UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
|
Washington,
DC 20549
|
|
FORM
10-Q
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
|
EXCHANGE
ACT OF 1934
|
|
For
the Quarterly Period Ended
March 31,
2010
|
|
|
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
0-50218
|
|
BEKEM METALS, INC.
|
Exact
name of registrant as specified in its
charter)
|
Utah
|
|
87-0669131
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
149
Kyz Zhibek Street, Office 11,
|
|
|
Almaty, Kazakhstan
|
|
050020
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
+7 (727) 227-94-05
|
(Registrant's
telephone number, including area code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|
Yes
x
No
o
|
|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
Yes
o
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
|
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
|
Yes
o
No
x
|
|
|
As
of April 30, 2010, the registrant had 124,980,296 shares of common stock,
par value $0.001, issued and outstanding.
|
BEKEM
METALS, INC.
FORM
10-Q
TABLE
OF CONTENTS
PART I —
FINANCIAL INFORMATION
Item
1. Financial Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets (Unaudited) as of March 31, 2010
and December 31, 2009
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2010 and 2009, and for the Period from March 5, 2004
(Date of Inception) through March 31, 2010
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2010 and 2009, and for the Period from March 5, 2004
(Date of Inception) through March 31, 2010
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
6
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
|
16
|
|
|
Item
3. Qualitative and Quantitative Disclosures About Market
Risk
|
24
|
|
|
Item
4T. Controls and Procedures
|
25
|
|
|
PART
II — OTHER INFORMATION
|
|
|
|
Item
1A. Risk Factors
|
26
|
|
|
Item
6. Exhibits
|
26
|
|
|
Signatures
|
27
|
2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
BEKEM
METALS, INC. AND SUBSIDIARIES
|
(An
Exploration Stage Company)
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
|
$
|
101,312
|
|
$
|
534,619
|
Trade
accounts receivable
|
|
30,069
|
|
|
22,439
|
VAT
recoverable
|
|
181,217
|
|
|
179,012
|
Inventories
|
|
545,178
|
|
|
542,245
|
Prepaid
expenses and other current assets
|
|
74,191
|
|
|
46,444
|
Deferred
compensation
|
|
-
|
|
|
6,390
|
Total
Current Assets
|
|
931,967
|
|
|
1,331,149
|
|
|
|
|
|
|
Property,
plant and mineral interests (net of accumulated
|
|
|
|
|
|
depreciation
of $589,565 and $564,990)
|
|
2,816,925
|
|
|
2,852,697
|
Other
assets
|
|
20,644
|
|
|
41,883
|
Total
Assets
|
$
|
3,769,536
|
|
$
|
4,225,729
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Notes
payable to related parties
|
$
|
2,031,981
|
|
$
|
2,031,981
|
Accounts
payable
|
|
188,801
|
|
|
122,610
|
Accrued
expenses
|
|
167,314
|
|
|
151,064
|
Total
Current Liabilities
|
|
2,388,096
|
|
|
2,305,655
|
|
|
|
|
|
|
Asset
retirement obligations
|
|
953,504
|
|
|
911,297
|
Total
Liabilities
|
|
3,341,600
|
|
|
3,216,952
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Shareholders'
Deficit
|
|
|
|
|
|
Preferred
stock; $0.001 par value, 20,000,000 shares authorized,
|
|
|
|
|
|
no
shares outstanding
|
|
-
|
|
|
-
|
Common
stock; $0.001 par value, 300,000,000 shares authorized,
|
|
|
|
|
|
and
124,980,296 shares issued and outstanding
|
|
124,980
|
|
|
124,980
|
Additional
paid-in capital
|
|
28,387,055
|
|
|
28,387,055
|
Accumulated
deficit
|
|
(30,613,114)
|
|
|
(30,229,302)
|
Accumulated
other comprehensive income
|
|
2,529,015
|
|
|
2,726,044
|
Total
Shareholders' Deficit
|
|
427,936
|
|
|
1,008,777
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Deficit
|
$
|
3,769,536
|
|
$
|
4,225,729
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed, consolidated
financial statements.
3
BEKEM
METALS, INC. AND SUBSIDIARIES
|
(An
Exploration Stage Company)
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(UNAUDITED)
|
|
|
|
For
the Three Months
Ended
March 31,
|
|
For
the Period from March 5, 2004 (Date of Inception)
through
|
|
|
2010
|
|
2009
|
|
March
31, 2010
|
|
|
|
|
|
|
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
General
and administrative expenses
|
|
555,004
|
|
647,056
|
|
13,992,427
|
Research
and development costs
|
|
-
|
|
-
|
|
1,057,970
|
Exploratory
costs
|
|
54,169
|
|
11,876
|
|
2,969,926
|
Loss
from impairment of property
|
|
-
|
|
-
|
|
10,243,178
|
Accretion
expense on asset retirement obligations
|
|
34,326
|
|
13,827
|
|
634,179
|
Grant
compensation expense
|
|
6,390
|
|
154,295
|
|
1,473,681
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
649,889
|
|
827,054
|
|
30,371,361
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
(649,889)
|
|
(827,054)
|
|
(30,371,361)
|
|
|
|
|
|
|
|
Other
Income/(Expense)
|
|
|
|
|
|
|
Exchange
gain from remeasurement
|
|
(3,588)
|
|
360
|
|
48,146
|
Exchange
(loss) gain
|
|
218,568
|
|
(2,802,998)
|
|
(2,718,310)
|
Interest
income
|
|
1,265
|
|
74,517
|
|
708,515
|
Interest
expense
|
|
-
|
|
-
|
|
(1,337,317)
|
Other
income, net
|
|
49,832
|
|
34,140
|
|
1,001,190
|
|
|
|
|
|
|
|
Net
Other Income/(Expense)
|
|
266,077
|
|
(2,693,981)
|
|
(2,297,776)
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
(383,812)
|
|
(3,521,035)
|
|
(32,669,137)
|
|
|
|
|
|
|
|
Income
(Loss) from Discontinued Operations
|
|
|
|
|
|
|
(including
gain on disposal of Kaznickel of $6,082,390 in 2009)
|
|
-
|
|
151,641
|
|
(1,475,786)
|
|
|
|
|
|
|
|
Net
Loss Before Taxes
|
|
(383,812)
|
|
(3,369,394)
|
|
(34,144,923)
|
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
-
|
|
-
|
|
3,390,601
|
|
|
|
|
|
|
|
Consolidated
Net Loss
|
|
(383,812)
|
|
(3,369,394)
|
|
(30,754,322)
|
|
|
|
|
|
|
|
Less:
Loss attributable to noncontrolling interests
|
|
-
|
|
-
|
|
141,208
|
|
|
|
|
|
|
|
Net
Loss Attributable To Shareholders of Bekem Metals Inc.
|
$
|
(383,812)
|
$
|
(3,369,394)
|
$
|
(30,613,114)
|
|
|
|
|
|
|
|
Basic
Loss per Common Share
|
|
|
|
|
|
|
Loss
from continuing operations
|
$
|
(0.00)
|
$
|
(0.03)
|
|
|
Income
from discontinued operations
|
|
-
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Consolidated
net loss
|
$
|
(0.00)
|
$
|
(0.03)
|
|
|
|
|
|
|
|
|
|
Weighted-Average
Shares used in
|
|
|
|
|
|
|
Basic
Loss per Common Share
|
|
124,980,296
|
|
125,172,011
|
|
|
The
accompanying notes are an integral part of these condensed, consolidated
financial statements.
