**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

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

For the Quarterly Period Ended March 31, 2009

 

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

For the Transition Period From ________ to _________

 

Commission File Number **0-50218**

 

**BEKEM METALS, INC.**

(Exact name of registrant as specified in its charter)

                

| **Utah**                                 |   | **87-0669131**      |
|------------------------------------------|--------|---------------------|
| (State or other jurisdiction of          |   | (I.R.S. Employer    |
| incorporation or organization)           |   | Identification No.) |
|                                     |   |                |
| **170 Tchaikovsky Street, 4th Floor**    |   |                |
| **Almaty, Kazakhstan**                   |   | **050000**          |
| (Address of principal executive offices) |   | (Zip Code)          |

 

**+7 (7272) 582-386**

(Registrant's telephone number, including area code)

 

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

 

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

 

|   | Large accelerated filer o | Accelerated filer o |
|--------|---------------------------|---------------------|

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

 

 

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

 

As of May 8, 2009, the registrant had 125,172,011 shares of common stock, par value $0.001, issued and outstanding.

 

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**BEKEM METALS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 

PART I — FINANCIAL INFORMATION

 

| Item 1. Financial Statements                                                                          |                                                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                  |                                                                                                                                                                                               |   |
|                                                                                                  | Condensed Consolidated Balance Sheets (Unaudited) as of 

March 31, 2009 and December 31, 2008                                                                                                     |  

3 |
|                                                                                                  |                                                                                                                                                                                               |   |
|                                                                                                  | Condensed Consolidated Statements of Operations (Unaudited) for the 

Three Months Ended March 31, 2009 and 2008, and for the Period from March 5, 2004 (Date of Inception) through March 31, 2009 |  

 

4 |
|                                                                                                  |                                                                                                                                                                                               |   |
|                                                                                                  | Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2009 and 2008, and for the Period from March 5, 2004 (Date of Inception) through March 31, 2009   |  

 

5 |
|                                                                                                  |                                                                                                                                                                                               |   |
|                                                                                                  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                                                                   | 6 |
|                                                                                                  |                                                                                                                                                                                               |
| Item 2. Management’s Discussion and Analysis of Financial Condition 

and Results of Operations |  

18                                                                                                                                                                                         |
|                                                                                                  |                                                                                                                                                                                               |
| Item 3. Qualitative and Quantitative Disclosures About Market Risk                                    | 27                                                                                                                                                                                                 |
|                                                                                                  |                                                                                                                                                                                               |
| Item 4T. Controls and Procedures                                                                      | 28                                                                                                                                                                                                 |
|                                                                                                  |                                                                                                                                                                                               |
| PART II — OTHER INFORMATION                                                                     |                                                                                                                                                                                               |
|                                                                                                  |                                                                                                                                                                                               |
| Item 1. Legal Proceedings                                                                             | 29                                                                                                                                                                                                 |
|                                                                                                  |                                                                                                                                                                                               |
| Item 1A. Risk Factors                                                                                 | 30                                                                                                                                                                                                 |
|                                                                                                  |                                                                                                                                                                                               |
| Item 6. Exhibits                                                                                      | 30                                                                                                                                                                                                 |
|                                                                                                  |                                                                                                                                                                                               |
| Signatures                                                                                            | 31                                                                                                                                                                                                 |

 

 

2

 

 

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

| **BEKEM METALS, INC. AND SUBSIDIARIES**                        |
|----------------------------------------------------------------|
| **(An Exploration Stage Company)**                             |
| **CONDENSED CONSOLIDATED BALANCE SHEETS**                      |
| **(UNAUDITED)**                                                |
|                                                           |   | **March 31,** | **December 31,** |
|                                                           |   | **2009** | **2008** |
| **ASSETS**                                                     |   |   |   |
|                                                           |   |   |   |
| **Current Assets**                                             |   |   |   |
| Cash                                                           |   | $        240,575  | $         115,644  |
| Trade accounts receivable                                      |   | 22,089  | 58,238  |
| VAT recoverable                                                |   | 246,714  | 301,447  |
| Inventories                                                    |   | 581,431  | 737,810  |
| Note receivable from related party                             |   | 15,140,828  | 15,066,328  |
| Prepaid expenses and other current assets                      |   | 115,980  | 116,203  |
| Deferred compensation                                          |   | 219,286  | 351,779  |
| **Total Current Assets**                                       |   | 16,566,903  | 16,747,449  |
|                                                           |   |   |   |
| Property, plant and mineral interests (net of accumulated      |   |   |   |
| depreciation of $481,399 and $545,151 )                        |   | 3,425,450  | 4,421,171  |
| Non-current deferred compensation                              |   | 87,209  | 109,011  |
| Other assets                                                   |   | 51,561  | 61,156  |
| **Total Assets**                                               |   | $    20,131,123  | $     21,338,787  |
|                                                           |   |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)**             |   |   |
|                                                           |   |   |   |
| **Current Liabilities**                                        |   |   |   |
| Notes payable to related parties                               |   | $    19,668,792  | $     19,668,792  |
| Advances received for prospective sale of subsidiary           |   | 500,000  | -  |
| Accounts payable                                               |   | 422,159  | 370,535  |
| Accrued expenses                                               |   | 261,552  | 320,142  |
| Advances received                                              |   | 85,865  | 59,562  |
| Due to related party                                           |   | 6,831  | 6,051  |
| **Total Current Liabilities**                                  |   | 20,945,199  | 20,425,082  |
|                                                           |   |   |   |
| Asset retirement obligations                                   |   | 1,190,591  | 1,455,423  |
| **Total Liabilities**                                          |   | 22,135,790  | 21,880,505  |
|                                                           |   |   |   |
| **Commitments and Contingencies**                              |   | -  | -  |
|                                                           |   |   |   |
| **Shareholders' Equity (Deficit)**                             |   |   |   |
| Preferred stock; $0.001 par value, 20,000,000 shares           |   |   |   |
| authorized, no shares outstanding                              |   | -  | -  |
| Common stock; $0.001 par value, 300,000,000 shares authorized, |   |   |   |
| and 125,172,011 shares issued and outstanding                  |   | 125,172  | 125,172  |
| Additional paid-in capital                                     |   | 28,540,235  | 28,540,235  |
| Accumulated deficit                                            |   | (33,642,268) | (30,272,874) |
| Accumulated other comprehensive loss                           |   | 2,972,194  | 1,065,749  |
| **Total Shareholders' Equity (Deficit)**                       |   | (2,004,667) | (541,718) |
|                                                           |   |   |   |
| **Total Liabilities and Shareholders' Equity (Deficit)**       |   | $     20,131,123  | $     21,338,787  |

 

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

 

3

 

 

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| **BEKEM METALS, INC. AND SUBSIDIARIES**             |
|-----------------------------------------------------|
| **(An Exploration Stage Company)**                  |
| **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS** |
| **(UNAUDITED)**                                     |
|                                                     |  |  |  |
|                                                |   | **For the Three Months****Ended March 31,** | **For the Period from March 5, 2004 (Date of Inception) through** |
|                                                |   | **2009** | **2008** | **March 31, 2009** |
|                                                |   |   |   |   |
| **Revenue**                                         |   | $                -  | $                -  | $                     -  |
|                                                |   |   |   |   |
| **Operating Expenses**                              |   |   |   |   |
| General and administrative expenses                 |   | 712,088  | 1,025,077  | 13,832,504  |
| Research and development costs                      |   | -  | -  | 1,329,070  |
| Exploratory costs                                   |   | 26,647  | 25,539  | 6,428,813  |
| Loss from impairment of property                    |   | -  | -  | 10,525,156  |
| Accretion expense on asset retirement obligations   | 32,256  | 21,324  | 334,501  |
| Grant compensation expense                          |   | 154,295  | 122,860  | 1,320,558  |
|                                                |   |   |   |   |
| **Total Operating Expenses**                        |   | 925,286  | 1,194,800  | 33,770,602  |
|                                                |   |   |   |   |
| **Loss From Operations**                            |   | (925,286) | (1,194,800) | (33,770,602) |
|                                                |   |   |   |   |
| **Other Income/(Expense)**                          |   |   |   |   |
| Exchange gain from remeasurement                    |   | 1,445,440  | 12,458  | 1,233,910  |
| Exchange gain/(loss)                                |   | (3,998,205) | 12,107  | (4,306,783) |
| Interest income                                     |   | 74,517  | 529  | 705,914  |
| Interest expense                                    |   | -  | -  | (1,677,441) |
| Other income/(expense), net                         |   | 34,140  | (689) | 640,925  |
|                                                |   |   |   |   |
| **Net Other Income/(Expense)**                      |   | (2,444,108) | 24,405  | (3,403,475) |
|                                                |   |   |   |   |
| **Net Loss Before Minority Interest and Taxes**     |   | (3,369,394) | (1,170,395) | (37,174,077) |
| Deferred tax benefit                                |   | -  | -  | 3,390,601  |
| Loss in minority interest                           |   | -  | -  | 141,208  |
|                                                |   |   |   |   |
| **Net Loss**                                        |   | $  (3,369,394) | $   (1,170,395) | $          (33,642,268) |
|                                                |   |   |   |   |
|                                                |   |   |   |   |
| **Basic Loss per Common Share**                     |   | $            (0.03) | $            (0.01) |   |
| **Weighted-Average Shares used in**                 |   |   |   |   |
| **Basic Loss per Common Share**                     |   | 125,172,011  | 124,778,048  |   |
|                                                |   |   |   |   |

