AuraSource, Inc. - Quarter Report: 2008 December (Form 10-Q)

 

The gold and bauxite mining industries are intensely competitive. Competitive factors in these industries include ease of use, quality, portability, versatility, reliability, cost and other factors. We will be competing with numerous individuals and companies, including many major gold exploration and mining companies, that have substantially greater technical, financial, and operational resources and staff. Accordingly, there is a high degree of competition for desirable mining leases, suitable properties for mining operations, and necessary mining equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed.  There are other competitors that have operations in Guinea, Mongolia and China and the presence of these competitors could adversely affect our ability to acquire mining leases.

 

 

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Further, there can be no assurance that new companies will not enter our markets in the future.  There can be no assurance that we will be able to penetrate any of our anticipated competitors’ shares of the market.  There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.

 

The profitability of our operations, and the cash flows generated by these operations, are significantly affected by the fluctuations in the price of input production factors, many of which are linked to the price of oil and steel.

 

    Fuel, power and consumables, including diesel, heavy fuel oil, chemical reagents, explosives and tires, which are used in mining operations, form a relatively large part of the operating costs of any mining company. The cost of these consumables is linked, to a greater or lesser extent, to the price of oil. Furthermore, the cost of steel, which is used in the manufacture of most forms of fixed and mobile mining equipment, is also a relatively large contributor to the operating costs and capital expenditure of a mining company. Fluctuations in the price of oil and steel have a significant impact upon operating cost and capital expenditure estimates and, in the absence of other economic fluctuations, could result in significant changes in the total expenditure estimates for new mining projects or render certain projects non-viable. We have no influence over the price of fuel, chemical reagents, explosives, steel and other commodities used in our mining activities. Our operations and development projects could be adversely affected by shortages of, as well as the lead times to deliver, strategic spares, critical consumables and heavy mining equipment.

 

Due to the significant increase in the world’s demand for commodities without a concomitant increase in the capacity for production, shortages and increased lead times in delivery of strategic spares, critical consumables, heavy mining and certain processing equipment could have an adverse impact upon our results of operations and our financial condition.

 

    The global mining industry is experiencing an increase in production capacity both in terms of expansions at existing, as well as the development of new, production facilities.  This increase in expansion capacity has taken place, in certain instances, without a concomitant increase in the capacity for production of certain strategic spares, critical consumables and mining and processing equipment used to operate and construct mining operations, resulting in shortages of and an increase in the lead times to deliver these items.  In particular, we could, like other gold and bauxite mining companies, experience shortages in critical consumables like tires for mobile mining equipment, as well as certain critical spares for both mining equipment and processing plants. In addition, we could experience an increase in delivery times for these and other items. These shortages could also result in unanticipated increases in the prices of certain strategic spares, critical consumables and mining and processing equipment, among other items. Shortages of critical spares, consumables and equipment result in delays and production shortfalls. Increases in prices result in an increase in both operating costs and the capital expenditure to develop mining operations. While suppliers and equipment manufacturers may increase capacity to meet the increased demand and therefore alleviate both shortages of, and time to deliver, strategic spares, critical consumables and mining and processing equipment, we have limited influence over manufacturers and suppliers. Consequently, shortages and increased lead times in delivery of strategic spares, critical consumables, heavy mining and certain processing equipment could have an adverse impact upon our results of operations and our financial condition.

 

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Gold companies face many risks related to their operations (including their exploration and development activities) that may adversely affect their cash flows and overall profitability.

 

    Uncertainty and cost of mineral exploration and acquisitions and exploration activities are speculative and are often unproductive. These activities also often require substantial expenditure to:

 

·	establish the presence, and quantify the extent and grades (metal content), of mineralized material through exploration drilling;

 

·	determine appropriate metallurgical recovery processes to extract gold from the ore;

 

·	estimate ore reserves;

 

·	undertake feasibility studies and estimate the technical and economic viability  of the project; and

 

·	construct, renovate or expand mining and processing facilities or contract with a third party to provide such facilities.

 

    The failure of our exploration activities resulting in productive mines will adversely effect our cash flows and overall profitability.

 

 Actual cash operating costs, production and economic returns may differ significantly from those anticipated by estimates.

