Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Unaudited
Overview
Mindesta Inc. (“Mindesta” or "the Company"), a Delaware Corporation, was incorporated on November 6, 1996 under the name Winchester Mining Corp. The name of the Company was changed to PNW Capital, Inc. on May 16, 2000. In 2002, PNW
Capital, Inc. acquired Industrial Minerals Incorporated, a private Nevada Corporation, and changed its name to Industrial Minerals, Inc. Effective July 26, 2011, the Company adopted the new name of “Mindesta Inc.”. In conjunction with
this action, the Company consolidated its stock on a 20:1 basis.
The Company is an exploration stage company. Prior to 2012, the Company’s sole asset and primary focus was its investment in Northern Graphite Corporation (“Northern”). Northern holds a 100% interest in a number of mineral claims
and a mining lease covering a deposit of natural graphite located in Maria Township, approximately 180 miles northeast of Toronto, Ontario and between the towns of Deep River and Mattawa, Ontario (the “Bissett Creek Property”). The
Bissett Creek Property was on care and maintenance from 2005 to 2010. In the latter part of 2009 and in the first quarter of 2010 Northern raised its own financing which had the effect of reducing the Company’s interest in Northern from 100%
to approximately 51%. The Company’s interest was subsequently reduced to 26.2% as the result of it selling 2,000,000 Northern shares and of Northern completing an initial public offering of shares, becoming listed on the TSX Venture Exchange,
and subsequent warrant exercises. As at December, 31, 2012, the Company owned less than 0.5% of Northern due to the distribution of its Northern shares to Mindesta shareholders. The Company currently no longer holds any shares of Northern.
From 2004 until late 2009 the Company experienced serious financial difficulties and went through many changes to the Board and management. Chris Crupi, CA and Gregory Bowes, MBA, were appointed directors of the Company and Mr. Robert Dinning, CA
was appointed President and CEO on June 23, 2008. In May 2009, Gregory Bowes was appointed CEO of Northern. Robert Dinning resigned as a director and CFO of Northern effective April 1, 2010 and resigned as a director, CEO and CFO of the Company
effective May 10, 2010. Miles Nagamatsu CA was appointed CFO of Northern on April 1, 2010 and Gregory Bowes was appointed CEO and CFO of the Company effective May 10, 2010. Cam Birge was appointed a director to replace Mr. Dinning, on June 3, 2010.
Chris Crupi resigned as a director effective August 18, 2010. On April 19, 2011, Douglas Perkins joined the Board of Directors and was appointed Chairman of the Audit Committee. On December 15, 2011, Albert Zapanta joined the Board of Directors and
was appointed to the Audit Committee, the Nominating Committee, and Compensation Committee.
On December 12, 2011, the Board of Directors declared a pro rata dividend-in-kind, payable January 25, 2012 to shareholders of record as at January 5, 2012, whereby most of the shares of Northern owned by the Company would be distributed to Mindesta
shareholders. At the close of trading on January 25, 2012, Mindesta completed this distribution to Company shareholders of a majority of the shares of Northern common stock owned by the Company. The distribution of 9,413,581 shares of Northern
owned by the Company (approximately 25% of the Northern common shares outstanding) was made to Company shareholders on the basis of one share of Northern for each share of the Company. The U.S. Financial Industry Regulatory Authority
(“FINRA”) established January 26, 2012 as the ex-dividend date (the “Ex-Dividend Date”) for this distribution. The Company’s interest in Northern has decreased to 0.5% primarily as a result of the distribution of
Northern shares.
Effective January 2, 2012, Mindesta entered into an option agreement with Nubian Gold Corporation (“Nubian”), a privately owned Ontario company, which holds title to two 2,000 km
2
mineral exploration permits, Arapsyo and Qabri
Bahar, which were the first two ever issued by the Republic of Somaliland. Nubian is a corporation incorporated under the laws of Ontario, Canada and Gregory Bowes, CEO, is its major shareholder. Mr. Bowes is also an officer and director of
Mindesta. Under the option agreement, Mindesta can earn a 50% interest in both permits by incurring total exploration expenditures of $2 million within two years and can increase its interest to 80 per cent by completing a bankable feasibility
study. Mindesta was required to make an upfront cash payment of $100,000 to Nubian as compensation for expenses incurred, and the first $750,000 of exploration expenditures represents a firm commitment. Mindesta also has the option to
acquire all of Nubian’s remaining interest in the permits at fair market value as determined by an independent valuator at any time after incurring the first $750,000 of exploration expenditures. On October 6, 2011, the Board of Directors
approved a revolving loan agreement between Mindesta, as the lender, and Nubian, as the borrower, to fund the ongoing exploration activities of Nubian in anticipation of the companies negotiating and entering into the option agreement. Under the
revolving loan agreement, all amounts due from Nubian to the Company were provided under a $100,000 credit facility which was repayable upon the earlier of one year from the date of the agreement or the signing of a property option agreement.
