Santa Fe Gold CORP - Quarter Report: 2014 March (Form 10-Q)

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

[   ] 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 registrant as specified in its charter)

6100 Uptown Blvd., NE, Suite 600, Albuquerque, NM 87110
(Address of principal executive offices) (Zip Code)

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. Check one:

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:
127,229,228 shares outstanding as of May 16, 2014.

SANTA FE GOLD CORPORATION
INDEX TO FORM 10-Q

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SANTA FE GOLD CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS)
(Unaudited)

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of the unaudited consolidated financial statements.
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SANTA FE GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(UNAUDITED)

NOTE 1 – NATURE OF OPERATIONS

            Santa Fe Gold Corporation (the “Company” or “Santa Fe”) 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.

            On November 8, 2013, the Company suspended all mining operations and placed its Summit mine and mill on a care and maintenance program. On January 23, 2014, the Company entered into a definitive merger agreement (the “Merger Agreement”) with Tyhee Gold Corp. (TSX Venture: TDC) (“Tyhee”), and Tyhee Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Tyhee (“Merger Sub”), which was terminated on March 20, 2014, by the Company.

            The Merger Agreement provided that in the event that Tyhee failed to consummate a qualified financing of at least $20 million on or before March 15, 2014, then the Company could elect to terminate the Merger Agreement. Because Tyhee failed to timely consummate a qualified financing, Santa Fe’s Independent Special Committee determined that it was in the best interest of Santa Fe and its stockholders to terminate the Merger Agreement. As such, Santa Fe provided Tyhee with notice of its election to terminate the Merger Agreement. The Merger Agreement provides that Tyhee shall promptly pay to Santa Fe a “break fee” of $300,000 if Santa Fe terminates the merger agreement because Tyhee failed to timely consummate a qualified financing. Santa Fe has requested prompt payment of the break fee and to date this has not been received.

             At March 31, 2013, the Company was in arrears on payments totaling approximately $8.5 million under its Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”) and approximately $6.6 million under a gold stream agreement (the “Gold Stream Agreement”) with Sandstorm Gold Ltd. and Sandstorm Gold (Barbados) Ltd. (collectively, “Sandstorm”). On June 30, 2013, the Company signed a Waiver of Default Letter with Waterton wherein Waterton agreed to waive any payment defaults under the Credit Agreement. On September 30, 2013, Waterton issued a separate letter re-confirming the waiver of default for non-payment under the Credit Agreement. Waterton may revoke the waiver at any time and note the Company in default.

            The Company is in active discussions with several private equity funds and potential strategic investors concerning a potential strategic or financing transaction with Santa Fe. There can be no assurance that a strategic transaction or additional financing will be available at all or on acceptable terms. If a strategic transaction or additional financing is not available, or if the Company fails to restructure or refinance its secured indebtedness with Waterton and Sandstorm (the “Debt Restructurings”), or should any of such indebtedness be accelerated, or should any of the Company’s unsecured creditors obtain a judgment against the Company, the Company will not have adequate liquidity to fund its operations, meet its obligations (including its debt payment obligations) and continue as a going concern, and will likely be forced to seek relief under Chapter 11 or 15 of the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or similar creditor action may be filed against it).

            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, 2014, are not necessarily indicative of the results that may be expected for our fiscal year ending June 30, 2014. 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, 2013, included in the Company’s Annual Report on Form 10-K, as filed with Securities and Exchange Commission (‘SEC”) on September 30, 2013.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Going Concern

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

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            The Company has incurred a loss of $8,331,474 for the nine months ended March 31, 2014, and has a total accumulated deficit of $82,670,117 and a working capital deficit at March 31, 2014 of $22,117,271. The Company began revenue generating operations during the fiscal year ended June 30, 2011, through the sales of precious metal concentrates and flux material.

            On November 8, 2013 the Company suspended all mining operations and placed the mine and mill on a care and maintenance program. The Company is currently working to restructure its debts and obtain adequate capital to restart operations.

            To continue as a going concern, the Company is dependent on achievement of the Debt Restructurings, the closing of a financing with new investors or a strategic transaction, continued fund raising for project development, repayment of various debt facilities and payment of operating and financing expenses until production at the Summit mine site attains cash flow sufficient to cover the Company’s costs. In conjunction with the Merger Agreement, Tyhee and the Company entered into a Bridge Loan Agreement, pursuant to which Tyhee was obligated to advance up to $3.0 million to the Company in accordance with the terms thereof. As of March31, 2014, Tyhee advanced $1,745,092 to the Company pursuant to the terms of the Bridge Loan. The Company has no current continuing commitment from any party to provide additional working capital and there is no assurance that such funding will be available to the Company. At this time, the Company and Tyree are in disagreement as to the repayment due date of the Bridge Loan. The Company does not have adequate liquidity to fund its operations, meet its obligations (including its debt payment obligations) and continue as a going concern, and will likely be forced to seek relief under the U.S. Bankruptcy Code unless the Company can secure other strategic financing alternatives.

            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.

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.

Reclassifications

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

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.

            Significant estimates are used when accounting for the Company’s carrying value of mineral properties, fixed assets, depreciation and amortization, accruals, derivative instrument liabilities, taxes and contingencies, asset retirement obligations, revenue recognition, and stock-based compensation which are discussed in the respective notes to the consolidated financial statements.

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, 2014 and June 30, 2013, due to the relatively short-term nature of these instruments. The carrying value of the Company’s convertible notes payable approximates the fair value based on the terms at which the Company could obtain similar financing and the short term nature of these instruments.

Cash and Cash Equivalents

            The Company considers all liquid investments purchased with an initial maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash balances. Restricted cash is excluded from cash and cash equivalents and is included in other assets.

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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.

Accounts Receivable

            Accounts receivable consist of trade receivables from precious metals sales of concentrate and flux. In evaluating the collectability of accounts receivable, the Company analyzes past results and identifies trends for each major payer source of revenue for the purpose of estimating an allowance for doubtful accounts. Data in each major payer source are regularly reviewed to evaluate the adequacy of the allowance, and actual write-offs are charged against the allowance. There was no allowance for doubtful accounts as of March 31, 2013, and June 30, 2013.

            On June 30, 2013, the Company signed a Waiver of Default Letter (the "Letter") with Waterton wherein the Company agreed to sell, convey, assign and transfer certain accounts receivable as consideration for Waterton's waiver for non-payment under the Senior Secured Gold Stream Agreement. The transfer of the accounts receivable to Waterton are to be applied as payment towards outstanding interest amounts first and any remaining transfer of receivables are then applied as payment towards other indebtedness under the Credit Agreement, including principal on the note. The measurement of receivables transferred is subject to revaluation in accordance with mark-to-market adjustments and final settlement of the invoices. The valuation of receivables transferred under the Letter was $1,053,599 at June 30, 2013.

            As of September 30, 2013, the valuation of receivables sold under the Letter was finalized at $1,018,056. Additionally, $813,919 of collected accounts receivable sold to Waterton still remains to be remitted to them and is recorded in Other Accrued Liabilities at March 31, 2014. See NOTE 7 - SENIOR SECURED GOLD STREAM CREDIT AGREEMENT.

Inventory

            Major types of inventories include ore stockpile inventories, in-process inventories, siliceous flux material inventories and concentrate inventories, as described below. Inventories are carried at the lower of average cost or net realizable value. The net realizable value of ore stockpile inventories and in-process inventories represents the estimated future sales price of the product based on current and future metals prices, less the estimated costs to complete production and bring the product to sale. Concentrate inventories and siliceous flux material inventories are carried at the lower of full cost of production or net realizable value based on current and future metals prices. Write-downs of inventory are reported as a component of costs applicable to sales.

            Ore Stockpile Inventories: Ore stockpile inventories represent mineralized materials that have been mined and are available for further processing. Costs are allocated to ore stockpile inventories based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the ore, including applicable overhead, depreciation, and amortization. Material is removed from the stockpile at an average cost per ton. The current portion of ore stockpiles is determined based on the expected amounts to be processed within the next 12 months. Ore stockpile inventories not expected to be processed within the next 12 months, if any, are classified as long-term.

            In-process Inventories: In-process inventories represent materials that are currently in the process of being converted to a saleable product. In-process inventories are valued at the lower of average cost or net realizable value attributable to the source material plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

            Siliceous Flux Material Inventories: The siliceous flux material inventories represent ore stockpiles that have been crushed and screened to the customer’s specifications, and represent a saleable product.

            Concentrate Inventories: Concentrates inventories include metal concentrates located either at the Company’s facilities or in transit to the customer’s port. Inventories consist of gold and silver metal concentrates and represent a saleable product.

