ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Concerning Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes included in this report. This report contains “forward-looking statements.” The statements contained in this report that are not historic in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,” “believes,” or “plans” or comparable terminology are forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from expectations include, but are not limited to, those set forth under the section “Risk Factors” set forth in this report.
The forward-looking events discussed in this report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties, and assumptions about us. For these statements, we claim the protection of the “bespeaks caution” doctrine. All forward-looking statements in this document are based on information currently available to us as of the date of this report, and we assume no obligation to update any forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results to differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements.
The Company
Mexus Gold US is an exploration stage mining company engaged in the evaluation, acquisition, exploration and advancement of gold, silver and copper projects in the State of Sonora, Mexico and the Western United States. Mexus Gold US is dedicated to protect the environment, provide employment and education opportunities for the communities that it operates in.
Our President and CEO, Paul Thompson, brings over 40 years’ experience in mining and mining development to Mexus Gold US. Mr. Thompson is currently recruiting additional management personnel for its Mexico, Nevada, and submarine Cable Recovery operations to assist in growing the company.
Our executive offices are located at, 1805 N. Carson Street, #150, Carson City, Nevada 89701. Our telephone number is (916) 776 -2166.
We were originally incorporated under the laws of the State of Colorado on June 22, 1990, as U.S.A. Connection, Inc. On October 28, 2009, we changed our domicile to Nevada and changed our name to Mexus Gold US to better reflect our new business operations. Our fiscal year end is March 31
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Description of the Business of Mexus Gold US
Mexus Gold US is engaged in the evaluation, acquisition, exploration and advancement of gold exploration and development projects in the state of Nevada and Mexico, as well as, the salvage of precious metals from identifiable sources. Our main activities in the near future will focus on our mining operations in Mexico.
Our mining opportunities located in the state of Nevada and the state of Sonora, Mexico will provide us with projects to recover gold, silver, copper and other precious metals. The cable salvage opportunity involves principally the recovery of copper and lead from abandoned cable previously utilized for communications purposes. Each of these opportunities are discussed further herein.
In addition, our management will look for opportunities to improve the value of the gold projects that we own or may acquire knowledge of or may acquire control through exploration drilling, introduction of technological innovations or acquisition with the goal of developing those properties into operating mines. We expect that emphasis on gold project acquisition and development will continue in the future.
Business Strategy
Our business plan was developed with the overriding goal of maximizing shareholder value through the exploration and development of our mineral properties, utilizing the extensive mining-related background and capabilities of our management and employees, and also through strategic partnerships. To achieve this goal, our business plan focuses on five strategic areas:
Lida Mining District, Nevada
We determined after out review of the data of the prior geological studies to release the option lands covering part of the prospect area to the original owner, Nevada Pacific Rim during the year ended March 31, 2012. During our initial evaluation we did acquire directly several claims in the area for further study in Esmeralda County, Nevada. The Mexus Claims are held pending our study and evaluation, however, at this time there has been no geological evaluation and are no plans scheduled for further work at this time.
Mexus Gold S.A. de C.V. Caborca
Effective March 31, 2011, we have acquired Mexus Gold S.A. de C.V. We began funding the operations in Mexico and have instituted a small placer processing operation to evaluate various areas of interest within the project lands.
Mexus-Trinidad Joint Venture
Mexus Gold US entered in to a joint venture known as the Mexus-Trinidad Joint Venture situated in the State of Sonora, Mexico. We are the managing partner of this project and hold 60% interest in the Project lands and facilities. All necessary permits are in place for the operation of the project.
Status of Cable Salvage Operations
We have determined that instituting a salvage operation offshore Alaska initially for the smaller diameter cable will provide us with the knowledge and experience to proceed forward with this project. We have now determined the larger cable will provide a more acceptable return on our investment. We have one vessel capable of conducting reconnaissance operations for the larger cable and are planning to begin such operations within the next 12 months.
Other Exploration Properties
We have staked several claims in the State of Sonora, Mexico in areas of interest to the company.
Mergers and Acquisitions
We will routinely review merger and acquisition opportunities. An appropriate merger and acquisition opportunity must be accretive to the overall value of Mexus Gold US. Our primary focus will be on those opportunities involving precious metal production or near-term production with a secondary focus on other resource-based opportunities. Potential acquisition targets would include private and public companies or individual properties. Although our preference would be for candidates located in the United States and Mexico. Mexus Gold US will consider opportunities located in other countries where the geopolitical risk is acceptable.