The revolving loan agreement became repayable upon the signing of a property option agreement and all obligations of Nubian were applied against the expenditure requirements of the Company under the property option agreement. The obligations under
the revolving loan agreement are now considered paid in full, and the revolving loan agreement has terminated and has no further force or effect. Advances under the facility bore interest from October 6, 2011 at an annual rate of 7.5 per cent,
payable annually. On December 2, 2011, this facility was amended to increase the maximum of the revolving loan agreement to $150,000. In 2012, Mindesta is focusing its efforts on mineral exploration in East Africa, and in
particular the Republic of Somaliland and Ethiopia, as it believes the region
has very attractive geology and an improving political environment.
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In 2012, Nubian was awarded a third permit, Abdul Qadir, which
is approximately 2,000 km
2
in size and is located in the northeast
part of Somaliland adjacent to the borders with Djibouti and Ethiopia. Abdul
Qadir is automatically included in the Option Agreement pursuant to its terms
with no change in expenditure requirements. Nubian has agreed with the
government of Somaliland to reduce the size of the Arapsyo and Qabri Bahar
permits by 50% following completion of the first phase exploration program.
Mindesta has completed a stream and rock sampling program over
the Arapsyo, Qabri Bahar and Abdul Qadir permits which involved taking over
3,000 samples. To date, Mindesta has incurred expenditures of approximately
$758,694 on work on these permits which exceeds the initial $750,000
requirement. The Company will require additional financing to execute the second
stage program.
Somaliland is an independent democratic republic which is not
yet recognized by the international community. In order to attract investment
and enhance the countrys reputation and standing in the international
community, the government desired to update its antiquated mining code and
attract foreign companies to explore and ultimately develop its mineral
potential. Nubian signed a Memorandum of Understanding (MOU) with the
government, effective June 10, 2010, whereby Nubian would assist the government
in drafting a new, modern mining code and generally provide consulting services
with respect to legal, financial and technical matters relating to the new
mining code. In exchange, the government agreed to grant Nubian prospecting
permits under the existing mining code and to automatically renew the
prospecting permits for successive one year terms until such time as a new
mining code is passed into law at which time the prospecting permits would
become subject to the new mining code.
Following the election of a new government and the appointment
of a new mines minister, Nubian signed an amendment to the MOU, effective June
14, 2011. Under the amendment the new government confirmed the validity of the
MOU and granted Nubian the exclusive mineral exploration rights to two 2,000
km
2
areas being Arapsyo (from 430 30 00 to 440 10 00 and from 90
40 00 to 90 55 00) and Qabri Bahar (100 00 00 to 100 15 00 and from 430
20 00 to 440 00 00).
Nubian retains the exclusive mineral rights to the above areas,
provided that it meets certain expenditure commitments, until such time as the
new mining code is enacted and becomes law at which time the exclusive mineral
rights will convert into exploration permits according to the terms of the new
mining code. The expenditure commitments consist of $50,000 to be spent on a
literature review and remote sensing program, a minimum of $200,000 on a ground
exploration and sampling program provided the government had made progress in
establishing a new mining code, and that after the new mining code was passed
Nubian would spend $1,250,000 on exploration within a two year period.
Nubian will be subject to the exploration period terms, fees,
relinquishment requirements and expenditure requirements contained in the new
mining code with respect to the areas for which it holds exclusive mineral
exploration rights. In the interim, Nubian agreed to reduce the size of the
areas of exclusive mineral rights by 50 per cent on the second anniversary from
the date of the MOU amendment and will reduce the remaining area by a further 50
per cent on the fourth anniversary date (unless specified otherwise in the new
mining code), and provided that the Government has made significant progress in
passing the new mining code and Nubian has been able to carry out its
exploration programs.
Effective September 1, 2011 Nubian was officially granted the
two permits which are subject to a US$8,000 annual licensing fee. Effective
March 28, 2012 Nubian signed a second MOU amendment with the government of
Somaliland whereby Nubian was granted a third permit, Abdul Qadir, which is
approximately 2,000km
2
in size, is subject to the same $8,000 annual
fee and has the following coordinates/corner posts:
1)
|
100 55 N 420 58 E (border)
|
2)
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100 55 N 430 00 E
|
3)
|
100 38 N 430 00 E
|
4)
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100 38 N 430 28 E
|
5)
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100 24 N 430 28 E
|
6)
|
100 24 N 420 32 E (border).
|
7)
|
Somaliland Ethiopia and Somaliland Djibouti border
between 1) and 6).
|
Nubian agreed to relinquish 50% of the Arapsyo and Qabri Bahar
permits by July 31, 2012 as part of obtaining the new permit and is in the
process of doing so. As the permits will fall under the terms of the new mining
code when passed, it is not possible at this time to determine what conditions
they will be subject to with respect to tenure, expenditure requirements,
development, etc. However, it is anticipated that the new mining code will be
based on, and competitive with, the mining codes in other African countries.
Under the option agreement, Mindesta is responsible for all of Nubians
obligations with respect to the MOU and the two amendments.