Property, Equipment and Mine Development

            Property and Equipment

            Property and equipment are carried at cost. Maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Expenditures for new property or equipment and expenditures that extend the useful lives of existing property and equipment are capitalized and recorded at cost. Upon retirement, sale or other disposition, the cost and accumulated amortization are eliminated and the gain or loss is included in operations. Depreciation is taken over the estimated useful lives of the assets using the straight-line method. The estimated useful lives of property and equipment are shown below. Land is not depreciated.

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            Mine Development

            Mine development costs include engineering and metallurgical studies, drilling and other related costs to delineate an ore body, and the building of access ways, shafts, lateral access, drifts, ramps and other infrastructure in an underground mine. Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expense. Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.

            Drilling and related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body or converting non-reserve mineralization to proven and probable reserves. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.

            Mine development is amortized using the units-of-production method based upon estimated recoverable tonnage in proven and probable reserves. To the extent that these costs benefit an entire ore body, they are amortized over the estimated life of the ore body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore body.

Idle Equipment

            The Company has certain idle equipment in storage related primarily to the Black Canyon project. The equipment’s carrying value totaled $411,600 and $1,223,528 as of March 31, 2014 and June 30, 2013, respectively. The Company re-evaluated the carrying value of the idle equipment during the current period in connection with the possible sale of the idle equipment. The current estimated value is based on a detailed review of the idle equipment inventory and valuation in the current market for used processing equipment. The Company recorded an impairment of $761,928 during the nine months ended March 31, 2014 compared to $-0- in the same comparable prior period in 2013.

Mineral Properties

            Mineral properties are capitalized at their fair value at the acquisition date, either as an individual asset purchase or as part of a business combination. When it is determined that a mineral property can be economically developed as a result of establishing reserves, subsequent mine development are capitalized and are amortized using the units of production method over the estimated life of the ore body based on estimated recoverable tonnage in proven and probable reserves.

            The Company’s mineral rights generally are enforceable regardless of whether proven and probable reserves have been established. The Company has the ability and intent to renew mineral interests where the existing term is not sufficient to recover all identified and valued proven and probable reserves and/or undeveloped mineralized material.

Impairment of Long-Lived Assets

            The Company reviews and evaluates long-lived assets for impairment when events or changes in circumstances indicate the related carrying amounts may not be recoverable. The assets are subject to impairment consideration if events or circumstances indicate that their carrying amount might not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. When impairment is identified, the carrying amount of the asset is reduced to its estimated fair value.

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            The Company is in process of discussions with various strategic financing sources at this time. It is unknown if such discussions will be successful in attaining a financing facility that would allow the Company to continue operations under a revised business plan. If discussions with these financing sources are unsuccessful the Company will not be able to continue as a going concern, and will likely be forced to seek relief under the U.S. Bankruptcy Code. At that time the Company would have to evaluate the circumstances and the potential impairment on its long- lived assets.

             As of March 31, 2014, no events or circumstances have happened to indicate the related carrying values of long-lived assets may not be recoverable.

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 instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For warrant-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 the convertible debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method.

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

Reclamation Costs

            Reclamation obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. The reclamation obligation is based upon when spending for an existing disturbance will occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at each mine site in accordance with ASC guidance for reclamation obligations. As of March 31, 2014 and June 30, 2013, the Company had a reclamation obligation totaling $230,511 and $167,746, respectively.

Revenue Recognition

            Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred physically, 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 upon a buyer either taking physical delivery of the metals product in the case of siliceous flux material or upon the buyer receiving all required documentation necessary to take physical delivery of the metals product in the case of concentrate (generally at the time the product is loaded onto a shipping vessel 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 and are subsequently adjusted to the current market prices existing at the end of each reporting period. Due to the period of time existing between delivery and final settlement with the buyer, the Company estimates the prices at which sales will be settled. Changes in metals prices between delivery and final settlement will result in adjustments to revenues previously recorded.

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            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.

Net Loss Per Share

            Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings 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. For the nine month periods ended March 31, 2014 and 2013, the impact of outstanding stock equivalents has not been included as they would be anti-dilutive.

Comprehensive Income (Loss)

            In addition to net income (loss), comprehensive income (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.

Stock-Based Compensation

            In connection with terms of employment with the Company’s executives and employees, the Company occasionally issues options to acquire its common stock. Awards are made at the discretion of the Board of Directors. Such options may be exercisable at varying exercise prices and generally vest over a period of six months to a year.

            The Company accounts for share-based compensation based upon on the grant date fair value of the award. The Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The simplified method is used to determine compensation expense since historical option exercise experience is limited. The compensation cost is recognized over the expected vesting period.

Recent Accounting Pronouncements

            In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU No. 2013-02”). ASU No. 2013-02 requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not required to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures under GAAP that provide additional detail about those amounts. ASU No. 2013-02 became effective in the first quarter of fiscal year 2014. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s results of operations, cash flows or financial condition.

            In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This new standard is effective for fiscal years beginning after December 15, 2013, with early adoption permitted, and may be applied either retrospectively or on a prospective basis to all unrecognized tax benefits that exist at the adoption date. The adoption of this ASU did not have a material impact on the Company’s results of operations, cash flows or financial condition.

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

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NOTE 3 – INVENTORY

            The following table provides the components of inventory as of:

NOTE 4 - ACCRUED LIABILITIES

            Accrued liabilities consist of the following as of:

            (See NOTE 10 – CONTINGENCIES AND COMMITMENTS, regarding further details of Commodity supply agreements.)

NOTE 5 - DERIVATIVE INSTRUMENT LIABILITIES

            The fair market value of the derivative instruments liabilities at March 31, 2013, was determined to be $217,407 with the following assumptions: (1) risk free interest rate of 0.06% to 1.09%, (2) remaining contractual life of 0.38 to 3.46 years, (3) expected stock price volatility of 109.61% to 223.15%, and (4) expected dividend yield of zero. Based upon the change in fair value, the Company has recorded a gain on derivative instruments for the nine months ended March 31, 2014, of $279,513 and a corresponding decrease in the derivative instruments liability.

            The entire amount of derivative instrument liabilities are classified as current due to the fact that settlement of the derivative instruments could be required within twelve months of the balance sheet date.

NOTE 6 –CONVERTIBLE NOTES PAYABLE

Senior Subordinated Convertible Notes

             On October 30, 2007, the Company completed the placement of 10% Senior Subordinated Convertible Notes of $450,000. The notes were placed with three accredited investors for $150,000 each and bear interest at 10% per annum. The notes had term of 60 months at which time all remaining principal and interest was due. Interest accrued for 18 months from the date of closing. Interest on the outstanding principal balance was 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 was convertible at any time into shares of the Company’s common stock at conversion price of $1.25 per share. The notes were to be automatically converted into common stock if the weighted average closing sales price of the stock exceeded $2.50 per share for ten consecutive trading days. The shares underlying the notes and warrants are to 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.

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            On October 31, 2012, the notes with the three accredited investors became due and payable. On January 15, 2013, the maturity dates for the convertible senior subordinated notes aggregating $450,000 were extended for a period of two years from the original maturity dates. Additionally, the convertible price of the notes was reduced to $0.40 and the automatic conversion price of $2.50 was reduced to $0.80. In connection with the extension of the notes, 562,500 warrants were issued with a strike price of $0.40 and term of two years from the original maturity dates; 375,000 warrants expiring on October 23, 2014 and the remaining 187,500 warrants with an expiration date of November 20, 2014.

            At March 31, 2014 and June 30, 2013, the outstanding principal balance on the senior subordinated convertible notes, was $450,000 and along with the unamortized discount is classified as current.

Convertible Secured Notes

            In October and November 2012, the Company received advances totaling A$3,900,000, representing cash proceeds of $3,985,000, from International Goldfields Limited (ASX: IGS) in fulfillment of an important condition of the Binding Heads of Agreement dated October 8, 2012 between the Company and IGS. The funds were advanced by way of two secured convertible notes. The convertible notes bear interest at a rate of 6% per annum, have a three-year term, and are secured by the Company’s contractual rights to the Mogollon property. The Company has the right to prepay the notes at any time without any premium or penalty. Should the Company fail to repay the notes on the maturity date or should an event of default occur, then IGS may choose to have the outstanding amounts repaid in the Company’s shares at a conversion rate equal to the daily volume weighted average sales price for the twenty trading days immediately preceding the date of conversion.