4
BEKEM
METALS, INC. AND SUBSIDIARIES
|
(An
Exploration Stage Company)
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
For
the Three Months
Ended
March 31,
|
|
|
For
the Period from March 5, 2004 (Date of Inception)
through
|
|
|
2010
|
|
2009
|
|
|
March
31, 2010
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(383,812)
|
$
|
(3,369,394)
|
|
$
|
(30,613,114)
|
(Income)
Loss from discontinued operations
|
|
-
|
|
(151,641)
|
|
|
1,475,786
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to
|
|
|
|
|
|
|
|
net
cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
51,446
|
|
57,834
|
|
|
894,511
|
Accretion
expense on asset retirement obligations
|
|
34,326
|
|
13,827
|
|
|
634,179
|
Interest
expense from debt discount
|
|
-
|
|
-
|
|
|
963,231
|
Shares
issued on option modification
|
|
-
|
|
-
|
|
|
19,426
|
Deferred
tax benefit
|
|
-
|
|
-
|
|
|
(3,390,601)
|
Foreign
currency exchange loss / (gain) and loss / (gain) from
remeasurement
|
|
(214,980)
|
|
2,827,642
|
|
|
2,670,164
|
Impairment
loss on property, plant and mineral interests
|
|
-
|
|
-
|
|
|
10,243,178
|
Loss
/ (gain) on disposal of property and equipment
|
|
24,596
|
|
22,364
|
|
|
(71,448)
|
Stock
grant compensation expense
|
|
6,390
|
|
154,295
|
|
|
1,473,681
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
(7,410)
|
|
26,546
|
|
|
(30,003)
|
VAT
recoverable
|
|
(681)
|
|
(3,726)
|
|
|
(121,415)
|
Inventories
|
|
1,668
|
|
7,996
|
|
|
(538,549)
|
Prepaid
expenses and other current assets
|
|
(19,308)
|
|
(62,959)
|
|
|
(96,339)
|
Change
in related party receivables / payables
|
|
-
|
|
-
|
|
|
(206,171)
|
Accounts
payable
|
|
65,551
|
|
77,057
|
|
|
23,598
|
Advances
received
|
|
-
|
|
(51,762)
|
|
|
-
|
Accrued
expenses
|
|
7,290
|
|
(67,593)
|
|
|
560
|
Cash
From Operating Activities - Continuing operations
|
|
(434,924)
|
|
(519,514)
|
|
|
(16,669,326)
|
Cash
From Operating Activities - Discontinuing operations
|
|
-
|
|
(1,904)
|
|
|
(5,816,257)
|
Net
Cash From Operating Activities
|
|
(434,924)
|
|
(521,418)
|
|
|
(22,485,583)
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
-
|
|
-
|
|
|
(4,051,384)
|
Purchase
of intangible assets
|
|
(302)
|
|
-
|
|
|
(47,221)
|
Proceeds
from disposal of property and equipment
|
|
2,001
|
|
149,805
|
|
|
473,218
|
Loans
provided to related parties
|
|
-
|
|
-
|
|
|
(14,900,000)
|
Cash
received from sale of subsidiary
|
|
-
|
|
500,000
|
|
|
5,000,000
|
Cash
acquired in acquisitions / received from discontinued
operations
|
|
-
|
|
-
|
|
|
52,364
|
Cash
From Investing Activities - Continuing operations
|
|
1,699
|
|
649,805
|
|
|
(13,473,023)
|
Cash
From Investing Activities - Discontinuing operations
|
|
-
|
|
-
|
|
|
425,377
|
Net
Cash From Investing Activities
|
|
1,699
|
|
649,805
|
|
|
(13,047,646)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
-
|
|
-
|
|
|
13,946,817
|
Payments
on notes payable
|
|
-
|
|
-
|
|
|
(21,649,038)
|
Proceeds
from loans / notes payable - related parties
|
|
-
|
|
-
|
|
|
18,210,606
|
Payments
on loans / notes payable - related parties
|
|
-
|
|
-
|
|
|
(6,815,004)
|
Issuance
of shares for cash
|
|
-
|
|
-
|
|
|
26,728,842
|
Cash
From Financing Activities - Continuing operations
|
|
-
|
|
-
|
|
|
30,422,223
|
Cash
From Financing Activities - Discontinuing operations
|
|
-
|
|
-
|
|
|
4,979,594
|
Net
Cash From Financing Activities
|
|
-
|
|
-
|
|
|
35,401,817
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
(82)
|
|
(3,456)
|
|
|
232,724
|
|
|
|
|
|
|
|
|
Net
(Decrease) / Increase in Cash
|
|
(433,307)
|
|
124,931
|
|
|
101,312
|
Cash
at Beginning of Period
|
|
534,619
|
|
115,459
|
|
|
-
|
Cash
at Beginning of Period - Discontinued Operations
|
|
-
|
|
185
|
|
|
-
|
Cash
at End of Period
|
|
101,312
|
|
240,575
|
|
|
101,312
|
Less
Cash of Discontinued Operations at End of Period
|
|
-
|
|
(37)
|
|
|
-
|
Cash
of Continuing Operations at End of Period
|
$
|
101,312
|
$
|
240,538
|
|
$
|
101,312
|
The
accompanying notes are an integral part of these condensed, consolidated
financial statements.
5
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES
Interim Financial
Information
– The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they are
condensed and do not include all of the information and notes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring
nature. The accompanying financial statements should be read in
conjunction with the most recent audited financial statements of Bekem Metals,
Inc. included in its annual report on Form 10-K filed for the year ended
December 31, 2009. Operating results for the three-month period ended
March 31, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010.
Basis
of Presentation
Company History
– The Company was incorporated in the State of Utah under the name EMPS
Research Corporation on January 30, 2001. The name was changed to
Bekem Metals, Inc. (“BMI”, “Bekem” or the “Company”) on February 9, 2005
following the reverse acquisition with Condesa Pacific, S.A. (“Condesa”)
discussed below. The Company’s primary business focus has been
exploring for nickel, cobalt and other minerals in Kazakhstan. The
Company’s operations are considered to be at the exploratory stage.
Bekem Metals,
Inc.
– Condesa and its wholly owned subsidiary Kaznickel, LLP
(“Kaznickel”) acquired Bekem in a reverse acquisition on January 28,
2005. On July 24, 2006, Condesa transferred its interest in Kaznickel
to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On
September 30, 2006, Bekem sold Condesa to a third party for a nominal value.
Also, during 2009 Bekem sold Kaznickel to a third party for 280,000 Kazakh tenge
(approximately $1,867) and for repayment of $5,000,000 worth of loans owed to
Bekem by Kaznickel.
On
October 24, 2005, Bekem Metals, Inc. entered into an Acquisition Agreement with
Kazakh Metals, Inc. (“KMI”), a British Virgin Islands international business
company, and its wholly owned subsidiary Kyzyl Kain Mamyt LLP (“KKM”), under
which BMI acquired 100% of the outstanding common shares of KMI in exchange for
the issuance of 61,200,000 common shares. The KMI shareholders received 61.1% of
the BMI common stock outstanding after the transaction and therefore KMI was
considered the acquirer for financial reporting purposes. Accordingly, the
accompanying financial statements include financial statements of KMI and its
wholly owned subsidiary KKM for all periods presented.
6
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
Brisa
Equities Corporation, a British Virgin Islands holding company (“Brisa”),
together with other entities its owners control, was the controlling shareholder
of KMI and was also the controlling shareholder of BMI. Accordingly,
the transaction was considered to be between entities under common control and
did not result in a change in control of BMI. Following the
transaction, entities over which the controlling shareholder maintained voting
and investment control held 51,600,000 BMI common shares, which represented
51.5% of the 100,088,888 outstanding common shares. The acquisition of the
portion of the net liabilities of BMI relating to the common shares owned by the
controlling shareholder was recorded at historical cost of
$(161,998). The acquisition of the common shares of BMI purchased
from the noncontrolling shareholders of BMI were recorded at $345,000, which was
the estimated fair value of those shares on the date of
acquisition. KMI accounted for the purchase of BMI similar to a
pooling.
Basis of
Presentation
– The accompanying consolidated financial statements include
the accounts of Bekem and its wholly owned subsidiaries KMI and
KKM. Intercompany accounts and transactions have been eliminated in
consolidation. The results of operations of KMI and BMI were combined for all
periods prior to the acquisition, with recognition of the noncontrolling
interest in BMI; the operations of BMI and KMI are consolidated from October 24,
2005.
