**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 EndedSeptember 30,            2007

 

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

For the Transition Period From ________ to _________

 

Commission File Number**0-50218**

 

**BEKEM METALS, INC.**

(Exact name of registrant as specified in its charter)

                

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

 

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

(Registrant’s telephone number, including area code)

 

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

 

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

 

|   | Large accelerated Filer                            o | Accelerated Filer                            o | Non-accelerated Filerx |
|--------|------------------------------------------------------|------------------------------------------------|------------------------|

 

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

 

As            of November 5, 2007, the registrant had 124,750,239 shares of common stock, par value            $0.001, issued and outstanding.

 

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**BEKEM METALS, INC.**

**FORM 10-Q**

**TABLE OF CONTENTS**

 

PART I            — FINANCIAL INFORMATION

 

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

September 30, 2007 and December 31, 2006                                                              |  

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

Three Months and Nine Months Ended September 30, 2007                            and 2006 |  

4 |
|                                                                                                                            |                                                                                                                                                                                      |   |
|                                                                                                                            | Condensed Consolidated Statements of Cash Flows                            (Unaudited) for the Nine Months Ended September 30, 2007 and                            2006                   |  

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

and Results of Operations |  

14                                                                                                                                                                                |
|                                                                                                                            |                                                                                                                                                                                      |
| Item 3. Qualitative and Quantitative Disclosures About                            Market Risk                                   | 30                                                                                                                                                                                        |
|                                                                                                                            |                                                                                                                                                                                      |
| Item 4. Controls and Procedures                                                                                                 | 31                                                                                                                                                                                        |
|                                                                                                                            |                                                                                                                                                                                      |
| PART II — OTHER INFORMATION                                                                                               |                                                                                                                                                                                      |
|                                                                                                                            |                                                                                                                                                                                      |
| Item 1A. Risk Factors                                                                                                           | 31                                                                                                                                                                                        |
|                                                                                                                            |                                                                                                                                                                                      |
| Item 6. Exhibits                                                                                                                | 32                                                                                                                                                                                        |
|                                                                                                                            |                                                                                                                                                                                      |
| Signatures                                                                                                                      | 32                                                                                                                                                                                        |

 

 

2

 

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**PART            I – FINANCIAL INFORMATION**

**Item            1. Financial Statements**

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 

|                                                                                          |   | **September 30,**                                                                |   | **December 31,**                                                     |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|
|                                                                                          |   | **2007**                                                                         |   | **2006**                                                             |
|                                                                                          |   |                                                                             |   |                                                                 |
| **ASSETS**                                                                                    |   |                                                                             |   |                                                                 |
|                                                                                          |   |                                                                             |   |                                                                 |
| **Current Assets**                                                                            |   |                                                                             |   |                                                                 |
| Cash                                                                                          |   | $        2,378,425                  |   | $     8,583,680                        |
| Trade accounts receivable                                                                     |   | 5,350                                                                       |   | 2,776                                                           |
| VAT recoverable                                                                               |   | 209,709                                                                     |   | 186,915                                                         |
| Inventories                                                                                   |   | 1,275,941                                                                   |   | 377,018                                                         |
| Prepaid expenses and other current assets                                                     |   | 352,580                                                                     |   | 139,293                                                         |
| Deferred compensation                                                                         |   | 362,825                                                                     |   | 757,920                                                         |
| **Total Current Assets**                                                                      |   | 4,584,830                                                                   |   | 10,047,602                                                      |
|                                                                                          |   |                                                                             |   |                                                                 |
| **Non-Current Assets**                                                                        |   |                                                                             |   |                                                                 |
| Property, plant and mineral interests (net of                            accumulated          |   |                                                                             |   |                                                                 |
| depreciation of $230,967 and $144,030 )                                                       |   | 14,833,026                                                                  |   | 13,870,563                                                      |
| Non-current deferred compensation                                                             |   | 467,234                                                                     |   | 1,202,587                                                       |
| Other assets                                                                                  |   | 189,234                                                                     |   | 169,130                                                         |
| **Total Assets**                                                                              |   | $      20,074,324                             |   | $    25,289,882                             |
|                                                                                          |   |                                                                             |   |                                                                 |
| **LIABILITIES AND SHAREHOLDERS’                            EQUITY**                     |   |                                                                             |   |
|                                                                                          |   |                                                                             |   |                                                                 |
| **Current Liabilities**                                                                       |   |                                                                             |   |                                                                 |
| Accounts payable                                                                              |   | $           366,854  |   | $         530,665  |
| Accrued expenses                                                                              |   | 303,335                                                                     |   | 274,739                                                         |
| Due to related party                                                                          |   | 13,347                                                                      |   | 9,644                                                           |
| **Total Current Liabilities**                                                                 |   | 683,536                                                                     |   | 815,048                                                         |
|                                                                                          |   |                                                                             |   |                                                                 |
| Deferred tax liabilities                                                                      |   | -                                                                           |   | 488,277                                                         |
| Asset retirement obligation                                                                   |   | 1,060,515                                                                   |   | 951,355                                                         |
| **Total Liabilities**                                                                         |   | 1,744,051                                                                   |   | 2,254,680                                                       |
|                                                                                          |   |                                                                             |   |                                                                 |
| **Commitments and Contingencies**                                                             |   | -                                                                           |   | -                                                               |
|                                                                                          |   |                                                                             |   |                                                                 |
| **Shareholders’ Equity**                                                                |   |                                                                             |   |                                                                 |
| Preferred stock; $0.001 par value, 20,000,000                            shares               |   |                                                                             |   |                                                                 |
| authorized, no shares outstanding                                                             |   | -                                                                           |   | -                                                               |
| Common stock; $0.001 par value, 150,000,000 shares                            authorized,     |   |                                                                             |   |                                                                 |
| and 124,750,239 and 125,172,011 shares issued and                            outstanding |   | 124,750                                                                     |   | 125,172                                                         |
| Additional paid-in capital                                                                    |   | 28,203,239                                                                  |   | 29,025,272                                                      |
| Accumulated deficit                                                                           |   | (9,916,457)                                                                      |   | (6,085,026)                                                          |
| Accumulated other comprehensive loss                                                          |   | (81,259)                                                                         |   | (30,216)                                                             |
| **Total Shareholders’ Equity**                                                          |   | 18,330,273                                                                  |   | 23,035,202                                                      |
| **Total Liabilities and Shareholders’                            Equity**               |   | $    20,074,324                                         |   | $     25,289,882                       |

 

3

----

 