Mining Operations
We classify our mineral properties into three categories: “Development Properties”, “Advanced Exploration Properties”, and “Other Exploration Properties”. Development Properties are properties where a decision to develop the property into a producing mine has been made. Advanced Exploration Properties are those properties where we retain a significant ownership interest or joint venture and where there has been sufficient drilling and analysis to identify and report proven and probable reserves or other mineralized material. We currently do not have a Development Property or Advanced Exploration Property. Other Exploration Properties are those that do not fall into the other categories. Please see below for information about our Other Exploration Properties.
Other Exploration Properties
Our Other Exploration Properties consist of the following:
Mining Properties located in the state of Nevada
Lida Mining District
Mexus Gold US entered into an agreement on lands located in Esmeralda County, Nevada. Mexus Gold US holds an option on 150 acres of patented lands, including 14 mining claims and two mill sites with water rights. Mexus Gold US has also staked 12 additional mining claims, including 2 fractions, as a result of initial geological evaluations. On July 9, 2011, Mexus Gold US entered into an Agreement to extend the option period until July 7, 2012. At that time the option lands were released to the original claim owner. The Mexus Claims are held pending our study and evaluation, however, at this time there has been no geological evaluation and are no plans scheduled for further work at this time.
Mining Properties Located in Mexico
The following properties are located in Mexico and owned by Mexus Gold S.A. de C.V., our wholly owned subsidiary:
Caborca Project
On January 5, 2011, Mexus Gold Mining S.A. de C.V. entered into a Purchase Agreement to purchase the Caborca Project. The Caborca Project consists of 7,400 acres (3,000 hectares) about 50 kilometers northwest of the City of Caborca, Sonora State, Mexico. The Caborca Project lies on claims filed by the owners of the Santa Elena Ranch, which controls the surface rights over the project claims. The claims lie near 112o 25' W, 31o 7.5" N. These claims were visited near the end of January, 2011. On or about July 11, 2011, we acquired five additional claims surrounding the Caborca Project consisting of approximately 1,000 additional acres.
We have been unable to locate geologic maps of the area from the Government Geological Survey. However, pursuant to our investigation of the project, the claims were found to be underlain by an igneous complex. The rocks observed included many types of granitic rocks, exhibiting porphyrytic textures, gneissic and equigrannular textures. Quartz was variable. At times quartz "eyes" were observed, that is porphyrytic quartz which many workers consider to be indicative of a porphyry environment. In other localities, no quartz was evident. When no quartz was present, the rock was equigrannular. Quartz veining was evident throughout the claim group. A mine was previously developed along a major quartz vein, called the Julio 2 Mine with the vein being called the Julio Vein.
There are multiple exploration targets on the Caborca Project. The two most important are the quartz stockwork zone and the Julio vein system. The first target will be the quartz stockwork zone. Several drill holes have been completed in this zone to test the mineral potential of this area. Additional holes will be completed to test the Julio vein system further.
Ocho Hermanos (Eight Brothers) Project
The main feature of this project area is an apparent “manto” sulfide zone composed primarily of galena with some pyrite, arsenopyrite and possibly phyrrotite. Above this zone there is an oxide zone composed of iron and lead oxides. Reconnaissance and characterization samples taken indicated sporadically high gold and silver values. The deposit occurs in shallow water sediments (principally quartzites, with some limestone and shales) and can be best characterized as a skarn type deposit due to the presence of intrusive rocks within 1 kilometer.
As of the date of this report, Mexus Gold US has obtained all necessary permits and environmental permits to begin operations. As of June 30, 2013, Mexus Gold US has completed a bypass water channel around the 8 Brothers mine.
Metallurgical work continued during the past year. Given the complex nature of the sulfide deposit and the partial oxidization of the material (indicated by the presence of yellow colored lead oxides), a satisfactory recovery method could not be found. Consequently, further work beyond the initial reconnaissance and characterization sampling was not completed and the entire project was put on hold.
El Scorpion Project Area
This area has several shear zones and veins which show copper and gold mineralizations. Recent assays of an 84’ drill hole shows 1.750% per ton to .750% per ton of copper and 3.971 grams per ton to 0.072 grams per ton of gold. Another assay of rock sample from the area shows greater than 4.690% per ton copper. This land form distribution appears to be synonymous to the ideal porphyry deposit at Baja La Alumbrera, Argentina.