Condesa
and Kaznickel are included in the consolidated financial statements from the
date of acquisition to the date of disposal. The three-month operations of
Kaznickel during 2009 were presented in the Company’s consolidated financial
statements as income from discontinued operations.
Foreign Currency
Transactions
– The consolidated financial statements are presented in
U.S. dollars. The functional currency of Bekem Metals, Inc. is United
States Dollars (USD).
The
Kazakh Tenge (KZT) is the functional currency of the operating subsidiary, KKM.
The respective balance sheets have been translated into USD at the exchange
rates prevailing at each balance sheet date. The respective statements of
operations have been translated into USD using the average exchange rates
prevailing during the periods of each statement. The corresponding translation
adjustments are part of accumulated other comprehensive income and are shown as
part of shareholders’ equity.
Kaznickel
made its principal investing and financing transactions in USD, which was also
its functional currency. Transactions and balances denominated in other
currencies were translated into USD using historical exchange rates. Exchange
gains and losses from holding foreign currencies and having liabilities payable
in foreign currencies were included in the results of operations.
Nature
of Business
The
Company holds licenses to explore mineral resource properties.
7
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
KKM holds
exploration and production licenses from the government of Kazakhstan to a
575,756 acre parcel, located approximately 130 kilometers northwest of Aktobe,
Kazakhstan. This deposit is referred to as the Kempirsai deposit. The
licenses grant KKM the right to explore for and produce nickel and cobalt from
deposits located within the territory through October 12, 2020, which may be
extended upon agreement between KKM and the Ministry of Energy and Mineral
Resources (MEMR). KKM also holds a license to explore for and produce
Mamyt brown coal from a deposit located within 40 kilometers of its cobalt and
nickel deposit. This license expires on December 11, 2018 with
further possible extensions. Because the Company does not have a
reserve estimate for its deposits that conforms to the standards of Industry
Guide 7 issued by the U. S. Securities and Exchange Commission, its operations
were considered to be at the exploratory stage for 2010 and 2009
KKM
contracts and licenses call for the extraction of the following amounts of ore
from the Kempirsai deposit and brown coal from the Mamyt deposit and the
following investments in the ore mining and processing technology:
|
Kempirsai
|
|
Mamyt
(1)
|
Tons
of Ore
|
Investments,
$
|
|
Tons
of Brown Coal
|
2009
|
-
|
6,000,000
|
|
200,000
|
2010
|
-
|
26,500,000
|
|
200,000
|
2011
|
-
|
42,000,000
|
|
200,000
|
2012
|
-
|
36,500,000
|
|
200,000
|
2013
|
800,000
|
2,400,000
|
|
200,000
|
2014
|
800,000
|
2,000,000
|
|
200,000
|
2015
|
1,000,000
|
2,000,000
|
|
200,000
|
2016
|
1,000,000
|
2,000,000
|
|
200,000
|
2017
|
1,500,000
|
1,000,000
|
|
200,000
|
2018
|
1,500,000
|
1,000,000
|
|
200,000
|
2019
|
1,600,000
|
1,000,000
|
|
|
2020
|
1,234,900
|
1,000,000
|
|
|
Total
|
9,434,900
|
123,400,000
|
|
2,000,000
|
(1)
|
In
December 2009 KKM received a letter from the MEMR granting KKM
’
s request to
decrease the coal volume production requirements of its work program from
200,000 tons per year to 5,000 tons per year for the period from 2009 to
2012. We anticipated an addendum to this license memorializing the
changes to the annual work program requirements to be prepared some time
in May 2010. However, preparation of the addendum may be postponed to
later dates due to recent reorganizations in the government of the
Republic of Kazakhstan and creation of the new Ministry of Industry and
New Technologies (MINT) in March 2010 to assume the responsibilities of
the MEMR with regard to non-oil-related licenses.
These
changes are not reflected in the above table and will be reflected when
these changes are legally approved by the government by the signing of a
new addendum to the existing subsoil use contract. See Note 8 for further
discussion of this addendum.
|
Business
Condition
– The financial crisis impacting the global economy has had a
material effect on the Company’s business. Metal prices fell sharply in 2008,
making future forecasts problematic and projected financial models unprofitable.
Although prices have recovered some during 2009 and the first three months of
2010, they still remain vulnerable due to the continuing global economic crisis
making the Company’s access to equity and/or debt financing temporarily
impossible. In light of the uncertain economic environment, the Company has been
looking for private investors and/or potential purchasers of some of the
Company’s assets.
8
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
The
Kempirsai deposits have not yet entered the development stage with respect to
their mineral interests and have no production. The Company has realized only
limited revenue from the Kempirsai deposits and has very little ability to
generate revenue. The Company does not expect this to change unless
it builds and begins operating a nickel ore processing plant.
Because
of a lack of funds, KKM did not fully meet its 2009 annual work program
requirements to invest up to $6 million into development of the Kempirsai
deposit, including construction of the processing plant. The Company
anticipates the need to seek significant additional funding during fiscal 2010
to satisfy the 2010 annual work program obligations (to invest up to $26.5
million) and to satisfy the obligations KKM did not meet in
2009. There is no assurance that the Company will be able to obtain
additional funding on favorable terms, or at all. If the Company is unsuccessful
in obtaining additional funding during 2010, the Company will likely have
insufficient funds to continue operations. If the Company cannot fulfill the
work program requirements, the Company could be subjected to the possible
forfeiture of its subsoil use contracts and licenses and current remediation
obligations of approximately $950,000.
These
factors raise substantial doubt about the Company’s ability to continue as a
going concern.
Exploration
Stage Company
The
Company is currently an exploration stage company. As an exploration stage
enterprise, the Company discloses the deficit accumulated during the exploration
stage and the cumulative statements of operations and cash flows from inception
through the current balance sheet date. The Company has incurred net
losses of $30,613,114 and used net cash in operations of $22,485,583 for the
period from March 5, 2004 (date of inception) through March 31, 2010. An entity
remains in the exploration stage until such time as proven or probable reserves
have been established for its deposits.
Reclassifications
– Certain reclassifications have been made to the 2009 financial information to
conform to the current period presentation.
NOTE
2 - CASH AND CASH EQUIVALENTS
The
Company considers all demand deposits, money market accounts and marketable
securities purchased with an original maturity of three months or less to be
cash and cash equivalents. The fair value of cash and cash equivalents
approximates their carrying amounts due to their short-term
maturity.
9
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
Cash
consists of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
2010
|
|
|
2009
|
Current
accounts (USD)
|
$
|
2,223
|
|
$
|
19,289
|
Current
accounts (Tenge)
|
|
39,476
|
|
|
75,071
|
Bank
deposit (USD)
|
|
4,918
|
|
|
150,107
|
Bank
deposit (Tenge)
|
|
54,695
|
|
|
290,152
|
Total
|
$
|
101,312
|
|
$
|
534,619
|
NOTE
3 - PROPERTY, PLANT AND MINERAL INTERESTS
Property,
plant and mineral interests consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
2010
|
|
|
2009
|
Buildings
|
$
|
1,573,965
|
|
$
|
1,562,807
|
Machinery
and equipment
|
|
1,759,287
|
|
|
1,744,464
|
Other
fixed assets
|
|
73,238
|
|
|
110,416
|
Unproved
mineral interests
|
|
-
|
|
|
-
|
|
|
3,406,490
|
|
|
3,417,687
|
Accumulated
depreciation
|
|
(589,565)
|
|
|
(564,990)
|
Property,
plant and equipment, net
|
$
|
2,816,925
|
|
$
|
2,852,697
|
The
government of Kazakhstan retains the title to the property upon which the
Company’s mineral interests pertain; however, the Company’s mineral interests
are considered to be tangible assets.
During
2009, the Company recognized impairment of $556,500 on its property and
equipment to be used in the pilot plant under the Vanyukov’s process. No further
impairment of mineral interests was required during the three-month period ended
March 31, 2010.
