XTRA-GOLD RESOURCES CORP - Quarter Report: 2011 September (Form 10-Q)

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

FORM 10-Q

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

For the quarterly period ended September 30, 2011

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

For the transition period from ________________to ________________

Commission File No. 333-139037

 
  (Exact name of registrant as specified in its charter)

360 BAY STREET – SUITE 301
TORONTO, ONTARIO – M5H 2V6 – CANADA
(Address of principal executive offices)

416 366-4227
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to the filing requirements for the past 90 days.

 [ X ] Yes  [   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or

for such shorter period that the registrant was required to submit and post such files).

[ X ] Yes  [   ] 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

 [   ] Yes [ X ] No

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

History and organization of the Company (Note 1)
Contingency and commitments (Note 15)
Subsequent events (Note 16)

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

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

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)

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

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Supplemental disclosure with respect to cash flows (Note 13)

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

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

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

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The Company follows the full cost method of accounting for oil and natural gas operations. Under this method, all costs associated with the acquisition of, exploration for, and development of, oil and gas reserves, are capitalized in cost centers on a country-by-country basis. Such costs include property acquisition costs, geological and geophysical studies, carrying charges on non-producing properties, costs of drilling productive wells, and overhead expenses directly related to these activities.

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

Equipment

Equipment is recorded at cost and is being amortized over its estimated useful life using the declining balance method at the following annual rates:

Deferred financing costs

Deferred financing costs consist of expenses incurred to obtain funds pursuant to the issuance of the convertible debentures and are being amortized straight-line over the term of the debentures.

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

The fair values of cash and cash equivalents, restricted cash and marketable securities are determined through market, observable and corroborated sources.

Concentration of credit risk

The financial instrument which potentially subjects the Company to concentration of credit risk is cash and cash equivalents and restricted cash. The Company maintains cash in bank accounts that, at times, may exceed federally insured limits. As of September 30, 2011 and December 31, 2010, the Company has exceeded the federally insured limit. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

Recent accounting pronouncements

In April 2010, the FASB issued ASU 2010-13, Compensation – Stock Compensation (Topic 718), amending ASC 718. ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which the entity's equity securities trade should not be classified as a liability if it otherwise qualifies as equity. ASU 2010-13 also improves GAAP by improving consistency in financial reporting by eliminating diversity in practice. ASU 2010-13 is effective for interim and annual reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company). The Company does not expect its adoption to have a material impact on the Company's financial reporting and disclosures.

In December 2010, the FASB issued ASU 2010-29, which contains updated accounting guidance to clarify the acquisition date that should be used for reporting pro forma financial information when comparative financial statements are issued. This update requires that a company should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This update also requires disclosure of the nature and amount of material, nonrecurring pro forma adjustments. The provisions of this update, which are to be applied prospectively, are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. The impact of this update on the Company's consolidated financial statements will depend on the size and nature of future business combinations.

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

As of December 31, 2009, the Company had made a deposit of $151,506 to acquire mining equipment, which was delivered during the year ended December 31, 2010.

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

The 1,000,000 Buccaneer shares received were valued at $411,440 at the date of the agreement. This value reduced the mineral properties value on the balance sheet. The shares are included in the investments account on the balance sheet and marked to market at the end of each reporting period. Further cash option payments received reduced the carrying value of the Muoso and Banso properties on the balance sheet.

Option agreement on Edum Banso Project

In October, 2005, XG Exploration entered into an option agreement (the “Option Agreement”) with Adom Mining Limited (“Adom”) to acquire 100% of Adom’s right, title and interest in and to a prospecting license on the Edum Banso concession (the “Edum Banso Project”) located in Ghana. Adom further granted XG Exploration the right to explore, develop, mine and sell mineral products from this concession. The prospecting license has been renewed for a two year period expiring on July 21, 2013.

The consideration paid for the Option Agreement was $15,000 with additional payments of $5,000 to be paid on the anniversary date of the Option Agreement in each year during the term; which term has been extended to November 11, 2013. Upon the commencement of gold production, an additional $200,000 is to be paid, unless proven and probable reserves are less than 2,000,000 ounces, in which case the payment shall be reduced to $100,000.

