Form 10QSB/A for GOLDEN PHOENIX MINERALS INC /MN/
19-Jan-2006
Quarterly Report
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF 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, (a) our estimates of mineral reserves and mineralized material, (b) our projected sales and profitability,
(c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, and (g) 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 Managements Discussion and Analysis of Financial Condition and Results of Operations and Business, 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 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. (Golden Phoenix or the Company) is a mineral exploration, development and production company, formed in Minnesota on June 2, 1997, specializing in acquiring and consolidating mineral properties with production potential and future growth through exploration discoveries. Acquisition emphasis is focused on properties containing gold, silver, copper, and other strategic minerals that are located in Nevada. Presently our primary mining property asset is the Mineral Ridge gold mine and the Ashdown gold-molybdenum project. The Company terminated its joint venture with International Enexco, Ltd. and its exploration license and option to purchase with F.W. Lewis, Inc. on December 23, 2004 at its Contact project. On January 31, 2005 the Company closed the sale of its Borealis project to Gryphon Gold Inc. for $1.4 million.
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Mineral Ridge
Golden Phoenix purchased the Mineral Ridge mine in late 2000 out of bankruptcy for $225,000 in 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 and the annual permit cost for the Nevada Department of Environmental Protection (NDEP) of approximately $20,000 during the time the permits were being transferred to Golden Phoenix from the previous operator. Golden Phoenix filed a $1.8 million interim reclamation bond, which allowed us to hold the Mineral Ridge property while other permitting was underway. The reclamation permit, which was in place when Golden Phoenix bought the property out of bankruptcy, was not transferable and the company holding the surety bond refused to write a new bond for a startup company. We were required to post a new bond, but this could not be completed until a new reclamation plan and permit was completed. The bond was due for a three-year review by the Bureau of Land Management (BLM) and NDEP. This review changed the cost of the bond from $1.64 million to $3.2 million for the same plan. The previous bonding company wanted to be released from the bond held by the BLM; however, without a replacement bond, the only method of release would have been by reclaiming the property. To avoid loss of the property value due to destruction of the infrastructure, Golden Phoenix needed to bring the property back into production. We negotiated an interim bond amount to keep the project in a status-quo status until a new plan and bond amount could be negotiated. The source for the cash bond was from the two (2) previous operators and one (1) of our shareholders.
On May 8, 2003, Golden Phoenix obtained a new amended operating permit and on June 23, 2003, we filed a $2.7 million reclamation bond with the BLM with respect to the Mineral Ridge mine. Now that the new permit and bond are in place the Company assumes its reclamation obligation to be $2.7 million. We 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 & Company, Inc. an independent mineral auditing consultant, the total value of the gold sales over the six-year mine life, at a $325 gold price, is estimated to be $59 million. The total operating cost, which includes royalty payments, refining costs, mining costs, milling costs, reclamation costs, and operating expenses, is estimated to be $36 million. Capital cost, including reclamation bonding, is estimated to be $6 million. The net income after taxes is estimated to be $12 million.
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Back to Table of Contents On October 27, 2004 the Company made a $16,920 deposit with Cow County Title for the purchase of approximately 1,200 acres of land and an existing 1,600-ton per day mill. The mill, know as the Lone Mountain Mill or Millers Mill, is held under separate title and leases the 1,200 acre land parcel. Cost to the Company for this investment at the close of escrow is estimated to be $650,000 for the land and $600,000 for the mill. The current agreement is for the landowner to have possession of both the land and mill. The current mill owner is in default of rental payments and is required by contract to deed the property to the landowner. The purchase of these properties is now delayed until the mill title has been cleared to the property owner. Concurrently with the legal working for the Lone Mountain Mill acquisition, economic feasibility studies are ongoing and may reveal that the mill is not economical to purchase due to the cost of ore transportation. If this becomes true, the deposit of $16,920 will be refunded.
On January 12 , 2005, Golden Phoenix announced the inauguration of a comprehensive restructuring of all mining operations beginning with the winter idling of the Mineral Ridge gold mine. Mining and crushing operations have been suspended for the time being and employees who conducted this work have been furloughed. Leaching operations continued to extract gold from the leach pad through August, 2005. The operation is now on temporary full idle, and 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. Employees trained to maintain the facilities have been retained. They will also ensure site security, environmental compliance and safety protocols . Due to cessation of leaching in August 2005 at Mineral Ridge, the overall operation will incur minimum expenses until recapitalization as a milling operation is approved by the Board.