            In June 2013, the Company negotiated an additional A$2.0 million capital injection from IGS by way of a secured convertible note. In conjunction with this financing, the Company agreed to explore a listing on the Singapore Catalist Stock Exchange (SGX-ST). The convertible note will bear interest at a rate of 10% per annum, has a maturity date of October 31, 2015, and is secured by the Company’s contractual rights in the Mogollon property. The note is repayable in cash or Santa Fe Gold stock, at IGS’s election, upon a refinancing of the Company’s loan from Waterton. Additionally, a facilitation fee of $300,000 common stock of the Company is due to IGS upon the first to occur of the maturity date, refinancing date of the note, or date that all principal and interest on the note is paid-in-full. As of March 31, 2014, the Company had received advances totaling $1,250,000 in connection with the secured convertible note. When the proposed Merger Agreement with Tyhee was signed, IGS and the Company agreed to have all outstanding amounts under the notes satisfied by the issue of Company’s stock aggregating 9,259,259 shares. The Company recorded a gain of $615,781 on the extinguishment of the debt. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such stock into the US or to any US person.

            At March 31, 2014, the outstanding balance on the Secured Convertible Notes was $4,056,330.

            The components of the convertible notes payable are as follows:

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NOTE 7 – SENIOR SECURED GOLD STREAM CREDIT AGREEMENT

            On March 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provided for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche was earmarked to fund the strategic acquisition of Columbus Silver and was not drawn down due to the expiration of the Columbus Silver acquisition agreement.

            Proceeds from the initial $10 million tranche of the Credit Agreement were used to retire the Company’s $5 million, 15% Senior Secured Bridge loan with Victory Park Capital Advisors, LLC, in addition to the payment of transaction fees and expenses. The Company utilized the remaining net proceeds for operations and working capital for the Summit silver-gold project.

            The Credit Agreement provides for a 9% coupon and the initial $10 million tranche amortized over a 12-month term with the first payment due July 31, 2012. In connection with the transaction, the Company entered into a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell the gold and silver originating from the Summit property to Waterton. See NOTE 10 - COMMITMENTS.

            Pursuant to a series of guarantees, security agreements, deeds of trust, a mortgage and a stock pledge agreement, the senior obligations are secured by a first priority lien on the stock of the Company’s subsidiaries and on liens covering substantially all of the Company’s assets, with the exception of the Ortiz gold project, including the Summit silver-gold project, the Black Canyon mica project, and the Planet micaceous iron oxide project. Existing creditor, Sandstorm Gold (Barbados) Ltd., executed an intercreditor agreement that provides for subordination of its security interests in favor of Waterton. The outstanding principal amounts owed under the Credit Agreement are aggregated with Notes Payable for financial statement presentation. See NOTE 8 - NOTES PAYABLE.

            On October 9, 2012, the Company entered into the First Amendment to the Credit Agreement which modified the due dates of certain principal payments on the note. The amendment provided for principal payments of $1,082,955 in October 2012, $500,000 on November 30, 2012, $-0- in December 2012 and January 2013, and $3,852,275 on February 28, 2013. All other principal payments remained unchanged and interest payments continued to be due monthly. The Company has not made the principal payments for February 2013 or subsequent months. In addition, the July through March 2014 interest payments have not been made and are outstanding at March 31, 2014.

            On June 30, 2013, the Company signed a Waiver of Default Letter (the “Letter”) with Waterton Global Value, L.P. (“Waterton”) wherein the Company agreed to sell, convey, assign and transfer certain accounts receivable as consideration for a waiver for non-payment to Waterton under the Credit Agreement. The transfer of the accounts receivable to Waterton were applied as payment towards outstanding interest payable amounts first with any remaining transfer of receivables treated as payment towards other indebtedness under the Credit Agreement, including principal on the note. The measurement of receivables transferred was subject to revaluation in accordance with mark-to-market adjustments and final settlement of the invoices. The initial valuation of receivables under the Letter was $1,053,599 at June 30, 2013. Under terms of the Letter, interest payable was reduced by $116,693 and the principal portion of the note was reduced by $768,263, while the remaining $168,643 was recorded as financing costs in interest expense at June 30, 2013. The outstanding principal balance on the note after reduction for the transferred receivables was $7,011,282 at June 30, 2013.

            As of September 30, 2013, the valuation of receivables sold under the Letter was finalized at $1,018,056. Accordingly, final valuation adjustments were made to increase the principal portion of the note outstanding by $29,145 and to decrease financing costs by $6,398. After recording final valuation adjustments, the principal portion of the note was ultimately reduced by $739,118, while the amount recorded over two quarters as financing costs in interest expense was $162,245. There was no final valuation adjustment to interest payable. The outstanding principal balance on the note after reduction for the transferred receivables is $7,040,427 at March 31, 2014. Additionally, $813,919 of collected accounts receivable sold to Waterton remains to be remitted to them and is recorded in Other Accrued Liabilities at March 31, 2014.

            Waterton may revoke the waiver at any time and note the Company in default under the Credit Agreement. In the event that Debt Restructurings are not consummated, or should any of Waterton’s indebtedness be accelerated, the Company will not have adequate liquidity to fund its operations, meet its obligations (including its debt payment obligations) and continue as a going concern, and will likely be forced to seek relief under Chapter 11 or 15 of the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or similar creditor action may be filed against it).

NOTE 8 – NOTES PAYABLE

            On May 8, 2012, the Company entered into an installment sales contract for $46,379 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 5.75%, with the equipment securing the loan.

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            On June 1, 2012, the Company entered into an installment sales contract for $593,657 to purchase certain equipment. The term of the agreement is for 48 months at an interest rate of 5.75%, with the equipment securing the loan.

            On October 1, 2013, the Company entered into an agreement to finance insurance premiums in the amount of $168,182 at an interest rate of 4.70% with equal payments of $19,055 including interest, due monthly beginning November 1, 2013 and continuing through July 2014.

            In conjunction with the Merger Agreement, Tyhee and the Company entered into a Bridge Loan Agreement, pursuant to which Tyhee was obligated to advance up to $3.0 million to Santa Fe in accordance with the terms thereof. Tyhee advanced Santa Fe $1,745,092 of principal and accrued interest under the Bridge Loan. The Bridge Loan bears interest at a rate of 1.5% per month. At this time the Company and Tyree are in disagreement as to the due date of the Bridge Loan. Tyhee has provided Santa Fe with purported notice of default under the Bridge Loan Agreement. Given the terms of the Bridge Loan and Merger Agreement, Santa Fe believes Tyhee’s default notice is wrongful.

            The following summarizes notes payable, including the Senior Secured Gold Stream Credit Agreement, at:

            The aggregate maturities of notes payable as of March 31, 2014, is as follows:

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NOTE 9 – FAIR VALUE MEASUREMENTS

            Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

            Asset and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

            The Company’s financial instruments consist of derivative instruments which are measured at fair value on a recurring basis. 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 1 or 2 inputs. The fair value measurement of financial instruments and other assets as of March 31, 2014 and June 30, 2013 are as follows:

            The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014:

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            On August 1, 2004, the Company entered into an option and lease agreement with Ortiz Mines, Inc., a New Mexico corporation, whereby the Company acquired exclusive rights for exploration, development and mining of gold and other minerals on 57,267 acres (approximately 90 square miles) of the Ortiz Mine Grant in Santa Fe County, New Mexico. On November 1, 2007, the Company relinquished 14,970 acres and retained under lease 42,297 acres (66 square miles). On May 1, 2010, we agreed with Ortiz Mines, Inc., to amend the terms of the lease. Under the amended terms, the lease provides for an extension of the initial term from seven to ten years (17 years in certain circumstances), continuing year-to-year thereafter for so long as we are producing gold or other leased minerals in commercial quantities and otherwise are performing our obligations under the lease. Among other terms, the amended lease provides for annual lease payments of $130,000; a sliding-scale production royalty varying from 3% to 5% depending on the price of gold; the requirement that we comply with governmental permitting and other regulations; and other terms common in mining leases of this type. The Ortiz gold project is subject to a property identification agreement between us and our President and Chief Executive Officer.

            The minimum and maximum future payments due on this lease are as follows for the next five years and thereafter:

Summit Silver-Gold Project

            The Summit project is subject to two underlying royalties and a net proceeds interest as follows: (1) a 7.5% royalty on net smelter returns toward an end price of $1,250,000; (2) a 5% royalty on net smelter returns toward an end price of $4,000,000 less any amount paid under the royalty described in (1); and (3) a net proceeds interest of 5% of net proceeds from sales of unbeneficiated mineralized rock until such time as the royalties described in (1) and (2) have been satisfied, and 10% of such net proceeds thereafter toward an end price of $2,400,000. The Summit silver-gold project is subject to a property identification agreement between the Company and President and Chief Executive Officer. The property identification agreement specifies that a 1% royalty be paid on the value of future production from the project.

