- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2008

or

 

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

For the transition period from ____________________________to______________________________________

Commission File Number: 0-52151

 

Eastern Goldfields, Inc.

(Exact name of Registrant as specified in its charter)

                                                Nevada                                                                  88-0441307

                             (State or other jurisdiction of                                           (I.R.S. Employer

                             incorporation or organization)                                         Identification No.)

1660 Hotel Circle North, Suite 207, San Diego, CA 92108-2808

(Address of principal executive offices – Zip Code)

[phone]

(Registrant’s telephone number, including area code)

__________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

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 such filing requirements for the past 90 days.

                                                                                                                           Yes  x         No o

 

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.

 

        Large accelerated filer      o                                                                                           Accelerated filer    o

               

        Non-accelerated filer   o           (Do not check if a smaller reporting company)              Smaller reporting company    x

 

 

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

 

                                                                                                                           Yes   o         No   x

 

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

                                                                                                                           Yes   x       No   o

 

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APPLICABLE ONLY TO CORPORATE ISSUERS:

 

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

On November 14, 2008, 9,377,986 shares of the issuer’s common stock were outstanding.

 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

ASSETS

                                                                                     September 30, 2008      December 31, 2007

                                                                                             (Unaudited)                    (Audited)

Cash Inventories (Note 3) Prepaid expenses and other current assets	$	305,379 439,861 429,723	$	355,148 467,254 378,703
Total current assets		1,174,963		1,201,105
Property, plant, and mine development, net     (Notes 4) Other assets Deferred debt issuance costs (Note 5)		23,372,436 569,160 45,042		13,377,800 189,461 -
Total assets	$	25,161,601	$	14,768,366

 

 

 

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

 

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                                                                 September 30, 2008         December 31, 2007

                                                                                       (Unaudited)                          (Audited)

Current liabilities: Accounts payable and other current liabilities Advances from stockholders Short term loans (Note 5) Current portion of long-term liabilities (Note 6)	$	1,694,599 9,215 15,749,881 125,379	$	1,688,411 17,485 - 202,704
Total current liabilities		17,579,074		1,908,600
Long-term liabilities: Long term liabilities, net of current portion (Note 6) Reclamation and remediation obligations (Note 7)		2,016,651 360,907		641,280 329,109
Total long-term liabilities		2,377,558		970,389
Commitments (Note 8) Minority interest (Note 9)		- 1,592,097		- 1,592,097
Stockholders’ equity: Common Stock: $0.001 par value, 160,000,000 and 25,000,000 shares authorized; 9,377,986 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively A Class Preference Shares: $0.00002 par value, 10,000,000 shares authorized; 2,881,393 shares issued and outstanding at September 30, 2008 and December 31, 2007 Preferred Stock: $0.001 par value, 20,000,000 shares authorized; 0 shares issued and outstanding at September 30, 2008 and December 31, 2007 Additional paid in capital Other comprehensive loss Accumulated deficit		9,378       45       - 21,053,902 (5,468,459) (10,283,531)		9,378       45       - 21,008,860 (448,497) (8,235,425)
Less: Loan to Lomshiyo (Note 9)		5,311,335 (1,698,463)		12,334,361 (2,037,081)
Total stockholders’ equity		3,612,872		10,297,280
Total liabilities and  stockholders’ equity	$	25,161,601	$	14,768,366

 

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

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30, 2008		Three Months Ended September 30, 2007		Nine Months Ended September 30, 2008		Nine Months Ended September 30, 2007
Income: Sales Other income	$	1,485,989 105,467	$	1,863,215 116,054	$	5,746,854 314,513		$	5,030,336 256,042
Total income		1,591,456		1,979,269		6,061,367			5,286,378
Costs and expenses: Cost of production Exploration costs Operating expenses		1,825,502 (4,433) 724,745		1,796,775 (26,764) 827,294		5,542,937 126,846 1,953,662			4,172,701 129,543 1,949,087
Total costs and expenses		2,545,814		2,597,305		7,623,445			6,251,331
Loss from operations		(954,358)		(618,036)		(1,562,078)			(964,953)
Other expenses: Interest   Loss before minority interest Minority interest		408,041		8,721		486,028			17,145
		(1,362,399) -		(626,757) -		(2,048,106) -			(982,098) -
Loss before provision for income taxes Provision for income taxes		(1,362,399)  -		(626,757) -		(2,048,106) -			(982,098) -
Net loss	$	(1,362,399)	$	(626,757)	$	(2,048,106)		$	(982,098)
Net income (loss) per share, basic	$	(0.15)	$	(0.07)	$	(0.22)		$	(0.11)
Net income (loss) per share, diluted	$	(0.15)	$	(0.06)	$	(0.22)		$	(0.10)
Weighted average shares outstanding, basic		9,377,986		9,117,117		9,377,986			9,117,117
Weighted average shares outstanding, diluted		9,377,986		9,967,117		9,377,986			9,967,117

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

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

	Common Stock					A Class Preference Shares
	Number of Shares		Par Value			Number of Shares		Par Value			Additional Paid-in Capital			Other Comprehensive Loss			Accumulated Deficit			Loan to Lomshiyo			Total Stockholders’ Equity
Balance at December 31, 2007   Accrual of interest income on   loan to Lomshiyo Debt issuance costs of warrants Net income Foreign currency translation	9,377,986     - - - -		$	9,378     - - - -		2,881,393     - - - -		$	45     - - - -		$	21,008,860     - 45,042 - -		$	(448,497)     - - - (5,019,962)		$	(8,235,425)     - - (2,048,106) -		$	(2,037,081)      (198,245) - - 536,863		$	10,297,280     (198,245) 45,042 (2,048,106) (4,483,099)
Balance at September 30, 2008	9,377,986		$	9,378		2,881,393		$	45		$	21,053,902			(5,468,459)			(10,283,531)			(1,698,463)			3,612,872

 

 

 

 

 

 

 

 

 

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

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007
Cash flows from operating activities: Net loss	$	(2,048,106)		$	(982,098)
Adjustments to reconcile net loss to net cash used   in operating activities: Depreciation, depletion and amortization Accrued interest income on Loan Lomshiyo Changes in assets and liabilities: Decrease (Increase) in inventories (Increase) in other assets  Decrease (Increase) in prepaid expenses and other current assets  Increase in accounts payable and other current liabilities		544,317 (198,245)   27,393 -   (51,020) 6,188			370,153 (199,739)   (89,342) (406,752) (250,503) 435,596
Net cash used in operations		(1,719,473)			(1,122,685)
Cash flows from investing activities: Purchase of  property and equipment Capitalized costs		(14,044,639) (485,792)			(2,542,544) -
Net cash used in investing activities		(14,530,431)			(2,542,544)
Cash flows from financing activities: Repayment of advances from stockholders Proceeds from long-term debt Proceeds from issuance of common stock		(8,270) 17,047,927 -			(6,473) 594,088 2,786,600
Net cash provided by financing activities		17,039,657			3,374,215
Effect of exchange rates on cash		(839,522)			482,844
Net increase (decrease) in cash		(49,769)			191,830
Cash, beginning of period		355,148			1,103,433
Cash, end of period	$	305,379		$	1,295,263
Supplemental disclosure of cash flow information:   Cash paid for interest	$	486,028		$	17,145
Supplemental disclosure of non-cash operating,    investing and financing activities:   Accrual of interest income on loan to Lomshiyo	$	198,245		$	199,739
Deferred debt issuance cost of warrants	$	45,042		$	-

 

 

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

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

1.         ORGANIZATION AND HISTORY

 

Eastern Goldfields, Inc., (the “Company" or "EGI") is the parent company of Eastern Goldfields SA (Proprietary) Limited, (“EGSA”), a corporation organized under the laws of the Republic of South Africa. EGSA conducts all of the Company’s business operations in South Africa through its South African corporation subsidiaries.

 

Eastern Goldfields, Inc. was originally incorporated under the laws of the State of Nevada on July 15, 1998, under the name of Fairbanks Financial, Inc. The Company was established as a business management, marketing and consulting firm to serve both the emerging and established business entrepreneur. Since its incorporation, the Company has had minimal operations. It redirected its business efforts in late 2005 and on September 23, 2005, following a change in control, it purchased 100% of the issued and outstanding common or ordinary stock of EGSA. On October 1, 2005, the Company’s wholly owned subsidiary, EGSA, acquired, via a share exchange, 100% of the issued and outstanding common or ordinary stock of Eastern Goldfields Limited. (“EGL”), a South African gold producer and developer corporation. EGL conducts mining operations in the Barberton Greenstone Belt area of the Mpumalanga Province, South Africa.  On October 25, 2005, the Company changed its corporate name to Eastern Goldfields, Inc. to more accurately reflect its business operations.  On May 30, 2008, EGSA, acquired 100% of the issued and outstanding common or ordinary stock of Barberton Mines Limited, also a South African gold producer and developer corporation. 

 

This share exchange for the acquisition of EGL by EGI’s wholly owned South African subsidiary, EGSA, was accounted for as a reverse acquisition, and, accordingly, for financial statement purposes, EGL was considered the accounting acquiror and the subject transaction was considered a recapitalization of EGL rather than an acquisition by the Company. Accordingly, the historical financial statements prior to this share exchange are those of EGL, however, the name of the consolidated corporation going forward is Eastern Goldfields, Inc.

 

EGL itself is a South African holding company which has three South African subsidiary corporations; Makonjwaan Imperial Mining Company (Pty) Ltd. (“MIMCO”), Eastern Goldfields Exploration (Pty) Ltd. (“EGE”) and Centurion Mining Company (Pty) Ltd. (“Centurion”).

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Basis of Accounting

 

The consolidated financial statements of the Company have been prepared on the accrual basis of accounting and are in conformity with accounting principles generally accepted in the United States of America and prevailing industry practice.

The interim consolidated financial statements of the Company and its subsidiaries are unaudited.  In the opinion of management, all necessary adjustments for a fair presentation of these interim statements have been included.  The results reported in these interim consolidated financial statements are not necessarily indicative of the results that may be reported for the entire year.  The accompanying interim consolidated financial statements of the Company should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.  

