U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A-2
x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from _________ to
__________
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Commission File Number
0-50218
BEKEM METALS, INC.
(Name
of Small Business Issuer in its charter)
Utah
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87-0669131
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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170 Tchaikovsky Street, 4
th
Floor
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Almaty, Kazakhstan
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050000
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(Address of principal executive offices)
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(Zip code)
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Issuer's telephone number:
+
7 3272 582 386
Securities registered pursuant to section 12(b) of the Exchange
Act:
None
Securities registered pursuant to section 12(g) of the Exchange
Act:
Common, $0.001 par value
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. (1) Yes
x
No
o
Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this form 10-KSB or any amendment to this Form 10-KSB.
o
Check
if the Issuer is a shell company.
o
The
issuer's revenue for its most recent fiscal year was: $0.
The
aggregate market value of the issuer's voting stock held as of March 20, 2007, by
non-affiliates of the issuer was approximately $45,054,015, based on the average of the
bid price and the ask price for the Company's common stock on that date, as reported on
the OTCBB.
As of
March 5, 2007, the issuer had 125,172,011 shares of its $0.001 par value common stock
outstanding.
Transitional Small Business Disclosure
Format
.
Yes
o
No
x
Documents incorporated by reference:
None
Table of Contents
PART I
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Explanatory Note
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2
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Items 1 & 2.
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Description of Business and Properties
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4
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Item 3.
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Legal Proceedings
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28
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Item 4.
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Submission of Matters to a Vote of Security
Holders
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28
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PART II
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Item 5.
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Market for Common Equity, Related Stockholders Matters
and Small Business Issuer Purchases of Equity Securities
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28
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Item 6.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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32
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Item 7.
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Financial Statements
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40
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Item 8.
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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40
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Item 8A.
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Controls and Procedures
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40
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Item 8B.
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Other Information
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42
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PART III
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Item 9.
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Directors, Executive Officers, Promoters, Control
Persons and Corporate Governance; Compliance with Section 16(a) of the
Exchange Act
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42
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Item 10.
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Executive Compensation
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47
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Item 11.
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Security Ownership of Certain Beneficial Owners and
Management
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50
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Item 12.
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Certain Relationships and Related Transactions, and
Director Independence
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52
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Item 13.
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Exhibits
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53
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Item 14.
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Principal Accountant Fees and Services
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53
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SIGNATURES
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54
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1
EXPLANATORY NOTE
Bekem
Metals, Inc. (hereinafter referred to as “us,” “we,” the
“Company” or “Bekem”) is filing this Amendment No. 2 on Form
10-KSB/A-2 (the “Second Amendment”) to its Annual Report for the fiscal
year ended December 31, 2006, which was filed with the Securities and Exchange
Commission (“SEC”) on April 2, 2007 (the “Original Report”), as
amended on March 20, 2008 (the “First Amendment”), in response to a comment
raised by the staff of the SEC. More particularly, this Second Amendment amends the
Original Report, as amended by the First Amendment, to clarify that Note 13 of the
notes to the audited consolidated financial statements included in the First Amendment
and in this Second Amendment is audited and to properly dual date the report from our
independent registered public accounting firm indicating the date that Note 13 is
audited. Item 7 “
Financial
Statements
” of the Original Report, as amended by the
First Amendment, is hereby revised accordingly.
In accordance with Rule 12b-15 under the Securities Exchange Act of
1934, this Amendment also includes currently dated certifications from the
Company’s Chief Executive Officer and Chief Financial Officer as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certification exhibits and
Item 13 “
Exhibits
” have
been revised accordingly.
This Amendment speaks only of the filing date of the Original Report, as
amended by the First Amendment and, except for those Items disclosed in this
explanatory note, is unchanged from the Original Report, as amended. This Second
Amendment does not reflect events after the filing of the Original Report, as amended,
or modify or update those disclosures affected by subsequent events. Therefore, you
should read this Second Amendment together with our other reports that update and
supersede the information contained in this Second Amendment.
2
FORWARD LOOKING STATEMENTS
Certain statements contained herein including, but not limited to those
relating to our plan of operations, future potential revenue, future expenses, future
exploration of our mineral properties, the development and commercial viability of our
processing technology, our ability to obtain future governmental approvals, expansion
of our activities, our ability to generate cash flow, future demand for nickel, cobalt
and brown coal, future commodity prices, integration of new technologies into
operations, credit facilities, future capital expenditures and working capital,
sufficiency of future working capital, borrowings and capital resources and liquidity,
expectations of timing, satisfaction of contingencies, the impact of any change in
accounting policies on our financial statements, future acquisitions,
management’s assessment of internal control over financial reporting, financial
results, opportunities, growth, business plans and strategy and other statements that
are not historical facts contained in this report are forward-looking statements. When
used in this document, words like
“
believe
,”
“
expect
,”
“
project
,”
“
intend
,”
“
estimate
,”
“
budget
,”
“
plan
,”
“
forecast
,”
“
predict
,”
“
may
,”
“
will
,”
“
could
,”
“
should
,” or
“
anticipates
” and
similar expressions or the negative thereof, or other variations thereon, or comparable
terminology, or discussions of strategy that involve risk and uncertainties are also
intended to identify forward-looking statements. Such statements involve known and
unknown risks, uncertainties, and other factors that may cause the actual results,
performance or achievements of the Company or industry to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, market
factors, market prices (including regional basis differentials) of nickel, cobalt and
brown coal, results of future exploration and extraction activities, future costs,
unsettled political conditions, civil unrest and governmental actions, foreign currency
fluctuations, and environmental and labor laws and other factors detailed herein. Given
these uncertainties, prospective investors are cautioned not to place undue reliance on
such forward-looking statements. These forward-looking statements are based on current
expectations, and we assume no obligation to update this information. We undertake no
obligation to publicly update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise.
3
PART I
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Items 1 & 2.
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Description of Business and Properties
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Company History
We are engaged in the exploration of nickel, cobalt and brown coal
deposits in the Republic of Kazakhstan.
We incorporated in the state of Utah under the name EMPS Research
Corporation on January 30, 2001. Until the end of the 2004 fiscal year, our primary
business focus was the development, marketing and licensing of our patented technology
for use in commercially separating nonmagnetic particulate material by building and
testing a high frequency eddy-current separator (“HFECS”).
We changed our name to Bekem Metals, Inc., on March 16, 2005 following
our acquisition of Condesa Pacific, S.A., a British Virgin Islands international
business company, and its wholly owned subsidiary Kaznickel, LLP in January of 2005.
With the acquisition of Kaznickel, our primary business focus shifted from the
development of our HFECS technology to exploring for nickel and cobalt in Kazakhstan.
On July 24, 2006 Condesa transferred its interest in Kaznickel to Bekem, making
Kaznickel a wholly-owned subsidiary of Bekem. On October 1, 2006 Bekem sold Condesa to
a third party for nominal value.
The primary asset of Kaznickel is an exploration and production
concession issued by the government of the Republic of Kazakhstan which grants
Kaznickel the exclusive right, through February 2008, unless extended, to explore for
nickel, cobalt and other minerals in a 12,232 acre area in northeastern Kazakhstan
known as the Gornostayevskoye (“Gornostai”) deposit. The concession further
provides that if we make a commercial discovery of nickel, cobalt or other minerals
within the concession territory, we can apply for and receive the exclusive rights to
commercially produce and sell nickel and cobalt ore through February 2026.
On October 24, 2005 we acquired Kazakh Metals, Inc. (“KMI”),
and its wholly owned subsidiary Kyzyl Kain Mamyt (“KKM”), LLP in exchange
for 61,200,000 shares of our common stock. KKM holds the exclusive subsoil use contract
to extract and process nickel and cobalt ore from its Kempirsai deposit, which is
comprised of the Kara-Obinskoye, and Stepninskoye sections (collectively referred to as
the “Kara-Obinskoye section”) and Novo-Shandashinskoye section, and brown
coal from its Mamyt deposit. Unless otherwise indicated by the context of the
disclosure, the Kara-Obinskoye section, the Novo-Shandashinskoye section and the Mamyt
deposit are collectively referred to herein as the “Kempirsai deposit.”
Under the applicable accounting reporting rules, KMI was considered the accounting
acquirer.
4
Business of the Company
The Nickel Market
According to United States Geological Survey (“USGS”) the
world mine reserves of nickel and the world mine reserves base of nickel in 2006 were
64 million tons and 140 million tons, respectively. In 2006 total nickel production was
approximately 1,550,000 tons. Russia was the largest producer of nickel in the world
with a 20% market share, followed by Canada with 15%, Australia with 12%, and Indonesia
with 9%.
There is some debate in the market as to whether nickel prices will
continue to increase. In 2006 the average price for nickel was about $24,287 per ton,
up from $14,372 in 2005. The average London Metal Exchange (“LME”) price
for nickel in January 2007 was $36,811 per ton.
There are several factors that can affect the overall worldwide nickel
demand and prices in the future, which include the following:
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•
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Expansion of new nickel mining capacity;
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•
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New processing technologies;
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•
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Stainless-steel worldwide demand.
|
5
There are a number of new nickel mining projects that are projected to
meet demand over the next five years. The Brazilian CVRD (former INCO) has been
constructing a laterite mining complex at Goro near the southeastern tip of New
Caledonia. It is anticipated that the New Caledonian nickel will be recovered onsite
using pressure acid leaching technology. Australia’s leading nickel producer, BHP
Billiton, is also developing a large laterite deposit near Ravensthorpe, Western
Australia. Several other companies are considering employing some form of acid leaching
technology to recover nickel in Cuba, Guatemala and the Philippines. The USGS has
reported, however, that some nickel consumers are concerned that the global demand for
nickel could outstrip supply before new mining projects can be completed. At least five
automobile manufactures plan to use nickel-metal hydride batteries to power their
gasoline-electric hybrid vehicle for the 2008 and 2009 model years, which would lead to
a significant increase in nickel demand.
According to CRU Strategies, an independent business analysis and
consultancy group focused on the mining, metals, power, cables, fertilizer and chemical
sectors, the compounded annual growth rate (“CAGR”) of primary nickel
consumption in the last 5 years was 4.1%. In the next five years the CAGR is expected
to grow strongly up to 4.3% annually. Increasing world consumption of stainless steel
is being driven in large part by China’s continued rapid economic expansion.
Strong economic growth in the rest of the world will also support nickel consumption.
The CRU Strategies analysis indicates that over 320,000 tons more primary nickel will
be required by 2011 compared with 2006, and that supply and demand of primary nickel
would be evenly matched in the next five years if the industry developed laterite ore
bodies, especially limonite deposits utilizing high pressure acid leach
technology.
Stainless-steel production, the single largest end use market segment of
nickel, is expected to grow steadily in the next five years, relying heavily on the
primary nickel supply for its expansion. Of course, high nickel prices force some steel
mills to substitute chromium and manganese in place of nickel; while this lowers the
cost of producing, it also lowers the corrosion-resistance of the steel. This
lower-quality steel is used mainly in consumer applications where the low price of the
final product is more important than corrosion resistance. Resistance to corrosion
makes nickel an essential element both in alloys and as a catalyst. For aerospace,
electric power and petrochemical industries, this resistance to corrosion is essential,
as well as for use in gray-iron castings to toughen the iron, promote graphitization
and improve machineability.
6
Our Properties
As discussed above, through our subsidiaries, we hold the rights to the
Kempirsai nickel, cobalt and brown coal deposits, which are located in northwestern
Kazakhstan and the Gornostai nickel and cobalt deposit located in northeastern
Kazakhstan.
7
Location and access to our properties
The Kempirsai deposit is located in the Khromtausky region of
northwestern Kazakhstan, approximately 130 kilometers northeast of Aktobe, Kazakhstan.
The nickel and cobalt deposits are located approximately 35 kilometers south of
Badamsha village, Aktobe region, Kazakhstan and the brown coal deposit is located
approximately 30 kilometers east of Badamsha village, Aktobe region, Kazakhstan.
Badamsha is a village of approximately 6,000 people. The Aktubinsk-Karabutak asphalt
highway runs within 14 kilometers to the south of the nickel and cobalt deposit. The
nickel, cobalt and brown coal deposits can be accessed through a network of country
roads. The Orsk-Kanadagash state railway runs nearby the Kempirsai deposit and, through
our subsidiary KKM, we own 55 kilometers of our own railway. Our railway connects the
Kempirsai deposit to a reloading station and to a Russian railway.
8
The Gornostai deposit is located in the Beskaragaiskiy region of
northeastern Kazakhstan, approximately 110 kilometers west of Semey, Kazakhstan and 30
kilometers east of Kurchatov, Kazakhstan. The Gornostai deposit is divided into the
South and North sections by the navigable Irtysh River. The Gornostai deposit may be
accessed by an asphalt highway that crosses the northern part of the South section of
the deposit. The Semey-Astana railway also passes through the northern part of the
South section of the deposit.
Title to Properties
We hold several subsoil use contracts that grant us the right to explore
for and extract nickel, cobalt and brown coal at the Kempirsai deposit. We also hold an
subsoil use contract that currently grants us the right to explore for nickel, cobalt
and other minerals within the Gornostai deposit. Upon discovery of commercially
producible reserves we can apply to move to commercial production. For additional
information regarding our contracts please see the following table.
9
Territory
Name
|
Size of
Territory
|
Primary Minerals
|
License
Type
|
License or
Contract
#
|
License and
Subsoil Use Contract Term
|
|
|
|
|
|
|
Kempirsai
|
575,756 acres
|
Nickel and cobalt ore
|
Production
|
MG #420
MG #426
|
Expires Oct, 12, 2011 unless extended.
|
|
|
|
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Mamyt
|
116 acres
|
Brown coal
|
Production
|
MG #9-D
|
Expires Dec, 11 2018 unless
extended.
|
Gornostai
|
12,232 acres
|
Nickel and cobalt ore
|
Exploration
and
Production
|
1349
|
Exploration period expires Feb. 26, 2008 unless
extended. Production period expires Feb. 26, 2026 unless
extended.
|
The Kempirsai deposit was discovered and actively explored during the
Soviet era. In the 1980s, the State Reserves Committee approved the reserves (based on
Soviet standards) and approved the Kempirsai deposit for commercial production. The
Kempirsai deposit was actively mined during the 1980s and early 1990s. Active mining at
the Kempirsai deposit ceased in 1996. The working program associated with these
licenses for the Kempirsai nickel, cobalt and Mamyt brown coal deposits are production
contracts, those contracts do not require us to undertake significant exploration
activities. While we do not have fixed exploration obligations, in order to retain our
licenses we are required to engage in certain activities. For details regarding our
minimum mine production requirements see “
Working
Programs of our Subsidiaries
” in this Item 1 & 2
“
Description of Business and
Properties
.”
The subsoil use contract to the Gornostai deposit was issued in February
2004. At the time it was issued, the MEMR determined that additional exploration of the
deposit was necessary to determine the existence of commercially producible mineral
reserves. Therefore, the subsoil use contract provides a period for exploration. Under
the terms of the contract for the Gornostai deposit, we were granted the right to
explore for nickel and cobalt for two years. The exploration term provides for two
two-year extensions upon our request. We requested and were granted our first
extension, extending the current exploration period to February 2008. Upon discovery of
commercially producible nickel and/or cobalt reserves, we may notify the MEMR and
convert from exploration stage to commercial production stage. If we make no commercial
discoveries before the end of the exploration period, as extended, our rights to the
territory will revert back to Republic of Kazakhstan. Upon completion of exploration,
we will return to the Republic of Kazakhstan the rights to all areas within the
licensed territory wherein no commercial discoveries of nickel and/or cobalt were
made.
When we complete exploration of the Gornostai deposit, assuming we make
commercial discoveries, we will apply to the MEMR to move to commercial production. At
that time we will be required to pay a 0.1% commercial discovery bonus based on the
initial determination of our mineral resources by the MEMR.
10
The term of each of our subsoil use contracts vary. Under our contracts
we have the right to negotiate with the MEMR for extensions of the terms of those
contracts. If we are unsuccessful in negotiating extensions, upon the expiration of
those contracts our interest in and rights to those properties terminates and reverts
back to the government of the Republic of Kazakhstan, but we retain the rights to all
tangible and intangible assets we acquire for exploration, extraction and production at
these deposits.
All of our subsoil use contracts are currently in good standing.
Retention of our contracts, however, is contingent upon our complying with our annual
minimum work program requirements and other subsoil use contract obligations. If we
fail to satisfy our annual minimum working program requirements we could be subject to
fines and penalties or even to the potential forfeiture of our contracts and all rights
we have thereunder.
Under the terms of our subsoil use contracts we are required to provide
industrial training to our employees in an amount not less than 1% of the total minimum
work program expenses we incur each year.
For additional details regarding the terms and obligations associated
with our subsoil use contracts and licenses please see
“
Tax and Royalty Scheme in the Republic of
Kazakhstan
” and “
Working
Programs of our Subsidiaries
” in Item 1 & 2
“
Description of Business and Properties”,
“Summary of Material Contractual Commitments
” in
Item 6 “
Management’s Discussion and
Analysis
” and “
Note 4
– Property, Plant and Mineral Interests
”,
“
Note 9 – Asset Retirement
Obligation
” and “
Note 12
– Commitments and Contingencies
” contained in the
Notes to our Consolidated Financial Statements.
Working Programs of our Subsidiaries
For us to maintain our rights to the Kempirsai and Gornostai deposits we
must satisfy the work program requirements of the MEMR for each property. Each year we
must submit a proposed annual work program under each subsoil use contract or license
to the MEMR. This annual work program must be reviewed and approved by the MEMR. The
current work program under our KKM contracts and licenses calls for KKM to extract the
following amounts of ore from the Kempirsai deposit and brown coal from the Mamyt
deposit:
|
Tons of Ore
|
Tons of Brown Coal
|
2006
|
-0-
|
20,000
|
2007
|
175,000
|
60,000
|
2008
|
350,000
|
200,000
|
2009
|
1,000,000
|
200,000
|
2010
|
1,000,000
|
200,000
|
2011
|
1,000,000
|
200,000
|
2012
|
|
200,000
|
2013
|
|
200,000
|
2014
|
|
200,000
|
2015
|
|
200,000
|
2016
|
|
200,000
|
2017
|
|
200,000
|
2018
|
|
200,000
|
11
Under our 2006 work program for Kaznickel, we were required to drill at
least 17,498 meters on the Gornostai deposit. We drilled only 12,652 meters during
2006. We have been successful in negotiating an amendment to our work program with the
MEMR to allocate the balance of the 4,846 meters to the drilling program for 2007. Our
total drilling requirement for the 2007 calendar year is 12,961 meters. Through
February 2007, we have drilled a total of 5,990 meters.
Should we fail to complete the minimum work program in any year, the
MEMR could review the work program, request an update and amendment to the work
program, impose fines and penalties upon us or even revoke our subsoil use contracts
and licenses.
Geology and mineralization of our deposits
Kempirsai
As mentioned above, the Kempirsai nickel and cobalt deposit is comprised
of two deposits: Kara-Obinskoye, and Novo-Shandashinskoye. These deposits are located
approximately 5-10 kilometers from each other. The results of exploration carried out
during the Soviet era show that nickel and cobalt ore is located within the Kempirsai
deposit ultramafic massif. The minerals are found in laterite form and are associated
with leached nontronized serpentinites. The ore bodies have a blanket-like shape and
tend to lie conformably on the underlying rocks. The depth of ore bodies from the
surface is 0-40 m. In vertical section they are mainly horizontal in attitude and show
variable thickness. Thickness varies from 2.0 meters to 30.0 meters, with an average
thickness of 6.0 meters. Average stripping ratio is 1.5 cubic meters per ton. The
nickel content of the ore within the Kempirsai deposit varies from 0.8% to 3.0% and
cobalt – from 0.025% to 0.08%. The average nickel and cobalt content for the
Kara-Obinskoye are 1.1% and 0.066% respectively. The average nickel and cobalt content
for the Novo-Shandashinskoye deposit are 1.38% and 0.045%.
The ore reserves of the Kempirsai deposit were evaluated during the
Soviet era based on Soviet standards. The Soviet standards, however, are not consistent
with the standards established by the SEC. Therefore, consistent with Industry Guide 7,
we have included no claims as to the ore reserves that may be contained within the
Kempirsai deposit. Until such time as we establish commercially producible reserves
within the Kempirsai deposit you should consider the Kempirsai project to be
exploratory in nature. The Kempirsai deposit is currently being evaluated by Wardell
Armstrong, a qualified independent engineering firm. We anticipate they will issue a
preliminary report during the second quarter 2007. For additional information regarding
reserves please see
“
Reserves
” in this Items
1 & 2 “
Description of Business and
Properties
.”
12
Gornostai
Exploration activities conducted during the Soviet era and by us since
we acquired the rights to the deposit have identified 21 ore bodies through drilling
within the South section of the deposit and two ore bodies in the North section. The
area of the deposit is located within the Gornostai ultramafic belt. The area of
deposit is characterized by three distinct zones of ochre, nontronite, and leached and
disintegrated serpentinite:
|
•
|
Ochre zone
represents the
upper part of the serpentinite weathered crust.
|
|
•
|
Nontronite zone
is more
widespread than the ochre zone with thickness varying from 2 up to 10 m
(sometimes reaching 30 m)
|
|
•
|
Zone of leached and disintegrated
serpentinite
is the most widespread amongst
the three zones. The zone mean thickness is 15-20 m (in some cases up
to 50 m).
|
The minerals are found mainly in laterite form. The ore bodies have
embedded form, are mainly horizontal in attitude and show variable thickness. The
nickel content in the ore bodies varies from 0.7% to 2.3% and cobalt from 0.05% to
0.37%. The ore bodies are typically located at depths between 0 to 20 meters from the
surface, allowing from strip mining. The lengths of the ore bodies range from 200
meters to 4,050 meters and widths range from 200 meters to 2,000 meters. Thickness
varies from 0.8 meters to 15 meters. Average ore body thickness is around 4.2 meters,
with an estimated average stripping ratio of 1.8 cubic meters per ton. Of the drilling
done to date, the average content of nickel is 0.85% and cobalt 0.059%.
Based on the exploration activities undertaken on the deposit, we
believe the size of the ore bodies, their simple form and shallow bedding will allow
the deposit to be mined by open pit method with a low stripping ratio.
Despite the exploration work completed during the Soviet time and by us
since acquiring this deposit, we do not have a current ore reserve estimate for the
Gornostai deposit that complies with the standards established by the SEC. Accordingly,
and consistent with Industry Guide 7, we provide no claims as to the ore reserves that
may be contained within the Gornostai deposit. Moreover, because we are currently in
the exploration stage of our contract and have not yet established commercially
producible reserves, the Gornostai project should be deemed exploratory in nature. This
deposit is currently being evaluated by Wardell Armstrong. We expect Wardell Armstrong
will complete their evaluation and issue their preliminary report during the second
quarter of 2007. For additional information regarding reserves please see
“
Reserves
” in this Items
1 & 2 “
Description of Business and
Properties
.”
13
History and current state of our deposits
Kempirsai
The KKM subsoil use contract to the nickel and cobalt deposits covers a
575,756 acre territory, in northwestern Kazakhstan. This contract was issued by the
MEMR and incorporates License series MG#420 and MG#426. These licenses to the nickel
and cobalt deposits cover a period expiring on October 12, 2011. This contract may be
extended upon agreement between KKM and the MEMR. KKM also holds a subsoil use contract
that incorporates License series MG #9-D for a brown coal deposit located within 40
kilometers of its nickel and cobalt deposit. This contract expires on December 11, 2018
with the possibility of further extensions.
Historical exploration and production
activities
Deposits in the area of the Kempirsai deposit were first discovered in
the 1930s. The Kempirsai deposit was discovered in 1938 and explored during the Soviet
era. During the late 1970s the Kara-Obinskoye and Novo-Shandashinskoye sections were
explored by core drilling on a 12.5-25m x 25m grid. The volume of exploration works
done on the deposits were as follows:
Deposit
|
|
Number of Holes
|
|
Meters
|
|
Samples
|
|
|
|
|
|
|
|
Kara-Obinskoye
|
|
4,498
|
|
79,400
|
|
46,490
|
Novo-Shandashinskoye
|
|
780
|
|
7,770
|
|
6,135
|
The State Reserves Committee approved the Kara-Obinskoye and
Novo-Shandashinskoye reserves for commercial production in the 1980s. These deposits,
along with others in the region, were assigned to YuzhUralNickel during the Soviet era.
