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Santa Fe Gold CORP - Quarter Report: 2011 March (Form 10-Q)

Santa Fe Gold Corporation: Form 10Q - Filed by newsfilecorp.com

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 March 31, 2011

[     ] 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)

Delaware 84-1094315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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.

Larger accelerated filer [     ] Accelerated filer [ x ]
Non-accelerated filer [     ] Smaller reporting company [     ]

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: 94,744,412 shares outstanding as of May 9, 2011.



SANTA FE GOLD CORPORATION
INDEX TO FORM 10-Q
 
 
PART I
FINANCIAL INFORMATION

    Page
Item 1. Financial Statements 3
  Consolidated Balance Sheets, March 31, 2011 (Unaudited) and June 30, 2010 3
Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited) 5
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
     
  PART II 
  OTHER INFORMATION 
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 28
SIGNATURES 28
CERTIFICATIONS  

2


PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SANTA FE GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS

    March 31,     June 30,  
    2011     2010  
ASSETS   (Unaudited)        
CURRENT ASSETS:            
       Cash and cash equivalents $  473,631   $  5,540,130  
       Accounts receivable   2,783,632     -  
       Inventory   78,851     -  
       Marketable securities   164,898     -  
       Prepaid expenses and other current assets   298,308     267,208  
                           Total Current Assets   3,799,320     5,807,338  
MINERAL PROPERTIES   579,000     579,000  
PROPERTY, PLANT AND EQUIPMENT, net   13,342,360     3,790,215  
OTHER ASSETS:            
       Construction in process   7,499,226     15,177,362  
       Idle equipment, net   1,223,528     1,223,528  
       Note receivable and accrued interest   201,400     -  
       Restricted cash   410,374     410,374  
       Deferred financing costs   339,279     413,017  
                           Total Other Assets   9,673,807     17,224,281  
       Total Assets $  27,394,487   $  27,400,834  
             
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)             
CURRENT LIABILITIES:            
       Accounts payable $  845,405   $  458,098  
       Accrued liabilities   1,582,444     320,566  
       Derivative instrument liabilities   11,524,959     9,894,041  
       Notes payable, current portion   108,124     138,821  
       Capital leases, current portion   109,100     138,117  
       Deferred revenue, current portion   3,804,674     243,107  
       Accrued interest payable   229,629     20,525  
                           Total Current Liabilities   18,204,335     11,213,275  
LONG TERM LIABILITIES:            
       Senior secured convertible notes payable, net of discount of $2,861,621 and $3,793,560, respectively 11,088,379 10,156,440
       Notes payable, net of current portion   60,518     122,915  
       Capital leases, net of current portion   54,913     128,909  
       Deferred revenue, net of current portion   -     3,756,893  
       Asset retirement obligation   84,059     84,059  
                           Total Liabilities   29,492,204     25,462,491  
STOCKHOLDERS' (DEFICIT) EQUITY :            
       Common stock, $.002 par value, 200,000,000 shares authorized; 94,744,412 and 
          93,059,568 shares issued and outstanding, respectively; Includes non-vested 
          shares of 575,000 and 765,000, respectively




188,341






184,590


       Additional paid in capital   58,876,434     56,883,203  
       Accumulated (deficit)   (61,229,332 )   (55,129,450 )
       Accumulated other comprehensive income   66,840     -  
                           Total Stockholders' (Deficit) Equity   (2,097,717 )   1,938,343  
  $  27,394,487   $  27,400,834  

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

3


SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)

    For the Three Months Ended     For the Nine Months Ended  
    March 31,     March 31,  
    2011     2010     2011     2010  
SALES $  2,894,007   $  261,532   $  4,144,269   $  274,978  
                         
OPERATING COSTS AND EXPENSES:                        
     Costs applicable to sales   1,604,449     -     2,303,871     264  
     Exploration and mine and mill start up costs   597,266     275,425     1,669,663     449,259  
     General and administrative   679,757     655,407     2,171,297     1,726,510  
     Depreciation and amortization   577,857     127,641     1,725,858     342,121  
    3,459,329     1,058,473     7,870,689     2,518,154  
                         
LOSS FROM OPERATIONS   (565,322 )   (796,941 )   (3,726,420 )   (2,243,176 )
                         
OTHER INCOME (EXPENSE):                        
     (Loss) on disposal of assets   -     -     -     (3,572 )
     Interest income   2,750     6,948     9,188     10,150  
     Miscellaneous income   2,485     1,000     14     4,278  
     Foreign currency translation loss   -     (726 )   -     (621 )
     Gain (loss) on derivative instrument liabilities   4,425,628     3,634,854     (898,934 )   671,158  
     Accretion of discounts on notes payable   (322,782 )   (260,774 )   (931,939 )   (774,437 )
     Interest expense   (180,457 )   (25,017 )   (551,791 )   (82,162 )
    3,927,624     3,356,285     (2,373,462 )   (175,206 )
                         
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES   3,362,302     2,559,344     (6,099,882 )   (2,418,382 )
PROVISION FOR INCOME TAXES   -     -     -     -  
                         
NET INCOME (LOSS)   3,362,302     2,559,344     (6,099,882 )   (2,418,382 )
OTHER COMPREHENSIVE INCOME                        
     Unrealized (loss) gain on marketable securities   (25,102 )   -     66,840     -  
                         
NET COMPREHENSIVE INCOME (LOSS) $  3,337,200   $  2,559,344   $  (6,033,042 ) $  (2,418,382 )
                         
Basic and Diluted Per Share Data                        
     Net Income (Loss) - basic and diluted $  0.04   $  0.03   $  (0.07 ) $  (0.03 )
                         
Weighted Average Common Shares Outstanding:                        
     Basic and diluted   94,126,551     90,646,438     92,943,423     86,023,046  

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

4


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

    For the Nine Months Ended  
    March 31,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES:            
       Net loss $  (6,099,882 ) $  (2,418,382 )
       Adjustments to reconcile net loss to net cash            
       used in operating activities:            
                 Depreciation   1,725,858     342,121  
                 Stock based compensation   864,965     509,677  
                 Accretion of discounts on notes payable   931,939     774,437  
                 Foreign currency translation loss   -     621  
                 Loss (gain) on derivative instrument liabilities   898,934     (671,158 )
                 Loss on disposal of assets   -     3,572  
                 Amortization of deferred financing costs   73,738     64,448  
       Net change in operating assets and liabilities:            
                 Accounts receivable   (2,783,632 )   (261,585 )
                 Prepaid expenses and other current assets   (109,951 )   (165,113 )
                 Accounts payable and accrued liabilities   1,649,185     (632,517 )
                 Deferred revenue   (195,326 )   -  
                 Accrued interest payable   209,104     228,919  
                                     Net Cash (Used in) Operating Activities   (2,835,068 )   (2,224,960 )
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
       Purchase of marketable securities   (98,058 )   -  
       Note receivable and accrued interest   (201,400 )   -  
       Proceeds from disposal of assets   -     31,400  
       Purchase of property, plant and equipment   (862,720 )   (277,257 )
       Construction in progress   (2,737,147 )   (3,827,731 )
                                     Net Cash (Used in) Investing Activities   (3,899,325 )   (4,073,588 )
CASH FLOWS FROM FINANCING ACTIVITIES:            
       Proceeds from issuance of stock and warrants   2,000,001     10,301,003  
       Proceeds from notes payable   77,306     212,762  
       Proceeds from deferred revenue   -     4,000,000  
       Payment of private placement fees   (136,000 )   (625,000 )
       Payment of financing cost   -     (288,000 )
       Payments on notes payable   (170,400 )   (170,606 )
       Payments on capital leases   (103,013 )   (97,436 )
                                     Net Cash Provided by Financing Activities   1,667,894     13,332,723  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (5,066,499 )   7,034,175  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   5,540,130     509,846  
CASH AND CASH EQUIVALENTS, END OF PERIOD $  473,631   $  7,544,021  