Mogollon Option Agreement

            On October 22, 2012, the Company entered into the Mogollon Option Agreement (the “Option Agreement”) with Columbus Exploration Corporation (“Columbus”), formerly Columbus Silver Corporation, following approval of the agreement by the TSX Venture Exchange. Under the agreement, the Company may acquire the Mogollon Project, Catron County, New Mexico, for payments aggregating $4,500,000 scheduled to be paid through the end of 2014. The Company paid an initial $100,000 upon the signing of the agreement and $150,000 upon approval of the agreement by the TSX Venture Exchange. The payment schedule calls for $500,000 to be paid on or before December 30, 2012, and four payments of $937,500 each on June 30, 2013, December 30, 2013, June 30, 2014, and December 30, 2014. Additionally, the Company must maintain the property in good standing by paying underlying claim and lease payments.

            On June 28, 2013 the Company entered into Amendment No. 1 to the Mogollon Option Agreement with Columbus. The amendment defers the due dates of option payments. In accordance with the amendment, the Company paid $50,000 in July 2013 and has an amended payment of $887,500 due on or before December 30, 2013, with three additional payments of $937,500 each due on June 30, 2014, December 30, 2014, and June 30, 2015. In consideration for the amendment, the Company transferred to Columbus its common shares held in the capital of Columbus Exploration Corporation valued at $11,914 at the time of transfer. The Company did not make the payment of $887,500 due on December 30, 2013.

            On March 6, 2014, the Company entered into an Amended and Restated Mogollon Option Agreement with Columbus. Upon execution of the new agreement the Company paid $50,000. To exercise the option the Company had the right to pay an additional $950,000 upon the closing of the merger with Tyhee Gold. In return, the Company will earn a 100% interest in the Mogollon Project with no further payments due. Upon notice of termination of the Merger on March 21, 2014, the Company has the right for three months, until June 21, 2014, to exercise the option and make the remaining payment of $950,000 and earn 100% interest in the Mogollon Project. As of March 31, 2014, the Company has made total payments of $864,159 under the various Option Agreements.

Smelting Contracts

            The Company’s sales and smelting contracts with LS Nikko, Aurubus, FMI and Asarco are currently suspended pending resumption of production.

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Commodity Supply Agreements

            In September 2009, the Company entered into a definitive gold stream agreement (the “Gold Stream Agreement”) with Sandstorm Gold Ltd. (TSX-V: SSL) (“Sandstorm”) to deliver a portion of the life-of-mine gold production (excluding all silver production) from our Summit silver-gold mine. Under the agreement we received advances of $4,000,000 as an upfront deposit, plus continue to receive future ongoing payments equal to the lesser of: $400 per ounce or the prevailing market price, (the “Fixed Price”) for each ounce of gold delivered pursuant to the agreement for the life of the mine. The Company purchases and delivers refined gold in order to satisfy the requirements of the Gold Stream Agreement and receives the Fixed Price per ounce in cash from Sandstorm. The difference between the prevailing market price and the Fixed Price per ounce for gold delivered is credited against the upfront deposit of $4,000,000 until the obligation is reduced to zero. Future ongoing payments for gold deliveries will continue at the Fixed Price per ounce with no additional credits or advances to be received from Sandstorm. 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, the Company may be required to return to Sandstorm any remaining uncredited balance of the original $4,000,000 upfront deposit. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. The net cost of delivering refined gold along with other related transactional costs corresponding to the Gold Stream Agreement are recorded in Other Expenses as financing costs - commodity supply agreements.

            On March 29, 2011, the Company entered into Amendment 1 for the Gold Stream Agreement. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. The completion guarantee test performs a calculation based upon that percentage of underproduction of gold produced relative to the amount of gold planned to have been produced as set out in the agreement. 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 the original agreement. Under the terms of the amendment the delivery of the additional gold was to be made prior to June 30, 2011.

            On June 28, 2011, the Company entered into Amendment 2 for the Gold Stream Agreement. The amendment extended the delivery date for the additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011 until October 15, 2011. In exchange for the new deferred delivery date the Company agreed to pay a per diem of 3 ounces of gold for each day the additional gold under Amendment 1 remained outstanding past June 30, 2011 until the actual date of delivery, no later than October 15, 2011. On August 9, 2011 the Company satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The net cost of delivering the gold after receiving payment from Sandstorm of $400 per ounce delivered was $1,075,785.

            At June 30, 2012, the Company calculated the completion guarantee payable provided by Amendment 1. Based upon the provisions of the Gold Stream Agreement and the related completion guarantee test, incremental financing charges totaling $504,049 were recognized and accrued at June 30, 2012. These accrued charges, combined with the remaining uncredited liability for the upfront deposit totaled $3,359,873 at March 31, 2014 and June 30, 2013 and are reported as the Completion guarantee payable.

            Under the Gold Stream Agreement the Company has a recorded obligation at March 31, 2014, of 3,676 ounces of undelivered gold valued at approximately $3.3 million, net of the Fixed Price of $400 per ounce to be received upon delivery.

            On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provided for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche, which was subject to several funding conditions, was earmarked to fund the strategic acquisition of Columbus Silver. The acquisition did not occur and consequently the second tranche was not drawn down. As part of the transaction, the Company agreed pursuant to a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell refined gold and silver to Waterton for the life the Summit mine. Gold and silver subject to the agreement includes all gold and silver originating from the Summit property that is not otherwise committed to delivery to and purchased by Sandstorm Gold, Ltd, pursuant to the September 9, 2011 Gold Stream Agreement. The sales price for refined gold and silver is based upon a formulation which considers the London Bullion Market Association (“LBMA”) PM fix settlement price for each respective metal, less a discount of three percent for each metal, and a transaction cost of $1.75 per ounce for gold and $0.07 per ounce for silver. The discount on gold and silver is only applicable until and ceases after the later of either, three years after all outstanding amounts due under the Senior Secured Gold Stream Credit Agreement have been repaid, or the date on which the Company has sold 125,000 gold equivalent ounces under the Gold and Silver Supply Agreement. The Company has recorded an obligation of $242,578 at March 31, 2014 related to the Gold and Silver Supply Agreement.

            The Company refers to the Gold Stream Agreement and Gold and Silver Supply Agreement collectively as the commodity supply agreements and records the costs related to these agreements in financing costs – commodity supply agreements.

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NOTE 11 - STOCKHOLDERS’ EQUITY

Issuance of Stock

            On January 23, 2014, the entire outstanding principal amount of the certain A$ 2.0 million Secured Convertible Note, dated June 23, 2013, issued by the Company and payable to IGS, including all accrued interest and any other amounts due or payable by the Company there under, was converted into 9,259,259 shares of common stock. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such shares into the US or to any US person. The amount payable at the time of conversion was $1,263,930, which included principal and accrued interest. The Company recorded a gain of $615,781 on extinguishment of the debt.

Issuance of Warrants

             On July 31, 2012, the Company entered into a one year agreement for investment banking services. In connection with the agreement the Company issued 4,500,000 five year warrants to purchase common stock at an exercise price of $0.40 per share. The warrants are exercisable immediately. Using the Black-Scholes option pricing model, the initial fair market value for the warrants upon execution of the agreement was determined to be $927,450 with the following assumptions: risk-free rate of interest of 0.60%, expected life of 5 years, expected stock price volatility of 82.19%, and expected dividend yield of zero. The amount has been reported as stock compensation over the period of the agreement and $78,770 was expensed during the nine months ended March 31, 2014, with $-0- remaining as unreported stock compensation.

            On January 23, 2014, the exercise prices for certain warrants were adjusted due to ratchet provisions contained in the agreements; 6,750,000 warrants were adjusted from an exercise price of $0.40 to $0.135 while 500,000 warrants were adjusted from an exercise price of $0.91 to $0.87. Additionally, both the exercise price and the number of warrants were adjusted on a third group as follows: 500,000 warrants were increased to 523,434 warrants with the exercise price adjusted from $0.40 to $0.38.

Stock Options and the 2007 Equity Incentive Plan

            During the nine months ended March 31, 2014, 600,000 options were granted, 630,000 options cancelled and 350,000 options expired.

             On December 31, 2012, the Company granted five-year options to officers and various employees to purchase 525,000 shares of common stock at an option exercise price of $0.36 per share, the closing price on the date of grant. The options will vest on January 1, 2014. The options were valued at $91,263 using the Black-Scholes option pricing model. The options were valued using the following significant assumptions: a risk free interest rate of 0.36%, expected life of 3.00 years, stock price volatility of 74.30% and expected dividend yield of zero. Stock-based compensation of $46,007 was expensed during the nine months ended March 31, 2014 and with $-0- remaining as unreported stock compensation.

