EGDD Eastern Goldfields Inc (PK)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________________to______________________________________

Commission File Number: 0-52151

 

Eastern Goldfields, Inc.

(Exact name of Registrant as specified in its charter)

 

 

1660 Hotel Circle North, Suite 207, San Diego, CA 92108-2808

(Address of principal executive offices – Zip Code)

 

(619) 497-2555

(Registrant’s telephone number, including area code)

 

__________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

---

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

 

 

---

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

On May 15, 2008, 9,377,986 shares of the issuer’s common stock were outstanding.

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MARCH 31, 2008

(Unaudited)

---

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MARCH 31, 2008

(Unaudited)

---

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

---

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

---

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Eastern Goldfields, Inc., (the “Company" or "EGI") is the parent company of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a corporation organized under the laws of the Republic of South Africa. EGSA conducts all of the Company’s business operations in South Africa through its South African corporation subsidiaries.

 

Eastern Goldfields, Inc. was originally incorporated under the laws of the State of Nevada on July 15, 1998, under the name of Fairbanks Financial, Inc. The Company was established as a business management, marketing and consulting firm to serve both the emerging and established business entrepreneur. Since its incorporation, the Company has had minimal operations. It redirected its business efforts in late 2005 and on September 23, 2005, following a change in control, it purchased 100% of the issued and outstanding common or ordinary stock of EGSA. On October 1, 2005, the Company’s wholly owned subsidiary, EGSA, acquired, via a share exchange, 100% of the issued and outstanding common or ordinary stock of Eastern Goldfields Limited. (“EGL”), a South African gold producer and developer corporation. EGL conducts mining operations in the Barberton Greenstone Belt area of the Mpumalanga Province, South Africa. On October 25, 2005, the Company changed its corporate name to Eastern Goldfields, Inc. to more accurately reflect its business operations.

 

This share exchange for the acquisition of EGL by EGI’s wholly owned South African subsidiary, EGSA, was accounted for as a reverse acquisition, and, accordingly, for financial statement purposes, EGL was considered the accounting acquiror and the subject transaction was considered a recapitalization of EGL rather than an acquisition by the Company. Accordingly, the historical financial statements prior to this share exchange are those of EGL, however, the name of the consolidated corporation going forward is Eastern Goldfields, Inc.

 

EGL itself is a South African holding company which has three South African subsidiary corporations; Makonjwaan Imperial Mining Company (Pty) Ltd. (“MIMCO”), Eastern Goldfields Exploration (Pty) Ltd. (“EGE”) and Centurion Mining Company (Pty) Ltd. (“Centurion”).

 

 

Basis of Accounting

 

The consolidated financial statements of the Company have been prepared on the accrual basis of accounting and are in conformity with accounting principles generally accepted in the United States of America and prevailing industry practice.

The interim consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all necessary adjustments for a fair presentation of these interim statements have been included. The results reported in these interim consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year. The accompanying interim consolidated financial statements of the Company should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All amounts are in U.S. dollars unless otherwise indicated. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Property Plant and Mine Development

 

Mining assets, including mine development and infrastructure costs and mine plant facilities, are recorded at cost of acquisition. Expenditure incurred to evaluate and develop new ore bodies, to define mineralization in existing ore bodies, to establish or expand productive capacity, is capitalized until commercial levels of production are achieved, at which times the costs are amortized as set out below.

 

Mineral rights are recorded at cost of acquisition. When there is little likelihood of a mineral right being exploited, or the value of mineral rights have diminished below cost, a write-down is affected against income in the period that such determination is made.

 

Non-mining assets are recorded at cost of acquisition. These assets include the assets of the mining operation not included in the previous categories and all the assets of the non-mining operations.

 

Depreciation, depletion and amortization is determined to give a fair and systematic charge in the income statement taking into account the nature of a particular ore body and the method of mining of that ore body. Mining assets, including mine development and infrastructure costs, mine plant facilities and evaluation costs, are amortized over the life of the mine using units-of-production method, based on estimated proved and probable ore reserves above the infrastructure. The proven and probable reserve quantities used to calculate depreciation, depletion and amortization do not include the proven and probable reserve quantities attributable to stockpiled inventory.

 

Proved and probable ore reserves reflect the estimated quantities of economically recoverable reserves, which can be recovered in future from known mineral deposits.

 

Certain mining plant and equipment included in mine development and infrastructure is depreciated on a straight-line basis over their estimated useful lives.

 

Other non-mining assets are recorded at cost and depreciated on a straight-line basis over their estimated useful lives as follows:

 

Vehicles – 10 years

 

Furniture and equipment – 3 years

 

The carrying amounts of the group's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such indication exists, the asset's recoverable amount is estimated.

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Use of Estimates

 

The preparation of 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 of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Earnings Per Share

 

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128 Earnings Per Share which requires the Company to present basic and diluted earnings per share for all periods presented. The computation of loss per common share (basic and diluted) is based on the weighted average number of shares actually outstanding during the period. Diluted earnings per share have been calculated to give effect to the number of additional shares of common stock that would have been outstanding if the potential dilutive instruments had been issued for the three months ended March 31, 2008 and 2007. The weighted average number of outstanding shares includes the common stock as well as the A Class Preference Shares, as the holders of the A Class Preference Shares have the same rights and entitlements as those attached to the common stock. The computation of dilutive loss per common share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.

