Santa Fe Gold CORP - Quarter Report: 2008 December (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2008

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to _______

Commission File Number: 001-12974

SANTA FE GOLD CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)

1128 Pennsylvania NE, Suite 200, Albuquerque, NM 87110
(Address of Principal Executive Offices)

Registrant's telephone number including area code: (505) 255-4852

N/A
Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [   ]

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

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]   No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date: 75,904,760 shares outstanding as of February 16, 2009.

SANTA FE GOLD CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2008

TABLE OF CONTENTS

2

PART I 
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SANTA FE GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

3

SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

4

SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

5

SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Continued)

The accompanying notes are an integral part of the consolidated financial statements.

6

SANTA FE GOLD CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008

NOTE 1 – NATURE OF OPERATIONS

          Santa Fe Gold Corporation (the Company) is a U.S. mining company incorporated in Delaware in August 1991. Its general business strategy is to acquire, explore and develop mineral properties. The Company’s principal assets are the 100% owned Summit silver-gold project in New Mexico, the leased Ortiz gold property in New Mexico, the 100% owned Black Canyon mica project in Arizona and the 100% owned Planet micaceous iron oxide property in Arizona.

          The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q under Article 8.03 of Regulation S-X. These statements do not include all of the information and notes to the financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 2008, are not necessarily indicative of the results that may be expected for the year ending June 30, 2009. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2008, included in the Company’s Annual Report on Form 10-KSB, as filed with Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Going Concern

          The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

          The Company had net income of $846,742 for the six months ended December 31, 2008, has working capital of $2,166,274 and has a total accumulated (deficit) of $(46,391,122) at December 31, 2008. In addition, the Company had only nominal revenue-generating operations in the six months ended December 31, 2008. To continue as a going concern, the Company is dependent on continued fund raising for project development and for administrative operating expenses. In December 2007, the Company entered into a definitive agreement with an investor for the private placement of a $13.5 million financing facility to be advanced in multiple tranches. As of December 31, 2008, the Company has received funding advances for the entire $13.5 million (see NOTE 4).

          The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

Derivative Financial Instruments

7

          The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

          The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services.

          Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instruments are initially recorded at their fair values and are then re-valued at each reporting date, with changes in the fair values reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

          The discount from the face value of a convertible debt or equity instrument resulting from allocating some or all of the proceeds to the derivative instrument, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method.

          The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Restricted Cash

          Restricted cash of $203,903 is maintained in connection with requirements for reclamation of projects as well as weighmaster activities. As part of the reclamation deposits, the Company has restricted cash of $202,903, comprised of $50,000 held on deposit for the Arizona State Treasurer in a one-year automatically renewable short-term investment; $128,658 held as collateral against an irrevocable letter of credit of the same amount to the U.S. Bureau of Land Management (BLM); and $24,245 posted as a financial guarantee with the New Mexico Energy Minerals and Natural Resources Department. The Company also maintains a certificate of deposit in the amount of $1,000 for the New Mexico Department of Agriculture in accordance with bonding requirements for a weighmaster.

Net Earnings (Loss) per Common Share

          The Company calculates net income (loss) per share as required by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. When computing diluted earnings per share, the consideration of the effect of the derivatives results in an adjusted net (loss) for the three months and six months ended December 31, 2008. Therefore the impact of outstanding stock equivalents has not been included as they would be anti-dilutive.

NOTE 3 - DERIVATIVE INSTRUMENT LIABILITIES

8

          On July 15, 2008, under the terms of 7% Senior Secured Convertible Debenture dated December 21, 2007, the Company received the fourth advance under the agreement of $3,500,000 and issued 1,750,000 warrants relating to the advance. The fair value of the derivative instruments liability for these warrants issued under the placements at the time of issuance was determined to be $1,184,521 with the following assumptions: (1) risk free interest rate of 3.43%, (2) an expected life of 6.5 years, (3) expected stock price volatility of 103.613%, and (4) expected dividend yield of zero.

          The convertible debenture was determined to have a beneficial conversion feature of $589,521 based upon the effective computed conversion price, which was charged to the note discount and credited to Additional Paid In Capital. The beneficial conversion feature in conjunction with the derivative instruments liability for the warrants resulted in an aggregated note discount of $1,774,042.

