UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





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


For
      the Quarterly Period Ended June 30,
      2010





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.
      Employerincorporation
      or organization)
            
            Identification
      No.)Sankibai
      Batyr Ave., 14DAktobe
      city,
              Republic
      of Kazakhstan
            
            030000(Address
      of principal executive offices)
            
            (Zip
      Code)





+7 (7132)
      55-75-54(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 such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.
                Yes
      xNo oIndicate
      by check mark whether the registrant has submitted electronically and
      posted on its corporate Web site, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of Regulation S-T
      (§ 232.405 of this chapter) during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files).
                Yes 
      oNo o
 Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. See the definitions of “large accelerated filer,” “accelerated
      filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
      Act.
 
 Large
      accelerated filer
                o
                
                Accelerated
      filer
                oNon-accelerated
      filer
                o
                
                Smaller
      reporting company
                x(Do
      not check if a smaller reporting company)
 Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act).
              Yes
      oNo
      xAs
      of July 28, 2010, the registrant had 124,980,296 shares of common stock,
      par value $0.001, issued and
outstanding.










BEKEM
METALS, INC.


FORM
10-Q


TABLE
OF CONTENTS








PART I —
FINANCIAL INFORMATION





PageItem
      1. Financial StatementsCondensed
      Consolidated Balance Sheets (Unaudited) as ofJune
      30, 2010 and December 31, 2009
            3Condensed
      Consolidated Statements of Operations (Unaudited) for the Three Months and
      Six Months Ended June 30, 2010 and 2009, and for the Period from
      March 5, 2004 (Date of Inception) through June 30,
    2010
            4Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
      June 30, 2010 and 2009, and for the Period from March 5, 2004 (Date
      of Inception) through June 30, 2010
            5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            6Item
      2.  Management’s Discussion and Analysis of Financial
      Conditionand
      Results of Operations
            15Item
      3.  Qualitative and Quantitative Disclosures About Market
      Risk
            24Item
      4.  Controls and Procedures
            25PART
      II — OTHER INFORMATIONItem
      1A. Risk Factors
            27Item
      5. Other Information
            27Item
      6.  Exhibits
            27Signatures
            28













PART
I – FINANCIAL INFORMATION


Item
1.  Financial Statements







BEKEM
      METALS, INC. AND SUBSIDIARIES(An
      Exploration Stage Company)CONDENSED
      CONSOLIDATED BALANCE SHEETS(UNAUDITED)June
      30,
              
              
              December
      31,2010
              
              
              2009ASSETSCurrent
      AssetsCash
              
              $
              16,014
              
              $
              534,619Trade
      accounts receivable
              
              
              50,068
              
              
              22,439VAT
      recoverable
              
              
              174,979
              
              
              179,012Inventories
              
              
              547,490
              
              
              542,245Prepaid
      expenses and other current assets
              
              
              77,408
              
              
              46,444Deferred
      compensation
              
              
              -
              
              
              6,390Total
      Current Assets
              
              
              865,959
              
              
              1,331,149Property,
      plant and mineral interests (net of accumulateddepreciation
      of $642,134 and $564,990)
              
              
              2,729,954
              
              
              2,852,697Other
      assets
              
              
              20,184
              
              
              41,883Total
      Assets
              
              $
              3,616,097
              
              $
              4,225,729LIABILITIES
      AND SHAREHOLDERS' DEFICITCurrent
      LiabilitiesNotes
      payable to related parties
              
              $
              2,031,981
              
              $
              2,031,981Accounts
      payable
              
              
              326,127
              
              
              122,610Accrued
      expenses
              
              
              247,419
              
              
              151,064Total
      Current Liabilities
              
              
              2,605,527
              
              
              2,305,655Asset
      retirement obligations
              
              
              985,623
              
              
              911,297Total
      Liabilities
              
              
              3,591,150
              
              
              3,216,952Commitments
      and Contingencies
              
              
              -
              
              
              -Shareholders'
      DeficitPreferred
      stock; $0.001 par value, 20,000,000 shares authorized,no
      shares outstanding
              
              
              -
              
              
              -Common
      stock; $0.001 par value, 300,000,000 shares authorized,and
      124,980,296 shares issued and outstanding
              
              
              124,980
              
              
              124,980Additional
      paid-in capital
              
              
              28,387,055
              
              
              28,387,055Accumulated
      deficit
              
              
              (31,074,045)
              
              
              (30,229,302)Accumulated
      other comprehensive income
              
              
              2,586,957
              
              
              2,726,044Total
      Shareholders' Deficit
              
              
              24,947
              
              
              1,008,777Total
      Liabilities and Shareholders' Deficit
              
              $
              3,616,097
              
              $
              4,225,729


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





BEKEM METALS, INC. AND
    SUBSIDIARIES(An
      Exploration Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)For
      the Three Months
                  Ended
      June 30,
                
                
                For
      the Six Months
                  Ended
      June 30,
                
                
                For
      the Period from March 5, 2004 (Date of Inception)
  through2010
                
                
                2009
                
                
                2010
                
                
                2009
                
                
                June
      30, 2010Revenue
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Operating
      ExpensesGeneral
      and administrative expenses
                
                479,408
                
                
                648,738
                
                
                1,034,412
                
                
                1,295,794
                
                
                14,471,835Research
      and development costs
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,057,970Exploratory
      costs
                
                8,638
                
                
                4,729
                
                
                62,807
                
                
                16,605
                
                
                2,978,564Loss
      from impairment of property
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                10,243,178Accretion
      expense on asset retirement obligations
                
                34,743
                
                
                12,776
                
                
                69,069
                
                
                26,603
                
                
                668,922Grant
      compensation expense
                
                -
                
                
                83,333
                
                
                6,390
                
                
                237,628
                
                
                1,473,681Total
      Operating Expenses
                
                522,789
                
                
                749,576
                
                
                1,172,678
                
                
                1,576,630
                
                
                30,894,150Loss
      From Operations
                
                (522,789)
                
                
                (749,576)
                
                
                (1,172,678)
                
                
                (1,576,630)
                
                
                (30,894,150)Other
      Income/(Expense)Exchange
      gain from remeasurement
                
                136
                
                
                1,239
                
                
                (3,452)
                
                
                1,599
                
                
                48,282Exchange
      (gain) loss
                
                (60,586)
                
                
                92,164
                
                
                157,982
                
                
                (2,710,834)
                
                
                (2,778,896)Interest
      income
                
                20
                
                
                183
                
                
                1,285
                
                
                74,700
                
                
                708,535Interest
      expense
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,337,317)Other
      income, net
                
                122,288
                
                
                173,449
                
                
                172,120
                
                
                207,589
                
                
                1,123,478Net
      Other Income/(Expense)
                
                61,858
                
                
                267,035
                
                
                327,935
                
                
                (2,426,946)
                
                
                (2,235,918)Loss
      from Continuing Operations
                
                (460,931)
                
                
                (482,541)
                
                
                (844,743)
                
                
                (4,003,576)
                
                
                (33,130,068)Income
      (Loss) from Discontinued Operations
                
                -
                
                
                (80,412)
                