 

The following table reconciles basic earnings per share and diluted earnings per share and the related weighted average number of shares outstanding for the three months ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Income Taxes

 

Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

During the year ended December 31, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes,” by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The “more-likely-than-not” threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax is not considered “more-likely-than-not” it is to be sustained based solely on its technical merits. No benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment upon adoption would be recorded directly to retained earnings and reported as a change in accounting principle at December 31, 2006.

 

Fair Value of Financial Instruments

 

Financial instruments consist principally of cash, short-term liabilities and long-term debt. The estimated fair values of these instruments approximate their carrying value.

 

Foreign Currency Translation

 

The Company translates the foreign currency financial statements of its foreign operations by translating balance sheet accounts at the exchange rate on the balance sheet date and the income statement accounts using the prevailing exchange rates at the transaction date. Translation gains and losses are recorded in stockholders’ equity and realized gains and losses are reflected in operations. The Company’s functional currency is the South African Rand.

 

Exploration Expenses

 

Exploration costs are charged to operations as incurred.

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets and certain identifiable intangibles 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 a comparison of the carrying amount of an asset to the 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 by which 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.

 

Inventories  

 

As described below, costs that are incurred in or that benefit the productive process are accumulated as stockpiles and inventories. Stockpiles and inventories are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles and inventories, resulting from net realizable value impairments, are reported as a component of Cost of production . The major classifications are as follows:

 

Stockpiles

 

Stockpiles represent materials that are currently in the process of being converted to a saleable product. Conversion processes vary depending on the nature of the ore and the specific processing facility, but include mill in-circuit, leach in-circuit and carbon in-pulp inventories. In-process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Precious Metals In process

 

Precious metals in process is gold bullion. Precious metals that result from the Company’s mining and processing activities are valued at the average cost of the respective in-process inventories incurred prior to the refining process, plus applicable refining costs.

 

Revenue Recognition  

 

Revenue is recognized, net of treatment charges, from a sale when the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured.

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Deferred Stripping Costs

 

In general, mining costs are allocated to production costs and inventories, and are charged to c osts of production when gold is sold. However, at open pit mines with diverse grades and waste-to-ore ratios over the mine life, the Company defers and amortizes certain mining costs on a UOP basis over the life of the mine. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining activities that are normally associated with the removal of waste rock. The deferred stripping accounting method is generally accepted in the mining industry where mining operations have diverse grades and waste-to-ore ratios; however, industry practice does vary. Deferred stripping matches the costs of production with the sale of such production at the Company’s operations where it is employed, by assigning each ounce of gold with an equivalent amount of waste removal cost.

 

If the Company were to expense stripping costs as incurred, there could be greater volatility in the Company’s period-to-period results of operations.

 

Deferred stripping costs are charged to Costs of Production as gold is produced and sold using the UOP method based on estimated recoverable ounces of proven and probable gold, using a stripping ratio calculated as the ratio of total tons to be moved to total proven and probable ore reserves, which results in the recognition of the costs of waste removal activities over the life of the mine as gold is produced.

 

The Company reviews and evaluates its deferred stripping costs for impairment when events or circumstances indicate that the related carrying amounts may not be recoverable.

 

As the Company’s open pit operations are forecasted to cease in mid-2008, the Company did not measure and recognize production stage deferred stripping costs and credits for the three months period ended March 31, 2008.

 

Reclamation and Remediation Costs (Asset Retirement Obligations)

 

In August 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. Reclamation costs are allocated to expense over the life of the related assets and are adjusted for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate. Prior to adoption of SFAS No. 143, estimated future reclamation costs were based principally on legal and regulatory requirements. Such costs related to active mines are accrued and charged over the expected operating lives of the mines using the UOP method based on proven and probable reserves. Future remediation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the undiscounted costs expected to be incurred at a site. Such cost estimates included, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Stock Option Expense  

Compensation cost recognized in 2007 and 2006 includes: (a) compensation cost for all share-based payments granted prior to, which have since vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, which have vested based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).

 

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2008. In February 2008, the FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Company’s fiscal year beginning January 1, 2009.                                                                                                             

FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are described below:

 

 

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy. S required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of output that is significant to the fair value measurement.

 

Assets:

 

Liabilities:

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Fair Value Accounting (Continued)

 

The company’s cash and certain other assets are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The cash and certain other assets that are valued based on quoted market prices in active markets are primarily money market securities.

 

The total amount of the changes in fair value for the period was included in net loss as a result of changes in the Company’s stock price from December 31, 2007.

 

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reprted earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 were adopted January 1, 2008. The Company did not elect the Fair Value Option for any of its financial assets or liabilities, and therefore, the adoption of FAS 159 had no impact on the Company’s consolidated financial position, results of operations or cash flows.

 

 

Inventories at March 31, 2008 consist of the following:

 

 

 

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

Major classes of property, plant, and mine development as of March 31, 2008 are as follows:

 

 

 

Advances from stockholders at March 31, 2008 consist of the following:

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

Secured banking facility against mining equipment bearing interest at the prime bank overdraft rate less 1% and repayable in monthly installments of South African Rands 182,669 ($22,451).

 

Maturities of the liabilities are as follows:

 

 

 

The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements.

 

At March 31, 2008 $277,550 were accrued for reclamation obligations relating to currently or recently producing mineral properties.

 

The following is a reconciliation of the total liability for reclamation and remediation:

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

A first continuing covering bond amounting to South African Rands 200,000 ($24,581) was registered over the property held by a subsidiary, Makonjwaan Properties Henry Nettman Two Eight (Pty) Ltd., in lieu of financial guarantees amounting to South African Rands 164,000 ($20,157) issued in favor of the Department of Minerals and Energy.