          On October 15, 2008, under the terms of the 7% Senior Secured Convertible Debenture dated December 21, 2007; the Company received the fifth advance under the agreement for $3,500,000 and issued 1,750,000 warrants relating to the advance. The fair value of the derivative instruments liability for these warrants issued under the placements at the time of issuance was determined to be $811,917 with the following assumptions: (1) risk free interest rate of 2.98%, (2) an expected life of 6.2 years, (3) expected stock price volatility of 91.534%, and (4) expected dividend yield of zero.

          On December 22, 2008, under the terms of the 7% Senior Secured Convertible Debenture dated December 21, 2007; the Company received the sixth and final advance under the agreement for $1,150,000 and issued 575,000 warrants relating to the advance. The fair value of the derivative instruments liability for these warrants issued under the placements at the time of issuance was determined to be $236,828 with the following assumptions: (1) risk free interest rate of 1.55%, (2) an expected life of 6.0 years, (3) expected stock price volatility of 88.659%, and (4) expected dividend yield of zero.

          The fair market value of the derivative instruments liability at December 31, 2008, was determined to be $4,506,241 with the following assumptions: (1) risk free interest rate of 0.27% to 1.55%, (2) remaining contractual life between 0.50 to 6.01 years, (3) expected stock price volatility of 88.659%, and (4) expected dividend yield of zero. Based upon the change in fair value, the Company has recorded a non-cash gain on derivative instruments for the six months ended December 31, 2008, of $2,785,079 and a corresponding decrease in the derivative instruments liability. The impact of EITF 00-19 on the financial statements as of and through December 31, 2008, was as follows:

NOTE 4 – CONVERTIBLE DEBENTURE NOTES PAYABLE

          On December 21, 2007, the Company entered into a definitive agreement for the placement with a single investor of a 7% Senior Secured Convertible Debenture in the amount of $13,500,000. The agreement provides that proceeds from the debenture shall be issued in accordance with a pre-determined funding schedule related to the Summit project’s anticipated construction requirements during 2008. The term of the debenture is 60 months, at the

9

end of which time all remaining principal and interest shall become due. The debenture bears interest at the rate of 7% per annum. Interest will be accrued until June 30, 2009. Interest on the outstanding principal balance will then be payable in quarterly installments commencing on July 1, 2009. Interest may be paid in cash or stock at the investor’s election. If paid in stock, the number of shares will be calculated using the average of the daily volume weighted average sales prices of the common stock for the twenty (20) trading days immediately preceding the payment date. The entire amount of principal and any unpaid interest will become due December 31, 2012, subject to the investor’s right to require the Company after 36 and 48 months to apply up to 30% of the Summit project’s positive cash flow toward retirement of the debenture. The debenture is secured by a mortgage on the Summit real property and a security interest in Summit personal property. The investor may at any time convert unpaid principal and interest into shares of the Company’s common stock at the rate of $1.00 per share. The debenture will be automatically converted into common stock if the weighted average closing sales price of the stock exceeds $2.50 per share for 10 consecutive trading days. Beginning January 1, 2011, the Company may redeem the entire outstanding amount of the debenture, including principal and outstanding interest, subject to the investor’s right to convert the debenture into shares of common stock. In connection with the transaction, for every $2.00 of the original principal amount of the debenture, the Company will issue to the investor a warrant to purchase one share of common stock at a price of $1.00. The warrants are exercisable from July 1, 2010 to December 31, 2014. As of December 31, 2008, the Company has received funding advances for the entire $13.5 million and has issued 6,750,000 warrants under the financing facility terms.

          The current and long-term portions of the convertible debenture notes payable and related discounts at December 31, 2008 are as follows:

NOTE 5 – NOTES PAYABLE

          On June 5, 2008, the Company agreed to exercise the option to purchase the Planet MIO property, consisting of thirty-one patented mining claims totaling 523 acres in La Paz County, Arizona. The Company originally leased the property in 2000 from New Planet Copper Mining Company under the terms of a Lease with Option to Purchase. The Company agreed to exercise the purchase option in connection with settlement of an action the Company commenced in March 2007 seeking to confirm that the lease remained in good standing. The purchase price was $250,000. The Company signed a promissory note for $200,000 with interest payable at 10% per annum from the date of closing of the transaction. The provisions of the note call for a $50,000 payment at the signing of the note, which occurred in August 2008, and $50,000 annual principal and interest payments on the four subsequent anniversary dates of the note. The agreement also provides for a 5% royalty to be paid on any future production from the property.

          On July 25, 2008, the Company entered into an installment sales contract for $94,613 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 6.75%, with the equipment securing the loan.

          The following summarizes notes payable at December 31, 2008 and June 30, 2008:

10

The aggregate maturities of notes payable as of December 31, 2008, is as follows:

NOTE 6 – CAPITAL LEASES

          During the six months ended December 31, 2008, the Company utilized capital leases for the purchase of equipment. Lease terms and interest rates for the equipment are 60 months at 6.25%, 36 months at 5.34%, and 36 months at 5.78% . The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized or depreciated over the lower of their related lease terms or their estimated productive lives.

          Minimum future lease payments under capital leases, as of December 31, 2008, for each of the following years and in aggregate, are as follows:

NOTE 7 - STOCKHOLDERS’ EQUITY

Issuances of Common Stock

          On September 30, 2008, a director exercised an option to purchase 500,000 shares of common stock at $0.11 per share on a cashless basis. Under the cashless basis exercise, 431,250 shares were issued.

Issuances of Options and Shares

          On December 3, 2008, the Company cancelled and re-issued several outstanding options to four employees. The new options grant each employee a five (5) year option to purchase 100,000 shares of common stock at an option exercise price of $0.60 per share, the closing price on the date of grant, and the options will vest on June 30,

11

2009. Each option was valued at $30,101 using the Black-Scholes option pricing model. The options were valued using a volatility of 80.172%, a risk free interest rate of 0.76%, an expected life of 2.8 years and zero quarterly dividends. General and administrative stock compensation of $4,300 each for the four employees, or $17,200 in the aggregate was recognized during the six months ended December 31, 2008. The following describes the options that were cancelled:

• On July 22, 2008, the Company granted a five (5) year option to purchase 100,000 shares of common stock to an employee. The option exercise price is $0.83 per share, the closing price on the date of grant and the options have a vesting period of six months from the date of grant. The options were valued at $64,247 using the Black-Scholes option pricing model. The options were valued using a volatility of 103.613%, a risk free interest rate of 3.48%, an expected life of 5.0 years and zero quarterly dividends. On December 3, 2008, the options were cancelled and re-issued, with any further amortization of the options ceasing on that date. General and administrative stock compensation of $42,832 was recognized during the six months ended December 31, 2008.

• On May 1, 2008, the Company granted a five (5) year option to purchase 100,000 shares of common stock to an employee. The option exercise price is $0.79 per share, the closing price on the date of grant. The options were valued at $61,724 using the Black-Scholes option pricing model. On December 3, 2008, the options were cancelled and re-issued. The options were fully vested and amortized at the time of the cancellation. General and administrative stock compensation expense of $41,149 was recognized for the six months ended December 31, 2008.

• On March 24, 2008, the Company granted a five (5) year option to purchase 100,000 shares of common stock to an employee. The option exercise price is $0.73 per share, the closing price on the date of grant, and the options have a vesting period of six months from the date of grant. The options were valued at $57,048 using the Black-Scholes option pricing model. On December 3, 2008 the options were cancelled and re-issued. The options were fully vested and amortized at the time of the cancellation. General and administrative stock compensation expense of $28,524 was recognized for the six months ended December 31, 2008.

• On May 2, 2006, the Company granted a five (5) year option to purchase 50,000 shares of common stock to an employee, who is the son of the Company’s President and Chief Executive Officer, in connection with an employment agreement. The option exercise price is $1.24 per share, the closing price on the date of grant and the options vested on the date of grant. The options were valued at $50,971 using the Black-Scholes option pricing model. On December 3, 2008, the options were cancelled and re-issued. The options were fully vested and amortized at the time of cancellation.

• On April 25, 2007, the Company granted a five (5) year option to purchase 50,000 shares of common stock to an employee, who is the son of the Company’s President and Chief Executive Officer. The option exercise price is $0.74 per share, the closing price on the date of grant and the options vested on the date of grant. The options were valued at $30,505 using the Black-Scholes option pricing model and are expensed in the period granted. On December 3, 2008, the options were cancelled and re-issued. The options were fully vested and amortized at the time of cancellation.

          On December 3, 2008, the Company granted a five (5) year option to twenty-three employees and two board members to purchase 830,000 shares of common stock at an option exercise price of $0.60 per share, the closing price on the date of grant, and the options will vest on June 30, 2009. The options were valued at $249,838 using the Black-Scholes option pricing model. The options were valued using a volatility of 80.172%, a risk free interest rate of 0.76%, an expected life of 2.8 years and zero quarterly dividends. General and administrative stock compensation of $35,690 was recognized during the six months ended December 31, 2008.

          On June 25, 2008, the Board of Directors granted awards of 500,000 shares of restricted stock to an officer and 200,000 shares of restricted stock to an employee. The shares will vest on December 31, 2008, and are subject to

12

forfeiture contingent on attainment of certain performance objectives related to construction of the Summit project. The stock grants were valued at $448,000 using the closing price on the date of grant and were recorded as deferred stock compensation as equity reduction. General and administrative stock compensation expense of $448,000 was recognized for the six months ended December 31, 2008.

Issuances of Warrants

          On December 22, 2008, in connection with a scheduled advance of $1,150,000 under the 7% Senior Secured Convertible Debenture, the Company issued 575,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.00 per share. The warrants are exercisable from July 1, 2010 to December 31, 2014.

          On October 15, 2008, in connection with a scheduled advance of $3,500,000 under the 7% Senior Secured Convertible Debenture, the Company issued 1,750,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.00 per share. The warrants are exercisable from July 1, 2010 to December 31, 2014.

          On July 15, 2008, in connection with a scheduled advance of $3,500,000 under the 7% Senior Secured Convertible Debenture, the Company issued 1,750,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.00 per share. The warrants are exercisable from July 1, 2010 to December 31, 2014.

          Stock option and warrant activity, both within the 1989 Stock Option Plan and 2007 EIP and outside of these plans, for the six months ended December 31, 2008, are as follows:

Stock options and warrants outstanding and exercisable at December 31, 2008, are as follows:

13

NOTE 8 – OTHER INCOME

          In August 2008, the Company received $60,762 that is included in miscellaneous income for full restitution of an amount it was defrauded in a financing transaction several years earlier. Additionally, in September 2008, the Company negotiated a settlement with a governmental agency on outstanding amounts owed for property taxes. In connection with the settlement, the Company made a payment in cash to settle the account in full and recognized relief of debt of $48,872 for the remaining unpaid amount.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

THIS FORM 10-Q MAY CONTAIN CERTAIN “FORWARD-LOOKING” STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANY’S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY’S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS “MAY”, “WILL”, “EXPECT”, “BELIEVE”, “ANTICIPATE”, “INTENT”, “COULD”, “ESTIMATE”, “MIGHT”, “PLAN”, “PREDICT” OR “CONTINUE” OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY’S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND TO UNDERTAKE TO UPDATE THE INFORMATION IN THIS FORM 10-Q IF ANY FORWARD-LOOKING STATEMENT LATER TURNS OUT TO BE INACCURATE. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION PRESENTED IN THE COMPANY’S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2008.

General

          Santa Fe Gold Corporation (“the Company”, “our” or “we”) is a U.S. mining company, incorporated in August 1991 in the state of Delaware, with a general business strategy to acquire and develop mining properties amenable to low cost production. We currently are focused on: (1) developing our Summit silver-gold property located in New Mexico and placing the property into production, (2) conducting further studies on our Ortiz gold project located in New Mexico, (3) funding the re-opening and enhancement of our Black Canyon mica project located in Arizona or alternatively selling the project, (4) raising working capital for general operating and administrative expenses, and (5) acquiring high quality gold, silver and/or copper properties.

Basis of Presentation and Going Concern

          The financial statements have been prepared on a going concern basis, which contemplates the realization of

14

assets and satisfaction of liabilities and commitments in the normal course of business. Should we be unable to continue as a going concern, we may be unable to realize the carrying value of our assets and to meet our liabilities as they become due. We had net income of $846,742 for the six months ended December 31, 2008, and have a total accumulated (deficit) of $(46,391,122) at December 31, 2008. To continue as a going concern, we are dependent on continued fund raising for project development, execution of our business strategy and payment of general and administrative operating expenses.

         In December 2007, we entered into a definitive agreement with a single investor for the private placement of a 7% Senior Secured Convertible Debenture in the amount of $13.5 million. Advances under this agreement were issued in accordance with a pre-determined funding schedule related to the Summit project’s anticipated construction requirements during 2008. As of December 31, 2008 the Company has received funding advances for the entire $13.5 million.