 

    Operating costs and capital expenditure are determined particularly by the costs of the commodity inputs, including the cost of fuel, chemical reagents, explosives, tires and steel that are consumed in mining activities. There are a number of uncertainties inherent in the development and construction of an extension to an existing mine, or in the development and construction of any new mine. In addition to those discussed above these uncertainties include:

 

·	the timing and cost, which can be considerable, of the construction of mining and processing facilities;

 

·	the availability and cost of skilled labor, power, water and transportation facilities;

 

·	the availability and cost of appropriate processing arrangements;

 

·	the need to obtain necessary environmental and other governmental permits and the timing of those permits; and

 

·	the availability of funds to finance construction and development activities.

 

The costs, timing and complexities of mine development and construction can increase because of the remote location of many mining properties and could result in unsuccessful development activities.

 

 New mining properties are generally located in remote locations.  We may incur additional costs related to the transportation of the equipment, materials and personnel necessary to conduct our mining operations at such remote locations.  New mining operations could experience unexpected problems and delays during development, construction and mine start-up. In addition, delays in the commencement of mineral production could occur.  Finally, operating cost and capital expenditure estimates could fluctuate considerably as a result of fluctuations in the prices of commodities consumed in the construction and operation of mining projects. Accordingly, if we are unable to appropriately estimate the costs of operating in remote locations and/or manage our operations in such remote locations, our future development activities may not be successful.

 

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Many of our competitors have greater resources.

 

Many of our existing or potential competitors may have substantially greater financial, technical and marketing resources, larger customer or potential customer bases, name recognition and more established key relationships than we do.  This may enable them to develop and expand their mining and processing infrastructure more quickly, and achieve greater scale and cost efficiencies; adapt more quickly to new or emerging production techniques and technologies and changing customer needs; take advantage of acquisitions and other opportunities more readily; establish operations in new markets more rapidly; devote greater resources to the marketing and sale of their products and services; and adopt more aggressive pricing policies and provide clients with additional benefits at lower overall costs in order to gain market share or in anticipation of future improvements in delivery costs.  If our competitive advantages are not compelling or sustainable and we are not able to effectively compete with our competitors, then we may not be able to generate, sustain or increase cash flow.

 

There will be risks related to dealing with governmental entities in our operations.

 

The principal markets for gold are the precious metals and commodity industries and the principal market for bauxite is the aluminum industry.  These industries are still under considerable influence from the national and local governmental entities of Guinea, Mongolia and China. The sale of products may be subject to considerations such as local development, safety and environmental concerns outside considerations of economic and competitive factors.  These considerations could result in a significant reduction in our anticipated revenues or increase in costs.  We cannot assure investors that such governmental agencies will make decisions that rely on economic and competitive factors and that our markets will develop as anticipated.  These decisions may create delays and relatively long sales cycles due to their internal decision making policies and procedures.

 

We face numerous uncertainties in estimating our economically recoverable gold, bauxite and precious mineral reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs or decreased profitability.

 

In the event we acquire the three mineral exploration licenses in Mongolia from Mongsource and Mongsource MN and four mineral exploration licenses in Guinea from GCI, we will have access to three areas in Mongolia and four areas in Guinea (referred to herein as the “Licensed Areas”) that contain commercial amounts of gold and bauxite and possibly other metals, such as copper.  We can, however, offer no assurances as to the amount of gold and bauxite, or any other metals, we will ultimately extract, if any.  We have not yet done a full-scale geological assessment of the gold and bauxite reserves at this time, nor have we developed a definitive mining plan.  Our estimates, as well as the quality of the content of the gold and bauxite at the Licensed Areas, will be revised and updated periodically to reflect the resolution of uncertainties and assumptions, the production of gold and bauxite from the Licensed Areas and new drilling or other data received.  There are numerous uncertainties inherent in estimating quantities and qualities of and costs to mine recoverable gold and bauxite reserves, including many factors beyond our control.  Estimates of economically recoverable gold and bauxite reserves and net cash flows necessarily depend upon a number of variable factors and assumptions, all of which may vary considerably from actual results such as:

 

·	geological and mining conditions which may not be fully identified by available exploration data or which may differ from experience in current operations;

 

 

·	production from the Licensed Areas compared with production from other similar producing areas;

 

 

·	the assumed effects of regulation and taxes by governmental agencies;

 

 

·	lack of control over our local operations in Guinea and Mongolia and lack of control over any joint venture partner we may have; and

 

 

·	assumptions concerning gold and bauxite prices, operating costs, mining technology improvements, taxes, development costs and reclamation costs.