During the year ended December 31, 2006, the Company entered into a Service and Support Agreement with Cheston Minerals PTY Limited (“CML”), a company owned by EGI’s President. This agreement covers the rental of the Company’s South African office and use of the office equipment and supplies, which are owned by CML. The agreement requires a monthly payment of $16,000. The term of the agreement is one year and is renewable on an annual basis. The Company charged $48,000 to operating expense for the three month period ended March 31, 2008.

During the year ended December 31, 2006, the Company entered into an Agreement for Consulting Services and Public Relations with Zenith Premier Limited (“ZPL”), a company in which EGI’s CFO serves as a director. This agreement covers the investor relation services to be provided by ZPL to EGI. The agreement requires a monthly payment of $16,500. The Company charged $49,500 to operating expense for the three month period ended March 31, 2008.

 

 

The current South African mining legislation promulgated under “Mineral and Petroleum Resources Development Act of 2004 (“MPRDA”) seeks, among other things, (i) to expand opportunities for historically disadvantaged South Africans to enter the mineral industry and obtain benefits from the exploitation of mineral resources; and (ii) to promote employment, social and economic welfare as well as ecologically sustainable development. In order to convert an old order mining right to a new order mining right the holder is required to submit a social and labor plan. The plan should describe how it will expand opportunities for historically disadvantaged South Africans to enter the mineral industry.

Further, for purposes of mining right conversions effective May 1, 2004 (the effective date), the MPRDA (incorporating the Mining Charter) requires mining company ownership for historically disadvantaged South Africans to 15% ownership within five years and 26% ownership within 10 years of the effective date. The transfer of ownership is to be consummated at fair market value.

Accordingly, and pursuant to the requirements of MPRDA, EGL on December 9, 2005 entered into a “Heads of Agreement” to sell 26% of its ordinary stock to Lomshiyo Investments (Proprietary) Limited (“Lomshiyo”) for a consideration of R9,900,000 (At March 31, 2008 – $1,216,784). This amount is a loan to Lomshiyo and is reflected as a reduction of equity in the Company’s March 31, 2008 consolidated balance sheet. Lomshiyo is a South African corporation whose majority shareholders are historically disadvantaged South Africans. The transaction closed on February 2, 2006. The ownership percentage of net assets of EGL acquired by Lomshiyo at December 31, 2005 amounted to $1,379,142 or 26%.

The purchase of ordinary stock was financed with a note receivable bearing an annual interest rate of the South African Prime Rate (12.5% at March 31, 2007). The note accrues interest and is payable to the Company on January 2, of each year. A total of $552,766 of accrued interest has been added to the note receivable. The note is due and payable on December 31, 2010. The Company’s common stock collaterizes the note receivable.

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

On March 28, 2008, EGSA entered into a Convertible Loan Agreement. The agreement involves EGSA receiving $3,981,932 (32,000,000 SA Rands) of proceeds. The loan principal can convert into 6.9% of the total issued and outstanding shares of ordinary capital after the conversion of the loan by EGSA. If EGSA is able to list its shares with JSE Limited (JSE) within six months of the agreement date then no interest is due and payable. If EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Rate. If EGSA list its ordinary shares with JSE after six months but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan. If EGSA has been unable to list its ordinary shares with JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding shares of ordinary shares of EGSA.

 

 

 

The Company currently maintains the Eastern Goldfields, Inc. 2005 Stock Plan (“Stock Plan”), approved by stockholders on November 26, 2005, for executives and eligible employees. Under this Stock Plan, options to purchase shares of stock can be granted with exercise prices not less than 100% of fair market value of the underlying stock at the date of grant. Options granted under the Company’s stock plan vest over periods ranging from one to three years of the date of the grant and are exercisable over a period of time not to exceed 10 years from grant date. At December 31, 2006, no shares were available for future grants under the Company’s 2005 Stock Incentive Plan.

 

The following table summarizes annual activity for all stock options for each of the three months ended March 31:

 

 

 

 

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

 

 

The fair value of the stock options granted (and vested) during the period ended March 31, 2008 and 2007, was approximately $0 and $0 or $0 and $0 per stock option, respectively, and was determined using the Black Scholes option pricing model. The factors used for the periods ended March 31, 2008 and 2007, were the option exercise price of $1.50 per share, a 3 year life of the options, volatility measure of 50%, a dividend rate of 0% and a risk free interest rate of 4.55%.

The following table summarizes information about stock options outstanding at March 31, 2008, with exercise prices less than the fair market value on the date of grant with no restrictions on exercisability after vesting:

 

 

 

 

 

 

---

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THREE MONTHS ENDED MARCH 31, 2008

(Unaudited)

---

 

 

 

 

As of March 31, 2008, there was approximately $86,000 of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of .9 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

---

MATTER OF FORWARD-LOOKING STATEMENTS

 

THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDS OR OTHER VARIATIONS OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OF PLANS OR STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. MANAGEMENT WISHES TO CAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS, COMPETITIVE CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NO EXISTING BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLY PREDICTIONS. NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVE CORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVE TO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKING STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANT FACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC., INCLUDING, BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTH IN ITEM 1A, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITED HISTORY OF OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE COMPANY, THE INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS, ANY ONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEW INFORMATION AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED OR OTHER SUBSEQUENT EVENTS.

 

As used herein, the term “the Company,” “we,” “us,” and “our” refer to Eastern Goldfields, Inc., a Nevada corporation and its subsidiaries unless otherwise noted.

 

Item 1A. Risk Factors.