          We will need to continue to raise additional working capital to deploy other segments of our business plan and for corporate general and administrative operating expenses. There is no assurance that such funding will be available when needed, or if available, that its terms will be favorable or acceptable to the Company. As of December 31, 2008, we have cash on hand of $5,765,266. We will be required to raise additional working capital in equity or financing transactions in order to satisfy our expected cash expenditures and continue to deploy our current business strategies.

          The Company’s financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

Derivative Financial Instruments

          In connection with the issuance of debt or equity instruments, we may issue options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances, may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

          The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For warrants that are accounted for as derivative instrument liability, we determined the fair value of these warrants using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the warrants. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

RESULTS OF OPERATIONS

Operating Results for the Three Months Ended December 31, 2008 and 2007

          Sales

          We had revenues of $6,367 for the three months ended December 31, 2008, and $-0- for the three months ended December 31, 2007. The increase of $6,367 is due to the sales of aggregate products.

          Operating Costs and Expenses

          Costs applicable to sales were incurred aggregating $23,606 for the three months ended December 31, 2008, and $-0- for the three months ended December 31, 2007, as the Company began allocating costs to the business segment in the current measurement period.

15

          Exploration and mining costs were $133,671 for the three months ended December 31, 2008, and $89,782 for the three months ended December 31, 2007, an increase of $43,889. The increase is mainly attributable to property and casualty liability insurance of $15,072 and equipment leases aggregating $29,007.

          General and administrative stock compensation increased to $308,593 for the three months ended December 31, 2008, from $18,385 for the comparative three months ended December 31, 2007, an increase of $290,208. The increase is attributable to amortized costs associated with deferred stock compensation for an officer and another key employee, as well as incentive stock options issued to employees during the current three month period.

          Other Income and Expenses

          Other income and (expenses) for the three months ended December 31, 2008, were $1,028,556 as compared to $(1,511,795) for the comparable three months ended December 31, 2007. The increase of $2,540,351 is attributable to an increase in the gain recognized on derivative instruments liability of $2,344,965; a decrease in interest expense of $183,705 due primarily to two factors: the capitalization of $159,784 in interest commencing with construction on the Summit Project, and the recognition of interest on the conversion of senior secured convertible debt in the prior comparable period; an increase in interest income of $22,965 and an increase in accretion of discounts on notes payable of $17,490.

          Gain on Derivative Financial Instruments

          We recognized a gain on derivative financial instruments of $1,415,856 for the three months ended December 31, 2008, as compared to a (loss) of ($929,109) for the prior year comparable period, an increase of $2,344,965. The non-cash income arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The derivative financial instruments arose in connection with senior secured convertible notes. Otherwise, we generally do not use derivative financial instruments for other purposes, such as hedging cash flow or fair-value risks. The increase in the derivative income in the three months ended December 31, 2008, is attributable mainly to changes in the market price of our common stock, which is a component of the calculation model and offset by the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

Operating Results for the Six Months Ended December 31, 2008 and 2007

          Sales

          We had revenues of $23,143 for the six months ended December 31, 2008, and $-0- for the six months ended December 31, 2007. The increase of $23,143 is due to the sales of aggregate products.

          Operating Costs and Expenses

          Costs applicable to sales were incurred aggregating $23,606 for the six months ended December 31, 2008, and $-0- for the three months ended December 31, 2007, as the Company began allocating costs to the business segment in the in the quarter ended December 31, 2008.

          Exploration and mining costs were $240,815 for the six months ended December 31, 2008, and $150,103 for the three months ended December 31, 2007, an increase of $90,712. The increase is mainly attributable to property and casualty liability insurance of $15,072, equipment leases aggregating $43,819, workmen’s compensation of $12,293, property taxes and mine claim fees of $7,920 and shop operating supplies and general mine expenses aggregating $54,087. These increases were offset by a decrease in outside mine consulting cost of $43,303.

          General and administrative stock compensation increased to $613,395 for the six months ended December 31, 2008, from $36,693 for the comparative six months ended December 31, 2007, an increase of $576,702. The

16

increase is attributable to amortized costs associated with deferred stock compensation for an officer and another key employee, as well as incentive stock options issued to numerous employees during the period.

