U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

 

OR

 

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

Commission File Number 0-50218

 

BEKEM METALS, INC.

(Name of Small Business Issuer in its charter)

 

 

Securities registered pursuant to section 12(b) of the Exchange Act:

None

 

Securities registered pursuant to section 12(g) of the Exchange Act:

Common, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        

o Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  

o Yes x No

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.         o

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2008 was $46,768,350 based upon the closing stock price of $1.50 (the closing price on June 30, 2008) per share as reported on the Over-the-Counter Bulletin Board.

 

As of April 7, 2009, the registrant had 125,172,011 shares of common stock, par value $0.001, issued and outstanding.

 

Documents incorporated by reference: None

 

 

Table of Contents

 

 

 

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement contained in this annual report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “may,” “hope,” “will,” “expect,” “believe,” “anticipate,” “estimate” “projected” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to those relating to our plan of operations including our ability to construct a processing plant and put out property into commercial production, economic conditions generally and in the industry in which we and our customers participate, future commodity prices; competition within our industry, including competition from much larger competitors, future exploration, legislative requirements and changes and the effect of such on our business, results of operations, sufficiency of future working capital, borrowings and capital resources and liquidity and our ability to generate future cash flow and our ability to continue to meet the requirements of and maintain our rights to our properties.

 

Forward-looking statements are predictions and not guarantees of future performance or events. The forward-looking statements are based on current industry, financial and economic information, which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. We hereby qualify all our forward-looking statements by these cautionary statements. We undertake no obligation to amend this report or revise publicly these forward looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Securities Exchange Act of 1934) to reflect subsequent events or circumstances.

 

The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in out our other filings with the Securities and Exchange Commission.

 

Throughout this report, unless otherwise indicated by the context, references herein to the “Company”, “BMI”, “we”, our” or “us” means Bekem Metals, Inc, a Utah corporation, and its corporate subsidiaries and predecessors.

 

PART I

 

 

Company History

 

Bekem Metals, Inc. is engaged in the exploration of nickel, cobalt and brown coal in the Republic of Kazakhstan.

 

 

We incorporated in the state of Utah under the name EMPS Research Corporation on January 30, 2001. Until the end of the 2004 fiscal year, our primary business focus was the development, marketing and licensing of our patented technology for use in commercially separating nonmagnetic particulate material by building and testing a high frequency eddy-current separator (“HFECS”).

 

We changed our name to Bekem Metals, Inc., on March 16, 2005 following our acquisition of Condesa Pacific, S.A., a British Virgin Islands international business company, and its wholly owned subsidiary Kaznickel, LLP in January 2005. With the acquisition of Kaznickel, our primary business focus shifted from the development of our HFECS technology to exploring for nickel and cobalt in Kazakhstan. On July 24, 2006 Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On October 1, 2006 Bekem sold Condesa to a third party for nominal value.

 

The primary asset of Kaznickel is an exploration and production concession issued by the government of the Republic of Kazakhstan which granted Kaznickel the exclusive right, through February 2008, to explore for nickel, cobalt and other minerals in a 12,232 acre area in northeastern Kazakhstan known as the Gornostayevskoye (“Gornostai”) deposit. On May 16, 2008 Kaznickel and the Ministry of Energy and Minerals Resources (“MEMR”) of the Republic of Kazakhstan signed an addendum to the subsoil use contract extending the exploration period to February 2010. This is the second and last two-year extension of the exploration period which is allowed under the Kazakhstani subsoil use legislation. The concession further provides that if we make a commercial discovery of nickel, cobalt or other minerals within the concession territory, we can apply for and receive the exclusive rights to commercially produce and sell nickel and cobalt ore through February 2026.

 

On October 24, 2005, we acquired Kazakh Metals, Inc. (“KMI”), and its wholly owned subsidiary Kyzyl Kain Mamyt (“KKM”), LLP in exchange for 61,200,000 shares of our common stock. KKM holds the exclusive subsoil use contract to extract and process nickel and cobalt ore from its Kempirsai deposit, which is comprised of the Kara-Obinskoye, and Stepninskoye sections (collectively referred to as the “Kara-Obinskoye section”) and Novo-Shandashinskoye section, and brown coal from its Mamyt deposit. Unless otherwise indicated by the context of the disclosure, the Kara-Obinskoye section, the Novo-Shandashinskoye section and the Mamyt deposit are collectively referred to herein as the “Kempirsai deposit.” Under the applicable accounting reporting rules, KMI was considered the accounting acquirer.

 

In July 2008, the MEMR and KKM agreed upon a new minimum required work program for the period August-December of 2008. In December 2008 KKM received notice from the MEMR that it had agreed to extend the term of KKM’s subsoil use contract until the year 2020. The MEMR has further agreed to suspend all ore mining requirements until the end of 2012 to allow KKM to focus on the construction of an ore processing facility. The notice indicates that under the new work program, KKM will be required to expend a minimum of $123.4 million by 2020 in the development of an ore processing facility and in the development and mining of the Kempirsai deposits. The definitive language of the addendum to the KKM subsoil use contract is currently under negotiations and expected to be signed in April 2009.

 

 

 

 

Declining metal prices and the increasing difficulties in obtaining financing due to the global economic and credit crisis has forced us to consider alternative means to obtain the funds we need to continue to satisfy our operating needs. As a result, on February 13, 2009, we executed a Memorandum of Understanding for the sale-purchase of 100% of the charter capital of our wholly-owned subsidiary Kaznickel LLP, dated February 11, 2008, between the Company and Ertis Ferronickel Works LLP (the “Memorandum”). Subject to the execution of a definitive agreement, Ertis has agreed to acquire 100% of the outstanding charter capital of Kaznickel, one of the Company’s wholly-owned subsidiaries, for 91,900 Kazakh tenge (approximately $630 U.S. dollars) and for repayment of $5,000,000 U.S. dollars worth of loans owed to Bekem Metals by Kaznickel. The Memorandum provides for an initial payment of $500,000 U.S. dollars which, was made on March 20, 2009, and payment on the remaining balance is to occur within 20 days after the execution of a definitive agreement. The Memorandum may be terminated in the event that the MEMR does not approve the transaction or if the parties are unable to negotiate the terms of a definitive agreement within five working days of receipt of the MEMR’s approval of the transaction. We are currently negotiating the terms of a definitive agreement. Subject to MEMR approval of the transaction, we anticipate completing this transaction during our second fiscal quarter.

 

Business of the Company

 

The Nickel Market

 

During 2008 the LME cash average nickel prices declined approximately by 41%. This resulted in many operations closing down, a reduction in the volume of mining, and new projects being cancelled in second half of 2008. The 2009 forecast for the market remains bleak before a modest and slow recovery is forecasted to begin in 2010. The frozen credit markets and lack of available finance have caused many companies to reduce capital expenditures by postponing maintenance work as well as drastically reducing exploration. To preserve positive cash flow, many  mining companies are focusing on extracting and processing higher grade material yielding smaller production volumes.

 

 

 

In January 2009, the United States Geological Survey (“USGS”) reported the world mine reserves of nickel and the world mine reserves base of nickel in 2008 were 70 million tons and 150 million tons, respectively.

 

 

       

 

Although slightly lower than that of 2007, world nickel mine production was at a relatively high level in 2008 despite the global financial crisis. Stainless steel accounted for two-thirds of primary nickel use, with more than one-half of the steel going into the construction, food processing, and transportation sectors. Nickel prices peaked at unprecedented levels in mid-2007, but have gradually declined since as the world economy weakened. In October 2008, the London Metal Exchange cash price for nickel averaged $12,133 per metric ton ($5.50 per pound), down 61% from the mean in October 2007.

 

There are several factors that can affect overall world nickel demand and price. These factors include the following:

 

 

 

World Demand for Stainless Steel

 

Total stainless steel demand dropped 7% in 2008 and is expected to drop approximately 11% in 2009. An estimated 4% increase in China will only partially offset reduced consumption elsewhere in the world. Negative demand growth is forecasted in the European Union, Japan and North America in 2009. The ongoing world economic slow down has led to significant decreased demand for products using stainless steel, particularly in the construction, transportation and consumer durables sectors.

 

The ongoing decrease in demand for stainless steel may also be a factor of market conditions. During 2006 and the early 2007 demand and price for nickel and stainless steel reached unprecedented levels. This led to significant increases in nickel stockpiles above traditional levels. As a result prices have decreased to reflect the imbalance between supply and demand. Current forecasts anticipate it may take until 2010 for the imbalance to correct itself and for associated demand and price to begin to rebound.

 

Nickel Substitutes

 

Because of price spikes from 2006 to 2008 nickel priced itself out of certain areas. As a result, a number of applications for which nickel has been used historically have disappeared. Engineers have begun substituting low-nickel, duplex, or ultrahigh-chromium stainless steels for austenitic grades in a few construction applications. Production of pig nickel and nickel-free specialty steels is increasing and continues to erode the market share for nickel bearing stainless steel grades. Titanium alloys or specialty plastics can substitute for nickel metal or nickel-based alloys in highly corrosive chemical environments. Cost savings in manufacturing lithium-ion batteries allow them to compete against NiMH in certain applications.

 

Expansion/Contraction of Nickel Mining Capacity

 

As a result of declining metal prices, fears of recession and tightening credit a number of well-known producers plan to halt mining at less profitable operations and to delay other development projects.

 

Norilsk Nickel, the world’s largest nickel miner, has announced that it is suspending its last two operating mines in Australia. Black Swan, which had already reduced its total output through the closure of the Silver Swan underground operations in November 2008 has been placed on care and maintenance. Lake Johnston, another acquisition from LionOre has also been closed. Norilsk Nickel also announced that it is also evaluating the economic viability of its African operations.

 

BHP Billiton announced in January 2009 that it was closing down its Ravensthorpe mine and processing plant (50ktpy) in Western Australia due to current low nickel price and the costs of operation. BHP Billiton mentioned the “indefinite suspension” of the nickel operation, which cost US $2.2 billion and was commissioned in May 2008. BHP Billiton also announced that it would scale down the rate of mining at the Mount Keith operation and focus on procuring more ore from existing stockpiles.

 

 

 

Sherritt has announced that it is in the process of reviewing its Ambotovy project (60ktpy of nickel and 5.6kpty of cobalt) in Madagascar as the outlook for nickel remains challenging and capital expenditures are exceeding previous expectations. In December 2008, Sherritt had already announced that it would defer any capital spending and would focus on reducing costs. The longer term economic viability of the project also depends on higher nickel prices than current ones.

 

Xstrata announced changes to its Sudbury nickel operations. The Sudbury complex has been placed on care and maintenance. Closure of the Thayer-Lindsley and Craig mines were announced in November 2008. The Fraser mine has also been closed.

 

New Processing Technologies

 

Historically, nickel production has come from higher-grade sulphide deposits because processing is less energy-intensive and therefore less expensive. However, as sulphide deposits are limited, interest in developing laterite deposits is increasing.

 

To date, the success rate of laterite deposits has not been encouraging. Several laterite mines have closed down, restructured or faced a number of issues affecting development of new laterite deposits including technological problems such as:

 

 

Our Properties

 

As discussed above, through our subsidiaries, we hold the rights to the Kempirsai nickel, cobalt and brown coal deposits, which are located in northwestern Kazakhstan and the Gornostai nickel and cobalt deposit located in northeastern Kazakhstan. As noted above, we are currently in negotiations to sale our Gornostai deposit.

 

 

 

 

 

Kempirsai

 

The Kempirsai deposit is located in the Khromtausky region of northwestern Kazakhstan, approximately 130 kilometers northeast of Aktobe, Kazakhstan. The nickel and cobalt deposits are located approximately 35 kilometers south of Badamsha village, Aktobe region, Kazakhstan. The brown coal deposit is located approximately 30 kilometers east of Badamsha village, Aktobe region, Kazakhstan. Badamsha is a village of approximately 6,000 people. The Aktubinsk-Karabutak asphalt highway runs within 14 kilometers to the south of the nickel and cobalt deposit. The nickel, cobalt and brown coal deposits can be accessed through a network of country roads. The Orsk-Kandagash state railway runs nearby the Kempirsai deposit and, through our subsidiary KKM, we own 55 kilometers of our own railway. Our railway connects the Kempirsai deposit to a reloading station and to a Russian railway.

 

 

 

Gornostai

 

The Gornostai deposit is located in the Beskaragaiskiy region of northeastern Kazakhstan, approximately 110 kilometers west of Semey, Kazakhstan and 30 kilometers east of Kurchatov, Kazakhstan. The Gornostai deposit is divided into the South and North sections by the navigable Irtysh River. The Gornostai deposit may be accessed by an asphalt highway that crosses the northern part of the South section of the deposit. The Semey-Astana railway also passes through the northern part of the South section of the deposit.

 

 

 

Title to Properties

 

We hold several subsoil use contracts that grant us the right to explore for and extract nickel, cobalt and brown coal at the Kempirsai deposit. We also hold a subsoil use contract that currently grants us the right to explore for nickel, cobalt and other minerals within the Gornostai deposit. Upon discovery of commercially producible reserves we can apply to move to commercial production. For additional information regarding our contracts please see the following table.

 

 

      

 

 

 

 

The term of each of our subsoil use contracts vary. Under our contracts we have the right to negotiate with the MEMR for extensions of the terms of those contracts. If we are unsuccessful in negotiating extensions, upon the expiration of those contracts our interest in and rights to those properties terminates and reverts back to the government of the Republic of Kazakhstan, but we retain the rights to all tangible and intangible assets we acquire for exploration, extraction and production at these deposits.

 

For additional details regarding the terms and obligations associated with our subsoil use contracts and licenses please see “Tax and Royalty Scheme in the Republic of Kazakhstan” and “Annual Work Programs of our Subsidiaries” in Item 1 “Business”, “Summary of Material Contractual Commitments” in Item 7 “Management’s Discussion and Analysis” and “Note 3 – Property, Plant and Mineral Interests”, “Note 6 – Asset Retirement Obligations” and “Note 9 – Commitments and Contingencies” contained in the Notes to our Consolidated Financial Statements.

 

Kempirsai

 

The Kempirsai deposit was discovered and actively explored during the Soviet era. In the 1980s, the State Reserves Committee approved the reserves (based on Soviet standards) and approved the Kempirsai deposit for commercial production. The Kempirsai deposit was actively mined during the 1980s and early 1990s. Active mining at the Kempirsai deposit ceased in 1996. The working program associated with the licenses for the Kempirsai nickel, cobalt and Mamyt brown coal deposits are production contracts, and those contracts do not require us to undertake significant exploration activities. While we do not have fixed exploration obligations, in order to retain our licenses we are required to engage in certain activities. For details regarding our mine production requirements, see “Annual Work Programs of our Subsidiaries” in Item 1 “Business.”