            On August 6, 2013, in connection with the appointment of three new directors, Company granted 200,000 five-year options to each new director. The options will vest on August 6, 2014. The options were valued at $44,558 using the Black-Scholes option pricing model. The options were valued using the following significant assumptions: a risk-free interest rate of 0.62%, expected life of 3.0 years, stock price volatility of 82.66% and expected dividend yield of zero. Stock-based compensation of $29,054 was expensed during the nine months ended March 31, 2013 and $15,504 will be reported over the remaining vesting period.

            On October 15, 2013, the Company amended the expiration date of an aggregate of 4,000,000 outstanding common stock options. The options were originally scheduled to expire on October 15, 2013. The expiration date of the 4,000,000 options was extended to October 15, 2016. The incremental increase in the fair value of the options was determined to be $252,020 using the Black-Scholes option pricing model and was expensed as stock-based compensation during nine months ended March 31, 2014. The options were valued using the following significant assumptions: a risk-free interest rate of 0.16%, expected life of 1.5 years, stock price volatility of 79.28% and expected dividend yield of zero.

            In addition to options under the 1989 Stock Option Plan and 2007 EIP, the Company previously issued non-plan options outside of these plans, exercisable over various terms up to a maximum of ten years.

            Stock option and warrant activity, both within the 1989 Stock Option Plan and 2007 EIP and outside of these plans, for the nine months ended March 31, 2014, are as follows:

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Stock options and warrants outstanding and exercisable at March 31, 2014, are as follows:

            As of March 31, 2014, the aggregate intrinsic value of all stock options and warrants vested and expected to vest was $-0- and the aggregate intrinsic value of currently exercisable stock options and warrants was $-0-. 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 $0.05 closing stock price of the common stock on March 31, 2014. There were no In-the-money options and warrants vested and exercisable as of March 31, 2014.

            The total intrinsic value associated with options exercised during the nine months ended March 31, 2014, was $-0-. 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 total fair value of options and warrants granted and extended during the nine months ended March 31, 2014, was approximately $296,579. The total grant-date fair value of option and warrant shares vested during the nine months ended March 31, 2014, was $16,189.

NOTE 12 – LEGAL PROCEEDINGS

            In October 2013 Lone Mountain Ranch, LLC, owner of the surface estate overlying our Ortiz gold property, filed a lawsuit against the Company and our lessor, Ortiz Mines, Inc. The lawsuit seeks to clarify Lone Mountain Ranch's rights and obligations under the split estate regime. Specifically, Lone Mountain Ranch seeks a declaratory judgment that it may participate in permit hearings, agency proceedings, and private activities related to the permitting of the Ortiz project without being in violation of common law duties to not interfere with development of the mineral estate.

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             On March 5, 2014 the Company announced it had received notice that Tony Cavanaugh, an alleged stockholder of the Company, filed in the Second Judicial District Court of the State of New Mexico, County of Bernalillo, a purported class action complaint on behalf of himself and all others similarly situated, against the Company, the five current members of its Board of Directors, and Tyhee Gold Corp. and Tyhee Merger Sub, Inc. (collectively, “Tyhee”). The plaintiff contended that the members of the Company’s Board of Directors breached their fiduciary duties arising out of their efforts to effectuate the merger of Santa Fe and Tyhee pursuant to an unfair process, for an unfair price and lacking material disclosures. Further, the plaintiff contended that Tyhee aided and abetted such conduct. The plaintiff’s complaint sought, among other things, damages, injunctive relief, recession of the proposed Tyhee transaction to the extent already implemented, and reasonable attorneys’ and experts’ fees. On March 31, 2014 the Company announced that the purported class action filed by Tony Cavanaugh had been dismissed without prejudice.

NOTE 13 – SUBSEQUENT EVENTS

            On April 3, 2014, the Company agreed to issue 370,371 shares of Santa Fe’s common stock at a price of $0.135 per share to Muzz Investments LLC, in fulfillment of the obligation to pay $50,000 in return for release of any residual liability related to the 2006 sale of real properly in Glendale, Arizona formerly owned by Azco Mica, Inc.

            On May 12, 2014, the Company announced the appointment of Mr. Frank Mueller as Interim CFO and Corporate Secretary, to replace Mr. Michael Martinez and Mr. Ryan Carson who have departed the Company and who previously held those respective positions.

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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 period ended March 31, 2014, and compares those results to the three and nine month period ended March 31, 2013. It also analyzes our financial condition at March 31, 2014. 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, 2013, 2012 and 2011 and Notes to the audited financial statements, in our Form 10-K for our fiscal year ended June 30, 2013.

             The discussion also presents certain Non-GAAP performance measures that are important to management in its evaluation of our operational results and which are used by management to compare our performance with that of comparable peer group mining companies. For a detailed description of each of the Non-GAAP financial measures, please see discussion under Non-GAAP Measures.

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.

            On November 8, 2013, the Company suspended all mining operations and placed its Summit mine and mill on a care and maintenance program.

            At March 31, 2013, the Company was in arrears on payments totaling approximately $8.5 million under its Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”) and approximately $6.6 million under a gold stream agreement (the “Gold Stream Agreement”) with Sandstorm Gold Ltd. and Sandstorm Gold (Barbados) Ltd. (collectively, “Sandstorm”). On June 30, 2013, the Company signed a Waiver of Default Letter with Waterton wherein Waterton agreed to waive any payment defaults under the Credit Agreement. On September 30, 2013, Waterton issued a separate letter re-confirming the waiver of default for non-payment under the Credit Agreement. Waterton may revoke the waiver at any time and note the Company in default.

            On January 23, 2014, the Company entered into a definitive merger agreement (the “Merger Agreement”) with Tyhee Gold Corp. (TSX Venture: TDC) (“Tyhee”), and Tyhee Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Tyhee (“Merger Sub”). Completion of the Merger was subject to customary conditions, including (i) the adoption of the Merger Agreement by the required vote of the holders of outstanding Company Common Stock, (ii) the Securities and Exchange Commission (the “SEC”) having declared effective a Registration Statement registering the Tyhee Common Shares and Tyhee Warrants under the Securities Act of 1933, as amended, (iii) the consummation of the comprehensive secured debt restructurings, (iv) receipt of the approval of the TSX Venture Exchange, and (v) Tyhee closing a qualified financing of at least $20 million (a “Qualified Financing”). Additional details of the Merger Agreement and the related anticipated secured debt restructurings can be found in the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2014, and available at www.sec.gov. On March 23, 2014, the Company announced that it had terminated the Merger Agreement as a result of Tyhee’s failure to close the Qualified Financing of $20 million. In connection with the execution of the Merger Agreement, Waterton and Sandstorm entered into respective preliminary agreements to restructure its Santa Fe indebtedness. Since the Company has terminated the Merger Agreement, because of Tyhee’s failure to consummate a qualified financing as required by the Merger Agreement, either Waterton or Sandstorm may note Santa Fe in default. As of the date of this filing, neither Waterton nor Sandstorm has delivered a notice of default.

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            The Company is in active discussions with several private equity funds and potential strategic investors concerning a potential strategic or financing transaction with Santa Fe. There can be no assurance that a strategic transaction or additional financing will be available at all or on acceptable terms. If a strategic transaction or additional financing is not available, or if the Company fails to restructure or refinance its secured indebtedness with Waterton and Sandstorm (the “Debt Restructurings”), or should any of such indebtedness be accelerated, or should any of the Company’s unsecured creditors obtain a judgment against the Company, the Company will not have adequate liquidity to fund its operations, meet its obligations (including its debt payment obligations) and continue as a going concern, and will likely be forced to seek relief under Chapter 11 or 15 of the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or similar creditor action may be filed against it).

            The results of operations for the nine months ended March 31, 2014, reflect the under-capitalization of our Summit silver-gold project and the suspension all mining operations and placed its Summit mine and mill on a care and maintenance program in November 2013. We require additional funding for restart of mining and mill operations and adequate funding to full project performance and sustained potential profitability. With adequate financing, we expect results of continued operations in fiscal 2014 to reflect improved performance of the Summit mine. However, there is significant uncertainty in our Summit estimates of both future costs and future revenues, and we require additional capital resources to complete our plans.

            Our sales decreased for the nine months ended March 31, 2014 to $2,013,496 as compared to $13,254,995 for the same prior year period, a decrease of $11,241,499. We temporarily suspended all mining operations in early November 2013, which decreased our production output for the current period. Our sales for the current quarter were significantly lower than forecasted and were adversely affected by continuing equipment issues and undercapitalization of our Summit project.