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Principles of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All amounts are in U.S. dollars unless otherwise indicated. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Property Plant and Mine Development

 

Mining assets, including mine development and infrastructure costs and mine plant facilities, are recorded at cost of acquisition. Expenditure incurred to evaluate and develop new ore bodies, to define mineralization in existing ore bodies, to establish or expand productive capacity, is capitalized until commercial levels of production are achieved, at which times the costs are amortized as set out below.

 

Mineral rights are recorded at cost of acquisition. When there is little likelihood of a mineral right being exploited, or the value of mineral rights have diminished below cost, a write-down is affected against income in the period that such determination is made.

 

Non-mining assets are recorded at cost of acquisition. These assets include the assets of the mining operation not included in the previous categories and all the assets of the non-mining operations.

 

Depreciation, depletion and amortization are determined to give a fair and systematic charge in the income statement taking into account the nature of a particular ore body and the method of mining of that ore body. Mining assets, including mine development and infrastructure costs, mine plant facilities and evaluation costs, are amortized over the life of the mine using units-of-production method, based on estimated proved and probable ore reserves above the infrastructure. The proven and probable reserve quantities used to calculate depreciation, depletion and amortization do not include the proven and probable reserve quantities attributable to stockpiled inventory.

 

Proved and probable ore reserves reflect the estimated quantities of economically recoverable reserves, which can be recovered in future from known mineral deposits.

 

Certain mining plant and equipment included in mine development and infrastructure is depreciated on a straight-line basis over their estimated useful lives.

 

Other non-mining assets are recorded at cost and depreciated on a straight-line basis over their estimated useful lives as follows:

 

Vehicles – 10 years

 

Furniture and equipment – 3 years

 

The carrying amounts of the group's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such indication exists, the asset's recoverable amount is estimated.

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Use of Estimates

 

The preparation of financial statements in accordance 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, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Earnings Per Share

 

In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128 Earnings Per Share which requires the Company to present basic and diluted earnings per share for all periods presented. The computation of loss per common share (basic and diluted) is based on the weighted average number of shares actually outstanding during the period. Diluted earnings per share have been calculated to give effect to the number of additional shares of common stock that would have been outstanding if the potential dilutive instruments had been issued for the nine months ended September 30, 2008 and 2007.  The weighted average number of outstanding shares includes the common stock as well as the A Class Preference Shares, as the holders of the A Class Preference Shares have the same rights and entitlements as those attached to the common stock. The computation of dilutive loss per common share does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on earnings.

 

The following table reconciles basic earnings per share and diluted earnings per share and the related weighted average number of shares outstanding for the nine months ended September 30, 2008:

 

                                                                                                      DISCLOSURE FOR RECONCILIATION

                                                                                                                OF BASIC AND DILUTED

                                                                                                                  EARNINGS PER SHARE

 

                                                                                               For the Nine Months Ended September 30, 2008

 

                                                                                                             Income                  Shares                 Per-share

                                                                                               ( Numerator )        ( Denominator )            Amount

 

        Net loss                                                                                       $(2,048,106)                  9,377,986                $   (0.22)

 

        BASIC EPS

        Income available to common

                stockholders                                                                      $(2,048,106)                  9,377,986                $   (0.22)

       

       

 

        DILUTED EPS

        Income available to common stockholders

                and assumed conversions                                              $(2,048,106)                  9,377,986                $   (0.22)

 

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes

 

Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  As the Company is operating at a loss, no income taxes have been provided or are currently due.

 

During the year ended December 31, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which supplements SFAS No. 109, “Accounting for Income Taxes,” by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The “more-likely-than-not” threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax is not considered “more-likely-than-not” it is to be sustained based solely on its technical merits. No benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustment upon adoption would be recorded directly to retained earnings and reported as a change in accounting principle at December 31, 2006.

 

Fair Value of Financial Instruments

 

Financial instruments consist principally of cash, short-term liabilities and long-term debt. The estimated fair values of these instruments approximate their carrying value.

 

Foreign Currency Translation

 

The Company translates the foreign currency financial statements of its foreign operations by translating balance sheet accounts at the exchange rate on the balance sheet date and the income statement accounts using the prevailing exchange rates at the transaction date. Translation gains and losses are recorded in stockholders’ equity and realized gains and losses are reflected in operations. The Company’s functional currency is the South African Rand.

 

Exploration Expenses

 

Exploration costs are charged to operations as incurred.

 

 

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Inventories  

 

As described below, costs that are incurred in or that benefit the productive process are accumulated as stockpiles and inventories. Stockpiles and inventories are carried at the lower of average cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles and inventories, resulting from net realizable value impairments, are reported as a component of Cost of production . The major classifications are as follows:

 

Stockpiles

 

Stockpiles represent materials that are currently in the process of being converted to a saleable product. Conversion processes vary depending on the nature of the ore and the specific processing facility, but include mill in-circuit, leach in-circuit and carbon in-pulp inventories. In-process material is measured based on assays of the material fed into the process and the projected recoveries of the respective plants. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Precious Metals In process

 

Precious metals in process is gold bullion. Precious metals that result from the Company’s mining and processing activities are valued at the average cost of the respective in-process inventories incurred prior to the refining process, plus applicable refining costs.

 

Revenue Recognition  

 

Revenue is recognized, net of treatment charges, from a sale when the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured.

 

 

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Deferred Stripping Costs  

 

In general, mining costs are allocated to production costs and inventories, and are charged to c osts of production when gold is sold. However, at open pit mines with diverse grades and waste-to-ore ratios over the mine life, the Company defers and amortizes certain mining costs on a UOP basis over the life of the mine. These mining costs, which are commonly referred to as “deferred stripping” costs, are incurred in mining activities that are normally associated with the removal of waste rock. The deferred stripping accounting method is generally accepted in the mining industry where mining operations have diverse grades and waste-to-ore ratios; however, industry practice does vary. Deferred stripping matches the costs of production with the sale of such production at the Company’s operations where it is employed, by assigning each ounce of gold with an equivalent amount of waste removal cost.

 

If the Company were to expense stripping costs as incurred, there could be greater volatility in the Company’s period-to-period results of operations.

 

Deferred stripping costs are charged to Costs of Production as gold is produced and sold using the UOP method based on estimated recoverable ounces of proven and probable gold, using a stripping ratio calculated as the ratio of total tons to be moved to total proven and probable ore reserves, which results in the recognition of the costs of waste removal activities over the life of the mine as gold is produced.

 

The Company reviews and evaluates its deferred stripping costs for impairment when events or circumstances indicate that the related carrying amounts may not be recoverable.

 

As the Company’s open pit operations are forecasted to cease by end-2008, the Company did not measure and recognize production stage deferred stripping costs and credits for the nine months period ended September 30, 2008.

 

Reclamation and Remediation Costs (Asset Retirement Obligations)

 

In August 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. Reclamation costs are allocated to expense over the life of the related assets and are adjusted for changes resulting from the passage of time and revisions to either the timing or amount of the original present value estimate. Prior to adoption of SFAS No. 143, estimated future reclamation costs were based principally on legal and regulatory requirements. Such costs related to active mines are accrued and charged over the expected operating lives of the mines using the UOP method based on proven and probable reserves. Future remediation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the undiscounted costs expected to be incurred at a site. Such cost estimates included, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised.

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Stock Option Expense  

Compensation cost recognized in 2008 and 2007 includes: (a) compensation cost for all share-based payments granted prior to, which have since vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of FAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, which have vested based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).

 

        Fair Value Accounting

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”).  FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  The provisions of FAS 157 were adopted January 1, 2008.  In February 2008, the FASB staff issued Staff Position No. 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”).  FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The provisions of FSP FAS 157-2 are effective for the Company’s fiscal year beginning January 1, 2009.           

 

FAS 157 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 under FAS 157 are described below:

 

                Level 1   Unadjusted quoted prices in active markets that are accessible at the measurement date                                  for identical, unrestricted assets or liabilities;

                Level 2   Quoted prices in markets that are not active, or inputs that are observable, either directly                                  or indirectly for substantially the full term of the asset or liability;

                Level 3   Prices or valuation techniques that require inputs that are both significant to the fair value                               measurement and unobservable (supported by little or no market activity).

 

The following table sets forth the Company’s financial assets and liabilities measured at fair value by level within the fair value hierarchy.  As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of output that is significant to the fair value measurement.

 

                                                                                                                          Fair Value at September 30, 2008

                                                                                                                             (in thousands)

                                                                                                                Total           Level 1            Level 2          Level 3

Assets:

                Cash                                                                                  $   305          $     305               $  -                 $  -

                Other assets                                                                      24,812            24,812                _____           _____

                                                                                                          $ 25,117          $ 25,117                _____             _____

Liabilities :

                None

14

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value Accounting (Continued)

 

The Company’s cash and certain other assets are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.  The cash and certain other assets that are valued based on quoted market prices in active markets are primarily money market securities.

 

The total amount of the changes in fair value for the period was included in net loss as a result of changes in the Company’s stock price from December 31, 2007.

 

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”) permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The provisions of FAS 159 were adopted January 1, 2008.  The Company did not elect the Fair Value Option for any of its financial assets or liabilities, and therefore, the adoption of FAS 159 had no impact on the Company’s consolidated financial position, results of operations or cash flows.  