 

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

 

4

 

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| **BEKEM METALS, INC. AND SUBSIDIARIES**                              |
|----------------------------------------------------------------------|
| **(An Exploration Stage Company)**                                   |
| **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**                  |
| **(UNAUDITED)**                                                      |
|                                                                      |  |  |  |  |
|                                                                 |   | **For the Three Month****Ended March 31,** |   | **For the Period from March 5, 2004 (Date of Inception) through** |
|                                                                 |   | **2009** |   | **2008** |   | **March 31, 2009** |
| **Cash Flows from Operating Activities**                             |   |   |   |   |   |   |
| Net loss                                                             |   | $    (3,369,394) |   | $    (1,170,395) |   | $       (33,642,268) |
| Adjustments to reconcile net loss to                                 |   |   |   |   |   |   |
| net cash provided by operating activities:                           |   |   |   |   |   |   |
| Depreciation and amortization                                        |   | 63,789  |   | 70,117  |   | 818,012  |
| Accretion expense on asset retirement obligations                    |   | 32,256  |   | 21,324  |   | 334,501  |
| Interest expense from debt discount                                  |   | -  |   | -  |   | 963,231  |
| Shares issued on option modification                                 |   | -  |   | -  |   | 19,426  |
| Deferred tax benefit                                                 |   | -  |   | -  |   | (3,390,601) |
| Foreign currency exchange loss / (gain) and gain from reameasurement |   | 2,827,642  |   | (14,130) |   | 2,928,909  |
| Purchased exploration costs                                          |   | -  |   | -  |   | 251,286  |
| Impairment loss on property, plant and mineral interests             |   | -  |   | -  |   | 10,525,156  |
| Loss / (gain) on disposal of property and equipment                  |   | 22,364  |   | 1,168  |   | (106,022) |
| Stock grant compensation expense                                     |   | 154,295  |   | 122,860  |   | 1,320,558  |
| Loss recognized on minority shareholders' interest                   |   | -  |   | -  |   | (141,208) |
| Change in operating assets and liabilities:                          |   |   |   |   |   |   |
| Trade accounts receivable                                            |   | 26,546  |   | (8,335) |   | (19,959) |
| VAT recoverable                                                      |   | 8,044  |   | (6,677) |   | (220,782) |
| Inventories                                                          |   | 8,318  |   | 15,311  |   | 78,313  |
| Prepaid expenses and other current assets                            |   | (57,538) |   | 6,684  |   | (91,276) |
| Change in related party receivables / payables                       |   | -  |   | 7,880  |   | (152,180) |
| Accounts payable                                                     |   | 79,940  |   | (10,888) |   | 133,061 |
| Advances received                                                    |   | (51,762) |   | -  |   | 8,033  |
| Accrued expenses                                                     |   | (265,918) |   | 152,907  |   | (187,755) |
| **Net Cash From Operating Activities**                               |   | (521,418) |   | (812,174) |   | (20,571,565) |
|                                                                 |   |   |   |   |   |   |
| **Cash Flows from Investing Activities**                             |   |   |   |   |   |   |
| Purchase of property and equipment                                   |   | -  |   | (3,890) |   | (4,019,868) |
| Purchase of intangible assets                                        |   | -  |   | (74) |   | (67,364) |
| Proceeds from disposal of property and equipment                     |   | 49,359  |   | -  |   | 429,699  |
| Advances received for sale of PPE                                    |   | 100,446  |   | -  |   | 100,446  |
| Advances received for sale of subsidiary                             |   | 500,000  |   | -  |   | 500,000  |
| Loans provided to related parties                                    |   | -  |   | -  |   | (14,900,000) |
| Notes receivable                                                     |   | -  |   | -  |   | (56,983) |
| Cash acquired in acquisitions                                        |   | -  |   | -  |   | 50,475  |
| **Net Cash From Investing Activities**                               |   | 649,805  |   | (3,964) |   | (17,963,595) |
|                                                                 |   |   |   |   |   |   |
| **Cash Flows from Financing Activities**                             |   |   |   |   |   |   |
| Proceeds from notes payable                                          |   | -  |   | -  |   | 14,706,914  |
| Payments on notes payable                                            |   | -  |   | -  |   | (22,745,753) |
| Proceeds from loans / notes payable - related parties                |   | -  |   | 2,897,467  |   | 24,025,062  |
| Payments on loans / notes payable - related parties                  |   | -  |   | -  |   | (4,326,912) |
| Issuance of shares for cash                                          |   | -  |   | -  |   | 26,728,842  |
| **Net Cash From Financing Activities**                               |   | -  |   | 2,897,467  |   | 38,388,153  |
|                                                                 |   |   |   |   |   |   |
| **Effect of Exchange Rate Changes on Cash**                          |   | (3,456) |   | (8,771) |   | 387,582  |
|                                                                 |   |   |   |   |   |   |
| **Net Increase in Cash**                                             |   | 124,931  |   | 2,072,558  |   | 240,575  |
| **Cash at Beginning of Period**                                      |   | 115,644  |   | 756,943  |   | -  |
| **Cash at End of Period**                                            |   | $           240,575  |   | $        2,829,501  |   | $              240,575  |

 

 

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

 

5

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

**NOTE 1 – BASIS OF PRESENTATION AND NATURE OF BUSINESS**

 

***Interim Financial Information***– The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they are            condensed and do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The accompanying financial statements should be read in conjunction with the most recent audited financial statements of            Bekem Metals, Inc. included in its annual report on Form 10-K filed for the year ended December 31, 2008. Operating results for the three-month period ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. 

 

**Basis of Presentation**

 

On October 24, 2005, Bekem Metals, Inc. (hereinafter referred to as “us,” “we,” the “Company”, “BMI” or “Bekem”) entered into an Acquisition Agreement with Kazakh Metals, Inc., a British Virgin Islands international business company (“KMI”), under which BMI acquired 100% of the outstanding common shares of            KMI in exchange for the issuance of 61,200,000 common shares. 

 

The KMI shareholders received 61.1% of the BMI common stock outstanding after the transaction and therefore KMI was considered the acquirer for financial reporting purposes. Accordingly, the accompanying financial statements include financial statements of KMI for all periods presented. 

 

Brisa Equities Corporation, a British Virgin Islands holding company (“Brisa”), together with other entities its owners control, is the controlling shareholder of KMI and was also the controlling shareholder of BMI. Accordingly, the transaction was considered to be between entities under common control and did not result in a change in control of BMI. Following the            transaction, entities over which the controlling shareholder maintained voting and investment control held 51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding common shares. 

 

The acquisition of the portion of the net liabilities of BMI relating to the common shares owned by the controlling shareholder was recorded at an historical cost of $161,998. The acquisition of the common shares of BMI purchased from the minority shareholders of BMI were recorded at $345,000, which was the estimated fair value of those shares on the date of acquisition. KMI            accounted for the purchase of BMI similar to a pooling. 

