**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 EndedJune 30,            2007

 

| 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, Kazkahstan**                                           |   | **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.                                                                                                                                                                          YesxNoo

 

Indicate by check mark whether the registrant is a large accelerated            filed, an accelerated filer, or non-accelerated filer. See definition of            “*accelerated filer and large accelerated            filer*” in Rule 12b-2 of the Exchange Act: (Check            one):

 

|   | Large accelerated Filero | Accelerated Filero | Non-accelerated Filerx |
|--------|--------------------------|--------------------|------------------------|

 

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

 

As            of August 7, 2007, the registrant had 124,750,239 shares of common stock, par value            $0.001, issued and outstanding.

 

----

**BEKEM METALS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 

PART I            — FINANCIAL INFORMATION

 

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

June 30, 2007 and December 31, 2006                                                             | 3 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Operations                            (Unaudited) for the

Six Months and Three Months Ended June 30, 2007 and                            2006 | 4 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash Flows                            (Unaudited) for the Six Months Ended June 30, 2007 and 2006                                              | 5 |
|                                                                                                                            |                                                                                                                                                                                |   |
|                                                                                                                            | Notes to Condensed Consolidated Financial Statements                            (Unaudited)                                                                                         | 6 |
|                                                                                                                            |                                                                                                                                                                                |
| Item 2. Management’s Discussion and Analysis of                            Financial Condition

and Results of Operations | 13                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| Item 3. Qualitative and Quantitative Disclosures About                            Market Risk                                   | 27                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| Item 4. Controls and Procedures                                                                                                 | 28                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| PART II — OTHER INFORMATION                                                                                               |                                                                                                                                                                                |
|                                                                                                                            |                                                                                                                                                                                |
| Item 1A. Risk Factors                                                                                                           | 29                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| Item 6. Exhibits                                                                                                                | 29                                                                                                                                                                                  |
|                                                                                                                            |                                                                                                                                                                                |
| Signatures                                                                                                                      | 29                                                                                                                                                                                  |

 

 

2

 

**PART            I – FINANCIAL INFORMATION**

**Item            1. Financial Statements**

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 

 

|                                                                                                                                                                              |   |   |   | **June 30,** |       |   |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------------|------------|--------|--------|------------------|--------|
|                                                                                                                                                                              |   |   |   | **2007**     |       |   |   | **2006**         |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **ASSETS**                                                                                                                                                                        |   |   |   |         |       |   |   |             |   |   |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **Current Assets**                                                                                                                                                                |   |   |   |         |       |   |   |             |   |   |   |
| Cash                                                                                                                                                                              |   |   |   | $            | 4,168,557  |   |   |             | $      | 8,583,680 |   |
| Trade accounts receivable                                                                                                                                                         |   |   |   |         | 5,686      |   |   |             |   | 2,776 |   |
| VAT recoverable                                                                                                                                                                   |   |   |   |         | 188,634    |   |   |             |   | 186,915 |   |
| Inventories                                                                                                                                                                       |   |   |   |         | 428,407    |   |   |             |   | 377,018 |   |
| Prepaid expenses and other current assets                                                                                                                                         |   |   |   |         | 279,451    |   |   |             |   | 139,293 |   |
| Deferred compensation                                                                                                                                                             |   |   |   |         | 483,766    |   |   |             |   | 757,920 |   |
| **Total Current Assets**                                                                                                                                                          |   |   |   |         | 5,554,501  |   |   |             |   | 10,047,602 |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| Property, plant and mineral interests (net of                            accumulateddepreciation of $198,635 and $144,030 )                                                       |   |   |   |         | 14,622,565 |   |   |             |   | 13,870,563 |   |
| Non-current deferred compensation                                                                                                                                                 |   |   |   |         | 467,234    |   |   |             |   | 1,202,587 |   |
| Other assets                                                                                                                                                                      |   |   |   |         | 416,940    |   |   |             |   | 169,130 |   |
| **Total Assets**                                                                                                                                                                  |   |   |   | $            | 21,061,240 |   |   |             | $      | 25,289,882 |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’                            EQUITY**                                                                                                         |   |   |   |         |       |   |   |             |   |   |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **Current Liabilities**                                                                                                                                                           |   |   |   |         |       |   |   |             |   |   |   |
| Accounts payable                                                                                                                                                                  |   |   |   | $            | 726,470    |   |   |             | $      | 530,665 |   |
| Accrued expenses                                                                                                                                                                  |   |   |   |         | 245,953    |   |   |             |   | 274,739 |   |
| Due to related party                                                                                                                                                              |   |   |   |         | 4,665      |   |   |             |   | 9,644 |   |
| **Total Current Liabilities**                                                                                                                                                     |   |   |   |         | 977,088    |   |   |             |   | 815,048 |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| Deferred tax liabilities                                                                                                                                                          |   |   |   |         | (597,666   | )      |   |             |   | 488,277 |   |
| Asset retirement obligation                                                                                                                                                       |   |   |   |         | 1,028,484  |   |   |             |   | 951,355 |   |
| **Total Liabilities**                                                                                                                                                             |   |   |   |         | 1,407,906  |   |   |             |   | 2,254,680 |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **Shareholders’ Equity**                                                                                                                                                    |   |   |   |         |       |   |   |             |   |   |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| Preferred stock; $0.001 par value, 20,000,000 shares                            authorized, noshares outstanding                                                                  |   |   |   |         | —    |   |   |             |   | — |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| Common stock; $0.001 par value, 150,000,000 shares                            authorized, and124,750,239 and 125,172,011 shares issued and                            outstanding |   |   |   |         | 124,750    |   |   |             |   | 125,172 |   |
| Additional paid-in capital                                                                                                                                                        |   |   |   |         | 28,203,239 |   |   |             |   | 29,025,272 |   |
| Accumulated deficit                                                                                                                                                               |   |   |   |         | (8,613,112 | )      |   |             |   | (6,085,026 | ) |
| Accumulated other comprehensive loss                                                                                                                                              |   |   |   |         | (61,543    | )      |   |             |   | (30,216 | ) |
| **Total Shareholders’ Equity**                                                                                                                                              |   |   |   |         | 19,653,334 |   |   |             |   | 23,035,202 |   |
|                                                                                                                                                                              |   |   |   |         |       |   |   |             |   |   |   |
| **Total Liabilities and Shareholders’                            Equity**                                                                                                   |   |   |   | $            | 21,061,240 |   |   |             | $      | 25,289,882 |   |

 

 

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

 

3

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

 