 

Gornostai

 

The subsoil use contract to the Gornostai deposit was issued in February 2004. At the time it was issued, the MEMR determined that additional exploration of the deposit was necessary to determine the existence of commercially producible mineral reserves. Therefore, the subsoil use contract provides a period for exploration. Under the terms of the contract for the Gornostai deposit, we were granted the right to explore for nickel and cobalt for two years. The exploration term provides for two two-year extensions upon our request. We requested and were granted our first extension, extending the current exploration period to February 2008. On May 16, 2008, Kaznickel and the MEMR signed an addendum to the subsoil use contract further extending the exploration period to February 2010.

 

In the event we are successful in discovering commercially producible nickel and/or cobalt reserves, we will be required to apply to the MEMR to convert our current license from an exploration license to a commercial production license. We would also be required to pay a 0.1% commercial discovery bonus based on the initial determination of our mineral resources by the MEMR. If we do not discover commercially producible reserves before February 2010, we will return to the Republic of Kazakhstan the rights to all areas within the licensed territory and will have no further rights to the licensed territory.

 

 

 

As discussed above, declining metal prices and increasing problems with the availability of market financing forced us to consider the option of selling Kaznickel. On February 13, 2009 we executed a Memorandum of Understanding to sell Kaznickel to Ertis Ferronickel Works LLP. The Memorandum may be terminated in the event that the MEMR does not approve the transaction or if the parties are unable to negotiate the terms of a definitive agreement.

 

Annual Work Programs of our Subsidiaries

 

Each year we must submit an annual work program to the MEMR’s Territorial Division under the State Body for Subsurface Use and Protection. The annual work program indicates the scope of exploration and/or production works and finance costs we are required to incur each year.

 

Kempirsai

 

Prior to the litigation associated with the licenses to our Kempirsai deposits, our contracts and licenses called for KKM to extract the following amounts of ore from the Kempirsai deposit and brown coal from the Mamyt deposit:

 

 

As a result of the litigation over the attempted cancellation of licenses, the 2008 annual work program for KKM was revised. In July 2008 the MEMR agreed with KKM on a new working program for the period August - December of 2008. As a result, the KKM’s contractual obligations for extraction of nickel ore and brown coal decreased from 350,000 tons to 146,000 tons and 200,000 tons to 83,000 tons, respectively. As discussed above, on December 29, 2008, KKM received a notice from the MEMR that it has agreed to suspend all ore mining requirements until the end of 2012 to allow KKM to focus on the construction of an ore processing facility. The notice indicates that under the work program, KKM will be required to invest $135,000,000 in its mining and ore processing technology during the period 2006-2020 (or around $123.4 million for the remaining period). Currently, the addendum to the KKM subsoil use contract is under negotiations and expected to be signed in April 2009.

 

Gornostai

 

The subsoil use contract for Gornostai provides Kaznickel certain rights and also imposes certain obligations and commitments. The rights include exploration through February 2010 (extended from 2008, as discussed above), and development and production of minerals through February 26, 2026.

 

 

 

The obligations and commitments under the amended contract are approximately $2,000,000. This amount includes $543,000 ($275,000 in 2008 and $268,000 in 2009) for exploration drilling (2,000 meters), sampling and assaying (1,000 core samples), metallurgical tests and preparation of the report to the State Resource Committee. Also, it includes financing the region’s social programs in the amount of $5,000 during the exploration extension period and donation for the ongoing development of Astana and Kurchatov (cities in Kazakhstan) in the amount of $300,000. Also, it includes $750,000 for repayment to the Republic of Kazakhstan of historical costs incurred by it in undertaking geological and geophysical studies and infrastructure improvements related to the Gornostai deposit. The repayment terms of this obligation will not be determined until Kaznickel applies to the Republic of Kazakhstan for and is granted a contract to engage in commercial production, which is anticipated within the next one to two years. However, there is no guarantee when or if Kaznickel will discover commercially producible reserves within the Gornostai deposit.

 

For us to maintain our rights to the Kempirsai and Gornostai deposits, we must satisfy the work program requirements for each property. As evidenced by the litigation associated with our Kempirsai deposits, if we fail to satisfy our working program requirements we could be subject to fines and penalties or even to the potential forfeiture of our contracts, licenses and all rights we have thereunder.

 

Geology and Mineralization

 

Nickel ferrous laterites make up approximately 70% of all land-based nickel resources, though currently they constitute about 45% of the primary nickel production. Nickel laterite deposits are formed as a result of prolonged weathering of ‘ultramafic’ rocks containing ferromagnesian silicate minerals. Under conditions of warm temperatures and high, frequent rainfall, nickel leaches from the upper layers and precipitates in the lower layers in a lattice of silicate and iron oxide minerals.

 

If an ore deposit is outcropping or occurs near the surface, it can be extracted using open cut methods. Open cut methods allow for lower extraction and operating costs, which can allow low-grade deposits to be economically viable. The topsoil and overburden are removed and stockpiled for later rehabilitation and, as the mine increases in depth, the walls of the excavation are left at an angle to avoid collapse. Open cut mines use large mobile machinery that enables high production rates. Large haul trucks carry the ore and waste to surface stockpiles. Rapid rates of mining in shallow weathered parts of the deposits slow down as the depths increase due to the increased hardness of the material. Nickel laterites are generally mined by surface operations up to 60 meters deep.

 

Kempirsai

 

The Kempirsai nickel and cobalt deposit is comprised of two deposits: Kara-Obinskoye, and Novo-Shandashinskoye. These deposits are located approximately 5-10 kilometers from each other. The results of exploration carried out during the Soviet era show that nickel and cobalt ore is located within the Kempirsai ultramafic massif. The minerals are found in laterite form and are associated with leached nontronized serpentinites. The ore bodies have a blanket-like shape and tend to lie conformably on the underlying rocks. The depth of ore bodies from the surface is 0-40

 

 

meters. In vertical section they are mainly horizontal in attitude and show variable thickness. Thickness varies from 2.0 meters to 30.0 meters, with an average thickness of 6.0 meters. Average stripping ratio is 1.5 cubic meters per ton. The nickel content of the ore within the Kempirsai deposit varies from 0.8% to 3.0% and cobalt – from 0.025% to 0.08%. The average nickel and cobalt content for the Kara-Obinskoye are 1.1% and 0.066% respectively. The average nickel and cobalt content for the Novo-Shandashinskoye deposit are 1.38% and 0.045%.

 

The ore reserves of the Kempirsai deposit were evaluated during the Soviet era based on Soviet standards. The Soviet standards, however, are not consistent with the standards established by the United States Securities and Exchange Commission (“SEC”). Therefore, during 2007 - 2008 we retained Wardell Armstrong International, an independent engineering firm, to perform a preliminary feasibility study, including an estimation of mineable reserves for the Kempirsai deposit. In 2008 the Company completed the preliminary feasibility study (“PFS”) for the Kempirsai deposit and plans to retain Wardell Armstrong International to conduct a bankable feasibility study of our Kempirsai deposit to provide detailed information on mining, processing, metallurgical, economic and other relevant factors. The PFS included pilot testing of various technologies for processing nickel ore from the Kempirsai deposit. Based on the results of the PFS, we intend to focus on the Vanyukov Process for further development of the Kempirsai deposits and construction of a nickel processing plant in Aktobe region, Kazakhstan (Kempirsai deposit). The Vanyukov Process, first developed in the 1940’s in Russia, is capable of treating oxide nickel ores to form either a nickel matte (by addition of a sulphur containing compound such as pyrite) or directly to form a ferronickel alloy containing up to 20% nickel. We expect that we will need around $160 million to fund construction of a processing plant with the planned annual capacity of 20,000 tons of ferronickel (5,000 tons of nickel). If funding can be secured, we anticipate construction of the plant will take approximately three years (including preparation of the bankable feasibility study). As we generate no revenue, we will need to raise additional capital through the sale of equity and/or debt securities to fund plant construction.

 

If funding is secured, we will continue preparation of bankable feasibility study. As we have not yet established reserves at the Kempirsai deposit, which can be accomplished upon completion of a bankable feasibility study, this project should be deemed exploratory in nature. For additional information regarding reserves please see “Reserves” in Item 1 “Business.”

 

Gornostai

 

Exploration activities conducted during the Soviet era and by us since we acquired the rights to the deposit have identified 21 ore bodies through drilling within the South section of the deposit and two ore bodies in the North section. The area of the deposit is located within the Gornostai ultramafic belt. The deposit is characterized by three distinct zones of ochre, nontronite, and leached and disintegrated serpentinite:

 

 

 

 

The minerals are found mainly in laterite form. The ore bodies have embedded form, are mainly horizontal in attitude and show variable thickness. The nickel content in the ore bodies varies from 0.7% to 2.3% and cobalt varies from 0.05% to 0.37%. The ore bodies are typically located at depths between 0 to 20 meters from the surface, which should allow for strip mining. The lengths of the ore bodies range from 200 meters to 4,050 meters and widths range from 200 meters to 2,000 meters. Thickness varies from 0.8 meters to 15 meters. Average ore body thickness is around 4.2 meters, with an estimated average stripping ratio of 1.8 cubic meters per ton. Of the drilling done to date, the average content of nickel is 0.85% and cobalt 0.059%.

 

Based on the exploration activities undertaken on the deposit, we believe the size of the ore bodies, their simple form and shallow bedding will allow the deposit to be mined by open pit method with a low stripping ratio.

 

Despite the exploration work completed during the Soviet time and by us since acquiring this deposit, we do not have a current ore reserve estimate for the Gornostai deposit that complies with the standards established by the SEC. Accordingly, and consistent with SEC Industry Guide 7, we provide no claims as to the ore reserves that may be contained within the Gornostai deposit. Moreover, because we are currently in the exploration stage of our contract and have not yet established commercially producible reserves, the Gornostai project should be deemed exploratory in nature.

 

Wardell Armstrong International also evaluated the Gornostai deposit in connection with a scoping study and preliminary resource estimation. As discussed above, we plan to sell Kaznickel. However, if we ultimately do not sell Kaznickel and if funding is secured, we plan to undertake a PFS on the Gornostai deposit during 2009 with completion in 2010. Completion of the PFS will allow for the preparation of a bankable feasibility study including a reserve estimate that will comply with the standards established by the SEC for development and/or production stage companies. For additional information regarding reserves please see “Reserves” in Item 1 “Business.”

 

History and current state of our deposits

 

Kempirsai

 

The KKM subsoil use contract covers a 575,756 acre territory, in northwestern Kazakhstan. This contract was issued by the MEMR and incorporates License series MG#420 and MG#426. These licenses to the nickel and cobalt deposits cover a period expiring on October 12, 2011. This contract may be extended upon agreement between KKM and the MEMR. KKM also holds a subsoil use contract that incorporates License series MG #9-D for a brown coal deposit located within 40 kilometers of its nickel and cobalt deposit. This contract expires on December 11, 2018 with the possibility of further extensions.

 

In July 2008, the MEMR agreed with KKM on a new work program for the period August-December of 2008. In December 2008, KKM received a notice from the MEMR that it has agreed to extend the term of KKM’s subsoil use contract until the year 2020. The MEMR has further agreed to suspend ore mining requirements until

 

 

the end of 2012 to allow KKM to focus on the construction of an ore processing facility. The notice indicates that under the Work Program, KKM will be required to invest $135 million to be applied to mining and ore processing technology during the period 2006-2020 (or around $125 million for the remaining period). Currently, the addendum to the KKM subsoil use contract is under negotiations and expected to be signed in April 2009.

 

Historical exploration and production activities

 

The first nickel deposits of the Kempirsai group were discovered in the 1930s. 44 deposits in total have been discovered and explored since then. The Kara-Obinskoye and Novo-Shandashinskoye sections were explored during the late 1970s by core drilling on a 12.5-25m x 25m grid. The volume of exploration works done on the deposits were as follows:

 

 

The State Reserves Committee approved the Kara-Obinskoye and Novo-Shandashinskoye reserves for commercial production in the 1980s. These deposits, along with others in the region, were assigned to YuzhUralNickel during the Soviet era. YuzhUralNickel is a Russian company with a nickel processing plant in Russia located approximately 90 kilometers north of the Kempirsai deposits. Approximately 171 million tons of nickel ore have been mined from these deposits, including 770,000 tons from the Kara-Obinskoye and Novo-Shandashinskoye sections. During peak production in the late 1980s, almost five million tons of ore were mined annually from the Kempirsai deposits. Active mining of the Kempirsai deposits was discontinued in 1996.

 

The Kempirsai deposits remained the property of YuzhUralNickel after the break up of the Soviet Union until 1996, when a joint venture between YuzhUralNickel and the Kazakhstan State Property Committee was formed. Because of a lack of Russian interest in developing this deposit in Kazakhstan, the joint venture was unsuccessful. In 1999 the rights to the Kara-Obinskoye and Novo-Shandashinskoye nickel deposits and Mamyt coal deposit were acquired by KKM from the joint venture. Due to a lack of funding and processing capability, combined with market conditions and the low nickel content of Kempirsai ore, KKM has not engaged in active or significant mining activity since acquiring the deposits.

 

Historically, the Kempirsai deposits were open-pit mined, with maximum mining depths of approximately 20 meters. We anticipate that the Kempirsai deposit will be open-pit mined in the future.

 

Plant, equipment and infrastructure

 

KKM owns fuel tanks, locomotives, rail cars, railway cranes, bridge cranes, railway cisterns, maintenance equipment, excavators, motor graders, passenger vehicles, passenger buses, heavy dump trucks, hoppers, scales, lathes, forging hammers, presses, grinding, milling and boring machines, boilers, electrical substations, office equipment, business machines, portable communication equipment, laboratory equipment and multiple buildings. The machinery was manufactured between 1950 and the present. The buildings were built between the 1940’s and the early 1990’s. Our equipment and infrastructure in its current state has the capacity to mine approximately 250,000 tons of ore annually. Much of our existing equipment and buildings will

 

 

need repair and refurbishing prior to being put into active operation. We estimate the cost of these repairs to be approximately $1,000,000. Once repaired, we expect our infrastructure and equipment to have a standing capacity to mine up to 500,000 tons of ore annually. According to a preliminary feasibility study prepared by Wardell Armstrong International, to meet a production rate of 3,400,000 tons of ore annually, our mining fleet will need to be enhanced with several new pieces of equipment, including primary digging machines, ancillary front end loaders and railway rolling stock in the amount of $14.4 million.

