EGDD Eastern Goldfields Inc (PK)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Mark One)

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

For the quarterly period ended March 31, 2009

or

   o     TRANSITION REPORT UNDER 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, California 92108-2808

(Address of principal executive offices                                 (Zip Code)

Registrant’s telephone number, including area code  (619) 497-2555

______________________________________________________________________

(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 Act).   

                                                                                                                                      Yes  o           No x

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

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 May 11, 2009, 9,932,214 shares of the issuer’s common stock were outstanding.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

ASSETS

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

3

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF OPERATIONS

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

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2009

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

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

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

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Barbrook Mines Limited (“Barbrook”), also a South African gold producer and developer corporation.  On December 15, 2008, ownership of Barbrook was placed under EGL.   

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 POLICIES

Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared in accordance with the accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the consolidated financial statements included in the Company’s annual report on Form 10-K of Eastern Goldfields, Inc. and Subsidiaries for the year ended December 31,  2008. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009, are not necessarily indicative of the results that may be expected for any other interim period or the entire year. For further information, these unaudited consolidated financial statements and the related notes should be read in conjuction with the Company’s audited financial statements for the year ended December 31, 2008, included in the Company’s annual report on Form  10-K.

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 is 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

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 three months ended March 31, 2009 and 2008.  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 three months ended March 31, 2009:

                                                                                         DISCLOSURE FOR RECONCILIATION

                                                                                                    OF BASIC AND DILUTED

                                                                                                      EARNINGS PER SHARE

                                                                                      For the Three Months Ended March 31, 2009

                                                                                        Income                  Shares                  Per-share

                                                                                        ( Numerator )        ( Denominator )            Amount

        Net loss                                                                          $(781,822)              9,377,986                    $   (0.08)

        BASIC AND DILUTED EPS

        Income available to common

                stockholders                                                         $(781,822)              9,377,986                    $   (0.08)

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Foreign Currency Translation

The Company’s functional currency is the South African Rand.  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.

Exploration Expenses

Exploration costs are charged to operations as incurred.

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.  During the three months ended March 31, 2009, there was no impairment of long-lived assets.

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

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 ceased by end-2008, the Company did not measure and recognize production stage deferred stripping costs and credits for the three months period ended March 31, 2009.  

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

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Option Expense  

Compensation cost recognized 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.

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 since 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 Company’s accounts payable and other current liabilities and advances from stockholders are classified within Level 1 of the fair value hierarchy since they occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

The Company’s short term loans and long term liabilities are classified within Level 2 of the fair value hierarchy since they have a specified (contractual) term.

The total amount of the changes in fair value for the period was included in net loss as a result of changes from December 31, 2008.

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.

            Recent Accounting Pronouncements

In April 23, 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)  Financial Accounting Standard (FAS) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Based on guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with the Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements . This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ending June 30, 2009. There is no expected impact on the Company’s financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The guidance applies to investments in debt securities for which other-than-temporary impairments may be recorded. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components:  1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will adopt this FSP for its quarter ended June 30, 2009. There is no expected impact on the Company’s financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP amends FSAS No. 107 “Disclosures about Fair Value of Financial Instruments” to require an entity to provide disclosures about fair value of financial instruments in interim financial instruments in interim financial information. This FSP is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. The company will include the required disclosures in its quarter ending June 30, 2009.

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, which became effective January 1, 2009 via prospective application to business combinations. This Statement requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). The company adopted this Statement on January 1, 2009. There was no impact upon adoption , and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

In April 2009, the FASB issued FSP FAS 141 (R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. This FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. Further, the FASB removed the subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS no. 141(R). The requirements of this FSP carry forward without significant revision the guidance on contingencies of SFAS No.  141, “Business Combinations”, which was superseded by SFAS No. 141(R) (see previous paragraph). The FSP also eliminates the requirement to disclose an estimate of the range of possible outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB requires that entities include only the disclosures required by SFAS No. 5. This FSP was adopted effective January 1, 2009. There was no impact upon adoption, and its effects on future periods will depend on the nature and significance of business combinations subject to this statement.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets. The FSP states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would used about renewal or extension options. This FSP is to be applied to intangible assets acquired after January 1, 2009. The adoption of this FSP did not have an impact on the Company’s financial statements.

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.         GOING CONCERN

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company has sustained net losses of $781,822 for the three months ended March 31, 2009.  Net cash used in operations for the three months ended March 31, 2009 was $467,129. The Company also has an accumulated deficit of $11,978,698 and a working capital deficit of $17,381,521 at March 31, 2009.