Upon successful transfer of title from Adom to XG Exploration, a production royalty (the “Royalty”) of 2% of the net smelter returns shall be paid to Adom; provided, however that in the event that less than 2,000,000 ounces of proven and probable reserves are discovered, then the Royalty shall be 1%. The Royalty can be purchased by XG Exploration for $2,000,000; which will be reduced to $1,000,000 if proven and probable reserves are less than 2,000,000 ounces.

During August 2011, the Company assigned its interest in the Edum Banso Project to Norman Cay Development Inc. (“NCD”) for cash of US$125,000, 1,000,000 NCD shares, valued at US$260,000 and an option payment of US$135,000 payable in six months from the date of assignment of the option interest. If NCD does not exercise its six-month option the Project reverts to the Company. Of the payments received, US$20,000 reduced the carrying value of the Edum Banso Project on the balance sheet and the balance reduced exploration spending in the third quarter of 2011.

Mining lease and prospecting license commitments

The Company is committed to expend, from time to time fees to Mincom for an extension of an expiry date of a prospecting license (currently $15,000 for each occurrence) or a mining lease and the Environmental Protection Agency of Ghana (“EPA”) for processing and certificate fees with respect to EPA permits, an aggregate of less than $500 in connection with annual ground rent and mining permits to enter upon and gain access to the areas covered by the Company’s mining leases and prospecting licenses.

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The Company has a legal obligation associated with its mineral properties for clean up costs when work programs are completed.

The undiscounted amount of cash flows, required over the estimated reserve life of the underlying assets, to settle the obligation, adjusted for inflation, is estimated at $220,000 (2010 - $220,000). The obligation was calculated using a credit-adjusted risk free discount rate of 10% and an inflation rate of 2%. It is expected that this obligation will be funded from general Company resources at the time the costs are incurred. The Company has been required by the Ghanaian government to post a bond of $220,000 which has been recorded as restricted cash with accrued interest ($220,961 at September 30, 2011).

Cancellation of shares

In May 2005, 47,000,000 common shares owned by two former directors were returned to treasury and cancelled. In June 2006, 10,000 common shares were returned to the Company in settlement of a dispute and cancelled.

In May 2009, 200,000 common shares were repurchased for $50,000 and cancelled. In March 2010, 80,891 common shares were repurchased for $108,000 and cancelled.

Issuance of shares for services

In December 2008, an aggregate of 131,243 common shares were issued to three vendors of the Company’s subsidiary, XG Mining, to settle outstanding accounts for services at a value of $1.50 per share.

Private placements

In June 2010, the Company issued 250,000 units at $1.00 per unit for gross proceeds of $250,000. Each unit consisted of one common share and one half of one share purchase warrant. One whole warrant enables the holder to acquire an additional common share at a price of $1.50 expiring 18 months from the date of issue. The Company also issued finder’s warrants enabling the holders to acquire up to 25,000 common shares at the same terms as the unit warrants. The fair value of the finder’s warrants was $15,091 calculated using the Black-Scholes valuation method. The assumptions used were 1.5 years of expected life, risk free interest rate of 1.82%, volatility of 99.78% and a dividend rate of 0%.

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

Stock option transactions and the number of stock options outstanding are summarized as follows:

The aggregate intrinsic value for options vested as of September 30, 2011 is approximately $1,179,764 (December 31, 2010 -$1,312,200) and for total options outstanding is approximately $1,289,669 (December 31, 2010 - $2,447,200).

Stock-based compensation

The fair value of stock options granted during the nine month period ended September 30, 2011 totaled $477,193 (December 31, 2010 - $594,388) of which at September 30, 2011 the remaining $247,632 from the 2011 grants and $121,635 from 2010 grants will be expensed in future periods. A total of $290,803 has been included in general and administrative expenses for the nine month period ended September 30, 2011 (year ended December 31, 2010 - $411,507). During the year ended December 31, 2009, the Company extended the life of previously granted options to May 1, 2013 which resulted in an expense of $468,052 which was included in general and administrative expenses.

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The weighted average fair value of options granted was $1.17 (December 31, 2010 - $0.63) .

Warrant transactions and the number of warrants outstanding are summarized as follows:

During the nine month periods ended September 30, 2011 and September 30, 2010, the Company entered into the following transactions with related parties:

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XTRA-GOLD RESOURCES CORP.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
September 30, 2011

During the three month period ended September 30, 2011), the company recorded the non-cash receipt of 1,000,000 NCD shares (Note 8). The significant non-cash transactions during the nine month period ended September 30, 2011 were the receipt of 1,000,000 Buccaneer common shares per the 2011 LOI (Note 8), the receipt of 1,000,000 NCD shares (Note 8), and the write off of $27,942 related to an asset sale.