 

3.         INVENTORIES

 

Inventories at September 30, 2008 and December 31, 2007 consist of the following:

 

                                                                                                                             2008                          2007

Precious metals in process Stockpiles	$	220,105 219,756	$	224,333 242,921
	$	439,861	$	467,254

 

 

  

 

 

 

 

 

 

 

 

 

 

 

15

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

 (Unaudited)

 

4.         PROPERTY, PLANT AND MINE DEVELOPMENT

 

Major classes of property, plant, and mine development as of September 30, 2008 and December 31, 2007 are as follows:

                                                                                                                              2008                           2007

Land and buildings Mining assets Mine development costs Mining rights Motor vehicles Furniture and equipment Metallurgical plant Plant and equipment Environmental rehabilitation fund	$	349,661 3,303,359 25,350,375 1,085,010 86,546 173,418 4,713,162 267,780 178,462	$	91,162 5,839,151 7,344,539 1,489,488 97,738 60,099 1,735,479 214,752 331,827
Less: accumulated depreciation		35,507,773 (12,135,337)		17,204,235 (3,826,435)
Net property and equipment	$	23,372,436	$	13,377,800

 

                Depreciation, depletion and amortization expense is $471,448 and $370,153 for the nine months ended September 30, 2008 and 2007, respectively.  Included in property, plant and mine development is Barbrook assets at acquisition cost of $16,749,383 and accumulated depreciation of $7,275,480.

 

5.         SHORT TERM LOANS

 

Short term loans at September 30, 2008 consist of the following:

 

Phoenix Gold Fund and Asian Investment Management Services Ltd Investec Bank Limited Kestrel S.A.	$	3,845,830 10,008,108 1,895,943
	$	15,749,881

There were no short term loans at December 31, 2007.

On March 28, 2008, the Company’s wholly owned subsidiary EGSA entered into a Convertible Loan Agreement (the “Agreement”) with Phoenix Gold Fund and Asian Investment Management Services Ltd, collectively referred to as “the Lenders”.

The Loan amounting to R32 million ($3,845,830 as of September 30, 2008) received on April 18, 2008 is termed as pre-listing funds prior to EGSA’s intended listing on the Johannesburg Stock Exchange within twelve months from the date of this Agreement.  

For the purposes of this Agreement, EGSA has been ascribed a value of R432 million and the percentage shareholding that will be issued to the Lenders in order to discharge the Loan has been calculated accordingly.

 

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

5.         SHORT TERM LOANS (Continued)

       

                The loan principal can convert into 6.9% of the total issued and outstanding shares of the ordinary capital of EGSA after the conversion of the loan by EGSA.  Conditions relating to interest payments are as                follows:   

 

•         If EGSA is able to list its shares with the JSE Limited (JSE) within six months of the agreement date then no interest is due and payable. 

•         If EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Lending Rate.

•         If EGSA lists its ordinary shares with the JSE after six months but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan. 

•         If EGSA has been unable to list its ordinary shares with the JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding ordinary shares of EGSA.

 

On May 27, 2008, the Company’s wholly owned subsidiary EGSA obtained R80 million ($9,614,229 as of September 30, 2008) six month bridging loan facility from Investec Bank Ltd. (“Investec”) for the acquisition of Barbrook Mines Ltd.  The facility is repayable 6 months after disbursement of May 30, 2008.  Interest on the facility is calculated at 3 month JIBAR plus 3% p.a., capitalized and payable quarterly.  EGSA has issued a R20 million warrant package to Investec on the execution of the Facility Documents.  The warrant package is calculated with reference to the conversion price for the common shares of EGSA equal to 110% of the lesser of R7.00 per share or the actual price per share achieved in the R100 million pre IPO equity raising.  As of the date of this filing the pre IPO equity raising has not taken place, therefore, the valuation of the warrants cannot be determined.  The warrants shall be convertible, in tranches of at least R1 million into ordinary shares of EGSA at the holder’s option at any time prior to 3 years after issue date.  If EGSA is not listed within nine months of execution of the Facility Documents, the Investec shall be entitled to elect to receive a settlement fee from EGSA equivalent to an independent valuation of the Warrant Package.  Security for the facility is:

 

•         A guarantee from the Company secured by a pledge and cession of its shareholding in and claims against EGSA;

•         A pledge and cession over EGSA’s shareholding in and claims against Barbrook Mines Ltd;

•         Suitable security over all of EGSA’s bank accounts, and

•         Subordination of shareholder and Group company loans to EGSA.

 

                The loan balance outstanding at September 30, 2008 includes $393,879 of accrued interest. 

 

                Also see Subsequent Events Note 12. 

17

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

5.         SHORT TERM LOANS (Continued)

 

                The following disclosures are in line with the requirements of Financial Accounting Standards Board             Statement No. 141 (“FAS 141”):

 

a.       On May 30, 2008, EGSA purchased 100% of the issued ordinary share capital of Barbrook Mines Limited (“Barbrook”) from Maid 'O The Mist (Proprietary) Limited, a company incorporated in the Republic of South Africa and a subsidiary of Caledonia Mining Corporation Limited (“Caledonia”), a company incorporated in Canada.  In accordance with the sale agreement, Caledonia also agreed to procure the sale and cession of total amount owing by Barbrook to the Caledonia Group with effect from the closing date.

 

b.       The primary reason for this acquisition was that the dormant processing plant of Barbrook will allow the Company to change its original strategy of building a new plant at the Company’s Lily Mine site thereby resulting in substantial reductions in capital expenditure.

 

c.        As the acquisition was completed on May 30, 2008, results of operations of Barbrook for the period from May 31, 2008 to September 30, 2008 are included in the interim consolidated statement of operations of the Company for the nine month period ended September 30, 2008.

 

d.       The cost of acquisition for the 100% of the issued ordinary share capital of Barbrook and shareholders loan accounts was South African Rands 70 million which approximated to $9.2 million as of the closing date.  The carrying value of the assets at December 31, 2007 has been written down to reflect the realisable value as per the value of this acquisition.

  

On August 25, 2008, the Company obtained Swiss Francs 2,200,000 six month loan from a shareholder, Kestrel SA (“Kestrel”) and for purposes of working capital requirements.  Interest on the loan is 15% p.a. calculated on the outstanding balance and compounded monthly in arrears.  As of September 30, 2008, the draw down on the loan amounted to Swiss Francs 2,057,000 ($1,895,943) and the balance as of that date included accrued interest of $22,620.  In addition, on August 22, 2008, the Company entered into a Common Stock Purchase Warrant Agreement with Kestrel whereby Kestrel is entitled to purchase up to Fifty Thousand (50,000) shares of Common Stock (par value $0.001 per share) from the Company upon payment to the Company of Five Dollars ($5.00) per share.   Warrants may be purchased at any time on or after August 20, 2008 but all rights to purchase the Shares and to exercise this Warrant shall expire on August 21, 2011 after which it shall become void and all rights hereunder shall thereupon cease.                                                                                    

18

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

6.         LONG TERM LIABILITIES

 

                                                                                                    September 30, 2008   December 31, 2007

Standard Bank Vehicle and Asset Finance Less: Current portion	$	2,142,030 (125,379)	$	843,984 (202,704)
	$	2,016,651	$	641,280

Secured banking facility against mining equipment bearing interest at the prime bank overdraft rate less 1% and repayable in monthly installments of South African Rands 551,474 ($66,275) and South African Rands 182,669 ($26,620) at September 30, 2008 and December 31, 2007, respectively.

 

Maturities of the liabilities are as follows:

 

For the year ending December 31: 2008 2009 2010 2011 2012				$	125,379 542,096 616,131 635,180 223,244
				$	2,142,030

 

               

 

 

 

 

 

 

 

 

19

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

7.         RECLAMATION AND REMEDIATION

 

The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment.  These laws and regulations are continually changing and are generally becoming more restrictive.  The Company conducts its operations so as to protect the public health and environment and believes its operations are in compliance with applicable laws and regulations in all material respects.  The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements.

 

At September 30, 2008 $360,907 were accrued for reclamation obligations relating to currently or recently producing mineral properties.

 

The following is a reconciliation of the total liability for reclamation and remediation:

 

                                                                                                                                   

Balance, December 31, 2007 Addition, change in estimate and other Liabilities settled Accretion expense	$	329,109 31,798 - -
Balance, September 30, 2008	$	360,907

 

8.         COMMITMENTS

 

A first continuing covering bond amounting to South African Rands 200,000 ($24,035) was registered over the property held by a subsidiary, Makonjwaan Properties Henry Nettman Two Eight (Pty) Ltd., in lieu of financial guarantees amounting to South African Rands 164,000 ($19,709) issued in favor of the Department of Minerals and Energy.

During the year ended December 31, 2006, the Company entered into a Service and Support Agreement with Cheston Minerals PTY Limited (“CML”), a company owned by EGI’s President.  This agreement covers the rental of the Company’s South African office and use of the office equipment and supplies, which are owned by CML.  The agreement requires a monthly payment of $16,000.  The term of the agreement is one year and is renewable on an annual basis.  The Company charged $144,000 and $135,000 to operating expense for the nine month period ended September 30, 2008 and 2007, respectively.

During the year ended December 31, 2006, the Company entered into an Agreement for Consulting Services and Public Relations with Zenith Premier Limited (“ZPL”), a company in which EGI’s CFO serves as a director.  This agreement covers the investor relation services to be provided by ZPL to EGI.  The agreement requires a monthly payment of $16,500 and was terminated on August 31, 2008.  The Company charged $132,000 and $148,500 to operating expense for the nine month period ended September 30, 2008 and 2007, respectively.

 

20

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

9.         MINORITY INTEREST

The current South African mining legislation promulgated under “Mineral and Petroleum Resources Development Act of 2004 (“MPRDA”) seeks, among other things, (i) to expand opportunities for historically disadvantaged South Africans to enter the mineral industry and obtain benefits from the exploitation of mineral resources; and (ii) to promote employment, social and economic welfare as well as ecologically sustainable development.  In order to convert an old order mining right to a new order mining right the holder is required to submit a social and labor plan.  The plan should describe how it will expand opportunities for historically disadvantaged South Africans to enter the mineral industry. 

Further, for purposes of mining right conversions effective May 1, 2004 (the effective date), the MPRDA (incorporating the Mining Charter) requires mining company ownership for historically disadvantaged South Africans to 15% ownership within five years and 26% ownership within 10 years of the effective date.  The transfer of ownership is to be consummated at fair market value. 