Los Laureles
As of the date of this Report, we have opened old workings at the Los Laureles claim and have discovered a gold carrying vein running north and south into the mountain to the south. Further work and analysis will be required; however, the project is placed on hold at this time.
Mexus-Trinidad Joint Venture
Mexus Gold US entered in to a joint venture known as the Mexus-Trinidad Joint Venture situated on the State of Sonora, Mexico. We are the managing partner of this project and hold 60% interest in the Project lands and facilities. All necessary permits are in place for the operation of the project.
Employees
Mexus Gold US has no employees at this time. Consultants with specific skills are utilized to assist with various aspects of the requirements of activities such as project evaluation, property management, due diligence, acquisition initiatives, corporate governance and property management. If we complete our planned activation of the Nichols Property Exploration and Drilling Program, Cable Salvage Operations and operations of the Mexican mining properties, our total workforce will be approximately 30 persons. Mr. Paul D. Thompson is our sole officer and director.
Competition
Mexus Gold US competes with other mining companies in connection with the acquisition of gold properties. There is competition for the limited number of gold acquisition opportunities, some of which is with companies having substantially greater financial resources than Mexus Gold US. As a result, Mexus Gold US may have difficulty acquiring attractive gold projects at reasonable prices.
Management of Mexus Gold US believes that no single company has sufficient market power to affect the price or supply of gold in the world market.
Legal Proceedings
There are no legal proceedings to which Mexus Gold US or Mexus Gold S.A. de C.V. is a party or of which any of our properties are the subject thereof.
Property Interests, Mining Claims, and Risk
Property Interests and Mining Claims
Our exploration activities are conducted in the state of Nevada. Mineral interests may be owned in this state by (a) the United States, (b) the state itself, or (c) private parties. Where prospective mineral properties are owned by private parties, or by the state, some type of property acquisition agreement is necessary in order for us to explore or develop such property. Generally, these agreements take the form of long term mineral leases under which we acquire the right to explore and develop the property in exchange for periodic cash payments during the exploration and development phase and a royalty, usually expressed as a percentage of gross production or net profits derived from the leased properties if and when mines on the properties are brought into production. Other forms of acquisition agreements are exploration agreements coupled with options to purchase and joint venture agreements. Where prospective mineral properties are held by the United States, mineral rights may be acquired through the location of unpatented mineral claims upon unappropriated federal land. If the statutory requirements for the location of a mining claim are met, the locator obtains a valid possessory right to develop and produce minerals from the claim. The right can be freely transferred and, provided that the locator is able to prove the discovery of locatable minerals on the claims, is protected against appropriation by the government without just compensation. The claim locator also acquires the right to obtain a patent or fee title to his claim from the federal government upon compliance with certain additional procedures.
Mining claims are subject to the same risk of defective title that is common to all real property interests. Additionally, mining claims are self-initiated and self-maintained and therefore, possess some unique vulnerabilities
not associated with other types of property interests. It is impossible to ascertain the validity of unpatented mining claims solely from an examination of the public real estate records and, therefore, it can be difficult or impossible to confirm that all of the requisite steps have been followed for location and maintenance of a claim. If the validity of a patented mining claim is challenged by the BLM or the U.S. Forest Service on the grounds that mineralization has not been demonstrated, the claimant has the burden of proving the present economic feasibility of mining minerals located thereon. Such a challenge might be raised when a patent application is submitted or when the government seeks to include the land in an area to be dedicated to another use.
Reclamation
We may be required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping and re-vegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts will be conducted in accordance with detailed plans, which must be reviewed and approved by the appropriate regulatory agencies.
Risk
Our success depends on our ability to recover precious metals, process them, and successfully sell them for more than the cost of production. The success of this process depends on the market prices of metals in relation to our costs of production. We may not always be able to generate a profit on the sale of gold or other minerals because we can only maintain a level of control over our costs and have no ability to control the market prices. The total cash costs of production at any location are frequently subject to great variation from year to year as a result of a number of factors, such as the changing composition of ore grade or mineralized material production, and metallurgy and exploration activities in response to the physical shape and location of the ore body or deposit. In addition costs are affected by the price of commodities, such as fuel and electricity. Such commodities are at times subject to volatile price movements, including increases that could make production at certain operations less profitable. A material increase in production costs or a decrease in the price of gold or other minerals could adversely affect our ability to earn a profit on the sale of gold or other minerals. Our success depends on our ability to produce sufficient quantities of precious metals to recover our investment and operating costs.
