**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

| x | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES** |
|---|------------------------------------------------------------------------------------------------|

|   | **EXCHANGE ACT OF 1934** |
|--------|--------------------------|

For            the fiscal year endedDecember 31, 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 Number0-50218

 

**BEKEM METALS, INC.**

(Name            of Small Business Issuer 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) |                |
|                                                                  |                                                                                       |                     |  |  |

 

**Securities registered pursuant to section 12(b) of the Exchange            Act:****None**

 

**Securities registered pursuant to section 12(g) of the Exchange            Act:****Common, $0.001 par value**

 

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

           oYesxNo

 

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

             oYesxNo

 

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

   xYesoNo

 

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

 

Indicate by check mark whether the registrant is a large accelerated            filed, an accelerated filer, a non-accelerated filer or a smaller reporting            company.

 

| Large accelerated Filero | Accelerated Filero | Non-accelerated Filero | Smaller Reporting Companyx |
|--------------------------|--------------------|------------------------|----------------------------|

 

 

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

|   | oYesxNo |
|--------|---------|

 

The            aggregate market value of the voting stock held by non-affiliates of the registrant as            of June 30, 2007 was $49,503,740 based upon the closing stock price of $1.70 (the            closing price on June 29, 2007) per share as reported on the Over-the-Counter Bulletin            Board.

 

As            of April 7, 2008, the registrant had 125,172,011 shares of common stock, par value            $0.001, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

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**Table of Contents**

 

|        |                                                                                                    | Page   |
|-------------|---------------------------------------------------------------------------------------------------------|--------|
|        | **PART I**                                                                                              |   |
|        |                                                                                                    |   |
| Item 1.     | Business                                                                                                | 4      |
|        |                                                                                                    |   |
| Item 1A.    | Risk Factors                                                                                            | 27     |
|        |                                                                                                    |   |
| Item 1B.    | Unresolved Staff Comments                                                                               | 30     |
|        |                                                                                                    |   |
| Item 2.     | Properties                                                                                              | 30     |
|        |                                                                                                    |   |
| Item 3.     | Legal Proceedings                                                                                       | 30     |
|        |                                                                                                    |   |
| Item 4.     | Submission of Matters to a Vote of Security                            Holders                          | 31     |
|        |                                                                                                    |   |
|        | **PART II**                                                                                             |   |
|        |                                                                                                    |   |
| Item 5.     | Market for Registrant’s Common Equity, Related                            Stockholder Matters and |   |
|        | Issuer Purchases of Equity Securities                                                                   | 31     |
|        |                                                                                                    |   |
| Item 6.     | Selected Financial Data                                                                                 | 34     |
|        |                                                                                                    |   |
| Item 7.     | Management’s Discussion and Analysis of Financial                            Condition            |   |
|        | and Results of Operations                                                                               | 35     |
|        |                                                                                                    |   |
| Item 7A.    | Quantitative and Qualitative Disclosures About Market                            Risk                   | 44     |
|        |                                                                                                    |   |
| Item 8.     | Financial Statements and Supplementary Data                                                             | 45     |
|        |                                                                                                    |   |
| Item 9.     | Changes in and Disagreements with Accountants on                            Accounting                  |   |
|        | and Financial Disclosure                                                                                | 45     |
|        |                                                                                                    |   |
| Item 9A(T). | Controls and Procedures                                                                                 | 45     |
|        |                                                                                                    |   |
| Item 9B.    | Other Information                                                                                       | 46     |
|        |                                                                                                    |   |
|        | **PART III**                                                                                            |   |
|        |                                                                                                    |   |
| Item 10.    | Directors, Executive Officers and Corporate                            Governance                       | 47     |
|        |                                                                                                    |   |
| Item 11.    | Executive Compensation                                                                                  | 52     |
|        |                                                                                                    |   |
| Item 12.    | Security Ownership of Certain Beneficial Owners and                            Management               |   |
|        | and Related Stockholder Matters                                                                         | 62     |
|        |                                                                                                    |   |
| Item 13.    | Certain Relationships and Related Transactions, and                            Director Independence    | 64     |
|        |                                                                                                    |   |
| Item 14.    | Principal Accounting Fees and Services                                                                  | 64     |
|        |                                                                                                    |   |
| Item 15.    | Exhibits and Financial Statement Schedules                                                              | 65     |
|        |                                                                                                    |   |
|        | SIGNATURES                                                                                              | 66     |

 

 

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**BEKEM METALS, INC.**

 

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

             

**Forward Looking Statements**

 

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

 

**PART I**

 

| **Item 1.** | **Business** |
|-------------|--------------|

 

**Company History**

 

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

             

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

 

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

             

The primary asset of Kaznickel is an exploration and production            concession issued by the government of the Republic of Kazakhstan which grants            Kaznickel the exclusive right, through February 2008, to explore for nickel, cobalt and            other minerals in a 12,232 acre area in northeastern Kazakhstan known as the            Gornostayevskoye (“Gornostai”) deposit. In January 2008 Kaznickel agreed            with the Expert Committee of the Ministry of Energy and Mineral Resources of the            Republic of Kazakhstan (the “MEMR”) to an extension of the exploration            period to February 2010. Currently, Kaznickel is in the process of signing the addendum            to its subsoil use contract to reflect these changes. The concession further provides            that if we make a commercial discovery of nickel, cobalt or other minerals within the            concession territory, we can apply for and receive the exclusive rights to commercially            produce and sell nickel and cobalt ore through February 2026.

             

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

             

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

             

 

 

5

 

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**Business of the Company**

 

**The Nickel Market**

 

In January 2008 the United States Geological Survey (“USGS”)            reported the world mine reserves of nickel and the world mine reserves base of nickel            in 2007 were 67 million tons and 150 million tons, respectively.

             

|                      | **Mine production** | **Reserves (1)** | **Reserve base (2)** |
|---------------------------|---------------------|------------------|----------------------|
| **2006**                  | **2007**            |
| United States             | —             | —          | —              | 150,000 |
| Australia                 | 185,000             | 180,000          | 24,000,000           | 27,000,000 |
| Botswana                  | 38,000              | 35,000           | 490,000              | 920,000 |
| Brazil                    | 82,500              | 75,300           | 4,500,000            | 8,300,000 |
| Canada                    | 233,000             | 258,000          | 4,900,000            | 15,000,000 |
| China                     | 82,100              | 80,000           | 1,100,000            | 7,600,000 |
| Colombia                  | 94,100              | 99,500           | 830,000              | 1,100,000 |
| Cuba                      | 75,000              | 77,000           | 5,600,000            | 23,000,000 |
| Dominican Republic        | 46,500              | 47,000           | 720,000              | 1,000,000 |
| Greece                    | 21,700              | 20,100           | 490,000              | 900,000 |
| Indonesia                 | 140,000             | 145,000          | 3,200,000            | 13,000,000 |
| New Caledonia             | 103,000             | 119,000          | 7,100,000            | 15,000,000 |
| Philippines               | 58,900              | 88,400           | 940,000              | 5,200,000 |
| Russia                    | 320,000             | 322,000          | 6,600,000            | 9,200,000 |
| South Africa              | 41,600              | 42,000           | 3,700,000            | 12,000,000 |
| Venezuela                 | 20,000              | 20,000           | 560,000              | 630,000 |
| Zimbabwe                  | 8,820               | 9,000            | 15,000               | 260,000 |
| Other countries           | 34,300              | 41,000           | 2,100,000            | 5,900,000 |
| **World total (rounded)** | **1,580,000**       | **1,660,000**    | **67,000,000**       | **150,000,000** |

             

| (1) | Reserves - that part of the reserve base which could be                            economically extracted or produced at the time of determination. The                            term reserves need not signify that extraction facilities are in place                            and operative. Reserves include only recoverable materials; thus, terms                            such as “extractable reserves” and “recoverable                            reserves” are redundant and are not a part of this classification                            system. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (2) | Reserve Base - that part of an identified resource that                            meets specified minimum physical and chemical criteria related to                            current mining and production practices, including those for grade,                            quality, thickness, and depth. The reserve base is the inplace                            demonstrated resource from which reserves are estimated. It may                            encompass those parts of the resources that have a reasonable potential                            for becoming economically available within planning horizons beyond                            those that assume proven technology and current economics. The reserve                            base includes those resources that are currently economic (reserves),                            marginally economic (marginal reserves), and some of those that are                            currently subeconomic (subeconomic resources). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

With demand growth averaging approximately 4% per annum over the past            seven years, nickel consumption has outpaced most other industrial metals. World nickel            production reached an all-time high in 2007. Total nickel production in 2007 was            approximately 1,660,000 tons. The price of nickel hit a record high of $51,800 per ton            in May 2007 before price fell nearly 50% during the ensuing months. The average price            for nickel in 2007 was about $37,181 per ton, up from $24,287 in 2006. The average            London Metal Exchange (“LME”) price for nickel in January and February 2008            were $27,690 per ton and $27,955 per ton, respectively.

             

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

             

|   | **•** | expansion of new nickel mining capacity; |
|--------|------------|------------------------------------------|

|   | **•** | new processing technologies; |
|--------|------------|------------------------------|

|   | **•** | world demand for stainless-steel; and |
|--------|------------|---------------------------------------|

|   | **•** | nickel substitutes. |
|--------|------------|---------------------|

             

*Expansion of New Nickel Mining Capacity*

             

As demand and nickel prices increase, companies have sought to expand            their mining and production capacity. In 2007, the leading nickel producer in the world            - a Russian company - created an entire overseas production operation by acquiring and            then integrating existing facilities in Australia, Botswana, and Finland. The larger of            the two Canadian takeover targets is preparing to commission a laterite mining complex            at Goro, New Caledonia. Several other companies are also considering employing some            form of acid leach technology to recover nickel at greenfield sites in Brazil, Cuba,            Guatemala, Indonesia, Madagascar, and the Philippines. A new type of heap-leaching            process is being used to recover nickel in Turkey. Work is also underway on a more            traditional, ferronickel plant in Goias, Brazil.

             

*New Processing Technologies*

             

While demand for nickel has been and is expected to continue to be            strong, expansion of nickel production capacity has not increased as rapidly as            anticipated. Of the identified land-based nickel resources averaging 1% nickel or            greater, about 70% is in laterite deposits and 30% in sulfide deposits. Historically,            nickel production has come from higher-grade sulphide deposits because processing is            less energy-intensive and therefore less expensive. However, as sulphide deposits are            limited, interest in developing laterite deposits is increasing.

             

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

 

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|   | **•** | developing economic processing techniques; |
|--------|------------|--------------------------------------------|

|   | **•** | high investment in infrastructure due to remote                            locations of mines; and |
|--------|------------|----------------------------------------------------------------------------------------------------|

|   | **•** | environmental concerns due to surface mining                            methods. |
|--------|------------|----------------------------------------------------------------------------------|

             

Many New Caledonian nickel projects were to be recovered onsite using            advanced high pressure acid leach (“HPAL”) technology. However, the            significant time and cost overruns that have been encountered in trying to bring HPAL            facilities onstream have resulted in continuous delays of these projects. As a result            of these factors, capital expenditure costs for laterite operations have been nearly            double initial estimates. These extra costs are the result of the larger plants and            tailings facilities required for the beneficiation process. Some existing laterite            projects are also suffering from significantly higher operating costs as smelters have            very high energy requirements. Together with nickel price volatility, this has had a            significant impact on the timing and cost of project completion.

             

*World Demand for Stainless Steel*

             

Stainless steel accounts for two-thirds of global primary nickel use.            Since 1993, global stainless steel production has been growing at an average rate of            5.6% per year. Leading metal consultants CRU note that world production of stainless            steel has grown from 5 million tons per annum in 1975 to 25 million tons per annum in            2005. By 2011, they expect demand to reach 35 million tons per annum. This growth            estimate is almost entirely attributed to Chinese demand as off-take from other major            consumers is expected to stabilize. This represents a predicted growth rate of 5% per            annum, with the conclusion being that over 320,000 tons of additional primary nickel            supply will be required by 2011 over 2006. Also, continued high prices for gasoline and            other petroleum products have spurred development and production of novel hydrogen            storage and battery materials, such as lanthanum-nickel-cobalt alloys. Nickel-metal            hydride (NiMH) batteries continue to be widely used in hybrid motor vehicles, despite            inroads made by lithium-ion batteries.

 

*Nickel Substitutes*

             

As noted above, nickel prices climbed to unprecedented levels in the            first half of 2007 before falling back almost 50 percent over the following few months            as stainless steel producers cut back production and replaced refined nickel by nickel            pig iron for stainless steel production. Nickel pig iron and refined nickel share the            market, as long as there is high demand from stainless steel producers and shortage of            refined nickel supply. However, nickel pig iron producers face environmental            challenges, as their facilities are still regarded as environmentally damaging.            Engineers have also begun substituting low-nickel, duplex, or ultrahigh-chromium            stainless steels for austenitic grades in a few construction applications. Nickel-free            specialty steels are sometimes used in place of stainless steel within the power            generating and petrochemical industries. Titanium alloys or specialty plastics can            substitute for nickel metal or nickel-base alloys in highly corrosive chemical            environments.

             

8

 

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**Our Properties**

 

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

 

****

             

|   | **Location and access to our properties** |
|--------|-------------------------------------------|

             

***Kempirsai***

             

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

 

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***Gornostai***

             

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

 

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**Title to Properties**

             

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

             

| **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                            (1).                                                             |
|                  |                     |                         |                         |                                                    |                                                                                                                              |
| Mamyt                 | 116 acres                | Brown coal                   | Production                   | MG #9-D                                                 | Expires Dec, 11 2018 unless extended                            (1).

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

and

Production | 1349                                                    | Exploration period expires Feb. 26, 2010 (2).                            Production period expires Feb. 26, 2026 unless extended. |

             

 

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| (1) | On December 10, 2007, the MEMR unilaterally terminated                            KKM’s contracts and licenses to explore for nickel, cobalt, brown                            coal, and other minerals within the Kempirsai and the Mamyt deposits on                            the basis that KKM had material failures in execution of the work                            programs associated with the contacts and licenses but did not detail                            those failures. In January 2008, KKM filed an action in the Court of                            Astana city against the MEMR challenging the legality of the unilateral                            termination of the KKM contracts and licenses by the MEMR for several                            reasons, including that the contracts and licenses had been terminated                            on grounds not provided for in the subsoil use contracts and                            legislation and there were no material failures in the execution of the                            work programs associated with the contracts and licenses. In February                            2008, the Court of Astana city acknowledged that the unilateral                            termination of the contracts and licenses by the MEMR was illegitimate.                            The Court canceled the order of the MEMR relating to the unilateral                            termination of the licenses and reinstated the KKM contracts and                            licenses. In March 2008, the MEMR appealed the Court’s decision                            to the Republic of Kazakhstan Supreme Court. A final decision from the                            Supreme Court is expected by the end of April 2008. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | In January 2008 Kaznickel agreed with the Expert                            Committee of the MEMR the extension of the exploration period up to                            February 2010. Currently, Kaznickel is in the process of signing the                            addendum to the subsoil use contract to reflect these                            changes. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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

             

For additional details regarding the terms and obligations associated            with our subsoil use contracts and licenses please see            “*Tax and Royalty Scheme in the Republic of            Kazakhstan*” and “*Working            Programs of our Subsidiaries*” in Item            1 “*Business”, “Summary of Material            Contractual Commitments*” in Item 6            “*Management’s Discussion and Analysis of Financial            Condition and Results of Operations*” and            “*Note 4 – Property, Plant and Mineral            Interests*”, “*Note 7            – Asset Retirement Obligation*” and            “*Note 10 – Commitments and            Contingencies*” contained in the Notes to our            Consolidated Financial Statements.

             

***Kempirsai***

             

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

             

***Gornostai***

             

The subsoil use contract to the Gornostai deposit was issued in February            2004. At the time it was issued, the MEMR determined that additional exploration of the            deposit was necessary to determine the existence of commercially producible mineral            reserves. Therefore, the subsoil use contract provides a period for exploration. Under            the terms of the contract for the Gornostai deposit, we were granted the right to            explore for nickel and cobalt for two years. The exploration term provides for two            two-year extensions upon our request. We requested and were granted our first            extension, extending the current exploration period to February 2008. In January 2008            Kaznickel agreed with the Expert Committee of the MEMR additional two two-year            extension period up to February 2010. Currently, Kaznickel is in the process of signing            the addendum to the subsoil use contract to reflect these changes.

 

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Upon discovery of commercially producible nickel and/or cobalt reserves,            we may notify the MEMR and convert from exploration stage to commercial production            stage. If we make no commercial discoveries before the end of the exploration period,            as extended, our rights to the territory will revert back to Republic of Kazakhstan.            Upon completion of exploration, we will return to the Republic of Kazakhstan the rights            to all areas within the licensed territory wherein no commercial discoveries of nickel            and/or cobalt were made. When we complete exploration of the Gornostai deposit,            assuming we make commercial discoveries, we will apply to the MEMR to move to            commercial production. At that time we will be required to pay a 0.1% commercial            discovery bonus based on the initial determination of our mineral resources by the            MEMR.

             

**Annual Work Program of our Subsidiaries**

             

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

             

***Kempirsai***

             

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

             

 

|   | **Tons of Ore** | **Tons of Brown Coal** |
|--------|-----------------|------------------------|
| 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                |

             

As a result of the litigation, the 2008 annual work program for KKM is            under discussion and negotiation with the MEMR’s Territorial Division under the            State Body for Subsurface Use and Protection. If the Supreme Court decision is made in            KKM’s favor, we will continue negotiations with the MEMR of the 2008 annual work            program requirements. Based on initial conversations with the MEMR, we anticipate the            financial obligations associated with our 2008 annual work program will include            financial obligations of up to $15 million.

             

***Gornostai***

 

The 2008 annual work programs for Kaznickel is currently under            discussion with the MEMR. We expect the 2008 work program will require us to continue            to perform exploratory drilling, sampling and assaying of core samples, metallurgical            testing and preparation of reports for the State Resource Reserves Committee. We            anticipate the financial commitment in 2008 will be approximately $1,500,000 including            exploration drilling and sampling and assaying (2,000 meters to be drilled and 1,000            core samples to be made during 2008 and 2009), metallurgical tests and preparation of            the report to the State Resource Committee.

             

13

 

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

 

**Geology and Mineralization**

             

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

             

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

             

***Kempirsai***

             

The Kempirsai nickel and cobalt deposit is comprised of two deposits:            Kara-Obinskoye, and Novo-Shandashinskoye. These deposits are located approximately 5-10            kilometers from each other. The results of exploration carried out during the Soviet            era show that nickel and cobalt ore is located within the Kempirsai ultramafic massif.            The minerals are found in laterite form and are associated with leached nontronized            serpentinites. The ore bodies have a blanket-like shape and tend to lie conformably on            the underlying rocks. The depth of ore bodies from the surface is 0-40 meters. In            vertical section they are mainly horizontal in attitude and show variable thickness.            Thickness varies from 2.0 meters to 30.0 meters, with an average thickness of 6.0            meters. Average stripping ratio is 1.5 cubic meters per ton. The nickel content of the            ore within the Kempirsai deposit varies from 0.8% to 3.0% and cobalt – from            0.025% to 0.08%. The average nickel and cobalt content for the Kara-Obinskoye are 1.1%            and 0.066% respectively. The average nickel and cobalt content for the            Novo-Shandashinskoye deposit are 1.38% and 0.045%.

             

The ore reserves of the Kempirsai deposit were evaluated during the            Soviet era based on Soviet standards. The Soviet standards, however, are not consistent            with the standards established by the United States Securities and Exchange Commission            (“SEC”). Therefore, during 2007 we retained Wardell Armstrong            International, an independent engineering firm to perform a feasibility study,            including an estimation of mineable reserves for the Kempirsai deposit. We anticipate            the results of the feasibility study, including an estimation of mineable reserves            during the second half of the 2008 fiscal year. As we have not yet established reserves            at the Kempirsai deposit, this project should be deemed exploratory in nature. For            additional information regarding reserves please see            “*Reserves*” in this Item            1 “*Business*”.

             

14

 

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***Gornostai***

             

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

             

|   | **•** | *Ochre zone*represents the                            upper part of the serpentinite weathered crust. |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | *Nontronite zone*is more                            widespread than the ochre zone with thickness varying from 2 up to 10 m                            (sometimes reaching 30 m) |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | *Zone of leached and disintegrated                            serpentinite*is the most widespread amongst                            the three zones. The zone mean thickness is 15-20 m (in some cases up                            to 50 m). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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

             

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

             

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

             

Wardell Armstrong International also evaluated the Gornostai deposit in            connection with a scoping study and preliminary resource estimation. We plan to            undertake a preliminary feasibility study on the Gornostai deposit during 2008 with            completion in 2009, including a reserve estimate that will comply with the standards            established by the SEC. For additional information regarding reserves please see            “*Reserves*” in this Item 1 “Business.”

             

**History and current state of our deposits**

             

***Kempirsai***

             

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

 

15

 

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In November 2007 KKM submitted to the MEMR the request for the extension            of the subsoil use contract to the nickel and cobalt deposits up to 2018 and            corresponding changes in the working program. Despite this fact, on December 10, 2007,            the MEMR unilaterally terminated KKM’s contracts and licenses to explore for            nickel, cobalt, brown coal and other minerals within the Kempirsai and Mamyt deposits            on the basis that KKM had material failures in the execution of the work programs            associated with the contacts and licenses. The MEMR did not, however, detail those            failures. In January 2008, KKM filed an action in the Court of Astana city against the            MEMR challenging the legality of the unilateral termination of the KKM contracts and            licenses by the MEMR for several reasons, including that the contracts and licenses had            been terminated on grounds not provided for in the subsoil use contracts and            legislation and there were no material failures in the execution of the work programs            associated with the contracts and licenses. In February 2008, the Court of Astana city            acknowledged that the unilateral termination of the contracts and licenses by the MEMR            was inconsistent with the terms of the contracts and licenses. The Court canceled the            order of the MEMR relating to the unilateral termination of the licenses and reinstated            the KKM contracts and licenses. In March 2008, the MEMR appealed the decision of the            Court of Astana city to the Republic of Kazakhstan Supreme Court. We expect the Supreme            Court to announce its final decision on this matter by the end of April            2008.

             

*Historical exploration and production            activities*

             

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

             

| **Deposit**          |   | **Number of Holes** |   | **Meters**        |   | **Samples**       |
|----------------------|--------|---------------------|--------|-------------------|--------|-------------------|
| Kara-Obinskoye       |   | 4,498               |   | 79,400            |   | 46,490            |
| Novo-Shandashinskoye |   |   780     |   |   7,770 |   |   6,135 |

 

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

             

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

             

16

 

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

             

*Plant, equipment and infrastructure*

             

KKM owns fuel tanks, locomotives, rail cars, railway cranes, bridge            cranes, railway cisterns, maintenance equipment, excavators, motor graders, passenger            vehicles, passenger buses, heavy dump trucks, hoppers, scales, lathes, forging hammers,            presses, grinding, milling and boring machines, boilers, electrical substations, office            equipment, business machines, portable communication equipment, laboratory equipment            and multiple buildings. The machinery was manufactured between 1950 and the present.            The buildings were built between the 1940’s and the early 1990’s. Our            equipment and infrastructure in its current state has the capacity to mine            approximately 250,000 tons of ore annually. Much of our existing equipment and            buildings will need repair and refurbishing prior to being put into active operation.            We estimate the cost of these repairs to be approximately $1,000,000. Once repaired, we            expect our infrastructure and equipment to have a standing capacity to mine up to            500,000 tons of ore annually. According to a preliminary feasibility study prepared by            Wardell Armstrong International, to meet a production rate of 3,400,000 tons of ore            annually, our mining fleet will need to be enhanced with several new pieces of            equipment, including primary digging machines, ancillary front end loaders and railway            rolling stock in the amount of $14.4 million.

             

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

             

*Costs*

             

Since the date we acquired KMI in October 2005 through December 31,            2007, KKM has expended approximately $17,740,000 at the Kempirsai deposits. We            anticipate future planned costs to be up to $600 million, depending on technology and            capacity of the processing plant we plan to build at the Kempirsai deposit as discussed            herein greater detail in the            “*Processing*” section of            this Item 1             “*Business*.” We plan to            spend approximately $20 million in 2008, depending on ore sells, in the further            development of the Kempirsai deposit and in the “*Plan of            Operations*” section of Item 6.            “*Management’s Discussion and Analysis of Financial            Condition and Results of Operations*.”

             

***Gornostai***

             

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

 

17

 

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*Historical exploration activities*

             

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

             

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

             

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

             

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

             

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

             

*Exploration activities*

             

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

 

18

 

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As discussed above, currently the exploration stage of our license runs            through February 2010 due to the second two-year extension of exploration stage. During            the exploration stage we are required to engage in certain activities to determine the            existence of commercially producible mineral reserves. We have planned the following            exploration activities for 2008 and 2009, which we believe will be sufficient to both            satisfy our Annual Work Program requirements and to help us establish commercially            producible reserves within the Gornostai deposit. Once we establish commercially            producible reserves, we plan to move to commercial production at the Gornostai            deposit.

             

| **Activity**                                                                                                                                                                                  |   | **Quantity**           |   | **Anticipated Timetable**     |   | **Estimated Cost**                                                                     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-------------------------------|--------|----------------------------------------------------------------------------------------|
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |
| Core drilling on North                            sectionincluding                            mobilization/demobilization                                                                     |   | 2,000 meters

15 holes |   | April 2008 - June 2009        |   | ***$250,000***

                             

                              |
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |
| Core sampling and sample preparation                                                                                                                                                          |   | 1,000 samples          |   | April 2008 - July 2009        |   | ***$10,800***                                                                          |
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |
| Assaying and metallurgical tests                                                                                                                                                              |   | 1,000 samples          |   | January 2008 -

October 2008  |   | ***$95,000***                                                                          |
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |
| Interpretation of exploration results and preparation of                            the report and reserve estimate for submission to the State Reserves                            Committee |   |                   |   | January 2008 -

December 2008 |   | ***$145,000***                                                                         |
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |
| The PFS for getting the reserve estimate that complies                            with the standards established by the SEC                                                                   |   |                   |   | July 2008 -

July 2009        |   | ***$400,000***                                                                         |
|                                                                                                                                                                                          |   |                   |   |                          |   |                                                                                   |

 

             

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

             

*Core sampling, assaying and quality assurance/quality            control*

             

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

             

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

             

19

 

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

             

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

             

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

             

*Submission of report and reserves estimate to the State Reserves            Committee*

             

We will retain a third party to work with our in-house geologists to            prepare the report and reserve estimate for submission to the State Reserves Committee            in connection with our application to move the Gornostai deposit from exploration phase            to commercial production phase. We have not yet selected a party to provide this            service.

             

*Infrastructure*

             

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

             

*Costs*

             

From January 2005, when we acquired Kaznickel, to December 31, 2007,            Kaznickel has spent approximately $5,140,000 in exploration activities at the Gornostai            deposit. As with the Kempirsai deposit, we anticipate costs to be as high as            $600,000,000, depending on capacity and technology of the type of processing plant we            build at the Gornostai deposit as discussed herein greater detail in the            “Processing” section of this Item            1 “*Business*.” We            plan to spend approximately $1,500,000 in exploration activities and further            development of the Gornostai deposit during fiscal 2008. For additional details please            see the “*Plan of            Operations*” section of Item 6.            “*Management’s Discussion and Analysis of Financial            Condition and Results of Operations*”.

 

**Reserves**

             

We do not have a current estimate of the ore reserves contained within            our contract territories. While we have reserve estimates prepared during Soviet times,            we do not know the accuracy of those reserve estimates and do not believe them to be to            the standards established by the SEC. As discussed above, we are working with Wardell            Armstrong International, an independent engineering firm, to provide us with an ore            reserve estimate of our Kempirsai deposit. We anticipate releasing the result of this            report during the 2008 fiscal year. We have also retained Wardell Armstrong            International toundertake a feasibility study on the Gornostai            deposit during 2008 with completion in 2009.

             

20

 

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In accordance with SEC Industry Guide 7 mineral deposits qualify as            “reserves” only to the extent some part of the deposit can be economically            and legally extracted or produced at the time of the reserve determination. At the            present time, we do not know whether the ore in our deposits can be economically            extracted or produced. For this purpose, we have retained Wardell Armstrong            International to conduct feasibility studies of our deposits to provide information on            mining, processing, metallurgical, economic and other relevant factors to determine            whether any of our deposits can be economically produced.

             

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

 

**Processing**

             

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

             

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

 

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

             

There are three main treatment processes for nickel            laterites:

             

|   | **•** | Conventional smelting (pyrometallurgical); |
|--------|------------|--------------------------------------------|

|   | **•** | Reduction roast / ammonia leach processing (Caron                            Process); and |
|--------|------------|--------------------------------------------------------------------------------------------|

|   | **•** | High pressure acid leaching (HPAL). |
|--------|------------|-------------------------------------|

 

21

 

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Following is a diagram of the key component steps in each of these            treatment processes:

             

 

*Conventional Smelting*

             

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

 

22

 

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*Reduction Roast / Ammonia Leach Processing (Caron            Process)*

             

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

 

*High Pressure Acid Leaching (HPAL)*

 

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

             

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

 

*Heap Leaching*

             

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

 

*Atmospheric Leaching*

             

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

 

23

 

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*Hydrochlorination*

             

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

             

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

             

|   | **•** | the necessary equipment for the pilot plant is difficult                            to design, locate and procure; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------|

|   | **•** | the use of chlorides in the process creates a risk to                            personnel and the environment; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

|   | **•** | the difficulties in accomplishing isolation in the                            rotating kiln; and |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | winter weather conditions at our Kempirsai deposit,                            including up to 13 feet of snow and temperature as low as 31 to 40                            degrees below zero Fahrenheit, require appropriate equipment to operate                            the pilot plant in harsh weather conditions. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The initial tests of the pilot plant used head ore from our Kempirsai            deposit. The average nickel content of our Kempirsai head ore is approximately 1.1            percent per ton. PIT Geoanalitika, an independent Kazakh company, conducted chemical            analysis of several different samples of the pilot plant concentrates and found that            nickel content following the hydrochlorination process increased 10 to 15 percent. We            feel these initial results justify further research and development to optimize the            process at the scale of the pilot plant with a view to employing the technology in            commercial production in the future. Irrespective of our decision regarding the            feasibility of a pyrometallurgical or hydrometallurgical processing plant at the            Kempirsai deposit, we plan to continue testing and development of our hydrochlorination            process in 2008.

             

*Smelting in a Liquid Bath (Pyrometallurgical - Russian Technology            or Vanyukov Process)*

             

In 1949, the Moscow State Institute of Steel and Alloys proposed a            process based on smelting in a liquid bath. This technology has been developed and,            although little used in the West, has for more than 25 years been applied successfully            as a standard metallurgical melting process, especially for the production of copper            from both oxide and sulphide ores in the CIS countries. The first commercial            application of this technology for the processing of nickel oxide ores to produce            ferronickel commenced at Kombinat YuzhUralNickel (Russia) on July 12, 2004. Coal, coke            or even methane can be used as the reducing agent. An advantage of the Vanyukov process            over the more widely known RKEF process is that reduction and melting occurs in a            single unit as opposed to having separate units (rotary kiln and electric furnace),            thereby enabling potential capital cost savings. The ability to use coal, coke and/or            methane as both a fuel and a reductant offers potential operational cost savings            compared to the more traditional routes. Another possible advantage of the Vanyukov            process is the considerably lower electrical power requirement compared to RKEF            technologies. YuzhUralNickel is currently undergoing upgrading and once complete should            demonstrate the commercial applicability of this process flow scheme.

             

24

 

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*Bioleaching*

             

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

             

**Our            Plans on Processing Technology**

             

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

             

We are working with Wardell Armstrong International, an independent            engineering firm, to provide us with a feasibility study and an ore reserve estimate of            our Kempirsai deposit. We anticipate releasing the result of this report during the            2008 fiscal year.

             

The feasibility study addresses relevant factors such as location,            geology and mineralization, resources, mining, processing (which includes a review of            available technologies), environmental issues and financial appraisal. The feasibility            study considers the following production options:

             

|   | **•** | construction of a Rotary-Kiln-Electro-Furnace processing                            plant and integrated power station; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

|   | **•** | construction of a processing plant utilizing the                            Vanyukov process (Russian technology); and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | construction of a heap or tank acid leaching processing                            plant. |
|--------|------------|-------------------------------------------------------------------------------------------|

 

Currently, Wardell Armstrong International is conducting            hydrometallurgical pilot test on a sample of the Kempirsai ore to determine whether            nickel can be recovered using acid leach technologies. Also, we are waiting for pilot            test results from a Russian institute and Wardell Armstrong International on the            Vanyukov process. Once we receive the results of these tests we will be in the position            to finalize our decision on the technology to be used for processing of the Kempirsai            ore and develop a detailed plan for construction of a processing plant.

             

**Tax            and Royalty Scheme in the Republic of Kazakhstan**

             

We are subject to the following taxes and royalties payable to the            Republic of Kazakhstan:

 

| **Class of Tax or Royalty** | **Basis of Tax** | **Payable Period** | **Annual Rate** |
|-----------------------------|------------------|--------------------|-----------------|
| Corporate Income Tax        | Profits          | Monthly            | 30%             |
| Social Tax                  | Payroll          | Monthly            | 21-26%          |
| VAT                         | Value added      | Monthly            | 14-20%          |
| Property Tax                | Property         | Quarterly          | 1%              |
| Royalty (ore)               | Output volume    | Monthly/Quarterly  | 2.21%           |
| Royalty (brown coal)        | Output volume    | Monthly/Quarterly  | 0.9%            |
| Excess Profit Tax           | Net income       | Annually           | 4-60%           |

             

 

25

 

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**Competition**

 

Total nickel production worldwide was approximately 1,660,000 tons in            2007, according to USGS. Norilsk Nickel is the largest nickel producer followed by            CVRD, BHP Billiton Plc, Eramet Group and Xtrata. These five companies account for            approximately 59% of the world’s primary nickel production, while more than 30            medium to small size companies produce the remaining 41%.

             

Until recently, there were no nickel-producing companies in Kazakhstan.            In February 2004, Oriel Resources, a London-based company, acquired 90% of Muzbel LLC,            which holds exploration and extraction rights for the Shevchenko nickel deposit in            northern Kazakhstan. Formed in July 2003, Oriel’s primary focus is the            acquisition and development of advanced and high-quality chrome, nickel and other            alloying commodities in the countries of the Former Soviet Union, primarily Kazakhstan            and the Russian Federation. Oriel Resources owns Tikhvin chrome smelter near St            Petersburg and has two deposits in Kazakhstan, including the Voskhod chrome and the            Shevchenko nickel projects. The Shevchenko nickel project feasibility study showed that            proven and probable nickel laterite ore reserves were 104.4 million tons of 0.79%            nickel. In October 2006, Oriel Resources was acquired by IPH Polychrom Holding BV and            Croweley International Limited. In March 2008, Mechel issued a statement, confirming            its interest in acquisition of Oriel Resources. Mechel is the leading Russian coking            coal and long steel producer, however recently its interest has expanded into utilities            and ferroalloy manufacturing. Being the second-largest nickel producer in Russia after            Norilsk Nickel and a significant ferrosilicon producer, Mechel is likely to derive some            synergies from Oriel Resources assets.

             

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

             

We believe that the proximity of our Gornostai deposit to China and            other Asian countries will provide us a competitive advantage. We have already been            approached by Chinese metal companies interested in purchasing finished product once we            reach production stage. As of this date we have not entered into definitive            negotiations with any party.

             

**Other Properties**

             

Bekem leases approximately 400 square feet of office space located at            324 South 400 West, Suite 225, Salt Lake City, Utah 84101 for its administrative and            registered office in the United States. We pay annual rents of approximately $7,800 for            this space pursuant to a lease agreement that expires December 31, 2008 with an option            to extend the lease for an additional year.

             

We also maintain a representative office in Almaty, Kazakhstan, where we            lease 1,880 square feet of office space. The lease agreement expires on November 30,            2008. The monthly lease payment is $7,000. Upon consent of both parties, the agreement            may be prolonged further.

 

26

 

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Kaznickel LLP rents approximately 2,200 square feet office in Semey,            Kazakhstan, for approximately $4,000 per month. Semey is the closest city to the            Gornostai deposit. Kaznickel also rents approximately 5,300 square feet of warehouse            space in Semey for $4,250 per month. Kaznickel uses this space to store test ore. These            lease agreements expire in March 31, 2008. If at any time the owner of this space            decides they need or want the space for other purposes, Kaznickel has no right to            continue to occupy the space and could be forced to move.

             

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

             

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

             

**Employees**

 

We currently have approximately 259 full-time employees. We hire our            employees under local labor contracts complying with the governing laws of the Republic            of Kazakhstan. We believe we have satisfactory relations with our employees. We            anticipate the need to hire additional personnel as operations expand. To date, neither            our operations nor the operations of any of our subsidiaries have been interrupted by            strikes or work stoppages. We have managed to maintain turnover of our work force at a            low level. With the ongoing labor market monitoring, we believe that future new labor            requirements can be satisfied and there is no significant risk of labor            shortage.

             

**Reports to Security Holders**

             

We file annual and quarterly reports with the SEC. The public may read            and copy any materials filed by the Company with the SEC at the SEC’s Public            Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain            information on the operation of the Public Reference Room by calling the SEC at (202)            551-8090. We are an electronic filer and the SEC maintains an Internet site that            contains reports and other information regarding the Company that may be viewed at            http://www.sec.gov.

             

| **Item 1A.** | **Risk Factors** |
|--------------|------------------|

             

*Need for Additional Capital.*We have            no proven mineral reserves that conform to U.S. standards. The Gornostai and Kempirsai            deposits have not yet entered the development stage with respect to our mineral            interests and we have no production. We have realized only limited revenue from our            Kempirsai deposit and no revenue from Gornostai and have very little ability to            generate revenue. We do not expect this to change until we build and begin operating a            nickel ore processing plant.

 

27

 

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Management expects that the Company will need $50 million to $300            million to fund construction of a processing plant depending upon which technology and            the size of the plant is deemed appropriate for processing our ores. We plan to begin            construction in 2008 and, assuming funding is available, expect a processing plant to            be operational in 2011. As we generate no revenue, we will need to raise additional            capital through the sale of our equity and/or debt securities to fund plant            construction.

             

While certain shareholders of the Company have indicated a willingness            to provide us line of credit to assist us in meeting our 2008 annual work program            expenses, we will likely need additional funds. Currently, we do not have any 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 to us any            funds.

             

We expect to be totally dependent upon investment funds to support our            operations and satisfy our mineral license annual work program until such time as we            begin to generate sufficient revenue to fund operations. We expect these funds will            consist primarily of funds raised in equity and/or debt financing activities. We            currently have no firm commitment from any party to provide us additional equity or            debt financing and there is no guarantee that we will obtain additional financing on            acceptable terms, or at all. If we are unsuccessful in obtaining additional funding            during 2008, we will likely have insufficient funds to continue operations or to meet            our annual work program requirements. If we cannot fulfill our annual work program            requirement, we could be subjected to fines and penalties and even to the possible            forfeiture of our subsoil use contracts and licenses.

             

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

             

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

 

28

 

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

             

|   | **•** | Foreign currency exchange fluctuations or imposition of                            currency exchange controls; |
|--------|------------|----------------------------------------------------------------------------------------------------------------|

|   | **•** | Legal and governmental regulatory                            requirements; |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | Disruption of tenders resulting from disputes with                            governmental authorities; |
|--------|------------|---------------------------------------------------------------------------------------------------------|

|   | **•** | Potential seizure or nationalization of                            assets; |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | Import-export quotas or other trade barriers; |
|--------|------------|-----------------------------------------------|

|   | **•** | Difficulties in collecting accounts receivable and                            longer collection periods; |
|--------|------------|----------------------------------------------------------------------------------------------------------|

|   | **•** | Political and economic instability; |
|--------|------------|-------------------------------------|

|   | **•** | Difficulties and costs of staffing and managing                            international operations; and |
|--------|------------|----------------------------------------------------------------------------------------------------------|

|   | **•** | Language and cultural differences. |
|--------|------------|------------------------------------|

 

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

             

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

             

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

             

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

             

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

 

29

 

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

             

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

             

*Competition**.*Our principal competitors are large established companies with            substantial financial resources and market share. If we establish commercially            producible reserves and move to production stage, we will have to compete for customers            with these companies.

 

| **Item 1B.** | **Unresolved Staff Comments** |
|--------------|-------------------------------|

 

|   | None. |
|--------|-------|

             

| **Item 2.** | **Properties** |
|-------------|----------------|

 

The information set forth above in*Item            1. Business*is incorporated by reference            herein.

             

| **Item 3.** | **Legal Proceedings** |
|-------------|-----------------------|

 

As discussed above, on December 10, 2007, the MEMR unilaterally            terminated KKM’s contracts and licenses to explore for nickel, cobalt, brown            coal, and other minerals within the Kempirsai and the Mamyt deposits on the basis that            KKM had material failures in execution of the work programs associated with the            contacts and licenses but did not detail those failures. In January 2008, KKM filed an            action in the Court of Astana city against the MEMR challenging the legality of the            unilateral termination of the KKM contracts and licenses by the MEMR for several            reasons, including that the contracts and licenses had been terminated on grounds not            provided for in the subsoil use contracts and legislation and there were no material            failures in the execution of the work programs associated with the contracts and            licenses. In February 2008, the Court of Astana city acknowledged that the unilateral            termination of the contracts and licenses by the MEMR was illegitimate. The Court            canceled the order of the MEMR relating to the unilateral termination of the licenses            and reinstated the KKM contracts and licenses. In March 2008, the MEMR appealed the            Court’s decision to the Republic of Kazakhstan Supreme Court. We anticipate the            Supreme Court will announce its final decision on this matter by the end of April            2008.

             

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

 

30

 

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| **Item 4.** | **Submission of Matters to a Vote of Security                            Holders** |
|-------------|------------------------------------------------------------------------------------|

 

No matters were submitted to a vote of security holders during the            quarter ended December 31, 2007.

 

**PART II**

 

| **Item 5.** | **Market for Registrant's Common Equity, Related                            Stockholder Matters and ** |
|-------------|-------------------------------------------------------------------------------------------------------------|

|   | **Issuer Purchases of Equity Securities** |
|--------|-------------------------------------------|

 

Our shares are currently traded on the Over-the-Counter Bulletin Board            ("OTCBB") under the symbol BKMM. As of April 7, 2008 we had approximately 158            shareholders holding 125,172,011 common shares. Of the issued and outstanding common            stock, approximately 13,358,592 are free trading, the balance are “restricted            securities” as that term is defined in Rule 144 promulgated by the Securities and            Exchange Commission.

             

Published bid and ask quotations from January 1, 2006 through December            31, 2007 are included in the chart below. These quotations represent prices between            dealers and do not include retail markup, markdown or commissions. In addition, these            quotations do not represent actual transactions.

 

|                 | **Bid**  | **Ask** |
|----------------------|----------|---------|
| **2007**             | **High** | **Low** | **High** | **Low** |
| Oct. 1 thru Dec. 31  | $1.90    | $0.41   | $2.00 | $0.65 |
| July 2 thru Sept. 28 | 1.90     | 1.25    | 2.00 | 1.35 |
| Apr. 2 thru June 29  | 1.60     | 1.37    | 1.72 | 1.70 |
| Jan. 3 thru Mar. 30  | 1.90     | 1.40    | 2.00 | 1.72 |
|                 |     |    |   |   |
| **2006**             | **High** | **Low** | **High** | **Low** |
| Oct. 2 thru Dec. 29  | 1.80     | 1.75    | 2.00 | 1.85 |
| July 3 thru Sept. 29 | 2.00     | 1.60    | 2.25 | 1.70 |
| Apr. 3 thru June 30  | 1.95     | 1.05    | 2.20 | 1.50 |
| Jan. 3 thru Mar. 31  | 2.00     | 1.25    | 10.01 | 1.35 |

 

The above information was obtained from Pink Sheets LLC, 304 Hudson            Street, 2nd Floor, New York, New York 10013.

             

**Dividends**

 

We have not paid, nor declared, any dividends since our inception and do            not intend to declare any such dividends in the foreseeable future. Our ability to pay            dividends is subject to limitations imposed by Utah law. Under Utah law, dividends may            be paid to the extent that the corporation's assets exceed its liabilities and the            corporation is able to pay its debts as they become due in the usual course of            business.

 

31

 

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**Securities Authorized for Issuance Under Equity Compensation            Plans**

 

| **Plan category**                                                                 | **Number of securities to be issued upon exercise of                            outstanding options, warrants and rights** | **Weighted-average exercise price of outstanding                            options, warrants and rights** | **Number of securities remaining available for future                            issuance under equity compensation plans (excluding securities                            reflected in column (a))** |
|-----------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                              | (a)                                                                                                                        | (b)                                                                                                        | (c)                                                                                                                                                                                                   |
| Equity compensation plans approved by security                            holders | -0-                                                                                                                        | $-0-                                                                                                       | 1,916,877                                                                                                                                                                                             |
| Equity compensation

plans not approved by security holders                       | -0-                                                                                                                        | $-0-                                                                                                       | -0-                                                                                                                                                                                                   |
| Total                                                                             | -0-                                                                                                                        | $-0-                                                                                                       | 1,916,877                                                                                                                                                                                             |

             

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

             

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

 

| **Name**            |   | **Position with the Company**                |   | **Number of Shares** |
|---------------------|--------|----------------------------------------------|--------|----------------------|
| Yermek Kudabayev    |   | Chief Executive Officer, President, Director |   | 421,772              |
| Zhassulan Bitenov   |   | Chief Financial Officer                      |   | 383,429              |
| Nurlan Tajibayev    |   | Vice President, Director                     |   | 191,715              |
| Alexander Rassokhin |   | Exploration Manager                          |   | 86,207               |

 

The stock grants were valued at $1.95 per share, which represented the            closing market price of our stock on October 20, 2006. The stock grants were made under            our 2003 Stock Option Plan. The shares have been issued and are outstanding and are            being held in escrow by the Company subject to the applicable vesting schedule for each            grant. The grantees have the right to vote the shares, receive dividends and enjoy all            other rights of ownership over the entire grant amount from the grant date, except for            the right to dispose of or otherwise encumber the shares prior to satisfying the            applicable vesting schedule. Shares will only vest to the grantee if the grantee is            employed by the Company on the applicable vesting date. Any unvested shares at the time            a grantee’s employment with the Company ceases, for any reason, shall be            forfeited back to the Company.

 

Mr. Kudabayev’s shares vest as follows: 95,857 shares vested in            April 2007, 115,029 shares vested in April 2008, and the final 210,886 shares will vest            in April 2009 provided that the Company timely files its reports with Securities and            Exchange Commission.

 

Mr. Bitenov’s shares vest as follows: one-fourth (95,857 shares)            in January 2009 and one-fourth (95,857 shares) in January 2010, provided that the            Company has timely filed its reports with Securities and Exchange Commission. The final            one-half (191,715 shares) will vest in January 2011. Vesting during each year is            contingent upon the Company timely filing of its reports with the Securities and            Exchange Commission each year. Moreover, vesting in the third year is also contingent            upon the Company having commenced commercial operations.

 

32

 

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Mr. Tajibayev’s shares vest as follows: one-fourth (47,929 shares)            vested on October 20, 2007, and one-fourth (47,929 shares) will vest on October 20,            2008, provided that the Company starts construction of the processing plant by October            20, 2008. The final one-half (95,857 shares) will vest on October 20, 2009 conditioned            upon the Company having commenced commercial            operations.            

 

Mr. Rassokhin’s shares vest as follows: one-fourth (21,552 shares)            vested on October 20, 2007 and one-fourth (21,552 shares) will vest on October 20,            2008, provided that in each year the Company timely performs the drilling work program            requirements as dictated by the Republic of Kazakhstan’s Ministry of Energy and            Mineral Resources. The final one-half (43,103 shares) will vest on October 20, 2009,            conditioned upon the Company timely performing the drilling work program requirements,            as dictated by the Republic of Kazakhstan’s Ministry of Energy and Mineral            Resources during the third year and the Company having commenced commercial            operations.

 

We have issued no other securities under the Plan.

             

In connection with a private placement we concluded on July 14, 2006, we            issued to Aton Securities, the placement agent for the private placement, warrants to            purchase up to 2,400,000 shares of our restricted common stock. The exercise price of            the warrants is $1.17 per share. The warrants were immediately exercisable. These            warrants expired unexercised on January 14, 2008.

             

**Unregistered Sales of Equity Securities**

 

We issued no securities during the quarter ended December 31, 2007.            Subsequent to the quarter end, on March 25, 2008 the board agreed to increase the            restricted stock grant to Yermek Kudabayev, our Chief Executive Officer, by an            additional 38,343. On March 25, 2008 the board also made a restricted stock grant to            Zhassulan Bitenov, our Chief Financial Officer, of 383,429 shares. For details            regarding the terms and conditions of those restricted stock grants please see            “*Securities Authorized for Issuance Under Equity            Compensation Plans*” immediately preceding this section.            Each of these individuals is a non US person resident in Kazakhstan. The restricted            stock grants were made pursuant to an exemption from the registration requirements of            the Securities Act of 1933, provided under Regulation S of the Securities Act of            1933.

 

**Repurchases of Equity Securities**

 

We did not repurchase any of our equity securities during the year ended            December 31, 2007.

 

**Transfer Agent**

 

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

 

33

 

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| **Item 6.** | **Selected Financial Data** |
|-------------|-----------------------------|

 

The selected consolidated financial information set forth below is            derived from our consolidated balance sheets and statements of operations as of and for            the years ended December 31, 2007, 2006 and 2005 and for the period from March 5, 2004            (the date of Inception) until December 31, 2004. The data set forth below should be            read in conjunction with Item 6. “*Management’s Discussion and Analysis            of Financial Condition and Results of Operations*” and the consolidated            financial statements and related notes thereto included in this Annual            Report.

 

| **Consolidated Statements of Operations                            Data:** |                                                       |                                                       | **For the Period from**                                    |                                                                                                                                        | **For the Period from** |
|----------------------------------------------------------------------------|------------------------------------------------------------|------------------------------------------------------------|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|
|                                                                       |                                                       |                                                       |                                                       | **March 5, 2004**                                                                                                                           |                    | **March 5, 2004** |
|                                                                       |                                                       |                                                       |                                                       | **(Date of Inception)**                                                                                                                     |                    | **(Date of Inception)** |
|                                                                       | **For the Years Ended December 31,**                       | **through**                                                |                                                       | **through**                                                                                                                                 |
|                                                                       | **2007**                                                   | **2006**                                                   | **2005**                                                   | **December 31, 2004**                                                                                                                       |                    | **December 31, 2007** |
| General and administrative expenses                                        | $       4,268,793  | $       3,136,715  | $       1,018,148  | $                     99,509  |                    | $                 8,523,165  |
| Research and development costs                                             | 296,070                                               | 389,507                                               | 131,562                                               | 271,099                                                                                                                                |                    | 1,088,238  |
| Exploratory costs at Gornostai deposit                                     | 1,584,428                                             | 1,118,115                                             | 697,496                                               | -                                                                                                                                      |                    | 3,400,039  |
| Exploratory costs at Kempirsai deposit                                     | 2,601,807                                             | 352,132                                               | -                                                     | -                                                                                                                                      |                    | 2,954,670  |
| Loss from operations                                                       | (9,259,321)                                                | (5,220,917)                                                | (1,907,838)                                                | (370,608)                                                                                                                                   |                    | (16,758,684) |
| Interest expense                                                           | (1,018)                                                    | (1,382,972)                                                | (293,451)                                                  | -                                                                                                                                      |                    | (1,677,441) |
| Interest income                                                            | 324,976                                               | 85,337                                                | -                                                     | -                                                                                                                                      |                    | 410,313  |
| Net loss                                                                   | (8,701,550)                                                | (4,706,122)                                                | (1,271,137)                                                | (245,090)                                                                                                                                   |                    | (14,923,899) |
| Basic loss per common share                                                | (0.07)                                                     | (0.04)                                                     | (0.03)                                                     | (0.05)                                                                                                                                      |                    |   |

 

 

| **Balance Sheet Data:**                    |   | **As of December 31,**                                           |
|--------------------------------------------|--------|------------------------------------------------------------------|
|                                       |   | **2007**                                                         | **2006** | **2005** | **2004** |
| Total current assets                       |   | $        1,919,931  | $        9,855,647  | $          452,406  | $            25,527  |
| Property, plant and mineral interests, net |   | 14,226,359                                                  | 13,870,563  | 10,938,368  | 777,051  |
| Total assets                               |   | 16,450,637                                                  | 25,097,927  | 11,430,015  | 817,695  |
| Notes payable                              |   | -                                                           | -  | 8,532,420  | -  |
| Total liabilities                          |   | 1,958,446                                                   | 2,200,048  | 12,347,567  | 880,111  |
| Total shareholders' equity (deficit)       |   | 14,492,191                                                  | 22,897,879  | (917,552) | (62,416) |

             

The increase in our general and administrative expenses in fiscal 2006            and 2007 is mainly related to the acquisition of the Kempirsai deposit on October 24,            2005. This increase in general and administrative expenses is attributable to the            significant increase in employees and employee-related costs as a result of the            acquisition of KKM, as well as, costs associated with having licensed territories in            both northeastern and northwestern Kazakhstan, increased office rents and consulting            and travel expenses.

 

Exploratory costs at the Gornostai deposit commenced after the            acquisition of Condesa Pacific, S.A. and its wholly owned subsidiary Kaznickel, LLP in            January 2005. The increase in the exploratory costs occurred due to increased            exploratory and drilling works at the Gornostai deposit in accordance with the subsoil            use contract associated with that deposit.

             

Exploratory costs at the Kempirsai deposit mainly represent Kempirsai            asset maintenance expenses and cost of extraction of ore. These costs are treated as            exploratory costs because the Company is deemed to be an exploration stage company.            During the twelve months ended December 31, 2007 we extracted 137,724 tons of ore,            which cost $858,105, while no ore was extracted during 2006. Also, during 2007 we            recognized $1,043,720 of impairment loss as a result of revisions to the recoverability            of our long-lived assets.

             

34

 

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Since we have been conducting exploratory activities and have not been            generating revenues, our capital resources have consisted primarily of funds we have            borrowed from related and non-related parties and the sale of our equity securities.            Interest expenses as well as interest earned are directly dependent on the availability            of borrowed resources and assets attracted from sale of equity securities. Losses from            operations and net losses have been increasing due to increased exploratory works at            the Gornostai deposit and maintenance and repair works of Kempirsai assets. We do not            expect further increases in losses from operations.

 

Total assets and liabilities increased in 2005 with the acquisition of            Kempirsai assets and issuance of notes payable to related parties. The notes payable            were fully paid in 2006.

             
| **Item 7.** | **Management's Discussion and Analysis of Financial                        Condition** |
|-------------|----------------------------------------------------------------------------------------|

|   | **and Results of Operations** |
|--------|-------------------------------|

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

 

Since inception we have generated no revenue. We have spent millions of            dollars to date and anticipate that we will spend significant additional capital before            we begin to realize revenue from operations. As discussed above in Item            1 “*Business*” we            have no proven mineral reserves that conform to U.S. standards. The Gornostai and            Kempirsai deposits have not yet entered the development stage and we have no            production. We have realized only limited revenue from our Kempirsai deposit and no            revenue from Gornostai and have very little ability to generate revenue. We do not            expect this to change until we build and begin operating a nickel ore processing plant.            We are currently investigating the financial viability of various processing            technologies for the construction of a processing plant to produce ferronickel at our            Kempirsai deposit to allow us to begin realizing revenues. We expect we will need            significant additional capital to fund construction of a processing plant in 2008-2011.            If we are able to obtain the necessary funding to finance construction of the            processing plant, we would not expect the plant to be operational prior to 2011.            Because we do not currently generate cash flow and we do not anticipate generating            significant cash flow until 2011 or later, if at all, we will be completely dependent            on external funding, if any, to support our activities until such time as we are able            to generate sufficient revenues to cover our expenses.

             

In July 2006 we raised $28,000,000 through a private placement of our            equity securities which resulted in net proceeds to us of approximately $26,400,000            after deducting fees and costs. This represents only a small portion of the funds we            will need to reach commercial production. Of the $26,400,000, as of December 31, 2007,            we had spent approximately $25,700,000. Approximately $12,200,000 was used to repay            loans, $4,200,000 was used on capital expenditures as a part of our annual work program            obligations, approximately $2,300,000 was spent researching and developing our            hydrochlorination technology and $7,000,000 was used as working capital. At December            31, 2007, we had cash on hand of $756,943.

             

We incurred net losses of $8,701,550 and $4,706,122 for the years ended            December 31, 2007 and 2006, respectively and $14,923,899 for the period from March 5,            2004 (date of inception) through December 31, 2007. Current assets exceeded current            liabilities by $1,000,533 and by $9,040,599 at December 31, 2007 and 2006,            respectively. We anticipate the need to seek significant additional funding during            fiscal 2008 to satisfy our annual work program obligations for this year. While certain            shareholders have indicated an interest in extend to us a credit line to satisfy at            least part of that obligation, we do not, at this time, have any signed agreement with            said shareholders. There is no assurance that we will be able to obtain this credit            line or additional funding on favorable terms, or at all. If we are unsuccessful in            obtaining additional funding during 2008, we will likely have insufficient funds to            continue operations or to meet our annual work program requirements. If we cannot            fulfill our annual work program requirement, we could be subjected to fines and            penalties and even to the possible forfeiture of our subsoil use contracts and            licenses.

 

35

 

----

 

**Results of Operations**

 

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

             

*General and Administrative Expenses*

 

Our general and administrative expenses increased from $3,136,715 during            2006 to $4,268,793 during 2007. This 36% increase in general and administrative            expenses is mainly attributable to an $840,000 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 revenue or funding so            justifies. 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.

 

*Research and Development Costs*

             

During 2007 we incurred research and development cost of $390,370. Of            this amount $296,070 was related to preparation of the feasibility study on the            Kempirsai deposits and $94,300 is related the development of our pilot processing            plant. The cost of development of the pilot processing plant was capitalized as it            represents tangible assets with alternative future use. During 2006 we realized            research and development costs of $2,389,507 related to the pilot processing plant,            $2,000,000 of which was capitalized and added to the cost of the pilot plant and            $389,507 was expensed. We expect our research and development costs during the upcoming            fiscal year will be higher than in 2007 as we continue research on processing            technologies.

             

*Exploratory Costs*

             

Our exploratory costs increased from $1,470,247 during the twelve months            ended December 31, 2006 to $4,186,235 incurred during the twelve months ended December            31, 2007. The increase occurred due to increased exploratory and drilling works at our            Gornostai deposit and an increase in volumes of extracted ore and brown coal at our            Kempirsai and Mamyt deposits. Because the Company is currently an exploration stage            entity, extraction costs were expensed. During the twelve months of 2007 we completed            drilling of 619 test holes (611 test holes in the South section and 8 test holes in the            North section of the Gornostai deposit) to an aggregate depth of 15,625 meters (14,965            meters in the South section and 660 meters in the North section). By comparison, during            the twelve months ended December 31, 2006, we drilled 488 holes in the South section            (no holes in the North section of the Gornostai deposit) to an aggregate depth of            12,652 meters. During 2007 and 2006 the cost of exploratory drilling works at the            Gornostai deposit amounted to $1,584,428 and $1,118,115, respectively.

             

36

 

----

During the twelve months ended December 31, 2007 we extracted 137,724            tons of ore. By comparison, during the twelve months ended December 31, 2006, we            extracted no ore. The ore extraction costs of $858,105 were included into exploratory            costs since the Company is in the exploration stage.

             

Also, during 2007 the Company recognized $1,043,720 of impairment loss            as a result of a revision of recoverability of its long-lived assets. The balance of            exploratory cost of $726,736 and $352,132 for 2007 and 2006, respectively, represent            the cost of maintenance and repair works of Kempirsai assets.

             

*Accretion Expense*

 

We realized accretion expense of $79,288 during the twelve months ended            December 31, 2007. During the twelve months ended December 31, 2006 we realized            accretion expenses of $72,865. This increase in accretion expense is due to the normal            increase in the asset retirement obligation balance over time. We believe accretion            expense during upcoming fiscal year will continue to increase at a rate consistent with            the rate experienced during the 2007 fiscal year.

 

*Grant Compensation Expense*

             

During the year ended December 31, 2007 we incurred $428,935 in grant            compensation expense for restricted stock grants issued to certain officers and key            employees. During 2006 the grant compensation expense amounted to $151,583. The            increase occurred because, as noted above, the grants were not made until the fourth            quarter 2006. The increase is less than initially expected due to the resignation of            Marat Cherdabayev who served as our Chief Executive Officer and President from May 2005            to June 2007 and whose shares did not vest because he resigned his positions with the            Company prior to the vesting dates of his grant.

 

*Total Operating Expenses and Loss from            Operations*

             

As a result of reasons described above, our total expenses and loss from            operations increased by 77%, from $5,220,917 during fiscal 2006 to $9,259,321 during            fiscal 2007. We expect our total expenses in 2008 will continue to increase but at a            lower rate than experienced during the 2007 fiscal year. Also, we expect we will            continue to generate losses until such time as we engage in significant revenue            generating activities, which most likely will not occur before 2011.

             

*Interest Income* 

 

During the twelve months ended December 31, 2007, we realized interest            on deposits of $324,976. By comparison during the twelve months ended December 31, 2006            we earned $85,337 of interest on deposits. Interest on deposits increased in 2007            because 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. All deposits matured            by the end of 2007 which resulted in the realization of higher rates of return as            compared to the fiscal 2006.

 

37

 

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*Interest Expense*

 

During 2007 we realized interest expense of $1,018 compared to            $1,382,972 during 2006. The reduction in interest expenses occurred due to retirement            of our outstanding notes payable and related party notes during 2006. During 2006            interest expense resulted from retiring notes payable prior to their due dates and the            full recognition of the debt discount of $885,970 on notes attracted at the below            market rates. As we experience shortages of funds to finance future activities, we            expect that interest expenses will increase if our activities are financed by            borrowings.

 

*Translation Adjustment*

 

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

             

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

             

*Exchange Loss and Gain*

 

During 2007 we realized an exchange loss of $64,280 compared to an            exchange loss of $174,278 during 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.

 

*Net Loss*

 

For all of the foregoing reasons, during the twelve months ended            December 31, 2007 we experienced a net loss of $8,701,550 compared to a net loss of            $4,706,122 during the twelve months ended December 31, 2006. We anticipate we will            continue to experience increasing net losses until we are able to engage in nickel and            cobalt ore extraction, processing and sales.

 

**Liquidity and Capital Resources**

 

Our capital resources have consisted primarily of funds we have borrowed            from related and non-related parties and the sale of our equity securities. As            discussed above, in July 2006 we raised $28,000,000 through the private placement of            our equity securities which resulted in net proceeds to us of approximately $26,400,000            after deducting fees and costs. These funds, however, represent only a portion of the            funds we will need to move to commercial production. As of December 31, 2007, we had            cash on hand of $756,943. We have used approximately $25,700,000 of the funds raised in            the private offering to repay loans to related and unrelated third parties in the            amount of $12,200,000; for ongoing drilling and exploration of our Gornostai deposit in            the amount of $2,600,000; $2,000,000 for the construction of our hydrochlorination            pilot plant, $300,000 for testing of our pilot plant; $1,600,000 was spent on other            capital expenditures as a part of our minimal working program and $7,000,000 for            working capital.

 

38

 

----

             

As noted above, we incurred net losses of $8,701,550 and $4,706,122 for            the years ended December 31, 2007 and 2006, respectively and $14,923,899 for the period            from March 5, 2004 (date of inception) through December 31, 2007. Current assets            exceeded current liabilities by $1,000,533 and by $9,040,599 at December 31, 2007 and            2006, respectively.

             

We anticipate the need for substantial additional capital resources            during the 2008 fiscal year to meet the annual work program obligations associated with            our Kempirsai and Gornostai deposits. Certain shareholders of the Company have            indicated a willingness to provide us a line of credit to satisfy at least part of our            2008 annual work program requirement. We do not, however, have any 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 to us any funds. As discussed            above, if we are unsuccessful in obtaining additional funding during 2008, we will            likely have insufficient funds to continue operations or to meet our annual work            program requirements. If we cannot fulfill our annual work program requirement, we            could be subjected to fines and penalties and to the possible forfeiture of our subsoil            use contracts and licenses.

 

During the 2007 and 2006 fiscal years, cash was primarily used to fund            operations and repay notes payable to related and non-related parties. See below for            additional discussion and analysis of cash flow.

 

| ***December 31,***                        | **2007**         | **2006**                                         |
|-------------------------------------------|------------------|--------------------------------------------------|
|                                      |             |                                             |
| Net cash used in operating activities     | $(6,900,230)     | $(5,617,395)                                     |
| Net cash used in investing activities     | (953,046)        | (2,722,288)                                      |
| Net cash provided by financing activities | –     | 16,473,112                                  |
| Effect of exchange rate changes on cash   | 26,539      | 360,885                                     |
| **NET INCREASE (DECREASE) IN CASH**       | **$(7,826,737)** | **$                            8,494,314**  |

             

In fiscal 2007 net cash used in operating activities was $6,900,230,            compared to net cash used in operating activities of $5,617,395 in fiscal 2006. This            increase in net cash used is primarily the result of increases in exploratory            activities which led to a significant increase in net loss as discussed above. The            significant increases in expenses were in the areas of general and administrative            expenses and exploratory costs.

             

Net cash used in investing activities during twelve months ended            December 31, 2007 was $953,046. The investments were made mainly on acquisition of            machinery and equipment and transport facilities needed for future mining activities at            the Kempirsai deposit. During 2006 we invested $2,577,696 to acquire equipment, which            is primarily used in KKM’s pilot plant.

 

There was no cash provided by financing activities in fiscal 2007            compared to net cash provided by financing activities of $16,473,112 in fiscal 2006. As            discussed herein, during the third fiscal quarter 2006, we raised $28,000,000 in a            private placement of our equity securities. This resulted in net proceeds to us of            approximately $26,422,386 after deducting fees and costs. During the 2006 fiscal year,            we realized proceeds from notes payable and notes payable to related parties of            $1,996,731 and $251,900, respectively. These funds were borrowed prior to our private            placement in July 2006 and were used to fund our activities during the first half of            the year. We spent $12,727,001 of the funds raised in the private placement to repay            notes payable, notes payable to related parties and interest expense. As a result, at            December 31, 2006, we had repaid all of our notes payable and notes payable to related            parties.

 

39

 

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**Plan            of Operations**

 

As of December 31, 2007 we had cash on hand of $756,943. Depending of            the result of the litigation process with the MEMR, as discussed above, we anticipate            the need to raise an additional $20,000,000 to meet our annual work program            requirements and planned activities. We plan to seek these funds through a combination            of private equity and debt financing. Following is a brief description of how we plan            to allocate such funds during fiscal 2008.

 

*Hydrochlorination Processing Technology Testing*

 

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

             

*Drilling and Core Analysis*

 

We will allocate approximately $400,000 to drilling and exploration.            This includes drilling of approximately 1,000 meters of the North section of the            Gornostai deposit, sample assaying, sample selection and handling and preparation of            the geological report on the South section for the State Reserves Committee. These            services will be performed by local drilling company and research            institutes.

             

*Extraction Costs* 

             

We plan to spend $1,500,000 for extraction of 350,000 tons in order to            meet KKM’s contract obligations.

             

*Feasibility Studies*

 

We anticipate spending approximately $400,000 for the preparation of the            feasibility study for the construction of the pyrometallurgical and hydrometallurgical            plant in the Gornostai deposit. This study will be prepared by Wardell Armstrong            International. Also, we plan to spend approximately $200,000 for completion of the            pre-feasibility study for the construction of the pyrometallurgical and            hydrometallurgical plant in the Kempirsai deposit. This amount includes involvement of            the Russian institute Gipronickel (St Peterburg) for the pilot testing on the Russian            technology and Wardell Armstrong International for completion of the pilot testing on            the acid leaching technologies. The completion of the study on the Kempirsai is            expected by the end of first half of 2008 with indication of estimates for capital and            operational expenditures which will allow us to make final decision on the technology            to be used for processing of the Kempirsay ore and start the feasibility study and            design of the processing plant.

             

*Processing Plant Design* 

             

As discussed in the preceding paragraph, we plan to spend approximately            $10,700,000 for design of the processing plant in the Kempirsai field during second            half of 2008. It also depends on the result of the litigation process with the MEMR and            our ability to raise $20,000,000 equity financing.

 

40

 

----

 

                *Field Modernization*

 

We have allocated approximately $1,000,000 for modernization of the            infrastructure and equipment including rail roads and electricity grid lines at the            Kempirsai deposit to allow us to increase our ore extracting capabilities.

 

*Administrative Expenses*

 

We plan to allocate approximately $5,000,000 for administrative expenses            during the next twelve months, which include expenses of maintaining offices in the            United States and Kazakhstan, for salaries and taxes.

 

*Professional Fees*

 

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

 

**Additional Activities**

 

As discussed in Item 1            “*Business*” we are            currently considering alternatives to a hydrochlorination processing plant to allow us            to begin to generate cash flow from the Kempirsai deposit. We do not currently have            sufficient cash on hand to fund these activities, nor have we budgeted for these items            in our 2007 budget. Therefore, to undertake these activities we will need to obtain            additional capital either through equity or debt financing. We plan to seek this            funding through private equity investments or debt financing to be obtained from banks            or shareholders. We currently have no firm commitment from any party to provide us            additional funding, except discussed above.

 

Also, on November 7, 2007 we signed the agreement with a Russian            processing plant for sale of 4,500 tons of ore for testing purposes. As of the date of            this report, we have shipped approximately 600 tons of ore. The remaining 3,900 tons of            ore are in the shipping process. We have agreed with the Russian processing plant to            commence negotiations for the sale of up to 500,000 tons of ore annually depending on            the test processing results of the initial 4,500 tons of ore. We plan to start this            negotiation at the second half of 2008.

 

**Summary of Material Contractual Commitments**

 

The following table lists our significant commitments as of December 31,            2007:

 

| **Contractual Commitments**        |  

**Total**                       | **Payments Due by Fiscal Year**        |
|------------------------------------|-----------------------------------------|----------------------------------------|
| **Less than 1 year**               | **2-3 years**                           | **4-5 years**                          |
|                               |                                    |                                   |   |   |
|                               |                                    |                                   |   |   |
| Kaznickel’s work programs(1) | $    4,031,221           | $  1,500,000                 | $  2,531,221 | -0- |
|                               |                                    |                                   |   |   |
| KKM’s work programs(2)       | $130,000,000                            | $15,000,000                            | $85,000,000 | $30,000,000 |
|                               |                                    |                                   |   |   |
| Operating leases                   | $      328,836 | $     328,836 | -0- | -0- |
|  

Total                      | $134,360,057                            | $16,828,836                            | $87,531,221 | $30,000,000 |

 

 

41

 

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| (1) | Each year we must submit the Annual Work Program to the                            MEMR. The Annual Work Program indicates scopes of mining works for                            exploration, production and finance costs. The work programs for                            Kaznickel represent estimates based on the subsoil use contract and                            results of the preliminary discussions and negotiations with the MEMR                            which will be finalized after the extension contract is signed by the                            MEMR. The estimates include $550,000 for exploration drilling (2,000                            meters - in 2008 and 2009), sampling and assaying (1,000 core samples                            in 2008 and 2009), metallurgical tests and preparation of the report to                            the State Resource Committee. Also, the estimates include $750,000 for                            repayment the Republic of Kazakhstan for historical costs incurred by                            it in undertaking geological and geophysical studies and infrastructure                            improvements related to the Gornostai deposit. The repayment terms of                            this obligation will not be determined until such time as we apply for                            and are granted a contract to engage in commercial production by the                            Republic of Kazakhstan where we anticipate that we will apply for a                            commercial production contract within the next 1-3 years. However,                            there is no guarantee when or if we will discover commercially                            producible reserves within the Gornostai deposit. Should we decide not                            to pursue a commercial production contract, we can relinquish the                            Gornostai deposit to the Republic of Kazakhstan in satisfaction of this                            obligation. Also, the estimates include the subsoil use contract                            requirement to donate $300,000 for the ongoing development of Astana                            and Kurchatov, which are cities in Kazakhstan. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Each year we must submit the Annual Work Program to the                            MEMR. The Annual Work Program indicates scopes of mining works for                            exploration, production and finance costs. KKM’s work programs                            represent estimates based on the subsoil use contract and the financial                            model which is attached to the working program as a justification of                            the hydroclorination technology. The contract requires to invest up to                            $100,000,000 for construction of a processing plant during the contract                            period. As discussed above, prior to the end of 2007, it has been the                            practice in Kazakhstan that if the subsurface user, for any reason,                            could not fulfill the conditions of its annual work program during a                            given year, those conditions were extended to the next year because the                            subsoil user’s obligations under its contract were effective                            throughout the contract duration. This practice, however, was                            terminated by order of the president of Kazakhstan at the end of 2007.                            It now appears that the government will impose fines and/or penalties                            and may cancel subsurface use contracts if the contract holder fails to                            satisfy the annual work program on a yearly basis. Also, the estimates                            include $950,000 for removal of all equipment and remediate the                            property. This remediation work can be done during the term of the                            subsoil use contract or upon completion of the terms of the contract.                            The 2008 work program for KKM is under discussion and negotiation and                            will be finalized after the Supreme Court announces its final decision                            in connection with our appeal of the unilateral cancelation of our                            rights to the Kempirsai deposits. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We are required, under our subsoil use contracts to submit a proposed            Annual Work Program to the MEMR for approval. Failure to meet the Annual Work Program            requirements could cause us to lose our concessions. For more information regarding            this requirement please see Item 1.            “*Business*” in the            section “*Working Programs of our            Subsidiaries*.”

             

**Off-Balance Sheet Financing Arrangements**

 

As of December 31, 2007 and 2006 we had no off-balance sheet financing            arrangements.

             

**Recent Accounting Pronouncements**

             

In September 2006, the Financial Accounting Standards Board (FASB)            issued SFAS No. 157, Fair Value Measurements, which defines fair value,            establishes a framework for measuring fair value in generally accepted accounting            principles and expands disclosures about fair value measurements. SFAS No. 157 is            effective for fiscal years beginning after November 15, 2007, and interim periods            within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP            FIN) No. 157-2 which extended the effective date to fiscal years beginning after            November 15, 2008. The Company does not expect the adoption of SFAS No. 157 to            have a material impact on our consolidated financial statements.

 

42

 

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In February 2007, the FASB issued SFAS No. 159, The Fair Value            Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits            companies to choose to measure many financial instruments and certain other items at            fair value. SFAS No. 159 is effective for financial statements issued for fiscal            years beginning after November 15, 2007. The Company does not expect the adoption            of SFAS No. 159 to have a material impact on our consolidated financial            statements.

 

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

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments and Hedging            Activities.*SFAS No. 161 amends SFAS No. 133,*Accounting for Derivative Instruments and Hedging            Activities*to require enhanced disclosures concerning the            manner in which an entity uses derivatives (and the reasons it uses them), the manner            in which derivatives and related hedged items are accounted for under SFAS No. 133 and            interpretations thereof, and the effects that derivatives and related hedged items have            on an entity's financial position, financial performance, and cash flows. SFAS No. 161            is effective for financial statements of fiscal years and interim periods beginning            after November 15, 2008. The Company does not expect the adoption of SFAS No. 161 to            have a material impact on our consolidated financial statements.

 

**Critical Accounting Policies**

 

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

 

43

 

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

 

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

 

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

             
| **Item 7A.** | **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. If and when we commence commercial            production, commodity prices will affect the amount of cash flow available for capital            expenditures and our ability to either borrow or raise additional capital. Price will            also affect our ability to produce, transport and market the nickel and cobalt we            produce.

 

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

 

|   | *Foreign Currency Risk*  |
|--------|-------------------------------|

 

Our functional currency is the U.S. dollar. Our Kazakhstani subsidiary            Kaznickel uses the U.S. dollar as its functional currency and KKM uses the Kazakh tenge            as its functional 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.

**** 

| **Item 8.** | **Financial Statements and Supplementary                            Data** |
|-------------|----------------------------------------------------------------------------|

 

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

 

| **Item 9.** | **Changes in and Disagreements with Accountants on                            Accounting and Financial** |
|-------------|----------------------------------------------------------------------------------------------------------|

|   | **Disclosure** |
|--------|----------------|

 

We have made no changes in and had no disagreements with our independent            registered accounting firm on accounting and financial disclosure during the 2007            fiscal year.

 

| **Item 9A(T).** | **Controls and Procedures** |
|-----------------|-----------------------------|

             

*Evaluation of Disclosure Controls and            Procedures*

             

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

 

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As of the end of the period covered by this report we conducted an            evaluation, under the supervision and with the participation of our management,            including our principal executive officer and principal financial officer, of the            effectiveness of the design and operation of our disclosure controls and procedures            pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this            evaluation, our principal executive officer and principal financial officer concluded            that our disclosure controls and procedures were effective as of December 31,            2007.

 

*Management's Report on Internal Control over Financial            Reporting*

 

Our management, including our Chief Executive Officer and our Chief            Financial Officer, is responsible for establishing and maintaining adequate internal            control over financial reporting for the Company as defined in Rule 13a-15(f) under the            Exchange Act. Our internal control over financial reporting is designed to provide            reasonable assurance to management and our board of directors regarding the preparation            and fair presentation of published financial statements and the reliability of            financial reporting. Because of its inherent limitations, internal control over            financial reporting may not prevent or detect misstatements. Therefore, even those            systems determined to be effective can provide only reasonable assurance with respect            to financial statement preparation and presentation.

 

Management assessed the effectiveness of the Company’s internal            control over financial reporting as of December 31, 2007. In making this            assessment, management used the criteria set forth by the Committee of Sponsoring            Organizations of the Treadway Commission (“COSO”) in*Internal Control - Integrated Framework*.            Based on our assessment, we believe that, as of December 31, 2007, the            Company’s internal control over financial reporting is effective based on those            criteria.

             

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

 

*Changes in Internal Control over Financial            Reporting*

             

There were no changes in our internal controls over financial reporting            during the quarter ended December 31, 2007 that materially affected, or are reasonably            likely to materially affect, our internal control over financial reporting.

             

| **Item 9B.** | **Other Information** |
|--------------|-----------------------|

             

None.

 

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**PART III**

 

| **Item 10.** | **Directors, Executive Officers and Corporate                            Governance** |
|--------------|---------------------------------------------------------------------------------------|

 

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

 

| Name of Director or

Executive Officer |   |  

Age |   | Positions with

the Company                                                |   |  

Director Since |
|----------------------------------------|--------|-------------|--------|----------------------------------------------------------------------------|--------|------------------------|
|                                   |   |        |   |                                                                       |   |                   |
| Yermek Kudabayev                       |   | 38          |   | Chief Executive Officer, President and                            Director |   | December 2007          |
|                                   |   |        |   |                                                                       |   |                   |
| Zhassulan Bitenov                      |   | 31          |   | Chief Financial Officer                                                    |   |                   |
|                                   |   |        |   |                                                                       |   |                   |
| James Kohler                           |   | 60          |   | Independent Director                                                       |   | May 2006               |
|                                   |   |        |   |                                                                       |   |                   |
| Timothy Adair                          |   | 43          |   | Independent Director                                                       |   | May 2006               |
|                                   |   |        |   |                                                                       |   |                   |
| Valery Tolkachev                       |   | 39          |   | Independent Director                                                       |   | May 2006               |
|                                   |   |        |   |                                                                       |   |                   |
| Nurlan Tajibayev                       |   | 60          |   | Vice President of Metallurgy and Director                                  |   | October 2006           |
|                                   |   |        |   |                                                                       |   |                   |
| Dossan Kassymkhanuly                   |   | 39          |   | Vice President and Director                                                |   | August 2007            |

 

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

 

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

 

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

 

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

 

**Timothy Adair**. Mr. Adair received a Masters            in Business Administration (MBA) from Brigham Young University, located in Provo, Utah,            in 1990. Mr. Adair also received a Bachelors of Science from the same university in            Mechanical Engineering with a minor in Mathematics in 1988. Since 2005, Mr. Adair has            been principally engaged as the Owner/President of Cube Office Designs located in Salt            Lake City, Utah where he has successfully transferred company ownership and management.            Cube Office Designs currently employs 22 persons and has annual revenue of            approximately $1.5 million USD. Prior to purchasing Cube Office Designs, from 1989            through 2004 Mr. Adair was principally engaged as the Human Resources Productivity /            Efficiency Manager with Intermountain Health Care (IHC) of Salt Lake City, Utah. IHC is            a health care provider with 25,000+ employees and annual revenue of 2.5 + billion USD.            While with IHC Mr. Adair consistently implemented cost savings improvements, such as            the standardizing and automating of employee transactions which resulted in annual            savings of $200k. Mr. Adair is also a licensed real estate agent and has been an avid            real estate investor and property manager since 1989 as a partner of ADLAW. Mr. Adair            was a member of the Oracle Applications User Group (OAUG) and the Intermountain            Compensation and Benefits Association (ICBA). Mr. Adair is not a director of any other            SEC reporting issuer.

 

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**Valery Tolkachev**. Since 1999, Mr. Tolkachev            has been employed with Aton Investment Company in Moscow, Russia, where he currently            serves as the Managing Director, Capital Markets. From 1991 to 1999, Mr. Tolkachev            served in various positions with various employers including, MDM Bank, InkomBank,            InkomCapital and others. Mr. Tolkachev graduated with Honors from the High Military            School in Kiev, USSR in 1989. In 2005, he completed his studies at the Academy of            National Economy, as a qualified lawyer. Mr. Tolkachev is also a director of BMB Munai,            Inc., and Caspian Services, Inc., both SEC reporting issuers.

             

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

             

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

             

|   | *Significant                            Employees* |
|--------|----------------------------------------------------|

 

**Aleksandr Rassokhin**. In December 2007, Mr.            Rassokhin was appointed to the position of Vice President of Geology. Mr. Rassokhin            served as the Exploration Manager since October 2006. He has over thirty years            experience in solid minerals geology. His work experience includes serving as the            President and Exploration Manager of Frontier Mining Ltd. Kazakhstan, where he managed            Frontier’s exploration programs and gold processing in Kazakhstan. Prior to            joining Frontier in 2005, Mr. Rassokhin spent ten years serving as Chief Geologist for            a number of companies operating in Kazakhstan, including Rio Tinto Mining and            Exploration, Ltd., Santa Fe Pacific Gold Kazakhstan Corporation and Newmont Kazakhstan            Gold, Ltd. As Chief Geologist his duties have included identification of new mineral            deposits, preparation of exploration plans and oversight of field explorations. Mr.            Rassokhin also spent fourteen years with the Research Institute of Mineral Resources,            Kazakhstan. Mr. Rassokhin is 54 years old.

 

49

 

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

 

|   | *Involvement in Certain Legal                            Proceedings* |
|--------|-----------------------------------------------------------------------|

 

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

 

**Compliance with Section 16(a) of the Exchange Act**

 

Directors and executive officers are required to comply with Section            16(a) of the Securities Exchange Act of 1934, which requires generally that such            persons file reports regarding ownership of and transactions in securities of the            Company on Forms 3, 4, and 5. A Form 3 is an initial statement of ownership of            securities. Form 4 is to report changes in beneficial ownership. Form 5 covers annual            statements of change in beneficial ownership.

 

Based solely on management’s review of these reports during the            year ended December 31, 2007, it appears that Dossan Kassymkhanuly failed to timely            file a Form 3 when he joined the board of directors of the Company in August 2007.            Nurlan Tajibayev failed to timely file a Form 4 in October 2007 when 47,929 shares of            his restricted stock grant vested. It is anticipated that Mr. Kassymkhanuly and Mr.            Tajibayev will file the required forms to remedy their delinquent filings as soon as            practicable.

 

**Code            of Ethics**

 

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

 

**Committees of the Board of Directors**

 

|   | *Audit Committee* |
|--------|-------------------|

 

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

 

50

 

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

 

*Nominating Committee*

 

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

 

The nominating committee will consider director candidates nominated by            shareholders during such times as the Company is actively considering obtaining new            directors. Candidates recommended by shareholders will be evaluated based on the same            criteria described above. Shareholders desiring to suggest a candidate for            consideration should send a letter to the Company’s Secretary and include: (a) a            statement that the writer is a shareholder (providing evidence if the person's shares            are held in street name) and is proposing a candidate for consideration; (b) the name            and contact information for the candidate; (c) a statement of the candidate’s            business and educational experience; (d) information regarding the candidate’s            qualifications to be director, including but not limited to an evaluation of the            factors discussed above which the board would consider in evaluating a candidate; (e)            information regarding any relationship or understanding between the proposing            shareholder and the candidate; (f) information regarding potential conflicts of            interest; and (g) a statement that the candidate is willing to be considered and            willing to serve as director if nominated and elected. Because of the small size of the            Company and the limited need to seek additional directors, there is no assurance that            all shareholder proposed candidates will be fully considered, that all candidates will            be considered equally, or that the proponent of any candidate or the proposed candidate            will be contacted by the Company or the board, and no undertaking to do so is implied            by the willingness to consider candidates proposed by shareholders.

 

51

 

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*Compensation Committee*

 

We do not have a standing compensation committee or a charter; rather            our Chief Executive Officer evaluates officer and employee compensation issues subject            to the approval of our board of directors. Our Chief Executive Officer makes            recommendations to the board of directors as to employee benefit programs and officer            and employee compensation. The compensation of our Chief Executive Officer is            determined and approved directly by board of directors. Neither the Chief Executive            Officer nor the board of directors engaged compensation consultants during the            year.

 

| **Item 11.** | **Executive Compensation** |
|--------------|----------------------------|

 

**Compensation Discussion and Analysis**

 

We do not have a standing compensation committee. Our Chief Executive            Officer (“CEO”) makes recommendations to our board of directors as to            employee benefit programs and officer and employee compensation.

             

|   | *Objectives and                            Philosophy of Our Executive Compensation Program*  |
|--------|----------------------------------------------------------------------------------------------------|

 

The primary objectives of our executive compensation programs are            to:

             

|   | **•** | attract, retain and motivate skilled and knowledgeable                            individuals; |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | ensure that executive compensation is aligned with our                            corporate strategies and business objectives |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | promote the achievement of key strategic and financial                            performance measures by linking short-term and long-term cash and                            equity incentives to the achievement of measurable corporate and                            individual performance goals; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | align executives’ incentives with the creation of                            stockholder value. |
|--------|------------|-------------------------------------------------------------------------------------------------------|

             

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

 

|   | *Components of our                            Executive Compensation Program*  |
|--------|-------------------------------------------------------------------------------------|

 

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

             

|   | **•** | base salaries; |
|--------|------------|----------------|

|   | **•** | cash bonuses; |
|--------|------------|---------------|

 

52

 

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|   | **•** | equity incentive awards; and |
|--------|------------|------------------------------|

|   | **•** | benefits and other compensation. |
|--------|------------|----------------------------------|

             

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

             

*Named Executive Officers*

 

The following table identifies the persons who, during the 2007 fiscal            year served as our principal executive officer, our principal financial officer and our            most highly paid executive and non-executive officers, who, for purposes of this            Compensation Disclosure and Analysis only, are referred to herein as the “named            executive officers.”

 

| Name                                            |   | Corporate                            Office                                          |
|-------------------------------------------------|--------|--------------------------------------------------------------------------------------|
|                                            |   |                                                                                 |
| Yermek                            Kudabayev     |   | Chief Executive Officer,                            President and Former CFO(1)(2)   |
| Marat                            Cherdabayev    |   | Former Chief Executive                            Officer and Former President(2)(3) |
| Zhassulan                            Bitenov    |   | Chief Financial                            Officer(4)                                |
| Dossan                            Kassymkhanuly |   | Vice                            President(2)                                         |
| Nurlan                            Tajibayev     |   | Vice President of                            Metallurgy(2)                           |
| Aleksandr                            Rassokhin  |   | Vice President of                            Geology                                 |

 

| (1) | Mr. Kudabayev served as our Chief Financial Officer from                            May 2006 to December 2007. He was appointed as interim President and                            Chief Executive Officer in June 2007 following the resignation of Marat                            Cherdabayev from those positions. In December 2007, Mr. Kudabayev was                            appointed as a director and as Chairman of the Board of Directors. At                            that time he was also named as the President and Chief Executive                            Officer of the Company. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Mr. Kudabayev, Mr. Cherdabayev, Mr. Kassymkhanuly and                            Mr. Tajibayev have served as members of the board of directors and                            received no compensation for services rendered as a director. All                            compensation amounts paid to these individuals were paid as                            compensation for services rendered as an employee of the                            Company. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Mr. Cherdabayev resigned as our Chief Executive Officer,                            President and Chairman of the Board of Directors in June                            2007. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Mr. Bitenov joined the Company and was appointed Chief                            Financial Officer of the Company in January 2008. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|

 

|   | *Employment Agreements* |
|--------|-------------------------|

 

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

 

53

 

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

             

|   | *Base                            Salaries*  |
|--------|--------------------------------------------------|

             

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

             

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

             

|   | *Cash                            Bonuses*  |
|--------|-------------------------------------------------|

             

Our board of directors has the discretion to award cash bonuses based on            our financial performance and individual objectives. The corporate financial            performance measures, which have typically been developed by our board of directors,            are given the greatest weight in this bonus analysis. During fiscal 2007 the board of            directors did not award cash bonuses to any of the named executive officers.

             

|   | *Equity Incentive                            Awards* |
|--------|------------------------------------------------------|

             

Our equity award program is the primary vehicle for offering long-term            incentives to our executives. Our equity awards to executives have typically been made            in the form of restricted stock grants. We believe that equity grants provide our            executives with a direct link to our long-term performance, create an ownership culture            and align the interests of our executives and our stockholders. Typically, we include a            restricted stock grant award as part of the executive employee’s compensation            package at the time we hire the individual. We do not use a formula to determine the            size of our restricted stock grants. This determination is left to the discretion of            the board of directors and is made on a case-by-case basis, although the board does            consider past awards in making such determination. These restricted stock awards vest            over time, typically three years, with one-quarter vesting in each of the first two            years and the final one-half vesting in the third year. Vesting of such awards is            typically tied to some performance measure directly tied to the responsibilities of the            employee, and may also be tied to certain Company landmark events. Should those vesting            requirements not be met, the associated shares would not vest to the individual.            Similarly, should the individual leave employment with the Company for any reason, any            shares that have not vested at that time shall be forfeited back to the Company. While            pecuniary interest in and the right to dispose of the shares awarded under our            restricted stock grants does not vest to the individual until he has satisfied the            vesting conditions, the individual is allowed to vote all of the shares included in the            grant and to enjoy all the other benefits associated with ownership of the shares. We            believe the vesting features further our objective of executive retention because this            feature provides an incentive to our executives to remain in our employ during the            vesting period.

 

54

 

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

             

Grants of discretionary equity awards, including those to executives,            would be approved by our board of directors and would generally be granted based on the            fair market value of our common stock. Our board of directors has not previously            granted discretionary equity awards and did not make discretion equity award during            2007.

 

|   | *Benefits and Other                            Compensation* |
|--------|--------------------------------------------------------------|

             

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

             

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

             

During the year we paid rent for housing for Mr. Cherdabayev in the            amount of $16,000 and for Mr. Kassymkhanuly in the amount of $24,339. The employment            agreements of our other named executive officers do not provide a housing            allowance.

             

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

 

|   | *Income Tax* |
|--------|--------------|

 

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

 

|   | *Social Tax* |
|--------|--------------|

 

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

 

55

 

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**Summary Compensation Table**

 

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

             

| **Name and****Principal Position**                   | **Year**               | **Salary**                                           | **Stock****Awards**(8)                                                       | **All Other****Compensation**            | **Total**                                            |
|------------------------------------------------------|------------------------|------------------------------------------------------|------------------------------------------------------------------------------|------------------------------------------|------------------------------------------------------|
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Marat Cherdabayev*(1)                               | 2007    | $  55,000                                  | $ (54,830)(2)                                                           | $56,343                                  | $111,343                                             |
| Former CEO and President                             | 2006    | $119,000                                             | $  54,830(2)                                             | $77,038                                  | $250,868                                             |
|                                                 | 2005(5)                | $110,000                                             | $-0-                                                          | $      -0- | $110,000                                             |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Yermek                            Kudabayev*(3)     | 2007    | $155,000                                             | $332,650                                                 | $72,493                                  | $560,143                                             |
| CEO, President and former CFO                        | 2006    | $  90,000                                  | $  31,089                                      | $40,555                                  | $161,644                                             |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Zhassulan Bitenov*(4)                               | 2007    | $        -0- | $         -0-    | $      -0- | $        -0- |
| CFO                                                  |                   |                                                 |                                                                         |                                     |                                                 |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Dossan                            Kassymkhanuly*(5) | 2007    | $  91,300                                  | $         -0-    | $53,411                                  | $144,711                                             |
| Vice-President                                       |                   |                                                 |                                                                         |                                     |                                                 |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Nurlan                            Tajibayev*(6)     | 2007    | $  60,000                                  | $124,615                                                 | $22,800                                  | $207,415                                             |
| Vice-President of Metallurgy                         | 2006    | $  35,000                                  | $  24,923                                      | $15,957                                  | $  75,880                                  |
|                                                 |                   |                                                 |                                                                         |                                     |                                                 |
| *Aleksandr                            Rassokhin*(7)  | 2007    | $  60,000                                  | $  56,035                                      | $23,366                                  | $139,401                                             |
| Vice-President of Geology                            | 2006    | $  20,000                                  | $  11,207                                      | $  9,728                       | $  40,935                                  |

| (1) | Mr. Cherdabayev served as the Chief Executive Officer                            and President from May 2005 to June 2007. On October 20, 2006, Mr.                            Cherdabayev was granted 421,772 shares with the following vesting                            terms: 105,443 shares in October 2007; 105,443 shares in October 2008                            and 210,886 shares in October 2009. In June 2007 Mr. Cherdabayev                            resigned as an officer and director of the Company prior to the vesting                            of any of his restricted stock grants. In accordance with the terms of                            his restricted stock grant, the entire grant was forfeited back to the                            Company upon his resignation. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | In 2006 we recognized deferred compensation expense                            associated with Mr. Cherdabayev’s stock grant of $54,830. In                            2007, when the stock grant was forfeited back to the Company we                            reversed the expense. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Mr. Kudabayev served as the Chief Financial Officer from                            April 2006 to December 2007. Mr. Kudabayev has served as the Chief                            Executive Officer and President, initially on an interim basis since                            June 2007. His employment agreement was amended in March 2008, with                            effect from June 1, 2007, to reflect his new responsibilities. The                            amended employment agreement provides for an annual salary of $180,000                            net of taxes. On October 20, 2006, with amendments made on March 25,                            2008, Mr. Kudabayev was granted 421,772 shares, which vest as follows:                            95,857 shares vested in April 2007; 115,029 shares vested in April                            2008. The final 210,886 shares will vest in April 2009 provided the                            Company timely files its reports with U.S. Securities and Exchange                            Commission. Mr. Kudabayev forfeits any unvested grants at the time his                            employment with the Company terminates. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Mr. Bitenov joined the Company and was named Chief                            Financial Officer of the Company in January 2008. Subsequent to the                            fiscal year end, on March 25, 2008, the board of directors Mr. Bitenov                            was granted a restricted stock grant of 383,429 shares, which vest as                            follows: 98,857 shares on January 3, 2009, 95,857 shares on January 3,                            2010 and 191,715 shares on January 3, 2011. Vesting of Mr.                            Bitenov’s stock grants is contingent upon the Company timely                            filing its reports with the U.S. Securities and Exchange Commission                            during each fiscal year. Mr. Bitenov forfeits any unvested grants at                            the time his employment with the Company terminates. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Mr. Kassymkhanuly has served as a member of the                            board of directors and Vice-President of the Company since August 2007.                            Mr. Kassymkhanuly also served as a member of the board of                            directors of Bekem Metals, Inc. from August 2005 to October                            2006. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

56

 

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| (6) | Mr. Tajibayev has served as a member of the board                            of directors and Vice-President of Metallurgy since October 2006. On                            October 20, 2006, with amendments made on March 25, 2008, Mr. Tajibayev                            was granted 191,715 shares, which vest as follows: 47,292 shares vested                            in October 2007 provided that the Company met the deadlines for the                            pilot plant construction, 47,292 shares will vest in October 2008                            provided the Company starts construction of the processing plant by                            October, 2008, and the final 95,857 shares will vest in October 2009                            conditioned upon the Company having commenced commercial operations.                            Mr. Tajibayev forfeits any unvested grants at the time his employment                            with the Company terminates. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Mr. Rassokhin has served as a vice-president on                            geology from December 2007. On October 20, 2006, Mr. Rassokhin was                            granted 86,207 shares, which vest as follows: 21,552 shares vested in                            October 2007 provided that the Company timely performed the drilling                            work program requirements as dictated by the MEMR, 21,552 shares will                            vest in October 2008 provided the Company timely performs the drilling                            work program requirements as dictated by the MEMR, and the final 43,103                            shares will vest in October 2009 conditioned upon the Company having                            commenced commercial operations. Mr. Rassokhin forfeits any unvested                            grants at the time his employment with the Company                            terminates. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Represents the dollar amount recognized for financial                            statement reporting purposes in accordance with FAS 123(R) with respect                            to restricted stock grants awarded on October 20, 2006. The restricted                            stock grants were valued at $1.95 per share, which represented the                            closing market price for our common stock on the date of                            grant. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**All            Other Compensation**

 

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

 

|  

**Name**     | **Year** | **Income****Tax** | **Social****Tax**         | **Medical****Insurance**                             | **Pension****Fund**      | **Rent**            | **Total**           |
|----------------------|----------|-------------------|---------------------------|------------------------------------------------------|--------------------------|---------------------|---------------------|
|                 |     |              |                      |                                                 |                     |                |                |
| Marat Cherdabayev    | 2007     | $ 20,648          | $   16,655 | $        -0- | $   3,040 | $  16,000 | $  56,343 |
|                 | 2006     | 21,289            | 10,857                    | 3,596                                                | 5,296                    | 36,000              | 77,038              |
|                 |     |              |                      |                                                 |                     |                |                |
| Yermek Kudabayev     | 2007     | 35,713            | 27,240                    | 2,244                                                | 7,296                    | -0-                 | 72,493              |
|                 | 2006     | 22,175            | 10,087                    | 3,947                                                | 4,346                    | -0-                 | 40,555              |
|                 |     |              |                      |                                                 |                     |                |                |
| Dossan Kassumkhanuly | 2007     | 10,645            | 9,089                     | 2,244                                                | 7,094                    | 24,339              | 53,411              |
|                 |     |              |                      |                                                 |                     |                |                |
| Nurlan Tajibayev     | 2007     | 7,068             | 7,189                     | 1,247                                                | 7,296                    | -0-                 | 22,800              |
|                 | 2006     | 5,854             | 4,663                     | 1,637                                                | 3,803                    | -0-                 | 15,957              |
|                 |     |              |                      |                                                 |                     |                |                |
| Aleksandr Rassokhin  | 2007     | 7,401             | 7,422                     | 1,247                                                | 7,296                    | -0-                 | 23,366              |
|                 | 2006     | 4,309             | 2,384                     | 861                                                  | 2,173                    | -0-                 | 9,728               |

 

**Annual Base Salary**

 

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

 

| **Name**                                        |   | **Annual                            Salary****(1)** |
|-------------------------------------------------|--------|-----------------------------------------------------|
|                                            |   |                                                |
| Yermek                            Kudabayev     |   | $180,000                                            |
| Zhassulan                            Bitenov    |   | $108,000                                            |
| Dossan                            Kassymkhanuly |   | $120,000                                            |
| Nurlan                            Tajibayev     |   | $  60,000                                 |
| Aleksandr                            Rassokin   |   | $  60,000                                 |

 

| (1) | Annual salary is net of all taxes and dues required                            under applicable laws of the Republic of Kazakhstan, which is the                            responsibility of the Company. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

57

 

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

 

**Grants of Plan-Based Awards Table for Fiscal Year 2007**

 

No grants of any plan-based awards were made to any of the named            executive officers during the 2007 fiscal year.

             

**Outstanding Equity Awards at Fiscal Year End 2007**

             

None of the named executive officers held unexercised stock options at            December 31, 2007. The following table sets forth information concerning all unvested            restricted stock grants and equity incentive plan awards for each of the named            executive officers as of December 31, 2007.

 

 

|                   | **Stock Awards**                                                                                                                               |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| **Name**               | **Equity Incentive Plan Awards:**

**Number of Unearned Shares, Units or Other Rights That                            Have Not****Vested (#)** | **Equity Incentive Plan Awards:**

**Market or Payout Value of Unearned Shares, Units or                            Other Rights That Have****Not Vested                            ($)** |
|                   |                                                                                                                                           |   |
| Yermek Kudabayev(1)    | 287,572(2)                                                                                                                                     | 575,144(3) |
| Marat Cherdabayev(1)   | -0-(4)                                                                                                                                         | -0- |
| Zhassulan Bitenov      | -0-                                                                                                                                            | -0- |
| Dossan Kassymkhanuly   | -0-                                                                                                                                            | -0- |
| Nurlan Tajibayev(1)    | 143,786(5)                                                                                                                                     | 287,572(3) |
| Aleksandr Rassokhin(1) | 64,655(6)                                                                                                                                      | 129,310(3) |

             

| (1) | On October 20, 2006, our board of directors awarded                            restricted stock grants to the following individuals in the following                            amounts: i) Yermek Kudabayev – 383,429 shares; ii) Marat                            Cherdabayev – 421,772 shares; iii) Nurlan Tajibayev –                            191,715 shares; and iv) Aleksandr Rassokhin – 86,207 shares.                            These restricted stock grants were made under the Company’s 2003                            Stock Option Plan made under the Company’s 2003 Stock Option                            Plan. Vesting of the awards was to occur over a period of three years                            and is contingent upon performance based metrics as described in more                            detail below. Any unvested shares at the time such individual’s                            employment with the Company ceases, for any reason, shall be forfeited                            back to the Company. All shares underlying the awards were issued at                            the time of grant and are being held in escrow by the Company subject                            to the vesting schedule placed on the grant. The grant holders have the                            right to vote the shares, receive dividends and enjoy all other rights                            of ownership over the entire grant amount, except for the right to                            dispose of or otherwise encumber the shares prior to satisfying the                            applicable vesting requirement. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Mr. Kudabayev’s restricted stock award vests as                            follows: 95,857 shares vested in April 2007; 95,857 shares vest in                            April 2008 and the final 191,715 shares will vest in April 2009                            provided that the Company timely files its reports with U.S. Securities                            and Exchange Commission during each year. Subsequent to the year end,                            in March 2008 the board of directors voted to increase Mr.                            Kudabayev’s restricted stock grant to an aggregate of 421,772                            shares, with the additional shares vesting 50% in April 2008 and 50% in                            April 2009. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | The market value of the unearned shares is computed by                            multiplying the closing market price of the Company’s stock at                            the end of the last completed fiscal year ($2.00 per share) by the                            number of unearned shares that have not vested. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

58

 

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| (4) | In June 2007 Mr. Cherdabayev resigned as an officer and                            director of the Company prior to the vesting of any of his restricted                            stock grants. In accordance with the terms of his restricted stock                            grant, the entire grant was forfeited back to the Company upon his                            resignation. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Mr. Tajibayev’s restricted stock award vests as                            follows: 47,929 shares vested in October 2007; 47,929 shares will vest                            in October 2008 provided that the Company begins construction of a                            processing plant by October 2007 and the final 95,857 shares will vest                            in October 2009 provided that the Company has commenced commercial                            operations by October 2009. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Mr. Rassokhin’s restricted stock award vests as                            follows: 21,552 shares vested in October 2007; 21,552 shares will vest                            in October 2008 and the final 43,103 shares will vest in October 2009                            provided that each year the Company timely completes the annual                            drilling requirements associated with its annual work program and that                            the Company has commenced commercial operations by October                            2009. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**Option Exercises and Stock Vested for Fiscal Year 2007**

             

None of the named executive officers exercised options during the 2007            fiscal year. The following table sets forth the number of restricted stock awards that            vested to our named executive officer during fiscal 2007 and the aggregate dollar            amount realized by our named executive officer on vesting.

             

|                 | **Stock Awards**                                  |
|----------------------|---------------------------------------------------|
| **Name**             | **Number of Shares**

**Acquired on Vesting (#)** | **Value Realized on Vesting ($)** |
| Yermek Kudabayev     | 95,857(1)                                         | 164,874(2) |
| Marat Cherdabayev    | -0-(3)                                            | -0- |
| Zhassulan Bitenov    | -0-                                               | -0- |
| Dossan Kassymkhanuly | -0-                                               | -0- |
| Nurlan Tajibayev     | 47,929(4)                                         | 50,325(2) |
| Aleksandr Rassokhin  | 21,552(5)                                         | 22,630(2) |

             

| (1) | As noted above, 95,857 shares of the restricted stock                            grant awarded to Mr. Kudabayev on October 20, 2006 vested on April 7,                            2007. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The value realized on vesting is computed by multiplying                            the number of shares of stock by the market value of the underlying                            shares on the vesting date. The closing market price of our common                            stock on April 7, 2007 was $1.72 per share. The market price of our                            common stock on October 20, 2007 was $1.05 per share. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | As noted above, Mr. Cherdabayev resigned as his                            positions and an officer of the Company prior to the vesting of any                            portion of his restricted stock grant. Therefore, his entire restricted                            stock grant reverted back to the Company. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | As noted above, 47,929 shares of the restricted stock                            grant awarded to Mr. Tajibayev on October 20, 2006 vested on October                            20, 2007. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | As noted above, 21,552 shares of the restricted stock                            grant awarded to Mr. Rassokhin on October 20, 2006 vested on October                            20, 2007. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**Pension Benefits**

             

In accordance with the legislative requirements of the Republic of            Kazakhstan during 2007 we paid government mandated pension fund payments for each of            the named executive officers, excluding Mr. Bitenov who did not commence employment            with the Company until January 2008. We do not have any other liabilities related to            any supplementary pensions, post retirement health care, insurance benefits or            retirement indemnities for any of the named executive officers.

             

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

 

59

 

----

 

**Nonqualified Deferred Compensation**

 

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

 

**Potential Payments upon Termination or            Change-in-Control**

 

|   | *Termination of Employment                            Agreements* |
|--------|-------------------------------------------------------------------|

 

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

             

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

 

|   | *Change-in-Control* |
|--------|---------------------|

 

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

 

**Compensation of Directors**

 

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

 

60

 

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     *Meeting            Fees* 

 

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

 

|   | *Equity                            Compensation*  |
|--------|--------------------------------------------------------|

 

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

             

**Director Compensation Table**

 

The following table sets forth a summary of the compensation we paid to            our directors for services on our board during our 2007 fiscal year.

 

| **Name**                | **Fees Earned or**

**Paid in Cash ($)** | **All Other****Compensation ($)** | **Total ($)** |
|-------------------------|------------------------------------------|-----------------------------------|---------------|
|                    |                                     |                              |          |
| Timothy Adair           | $16,000                                  | $500(1)                           | $16,500       |
| James Kohler            | $16,000                                  | $500(1)                           | $16,500       |
| Valery Tolkachev        | $16,000                                  | -0-                               | $16,000       |
| Nurlan Tajibaev(1)      | -0-                                      | -0-                               | -0-           |
| Yermek Kudabayev(1)     | -0-                                      | -0-                               | -0-           |
| Dossan Kassymkhanuly(1) | -0-                                      | -0-                               | -0-           |

             

| (1) | Represents compensation for in person attendance at                            board meetings held in Almaty, Kazakhstan. |
|-----|---------------------------------------------------------------------------------------------------------------------------|

| (2) | In addition to being directors Mr. Kudabayev, Mr.                            Tajibaev and Mr. Kasymkhanuly are also Company employees, and therefore                            do not qualify for compensation as non-employee directors. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Compensation Committee Interlocks and Insider            Participation**

 

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

 

**Board of Directors Report**

             

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

             

|                                          |
|-----------------------------------------------|
| BOARD OF                            DIRECTORS |
|                                          |
| Yermek Kudabayev                              |
| Dossan Kassymkhanuly                          |
| Nurlan Tajibaev                               |
| Timothy Adair                                 |
| James Kohler                                  |
| Valery Tolkachev                              |

 

 

61

 

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| **Item 12.** | **Security Ownership of Certain Beneficial Owners and                        Managment and                         Related Stockholder Matters** |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

The term “beneficial owner” refers to both the power of            investment and the right to buy and sell our shares. It also refers to rights of            ownership or the right to receive distributions from the Company and proceeds from the            sale of our shares. Since these rights may be held or shared by more than one person,            each person who has a beneficial ownership interest in shares is deemed to be the            beneficial owner of the same shares because there is shared power of investment or            shared rights of ownership.

 

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

 

| **Type of Security** | **Name and Address**               | **Amount & Nature of Beneficial                            Ownership** | **% of Class** |
|----------------------|------------------------------------|----------------------------------------------------------------------------|----------------|
|                 |                               |                                                                       |           |
| Common               | Hsuih Chi Hun(1)                   | 36,306,120                                                                 | 29%            |
|                 | 1/F., Chap Biu Building            |                                                                       |           |
|                 | Tai Po Market, 15 On Fu Road       |                                                                       |           |
|                 | New Territories, Hong Kong, S.A.R. |                                                                       |           |
|                 | China                              |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Brisa Equities Corporation(1)      | 21,000,000                                                                 | 17%            |
|                 | 1020 East 900 South                |                                                                       |           |
|                 | Bountiful, Utah 84010              |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Central Asian Metals, Inc.(2)      | 15,504,408                                                                 | 12%            |
|                 | P.O. Box 5251                      |                                                                       |           |
|                 | CH 6901                            |                                                                       |           |
|                 | Lugano, Switzerland                |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | GLG Emerging Markets Fund(3)       | 28,000,000                                                                 | 21%            |
|                 | c/o GLG Partnership                |                                                                       |           |
|                 | One Curzon Street                  |                                                                       |           |
|                 | London W1J 5HB                     |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Jamestown Financial, Inc. (4)      | 21,093,880                                                                 | 17%            |
|                 | Akara Building, 24 de Castro St.   |                                                                       |           |
|                 | Wickhams Cay I, PO Box 36          |                                                                       |           |
|                 | Road Town, Tortola, BVI            |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Yermek Kudabayev(5) (6)            | 421,772                                                                    | *              |
|                 | 170 Tchaikovsky Street             |                                                                       |           |
|                 | 4th Floor                          |                                                                       |           |
|                 | Almaty, Kazakhstan 050000          |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Zhassulan Bitenov(5) (6)           | 383,429                                                                    | *              |
|                 | 170 Tchaikovsky Street             |                                                                       |           |
|                 | 4th Floor                          |                                                                       |           |
|                 | Almaty, Kazakhstan 050000          |                                                                       |           |
|                 |                               |                                                                       |           |
| Common               | Nurlan Tajibaev (5) (6)            | 191,715                                                                    | *              |
|                 | 170 Tchaikovsky Street             |                                                                       |           |
|                 | 4th Floor                          |                                                                       |           |
|                 | Almaty, Kazakhstan 050000          |                                                                       |           |

 

 

62

 

----

 

|                             |                                                      |   |   |
|----------------------------------|-----------------------------------------------------------|--------|--------|
| Common                           | Dossan Kassymkhanuly (6)                                  | -0-    | *      |
|                             | 170 Tchaikovsky Street                                    |   |   |
|                             | 4th Floor                                                 |   |   |
|                             | Almaty, Kazakhstan 050000                                 |   |   |
|                             |                                                      |   |   |
| Common                           | James Kohler (6)                                          | -0-    | *      |
|                             | 2011 Maple View Drive                                     |   |   |
|                             | Bountiful, Utah 84101                                     |   |   |
|                             |                                                      |   |   |
| Common                           | Timothy Adair (6)                                         | -0-    | *      |
|                             | 5062 W. Amelia Earhart Drive                              |   |   |
|                             | Salt Lake City, Utah 84116                                |   |   |
|                             |                                                      |   |   |
| Common                           | Valery Tolkachev (6)                                      | -0-    | *      |
|                             | 27 Pokrovka St., Bldg.6                                   |   |   |
|                             | Moscow, Russia 105062

                              |   |   |
|                             |                                                      |   |   |
| Officers, Directors and Nominees | 996,376                                                   | *      |
| as a Group: (7 persons)          |                                                      |   |

 

* Less            than 1%.

| (1) | Mr. Hsuih Chi Hun owns no shares in his own name.                            However, he maintains voting and investment control over 21,000,000                            shares held of record by Brisa Equities, Inc., as well as 5,110,200                            shares held of record by Landsgate Marketing Limited, 5,097,960 shares                            held of record by Comodidad y Fantasia en Tierra, S.A. and 5,097,960                            shares held of record by Las Tierras del Deleite, S.A., and therefore                            may be deemed to be the beneficial owner of the shares held by these                            entities. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Brilliance Investments Ltd., as trustee, maintains the                            voting and investment control over the 15,504,408 shares held of record                            by Central Asian Metals, Inc., and therefore, may be deemed to be the                            beneficial owner of the shares held by that entity. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Includes 21,000,000 shares held of record and an                            immediately exercisable warrant to purchase up to an additional                            7,000,000 common shares at a price of $2.00 per share. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Jamestown Financial, Inc. is a wholly-owned subsidiary                            of Stockton Properties Ltd. As the parent company of Jamestown                            Financial, Inc., Stockton Properties Ltd. may be deemed to have voting                            and investment power over the shares held of record by Jamestown                            Financial and therefore may be deemed to be the beneficial owner of the                            shares held by that entity. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | On October 20, 2006 our board of directors awarded a                            restricted stock grant to Mr. Kudabayev in the amount of 383,429 shares                            and to Mr. Tajibaev in the amount of 191,715 shares. On March 25, 2008                            the board of directors increased Mr. Kudabayev’s restricted stock                            grant by an additional 38,343 shares and awarded a restricted stock                            grant to Mr. Bitenov. As of the date of this report 210,886 shares of                            Mr. Kudabayev award had vested, 47,929 shares of Mr. Tajibaev’s                            award had vested and none of Mr. Bitenov’s award had vested. The                            awards vest over a period of three years. The shares have been issued                            and are outstanding and are being held in escrow by the Company subject                            to the applicable vesting schedule for each grant. The grantees have                            the right to vote the shares, receive dividends and enjoy all other                            rights of ownership over the entire grant amount from the grant date,                            except for investment control of the shares, which will not pass to                            these individuals until the shares vest. Shares will vest to the                            grantee only if the grantee is employed by the Company on the                            applicable vesting date. Any unvested shares at the time a                            grantee’s employment with the Company ceases, for any reason,                            shall be forfeited back to the Company. For additional information                            regarding vesting dates and conditions see the section entitled                            “*Securities Authorized for Issuance                            Under Equity Compensation Plans*”                            contained in Item 5. “*Market for Common                            Equity, Related Stockholder Matters and Small Business Issuer Purchases                            of Equity Securities”*of this                            report. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Mr. Kudabayev, Mr. Bitenov, Mr. Tajibaev and Mr.                            Kassymkhanuly are officers of the Company. Mr. Kudabayev, Mr. Tajibaev,                            Mr. Kassymkhanuly, Mr. Kohler, Mr. Adair and Mr. Tolkachev are                            directors of the Company. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

63

 

----

**Change in Control**

 

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

 

| **Item 13.** | **Certain Relationships and Related Transactions, and                            Director Independence** |
|--------------|----------------------------------------------------------------------------------------------------------|

 

**Certain Relationships and Related Transactions**

             

The Company did not engage in any transaction during the past fiscal            year that involved an amount in excess of $120,000 or 1% of our average total assets in            which any related party had a direct or indirect material interest.

             

**Director Independence**

 

Our board of directors has determined that the following directors are            “independent directors” as defined in Section 121 of the American Stock            Exchange Company Guide: Timothy Adair, James Kohler and Valery Tolkachev. Such            independence definition includes a series of objective tests, including that the            director is not an employee of the Company and has not engaged in various types of            business dealings with the Company. In addition, as further required by the American            Stock Exchange listing standards, the board of directors has made a subjective            determination as to each independent director that no relationships exist which, in the            opinion of the board of directors, would interfere with the exercise of independent            judgment in carrying out the responsibilities of a director.

             
| **Item 14.** | **Principal Accountant Fees and Services** |
|--------------|--------------------------------------------|

 

Hansen, Barnett and Maxwell, P.C. served as the Company’s            independent registered public accounting firm for the years ended December 31, 2007 and            2006 and is expected to serve in that capacity for the current year. Principal            accounting fees for professional services rendered for us by Hansen, Barnett &            Maxwell, P.C. for the years ended December 31, 2007 and 2006, are summarized as            follows:

             

|      | **2007** | **2006** |
|-----------|----------|----------|
| Audit     | $133,735 | $86,074  |
| Tax       | 2,595    | 2,000    |
| All other | -        | -        |
| Total     | $136,330 | $88,074  |

             

*Audit Fees*. Audit fees were for            professional services rendered in connection with the Company’s annual financial            statement audits and quarterly reviews of financial statements for filing with the            Securities and Exchange Commission.

             

*Tax Fees*. Tax fees related to services for            tax compliance and consulting.

 

*Board of Directors Pre-Approval Policies and            Procedures*. At its regularly scheduled and special meetings,            the Board of Directors, in lieu of an established audit committee, considers and            pre-approves any audit and non-audit services to be performed by our independent            registered public accounting firm. The Board of Directors has the authority to grant            pre-approvals of non-audit services.

 

 

64

 

----

| **Item 15.** | **Exhibits and Financial Statement                            Schedules** |
|--------------|---------------------------------------------------------------------------|

 

|   | The following exhibits are included as part of this                            report: |
|--------|----------------------------------------------------------------------------------------|

 

| Exhibit 21.1                               | List of Subsidiaries                                                                                                               |
|--------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                                       |                                                                                                                               |
| 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 of Principal Executive Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002. |
|                                       |                                                                                                                               |
| Exhibit 32.2                               | Certification of Principal Financial Officer Pursuant to                            Section 906 of the Sarbanes-Oxley Act of 2002. |

 

65

 

----

**SIGNATURES**

 

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

 

**BEKEM METALS, INC.**

 

 

| Date: April 14, 2008 | /s/ Yermek Kudabayev    |   |
|----------------------|-------------------------|--------|
|                 | Yermek Kudabayev        |
|                 | Chief Executive Officer |

 

 

 

| Date: April 14, 2008 | /s/ Zhassulan Bitenov   |   |
|----------------------|-------------------------|--------|
|                 | Zhassulan Bitenov       |
|                 | Chief Financial Officer |

 

 

| Date: April 14, 2008 | /s/ James Kohler |   |
|----------------------|------------------|--------|
|                 | James Kohler     |
|                 | Director         |

 

 

| Date: April 14, 2008 | /s/ Timothy Adair |   |
|----------------------|-------------------|--------|
|                 | Timothy Adair     |
|                 | Director          |

 

| Date: April 14, 2008 | /s/ Nurlan Tajibayev |   |
|----------------------|----------------------|--------|
|                 | Nurlan Tajibayev     |
|                 | Director             |

 

 

| Date: April 14, 2008 | /s/ Dossan Kassymkhanuly |   |
|----------------------|--------------------------|--------|
|                 | Dossan Kassymkhanuly     |
|                 | Director                 |

 

 

| Date: April 14, 2008 | /s/ Valery Tolkachev |   |
|----------------------|----------------------|--------|
|                 | Valery Tolkachev     |
|                 | Director             |

 

 

66

 

----

 

 

 

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

 

**(An Exploration Stage Company)**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

**AND**

**FINANCIAL STATEMENTS**

 

**December 31, 2007 and 2006**

 

**HANSEN,BARNETT&            MAXWELL, P.C.**

A            Professional Corporation

CERTIFIED PUBLIC ACCOUNTANTS

 

----

 

**BEKEM METALS, INC. AND SUBSIDIARIES**

**(An Exploration Stage Company)**

 

**TABLE OF CONTENTS**

 

|                                                                               |                                                                                                 | **Page** |
|------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|----------|
|                                                                               |                                                                                                 |     |
| Report of Independent Registered Public Accounting                            Firm | F-2                                                                                                  |
|                                                                               |                                                                                                 |     |
| Consolidated Financial Statements:                                                 |                                                                                                 |
|                                                                               |                                                                                                 |     |
|                                                                               | Consolidated Balance Sheets – December 31, 2007                            and 2006            | F-3      |
|                                                                               |                                                                                                 |     |
|                                                                               | Consolidated Statements of Operations for the years                            ended                 | F-4      |
|                                                                               | December 31, 2007 and 2006, and for the period from                            March 5,              |     |
|                                                                               | 2004 (Date of Inception) through December 31,                            2007                        |     |
|                                                                               |                                                                                                 |     |
|                                                                               | Consolidated Statements of Shareholders’ Equity                            for the years ended | F-5      |
|                                                                               | December 31, 2007 and 2006, and for the period from                            March 5,              |     |
|                                                                               | 2004 (Date of Inception) through December 31,                            2007                        |     |
|                                                                               |                                                                                                 |     |
|                                                                               | Consolidated Statements of Cash Flows for the years                            ended                 | F-6      |
|                                                                               | December 31, 2007 and 2006, and for the period from                            March 5,              |     |
|                                                                               | 2004 (Date of Inception) through December 31,                            2007                        |     |
|                                                                               |                                                                                                 |     |
| Notes to Consolidated Financial Statements                                         | F-7                                                                                                  |

 

 

F-1

 

 

----

| **Hansen, Barnett & Maxwell,P.C.** |   | **Registered with the Public Company** |
|----------------------------------------|--------|----------------------------------------|
| A Professional Corporation             |   | **Accounting Oversight Board**         |
| CERTIFIED PUBLIC ACCOUNTANTS           |   |                                   |
| AND                                    |   | **An independent member of**           |
| BUSINESS CONSULTANTS                   |   | **BAKER TILLY**                        |
| 5 Triad Center, Suite 750              |   | **INTERNATIONAL**                      |
| Salt Lake City, UT 84180-1128          |   |                                   |
| Phone: (801) 532-2200                  |   |                                   |
| Fax: (801) 532-7944                    |   |                                   |
| www.hbmcpas.com                        |   |                                   |

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and the Shareholders

Bekem            Metals, Inc. and Subsidiaries

 

We            have audited the accompanying consolidated balance sheets of Bekem Metals, Inc. and            Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements            of operations, shareholders’ equity (deficit), and cash flows for the years ended            December 31, 2007 and 2006, and for the period from March 5, 2004 (Date of Inception)            through December 31, 2007. These financial statements are the responsibility of the            Company’s management. Our responsibility is to express an opinion on these            financial statements based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether the financial statements are free of            material misstatement. The company is not required to have, nor were we engaged to            perform, an audit of its internal control over financial reporting. Our audit included            consideration of internal control over financial reporting as a basis for designing            audit procedures that are appropriate in the circumstances, but not for the purpose of            expressing an opinion on the effectiveness of the company's internal control over            financial reporting. Accordingly, we express no such opinion. An audit also includes            examining, on a test basis, evidence supporting the amounts and disclosures in the            financial statements, assessing the accounting principles used and significant            estimates made by management, as well as evaluating the overall financial statement            presentation. We believe that our audits provide a reasonable basis for our            opinion.

 

In            our opinion the consolidated financial statements referred to above present fairly, in            all material respects, the financial position of Bekem Metals, Inc. and Subsidiaries as            of December 31, 2007 and 2006, and the results of its operations and its cash flows for            the years ended December 31, 2007 and 2006, and for the period from March 5, 2004 (Date            of Inception) through December 31, 2007 in conformity with U.S. generally accepted            accounting principles.

 

The            accompanying consolidated financial statements have been prepared assuming that the            Company will continue as a going concern. As discussed in Note 1 to the financial            statements, the Company’s limited operating history, operating losses and            negative cash flows from operations, and dependence upon debt or equity infusions to            meet its work program requirements under certain government mineral licenses, raise            substantial doubt about its ability to continue as a going concern. Management’s            plans regarding those matters are also described in Note 1. The financial statements do            not include any adjustments that might result from the outcome of this            uncertainty.

 

|   | **** |
|--------|------|

 

Salt            Lake City, Utah

April 12, 2008

 

F-2

 

 

----

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                                   |
|-------------------------------------------------------------------------------------------|
| **(An Exploration Stage Company)**                                                        |
| **CONSOLIDATED BALANCE SHEETS**                                                           |
|                                                                                      |   |   |   |   |
| *December 31,*                                                                            |   | **2007** |   | **2006** |
|                                                                                      |   |   |   |   |
| **ASSETS**                                                                                |   |   |   |   |
|                                                                                      |   |   |   |   |
| **Current Assets**                                                                        |   |   |   |   |
| Cash                                                                                      |   | $     756,943  |   | $     8,583,680  |
| Trade accounts receivable                                                                 |   | 4,048  |   | 2,776  |
| VAT recoverable                                                                           |   | 269,087  |   | 186,915  |
| Inventories                                                                               |   | 287,240  |   | 185,063  |
| Prepaid expenses and other current assets                                                 |   | 118,847  |   | 139,293  |
| Deferred compensation                                                                     |   | 483,766  |   | 757,920  |
| **Total Current Assets**                                                                  |   | 1,919,931  |   | 9,855,647  |
|                                                                                      |   |   |   |   |
| Property, plant and mineral interests (net of                            accumulated      |   |   |   |   |
| depreciation of $416,773 and $144,030)                                                    |   | 14,226,359  |   | 13,870,563  |
| Non-current deferred compensation                                                         |   | 225,351  |   | 1,202,587  |
| Other assets                                                                              |   | 78,996  |   | 169,130  |
|                                                                                      |   |   |   |   |
| **Total Assets**                                                                          |   | $ 16,450,637  |   | $   25,097,927  |
|                                                                                      |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                  |   |   |   |   |
|                                                                                      |   |   |   |   |
| **Current Liabilities**                                                                   |   |   |   |   |
| Accounts payable                                                                          |   | $     423,776  |   | $       530,665  |
| Accrued expenses                                                                          |   | 237,142  |   | 274,739  |
| Advances received                                                                         |   | 257,689  |   | -  |
| Due to related party                                                                      |   | 791  |   | 9,644  |
| **Total Current Liabilities**                                                             |   | 919,398  |   | 815,048  |
|                                                                                      |   |   |   |   |
| Deferred tax liabilities                                                                  |   | -  |   | 433,645  |
| Asset retirement obligation                                                               |   | 1,039,048  |   | 951,355  |
| **Total Liabilities**                                                                     |   | 1,958,446  |   | 2,200,048  |
|                                                                                      |   |   |   |   |
| **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                                                                       |   | (14,923,899) |   | (6,222,349) |
| Accumulated other comprehensive gain (loss)                                               |   | 1,088,101  |   | (30,216) |
| **Total Shareholders' Equity**                                                            |   | 14,492,191  |   | 22,897,879  |
|                                                                                      |   |   |   |   |
| **Total Liabilities and Shareholders'                            Equity**                 |   | $ 16,450,637  |   | $   25,097,927  |

 

 

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

 

F-3

 

 

----

 

 

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                      |
|------------------------------------------------------------------------------|
| **(An Exploration Stage Company)**                                           |
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                                    |
|                                                                         |   |   |
|                                                                         |   |   | **For the Period from** |
|                                                                         |   |   | **March 5, 2004** |
|                                                                         | **For the Years Ended** | **(Date of Inception)** |
|                                                                         | **December 31,** | **through** |
|                                                                         | **2007** | **2006** | **December 31, 2007** |
|                                                                         |   |   |   |
| **Revenue**                                                                  | $                         -  | $                         -  | $                                   -  |
|                                                                         |   |   |   |
| **Operating Expenses**                                                       |   |   |   |
| General and administrative expenses                                          | 4,268,793  | 3,136,715  | 8,523,165  |
| Research and development costs                                               | 296,070  | 389,507  | 1,088,238  |
| Exploratory costs                                                            | 4,186,235  | 1,470,247  | 6,353,978  |
| Accretion expense on asset retirement                            obligations | 79,288  | 72,865  | 212,785  |
| Grant compensation expense                                                   | 428,935  | 151,583  | 580,518  |
|                                                                         |   |   |   |
| **Total Operating Expenses**                                                 | 9,259,321  | 5,220,917 | 16,758,684  |
|                                                                         |   |   |   |
| **Loss From Operations**                                                     | (9,259,321) | (5,220,917) | (16,758,684) |
|                                                                         |   |   |   |
| **Other Income (Expense)**                                                   |   |   |   |
| Interest income                                                              | 324,976  | 85,337  | 410,313  |
| Other income                                                                 | 97,391  | 2,371  | 119,252  |
| Interest expense                                                             | (1,018) | (1,382,972) | (1,677,441) |
| Translation adjustment                                                       | (255,752) | (32,572) | (250,134) |
| Exchange loss                                                                | (64,280) | (174,278) | (299,014) |
|                                                                         |   |   |   |
| **Net Other Expense**                                                        | 101,317  | (1,502,114) | (1,697,024) |
|                                                                         |   |   |   |
| **Net Loss Before Minority Interest and                            Taxes**   | (9,158,004) | (6,723,031) | (18,455,708) |
| Deferred tax benefit                                                         | 456,454  | 2,016,909  | 3,390,601  |
| Loss attributed to minority interest                                         | -  | -  | 141,208  |
|                                                                         |   |   |   |
| **Net Loss**                                                                 | $       (8,701,550) | $       (4,706,122) | $               (14,923,899) |
|                                                                         |   |   |   |
|                                                                         |   |   |   |
| **Basic Loss per Common Share**                                              | $                (0.07) | $                                           (0.04) |   |
| **Weighted-Average Shares used in**                                          |   |   |   |
| **Basic Loss per Common Share**                                              | 124,958,236  | 111,480,627  |   |

 

 

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

 

F-4

 

 

----

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                                  |
|------------------------------------------------------------------------------------------|
| **(An Exploration Stage Company)**                                                       |
| **CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY                            (DEFICIT)** |
| **FOR THE PERIOD FROM MARCH 5, 2004 (DATE OF                            INCEPTION)**     |
| **THROUGH DECEMBER 31, 2007**                                                            |
|                                                                                     |   |   |   |   |   |   |
|                                                                                     |   |   |   | **Accumulated** |   |   |
|                                                                                     |   |   |   | **Other** |   | **Total** |
|                                                                                     | **Common Shares** | **Additional** | **Comprehensive** | **Accumulated** | **Shareholders'** |
|                                                                                     | **Shares** | **Amount** | **Paid-in Capital** | **Gain (Loss)** | **Deficit** | **Equity (Deficit)** |
| **Balance - March 5, 2004**                                                              |   |   |   |   |   |   |
| (Date of inception)                                                                      |   | $                    -  | $                    -  | $                    -  | $                  -  | $                   -  |
| Shares issued for cash, August 12, 2004                                                  | 8,400,000  | 8,400  | 174,274  | -  | -  | 182,674  |
| Shares issued for 60% interest in                                                        |   |   |   |   |   |   |
| Kaznickel, November 19, 2004,                                                            |   |   |   |   |   |   |
| $0.02 per share                                                                          | 12,600,000  | 12,600  | (12,600) | -  | -  | -  |
| Net loss for period                                                                      |   | -  | -  | -  | (245,090) | (245,090) |
| **Balance, December 31, 2004**                                                           | 21,000,000  | $         21,000  | $             161,674  | $                  -  | $           (245,090) | $             (62,416) |
|                                                                                     |   |   |   |   |   |   |
| Net loss for period                                                                      |   |   |   |   | (1,271,137) | (1,271,137) |
| Cumulative translation adjustment                                                        |   |   |   | (17,293) |   | (17,293) |
| **Comprehensive Loss**                                                                   |   |   |   |   |   | $        (1,350,846) |
|                                                                                     |   |   |   |   |   |   |
| Minority interest shares issued in                                                       |   |   |   |   |   |   |
| acquisition of EMPS Research                                                             |   |   |   |   |   |   |
| Corporation, January 24, 2005                                                            | -  | -  | (11,706) | -  | -  | (11,706) |
| Shares issued for cash, August 8, 2005                                                   | 61,200,000  | 61,200  | 38,800  | -  | -  | 100,000  |
| Shares issued for the acquisition of                                                     |   |   |   |   |   |   |
| the minority interests of Bekem Metals,                                                  |   |   |   |   |   |   |
| Inc., October 24, 2005                                                                   | 17,888,888  | 17,889  | 327,111  | -  | -  | 345,000  |
| **Balance, December 31, 2005**                                                           | 100,088,888  | $       100,089  | $             515,879  | $             (17,293) | $        (1,516,227) | $           (917,552) |
|                                                                                     |   |   |   |   |   |   |
| Net loss for period                                                                      |   |   |   |   | (4,706,122) | (4,706,122) |
| Cumulative translation adjustment                                                        |   |   |   | (12,923) |   | (12,923) |
| **Comprehensive Loss**                                                                   |   |   |   |   |   | $        (5,636,597) |
|                                                                                     |   |   |   |   |   |   |
| Shares issued for cash, July 14, 2006 -                                                  |   |   |   |   |   |   |
| net of fees of 1,577,614                                                                 | 24,000,000  | 24,000  | 26,398,386  | -  | -  | 26,422,386  |
| Issue of Stock grants at 1.95 per share on                                               |   |   |   |   |   |   |
| October 20, 2006                                                                         | 1,083,123  | 1,083  | 2,111,007  | -  | -  | 2,112,090  |
| **Balance, December 31, 2006**                                                           | 125,172,011  | $       125,172  | $        29,025,272  | $             (30,216) | $        (6,222,349) | $        22,897,879  |
|                                                                                     |   |   |   |   |   |   |
| Net loss for period                                                                      |   |   |   |   | (8,701,550) | (8,701,550) |
| Cumulative translation adjustment                                                        |   |   |   | 1,118,317  |   | 1,118,317  |
| **Comprehensive Loss**                                                                   |   |   |   |   |   | $        15,314,646  |
|                                                                                     |   |   |   |   |   |   |
| Shares resigned, June 30, 2007                                                           | (421,772) | (422) | (822,033) | -  | -  | (822,455) |
| **Balance, December 31, 2007**                                                           | 124,750,239  | $       124,750  | $        28,203,239  | $          1,088,101  | $      (14,923,899) | $        14,492,191  |

 

 

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

 

F-5

 

 

----

| **BEKEM METALS, INC. AND SUBSIDIARIES**                                                     |
|---------------------------------------------------------------------------------------------|
| **(An Exploration Stage Company)**                                                          |
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                                                   |
|                                                                                        |   |   |   |   | **For the Period from** |
|                                                                                        |   |   |   |   | **March 5, 2004** |
|                                                                                        |   | **For the Years Ended** | **(Date of Inception)** |
|                                                                                        |   | **December 31,** | **through** |
|                                                                                        |   | **2007** |   | **2006** | **December 31, 2007** |
|                                                                                        |   |   |   |   |   |
| **Cash Flows from Operating Activities**                                                    |   |   |   |   |   |
| Net loss                                                                                    |   | $        (8,701,550) |   | $        (4,706,122) | $              (14,923,899) |
| Adjustments to reconcile net loss to                                                        |   |   |   |   |   |
| net cash provided by operating activities:                                                  |   |   |   |   |   |
| Depreciation and amortization                                                               |   | 318,660  |   | 117,502  | 485,793  |
| Accretion expense on asset retirement                            obligations                |   | 79,288  |   | 72,865  | 228,854  |
| Interest expense from debt discount                                                         |   | -  |   | 855,970  | 963,231  |
| Shares issued on option modification                                                        |   | -  |   | -  | 19,426  |
| Deferred tax benefit                                                                        |   | (456,454) |   | (2,016,909) | (3,390,601) |
| Foreign currency exchange loss (gain) and translation                            adjustment |   | 398,461  |   | (142,795) | 195,210  |
| Purchased exploration costs                                                                 |   | -  |   | -  | 251,286  |
| Impairment loss on property, plant and                            equipment                 |   | 1,043,720  |   | -  | 1,043,720  |
| Stock grant compensation expense                                                            |   | 428,935  |   | 151,583  | 580,518  |
| Loss on disposal of property and equipment                                                  |   | 8,801  |   | 58,928  | 67,729  |
| Loss recognized on minority shareholders'                            interest               |   | -  |   | -  | (141,208) |
| Change in operating assets and liabilities:                                                 |   |   |   |   | -  |
| Trade accounts receivable                                                                   |   | (1,165) |   | 16,983  | 7,803  |
| Inventories                                                                                 |   | (90,403) |   | 47,985  | (12,019) |
| VAT recoverable                                                                             |   | (73,065) |   | (122,498) | (195,563) |
| Prepaid expenses and other current assets                                                   |   | (27,031) |   | (29,040) | 53,948  |
| Accounts payable                                                                            |   | (116,060) |   | 88,129  | 105,907  |
| Accrued expenses                                                                            |   | 34,675  |   | (9,976) | (52,535) |
| Advances received                                                                           |   | 252,958  |   | -  | 252,958  |
| **Net Cash From Operating Activities**                                                      |   | (6,900,230) |   | (5,617,395) | (14,459,442) |
|                                                                                        |   |   |   |   |   |
| **Cash Flows from Investing Activities**                                                    |   |   |   |   |   |
| Purchase of property and equipment                                                          |   | (1,056,041) |   | (2,577,696) | (3,674,478) |
| Purchase of intangible assets                                                               |   | (7,613) |   | (57,480) | (65,093) |
| Proceeds from disposal of property and                            equipment                 |   | 10,608  |   | 22,941  | 33,549  |
| Restricted cash                                                                             |   | 100,000  |   | (100,000) | -  |
| Notes receivable                                                                            |   | -  |   | (56,983) | (56,983) |
| Change in related party receivables /                            payables                   |   | -  |   | 46,930  | (152,180) |
| Cash acquired in acquisitions                                                               |   | -  |   | -  | 50,475  |
| **Net Cash From Investing Activities**                                                      |   | (953,046) |   | (2,722,288) | (3,864,710) |
|                                                                                        |   |   |   |   |   |
| **Cash Flows from Financing Activities**                                                    |   |   |   |   |   |
| Proceeds from notes payable                                                                 |   | -  |   | 1,996,731  | 14,706,914  |
| Payments on notes payable                                                                   |   | -  |   | (7,870,993) | (22,745,753) |
| Proceeds from notes payable - related parties                                               |   | -  |   | 251,900  | 4,326,912  |
| Payments on notes payable - related parties                                                 |   | -  |   | (4,326,912) | (4,326,912) |
| Issuance of shares for cash                                                                 |   | -  |   | 26,422,386  | 26,728,842  |
| **Net Cash From Financing Activities**                                                      |   | -  |   | 16,473,112  | 18,690,003  |
|                                                                                        |   |   |   |   |   |
| **Effect of Exchange Rate Changes on                            Cash**                      |   | 26,539  |   | 360,885  | 391,092  |
|                                                                                        |   |   |   |   |   |
| **Net Increase (Decrease) in Cash**                                                         |   | (7,826,737) |   | 8,494,314  | 756,943  |
| **Cash at Beginning of Period**                                                             |   | 8,583,680  |   | 89,366  | -  |
| **Cash at End of Period**                                                                   |   | $              756,943  |   | $          8,583,680  | $                     756,943  |

 

 

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

 

F-6

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

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

 

**Basis of Presentation**

 

The            accompanying consolidated financial statements include the accounts of Bekem Metals,            Inc. (“BMI”, “Bekem” or the “Company”) and its            wholly owned subsidiaries Kazakh Metals, Inc. (“KMI”), Kyzyl Kain Mamyt LLP            (“KKM”), Condesa Pacific, S.A. (“Condesa”) and Kaznickel, LLP            (“Kaznickel”). Intercompany accounts and transactions have been eliminated            in consolidation. The results of operations of the previously separate KMI and BMI were            combined for all periods prior to the acquisition (as further explained below), with            recognition of the minority interest in BMI, and the operations of BMI and KMI are            consolidated from October 24, 2005.

 

On            October 24, 2005, Bekem Metals, Inc. entered into an Acquisition Agreement with Kazakh            Metals, Inc., a British Virgin Islands international business company, 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, was the            controlling shareholder of KMI and was also the controlling shareholder of BMI.            Accordingly, the transaction was considered to be between entities under common control            and did not result in a change in control of BMI. Following the transaction, entities            over which the controlling shareholder maintained voting and investment control held            51,600,000 BMI common shares, which represented 51.5% of the 100,088,888 outstanding            common shares.

 

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

 

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

 

***Kazakh Metals, Inc.***– The            consolidated financial statements also include the accounts of KMI and its wholly-owned            subsidiary, KKM, which it acquired on June 1, 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.

 

F-7

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

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

 

In            January 2008, Kaznickel agreed with the Expert Committee of the Ministry of Energy and            Minerals Resources (“MEMR”) of the Republic of Kazakhstan to an extension            of the exploration period to February 2010. Currently, Kaznickel is in the process of            signing the addendum to the subsoil use contract to reflect these changes. Upon            discovery of commercially producible nickel and/or cobalt reserves, the Company may            notify the MEMR and convert from exploration stage to commercial production stage. If            the Company makes no commercial discoveries before the end of the exploration period,            as extended, the rights to the territory will revert back to the Republic of            Kazakhstan. Upon completion of exploration, the Company will return to the Republic of            Kazakhstan the rights to all areas within the licensed territory wherein no commercial            discoveries of nickel and/or cobalt were made. When the Company completes exploration            of the Gornostai deposit, assuming that commercial discoveries are made, the            Company will apply to the MEMR to move to commercial production.

 

KKM            holds exploration and production licenses from the government of Kazakhstan to a            575,756 acre parcel, located approximately 130 kilometers northwest of Aktobe,            Kazakhstan. This deposit is referred to as the Kempirsai deposit. The licenses grant            KKM the right to explore for and produce nickel and cobalt from deposits located within            the territory through October 12, 2011, which may be extended upon agreement between            KKM and the MEMR. KKM also holds a license to explore for and produce Mamyt brown coal            from a deposit located within 40 kilometers of its cobalt and nickel deposit. This            license expires on December 11, 2018 with further possible extensions. Because the            Company does not have a reserve estimate for its deposits that conforms to the            standards of Industry Guide 7 issued by the U.S. Securities and Exchange Commission,            its operations were considered to be at the exploratory stage for 2007 and            2006.

 

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

 

F-8

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

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

 

The            Company has in the past been able to raise capital through the sale of equity            securities and continues to believe that investors will see the merits of its plans to            exploit its mineral licenses and will be able to raise capital. The Company currently            has no firm commitment from any party to provide additional equity or debt financing            and there is no guarantee that it will obtain additional financing on acceptable terms,            or at all. Certain shareholders of the Company have indicated a willingness to provide            the Company a line of credit to meet current operation needs, however, 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. If the Company is unsuccessful in obtaining additional funding            during 2008, the Company will likely have insufficent funds to continue operations or            to meet its mineral license work program requirements. If the Company cannot fulfill            its work program requirement, the Company could be subjected to fines and            penalties and even to the possible forfeiture of its subsoil use contracts and            licenses.

 

In            March 2008, KKM has entered into a consortium agreement with two other Kazakhstani            companies who also have exploration and production licenses near the Company’s            Kempersai deposits in northwestern Kazakhstan, to develop and construct a nickel            processing plant in the area for joint use by the parties. KKM is considered to be the            operator of the consortium. In April 2008, one party to this agreement deposited            approximately $9,900,000 with the Company to be used toward the project.

 

**Exploration Stage Company**

 

The            Company is currently an exploration stage company. As an exploration stage enterprise,            the Company discloses the deficit accumulated during the exploration stage and the            cumulative statements of operations and cash flows from inception to the current            balance sheet date. The Company has incurred net losses of $14,923,899 and used net            cash in operations of $14,459,442 for the period from March 5, 2004 (date of inception)            through December 31, 2007. An entity remains in the exploration stage until such time            as proven or probable reserves have been established for its deposits.

 

**Significant Accounting Policies**

 

***Use of Estimates***– The            preparation of the Company’s consolidated financial statements in accordance with            accounting principles generally accepted in the United States of America requires            management to make estimates and assumptions that affect the reported amounts in the            financial statements and accompanying notes. Actual results could differ from those            estimates. The Company bases its estimates on historical experience and on various            other assumptions that are believed to be reasonable under the circumstances.            Accordingly, actual results may differ significantly from these estimates under            different assumptions or conditions.

 

F-9

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

***Revenue Recognition***– Since            the Company is in the exploration stage, any incidental sales of ore and Mamyt brown            coal are recorded as a reduction of the exploratory costs. Income from such sales is            recognized when persuasive evidence of an arrangement exists, title to product            transfers to the customer, and collectibility is reasonably assured.

 

***Inventories***– Inventory            consists of materials and spare parts, miscellaneous goods, fuel and some raw            materials. Spare parts, goods and fuel are recorded at the lower cost or estimated            service value. The Company applies the weighted average method of inventory            costing.

 

***Prepaid Expenses***– Prepaid            expenses relate to office rent, subscriptions, insurance and advance drilling costs.            Prepaid expenses are charged to operations in the period the related service or work is            performed.

 

***Impairment of Long-Lived Assets and Long-Lived Assets to be            Disposed***– Long-lived assets are reviewed for            impairment whenever events or changes in circumstances indicate that the carrying            amount of an asset may not be recoverable. Recoverability of assets to be held and used            is measured by comparison of the carrying amount of an asset to future net cash flows            expected to be generated by the asset. If such assets are considered to be impaired,            the impairment to be recognized is measured by the amount that the carrying amount of            the assets exceeds the fair value of the assets. Assets to be disposed of are reported            at the lower of the carrying amount or fair value less costs to sell. At December 31,            2007, the Company reviewed its long-lived assets as disclosed above and determined that            impairment losses incurred in 2007 amounted to $1,043,720. This impairment loss was            recognized in the 2007 financial statements (as exploratory costs). During 2006, the            Company realized losses from the impairment and disposal of property, plant and            equipment in the amount of $58,928.

 

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

 

***Depreciation, Depletion and Amortization***– Costs incurred to develop new properties will be capitalized as            incurred, when it has been determined that the property can be economically developed            based on the existence of proven and probable reserves. All such costs will be            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.

 

Depreciation of equipment used in exploration activities is calculated            using the straight-line method based on the estimated useful lives of the assets and is            charged to exploratory costs.

 

Expenditures for new facilities or equipment and expenditures not            related to exploration activities and used for administrative and other operation            purposes or that extend the useful lives of existing facilities or equipment are            capitalized and depreciated using the straight-line method at rates sufficient to            depreciate such costs over the estimated future lives of such facilities or equipment.            These lives do not exceed the estimated mine life as the useful lives of these assets            are considered to be limited to the life of the relevant mine.

 

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

 

F-10

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

During 2007, the Company revised estimated useful lives applied to the            Kempirsai buildings and other fixed assets as follows:

 

|               | **Useful Lives (Years)** |
|--------------------|--------------------------|
|               | **Old**                  |   | **New** |
| Buildings          | 20-30                    |   | 20 |
| Other fixed assets | 4-7                      |   | 5-7 |

 

The            effect of the change in estimate was an increase in depreciation expenses by            approximately $67,000. This effect was recognized in the current statements of            operations as a change in estimate.

 

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

 

Exploration costs incurred on mineral interests, other than acquisition            costs, prior to the establishment of proven and probable reserves are charged to            operations as incurred. Development costs incurred on mineral interests with proven and            probable reserves will be capitalized as mineral properties. The Company regularly            evaluates the investments in mineral interests to assess the recoverability and / or            the residual value of the investments in these assets. All mineral interests and            mineral properties are reviewed for impairment whenever events or circumstances change            which indicate the carrying amount of an asset may not be recoverable, utilizing            established guidelines based upon undiscounted future net cash flows from the asset or            upon the determination that certain exploration properties do not have sufficient            potential for economic mineralization.

 

The            estimates of mineral prices and operating, capital and reclamation costs, when            available, are subject to certain risks and uncertainties, which may affect the            recoverability of mineral property costs. Although the Company makes its best estimates            of these factors, it is possible that changes could occur in the near term, which could            adversely affect the future net cash flows to be generated from the            properties.

 

***Exploratory Costs –***since the            Company is deemed to be in the Exploration stage, all costs related to operating            activities are classified as Exploratory costs, which mainly consist of costs of            drilling exploration works at the Gornostai deposits, costs of blasting, stripping,            excavation and ore extracting works at the Kempirsai deposits, as well as salaries and            wages, depreciation charges and other expenses directly related to these            works.

 

***Financial Instruments***– The            nature of the Company’s operation exposes the Company to fluctuations in            commodity prices and foreign currency exchange risk. The Company recognizes these risks            and manages its operation in a manner such that exposure to these risks is minimized to            the extent practical. The Company is not exposed to the credit risk fluctuations in            interest rates because certain of its loans are interest free, as a general requirement            under Kazakh law for non-financial institutions.

 

F-11

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

***Basic and Diluted Income (Loss) Per Share***– Basic income (loss) per share is calculated by dividing net            income (loss) by the weighted-average number of shares outstanding. Diluted income per            share is calculated by dividing net income by the weighted-average number of shares and            all dilutive potentially issuable shares, except during loss periods when those            potentially issuable shares are anti-dilutive.

 

The            following data shows the amounts used in computing basic and diluted weighted-average            number of shares outstanding at December 31, 2007 and 2006:

 

| *For the Years Ended December 31,*                                                | **2007**                             |   | **2006**                               |
|-----------------------------------------------------------------------------------|--------------------------------------|--------|----------------------------------------|
| Basic weighted average common shares                            outstanding       | $    124,958,236 |   | $    111,480,627   |
| Dilutive effect of outstanding options /                            warrants      | -                                    |   | -                                      |
| **Diluted Weighted Average Common Shares                            Outstanding** | **$** **124,958,236**           |   | **$**   **111,480,627** |

 

***Recent Accounting Pronouncements***– In September 2006, the Financial Accounting Standards Board            (FASB) issued SFAS No. 157, *Fair Value Measurements*, which defines            fair value, establishes a framework for measuring fair value in generally accepted            accounting principles and expands disclosures about fair value measurements. SFAS            No. 157 is effective for fiscal years beginning after November 15, 2007, and            interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff            Position (FSP FIN) No. 157-2 which extended the effective date to fiscal years            beginning after November 15, 2008. The Company does not expect the adoption of SFAS            No. 157 to have a material impact on the consolidated financial            statements.

 

In            February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for            Financial Assets and Financial Liabilities.* SFAS No. 159 permits companies to            choose to measure many financial instruments and certain other items at fair value.            SFAS No. 159 is effective for financial statements issued for fiscal years            beginning after November 15, 2007. The Company does not expect the adoption of            SFAS No. 159 to have a material impact on the consolidated financial            statements.

 

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

 

In March            2008, the FASB issued SFAS No. 161,*Disclosures about            Derivative Instruments and Hedging Activities.*SFAS No. 161            amends SFAS No. 133,*Accounting for Derivative Instruments and            Hedging Activities*to require enhanced disclosures concerning            the manner in which an entity uses derivatives (and the reasons it uses them), the            manner in which derivatives and related hedged items are accounted for under SFAS No.            133 and interpretations thereof, and the effects that derivatives and related hedged            items have on an entity's financial position, financial performance, and cash flows.            SFAS No. 161 is effective for financial statements of fiscal years and interim periods            beginning after November 15, 2008. The Company does not expect the adoption of SFAS No.            161 to have a material impact on the consolidated financial statements.

 

F-12

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

**NOTE            2**–**ACQUISITIONS AND            DISPOSAL**

 

***Kaznickel acquisition by Condesa***

 

On            July 9, 2004, Condesa, which was owned 60% by Brisa holding 8,400,000 of 14,000,000            shares of outstanding common stock, entered into an investment agreement under which            Condesa provided a $300,000 convertible loan to Kaznickel LLP, which was immediately            converted into a new 40 percent equity interests in Kaznickel. On September 22, 2004,            Brisa acquired an interest in Kaznickel by purchasing 60 percent of the equity interest            of the founding partners’ remaining 60 percent interests. As consideration for            the purchase, the original partners obtained a commitment from Brisa to facilitate a            reverse merger with a U.S. public company, and a commitment to obtain funding enabling            Kaznickel to further explore its mineral property rights. The value of the commitment            was estimated to be $270,000 based on the percent of Kaznickel obtained for            Condesa’s original cash investment of $300,000.

 

On            November 19, 2004, Brisa and the remaining Kaznickel partners exchanged their combined            60% interest in Kaznickel for a new 60% interest, equal to 21,000,000 shares of            Condesa, thereby making Kaznickel a wholly-owned subsidiary of Condesa. Brisa received            12,600,000 shares of Condesa in the transaction. The remaining 8,400,000 common shares            issued in the acquisition were recognized as minority shareholders’ interests.            The acquisition of a controlling interest in Kaznickel by Brisa and Condesa was            considered the purchase of Kaznickel with a measurement date of September 22, 2004, the            date Brisa and Condesa obtained control from the original Kaznickel            partners.

 

Condesa accounted for the acquisition of Kaznickel as a purchase            business combination with a purchase price of $304,456. The purchase price was            allocated to the assets acquired and liabilities assumed based on their estimated fair            values. Negative goodwill was not recognized in connection with the acquisition of            Kaznickel. Instead, the excess of the fair value of the net assets over the purchase            price was allocated as a pro rata reduction of the amounts that otherwise would have            been assigned to the long-term assets. The Company is in the process of obtaining an            independent valuation of the net assets acquired. Accordingly the allocation of the            purchase price is subject to refinement. At September 22, 2004, the purchase price was            allocated to the assets acquired and the liabilities assumed as follows:

 

| Current assets                               |   | $       231,674  |
|----------------------------------------------|--------|----------------------------------------------------------|
| Mineral property rights                      |   | 267,660                                             |
| Asset retirement costs of the mineral rights |   | 474,936                                             |
| Property and equipment                       |   | 21,573                                              |
| Total assets acquired                        |   | 995,843                                             |
| Current liabilities                          |   | (25,468)                                                 |
| Asset retirement obligation                  |   | (665,919)                                                |
| Total liabilities assumed                    |   | (691,387)                                                |
| Minority Shareholders' interests             |   | (121,782)                                                |
| **Net Assets Acquired**                      |   | $       182,674  |

 

 

F-13

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

Intangible assets acquired include the mineral property rights, which            are capitalized until the production phase begins, subject to impairment            considerations. Other intangible assets include the asset retirement costs of the            mineral rights, which have a 20-year estimated life and are subject to amortization at            a planned rate of $24,291 per year, and the asset retirement obligation, which is            accreted over its 20-year life, with a current estimated expense of $43,274 per            year.

 

***Condesa acquisition of EMPS (Bekem)***

 

On            January 28, 2005, EMPS Research, Inc. (“EMPS”) completed a Plan and            Agreement of Reorganization with Condesa, wherein EMPS acquired 100% of the outstanding            capital stock of Condesa in exchange for the issuance of 35,000,000 common shares of            which 21,000,000 were held by the controlling shareholder and 14,000,000 were issued to            minority shareholders in Condesa. EMPS subsequently changed its name to Bekem Metals,            Inc. As a result of that reorganization, the shareholders of Condesa owned 91% of the            outstanding common stock of EMPS at that reorganization date. The combined entities            were referred to after that reorganization as Bekem.

 

EMPS            had 3,300,000 shares of common stock outstanding prior to that transaction that            remained outstanding, were classified as minority interests, and were valued at $0. The            transaction resulted in a change of control of EMPS. For financial reporting purposes,            Condesa was considered the acquirer. The acquisition was recognized as a forward stock            split of Condesa’s 30,000 shares of capital stock held by the controlling            shareholder that were outstanding prior to the reorganization into 21,000,000 common            shares, or a 700-for-1 stock split. The financial statements were restated for the            effects of the stock split for all periods presented. Condesa’s assets,            liabilities and minority interests were recorded at their historical cost and the            effect of the stock split was reflected retroactively since the inception of Condesa.            The assets of EMPS were considered to have been acquired by Condesa in exchange for the            assumption of EMPS’s net liabilities. The net assets consisted of cash of $2,648,            intangible assets of $1,823 and current liabilities of $15,077. The operations of            Condesa were included for all periods presented and the operations of EMPS were            included from the acquisition of EMPS.

 

***Kazakh Metals, Inc. acquisition of Kyzyl Kain Mamyt,            LLC***

 

On            June 1, 2005, Kazakh Metals acquired 100% of the equity interests of Kyzyl Kain Mamyt,            LLC (KKM) for the cash purchase price of $100,000. The management of the Company            understands that at this time KKM was not able to maintain the subsoil use contract            because of financial liquidity problems. The owners of KKM, prior to its acquisition by            Kazakh Metals, had incurred significant debt obligations on the property which they            were unable to service and KKM’s assets were pledged as a guarantee for these            debt obligations. Moreover, at the time of the acquisition of KKM by Kazakh Metals, the            price of nickel was at the level where the processing of nickel ore by known and proven            technologies was not considered economically feasible due to high processing costs.            Therefore, the former owners of KKM sold their interests in KKM to Kazakh Metals at a            price significantly below the estimated fair value to free itself from the debt            obligations associated with the property. The former equity holders of KKM were not            related parties.

 

KKM            operates in the Aktyubinsk region of northwestern Kazakhstan and owns licenses to            explore for, and is engaged in the production and sale of nickel and cobalt ore and            Mamyt brown coal. KKM has been actively involved in mining cobalt and nickel ore since            its inception and has been operating in the Soviet Union since 1938. The height of            production occurred in the late 1980’s. Production, although limited, has            occurred since that time. KKM’s primary assets are its rights to exploit unproved            reserves and its infrastructure of buildings, machinery and equipment, including a rail            spur.

 

F-14

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

Kazakh Metals accounted for the acquisition of KKM as a purchase            business combination with a purchase price of $100,000. The purchase price was            allocated to the assets acquired and liabilities assumed based on their estimated fair            values. The Company has estimated a fair value of $40,000,000 for the mineral interests            and obtained an independent appraisal of the buildings and equipment of $17,693,795 on            the acquisition date, and is in the process of obtaining third-party valuations of the            mineral assets; accordingly, the allocation of the purchase price is subject to            refinement. Negative goodwill was not recognized in connection with the acquisition of            KKM. Instead, the excess of the fair value of the net assets over the purchase price            was allocated as a pro rata reduction of the amounts that otherwise would have been            assigned to the long-term assets. Notes payable assumed in the acquisition with a            stated value of $7,445,197 are due to third parties generally within three years,            including $4,432,290 to a bank, and were recorded based upon their fair values on the            acquisition date, resulting in a discount to the notes that will be recognized as            interest expense through maturity. The operations and cash flows of KKM were included            in the Company’s consolidated financial statements since the date of the            acquisition.

 

The            following table summarizes the estimated fair values of the assets acquired and            liabilities assumed at the date of acquisition.

 

| Current Assets                                                              |   | $       469,379  |
|-----------------------------------------------------------------------------|--------|----------------------------------------------------------|
| Unproved mineral property rights                                            |   | 7,034,321                                           |
| Asset retirement costs of the mineral rights                                |   | 86,852                                              |
| Buildings, constructions machinery and                            equipment |   | 3,068,786                                           |
| Total assets acquired                                                       |   | 10,659,338                                          |
| Current liabilities                                                         |   | (717,527)                                                |
| Asset retirement obligation                                                 |   | (97,223)                                                 |
| Notes Payable, net of discount of $917,737                                  |   | (6,541,670)                                              |
| Deferred tax liability                                                      |   | (3,202,918)                                              |
| Total liabilities assumed                                                   |   | (10,559,338)                                             |
| **Net Assets Acquired**                                                     |   | $       100,000  |

 

Intangible assets acquired include the mineral property rights, which            are capitalized and amortized on a units-of-production method, subject to impairment            considerations. Other intangible assets include the asset retirement costs of the            mineral rights, which have a 20-year estimated life and are subject to amortization at            a planned rate of $4,311 per year, and the asset retirement obligation, which is            accreted over its 20-year life, with a current estimated expense of $7,680 per            year.

 

***Bekem acquisition of Kazakh Metals***

 

On            October 24, 2005, Kazakh Metals, Inc. (KMI) was acquired by Bekem Metals, Inc. in a            purchase business combination under which Bekem acquired 100% of the outstanding common            shares of KMI in exchange for the issuance of 61,200,000 common shares. The primary            asset of KMI is its wholly owned subsidiary, KKM.

 

The            principal shareholder of Bekem was also the principal shareholder of KMI. Accordingly,            the transaction was considered to be between entities under common control and did not            result in a change in control of Bekem. Following the transaction, entities over which            this shareholder maintains voting and investment control hold 51,600,000 Bekem common            shares, which represented 51.5% of the 100,088,888 outstanding common shares. The            acquisition of the portion of KMI owned by the principal shareholder will be recorded            at historical cost. The portion of KMI purchased from the minority shareholders of KMI            was recorded at fair value.

 

F-15

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

***Disposal of Condesa***

 

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 generated no sales and had no income. The            disposals of Condesa had no material effect on the financial position and the income            statement of Bekem.

 

 

**NOTE 3 – 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:

 

| *December 31,*           | **2007**                                     |                               | **2006**                                                       |
|--------------------------|----------------------------------------------|------------------------------------|----------------------------------------------------------------|
| Current accounts (USD)   | $      253,892 |                               | $         479,947 |
| Current accounts (Tenge) | 503,051                                      |                               | 38,379                                                         |
| Bank deposit (USD)       | -                                            |                               | 8,065,354                                                      |
| **Total**                |                                         | **$**   **756,943** |                                                           | **$**   **8,583,680** |
|                          |                                              |                                    |                                                                |  |

 

 

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

             

Property, plant and mineral interests consist of the            following:

 

| *December 31,*                 |   | **2007**                                 |   | **2006**                                 |
|--------------------------------|--------|------------------------------------------|--------|------------------------------------------|
| Buildings                      |   | $    1,995,927  |   | $    2,156,326  |
| Machinery and equipment        |   | 3,771,957                           |   | 3,474,858                           |
| Other fixed assets             |   | 149,721                             |   | 69,665                              |
| Unproved mineral interests     |   | 8,725,527                           |   | 8,313,744                           |
|                           |   | 14,643,132                          |   | 14,014,593                          |
| Accumulated depreciation       |   | (416,773)                                |   | (144,030)                                |
| **Net Property and Equipment** |   | **$****14,226,359**                 |   | **$****13,870,563**                 |

 

The            increase in property, plant and mineral interests is principally related to the            purchase of equipment (trucks, other transportation vehicles, etc) and capital repairs            undertaken by the Company at the Kempirsai deposit.

 

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.

 

F-16

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

***Gornostai Deposit***

 

Kaznickel acquired its interest in the Contract on Exploration and            Development of Gornostai Cobalt and Nickel Deposit (the “Contract”) issued            by the MEMR dated February 26, 2004. As discussed above, Kaznickel acquired the right            to exploit the mineral property including the right to explore, develop and produce the            cobalt and nickel mineral resources on the Deposit through February 26, 2026 providing            commercial discoveries are made before the end of the exploration period. 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. In January 2008, Kaznickel agreed            with the Expert Committee of the MEMR to an extension of the exploration period to            February 2010. Currently, Kaznickel is in the process of signing the addendum to the            subsoil use contract to reflect these changes.

 

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 and obligations and commitments of the Contract include monetary commitments for            exploration of $1,105,100 in 2006 and $1,576,480 in 2007, and expenditures to support            social projects amounting to $300,000 during the production stage. In addition, the            Company was required to pay a fee of $2,000 upon award of the Contract, and a fee for            the use of Kazakh owned technical data of $735,400 of which $4,179 was paid on award of            the Contract and $731,221 will be due upon a finding of commercial deposits. Royalties            of 0.5% of ores extracted and sold will be required. The Contract subjects the Company            to pay regular income tax of 30 percent and requires an excess profits tax of 15 to 60            percent if its net profits exceed 20 percent of gross profit. Obligations also include            the establishment and funding of a reclamation fund that includes the cost of removing            buildings and equipment used in the Deposit area. The Company is also required to            comply with Kazakh environmental laws and regulations.

 

***Kempirsai Deposit***

 

Bekem acquired two contracts to explore for and extract minerals in            connection with the purchase of KKM. One contract is for the exploration and extraction            of nickel and cobalt ore from deposits located in an approximately 575,756 acre site in            the northwest area of the Republic of Kazakhstan (approximately 130 kilometers            northwest of the city of Aktobe, Kazakhstan, near the town of Badamsha, referred to as            the “Kempirsai” deposit), which is valid through October 12, 2011. The            other contract is for the exploration and extraction of Mamyt brown coal at a site            located within 40 kilometers of the Kempirsai deposit, which is valid through December            11, 2018. 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.

 

F-17

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

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

 

 

**NOTE 5 – INCOME TAXES**

 

In            accordance with the laws and regulations of the Republic of Kazakhstan income taxes are            calculated at the statutory rate of 30 percent. Net operating losses for development            companies in exploration and development may be carried forward for the seven            subsequent years from the date the losses are incurred. Therefore, the Company has            deferred tax assets due to the savings of income tax in future periods. However, the            Company assessed the recoverability of these deferred tax assets and created a            provision against them until it has more evidence of its recoverability in the future            periods.

 

Deferred tax assets and liabilities were as follows:

 

| *December 31,*                   | **2007**                                                                                                                     |   | **2006**                                       |
|----------------------------------|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|
| Tax loss carryforwards           | $    5,111,855                                                                                      |   | $     2,590,511  |
| Property and equipment           | (519,790)                                                                                                                    |   | (704,645)                                      |
| Asset retirement cost            | (162,506)                                                                                                                    |   | (169,521)                                      |
| Asset retirement obligation      | 340,178                                                                                                                 |   | 308,263                                   |
| Unproved mineral property rights | (2,653,191)                                                                                                                  |   | (2,503,728)                                    |
| Grant compensation expense       | 174,155                                                                                                                 |   | 45,475                                    |
| Valuation allowance              | (2,290,701)                                                                                                                  |   | -                                         |
| **Net Deferred Tax Liabilities** | **$**                  **-**  |   | **$**   **(433,645)**           |

 

The            valuation allowance was recognized for the amount of loss carryforward balance which is            estimated to be unrecoverable.

 

The            following is a reconciliation of the amount of tax that would result from applying the            U.S. federal rate to pretax income with the provision for income taxes at December 31,            2007 and 2006:

 

| *For the Years Ended December 31,*     | **2007**                       |   | **2006**                       |
|----------------------------------------|--------------------------------|--------|--------------------------------|
| Tax at US Federal statutory rate (34%) | $   (2,747,155) |   | $   (2,016,909) |
| Change in valuation allowance          | 2,290,701                 |   | -                         |
| **Deferred Tax Benefit**               | **$**  **(456,454)** |   | **$** **(2,016,909)**     |

 

 

F-18

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

**NOTE 6 – RELATED PARTY TRANSACTIONS**

 

As            discussed above, during 2007, the Company financed all operations using the proceeds            received from the private placement of shares. No related party transactions were made            in 2007. During 2006, the Company borrowed $329,000 from shareholders to fund the U.S.            administrative operations. The notes were due on demand and accrued interest at 3            percent. The notes were paid off in 2006.

 

 

**NOTE 7 – ASSET RETIREMENT OBLIGATION**

 

Upon            the purchase of Kaznickel on September 22, 2004 and KKM on June 1, 2005, the Company            recorded the effects of asset retirement obligations in accordance with SFAS            No. 143, “Accounting for Asset Retirement Obligations,” and related            interpretations, which requires entities to record the fair value of a liability for an            asset retirement obligation when it is incurred. The Company is required under the            contracts with the Geology and Minerals Resources Committee of the MEMR, to remediate            the properties from the effects of the open pit mining processes. The standard applies            to legal obligations associated with the retirement of long-lived assets that result            from the acquisition, construction, development or normal use of the asset. The            Company’s asset retirement obligations relate primarily to the obligation to fill            mining pits and restore surface conditions at the conclusion of the term of the            Contracts.

 

SFAS            No. 143 requires that the fair value of a liability for an asset retirement            obligation be recognized in the period in which it is incurred, if a reasonable            estimate of fair value can be made. When the liability is initially recorded, the            related cost is capitalized by increasing the carrying amount of the related mineral            interest rights. Over time, the liability is accreted upward for the change in its            present value each period until the obligation is settled. The initial capitalized cost            is amortized as a component of mineral rights interests as described in Note            4.

 

The            reconciliation of the asset retirement obligation is as follows:

 

| *December 31,*                       | **2007**                                           |   | **2006**                                     |
|--------------------------------------|----------------------------------------------------|--------|----------------------------------------------|
| Balance at the beginning of the year | $       951,355 |   | $      833,840 |
| Liabilities incurred                 | 8,405                                              |   | 44,650                                       |
| Accretion expense during the year    | 79,288                                             |   | 72,865                                       |
| **Asset Retirement Obligation**      | **$** **1,039,048**                           |   | **$**   **951,355**           |

 

 

**NOTE 8 – SHAREHOLDERS’ EQUITY**

 

***Shares issued for cash***– On            July 14, 2006, the Company closed a private placement of 8,000,000 units at $3.50 per            unit, each unit consisting of three shares of restricted common stock and one warrant            to purchase one share of common stock for two dollars. The warrant is immediately            exercisable and expires twenty-four months from the date granted, i.e., in July 2008.            The private placement resulted in the issuance of 24,000,000 restricted common shares            and warrants to purchase 8,000,000 common shares to two non-U.S. investors for            $28,000,000. These issuances did not result in a change in control of the            Company.

 

From            the total proceeds, the Company paid the placement agent, Aton Securities, Inc., a cash            fee totaling 5% of the total proceeds raised, or $1,400,000. The Company also issued to            the placement agent a warrant to purchase up to 2,400,000 shares of restricted common            stock. The exercise price of this warrant is $1.17 per share. The warrant is            immediately exercisable and expired eighteen months from the date granted, i.e., in            January 2008. The warrants were not exercised.

 

F-19

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

Also, the Company incurred legal and consulting expenses of            $153,487.

 

The            following summarizes warrant activity for the years ended December 31, 2007 and            2006:

 

|                           |                                                                                                                       |   | **Weighted**                                                                                                                     |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                       |   | **Average**                                                                                                                      |
|                           | **Warrants**                                                                                                               |   | **Exercise Price**                                                                                                               |
| Balance, December 31, 2005     | $                    - |   | $                     - |
| Issued                         | 10,400,000                                                                                                                 |   | 1.81                                                                                                                             |
| Expired                        | -                                                                                                                          |   | -                                                                                                                                |
| Exercised                      | -                                                                                                                          |   | -                                                                                                                                |
| Balance, December 31, 2006     | 10,400,000                                                                                                                 |   | 1.81                                                                                                                             |
| Issued                         | -                                                                                                                     |   | -                                                                                                                                |
| Expired                        | -                                                                                                                     |   | -                                                                                                                                |
| Exercised                      | -                                                                                                                     |   | -                                                                                                                                |
| **Balance, December 31, 2007** | **$** **10,400,000**                                                                                                  |   | **$**             **1.81**                                      |

 

The            following table summarizes information about warrants outstanding at December 31,            2007:

 

|                                                                                      |            | **Weighted**     |                                                                                      |
|-------------------------------------------------------------------------------------------|-----------------|------------------|-------------------------------------------------------------------------------------------|
|                                                                                      |            | **Average**      |                                                                                      |
|                                                                                      |            | **Remaining**    | **Weighted**                                                                              |
| **Range of**                                                                              | **Number**      | **Contractual**  | **Average**                                                                               |
| **Exercise Price**                                                                        | **Outstanding** | **Life (Years)** | **Exercise Price**                                                                        |
| $              1.17 | 2,400,000       | 0.04             | $              1.17 |
| $              2.00 | 8,000,000       | 0.54             | $              2.00 |

 

The            $1.17 warrants expired on January 14, 2008. The $2.00 warrants expire on July 14,            2008.

 

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

 

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

 

As            of December 31, 2007, there was $709,117 of total unexpensed compensation cost. The            cost is expected to be recognized over a period of 2 years. 95,857 shares were vested            during 2007. No shares were vested as of December 31, 2006. The Company recognized            $428,935 and $151,583 of compensation expense for the years ended December 31, 2007,            and 2006, respectively.

 

F-20

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

**NOTE 9 – SUPPLEMENTAL CASH FLOW DISCLOSURES**

 

 

| **Supplemental Disclosure of Cash Flow                            Information:** |                                                               |
|----------------------------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                             |                                                               |   |   |
| *For the Years Ended December 31,*                                               | **2007**                                                           |   | **2006** |
| Cash paid for interest                                                           | $       1,018    |   | $   529,096   |
|                                                                             |                                                               |   |   |
| **Non-cash Investing and Financing                            Activities:**      |                                                               |   |
|                                                                             |                                                               |   |   |
| *For the Years Ended December 31,*                                               | **2007**                                                           |   | **2006** |
| Share-based compensation arrangements                                            | $(822,455)                                                         |   | $2,112,090 |

 

 

**NOTE 10 – 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.

 

***Need for Additional Capital –***The Company needs substantial additional capital resources and is            expected to be totally dependent upon investment funds to support operations until such            time as the Company begins to generate sufficient revenue to fund operations. These            funds are expected to consist primarily of funds raised in equity and/or debt financing            activities. Currently there is no firm commitment from any party to provide the Company            with additional equity or debt financing.

             

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

             

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

 

 

F-21

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

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

 

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

 

***Due to the Government of the Republic of Kazakhstan            –***In connection with the Company’s            acquisition of the exploration contract covering the Gornostai deposit, it is required            to repay the Republic of Kazakhstan for historical costs incurred in undertaking            geological and geophysical studies and infrastructure improvements. The repayment terms            of this obligation will not be determined until the Company applies for and is granted            a contract by the Republic of Kazakhstan to engage in commercial production. That            amount is expected to be $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, which is currently February            2010. 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 licenses, to submit a proposed annual work program to            the MEMR for approval. Failure to meet the minimum work program requirements could            cause the Company to lose its licenses.

 

***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, 2008 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 1,880 square feet of office space. The lease agreement expires on            November 30, 2008. The monthly lease payment is $7,000. Upon consent of both parties,            the agreement may be prolonged further.

 

F-22

 

 

----

|   | **BEKEM METALS, INC. AND SUBSIDIARIES** |
|--------|-----------------------------------------|

|   | **(An Exploration Stage Company)** |
|--------|------------------------------------|

|   | **NOTES TO CONSOLIDATED FINANCIAL                            STATEMENTS** |
|--------|---------------------------------------------------------------------------|

|   | **DECEMBER 31, 2007 AND 2006** |
|--------|--------------------------------|

 

 

Kaznickel LLP rents an office (approximately 2,200 square feet) in            Semei, Kazakhstan, for approximately $4,000 per month. Semei is the closest city to the            Gornostai deposit. Kaznickel also rents approximately 5,300 square feet of warehouse            space in Semei for $4,250 per month. Kaznickel uses this space to store test ore. These            lease agreements expire in March 31, 2009. If at any time the owner of this space            decides they need or want the space for other purposes, Kaznickel has no right to            continue to occupy the space and could be forced to move.

 

KKM            rents approximately 1,120 square feet of office space in Aktobe, Kazakhstan. KKM pays            approximately $5,500 per month for this space under a one-year lease agreement. This            space is leased on a year-to-year basis.

 

Rent            expense for the years ended December 31, 2007 and 2006 was $282,042 and $194,854,            respectively.

 

 

**NOTE 11 – SUBSEQUENT EVENTS**

 

In            March 2008, the Company’s board increased the restricted stock grant previously            made to its Chief Executive Officer by 38,343 shares and awarded a restricted stock            grant of 383,429 shares to its Chief Financial Officer. Vesting is dependent upon            certain future events. These restricted stock grants were made under the            Company’s 2003 Stock Option Plan

 

In            March 2008, KKM has entered into a preliminary consortium agreement, subject to            negotiation of the terms of a definitive agreement,            with  two Kazakhstani companies who also have exploration and production            licenses near the Company's Kempirsai deposits in northwestern Kazakhstan, to develop            and construct a nickel processing plant in the area for joint use by the            parties. KKM is considered as the operator of the consortium.  In April 2008,            one party to this agreement deposited approximately $9,900,000 with the Company to be            used toward the project.

 

F-23