|                                                                         |   |   |   | **For the three months ended** |       | **For the six months ended** |   |
|------------------------------------------------------------------------------|--------|--------|--------|--------------------------------|------------|------------------------------|--------|
|                                                                         |   |   |   | **June 30,**                   |       | **June 30,**                 |   |
|                                                                         |   |   |   | **2007**                       |       |                         |   | **2006** |   | **2007** |   |   |   | **2006** |   |
| **Revenue**                                                                  |   |   |   | **$**                          | **36,655** |                         |   |   | **$** | **4,885** |   | **$** | **36,655** |   |   |   | **$** | **69,527** |   |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Operating Expenses**                                                       |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product sold                                                         |   |   |   |                           | 34,800     |                         |   |   |   | 36,461 |   |   | 34,800 |   |   |   |   | 65,871 |   |
| General and administrative expenses                                          |   |   |   |                           | 1,437,371  |                         |   |   |   | 564,550 |   |   | 2,693,233 |   |   |   |   | 922,088 |   |
| Research and development costs                                               |   |   |   |                           | —    |                         |   |   |   | 93,402 |   |   | — |   |   |   |   | 386,411 |   |
| Exploratory costs                                                            |   |   |   |                           | 561,608    |                         |   |   |   | 57,336 |   |   | 1,395,804 |   |   |   |   | 118,265 |   |
| Accretion expense on asset retirement                            obligations |   |   |   |                           | 20,458     |                         |   |   |   | 18,599 |   |   | 40,369 |   |   |   |   | 36,143 |   |
| Depreciation expense                                                         |   |   |   |                           | 40,115     |                         |   |   |   | 17,570 |   |   | 66,781 |   |   |   |   | 35,728 |   |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total Operating Expenses**                                                 |   |   |   |                           | 2,094,352  |                         |   |   |   | 787,918 |   |   | 4,230,987 |   |   |   |   | 1,564,506 |   |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loss From Operations**                                                     |   |   |   |                           | (2,057,697 | )                            |   |   |   | (783,033 | ) |   | (4,194,332 | ) |   |   |   | (1,494,979 | ) |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other Income (Expense)**                                                   |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                             |   |   |   |                           | —    |                         |   |   |   | (300,314 | ) |   | (1,018 | ) |   |   |   | (365,212 | ) |
| Grant compensation expense                                                   |   |   |   |                           | 2,427      |                         |   |   |   | — |   |   | (187,052 | ) |   |   |   | — |   |
| Translation adjustment                                                       |   |   |   |                           | (55,663    | )                            |   |   |   | (81,748 | ) |   | (139,387 | ) |   |   |   | (125,210 | ) |
| Exchange loss                                                                |   |   |   |                           | 211,847    |                         |   |   |   | 650,093 |   |   | 691,979 |   |   |   |   | 890,148 |   |
| Other income (expense)                                                       |   |   |   |                           | 20,583     |                         |   |   |   | (35,764 | ) |   | 214,217 |   |   |   |   | (71,711 | ) |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Other Expense**                                                        |   |   |   |                           | 179,194    |                         |   |   |   | 232,267 |   |   | 578,739 |   |   |   |   | 328,015 |   |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Loss Before Taxes**                                                    |   |   |   |                           | (1,878,503 | )                            |   |   |   | (550,766 | ) |   | (3,615,593 | ) |   |   |   | (1,166,964 | ) |
| Deferred tax benefit                                                         |   |   |   |                           | 572,196    |                         |   |   |   | — |   |   | 1,087,507 |   |   |   |   | — |   |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Loss**                                                                 |   |   |   | $                              | (1,306,307 | )                            |   |   | $ | (550,766 | ) | $ | (2,528,086 | ) |   |   | $ | (1,166,964 | ) |
|                                                                         |   |   |   |                           |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic Loss per Common Share**                                              |   |   |   | $                              | (0.01      | )                            |   |   | $ | (0.01 | ) | $ | (0.02 | ) |   |   | $ | (0.01 | ) |

 

| **Weighted-Average Shares used in** |   |   |   |   |        |   |   |   |   |       |   |   |        |   |   |   |   |       |   |
|-------------------------------------|--------|--------|--------|--------|-------------|--------|--------|--------|--------|------------|--------|--------|-------------|--------|--------|--------|--------|------------|--------|
| **Basic Loss per Common Share**     |   |   |   |   | 115,517,459 |   |   |   |   | 10,088,888 |   |   | 115,517,459 |   |   |   |   | 10,088,888 |   |

 

 

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

 

4

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

 

| **For the Six Months Ended June 30,**                                                                      |   |   |   | **2007** |       |   |   | **2006** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|------------|--------|--------|----------|--------|
| **Cash Flows from Operating Activities**                                                                   |   |   |   |     |       |   |   |     |   |   |   |
| Net loss                                                                                                   |   |   |   | $        | (2,528,086 | )      |   |     | $      | (1,166,964 | ) |
| Adjustments to reconcile net loss to net cash provided                            by operating activities: |   |   |   |     |       |   |   |     |   |   |   |
| Depreciation and amortization                                                                              |   |   |   |     | 66,781     |   |   |     |   | 23,216 |   |
| Accretion expense on asset retirement                            obligations                               |   |   |   |     | 40,369     |   |   |     |   | 36,143 |   |
| Interest expense from debt discount                                                                        |   |   |   |     | —    |   |   |     |   | 5,020 |   |
| Deferred tax benefit                                                                                       |   |   |   |     | (1,112,615 | )      |   |     |   | — |   |
| Foreign currency exchange gain and translation                            adjustment                       |   |   |   |     | (33,713    | )      |   |     |   | (890,148 | ) |
| Loss on disposal of property and equipment                                                                 |   |   |   |     | 147,415    |   |   |     |   | 40,166 |   |
| Stock grant compensation expense                                                                           |   |   |   |     | 212,160    |   |   |     |   | — |   |
| Change in operating assets and liabilities:                                                                |   |   |   |     |       |   |   |     |   |   |   |
| Trade accounts receivable                                                                                  |   |   |   |     | (3,341     | )      |   |     |   | 14,298 |   |
| Inventories                                                                                                |   |   |   |     | (36,630    | )      |   |     |   | (10,108 | ) |
| VAT recoverable                                                                                            |   |   |   |     | 5,410      |   |   |     |   | — |   |
| Prepaid expenses and other current assets                                                                  |   |   |   |     | (463,696   | )      |   |     |   | (357,687 | ) |
| Accounts payable                                                                                           |   |   |   |     | 187,034    |   |   |     |   | 229,263 |   |
| Accrued expenses                                                                                           |   |   |   |     | (625,373   | )      |   |     |   | — |   |
| Deferred grant revenue                                                                                     |   |   |   |     | —    |   |   |     |   | 2,415 |   |
| **Net Cash From Operating Activities**                                                                     |   |   |   |     | (4,144,285 | )      |   |     |   | (2,074,386 | ) |
|                                                                                                       |   |   |   |     |       |   |   |     |   |   |   |
| **Cash Flows from Investing Activities**                                                                   |   |   |   |     |       |   |   |     |   |   |   |
| Purchase of property and equipment                                                                         |   |   |   |     | (434,744   | )      |   |     |   | (1,940,755 | ) |
| Purchase of intangible assets                                                                              |   |   |   |     | (7,016     | )      |   |     |   | — |   |
| Restricted cash                                                                                            |   |   |   |     | 100,000    |   |   |     |   | — |   |
| Change in related party receivables/payables                                                               |   |   |   |     | (29,877    | )      |   |     |   | (416,880 | ) |
| **Net Cash From Investing Activities**                                                                     |   |   |   |     | (371,637   | )      |   |     |   | (2,357,635 | ) |
|                                                                                                       |   |   |   |     |       |   |   |     |   |   |   |
| **Cash Flows from Financing Activities**                                                                   |   |   |   |     |       |   |   |     |   |   |   |
| Proceeds from notes payable                                                                                |   |   |   |     | —    |   |   |     |   | 3,968,114 |   |
| Payments on notes payable                                                                                  |   |   |   |     | —    |   |   |     |   | (481,558 | ) |
| Proceeds from notes payable related parties                                                                |   |   |   |     | —    |   |   |     |   | 1,008,031 |   |
| **Net Cash From Financing Activities**                                                                     |   |   |   |     | —    |   |   |     |   | 4,494,587 |   |
|                                                                                                       |   |   |   |     |       |   |   |     |   |   |   |
| **Effect of Exchange Rate Changes on                            Cash**                                     |   |   |   |     | 100,799    |   |   |     |   | 128,803 |   |
|                                                                                                       |   |   |   |     |       |   |   |     |   |   |   |
| **Net Increase in Cash**                                                                                   |   |   |   |     | (4,415,123 | )      |   |     |   | 191,369 |   |
| **Cash at Beginning of Period**                                                                            |   |   |   |     | 8,583,680  |   |   |     |   | 89,366 |   |
| **Cash at End of Period**                                                                                  |   |   |   | $        | 4,168,557  |   |   |     | $      | 280,735 |   |
|                                                                                                       |   |   |   |     |       |   |   |     |   |   |   |
| **Supplemental Disclosure of Cash Flow                            Information**                            |   |   |   |     |       |   |   |     |   |   |   |
| Forfeiture of an executive  officer’s                            shares                         |   |   |   | $        | 822,455    |   |   |     |   |   |   |

 

 

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

 

5

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (UNAUDITED)**

 

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

***Interim Financial Information***— The accompanying unaudited condensed 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-KSB filed for the year            ended December 31, 2006. Operating results for the six-month period ended June 30, 2007            are not necessarily indicative of the results that may be expected for the year ending            December 31, 2007.

 

**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 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 and to the date of disposal.

 

6

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (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.

 

***Currency Translation***– The            consolidated financial statements are presented in U.S. dollars. The functional            currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars            for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.            dollars at the average exchange rates during the reporting period. Non-monetary assets            and liabilities of Kaznickel 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. Translation differences            are included in results of operations. 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.