The items discussed above raise substantial doubt about the Company's ability to continue as a going concern. If the Company's financial resources are insufficient, the Company may require additional financing in order to execute its business plan and support its operations. The Company cannot predict whether this additional financing will be in the form of equity, debt or another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. Should financing sources fail to materialize, management would seek alternate funding sources such as the sale of common and/or preferred stock, the issuance of debt or other means. The Company plans to attempt to address its working capital deficiency by increasing its sales, maintaining strict expense controls and seeking strategic alliances.

In the event that these financing sources do not materialize, or the Company is unsuccessful in increasing its revenues and profits, the Company will be forced to further reduce its costs, may be unable to repay its debt obligations as they become due, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. Additionally, if these funding sources or increased revenues and profits do not materialize, and the Company is unable to secure additional financing, the Company could be forced to reduce or curtail its business operations.

4.         INVENTORIES

Inventories at March 31, 2009 and December 31, 2008 consist of the following:

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.         PROPERTY, PLANT AND MINE DEVELOPMENT

Major classes of property, plant, and mine development as of March 31, 2009 and December 31, 2008 are as follows:

Depreciation, depletion and amortization expense is $124,680 and $135,841 for the three months ended March 31, 2009 and 2008, respectively.   

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.         SHORT TERM LOANS

Short term loans at March 31, 2009 and December 31, 2008 consist of the following:

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 ($3,361,768 as of March 31, 2009) 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.

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.  Accordingly, the loan balance outstanding at March 31, 2009 includes $529,536 of accrued interest. The Company is currently renegotiating the terms of the agreement with the lender.

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.         SHORT TERM LOANS (Continued)

On May 27, 2008, the Company’s wholly owned subsidiary EGSA obtained R80 million ($8,404,421 as of March 31, 2009) six month bridging loan facility (“facility”) from Investec Bank Ltd. (“Investec”) for the acquisition of Barbrook Mines Ltd.  On October 30, 2008, this facility was renegotiated and the Company received a commitment letter agreement from Investec.  Under the terms of this 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.

The loan balance outstanding at March 31, 2009 includes $1,145,343 of accrued interest. 

On August 25, 2008, the Company obtained a Swiss Francs 2,200,000 ($2,061,650 as of March 31, 2009) six month loan from a shareholder, Kestrel SA (“Kestrel”), for purposes of working capital requirements.  Interest on the loan is 15% p.a. calculated on the outstanding balance and compounded monthly in arrears.  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.  The repayment of the loan was extended to June 30, 2009.

The loan balance outstanding at March 31, 2009 includes $105,985 of accrued interest.

  19

EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.         LONG TERM LIABILITIES

Secured by installment sale agreements over certain mining equipment, bearing interest at the prime bank overdraft rate less 1% and repayable in monthly installments of R547,956 ($57,566), including interest.

Maturities of the liabilities are as follows:

8.         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 March 31, 2009 $346,262 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:

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.         COMMITMENTS AND CONTINGENCIES

A first continuing covering bond in the amount of South African Rands 200,000 ($21,011) 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 ($17,229) 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 term of the agreement is one year and is renewable on an annual basis.  The Company charged $49,500 to operating expense for the three months ended March 31, 2009.

Our 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 $116,000) 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 $783,000) 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.

10.       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 (At March 31, 2009 – $1,040,047).  The transaction closed on February 2, 2006.  Further, and upon the acquisition of Barbrook on May 30, 2008, a similar agreement was concluded with Lomshiyo on December 15, 2008 amounting to R20,800,000 (At March 31, 2009 – $2,185,149).   

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.       MINORITY INTEREST (Continued)

These two amounts are classified as loans to Lomshiyo and are reflected as a reduction of equity in the Company’s March 31, 2009 consolidated balance sheet.  Lomshiyo is a South African corporation whose majority shareholders are historically disadvantaged South Africans. 

The purchase of ordinary stock was financed with a note receivable bearing an annual interest rate of the South African Prime Rate (15% at March 31, 2009).  The note accrues interest and is payable to the Company on January 2, of each year.  A total of $637,477 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 collateralizes the note receivable.

11.        CONVERTIBLE LOAN

In December 2008, the Company approved a private placement of up to $2,000,000 at a price of $3 per Common Stock and Common Stock Purchase Warrants with an exercise price of $3.  This private placement was closed on March 15, 2009, and funds received from subscribers amounted to $1,633,554 (net of $29,134 in commissions) representing 554,228 of Common Stock.  The issuing of the share certificates is in progress.    

12.       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.