 

***Bekem Metals, Inc.***– The consolidated financial statements include the accounts of Condesa and Kaznickel, since the date of its acquisition by Condesa, and the accounts of BMI since its acquisition by Condesa. Condesa was incorporated under the laws of the British Virgin Islands on March 5, 2004. Condesa acquired BMI in a reverse            acquisition, on January 28, 2005. On July 24, 2006, Condesa transferred its interest in Kaznickel to Bekem, making Kaznickel a wholly-owned subsidiary of Bekem. On September 30, 2006, Bekem sold Condesa to a third party for a nominal value. Condesa is included in the consolidated financial statements from the date of acquisition to the date of disposal.

 

6

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

***Kazakh Metals, Inc.***– The consolidated financial statements also include the accounts of KMI and its wholly-owned subsidiary, KKM, which it acquired on May 31, 2005 in a purchase business combination.

 

***Name Change***– On February 9, 2005, the Board of Directors of EMPS Research Corporation approved, and the stockholders holding a majority of the outstanding shares of the company approved and ratified by written consent, a change in the Company’s name from EMPS Research Corporation to Bekem Metals, Inc. On March 16, 2005, the            Company filed an amendment to its Articles of Incorporation to affect the change.

 

***Foreign Currency Transactions***– The consolidated financial statements are presented in United States Dollars (USD). The functional currency of Bekem Metals, Inc. is USD. 

 

Kaznickel makes its principal investing and financing transactions in USD, which is also its functional currency. Transactions and balances denominated in other currencies have been translated into USD using historical exchange rates. Exchange gains and losses from holding foreign currencies and having liabilities payable in foreign currencies are included in the results of            operations.

 

The Kazakh Tenge (KZT) is the functional currency of the operating subsidiary, KKM. The respective balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The respective statements of operations have been translated into USD using the average exchange rates prevailing during the periods of each statement. The corresponding            translation adjustments are part of accumulated other comprehensive income and are shown as part of shareholders’ equity.

 

**Nature of Business**

 

The Company is engaged in the exploration of mineral resource properties. Kaznickel owns the right to the Gornostayevskoye (“Gornostai”) nickel and cobalt deposit located in the East Kazakhstan Oblast in northeast Kazakhstan. The license is for exploration and production of cobalt and nickel ores and is valid through February 26, 2026 provided commercial discoveries            are made before the end of the exploration period. 

 

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. Upon discovery of commercially producible nickel and/or cobalt reserves, the Company may notify the MEMR and convert from exploration stage to commercial            production stage. If the Company makes no commercial discoveries before the end of the exploration period, as extended, the rights to the territory will revert back to the Republic of Kazakhstan. Upon completion of exploration, the Company will return to the Republic of Kazakhstan the rights to all areas within the licensed territory wherein no commercial discoveries of nickel and/or cobalt were made. When the Company completes exploration of the Gornostai deposit, assuming that            commercial discoveries are made, the Company will apply to the MEMR to move to commercial production.

 

KKM holds exploration and production licenses from the government of Kazakhstan to a 575,756 acre parcel, located approximately 130 kilometers northwest of Aktobe, Kazakhstan. This deposit is referred to as the Kempirsai deposit. The licenses grant KKM the right to explore for and produce nickel and cobalt from deposits located within the territory through October 12, 2011,            which may be extended upon agreement between KKM and the MEMR. KKM also holds a license to explore for and produce Mamyt brown coal from a deposit located within 40 kilometers of its cobalt and nickel deposit. This license expires on December 11, 2018 with further possible extensions. 

 

7

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

In December 2008 KKM received a notice from the MEMR extending 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 its 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 June 2009.

 

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 the Mamyt deposits on the basis that KKM had material failures in execution of the work programs associated with the contacts and licenses and did not 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 illegitimate. 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 the Company’s contracts and            licenses to the Kempirsai deposit. 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 cancellation of the unilateral termination of the KKM contracts and licenses. Pursuant to the Code of Civil Procedure of the Republic of Kazakhstan, the General Prosecutor can 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. The Company filed a formal objection to the protest of the General Prosecutor. On March 18, 2009, the Supervisory board under the Supreme Court rejected the protest of            the General Prosecutor.

 

Because the Company does not have a reserve estimate for its deposits that conforms to the standards of Industry Guide 7 issued by the U.S. Securities and Exchange Commission, its operations were considered to be at the exploratory stage for the first quarter 2009 and 2008.

 

***Business Condition***– The financial crisis impacting the global economy has had a material effect on the Company’s business. Metal prices fell sharply in 2008, making future forecasts problematic and projected financial models unprofitable. The financial crisis made the Company’s access to equity and/or debt financing            temporarily impossible. In light of the uncertain economic environment, the Company has been looking for private investors and/or potential purchasers of some of the Company’s assets.

 

8

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

The Gornostai and the Kempirsai deposits have not yet entered the development stage with respect to their mineral interests and have no production while the Company’s mineral licenses contain certain work program requirements to be met which are expected to require significant capital. The Company has realized only limited revenue from the Kempirsai deposit and no revenue            from the Gornostai deposit and has very little ability to generate revenue. The Company does not expect this to change until it builds and begins operating a nickel ore processing plant where the Company will need to raise significant additional capital in order to maintain its current level of operations and to fund construction of a processing plant. The Company expects to be totally dependent upon investment funds to support operations until such time as it begins to generate            sufficient revenue to fund operations. The Company expects these funds will consist primarily of funds raised in equity and/or debt financing activities.

 

In the past the Company has been able to raise capital through the sale of its equity securities and continues to believe that investors will see the merits of its plans to exploit its mineral licenses and will be able to raise capital. The Company currently has no firm commitment from any party to provide additional equity or debt financing and there is no guarantee that it            will obtain additional financing on acceptable terms, or at all. If the Company is unsuccessful in obtaining additional funding during 2009, the Company will have insufficient funds to continue exploring its territories, to meet its mineral license work program requirement or to satisfy its operating needs. Failure to satisfy its work program requirements could result in fines and penalties or even the possible forfeiture of the subsoil use contracts and licenses.

 

On February 4, 2009, Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S. dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports), currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the domestic banking            sector. The Company has limited confidence in the government’s ability to control prices in the near to medium term, and with the value of Tenge wages falling, purchasing power is declining. The future effect of the devaluation is difficult to project given the present uncertainty on the currency markets and on the government’s policies regarding exchange rates and/or foreign currency regulations.

 

On February 13, 2009, the Company executed a Memorandum of Understanding for the sale-purchase of 100% of the charter capital of 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 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.

 

Despite the execution of the Memorandum of Understanding and receipt of the initial payment of $500,000, the Company has not reclassified Kaznickel’s long-lived assets as held for sale because the sale of the asset is not deemed to be probable yet. The outcome of the transaction is still uncertain due to lack of confidence in obtaining approval of the MEMR which has been            inconsistent in its approvals in similar transactions. The financial crisis experienced in Kazakhstan has also made the behavior of governmental authorities and potential buyers unpredictable. 

 

9

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

SFAS No. 144 *“Accounting for the Impairment or Disposal of Long-Lived Assets”*requires an entity to present assets and liabilities of a disposal group separately in the asset and liability sections, respectively, of the balance sheet; the results of operations of a component of an entity that has been classified as            held for sale shall be reported separately in discontinued operations. If the Company classified Kaznickel’s long-lived assets as held for sale, the disposal group would be presented on the balance sheet as of March 31, 2009 as follows:

 

| **Account**                               | **March 31, 2009**                                 |
|-------------------------------------------|----------------------------------------------------|
| Assets of the disposal group              | $      125,053  |
| Liabilities of the disposal group         | (6,423,428)                                        |
| Accumulated deficit of the disposal group | $ (6,298,375)                                 |

 

The assets above would have been measured at their carrying amount which is lower than estimated fair value less cost to sell (approximately $5,000,000). The balance of the Kaznickel liabilities mainly consists of the loan provided by the Company in the amount of $5,316,211. 

 

Loss from discontinued operations would amount to approximately $40,000. 

 

***Kempirsai Exploration Stage***– The Kempirsai, or KKM, operations are considered to be in the exploration stage until the Company establishes commercially producible reserves within the Kempirsai deposit. Accordingly, no revenues from production have been recorded.