                
                -
                
                
                71,229
                
                
                (1,475,786)Net
      Loss Before Taxes
                
                (460,931)
                
                
                (562,953)
                
                
                (844,743)
                
                
                (3,932,347)
                
                
                (34,605,854)Deferred
      tax benefit
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,390,601Consolidated
      Net Loss
                
                (460,931)
                
                
                (562,953)
                
                
                (844,743)
                
                
                (3,932,347)
                
                
                (31,215,253)Less:
      Loss attributable to noncontrolling interests
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                141,208Net
      Loss Attributable To Shareholders of Bekem Metals Inc.
                $
                (460,931)
                
                $
                (562,953)
                
                $
                (844,743)
                
                $
                (3,932,347)
                
                $
                (31,074,045)Basic
      Loss per Common ShareLoss
      from continuing operations
                $
                0.00
                
                $
                0.00
                
                $
                (0.01)
                
                $
                (0.03)Income
      from discontinued operations
                
                0.00
                
                
                0.00
                
                
                0.00
                
                
                0.00Consolidated
      net loss
                $
                0.00
                
                $
                0.00
                
                $
                (0.01)
                
                $
                (0.03)Weighted-Average
      Shares used inBasic
      Loss per Common Share
                
                124,980,296
                
                
                125,172,011
                
                
                124,980,296
                
                
                125,172,011
  The
accompanying notes are an integral part of these condensed, consolidated
financial statements.


BEKEM
      METALS, INC. AND SUBSIDIARIES(An
      Exploration Stage Company)CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For
      the Six Months Ended
      June 30,
            
            For
      the Period from March 5, 2004 (Date of Inception) through2010
            
            2009
            
            June
      30, 2010Cash
      Flows from Operating ActivitiesNet
      loss
            $
            (844,743)
            
            $
            (3,932,347)
            
            $
            (31,074,045)(Income)
      loss from discontinued operations
            
            -
            
            
            (71,229)
            
            
            1,475,786Adjustments
      to reconcile net loss tonet
      cash provided by operating activities:Depreciation
      and amortization
            
            101,264
            
            
            108,133
            
            
            944,329Accretion
      expense on asset retirement obligations
            
            69,069
            
            
            26,603
            
            
            668,922Interest
      expense from debt discount
            
            -
            
            
            -
            
            
            963,231Shares
      issued on option modification
            
            -
            
            
            -
            
            
            19,426Deferred
      tax benefit
            
            -
            
            
            -
            
            
            (3,390,601)Foreign
      currency exchange loss / (gain) and loss / (gain) from
      remeasurement
            
            (154,530)
            
            
            2,709,235
            
            
            2,730,614Impairment
      loss on property, plant and mineral interests
            
            -
            
            
            -
            
            
            10,243,178Loss
      / (gain) on disposal of property and equipment
            
            (8,023)
            
            
            24,210
            
            
            (104,067)Stock
      grant compensation expense
            
            6,390
            
            
            237,628
            
            
            1,473,681Change
      in operating assets and liabilities:Trade
      accounts receivable
            
            (27,569)
            
            
            (2,741)
            
            
            (50,162)VAT
      recoverable
            
            5,153
            
            
            (21)
            
            
            (115,581)Inventories
            
            (1,955)
            
            
            23,193
            
            
            (542,172)Prepaid
      expenses and other current assets
            
            (17,422)
            
            
            (26,467)
            
            
            (94,453)Change
      in related party receivables / payables
            
            -
            
            
            -
            
            
            (206,171)Accounts
      payable
            
            192,104
            
            
            54,385
            
            
            150,151Advances
      received
            
            11,328
            
            
            (42,457)
            
            
            11,328Accrued
      expenses
            
            82,881
            
            
            183,999
            
            
            76,151Cash
      From Operating Activities - Continuing operations
            
            (586,053)
            
            
            (707,876)
            
            
            (16,820,455)Cash
      From Operating Activities - Discontinued operations
            
            -
            
            
            (1,904)
            
            
            (5,816,257)Net
      Cash From Operating Activities
            
            (586,053)
            
            
            (709,780)
            
            
            (22,636,712)Cash
      Flows from Investing ActivitiesPurchase
      of property and equipment
            
            -
            
            
            (38,382)
            
            
            (4,051,384)Purchase
      of intangible assets
            
            (302)
            
            
            (624)
            
            
            (47,221)Proceeds
      from disposal of property and equipment
            
            65,859
            
            
            159,300
            
            
            537,076Loans
      provided to related parties
            
            -
            
            
            -
            
            
            (14,900,000)Cash
      received from sale of subsidiary
            
            -
            
            
            500,000
            
            
            5,000,000Cash
      acquired in acquisitions / received from discontinued
      operations
            
            -
            
            
            -
            
            
            52,364Cash
      From Investing Activities - Continuing operations
            
            65,557
            
            
            620,294
            
            
            (13,409,165)Cash
      From Investing Activities - Discontinued operations
            
            -
            
            
            -
            
            
            425,377Net
      Cash From Investing Activities
            
            65,557
            
            
            620,294
            
            
            (12,983,788)Cash
      Flows from Financing ActivitiesProceeds
      from notes payable
            
            -
            
            
            -
            
            
            13,946,817Payments
      on notes payable
            
            -
            
            
            -
            
            
            (21,649,038)Proceeds
      from loans / notes payable - related parties
            
            -
            
            
            -
            
            
            18,210,606Payments
      on loans / notes payable - related parties
            
            -
            
            
            -
            
            
            (6,815,004)Issuance
      of shares for cash
            
            -
            
            
            -
            
            
            26,728,842Cash
      From Financing Activities - Continuing operations
            
            -
            
            
            -
            
            
            30,422,223Cash
      From Financing Activities - Discontinued operations
            
            -
            
            
            -
            
            
            4,979,594Net
      Cash From Financing Activities
            
            -
            
            
            -
            
            
            35,401,817Effect
      of Exchange Rate Changes on Cash
            
            1,891
            
            
            (3,396)
            
            
            234,697Net
      (Decrease) / Increase in Cash
            
            (518,605)
            
            
            (92,882)
            
            
            16,014Cash
      at Beginning of Period
            
            534,619
            
            
            115,459
            
            
            -Cash
      at Beginning of Period - Discontinued Operations
            
            -
            
            
            185
            
            
            -Cash
      at End of Period
            
            16,014
            
            
            22,762
            
            
            16,014Less
      Cash of Discontinued Operations at End of Period
            
            -
            
            
            (37)
            
            
            -Cash
      of Continuing Operations at End of Period
            $
            16,014
            
            $
            22,725
            
            $
            16,014


The
accompanying notes are an integral part of these condensed, consolidated
financial statements.
 
 BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)


NOTE
1 – BASIS OF PRESENTATION, NATURE OF BUSINESS, AND SIGNIFICANT ACCOUNTING
POLICIES





Interim Financial
Information– The
accompanying 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-K filed for the year ended
December 31, 2009.  Operating results for the six-month period ended
June 30, 2010 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2010.





