pond. After the solids have settled and separated from the water, some of the process water is returned to the mill for re-use. The tailings pond is essentially a lake containing saturated mill tailings (liquid mud).
However, through the permit amendment process during fiscal years 2010 and 2011, and working with the Division of Reclamation Mining and Safety, we have learned that this method of tailings disposal has more challenges than originally anticipated.
In December 2010, the Colorado Division of Reclamation, Mining and Safety ("Division" or "DRMS"), accepted the parts of the amendment regarding the following.
? Mill building;
? Laboratory building;
? Ore stockpile area;
? Leach plant building;
? River protection dike;
? Procedures for custom or "toll" milling.
Since that time, we have developed a "dry stack" method of tailings disposal as part of a new permit amendment ("AM-03"), which was submitted on January 27, 2012.
According to Colorado law, the Company is required to "publish notice in a newspaper of general circulation once a week for four consecutive weeks." Further, the regulations require that the Company notify all owners of record of surface and mineral rights, holders of any recorded easements, and all owners of record of lands within 200 feet of the permit boundary and affected land via certified mail and submit proof of the notices prior to the decision date.
The Company began notice publications on February 9, 2012 in the Silverton Standard and the Miner and completed the publication requirement on March 1, 2012. Certified mail notices were completed on February 9, 2012. The comment period closed on March 21, 2012. The Division received four comments/objections during the comment period. As of the date of this report, it is uncertain whether any of the comments/objections will require a hearing before the Colorado Mined Land Reclamation Board.
As part of the Mill re-activation plan, we will be reclaiming the old tailings ponds on the property. That work is pursuant to a Technical Revision ("TR"), to the existing permit. On March 25, 2011 we filed Technical Revision 11 ("TR-11") with the DRMS. TR-11 was approved by the DRMS on June 27, 2011.
TR-11 consists of 8 work tasks that will commence immediately upon approval from the DRMS. The 8 tasks within TR-11 will address the closure of six test pits and two geotechnical drill holes located within the Upper and Lower Tailings Pond areas of the site and the relocation and final disposition of certain Waste Rock, initiates the final reclamation of the Mill Drain Pond, the Upper Tailings Pond and the Lower Tailings Pond. These were the major problem areas in the December 2010 permit amendment, and now are removed from the scope of the permit.
The first several tasks were completed during the summer of 2011; however, early snowfall caused suspension of the remaining work until spring 2012.
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We believe that this new permit amendment along with the extension of the Mill mortgage to July 1, 2012, will move the business plan forward.
Operations at the Utah & Uranium Claims:
On June 13, 2011, we purchased the Pay Day and Rage claims. These claim groups consist of 63 (55 Pay Day and 8 Rage) claims. The Pay Day claim group is located in Township 32 South, Range 24 East of the Salt Lake Meridian in Sections 26, 27, 34, and 35, in San Juan County northeast of Monticello, Utah. The Rage claim group spans Stevens Canyon on the southeast flank of the Seven Sisters Buttes in Township 33 South, Range 20 East of the Salt Lake Meridian in Section 33, San Juan County, Utah.
An initial internal analysis by Company president Lee R. Rice indicates that the historical information used by others did not account for all possible sources and additional potential resource at depth. For that reason, we have engaged Allan P. Juhas, Ph.D. in Economic Geology, University of Manitoba 1973, to undertake the preparation of an NI43-101 technical report based upon the Company's exploration plan and previous work that can be verified. Dr. Juhas has over 50 years' experience in a broad spectrum of precious metals and base metals geological pursuits. He is well recognized in the industry, and prepares a number of NI43-101 reports each year.
We are in the process of constructing an N1431-01 compliant report to confirm and verify the value of these assets.
We acquired the properties in all stock transaction consisting of 125,000,000 shares of 1-year restricted Class A Common Stock and 125,000,000 shares of 2-year restricted Class A Common Stock.
Operations at the Silver Wing Mine:
In anticipation of our final acquisition of the Silver Wing Mine, we submitted a Notice of Intent to Conduct Prospecting Activities for activities at the Silver Wing Mine. The application was approved on November 18, 2011. Prior to any work commencing on at the Silver Wing Mine, we will be required to post a $25,000 financial warranty with the DRMS for reclamation costs.
Activities to be completed under this initial approval of work at the Silver Wing Mine will include re-sampling key areas of the mine by taking approximately 250 channel samples to verify records of sample data taken by prior operators and consultants. In preparation for drilling, work will also include the verification of underground mine maps, evaluation of prior underground development work and the condition of existing workings. This information will be utilized to develop an on-going core drilling program and an initial mining plan.
