treated as these “old workings” are previously stopped out
areas representing loss of ore. In comparison, during the First Three-Quarter 2006,
higher grade sulphide ore was being mined from the Lily open pit. As a result,
119,654 tons of ore were milled during the First Three-Quarter 2007 as
compared to 133,925 tons of ore during the First Three-Quarter 2006; a reduction in ore
tons milled of approximately 11%.
Furthermore, cost of production during the First Three-Quarter 2007 was
higher due to the high waste to ore strip ratio in both the Lily East and Rosie’s
Fortune pits. Although, this strip ratio in the initial phases of an open pit is
expected to be high, the overburden at the Lily East open pit was much greater than was
originally estimated. Total waste tones mined during the First Three-Quarter 2007 was
119,167 tons at a strip ratio of 9.33:1 in comparison to the First Three-Quarter 2006
where a total of 322,886 waste tons were mined at a strip ratio
2.43:1.
Accordingly, during the First Three-Quarter 2007, we produced 7,257
ounces of gold for $4,172,701, whereas, during the First Three-Quarter 2006, we
produced 10,389 ounces of gold for $3,794,538. This resulted in per ounce cost of
production for the First Three-Quarter 2007 of $575 whereas per ounce cost of
production for the First Three-Quarter 2006 was $365; an increase in the per ounce
production of gold of approximately 58%.
Operating Expenses for the First Three-Quarter 2007:
Our operating expenses increased by approximately 53%; from
$1,272,000 in the First Three-Quarter 2006 to $1,949,000 in the First Three-Quarter
2007. The increase is mainly due to legal and audit fees relating to the periodic
reporting requirements of the company, salaries and wages and travelling
expenses.
Changes in Exchange Rates:
Changes in
exchange rates did not have a significant impact on the comparability of our results
for the First Three-Quarter 2007 versus the First Three-Quarter 2006. The average rates
of exchange for the interim periods ended September 30, 2007 and September 30, 2006
were SAR 6.9664 to $1 and SAR 6.9995 to $1, respectively – approximately 0.47%
strengthening of the South African Rand against the US Dollar. Had the exchange rate
remained the same during the First Three-Quarter 2007 as that during the First
Three-Quarter 2006, the results of our operations arising from South African Rand
transactions would have been negligibly affected.
Changes in exchange rates had a significant impact on the comparability
of our balance sheets as of September 30, 2007 versus September 30, 2006. The rates of
exchange as at September 30, 2006 and September 30, 2007 were SAR 7.6540 to $1 and SAR
6.8840 to $1, respectively – approximately 11% strengthening of the South African
Rand against the US Dollar. Had the exchange rate remained the same in 2007 as that of
2006, our total South African Rand based net assets would have been approximately
$1,043,000 lower. This variation in the main relates to our property, plant and mine
development costs.
21
Development
In April 2006, we completed our pre-feasibility study for underground
mining at the Lily Mine. The results, which have since been revised, currently suggests
that a Life of Mine plan may show 1.25 million tons of ore that may be milled at a
yield of 3.92 grams per ton to recover approximately 160,000 ounces of gold over a
period of 8 years. The grade distribution of the orebody dictates that production in
the first 2 years may be approximately 30,000 ounces per annum reducing to 18,000
ounces per annum in the remaining 5 to 6 years based on our current estimates. As a
result, the mine may be highly profitable in the first two years and provides adequate
returns in the subsequent years. The development of this underground mine commenced in
July 2007. Capital expenditure to develop this underground mine is currently estimated
at approximately $20 million and, to the extent that we are able, we plan to raise this
amount through an Initial Public Offering (IPO) in London’s AIM market through a
secondary listing in April 2008. We may incur additional capital expenditures or revise
our estimates further as we evaluate our capital requirements in the future.
The inauguration ceremony for our Lily underground mine was held on
February 15, 2007 with the first blast officially set off by the wife of Chief Dlamini,
head of the Lomshiyo Tribal Community, the company’s Black Economic Empowerment
partner. The occasion marked the mine’s transformation from a previously
open-cast mine into an underground mine, the completion of the planning and preparation
of the upper section of the Lily underground mine and the commencement of the
development of the adit portal. Underground development commenced in July 2007 with the
first production from the underground section expected mid-2007 and full production in
2008. Undoubtedly, this was a historic moment for us all. From our local social
standpoint, we look forward to evidencing the benefits from the Lily underground mine,
showing that EGI brings hope and opportunity to the overall area. We will focus on
social responsibility programs, job creation and rural renewal, to the extent that we
are able.
With the finalization of the last of three phases of diamond drilling at
the Company’s Lily Mine, we announced a 76% increase in the Company’s
mineral reserves to 366,100 ounces since March 31, 2006. This was based on our
estimates and assessments at that time.