Bekem
acquired two contracts to explore for and extract minerals in connection with
the purchase of KKM made in October 24, 2005. One contract is for the
exploration and extraction of nickel and cobalt ore from deposits located in an
approximately 575,756 acre site in the northwest area of the Republic of
Kazakhstan (approximately 130 kilometers northwest of the city of Aktobe,
Kazakhstan, near the town of Badamsha, referred to as the “Kempirsai” deposit),
which is valid through October 12, 2020. The other contract is for
the exploration and extraction of brown coal at the Mamyt deposit located within
40 kilometers of the Kempirsai deposit, which is valid through December 11,
2018. The contracts may be extended upon agreement between KKM and
the new Ministry of Industry and New Technologies of the Republic of Kazakhstan
(the “MINT”) which was created in March 2010 to assume the responsibilities of
the MEMR with regard to non-oil-related licenses.
10
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
In
January 2009 Kazakhstan adopted a new tax code. The new tax code
invalidates tax stability clauses in existing contracts and eliminated tax
stability in future contracts. Also, during 2009 KKM received a
letter from the MEMR requiring changes/addendums to the tax provisions of its
existing subsurface use contracts to make them consistent with the new tax
code. Despite the fact that KKM’s existing subsurface use contracts
include statements of stabilization of the tax rate with regard to subsurface
user taxes (such as royalty, excess profit tax), the MEMR letter required the
new tax rates to be applied to existing contracts beginning January 1,
2009. In December 2009 KKM signed an addendum to the Kempirsai
subsoil use contract replacing the existing tax rate indicated in the subsoil
use contact to be in compliance with the new tax code in exchange for changes in
the annual work program proposed by KKM. A similar addendum was
expected to be signed for the Mamyt subsoil use contract some time in April
2010. However, preparation of the addendum may be postponed to later dates due
to recent reorganizations in the government of the Republic of Kazakhstan and
creation of the MINT, as indicated above.
The new
tax code introduces a new minerals extraction tax (MET), while canceling royalty
payments. In general, MET applies to the value of produced resources
which is calculated based on “world” prices. The current MET rate
applicable to nickel is set at 6%. The new tax code also makes rent
tax applicable to exports of coal (previously applicable only to exports of
hydrocarbons). The rent tax at the rate of 2.1% applies to value of exported
coal calculated on the basis of the sale prices. The current Mamyt brown coal
contract requires a royalty payment equal to nine tenths of one percent (0.9%)
of gross coal sales.
Extractive
companies are also liable to pay excess profit tax (“EPT”). EPT
liability arises when the ratio of aggregate annual income to deductions
allowable for EPT purposes relative to operations under a specific subsurface
use contract is more than 1.25 for the reporting tax period which, in most
cases, is a calendar year. The new tax code provides for an
incremental sliding scale of EPT rates ranging from 0% to 60% for various profit
levels above the mentioned ratio.
The
allocated purchase price of the mineral interest included a capitalized amount
of an acquired asset retirement obligation.
NOTE
4 - RELATED PARTY TRANSACTIONS
In March
2008, KKM entered into a preliminary consortium agreement, subject to
negotiation of the terms of a definitive agreement,
with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest
Corporation LLP (“AI”). GRK and AI are related parties of the Company through a
common stockholder. These companies also have exploration and production
licenses near the Company's Kempirsai deposits in northwestern Kazakhstan. This
agreement provides for the joint development and construction of a nickel
processing plant in the area for joint use by the parties. Under the preliminary
consortium agreement, KKM is considered to be the operator of the Consortium.
The preliminary shares of the parties in the Consortium are the following: KKM -
50%; GRK Koitas - 40%; and Asia-Invest - 10%.
11
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
Under the
preliminary consortium agreement, the parties were obliged to jointly contribute
approximately $40 million for financing the construction of the processing
plant. Of this amount, KKM was obligated to contribute approximately $20
million. KKM received advances of KZT 2.278 billion ($18,862,300 as
of December 31, 2008) from GRK, and KZT 97.4 million ($806,492 as of December
31, 2008) from AI, which were to be used for construction of a processing plant.
The parties have the right to withdraw from the Consortium subject to three
months written notice. Consequently, these advances have been classified as
current notes payable to related parties and bear no interest since they
represent contributions to the Consortium.
When the
Company received the advance payments from GRK and AI, the parties had not yet
selected the technology to be implemented for processing the Kempirsai ore and
therefore, they had not yet developed the Consortium’s detailed plan for capital
expenditures. The technology (Vanyukov process) for the processing plant was
selected in September 2008 only after completion of the initial pilot testing of
various technologies capable of processing nickel ore. The technology
was selected based on the results of the testing and the preliminary feasibility
study report.
In May
2008 Latimer, one of the major shareholders in GRK and AI, applied to the
Company with a request for a loan. On May 22, 2008 the Company signed a Note
Agreement with Latimer Assets Inc. Pursuant to the terms of the Note Agreement,
the Company loaned $7,400,000 to Latimer Assets Inc. (“Latimer”). The note was
originally interest free. Latimer owns substantial interests in GRK and
AI.
On June
19, 2008 the Company and Latimer entered into Addendum # 1 to the Note Agreement
whereby the Company agreed to loan an additional $7,500,000 to Latimer,
increasing the total note amount to $14,900,000. The total note was provided at
an interest rate of 2% per annum. Interest was charged on a monthly basis and
was payable as a lump-sum payment at the date of the note repayment. The Company
ceased accruing interest on the note since March 31, 2009 upon consent of both
parties. The balance of the note receivable from related party at that time was
$15,140,828.
Pursuant
to a Pledge Agreement dated May 22, 2008 between the Company, its subsidiary,
KKM, GRK and AI, the Latimer note receivable was secured by a pledge of a
cumulative 39% interest in the Consortium. The 39% interest consists of 31% of
GRK’s 40% interest in the Consortium and 8% of AI’s 10% interest in the
Consortium.
On
September 15, 2009 Bekem, KKM, GRK and Latimer Assets Inc. executed an
Assignment and Assumption Agreement, dated August 13, 2009 (the “Assignment
Agreement”). Pursuant to the Assignment Agreement, the Company’s receivable from
Latimer was satisfied with a corresponding reduction in the payable to
GRK.
On
November 11, 2009 KKM and GRK entered into the Offset Agreement. Pursuant to the
terms of the Offset Agreement, GRK and KKM agreed to partially offset KZT
2,282,328,413 (equivalent to $15,136,811 at the currency conversion rate of KZT
150.78 per $1 on November 11, 2009) owed by GRK to KKM.
12
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
On
November 11, 2009 KKM, GRK and AI also executed an Addendum #2 to the Joint
Activity Agreement (Addendum #2”) to reflect certain changes in connection with
the Offset Agreement. The main difference was a change in the amounts each party
was required to invest in the consortium. KKM’s investment obligation
decreased from KZT 2,333,000,000 (equivalent to $15,690,362 on November 11,
2009) to KZT 686,936,015 (equivalent to $4,619,921 on November 11, 2009). GRK’s
investment obligation decreased from KZT 2,235,600,000 (equivalent to
$15,707,849 on November 11, 2009) to KZT 565,143,597 (equivalent to $3,800,818
on November 11, 2009). And AI’s investment obligation increased from KZT
97,400,000 (equivalent to $655,054 on November 11, 2009) to KZT 121,792,418
(equivalent to $819,103 on November 11, 2009). In connection with Addendum #2,
the parties also agreed to extend the period for final determination of the
ownership interests of the parties in the Consortium to March 1,
2010. However, in March 2010 AI was successful in negotiating with
the MEMR an extension of the investment obligations under its license to later
periods while GRK obtained a similar extension in 2009. As a result, the parties
further agreed to extend the period for final determination of the ownership
interests of the parties in the Consortium to June 1, 2010.