Accordingly, and pursuant to the requirements of MPRDA, EGL on December 9, 2005 entered into a “Heads of Agreement” to sell 26% of its ordinary stock to Lomshiyo Investments (Proprietary) Limited (“Lomshiyo”) for a consideration of R9,900,000 ($1,081,600 and $1,442,728 at September 30, 2008 and December 31, 2007, respectively.)  This amount is a loan to Lomshiyo and is reflected as a reduction of equity in the Company’s September 30, 2008 consolidated balance sheet.  Lomshiyo is a South African corporation whose majority shareholders are historically disadvantaged South Africans.  The transaction closed on February 2, 2006.  The ownership percentage of net assets of EGL acquired by Lomshiyo at December 31, 2005 amounted to $1,379,142 or 26%.

The purchase of ordinary stock was financed with a note receivable bearing an annual interest rate of the South African Prime Rate (12.075% at June 30, 2007).  The note accrues interest and is payable to the Company on January 2, of each year.  A total of $616,863 of accrued interest has been added to the note receivable.  The note is due and payable on December 31, 2010.  The Company’s common stock collaterizes the note receivable.

 

10.       STOCK OPTIONS

 

            Employee Stock Options

 

The Company currently maintains the Eastern Goldfields, Inc. 2005 Stock Plan (“Stock Plan”), approved by stockholders on November 26, 2005, for executives and eligible employees.  Under this Stock Plan, options to purchase shares of stock can be granted with exercise prices not less than 100% of fair market value of the underlying stock at the date of grant.  Options granted under the Company’s stock plan vest over periods ranging from one to three years of the date of the grant and are exercisable over a period of time not to exceed 10 years from grant date.  At December 31, 2006, no shares were available for future grants under the Company’s 2005 Stock Incentive Plan.  Also see Subsequent Events Note 12.

 

The following table summarizes annual activity for all stock options for the nine months ended September  30, 2008 and the year ended December 31, 2007:

 

 

21

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

10.       STOCK OPTIONS (Continued)

 

            Employee Stock Options (Continued)

 

	2008						2007
	Number of Shares			Weighted Average Exercise Price			Number of Shares			Weighted Average Exercise Price
Outstanding, beginning    of the period Granted Exercised Forfeited and expired		850,000 - - -		$	1.50 - - -			850,000 - - -		$	1.50 - - -
Outstanding, end of period		850,000		$	1.50			850,000		$	1.50
Options exercisable, end of period   Weighted average fair value of options granted during the period	$	833,000       -		$	1.50		$	833,000       -		$	1.50

 

The fair value of the stock options granted (and vested) during the nine month period ended September 30, 2008 and the year ended December 31, 2007, was approximately $0 and $0 or $0 and $0 per stock option, respectively, and was determined using the Black Scholes option pricing model.  The factors used for the nine month period ended September 30, 2008 and the year ended December 31, 2007, were the option exercise price of $1.50 per share, a 3 year life of the options, volatility measure of 43.77% (2007 - 50%), a dividend rate of 0% and a risk free interest rate of 2.10% (2007 - 4.55%).

The following table summarizes information about stock options outstanding at September 30, 2008, with exercise prices less than the fair market value on the date of grant with no restrictions on exercisability after vesting:

 

		Options Outstanding							Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted- average Remaining Contractual Life (in years)		Weighted- average Exercise Price			Number Exercisable		Weighted Average Exercise Price
$1.50		850,000		0.6		$	1.50		833,000		$	1.50

 

As of September 30, 2008, there was approximately $86,000 of unrecognized compensation cost related to unvested stock options.  This cost is expected to be recognized over a weighted average period of 0.6 years.

 

22

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 

11.       CAPITAL STOCK

 

Common Stock

 

On September 30, 2008 the Board of Directors of Eastern Goldfields, Inc. approved an amendment to the Company’s Articles of Incorporation to increase the authorized common stock to 160,000,000.

 

Preferred Stock

 

On September 30, 2008, the Board of Directors of Eastern Goldfields, Inc. approved an amendment to the Company’s Articles of Incorporation to authorize 20,000,000 shares of Preferred Stock with a par value of $0.001 per Share.

 

12.       SUBSEQUENT EVENTS

 

a.  On October 30, 2008, the Company received a commitment letter agreement from Investec Bank Limited (“Investec”).  Under the terms of the agreement, Investec has agreed to extend the maturity date of the Company’s existing bridging loan (the “Existing Loan”) from the original maturity date of November 28, 2008 to May 29, 2009 (the “Loan Extension”).

 

As consideration for the Loan Extension, the Company agreed to the following:

 

i.         To grant Investec 820,000 Common Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s Common Stock at an exercise price equal to the lower of $3.75 per share and the price at which the Company raises equity capital in its next offering;

 

ii.        To increase the interest rate on the Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

iii.      To confirm that the Company has sufficient working capital for the period through the last date of the Loan Extension;

 

iv.      To subordinate all shareholder loans to the Existing Loan;

 

v.       To prohibit the payment of any interest and principal on all shareholder loans;

 

vi.      To prohibit further indebtedness without the prior written approval of Investec; and

 

vii.    To provide Investec on or before the 5th calendar day of each month, monthly management accounts and an update on the Company’s financing strategy and provide Investec with an opportunity to review the strategy with Investec, upon Investec’s request.

 

 

b.     On October 9, 2008, the Board of Directors approved the extension of the Company's 2005 Stock Option Plan so that, as extended, the 2005 Stock Option Plan shall not expire until October 28, 2010.

 

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MATTER OF FORWARD-LOOKING STATEMENTS

 

THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," OR "ANTICIPATES," OR THE NEGATIVE OF THESE WORDS OR OTHER VARIATIONS OF THESE WORDS OR COMPARABLE WORDS, OR BY DISCUSSIONS OF PLANS OR STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.  MANAGEMENT WISHES TO CAUTION THE READER THAT THESE FORWARD-LOOKING STATEMENTS, INCLUDING,  BUT NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY’S MARKETING PLANS, GOALS, COMPETITIVE CONDITIONS, REGULATIONS THAT AFFECT PUBLIC COPMPANIES THAT HAVE NO EXISTING BUSINESS AND OTHER MATTERS THAT ARE NOT HISTORICAL FACTS ARE ONLY PREDICTIONS.  NO ASSURANCES CAN BE GIVEN THAT SUCH PREDICTIONS WILL PROVE CORRECT OR THAT THE ANTICIPATED FUTURE RESULTS WILL BE ACHIEVED.  ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY EITHER BECAUSE ONE OR MORE PREDICTIONS PROVE TO BE ERRONEOUS OR AS A RESULT OF OTHER RISKS FACING THE COMPANY. FORWARD-LOOKING STATEMENTS SHOULD BE READ IN LIGHT OF THE CAUTIONARY STATEMENTS AND IMPORTANT FACTORS DESCRIBED IN THIS FORM 10-Q FOR EASTERN GOLDFIELDS, INC., INCLUDING, BUT NOT LIMITED TO THE MATTERS SET FORTH IN MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE RISKS INCLUDE, BUT ARE NOT LIMITED TO, THE RISK FACTORS AND UNCERTAINTIES SET FORTH IN ITEM 1A, RISKS ASSOCIATED WITH A SMALL COMPANY THAT HAS ONLY A LIMITED HISTORY OF OPERATIONS, THE COMPARATIVELY LIMITED FINANCIAL RESOURCES OF THE COMPANY, THE INTENSE COMPETITION THE COMPANY FACES FROM OTHER ESTABLISHED COMPETITORS, ANY ONE OR MORE OF THESE OR OTHER RISKS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FUTURE RESULTS INDICATED, EXPRESSED, OR IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS.  WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS, CIRCUMSTANCES, OR NEW INFORMATION AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED OR OTHER SUBSEQUENT EVENTS.

 

As used herein, the term “the Company,” “we,”  “us,” and “our” refer to Eastern Goldfields, Inc., a Nevada corporation and its subsidiaries unless otherwise noted.

 

Item 1A.  Risk Factors.

 

Lack of Diversification:  Our business, assets, and operations are concentrated in South Africa and the mining of gold. As a result, we are not diversified and to that extent we face continuing challenges to achieve stable revenues, profits, and cash flow while also remaining exposed to the risks associated with this concentration.

 

Small Company, Limited Resources & Need for Additional Capital :  We are a small company with limited financial resources relative to the many competitors in our industry.  In the event of any unexpected problems or difficulties in our business and operations, we may not have the ability to obtain sufficient additional capital on terms that are reasonable in light of our current circumstances and market conditions. Further, we currently estimate that we will need to raise $60,000,000 in additional capital.  We have not received any assurances that this additional capital can be obtained or if it is obtained, that can be obtained on reasonable terms and in a timely fashion to allow us to execute our plans. 

 

Limited Trading Market for Common Stock:   Our common stock is presently traded in the over-the-counter Bulletin Board and is quoted on the “OTCBB Market”.  Our stock trades on a limited and sporadic basis and we cannot assure you that a continuous liquid trading market will develop or, if it does develop, that it will be sustained for any continuous period.

 

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Lack of Profits and Negative Cash Flow:   During the nine months ended September 30, 2008, we recorded a net loss of $2,048,106 compared to a net loss of $982,098 for the nine months ended September 30, 2007 and negative cash flow during both periods.  While we believe that if we can successfully implement our business plan and if market and competitive conditions allow, we may achieve profitability and positive cash flow, however, we can not assure you that we will achieve profitability and positive cash flow or if we do achieve these goals, that we can sustain profitability and positive cash flow in the future.

 

Extension of Loan & Covenants Granted to Investec :  On October 30, 2008, we entered into an extension of the bridging loan with Investec Bank Limited.  Under the terms of the loan, we are obligated to pay interest to Investec and repay all principal due to Investec on May 29, 2009.  Further, and in addition to other provisions, we granted Investec 820,000 common stock purchase warrants and agreed to provide Investec with monthly management reports.  While we believe that the agreement extending the existing bridging loan serves our long-term interests, we can not assure you that we will be successful in repaying the loan as required.