 

 

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For these reasons, estimates of the economically recoverable quantities and qualities of gold and bauxite attributable to the Licensed Areas, classifications of reserves based on risk of recovery and estimates of net cash flows expected from the Licensed Areas may vary substantially. Actual gold and bauxite tonnage recovered from the Licensed Areas and revenues and expenditures with respect thereto may vary materially from our actual results from operations.  As a result, the estimates set forth in this Memorandum may differ materially from our actual reserves. Inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs, or decreased profitability.

 

Our financial condition could be adversely affected because we lack control over the management and operation of our local operations or joint ventures in Guinea and Mongolia..

 

               We are dependent on the ability of our local operations in Guinea, Mongolia and China to operate and manage our operations at the Licensed Areas. As a result, we are unable to directly implement strategic business decisions for the operation and management of the Licensed Areas, including decisions with respect to the hiring labor and other daily business decisions. To the extent our we are unable to implement our strategic business decisions at our local operations in the Licensed Areas, our financial condition and results of operation will be adversely effected.

 

We face risks inherent to mining which could increase the cost of operating our business.

 

Our mining operations will be subject to conditions beyond our control that can impact the safety of the workers at the Licensed Areas, delay gold and bauxite deliveries or increase the cost of mining for varying lengths of time.  These conditions include fires and explosions from methane gas or dust, accidental mine water discharges, weather and natural disasters, unexpected maintenance problems, key equipment failures, variations in gold and bauxite seam thickness, variations in the amount of rock and soil overlying the gold and bauxite deposits, variations in rock and other natural materials and variations in geologic conditions.  Any of these factors could increase the cost of operating our business, which would lower or eliminate our margins.

 

Our ability to commercialize our rights to the Licensed Areas is dependent on many factors, including the ability to receive various government permits.

 

In order to develop our gold and bauxite deposits, we must receive and continue to receive various governmental permits.  We must apply for renewal of our licenses every three years. For the license renewals to be granted we must complete certain work on the Licensed Areas every year. We cannot predict whether we will continue to receive the permits necessary for us to continue our operations.

 

Defects in title or loss of any leasehold or licensed interests in the Licensed Areas could adversely affect our ability to mine the property.

 

We currently plan to conduct substantially all of our mining operations at the Licensed Areas.  A title defect or the loss of any lease or license granted to us in connection with our operations at the Licensed Areas could adversely affect our ability to mine at such location.  Title to and the area of resource concessions may be disputed.  Currently, title to the Licensed Areas in Guinea has not been verified and there is no guarantee of title to these properties.  We have verified title to the Licensed Areas in Mongolia. We are relying on title information and/or representations and warranties provided by Mongsource and GCI.  We intend to obtain from the Guinean government certification of title with respect to the Licensed Areas in Guinea  Our right to mine reserves at the Licensed Areas may be adversely affected if defects in title or boundaries exist or if a lease, license or concession expires.  The Licensed Areas may be subject to prior unregistered agreements or transfers and title may be affected by undetected defects.  Title may be based upon interpretation of the laws of Guinea and Mongolia, which laws may be ambiguous, inconsistently applied and subject to reinterpretation or change.  Any title challenge could delay the exploration and development of the Licensed Areas and could ultimately result in the loss of some or all of our interest in the Licensed Areas and could increase our costs.  The interests we have in the Licensed Areas are subject to any number of Guinean and Mongolian government approvals, licenses and permits.  Such approvals, licenses and permits are, as a practical matter, subject to the discretion of the applicable governments or governmental officials.  No assurance can be given that we will be successful in maintaining any or all of the various approvals, licenses and permits in full force and effect without modification or revocation.

 

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In addition, if we mine on property that we do not own or lease, we could incur liability for such mining.  We have not surveyed the boundaries of the Licensed Areas and consequently the boundaries of the property may be disputed.  We expect that boundaries of the Licensed Areas property will be designated on a map issued by the Guinean and Mongolian governments in the future.  The documents related to the Licensed Areas that we have entered into, or may enter into in the future, may have minimum production requirements or require us to commence mining in a specified term to retain our rights.  Failure to meet those requirements could result in certain financial losses and could result in a loss of the rights themselves.

