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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ x ]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

[     ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _____to _______

Commission File Number: 001-12974

SANTA FE GOLD CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)

Delaware 84-1094315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1128 Pennsylvania NE, Suite 200, Albuquerque, NM 87110
(Address of Principal Executive Offices)(Zip Code)

Registrant's telephone number including area code: (505) 255-4852

N/A
Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Larger accelerated filer [     ] Accelerated filer [ x ]
Non-accelerated filer [    ] Smaller reporting company [     ]

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [     ]  No [ x ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 108,760,510 shares outstanding as of February 8, 2012.


SANTA FE GOLD CORPORATION
INDEX TO FORM 10-Q

PART I
FINANCIAL INFORMATION

    Page
Item 1. Financial Statements 3
Consolidated Balance Sheets as of December 31, 2011 (Unaudited) and June 30, 2011 3
Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and 2010 (Unaudited) 5
  Notes to the Unaudited Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 27
     
  PART II 
  OTHER INFORMATION 
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
SIGNATURES 30
CERTIFICATIONS  

2


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


SANTA FE GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS

    December 31,     June 30,  
                                                                                                                                         ASSETS   2011     2011  
    (Unaudited)        
CURRENT ASSETS:            
       Cash and cash equivalents $  3,480,057   $  172,531  
       Accounts receivable   1,769,830     2,230,605  
       Inventory   109,212     175,578  
       Marketable securities   176,241     97,260  
       Prepaid expenses and other current assets   801,287     279,064  
       Note receivable and accrued interest   207,511     -  
                           Total Current Assets   6,544,138     2,955,038  
MINERAL PROPERTIES   579,000     579,000  
             
PROPERTY, PLANT AND EQUIPMENT,
                net of depreciation of $4,326,478 and $3,090,516, respectively
  12,409,643     13,104,215  
OTHER ASSETS:            
       Construction in process   11,096,009     8,427,113  
       Idle equipment, net   1,223,528     1,223,528  
       Note receivable and accrued interest   -     203,422  
       Restricted cash   231,716     410,374  
       Deferred financing costs   504,387     314,700  
                           Total Other Assets   13,055,640     10,579,137  
       Total Assets $  32,588,421   $  27,217,390  
             
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)    
CURRENT LIABILITIES:            
       Accounts payable $  1,054,548   $  1,090,907  
       Accrued liabilities   1,450,826     1,976,751  
       Derivative instrument liabilities   4,797,174     8,973,066  
       Current portion, notes payable, net of discount of $440,766 and $-0-, respectively   4,030,024     78,384  
       Current portion, capital leases   40,276     83,856  
       Senior subordinated convertible notes payable, net of discount of
                 $12,819 and $-0-, respectively
  437,181     -  
       Deferred revenue   3,159,612     3,611,266  
       Accrued interest payable   395,628     255,109  
                           Total Current Liabilities   15,365,269     16,069,339  
LONG TERM LIABILITIES:            
       Notes payable, net discount of $125,135 and $-0-, respectively   5,543,045     58,957  
       Capital leases, net of current portion   24,622     45,057  
       Senior secured convertible notes payable, net of discount of
                 $-0- and $2,498,065, respectively
  -     11,001,935  
       Senior subordinated convertible notes payable, net of discount of
                 $-0- and $19,684, respectively
  -     430,316  
       Asset retirement obligation   155,363     149,236  
                           Total Liabilities   21,088,299     27,754,840  
STOCKHOLDERS' EQUITY (DEFICIT):            
       Common stock, $.002 par value, 300,000,000 shares authorized; 108,294,412 and
            94,744,412 shares issued and outstanding, respectively; Includes non-vested
            shares of 237,500 and 575,000, respectively
 

215,441
   

188,341
 
       Additional paid in capital   72,764,515     59,021,550  
       Accumulated (deficit)   (61,558,017 )   (59,746,543 )
       Accumulated other comprehensive income (loss)   78,183     (798 )
                           Total Stockholders' Equity (Deficit)   11,500,122     (537,450 )
  $  32,588,421   $  27,217,390  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
3



SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS)
(Unaudited)

    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2011     2010     2011     2010  
SALES $  1,918,495   $  473,440   $  4,469,219   $  1,250,262  
                         