 

**Nature of Business**

 

The            Company is engaged in the acquisition, exploration and production 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 subsoil use contract and license is for exploration and production of            cobalt and nickel ores and is valid through February 26, 2026. KKM holds exploration            and production subsoil use contracts and licenses from the government of Kazakhstan to            a 575,756 acre parcel, located approximately 130 kilometers northeast of Aktobe,            Kazakhstan. This deposit is referred to as the Kempirsai deposit. The subsoil use            contracts and 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 Ministry of Energy and Minerals Resources            (“MEMR”) of the Republic of Kazakhstan. KKM also holds a subsoil use            contract and a license to explore for and produce Mamyt brown coal from a deposit            located within 40 kilometers of its cobalt and nickel deposit. This subsoil use            contract and license expires on December 11, 2018 with further possible            extensions.

 

***Business Condition***– The            Company has no proven mineral reserves that conform to U.S. accounting standards and            has had only limited nickel ore and Mamyt brown coal production from its Kempirsai            deposit since its acquisition on May 31, 2005. The Gornostai deposit has not yet            entered the development stage with respect to its mineral interests and has no            production. There has been only limited revenue from the Kempirsai operations, and the            Company has incurred net losses of ($2,528,086) and ($1,166,964) for the six months            ended June 30, 2007 and 2006, respectively. Current assets exceeded current liabilities            by $4,577,413 at June 30, 2007. Management expects that the Company will need            significant additional capital to fund construction of a processing plant in 2007-2008.            The Company anticipates it will need to raise additional capital through the sale of            its equity securities or debt securities.  Certain shareholders  of the             Company have indicated a  willingness  to provide the

 

7

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (UNAUDITED)**

 

Company a line of credit. The Company has no formal agreement with said            shareholders to provide this line of credit and the shareholders are under no            obligation to enter into any agreement or make available any funds to the            Company.

 

***Kempirsai Production Stage***–            The Kempirsai, or KKM, operations are considered to be in the production            stage.

 

***Gornostai Exploration Stage***–            The Gornostai, or Kaznickel, operations are considered to be in the exploration stage.            Since its inception on March 4, 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.

 

**Corrected prior periods financials**

 

During the course of preparing the financial statements for the six            months ended June 30, 2007, the Company identified certain prior period misstatements            whose impact was not material, either individually or in aggregate, to the            Company’s financial statements for the year ended December 31, 2006 or the period            ended March 31, 2007. However, these misstatements were considered material to the            Company’s financial statements for the six months ended June 30, 2007. As a            result, the Company corrected the financial statements for the year ended December 31,            2006 and for the period ended March 31, 2007. The corrected statements of income as of            December 31, 2006 and March 31, 2007 are included in these financial statements. These            misstatements relate to recognizing an incorrect amount of deferred compensation. The            effect of correcting these misstatements resulted in an increase in deferred            compensation expense, an increase in accumulated deficit, and an increase in net loss            of $48,740 and $60,924 for the year ended December 31, 2006 and the period ended March            31, 2007, respectively.

 

**NOTE 2 - CASH**

 

Cash            consists of the following:

 

|                     |   | **June 30,** |          |   |   | **December 31,** |   |
|--------------------------|--------|--------------|---------------|--------|--------|------------------|--------|
|                     |   | **2007**     |          |   |   | **2006**         |   |
| Current accounts (USD)   |   | $            | 411,847       |   |   |             | $      | 479,947 |   |
| Current accounts (Tenge) |   |         | 54,318        |   |   |             |   | 38,379 |   |
| Bank deposit (USD)       |   |         | 1,240,832     |   |   |             |   | 8,065,354 |   |
| Bank deposit (Tenge)     |   |         | 2,461,560     |   |   |             |   | — |   |
| **Total**                |   | **$**        | **4,168,557** |   |   |             | **$**  | **8,583,680** |   |

 

Bank            deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits            earn interest from 3% to 8% annually. Bank deposits include cash of $108,000 restricted            in its use until December 20, 2007.

 

8

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (UNAUDITED)**

 

**NOTE            3 – INVENTORY**

 

Inventory consists of the            following**:**

 

|                |   |   |   | **June 30,** |        |   |   | **December 31,** |   |
|---------------------|--------|--------|--------|--------------|-------------|--------|--------|------------------|--------|
|                |   |   |   | **2007**     |        |   |   | **2006**         |   |
| Ore                 |   |   |   | $            | 146,268     |   |   |             | $      | 109,058 |   |
| Fuel                |   |   |   |         | 154,808     |   |   |             |   | 15,254 |   |
| Materials           |   |   |   |         | 127,893     |   |   |             |   | 183,360 |   |
| Spare parts         |   |   |   |         | 63,647      |   |   |             |   | 69,346 |   |
| Obsolesence reserve |   |   |   |         | (64,209     | )      |   |             |   | — |   |
|                |   |   |   | **$**        | **428,407** |   |   |             | **$**  | **377,018** |   |

 

Ore            represents 124,798 tons and 108,707 tons of the 0.85% nickel ore located in the ore            warehouse as of June 30, 2007 and December 31, 2006, respectively.

 

Brown coal represents 20,351 tons and 21,028 tons located in the coal            warehouse as of June 30, 2007 and December 31, 2006, respectively.

 

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

 

Property, plant and mineral interests consist of the            following:

 

|                             |   |   |   | **June 30,** |           |   |   | **December 31,** |   |
|----------------------------------|--------|--------|--------|--------------|----------------|--------|--------|------------------|--------|
|                             |   |   |   | **2007**     |           |   |   | **2006**         |   |
| Buildings                        |   |   |   | $            | 2,292,023      |   |   |             | $      | 2,156,326 |   |
| Machinery and equipment          |   |   |   |         | 3,783,083      |   |   |             |   | 3,474,858 |   |
| Other fixed assets               |   |   |   |         | 113,557        |   |   |             |   | 69,665 |   |
| Unproved mineral interests - net |   |   |   |         | 8,632,537      |   |   |             |   | 8,313,744 |   |
|                             |   |   |   |         | 14,821,200     |   |   |             |   | 14,014,593 |   |
| Accumulated depreciation         |   |   |   |         | (198,635       | )      |   |             |   | (144,030 | ) |
| Net Property and Equipment       |   |   |   | **$**        | **14,622,565** |   |   |             | **$**  | **13,870,563** |   |

 

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.

 

9

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (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. By virtue of the Contract, Kaznickel acquired the            right to exploit the mineral property including the right to explore, develop and            produce the nickel and cobalt mineral resources on the Deposit through February 26,            2026. The Company has the right to re-negotiate the contract at that time for an            additional 30 years. The government of Kazakhstan retains the title to the property;            however, the Company’s mineral interests are considered to be tangible assets.            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 provides the Company certain rights and also imposes certain obligations and            commitments. The rights include exploration through February 2008, 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. Significant rights, obligations and            commitments of the Contract include monetary commitments for exploration of $1,576,480            in 2007, and expenditures to support social projects amounting to $300,000 during the            production stage. In addition, the Company was required to pay a fee of $2,000 upon            award of the Contract, and a fee for the use of Kazakh owned technical data of $735,400            of which $4,179 was paid on award of the Contract and $731,221 will be due upon a            finding of commercial deposits. Royalties of 0.5% of ores extracted and sold will be            required. The Contract subjects the Company to pay regular income tax of 30 percent and            requires an excess profits tax of 15 to 60 percent if its net profits exceed 20 percent            of gross profit. Obligations also include the establishment and funding of a            reclamation fund that includes the cost of removing buildings and equipment used in the            Deposit area. The Company is also required to comply with Kazakh environmental laws and            regulations.

 

***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 Ministry of Energy and Minerals Resources of the Republic of Kazakhstan. 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 the reaching of 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 asset retirement cost is depleted over the            life

 

10

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (UNAUDITED)**

 

of            the contract from the date of acquisition. 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 – OTHER ASSETS**

 

As of            June 30, 2007 other assets primarily represented deferred stripping costs of $164,351            related to the Mamyt brown coal deposit and stripping costs of $187,724 related to the            Kempirsai nickel ore deposit which will be charged to costs when the brown coal and            nickel ore is produced and sold.