 

In addition to the rail and road infrastructure discussed above, 220 and 110 kilovolt high voltage power lines run nearby the Kempirsai deposits and the Buhara-Ural gas pipeline runs approximately 10 km to the east of our nickel deposits, (see “Kempirsai Project Location Map” included in “Location and access to our properties” in this Item 1 “Business.”) We can access water from the lakes around Badamsha. In the future, we also plan to use coal from our Mamyt deposit to supply power for our ore processing plant.

 

Costs

 

Since October 2005, when we acquired KMI, through December 31, 2008, KKM has expended approximately $21,340,000 at the Kempirsai deposits. These funds were used to repay loans to related and unrelated third parties in the amount of $10,100,000; $2,000,000 for the construction of our hydrochlorination pilot plant; $9,240,000 was spent on other capital expenditures as a part of our minimal working program and financing working capital. We anticipate future costs to be up to $300 million for construction of a nickel processing plant at the Kempirsai deposit. We anticipate the plant will utilize the Vanyukov process technology, which is discussed in greater detail in the “Processing” section of this Item 1 “Business.” We plan to spend approximately $10,000,000 to meet our annual work program requirements and other planned activities in 2009. Our plans are dependent upon our success in signing an addendum to the Kempirsai deposit contract, selling Kaznickel and raising funds as discussed in the “Plan of Operations” section of Item 6 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Gornostai

 

In February 2004, Kaznickel acquired a concession for exploration and development of the Gornostai nickel and cobalt deposit (contract No. 1349 registered by the MEMR), covering 12,232 acres in eastern Kazakhstan.

 

Historical exploration activities

 

We are at the exploration stage on the Gornostai deposit. This deposit was discovered in 1958. From 1960 to 1968 a series of geological and prospecting surveys and evaluation work was performed on both sections of the deposit by the Semipalatinsk Expedition to evaluate available nickel and cobalt ore reserves. The surveys identified and explored 21 ore bodies on the South section and two ore bodies on the North section of the deposit. These exploration works tested the deposit to depths of around 50-75 meters in the South section and up to 150 meters in the North section.

 

 

In the South section, drilling was undertaken on a 200-400 meter x 100-200 meter grid. In total 2,067 shallow depth holes with a total length of about 60,000 meters and several deep holes with a total length of 2,857 meters were drilled. 48 pits varying in depth between 4.3 – 24.6 meters (570 meters in total) were explored around drill holes to check core sample results. In 1965 two pits were explored for metallurgical samples. Sample weights were 1.3 and 3.6 tons. Samples were tested at the VNIITzvetmet Institute in Ust-Kamenogorsk, Kazakhstan. Metallurgical tests were carried out at pilot-plant scale using four options; ferronickel electro smelting, matte electro smelting, sulphuric acid, and carbonate – ammonia leaching.

 

In the North section, drilling was undertaken primarily on a 1,600 meter x 400 meter grid. Ore bodies of significant thickness, up to 40 meters, with nickel content up to 3.64% (average 1.55%) were identified. These deposits were located at depths between 40-90 meters.

 

The Gornostai deposit, however, was abandoned as reserves around Norilsk in Russia were considered more attractive because of larger reserves and higher nickel content. Moreover, the Norilsk reserves were already at the production stage. In addition, a Soviet army nuclear test site, similar to the Nevada Test Site, was located near the Gornostai deposit. The surrounding territory, including the deposit, was considered a secret military zone. For these reasons, further exploration of the deposit was discontinued in 1968.

 

The last nuclear testing in the area was conducted in 1989. Recent tests performed by state agencies show that the radiation levels in the soil, water and air are within normal ranges.

 

Exploration activities

 

Since acquiring Kaznickel, consistent with the terms of the current three-year work program for the deposit approved by the MEMR in 2005, we have engaged in exploration activities within the Gornostai licensed territory to determine the characteristics of this deposit. During 2008 we completed drilling of 10 test holes (all test holes in the North section of the Gornostai deposit) to an aggregate depth of 967.2 meters, and have taken 650 core samples. During 2007 we drilled 619 holes to a total depth of 15,625 meters, and an average depth of 25 meters per hole, and have taken 8,370 geochemical and core samples. 14 exploration pits (173 meters total depth) were made on the South section and 340 channel samples were collected. During 2006 we drilled 488 holes to a total depth of 12,652 meters, and an average depth of 30 meters per hole, and have taken 6,755 geochemical and core samples All samples collected in 2006-2008 were assayed by CenterGeoAnalit LLP, a nationally accredited independent laboratory located in Karaganda, Kazakhstan, to perform spectrum and quantity analysis to identify the content of nickel, cobalt and iron. During 2005 we drilled 42 holes to a total depth of 1,065 meters, and an average depth of 30 meters and have taken 595 samples to the Institute of Nonferrous Metals, located in Ust-Kamenogorsk, Kazakhstan where these samples represent ordinary core samples for nickel and cobalt content.

 

As discussed above, currently the exploration stage of our license runs through February 2010 due to the second two-year extension of exploration stage. During the exploration stage we are required to engage in certain activities to determine the existence of commercially producible mineral reserves.

 

 

As discussed above, we plan to sell Kaznickel. However, if we are not successful in selling Kaznickel, we plan the following exploration activities for 2009, which we believe will be sufficient to both satisfy our annual work program requirements and to help us establish commercially producible reserves within the Gornostai deposit. Once we establish commercially producible reserves, we plan to move to commercial production at the Gornostai deposit.

 

 

A local drilling company will be contracted for drilling activities. Core sampling, core logging and results interpretation will be carried out by our own in-house geologists, who have 10-30 years experience in such activities. Core preparation will be conducted by SemGeo LLP, a third party with years of experience in the local market. CenterGeoAnalit LLP will carry out the assaying. Wardell Armstrong International will be contracted for performance of the preliminary feasibility study.

 

Core sampling, assaying and quality assurance/quality control

 

We have and will continue to conduct core sampling over the full length of the exploration hole. In general, sample intervals were 1-2 meters, which produced 2-5 kilograms of sample from each interval. Cores are not cut because cutting fractures the rocks. Samples are undertaken of the whole core.

 

All sample preparation done to date has been done at the SemGeo LLP laboratory, which is located approximately 120 kilometers from the Gornostai deposit. Whole core samples are sent to SemGeo in 2-5 kilogram labeled Hessian bags which are stacked in racks and dried at approximately 90° C. Samples are then sent to a small jaw crusher that reduces the whole sample to 4-5 millimeters. The sample is then sent to a roll crusher where it is reduced to 1-2 millimeters. The equipment is cleaned with compressed air between samples. Samples are then split by cone and quartering with opposite quadrants combined before being sent to the disc grinder where the sample is reduced in size to 74 micrometers. Every fifth sample is checked by sieving to see if it complies with this grain size. As an additional check, every thirtieth sample is waste rock to act as a “blank” control.

 

 

 

From the sample preparation facility, approximately 60 grams of pulverized sample was sent to the CenterGeoAnalit LLP laboratory for assay, while the pulps are kept at the sample preparation facility. Assaying includes the quantitative determination of the main ore components, including nickel, cobalt and iron.

 

Composite samples were produced to determine the chemical composition of slag-forming oxides, detrimental impurities and accompanying components in the ores. Composites are made up from three to five individual samples from one intersection by taking material from duplicates of analytical samples proportional to their length. The maximum weight of a composite sample was 250 grams.

 

For quality control, each of 30 samples includes approximately 10% checks comprising of one blank, one duplicate and one standard. As standards, we use the certified Reference Samples from GEOSTATS PTY LTD (Australia). We have 11 standards with nickel grade varying from 0.02% to 1.51%. In the event an assay result of the Reference Sample shows >2 or <2 standard deviations from the accredited value, the whole batch will be re-assayed.

 

Submission of report and reserves estimate to the State Reserves Committee

 

During 2008, we retained a third party to work with our in-house geologists to prepare the report and reserve estimate for submission to the State Reserves Committee in connection with our application to move the Gornostai deposit from exploration phase to commercial production phase. This work will be continued in 2009.

 

Infrastructure

 

In addition to the road and rail infrastructure discussed above, low tension power lines follow the railway and run within the Gornostai deposit. A high tension power line is located approximately 6-7 km to the south of the central part of the South deposit. We have access to water from the Irtysh River. Unlike the Kempirsai deposit, there are no buildings and only minimal equipment at the Gornostai deposit.

 

Costs

 

Since January 2005, when we acquired Kaznickel, to December 31, 2008, Kaznickel has spent approximately $5,780,000 in exploration activities at the Gornostai deposit. As discussed above, we plan to sell Kaznickel. If we are not successful in selling Kaznickel in 2009, we plan to spend approximately $1,300,000 during 2009 on exploration activities and further development of the Gornostai deposit. This spending depends on our ability to raise funds through a combination of private equity and debt financing. For additional details please see the “Plan of Operations” section of Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

Reserves

 

The Gornostai deposit is considered to be at the exploration stage. As with the Kempirsai deposit, in accordance with SEC Industry Guide 7 mineral deposits qualify as “reserves” only to the extent some part of the deposit can be economically and legally extracted or produced at the time of the reserve determination based on the bankable feasibility study. At the present time, we have completed a preliminary feasibility study for the Kempirsai deposit and we plan to retain Wardell Armstrong International to conduct a bankable feasibility study of our Kempirsai deposit to provide detailed information on mining, processing, metallurgical, economic and other relevant factors.

 

Because our deposits are without known reserves, our proposed programs should be considered exploratory in nature.

 

Processing

 

The design of the processing technology is highly dependent on the chemistry of the laterite ore specifically the iron, magnesium and silicon content and whether the metals are locked in a clay lattice. These factors will control metal recovery and processing economics in terms of energy consumption and acid consumption where leaching technologies are to be employed. High iron, low magnesium ores are traditionally processed by leaching (hydrometallurgical) methods whereas, high magnesium, low iron ores are traditionally processes by high temperature (pyrometallurgical) smelting methods.

 

High iron, low magnesia ores (limonite or nontronite / smectite) are typical of Australia and dryer climates. The nickel is relatively loosely bonded to goethite (hydrated iron oxide) and is usually suitable for hydrometallurgical processing. The nickel can be recovered by pressure acid leaching (“PAL”) and in some cases by selective reduction followed by ammonia-ammonium carbonate leaching.

 

High magnesia, relatively low iron ores (saprolite, serpentinite or garnierite) are typical of tropical climates such as in Indonesia. These ores are traditionally processed by pyrometallurgical techniques, particularly smelting, as generally the nickel replaces magnesium in the magnesium- silicate lattice. In order to recover the nickel, the lattice has to be broken down thereby freeing the nickel. This is achieved by smelting under reducing conditions, i.e. drying, calcining/reduction and electric furnace smelting to produce ferronickel or nickel sulphide matte, which are further processed and refined to recover metal. High pressure acid leaching (“HPAL”) is also possible but large amounts of MgSO4 and MgCl2 are produced increasing the cost of regenerating acid; therefore heap leaching is more suitable to low clay content laterites.

 

There are three main treatment processes for nickel laterites:

 

 

 

Conventional Smelting

 

This process is typically used for high nickel and low iron saprolite ores, and involves furnace smelting to form an iron-nickel product typically with 20%-40% contained nickel. Further treatment can increase this to around 78% nickel. The classic pyrometallurgical process for nickel laterite ores is commonly referred to as the RKEF process (Rotary Kiln-Electric Furnace). Ore is calcined and pre-reduced in a rotary kiln prior to smelting to produce FeNi (ferronickel) and slag. The RKEF process is widely used and there is a relatively good understanding of the process flow scheme. This technique is very simple and is used at the PT Inco mine in Indonesia, the Falcondo mine in Dominican Republic and the Cerro Matoso mine in Columbia, among others. In recent years modifications to the RKEF process have been attempted, replacing the rotary kiln element with flash calcining and utilizing DC ARC furnace technology for the smelting stage (so-called NST process). These recent technologies have been studied at bench scale and proposed for full-sized commercial installations, but, they are not widely practiced and regarded as emerging rather than established technology.

 

Reduction Roast / Ammonia Leach Processing (Caron Process)

 

The Caron process is used for ores with high iron and high magnesium content. The ore is roasted and then cooled in a non-oxidizing environment. The resulting material is leached with an ammonia solution and further treated to produce a nickel-rich product (75% nickel) which can then be refined to produce nickel metal and other by products. This process usually yields lower nickel recoveries than with other types of laterite ore processing, an example is BHP Billiton’s Yabulu refinery in Queensland, Australia.

 

High Pressure Acid Leaching (HPAL)

 

The HPAL process is used where there is high iron, limonitic ores with low magnesium and silica such as the dry laterites found in Australia. The process involves the dissolution of limonite ores in acid under high pressures and temperatures. This liberates the nickel and other metals in solution and allows concentration and processing to produce an intermediate nickel product which can be further refined. Leaching occurs at 250°C to 270°C, with high acid consumption. Existing operations include plants at Murrin Murrin, Cawse (Australia), Moa Bay (Cuba) and Rio Tuba (Philippines) and new projects Goro (New Caledonia) and Ravensthorpe (Australia). HPAL technology was expected to change the shape of the industry cost curve. However, existing equipment has proven inadequate for the required high temperatures, pressures and acid strengths. This has resulted in longer than expected ramp-up schedules and significant cost overruns at a number of proposed HPAL facilities. As an example, Ravensthorpe was closed down after only one year of production due to cost pressure.

 

In addition, several low-tech processes are currently in development. A description of each process follows:

 

 

Heap Leaching

 

Heap leaching is a process currently in development that has been designed to process a range of ore types. The process is low-tech, with modest capital and operating costs. Ore is leached for between 150 and 700 days. The process uses a reductant for cobalt extraction. During downstream processing, iron is removed from goethite, jarosite and hematite, with the precipitate nickel forming as mixed sulphide or hydroxide. Minara Resources is currently undertaking a research and development project at Murrin Murrin to allow nickel/cobalt heap leaching, initially to process ore rejects (scats) to run in parallel with its HPAL operation. The other committed project is European Nickel’s Caldag deposit in Turkey which is currently under construction.

 

Atmospheric leaching

 

An alternative lower cost method of processing ore is atmospheric leaching, where limonite ores are leached with the addition of sulphur dioxide for cobalt extraction. Atmospheric leaching requires very high acid usage. This process is in the early stages of development and is not currently used operationally.

 

Hydrochlorination

 

The KMI acquisition gave us the rights to a proprietary technology for processing nickel and cobalt ores. While this technology has not previously been used to process nickel and cobalt ores, it is based on the same principles used to process titanium and other rare earth metals in Kazakhstan and Russia. The processing technique utilizes hydrogen chloride to leach out the nickel and cobalt ores with sublimation of the nickel and cobalt chlorides occurring at 1,050-1,100 (Degrees) Celsius. This technology utilizes a closed-circle utilization chamber, which results in no emissions while achieving extraction rates comparable to pyrometallurgy and hydrometallurgy.