            We anticipate a need for approximately $23 million over the next 12 months, and $48.0 million over the next 36 months in order to satisfy past commitments and notes, pay corporate overhead costs, complete Summit development, and fund feasibility studies and exploration programs as discussed under the Liquidity and Capital Resources section of this report. A portion of the required funding may be generated from cash flows from our Summit mine. If we fail to procure adequate funding on acceptable terms, we may be required to reduce or eliminate substantially all business activities until such time as funding on a basis acceptable to us can be secured.

Basis of Presentation and Going Concern

            The consolidated unaudited 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 we be unable to continue as a going concern, we may be unable to realize the carrying value of our assets and to meet our obligations as they become due.

            At March 31, 2014, we have a total accumulated deficit of $82,670,117 and have a working capital deficit of $22,117,271. To continue as a going concern, we are dependent on continued fund raising or other a strategic alternative financing vehicles. See Liquidity and Capital Resources; Plan of Operation below for additional details.

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

Liquidity and Capital Resources; Plan of Operation

            As of March 31, 2014, we had cash and cash equivalents of $410,764 as compared to $115,094 at June 30, 2013 and we had accounts receivable of $-0- at March 31, 2014 as compared to $273,797 at June 30, 2013. As of March 31, 2014, we had a working capital deficit of $22,117,271.

            On June 30, 2013, we signed a Waiver of Default Letter (the “Letter”) with Waterton wherein we agreed to sell, convey, assign and transfer certain accounts receivable as consideration for a waiver for non-payment to Waterton under the Credit Agreement. The transfer of the accounts receivable to Waterton were treated as payment towards outstanding interest payable amounts first with the remaining transfer of receivables treated as payment towards other indebtedness under the Credit Agreement, including principal on the note. The measurement of receivables transferred was subject to revaluation in accordance with mark-to-market adjustments and final settlement of the invoices. The final valuation of receivables under the Letter is $1,018,056. Under terms of the Letter, interest payable was reduced by $116,693, and the principal portion of the note was reduced by $739,118, while the final net amount recorded as financing costs in interest expense was $162,245 recorded over two quarters, with $168,643 recorded at June 30, 2013 and the final adjustment of $(6,398) recorded at September 30, 2013. The outstanding principal balance on the note after reduction for the transferred receivables is $7,040,427 at March 31, 2014. Additionally, $813,919 of collected accounts receivable sold to Waterton remains to be remitted to them and is recorded in Other Accrued Liabilities at March 31, 2014.

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             In July 2013, we negotiated an additional A$2.0 million working capital injection from IGS by way of a secured convertible note. The convertible note bears interest at a rate of 10% per annum, has a maturity date of October 31, 2015, and is secured by our contractual rights in the Mogollon property. Additionally, a facilitation fee of $300,000 common stock of the Company is due to IGS upon the first to occur of the maturity date, refinancing date of the note, or date that all principal and interest on the note is paid-in-full. The note is repayable in cash or Santa Fe Gold stock, at IGS’s election, upon refinancing of our loan from Waterton. As of January 23, 2014, we had received advances totaling US$1,250,000 in connection with the secured convertible note. In connection with the execution of the Merger Agreement on January 23, 2014, IGS converted all amounts due and payable under the note including all outstanding principal and accrued interest into 9,259,259 shares of our common stock. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such stock into the US or to any US person. The amount payable at the time of conversion was $1,263,930, which included principle and accrued interest. The Company recorded a gain of $615,781on extinguishment of the debt.

            On September 30, 2013, Waterton issued a separate letter re-confirming the waiver of default for non-payment under the Credit Agreement. Waterton may revoke the waiver at any time and note the Company in default under the Credit Agreement In the event that debt restructurings are not consummated or should any of Waterton or Sandstorm’s indebtedness be accelerated, we do not have adequate liquidity to fund our operations, meet our obligations (including our debt payment obligations) and continue as a going concern, we may be forced to seek relief under Chapter 11 or 15 of the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or similar creditor action may be filed against us).

            We are in arrears on payments totaling approximately $8.5 million under the Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton and approximately $6.6 million under a gold stream agreement (the “Gold Stream Agreement”) with Sandstorm at March 31, 2014.

            On November 8, 2013, the Company temporarily suspended operations and placed the mine on care and maintenance status in order to cut costs and preserve our reserves while seeking a sufficient amount of funding for equipment and working capital in order to resume long-term profitable operations.

            In connection with the execution of the Merger Agreement, each of our three senior secured creditors, Waterton Global Value, L.P., Sandstorm Gold Ltd. and Sandstorm Gold (Barbados) Ltd., and International Goldfields Limited, have entered into respective non-binding agreements to restructure collectively more than $23.1 million of our indebtedness. Additionally Tyhee and the Company entered into a Bridge Loan Agreement, pursuant to which Tyhee was obligated to advance up to $3.0 million to the Company in accordance with the terms thereof. As of March 23, 2014, the Company received $1,745,092 in accordance with the terms of the Bridge Loan. On March 23, 2014, we announced that we terminated the Merger Agreement as a result of Tyhee’s failure to close the Qualified Financing of $20 million. Tyhee has provided Santa Fe with a purported notice of default under the Bridge Loan. At this time we are in disagreement with Tyree as to the due date, interest and principal of the Bridge Loan.

            Currently we have no other current continuing commitment from any party to provide additional working capital, or if one becomes available, there is no certainty that its terms will be favorable or acceptable to the Company. We are currently in process of discussions with various strategic financing alternatives. It is unknown if such discussions will be successful in attaining a financing facility which will allow the Company to continue operations under a revised business plan. If discussions with these financing sources are unsuccessful we will not be able to continue as a going concern, and will likely be forced to seek relief under the U.S. Bankruptcy Code.

            Upon securing adequate funding for equipment and working capital, we intend to continue working towards achieving our goal of sustained production of 10,000 tons of ore per month from the Summit mine. Additionally, during fiscal 2014 we will be working towards optimizing the performance of the mine, with the objective of meeting or exceeding our targets of production for both tons and grades. Cost control and other measures also are planned to attempt to increase efficiency and profitability.

            Our Lordsburg flotation mill constitutes a strategic asset with flexibility to handle various ore types and has significant extra processing capacity. In addition to the Summit mine, we will place a strong emphasis on developing new sources of ore for the mill with acceptable transportation costs to the mill and thereby build our production profile.

            We engaged an independent engineering firm to prepare a Canadian standard NI 43-101 technical report on two deposits located at the Ortiz Gold Project site. The engineering firm completed a resource calculation in November 2012, which was released by International Goldfields Ltd as an Australian - standard JORC compliant resource statement. The NI 43-101 report in currently in an advanced draft form, and a Preliminary Economic Assessment has been completed. Currently the Company is conducting technical and baseline environmental studies in preparation for possible permitting and mining.

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.

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            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 a 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, 2014 and 2013

            Sales, net

            During the three months ended March 31, 2014, we recorded $(205,761) in concentrate and flux sales, net of treatment charges, compared to $3,313,077 for the three months ended March 31, 2013, a decrease of $3,518,838. The change is the result of a drop-off in production as we suspended all mining operations in early November 2013 and placed the mine and mill on a care and maintenance program. The decrease is also attributable to adjustments to revenues due to the decrease prices of gold and silver in the third quarter. Revenues are adjusted from the estimated recorded sales in the second quarter to actual market prices at final settlement in the third quarter.

            Costs applicable to sales

            During the three months ended March 31, 2014, costs applicable to sales totaled $-0- as compared to $3,001,655 for the same comparable period in 2013. The decrease for the period corresponds with the decrease in production of tons processed as compared to the prior year comparable period and reflected by our decision to temporarily suspend all mining operations in early November 2013.

            Exploration

            Exploration and other mine related costs were $503,226 for the three months ended March 31, 2014, as compared to $786,045 for the prior period of measurement, a decrease of $282,819. The decrease in the current period of measurement is mainly attributable to decreased costs incurred on the Ortiz and Lordsburg properties in the current year period of measurement.

            General and Administrative

            General and administrative expenses decreased to $1,038,668 for the three months ended March 31, 2014, from $1,149,088 for the comparative three month period ended March 31, 2013, a decrease of approximately $110,000. General and administrative expenses include salaries and benefits, stock-based compensation, professional and consulting fees, marketing and investor relations, and travel costs. The decrease is mainly attributable to cutbacks in current operations due to the Company’s decision to suspended all mining operations in early November 2013 and placed the mine and mill on a care and maintenance program.