Basis
of Presentation





Company History– The Company was incorporated in the State of Utah under the name EMPS
Research Corporation on January 30, 2001.  The name was changed to
Bekem Metals, Inc. (“BMI”, “Bekem” or the “Company”) on February 9, 2005
following the reverse acquisition with Condesa Pacific, S.A. (“Condesa”)
discussed below.  The Company’s primary business focus has been
exploring for nickel, cobalt and other minerals in Kazakhstan.  The
Company’s operations are considered to be at the exploratory stage.





Bekem Metals,
Inc. – Condesa and its wholly owned subsidiary Kaznickel, LLP
(“Kaznickel”) acquired Bekem 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.
Also, during 2009 Bekem sold Kaznickel to a third party for 280,000 Kazakh Tenge
(KZT)  (approximately $1,867 U.S. Dollars (USD)) and for repayment of
$5,000,000 worth of loans owed to Bekem by Kaznickel.





On
October 24, 2005, Bekem Metals, Inc. entered into an Acquisition Agreement with
Kazakh Metals, Inc. (“KMI”), a British Virgin Islands international business
company, and its wholly owned subsidiary Kyzyl Kain Mamyt LLP (“KKM”), 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 and its
wholly owned subsidiary KKM for all periods presented.







BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)





Brisa
Equities Corporation, a British Virgin Islands holding company (“Brisa”),
together with other entities its owners control, was 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 noncontrolling 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.





Basis of
Presentation – The accompanying condensed consolidated financial
statements include the accounts of Bekem and its wholly owned subsidiaries KMI
and KKM.  Intercompany accounts and transactions have been eliminated
in consolidation. The results of operations of KMI and BMI were combined for all
periods prior to the acquisition, with recognition of the noncontrolling
interest in BMI; the operations of BMI and KMI are consolidated from October 24,
2005.





Condesa
and Kaznickel are included in the condensed consolidated financial statements
from the date of acquisition to the date of disposal. The three and six month
operations of Kaznickel during 2009 were presented in the Company’s condensed
consolidated financial statements as income from discontinued
operations.





Foreign Currency
Transactions – The condensed consolidated financial statements are
presented in U.S. Dollars.  The functional currency of Bekem Metals,
Inc. is United States Dollars.





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





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






BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)





Nature
of Business





The
Company holds licenses to explore mineral resource properties.





KKM holds
exploration and production licenses from the government of Kazakhstan to a
575,756 acre parcel, located approximately 130 kilometers northwest of Aktobe,
Kazakhstan.  This deposit is referred to as the Kempirsai deposit. The
licenses grant KKM the right to explore for and produce nickel and cobalt from
deposits located within the territory through October 12, 2020, which may be
extended upon agreement between KKM and the Ministry of Energy and Mineral
Resources (“MEMR”).  KKM also holds a license to explore for and
produce Mamyt brown coal from a deposit located within 40 kilometers of its
Kempirsai deposit.  This license expires on December 11, 2018 with
further possible extensions.  Because the Company does not have a
reserve estimate for its deposits that conforms to the standards of Industry
Guide 7 issued by the U.S. Securities and Exchange Commission, its operations
were considered to be at the exploratory stage for 2010 and 2009.





KKM
contracts and licenses call for the extraction of the following amounts of ore
from the Kempirsai deposit and brown coal from the Mamyt deposit and the
following investments in ore mining and processing technology:





Kempirsai
            
            Mamyt (1)Tons
      of Ore
            Investments,
              $
            
            Tons
      of Brown Coal2009
            -
            6,000,000
            
            200,0002010
            -
            26,500,000
            
            200,0002011
            -
            42,000,000
            
            200,0002012
            -
            36,500,000
            
            200,0002013
            800,000
            2,400,000
            
            200,0002014
            800,000
            2,000,000
            
            200,0002015
            1,000,000
            2,000,000
            
            200,0002016
            1,000,000
            2,000,000
            
            200,0002017
            1,500,000
            1,000,000
            
            200,0002018
            1,500,000
            1,000,000
            
            200,0002019
            1,600,000
            1,000,0002020
            1,234,900
            1,000,000Total
            9,434,900
            123,400,000
            
            2,000,000





(1)
            In
      December 2009 KKM received a letter from the MEMR granting KKM’s request
      to decrease the coal volume production requirements of its work program
      from 200,000 tons per year to 5,000 tons per year for the period from 2009
      to 2012. These changes are not reflected in the above table and will not
      be reflected until these changes are legally approved by the government by
      the signing of a new addendum to the existing subsoil use contract.
      Signing of the addendum by the government has not yet occurred due to
      recent reorganizations within the government of the Republic of Kazakhstan
      and creation of the new Ministry of Industry and New Technologies (MINT)
      in March 2010 to assume the responsibilities of the MEMR with regard to
      non-oil-related licenses. The Company anticipates an addendum to this
      license memorializing the changes to the annual work program requirements
      to be signed by MINT sometime in August
2010.









BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)





Business
Condition – The financial crisis impacting the global economy has had a
material effect on the Company’s business. Metal prices fell sharply in 2008,
making future forecasts problematic and projected financial models unprofitable.
Although prices recovered some during 2009 and the first six months of 2010,
they still remain vulnerable due to the continuing global economic crisis making
the Company’s access to equity and/or debt financing temporarily impossible. In
light of the uncertain economic environment, the Company has been looking for
private investors and/or potential purchasers of some of the Company’s
assets.





The
Company’s deposits have not yet entered the development stage with respect to
their mineral interests and have no production. The Company has realized only
limited revenue from its deposits and has very little ability to generate
revenue.  The Company does not expect this to change unless it builds
and begins operating a nickel ore processing plant.





Because
of a lack of funds, KKM did not fully meet its 2009 annual work program
requirements to invest up to $6 million into development of the Kempirsai
deposit, including construction of a processing plant.  The Company
anticipates the need to seek significant funding during fiscal 2010 to fulfill
the 2010 annual work program obligations (to invest up to $26.5 million) and to
satisfy the obligations KKM did not meet in 2009 (to invest up to $4.3
million.)  There is no assurance that the Company will obtain funding
on favorable terms, or at all. If the Company is unsuccessful in obtaining
funding during 2010, the Company will have insufficient funds to meet its work
program obligations for 2009 and 2010 or to continue operations. If the Company
cannot fulfill its work program requirements, the Company could be subjected to
the possible forfeiture of its subsoil use contracts and licenses and current
remediation obligations of approximately $985,000.





On April
21, 2010 KKM received notifications (dated April 6, 2010) from the MINT related
to fulfillment of KKM’s contract obligations. The notifications required KKM to
provide explanations for non-performance of the Kempirsai and Mamyt work
programs. On April 23 and 29, 2010 KKM responded to these notifications with
references to delays in signing of the addendum to the nickel and cobalt ore
production contract (which was signed in December 2009) and to the recent letter
from the MEMR (which was also received in December 2009) granting KKM’s request
to decrease the coal volume production requirements of its work program from
200,000 tons per year to 5,000 tons per year for the period from 2009 to 2012.
On June 3, 2010 KKM received a response letter from the MINT requesting the
Company fulfill its contract obligations (including the unfulfilled obligations
of 2009) by the end of 2010.