The significant non-cash transactions during the year ended December 31, 2010 included (a) the issuance of 665,282 finder’s warrants with a value of $419,855 in connection with a private placement (Note 11); (b) the conversion of $250,000 of a convertible debenture into 250,000 common shares; and (c) capitalization of $76,298 in mineral properties related to asset retirement costs.

The Company has one reportable segment, being the exploration and development of resource properties.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion and analysis of the consolidated financial statements and results of operations of Xtra-Gold Resources Corp. (“Xtra-Gold” or “our company”) for the nine months ended September 30, 2011 and 2010 should be read in conjunction with the consolidated financial statements and the related notes to our company’s consolidated financial statements and other information presented elsewhere in this Report. The following discussion contains forward-looking statements that reflect Xtra-Gold’s plans, estimates and beliefs. Our company’s actual results could differ materially from those discussed in the forward-looking statements set out herein. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and as contained elsewhere in this Report. Our company’s consolidated unaudited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

Highlights

• In August 2011, reported (i) 38 metres at 2.62 g/t gold; (ii) 16 metres at 2.25 g/t gold; (iii) 32 metres at 2.41 g/t gold; and 16 metres at 4.88 g/t gold in our Kibi Project.

• Used $3,433,958 cash in the quarter, including the purchase of $1,493,809 of trading securities. Cash of $5,663,876 at September 30, 2011.

• Reported net gold sales in the quarter of $55,394 from our company’s placer gold operations.

• Completed an assignment of our Edun Banso Project with Norman Cay Development Inc. (“NCD”) in September 2011 for $125,000 cash, 1,000,000 NCD shares and a six-month option payment for $135,000.

Plan of Operations

We are a gold exploration company engaged in the exploration of gold properties in the Republic of Ghana, West Africa. Our mining portfolio currently consists of 246.47 sq km comprised of 33.65 sq km for our Kibi Project, 51.67 sq km for our Banso Project, 55.28 sq km for our Muoso Project, 44.76 sq km for our Kwabeng Project, 40.51 sq km for our Pameng Project and 20.60 sq km for our Edum Banso Project, or 60,969 acres, pursuant to the leased and licensed areas set forth in our respective mining leases, prospecting licenses and/or option agreement.

Our strategic plan is, with respect to our mineral projects: (i) to focus our efforts and dedicate our financial resources toward the potential to drill out a resource and, perhaps ultimately, a reserve of our Kibi Project located on the Kibi Gold Belt; (ii) to define a resource and, perhaps ultimately, a reserve on our other exploration projects; (iii) to enter into negotiations with independent Ghanaian contract miners and operators to assume our recovery of gold operations at our Kwabeng Project with a view to these contractors conducting recovery of placer gold operations for fixed payments to our company; and (iv) to acquire further interests in gold mineralized projects that fall within the criteria of providing a geological basis for development of drilling initiatives that can enhance shareholder value by demonstrating the potential to define reserves.

As part of our current business strategy, we plan to continue engaging technical personnel under contract where possible as our management believes that this strategy, at its current level of development, provides the best services available in the circumstances, leads to lower overall costs, and provides the best flexibility for our business operations.

We anticipate that our ongoing efforts will continue to be focused on the exploration and development of our Projects and completing acquisitions in strategic areas.

In October 2008, we suspended our operations at our Kwabeng Project while our management considered a more economic and efficient manner in which to extract and process the gold recovered from the mineralized material at this Project. As at the date of this Report, we have not planned to resume operations at our Kwabeng Project. During the next 12 months, we plan to (i) enter into negotiations to contract out the recovery of placer gold operations at this Project, as noted above; (ii) advance the development of our Kibi Project by continuing to carry out the 2011 Drill Program; and (iii) acquire further interests in mineral projects by way of acquisition or joint venture participation.

We anticipate that, during 2011, we will spend an aggregate of approximately $6,000,000 comprised of $5,000,000 for exploration expenses in connection with our 2011 Drill Program of our Kibi Project located on the Kibi Gold Belt to identify a potential resource and approximately $1,000,000 for general and administrative expenses (which includes approximately $500,000 in non-cash expenses).