            Depreciation and Amortization

            Depreciation and amortization expense decreased to $541,928 for the three months ended March 31, 2014, as compared to $1,035,927 for the three months ended March 31, 2013, a decrease of approximately $494,000. The decrease in the current period is attributable primarily to the decrease in production and a corresponding decrease in the amortization of mine development costs which are amortized on a units-of-production basis. Reduced depreciation on fully depreciated equipment also contributed to the decrease.

            Impairment of Idle Equipment

            The Company has certain idle equipment in storage related primarily to the Black Canyon project. The equipment’s carrying value totaled $411,600 and $1,223,528 as of March 31, 2014 and March 31, 2013, respectively. The Company re-evaluated the carrying value of the idle equipment during the current period in connection with the possible sale of the idle equipment. The current estimated value is based on a detailed review of the idle equipment inventory and valuation in the current market for used processing equipment. The Company recorded an impairment of $761,928 during the three months ended March 31, 2014 compared to $-0- in the same comparable prior period in 2013.

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            Other Income and Expenses

            Other income and (expenses) for the three months ended March 31, 2014, was $(69,492) as compared to $(127,862 for the three months ended March 31, 2013 a increase in other expenses of approximately $197,000.

            The net increase in expenses for the three months ended March 31, 2014, compared to the same comparable period in 2013, is mainly comprised of the following components: increased loss recognized on foreign currency translation of approximately $200,000 and a reduced gain on derivative instrument liabilities of approximately $994,000. These increases were offset by a gain on debt extinguishment of approximately $616,000 and decreases in financing costs related to the commodity supply agreements approximating $310,000; and a decrease in interest expense of approximately $107,000. Further information regarding the changes in the various components of Other Income and Expenses is discussed in the categories below.

            Gain on Extinguishment of Debt

            On January 23, 2014, the entire outstanding principal amount of the certain A$ 2.0 million Secured Convertible Note, dated June 23, 2013, issued by the Company and payable to IGS, including all accrued interest and any other amounts due or payable by the Company there under, was converted into 9,259,259 shares of common stock. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such stock into the US or to any US person. The amount payable at the time of conversion was $1,263,930, which included principle and accrued interest. The Company recorded a gain of $615,781on extinguishment of the debt.

            Gain on Derivative Financial Instruments

            For the three months ended March 31, 2014, the gain on derivative financial instruments totaled $134,138 as compared to $1,127,873 for the three months ended March 31, 2013. The changes in derivative financial instruments are non-cash items and arise from adjustments to record the derivative financial instruments at fair values in accordance with pronounced accounting standards. These changes are attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, 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 the derivative financial instruments. Due to anti-dilutive provisions of several derivative instruments, the Company was required to reprice the exercise of the affected warrants and also issue an additional 23,434 warrants during the current period of measurement. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility to the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

            Financing costs – commodity supply agreements

            The financing costs for commodity supply agreements relate directly to production for the period and the subsequent delivery of refined precious metals to Sandstorm and Waterton. These financing costs are adjusted period-to-period based upon the total number of undelivered gold and silver ounces outstanding at the end of each period valued at current spot prices. For the three months ended March 31, 2014, these adjusted financing costs resulted in $251,739 expense as compared to $561,282 of expense for the three months ended March 31, 2013. The reduction of expense from March 31, 2013 and subsequent recording of no income in the current period is driven by both a decrease in the number of ounces produced for the period as well as a decrease in precious metals prices.

            Interest expense

            For the three months ended March 31, 2014, interest expense totaled $319,508 as compared to $426,230 for the three months ended March 31, 2013. The decrease of approximately $107,000 is mainly attributable to the cessation of an additional interest expense premium calculated and recorded only at the time principal payments are made, which did not occur during the current period. Interest expense relating to the coupon rate of the note continued to be recorded and also decreased due to reduction of the outstanding balance on the notes from period to period.

Operating Results for the Nine Months Ended March 31, 2014 and 2013

            Sales, net

            During the nine months ended March 31, 2014, we generated $2,013,496 in concentrate and flux sales, net of treatment charges, compared to $13,254,995 for the nine months ended March 31, 2013, an 84% decrease of $11,241,499. We temporarily suspended all mining operations in early November 2013 and placed the mine and mill on a care and maintenance program.

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            Costs applicable to sales

            During the nine months ended March 31, 2014, costs applicable to sales totaled $3,213,205 as compared to $9,615,367 for the same comparable period in 2013, a decrease of $6,402,162 or 66%. The decrease for the period corresponds with the decrease in production of tons processed as compared to the prior year period and reflected by our decision to temporarily suspend all mining operations in early November 2013.

            Exploration

            Exploration and other mine related costs were $737,403 for the nine months ended March 31, 2014, as compared to $1,458,431 for the prior period of measurement, a decrease of $721,028. The decrease in the current period of measurement is mainly attributable to decreased costs incurred on the Ortiz property aggregating $$440,811 and the Lordsburg property of $472,794 in the current period of measurement.

            General and Administrative

            General and administrative expenses increased to $2,942,713 for the nine months ended March 31, 2014, from $2,941,075 for the comparative nine month period ended March 31, 2013, an increase of approximately $1,638. General and administrative expenses include salaries and benefits, stock-based compensation, professional and consulting fees, marketing and investor relations, and travel costs.

            Depreciation and Amortization

            Depreciation and amortization expense decreased to $1,977,247 for the nine months ended March 31, 2014, as compared to $3,238,017 for the nine months ended March 31, 2013. The decrease in the current period is primarily attributable to the decrease in production and a corresponding decrease in the amortization of mine development costs which are amortized on a units-of-production basis. Reduced depreciation on fully depreciated equipment also contributed to the decrease.

            Impairment of Idle Equipment

            The Company has certain idle equipment in storage related primarily to the Black Canyon project. The equipment’s carrying value totaled $411,600 and $1,223,528 for the nine month periods ended March 31, 2014 and 2013, respectively. The Company re-evaluated the carrying value of the idle equipment during the current period in connection with the possible sale of the idle equipment. The current estimated value is based on a detailed review of the idle equipment inventory and valuation in the current market for used processing equipment. The Company recorded an impairment of $761,928 during the nine months ended March 31, 2014 compared to $-0- in the same comparable prior period in 2013.

            Other Income and Expenses

            Other income and (expenses) for the nine months ended March 31, 2014, was $(846,266) as compared to $(3,811,929) for the nine months ended March 31, 2013 a decrease in other expenses of approximately $2,965,663.

            The net decrease in expenses for the nine months ended March 31, 2014, compared to the same comparable period in 2013, is mainly comprised of the following components: decreased cost recognized on foreign currency translation of approximately $90,000; decrease in financing costs related to the commodity supply agreements approximating $2,094,000; decrease in interest expense of approximately $711,000: and recognition of a gain on debt extinguishment of approximately $616,000., These decreases in costs were offset by increases in accretion of discounts on noted payable of approximately $18,000 and a decrease in gain on derivative instruments liability of approximately $526,000. Further information regarding the changes in the various components of Other Income and Expenses is discussed in the categories below.

            Gain on Extinguishment of Debt

            On January 23, 2014, the entire outstanding principal amount of the certain A$ 2.0 million Secured Convertible Note, dated June 23, 2013, issued by the Company and payable to IGS, including all accrued interest and any other amounts due or payable by the Company there under, was converted into 9,259,259 shares of common stock. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such stock into the US or to any US person. The amount payable at the time of conversion was $1,263,930, which included principle and accrued interest. The Company recorded a gain of $615,781 on extinguishment of the debt.

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            Gain on Derivative Financial Instruments

            For the nine months ended March 31, 2014, the gain on derivative financial instruments totaled $279,513 as compared to a gain of $805,565 recorded for the nine months ended March 31, 2013. The changes in derivative financial instruments are non-cash items and arise from adjustments to record the derivative financial instruments at fair values in accordance with pronounced accounting standards. These changes are attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, 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 the derivative financial instruments. Due to anti-dilutive provisions of several derivative instruments, the Company was required to reprice the exercise of the affected warrants and also issue an additional 23,434 warrants during this period of measurement. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility to the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

            Accretion of Discounts on Notes Payable

             For the nine months ended March 31, 2014, accretion of discounts on notes payable totaled $31,094 as compared to $12,672 for the nine months ended March 31, 2013. The increase is the result of the issuance of warrants and a corresponding discount recorded and accreted in relation to the extension of due dates for senior subordinated convertible notes aggregating $450,000.