The approval of this project is particularly significant because it allows for an investigation to be made to determine the source of the existing mine drainage of approximately 20 gallons per minute and evaluate the potential for controlling or eliminating this discharge with an underground grouting program which could avoid the need for a discharge permit. If it is determined that the discharge cannot be eliminated, then an evaluation will be made of what actions can be taken to minimize the discharge, and assuming a permit is required, what permit conditions would be most effective and appropriate for preventing discharges of pollutants into the Animas River.
As of the date of this report, we are awaiting improved weather conditions so the work may be commenced.
Operations at the Brooklyn Mine:
We completed the 2011 exploration plan on the Brooklyn Mine during first quarter of fiscal 2012 and prepared samples during the second quarter of fiscal 2012. 178 samples have been prepared and boxed for shipment to Reno, Nevada for sample preparation. The samples will then be forwarded to a certified laboratory in Canada for analysis. 164 samples will be analyzed for geochemical components and 14 samples will be analyzed by fire assay for gold and silver.
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The overall goal of the exploration project was to confirm historic data on two major targets; including the sampling of the intersection of two veins, the Rainbow and the Gloucester. Historic sampling data indicates a probable zone of high grade gold in the intersection area. Sampling of this area has been completed. The Company is awaiting assay results.
The second major sampling project was geochemical sampling of the property. Soil and/or rock chip samples on a grid system with sample lines 125 meters apart and 50 meters between sample points have been collected. The samples will be analyzed for the presence of 48 elements. The concentration of the 48 elements within the grid enables the Company's geologists to determine the shape and course of known structures and to identify structures which are not visible from the surface.
In addition to gold and silver, previous studies in the area have identified a number of trace elements in the vicinity of orebodies. We will closely monitor the data for indications of economically important elements, which include the rare metals tellurium and indium and monazite, which are essential to many of today's green technologies. Tellurium is known to be present in Brooklyn Mine ores. Indium is known to be associated with zinc in the district.
Although very speculative, historic information has revealed enough to warrant study of a possible intrusive breccia pipe. The area surrounding the Brooklyn is known for high grade ores contained in these breccia pipes, which geologists call "spectacular." Previous investigations have shown that a number of veins radiate from the possible breccia zone. One short crosscut into the zone indicates that ore grade silver might extend to the perimeter of the zone. This prospective pipe is known as the Growler Pipe.
Upon completion of the geotechnical sample analysis, the diamond drilling plan will be prepared and application for drilling permits will be submitted to the state.
Operations at the King Solomon Mine:
We completed our 2011 exploration program on the King Solomon Mine during first quarter of 2012.
The land position surveys were completed and corner monuments were set for the King Solomon claims. Several original corners, first placed in the 1800s, were found and re-monumented, which verifies the claim locations. Specific survey control points were completed to establish and fix the location of the two principal mine portals relative to the claim boundaries and surface vein expressions.
Exploration teams entered and explored the underground workings, locating important vein structures, and taking ore samples from each. Underground workings also revealed areas that are ready to be mined along with those that will require re-habilitation and timbering.
Most importantly, sufficient data was collected to begin the construction of the 3-D model of the mine; the most efficient way to develop the surface and underground diamond drilling exploration plan.
The King Solomon Mine is located on the southern flank of King Solomon Mountain, just a few hundred yards up the mountain from the first discovery of gold in the San Juan Mountains in Little Giant Basin.
As of the date of this report, we are awaiting improved weather conditions so the work may be commenced.
Planned Acquisitions:
On October 20, 2011 we entered into a non-binding Memorandum of Understanding ("MOU"), with American Sierra Gold Corp ("American Sierra"). The MOU, which provides for customary due diligence, intends to make American Sierra a wholly owned subsidiary of Colorado Goldfields Inc. Existing shareholders of American Sierra will receive a ratio of Colorado Goldfields Class A shares in exchange for their American Sierra shares.
American Sierra Gold Corp. incorporated in Nevada on January 30, 2007. They are focused on the acquisition, exploration, development, mining, and production of precious metals, with emphasis on gold and silver. The Company's plan of operation is to conduct mineral exploration activities in order to assess whether the sites possesses mineral deposits of gold or other precious metals in commercial quantities, capable of commercial extraction. The MOU originally set February 29, 2012 as the date by which the transaction shall be completed. On February 16, 2012, the date was extended to August 31, 2012.
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Weather conditions in San Juan County, Colorado vary by season. During the winter season our activities are concentrated on analysis, planning, and development of properties in more temperate climates. Surface drilling and property exploration in San Juan County can reasonably take place between May and late October. Of course underground operations continue year-round.
Our plan of operation for fiscal 2012 is to: 1) complete all necessary permitting requirements, 2) bring the Mill into operation, 3) continue seeking funding for our operations and mining exploration program, and 4) commence custom/toll milling of ore from the companies that have entered into preliminary purchase orders with us and from our own mines.
Liquidity and Capital Resources
We were formed in early 2004 and have had limited activity until our acquisition of the option to acquire interests in the San Juan Properties. Since we have received no revenue from the production of gold or other metals, we have relied on funds received in connection with our equity and debt offerings to finance our ongoing operations. We have experienced net losses since inception, and we expect we will continue to incur losses for the next year. As of the date of this filing, we do not have any available external source of funds. We require additional capital in the near term to maintain our current operations. Although we are actively seeking additional equity and debt financing, such financing may not be available on acceptable terms, if at all.
Our financial statements have been prepared assuming that we will continue as a going concern. Since our inception in February 2004, we have not generated revenue and have incurred net losses. The Company has a working capital deficit of $2,875,778 at February 29, 2012; an incurred net loss of $2,439,740 for the six months ended February 29, 2012, and has incurred a deficit accumulated during the exploration stage of $21,643,988 for the period from February 11, 2004 (inception) through February 29, 2012. Accordingly, we have not generated cash flows from operations and have primarily relied upon advances from stockholders, promissory notes, advances from unrelated parties, and equity financing to fund our operations. These conditions (as indicated in the 2011 audit report of our Independent Registered Public Accounting Firm), raise substantial doubt about our ability to continue as a going concern.
We currently have minimal cash on hand. Accordingly, we do not have sufficient cash resources or current assets to pay our obligations, and we have been meeting many of our obligations through the issuance of our common stock to our employees, consultants and advisors as payment for goods and services. Considering the foregoing, we are dependent on additional financing to continue our operations and exploration efforts and, if warranted, to develop and commence mining operations. Our significant capital requirements for the foreseeable future include exploration commitments of $650,000 on our mining property options, payment of approximately $480,164 on a promissory note and accrued interest, which is collateralized by the Mill (due July 1, 2012), payment on notes payable to related parties including accrued interest totaling $329,667, re-activation expenses for the Mill, and our corporate overhead expenses.
We are actively seeking additional equity or debt financing, and have secured two sources of funding. However, there can be no assurance that the total funds required during the next twelve months or thereafter will be available from external sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force us to substantially curtail or cease operations and would, therefore, have a material adverse effect on our business. Further, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significantly dilutive effect on our existing shareholders. All of these factors have been exacerbated by the extremely unsettled credit and capital markets presently existing.
We are dependent upon the DRMS/MLRB, approving an amendment to the existing reclamation permit for the Mill. The amendment, if approved, would cure the current cease and desist order, which was issued in 2005, and allow the Mill to become operational. The permit amendment process is lengthy and complex. We submitted an amendment to our existing reclamation permit on January 27, 2012 and the DRMS has set May 1, 2012 as the date they plan to make their decision.
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Ultimately, should the Company not be able to obtain the approval of a new permit amendment, management anticipates that the Mill will be reclaimed and liquidated.
As of February 29, 2012, we had cash of approximately $5,700, other current assets of approximately $102,500 and current liabilities of approximately $2,984,000, resulting in a working capital deficit of approximately $2,876,000. We used cash of approximately $227,000 in operating activities for the six months ended February 29, 2012. Investing activities used cash of approximately $3,000 for the six months ended February 29, 2012, and financing activities was provided with cash of approximately $224,000 received primarily from the issuance of convertible debt.
Results of Operations
Three months ended February 29, 2012 Compared to the Three Months Ended February 28, 2011
For the three months ended February 29, 2012, we incurred a net loss of approximately $1,467,000 compared to a net loss of approximately $1,383,000 for the three months ended February 28, 2011.
For the three months ended February 29, 2012 and 2011, overall mineral property and exploration costs increased $26,000 to $145,000 from $119,000 for the same period last year. The increase was due to increased expenses related to the permit for the Mill and costs associated with additional supervisory management of the Mill and mineral properties.
Professional fees decreased $49,000 from $56,000 for the three months ended February 28, 2011 to $7,000 for the three months ended February 29, 2012. The decrease was due to reduced legal expenses related to the Hennis lawsuit. (See "Part II, Item 1. Legal Proceedings".)
General and administrative costs were approximately $776,000 and $672,000 for the three months ended February 29, 2012 and 2011, respectively; an increase of $104,000. The increase is due primarily to the specific reasons presented below.
Consulting expenses were $393,000 and $454,000 for the three months ended February 29, 2012 and 2011, respectively, a decrease of $61,000. The decrease is due to the reduced use of outside services for corporate communications, economic imaging, and an increase in the use of results based compensation for services rendered.
Salaries were $133,000 and $93,000 for the three months ended February 29, 2012 and 2011, respectively, an increase of $40,000. The increase is due to higher compensation pursuant to our executive compensation agreements entered into in July, 2011. All salaries are either accrued as an unpaid liability or, paid in the form of stock awards in lieu of cash, which are exempt under Rule 16b-3. Our Chief Executive Officer and Chief Financial Officer have forgone any cash compensation since September 2008. However, compensation for amounts owed pursuant to our executive employment agreements has been fully accrued as of February 29, 2012.
Filing fees and transfer agent fees were $37,000 and $9,000 for the three months ended February 29, 2012 and February 28, 2011 respectively. The $28,000 increase was due to filing fees in the state of Nevada associated with an increase of the number of authorized Class A Common Stock shares.
Bank and brokerage fees increased to $14,600 for the three months ended February 29, 2012 from $3,500 for the three months ended February 28, 2011. The increase was due to higher costs associated with transacting the Class A Common Stock shares of the Company.
Investor relations costs were $4,500 and $80,000 for the three months ended February 29, 2012 and February 28, 2011, respectively, a 94% decrease of $75,500. The decrease was due to decreased radio media presence.
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Licenses and Permit fees increased to $4,700 from zero for the three months ended February 29, 2012 and February 28, 2011, respectively. The increase was due the required filing fee associated with the permit amendment application for the Mill.
Interest expense was $266,000 and $324,000 for the three months ended February 29, 2012 and 2011, respectively. The decrease of $58,000 is primarily related to the required accounting treatment of convertible debt derivative liabilities and the amortization of debt discounts.
Six months ended February 29, 2012 Compared to the Six Months Ended February 28, 2011
For the six months ended February 29, 2012, we incurred a net loss of approximately $2,440,000 compared to a net loss of approximately $2,770,000 for the six months ended February 28, 2011.
For the six months ended February 29, 2012 and February 28, 2011, overall mineral property and exploration costs increased $83,000 to $333,000 from $250,000 for the same period last year. The increase was due to increased expenses related to the permit for the Mill and costs associated with additional supervisory management of the Mill and mineral properties.
Professional fees decreased $45,000 from $171,000 for the six months ended February 28, 2011 to $126,000 for the six months ended February 29, 2012. The decrease was due to reduced legal expenses related to the Hennis lawsuit. (See "Part II, Item 1. Legal Proceedings".)
General and administrative costs were approximately $1,000,000 and $1,200,000 for the six months ended February 29, 2012 and February 28,2011, respectively; a decrease of $200,000. The decrease is due primarily to the specific reasons presented below.
Consulting expenses were $524,000 and $653,000 for the six months ended February 29, 2012 and February 28, 2011, respectively, a decrease of $129,000. The decrease is due to the reduced use of outside services for corporate communications, economic imaging, and an increase in the use of results based compensation for services rendered.
Salaries were $244,000 and $186,000 for the six months ended February 29, 2012 and February 28, 2011, respectively, an increase of $58,000. The increase is due to higher compensation pursuant to our executive compensation agreements entered into in July, 2011. All salaries are either accrued as an unpaid liability or, paid in the form of stock awards in lieu of cash, which are exempt under Rule 16b-3. Our Chief Executive Officer and Chief Financial Officer have forgone any cash compensation since September 2008. However, compensation for amounts owed pursuant to our executive employment agreements has been fully accrued as of February 29, 2012.
Filing fees and transfer agent fees were $41,000 and $16,000 for the six months ended February 29, 2012 and February 28, 2011 respectively. The $25,000 increase was due to filing fees in the state of Nevada associated with an increase of the number of authorized Class A Common Stock shares.
Bank and brokerage fees increased to $21,600 for the six months ended February 29, 2012 from $16,000 for the six months ended February 28, 2011. The increase was due to higher costs associated with transacting the Class A Common Stock shares of the Company.
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