 

Lack of Diversification: Our business, assets, and operations are concentrated in South Africa and to that extent in a limited gold mining area solely for the mining of gold. As a result, we are not diversified and to that extent we face continuing challenges to achieve stable revenues, profits, and cash flow while also remaining exposed to the risks associated with this concentration. For the foreseeable future, we remain subject to these risks and uncertainties and we remain highly dependent upon the price of gold. For these and other reasons, the purchase our Common Stock should not be undertaken except by those persons who can afford the total loss of their investment.

 

Matter of Estimates: Our reserves and many of our calculations regarding our mining properties and associated reserves are based upon estimates obtained under our Bank Feasibility Study. While this study was conducted by reputable and recognized experts who, we believe, possess the expertise, experience, and capabilities that allow them to undertake the Bank Feasibility Study and thereby provide estimates upon which we rely, these estimates and the resulting calculations may change and later be revised upward or downward to such an extent that the magnitude and timing of any such revision cannot be projected. As a result and as we undertake further mining operations, we may revise the estimates based upon additional information and studies then conducted. For these and other reasons, we cannot give you or any person any assurances that the estimates we have used and which are otherwise incorporated or referenced in this Form 10-Q will remain accurate or that they will not be revised downward as further information becomes available.

 

Small Company, Limited Resources & Need for Additional Capital : We are a small company with limited financial resources relative to the many competitors in our industry. In the event of any unexpected problems or difficulties in our business and operations, we may not have the ability to obtain sufficient additional capital on terms that are reasonable in light of our current circumstances and market conditions. Further, we currently estimate that we will need to raise an additional $70,000,000 in additional capital. We have not received any assurances that this additional capital can be obtained or if it is

 

 

---

obtained, that can be obtained on reasonable terms and in a timely fashion to allow us to execute our plans. Further, in the event that we are successful and raise any additional capital, our stockholders may incur significant and immediate dilution of their investment and thereby also incur a significant diminution of their influence and control of the Company.

 

Limited Trading Market for Common Stock: Our common stock is presently traded in the over-the-counter market and is quoted on the “Pink Sheets.” While we seek to obtain trading of our common stock on the OTC Bulletin Board and possibly, we can not give any assurances that we will be successful in these efforts. Our stock trades on a limited and sporadic basis and we cannot assure you that a continuous liquid trading market will develop or, if it does develop, that it will be sustained for any continuous period.

 

Lack of Profits and Lack of Positive Cash Flow: During the three months ended March 31, 2008, we recorded a net profit of $87,249 compared to a Net Loss of $342,362 for the three months ended March 31, 2007 and negative cash flow during both periods. While we believe that if we can successfully implement our business plan and if market and competitive conditions allow we will achieve profitability, we can not assure you that we will achieve profitability or if we do achieve profitability, that we can sustain profitability and positive cash flow in the future.

 

Lack of Dividends : Our board of directors determines whether to pay dividends on the Company’s issued and outstanding shares. The declaration of dividends will depend upon our future earnings (if any), our capital requirements, our financial condition and other relevant factors. Our board of directors does not intend to declare any dividends on our Common Stock for the foreseeable future. We anticipate that we will retain any earnings to finance the growth of our business and for general corporate purposes.

 

Competition & Lack of Diversification : Gold properties eventually become depleted or uneconomical to continue mining. As a result, our long-term success is dependent on its ability to acquire, discover, develop and mine new properties. The acquisition of gold properties and their exploration and development are subject to intense competition. Companies with greater financial resources, larger staffs, more experience and more equipment for exploration and development may be in a better position than us to compete for such mineral properties. If the Company is unable to locate, develop and economically mine new properties, it most likely will not be able to be profitable on a long-term basis. In addition, all of our assets and operations are concentrated in the mining business described in this Form 10-Q and we have no current plans to diversify into any other business activity.

 

Limited Trading History for our Common Stock : Our common stock has had only a limited trading history and there exists only a limited and sporadic trading market. As a result and given the limited trading market for our common stock and the lack of any continuous trading volume, the price of our common stock may be far more volatile and unpredictable than the prices of common stocks and other securities that have a long and established trading history. Further, our Common Stock may not possess the attributes necessary to allow it to be used as collateral in any loan transaction.

 

Possible Rule 144 Stock Sales : A large portion of our outstanding Common Stock is "restricted securities" and may be sold only in compliance with Rule 144 adopted under the Securities Act of 1933 or other applicable exemptions from registration. Rule 144 provides that a person holding restricted securities for a period of one year may thereafter sell in brokerage transactions, an amount not exceeding in any three month period the greater of either (i) 1% of the Company's outstanding Common Stock, or (ii) the average weekly trading volume during a period of four calendar weeks immediate preceding any sale. Persons who are not affiliated with the Company and who have held their restricted securities for at least two years are not subject to the volume limitation. Possible or actual sales of the Company's Common Stock by present shareholders under Rule 144 may have a depressive effect on the price of the Company's Common Stock in any market which may develop.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Our strategy, to the extent that we are able, is to grow our mineral reserves. At the same time, we seek to optimize our current operations, through exploration and prudent acquisitions. During 2008, we took the following actions:

 

 

 

 

 

 

---

 

Growth and Expansion

 

Lily Mine

 

Our primary focus, to the extent that we are able, is to develop the underground mine at Lily. Primary development of the initial underground section began in July 2007 and we are anticipating that if current projections hold, our first production may be in the fourth quarter of 2008. Under these conditions, the underground tonnage will be treated at the current Makonjwaan mill for the next two years. If we complete the acquisition of the nearby Barbrook Mine (see discussion below), the mine’s dormant processing plant may allow us, to the extent that we are able, to change the original strategy of building a new plant at the Lily Mine site. If we are able to do so, we plan to refurbish the Barbrook plant by the end of 2008 which may allow us to undertake operations in early 2009.