The Company is dependent upon outside financing to continue operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. It is management’s plan to raise necessary funds through a private placement of its common stock to satisfy the capital requirements of the Company’s business plan. There is no assurance that the Company will be able to raise necessary funds or that if it is successful in raising the necessary funds, that the Company will successfully operate its business plan.
Distribution Methods of the Products
The end product of our operations will usually be doré bars. Doré is an alloy consisting of gold, silver and other precious metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% pure gold. Under the terms of refining agreements we expect to execute, the doré bars are refined for a fee and our share of the refined gold, silver and other metals are credited to our account or delivered to our buyers who will then use the refined metals for fabrication or held for investment purposes.
General Market
The general market for gold has two principal categories, being fabrication and investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry. The supply of gold consists of a combination of current production from mining and the draw-down of existing stocks of gold held by governments, financial institutions, industrial organizations and private individuals.
Patents, trademarks, licenses, franchises, concessions, royalty agreements, or labor contracts, including duration;
We do not have any designs or equipment which is copyrighted, trademarked or patented.
Effect of existing or probable governmental regulations on the business
Government Regulation
Mining operations and exploration activities are subject to various national, state, provincial and local laws and regulations in the United States, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. We have obtained or have pending applications for those licenses, permits or other authorizations currently required to conduct our exploration and other programs. We believe that Mexus Gold US is in compliance in all material respects with applicable mining, health, safety and environmental statutes and the regulations passed there under in Nevada and the United States and in any other jurisdiction in which we will operate. We are not aware of any current orders or directions relating to Mexus Gold US with respect to the foregoing laws and regulations.
Environmental Regulation
Our gold projects are subject to various federal and state laws and regulations governing protection of the environment. These laws are continually changing and, in general, are becoming more restrictive. It is our policy to conduct business in a way that safeguards public health and the environment. We believe that the actions and operations of Mexus Gold US will be conducted in material compliance with applicable laws and regulations. Changes to current state or federal laws and regulations in Nevada, where we operate currently, or in jurisdictions where we may operate in the future, could require additional capital expenditures and increased operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could impact the economics of our projects.
Research and Development
We do not foresee any immediate future research and development costs.
Costs and effects of compliance with environmental laws
Our gold projects are subject to various federal and state laws and regulations governing protection of the environment. These laws are continually changing and, in general, are becoming more restrictive. It is our policy to conduct business in a way that safeguards public health and the environment. We believe that our operations are and will be conducted in material compliance with applicable laws and regulations. The economics of our current projects consider the costs and expenses associated with our compliance policy.
Changes to current state or federal laws and regulations in Nevada, where we operate currently, or in jurisdictions where we may operate in the future, could require additional capital expenditures and increased operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could impact the economics of our projects.
Results of Operations
The following management’s discussion and analysis of operating results and financial condition of Mexus Gold US is for the three month period ended June 30, 2013 and 2012 and for the period from September 18, 2009 (exploration stage re-entry) through June 30, 2013. All amounts herein are in U.S. dollars.
Three Months Ended June 30, 2013 compared with the Three Months Ended June 30, 2012 and September 18, 2009 (Exploration Stage Re-Entry) through June 30, 2013
We had a net loss during the three months ended June 30, 2013 of $1,141,997 compared to a net loss of $245,982 during the same period in 2012. We had a cumulative net loss of $9,778,720 for the period from September 18, 2009 (Exploration Stage Re-Entry) through June 30, 2013. The increase in net loss are attributable to the increase in (i) Exploration Costs – a $743,249 increase in exploration costs primarily attributable to the Joint Venture Agreement entered into between Mexus Gold US, Mexus Gold Mining, Minerals La Negra S. de R.L. de C.V. and Trinidad Pacifica S. de R.L. de C.V. on November 1, 2012 (ii) Bad debt expense of $247,509 (2012 - $0) (iii) Stock-based expenses of $37,500 (2012 - $0) (iv) General and administrative expense of $18,608 due to an increase in rent, audit and accounting costs.
Revenue
For the three months ended June 30, 2013, we had revenues of $406,387 compared to $105,583 for the three months ended June 30, 2012. We recorded revenues of $1,826,040 for the cumulative period from September 18, 2009 (Exploration Stage Re-Entry) through June 30, 2013.
The revenues of $406,387 for the three months ended June 30, 2013 are from our gold mining operations in Mexico. While the Company is in the exploration stage we are earning revenue from placer operations and experimental mineral processing to help fund our exploration activities.