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Our company has historically relied on equity and debt financings to finance its ongoing operations. Existing working capital, possible debt instruments, anticipated warrant exercises, further private placements and anticipated cash flow are expected to be adequate to fund our company’s operations over the next year. During the future years, subsequent to 2011, we require additional capital to implement our plan of operations. We anticipate that these funds primarily will be raised through equity and debt financing or from other available sources of financing. If we raise additional funds through the issuance of equity or convertible debt securities, it may result in the dilution in the equity ownership of investors in our common stock. There can be no assurance that additional financing will be available upon acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to take advantage of prospective new opportunities or acquisitions, which could significantly and materially restrict our operations, or we may be forced to discontinue our current projects.

Trends

In 2010, many commodity and stock market indices experienced historically high levels of volatility in the face of the global economic crisis. Financial market conditions continued to improve during the year as global credit markets started to return to a more normal position, investor confidence improved and most economies experienced positive growth.

During the year, the US dollar was generally in decline, primarily from concerns about the level of US government borrowings and the growing US deficit and from the low interest rates offered on US dollar deposits. The EURO also weakened against the Canadian dollar as a result of low interest rates, concerns about the solvency of certain European economies and the level of sovereign debt in those countries. During the third quarter of 2011 the US dollar rallied against the Canadian dollar as compared to results in the first six months of 2011.

Gold price volatility in 2010 remained high with the price reaching a record level of US$1,424 per ounce. During the third quarter of 2011, the gold price continued to increase and to be volatile, reaching a high of $1,895.00 per ounce on September 4, 2011 of the September 2011 quarter. The average market price for the third quarter of 2011 was $1,700.16 per ounce and for 2010 was US$1,262.50 per ounce. The tone for the precious metals market in the near future will depend on whether the US dollar will be supported, and if the central banks will continue to maintain interest rates at low levels to support economic growth. The continued global easing of monetary policy could lead to higher inflation and further US dollar depreciation in the coming years. This dollar depreciation could have a positive impact on gold prices in the future and the long–term upward trend in prices may continue. Conversely, subdued inflation rates and the recovering global economy could put downward pressure on the gold price in the future. Additionally, recent events in Europe could continue to have a positive effect on the gold price.

Overall, a lower US dollar should lead to higher costs in US dollar terms to identify and explore for gold but could be more than offset by higher gold prices, resulting in greater interest in gold exploration companies. Conversely, if the US dollar strengthens, interest in the gold exploration sector could be reduced.

Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

Our company’s loss for the three months ended September 30, 2011 was $2,014,669 as compared to a net loss of $563,501 for the three months ended September 30, 2010, an increase of $1,451,168.

Our company’s basic and diluted income (loss) per share for the three months ended September 30, 2011 was ($0.05) compared to $(0.02) per share for the three months ended September 30, 2010. The weighted average number of shares outstanding was 43,964,595 at September 30, 2011 compared to 34,625,543 for the three months ended September 30, 2010. The increase in the weighted average number of shares outstanding can be attributed to the issuance of 8,092,593 shares in the November 2010 placement, 1,045,050 shares in connection with the conversion of warrants and finders’ warrants during the second quarter, and 206,164 shares in connection with the conversion of warrants during the third quarter.

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We incurred expenses of $1,827,795 in the three months ended September 30, 2011 as compared to $1,266,309 in the three months ended September 30, 2010, an increase $561,486. The increase in expenses in the three months ended September 30, 2011 can be primarily attributed to an increase of $518,892 in exploration costs to $1,391,046 (2010 - $872,154) resulting from drilling and other exploration activities conducted at our Kibi Project. All exploration costs for the three months ended September 30, 2011 were booked as exploration expenses. The September 2011 exploration expenses were reduced by $80,000 for NCD cash received and by a non-cash balance of $260,000 related to shares received upon assignment of the Edum Banso Project. General and administrative expenses (“G&A”) of $374,280 for the three months ended September 30, 2011, as compared to $370,515 for the three months ended September 30, 2010 can be primarily attributed to stock-based compensation of $191,381 in 2011 (2010 - $19,757) expensed with respect to stock options vested during the period. The 2010 G&A costs reflect legal, regulatory and marketing costs associated with the Toronto listing of the company’s shares. Other G&A costs included consulting fees, legal, auditor and regulatory filing fees, travel and promotional expenses.

Exploration results from the third quarter of 2011 included drilling of 6,171metres, trenching 255 metres, while 6,896 drill assays and 1,776 trenching assays were received from the lab.

