2. RISK FACTORS

Mining is a high risk business. Key risks are product price risk,
exchange rate risk, production risk, capital project risk, environmental
risk, community relations risk, ore reserves risk and regulatory risk.
The Board of Directors, with the assistance of the Audit Committee,
closely monitors the Company's risk management. The Audit Committee has
full access to the Company's management and auditors, both external and
internal, to obtain all information regarding risk events and risk
responses. At operational level, management continually monitors,
analyzes and controls all key business risks.

Price Risk 

Product price has been taken into consideration from the exploration
stage onward. Proved ore reserve and the feasibility of the Company's
gold mine at Phu Tap Fah was established based on an assumed gold price
of USD350 per oz. To protect the financial feasibility of the gold
mining operations, the Company entered into a zero cost reverse collar
with a schedule as described below:-

+----------------+----------------+----------------+-----------------+
| Delivery       | Notional       | Floor          | Cap             |
| Period         | Amount per     |                |                 |
|                | Month          | (USD/oz.)      | (USD/oz.)       |
|                |                |                |                 |
|                | (oz.)          |                |                 |
+----------------+----------------+----------------+-----------------+
| Apr 08 – Feb   | 2,083.33       | 500            | 862             |
| 09             |                |                |                 |
+----------------+----------------+----------------+-----------------+
| Mar 09 – Feb   | 2,500.00       | 500            | 825             |
| 10             |                |                |                 |
+----------------+----------------+----------------+-----------------+
| Mar 10 – Feb   | 2,083.33       | 500            | 815             |
| 11             |                |                |                 |
+----------------+----------------+----------------+-----------------+
| Mar 11 – Mar   | 2,500.00       | 500            | 805             |
| 12             |                |                |                 |
+----------------+----------------+----------------+-----------------+

 

Since entering into the collar, gold price has dropped as low as
USD692/oz. before rebounding strongly in 2009. Were the Company to opt
for a plain vanilla price floor, the upfront cost for the protection
would have been very high.

Prices for andesite aggregates which the Company has been operating in
Saraburi since 1997 remain the same over recent years. This is in spite
of the fact that prices of several commodities and raw materials that
contribute to production cost have risen rather drastically, e.g.,
gasoline oil. The main constraint being competition with limestone
aggregates produced from the vicinity, which are naturally softer and
abundant, thus have much lower production cost.

Exchange Rate Risk 

The prices of gold and associated metals are fixed in USD while the
prices of Andesit are fixed in THB. The Company's exchange rate risk is
however dampened by its cost structure. Over 80% of the Company's debts
are denominated in USD. Around 20% of its expenditures on raw materials,
consumables, equipment and spare parts are in USD. Also statutory fees
are on ad valorem basis, in effect linked to USD. The Company sees no
further need to hedge against USD beyond the existing natural hedge.

Production and Capital Project Risks 

Unit cost of gold produced is largely determined by capacity
utilization, ore grades and recovery rate. The Company's plant and heavy
equipment have generally been utilized at high rates. Availability has
been high. Modern maintenance practices, such as Root Cause Analysis,
have been adopted. Ore feed grade is diligently controlled. The Company
nevertheless needed to adjust its gold extraction process as the mining
operations moved toward ore with higher copper content. Copper in the
ore increased the consumption of process reagents and reduced gold
recovery rate. A flotation circuit was therefore added to the process.
The Company anticipated a period of low production out while the new
circuit were to be commissioned. The Company therefore built up finished
gold doré inventory as well as cash reserve toward the end of 2008.
However the completion of the flotation was delayed by five months. The
problem was compounded by the delay in obtaining transportation and
export permit for copper concentrate produced by the new flotation
circuit. The delays resulted in significant cash flow difficulties,
which have since been resolved.

Environmental and Community Relations Risks 

Prior to the commencement of any mining operations, potential
environmental, health and social impacts have to be assessed. Impact
mitigation measures and impact monitoring program have to be designed.
The Company has used reputable companies, both local and international,
to carry the required environmental studies. In 2009, the Company
conducted an additional environmental study on an area adjacent to the
current mining operations. The study was submitted to the Office of
Natural Resources and the Environment Policy and Planning (ONEP) in
January, subsequent to the closing of the Financial Year 2009.

To provide the surrounding communities with complete comfort against any
contamination resulting from mining and ore processing operations, the
Company adheres to a zero discharge policy. Ongoing environmental
monitoring both inside the Company's site and in the surrounding area is
conducted by Khon Kaen University. Monthly reports are being submitted
to the ONEP for its approval. All reports were approved in 2009.

The Company's relationship with communities surrounding its site in Loei
is very strong. The mine is a major employer in the area. Most of the
staff are hired locally. In addition, the Company conducts many social
activities jointly with local communities. The mine is open for visit
and a large number of visitors, both from within the province and far
afield.

These risks are apparently lower for Saraburi quarry since it is located
on the lee side of an extensive mountain chains which help prevent any
disturbances resulted from operation. Its location is also at some
distance from villages or temples. Coupled with natural advantage, the
quarry has also been active in keeping all activities in compliance with
regulations set forth by government agencies.

Another prospect of the Company -offshore tin deposit lies some 20
kilometres westward from Takuapa District, in which mining license
applications was lodged. Environmental impact study for mining,
including mitigation measures, was also approved by ONEP since 1995. On
the basis of the study, the Company has run public education campaign in
the communities onshore and won an approval from Kugkag Subdistrict
Council in 2006. However, Bang Muang Subdistrict Council has yet to
approve the proposal, and the Company has to continue working with
community leaders and general public on the issue.  

Ore Reserves and Regulatory Risks 

The accuracy of the estimation of gold resources and reserves has been a
major concern for the financial community for several decades.
Australia's JORC Code and Canada's NI43-101 have been developed to
addressed this concern. The Company strictly follow the JORC Code in the
estimation of its gold resources and reserves. Resources and reserves
reported in this Form 56-1 are based on a formal statement of Ore
Resources and Reserves by a “competent person” as defined in the JORC
Code. As detailed in the next section, the Company has a large number of
Mining License Applications (MLAs) filed with the Department of Primary
Industries and Mining (DPIM). The Company is in the process of
expediting the approval of some of these MLAs. The approval requires a
prior approval of the environmental study by the Cabinet and the
National Environmental Board. The environmental approval process has
become increasingly time consuming. The Administrative Court's decision
concerning environmental approval of projects in Map Ta Phut in
September of 2009 has resulted further uncertainties in the
environmental approval process. The Company's management has been
actively involved resolving the uncertainties with regard to
environmental approval of mining projects.

Another major aspect of regulatory risk lays in statutory fees. The
Company won a tender for special prospecting licenses when the royalty
rate for gold mining was 2.5%. The Government changed the rate to an
escalating scale in 2007.

+-----------------------------------+----------------------------------+
| Gold Price                        | Royalty Rate                     |
|                                   |                                  |
| (THB/gram)                        | (%)                              |
+-----------------------------------+----------------------------------+
| Below 400                         | 2.5                              |
+-----------------------------------+----------------------------------+
| 401 – 600                         | 5.0                              |
+-----------------------------------+----------------------------------+
| 601 – 1,000                       | 10.0                             |
+-----------------------------------+----------------------------------+
| 1,001 – 1,500                     | 15.0                             |
+-----------------------------------+----------------------------------+
| Above 1,500                       | 20.0                             |
+-----------------------------------+----------------------------------+

 

The risk is further complicated by the Agricultural Land Reform Office
(ALRO). The ALRO contentiously claims jurisdiction over the land where
the Company's gold mine is located. The claim is against the opinion
issued by the Juridical Council on the matter. The ALRO insist on usage
fee equivalent to royalty payment to the DPIM. This results in more than
quadrupling of statutory fees since the term that the Company tendered
for the right to prospect and mine the area. The Company has filed a
petition with the Administrative Court to decide on the ALRO's
jurisdiction vis-à-vis the Company's Phu Tap Fah mine. The Company has
also been actively engaged in discussion with policy makers regarding
the sensibility of the escalating royalty rate.

Risks Relating to Non-Mining Activities 

In addition to the mining business, the Company is also involved in
property development business. The Company holds 75% interest in Sky
Cliff Limited. The subsidiary owns a plot of land near the intersection
between Rama 9 Road and Ratchadapisek Road. As of 31 December 2009, the
subsidiary has invested THB83.16 million (net of depreciation) in the
development of a residential condominium project on the plot. Parts of
this investment might be impaired, were there to be some changes in the
project development concept. This potential impairment would not be very
significant and would be completely offset by the rise in the value of
the land that had occurred in 2009.

The Company also has some risks relating to litigation. This is
discussed in detail in Section 6 of this Form 56-1.