SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-13078
CAPITAL GOLD CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 13-3180530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, 26TH floor, New York, NY 10005
(Address of principal executive offices)
Issuer's telephone number: (212) 344-2785
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class Outstanding at December 11, 2003
----- --------------------------------
Common Stock, par value $.001 per share 46,102,759
Transitional Small Business Format (check one); Yes |_| No |X|
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying financial statements are unaudited for the interim
periods, but include all adjustments (consisting only of normal recurring
accruals), which we consider necessary for the fair presentation of results for
the three months ended October 31, 2003.
Moreover, these financial statements do not purport to contain complete
disclosure in conformity with generally accepted accounting principles and
should be read in conjunction with our audited financial statements at, and for
the fiscal year ended July 31, 2003.
The results reflected for the three months ended October 31, 2003 are not
necessarily indicative of the results for the entire fiscal year.
-2-
CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2003
(Unaudited)
ASSETS
Current Assets:
Cash and Cash Equivalents $ 125,818
Loans Receivable - Related Party 20,319
Loans Receivable - Others 18,040
Other Current Assets 17,001
Prepaid Expenses 19,027
Marketable Securities 100,000
------------
Total Current Assets 300,205
------------
Mining, Milling and Other Property and Equipment
(Net of Accumulated Depreciation of $358,230) 344,780
------------
Other Assets:
Other Investments 12,882
Mining Reclamation Bonds 35,550
Security Deposits 9,599
------------
Total Other Assets 58,031
------------
Total Assets $ 703,016
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 95,859
Accrued Expenses 116,623
------------
Total Current Liabilities 212,482
------------
Minority Interest (133,361)
------------
Commitments and Contingencies
Stockholders' Equity:
Common Stock, Par Value $.001 Per Share;
Authorized 150,000,000 shares; Issued and
Outstanding 45,741,095 Shares 45,741
Additional Paid-In Capital 22,384,236
Deficit Accumulated in the Development Stage (21,933,436)
Accumulated Other Comprehensive Income (Loss) 127,354
------------
Total Stockholders' Equity 623,895
------------
Total Liabilities and Stockholders' Equity $ 703,016
============
The accompany notes are an integral part of the financial statements.
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CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three For The Period
Months Ended September 17,1982
October 31, (Inception)
------------------------------- To
2003 2002 October 31, 2003
------------ ------------ -----------------
Revenues:
Sales $ -- $ -- $ --
Interest Income 174 21,166 749,615
Miscellaneous -- 7,701 32,677
------------ ------------ ------------
Total Revenues 174 28,867 782,292
------------ ------------ ------------
Costs and Expenses:
Mine Expenses 146,330 163,599 6,285,814
Write-Down of Mining, Milling and Other Property and
Equipment -- -- 999,445
Selling, General and Administrative Expenses 139,255 139,105 8,309,462
Stock Based Compensation 33,034 -- 8,876,004
Depreciation -- -- 367,726
------------ ------------ ------------
Total Costs and Expenses 318,619 302,704 24,838,451
------------ ------------ ------------
Loss Before Other Income (Expense) (318,445) (273,837) (24,056,159)
------------ ------------ ------------
Other Income (Expense):
Gain on Sale of Property and Equipment -- -- 46,116
Gain on Sale of Subsidiary -- -- 1,907,903
Option Payment -- -- 70,688
Loss on Write-Off of Investment -- -- (10,000)
Loss on Joint Venture -- -- (101,700)
Loss on Option -- -- (50,000)
------------ ------------ ------------
Total Other Income (Expense) -- -- 1,863,007
------------ ------------ ------------
Loss Before Minority Interest (318,445) (273,837) (22,193,152)
Minority Interest in Net Loss of Subsidiary 24,548 14,465 259,716
------------ ------------ ------------
Net Loss $ (293,897) $ (259,372) $(21,933,436)
============ ============ ============
Net Loss Per Common Share - Basic and Diluted $ (.01) $ (.01)
============ ============
Weighted Average Common Shares Outstanding 45,150,223 40,640,365
============ ============
The accompanying notes are an integral part of the financial statements.