The following table summarizes annual activity for all stock options for each of the two years ended December 31:

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EASTERN GOLDFIELDS, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.       STOCK OPTIONS (Continued)

            Employee Stock Options (Continued)

The fair value of the stock options granted (and vested) during the years ended December 31, 2008 and 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 years ended December 31, 2008, 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 December 31, 2008, with exercise prices less than the fair market value on the date of grant with no restrictions on exercisability after vesting:

As of March 31, 2009, there were approximately $NIL 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.

13.       COMMON STOCK

On November 21, 2008, the Board of Directors approved the issuance of 300,000 Special Shares to certain employees in payment of the services that the Company had received. Of the total 300,000 Special Shares, 200,000 related to South African employees, and, in accordance with the South African Exchange Regulations, 200,000 Class A Preference Shares in the South African subsidiary EGSA had been issued. The corresponding 200,000 shares in EGI and the balance of 100,000 shares of EGI to non-South African employees are in the process of being issued.
 

On February 16, 2009, 554,228 shares of restricted common stock at $3.00 per share and 554,228 Common Stock Purchase Warrants in the form of a unit security at $3.00 per unit were issued for cash for a total offering of $1,662,684 less offering costs of $29,134 totaling $1,633,550. These share certificates were issued on May 7, 2009.

 

14.       SUBSEQUENT EVENT

On April 30, 2009 the Company entered into the Restated Convertible Loan and Option Agreement (the "Restated Agreement") with Asian Investment Management Services, Limited ("AIMS"). The Restated Agreement provides that AIMS will; (A) provide technical and corporate assistance to the Company's subsidiary, EGSA, in connection with EGSA's strategies and objectives; (B) make available additional funds as an "Additional Loan" no later than May 29, 2009 in an amount not to exceed 93,000,000 (South African Rand) to EGSA so as to allow EGSA to pay all amounts due Investec Bank Limited under the Investec Loan and for EGSA to cancel the security given by or on behalf of EGSA to Investec Bank including, but not limited to, the Borrower's Cession and the Guarantee; (C) convert the Additional Loan and the existing convertible loan of March 31, 2008 in the amount of 32,000,000 (South African Rand) that EGSA received from AIMS and the Phoenix Gold Fund (as amended on March 27, 2009) (the "Original Loan"), both consolidated and totaling 125,000,000 (South African Rand) into 40% of the outstanding common shares of either EGSA or such other entity as the parties agree for purposes of the planned listing of the common stock of the Company and its subsidiaries (or such other entity as the Company and AIMS may determine by subsequent agreement) pursuant to the Listing Commitment. The Restated Agreement also grants AIMS a right of first refusal which provides that the Company shall not obtain any additional funding from any other source unless the Company has first offered AIMS the opportunity to provide such additional funding on no less favorable terms and conditions and AIMS has, after thirty days from the date of receipt of notice, declined to exercise its right of first refusal.
 

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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 2. Plan of Operation.

Critical Accounting Policies and Estimates.  Our Plan of Operations section discusses our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in our Quarterly Report on Form 10-Q for the period ended March 31, 2009

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Our strategy, to the extent that we are able, is to grow our mineral reserves through optimization of current operations, exploration and prudent acquisitions.  The following is a summary of the actions and strategies that we implemented in 2008:

•         Development of the Lily Mine operation

•         Acquisitions

•         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 June 2007 and full conversion from open pit mining to underground mining commenced in January 2009.  All of Lily Mine’s gold production since January 2009 is being derived from underground operations.  To date, some 2,400 meters of underground development has been completed.  This underground tonnage will be treated at the current Makonjwaan mill for the next two years.  The acquisition of the nearby Barbrook Mine, discussed below, with a dormant processing plant has altered the original strategy of building a new plant at the Lily Mine site.  The Barbrook processing plant, which is in the process of being refurbished, will be used to process the ore from Lily Mine’s underground mining operation. 

If our estimates and operating conditions can be maintained and assuming no interruptions in our plans. we anticipate that Lily underground operations may ramp up to full production of around 30,000 tons per month by mid 2010.  If current operating levels can be maintained and if we are successful in meeting the challenges and uncertainties that we face, we expect to produce approximately 14,000 ounces of gold in 2009 for gross revenue of approximately $12,450,000 increasing to approximately 35,000 ounces of gold per year in years 2011 through 2023 for gross annual revenue of approximately $31,400,000 (using a projected gold price of $900/oz.).  These are only estimates and are subject to change and fluctuating market conditions.  The results of the Bankable Feasibility Study (“BFS”) completed in March 2008, include an estimate that the Lily Mine has a life of at least 15 years based on existing mineral reserves.    

The Lily Main Pit opencast operation:

• Commenced in June 2000 and was closed in October 2006.  During this period, 1,012,000 tonnes were successfully extracted at an average grade of 2.89 grams of gold per ton.