OPERATING COSTS AND EXPENSES:                        
       Costs applicable to sales   1,032,488     304,335     2,652,978     699,422  
       Exploration, mine and mill start up costs   713,067     682,378     1,242,021     1,072,397  
       General and administrative   920,470     726,456     1,692,160     1,491,540  
       Depreciation and amortization   658,312     575,844     1,316,719     1,148,001  
       Accretion of asset retirement obligation   4,000     -     6,127     -  
    3,328,337     2,289,013     6,910,005     4,411,360  
LOSS FROM OPERATIONS   (1,409,842 )   (1,815,573 )   (2,440,786 )   (3,161,098 )
                         
OTHER INCOME (EXPENSE):                        
       (Loss) on disposal of assets   -     -     (152,587 )   -  
       Interest income   2,336     1,930     5,085     6,438  
       Miscellaneous income(loss)   5,328     (1,166 )   5,328     (2,471 )
       Gain (loss) on derivative instrument liabilities   (89,636 )   (3,197,189 )   2,798,124     (5,324,562 )
       Accretion of discounts on notes payable   (784,839 )   (312,793 )   (1,338,685 )   (609,157 )
       Interest expense   (376,109 )   (185,687 )   (687,953 )   (371,334 )
    (1,242,920 )   (3,694,905 )   629,312     (6,301,086 )
                         
(LOSS) BEFORE PROVISION FOR INCOME TAXES   (2,652,762 )   (5,510,478 )   (1,811,474 )   (9,462,184 )
                         
PROVISION FOR INCOME TAXES   -     -     -     -  
                         
NET LOSS   (2,652,762 )   (5,510,478 )   (1,811,474 )   (9,462,184 )
                         
OTHER COMPREHENSIVE INCOME                        
       Unrealized gain on marketable securities   47,002     91,942     78,981     91,942  
                         
NET COMPREHENSIVE LOSS $  (2,605,760 ) $  (5,418,536 ) $  (1,732,493 ) $  (9,370,242 )
                         
Basic and Diluted Per Share data Net (Loss) - basic and diluted $  (0.03 ) $  (0.06 ) $  (0.02 ) $  (0.10 )
                         
Weighted Average Common Shares Outstanding: Basic and diluted   95,877,564     92,433,783     95,217,238     92,364,720  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
4



SANTA FE GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

    Six Months Ended  
    December 31,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES:            
     Net loss $  (1,811,474 ) $ (9,462,184 )
     Adjustments to reconcile net loss to net cash used in operating activities:        
               Depreciation   1,316,719     1,148,001  
               Stock-based compensation   337,641     686,294  
               Accretion of discount on notes payable   1,338,686     609,157  
               Accretion of asset retirement obligation   6,127     -  
               (Gain) loss on derivative instrument liabilities   (2,798,124 )   5,324,562  
               Loss on disposal of assets   152,587     -  
               Amortization of deferred financing costs   335,312     49,159  
     Net change in operating assets and liabilities:            
               Accounts receivable   460,775     (657,178 )
               Inventory   66,366     -  
               Prepaid expenses and other current assets   (522,223 )   33,472  
               Accounts payable and accrued liabilities   (562,284 )   69,604  
               Deferred revenue   (451,654 )   (117,137 )
               Accrued interest payable   140,519     (9,680 )
                               Net Cash Used in Operating Activities   (1,991,027 )   (2,325,930 )
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
     Decrease to restricted cash   178,658     -  
     Proceeds from disposal of assets   25,000     -  
     Purchase of marketable securities   -     (98,058 )
     Notes receivable and accrued interest   (4,089 )   -  
     Purchase of property, plant and equipment   (799,734 )   (459,345 )
     Construction in progress   (2,668,896 )   (1,758,614 )
                               Net Cash Used in Investing Activities   (3,269,061 )   (2,316,017 )
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
     Proceeds from issuance of stock   -     2,000,001  
     Proceeds from notes payable   15,105,119     77,306  
     Payments on notes payable   (5,103,490 )   (139,634 )
     Payments on capital leases   (64,015 )   (68,207 )
     Payment of financing costs   (1,370,000 )   (136,000 )
                               Net Cash Provided by Financing Activities   8,567,614     1,733,466  
             