 

The Lily Main Pit opencast operation which commenced in 2000 was completed in September 2006. Production from the additional discovery of open pit reserves along the eastern strike extension (Lily East and Rosie’s Fortune) commenced immediately thereafter to give the Company a continuous production life of mine up until September 2008.

 

The following table summarizes the tons milled, gold produced and operating profit (loss) for the life of the open pit operations to date (using the estimates that we have obtained from a third party and which, based on current information, appear as reasonable projections):

 

 

 

 

 

 

If our current estimates are reasonable and subject to a continuation of current market conditions, we currently anticipate a potential of about 9,000 oz may remain in the Rosie’s Fortune Pit for extraction in the three-quarters of 2008. Thereafter the Company will likely require, as reported in previous reports, working capital financing to meet the requirements of its future short term business plan.

 

The extensive exploration diamond drilling programs completed since 2005 up to the end of 2007 have successfully increased the mineral reserves of the Lily Mine to the extent that a full Bankable Feasibility Study has been completed giving the entire project a projected very positive NPV and IRR at a conservative medium term gold price of US$800/ounce. Eighty two diamond drill holes (with wedges), totaling in excess of 21,000 meters of drilling, have increased proved and probable

 

 

---

reserves from 208,000 ounces at the end of 2006 to an estimated 565,000 ounces by the end of 2007The discovery cost is remarkably low at an estimated ±US$1.50 per ounce during this exploration period.

 

 

To the extent that we are able and provided that we can implement our current plans, we anticipate that exploration will continue on the mine property both from surface and later from underground as the mine develops in depth to continue increasing the reserve potential.

 

There can be no assurance that we will be successful in implementing our plans or the plan of operations described in this Form 10-Q. We face many risks and uncertainties and we have only a limited history of operations and all of our projections are based upon estimates which incorporate assumptions which may be revised (adversely) as further information becomes available.

 

Acquisitions

 

If circumstances and our financial resources allow, we intend to make strategic acquisitions in the next few years with the objective of increasing its production to 100,000 oz/annum. We continue to investigate potential opportunities. External projects that have or are being considered at present include the Barbrook Mine.

 

Barbrook Mine

 

As previously disclosed in our Form 8-K, on February 21, 2008 we entered into an agreement to purchase Barbrook Mine. This offer was accepted by the seller corporation, Caledonia Mining Corporation. We have not, as of this date, completed the acquisition of the Barbrook Mine. The contemplated acquisition of the Barbrook Mine is subject to the Company’s completion of due diligence, the Company’s receipt of sufficient financing, and the satisfaction of other customary requirements necessary to complete the contemplated acquisition.

 

Currently and based on the due diligence that we have completed to date, we believe that the Barbrook Mines Limited holds title to a Mining Authorization covering an estimated 2,286 hectares which hosts a consolidation of numerous small mines and claims in the historically renowned Barberton gold mining district of South Africa. Mining at Barbrook commenced in the 1880’s. In 1996 our exploration significantly improved the definition of estimated main ore zones. Treatment of refractory ores commenced in July 1996 and continued until July 1997. A total of 166,400 tons of sulphide ore was treated at an average rate of ±14,000 tons per month. 311 kg of gold was produced at a recovered grade of 1.87g/t. Both the head grade and metallurgical recovery achieved over this period (~40%) were below target and the mine was put on care and maintenance pending a re-evaluation of the mining method and metallurgical process.

 

Based on the information we have available and provided that current trends continue, we believe that the Barbrook Mine looks promising. Various metallurgical test work took place between 1997-2007 which showed that improvements to gold recoveries are achievable. A complete re-evaluation was done in 2002. At that date, this lead to an estimate of Proven and Probable Ore Reserves amounting to 176,000 tons at an insitu grade of an estimated 6.0 g/t gold. All quoted Resource and Reserve estimates will be re-evaluated by EGL’s competent staff in time as additional information becomes available. Our estimates and projections may change and there can be no assurance that we will not later reduce our current estimates and projections as additional information becomes available.

 

The present state of the mine includes extensive (±40km) underground development above “10 Level” adit (600m amsl) up to surface. Measured and Indicated Mineral Reserves to 400 metres below 10 Level are reported at an estimated 322,000 oz of gold. A complete but partially operational plant remains requiring refurbishment. Barbrook lies approximately 7km from Lily Mine on a flat well-maintained dirt road.

 

If we are successful in obtaining sufficient financing on reasonable terms and assuming that our due diligence review is completed and confirms our current assessments, we intend to complete our efforts to acquire the Barbrook Mine. However, there can be no assurance that we will be successful in these efforts.

 

 

 

 

---

 

 

 

 

Prospects for the Future:

 

Exploration

 

Other Properties

 

To the extent that we are able, we anticipate that geological exploration will continue on the Worcester project area, the Bonanza project area and other target locations, where drilling programs will be continued and where possible completed. The outcome of these drilling programs is expected to result in the further delineation of new ore bodies which can be developed for mining in the short term future. To the extent that it is possible and if we are successful, our goal is to produce an additional 20,000 oz/annum from a second operation. While we currently believe that this goal is feasible, we cannot assure that we will achieve this goal or the related objectives.

 

 

Requirement for Additional Capital

 

Based on our current estimates and subject to later evaluations that are to be completed by management, we anticipate that our capital requirements can be grouped into three areas:

 

 

 

 

The development of the underground mine at Lily is of primary importance and the capital expenditure estimate for this project is US$70 Million. Our current estimates and projections suggest that will be sufficient to allow us to develop the underground workings and the mine infrastructure as well as the construction of a new processing plant at the Lily Mine site.

 

Currently, we anticipate that ongoing exploration will continue at the Worcester Mine and the other target locations within our mineral rights. In most cases we have had encouraging results so far. But we anticipate that we will need to make an estimated US $3.5 Million in additional capital expenditures to achieve the exploration objectives that we have set for the next 18 months. That estimate may change or increase if further evaluations show that additional expenditures may be needed to fully complete these explorations.

 

The Company intends 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. An amount of US$10 Million has been estimated for this purpose and this estimate may be changed as we complete further reviews in light of new additional information.

 

Accordingly and to the extent that we are able, we seek to raise additional capital for our Lily Mine underground development in the third quarter of 2008. Our current capital raising strategy also calls for us to seek an additional $70 million in new capital. While we have had discussions with several potential providers of capital, we are not in a position to estimate the form or terms of any such financing arrangement and we cannot give you any assurance we will successfully complete any financing arrangements or, if we do, that the additional new capital obtained in any financing arrangement can be raised on terms that are reasonable in light of our current circumstances.

 

But, overall and if we can achieve our current objectives, our goal is to complete all of these financing arrangements in the third quarter of 2008. As an interim step, we completed a convertible bond facility in March 2008 which raised US$4 million as part of our additional capital raising strategy. This interim funding is necessary to implement our plans prior to the

 

 

---

main fund raising in the third quarter of 2008. Given the uncertainties of the marketplace and the challenges that we face, there can be no assurance that our efforts to raise additional new capital will be successful.

 

Results of Operations for the Three Months Ended March 31, 2008 and 2007

 

A summary of our comparative operations, which arise only from open pit mining operations at the Lily Mine, for the three months period ended March 31, 2008 and March 31, 2007 were as follows:

 

  

* Expressed in Thousands

 

Comparative Results of the Three Months Ended March 31, 2008 and 2007

 

Revenues: For the 2008 period covering three months of commercial production from January 1, 2008 to March 31, 2008 (“First Quarter 2008”), we recorded revenues of approximately $2,185,000 from sales of gold versus revenues of approximately $1,428,000 for the three month period from January 1, 2007 to March 31, 2007 (the “First Quarter 2007”), which amounted to an increase of approximately 53%. The principal factors affecting this increase in revenue were as follows:

 

 

 

Cost of Production: Although ore tons milled was marginally lower in the First Quarter 2008 compared to the First Quarter 2007, overall we experienced higher cost of production. During the First Quarter 2008, we produced 2,492 ounces of gold for $1,589,000, whereas, during the First Quarter 2007, we produced 2,362 ounces of gold for $1,172,000. Accordingly, per ounce cost of production for the First Quarter 2008 was $638 whereas per ounce cost of production for First Quarter 2007 was $496; an increase in the per ounce production of gold of 31%. A principal reason for this increase was due to the increase in the diesel price per liter of 11.5% for the quarter and in comparison to the diesel price as at 31 March 2007 a 43.7% increase and a 7.5% increase in the plant hire costs effective 1 January 2008. Fuel and oil price increases generally have a negative impact on our margins, cash flow, and profitability.

 

 

---

 

Operating Expenses for the First Quarter 2008:  Our operating expenses remained approximately same and even marginally lower in the First Quarter 2008 at $543,000 than in the First Quarter 2007.

 

Changes in Exchange Rates: Changes in exchange rates did not have a significant impact on the comparability of our results for the First Quarter 2008 versus the First Quarter 2007. The average rates of exchange for the interim periods ended March 31, 2008 and March 31, 2007 were SAR 7.4990 to $1 and SAR 7.1619 to $1, respectively – approximately 5% weakening of the South African Rand against the US Dollar. Had the exchange rate remained the same during the First Quarter 2008 as that of First Quarter 2007, the results of our operations arising from South African Rand transactions would have been approximately $18,600 higher.

 

Changes in exchange rates also had a significant impact on the comparability of our balance sheets as of March 31, 2008 versus March 31, 2007. The rates of exchange as at March 31, 2008 and March 31, 2007 were SAR 8.1363 to $1 and SAR 7.2750 to $1, respectively – approximately 12% weakening of the South African Rand against the US Dollar. Had the exchange rate remained the same in 2008 as that of 2006, our total South African Rand based net assets would have been approximately $1,319,000 higher. This variation in the main relates to our property, plant and mine development costs. We are not able to predict future exchange rates and we may face prolonged and dramatic adverse exchange rate market conditions in the future.

 

Restructuring: On March 28, 2008 and through our subsidiary, EGSA, we entered into a Convertible Loan Agreement. The agreement involves EGSA receiving $3,981,932 (32,000,000 SA Rands) of proceeds. The loan principal can convert into 6.9% of the total issued and outstanding shares of ordinary capital after the conversion of the loan by EGSA. This would serve to dilute (reduce) our interest in EGSA, our subsidiary. If EGSA is able to list its shares with Johannesburg Stock Exchange Limited (JSE) within six months of the agreement date then no interest is due and payable. However, if EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Rate and be due and payable immediately. If EGSA list its ordinary shares with JSE after six months due but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan. If, for any reason, EGSA is unable to list its ordinary shares with JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding shares of ordinary shares of EGSA.

 

 

 

---

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The Company’s operations and its securities are subject to a number of substantial risks, including those described below. If any of these or other risks actually occur, the Company’s business, financial condition and operating results, as well as the trading price or value of its securities could be materially adversely affected. No attempt has been made to rank these risks in the order of their likelihood or potential harm. In addition to those general risks enumerated elsewhere in the document, any purchaser of the Company’s common stock should also consider the following risk factors:

 

Risks Related to the Company’s Operations

 

The Company requires additional funding which may not be available. If the Company is unable to obtain necessary financing on acceptable terms, it may have to curtail its current or planned operations.

 

The Company requires additional funding to implement its business plan. The Company’s current open pit operations at its Lily Mine are anticipated to terminate in September 2008. Additional capital will be required in order to undertake underground mining operations at the Lily Mine. The Company also will require still additional funding to explore its other properties. The Company may seek to obtain such funding for these activities through equity or debt financing, joint ventures or from other sources. There can be no assurances that the Company will be able to raise adequate funds on acceptable terms from these or other sources (in light of the Company’s current circumstances), which may hinder the Company from continuing or expanding its operations.

 

Operational hazards and responsibilities could adversely affect our operations.

 

The Company’s operational activities are subject to a number of risks and hazards which include but not limited to the following:

 

 

These occurrences could result in significant damage to, or destruction of, mineral properties or production equipment, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. The occurrence of these operational hazards could adversely affect the Company’s mining operations by limiting production or the closure of the mines themselves.

 

The Company is not insured against any losses or liabilities that could arise from its operations either because insurance is unavailable or because the premium cost is excessive. The payment of such liabilities could have a material adverse effect on the Company’s financial position and, depending on the extent of such liability, could result in the total loss of its assets and operations.

 

Exploration for gold involves hazards, which could result in the Company’s incurring substantial losses and liabilities to third parties for pollution, accidents and other hazards. The Company has public liability insurance of $1,500,000 but,if the Company incurs uninsured losses or liabilities, the funds available for the implementation of its business plan will be reduced and its assets may be jeopardized. The payment of such liabilities may have a material adverse effect on the Company’s financial position and, depending on the extent of such liability, could result in the total loss of its assets and operations.

The Bank Feasibility Study (“BFS”) contains estimates and assumptions regarding the feasibility of the Company’s mining operations which may later prove to be inaccurate as additional information becomes available .

 

 

---

While we believe that the Bank Feasibility Study was conducted in a responsible fashion and the estimates, assumptions, and methodology of the BFS follows standards that are consistent with industry practice, the amount of Reserves, Proven Reserves, and other projections may be later significantly reduced as we obtain additional information. The extent of any reduction in these estimates and their magnitude can not be known at this time. The Company is aware that estimates in the mining industry can be subject to dramatic changes. For these reasons, we can not assure you that we will not later discover that our estimates need to be significantly reduced as we complete further work on our mining properties.

 

The Company’s ability to discover a viable and economic mineral reserve on its properties is subject to numerous factors, most of which are beyond its control and are not predictable. If the Company is unable to discover such reserves, it most likely will not be able to establish a profitable commercial mining operation on these properties.

 

Exploration for gold is speculative in nature, involves significant financial risks and is frequently unsuccessful. Few properties that are explored are ultimately developed into commercially producing mines. The Company’s long-term profitability will be, in part, directly related to the cost and success of exploration programs. The Company’s gold exploration programs entail risks relating to the following:

 

 

The commercial viability of a mineral deposit is dependent on a number of factors including the following:

 

 

The effect of these factors cannot be accurately predicted and any one of which could adversely affect the Company’s ability to operate. Further, the Company has little or no control over these variables.

 

 

 

 

 

 

 

 

---

The Company’s ability to become and remain profitable, should it become profitable, will be dependent on its ability to locate, explore, develop and mine additional properties. There is intense competition for the acquisition of gold properties. If the Company is unable to accomplish this, it most likely will not be able to be profitable on a long-term basis.

 

Gold properties eventually become depleted or uneconomical to continue mining. As a result, the Company’s long-term success is dependent on its ability to acquire, discover, develop and mine new properties. The acquisition of gold properties and their exploration and development are subject to intense competition. Companies with greater financial resources, larger staffs, more experience and more equipment for exploration and development may be in a better position than the Company to compete for such mineral properties. If the Company is unable to locate, develop and economically mine new properties, it most likely will not be able to be profitable on a long-term basis.

 

The Company’s property interests are located in South Africa. The risk of doing business in a foreign country could adversely affect its results of operations and financial condition.

 

The Company faces risks normally associated with any conduct of business in foreign countries, including various levels of political and economic risk. The occurrence of one or more of these events could have a material adverse impact on the Company’s current and future operations which, in turn, could have a material adverse impact on its future cash flows, earnings, results of operations and financial condition. These risks include the following:

 

 

Any such changes may affect the Company’s current miningoperations and ability to undertake exploration activities in respect of present and future properties in the manner currently contemplated, as well as its ability to explore and eventually develop and operate those properties in which it has an interest or in respect of which it has obtained exploration rights to date. Certain changes could result in the confiscation of property by nationalization or expropriation without fair compensation.

 

 

---

 

There are uncertainties as to title matters in the mining industry. Any defects in such title may cause the Company to forfeit its rights in mineral properties and could jeopardize its business operations.