• The closure of the Lily Main open pit was timed to coincide with extraction of oxidized ore from the Lily East pit.  Mining continued until August 2007 before the pit was closed due to unstable high wall conditions.  During this period a total of 96,347 tons were extracted having an average grade of 2.27 grams of gold per ton.

• Open pit production commenced at Rosie’s Fortune in July 2007.  This open pit was initially planned to be mined until May 2008 but was found to be sufficiently productive to be continued until December 2008.  A total of 180,572 tonnes were extracted at an average grade of 2.22 grams of gold per ton.

The strategy behind extending open pit mining operations after closure of the Main pit in October 2006 was to maintain cash flow while establishing and preparing the underground workings for production.  This was done with the expectation that the Lily East and Rosie’s Fortune open pit operations would be marginal but profitable.

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The following table summarizes the tons milled, gold produced and operating profit (loss) for the life of the open pit operations to December 2008.

(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

The extensive exploration diamond drilling programs completed since 2005 up to the end of 2008 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.  82 diamond drill holes (with wedges), totaling in excess of 28,800 meters of drilling, have increased reserves from 210,000 ounces at the end of 2004 to an estimated 565,000 ounces by the end of 2008.  The discovery cost is remarkably low at an estimated +/-US$2.00 per ounce during this exploration period. 

The aim of this extensive drilling exercise was twofold:

•         To extend Mineral Reserves along strike and in depth.  The drilling has successfully identified the mineralized zone over 2,000 meters of horizontal strike to 600 meters of vertical depth below surface.

•         To infill between existing drill intersections in certain areas, thereby upgrading the estimation confidence of the Mineral Reserves within the planned underground section of the extended Lily ore body.

The resultant revised Reserves allow for a Life of Mine of 15 years with a production capacity of 32,000 tons per month.

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 these 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.  See Item 1A. “Risk Factors”

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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 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, 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 .  The acquisition was completed on May 30, 2008. 

The acquisition of Barbrook has had the following twofold positive impact on EGI:

•         The planned underground mining operations at Lily Mine, as reported in the BFS (March 2008), required the construction of a new processing plant on site.  The existing processing plant at Barbrook, once refurbished, will substitute for a new plant.  The purchase price of Barbrook was less than half the budgeted cost for the proposed new plant.  The plant, complete with a large slimes dam, is located less than half the distance from Lily Mine (6 km) than its current operating Makonjwaan plant facility (17 km).

•         Barbrook contains substantial mineralized assets and a well developed underground infrastructure including some 50 km of development and readily accessible areas for mining.  Extensions to the processing plant will be required to treat the metallurgically complicated ore bodies once mining commences at Barbrook. This is currently being investigated.  It is planned to geologically model and re-evaluate Barbrook by commencing exploration and primary development with the objective of bringing Barbrook Mine successfully into initial production in 2010.

Currently and based on the due diligence that we completed to date, we believe that 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.

 27

                Historic Production – Barbrook Mine

Note: Information taken from Venmyn (Pty) Ltd Technical Statement January 2007

Based on the information we have available and provided that current trends continue, we believe that the Barbrook Mine looks promising.  Various metallurgical test work 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 EGI’s competent staff in time as additional information becomes available

Barbrook has a well established surface infrastructure (plant, workshops, laboratory, tailings dam, etc) and extensive underground development (>50 km).  Access to the mine is via two adits, respectively on 7 and 10 Levels, separated by 150 meters.  No development exists and very little exploration has been completed below 10 Level, which is at surface river elevation.  All ancillary utilities are operational.

If we are successful in obtaining sufficient financing on reasonable terms and assuming that our current assessments and estimates are not later reduced, we intend to further implement our plans for the operation of the Barbrook Mine. However, there can be no assurance that we will be successful in these efforts.

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.  A further 4,180 meters of exploration diamond drilling was completed during 2008, bringing the total amount of core recovered since 2006 to 9,385 meters. The additional drilling was successful in confirming the down-dip extension of the Worcester mineralized zone below the old mine workings.  It is envisaged that this project will proceed to pre-feasibility status during early 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 in 2009 but we have not made any specific determinations with respect to the extent of the amount of exploration that may be completed in 2009 or the precise time frame for this exploration.

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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 areas:

• Development of the Lily underground mine and new processing plant;
• Exploration of the company’s minerals rights including extensions to Lily and the Worcester project area; and
• Partial financing of acquisitions.

The development of the underground mine at Lily is of primary importance and the capital expenditure is currently estimated at $25 Million.  Breakdown of this estimate is as follows: 

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 $4 Million in additional capital expenditures to achieve the exploration objectives that we have set for the next 12 months.  That estimate may change or increase if further evaluations show that additional expenditures may be needed to fully complete these explorations.