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   3,307,526     (2,908,481 )
             
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   172,531     5,540,130  
             
CASH AND CASH EQUIVALENTS, END OF PERIOD $  3,480,057   $  2,631,649  
             
SUPPLEMENTAL CASH FLOW INFORMATION:            
     Cash paid for interest $  675,039   $  529,873  
     Cash paid for income taxes $  -   $  -  
             
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
     Stock issued for services $  -   $  6,750  
             
     Issuance of common stock for conversion of convertible notes payable $  13,432,424   $  -  

The accompanying notes are an integral part of the unaudited consolidated financial statements.
5



SANTA FE GOLD CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2011

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

     Santa Fe Gold Corporation (the Company) is a U.S. mining company incorporated in Delaware in August 1991. Its general business strategy is to acquire, explore and develop mineral properties. The Company’s principal assets are the 100% owned Summit silver-gold project in New Mexico, the leased Ortiz gold property in New Mexico, and the 100% owned Black Canyon mica project in Arizona.

     The unaudited interim consolidated financial statements of the Company included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q under Article 8.03 of Regulation S-X. These statements do not include all of the information and notes to the financial statements required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 2011, are not necessarily indicative of the results that may be expected for our fiscal year ending June 30, 2012. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2011, included in the Company’s Annual Report on Form 10-K, as filed with Securities and Exchange Commission.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern

     The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

     The Company had a net loss of $2,652,762 for the six months ended December 31, 2011, has a working capital deficit of $8,821,131, which includes a non-cash financial derivative liability of $4,797,174 and deferred revenue of $3,159,612, and has a total accumulated deficit of $61,558,017 at December 31, 2011. The Company generated revenues of $4,469,219 from the sales of precious metals in the six months ended December 31, 2011. To continue as a going concern, the Company is dependent upon an increased ramp up of production on the Company’s Summit mine site; increased throughput recovery of precious metals through the Banner mill; and continued fund raising for project development and working capital for operational and administrative expenses.

     The Company’s consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Azco Mica, Inc., a Delaware corporation; The Lordsburg Mining Company, a New Mexico corporation; Minera Sandia, S.A. de C.V., a Mexican corporation and Santa Fe Gold Barbados Corporation, a Barbados corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

6


     Significant estimates are used when accounting for the Company’s carrying value of mineral properties, fixed assets, depreciation, accruals, derivative instrument liabilities, taxes and contingencies, which are discussed in the respective notes to the consolidated financial statements.

Marketable Securities

     Marketable securities are classified as available for sale and classified as current assets as they are subject to use within one year. The marketable securities are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity (deficit).

Inventory

     Inventory is carried at the lower of cost or net realizable value. Inventory classifications include stockpiled ore, in-process inventory, siliceous flux material and precious metals concentrate. Currently the stockpiled ore represents ore that is extracted from the mine and is waiting for processing. The ore currently is valued solely at the cost of transportation to the mill site as the Summit mine is still in process of ramping up to full production from the development stage. In-process inventory represents material that is currently being processed through the Banner mill. The in-process inventory is currently valued at stockpile ore costs plus applicable costs to crush the ore into mill feed. The siliceous flux material inventory and the precious metals concentrates awaiting shipment are valued at stockpile ore costs, plus allocated mill processing costs per ton based upon the processing requirements of the final product.

Fair Value Measurements

     The carrying values of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximated their related fair values as of December 31, 2011, due to the relatively short-term nature of these instruments. The carrying value of the Company’s convertible debentures approximates the fair value based on the terms at which the Company could obtain similar financing and the short term nature of these instruments.

Derivative Financial Instruments

     The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

     The Company reviews the terms of convertible debt, equity instruments and other financing arrangements to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. Also, in connection with the issuance of financing instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services.

     Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For warrant-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

     The discount from the face value of debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method.