YuzhUralNickel is a Russian company with a nickel processing plant in Russia located
approximately 90 kilometers north of the Kempirsai deposit. Approximately 171 million
tons of nickel ore have been mined from deposits in the area where the Kempirsai
deposit is located, including 770,000 tons from the Kara-Obinskoye and
Novo-Shandashinskoye sections of the Kempirsai deposit. During peak production in the
late 1980s, almost five million tons of ore were mined annually from the Kempirsai
deposit. Active mining of the Kempirsai deposit was discontinued in 1996.
The Kempirsai deposit remained the property of YuzhUralNickel after the
break up of the Soviet Union until 1996, when a joint venture between YuzhUralNickel
and the Kazakhstan State Property Committee was formed. Because of a lack of Russian
interest in developing this deposit in Kazakhstan, the joint venture was unsuccessful.
In 1999 the rights to the Kempirsai and Mamyt deposits were acquired by KKM from the
joint venture. Due to a lack of funding and processing capability, combined with market
conditions and the nickel content of Kempirsai ore, KKM has not engaged in active or
significant mining activity since acquiring the deposits.
14
Historically, the Kempirsai deposit was open-pit mined, with maximum
mining depths of approximately 20 meters. We anticipate that the Kempirsai deposit will
be open-put mined in the future.
Plant, equipment and infrastructure
KKM owns fuel tanks, locomotives, rail cars, railway cranes, bridge
cranes, railway cisterns, maintenance equipment, excavators, motor graders, passenger
vehicles, passenger buses, heavy dump trucks, hoppers, scales, lathes, forging hammers,
presses, grinding, milling and boring machines, boilers, electrical substations, office
equipment, business machines, portable communication equipment, laboratory equipment
and multiple buildings. The machinery was manufactured between 1950 and the present.
The buildings were built between the 1940’s and the early 1990’s. Our
equipment and infrastructure in its current state has the capacity to mine
approximately 250,000 tons of ore annually. Much of our existing equipment and
buildings will need repair and refurbishing prior to being put into active operation.
We estimate the cost of these repairs to be approximately $1,000,000. Once repaired, we
expect our infrastructure and equipment to have a standing capacity to mine up to
500,000 tons of ore annually.
In addition to the rail and road infrastructure discussed above, 220 and
110 kilovolt high voltage power lines run nearby the Kempirsai deposit and the
Buhara-Ural gas pipeline runs approximately 10 km to the east of the Kempirsai deposit,
(see “Kempirsai Project Location Map” included in “Location and
access to our properties” in this Item 1 & 2 “Description of Business
and Properties.”) We can access water from the lakes around Badamsha. In the
future, we also plan to use coal from our Mamyt deposit to supply power for an ore
processing plant.
Costs
Since acquiring the rights to the Kempirsai deposit in 1999, KKM has
expended approximately $14,000,000 million at the Kempirsai deposit, including
approximately $5,500,000 from the date we acquired KMI in October 2005 through December
31, 2006. We anticipate future planned costs to be up to $600 million, depending on
technology and capacity of the processing plant we plan to build at the Kempirsai
deposit as discussed herein greater detail in the
“
Processing
” section of
this Item 1 & 2. “
Description of Business and
Property
.” We plan to spend approximately $3.4 million
in 2007, depending on ore sells, in the further development of the Kempirsai deposit
and in the “
Plan of
Operations
” section of Item 6.
“
Management’s Discussion and
Analysis
.”
Gornostai
In February 2004, Kaznickel acquired a concession for exploration and
development of the Gornostai nickel and cobalt deposit (contract No. 1349 registered by
the MEMR), covering 12,232 acres in eastern Kazakhstan.
15
We are at the exploration stage on the Gornostai deposit. This deposit
was discovered in 1958. From 1960 to 1968 a series of geological and prospecting
surveys and evaluation work was performed on both sections of the deposit by the
Semipalatinsk Expedition to evaluate available nickel and cobalt ore reserves. The
surveys identified and explored 21 ore bodies on the South section and two ore bodies
on the North section of the deposit. These exploration works tested the deposit to
depths of around 50-75 meters in the South section and up to 150 meters in the North
section.
In the South section, drilling was undertaken on a 200-400 meter x
100-200 meter grid. In total 2,067 shallow depth holes with a total length of about
60,000 m and several deep holes with a total length of 2,857 meters were drilled. 48
pits varying in depth between 4.3 – 24.6 meters (570 meters in total) were
explored around drill hole to check core sample results. In 1965 two pits were explored
for metallurgical samples. Sample weights were 1.3 and 3.6 tons. Samples were tested at
the VNIITzvetmet Institute in Ust-Kamenogorsk, Kazakhstan.
In the North section, drilling was undertaken primarily on a 1600 meter
x 400 meter grid. Ore bodies of significant thickness, up to 40 meters, with nickel
content up to 3.64% (average 1.55%) were identified. These deposits were located at
depths between 40-90 meters.
The Gornostai deposit was abandoned, however, as reserves around Norilsk
in Russia were considered more attractive because of larger reserves and higher nickel
content. Moreover, the Norilsk reserves were already at the production stage. In
addition, a Soviet army nuclear test site, similar to the Nevada Test Site, was located
near the Gornostai deposit. The surrounding territory, including the deposit, was
considered a secret military zone. For these reasons, further exploration of the
deposit was discontinued in 1968.
The last nuclear testing in the area was conducted more than 15 years
ago. Recent tests show that the radiation levels in the soil, water and air are within
normal ranges.
Exploration activities
Since acquiring Kaznickel, consistent with the terms of the current
three-year work program for the deposit approved by the MEMR in 2005, we have engaged
in exploration activities within the Gornostai licensed territory to determine the
characteristics of this deposit. During 2006 we drilled 488 holes to a total depth of
12,652 meters, and an average depth of 30 meters per hole, and have taken 6,755
geochemical and core samples to CenterGeoAnalit LLP, a nationally accredited
independent laboratory located in Karaganda, Kazakhstan, to perform spectrum and
quantity analysis to identify the content of nickel, cobalt and iron. During 2005 we
drilled 42 holes to a total depth of 1,065 meters, and an average depth of 30 meters
and have taken 595 samples to the Institute of Nonferrous Metals, located in Oskemen,
Kazakhstan. Under the three-year work program, we are required to drill an additional
12,961 meters in 2007. In addition to the drilling works that have been completed, a
small area of the Gornostai deposit was strip mined in 1991.
16
As discussed above, currently the exploration stage of our license runs
through February 2008. We have the option to extend exploration stage through December
31, 2009. During the exploration stage we are required to engage in certain activities
to determine the existence of commercially producible mineral reserves. We have planned
the following exploration activities for 2007, which we believe will be sufficient to
both satisfy our minimum work program requirements and to help us establish
commercially producible reserves within the Gornostai deposit. Once we establish
commercially producible reserves, we plan to move to commercial production at the
Gornostai deposit.
Activity
|
|
Quantity
|
|
Anticipated Timetable
|
|
Estimated Cost
|
|
|
|
|
|
|
|
|
|
Core drilling South section
including mobilization/ demobilization
|
|
15,000 meters
615 holes
|
|
January 2007 through
June 2007
|
|
$1,315,000
|
|
|
|
|
|
|
|
|
|
Core drilling North section
|
|
700 meters
5 holes
|
|
June 2007 through
July 2007
|
|
$62,000
|
|
|
|
|
|
|
|
|
|
Pits for checking drilling results
|
|
|
|
July 2007 through
September 2007
|
|
$51,000
|
|
|
|
|
|
|
|
|
|
Core sampling
|
|
8,700 samples
|
|
January 2007 through
July 2007
|
|
$42,000
|
|
|
|
|
|
|
|
|
|
Survey, hydrology and engineering
|
|
|
|
March 2007 through
July 2007
|
|
$58,000
|
|
|
|
|
|
|
|
|
|
Core preparation
|
|
8,900 samples
|
|
January 2007 through
September 2007
|
|
$52,000
|
|
|
|
|
|
|
|
|
|
Assaying and metallurgical tests
|
|
9,000 samples
|
|
February 2007 through
October 2007
|
|
$135,000
|
|
|
|
|
|
|
|
|
|
Interpretation of exploration results and preparation of
the report and reserve estimate for submission to the State Reserves
Committee (“SRC”)
|
|
|
|
July 2007 through
April 2008
|
|
$50,000
|
|
|
|
|
|
|
|
|
|
Approval of report and reserve estimate by
SRC
|
|
|
|
April 2008 to
September 2008
|
|
$0
|
|
|
|
|
|
|
|
|
We have retained three local drilling contractors, SemGeo LLP, Topaz and
Tomai-Burservice to perform core drilling activities. Each of these drilling
contractors holds a state license to provide services as a drilling contractor and has
years of drilling experience in the local market.
17
Core sampling, core logging and results interpretation will be carried
out by our own in-house geologists, who have 10-30 years experience in such activities.
Core preparation will be conducted by the preparation laboratory of SemGeo LLP, a third
party with years of experience in the local market. Assaying will be done by
CenterGeoAnalit LLP.
Core sampling, assaying and quality assurance/quality
control
Core sampling will be conducted over the full length of the hole. In
general, sample intervals will be 1-2 meters, which will produce 2-5 kilograms of
sample from each interval. The core will not be cut because the rocks are fractured.
Samples will be undertaken of the whole core.
All sample preparation will be done at the SemGeo LLP laboratory, which
is located approximately 120 kilometers from the Gornostai deposit. Whole core samples
are sent to SemGeo in 2-5 kilogram labeled Hessian bags which are stacked in racks and
dried at approximately 90° C. Samples are then sent to a small jaw crusher that
reduces the whole sample to 4-5 millimeters. The sample is then sent to a roll crusher
where it is reduced to 1-2 millimeters. The equipment is cleaned with compressed air
between samples. Samples are then split by cone and quartering with opposite quadrants
combined before being sent to the disc grinder where the sample is reduced in size to
74 micrometers. Every fifth sample is checked by sieving to see if it complies with
this grain size. As an additional check, every thirtieth sample is waste rock to act as
a “blank” control.
From the sample preparation facility, approximately 60 grams of
pulverized sample will be sent to the CenterGeoAnalit LLP laboratory for assay, while
the pulps are kept at the sample preparation facility. Assaying includes the
quantitative determination of the main ore components, including nickel, cobalt and
iron.
Composite samples will be produced to determine the chemical composition
of slag-forming oxides, detrimental impurities and accompanying components in the ores.
Composites are made up from three to five individual samples from one intersection by
taking material from duplicates of analytical samples proportional to their length. The
maximum weight of a composite sample will be 250 grams.
For quality control, each of 30 samples includes approximately 10%
checks comprising of one blank, one duplicate and one standard. As standards, we use
the certified Reference Samples from GEOSTATS PTY LTD (Australia). We have 11 standards
with nickel grade varying from 0.02% to 1.51%. In the event an assay result of the
Reference Sample shows >2 or <2 standard deviations from the accredited value,
the whole batch will be re-assayed.
18
Submission of report and reserves estimate to the State Resources
Committee
We will retain a third party to work with our in-house geologists to
prepare the report and reserve estimate for submission to the State Resources Committee
in connection with our application to move to the Gornostai deposit from exploration
phase to commercial production phase. We have not yet selected a party to provide this
service.
Infrastructure
In addition to the road and rail infrastructure discussed above, low
tension power lines follow the railway are run within the Gornostai deposit. A high
tension power line is located approximately 6-7 km to the south of the central part of
the South deposit. We have access to water from Irtysh River. Unlike the Kempirsai
deposit, there are no buildings and minimal equipment at the Gornostai
deposit.
Costs
Since acquiring the rights to the Gornostai deposit in February 2004,
Kaznickel has spent approximately $3,000,000 in exploration activities at the Gornostai
deposit. Of this amount, approximately $2,500,000 was spent from January 2005, when we
acquired Kaznickel, to December 31, 2006. As with the Kempirsai deposit, we anticipate
costs to be as high as $600,000,000, depending on capacity and technology of the type
of processing plant we build at the Gornostai deposit as discussed herein greater
detail in the “Processing” section of this Item 1 & 2.
“
Description of Business and
Property
.” We plan to spend approximately $1,800,000 in
exploration activities within the Gornostai deposit during fiscal 2007. For additional
details please see the “
Plan of
Operations
” section of Item 6.
“
Management’s Discussion and
Analysis
”.
Processing
We currently have no processing facilities at either the Gornostai or
Kempirsai deposits. Once we establish to existence of commercially producible reserves,
we intend to construct a processing facility. Historically, pyrometallurgy has been the
most common processing procedure utilized to process nickel and cobalt ores.
Hydrometallurgical technology has improved to the point that it is now an acceptable
alternative to pyrometallurgy for processing nickel and cobalt ores. Both technologies
require large plants, costly construction and expensive equipment often requiring
capital infusions of hundreds of millions of dollars.
The KMI acquisition gave us the rights to a proprietary technology for
processing nickel and cobalt ores. While this technology has not previously been used
to process nickel and cobalt ores, it is based on the same principles used to process
titanium and other rare earth metals in Kazakhstan and Russia. The processing technique
utilizes hydrogen chloride to leach out the nickel and cobalt ores with sublimation of
the nickel and cobalt chlorides occurring at 1,050-1,100 (Degrees) Celsius. This
technology utilizes a closed-circle utilization chamber, which results in no emissions
while achieving extraction rates comparable to pyrometallurgy and
hydrometallurgy.
19
The following table provides additional information regarding recovery
rates and cost per ton of metal recovered associated with pyrometallurgical,
hydrometallurgical and hydrochlorination plants:
|
Pyrometallurgy
|
Hydrometallurgy
|
Hydrochlorination
(1)
|
|
|
|
|
Average nickel recovery rate
(2)
|
80%
|
95-99%
|
93%
|
Average cobalt recovery
rate
(
2)
|
75-80%
|
90-95%
|
85-88%
|
Cost per ton of metal recovered
|
$8,000
|
$4,000
|
$5,000
|
(1)
As this process is still in the research and development
stage, all figures given are estimates based on the estimates calculated by the Mining
Bureau, an independent third party research and development firm focused on mining and
metallurgy in Kazakhstan. These estimates could vary materially if test works show the
need for additional materials, equipment or processes needed to recover nickel and
cobalt.
(2)
Ore recovery rates are subject to a number of different
factors, including processing techniques, ore characteristics, etc., which can cause
rates of recovery actually realized to vary.
The following table provides a comparison of the estimated initial
construction costs and time required to build pyrometallurgical, hydromettalurgical and
hydrochlorination ore processing plants capable of processing 500,000 and 1,000,000
tons of head ore annually.
|
Pyrometallurgy
|
Hydrometallurgy
|
Hydrochlorination
(1)
|
500,000 tons annually
|
|
|
|
Initial construction cost
|
$100-150 million
|
$500-600 million
|
$100 million
|
Estimated construction time
|
24 months
|
24 months
|
24 months
|
|
|
|
|
1,000,000 tons annually
|
|
|
|
Initial construction cost
|
$250-$350 million
|
Over $650 million
|
$100 million
|
Estimate construction time
|
24-36 months
|
36+ months
|
24 months
|
(1)
As this process is still in the research and development
stage, all figures given are estimates based on the estimates calculated by the Mining
Bureau, an independent third party research and development firm focused on mining and
metallurgy in Kazakhstan. These estimates could vary materially if test works show the
need for additional materials, equipment or processes needed to recover nickel and
cobalt.
We have constructed a pilot plant at our Kempirsai deposit to test our
hydrochlorination process. Initially we had planned to complete the pilot plant and
begin testing during the second quarter 2006. The pilot plant was completed in October
2006 and we began testing the mineral concentrating capability of our hydrochlorination
processing technology at the pilot plant level in October 2006. The initial tests of
the pilot plant used head ore from our Kempirsai deposit. The average nickel content of
our Kempirsai head ore is approximately 1.1 percent per ton. PIT Geoanalitika, an
independent Kazakh company, conducted chemical analysis of several different samples of
the pilot plant concentrates and found that nickel content following the
hydrochlorination process increased to 10 to 15 percent. We feel these initial results
justify further research and development to optimize the process at the scale of a
pilot plant with a view to employing the technology in commercial production in the
future.
20
Our pilot processing plant has a processing capacity of 12.5 tons of ore
per day. We processed an aggregate of 10 tons of ore through the pilot plant from
October 2006 to January 2007. For reasons discussed in more detail below, we have
processed no additional ore since January 2007.
Initially we estimated that we would need approximately six months to
test our hydrochlorination process at the pilot plant level to determine its commercial
viability. Testing, however, has progressed more slowly than initially expected due to
a number of factors. First, the use of chlorides in the process and difficulties in
getting isolation in the rotating kiln significantly enhances the potential risk to
personnel and the environment, so we have had to proceed carefully. Second, because
this process has not previously been used to commercially process nickel and cobalt, we
have had to develop processes and procedures without the benefit of relying on others
experience. Third, because of the use of chlorides and associated acids, the necessary
equipment for the pilot plant has been difficult to design, locate and procure. Fourth,
during the testing stage, following each test run we halt the pilot plant, disassemble
the rotating kiln and test and replace the inner lining of the kiln to ensure the
integrity of the equipment used in the process. Fifth, due to unusually harsh weather
conditions at our Kempirsai deposit this winter, including up to 13 feet of snow and
temperature as low as 31 to 40 degrees below zero Fahrenheit, we were forced to
discontinue operations at the pilot plant in January 2007 and have not operated the
pilot plant for testing of hydrochlorination since that time. The idle time at the
pilot plant has been used to improve the inner lining of the rotating kiln to withstand
the temperatures of more than 1,200 degrees Celsius, check and replace the pipes
transporting the acids throughout the pilot plant facility, recheck, order and replace
the heating and cooling system, and various other parts and blocks of the pilot plant
and to investigate the possible acquisition of agglomeration and magnetic separation
equipment.
Weather permitting, we plan to recommence testing at the pilot plant in
April 2007. We have planned a series of tests designed to establish the economic
feasibility of the processing technology and to formulate the required procedures,
protocols and operational guidelines for commercial utilization of the
hydrochlorination process. We expect this testing will be completed in the fourth
quarter 2007 and have budgeted $200,000 for the cost of this testing and
development.
Once we have completed these tests and analyzed the results, we will
make a final determination as to the feasibility of our hydrochlorination technology
for the commercial production of our deposits.
In light of the delays experienced to this point and the planned testing
through the end of the 2007 fiscal year, coupled with the time requirements to build a
commercial hydrochlorination processing plant, should the technology prove technically
and economically feasible, we have been researching other options that might allow us
to get to commercial production at Kempirsai more quickly. To this end, we have
approached several leading design and metallurgy institutes to supply feasibility
studies for a commercial processing plant utilizing pyrometallurgy as a main technology
to produce ferronickel from our Kempirsai deposit.
21
We are considering proposals for the construction of a ferronickel
pyrometallurgical commercial processing plant at the Kempirsai deposit. We anticipate
the plant will be built in several phases. The first phase would include the
construction of a plant with capacity to process up to 500,000 tons of head ore
annually. Depending upon the success of the first phase of the plant, we would then
have the option to increase the capacity to 1,000,000 tons of head ore processing
capacity annually over several years. We anticipate this expansion would occur in
additional phases. We have allocated $940,000 this year for pre-feasibility and
feasibility studies upon which we can base a decision with regard to commencement of
construction of phase one of a pyrometallurgical plant at the Kempirsai deposit. We
expect to receive a detailed feasibility study within the next several
months.
Irrespective of our decision regarding the feasibility of a
pyrometallurgical processing plant at the Kempirsai deposit, we plan to continue
testing and development of our hydrochlorination process as discussed above.
Reserves
We do not have a current estimate of the ore reserves contained within
our concessions. While we have reserve estimates prepared during Soviet times, we do
not know the accuracy of those reserve estimates and do not believe them to be to the
standards established by the SEC. As disclosed herein, we are working with Wardell
Armstrong, a qualified independent engineering firm, to provide us with a preliminary
ore resource estimate of our deposits that will conform to the Australasian Joint Ore
Reserves Committee (“JORC Code”). We anticipate this report will be
completed during the second quarter 2007.
We anticipate that the preliminary Wardell Armstrong report will
indicate that currently we have only ore resources. Under the SEC standard and the JORC
Code, mineral deposits qualify as “reserves” only to the extent some part
of the deposit can be economically and legally extracted or produced at the time of the
reserve determination. At the present time, we do not know whether the ore in our
deposits can be economically extracted or produced. For this purpose, we intend to
retain an independent third party during 2007 to conduct a preliminary feasibility
study to provide information on mining, processing, metallurgical, economic and other
relevant factors to determine whether each of our deposits can be economically
produced. We anticipate this preliminary feasibility study on the Kempirsai deposit
will be undertaken in the second half of 2007 and should be completed sometime during
the first quarter 2008. We expect a preliminary feasibility study on the Gornostai
deposit will be undertaken some time in 2008. At the time these preliminary feasibility
studies are conducted, we will ask Wardell Armstrong to conduct a follow up evaluation
of our deposits consistent with SEC standards.
Because our deposits are without known reserves, you should consider our
proposed programs to be exploratory in nature.
22
Tax and Royalty Scheme in the Republic of Kazakhstan
We are subject to the following taxes and royalties payable to the
Republic of Kazakhstan:
Class of Tax or Royalty
|
Basis of Tax
|
Payable Period
|
Annual Rate
|
Corporate Income Tax
|
Profits
|
Monthly
|
30%
|
Social Tax
|
Payroll
|
Monthly
|
21-26%
|
VAT
|
Value added
|
Monthly
|
14-20%
|
Property Tax
|
Property
|
Quarterly
|
1%
|
Royalty (ore)
|
Output volume
|
Monthly/Quarterly
|
2.21%
|
Royalty (brown coal)
|
Output volume
|
Monthly/Quarterly
|
0.9%
|
Excess Profit Tax
|
Net income
|
Annually
|
4-60%
|
Competition
Recent high prices for nickel and cobalt are the result of the growing
demand from such economies, such as China and India, and certain industries, such as
stainless steel, experienced a near 8% increase in demand in 2006 as compared to 2005.
This spike in worldwide demand is not being met by current supply as the current
capacity of nickel producers is limited and new plant commissions have been postponed
several times. Also contributing to the price increase is the uneasy situation in New
Caledonia and Indonesia, where the local populations have held protests at mines and
plants, as well a series of strikes held in Canada at the CVRD and Xtrata owned
properties. All of these issues have contributed to increased prices and historically
low levels of the nickel held at LME-approved warehouses, reaching as low as 3,600
tons.
Cobalt prices have also reached as high as $66,000 per ton recently due
to several factors. The main reason for the price increase is the deal between Norilsk
Nickel, the world’s largest producer of nickel, and OM group. In exchange for
selling OM’s plant in Finland to NorNickel, NorNickel has agreed to sell all of
its produced cobalt to directly to OM, thus potentially limiting the volume of cobalt
available on the market.
Total nickel production worldwide was approximately 1,550,000 tons in
2006, according to USGS. Norilsk Nickel is the largest nickel producer followed by
CVRD, BHP Billiton Plc, Eramet Group and Xtrata. These five companies account for
approximately 66% of the world’s primary nickel production, while more than 30
medium to small size companies produce the remaining 34%.
Until recently, there were no nickel-producing companies in Kazakhstan.
In February 2004, Oriel Resources, a London-based company, acquired 90% of Muzbel LLC,
which holds exploration and extraction rights for the Shevchenko nickel deposit in
northern Kazakhstan. The Shevchenko Nickel Project Feasibility Study showed that proven
and probable nickel laterite ore reserves were 104.4 million tons of 0.79%
nickel.
23
In October 2006, Oriel Resources was acquired by IPH Polychrom Holding
BV and Croweley International Limited. Based on the latest announcement, Oriel plans to
develop its chrome deposit in Kazakhstan and review its plans for the Schevchenko
nickel deposit in Kazakhstan.
Companies compete with each other generally across the globe and are
best categorized by their size, reserve base, ore richness and production method, due
to different extracting technologies applied, and the final product. Competition in
this industry focuses largely on price and nickel content, whether it is sold in
unwrought or chemical form. High nickel content material is sold at higher prices and
is most sought after among customers.