5


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

    For the Nine Months Ended  
    March 31,  
    2011     2010  
SUPPLEMENTAL CASH FLOW INFORMATION:            
       Cash paid for interest $  558,331   $  78,711  
             
       Cash paid for income taxes $  -   $  -  
             
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND            
FINANCING ACTIVITIES:            
       Stock issued for conversion of accrued interest $  -   $  483,000  
             
       Equipment purchased with note payable $  -   $  16,825  
             
       Stock issued for conversion of accrued liability $  -   $  200,000  
             
       Stock issued for conversion of note payable $  -   $  18,219  
             
       Stock issued for services $  16,550   $  -  

6

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



SANTA FE GOLD CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     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, and the 100% owned Black Canyon mica project 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 adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. 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, 2010, included in the Company’s Annual Report on Form 10-K, as filed with Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

     The consolidated 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 a net loss of $6,099,882 for the nine months ended March 31, 2011, has a working capital deficit of $14,405,015 which includes a non-cash financial derivative liability of $11,524,959 and deferred revenue of $3,804,674, and has a total accumulated deficit of $61,229,332 at March 31, 2011. The Company generated revenues of $4,144,269 from the initial sales of precious metals in the nine months ended March 31, 2011. To continue as a going concern, the Company is dependent upon an increased ramp up of production on the Company’s Summit mine site; increased through put recovery of precious metals through the Banner mill; and continued fund raising for project development and working capital for operational and administrative expenses.

     The Company’s consolidated 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.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Azco Mica, Inc., a Delaware corporation; The Lordsburg Mining Company, a New Mexico corporation; Minera Sandia, S.A. de C.V., a Mexican corporation; and Santa Fe Gold Barbados Corporation, a Barbados corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

7


Estimates

     The preparation of consolidated 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 consolidated 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.

Marketable Securities

     Marketable securities are classified as available for sale and classified as current assets as they are subject to use within one year. The marketable securities are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Inventory

     Inventory classifications include stockpiled ore, in-process inventory, siliceous flux material and precious metals concentrate. Currently the stockpiled ore represents ore that is extracted from the mine and is waiting for processing. The ore currently is valued solely at the cost of transportation to the mill site as the Summit mine is still in process of ramping up to full production from the development stage. In-process inventory represents material that is currently being processed through the Banner mill. The in-process inventory is currently valued at stockpile ore costs plus applicable costs to crush the ore into mill feed. The siliceous flux material inventory and the precious metals concentrates awaiting shipment are valued at stockpile ore costs, plus allocated mill processing costs per ton based upon the processing requirements of the final product.

Fair Value Measurements

     The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximated their related fair values as of March 31, 2011, due to the relatively short-term nature of these instruments. The carrying value of the Company’s convertible debentures approximates the fair value based on the terms at which the Company could obtain similar financing and the short term nature of these instruments.

Derivative Financial Instruments

     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.

8


     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 twelve months of the balance sheet date.

Deferred Revenue

     Deferred revenue represents a cash advance made under a definitive gold sale agreement to sell a portion of the life-of-mine gold production only, not silver production, from our Summit silver-gold mine. Under the terms of the agreement, the Company received an upfront cash advance of $4.0 million. The upfront cash advance will be amortized by the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits will be recognized as revenue along with the on-going production payments for gold delivered pursuant to the agreement. Deferred revenue on the Company’s balance sheet is categorized as current if the Company expects to recognize such revenue within the following twelve months. Based upon the terms of the agreement, current deferred revenue approximated $3,804,674 at March 31, 2011.

Revenue Recognition

     Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred either physically or through an irrevocable transfer of metals to customers’ accounts, the price is fixed or determinable, no related obligations remain and collectability is probable.

     Sales of all metals products sold directly to the Company’s metals buyers, including by-product metals, are recorded as revenues when a buyer either, takes delivery of siliceous flux material or has received all required documentation necessary to take delivery of concentrate (generally at the time the concentrate is loaded onto the ship at the originating port and the bill of lading is generated).

     Revenues for metals products are recorded at current market prices at the time of delivery. Due to the time elapsed from delivery to the buyer and the final settlement with the buyer, we must estimate the prices at which sales of our metals will be settled. Changes in metals prices between delivery and final settlement will result in adjustments to revenues related to sales previously recorded upon delivery. Previously recorded sales are adjusted to estimated settlement metals prices until final settlement by the buyer.

     Sales of metals products are recorded net of charges from the buyer for treatment, refining, smelting losses, and other negotiated charges. Charges are estimated upon shipment of product based on contractual terms, and actual charges do not vary materially from estimates. Costs charged by smelters include a metals payable fee, fixed treatment and refining costs per ton of product.

Sales of refined gold related to the definitive gold sale agreement entered into on September 11, 2009 are recorded as revenues when the buyer takes delivery. Revenue from sales of refined gold is not estimated and is final at the time of delivery. Due to the contractual obligation of the definitive gold sale agreement, costs applicable to sales for the delivery of refined gold are recorded at the current market price to purchase the gold and concurrent with deliveries for our metals products to the smelter and the resulting recording of revenue for those products. Due to the time elapsed between the delivery of our metals products to the smelter and the delivery of refined gold, we must estimate the prices at which costs applicable to sales of refined gold will be settled. Cost of sales previously recorded for open invoices are adjusted to estimated settlement prices until final settlement upon delivery of the refined gold.

Net Earnings (Loss) per Common Share

     The Company calculates net income (loss) per share as required by Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). 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 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. Consequently the impact of outstanding stock equivalents has not been included in the current period as they would be anti-dilutive.

9


Comprehensive Loss

     In addition to net loss, comprehensive loss includes all changes in equity during a period, such as cumulative unrealized changes in the fair value of marketable securities available for sale or other investments.

Reclassifications

     Certain items in these consolidated financial statements have been reclassified to conform to the current year’s presentation.

Recent Accounting Pronouncements

      In January 2010, the ASC guidance for fair value measurements and disclosure was updated to require additional disclosures related to: i) transfers in and out of level 1 and 2 fair value measurements and ii) enhanced detail in the level 3 reconciliation. The guidance was amended to provide clarity about: i) the level of disaggregation required for assets and liabilities and ii) the disclosures required for inputs and valuation techniques used to measure fair value for both recurring and nonrecurring measurements that fall in either level 2 or level 3. The adoption of the updated guidance by the Company, with the exception of the level 3 disaggregation, which is effective for the Company’s fiscal year beginning July 1, 2011, did not have a material impact on the Company’s consolidated financial statements. The Company is evaluating the potential impact of adopting the level 3 disaggregation of this guidance on the Company’s consolidated financial position, results of operations and cash flows.

     In March 2010, the FASB issued authoritative guidance which clarifies the “Embedded Derivatives” guidance (ASC 815). All entities that enter into contracts containing an embedded credit derivative feature related to the transfer of credit risk that is not only in the form of subordination of one financial instrument to another will be affected by the amendments. The amendments in this update are effective for interim periods beginning after June 15, 2010. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In April 2010, the FASB issued authoritative guidance which clarifies the “Stock Compensation” guidance (ASC 718). This guidance clarifies the accounting for certain employee share-based payment awards. Awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades would not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. This accounting guidance is effective for accounting periods beginning on or after December 15, 2010, with earlier application permitted. The adoption of this update has not had a material impact on the Company’s consolidated financial statements.