These
factors raise substantial doubt about the Company’s ability to retain its
licenses or to continue as a going concern.






BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)





Exploration
Stage Company





The
Company is currently an exploration stage company. As an exploration stage
enterprise, the Company discloses the deficit accumulated during the exploration
stage and the cumulative statements of operations and cash flows from inception
through the current balance sheet date.  The Company has incurred net
losses of $31,074,045 and used net cash in operations of $22,636,712 for the
period from March 5, 2004 (date of inception) through June 30, 2010. An entity
remains in the exploration stage until such time as proven or probable reserves
have been established for its deposits.





Reclassifications
– Certain reclassifications have been made to the 2009 financial information to
conform to the current period presentation.





NOTE
2 - CASH AND CASH EQUIVALENTS





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





Cash
consists of the following:





June
      30,
              
              December
      31,2010
              
              2009Current
      accounts (USD)
              $
              1,791
              $
              19,289Current
      accounts (Tenge)
              
              9,365
              
              75,071Bank
      deposit (USD)
              
              4,858
              
              150,107Bank
      deposit (Tenge)
              
              -
              
              290,152Total
              $
              16,014
              $
              534,619


NOTE
3 - PROPERTY, PLANT AND MINERAL INTERESTS





Property,
plant and mineral interests consist of the following:




June
      30,
              
              
              December
      31,2010
              
              
              2009Buildings
              $
              1,543,912
              
              $
              1,562,807Machinery
      and equipment
              
              1,755,112
              
              
              1,744,464Other
      fixed assets
              
              73,064
              
              
              110,416Unproved
      mineral interests
              
              -
              
              
              -3,372,088
              
              
              3,417,687Accumulated
      depreciation
              
              (642,134)
              
              
              (564,990)Property,
      plant and equipment, net
              $
              2,729,954
              
              $
              2,852,697


The
government of Kazakhstan retains the title to the property upon which the
Company’s mineral interests pertain; however, the Company’s mineral interests
are considered to be tangible assets.





During
December 2009 the Company recognized impairment of $556,500 on its property and
equipment to be used in the pilot plant under the Vanyukov process. No further
impairment of mineral interests was required during the six-month period ended
June 30, 2010.





Bekem
acquired two contracts to explore for and extract minerals in connection with
the purchase of KKM made in October 24, 2005. One contract is for the
exploration and extraction of nickel and cobalt ore from deposits located in an
approximately 575,756 acre site in the northwest area of the Republic of
Kazakhstan which is valid through October 12, 2020.  The other
contract is for the exploration and extraction of brown coal at the Mamyt
deposit located within 40 kilometers of the Kempirsai deposit, which is valid
through December 11, 2018.





The
allocated purchase price of the mineral interest included a capitalized amount
of an acquired asset retirement obligation.











BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)





NOTE
4 - RELATED PARTY TRANSACTIONS




In March
2008 KKM entered into a preliminary consortium agreement, subject to
negotiation of the terms of a definitive agreement,
with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and Asia-Invest
Corporation LLP (“AI”). GRK and AI are related parties of the Company through a
common stockholder. These companies also have exploration and production
licenses near the Company’s Kempirsai deposits in northwestern Kazakhstan. This
agreement provides for the joint development and construction of a nickel
processing plant in the area for joint use by the parties. Under the preliminary
consortium agreement, KKM is considered to be the operator of the Consortium.
The preliminary shares of the parties in the Consortium are the following: KKM -
50%; GRK Koitas - 40%; and Asia-Invest - 10%. Under the preliminary consortium
agreement, which was amended in November 2009, the parties are obliged to
jointly contribute approximately $9.2 million for financing the construction of
a processing plant. Of this amount, KKM is obligated to contribute approximately
$4.6 million. Also, the parties further agreed to extend the period for final
determination of the ownership interests of the parties in the Consortium to
December 31, 2010.





The
parties have the right to withdraw from the Consortium subject to three months
written notice. Consequently, these advances have been classified as current
notes payable to related parties and bear no interest since they represent
contributions to the Consortium.





As of
June 30, 2010 the notes payable to GRK and AI were $1,225,489 and $806,492,
respectively.





NOTE
5 – SHAREHOLDERS’ EQUITY





Stock grants and
shares cancelled–On March 25, 2008 the
board agreed to award to certain executives and key employees of the Company
additional restricted stock grants (421,772 shares) with an estimated fair value
of $337,418 at the closing market price of common stock on the date of grant
($0.80 per share).  Out of this amount, $45,301 (191,715 shares) was
reversed in 2009 due to anticipated resignation of Mr. Bitenov, the CFO of the
Company.





As of
June 30, 2010 there was no unexpensed compensation cost.  During 2010
the remaining shares vested.  The Company recognized $6,390 and
$237,628 of compensation expense for the six months ended June 30, 2010 and
2009, respectively.





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.






BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)


Failure to
Satisfy the Terms of the Subsoil Use Contracts– Under the subsoil use
contracts, the Company is required to satisfy the annual minimum work program
requirements.  If the Company fails to satisfy these commitments, it
may be subject to the loss of one or more of the subsoil use
contracts.  The cancellation of the contracts would have a material
adverse effect on the Company’s business, results of operations and financial
condition.  While the Company does not expect any other penalties and
fines, except the loss of one or more of the subsoil use contracts, KKM is
required to remove all equipment and remediate the property where the
remediation costs are currently estimated at the level up to
$985,000.
 
 Annual Work
Program – Historically, it has been the practice of the MEMR that if a
subsurface user could not fulfill certain conditions for a specific year, for
any reason, then the work program requirements of that year would be extended to
the next year.  This was done because the obligations of subsoil users
were typically set forth on the basis of the full duration of the subsoil use
contract, rather than on an annual basis. On June 24, 2010 the new law “On
Subsoil and Subsoil Use” was signed by the President of the Republic of
Kazakhstan.  The new law replaces both a 1995 “Law on Petroleum” and
similar regulations enacted in 1996 under the same name.




The new
subsoil law seeks to maximize the protection of the interests of the state – the
owner of the subsoil. As a result, the new subsoil law allows the government to
annul contracts in the extractive sector if they are deemed to be harmful to
Kazakhstan's economic security or national interests. Also, the new subsoil
legislation removed the issuance of joint exploration and development licenses,
except for projects of a strategic importance and/or with complicated geological
structure. The regulation of disputes between subsurface users and the
government was not changed and allow both settlements in the courts of
Kazakhstan and international arbitration. Currently, there is no legislatively
fixed mechanism governing the development of annual work programs or for the
independent determination of compliance by the subsurface user with the
parameters of the annual work program. The determination is currently being made
at the discretion of officials employed by the authorized governmental
body.  Based solely on their own discretion, these officials have the
authority to suspend the activities of the subsurface user even for a minor
breach of the detailed annual work program. These facts, coupled with the right
of the competent body to unilaterally terminate a subsoil user’s contract if the
contractor materially breaches the subsoil use contract obligations, indicates
there is a risk that one or more of the Company’s subsoil use contracts could be
cancelled.