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Due to weak equity markets and the inability of Mindesta to raise additional capital, especially for an early stage exploration program in Somaliland, Nubian and Bowes & Company agreed to advance funds to the Company to fund ongoing exploration
activities. Effective August 1, 2012, the Board of Directors approved a loan agreement between Nubian and Bowes & Company. Nubian and Bowes & Company are corporations incorporated under the laws of Ontario, Canada and Gregory Bowes is the
CEO and major shareholder of both companies. Mr. Bowes is also an officer and director of Mindesta. Mr. Bowes declared his conflict of interest to the Board of Directors and abstained from voting on the consent resolution approving the revolving
loan agreement. Under the loan agreement, all amounts due from Mindesta to Nubian and Bowes & Company are provided under a $250,000 credit facility which is repayable upon the termination date of December 31, 2012. Any obligation
outstanding after the Termination Date shall accrue interest at a rate of 7.5% per annum. Under the terms of the loan agreement, Mindesta is required to sell its remaining shares of Northern as they are released from escrow and remit all proceeds to
Bowes & Company, until all obligations to Bowes & Company are satisfied, and then shall remit any further proceeds to Nubian until all obligations to Nubian are satisfied. All advances under this facility bear interest from August 1, 2012 at
an annual rate of 7.5 per cent, payable annually, or earlier at anytime that the advances are repaid in full. At any time, before or after the termination date, Bowes & Company and Nubian shall have the right to convert any part of, or all of,
the obligations into common shares of Mindesta Inc. at a price of $0.075 per share.
On November 27, 2012, Mindesta announced that it received assay results from its first stage stream sediment and rock sampling program on the Arapsyo, Qabri Bahar and Abdul Qadir exploration permits in the Republic of Somaliland. Over the September,
2011 to April, 2012 period, 2,500km
2
of the Arapsyio and Qabri Bahar permits were sampled at a density of one sample every 1-2 km
2
. A total of 1,659 stream sediment and 58 rock samples were submitted to the assay
laboratory.
Encouraging regional anomalies have been identified, particularly for gold, and future work will be centered on narrowing them down by infill stream sediment sampling and prospecting followed by soil sampling and/or geophysics. A Cu/Mo/Bi occurrence
is already at a stage where soil sampling and that ground geophysics could be carried out. Future work would also include ground checking a significant number of secondary anomalies on a case by case basis.
Mindesta has made the first $750,000 of exploration expenditures as required as a firm commitment but has accumulated substantial payables to Bowes & Company and Nubian in doing so. The Company does not have the resources to repay these
amounts or make ongoing commitments with respect to the permits. Options are currently being evaluated.
RESULTS OF OPERATIONS
For the three months ended March 31, 2013, the Company recorded a net loss of $40,449, or ($0.01) per share, compared to a loss of $582,376 for the three months ended March 31, 2012, or ($0.06) per share. The Company had no revenues
for the period ended March 31 in both 2013 and 2012 as the Company is an exploration stage company with no source of revenues.
For the three months ended March 31, 2013, expenses amounted to $60,319 compared to $582,818 for the three months ended March 31, 2012. There were lower expenses for the three months ended March 31, 2013 as a result of lower exploration
expenses incurred by Nubian Gold. The Company did not pay any management fees and salaries in the three months ended March 31, 2013, compared to $32,514 for the three months ended March 31, 2012. Professional fees decreased to $10,912 in the
three months ended March 31, 2013 from $76,912 in 2012 as a result of additional fees related to the Company’s pro rata dividend-in-kind in 2012. General and administration expenses decreased from $55,456 in the first three months of
2012 to $36,173 in the first three months of 2013 as the Company has scaled back all activities.
The Company currently has no full time employees and contracts with consultants for administrative and financial services.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash as at March 31, 2013 of $19,000 versus $12,091 as at December 31, 2012 due to the sale of shares of Northern Graphite, partially offset by exploration expenditures incurred under the property option agreement with
Nubian.
The Company requires additional funding to continue operations and there is no assurance that such financing will be available or will be available on terms acceptable to the Company.
Going Concern Consideration
The Company's auditors in their report for the year ended December 31, 2012 have expressed a concern that the Company may not be able to continue as a going concern. The Company had a net loss from operations of $40,449 for the three months
ended March 31, 2013 and has had recurring losses and an accumulated deficit of $13,076,713 since inception. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital for operating and
administrative costs. However, there is a high degree of risk and many inherent uncertainties in the natural resource development industry and management cannot provide assurances that it will be successful.
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The Company no longer has ownership in Northern and operates as a distinct entity. As at March 31, 2013, the Company had $19,000 in cash. If the Company cannot continue as a going concern the value of the Company's assets may approach a level
close to zero. Investors should be cautioned that should the Company cease to operate, the Company may only recover a small fraction of the original costs of its assets should a liquidation of the Company's assets occur. The Financial Statements do
not include any adjustments that might result if the going concern assumption is not valid.