 

**NOTE            6 - COMMITMENTS AND CONTINGENCIES**

 

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

 

***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 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.

 

***Tax Matters***– The local and            national tax environment in the Republic of Kazakhstan is subject to change and            inconsistent application, interpretation and enforcement. Non-compliance with            Kazakhstan laws and regulations, as interpreted by the Kazakh authorities, can lead to            the imposition of fines, penalties and interest.

 

***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 provide for 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,  the  Company  is   required  to             repay   the  Republic  of

 

11

 

----

**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2007 (UNAUDITED)**

 

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 $731,221 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 and development rights in February 2026. The            Company anticipates it will apply for a commercial production contract within the next            1-3 years. Of course, 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 subsoil use contracts and 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 subsoil use contracts and            licenses.

 

***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, 2007 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 1,575 square feet of office space. The lease agreement expires on            December 31, 2007. In April 2007, our monthly lease payment increased from $5,250 to            $6,125. Under the terms of the lease agreement, the owner of the space could terminate            the lease at any time and require the Company to vacate the premises.

 

Kaznickel LLP rents an office (approximately 1,840 square feet) in            Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the            Gornostai deposit. Kaznickel also rents approximately 4,450 square feet of            warehouse space in Semei for $4,000 per month. Kaznickel uses this space to store test            ore. These spaces are leased on a year-to-year basis. Also, Kaznickel LLP rents an            office (approximately 350 square feet) in Astana, Kazakhstan, for approximately $1,600            per month. This lease agreement terminates August 1, 2007 and will not be renewed            as Kaznickel is closing its Astana office effective August 1, 2007.

 

In            April 2007, KKM increased the size of its offices in Aktobe, Kazakhstan from 1,260            square feet to 1,900 square feet. As a result, KKM’s monthly lease payment            increased from $4,000 per month to $5,400 per month. This space is leased on a            year-to-year basis.

 

**NOTE            7 - STOCK GRANT FORFEITURE**

 

The            Company's president and CEO resigned in May 2007 and as a result, his shares of stock,            in connection with the stock grant of October 2006, were forfeited. The expense related            to the amortization of this deferred compensation which was recorded in the first            quarter of 2007, was reversed in the second quarter. Common stock and additional paid            in capital were also adjusted to eliminate his shares.

 

12

 

----

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

 

For a complete understanding, this Management’s Discussion and            Analysis should be read in conjunction with the*Financial            Statements*and*Notes to the            Financial Statements*contained in this Form 10-Q and our Form            10-KSB for the year ended December 31, 2006.

 

**Forward Looking Information and Cautionary Statement**

 

Certain statements contained herein including, but not limited to those            relating to our plan of operations, future potential revenue, future expenses, future            development of our mineral properties, the development and commercial viability of our            processing technology, our ability to obtain future governmental approvals, expansion            of our operations, our ability to generate cash flow, future demand for nickel, cobalt            and brown coal, future commodity prices, integration of new technologies into            operations, credit facilities, future capital expenditures and working capital,            sufficiency of future working capital, borrowings and capital resources and liquidity,            expectations of timing, satisfaction of contingencies, the impact of any change in            accounting policies on our financial statements, future acquisitions,            management’s assessment of internal control over financial reporting, financial            results, opportunities, growth, business plans and strategy and other statements that            are not historical facts contained in this report are forward-looking statements. When            used in this document, words like            “*believe*,”            “*expect*,”            “*project*,”            “*intend*,”            “*estimate*,”            “*budget*,”            “*plan*,”            “*forecast*,”            “*predict*,”            “*may*,”            “*will*,”            “*could*,”            “*should*,” or            “*anticipates*” and            similar expressions or the negative thereof, or other variations thereon, or comparable            terminology, or discussions of strategy that involve risk and uncertainties are also            intended to identify forward-looking statements. Such statements involve known and            unknown risks, uncertainties, and other factors that may cause the actual results,            performance or achievements of the Company or industry to be materially different from            any future results, performance or achievements expressed or implied by such            forward-looking statements. Such factors include, but are not limited to, market            factors, market prices (including regional basis differentials) of nickel, cobalt and            brown coal, results of future exploration and extraction activities, future production            and costs, unsettled political conditions, civil unrest and governmental actions,            foreign currency fluctuations, and environmental and labor laws and other factors            detailed herein. Given these uncertainties, prospective investors are cautioned not to            place undue reliance on such forward-looking statements. These forward-looking            statements are based on current expectations, and we assume no obligation to update            this information. We undertake no obligation to publicly update or revise any            forward-looking statement, whether as a result of new information, future events or            otherwise.

 

|   | **Overview** |
|--------|--------------|

 

We are engaged in the exploration and mining of nickel, cobalt and brown            coal in the Republic of Kazakhstan. We carry out our operations through two            wholly-owned subsidiaries, Kaznickel LLP (“Kaznickel”) and Kyzyl Kain Mamyt            LLP (“KKM”).

 

The primary asset of Kaznickel is a subsoil use contract issued by the            government of the Republic of Kazakhstan. This contract grants Kaznickel the exclusive            right to explore for and engage in test production of nickel, cobalt and other minerals            in a 12,232 acre area in northeastern Kazakhstan referred to herein as the Gornostai            deposit.

 

13

----

 

KKM holds a subsoil use contract for a 575,756 acre territory in            northwestern Kazakhstan referred to herein as the Kempirsai deposit. The contract            grants KKM the right to extract and process nickel and cobalt ore from the Kempirsai            deposit, which is comprised of the Kara-Obinskoe and Novo-Shandashinskoe deposits. KKM            also holds a subsoil use contract to produce brown coal from the Mamyt coal deposit,            which is located within 40 kilometers of the Kempirsai deposit.

             

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

and

Production | 1349                                                    | Exploration period expires

Feb. 26, 2008 unless extended.

Production period expires Feb. 26, 2026 unless                            extended. |
|                  |                     |                    |                         |                                                    |                                                                                                                                            |
| Kempirsai             | 575,756 acres            | Nickel and cobalt ore   | Production                   | MG #420

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

             

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. We are            currently in the third year of a three-year work program. Under this program, we are            required to engage in an exploratory drilling program designed to identify and evaluate            the mineral resources contained within the contract territory. In 2007, we are required            to drill test holes totaling at least 12,961 meters. We plan to drill approximately 615            test holes totaling 15,700 meters during 2007. As of the six-month period end, we have            drilled a total of 15,020 meters (603 holes). We completed our planned exploratory            drilling program in July 2007.

             

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.

 

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.

 

14

 

----

 

We also have minimum work program requirements under our subsoil use            contracts for the Kempirsai nickel ore and Mamyt brown coal deposits. Our current work            program calls for us to extract the following amounts of ore and brown coal:

 

|   | **Tons of Ore** | **Tons of Brown Coal** |
|--------|-----------------|------------------------|
| 2007   | 175,000         | 60,000                 |
| 2008   | 350,000         | 200,000                |
| 2009   | 1,000,000       | 200,000                |
| 2010   | 1,000,000       | 200,000                |
| 2011   | 1,000,000       | 200,000                |
| 2012   |            | 200,000                |
| 2013   |            | 200,000                |
| 2014   |            | 200,000                |
| 2015   |            | 200,000                |
| 2016   |            | 200,000                |
| 2017   |            | 200,000                |
| 2018   |            | 200,000                |

             

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 Gornostai or            Kempirsai deposits to process the ores we will mine. We are currently investigating the            viability of constructing a pyrometallurigcal processing plant at our Kempirsai            deposit. We are also in the process of testing and developing a proprietary            hydrochlorination processing technology. We have retained the services of an            independent engineering firm to conduct a pre-feasibility study reviewing different            technologies to determine the best processing technology, optimal processing capacity,            construction costs and timelines, etc. to allow us to determine the type of processing            facility we will construct at the Kempirsai deposit. We expect the pre-feasibility            study to be completed by the end of 2007.

 

**Results of Operations**

 

Since inception we have generated limited revenue from operations. We            have spent millions of dollars to date and anticipate that we will spend significant            additional capital before we begin to realize significant revenue from            operations.