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








BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)


In
January 2009 Kazakhstan adopted a new tax code.  The new tax code
invalidates tax stability clauses in existing contracts and eliminated tax
stability in future contracts.  Also, during 2009 KKM received a
letter from the MEMR requiring changes/addenda to the tax provisions of its
existing subsurface use contracts to make them consistent with the new tax
code.  Despite the fact that KKM’s existing subsurface use contracts
included statements of stabilization of the tax rate with regard to subsurface
user taxes (such as royalty and excess profit tax), the MEMR letter required the
new tax rates to be applied to existing contracts beginning January 1,
2009.  In December 2009 KKM signed an addendum to the Kempirsai
subsoil use contract replacing the existing tax rate indicated in the subsoil
use contact to be in compliance with the new tax code in exchange for changes in
the annual work program proposed by KKM.  A similar addendum was
expected to be signed for the Mamyt subsoil use contract sometime in April 2010.
However, preparation of the addendum has been postponed due to recent
reorganizations in the government of the Republic of Kazakhstan and creation of
the MINT, as indicated above.





The new
tax code introduces a new minerals extraction tax (MET), while canceling royalty
payments.  In general, MET applies to the value of produced resources
which is calculated based on “world” prices.  The current MET rate
applicable to nickel is set at 6%.  The new tax code also makes rent
tax applicable to exports of coal (previously applicable only to exports of
hydrocarbons). The rent tax at the rate of 2.1% applies to value of exported
coal calculated on the basis of the sale prices. The current Mamyt brown coal
contract requires a royalty payment equal to nine tenths of one percent (0.9%)
of gross coal sales.





Extractive
companies are also liable to pay excess profit tax (“EPT”).  EPT
liability arises when the ratio of aggregate annual income to deductions
allowable for EPT purposes relative to operations under a specific subsurface
use contract is more than 1.25 for the reporting tax period which, in most
cases, is a calendar year.  The new tax code provides for an
incremental sliding scale of EPT rates ranging from 0% to 60% for various profit
levels above the mentioned ratio.





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





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 expired in October 2009. The Company is currently renting
this space on a month-to-month basis at the same rate.





The
Company also maintained a representative office in Almaty, Kazakhstan, where it
leased approximately 645 square feet of office space. However, to minimize its
operating expenses, in March 2010 the Company decided to close the office in
Almaty. The lease agreement was cancelled on May 31, 2010 when the monthly lease
payment was $921. Withdrawal from the state registration is expected to take
three months.








BEKEM
METALS, INC. AND SUBSIDIARIES
 (An
Exploration Stage Company)
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2010 (UNAUDITED)




KKM rents
approximately 1,668 square feet of office space in Aktobe, Kazakhstan. KKM pays
approximately $1,200 per month for this space under a one-year lease agreement.
This space is leased on a year-to-year basis.
 
 Rent
expense for the six months ended June 30, 2010 and 2009 was $15,528 and $29,632,
respectively.
 
 NOTE
7 –SUBSEQUENT EVENTS
 
 On July
16, 2010 the President, Chief Executive Officer and interim Chief Financial
Officer of the Company tendered his resignation to be effective as of August 16,
2010.  This resignation was not the result of any disagreement with
the Company on any matter relating to operations, policies or practices.
Although the Company has begun the process of identifying a qualified person(s)
to fill the vacancies created by this resignation, to date the Company has been
unsuccessful in identifying such person(s).
















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





For a complete understanding, this
management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes to the Condensed Consolidated Financial
Statements contained in this quarterly report on Form 10-Q and our annual report
on Form 10-K for the year ended December 31, 2009.





Forward
Looking Information and Cautionary Statement





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





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





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














Overview





We are
engaged in the development and exploration of nickel, cobalt and brown coal
deposits in the Republic of Kazakhstan.  We carry out our exploration
activities through our wholly-owned subsidiary, KKM.





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





Territory
      Name
            Size
      of Territory
            PrimaryMinerals
            License
              Type
            License
      or Contract #
            License
      and Subsoil
              Use Contract TermKempirsai
            575,756
      acres
            Nickel
      and cobalt ore
            Production
            MG
      #420
              MG
      #426
            Expires
      Oct. 12, 2020 unless extended.Mamyt
            116
      acres
            Brown
      coal
            Production
            MG
      #9-D
            Expires
      Dec. 11, 2018 unless extended.





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.  The Mamyt brown coal deposit is located within 40
kilometers of the Kempirsai deposit.





The
Kempirsai and Mamyt licenses are independent of one another.  The loss
of one would not necessarily trigger a loss of the other.  Upon the
expiration of our contracts, our interest in and rights to each deposit
terminates and reverts back to the government of the Republic of Kazakhstan but
we retain the rights to all tangible and intangible assets we acquire for
exploration, extraction and production at these deposits.





There is
very little demand for our nickel ore until it has been processed and
concentrated because of its low nickel content.  Currently, there is
no nickel ore processing facility within the region of the Kempirsai
deposit.  We have spent several years investigating processing
technologies and undertaking preliminary feasibility studies (“PFS”) for the
construction of a nickel ore processing facility.  We anticipate the
cost to construct a processing plant with a planned annual capacity of 20,000
tons of ferronickel (5,000 tons of nickel) is approximately $160
million.





We do not
expect to generate revenue from ore extraction and sales until such time as we
are able to secure funding for and construct a nickel processing
facility.  Given our current financial condition, coupled with current
and projected nickel inventories and world nickel prices over the next few years
we believe our prospects for securing funding to construct a nickel ore
processing plant are limited at best.












Because of a lack of funds, KKM did not
fully meet its 2009 annual work program requirements to invest up to $6 million
into development of the Kempirsai deposit.  On April 21, 2010 KKM
received notifications from the MINT requiring KKM to provide explanations for
non-performance of the Kempirsai and Mamyt work programs. On April 23 and 29,
2010 KKM responded to these notifications with references to delays in signing
of the addendum to the nickel and cobalt ore production contract (which was
signed in December 2009) and to the recent letter from the MEMR (which was also
received in December 2009) granting KKM’s request to decrease the coal volume
production requirements of its work program from 200,000 tons per year to 5,000
tons per year for the period from 2009 to 2012.  On June 3, 2010 KKM
received a response letter from the MINT requesting KKM fulfill its contract
obligations (including the unfulfilled obligations of 2009) by the end of
2010.





Because
of our limited prospects for generating revenue or obtaining additional
financing, we anticipate that we will be unable to fulfill the unfulfilled
obligations of our 2009 minimum work program requirements, or the 2010 minimum
work requirements associated with the Kempirsai deposit.





To avoid
the loss of our contract, management plans to engage in discussions with the
appropriate governmental agencies to revise the terms of its annual work
programs.  On July 1, 2010 KKM submitted a request to the MINT asking
for additional changes to the nickel and cobalt ore production contract.
However, the government is under no obligation to negotiate with us and there is
no guarantee that we can be successful in renegotiating the terms of our subsoil
use contracts.





We are
investigating the possibility of selling our rights to the Kempirsai
deposit.