 

During 2006 we constructed a pilot plant at our Kempirsai deposit to test our hydrochlorination process. Our pilot processing plant has a processing capacity of 12.5 tons of ore per day. We performed initial testing and processed an aggregate of 10 tons of ore through the pilot plant from October 2006 to January 2007. The test results indicated the following issues that we are trying to resolve:

 

 

The initial tests of the pilot plant used head ore from our Kempirsai deposit. The average nickel content of our Kempirsai head ore is approximately 1.1 percent per ton. PIT Geoanalitika, an independent Kazakh company, conducted chemical analysis of several different samples of the pilot plant concentrates and found that nickel content following the hydrochlorination process increased 10 to 15 percent. We feel these initial results justify further research and development to optimize the process at the scale of the pilot plant with a view to employing the technology in commercial production in the future. Irrespective of our decision regarding the feasibility of a pyrometallurgical or hydrometallurgical processing plant at the Kempirsai deposit, we plan to continue testing and development of our hydrochlorination process.

 

 

 

Smelting in a liquid bath (pyrometallurgical - Vanyukov process)

 

In 1949, the Moscow State Institute of Steel and Alloys proposed a process based on smelting in a liquid bath. This technology has been developed and, although little used in the West, has for more than 25 years been applied successfully as a standard metallurgical melting process, especially for the production of copper from both oxide and sulphide ores in the CIS countries. The first commercial application of this technology for the processing of nickel oxide ores to produce ferronickel commenced at Kombinat YuzhUralNickel (Russia) in 2004. Coal, coke or even methane can be used as the reducing agent. An advantage of the Vanyukov process over the more widely known RKEF process is that reduction and melting occurs in a single unit as opposed to having separate units (rotary kiln and electric furnace), thereby enabling potential capital cost savings. The ability to use coal, coke and/or methane as both a fuel and a reductant also offers potential operational cost savings compared to the more traditional routes. Another possible advantage of the Vanyukov process is the considerably lower electrical power requirement compared to RKEF technologies. YuzhUralNickel is currently undergoing upgrading and once complete should demonstrate the commercial applicability of this process flow scheme.

 

Bioleaching

 

Low grade ores can also be treated through the environmentally safe hydrometallurgical process of bioleaching, a process currently undergoing successful trials by Titan Resources at the Radio Hill nickel mine (Western Australia). Unlike other processes that release noxious sulphur gases, all the sulphides are converted into water-soluble sulphates.

 

Our Plans on Processing Technology

 

We spent the past several years analyzing and pilot testing a number of nickel processing technologies.

 

Kempirsai

 

The most recent pilot testing and the PFS were performed to investigate the following technologies:

 

 

In September 2008, Bekem and its subsidiary, KKM, completed initial pilot testing of various technologies for processing nickel ore from its Kempirsai deposit. The testing was conducted in the United Kingdom, Russia and Kazakhstan. The primary objective of pilot testing and commissioning the PFS was to identify an effective and efficient nickel processing technology in terms of capital expenses and operating cost, nickel recovery and input-output volatility parameters. Based on the results of testing, the PFS reports and other factors, such as economics and funding, we intend to focus on the Vanyukov Process for further development of the Kempirsai deposits and construction of a nickel processing plant in the Aktobe region of Kazakhstan, subject to obtaining the necessary capital financing. Preparation of the PFS involved several independent experts including well-known western companies like Wardell Armstrong International, GBM, PB Power and leading Russian institutes -- Moscow Institute of Steel and Alloys and Gipronickel.

 

 

The Vanyukov Process is capable of treating oxide nickel ores to form either a nickel matte (by addition of a sulphur containing compound such as pyrite) or directly to form a ferronickel alloy containing up to 20% nickel. Potential advantages of using the Vanyukov Process compared to the other processing technologies considered include:

 

 

The following table represents the summary of the PFS initial cash operating and capital costs estimates as of July 1, 2008 for processing 1.6 million tons of ore annually and with the annual capacity of 50,000 tons of ferronickel (10,000 tons of nickel):

 

 

The RKEF and Vanyukov process technologies produce a ferronickel product that has a market value of approximately 90% of the nickel and cobalt content in the produced product. The acid leaching technologies produce a Mixed Hydroxide Product ("MHP") that has a market value of approximately 70% of the nickel and cobalt content in the produced MHP product. We believe additional marketing studies would be required to determine potential customers for the MHP product. The cash operating expense figures in the above table take into account the varying values of each product to present the operating expenses of each technology on an equivalent per ton basis.

 

Small pilot scale tests conducted in the first half of 2008 on Kempirsai ore utilizing the Vanyukov Process technology demonstrated recovery of more than 90% of the nickel, i.e. more than 90% of the nickel contained in the ore samples was recovered in the ferronickel alloy.

 

We plan to continue working with Wardell Armstrong International to provide us with a bankable feasibility study and an ore resource estimate of our Kempirsai deposit. We anticipate completion of this study during our 2010 fiscal year if we secure financing of this study in 2009-2010.

 

Gornostai

 

We currently have no processing facilities at the Gornostai deposits. Soviet era data and our own activities indicate that the Gornostai ore appears to be high magnesia, low iron ores. Based on this, the processing technique that has historically been most commonly used with ore like ours is pyrometallurgical processing. Heap leaching may also be possible.

 

As discussed above, if we ultimately do not sell Kaznickel we plan to work with Wardell Armstrong International to provide us with a preliminary feasibility study and an ore resource estimate of our Gornostai deposit after completion of interpretation of exploration results and preparation of the report and reserve estimate for submission to the State Reserves Committee.

 

 

Tax and Royalty Scheme in the Republic of Kazakhstan

 

Over the last several years the Kazakhstan state policy was oriented on reducing tax burden on entities by gradual decrease of major tax rates (VAT, social and individual income tax, etc).

 

On December 10, 2008 a new Tax Code was adopted, which is effective from January 1, 2009. According to the new Tax Code, tax rates were revised in both directions. Major changes include:

 

 

As of December 31, 2008, we are subject to the following taxes and royalties payable to the Republic of Kazakhstan:

 

 

Competition

 

Total nickel production worldwide was approximately 1,610,000 tons in 2008, according to the USGS. Norilsk Nickel is the largest nickel producer followed by CVRD, BHP Billiton Plc, Eramet Group and Xtrata. These five companies account for approximately 60% of the world’s primary nickel production, while more than 30 medium to small size companies produce the remaining 40%.

 

Until recently, there were no nickel-producing companies in Kazakhstan. In February 2004, Oriel Resources, a London-based company, acquired 90% of Muzbel LLC, which holds exploration and extraction rights for the Shevchenko nickel deposit in northern Kazakhstan. Formed in July 2003, Oriel’s primary focus is the acquisition and development of advanced and high-quality chrome, nickel and other alloying commodities in the countries of the Former Soviet Union, primarily Kazakhstan and the Russian Federation. Oriel Resources owns Tikhvin chrome smelter near St Petersburg and has two deposits in Kazakhstan, including the Voskhod chrome and the Shevchenko nickel projects. The Shevchenko nickel project feasibility study showed proven and probable nickel laterite ore reserves of 104.4 million tons of 0.79% nickel. In 2008, Mechel acquired Oriel Resources. Mechel is the leading Russian coking coal and long steel producer, however recently its interest has expanded into utilities and ferroalloy manufacturing.

 

 

 

Companies compete with each other generally across the globe and are best categorized by their size, reserve base, ore richness and production method, due to different extracting technologies applied, and the final product. Competition in this industry focuses largely on price and nickel content, whether it is sold in unwrought or chemical form. High nickel content material is sold at higher prices and is most sought after among customers. We do not anticipate direct competition from Oriel Resources should they pursue plans to build a nickel processing plant in Kazakhstan. Nickel and cobalt are part of a global market and a worldwide demand, in which the supply is limited and the number of industries that use nickel and cobalt is increasing, thus ensuring long-term demand for additional production of nickel and cobalt.

 

We believe that the utilization of the Vanukov process for processing of nickel will allow us to be competitive on a cost basis. For example, the Russian UfaleiNickel and YuzhUralNickel nickel smelters cut its nickel output by some 30% in 2008 because of the sharp fall in world nickel prices while the price of the special coke used in nickel smelting increased. The technology utilized by these companies requires 40 tons of coke for production of one ton of nickel (whose share in the production cost is 60%), and with the rising coke prices, production cost is exceeding the price at which the nickel can be sold.

 

Employees

 

We currently employ approximately 200 employees, including part- and full-time working employees and 115 employees have been sent on unpaid vacation due to our current financial difficulties. We hire our employees under local labor contracts complying with the governing laws of the Republic of Kazakhstan. We anticipate the need to hire additional personnel only if operations expand. We have managed to maintain turnover of our work force at a low level. With the ongoing labor market monitoring, we believe that future new labor requirements can be satisfied and there is no significant risk of labor shortage.

 

Reports to Security Holders

 

We are subject to the reporting requirements of the Securities Exchange Act of 1934. As such, we are required to file annual, quarterly and current reports, any amendments to those reports, proxy and registration statements and other information with the United States Securities and Exchange Commission (“SEC”) in accordance with reporting requirements. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 202-551-8090. We are an electronic filer and the SEC maintains an Internet site that contains reports and other information regarding the Company that may be viewed at http://www.sec.gov.

 

 

 

If We are Unable to Obtain Additional Financing in the Near Future, We May be Forced to Terminate Operations. We have no proven mineral reserves that conform to the standards established by the SEC. The Gornostai and Kempirsai deposits have not yet entered the development stage with respect to their mineral interests and we have no production. We have realized only limited revenue from the Kempirsai deposit and no revenue from the Gornostai deposit and have very little ability to generate revenue. We do not expect this to change until a nickel ore processing plant is built and we have commenced commercial operations. As we currently generate no revenue, we will need to raise additional capital through the sale of our equity and/or debt securities to fund plant construction.

 

Since completion of the preliminary feasibility study, our management has expended significant time and effort over the past year trying to obtain additional financing for the Company. To date, we have been unsuccessful in securing sufficient additional financing to meet our needs. We believe this is due to several factors. Since inception we have incurred an accumulated deficit of $30,272,874. At December 31, 2008 our current liabilities exceeded current assets by $3,677,633. We currently generate no revenue from operations and do not anticipate that to change until such time as we are able to construct an ore processing plant. When coupled with the difficulties in the broader world economy, including the recent problems in the credit markets, steep declines in worldwide nickel prices and volatility and downward trends in the stock market which evidence ongoing weakeness in the United States and global economy, our prospects for obtaining additional funding in the near term are limited.

 

If we are unable to obtain additional financing in the near future, we will have insufficient funds to satisfy our operating needs, much less to meet our annual work program obligations to ensure we retain our licenses. If we have insufficient funds to meet our operating needs we may be forced to cease operations.

 

We may be unsuccessful in our negotiations to sell Kaznickel. As noted above, we are currently in negotiations to sell our wholly-owned subsidiary Kaznickel LLP. We anticipate the sale of Kaznickel will provide sufficient capital to fund our operations through the third quarter of the 2009 fiscal year. We are still in the negotiation phase. If we are unsuccessful in negotiating a definitive agreement, in obtaining the necessary governmental and other approvals for the sale or are unable to close the transaction, we will be unable to sale Kaznickel, which currently appears to be our best opportunity in the short-term to obtain capital to continue operations.

 

Failure to Satisfy the Terms of Our Subsoil Use Contracts Could Result in the Loss of Our Contracts. Under our subsoil use contracts, we are required to satisfy our annual minimum work program requirements. There is no guarantee that we will be able to continue to meet these commitments in the future. If we fail to satisfy these commitments we may be subject to penalties and fines and/or the loss of one or more of our subsoil use contracts. The cancellation of our contracts would have a material adverse effect on our business, results of operations and financial condition. Although we would seek waivers of any breaches or seek to renegotiate the terms of our commitments in the event we do not believe we can meet such commitments, we cannot assure you that we would be successful in doing so.

 

 

For many years it was the practice of the MEMR that if a subsurface user for any reason could not fulfill certain conditions for a specific year, then such actions were extended to the next year. During the latter part of 2007, however, this practice was terminated by order of the president of Kazakhstan. This change in practice has created great uncertainty as to how the government will proceed in the future. This problem is enhanced by the fact that there exists no legislatively fixed mechanism for independent determination at a detail level, of the compliance by subsurface users with the parameters of their annual work program. Currently, this determination is made at the discretion of officials employed by the authorized governmental body. These officials are authorized to suspend the activities of the subsurface user even for a minor breach of the detailed annual program. This fact coupled with the right of the competent body to unilaterally terminate a subsoil users contract if the contractor materially breaches the subsoil use contract obligations, indicates there is a risk that penalties and fines and/or the loss of one or more of our subsoil use contracts.

 

Fluctuations in Commodity Price and Demand for Nickel and Cobalt Have and Will Likely Continue to Adversely Impact the Company. Commodity prices, and demand for nickel and cobalt, are cyclical and influenced strongly by world economic growth, particularly in the US and Asia (notably China). Commodity prices have significantly declined recently and prices can fluctuate widely. Such fluctuations could have a material adverse impact on the our revenues, earnings, cash flows, asset values and growth in the future. As a result of difficult market and general economic conditions (which may be long lasting and continue to deepen), there is reduced direct and indirect demand for nickel and cobalt and these declines, if they do not reverse are expected to a material adverse impact on our future revenues, earnings, cash flows, asset values and growth.

 

Due to the significant reduction in nickel prices we were required to recognize an impairment of our mineral interests. According to our estimates, we can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. Nickel prices at December 31, 2008, however, fell below this level, requiring us to recognize an impairment. of our mineral interests in the amount of $8,916,265. If nickel prices continue to fall we may be required to recognize additional impairments to our mineral interests in the future.

 

Mineral Exploration and Exploitation is Inherently Dangerous. The search for valuable minerals involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure. At the present time we have no coverage to insure against these hazards. The payment of such liabilities may have a material adverse effect on our financial position.

 

We are Subject to All the Risks of Operating in a Foreign Country. In recent years, the Republic of Kazakhstan has undergone substantial political and economic change. As an emerging market, Kazakhstan does not possess the well-developed business infrastructure that generally exists in more mature free market economies. As a result, operations carried out in Kazakhstan can involve significant risks that are not typically associated with developed markets. Instability in the market reform process could subject us to unpredictable changes in the basic business infrastructure in which we currently operate. Therefore, we face risks inherent in conducting business internationally, such as:

 

 

Any of these factors could materially adversely affect our business and financial condition. At this time, we are unable to estimate what, if any, changes may occur or the resulting effect of any such changes on us.