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 

|                                                                         | **For the three month ended**                                             | **For the nine month ended**                                                                                   |
|------------------------------------------------------------------------------|---------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                                                         | **September 30,**                                                         | **September 30,**                                                                                              |
|                                                                         | **2007**                                                                  | **2006**                                                                                                       | **2007** | **2006** |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Revenue**                                                                  | $          1,882   | $                 -  | $             38,537  | $           52,356  |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Operating Expenses**                                                       |                                                                      |                                                                                                           |   |   |
| Cost of product sold                                                         | 2,150                                                                | -                                                                                                         | 36,950  | 65,871  |
| General and administrative expenses                                          | 871,463                                                              | 1,287,652                                                                                                 | 3,564,696  | 2,209,740  |
| Research and development costs                                               | -                                                                    | -                                                                                                         | -  | 391,307  |
| Exploratory costs                                                            | 71,534                                                               | 264,688                                                                                                   | 1,467,338  | 382,953  |
| Accretion expense on asset retirement                            obligations | 20,189                                                               | 18,758                                                                                                    | 60,558  | 54,901  |
| Depreciation expense                                                         | 27,472                                                               | 12,695                                                                                                    | 94,253  | 48,423  |
| Stock Grant compensation expense                                             | 120,941                                                              | -                                                                                                         | 307,993  | -  |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Total Operating Expenses**                                                 | 1,113,749                                                            | 1,583,793                                                                                                 | 5,531,788  | 3,153,195  |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Loss From Operations**                                                     | (1,111,867)                                                               | (1,583,793)                                                                                                    | (5,493,251) | (3,100,839) |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Other Income (Expense)**                                                   |                                                                      |                                                                                                           |   |   |
| Interest expense                                                             | -                                                                    | (1,109,062)                                                                                                    | (1,018) | (1,474,274) |
| Translation adjustment                                                       | (77,526)                                                                  | 90,045                                                                                                    | (216,913) | (30,269) |
| Exchange gain (loss)                                                         | 361,665                                                              | (1,031,056)                                                                                                    | 1,053,644  | (140,908) |
| Interest earned                                                              | 89,902                                                               | 17,563                                                                                                    | 316,529  | 27,935  |
| Other income (expense)                                                       | 31,673                                                               | (55,119)                                                                                                       | 19,264  | (120,031) |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Net Other Income (Expense)**                                               | 405,714                                                              | (2,087,629)                                                                                                    | 1,171,506  | (1,737,547) |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Net Loss Before Taxes**                                                    | (706,153)                                                                 | (3,671,422)                                                                                                    | (4,321,745) | (4,838,386) |
| Deferred tax (provision) benefit                                             | (597,193)                                                                 | -                                                                                                         | 490,314  | -  |
|                                                                         |                                                                      |                                                                                                           |   | -  |
| **Net Loss**                                                                 | $  (1,303,346)                                                  | $  (3,671,422)                                                                                       | $    (3,831,431) | $     (4,838,386) |
|                                                                         |                                                                      |                                                                                                           |   |   |
| **Basic Loss per Common Share**                                              | $           (0.01) | $          (0.03)                                            | $             (0.03) | $                                        (0.05) |
| **Weighted-Average Shares used in**                                          |                                                                      |                                                                                                           |   |   |
| **Basic Loss per Common Share**                                              | 115,517,459                                                          | 120,436,714                                                                                               | 115,517,459  | 106,946,031  |

 

4

 

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**BEKEM            METALS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 

| *For the Nine Months Ended September                            30,*                 |   | **2007**                                             |   | **2006**                                       |
|--------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|------------------------------------------------|
| **Cash Flows from Operating Activities**                                             |   |                                                 |   |                                           |
| Net loss                                                                             |   | $     (3,831,431)           |   | $     (4,838,386)     |
| Adjustments to reconcile net loss to                                                 |   |                                                 |   |                                           |
| net cash provided by operating activities:                                           |   |                                                 |   |                                           |
| Depreciation and amortization                                                        |   | 94,567                                          |   | 37,396                                    |
| Accretion expense on asset retirement                            obligations         |   | 60,558                                          |   | 54,901                                    |
| Deferred tax benefit                                                                 |   | (515,422)                                            |   | -                                         |
| Foreign currency exchange gain and translation                            adjustment |   | (203,106)                                            |   | 41,682                                    |
| Loss on disposal of property and equipment                                           |   | 155,814                                         |   | 40,191                                    |
| Stock grant compensation expense                                                     |   | 333,101                                         |   | -                                         |
| Change in operating assets and liabilities:                                          |   |                                                 |   |                                           |
| Trade accounts receivable                                                            |   | (2,949)                                              |   | 7,370                                     |
| Inventories                                                                          |   | (864,592)                                            |   | (24,469)                                       |
| VAT recoverable                                                                      |   | (13,222)                                             |   | -                                         |
| Prepaid expenses and other current assets                                            |   | (225,887)                                            |   | (709,570)                                      |
| Accounts payable                                                                     |   | (174,605)                                            |   | 298,512                                   |
| Accrued expenses                                                                     |   | (570,261)                                            |   | 206,418                                   |
| Deferred grant revenue                                                               |   | -                                               |   | 2,445                                     |
| **Net Cash From Operating Activities**                                               |   | (5,757,435)                                          |   | (4,883,510)                                    |
|                                                                                 |   |                                                 |   |                                           |
| **Cash Flows from Investing Activities**                                             |   |                                                 |   |                                           |
| Issuance of shares                                                                   |   | -                                               |   | 26,401,842                                |
| Purchase of property and equipment                                                   |   | (516,434)                                            |   | (2,079,419)                                    |
| Purchase of intangible assets                                                        |   | (7,399)                                              |   | (31,797)                                       |
| Restricted cash                                                                      |   | -                                               |   | (100,000)                                      |
| Cash acquired in acquisitions                                                        |   | -                                               |   | 45,393                                    |
| Change in related party receivables/payables                                         |   | (4,619)                                              |   | (2,240,525)                                    |
| **Net Cash From Investing Activities**                                               |   | (528,452)                                            |   | 21,995,494                                |
|                                                                                 |   |                                                 |   |                                           |
| **Cash Flows from Financing Activities**                                             |   |                                                 |   |                                           |
| Proceeds from notes payable                                                          |   | -                                               |   | 869,900                                   |
| Payments on notes payable                                                            |   | -                                               |   | (11,260,644)                                   |
| Proceeds from notes payable related parties                                          |   | -                                               |   | 1,536,044                                 |
| **Net Cash From Financing Activities**                                               |   | -                                               |   | (8,854,700)                                    |
|                                                                                 |   |                                                 |   |                                           |
| **Effect of Exchange Rate Changes on                            Cash**               |   | 80,632                                          |   | 149,573                                   |
|                                                                                 |   |                                                 |   |                                           |
| **Net Decrease in Cash**                                                             |   | (6,205,255)                                          |   | 8,406,857                                 |
| **Cash at Beginning of Period**                                                      |   | 8,583,680                                       |   | 89,366                                    |
| **Cash at End of Period**                                                            |   | $      2,378,425  |   | $     8,496,223  |

 

5

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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

 

***Interim Financial Information***— The accompanying unaudited condensed consolidated financial            statements have been prepared in accordance with accounting principles generally            accepted in the United States of America for interim financial information and pursuant            to the rules and regulations of the Securities and Exchange Commission. Accordingly,            they are condensed and do not include all of the information and notes required by            accounting principles generally accepted in the United States of America for complete            financial statements. In the opinion of management, all adjustments and            reclassifications considered necessary for a fair and comparable presentation have been            included and are of a normal recurring nature. The accompanying financial statements            should be read in conjunction with the most recent audited financial statements of            Bekem Metals, Inc. included in its annual report on Form 10-KSB filed for the year            ended December 31, 2006. Operating results for the nine-month period ended September            30, 2007 are not necessarily indicative of the results that may be expected for the            year ending December 31, 2007.

 

**Basis of Presentation**

 

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

 

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

 

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

 

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

 

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

 

6

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

 

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

 

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

 

***Currency Translation***– The            consolidated financial statements are presented in U.S. dollars. The functional            currency of the Company’s subsidiaries operating in Kazakhstan is U.S. dollars            for Kaznickel and Kazakh tenge for KKM. Results of operations are translated into U.S.            dollars at the average exchange rates during the reporting period. Non-monetary assets            and liabilities of Kaznickel are translated into U.S. dollars, using historical            exchange rates and monetary assets and liabilities are translated into U.S. dollars            using exchange rates on the date of the financial statements. Translation differences            are included in results of operations. All balance sheet accounts of KKM are translated            at exchange rates on the date of the financial statements and translation differences            are included in stockholders’ equity as cumulative translation            adjustments.

 

**Nature of Business**

 

The            Company is engaged in the acquisition, exploration and production of mineral resource            properties. Kaznickel owns the right to the Gornostayevskoye (“Gornostai”)            nickel and cobalt deposit located in the East Kazakhstan Oblast in northeast            Kazakhstan. The subsoil use contract and license is for exploration and production of            cobalt and nickel ores and is valid through February 26, 2026. KKM holds production            subsoil use contracts and licenses from the government of Kazakhstan to a 575,756 acre            parcel, located approximately 130 kilometers northeast of Aktobe, Kazakhstan. This            deposit is referred to as the Kempirsai deposit. The subsoil use contracts and licenses            grant KKM the right to produce nickel and cobalt from deposits located within the            territory through October 12, 2011, which may be extended upon agreement between KKM            and the Ministry of Energy and Minerals Resources (“MEMR”) of the Republic            of Kazakhstan. KKM also holds a subsoil use contract and a license to produce Mamyt            brown coal from a deposit located within 40 kilometers of its cobalt and nickel            deposit. This subsoil use contract and license expires on December 11, 2018 with            further possible extensions.

 

***Business Condition***– The            Company has no proven mineral reserves that conform to U.S. accounting standards and            has had only limited nickel ore and Mamyt brown coal production from its Kempirsai            deposit since its acquisition on May 31, 2005. The Gornostai deposit has not yet            entered the development stage with respect to its mineral interests and has no            production. There has been only limited revenue from the Kempirsai operations, and the            Company has incurred net losses of ($3,831,431) and ($4,838,386) for the nine months            ended September 30, 2007 and 2006, respectively. Current assets exceeded current            liabilities by $3,901,294 at September 30, 2007. Management expects that the Company            will need significant additional capital to fund construction of a processing plant in            2007-2008. The Company anticipates it will need to raise additional capital through the            sale of its equity securities or debt securities. Certain shareholders of the Company            have indicated a willingness to provide the Company a line of credit. The Company has            no formal agreement with said shareholders to provide this line of            credit and the shareholders are under no obligation to enter into any agreement or make            available any funds to the Company.

 

7

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

 

***Kempirsai Production Stage***–            The Kempirsai, or KKM, operations are considered to be in the production stage.            According to EITF 04-6, the production phase of a mine is deemed to have begun when            saleable minerals are extracted (produced) from an ore body, regardless of the level of            production. The Kempirsai mine has been an operating mine in the production stage            dating back to the 1980s and saleable minerals were previously, and continue to be            extracted from the mine.

 

***Gornostai Exploration Stage***–            The Gornostai, or Kaznickel, operations are considered to be in the exploration stage.            Since its inception on March 4, 2004, the Company has devoted a substantial amount of            effort in raising capital, acquiring Kaznickel, and exploring the Gornostai deposit            under its exploration contract. This mineral property has not yet reached development            or production stage and accordingly, no revenues from production have been            recorded.

 

**Corrected prior periods financials**

 

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

 

**Reclassifications**

 

The            following prior year amounts have been reclassified to conform to the current year            presentation:

 

During 2006 the Company, through its subsidiary KKM, provided locomotive            railroad services to a third party. The related expenses incurred by KKM were charged            to this third party as reimbursement and recorded as “Revenue”, when it            should have been recorded as “Other income (expense)”. The total value of            the services provided was $52,948. As a result, Revenue for the year ended December 31,            2006 was reduced by $52,948 and Other income (expense) for the year ended December 31,            2006 was credited by the same amount to reflect proper classification of revenue and            expenses related to the operating and non-operating activity.

 

Also, the stock grant compensation expense has been reclassified to            “Operating Expenses” rather than “Net Other            Expense.”

 

8

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

**NOTE 2 - CASH**

 

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:

 

|                     | **September 30,**                                        |   | **December 31,**                                               |
|--------------------------|----------------------------------------------------------|--------|----------------------------------------------------------------|
|                     | **2007**                                                 |   | **2006**                                                       |
| Current accounts (USD)   | $        169,121 |   | $         479,947 |
| Current accounts (Tenge) | 43,877                                                   |   | 38,379                                                         |
| Bank deposit (USD)       | 143,626                                                  |   | 8,065,354                                                      |
| Bank deposit (Tenge)     | 2,021,801                                                |   | -                                                              |
| **Total**                | **$**  **2,378,425**                           |   | **$**  **8,583,680**                                 |

 

Bank            deposit accounts are located in a Kazakhstani Bank (Center Credit Bank). Bank deposits            earn interest from 3% to 8% annually based on the length of time the funds are left on            deposit. Of the total bank deposits, $100,000 is restricted until December 20, 2007.            This amount is included in other non-current assets. The remaining balances of the bank            deposits are immediately available to the Company.

 

**NOTE            3 – INVENTORY**

 

Inventory consists of the            following**:**

 

|                 | **September 30,**                                        |   | **December 31,**                       |
|----------------------|----------------------------------------------------------|--------|----------------------------------------|
|                 | **2007**                                                 |   | **2006**                               |
| Ore                  | $       577,790  |   | $      82,897 |
| Brown coal           | 346,027                                             |   | 109,058                                |
| Fuel                 | 177,529                                             |   | 15,254                                 |
| Materials            | 175,418                                             |   | 100,463                                |
| Spare parts          | 64,103                                              |   | 69,346                                 |
| Obsolescence reserve | (64,926)                                                 |   | -                                      |
|                 | **$**  **1,275,941**                      |   | **$ 377,018**                          |

 

Ore            represents 186,863 tons and 108,707 tons of the nickel ore with nickel content of 1.04%            and 0.85% located in the ore warehouse as of September 30, 2007 and December 31, 2006,            respectively. During the nine-month period ended September 30, 2007 the Company            produced 79,021 tons of ore while no ore was produced during the same period of            2006.

 

Brown coal represents 20,098 tons and 21,028 tons located in the coal            warehouse as of September 30, 2007 and December 31, 2006, respectively.

 

9

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

The            Company has adopted FASB Emerging Issues Task Force Issue No. 04-6,            “Accounting for Stripping Costs Incurred during Production in the Mining            Industry,” (EITF 04-6) which addresses the accounting for stripping costs            incurred during the production phase of a mine and refers to these costs as variable            production costs that should be included as a component of inventory to be recognized            in costs applicable to sales in the same period as the revenue from the sale of            inventory.

 

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

 

Property, plant and mineral interests consist of the            following:

 

|                             | **September 30,**                                    |   | **December 31,**                                           |
|----------------------------------|------------------------------------------------------|--------|------------------------------------------------------------|
|                             | **2007**                                             |   | **2006**                                                   |
| Buildings                        | $      2,364,257  |   | $       2,156,326  |
| Machinery and equipment          | 3,846,276                                       |   | 3,474,858                                             |
| Other fixed assets               | 124,578                                         |   | 69,665                                                |
| Unproved mineral interests - net | 8,728,882                                       |   | 8,313,744                                             |
|                             | 15,063,993                                      |   | 14,014,593                                            |
| Accumulated depreciation         | (230,967)                                            |   | (144,030)                                                  |
| **Net Property and Equipment**   | **$** **14,833,026**                       |   | **$** **13,870,563**                             |

 

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

 

***Gornostai Deposit***

 

Kaznickel acquired its interest in the Contract on Exploration and            Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued            by the MEMR dated February 26, 2004. By virtue of the Contract, Kaznickel acquired the            right to exploit the mineral property including the right to explore, develop and            produce the nickel and cobalt mineral resources on the Deposit through February 26,            2026. The Company has the right to re-negotiate the contract at that time for an            additional 30 years. The government of Kazakhstan retains the title to the property;            however, the Company’s mineral interests are considered to be tangible assets.            The Company capitalized the acquisition costs of its mineral interest upon the purchase            business combination with Kaznickel. The allocated purchase price included a            capitalized amount of an acquired asset retirement obligation. While the property is            not in production, the asset retirement cost is depleted over the life of the contract            from the date of acquisition.

 

The            Contract provides the Company certain rights and also imposes certain obligations and            commitments. The rights include exploration through February 2008, and development and            production of minerals through February 26, 2026. The Company may transfer its right to            third parties in accordance with Kazakh laws and regulations and has a right to            renegotiate an extension of the Contract. Significant rights, obligations and            commitments of the Contract include monetary commitments for exploration of $1,576,480,            which have been fulfilled in 2007, and expenditures to support social projects            amounting to $300,000 during the production stage. In addition, the Company was            required to pay a fee of $2,000 upon award of the Contract, and a fee for the use            of

 

10

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

Kazakh owned technical data of $735,400 of which $4,179 was paid on            award of the Contract and $731,221 will be due upon a finding of commercial deposits.            Royalties of 0.5% of ores extracted and sold will be required. The Contract subjects            the Company to pay regular income tax of 30 percent and requires an excess profits tax            of 15 to 60 percent if its net profits exceed 20 percent of gross profit. Obligations            also include the establishment and funding of a reclamation fund that includes the cost            of removing buildings and equipment used in the Deposit area. The Company is also            required to comply with Kazakh environmental laws and regulations.

 

***Kempirsai Deposit***

 

Bekem acquired two contracts to explore for and extract minerals in            connection with the purchase of KKM. One contract is for the exploration and extraction            of nickel and cobalt ore through October 12, 2011 from deposits located in an            approximately 575,756 acre site in the northwest area of the Republic of Kazakhstan            approximately 130 kilometers northeast of the city of Aktobe, Kazakhstan, near the town            of Badamsha, referred to as the “Kempirsai” deposit. The other contract is            for the exploration and extraction of Mamyt brown coal through December 11, 2018 at a            site located within 40 kilometers of the Kempirsai deposit. The contracts may be            extended upon agreement between KKM and the Geology and Minerals Resources Committee of            the Ministry of Energy and Minerals Resources of the Republic of Kazakhstan. The            Kempirsai contract requires the Company to pay royalty payments equal to 2.21% of gross            ore sales. The Mamyt brown coal contract requires a royalty payment equal to nine            tenths of one percent (0.9%) of gross coal sales. Both contracts require the Company to            pay an excess profits tax ranging from 4 to 30 percent based upon the reaching of an            internal rate of return (as defined in the contracts) ranging from 22 to 30 percent.            The allocated purchase price of the mineral interest included a capitalized amount of            an acquired asset retirement obligation. The asset retirement cost is depleted over the            life of the contract from the date of acquisition. Obligations also include the            establishment and funding of a reclamation fund that includes the cost of removing            buildings and equipment used. The Company is also required to comply with Kazakh            environmental laws and regulations.

 

**NOTE            5 - COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

11

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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

 

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

 

***Due to the Government of the Republic of Kazakhstan***– In connection with the Company’s acquisition of the            exploration contract covering the Gornostai deposit, the Company is required to repay            the Republic of Kazakhstan for historical costs incurred in undertaking geological and            geophysical studies and infrastructure improvements. The repayment terms of this            obligation will not be determined until the Company applies for and is granted a            contract by the Republic of Kazakhstan to engage in commercial production. That amount            is expected to be $731,221 and has not been recorded as a liability. Under the current            contract, once the Company determines the property contains commercially producible            reserves, and desires to commence commercial production, it must apply for such right            prior to the expiration of its exploration and development rights in February 2026. The            Company anticipates it will apply for a commercial production contract within the next            1-3 years. Of course, there is no guarantee when or if the Company will discover            commercially producible reserves within the Gornostai deposit. Should the Company            decide not to pursue a commercial production contract, then it can relinquish the            Gornostai deposit to the Republic of Kazakhstan in satisfaction of this            obligation.

 

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

 

***Operating leases***– Bekem            leases approximately 400 square feet of office space located at 324 South 400 West,            Suite 225, Salt Lake City, Utah 84101 for its administrative and registered office in            the United States. The Company pays annual rents of approximately $7,800 for this space            pursuant to a lease agreement that expires December 31, 2007 with an option to extend            the lease for an additional year.

 

The            Company also maintains a representative office in Almaty, Kazakhstan, where it leases            approximately 1,575 square feet of office space. The lease agreement expires on            December 31, 2007. In April 2007, our monthly lease payment increased from $5,250 to            $6,125. Under the terms of the lease agreement, the owner of the space could terminate            the lease at any time and require the Company to vacate the premises.

 

12

 

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**BEKEM METALS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007 (UNAUDITED)**

 

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

 

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

 

13

 

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

 

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

 

**Forward Looking Information and Cautionary Statement**

 

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

 

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

 

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

 

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

 

14

 

 

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The primary asset of Kaznickel is an exclusive subsoil use license and            contract that grants Kaznickel the exclusive right, through February 2008, unless            extended, to explore for and engage in test production of nickel, cobalt and other            minerals in a 12,232 acre area in northeastern Kazakhstan known as the Gornostayevskoye            (“Gornostai”) deposit. The concession further provides that if we make a            commercial discovery of nickel, cobalt or other minerals within the concession            territory, we can apply for and receive the exclusive rights to commercially produce            and sell nickel and cobalt ore through February 2026.

             

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

             

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

**Primary Minerals** | **License**

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

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

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

extended.

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

and

Production | 1349                                                    | Exploration period expires Feb. 26, 2008 unless                            extended. Production period expires Feb. 26, 2026 unless                            extended. |

             

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

 

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

 

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

 

15

 

 

----

We are currently at the exploration stage on the Gornostai deposit. To            retain our subsoil use contract during exploration stage we are required to satisfy a            minimum work program that is approved by the Geology Committee of the MEMR. We are            currently in the third year of a three-year work program. Under this program, we are            required to engage in an exploratory drilling program designed to identify and evaluate            the mineral resources contained within the contract territory. In 2007, we are required            to drill test holes totaling at least 12,961 meters. For 2007, we planned to drill            approximately 615 test holes totaling approximately 15,700 meters during 2007. As of            September 30, 2007 we have drilled a total of 15,625 meters (619 test            holes).

             

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

 

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

 

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

 

We currently have no processing facilities at either the Kempirsai or            Gornostai deposits. We plan to construct processing facilities to process our ores at            our Kempirsai deposit. Historically, pyrometallurgy has been the most common processing            procedure utilized to process nickel and cobalt ores. Hydrometallurgical technology has            improved to the point that it is now an acceptable alternative to pyrometallurgy for            processing nickel and cobalt ores. Both technologies require large plants, costly            construction and expensive equipment often requiring capital infusions of hundreds of            millions of dollars.

             

We have retained the services of an independent engineering firm to            conduct a pre-feasibility study reviewing different technologies to determine the best            processing technology, optimal processing capacity, construction costs and timelines,            etc. to allow us to determine the type of processing facility we will construct at the            Kempirsai deposit. We expect the pre-feasibility study to be completed by the end of            2007.

 

**Results of Operations**

 

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

 

16

 

 

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In July 2006 we realized net proceeds of approximately $26,600,000            through a private placement of our equity securities. As of September 30, 2007, we had            spent approximately $24,222,000 of those funds. Approximately $12,200,000 was used to            repay loans, $2,500,000 was used to meet our minimum working program obligations,            approximately $2,200,000 was spent developing our hydrochlorination processing            technology and $7,300,000 was used for working capital. At September 30, 2007, we had            cash on hand of $2,378,425. We expect cash on hand will be sufficient to fund our            operations through the end of the current fiscal year. We also anticipate the need to            seek additional funding by the end of fiscal 2007 to continue our operations and our            efforts to exploit our mineral resources. There is no assurance that we will be able to            obtain additional funding in the future on favorable terms, or at all. At this time, we            have no commitments from any parties to provide us additional funding.

 

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

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

 

During the three months period ended September 30, 2007, we earned            revenue of $1,882. This revenue was generated from the sale of coal. By comparison            during the third quarter 2006 we realized no revenue. We continue to investigate            opportunities to sell ore from our Kempirsai deposit and brown coal from our Mamyt            deposit. We do not, however, expect to realize significant revenue from ore or coal            sales during the remainder of the current fiscal year.

 

|   | Cost of Product Sold |
|--------|----------------------|

 

We realized cost of product sold of $2,150 during the third quarter            2007. By comparison during the third quarter 2006 we realized no cost of product sold.            Cost of product sold during the third quarter 2007 represented the cost associated with            the brown coal sold. During the quarter, cost of coal sales exceeded revenue from coal            sold because there is currently a limited market for the brown coal we mine. We sold            coal for less than our production cost in hopes of attracting future interest in our            brown coal. While we hope to establish a profitable market for our brown coal, there is            no assurance one will develop. Even if we are unable to sell our brown coal at a profit            in the future, we will likely continue to mine and sell brown coal because we are            required to extract certain quantities of coal each year to maintain our subsoil use            contract for the deposit.

 

We believe the real value of the Mamyt brown coal deposit will be as a            potential energy source for the ore processing plant we plan to construct at the            Kempirsai deposit. So, even if a profitable market for our brown coal does not develop,            we anticipate we will continue to mine and, as possible, sell brown coal, in order to            maintain our license and contract to the deposit, at least until the pre-feasibility            study is completed and we have determined which processing method we will employ at the            Kempirsai deposit.

 

17

 

 

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                General and Administrative Expenses

             

Our general and administrative expenses during the three months ended            September 30, 2007 decreased to $871,463 from $1,287,652 during the three months ended            September 30, 2006. During the 2006 quarter we produced no ore. As a result, production            expenses (salaries of workers and other production expenses) of approximately $400,000            were allocated to general and administrative expenses. By comparison, during the 2007            quarter we produced 62,065 tons of ore, which allowed us to reduce the amount of            workers’ salaries and other production expenses allocated to general and            administrative expense during the three months ended September 30, 2007.

             

Research and Development Costs

 

We engaged in no research and development in connection with the            development and testing of our hydrochlorination processing technology during the third            quarter 2007 or during the third quarter 2006.

 

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

 

We pursued an aggressive exploratory drilling program during the first            half of 2007, which resulted in our nearly satisfying our full year drilling commitment            during the first six months of the year. As a result, during the three months ended            September 30, 2007 we completed drilling of 16 test holes (12 test holes in the South            section of the Gornostai deposit and four test holes in the North section of the            Gornostai deposit). We incurred $71,534 in exploratory costs during the three months            ended September 30, 2007. By comparison, during the three months ended September 30,            2006, we drilled 105 test holes in the South section of the Gornostai deposit and            incurred exploratory costs of $264,688. We will continue to engage in exploration            activities throughout the remainder current fiscal year, but we expect our exploration            activities to be limited in comparison to the first half of 2007. Therefore, we do not            anticipate incurring significant additional exploratory costs throughout the balance of            this year.

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

             

Accretion expense increased by $1,431 during the three months ended            September 30, 2007 compared to the same period of 2006. Because we do not expect to            engage in significant mining and production activities during 2007, we believe            accretion expense will continue at rates consistent with those realized during the            quarter ended September 30, 2007 through the balance of the current fiscal            year.

|   | Depreciation Expense |
|--------|----------------------|

             

During the third quarter 2007 depreciation expense increased to $27,472            from $12,695 during the third quarter 2006. This increase resulted primarily from            equipment acquisitions made during the past year. We believe depreciation expense will            continue at rates consistent with those realized during the quarter ended September 30,            2007 through the balance of the current fiscal year.

             

Stock Grant Compensation Expense

             

During the three months ended September 30, 2007 we recognized $120,941            in grant compensation expense for restricted stock grants issued to certain officers            and key employees during the fourth quarter 2006. We had no comparable expense during            the three months ended September 30, 2006 because the restricted stock grants were not            made until the fourth quarter of 2006.

 

18

 

 

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|   | Total Operating Expense |
|--------|-------------------------|

             

Our total operating expense decreased from $1,583,793 during the three            months ended September 30, 2006 to $1,113,749 during three months ended September 30,            2007. The principal reasons for the $470,044 decrease are the following:

             

|   | o | Reduction in exploratory drilling costs of $193,154 as                            we completed most of our 2007 drilling program by July 2007. By                            comparison, we were actively engaged in our 2006 drilling program                            throughout the entire three months of the quarter ended September 30,                            2006; |
|--------|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Decrease in general and administrative expense of                            $416,189 as we increased our production of ore which led to decrease in                            allocation of the production costs to general and administrative                            expenses. By comparison, no ore was produced during the same period of                            2006; and |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | Increase in recognition of the stock grant compensation                            expenses of $120,941. By comparison, we had no comparable expense                            during the three months ended September 30, 2006. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Despite            the reduction in total operating expenses realized during the third quarter 2007            compared to 2006, we expect total operating expenses during the balance of 2007 to be            higher as compared to 2006.

             

Loss from Operations

             

During the three months ended September 30, 2007 we experienced a loss            from operations of $1,111,867 compared to a loss of $1,583,793 during the three months            ended September 30, 2006. This decrease in loss from operations during the third            quarter 2007 is the result of the decrease in total operating expenses during the third            quarter 2007. We expect we will continue to generate losses from operations until such            time as we begin significant ore production.

             

Interest Expense

             

We realized no interest expense during the three months ended September            30, 2007. During the three months ended September 30, 2006 we realized interest expense            of $1,109,062. The interest expense realized during the third quarter 2006 resulted            from retiring notes payable prior to their due dates and the full recognition of the            debt discount of $885,970. Upon acquisition of KKM we assumed certain debts with            interest rates that were considered to be below market rates. These particular debts            with below market interest rates were discounted, for reporting purposes, to arrive at            interest rates equivalent to market rates. The total payout of these debts was not            adjusted, just the allocation of principal and interest payments. Upon the payoff of            these debts, the interest expense, or discount, was recognized in full.            The recognition of the debt discount was a one-time occurrence and we have not and do            not expect to recognize a similar charge in future years. The actual dollar amount of            funds paid by us for interest during the third quarter 2006 was            $229,096.

 

19

 

 

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Translation Adjustment

             

The consolidated financial statements are presented in U.S. dollars. The            functional currency of our subsidiary Kaznickel is U.S. dollars. The functional            currency of our subsidiary KKM is Kazakh tenge. Results of operations are translated            into U.S. dollars at the average exchange rates during the reporting period. All            balance sheet accounts of KKM are translated at exchange rates on the date of the            financial statements and translation differences are included in stockholders’            equity as cumulative translation adjustments. However, non-monetary assets and            liabilities of Kaznickel are translated into U.S. dollars, using historical or average            exchange rates and monetary assets and liabilities are translated into U.S. dollars            using exchange rates on the date of the financial statements where translation            differences are included in results of operations.

             

Therefore, the translation adjustment in the consolidated financial            statements represents the translation differences from translation of the            Kaznickel’s financial statements. As a result, the translation adjustment is            commonly, but not always, positive if the average exchange rates are lower than            exchange rates on the date of the financial statements and negative if the average            exchange rates are higher than exchange rates on the date of the financial            statements.

             

As a result of the weakening of the US dollar against the Kazakh tenge,            the average exchange rate during the three months ended September 30, 2007 was higher            than the closing exchange rate, thus resulting in a negative translation adjustment            during the three months ended September 30, 2007.

             

Exchange Gain (Loss)

             

During the quarter ended September 30, 2007 we realized an exchange gain            of $361,665 compared to an exchange loss of $1,031,056 during the quarter ended            September 30, 2006. As with translation adjustment, 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.

 

Interest Earned

 

During the three months ended September 30, 2007, we realized interest            on deposits of $89,902. By comparison during the three months ended September 30, 2006            we earned $17,563 interest on deposits. The deposit accounts in which our funds are            held provide for higher rates of return, varying from 3% to 8%, the longer the funds            are left on deposit, with determination of the interest rate and recognition of the            interest earned at the time the funds are withdrawn or upon the maturity date of the            deposit. Certain deposits matured during the third quarter of 2007 which resulted in            the realization of higher rates of return as compared to the third quarter            2006.

             

20

 

 

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Other Income (Expense)

             

During the three months ended September 30, 2007 and 2006 we realized            the following other income (expense):

             

| ***For the three month                            ended***                | **September 30, 2007**                            |   | **September 30, 2006**                                       |
|--------------------------------------------------------------------------------|---------------------------------------------------|--------|--------------------------------------------------------------|
| Income from rent of equipment                                                  | $      43,128  |   | $        3,709  |
| Loss from write off and disposal of inventory                                  | (4,557)                                           |   | (55,409)                                                     |
| Loss from disposal of property, plant and                            equipment | (6,898)                                           |   | (3,419)                                                      |
| **Total**                                                                      | **$**  **31,673**                  |   | **$** **(55,119)**                                      |

             

             

Income from rent of equipment earned during the three months ended            September 30, 2007 substantially represents locomotive railroad services we provided            through our subsidiary KKM, to third parties in the Badamsha region where we own            certain railroad equipment and rail lines.

             

During the three months ended September 30, 2007 and 2006 we realized            losses from the write off and disposal of inventory and from the disposal and            impairment of property, plant and equipment in the amounts of $11,455 and $58,828,            respectively. These losses from disposal of inventory and property, plant and equipment            are substantially related to the write off and disposal of obsolete assets discovered            during asset observations.

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

             

Because of reductions in operating expense and our realizing net other            income of $405,714 compared to net other expense of $2,087,629 during the three months            ended September 30, 2007 we experienced a net loss of $1,303,346, or $.01 per share,            compared to a net loss of $3,671,422 or $.03 per share, during the three months ended            September 30, 2006. We anticipate we will continue to experience net losses until we            are able to engage in significant nickel and cobalt ore extraction, processing and            sales. We do not expect to be engaged in significant ore extraction and processing            prior to the 2009 fiscal year.

 

***Nine months ended September 30, 2007 compared to the nine months            ended September 30, 2006***

             

Revenue

 

During the nine months ended September 30, 2007 we have been engage in            negotiating ore sales agreements with certain third parties. As a result, 95% of the            $38,537 we have realized in revenue during the current fiscal year has been from ore            sales. These sales have primarily been for the purpose of testing our ore for            suitability of processing at third party processing facilities. By comparison, during            the nine months ended September 30, 2006 we realized no revenue from sale of ore and            earned revenue of $52,356 from the sale of coal. We do not anticipate realizing            significant revenue from ore or coal sales during 2007.

 

|   | Cost of Product Sold |
|--------|----------------------|

 

We realized cost of ore sold of $36,950 during the nine months of 2007.            By comparison during the nine months of 2006 we realized $65,871 in cost of coal sold.            Sales of ore and coal during 2007 and 2006 were not significant because, as discussed            above, these sales were primarily made for marketing and testing purposes and for the            purpose of meeting our minimum work program requirements. As we do not expect to engage            in significant production during 2007, we do not expect to incur significant cost of            product sold.

 

21

 

 

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

             

Our general and administrative expenses during the nine months ended            September 30, 2007 increased to $3,564,696 from $2,209,740 during the nine months ended            September 30, 2006. This increase in general and administrative expenses during the            nine months ended September 30, 2007 is mainly attributable to a $700,000 increase in            salary expense and related taxes as a result of an increase in the number of personnel            we employ and salary increases for existing employees, as our subsidiary KKM hired a            number of personnel to carry out development and testing of the pilot plant and            additional geologists, metallurgists and ecology supervisors. We also hired additional            in-house accounting, finance, legal and information technology personnel. We do not            expect to hire a significant number of additional employees until such time as            operations or funding so justify. Therefore, we do not expect to experience significant            increases in salaries and related taxes during the remainder of the 2007 fiscal year.            Also, during second quarter we had a $270,000 increase in transportation and repair            services related to modernization works at KKM’s facilities. Another contributing            factor to the increase in general and administrative expenses was a $447,000 increase            in professional fees, primarily attributable to increased legal and accounting fees and            costs associated with a resource estimation prepared by a third party consulting firm.            We believe this increase in professional fees was more a matter of timing and the            one-time cost of the resource estimation than a trend and we expect professional fees            to return to more traditional levels in upcoming quarters.

             

Research and Development Costs

 

We engaged in no research and development in connection with the            development and testing of our hydrochlorination processing technology during the nine            months ended September 30, 2007. During the nine months ended September 30, 2006 we            spent $391,307 in research and development costs, primarily in            connection with the development of our pilot plant. Given our limited funds, we have            decided to allocate the funds budgeted for development and testing of our pilot plant            to other uses. We do not anticipate engaging in additional development and testing of            our hydrochlorination processing technology prior to receipt of the pre-feasibility            study.

 

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

 

As a result of our aggressive exploratory drilling program for 2007,            during the nine months of 2007 we completed drilling of 619 test holes (611 test holes            in the South section and 8 test holes in the North section of the Gornostai deposit) to            an aggregate depth of 15,625 meters (14,965 meters in the South section and 660 meters            in the North section). We incurred $1,467,338 in exploratory drilling costs through            September 30, 2007. By comparison, during the nine months ended September 30, 2006, we            drilled 169 test holes in the South section and no holes in the North section of the            Gornostai deposit and incurred exploratory costs of $382,953. Our exploratory drilling            program for our 2007 fiscal year calls for us to drill a total of 615 test holes to an            aggregate depth of approximately 15,700 meters.

             

22

 

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

             

Accretion expense increased by $5,657 during the nine months ended            September 30, 2007. Because we do not expect to engage in significant mining and            production activities during 2007, we believe accretion expense will continue at rates            consistent with those realized during the nine months ended September 30, 2007 through            the balance of the current fiscal year.

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

             

During the nine months ended September 30, 2007 depreciation expenses            increased to $94,253 from $48,423 during the nine months ended September 30, 2006. This            increase resulted primarily from equipment acquisitions made during the past year. We            believe depreciation expense during the final quarter of the current fiscal year will            continue at rates consistent with those realized during the first nine months of the            current fiscal year.

             

Grant Compensation Expense

             

During the nine months ended September 30, 2007 we incurred $307,993 in            grant compensation expense for restricted stock grants issued to certain officers and            key employees during the fourth quarter 2006. We had no comparable expense during the            nine months ended September 30, 2006 because, as noted above, the grants were not made            until the fourth quarter 2006.

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

             

Despite a 29% decrease in total operating expenses during the three            month period ended September 30, 2007 we realized a 75% increase in total operating            expenses during the nine months ended September 30, 2007 as a result of higher general            and administrative expense, grant compensation expense and exploration costs, which            expenses and costs were only partially offset by a reduction in research and            development costs during the nine months ended September 30, 2007. Our            total operating expenses increased $2,378,593 during the nine months            ended September 30, 2007. We expect total operating expenses during the balance of 2007            to remain significantly higher as compared to 2006.

 

Loss from Operations

             

During the nine months ended September 30, 2007 we experienced a loss            from operations of $5,493,251 compared to a loss of $3,100,839 during the nine months            ended September 30, 2006. This increase in loss from operations is the result of the            increase in total operating expenses and the reduction in revenue during 2007 as            compared to 2006. We expect we will continue to generate losses from operations until            such time as we begin significant ore production.

 

23

 

 

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Interest Expense

             

During the nine months ended September 30, 2007 we incurred interest            expense of $1,018 compared to interest expense of $1,474,274 during the nine months            ended September 30, 2006. As discussed above, the interest expense realized during the            first three quarters of 2006 resulted from retiring notes payable prior to their due            dates and the full recognition of the debt discount of $885,970. Upon acquisition of            KKM we assumed certain debts with interest rates that were considered to be below            market rates. These particular debts with below market interest rates were discounted,            for reporting purposes, to arrive at interest rates equivalent to market rates. The            total payout of these debts was not adjusted, just the allocation of principal and            interest payments. Upon the payoff of these debts, the interest expense, or discount,            was recognized in full. The recognition of the debt discount was a one-time occurrence            and we have not and do not expect to recognize a similar charge in future years. The            actual dollar amount of funds paid by us for interest during the nine months ended            September 30, 2006 was $529,096.

             

Translation Adjustment

             

As indicated above, the translation adjustment in the consolidated            financial statements represents the translation differences from translation of the            Kaznickel’s financial statements.

             

As a result of the weakening of the US dollar against the Kazakh tenge,            the average exchange rate during the three months ended September 30, 2007 was higher            than the closing exchange rate, thus resulting in a negative translation adjustment            during the nine months ended September 30, 2007.

Exchange Gain (Loss)

             

During the nine months ended September 30, 2007 we realize an exchange            gain of $1,053,644 compared to an exchange loss of $140,908 during the quarter ended            September 30, 2006. As with translation adjustment, 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 or operations include exchange gains or losses            on the U.S. dollar  monetary assets and liabilities. 

             

Interest Earned

             

During the nine months ended September 30, 2007, we realized interest on            deposits of $316,529. By comparison during the nine months ended September 30, 2006 we            earned $27,935interest on deposits. As discussed above, the            deposit accounts in which our funds are held provide for higher rates of return,            varying from 3% to 8%, the longer the funds are left on deposit, with determination of            the interest rate and recognition of the interest earned at the time the funds are            withdrawn or upon the maturity date of the deposit. Certain deposits matured during the            third quarter of 2007 which resulted in the realization of higher rates of return as            compared to the third quarter 2006.

             

24

 

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Other Income (Expense)

 

During the nine months ended September 30, 2007 and 2006 we realized the            following other income (expense):

             

|  

***For the nine month ended***                                         | **September 30, 2007**                        |   | **September 30, 2006**            |
|--------------------------------------------------------------------------------|-----------------------------------------------|--------|-----------------------------------|
| Income (loss) from rent of equipment                                           | $     141,011   |   | $    (30,639) |
| Loss from writeoff and disposal of inventory                                   | (5,433)                                       |   | (78,813)                          |
| Loss from disposal of property, plant and                            equipment | (116,314)                                     |   | (10,579)                          |
| **Total**                                                                      | **$**    **19,264**  |   | **$ (120,031)**                   |

             

             

Income (loss) from rent of equipment earned during the nine months ended            September 30, 2007 and 2006 substantially represents locomotive railroad services            provided by the Company, through its subsidiary KKM, to third parties.

             

During the nine months ended September 30, 2007 and 2006 the Company            also realized losses from the write off and disposal of inventory and from the disposal            and impairment of property, plant and equipment in the amounts of $121,747 and $89,392,            respectively. These losses from disposal of inventory and property, plant and equipment            are substantially related to the write off and disposal of obsolete assets discovered            during asset observations.

                Net Loss

             

For the foregoing reasons, during the nine months ended September 30,            2007 we experienced a net loss of $3,831,431, or $.03 per share, compared to a net loss            of $4,838,386, or $.05 per share, during the nine months ended September 30, 2006. We            anticipate we will continue to experience increasing net losses until we are able to            engage in significant nickel and cobalt ore extraction, processing and sales. We do not            expect to be engaged in significant ore extraction and processing prior to the 2009            fiscal year.

 

**Liquidity and Capital Resources**

 

Our capital resources have consisted primarily of funds we have borrowed            from related and non-related parties and funds we raised through a private placement of            our equity securities in July 2006. These funds, however, represent only a portion of            the funds we will need to complete exploration and development and move to commercial            production. As of September 30, 2007, we have $2,378,425 of the approximately            $26,600,000 in net proceeds we realized from the private placement. We have used the            money raised in the private offering to reduce debt, acquire equipment, continue            exploration and fund operations. We anticipate the need for substantial additional            capital resources. As discussed above, we are in negotiations with certain third            parties for the sale of our ore, depending on the success of those negotiations, we may            be able to fund our operating costs through the sale of our ore. We have received            indications from certain of our primary shareholders that if we are unsuccessful in            negotiating ore sales contracts, they are willing to provide additional funds to us to            continue operations during 2008, most likely in the form of loans. We currently,            however, do not have definitive agreements with any parties to provide us additional            funding.

 

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

 

25

 

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| *For the Nine Months Ended September 30*                                       | **2007**         | **2006**                       |
|--------------------------------------------------------------------------------|------------------|--------------------------------|
|                                                                           |             |                           |
| Net cash used in operating activities                                          | $(5,757,435)     | $(4,883,510)                   |
| Net cash provided by (used in) investing                            activities | (528,452)        | 21,995,494                |
| Net cash provided used in financing                            activities      | -           | (8,854,700)                    |
| Effect of exchange rate changes on cash                                        | 80,632      | 149,523                   |
| **NET (DECREASE) INCREASE IN CASH**                                            | **$(6,205,255)** | **$** **8,406,857**  |

 

During the nine months ended September 30, 2007 net cash used in            operating activities was $5,757,435 compared to net cash used in operating activities            of $4,883,510 during the nine months ended September 30, 2006. This increase in net            cash used in operating activities is primarily attributable to increases in salary and            related taxes, exploratory costs and professional fees.

             

    During the nine months ended September 30, 2007 net            cash used in investing activities was $528,452. By comparison, during the nine months            ended September 30, 2006 we realized net cash from investing activities of $21,995,494,            as a result of the private placement of our equity securities.

 During the nine months ended September 30, 2007 no cash was            generated in financing activities compared to net cash used in financing activities of            $8,854,700 during the nine months ended September 30, 2006. This cash used in financing            activities is explained by availability of capital from our private placement for            repayment of debts.

 

**Plan of Operations**

             

As of September 30, 2007 we had cash on hand of $2,378,425. As discussed            above, we have budgeted to spend all of these funds in operations and development            activities during remaining three months of 2007. Following is a brief description of            how we anticipate allocating our cash on hand during the next three months.

 

***Drilling and core analysis***

 

We have allocated approximately $169,400 to the completion of our            drilling and exploration program for the remainder of the 2007 fiscal year. This            included exploration costs for geologist fees, geological data processors, core sample            takers, topographers etc. The drilling program is completed in July 2007 by drilling            15,625 meters, including 14,965 meters in South section and 660 meters in North            section. We have satisfied our 2007 minimum work program requirements for the Gornostai            deposit. We do not expect to engage in additional drilling activities during the            remainder of 2007. Currently, we are analyzing the results of our drilling and            exploration works in order to prepare and submit an exploration report to the MEMR for            finalizing the reserve estimates and obtaining permission for commercial production of            the nickel ore from the Gornostai deposit.

             

***Feasibility Study***

 

We anticipate spending approximately $315,000 for the preparation of            pre-feasibility studies for the construction of a processing plant at the Kempirsai            deposit. As of September 30, 2007 we had spent $102,000 for the study.

             

26

 

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***Field modernization***

             

We have allocated approximately $1,000,000 during 2007 for modernization            of vehicles and equipment at the Kempirsai deposit to allow us to increase our ore            extracting capabilities. As of September 30, 2007 we had spent approximately $563,000            to modernize vehicles and equipment at the Kempirsai deposit.

 

***Administrative Expenses***

 

We plan to allocate approximately $1,500,000 for administrative expenses            during the next three months, which include expenses of maintaining offices in the            United States and Kazakhstan, for salaries and taxes.

***Professional Fees***

 

We expect to incur approximately $52,000 in expenses for services of our            financial auditors and securities attorneys during the next three months.

 

**Additional Activities**

 

We are currently considering alternatives to a hydrochlorination            processing plant to allow us to begin to generate cash flow from the Kempirsai deposit.            We are considering the economic viability of a pyrometallurgical or hydrometallurgical            processing plant to produce ferronickel at our Kempirsai deposit. As noted above, we            have allocated $315,000 in our 2007 budget for the preparation of pre-feasibility study            to help us determine the appropriate technology for use at the Kempirsai deposit. Once            that determination is made, we plan to undertake a feasibility study. Assuming the            results of those studies are positive, we would like to move to the design phase of a            commercial processing plant, including obtaining detailed engineering and design for            plant construction. This would include flow sheet design and pilot testing. We estimate            the cost to do this will be roughly $2.5 million.

 

**Summary of Material Contractual Commitments**

 

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

 

|                                                                      |   | Payments Due by Fiscal Year |
|---------------------------------------------------------------------------|--------|-----------------------------|
| Contractual Commitments                                                   |   |                        | Total |   | Less thanone year |   | 2-3 years |   | 4-5 years |   | After5 years |
|                                                                      |   |                        |   |   |   |   |   |   |   |   |   |
| Due to the government                                                     |   |                        |   |   |   |   |   |   |   |   |   |
| of Republic of                               Kazakhstan(1) |   |                        | $   731,221 |   | $     -0- |   | $731,221 |   | $       -0- |   | $          -0- |
| Social projects(2)                                                        |   |                        | 321,000 |   | -0- |   | 14,000 |   | 307,000 |   | -0- |
| Asset retirement obligation(3)                                            |   |                        | 1,060,515 |   | -0- |   | -0- |   | -0- |   | 1,060,515 |
| Operating leases                                                          |   |                        | 61,900 |   | 61,900 |   | -0- |   | -0- |   | -0- |
| Total                                                                     |   |                        | $ 2,174,636 |   | $61,900 |   | $745,221 |   | $307,000 |   | $1,060,515 |

 

 

27

 

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(1)In connection with our acquisition            of the exploration contract covering the Gornostai deposit, we are required to repay            the Republic of Kazakhstan for historical costs incurred by it in undertaking            geological and geophysical studies and infrastructure improvements. The repayment terms            of this obligation will not be determined until such time as we apply for and are            granted a contract to engage in commercial production by the Republic of Kazakhstan.            Under our current contract once we determine the property contains commercially            producible reserves, if we wish to commence commercial production, we must apply for            such right prior to the expiration of our exploration rights in February 2008, unless            we extend our exploration period. We anticipate that we will apply for a commercial            production contract within the next 1-3 years. Of course, there is no guarantee when or            if we will discover commercially producible reserves within the Gornostai deposit.            Should we decide not to pursue a commercial production contract, we can relinquish the            Gornostai deposit to the Republic of Kazakhstan in satisfaction of this            obligation.

(2)Under the terms of our subsoil use            contracts, we are required to make funding for social projects relating to employees of            KKM, including improvements to living conditions, etc., in the amount of $117,906. We            have already satisfied approximately $97,000 of this obligation during 2007 by            transferring an idle building to the Badamsha village administration. We are also            required to donate $300,000 for the ongoing development of Astana and Kurchatov, which            are cities in Kazakhstan.

(3) Under the terms of our subsoil use contracts,            we are required to remove all operating equipment and remediate the property. This            remediation work can be done during the term of the subsoil use contract or upon            completion of the terms of the contract.

 

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

             

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

             

As part of the minimum work program requirements for the Kempirsai            deposit we are required to extract 175,000 tons of nickel ore during 2007. As of            September 30, 2007 we have extracted and placed into storage 79,021 tons of nickel ore,            or 45% of the required amount for 2007. If we are successful in negotiating nickel ore            sales contracts during the fourth quarter we anticipate we will meet the minimum nickel            ore extraction requirements by the end of 2007. If we are not successful in negotiating            nickel or sales contracts and do not believe we will meet our minimum ore extraction            requirements by year end we will seek to negotiate a revision of our ore extraction            requirements for 2007.

             

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

 

**Off-Balance Sheet Financing Arrangements**

 

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

 

28

 

 

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**Critical Accounting Policies**

             

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

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

 

***Use of Estimates***– In            connection with the preparation of our financial statements, we are required to make            estimates and assumptions that affect the reported amounts in the financial statements            and accompanying notes. One of the significant areas requiring the use of management            estimates and assumptions relates to environmental reclamation and closure obligations.            Under our licenses with the Republic of Kazakhstan, following completion of exploration            and mining activities we are required to reclaim our licensed territories. To prepare            our financial statements in accordance with accounting principles generally accepted in            the United States of America we are required to account for this obligation. The            determination of the amount of the mine retirement and environmental reclamation            obligation the Republic of Kazakhstan will impose upon us, however, has not yet been            determined. The determination of the mine retirement and environmental reclamation            obligation is based, in significant part, on the size of each deposit. Because we are            still exploring our Gornostai property and do not yet know the full extent of the            Gornostai deposit, the mine retirement and environmental reclamation obligation has not            yet been set by the Republic of Kazakhstan. While 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.

             

29

 

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***Depreciation, Depletion and Amortization***– We capitalize the costs we incur in developing new properties as            they are incurred, where it has been determined that the property can be economically            developed based on the existence of proven and probable reserves. At our surface mines,            these costs include costs to further delineate the ore body and remove overburden to            initially expose the ore body. All such costs are amortized using the            units-of-production (“UOP”) method over the estimated life of the ore body            based on recoverable minerals to be mined from proven and probable reserves. The            calculation of the UOP rate of amortization, and therefore the annual amortization            charge to operations, could be materially impacted to the extent that actual production            in the future is different from current forecasts of production. We do not have current            reserve reports on our properties. Rather, the data we use to help form the basis of            our estimates of future production is data that was gathered during the Soviet era. We            were not involved in the gathering of the data or the preparation of the reports.            Should the data prove to be inaccurate, our estimates of future production and UOP            could be materially impacted.

 

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

 

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

 

**Commodity Price Risk**

 

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

 

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

 

**Foreign Currency Risk**

 

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

 

30

 

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**Item            4. Controls and Procedures**

 

*Evaluation of Disclosure Controls and Procedures*

             

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

             

As of the end of the period covered by this Report we conducted an            evaluation, under the supervision and with the participation of our management,            including our principal executive officer and principal financial officer, of the            effectiveness of the design and operation of our disclosure controls and procedures            pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this            evaluation, our principal executive officer and principal financial officer concluded            that our disclosure controls and procedures were effective as of September 30,            2007.

             

*Changes in Internal Control over Financial Reporting*

 

There were no changes in our internal control over financial reporting            during the quarter ended September 30, 2007 that materially affected, or are reasonably            likely to materially affect, our internal control over financial reporting.

 

**PART            II -- OTHER INFORMATION**

 

**Item            1A. Risk Factors**

 

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

             

31

 

 

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**Item            6. Exhibits**

 

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

 

                

|   | Exhibit 31.1 |   | Certification of Principal Executive Officer pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002     |
|--------|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |         |   |                                                                                                                                  |
|   | Exhibit 31.2 |   | Certification of Principal Financial Officer pursuant to                            Section 302 of the Sarbanes-Oxley Act of 2002     |
|   |         |   |                                                                                                                                  |
|   | Exhibit 32.1 |   | Certification by the Principal Executive Officer                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |         |   |                                                                                                                                  |
|   | Exhibit 32.2 |   | Certification by the Principal Financial Officer                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

**SIGNATURES**

 

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

 

**BEKEM METALS, INC.**

 

 

| Date: November 13, 2007 | /s/ Yermek Kudabayev                                                        |
|-------------------------|-----------------------------------------------------------------------------|
|                    | Yermek Kudabayev

Interim Chief Executive Officer,

Chief Financial Officer |

 

 

32

 

 

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