 

***Gornostai Exploration Stage***– The Gornostai, or Kaznickel, operations are considered to be in the exploration stage. Since its inception on March 5, 2004, the Company has devoted a substantial amount of effort in raising capital, acquiring Kaznickel, and exploring the Gornostai deposit under its exploration contract. This mineral            property has not yet reached development or production stage and accordingly, no revenues from production have been recorded. 

 

**NOTE 2 - CASH AND CASH EQUIVALENTS**

 

The Company considers all demand deposits, money market accounts and marketable securities purchased with an original maturity of three months or less to be cash and cash equivalents. The fair value of cash and cash equivalents approximates their carrying amounts due to their short-term maturity.

 

Cash consists of the following:

 

|                     |   | **March 31,**                                                                                                                                |   | **December 31,**                                                                                                                             |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   | **2009**                                                                                                                                     |   | **2008**                                                                                                                                     |
| Current accounts (USD)   |   | $                      200,698 |   | $                      102,019 |
| Current accounts (Tenge) |   | 39,877                                                                                                                                       |   | 13,625                                                                                                                                       |
| **Total**                |   | **$**                    **240,575**     |   | **$**                    **115,644**     |

 

10

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

**NOTE 3 - NOTE RECEIVABLE FROM RELATED PARTY**

 

On May 22, 2008 the Company signed a Note Agreement with Latimer Assets Inc. Pursuant to the terms of the Note Agreement, the Company loaned $7,400,000 to Latimer Assets Inc. (“Latimer”). The note was originally interest free. Latimer owns substantial interests in GRK and AI.

 

On June 19, 2008 the Company and Latimer entered into Addendum # 1 to the Note Agreement whereby the Company agreed to loan an additional $7,500,000 to Latimer, increasing the total note amount to $14,900,000. The total note was provided at an interest rate of 2% per annum. Interest is charged on a monthly basis and is payable as a lump-sum payment at the date of the note            repayment. Repayment of the note was due on March 1, 2009. The Company and Latimer are in the process of negotiating an addendum to the Note Agreement whereby the parties are to extend the repayment period until September 30, 2009 or offset the note receivable from Latimer against KKM’s notes payable to GRK and AI. For detailed discussion of the related party transactions, please refer to the Note 5 below.

 

The balance of the note receivable from related party at March 31, 2009 was $15,140,828, which includes $240,828 of interest.

 

**NOTE 4 - PROPERTY, PLANT AND MINERAL INTERESTS**

 

Property, plant and mineral interests consist of the following:

 

|                               | **March 31,**    | **December 31,** |
|------------------------------------|------------------|------------------|
|                               | **2009**         | **2008**         |
| Buildings                          | $1,517,760  | $1,908,113  |
| Machinery and equipment            | 2,251,137   | 2,904,378   |
| Other fixed assets                 | 137,952     | 153,831     |
| Unproved mineral interests         | -           | -           |
|                               | 3,906,849   | 4,966,322   |
| Accumulated depreciation           | (481,399)        | (545,151)        |
| Property, plant and equipment, net | $3,425,450  | $4,421,171  |

 

Unproved mineral interests represent the acquisition costs of the mineral interests upon the purchase business combinations with Kaznickel and with KKM. The government of Kazakhstan retains the title to the property upon which the Company’s mineral rights pertain; however, the Company’s mineral interests are considered to be tangible assets. 

 

In 2008 the Company recognized full impairment of unproved mineral interests of $8,916,265. According to management’s estimates, the Company can generate positive cash flows if nickel prices are not lower than $12,000-$12,500 per ton. However, current nickel prices fell below this level making the Company recognize impairment of the mineral interests. 

 

11

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

***Gornostai Deposit***

 

Kaznickel acquired its interest in the Contract on Exploration and Development of Gornostai Cobalt and Nickel Deposit (“the Contract”) issued by the MEMR dated February 26, 2004. As discussed above, Kaznickel acquired the right to exploit the mineral property including the right to explore, develop and produce the cobalt and nickel mineral resources within the            deposit through February 26, 2026 providing commercial discoveries are made before the end of the exploration period. The Company has the right to renegotiate the contract at that time for an additional 30 years. The Company capitalized the acquisition costs of its mineral interest upon the purchase business combination with Kaznickel. The allocated purchase price included a capitalized amount of an acquired asset retirement obligation. While the property is not in production, the            asset retirement cost is depleted over the life of the contract from the date of acquisition.

 

The 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 below), and development and production of minerals through February 26, 2026. The Company may transfer its right to third parties in accordance with Kazakh laws and regulations            and has a right to renegotiate an extension of the Contract. 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. 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. The amount also includes financing the region’s social programs in the amount of $5,000 during the exploration extension period. Also, the estimates include $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 must occur prior to the expiration of the exploration stage of our contract in February 2010. However, there is no guarantee when or if Kaznickel will discover commercially producible reserves within the Gornostai deposit. Also, the estimates include the subsoil use contract requirement to            donate $300,000 for the ongoing development of Astana and Kurchatov, which are cities in Kazakhstan.

 

***Kempirsai Deposit***

 

Bekem acquired two contracts to explore for and extract minerals in connection with the purchase of KKM. One contract is for the exploration and extraction of nickel and cobalt ore through October 12, 2011 from deposits located in an approximately 575,756 acre site in the northwest area of the Republic of Kazakhstan approximately 130 kilometers northeast of the city of Aktobe,            Kazakhstan, near the town of Badamsha, referred to as the “Kempirsai” deposit. The other contract is for the exploration and extraction of Mamyt brown coal through December 11, 2018 at a site located within 40 kilometers of the Kempirsai deposit. The contracts may be extended upon agreement between KKM and the Geology and Minerals Resources Committee of the MEMR. The obligations and commitments under the contracts are approximately $130,000,000. This amount includes a            commitment to invest $100,000,000 for construction of a processing plant during the contract period. Also, the estimates include $950,000 for removal of all equipment and to remediate the property. The KKM work program for 2009 and subsequent years is currently under discussion and negotiation with the MEMR.

 

12

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

The Kempirsai contract requires the Company to pay royalty payments equal to 2.21% of gross ore sales. The Mamyt brown coal contract requires a royalty payment equal to nine tenths of one percent (0.9%) of gross coal sales. Both contracts require the Company to pay an excess profits tax ranging from 4 to 30 percent based upon an internal rate of return (as defined in the            contracts) ranging from 22 to 30 percent. The allocated purchase price of the mineral interest included a capitalized amount of an acquired asset retirement obligation. The obligations also include the establishment and funding of a reclamation fund that includes the cost of removing buildings and equipment used. The Company is also required to comply with Kazakh environmental laws and regulations.

 

**NOTE 5 - NOTES PAYABLE TO RELATED PARTIES**

 

In March 2008, KKM entered into a preliminary consortium agreement, subject to negotiation of the terms of a definitive agreement, with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”). GRK and AI are related parties of the Company through a common stockholder. These companies also have            exploration and production licenses near the Company's Kempirsai deposits in northwestern Kazakhstan. This agreement provides for the joint development and construction of a nickel processing plant in the area for joint use by the parties. Under the preliminary consortium agreement, KKM is considered to be the operator of the Consortium. The preliminary shares of the parties in the Consortium are the following: KKM - 50%; GRK Koitas - 40%; and Asia-Invest - 10%.

 

Under the preliminary consortium agreement, the parties are obliged to jointly contribute approximately $40 million for financing the construction of the processing plant. Of this amount, KKM is obligated to contribute approximately $20 million. KKM received advances of KZT 2.278 billion ($18,862,300 as of December 31, 2008) from GRK, and KZT 97.4 billion ($806,492 as of            December 31, 2008) from AI, which are to be used for construction of a processing plant. The parties have the right to withdraw from the Consortium without penalty subject to three months written notice. Consequently, these advances have been classified as current notes payable to related parties and bear no interest since they represent contributions to the Consortium.

 

When the Company received the advance payments from GRK and AI, the parties had not yet selected the technology to be implemented for processing the Kempirsai ore and therefore, they had not yet developed a detailed plan for capital expenditures. The technology (Vanyukov process) for the processing plant was selected in September 2008 only after completion of the initial pilot            testing of various technologies capable of processing nickel ore. The technology was selected based on the results of the testing and the preliminary feasibility study report. In addition, KKM was in dispute with the MEMR in relation to unilateral termination of the subsoil use contract as disclosed in Note 1. Therefore, in May 2008 Latimer, one of the major shareholders in GRK and AI, applied to the Company with a request for a loan. On May 22, 2008 the Company signed a Note            Agreement with Latimer Assets Inc. Pursuant to the terms of the Note Agreement, the Company loaned $7,400,000 to Latimer Assets Inc. (“Latimer”). The note was originally interest free.