             

In July 2006 we realized net proceeds of approximately $26,600,000            through a private placement of our equity securities. As of June 30, 2007, we had spent            approximately $22,400,000 of those funds. Approximately $12,200,000 was used to repay            loans, $2,500,000 was used to meet our minimum working program obligations,            approximately $2,200,000 was spent developing our hydrochlorination technology and            $5,500,000 was used for working capital. At June 30, 2007, we had cash on hand of            $4,168,557 We expect the cash on hand will be sufficient to fund our operations through            the end of the current fiscal year. We anticipate the need to seek significant            additional funding by the end of fiscal 2007 to continue our operations and our efforts            to exploit our

 

15

 

----

mineral            resources. There is no assurance that we will be able to obtain additional funding in            the future on favorable terms, or at all. At this time, we have no commitments from any            parties to provide us additional funding.

 

*Three months ended June 30, 2007 compared to the three months            ended June 30, 2006*

             

|   | Revenue |
|--------|---------|

 

During the three months period ended June 30, 2007, we earned revenue of            $36,655 primarily from the sale of ore. By comparison during the second quarter 2006 we            realized $4,885 in revenue from coal sales. We do not expect to realize significant            revenue from operations during the remainder of the current fiscal year.

 

|   | Cost of Products Sold |
|--------|-----------------------|

 

We realized cost of ore sold of $34,800 during second quarter 2007. By            comparison during the second quarter 2006 we realized $36,461 in cost of coal sold. As            we do not expect to engage in significant production during 2007, we do not expect to            incur significant cost of products sold.

 

|   | General and Administrative Expenses |
|--------|-------------------------------------|

             

Our general and administrative expenses during the three months ended            June 30, 2007 increased to $1,437,371 from $564,550 during the three months ended June            30, 2006. This increase in general and administrative expenses in the second quarter            2007 is mainly attributable to a $340,000 increased salary expense and related employee            taxes resulting from an increase in the number of personnel we employ and salary            increases for existing employees, as KKM hired a number of people to carry out            development and testing of the pilot plant, additional geologists, metallurgists and            ecology supervisors. We also hired additional in-house accounting, finance, legal and            information technology personnel. We do not expect to hire a significant number of            additional employees until such time as operations or funding so justify. Therefore, we            do not expect to experience significant increases in salaries and related taxes during            the remainder of the 2007 fiscal year. Also, during second quarter we experienced a            $270,000 increase in transportation and current repair services related to            modernization works at KKM’s facilities. Another contributing factor to the            increase in general and administrative expenses was a $147,000 increase in professional            fees, primarily attributable to increased legal and accounting fees and costs            associated with a resource estimation prepared by a third party consulting firm. We            believe this increase in professional fees was more a matter of timing and the one-time            cost of the resource estimation than a trend and we expect professional fees to return            to more traditional levels in upcoming quarters.

             

Research and Development Costs

 

We engaged in no research and development in connection with the            development and testing of our hydrochlorination processing technology during the            second quarter 2007. By comparison, during the second quarter 2006 we spent $93,402 in            research and development costs, primarily in connection with the development of our            hydrochlorination processing pilot plant. We have budgeted and expect to spend $200,000            for testing of our pilot plant by the end of 2007.

 

16

 

----

|   | Exploratory Costs |
|--------|-------------------|

 

As a result of our aggressive exploratory drilling program, during the            three months ended June 30, 2007 we completed drilling of 250 test holes (246 test            holes in the South section of the Gornostai deposit and 4 test holes in the North            section of the Gornostai deposit) we incurred $561,608 in exploratory costs during the            three months ended June 30, 2007. By comparison, during the three months ended June 30,            2006, we had drilled 53 test holes in the South section of the Gornostai deposit and            incurred exploratory costs of $57,336. Our exploratory drilling program for our 2007            fiscal year calls for us to drill a total of 615 test holes to an aggregate depth of            15,700 meters. In July 2007 we completed our exploratory drilling program for            2007.

 

|   | Accretion Expense |
|--------|-------------------|

             

Accretion expense increased $1,859 during the three months ended June            30, 2007. Because we do not expect to engage in significant mining and production            activities during 2007, we believe accretion expense will continue at rates consistent            with those realized during the quarter ended June 30, 2007 through the balance of the            current fiscal year.

             

|   | Depreciation Expenses |
|--------|-----------------------|

             

During the second quarter 2007 depreciation expenses increased to            $40,115 from $17,570 during the second quarter 2006. This increase resulted primarily            from equipment acquisitions made during the past year. We believe depreciation expense            will continue at rates consistent with those realized during the quarter ended June 30,            2007 through the balance of the current fiscal year.

             

|   | Total Operating Expenses |
|--------|--------------------------|

             

As a result of the 155% increase in general and administrative expense            and the 880% increase in exploratory costs, which were only partially offset by a            decrease in research and development costs, our total operating expenses increased from            $787,918 during the three months ended June 30, 2006 to $2,094,352 during three months            ended June 30, 2007. We expect total operating expenses during the balance of 2007 to            continue to be significantly higher as compared to 2006.

             

|   | Loss from Operations |
|--------|----------------------|

             

During the three months ended June 30, 2007 we experienced a loss from            operations of $2,057,697 compared to a loss of $783,033 during the three months ended            June 30, 2006. This increase in loss from operations during the second quarter 2007 is            the result of the increase in total operating expenses during the second quarter 2007.            We expect we will continue to generate losses from operations until such time as we            begin significant ore production.

             

|   | Net Loss |
|--------|----------|

             

For the foregoing reasons, during the three months ended June 30, 2007            we experienced a net loss of $1,306,307 compared to a net loss of $550,766 during the            three months ended June 30, 2006. We anticipate we

 

17

 

----

will            continue to experience increasing net losses until we are able to engage in significant            nickel and cobalt ore extraction, processing and sales. We do not expect to be engaged            in significant ore extraction and processing prior to the 2009 fiscal year.

             

*Six months ended June 30, 2007 compared to the six months ended            June 30, 2006*

             

|   | Revenue |
|--------|---------|

 

During the six months ended June 30, 2007 we realized $36,655 in revenue            from the sale of ore. By comparison, during the six months ended June 30, 2006 we            realized earned revenue of $69,527. We do not anticipate realizing significant revenue            during 2007.

 

|   | Cost of Products Sold |
|--------|-----------------------|

 

We realized cost of ore sold of $34,800 during the first half of 2007.            By comparison during the first half of 2006 we realized $65,871 in cost of coal sold.            As we do not expect to engage in significant production during 2007, we do not expect            to incur significant cost of products sold.

 

|   | General and Administrative Expenses |
|--------|-------------------------------------|

             

Our general and administrative expenses during the six months ended June            30, 2007 increased to $2,693,233 from $922,088 during the six month ended June 30,            2006. This increase in general and administrative expenses during the six month ended            June 30, 2007 is mainly attributable to a $883,000 increase salary and related taxes as            a result of an increase in the number of personnel we employ and salary increases for            existing employees, as KKM hired a number of personnel to carry out development and            testing of the pilot plant, additional geologists, metallurgists and ecology            supervisors. We also hired additional in-house accounting, finance, legal and            information technology personnel. We do not expect to hire a significant number of            additional employees until such time as operations or funding so justify. Therefore, we            do not expect to experience significant increases in salaries and related taxes during            the remainder of the 2007 fiscal year. Also, during second quarter we had a $270,000            increase in transportation and repair services related to modernization works at            KKM’s facilities. Another contributing factor to the increase in general and            administrative expenses was a $447,000 increase in professional fees, primarily            attributable to increased legal and accounting fees and costs associated with a            resource estimation prepared by a third party consulting firm. We believe this increase            in professional fees was more a matter of timing and the one-time cost of the resource            estimation than a trend and we expect professional fees to return to more traditional            levels in upcoming quarters.

             

Research and Development Costs

 

We engaged in no research and development in connection with the            development and testing of our hydrochlorination processing technology during the six            months ended June 30, 2007. During the six months ended June 30, 2006 we spent $386,411            in research and development costs, primarily in connection with the development of our            pilot plant. During the 2007 fiscal year we have budgeted and planned to spend $200,000            in testing our pilot plant.