We do not anticipate direct competition from Oriel Resources should they
pursue the plan to build a nickel processing plant. Nickel and cobalt are part of a
global market and a worldwide demand, in which the supply is limited and the number of
industries that use nickel and cobalt is increasing, thus ensuring a constant demand
for additional production of nickel and cobalt.
We believe that the proximity of our Gornostai deposit to China and
other Asian countries will provide us a competitive advantage. We have already been
approached by Chinese metal companies interested in purchasing finished product once we
reach production stage. As of this date we have not entered into definitive
negotiations with any party.
Risk Factors
Business Risks
Need for Additional
Capital
.
Since focusing our
efforts on nickel and cobalt exploration our capital resources have consisted almost
exclusively of funds we have borrowed from related and non-related parties and from a
private sale of our equity securities. In July 2006 we raised $28,000,000 through a
private placement of our equity securities. As of December 31, 2006, we had cash on
hand of $8,583,680. We believe this should be sufficient capital to fund our operations
until the end of 2007. We currently have very limited capacity to generate revenue.
Should we determine to pursue construction of an ore processing plant to produce
ferronickel, we expect the cost to build a facility capable of processing 500,000 tons
of head ore per year will be about $50,000,000 and the cost to construct an ore
processing facility capable of processing 1,000,000 tons of head ore per year will
range from $100,000,000 to $150,000,000. We will have very little ability to generate
revenue until we build and begin operating this plant. We expect that it will be 2009
or later, if ever, before we have the ability to generate revenue sufficient to meet
our operating needs. Therefore, we anticipate the need for substantial additional
capital resources by the end of the 2007 fiscal year. And we expect to be totally
dependent upon investment funds to support our operations until such time as we begin
to generate sufficient revenue to fund operations. We expect these funds will consist
primarily of funds raised in equity and/or debt financing activities. We currently have
no firm commitment from any party to provide us additional equity or debt financing and
there is no guarantee that we will obtain additional financing on acceptable terms, or
at all. If we are unsuccessful in obtaining additional funding by the end of 2007, we
will likely have insufficient funds to continue operations or to meet our minimum
annual work program requirements. If we cannot fulfill our minimum work program
requirement, we could be subjected to fines and penalties and even to the possible
forfeiture of our subsoil use contracts and licenses.
24
Nickel and Cobalt Prices can be Volatile.
Commodity prices for nickel and cobalt fluctuate according to the
influence of diverse market conditions that can affect the supply or demand for a
commodity such as political and economic conditions and uncertainties; advances in
exploration and development technology; introduction of competing products; and
governmental restrictions on exploration, production and export of natural
resources.
Competition
.
Our principal competitors are large established companies with
substantial financial resources and market share. If we establish commercially
producible reserves and move to production stage, we will have to compete for customers
with these companies.
New Technology
. We are developing
the proprietary technology. Although this technology has been used successfully to
recover other metals, it has not been used in the commercial recovery of nickel and
cobalt. We have completed construction of the pilot processing facility and continuing
test operations to further establish the feasibility of the technology. There is no
assurance that our pilot facility will operate as we expect. After testing of the pilot
facility we will begin construction of a facility to process commercial quantities of
ore. There is no assurance the technology operated in a test facility will scale to a
commercial facility successfully or operate at expected extraction efficiencies and
operating costs to support profitable commercial operation. In the event our technology
does not work as expected, we will be required to construct a facility using other
technology, which would increase our need for investment capital and would also
increase our operating costs and breakeven point.
Failure to Satisfy the Terms of Our Subsoil Use
Contracts
. Under our subsoil use contracts, we are
required to satisfy our annual minimum work program requirements. There is no guarantee
that we will be able to continue to meet these commitments in the future. If we fail to
satisfy these commitments we may be subject to penalties and fines and, potentially, to
the loss of one or more of our subsoil use contracts. The cancellation of our contracts
would have a material adverse effect on our business, results of operations and
financial condition. Although we would seek waivers of any breaches or seek to
renegotiate the terms of our commitments in the event we do not believe we can meet
such commitments, we cannot assure you that we would be successful in doing
so.
Foreign Operations
. In recent years,
the Republic of Kazakhstan has undergone substantial political and economic change. As
an emerging market, Kazakhstan does not possess the well-developed business
infrastructure that generally exists in more mature free market economies. As a result,
operations carried out in Kazakhstan can involve significant risks that are not
typically associated with developed markets. Instability in the market reform process
could subject us to unpredictable changes in the basic business infrastructure in which
we currently operate. Therefore, we face risks inherent in conducting business
internationally, such as:
|
•
|
Foreign currency exchange fluctuations or imposition of
currency exchange controls;
|
|
•
|
Legal and governmental regulatory
requirements;
|
|
•
|
Disruption of tenders resulting from disputes with
governmental authorities;
|
25
|
•
|
Potential seizure or nationalization of
assets;
|
|
•
|
Import-export quotas or other trade barriers;
|
|
•
|
Difficulties in collecting accounts receivable and
longer collection periods;
|
|
•
|
Political and economic instability;
|
|
•
|
Difficulties and costs of staffing and managing
international operations; and
|
|
•
|
Language and cultural differences.
|
Any of these factors could materially adversely affect our business and
financial condition. At this time, we are unable to estimate what, if any, changes may
occur or the resulting effect of any such changes on us.
We also face a significant potential risk of unfavorable tax treatment
and currency law violations. Legislation and regulations regarding taxation, foreign
currency transactions and licensing of foreign currency loans in the Republic of
Kazakhstan continue to evolve as the central government manages the transformation from
a command to a market-oriented economy. The legislation and regulations are not always
clearly written and their interpretation is subject to the opinions of local tax
inspectors. Instances of inconsistent opinions between local, regional and national tax
authorities are not unusual.
The current regime of penalties and interest related to reported and
discovered violations of Kazakhstan’s laws, decrees and related regulations can
be severe. Penalties include confiscation of the amounts at issue for currency law
violations, as well as fines of generally 100% of the taxes unpaid. Interest is
assessable at rates of generally 0.3% per day. As a result, penalties and interest can
result in amounts that are multiples of any unreported taxes.
We may be adversely affected by Kazakh political developments, including
the application of existing and future legislation and tax regulations.
Environmental Regulations
. We are
subject to stringent federal, state and local laws and regulations relating to the
release or disposal of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the acquisition of
permits before extraction activities commence, restrict the types, quantities and
concentration of substances that can be released into the environment in connection
with extraction and production activities and impose substantial liabilities for
pollution resulting from our operations. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil and criminal
penalties, incurrence of investigatory or remedial obligations or the imposition of
injunctive relief. Changes in environmental laws and regulations occur frequently, and
any changes that result in more stringent or costly waste handling, storage, transport,
disposal or cleanup requirements could require us to make significant expenditures to
maintain compliance, and may otherwise have a material adverse effect on us as well as
the industry in general. Under these environmental laws and regulations, we could be
held strictly liable for the removal or remediation of previously released materials or
property contamination regardless of whether we were responsible.
26
Liquidity of Common Shares.
Our
common stock has limited trading volume on the Over-the-Counter Bulletin Board and is
not listed on a national exchange. Moreover, a significant percentage of the
outstanding common stock is “restricted” and therefore subject to the
resale restrictions set forth in Rule 144 of the rules and regulations promulgated by
the U.S. Securities and Exchange Commission under the Securities Act of 1933. These
factors could adversely affect the liquidity, trading volume, price and transferability
of our common shares.
Other Properties
Bekem leases approximately 400 square feet of office space located at
324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and
registered office in the United States. We pay annual rents of approximately $7,800 for
this space pursuant to a lease agreement that expires December 31, 2007 with an option
to extend the lease for an additional year.
We also maintain a representative office in Almaty, Kazakhstan, where we
lease 1,575 square feet of office space. The lease agreement expires on December 31,
2007. The monthly lease payment is $5,250. Under the terms of our lease agreement, the
owner of the space could terminate our lease at any time and require us to vacate the
premises.
Kaznickel LLP rents approximately 1,840 square feet office in Semey,
Kazakhstan, for approximately $4,000 per month. Semey is the closest city to the
Gornostai deposit. This lease agreement expires in May 2007. Kaznickel also rents
approximately 4,450 square feet of warehouse space in Semey for $4,000 per month.
Kaznickel uses this space to store test ore. Also, Kaznickel LLP rents a 350 square
feet office in Astana, Kazakhstan, for approximately $1,600 per month. This space is
leased on a year-to-year basis. If at any time the owner of this space decides they
need or want the space for other purposes, Kaznickel has no right to continue to occupy
the space and could be forced to move.
KKM rents approximately 1,260 square feet of office space in Aktobe,
Kazakhstan. KKM pays approximately US $4,000 per month for this space under a one-year
lease agreement. This space is leased on a year-to-year basis. If at any time the owner
of this space decides they need or want the space for other purposes, Kaznickel has no
right to continue to occupy the space and could be forced to move.
We believe each of the various office spaces rented by us and our
subsidiaries are suitable and adequate for our needs.
Employees
We currently have approximately 416 full-time employees. We hire our
employees under local labor contracts complying with the governing laws of the Republic
of Kazakhstan. We believe we have satisfactory relations with our employees. We
anticipate the need to hire additional personnel as operations expand. To date, neither
our operations nor the operations of any of our subsidiaries have been interrupted by
strikes or work stoppages. We have managed to maintain turnover of our work force at a
low level. With the ongoing labor market monitoring, we believe that future new labor
requirements can be satisfied and there is no significant risk of labor
shortage.
27
Research and Development
During 2006, we spent approximately $2,400,000 in research and
development developing the hydrochlorination technology. Approximately $2,000,000 was
capitalized as the pilot plant and approximately $400,000 was recognized as an expense
in 2006. None of these costs have been borne directly by any of our
customers.
Reports to Security Holders
We file annual and quarterly reports with the SEC. The public may read
and copy any materials filed by the Company with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at (202)
551-8090. We are an electronic filer and the SEC maintains an Internet site that
contains reports and other information regarding the Company that may be viewed at
http://www.sec.gov.
|
Item 3.
|
Legal Proceedings
|
To the knowledge of management, there is no material litigation or
governmental agency proceeding pending or threatened against Bekem or its management.
Further, we are not aware of any material pending or threatened litigation or
governmental agency proceeding to which Bekem or any of our directors, officers or
affiliates are, or would be, a party.
|
Item 4.
|
Submission of Matters to a Vote of Security
Holders
|
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2006.
PART II
|
Item 5.
|
Market for Common Equity, Related Stockholder Matters
and Small Business
|
|
Issuer Purchases of Equity
Securities
|
Our shares are currently traded on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol BKMM. As of March 20, 2007 we had approximately 150
shareholders holding 125,172,011 common shares. Of the issued and outstanding common
stock, approximately 7,813,708 are free trading, the balance are "restricted
securities" as that term is defined in Rule 144 promulgated by the Securities and
Exchange Commission.
Published bid and ask quotations from January 1, 2005 through December
31, 2006, are included in the chart below. These quotations represent prices between
dealers and do not include retail markup, markdown or commissions. In addition, these
quotations do not represent actual transactions.
28
|
Bid
|
Ask
|
2006
|
High
|
Low
|
High
|
Low
|
Jan. 3 thru Mar. 31
|
$2.00
|
$1.25
|
$10.01
|
$1.35
|
Apr. 3 thru June 30
|
1.95
|
1.05
|
2.20
|
1.50
|
July 3 thru Sep. 29
|
2.00
|
1.60
|
2.25
|
1.70
|
Oct. 2 thru Dec. 29
|
1.80
|
1.75
|
2.00
|
1.85
|
|
|
|
|
Bid
|
Ask
|
2005
|
High
|
Low
|
High
|
Low
|
Jan. 1 thru Mar. 31
|
$3.95
|
$2.00
|
$7.50
|
$4.00
|
Apr. 1 thru June 30
|
3.55
|
2.50
|
7.00
|
3.25
|
July 1 thru Sep. 30
|
2.90
|
2.40
|
6.00
|
3.00
|
Oct. 1 thru Dec. 31
|
2.60
|
2.00
|
4.00
|
2.60
|
The above information was obtained from Pink Sheets LLC, 304 Hudson
Street, 2nd Floor, New York, New York 10013.
Dividends
We have not paid, nor declared, any dividends since our inception and do
not intend to declare any such dividends in the foreseeable future. Our ability to pay
dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may
be paid to the extent that the corporation's assets exceed it liabilities and the
corporation is able to pay its debts as they become due in the usual course of
business.
Securities Authorized for Issuance Under Equity Compensation
Plans
|
Number of securities to be issued upon exercise of
outstanding options, warrants and rights
|
Weighted-average exercise price of outstanding
options, warrants and rights
|
Number of securities remaining available for future
issuance under equity compensation plans (excluding securities
reflected in column (a))
|
Plan category
|
(a)
|
(b)
|
(c)
|
Equity compensation plans approved by security
holders
|
-0-
|
$-0-
|
1,916,877
|
Equity compensation
plans not approved by security holders
|
2,400,000
|
$1.17
|
-0-
|
Total
|
2,400,000
|
$1.17
|
1,916,877
|
29
In March 2003, we adopted the EMPS Research Corporation 2003 Stock
Option Plan (the "Plan") reserving 5,000,000 common shares for distribution under the
Plan. The purpose of the Plan is to allow us to offer key employees, officers,
directors, consultants and sales representatives an opportunity to acquire a
proprietary interest in the Company. The various types of incentive awards which may be
provided under the Stock Option Plan enable us to respond to changes in compensation
practices, tax laws, accounting regulations and the size and diversity of our
business.
On February 16, 2004, we granted options to two parties to purchase
1,000,000 shares each for technology and asset acquisition and business development
services. The options were not exercisable until such time as we acquired assets with a
fair value of at least $2,000,000, as determined by the board of directors. The
exercise price of the options was $0.10. The options were scheduled to expire on
February 16, 2009. We granted the option holders a registration right in connection
with the exercise of the options and/or the resale of the underlying common shares. On
August 23, 2005 we issued 588,888 shares of our restricted common stock to the option
holders in exchange for the cancellation of these options.
On October 20, 2006 the board agreed to award restricted stock grants to
the following four officers or employees of the Company;
Name
|
|
Position with the Company
|
|
Number of Shares
|
Marat Cherdabayev
|
|
Chief Executive Officer, President, Director
|
|
421,772
|
Yermek Kudabayev
|
|
Chief Financial Officer
|
|
383,429
|
Nurlan Tajibaev
|
|
Vice President, Director
|
|
191,715
|
Alexander Rassokhin
|
|
Exploration Manager
|
|
86,207
|
The stock grants were valued at $1.95 per share, which represented the
closing market price of our stock on October 20, 2006. The stock grants were made under
our 2003 Stock Option Plan. The shares have been issued and are outstanding and are
being held in escrow by the Company subject to the applicable vesting schedule for each
grant. The grantees have the right to vote the shares, receive dividends and enjoy all
other rights of ownership over the entire grant amount from the grant date, except for
the right to dispose of or otherwise encumber the shares prior to satisfying the
applicable vesting schedule. Shares will only vest to the grantee if the grantee is
employed by the Company on the applicable vesting date. Any unvested shares at the time
a grantee’s employment with the Company ceases, for any reason, shall be
forfeited back to the Company.
Mr. Cherdabayev’s shares will vest as follows: one-fourth (105,443
shares) on the first anniversary of the grant date; one-fourth (105,443 shares) on the
second anniversary of the grant date and the remaining one-half (210,886 shares) will
vest on the third anniversary of the grant date.
Mr. Kudabayev’s shares will vest as follows: one-fourth (95,857
shares) in April 2007 and one-fourth (95,857 shares) in April 2008, provided that the
Company has timely filed its reports with Securities and Exchange Commission. The final
one-half (191,715 shares) will vest in April 2009. Vesting during each year is
contingent upon the Company timely filing of its reports with the Securities and
Exchange Commission each year. Moreover, vesting in the third year is also contingent
upon the Company having commenced commercial operations.
30
Mr. Tajibaev’s shares will vest as follows: one-fourth (47,929
shares) on the first anniversary of the grant date and one-fourth (47,929 shares) on
the second anniversary of the grant date, provided that in each year the Company meets
the yearly deadlines for the pilot plant construction, completion and operations as
dictated by the board of directors. The final one-half (95,857 shares) will vest on the
third anniversary of the grant date conditioned that the Company timely meets the third
year deadlines for the pilot plant construction, completion and operations during the
third year, and the Company having commenced commercial
operations.
Mr. Rassokhin’s shares will vest as follows: one-fourth (21,552
shares) on the first anniversary of the grant date and one-fourth (21,552 shares) on
the second anniversary of the grant date, provided that in each year the Company timely
performs the drilling work program requirements as dictated by the Republic of
Kazakhstan’s Ministry of Energy and Mineral Resources. The final one-half (43,103
shares) will vest on the third anniversary of the grant date, conditioned upon the
Company timely performing the drilling work program requirements, as dictated by the
Republic of Kazakhstan’s Ministry of Energy and Mineral Resources during the
third year and the Company having commenced commercial operations.
We have issued no other securities under the Plan.
In connection with a private placement we concluded on July 14, 2006, we
issued to Aton Securities, the placement agent for the private placement, warrants to
purchase up to 2,400,000 shares of our restricted common stock. The exercise price of
the warrants is $1.17 per share. The warrants will be immediately exercisable and
expire on January 14, 2008.
Unregistered Sales of Equity Securities
As discussed above, pursuant to the board of directors desire to attract
and retain experienced and educated executives on October 20, 2006 the board agreed to
award restricted stock grants to Marat Cherdabayev, Yermek Kudabayev, Nurlan Tajibaev
and Alexander Rassokhin. For additional details regarding the terms and conditions of
those restricted stock grants please see “
Securities
Authorized for Issuance Under Equity Compensation
Plans
” immediately preceding this section. Each of
these individuals is a non US person resident in Kazakhstan. The restricted stock
grants were made pursuant to an exemption from the registration requirements of the
Securities Act of 1933, provided under Regulation S of the Securities Act of
1933.
Repurchases of Equity Securities
We did not repurchase any of our equity securities during the year ended
December 31, 2006.
Transfer Agent
Our transfer agent and registrar is Interwest Transfer Company, Inc.,
1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, Telephone (801)
272-9294.
31
|
Item 6.
|
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
|
For a complete understanding, this Management's Discussion and Analysis
of of Financial Condition and Results of Operations should be read in conjunction with
the Consolidated Financial Statements and Notes to the Consolidated Financial
Statements contained in this Form 10-KSB.
Since inception we have generated no revenue. We have spent millions of
dollars to date and anticipate that we will spend significant additional capital before
we begin to realize significant revenue from operations. As discussed above in Items 1
& 2 “
Description of Business and
Properties
” based on our expectation that we will
discover commercially producible reserves, we are currently investigating the
possibility of constructing a pyrometallurgical processing plant to produce ferronickel
at our Kempirsai deposit to allow us to begin realizing revenues as soon as possible.
At this time, we are investigating to determine the financial viability of this option.
If we determine that construction of a pyrometallurgical processing plant to produce
ferronickel is our best option for realizing cash flow from Kempirsai, and we are able
to obtain the necessary funding to finance construction, we would not expect a first
phase of the plant, with capacity to process up to 500,000 tons of ore annually, to be
completed and operational prior to the first quarter 2009. If our hydrochlorination
process proves to be economically viable for commercial production of nickel and
cobalt, we would not expect to have the first phase of a commercial hydrochlorination
plant completed prior to 2010. Because we do not currently generate cash flow and we do
not anticipate generating significant cash flow until 2009 or later, if at all, we will
be completely dependent on investor’s funds, if any, to support our activities
until such time as we are able to generate sufficient revenues to cover our
expenses.
In July 2006 we raised $28,000,000 through a private placement of our
equity securities. Of that amount, as of December 31, 2006, we had spent approximately
$18,000,000. Of these funds, approximately $12,200,000 was used to repay loans,
$1,000,000 was used to meet our minimum working program obligations, approximately
$2,200,000 was spent researching and developing our hydrochlorination technology and
$2,600,000 was used as working capital. At December 31, 2006, we had cash on hand of
$8,583,680. The funds raised in July represent only a small portion of the funds we
will need to reach commercial production. We anticipate the need to seek significant
additional funding by the end of fiscal 2007. There is no assurance that we will be
able to obtain additional funding in the future on favorable terms, or at
all.
Results of Operations
As you read this Results of Operations section it is important to keep
in mind that we acquired KMI and its operating subsidiary KKM on October 24, 2005.
While KKM has not engaged in significant operations in recent years, it has engaged in
significantly greater operations than Bekem or Kaznickel in years past. Prior to the
acquisition of KMI, we were engaged in exploration of our Gornostai deposit. However,
because of a lack of funds our exploration activities were limited. The increases in
expenses in fiscal 2006 compared to fiscal 2005 are primarily the result of our
acquisition of KKM and not the result of significantly increased operations of Bekem or
Kaznickel. We also incurred more expenses in fiscal 2006 because we had capital
available from our private placement to undertake greater activity.
32
General and Administrative Expenses
With the acquisition of KKM, our general and administrative expenses
increased from $1,018,148 during 2005 to $3,136,715 during 2006. This 208% increase in
general and administrative expenses is attributable to the significant increase in
employees and employee-related costs as a result of the acquisition of KKM, as well as,
costs associated with having licensed territories in both northeastern and northwestern
Kazakhstan, increased office rents and travel expenses. As a result of this acquisition
and growth of our Almaty office the number of employees of the Company increased from
31 to 418 and employee and employee-related costs increased from $50,000 to $1,800,000.
In the upcoming fiscal year we expect general and administrative expenses will continue
to increase, but at a lower rate than experienced during the 2006 fiscal year, as we
continue our efforts to develop our hydrochlorination process and seek to employ new
technical specialists.
Research and Development Costs
We realized research and development costs of $2,389,507 related to the
development of our pilot processing plant, $2,000,000 which was capitalized because it
also represents tangible assets with alternative future use and added to the cost of
the pilot plant during the twelve months ended December 31, 2006 and $389,507 that was
expensed during the 2006 fiscal year, compared to $131,562 during the 2005 fiscal year.
We expect our research and development costs will increase during the next fiscal year
as we continue testing our pilot processing plant.
Exploratory Costs
Our exploratory costs increased from $697,496 during the twelve months
ended December 31, 2005 to $1,470,247 incurred during the twelve months ended December
31, 2006 as a direct result of our increased exploratory and drilling works at our
Gornostai deposit, as discussed above. Also, as discussed above, because we are
considered to be at the exploration stage, the exploratory costs are reflected net of
revenues earned from incidental sales of ore or brown coal. We expect our exploration
costs will continue to increase at a rate consistent with or even somewhat higher than
was experienced during 2006 as we continue to expand our drilling efforts at the
Gornostai deposit.
Accretion Expense
We realized accretion expense of $60,632 during the twelve months ended
December 31, 2005. During the twelve months ended December 31, 2006 we realized
accretion expenses of $72,865. As discussed above, this increase in accretion expense
is attributable to our acquisition of the Kempirsai deposit. We believe accretion
expense during upcoming fiscal year will continue at rates consistent with those
realized during the 2006 fiscal year.
Grant Compensation Expense
During the nine months ended September 30, 2007 we incurred $151,583 in
grant compensation expense for restricted stock grants issued to certain officers and
key employees during the fourth quarter 2006. We had no comparable expense during
2005.
33
Total Operating Expenses and Loss from
Operations
As a result of our acquisition of KKM and undertaking more exploration
activities in 2006 our total expenses and loss from operations increased 166% from
$1,907,838 during fiscal 2005 to $5,220,917 during fiscal 2006. We expect our total
expenses in 2007 will continue to increase. Also, we expect we will continue to
generate losses until such time as we engage in significant revenue generating
activities, which most likely will not occur before 2009 or 2010.
Interest Income
During the twelve months ended December 31, 2006, we realized interest
on deposits of $47,227. By comparison during the twelve months ended December 31, 2005
we earned no interest on deposits. Interest on deposits increased in 2006 because
during 2006 we raised approximately $28,000,000 in a private placement, which resulted
in our having significantly more funds on deposit during 2006 than 2005. During 2006,
we also realized $38,110 in interest earned from financing resulting from the
prepayment to the Mining Bureau of Kazakhstan of $2,070,000 under the loan agreement
for the period ended December 31, 2006, which bears interest at a rate of 6% per annum.