     In December 2010, FASB issued ASU 2010-29, "Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force)." ASU 2010-29 provides amendments to subtopic 805-10 of the FASB ASC that requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The adoption of this update has not had an impact on the Company's consolidated financial statements.

     Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period did not, or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

NOTE 3 – INVENTORY

     The following table provides the components of inventory:

10



    March 31,     June 30  
    2011     2010  
Stockpiled ore $  2,647   $  --  
In-process material   1,782     --  
Siliceous flux material   49,911     --  
Precious metals concentrate   24,511     --  
  $  78,851   $  --  

NOTE 4 – NOTE RECEIVABLE

     On January 27, 2011, the Company advanced $200,000 to Columbus Silver Corporation (“Columbus Silver”) (TSXV: CSC) in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with a Memorandum of Understanding (“MOU”) dated September 23, 2010, in contemplation of a business combination (the “Transaction”). In the event that either party to the MOU informs the other that it will not proceed with the Transaction, either the maker or the holder will have the ability, by providing written notice to the other, to require that the maker apply to the TSX Venture Exchange to have the entire outstanding principal amount and accrued unpaid interest of this note paid in common shares of the maker. As of March 31, 2011, accrued interest receivable on the note receivable was $1,400.

NOTE 5 - DERIVATIVE INSTRUMENT LIABILITIES

     On December 30, 2010, in connection with the registered direct offering to three institutional investors for 1,666,668 shares of the Company’s common stock, the Company issued 833,334 five year warrants giving the holders the right to purchase common stock at $1.50 per share. The warrants are exercisable immediately after issuance and will expire five years from the date of issuance. Using the Black-Scholes option pricing model, the fair market value of the warrants under the placement at the time of issuance was determined to be $669,372 with the following assumptions: (1) risk-free rate of interest of 2.01%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 79.51%, and (4) expected dividend yield of zero. The private placement was subject to the issuance of 100,000 warrants to the placement agent, exercisable at $1.50 per share and has an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. Using the Black-Scholes option pricing model, the fair market value of the placement agent warrants under the placement at the time of issuance was determined to be $62,614 with the following assumptions: (1) risk-free rate of interest of 1.47%, (2) an expected life of 3.92 years, (3) expected stock price volatility of 68.65%, and (4) expected dividend yield of zero.

     The fair market value of the derivative instruments liability at March 31, 2011, was determined to be $11,524,959 with the following assumptions: (1) risk free interest rate of 0.15% to 2.12%, (2) remaining contractual life of 0.45 to 4.75 years, (3) expected stock price volatility of 70.63% to 71.39%, and (4) expected dividend yield of zero. Based upon the change in fair value, the Company has recorded a non-cash loss on derivative instruments for the nine months ended March 31, 2011, of $(898,934) and a corresponding increase in the derivative instruments liability.

    Derivative     Derivative     Derivative  
    Liability as of     Liability as of     (Loss) Through  
    June 30, 2010     March 31, 2011     March 31, 2011  
Convertible Debentures:                  
   Purchase Agreement Warrants $ 6,585,752   $ 7,204,696   $  (618,944 )
   Amendment 2 Warrants   637,296     598,043     39,253  
   Embedded Conversion Option   2,670,993     3,722,220     (1,051,227 )
                                                 Totals $ 9,894,041   $ 11,524,959     (1,630,918 )
                   
Amount allocated to derivative liability at inception     731,984  
              $  (898,934 )

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The derivative liability is comprised of the following as of:

    March 31,     June 30,  
    2011     2010  
Current portion of derivative instruments liability $ 11,524,959   $ 9,894,041  
Long-term portion of derivative instruments liability   -     -  
  $ 11,524,959   $ 9,894,041  

NOTE 6 – CONVERTIBLE NOTES PAYABLE AND DEBENTURES

Convertible Senior Subordinated Notes

     On October 30, 2007, the Company completed the placement of 10% Convertible Senior Subordinated Notes of $450,000. The notes were placed with three accredited investors for $150,000 each. The notes have a term of 60 months, and at such time all remaining principal and interest shall be due. The notes bear interest at 10% per annum. Interest accrued for 18 months from the date of closing. Interest on the outstanding principal balance is then payable in quarterly installments commencing on the first day of the 19th month following closing. In connection with the transaction, the Company issued a five year warrant for each $2.50 invested, for a total of 180,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.25 per share. At the option of the holders of the convertible notes, the outstanding principal and interest is convertible at any time into shares of the Company’s common stock at conversion price of $1.25 per share. The notes will be automatically converted into common stock if the weighted average closing sales price of the stock exceeds $2.50 per share for ten consecutive trading days. The shares underlying the notes and warrants will be registered on request of the note holders, provided the weighted average closing price of the stock exceeds $1.50 per share for ten consecutive trading days.

Senior Secured Convertible Debenture

     On December 21, 2007, the Company entered into definitive agreements for the placement with a single investor of a 7% Senior Secured Convertible Debenture in the amount of $13,500,000. Proceeds from the debenture were issued in accordance with a pre-determined funding schedule related to the Summit project’s anticipated construction requirements. The term of the debenture is 60 months, at the end of which time all remaining principal and interest shall be due. The debenture bears interest at the rate of 7% per annum. Interest was accrued until June 30, 2009. Interest on the outstanding principal balance is 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 be 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 our 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 investor received 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. The Company has received total advances under the agreement of $13,500,000, and the Company issued an aggregate of 6,750,000 warrants under the debenture advances.

     On June 30, 2009, the Company entered into Amendment 2 on the Senior Secured Convertible Debenture dated December 21, 2007. Pursuant to the amendment, the accrued interest on the debentures due June 30, 2009, in the collective aggregate amount of $974,360, was automatically converted into 974,360 shares of the Company’s common stock effective as of June 30, 2009. The amendment also provided that the accrued interest for the quarters ended September 30, 2009 and December 31, 2009 shall be paid in shares of the Company’s common stock, to be valued at $1.00 per share at the time of payment and issuance. Accordingly the Company issued 483,000 shares of its common stock for payment of $483,000 of aggregate accrued interest for the quarters ended September 30, 2009 and December 31, 2009. Additionally the amendment provided that on March 31, 2010, the note holder had the option to make a six-month election, by providing written notice of its election thirty days prior to March 31, 2010, to have the March 31, 2010 and June 30, 2010 quarterly interest payments paid in shares of the Company’s common stock. The note holder chose not to make the election, and consequently the accrued interest relating to the debentures, totaling $475,125 for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, was paid in cash. Commencing September 30, 2010, the note holder had the option to make an annual election, by providing 30 days prior written notice of its election, to have the subsequent four quarterly interest payments paid in shares of the Company’s common stock. Valuation of the common stock is to be based upon the Market Price of the stock for the 30 trading days immediately preceding the payment due date. The note holder chose not to make the election, and consequently the accrued interest relating to the debentures, totaling $483,000 for the quarters ended September 30, 2010 and December 31, 2010, was paid in cash.