 

18

 

----

|   | Exploratory Costs |
|--------|-------------------|

 

As a result of our aggressive exploratory drilling program for 2007,            during the first six months of 2007 we completed drilling of 603 test holes (599 test            holes in the South section and 4 test holes in the North section of the Gornostai            deposit) to an aggregate depth of 15,020 meters (14,720 meters in the South section and            300 in the North section). We incurred $1,395,804 in exploratory drilling costs through            June 30, 2007. By comparison, during the six months ended June 30, 2006, we drilled 91            test holes in the South section the Gornostai deposit and incurred exploratory costs of            $118,265. Our exploratory drilling program for our 2007 fiscal year calls for us to            drill a total of 615 test holes to an aggregate depth of 15,700 meters. We completed            our exploratory drilling program in July 2007.

 

|   | Accretion Expense |
|--------|-------------------|

             

Accretion expense increased $4,226 during the six months ended June 30,            2007. Because we do not expect to engage in significant mining and production            activities during 2007, we believe accretion expense will continue at rates consistent            with those realized during the six months ended June 30, 2007 through the balance of            the current fiscal year.

             

|   | Depreciation Expenses |
|--------|-----------------------|

             

During the six months ended June 30, 2007 depreciation expenses            increased to $66,781 from $35,728 during the six months ended June 30, 2006. This            increase resulted primarily from equipment acquisitions made during the past year. We            believe depreciation expense will continue at rates consistent with those realized            during the six months ended June 30, 2007 through the balance of the current fiscal            year.

             

|   | Total Operating Expenses |
|--------|--------------------------|

             

As a result of the 192% increase in general and administrative expense            and the 1,080% increase in exploratory costs, which were only partially offset by a            decrease in research and development costs, our total operating expenses increased from            $1,564,506 during the six months ended June 30, 2006 to $4,230,987 during six months            ended June 30, 2007. We expect total operating expenses during the balance of 2007 to            remain significantly higher as compared to 2006.

             

|   | Loss from Operations |
|--------|----------------------|

             

During the six months ended June 30, 2007 we experienced a loss from            operations of $4,194,332 compared to a loss of $1,494,979 during the six months ended            June 30, 2006. This increase in loss from operations during the first and second            quarters 2007 is the result of the increase total operating expenses and the reduction            in revenue during 2007 as compared to 2006. We expect we will continue to generate            losses from operations until such time as we begin significant ore            production.

 

19

 

----

Net Loss

             

For the foregoing reasons, during the six months ended June 30, 2007 we            experienced a net loss of $2,528,086 compared to a net loss of $1,166,964 during the            six months ended June 30, 2006. We anticipate we will continue to experience increasing            net losses until we are able to engage in significant nickel and cobalt ore extraction,            processing and sales. We do not expect to be engaged in significant ore extraction and            processing prior to the 2009 fiscal year.

 

**Liquidity and Capital Resources**

 

Our capital resources have consisted primarily of funds we have borrowed            from related and non-related parties and funds we raised through a private placement of            our equity securities in July 2006. These funds, however, represent only a portion of            the funds we will need to complete exploration and development and move to commercial            production. As of June 30, 2007, we have $4,168,557 of the approximately $26,600,000 in            net proceeds we realized from the private placement. We have used the money raised in            the private offering to reduce debt, acquire equipment, continue exploration and fund            operations. We anticipate the need for substantial additional capital resources, which            will likely consist primarily of funds raised in financing activities or debt, by the            end of fiscal 2007. If we do not obtain additional funding, we will be required to            limit our activities until such time as additional funds are raised.

 

During the six months ended June 30, 2007 and June 30, 2006, cash was            primarily used to fund operations and repay notes payable. See below for additional            discussion and analysis of cash flow.

 

| *For the Six Months Ended June 30*                                             | **2007**                         | **2006**                                             |
|--------------------------------------------------------------------------------|----------------------------------|------------------------------------------------------|
|                                                                           |                             |                                                 |
| Net cash used in operating activities                                          | $  (4,144,285)         | $  (2,074,386)                             |
| Net cash provided by (used in) investing                            activities | (371,637)                        | (2,357,635)                                          |
| Net cash provided by financing activities                                      | -                           | 4,494,587                                       |
| Effect of exchange rate changes on cash                                        | 100,799                     | 128,803                                         |
| **NET (DECREASE) INCREASE IN CASH**                                            | **$**  **(4,415,123)** | **$**     **191,369**  |

 

During the six months ended June 30, 2007net cash            used in operating activities was $4,144,285compared to net cash            used in operating activities of $2,074,386 during the six months ended June 30, 2006.            This increase in net cash used in operating activities is primarily attributable to            increases in salary and related taxes, exploratory costs and professional            fees.

             

During the six months ended June 30, 2007 net cash used in investing            activities was $371,637. By comparison, during the six months ended June 30, 2006 we            used net cash in investing activities of $2,357,635. We used more cash in investing            activity in 2006 primarily resulting from the purchase of equipment for KKM’s            pilot plant.

             

During the six months ended June 30, 2007 no cash was generated in            financing activities compared to net cash provided by financing activities of            $4,494,587 during the six months ended June 30, 2006. This decrease in net cash used in            financing activities is explained by availability of capital from our private            placement.

 

20

 

----

**Plan of Operations**

             

As of June 30, 2007 we had cash on hand of $4,168,557. As discussed            above, we have budgeted to spend all of these funds in operations and development            activities during remaining six months of 2007. Following is a brief description of how            we anticipate allocating our cash on hand during the next six months.

 

***Drilling and core analysis***

 

We allocated approximately $258,750 to the completion of our drilling            and exploration program for the remainder of the 2007 fiscal year. This included            drilling of 360 meters (4 test holes) of the North section and 232 meters (9 test            holes) of the South section of the Gornostai deposit. Drilling of these test holes was            completed in July 2007. Exploration costs include geologist fees and costs for site            supervisors, geological data processors, core sample takers, topographers, site            procurement specialists, etc. We have satisfied our 2007 minimum work program            requirements for the Gornostai deposit. We do not expect to engage in additional            drilling activities during the remainder of 2007. Currently, we are analyzing the            results of our drilling and exploration works in order to prepare and submit an            exploration report to the MEMR for finalizing the reserve estimates and obtaining            permission for commercial production of the nickel ore from the Gornostai            deposit.

             

***Hydrochlorination processing technology testing***

 

During next six months we expect to spend approximately $200,000 for            continued testing at our pilot plant of the mineral concentrating capability of our            proprietary hydrochlorination processing technology and to formulate required            procedures, protocols and operational guidelines.

 

***Feasibility Study***

 

We anticipate spending approximately $940,000 for the preparation of            pre-feasibility (“PFS”) and feasibility (“FS”) studies for the            construction of a processing plant at the Kempirsai deposit. This amount could increase            if we retain a western consulting firm. The preparation of the FS will depend on the            ore processing technology to be selected by BMI by the end of 2007.

             

***Field modernization***

 

We have allocated approximately $1,000,000 during 2007 for modernization            of vehicles and equipment at the Kempirsai deposit to allow us to increase our ore            extracting capabilities. As of June 30, 2007 we had spent approximately $270,000 to            modernize vehicles and equipment at the Kempirsai deposit.

 

***Administrative Expenses***

 

We plan to allocate approximately $1,707,000 for administrative expenses            during the next six months, which include expenses of maintaining offices in the United            States and Kazakhstan, for salaries and taxes.

 

21

 

----

***Professional Fees***

 

We expect to incur approximately $63,000 in expenses for services of our            financial auditors and securities attorneys during the next six months.

 

**Additional Activities**

 

We are currently considering alternatives to a hydrochlorination            processing plant to allow us to begin to generate cash flow from the Kempirsai deposit.            We do not currently have sufficient cash on hand to fund these activities, nor have we            budgeted for these items in our 2007 budget. Therefore, to undertake these activities            we will need to obtain additional capital either through equity or debt financing. We            plan to seek this funding through private equity investments or debt financing to be            obtained from banks or shareholders. We currently have no firm commitment from any            party to provide us additional funding.