The Company did not realize corresponding interest during 2005.
Interest Expense
During 2006 we realized interest expense of $1,382,972 compared to
$293,451 during 2005. The increase in interest expense resulted from retiring notes
payable prior to their due dates and the full recognition of the debt discount of
$885,970. Upon acquisition of KMI and KKM, we assumed certain debts with interest rates
that were considered to be below market rates. These particular debts with below market
interest rates were discounted, for reporting purposes, to arrive at interest rates
equivalent to market rates. The total payout of these debts was not adjusted, just the
allocation of principal and interest payments. Upon the payoff of these debts, the
interest expense, or discount, was recognized in full. The recognition of the debt
discount was a one-time occurrence. We do not expect to recognize a similar charge in
future years. The actual dollar amount of funds paid by us for interest during fiscal
2006 was $529,096. As we retired our outstanding notes payable and related party notes
during 2006, we expect interest expense in 2007 will be lower than experienced in prior
years.
Translation Adjustment
The consolidated financial statements are presented in U.S. dollars. The
functional currency of our subsidiary Kaznickel is U.S. dollars. The functional
currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated
into U.S. dollars at the average exchange rates during the reporting period. All
balance sheet accounts of KKM are translated at exchange rates on the date of the
financial statements and translation differences are included in stockholders’
equity as cumulative translation adjustments. However, non-monetary assets and
liabilities of Kaznickel are translated into U.S. dollars, using historical or average
exchange rates and monetary assets and liabilities are translated into U.S. dollars
using exchange rates on the date of the financial statements where translation
differences are included in results of operations.
34
Exchange Loss
During 2006 we realized an exchange loss of $174,278 compared to an
exchange loss of $64,192 during 2005. As with translation adjustment, we recognize
exchange gain or loss as a result of having subsidiaries operating in foreign countries
whose functional currency may or may not be the U.S. dollar. This requires us to
translate results of operations from a foreign currency, in this case Kazakh tenge, to
U.S. dollars at the average exchange rate, where results of operations include exchange
gains or losses on the U.S. dollar monetary assets and liabilities.
Net Loss
For all of the foregoing reasons, during the twelve months ended
December 31, 2006 we experienced a net loss of $4,706,122 compared to a net loss of
$1,271,137 during the twelve months ended December 31, 2005. We anticipate we will
continue to experience increasing net losses until we are able to engage in nickel and
cobalt ore extraction, processing and sales.
Liquidity and Capital Resources
Our capital resources have consisted primarily of funds we have borrowed
from related and non-related parties and the sale of our equity securities. As
discussed above, in July 2006 we raised $28,000,000 through the private placement of
our equity securities. These funds, however, represent only a portion of the funds we
will need to move to commercial production. As of December 31, 2006, we had cash on
hand of $8,583,680. We have used approximately $18,000,000 of the funds raised in the
private offering to repay loans to related and unrelated third parties in the amount of
$12,197,905, for ongoing drilling and exploration of our Gornostai deposit in the
amount of $991,087, $2,000,000 for the construction of our hydrochlorination pilot
plant, $194,147 for testing of our pilot plant and $2,559,321 for working capital. We
anticipate we will use the full $8,583,680 to fund our activities during the 2007
fiscal year. Therefore, we anticipate the need for substantial additional capital
resources by the end of the 2007 fiscal year. We expect these funds will likewise
consist primarily of funds raised in equity and/or debt financing activities. We
currently have no firm commitment from any party to provide us additional equity or
debt financing and there is no guarantee that we will obtain additional financing on
acceptable terms, or at all.
During the 2006 and 2005 fiscal years, cash was primarily used to fund
operations and repay notes payable to related and non-related parties. See below for
additional discussion and analysis of cash flow.
December 31,
|
2006
|
2005
|
|
|
|
Net cash used in operating activities
|
$(5,617,395)
|
$(1,757,443)
|
Net cash provided by (used in) investing
activities
|
(2,722,288)
|
14,206
|
Net cash provided by financing activities
|
16,473,112
|
1,821,031
|
Effect of exchange rate changes on cash
|
360,885
|
7,382
|
NET INCREASE IN CASH
|
$
8,494,314
|
$
85,176
|
35
In fiscal 2006 net cash used in operating activities was $5,617,395,
compared to net cash used in operating activities of $1,757,443 in fiscal 2005. This
increase in net cash used is primarily the result of increases in expenses due to the
acquisition of KMI and its subsidiary KKM which led to a significant increase in net
loss as discussed above. The significant increases in expenses were in the areas of
general and administrative expenses and exploratory costs.
Net cash used in investing activities during twelve months ended
December 31, 2006 was $2,722,288. During 2006 we invested $2,577,696 to acquire
equipment, which is primarily used in KKM’s pilot plant. By comparison, in fiscal
2005, cash of $14,206 was provided by investing activities.
Net cash provided by financing activities in fiscal 2006 was $16,473,112
compared to net cash provided by financing activities of $1,821,031 in fiscal 2005. As
discussed herein, during the third fiscal quarter 2006, we raised $28,000,000 in a
private placement of our equity securities. This resulted in net proceeds to us of
approximately $26,422,386 after deducting fees and costs. During the 2006 fiscal year,
we realized proceeds from notes payable and notes payable to related parties of
$1,996,731 and $251,900, respectively. These funds were borrowed prior to our private
placement in July 2006 and were used to fund our activities during the first half of
the year. We spent $12,727,001 of the funds raised in the private placement to repay
notes payable, notes payable to related parties and interest expense. As a result, at
December 31, 2006, we had repaid all of our notes payable and notes payable to related
parties.
Plan
of Operations
As of December 31, 2006 we had cash on hand of $8,583,680. As discussed
above, we have budgeted to spend all of these funds during fiscal 2007. Following is a
brief description of how we anticipate allocating our cash on hand during fiscal
2007.
Drilling and core analysis
We will allocate approximately $1,765,000 to drilling and exploration.
This includes drilling of approximately 15,000 meters of the South section of the
Gornostai deposit. Estimated drilling costs include both direct and indirect drilling
costs, including geologist fees and costs for site supervisors, geological data
processors, core sample takers, topographers, site procurement specialists,
etc.
Reserve Report
Wardell Armstrong, a qualified independent engineering firm, has begun
preparing an ore reserve estimate of our deposits. We expect to receive their completed
report during the second quarter 2007. We anticipate the cost of the reserve evaluation
will be approximately $135,000.
Hydrochlorination processing technology testing
During next twelve months we expect to spend approximately $200,000 for
continued testing at our pilot plant of the mineral concentrating capability of our
proprietary hydrochlorination processing technology and to formulate required
procedures, protocols and operational guidelines.
36
Feasibility Study
We anticipate spending approximately $940,000 for the preparation of
pre-feasibility and feasibility studies for the construction of the pyrometallurgical
plant. This amount could increase if we retain a western consulting firm.
Field modernization
We have allocated approximately $1,000,000 for modernization of vehicles
and equipment at the Kempirsai deposit to allow us to increase our ore extracting
capabilities.
Administrative Expenses
We plan to allocate approximately $3,900,000 for administrative expenses
during the next twelve months, which include expenses of maintaining offices in the
United States and Kazakhstan, for salaries and taxes.
Professional Fees
We expect to incur approximately $530,000 in expenses for services of
our financial auditors and securities attorneys during the next twelve
months.
Additional Activities
As discussed in Item 1 “
Description of
Business and Properties
” we are currently considering
alternatives to a hydrochlorination processing plant to allow us to begin to generate
cash flow from the Kempirsai deposit. We do not currently have sufficient cash on hand
to fund these activities, nor have we budgeted for these items in our 2007 budget.
Therefore, to undertake these activities we will need to obtain additional capital
either through equity or debt financing. We plan to seek this funding through private
equity investments or debt financing to be obtained from banks or shareholders. We
currently have no firm commitment from any party to provide us additional
funding.
We are considering the economic viability of a pyrometallurgical
processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we
have allocated $940,000 in our 2007 budget for the preparation of pre-feasibility and
feasibility studies. Assuming the results of those studies are positive, we would like
to move to the design phase of a commercial pyrometallurgical plant, including
obtaining detailed engineering and design for plant construction. This would include
flowsheet design and pilot testing. We estimate the cost to do this will be roughly
$2.5 million.
Summary of Material Contractual Commitments
The
following table lists our significant commitments as of December 31, 2006:
37
|
|
Payments Due by Fiscal Year
|
Contractual
Commitments
|
|
Total
|
|
Less than
1 year
|
|
2-3 years
|
|
4-5 years
|
|
After
5 years
|
Monetary
commitments for
exploration
|
|
$1,576,480
|
|
$1,576,480
|
|
$ -0-
|
|
$ -0-
|
|
$ -0-
|
Due to the
government of
Republic of
Kazakhstan
(1)
|
|
731,221
|
|
-0-
|
|
731,221
|
|
-0-
|
|
-0-
|
Training
|
|
42,000
|
|
42,000
|
|
-0-
|
|
-0-
|
|
-0-
|
Social projects
(2)
|
|
417,906
|
|
-0-
|
|
-0-
|
|
300,000
|
|
117,906
|
Asset retirement
obligation
(3)
|
|
951,355
|
|
-0-
|
|
-0-
|
|
-0-
|
|
951,333
|
Operating leases
|
|
230,170
|
|
230,170
|
|
-0-
|
|
-0-
|
|
-0-
|
Total
|
|
$3,949,132
|
|
$1,848,650
|
|
$ 731,221
|
|
$ 300,000
|
|
$1,069,239
|
(1)
In connection with our acquisition
of the exploration contract covering the Gornostai deposit, we are required to repay
the Republic of Kazakhstan for historical costs incurred by it in undertaking
geological and geophysical studies and infrastructure improvements. The repayment terms
of this obligation will not be determined until such time as we apply for and are
granted a contract to engage in commercial production by the Republic of Kazakhstan.
Under our current contract once we determine the property contains commercially
producible reserves, if we wish to commence commercial production, we must apply for
such right prior to the expiration of our exploration and development rights in
February 2026. We anticipate that we will apply for a commercial production contract
within the next 1-3 years. Of course, there is no guarantee when or if we will discover
commercially producible reserves within the Gornostai deposit. Should we decide not to
pursue a commercial production contract, we can relinquish the Gornostai deposit to the
Republic of Kazakhstan in satisfaction of this obligation.
(2)
Under the terms of our subsoil use
contracts, we are required to provide funding for social projects relating to employees
of KKM, including improvements to living conditions, etc., in the amount of $117,906.
We are also required to donate $300,000 for the ongoing development of Astana and
Kurchatov, which are cities in Kazakhstan.
(3)
Under the terms of our subsoil use
contracts, we are required to remove all equipment and remediate the property. This
remediation work can be done during the term of the subsoil use contract or upon
completion of the terms of the contract.
We are required, under our subsoil use contracts to submit a proposed
annual work program to the MEMR for approval. Failure to meet the minimum work program
requirements could cause us to lose our concessions. More information relative to this
requirement is included in Item 1. “
Description of
Business and Properties
” in the section
“
Working Programs of our
Subsidiaries
.”
Off-Balance Sheet Financing Arrangements
As of December 31, 2006 and 2005 we had no off-balance sheet financing
arrangements.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes,
which provides guidance on the accounting for uncertainty in income
taxes recognized in financial statements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, with earlier adoption permitted. We are currently
evaluating the impact, if any, the adoption of FIN 48 will have on its financial
reporting and disclosures.
38
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments -- an amendment
of FASB Statements No. 133 and 140.
SFAS No. 155 resolves
issues addressed in SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets
. SFAS No. 155 will become effective for our
fiscal year that begins after September 15, 2006. The impact of SFAS No. 155 will
depend on the nature and extent of any new derivative instruments entered into after
the effective date.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157,
Fair Value Measurements,
which provides enhanced guidance for using fair value to measure assets
and liabilities. SFAS No. 157 establishes a common definition of fair value, provides a
framework for measuring fair value under generally accepted accounting principles, and
expands disclosure requirements about fair value measurements. SFAS No. 157 is
effective for financial statements issued in fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. We are currently evaluating
the impact, if any, the adoption of SFAS No. 157 will have on its financial reporting
and disclosures.
In September 2006, the SEC staff published Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB
108”). SAB 108 addresses quantifying the financial statement effects of
misstatements, specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial statements. This
statement is effective for fiscal years ending after November 15, 2006. We do not
expect the adoption of SAB 108 to have a material effect on its financial
statements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting
principles generally accepted in the United States of America. As such, we are required
to make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of expenses and revenues, to the extent we generated revenue
during the periods presented. Actual results could differ from these estimates. Our
significant accounting policies require us to make difficult, subjective or complex
judgments or estimates. We consider an accounting estimate to be critical if (1) the
accounting estimate requires us to make assumption about matters that were highly
uncertain at the time the accounting estimate was made and (2) changes in the estimates
that are reasonably likely to occur from period to period, or use different estimates
that we reasonably could have used in the current period, would have a material impact
on our financial condition or results of operations.
There are other items within our financial statements that require
estimation, but are not deemed critical as defined above. Changes in estimates used in
these and other items could have a material impact on our financial statements.
Management has discussed the development of these critical accounting estimates with
our board of directors and they have reviewed the foregoing disclosure.
39
Use of Estimates
– In
connection with the preparation of our financial statements, we are required to make
estimates and assumptions that affect the reported amounts in the financial statements
and accompanying notes. One of the significant areas requiring the use of management
estimates and assumptions relates to environmental reclamation and closure obligations.
Under our licenses with the Republic of Kazakhstan, following completion of exploration
and mining activities we are required to reclaim our licensed territories. To prepare
our financial statements in accordance with accounting principles generally accepted in
the United States of America we are required to account for this obligation. The
determination of the amount of the mine retirement and environmental reclamation
obligation the Republic of Kazakhstan will impose upon us, however, has not yet been
determined. The determination of the mine retirement and environmental reclamation
obligation is based, in significant part, on the size of each deposit. Because we are
still exploring our Gornostai property and do not yet know the full extent of the
Gornostai deposit, the mine retirement and environmental reclamation obligation has not
yet been set by the Republic of Kazakhstan. While we base our estimate of this
obligation on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Accordingly, actual results may differ
significantly from our estimate.
Income Taxes
– While we are a
Utah corporation, our primary operations are in the Republic of Kazakhstan. The
Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet
Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code.
The tax code and the application of tax laws in the Republic of Kazakhstan are still
developing and may not be uniformly applied in all instances.
|
Item 7.
|
Financial Statements
|
See Consolidated Financial Statements listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
|
Item 8.
|
Changes in and Disagreements with Accountants on
Accounting and Financial
|
We have made no changes in and had no disagreements with our independent
registered accounting firm on accounting and financial disclosure during the 2006
fiscal year.
|
Item 8A.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to provide reasonable
assurance that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required financial disclosures. Because of inherent limitations,
our disclosure controls and procedures, no matter how well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of such
disclosure controls and procedures are met.
40
Subsequent to the filing of the Original Report, and in connection with
the comments of the staff of the SEC, we determined that we had erroneously presented
the Company as being in the “production stage” rather than the
“exploration stage.” As a result of this error, the Company has restated
its audited financial statements for the years ended December 31, 2006 and 2005,
and is filing the Amendment for the fiscal year ended December 31, 2006 to restate
these annual audited financial statements. Our management and our board of directors
determined on February 5, 2008, with respect to the annual reports for the fiscal
years ended December 31, 2006 and 2005 and the fiscal quarters beginning January 1,
2006 through September 30, 2007, that we had a material weakness in internal control
over financial reporting because the controls did not identify the error on a timely
basis.
In connection with the restatement referred to above, the Company, under
the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, re-evaluated the effectiveness of the design and
operation of the disclosure controls and procedures as of the end of the period covered
by this report, which included consideration of the required restatement. Based on the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of the end of the period
covered by this report and that we had a material weakness in its internal control over
financial reporting because the controls did not identify the error on a timely
basis.
In light of this conclusion, the Company performed additional analysis
and procedures to ensure its consolidated financial statements are prepared in
accordance with U.S. generally accepted accounting principles. Accordingly, management
believes that the financial statements included in this report fairly present in all
material respects the Company’s financial condition, results of operations and
cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
Management had previously concluded that our disclosure controls and
procedures were effective as of December 31, 2006 and reported that there was no change
in the Company’s internal control over financial reporting that occurred during
the quarter ended December 31, 2006 that materially affected, or was reasonably
likely to materially affect, the internal control over financial reporting. However, in
connection with the restatements of the Company’s consolidated financial
statements for the fiscal years ended December 31, 2006 and 2005, as fully
described in Note 13 of this Amendment, management determined that the material
weakness described above existed as of December 31, 2006 and has, as a result,
effected material changes to the Company’s internal control over financial
reporting subsequent to the period covered by this report. Management has implemented
new policies requiring our internal accounting staff and management to receive ongoing
training on accounting for mineral properties in accordance with generally accepted
accounting principles in the United States and Industry Guide 7. Management believes
these additional policies will provide additional and enhanced internal control over
financial reporting and improve the ability of management to identify any potential
errors prior to and during the Company’s consolidated financial statement close
process and prevent recurrence of future errors of this nature.
41
|
Item 8B.
|
Other Information.
|
None.
PART III
Item 9.
|
Directors, Executive
Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the
Exchange Act
|
The following table sets forth our directors, executive officers,
promoters and control persons, their ages, and all offices and positions held.
Directors are elected for a period of one year and thereafter serve until their
successor is duly elected by the stockholders and qualified. Officers and other
employees serve at the will of the Board of Directors.
Name of Director or
Executive Officer
|
|
Age
|
|
Positions with
the Company
|
|
Director Since
|
|
|
|
|
|
|
|
Marat Cherdabayev
|
|
31
|
|
Chief Executive Officer, President and
Director
|
|
November 2004
|
|
|
|
|
|
|
|
Yermek Kudabayev
|
|
36
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
James Kohler
|
|
59
|
|
Independent Director
|
|
May 2006
|
|
|
|
|
|
|
|
Timothy Adair
|
|
42
|
|
Independent Director
|
|
May 2006
|
|
|
|
|
|
|
|
Valery Tolkachev
|
|
38
|
|
Independent Director
|
|
May 2006
|
|
|
|
|
|
|
|
Nurlan Tajibaev
|
|
59
|
|
Vice President of Metallurgy and Director
|
|
October 2006
|
The above individuals will serve as the Company’s officers and/or
directors. A brief description of their positions, proposed duties and their background
and business experience follows:
Marat Cherdabayev
. From July 2002 to July
2005, Mr. Cherdabayev served as a director of Caspian Services Group, Inc.,
(“CSI”) a U.S. reporting issuer, and former parent company of Bekem Metals,
Inc. Prior to joining CSI, Mr. Cherdabayev worked for Caspian Services Group Limited
(“CSGL”) in Almaty, Kazakhstan. CSGL is a wholly-owned subsidiary of CSI.
Mr. Cherdabayev was a Business Development Manager for CSGL, and was responsible for
developing a marketing plan for CSGL’s services. Prior to his employment with
CSGL, Mr. Cherdabayev worked for the Department of Project Finance at OJSC
Kazakhtelecom in Almaty, Kazakhstan. Mr. Cherdabayev served as the Head of Project
Planning and Monitoring, with responsibility for analyzing the financial feasibility of
investment projects. He began working for OJSC Kazakhtelecom in January 2001. From
October 2000 to January 2001, Mr. Cherdabayev served as the Advisor to the President of
TNS Plus, a private telecommunications company in Almaty, Kazakhstan. In that capacity,
he developed and advised the president on marketing strategies, marketing analysis and
optimization issues. From January 1999 to June 1999, Mr. Cherdabayev was a Mutual Fund
Accountant for State Street Corporation, in Boston, Massachusetts. His primary duties
included producing and verifying daily financial statements, monitoring general ledger
activity and pricing and reconciling five mutual funds on a daily basis. From January
1998 to June 1998, Mr. Cherdabayev was a Financial Reporting Assistant at Boston Edison
in Boston Massachusetts. Mr. Cherdabayev graduated with a Bachelor of Science in
Business Administration from Northeastern University in June 2000. Mr. Cherdabayev is
not a director of any other SEC reporting company.
42
Yermek Kudabayev
.Mr. Kudabayev earned a
Bachelors degree in Engineer-Economics from the Moscow Institute of Steel and Alloys in
1993. He earned an MBA degree from the Kazakhstan Institute of Management, Economics
and Strategic Research in 1996. Mr. Kudabayev has been a member of the Association of
Chartered Certified Accountants, an international accountancy body, since 2004. He was
issued a Certified Accounting Practitioner Certificate from the International Counsel
of Certified Accountants and Auditors in 2002. He has been a Kazakhstani Certified
Accountant since 1998 and a Certified Kazakhstani Auditor since 2000. Prior to joining
the Company, Mr. Kudabayev served as the Finance Director for Kazkhoil Aktobe LLP from
2003 to April 2006. As the Finance Director, Mr. Kudabayev was responsible for
budgeting, planning, cash flow forecasting and management, strategic research
accounting, taxation and reporting. From 2002 to 2003, Mr. Kudabayev served as the
Director of the Astana, Kazakhstan office of Ernst & Young, where he was
responsible for auditing and coordination of projects in the Astana, Karaganda and
Pavlodar regions of Kazakhstan. From 1997 to 2002 Mr. Kudabayev worked for Arthur
Andersen as a Senior Auditor and as a Manager. Mr. Kudabayev is not a director of any
SEC reporting company.
James F. Kohler
. Mr. Kohler received a B.S.
in geology in 1970 and an M.S. in geology in 1980 from Utah State University. From 2001
to the present he has been employed as the Branch Chief of Solid Minerals with the U.S.
Bureau of Land Management in Salt Lake City, Utah, where he oversees all mining
activity on public lands within the State of Utah. He began working at the U.S Bureau
of Land Management in 1988 as a Senior Geologist, providing geologic support for all
federal solid mineral leasing actions to establish a basis for economic evaluation of
leasing tracts. From 1987-1988 Mr. Kohler served as Senior Geologist with the Utah
Office of High Level Nuclear Waste in Salt Lake City, Utah, where he provided oversight
for high-level nuclear waste repository characterization in Nevada, Texas, and
Washington. From 1981-1986 he was the senior geologist and Manager of coal development
and mining geology for Anaconda Minerals/ARCO Coal Company in Denver, Colorado
supervising geologic support for operating coal mines and acquisitions in the U.S.,
Indonesia and China. From 1977 to 1981 Mr. Kohler was a Supervisory Geologist with the
U.S. Geological Survey in Salt Lake City, Utah. In 2000 Mr. Kohler was awarded the Utah
Governor's Medal for Science and Technology. Mr. Kohler is not a director of any other
SEC reporting company.
Timothy Adair
. Mr. Adair received a Masters
in Business Administration (MBA) from Brigham Young University, located in Provo, Utah,
in 1990. Mr. Adair also received a Bachelors of Science from the same University in
Mechanical Engineering with a minor in Mathematics in 1988. Since 2005, Mr. Adair has
been principally engaged as the Owner/President of Cube Office Designs located in Salt
Lake City, Utah where he has successfully transferred company ownership and management.
Cube Office Designs currently employs 22 persons and has annual revenue of
approximately $1.5 million USD. Prior to purchasing Cube Office Designs, from 1989
through 2004 Mr. Adair was principally engaged as the Human Resources Productivity /
Efficiency Manager with Intermountain Health Care (IHC) of Salt Lake City, Utah. IHC is
a health care provider with 25,000+ employees and annual revenue of 2.5 + billion USD.
While with IHC Mr. Adair consistently implemented cost savings improvements, such as
the standardizing and automating of employee transactions which resulted in annual
savings of $200k. Mr. Adair is also a licensed real estate agent and has been an avid
real estate investor and property manager since 1989 as a partner of ADLAW. Mr. Adair
was a member of the Oracle Applications User Group (OAUG) and the Intermountain
Compensation and Benefits Association (ICBA). Mr. Adair is not a director of any other
SEC reporting company.