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     The accrued interest due on the debentures at March 31, 2011, was extended by the debenture holder in late March 2011. Accrued interest on the debentures for the quarter was $236,250, of which $20,000 was paid by March 31, 2011. The remaining balance is due with additional interest calculated on the agreed dates of payments as follows:

On or before April 15, 2011 $  60,000  
On or before April 30, 2011   20,000  
On or before May 15, 2011   70,000  
On or before June 15, 2011   66,250  
  $ 216,250  

     The components of the convertible notes payable and debentures are as follows:

March 31, 2011   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $  -   $  -   $  -  
Long-term portion, net of current   13,950,000     (2,861,621 )   11,088,379  
                   
  $ 13,950,000   $ (2,861,621 ) $ 11,088,379  

June 30, 2010   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $  -   $  -   $  -  
Long-term portion, net of current   13,950,000     (3,793,560 )   10,156,440  
                   
  $ 13,950,000   $ (3,793,560 ) $ 10,156,440  

     Aggregate yearly maturities of long term debt based upon payment terms at March 31, 2011, are as follows:

2011 $  -  
2012   13,950,000  
Subtotal   13,950,000  
Less: unamortized original discount   (2,861,621 )
  $ 11,088,379  

     As of March 31, 2011, accrued interest payable on the convertible notes payable and debentures was $222,459.

NOTE 7 – 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 original provisions of the note called for a $50,000 payment at the signing of the note, which occurred in August 2008, and four subsequent principal payments of $50,000 plus interest due each anniversary date of the agreement. In August 2009, the amortization schedule of the note was amended to reflect four equal annual payments of principal and interest of $63,094. The due date for the first annual payment was extended with the interest rate increased to 20% per annum during the extension period. The Company also agreed to pay an additional $2,000 in legal and miscellaneous fees to document the amendment. All other provisions of the original agreement remain unchanged including the provision for a 5% royalty to be paid on any future production from the property.

13


     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.

     On September 30, 2009, the Company entered into an installment sales contract for $16,825 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 9.25%, with the equipment securing the loan.

     On October 1, 2009, the Company entered into an agreement to finance insurance premiums in the amount of $72,906 at an interest rate of 6.99% with equal payments due monthly beginning November 1, 2009 and continuing until September 1, 2010. All amounts owed under the agreement were paid off in full prior to September 30, 2010.

     On November 1, 2009, the Company entered into an agreement to finance insurance premiums in the amount of $139,856 at an interest rate of 5.99% with equal payments due monthly beginning December 10, 2009 and continuing until October 10, 2010. All amounts owed under the agreement were paid off in full prior to September 30, 2010.

     On September 27, 2010, the Company entered into an agreement to finance insurance premiums in the amount of $77,306 at an interest rate of 6.99% with equal payments due monthly beginning November 1, 2010 and continuing until September 1, 2011.

     The following summarizes notes payable at March 31, 2011 and June 30, 2010:

      March 31, 2011     June 30, 2010  
      (Unaudited)        
Note payable for mineral property, interest at 10%, payable in 4 annual installments of $63,094, including interest through August 2012   $ 109,502   $ 156,906  
               
Installment sales contract on equipment, interest at 6.75%, payable in 36 monthly installments of $2,911, including interest through September 2011     14,328     39,180  
               
Installment sales contract on equipment, interest at 9.25%, payable in 36 monthly installments of $537, including interest through October 2012     9,060     13,141  
               
Financing contract on insurance premiums interest at 6.99%, payable in 11 monthly installments of $6,862, including interest through September 2010     -     13,604  
               
Financing contract on insurance premiums interest at 5.99%, payable in 11 monthly installments of $13,098, including interest through October 2010     -     38,905  

14



Financing contract on insurance premiums interest at 6.99%, payable in 11 monthly installments of $7,276, including interest through September 2011     35,752     -  
               
Total Outstanding Notes Payable     168,642     261,736  
Less: Current maturities     (108,124 )   (138,821 )
Obligations of notes payable due after one year   $  60,518   $  122,915  

     The aggregate maturities of notes payable as of March 31, 2011, is as follows:

Year ending June 30,      
                                                 2011 $  37,079  
                                                 2012   72,607  
                                                 2013   58,956  
Total Outstanding Notes Payable $ 168,642  

NOTE 8 – CAPITAL LEASES

     The Company utilizes 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 March 31, 2011, for each of the following years and in aggregate, are as follows:

Year ended June 30,      
                                                 2011 $  37,391  
                                                 2012   88,405  
                                                 2013   43,041  
                                                 2014   3,587  
Total minimum lease payments   172,424  
Amount representing interest   (8,411 )
Present value of future minimum lease payments   164,013  
Current portion of capital lease obligations   (109,100 )
Obligations of capital leases due after one year $  54,913  

NOTE 9 – FAIR VALUE MEASUREMENTS

     U.S. accounting standards require disclosure of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. In September 2006, the FASB issued new accounting guidance, which establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. The Company previously partially adopted this guidance for all instruments recorded at fair value on a recurring basis. In the second quarter of fiscal 2010, the Company adopted the remaining provisions of the guidance for all non-financial assets and liabilities that are not re-measured at fair value on a recurring basis. The adoption of these provisions did not have an impact on the Company’s consolidated financial statements.

     Fair value standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the standards establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair-value hierarchy are described as follows:

15


Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, Level 1 inputs include quoted prices on the Company’s securities that are actively traded.

Level 2: Inputs other than Level 1 that is observable, either directly or indirectly. For the Company, Level 2 inputs include assumptions such as estimated life, risk free rate and volatility estimates used in determining the fair values of the Company’s option and warrant securities issued derivative financial instruments.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flows methodologies and similar techniques that use significant unobservable inputs.

     The Company’s financial instruments consist of marketable securities and derivative instruments which are measured at fair value on a recurring basis. Marketable securities are comprised of 1,000,000 shares of common stock of Columbus Silver Corporation which is traded on the TSX Venture Exchange (TSXV: CSC). The stock was purchased in accordance with a Memorandum of Understanding entered into on September 24, 2010 for the purpose of consummating a business combination. The derivative instruments consist of certain embedded features contained within its debt instruments and certain warrant contracts. The derivatives are measured on their respective origination dates, at the end of each reporting period and at other points in time when necessary, such as modifications, using Level 3 inputs in accordance with GAAP. The Company does not report any financial assets or liabilities that it measures using Level 2 inputs. The fair value measurement of financial instruments and other assets as of March 31, 2011 are as follows:

                      March 31,  
    Level 1     Level 2     Level 3     2011  
Marketable Securities $  164,898     ---     ---   $  164,898  
Other Assets:                        
         Idle equipment, net   ---     ---   $  1,223,528   $  1,223,528  
                         
Value of derivative instruments liability   ---     ---   $  11,524,959   $  11,524,959  

     Idle equipment includes equipment associated with the Black Canyon mica project and which the Company has ceased operations and are classified as Level 3 non-financial assets. The fair value of the idle equipment was determined based upon an independent third party appraisal. The appraised value was established based upon comparable sales of similar assets and certain assumptions regarding market demand for these assets. As this valuation was based upon unobservable inputs, we classified the idle equipment as Level 3. There was no change in the carrying valuation of the idle equipment during the nine months ended March 31, 2011.

NOTE 10 – COMMITMENTS

     On March 29, 2011, the Company amended the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. In exchange for the amended completion guarantee date, the Company agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $727,300 based upon the closing gold price on March 31, 2011. The Company will mark to market the accrued liability on the delivery date of the additional ounces based upon the closing gold price on such date. Under the terms of the amendment the delivery is to be made prior to June 30, 2011.

NOTE 11 - STOCKHOLDERS’ (DEFICIT) EQUITY

Issuances of Common Stock

     On August 31, 2010, an individual exercised an option to purchase 10,000 shares of common stock at $0.60 per share on a cashless basis. Under the cashless basis exercise, 2,942 shares were issued.