Other items totaled a loss of $334,218 for the three months ended September 30, 2011 compared to a gain of $726,746 for the three months ended September 30, 2010. During the three months ended September 30, 2011, our company had a foreign exchange loss of $263,026 compared to a gain of $14,345 in the three months ended September 30, 2010 which loss can be attributed to a stronger US dollar in the quarter. Gold recovery during the three months ended September 30, 2011 was $55,394 as compared to $733,391 for the three months ended September 30, 2010 as efforts in the 2011 quarter were focused on land remediation rather than production. Our company’s portfolio of marketable securities had an unrealized loss of $110,942 in the three months ended September 30, 2011 compared to an unrealized loss of $59,557 in the three months ended September 30, 2010 which loss can be attributed to extreme volatility in the public equity markets this reporting period. The company sold no securities in the three months ended September 30, 2011 compared to a gain of $34,398 from the sale of securities in the three months ended September 30, 2010. Other income, primarily derived from interest earned and other miscellaneous items reported a loss of $5,644 in the three months ended September 30, 2011 as compared to a gain of $4,169 in the three months ended September 30, 2010.

During the September 2011 quarter, the company assigned its interest in the Edum Banso Project to NCD for cash payments of $125,000 ($25,000 in December 2010, $100,000 in the September quarter), 1,000,000 NCD shares (valued at $260,000 on the date received), and a six-month option payment of $135,000. In the event NCD does not exercise its option the Project reverts back to the company. The value of the cash and shares ($385,000) reduced the carrying value of the mineral properties on the September 30, 2011 balance sheet by $20,000 with the balance of $365,000 reducing exploration expense in the quarter.

Results of Operations for the Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Our company’s loss for the nine months ended September 30, 2011 was $3,869,715 as compared to a net loss of $1,562,066 for the nine months ended September 30, 2010, an increase of $2,307,649. Increased exploration spending was significantly offset by gold recovery and a gain on disposition of equipment, especially in the first quarter of 2011. Gold recovery was reduced in the second and third quarters of 2011 and the investment portfolio posted unrealized losses from shares held.

Our company’s basic and diluted loss per share for the nine months ended September 30, 2011 was $0.09 compared to net loss of $0.05 per share for the nine months ended September 30, 2010. The weighted average number of shares outstanding was 43,600,303 for the nine months ended September 30, 2011 compared to 34,031,604 for the nine months ended September 30, 2010. The increase in the weighted average number of shares outstanding can be mostly attributed to the issuance of 8,092,593 shares in the November 2010 placement and the issuance of 1,276,214 shares in connection with the conversion of warrants and finders’ warrants during the 2011 period.

We incurred expenses of $5,175,894 in the nine months ended September 30, 2011 as compared to $2,444,129 in the nine months ended September 30, 2010, an increase $2,731,765. The increase in expenses in the nine months ended September 30, 2011 can be primarily attributed to an increase of $2,773,072 in exploration costs to $4,082,495 (2010 - $1,309,423) resulting from drilling and other exploration activities conducted at our Kibi Project. The year to date 2011 exploration expenses were reduced by $80,000 for NCD cash received and by a non-cash balance of $260,000 related to shares received upon assignment of the Edum Banso Project. All exploration costs for the nine months ended September 30, 2011 were booked as exploration expenses. General and administrative expenses (“G&A”) of $951,352 for the nine months ended September 30, 2011, as compared to $1,090,432 for the nine months ended September 30, 2010 can be primarily attributed to the legal, regulatory and marketing costs associated with the Toronto listing of the company’s shares. Stock-based compensation, a non-cash component of G&A, was $290,803 in 2011 (2010 -$331,386), representing the expense with respect to stock options vested during the period.

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Other G&A costs included consulting fees, legal, auditor and regulatory filing fees, travel and promotional expenses. Amortization for the nine months ended September 30, 2011 was $142,035 as compared to $44,274 for the nine months ended September 30, 2010, an increase of $97,761. We added two excavators, two bulldozer and two vehicles at a purchase cost of $1,005,467 to the assets, which increased the comparative amortization expense in 2011.

Exploration work was focused primarily on the Kibi Project in the nine-month period. Exploration spending in 2011 reflected the funds available from the November 2010 financing while spending in 2010 reflected conservation of cash available at that time.