     The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period. If reclassification is required, the fair value of the derivative instrument, as of the determination date, is reclassified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

7


Reclamation Costs

     The Company follows ASC 410, Asset Retirement and Environmental Obligations, which requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable, with an offsetting increase in the carrying amount of the associated asset. The cost of the tangible asset, including the initially recognized ARO, is depleted, such that the cost of the ARO is recognized over the useful life of the asset. The ARO is recorded at fair value, and accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO is measured using expected future cash flow, discounted at the Company’s credit-adjusted risk-free interest rate. At June 30, 2011, the Company has made a provision for an asset retirement obligation for the Summit mine and Banner mill sites aggregating $149,236. The projected required asset retirement obligation at settlement value is $230,716 and the accretion of the discounted liability will be recognized quarterly through December 2016.

     The Company’s asset retirement obligation through December 31, 2011, is as follows:

Balance at June 30, 2011 $  149,236  
Accretion expense for the six months ended December 31, 2011   6,127  
Balance at December 31, 2011 $  155,363  

Deferred Revenue

     Deferred revenue represents a cash advance made under a definitive gold sale agreement to sell a portion of the life-of-mine gold production only, not silver production, from our Summit silver-gold mine. Under the terms of the agreement, the Company received an upfront cash deposit of $4 million, plus it will receive ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. The upfront cash advance will be amortized by the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. The Company will also recognize the on-going production payments as revenue for gold delivered pursuant to the agreement. Deferred revenue on the Company’s balance sheet is categorized as current if the Company expects to recognize such revenue within the following twelve months. Current deferred revenue amounted to $3,159,612 at December 31, 2011.

Revenue Recognition

     Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred either physically or through an irrevocable transfer of metals to the buyer’s account, the price is fixed or determinable, no related obligations remain and collectability is probable.

     Sales of all metals products sold directly to the Company’s metals buyers, including by-product metals, are recorded as revenues upon a buyer either taking physical delivery of the metals product in the case of siliceous flux material or upon the buyer receiving all required documentation necessary to take physical delivery of the metals product in the case of concentrate (generally at the time the product is loaded onto a shipping vessel at the originating port and the bill of lading is generated).

     Revenues for metals products are recorded at current market prices at the time of delivery and are subsequently adjusted to the current market prices existing at the end of each reporting period. Due to the period of time existing between delivery and final settlement with the buyer, the Company must estimate the prices at which sales of its metals will be settled. Changes in metals prices between delivery and final settlement will result in adjustments to revenues previously recorded.

8


     Sales of metals products are recorded net of charges from the buyer for treatment, refining, smelting losses, and other negotiated charges. Charges are estimated upon shipment of product based on contractual terms, and actual charges do not vary materially from estimates. Costs charged by smelters include a metals payable fee, fixed treatment and refining costs per ton of product.

     Sales of refined gold related to the definitive gold sale agreement dated September 11, 2009 are recorded as revenues when the buyer takes delivery. The recorded revenues are final at that time. Due to the nature of the definitive gold sale agreement an obligation exists for the delivery of refined gold concurrent with the delivery of other metals products. Consequently the associated costs to purchase refined gold are also recorded at the same time as the delivery of other metals products. The costs to purchase refined gold are recorded using the current market price upon delivery of the refined gold or upon accrual of the obligation if undelivered. If necessary the accrual for any unsettled deliveries of refined gold and the related costs to purchase such are adjusted to the current market price existing at the end of each reporting period until final delivery and adjustment occurs.

Net Earnings (Loss) per Common Share

     The Company calculates net income (loss) per share as required by Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During the periods when they are anti-dilutive, common stock equivalents, if any, are not considered in the computation. Consequently the impact of outstanding stock equivalents has not been included in the current period as they would be anti-dilutive.

Comprehensive Income (Loss)

     In addition to net (loss), comprehensive income (loss) includes all changes in equity during a period, such as cumulative unrealized changes in the fair value of marketable securities available for sale or other investments.

Stock-Based Compensation

      In connection with terms of employment with the Company’s executives and employees, the Company issues options to acquire its common stock. Employee and non-employee awards are made at the discretion of the Board of Directors. Such options may be exercisable at varying exercise prices and generally vest over a period of six months to a year.

     The Company accounts for share based payments in accordance with ASC 718, Compensation - Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, Measurement Objective – Fair Value at Grant Date, the Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share-based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders. The simplified method is used to determine compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.