 

A substantial or extended decline in gold and bauxite prices could reduce our revenues and the value of any mineral reserves that are established at the Licensed Areas.

 

The prices we plan to charge for gold and bauxite will depend upon factors beyond our control, including:

·	the supply of, and demand for, gold and bauxite;

·	the proximity to, capacity of, and cost of transportation facilities;

·	governmental regulations and taxes; and

·	regulatory, administrative and court decisions.

Our results of operations will be largely dependent upon the prices we charge for our gold and bauxite as well as our ability to improve productivity and control costs.  Decreased demand would cause prices to decline and require us to increase productivity and lower costs in order to maintain margins.  If we are not able to maintain our margins, our operating results could be adversely affected.  Therefore, price declines may adversely affect operating results for future periods and our ability to generate cash flows necessary to improve productivity, invest in operations and continue as a going concern.

 

Due to variability in gold and bauxite and in our early estimates in the cost of producing such gold and bauxite, as well as certain provisions in contracts into which we may enter, we may be unable to sell gold and bauxite at a profit.

 

We may sell gold and bauxite we extract for a specified tonnage amount and at a negotiated price pursuant to short-term contracts and contracts of twelve months or greater.  Price adjustment, “price reopener” and other similar provisions in long-term supply agreements may reduce the protection from short-term gold and bauxite price volatility traditionally provided by such contracts.  Contracts we may enter into in the future may contain provisions allowing the purchase price to be renegotiated or adjusted based on market prices at the time at periodic intervals.  Any adjustment or renegotiation leading to a significantly lower contract price would result in decreased revenues and lower our gross margins.  Gold and bauxite supply agreements also typically contain force majeure provisions allowing temporary suspension of performance by us or our customers during the duration of specified events beyond the control of the affected party.  Our gold and bauxite supply agreements may contain provisions requiring us to deliver gold and bauxite meeting quality thresholds for certain characteristics.  Failure to meet these specifications could result in economic penalties, including price adjustments, the rejection of deliveries or, in the extreme, termination of the contracts.  Consequently, due to the risks mentioned above with respect to long-term supply agreements, we may not achieve the revenue or profit we expect to achieve from these sales commitments.  In addition, we may not be able to successfully convert these sales commitments into long-term supply agreements.

 

 

 

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We will likely depend heavily on a small number of large customers, the loss of any of which would adversely affect our operating results.

 

Other than extracting samples from the sites in Mongolia, at present, we have not begun any activities at the Licensed Areas.  Given our current business plan, and without the benefit of having a specific mining plan in place, we expect that our gold and bauxite revenues from sales will be to a small number of large customers.  If any of these customers were to significantly reduce their purchases of gold and bauxite from us, or if we were unable to sell gold and bauxite to them on terms favorable to us, our financial condition and results of operations could suffer materially.

 

We are not diversified, we will concentrate on one industry and four mining locations.

 

Our business strategy will concentrate in exploration, development, production and extraction of gold and bauxite from the Licensed Areas in Guinea and Mongolia.  There is an inherent risk in not having a more diverse base of properties in exploration, development, production, extraction and processing because we will not have alternate sources of revenue if we are not successful with our currently anticipated activities.  As we will invest substantially all of our assets in the gold and bauxite markets and in the Licensed Areas, specifically, we may be more affected by any single adverse economic, political or regulatory event than a more diversified entity.  Our failure in the exploration, development, production and extraction of gold and bauxite in Guinea and Mongolia at the Licensed Areas and the processing thereof would have a material adverse affect on our business.

 

There is no assurance that we will find purchasers of our product at profitable prices.

 

If we are unable to achieve supply contracts, or are unable to find buyers willing to purchase our gold and bauxite at profitable prices, our revenues and operating profits could suffer.

 

A shortage of skilled labor in the mining industry could pose a risk to achieving optimal labor productivity and competitive costs, which could adversely affect our profitability.