Other items totaled a gain of $1,011,358 for the nine months ended September 30, 2011 compared to a gain of $877,855 for the nine months ended September 30, 2010. During the nine months ended September 30, 2011, our company had a foreign exchange loss of $427,420 compared to a gain of $21,055 in the nine months ended September 30, 2010 which loss can be attributed to a stronger US dollar in the quarter, especially in the third quarter of 2011. Gold recovery during the nine months ended September 30, 2011 was $1,338,073 as compared to $733,391 for the three months ended September 30, 2010. Gold recovery efforts in the second and third quarter of 2011 were focused on land remediation rather than production while the 2010 results reflected a startup of gold recovery efforts in the third quarter of 2010. Our company’s portfolio of marketable securities had an unrealized loss of $177,932 in the nine months ended September 30, 2011 compared to an unrealized loss of $77,858 in the nine months ended September 30, 2010 which loss can be attributed to extreme volatility in the public equity markets this reporting period. The company sold no securities in the nine months ended September 30, 2011 compared to a gain of $169,539 from the sale of securities in the nine months ended September 30, 2010. Other income, primarily derived from interest earned and other miscellaneous items reported a gain of $18,579 in the nine months ended September 30, 2011 as compared to a gain of $33,011 in 2010. During the nine months ended September 30, 2011, we sold a placer gold recovery plant with book value $27,942 for $288,000 for a net gain of $260,058. Our decision to use local Ghanaian contractors for placer gold operations made the plant a non-core asset to us. Most of the cash received was used to purchase a bulldozer and excavator which we will use in our continuing exploration efforts.

During the nine months ended September 30, 2011, we received 1,213 ounces of gold from our share of the placer gold operations. These placer gold operations have been contracted to local Ghanaian groups which pay a portion of their gold receipts to us for the right to work on our projects. We pay all government royalties due on all of the production. This method promotes the local economy while avoiding illegal workings on our projects.

During the first half of 2011, the company granted Buccaneer Gold Corp. (“Buccaneer”) a 55% interest in the Banso and Muoso Projects on completion of certain payments over a five-year period. The value of the cash option payments ($425,000) and shares ($411,440) received to date reduced the carrying value of the mineral properties on the September 30, 2011 balance sheet and a further $300,000 cash payment reduced exploration spending during 2011. During the September 2011 quarter the company assigned its interest in the Edum Banso Project to NCD and reduced the carrying value of the mineral properties on the September 30, 2011 balance sheet by $20,000 for cash and reduced the exploration expense by $340,000 for cash and shares received.

Liquidity and Capital Resources

Our activities, principally the exploration and acquisition of properties for gold and other metals, may be financed through joint ventures or through the completion of equity transactions such as equity offerings and the exercise of stock options and warrants. In November 2010, our company issued 8,092,593 common shares for proceeds of $10.8 million in conjunction with our IPO on to the TSX. We issued 566,482 broker warrants related to the November 2010 financing.

At September 30, 2011, accounts payable and accrued liabilities decreased to $410,160 (December 31, 2010 - $517,236), due to general business payables. Our cash and cash equivalents as at September 30, 2011 were sufficient to pay these liabilities.

At September 30, 2011, we had total cash of $5,663,876 (December 31, 2010 - $10,096,122). Working capital as of September 30, 2011 was $7,486,377 (December 31, 2010 - $9,833,381). The decrease in cash mostly reflects exploration and administrative spending net of gold recovery. Proceeds from the sale of equipment were more than offset by $1,005,467 of new equipment purchased in the first nine months of 2011. During the September 2011 quarter, the company invested $1,493,809 in investment vehicles, including a bank bond with a maturity beyond 90 days, resulting in a reclassification from cash to investment in trading securities.

To date in 2011, we received $425,000 which was due as an option fee on our Banso and Muoso concessions and a further $300,000 for exploration work done on these projects to date. A further $100,000 in cash was received from NCD for the assignment of our Edum Banso Project.

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During the nine months ended September 30, 2011, we received $1,494,739 in connection with the conversion of 1,276,214 warrants and finders’ warrants.

We are an exploration company focused on gold and associated commodities and do not have operating revenues; and therefore, we must utilize our current cash reserves, income from placer gold sales, income from investments, funds obtained from the exercise of stock options and warrants and other financing transactions to maintain our capacity to meet the planned exploration programs, or to fund any further development activities. There is no certainty that future financing will be available to us in the amounts or at the times desired on terms acceptable to us, if at all.

