5-Apr-2007
Annual Report
THE FOLLOWING IS A DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY FOR THE FISCAL YEARS ENDED DECEMBER 31, 2006 AND 2005. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE HEREIN.
This section of the Company's Annual Report includes a number of forward-looking statements that reflect Bullion River's current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project, and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Annual Report. These forward-looking states are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or out predictions.
2006 Overview and 2007 Outlook
Summary
During the year ending December 31, 2006, the Company concentrated its activities at the French Gulch project located in northern California. At French Gulch, the Company continued work on the main decline and other access points to access the Washington and Lucky-7 veins. The Company completed excavation of the bulk sample and commenced commercial production during the fourth quarter. The Company finished mill rehabilitation in preparation for commercial production and is continuing to upgrade the facility as necessary. See the French Gulch section below for additional detail.
The Company will continue to seek projects that contain high grades and large deposits of gold or silver as well as projects that contain the potential for mineralization concealed under post-mineral cover. This focus is primarily in the Mother lode belt and Klamath Mountains in California and the Great Basin of the western United States. There is no assurance that the Company will locate high grades and sufficient deposits of mineralization, or locate projects that contain the potential for mineralization concealed under post-mineral cover, or that there is high grade or sufficient tonnage of gold or silver to make a project commercially viable.
Unless the Company's anticipated production projects contain commercially viable sources of gold or silver and until such time as it achieves significant revenues from the sales of gold or silver, the Company will continue to incur losses. The costs associated with bringing a commercially viable mine into operation are significant and the Company cannot guarantee that it will be able to obtain the required working capital to continue current operations or bring any other mines into commercial production. As the Company proceeds with its production and exploration programs it will need to hire independent contractors as well as purchase or lease additional equipment.
During 2007, the Company plans to continue concentrating its activities at the French Gulch property focusing on production and development activities and implementing capital upgrades in accordance with the mine operating plan. Exploration activities will continue on the Corcoran Canyon property in accordance with the joint venture agreement with Silver Quest Resources Ltd., a Vancouver based mineral exploration company. Currently there is minimal activity planed for the North Fork, Mission Mine, Antone Canyon, and Wenban Spring properties in 2007. If additional funding becomes available, the Company may do some exploration work at North Fork, Antone Canyon, and Wenban Spring.
The Company anticipates continuing to rely on debt and equity sales in order to finance operations until such time that sufficient revenue is generated from precious metal extraction that the Company is capable of supporting itself with internally generated cash flow. The issuance of additional shares will result in dilution to existing shareholders of the Company.
French Gulch Nevada Mining Corp
Current status
During 2006, the Company operated in its test mining phase until November 10, 2006 when commercial production began. The new decline has advanced further towards the Lucky 7 and Washington vein systems and the explosives storage area, the water treatment cut out, and electrical power center cut out have been completed. Furthermore, a drift towards the Niagara vein system in the northwest part of the property was started. On the I-level, the drift towards the Main Decline was extended and ore from an old existing stope was extracted and processed. A new decline from the I-level drift was driven in order to access a previously explored Washington vein area below the existing stope. New stopes were started and mined, both in the Washington and the Dean vein systems. Additionally, the Company extracted ore from the Lucky 7 vein system via the Robillard level.
The Company continued to make improvements on the mill structure throughout the year improving its milling activity. More testing has been completed in order to improve functionality, gold recovery, water flows, and treatment processes. The Company has also installed an improved water treatment plant on surface and made several mechanical and equipment improvements.
The Company has completed all 16 holes in the most resent drilling program. All assay results are being received and transferred into the company's 3-D modeling software for further evaluation.
During the year ending December 31, 2006, the Company spent approximately $6.2 million on exploration and development and $600 thousand on mill rehabilitation at French Gulch.
Subsequent and Future Work
Advancement of the main decline is being continued in order to gain access to the Washington and the Niagara vein systems. The Lucky 7 vein has been accessed via a cross-cut from the decline and the first new stope, the 2173, started production in late January and is still being mined. An additional access ramp has been completed to the next stope level, the 2150. Production began in this stope in the mid March.