 

Lack of Dividends :  Our board of directors determines whether to pay dividends on the Company’s issued and outstanding shares. The declaration of dividends will depend upon our future earnings (if any), our capital requirements, our financial condition and other relevant factors. Our board of directors does not intend to declare any dividends on our Common Stock for the foreseeable future. We anticipate that we will retain any earnings to finance the growth of our business and for general corporate purposes.

 

Competition & Lack of Diversification :  Gold properties eventually become depleted or uneconomical to continue mining. As a result, our long-term success is dependent on its ability to acquire, discover, develop and mine new properties. The acquisition of gold properties and their exploration and development are subject to intense competition. Companies with greater financial resources, larger staffs, more experience and more equipment for exploration and development may be in a better position than us to compete for such mineral properties. If the Company is unable to locate, develop and economically mine new properties, it most likely will not be able to be profitable on a long-term basis. In addition, all of our assets and operations are concentrated in the mining business described in this Form 10-Q and we have no current plans to diversify into any other business activity. 

 

Reliance Upon Estimates & Matter of Estimated Reserves:   Our business and the plans described in this Form 10-Q rely in large measure upon estimates that we received from others (including those in the Bank Feasibility Study) used in combination with our own assessments.  While we continue to evaluate the geological information that we use, we cannot assure you that the estimates recited in this Form 10-Q are accurate or that we will not later revise and lower our estimated reserves which may adversely impact our financial performance.

 

Limited Trading and Limited History for our Common Stock :  Our common stock trades on a limited and sporadic basis and, as a result, there is only limited liquidity in our common stock.  Further our common stock has had only a limited trading history on the Bulletin Board Market.  As a result and given the limited trading market for our common stock, the price of our common stock may be far more volatile and unpredictable than the prices of common stocks and other securities that have a long and established trading history.

 

Possible Rule 144 Stock Sales :  A large portion of our outstanding Common Stock is "restricted securities" and may be sold only in compliance with Rule 144 adopted under the Securities Act of 1933 or other applicable exemptions from registration.  As revised effective February 15, 2008, Rule 144 generally now requires that a holder of our restricted Common Stock hold these “restricted securities” for at least six months from the date at which they were acquired before undertaking any re-sale of the restricted Common Stock pursuant to Rule 144.  And if the holder is an “affiliate” (as defined in Rule 144(a)(1) or was an “affiliate” in the immediately preceding 90 day period), then the holder must also satisfy certain other requirements of Rule 144.  As a result of the revision to Rule 144 that became effective February 15, 2008 (including but not limited to the shorter holding period under Rule 144(d)), potential and actual sales of our Common Stock by our present shareholders may have a depressive effect on the price of our Common Stock in the marketplace.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Our strategy, to the extent that we are able, is to grow our mineral reserves.  At the same time, we seek to optimize our current operations, through exploration and prudent acquisitions.  During 2008, we took the following actions:

 

•

We expanded the Lily Mine operation and success of drilling programs to date

 

•

We commenced refurbishment of the Barbrook Mine

 

•

We continued our exploration

 

Growth and Expansion

 

Lily Mine

 

Our primary focus, to the extent that we are able, is to develop the underground mine at Lily.  Primary development of the initial underground section began in July 2007 and we are anticipating that if current projections hold, our first production will be in the fourth quarter of 2008.  Under these conditions, the underground tonnage will be treated at the current Makonjwaan mill until the Barbrook Plant has been refurbished. The dormant processing plant of the recently acquired Barbrook Mine (see discussion below), will allow us to change the original strategy of building a new plant at the Lily Mine site.  We commenced refurbishment of the Barbrook plant by the beginning of 2008 which may allow us to undertake operations in 2009.

 

The Lily Main Pit opencast operation which commenced in 2000 was completed in September 2006. Production from the additional discovery of open pit reserves along the eastern strike extension (Lily East and Rosie’s Fortune) commenced immediately thereafter to give the Company a continuous production life of mine up until December 2008.

 

The following table summarizes the tons milled, gold produced and operating profit (loss) for the life of the open pit operations to date (using the estimates that we have obtained and which, based on current information, appear as reasonable projections):

 

Period		Ore Milled	Au Produced		Average Grade Produced		Operating Profit/(loss)
Year	mths	t	kg	oz	g/t	Oz/t	US$
2000/01	9	120,000	240	7,700	1.99	0.062	338,087
2001/02	12	154,000	309	9,900	2.00	0.063	647,117
2002/03	12	153,000	343	11,000	2.24	0.074	1,049,173
2003/04	12	131,000	241	7,700	1.84	0.057	(541,559)
2004	9	116,000	230	7,400	1.98	0.062	(743,916)
2005	12	168,000	398	12,800	2.37	0.074	420,522
2006	12	166,200	377	12,100	2.27	0.071	2,276,493
2007	12	160,000	322	10,400	2.01	0.072	1,010,599
2008	9	115,915	195	6,339	1.68	0.055	(1,562,078)
TOTAL		1,284,115	2,655	85,339	2.04	0.066	2,894,438

 

(1)

Prior to March 31, 2004, 12 month accounting periods were from April 1 to March 31

 

(2)

2005 represents the first year of change to the accounting period or fiscal year based on a calendar year.

 

 

If our current estimates are reasonable, we currently anticipate a potential of about 1,500 oz may remain in the Rosie’s Fortune Pit for extraction in the fourth of 2008. Thereafter the Company will require, as reported in previous reports, working capital financing to meet the requirements of its future short term business plan.

 

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The extensive exploration diamond drilling programs completed since 2005 up to the end of 2007 have successfully increased the mineral reserves of the Lily Mine to the extent that a full Bankable Feasibility Study has been completed giving the entire project a very positive NPV and IRR at a conservative medium term gold price of US$800/ounce.  Ninety diamond drill holes (with deflections), totaling in excess of 28,800 meters of drilling, have increased the confidence in the reserves.   The discovery cost remains remarkably low at an estimated +/-US$1.50 per ounce during this exploration period.

 

To the extent that we are able and provided that we can implement our current plans, we anticipate that exploration will continue on the mine property both from surface and later from underground as the mine develops in depth to continue increasing the reserve potential.

 

There can be no assurance that we will be successful in implementing our plans or the plan of operations described in this Form 10-Q.  We face many risks and uncertainties and we have only a limited history of operations.

 

Acquisitions

 

If circumstances and our financial resources allow, we intend to make strategic acquisitions in the next few years with the objective of increasing its production to 100,000 oz/annum.  We continue to investigate potential opportunities.  We cannot assure you that we will achieve these or other goals or if we achieve them, that we can sustain any such achievement for any period in the future.

 

Barbrook Mine

 

As previously disclosed in our Form 8-K, on February 21, 2008 we entered into an agreement to purchase Barbrook Mine.  This offer was accepted by the seller corporation, Caledonia Mining Corporation.  The acquisition was completed on May 30, 2008. 

 

                Currently and based on the due diligence that we have completed, the Barbrook Mines Limited holds title to a Mining Authorization covering an estimated 2,286 hectares which hosts a consolidation of numerous small mines and claims in the historically renowned Barberton gold mining district of South Africa.  Mining at Barbrook commenced in the 1880’s.  In 1996 exploration significantly improved the definition of estimated main ore zones.  Treatment of refractory ores commenced in July 1996 and continued until July 1997.  A total of 166,400 tons of sulphide ore was treated at an average rate of 14,000 tons per month. 311 kg of gold was produced at a recovered grade of 1.87g/t.  Both the head grade and metallurgical recovery achieved over this period (~40%) were below target and the mine was put on care and maintenance pending a re-evaluation of the mining method and metallurgical process.

 

Based on the information we have available and provided that current trends continue, we believe that the Barbrook Mine looks promising.  Various metallurgical tests took place between 1997-2007 which showed that improvements to gold recoveries are achievable.  A complete re-evaluation was done in 2002.  At that date, this lead to an estimate of Proven and Probable Ore Reserves amounting to 176,000 tons at an insitu grade of an estimated 6.0 g/t gold.  All quoted Resource and Reserve estimates will be re-evaluated by EGL’s competent staff in time as additional information becomes available.  Our estimates and projections may change and there can be no assurance that we will not later reduce our current estimates and projections as additional information becomes available.

 

The present state of the mine includes extensive (40km) underground development above “10 Level” adit (600m amsl) up to surface.  A complete but partially operational plant remains requiring refurbishment. Barbrook lies approximately 7km from Lily Mine on a flat well-maintained dirt road.  Our plans for the Barbrook Mine are subject to our receipt of additional financial resources.  We cannot assure that we will be successful in obtaining additional financial resources or, if we are successful, that we can obtain such resources on a reasonable basis given our present circumstances.

 

 

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Prospects for the Future:

 

Exploration

 

Other Properties

 

Geological exploration has continued with positive results on the Worcester project area where continued diamond drilling has successfully identified the continuation of the mineralized zone well below the old workings. This exercise will be completed in the fourth quarter and all the information assessed. However it is envisaged that this project will be taken to pre-feasibility status in the first quarter of 2009.  The Bonanza project area and other target locations are still under investigation and proposals for further exploration are being considered. The outcome of these exploration programs is expected to result in the further delineation of new ore bodies which can be developed for mining in the medium term future.  To the extent that it is possible and if we are successful, our goal is to produce an additional 20,000 oz/annum from a second operation.  While we currently believe that this goal is feasible, we cannot assure that we will achieve this goal or the related objectives.

 

            We anticipate that the acquisition of Barbrook may also add to the exploration focus for the last quarter of 2008 but we have not made any specific determinations with respect to the extent of the amount of exploration that may be completed in 2008 or the precise time frame for this exploration.

 

 

Requirement for Additional Capital

 

Based on our current estimates and subject to later evaluations that are to be completed by management, we anticipate that our capital requirements can be grouped into three general areas:

 

•

Development of the Lily underground mine and refurbishment of the Barbrook plant

 

•

Exploration of the company’s minerals rights including extensions to Lily and the Worcester project area

 

•

Partial financing of acquisitions.