 

On June 19, 2008 the Company and Latimer entered into Addendum # 1 to the Note Agreement whereby the Company agreed to loan an additional $7,500,000 to Latimer, increasing the total note amount to $14,900,000. The total note was provided at an interest rate of 2% per annum imposed from the date of signing the Addendum. Interest is charged on a monthly basis and is payable as a            lump-sum payment at the date of the note repayment. Repayment of the note was due on March 1, 2009. The balance of the note receivable from related party at March 31, 2009 was $15,140,828, which includes $240,828 of interest. The Company and Latimer are in the process of negotiating an addendum to the Note Agreement whereby the parties will agree to extend the repayment period until September 30, 2009 or offset the note receivable from Latimer against KKM’s notes payable to            GRK and AI. 

 

13

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

Pursuant to a Pledge Agreement dated May 22, 2008 between the Company, its subsidiary, KKM, GRK and AI, the Latimer note receivable is secured by a pledge of a cumulative 39% interest in the Consortium. The 39% interest consists of 31% of GRK’s 40% interest in the Consortium and 8% of AI’s 10% interest in the Consortium. Since the Latimer note receivable is fully            secured by the pledge agreement, no allowance against this receivable was created.

 

On May 6, 2009 KKM, GRK and AI entered into Addendum #1 to the preliminary consortium agreement whereby the parties agreed to convert the advance payments of the total amount of KZT 2,375,400,000 (equivalent to $19,668,792 at the rate of KZT 120.77 per $1 effective as of January 1, 2009) received by KKM from GRK and AI in 2008 into U.S. dollars. The addendum was made to memorialize the original intent of the consortium parties at the time they entered into the preliminary consortium agreement in the context of the subsequent Tenge devaluation made by the Kazakhstan government in February, 2009. Of the approximately $19,700,000 advances made by GRK and AI to the consortium, approximately $14,900,000 was loaned to Latimer Assets, Inc., pursuant to a U.S. dollar denominated Note Agreement, as discussed in more detail in *Note 3 – Note Receivable From a Related Party*, and therefore not effected by the Tenge devaluation.  The balance, approximately $4,800,000, was used by Bekem in its own operations prior to the devaluation.**As a result of the addendum execution, as of March 31, 2009 the advance payments received by KKM from GRK and AI equals $19,668,792 at the rate of KZT 151.40 per $1 and KKM recognized foreign exchange loss of KZT 602,455,000 (approximately $3,979,000). 

 

KKM, GRK and AI are currently in the process of negotiating an addendum to the preliminary consortium agreement. According to the intended addendum, the period of final determination of the ownership interests of the parties is to be extended for six months and will be determined upon completion of the negotiations and signing of addendums to the subsoil agreements with the            MEMR. Currently, KKM and GRK are in the process of revising the terms of their subsoil use agreements due to the effect of the nickel price situation. AI plans to start negotiations with the MEMR in the second quarter 2009.

 

**NOTE 6 – SHAREHOLDERS’ EQUITY**

 

***Stock grants and shares cancelled**–*On October 20, 2006, under the Company’s 2003 Stock Option Plan and pursuant to the board of directors desire to attract and retain experienced and educated executives, the Board agreed to award to certain executives and key employees of the Company restricted stock grants            (1,083,123 shares). The vesting of the shares is contingent upon meeting various company-wide performance goals, including timely filing of reports with the Securities and Exchange Commission, meeting the yearly deadlines for the pilot plant construction, operations as dictated by the Board of Directors, timely performing of the drilling work program requirements as dictated by the Republic of Kazakhstan’s Ministry of Energy and Mineral Resources, and start of commercial            operations. The shares under the restricted stock grant scheme are held and released by the Company to awarded employees based on the approval of the Board and analysis of employee’s performance. If these performance conditions are not met, the Company will reverse compensation expense, unless approved by the Board of Directors, and will reverse any previously recognized compensation expenses. The fair value of the restricted stock grants was valued at $1.95 per share, which            represented the closing market price of the Company’s stock on October 20, 2006, or $2,112,090. These restricted shares are being expensed over the expected term of the performance condition, which is three years.

 

During 2007, the Company reversed the amount of deferred compensation of $822,455 (421,772 shares) due to the resignation of Mr. Cherdabayev, the previous CEO and President of the Company. 

 

On March 25, 2008, the board agreed to award to certain executives and key employees of the Company additional restricted stock grants (421,772 shares) with an estimated fair value of $337,418 at the closing market price of common stock on the date of grant ($0.80 per share).

 

14

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

As of March 31, 2009, there was $306,495 of total unexpensed compensation cost. The cost is expected to be fully recognized by January 2011. As of March 31, 2009, 349,848 shares were vested. The Company recognized $154,295 and $122,860 of compensation expense for the three months ended March 31, 2009 and 2008, respectively.

 

**NOTE 7 - COMMITMENTS AND CONTINGENCIES**

 

***Concentration of Risk Relating to Foreign Mining Operations***– All of the Company’s properties are located within the Republic of Kazakhstan in Central Asia. In addition to general industry risks of nickel and cobalt price fluctuations, and potential lack of economic viability of the claims, the Company has a concentration of risk            related to its foreign properties and interests which are subject to political uncertainty, changes in government, unilateral renegotiation of licenses, claims or contracts, nationalization, or other uncertainties. In addition, the validity of mining claims which constitute the Company's property holdings in Kazakhstan, may, in certain cases, be uncertain and are subject to being contested. 

 

***Failure to Satisfy the Terms of the Subsoil Use Contracts***– Under the subsoil use contracts, the Company is required to satisfy the annual minimum work program requirements. If the Company fails to satisfy these commitments, it may be subject to penalties and fines and, potentially, to the loss of one or more of the subsoil use            contracts. The cancellation of the contracts would have a material adverse effect on the Company’s business, results of operations and financial condition. 

 

***Annual Work Program***– Historically, it has been the practice of the MEMR that if a subsurface user could not fulfill certain conditions for a specific year, for any reason, then the work program requirements of that year would be extended to the next year. This was done because the obligations of subsoil users were typically set forth            on the basis of the full duration of the subsoil use contract, rather than on an annual basis. During the latter part of 2007, this practice was terminated by order of the president of the country. This change in practice has created great uncertainty as to how the government will proceed in the future. Currently, there is no legislatively fixed mechanism governing the development of annual work programs or for the independent determination of compliance by the subsurface user with            the parameters of the annual work program. The determination is currently being made at the discretion of officials employed by the authorized governmental body. Based solely on their own discretion, these officials have the authority to suspend the activities of the subsurface user even for a minor breach of the detailed annual work program. These facts, coupled with the right of the competent body to unilaterally terminate a subsoil user’s contract if the contractor            materially breaches the subsoil use contract obligations, indicates there is a risk that penalties and fines could be assessed and/or one or more of the subsoil use contracts could be cancelled. 

 

***Kazakhstan Business Environment***– Kazakhstan, as an emerging market, has a legal and regulatory infrastructure that is not as mature and stable as those usually existing in more developed free market economies. As a result, operations carried out in Kazakhstan can involve risks and uncertainties that are not typically associated with            those in developed markets. The instability associated with the ongoing transformation process to a market economy can lead to changes in the business conditions in which the Company currently operates. Changes in the political, legal, tax or regulatory environment could adversely impact the Company’s operations.

 

15

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

***Environmental Matters***– Extensive national, regional and local environmental laws and regulations in Kazakhstan affect the Company’s operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality and impose user fees, penalties and other liabilities for the violation of            these standards and establish, in some circumstances, obligations to remediate current and former facilities and off-site locations. The Company believes it is currently in compliance with all existing Republic of Kazakhstan environmental laws and regulations. However, as new environmental laws and legislation are enacted and the old laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance in the future could require significant            expenditures, which may adversely affect the Company’s operations.