Mining of the Washington and Dean vein systems accessed via the I-level was suspended in early January due to the opening of the Lucky 7 stope 2173 which currently is less complicated logistically.
The Company is continuing to plan and prepare for expansion of the mill. SGS of Toronto, Canada has been retained to assist in the engineering work required to convert the mill from its current capacity to that of at least 500 tons per day. SGS is a renowned multi disciplined engineering group that operates internationally with its main North American metallurgical office based in Toronto, Canada.
The Company intends to proceed with engineering work focused on the
completion of the mill design and other infrastructure requirements that
include:
? Foundation design for the fine ore bin
? Design of supports / foundations for a larger ball mill.
? Procurement of equipment.
? Provision of structure over outdoor flotation cells and electrical equipment.
? Revision of site electrical distribution system to reflect operational changes from previous operations.
? Design of site offices and shop.
? Development of new reclamation plan for the site reflecting changes in provision for waste storage and proactive reclamation proposals.
? Design and implementation of mine backfill system.
? Emergency spill response program.
Although the Company has proceeded into the commercial production phase, underground development will continue in an effort to open new stoping blocks in the current development area and to access the Niagara Mine to the northwest. The development program will be an ongoing activity to ensure that sufficient mining areas are available to provide ore to the mill on a continuous basis as well as to provide additional underground drill sites for further exploration
Other planned work in the mine will include the preparation of an underground equipment service and repair facility and an underground dry room for employees. These facilities will be built underground in order to reduce surface congestion as well as make it simpler to contain any possible pollutants within the mine. Engineering work has been completed for these facilities.
Furthermore, the Company contracted Reliance Geological Services Inc. to conduct a Technical Report of the property according to Canadian standard 43-101, which was published on the Company's website in January 2007.
The Company has a verbal agreement with the Washington Niagara Mining Partnership to delay payments under the original terms of the option agreement. As of December 31, 2006, the Company had delayed its December 2006 option payment of $175,000.
North Fork Mining Corp
Current status
The Company does not claim to have any ores or reserves whatsoever at this time on the North Fork Property.
An exploration permit is in place, which has been extended until December 2008. Currently, the Company has two reclamation bonds in place totaling $29,800 with the U.S. Forest Service for financial assurances for completion of foreseeable reclamation related to underground and surface exploration.
The Company suspended activities at North Fork in February 2006 as a result of management's decision to concentrate manpower and equipment resources at French Gulch. The only significant activity performed at North Fork during the year was general exploration work in the first quarter.
During the year ending December 31, 2006, the Company spent approximately $470 thousand on exploration at North Fork.
The Company has a verbal agreement with owners to delay payments under the original terms of the option agreement. As of December 31, 2006, the Company had delayed its December 2006 option payments of $5,000 each.
Proposed Exploration
Decline rehabilitation at North Fork is planned to resume once the French Gulch mine is providing sufficient positive cash flows to finance the activity. The majority of the equipment required to complete the rehabilitation phase is onsite.
After the completion of the decline rehabilitation, some underground
development will be required to prepare one or more diamond drilling stations.
This will include:
? Excavation and securing of the diamond drill station
? Excavation and securing underground explosives magazines
? Installing transformers and cable from surface to the underground drill station
? Excavation and securing a refuge station.
Depending on the results of the early drilling program and the geological information gained from that activity, it may be necessary to advance an exploration drift into what is expected to be the hanging wall of the deposit. This will facilitate the drilling of a pattern of fanned holes back into the deposit from a more advantageous angle.
Antone Canyon Mining Corp
Current status and Proposed Exploration
The Company does not claim to have any ores or reserves whatsoever at this time on the Antone Property.
The Company must conduct exploration to determine what amount of minerals, if any, exist on the Antone Canyon property and if any minerals that are found can be economically extracted and profitably processed. The exploration program is designed to economically explore and evaluate the Antone Canyon property.
Currently, the Company has a reclamation bond in place in the amount of $3,300 with the U.S. Forest Service for financial assurances for completion of foreseeable reclamation related to surface exploration.