Historically
we had planned to use the brown coal from our Mamyt deposit primarily to provide
power for our planned nickel processing facility because of the lack of readily
available market in Kazakhstan for low grade brown coal of the quality contained
at our Mamyt deposit.  Given the unlikelihood that we will obtain
funding to construct a nickel processing facility, we are also investigating
potential markets and uses for coal from the Mamyt deposit.





In addition to its contracts to the
Kempirsai and Mamyt deposits, KKM also owns fuel tanks, locomotives, rail cars,
railway cranes, bridge cranes, railway cisterns, maintenance equipment,
excavators, motor graders, passenger vehicles, passenger buses, heavy dump
trucks, hoppers, scales, lathes, forging hammers, presses, grinding, milling and
boring machines, boilers, electrical substations, office equipment, business
machines, portable communication equipment, laboratory equipment and multiple
buildings.  The machinery was manufactured between 1950 and the
present. The buildings were built between the 1940’s and the early
1990’s.  Much of our existing equipment and buildings will need repair
and refurbishing prior to being put into active operation.  We planned
to use this equipment to support our nickel mining activities at the Kempirsai
deposit. Given the unlikelihood that we will engage in nickel mining activities,
we are investigating whether this equipment can be put to other uses to generate
capital for the Company.  We are also investigating whether there is a
market for the sale of this equipment.





Liquidity
and Capital Resources





Since
inception we have generated no revenue. Our capital resources have consisted
primarily of funds we have borrowed from related and non-related parties, the
sale of our equity securities and funds received from the sale of
Kaznickel.  As of June 30, 2010 we had cash on hand of
$16,014.  Since inception we have an accumulated deficit of
$31,074,045.  At June 30, 2010 current liabilities exceeded current
assets by $1,739,568.










Our
deposits have not yet entered the development stage and we have no
production.  We have realized only limited revenue from our Kempirsai
and Mamyt deposits and have very little ability to generate
revenue.  We do not expect this to change until we build and begin
operating a nickel ore processing plant.





We
anticipate the need to seek more than $30 million in additional funding during
fiscal 2010 to satisfy our 2010 annual work program obligations (to invest up to
$26.5 million) and the outstanding obligations we did not meet in 2009 ($4.3
million) associated with our Kempirsai deposit.  We also anticipate
the need for up to $400,000 to satisfy the 2010 work program requirements
associated with our Mamyt deposit if we are successful in negotiations to reduce
the 2009 annual work program to the level that was actually spent in
2009.





There is
no assurance that we will be able to obtain additional funding on favorable
terms, or at all.  We do not currently anticipate generating
significant revenue during 2010.  If we are unsuccessful in obtaining
additional funding or generating significant revenue during 2010, we will likely
be unable to meet our work program requirements or to continue
operations.





Cash
Flow





During
the six months ended June 30, 2010 and 2009 cash was used to fund operations as
follows:








For
      the Six Months Ended June 30,
            
            2010
            
            
            2009Net
      cash from operating activities
            $
            (586,053)
            
            $
            (709,780)Net
      cash from investing activities
            
            65,557
            
            
            620,294Net
      cash from financing activities
            
            –
            
            
            –Effect
      of exchange rate changes on cash
            
            1,891
            
            
            (3,396)NET
      DECREASE IN CASH
            $
            (518,605)
            
            $
            (92,882)





During
the six months ended June 30, 2010 net cash used in operating activities was
$586,053 compared to net cash used in operating activities of $709,780 during
the six months ended June 30, 2009. This decrease in net cash used in operating
activities primarily occurred due to reduced general and administrative costs
and exploratory activities as a result of our financial difficulties and the
sale of Kaznickel by the end of 2009.





During the six months ended June 30,
2010 net cash received from investing activities was $65,557 which was received
from sale of 1 kilometer of obsolete railroad bed (rails and ties or wooden
sleepers) related to the Mamyt rail road which requires overhauling including
renewal of the railroad bed (rails and ties or wooden sleepers). By comparison,
during the six months ended June 30, 2009 we received net cash from investing
activities of $620,294 which mainly represented an advance payment received in
connection with sale of Kaznickel.





During
the six months ended June 30, 2010 and 2009 we did not receive any cash from
financing activities.










Results
of Operations





Three
months ended June 30, 2010 compared to the three months ended June 30,
2009





Revenue





Because
our deposits are without known reserves, we are considered to be in the
exploration stage.  Any revenue earned during this stage from the sale
of ore or brown coal is recorded against exploratory costs. We did not have any
sales during the three months ended June 30, 2010 and 2009.





General and Administrative
Expenses





Our
general and administrative expenses during the three months ended June 30, 2010
decreased to $479,408 from $648,738during the second quarter
2009. This $169,330 decrease in general and administrative expenses was
primarily the result of lower payroll expenses and related taxes by
approximately $103,614 in the second quarter 2010 due to staff reductions,
decreases in rent expense of $22,120 due to reduction of rent fees and rented
premises and the reduction of other administrative expenses by $43,497 resulting
from the reduced scope of the Company’s operations due to our current financial
difficulties.





Research and Development
Costs





We
engaged in no research and development activities during the second quarter 2010
and 2009.




Exploratory
Costs





During
the three months ended June 30, 2010 and 2009 we did not extract any ore or
coal. The exploration costs incurred during these periods mainly represent
geologists’ and other specialists’ salaries, other costs in preparation for
future exploratory activities and some Kempirsai mining asset maintenance
expenses.





Accretion
Expense





Accretion
expense increased by $21,967 to $34,743 during the three months ended June 30,
2010 compared to the same period of 2009 due to the revision of asset retirement
obligations made at the end of 2009.  Until we engage in mining and
production, we believe accretion expense will continue at rates consistent with
those realized during the quarter ended June 30, 2010.





Grant Compensation
Expense





During
the three months ended June 30, 2010 we recognized no grant compensation expense
for restricted stock grants compared to $83,333 for the three months ended June
30, 2009. The reduction in grant compensation expense occurred due to vesting of
certain stock grants in 2009 and reversal of unvested shares granted to our
former Chief Financial Officer which were expected to vest in 2011. The reversal
was made at the end of 2009 due to the resignation of our former Chief Financial
Officer, which became effective on April 30, 2010.





Total Operating Expenses and
Loss from Operations





Our total
operating expenses and loss from operations decreased from $749,576 during the
three months ended June 30, 2009 to $522,789 during three months ended June 30,
2010.  The principal reasons for the decrease are a decrease in
general and administrative expense of $169,231 due to the reduced scope of the
Company’s operations and lower grant compensation expense due to due to vesting
and reversal of the shares granted.













Translation Adjustment and
Exchange Gain/Loss From Remeasurement





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





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





Exchange
Gain/Loss





As
discussed above, we recognize exchange gain or loss as a result of having
subsidiaries operating in foreign countries whose functional currency is not the
U.S. dollar.  This requires us to translate results of operations from
a foreign currency, in this case Kazakh tenge, to U.S. dollars at the average
exchange rate, where results of operations include exchange gains or losses on
the U.S. dollar monetary assets and liabilities. During the quarter ended June
30, 2010 we realized an exchange loss of $60,586 compared to an exchange gain of
$92,164during the
quarter ended June 30, 2009 because during the second quarter 2010 the Kazakh
tenge/U.S. dollar exchange rate strengthened from 146.98 Kazakh tenge/U.S.
dollar to 147.46 Kazakh tenge/U.S. dollar while during the second quarter 2009
the exchange rate was changed inversely from 151.08 Kazakh tenge/U.S. dollar to
150.41 Kazakh tenge/U.S. dollar.