     Stock-based compensation costs recognized for the six months ended December 31, 2011 and 2010 amounted to $337,641 and $686,294, respectively.

Reclassifications

     Certain items in these consolidated financial statements have been reclassified to conform to the current year’s presentation.

9


Recent Accounting Pronouncements

     In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”(“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its consolidated financial statement note disclosures.

      In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity (deficit). Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company’s adopted ASU 2011-05 did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

     In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 defers changes in Update 2011-05 that relate to the presentation of reclassification adjustments. ASU 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-12 to have a material impact on its results of operations, financial condition, or cash flows.

     Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC during the current reporting period did not, or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

NOTE 3 – CONTEMPLATED ACQUISITION

      The Company entered into a non-binding Memorandum of Understanding (“MOU”) on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”), pursuant to which the Company agreed to acquire all the outstanding shares of common stock of Columbus Silver in exchange for the Company’s common stock. In accordance with the Memorandum of Understanding, the Company purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058. Proceeds of the issuance were used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. Additionally on January 27, 2011, the Company advanced $200,000 to Columbus Silver in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with the MOU.

On September 6, 2011, the Company entered into a new Memorandum of Understanding with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”) pursuant to which the Company conditionally agreed to acquire all of Columbus Silver’s outstanding common stock for a cash amount of Cdn $0.20 per outstanding share in a transaction valued at $10 million. Until closing of the transaction, the Company agreed to provide advances for bridge financing to Columbus Silver to fund leasehold payments and for working capital, which through the end of December 2011 totaled $513,716.

     On December 15, 2011, the Company entered into definitive agreements governing the proposed acquisition of Columbus Silver in a transaction valued at approximately $10 million. The definitive agreement contemplates a business combination by way of a Plan of Arrangement, which is subject to Canadian court approval. In addition, the proposed transactions are subject to the final approval of the boards of directors of the Company and Columbus Silver, stock exchange and regulatory approvals, and Columbus Silver shareholder approval. The Senior Secured Gold Stream Credit Agreement entered into on December 23, 2011 provides for a conditional $10 million facility earmarked for the acquisition of Columbus Silver and satisfies the financing requirement under the definitive agreement. Under certain circumstances listed in the definitive agreement in which the transaction is unable to consummate, the advances of $513,716 and note receivable of $207,511, including accrued interest, may not be refundable to the Company.

NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

     The following table provides the components of prepaid expenses and other current assets as of:

      December 31,     June 30,  
      2011     2011  
  Supplies $  61,672   $  69,643  
  Prepaid expenses   225,899     209,421  
  Advances to Columbus Silver   513,716     -  
    $  801,287   $ 279,064  

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NOTE 5 – INVENTORY

The following table provides the components of inventory as of:

      December 31,     June 30,  
      2011     2011  
  Stockpiled ore $  0   $  23,296  
  In-process material   2,990     24,281  
  Siliceous flux material   9,966     46,135  
  Precious metals concentrate   96,256     81,866  
    $  109,212   $  175,578  

NOTE 6 – NOTE RECEIVABLE

     On January 27, 2011, the Company advanced $200,000 to Columbus Silver Corporation (“Columbus Silver”) (TSXV: CSC) in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with a non-binding Memorandum of Understanding (“MOU”) dated September 23, 2010, in contemplation of a business combination (the “Transaction”). In the event that either party to the MOU informs the other that it will not proceed with the Transaction, either the maker or the holder will have the ability, by providing written notice to the other, to require that the maker apply to the TSX Venture Exchange to have the entire outstanding principal amount and accrued unpaid interest of this note paid in common shares of the maker. As of December 31, 2011, accrued interest receivable on the note receivable was $7,511.