Expenses totaled approximately $62,000 for the Antone Canyon property during 2006, primarily attributable to consulting, claim maintenance fees, and insurance.
The Company's plan to do 2,000 feet of surface drilling early in the fourth quarter of 2006 was delayed due to adverse weather conditions. The Company has not yet rescheduled the drilling program. Total spending for the drilling is estimated to be $108,000.
Cimarron Mining Corp
As of August 23, 2006, the Company and Brancote US, owner of the majority of the Cimarron claims, have allowed the option agreement for the property to expire.
Corcoran Canyon Mining Corp
Current status and Proposed Exploration
The Company does not claim to have any ores or reserves whatsoever at this time on the Corcoran Canyon Property.
Currently, the Company has two reclamation bonds in place in the amount of $2,600 with the U.S. Forest Service and $6,700 with the Bureau of Land Management for financial assurances for completion of foreseeable reclamation related to surface exploration.
The option agreement expired on February 28, 2006. At that time, the Company started negotiations with the owner to purchase the property as required by the terms set forth in the original agreement. Two partial payments of $20,000 were made on February 28 and March 30, 2006. On May 19, 2006 the Company completed negotiations made the final payment of $160,000.
Expenses for the year ending December 31, 2006 totaled approximately $250,000 for the property, primarily attributable to purchase option payments, claim maintenance fees, professional fees, and insurance.
On June 16, 2006 the Company and Silver Quest Resources LTD and Silver Quest Resources (US) LTD (together "Silver Quest") entered into a joint venture exploration agreement for the property. As of December 31, 2006, Silver Quest had made all cash payments due to the Company and has issued the 100,000 common shares of Silver Quest to stay in compliance with all of the terms of the option agreement.
Silver Quest can acquire an initial 51% interest in the property by making cash payments of $250,000, issuing 400,000 shares, and incurring $1,500,000 in exploration and development expenditures over a three year period. Silver Quest has a further option to increase its interest to 75%, by paying an additional $1.0 million, issuing an additional 500,000 shares, and incurring an additional $1.75 million (U.S.) in expenditures.
As of December 31, 2006, Silver Quest has conducted an exploration drilling program consisting of drilling three exploration holes using a Diamond drill rig. The program has been completed successfully and results have been published in the Company's January 19, 2007 press release.
Wenban Spring Mining Corp
Current status and Proposed Exploration
The Company does not claim to have any ores or reserves whatsoever at this time on the Wenban Spring property.
The Company must conduct exploration to determine what amount of minerals, if any, exist on the Wenban Spring property and if any minerals that are found can be economically extracted and profitably processed. The exploration program is designed to economically explore and evaluate the Wenban Spring property.
Currently, the Company has a reclamation bond in place for $5,400 with the Bureau of Land Management for financial assurances for completion of foreseeable reclamation related to surface exploration.
Expenses for the year ending December 31, 2006 totaled approximately $250,000 for the property, primarily attributable to purchase option payments, professional fees, and insurance.
The Company is planning to maintain the property for future exploration but does not have any significant plans for 2007 at this time.
The Company contracted Reliance Geological Services Inc. to conduct a Technical Report of the property according to Canadian Instrument 43-101, which has been published on the Company's website.
Painted Hills Property
As of September 1, 2006, management has decided not to pursue any additional exploration at the Painted Hills property and has chosen not to renew the mining claims.
Mission Mine Project
Location and Background
The Mission Mine property consists of 26 unpatented lode claims which are located about 58 km southeast of Twenty-Nine Palms in Riverside Co., California. The Mission Mine was originally developed between 1890 and 1930 as part of the Dale Mining District and contributed to the 17,000 oz of gold production during that time. The mine was reopened in 1981 when a production shaft was sunk to the 619 foot level and four working levels were developed along the vein for production. Underground channel sampling by TKM Corp, Asamera Minerals, USMX, and New Gold Corp. in the 1980's and 1990's indicated much of the Mission quartz-magnetite-specularite-pyrite vein contained between 0.25 oz/t and 2.0 oz/t Au. Recent surface sampling from the Mission vein and other surrounding veins has confirmed high gold contents from various quartz-magnetite veins in the district.