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: 

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.

29

If circumstances and opportunities allow, we may make at least one other acquisition in 2009 and will require funds in order to secure such acquisition or to provide initial support for the acquired operation.  An amount of $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 $25 million for our Lily Mine underground development in the second quarter of 2009 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 that 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 favorable conditions allow 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 second quarter of 2009.  For this we seek to raise $29 million.  Accordingly, as an interim step and as part of our capital raising strategy, in 2008 we completed:

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

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

These interim financings were necessary to implement our plans prior to the main fund raising in the second quarter of 2009.  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.

We are obligated to repay Investec the US $10 million bridging loan facility on or before May 29, 2009.  In the event that we are not successful in repaying this loan or re-negotiating the terms of the loan, we may face the loss of our subsidiary and thus our principal business and assets. While we are hopeful that we will be successful in these efforts, we cannot assure you that we will achieve our objectives.  In that event, any investor who acquires our Common Stock can stand to lose all or substantially all of their investment.

Results of Operations for the Three Months Ended March 31, 2009 and 2008

A summary of our comparative operations, which arise only from mining operations at the Lily Mine for the three months period ended March 31, 2009 and March 31, 2008 were as follows:

* Expressed in Thousands

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Comparative Results of the Three Months Ended March 31, 2009 and 2008

Revenues:   For the 2009 period covering three months of commercial production from January 1, 2009 to March 31, 2009 (“First-Quarter 2009”), we recorded revenues of approximately $1,913,000 from sales of gold versus revenues of approximately $2,185,000 for the three month period from January 1, 2008 to March 31, 2008 (the “First-Quarter 2008”), which amounted to a decrease of approximately 12%.  The principal factors affecting this decrease in revenue were as follows:

•         Ore tons milled in the First-Quarter 2009 was lower than that of First-Quarter 2008 at 35,921 tons, yield had dropped by approximately 9% resulting in lower gold production.  Accordingly, 2,033 oz. of gold was sold in First-Quarter 2009 as compared with 2,378 oz. of gold sold in First-Quarter 2008, a drop of approximately 15%.  This was primarily due to change in the nature of production in that First-Quarter 2008 was totally from open pit operations whereas First-Quarter 2009 was the first output obtained from underground mining activity.  

•         In 2008 sales averaged $916 per ounce of gold, our 2009 sales averaged $903 per ounce of gold; a decrease in the price of gold of approximately 1%.  However, this decrease 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. 

Cost of Production:   Ore tons milled in the First-Quarter 2009 was lower than that of First-Quarter 2008 at 35,921 tons.  During the First-Quarter 2009, we produced and sold 2,033 oz. of gold at a cost of $1,486,000, whereas, during the First-Quarter 2008, we produced and sold 2,378 oz. of gold at a cost of $1,589,000.  Accordingly, per ounce cost of production for the First-Quarter 2009 was $731 whereas per ounce cost of production for First-Quarter 2008 was $668; an increase in the per ounce production of gold of 9%.

Principal factor affecting this increase in cost of production were the change over from open pit production to underground production and that the First-Quarter 2009 was the first production from underground mining activities.

Operating Expenses for the First-Quarter 2009:  Our operating expenses increased to $1,183,000 in the First-Quarter 2009 from $493,000 in the First-Quarter 2008; an increase of approximately 240%. A major factor affecting this was an increase in interest charges of $630,000 on the Company’s loan commitments.     

Changes in Exchange Rates:  Changes in exchange rates had a significant impact on the comparability of our results for the First -Quarter 2009 versus the First -Quarter 2008.  The average rates of exchange for the interim periods ended March 31, 2009 and March 31, 2008 were SAR 9.4283 to $1 and SAR 7.4990 to $1, respectively – approximately 26% weakening of the South African Rand against the US Dollar.  Had the exchange rate remained the same during the First -Quarter 2009 as that of First -Quarter 2008, the results of our operations arising from South African Rand transactions would have been approximately $98,000 higher.

Changes in exchange rates had a significant impact on the comparability of our balance sheets as of March 31, 2009 versus March 31, 2008.  The rates of exchange as at March 31, 2009 and March 31, 2008 were SAR 9.3378 to $1 and SAR 8.1363 to $1, respectively – approximately 15% weakening of the South African Rand against the US Dollar.  Had the exchange rate remained the same in 2009 as that of 2008, our total South African Rand based net assets would have been approximately $1,500,000 higher.  This variation in the main relates to:

•         o ur property, plant and mine development costs which would have been approximately $4,100,000 higher;