 

The development of the underground mine at Lily is of primary importance and the capital expenditure is currently estimated at US$31 Million.  Breakdown of this estimate is as follows: 

 

                                                                                                                                                         US$ million

Repayment of bridging loan (incl. interest) arranged to acquire

       100% of the shares in Barbrook Mines                                                                                                     $12

Development of underground mine at the Lily Mine                                                                                      10

Refurbish and expand Barbrook plant                                                                                                                 5

Working capital and finance costs                                                                                                                      4

                                                                                                                                                                                $ 31

 

Our current estimates and projections suggest that this may be sufficient to allow us to develop the underground workings and the mine infrastructure at the Lily Mine site as well as the refurbishment of the Barbrook plant to be used for processing the Lily ore.  We may change or revise our estimates as we obtain additional information and as studies of the mine are completed.  In the event that the amount needed is increased, we may re-evaluate our plans and delay or re-schedule capital expenditures for this property and other properties consistent with circumstances and priorities at that time.

 

Currently, we anticipate that ongoing exploration will continue at the Worcester Mine and the other target locations within our mineral rights.  In most cases we have had encouraging results so far.  But we anticipate that we will likely need to make an estimated US $4 Million in additional capital expenditures to achieve the exploration objectives that we have set for the next 18 months.  That estimate may change or increase if further evaluations show that additional expenditures may be needed to fully complete these explorations.

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If circumstances allow and if we are successful in obtaining additional necessary capital, we anticipate that we may develop Barbrook underground by expanding Barbrook plant for production of a planned 28,000 oz pa starting in 2010.  Currently, and subject to further confirmation, we estimate that capital expenditures for Barbrook are as follows:  

 

                                                                                                                                                        US$ million

Pre-production capital program to develop underground workings

       commencing 2009                                                                                                                                           $6

Barbrook plant expansion to accommodate Barbrook ore – 2009/10                                                              9

Construction of BIOX plant to treat refractory ore - 2010                                                                              10

                                                                                                                                                                               $ 25

 

The BIOX Process is a pretreatment process for refractory gold ores or concentrates, using naturally occurring bacteria to break down the sulphide matrix and liberate the gold for subsequent cyanidation.  This is an alternative to the conventional processes of roasting and pressure oxidation and offers advantages that typically include reduced capital cost, simplicity of operation, robustness and environmental friendliness.

 

If circumstances and opportunities allow, we may make at least one other acquisition in 2008 and will require funds in order to secure such acquisition or to provide initial support for the acquired operation.  An amount of US$10 Million has been estimated for this purpose and this estimate may be changed as we complete further reviews in light of new additional information.

 

Accordingly and to the extent that we are able, we seek to raise additional capital of $31 million for our Lily Mine underground development in the third quarter of 2008 and $4 million for our ongoing exploration program and objectives.  Our current capital raising strategy also calls for us to seek an additional $25 million in new capital for developing underground mining operations at Barbrook Mine.  While we have had discussions with several potential providers of capital, we are not in a position to estimate the form or terms of any such financing arrangement and we cannot give you any assurance we will successfully complete any financing arrangements or, if we do, that the additional new capital obtained in any financing arrangement can be raised on terms that are reasonable in light of our current circumstances.

 

But, overall and if we can achieve our current objectives, our goal is to complete financing arrangements for the Lily Mine and our exploration program in the fourth quarter of 2008.  For this we seek to raise $25 million.  Accordingly, as an interim step and as part of our capital raising strategy, we completed:

a .  Convertible bond facility in March 2008 which raised US$4 million.  

b.     Bridging loan facility in May 2008 of approximately US$10 million. 

These interim fundings are necessary to implement our plans prior to the main fund raising in the fourth quarter of 2008.  Given the uncertainties of the marketplace and the challenges that we face, there can be no assurance that our efforts to raise additional new capital will be successful or if we are successful, that we can raise additional capital on terms that are reasonable in light of our current circumstances.

 

 

 

 

 

 

 

 

 

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Results of Operations for the Nine Months Ended September 30, 2008 and 2007

A summary of our comparative operations, which arise only from open pit mining operations at the Lily Mine for the nine months period ended September 30, 2008 and September 30, 2007 were as follows:

 

	Nine months period ended September 30,			Three months period ended September 30,
	2008	2007		2008	2007
Ore Tons Milled	115,915	119,624		39,678	43,343
Yield – grams per ton	1.81	1.96		1.44	1.91
Gold Sold – oz	6,339	7,257		1,826	2,639
Gold price - $/oz	$896	$668		$870	$678
Total Income*	$6,061	$5,286		$1,591	$1,979
Cost of Production*	($5,543)	($4,173)		($1,825)	($1,797)
Exploration Costs*	($127)	($129)		$4	$27
Operating Income (Loss)*	$391	$984		($230)	$209
Operating Expenses, net*	($2,439)	($1,966)		($1,132)	($836)
Minority Interest*	-	-		-	-
Net Loss *	($2,048)	($982)		($1,362)	($627)

  

* Expressed in Thousands

 

Comparative Results of the Nine Months Ended September 30, 2008 and 2007

 

Revenues:   For the 2008 period covering nine months of commercial production from January 1, 2008 to September 30, 2008 (“First Three-Quarter 2008”), we recorded revenues of approximately $5,747,000 from sales of gold versus revenues of approximately $5,030,000 for the nine month period from January 1, 2007 to September 30, 2007 (the “First Three-Quarter 2007”), which amounted to an increase of approximately 14%.  The principal factors affecting this increase in revenue were as follows:

 

•         Although ore tons milled in the First Three-Quarter 2008 was slightly lower than that of Three-Quarter 2007 at 115,915 tons, yield had dropped by approximately 8% resulting in lower gold production.  Accordingly, 6,339 oz. of gold was sold in First Three-Quarter 2008 as compared with 7,257 oz. of gold sold in First Three-Quarter 2007, a drop of approximately 13%.  This was primarily due to  production specifically in the third quarter which consisted of open and underground production.  Tons mined, ore and waste were significantly down as the open pit nears the end of its life.  Problems with ground water flowing into the open pit continued causing dilution of ore and adversely affecting the extraction of ore.  Development of the underground section was not sufficiently advanced to make up for the shortfall in ore tons.  

 

•         However, this reduction in production was compensated primarily by the increase in the price of gold.  Whereas, our 2007 sales averaged $668 per ounce of gold, our 2008 sales have averaged $896 per ounce of gold; an increase in the price of gold of approximately 34%.  This increase enhanced our margins and our results of operations.  However, this increase in the price of gold may or may not be a trend and if it is a trend, we do not know if it will continue.  We are not able to project gold prices and to the extent that gold prices fall in the future, our operations, revenues, profitability, and cash flow will be adversely and significantly impacted for such period of time as lower price levels in the marketplace are maintained. 

 

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Cost of Production:   Although ore tons milled in the First Three-Quarter 2008 was slightly lower than that of First  Three-Quarter 2007 at 115,915 tons, overall we experienced higher cost of production.  During the First Three-Quarter 2008, we produced 6,339 oz. of gold at a cost $5,543,000, whereas, during the First Three-Quarter 2007, we produced 7,257 oz. of gold for $4,173,000.  Accordingly, per ounce cost of production for the First Three-Quarter 2008 was $874 whereas per ounce cost of production for First Three-Quarter 2007 was $575; an increase in the per ounce production of gold of 52%.

 

Principal factors affecting this increase in cost of production were:

 

•         Increase in diesel price per liter of 11.5% during the First Quarter 2008 and in comparison to diesel price in First Quarter 2007 a 43.7% increase

 

•         7.5% increase in the plant hire costs effective January 1, 2008

 

•         Significantly lower tons of ore mined from the open pit as it nears the end of its life         

 

Fuel and oil price increases generally have a negative impact on our margins, cash flow, and profitability. 

 

Operating Expenses for the First Three-Quarter 2008:  Our operating expenses increased to $1,954,000 in the First Three-Quarter 2008 from $1,949,000 in the First Three-Quarter 2007; an increase of approximately 0%.  Major factor affecting this was increase in interest charges of $486,000 on the Company’s loan commitments.      

 

Changes in Exchange Rates:  Changes in exchange rates did not have a significant impact on the comparability of our results for the First Three-Quarter 2008 versus the First Three-Quarter 2007.  The average rates of exchange for the interim periods ended September 30, 2008 and September 30, 2007 were SAR 7.5913 to $1 and SAR 6.9664 to $1, respectively – approximately 9% weakening of the South African Rand against the US Dollar.  Had the exchange rate remained the same during the First Three-Quarter 2008 as that of First Three-Quarter 2007, the results of our operations arising from South African Rand transactions would have been approximately $100,000 lower.

 

Changes in exchange rates had a significant impact on the comparability of our balance sheets as of September 30, 2008 versus September 30, 2007.  The rates of exchange as at September 30, 2008 and September 30, 2007 were SAR 8.3210 to $1 and SAR 6.8840 to $1, respectively – approximately 21% weakening of the South African Rand against the US Dollar.  Had the exchange rate remained the same in 2008 as that of 2007, our total South African Rand based net assets would have been approximately $2,200,000 higher.  This variation in the main relates to:

 

•         o ur property, plant and mine development costs which would have been approximately $5,400,000 higher; and

•         our liabilities which would have been 3,700,000 higher.

 

Restructuring:  On March 28, 2008 and through our subsidiary, EGSA, we entered into a Convertible Loan Agreement.  The agreement involves EGSA receiving $3,981,932 (32,000,000 SA Rands) of proceeds.  The loan principal can convert into 6.9% of the total issued and outstanding shares of ordinary capital after the conversion of the loan by EGSA. If EGSA is able to list its shares with Johannesburg Stock Exchange Limited (JSE) within six months of the agreement date then no interest is due and payable. However, if EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Rate and be due and payable immediately. If EGSA list its ordinary shares with JSE after six months due but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan. If, for any reason, EGSA is unable to list its ordinary shares with JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding shares of ordinary shares of EGSA.

 

On May 27, 2008, our wholly owned subsidiary EGSA obtained R80 million ($9,614,229 as of September 30, 2008) six month bridging loan facility from Investec Bank Ltd. (“Investec”) for the acquisition of Barbrook Mines Ltd.  This facility is repayable on May 29, 2009.  Interest on the facility is calculated at 3 month JIBAR plus 4% p.a., capitalized and payable quarterly.  EGSA has issued a R20 million warrant package to Investec on the execution of the Facility Documents.  The warrant package is calculated with reference to the conversion price for the common shares of EGSA equal to 110% of the lesser of R7.00 per share or the actual price per share achieved in the R100 million pre IPO equity raising.  The warrants shall be convertible, in tranches of at least R1 million into ordinary shares of EGSA at the holder’s option at any time prior to 3 years after issue date.  If EGSA is not listed within nine months of execution of the Facility Documents, the Investec shall be entitled to elect to receive a settlement fee from EGSA equivalent to an independent valuation of the Warrant Package.  Security for the facility is:

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•         A guarantee from us secured by a pledge and cession of our shareholding in and claims against EGSA;

 

•         A pledge and cession over EGSA’s shareholding in and claims against Barbrook Mines Ltd;

 

•         Suitable security over all of EGSA’s bank accounts, and

 

•         Subordination of shareholder and Group company loans to EGSA.

 

On October 30, 2008, the Company received a commitment letter agreement from Investec Bank Limited (“Investec”).  Under the terms of the agreement, Investec has agreed to extend the maturity date of the Company’s existing bridging loan (the “Existing Loan”) from the original maturity date of November 28, 2008 to May 29, 2009 (the “Loan Extension”).

 

As consideration for the Loan Extension, the Company agreed to the following:

 

a.       To grant Investec 820,000 Common Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s Common Stock at an exercise price equal to the lower of $3.75 per share and the price at which the Company raises equity capital in its next offering;

 

b.       To increase the interest rate on the Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

c.        To confirm that the Company has sufficient working capital for the period through the last date of the Loan Extension;

 

d.       To subordinate all shareholder loans to the Existing Loan;

 

e.        To prohibit the payment of any interest and principal on all shareholder loans;

 

f.        To prohibit further indebtedness without the prior written approval of Investec; and

 

g.        To provide Investec on or before the 5th calendar day of each month, monthly management accounts and an update on the Company’s financing strategy and provide Investec with an opportunity to review the strategy with Investec, upon Investec’s request.

 

In the event that we breach our obligations to Investec Bank Ltd., we could lose our wholly owned subsidiary and all of our assets and business.

 

On October 28, 2008, the Company engaged IBK Capital Corporation of Toronto ("IBK") where IBK has agreed to undertake its best efforts to assist the Company in raising up to $10 million in the next three months.  In the event that market conditions allow and if IBK is successful, IBK will be paid a commission on the funds raised and will receive common stock purchase warrants.  In this event, the net proceeds will be used to fund expenditures on the development of the Lily project and for general and corporate working capital purposes. 

 

The Company is also under discussions with a major broker-dealer in New York for the purpose of raising an additional $15 million.

 

With funds raised and positive cash flow from its ongoing production activities, the Company believes that it will be able to repay the existing Investec bridging loan.  While the Company has not received any commitment from the broker-dealer with respect to raising these additional funds and there can be no assurance that the efforts of IBK Capital will be successful, the Company remains optimistic that if market conditions allow, it may be able to complete one or more of these planned financial transactions on reasonable terms.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The Company’s operations and its securities are subject to a number of substantial risks, including those described below.  If any of these or other risks actually occur, the Company’s business, financial condition and operating results, as well as the trading price or value of its securities could be materially adversely affected.  No attempt has been made to rank these risks in the order of their likelihood or potential harm.  In addition to those general risks enumerated elsewhere in the document, any purchaser of the Company’s common stock should also consider the following risk factors:

 

Risks Related to the Company’s Operations

 

We require additional funding which may not be available.  If we are unable to obtain necessary financing on acceptable terms, we may have to curtail our current or planned operations.

 

We require additional funding to implement our business plan. Our current open pit operations at our Lily Mine are anticipated to terminate by December 2008.  Additional capital will be required in order to undertake underground mining operations at the Lily Mine.  We also will require still additional funding to explore our other properties. We may seek to obtain such funding for these activities through equity or debt financing, joint ventures or from other sources.  There can be no assurances that we will be able to raise adequate funds on acceptable terms from these or other sources (in light of our current circumstances), which may hinder us from continuing or expanding our operations.

 

Operational hazards and responsibilities could adversely affect our operations.

 

Our current operational activities are subject to a number of risks and hazards which include but not limited to the following:

 

	•	environmental hazards,
	•	industrial accidents
	•	Labor disputes,
	•	unusual or unexpected geological or operating conditions,
	•	changes in regulatory environment
	•	natural phenomena such as severe weather conditions, floods, earthquakes and
	•	Other hazards

 

These occurrences could result in significant damage to, or destruction of, mineral properties or production equipment, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability.  The occurrence of these operational hazards could adversely affect our mining operations by limiting production or the closure of the mines themselves.

 

We are not insured against any losses or liabilities that could arise from our operations either because insurance is unavailable or because the premium cost is excessive.  The payment of such liabilities could have a material adverse effect on our financial position and, depending on the extent of such liability, could result in the total loss of our assets and operations.

 

                Exploration for gold involves hazards, which could result in us incurring substantial losses and liabilities to third parties for pollution, accidents and other hazards. We have public liability insurance of $1,500,000, but if we incur uninsured losses or liabilities, the funds available for the implementation of its business plan will be reduced and our assets may be jeopardized. The payment of such liabilities may have a material adverse effect on our financial position and, depending on the extent of such liability, could result in the total loss of our assets and operations.

 

 

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The Bank Feasibility Study (“BFS”) contains estimates and assumptions regarding the feasibility of the Company’s mining operations which may later prove to be inaccurate as additional information becomes available .

 

While we believe that the Bank Feasibility Study was conducted in a responsible fashion and the estimates, assumptions, and methodology of the BFS follows standards that are consistent with industry practice, the amount of Reserves, Proven Reserves, and other projections may be later significantly reduced as we obtain additional information. The extent of any reduction in these estimates and their magnitude can not be known at this time. The Company is aware that estimates in the mining industry can be subject to dramatic changes. For these reasons, we can not assure you that we will not later discover that our estimates need to be significantly reduced as we complete further work on our mining properties.

 

Our ability to discover a viable and economic mineral reserve on its properties is subject to numerous factors, most of which are beyond its control and are not predictable. If the Company is unable to discover such reserves, it most likely will not be able to establish a profitable commercial mining operation on these properties.

 

Exploration for gold is speculative in nature, involves significant financial risks and is frequently unsuccessful. Few properties that are explored are ultimately developed into commercially producing mines. The Company’s long-term profitability will be, in part, directly related to the cost and success of exploration programs. The Company’s gold exploration programs entail risks relating to the following:

 

	•	location of economic ore bodies,
	•	Development of appropriate metallurgical process
	•	receipt of necessary government approvals, and
	•	construction of mining and processing facilities at sites chosen for mining

 

The commercial viability of a mineral deposit is dependent on a number of factors including, but not limited to, the following:

 

	•	the price of gold,
	•	exchange rates,
	•	the particular attributes of the deposit (i.e. size, grade and the proximity to infrastructure)
	•	financing costs,
	•	taxation,
	•	royalties,
	•	land tenure,
	•	land use,
	•	water use,
	•	availability and cost of power source
	•	importing and exporting gold, and
	•	environmental protection

 

The effect of these factors and their magnitude cannot be accurately predicted and any one of which could adversely affect the Company’s ability to operate. Further, we have little or no control over these variables.

 

 

 

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Our ability to become and remain profitable, should we become profitable, will be dependent on our ability to locate, explore, develop and mine additional properties. There is intense competition for the acquisition of gold properties. If we are unable to accomplish this, we most likely will not be able to be profitable on a long-term basis.

 

Gold properties eventually become depleted or uneconomical to continue mining. As a result, the Company’s long-term success is dependent in large part on its ability to acquire, discover, develop and mine new properties. The acquisition of gold properties and their exploration and development are subject to intense competition. There are many larger companies with greater financial resources, larger staffs, more experience and more equipment for exploration and development may be in a better position than the Company to compete for such mineral properties. If we are unable to locate, develop and economically mine new properties, we most likely will not be able to be profitable on a long-term basis.  Further, given the competition that we face from these larger companies, we cannot assure you that we can achieve or sustain profitability or if we do, that we can sustain it.

 

Our property interests are located in South Africa. The risk of doing business in a foreign country could adversely affect its results of operations and financial condition.

 

We face risks normally associated with any conduct of business in foreign countries, including various levels of political and economic risk. The occurrence of one or more of these events could have a material adverse impact on our current and future operations which, in turn, could have a material adverse impact on its future cash flows, earnings, results of operations and financial condition. These risks include the following:

 

	•	prevalence of various diseases at the mining sites,
	•	security concerns
	•	adverse weather such as rainy season
	•	labor disputes
	•	uncertain or unpredictable political and economic environments,
	•	war and civil disturbances,
	•	changes in laws or policies,
	•	mining policies,
	•	monetary policies,
	•	unlinking of rates of exchange to world market prices,
	•	environmental regulations,
	•	labor relations,
	•	return of capital,
	•	taxation,
	•	delays in obtaining or the inability to obtain necessary governmental permits,
	•	Governmental seizure of land or mining claims,
	•	limitations on ownership,
	•	Institution of laws requiring repatriation of earnings,
	•	increased financial costs,
	•	import and export regulations, and
	•	Establishment of foreign exchange regulations.

 

 

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Any such changes may affect our current mining operations and ability to undertake exploration activities in respect of present and future properties in the manner currently contemplated, as well as our ability to explore and eventually develop and operate those properties in which we have an interest or in respect of which we have obtained exploration rights to date. Certain changes could result in the confiscation of property by nationalization or expropriation without fair compensation. We do not carry any insurance for any of these risks and we have no plans to acquire any such insurance in the future.

 

There are uncertainties as to title matters in the mining industry. Any defects in such title may cause the Company to forfeit its rights in mineral properties and could jeopardize its business operations.

 

There are uncertainties as to title matters in the mining industry. If the title to or our rights of ownership in its properties, prospects and/or claims are challenged or impugned by third parties, or the properties, prospects and/or claims in which we have  an interest are subject to prior transfers or claims, such title defects could cause us to loose our rights in such properties. If we lose its rights in and to any of its mineral properties, its business operations could be jeopardized.  We may not have the financial resources to protect and assert our legal claims in such properties.

 

In the event that we breach our obligations to Investec, we may lose our wholly-owned subsidiary EGSA and thereby lose all of our assets.

 

While we believe that the financing arrangement with Investec was prudent and appropriate, we have incurred a risk that in the event that we breach our obligations to Investec, Investec has the right to our wholly owned subsidiary, EGSA, and in that event we could lose all of our assets and business.

 

Our current and planned operations require permits and licenses from various governmental authorities. If we are unable to obtain and maintain such requisite permits, licenses and approvals, our business operations and ability to become profitable may be adversely affected.

 

Our current and planned operations require permits and licenses from various governmental authorities. Such permits and licenses are subject to change in regulations and in various operating circumstances. We cannot assure you that we will be able to obtain or maintain in force all necessary permits and licenses that may be required to conduct exploration or commence construction or operation of mining facilities at properties to be explored or to maintain continued operations at economically justifiable costs. Further, certain of our mineral rights and interests are subject to government approvals. In all such cases such approvals are, as a practical matter, subject to the discretion of the South African government or governmental officials. No assurance can be given that we will be successful in obtaining any or all of such approvals. Our inability to obtain and maintain the requisite permits, licenses and approvals could materially and adversely affect our operations and ability to become profitable.

 

Gold prices can fluctuate on a material and frequent basis due to numerous factors beyond the Company’s control.  Our ability to generate profits from operations could be materially and adversely affected by such fluctuating prices.

 

The profitability of our current and future gold mining operations is significantly affected by changes in the market price of gold. Between January 1, 2006 and September 30, 2008, the “fixed price” for gold on the London Exchange has fluctuated between $524.75 and $1,011.25 per ounce.  Gold prices fluctuate on a daily basis and are affected by numerous factors beyond our control, including:

 

	•	Level of interest rates,
	•	rate of inflation,
	•	central bank sales, and
	•	world supply of gold

 

 

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Each of these factors can cause significant fluctuations in gold prices. Such external factors are in turn influenced by changes in international investment patterns and monetary systems and political developments.  The price of gold has historically fluctuated widely and, depending on the price of gold, revenues from mining operations may not be sufficient to offset the costs of such operations.  We have no means of controlling or influencing any of these factors and there is no likelihood that we will achieve any such control or influence in the future.

 

Gold is sold in South Africa in South African Rands. If applicable currency exchange rates fluctuate our revenues and results of operations may be materially and adversely affected.  

 

All of the gold that we produce is sold is required to be sold to The Rand Refinery Ltd. which is a South African corporation and the world’s largest gold refinery. Such sales are paid for with South African Rands. We also incur a significant amount of our expenses which are payable in South African Rands. As a result of the required utilization of the South African Rand, our financial performance is affected by fluctuations in the value of the South African Rand to the U.S. Dollar. At the present time, we have no plan or policy to utilize forward contracts or currency options to minimize this exposure, and even if these measures are implemented there can be no assurance that such arrangements will be available, be cost effective or be able to fully offset such future currency risks.

 

Dependence upon Key Executives and Employees

 

Our success depends to a great extent upon the continued successful performance of key executives and employees in general and specifically Mr. Michael McChesney. Mr. McChesney is presently employed by us as our President and Chief Executive Officer. Mr. McChesney also serves as one of our directors. If Mr. McChesney and certain other present key executives and employees are unable to perform their duties for any reason, our ability to operate in South Africa will be materially adversely effected. We do not have a key man life insurance policy on the life of Mr. McChesney or any other key executives and employees and we have no present plans to acquire any such policies.

 

 

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2008, that our disclosure controls and procedures are effective to a reasonable assurance level of achieving such objectives.  However, it should be noted that the design of any system of controls is based in part upon 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, regardless of how remote.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The internal controls for the Company are provided by executive management’s review and approval of all transactions.  Our internal control over financial reporting also includes those policies and procedures that:

 

(1)  pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

(2)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and

 

(3)  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.  Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls.

 

Based on this assessment, management has concluded that as of December 31, 2007, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

 

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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during our fiscal quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company’s recently acquired subsidiary, Barbrook Mines, was subject to several claims brought against it by creditors during 2006 and 2007 fiscal years.  These claims, which had been accrued for at 2007 year end, were in the main settled and the matters finalized.  In the matter with Sentinel Corporate Solutions (Pty) Limited, Sentinel has issued summons against Barbrook for R1,108,061 (approximately US$133,000) in respect of amounts payable, which are accrued for, in respect of a labor contract.  Barbrook has instituted an action against Sentinel for R7,456,465 (approximately US$896,000) in respect of damages incurred when the labor force set fire to the Barbrook administration building.  Both matters with Sentinel are presently still being defended and are not yet finalized.

 

Other than the matter discussed above, we are not a party to any pending legal proceedings, and no such proceedings are known to be threatened or contemplated.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On March 28, 2008, our subsidiary, EGSA, entered into a Convertible Loan Agreement which was completed without the use of an underwriter.  The transaction and the agreements were completed directly without any intermediary.

 

Through our subsidiary, EGSA, we received net proceeds of $3,981,932 (32,000,000 SA Rands) (based on current exchange rates).

 

In entering into the transaction with the Lender, we received assurances that:

 

(1) the Lender had received information, business and financial documents, and other disclosures regarding the Company, EGSA, and management equivalent to that found in a registration statement;

 

(2) the Lender had a full and unrestricted opportunity to ask questions of the Company’s and EGSA’s officers and directors and to receive answers to all such questions;

 

(3)  the Lender is an Accredited Investor who is experienced and sophisticated in investment transactions made with small public companies;

 

(4) the Lender understood that it acquired the Convertible Loan (and subsequently, any shares of EGSA’s common stock thereby) as “restricted securities,” for investment purposes only and not with a view toward their resale; and

 

(5)  the transaction with the Lender was not the product of any general solicitation or advertising but was the result of a pre-existing business relationship.

 

On this basis, we relied upon the exemption provided by Section 4(2) of the Securities Act of 1933.

 

All of the proceeds were and are to be used by EGSA to increase its working capital and for capital expenditures.

 

The loan principal can convert into 6.9% of the total issued and outstanding shares of ordinary capital (of EGSA) after the conversion of the loan by EGSA.  If EGSA is able to list its shares with the Johannesburg Stock Exchange Limited (JSE) within six months of the agreement date then no interest is due and payable. If EGSA is not able to list its ordinary shares with the JSE within six months of the agreement date then interest will accrue at the South African Prime Rate.  If EGSA list its ordinary shares with JSE after six months but before twelve months of the agreement date, then interest will accrue and be paid on a monthly basis until conversion or repayment of the loan.  If EGSA has been unable to list its ordinary shares with JSE within twelve months of the agreement date, then the lender can demand repayment of principal and accrued interest or conversion of the debt into the corresponding shares of ordinary shares of EGSA.

 

 

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On October 30, 2008, we received a commitment letter agreement from Investec Bank Limited (“Investec”).  Under the terms of the agreement, Investec has agreed to extend the maturity date of our existing bridging loan (the “Existing Loan”) from the original maturity date of November 28, 2008 to May 29, 2009 (the “Loan Extension”).

 

As consideration for the Loan Extension, the Company agreed to the following:

 

(1)                 To grant Investec 820,000 Common Stock Purchase Warrants for the purchase of 820,000 shares of the Company’s Common Stock at an exercise price equal to the lower of $3.75 per share and the price at which the Company raises equity capital in its next offering;

 

(2)                 To increase the interest rate on the Existing Loan from Jibar plus 3% to Jibar plus 4%;

 

(3)                 To confirm that the Company has sufficient working capital for the period through the last date of the Loan Extension;

 

(4)                 To subordinate all shareholder loans to the Existing Loan;

 

(5)                 To prohibit the payment of any interest and principal on all shareholder loans;

 

(6)                 To prohibit further indebtedness without the prior written approval of Investec; and

 

(7)                 To provide Investec on or before the 5 ^th calendar day of each month, monthly management accounts and an update on the Company’s financing strategy and provide Investec with an opportunity to review the strategy with Investec, upon Investec’s request.

 

We did not use an underwriter or pay any fees or commissions to any third party in connection with the Loan Extension.  All of the Warrants granted to Investec were granted pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933 pursuant to the representations and assurances that the Company received from Investec and the due diligence conducted by Investec.  The Warrants were issued to Investec with a restricted securities legend and Investec agreed that it was acquiring the Warrants for investment purposes only.

 

 

 

 

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Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

Regulation

S-B Number                                              Exhibit

 

31.1                      Rule 13a-14(a) Certification of Chief Executive Officer

 

31.2                      Rule 13a-14(a) Certification of Chief Financial Officer

 

32.1                      Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer

 

32.2                      Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer

 

 

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SIGNATURES

 

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

                                                                                                EASTERN GOLDFIELDS, INC.

Date:  November 18, 2008                                                        BY:____________________________

                                                                                        MICHAEL MCCHESNEY

                                                                                        Chief Executive Officer

 

Date:  November 18, 2008                                                        BY:____________________________

                                                                                        TAMER MUFTIZADE

                                                                               Chief Financial Officer

 

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