Net Loss





For the foregoing reasons, during the
three months ended June 30, 2010 we experienced a net loss of $460,931 compared
to a net loss of $562,953 during the three months ended June 30, 2009. We
anticipate we will continue to experience net losses in upcoming quarters, but
given the current uncertainty associated with our licenses and our financial
condition we cannot predict the size or nature of those losses at this
time.











Six
months ended June 30, 2010 compared to the six months ended June 30,
2009





Revenue





We did
not have any sales during the six months ended June 30, 2010 while during the
six months 2009 we realized $311 from incidental sales of brown
coal.





General and Administrative
Expenses





Our
general and administrative expenses during the six months ended June 30, 2010
decreased to $1,034,412 from $1,295,794during the six months
ended June 30, 2009. This $261,382 decrease in general and administrative
expenses was primarily the result of lower payroll expenses and related taxes by
approximately $143,701 in the six months ended June 30, 2010 due to staff
reductions; decreases in rent expense of $48,766 due to reduction of rent fees
and rented premises; and the reduction of other administrative expenses by
$68,916 resulting from the reduced scope of the Company’s operations due to our
current financial difficulties.





Research and Development
Costs





We
engaged in no research and development activities during the six months 2010 and
2009.


Exploratory
Costs





During
the six months ended June 30, 2010 and 2009 we did not extract any ore or coal.
The exploration costs incurred during these periods mainly represent geologists’
and other specialists’ salaries, other costs in preparation for future
exploratory activities and some Kempirsai mining asset maintenance
expenses.





Accretion
Expense





Accretion
expense increased by $42,466 to $69,069 during the six months ended June 30,
2010 compared to the same period of 2009 due to the revision of asset retirement
obligations made at the end of 2009.  Until we engage in mining and
production, we believe accretion expense will continue at rates consistent with
those realized during the six months ended June 30, 2010.





Grant Compensation
Expense





During
the six months ended June 30, 2010 we recognized $6,390 in grant compensation
expense for restricted stock grants compared to $237,628 for the six months
ended June 30, 2009. As discussed above, the reduction in grant compensation
expense occurred due to vesting of certain stock grants in 2009 and reversal of
unvested shares granted to our former Chief Financial Officer which was made at
the end of 2009 due to his resignation.









Total Operating Expenses and
Loss from Operations





Our total
operating expenses and loss from operations decreased from $1,576,630 during the
six months ended June 30, 2009 to $1,172,678 during six months ended June 30,
2010.  The principal reasons for the decrease are a decrease in
general and administrative expense of $261,382 due to the reduced scope of the
Company’s operations and lower grant compensation expense due to due to vesting
and reversal of the shares granted.


Interest
Income





During
the six months ended June 30, 2010 we realized interest of $1,285 on deposits.
By comparison, during the six months ended June 30, 2009 we realized interest of
$74,700 on deposits and on the note receivable from a related
party.





Translation Adjustment and
Exchange Gain/Loss From Remeasurement





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





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





Exchange
Gain/Loss





As
discussed above, we recognize exchange gain or loss as a result of having
subsidiaries operating in foreign countries whose functional currency may or may
not be the U.S. dollar.  This requires us to translate results of
operations from a foreign currency, in this case Kazakh tenge, to U.S. dollars
at the average exchange rate, where results of operations include exchange gains
or losses on the U.S. dollar monetary assets and liabilities.





During
the six months ended June 30, 2010 we realized an exchange gain of $157,982
compared to an exchange loss of $2,710,834 during the six ended June 30,
2009.  During the six months ended June 30, 2010 the Kazakh tenge/U.S.
dollar exchange rate weakened from 148.46 Kazakh tenge/U.S. dollar to 147.46
Kazakh tenge/U.S. dollar while during the second quarter 2009 the exchange rate
was changed inversely from 120.79 Kazakh tenge/U.S. dollar to 150.41 Kazakh
tenge/U.S. dollar. On February 4, 2009 Kazakhstan’s National Bank dramatically
devalued the Kazakh tenge, the local currency, from a range of 117-123 Kazakh
tenge/U.S. dollar to 145-155 Kazakh tenge/U.S. dollar, citing the decline in oil
price (oil comprises 60% of Kazakh exports), currency devaluations in
Kazakhstan’s neighbors, particularly Russia, and the fledgling state of the
domestic banking sector. This currency devaluation was the main cause of the
exchange loss recognized by us during the six months ended June 30,
2009.











Net Loss





For the foregoing reasons, during the
six months ended June 30, 2010 we experienced a net loss of $844,743 compared to
a net loss of $3,932,347 during the six months ended June 30, 2009. We
anticipate we will continue to experience net losses in upcoming quarters, but
given the current uncertainty associated with our licenses and our financial
condition we cannot predict the size or nature of those losses at this
time.





Summary
of Material Contractual Commitments





The
following table lists our significant commitments as of June 30,
2010:





Payments
      due by Fiscal YearContractual
      Commitments
            
            Total
            
            Less
      than
              1
      year
            
            1-3
      years
            
            3-5
      years
            
            More
      than 5 yearsKKM’s
      work programs (1)
      (2)
            
            $123,400,000
            
            $32,500,000
            
            $78,500,000
            
            $4,400,000
            
            $8,000,000Operating
      leases
            
            22,200
            
            22,200
            
            -0-
            
            -0-
            
            -0-Total
            
            $123,422,200
            
            $32,522,200
            
            $78,500,000
            
            $4,400,000
            
            $8,000,000





(1)
            The
      current terms of the Kempirsai contract require KKM to invest $135 million
      to be applied to its mining and ore processing technology during the
      period 2006-2020 (or around $123.4 million for the remaining period).
      Also, the estimates include $985,000 for removal of all equipment and to
      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.


(2)
            In
      March 2008 KKM entered into a preliminary consortium agreement
      with two Kazakhstani companies, GRK Koitas LLP (“GRK”) and
      Asia-Invest Corporation LLP (“AI”), who also have exploration and
      production licenses near the Company’s Kempirsai deposit in northwestern
      Kazakhstan.  Under the preliminary consortium agreement, which
      was amended in November 2009, the parties are obliged to jointly
      contribute approximately $9.2 million for financing the construction of
      the processing plant. Of this amount, KKM is obligated to contribute
      approximately $4.6 million. Contributions made by the parties into the
      consortium are accounted for in the annual work programs of these parties.
      As of June 30, 2010 contributions of GRK equal KZT 181 million
      ($1,225,489) and contributions of AI equal KZT 119 million ($806,492),
      which were to be used for construction of a processing
    plant.





Off-Balance
Sheet Financing Arrangements





As of June 30, 2010 we had no
off-balance sheet financing arrangements.





Critical
Accounting Policies





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












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





Use of
Estimates – In connection with the preparation of our financial
statements, we are required to make estimates and assumptions that affect the
reported amounts in the financial statements and accompanying
notes.  One of the significant areas requiring the use of management
estimates and assumptions relates to environmental reclamation and closure
obligations.  Under our licenses with the Republic of Kazakhstan,
following completion of exploration and mining activities we are required to
reclaim our licensed territories.  To prepare our financial statements
in accordance with accounting principles generally accepted in the United States
of America we are required to account for this obligation.   The
determination of the amount of the mine retirement and environmental reclamation
obligation the Republic of Kazakhstan will impose upon us, however, has not yet
been determined.  The determination of the mine retirement and
environmental reclamation obligation is based, in significant part, on the size
of each deposit.  We base our estimate of this obligation on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances.  Accordingly, actual results may
differ significantly from our estimate.





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





Item
3. Qualitative and Quantitative Disclosures about Market Risk





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




Commodity
Price Risk





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.  As a result, commodity price
fluctuations affect our ability to borrow funds or raise additional capital
because declines in nickel and cobalt prices would reduce the revenues we could
earn if we begin commercial production.  Commodity prices for nickel
and cobalt have a material effect on our business and financial
condition.









Foreign
Currency Risk





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





Our
foreign-denominated monetary assets and liabilities are revalued on a monthly
basis with gains and losses on revaluation reflected in net income. A
hypothetical 10% favorable or unfavorable change in foreign currency exchange
rate at June 30, 2010 would have affected our consolidated net loss by
approximately $180,000.





Item
4.  Controls and Procedures





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended.  Our internal control
over financial reporting is designed to ensure that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure and to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles.





As of June 30, 2010 we conducted an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of our
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in “Internal
Control — Integrated Framework,” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission.  Based upon this
assessment, we determined that there is a material weakness affecting our
internal control over financial reporting.





The
matter involving internal controls and procedures that our management considers
to be material weaknesses under COSO and SEC rules is: with the resignation
of our Chief Financial Officer at the end of our first fiscal quarter 2010 and
the appointment of our Chief Executive Officer to also serve as our Interim
Chief Financial Officer until a suitable replacement can be retained, management
believes there is inadequate segregation of duties consistent with control
objectives.  This potential material weakness was identified by our
Interim Chief Financial Officer in connection with the preparation of our
financial statements as of June 30, 2010, who communicated the matter to our
board of directors.










Since the
current operations of the Company are insignificant and limited to maintenance
due to lack of funds and searching for additional financing, management believes
this material weakness did not have an effect on our current financial results.
However, were the lack of segregation of duties created by the Company relying
on its Chief Executive Officer to also serve as its Interim Chief Financial
Officer to continue for an extended period of time, management believes this
could impact our financial statements in the future.





Management’s
Remediation Initiatives





The
Company is committed to meeting the standards under COSO.  To date, we
have not retained a replacement Chief Financial Officer because the current
financial difficulties confronting the Company are such that we have not had
funds available to retain a replacement.  The Company intends to
retain a new Chief Financial Officer as soon as finances permit.  With
the retention of a new Chief Financial Officer, the Company will once again be
able to segregate the duties of the Chief Executive Officer and Chief Financial
Officer, which management believes will resolve the material
weakness.





Changes in Internal Control
Over Financial Reporting





Management
of the Company believes there is inadequate segregation of duties consistent
with control objectives due to the resignation of our Chief Financial Officer at
the end of first fiscal quarter 2010 and the appointment of our Chief Executive
Officer to also serve as our Interim Chief Financial Officer until a suitable
replacement can be retained.  This potential material weakness was
identified by our Interim Chief Financial Officer in connection with the
preparation of our financial statements as of June 30, 2010, who communicated
the matter to our board of directors.





Since the
current operations of the Company are insignificant and limited to maintenance
due to lack of funds and searching of additional financing and the quarterly
reporting process requires preparation of condensed consolidated financial
statements only, some of the Chief Financial Officer’s functions in preparing
the condensed consolidated financial statements were delegated to a
Company  accountant responsible for consolidation while our Chief
Executive Officer (who also serves as our Interim Chief Financial Officer) was
responsible for review of the condensed consolidated financial statements in
order to achieve certain level of segregation of duties in the financial
reporting process.  Therefore, management believes this material
weakness did not have an effect on our current financial results. However, were
the lack of segregation of duties created by the Company relying on a single
individual to serve as its Chief Executive Officer and Chief Financial Officer
to continue for an extended period of time, management believes this could
impact our financial statements in the future.












PART
II -- OTHER INFORMATION





Item
1A.  Risk Factors





Except as disclosed above in Part 1,
Item 4T. Controls and
Procedures and as provided in below, there were no material changes
during the quarter from the risk factors previously discussed in Item 1A,
“Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2009.





The
impending resignation of Yermek Kudabayev could materially impact the
Company.Yermek Kudabayev the
Company’s CEO, President, Interim CFO and a member of the Company’s board of
directors has tendered his resignation from all positions with the Company to
become effective August 16, 2010.  While we have initiated a search to
identify qualified candidates to fulfill the executive level positions that will
be left vacant by Mr. Kudabayev’s resignation, to date we have not been
successful in identify or retain appropriate candidates.  At this
time, it is unclear when, or if, a qualified candidate or candidates may be
identified and retained.  Given our current financial situation it may
be difficult to retain qualified individuals to fill our vacant executive level
positions.  Until such time as we are able to retain qualified
candidates, we will have to rely upon current company employees and members of
the board of directors to carry out the duties previously performed by Mr.
Kudabayev.  There is no guarantee that our current employees and board
members will be as qualified, effective or successful in carrying out the
Company’s business as was Mr. Kudabayev.  Given the current critical
conditions currently facing the Company relative to our financial condition and
the status of our subsoil use contracts, if we are unable to quickly retain
qualified individuals to serve as our CEO and CFO, our ability to retain our
licenses or continue as a going concern may be materially impacted.





Item
5.  Other Information





As disclosed by the Company in a
Current Report on Form 8-K filed with the SEC on July 21, 2010, Yermek
Kudabayev, the Company’s CEO, President, Interim CFO and a director tendered his
resignation from all positions with the Company to become effective August 16,
2010.  Mr. Kudabayev’s resignation was not the result of any
disagreement with the Company on any matter relating to operations, policies or
practices. The board of directors has not yet identified qualified persons to
fill the vacancies that will be created by Mr. Kudabayev’s
resignation.





Item
6.  Exhibits





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





Exhibit
      No.
            
            Exhibit
      Description31.1
            
            Certification
      of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-
      Oxley Act of 2002*31.2
            
            Certification
      of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-
      Oxley Act of 2002*32.1
            
            Certification
      of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-
      Oxley Act of 2002*32.2
            
            Certification
      of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-
      Oxley Act of 2002*





*  Filed
herewith.












SIGNATURES







Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.





BEKEM
      METALS, INC.





Date:
      August 11, 2010
            /s/
      Yermek KudabayevYermek
      Kudabayev
              Chief
      Executive Officer





Date:
      August 11, 2010
            /s/
      Yermek KudabayevYermek
      Kudabayev
              Interim
      Chief Financial Officer