     On September 29, 2010, an individual exercised an option to purchase 10,000 shares of common stock at $0.60 per share on a cashless basis. Under the cashless basis exercise, 4,445 shares were issued.

16


     On October 8, 2010, an individual exercised an option to purchase 75,000 shares of common stock at $0.60 per share on a cashless basis. Under the cashless basis exercise, 34,822 shares were issued.

     On November 16, 2010, 7,500 shares of common stock were issued to a consultant for services, valued at $6,750 based on the closing market price on the date of the transaction.

     On December 30, 2010, 1,666,668 common shares of common stock were issued to three institutional investors pursuant to the Company’s shelf registration statement on Form S-3. The shares were sold at $1.20 per share and gross cash proceeds aggregated $2,000,001. Placement agent fees of $136,000 were paid on the offering.

     On December 31, 2010, an individual forfeited 100,000 shares of stock which were unvested at the time employment with the Company was terminated.

     On January 1, 2011, an individual exercised an option to purchase 10,000 shares of common stock at $1.165 per share on a cashless basis. Under the cashless basis exercise, 1,241 shares were issued.

     During January 3 through January 10, 2011, five individuals exercised options, on a cashless basis, to purchase an aggregate of 70,000 shares of common stock at $0.86 per share. Under the cashless basis exercises, 19,611 shares were issued.

     On February 23, 2011, the Company issued 10,000 shares of common stock to a consultant for services, valued at $9,800 based on the closing market price on the date of the transaction.

     On March 29, 2011, an individual exercised options to purchase 100,000 shares of common stock at $0.86 per share and 200,000 shares at $1.00 per share, both on a cashless basis. Under the cashless basis exercises, 37,615 shares were issued.

     Stock-based compensation for stock granted in the prior year totaling $75,545 and $396,106 was recorded respectively for the three months and nine months ended March 31, 2011.

Issuances of Options

      On November 10, 2010, the Company granted 150,000 three-year options at an exercise price of $1.30 per share. The options have a six month vesting period from the date of grant. The options were valued at $55,368 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 0.63%, (2) an expected life of 3.0 years, (3) expected stock price volatility of 75.51%, and (4) expected dividend yield of zero. Stock-based compensation of $27,684 and $43,372 was recorded during the three months and nine months ended March 31, 2011, respectively.

     On January 1, 2011, the Company granted 75,000 five-year options at an exercise price of $1.21 per share to each of the two outside directors. The options have a six month vesting period from the date of grant. The options were valued at $116,508 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 2.02%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 79.05%, and (4) expected dividend yield of zero. Stock-based compensation of $57,932 was recorded during the three months ended March 31, 2011.

     On March 1, 2011, the Company granted 50,000 five-year options at an exercise price of $0.88 per share to an employee. The options have a six month vesting period from the date of grant. The options were valued at $26,734 using the Black-Scholes option pricing model. The options were valued using the following assumptions: (1) a risk free interest rate of 2.11%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 73.03%, and (4) expected dividend yield of zero. Stock-based compensation of $4,529 was recorded during the three months ended March 31, 2011.

     Stock-based compensation for options issued in the prior year totaling $3,183 and $346,476 was recorded respectively for the three months and nine months ended March 31, 2011.

17


Issuances of Warrants

     On December 30, 2010, in connection with the registered direct offering to three institutional investors for 1,666,668 shares of the Company’s common stock, the Company issued 833,334 five-year warrants giving the holders the right to purchase common stock at $1.50 per share. The warrants are exercisable immediately after issuance and will expire five years from the date of issuance. Using the Black-Scholes option pricing model, the fair market value of the warrants under the placement at the time of issuance was determined to be $669,372 with the following assumptions: (1) risk-free rate of interest of 2.01%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 79.51%, and (4) expected dividend yield of zero. In connection with the registered direct offering, the Company issued 100,000 warrants to the placement agent, exercisable at $1.50 per share and with an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. Using the Black-Scholes option pricing model, the fair market value of the placement agent warrants at the time of issuance was determined to be $62,614 with the following assumptions: (1) risk-free rate of interest of 1.47%, (2) an expected life of 3.92 years, (3) expected stock price volatility of 68.65%, and (4) expected dividend yield of zero.

     Stock option and warrant activity, both within the 1989 Stock Option Plan and 2007 Equity Incentive Plan and outside of these plans, for the nine months ended March 31, 2011, are as follows:

    Stock Options     Stock Warrants  
          Weighted           Weighted  
          Average           Average  
          Exercise           Exercise  
    Shares     Price     Shares     Price  
Outstanding at June 30, 2010   6,705,000     $0.41     15,009,528     $1.20  
   Granted   350,000     $1.20     933,334     $1.50  
   Canceled   (10,000 )   $0.86     ---     ---  
   Expired   ---     ---     ---     ---  
   Exercised   (475,000 )   $0.87     ---     ---  
Outstanding at March 31, 2011   6,570,000     $0.42     15,942,862     $1.22  

Stock options and warrants exercisable at March 31, 2011, are as follows:

Outstanding and Exercisable Options     Outstanding and Exercisable Warrants  
                Weighted                             Weighted        
                Average                             Average        
                Contractual     Weighted                         Contractual     Weighted    
Exercise               Remaining     Average     Exercise                 Remaining     Average  
Price   Outstanding      Exercisable      Life     Exercise     Price     Outstanding     Exercisable     Life     Exercise  
Range   Number     Number     (in Years)     Price     Range     Number     Number     (in Years)     Price  
$0.11   4,000,000     4,000,000     2.52     $0.11     $1.00     10,233,203     10,233,203     2.76     $1.00  
$0.46   100,000     100,000     1.32     $0.46     $1.06     253,773     253,773     3.28     $1.06  
$0.55   175,000     175,000     1.76     $0.55     $1.25     214,858     214,858     1.70     $1.25  
$0.60   610,000     610,000     2.68     $0.60     $1.50     933,334     933,334     4.64     $1.50  
$0.86   915,000     915,000     4.19     $0.86     $1.625     461,539     461,539     3.75     $1.625  
$0.88   50,000     ---     4.92     $0.88     $1.70     3,846,155     3,846,155     3.81     $1.70  
$1.165   20,000     20,000     3.14     $1.165                                
$1.21   150,000     ---     4.76     $1.21                                
$1.30   125,000     125,000     2.08     $1.30                                
$1.30   150,000     ---     2.62     $1.30                                

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 $1.38   150,000     150,000     3.76   $1.38                                
 $1.70   125,000     125,000     2.08   $1.70                                
    6,570,000     6,220,000                     15,942,862     15,942,862              
                                     
Outstanding Options           2.82   $0.42     Outstanding Warrants     3.15     $1.22  
Exercisable Options           2.76   $0.38     Exercisable Warrants     3.15     $1.22  

     As of March 31, 2011, the aggregate intrinsic value of all stock options and warrants vested and expected to vest was approximately $5,515,451 and the aggregate intrinsic value of currently exercisable stock options and warrants was approximately $5,515,451. The intrinsic value of each option share is the difference between the fair market value of the common stock and the exercise price of such option or warrant share to the extent it is "in-the-money". Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $1.09 closing stock price of the Common Stock on March 31, 2011. The total number of in-the-money options and warrants vested and exercisable as of March 31, 2011, was 16,286,976.

     The total intrinsic value of options exercised during the three months ended March 31, 2011, was $66,150. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option or warrant holder to exercise the options. The options were exercised on a cashless basis and no cash proceeds were received from the exercise of the stock options.

     The total fair value of options and warrants granted during the three months ended March 31, 2011, was approximately $77,964. The total grant-date fair value of option and warrant shares vested during the three months ended March 31, 2011, was approximately $-0-.