43
Valery Tolkachev
. Since 1999, Mr. Tolkachev
has been employed with Aton Investment Company in Moscow, Russia, where he currently
serves as the Managing Director, Capital Markets. From 1991 to 1999, Mr. Tolkachev
served in various positions with various employers including, MDM Bank, InkomBank,
InkomCapital and others. Mr. Tolkachev graduated with Honors from the High Military
School in Kiev, USSR in 1989. In 2005, he completed his studies at the Academy of
National Economy, as a qualified lawyer. Mr. Tolkachev is also a director of BMB Munai,
Inc., and Bekem Metals, Inc., both SEC reporting issuers.
Nurlan Tajibaev
. Mr. Tajibaev has worked in
the metallurgy industry since earning a Bachelors degree in Engineer-Metallurgy from
the Kazakh State Technical University in 1973. Prior to joining Bekem Metals, Mr.
Tajibaev served as the Executive Director of Kyzyl Kain Mamyt, LLP, a wholly-owned
subsidiary of Bekem Metals. Before joining Kyzyl Kain Mamyt in 2003, Mr. Tajibaev
served as Chairman of Canat UK Ltd., a supplier of metallurgical equipment from Europe
and the United States to Kazakhstan, for six years. Mr. Tajibaev also spent twenty
years serving in various capacities, including Senior Engineer, for Aktyubinsk
Ferroalloys Plant and President of Kazchrome Corporation. Mr. Tajibaev is not a
director of any SEC reporting company.
Alexander Rassokhin
. In October 2006, Mr.
Rassokhin was appointed to the position of Exploration Manager. He has over thirty
years experience in solid minerals geology. His work experience includes serving as the
President and Exploration Manager of Frontier Mining Ltd. Kazakhstan, where he managed
Frontier’s exploration programs and gold processing in Kazakhstan. Prior to
joining Frontier in 2005, Mr. Rassokhin spent ten years serving as Chief Geologist for
a number of companies operating in Kazakhstan, including Rio Tinto Mining and
Exploration, Ltd., Santa Fe Pacific Gold Kazakhstan Corporation and Newmont Kazakhstan
Gold, Ltd. As Chief Geologist his duties have included identification of new mineral
deposits, preparation of exploration plans and oversight of field explorations. Mr.
Rassokhin also spent fourteen years with the Research Institute of Mineral Resources,
Kazakhstan. Mr. Rassokhin is 53 years old. Mr. Rassokhin is not a director of any SEC
reporting company.
There are no family relationships among any of the Company’s
officers, significant employees or directors.
|
Involvement in Certain Legal
Proceedings
|
To our knowledge, during the past five years none of the directors or
executive officers has been convicted or is currently the subject of a criminal
proceeding, excluding traffic violations or similar minor offenses, or has been a party
to any judicial or administrative proceeding that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation of federal
or state securities laws, except for matters that were dismissed without sanction or
settlement.
Similarly, in the past two years none of our
directors or executive officers, or any business in which they were a general partner
or executive officer, have been the subject of a bankruptcy proceeding.
44
Compliance with Section 16(a) of the Exchange Act
Directors and executive officers are required to comply with Section
16(a) of the Securities Exchange Act of 1934, which requires generally that such
persons file reports regarding ownership of and transactions in securities of the
Company on Forms 3, 4, and 5. A Form 3 is an initial statement of ownership of
securities. Form 4 is to report changes in beneficial ownership. Form 5 covers annual
statements of change in beneficial ownership.
Based solely on management’s review of these reports during the
year ended December 31, 2006, it appears that Valery Tolkachev, Timothy Adair, James
Kohler, Nurlan Tajibaev and Yermek Kudabayev failed to timely file Form 3s at the time
they were appointed as members of the board of directors or as executive officers of
the Company. Messers Tolkachev, Adair and Kohler subsequently filed Form 5s to remedy
the late filings and Mr. Kudabayev filed a Form 4 to remedy the late filing.
Code
of Ethics
Our Board of Directors has adopted a code of ethics that applies to all
of our officers and employees, including our principal executive officer, principal
financial officer, principal accounting officer, controller and persons performing
similar functions. Our website can be found at
www.bekemmetals.com
. The code of ethics is posted on our website.
Committees of the Board of Directors
Audit Committee
We do not currently have a standing audit committee or other committee
performing similar functions, nor have we adopted an audit committee charter. Given the
size of the Company, its available resources and the fact that the OTCBB does not
require us to have an audit committee, the board of directors has determined that it is
in the Company’s best interest to have the full board fulfill the functions that
would be performed by the audit committee, including selection, review and oversight of
the Company’s independent accountants, the approval of all audit, review and
attest services provided by the independent accountants, the integrity of the
Company’s reporting practices and the evaluation of the Company’s internal
controls and accounting procedures. The board is also responsible for the pre-approval
of all non-audit services provided by its independent auditors. Non-audit services are
only provided by our independent accountants to the extent permitted by law.
Pre-approval is required unless a “de minimus” exception is met. To qualify
for the “de minimus” exception, the aggregate amount of all such non-audit
services provided to the Company must constitute not more than 5% of the total amount
of revenues paid by us to our independent auditors during the fiscal year in which the
non-audit services are provided; such services were not recognized by us at the time of
the engagement to be non-audit services; and the non-audit services are promptly
brought to the attention of the board and approved prior to the completion of the audit
by the board or by one or more members of the board to whom authority to grant such
approval has been delegated.
45
As we do not currently have a standing audit committee, we do not, at
this time have an “audit committee financial expert” as defined under the
rules of the Securities and Exchange Commission. The board does believe, however, that
should the Company form a standing audit committee in the future, Mr. Timothy Adair, an
independent director, could qualify as an audit committee expert.
Nominating Committee
We do not currently have a standing nominating committee or other
committee performing similar functions, nor have we adopted a nominating committee
charter. Given the size of the Company, its available resources and the fact that the
OTCBB does not require us to have a nominating committee, the board of directors has
determined that it is in the Company’s best interest to have the full board of
directors to participate in the consideration for director nominees. In general, when
the board determines that expansion of the board or replacement of a director is
necessary or appropriate, the board will review through candidate interviews with
members of management, consult with the candidate’s associates and through other
means determine a candidate’s honesty, integrity, reputation in and commitment to
the community, judgment, personality and thinking style, residence, willingness to
devote the necessary time, potential conflicts of interest, independence, understanding
of financial statements and issues, and the willingness and ability to engage in
meaningful and constructive discussion regarding Company issues. The board would review
any special expertise, for example, that qualifies a person as an audit committee
financial expert, membership or influence in a particular geographic or business target
market, or other relevant business experience. To date we have not paid any fee to any
third party to identify or evaluate, or to assist it in identifying or evaluating,
potential director candidates.
The nominating committee will consider director candidates nominated by
shareholders during such times as the Company is actively considering obtaining new
directors. Candidates recommended by shareholders will be evaluated based on the same
criteria described above. Shareholders desiring to suggest a candidate for
consideration should send a letter to the Company’s Secretary and include: (a) a
statement that the writer is a shareholder (providing evidence if the person's shares
are held in street name) and is proposing a candidate for consideration; (b) the name
and contact information for the candidate; (c) a statement of the candidate’s
business and educational experience; (d) information regarding the candidate’s
qualifications to be director, including but not limited to an evaluation of the
factors discussed above which the board would consider in evaluating a candidate; (e)
information regarding any relationship or understanding between the proposing
shareholder and the candidate; (f) information regarding potential conflicts of
interest; and (g) a statement that the candidate is willing to be considered and
willing to serve as director if nominated and elected. Because of the small size of the
Company and the limited need to seek additional directors, there is no assurance that
all shareholder proposed candidates will be fully considered, that all candidates will
be considered equally, or that the proponent of any candidate or the proposed candidate
will be contacted by the Company or the board, and no undertaking to do so is implied
by the willingness to consider candidates proposed by shareholders.
46
Compensation Committee
We do not have a standing compensation committee or a charter; rather
our Chief Executive Officer evaluates officer and employee compensation issues subject
to the approval of our board of Directors. Our Chief Executive Officer makes
recommendations to the board of directors as to employee benefit programs and officer
and employee compensation. The compensation of Chief Executive Officer is determined
and approved directly by board of directors. Neither the Chief Executive Officer nor
the board of directors engaged compensation consultants during the year.
|
Item 10.
|
Executive Compensation.
|
The following table summarizes the total compensation paid for the
fiscal year 2006 to our president and chief executive officer and to each other named
executive officer whose compensation exceeded $100,000 for the year ended December 31,
2006 (the “named executive officers”).
SUMMARY COMPENSATION TABLE
Name and
Principal Position
|
Year
|
Salary
|
Stock
Awards
(3)
|
All Other
Compensation
(4)
|
Total
|
|
|
|
|
|
|
Marat
Cherdabayev
(1)
|
2006
|
$119,000
|
$28,118
|
$66,181
|
$213,299
|
CEO and President
|
2005
(5)
|
$110,000
|
-0-
|
-0-
|
$110,000
|
|
|
|
|
|
|
Yermek
Kudabayev
(2)
|
2006
|
$90,000
|
$31,089
|
$31,008
|
$152,097
|
CFO
|
|
|
|
|
|
|
(1)
Mr. Cherdabayev has
served as the Chief Executive Officer and President since May
2005.
|
|
(2)
Mr. Kudabayev has
served as the Chief Financial Officer since April 2006.
|
(3)
Represents the dollar amount
recognized for financial statement reporting purposes during 2006 in accordance with
FAS 123(R) with respect to restricted stock grants awarded on October 20, 2006. The
restricted stock grants were valued at $1.95 per share, which represented the closing
market price for our common stock on the date of grant. Mr. Cherdabayev was granted
421,772 shares which vest as follows: one-fourth (105,443 shares) on the first
anniversary of the grant date; one-fourth (105,443 shares) on the second anniversary of
the grant date and the remaining one-half (210,886 shares) will vest on the third
anniversary of the grant date. Mr. Kudabayev was granted 383,429 shares, which vest as
follows: one-fourth (95,857 shares) in April 2007 and one-fourth (95,857 shares) in
April 2008 and the final one-half (191,715 shares) in April 2009. Vesting during each
year is contingent upon the Company timely filing of its reports with the Securities
and Exchange Commission each year. Moreover, vesting in the third year is also
contingent upon the Company having commenced commercial operations. In order for their
grants to vest, Mr. Cherdabayev and Mr. Kudabayev must be employed with the Company on
the vesting date. They forfeit any unvested grants at the time their employment with
the Company terminates.
(4)
Represents the following amounts:
Mr. Cherdabayev, pension fund payment $5,296, income tax expense, $21,289, medical
insurance premiums $3,596, paid rent $36,000; Mr. Kudabayev, pension fund payment
$4,346, income tax expense $22,715, medical insurance premiums $3,947.
(5)
In our annual report for the year
ended December 31, 2005 we incorrectly reported that Mr. Cherdabayev’s
compensation was $160,000. The disclosure included herein properly disclosed Mr.
Cherdabayev’s total compensation for the 2005 fiscal year.
47
Pension Fund Payments
In accordance with the legislative requirements of the Republic of
Kazakhstan during 2006 we were required to pay into an employee pension fund an amount
equivalent to 10% of each employee’s monthly wages, (but not more than $547).
Pension fund payments are withheld from employees’ salaries and included with
other salary costs in the income statement. We do not have any other liabilities
related to any supplementary pensions, post retirement health care, insurance benefits
or retirement indemnities.
Employment Agreements
Mr. Cherdabayev entered into a standard local Kazakhstani employment
agreement as dictated under the Labor Legislation of the Republic of Kazakhstan with
the Company on March 1, 2006. The agreement has no term. The agreement is terminable by
Mr. Cherdabayev on 30 days notice and can be terminated immediately by the Company for
failure to perform. The agreement calls for a salary to be paid, subject to annual
merit increases, but does not specify the amount of the salary. The agreement also
provides that the Company may pay Mr. Cherdabayev a bonus in an amount determined by
the Company. The agreement provides for compensation of official business travel
expenses and 28 days of paid vacation. The board of directors has determined that Mr.
Cherdabayev’s annual salary for 2007 will be $132,000, net of income
taxes.
Mr. Kudabayev has an employment agreement with the Company effective as
of May 1, 2006 to serve as the Company’s Chief Financial Officer. His employment
agreement is effective for an initial term of one year. The term of this agreement will
continue for three (3) one-year after the initial term unless terminated by either
party before the beginning a renewal term. The employment agreement provides for an
annual salary of $120,000 net of taxes, which shall also be paid by the Company. Mr.
Kudabayev’s salary may be reviewed and adjusted by the board of directors not
less frequently than annually. During the term of his employment, Mr. Kudabayev will be
allowed to participate in such pension, profit sharing, bonus, life insurance,
hospitalization, major medical and other employee benefit plans that may be in effect
from time to time and to the extent he is eligible to participate under the terms of
the particular plan. Mr. Kudabayev shall be eligible for performance bonuses in
accordance with the terms of the Employers Performance Bonus Scheme at the discretion
of the board of directors. Pursuant to his employment contract, Mr. Kudabayev received
a performance based restricted stock grant of 383,429 shares which vests over a period
of three years commencing in April 2007. Mr. Kudabayev’s employment agreement
provides for 28 days of paid vacation.
Should the Company terminate Mr. Kudabayev’s employment for good
reason, he shall be entitled to salary for the month in which he is terminated and for
the succeeding three calendar months. An additional month will be added up to a maximum
of twelve months for each year of completed service beginning after two full years of
service. This amount may be reduced in the event Mr. Kudabayev obtains new employment
prior to the completion of the payment period. If he is terminated for cause he shall
only be entitled to compensation through the date of termination. If he is terminated
for disability he shall be compensated for the remainder of the month and for three
succeeding months or until disability insurance benefits commence. If employment is
terminated because of death he shall be entitled to compensation through the end of the
calendar month in which his death occurs.
48
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth information concerning all option
holdings for the fiscal year ended December 31, 2006 for each of the named executive
officers.
|
Stock Awards
|
Name
|
Number of Shares or Units of
Stock
That
Have
Not Vested (#)
|
Market Value of Shares or Units of
Stock
That Have
Not
Vested ($)
|
Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not
Vested (#)
|
Equity Incentive
Plan Awards:
Market or Value of Unearned
Shares, Units or
Other Rights
That Have Not
Vested ($)
|
|
|
|
|
|
Marat Cherdabayev
|
421,772
(1)
|
801,367
|
-0-
|
-0-
|
Yermek Kudabayev
|
-0-
|
-0-
|
383,429
(1)
|
728,515
|
(1)
On October 20, 2006, our board of
directors awarded the above listed restricted stock grants to Mr. Cherdabayev and Mr.
Kudabayev. The award to Mr. Cherdabayev was in recognition of his efforts as the
Company’s Chief Executive Officer and President up to the date of the award, and
is not contingent on future performance. Mr. Kudabayev’s award is based on future
performance and is contingent upon such performance as described in more detail below.
The restricted stock grants were made under the Company’s 2003 Stock Option
Plan.
The shares have been issued and are outstanding and are
being held in escrow by the Company subject to the vesting schedule placed on the
grant. Mr. Cherdabayev and Mr. Kudabayev have the right to vote the shares, receive
dividends and enjoy all other rights of ownership over the entire grant amount, except
for the right to dispose of or otherwise encumber the shares prior to satisfying the
applicable vesting requirement. These restricted stock awards will only vest to these
individuals if they are employed by the Company on the applicable vesting date. Any
unvested shares at the time such individual’s employment with the Company ceases,
for any reason, shall be forfeited back to the Company.
Mr. Cherdabayev’s shares will vest as follows: one-fourth (105,443
shares) on the first anniversary of the grant date; one-fourth (105,443 shares) on the
second anniversary of the grant date and the remaining one-half (210,886 shares) will
vest on the third anniversary of the grant date.
Mr. Kudabayev’s shares will vest as follows: one-fourth (95,857
shares) in April 2007 and one-fourth (95,857 shares) in April 2008, provided that the
Company has timely filed its reports with Securities and Exchange Commission. The final
one-half (191,715 shares) will vest in April 2009. Vesting during each year is
contingent upon the Company timely filing of its reports with the Securities and
Exchange Commission each year. Moreover, vesting in the third year is also contingent
upon the Company having commenced commercial operations.
DIRECTOR COMPENSATION
Name
|
Fees Earned or
Paid in Cash
|
Total
|
|
|
|
Timothy Adair
|
$4,000
|
$4,000
|
Marat Cherdabayev
(1)
|
$ 0
|
$ 0
|
James Kohler
|
$4,000
|
$4,000
|
Nurlan Tajibaev
|
$ 0
|
$ 0
|
Valery Tolkachev
(1)
|
$4,000
|
$4,000
|
(1)
In addition to being directors, Mr.
Cherdabayev and Mr. Tajibaev are Company employees, and therefore do not qualify for
compensation as non-employee directors.
49
In October 2006, we adopted a compensation plan for our non-employee
directors. We pay an annual director fee to our non-employee directors of $16,000,
payable quarterly. Non-employee directors are also paid $1,000 for each board meeting
attended in person plus reimbursement for travel expenses.
Stock Option Plan
In March 2003, we adopted the EMPS Research Corporation 2003 Stock
Option Plan (the "Plan") reserving 5,000,000 common shares for distribution under the
Plan. The purpose of the Plan is to allow us to offer key employees, officers,
directors, consultants and sales representatives an opportunity to acquire a
proprietary interest in the Company. The various types of incentive awards which may be
provided under the Stock Option Plan enable us to respond to changes in compensation
practices, tax laws, accounting regulations and the size and diversity of our
business.
Employee Stock Purchase Plan
|
We do not currently have an employee stock purchase plan
in place.
|
Director Stock Purchase Plan
|
We do not currently have a director stock purchase plan
in place.
|
|
Item 11.
|
Security Ownership of Certain Beneficial Owners and
Management
|
The term “beneficial owner” refers to both the power of
investment and the right to buy and sell our shares. It also refers to rights of
ownership or the right to receive distributions from the Company and proceeds from the
sale of our shares. Since these rights may be held or shared by more than one person,
each person who has a beneficial ownership interest in shares is deemed to be the
beneficial owner of the same shares because there is shared power of investment or
shared rights of ownership.
The following table sets forth as of March 20, 2007, the name and the
number of shares of our Common Stock, par value of $0.001 per share, held of record or
beneficially by each person who held of record, or was known by the Registrant to own
beneficially, more than 5% of the 125,172,011 issued and outstanding shares of our
Common Stock, and the name and shareholdings of each director and of all officers and
directors as group.
50
Type of Security
|
Name and Address
|
Amount & Nature of Beneficial
Ownership
|
% of Class
|
|
|
|
|
Common
|
Bekem Metals, Inc.,
|
24,031,880
|
19%
|
|
Voting Trust
(1)
|
|
|
|
170 Tchaikovsky Street
|
|
|
|
4th Floor
|
|
|
|
Almaty, Kazakhstan 050000
|
|
|
|
|
|
|
Common
|
Marat Cherdabayev
(1) (2)(6)
|
24,453,652
|
20%
|
|
170 Tchaikovsky Street
|
|
|
|
4
th
Floor
|
|
|
|
Almaty, Kazakhstan 050000
|
|
|
|
|
|
|
Common
|
Hsuih Chi Hun
(3)
|
36,306,120
|
29%
|
|
1/F., Chap Biu Building
|
|
|
|
Tai Po Market, 15 On Fu Road
|
|
|
|
New Territories, Hong Kong, S.A.R.
|
|
|
|
China
|
|
|
|
|
|
|
Common
|
Brisa Equities Corporation
(3)
|
21,000,000
|
17%
|
|
1020 East 900 South
|
|
|
|
Bountiful, Utah 84010
|
|
|
|
|
|
|
Common
|
Brilliance Investments Ltd.
(4)
|
15,504,408
|
17%
|
|
P.O. Box 5251
|
|
|
|
CH 6901
|
|
|
|
Lugano, Switzerland
|
|
|
|
|
|
|
Common
|
Central Asian Metals, Inc.
(4)
|
15,504,408
|
12%
|
|
P.O. Box 5251
|
|
|
|
CH 6901
|
|
|
|
Lugano, Switzerland
|
|
|
|
|
|
|
Common
|
GLG Emerging Markets Fund
(5)
|
28,000,000
|
21%
|
|
c/o GLG Partnership
|
|
|
|
One Curzon Street
|
|
|
|
London W1J 5HB
|
|
|
|
|
|
|
Common
|
Yermek Kudabayev
(2) (6)
|
383,429
|
*
|
|
170 Tchaikovsky Street
|
|
|
|
4
th
Floor
|
|
|
|
Almaty, Kazakhstan 050000
|
|
|
|
|
|
|
Common
|
Nurlan Tajibaev
(2) (6)
|
191,715
|
*
|
|
170 Tchaikovsky Street
|
|
|
|
4
th
Floor
|
|
|
|
Almaty, Kazakhstan 050000
|
|
|
|
|
|
|
Common
|
James Kohler
(6)
|
-0-
|
*
|
|
2011 Maple View Drive
|
|
|
|
Bountiful, Utah 84101
|
|
|
|
|
|
|
Common
|
Timothy Adair
(6)
|
-0-
|
*
|
|
5062 W. Amelia Earhart Drive
|
|
|
|
Salt Lake City, Utah 84116
|
|
|
|
|
|
|
Common
|
Valery Tolkachev
(6)
|
-0-
|
*
|
|
27 Pokrovka St., Bldg.6
|
|
|
|
Moscow, Russia 105062
|
|
|
|
|
|
|
Officers, Directors and Nominees
|
25,028,797
|
20%
|
as a Group: (6 persons)
|
|
|
*
Less than 1%.
51
(1)
Mr. Marat Cherdabayev owns no shares in his own name.
He is the trustee of the Bekem Metals, Inc., Voting Trust and as such, he maintains
voting and investment control over these shares and therefore may be deemed to be the
beneficial owner of the shares held by the Voting Trust.
(2)
On October 20, 2006 our board of directors awarded a restricted stock grant to
Mr. Cherdabayev in the amount of 421,772 shares, to Mr. Kudabayev in the amount of
383,429 shares and to Mr. Tajibaev in the amount of 191,715 shares. The shares vest
over a period of three years. The shares have been issued and are outstanding and are
being held in escrow by the Company subject to the applicable vesting schedule for each
grant. The grantees have the right to vote the shares, receive dividends and enjoy all
other rights of ownership over the entire grant amount from the grant date, except for
investment control of the shares, which will not pass to these individuals until the
shares vest. Shares will vest to the grantee only if the grantee is employed by the
Company on the applicable vesting date. Any unvested shares at the time a
grantee’s employment with the Company ceases, for any reason, shall be forfeited
back to the Company. For additional information regarding vesting dates and conditions
see the section entitled “
Securities Authorized for
Issuance Under Equity Compensation Plans
” contained in
Item 5. “
Market for Common Equity, Related Stockholder
Matters and Small Business Issuer Purchases of Equity Securities”
of this report.
(3)
Mr. Hsuih Chi Hun owns no shares in his own name.
However, he maintains voting and investment control over the shares held of record by
Brisa Equities, Inc., as well as by Landsgate Marketing Limited, Comodidad y Fantasia
en Tierra, S.A. and Las Tierras del Deleite, S.A., and therefore may be deemed to be
the beneficial owner of the shares held by these entities.
(4)
Brilliance Investments Ltd., as trustee, maintains the
voting and investment control over the shares held of record by Central Asian Metals,
Inc., and therefore, may be deemed to be the beneficial owner of the shares held by
that entity.
(5)
Includes an immediately exercisable warrant to purchase up to 7,000,000 common
shares at a price of $2.00 per share.
(6)
Mr. Cherdabayev, Mr. Kudabayev and Mr. Tajibaev are
executive officers of the Company. Mr. Cherdabayev, Mr. Tajibaev, Mr. Kohler, Mr. Adair
and Mr. Tolkachev are directors of the Company.
Change in Control
To the knowledge of the management, there are no present arrangements or
pledges of our securities that may result in a change in control of the
Company.
|
Item 12.
|
Certain Relationships and Related Transactions and
Director Independence.
|
On December 2, 2004, we borrowed $92,308 from CJSC Kazmorgeophysica, a
Kazakh company related by virtue of several common shareholders. The short-term loan is
denominated in Kazakh Tenge, interest free and was due on its original terms by
December 31, 2004. During March 2005 the Company borrowed an additional $99,798 from
CJSC Kazmorgeophysica, as a Kazakh Tenge denominated, interest-free, due on demand
note. In addition, during the six months ended March 31, 2005, the Company received
advances in the amount of $26,866 from certain owners, which are short-term in nature
and payable upon demand.