 

We also face a significant potential risk of unfavorable tax treatment and currency law violations. Legislation and regulations regarding taxation, foreign currency transactions and licensing of foreign currency loans in the Republic of Kazakhstan continue to evolve as the central government manages the transformation from a command to a market-oriented economy. The legislation and regulations are not always clearly written and their interpretation is subject to the opinions of local tax inspectors. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual.

 

The current regime of penalties and interest related to reported and discovered violations of Kazakhstan’s laws, decrees and related regulations can be severe. Penalties include confiscation of the amounts at issue for currency law violations, as well as fines of generally 100% of the taxes unpaid. Interest is assessable at rates of generally 0.3% per day. As a result, penalties and interest can result in amounts that are multiples of any unreported taxes.

 

 

We may be adversely affected by Kazakh political developments, including the application of existing and future legislation and tax regulations.

 

On February 4, 2009 Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a corridor of 117-123 Tenge/US dollar to 145-155 Tenge/US dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports); currency devaluations in Kazakhstan’s neighbors, particularly Russia; and the fledgling state of the domestic banking sector. There is limited confidence in the government’s ability to control prices in the near to medium term, and with the value of Tenge denominated wages falling, purchasing power is declining. Given our limited current operations, the devaluing of the Tenge has not significantly affected our business. The future effect of the devaluation is hardly projectable given present uncertainty on currency markets and government’s policy regarding the exchange rates and/or foreign currency regulations.

 

We are Subject to Strict Environmental Regulations. We are subject to stringent federal, state and local laws and regulations relating to the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of permits before extraction activities commence, restrict the types, quantities and concentration of substances that can be released into the environment in connection with extraction and production activities and impose substantial liabilities for pollution resulting from our operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, incurrence of investigatory or remedial obligations or the imposition of injunctive relief. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to maintain compliance, and may otherwise have a material adverse effect on us as well as the industry in general. Under these environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible.

 

We are Subject to Intense Competition. Our competition includes large established mining companies with substantial capabilities and with greater financial and technical resources than we have. As a result of this competition, we may have to compete for financing and we may be unable to acquire financing on terms we consider acceptable. Our competition could adversely affect our ability to acquire suitable prospects for exploration in the future. We may also have to compete with the other mining companies in the recruitment and retention of qualified managerial and technical employees. If we are unable to successfully compete for financing, mineral properties or qualified employees, we will likely have to cease operations. The occurrence of any of these things would likely cause us to cease operations as a company and investors would lose their entire investment in our company.

 

Liquidity of Common Shares. Our common stock has limited trading volume on the Over-the-Counter Bulletin Board and is not listed on a national exchange. Moreover, a significant percentage of the outstanding common stock is “restricted” and therefore subject to the resale restrictions set forth in Rule 144 of the rules and regulations promulgated by the U.S. Securities and Exchange Commission under the Securities Act of 1933. These factors could adversely affect the liquidity, trading volume, price and transferability of our common shares.

 

 

 

 

 

For a discussion of our mineral interests, please see the information set forth above in Item 1 “Business” which is incorporated by reference herein.

 

Bekem leases approximately 400 square feet of office space located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in the United States. We pay annual rent of approximately $7,800 for this space. The term is on a month-to-month basis commencing on January 1, 2009 and ending on thirty days notice.

 

We also maintain a representative office in Almaty, Kazakhstan, where we lease 1,580 square feet of office space. The lease agreement expires on November 30, 2009. The monthly lease payment is $5,145. Upon consent of both parties, the agreement may be prolonged further.

 

Kaznickel LLP rents approximately 2,200 square feet office in Semey, Kazakhstan, for approximately $4,000 per month. Semey is the closest city to the Gornostai deposit. Kaznickel also rents approximately 5,300 square feet of warehouse space in Semey for $4,250 per month. Kaznickel uses this space to store test ore. This space is leased on a year-to-year basis. If at any time the owner of this space decides they need or want the space for other purposes, Kaznickel has no right to continue to occupy the space and could be forced to move.

 

KKM rents approximately 2,120 square feet of office space in Aktobe, Kazakhstan. KKM pays approximately $5,500 per month for this space under a one-year lease agreement. This space is leased on a year-to-year basis. If at any time the owner of this space decides they need or want the space for other purposes, KKM has no right to continue to occupy the space and could be forced to move.

 

We believe each of the various office spaces rented by us and our subsidiaries are suitable and adequate for our needs.

 

 

On December 10, 2007, the MEMR unilaterally terminated KKM’s contracts and licenses to explore for nickel, cobalt, brown coal and other minerals within the Kempirsai and Mamyt deposits on the basis that KKM had material failures in the execution of the work programs associated with the contacts and licenses. The MEMR did not, however, detail those failures. In January 2008, KKM filed an action in the Court of Astana city against the MEMR challenging the legality of the unilateral termination of the KKM contracts and licenses by the MEMR for several reasons, including that the contracts and licenses had been terminated on grounds not provided for in the subsoil use contracts and legislation and there were no material failures in the execution of the work programs associated with the contracts and licenses. In February 2008, the Court of Astana city acknowledged that the unilateral termination of the contracts and licenses by the MEMR was

 

 

inconsistent with the terms of the contracts and licenses. The Court canceled the order of the MEMR relating to the unilateral termination of the licenses and reinstated the KKM contracts and licenses. In March 2008, the MEMR appealed the decision of the Court of Astana city to the Republic of Kazakhstan Supreme Court. On April 22, 2008 the Supreme Court cancelled the MEMR’s unilateral termination and reinstated KKM’s contracts and licenses to the Kempirsai deposit. However, on February 18, 2009 the General Prosecutor of the Republic of Kazakhstan lodged a protest to the Supervisory board under the Supreme Court against the judgment of the Court of Astana city and the Supreme Court canceling the unilateral termination of the KKM contracts and licenses. Pursuant to the Code of Civil Procedure of the Republic of Kazakhstan, the General Prosecutor may protest the decision of the Supreme Court within one year of its determination. The General Prosecutor asserted that the Court of Astana city and the Supreme Court wrongly applied the substantive law and requested an order cancelling the decisions of the Court of Astana city and the Supreme Court and reinstating the order unilaterally cancelling the KKM contracts and licenses. We filed a formal objection to the protest of the General Prosecutor. In March 2009 the Supervisory board under the Supreme Court dismissed the protest of the General Prosecutor.

 

We are not aware of any other material pending or threatened litigation or governmental agency proceeding to which Bekem or any of our directors, officers or affiliates are, or would be, a party.

 

 

On November 18, 2008 we held our annual meeting of stockholders to vote on the following matters:

 

 

The number of shares outstanding and entitled to vote upon these matters was 125,172,011.  The number of shares represented at the annual meeting of stockholders, present or by proxy was 77,831,921.

 

At the meeting, 77,831,421 shares voted to approve and adopt Articles of Amendment to our Articles of Incorporation to increase our authorized common stock from 150,000,000 shares to 300,000,000 shares, 500 shares voted against this matter and no shares abstained from voting on this matter.

 

 

Six individuals were nominated to fill directorships for a period of one year and until their successors are elected.  Following are the results of voting in the election of directors:

 

 

77,831,921 shares voted to appoint Hansen, Barnett and Maxwell, P.C. as our independent registered public accounting firm for the 2008 fiscal year, no shares voted against this matter and no shares abstained from voting on the matter.

 

PART II

 

 

Our shares are currently traded on the Over-the-Counter Bulletin Board ("OTCBB") under the symbol BKMM. The following table presents the high and low bid quotations for the fiscal years ended December 31, 2008 and 2007. The published high and low bid quotations were furnished to us by Pink OTC Markets Inc. These quotations represent prices between dealers and do not include retail markup, markdown or commissions. The quotations do not represent actual transactions.

 

 

 

Record Holders

 

As of April 4, 2009 we had approximately 157 shareholders holding 125,172,011 shares of our common stock. The number of record shareholders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing houses.

 

Dividends

 

We have not declared a cash dividend on any class of common equity. Our ability to pay dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may not be made if, after giving it effect: a) the Company would not be able to pay its debts as they become due in the usual course of business; or b) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy the rights of any holders of preferential rights. Our board of directors does not, however, anticipate paying any dividends in the foreseeable future; it intends to retain the earnings that could be distributed, if any, for the operations, expansion and development of its business.

 

Unregistered Sales of Equity Securities

 

No instruments defining the rights of the holders of any class of registered securities have been materially modified, limited or qualified.

 

During the fourth quarter of the year ended December 31, 2008, we did not sell any equity securities.

 

Issuer Repurchases of Equity Securities

 

During the fourth quarter of the year ended December 31, 2008, we did not repurchase any of our equity securities.

 

Transfer Agent

 

Our transfer agent and registrar is Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117, Telephone (801) 272-9294.

 

 

The selected consolidated financial information set forth below is derived from our consolidated balance sheets and statements of operations as of and for the years ended December 31, 2008, 2007 and 2006 and for the period from March 5, 2004 (the date of Inception) until December 31, 2005. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis” and the consolidated financial statements and related notes thereto included in this Annual Report.

 

 

 

 

 

 

 

For a complete understanding of this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements contained in this Form 10-K.

 

Since inception we have generated no revenue. We have spent around US $30 million to date and anticipate that we will spend significant additional capital before we begin to realize revenue from operations. As discussed above in Item 1 “Business” we have no proven mineral reserves that conform to the standards established by the U.S. Securities and Exchange Commission. The Gornostai and Kempirsai deposits have not yet entered the development stage and we have no production. We have realized only limited revenue from our Kempirsai deposit and no revenue from Gornostai and have very little ability to generate revenue. We do not expect this to change until we build and begin operating a nickel ore processing plant. We are currently investigating the financial viability of various processing technologies for the construction of a processing plant to produce ferronickel at our Kempirsai deposit to allow us to begin realizing revenues. We expect we will need significant additional capital to fund construction of a processing plant. If we are able to obtain the necessary funding to finance construction of a processing plant in the near future, we would not expect the plant to be operational prior to 2012. Because we do not currently generate cash flow and we do not anticipate generating significant cash flow until 2012 or later, if at all, we will be completely dependent on external funding, if any, to support our activities until we are able to generate sufficient revenues to cover our expenses.

 

In July 2006 we raised $28,000,000 through a private placement of our equity securities, which resulted in net proceeds to us of approximately $26,400,000 after deducting fees and costs. As of December 31, 2008, we had fully spent those funds.

 

 

We incurred net losses of $15,348,975 and $8,701,550 for the years ended December 31, 2008 and 2007, respectively and $30,272,874 for the period from March 5, 2004 (date of inception) through December 31, 2008. Current liabilities exceeded current assets by $3,677,633 at December 31, 2008 and current assets exceeded current liabilities by $1,000,533 at December 31, 2007. We anticipate the need to seek significant additional funding during fiscal 2009 to satisfy our annual work program obligations for this year.

 

Results of Operations

 

While reading the Results of Operations section, it is important to keep in mind that we acquired KMI and its operating subsidiary KKM on October 24, 2005. While KKM has not engaged in significant activity in recent years, it has engaged in significantly greater activity than Bekem or Kaznickel in the past years. Prior to the acquisition of KMI, we were engaged in exploration of our Gornostai deposit.

 

General and Administrative Expenses

 

Our general and administrative expenses increased from $4,219,131 during 2007 to $4,646,913 during 2008. This 9% increase in general and administrative expenses is mainly attributable to consulting services (revaluation of property, plant and equipment, assessment of our business plan, etc.) of approximately $332,107 incurred in attempt of attracting loans and/or other investment proceeds from potential lenders/investors.

 

Research and Development Costs

 

During 2008 we incurred research and development cost of $240,832, which was related to preparation of the preliminary feasibility study on the Kempirsai deposits. During 2007 we realized research and development costs of $296,070, which was related to preparation of the preliminary feasibility study on the Kempirsai deposits.

 

Exploratory Costs

 

Our exploratory costs decreased from $3,192,177 during the twelve months ended December 31, 2007 to $1,042,246 during the twelve months ended December 31, 2008.

 

Exploratory costs of Kaznickel. During the twelve months of 2008 we completed drilling of 10 test holes (all test holes were in the North section of the Gornostai deposit) to an aggregate depth of 967 meters. By comparison, during the twelve months of 2007 we completed drilling of 619 test holes (611 test holes in the South section and 8 test holes in the North section of the Gornostai deposit) to an aggregate depth of 15,625 meters (14,965 meters in the South section and 660 meters in the North section). During 2008 and 2007 the cost of exploratory drilling works and chemical and other laboratory analyses of the drilled samples at the Gornostai deposit amounted to $278,841 and $1,584,428, respectively.

 

Exploratory costs of KKM. During the twelve months ended December 31, 2008 we extracted 146,107 tons of ore. By comparison, during the twelve months ended December 31, 2007, we extracted 137,724 tons of ore. The ore extraction costs of $393,018 and $858,105 (including stripping costs for 2008 and 2007), respectively, were included in exploratory costs since the Company is in the exploration stage.

 

 

The balance of exploratory cost of $370,387 and $749,644 for 2008 and 2007, respectively, represent the cost of maintenance and repair works of Kempirsai assets.

 

Loss from Impairment of Property

 

Due to the global financial crisis, we reassessed our assets and recognized impairment of mineral interests of $8,916,265. According to our estimates, we can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. Nickel prices at December 31, 2008, however, fell below this level, requiring us to recognize an impairment of our mineral interests. Also, impairment for other property was recognized for the amount of $565,171. The amount represents assets used in the pilot plant under hydrochlorination technology that will not be used in the Vanyukov’s technology to be applied at the nickel processing plant. During 2007 the Company recognized $1,043,720 of impairment loss as a result of a revision of recoverability of its long-lived assets.

 

Accretion Expense

 

We realized accretion expense of $89,460 during the twelve months ended December 31, 2008. During the twelve months ended December 31, 2007 we realized accretion expenses of $79,288. This increase in accretion expense is due to the normal increase in the asset retirement obligation balance over time. We believe accretion expense during upcoming fiscal year will continue to increase at a rate consistent with the rate experienced during the 2008 fiscal year.

 

Grant Compensation Expense

 

During the year ended December 31, 2008 we incurred $585,745 in grant compensation expense for restricted stock grants issued to certain officers and key employees. During 2007 the grant compensation expense amounted to $428,935. The 2007 grant compensation expense was lower mainly because of the reversal of deferred compensation of $822,455 due to the resignation of our former CEO and President.

 

On March 25, 2008, the board agreed to award certain executives and key employees of the Company additional restricted stock grants (421,772 shares) with an estimated fair value of $337,418. Although the number of shares granted turned out to be the same as it was before the resignation of our former CEO and President, the nominal compensation expense has decreased due to decreased market prices for the Company’s shares in March, 2008.