Operating Expenses
Total operating expenses increased to $1,364,818 during three months ended June 30, 2013, compared to $345,848 for the three months ended June 30, 2012. Total operating expenses for the period from September 18, 2009 (exploration stage re-entry) through June 30, 2013 were $11,305,618. The increase in operating expenses for each of these periods was due to our expansion into the mining operations through the exploration activities of our properties, bad debt expense and stock-based expenses.
Other Income (Expense)
We incurred $161,774 of interest expense during the three months ended June 30, 2013 compared to $5,717 during the same period in 2012.
The increase is attributable to the:
(a) Issuance of promissory notes for $255,000 in cash during the three month period ended June 30, 2013. The Notes bear interest of 4% per annum and are due on December 31, 2013. In addition, a fee of 2,550,000 shares of common stock of the Company valued at $501,075 ($0.1965 per share) was paid to the Note holders on April 18, 2013. During the three months ended June 30, 2013, deferred financing expense of $142,329 recognized as interest expense using the straight line method, which approximates the effective interest method, and
(b) Issuance of secured convertible promissory notes for $250,000 in cash. The notes are convertible in to shares of common stock of the Company at a price of $0.23 per shares. The conversion price is subject to adjustment by an anti-dilution clause. In conjunction with the issuance of the Notes on June 12, 2013, the Company issued a variable number of warrants of the Company’s common stock equal to $278,750 divided by the Market Price. Market Price is defined as the higher of (i) the closing price of the common stock of the Company on June 12, 2013, and (ii) the VWAP of the common stock for the trading day that is two days prior to the exercise date. The Exercise Price of the warrants are $0.24 per share. The Exercise Price is subject to adjustment by an anti-dilution clause. As a result of a discount recorded on the Note, the Company recorded $14,048 as interest accretion expense during the three months ended June 30, 2013.
Liquidity and Capital Resources
At June 30, 2013, we had cash of $84,546 compared to $104,701 at March 31, 2013. This increase in cash is primarily due to revenue and the issuance of promissory notes, secured convertible promissory notes and shares of common stock.
Our equipment decreased to $1,862,830 at June 30, 2013, compared to $1,955,813 at March 31, 2013. The decrease in equipment is largely due to depreciation expense of $85,684 during the three months ended June 30, 2013.
Equipment under construction increased to $105,977 at June 30, 2013, compared to $52,575 at March 31, 2013. The increase is due to the construction of a new plant in Mexico.
Our mineral properties remained unchanged at $1,233,483 at June 30, 2013 and March 31, 2013.
Total assets increased to $3,686,489 at June 30, 2013, compared to $3,371,591 at March 31, 2013. The majority of the increased assets related to the capitalized of deferred finance expense on the Promissory Notes issued during the three months ended June 30, 2013.
Our total liabilities increased to $1,066,025 at June 30, 2013, compared to $493,105 as of March 31, 2013. The increase in our total liabilities can be primarily attributed to the issuance of promissory notes and secured convertible promissory notes.
The Company is dependent upon outside financing to continue operations. It is management’s plans to raise necessary funds through a private placement of its common stock to satisfy the capital requirements of the Company’s business plan. There is no assurance that the Company will be able to raise the necessary funds, or that if it is successful in raising the necessary funds, that the Company will successfully execute its business plan.
Future goals
The Caborca Properties have become our primary focus after our installation of a small placer recovery plant to conduct tests on prospective placer areas and determine the viability of the placer deposits while we conducted evaluations of the other Mexico properties. We have added additional equipment which will allow the continuation of mining operations of the placer deposits.
The Company has now scheduled the installation of a crushing/milling recovery plant for the high grade Julio quartz deposit as a result of the values of the assay analysis from the deposit which range from .250 to 5.5 ounces of gold per ton. This equipment should be in place and operational during August, 2012.
Therefore, our goal for the current year is to increase the cash flow of the placer mining operation, continue the drilling program which begun during 2011, initialize mining operations on the Julio quartz deposit while we conduct a thorough geological study by an independent geological firm of the future potential of other vein deposits located near the Julio deposit.
Foreign Currency Transactions
The majority of our operations are located in United States and most of our transactions are in the local currency. We plan to continue exploration activities in Mexico and therefore we will be exposed to exchange rate fluctuations. We do not trade in hedging instruments and a significant change in the foreign exchange rate between the United States Dollar and Mexican Peso could have a material adverse effect on our business, financial condition and results of operations.
Off-balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.