Ashdown
The Ashdown property near Denio, Nevada was originally held through a letter agreement with PRS Enterprises (PRS) with Golden Phoenix managing the project. PRS also had a letter agreement with Win-Eldridge Mines, Ltd. (W-E) which grants the Ashdown property to a three (3)-company venture. This agreement expired on December 15, 2003 due to the inability of PRS to fulfill their contractual obligations. Negotiations with W-E continued, which resulted in a signed letter of intent to joint venture on February 5, 2004. The terms of the agreement gives sixty percent (60%) to Golden Phoenix, as manager/operator of project, and forty percent (40%) to W-E, as owner of the property. Golden Phoenix will earn an undivided vested sixty percent (60%) interest in the project in either of two
(2) ways: by placing the project into profitable production using a small pilot mill, or spending $5 million toward development of the project on or before February 4, 2008. Upon signing the letter of intent, Golden Phoenix paid W-E $50,000, and beginning three (3) months after the signing, it has paid $5,000 per month each month for seventeen (17) months and will continue to pay $5,000 per month until a cash distribution through profitable production is achieved. All payments are current.
On September 8, 2004 the Company entered into a purchase agreement for a one hundred (100) ton per day mill located in Kingston, Nevada. This mill is known as the Kingston Mill. The agreement called for payment of back taxes, liens and reclamation of land on which the mill was located. The mill was disassembled and moved to the Ashdown mine area where it was held in storage awaiting permits for construction and operation. To date, we have made payments totaling $116,952 for the mill.
On April 19, 2005 Golden Phoenix announced it has secured a long-term lease on the Morris Mill site, a highly suitable twenty (20) acre parcel adjacent to its Ashdown gold/molybdenum joint venture in northwestern Nevada. In doing so, the Company plans to increase Ashdowns molybdenum processing capacity from 10,000 tons in a pilot mill scenario to 120,000 tons, a twelve (12)-fold increase, and to lengthen the mills initial operating period to five (5) years. A reclamation bond in the amount of $114,000 has been posted with the Nevada Department of Environmental Protection for the Morris Mill site.
On June 10, 2005, the Company was provided written notice that Win-Eldrich Mines Ltd. planned to remove a 1,400-ton stockpile of mineralized material mined by a previous operator and that it considered personal property not subject to the joint venture. The material had been stored on site for twenty three (23) years and had been identified by the BLM as an item for reclamation. It is the opinion of the Company that the material is subject to the letter of intent to joint venture (LOI) dated February 5, 2004. The Company agreed to the removal of the material while reserving its rights under the LOI to share in the proceeds generated from the stockpile. The stockpile was removed over a five (5) week period which commenced in June 2005, and the Company intends to resolve this matter with Win-Eldrich at a later date.
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Back to Table of Contents On June 15, 2005, the Company and regional officials with the BLM entered into a verbal agreement to remove and to take possession of a two hundred (200) ton per day mill located near Austin, Nevada. This mill is known as the Austin Mill. The agreement constituted the removal of the mill and reclamation of the land. The Company has recognized an estimated cost of $80,000 to comply with the verbal agreement.
On June 29, 2005 the Company announced it had taken title from the BLM to take possession of the Austin Mill. The BLM acquired the Austin Mill following abandonment of an un-bonded mining project situated on public land. Golden Phoenix offered to assist the BLM in reclaiming the property, and has accepted the responsibility to remove the mill and the building in exchange for clear title to the equipment. The Austin Mill is complete with crushing, grinding and flotation gear, all in excellent condition. The Company scheduled a truck and trailer to transport the equipment to Winnemucca, Nevada where it has been stored until permits are issued allowing it to be moved to the Ashdown project. The mill is ideal for processing gold and molybdenum ores and provides several key components that will enhance the capability of the primary millworks. It also gives Golden Phoenix the flexibility to double its molybdenite-processing capacity or to add a separate gold circuit, as may be warranted in the future. Disassembly and relocation of the mill is expected to take six (6) weeks. The Company plans to merge both the Kingston and Austin mills into what will be known as the Pilot Mill with a milling capability of one hundred (100) tons per day.
On August 15, 2005 the Company received approval from the BLM to extract 1,000 tons of molybdenum mineralization from its Ashdown mine for the purpose of metallurgical testing. The approval was issued by the BLM as an amendment to an existing Notice of Intent (Amended NOI). Under the Amended NOI, Golden Phoenix may access and remove molybdenite-bearing material using underground mining techniques, and then mill, metallurgically test, and trial-market the moly concentrates. The intent of the bulk sample program is to prepare Golden Phoenix for full-scale mining at Ashdown, scheduled to begin following the BLMs final approval of the comprehensive Plan of Operations and its associated Environmental Assessment. Ashdown mine personnel have dewatered and rehabilitated the portal section of the Sylvia decline and determined that it is safer, shorter and faster to drive a new bypass from inside the portal directly to the targeted ore-shoot rather than to attempt to restore the original decline. Once full-scale mining is approved, this bypass will serve as the main haulage way for daily operations.
On August 26, 2005 the Pilot Mill was deeded to an earth working company known as Retrievers LLC. The deed states that a signing fee of $30,000 shall be paid to Retrievers LLC and that when the Ashdown mill final permit is issued, an additional $30,000 shall be paid to Retrievers LLC. The Company agreed to an exclusive arrangement with Retrievers LLC for all earthworks over a five (5) year period. At the conclusion of the agreement period, the Pilot Mill deed shall be transferred to the Company at no cost.
On September 26, 2005, the Company entered into a Production Payment Purchase Agreement (PPPA) with Ashdown Milling Company, LLC, a company of which Mr. Kenneth Ripley and Mr. Rob Martin are both members. Under the terms of the PPPA, Ashdown Milling agreed to purchase a production payment to be paid from the production of the Companys Ashdown Mine for a minimum of $800,000. This minimum purchase price will be paid upon the achievement of certain milestones related to the exploration and development of the Ashdown Mine. In addition, the PPPA provides that Ashdown Milling has the right to increase its investment in the production payment up to an additional $700,000 for a maximum purchase price of $1,500,000. The Company must use the funds for qualifying exploration and development expenditures on the Ashdown Mine in a sharing arrangement of its obligation to explore and develop the mine under the letter of intent to joint venture dated February 5, 2004. The amount of the production payment to be paid to Ashdown Milling is equal to a twelve percent (12%) net smelter returns royalty on the minerals produced from the mine until an amount equal to two hundred forty percent (240%) of the total purchase price has been paid. However, the production payment is paid solely from the Companys share of production it is entitled to receive under the letter of intent to joint venture.
The Company received $200,000 of the minimum purchase price upon execution of the PPPA and will receive an additional $200,000 upon approval of the mill foundation and $200,000 upon receipt of a water pollution control permit. Additional production payment proceeds may be purchased by Ashdown Milling upon completion of the mill building.
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Back to Table of Contents In addition to the foregoing, the PPPA provides that for each dollar of the purchase price up to the maximum purchase price paid for the production payment, the Company will issue one (1) share of its restricted common stock and one (1) common stock purchase warrant. The warrants will be exercisable for a period of three (3) years from the date of the PPPA and entitle the holder to purchase one
(1) share of the Company's restricted common stock for $0.20 per share. For each dollar of the purchase price for the production payment, $0.17 has been allocated to the purchase price for each share and warrant as a unit. Pursuant to the representations provided to the Company in the PPPA, Ashdown Milling is an accredited investor and the shares and warrants were offered and sold by the Company in reliance on an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder.
To date, permitting at Ashdown is underway on federal lands administrated by the BLM for a selective underground mining operation designed to extract molybdenum mineralization from a vein setting. Milling facilities designed to process the mineralized material extracted from the mine are being permitted concurrently on private land two (2) miles from the mine. Beginning towards the end of 2004 permit applications were being reviewed by the agencies, including the Water Pollution Control Permit, Reclamation Plan, the Air Quality Permit and the Storm Water Discharge Permit. Permitting efforts for a larger mill and underground mine including the Plan of Operations and gathering base line information for the Environmental Assessment was underway. To date, a total of $45,368 has been placed in bond to secure the work currently being performed at the Ashdown mine site, and $114,000 has been placed in bond to secure work currently being performed at the mill site. Full-scale mining will proceed upon receipt of the final permits from the Bureau of Land Management and the Nevada Division of Environmental Protection. The Ashdown property currently has no SEC compliant reserves, and will require significant investment in delineation drilling and underground development before a reserve base can be developed and audited by a third party mining engineer.
Borealis
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 (3) partners. On July 18, 2003 the Company signed a joint venture agreement for its Borealis gold project with Gryphon Gold Corporation, a Nevada incorporated company. On January 31, 2005 the Company closed an agreement to sell its thirty percent (30%) interest in the Borealis Gold Project to Borealis Mining Company/Gryphon Gold Corporation (Borealis/Gryphon) for a series of cash payments totaling $1,400,000. The terms of payment are as follows: $400,000 paid on January 18, 2005, followed by four (4) payments of $250,000, paid in ninety
(90) day increments. In accordance with the terms of the joint venture agreement to date, the parties agree that Borealis/Gryphon has earned seventy percent (70%) of the overall joint venture. With the purchase of the Companys thirty percent (30%) interest, Borealis/Gryphon will own one hundred percent (100%) of the project. In return, Gryphon Gold Corporation will guarantee Borealis Mining Companys payment obligation to Golden Phoenix by depositing as security fifteen percent (15%) of Borealis Mining Companys shares into escrow. All payments to Golden Phoenix are current with $[900,000] paid to date.
Contact
The Contact project property was held through agreements with two (2) separate entities, the International Enexco Ltd. (Enexco) joint venture and an exploration license and purchase option agreement with F.W. Lewis, Inc. (Lewis). Golden Phoenixs operating control over property owned by these two (2) entities allowed it to combine deposits within the district allowing for economic mining, which was previously not possible. On January 28, 1998, we acquired the right to earn a sixty percent (60%) percent interest in the Enexco patented mining claims through a combination of annual work commitments totaling $2,600,000 on the Enexco property and $4,000 per month payments to Enexco totaling $313,000 over seven (7) years. The Enexco agreement terminated on December 23, 2004, and at December 31, 2004 the total liability for the minimum work commitments to Enexco was $2,175,200 and $4,000 for the monthly lease payments.
On July 10, 1998 Golden Phoenix entered into an exploration license and purchase option agreement for the Lewis portion of the Contact project. On February 19, 2003 Lewis and Golden Phoenix amended the exploration license and purchase option agreement which 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 that clarified that expenditures for work performed by Golden Phoenix on either the Lewis property or the adjoining Enexco property shall be applied to Lewis minimum work commitment. On December 23, 2004 the Company terminated the Lewis agreement. With respect to the Contact project the Company reports as a liability on its balance sheet the following as current accrued liabilities: (a) land lease payments of $21,000, (b) work commitments of $2,420,643 and (c) equity payables of $1,743,807. The Company still controls six
(6) unpatented mining claims over a portion of the Banner Zone deposit and over the highest grade drill hole in the area.
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Back to Table of Contents The Company has 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 two (2) mines and conduct additional exploration in their vicinity. 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 Purchase Agreement with 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 have been open to and will continue to entertain possible joint ventures with other mining company partners. We currently have a letter of intent to joint venture dated February 5, 2004 with W-E for the Ashdown project. The Company is currently working with W-E to finalize a formal joint venture operating agreement. No other joint ventures have been entered into.
Our ability to satisfy the cash requirements of our mining development and exploration operations will be dependent upon future financing and cash flow from the Mineral Ridge gold mine and any questions from the Ashdown property that additional financing will be obtained, although no assurance can be made that funds will be available on terms acceptable to us.
Recent Corporate Developments
On January 29, 2005 the Board Compensation Committee voted on and approved compensation payments to Directors that attend supplemental meetings. The proposal was voted on and approved by the Board. Directors attending meetings supplemental to the quarterly general meeting are now compensated at $250 per meeting and the general meeting compensation of $500 was not changed.