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CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Period
For The Three Months Ended September 17, 1982
October 31, (Inception)
-------------------------- To
2003 2002 October 31, 2003
--------- --------- ------------------
Cash Flow From Operating Activities:
Net Loss $(293,897) $(259,372) $(21,933,436)
Adjustments to Reconcile Net Loss to
Net Cash (Used) By Operating Activities:
Depreciation -- -- 367,726
Gain on Sale of Subsidiary -- -- (1,907,903)
Minority Interest in Net Loss of Subsidiary (24,548) (14,465) (259,716)
Write-Down of Impaired Mining, Milling and Other
Property and Equipment -- -- 999,445
Gain (Loss) on Sale of Property and Equipment -- -- (46,116)
Loss on Write-Off of Investment -- -- 10,000
Loss From Joint Venture -- -- 101,700
Value of Common Stock Issued for Services -- -- 2,812,993
Stock Based Compensation 33,034 -- 8,876,004
Changes in Operating Assets and Liabilities:
(Increase) in Prepaid Expenses (9,000) -- (19,027)
(Increase) Decrease in Other Current Assets (2,023) 568 (17,001)
(Increase) in Security Deposits (1,164) -- (9,599)
Increase (Decrease) in Accounts Payable (36,158) (90,576) 88,052
Increase (Decrease) in Accrued Expenses (5,659) 33,766 (5,931)
--------- --------- ------------
Net Cash (Used) By Operating Activities (339,415) (341,067) (10,942,809)
--------- --------- ------------
Cash Flow From Investing Activities:
Purchase of Other Investments -- -- (12,882)
Purchase of Mining, Milling and Other Property and
Equipment -- -- (1,705,650)
Proceeds on Sale of Mining, Milling and Other Property
and Equipment -- -- 83,638
Proceeds From Sale of Subsidiary -- 497,377 2,131,616
Expenses of Sale of Subsidiary -- -- (101,159)
Advance Payments - Joint Venture -- -- 98,922
Investment in Joint Venture -- -- (101,700)
Investment in Privately Held Company -- -- (10,000)
Net Assets of Business Acquired (Net of Cash) -- -- (42,130)
Investment in Marketable Securities -- (50,000) (50,000)
--------- --------- ------------
Net Cash Provided By Investing Activities -- 447,377 290,655
--------- --------- ------------
The accompanying notes are an integral part of the financial statements.
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CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For The Period
For The Three Months Ended September 17, 1982
October 31, (Inception)
-------------------------- To
2003 2002 October 31, 2003
--------- --------- ------------------
Cash Flow From Financing Activities:
(Increase) Decrease in Loans Receivable -
Related Party $ (139) $ -- $ (20,319)
Increase (Decrease) in Loans Receivable - Others 325 (3,040) (18,040)
Increase in Loans Payable - Officers -- -- 18,673
Repayment of Loans Payable - Officers -- -- (18,673)
Increase in Note Payable -- -- 11,218
Payments of Note Payable -- -- (11,218)
Proceeds From Issuance of Common Stock 82,400 1,500 10,865,501
Commissions on Sale of Common Stock -- -- (5,250)
Expenses of Initial Public Offering -- -- (408,763)
Capital Contributions - Joint Venture Subsidiary 112,516 -- 316,924
Purchase of Certificate of Deposit - Restricted -- -- (5,000)
(Purchase) Sale of Mining Reclamation Bonds -- -- (30,550)
--------- --------- ------------
Net Cash Provided By Financing Activities 195,102 (1,540) 10,694,503
--------- --------- ------------
Effect of Exchange Rate Changes 23,721 (6,027) 83,469
--------- --------- ------------
Increase (Decrease) In Cash and Cash Equivalents (120,592) 98,743 125,818
Cash and Cash Equivalents - Beginning 246,410 149,433 --
--------- --------- ------------
Cash and Cash Equivalents - Ending $ 125,818 $ 248,176 $ 125,818
========= ========= ============
Supplemental Cash Flow Information:
Cash Paid For Interest $ -- $ -- --
========= ========= ============
Cash Paid For Income Taxes $ -- $ $ 28,060
========= ========= ============
Non-Cash Financing Activities:
Issuances of Common Stock as Commissions
on Sales of Common Stock $ -- $ $ 440,495
========= ========= ============
Issuance of Common Stock as Payment for Mining,
Milling and Other Property and Equipment $ -- $ -- $ 4,500
========= ========= ============
The accompanying notes are an integral part of the financial statements.
-6-
CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(Unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include the accounts of Capital Gold Corporation and its
subsidiaries, which are wholly and majority owned. All significant inter-company
accounts and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with instructions to
Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the
accompanying consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
consolidated financial position and results of operations and cash flows for the
periods presented.
Results of operations for interim periods are not necessarily
indicative of the results of operations for a full year.
The condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company is a
development stage enterprise and has recurring losses from operations and
operating cash constraints that raise substantial doubt about the Company's
ability to continue as a going concern.
NOTE 2 - Marketable Securities
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of all
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. The Company has classified its marketable equity securities
as available for sale securities and has recorded such securities at fair value.
The Company uses the specific identification method to determine realized gains
and losses. Unrealized holding gains and losses are excluded from earnings and,
until realized, are reported in a separate component of stockholders' equity.