 

***Due to the Government of the Republic of Kazakhstan***– In connection with the Company’s acquisition of the exploration contract covering the Gornostai deposit, it is required to repay the Republic of Kazakhstan for historical costs incurred in undertaking geological and geophysical studies and infrastructure improvements. The            repayment terms of this obligation will not be determined until the Company applies for and is granted a contract by the Republic of Kazakhstan to engage in commercial production. That amount is expected to be around $731,000 and has not been recorded as a liability. Under the current contract, once the Company determines the property contains commercially producible reserves, and desires to commence commercial production, it must apply for such right prior to the expiration of its            exploration, which is currently February 2010. The Company anticipates it will apply for a commercial production contract within the next 1-3 years. There is no guarantee when or if the Company will discover commercially producible reserves within the Gornostai deposit. Should the Company decide not to pursue a commercial production contract, then it can relinquish the Gornostai deposit to the Republic of Kazakhstan in satisfaction of this obligation.

 

The Company is required, under its licenses, to submit a proposed annual work program to the MEMR for approval. Failure to meet the minimum work program requirements could cause the Company to lose its licenses. 

 

***Liquidity of Common Shares***– The Company’s 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 the Company’s common shares.

 

***Nickel and Cobalt Prices can be Volatile –***Commodity prices for nickel and cobalt fluctuate according to the influence of diverse market conditions that can affect the supply or demand for a commodity such as political and economic conditions and uncertainties, advances in exploration and development technology, introduction of            competing products, and governmental restrictions on exploration, production and export of natural resources.

 

***Competition***– The Company’s principal competitors are large established companies with substantial financial resources and market share. If the Company establishes commercially producible reserves and moves to production stage, it will have to compete for customers with these companies.

 

16

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2009 (UNAUDITED)**

 

 

***Operating Leases***– Bekem leases approximately 400 square feet of office space located at 324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in the United States. The Company pays annual rents of approximately $7,800 for this space pursuant to a lease agreement that expires December 31,            2009 with an option to extend the lease for an additional year. 

 

The Company also maintains a representative office in Almaty, Kazakhstan, where it leases approximately 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 an office (approximately 2,200 square feet) in Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the Gornostai deposit. Kaznickel also rents approximately 5,300 square feet of warehouse space in Semei for $3,900 per month. Kaznickel uses this space to store test ore. These lease agreements expire in March 31, 2010. 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.

 

**NOTE 8 – SUBSEQUENT EVENT**

 

On April 9, 2009 KKM and the MEMR signed an addendum # 3 to its nickel subsoil use contract whereby KKM is obliged to the following commitments:

 

|   | **•** | Until 2013, at least 30% of KKM’s total procurements of equipment, materials and other products, must be of goods produced in Kazakhstan, during 2013 and 2014, this percentage shall increase to 40%, after 2014, at least 50% of KKM’s total procurements must have been of equipment, materials and other products produced in Kazakhstan; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Of the total percentage of nickel mining related services retained by KKM until 2013, at least 70% shall be provided by Kazakhstani companies, between 2013 and 2014 that percentage shall increase to 80%, after 2014 the percentage shall increase to 90%; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Kazakhstan citizen shall be given priority in personnel hiring, and depending upon the type of position within KKM, Kazakhstani citizens should account for 80-100% of total KKM personnel until 2013, between 2013 and 2014 the percentages increase to between 90 and 100%, and after 2015, 100% of KKM employees shall be Kazakhstani citizens. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

17

 

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

 

For a complete understanding, this management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes to the Financial Statements contained in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 2008. 

 

**Forward Looking Information and Cautionary Statement**

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. For this purpose any statement            contained in this annual report that is not a statement of historical fact may be deemed to be forward-looking, including statements about our revenue, spending, cash flow, products, actions, intentions, plans, strategies and objectives. Without limiting the foregoing, words such as “*may*,” “*hope*,”            “*will*,” “*expect*,” “*believe*,” “*anticipate*,” “*estimate*” “*projected”*or            “*continue*” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainty, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to those relating to our plan of operations including our ability to construct a processing plant            and put 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.

 

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

 

**                 Overview**

We are engaged in the development and exploration of nickel, cobalt and brown coal deposits in the Republic of Kazakhstan. We carry out our exploration activities through our two wholly-owned subsidiaries, Kyzyl Kain Mamyt LLP and Kaznickel LLP. 

 

The primary assets of KKM are exclusive subsoil use licenses and contracts to a 575,756 acre territory in northwestern Kazakhstan referred to herein as the Kempirsai deposit. The contract grants KKM the right to explore, extract and process nickel and cobalt ore from the Kempirsai deposit, which is comprised of the Kara-Obinskoe and Stepninskoye sections            (collectively referred to as the “Kara-Obinskoye section”) and the Novo-Shandashinskoe section. KKM also holds a subsoil use contract to explore and produce brown coal from the Mamyt coal deposit, which is located within 40 kilometers of the Kempirsai deposit. 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.            

 

The primary asset of Kaznickel is an exclusive subsoil use license and contract that grants Kaznickel the exclusive right, through February 2010 to explore for nickel, cobalt and other minerals in a 12,232 acre area in northeastern Kazakhstan known as the Gornostai deposit. 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. 

 

The following table provides additional information regarding our subsoil use contracts: 

 

|  

**Territory****Name** |  

**Size of****Territory** |  

 

**Primary Minerals** |  

**License**

**Type** |  

**License or****Contract #** | **License and**

**Subsoil Use Contract Term**                                                     |
|-------------------------------|----------------------------------|--------------------------------------|-------------------------------|--------------------------------------|----------------------------------------------------------------------------------------------------|
|                          |                             |                                 |                          |                                 |                                                                                               |
| Kempirsai                     | 575,756 acres                    | Nickel and cobalt ore                | Production                    | MG #420

MG #426                     | Expires Oct, 12, 2011 unless extended.                                                             |
|                          |                             |                                 |                          |                                 |                                                                                               |
| Mamyt                         | 116 acres                        | Brown coal                           | Production                    | MG #9-D                              | Expires Dec, 11 2018 unless extended.

                                                       |
|                               |                                  |                                      |                               |                                      |                                                                                                    |
| Gornostai                     | 12,232 acres                     | Nickel and cobalt ore                | Exploration

and 

Production | 1349                                 | Exploration period expires Feb. 26, 2010. Production period expires Feb. 26, 2026 unless extended. |

 

 

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As noted above, our subsoil use contract for the Kempirsai nickel and cobalt deposit and Mamyt brown coal deposit grant us commercial production rights. The Kempirsai deposit was discovered in 1938 and at its peak in the late 1980’s produced almost five million tons of ore annually. Since the mid-1990’s, however, mining activity at the deposit has            been insignificant.

 

We are currently at the exploration stage on the Gornostai deposit. To retain our subsoil use contract during exploration stage we are required to satisfy a minimum work program that is approved by the Geology Committee of the MEMR. The annual work program for 2009 requires Kaznickel to drill test holes totaling at least 1,000 meters.

 

The objective of our drilling program is to complete a detailed study of the structural characteristics of what we believe to be the two largest ore bodies in the Gornostai deposit, as well as certain other ore bodies where high grade nickel deposits have been located. The drilling was conducted on a 50 x 50-100 meter grid, which will make it possible to            convert indicated and inferred resources to proved and probable reserves as development of the property progresses. 

 

When we complete exploration of the Gornostai deposit, assuming we make commercial discoveries, we will apply to the MEMR to move to commercial production. 

 

Should we fail to complete the minimum work program imposed by any of our subsoil use contracts in a given year, the MEMR could review the work program, request an update and amendment to the work program, impose fines and penalties upon us or even revoke our subsoil use contracts and licenses.

 

We currently have no processing facilities at either the Kempirsai or Gornostai deposits. We plan to construct processing facilities to process our ores at our Kempirsai deposit. On September 8, 2008 the Company announced that it has completed initial pilot testing of various technologies for processing nickel ore from its Kempirsai deposit. Based on the            results of the pre-feasibility study, the Company intends 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. Management expects the Company 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, management hopes to begin construction in 2009 and anticipates a processing plant could be operational in 2011. As we generate no revenue, we will need to raise additional capital through the sale of our equity and/or debt securities to fund plant            construction.

 

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**Liquidity and Capital Resources**

 

At March 31, 2009 we had cash on hand of $240,575. Since inception we have generated limited revenue and we anticipate we will need to spend at least $160 million to fund construction of a processing plant before we begin to realize significant revenue from operations. Since inception we have an accumulated deficit of $33,642,268. At March 31, 2009, current            liabilities exceeded current assets by $4,378,296. For some time we have been seeking sources of additional funding, but to date we have been unsuccessful in our efforts. Given the current global financial and economic condition, coupled with the significant decline in world nickel prices, we anticipate it will be difficult to secure additional funding.

 

In our current situation, we anticipate we have sufficient funding to meet our working capital requirements for approximately three to four months. As we have, to date, been unable to source equity or debt funding, we have also been investigating the possibility of liquidating certain Company assets to allow us to continue operations while we continue to seek            equity or debt funding. As discussed in *Note 1*to our *Consolidated Financial Statements*, during the quarter we entered into a Memorandum of Understanding for the potential sale of our wholly-owned subsidiary Kaznickel, including its rights to the Gornostai deposit. We are currently negotiating a definitive agreement and seeking approval from the necessary governmental authorities to            proceed with the sale. There is no guarantee we will be successful in obtaining the requisite governmental approvals or in concluding a definitive agreement. 

 

If we are successful in selling Kaznickel, we anticipate the proceeds from that sale, approximately $5,000,000, will provide us adequate funding to meet our minimal operational needs through the end of the current fiscal year. This does not, however, include allocation of any funds to satisfy the minimum annual work program associated with the Kempirsai            deposit, which we expect will be at least $6,000,000 during 2009. To address our minimal operating needs and the annual work program requirements associated with the Kempirsai deposit, we anticipate will require approximately $10,520,000. We anticipate the failure to satisfy our annual work program requirements would result in the forfeiture of our Kempirsai subsoil use contracts and licenses.

 

In order to meet our anticipated short fall and avoid the forfeiture of our rights to the Kempirsai deposit, we continue to seek sources of funding. We are also investigating the potential sale of other Company assets. Given the significant capital requirements associated with the construction of a processing plant and the difficulties we have faced in the            current economic and financial climate in sourcing additional capital, coupled with the collapse of world nickel prices, we may even begin to investigate the possibility of selling our interest in our wholly-owned subsidiary KKM, including its rights to the Kempirsai deposit.

 

The *Report of Independent Registered Public Accounting Firm*included in our annual report for the year ended December 31, 2008, included a going concern note. We believe nothing has occurred during the quarter that would change that guidance, nor do we anticipate the underlying conditions will improve until we            are able to obtain significant additional funding.

 

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During the three months ended March 31, 2009 and March 31, 2008, cash was used to fund operations as follows:

 

| *For the Three Months Ended March 31,*              | **2009**            | **2008**                      |
|-----------------------------------------------------|---------------------|-------------------------------|
|                                                |                |                          |
| Net cash used in operating activities               | $ (521,418)         | $    (812,174) |
| Net cash provided by (used in) investing activities | 649,805        | (3,964)                       |
| Net cash provided by financing activities           | –   | 2,897,467                |
| Effect of exchange rate changes on cash             | (3,456)             | (8,771)                       |
| **NET INCREASE IN CASH**                            | **$ 124,931**  | **$ 2,072,558**          |

 

During the three months ended March 31, 2009 net cash used in operating activities was $521,418 compared to net cash used in operating activities of $812,174 during the three months ended March 31, 2008. This decrease in net cash used in operating activities primarily occurred due to reduced exploratory activities as a result of our financial            difficulties.

 

During the three months ended March 31, 2009 net cash received from investing activities was $649,805. By comparison, during the three months ended March 31, 2008 we used net cash in investing activities of $3,964. Cash received from investing activities mainly represents an advance payment received from “Ertis” for purchase of Kaznickel and an            advance received from AsiaInvest for sale of special equipment.

 

During the three months ended March 31, 2009 we did not receive any cash from financing activities. During the three months ended March 31, 2008 net cash provided by financing activities was $2,897,467 which occurred due to loans provided to KKM under the consortium agreement. 

 

**Results of Operations**

 

***Three months ended March 31, 2009 compared to the three months ended March 31, 2008***

                Revenue

 

Because our deposits are without known reserves, we are considered to be in the exploration stage. Any revenue earned during this stage from sale of ore or brown coal is recorded against exploratory costs. During the three months ended March 31, 2009, such incidental sales amounted to $311. By comparison, during the first quarter 2008, we realized $14,800 from            the sale of ore or brown coal.

 

                General and Administrative Expenses

 

Our general and administrative expenses during the three months ended March 31, 2009 decreased to $712,018 from $1,025,077 during the first quarter 2008. This $313,059 decrease in general and administrative expenses in the first quarter 2009 was primarily the result of lower payroll expenses. During the three months ended March 31, 2009 payroll expenses            decreased by approximately $281,000. 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. General and administrative expenses also decreased as a result of the Tenge devaluation which occurred in the beginning of February, 2009. The total estimated effect of the Tenge devaluation on our general and administrative expenses is approximately            $127,000, including devaluation effect on payroll expenses of $45,000. We plan to allocate approximately $3,300,000 for general and administrative expenses during the remainder of the 2008 fiscal year. 

 

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Research and Development Costs

 

We engaged in no research and development activities during the first quarter 2009 or 2008. During the 2008 fiscal year we have budgeted approximately $400,000 for processing technology testing and preliminary feasibility studies for Gornostai. 

 

                Exploratory Costs

 

During the three months ended March 31, 2009, due to a lack of working capital as a result of the current inability of the Company to raise funds due to the global financial crisis, we did no exploratory drilling at the Gornostai deposit. During the three months ended March 31, 2008 we also did no exploratory drilling at the Gornostai deposit because Kaznickel            was in the process of signing an addendum to its subsoil use contract. Exploratory costs incurred during these periods mainly represent geologists’ and other specialists’ salaries, other cost in preparation for future exploratory activities and some Kempirsai mining assets maintenance expenses. Assuming we are successful in obtaining additional funding, we budgeted $378,000 for drilling and core sampling expenses during 2009. 

 

Accretion Expense

 

Accretion expense increased by $10,932 during the three months ended March 31, 2009 compared to the same period of 2008 due to the revision of asset retirement obligations made in the end of 2008. Until we engage in mining and production, we believe accretion expense will continue at rates consistent with those realized during the quarter ended March 31, 2009.            

 

Grant Compensation Expense

 

During the three months ended March 31, 2009 we recognized $154,295 in grant compensation expense for restricted stock grants issued to certain officers and key employees during the fourth quarter 2006 and the first quarter 2008 compared to $122,860 for the three months ended March 31, 2008, which resulted from a reversal of the deferred compensation amount of            $822,455 during the first quarter 2007 due to the resignation of Marat Cherdabayev, our former CEO and President of the Company. 

 

On March 25, 2008 the board agreed to award to certain executives and key employees of the Company additional restricted stock grants (421,772 shares) with the estimated fair value of $337,418. As a result of the award of these restricted stock grants, we anticipate the next quarterly grant compensation expense amount to increase by approximately $31,440.            

 

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Total Operating Expense and Loss from Operations

 

Our total operating expense and loss from operations decreased from $1,194,800 during the three months ended March 31, 2008 to $925,286 during three months ended March 31, 2009. The principal reasons for the decrease are a decrease in general and administrative expense of $313,059 due to lower payroll expenses and the effect of the Tenge devaluation during the            first quarter 2009. 

 

Interest Income

 

During the three months ended March 31, 2009, we realized interest on deposits of $17 and on the note receivable from a related party (Latimer) of $74,500. By comparison, during the three months ended March 31, 2008, we realized interest on deposits of $529.

 

Translation Adjustment and Exchange Gain/Loss From Remeasurement

 

The consolidated financial statements are presented in U.S. dollars. The functional currency of Kaznickel is U.S. dollars. The functional currency of KKM is Kazakh tenge. Results of operations are translated into U.S. dollars at the average exchange rates during the reporting period. All balance sheet accounts of KKM are translated at exchange rates on the            date of the financial statements and translation differences are included in stockholders’ equity as cumulative translation adjustments. 