Our common shares, warrants and stock options outstanding as at November 10, 2011, September 30, 2011, and December 31, 2010 were as follows:

As of the date of this report, the full exercise of all warrants and options would raise approximately $3.2 million. Exercise of these warrants and options is not anticipated until the market value of our common shares increases in value.

We remain debt free and our credit and interest rate risk is limited to interest-bearing assets of cash and bank or government guaranteed investment vehicles. Accounts payable and accrued liabilities are short-term and non-interest bearing.

Our liquidity risk with financial instruments is minimal as excess cash is invested with a Canadian financial institution in government-backed securities or bank-backed guaranteed investment certificates.

Our fiscal 2011 budget is approximately $6.0 million as disclosed above under the heading “Plan of Operations”. As of the date of this MD&A, our total cash position is sufficient to meet our current budgetary requirements for 2011. These expenditures are subject to change if management decides to scale back or accelerate operations.

We expect to be adequately capitalized to fund ongoing operations at the current level in the short-term for fiscal 2012. Thereafter from 2012, we will require additional funds from equity sources to maintain the current momentum on our projects.

Recent Capital Raising Transactions

During November 2010, we raised $10.8 million from the issuance of 8,092,593 common shares.

Material Commitments

Mineral Property Commitments

Save and except for fees payable from time to time to (i) the Minerals Commission for an extension of an expiry date of a prospecting license (current consideration fee payable is $15,000) or mining lease or annual operating permits; (ii) the EPA for the issuance of permits prior to the commencement of any work at a particular concession or the posting of a bond in connection with any mining operations undertaken by our company; and (iii) a legal obligation associated with our mineral properties for clean up costs when work programs are completed, we are committed to expend an aggregate of less than $500 in connection with annual or ground rent and mining permits to enter upon and gain access to the following concessions and such other financial commitments arising out of any approved exploration programs in connection therewith:

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Upon and following the commencement of gold production at any of our Projects, a royalty of the net smelter returns is payable quarterly to the Government of Ghana as prescribed by legislation.

With respect to the Edum Banso Project:

Repayment of Convertible Debentures and Accrued Interest

We issued Convertible Debentures aggregating the face value of $900,000 in July 2005 under which interest was calculated at 7% per annum. Interest only payments were payable quarterly on the last days of September, December, March and June in each year of the term or until such time that the principal was repaid in the full. The Convertible Debenture holders were entitled, at their option, to convert, at any time and from time to time, until payment in full of their respective Convertible Debentures, all or any part of the outstanding principal amount of the Convertible Debenture, plus the Accrued Interest, into shares (the “Conversion Shares”) of our common stock at the conversion price of $1.00 per share (the “Conversion Price”). Each Convertible Debenture provided for the automatic conversion of the outstanding principal amount and all accrued but unpaid interest, into shares of our common stock, at the Conversion Price, in the event that our common stock traded for 20 consecutive trading days (a) with a closing bid price of at least $1.50 per share and (b) a cumulative trading volume during such twenty (20) trading day period of at least 1,000,000 shares.

In June 2008, we provided notice of the automatic conversion of the Convertible Debentures and in July 2008 we converted $650,000 of the aggregate principal of $900,000 of the Convertible Debentures by way of the issuance of 650,000 Conversion Shares. In February 2010 we converted the outstanding principal of $250,000 owing under one remaining Convertible Debenture by way of the issuance of 250,000 Conversion Shares.

Purchase of Significant Equipment

We purchase equipment as needed to conduct our exploration activities. Due to demand from the mining and exploration industry, at this time it is difficult to source resources for exploration work in Ghana, including drills, excavators and bulldozers. We will consider the further acquisition of equipment pieces to allow work to expand on our projects.

Off Balance Sheet Arrangements

Our company has no off balance sheet arrangements.

Significant Accounting Applications

Application of Critical Accounting Policies

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Generally accepted accounting principles

These consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America (“US GAAP”).

Principles of consolidation

These consolidated financial statements include the accounts of our company, our wholly owned subsidiaries, Xtra Energy (from October 31, 2003), XGEL (from February 16, 2004), XOG (from October 20, 2005) and XOGG (from March 2, 2006) and our 90% owned subsidiary, XG Mining (from December 22, 2004). All significant intercompany accounts and transactions have been eliminated on consolidation.

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Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents