Form 10QSB for GOLDEN PHOENIX MINERALS INC /MN/
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14-Aug-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements and Associated Risks. This filing contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (1) our estimates of mineral reserves and mineralized material, (2) our projected sales and profitability, (3) our growth strategies, (4) anticipated trends in our industry, (5) our future financing plans, (6) our anticipated needs for working capital, (7) our lack of operational experience and (8) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," or "project" or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in this filing generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Certain Business Risk Factors" and matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur as projected.
Overview
Golden Phoenix Minerals, Inc. is a mineral exploration, development and production company, formed in Minnesota on June 2, 1997, specializing in acquiring and consolidating mineral properties with potential production and future growth through exploration discoveries. Acquisition emphasis is focused on properties containing gold, silver, and other strategic minerals that present low political and financial risk and exceptional upside potential. Our main focus remains in Nevada where the political and geologic profile consistently ranks at the top of the Frazier Institute's worldwide mineral analysis, but we are committed to creating value wherever opportunity lies.
Presently our primary mining property assets are the Ashdown molybdenum/gold project and the (idled) Mineral Ridge gold mine (Figure 1). On December 23, 2004, we terminated the Joint Venture Agreement with International Enexco Ltd. ("Enexco") dated as of January 28, 1998 (the "Enexco Agreement") and the Exploration License and Option to Purchase with F.W. Lewis, Inc. ("Lewis") dated as of July 10, 1998, as amended on February 19, 2003, and as further amended on May 7, 2003 (collectively, the "Lewis Agreement") relating to an interest in the Contact Property. We retained six (6) claims at the Contact Property, which were sold outright to Enexco on June 27, 2006. We currently hold no further direct interest at the Contact Property. On January 31, 2006, we received the final payment for our Borealis project from Borealis Mining Company pursuant to the purchase contract entered into on January 31, 2005 and retain no further interest at Borealis. On April 18, 2006, we entered into a purchase agreement with Robert R. Robitaille, Douglas Lalonde, Sheldon Davis and Ronald E. Dockweiler for the Northern Champion molybdenum property located in Ontario, Canada (Figure 2).
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Figure 1. Map showing the locations of the Nevada properties discussed in this report. Ashdown and Mineral Ridge remain the only active properties, with the assets at Borealis and Contact both having been 100% divested in 2006.
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Figure 2. Map showing the Northern Champion property located within the Province of Ontario, Canada. This property was acquired in April 2006.
The Ashdown property was secured under a Letter Agreement with Win-Eldrich Mines ("Win-Eldrich") executed on February 5, 2004. The terms of the joint venture agreement gives us the right to earn 60%, as manager and operator of project, from Win-Eldrich (40%) as owner of the property. We can earn an undivided vested 60% interest in the project in either of two (2) ways: (1) by placing the project into profitable production using a small mill, or (2) spending $5,000,000 toward development of the project. We have four (4) years to complete vesting into the project. Upon signing the agreement, we paid Win-Eldrich $50,000, and starting three (3) months after the signing began paying a monthly sum of $5,000 until a cash distribution through profitable production is achieved. In May 2006, we exceeded the $5,000,000 benchmark for
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development expenditures at Ashdown and formally notified Win-Eldrich that we had vested our 60% interest as provided under clause (2) of the Letter Agreement. By the end of June 2006, the only significant permits remaining for approval by the regulators were the Environmental Assessment and the Plan of Operations. Final versions of these documents have been submitted to the Bureau of Land Management and are currently under review.
We purchased the Mineral Ridge mine in late 2000 out of bankruptcy for $225,000 cash and the assumption of a $382,000 liability to Sierra Pacific Power Co. for a facility charge for the installation of a grid power line. Additional commitments were also assumed, including obligations to pay advanced royalty payments of $60,000 per year posting an interim reclamation bond for approximately $1,800,000 with the Bureau of Land Management, which allowed us to hold the Mineral Ridge property while other permitting was underway. On May 8, 2003, we obtained a new operating permit and on June 23, 2003, we increased reclamation bond to approximately $2,700,000 and began mine operations and gold production from the leach pad through the addition of new cyanide to the regular leach fluids and from initiating open pit mining and stockpile transfers to the pad. Pursuant to our internally generated feasibility study for Mineral Ridge, which was evaluated and reported by Behre Dolbear and Company, Inc., an independent mineral auditing consultant ("Behre Dolbear"), the total value of the gold sales over the six (6) year mine life, at a $325 gold price, is estimated to be approximately $59,000,000. The total operating cost, which includes royalty payments, refining costs, mining costs, processing costs, reclamation costs, and operating expenses, is estimated to be approximately $36,000,000. Capital cost, including reclamation bonding, is estimated to be approximately $6,000,000. The net income after taxes is estimated to be approximately $12,000,000.
On January 12, 2005, we announced the inauguration of a comprehensive restructuring of all mining operations beginning with the idling of the Mineral Ridge gold mine. The idling is designed to re-deploy manpower and resources, improve cash flow, and accelerate the development of certain high-yield mine assets. Mineral Ridge is scheduled to resume full operations pending management evaluation of an engineering study commissioned to identify techniques for improving recovery rates from existing and newly uncovered higher-grade ore deposits. We placed the Mineral Ridge mine into a leach-only status, due in part to the higher costs of winter operation and sub-optimal gold recovery conditions. Mining and crushing operations are suspended for the time being and employees who conducted this work have been furloughed. Employees have been retained to maintain the leach pad and round-the-clock circulation of leach solutions have been retained. They will also ensure site security, environmental compliance and safety protocols.
The Borealis Property was held under a lease agreement with the Borealis Partnership, which consists of three (3) separate individuals who entered an exploration partnership to facilitate leasing the entire mineralized zone owned by the three partners. On July 18, 2003, we signed a Joint Venture Agreement for our Borealis gold project with Gryphon Gold Corporation ("Gryphon Gold"). Under the terms of the agreement, Gryphon Gold had the right to acquire a 50% interest in the property after incurring qualified expenditures on work programs or making payments to us in the aggregate of $5,000,000 over a four (4) year period. Gryphon Gold had the right to acquire an additional 20% by delivering to us a feasibility study for mine production based on a mineable reserve of 500,000 ounces of gold or gold equivalent or by incurring an additional $4,000,000 in expenditures. Gryphon Gold paid us $25,000 in consideration of a 75 day due diligence period and also paid an additional $100,000 upon signing the definitive Joint Venture Agreement. On January 31, 2005, we closed an agreement to sell our 30% interest in the Borealis gold project to Borealis Mining Company, a subsidiary of Gryphon Gold, ("Borealis Mining") for a series of cash payments totaling $1,400,000. On January 31, 2006, we received the final payment under the contract and retain no further interest in the assets or liabilities associated with the Borealis Property.
The Contact Property was held through agreements with two (2) separate entities, Enexco and Lewis. On January 28, 1998, pursuant to the terms of a Letter Agreement with Enexco (the "Letter Agreement"), we acquired the right to earn a 60% interest in the Enexco patented mining claims through a combination of annual work commitments totaling $2,600,000 on the portion of the property owned by Enexco and $4,000 per month payments to Enexco totaling $313,000 over seven
(7) years. The Letter Agreement was terminated on December 23, 2004. At June 27, 2006, the accrued unpaid liabilities for the minimum work commitments and monthly lease payments due to Enexco totaled $2,420,643. On June 27, 2006, we entered into a Termination Agreement with Enexco affirming that: (1) the Letter Agreement was terminated with an effective date of January 22, 2005; (2) we release any claim of further right, title or interest in the Contact Property; and (3) Enexco releases us from any and all claims, demands, or liabilities arising from our activities at the Contact Property. Upon signing the Termination Agreement, the accrued unpaid liabilities relating to the Letter Agreement were extinguished and reversed, resulting in a gain on extinguishment of debt in the amount of $2,420,643.
On July 10, 1998, we entered into an Exploration License and Purchase Option Agreement (the "Lewis Agreement") with Lewis for the portion of the Contact Property owned by Lewis (the "Lewis Property"). On February 19, 2003, the parties amended the Lewis Agreement to extended the term to December 31, 2007 and made other modifications to the original agreement. On May 7, 2003, the parties signed a second amendment to clarify that expenditures for work performed by us on either the Lewis Property or the adjoining property owned by Enexco would be applied to the minimum work commitment
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due under the Lewis Agreement. On December 23, 2004, we terminated the Lewis Agreement. On December 12, 2005, we were notified that 50% of the accrued and unpaid obligations due Lewis had been assigned to the Sharon F. Lewis Trust dated January 22, 2004 and the remaining 50% to the Frank Lewis Revocable Living Trust dated March 15, 2004. On July 3, 2006, we were served with a Summons and Complaint filed on June 29, 2006 by Frank Lewis Revocable Living Trust dated March 15, 2004 in the Second Judicial District Court of the State of Nevada in Washoe County. On August 7, 2006, we filed an Answer to the Summons and Complaint.
Concurrently with the filing of the Answer on August 7, 2006, we filed a Third Party Complaint in the Second Judicial District of the State of Nevada naming F.W. Lewis, Inc., the Sharon F. Lewis Trust dated January 22, 2004 and Roes 1 through 10, inclusive, as third party defendants to the action brought by the Frank Lewis Revocable Living Trust dated March 15, 2004, as described above. We are seeking declaratory relief in order to: (1) ascertain our rights and duties as well as the rights and duties of the named third party defendants as to the damages claimed in the complaint filed by the Frank Lewis Revocable Living Trust dated March 15, 2004 in the Second Judicial District Court of the State of Nevada in Washoe County, as outlined above; (2) find that we owe no further obligation under the Lewis Agreement; and (3) determine that the assignment by Lewis was ineffective and transferred no rights to either of the Frank Lewis Revocable Living Trust dated March 15, 2004 or the Sharon F. Lewis Trust dated January 22, 2004 to receive any obligation not already paid by us under the Lewis Agreement.
As disclosed in our Current Report on Form 8-K on July 7, 2006, we conveyed our interest in and to the six (6) unpatented mining claims at the Contact Property known as the "Red Metal" Claims to Enexco in exchange for 100,000 shares of Enexco.
We have a history of operating losses, and we expect to continue to incur operating losses in the near future as we initiate mining operations at our mines in 2006. As a development stage company, we have been funded primarily through stock sales and loans from officers and shareholders with the addition of revenue from gold sales through the production from the Mineral Ridge mine and the Common Stock Purchase Agreement with Fusion Capital Fund II, LLC ("Fusion Capital"). We intend to develop and mine existing reserves and to further delineate additional, identified mineral deposits at our mines. We also intend to explore for undiscovered deposits on these properties and to acquire and explore new properties, all with the view to enhancing the value of such properties. We will continue to entertain possible joint ventures with other mining company partners. We currently have one active joint venture pursuant to a Letter Agreement dated February 5, 2004 with Win-Eldrich for the Ashdown project. No other joint ventures are active at this time.
Our ability to satisfy the cash requirements of our mining development and exploration operations will be dependent upon future financing, utilization of the Fusion Capital equity vehicle and production from the Ashdown property. No assurance can be made that that additional financing will be obtained.
Recent Developments
Ashdown Project, Humboldt County, Nevada
The Ashdown molybdenum-gold project is located about 100 miles northwest of Winnemucca in Humboldt County, Nevada ("Ashdown"). The property covers about six
(6) square miles and is controlled by 101 unpatented mining claims. We signed a Joint Venture Agreement for the Ashdown property with Win-Eldrich on February 5, 2004. The terms of the agreement give us the right to earn in to 60%, as manager and operator of the project, with Win-Eldrich retaining 40% as owner of the property. We will earn an undivided vested 60% interest in the project in either of two (2) ways: (1) by placing the project into profitable production using a small mill, or (2) by spending $5,000,000 toward development of the project. We have four (4) years to complete vesting. Upon signing, we paid Win-Eldrich $50,000, and beginning three (3) months after signing will pay $5,000 per month until a cash distribution through profitable production is achieved. In May 2006, we exceeded the $5,000,000 benchmark for development expenditures at Ashdown and formally notified Win-Eldrich that we had vested our 60% interest as provided under clause (2) of the Letter Agreement.
In May 2006, we completed permitting a mill designed to run about 100 tons per day of mine production. Construction on the mill and tailings impoundment was 100% complete at quarter-end, and the facility will be prepared to process material in the near term. We plan to assess expansion into a larger operation once production is underway. We have a marketing agreement in place that facilitates the sale of the molybdenite concentrates (FOB mine) to an international metals broker. We will not be required to provide roasted material to the market, and do not have to locate third party roasting capacity under this contract.
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By the end of the June 2006, the only permits remaining before full mining operations commence were limited to the Environmental Assessment and the Plan of Operations ("POO"). Both of these documents are currently being reviewed by the agencies in their final forms. Interim progress at the mine has been accomplished under a Notice of Intent level permit that allows for the removal, test processing and marketing of a 1000-ton sample. The activities that have been undertaken to access the bulk sample are the same as those that would have occurred under the full POO, and the delays in the permitting process have not substantially impacted our operations to date. During the quarter ended June 30, 2006, we spent approximately $1,290,000 on this project.