During 2005 and 2006, the Company borrowed $3,998,874 from KMI per an
agreement dated August 8, 2005, between KMI and KKM, for the purpose of assisting KKM
in funding its work requirements, including generation of geological data, under its
mineral extraction contract. The former owners of Kazakh Metals, Inc. were funding this
agreement.
Also, during 2005 and 2006 the Company borrowed $329,000 from
shareholders to fund the U.S. administrative operations.
Our board of directors has determined that the following directors are
“independent directors” as defined in Section 121 of the American Stock
Exchange Company Guide: Timothy Adair, James Kohler and Valery Tolkachev.
52
|
The following exhibits are included as part of this
report:
|
Exhibit No.
|
Exhibit
|
Location
|
|
|
|
Exhibit 10.1
|
Employment Agreement – Yermek Kudabayev
|
*
|
|
|
|
Exhibit 10.2
|
Stock Grant Agreement – Marat
Cherdabayev
|
*
|
|
|
|
Exhibit 10.3
|
Stock Grant Agreement – Yermek
Kudabayev
|
*
|
|
|
|
Exhibit 10.4
|
Stock Grant Agreement – Nurlan Tajibaev
|
*
|
|
|
|
Exhibit 10.5
|
Stock Grant Agreement – Alexander
Rassohkin
|
*
|
|
|
|
Exhibit 21.1
|
List of Subsidiaries
|
*
|
|
|
|
Exhibit 31.1
|
Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith
|
|
|
|
Exhibit 31.2
|
Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith
|
|
|
|
Exhibit 32.1
|
Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith
|
|
|
|
Exhibit 32.2
|
Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
Filed herewith
|
*
Incorporated by reference to exhibits of
the same number filed with our Annual Report on Form 10-K (File No. (000-50218)), filed
on April 2, 2007.
Item 14.
|
Principal Accountant Fees and Services
|
Hansen, Barnett and Maxwell served as the Company’s independent registered public
accounting firm for the years ended December 31, 2006 and 2005 and is expected to serve
in that capacity for the current year. Principal accounting fees for professional
services rendered for us by Hansen, Barnett & Maxwell for the years ended December
31, 2006 and 2006, are summarized as follows:
|
2006
|
2005
|
Audit
|
$86,074
|
$77,800
|
Audit related
|
-
|
-
|
Tax
|
$ 2,000
|
$ 2,000
|
All other
|
-
|
-
|
Total
|
$88,074
|
$79,800
|
53
Audit Fees
. Audit fees were for
professional services rendered in connection with the Company’s annual financial
statement audits and quarterly reviews of financial statements for filing with the
Securities and Exchange Commission.
Tax Fees
. Tax fees related to services for
tax compliance and consulting.
Board of Directors Pre-Approval Policies and
Procedures
. At its regularly scheduled and special meetings,
the Board of Directors, in lieu of an established audit committee, considers and
pre-approves any audit and non-audit services to be performed by our independent
registered public accounting firm. The Board of Directors has the authority to grant
pre-approvals of non-audit services.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amended report to be signed on its behalf, thereunto duly
authorized.
BEKEM METALS, INC.
Date: April 2, 2008
|
/s/ Yermek Kudabayev
|
|
|
Yermek Kudabayev
|
|
Chief Executive Officer
|
54
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
AND
FINANCIAL STATEMENTS
December 31, 2006 and 2005
H
ANSEN,
B
ARNETT
&
M
AXWELL, P.C.
A
Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
BEKEM METALS, INC. AND SUBSIDIARIES
|
(An Exploration Stage Company)
|
|
|
TABLE OF CONTENTS
|
|
Page
|
|
|
Report of Independent Registered Public Accounting
Firm
|
F-3
|
|
|
Consolidated Financial Statements:
|
|
|
|
Consolidated Balance Sheets – December 31, 2006
and 2005 (Restated)
|
F-4
|
|
|
Consolidated Statements of Operations for the years
ended
|
|
December 31, 2006 and 2005, and for the period from
March 5,
|
|
2004 (Date of Inception) through December 31, 2006
(Restated)
|
F-5
|
|
|
Consolidated Statements of Shareholders’ Equity
for the years ended
|
|
December 31, 2005 and 2006, and for the period from
March 5,
|
|
2004 (Date of Inception) through December 31, 2006
(Restated)
|
F-6
|
|
|
Consolidated Statements of Cash Flows for the years
ended
|
|
December 31, 2006 and 2005, and for the period from
March 5,
|
|
2004 (Date of Inception) through December 31, 2006
(Restated)
|
F-7
|
|
|
Notes to Consolidated Financial Statements
|
F-8
|
F-1
H
ANSEN
,
B
ARNETT
&
M
AXWELL, P.C.
|
Registered with the Public Company
|
|
Accounting Oversight Board
|
|
A Professional Corporation
|
|
CERTIFIED PUBLIC ACCOUNTANTS
|
|
5 Triad Center, Suite 750
|
|
Salt Lake City, UT 84180-1128
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and the Shareholders
Bekem
Metals, Inc. and Subsidiaries
We
have audited the accompanying consolidated balance sheets of Bekem Metals, Inc. and
Subsidiaries as of December 31, 2006 and 2005, and the related statements of
operations, shareholders’ equity (deficit), and cash flows for the years ended
December 31, 2006 and 2005, and for the period March 5, 2004 (Date of Inception)
through December 31, 2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our opinion the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Bekem Metals, Inc. and Subsidiaries as
of December 31, 2006 and 2005, and the results of its operations and its cash flows for
the years ended December 31, 2006 and 2005, and for the period March 5, 2004 (Date of
Inception) through December 31, 2006 in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 13, the accompanying consolidated financial statements have been
restated for the effects of correcting the presentation to reflect an exploration stage
enterprise, to correct the reporting of deferred compensation expense for the years
ended December 31, 2006 and 2005, and to correct the weighted average number of shares
outstanding.
|
HANSEN, BARNETT & MAXWELL, P.C.
|
Salt
Lake City, Utah
March 28, 2007, except for Note 13
as to which the date is February 18, 2008
F-2
BEKEM METALS, INC. AND SUBSIDIARIES
|
(An Exploration Stage Company)
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
December 31,
|
|
2006
|
|
2005
|
|
|
(Restated)
|
|
(Restated)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
$
|
8,583,680
|
$
|
89,366
|
Trade accounts receivable
|
|
2,776
|
|
18,657
|
VAT recoverable
|
|
186,915
|
|
61,936
|
Inventories
|
|
185,063
|
|
240,054
|
Prepaid expenses and other current assets
|
|
139,293
|
|
42,393
|
Deferred compensation
|
|
757,920
|
|
-
|
Total Current Assets
|
|
9,855,647
|
|
452,406
|
|
|
|
|
|
Property, plant and mineral interests (net of
accumulated
|
|
|
|
|
depreciation of $144,030 and $57,709)
|
|
13,870,563
|
|
10,938,368
|
Non-current deferred compensation
|
|
1,202,587
|
|
-
|
Other assets
|
|
169,130
|
|
39,241
|
|
|
|
|
|
Total Assets
|
$
|
25,097,927
|
$
|
$ 11,430,015
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
Accounts payable
|
$
|
530,665
|
$
|
424,306
|
Accrued expenses
|
|
274,739
|
|
276,291
|
Due to related party
|
|
9,644
|
|
5,518
|
Current portion of long-term notes payable
|
|
-
|
|
3,660,230
|
Total Current Liabilities
|
|
815,048
|
|
4,366,345
|
|
|
|
|
|
Deferred tax liabilities
|
|
433,645
|
|
2,275,192
|
Long -term notes payable
|
|
-
|
|
797,178
|
Long-term notes payable - related parties
|
|
-
|
|
4,075,012
|
Asset retirement obligation
|
|
951,355
|
|
833,840
|
Total Liabilities
|
|
2,200,048
|
|
12,347,567
|
|
|
|
|
|
Commitments and Contingencies
|
|
-
|
|
-
|
|
|
|
|
|
Shareholders' Equity (Deficit)
|
|
|
|
|
Preferred stock; $0.001 par value, 20,000,000
shares
|
|
|
|
|
authorized, no shares outstanding
|
|
-
|
|
-
|
Common stock; $0.001 par value, 150,000,000 shares
authorized,
|
|
|
|
|
and 125,172,011 and 100,088,888 shares issued and
outstanding
|
|
125,172
|
|
100,089
|
Additional paid-in capital
|
|
29,025,272
|
|
515,879
|
Accumulated deficit
|
|
(6,222,349)
|
|
(1,516,227)
|
Accumulated other comprehensive loss
|
|
(30,216)
|
|
(17,293)
|
Total Shareholders' Equity (Deficit)
|
|
22,897,879
|
|
(917,552)
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
(Deficit)
|
$
|
25,097,927
|
$
|
11,430,015
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
F-3
BEKEM METALS, INC. AND SUBSIDIARIES
|
(An Exploration Stage Company)
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from
|
|
|
|
|
|
|
March 5, 2004
|
|
|
For the Years Ended
|
|
(Date of Inception)
|
|
|
December 31,
|
|
through
|
|
|
2006
|
|
2005
|
|
December 31, 2006
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
Revenue
|
|
$
-
|
|
$
-
|
|
$ -
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
General and administrative expenses
|
|
3,136,715
|
|
1,018,148
|
|
4,254,372
|
Research and development costs
|
|
389,507
|
|
131,562
|
|
792,168
|
Exploratory costs
|
|
1,470,247
|
|
697,496
|
|
2,167,743
|
Accretion expense on asset retirement
obligations
|
|
72,865
|
|
60,632
|
|
133,497
|
Grant compensation expense
|
|
151,583
|
|
-
|
|
151,583
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
5,220,917
|
|
1,907,838
|
|
7,499,363
|
|
|
|
|
|
|
|
Loss From Operations
|
|
(5,220,917)
|
|
(1,907,838)
|
|
(7,499,363)
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
Interest income
|
|
85,337
|
|
-
|
|
85,337
|
Other income
|
|
2,371
|
|
19,490
|
|
21,861
|
Interest expense
|
|
(1,382,972)
|
|
(293,451)
|
|
(1,676,423)
|
Translation adjustment
|
|
(32,572)
|
|
38,190
|
|
5,618
|
Exchange loss
|
|
(174,278)
|
|
(64,192)
|
|
(234,734)
|
|
|
|
|
|
|
|
Net Other Expense
|
|
(1,502,114)
|
|
(299,963)
|
|
(1,798,341)
|
|
|
|
|
|
|
|
Net Loss Before Minority Interest and
Taxes
|
|
(6,723,031)
|
|
(2,207,801)
|
|
(9,297,704)
|
Deferred tax benefit
|
|
2,016,909
|
|
917,238
|
|
2,934,147
|
Loss attributed to minority interest
|
|
-
|
|
19,426
|
|
141,208
|
|
|
|
|
|
|
|
Net Loss
|
|
$ (4,706,122)
|
|
$ (1,271,137)
|
|
$ (6,222,349)
|
|
|
|
|
|
|
|
Basic Loss per Common Share
|
|
$ (0.04)
|
|
$ (0.03)
|
|
|
Weighted-Average Shares used in
|
|
|
|
|
|
|
Basic Loss per Common Shares
|
|
111,480,627
|
|
48,645,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
F-4
BEKEM METALS, INC. AND SUBSIDIARIES
|
(An Exploration Stage Company)
|
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIT)
|
FOR THE PERIOD FROM MARCH 5, 2004 (DATE OF
INCEPTION)
|
THROUGH DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
Total
|
|
Common Shares
|
Additional
|
Comprehensive
|
Accumulated
|
Shareholders'
|
|
Shares
|
Amount
|
Paid-in Capital
|
Loss
|
Deficit
|
Equity (Deficit)
|
Balance - March 5, 2004
|
|
|
|
|
|
|
(Date of inception)
|
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Shares issued for cash, August 12, 2004
|
8,400,000
|
8,400
|
174,274
|
-
|
-
|
182,674
|
Shares issued for 60% interest in
|
|
|
|
|
|
|
Kaznickel, November 19, 2004,
|
|
|
|
|
|
|
$0.02 per share
|
12,600,000
|
12,600
|
(12,600)
|
-
|
-
|
-
|
Net loss for period
|
|
-
|
-
|
-
|
(245,090)
|
(245,090)
|
Balance, December 31, 2004
|
21,000,000
|
$ 21,000
|
$ 161,674
|
$ -
|
$ (245,090)
|
$ (62,416)
|
|
|
|
|
|
|
|
Net loss for period
|
|
|
|
|
(1,271,137)
|
(1,271,137)
|
Cumulative translation adjustment
|
|
|
|
(17,293)
|
|
(17,293)
|
Comprehensive Loss
|
|
|
|
|
|
$ (1,350,846)
|
|
|
|
|
|
|
|
Minority interest shares issued in
|
|
|
|
|
|
|
acquisition of EMPS Research
|
|
|
|
|
|
|
Corporation, January 24, 2005
|
-
|
-
|
(11,706)
|
-
|
-
|
(11,706)
|
Shares issued for cash, August 8, 2005
|
61,200,000
|
61,200
|
38,800
|
-
|
-
|
100,000
|
Shares issued for the acquisition of
|
|
|
|
|
|
|
the minority interests of Bekem Metals,
|
|
|
|
|
|
|
Inc., October 24, 2005
|
17,888,888
|
17,889
|
327,111
|
-
|
-
|
345,000
|
Balance, December 31, 2005 - Restated
|
100,088,888
|
$100,089
|
$ 515,879
|
$ (17,293)
|
$ (1,516,227)
|
$ (917,552)
|
|
|
|
|
|
|
|
Net loss for period
|
|
|
|
|
(4,706,122)
|
(4,706,122)
|
Cumulative translation adjustment
|
|
|
|
(12,923)
|
|
(12,923)
|
Comprehensive Loss
|
|
|
|
|
|
$ (5,636,597)
|
|
|
|
|
|
|
|
Shares issued for cash, July 14, 2006 -
|
|
|
|
|
|
|
net of fees of 1,577,614
|
24,000,000
|
24,000
|
26,398,386
|
-
|
-
|
26,422,386
|
Issue of Stock grants at 1.95 per share on
|
|
|
|
|
|
|
October 20, 2006
|
1,083,123
|
1,083
|
2,111,007
|
-
|
-
|
2,112,090
|
Balance, December 31, 2006 - Restated
|
125,172,011
|
$125,172
|
$ 29,025,272
|
$ (30,216)
|
$ (6,222,349)
|
$ 22,897,879
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
F-5
BEKEM METALS, INC. AND SUBSIDIARIES
|
(An Exploration Stage Company)
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
from
|
|
|
|
|
|
March 5, 2004
|
|
|
|
For the Years Ended
|
|
(Date of Inception)
|
|
|
|
December 31,
|
|
through
|
|
|
|
2006
|
|
2005
|
|
December 31, 2006
|
|
|
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
Net loss
|
|
$ (4,706,122)
|
|
$ (1,271,137)
|
|
$ (6,222,349)
|
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
117,502
|
|
48,233
|
|
167,133
|
|
Accretion expense on asset retirement
obligations
|
|
72,865
|
|
60,632
|
|
149,566
|
|
Interest expense from debt discount
|
|
855,970
|
|
107,261
|
|
963,231
|
|
Shares issued on option modification
|
|
-
|
|
19,426
|
|
19,426
|
|
Deferred tax benefit
|
|
(2,016,909)
|
|
(917,238)
|
|
(2,934,147)
|
|
Foreign currency exchange gain and
translation
|
|
|
|
|
|
|
|
adjustment
|
|
(142,795)
|
|
(64,192)
|
|
(203,251)
|
|
Purchased exploration costs
|
|
-
|
|
251,286
|
|
251,286
|
|
Stock grant compensation expense
|
|
151,583
|
|
-
|
|
151,583
|
|
Loss on disposal of property and equipment
|
|
58,928
|
|
-
|
|
58,928
|
|
Loss recognized on minority shareholders'
interest
|
|
-
|
|
(19,426)
|
|
(141,208)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
16,983
|
|
(8,015)
|
|
8,968
|
|
Inventories
|
|
47,985
|
|
30,399
|
|
78,384
|
|
VAT recoverable
|
|
(122,498)
|
|
-
|
|
(122,498)
|
|
Prepaid expenses and other current assets
|
|
(29,040)
|
|
30,181
|
|
80,979
|
|
Accounts payable
|
|
88,129
|
|
52,381
|
|
221,967
|
|
Accrued expenses
|
|
(9,976)
|
|
(77,234)
|
|
(87,210)
|
|
Net Cash From Operating Activities
|
|
(5,617,395)
|
|
(1,757,443)
|
|
(7,559,212)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(2,577,696)
|
|
(16,100)
|
|
(2,618,437)
|
|
Purchase of intangible assets
|
|
(57,480)
|
|
-
|
|
(57,480)
|
|
Proceeds from disposal of property and
equipment
|
|
22,941
|
|
-
|
|
22,941
|
|
Restricted cash
|
|
(100,000)
|
|
-
|
|
(100,000)
|
|
Notes receivable
|
|
(56,983)
|
|
-
|
|
(56,983)
|
|
Change in related party receivables/payables
|
|
46,930
|
|
3,545
|
|
50,475
|
|
Cash acquired in acquisitions
|
|
-
|
|
26,761
|
|
(152,180)
|
|
Net Cash From Investing Activities
|
|
(2,722,288)
|
|
14,206
|
|
(2,911,664)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
1,996,731
|
|
12,618,779
|
|
14,706,914
|
|
Payments on notes payable
|
|
(7,870,993)
|
|
(14,874,760)
|
|
(22,745,753)
|
|
Proceeds from notes payable related parties
|
|
251,900
|
|
4,075,012
|
|
4,326,912
|
|
Payments on notes payable - related parties
|
|
(4,326,912)
|
|
-
|
|
(4,326,912)
|
|
Issuance of shares for cash
|
|
26,422,386
|
|
2,000
|
|
26,728,842
|
|
Net Cash From Financing Activities
|
|
16,473,112
|
|
1,821,031
|
|
18,690,003
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on
Cash
|
|
360,885
|
|
7,382
|
|
364,553
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash
|
|
8,494,314
|
|
85,176
|
|
8,583,680
|
|
Cash at Beginning of Period
|
|
89,366
|
|
4,190
|
|
-
|
|
Cash at End of Period
|
|
$ 8,583,680
|
|
$ 89,366
|
|
$ 8,583,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
F-6
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE
1 – BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The
accompanying consolidated financial statements include the accounts of Bekem Metals,
Inc. (“BMI”) and its wholly owned subsidiaries Kazakh Metals, Inc.
(“KMI”), Kyzyl Kain Mamyt LLP (“KKM”), Condesa Pacific, S.A.
(“Condesa”) and Kaznickel, LLP (“Kaznickel”). Intercompany
accounts and transactions have been eliminated in consolidation. The results of
operations of the previously separate KMI and BMI were combined for all periods prior
to the acquisition (as further explained below), with recognition of the minority
interest in BMI, and the operations of BMI and KMI are consolidated from October 24,
2005.
On
October 24, 2005, Bekem Metals, Inc. (“BMI”, “Bekem” or the
“Company”) entered into an Acquisition Agreement with Kazakh Metals, Inc.,
a British Virgin Islands international business company (“KMI”), under
which BMI acquired 100% of the outstanding common shares of KMI in exchange for the
issuance of 61,200,000 common shares.
The
KMI shareholders received 61.1% of the BMI common stock outstanding after the
transaction and therefore KMI was considered the acquirer for financial reporting
purposes. Accordingly, the accompanying financial statements include financial
statements of KMI for all periods presented.
Brisa Equities Corporation, a British Virgin Islands holding company
(“Brisa”), together with other entities its owners control, is the
controlling shareholder of KMI and was also the controlling shareholder of BMI.
Accordingly, the transaction was considered to be between entities under common control
and did not result in a change in control of BMI. Following the transaction, entities
over which the controlling shareholder maintained voting and investment control held
51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding
common shares.
The
acquisition of the portion of the net liabilities of BMI relating to the common shares
owned by the controlling shareholder was recorded at historical cost of $(161,998). The
acquisition of the common shares of BMI purchased from the minority shareholders of BMI
were recorded at $345,000, which was the estimated fair value of those shares on the
date of acquisition. KMI accounted for the purchase of BMI similar to a
pooling.
Bekem Metals, Inc.
– The
consolidated financial statements include the accounts of Condesa and Kaznickel, since
the date of its acquisition by Condesa, and the accounts of BMI since its acquisition
by Condesa. Condesa was incorporated under the laws of the British Virgin Islands on
March 5, 2004. Condesa acquired BMI in a reverse acquisition, on January 28, 2005. On
July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel
a wholly-owned subsidiary of Bekem. On September 30, 2006 Bekem sold Condesa to a third
party for a nominal value. Condesa is included in the consolidated financial statements
from the date of acquisition and to the date of disposal.
Kazakh Metals, Inc.
– The
consolidated financial statements also include the accounts of KMI and its wholly-owned
subsidiary, KKM, which it acquired on June 1, 2005 in a purchase business
combination.
Name Change
– On February 9,
2005, the Board of Directors of EMPS Research Corporation approved, and the
stockholders holding a majority of the outstanding shares of the company approved and
ratified by written consent, a change in the Company’s name from EMPS Research
Corporation to Bekem Metals, Inc. On March 16, 2005, the Company filed an amendment to
its Articles of Incorporation to affect the change.
F-7
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Currency Translation
– The
consolidated financial statements are presented in U.S. dollars. The functional
currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars
for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.
dollars at the average exchange rates during the reporting period. Non-monetary assets
and liabilities of Kaznickel are translated into U.S. dollars, using historical
exchange rates and monetary assets and liabilities are translated into U.S. dollars
using exchange rates on the date of the financial statements. Translation differences
are included in results of operations. All balance sheet accounts of KKM are translated
at exchange rates on the date of the financial statements and translation differences
are included in stockholders’ equity as cumulative translation
adjustments.
Nature of Business
The
Company is engaged in the acquisition, exploration and production of mineral resource
properties. Kaznickel owns the right to the Gornostayevskoye (“Gornostai”)
nickel and cobalt deposit located in the East Kazakhstan Oblast in northeast
Kazakhstan. The license is for exploration and production of cobalt and nickel ores and
is valid through February 26, 2026. KKM holds exploration and production licenses from
the government of Kazakhstan to a 575,756 acre parcel, located approximately 130
kilometers northwest of Aktobe, Kazakhstan. This deposit is referred to as the
Kempirsai deposit. The licenses grant KKM the right to explore for and produce nickel
and cobalt from deposits located within the territory through October 12, 2011, which
may be extended upon agreement between KKM and the Ministry of Energy and Minerals
Resources (MEMR) of the Republic of Kazakhstan. KKM also holds a license to explore for
and produce Mamyt brown coal from a deposit located within 40 kilometers of its cobalt
and nickel deposit. This license expires on December 11, 2018 with further possible
extensions.
Business Condition
– The
Company has no proven mineral reserves that conform to U.S. accounting standards and
has had only limited ore and Mamyt brown coal production from its Kempirsai deposit
since its acquisition on May 31, 2005. The Gornostai deposit has not yet entered the
development stage with respect to its mineral interests and has no production. There
has been only limited revenue from the Kempirsai operations, and the Company has
incurred net losses of ($4,706,122) and ($1,271,137) for the years ended December 31,
2006 and 2005, respectively and ($6,222,349) for the period from March 5, 2004 (date of
inception) through December 31, 2006. Current assets exceeded current liabilities by
$9,040,599 at December 31, 2006, while current liabilities exceeded current assets by
$3,913,939 at December 31, 2005. Management expects that the Company will need
significant additional capital to fund construction of a processing plant in 2007-2008.
The Company anticipates it will need to raise additional capital through the sale of
its equity securities or debt securities. Certain shareholders of the Company have
indicated a willingness to provide the Company a line of credit. The Company has no
formal agreement with said shareholders to provide this line of credit and the
shareholders are under no obligation to enter into any agreement or make available any
funds to the Company.