NOTE 7- DERIVATIVE INSTRUMENT LIABILITIES

     On December 30, 2010, in connection with the registered direct offering to three institutional investors for 1,666,668 shares of the Company’s common stock, the Company issued 833,334 five year warrants giving the holders the right to purchase common stock at $1.50 per share. The warrants are exercisable immediately after issuance and will expire five years from the date of issuance. Using the Black-Scholes option pricing model, the fair market value of the warrants under the placement at the time of issuance was determined to be $669,372 with the following assumptions: (1) risk-free rate of interest of 2.01%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 79.51%, and (4) expected dividend yield of zero. The private placement was subject to the issuance of 100,000 warrants to the placement agent, exercisable at $1.50 per share and has an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. Using the Black-Scholes option pricing model, the fair market value of the placement agent warrants under the placement at the time of issuance was determined to be $62,614 with the following assumptions: (1) risk-free rate of interest of 1.47%, (2) an expected life of 3.92 years, (3) expected stock price volatility of 68.65%, and (4) expected dividend yield of zero.

     On August 2, 2011, the Company secured a $5 million senior secured loan with Victory Park Capital Advisors, LLC (“Victory Park”), see NOTE 10. In connection with the loan, the Company issued warrants to purchase 500,000 shares of its common stock. The warrants have an exercise price of $1.00 per share, are exercisable immediately after issuance and will expire five years from the date of issuance. Using the Black-Scholes option pricing model, the fair market value of the warrants at the time of issuance was determined to be $339,247 with the following assumptions: (1) risk-free rate of interest of 1.23%, (2) an expected life of 5.0 years, (3) expected stock price volatility of 86.79%, and (4) expected dividend yield of zero.

     The fair market value of the derivative instruments liabilities at December 31, 2011, was determined to be $4,797,174 with the following assumptions: (1) risk free interest rate of 0.01% to 0.73%, (2) remaining contractual life of 0.15 to 4.59 years, (3) expected stock price volatility of 50.52% to 85.13%, and (4) expected dividend yield of zero. Based upon the change in fair value, the Company has recorded a non-cash gain on derivative instruments for the six months ended December 31, 2011, of $2,798,124 and a corresponding decrease in the derivative instruments liability.

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    Derivative     Derivative     Derivative Gain  
    Liability as of     Liability as of     (Loss) Through  
    June 30, 2011     December 31, 2011     December 31, 2011  
Convertible Debentures:                  
   Purchase Agreement Warrants $ 5,712,913   $ 4,373,054   $  1,339,859  
   Amendment 2 Warrants   332,387     114,273     218,114  
   Embedded Conversion Option   2,927,766     -     2,927,766  
   Stand alone warrants   --     309,847     (309,847 )
                                                 Totals $ 8,973,066   $ 4,797,174     4,175,892  
                   
Portion of derivative applied to Additional Paid-In Capital     (1,717,015 )
Amount allocated to warrants at inception     339,247  
    $ 2,798,124  

The derivative liability is comprised of the following as of:

    December 31,     June 30,  
    2011     2011  
Current portion of derivative instruments liability $ 4,797,174   $ 8,973,066  
Long-term portion of derivative instruments liability   --     --  
  $ 4,797,174   $ 8,973,066  

NOTE 8 – CONVERTIBLE NOTES PAYABLE AND DEBENTURES

Convertible Senior Subordinated Notes

     On October 30, 2007, the Company completed the placement of 10% Senior Subordinated Convertible Notes of $450,000. The notes were placed with three accredited investors for $150,000 each. The notes have a term of 60 months, and at such time all remaining principal and interest shall be due. The notes bear interest at 10% per annum. Interest will accrue for 18 months from the date of closing. Interest on the outstanding principal balance will then be payable in quarterly installments commencing on the first day of the 19th month following closing. In connection with the transaction, the Company issued a five year warrant for each $2.50 invested, for a total of 180,000 warrants, each warrant giving the note holder the right to purchase one share of common stock at a price of $1.25 per share. At the option of the holders of the convertible notes, the outstanding principal and interest is convertible at any time into shares of the Company’s common stock at conversion price of $1.25 per share. The notes will be automatically be converted into common stock if the weighted average closing sales price of the stock exceeds $2.50 per share for ten consecutive trading days. The shares underlying the notes and warrants will be registered on request of the note holders, provided the weighted average closing price of the stock exceeds $1.50 per share for ten consecutive trading days.

     At December 31, 2011, accrued interest due on the Senior Subordinated Convertible Notes was $6,375.

Senior Secured Convertible Subordinated Debentures

     On December 21, 2007, the Company entered into definitive agreements for the placement with a single investor, