ITEM 1.
BUSINESS
General
Sterling Mining Company (“Sterling,” “we,” or the “Company”) is engaged in the business of acquiring, exploring, and developing mineral properties, primarily those containing silver and associated base and precious metals. The Company was incorporated under the laws of the State of Idaho on February 21, 1903. The Company is headquartered at 609 Bank Street, Wallace, ID 83873. The Company’s executive offices are located at 2201 Government Way, Suite E, Coeur d’Alene, Idaho 83814. The Company maintains additional offices in Kellogg, Idaho, and in Zacatecas, Mexico, to support our operations.
The Company was founded in 1903 by John Presley. The Company initially staked the East-West Link claims which are still held by the Company. In the first 30 years, early exploration included the driving of six tunnels onto the property. In 1951, Day Mines and later associated entities leased the key Sterling property for exploration purposes. In 1996, Coeur d’Alene Mines Corporation (through a subsidiary) leased the original Sterling East-West link claims. In 1998, the Company embarked on an expansion program in the Silver Valley to add silver exploration prospects. Beginning with 340 acres of mining claims, this expansion program reached a total of over 23,100 acres under control by ownership, lease or option by 2007.
Sterling is generally not affected by seasonality. The only seasonal affect on the Sunshine Mine could be a delay of supplies in the winter due to extreme snowfall preventing delivery of mine supplies.
Business Plan and Plan of Operations
The Company operates in two geographical locations or segments. The first is the Company’s exploration and development of mineral properties in the Northwestern part of the United States, where the Company’s principal focus is on rehabilitating and bringing back into production the Sunshine Mine in Idaho. The other geographical segment is in Mexico, where the Company has, since 2005, been producing at its Barones facility and exploration on its other prospects and projects in and around the State of Zacatecas, Mexico. Certain financial information pertaining to the Company’s geographical segments for the fiscal years ended December 31, 2007, 2006, and 2005, is presented in Note 11 of the Notes to Consolidated Financial Statements of the Company in this report.
The Company’s corporate business plan is to (i) expand its silver assets and production; (ii) explore and develop the Sunshine Mine with an objective of return to full and sustainable production; (iii) develop and implement a capitalization strategy to increase liquidity for shareholders; and (iv) acquire or develop a pipeline of silver prospects and projects designed to provide leverage to silver and cash flow.
The Company has identified the regional mineral geology of the Pacific Northwest, stretching from the U.S.-Canadian border south through Idaho then turning east into Montana, as a possible area for exploration and the Company has particularly focused on the Coeur d’Alene Mining District in Idaho. Within this district, the Company is seeking, through exploration or acquisition, to build a portfolio of assets ranging from exploration prospects to former producing mines. The Company has chosen silver as the prime metal that it will seek to acquire and develop.
The Company’s primary objective is to return the Sunshine Mine to long-term sustained production; thus the Company has placed a heavy emphasis on a revised business plan, exploration and development, and the addition of an “upper country” exploration strategy, as part of its plan to methodically bring the project forward. In late 2005, and through 2006, the Company’s activity with respect to the Sunshine Mine included finalization of the Phase III Mine Planning Study, surface infrastructure rehabilitation, initiation of underground rehabilitation of infrastructure, and expansion of the surface and underground “upper country” exploration program. The Phase III activities included the following: continued renovation and development of the Sunshine Mine; addition of experienced mining professionals with underground mining experience; assessment of the cost of returning the Mine to full production; review of a conceptual mine plan by an independent engineering firm; and development of a final mine plan.
The Company’s business plan for its Mexican properties includes the following: focus on expanding production at its Barones facility; conduct metallurgical tests of exploration properties; drilling and evaluation of these properties in order to develop an exploration program; and seeking joint venture partners.
The Silver Market
Our primary focus is on exploration, development and production of silver. The worldwide demand for silver has exceeded newly-mined production for several years. The difference between demand and supply is primarily being made up by re-melting of bullion and silver coins, and other recycling effects. Much of the future value and/or viability of the Company is dependent on the price of silver, which the Company is unable to control. However, the Company believes, and has established its business strategy
accordingly, that if the demand for silver continues to exceed production silver prices will increase further. However, there is no assurance this will occur.
The current principal uses of silver are for industrial uses including electrical and electronic components, batteries, computer chips, electrical contacts, high technology printing, photography, jewelry and silverware. Silver’s strength, malleability, ductility, thermal and electrical conductivity, sensitivity to light and ability to endure extreme changes in temperature combine to make silver a widely used industrial metal. Silver’s anti-bacterial properties also make it usable in medical technology and in water purification.
According to the Silver Institute, an international industry association of miners, refiners, fabricators and silver wholesalers, Global Silver Fabrication, demand for silver was 841 million ounces in 2006. Global Silver Mine production accounts for just over 646 million ounces, resulting in a significant shortfall. Increased demand is not only from the jewelry (25%) and photographic (16%) sectors, traditionally the largest users of silver, but also from growing demand for silver’s industrial (47%) uses in electrical devices and components such as computers and cellular telephones.
A significant portion of all newly mined silver comes as a by-product in the production of other metals such as gold or copper, thus to a certain degree this means that an increase in the price of silver does not automatically bring about an increase in production as it might other commodities. The mining industry is subject to an increasing amount of government regulation and environmental laws over the last 30 years and is highly capital-intensive, thus to put a new mine into production can take two to five years under the best circumstances.
The Price of Silver and Sterling Mining Company
The price of silver can affect the Company in several ways. A low price of silver may permit the Company to acquire silver assets at a lower cost than would otherwise be the case. An increasing price of silver can affect public perception of the value of the Company and its assets, and improve the revenue potential of present and proposed operations. The Company believes a sustained silver price in excess of $6.50 per ounce, depending on the project, is required to permit the possibility of production by the Company.
The following table sets forth the London Metal Exchange’s high and low prices of silver in U.S. dollars per ounce:
*
Through March 25, 2008
Employees
As of December 31, 2007, the Company had 139 full-time employees in the United States and 45 full-time employees in Mexico. As circumstances require, the Company intends to utilize the service of consultants to provide additional services to the Company.
Competition
There is aggressive competition within the minerals industry to discover and acquire properties considered to have commercial potential. The Company competes for the opportunity to participate in promising exploration projects with other entities, such as Coeur d’Alene Mines Corporation and Hecla Mining Company, Stillwater Mining Company, and Kinross, who have greater resources than the Company. In addition, the Company competes with these entities in efforts to obtain financing to explore and develop mineral properties.
The Company also encounters competition for the hiring of personnel, as the mining industry has a very tight labor situation for experienced mining professionals industry-wide. This competition affects our operations in Idaho, Montana and Mexico. Larger regional companies such as Coeur d’Alene Mines Corporation, Hecla Mining Company, Stillwater Mining Company, and Kinross in the Pacific Northwest can offer better employment terms as compared to smaller companies such as the Company.
The Company also competes for mine service companies, in particular drilling companies. Potential suppliers may choose to provide better terms and scheduling to larger companies in the industry.
Regulation
The Company’s activities in the United States are subject to various federal, state, and local laws and regulations governing prospecting, development, production, labor standards, occupational health and mine safety, control of toxic substances and other matters involving environmental protection and taxation. In particular, the Sunshine Mine must follow the rules and regulations of numerous agencies. The Company has hired a full-time Environmental Manager and a part-time Environmental Compliance Manager who was in a similar position at the former Sunshine Mining Company for over 30 years. The Company also has a full-time Safety Officer at the Sunshine Mine.
It is possible that future changes in these laws or regulations could have a significant impact on the Company’s business, causing those activities to be economically reevaluated at that time.
Future Information and Reports
We are required to file with the Securities and Exchange Commission annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports of certain events on Form 8-K, and proxy and information statements disseminated to stockholders in connection with meeting of stockholders and other stockholder actions. Copies of these and any other materials we file with the Commission may be inspected without charge at the public reference facilities maintained by the Commission in Room 1580 - 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of our filings may be obtained from the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, upon payment of the prescribed fees. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s filings with the Commission are also available through its web site at http://www.sec.gov. We are also required to file annual and quarterly reports with the Toronto Stock Exchange (TSX) which are filed on SEDAR. The Company’s filings with the TSX are available through its web site at http://www.sedar.com.
The Company maintains a website at the following URL: www.sterlingmining.com.
ITEM 1A.
ITEM 1A.
RISK FACTORS
The following is a discussion of risks we believe to be significant with respect to our business, operations, financial condition and other matters pertaining to an investment in our common stock. It is not possible to anticipate or predict every risk that may, in the future, prove to have a significant affect on the Company. Additional risks, including those that are currently not known to us or that we currently deem immaterial, may also impair our business operations.
Risks Related to our Common Stock
If we complete additional equity financings, our existing shareholders will experience dilution.
Sterling believes its current working capital will be sufficient, based on the current business plan, to complete the development work necessary to reach full production capacity at the Sunshine Mine. We cannot predict, at this time, what level of production may be achieved, how it will impact revenue in 2008, or whether we will achieve positive cash flow from operations. Should unexpected events affect planned production or cash flow from operations not become positive in 2008 for any reason, we may be required to seek additional equity or debt financing. Any additional equity financing that it obtains or the exercise of existing warrants would have the effect of diluting existing shareholders.
There is limited liquidity for our common stock.
Quotations for our common stock are published on the Over the Counter Bulletin Board, and the TSX. The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than other markets. Purchasers of our common stock may therefore have difficulty selling their shares should they desire to do so, and the lack of liquidity could adversely affect the market price for our common stock.
Risks Related to our Business
We have a limited recent operating history on which to evaluate our potential for future success. We also have a history of net losses.
Although the Company was founded in 1903, the Company was dormant for many years and was reactivated in 1998 with substantial activity beginning in 2003. The Company’s business since that time represents a limited operating history upon which shareholders or prospective shareholders can evaluate the Company’s business and prospects. We have a history of net losses. Furthermore, since our reactivation in 1998, we have not generated sufficient revenues to cover our expenses and costs. If we are unsuccessful in generating our business, results of operations and financial condition will be materially and adversely affected.
The Company has limited capital and has minimal revenue to date and may thus need to obtain additional capital to continue operations.
Over the five-year period ended December 31, 2007, our cumulative revenues were $3,167,459, and we did not have any significant revenues from operations until 2005. As a mineral exploration company, we will sustain operating expenses without corresponding revenues. This will result in significant net operating losses until the Company can bring a property into production or lease, joint venture or sell the properties. The Company will need to obtain additional financing in the future to fund future exploration and development activities or acquisitions of additional properties or other interests that may be appropriate to enhance the Company’s financial or operating interests. If the Company’s exploration programs successfully locate an economic ore body, additional funds will be required to place it into commercial production. Substantial expenditures would be required to establish ore reserves through drilling, to develop metallurgical processes to extract the metals from the ore and to construct the mining and processing facilities at any site chosen for mining.
If the Company fails to obtain additional financing, it will have to delay or cancel further exploration, and it could lose all of its interest in its properties. The Company has historically raised capital through equity financing and in the future may raise capital through equity or additional debt financing, joint ventures, production sharing arrangements or other means. There can be no assurance that the Company will be able to obtain necessary financing in a timely manner on acceptable terms, if at all. If additional financing is not available, it may have to postpone the development of, or sell, one or more of its property interests.
Our accounting and other estimates may be imprecise.
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, liabilities, revenue and expenses at the date of the consolidated financial statements and reporting periods. The more significant areas requiring the use of management assumptions and estimates relate to:
·
Mineral reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations;
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Future metals prices;
·
Environmental, reclamation and closure obligations;
·
Asset impairments, including long-lived assets and investments;
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Reserves for contingencies and litigation; and
·
Deferred tax asset valuation allowance.
Actual results may differ materially from these estimates using different assumptions or conditions. For additional information, see Critical Accounting Estimates in MD&A, Note 1 - Significant Accounting Policies of Notes to Consolidated Financial Statements and the risk factors: “Our development of new orebodies and other capital costs may cost more and provide less return than we estimate,” “Our ore reserve estimates may be imprecise” and “Our environmental remediation obligations may exceed the provisions we have made.”
We may lose rights to properties if we fail to meet payment requirements or development or production schedules.
We derive the rights to most of our mineral properties from unpatented mining claims, leaseholds, joint ventures or purchase option agreements, which require the payment of maintenance fees, rents, or purchase price installments, exploration expenditures, or other fees. In 2005, 2006 and 2007, these fees totaled $ 2,794,511, $3,701,487 and $2,644,491 respectively, and, based on properties in which the Company currently has an interest, are expected to total $473,300 for 2008. If we fail to make these payments when they are due, our rights to the various properties may lapse. There can be no assurance that we will always make payments by the requisite payment dates. In addition, some contracts with respect to our mineral properties require development or production schedules. There can be no assurance that we will be able to meet any or all of the development or production schedules. Our ability to purchase, transfer or sell rights to mineral properties may require government approvals or third party consents, which may not be granted.
The Company’s operations in Mexico are subject to risks associated with the conduct of business in foreign countries.
The Company conducts mining, development or exploration activities in the United States and Mexico. The Company’s foreign mining investments are subject to the risks normally associated with the conduct of business in foreign countries. These risks may include invalidation of governmental permits, uncertain political and economic environments, arbitrary changes in laws or policies and limitations on foreign ownership. The occurrence of one or more of these risks could have a material and adverse effect on our interest and investment in foreign properties, or on the viability of affected foreign operations and our results of operations.
The Company could face environmental liabilities with respect to its Sunshine Mine that could have a significant adverse effect on the Company’s results of operations.
In 1994, Sunshine Mining and Refining Company (former owner of the Sunshine Mine) determined it was a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), and entered into a Consent Decree with the Environmental Protection Agency (“EPA”) and the State of Idaho concerning environmental
remediation obligations at the Bunker Hill Superfund site, a 21-square mile site located near Kellogg, Idaho. The 1994 Consent Decree (the “1994 Decree”) settled their response-cost responsibility under CERCLA at the Bunker Hill site. In August 2000, Sunshine Mining and Refining Company filed for Chapter 11 bankruptcy and in January 2001, the United States Federal District Court in Idaho approved a new Consent Decree between Sunshine Mining and Refining Company, the U.S. Government and the Coeur d’Alene Indian Tribe, which settled its environmental liabilities in the Coeur d’Alene River Basin and released it from further obligations under the 1994 Decree.
We inherited the Sunshine Mine obligations under the new Consent Decree when we acquired our interest in the property, which means we may be required to pay royalties if the price of silver is at certain levels when we begin recovering silver from the mine. Other properties acquired by Sterling which surround the Sunshine Mine are not subject to the royalty as Sterling is not a party to the Consent Decree. While we do not expect the royalty payments will impact our ability to operate profitably in relation to operation of the mine or our results of operations when production commences, this history highlights the fact that environmental regulation and litigation for past, present, or future mining operations can have significant effects on a mining company and its ability to operate successfully.
Some of the Company’s directors and officers may have conflicts of interest as a result of their involvement with other natural resource companies.
Some of Sterling’s directors and officers are directors or officers of other natural resource or mining-related companies. These associations may give rise to conflicts of interest from time to time. There is no assurance these conflicts will be resolved in favor or to the benefit of Sterling. If a conflict of interest situation arises and it is not resolved appropriately with respect to the interest of Sterling, the result could have an adverse effect on Sterling’s participation in business opportunities, the manner in which the operations of Sterling are managed, or Sterling’s results of operations.
Sterling’s insurance coverage for its mine operations is limited, so the occurrence of a substantial uninsured loss would have significant adverse effect on Sterling’s financial condition and results of operations.
Insurance coverage for Sterling’s mining operations now and in the future is limited by what is affordable to Sterling and by the types and limits of coverage available at rates that are reasonable in relation to the risk. Sterling’s insurance may not provide sufficient insurance coverage for losses related to property, business interruption, or liability. In addition, Sterling does not have coverage for certain environmental losses and other risks; as such coverage cannot be purchased at a commercially reasonable cost. If a substantial uninsured loss or liability should arise, the resulting expense would negatively impact results of operations and paying for the loss or liability would adversely affect the Sterling’s financial condition.
Risks Related to Our Industry
Mineral exploration is by its nature highly speculative and capital intensive.
Most of the Company’s properties are considered mineral exploration properties. Mineral exploration is highly speculative and capital intensive. Most exploration efforts are not successful, in that they do not result in the discovery of mineralization of sufficient quantity or quality to be profitably mined. The operations of the Company are also indirectly subject to all of the hazards and risks normally incident to mineral exploration. These risks include: insufficient ore reserves, fluctuations in production costs that may make mining of reserves uneconomic, significant environmental and other regulatory restrictions, labor disputes, geological problems, failure of pit walls or dams and the risks of injury to persons, property or the environment.
The titles to some of our properties may be uncertain or defective, thus risking our investment in such properties.
Certain of our United States mineral rights consist of “patented” and “unpatented” mining claims created and maintained in accordance with the U.S. General Mining Law of 1872. Unpatented mining claims are unique U.S. property interests, and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations that supplement the General Mining Law. Also, patented and unpatented mining claims and related rights, including rights to use the surface, are subject to possible challenges by third parties or contests by the federal government. The validity of an unpatented mining claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining claims. While we have no reason to believe that the existence and extent of any of our properties are in doubt, title to mining properties are subject to potential claims by third parties claiming an interest in them.
Our development of new orebodies and other capital costs may cost more and provide less return than we estimated.
Capitalized development projects may cost more and provide less return than we estimate. If we are unable to realize a return on these investments, we may incur a related asset write-down that could adversely affect our financial results or condition.
Our ability to sustain or increase our current level of production of metals partly depends on our ability to develop new orebodies and/or expand existing mining operations. Before we can begin a development project, we must first determine whether it is economically feasible to do so. This determination is based on estimates of several factors, including:
·
Ore reserves;
·
Expected recovery rates of metals from the ore’
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Future metals prices;
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Facility and equipment costs;
·
Availability of affordable sources of power and adequacy of water supply;
·
Exploration and drilling success;
·
Capital and operating costs of a development project;
·
Environmental considerations and permitting;
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Adequate access to the site, including competing land uses (such as agriculture and illegal mining);
·
Currency exchange and repatriation risks;
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Applicable tax rates;
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Foreign currency fluctuation and inflation rates;
·
Political risks and regulatory climate in the foreign countries in which we operate; and
·
Availability of financing.
These estimates are based on geological and other interpretive data, which may be imprecise. As a result, actual cash operating costs and returns from a development project may differ substantially from our estimates as a result of which it may not be economically feasible to continue with a development project.
Our ore reserve estimates may be imprecise.
Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. You are strongly cautioned not to place undue reliance on estimates of reserves. Reserves are estimates made by our professional technical personnel, and no assurance can be given that the estimated amount of metal or the indicated level of recovery of these metals will be realized. Reserve estimation is an interpretive process based upon available data and various assumptions. Our reserve estimates, particularly those for properties that have not yet started producing, may change based on actual production experience. Further, reserves are valued based on estimates of costs and metals prices, which may not be consistent among our operating and nonoperating properties. The economic value of ore reserves may be adversely affected by:
·
Declines in the market price of the various metals we mine;
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Increased production or capital costs;
·
Reduction in the grade or tonnage of the deposit;
·
Increase in the dilution of the ore; and
·
Reduced recovery rates.
Short-term operating factors relating to our ore reserves, such as the need to sequentially develop orebodies and the processing of new or different ore grades, may adversely affect our ash flow. We may use forward sales contracts and other hedging techniques to partially offset the effects of a drop in the market prices of the metals we mine. However, if the prices of metals that we produce decline substantially below the levels used to calculate reserves for an extended period, we could experience:
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Delays in new project development;
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Net losses;
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Reduced cash flow;
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Reductions in reserves; and
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Write-down of asset values.
Reserve estimation is a major risk inherent in mining. Our reserve estimates, which drive our mining investment plans and many of our costs, may change based on economic factors and actual production experience.
Exploration programs may not result in a commercial mining operation, resulting in expensing our investment.
Mineral exploration involves significant risk because few explored properties contain bodies of ore that would be commercially economic to develop into producing mines. The determination of whether the extraction and production of mineral deposits are economic is affected by numerous factors beyond our control. These factors include market price fluctuations for precious metals, the proximity and capacity of natural resource markets, processing equipment and government regulations. If exploration programs do not result in the discovery of commercial ore, our investments in the properties will be expensed.
We may be subject to risks and expenditures that may be financially burdensome in connection with the safety and regulation of operations at the Sunshine Mine.
Our U.S. mining operations are subject to inspection and regulation by the Mine Safety and Health Administration of the United States Department of Labor (“MSHA”) under the provisions of the Mine Safety and Health Act of 1977. The Occupational Safety and Health Administration (“OSHA”) also has jurisdiction over safety and health standards not covered by MSHA. Our policy is to comply with applicable directives and regulations of MSHA and OSHA. We have made, and expect to make in the future, significant expenditures to comply with these laws and regulations. Changes to the current laws and regulations governing the operations and activities of mining companies, including changes to the U.S. General Mining Law of 1872, and permitting, environmental, title, health and safety, labor and tax laws, are actively considered from time to time. We cannot predict which changes may be considered or adopted and changes in these laws and regulations could have a material adverse impact on our business. Expenses associated with the compliance with new laws or regulations could be material. Further, increased expenses could prevent or delay exploration or mine development projects and could therefore affect future levels of mineral production.
The Company may be significantly affected by fluctuations in the price of silver.
The business and financial performance of the Company will be significantly affected by fluctuations in the price of silver. The price of silver is volatile, can fluctuate substantially and is affected by numerous factors that are beyond the control of Sterling, including industrial and jewelry demand around the world, the strength of U.S. dollars and of other currencies, inflation and regional and global politics. If silver prices should decline significantly and remain at low market levels for a sustained period, the Company would be adversely affected and it may be unable to operate at a profit.
A substantial or extended decline in metals prices would have a material adverse effect on us.
The majority of our revenue is derived from the sale of silver and, as a result, our earnings are directly related to the prices of these metals. Silver prices fluctuate widely and are affected by numerous factors, including:
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Speculative activities;
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Relative exchange rates of the U.S. dollar;
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Global and regional demand and production; and
·
Political and economic conditions.
These factors are largely beyond our control and are difficult to predict. If the market prices for these metals fall below our production or development costs for a sustained period of time, we will experience losses and may have to discontinue exploration, development or operations, or incur asset write-downs at one or more of our properties.
The following table sets forth the average daily closing prices of silver for 2001 through 2007.
(1) London Fix
On December 31, 2007, the closing price for silver was $16.74 per ounce.
We may be subject to environment risks and land reclamation requirements for mineral properties that may be financially burdensome.
We are subject to potential risks and liabilities associated with environmental compliance and the disposal of waste rock and materials that could occur as a result of our mineral exploration and production. To the extent that we are subject to environmental liabilities, the payment of such liabilities or the costs that we may incur to remedy any non-compliance with environmental laws would reduce funds otherwise available to us and could have a material adverse effect on our financial condition or results of operations. If we are unable to fully remedy an environmental problem, we might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy. The potential exposure may be significant and could have a material adverse effect on our operations and financial condition. We have not purchased insurance for environmental risks (including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from exploration and production) because it is not generally available at a reasonable price or at all.
Although variable depending on location and the governing authority, land reclamation requirements are generally imposed on mineral exploration companies in order to minimize long term effects of land disturbance. Reclamation may include requirements to control dispersion of potentially deleterious effluents and to reasonably re-establish pre-disturbance land forms and vegetation. In order to carry out reclamation obligations imposed on the Company in connection with its mineral exploration, the Company must allocate financial resources that might otherwise be spent on further exploration programs.
We face competition in the acquisition of mining properties and the recruitment and retention of qualified personnel.
The Company competes with other mineral exploration and mining companies, many of which have greater financial resources than us, for the acquisition of mineral claims, leases and other mineral interests as well as for the recruitment and retention of qualified
employees and other personnel. If the Company requires and is unsuccessful in acquiring additional mineral properties or personnel, it will not be able to grow at the rate it desires or at all.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments with the Securities and Exchange Commission.
ITEM 2.
ITEM 2.
PROPERTIES
COEUR D’ALENE MINING DISTRICT
Overview
The Silver Valley of Idaho, a region noted for its historical silver production, is located in a heavily mineralized zone in northern Idaho. In the Silver Belt of the region, mineralization is found primarily in the Revett and St. Regis Formations.
The Company is primarily focused on locating, purchasing or leasing mining claims in key positions throughout the Silver Valley. Through December 31, 2007, the Company controlled through ownership or lease over 23,100 acres.
The Sunshine Mine property is the flagship of Sterling-controlled landholdings from which to develop other properties and landholdings within the Coeur d’Alene Mining District.
The following map shows the locations of our various properties in the Coeur D’Alene Mining District near Kellogg, Idaho.
The table below summarizes the Company’s Coeur d’Alene Mining District land holdings by property and their corresponding acreage:
*
Sunshine group includes the leased Chester, Mineral Mountain, Merger, Metropolitan, Bismark and United Mines properties. See “Sunshine Property” table for detail on the Sunshine Group properties.
Geology of the District
The district is hosted by the rocks of the Pre-Cambrian Belt super group. These sedimentary rocks were deposited approximately 1.6 billion years ago. At various times these rocks were faulted, leached, altered and re-mineralized. The Belt super group has been divided into the Prichard group, Ravalli group, Middle Carbonate group, and Missoula group. Within the Coeur d’Alene Mining District, rocks of the Prichard, Ravalli, and Middle Carbonate groups can be found. The formations comprising the Ravalli group are the preferred host rocks for silver mineralization in the district. These formations are from older to younger Burke, Revett, and Saint Regis.
The District has a history of intense faulting and folding of these rock formations. Two major east-west fault zones, the Osburn and Placer Creek faults, cut through the District and, although mineralization does not necessarily occur along these fault zones, the district ore bodies are intimately associated with this and other faulting.
The combination of faults, fractures, folds and favorable host rocks found in the District has created suitable conditions for lead-zinc-silver mineralization. The geology of the District may display little or no indication of mineralization on the surface, and many of the successful silver mines in the District did not realize their full potential and best grade of ore until after a depth of at least 1,700 feet was reached in the development and exploration. Examples include the Galena, Sunshine and Lucky Friday Mines, thus mining claims in the District often require deep drilling from the surface or underground drilling to determine whether commercial grade ore bodies are present. Exploration of land near major mines is often easier to target for exploration and development from existing shafts. In other silver producing areas, a deposit may bottom out at a few thousand feet below surface. However, in the Coeur d’Alene Mining District, this is not necessarily the case, as deep extensions of primarily silver mineralization are faulted and folded, which may have moved the favorable host rocks deeper.
Sunshine Property
Background
The Sunshine Mine was a significant primary silver mine from 1884 to 2001. The mine facility includes extensive underground workings including shafts, levels, raises and ramp systems extending to depths of 6,000 feet below ground and a broad database reflecting over 100 years of exploration, development and production.
The mine ceased production in the first quarter of 2001 as a result of several factors, including the low price of silver and the lack of regular and consistent exploration and development activities. The Company acquired control of the Sunshine Mine in June 2003 through a lease with option to purchase agreement. Beginning in August 2003, and followed by the initial drilling in the fall of 2004, the Company is continuing and expanding an exploration program. The process of rehabilitation of the underground areas of the mine began in 2004. The Company commenced initial production in December 2007 and is methodically working towards returning the Sunshine Mine to long-term sustained production.
Land Position and Ownership
The Sunshine property comprises 5,930 patented and unpatented acres including substantial infrastructure and equipment. Mine workings and surface facilities include: the Jewell surface shaft, two surface access levels, six internal shafts, 17 major underground levels, numerous raises, boreholes, sublevels and inclined haul roads, the Polaris concentrating mill, machines shops, warehouses and offices. The Sunshine property also includes the Chester, Mineral Mountain, Merger, Metropolitan, Bismark and United Mines properties that are leased by the Company. These properties are described in more detail below.
The following table sets out the various properties that comprise the Sunshine property:
On June 6, 2003, the Company leased the Sunshine Mine and infrastructure, including historical records, from Sunshine Precious Metals, Inc. (“SPMI”) for a term of 15 years. Annual lease payments are $120,000 per year, payable in monthly increments. The Company also agreed to assume approximately $840,000 in outstanding county property tax liabilities and, in a separate transaction, purchased various items of equipment in exchange for $396,000, payable in six monthly installments. The Company has the option to purchase the property at a price ranging from $3.0 to $5.0 million, depending on the spot price of silver as of the date of exercise.
In late 1998, SPMI implemented a Consent Agreement which settled various issues with the EPA, State and Coeur d’Alene Tribe as SPMI’s settlement of a federal natural resource damage suit involving active mining companies in the Coeur d’Alene Mining District. In addition to conveying surface ownership of some patented mining claims, portions of the property may be subject to certain royalties to government and tribal entities as part of a settlement action. Specifically, the Company may be required to pay a royalty indexed to the average silver price. The quarterly NSR royalty payment ranges from zero percent (0%) at silver prices less than $6.00 to a maximum of seven percent (7%) at silver prices $10.00 and over. The Company cannot predict or control the future price of silver and therefore cannot predict the royalties or if they will be material.
Access
The Jewell Shaft side or west side of the Sunshine Mine is approximately three miles south from Interstate 90 at Exit 54 via Big Creek Road. Big Creek Road is a two-lane, paved road to the mine site and is suitable for all transportation needs of the mine.
The Silver Summit side, or east side, of the mine is approximately 1,000 feet south on Johnson Street from its intersection with Yellowstone Avenue in the city of Osburn, Idaho, via paved and maintained gravel roads suitable for routine mining and exploration activities at this mine entrance.
The Chester, Mineral Mountain, Merger and United Mines lease groups that are part of the Sunshine mining block are accessible via National Forest Service road NF-330 from Big Creek Road approximately 200 feet south of Interstate 90 Exit 54. This is an unimproved dirt road suitable for exploration access and activities.
The Metropolitan mining lease group that is part of the Sunshine mining block is accessible via Big Creek Road approximately one mile south of the Sunshine Mine. This is an improved Shoshone County maintained dirt road suitable for exploration access and activities.
The Bismark mining lease group that is part of the Sunshine mining block is accessible via West Fork Big Creek Road from its junction with Big Creek Road approximately three-quarters of a mile south of the Sunshine Mine. This is an unimproved to primitive dirt road suitable for exploration access and activities.
Power and Water
Electrical power to the Sunshine Mine is provided by Avista Utilities, Inc. (formerly Washington Water Power) at 13,200 volts from two separate primary feeds. The first is adjacent to Big Creek Road to the mine site where it supplies power to two on-site substation metering points, the north and the south. Both on-site substations reduce the feed voltage to either 2,300 or 480 volts depending on motor requirements. The south substation metering point feeds 13,200 volts down the Jewell Shaft to underground substations for transformation to lower voltages.
The second primary feed is brought to the Silver Summit mine site (east side of the mine) adjacent to Johnson Street in the City of Osburn, Idaho. A small transformer is located at the mine site to provide 480 volt power to surface facilities. The primary feed is taken underground at 13,200 volts via the Silver Summit Tunnel to the Silver Summit hoist room, where it is transformed to 2,400 or 480 volts depending on motor requirements.
Water for mine and processing operational requirements, including fire protection, is supplied via Big Creek, a tributary to the South Fork of the Coeur d’Alene River, upon which sufficient water rights are controlled to provide water for any foreseeable needs. Water conservation is practiced in both mine and processing operations.
Infrastructure
Surface mine plant facilities at the Sunshine Mine include the Jewell Shaft hoisting machinery, compressor plant and distribution system, 13,200 volt electrical substations, complete concentrating mill, repair shops, electrical shop, warehouse, water distribution system, independent fire protection system, heating plant, change rooms, office buildings and the Big Creek tailings impoundment.
The Sunshine Mine is serviced by the Jewell Shaft, Sterling Tunnel and Silver Summit Tunnel and Shaft. The Sterling Tunnel accesses the “upper country” of the mine and connects to the Silver summit Tunnel. The Jewell Shaft is the primary entry and the primary escapeway to and from lower levels while the Silver Summit is used as a secondary access and is the required secondary escapeway from lower levels of the Sunshine Mine. Both shafts are an integral part of the mine ventilation system. Five additional shafts on deeper levels are used for various purposes, including ventilation and water management. The Jewell Shaft, which extends vertically down to the 4,000 foot level is serviced by a Nordberg 700 horsepower double drum hoist for ore, waste and large equipment movement and a separate Nordberg “chippy” (single drum) hoist is used to distribute personnel, small equipment and supplies. The Silver Summit Shaft is serviced by a completely renovated 600 horsepower Coeur d’Alene double drum hoist.
Since 2003, the Company has been actively renovating and maintaining the mine facilities and equipment. Completion of the lower mine’s secondary escapeway was achieved in December 2007 and will allow production to resume from lower levels. Mine activities continue to be guided by a plan developed to rehabilitate the infrastructure and mine plant in order to sustain and increase production that commenced in December 2007.
Mineralogy
Typically the Sunshine ore consists principally of tetrahedrite, the high silver-containing copper antimony sulfide. This silver bearing tetrahedrite is properly called freibergite. Freibergite contains three to thirty percent silver substituting for the copper in the crystal structure. Galena is present in the West Chance Vein.
Reserve Statement
Sterling commissioned Behre Dolbear & Company (USA), Inc. (Behre Dolbear), an independent consulting firm, to provide a feasibility analysis of the re-start of operations at Sterling’s Sunshine Mine in the Coeur d’Alene Mining District at Big Creek near Kellogg, Idaho, and based on the feasibility analysis, determine the Proven and Probable Reserves present at the property. Behre Dolbear produced a report titled “Sterling Mining Company, Sunshine Mine, Phase 2, Development of Mineable Reserves and Re-start of Sunshine Mine Operations.”
The report on the analysis reads in part “Behre Dolbear has verified that the plans for future operations have been based on adequate data formulated in accordance with sound mining and engineering practice, to assure that the mine can achieve its intended capacity within the capital and cost budget estimates.” The report adds “This Phase 2 feasibility study indicates that 23,486,698 ounces of silver, currently [sic] classified as Mineralized Material has been brought into the classification of Proven and/or Probable Reserves.” It was noted in the report that “Behre Dolbear has not included unidentified mineralization in the mining reserve and has restricted the economic analysis to Proven and Probable ore reserves.
Sterling did not mine any of the proven and probable reserves during the fiscal year ended December 31, 2007, but has begun mining these reserves in 2008. A 15% mine recovery loss was deducted to arrive at Behre Dolbear’s estimate of Mineable Proven Reserves presented herein. The proven and probable reserves at Sterling’s Sunshine Mine at December 31, 2007 are shown in the table below as developed in the Behre Dolbear report.
(1) Silver grades are rounded numbers
(2) The above reserves were calculated using operating costs of $6.92 per Ag oz., and a silver price of $10.00.
Metallurgy and Milling
The current metallurgical facilities include a 1,000-ton per day flotation mill with a projected silver recovery rate of 96 to 97 percent. Both silver and lead concentrates were formerly produced and shipped to the former ASARCO East Helena Smelter which is now closed. Future production could most likely need to be shipped to an offshore smelter. Sunshine silver concentrate typically exceeds 1,000 ounces per ton silver.
In 2006, Sterling purchased a tailings pond, critical to the disposal of tailings after ore processing, and related water discharges.
In September 2007, the Number 3 ball mill was returned to operation allowing processing of upper country vein material that culminated in shipping the mine’s first concentrates to a smelter in December 2007. The Company is currently studying terms and options for a longer term smelter contract.
Environmental
The Sunshine Mine, which Sterling acquired in 2003, operated near continuously from 1884 to 2001, with various changes in production levels and extraction, beneficiation and processing method since that time. As such, many process emissions, discharges and waste management activities may be grandfathered under the state and federal regulatory framework. Further, the land position involves mostly patented claims; therefore surface and underground operations have required less regulatory burden that would have been the case if incurred on unpatented mining claims. In addition, in late 1998, Sunshine Precious Metals, Inc. implemented a Consent Agreement which settled various issues with the EPA, State and Coeur d’Alene Tribe. The Company has a full-time Environmental Manager, an Environmental Specialist, and a part-time Environmental Compliance Manager, who continually review environmental matters and requirements for future plans.
To the best of the Company’s knowledge, all required permits are in place, or under extension where applicable, to operate the Sunshine facility. A preliminary environmental assessment was completed and supports the past understanding of permits and environmental conditions at the project. Further environmental assessments will be ongoing to better understand current conditions and operations permit conditions.
The Company operates in an environmentally sensitive area and nearby is a “Superfund” designated site. It is to be expected, notwithstanding the consent decree signed in 2001 by the former operator, that ongoing environmental issues will require our attention.
Prior to closure, the Sunshine Mining Company settled a natural resources damage suit with the federal government that gave surface rights to many patented claims to the Environmental Protection Agency (EPA) and the Coeur d’Alene Tribe. The settlement included a royalty payable to the Coeur d’Alene Tribe that is indexed to the price of silver for production from those claims owned by Sunshine at the time of the suit. This action limits future disturbance on the surface covered by those claims and may result in the need for negotiations for any future surface access. However, it is important to note that all access by way of underground workings for either exploration or production was retained by the mine.
After closure of the mine, Sunshine Mining Company sold the Big Creek tailings impoundment, the antimony plant and silver refinery to Essential Metals Company, but retained rights to use the impoundment. This right to use the tailings impoundment was covered in the Company’s lease agreement. In 2006, the Company purchased the tailings impoundment from Essential Metals Company.
A water treatment facility is being installed to treat mine waters from dewatering activities. The Company will continue to review water treatment technology for potential improvements to the system being installed.
One other significant environmental issue is site remediation and reclamation following ultimate closure. The Company has purchased a Certificate of Deposit, required by the state to address the issue of future mine remediation and reclamation costs.
Business Plan
The Company established a goal of returning the Sunshine Mine to long-term, sustainable production. To this end, the Company has developed a three-phase plan to accomplish this goal.
The Sunshine Mine or the associated properties had been in continuous operation for 100 years, and the extensive quantity of geologic, mine, and operational data provide a unique opportunity to assess the property and develop costs associated with resuming production. Previously, Sunshine Precious Metals, Inc. developed a ten-year plan that was peer reviewed by outside experts in 1999. The Company plans to use this data, projected costs and other pertinent information to support its project review. The mine has been idle for several years; hence there will be additional startup costs beyond those identified in the original plan developed several years ago. The Company has been working to update the plan with current economic information and assess the rehabilitation required.
In April 2007, the Sterling Tunnel Project was completed with the underground mining contractor advancing the project 2,519 feet during the year, including 164 feet of tracked drift to connect with the Silver Summit - Polaris Tunnel. The contractor continued with secondary excavation work totaling 880 feet to access portions of the Sunshine vein structure west of Polaris workings and 167 feet of track drift to start a diamond drill access east of Polaris workings.
The Company’s underground diesel equipment began arriving on site in July and Sterling mining crews began limited mining activities in August. In addition to starting a second crosscut to the Sunshine vein, crews began drifting on mineralization in an unmined portion of the Sunshine vein west of the historic Polaris mine area. By year end crews had completed 876 feet of vein drifting on the initial (I-drift) cut and a second cut that yielded approximately 5,630 tons of mill feed containing an estimated 32,408 ounces of silver based on daily vein sampling.
To the east, crews resumed Polaris track drift development advancing 142 feet to complete a drill station currently in use to explore lower elevations of the Sunshine-Polaris veins and the Yankee Girl vein 1,200 feet to the south. In addition to “upper country” mining, Sterling crews excavated 110 feet of track drift adjacent to the Jewell Shaft for a primary 13,200 to 2,400 volt substation to feed 2700 and 3100 levels.
During 2007, the Company completed underground diamond drilling from locations in the Sterling Tunnel and the connecting Silver Summit drift. Diamond drilling for the year totaled 18,355 feet of which 7,493 feet was in-house and 10,862 feet contracted. Drill results continue to guide additional drilling and exploration activities in the “upper country” of the mine. Diamond drilling to guide stope development below 2700 level in the West Chance commenced in February 2008.
After 18 months of rehabilitation, re-engineering and repair, the Silver Summit hoist became operational on August 10, 2007, and was certified to carry personnel to begin shaft repair in September. Shaft repair crews working on a double shift basis reached 3000 level on December 20, 2007, thus completing the lower mine’s secondary escapeway system. In-depth rehabilitation work on 3000 is currently in progress; however, the secondary escapeway was inspected and approved for use in January and February, 2008.
Re-establishment of the escapeway system allows mining activities to proceed on the 2700 and 3100 levels of the mine where production was suspended by former operators in February, 2001. Following re-establishment of communications and compressed air, work was accelerated to re-establish electrical services across 3100 in order to supply power for fans, pumps, drill jumbo and shop facilities that service the Sunshine ramp production and development area. Similar work is underway on 2700 level in the West Chance ore zone to restart production from that area.
Sterling mill and maintenance crews returned the concentrating facility to operational status using the Number 3 ball mill in late September. The regrind mill and Number 2 ball mill became operational in January and February 2008. Installation of a conveyor feed system to allow upper country ore to be introduced into the coarse ore bin was completed. Vein material from exploration drifting on the Sterling Tunnel level currently provides mill feed that will be augmented by 2700 and 3100 level production in early 2008. Resulting concentrates are stockpiled until an appropriate amount is available for shipment to a smelter. Concentrate load-out facilities were renovated during the year including a new heated, environmentally engineered truck loading pad. The first shipment of concentrates to a smelter was made on December 20, 2007 thereby marking the Sunshine Mine’s return to production.
Jewell shaft dewatering began in April 2007, since then water in the shaft has been lowered 95 feet and is currently 220 feet below the 3100 level. Progress was slowed late in the year by receiving additional quantities of water from 3000 level in advance of Silver Summit shaft repair. Water treatment equipment located adjacent to the tailings pond was installed and made operational during the year. Start-up tailings will report to the tailings pond and sand storage tanks until renovation of the underground sandfill distribution system is complete in early 2008. Until the system is operational, waste rock from mine development will be used to fill stopes in order to maintain ore production. During the year the 14-inch tailings distribution line around the pond was renovated and an 8-inch water line from the mine was completed to enhance mine dewatering.
The Company hired 88 full time employees at the Sunshine Mine during 2007. The total mine workforce at year end was 118 employees. The mine continues to hire as operations expand.
Five-1.25 cubic yard and four-2.5 cubic yard underground diesel loaders for development and production, three single-boom hydraulic drill machines for development and one seven-ton haul truck were received during 2007. The Company continued to order and receive equipment and supplies and re-stock the mine warehouse to meet the development plan and production goals.
Other Sunshine Group Properties
The Chester, Bismark, Merger, Mineral Mountain, Metropolitan and United Mines properties are included in the Sunshine Property group. For the most part, these properties were originally leased by SPMI prior to its bankruptcy in 2001.
Chester and Bismark Group
In 2004, the Company leased the Chester and Bismark claim groups pursuant to a 25-year lease, renewable for an additional 25 years. The lease, which expires in 2029, requires the annual payment of 50,000 shares of the Company’s common stock, a $7,200 annual advance royalty payable in monthly installments, and a 4% Net Smelter Return (“NSR”). The Company has no work obligations under the lease. Specifically, with respect to Chester Mining Company we lease six patented mining claims covering 106 acres, which are part of the Sunshine Mine property. In October 2006, we entered into an agreement with Chester Mining Company under which we sold 50% of our interest in the Tabasquena Mine in Mexico for 600,000 restricted common shares of Chester Mining Company. Under a separate agreement, we issued 400,000 restricted shares of our common stock to Chester Mining Company in exchange for 675,000 outstanding common shares of Chester Mining Company. As a result of these transactions we now hold approximately 47% of the issued and outstanding common shares of Chester Mining, which management believes to be to the advantage of the Company because of its leasehold interest in Chester Mining Company’s patented mining claims described above.
Mineral Mountain Group
In 2004, the Company leased the Mineral Mountain claim groups pursuant to a 25-year lease, renewable for an additional 25 years. The lease, which expires in 2029, required the issuance to the lessor of 30,000 shares of the Company’s common stock, and provides for an annual advance royalty payment of $3,600, and a 3% NSR. The Company has no work obligations under the lease. As part of the lease, the Company received an option to buy up to 1,000,000 shares of the lessor.
Metropolitan Group
In 2004, the Company entered into an agreement pertaining to the Metropolitan claim groups, which expire when cancelled. The agreement provided for the issuance to the Company of 200,000 shares of the stock in the owner of the Metropolitan claim groups and an annual advance royalty payment by the Company to the lessor of $12,000.
The Metropolitan Mining Company property consists of 2 patented and 40 unpatented mineral lode claims. These claims lay immediately to the south of the primary workings of the Sunshine Mine and immediately to the west of the ConSil Mine. The workings of the Metropolitan Mine are inaccessible. At depth the claims intersect several veins mined from the Sunshine Mine.
The Metropolitan Mine is located on the south limb of the Big Creek Anticline, in the south dipping rocks of the lower Wallace Formation. There are two veins in the Metropolitan Mine. The north and south veins. The north vein is characterized by a very narrow quartz band, accompanied by a two foot zone of intensely sheared rock with loose, muddy gouge on either wall. The quartz carries pyrite, minor siderite and occasional tetrahedrite and chalcopyrite. The vein strikes east-west and dips at approximately 45 to 60 degrees. The south vein is composed of a zone a few inches to three feet in width, made up of stringers of quartz carrying siderite and pyrite. Some tetrahedrite is found in the included country rock and in the adjacent hanging wall. The property also covers the Big Creek Fault Zone that separated the rocks of the Wallace and St. Regis Formations on the footwall from rocks of the Revett Formation on the hanging wall. It is likely that the north and south veins have never been explored in the more favorable quartzite units. It has been postulated that the north vein should intersect the quartzites of the Revett Formation around 2,700 feet. The south vein is projected to intersect with the Big Creek Fault at the 1,900 foot level and may host potential ore zones in the Revett Formation.
Sunshine Mining Company explored the Metropolitan property from the 3,100 foot level with the development of the Metropolitan cross-cut. A number of narrow quartz-siderite zones were encountered, but no commercial ore-shoots were intersected.
The Yankee Girl Vein on Sunshine claims lies immediately to the north of the Metropolitan property, and dips onto Metropolitan claims. Issues regarding ownership of the Yankee Girl Vein have prevented exploration of this structure in the past. The Yankee Girl Vein is believed to host mineralization along 10,000 feet of strike length.
The Company proposes to extend the area of existing surface exploration on the Sunshine property onto Metropolitan land holdings. The program consists of both induced polarization and resistivity geophysics. Drilling is best deferred until drill stations can be accessed underground from the Sunshine workings. Drilling will test for the down-dip projection of the Yankee Girl Vein as well as the Metropolitan North and South Veins.
Merger Group
In 2004, the Company leased the Merger claim groups pursuant to a 25-year lease, renewable for an additional 25 years. The lease, which expires in 2029, required the issuance by the Company to the lessor of 20,000 shares of the Company’s common stock and the payment by the Company of annual advance royalty payments as follows: $2,500 for each of the first five years of the lease; $5,000 for each of the second five years of the lease; $7,500 for each of the next ten years of the lease; and $10,000 for each of the next five years of the lease. In addition, the Company has agreed to pay a 5% NSR. The lease is subject to minimum work obligations of approximately $25,000 annually throughout the term of the lease.
The Merger claim groups consist of 35 patented lode claims. The northerly section of the property (21 patented claims) is part of the CAMP project between Coeur d’Alene Mines Corporation, Plainview, and Merger, leased to Silver Valley Resources, Inc. (Coeur d’Alene Mines Corporation), and the southerly section (14 patented claims) is located between Sterling’s Sunshine and Link property. Production from the CAMP ground above a minus 900 feet sea level elevation is for the benefit of the CAMP interests, while production from below this elevation (approximately 3,600 foot level Sunshine) is part of the Sunshine Mine and would benefit Sterling.
The Merger claims have received little exploration work, even though numerous mineralized structures strike onto the Merger ground from the ConSil property. Results of 13,200 feet of exploration geophysics performed during 2005 indicate a high-chargeability / low-resistivity anomaly indicative of sulfide mineralization. This anomaly extended from near surface to the maximum sensitivity of the test instrumentation in a generally east-west orientation and appears to increase in depth to the east.
Geology of the Merger group is similar to that of the Silver Summit (ConSil) portion of the Sunshine Mine. However, influences by the Fort Wayne and Mineral Point faults and the intersection of the Polaris fault with the Chester fault are poorly understood and present areas for future exploration.
Prime targets for future underground exploration and development are the Silver Summit Veins explored and mined in the Silver Summit (ConSil) Mine west of the Silver Summit shaft. Additionally, the Silver Summit, Chester, Wire Silver, “D,” and Chester-Polaris “Hook” Veins all originate in or extend onto Merger property at depth. An extensive underground exploration program of these structures by Hecla Mining Company was started in the 1980’s on the 5,400 foot level of what is now the Silver Summit portion of the Sunshine Mine, but the program was halted and never completed.
Future exploration program may include geochemical sampling, expansion of geophysics and/or surface diamond drilling. At such a time as conditions permit, underground exploration activities will resume at depth on Merger ground. Rehabilitation and development of the Sunshine Mine will be a key factor in this future exploration.
United Mines Group
In 2002, the Company leased the United Mines claim groups Big Creek 1 and Big Creek 3 pursuant to a 10-year lease. Terms for the lease, which expires in 2012, are a 1% Gross Revenue to the lessor from this property. The Company will pay the claim fees for the property.
Silver Valley
In addition to the Sunshine Mine, the Company controls, by lease, ownership or option, nine claim groups in the Coeur d’Alene Mining District region, most of them close to the Sunshine property. A description of these claims groups is set forth below.
East Silver Valley
Land Position and Ownership
The East Silver Valley (“ESV”) region is comprised of 280 lode claims covering an area totaling 5,600 acres in the Coeur d’Alene Mining District east of a line running on the 115.875° west longitude to the intersection with Placer Creek, then downstream to the town of Wallace, Idaho, from there upstream on Camp Creek to the intersection with and then following the 115.925° west longitude within Shoshone County, Idaho.
The ESV region holdings are covered by six different claim groups: (i) Beacon Light with 11 claims and 220 acres; (ii) Boulder Creek with 4 claims and 80 acres; (iii) Bullion Creek with 2 claims and 40 acres; (iv) Rock Creek with 236 claims and 4720 acres;
(v) Military Gulch with 2 claims and 40 acres; and (vi) Snowstorm with 25 claims and 500 acres. None of the claims in the ESV group are patented claims. The Company has acquired all claims and outstanding mineral rights and NSRs for these claim groups.
History
The claim groups in the ESV region have various adits and tunnels. Most groups have some surface sampling that indicates at least minor lead, silver and copper sulfide mineralization.
Geology
The ESV region is hosted by the rocks of the Pre-Cambrian Belt super group and the Prichard, Burke, Revett, Saint Regis, and Wallace formations occur both on the surface and subsurface. The Osburn fault cuts the region north of and roughly parallel to the south fork of the Coeur d’Alene River. The Osburn fault is a significant structural boundary in this region with the younger Saint Regis and Wallace formations outcropping on the south side of the fault. To the north of the Osburn fault older formations outcrop along with several igneous intrusions.
The Beacon Light, Boulder Creek, Bullion Creek, and Rock Creek claim groups are all on the south side of the Osburn fault. The Military Gulch and Snowstorm claim groups are to the north of the fault.
All of the ESV claim groups contain classic Coeur d’Alene District narrow vein replacement deposits except the Snowstorm group.
The Snowstorm property lies in the southwest corner of the Montana Copper Sulfide Belt where it overlaps the northeast corner of the Coeur d’Alene Mining District. The mineralization in this group is probably a silver-copper mineralization, Troy-type, disseminated stratabound deposit.
Work Plan
These claim groups are all considered exploration properties. Some claim groups have had more work done on them than others, but the results of these remain unknown and may be unavailable. Initial efforts will be directed towards obtaining and compiling all data for each claim group. Once all known data is compiled then coherent plans can be developed for each claim group or combinations of groups to move evaluation and exploration forward in an efficient manner. Some of the possible work that can be considered for these claim groups are: (i) perform surface geological mapping; (ii) conduct systematic surface soil sampling program to identify any areas of mineralization; (iii) conduct appropriate geophysical programs; and (iv) assess and evaluate access to any adits or other underground workings.
Beacon Light Property Option Agreement
On May 9, 2007, we entered into an agreement with Silver Fields Resources Inc., by granting it an option to acquire an undivided 75% interest in the Beacon Light Property, consisting of eleven mineral claims covering 220 acres, located in Shoshone County, Idaho. The agreement provides for cash payments of $75,000 over four years, issuance of 400,000 shares of Silver Fields Resources common stock to Sterling over four years and minimum expenditures of $115,000 by January 2010. If and when the option is exercised, the parties will execute a Joint Venture Agreement for future exploration and development of the property.
History
The claim groups in the ESV region have various adits and tunnels. Most groups have some surface sampling that indicates at least minor lead, silver and copper sulfide mineralization.
Geology
The ESV region is hosted by the rocks of the Pre-Cambrian Belt super group and the Prichard, Burke, Revett, Saint Regis, and Wallace formations occur both on the surface and subsurface. The Osburn fault cuts the region north of and roughly parallel to the south fork of the Coeur d’Alene River. The Osburn fault is a significant structural boundary in this region with the younger Saint Regis and Wallace formations outcropping on the south side of the fault. To the north of the Osburn fault older formations outcrop along with several igneous intrusions.
The Beacon Light, Boulder Creek, Bullion Creek, and Rock Creek claim groups are all on the south side of the Osburn fault. The Military Gulch and Snowstorm claim groups are to the north of the fault. All of the ESV claim groups contain classic Coeur d’Alene District narrow vein replacement deposits except the Snowstorm group.
The Snowstorm property lies in the southwest corner of the Montana Copper Sulfide Belt where it overlaps the northeast corner of the Coeur d’Alene Mining District. The mineralization in this group is probably a silver-copper mineralization, Troy-type, disseminated stratabound deposit.
Work Plan
These claim groups are all considered exploration properties. Some claim groups have had more work done on them than others, but the results of these remain unknown and may be unavailable. Initial efforts will be directed towards obtaining and compiling all data for each claim group. Once all known data is compiled then coherent plans can be developed for each claim group or combinations of groups to move evaluation and exploration forward in an efficient manner. Some of the possible work that can be considered for these claim groups are: (i) perform surface geological mapping; (ii) conduct systematic surface soil sampling program to identify any areas of mineralization; (iii) conduct appropriate geophysical programs; and (iv) assess and evaluate access to any adits or other underground workings.
Central Silver Valley
Land Position and Ownership
The Central Silver Valley (“CSV”) region describes all of the Company’s lode claim holdings in the Coeur d’Alene Mining District between the western boundary of the East Silver Valley region and eastern boundary of the West Silver Valley region within Shoshone County, Idaho. This region contains the Company’s Sunshine Mine. The Sunshine Mine land holdings are discussed separately and the claims discussed here are in addition to the Sunshine property position.
The Company’s CSV region totals 84 lode claims, none of which are patented, covering an area totaling 1,680 acres, as follows: (i) East-West with 17 claims and 340 acres; (ii) Idaho-Leadville with 25 claims and 500 acres; (iii) JD with 9 claims and 180 acres; (iv) Last Chance with 28 claims and 560 acres; and (v) Royal Apex with 5 claims and 100 acres.
In April 1996, the Company signed a 20-year lease with Silver Valley Resources Corporation (also known as, Coeur Silver Valley, Inc., also known as U.S. Silver Corporation) that guarantees an annual lease payment to the Company, as well as a 15% net profits interest from eventual production from the property. For the rest of the claim groups in the CSV, the Company retains sole interest and is maintaining these claims under applicable laws and agreements.
History
The following details the history of two of these claim groups. The rest of the claim groups have had no production or significant exploration work performed.
East-West Link Claims. Coeur Silver Valley diamond drilled in excess of 15,000 feet in 2000 and 2001 and defined an ore shoot along the Silver Vein, west of historic productive areas and just east of the Link claim. Development into the area began in 2002 from the rehabilitated 2,400 foot level. In late 2003 the ore shoot was drifted on and confirmed. Additional drilling in December 2003 and January 2004 defined another potential ore shoot on the Company’s Link claim. During the remainder of 2004, drilling, drifting and extraction occurred on the Link claim. A total of 1,161 feet of mechanized drift was developed on the Company’s property with another 684 feet of drift driven to access ore blocks on the Company ground. The Link shoot was cut on three levels (475, 535 and 595 foot elevations) and was found to be approximately 150 feet long and from a few to over five feet wide. During 2004, Coeur Silver Valley reported mining and milling 11,145 tons of ore from the Link claim. The average grade of this ore was 11.88 ounces per ton. In 2005, 9,596 tons of ore were mined with an average grade of 9.41 ounces of silver per ton for production of approximately 90,298 ounces. The Company has not received the 2006 results from the lessee.
Silver Royal Apex. Historical reports indicate several thin veins are found in the Burke Formation on the footwall of the Carpenter Gulch Fault. Historical assays suggest that the silver is carried by tetrahedrite, with gangue minerals consisting of quartz and siderite consistent with Silver Belt style mineralization.
Geology
The CSV region is hosted by the rocks of the Pre-Cambrian Belt super group and the Prichard, Burke, Revett, Saint Regis, and Wallace formations occur both on the surface and subsurface. The Osburn fault cuts the region roughly parallel to the south fork of the Coeur d’Alene River. The Osburn fault is a significant structural boundary in this region with the younger Saint Regis and Wallace formations outcropping on the south side of the fault. To the north of the Osburn fault, older formations outcrop along with several igneous intrusions. In the CSV region all but 100 acres of holdings are south of the Osburn fault. The central part of Coeur d’Alene Mining District’s silver belt occurs to the south of the Osburn fault in the CSV region. All but the Royal Apex claim group are associated with the narrow silver vein replacement deposits of the silver belt.
Work Plan
The Company has no current plans for the CSV region, and we intend to hold the property for future exploration.
West Silver Valley
Land Position and Ownership
The West Silver Valley (WSV) region describes all of the Company’s lode claim holdings in the Coeur d’Alene Mining District west of a line running north on 116.05° west longitude to the intersection with Big Creek, then downstream to the mouth of Big Creek, and then running north on the 116.072° west longitude within Shoshone County, Idaho. Total holdings in the WSV region are 167 claims and leases covering 4,281 acres. WSV region unpatented holdings are covered by three claim groups: (i) Alhambra with 8 claims and 160 acres; (ii) Highland Surprise with 17 claims and 340 acres; and (iii) Pine Creek with 116 claims and 2,320 acres. WSV region patented holdings are covered by the following three groups: (i) Silver Bowl with 2 tracts (80 acres) and 11 claims (106 acres); (ii) New Era with 5 claims (82 acres); (iii) Lookout Mountain Lease (6 government lots, 80 acres) and Idaho State Leases (2 tracts, 1,113 acres).
In June the Company signed an Options Agreement with Aura Silver Resources Inc. They have a right to acquire a 50% interest in the Pine Creek property for a payment of $40,000 on signing. The Agreement calls for $200,000 on the first anniversary of the effective date, $250,000 before December 31, 2008, $550,000 on or before December 31, 2009, and $2,000,000 on or before December 31, 2010. In addition, Aura will issue 1,000,000 common shares to Sterling over a four year period. This Agreement was cancelled on February 8, 2008.
History
There are underground workings on many of the claim groups and some contain historic production. Most production and underground exploration have occurred on structures and veins exploited in adjacent mines.
Geology
The WSV region is hosted by the rocks of the Pre-Cambrian Belt super group and the Prichard, Burke, Revett, Saint Regis, and Wallace formations occur both on the surface and subsurface. The Osburn fault cuts the region south of and roughly parallel to the south fork of the Coeur d’Alene River. The Osburn fault is a significant structural boundary in this region with the younger Saint Regis and Wallace formations outcropping on the south side of the fault. To the north of the Osburn fault older formations outcrop along with several igneous intrusions. In the WSV region all but 80 acres of holdings are south of the Osburn fault.
The extreme western end of the famed Coeur d’Alene Mining District’s silver belt occurs to the south of the Osburn fault and in the eastern most part of the WSV region. The primary deposits in this region are lead-zinc type ores of the Bunker Hill Mine. Therefore, all of the claim groups in WSV are lead-zinc-silver prospects.
Work Plan
The Company plans to advance its geological knowledge of the area on its own or in joint venture exploration agreements; however no definitive plans for 2008 have been established.
MEXICO PROPERTIES
Overview
In March 2004, the Company formed a 99% owned subsidiary in Mexico, Sterling Mining de Mexico S.A. de C.V., and through this subsidiary, the Company now owns interests in several mineral properties in the Zacatecas region of Mexico. The Company entered the Mexican market in 2004 with the intention of providing greater diversification of silver interests, developing mining properties for near- to medium-term production, and building a base of prospects and properties that would add to our silver assets. The Company periodically evaluates whether particular Mexican mining concessions it controls would add more value if operated with joint venture partners or if such arrangements would enhance the timing of exploration and development of these projects in support of our overall corporate objectives. The principal projects targeted were the Barones and the San Acacio properties. In November 2005, the Barones commissioning process began and in late March 2005, processing capability was achieved.
Under Mexico’s mining claim system, mining claims/concessions are divided between exploration concessions (valid for six years) and exploitation concessions (valid for 99 years). Thus, during the exploration concession stage, certain activities must be conducted, such as the completion of a land survey of the property; then application for exploitation concession may be made.
As of December 31, 2007, the Company had 45 full-time employees in Mexico.
Regional Geography and Access
Zacatecas is one of the 31 constituent states of Mexico. It is bounded to the north by Durango and Coahuila, to the east by San Luis Potosi, to the south by Aguascalientes and Jalisco, and to the west by Jalisco and Durango. The state shares its name with its capital and chief center of population, the city of Zacatecas.
Zacatecas, the principal city in Zacatecas State, benefits from established infrastructure, an international airport, rail links to the Caribbean coastal town of Vera Cruz and highway to Mexico City and the United States border. The town was the historic center of Spanish silver production in the 15th and 16th Centuries and produced over half the total silver shipped by the Spanish during that period. Many of the mines in the surrounding areas were worked continually up to the time of the Mexican revolution in the early 20th Century, but have not worked since. Peñoles, the largest silver mining company in Mexico, operates the largest operation in Mexico in the town of Fresnillo, and there are a number of smaller operations in the Zacatecas area. There is considerable local and regional governmental interest in reviving larger scale mining operations.
Central Mexico is known for silver, lead, zinc and gold deposits. These occur as epithermal veins, locally with bonanza grades, and related manto replacement bodies. Major vein deposits in the area include those at Fresnillo and Zacatecas. Much of the epithermal mineralization is hosted by Lower Tertiary volcanic rocks and is mid-Tertiary in age. Some deposits are hosted by Upper Jurassic-Lower Cretaceous volcanic rocks (e.g., veins around Zacatecas) and Lower to Upper Cretaceous carbonates and silicilastic sedimentary rocks (e.g., Real de Angeles), although the mineralization is still interpreted to be Tertiary. Cretaceous sedimentary rocks also host the Franciso I. Madero has been postulated to be sedex-type mineralization, although a high temperature replacement origin has also been proposed. The possible sedex origin of Franciso I. Madero was the first indication that syngenetic sulfide mineralization might exist in the Zacatecas area. Volcanic rocks in the lower part of the stratigraphy, the Upper Jurassic to Lower Cretaceous Chilitos Formation, were recognized as submarine sequence containing extensive pillow basalts, but volcanogenic massive sulfide (“VMS”) deposits were not considered a serious exploration target.
Access to the Company’s Barones and San Acacio properties is by paved roads to above the city of Zacatecas and extending to the small town of San Acacio near the center of the Veta Grande mine area. From this highway, gravel roads lead to the Barones area, about 4.5 kilometers south of San Acacio. From San Acacio, gravel or dirt mine roads extend to several shafts and two main adits. The Barones and San Acacio properties lie at elevations about 7,000 feet, in the subdued mountainous terrain north of Zacatecas. Access to the other exploration properties is by paved road from Zacatecas to the communities of General Panfilo Nateras, Ojocaliente and Luis Moya, from which secondary roads give good access to the properties.
The following map shows the locations of the Company’s various Mexican properties:
Geology
The Zacatecas Mining District is located in the east central part of the state of Zacatecas, in north-central Mexico and covers approximately 700 square kilometers located at the transition of the eastern flank of the southern Sierra Madre Occidental province and the northwestern limit of the Mesa Central physiographic province. The Sierra Madre Occidental province, one of the most extensive volcanic fields of the world, is a massive pile of nearly horizontal volcanic rocks that underlies a vast plateau, largely of siliceous volcanic rocks of the upper volcanic series rest discordantly either on the lower volcanic series, composed mainly of intermediate lavas, or on metamorphic rocks of Precambrian or Paleozoic age and igneous or sedimentary rocks of the Mesozoic era (the Pimienta series).
Local Geology at Zacatecas
The oldest rocks in the Zacatecas District are schists which are overlain by volcanic sedimentary sequence. Tertiary conglomerate overlies basal andesites. The conglomerate is covered by tuffs and rhyolitic flows. Dikes (TR) and rhyolitic necks crosscut this rock package. This volcanic sequence is associated with a caldera lies south of Zacatecas, in which a concentric and radial system can be distinguished. The most prominent structural features of the area are north-south trending extension faults, northwest-southeast trending tension fissures north of the caldera and radial fissures within the caldera.
The most economically significant structures are the silver-lead-zinc-copper-gold bearing vein-fracture systems that are emplaced within the NW-SE trending tension fissures. These are located north of Zacatecas and include El Bote, La Cantera, Mala Noche, Veta Grande, Panuco and La Plomosa Vein systems. South of Zacatecas, within the caldera, silver-gold bearing vein-fracture systems (Orito Veins) are orientated in a radial geometry. The fissure veins are believed to have originated as tension fractures caused by the crustal bulging related to the development of the caldera. Collapse of the caldera caused widening of the concentric fractures and development of additional minor structures. Extensional faulting and at least 500 meters of erosion followed emplacement of the veins.
Deposit Types
The San Acacio Mine is a classic epithermal silver-gold (high Sulphide) deposit in a number of parallel veins. There is no documented mineralization in the wallrock. The Veta Grande Veins are predominantly silver-bearing with minor gold and base metals.
The veins at the other concessions such as Aventurera, Nueva Andromeda, Tesorito and Tabasquena have a similar origin; all are high sulphide epithermal veins. Little information is available on their mineralogical makeup, but they are all assumed to be silver-bearing with minor base metals. These are less explored than the San Acacio, but examination of dumps supports these assumptions.
The Vetas Negras area is believed to be intermediate between low sulphide epithermal and replacement deposits in carbonate rocks.
Mineralization
The mineralized structures in the Zacatecas mining district can be divided into three vein systems, based on their orientation, age and ore assemblages: (i) the silver-base metal system, considered the most important; (ii) the silver-gold selenium system; and (iii) the fluorite bearing system. The silver-base metal system is the most extensive and economically important and has been exploited in the Panuco, Veta Grande, Mala Nocher, and Cantera zones, as well as in the Bote and San Rafael areas (the latter located south of the Cantera Vein). In the last areas, the silver-gold selenium system is also present.
The silver-base metals system is formed by long veins with an orientation of N 45º to 85ºW, and dips of 50º to 70º SW and 64º to 75º NE. The vein branches occasionally display a horsetail structure while others form zones of sheeted, essentially parallel, stringers of variable thickness. The lengths of the main veins vary from 4 to 16 kilometers with widths of 1 to 30 meters. The veins usually have a branching form, both in horizontal as well as vertical section. The branches merge and split repeatedly but intersections are rare. Sometimes the branches join with the main vein to form ellipsoidal forms but more commonly the branches diverge and pinch out. Also, the veins may double up, run parallel and either split again or become wider than what was formally the main vein. These splits are important since deviation from the general strike and dip occurs in these places and the result is a widening of the vein.
Work Program
The Company conducted ongoing data compilation and began a rehabilitation effort of the Purisima and Refugio tunnels. Trenching was conducted for sampling purposes.
The Company will consider opportunities for a joint-venture or other similar arrangements to speed up the implementation of the work program, but no such opportunities are presently under consideration, except as noted below.
The Barones Silver Project
Land Position and Ownership
The Barones plant, located four kilometers north of Zacatecas, is approximately 40 hectares in size, of which the Barones tailings cover 12.5 hectares to a depth of up to 30 meters. The tailings are finely ground and readily accessible on the surface. The Barones Tailings project consists of a thiosulfite vat leaching plant designed to process the Barones tailings and other oxide ore. An on-site 18-vat plant and supporting infrastructure has been constructed by Sterling, and this facility commenced production in late March 2005. Currently with the inclusion of San Acacio material in processing, each vat is processing 200 to 270 metric tons per cycle. The plant is capable of producing both precipitate and dore bars. Sterling is currently shipping the precipitate product to a local smelter.
Sterling has signed a 20-year lease agreement with the property owner and paid $25,000 USD for the rights. There is no requirement for annual lease payments. The lease has a provision where 50% of the net profits up to a maximum of $4.55 million USD is paid to the owner in shares of our stock valued at $10.00 per share. Once the threshold of $4.55 million has been paid, a 0.75% of NSR is payable for the duration of the lease.
Processing Plant
The Barones project was acquired via a long-term lease in early 2004. The plant currently has 18 leach vats in use. Capital improvements include the completion of a crushing facility in July of 2007. The crushing operation in the third and fourth quarters of 2007 enabled the company to process high grade ore and realize increased recoveries and production.
Work Plan
A copper recovery system currently being planned is expected to lower costs. Increased precipitation plant capacity is under construction with the goal of increasing recovery and mill capacity. Sterling will evaluate the current plant as it reaches a steady production output. The results of this evaluation will help determine the feasibility of developing further processing capability.
The San Acacio Mine Concession
Land Position and Ownership
The San Acacio Mine concession contains the southeastern half of the Veta Grande Vein in the Zacatecas mining district. The concession is located 6 kilometers due north of the city of Zacatecas. There are numerous underground workings in the concession but most of the historic workings are inaccessible due to caving and flooding.
In April 2007, Sterling approved a memorandum of understanding as previously disclosed. On March 4, 2008, an Earn-In Agreement was signed between , Sterling Mining Company, Sterling Mining de Mexico S.A. De C.V., Source Exploration Corporation and Roca Verde Exploracion de Mexico S.A. de C.V. grants two options to Roca Verde. The First Option is in 75% interest in the Asset and the Second Option grant an additional 15% interest in the Assets. To maintain a good standing in the Options, Source Minerals shall make cash payments and underlying payments, incur expenditures and issue Source Shares as follows:
On or before the dates set out below, make the following Pre-Production Royalty Payments to Sterling Mexico
On or before the dates set out beloo9w, issue the following Source Shares to Sterling Mexico;
Incurring Expenditures are as follows: (a) on or before the first Anniversary Date, completing not less that $1,000,000 in Expenditures; (b) on or before the second Anniversary Date, completing not less that an additional $1,000,000 in Expenditures. The 3,000,000* Source Shares to be issued on the Effective Date. By Source in three separate share certificates each representing 1,000,000 Source Shares and registered in the name of Sterling Mexico. 1,000,000 of such Source Shares shall vest on the Effective Date and shall be delivered by Source to Sterling Mexico on the Effective Date. The remaining two share certificates representing 1,000,000 Source Shares each (for an aggregate of 2,000,000 Source Shares) shall be delivered to the Escrow Agent on the Effective Date and held pursuant to the Escrow Agreement to be released as follows:
History
Although complete history and production records are not available, this district has hosted mining from before colonial times. Full scale production ended in the early 1900’s in response to the Mexican revolution. Sporadic mining occurred during the 1930’s and 1940’s. Small scale and some illegal mining continued from that time until the present. Several companies have controlled and explored the concession since 1992. These companies have conducted several drill programs with generally poor results due to bad ground conditions and old workings. In spite of the problems encountered, this prior exploration has demonstrated potential for the concession.
Geology
The Veta Grande Vein is hosted by the volcanic rocks of the Chilitos formation. The numerous veins that together form the Veta Grande Vein system consist of epithermal mineralization and filling of faults and fractures in the host rock. The Veta Grande Vein strikes northwest and dips 65°southwest. The length of the identified vein is 7 kilometers, of which only 5 kilometers have been exploited. The bulk of production from the mine has occurred in the oxidized zone but some limited mining has occurred from the sulphide zone.
Work Plan
Sterling has successfully processed material from San Acacio dumps and backfill with positive results. Sterling has permitted an expansion of the Barones plant for production processing of the San Acacio material. Sterling has initiated rehabilitation efforts to gain entry to one or more adit levels of the mine. Once safe entry to the underground working is established the vein can be assessed for geologic and metallurgic purposes. Additional drill programs will be developed from both surface and underground. The goal of future drilling will be to extend the system both on strike and down dip. See above agreement.
El Morro Area
Land Position and Ownership
Sterling has established a property position in the Morro Hill area. This area is located west of the town of General Panfilo Nateras and south of the highway to Ojocaliente and includes the La Griega, (Melanie), Aventura, and Nueva Andromeda concessions. The Company entered into a mining claim exploration concession that expires in 2009.
History
No recent work has been done on any of these concessions. However, the area supported a number of colonial mines that produced from the near surface oxidized zone. The concessions have numerous open stopes, small shafts, and open cuts. Past production was limited and unknown. At least one other company is conducting exploration in the area.
Geology
The veins of the El Morro are typical hosted by granites. The veining is typically polymetallic replacement deposits consisting of silver veins, skarns and wollastonite deposits. The three concessions Sterling controls host silver rich epithermal veins. Geology for these concessions is not well known and limited.
Work Plan
Limited geological work has been done on the property.
Vetas Negras/Esperanza
Land Position and Ownership
The Vetas Negras (Black Veins) veins are located 13 kilometers to the east of the municipality of Luis Moya, and 60 kilometers from the city of Zacatecas. Access is from Zacatecas using the highway that leads to Aguascalientes, through Ojocaliente and Luis Moya. The Vetas Negras property, though small, lies adjacent to an area which has been thoroughly drilled by Mineral Frisco. It has been reported that Mineral Frisco intends to mine this adjacent property by open pit methods with an estimated production of 5000 tons per day. The property consists of two titles, 1) Ampliacion Vetas Negras and 2) Ampliacion de Vetas Negras. These properties total 86 hectares. About eight shallow pits and three cuts are present on the property. The Company entered into a mining claim exploration concession that expires in 2009.
In 2007 the Company signed an Options Agreement with Silver Fields Resources Inc. They have a right to acquire a 75% interest in the Property for total payments of $85,000, $25,000 on signing, $20,000 on or before March 31, 2008, $20,000 on or before March 31, 2009, and $20,000 on or before March 31, 2010. The Agreement calls for a minimum work expenditure of $100,000 on or before March 31, 2008, $200,000 on or before March 31, 2009, and $300,000 on or before March 31, 2010. In addition, Aura will issue 400,000 common shares to Sterling over a three year period.
History
The property has not received the benefit of modern exploration methods and so is at an early stage of exploration.
Geology
The deposit is hosted by sedimentary rocks. The sedimentary section is the Cuesta del Cura Formation and Indidura Formation of Cretaceous age, cut by Miocene rhyolites and silicified breccia. The Cuesta del Cura Formation is mainly argillic limestone with lenses of black chert. The Upper Cretaceous Indidura Formation includes alternating grey argillaceous limestone and calcareous limonite. Outcrops of Miocene rhyolite east of the area are dense rhyolite composed of quartz, feldspar, and clay. Fine sandy recent sediments cover much of the area.
The mineralized zones are bodies of silicified breccias composed of limestone fragments in a matrix of grey to black silica containing silver, and quartz veins, trending northwest-southeast and approximately 0.60 meters wide, mineralized by iron oxides and argentite in quartz gangue. The breccia bodies are from 70 to 300 meters long and 20 to 50 meters wide.
Work Plan
The joint venture exploration partner has conducted the initial exploration work. The results are pending.
Tesorito - Tabasquena
Land Position and Ownership
The Tabasqueña Mine concession is located in the Ojocaliente mining district in the state of Zacatecas, Mexico. This concession is located several kilometers east of highway 45 and north of the road between the towns of Ojocaliente and Jarillas. The concession contains two vertical shafts and approximately 180 meters of underground workings to a depth of 50 meters. The Company entered into a mining claim exploration concession that expires in 2009.
This property consists of six separate mining concessions: La Tabasqueña; Mina Del Tesorito; La Querencia; Aracelli; Angustias; and Melania. Total surface area of the concession is 287.2 hectares. This concession lies at the north end of the Milagros Vein system. The Milagros mine at the southern end of the vein system has been mined extensively in the past.
On October 25, 2006, the Company sold a 50% interest in the project to Chester Mining Company in exchange for 600,000 shares of that company’s common stock.
History
Two companies have operated in the concession since 1980, Minera Las Cuevas (“Cuevas”) 1981 and Servicios Industriales Peñoles (“Peñoles”) 1988 to 1989. Both companies have mapped and sampled the underground workings. Cuevas drilled five exploration holes and Peñoles drilled ten holes. In addition, Peñoles conducted surface trenching and sampling and IP geophysics surveys. Most of this data is available on various maps and cross sections.
Geology
The basal unit of the geologic section exposed in this concession is volcanic andesites of the Chillitos formation. The Chillitos formation is overlain by conglomerates of Zacatecas Red Conglomerate. The top of the exposed section are extrusive Rhyolite flows. The Milagros vein system cuts this section on a north northwest trend for approximately ten miles.
The concession hosts two veins of the Milagros Vein system, the Tabasqueña Vein and the La Ninã Vein. The Tabasqueña dips approximately 60° west and the La Ninã Vein dips 55° east. These two veins project to an intersection approximately 130 meters deep. Both veins are hosted entirely within the Zacatecas Red Conglomerate.
Work Plan
Exploration began via a small-scale drill program.
Arturo
Land Position and Ownership
The Arturo lot is located in northern Zacatecas State in the Jimenez de Teul mining district. The property consists of a single lot of 589.24 hectares. There are no known mineral occurrences on the lot, but there are several Au-Ag-Cu mineralized occurrences to the north, south and east of the concession.
On May 9, 2007, Sterling entered into an agreement with Silver Fields Resources Inc., granting them an option to acquire an undivided 75% interest in the Arturo Property, consisting of exploration concessions covering 1,615 hectares, located in Zacatecas, Mexico. The agreement provides for cash payments of $85,000 over four years, issuance of 400,000 shares of Silver Fields Resources common stock to Sterling Mining Company over four years and minimum expenditures of $600,000 by March 2010. If and when the option is exercised, the parties will execute a Joint Venture Agreement for future exploration and development of the Property.
History
There is no known mining or exploration history on the concession.
Geology
Geology consists of rhyolites of the lower Upper Volcanic sequence. The rhyolites are mineralized in this area.
Work Plan
The property under the existing agreement is to be explored by Silverfields.
Bolshoi
Land Position and Ownership
The Bolshoi project consists of four lots: Bolshoi, Bolshoi II, Bolshoi III and Terrible Jim. Total surface area of the lots is 5395 hectares.
History
There is no known mining or exploration history on the concessions.
Geology
Most of the project is covered by post mineral rhyolites of the Upper Volcanics. Two windows into deeper rocks, located north of and west of the Bolshoi lot expose the Chulitos formation. There is structure controlled silver-copper mineral in one of these windows.
Work Plan
No geological work has been done on the property as of yet.
La Chapis
Land Position and Ownership
The La Chapis concession is located is located approximately five kilometers east of Ojocaliente and approximately 60 kilometers southeast of the city of Zacatecas. Access is from Zacatecas using the highway that leads to Aguascalientes, through Ojocaliente, then east on secondary roads. The 2,000 hectare property lies less than two kilometers south of the highly mineralized Cerro El Morro area. Sterling geologists became interested in the La Chapis claim when silicified material was noted in rocks culled
from cultivated land and piled along access roads to the fields. The silicified material is similar to that found in epithermal vein systems such as are present at Cerro El Morro. Some of the silver veins exposed at Cerro El Morro may project into this area.
The property consists of a single exploration concession. Sterling is purchasing the concession for $25,000 in two annual payments. The concession holder will retain a 2% Met Smelter Revenue interest. Sterling is committed to $250,000 in work on the property over the next three years.
History
The property has not received the benefit of modern exploration methods and so is at an early stage of exploration.
Geology
There are few outcrops on the concession. Rocks culled from the fields suggest that veins and silicified zones that may be present are hosted in a combination of Indidura Formation of Cretaceous age, and slightly metamorphic rocks of the Jurassic Chulitos Formation. The Upper Cretaceous Indidura Formation includes alternating grey argillaceous limestone and calcareous limonite. Outcrops of Miocene rhyolite north of the area are dense rhyolite composed of quartz, feldspar, and clay. Loamy soils cover most of the area. Mineralized zones are inferred based on material gleaned from cultivated land.
Work Plan
Sterling is currently drawing up plans for exploring this area using geophysics followed up by geochemical prospecting.
Jimenez de Teul
Land Position and Ownership
The project represents a major land package in western Zacatecas, consisting of 7,601.45 hectares, located near the town of Jimenez de Teul, Zacatecas Mexico. It surrounds Sterling’s Arturo claim, presently under joint venture with Silver Fields Resources Inc. The acquisition gives Sterling control of most of the Jimenez de Teul mining district.
This property consists of 11 separate mining concessions: Santa Roslaia, Santa Rosalia, Reyna Maria, El Tragedias, Sutti, Sutti 1, Sutti 2, Reyna Sofia, Arturo, Arturo and Karina. Note that the Arturo is not the same as the concession by the same name already controlled by Sterling in this district.
Sterling is purchasing the concessions for $100,000 in cash with an additional $150,000 in cash or Sterling common stock at a price of $4.25/share. The concession holder will retain a 2% Net Smelter Revenue interest. Sterling is committed to $250,000 in work on the property over the next three years.
History
Precious metals were found in the area fairly recently by Mexican standards. The district was likely first exploited in the very late 19th century. The only known mining records report 1,038 kilograms of silver and 25 tons of lead produced between 1983 and 1987. There are no records from the turn of the century mines.
Geology
The underlying rocks consist of limestone and shale of the Indidura Formation of Cretaceous Age. Stocks and dikes of rhyloite porphyry occur as intrusions in the Indidura Formation. Miocene age rhyolite tuffs cover much of the area.
Known mineral deposits consist of northeast striking veins of gold, silver and lead, and replacement zones along the contact of rhyolite dikes and stocks and the Indidura limestone. In addition, exploration by another mining company in 1996-97 discovered wide zones of stockworks adjacent to rhyolite domes reportedly containing silver and gold, and the exploration indicated that other zones, such as the Iron Sombrero, have gold potential.
Work Plans
Sterling’s exploration plan will focus on examining and sampling multiple alteration zones on the property and identifying targets for drill testing.
Cuatro Cienegas Property
Land Position and Ownership
The property consists of six mining concessions in three non-contiguous groups covering approximately 3,409 hectares. The property is located near the town of Cuarto Cienegas in Central Coahuila State, Mexico. It is approximately 10 kilometers to the south by paved and graveled road, but well outside of the environmentally sensitive valley of Cuatro Cienegas.
Sterling signed an agreement on April 10, 2007 with Enrique Gaytan Enriquez and Ezequiel Aguero Zamudio under which it has the right to acquire the Cuatro Cienegas sandstone-hosted copper-silver deposit located in Coahuila State, Mexico. Under the terms of the agreement, Sterling has the right to acquire a 100% interest in the Property, subject to a 2.5% Net Smelter Revenue interest by making payments totaling $550,000 as below:
·
$50,000 on signing (paid)
·
$100,000 on the first year anniversary of signing
·
$100,000 on the second year anniversary of signing
·
$100,000 on the third year anniversary of signing
·
$100,000 on the fourth year anniversary of signing
·
$100,000 on the fifth year anniversary of signing.
History
Previous work on the property consists of a few small exploration adits, and sampling done by the underlying land owners. There has been some sampling done by a major mining company in the region, but that data was unavailable at this time. The underlying landowner contracted with Servicios Geologico Mexicano to investigate the metallurgy of the deposit. Column leach tests have returned recovery of silver using sulphuric acid and cyanide. Sterling intends to continue metallurgical testing on representative samples.
Geology
The property is underlain by Early Cretaceous limestone, shale, sandstone and conglomerate related to the Early Cretaceous Coahuila terrane, a suspect tectonic block that became attached to the American continent sometime in the Early to Middle Cretaceous. Copper-silver mineralization is hosted in the lower sandstone and conglomerate units. The primary copper minerals are not known at this time.
Sterling collected three samples during its initial assessment of the property. All assay samples were transported directly to Sterling’s production facility in Zacatecas where they were analyzed using fire assay and AA techniques. The results of these grab samples are presented below:
Work Plan
Sterling plans to map and sample the concessions in detail and follow up sampling with a trenching program. A bulk sample will be collected for additional metallurgical testing and mineralogical studies. The goal is to quickly assess the known mineralized areas and the potential for expansion as early as possible in the life of the agreement. Assuming favorable results, additional bulk sampling, diamond drilling and exploration drifting will be planned.
OTHER EXPLORATION PROSPECTS
The Company has rights to projects that are located within the Montana Copper Sulphide Belt, a 1,600 square mile area in Sanders County, Montana.
Lucky Luke Copper-Silver Prospect
Land Position and Ownership
The Lucky Luke prospect consists of 20 unpatented lode mining claims located on U.S. Forest Service property about ten miles northwest of Thompson Falls, in Sanders County, Montana The claims are located in Sections 17, 18, 19 and 20, Township 22 North, Range 30 West. Access is via the Little Beaver Creek Road, west of Montana State Highway 200.
The Company acquired its interest in the Lucky Luke prospect pursuant to a mineral lease agreement dated November 26, 2004 (the “Timberline Agreement”), whereby the Company acquired exploration rights for a 20-year period, with option to renew for an additional 20-year-plus period, with respect to the Lucky Luke, Minton Pass, East Bull and Standard Creek properties (see below). In consideration for the lease, the Company forgave indebtedness of approximately $65,000, reimbursed expenses of approximately $20,000, and agreed to annual advance royalty payments of up to $20,000, based on the number of claims still subject to the
agreement. The lease agreement also provides for a 1% NSR royalty on all minerals mined or removed from the property covered by the lease agreement.
Geology
Quartz veins at the Lucky Luke adit cut St. Regis Formation argillites and quartzites approximately 100 feet above the St. Regis/Revett contact. Revett quartzites outcrop on the ridge above the adit. Middle Revett siltites are exposed on the south slope.
Exposures near the adit are generally dipping northwest at 15 to 24 degrees. To the north and east, bedding attitudes are much steeper and the mineralized veins are near the relatively flat-lying apex of a domal structure. This dome is bounded on the west by a north-northwest trending fault that has brought the Revett up to the surface on the west side. To the south, a large-scale tear fault separates the dome from an overturned section of strata of Burke and Wallace Formations.
Geologic mapping and rock chip sampling confirmed that the copper-silver mineralization seen in the veins is dominantly chalcocite and tetrahedrite with some bornite. Revett exposures to the south also exhibit pyrite with dendritic manganese stain. Rock chip samples in this location show weak copper-silver anomalies.
It is postulated that the mineralized horizons or quartzite in the lower Revett were the source beds for the vein mineralization seen in the Lucky Luke adit. Quartz veins similar to these are regionally related to mobilization from the underlying strataform copper-silver mineralization.
History
In the mid-1920’s, the Lucky Luke adit was driven on a mineralized quartz vein. Reports indicate that the adit was extended for 1,000 feet; the size of the dumps confirms this report. In 1926, the Lucky Luke reportedly produced ore containing silver, copper and gold.
The property was subsequently acquired by Luke Williams. Exploration work during this ownership included several shallow trenches that crosscut at least two quartz veins that had strike lengths in excess of 3,000 feet.
In 1983, the property was acquired by U.S. Borax, as a result of a reconnaissance exploration program conducted for Revett copper-silver deposits. U.S. Borax staked 76 claims on the prospect, and conducted mapping and sampling. U.S. Borax and its successor Kennecott Exploration Company held the property until the early 1990’s.
Work Plan
The Company intends to prepare a scale geologic map of the entire project area, including the adit and trench area. Thereafter, the Company will consider adopting a plan for drilling test holes to evaluate the two mineralized Revett horizons. The Company will also evaluate reopening the caved Lucky Luke adit for underground mapping and sampling.
East Bull Copper-Silver Prospect
Land Position and Ownership
The East Bull prospect consists of 19 unpatented lode mining claims located on U.S. Forest Service property about one mile due east of Bull Lake in Lincoln County, Montana. The claims are located in Sections 2 and 11, Township 28 North, Range 32 West. Access is via Forest Service roads along the South and North Fork of the Bull River, to the east of Montana State Highway 56. The Company acquired its interest in the East Bull Prospect pursuant to the Timberline Agreement, described above.
Geology
The property has local exposures of north-striking and moderately east dipping St. Regis and Wallace Formations, both Proterozoic in age. The Burke Formation and the base of the Lower Revett Formation are exposed along the southeast shore of Bull Lake, about a mile west of the claims. The northwest-trending Bull Lake Fault crosses the east side of the property and has down-dropped Wallace Formation strata on the east. The majority of the property is covered with glacial till.
Potential for strataform copper-silver mineralization in the Upper or Lower Revett exists on both sides of the Bull Lake Fault. The Bull Lake Fault is a major north trending structure, easily identified on the ground, with much local folding and slickensides. A major reason to pursue this target is the presence of the Bull Lake Fault-a large un-tested structure. Target depths will range from 1,000 feet on the west side to +2,000 feet on the east side.
History
In 1983, the property was acquired by U.S. Borax, as a result of a reconnaissance exploration program conducted for Revett copper-silver deposits. U.S. Borax staked 23 claims on the prospect, and conducted mapping and sampling. U.S. Borax and its successor Kennecott Exploration Company held the property until the early 1990’s.
Work Plan
The only work the Company may pursue on this property is the preparation of more detailed mapping to more accurately define the location of the Wallace/St. Regis/Revett Formation rock units on the property.
Standard Creek Copper-Silver Prospect
Land Position and Ownership
The Standard Creek prospect consists of 29 unpatented lode mining claims located on U S. Forest Service property about 6 miles due east of the Montanore deposit and 21 miles south of Libby, in Lincoln County, Montana. The claims are located in Sections 19, 20, and 30, Township 27 North, Range 30 West. Access is via Forest Service road number 231. The Company acquired its interest in the East Bull Prospect pursuant to the Timberline Agreement, described above.
Geology
The property is underlain by the Revett, St. Regis and Wallace Formations. Strata from all three formations strike northwest and dip moderately eastward with dips becoming flatter to the east. A pair of northeast-trending faults have been identified, each having down-dropped northwest sides. Displacement along these faults is in the range of 200 to 400 feet. Numerous copper, silver and lead bearing quartz veins occur in the St. Regis and Wallace Formations. The 1987 drilling by U.S. Borax encountered only trace amounts of pyrite, chalcopyrite and bornite.
The claims were staked on the basis of the high grade veins found in the overlying Wallace Formation. The presence of mineralization above the permissive underlying Revett stratigraphy was the main reason for acquiring this prospect.
History
In the early 1980’s, the property was acquired by U.S. Borax, as a result of a reconnaissance exploration program conducted for Revett copper-silver deposits. U.S. Borax staked 115 claims on the prospect, and optioned 14 more from a local prospector. U.S. Borax conducted mapping and sampling and drilled one 1,450 foot core hole. U.S. Borax and its successor Kennecott Exploration Company held the property until the early 1990’s.
Work Plan
The Company intends to prepare a geologic map of the entire project area. The Company may also pursue further sampling on the Midas dump for the purpose of defining metal ratios seen in the vein mineralization. Additional research into the geology and production from the Midas Mine may also be conducted.
Minton Pass Copper-Silver Project
Land Position and Ownership
The Minton Pass Silver-Copper prospect consists of 20 unpatented lode mining claims located on U.S. Forest Service property east of Trout Creek, Montana. The claims are located in Sections 20 and 21, Township 24 North, Range 32 West, MPM. Access is via well-maintained U.S. Forest services roads from Trout Creek. The Company acquired its interest in the East Bull Prospect pursuant to the Timberline Agreement, described above.
Geology
The Minton Creek Pass claim group hosts metasedimentary rocks of the Belt Supergroup. Vast areas of the Belt Supergroup contain strataform silver-copper occurrences, which are hosted by quartzites of the Revett Formation. These are found primarily within the Montana Copper Sulphide Belt, which covers some 1,600 square miles.
History
The prospect was discovered in the 1960’s and has been explored intermittently since that time. Kennecott maintained a core group of claims in the area from 1966 to 1992. In the early 1970’s the prospect was explored by Hillside Mines, Inc. Exploration focused on two mineralized horizons. Mapping, sampling and trenching were conducted to better define the extent of the mineralization. A short adit was driven and a limited drilling program conducted.
In 1981, ASARCO expanded their land position to several hundred claims. Exploration, including some drilling, continued in an attempt to further define the extent of the mineralized zones. ASARCO abandoned the property in 1992.
Work Plan
The only work the Company may pursue on this property is the preparation of a geologic map of the entire project area.
JE Project
Land Position and Ownership
The JE Project is located along the Bull Lake Corridor, on a line between the Troy and Rock Creek deposits, roughly ten miles southeast of the Troy and three miles northwest of the Rock Creek. The Montanore (Rock Lake) deposit is roughly two miles east of the Rock Creek.
In January, 2003, the Company leased the JE Project, a set of 11 unpatented mining claims in the Montana Copper Sulfide Belt. The lease agreement provides for annual payments increasing from $3,000 to $20,000 by 2009 and for a 2% production royalty on sales of metals extracted from the property.
During 2006, the Company entered into an option agreement with Silver Fields (formerly Red Lake Resources) regarding the JE prospect. Under the terms of the agreement, Silver Fields may earn a 75% interest in the property for cash payments totaling US $300,000, the issuance of 500,000 common shares of Silver Fields common stock to Sterling and $600,000 work commitment for exploration during the next three years. Sterling will retain a 25% interest and a 2.5% net smelter return. After Red Lake has completed its earn-in, Sterling may maintain or increase its 25% carried interest by participating in future exploration and development.
Geology
The JE claim group hosts metasedimentary rocks of the Belt Supergroup. These are found primarily within the Montana Copper Sulphide Belt, which covers some 1,600 square miles. The lower member of the Revett Formation hosts Stratabound mineralization and this formation is about 1,300 feet thick in the JE project area.
At least three N-NW trending faults cut across the JE Project area. The Snake Creek-Copper Lake Fault and the Lost Girl Fault may control stratabound mineralization within the lower Revett Formation.
Significant copper/silver mineralization is not exposed on the property. U.S. Borax has drilled an exploration drill hole. This drill hole contained 265 feet of mineralization that averaged 0.32% copper and 0.41 ounces of silver per ton. Within this zone, a 90 feet interval averaged 0.47% copper and 0.70 ounces of silver per ton.
History
In the late 1980’s, U.S. Borax and Santa Fe Minerals explored the Belt rocks of NW Montana for additional deposits similar to ASARCO’s Troy Mine. Initial discoveries were made at surface at Montanore and Rock Creek. U.S. Borax completed detailed geological mapping at a scale of 1:6,000 over a very large area within and adjacent to the property. Santa Fe Minerals performed limited geological mapping at a scale of 1:24,000.
This mapping identified a potential target at the intersection of the Copper Lake (a controlling structure on mineralization in the Rock Creek ore-body) and the Wolf Creek faults. U.S. Borax and Santa Fe completed nine diamond drill holes in the area under investigation. Kennecott acquired the property through the acquisition of U.S. Borax. Kennecott held the property for 12 years before abandoning them.
The Company leased the JE property from the current claim holders, Jim Ebisch and Ryan Reich, and located an additional 24 lode claims to increase the property package to its current size.
Work Plan
The Company intends to prepare additional surface geological mapping to identify surface lithologies and rock packages.
Trout Creek Project
Land Position and Ownership
The Company has acquired lease rights to 18 claims of the Trout Creek deposit in Northwestern Montana (JESTEC Group), located approximately six miles west of the town of Trout Creek. The Trout Creek property expands the Company’s presence in the Montana Silver-Copper Sulfide Belt.
Geology
Trout Creek is within the Pre-Cambrian Best Basin, along the western flank of the northeast-trending anticline. An anomalously thick quartzite section identified on the Trout Creek property could coincide with a mineralized oxidation/reduction front.
History
Exploration thus far has consisted of geologic mapping, outcrop sampling and diamond drilling, results of which indicated a strong potential for the discovery of significant, economically viable Troy-type silver-copper mineralization.
Work Plan
The Company intends to prepare additional surface geological mapping that will identify surface lithologies and rock packages.
Glossary
The following is a glossary of selected mining terms used in the Form 10-K that may be technical in nature:
Adit: An opening driven horizontally into the side of a mountain or hill for providing access to a mineral deposit.
Andesite: Dark, fine grained extrusive volcanic rock.
Anticline: An arch or fold in layers of rock shaped like the crest of a wave.
Assay: A chemical test performed on a sample of ores or minerals to determine the amount of valuable metals contained.
Base Metal: Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.).
Bedding: The arrangement of sedimentary rocks in layers.
Bornite: Copper sulfide mineral. A copper ore mineral.
Breccia: A rock in which angular fragments are surrounded by a mass of fine-grained minerals.
Caldera: A large basin shaped volcanic depression of a roughly circular shape.
Chalcocite: Copper sulfide mineral. A primary copper ore mineral.
Concentrate: A fine, powdery product of the milling process containing a high percentage of valuable metal.
Conglomerate: A sedimentary rock consisting of rounded, water-worn pebble or boulders cemented into a solid mass.
Contact: A geological term used to describe the line or plane along which two different rock formations meet.
Core: The long cylindrical piece of rock, about an inch in diameter, brought to surface by diamond drilling.
Crosscut: A horizontal opening driven from a shaft and (or near) right angles to the strike of a vein or other orebody.
Deposit: A natural occurrence of mineral or mineral aggregate, in such quantity and quality to invite exploitation.
Development: Work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible.
Diamond Drill: A rotary type of rock drill that cuts a core of rock that is recovered in long cylindrical sections, two centimeters or more in diameter.
Dike: A tabular body of igneous rock that has been injected while molten into a fissure.
Dilution (mining): Rock that is, by necessity, removed along with the ore in the mining process, subsequently lowering the grade of the ore.
Dip: The angle at which a vein, structure or rock bed is inclined from the horizontal as measured at right angles to the strike.
Discordant: Non parallel contact between rock formations.
Dore: Unparted gold and silver poured into molds when molten to form buttons or bars. Further refining is necessary to separate the gold and silver.
Drift: A horizontal underground opening that follows along the length of a vein or rock formation as opposed to a cross-cut which crosses the rock formation.
Due Diligence: The degree of care and caution required before making a decision; loosely, a financial and technical investigation to determine whether an investment is sound.
EPA: Environmental Protection Agency. A part of the United States government that enforces environmental laws and provides information and guidance to policy makers.
Epithermal: Low temperature, hydrothermal, vein forming deposit created near the surface of the earth.
Exploration: Work involved in searching for ore, usually by drilling or driving a drift.
Fissure: An extensive crack, break or fracture in rocks.
Footwall: The rock on the underside of a vein or ore structure.
Flotation: The separation of the particles of a mass f pulverized ore according to their relative capacity for floating on a given liquid.
Fracture: A break in the rock, the opening of which allows mineral bearing solutions to enter. A “cross-fracture” is a minor break extending at more-or-less right angles to the direction of the principal fractures.
Galena: Lead sulfide, the most common ore mineral of lead.
Gangue: Vein minerals that have no economic value.
Grade: The average assay of a ton of ore, reflecting metal content.
High Grade: Rich ore. As a verb, it refers to selective mining of the best ore in a deposit.
Host Rock: The rock surrounding an ore deposit.
Intrusive: Igneous rocks that crystallize below Earth’s surface.
Level: The horizontal openings on a working horizon in a mine; it is customary to work mines from a shaft, establishing levels at regular intervals, generally about 50 meters or more apart.
Limestone: A bedded, sedimentary deposit consisting chiefly of calcium carbonate.
Lode: A mineral deposit in solid rock.
LOM: Life of Mine. The period of time for which a mine may continue to operate.
Mill: A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to affect recovery of the pure metal.
Mineral: A naturally occurring homogeneous substance having definite physical properties and chemical composition and, if formed under favorable conditions, a definite crystal form.
Mineral Resource: The economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a preliminary feasibility study (as defined in the Definition Standards on Mineral Resources and Mineral Reserves adopted by the Canadian Institute of Mining, Metallurgy and Petroleum). This Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined.
Mineralized Material or Deposit: A mineralized body which has been delineated by appropriate drilling and/or underground sampling to support a sufficient tonnage and average grade of metal(s) for potential development. Under SEC standards, such a deposit does not qualify as a reserve until a comprehensive evaluation, based upon unit cost, grade, recoveries, and other factors, conclude economic feasibility.
Mineralization: The presence of potentially economic minerals in a specific area or geological formation.
Net Profit Interest: A portion of the profit remaining after all charges, including taxes and bookkeeping charges (such as depreciation) have been deducted.
NPDES: National Pollutant Discharge Elimination System. A permit program of the EPA that controls water pollution by regulating point sources that discharge pollutants into waters.
Ore: Material that can be mined and processed at a positive cash flow.
Orebody: A natural concentration of valuable material that can be extracted and sold at a profit.
Ore Reserves: The calculated tonnage and grade of mineralization which can be extracted profitably; classified as possible, probable and proven according to the level of confidence that can be placed in the data.
Ounce: A troy ounce. There are 14.5833 troy ounces in one pound.
Patent: The ultimate stage of holding a mineral claim in the United States, after which no more assessment work is necessary because all mineral rights have been earned.
Patented Mining Claim: A parcel of land originally located on federal lands as an unpatented mining claim under the General Mining Law, the title of which has been conveyed from the federal government to a private party pursuant to the patenting requirements of the General Mining Law.
Prospect: mining property, the value of which has not been determined by exploration.
Probable (Indicated) Reserves: The economically mineable part of an Indicated and, in some circumstances, a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified.
Proven (Measured) Reserves: The economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified.
Reclamation: The restoration of a site after mining or exploration activity is completed.
Recovery: The percentage of valuable metal in the ore that is recovered by metallurgical treatment.
Reserves: That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of “Ore” when dealing with metalliferous minerals.
Resource: The calculated amount of material in a mineral deposit, based on limited drill information.
Sample: A small portion of rock or a mineral deposit, taken so that the metal content can be determined by assaying.
Sedex: An abbreviation for sedimentary exhalative, which are ore deposits that are interpreted to have been formed by release of ore-bearing hydrothermal fluids into a water body resulting in the precipitation of ore.
Shaft: A vertical or steeply inclined excavation for the purpose of opening and servicing a mine. It is usually equipped with a hoist at the top which lowers and raises a conveyance for handling personnel and materials.
Shear or Shearing: The deformation of rocks by lateral movement along numerous parallel planes, generally resulting from pressure and producing such metamorphic structures as cleavage and schistosity.
Silicified: Pore filling and mineral replacement by silica and silica minerals.
Stope: An underground excavation from which ore has been extracted either above or below mine level.
Stratigraphy: Strictly, the description of bedded rock sequences; used loosely, the sequence of bedded rocks in a particular area.
Stratabound: A mineral deposit confined to a single stratigraphic unit. Typically disseminated but can occur as veinlets.
Strike: The direction, or bearing from true north, of a vein or rock formation measured on a horizontal surface.
Sublevel: A level or working horizon in a mine between main working levels.
Sulfide: A compound of sulfur and some other element.
Syngenetic: A mineral deposit formed at the same time as the formation of the host rock.
Tetrahedrite: A copper silver sulfide mineral. An important copper and silver ore mineral.
Ton: A short ton. There are 2,000 pounds in a short ton.
Unpatented Mining Claim: A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law.
Volcanic: Pertaining to the activities, structure, or rock types of a volcano.
Vein: A mineralized zone having a more or less regular development in length, width and depth which clearly separates it from neighboring rock.
Wall Rocks: Rock units on either side of an orebody. The hanging-wall and footwall rocks of an orebody.
Waste: Barren rock in a mine, or mineralized material that is too low in grade to be mined and milled at a profit.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
As initially reported in our report on Form 10-Q for the quarter ended June 30, 2006, in September 2005, James D. Christianson and several small entities whom Christianson represents filed a lawsuit in the United States District Court for the Western District of Washington against several parties, including two directors of the Company.
The plaintiffs claim that several Company directors fraudulently induced the plaintiffs to invest in the Company and various other entities affiliated with the directors. The case was originally filed in federal court in the Western District of Washington, but was transferred to the District of Idaho in September 2006. Discovery has commenced. The plaintiffs initially assert claims for fraud, violation of Washington and Idaho securities laws, and violation of Idaho’s RICO statute, among other things, against Sterling, but most all were dismissed for failure to state actionable claims. Plaintiffs filed another amended complaint in October 2007, which limits the claims against Sterling to common law fraud. Motions to dismiss the latest complaint on the part of the Company and its directors are pending. The Company intends to defend the case vigorously, unless acceptable terms of settlement can be achieved.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders through the solicitation of proxies, or otherwise, during the quarter ended December 31, 2007.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER REPURCHASES OF EQUITY SECURITIES
Market price, stockholder matters, and unregistered sales
The Company’s common stock trades in the over-the-counter market and quotations for the common stock are listed in the Over the Counter Bulletin Board (“OTCBB”) and were formerly listed in the “Pink Sheets” published by the National Quotation Bureau under the symbol “SRLM.” The Company is also traded on the Toronto Stock Exchange (“TSX”) and the Frankfurt Exchange (“FWB”). The following table sets forth, for the respective periods indicated, the prices of the Company’s common stock in the over-the-counter market, as reported and summarized by the National Quotation Bureau. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
Holders
As of December 31, 2007, there were approximately 810 shareholders of record of the Company’s common stock.
Dividends
The Company has never paid any dividends and does not anticipate the payment of dividends in the foreseeable future.
Repurchases of common stock
There were no repurchases of equity securities by the Company during 2007.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2007 regarding the Company’s equity compensation plans.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following tables set forth selected financial data for each of the years in the five-year period ended December 31, 2007. The consolidated statement of operations data and balance sheet data are derived from the audited Consolidated Financial Statements of Sterling. The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this report.
Consolidated Statement of Operations Data:
Consolidated Balance Sheet Data:
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a minerals, exploration, development and a producing company. As is typical with such companies, losses are incurred in the stages of exploration and development, which typically need to be funded through equity or debt financing. The Company has expanded rapidly its range of activities since 2003 and this has generated funding requirements for:
(a) the rehabilitation, maintenance, exploration and mine planning at the Sunshine Mine,
(b) the initial entry into Mexico, acquisition costs of projects, and the financing and construction of the Barones plant, and
(c) increasing both administrative and operational staff to manage the increased scope of the Company’s activities.
The Company’s principal project is the Sunshine Mine in the State of Idaho. Initial production began in December 2007 with the first shipment of concentrates to a smelter. During the year, 88 full-time employees were hired at the Sunshine Mine, bringing the mine workforce at year end to 118.
Diamond drilling for the year totaled 18,355 feet of which 7,493 feet was in-house and 10,862 feet contracted. Drill results continue to guide additional drilling and exploration activities in the “upper country” of the mine.
In April 2007, the Sterling Tunnel Project was completed with the underground mining contractor advancing the project 2,519 feet during the year including 164 feet of tracked drift to connect with the Silver Summit, or east side of the mine. The contractor performed secondary excavation work totaling 880 feet to access portions of the Sunshine Vein and 167 feet of track drift to establish access for diamond drilling.
The Company’s underground diesel equipment started arriving in July and Sterling crews took over “upper country” mining activities in August. A second crosscut to the Sunshine Vein was started and drifting on an unmined portion of the Sunshine Vein commenced. By year end 876 feet of vein drifting was completed yielding approximately 5,630 tons of mill feed containing an estimated 32,408 ounces of silver.
Crews completed 142 feet of track drift started by the contractor and established a drill station to explore Sunshine-Polaris and Yankee Girl Veins. On 3100 level, another crew excavated 110 feet of track drift adjacent to the Jewell Shaft for a primary 13,200 to 2,400 volt substation to feed 2700 and 3100 levels.
The Silver Summit hoist became operational on August 10, 2007 and was certified to carry personnel to begin shaft repair in September. Shaft repair crews working on a double shift basis reached 3000 level on December 20, thus completing the lower mine’s secondary escapeway system as required by law.
A large multi-stage pump was installed in the Jewell Shaft to dewater to 3700 level. Dewatering began in April 2007, since then water in the shaft has been lowered 95 feet and is currently 220 feet below 3100 level.
Re-establishment of the escapeway system allowed mining activities to proceed on 2700 and 3100 levels. Following re-establishment of communications and compressed air, work was accelerated to re-establish electrical services across 3100 level to support the Sunshine ramp production and development area (SR1). Similar work is underway on 2700 level in the West Chance ore zone to restart production from that area.
Sterling mill and maintenance crews returned the concentrating facility to operational status using the Number 3 ball mill in late September. The regrind mill and Number 2 ball mill became operational in January and February 2008. Installation of a conveyor feed system to allow upper country ore to be introduced into the coarse ore bin was completed. Vein material from exploration drifting on the Sterling Tunnel level provided mill feed in the fourth quarter resulting in the first shipment of concentrates.
The Big Creek tailings impoundment facility was purchased in the first quarter. Water treatment equipment was installed at the impoundment and made operational. Start-up tailings will report to the tailings pond and sand storage tanks until renovation of the underground sandfill distribution system is complete in early 2008.
Nine underground diesel loaders, three single-boom hydraulic drill machines and one seven-ton haul truck were received during 2007. The Company continued to order and receive equipment and supplies and re-stock the mine warehouse to meet the development and production goals.
In Mexico, the Company is engaged in processing materials from its Barones property at the Barones processing plant. Besides continuing work to optimize processing capacity at the Barones project, Sterling is evaluating the potential for development of the San Acacio and Tesorito projects.
The Company’s operating mines are the Sunshine, the Barones silver project and the San Acacio mine in Zacatecas, Mexico. The crusher at the Barones project became operational in late July 2007, resulting in increased production, recoveries, precipitate and work-in-process inventory. Total production for the year was 113,087 ounces of silver and 85 ounces of gold compared to 72,069 ounces of silver and 87 ounces of gold in 2006. At the Barones silver project in Mexico, silver production was 61,303 ounces of silver and 53 ounces of gold in 2007. San Acacio ore processed at an outsourced concentrating facility resulted in additional silver production of 51,784 ounces of silver and 32 ounces of gold during 2007. The company realized a price of $13.05 per ounce of silver and $685.98 per ounce of gold in 2007 compared to $11.26 and $594.95 respectively in 2006.
The Company has exploration projects in Idaho, Montana and Mexico. During the third quarter of 2007, Sterling Mining Company continued acquisition and assessment of exploration properties in Mexico. The Company intends to enter into joint ventures with other junior exploration companies on several of its projects while advancing other projects by itself.
The Company has made substantial expenditures on its key projects, and will continue to do so. Thus, further progress will be heavily influenced by the Company’s ability to obtain significant funding from outside sources. Should significant funding not be raised concurrently with its capital requirements, the Company may be forced to curtail key initiatives.
Sterling Mining operates in the mining sector which has numerous and significant risk factors.
Results of Operations
Fiscal Year Ended December 31, 2007, Compared to Fiscal Year Ended December 31, 2006
Revenues
Revenues in fiscal years 2007 and 2006 consisted of sales of silver and gold to the refinery in Zacatecas, Mexico, and coin revenues in the United States from the sale of coins, rounds and bullion and from contract and lease income. Revenue increased by $1,001,049, or 133%, an increase to $1,888,573 for the year ended December 31, 2007 from $887,524 for the year ended December 31, 2006. The Sunshine Mine had a single concentrate sale in December 2007. Revenues from our operations in Mexico are $893,786 in 2007 compared to $829,165 in 2006. The increase in Mexico revenues in 2007 versus 2006 is primarily due to the ability to process coarse high grade ore, due to the crusher becoming operational in August, and to an increase in lease and contract income.
Cost of Revenues
Cost of revenues increased 46% to $1,393,360 for the year ended December 31, 2007from $956,263 in 2006. The variance is due to increased production in Mexico and the Sunshine Mine concentrate sale.
Costs and Expenses
Costs and expenses increased by $12.7 million, or 196% from $6.5 million for the year ended December 31, 2006, to $19.2 million for the year ended December 31, 2007. The primary contributors to the increase in costs and expenses include the increase of $7.8 million during 2007 over mine rehabilitation costs in 2006 and in general and administrative expenses. The increase in general and administrative expenses to $8.3 million in 2007 from $2.8 million in 2006 resulted from the increase in employees and support services required to advance the Company’s work on the Sunshine Mine, the increase in legal costs financing and filing costs, and the costs to manage the Company’s operation in Mexico.
Other Income and Expenses
Other income and expense decreased in 2007. Total other income in 2007 was $464,240 compared to total other income of $1,336,569 in 2006. The largest component of the change was a decrease in other income in 2007 compared to 2006 due to the gain on the Chester Mining Company transaction in 2006, which was partially offset by an increase in gain on the sale of investments.
Net Loss
As a result of the foregoing factors and after taking into consideration a gain of $13,784 from the Company’s investment in Chester Mining Company and a nominal gain of $25,854 from the Company’s investment in Merger Mines Corporation, the Company recognized a net loss of $18,726,144 for the year ended December 31, 2007, compared to a net loss of $5,230,395 for 2006. Of these amounts, in 2007 our United States geographical segment contributed $17,812,139 to the loss and our Mexico segment contributed $914,005 to the loss, and in 2006 our United States geographical segment contributed $4,318,338 to the loss and our Mexico segment contributed $912,056 to the loss.
Fiscal Year Ended December 31, 2006, Compared to Fiscal Year Ended December 31, 2005
Revenues
Revenues in fiscal years 2006 and 2005 consisted of sales of silver and gold to the refinery in Zacatecas, Mexico, and coin revenues in the United States from the sale of coins, rounds and bullion and from lease and contract income. Revenue increased by $395,808, or 80.5%, from $491,716 for the year ended December 31, 2005, to $887,524 for the year ended December 31, 2006. Nearly all of our revenue in 2006 and 2005 was derived from our operations in Zacatecas, Mexico. Revenues from operations in Mexico are $829,165 in 2006 compared to $441,160 in 2005. The increase in Mexico revenues in 2006 versus 2005 is primarily due to the fact that the Mexico segment produced silver for a full year in 2006 and for a partial year in 2005.
Cost of Revenues
Cost of revenues increased substantially from $362,758 in 2005 to $956,263 for the year ended December 31, 2006, which represents an increase of 263.6% year to year. The increase in cost of revenues is primarily the result of a full year of operation in 2006 versus a partial year in 2005.
Costs and Expenses
Costs and expenses increased by $2,115,124, or 48.2%, from $4,384,569 for the year ended December 31, 2005, to $6,499,693 for the year ended December 31, 2006. The primary contributors to the increase in costs and expenses include the increase of $906,976 during 2006 over 2005 in exploration costs related primarily to the Sunshine Mine, the increase in general and administrative expenses from $1,223,312 in 2005 to $1,902,427 in 2006 arising from the increase in employees and support services required to advance work on the Sunshine Mine and manage our operation in Mexico, and the increase of $640,732 in professional fees to $861,568 in 2006 compared to $220,836 in 2005.
Other Income and Expenses
Other income and expense improved dramatically in 2006. Total other income in 2006 was $1,336,570 compared to total other expense of $293,346 in 2005. The major components in the improvement are a gain on sale of investments of $171,410 in 2006 compared to a loss from sale of investments of $78,356 in 2005, a decrease in the loss on foreign exchange from a loss of $179,251 in 2005 to a loss of $95,149 in 2006, and the recognition of $1,362,416 in other income from the gain on the sale of Tabasquena mineral rights in Mexico in the fourth quarter, 2006, compared to no other income recognized in 2005.
Net Loss
As a result of the foregoing factors and after taking into consideration a nominal gain of $1,467 from our investment in Chester Mining Company, we recognized a net loss of $5,230,395 for the year ended December 31, 2006, compared to a net loss of $4,548,957 for 2005. Of these amounts, in 2006 our United States geographical segment contributed $4,318,339 to the loss and our Mexico segment contributed $912,056 to the loss, and in 2005 our United States geographical segment contributed $3,537,508 to the loss and our Mexico segment contributed $1,011,449 to the loss.
Liquidity and Capital Resources
At December 31, 2007, the Company’s cash balance was $6.1 million, current assets were $10.5 million, current liabilities were $5.3 million and working capital was $5.2 million. During 2007, Sterling received cash upon the exercise of options and warrants, private placement of common stock, and the issuance of one debenture. Total cash provided by financing activities in 2007 was approximately $37.1 million.
Whether we will need to seek additional financing from external sources in 2008 will depend on a number of factors, including, when full scale production begins at the Sunshine Mine, the level of production and silver prices, whether production from our properties in Mexico increases, and other circumstances that are difficult to predict until Sterling has completed its development activities and achieved a sustained period of production. Management has been successful in raising capital through private equity offerings and may seek additional debt and/or equity funding for future operations, if needed. There can be no assurances that financing will be available though private equity or debt offerings, if needed.
Sterling’s use of funds has been growing due to increasing exploration activities both in Mexico and at the Sunshine Mine in Idaho. Rehabilitation of the Sunshine Mine has been the primary use of funds for capital expenditures. The installation of the crusher at the Barones silver plant was the second largest capital expenditure during the year. Corporate General and Administrative expense has grown since 2006 as Sterling expanded its operational and administrative staff. As Sterling grows and ramps up to full production at the Sunshine Mine, management anticipates further capital improvements, equipment purchases and staff increases.
The financing requirements of Sterling will grow as the Sunshine Mine project advances during the next stages in 2008. Gross proceeds of approximately $24.5 million in financing were secured in August of 2007. Should the mine fail to produce positive operating cash flows, there is no assurance Sterling will be successful in it’s fund raising efforts in future years, or that its Mexican operations can generate significant excess cash to help fund operating expenses.
The capital requirements of Sterling’s Mexican operations will be dependent on the profits and cash flow from Barones and San Acacio operations, results of economic and technical studies on our other projects and any exploration projects Sterling may select for advancement.
Contractual Obligations
The Company is obligated under certain contractual arrangements for future cash expenditures. The following table sets forth our contractual obligations at December 31, 2007, for the periods shown:
Critical accounting policies and estimates
The Company has determined from the significant accounting policies disclosed in Note 2 of the Company’s financial statements, that the following three disclosures are critical accounting policies.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
At least annually, management reviews the reserves used to estimate the quantities and grades of ore at our mines which management believes can be recovered and sold economically. Management’s calculations of proven and probable ore reserves are based on in-house engineering and geological assessments using current operating costs, metals prices and, when applicable, on third-party audits of our reserves.
Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. A significant drop in metals prices may reduce reserves by making some portion of such ore uneconomic to develop and produce. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Estimated reserves, particularly for properties that have not yet commenced production, may require revision based on actual production experience.
Declines in the market prices of metals, increased production or capital costs, reduction in the grade or tonnage of the deposit or an increase in the dilution of the ore or reduced recovery rates may render ore reserves uneconomic to exploit. If our realized price for the metals we produce were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized.
Exploration Costs
In accordance with accounting principles generally accepted in the United States of America, the Company expenses exploration costs as incurred. Exploration costs expensed during the periods ended December 31, 2007, 2006 and 2005 were $2.6 million, $3.7 million, and $2.8 million respectively.
Mineral Development Costs
The Company will capitalize property acquisition costs for undeveloped mineral interests that have significant potential to develop an economic ore body. The Company will amortize the capital costs based on proven and probable ore reserves if an economic ore body is developed. If an economic ore body is not discovered, previously capitalized costs are expensed in the period in which it is determined that the property does not contain an economic ore body. Costs to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on a unit of production basis over proven and probable reserves. Gains and losses on the sales or retirement of assets are recorded as other income or expense.
Revenue Recognition Policy
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectability is considered probable. The passing of title to the customer is based on terms of sales contracts. Revenues from leases are recognized when realized and earned according to the lease provisions and receipt of the lease payments. The Company recognizes revenue from coin sales when title passes, which is typically when cash is received in exchange for the coins. When the Mexican subsidiary sells precipitate, revenue is recognized when payment is reported by the refining plant. Advance payments in Mexico are recorded as deferred revenue
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140.” This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a transfer of the servicer’s financial assets that meets the requirements for sale accounting; a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities; or an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. The statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable and permits an entity to choose either the amortization or fair value method for subsequent measurement of each class of servicing assets and liabilities. The statement further permits, at its initial adoption, a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities under Statement 115, provided that the available for sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations.
In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS No. 155”). This statement established the accounting for certain derivatives embedded in other instruments. It simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133 as well as eliminating a restriction on the passive derivative instruments that a qualifying special-purpose entity (“SPE”) may hold under SFAS No. 140. This statement allows a public entity to irrevocably elect to initially and subsequently measure a hybrid instrument that would be required to be separated into a host contract and derivative in its entirety at fair value (with changes in fair value recognized in earnings) so long as that instrument is not designated as a hedging instrument pursuant to the statement. SFAS No. 140 previously prohibited a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains on items for which the fair value option has been elected are to be reported in earnings. SFAS 159 will become effective as of the beginning of the first fiscal year that begins after November 15, 2007. Management has not determined yet the effect that adoption of SFAS 159 may have on our results of operations or financial position.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), Noncontrolling interests in Consolidated Financial Statements, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R ("SFAS 141R"), Business Combinations, which establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, goodwill acquired in the business combination, or a gain from a bargain purchase. SFAS 141R is effective for financial statements issued for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (hereinafter “FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material impact on its financial reporting, and the Company is currently evaluating the impact, if any the adoption of FIN 48 will have on its disclosure requirements.
In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,88,106, and 132(R)” (hereinafter :SFAS No. 158”). This statement requires an employer to recognize the overfunded or underfunded statues of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not for profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. The adoption of this statement had no immediate material effect on the Company’s financial condition or results of operations.
In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (hereinafter “SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. This statement does not require any new fair value measurements, but for some entities, the application of this statement may change current practice. The adoption of this statement had no immediate material effect on the Company’s financial condition or results of operations.
In February 2006, the FASB issued FSP No. 123(R)-4 “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of Contingent Event.” FSP 123(R)-4 amends paragraphs 32 and A229 of SFAS No. 123(R) to incorporate the concept that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet the condition in paragraphs 32 and A229 until it becomes probable that the event will occur, and that an option or similar instrument that is classified as equity, but subsequently becomes a
liability because the contingent cash settlement event is probable of occurring, shall be accounted for similar to a modification from an equity to liability award. FSP 123(R)-4 became effective when the Company adopted SFAS 123(R) and is not expected to have a material effect on the Company’s consolidated financial statements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange, interest rates, and commodity prices. Our operations in Mexico could potentially be affected by a change in the exchange rate of Mexican pesos into US dollars.
ITEM 8.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The financial statements of the Company appear at the end of this report beginning with the Index to Financial Statements on page.
Supplementary Financial Information
Selected quarterly financial data for the years ended December 31, 2007 and 2006 is as follows:
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes or disagreements in the past two fiscal years that are required to be reported.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this annual report on Form 10-K, an evaluation was carried out by Sterling Mining Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of Sterling Mining Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2007. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
During the evaluation of disclosure controls and procedures as of December 31, 2007, management identified material weaknesses in internal control over financial reporting, which management considers an integral component of disclosure controls and procedures. Material weaknesses identified include ineffective oversight of financial reporting, lack of appropriate accounting policies, procedures, and personnel, procedures for accounting for investments, journal entry documentation and procedures, and
management’s assessment of internal control over financial reporting. As a result of the material weaknesses identified, management concluded that Sterling Mining Company’s disclosure controls and procedures were ineffective.
Notwithstanding the existence of these material weaknesses, Sterling Mining Company believes that the consolidated financial statements in this annual report on Form 10-K fairly present, in all material respects, Sterling Mining Company’s financial condition as of December 31, 2007 and 2006, and results of its operations and cash flows for the years ended December 31, 2007 and 2006, in conformity with United States generally accepted accounting principles (GAAP).
Management’s Report on Internal Control over Financial Reporting
Management of Sterling Mining Company is responsible for establishing and maintaining adequate internal control over financial reporting. Sterling Mining Company’s internal control over financial reporting is a process, under the supervision of the Chief Executive Officer and the Chief Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Sterling Mining Company’s financial statements for external purposes in accordance with GAAP. Internal control over financial reporting 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 Company’s assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; 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.
Sterling Mining Company management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment, management identified material weaknesses in internal control over financial reporting.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of Sterling Mining Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified are disclosed below.
Ineffective Oversight of Financial Reporting. Sterling Mining Company has not provided an appropriate level of oversight of the financial reporting process and has not appropriately monitored the Company’s system of internal control. The Company’s monitoring of management’s assessment of internal control over financial reporting did not result in appropriate actions taken by management to remedy the deficiencies in the process to assess internal control over financial reporting.
Lack of Appropriate Accounting Policies, Procedures, and Personnel. Management of Sterling Mining Company has not established with appropriate rigor the accounting policies, procedures, and documentation of significant judgments and estimates made by management in the preparation of the financial statements, including accounting policies related to accounting for stock options and warrants, accounting for equity method investments, determination of the functional currency of the foreign subsidiary, and accounting for prepaid assets, as well as procedures for the remeasurement of the foreign subsidiary financial statements. In addition, management has not appropriately assessed the risk to reliable financial reporting related to the effects of unfilled key financial reporting position(s). This led to the identification by the auditors of material misstatements in the financial statements that were not identified by management related to the remeasurement of foreign subsidiary financial statements, investment accounting, and accounting for prepaid assets.
Procedures for Accounting for Investments. The Company holds available-for-sale securities in brokerage accounts, as well as maintaining a safe containing certificates for certain available-for-sale securities. Management does not perform a reconciliation between all sources of information related to the available-for-sale securities the Company holds to ensure the accuracy and completeness of investment information presented in the Company financial statements, resulting in the identification by the auditors of a required material adjustment to the Company financial statements due to a number of securities that had been erroneously excluded from the Company’s population of investment securities.
Journal Entry Documentation and Procedures. Journal entries are the principal means by which Sterling Mining Company’s books and records are compiled for financial reporting purposes, and management has not established a formal policy for the processing of journal entries, including required supporting documentation, review, and approval. Testing of the documentation, review, and approval of journal entries made in the accounting records of the Company confirmed that the Company has not maintained records that, in reasonable detail, accurately and fairly reflect the transactions of the Company. Documentation to support journal entries made was missing, inadequate, and lacked any evidence of approval.
Management’s Assessment of Internal Control over Financial Reporting. Management has not appropriately complied with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Management provided documentation of its assessment of internal control over financial reporting that was deficient in terms of accuracy, reliability, and appropriateness. Management’s evaluation of the risks to reliable financial reporting failed to identify key risks to the reliability of the financial statements, including remeasurement of the foreign subsidiary’s financial statements, consolidation of the financial statements, and the effects of unfilled key financial reporting positions. In addition, management failed to appropriately identify controls to address the risks, and also did not perform an evaluation of the design of the controls that were identified. The operating effectiveness testing performed failed to identify failures in the operations of controls, and, when questioned about the adequacy of the documentation as reasonable support for management’s report on internal control over financial reporting, management could not appropriately explain their rationale and did not respond with appropriate corrective action.
As a result of the material weaknesses in internal control over financial reporting described above, Sterling Mining Company management has concluded that, as of December 31, 2007, Sterling Mining Company’s internal control over financial reporting was not effective based on the criteria in Internal Control - Integrated Framework issued by the COSO.
The effectiveness of Sterling Mining Company’s internal control over financial reporting as of December 31, 2007, has been audited by Williams & Webster, P.S., an independent registered public accounting firm, as stated in their report appearing below, which expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.
REMEDIATION OF MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Sterling Mining Company is actively remedying the material weaknesses identified above, including enhancing the oversight responsibilities of the Audit Committee. Management is actively recruiting to fill the open Controller position, and is evaluating staffing of the Accounting Department. Existing accounting policies and procedures will be enhanced, and policies will be developed to address identified gaps. Management is negotiating the engagement of an independent third party to serve as an outsourced Internal Audit function and to provide appropriate internal control assessment documentation to support Sarbanes-Oxley compliance going forward.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2007, that materially affected, or are reasonably likely to materially affect, Sterling Mining Company internal control over financial reporting.
Subsequent to the period covered by this report, Sterling Mining Company implemented a new accounting software system as of January 1, 2008.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Sterling Mining Company
We have audited Sterling Mining Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sterling Mining Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, including in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting including obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the 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 (3) 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.
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statement will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
Ineffective Oversight of Financial Reporting
Sterling Mining Company has not provided an appropriate level of oversight of the financial reporting process and has not appropriately monitored the Company’s system of internal control. The Company’s monitoring of management’s assessment of internal control over financial reporting did not result in appropriate actions taken by management to remedy the deficiencies in the process to assess internal control over financial reporting.
Lack of Appropriate Accounting Policies, Procedures, and Personnel
Management of Sterling Mining Company has not established with appropriate rigor the accounting policies, procedures, and documentation of significant judgments and estimates made by management in the preparation of the financial statements, including accounting policies related to accounting for stock options and warrants, accounting for equity method investments, determination of the functional currency of the foreign subsidiary, and accounting for prepaid assets, as well as procedures for the remeasurement of the foreign subsidiary financial statements. In addition, management has not appropriately assessed the risk to reliable financial reporting related to the effects of unfilled key financial reporting position(s). This led to the identification by the auditors of material misstatements in the financial statements that were not identified by management related to the remeasurement of the foreign subsidiary financial statements, investment accounting, and accounting for prepaid assets.
Procedures for Accounting for Investments
The Company holds available-for-sale securities in brokerage accounts, as well as maintaining a safe containing certificates for certain available-for-sale securities. Sterling Mining Company management does not perform a reconciliation between all sources of information related to the available-for-sale securities the Company holds to ensure the accuracy and completeness of investment information presented in the Company financial statements, resulting in the identification by the auditors of a required material adjustment to the Company financial statements due to a number of securities that had been erroneously excluded from the Company’s population of investment securities.
Journal Entry Documentation and Procedures
Journal entries are the principal means by which Sterling Mining Company’s books and records are compiled for financial reporting purposes, and management has not established a formal policy for the processing of journal entries, including required supporting documentation, review, and approval. Testing of the documentation, review, and approval of journal entries made in the accounting records of the Company confirmed that the Company has not maintained records that, in reasonable detail, accurately and fairly reflect the transactions of the Company. Documentation to support journal entries made was missing, inadequate, and lacked any evidence of approval.
Management’s Assessment of Internal Control over Financial Reporting
Management has not complied with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Management provided documentation of its assessment of internal control over financial reporting that was deficient in terms of accuracy, reliability, and appropriateness. Management’s evaluation of the risks to reliable financial reporting failed to identify key risks to the reliability of the financial statements, including remeasurement of the foreign subsidiary’s financial statements, consolidation of the financial statements, and the effects of unfilled key financial reporting positions. In addition, management failed to appropriately identify controls to address the risks, and also did not perform an evaluation of the design of the controls that were identified. The operating effectiveness testing performed failed to identify failures in the operations of controls, and, when questioned about the
adequacy of the documentation as reasonable support for management’s report on internal control over financial reporting, management could not appropriately explain their rationale and did not respond with appropriate corrective action.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2007 financial statements, and this report does not affect our report dated March 28, 2008, on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Sterling Mining Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity and comprehensive income, and cash flows of Sterling Mining Company, and our report dated March 28, 2008, expressed an unqualified opinion.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Spokane, Washington
March 28, 2008
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Officers
The following table sets forth the names, ages, and positions with Sterling Mining for each of the directors and officers:
All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualify. Officers serve at the discretion of our Board. The following is information on the business experience of each director and officer.
Raymond K. De Motte, President, CEO and Director. Mr. De Motte has been President and CEO of Sterling since 1998. He has also been a director and chief financial officer of Kimberly Gold Mines, Inc. since 1999. Mr. De Motte spends approximately 95% of his time on activities related to Sterling. He holds a Bachelor of Science in International Business Administration from the American College of Switzerland and a Master of Business Administration from Golden Gate University in San Francisco, California. Mr. De Motte is a member of the Canadian Institute of Mining and Metals and the Society of Economic Geologists. Mr. De Motte has been directly responsible for guiding the growth of the company since late 1998.This growth has included acquisition of control of the Sunshine Mine, an expansion of the company’s silver prospects from 340 acres to over 60,000 acres under Sterling’s control in key silver districts and return to production of the Sunshine mine.
James N. Meek, Vice-President and Chief Financial Officer. Mr. Meek has over 25 years of experience in accounting and asset management in the mining industry. He was appointed Chief Financial Officer of Sterling on September 1, 2005, after having served as Acting Chief Financial Officer of Sterling Mining since May 26, 2005. From 2004 until joining Sterling Mining, Mr. Meek worked as an independent consultant. From 1993 to 2004, Mr. Meek served as Treasurer of Coeur d’Alene Mines Corporation. Mr. Meek has also held the positions of acting controller for Century Mining Company and Accounting Manager for ASARCO Incorporated. He holds a Bachelor of Arts in Mathematics from Rocky Mountain College, a Master of Business Administration from the University of Idaho and is a licensed CPA in the State of Idaho.
Kevin G. Shiell, Executive Vice President, Director. Mr. Shiell has been a director and Executive Vice-President of Sterling Mining since January 2003. He has also been a foreman and superintendent of Stillwater Mining Company since 1999 and President and a director of Kimberly Gold Mines, Inc. since 2003. Mr. Shiell spends approximately 5% of his time on matters relating to Sterling Mining and 95% of his time on his other professional activities. Mr. Shiell has been in the mining business for over 25 years in operation positions such as Mine Foreman, Mine Superintendent and Manager of Operations with various companies in the western United States. He has experience with safety, human relations, mine site construction and infrastructure, as well as development, production and maintenance of operating mines. Mr. Shiell is also a member of the Northwest Mining Association.
Carol Stephan, Director. Ms. Stephan serves as a corporate secretary, treasurer, and/or director for several mining companies in north Idaho. Ms. Stephan also owns and operates several businesses in Idaho. Ms. Stephan is a director of Shoshone Silver Mining Company. She has served as a director of Sterling Mining since 2003 and manager of Silver Valley Capital since 2003.
David J. Waisman, Director. Mr. Waisman has been employed as a business development manager for SVL Analytical in Kellogg, Idaho since 1993. Prior thereto, he was employed as Senior Exploration Geologist for Hecla Mining. He holds degrees in Geology from the University of Montana and Colorado State University and is a director of the Society of Inland Northwest Environmental Scientists, and is on the Advisory Board of Kimberly Gold Mines, Inc. Mr. Waisman has served as a director of Sterling Mining since 1998.
Roger A. VanVoorhees, Director. Mr. VanVoorhees graduated with a Bachelor of Science from Western Michigan University and has business and investment interests in the hospitality, real estate, oil and gas, and metal mining industries.
J. Kenney Berscht, Director. Mr. Berscht graduated with a degree in Business Administration from the University of Western Ontario, Canada, has held executive positions with a number of energy companies and is a member of the American Institute of Mining, Metallurgical and Petroleum Engineers.
Certain Employees
In addition to the foregoing executive officers and directors, the following information is provided with respect to significant employees of Sterling Mining at the Sunshine Mine:
Michael McLean, General Manager, Sunshine Mine Division. Mr. McLean has served as Sterling Mining’s Mine Manager at the Sunshine Mine since 2004. From 2001 to 2004, Mr. McLean was Manager of Engineering at Energy Products of Idaho. He served as the Mine Manager and Chief Engineer of the Sunshine Mine from 1995 to 2001 and designed and managed production systems at the mine. He holds a Bachelor of Science in Mining Engineering from the University of Nevada, Reno, and has more than 20 years of experience in mine management and engineering.
Section 16(a) Filing Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors of Sterling Mining and persons who own more than ten percent of a registered class of its equity securities to file reports of ownership and changes in their ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission, and forward copies of such filings to Sterling Mining. Based on the copies of filings received by Sterling Mining during the most recent fiscal year the following reports were filed late with respect to transactions in 2007. Ray Demotte, a director, President and CEO, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 and filed a Form 5 late. Mr. Demotte filed the Form 5 and an amended Form 4 on March 31, 2008. Kevin Shiell, a director and Executive Vice-President, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 and filed a Form 5 late. The Form 5 and an amended Form 4 were filed on March 5, 2008. Carol Stephan, a director, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 and filed an amended Form 4 on March 11, 2008. David Waisman, a director, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 and filed an amended Form 4 on March 5, 2008. Roger VanVoorhees, a director, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 filed an amended Form 4 on March 5, 2008. J. Kenney Berscht, a director, filed a Form 4 on September 6, 2007 that was due by August 27, 2007 and filed an amended Form 4 on March 5, 2008. James Meek, an officer Vice-President and CFO, filed a Form 5 late on March 5, 2008. No directors, officers, and beneficial owners hold more than ten percent of our equity.
Code of Ethics
Sterling Mining has adopted a code of ethics that applies to Sterling Mining’s executive officers, its Chief Financial Officer and all other employees, as well as to the members of Sterling Mining Company’s Board of Directors. The Company will provide to any person, without charge, a copy of the code of ethics upon written or oral request directed to Monique Hayes, Marketing Communication Manager, at Sterling Mining Company, 609 Bank Street, Wallace, Idaho 83873, telephone (208) 556-0227.
Director Nominations
The Board of Directors has not made any changes to the procedures by which security holders may recommend nominee’s to our Board of Directors.
Audit Committee
In September 2006, the Board formed the Audit Committee, the current members of which are J. Kenney Berscht (Chairperson), Carol Stephan, Roger A. Van Voorhees, and David J. Waisman. The Board has determined that each of the members of the Audit Committee is “independent” under the criteria set forth in Rule 4350(d) of the NASDAQ Marketplace Rules, and that at least J. Kenney Berscht is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General Philosophy
At the end of September 2006, Sterling Mining’s Board of Directors adopted a Compensation Committee Charter and established the Compensation Committee through the appointment of independent, non-employee directors. The Committee is responsible for establishing and administering Sterling Mining’s executive and director compensation programs and arrangements.
Executive Compensation
The Committee’s compensation objective is designed to attract and retain the best available talent while efficiently utilizing available resources. In circumstances where Sterling Mining has nominal revenues and is focused on bringing the Sunshine Mine back into production and applying its capital to that purpose, the challenge for the Committee is stretching limited capital resources to effectively seek out and retain executives with the education, skills, and experience necessary for restarting and running a major underground mining operation in the United States. The Committee is learning to meet that challenge by developing packages consisting of different forms of compensation that strike a balance between limiting the amounts of cash paid out for compensation
and fostering commitment to Sterling Mining through the upside potential of deferred compensation paid in the form of equity ownership or participation. The Committee seeks to compensate employees with a complete package competitive with comparable employers in the mining industry while maintaining internal and external equality and aligning senior management’s compensation with the long-term interests of shareholders. The process the Committee is developing for establishing compensation consists of targeting overall compensation for each executive officer and allocating that compensation among base salary and incentive compensation. The Committee believes that a significant portion of total compensation should be earned through incentive compensation.
Allocation among Components. Under the Committee’s compensation structure, the mix of base salary, cash bonus, and equity compensation varies depending upon the employment level. In allocating compensation among these elements, the Committee believes that the compensation of its senior-most levels of management, such as the Chief Executive Officer (“CEO”), the levels of management having the greatest ability to influence Sterling Mining’s performance, should be significantly performance-based. However, the Committee recognizes that certain critical control positions, such as the Chief Financial Officer (“CFO”), should receive a greater portion of their total compensation in the form of base salary versus incentive to assure sound judgment in decisions that will not be influenced by incentive payouts. At lower levels of management and staff, the Committee designs incentive compensation, as needed, which includes both cash and equity awards, to reward the achievement of specific performance goals within areas under control of the relevant employees, although company-wide performance is also a factor.
In making compensation allocations, the Committee will rely in part upon an evaluation of aggressive exploration companies. The allocation made by the Committee is consistent with the results in their evaluation, which showed the peer group providing their executive management with targeted cash incentive opportunities.
Base Salaries. The Committee provides its executive management with a level of assured cash compensation in the form of base salary that is competitive in the market, is based upon the experience level of the individual executive, is consistent with other companies with similar performance characteristics, and promotes sound judgment in daily decision making. The Committee concluded that for 2007, the appropriate base salary for the CEO is $156,000 and the appropriate base salary for the CFO is $180,000. These salaries were determined based upon the evaluation and analysis performed by the Committee relative to targeted overall compensation.
Incentive Bonuses. The Committee will award incentive cash bonuses based upon performance objectives. For 2007, the performance goals achieved by Sterling Mining’s CEO and CFO were viewed as being instrumental in obtaining financing for advancing rehabilitation of the Sunshine Mine.
Equity Compensation. The primary form of equity compensation consists of stock options. Beginning in 2006, the accounting treatment for stock options changed as a result of Statement of Financial Accounting Standards No. 123(R), making the accounting treatment of stock options somewhat less attractive. Nevertheless, it should be expected the Committee will continue to use options as a compensation tool and will evaluate opportunities to use other forms of stock and equity awards in the future.
Executive Agreements. The Committee believes that employment agreements, severance and change of control agreements are appropriate for its senior management and top executives.
Retirement Plans. Sterling Mining has no defined pension plan. Sterling Mining does maintain a 401(k) “Safe Harbor” Plan in which Sterling Mining matches employee contributions up to 100% of the employee’s contribution, with a maximum equal to three percent of eligible compensation, and 50% of the next two percent of eligible compensation.
Perquisites and Other Benefits. The Committee annually reviews the perquisites that executive management receives. The current available perquisite for executive management is the lease payment for vehicles. The Committee recognizes this automobile allowance pursuant to the employment agreements of the CEO and CFO.
Board Process. The Compensation Committee of the Board of Directors approves all compensation awards to executive officers. The Compensation Committee will review the performance and compensation of the executive officers, and following discussions with those individuals and the members of the Board of Directors and, where it deems appropriate, other advisors, will establish their compensation levels. The Chair of the Committee reports to the full board the actions of the Committee. With respect to employee equity compensation awards, the Committee will recommend awards to the full Board of Directors for discussion and approval.
Director Compensation
Director compensation is evaluated and recommended by the Committee and approved by the full Board of Directors. Sterling Mining does pay directors who are also employees for their service as directors, so all directors are compensated similarly for their service as directors. Currently Sterling Mining does not provide for incentive cash bonuses, defined pension benefits, deferred compensation, medical or dental benefits, or perquisites for its non-employee directors.
Summary Compensation Table
The following table sets forth the compensation paid or accrued for the benefit of the principal executive officer and principal financial officer of Sterling Mining, who are the only executive officers whose total compensation exceeded $100,000 for the year ended December 31, 2007.
STERLING MINING COMPANY-EXECUTIVE COMPENSATION TABLE
No other officers received total compensation in excess of $100,000 in 2005, 2006 and 2007.
(a) Stock awards valued according to FAS 123R using a Black-Scholes valuation method. Shares granted to officers in 2007 are as follows; Ray DeMotte, 11,000; Kevin Shiell, 11,000; James Meek, 10,000; Michael Mooney, 10,000.
(b) Options to officers for service years 2006 and 2007 were awarded in 2007 as follows: Ray DeMotte, 250,000; Kevin Shiell, 100,000; James Meek, 200,000; Michael Mooney, 100,000
Raymond K. De Motte Employment Agreement
Sterling Mining entered into an employment agreement with Raymond K. De Motte, Sterling Mining’s President and Chairman of the Board, on January 1, 2004. The agreement has a ten-year term. The annual salary under the agreement is presently $156,000, and may be adjusted at the discretion of the Board of Directors. The agreement also provides for standard health insurance and vacation benefits. The agreement provides for payment of a vehicle allowance that Mr. De Motte has waived to date, but which may be paid in the future upon Mr. De Motte’s request and approval of the Board. Mr. De Motte is entitled to receive each year stock options on 100,000 shares of Sterling Mining common stock under his employment agreement, which was amended to 50,000 Shares for 2006 and 2007. The agreement also provides for a single lump-sum payment of $600,000, net of taxes, in the event Mr. De Motte’s employment is terminated by Sterling Mining for reasons other than cause, or if Mr. De Motte terminates his employment for good reason (as defined in the agreement). In addition, pursuant to his employment agreement Mr. De Motte is entitled to put all of his Sterling Mining stock to Sterling Mining for an aggregate amount of $200,000 or the aggregate market price of such stock, whichever is greater. In the event Mr. De Motte’s employment is terminated for cause, or if he resigns for reasons other than a good reason, then Mr. De Motte is entitled to a single lump-sum payment, net of taxes, of $100,000.
James N. Meek Employment Agreement
During 2005, Sterling Mining entered into an Employment Agreement with James N. Meek, who was elected and appointed Vice-President and Chief Financial Officer for Sterling Mining. The agreement is for a term of three years, expiring on September 1, 2008, and the current annual salary is $180,000, and may be adjusted at the discretion of the Board of Directors. The agreement also provides for standard health insurance and vacation benefits. The agreement provides for payment of a vehicle allowance that Mr. Meek has waived to date, but which may be paid in the future upon Mr. Meek’s request and approval of the Board. As provided in his employment agreement, Mr. Meek earned a bonus of $25,000 in 2005 when Sterling Mining filed its registration statement on Form 10 with the Securities and Exchange Commission and earned an additional bonus of $25,000 in 2006 when quotations for the common stock of Sterling Mining were approved for publication on the OTC Bulletin Board, but payment of these bonuses was not made until 2007 when the Board determined there was sufficient capital to make the expenditures. Mr. Meek’s agreement further provides that a bonus of $20,000 will be paid when Sterling Mining files an application for listing on the American Stock Exchange and a bonus of $50,000 will be paid when Sterling Mining is approved for trading on the American Stock Exchange. Mr. Meek is entitled to receive each year stock options of 100,000 shares of Sterling Mining common stock under his employment agreement, which was amended to 50,000 for 2006 and 2007. Discretionary performance bonuses may be awarded as determined by the Board.
Equity Awards and Benefits in 2007
Neither the CEO nor the CFO exercised any stock options or realized any monetary amount on stock rights or awards during 2007 or 2006. Sterling Mining awarded options per the employment agreements in 2007, but did not have any stock options or stock awards outstanding at the end of 2006. In September 2006, the Board of Directors adopted an Employee Stock Purchase Plan and Equity Incentive Plan, in each case subject to stockholder approval.
Employee Stock Purchase Plan
On May 17, 2007, Sterling’s shareholders approved the adoption of an employee stock purchase plan (ESPP) to promote Sterling’s operating performance and growth potential by encouraging employees to acquire equity in Sterling. The ESPP is administered by the Compensation Committee of the Board; however, the Board may exercise the Compensation Committee’s powers and duties under the ESPP.
A total of 200,000 shares of common stock are authorized for purchase over the term of the ESPP. Shareholder approval is required for any increase in the number of shares authorized for purchase under the ESPP.
Under the ESPP, shares are issued through a series of offerings, each of a duration designated by the plan administrator, but in no event longer than 27 months. Each participant is granted a separate option to purchase shares for each offering period in which he or she participates. The Compensation Committee establishes one or more purchase dates during the offering on which shares are purchased and the maximum number of shares that may be purchased on any given purchase date, but in no event can the aggregate dollar amount of shares purchased during an offering exceed 15% of a participant’s earning for the applicable period.
Any individual who customarily works for more than 20 hours per week for more than five months per calendar year in the employ of Sterling is eligible to participate in one or more offering periods. An eligible employee may only join an offering period on the start date of that period.
The purchase price per common share for each purchase date is equal to 85% of the lower of, the fair market value per share of Sterling’s common stock on the start date of that offering period, or the fair market value per share of Sterling’s common shares on the purchase date. The fair market value per share on any relevant date will be the average of the highest “bid” quotation and lowest “asked” quotation of a common share on such date as reported on the OTC Bulletin Board.
The ESPP imposes certain limitations upon a participant’s rights to acquire common shares including:
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No purchase right may be granted to any individual who owns common stock (including common stock purchasable under any outstanding options or purchase rights) possessing 5% or more of the total combined voting power or value of all classes of shares of Sterling; and
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No purchase right granted to a participant may permit such individual to purchase common stock at a rate greater than $25,000 worth of such common shares (valued at the time such purchase right is granted) for each calendar year.
A participant’s purchase right immediately terminates upon such participants loss of eligible employee status and his or her accumulated payroll deductions for the offering period in which the purchase right terminates are promptly refunded. A participant may withdraw from an offering period at any time prior to the end of that period and elect to have his or her accumulated payroll deductions for the offering period in which such withdrawal occurs either refunded or applied to the purchase of common stock on the next purchase date.
No participant has any shareholder rights with respect to the common stock covered by his or her purchase right until the shares are actually purchased on the participant’s behalf. No adjustment will be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase.
If Sterling is acquired by merger or asset sale during an offering period, the surviving entity can assume and carry over the ESPP. If the ESPP is not continued, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. No purchase right will be assignable or transferable and will be exercisable only by the participant.
In the event any changes is made to the outstanding common shares by reason of any recapitalization, share dividend, share split, combination of shares, exchange of shares or other change in corporate structure effected without Sterling’s receipt of consideration, appropriate adjustments will be made to: (i) the class and/or maximum number of shares of common stock issuable under the ESPP, including the class and/or maximum number of shares issuable per participant or in the aggregate on any one purchase date, and (ii) the class and/or maximum number of shares of common shares subject to each outstanding purchase right and the purchase price payable per share thereunder.
The ESPP will terminate upon the earliest to occur of, May 17, 2017, the date on which all available shares of common stock are issued, or the date on which all outstanding purchase rights are exercised in connection with an acquisition of Sterling.
The Board may at any time alter, suspend or discontinue the ESPP. However, the Board may not, without shareholder approval, increase the number of shares issuable under the ESPP, except in connection with certain changes in Sterling’s capital structure, alter the purchase price formula so as to reduce the purchase price, or modify the requirements for eligibility to participate in the ESPP.
Equity Incentive Plan
On May 17, 2007, the shareholders of Sterling adopted an equity incentive plan (Equity Plan). The Equity Plan is intended to further Sterling’s growth, development and financial success by attracting and retaining talented employees, consultants and directors, and by aligning the long-term interests of such persons with those of the shareholders by providing an opportunity to acquire an ownership interest in Sterling and by providing both performance rewards and long term incentives for future contributions to Sterling’s success.
The Equity Plan permits the grant of incentive stock options, nonqualified stock options, restricted shares, restricted share units, stock appreciation rights, and cash awards. The Equity Plan is administered by the Compensation Committee of the Board. The Compensation Committee has full authority to adopt such rules and procedures as it may deem necessary for the proper plan administration and to interpret the provisions of the Equity Plan. The powers of the Compensation Committee to administer the Equity Plan are subject to any limitations imposed by the Board on the Compensation Committee’s powers in any resolution duly adopted by the Board.
Options granted under the Equity Plan are designated as either incentive stock options or as nonqualified options, and the exercise price of such options ranges from 100% to 110% of the fair market value per share on the date of grant. Repricing of options following grant is not permitted under the Equity Plan. The term of each incentive stock option ranges from two to three years, and the term of nonqualified options can range up to fifteen years. The Compensation Committee has the power to determine the vesting schedule and other terms applicable to options pursuant to an option award.
Grants of restricted shares or restricted share units (consisting of a right to receive common shares in the future or their cash equivalent, or both) may be made under the Equity Plan. The terms of a specific grant will be determined by the Compensation Committee and incorporated into an award agreement with the recipient. The Compensation Committee may impose such conditions or restrictions on the restricted shares or restricted share units as it may determine advisable, including the achievement of specific performance goals, time based restrictions on vesting, conduct criteria or others. If the Compensation Committee established performance or other goals, the Compensation Committee shall determine whether a participant has satisfied the performance of such goals.
The Compensation Committee also has the power and authority, exercisable in its sole discretion, to grant stock appreciation rights to selected participants that cover a specified number of shares and are exercisable upon such terms and conditions as the Compensation Committee may establish. Upon exercise of a stock appreciation right, the holder is entitled to receive a distribution from Sterling of an amount equal to the excess of, the aggregate fair market value (on the exercise date) of the common stock underlying the exercised right, over the aggregate base price in effect for the common stock. The number of shares of common stock underlying each stock appreciation right and the base price in effect for the shares (which may not be less that the fair market value of the common stock on the date of grant) are determined by the Compensation Committee at the time the stock appreciation right is granted. The distribution with respect to an exercised stock appreciation right may be made in common shares valued at fair market value on the exercise date, in cash, or partly in common shares and partly in cash, as the Compensation Committee shall deem appropriate.
Finally, cash awards that are intended to qualify as “performance based compensation” may be made under the Equity Plan and are paid in cash upon the achievement, in whole or part, of performance goals relating to one or more of the performance criteria selected by the Compensation Committee and specified at the time such cash awards are granted. These criteria shall be selected and calculated under a methodology established in writing by the Compensation Committee prior to the issuance of a cash award.
A total of 2,100,000 shares of common stock have been reserved for issuance under the Equity Plan, subject to adjustment for certain changes in Sterling’s capitalization. The reserved common shares may be used for any of the types of awards available under the Equity Plan. Shareholder approval is required for any increase in the number of shares authorized for issuance under the Equity Plan.
The shares of common stock issuable under the Equity Plan may be drawn from Sterling’s authorized but unissued shares of common stock or from shares reacquired by Sterling, including shares repurchased on the open market. Common shares subject to any outstanding award under the Equity Plan that expire or otherwise terminate prior to the issuance of those shares will be available for subsequent awards. Unvested shares issued under the Equity Plan and subsequently cancelled or repurchased by Sterling, at the exercise or purchase price paid per share, pursuant to its repurchase rights under the Equity Plan, will also be available for subsequent awards.
Should the exercise price of an option under the Equity Plan be paid with shares of common stock or should shares otherwise issuable under the Equity Plan be withheld by Sterling in satisfaction of the withholding taxes incurred in connection with the issuance, exercise or vesting of an award, the number of shares available for issuance under the Equity Plan will be reduced by the gross number of fully-vested common shares for which the option is exercised or the gross number of fully-vested shares issued under the award, and not by the net number of shares issued pursuant to that award.
Employees, directors, and consultants in the service of Sterling or its subsidiaries are eligible to participate in the Equity Plan. In the event Sterling is acquired by merger, asset sale, or similar corporate transaction, outstanding awards may be assumed by the surviving entity. If not assumed, the Compensation Committee has discretion to resolve outstanding awards by, accelerating the exercise date of the award, or require surrender of the award for cancellation in exchange for payment of the spread between the value per share of common stock in the corporate transaction and the amount the participant is required to pay under the award to acquire a share of common stock.
The Compensation Committee will have the discretion to structure one or more awards under the Equity Plan so that those awards will vest in full either immediately upon a corporate transaction or in the event the individual’s service with Sterling or the successor entity is terminated (actually or constructively) within a designated period following a corporate transaction, whether or not those awards are to be assumed or otherwise continued in effect.
The acceleration of vesting in the event of a corporate transaction, change in control or hostile take-over of Sterling may be seen as an anti-takeover provision and may have the affect of discouraging a merger, a take-over attempt or other efforts to gain control of Sterling.
The holder of an option or stock appreciation award will have no shareholder rights with respect to the shares subject to that award unless and until such person shall have exercised the award. Awards are not assignable or transferable other than by will or the laws of inheritance following the holder’s death. The Compensation Committee, however, has discretion on awards that are not incentive stock options to permit assignment on such terms as it may determine.
A participant may have certain shareholder rights with respect to the restricted shares issued to him or her under restricted stock units, whether or not his or her interest in those shares is vested, as determined by the Compensation Committee. Such rights may include the right to vote the shares and to receive any regular cash dividends paid on the shares.
In the event any change is made to the outstanding shares of common stock by reason of any recapitalization, dividend, share split, combination of shares, exchange of shares or other change in corporate structure effected without Sterling’s receipt of consideration, appropriate adjustments will be made to, the maximum number and/or class of securities issuable under the Equity Plan, the number and/or class of securities and the exercise or base price per share of common stock in effect under each outstanding award, and the maximum number of shares of common stock that may be issued pursuant to awards of restricted shares and restricted share units under the Equity Plan. All such adjustments will be designed to preclude any dilution or enlargement of benefits under the Equity Plan or the outstanding Equity Awards thereunder.
The Board may amend, modify, suspend or terminate the Equity Plan at any time, subject to shareholder approval pursuant to applicable laws, regulations, or rules of any stock exchange (or over-the-counter market, if applicable) on which the common stock is then listed for trading. No such amendment, modification, suspension or termination shall adversely affect the rights and obligations with respect to stock options, unvested restricted shares or restricted stock awards at the time outstanding under the Equity Plan unless the optionee or the participant consents to such amendment or modification. Unless sooner terminated by the Board, the Equity Plan will terminate on the earliest of September 26, 2016, the date on which all shares of common stock available for issuance under the Equity Plan have been issued as fully-vested shares, or the termination of all outstanding options, unvested restricted shares and restricted stock units in connection with certain changes in control or ownership of Sterling. Should the Equity Plan terminate in September 2016, all option grants, unvested restricted shares and unvested restricted stock units outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants, issuances or awards.
Recent Awards
On June 15, 2007, Sterling issued an aggregate of 810,000 options to purchase shares of its common stock to 12 officers, directors, employees and consultants of Sterling, exercisable at prices ranging from $4.00 to $4.30 per share through dates ranging from June 2009 to May 2010. Of these options, most vested July 1, 2007, with the remaining options vesting at the rate of 25% annually. The vesting dates range from July 2007 through December 2010.
Nonqualified Deferred Compensation
Raymond K. De Motte Employment Agreement
Under his employment agreement, Mr. De Motte is entitled to receive a single lump-sum payment of $600,000, net of taxes, in the event his employment is terminated by Sterling Mining for reasons other than cause, or if Mr. De Motte terminates his employment for good reason as defined in the agreement, which includes a change in control of Sterling Mining. In addition, pursuant to his employment agreement Mr. De Motte is entitled to put all of his Sterling Mining stock to Sterling Mining for an aggregate amount of $200,000 or the aggregate market price of such stock, whichever is greater. Based on a market price of $3.47 at December 31, 2007, the amount that would have been paid for 172,686 shares of common stock owned by Mr. De Motte would be $599,220. In the event Mr. De Motte’s employment is terminated for cause, or if he resigns for reasons other than a good reason, then Mr. De Motte is entitled to a single lump-sum payment, net of taxes, of $100,000. In the event termination is a result of disability, Mr. De Motte would receive full salary for three months, one-half salary for an additional three months, and payment of health insurance premiums for 12 months. Based on his current level of compensation, the aggregate payments on termination for disability would be $47,808.
James N. Meek Employment Agreement
Under his employment agreement, if Mr. Meek is terminated without cause or if there is a change in control of Sterling Mining, he is entitled to receive 36 months of salary, any stock options granted will vest immediately, he will receive a payment equal to 100% or the greater of any target bonus or bonus actually earned during the preceding 24-month period, and he will receive payment of health insurance premiums for a period of two years. On a change in control Mr. Meek will also receive an additional bonus equal to 40% of his salary and receive additional equity equivalent to the type an amount of equity held prior to the change in control. Based on his current compensation arrangement, he would receive $841,953 if terminated without cause, and $913,953 plus 30,000 shares of common stock if there is a change in control. For the purpose of calculating such payments, all Federal and State taxes and Federal excise taxes shall be grossed-up such that Mr. Meek receives the amount specified after all taxes have been paid.
Director Compensation
The following table shows compensation paid or accrued for the last fiscal year to Sterling Mining’s directors.
In September 2006, the Board of Directors adopted a compensation plan for directors. Under the plan, each director receives as an annual fee $16,008 paid monthly in cash. In addition, Directors are compensated at a rate of $100 per hour for additional director work outside of the preparation for and attendance of Board meetings. As additional consideration for services in years prior to 2006, the Board approved a one time payment of $16,000 for each Director who served throughout 2005.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee formed in September 2006 are Carol Stephan, Roger A. Van Voorhees, and J. Kenney Berscht, and no other directors served on the Compensation Committee during 2006. No interlocking relationship exists between our Compensation Committee and the board of directors or compensation committee of any other company.
Prior to September 2006, executive compensation decisions were made by the entire Board. Raymond K. De Motte, a director and our President and Chief Executive Officer, and Kevin G. Shiell, a director and our Executive Vice President, participated in deliberations on executive compensation prior to the formation of the Compensation Committee. Mr. De Motte is a director and Mr. Shiell is a director of Kimberly Gold Mines, Inc.
Report of Compensation and Benefits Committee on Executive Compensation
Carol Stephan was the chairperson of the Committee and Roger A. Van Voorhees, and J. Kenney Berscht served on the Compensation Committee. The Compensation Committee was comprised solely of non-employee directors who were each: (i) independent as defined, (ii) a non-employee director for purposes of Rule 16b-3 of the Securities Exchange Act of 1934, and (iii) an outside director for purposes of Section 162(m) of the Internal Revenue Code.
The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Form 10-K.
Respectfully submitted,
Carol Stephan, Chairperson
Roger A. Van Voorhees
J. Kenney Berscht
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 25, 2008, the number and percentage of the outstanding shares of common stock and warrants and options that, according to the information supplied to Sterling, were beneficially owned by (i) each person who is currently a director, (ii) each executive officer, (iii) all current directors and executive officers as a group and (iv) each person who, to the knowledge of Sterling, is the beneficial owner of more than five percent of the outstanding common stock. Except as otherwise indicated, the persons named in the table have sole voting and dispositive power with respect to all shares beneficially owned, subject to community property laws where applicable.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence and Committees
The Board has determined that Carol Stephan, David J. Waisman, Roger A. Van Voorhees, and J. Kenney Berscht, who constitute a majority of the board, are “independent directors” under the criteria set forth in Rule 4200(15) of the NASDAQ Marketplace Rules. The Board does not have a separately designated nominating committee, so the function of evaluating and nominating persons for election as directors is performed by the entire Board.
In September 2006, the Board formed the Compensation Committee, the current members of which are Carol Stephan (Chairperson), Roger A. Van Voorhees, and J. Kenney Berscht. The Board has determined that each of the members of the Compensation Committee is “independent” under the criteria set forth in Rule 4200(15) of the NASDAQ Marketplace Rules.
Also in September 2006, the Board formed the Audit Committee, the current members of which are J. Kenney Berscht (Chairperson), Carol Stephan, Roger A. Van Voorhees, and David J. Waisman. The Board has determined that each of the members of the Audit Committee is “independent” under the criteria set forth in Rule 4350(d) of the NASDAQ Marketplace Rules, and that at least J. Kenney Berscht is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.
Review of Transactions with Related Persons
The Bylaws of Sterling Mining provide that it cannot enter into a “director’s conflict of interest transaction,” unless the transaction is approved through the designated “directors’ action” or “shareholders’ action.” A director’s conflict of interest transaction is any transaction effected or proposed to be effected by Sterling Mining, or by a subsidiary, in which
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a director knows at the time of the commitment that he or she or a related person is a party to the transaction or has a beneficial financial interest in or so closely linked to the transaction and of such financial significance to the director or a related person that the interest would reasonably be expected to exert an influence on the director’s judgment if he or she were called upon to vote on the transaction; or
·
the transaction is brought, or is of such character and significance that it would in the normal course be brought before the Board of Directors for action, and the director knows at the time of commitment that any of the following persons is either a party to the transaction or has a beneficial financial interest in or so closely linked to the transaction and of such financial significance to the person that the interest would reasonably be expected to exert an influence on the director’s judgment if he or she were called upon to vote on the transaction: an entity of which the director is a director, general partner, agent or employee; a person that controls, is controlled by, or is under common control with, an entity of which the director is a director, general partner, agent or employee; or, an individual who is a general partner, principal, or employer of the director.
A director’s conflict of interest transaction is effective if approved by “directors’ action,” which is approval by a majority (but not less than two) of the directors on a committee or, if there is no such committee, the Board of Directors who do not have a conflicting interest with respect to the transaction, or a familial, financial, professional, or employment relationship with the director the who does have a conflicting interest respecting the transaction, which relationship would, in the circumstances, reasonably be expected to exert an influence on the first director’s judgment when voting on the transaction. However, such approval is not effective unless the directors giving the required approval have been informed in advance of the nature and circumstances of the conflict of interest associated with the transaction.
A director’s conflict of interest transaction is effective if approved by “shareholders’ action,” which is approval by a majority of the outstanding shares entitled to vote that are not owned or controlled by directors or related persons who are subject to the conflict of interest. However, such approval is not effective unless the shareholders voting on the matter have been informed in advance of the nature and circumstances of the conflict of interest associated with the transaction.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees and expenses billed by our principal accounting firm, Williams & Webster, P.S., for fees and expenses billed during fiscal years ended December 31, 2007 and 2006, were as follows:
Audit related fees were for reviews of our filings on Form 10 for 2007 and 2006, meetings with the Board and executive officers, and work required by our filing a registration statement on Form 10.
Each of the permitted non-audit services has been pre-approved by the Board of Directors or the Chief Executive Officer pursuant to delegated authority by the Board of Directors, other than de minimus non-audit services for which the pre-approval requirements are waived in accordance with the rules and regulations of the Securities and Exchange Commission.
The Audit Committee will pre-approve audit services and non-audit services to be provided by our independent auditors before the accountant is engaged to render these services. The Audit Committee may consult with management in the decision-making process, but may not delegate this authority to management. The Audit Committee may delegate its authority to pre-approve services to one or more Audit Committee members, provided that the designees present the pre-approvals to the full committee at the next committee meeting.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
See Index to Financial Statements and Supplemental Data at page
Exhibits
Copies of the following documents are included as exhibits to this Form 10-K pursuant to Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in City of Coeur d’Alene, State of Idaho, on March 31, 2008.
STERLING MINING COMPANY
By:
/s/ Raymond K. De Motte
Raymond K. De Motte
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ James N. Meek
James N. Meek
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Date
/s/ Raymond K. DeMotte
March 31, 2008
Raymond K. DeMotte, Director
/s/ Kevin G. Shiell
Kevin G. Shiell, Director
March 31, 2008
/s/ Carol Stephan
Carol Stephan, Director
March 31, 2008
/s/ David J. Waisman
David J. Waisman, Director
March 31, 2008
/s/ Roger A. VanVoorhees
Roger A. VanVoorhees, Director
March 31, 2008
/s/ J. Kenney Berscht
J. Kenney Berscht, Director
March 31, 2008
STERLING MINING COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2007 and 2006
Consolidated Statements Of Operations and Comprehensive Loss - Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements Of Stockholders’ Equity - Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements Of Cash Flows - Years Ended December 31, 2007, 2006 and 2005
Notes To Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Sterling Mining Company
We have audited Sterling Mining Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sterling Mining Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, including in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting including obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Sterling Mining Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity and comprehensive income, and cash flows of Sterling Mining Company, and our report dated March 28, 2008, expressed an unqualified opinion.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Spokane, Washington
March 28, 2008
F - 2
STERLING MINING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
F - 3
STERLING MINING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
The accompanying notes are an integral part of these financial statements.
F - 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
STERLING MINING COMPANY AND SUBSIDIARY
The accompanying notes are an integral part of these financial statements.
F - 5
STERLING MINING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
F - 6
STERLING MINING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Sterling Mining Company was incorporated in the State of Idaho on February 21, 1903, for the purpose of exploring and developing mineral properties through the sale, leasing or joint venture of such properties. The consolidated financial statements presented herein include those of Sterling Mining Company and its majority-owned subsidiary, Sterling Mining de Mexico S.A. de C.V., collectively herein referred to as “the Company” or “Sterling.” Sterling Mining de Mexico S.A. de C.V. was incorporated in Mexico on February 27, 2004, to engage in the business of exploring and developing mining properties in Mexico.
The Company is engaged in the exploration of and mining of properties in the Coeur d’Alene Mining District region in North Idaho, in Montana and in the State of Zacatecas, Mexico.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Accounting Method
The Company’s financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Accounts Receivable
The Company carries its accounts receivable at net realizable value. On a periodic basis, the Company evaluates its accounts receivable and determines if an allowance for doubtful accounts is necessary, based on a history of past write-offs and collections and current credit conditions. At December 31, 2007, the Company’s accounts receivable balance includes an allowance for doubtful accounts of $10,828.
Asset Retirement Obligations
The Company accounts for asset retirement obligations and conditional asset retirement obligations in according with SFAS 143, FIN 47 and U.S. GAAP.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Compensated Absences
Employees of the Company may be paid vacation, sick, and personal days off. During 2007 the Company accrued compensated absences expense during the year totaling $40,725.
Concentration of Risk
The Company maintains its domestic cash in several commercial banks in Coeur d’Alene, Idaho. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Approximately $5.8 million of the Company’s cash in U.S. bank accounts was not FDIC insured at December 31, 2007. The Company also maintains cash in a Mexican bank. The Mexican accounts, which had a U.S. dollar balance of $10,558 at December 31, 2007, is considered uninsured.
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (hereinafter “SFAS No. 133”) as amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140.” See Recent Accounting Pronouncements.
F - 7
If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
Historically, the Company has not entered into derivative contracts to hedge existing risks.
The Company issued one convertible debenture in 2007 which did not give rise to derivative instruments.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Although there were common stock equivalents outstanding December 31, 2007, they were not included in the calculation of earnings per share because they would have been considered anti-dilutive.
As of December 31, 2007, the Company had outstanding options, warrants and convertible debt for a total of 10,772,971 shares which were considered anti-dilutive.
Equity Method
The Company applies the equity method to account for investments for which it has significant influence upon the investee, according to APB Opinion 18 and subsequent pronouncements.
During 2007 the Company acquired significant influence in Merger Mines Corporation and began accounting for its investment in Merger Mines Corporation using the equity method. The value of the Company’s investment in Merger Mines Corporation increased to approximately $1.4 million during 2006. Sterling owns 43% of the voting shares of common stock issued and outstanding by Merger. The difference between the carrying value of the investment in Merger and the underlying equity in the net assets of Merger is $225,388. Consequently, management considers $225,388 of its investment in Merger to be goodwill. Management has evaluated the investment in Merger Mines Corporation and does not consider it to be impaired, at December 31, 2007.
During 2006 the Company acquired significant influence in Chester Mining Company and began accounting for its investment in Chester Mining Company using the equity method. Sterling owns 47% of the voting shares of common stock issued and outstanding by Chester. The difference between the carrying value of the investment in Chester and the underlying equity in the net assets of Chester Mining Company is $240,124 consequently; management considers $240,124 of its investment in Chester to be goodwill. Management has evaluated the investment in Chester Mining Company and does not consider it to be impaired. at December 31, 2007
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
At least annually, management reviews the reserves used to estimate the quantities and grades of ore at our mines which management believes can be recovered and sold economically. Management’s calculations of proven and probable ore reserves are based on in-house engineering and geological assessments using current operating costs, metals prices and, when applicable, on third-party audits of our reserves.
Reserve estimates will change as existing reserves are depleted through production and as production costs and/or metals prices change. A significant drop in metals prices may reduce reserves by making some portion of such ore uneconomic to develop and produce. Changes in reserves may also reflect that actual grades of ore processed may be different from stated reserve grades because of variation in grades in areas mined, mining dilution and other factors. Estimated reserves, particularly for properties that have not yet commenced production, may require revision based on actual production experience.
Declines in the market prices of metals, increased production or capital costs, reduction in the grade or tonnage of the deposit or an increase in the dilution of the ore or reduced recovery rates may render ore reserves uneconomic to exploit. If our realized price for the metals we produce were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, net losses, reduced cash flow, restatements or reductions in reserves and asset write-downs in the applicable accounting periods. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. No assurance can be given that the estimate of the amount of metal or the indicated level of recovery of these metals will be realized.
Exploration Costs
F - 8
In accordance with accounting principles generally accepted in the United States of America, the Company expenses exploration costs as incurred. Exploration costs expensed during the years ended December 31, 2007, 2006 and 2005 were $2.7 million, $3.7 million, and $2.8 million, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments, as defined by Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments,” include cash, marketable securities, investments in stocks, purchase options, purchase warrants, receivables, payables and accrued expenses. Cash, receivables, payables and accrued expenses are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at December 31, 2007 and 2006. Marketable securities, investments in stocks, purchase options and purchase warrants are accounted for by market prices when available, or by other valuation methods described in these notes when market prices are not available.
Foreign Currency Transactions
The Company created a Mexican subsidiary during 2004 for the purpose of exploration and exploitation of silver bearing minerals in Mexico. The Company translates into United States dollars the assets and liabilities of its Mexico subsidiary according to generally accepted accounting principles. The Company translates into United States dollars the revenues, expenses, gains and losses of its Mexican subsidiary at the transaction date and records them according to generally accepted accounting principles. Management has concluded that for the purposes of financial reporting, the functional currency of the Mexican subsidiary is the United States dollar. Consequently, management uses the temporal method of foreign currency translation.
Inventories
Metals inventories are carried at the lower of current market value or average unit cost. Production costs include the cost of direct labor and materials, depreciation, amortization, and overhead costs relating to mining and processing activities. Materials and supplies inventories are valued at the lower of average cost or fair market value. The inventories balance at December 31, 2007 represented supplies inventory in the U.S. and Mexico, silver concentrate in the U.S., silver concentrate and precipitate in Mexico.
Mineral Development Costs
The Company will capitalize property acquisition costs for undeveloped mineral interests that have significant potential to develop an economic ore body. The Company will amortize the capital costs based on proven and probable ore reserves if an economic ore body is developed. If an economic ore body is not discovered, previously capitalized costs are expensed in the period in which it is determined that the property does not contain an economic ore body. Costs to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and will be amortized on a unit of production basis over proven and probable reserves. Gains and losses on the sales or retirement of assets are recorded as other income or expense.
Prepaid Expenses
The Company’s current prepaid expenses primarily consist of prepaid insurance premiums and prepaid lease payments which are paid for up to a year in advance. Prepaid lease payments for periods beyond one year are considered other non-current assets. Non-current assets are primarily comprised of the 20 year Barones lease which was prepaid in 2004 and is being amortized over the 20-year lease term. See Note 5.
Minority Interest
The Company owns 99% of its Mexico subsidiary, Sterling Mining de Mexico S.A. de C.V. The 1% minority in the subsidiary is owned by an individual. A minority interest is not shown on the balance sheet because there is a negative value to the capital account of the minority interest holder. Additionally, the minority holder is not expected to make additional capital contributions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary after elimination of intercompany accounts and transactions. The majority-owned subsidiary of the Company is named above.
Property and Equipment
Property and equipment is recorded at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. See Note 4.
F - 9
Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by SFAS No. 109 to allow recognition of such an asset.
At December 31, 2007, the Company had deferred tax assets, calculated at an expected rate of 34%, of approximately $7,570,000 principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax assets, a valuation allowance equal to the deferred tax asset has been recorded.
The Company’s deferred tax assets are estimated as follows:
At December 31, 2007, the Company has net operating loss carryforwards of approximately $22.3 million from U.S. operations, which expire in the years 2017 through 2026. The change in the allowance account from December 31, 2006 to December 31, 2007, was approximately $2.5 million.
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140.” This statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a transfer of the servicer’s financial assets that meets the requirements for sale accounting; a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities; or an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. The statement also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable and permits an entity to choose either the amortization or fair value method for subsequent measurement of each class of servicing assets and liabilities. The statement further permits, at its initial adoption, a one-time reclassification of available for sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available for sale securities under Statement 115, provided that the available for sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations.
In February 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS No. 155”). This statement established the accounting for certain derivatives embedded in other instruments. It simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133 as well as eliminating a restriction on the passive derivative instruments that a qualifying special-purpose entity (“SPE”) may hold under SFAS No. 140. This statement allows a public entity to irrevocably elect to initially and subsequently measure a hybrid instrument that would be required to be separated into a host contract and derivative in its entirety at fair value (with changes in fair value recognized in earnings) so long as that instrument is not designated as a hedging instrument pursuant to the statement. SFAS No. 140 previously prohibited a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for fiscal years beginning after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. Management believes the adoption of this statement will have no impact on the Company’s financial condition or results of operations.
F - 10
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains on items for which the fair value option has been elected are to be reported in earnings. SFAS 159 will become effective as of the beginning of the first fiscal year that begins after November 15, 2007. Management has not determined yet the effect that adoption of SFAS 159 may have on our results of operations or financial position.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), Noncontrolling interests in Consolidated Financial Statements, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R ("SFAS 141R"), Business Combinations, which establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, goodwill acquired in the business combination, or a gain from a bargain purchase. SFAS 141R is effective for financial statements issued for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (hereinafter “FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material impact on its financial reporting, and the Company is currently evaluating the impact, if any the adoption of FIN 48 will have on its disclosure requirements.
In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,88,106, and 132(R)” (hereinafter :SFAS No. 158”). This statement requires an employer to recognize the overfunded or underfunded statues of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not for profit organization. This statement also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. The adoption of this statement had no immediate material effect on the Company’s financial condition or results of operations.
In September, 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (hereinafter “SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosure about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. This statement does not require any new fair value measurements, but for some entities, the application of this statement may change current practice. The adoption of this statement had no immediate material effect on the Company’s financial condition or results of operations.
In February 2006, the FASB issued FSP No. 123(R)-4 “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of Contingent Event.” FSP 123(R)-4 amends paragraphs 32 and A229 of SFAS No. 123(R) to incorporate the concept that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet the condition in paragraphs 32 and A229 until it becomes probable that the event will occur, and that an option or similar instrument that is classified as equity, but subsequently becomes a liability because the contingent cash settlement event is probable of occurring, shall be accounted for similar to a modification from an equity to liability award. FSP 123(R)-4 became effective when the Company adopted SFAS 123(R) and is not expected to have a material effect on the Company’s consolidated financial statements.
Reclassification
Certain amounts from prior periods have been reclassified to conform to the current period financial statement presentation. This reclassification has not resulted in changes to the Company’s accumulated deficit or net losses presented.
Revenue Recognition Policy
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectability is considered probable. The passing of title to the customer is based on terms of sales contracts. Revenues from leases are recognized when realized and earned according to the lease provisions and receipt of the lease payments. The Company recognizes revenue from coin sales when title passes, which is typically when cash is received in exchange for the coins. When the Mexican subsidiary sells precipitate, revenue is recognized when payment is reported by the refining plant. Advance payments in Mexico are recorded as deferred revenue.
F - 11
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (R), “Share-Based Payments.” The Company has adopted this statement, as previously discussed.
NOTE 3 - MARKETABLE SECURITIES AND INVESTMENTS
Investment in Securities
The Company’s investment portfolio consists primarily of small-cap mining stocks, options and warrants.
The Company’s investments in securities are classified as either trading, held to maturity, or available-for-sale in accordance with Statement of Financial Accounting Standards No. 115. During the years ended December 31, 2007 and 2006, the Company did not own any securities classified as trading or held to maturity, but did own securities classified as available-for-sale. Available-for-sale securities consist of equity securities not classified as trading securities or as securities to be held to maturity. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in a separate component of other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the average cost method and are included in earnings. The Company uses the average cost method to determine the gain or loss on investment securities held as available-for-sale, based upon the accumulated cost bases of specific investment accounts.
Certain “long-term investments” are those that management intends to hold for more than one year. Other investments are in options and warrants, which are recorded at fair market value, calculated using a conventional Black Scholes pricing model. Assumptions made in estimating the fair value include the risk-free interest rate, volatility and expected life. In 2007, the volatility ranged from 49% to 105%. Expected life used was the number of days to expiration. The risk-free interest rate used was the Federal Reserve Board’s risk-free rate most closely corresponding to the option or warrant lifetime. On the Company’s balance sheet, short-term available-for-sale securities are classified as “marketable securities.” Long-term available-for-sale securities and other investments are classified as “investments.”
The changes in marketable securities, long-term investments, and investments-other during the twelve months ended December 31, 2007 and 2006, are as follows:
12 Months ended December 31, 2007
Fair Value at Dec. 31, 2006
Reclassification
Plus Purchases
Less Sales at Cost
Plus (Less) Unrealized Gain (Loss)
(Less) Impairments
Fair Value at Dec 31, 2007
Investments Long-Term
$ 432,329
$ (222,264)
$ 349,848
$ (56,250)
$ 485,666
$ -
$ 989,328
Investments Other
349,924
-
-
-
(55,625)
-
294,299
Total-Investments
782,253
-
349,848
(56,250)
430,040
-
1,283,627
Marketable Securities
790,514
-
1,388,715
(451,452)
(443,065)
-
1,284,712
Total-Marketable Securities and Investments
$1,572,767
$ -
$ 1,738,563
$ (507,702)
$ (13,024)
$ -
$ 2,568,339
12 Months ended December 31, 2006
Fair Value at Dec. 31, 2005
Reclassification
Plus Purchases
Less Sales at Cost
Plus (Less) Unrealized Gain (Loss)
(Less) Impairments
Fair Value at Dec 31, 2006
Investments Long-Term
$ 335,389
$ 33,875
$ (14,666)
$ 77,732
$ -
$ 432,329
Investment in Chester Mining Company
46,150
2,775,585
-
(14,942)
-
2,808,238
Investments Other
343,314
125,393
(108,081)
(10,702)
-
349,924
Total-Investments
724,853
2,934,853
(122,747)
53,533
-
3,590,491
Marketable Securities
288,715
282,641
(106,260)
388,327
(62,908)
790,514
Total-Marketable Securities and Investments
$1,013,568
$ 3,217,494
$ (229,008)
$ 440,393
$ -
$ 4,381,005
The value of the Company’s marketable securities and long-term investments increased during the period from December 31, 2006 to December 31, 2007, primarily due to the acquisition of shares in various companies. Marketable securities increased by approximately $422,000 and long-term investments increased by approximately $557,000. The Company adjusts the value of its securities to current market prices at the end of each reporting period.
During 2007 the Company acquired significant influence in Merger Mines Corporation and began accounting for its investment in Merger Mines Corporation using the equity method. The value of the Company’s investment in Merger Mines Corporation increased to approximately $1.4 million during 2006. Sterling owns 43% of the voting shares of common stock issued and outstanding by Merger. The difference between the carrying value of the investment in Merger and the underlying equity in the net assets of
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Merger is $225,388. Consequently, management considers $225,338 of its investment in Merger to be goodwill. Management has evaluated the investment in Merger Mines Corporation and does not consider it to be impaired at December 31, 2007.
During 2006 the Company acquired significant influence in Chester Mining Company and began accounting for its investment in Chester Mining Company using the equity method. Sterling owns 47% of the voting shares of common stock issued and outstanding by Chester. The difference between the carrying value of the investment in Chester and the underlying equity in the net assets of Chester Mining Company is $240,124 consequently; management considers $240,124 of its investment in Chester to be goodwill. Management has evaluated the investment in Chester Mining Company and does not consider it to be impaired at December 31, 2007.
The value of other investments, which include stock purchase options and stock purchase warrants, decreased during the period from December 31, 2006 to December 31, 2007 by approximately $29,000. The Company adjusts the balance of its options and warrants at the end of each reporting period using the Black-Scholes options pricing model. The values of these instruments are expected to decrease over time as their expiration dates approach. However, the valuations are subject to market prices, and there may be periods in which the values of certain instruments rise.
NOTE 4 - PROPERTY AND EQUIPMENT
Equipment is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets which range from 3-10 years. The following summarizes capitalized equipment and accumulated depreciation:
In 2007, the Company acquired 13 pieces of underground mining equipment and one set of mine rescue equipment under a capital lease agreement.
The Company conducts a major part of its operation with leased equipment. These equipment leases, which are for 2 years each, expiring in 2009, are classified as capital leases. Each lease contains the option for the Company, after the initial lease term, to purchase the property at approximately 15% of the purchase price.
The rental payments under each lease are based on the remaining balance, after an initial down payment of 40%, subject to a stated interest rate of 12%. The first and last months payments are due at the beginning of the lease term and do not reduce the balance used to calculate the minimum lease payment, resulting in implicit interest rates of approximately 14%.
Depreciation expense for the years ended December 31, 2007, 2006 and 2005, was $463,891, $34,211, and $21,811, respectively. The increase in 2007 was primarily due to depreciation on leased underground diesel equipment.
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The following is an analysis of the leased property under capital leases by major classes:
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2007:
The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts, or other acceptable measures. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.
NOTE 5 - MINERAL PROPERTIES
The Company conducts exploration activities on patented and unpatented mining claims, and where appropriate, seeks joint-venture partners to lease or sell such properties.
Sunshine Mine
On June 6, 2003, the Company leased the Sunshine Mine, which includes approximately 240 patented and unpatented mining claims and related infrastructure buildings and equipment. The property includes the Sunshine Mine and Mill and all of the proximate support buildings, including the shops, dry, assay office, mine office, warehouse, hoist house, compressor building and surface and underground equipment. The leased property also includes the ConSil Mine and Mill and related infrastructure buildings and equipment. The lease, with a term of 15 years, provides an option for the Company to purchase the property for an amount between $3 and $5 million, indexed to the price of silver. The Company issued two million shares of common stock, assumed certain property tax payments in arrears and made other cash payments to secure the lease. The Company pays a monthly lease fee of $10,000 per month and is subject to certain royalty interests payable to third parties when the mine is in production. There are no work requirements included in the lease other than to comply with applicable laws and regulations. The Company is developing a plan to put the mine back into production and is concurrently engaging in surface exploration that has consisted of geochemical and geophysical studies and core diamond drilling. The Company has subsequently acquired by lease several adjacent properties to the Sunshine Mine that are accessible from the underground workings of the mine.
Galena-East/West Claims
The Company owns, by right of location, 17 unpatented mining claims in the Coeur d’Alene Mining District Region which are adjacent to the Galena Mine property of U.S. Silver Corp. In 1996, a 20-year lease was signed on the claim group which requires payment to the Company of an annual royalty of $4,200 and a 15% net profit interest.
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Chester Group of Mining Claims
On February 4, 2004, the Company leased the Chester Group (“Chester”) which consists of nine patented mining claims and a 1/3 interest in four other patented mining claims that are adjacent to the mining claims of the Sunshine Mill. The lease term is for 25 years and is renewable for an additional 25 years. The lease is subject to an advance royalty payable by the Company of $600 per month until such time as a royalty of 4% on net returns or a royalty of 20% of net profits is payable. The Company is also obligated by the lease to issue to Chester Mining Company 50,000 shares of restricted Sterling Mining Company common stock on each anniversary date that the lease is in effect. In 2006, the Company acquired an ownership of 43% of Chester’s voting stock, giving Sterling significant influence in Chester Mining Company. In 2006, the Company began using the equity method to account for its investment in Chester.
JE Prospect
On January 15, 2003, the Company signed a lease on the JE Prospect covering 220 acres in northwest Montana. Pursuant to the agreement, in year 1 of the lease the Company located 17 claims covering an additional 340 acres. The lease payment schedule is as follows:
·
$1,000 upon execution of the agreement, and upon 30 day and 10 month anniversaries
·
$12,500 by October 31, 2007 and $15,000 by October 31, 2008
·
$20,000 per year on all subsequent October 31st dates
A production royalty of 2% gross returns will be paid to lessors on the total dollar value of the sales price of metals recovered from the property. During years 1-10 of the agreement, 0.5% of the aforementioned production royalty may be bought by the Company for $500,000. The remaining 1.5% royalty will remain effective through the life of the agreement, unless another buyout is negotiated. In year 2 of the lease, there is no work commitment other than the minimum requirement for claim maintenance unless the Company elects to withdraw from the project. In year 3, the Company is obligated for one drill hole, a minimum of 1,200 feet deep. In years 4 through 10, the Company is required to do a minimum of 1,000 feet of drilling per year.
During 2006, the Company entered into an option agreement with Silver Fields Resources Inc. (formerly Red Lake Resources) regarding the JE prospect. Under the terms of the agreement, Silver Fields may earn a 75% interest in the property for cash payments totaling US $300,000, the issuance of 500,000 common shares of Silver Fields common stock to Sterling and $600,000 work commitment for exploration during the next three years. Sterling will retain a 25% interest and a 2.5% net smelter return. After Silver Fields has completed its earn-in, Sterling may maintain or increase its 25% carried interest by participating in future exploration and development.
Merger Mines Mining Claims
The Company leased the Merger Mines (“Merger”) group of thirty-five patented mining claims that are adjacent to the mining claims of the Sunshine Mine on July 6, 2004. The lease term is for 25 years and is renewable for an additional 25 years. The lease is subject to an advance royalty payable by the Company of $2,500 per year until such time as a royalty of 5% on NSRs is payable. The advance royalty increases to $5,000 per year at the beginning of the sixth year, increases to $7,500 per year at the beginning of the eleventh year, and increases to $10,000 at the beginning of the twenty-first year. The Company also issued to Merger Mines Corporation 20,000 shares of restricted Sterling Mining Company common stock as required by the lease at the beginning of the lease term. The Company is required to perform certain exploration activities during the first 18 months with minimal costs to be incurred of $25,000, during the second 18 months with minimal costs to be incurred of $100,000, and following the first 36 months a minimum of $25,000 per year.
Metropolitan Mines Mining Claims
The Company leased on September 16, 2004 the Metropolitan Mines Corporation’s (“Metropolitan”) group of forty unpatented mining claims and Metropolitan’s partial interest in two patented claims that are adjacent to the mining claims of the Sunshine Mine. The Company also conveyed to and leased back from Metropolitan Mines Corporation 37 unpatented mining claims. The lease term is indefinite until cancelled. The lease is subject to an advance royalty payable by the Company of $1,000 per month until such time as ore is produced from the Metropolitan property. Net proceeds, when ore is produced, are to be split between Metropolitan (16% or 50%) and the Company (84% or 50%) depending upon the location of the production. Metropolitan Mines Corporation also delivered 200,000 shares of their restricted common stock to the Company as part of the aforementioned lease transactions.
Mineral Mountain Mining Claims
The Company leased the Mineral Mountain Mining and Milling Company (“Mineral Mountain”) group of four patented mining claims that are adjacent to the mining claims of the Sunshine Mine on February 25, 2004. The lease term is for 25 years and is renewable for an additional 25 years. The lease is subject to an advance royalty payable by the Company of $3,600 per year until such
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time as net profits royalties of 3% are payable. The Company also issued to Mineral Mountain 30,000 shares of restricted Sterling Mining Company common stock as required by the lease at the beginning of the lease term.
Northwest Montana Group Claims (“Timberline Resources”)
The Company leased four groups of unpatented mining claims located in Lincoln and Sanders Counties in Western Montana from Timberline Resources Corporation. Each claim group has the potential to host stratabound silver/copper deposits in the favorable Revett rock formation. The Lucky Luke Claim Group consists of twenty unpatented mining claims in Sanders County, the Standard Creek Claim Group consists of twenty nine unpatented mining claims in Lincoln County, the Minton Pass Claim Group consists of twenty unpatented mining claims in Sanders County, and the East Bull Claim Group consists of twenty-six unpatented mining claims in Lincoln County, Montana. The lease was dated November 26, 2004, has a term of 20 years and is renewable for an additional twenty years. The lease is subject to an advance royalty of $5,000 for each of the above claim groups that remain subject to the lease on June 1 of each year beginning in 2007. The Company is obligated for a payment of $20,000 annually for all four groups. Consideration provided to Timberline by the Company consisted of recognizing as paid a $65,500 receivable, and a cash payment to Timberline of $19,600.
Rock Creek
The Company leased twenty six unpatented claims and one patented claim at Rock Creek (Idaho). The lease was signed by the Company on March 1, 2006, with a term of 25 years, with a 25% net profits royalty and an advance minimum royalty of $500 per month applied against net profits royalty when operational. Contained within the lease is a work commitment of $50,000 per every 5-year period. As part of the lease transaction, the Company issued to Rock Creek 20,000 shares of Sterling stock and 500,000 Rock Creek shares were issued to Sterling. Sterling is obligated to pay all future taxes relating to the leased property and Sterling may cancel the lease with 30 days notification.
Other U.S. Exploration Prospects
The Company has numerous exploration prospects held by ownership, lease or lease option in the States of Idaho and Montana comprising over 4,000 acres of unpatented mining claims. Generally mining properties are leased for 10 to 25 year terms with a net smelter return of 1% to 2%, or an operating profit interest up to 50%, due to the owner. Owned properties are unpatented mining claims subject to the paramount title of the federal government, subject to annual work requirements and annual fees.
Sterling Mining De Mexico, S.A. De C.V. Properties
The Company formed Sterling Mining De Mexico, S.A. De C.V. in February, 2004, to engage in the exploration and exploitation of silver minerals in Mexico. Sterling Mining De Mexico is a 99% owned subsidiary of Sterling Mining Company. As of December 31, 2007, the Company had invested approximately $6 million USD in its Mexican subsidiary, of which a significant portion has been used to lease and construct the Barones plant and acquire the following silver bearing mineral concessions and leases.
These properties include:
Barones Lease
The Barones property is located approximately three kilometers northeast of the City of Zacatecas, in the State of Zacatecas, Mexico. The Barones project consists of a vat leach plant for the treatment of silver bearing tailings at the plant site and silver bearing minerals from other properties near the site. The property consists of approximately five hectares (12 acres). The lease agreement requires payments of 50% of net profits up to a maximum of $4.55 million USD. Payments are in shares of the Company’s common stock at a price of $10.00 USD per share.
San Acacio Lease
The San Acacio lease is located approximately five kilometers northeast of the City of Zacatecas and two kilometers from the Barones Plant. The property consists of approximately ten exploitation concessions containing approximately 745 hectares (1,840 acres).
Other Mexico Mineral Concessions
Sterling Mining De Mexico, S.A. De C.V. holds several exploration mineral concessions that are situated approximately 60 kilometers to the southeast of the city of Zacatecas. These include the Tesorito Group, the La Esperanza Group, the La Aventurera Group and the Bolshoi. These properties comprise approximately 25,292 hectares (62,497 acres). Properties include La Blanca, Cuauhtemoc, Bilbao, Arturo, La Leona, Pinos, Pico de Treyo, Jimenez de Teul, Cuatro Cienegas, and Venaditas.
In 2006 the Company entered into an agreement with Silver Fields (formerly Red Lake Resources) regarding the Bolshoi property. Silver Fields has the right to earn a 100% interest in the Bolshoi Property. The agreement required Silver Fields to make total payments to Sterling of $75,000 USD, issue 400,000 shares, and complete $300,000 USD in exploration over a period of 3 years. The property is subject to a royalty of 2.5% of net smelter returns. This agreement has since expired.
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The Company entered into an agreement with Chester Mining Company regarding the Tesorito Group. The Company sold 50% of its interest in the Tabasquena Mine (Tesorito) in Mexico for 600,000 restricted common shares of Chester Mining Company, as disclosed in the Company’s Form 10-Q filed on November 15, 2006.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2007 the Company purchased 1,149,653 shares of Kimberly Gold Mines for $212,803. Raymond DeMotte is a director of both companies. The Company also purchased 747,499 shares of Merger Mines Corp. for $724,125. Carol Stephan is a former director of Merger Mines Corporation and a director of Sterling Mining Company.
NOTE 7 - COMMON STOCK
During the year ended December 31, 2007, the Company issued 13,821,260 shares of common stock as follows; for $32,311,251; 6,230,902 shares with warrants attached for cash of $16,921,132; 5,585,792 shares for $18,153,824 upon the exercise of special warrants; 350,000 shares for land; 112,000 shares for services; 50,000 shares for leases; 49,959 shares for commissions; 25,000 shares upon the exercise of options; and 1,417,607 shares upon the exercise of warrants for cash of $3,547,115.
During the year ended December 31, 2006, the Company issued 6,400,149 shares of common stock as follows; 4,180,401 shares with warrants attached for cash of $11,869,099, 400,000 shares in exchange for equity investments; 190,000 shares for land; 6,000 shares for services; 290,000 shares for leases and equipment; 296,530 shares for commissions; 288,594 shares upon the conversion of debentures; 683,108 shares upon the exercise of options; 17,500 shares upon the exercise of $4.00 warrants and miscellaneous equity adjustments of 48,016 shares.
NOTE 8 - STOCK OPTIONS
During the year ended December 31, 2007, stock options of 25,000 were exercised for cash proceeds of $18,750 and 810,000 stock options were granted. Options granted have been reduced from 960,000 to 810,000 due to the correction of a mathematical error and an amendment to the employment agreement of Mr. Ray DeMotte. The exercise price of the options remains at $4.00.
During the year ended December 31, 2006 stock options of 683,108 were exercised for cash proceeds of $512,331. There were no stock options granted during 2006.
Following is a summary of stock option activity during the years ending December 31, 2004, 2005 and 2006:
NOTE 9 - COMMON STOCK WARRANTS
During the year ended December 31, 2007 the Company granted 8,440,722 warrants with exercise prices ranging from $3.75 to $4.50 and expirations at various dates through 2009. The total value of the warrants was $5,849,084 as determined by a Black Scholes pricing model.
During the year ended December 31, 2006, the Company granted 5,205,408 warrants with exercise prices ranging from $2.60 to $8.42 and expirations at various dates through 2008. The total value of the warrants was $3,795,636 as determined by a Black Scholes pricing model.
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During the year ended December 31, 2005, the Company granted 1,018,317 common stock warrants with exercise prices ranging from $2.25 to $5.00 and expirations at various dates through 2008. The total Black Scholes value of the warrants issued was estimated at $577,754. During 2005, the Company cancelled 150,000 previously issued warrants. These warrants were replaced with 100,000 warrants at a reduced exercise price and a prolonged exercise term. Based upon a comparison of the fair value of the modified award with the fair value of the award immediately before the modification, an adjustment was deemed unnecessary.
Following is a summary of stock warrant activity for the years ended December 31, 2006 and 2007:
Common
Shares Under
Warrants
Exercise Price
Per Share
Fair Value Per
Share At Grant
Date
Expiration
Date
Outstanding at December 31, 2004
500,889
$
5.43
$3.50 - $13.40
1/05 - 5/08
Warrants issued in connection with sale of common stock
1,018,317
$
3.03
$2.25 - $5.00
3/06 - 2/08
Warrants issued as replacement for cancellation
100,000
$
3.50
$3.60
2/07
Warrants exercised
(69,444)
$
3.00
$3.00
1/07
Warrants expired
(256,445)
$
1.00
$3.00 - $7.00
6/05 - 9/05
Warrants cancelled
(150,000
$
7.00
$2.12
2/07
Outstanding at December 31, 2005
1,143,317
$
3.12
$2.25 - $7.00
2006-2008
Warrants issued in connection with sale of common stock
5,205,408
$
4.67
$3.50-$8.42
2007-2008
Warrants exercised
(17,500)
Warrants expired
(113,000)
$
4.73
$0.03-$1.97
Outstanding at December 31, 2006
6,218,225
$
4.09
$0.14-$5.40
2007-2008
Warrants issued in connection with sale of common stock
8,440,722
$
2.63
0.98-1.60
2007-2009
Warrants exercised
(1,332,699)
$
2.64
0.14-0.85
Warrants expired
(685,510)
$
4.17
Outstanding at December 31, 2007
12,640,738
$
3.36
0.16-1.60
2007-2009
The weighted average fair value of warrants granted during the years ended December 31, 2007 and 2006 was $0.69, and $0.70.
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NOTE 10 - COMMITMENTS AND CONTINGENCIES
Mineral Leases
The Company has secured leases of several mineral properties. Each of the leases is subject to lease payments as shown in the table below:
(1)
All leases are subject to production royalties.
(2)
$375,000 in cash and $100,000 in the Company’s common stock were prepaid in 2004 to apply to the life of the Barones lease of 225 months. There are no annual lease fees.
(3)
The Chester Claim Group lease also requires an annual payment of 50,000 shares of the Company’s common stock.
(4)
Montana Revett Claim Group annual lease fee of $20,000 commences on June 1, 2007.
(5)
San Acacio production royalties are not payable to lessor, but are payable to third parties.
(6)
Timberline annual lease fee of $20,000 began on June 1, 2007.
(7)
The lease includes a $50,000 per year work commitment and payments of $500 a month, which can be credited against the 25% net profits royalty.
(8)
The lease includes a $50,000 work commitment in 2007 and additional work commitments of $100,000 for each of the next four years.
(9)
The lease includes payments of $100,000 per year for each of the next five years.
(10)
The lease includes an initial payment of $25,000 and work commitments of $50,000 the first year and $100,000 the second and third years.
(11)
The lease includes annual payments $3,000 per year until such time as Net Profit Royalties are payable.
(12)
The lease includes annual payments $1,500 per year until such time as Net Profit Royalties are payables
The total value of shares issued for leases in 2007 was $156,500. The total number of shares of common stock issued for leases in 2007 was 50,000.
Other Leases
The Company has entered into a lease for office space near the Sunshine Mine site at $2,259 per month through September 2008. The Company has entered into a lease for office space in Coeur d’Alene, Idaho for $1,843 from December 2007 through November 2008. The Company entered into a lease for additional office space in Wallace, Idaho for $5,200 per month through December, 2008.
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The Company’s future obligations under mineral and office space operating lease agreements are as follows:
Compliance with Environmental Regulations
The Company is subject to a variety of federal, state and local statues, rules and regulations designed to protect the quality of the water and air, and threatened or endangered species, in the vicinity of many of its mining operations. These regulations include “permitting” or pre-operating approval requirements designed to ensure the environmental integrity of a proposed mining facility, operating requirements to mitigate the effects of discharges into the environment during mining operations, and reclamation or post-operation requirements designed to remediate the lands affected by a mining facility. The Company is investigating the necessary environmental requirements and any bonding necessary to comply with the regulations.
Employment Agreements
During 2004, a key employee was granted a severance pay agreement that is effective through January 1, 2014, and another key employee was granted a severance pay agreement effective through January 31, 2009. These agreements provide compensation to the employees in the event of termination of employment at various compensation levels, depending upon the reason for termination. The maximum termination compensation payable to one employee is $250,000. The maximum termination compensation payable to the other employee was raised from $350,000 to $600,000 effective January 28, 2005.
During 2005, two additional key employees were hired by the Company. Both key employees have employment agreements and received shares of common stock.
There were no employment agreements granted in 2007.
Contingent Liabilities
The Company has been named in legal proceedings. Management has not recorded a contingent liability for the following reasons:
As initially reported in our report on Form 10-Q for the quarter ended June 30, 2006, in September 2005 James D. Christianson and a small group of shareholders affiliated with Mr. Christianson filed a lawsuit against two directors of the Company, Carol Stephan and Ray DeMotte, in the United States District Court, Western District of Washington at Tacoma, Case No. CV05-5590 RBL. The plaintiffs requested permission to amend the original complaint to add claims against the Company. During the second quarter of 2006 the motion was approved and the Company was added as a party. The Company subsequently filed a motion to dismiss the complaint on the grounds that the complaint fails to state a viable claim against Sterling Mining even if the alleged facts are taken as true. In a separate motion, a director moved to change the venue of the lawsuit from Washington to Idaho, which motion was granted September 21, 2006. Trial is scheduled to begin June 10, 2009, in the United States District Court for the District of Idaho, Case No. CV06-429-N-EJL. The Company and the other parties have been ordered by the Court to attend mediation to attempt to voluntarily resolve the claims asserted in this matter.
The Company does not consider the matter to be material. Management believes that the case is without merit and that any liability resulting from the case is neither estimable nor probable. The Company intends to aggressively defend itself in this matter unless an acceptable settlement can be achieved. If the litigation does proceed, the Company intends to assert counterclaims against Mr. Christianson alleging, among other things, that Mr. Christianson made certain material misrepresentations and omitted material information in conjunction with soliciting the purchase of Company stock, and engaged in other conduct to the Company’s detriment.
The plaintiffs requested, and were granted leave to amend their complaint, and their amended complaint included new claims against the Company and others. The plaintiffs’ amended complaint asserted, with respect to the Company, that it and others made misrepresentations and omitted information in connection with the plaintiffs’ purchases of the Company’s stock. It asserted claims for civil RICO under Idaho law, and for securities fraud, misrepresentation and other causes of action. The Company and the other defendants responded by moving to dismiss the amended complaint on various grounds. In March 2007, Plaintiffs filed a motion for a second amendment to their complaint adding several third parties. In June 2007, the parties participated in court ordered mediation, but a settlement was not reached.
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On September 24, 2007, the pending motions to dismiss the amended complaint were partially granted and partially denied. In particular, the Court dismissed all of the RICO and common fraud claims, dismissed the state law securities claims against the Company except as they related to plaintiffs’ initial purchase of approximately 75,000 shares of Sterling stock, dismissed all Consumer Protection Act claims, but found the state securities law claims against Mr. DeMotte to be adequately pled. The motion to file a second amendment to the plaintiffs’ complaint was denied with regard to the claim under the state Consumer Protection Act, but was granted as to the remaining claims. The Court’s opinion cautioned, however, that this will be the last chance given to plaintiffs to amend their pleadings, and that the Court may award attorneys’ fees against plaintiffs if they file a second amended complaint which is successfully challenged by defendants.
On October 31, 2007, Plaintiffs filed a second amended complaint in which the claims against the Company were substantially narrowed. Motions to dismiss by the defendants must be filed by December 29, 2007. The Company intends to continue to vigorously defend the claims against it, unless and until a settlement can be reached on acceptable terms.
Other Taxes
The Company assumed certain property taxes in arrears as part of the Company’s obligation in the lease of the Sunshine Mine. The Company has paid property taxes in arrears for the years 1999 through 2004. Estimated tax liabilities including penalties and interest outstanding at December 31, 2007 are shown below:
Tax Year:
$
40,070
Accrued Penalties and Interest
-
Balance, December 31, 2007
$
40,070
The Company has corrected some earlier payroll tax and information returns, and has accrued a liability for taxes and penalties that may result from the underpayment of those taxes. There may be other penalties the Company has not sufficiently provided for, and the Company expects to pay those penalties if they are assessed. Any further assessments are not expected to be material to the Company and its estimates.
NOTE 11- SEGMENT REPORTING
The Company had two business segments beginning in 2004. One segment is the exploration and mining segment in the United States of America. The Company engages in the acquisition and exploration of mineral properties in the U.S. in this segment and is preparing the Sunshine mine for production. The Company’s other segment is the Mexico segment, which includes the Company’s 99% owned subsidiary Sterling Mining De Mexico, S.A. De C.V. The Mexico segment engages in the acquisition and exploration of mineral properties in Mexico and has been operating the Barones tailings project since mid-year 2005. The Company’s objective in each segment is to place those properties that can be operated at a profit into production.
The following table presents information about reportable segments for the twelve months ended December 31, 2007, 2006 and 2005, respectively:
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NOTE 12 - NOTES PAYABLE
At December 31, 2007, the Company had three notes payable as follows: $400,000 to Western Continental for a land purchase, $50,000 to Diversified Machine Technology “DMT” for a land purchase and $83,694 to Microsoft Corporation for the purchase of computer hardware and software. Notes payable-current portion on the balance sheet is $477,862 the sum of the $400,000 Western Continental note, the $50,000 DMT note and $27,862, the current portion of the Microsoft note. Notes payable-long term on the balance sheet is $41,901, the long-term portion of the Microsoft note.
The notes payable have the following terms: The Western Continental note has a 7.25% interest rate, monthly interest payments of $2,417, with payment of the principal due in full on November 6, 2008. The DMT note has a maturity date of October 6, 2008, when the principal is due in full. No payment is due until the maturity date. The Microsoft note had monthly payments of $50 for the first six months and $2,803 for the succeeding 36 months. Interest and principal are scheduled to be paid in full on July 1, 2010. Each note is collateralized by the asset acquired.
NOTE 13 - SUBSEQUENT EVENTS
On February 8, 2008, Aura Silver cancelled the Pine Creek Agreement with Sterling.
On March 4, 2008, Sterling Mining Company, Sterling Mining de Mexico S.A. De C.V., Source Exploration Corporation and Roca Verde Exploracion de Mexico S.A. de C.V., entered into an Earn-In Agreement and are currently negotiating and Escrow Agreement.
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