The following table summarises our estimated mineral reserves as at
December 31, 2006:
|
Category
|
|
Tons
|
|
Grade
|
|
Content
|
|
|
|
(000)
|
|
g/t
|
|
Kg
|
|
Oz
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
93
|
|
2.58
|
|
240
|
|
7,700
|
|
Probable
|
|
2,089
|
|
5.34
|
|
11,150
|
|
358,400
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,182
|
|
5.22
|
|
11,390
|
|
366,100
|
The success, to date, of the drilling programs in the Lily Project area
is further reflected in the discovery of additional zones of gold mineralization over
some 2.5 km of strike (horizontal
22
continuation) of the Lily ore body. This has lead to the establishment
of the new Lily East open pit and the identification of the economic potential of a
more laterally extensive area for shallow underground mining than originally thought
when the underground pre-feasibility study was completed a year ago. The estimates
given above may be changed or revised as we continue to further review our mineral
reserves in light of further studies in the future. As noted elsewhere in this Form
10-QSB, we have undertaken prudent efforts to calculate and estimate our mineral
reserves for the purpose of accurately understanding and evaluating the mineral
deposits that we seek to extract. Further, we are currently undertaking a formal
feasibility study to fully understand and evaluate the full extent of our reserves and
the mineral deposits on the properties wherein our mining operations are conducted. We
can not assure you that we will not change or revise our estimates.
Furthermore, following the successful results of a Reverse Circulation
drilling programme in the vicinity of the old Rosie's Fortune workings, situated at the
eastern extremity of the Lily Fault within the Company's mining title, another open pit
has been established. The drilling results indicated open pitable Mineral Reserves of
approximately 100,000 tonnes at an average grade of 3.5 g/t, representing a gold
content of 10,000 oz. Production commenced in July 2007 and is expected to continue
until March 2008.
Exploration
The relatively limited amount of exploration drilling completed over the
past year has not only added to our Mineral Reserve inventory, at a low cost of
discovery, but it has also provided us with enhanced information on the geological
controls and continuity of gold mineralization in the areas where we have concentrated
our activities thus far.
During the last quarter of 2006 and into the first quarter of 2007, we
also carried out a Phase 1 drilling program on our dormant Worcester Mine. This program
comprised of 3,125 meters of core. This phase of drilling was planned to probe the
immediate strike and depth extension of the known, previously mined ore body with the
objective of gathering geological information on the complex structure and gold
distribution trends in the Worcester Reef. The results confirmed that the Worcester
Reef continues in depth, and that the well mineralized portions have been dislocated by
faulting and shearing. We plan to carry out a next phase of drilling which will be
designed to delineate the main zones of mineralization. While we remain optimistic that
further exploration will confirm and possibly add to our Mineral Reserve inventory, we
cannot assure you that further exploration will result in these outcomes. We may
encounter additional difficulties and unexpected problems as we continue our
exploration drilling activity. For these and other reasons, we can not assure you that
we will not change or reduce our estimates in the future.
Further, analytical results of the first batch of geochemical soil
samples and ground magnetometer surveys covering 3 of the Company's 18 currently
identified prospects have been received. All 3 prospects are located on strike
extensions of the Lily Fault, the main mineralizing structure within the Lily mining
right area. The results indicate the presence of anomalous gold concentrations in the
soil cover in proximity to the Lily Fault and associated structures. We will continue
with the next phase of prospecting in these localities which will
23
entail the digging of trenches to expose the sub-outcropping sources of
the anomalies, followed by reverse circulation drilling, where applicable.
Requirement for Additional Capital
In general and in accordance with the Company’s current plans, the
Company’s current capital requirements can be grouped into three
areas:
|
|
•
|
Development of the Lily underground mine and new
processing plant;
|
|
|
•
|
Exploration of the Company’s minerals rights
including extensions to Lily and Worcester project areas;
|
|
|
•
|
Partial financing of acquisitions.
|
The development of the underground mine at Lily is of primary importance
and the capital expenditure estimate for this project is $20 Million based solely upon
our current estimates. If these estimates remain accurate, we believe that this may
allow for the development of the underground workings and the mine infrastructure as
well as the construction of a new processing plant at the Lily Mine site. However, the
estimated cost for this project may change or increase if difficulties or problems
arise.
Ongoing exploration is currently expected to continue at the Worcester
Mine and the other target locations within the Company’s mineral rights. In most
cases encouraging results have been obtained so far and a further amount of $3.5
Million is required for exploration purposes over the next 18 months if current
estimates remain accurate
In line with our current growth strategy and if market conditions allow,
we intend to make at least one acquisition in 2008 and will require funds in order to
secure such acquisition or to provide initial support for the acquired
operation.
Accordingly we seek to raise additional capital in April 2008 that may
allow us to raise an additional $25 Million in new capital. There can be no assurance
that we will be successful in raising any such additional new capital or, if we are
successful, that the additional new capital can be raised on terms that are reasonable
in light of our current circumstances. The use of funds, as currently estimated, is
summarized below:
|
Lily underground mine
|
|
$20.0 M
|
|
Exploration
|
|
$ 3.5 M
|
|
Other
|
|
$ 1.5 M
|
|
Total
|
|
$25.0 M
|
To the extent that we are able, we plan to raise this amount via a
secondary listing of our common stock in London’s AIM market in April
2008.
In the interim, the Company requires funding in order to implement its
plans prior to the main funding discussed above. Accordingly, in May 2007, the Company
raised US$3,000,000 via a private placement offering of 521,739 restricted common
shares.
24
More specifically, this Phase 3 interim funding is planned to meet the
costs of the following activities:
|
|
•
|
Additional drilling at the Lily Mine;
|
|
|
•
|
Initial stages of underground mining;
|
|
|
•
|
Ensuring the sufficiency of the Company’s tailings
dam through the installation of a paste thickener;
|
|
|
•
|
Continuation of the regional exploration
program;
|
|
|
•
|
Planned secondary listing program discussed
below.
|
Prospects for the Future
We are pursuing a strategy of growth in the development of our mineral
reserves through optimization of our current operations, exploration and additional
selective acquisitions. Furthermore, we believe that, if current market and competitive
conditions allow, we are likely to have the personnel and properties necessary to
successfully make the transition from our current production status as a small mining
company to a “junior resource company”.
We hold mineral claims covering 14,000 hectares (approximately 34,600
acres) in the Barberton Greenstone Belt, which has been an active mining district for
more than 100 years, yet is still largely under-explored. Our producing mine, the Lily
Mine, has been operating since 2000 as an open pit with production of about 15,000
ounces of gold annually. However, production, from the Lily Mine open pit operation is
presently anticipated to terminate in mid-2008.
Accordingly, we have planned to expand the life of the operations at the
Lily Mine area by commencing underground operations in 2007. In September 2005, we were
able to raise $2,750,000 via a Phase I private placement offering which was primarily
utilized to conduct a drilling program which confirmed and enhanced the results of
earlier preliminary studies with respect to our Mineral reserves located at the Lily
Mine area. The results of this drilling program were incorporated in a Prefeasibility
Study prepared by us to assess the future development of the Lily Mine. The
international mining consultant firm of Behre Dolbear was engaged by us to provide an
independent expert opinion on the Prefeasibility Study.
In line with this Prefeasibility study, and the recommendations of its
consultants, we raised further funds of $2,000,000 in October 2006 and carried out the
recommended additional drilling program thereby strengthening and confirming its
mineral reserves. Our current plan has been revised to include the building of the new
processing in 2008 which, if our plans can be undertaken, may become operational in
2009.
Prior to this planned new processing plant becoming operational,
underground ore will be transported to the Makonjwaan processing plant where it will be
treated in the same way as it has over the last 6 years of operations at the Lily Mine.
The funding required to establish the new underground mine, is currently estimated at
$20,000,000, and is subject to change as we revise our estimates based on further
analysis. To the extent that we are able, we plan to raise this amount via a secondary
listing of our common stock in London’s AIM market in April 2008.
25
ITEM 3.
CONROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in company
reports filed or submitted under the Securities Exchange Act of 1934 (the
“Exchange Act”) is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in company
reports filed under the Exchange Act is accumulated and communicated to management,
including the Company’s Chief Executive Officer and Chief Financial Officer (the
“Certifying Officers”), as appropriate to allow timely decisions regarding
required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, the
Certifying Officers carried out an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as of September 30,
2007. Their evaluation was carried out with the participation of other members of the
Company’s management. Based upon their evaluation, the Certifying Officers
concluded that the Company’s disclosure controls and procedures were
effective.
The Company’s internal control over financial reporting is a
process designed by, or under the supervision of, the Certifying Officers and effected
by the Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of the Company’s financial
reporting and the preparation of the Company’s financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control
over financial reporting includes policies and procedures that pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the Company’s assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of the
Company’s financial statements in accordance with generally accepted accounting
principles, and that the Company’s receipts and expenditures are being made only
in accordance with the authorization of the Company’s Board of Directors and
management; and provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on its financial statements. There has been no change in
the Company’s internal control over financial reporting that occurred in the
three-quarter period ended September 30, 2007, that has materially affected, or is
reasonably likely to affect, the Company’s internal control over financial
reporting.
26