NOTE 12 – CONTEMPLATED ACQUISITION

     The Company entered into a non-binding Memorandum of Understanding on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”), pursuant to which the Company will acquire all the outstanding shares of common stock of Columbus Silver in exchange for the Company’s common stock. The contemplated exchange ratio is one share of Santa Fe common stock for every 5.82515 shares of Columbus Silver’s common stock. It is contemplated that Santa Fe will issue a total of 8,787,527 shares in the transaction, the value of which shares will be determined by the closing market price of the Company’s common stock on the effective closing date of the contemplated transaction. Following completion of the transaction, it is estimated that the Company will be owned 91.37% by current Company shareholders and 8.63% by Columbus Silver shareholders. In accordance with the Memorandum of Understanding, the Company purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058, or CDN$0.10 per share. The proceeds of the issuance are to be used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. On January 27, 2011, the Company advanced $200,000 to Columbus Silver in exchange for a promissory note bearing interest at 4% per annum. See NOTE 4.

     Currently the Company is negotiating a revocation of cease trade orders against the Company issued by the British Columbia and Ontario Securities Commission in 2003 after the Company did not make required regulatory filings. Until the cease trade orders are revoked steps cannot be taken to consummate the proposed transaction.

NOTE 13 – SUBSEQUENT EVENTS

     The company has evaluated events and transactions that occurred subsequent to March 31, 2011 for possible disclosure or recognition in the consolidated financial statements. The Company has determined that there were no such events or transactions that warrant disclosure or recognition in the consolidated financial statements.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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 discussion summarizes the results of our operations for the three and nine month periods ended March 31, 2011, and compares those results to the three and nine month periods ended March 31, 2010. It also analyzes our financial condition at March 31, 2011. This discussion should be read in conjunction with the Management’s Discussion and Analysis, including the audited financial statements for the years ended June 30, 2010 and 2009 and Notes to the financial statements, in our Form 10-K for the year ended June 30, 2010.

Overview

     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) continuing the ramp up of production at our Summit silver-gold property located in New Mexico, (2) conducting further studies on our Ortiz gold project located in New Mexico and (3) continuing to raise working capital for operating and administrative expenses.

     We commenced processing operations at the Banner Mill in March 2010. Commissioning of the mill proceeded satisfactorily and in July 2010, the mill facilities were placed into service and depreciation started to be recognized on the plant. The Company plans to ramp up production from the Summit mine and increase throughput at the Banner Mill, and expects the Summit project will achieve commercial production in 2011.

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.

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      The Company has incurred a net loss of $6,099,882 for the nine months ended March 31, 2011, and has a total accumulated deficit of $61,229,332 and a working capital deficit of $14,405,015 at March 31, 2011, which includes non-cash derivative instrument liabilities aggregating $11,524,959 and deferred revenue of $3,804,674.

     The Company has increased revenue-generating operations during the current quarter as we ramp up to commercial production at our Summit mine site and attain full throughput at our Banner Mill. To continue as a going concern, the Company is dependent on continued fund raising for project development and payment of general and administration expenses until production at the Summit mine site ramps up to full production and profitable operations are achieved. The Company has no commitment from any party to provide additional working capital and there is no assurance that such funding will be available if needed, or if available, that its terms will be favorable or acceptable to the Company.

     The Company’s consolidated 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 the Company 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 revalued 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 consolidated financial statements.

RESULTS OF OPERATIONS

Operating Results for the Three Months Ended March 31, 2011 and 2010

     Sales

     We had revenues of $2,894,007 for the three months ended March 31, 2011, as compared to $261,532 for the three months ended March 31, 2010. The increase of $2,632,475 is due to increased production at the Summit mine and related shipments of precious metals concentrate, flux material and the sale of refined gold. Sales for the current quarter consisted of concentrate sales of $2,340,341, flux material of $443,291 and refined gold of $110,375.

     The definitive gold sale agreement entered into on September 11, 2009 stipulates that we deliver the contractual production quantity in refined gold. See the Liquidity and Capital Resources section within this Item 2 for additional information. The Summit Project is not currently configured or permitted to produce refined gold. To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of $400 per ounce plus the upfront advance, representing deferred revenue, which is to be credited by the difference between the market price and the fixed price of gold for the number of ounces delivered. The revenue component of $110,375 for the delivery of refined gold is comprised of $32,187 representing sales of gold at the fixed price of $400 per ounce, and $78,188 representing the realization of deferred revenue related to the upfront cash advance.

     Operating Costs and Expenses

     Costs applicable to sales were incurred aggregating $1,604,449 for the three months ended March 31, 2011, as compared to $-0- for the three months ended March 31, 2010. The increase of $1,604,449 is attributable to the costs associated with the shipments of concentrate and flux material for smelting feedstock totaling $396,357, and the cost of purchasing refined gold of $1,208,092 in order to satisfy the delivery requirements of the definitive gold sale agreement. Of this amount, approximately $727,000 is attributable to the completion guarantee extension as discussed in NOTE 9 to the consolidated financial statements. The Summit project has not yet completed development of its initial targets and ramp-up is still underway. Costs applicable to sales are higher than normally expected. We anticipate these costs will decrease in relation to sales once we achieve full production at the mine and corresponding full throughput at the mill site later in calendar 2011.

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     Exploration and mining costs were $597,266 for the three months ended March 31, 2011, as compared to $275,425 for the three months ended March 31, 2010, an increase of $321,841. The increase is attributable to expanding production operations at the Summit mine site, increased throughput at the Banner Mill and a corresponding decrease in capitalized payroll burden. The increase in costs is primarily comprised of: $245,467 related royalties; $49,611 related to exploration associated costs; repairs and maintenance aggregating $10,990 and equipment leases of $13,574.

     General and administrative expenses increased to $679,757 for the three months ended March 31, 2011, from $655,407 for the comparative three month period ended March 31, 2010, an increase of $24,350. The increase is mainly attributable to investor relations expenses of $73,145; labor burden of $21,801, employee stock compensation of $75,545 and costs associated with options of $27,415. These increases were offset by decreased expenses in the following areas: consulting fees of $99,463; audit, accounting and legal fees aggregating $44,589; general and administration costs incurred in foreign subsidiaries of $13,458, and corporate filing fees of $12,600.

     Depreciation and amortization expense increased to $577,857 for the quarter ended March 31, 2011, as compared to $127,641 for the quarter ended March 31, 2010, an increase of $450,216. The increase is attributable primarily to recognizing depreciation of $379,007 on the Banner mill processing facilities which were placed into service during the first quarter of our current fiscal year and additional capitalized equipment at the mine site.

     Other Income and Expenses

     Other income and (expenses) for the three months ended March 31, 2011, were 3,927,624 as compared to $3,356,285 for the comparable three months ended March 31, 2010. The increase in net other income of $571,339 is primarily attributable to the increase gain recognized on derivative instruments liability of $790,774. The increase was offset by increase in interest expense of $155,440 and an increase in accretion of discounts on notes payable of $62,008.

     The increase in interest expense was due primarily to the fact that the portion of interest expense on the debentures related to the construction of the mill facilities was previously capitalized. In July 2010 based upon the commissioning of the mill proceeding satisfactorily over the previous quarter, the mill facilities were placed into service and the capitalization of interest expense related to the mill construction ceased, contributing $162,000 of interest expense to the current three month period.

     Loss on Derivative Financial Instruments

     We recognized a gain on derivative financial instruments of $4,425,628 for the three months ended March 31, 2011, as compared to a gain of $3,634,854 for the prior year’s comparable period, resulting in an increased gain of $790,774. The non-cash gain 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 and the issuance of warrants attached to stock subscriptions and warrants issued under our registered direct offerings. 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 gain for the three months ended March 31, 2011, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, the warrants previously issued under our registered direct offerings, changes in the market price of our common stock, which is a component of the calculation model, and 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.

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Operating Results for the Nine Months Ended March 31, 2011 and 2010

     Sales

     We had revenues of $4,144,269 for the nine months ended March 31, 2011, as compared to $274,978 for the nine months ended March 31, 2010. The increase of $3,869,291 is due to increased production at the Summit mine and related shipments of precious metals concentrate, flux material and the sale of refined gold. Sales for the current nine month period consisted of concentrate sales of $2,832,032, flux material of $1,037,383 and refined gold of $274,854 in accordance with the definitive gold sale agreement entered into on September 11, 2009. We had no aggregate material sales during the current nine month period as compared to aggregate material sales of $11,265 for the prior comparable period.

     The definitive gold sale agreement entered into on September 11, 2009, stipulates that we deliver the contractual production quantity in refined gold. See the Liquidity and Capital Resources section within this Item 2 for additional information. The Summit Project is not currently configured or permitted to produce refined gold. To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of $400 per ounce plus the upfront advance, representing deferred revenue, which is to be credited by the difference between the market price and the fixed price of gold for the number of ounces delivered. The revenue component of $274,854 for the delivery of refined gold is comprised of $79,528 representing sales of gold at the fixed price of $400 per ounce, and $195,326 representing the realization of deferred revenue related to the upfront cash advance.

     Operating Costs and Expenses

     Costs applicable to sales were incurred aggregating $2,303,871 for the nine months ended March 31, 2011, as compared to $264, attributable to aggregate sales, for the nine months ended March 31, 2010. The increase of $2,303,607 is attributable to the costs associated with the shipments of concentrate and flux material for smelting feedstock totaling $931,301, and the cost of purchasing refined gold of $1,372,570 in order to satisfy the delivery requirements of the definitive gold sale agreement. Of this amount, approximately $727,000 is attributable to the completion guarantee extension as discussed in NOTE 9 to the consolidated financial statements. The Summit project has not yet completed development of its initial targets and ramp-up is still underway. Costs applicable to sales are higher than normally expected. We anticipate these costs will decrease in relation to sales once we achieve full production at the mine and corresponding full throughput at the mill site later in calendar 2011.

     Exploration and mining costs were $1,669,663 for the nine months ended March 31, 2011, as compared to $449,259 for the nine months ended March 31, 2010, an increase of $1,220,404. The increase is attributable to expanding production operations at the Summit mine site, increased throughput at the Banner Mill and a corresponding decrease in capitalized payroll burden. The increase in costs is primarily comprised of: $183,648 related to payroll burden; $103,514 in shop supplies; vehicle operating costs of $13,036; repairs and maintenance aggregating $71,757; general mill and mine costs of $64,635; royalty fees of $364,527; leased equipment of $14,089; liability insurance of $9,972; property and resource taxes aggregating $53,945; and $186,853 for exploration associated costs.

     General and administrative expenses increased to $2,171,297 for the nine months ended March 31, 2011, from $1,726,510 for the comparative nine months ended March 31, 2010, an increase of $444,787. The increase is primarily attributable to increased expenses in the following areas: employee stock compensation of $338,951 and amortized costs associated with options of $255,475, both related primarily to awards granted from the 2007 Equity Incentive Plan on June 8, 2010; investor relations costs of $135,474. These increases were offset by decreases in audit and accounting fees of $65,433; legal and SEC related costs of $93,896; consulting fees of $114,047.

     Depreciation and amortization expense increased to $1,725,858 for the nine months ended March 31 2011, as compared to $342,121 for the nine months ended March 31, 2010, an increase of $1,383,737. The increase is attributable primarily to recognizing depreciation of $1,256,897 on the Banner mill processing facilities which were placed into service during the first quarter of our current fiscal year and additional equipment that entered into service.

     Other Income and Expenses

     Other income and (expenses) for the nine months ended March 31, 2011, were $(2,373,462) as compared to $(175,206) for the comparable nine months ended March 31, 2010. The increase in net expenses of $2,198,256 is primarily attributable to an increase in interest expense of $469,629; an increase in accretion of discounts on notes payable of $157,502 and the loss recognized on derivative instruments liability of $1,570,092.

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     The increase in interest expense was due primarily to the fact that the portion of interest expense on the debentures related to the construction of the mill facilities was previously capitalized. In July 2010 based upon the commissioning of the mill proceeding satisfactorily over the previous quarter, the mill facilities were placed into service and the capitalization of interest expense related to the mill construction ceased, contributing $493,200 in interest expense to the current nine month period.

     Loss on Derivative Financial Instruments

     We recognized a loss on derivative financial instruments of $898,934 for the nine months ended March 31, 2011, as compared to a gain of $671,158 for the prior year’s comparable period, resulting in an increased loss of $1,570,092. The non-cash loss 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 and the issuance of warrants attached to stock subscriptions and warrants issued under our registered direct offerings. 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 loss for the nine months ended March 31, 2011, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments; the warrants previously issued under our registered direct offerings; changes in the market price of our common stock, which is a component of the calculation model; and 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.

     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 until we reach profitable operations.

     As of March 31, 2011, we have cash and cash equivalents of $473,631, accounts receivable for product sales of $2,783,632, a working capital deficit of $14,405,015, which includes a non-cash financial derivative liability of $11,524,959 and deferred revenue of $3,804,674, and an accumulated deficit of $61,229,332.

     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. Historically, we have relied upon equity related financing to fund our deployment of our business plan. Currently we have no arrangements to borrow funds for working capital requirements. We will require additional funding to meet our corporate general and administrative commitments, to continue feasibility studies on our mineral properties and to initiate exploration programs. We expect the Summit project will achieve commercial production in calendar year 2011 and that our operations for the remaining fiscal year 2011 will be funded mainly from anticipated sales of precious metals, the sale of our equity securities and possibly through the exercise of certain options and warrants. We believe we will be able to finance our continuing future activities, although 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, future operations and liquidity may be adversely impacted. In the event that we are unable to obtain required capital, we may be forced to reduce our exploration and operating expenditures or to cease development operations altogether.

     On September 11, 2009, we entered into a definitive gold sale agreement with Sandstorm Resources Ltd. (TSX-V: SSL) (“Sandstorm”) to sell a portion of the life-of-mine gold production (but not silver production) from our Summit silver-gold mine. Under the agreement we received an upfront cash deposit of $4.0 million, plus we will receive ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. The amount of payable gold can be reduced from 22% to 15% provided that within 36 months the Summit mine reaches certain performance levels in any consecutive 12 month period, in compliance with prefeasibility estimates, including 1) the rate of ore mined and processed must average 400 tons per day or more, and 2) payable gold production must exceed 11,500 ounces during such consecutive 12 month period. We will receive credit against the $4,000,000 upfront cash deposit for the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits will be recognized as revenue, in addition to the ongoing production payments received for gold delivered pursuant to the agreement. In certain circumstances, including failure to meet minimum production rates, interruption in production due to permitting issues and customary events of default, the agreement may be terminated. In such event, we may be required to return to Sandstorm the upfront cash deposit of $4.0 million less a credit for gold delivered up to the date of that event, which is determined using the difference between the market price and $400 per ounce for gold deliveries where the prevailing market price exceeded $400 per ounce.

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     On January 14, 2010, the Company entered into definitive security purchase agreements with 23 institutional investors (collectively, “Purchasers") to sell an aggregate of $10.0 million of units, each unit consisting of one Share and one-half of a Warrant to purchase a Share by way of a registered direct offering. Pursuant to the transaction, we sold to the Purchasers an aggregate of 7,692,310 Shares and Warrants to purchase up to 3,846,155 additional Shares. The Warrants are exercisable at an exercise price of $1.70 per share upon issuance and have a term of five years. In connection with the placement we issued 461,539 warrants to Placement Agents, exercisable at $1.625 per share and having a term of approximately 4.9 years. These Placement Agent warrants vested six months from the date of issuance. We received net proceeds from the offering of approximately $9,375,000, after deducting placement agent fees and other offering expenses.

     The securities were issued pursuant to the Company's effective S-3 Registration Statement under which the securities are registered. The units, including the Shares and Warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants were issued pursuant to a prospectus supplement dated as of January 20, 2010, which was filed with the Securities and Exchange Commission ("SEC") in connection with a takedown from the Company’s shelf registration statement on Form S-3, which became effective on December 29, 2009, and the base prospectus contained in such registration statement.

     On December 29, 2010, we entered into a definitive security purchase agreements with three institutional investors to sell an aggregate of $2 million of units, each unit consisting of one share and one-half warrant per share to purchase a share by way of the placement. Under the agreement, we sold 1,666,668 shares and warrants to purchase 833,334 additional shares of our common stock. The warrants will be exercisable at an exercise price of $1.50 per share immediately upon the issuance of the stock and will expire five years from the date they are first exercisable. In connection with the transaction, the Company paid the Placement Agent a fee of $136,000 and issued 100,000 warrants exercisable at $1.50 per share which have an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. We received $1,864,001 net cash proceeds from the placement.

The units, including the shares and warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants are issued pursuant to the prospectus supplement dated as of December 29, 2010, which was filed with the Securities and Exchange Commission (“SEC”) in connection with a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-163112), which became effective on December 29, 2009, and the base prospectus contained in such registration statement.

     We are utilizing the net proceeds for general corporate purposes, including but not limited to, working capital for the Summit silver-gold project; acquisition of additional feed sources for expansion of the Lordsburg mill; advancement of the Ortiz gold project; and pursuit of acquisition opportunities.

     On March 29, 2011, the Company amended the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. In exchange for the amended completion guarantee date, the Company agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $727,300 based upon the closing gold price on March 31, 2011. The Company will mark to market the accrued liability on the delivery date of the additional ounces based upon the closing gold price on such date. Under the terms of the amendment the delivery is to be made prior to June 30, 2011.

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Factors Affecting Future Operating Results

     We continue to deploy our plan to place the Company on an improved financial footing. In addition to the significant capital raisings already achieved and the securities placements in January and December 2010, an important element of the plan includes continuing to raise working capital funding as may be required to provide for operations on our various property sites. If we 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.

     The Company entered into a non-binding Memorandum of Understanding on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”), pursuant to which the Company will acquire all the outstanding shares of common stock of Columbus Silver in exchange for the Company’s common stock. The contemplated exchange ratio is one share of Santa Fe common stock for every 5.82515 shares of Columbus Silver’s common stock. It is contemplated that Santa Fe will issue a total of 8,787,527 shares in the transaction, the value of which shares will be determined by the closing market price of the Company’s common stock on the effective closing date of the contemplated transaction. Following completion of the transaction, it is estimated the Company will be owned 91.37% by current Company shareholders and 8.63% by Columbus Silver shareholders. In accordance with the Memorandum of Understanding, the Company purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058. Proceeds of the issuance were used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. On January 27, 2011, the Company advanced $200,000 to Columbus Silver in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with a Memorandum of Understanding (“MOU”) dated September 23, 2010, in contemplation of a business combination (the “Transaction”). In the event that either party to the MOU informs the other that it will not proceed with the Transaction, either the maker or the Holder will have the ability, by providing written notice to the other, to require that the Maker apply to the TSX Venture Exchange to have the entire outstanding principal amount and accrued unpaid interest of this Note paid in common shares of the Maker pursuant to Exchange Policy 4.3, Shares for Debt, or its successor policy or instrument. Currently the Company is negotiating a revocation of cease trade orders against the Company issued by the British Columbia and Ontario Securities Commission in 2003 after the Company did not make required regulatory filings. Until the cease trade orders are revoked, steps cannot be taken to consummate the proposed transaction by us.

Off-Balance Sheet Arrangements

     During the three months ended March 31, 2011, we did not engage in any off-balance sheet arrangements defined in Item 303(a) (4) of the SEC’s Regulation S-K.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There has been no material change in the market risks discussed in Item 7A of Santa Fe Gold’s Form 10-K for the fiscal year ended June 30, 2010.

ITEM 4 – CONTROLS AND PROCEDURES

     We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(d) 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 recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that our disclosure controls and procedures are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports. Under the supervision of, and the participation of our management, our Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, has conducted an evaluation of our disclosure controls and procedures as of March 31, 2011. This evaluation included certain areas in which we have made, and are continuing to make, changes to improve and enhance controls. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer has concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required, and are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports.

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     During the quarter ended March 31, 2011, 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

     Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our annual report on Form 10-K for the year ended June 30, 2010, in addition to the other information included in this quarterly report. If any of the risks described actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

     As of March 31, 2011, there have not been any material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, although we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

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

None

ITEM 5. OTHER INFORMATION

Mine Safety Disclosures

     The Dodd-Frank Wall Street Reform and Consumer Protection Act (“The Act”) requires the operators of mines, including gold and silver mines, to include in each periodic report filed with the Securities and Exchange Commission certain specified disclosures regarding the company’s history of mine safety.

     In evaluating these disclosures, consideration should be given to factors such as: (i) the number of citations and orders may vary depending on the size of the mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

     Specified disclosures relating to The Act and pertaining to the Summit Mine for the quarter ended March 31, 2011 are as follows: (i) Total number of violations of mandatory health or safety standards that could “significantly and substantially” (“S&S”) contribute to a safety or health hazard under the Federal Mine Safety and Health Act of 1977 (the “Mine Safety Act”) for which the Company received a citation from the Mine Safety and Health Administration (“MSHA”): - Seven (These are violations that could "significantly and substantially" contribute to a safety or health hazard as issued.); (ii) Total number of orders and citations issued under Section 104(b) of the Mine Safety Act (a “failure to abate”): - None; (iii) Total number of citations and orders for unwarrantable failure to comply with mandatory health and safety standards under Section 104(b): - None; (iv) Total number of imminent danger orders under Section 107(a) of the Mine Safety Act issued to the Company: - None; (v) Total dollar value of proposed assessments from MSHA: - No assessments received; (vi) Total number of mining related fatalities: - None; (vii) Mines for which the operator has received written notice of a pattern of violations or the potential to have such a pattern: - None; (viii) Pending legal action before the Mine Safety and Health Review Commission: - We have multiple citation protests pending before the Commission.

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ITEM 6. EXHIBITS

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

  10.68

Amendment No. 1 dated March 29, 2011, to Gold Sale Agreement dated September 11, 2009, by and between Registrant and Purchaser.

     
31.1

Certification of Chief Executive Officer and Principal Accounting Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

     
32.1

Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. – Section 1350.

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.

  /s/ W. Pierce Carson
Dated: May 9, 2011              W. Pierce Carson,
               Chief Executive Officer, President, Director
             and Principal Accounting Officer

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