Exploration Stage Company
The
Company is an exploration stage company. As an exploration stage enterprise, the
Company discloses the deficit accumulated during the exploration stage and the
cumulative statements of operations and cash flows from inception to the current
balance sheet date. The Company will remain in the exploration stage until such time as
proven or probable reserves have been established for either the KKM (Kempirsai) or the
Kaznickel (Gornostai) operations.
F-8
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Significant Accounting Policies
Use of Estimates
– The
preparation of the Company’s consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ from those
estimates. The more significant areas requiring the use of management estimates and
assumptions relate to mineral reserves that are the basis for future cash flow
estimates and units-of-production depreciation, depletion and amortization
calculations; environmental, reclamation and closure obligations; asset impairments;
write-down of inventory to net realizable value; valuation allowances for deferred tax
assets; reserves for contingencies and litigation; and the fair value and accounting
treatment of financial instruments. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable under
the circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Revenue Recognition
– Since
the Company is in the exploration stage, any incidental sales of ore and Mamyt brown
coal are recorded as a reduction of the exploratory costs. Income from such sales is
recognized when persuasive evidence of an arrangement exists, title to product
transfers to the customer, and collectibility is reasonably assured.
Trade Receivables
– In the
normal course of business, the company extends credit to its customers on a short-term
basis. The principal customers are local companies and government agencies. Although
credit risks associated with these customers are considered minimal, the company
routinely reviews its accounts receivable balances and makes provisions for doubtful
accounts.
Related Party Receivables
–
Related party receivables consists of short-term advances to employees. No allowance
has been provided due to the historic short-term nature and recoverability of such
advances.
Inventories
– Inventory
consists of materials and spare parts, miscellaneous goods, fuel and some raw
materials. Spare parts, goods and fuel are recorded at the lower cost or estimated
service value.
Prepaid Expenses
– Prepaid
expenses relate to office rent, subscriptions, insurance and advance drilling costs.
Prepaid expenses are charged to operations in the period the related service or work is
performed.
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed
– Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount that the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. During 2006, the
Company realized losses from the impairment and disposal of property, plant and
equipment in the amount of $58,928. At December 31, 2006, the Company reviewed its
long-lived assets as disclosed above and determined no additional impairment was
necessary.
Income Taxes
– Income taxes
are calculated using the liability method of tax accounting. Under this method, future
income tax assets and liabilities are computed based on temporary differences between
the tax basis and carrying amount on the balance sheet for assets and liabilities.
Future income tax assets and liabilities are calculated using tax rates anticipated to
apply in the periods that the temporary differences are expected to reverse.
F-9
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Depreciation, Depletion and Amortization
– Costs incurred to develop new properties will be capitalized as
incurred, when it has been determined that the property can be economically developed
based on the existence of proven and probable reserves. All such costs will be
amortized using the units-of-production (“UOP”) method over the estimated
life of the ore body based on recoverable minerals to be mined from proven and probable
reserves.
Depreciation of equipment used in exploration activities is calculated
using the straight-line method based on the estimated useful lives of the assets and is
charged to Exploratory costs.
Expenditures for new facilities or equipment and expenditures not
related to exploration activities and used for administrative and other operation
purposes or that extend the useful lives of existing facilities or equipment are
capitalized and depreciated using the straight-line method at rates sufficient to
depreciate such costs over the estimated future lives of such facilities or equipment.
These lives do not exceed the estimated mine life as the useful lives of these assets
are considered to be limited to the life of the relevant mine.
The
expected useful lives used in depreciation, depletion and amortization calculations are
determined based on applicable facts and circumstances, as described above. Significant
judgment is involved in the determination of useful lives, and no assurance can be
given that actual useful lives will not differ significantly from the useful lives
assumed for purpose of depreciation, depletion and amortization
calculations.
Mineral Property Rights
–
Mineral property acquisition costs, site restoration costs and development costs on
mineral properties with proven and probable reserves are capitalized and will be
depleted using the units-of-production method over the estimated life of the reserves.
If there are insufficient reserves to use as a basis for depleting such costs, they are
written off as a mineral property or mineral interest impairment in the period in which
the determination is made. Site restoration costs are depleted over the term of their
expected life. Interest costs are capitalized on mineral properties and mineral
interests in development. The development potential of mining properties is established
by the existence of proven and probable reserves, reasonable assurance that the
property can be permitted as an operating mine and evidence that there are no
metallurgical or other impediments to the production of saleable metals.
Exploration costs incurred on mineral interests, other than acquisition
costs, prior to the establishment of proven and probable reserves are charged to
operations as incurred. Development costs incurred on mineral interests with proven and
probable reserves will be capitalized as mineral properties. We regularly perform
evaluations of our investment in mineral interests to assess the recoverability and /
or the residual value of the investments in these assets. All mineral interests and
mineral properties are reviewed for impairment whenever events or circumstances change
which indicate the carrying amount of an asset may not be recoverable, utilizing
established guidelines based upon undiscounted future net cash flows from the asset or
upon the determination that certain exploration properties do not have sufficient
potential for economic mineralization.
Our
estimates of mineral prices, recoverable probable reserves, and operating, capital and
reclamation costs, when available, are subject to certain risks and uncertainties,
which may affect the recoverability of mineral property costs. Although we make our
best estimate of these factors, it is possible that changes could occur in the near
term, which could adversely affect the future net cash flows to be generated from the
properties.
Exploratory Costs
– since the
Company is deemed to be in the Exploration stage, all costs related to operating
activities are classified as Exploratory costs, which mainly consist of cost of
drilling exploration works at the Gornostai deposits, cost of blasting, stripping,
excavation and ore extracting works at the Kempirsai deposits, as well as salaries and
wages, depreciation charges and other expenses directly related to these
works.
F-10
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Financial Instruments
– The
nature of the Company’s operation exposes the Company to fluctuations in
commodity prices, foreign currency exchange risk and credit risk. The Company
recognizes these risks and manages its operation in a manner such that exposure to
these risks is minimized to the extent practical. The Company is not exposed to
fluctuations in interest rates because certain of its loans are interest free, as a
general requirement under Kazakh law for non-financial institutions.
Basic and Diluted Income (Loss) Per Share
– Basic income (loss) per share is calculated by dividing net
income (loss) by the weighted-average number of shares outstanding. Diluted income per
share is calculated by dividing net income by the weighted-average number of shares and
all dilutive potentially issuable shares, except during loss periods when those
potentially issuable shares are anti-dilutive.
The
following data shows the amounts used in computing basic and diluted weighted-average
number of shares outstanding at December 31, 2006 and 2005:
For the years ended December 31,
|
2006
|
|
2005
|
Basic weighted average common shares
outstanding
|
95,285,844
|
|
48,645,053
|
Dilutive effect of outstanding
options/warrants
|
-
|
|
-
|
Diluted Weighted Average Common Shares
Outstanding
|
95,285,844
|
|
48,645,053
|
Recent Accounting Pronouncements
– In July 2006, the FASB issued FASB Interpretation (FIN) No.
48,
Accounting for Uncertainty in Income Taxes,
which provides guidance on the accounting for uncertainty in income
taxes recognized in financial statements. FIN 48 is effective for fiscal years
beginning after December 15, 2006, with earlier adoption permitted. The Company is
currently evaluating the impact, if any, the adoption of FIN 48 will have on its
financial reporting and disclosures.
In
February 2006, the FASB issued SFAS No. 155,
Accounting for
Certain Hybrid Financial Instruments -- an amendment of FASB Statements No. 133 and
140.
SFAS No. 155 resolves issues addressed in SFAS No. 133
Implementation Issue No. D1,
Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets
. SFAS
No. 155 will become effective for the Company's fiscal year that begins after September
15, 2006. The impact of SFAS No. 155 will depend on the nature and extent of any new
derivative instruments entered into after the effective date.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157,
Fair Value Measurements,
which
provides enhanced guidance for using fair value to measure assets and liabilities. SFAS
No. 157 establishes a common definition of fair value, provides a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosure requirements about fair value measurements. SFAS No. 157 is effective for
financial statements issued in fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. The Company is currently evaluating the
impact, if any, the adoption of SFAS No. 157 will have on its financial reporting and
disclosures.
In
September 2006, the SEC staff published Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 addresses quantifying the financial statement effects of misstatements,
specifically, how the effects of prior year uncorrected errors must be considered in
quantifying misstatements in the current year financial statements. This statement is
effective for fiscal years ending after November 15, 2006. SAB 108 did not have a
material effect on the Company’s financial reporting and disclosures.
F-11
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE
2
–
ACQUISITIONS AND
DISPOSAL
Kaznickel Acquisition by Condesa
On
July 9, 2004 Condesa, which was owned 60% by Brisa holding 8,400,000 of 14,000,000
shares of outstanding common stock, entered into an investment agreement under which
Condesa provided a $300,000 convertible loan to Kaznickel LLP, which was immediately
converted into a new 40 percent equity interests in Kaznickel. On September 22, 2004,
Brisa acquired an interest in Kaznickel by purchasing 60 percent of the equity interest
of the founding partners’ remaining 60 percent interests. As consideration for
the purchase, the original partners obtained a commitment from Brisa to facilitate a
reverse merger with a U.S. public company, and a commitment to obtain funding enabling
Kaznickel to further explore its mineral property rights. The value of the commitment
was estimated to be $270,000 based on the percent of Kaznickel obtained for
Condesa’s original cash investment of $300,000.
On
November 19, 2004, Brisa and the remaining Kaznickel partners exchanged their combined
60% interest in Kaznickel for a new 60% interest, equal to 21,000,000 shares of
Condesa, thereby making Kaznickel a wholly-owned subsidiary of Condesa. Brisa received
12,600,000 shares of Condesa in the transaction. The remaining 8,400,000 common shares
issued in the acquisition were recognized as minority shareholders’ interests.
The acquisition of a controlling interest in Kaznickel by Brisa and Condesa was
considered the purchase of Kaznickel with a measurement date of September 22, 2004, the
date Brisa and Condesa obtained control from the original Kaznickel
partners.
Condesa accounted for the acquisition of Kaznickel as a purchase
business combination with a purchase price of $304,456. The purchase price was
allocated to the assets acquired and liabilities assumed based on their estimated fair
values. Negative goodwill was not recognized in connection with the acquisition of
Kaznickel. Instead, the excess of the fair value of the net assets over the purchase
price was allocated as a pro rata reduction of the amounts that otherwise would have
been assigned to the long-term assets. The Company is in the process of obtaining an
independent valuation of the net assets acquired. Accordingly the allocation of the
purchase price is subject to refinement. At September 22, 2004, the purchase price was
allocated to the assets acquired and the liabilities assumed as follows:
Current assets
|
$
|
231,674
|
Mineral property rights
|
|
267,660
|
Asset retirement costs of the mineral rights
|
|
474,936
|
Property and equipment
|
|
21,573
|
Total assets acquired
|
|
995,843
|
Current liabilities
|
|
(25,468)
|
Asset retirement obligation
|
|
(665,919)
|
Total liabilities assumed
|
|
(691,387)
|
Minority Shareholders' interests
|
|
(121,782)
|
Net Assets Acquired
|
$
|
182,674
|
Intangible assets acquired include the mineral property rights, which
are capitalized until the production phase begins, subject to impairment
considerations. Other intangible assets include the asset retirement costs of the
mineral rights, which have a 20-year estimated life and are subject to amortization at
a planned rate of $24,291 per year, and the asset retirement obligation, which is
accreted over its 20-year life, with a current estimated expense of $43,274 per
year.
F-12
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Condesa Acquisition of EMPS (Bekem)
On
January 28, 2005, EMPS Research, Inc. (“EMPS”) completed a Plan and
Agreement of Reorganization with Condesa, wherein EMPS acquired 100% of the outstanding
capital stock of Condesa in exchange for the issuance of 35,000,000 common shares of
which 21,000,000 were held by the controlling shareholder and 14,000,000 were issued to
minority shareholders in Condesa. EMPS subsequently changed its name to Bekem Metals,
Inc. As a result of that reorganization, the shareholders of Condesa owned 91% of the
outstanding common stock of EMPS at that reorganization date. The combined entities
were referred to after that reorganization as Bekem.
EMPS
had 3,300,000 shares of common stock outstanding prior to that transaction that
remained outstanding, were classified as minority interests, and were valued at $0. The
transaction resulted in a change of control of EMPS. For financial reporting purposes,
Condesa was considered the acquirer. The acquisition was recognized as a forward stock
split of Condesa’s 30,000 shares of capital stock held by the controlling
shareholder that were outstanding prior to the reorganization into 21,000,000 common
shares, or a 700-for-1 stock split. The financial statements were restated for the
effects of the stock split for all periods presented. Condesa’s assets,
liabilities and minority interests were recorded at their historical cost and the
effect of the stock split was reflected retroactively since the inception of Condesa.
The assets of EMPS were considered to have been acquired by Condesa in exchange for the
assumption of EMPS’s net liabilities. The net assets consisted of cash of $2,648,
intangible assets of $1,823 and current liabilities of $15,077. The operations of
Condesa were included for all periods presented and the operations of EMPS were
included from the acquisition of EMPS.
Kazakh Metals, Inc. Acquisition of Kyzyl Kain Mamyt,
LLC
On
June 1, 2005, Kazakh Metals acquired 100% of the equity interests of Kyzyl Kain Mamyt,
LLC (KKM) for the cash purchase price of $100,000. The management of the Company
understands that at this time KKM was not able to maintain the subsoil use contract
because of financial liquidity problems. The owners of KKM, prior to its acquisition by
Kazakh Metals, had incurred significant debt obligations on the property which they
were unable to service and KKM’s assets were pledged as a guarantee for these
debt obligations. Moreover, at the time of the acquisition of KKM by Kazakh Metals, the
price of nickel was at the level where the processing of nickel ore by known and proven
technologies was not considered economically feasible due to high processing costs.
Therefore, the former owners of KKM sold their interests in KKM to Kazakh Metals at a
price significantly below the estimated fair value to free itself from the debt
obligations associated with the property. The former equity holders of KKM were not
related parties.
KKM
operates in the Aktyubinsk region of northwestern Kazakhstan and owns licenses to
explore for, and is engaged in the production and sale of nickel and cobalt ore and
Mamyt brown coal. KKM has been actively involved in mining cobalt and nickel ore since
its inception and has been operating in the Soviet Union since 1938. The height of
production occurred in the late 1980’s. Production, although limited, has
occurred since that time. KKM’s primary assets are its rights to exploit unproved
reserves and its infrastructure of buildings, machinery and equipment, including a rail
spur.
Kazakh Metals accounted for the acquisition of KKM as a purchase
business combination with a purchase price of $100,000. The purchase price was
allocated to the assets acquired and liabilities assumed based on their estimated fair
values. The Company has estimated a fair value of $40,000,000 for the mineral interests
and obtained an independent appraisal of the buildings and equipment of $17,693,795 on
the acquisition date, and is in the process of obtaining third-party valuations of the
mineral assets; accordingly, the allocation of the purchase price is subject to
refinement. Negative goodwill was not recognized in connection with the
acquisition of KKM. Instead, the excess of the fair value of the net
assets over the purchase price was allocated as a pro rata reduction of the amounts
that otherwise would have been assigned to the long-term assets. Notes payable assumed
in the acquisition with a stated value of $7,445,197 are due to third parties generally
within three years, including $4,432,290 to a bank, and were recorded based upon their
fair values on the acquisition date, resulting in a discount to the notes that will be
recognized as interest expense through maturity. The operations and cash flows of KKM
were included in the Company’s consolidated financial statements since the date
of the acquisition.
F-13
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
Acquisition of Kaznickel LLP
|
|
|
|
|
|
Current assets
|
$
|
231,674
|
Mineral property rights
|
|
267,660
|
Asset retirement costs of the mineral rights
|
|
474,936
|
Property and equipment
|
|
21,573
|
Total assets acquired
|
|
995,843
|
Current liabilities
|
|
(25,468)
|
Asset retirement obligation
|
|
(665,919)
|
Total liabilities assumed
|
|
(691,387)
|
Minority Shareholders' interests
|
|
(121,782)
|
Net Assets Acquired
|
$
|
182,674
|
|
|
|
Acquisition of Minority Shareholders' Interests of
Bekem Metals
|
|
|
|
Unproved mineral property rights
|
$
|
132,432
|
Purchased exploration costs
|
|
251,286
|
Deferred tax liability
|
|
(38,718)
|
Minority Shareholders' Interests
Acquired
|
$
|
345,000
|
|
|
|
Acquisition of KKM
|
|
|
|
|
|
Current Assets
|
$
|
469,379
|
Unproved mineral property rights
|
|
7,034,321
|
Asset retirement costs of the mineral rights
|
|
86,852
|
Buildings, constructions machinery and
equipment
|
|
3,068,786
|
Total assets acquired
|
|
10,659,338
|
Current liabilities
|
|
(717,527)
|
Asset retirement obligation
|
|
(97,223)
|
Notes Payable, net of discount of $917,737
|
|
(6,541,670)
|
Deferred tax liability
|
|
(3,202,918)
|
Total liabilities assumed
|
|
(10,559,338)
|
Net Assets Acquired
|
$
|
100,000
|
Intangible assets acquired include the mineral property rights, which
are capitalized and amortized on a units-of-production method, subject to impairment
considerations. Other intangible assets include the asset retirement costs of the
mineral rights, which have a 20-year estimated life and are subject to amortization at
a planned rate of $4,311 per year, and the asset retirement obligation, which is
accreted over its 20-year life, with a current estimated expense of $7,680 per
year.
F-14
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Bekem Acquisition of Kazakh Metals
On
October 24, 2005, Kazakh Metals, Inc. (KMI) was acquired by Bekem Metals, Inc. in a
purchase business combination under which Bekem acquired 100% of the outstanding common
shares of KMI in exchange for the issuance of 61,200,000 common shares. The primary
asset of KMI is its wholly owned subsidiary, KKM.
The
principal shareholder of Bekem was also the principal shareholder of KMI. Accordingly,
the transaction was considered to be between entities under common control and did not
result in a change in control of Bekem. Following the transaction, entities over which
this shareholder maintains voting and investment control hold 51,600,000 Bekem common
shares, which represented 51.5% of the 100,088,888 outstanding common shares. The
acquisition of the portion of KMI owned by the principal shareholder will be recorded
at historical cost. The portion of KMI purchased from the minority shareholders of KMI
was recorded at fair value.
Disposal of Condesa
On
July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel
a wholly-owned subsidiary of Bekem. On September 30, 2006 Bekem sold Condesa to a third
party for a nominal value. Condesa generated no sales and had no income. The disposals
of Condesa had no material effect on the financial position and the income statement of
Bekem.
NOTE
3 – CASH
The
Company considers all demand deposits, money market accounts and marketable securities
purchased with an original maturity of three months or less to be cash and cash
equivalents. The fair value of cash and cash equivalents approximates their carrying
amounts due to their short-term maturity.
Cash
consists of the following:
December 31,
|
|
2006
|
|
|
2005
|
Current accounts (USD)
|
$
|
479,947
|
|
$
|
64,136
|
Current accounts (Tenge)
|
|
38,379
|
|
|
25,230
|
Bank deposit (USD)
|
|
8,065,354
|
|
|
-
|
Total
|
|
$
|
8,583,680
|
|
$
|
89,366
|
|
|
|
|
|
|
|
Bank
deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits
earn interest from 3% to 8% annually based on the length of time the funds are left on
deposit. Of the total bank deposits, only $100,000 is restricted. The $100,000 is
restricted for a term of 15 months. This amount is shown as other non-current assets.
The balances of the bank deposits are immediately available to the Company.
F-15
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE
4 – PROPERTY, PLANT AND MINERAL INTERESTS
Property, plant and mineral interests consist of the
following:
December 31,
|
|
2006
|
|
|
2005
|
Buildings
|
$
|
2,156,326
|
|
$
|
2,062,865
|
Machinery and equipment
|
|
3,474,858
|
|
|
970,005
|
Other fixed assets
|
|
69,665
|
|
|
53,856
|
Unproved mineral property rights
|
|
8,313,744
|
|
|
7,909,351
|
|
|
14,014,593
|
|
|
10,996,077
|
Accumulated depreciation
|
|
(144,030)
|
|
|
(57,709)
|
Net Property and Equipment
|
$
|
13,870,563
|
|
$
|
10,938,368
|
The
increase in property, plant and mineral interests is principally related to the
purchase of equipment by the Company in May 2006 from a third party for $2,000,000,
which is used in KKM’s pilot plant. The equipment was placed in service and
capitalized in October, 2006. The $2,000,000 capitalized assets represents only
tangible equipment that have alternative uses either in other research and development
projects or for other nickel ore processing technologies such a pyrometallurgical
technologies or hydrometallurgical technologies.
Unproved mineral interests represent the acquisition costs of the
mineral interests upon the purchase business combinations with Kaznickel and with KKM.
The government of Kazakhstan retains the title to the property upon which the
Company’s mineral rights pertain; however, the Company’s mineral interests
are considered to be tangible assets.
Gornostai Deposit
Kaznickel acquired its interest in the Contract on Exploration and
Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued
by the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan
(“MEMR”) dated February 26, 2004. By virtue of the Contract, Kaznickel
acquired the right to exploit the mineral property including the right to explore,
develop and produce the cobalt and nickel mineral resources on the Deposit through
February 26, 2026. The Company has the right to re-negotiate the contract at that time
for an additional 30 years. The government of Kazakhstan retains the title to the
property; however, the Company’s mineral interests are considered to be tangible
assets. The Company capitalized the acquisition costs of its mineral interest upon the
purchase business combination with Kaznickel. The allocated purchase price included a
capitalized amount of an acquired asset retirement obligation. While the property is
not in production, the asset retirement cost is depleted over the life of the contract
from the date of acquisition.
The
Contract provides the Company certain rights and also imposes certain obligations and
commitments. The rights include exploration through February 2008, and development and
production of minerals through February 26, 2026. The Company may transfer its right to
third parties in accordance with Kazakh laws and regulations and has a right to
renegotiate an extension of the Contract. Significant rights and obligations and
commitments of the Contract include monetary commitments for exploration of $1,105,100
in 2006 and $1,576,480 in 2007, and expenditures to support social projects amounting
to $300,000 during the production stage. In addition, the Company was required to pay a
fee of $2,000 upon award of the Contract, and a fee for the use of Kazakh owned
technical data of $735,400 of which $4,179 was paid on award of the Contract and
$731,221 will be due upon a finding of commercial deposits. Royalties of 0.5% of ores
extracted and sold will be required. The Contract subjects the Company to pay regular
income tax of 30 percent and requires an excess profits tax of 15 to 60 percent if its
net profits exceed 20 percent of gross profit. Obligations also include the
establishment and funding of a reclamation fund that includes the cost of removing
buildings and equipment used in the Deposit area. The Company is also required to
comply with Kazakh environmental laws and regulations.
F-16
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Kempirsai Deposit
Bekem acquired two contracts to explore for and extract minerals in
connection with the purchase of KKM. One contract is for the exploration and extraction
of nickel and cobalt ore from deposits located in an approximately 575,756 acre site in
the northwest area of the Republic of Kazakhstan approximately 130 kilometers northwest
of the city of Aktobe, Kazakhstan, near the town of Badamsha, referred to as the
“Kempirsai” deposit through October 12, 2011. The other contract is for the
exploration and extraction of Mamyt brown coal at a site located within 40 kilometers
of the Kempirsai deposit through December 11, 2018. The contracts may be extended upon
agreement between KKM and the Geology and Minerals Resources Committee of the Ministry
of Energy and Minerals Resources of the Republic of Kazakhstan. The Kempirsai contract
requires the Company to pay royalty payments equal to 2.21% of gross ore sales. The
Mamyt brown coal contract requires a royalty payment equal to nine tenths of one
percent (0.9%) of gross coal sales. Both contracts require the Company to pay an excess
profits tax ranging from 4 to 30 percent based upon the reaching of an internal rate of
return (as defined in the contracts) ranging from 22 to 30 percent. The allocated
purchase price of the mineral interest included a capitalized amount of an acquired
asset retirement obligation.
In
accordance with the laws and regulations of the Republic of Kazakhstan income taxes are
calculated at the statutory rate of 30 percent. Net operating losses for development
companies in the exploration and development may be carried forward for the seven
subsequent years from the date the losses are incurred. Therefore, the Company has
deferred tax assets due to the savings of income tax in future periods. However, the
Company assessed the recoverability of these deferred tax assets and created a
provision against them until it has more evidence of its recoverability in the future
periods.