In
November 2009 KKM made partial repayment of the notes payable to GRK in the
amount of $2,500,000. As a result, as of March 31, 2010 the notes payable to GRK
and AI were KZT 180,281,673 (equivalent $1,225,489) and KZT 118,642,991
(equivalent $806,492), respectively.
NOTE
5 – SHAREHOLDERS’ EQUITY
Stock grants and
shares cancelled
–On March 25, 2008 the
board agreed to award to certain executives and key employees of the Company
additional restricted stock grants (421,772 shares) with an estimated fair value
of $337,418 at the closing market price of common stock on the date of grant
($0.80 per share). Out of this amount, $45,301 (191,715 shares) was
reversed in 2009 due to anticipated resignation of Mr. Bitenov, the CFO of the
Company.
As of
March 31, 2010 there was no unexpensed compensation cost. During 2010
the remaining shares vested. The Company recognized $6,390 and
$154,295 of compensation expense for the three months ended March 31, 2010 and
2009, respectively.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
Concentration of
Risk Relating to Foreign Mining Operations
– All of the Company’s
properties are located within the Republic of Kazakhstan in Central Asia. In
addition to general industry risks of nickel and cobalt price fluctuations, and
potential lack of economic viability of the claims, the Company has a
concentration of risk related to its foreign properties and interests which are
subject to political uncertainty, changes in government, unilateral
renegotiation of licenses, claims or contracts, nationalization, or other
uncertainties. In addition, the validity of mining claims which constitute the
Company's property holdings in Kazakhstan, may, in certain cases, be uncertain
and are subject to being contested.
13
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
Failure to
Satisfy the Terms of the Subsoil Use Contracts
– Under the subsoil use
contracts, the Company is required to satisfy the annual minimum work program
requirements. If the Company fails to satisfy these commitments, it
may be subject to the loss of one or more of the subsoil use
contracts. The cancellation of the contracts would have a material
adverse effect on the Company’s business, results of operations and financial
condition. While the Company does not expect any other penalties and
fines, except the loss of one or more of the subsoil use contracts, KKM is
required to remove all equipment and remediate the property where the
remediation costs are currently estimated at the level up to
$950,000.
Annual Work
Program
– Historically, it has been the practice of the MEMR that if a
subsurface user could not fulfill certain conditions for a specific year, for
any reason, then the work program requirements of that year would be extended to
the next year. This was done because the obligations of subsoil users
were typically set forth on the basis of the full duration of the subsoil use
contract, rather than on an annual basis. In December 2008 a new subsoil use
legislation of Kazakhstan was submitted to parliament, superseding legislation
on oil production and exploration, mineral resources mineral management, and
production sharing agreements (PSAs). The new subsoil use legislation of
Kazakhstan, which is expected to be adopted by parliament and signed by the
President in the second quarter of 2010 and will become effective six months
after its approval by parliament and the President, allows the government to
annul contracts in the extractive sector if they are deemed to be harmful to
Kazakhstan's economic security or national interests. The legislation also
requires separate contracts for exploration and production operations, puts
shorter time limits on exploration contracts, enhances the government’s
authority to terminate contracts not in compliance with the law, and requires
tax stability clauses in individual contracts to be approved by the President of
Kazakhstan. Also, the latest draft assumes that disputes between subsurface
users and the government will be settled in the courts of Kazakhstan, and does
not assume international arbitration. Disputes regarding the existing
subsurface use contracts would also be settled in the courts of
Kazakhstan. This change in practice has created great uncertainty as
to how the government will proceed in the future. Currently, there is
no legislatively fixed mechanism governing the development of annual work
programs or for the independent determination of compliance by the subsurface
user with the parameters of the annual work program. The determination is
currently being made at the discretion of officials employed by the authorized
governmental body. Based solely on their own discretion, these
officials have the authority to suspend the activities of the subsurface user
even for a minor breach of the detailed annual work program. These facts,
coupled with the right of the competent body to unilaterally terminate a subsoil
user’s contract if the contractor materially breaches the subsoil use contract
obligations, indicates there is a risk that one or more of the Company’s subsoil
use contracts could be cancelled. While the Company does not expect
any other penalties and fines, except the loss of one or more of the subsoil use
contracts, KKM is required to remove all equipment and remediate the property
where the remediation costs are currently estimated at the level up to
$950,000.
Kazakhstan
Business Environment
– As an emerging market, Kazakhstan has a legal and
regulatory infrastructure that is not as mature and stable as those usually
existing in more developed free market economies. As a result, operations
carried out in Kazakhstan can involve risks and uncertainties that are not
typically associated with those in developed markets. The instability associated
with the ongoing transformation process to a market economy can lead to changes
in the business conditions in which the Company currently operates. Changes in
the political, legal, tax or regulatory environment could adversely impact the
Company’s operations.
14
BEKEM
METALS, INC. AND SUBSIDIARIES
(An
Exploration Stage Company)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2010 (UNAUDITED)
Environmental
Matters –
Extensive national, regional and local environmental laws and
regulations in Kazakhstan affect the Company’s operations. These laws and
regulations set various standards regulating certain aspects of health and
environmental quality and impose user fees, penalties and other liabilities for
the violation of these standards and establish, in some circumstances,
obligations to remediate current and former facilities and off-site locations.
The Company believes it is currently in compliance with all existing Republic of
Kazakhstan environmental laws and regulations. However, as new environmental
laws and legislation are enacted and the old laws are repealed, interpretation,
application and enforcement of the laws may become inconsistent. Compliance in
the future could require significant expenditures, which may adversely affect
the Company’s operations.
Operating
Leases
– Bekem leases approximately 400 square feet of office space
located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its
administrative and registered office in the United States. The
Company pays annual rents of approximately $7,800 for this space pursuant to a
lease agreement that expired in October 2009. The Company is currently renting
this space on a month-to-month basis at the same rate.
The
Company also maintains a representative office in Almaty, Kazakhstan, where it
leases approximately 645 square feet of office space. The lease agreement
expires on August 31, 2010. The monthly lease payment is $921. To minimize its
operating expenses, in March 2010 the Company decided to close the office.
Withdrawal from the state registration is expected to take three
months. Closure of the representative office will help to reduce the
expenses by approximately $50,000 per month.
KKM rents
approximately 1,706 square feet of office space in Aktobe, Kazakhstan. KKM pays
approximately $1,400 per month for this space under a one-year lease agreement.
This space is leased on a year-to-year basis.
Rent
expense for the three months ended March 31, 2010 and 2009 was $8,700 and
$35,317, respectively.
NOTE
8 –SUBSEQUENT EVENTS
On April
21, 2010 KKM received notifications (dated April 6, 2010) from the MINT related
to fulfillment of KKM contract obligations. The notifications require KKM to
provide explanations for non-performance of the Kempirsai and Mamyt work
programs. On April 23 and 29, 2010 KKM responded to these notifications with
references to delays in signing of the addendum to the nickel and cobalt ore
production contract (which was signed in December 2009) and to the recent letter
from the MEMR (which was also received in December 2009) granting KKM’s request
to decrease the coal volume production requirements of its work program from
200,000 tons per year to 5,000 tons per year for the period from 2009 to 2012.
The review of KKM’s responses to the notifications from the MINT is expected in
May-June 2010.
15
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
For a
complete understanding, this management’s discussion and analysis of financial
condition and results of operations should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements contained in this quarterly report on Form
10-Q and our annual report on Form 10-K for the year ended December 31,
2009.
Forward
Looking Information and Cautionary Statement
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended, that are based on our
management’s beliefs and assumptions and on information currently available to
our management. For this purpose any statement contained in this
annual report that is not a statement of historical fact may be deemed to be
forward-looking, including statements about our revenue, spending, cash flow,
products, actions, intentions, plans, strategies and
objectives. Without limiting the foregoing, words such as “
may
,” “
hope
,” “
will
,” “
expect
,” “
believe
,” “
anticipate
,” “
estimate
” “
projected”
or “
continue
” or comparable
terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial
risks and uncertainty, and actual results may differ materially depending on a
variety of factors, many of which are not within our control. These factors
include but are not limited to those relating to our plan of operations
including our ability to construct a processing plant and put our property into
commercial production, economic conditions generally and in the industry in
which we and our customers participate, future commodity prices; competition
within our industry, including competition from much larger competitors, future
exploration, legislative requirements and changes and the effect of such on our
business, results of operations, sufficiency of future working capital,
borrowings and capital resources and liquidity and our ability to generate
future cash flow and to continue to meet the requirements of and maintain our
rights to our properties.