 

Total Operating Expenses and Loss from Operations

 

As a result of the factors described above, our total expenses and loss from operations increased by 74%, from $9,259,321 during fiscal 2007 to $16,086,632 during fiscal 2008. The principal reason for this increase is the increased loss from impairment of property by $8,437,716, which occurred mainly due to the sharp fall in nickel prices on the world market in the second half of 2008 after the global financial crisis. We expect we will continue to generate losses until we engage in significant revenue generating activities, which most likely will not occur before 2011.

 

 

Interest Income  

 

During the twelve months ended December 31, 2008, we realized interest on deposits of $221,084. The amount includes $54,756 of interest earned on short-term bank deposits and $166,328 accrued on the note receivable from Latimer. By comparison, during the twelve months ended December 31, 2007 we earned $324,976 of interest on deposits.

 

Interest Expense

 

During 2007 we realized interest expense of $1,018, while we realized no interest expense during 2008. The reduction in interest expenses took place due to our outstanding non-interest bearing notes payable.

 

Translation Adjustment

 

The consolidated financial statements are presented in U.S. dollars. The functional currency of our subsidiary Kaznickel is U.S. dollars. The functional currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated into U.S. dollars at the average exchange rates during the reporting period. All balance sheet accounts of KKM are translated at exchange rates on the date of the financial statements and translation differences are included in stockholders’ equity as cumulative translation adjustments. The translation adjustment balance recorded in the consolidated statement of shareholders’ equity (deficit) also includes foreign exchange differences arising from intercompany transactions that are of long-term-investment nature (long-term intercompany loans) in accordance with the requirements of FAS 52.

 

Non-monetary assets and liabilities of Kaznickel are translated into U.S. dollars using historical or average exchange rates and monetary assets and liabilities are translated into U.S. dollars using exchange rates on the date of the financial statements where translation differences are included in results of operations.

 

Exchange Loss and Gain

 

During 2008 we realized an exchange loss of $9,564 compared to an exchange loss of $64,280 during 2007. As with translation adjustments, we recognize an exchange gain or loss as a result of having subsidiaries operating in foreign countries whose functional currency may or may not be the U.S. dollar. This requires us to translate results of operations from a foreign currency, in this case the Kazakh tenge, to U.S. dollars at the average exchange rate, where results of operations include exchange gains or losses on the U.S. dollar monetary assets and liabilities.

 

Other Income (Expense)

 

During the twelve months ended December 31, 2008, we realized $487,533 of other income. This amount includes income from the sale of two locomotives and rent of railways and other technical equipment. Advance payments for the locomotives were received in 2007 in the amount of approximately $252,958.

 

 

 

 

Net Loss

 

For all of the foregoing reasons, during the twelve months ended December 31, 2008 we experienced a net loss of $15,348,975 compared to a net loss of $8,701,550 during the twelve months ended December 31, 2007. We anticipate we will continue to experience annual net losses of around $8 million until we are able to engage in nickel and cobalt ore extraction, processing and sales.

 

Liquidity and Capital Resources

 

As of December 31, 2008 we had cash on hand of $115,644. We incurred net losses of $15,348,975 and $8,701,550 for the years ended December 31, 2008 and 2007, respectively and $30,272,874 for the period from March 5, 2004 (date of inception) through December 31, 2008. Current liabilities exceeded current assets by $3,677,633 as of the year ended December 31, 2008 and current assets exceeded current liabilities by $1,000,533 as of the year ended December 31, 2007.

 

Our capital resources have consisted primarily of funds we have borrowed from related and non-related parties and the sale of our equity securities. As discussed above, in July 2006 we raised $28,000,000 through the private placement of our equity securities which resulted in net proceeds to us of approximately $26,400,000 after deducting fees and costs. These funds, however, represent only a portion of the funds we will need to move to commercial production. As of December 31, 2008, we had fully spent those funds. These funds were used to repay loans to related and unrelated third parties in the amount of $12,200,000; for ongoing drilling and exploration of our Gornostai deposit in the amount of $2,600,000; $2,000,000 for the construction of our hydrochlorination pilot plant, $300,000 for testing of our pilot plant; $1,600,000 was spent on other capital expenditures as a part of our minimal working program and $7,000,000 for working capital.

 

In addition, during 2008 we received net proceeds from notes payable to related parties in the amount of approximately $4,800,000. Out of this amount, as of December 31, 2008, we had cash on hand of $115,644. The remaining amount was spent during 2008 on financing our working capital.

 

We anticipate the need for substantial additional capital resources during the 2009 fiscal year to meet the annual work program obligations associated with our Kempirsai and Gornostai deposits.

 

As discussed in Item 1 “Business” we are currently in negotiations for the sale of Kaznickel in exchange for repayment of $5,000,000 of intercompany debt owed by Kaznickel to Bekem. If we are successful in completing the sale of Kaznickel, we will use those proceeds to fund our operations. We anticipate the funds from repayment of the Kaznickel loans would provide us sufficient working capital through the third quarter 2009.

 

There is no assurance that we will be able to obtain additional funding on favorable terms, or at all. There is also no guarantee that we will be successful in selling Kaznickel, or that the proposed sale of Kaznickel will be approved by the MEMR. If we are unsuccessful in obtaining additional funding during 2009, we will likely have insufficient funds to continue operations or to meet our annual work program requirements. If we cannot fulfill our annual work program requirement, we could be subjected to fines and penalties and even to the possible forfeiture of our subsoil use contracts and licenses.

 

 

During the 2008 and 2007 fiscal years, cash was primarily used to fund operations and provide loans (out of the amount of notes payable received during 2008). See below for additional discussion and analysis of cash flow.

 

 

In fiscal 2008 net cash used in operating activities was $5,185,567, compared to net cash used in operating activities of $7,153,188 in fiscal 2007. This decrease in net cash used in operating activities primarily occurred due to reduced exploratory activities as a result of the uncertainty regarding the KKM lawsuit with the MEMR, which was resolved during the second quarter of 2008, and the delay in signing the amendment to the subsoil agreement between Kaznickel and the MEMR (signed on May 16, 2008).

 

Net cash used in investing activities during twelve months ended December 31, 2008 was $15,153,828. By comparison, during the twelve months ended December 31, 2007, we used net cash in investing activities of $700,088. The increased cash outflows in investing activity during the twelve months ended December 31, 2008 mainly occurred due to the loan provided to Latimer, one of the owners of the other parties to the consortium.

 

There was no cash provided by financing activities in fiscal 2007 compared to net cash provided by financing activities of $19,698,150 in fiscal 2008. This increase in net cash provided by financing activities occurred due to proceeds received by KKM under the preliminary Consortium agreement.

 

Plan of Operations

 

Depending on the negotiations with the MEMR on signing the addendum to the Kempirsai deposit contract and completion of the sale of Kaznickel, as discussed above, we anticipate the need to raise an additional $11,300,000 to meet our minimum annual work program requirements (approximately $6,000,000) and other planned activities during 2009. We plan to seek these funds through a combination of private equity and debt financing. Following is a brief description of how we plan to allocate such funds, if obtained, during fiscal 2009.

 

Hydrochlorination processing technology testing

 

During 2009 we expect to spend approximately $100,000 for testing at our pilot plant of the mineral concentrating capability of our proprietary hydrochlorination processing technology and to formulate required procedures, protocols and operational guidelines.

 

Drilling and core analysis

 

We will allocate approximately $600,000 for interpretation of exploration results and preparation of the report and reserve estimate for submission to the State Reserves Committee and preparation of the PFS for the Gornostai deposit. These services will be performed by local research institutes and Wardell Armstrong International, an independent mining company.

 

 

 

Feasibility Study and Processing Plant Design  

 

We plan to spend approximately $5,000,000 in 2009 for preparation of the first stage of the processing plant design. In accordance with the Kazakhstani construction requirements the first stage includes preparation of the design developed on the basis of summaries and indexes of pre-design documentation while the second stage includes preparation of detailed working documentation. This amount includes involvement of the Russian institute Gipronickel (St. Petersburg) for design of the metallurgical part and a Kazakhstani design institute for the design of the infrastructure. The results of the first stage of design are subject to government approval. The total cost estimate for the first stage of design is estimated at $8,000,000 with a time period for completion of the first stage of 12 months.

 

Also, we plan to spend $1,000,000 for preparation of the bankable feasibility study to be performed by Wardell Armstrong International. Completion of the feasibility study depends on results of work to be performed by Gipronickel on metallurgical part during the first step of the design.

 

Administrative Expenses

 

We plan to allocate approximately $4,000,000 for administrative expenses during the next twelve months, which include expenses of maintaining offices in the United States and Kazakhstan, for salaries and taxes.

 

Professional Fees

 

We expect to incur approximately $600,000 in expenses for services of our financial auditors, securities attorneys and other professional services during the next twelve months.

 

Additional Activities

 

As discussed in Item 1 “Business”, we are currently considering the possibility of constructing a nickel processing plant based utilizing the Vanyukov Process to allow us to begin to generate cash flow from the Kempirsai deposit. We do not currently have sufficient cash on hand to fund these activities, nor have we budgeted for these items in our 2009 budget. To undertake these activities we will need to obtain additional capital either through equity or debt financing. We plan to seek this funding through private equity investments or debt financing to be obtained from banks or shareholders. We currently have no firm commitment from any party to provide us additional funding.

 

 

Summary of Material Contractual Commitments

 

The following table lists our significant commitments as of December 31, 2008:

 

 

                

           

 

 

Each year we are required under our subsoil use contracts to submit a proposed annual work program to the MEMR for approval. The annual work program indicates the scope of mining works for exploration, production and finance costs. Failure to meet the annual work program requirements could cause us to lose our concessions. For more information regarding this requirement please see the “Annual Work Programs of our Subsidiaries” section of Item 1 “Business.”

 

Off-Balance Sheet Financing Arrangements

 

As of December 31, 2008 and 2007 we had no off-balance sheet financing arrangements.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard Number 157, Fair Value Measurements, (SFAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 related to financial assets and financial liabilities were effective during 2008. With respect to certain nonfinancial assets and nonfinancial liabilities, SFAS No. 157 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 157 with respect to nonfinancial assets and nonfinancial liabilities will have a material impact on our financial statements.

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements, consolidated net income should be adjusted to include the net income attributed to the non-controlling interest and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We do not expect that the adoption of SFAS No. 141(R) or SFAS No. 160 will have a material impact on our financial statements.

 

In December 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. We do not expect that the adoption of EITF 07-1 will have a material impact on our financial statements.

 

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect that the adoption of SFAS No. 161 will have a material impact on our financial statements.

 

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles.  SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP.  The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.  The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  The adoption of FASB 162 is not expected to have a material impact on our financial statements.

 

Critical Accounting Policies

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses and revenues, to the extent we generated revenue during the periods presented. Actual results could differ from these estimates. Our significant accounting policies require us to make difficult, subjective or complex judgments or estimates. We consider an accounting estimate to be critical if (1) the accounting estimate requires us to make assumption about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimates that are reasonably likely to occur from period to period, or use different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.

 

There are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. Management has discussed the development of these critical accounting estimates with our board of directors and they have reviewed the foregoing disclosure.

 

Use of Estimates – In connection with the preparation of our financial statements, we are required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. One of the significant areas requiring the use of management estimates and assumptions relates to

 

 

environmental reclamation and closure obligations. Under our  licenses with the Republic of Kazakhstan, following completion of exploration and mining activities we are required to reclaim our licensed territories. To prepare our financial statements in accordance with accounting principles generally accepted in the United States of America we are required to account for this obligation. The determination of the amount of the mine retirement and environmental reclamation obligation the Republic of Kazakhstan will impose upon us, however, has not yet been determined. The determination of the mine retirement and environmental reclamation obligation is based, in significant part, on the size of each deposit. Because we are still exploring our Gornostai property and do not yet know the full extent of the Gornostai deposit, the mine retirement and environmental reclamation obligation has not yet been set by the Republic of Kazakhstan. We base our estimate of this obligation on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from our estimate.

 

Income Taxes – While we are a Utah corporation, our primary operations are in the Republic of Kazakhstan. The Republic of Kazakhstan was formed in 1991 following the break-up of the former Soviet Union. At the time the Republic of Kazakhstan was formed, it adopted a new tax code. The tax code and the application of tax laws in the Republic of Kazakhstan are still developing and may not be uniformly applied in all instances.

 

 

Our primary market risks are fluctuations in commodity prices and foreign currency exchange rates. We do not currently use derivative commodity instruments or similar financial instruments to attempt to hedge commodity price risks associated with future nickel production.

 

 

Our revenues, profitability and future growth will depend substantially on prevailing prices for nickel and cobalt. If and when we commence commercial production, commodity prices will affect the amount of cash flow available for capital expenditures and our ability to either borrow or raise additional capital. Price will also affect our ability to produce, transport and market the nickel and cobalt we produce.

 

Historically, nickel and cobalt prices have been subject to significant volatility in response to changes in supply, market uncertainty and a variety of other factors beyond our control. Nickel and cobalt are likely to continue to be volatile in the future and this volatility makes it difficult to predict future price movements with any certainty. Any declines in nickel and cobalt prices would reduce the revenues we could earn when we begin commercial production and could also reduce the amount of nickel and cobalt that we can produce economically. As a result, this could have a material adverse effect on our business, financial condition and results of operations.

 

 

Our functional currency is the U.S. dollar. Our Kazakhstani subsidiary Kaznickel uses the U.S. dollar as its functional currency and KKM uses the Kazakh tenge as its functional currencies. To the extent that business transactions in Kazakhstan are denominated in the Kazakh Tenge we are exposed to transaction gains and losses that could result from fluctuations in the U.S. Dollar—Kazakh Tenge exchange rate. When the U.S. dollar strengthens in relation to the Kazakh Tenge, the U.S. dollar-reported expenses will decrease. We do not engage in hedging transactions to protect us from such risk.

 

 

 

On February 4, 2009, Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/US dollar to 145-155 Tenge/US dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports); currency devaluations in Kazakhstan’s neighbors, particularly Russia; and the fledgling state of the domestic banking sector. There is limited confidence in the government’s ability to control prices in the near to medium term and with the value of Tenge denominated wages falling, purchasing power is declining. Given our limited current operations, the devaluing Tenge has not significantly affected our business. The future effect of the devaluation is hardly projectable given present uncertainty on currency markets and government’s policy regarding the exchange rates and/or foreign currency regulations.

 

 

See Consolidated Financial Statements listed in the accompanying index to the Consolidated Financial Statements on Page F-1 herein.