 

There are uncertainties as to title matters in the mining industry. If the title to or the Company’s rights of ownership in its properties, prospects and/or claims are challenged or impugned by third parties, or the properties, prospects and/or claims in which it has an interest are subject to prior transfers or claims, such title defects could cause the Company to loose its rights in such properties. If the Company looses its rights in and to any of its mineral properties, its business operations could be jeopardized.  The Company may not have the financial resources to protect and assert its legal claims in such properties.

 

The Company’s current and planned operations require permits and licenses from various governmental authorities. If the Company is unable to obtain and maintain such requisite permits, licenses and approvals, its business operations and ability to become profitable may be adversely affected.

 

The Company’s current and planned operations require permits and licenses from various governmental authorities. Such permits and licenses are subject to change in regulations and in various operating circumstances. The Company cannot assure that it will be able to obtain or maintain in force all necessary permits and licenses that may be required to conduct exploration or commence construction or operation of mining facilities at properties to be explored or to maintain continued operations at economically justifiable costs. Further, certain of the Company’s mineral rights and interests are subject to government approvals. In all such cases such approvals are, as a practical matter, subject to the discretion of the South African government or governmental officials. No assurance can be given that the Company will be successful in obtaining any or all of such approvals. The Company’s inability to obtain and maintain the requisite permits, licenses and approvals could materially and adversely affect its operations and ability to become profitable.

 

Gold prices can fluctuate on a material and frequent basis due to numerous factors beyond the Company’s control. The Company’s ability to generate profits from operations could be materially and adversely affected by such fluctuating prices.

 

The profitability of the Company’s current and future gold mining operations is significantly affected by changes in the market price of gold. Between January 1, 2006 and December 31, 2007, the “fixed price” for gold on the London Exchange has fluctuated between $608.40 and $841.10 per ounce. Gold prices fluctuate on a daily basis and are affected by numerous factors beyond the Company’s control, including:

 

 

Each of these factors can cause significant fluctuations in gold prices. Such external factors are in turn influenced by changes in international investment patterns and monetary systems and political developments.  The price of gold has historically fluctuated widely and, depending on the price of gold, revenues from mining operations may not be sufficient to offset the costs of such operations.

 

 

Gold is sold in South Africa in South African Rands. If applicable currency exchange rates fluctuate the Company’s revenues and results of operations may be materially and adversely affected.  

 

The Company exclusively sells its gold to The Rand Refinery Ltd. which is a South African corporation and the world’s largest gold refinery. Such sales are paid for with South African Rands. The Company also incurs a significant amount of its expenses which are payable in South African Rands. As a result of the required utilization of the South African Rand, the Company’s financial performance is affected by fluctuations in the value of the South African Rand to the U.S. Dollar. At the present time, the Company has no plan or policy to utilize forward contracts or currency options to minimize this exposure, and even if these measures are implemented there can be no assurance that such arrangements will be available, be cost effective or be able to fully offset such future currency risks.

 

 

---

 

Dependence upon Key Executives and Employees

 

The Company’s success depends to a great extent upon the continued successful performance of key executives and employees in general and specifically Mr. Michael McChesney. Mr. McChesney is presently employed by the Company as its President and Chief Executive Officer. Mr. McChesney also serves as one of the Company’s directors. If Mr. McChesney and certain other present key executives and employees are unable to perform their duties for any reason, the Company’s ability to operate in South Africa will be materially adversely effected. The Company does not have a key man life insurance policy on the life of Mr. McChesney or any other key executives and employees.

 

 

 

---

Item 4. Controls 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 March 31, 2008. 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 quarter ended March 31, 2008, that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

 

 

---

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not a party to any pending legal proceedings, and no such proceedings are known to be threatened or contemplated.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On March 28, 2008, our subsidiary, EGSA, entered into a Convertible Loan Agreement which was completed without the use of an underwriter. The transaction and the agreements were completed directly without any intermediary.

 

Through our subsidiary, EGSA, we received net proceeds of $3,981,932 (32,000,000 SA Rands)(based on current exchange rates).

 

In entering into the transaction with the Lender, we received assurances that:

 

(1) the Lender had received information, business and financial documents, and other disclosures regarding the Company, EGSA, and management equivalent to that found in a registration statement;

 

(2) the Lender had a full and unrestricted opportunity to ask questions of the Company’s and EGSA’s officers and directors and to receive answers to all such questions;

 

(3) the Lender is an Accredited Investor who is experienced and sophisticated in investment transactions made with small public companies;

 

(4) the Lender understood that it acquired the Convertible Loan (and subsequently, any shares of EGSA’s common stock thereby) as “restricted securities,” for investment purposes only and not with a view toward their resale; and

 

(5) the transaction with the Lender was not the product of any general solicitation or advertising but was the result of a pre-existing business relationship.

 

On this basis, we relied upon the exemption provided by Section 4(2) of the Securities Act of 1933.

 

All of the proceeds were and are to be used by EGSA to increase its working capital and for capital expenditures.

 

The loan principal can convert into 6.9% of the total issued and outstanding shares of ordinary capital (of EGSA) after the conversion of the loan by EGSA. If EGSA is able to list its shares with the Johannesburg Stock Exchange Limited (JSE) within six months of the agreement date then no interest is due and payable. If EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Rate. If EGSA list its ordinary shares with JSE after six months but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan. If EGSA has been unable to list its ordinary shares with JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding shares of ordinary shares of EGSA.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

 

---

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

Regulation

 

 

 

 

Sarbanes-Oxley Act of 2002 of Chief Financial Officer

 

 

---

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.