Marketable securities are classified as current assets and are
summarized as follows:
Marketable equity securities, at cost $ 50,000
========
Marketable equity securities, at fair value $100,000
========
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CAPITAL GOLD CORPORATION
F/K/A LEADVILLE MINING AND MILLING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(Unaudited)
NOTE 3 - Other Comprehensive Income (Loss) - Supplemental Non-Cash Investing
Activities
Other comprehensive income (loss) consists of accumulated foreign
translation gains and losses and net unrealized gain on available-for-sale
securities and is summarized as follows:
Balance - July 31, 2003 $ 53,633
Equity Adjustments from Foreign
Currency Translation 23,721
Unrealized Gain on Available-for-
Sale Securities 50,000
--------
Balance - October 31, 2003 $127,354
========
NOTE 4 - Subsequent Events
The Company has executed a royalty financing term sheet with Royal
Gold, Inc., of Denver, Colorado to supply $13.8 million. Consummation of this
funding is subject to due diligence, execution of a definitive agreement, the
satisfaction of conditions to be contained therein, and approval by the other
party's Directors. Accordingly, no assurance can be given that the Company will
consummate the proposed financing.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Statement on Forward-Looking Statements
Some information contained in or incorporated by reference into this report on
Form 10-QSB may contain "forward-looking statements," as defined in Section 21E
of the Securities and Exchange Act of 1934. These statements include comments
regarding exploration and mine development and construction plans, costs, grade,
production and recovery rates, permitting, financing needs, the availability of
financing on acceptable terms or other sources of funding, and the timing of
additional tests, feasibility studies and environmental permitting. The use of
any of the words "anticipate," "continue," "estimate," "expect," "may," "will,"
"project," "should," "believe" and similar expressions are intended to identify
uncertainties. We believe the expectations reflected in those forward-looking
statements are reasonable. However, we cannot assure you that these expectations
will prove to be correct. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the risk factors
set forth below and other factors set forth in, including the section "Issues
and Uncertainties" below, or incorporated by reference into, this report:
o worldwide economic and political events affecting the supply of and
demand for gold;
o volatility in market prices for gold and other metals;
o financial market conditions, and the availability of debt or equity
financing on terms acceptable to our company;
o uncertainties as to whether additional drilling, testing and
feasibility studies will establish reserves at any of our
properties;
o uncertainties associated with developing a new mine, including
potential cost overruns and the unreliability of estimates in early
states of mine development;
o uncertainties as to title to our properties and the availability of
sufficient properties to allow for planned activities at Leadville
in Colorado and at El Chanate in Mexico.
o variations in ore grade and other characteristics affecting mining,
crushing, milling and smelting operations and mineral recoveries;
o geological, metallurgical, technical, permitting, mining and
processing problems;
o the availability and timing of acceptable arrangements for power,
transportation, mine construction, contract mining, water and
smelting; the availability, terms conditions and timing of required
government approvals;
o uncertainties regarding future changes in tax and foreign-investment
legislation or implementation of existing tax and foreign-investment
legislation;
o the availability of experienced employees; and
o political instability, violence and other risks associated with
operating in a country like Mexico with a developing economy.
-9-
Many of those factors are beyond our ability to control or predict. You should
not unduly rely on these forward-looking statements. These statements speak only
as of the date of this report on Form 10-QSB. Except as required by law, we are
not obligated to publicly release any revisions to these forward-looking
statements to reflect future events or developments. All subsequent written and
oral forward-looking statements attributable to our Company and persons acting
on our behalf are qualified in their entirety by the cautionary statements
contained in this section and elsewhere in this report on Form 10-QSB.
Results of Operation
General
Sonora, Mexico
During the quarter ended October 31, 2003, we continued to analyze the El
Chanate concessions in Mexico. As of October 31, 2003, we had reduced our
property holdings to a coherent package of 14 contiguous, high priority
concessions totaling approximately 3,497 hectares (8,642 acres or 13.5 square
miles). Further exploration and development of the El Chanate project, assuming
it is economically feasible, will mostly occur on these concessions owned by us.
We also own outright 466 hectares (1,151 acres or 1.8 square miles) of surface
rights at El Chanate (except for our joint venture agreement with Grupo Minero
FG S.A. de C.V.) and no third party ownership or leases exist on this fee land
or the El Chanate concessions.
In August 2003, M3 Engineering of Tucson, Arizona completed a feasibility study
(the "Study") on the El Chanate concessions. Based on 253 drill holes and more
than 22,000 gold assays, the study provides details for an open pit gold mine.
The Study indicates that the initial open pit project contains proven and
probable reserves of 358,000 ounces of gold within 13.5 million metric tonnes of
ore with an average grade of 0.827 grams/tonne. It estimated that the mine could
recover approximately 48,000 - 50,000 ounces of gold per year over a five year
mine life.
The study assumes a production rate of 2.6 million tonnes of ore per year or
7,500 tonnes per day, operating at 345 days per year. The processing plan for
this open pit heap leach gold project calls for crushing the ore to 100% minus
3/8 inch. Carbon columns will be used to recover the gold. If financing for the
project is obtained and required permitting is completed by the end of 2003, and
if the necessary mining plant, equipment and facilities are acquired, an
adequate water supply is secured, and power lines to the mine are constructed,
we anticipate, but cannot assure, that the mine will commence full commercial
production in January of 2005.
Based on the current reserve calculations, the mine life is estimated to be 62
months. The study forecasts initial capital costs of $13.8 million, which
includes $2.1 million of working capital. Average initial annual production is
planned at approximately 50,000 ounces per year at an average operating cash
cost of $229 per ounce. This cash cost may decrease as the production rate
increases. Total costs will vary depending upon the price of gold (due to the
nature of underlying payment obligations to the original owner of the property);
they are estimated to range between $292 per ounce at a gold price of $310/ounce
and $299 per ounce at a gold price of $370 per ounce, although we will be
working on measures to attempt to reduce costs going forward. Reserves and
production rates are based on a gold price of $325 per ounce, which is the Base
Case of the study.
-10-
Management believes that the capital costs to establish a surface, heap leach
mining operation at El Chanate will be approximately $13.8 million. Financing,
is being sought through bank loans, equity and/or royalty arrangements. In this
regard, we have executed a royalty financing term sheet with Royal Gold, Inc.,
of Denver, CO to supply the $13.8 million, as specified in the Study.
Consummation of this funding is subject to due diligence by Royal Gold,
execution of a definitive agreement, the satisfaction of conditions to be
contained therein, and approval by Royal Gold's Board of Directors. Accordingly,
no assurance can be given that we will consummate the proposed financing with
Royal Gold.
On March 13, 2003, we obtained exclusive options to purchase an ore crusher and
related assets (spare parts for the crusher and certain transportable building
structures). The total cost for these assets (exclusive of the option cost) will
be $700,000. Grupo Minero FG S.A. de C.V. ("FG"), our joint venture partner, has
agreed orally that this purchase will be pursuant to the joint venture and that
FG will be responsible for 50% of the cost. On March 13, 2003, we paid $25,000
for these options. As originally agreed, on April 30,2003, we elected to extend
the options to June 30, 2003 by paying an additional $25,000. Pursuant to the
options, we were required to enter definitive purchase agreements for these
assets on or before June 30, 2003 and, upon execution of these agreements, we
were obligated to pay an aggregate of $400,000 towards the purchase price. The
owner of these assets recently sold his interest to a third party and we are
currently discussing the possibility of acquiring the crushing system with the
new owner. These assets currently are located in Sonora, Mexico, approximately
70 miles from the El Chanate Concessions. Assuming we can obtain the requisite
financing to acquire these assets and actually acquire them, and rights of clear
passage, we plan to move them to our concessions. We continue to look for
comparable equipment to acquire in the event that we are unable to acquire these
assets. There can be no assurance that we will be successful in acquiring the
assets discussed above or comparable assets.
Pursuant to the joint venture between Minera Santa Rita S. de R.L. de C.V., one
of our wholly-owned Mexican affiliates ("Santa Rita") and FG, which commenced in
February 2002, FG's percentage of the venture (currently 31%) can increase to
45% provided it provides its share of the funding and equipment. However, FG has
not made all of the payments required to be paid by it under Phase two of the
venture. FG is currently behind $139,000.
Leadville, Colorado
During the quarter ended October 31, 2003, as during the prior fiscal year ended
July 31, 2003, activity at our Leadville, Colorado properties consisted
principally of mine maintenance. Primarily as a result of our focus on El
Chanate, we temporarily reduced to a minimum activity in Leadville, Colorado.
Between November 1, 2002 and December 1, 2003, we conditionally acquired 61
properties in Leadville, Colorado having a gross acreage of approximately 623
acres. Some of the properties are classified as residential and others are
classified as mining. All were purchased at the Lake County, Colorado, tax sale
for the back taxes due on the properties. We paid an aggregate of approximately
$15,600 for the properties. Of these properties, we let 9 lapse and, with regard
to 8 of these properties, we were paid off by the property owners and we
received back our payments for these properties, plus interest at 10%.
If a property owner does not pay his property taxes the county treasurer has the
right to put the property up for auction at an advertised county tax sale.
Sometimes, the property owner will ask the treasurer to postpone the auction of
the property for a year with the promise to pay soon. If taxes are still not
paid, the auction bidder will be required to pay two years of taxes. If we pay
the 'back taxes' and then 'current year' taxes for four consecutive years our
ownership
-11-
of a given property purchased at tax sale is final, and the deed is transferred
to us. If the property owner can pay the back taxes, he is required to pay us
the back taxes plus interest. The current back tax interest rate is 12% in Lake
County.
We acquired these properties, especially the residential properties, as an
investment. We are not required to commit to any work or maintenance on any of
the properties at this time. Management believes that these are good
investments. The mining properties are located in the general area of our other
mining properties. There is a possibility that at some future date the zoning
for the mining claims will be changed to allow residential development.
Management believes that, at such time, these properties will most likely become
more valuable due to their scenic location. In the time prior to any zoning
change, these properties may have mineral value; however, we have no current
plans to explore these mining properties.
Revenues
We generated no revenues from mining operations during the three months ended
October 31, 2003 and 2002. There were de minimis non-operating revenues during
the three months ended October 31, 2003 and 2002 of $174 and $28,867,
respectively. These non-operating revenues primarily represent interest income.
Costs and Expenses
Over all, costs and expenses during the three months ended October 31, 2003
($318,619) increased by $15,915 (approximately 10%) from the three months ended
October 31, 2002 ($302,704).