Forward-looking
statements are predictions and not guarantees of future performance or
events. Forward-looking statements are based on current industry,
financial and economic information, which we have assessed but which by its
nature is dynamic and subject to rapid and possibly abrupt
changes. Our actual results could differ materially from those stated
or implied by such forward-looking statements due to risks and uncertainties
associated with our business. We hereby qualify all our
forward-looking statements by these cautionary statements. We undertake no
obligation to amend this report or revise publicly these forward looking
statements (other than pursuant to reporting obligations imposed on registrants
pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or
circumstances.
Throughout
this report, unless otherwise indicated by the context, references herein to the
“Company”, “BMI”, “we”, our” or “us” and similar language means Bekem Metals,
Inc, a Utah corporation, and its corporate subsidiaries and predecessors
.
16
Overview
We are
engaged in the development and exploration of nickel, cobalt and brown coal
deposits in the Republic of Kazakhstan. We carry out our exploration
activities through our wholly-owned subsidiary, Kyzyl Kain Mamyt LLP
(“KKM”).
The
following table provides additional information regarding our subsoil use
contracts:
Territory
Name
|
|
Size
of
Territory
|
|
Primary
Minerals
|
|
License
Type
|
|
License
or
Contract #
|
|
License
and Subsoil
Use Contract Term
|
|
|
|
|
|
|
|
|
|
|
|
Kempirsai
|
|
575,756
acres
|
|
Nickel
and cobalt ore
|
|
Production
|
|
MG
#420
MG
#426
|
|
Expires
Oct, 12, 2020 unless extended.
|
Mamyt
|
|
116
acres
|
|
Brown
coal
|
|
Production
|
|
MG
#9-D
|
|
Expires
Dec, 11 2018 unless extended.
|
The
primary assets of KKM are exclusive subsoil use licenses and contracts to a
575,756 acre territory in northwestern Kazakhstan referred to herein as the
Kempirsai deposit. The contract grants KKM the right to explore,
extract and process nickel and cobalt ore from the Kempirsai deposit, which is
comprised of the Kara-Obinskoe and Stepninskoye sections (collectively referred
to as the “Kara-Obinskoye section”) and the Novo-Shandashinskoe section. The
Kempirsai deposit was discovered in 1938 and at its peak in the late 1980’s
produced almost five million tons of ore annually. Since the
mid-1990’s, however, mining activity at the deposit has been
insignificant.
KKM also
holds a subsoil use contract to explore and produce brown coal from the Mamyt
coal deposit, which is located within 40 kilometers of the Kempirsai
deposit.
The
Kempirsai and Mamyt licenses are independent of one another. The loss
of one would not necessarily trigger a loss of the other. Under our
contracts we have the right to negotiate with the government for extensions of
the terms of those contracts. If we are unsuccessful in negotiating
extensions, upon the expiration of our contracts, our interest in and rights to
those deposits terminates and reverts back to the government of the Republic of
Kazakhstan at the expiration of the term of the license, but we retain the
rights to all tangible and intangible assets we acquire for exploration,
extraction and production at these deposits.
There is
very little demand for our nickel ore until it has been processed and
concentrated because of its low nickel content. Currently, there is
no nickel ore processing facility within the region of the Kempirsai
deposit. We have spent several years investigating processing
technologies and undertaking preliminary feasibility studies (“PFS”) for the
construction of a nickel ore processing facility. Based on the
results of the PFS, if we are able to secure funding, we intend to focus on the
Vanyukov Process for further development of the Kempirsai deposits and
construction of a nickel processing plant in the Aktobe region of Kazakhstan,
where the Kempirsai deposit is located. The Vanyukov Process, first developed in
the 1940’s in Russia, is capable of treating oxide nickel ores to form either a
nickel matte (by addition of a sulphur containing compound such as pyrite) or
directly to form a ferronickel alloy containing up to 20% nickel. The
anticipated cost to construct such a processing plant with the planned annual
capacity of 20,000 tons of ferronickel (5,000 tons of nickel) is approximately
$160 million.
17
In 2008
KKM entered into a preliminary consortium agreement, subject to negotiation
of the terms of a definitive agreement, with two Kazakhstani
companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”) for the
purpose of jointly developing and constructing a processing plant. Like us, GRK,
AI and their shareholders have been unsuccessful raising funds to finance the
Consortium due to the effects of the volatility in the world financial and
nickel markets. In 2009 GRK was successful in negotiating an
extension of the investment obligations under its license to later periods.
Also, in March 2010 AI obtained a similar extension of its investment
obligations to later periods. We believe the extension of GRK’s and
AI’s licenses make it unlikely that the parties will finalize a definitive
consortium agreement or move forward with the joint development of a processing
plant.
Given our
current financial condition, coupled with current and projected nickel
inventories and world nickel prices over the next few years we believe our
prospects for securing funding to construct a nickel ore processing plant are
limited at best. We do not expect to generate revenue from ore
extraction and sales until such time as we are able to secure funding for and
construct a nickel processing facility.
Because
of a lack of funds, KKM did not fully meet its 2009 annual work program
requirements to invest up to $6 million into development of the Kempirsai
deposit, including construction of the processing plant. On April 21,
2010 KKM received notifications (dated April 6, 2010) related to fulfillment of
KKM contract obligations from the MINT. The notifications required KKM to
provide explanations for non-performance of the Kempirsai and Mamyt work
programs. On April 23 and 29, KKM responded on these notifications with
references to the delay in the signing of the addendum to the nickel and cobalt
ore production contract (which was signed in December 2009) and to the recent
letter from the Ministry of Energy and Mineral Resources of the Republic of
Kazakhstan (the “MEMR”) granting KKM’s request to decrease the coal volume
production requirements of its work program from 200,000 tons per year to 5,000
tons per year for the period from 2009 to 2012 (which was also received in
December 2009). The review of KKM’s responses to the notifications from the MINT
is expected in May-June 2010. To avoid the loss of its contract, management
plans to engage in discussions with the appropriate governmental agencies to
revise the terms of its annual work programs. However, the government
is under no obligation to negotiate with us and there is no guarantee that we
can be successful in renegotiating the terms of our work programs.
Because
of our limited prospects for generating revenue or obtaining additional
financing, we anticipate that we will be unable to fulfill the unfulfilled
obligations of our 2009 minimum work program requirements, or the 2010 minimum
work requirements associated with the Kempirsai deposit.
We are
investigating the possibility of selling our rights to the Kempirsai
deposit.
Historically
we had planned to use the brown coal from our Mamyt deposit primarily to provide
power for our planned nickel processing facility because of the lack of readily
available market in Kazakhstan for low grade brown coal of the quality contained
at our Mamyt deposit. Given the unlikelihood that we will obtain
funding to construct a nickel processing facility, we are also investigating
potential markets and uses for coal from the Mamyt deposit.
18
In
addition to its contracts to the Kempirsai and Mamyt deposits, KKM also owns
fuel tanks, locomotives, rail cars, railway cranes, bridge cranes, railway
cisterns, maintenance equipment, excavators, motor graders, passenger vehicles,
passenger buses, heavy dump trucks, hoppers, scales, lathes, forging hammers,
presses, grinding, milling and boring machines, boilers, electrical substations,
office equipment, business machines, portable communication equipment,
laboratory equipment and multiple buildings. The machinery was
manufactured between 1950 and the present. The buildings were built between the
1940’s and the early 1990’s. Much of our existing equipment and
buildings will need repair and refurbishing prior to being put into active
operation. We planned to use this equipment to support our nickel
mining activities at the Kempirsai deposit. Given the unlikelihood that we will
engage in nickel mining activities, we are investigating whether this equipment
can be put to other uses to generate capital for the Company. We are
also investigating whether there is a market for the sale of this
equipment.