Mineral Ridge Property
On November 7, 2000, we purchased the Mineral Ridge gold mine and related land, property and equipment located near Silver Peak, Nevada ("Mineral Ridge"). The mine was acquired out of bankruptcy and the trustee was conducting only minimum maintenance activities at the time. The permits associated with the Mineral Ridge mining operations had either expired or were under review by the State of Nevada and the Bureau of Land Management at the time of the purchase. Since then we have obtained new permits based upon a revised POO and posted an updated reclamation surety bond of approximately $2,700,000. The Mineral Ridge mine was placed in full operation in the spring of 2004.
We have determined, with the assistance of Behre Dolbear, that the Mineral Ridge mine and related mineral property has economically feasible proven and probable reserves that can be recovered using a cyanide heap leaching process. The combined reserves, at a 0.030 troy ounces of gold per ton cut off grade and a gold price of $325 per ounce, are 2,392,000 tons averaging 0.0758 troy ounces of gold per ton for 146,504 ounces of recoverable gold at an 80.8% process efficiency. There are an additional 10,000 recoverable ounces estimated to be on the leach pad. Silver values are not economically significant in the mineralized material at Mineral Ridge and have not been included in these reserve calculations. The combined direct operating costs, royalties, property and net proceeds tax burden, and costs of capital (total costs) are estimated at $241.63 per troy ounce.
Our operations have yielded certain amounts of precious metal product that has been sold resulting in revenues of $746,490 in 2005 and $1,560,419 in 2004. Costs associated with these activities totaled $210,940 in 2005 and $3,806,968 in 2004. Under-performance of the leach pads and associated high production costs resulted from our failure to meet the designed processing specifications as outlined under the Behre Dolbear feasibility study of May 2003. On January 12, 2005, we announced its decision to temporarily idle the mine pending full reviews of engineering and metallurgy, and optimization of a revised mine and operations plan.
Borealis Property
In the fourth quarter of 2004, we entered into negotiations with Gryphon Gold for the sale of the Borealis Property to Borealis Mining Company, a subsidiary of Gryphon Gold for cash payments totaling $1,400,000. Borealis Mining completed its final payment on January 31, 2006 and we retain no further rights or interest in the Borealis Property.
Contact Property
The Contact Property was held through agreements with two (2) separate entities, Enexco and Lewis. On January 28, 1998, pursuant to the terms of the Letter Agreement, we acquired the right to earn a 60% interest in the Enexco patented mining claims through a combination of annual work commitments totaling $2,600,000 on the portion of the property owned by Enexco and $4,000 per month payments to Enexco totaling $313,000 over seven (7) years. The Letter Agreement was terminated on December 23, 2004. At June 27, 2006, the accrued unpaid liabilities for the minimum work commitments and monthly lease payments due to Enexco totaled $2,420,643. On June 27, 2006, we entered into a Termination Agreement with Enexco affirming that: (1) the Letter Agreement was terminated with an effective date of January 22, 2005; (2) we release any claim of further right, title or interest in the Contact Property; and (3) Enexco releases us from any and all claims, demands, or liabilities arising from our activities at the Contact Property. Upon signing the Termination Agreement, the accrued unpaid liabilities relating to the Letter Agreement were extinguished and reversed, resulting in a gain on extinguishment of debt in the amount of $2,420,643.
On July 10, 1998, we entered into the Lewis Agreement for the Lewis Property. On February 19, 2003, the parties amended the Lewis Agreement to extended the term to December 31, 2007 and made other modifications to the original agreement. On May 7, 2003, the parties signed a second amendment to clarify that expenditures for work performed by us on either the Lewis Property or the adjoining property owned by Enexco would be applied to the minimum work commitment due under the Lewis Agreement. On December 23, 2004, we terminated the Lewis Agreement. On December 12, 2005, we were notified that 50% of the accrued and unpaid obligations due Lewis had been assigned to Sharon F. Lewis Trust dated
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January 22, 2004 and the remaining 50% to the Frank Lewis Revocable Living Trust dated March 15, 2004. On July 3, 2006, we were served with a Summons and Complaint filed on June 29, 2006 by Frank Lewis Revocable Living Trust dated March 15, 2004 in the Second Judicial District Court of the State of Nevada in Washoe County. On August 7, 2006, we filed an Answer to the Summons and Complaint.
Concurrently with the filing of the Answer on August 7, 2006, we filed a Third Party Complaint in the Second Judicial District of the State of Nevada naming F.W. Lewis, Inc., the Sharon F. Lewis Trust dated January 22, 2004 and Roes 1 through 10, inclusive, as third party defendants to the action brought by the Frank Lewis Revocable Living Trust dated March 15, 2004, as described above. We are seeking declaratory relief in order to: (1) ascertain our rights and duties as well as the rights and duties of the named third party defendants as to the damages claimed in the complaint filed by the Frank Lewis Revocable Living Trust dated March 15, 2004 in the Second Judicial District Court of the State of Nevada in Washoe County, as outlined above; (2) find that we owe no further obligation under the Lewis Agreement; and (3) determine that the assignment by Lewis was ineffective and transferred no rights to either of the Frank Lewis Revocable Living Trust dated March 15, 2004 or the Sharon F. Lewis Trust dated January 22, 2004 to receive any obligation not already paid by us under the Lewis Agreement.
As disclosed in our Current Report on Form 8-K on July 7, 2006, we conveyed our interest in and to the six (6) unpatented mining claims at the Contact Property known as the "Red Metal" Claims to Enexco in exchange for 100,000 shares of Enexco.
Lone Mountain Mill
The Lone Mountain Mill is located in Esmeralda County, Nevada ("Lone Mountain"). The property is also located about 15 miles west of Tonopah on the south side of U. S. Highways 6 & 95 and just north of Lone Mountain, a major local landmark. We signed two (2) option agreements: (1) for the mill and (2) for the private land the mill is located upon. These transactions were jointly negotiated with two (2) separate owners. Esmeralda Extraction Company, who owns approximately 1,128 acres of private land that the mill sits on, agreed to an option-to-purchase for the property. The individual owner of the mill equipment also agreed to an option-to-purchase for the mill. On October 27, 2004, a payment of $16,800 was made to Cow County Title located in Tonopah, Nevada, as were filings for the purchase of approximately 1,200 acres of mill site land. When completed, the land will have an estimated cost of $360,000. At this time, the purchase of Lone Mountain has been placed on hold due to economic feasibility studies on the property.
Northern Champion Property
The Northern Champion Property is approximately 880 acres in Griffith and Broughham Townships in the Province of Ontario, Canada ("Northern Champion Property"). On April 18, 2006, we executed a Purchase Agreement with Robert R. Robitaille, Douglas Lalonde, Sheldon Davis and Ronald E. Dockweiler (collectively, the "Vendors") to purchase five (5) registered claims totaling 22 units on the Northern Champion Property together with a NI43-101 report describing a molybdenite deposit within the area of the claims.
Pursuant to the terms of the agreement, we are obligated to pay $125,000 in four
(4) equal quarterly installments of $31,250 commencing on August 15, 2006. Each payment will be distributed as follows, $9,991.50 to Mr. Lalonde, $9,247.45 to each of Messrs. Robitaille and Davis, and $2,763.61 to Mr. Dockweiler. In addition, the agreement provides that we will issue 735,000 shares of our common stock to the Vendors. Said shares of our common stock have been issued as "restricted securities" as such term is defined in paragraph (a)(3) of Rule 144 as promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. Mr. Lalonde received 235,000 shares, each of Messrs. Robitaille and Davis received 217,500 shares and Mr. Dockweiler received 65,000 shares. The agreement also provides that the Vendors will retain a 3.3% Net Smelter Return on the sales of minerals taken from the Northern Champion Property. Each of Messrs. Lalonde, Robitaille and Davis will be entitled to receive 1% of the Net Smelter Return and Mr. Dockweiler will be entitled to receive 0.3% of the Net Smelter Return. Additionally, we will have the right of first refusal to purchase 1.65% of said Net Smelter Return from the Vendors for $1,650,000. We will have the ability to purchase 0.5% of said Net Smelter Return from each of Messrs. Lalonde, Robitaille and Davis and 0.15% of said Net Smelter Return from Mr. Dockweiler.
Alaskan Royalties
We own a 1% net smelter return royalty on the following properties located in Alaska. We are not required to perform any work or make any payments for these royalties:
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1. Glory Creek. This property is 100% controlled by Great American Mineral Exploration, Inc. ("GAME"). It is located in the Bonnifield mining district, about 60 miles south of Fairbanks. Exploration work on the property has defined an anomalous zone of gold mineralization that requires drilling for the next phase of work. We do not know if and when a discovery of gold mineralization will be made.
2. Uncle Sam. This property is 100% controlled by GAME. The property is located in the Richardson Gold District, about 60 miles southeast of Fairbanks. Their work has defined a strongly anomalous gold zone that requires drilling for the next phase of work. We do not know if and when a discovery of gold mineralization will be made.
Corporate Activities
On July 13, 2005, we entered into a Common Stock Purchase Agreement (the "Original Purchase Agreement") with Fusion Capital, pursuant to which Fusion . . .
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