 

Efficient gold and bauxite mining using modern techniques and equipment requires skilled laborers, preferably with at least a year of experience and proficiency in multiple mining tasks.  If we are faced with a shortage of experienced labor to operate our facilities at the Licensed Areas there could be an adverse impact on our labor productivity and costs and our ability to expand production and therefore have a material adverse effect on our business.  In addition, we anticipate that our gold mining and processing will be through contracting with a major Chinese gold and precious metal company and that our bauxite mining and processing will be through contracting with a major Chinese aluminum company or other third party with experience and access to equipment, labor and markets.  If our contract miners or other workers are unable to perform their duties as expected, we may experience disruptions in our production.  If difficulties with our contract miners and other workers arise in the future, there could be an adverse effect on our productivity and costs and our ability to expand production and therefore have a material adverse effect on our business.

 

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Our mining operations will be extensively regulated, which will impose significant costs on us, and future regulations and developments could increase those costs or limit our ability to produce gold and bauxite.

 

We expect that Guinean and Mongolian authorities, at all levels, likely will exercise some regulatory control over our operations and in the gold and bauxite mining industry, generally, with respect to matters such as employee health and safety, permitting and licensing requirements, air quality standards, water pollution, plant and wildlife protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability.  It is our understanding that numerous governmental permits and approvals are required for mining operations.  We may be required to prepare and present to Guinean and Mongolian authorities data pertaining to the effect or impact that any proposed exploration for or production of gold and bauxite may have upon the environment.  The costs, liabilities and requirements associated with these regulations may be costly and time consuming and may delay commencement or continuation of exploration or production.  The possibility exists that new legislation and/or regulations and orders related to the environment or employee health and safety may be adopted and may materially adversely affect our anticipated mining operations and/or our cost structure.  New legislation or administrative regulations (or judicial interpretations of existing laws and regulations), including proposals related to the protection of the environment that would further regulate and tax the gold and bauxite industries, may also require us or our customers to change operations significantly or incur increased costs.  Our gold and bauxite supply agreements may contain provisions that allow a purchaser to terminate its contract if legislation is passed that either restricts the use or type of gold and bauxite permissible at the purchaser’s plant or results in specified increases in the cost of gold and bauxite or their use.  These factors and legislation, if enacted, could have a material adverse effect on our financial condition and results of operations.

Laws to which we will be subject will likely impose liability relating to contamination by hazardous substances.  Such liability may involve the costs of investigating or remediating contamination and damages to natural resources, as well as claims seeking to recover for property damage or personal injury caused by hazardous substances.  Such liability may arise from conditions at currently operated properties and at properties to which hazardous substances have been sent for treatment, disposal, or other handling.  Our mining and processing operations will involve some use of hazardous materials. Future developments, such as new information concerning areas known to be or suspected of being contaminated for which we may be responsible, the discovery of new contamination for which we may be responsible, or the inability to share costs with other parties that may be responsible for the contamination, could have a material adverse effect on our financial condition or results of operations.

 

A decrease in the availability or increase in costs of key supplies, capital equipment or commodities such as diesel fuel, steel, explosives and tires could decrease our anticipated profitability.

 

Our mining operations will require a reliable supply of replacement parts, explosives, fuel, tires, steel related products (including roof control) and lubricants.  Although we plan to enter into joint ventures and outsource our mining operations to one or more large, experienced mining firms that can provide capital for mining and processing equipment as well as do the mining and processing to prepare for shipment, if the cost of any of these inputs increased significantly, or if a source for these supplies or mining equipment were unavailable to meet our replacement demands or the demands of our contractor, our profitability could be reduced from our current expectations.

 

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Our market is characterized by new gold and bauxite supply products and quality and price sensitivity.

 

The market for our product is characterized by the need for additional gold and bauxite supply, as well as quality and price sensitivity.  For example, the price of gold has fluctuated between $736.50 per ounce on October 8, 2007 to $913.00 per ounce on October 8, 2008. See http://www.kitco.com/gold.londonfix.html. The price of international third party bauxite generally fluctuates between $20 and $30 per ton. See www.capealumina.com.au/market.htm.  Our success will depend in large part on our ability to produce and deliver quality gold and bauxite efficiently, enhance our mining and processing techniques and technologies and produce gold and bauxite products of high and consistent quality in sufficient quantities at a competitive price.  We intend to subcontract a significant portion of our operation to or enter into joint ventures with more experienced operators with experience in the development of techniques and technology for the production of gold and bauxite.  There can be no assurance that our contractors will successfully complete the development of these techniques and technologies and resulting product in a timely fashion or that our gold and bauxite will satisfy the needs of the market.  There can also be no assurance that other suppliers of gold and bauxite and their techniques and technologies developed will not adversely affect our competitive position or render our techniques and technologies non-competitive or obsolete.

 

The profitability of our operations, and the cash flows generated by these operations, are significantly affected by changes in the market price for gold.

 

 The market price for gold can fluctuate widely. These fluctuations are caused by numerous factors beyond our control, including:

 

·	speculative positions taken by investors or traders in gold;

 

·	changes in the demand for gold as an investment;

 

·	changes in the demand for gold used in jewelry and for other industrial uses;

 

·	changes in the supply of gold from production, disinvestment, scrap and hedging;

 

·	financial market expectations regarding the rate of inflation;

 

·	the strength of the dollar (the currency in which the gold price trades internationally) relative to other currencies;

 

·	changes in interest rates;

 

·	actual or expected gold sales by central banks and the International Monetary Fund;

 

·	gold hedging and de-hedging by gold producers;

 

·	global or regional political or economic events;

 

·	costs of removal and processing; and

 

·	costs of gold production in major gold-producing nations in which we have operations, such as Guinea, Mongolia and China.

 

 

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The price of gold can be volatile.

 

 Gold prices historically have fluctuated widely and are affected by numerous factors outside of our control, including industrial and retail demand, central bank lending, sales and purchases of gold, forward sales of gold by producers and speculators, levels of gold production, short-term changes in supply and demand because of speculative hedging activities, confidence in the global monetary system, expectations of the future rate of inflation, the strength of the US dollar (the currency in which the price of gold is generally quoted), interest rates, and global or regional political or economic events. The potential profitability of our operations is directly related to the market price of gold. A decline in the market price of gold would materially and adversely affect our financial position. A decline in the market price of gold may also require us to write-down any mineral reserves that we might book, which would have a material and adverse effect on our earnings and financial position. Further, if the market price of gold declines, we may experience liquidity difficulties if and when we attempt to sell any gold we discover. This may reduce our ability to invest in exploration and development, which would materially and adversely affect future production, earnings, and our financial position.

 

The price of gold is often subject to sharp, short-term changes resulting from speculative activities.

 

 While the overall supply of and demand for gold can affect its market price, because of the considerable size of above-ground stocks of the metal in comparison to other commodities, these factors typically do not affect the gold price in the same manner or degree that the supply of and demand for other commodities tends to affect their market price

 

If the gold and bauxite industries experience overcapacity in the future, our profitability could be impaired.

 

An increase in future gold and bauxite prices and imports to places such as China could encourage the development of expanded capacity by new or existing gold and bauxite producers.  Any overcapacity could reduce gold and bauxite prices in the future, resulting in a negative impact on our profitability.

 

We are and will be dependent on key personnel and third parties in other countries.

 

Our success will be largely dependent upon the efforts of our officers and directors, as well as our joint venture partners and other third parties in other countries.  The loss of the services of these individuals could have a material adverse effect on our business and prospects.  There can be no assurance that we will be able to retain the services of such individuals in the future.  We will also be dependent to a substantial degree on our technical and development staff, most of whom will be located in other countries such as China.  Our success will be dependent upon our ability to hire and retain additional qualified technical, research, management, marketing and financial personnel.  We will compete with other companies with greater financial and other resources for such personnel.  To date we do not have any employees and there can be no assurance that we will be able to acquire qualified personnel required as and when needed.

 

We have limited marketing capability.

 

We have limited marketing capabilities and resources.  In order to achieve market penetration we will have to undertake significant efforts and expenditures to create awareness of, and demand for, our gold product.  Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to establish strategic marketing arrangements or joint ventures with other companies, such as China Minmetals and China Aluminum.  No assurance can be given that we will be able to enter into any such arrangements or joint ventures or if entered into that they will be successful.  Our failure to successfully develop our marketing capabilities, both internally and through third-party alliances, would have a material adverse effect on our business, operating results and financial condition.  Further, there can be no assurance that, if developed, such marketing capabilities will lead to sales of our product.

 

 

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We will be heavily dependent on third party operators for mining and transportation.

 

We expect to contract out substantially all of our mining, processing and transportation activities to a limited number of companies.  We currently do not have any contracts with these parties, although we expect that entering into such contracts will be a necessary part of our operations.  Our reliance upon outside companies will involve a number of risks, including limited control over the availability of amounts, delivery schedules, pricing and product quality.  We may experience delays, additional expenses and lost sales if we are required to locate and qualify alternative operating companies.

 

We will not have the ability to run our operations directly in Guinea and Mongolia.

 

We expect to either hire employees to conduct our operations in Guinea and Mongolia or contract such functions to joint venture partners or other third parties.  We do not have the ability to run our operations directly and will therefore have to rely on employees, joint venture partners or other third party contractors located in foreign countries to conduct our daily operations in Guinea and Mongolia.

 

We are uncertain of our ability to protect any cost advantage that we may develop.

 

Our ability to become and remain a low cost, high quality gold and bauxite producer will depend in part on our relationship with third party contractors, cost control and currency rate fluctuations.  We believe that we have a highly desirable gold and bauxite resources. Our success will depend on cost control, maintaining a level of quality control, safety factors, infrastructure availability and the completion of roads and rail for shipping.

 

Fluctuations in exchange rates could adversely affect our business.

 

Our sales will generally be denominated in United States dollars with costs and expenses in the Chinese currency, the RMB, Mongolian currency, the Tugrik, and in the Guinean currency, the Guinea Franc.  Fluctuations in exchange rates, particularly among the RMB, the Tugrik and the Guinea Franc, could result in exchange losses and operating losses.

 

Because our possible joint ventures and contract partners may have more influence with various levels of government, we may not be able to adequately protect our property interests in Mongolia, Guinea and China.

 

We may enter into joint venture agreements and/or contracts with third parties in connection with, among other things, the management and operation of our gold and bauxite mining business at the Licensed Areas.  Although we expect that these connections will benefit us in some respects, there may be a substantial inequality with respect to the influence of the respective third parties with the various levels of Mongolian, Guinean and Chinese government. The governments hold a substantial degree of subjective control over the application and enforcement of laws and the conduct of business.  This inequality would become particularly detrimental if a business dispute arose between us and any of these third parties.  We will endeavor to maintain positive relations with both our partners and local governments, but there can be no guarantee that these measures will be sufficient to protect our interests in Mongolia, Guinea or China.  See “Risks Related to Doing Business in China” and “Risks Related to Doing Business in Guinea and Mongolia.”

 

Compliance with environmental regulations might be expensive and noncompliance with these regulations may result in adverse publicity and potential significant monetary damages and fines.

 

Gold and bauxite mining generates a disruption to the natural topography of the area and metal cleaning creates large volumes of contaminated water that must be cleaned or disposed of.  We plan to operate within all applicable environmental laws and regulations and to restore the area to approximately its original terrain.  We also plan to contain and treat all water discharge for reuse or conservation.  If we fail to comply with present or future environmental regulations we may be required to pay substantial fines, suspend production or cease operations. Any failure by us to control the use of, or restrict adequately the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspensions in our business operation.

 

 

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There are economic and general risks relating to business.

 

The success of our activities is subject to risks inherent in business generally, including demand for products and services; general economic conditions; changes in taxes and tax laws; and changes in governmental regulations and policies.

 

Control by key stockholders.

 

Our largest stockholder, Mongsource, represents approximately 98% of the voting power of our outstanding capital stock if 20,200,000.  Mongsource is a subsidiary of Mongsource BVI, which, in turn, is controlled by Mongolian Natural Resources Investment Group.  Our stockholders will have only limited rights to participate in our management.

Risks Related to Doing Business in China

 

Most, if not all, of our sales may be in China.

 

China is a developing country and has only a limited history of trade practices as a nation.  Because we will likely direct a substantial amount of our sales efforts to purchasers in China, we will be subject to the laws, rules, regulations, and political authority of the government of the People’s Republic of China (“PRC”).  We may encounter material problems while doing business in China, such as in interactions with the Chinese government and the uncertainty of foreign legal precedent pertaining to coke processing and the sale of gold and bauxite in China.  Risks inherent in international operations also include the following:

 

·	local currency instability;

 

·	inflation;

 

·	the risk of realizing economic currency exchange losses when transactions are completed in the Chinese RMB, Mongolian Tugrik, Guinea Franc and other currencies;

 

·	the ability to repatriate earnings under existing exchange control laws; and

 

·	political unrest.

 

    ·  Changes in import and export laws and tariffs can also materially impact international operations.  In addition, international operations involve political, as well as economic risks, including:

 

·	nationalization;

 

·	expropriation;

 

·	contract renegotiations; and

 

·	changes in laws resulting from governmental changes.

 

In addition, we may be subject to rules and regulations of the PRC or the jurisdiction of other governmental agencies in the PRC that may adversely affect our ability to perform under, or our rights and obligations in, our contracts with Chinese companies or government entities.  In the event of a dispute, we will likely be subject to the exclusive jurisdiction of foreign courts.  We may also be hindered or prevented from enforcing our rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity.

 

 

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Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

 

Some or all of our sales may be made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:

 

·	the amount of government involvement;

 

·	the level of development;

 

·	the growth rate;

 

·	the control of foreign exchange; and

 

·	the allocation of resources.

 

While it is our understanding that the economy in China has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various economic sectors. The government of the People’s Republic of China (“PRC”) has implemented various measures to encourage or control economic growth and guide the allocation of resources.  Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us.  For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

 

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business.  The PRC government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.  Efforts by the PRC government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by gold and bauxite users, which in turn could reduce demand for our products.

 

We risk the effects of general economic conditions in China.

 

Sales we secure in China could be adversely affected by a sustained economic recession in China.  Therefore, a sustained economic recession in that country could result in lower demand or lower prices for the gold and bauxite to be produced by us.

 

Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.

 

We plan to conduct some of our sales and substantially all of our administrative activities in China.  We will be generally subject to laws and regulations applicable to foreign investment in China.  The PRC legal system is based, at least in part, on written statutes.  Prior court decisions may be cited for reference but may have limited precedential value.  It is our understanding that since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.  However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.  We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, the preemption of local regulations by national laws, or the overturn of local government’s decisions by the superior government.  These uncertainties may limit legal protections available to us.  In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

 

 

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Risks Related to Doing Business in Guinea and Mongolia

 

Our business operations are subject to and may be adversely affected by various political and economic factors in Guinea and Mongolia.

 

We plan to operate substantially all of our business in Guinea and Mongolia, and like China, Guinea and Mongolia are countries that are subject to various political, economic and other uncertainties, including among other things, the risks of civil unrest, expropriation, nationalization, renegotiation or nullification of existing concessions, licenses, permits, approvals and contracts, taxation policies, foreign exchange and repatriation restrictions, changing political conditions, international monetary fluctuations, currency controls and foreign governmental regulations that favor or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.  In addition, if there is a dispute arising from our operations, we may be subject to the exclusive jurisdiction of courts in Guinea or Mongolia (or China) or may not be successful in subjecting foreign persons to the jurisdiction of courts elsewhere.  We also may be hindered or prevented from enforcing our rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity.  It is not possible for us to accurately predict such developments or changes in laws or policy or to what extent any such developments or changes may have a material adverse effect on our business operations.

 

Because we anticipate that substantially all of our gold and bauxite mining interests will be in Guinea and Mongolia, you will be exposed to political risk.

 

We anticipate that substantially all of our gold and bauxite mining interests will be in Guinea and Mongolia and may be affected by varying degrees of political instability in Guinea and Mongolia and the policies of these and other nations.  These risks and uncertainties include military repression, political and labor unrest, extreme fluctuations in currency exchange rates, high rates of inflation, terrorism, hostage taking and expropriation.  Our mining, exploration and development activities may be affected by changes in government, political instability and the nature of various government regulations relating to the mining industry, including but not limited to, environmental regulation, labor regulations, worker health and safety regulations, and royalties, taxes, import and export laws and regulations.  Any changes in regulations or shifts in political conditions are beyond our control and may adversely affect our business and/or holdings.  Operations may be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, environmental legislation, imposition of new, high government royalties and ownership interests, and safety factors.  Our operations in Guinea and Mongolia will entail significant governmental, economic, social, medical and other risk factors common to all developing countries.  The status of Guinea and Mongolia as developing countries may make it more difficult for us to obtain any required financing because of the investment risks associated with these countries.

 

Because we anticipate that substantially all of our gold and bauxite mining operations will be in Guinea and Mongolia, we may be adversely affected by economic uncertainty characteristic of developing countries.

 

Our operations in Guinea and Mongolia may be adversely affected by the economic uncertainty characteristic of developing countries.