Mine expenses during the three months ended October 31, 2003 ($146,330)
decreased by $17,269 (approximately 10.5%) from the three months ended October
31, 2002 ($163,599). We believe that the decrease in mine expenses resulted
primarily from less available capital.
Selling, general and administrative expenses during the three months ended
October 31, 2003 ($139,255) increased by $150 (approximately 0.1%) from the
three months ended October 31, 2002 ($139,105).
Stock based compensation during the three months ended October 31, 2003 was
$33,034 compared to -0- for the three months ended October 31, 2002.
Net Loss
As a result, our net loss for the three months ended October 31, 2003 was
$293,897, which was $34,525 greater than our $259,372 net loss for the three
months ended October 31, 2002.
Gains from Changes in Foreign Exchange Rates
During the three months ended October 31, 2003, we recorded equity adjustments
from foreign currency translations of approximately $23,700. These translation
adjustments are related to changes in the rates of exchange between the Mexican
Peso and the US dollar.
Liquidity and Capital Resources; Plan of Operations
As of October 31, 2003, we had working capital of $87,724. Our plans over the
next 12 months include the costs related to our joint venture with FG, primarily
the cost of construction of the El
-12-
Chanate open-pit gold mine in Mexico, administration and holding costs in
Colorado and general administrative costs in New York.
Our primary source of funds used during the quarter ended October 31, 2003 was
from the sale and issuance of common stock for gross proceeds of $82,400.
Phase two of our joint venture with FG was to culminate with a feasibility
study. Although we have obtained the feasibility study, Phase two was extended
until the end of February 2004 to allow us to secure funding before starting
Phase Four (Phase three consists of FG's contribution to the venture of mining
equipment sufficient to develop the lots pursuant to the feasibility study). We
estimate that Phase two will cost approximately $840,000.
Pursuant to the agreement, FG paid us $75,000 to participate in the venture and
contributed an additional $75,000 towards the first phase of the venture for
which it received a 30% interest in the venture. The balance of the costs for
Phase one and the costs for Phase two are to be split equally between the
parties. FG's percentage of the venture can increase to 45%. It increased to 31%
upon completion of Phase one and could increase to 33% upon completion of Phase
two. Notwithstanding the foregoing, FG has not made all of the payments required
to be paid by it under Phase two. If FG does not pay its required share of
expenses, it will not earn all of the foregoing increases in its percentage
interest in the venture. If FG determines that it does not want to continue to
participate in the venture, or it cannot provide its share of the funding for
Phase two, Santa Rita has a 45 day option to purchase FG's interest in the
venture for $127,500. If Santa Rita does not exercise this option within the 45
day period and pay the purchase price within 15 days thereafter, FG may sell its
interest to another party. As of the date hereof, FG is behind by about $120,000
in its share of the payments for Phase two.
We believe, but cannot assure, that we have a credible funding source for
construction of the El Chanate open-pit gold mine in Sonora, Mexico. We have
executed a royalty financing term sheet with Royal Gold, Inc. of Denver, CO for
supplying $13.8 million to fund the construction. However, consummation of this
funding is subject to due diligence by Royal Gold, execution of a definitive
agreement, the satisfaction of conditions to be contained therein, and approval
by Royal Gold's Board of Directors. Should we be unable to consummate this
financing we will continue to look for other sources. Unless and until we obtain
adequate financing on acceptable terms, we will not be able to move forward with
the construction of the mine.
As explained in our annual report on form 10-KSB, historically, we have not
generated any material revenues from operations and have been in a precarious
financial condition. Should we not consummate the Royal Gold funding, no
assurance whatsoever can be given that we will be able to obtain any significant
funds in the near future or that we will be able to continue as a going concern
or that any of our plans with respect to our gold properties will, to a material
degree, come to fruition. In order to continue our program we will need to
obtain substantial financing. There is no assurance that we will be successful.
Our condensed consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. We are a development stage
enterprise and have recurring losses from operations and operating cash
constraints that raise substantial doubt about our ability to continue as a
going concern.
Environmental Issues
Management does not expect that environmental issues will have an adverse
material effect on our liquidity or earnings. Before any additional exploration
or any development or mining or
-13-
construction of milling facilities could begin at our Leadville properties, it
would be necessary to meet all environmental requirements and to satisfy the
regulatory agencies in Colorado that our proposed procedures fell within the
boundaries of sound environmental practice. We currently are bonded to insure
reclamation of any areas disturbed by our past activities. The current amount of
this bond is $35,550. In Mexico, we are not aware of any significant
environmental concerns or existing reclamation requirements at the El Chanate
properties. However, we will be required to obtain various environmental and
related permits in order to engage in our planned activities at El Chanate. This
process has begun. The costs and any delays associated with obtaining these
required permits could have an impact on our ability to timely complete our
planned activities at El Chanate and ultimately on the feasibility of opening a
mine.
Part of the Leadville Mining District has been declared a federal Superfund site
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, and the Superfund Amendments and Reauthorization Act of 1986. Several
mining companies and one individual were declared defendants in a possible
lawsuit. We were not named a defendant or Possible Responsible Party. We did
respond in full detail to a lengthy questionnaire prepared by the Environmental
Protection Agency ("EPA") regarding our proposed procedures and past activities
in November 1990. To our knowledge, the EPA has initiated no further comments or
questions.
We do include in all our internal revenue and cost projections a certain amount
for environmental and reclamation costs on an ongoing basis. This amount is
determined at a fixed amount of $1.50 per ton of material to be milled on a
continual, ongoing basis to provide for further tailing disposal sites and to
reclaim the tailings disposal sites in use. At this time, there do not appear to
be any environmental costs to be incurred by us beyond those already addressed
above. No assurance can be given that environmental regulations will not be
changed in a manner that would adversely affect our planned operations.
Off-Balance Sheet Transactions
We do not have any transactions, agreements or other contractual arrangements
that constitute off-balance sheet arrangements.
Application Of Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies for us include
impairment of long-lived assets, accounting for stock-based compensation and
environmental remediation costs.
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," we review our long-lived assets
for impairments. Impairment losses on long-lived assets are recognized when
events or changes in circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be recoverable.
Impairment losses then are measured by comparing the fair value of
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assets to their carrying amounts. During the year ended July 31, 2002, we
performed a review of our Colorado mine and mill improvements and determined
that an impairment loss should be recognized. Accordingly, at July 31, 2002, we
reduced by $999,445 the net carrying value of certain assets relating to our
Leadville, Colorado facility to $300,000, which approximates management's
estimate of fair value. We recognized no additional impairment loss during the
quarter ended October 31, 2003.
We account for stock-based compensation to our employees using the intrinsic
value method in accordance with provisions of the Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations which requires the recognition of compensation expense over the
vesting period of the option when the exercise price of the stock option granted
is less than the fair value of the underlying common stock. Additionally, we
comply with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") and
provide pro forma disclosure of net loss and loss per share as if the fair value
method has been applied in measuring compensation expense for stock options
granted. Stock-based compensation related to options granted to non-employees is
recognized using the fair value method in accordance with SFAS 123.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposure. Such accruals are recorded even if
significant uncertainties exist over the ultimate cost of the remediation. It is
reasonably possible that our estimates of reclamation liabilities, if any, could
change as a result of changes in regulations, extent of environmental
remediation required, means of reclamation or cost estimates. Ongoing
environmental compliance costs, including maintenance and monitoring costs, are
expensed as incurred. There were no environmental remediation costs accrued at
October 31, 2003.
Issues And Uncertainties
The following issues and uncertainties, among others, should be considered in
evaluating our financial outlook.
We have not generated any operating revenues. If we are unable to
commercially develop our mineral properties, we will not be able to
generate profits and our business may fail.
To date, we have no producing properties. As a result, we have no current source
of operating revenue and we have historically operated and continue to operate
at a loss. Our ultimate success will depend on our ability to generate profits
from our properties. Our viability is largely dependent on the successful
commercial development of the El Chanate project.
We lack operating cash flow and rely on external funding sources. If we
are unable to continue to obtain needed capital from outside sources, we
will be forced to reduce or curtail our operations.
We do not generate any positive cash flow from operations and we do not
anticipate that any positive cash flow will be generated for some time. We have
limited financial resources. Leases and licenses which we hold as well as our
joint venture agreement with FG, impose financial obligations on us. We cannot
assure that additional funding will be available to allow us to fulfill such
obligations. Although we have executed a royalty financing term sheet with Royal
Gold, Inc. of Denver, CO for supplying $13.8 million to fund the construction of
the El
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Chanate open-pit gold mine in Sonora, Mexico, we cannot assure that the funding
will occur. Consummation of this funding is subject to due diligence by Royal
Gold, execution of a definitive agreement, the satisfaction of conditions to be
contained therein, and approval by Royal Gold's Board of Directors.
Further exploration and development of the mineral properties in which we hold
interests depends upon our ability to obtain financing through
o bank or other debt financing,
o equity financing, or
o other means.
Failure to obtain additional financing on a timely basis could cause us to
forfeit all or parts of our interests in some or all of (i) the El Chanate
concessions, (ii) the joint venture with FG and (iii) our Leadville properties,
and reduce or terminate our operations.
Our year end audited financial statements contain a "going concern"
explanatory paragraph. Our inability to continue as a going concern would
require a restatement of assets and liabilities on a liquidation basis,
which would differ materially and adversely from the going concern basis
on which our financial statements included in this quarterly report have
been prepared.
Our financial statements for the year ended July 31, 2003 included in our form
10-KSB for the year ended as of that date, and the financial statements for the
quarter ended October 31, 2003 contained in this quarterly report on form
10-QSB, and filed with the Commission, have been prepared on the basis of
accounting principles applicable to a going concern. Our auditors' report on the
financial statements contained in our Form 10-KSB includes an additional
explanatory paragraph following the opinion paragraph on our ability to continue
as a going concern. A note to these financial statements describes the reasons
why there is substantial doubt about our ability to continue as a going concern
and our plans to address this issue. Neither our July 31, 2003 financial
statements nor our October 31, 2003 quarterly unaudited financial statements
include any adjustments that might result from the outcome of this uncertainty.
Our inability to continue as a going concern would require a restatement of
assets and liabilities on a liquidation basis, which would differ materially and
adversely from the going concern basis on which our financial statements have
been prepared.
Our ability on a going forward basis to discover viable and economic
mineral reserves is subject to numerous factors, most of which are beyond
our control and are not predictable.
Exploration for gold is speculative in nature, involves many risks and is
frequently unsuccessful. Any gold exploration program entails risks relating to
o the location of economic ore bodies,
o development of appropriate metallurgical processes,
o receipt of necessary governmental approvals and
o construction of mining and processing facilities at any site chosen
for mining.
The commercial viability of a mineral deposit is dependent on a number of
factors including:
o the price of gold,
o exchange rates,
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o the particular attributes of the deposit, such as its
o size,
o grade and
o proximity to infrastructure,
o financing costs,
o taxation,
o royalties,
o land tenure,
o land use,
o water use,
o power use,
o importing and exporting gold and
o environmental protection.
The effect of these factors cannot be accurately predicted.
Aside from our El Chanate concessions, the mineral properties in which we have
an interest or right are in the exploration stages and are without reserves of
gold or other minerals. We cannot assure that current or proposed exploration or
development on our other properties in which we have an interest will result in
the discovery of gold mineralization reserves or will result in a profitable
commercial mining operation.
We have a limited number of prospects. As a result, our chances of
commencing viable mining operations are dependent upon the success of one
project.
Our only current properties are the El Chanate concessions and our Leadville
properties. At present, we are not doing any substantive work at our Leadville
properties. Our El Chanate concessions are owned by one of our wholly-owned
subsidiaries Oro de Altar. FG, our joint venture partner, has a 31% interest in
the operating profits of the El Chanate project with a right to increase its
interest to 45%. We currently do not have operations on either of our
properties, and we must commence such operations to receive revenues.
Accordingly, we are dependent upon the success of the El Chanate concessions.
Gold prices can fluctuate on a material and frequent basis due to numerous
factors beyond our control. If and when we commence production, our
ability to generate profits from operations could be materially and
adversely affected by such fluctuating prices.
The profitability of any gold mining operations in which we have an interest
will be significantly affected by changes in the market price of gold. Gold
prices fluctuate on a daily basis and are affected by numerous factors beyond
our control, including:
o the level of interest rates,
o the rate of inflation,
o central bank sales,
o world supply of gold and
o stability of exchange rates.
Each of these factors can cause significant fluctuations in gold prices. Such
external factors are in turn influenced by changes in international investment
patterns and monetary systems and political developments. The price of gold has
historically fluctuated widely and, depending on
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the price of gold, revenues from mining operations may not be sufficient to
offset the costs of such operations.
Changes in regulatory or political policy could adversely affect our
exploration and future production activities.
Any changes in government policy may result in changes to laws affecting:
o ownership of assets,
o land tenure,
o mining policies,
o monetary policies,
o taxation,
o rates of exchange,
o environmental regulations,
o labor relations,
o repatriation of income and
o return of capital.
Any such changes may affect our ability to undertake exploration and development
activities in respect of present and future properties in the manner currently
contemplated, as well as our ability to continue to explore, develop and operate
those properties in which we have an interest or in respect of which we have
obtained exploration and development rights to date. The possibility,
particularly in Mexico, that future governments may adopt substantially
different policies, which might extend to expropriation of assets, cannot be
ruled out.
Compliance with environmental regulations could adversely affect our
exploration and future production activities.
With respect to environmental regulation, environmental legislation generally is
evolving in a manner which will require:
o stricter standards and enforcement,
o increased fines and penalties for non-compliance,
o more stringent environmental assessments of proposed projects and
o a heightened degree of responsibility for companies and their
officers, directors and employees.
There can be no assurance that future changes to environmental legislation and
related regulations, if any, will not adversely affect our operations. We could
be held liable for environmental hazards that exist on the properties in which
we hold interests, whether caused by previous or existing owners or operators of
the properties. Any such liability could adversely affect our business and
financial condition.
Mining Risks and Potential Inadequacy of Insurance Coverage could
adversely affect us
If and when we commence mining operations at any of our properties, such
operations will involve a number of risks and hazards, including:
o environmental hazards,
o industrial accidents,
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o labor disputes,
o metallurgical and other processing,
o unusual and unexpected rock formations,
o ground or slope failures,
o cave-ins,
o acts of God,
o mechanical equipment and facility performance problems and
o the availability of materials and equipment.
Such risks could result in:
o damage to, or destruction of, mineral properties or production
facilities,
o personal injury or death,
o environmental damage,
o delays in mining,
o monetary losses and
o possible legal liability.
Industrial accidents could have a material adverse effect on our future business
and operations. Although as we move forward in the development of any of our
properties we plan to maintain insurance within ranges of coverage consistent
with industry practice, we cannot be certain that this insurance will cover the
risks associated with mining or that we will be able to maintain insurance to
cover these risks at economically feasible premiums. We also might become
subject to liability for pollution or other hazards which we cannot insure
against or which we may elect not to insure against because of premium costs or
other reasons. Losses from such events could have a material adverse effect on
us.
Calculation of reserves and metal recovery dedicated to future production
is not exact, might not be accurate and might not accurately reflect the
economic viability of our properties.
Reserve estimates may not be accurate. There is a degree of uncertainty
attributable to the calculation of reserves, resources and corresponding grades
being dedicated to future production. Until reserves or resources are actually
mined and processed, the quantity of reserves or resources and grades must be
considered as estimates only. In addition, the quantity of reserves or resources
may vary depending on metal prices. Any material change in the quantity of
reserves, resource grade or stripping ratio may affect the economic viability of
our properties. In addition, there can be no assurance that mineral recoveries
in small scale laboratory tests will be duplicated in large tests under on-site
conditions or during production.
We are dependent on the efforts of certain key personnel and contractors,
the loss of whose services could have a materially adverse effect on our
operations.
We are dependent on a relatively small number of key personnel, the loss of any
one of whom could have an adverse effect on us. In addition, while certain of
our officers and directors have experience in the exploration and operation of
gold producing properties, we will remain highly dependent upon contractors and
third parties in the performance of our exploration and development activities.
As such there can be no guarantee that such contractors and third parties will
be available to carry out such activities on our behalf or be available upon
commercially acceptable terms.
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There are uncertainties as to title matters in the mining industry. We
believe that we have good title to our properties; however, defects in
such title could have a material adverse effect on us.
We have investigated our rights to explore, exploit and develop our various
properties in manners consistent with industry practice and, to the best of our
knowledge, those rights are in good standing. However, we cannot assure that the
title to or our rights of ownership of either the El Chanate concessions or our
Leadville properties will not be challenged or impugned by third parties or
governmental agencies. In addition, there can be no assurance that the
properties in which we have an interest are not subject to prior unregistered
agreements, transfers or claims and title may be affected by undetected defects.
Any such defects could have a material adverse effect on us.
Should we successfully commence mining operations in the future, our
ability to remain profitable, should we become profitable, will be
dependent on our ability to find, explore and develop additional
properties. Our ability to compete for such additional properties will be
hindered by competition.
The acquisition of gold properties and their exploration and development are
subject to intense competition. Companies with greater financial resources,
larger staffs, more experience and more equipment for exploration and
development may be in a better position than us to compete for such mineral
properties.
Our property interests in Mexico are subject to the risks of doing
business in foreign countries.
We face risks normally associated with any conduct of business in foreign
countries with respect to our El Chanate project in Sonora, Mexico, including
various levels of political and economic risk. The occurrence of one or more of
these events could have a material adverse impact on our efforts or future
operations which, in turn, could have a material adverse impact on our future
cash flows, earnings, results of operations and financial condition. These risks
include the following:
o labor disputes,
o invalidity of governmental orders,
o uncertain or unpredictable political, legal and economic environments,
o war and civil disturbances,
o changes in laws or policies,
o taxation,
o delays in obtaining or the inability to obtain necessary governmental
permits,
o governmental seizure of land or mining claims,
o limitations on ownership,
o limitations on the repatriation of earnings,
o increased financial costs,
o import and export regulations, including restrictions on the export of
gold, and
o foreign exchange controls.
These risks may limit or disrupt the project, restrict the movement of funds or
impair contract rights or result in the taking of property by nationalization or
expropriation without fair compensation.
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Gold is sold in the world market in U.S. dollars; however, we may incur a
significant amount of our expenses in Mexican pesos. If and when we sell
gold, if applicable currency exchange rates fluctuate our revenues and
results of operations may be materially and adversely affected.
If and when we commence sales of gold, such sales will be made in the world
market in U.S. dollars. We may incur a significant amount of our expenses in
Mexican pesos. As a result, our financial performance would be affected by
fluctuations in the value of the Mexican peso to the U.S. dollar. At the present
time, we have no plan or policy to utilize forward contracts or currency options
to minimize this exposure, and even if these measures are implemented there can
be no assurance that such arrangements will be available, be cost effective or
be able to fully offset such future currency risks.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
During the quarter ended October 31, 2003, we issued the following shares of our
Common Stock pursuant to the exemption from registration provided by Section
4(2) of the Securities Act of 1933: We sold 1,063,561 shares for $82,400 to 16
persons. We also issued 2,500 shares to an individual for commissions related to
sale of common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 from the Company's Chief Executive Officer
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 from the Company's Chief Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from the Company's Chief Executive Officer
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 from the Company's Chief Financial Officer
Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CAPITAL GOLD CORPORATION
Registrant
By: /s/ Gifford A. Dieterle
---------------------------------
Gifford A Dieterle
President/Treasurer
Date: December 15, 2003
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