Liquidity
and Capital Resources
Since
inception we have generated no revenue. Our capital resources have consisted
primarily of funds we have borrowed from related and non-related parties, the
sale of our equity securities and funds received from the sale of
Kaznickel. As of March 31, 2010 we had cash on hand of $101,312.
Since inception we have an accumulated deficit of $30,613,114. At
March 31, 2010 current liabilities exceeded current assets by
$1,456,129.
Our
deposits have not yet entered the development stage and we have no
production. We have realized only limited revenue from our Kempirsai
and Mamyt deposits and have very little ability to generate
revenue. We do not expect this to change until we build and begin
operating a nickel ore processing plant.
Because
of a lack of funds, we were unable to meet our 2009 annual work program
requirements to invest up to $6 million into development of the Kempirsai
deposit and a processing plant. In April 2010 we received
notifications from the MINT requesting explanations for our non-performance in
connection with our Kempirsai and Mamyt deposits. We have responded
to those requests. If our explanations are acceptable to the MINT,
and it does not cancel or otherwise change the terms of our Kempirsai
license, we anticipate the need to seek significant additional funding during
fiscal 2010 to satisfy our 2010 annual work program obligations (to invest up to
$26.5 million) and to satisfy the obligations we did not meet in
2009. We also anticipate the need for up to $400,000 to satisfy the
2010 work program requirements associated with our Mamyt deposit if we are
successful in negotiations to reduce the 2009 annual work program to the level
that was actually spent in 2009. At this time, we have no indication
of the potential outcome of the MINT inquiry. Even if our licenses
are not canceled, there is no assurance that we will be able to obtain
additional funding on favorable terms, or at all. We do not currently
anticipate generating significant revenue during 2010. If we are
unsuccessful in obtaining additional funding or generating significant revenue
during 2010, we will likely be unable to meet our work program requirements or
to continue operations. Unless we can renegotiate the terms of our
work program requirements we anticipate we will also lose our licenses some time
during 2010.
19
Cash
Flow
During
the three months ended March 31, 2010 and 2009 cash was used to fund operations
as follows:
For
the Three Months Ended March 31,
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Net
cash from operating activities
|
$
|
(434,924)
|
|
$
|
(521,418)
|
Net
cash from investing activities
|
|
1,699
|
|
|
649,805
|
Net
cash from financing activities
|
|
–
|
|
|
–
|
Effect
of exchange rate changes on cash
|
|
(82)
|
|
|
(3,456)
|
NET
(DECREASE) / INCREASE IN CASH
|
$
|
(433,307)
|
|
$
|
124,931
|
During
the three months ended March 31, 2010 net cash used in operating activities was
$434,924 compared to net cash used in operating activities of $521,418 during
the three months ended March 31, 2009. This decrease in net cash used in
operating activities primarily occurred due to reduced general and
administrative costs and exploratory activities as a result of our financial
difficulties and the sale of Kaznickel during 2009.
During
the three months ended March 31, 2010 net cash received from investing
activities was $1,699 which was received from sale of minor office property and
equipment. By comparison, during the three months ended March 31, 2009 we
received net cash in investing activities of $649,805. Cash received from
investing activities during the three months ended March 31, 2009 mainly
represented an advance payment received in connection with the potential sale of
Kaznickel and an advance received from Asia Invest for the sale of special
equipment.
During
the three months ended March 31, 2010 and 2009 we did not receive any cash from
financing activities.
Results
of Operations
Three
months ended March 31, 2010 compared to the three months ended March 31,
2009
Revenue
Because
our deposits are without known reserves, we are considered to be in the
exploration stage. Any revenue earned during this stage from the sale
of ore or brown coal is recorded against exploratory costs. We did not have any
such incidental sales during the three months ended March 31, 2010. By
comparison, during the first quarter 2009 we realized $311 from incidental sales
of ore or brown coal.
General and Administrative
Expenses
Our
general and administrative expenses during the three months ended March 31, 2010
decreased to $555,004 from $647,056 during the first quarter 2009. This $92,052
decrease in general and administrative expenses was primarily the result of
lower payroll expenses and related taxes by approximately $45,050 in the first
quarter 2010 due to staff reductions; decreases in rent expense of $26,600 due
to reduction of rent fees and rented premises; and the reduction of other
administrative expenses resulting from the reduced scope of the Company’s
operations due to our current financial difficulties.
20
Research and Development
Costs
We
engaged in no research and development activities during the first quarter 2010
and 2009.
Exploratory
Costs
During
the three months ended March 31, 2010 and 2009 we did not extract any ore or
coal. The exploration costs incurred during these periods mainly represent
geologists’ and other specialists’ salaries, other costs in preparation for
future exploratory activities and some Kempirsai mining asset maintenance
expenses.
Accretion
Expense
Accretion
expense increased by $20,499 to $34,326 during the three months ended March 31,
2010 compared to the same period of 2009 due to the revision of asset retirement
obligations made at the end of 2009. Until we engage in mining and
production, we believe accretion expense will continue at rates consistent with
those realized during the quarter ended March 31, 2010.
Grant Compensation
Expense
During
the three months ended March 31, 2010 we recognized $6,390 in grant compensation
expense for restricted stock grants issued to certain officers and key employees
during the fourth quarter 2006 and the second quarter 2008 compared to $154,295
for the three months ended March 31, 2009. The reduction in grant compensation
expense occurred due to vesting of the shares granted and reversal
of unvested shares granted to Mr. Bitenov which were expected to vest in
2011. The reversal was made at the end of 2009 due to the resignation of
Zhassulan Bitenov, which became effective on April 30, 2010. Mr.
Bitenov had served as our Chief Financial Officer since January
2008.
Total Operating Expenses and
Loss from Operations
Our total
operating expenses and loss from operations decreased from $827,054 during the
three months ended March 31, 2009 to $649,889 during three months ended March
31, 2010. The principal reasons for the decrease are a decrease in
general and administrative expense of $92,052 due to the reduced scope of the
Company’s operations and lower grant compensation expense due to due to vesting
and reversal of the shares granted.
Interest
Income
During
the three months ended March 31, 2010 we realized interest of $1,265 on
deposits. By comparison, during the three months ended March 31, 2009 we
realized interest of $74,517 on deposits and on the note receivable from a
related party.
21
Translation Adjustment and
Exchange Gain/Loss From Remeasurement
The
consolidated financial statements are presented in U.S. dollars. The functional
currency of Kaznickel is U.S. dollars. The functional currency of KKM is Kazakh
tenge. Results of operations are translated into U.S. dollars at the average
exchange rates during the reporting period. All balance sheet accounts of KKM
are translated at exchange rates on the date of the financial statements, except
equity which is translated at weighted-average historical rates. The
translation differences are included in stockholders’ equity as cumulative
translation adjustments.
Non-monetary
assets and liabilities of our Kaznickel and Almaty representative offices, as
well as the related expense accounts, are translated into U.S. dollars, using
historical exchange rates and monetary assets and liabilities
are translated into U.S. dollars using exchange rates on the date of the
financial statements and the resulting balance sheet item differences are
included in the results of operations as exchange gains/losses from
remeasurement. The exchange difference from remeasurement is
commonly, but not always, positive (gain) if the average exchange rates are
lower than exchange rates on the date of the financial statements and negative
(loss) if the average exchange rates are higher than exchange rates on the date
of the financial statements.
Exchange
Gain/Loss
During
the quarter ended March 31, 2010 we realized an exchange gain of $218,568
compared to an exchange loss of $2,802,998
during the quarter ended
March 31, 2009. As with the gain/loss from remeasurement, we
recognize exchange gain or loss as a result of having subsidiaries operating in
foreign countries whose functional currency may or may not be the U.S.
dollar. This requires us to translate results of operations from a
foreign currency, in this case Kazakh tenge, to U.S. dollars at the average
exchange rate, where results of operations include exchange gains or losses on
the U.S. dollar monetary assets and liabilities.