Since entering into the exploration agreement, the Company has located an additional 71 claims in the district to cover a series of old mines, veins, prospects, adits, and shafts. Three of the old mines, which were recently acquired by staking, had mills which produced gold from the ore.
On November 16th, 2006 the Company entered into an exploration permit with the option to purchase 34 unpatented lode mining claims from Nevada Eagle Resources LLC (NER). The 32 LA claims ( LA 1-17and 19-31) claims and the MMC 1 and 2 claims are located in the Dale Mining District of Riverside and San Bernardino counties of southern California. The claims were located in the spring of 2006 and were subsequently filed and recorded with the California BLM and the respective recorders offices in San Bernardino and Riverside counties. The Company paid $10,000 upon signing the agreement and can purchase the aforesaid unpatented mining claims from NER as per the following schedule:
$15,000 - April 27, 2007
$20,000 - April 27, 2008
$25,000 - April 27,
2009
$30,000 - April 27, 2010
$50,000 - April 27, 2011
The purchase option will be considered exercised once the payments totaling $150,000 have been made to NER. NER will retain a 3% net smelter return on the claims, of which 2% may be purchased for $1 million per percentage point by the Company.
Current status and Proposed Exploration
The Company does not claim to have any ores or reserves whatsoever at this time on the Mission Mine Claims.
The Company must conduct exploration to determine what amount of minerals, if any, exist on the Mission Mine property and if any minerals that are found can be economically extracted and profitably processed. The exploration program is designed to economically explore and evaluate the Mission Mine property.
Ground magnetometer surveys have been conducted over the most prominent veins exposed on the claim blocks and they have defined the structural zones controlling the veining. Ongoing metallurgical scoping tests are being performed to determine economically feasible processes for gold recovery. The results of these tests are being evaluated. Additional mapping and sampling of the various mines and veins found on the claims is planned in the future. The Company is also working on permitting for a core drilling program.
Expenses for the year ending December 31, 2006 totaled approximately $225,000 for the property, primarily attributable to purchase option payments, claim maintenance fees, consulting, and legal fees.
For 2007, the Company is currently in the process of permitting a plan of operations through the Barstow BLM office with the intent of improving the mine access road and starting a feasibility study for the mining district.
The Company contracted Reliance Geological Services Inc. to conduct a Technical Report of the property according to Canadian Instrument 43-101, which has been published on the Company's website.
Results of Operations
Revenues and Cost of Sales for the year ending December 31, 2006 vs. December 31, 2005
There were no revenues or cost of sales for the year ending December 31, 2005 as the Company was still in the exploration stage. The Company remained in the exploration stage until the fourth quarter of the year ending December 31, 2006 when the Company transitioned into the production phase. At that time Management concluded that substantial testing of the mining processes and equipment at the French Gulch mine had been completed and that the Company was now operating with the intent to extract and process known mineralized deposits in order to generate revenue. For the year ending December 31, 2006 the Company generated $800,000 in revenue from the sales of precious metals. The revenue was offset with cost of sales of $2.3 million for a gross loss of $1.5 million.
Expenses for the year ending December 31, 2006 vs. December 31, 2005
The Company's total expenses were $14 million for the year ended December 31, 2006, an increase of $8.6 million or 159% over the year ended December 31, 2005. Of the $8.6 million increase in expenses, $7.7 million or 89% was attributed to operating expenses while the remaining $860,000 was non-operating related.
The increase in operating expenses was primarily attributable to exploration and development activities. Exploration and development expenses totaled $8.8 million for 2006 as compared to $3.3 million last year, an increase of $5.5 million or 165%. Most of this increase is related to the French Gulch operations which were limited to preparation starting the bulk sampling and site set up in 2005. Additionally, during 2006 the French Gulch mill rehabilitation and testing took place accounting for approximately $600,000 of the exploration and development variance. General and administrative expenses increased by $1.4 million, or 73%, due primarily to the increased level of support required by the activities at French Gulch. Other variances in operating expenses from last year include an increase in depreciation and accretion of $340,000 and an increase in employee stock based compensation of $560,000.
The increase in net non-operating expenses was primarily attributable to interest expense. Interest expense totaled $1.04 million for 2006 as compared to $65,000 last year, an increase of $975,000. The increase in interest expense is mainly attributable to the issuances of convertible debt in the third and fourth quarters of 2006. The increase in interest expense was offset by a net gain of $115,000 from interest income, gain on extinguishment of debt, loss on asset disposal, and other non-operating income.
Liquidity and Financial Condition
Cash and Working Capital
The Company had a cash balance of $146,509 on December 31, 2006. For the year
ending December 31, 2006, the Company had a net cash inflow of $21,721 which was
made up of the following:
? The Company used $11.3 million in operating
activities. This operating cash outflow represents a net loss for the period of
$15.6 million; reduced by $2.7 millionof non-cash expenses; increased by a net
increase in operating assets of $176,000; and reduced by an increase in
operating liabilities of $1.8 million.
? The Company had cash outflow in investment activities of $2.25 million, which represents $2.5 million used for the purchase of fixed assets offset by a $263,000 increase in lease obligations.
? The Company had cash inflow from financing activities totaling $13.5 million from a net increase in debt of $5.5 million; a net increase in equity of $8.2 million; offset by offering costs of $117,000; and increased by an increase in unrealized holding gains of $18,000.
At December 31, 2006, the Company had a working capital deficit of $1.7 million. The decrease in working capital of $1.75 million from December 31, 2005 was due to an increase in current liabilities of $1.9 million partially offset by an increase in current assets of $178,000. The increase in current liabilities is primarily attributable to increases in accounts payable and accrued liabilities. Bullion River had an accumulated deficit of $24.1 million since inception and has a shareholder's deficit of $1.2 million. The Company has no contingencies or long-term agreements except for its commitments under the option agreements, premises, and leases.
Internal and External Sources of Liquidity
The Company's production operations and mineral exploration programs are limited and restricted by the amount of working capital that the Company has and is able to raise from financing and debt. The company anticipates continuing to rely on loans payable, equity sales of common shares or joint ventures with other exploration companies in order to fund further exploration and production programs. Acquiring additional financing would be subject to a number of factors, including the market prices for gold and silver, investor acceptance of the Company's mineral claims, and investor sentiment. These factors may make the timing, amount, terms or conditions of additional financing unavailable to the Company.
Critical Accounting Policies
Mineral Properties
The Company confines its exploration activities to areas from which gold and silver have been previously produced, or to properties that are contiguous to such areas and have demonstrated mineralization. The costs of acquiring options on the mineral claims and exploration and development costs will be expensed until established economically recoverable reserves are found, after which, costs to develop the mineral claims will be capitalized and amortized on a unit-of-production basis. At this time it is unknown when established economically recoverable reserves will be found. Properties that do not have economically recoverable reserves will be abandoned.
Stock Options
In December 2004, the Financial Accounting Standard Board ("FASB") issued SFAS 123R, "Share-Based Payments" ("SFAS No. 123R"), a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their financial statements. The Company adopted this standard effective January 1, 2006 and elected the modified-prospective transition method. Under the modified-prospective transition method, awards that are granted, modified, repurchased or cancelled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R.
Reclamation and Abandonment Costs
Adoption of SFAS 143 "Accounting for Asset Retirement Obligations" addresses financial accounting and reporting for obligations associated with the reclamation and abandonment costs. The policy requires that reclamation and closure costs including site rehabilitation costs be recorded at the estimated present value of reclamation liabilities and recorded as an asset. These reclamation costs will be allocated to expense over the life of the related options and will be adjusted for changes resulting from the passage of time and revisions to either the timing, or the amount of the original present value estimate.
Accounting for reclamation and remediation liabilities requires management to make estimates at the end of each period of the undiscounted costs expected to be incurred. Such cost estimates include, ongoing care, maintenance and monitoring costs. Changes in estimates are reflected in earnings in the period an estimate is revised.
Accounting for reclamation and remediation liabilities requires management to make estimates of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Actual . . .