            Financing costs – commodity supply agreements

            The financing costs for commodity supply agreements relate directly to production for the period and the subsequent delivery of refined precious metals to Sandstorm and Waterton. These financing costs are adjusted period-to-period based upon the total number of undelivered gold and silver ounces outstanding at the end of each period valued at current spot prices. For the nine months ended March 31, 2014, these adjusted financing costs totaled $736,384 as compared to $2,830,007 for the nine months ended March 31, 2013 a decrease of approximately $2,093,000. The reduction in the current period is driven by both a decrease in the number of ounces produced for the period as well as a decrease in precious metals prices.

            Interest expense

            For the nine months ended March 31, 2014, interest expense totaled $1,000,243 as compared to $1,711,366 for the nine months ended March 31, 2013. The decrease of approximately $711,000 is mainly attributable to the cessation of an additional interest expense premium calculated and recorded only at the time principal payments are made, which did not occur during the current period. Interest expense relating to the coupon rate of the note continued to be recorded and also decreased due to reduction of the outstanding balance on the notes from period to period.

Non-GAAP Measures

            Throughout this report we have provided information prepared or calculated in accordance with U.S. GAAP, in addition to various non-U.S. GAAP (“Non-GAAP”) performance measures. Since our Non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly these measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.

Production Statistics, Sales Statistics, and Cash Costs

            Presented below are selected key operating measures for our Summit underground mine and Banner mill processing facility for the nine months ended March 31, 2014 and March 31, 2013. In the presentation of our production statistics, we utilize the terms ‘contained metals’ and ‘payable metals’. Contained metals represent the number of ounces before metallurgical losses, primarily recoveries, and payable metals deductions levied by a smelter; whereas payable metals represents the number of ounces after metallurgical losses, primarily recoveries, and payable metals deductions levied by a smelter. Payable metals sold represent the final number of ounces which are used to record sales.

            We temporarily suspended all mining operations in early November 2013 and placed the mine and mill on a care and maintenance program.

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PRODUCTION STATISTICS

SALES STATISTICS

            Total Cash Cost per Gold Equivalent Ounce Sold

            We utilize total cash cost (including royalties and resource taxes) per gold equivalent ounce sold, calculated in accordance with the Gold Institute’s Standard, as one indicator for comparative monitoring of our mining operations from period to period. Total cash costs are calculated using cost of sales, plus treatment and refining charges (which are netted against revenues). Total cash costs are divided by gold equivalent ounces sold (gold sold, plus gold equivalent ounces of silver sold converted to gold using our realized gold price to silver price ratio to arrive at total cash cost per gold equivalent ounce sold.

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            We also utilize operating cash costs per gold equivalent ounce to measure our performance. The principal difference between operating cash costs and total cash costs is that operating cash costs exclude royalty payments and resource taxes whereas total cash costs include royalty payments and resource taxes. Total cash cost per ounce figures for all periods presented in this Management’s Discussion and Analysis are presented on an ounces sold basis. There can be no assurance that our reporting of these Non-GAAP measures is similar to that reported by other mining companies.

            We have reconciled operating cash cost per gold equivalent ounce sold and total cash cost per gold equivalent ounce sold to reported U.S. GAAP measures in the table below. The most comparable financial measures to our operating cash cost and total cash cost is costs applicable to sales calculated in accordance with U.S. GAAP. Costs applicable to sales are obtained from the unaudited consolidated statements of operations.

            The increase in cash costs per gold equivalent ounce between the nine month comparable periods is the result of a decrease in production resulting from fewer tons processed during the current period and accompanied by a decrease in the average grade for silver. Equipment issues and production downtime continued to be encountered during the current period, and the mining operations were suspended on November 8, 2013 pending the sourcing of sufficient capital to recapitalize the project and resume profitable operations.

CASH COST STATISTICS

Factors Affecting Future Operating Results

            We continue to deploy our plan to place the Company on an improved financial footing, including refinancing existing debt obligations and securing additional production equipment and corresponding working capital related to increased production. We plan to procure capital with a combination of short and long term financing arrangements and/or equity placements as required. If we are able to secure required financing on acceptable terms, we believe we will be in a position to execute our business plan on our current property sites and to strengthen our overall financial position.

            Currently we have no other continuing commitment from any party to provide additional working capital, or if one becomes available, there is no certainty that its terms will be favorable or acceptable to the Company. We are currently in process of discussions with various strategic financing alternatives. It is unknown if such discussions will be successful in attaining a financing facility which will allow the Company to continue operations under a revised business plan. If discussions with these financing sources are unsuccessful we will not be able to continue as a going concern, and will likely be forced to seek relief under the U.S. Bankruptcy Code.

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Off-Balance Sheet Arrangements

            During the three months ended March 31, 2014, 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, 2013.

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 Accounting Officer, or persons performing similar functions, have conducted an evaluation of our disclosure controls and procedures as of March 31, 2014.

            Based on this evaluation, our Chief Executive Officer and Principal Accounting Officer have 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.

             During the quarter ended March 31, 2014, 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. On May 8, 2014, Michael P. Martinez, Chief Financial Officer and Principal Accounting Officer, departed employment with the Company and was replaced by Frank G. Mueller as Interim Chief financial Officer and Principal Accounting Officer. Based on these changes, our internal controls over financial reporting remain effective.

            Our Management including our CEO and Principal Accounting Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

             In October 2013 Lone Mountain Ranch, LLC, owner of the surface estate overlying our Ortiz gold property, filed a lawsuit against us and our lessor, Ortiz Mines, Inc. The lawsuit seeks to clarify Lone Mountain Ranch's rights and obligations under the split estate regime. Specifically, Lone Mountain Ranch seeks a declaratory judgment that it may participate in permit hearings, agency proceedings, and private activities related to the permitting of the Ortiz project without being in violation of common law duties to not interfere with development of the mineral estate.

            On March 5, 2014 the Company announced it had received notice that Tony Cavanaugh, an alleged stockholder of the Company, filed in the Second Judicial District Court of the State of New Mexico, County of Bernalillo, a purported class action complaint on behalf of himself and all others similarly situated, against the Company, the five current members of its Board of Directors, and Tyhee Gold Corp. and Tyhee Merger Sub, Inc. (collectively, “Tyhee”). The plaintiff contended that the members of the Company’s Board of Directors breached their fiduciary duties arising out of their efforts to effectuate the merger of Santa Fe and Tyhee pursuant to an unfair process, for an unfair price and lacking material disclosures. Further, the plaintiff contended that Tyhee aided and abetted such conduct. The plaintiff’s complaint sought, among other things, damages, injunctive relief, recession of the proposed Tyhee transaction to the extent already implemented, and reasonable attorneys’ and experts’ fees. On March 31, 2014 the Company announced that the purported class action filed by Tony Cavanaugh had been dismissed without prejudice.

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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 our year fiscal ended June 30, 2013, 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.

            At March 31, 2013, the Company was in arrears on payments totaling approximately $8.5 million under its Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”) and approximately $6.6 million under a gold stream agreement (the “Gold Stream Agreement”) with Sandstorm Gold Ltd. and Sandstorm Gold (Barbados) Ltd. (collectively, “Sandstorm”).

            The Company is in active discussions with several private equity funds and potential strategic investors that have expressed an interest in pursuing a strategic transaction with Santa Fe. There can be no assurance that a strategic transaction or additional financing will be available at all or on acceptable terms. If a strategic transaction or additional financing is not available, or if the Company fails to restructure or refinance its secured indebtedness with Waterton and Sandstorm or should any of such indebtedness be accelerated, the Company will not have adequate liquidity to fund its operations, meet its obligations (including its debt payment obligations) and continue as a going concern, and will likely be forced to seek relief under Chapter 11 or 15 of the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy relief or similar creditor action may be filed against it).

            Equipment issues and production downtime continued to be encountered during the current year period, and the mining operations were suspended on November 8, 2013 pending the sourcing of sufficient capital to recapitalize the project and resume profitable operations.

            Except as set forth herein, as of March 31, 2014, 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, 2013, 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

            On January 23, 2014, the entire outstanding principal amount of the certain A$ 2.0 million Secured Convertible Note, dated June 23, 2013, issued by the Company and payable to IGS, including all accrued interest and any other amounts due or payable by the Company there under, was converted into 9,259,259 shares of common stock. The stock was issued pursuant to an exemption from registration under Regulation S of the Securities Act of 1933, as amended, and IGS is restricted from selling any of such stock into the US or to any US person. The amount payable at the time of conversion was $1,263,930, which included principle and accrued interest. The Company recorded a gain of $615,781on extinguishment of the debt.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

            None.

ITEM 4. 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 nine months ended March 31, 2013 are as follows:

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Pending legal action before the Mine Safety and Health Review Commission: We have multiple citation protests pending before the Commission.

ITEM 5. OTHER INFORMATION

            None

ITEM 6. EXHIBITS

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

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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.

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