On
February 4, 2009 Kazakhstan’s National Bank dramatically devalued the Tenge, the
local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S.
dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports),
currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the
fledgling state of the domestic banking sector. This currency devaluation was
the main cause of the exchange loss recognized by us during the quarter ended
March 31, 2009.
Net Loss
For the
foregoing reasons, during the three months ended March 31, 2010 we experienced a
net loss of $383,812 compared to a net loss of $3,369,394 during the three
months ended March 31, 2009. We anticipate we will continue to experience net
losses in upcoming quarters, but given the current uncertainty associated with
our licenses and our financial condition we cannot predict the size or nature of
those losses at this time.
22
Summary
of Material Contractual Commitments
The
following table lists our significant commitments as of March 31,
2010:
|
|
|
|
Payments
due by Fiscal Year
|
Contractual
Commitments
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5 years
|
KKM’s
work programs
(1)
(2)
|
|
$123,400,000
|
|
$32,500,000
|
|
$78,500,000
|
|
$4,400,000
|
|
$8,000,000
|
Operating
leases
|
|
35,635
|
|
35,635
|
|
-0-
|
|
-0-
|
|
-0-
|
Total
|
|
$123,435,635
|
|
$32,535,635
|
|
$78,500,000
|
|
$4,400,000
|
|
$8,000,000
|
(1)
|
The
current terms of the Kempirsai contract require KKM to invest $135 million
to be applied to its mining and ore processing technology during the
period 2006-2020 (or around $123.4 million for the remaining period).
Also, the estimates include $950,000 for removal of all equipment and to
remediate the property. This remediation work can be done
during the term of the subsoil use contract or upon completion of the
terms of the contract.
|
(2)
|
In
March 2008 KKM entered into a preliminary consortium agreement
with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and
Asia-Invest Corporation LLP (“AI”), who also have exploration and
production licenses near the Company’s Kempirsai deposit in northwestern
Kazakhstan. Under the preliminary consortium agreement, which
was amended in November 2009, the parties are obliged to jointly
contribute approximately $9.2 million for financing the construction of
the processing plant. Of this amount, KKM is obligated to contribute
approximately $4.6 million. Contributions made by the parties into the
consortium are accounted for in the annual work programs of these parties.
As of December 31, 2009 contributions of GRK equal KZT 192 million
($1,293,565) and contributions of AI equal KZT 122 million ($820,925),
which were to be used for construction of a processing
plant.
|
Off-Balance
Sheet Financing Arrangements
As of
March 31, 2010 we had no off-balance sheet financing arrangements.
Critical
Accounting Policies
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe
are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of expenses and revenues, to
the extent we generated revenue during the periods presented. Actual
results could differ from these estimates. Our significant accounting
policies require us to make difficult, subjective or complex judgments or
estimates. We consider an accounting estimate to be critical if (1)
the accounting estimate requires us to make assumption about matters that were
highly uncertain at the time the accounting estimate was made and (2) changes in
the estimates that are reasonably likely to occur from period to period, or use
different estimates that we reasonably could have used in the current period,
would have a material impact on our financial condition or results of
operations.
There are
other items within our financial statements that require estimation, but are not
deemed critical as defined above. Changes in estimates used in these
and other items could have a material impact on our financial
statements. Management has discussed the development of these
critical accounting estimates with our board of directors and they have reviewed
the foregoing disclosure.
23
Use of
Estimates
– In connection with the preparation of our financial
statements, we are required to make estimates and assumptions that affect the
reported amounts in the financial statements and accompanying
notes. One of the significant areas requiring the use of management
estimates and assumptions relates to environmental reclamation and closure
obligations. Under our licenses with the Republic of Kazakhstan,
following completion of exploration and mining activities we are required to
reclaim our licensed territories. To prepare our financial statements
in accordance with accounting principles generally accepted in the United States
of America we are required to account for this obligation. The
determination of the amount of the mine retirement and environmental reclamation
obligation the Republic of Kazakhstan will impose upon us, however, has not yet
been determined. The determination of the mine retirement and
environmental reclamation obligation is based, in significant part, on the size
of each deposit. We base our estimate of this obligation on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results may
differ significantly from our estimate.
Income
Taxes
– While we are a Utah corporation, our primary operations are in
the Republic of Kazakhstan. The Republic of Kazakhstan was formed in
1991 following the break-up of the former Soviet Union. At the time
the Republic of Kazakhstan was formed, it adopted a new tax code. The
tax code and the application of tax laws in the Republic of Kazakhstan are still
developing and may not be uniformly applied in all instances.
Item
3. Qualitative and Quantitative Disclosures about Market Risk
Our
primary market risks are fluctuations in commodity prices and foreign currency
exchange rates. We do not currently use derivative commodity
instruments or similar financial instruments to attempt to hedge commodity price
risks associated with future nickel production.
Commodity
Price Risk
Historically,
nickel and cobalt prices have been subject to significant volatility in response
to changes in supply, market uncertainty and a variety of other factors beyond
our control. Nickel and cobalt are likely to continue to be volatile
in the future and this volatility makes it difficult to predict future price
movements with any certainty. As a result, commodity price
fluctuations affect our ability to borrow funds or raise additional capital
because declines in nickel and cobalt prices would reduce the revenues we could
earn if we begin commercial production. Commodity prices for nickel
and cobalt have a material effect on our business and financial
condition.
Foreign
Currency Risk
Our
functional currency is the U.S. dollar. Our Kazakhstani subsidiary
KKM uses the Kazakh tenge as its functional currency. To the extent
that business transactions in Kazakhstan are denominated in the Kazakh tenge we
are exposed to transaction gains and losses that could result from fluctuations
in the U.S. dollar—Kazakh tenge exchange rate. When the U.S. dollar strengthens
in relation to the Kazakh tenge, the U.S. dollar-reported expenses will
decrease. We do not engage in hedging transactions to protect us from such
risk.
24
Our
foreign-denominated monetary assets and liabilities are revalued on a monthly
basis with gains and losses on revaluation reflected in net income. A
hypothetical 10% favorable or unfavorable change in foreign currency exchange
rate at March 31, 2010 would have affected our net income by approximately
$180,000.
Item
4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)), as of March 31, 2010. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2010, our disclosure controls and procedures were effective
in (1) recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act and (2) ensuring that information disclosed by us in such
reports is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Exchange Act as a process designed by, or under the supervision of, the
company’s principal executive officer and principal financial officer and
effected by the company’s board of directors, management and other personnel, 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 and includes those policies and
procedures that:
●
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
●
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
●
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s 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.
25
Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of March 31, 2010. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control - Integrated
Framework
. Based on this assessment, our management concluded that as of
March 31, 2010, our internal control over financial reporting is effective based
on those criteria.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2010 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART
II -- OTHER INFORMATION
Item
1A. Risk Factors
There
have been no material changes to the risk factors as previously disclosed in our
annual report on Form 10-K for the year ended December 31, 2009.
Item
6. Exhibits
Exhibits. The
following exhibits are included as part of this report:
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
10.31
|
|
Addenda
No.1 to the Contract on work on Extraction of brown coal on East - Ural a
deposit (A site East - Ural) Located in the Aktyubinsk area Kazakhstan
Republic (English translation)*
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002*
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002*
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
|
* Filed
herewith.
26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
BEKEM
METALS, INC.
|
|
|
|
|
Date:
May 7, 2010
|
/s/
Yermek Kudabayev
|
|
Yermek
Kudabayev
Chief
Executive Officer
|
|
|
|
|
Date:
May 7, 2010
|
/s/
Yermek Kudabayev
|
|
Yermek
Kudabayev
|
|
Interim
Chief Financial Officer
|
27
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