 

We are considering the economic viability of a pyrometallurgical            processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we            have allocated $940,000 in our 2007 budget for the preparation of pre-feasibility and            feasibility studies. Assuming the results of those studies are positive, we would like            to move to the design phase of a commercial pyrometallurgical plant, including            obtaining detailed engineering and design for plant construction. This would include            flowsheet design and pilot testing. We estimate the cost to do this will be roughly            $2.5 million.

 

**Summary of Material Contractual Commitments**

 

|   | The                            following table lists our significant commitments as of June 30,                            2007: |
|--------|----------------------------------------------------------------------------------------------------------------------------------|

 

| Contractual Commitments                                                                                    |  

Total | Payments Due by Fiscal Year |
|------------------------------------------------------------------------------------------------------------|---------------|-----------------------------|
| Less than 1 year                                                                                           | 2-3 years     | 4-5 years                   | After

5 years |
|                                                                                                       |          |                        |   |   |   |
| Monetary commitments for                               exploration                          | 70,619        | 70,619                      | -0- | -0- | -0- |
| Due to the government of Republic                               of  Kazakhstan(1) | 731,221       | -0-                         | 731,221 | -0- | -0- |
| Training                                                                                                   | 37,400        | 37,400                      | -0- | -0- | -0- |
| Social projects(2)                                                                                         | 417,906       | -0-                         | -0- | 300,000 | 117,906 |
| Asset retirement obligation(3)                                                                             | 951,333       | -0-                         | -0- | -0- | 951,333 |
| Operating leases                                                                                           | 80,025        | 80,025                      | -0- | -0- | -0- |
|  

Total                                                                                              | $ 2,288,504   | $188,044                    | $ 731,221 | $ 300,000 | $ 1,069,239 |

 

(1)In connection with our acquisition            of the exploration contract covering the Gornostai deposit, we are required to repay            the Republic of Kazakhstan for historical costs incurred by it in undertaking            geological and geophysical studies and infrastructure improvements. 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.            Under our current contract once we determine the property contains commercially            producible reserves, if we wish to commence commercial production, we must apply for            such right prior to the expiration of our exploration and development rights in            February 2026. We anticipate that we will apply for a commercial production contract            within the next 1-3 years. Of course, 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.

 

22

 

----

(2)Under the terms of our subsoil use            contracts, we are required to make provide funding for social projects relating to            employees of KKM, including improvements to living conditions, etc., in the amount of            $117,906. We are also required to donate $300,000 for the ongoing development of Astana            and Kurchatov, which are cities in Kazakhstan.

(3) Under the terms of our subsoil use contracts, we are            required to remove all operating 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.

 

For us to maintain our rights to the Gornostai, Kempirsai and Mamyt            deposits we must satisfy the work program requirements of the MEMR. Each year we must            submit a proposed annual work program under each subsoil use contract or license to the            MEMR. This annual work program must be reviewed and approved by the MEMR.

             

In July 2007 we completed the minimum exploratory drilling requirements            for 2007 associated with the Gornostai deposit.

             

As part of the minimum work program requirements for the Kempirsai            deposit we are required to extract 175,000 tons of nickel ore during 2007. As of June            30, 2007 we have extracted and placed into storage 16,956 tons of nickel ore, or 10% of            the required amount for 2007, because sales of nickel ore, if any, are expected in the            fourth quarter of 2007. We anticipate that we will meet the minimum nickel ore            extraction requirements by the end of 2007.

             

As part of the minimum work program requirements for the Mamyt brown            coal deposit we are required to extract 60,000 tons of brown coal during 2007. As of            June 30, 2007, we had not extracted any brown coal because we have had no buyers for            our coal. At this time we are negotiating several tenders for the sale of our brown            coal. Depending upon the outcome of these tenders, we may or we may not meet our            minimum brown coal extraction requirements by the end of 2007. If we do not believe we            will meet our minimum extraction requirement by year-end, we will discuss this matter            with the MEMR and attempt to negotiate a revision to our brown coal extraction            requirements.

 

**Off-Balance Sheet Financing Arrangements**

 

|   | As of June 30, 2007 we had no off-balance sheet                            financing arrangements. |
|--------|----------------------------------------------------------------------------------------------------|

 

**Critical Accounting Policies**

             

The preparation of financial statements in accordance with accounting            standards generally accepted in the United States requires management to make estimates            and assumptions that affect both the recorded values of assets and liabilities at the            date of the financial statements and the revenues recognized and expenses incurred            during the reporting period. Our estimates and assumptions affect our recognition of            deferred expenses, bad debts, income taxes, the carrying value of our long-lived assets            and our provision for certain contingencies. We evaluate the reasonableness of these            estimates and assumptions continually based on a combination of historical information            and other information that comes to our attention that may vary our outlook for the            future. Actual results may differ from these estimates under different            assumptions.

             

23

----

We suggest that our Summary of Significant Accounting Policies, as            described in Note 1 of Notes to Consolidated Financial Statements on Form 10-KSB for            December 31, 2006, be read in conjunction with this Management’s Discussion and            Analysis of Financial Condition and Results of Operations. We believe the critical            accounting policies that most impact our consolidated financial statements are            described below.

             

***Use of Estimates***– The            preparation of financial statements in accordance with accounting principles generally            accepted in the United States of America requires management to make estimates and            assumptions that affect the reported amounts in the financial statements and            accompanying notes. Actual results could differ from those estimates. The more            significant areas requiring the use of management estimates and assumptions relate to            mineral reserves that are the basis for future cash flow estimates and            units-of-production depreciation, depletion and amortization calculations;            environmental, reclamation and closure obligations; asset impairments; write-down of            inventory to net realizable value; valuation allowances for deferred tax assets;            reserves for contingencies and litigation; and the fair value and accounting treatment            of financial instruments. The Company bases its estimates on historical experience and            on various other assumptions that are believed to be reasonable under the            circumstances. Accordingly, actual results may differ significantly from these            estimates under different assumptions or conditions.

             

***Currency Translation***– The            consolidated financial statements are presented in U.S. dollars. The functional            currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars            for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.            dollars at the average exchange rates during the reporting period. Non-monetary assets            and liabilities of Kaznickel 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. Translation differences            are included in results of operations. 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.

             

***Revenue Recognition***– For its            operating mine, revenues currently arise from the limited sale of ore and Mamyt brown            coal. Revenue is recorded when persuasive evidence of an arrangement exists, title to            product transfers to the customer, and collectibility is reasonably assured. Produced,            but unsold minerals or ore are recorded as inventory until sold.

             

***Trade Receivables***— In the            normal course of business, the company extends credit to its customers on a short-term            basis. The principal customers are local companies and government agencies. Although            credit risks associated with these customers are considered minimal, the company            routinely reviews its accounts receivable balances and makes provisions for doubtful            accounts.

             

***Related Party Receivables***–            Related party receivables consists of short-term advances to employees. No allowance            has been provided due to the historic short-term nature and recoverability of such            advances.

             

***Impairment of Long-Lived Assets and Long-Lived Assets to be            Disposed Of***— Long-lived assets are reviewed for            impairment whenever events or changes in circumstances indicate that the carrying            amount of an

 

24

----

asset            may not be recoverable. Recoverability of assets to be held and used is measured by            comparison of the carrying amount of an asset to future net cash flows expected to be            generated by the asset. If such assets are considered to be impaired, the impairment to            be recognized is measured by the amount that the carrying amount of the assets exceeds            the fair value of the assets. Assets to be disposed of are reported at the lower of the            carrying amount or fair value less costs to sell. At December 31, 2006, we reviewed our            long-lived assets as disclosed above and determined no impairment was            necessary.

 

***Income taxes***– Income taxes            are calculated using the liability method of tax accounting. Under this method, future            income tax assets and liabilities are computed based on temporary differences between            the tax basis and carrying amount on the balance sheet for assets and liabilities.            Future income tax assets and liabilities are calculated using tax rates anticipated to            apply in the periods that the temporary differences are expected to reverse.

 

***Depreciation, Depletion and Amortization***– Expenditures for new facilities or equipment and expenditures            that extend the useful lives of existing facilities or equipment are capitalized and            depreciated using the straight-line method at rates sufficient to depreciate such costs            over the estimated future lives of such facilities or equipment. These lives do not            exceed the estimated mine life based on proven and probable reserves as the useful            lives of these assets are considered to be limited to the life of the relevant            mine.

 

Costs incurred to develop new properties are capitalized as incurred,            where it has been determined that the property can be economically developed based on            the existence of proven and probable reserves. At our surface mines, these costs            include costs to further delineate the ore body and remove overburden to initially            expose the ore body. All such costs are amortized using the units-of-production            (“UOP”) method over the estimated life of the ore body based on recoverable            minerals to be mined from proven and probable reserves.

 

Major development costs incurred after the commencement of production            are amortized using the UOP method based on estimated recoverable minerals to be mined            from proven and probable reserves. Depending upon whether the development is expected            to benefit the entire remaining ore body, or specific ore blocks or areas only, the UOP            basis is either the life of the entire ore body, or the life of the specific ore block            or area.

 

The calculation of the UOP rate of amortization, and therefore the            annual amortization charge to operations, could be materially impacted to the extent            that actual production in the future is different from current forecasts of production            based on proven and probable reserves. This would generally occur to the extent that            there were significant changes in any of the factors or assumptions used in determining            reserves. These factors could include: (i) an expansion of proven and probable reserves            through exploration activities; (ii) differences between estimated and actual cash            costs of mining, due to differences in grade, mineral recovery rates and foreign            currency exchange rates; and (iii) differences between actual commodity prices and            commodity price assumptions used in the estimation of reserves. Such changes in            reserves could similarly impact the useful lives of assets depreciated on a            straight-line basis, where those lives are limited to the life of the mine, which in            turn is limited to the life of the proven and probable reserves.

             

25

----

The expected useful lives used in depreciation, depletion and            amortization calculations are determined based on applicable facts and circumstances,            as described above. Significant judgment is involved in the determination of useful            lives, and no assurance can be given that actual useful lives will not differ            significantly from the useful lives assumed for purpose of depreciation, depletion and            amortization calculations.

 

***Stripping Costs***– In general,            mining costs are allocated to production costs, stockpiles, and inventories, and are            charged to costs applicable to sales when minerals are sold. However, the mining            industry, generally, defers and amortizes certain mining costs on a units-of-production            basis over the life of the mine. These mining costs, which are commonly referred to as            “deferred stripping” costs, are incurred in mining activities that are            normally associated with the removal of waste rock. The deferred stripping accounting            method is generally accepted in the mining industry where mining operations have            diverse grades and waste-to-ore ratios; however, industry practice does vary. Deferred            stripping matches the costs of production with the sale of minerals, where this            procedure is employed, by assigning each quantity of mineral with an equivalent amount            of waste removal cost. When stripping costs are expensed as incurred, there might be            greater volatility in a company’s period-to-period results of            operations.

 

In March 2005, the FASB ratified Emerging Issues Task Force Issue            No. 04-6, “Accounting for Stripping Costs Incurred during Production in the            Mining Industry,” (EITF 04-6) which addresses the accounting for stripping costs            incurred during the production phase of a mine and refers to these costs as variable            production costs that should be included as a component of inventory to be recognized            in costs applicable to sales in the same period as the revenue from the sale of            inventory. As a result, capitalization of stripping costs is appropriate only to the            extent product inventory exists at the end of a reporting period and the carrying value            is less than the net realizable value. We adopted the provisions of EITF 04-6 on            January 1, 2006. We have had very limited production activity in the recent            period, so the full effect of this adoption will be felt as production increases in the            future periods.

 

***Mineral Property Rights***–            Mineral property acquisition costs, site restoration costs and development costs on            mineral properties with proven and probable reserves are capitalized and will be            depleted using the units-of-production method over the estimated life of the reserves.            If there are insufficient reserves to use as a basis for depleting such costs, they are            written off as a mineral property or mineral interest impairment in the period in which            the determination is made. Site restoration costs are depleted over the term of their            expected life. Interest costs are capitalized on mineral properties and mineral            interests in development. The development potential of mining properties is established            by the existence of proven and probable reserves, reasonable assurance that the            property can be permitted as an operating mine and evidence that there are no            metallurgical or other impediments to the production of saleable metals.

 

Exploration costs incurred on mineral interests, other than acquisition            costs, prior to the establishment of proven and probable reserves are charged to            operations as incurred. Development costs incurred on mineral interests with proven and            probable reserves will be capitalized as mineral properties. We regularly perform            evaluations of our investment in mineral interests to assess the recoverability and /            or the residual value of its investments in these assets. All mineral interests and            mineral properties are reviewed for impairment whenever

             

26

----

events            or circumstances change which indicate the carrying amount of an asset may not be            recoverable, utilizing established guidelines based upon undiscounted future net cash            flows from the asset or upon the determination that certain exploration properties do            not have sufficient potential for economic mineralization.

 

Our estimates of mineral prices, recoverable probable reserves, and            operating, capital and reclamation costs, when available, are subject to certain risks            and uncertainties, which may affect the recoverability of mineral property costs.            Although we have made our best estimate of these factors, it is possible that changes            could occur in the near term, which could adversely affect the future net cash flows to            be generated from the properties.

 

**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 crude oil production.

 

**Commodity Price Risk**

 

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

 

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

 

**Foreign Currency Risk**

 

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

 

27

----

**Item            4. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

             

Our principal executive officer and our principal financial officer            (the*“Certifying            Officers”*) are responsible for establishing and            maintaining disclosure controls and procedures (as defined in Exchange Act Rules            13a-15(e) and 15d-15(e). Such officers have concluded (based upon their evaluations of            these controls and procedures as of the end of the period covered by this report) that            our disclosure controls and procedures are effective to ensure that information            required to be disclosed by us in this report is accumulated and communicated to            management, including the Certifying Officers as appropriate, to allow timely decisions            regarding required disclosure. Based on this evaluation, our Certifying Officers have            concluded that our disclosure controls and procedures are effective as of June 30,            2007.

 

*Changes in Internal Control over Financial Reporting*

             

During the course of preparing the financial statements for the three            and six months ended June 30, 2007, we identified certain prior period misstatements            whose impact was not material, either individually or in aggregate, to our financial            statements for the year ended December 31, 2006 or the quarter ended March 31, 2007.            However, these misstatements were considered material to our financial statements for            the three months ended June 30, 2007. These findings were communicated to our            independent registered public accountants, who concurred with our view that these            misstatements were immaterial, both individually and in the aggregate to our financial            statements for the year ended December 31, 2006 and the quarter ended March 31,            2007.

 

Consistent with the guidance provided in Staff Accounting Bulletin 108,            we are not required to amend our Annual Report on Form 10-KSB for the year ended            December 31, 2006, or our Quarterly Report on Form 10-Q for the quarter ended March 31,            2007 to correct these misstatements. Rather, in this Quarterly Report we have corrected            the balance sheet for the year ended December 31, 2006. These misstatements relate to            recognizing an incorrect amount of deferred compensation. The effect of correcting            these misstatements resulted in an increase in deferred compensation expense, an            increase in accumulated deficit, and an increase in net loss for the year ended            December 31, 2006 and the quarter ended March 31, 2007. The misstatements resulted from            applying an incorrect share price in the calculation of deferred compensation expense.            To remedy the problem we implemented procedures to ensure that such errors are not made            in the future by involving an additional level of review by an individual with greater            experience and expertise in deferred compensation accounting standards. Monitoring of            data, which detected the original misstatement, continues to be performed. We believe            these changes will improve our control over financial reporting.

 

Except as otherwise discussed above, there have been no changes in our            internal control over financial reporting during the most recently completed fiscal            quarter that have materially affected, or are reasonably likely to materially affect,            our internal control over financial reporting.

 

28

----

**PART            II -- OTHER INFORMATION**

 

**Item            1A. Risk Factors**

 

There have been no material changes to the risk factors as previously            disclosed in our Annual Report on Form 10-KSB for the year ended December 31,            2006.

 

**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 |

 

**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: August 13, 2007 | /s/ Yermek Kudabayev                                                        |
|-----------------------|-----------------------------------------------------------------------------|
|                  | Yermek Kudabayev

Interim Chief Executive Officer,

Chief Financial Officer |

 

 

29

----