          Other Income and Expenses

          Other income and (expenses) for the six months ended December 31, 2008, were $2,304,906 as compared to $(2,672,974) for the comparable six months ended December 31, 2007. The increase of $4,977,880 is attributable to an increase in the gain recognized on derivative instruments liability of $3,503,620; a decrease in interest expense of $843,460 due primarily to two factors: the capitalization of $299,841 in interest commencing with the construction of the Summit Project, and the recognition of interest on the conversion of senior secured convertible debt in the prior comparable period; a decrease in accretion of discounts on notes payable of $465,483 resulting from an early payoff in 2007 on a convertible note; an increase in interest income of $43,572; an increase in miscellaneous income of $61,262 and relief of debt of $48,872.

          Gain on Derivative Financial Instruments

          We recognized a gain on derivative financial instruments of $2,785,079 for the six months ended December 31, 2008, as compared to a (loss) of ($718,541) for the prior year comparable period, an increase of $3,503,620. The non-cash income arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The derivative financial instruments arose in connection with senior secured convertible notes. Otherwise, we generally do not use derivative financial instruments for other purposes, such as hedging cash flow or fair-value risks. The increase in the derivative income in the six months ended December 31, 2008, is attributable mainly to changes in the market price of our common stock, which is a component of the calculation model and offset by the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

PLAN OF OPERATIONS

Liquidity and Capital Resources

          To continue with the deployment of our business strategies, we will require significant additional working capital. We also will require additional working capital for employment of necessary corporate personnel, and related general and administrative expenses.

          As of December 31, 2008, we had cash on hand of $5,765,266, a working capital of $2,166,274 and an accumulated (deficit) of $(46,391,122).

          We are continuing to pursue a joint venture or sale of the Black Canyon mica project. Management has determined to deploy its resources in the area of precious metals based upon the current and projected market trends in this area.

          We continue to seek funding to advance our business plan and strategies. We require funding to meet our corporate general and administrative commitments, to continue feasibility studies on our mineral properties and to initiate exploration programs. We project the need for a minimum of $5,500,000 working capital during the next 36 months, estimated as exploration programs and feasibility studies of $2,500,000 and corporate overhead and related expenses of $3,000,000. We anticipate going into production in the second quarter of 2009 and that our operations for the remaining fiscal year 2009 will be funded from our current financing facilities, the sale of our securities and possibly through the exercise of certain options and warrants. While we believe we will be able to finance our continuing activities, there are no assurances of success in this regard or in our ability to obtain continued financing through capital markets, joint ventures, or other acceptable arrangements. If our plans are not successful, operations and liquidity may be adversely impacted. In the event that we are unable to obtain additional required capital, we may be forced to reduce our exploration and operating expenditures or to cease development operations altogether.

17

         On December 21, 2007, we entered into a definitive agreement for the placement with a single investor of a 7% Senior Secured Convertible Debenture in the amount of $13,500,000. Advances from the debenture were issued in accordance with a pre-determined funding schedule and the term of the debenture is 60 months. As of December 31, 2008, the Company has received funding advances for the entire $13.5 million and has issued 6,750,000 warrants under the financing facility terms.

Factors Affecting Future Operating Results

          We have deployed our plan to place the Company on an improved financial footing. In addition to the significant capital raisings already achieved, important elements of the plan include maintaining currency in the filing of our annual and quarterly financial reports and continuing to raise interim funding to provide for operations on our various property sites. If we are able to continue to secure required financing on acceptable terms, we believe we will be in a position to execute our business plan on our property sites.

Off-Balance Sheet Arrangements

          During the six months ended December 31, 2008, we did not engage in any off-balance sheet arrangements defined in Item 303(a)(4) of the SEC’s Regulation S-K.

ITEM 4 – CONTROLS AND PROCEDURES

          We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure. Under the supervision of, and the participation of, our management, including our Chief Executive Officer, we have conducted an evaluation of our disclosure controls and procedures as of December 31, 2008. Based on this evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are effective.

          During the quarter ended December 31, 2008, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II
OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

     None

ITEM 1A. RISK FACTORS

     Not Applicable

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

18

     None

ITEM 5. OTHER INFORMATION

     None

ITEM 6. EXHIBITS

     (a)      The following exhibits are filed as part of this report:

SIGNATURES:

          In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

19