 

Non-monetary assets and liabilities of our Kaznickel and Almaty representative office, as well as the related expense accounts, are translated into U.S. dollars, using historical exchange rates and monetary assets and liabilities are translated into U.S. dollars using exchange rates on the date of the financial statements and the resulting balance sheet            item differences are included in the results of operations as exchange gains/losses from remeasurement. The exchange difference from remeasurement is commonly, but not always, positive (gain) if the average exchange rates are lower than exchange rates on the date of the financial statements and negative (loss) if the average exchange rates are higher than exchange rates on the date of the financial statements.

 

On February 4, 2009, Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S. dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports), currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the            domestic banking sector. This currency devaluation was the main cause of the exchange gain from remeasurement recognized by us during the quarter ended March 31, 2009.

 

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Exchange Gain/Loss

 

During the quarter ended March 31, 2009 we realized an exchange loss of $3,998,205 compared to an exchange gain of $12,107 during the quarter ended March 31, 2008. As with the gain/loss from remeasurement, we recognize exchange gain or loss as a result of having subsidiaries operating in foreign countries whose functional currency may or may not be the U.S.            dollar. This requires us to translate results of operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars at the average exchange rate, where results of operations include exchange gains or losses on the U.S. dollar monetary assets and liabilities. The currency devaluation discussed above was the main cause of the foreign exchange loss incurred by the Company during the quarter ended March 31, 2009 and comprised mainly loss incurred from revaluation of advances            received by KKM under the preliminary consortium agreement (approximately $3,979,000).

                Net Loss

 

For the foregoing reasons, during the three months ended March 31, 2009 we experienced a net loss of $3,369,394 compared to a net loss of $1,170,395 during the three months ended March 31, 2008. We anticipate that we will continue to experience net losses of around $1,300,000 per quarter until we are able to engage in significant nickel and cobalt ore            extraction, processing and sales. We anticipate we will continue to experience net losses until we are able to engage in nickel and cobalt ore extraction, processing and sales. 

 

**Summary of Material Contractual Commitments**

 

                The following table lists our significant commitments as of March 31, 2009:

 

|                               |   | **Payments due by Fiscal Year** |
|------------------------------------|--------|---------------------------------|
| **Contractual Commitments**        |   |  

**Total**               |   | **Less than**

**1 year** |   |  

**1-3 years** |   |  

**3-5 years** |   | **More than 5 years** |
|                               |   |                            |   |   |   |   |   |   |   |   |
| Kaznickel’s work programs(1) |   |  

$3,409,580              |   |  

$378,000 |   |  

$1,900,000 |   |  

$1,131,580 |   |  

-0- |
| KKM’s work programs (2) (3)  |   | 121,018,000                     |   | 12,700,000 |   | 108,318,000 |   | -0- |   | -0- |
| Operating leases                   |   | 328,836                         |   | 328,836 |   | -0- |   | -0- |   | -0- |
| **Total**                          |   | $124,756,416                    |   | $13,406,836 |   | $110,218,000 |   | $1,131,580 |   | -0- |

                

 

| (1) | The work program for Kaznickel substantially represents estimates for 2009 based on the subsoil use contract and includes $378,000 for exploration drilling (1,000 meters), sampling and assaying (650 core samples), metallurgical tests and preparation of the report to the State Resource Committee. Also, the estimate includes $831,580 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 such time as we apply for and are granted a contract to engage in commercial production by the Republic of Kazakhstan. We currently anticipate that we will apply for a commercial production contract within the next one to two                            years. The figures above include an estimated amount of a commercial discovery bonus of $1,500,000. However, there is no guarantee when or if we will discover commercially producible reserves within the Gornostai deposit. Should we decide not to pursue a commercial production contract, we can relinquish the Gornostai deposit to the Republic of Kazakhstan in satisfaction of this obligation. Also, the estimates include the subsoil use contract requirement to donate                            $300,000 for the ongoing development of Astana and Kurchatov, which are cities in Kazakhstan. The estimates above do not include cost of bankable feasibility study and construction of a nickel processing plant. The amount of preliminary feasibility study included in the table above is $400,000. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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| (2) | KKM’s work program represents estimates based on the subsoil use contract and the financial model which is attached to the working program. The current terms of the contract require us to invest up to $100,000,000 for construction of a processing plant during the contract period. Also, the estimate includes $950,000 for removal of all equipment                            and remediate the property. This remediation work can be done during the term of the subsoil use contract or upon completion of the terms of the contract. On December 29, 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 new work program, KKM will be required to invest $135 million to be applied to its mining and ore processing technology during the period 2006-2020 (or around $123.4 million for the remaining period). Currently, the addendum to the KKM subsoil use contract and new annual work program for 2009 is under negotiation and expected to be signed in June 2009. The expected changes are not reflected in the above estimates and will be                            reflected when these changes are legally approved by the MEMR. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| (3) | In March 2008, KKM entered into a preliminary consortium agreement with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest Corporation LLP (“AI”), who also have exploration and production licenses near the Company's Kempirsai deposits in northwestern Kazakhstan. Under the preliminary consortium                            agreement, the parties are obliged to jointly contribute approximately $40 million for financing the construction of the processing plant. Of this amount, KKM is obligated to contribute approximately $20 million. KKM received advances of KZT 2.278 million ($18,862,300 as of December 31, 2008) from GRK, and KZT 97.4 million ($806,492 as of December 31, 2008) from AI, which are to be used for construction of a processing plant. The parties have the right to withdraw                            from the Consortium subject to three months written notice. Consequently, these advances have been classified as current notes payable to related parties. Contributions made by the parties into the consortium are accounted for in the annual work programs of these parties. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As discussed above, to maintain our rights to the Gornostai, Kempirsai and Mamyt deposits we must satisfy the minimum work program requirements of the MEMR. Should we fail to complete the minimum work program requirements, the MEMR could review the work program, request an update and amendment to the work program, impose fines and penalties upon us or even            revoke our subsoil use contracts and licenses.

 

**Off-Balance Sheet Financing Arrangements**

 

                As of March 31, 2009 we had no off-balance sheet financing arrangements.

 

**Critical Accounting Policies**

 

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

 

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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.

 

**Item 3. Qualitative and Quantitative Disclosures about Market Risk**

 

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

 

**Commodity Price Risk**

 

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.

 

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            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. 

 

**Foreign Currency Risk**

 

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

 

On February 4, 2009, Kazakhstan’s National Bank dramatically devalued the Tenge, the local currency, from a range of 117-123 Tenge/U.S. dollar to 145-155 Tenge/U.S. dollar, citing the decline in oil price (oil comprises 60% of Kazakh exports), currency devaluations in Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the            domestic banking sector. We have limited confidence in the government’s ability to control prices in the near to medium term, and with the value of Tenge wages falling, purchasing power is declining. The future effect of the devaluation is difficult to project given present uncertainty on the currency markets and on the government’s policy regarding the exchange rates and/or foreign currency regulations.

 

**Item 4T. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

 

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is            recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures. Because of inherent limitations, our disclosure controls and procedures, no matter how well designed and operated, can provide only            reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met.

 

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As of the end of the period covered by this report we conducted an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act            Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2009. 

 

*Changes in Internal Control Over Financial Reporting*

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II -- OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

As discussed in Note 1 to the Financial Statements, 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.

 

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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.

 

**Item 1A. Risk Factors**

There have been no material changes to the risk factors as previously disclosed in our annual report on Form 10-K for the year ended December 31, 2008. 

 

**Item 6. Exhibits**

 

Exhibits. The following exhibits are included as part of this report:

 

                

|           | Exhibit 31.1 |   | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     |
|----------------|--------------|--------|------------------------------------------------------------------------------------------------------------|
|           |         |   |                                                                                                       |
|           | Exhibit 31.2 |   | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     |
|           |         |   |                                                                                                       |
|           | Exhibit 32.1 |   | Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|           |         |   |                                                                                                       |
|  

  | Exhibit 32.2 |   | Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf, thereunto duly authorized.

 

**BEKEM METALS, INC.**

 

 

| Date: May 11, 2009 | /s/ Yermek Kudabayev                              |
|--------------------|---------------------------------------------------|
|               | Yermek Kudabayev

Chief Executive Officer

  |

 

 

 

| Date: May 11, 2009 | /s/ Zhassulan Bitenov                              |
|--------------------|----------------------------------------------------|
|               | Zhassulan Bitenov

Chief Financial Officer

  |

 

 

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