Deferred tax assets and liabilities were as follows:
December 31,
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Tax loss carryforward
|
$
|
2,590,511
|
|
$
|
747,485
|
Property and equipment
|
|
(704,645)
|
|
|
(803,003)
|
Asset retirement obligation
|
|
308,263
|
|
|
250,152
|
Unproved mineral property rights
|
|
(2,503,728)
|
|
|
(2,080,040)
|
Asset retirement cost
|
|
(169,521)
|
|
|
(149,837)
|
Grant compensation expense
|
|
45,475
|
|
|
-
|
Long-term debt and discount
|
|
-
|
|
|
(239,949)
|
Net Deferred Tax Liabilities
|
$
|
(433,645)
|
|
$
|
(2,275,192)
|
|
|
|
|
|
|
The
following is a reconciliation of the amount of tax that would result from applying the
federal rate to pretax income with the provision for income taxes at December 31, 2006
and 2005:
F-17
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
For the Years Ended December 31,
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Tax at US Federal statutory rate (34%)
|
$
|
(2,016,909)
|
|
$
|
(656,513)
|
Change in valuation allowance
|
|
-
|
|
|
(107,721)
|
Effect of higher effective tax rates
|
|
-
|
|
|
(153,004)
|
Deferred Tax Benefit
|
$
|
(2,016,909)
|
|
$
|
(917,238)
|
NOTE
6 – RELATED PARTY TRANSACTIONS
On
December 2, 2004, the Company borrowed $92,308 from CJSC Kazmorgeophysica, a Kazakh
company related by virtue of several common shareholders. The short-term loan is
denominated in Kazakh Tenge, interest free and was due on its original terms by
December 31, 2004. During March 2005, the Company borrowed an additional $99,798 from
CJSC Kazmorgeophysica, as a Kazakh Tenge denominated, interest-free, due on demand
note. In addition, during 2005 the Company received advances in the amount of $26,866
from certain owners, which are short-term in nature and payable upon demand. The note
was paid off in 2005.
During 2005 and 2006, the Company borrowed $3,998,874 from KMI per an
agreement dated August 8, 2005, between KMI and KKM, for the purpose of assisting KKM
in funding its work requirements, including generation of geological data, under its
mineral extraction contract. The former owners of Kazakh Metals, Inc. were funding this
agreement.
Also, during 2005 and 2006 the Company borrowed $329,000 from
shareholders to fund the U.S. administrative operations. The notes were due on demand
and accrued interest at 3 percent. The notes were paid off in 2006.
F-18
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE 7 – LONG-TERM NOTES PAYABLE, NET OF
DISCOUNT
Long-term notes payable, net of discount, consists of the
following:
December 31,
|
|
2006
|
|
2005
|
Note payable to a company bearing interest at
0%;
|
|
|
|
imputed interest of 22%; denominated in U.S.
|
|
|
|
dollars; due April 2009; unsecured;
|
|
$ -
|
|
$
497,818
|
Note payable to a company bearing interest at
3%;
|
|
|
|
imputed interest of 22%; denominated in U.S.
|
|
|
|
dollars; due April 2010; unsecured;
|
|
-
|
|
550,000
|
Note payable to a company bearing interest at
0%;
|
|
|
|
imputed interest of 22%; denominated in U.S.
|
|
|
|
dollars; due August 2008; unsecured;
|
|
-
|
|
485,951
|
Note payable to a company bearing interest at
|
|
|
|
|
LIBOR plus 2% (6.39% at December 31, 2005);
|
|
|
|
imputed interest of 22%; denominated in U.S.
|
|
|
|
dollars; due March 2010; unsecured;
|
|
-
|
|
60,000
|
Notes payable to companies bearing interest at
0%;
|
|
|
|
imputed interest of 22%; due on demand;
unsecured;
|
-
|
|
3,018,032
|
Note payable to a company bearing interest at
14%;
|
|
|
|
due on demand; unsecured;
|
|
-
|
|
29,709
|
Note payable to a company bearing interest at
16%;
|
|
|
|
due on demand; unsecured;
|
|
-
|
|
52,286
|
Note payable to a company bearing interest at
5%;
|
|
|
|
due on demand; unsecured;
|
|
-
|
|
560,203
|
Total Long-term Debt
|
|
-
|
|
5,253,999
|
Less: Current Portion
|
|
-
|
|
(3,660,230)
|
Less: Debt discount
|
|
-
|
|
(796,591)
|
Long-term Debt - Net of Current
Portion
|
|
$ -
|
|
$
797,178
|
During 2006, the Company repaid its notes payable in the amount of
$7,870,993, which includes additional borrowings made during 2006, and interest of
$416,394.
F-19
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE 8 – LONG-TERM NOTES PAYABLE – RELATED
PARTIES
Long-term notes payable to related parties consists of the
following:
December 31,
|
|
2006
|
|
2005
|
Notes payable to related companies bearing
interest
|
|
|
|
at 6.29%; due August 2008; unsecured;
|
|
$
-
|
|
$ 1,710,012
|
Note payable to related company bearing
interest
|
|
|
|
at 6.29%; due August 2010; unsecured;
|
|
-
|
|
2,288,000
|
Notes payable to related companies bearing
interest
|
|
|
|
at 6.29%; due May 2008; unsecured;
|
|
-
|
|
77,000
|
Total Long-term Debt
|
|
-
|
|
4,075,012
|
Less: Current Portion
|
|
-
|
|
-
|
Long-term Debt - Net of Current
Portion
|
|
$
-
|
|
$ 4,075,012
|
During 2005 and 2006, the Company borrowed $3,998,874 from KMI per an
agreement dated August 8, 2005, between KMI and KKM, for the purpose of assisting KKM
in funding its work requirements, including generation of geological data, under its
mineral extraction contract. The former owners of Kazakh Metals, Inc. were funding this
agreement.
Funds borrowed from shareholders and former owners of KMI bear interest
at the rate of 3% per annum, as amended in October 2006. During 2006, the Company
repaid all related party debts amounting to $4,326,912 and interest of
$112,702.
NOTE
9 – ASSET RETIREMENT OBLIGATION
Upon
the purchase of Kaznickel on September 22, 2004 and KKM on June 1, 2005, the Company
recorded the effects of asset retirement obligations in accordance with SFAS
No. 143, “Accounting for Asset Retirement Obligations,” and related
interpretations, which requires entities to record the fair value of a liability for an
asset retirement obligation when it is incurred. The Company is required under the
contracts with the Geology and Minerals Resources Committee of the Ministry of Energy
and Minerals Resources (MEMR) of the Republic of Kazakhstan, to remediate the
properties from the effects of the open pit mining processes. The standard applies to
legal obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development or normal use of the asset. The
Company’s asset retirement obligations relate primarily to the obligation to fill
mining pits and restore surface conditions at the conclusion of the term of the
Contracts.
SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. When the liability is initially recorded, the
related cost is capitalized by increasing the carrying amount of the related mineral
interest rights. Over time, the liability is accreted upward for the change in its
present value each period until the obligation is settled. The initial capitalized cost
is amortized as a component of mineral rights interests as described in Note
4.
F-20
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
The
reconciliation of the asset retirement obligation is as follows:
December 31,
|
|
2006
|
|
|
2005
|
Balance at beginning of year
|
$
|
833,840
|
|
$
|
675,460
|
Liabilities incurred
|
|
44,650
|
|
|
97,748
|
Accretion expense during the year
|
|
72,865
|
|
|
60,632
|
Asset Retirement Obligation
|
$
|
951,355
|
|
$
|
833,840
|
NOTE
10 – SHAREHOLDERS’ EQUITY
Shares Issued for Cash
– On
August 8, 2005 the Company issued 61,200,000 shares of common stock for cash proceeds
of $100,000, or $0.02 per share.
On
July 14, 2006, the Company closed a private placement of 8,000,000 units at $3.50 per
unit, each unit consisting of three shares of restricted common stock and one warrant
to purchase one share of common stock for two dollars. The private placement resulted
in the issuance of 24,000,000 restricted common shares and warrants to purchase
8,000,000 common shares to two non-U.S. investors for $28,000,000. These issuances did
not result in a change in control of the Company.
From
the total proceeds, the Company paid the placement agent, Aton Securities, Inc., a cash
fee totaling 5% of the total proceeds raised, or $1,400,000. The Company also issued to
the placement agent a warrant to purchase up to 2,400,000 shares of restricted common
stock. The exercise price of this warrant is $1.17 per share. The warrant is
immediately exercisable and will expire eighteen months from the date
granted.
Also, the Company incurred legal and consulting expenses of
$153,487.
The
following summarizes warrant activity for the year ended December 31, 2006:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Warrants
|
|
|
Exercise Price
|
Outstanding at beginning of year
|
$
|
-
|
|
$
|
-
|
Issued
|
|
10,400,000
|
|
|
1.81
|
Expired
|
|
-
|
|
|
-
|
Exercised
|
|
-
|
|
|
-
|
Outstanding at End of Year
|
$
|
10,400,000
|
|
$
|
1.81
|
F-21
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
The
following table summarizes information about warrants outstanding at December 31,
2006:
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
Remaining
|
|
Average
|
Range of
|
|
Number
|
|
Contractual
|
|
Exercise
|
Exercise Price
|
|
Outstanding
|
|
Life (Years)
|
|
Price
|
$ 1.17
|
|
2,400,000
|
|
1.01
|
|
$ 1.17
|
$ 2.00
|
|
8,000,000
|
|
1.51
|
|
$ 2.00
|
Shares Issued for Acquisition of the Minority
Interests
– On August 23, 2005, and prior to its
combination with the Company, BMI issued 588,888 shares of common stock in exchange for
the cancellation of 2,000,000 options to purchase common stock at $0.10 per share. BMI
treated the cancellation, for accounting purposes, as a modification of 588,888 of the
options to options with an exercise price of zero, and the cancellation of the
remaining options. The modification resulted in a charge to operations of $19,426, the
difference between the fair value of the options before and after the modification. The
issued shares were included in the 17,888,888 shares considered issued for the
acquisition of the minority shareholders’ interests in BMI on October 24,
2005.
Stock Grants
–
On October 20, 2006, under the Company’s 2003 Stock Option Plan
and pursuant to the board of directors desire to attract and retain experienced and
educated executives, the board agreed to award to certain executives and key employees
of the Company restricted stock grants (1,083,123 shares). The vesting of the shares is
contingent upon meeting various company-wide performance goals, including timely filing
of reports with the Securities and Exchange Commission, meeting the yearly deadlines
for the pilot plant construction, operations as dictated by the board of directors,
timely performing of the drilling work program requirements as dictated by the Republic
of Kazakhstan’s Ministry of Energy and Mineral Resources, and start of commercial
operations. If these goals are not met, the Company will not recognize compensation
expense and will reverse any previously recognized compensation expenses. The fair
value of the restricted stock grants was valued at $1.95 per share, which represented
the closing market price of the Company’s stock on October 20, 2006, or
$2,112,090.
As
of December 31, 2006, there was $2,034,355 of total unrecognized compensation cost. The
cost is expected to be recognized over a period of 3 years. No shares were vested as of
December 31, 2006. The Company recognized $77,735 of compensation expense for the year
ended December 31, 2006.
F-22
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE
11 – SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental Disclosure of Cash Flow
Information:
|
December 31,
|
|
2006
|
|
2005
|
Cash paid for interest
|
$ 529,096
|
|
$ 149,256
|
Cash paid for income taxes
|
-
|
|
-
|
|
|
|
|
Non-cash Investing and Financing
Activities:
|
December 31,
|
|
2006
|
|
2005
|
Fair value of the assets acquired
|
$ -
|
|
$ 3,640,160
|
Fair value of intangible mineral interest
rights
|
-
|
|
7,198,372
|
Cash paid for equity interests
|
-
|
|
(100,419)
|
Liabilities assumed
|
-
|
|
(10,656,105)
|
Fair value of shares issued for acquisitions
|
-
|
|
(333,294)
|
Share-based compensation arrangements
|
2,112,090
|
|
-
|
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Concentration of Risk Relating to Foreign Mining
Operations
– All of the Company’s properties
are located within the Republic of Kazakhstan in Central Asia. In addition to general
industry risks of nickel and cobalt price fluctuations, and potential lack of economic
viability of the claims, the Company has a concentration of risk related to its foreign
properties and interests which are subject to political uncertainty, changes in
government, unilateral renegotiation of licenses, claims or contracts, nationalization,
or other uncertainties. In addition, the validity of mining claims which constitute the
Company's property holdings in Kazakhstan, may, in certain cases, be uncertain and are
subject to being contested.
Kazakhstan Business Environment
– Kazakhstan, as an emerging market, has a legal and regulatory
infrastructure that is not as mature and stable as those usually existing in more
developed free market economies. As a result, operations carried out in Kazakhstan can
involve risks and uncertainties that are not typically associated with those in
developed markets. The instability associated with the ongoing transformation process
to a market economy can lead to changes in the business conditions in which the Company
currently operates. Changes in the political, legal, tax or regulatory environment
could adversely impact the Company’s operations.
Tax Matters
– The local and
national tax environment in the Republic of Kazakhstan is subject to change and
inconsistent application, interpretation and enforcement. Non-compliance with
Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to
the imposition of fines, penalties and interest.
Environmental Matters
–
Extensive national, regional and local environmental laws and regulations in Kazakhstan
affect the Company’s operations. These laws and regulations set various standards
regulating certain aspects of health and environmental quality provide for user fees,
penalties and other liabilities for the violation of these standards and establish, in
some circumstances, obligations to remediate current and former facilities and off-site
locations. The Company believes it is currently in compliance with all existing
Republic of Kazakhstan environmental laws and regulations. However, as new
environmental laws and legislation are enacted and the old laws are repealed,
interpretation, application and enforcement of the laws may become inconsistent.
Compliance in the future could require significant expenditures, which may adversely
affect the Company’s operations.
F-23
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
Due to the Government of the Republic of Kazakhstan
–
In connection with the Company’s
acquisition of the exploration contract covering the Gornostai deposit, it is required
to repay the Republic of Kazakhstan for historical costs incurred in undertaking
geological and geophysical studies and infrastructure improvements. The repayment terms
of this obligation will not be determined until the Company applies for and is granted
a contract by the Republic of Kazakhstan to engage in commercial production. That
amount is expected to be $731,221 and has not been recorded as a liability. Under the
current contract, once the Company determines the property contains commercially
producible reserves, and desires to commence commercial production, it must apply for
such right prior to the expiration of its exploration and development rights in
February 2026. The Company anticipates it will apply for a commercial production
contract within the next 1-3 years. Of course, there is no guarantee when or if the
Company will discover commercially producible reserves within the Gornostai deposit.
Should the Company decide not to pursue a commercial production contract, then it can
relinquish the Gornostai deposit to the Republic of Kazakhstan in satisfaction of this
obligation.
The
Company is required, under its licenses, to submit a proposed annual work program to
the MEMR for approval. Failure to meet the minimum work program requirements could
cause the Company to lose its licenses.
Operating Leases
– Bekem
leases approximately 400 square feet of office space located at 324 South 400 West,
Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in
the United States. The Company pays annual rents of approximately $7,800 for this space
pursuant to a lease agreement that expires December 31, 2007 with an option to extend
the lease for an additional year.
The
Company also maintains a representative office in Almaty, Kazakhstan, where it leases
approximately 1,575 square feet of office space. The lease agreement expires on
December 31, 2007. The monthly lease payment is $5,250. Under the terms of the lease
agreement, the owner of the space could terminate the lease at any time and require the
Company to vacate the premises.
Kaznickel LLP rents an office (approximately 1,840 square feet) in
Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the
Gornostai deposit. This lease agreement expires in May 2007. Kaznickel also rents
approximately 4,450 square feet of warehouse space in Semei for $4,000 per month.
Kaznickel uses this space to store test ore. Also, Kaznickel LLP rents an office
(approximately 350 square feet) in Astana, Kazakhstan, for approximately $1,600 per
month. This space is leased on a year-to-year basis. If at any time the owner of this
space decides they need or want the space for other purposes, Kaznickel has no right to
continue to occupy the space and could be forced to move.
KKM
rents approximately 1,260 square feet of office space in Aktobe, Kazakhstan. KKM pays
approximately $4,000 per month for this space under a one-year lease agreement. This
space is leased on a year-to-year basis.
Rent
expense for the years ended December 31, 2006 and 2005 was $194,854 and $103,160,
respectively. All leases are due within the next year.
NOTE
13 – RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the December 31, 2006 and 2005 financial
statements, the Company realized that its financial statements needed to be restated to
correct the reporting of mining transactions to be consistent with SEC Industry Guide
7,
Description of Property by Issuers Engaged or to Be Engaged
in Significant Mining Operations
that defines a production
stage enterprise as one that has reserves that are proven or probable as evidenced by
an acceptable reserve report. The Company has not yet received its reserve report,
therefore, under Industry Guide 7 it is an exploration stage enterprise. The Company
had not considered itself a development or exploration stage company due to the history
of production of the sites under mining licenses during the 1980s and 1990s and using
the reports evidencing commercial ore bodies that were developed during the Soviet era
under different methods than those currently used to support the definition of
“reserves” under Industry Guide 7. The Company’s licenses granted by
the MEMR for the Kempirsai and Mamyt deposits are production licenses and require the
Company to extract certain quantities of nickel, cobalt and coal in order to retain the
licenses, which were previously reported as production activity. The Company expects to
obtain acceptable reserve reports early in 2008.
F-24
BEKEM METALS, INC. AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
In
order to comply with the reporting under Industry Guide 7 for the years 2006 and 2005,
a column for transactions from “inception to date” has been added to the
statements of operations and cash flows, stripping costs have been expensed rather than
capitalized, and revenues and costs of products sold have been reclassified to offset
certain direct mining expenses which are included in exploratory costs, depreciation
and amortization expenses were also reclassified as exploratory costs. Also, the other
income (expense) as originally filed included disposals of inventory, which were
reclassified as exploratory costs and revenue from services were reclassified as other
income.
In
addition, the reporting of deferred compensation costs has been corrected to properly
allocate the costs to the appropriate years. The change in the deferred compensation,
as well as the changes to the net loss caused the deferred tax liabilities to decrease.
Also, the number of weighted-average shares outstanding at December 31, 2006, was
corrected.
The
effects of the restatements are as follows:
Balance Sheets
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ 377,018
|
|
$(191,955)
|
|
$ 185,063
|
Deferred compensation
|
|
450,267
|
|
307,653
|
|
757,920
|
Non-current deferred compensation
|
|
1,584,088
|
|
(381,501)
|
|
1,202,587
|
Deferred tax liabilities
|
|
513,385
|
|
(79,740)
|
|
433,645
|
Accumulated deficit
|
|
$(6,036,286)
|
|
$(186,063)
|
|
$(6,222,349)
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ 337,030
|
|
$(96,976)
|
|
$ 240,054
|
Deferred tax liabilities
|
|
2,304,285
|
|
(29,093)
|
|
2,275,192
|
Accumulated deficit
|
|
$(1,448,344)
|
|
$(67,883)
|
|
$(1,516,227)
|
|
|
|
|
|
|
|
F-25
Statements of Operations
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 105,304
|
|
$
(105,304)
|
|
$ -
|
Cost of product sold
|
|
58,980
|
|
(58,980)
|
|
-
|
Exploratory costs
|
|
1,118,115
|
|
352,132
|
|
1,470,247
|
Depreciation and amortization
|
|
108,125
|
|
(108,125)
|
|
-
|
Grant compensation expense
|
|
77,735
|
|
73,848
|
|
151,583
|
Interest income
|
|
-
|
|
85,337
|
|
85,337
|
Other income (expense)
|
|
(107,644)
|
|
110,015
|
|
2,371
|
|
|
|
|
|
|
|
Net Loss Before Minority Interest and Taxes
|
|
(6,554,203)
|
|
(168,828)
|
|
(6,723,031)
|
Deferred tax benefit
|
|
1,966,261
|
|
50,648
|
|
2,016,909
|
|
|
|
|
|
|
|
Net Loss
|
|
$ (4,587,942)
|
|
$ (118,180)
|
|
$(4,706,122)
|
|
|
|
|
|
|
|
Basic Loss per Common Share
|
|
$
(0.04)
|
|
$
-
|
|
$
(0.04)
|
Weighted-Average Shares used in
|
|
|
|
|
|
|
Basic Loss per Common Share
|
|
111,266,970
|
|
213,657
|
|
111,480,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ 148,549
|
|
$ (148,549)
|
|
$ -
|
Cost of product sold
|
|
74,205
|
|
(74,205)
|
|
|
General and administrative expenses
|
|
1,018,633
|
|
(485)
|
|
1,018,148
|
Exploratory costs
|
|
623,446
|
|
74,050
|
|
697,496
|
Depreciation and amortization
|
|
48,233
|
|
(48,233)
|
|
|
Other income
|
|
16,790
|
|
2,700
|
|
19,490
|
|
|
|
|
|
|
|
Net Loss Before Minority Interest and Taxes
|
|
(2,110,825)
|
|
(96,976)
|
|
(2,207,801)
|
Deferred tax benefit
|
|
888,145
|
|
29,093
|
|
917,238
|
|
|
|
|
|
|
|
Net Loss
|
|
$ (1,203,254)
|
|
$ (67,883)
|
|
$ (1,271,137)
|
|
|
|
|
|
|
|
Basic Loss per Common Share
|
|
$
(0.02)
|
|
$
(0.01)
|
|
$ (0.03)
|
Weighted-Average Shares used in
|
|
|
|
|
|
|
Basic Loss per Common Share
|
|
48,645,053
|
|
-
|
|
48,645,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
For the Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(4,587,942)
|
|
$ (118,180)
|
|
$(4,706,122)
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
108,125
|
|
9,377
|
|
117,502
|
Deferred tax benefit
|
|
(1,966,261)
|
|
(50,648)
|
|
(2,016,909)
|
Stock grant compensation expense
|
|
77,735
|
|
73,848
|
|
151,583
|
Loss on disposal of property and equipment
|
|
68,305
|
|
(9,377)
|
|
58,928
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Inventories
|
|
(21,886)
|
|
69,871
|
|
47,985
|
Prepaid expenses and other current assets
|
|
(54,149)
|
|
25,109
|
|
(29,040)
|
Net Cash From Operating Activities
|
|
$(5,617,395)
|
|
$ -
|
|
$(5,617,395)
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
Effect of
|
|
|
|
|
Reported
|
|
Restatement
|
|
As Restated
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$(1,203,254)
|
|
$ (67,883)
|
|
$(1,271,137)
|
Adjustments to reconcile net loss to
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
Deferred tax benefit
|
|
(888,145)
|
|
(29,093)
|
|
(917,238)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Inventories
|
|
(67,062)
|
|
97,461
|
|
30,399
|
Accounts payable
|
|
(24,368)
|
|
76,749
|
|
52,381
|
Accrued expenses
|
|
-
|
|
(77,234)
|
|
(77,234)
|
Net Cash From Operating Activities
|
|
$(1,757,443)
|
|
$ -
|
|
$(1,757,443)
|
|
|
|
|
|
|
|
Note
14 – SUBSEQUENT EVENT (UNAUDITED)
In
December 2007, the Republic of Kazakhstan Ministry of Energy and Mineral Resources
(“MEMR”) unilaterally terminated KKM’s contracts and licenses to
explore for nickel, cobalt, brown coal, and other minerals within the Kempirsai and the
Mamyt deposits on the basis that KKM had material failures in execution of the work
programs associated with the contacts and licenses but did not detail those failures.
In January 2008, KKM filed an action in the Court of Astana city against the MEMR
challenging the legality of the unilateral termination of the KKM contracts and
licenses by the MEMR for several reasons, including that the contracts and licenses had
been terminated on grounds not provided for in the subsoil use contracts and
legislation and there were no material failures in the execution of the work programs
associated with the contracts and licenses. In February 2008, the Court of Astana city
acknowledged that the unilateral termination of the contracts and licenses by the MEMR
was illegitimate. The Court canceled the order of the MEMR relating to the unilateral
termination of the licenses and reinstated the KKM contracts and licenses. The MEMR has
appealed the Court’s decision to the Republic of Kazakhstan Supreme
Court.
F-27