 

 

 

 

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. The term “disclosure controls and procedures” as defined in Rules 13(a)-15(e) and 15d-15(e) under the Exchange Act, means controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2008, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

 

 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based on this assessment, our management concluded that as of December 31, 2008, our internal control over financial reporting is effective based on those criteria.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the year ended December 31, 2008 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

 

None.

 

PART III

 

 

The following table sets forth our directors, executive officers, promoters and control persons, their ages, and all offices and positions held. Directors are elected for a period of one year and thereafter serve until their successor is duly elected by the stockholders and qualified. Officers and other employees serve at the will of the board of directors.

 

 

The above individuals currently serve as the Company’s officers and/or directors. A brief description of their background and business experience follows:

 

Yermek Kudabayev. In December 2007, the Company’s board of directors appointed Yermek Kudabayev as the Chief Executive Officer, President of the Company and Chairman of the board of directors. Mr. Kudabayev served as the Company’s Chief Financial Officer from April 2006 until December 2007 and as interim Chief Executive Officer and interim President from May 2007 to December 2007. Mr. Kudabayev earned a Bachelors degree in Engineer-Economics from the Moscow Institute of Steel and Alloys in 1993. He earned an MBA degree from the Kazakhstan Institute of Management, Economics and Strategic Research in 1996. Mr. Kudabayev is a past member of the Association of Chartered Certified Accountants, an international accountancy body. He was issued a Certified Accounting Practitioner Certificate from the International Counsel of Certified Accountants and Auditors in 2002. He has been a Kazakhstani Certified Accountant since 1998 and a Certified Kazakhstani Auditor since 2000. Prior to joining the Company in 2006, Mr. Kudabayev served as the Finance Director for Kazkhoil Aktobe LLP from 2003 to April 2006. As the Finance Director, Mr. Kudabayev was responsible for budgeting, planning, cash flow forecasting and management, strategic research accounting, taxation and reporting. From 2002 to 2003, Mr. Kudabayev served as the Director of the Astana, Kazakhstan office of Ernst & Young, where he was responsible for auditing and coordination of projects in the Astana, Karaganda and  Pavlodar regions of Kazakhstan. From 1997 to 2002, Mr. Kudabayev worked for Arthur Andersen as a Senior Auditor and as a Manager. Mr. Kudabayev was appointed the Chief Financial Officer of Bekem Metals, Inc. in April 2006. Mr. Kudabayev is not a director or nominee of any other SEC registrant.

 

 

 

Zhassulan Bitenov. In January 2008, Mr. Bitenov accepted appointment as the Company’s Chief Financial Officer. In 1999, Mr. Bitenov earned a Masters of Arts in Economics from Kazahstan Institute of Management, Economics and Strategic Research in Almaty, Kazakshtan, with a specialization in international economics. He earned a Bachelors degree in International Economics from the International Kazakh –Turkish University in Turkestan, Kazakhstan in 1997. Mr. Bitenov passed the U.S. CPA exam in 2001. Mr. Bitenov served in various positions with the Almaty office of the accounting firm of Ernst & Young from November 2001 to October 2003 and from December 2004 through December 2007. While at Ernst & Young, Mr. Bitenov worked as a Senior auditor, Audit manager and Senior manager. Among other things, he was responsible for clients’ audits, preparation of audit reports, management of current engagements and negotiations with clients. From October 2003 to April 2004, he served as the Vice President of JSC AstanaEnergoService where he was responsible for the daily management and supervision of several company departments including the accounting, planning, sales, legal and marketing departments. From June 2004 to December 2004, he served as the finance director of JSC Interfarma-K.

 

James F. Kohler. Mr. Kohler received a B.S. in geology in 1970 and an M.S. in geology in 1980 from Utah State University. Mr. Kohler is currently self-employed as a geological consultant. From 2001 through 2008 Mr. Kohler was employed with the U.S. Bureau of Land Management in Salt Lake City, Utah. Prior to leaving the BLM, Mr. Kohler was serving as the Branch Chief of Solid Minerals in Salt Lake City, where he oversaw all mining activity on public lands within the State of Utah. He began working at the U.S Bureau of Land Management in 1988 as a Senior Geologist, providing geologic support for all federal solid mineral leasing actions to establish a basis for economic evaluation of leasing tracts. From 1987-1988, Mr. Kohler served as Senior Geologist with the Utah Office of High Level Nuclear Waste in Salt Lake City, Utah, where he provided oversight for high-level nuclear waste repository characterization in Nevada, Texas, and Washington. From 1981-1986, he was the senior geologist and Manager of coal development and mining geology for Anaconda Minerals/ARCO Coal Company in Denver, Colorado supervising geologic support for operating coal mines and acquisitions in the U.S., Indonesia and China. From 1977 to 1981, Mr. Kohler was a Supervisory Geologist with the U.S. Geological Survey in Salt Lake City, Utah. In 2000, Mr. Kohler was awarded the Utah Governor's Medal for Science and Technology. Mr. Kohler is not a director or nominee of any other SEC registrant.

 

Timothy Adair. Mr. Adair received a Masters in Business Administration (MBA) from Brigham Young University, located in Provo, Utah, in 1990. Mr. Adair also received a Bachelors of Science from the same university in Mechanical Engineering with a minor in Mathematics in 1988. Since 2005, Mr. Adair has been principally engaged as the Owner/President of Cube Office Designs located in Salt Lake City, Utah where he has successfully transferred company ownership and management. Cube Office Designs currently employs 22 persons and has annual revenue of approximately $1.5 million USD. Prior to purchasing Cube Office Designs, from 1989 through 2004 Mr. Adair was principally engaged as the Human Resources Productivity / Efficiency Manager with Intermountain Health Care (IHC) of Salt Lake City, Utah. IHC is a health care provider with 25,000+

 

 

employees and annual revenue of 2.5 + billion USD. While with IHC Mr. Adair consistently implemented cost savings improvements, such as the standardizing and automating of employee transactions which resulted in annual savings of $200k. Mr. Adair is also a licensed real estate agent and has been an avid real estate investor and property manager since 1989 as a partner of ADLAW. Mr. Adair was a member of the Oracle Applications User Group (OAUG) and the Intermountain Compensation and Benefits Association (ICBA). Mr. Adair is not a director or nominee of any other SEC registrant.

 

Valery Tolkachev. From August 2008 to March 2009, Mr. Tolkachev was employed with Slavyansky Bank in Moscow, Russia, where he served as the Deputy Chairman. From 1991 to 2008, Mr. Tolkachev served in various positions with various employers including UniCreditAton, MDM Bank, InkomBank, InkomCapital and others. Mr. Tolkachev graduated with Honors from the High Military School in Kiev, USSR in 1989. In 2005, he completed his studies at the Academy of National Economy, as a qualified lawyer. Mr. Tolkachev also serves as a director of Caspian Services, Inc., and BMB Munai, Inc. Both are SEC registrants.

 

Nurlan Tajibayev. Mr. Tajibayev has worked in the metallurgy industry since earning a Bachelors degree in Engineer-Metallurgy from the Kazakh State Technical University in 1973. Prior to joining Bekem Metals, Mr. Tajibayev served as the Executive Director of Kyzyl Kain Mamyt, LLP, a wholly-owned subsidiary of Bekem Metals. Before joining Kyzyl Kain Mamyt in 2003, Mr. Tajibayev served as Chairman of Canat UK Ltd., a supplier of metallurgical equipment from Europe and the United States to Kazakhstan, for six years. Mr. Tajibayev also spent twenty years serving in various capacities, including Senior Engineer, for Aktyubinsk Ferroalloys Plant and President of Kazchrome Corporation. Mr. Tajibayev is not a director or nominee of any other SEC registrant.

 

Dossan Kassymkhanuly. In August 2007, the board of directors appointed Mr. Kassymkhanuly as a director. The board also appointed Mr. Kassymkhanuly as a vice-president of the Company. Mr. Kassymkhanuly served as the Business Manager for Gauhar-Tas Centre from December 1992 to February 1999. Gauhar-Tas Centre was engaged in foreign-economic activity with China, including exportation of non-ferrous metals and importation of building materials and mining engineering. From February 1999 to November 2003, Mr. Kassymkhanuly served as Director of the Semey FPG JSC regional office in Ust-Kamenogorsk. He was responsible for coal sales in Eastern Kazakhstan.  Mr. Kassymkhanuly also took part in the development of the Gornostai nickel-cobalt deposit, as well as in the pilot industrial smelting for ferronickel at the Pavlodar tractor plant. He was also responsible for negotiations with the Geology Committee of the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan, including overseeing amendments and addendums to contracts for subsoil use. Mr. Kassymkhanuly chairmanned a group on implementation of new technology. In particular, he took part in the construction project for a briquette plant to produce briquette coal at the Karazhira coal deposit, Eastern Kazakhstan. Mr. Kassymkhanyly served as the Director of the Representative Office of Kaznickel LLP in Astana, Kazakhstan from March 2004 to August 2007. In that position he was primarily responsible for negotiations with various government entities and committees on behalf of Kaznickel. Mr. Kassymkhanuly also served as a member of the board of directors of Bekem Metals, Inc. from August 2005 to October 2006. Mr. Kassymkhanuly earned a degree in Engineer-Construction from Semipalatinsk College of Civil Engineering in 1989. He earned a Bachelors degree in Engineer-Economics from the Eastern Kazakhstan Technical University in 2002. At present, he is a candidate for a PhD degree in Engineering Sciences at the Semey State Institute. Mr. Kassymkhanuly is not a director or nominees of any other SEC registrant.

 

 

 

Aleksandr Rassokhin. In December 2007, Mr. Rassokhin was appointed to the position of Vice President of Geology. Mr. Rassokhin served as the Exploration Manager since October 2006. He has over thirty years experience in solid minerals geology. His work experience includes serving as the President and Exploration Manager of Frontier Mining Ltd. Kazakhstan, where he managed Frontier’s exploration programs and gold processing in Kazakhstan. Prior to joining Frontier in 2005, Mr. Rassokhin spent ten years serving as Chief Geologist for a number of companies operating in Kazakhstan, including Rio Tinto Mining and Exploration, Ltd., Santa Fe Pacific Gold Kazakhstan Corporation and Newmont Kazakhstan Gold, Ltd. As Chief Geologist his duties have included identification of new mineral deposits, preparation of exploration plans and oversight of field explorations. Mr. Rassokhin also spent fourteen years with the Research Institute of Mineral Resources, Kazakhstan. Mr. Rassokhin is 55 years old.

 

There are no family relationships among any of the Company’s executive officers, significant employees or directors.

 

 

To our knowledge, during the past five years none of our directors or executive officers has been convicted or is currently the subject of a criminal proceeding, excluding traffic violations or similar minor offenses, or has been a party to any judicial or administrative proceeding that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Similarly, in the past five years none of our directors or executive officers, or any business in which they were a general partner or executive officer, have been the subject of a bankruptcy proceeding.

 

Compliance with Section 16(a) of the Exchange Act

 

Directors, executive officers and holders of more than 10% of our outstanding common stock are required to comply with Section 16(a) of the Securities Exchange Act of 1934, which requires generally that such persons file reports regarding ownership of and transactions in securities of the Company on Forms 3, 4, and 5. Based solely on management’s review of these reports during the year ended December 31, 2008, it appears that Zhassulan Bitenov did not timely file a Form 3 at the time he was appointed Chief Financial Officer of the Company in January 2008. A Form 3 was filed in March 2008. It also appears that GLG Partners LP, a greater than 10% shareholder of the Company did not timely file a Form 4 disclosing the sale of 10,000 shares of our common stock and the settlement of a cash settled forward contract for 53,000 shares.

 

Code of Ethics

 

Our board of directors has adopted a code of ethics that applies to all of our officers and employees, including our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. Our code of ethics is posted on our website which can be found at www.bekemmetals.com.

 

 

Committees of the Board of Directors

 

 

We do not currently have a standing audit committee or other committee performing similar functions, nor have we adopted an audit committee charter. Given the size of the Company, its available resources and the fact that the OTCBB does not require us to have an audit committee, the board of directors has determined that it is in the Company’s best interest to have the full board fulfill the functions that would be performed by the audit committee, including selection, review and oversight of the Company’s independent accountants, the approval of all audit, review and attest services provided by the independent accountants, the integrity of the Company’s reporting practices and the evaluation of the Company’s internal controls and accounting procedures. The board is also responsible for the pre-approval of all non-audit services provided by its independent auditors. Non-audit services are only provided by our independent accountants to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than 5% of the total amount of fees paid by us to our independent auditors during the fiscal year in which the non-audit services are provided; such services were not recognized by us at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the board and approved prior to the completion of the audit by the board or by one or more members of the board to whom authority to grant such approval has been delegated.

 

As we do not currently have a standing audit committee, we do not at this time have an “audit committee financial expert” as defined under the rules of the Securities and Exchange Commission. The board does believe, however, that should the Company form a standing audit committee in the future, Mr. Timothy Adair, an independent director, could qualify as an audit committee expert.

 

Nominating Committee

 

We do not currently have a standing nominating committee or other committee performing similar functions, nor have we adopted a nominating committee charter. Given the size of the Company, its available resources and the fact that the OTCBB does not require us to have a nominating committee, the board of directors has determined that it is in the Company’s best interest to have the full board of directors to participate in the consideration for director nominees. In general, when the board determines that expansion of the board or replacement of a director is necessary or appropriate, the board will review through candidate interviews with members of management, consult with the candidate’s associates and through other means determine a candidate’s honesty, integrity, reputation in and commitment to the community, judgment, personality and thinking style, residence, willingness to devote the necessary time, potential conflicts of interest, independence, understanding of financial statements and issues, and the willingness and ability to engage in meaningful and constructive discussion regarding Company issues. The board would review any special expertise, for example, that qualifies a person as an audit committee financial expert, membership or influence in a particular geographic or business target market, or other relevant business experience. To date we have not paid any fee to any third party to identify or evaluate, or to assist it in identifying or evaluating, potential director candidates.

 

 

 

The nominating committee will consider director candidates nominated by shareholders during such times as the Company is actively considering obtaining new directors. Candidates recommended by shareholders will be evaluated based on the same criteria described above. Shareholders desiring to suggest a candidate for consideration should send a letter to the Company’s Secretary and include:

 

 

Because of the small size of the Company and the limited need to seek additional directors, there is no assurance that all shareholder proposed candidates will be fully considered, that all candidates will be considered equally, or that the proponent of any candidate or the proposed candidate will be contacted by the Company or the board, and no undertaking to do so is implied by the willingness to consider candidates proposed by shareholders.

 

Compensation Committee

 

We do not have a standing compensation committee. Our Chief Executive Officer (“CEO”) makes recommendations to our board of directors as to employee benefit programs and officer and employee compensation. Historically, our CEO has not made recommendations to the board of directors regarding his own compensation, although we have no policy prohibiting the CEO from doing so. Our board of directors may seek input from the CEO as to his compensation, but CEO compensation must be approved by a majority of our board of directors. Currently our CEO is a member of our board of directors. In accordance with the Bylaws of the Company, our CEO does not vote on any matter relating to his own compensation.

 

 

Compensation Discussion and Analysis

 

As stated above, we do not have a standing compensation committee. Our CEO makes recommendations to our board of directors as to employee benefit programs and officer and employee compensation. Historically, our CEO has not made recommendations to the board of directors regarding his own compensation, although we have no policy prohibiting the CEO from doing so. Our board of directors may seek input from the CEO as to his compensation, but CEO compensation must be approved by a majority of our board of directors. Currently our CEO is a member of our board of directors. In accordance with the Bylaws of the Company, our CEO does not vote on any matter relating to his own compensation.

 

 

 

 

The primary objectives of our executive compensation programs are to:

 

 

To achieve these objectives, our CEO and board of directors evaluate our executive compensation program with the objective of setting compensation at levels they believe will allow us to attract and retain qualified executives. In addition, a portion of each executive’s overall compensation is tied to key strategic, financial and operational goals set by our board of directors. We also provide a portion of our executive compensation in the form of equity awards that vest over time, which we believe helps us retain our executives and align their interests with those of our stockholders by allowing the executives to participate in our longer term success as reflected in asset growth and stock price appreciation.

 

 

At this time, the primary elements of our executive compensation program are:

 

 

We do not have any formal or informal policy or target for allocating compensation between short-term and long-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, the appropriate level and mix of the various compensation components has typically been determined subjectively based on negotiation on a case-by-case basis. We do not rely on benchmarking against our competitors in making compensation related decisions. In the past, however, we have hired executive recruiters as needed to help locate and identify suitable candidates for hire. In this context we typically discuss compensation packages with the recruiter to structure compensation packages we believe will be attractive to prospective executive employees.

 

 

Named Executive Officers

 

The following table identifies the persons who, during the 2008 fiscal year, served as our principal executive officer, our principal financial officer and our most highly paid executive and non-executive officers, who, for purposes of this Compensation Disclosure and Analysis only, are referred to herein as the “named executive officers.”

 

 

           

 

We maintain employment agreements with each of the named executive officers. The employment agreements with Mr. Kassymkhanuly, Mr. Tajibayev and Mr. Rassokhin are the standard statutorily required employment agreements for all employees in the Republic of Kazakhstan. These employment agreements are limited in their terms and primarily provide for statutory requirements related to the rights of employees, base salary, payment of income and social taxes and pension fund obligations.

 

We maintain a more detailed employment contracts with Mr. Kudabayev and Mr. Bitenov. As discussed in more detail below, in addition to base salary and payment of income and employment-related taxes, these employment agreements cover a range of other components of the executive’s compensation package.

 

 

Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of our named executive officers. Base salaries for our named executive officers typically have been set in our offer letter to the individual at the outset of employment. Under the terms of these employment agreements base salary and other components of compensation, may be evaluated by our board of directors for adjustment based on an assessment of the individual’s performance and compensation trends in our industry.

 

As discussed above, we maintain a more detailed employment contract with Mr. Kudabayev, which prior to the end of our fiscal year, governed his employment as our Chief Financial Officer.

 

 

At the end of our 2007 fiscal year, our board of directors appointed Mr. Kudabayev to serve as the Company’s President and Chief Executive Officer on a permanent basis. Mr. Kudabayev had been serving in these positions on an interim basis since June 2007, while he continued to also serve as the Company’s Chief Financial Officer. In March 2008 in recognition of the fact that Mr. Kudabayev’s position with the Company had changed, the board approved amendments to Mr. Kudabayev’s employment contract to recognize his change in position. In connection with this amendment, the board voted to increase Mr. Kudabayev’s base salary from $120,000 per year net to $180,000 per year net, which is equivalent to the amount the Company had been paying its former President and Chief Executive Officer in salary and housing allowance. Mr. Kudabayev’s agreement does not provide a housing allowance. This salary increase was made effective retroactive to June 2007, when Mr. Kudabayev began serving as the Company’s President and Chief Executive Officer. The board did not consider salary increases for any of the other named executive officers.

 

Non-Equity Incentive Compensation and Bonuses

 

From time to time, we may make cash awards to our named executive officers. Such awards may be designed to incentivize employees over a specified period of time pursuant to pre-established, performance-based criteria, the accomplishment of which is substantially uncertain at the time the criteria is established. In the event this type of cash award were made, it would be reflected in the “Summary Compensation Table” under a separate column entitled “Non-Equity Incentive Plan Compensation.” The criteria for earning such non-equity incentive bonuses may be based on corporate financial performance measures that would be developed by our board of directors at the time the non-equity incentive compensation plan is established. Our board of directors would determine the applicable performance measures and the appropriate weighting of such measures at the time it establishes any non-equity incentive plan. The board of directors did not establish a non-equity incentive compensation during fiscal 2008 and no non-equity incentive compensation was awarded during the year.

 

We may also make cash awards to our named executive officers and employees that are not part of any pre-established performance-based criteria. Awards of this type are completely discretionary and subjectively determined by our board of directors at the time they are awarded. In the event this type of cash award were made, it would be reflected in the “Summary Compensation Table” under a separate column entitled “Bonus.” The board of directors did not award any bonuses to any of our named executive officers during fiscal 2008.

 

 

Our equity award program is the primary vehicle for offering long-term incentives to our named executive officers. Our equity awards have typically been made in the form of restricted stock grants. We believe that equity grants provide our named executive officers with a direct link to our long-term performance, create an ownership culture and align the interests of our executives and our stockholders. Typically, we include a restricted stock grant award as part of the executive employee’s compensation package at the time we hire the individual. We do not use a formula to determine the size of our restricted stock grants. This determination is left to the discretion of the board of directors and is made on a case-by-case basis, although the board does consider past awards in making such determination. These restricted stock awards vest over time, typically three years, with one-quarter vesting in each of the first two years and the final one-half vesting in the third year.

 

 

Vesting of such awards is typically tied to some performance measure directly tied to the responsibilities of the employee, and may also be tied to certain Company landmark events. Should those vesting requirements not be met, the associated shares would not vest to the individual without further review of the vesting conditions and performance of the named executive by the board of directors. Should the individual leave employment with the Company for any reason, any shares that have not vested at that time shall be forfeited back to the Company. While pecuniary interest in and the right to dispose of the shares awarded under our restricted stock grants does not vest to the individual until he has satisfied the vesting conditions, the individual is allowed to vote all of the shares included in the grant and to enjoy all the other benefits associated with ownership of the shares. We believe the vesting features further our objective of executive retention because this feature provides an incentive to our executives to remain in our employ during the vesting period.

 

During the 2008 fiscal year, in recognition of his appointment as Chief Executive Officer of the Company the board of director amended the restricted stock grant previously awarded to Yermek Kudabayev to increase his equity award by 38,343 (from 383,429 to 421,772) to reflect the same restricted stock grant awarded to the Company’s prior Chief Executive Officer. During the 2008 fiscal year, the board of directors also awarded a restricted stock grant to Zhassulan Bitenov in connection with his appointment as the Company’s Chief Financial Officer. The grant is for 383,429 shares and vests over three years, consistent with the practice discussed in the preceding paragraph. The first quarter of the grant vested in January 2009. The amount of the restricted stock grant was equal to the grant awarded to the Company’s prior Chief Financial Officer.

 

We may also make discretionary equity awards to our named executive officers. In determining the size of equity grants, our board of directors will consider company-level performance, the applicable individual’s performance, the amount of equity previously awarded to the individual, the vesting of such awards and the recommendations of management.

 

Grants of discretionary equity awards to our named executive officers would be approved by our board of directors and would generally be granted based on the fair market value of our common stock. Our board of directors has not previously granted discretionary equity awards and did not make any discretion equity award during 2008.

 

 

Under the terms of their employment contracts, our named executive officers are permitted to participate in such health care, disability insurance and other employee benefits plans as may be in effect with the Company from time to time to the extent the executive is eligible under the terms of those plans.

 

For example, under the terms of their respective employment agreements Mr. Kudabayev and Mr. Bitenov are allowed to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical and other employee benefit plans that may be in effect from time to time and to the extent he is eligible to participate under the terms of the particular plan. They are each also entitled to 28 days of paid vacation per year.

 

Under all of our employment agreements we agree to pay all income and social taxes and dues under applicable laws of Kazakhstan for our named executive officers including income and social taxes and government pension fund payments. This does not include the officer’s home base income or other taxes in the case of expatriates.

 

 

 

 

As is the custom in Kazakhstan, we pay the income taxes of our employees, including the named executive officers. The income tax rate for individuals in Kazakhstan is currently 10%.

 

 

We make payments of mandatory Kazakhstani social taxes, which typically range between 7% and 20% of an employee’s wages. These costs are recorded in the period when they are incurred and presented as salary related tax expense in the income statement.

 

Summary Compensation Table

 

The table below summarizes compensation paid to or earned by our Chief Executive Officer, our Chief Financial Officer and our other most highly compensated officers, who we refer to collectively as our “named executive officers.”

 

         

  60

           

 

All Other Compensation

 

The table below provides additional information regarding “all other compensation” awarded to the named executive officers as disclosed in the “All Other Compensation” column of the “Summary Compensation Table” above.

 

 

 

Annual Base Salary

 

The following table discloses the annual salary set forth in the employment agreement of each of the individual named executive officers for fiscal 2008. 

 

 

   

 

As discussed above, our employment agreements provide for an annual salary. Base salary may be increased from time to time with the approval of the board of directors. Base salary may not be decreased without the written consent of the named executive officer. The agreements provide for statutory requirements related to the rights of employees, base salary, payment of income and social taxes and pension fund obligations.

 

Grants of Plan-Based Awards Table for Fiscal Year 2008

 

No grants of any plan-based awards were made to any of the named executive officers during the 2008 fiscal year.

 

Outstanding Equity Awards at Fiscal Year End 2008

 

None of the named executive officers held unexercised stock options at December 31, 2008. The following table sets forth information concerning all unvested restricted stock grants and equity incentive plan awards for each of the named executive officers as of December 31, 2008.

 

 

 

 

  62

                   

 

Option Exercises and Stock Vested for Fiscal Year 2008

 

None of the named executive officers exercised options during the 2008 fiscal year. The following table sets forth the number of restricted stock awards that vested to our named executive officer during fiscal 2008 and the aggregate dollar amount realized by our named executive officer on vesting.

 

 

           

 

 

 

Pension Benefits

In accordance with the legislative requirements of the Republic of Kazakhstan during 2008 we paid government mandated pension fund payments for each of the named executive officers. We do not have any other liabilities related to any supplementary pensions, post retirement health care, insurance benefits or retirement indemnities for any of the named executive officers.

 

We offer no pension or other specified retirement payments or benefits, including but not limited to tax-qualified deferred benefit plans and supplemental executive retirement plans to its named executive officers.

 

Nonqualified Deferred Compensation

 

We offer no defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified to any of our employees including the named executive officers.

 

Potential Payments upon Termination or Change-in-Control

 

 

With the exception of the employment agreements of Mr. Kudabayev and Mr. Bitenov, none of the other named executive officers employment agreements provide for potential payments upon the termination of their employment.

 

Should we terminate the employment agreements of Mr. Kudabayev or Mr. Bitenov for good reason, they shall be entitled to salary for the month in which he is terminated and for the succeeding three calendar months. An additional month will be added up to a maximum of twelve months for each year of completed service beginning after two full years of service. This amount may be reduced in the event Mr. Kudabayev or Mr. Bitenov obtains new employment prior to the completion of the payment period. If either is terminated for cause he shall only be entitled to compensation through the date of termination. If either is terminated for disability he shall be compensated for the remainder of the month and for three succeeding months or until disability insurance benefits commence. If employment is terminated because of death Mr. Kudabayev or Mr. Bitenov shall be entitled to compensation through the end of the calendar month in which his death occurs. The phrase “for good reason” means any of the following: (a) the Company’s material breach of the employment agreement; (b) the assignment of the executive without his consent to a position, responsibilities, or duties of a materially lesser status or degree of responsibility than his position, responsibilities, or duties; or (c) the relocation of the Company’s principal executive offices outside the Kazakhstan area; or (d) the requirement by the Company that the executive be based anywhere other than the Company’s principal executive offices, without the executive’s consent.

 

 

None of the employment agreements of our named executive officers provide for potential payouts or other change in control benefits.

 

 

Compensation of Directors

 

We offer cash compensation to attract and retain candidates to serve on our board of directors. We do not compensate directors who are also our employees for their service on our board of directors. Therefore, Mr. Kudabayev, Mr. Kassymkhanuly and Mr. Tajibayev did not receive any compensation for their service on our board of directors.

 

 

Members of the board of directors who are not also employees of the Company or one of its subsidiaries are paid a $16,000 stipend per year, payable quarterly. Non-employee directors are also paid $1,000 for each board meeting attended in person plus reimbursement for travel expenses.

 

 

We do not currently have a fixed plan for the award of equity compensation to our non-employee directors.

 

Director Compensation Table

 

The following table sets forth a summary of the compensation we paid to our directors for services on our board during our 2008 fiscal year.

 

 

   

 

Compensation Committee Interlocks and Insider Participation

 

We do not currently have a standing Compensation Committee, rather our entire board of directors participates in deliberations concerning executive officer compensation. Yermek Kudabayev, Dossan Kassymkhanuly and Nurlan Tajibaev, members of our board of directors, are currently or have previously been officers of the Company or one or more of its subsidiaries.

 

 

Board of Directors Report

 

The board of directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the board of directors recommended that this Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

 

 

 

The following table sets forth as of April 7, 2008 the name and the number of shares of our common stock, par value of $0.001 per share, held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the 125,172,011 issued and outstanding shares of our common stock, and the name and shareholdings of each director and of all officers and directors as group.

 

 

 

 

 

* Less than 1%.

       

 

 

           

 

Change in Control

 

To the knowledge of the management, there are no present arrangements or pledges of our securities that may result in a change in control of the Company.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

 

In March 2003, we adopted the EMPS Research Corporation 2003 Stock Option Plan (the "Plan") reserving 5,000,000 common shares for distribution under the Plan. The purpose of the Plan is to allow us to offer key employees, officers, directors, consultants and sales representatives an opportunity to acquire a proprietary interest in the Company. The various types of incentive awards which may be provided under the Stock Option Plan enable us to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of our business.

 

 

On October 20, 2006 and March 25, 2008 the board agreed to award restricted stock grants to the following four officers or employees of the Company;