On February 7, 2005 the development of an Advisory Board to the Board was finalized. The Advisory Board members are compensated for any hours worked in excess of eight (8) hours during any given month. To date, there has been no compensation dispersed. Compensation is made in restricted common stock payable in blocks of 2,500 shares for each eight (8) hours over the minimum requirement. In addition, normal expenses are paid by the Company. To date, there have been no submittals for expenses. Advisory Board members consist of: (a) Mr. Daniel Breckenridge from Oklahoma, (b) Mr. Robert Martin from Hawaii, (c) Mr. William R. Thomson from London, England, (d) Mr. David W. Payne from Kansas and (e) Mr. Ripley from Washington State.
On February 12, 2005 Mr. Jeffery Tissier, our former Co-Chairman of the Board, resigned his position due to pre-existing professional commitments. Mr. Tissier was also Chairman of the Audit Committee. Upon Mr. Tissier's resignation, Mr. Steven Craig assumed the position of Chairman of the Board.
On February 18, 2005, Mr. Michael Fitzsimonds resigned his positions as Chairman of the Board and Chief Executive Officer. For consideration of Mr. Fitzsimonds service, the Board of Directors (the Board) agreed to the following: (a) full compensation for one (1) year at and annual rate of $95,000, (b) the payment of all accrued vacation at full annual rate for two (2) months, (c) health insurance for fourteen (14) months at $685 per month, (d) one (1) company portable computer system valued at $1,200, (e) life insurance at $181 per month,
(f) payment of legal fees at $3,515 per month to be deducted from a note payable issued from the Company to Mr. Fitzsimonds, (g) one (1) Company truck valued at $658 per month, (h) a severance bonus of $100,000 and (i) monthly interest payments of $1,350 for a period of approximately seventy two (72) months.
On February 18, 2005 Mr. Kenneth Ripley was employed as Interim Chief Executive Officer. Currently, the Board Compensation Committee and Mr. Ripley have not agreed to an employment contract. For accounting liabilities, the last known proposed agreement made to Mr. Ripley was used as the liability basis. The offer consists of: (a) a base annual salary of $185,000, (b) per diem meals at a rate of $28.00 per day, (c) a Company vehicle with a monthly value of $600, (d) Company housing with a value of $1,000 per month, (e) reimbursement of travel expenses from Mr. Ripleys home to the Company's headquarters and return on a weekly basis equal to $280 and (f) and other items such as cell phone, parking, etc. equal to $1,000.
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Back to Table of Contents On February 18, 2005 the Board approved the formation of an Interim Governing Board. The Interim Governing Board has daily management control of the Company. The Interim Governing Board reports directly to the Board. Members of the Interim Governing Board consist of: (a) Mr. Kenneth Ripley, (b) Mr. Ronald Parratt and (c) Mr. David Caldwell.
On May 10, 2005, the Company entered into a loan agreement with William and Candida Schnack. The basic loan agreement is for advances of $1,000,000 with a payback including principal of $3,000,000. Under the terms of the Companys payback, certain portions of the loan compute annual interest rates of approximately 500%. Average computed interest for the loan with timed payback is approximately 300%. The Company is currently in default of the first $500,000 payment due October 20, 2005, and is negotiating an amendment to the original loan agreement that will restate the payment schedule of the loan to conform with the actual progress of the mining activities at Ashdown.
On June 14, 2005 the Company entered into a short term loan with Kenneth Ripley. The combined amounts of $241,000 constitute two (2) loans payable on July 31, 2005. These loans have been extended for an indefinite period. Interest rates for the short term advances are at eighteen (18%) per annum and with setup charges have an annual rate of twenty-three percent (23%).
On July 13, 2005, we entered into the Purchase Agreement with Fusion Capital pursuant to which Fusion Capital agreed to purchase, on each trading day during the term of the agreement, $12,500 of our common stock or an aggregate of $6.2 million. Upon the effectiveness of a registration statement Fusion Capital has agreed to purchase $200,000 of the Companys common stock at a price of $0.15 per share (or 1,333,334 shares). The remaining $6 million of common stock is to be .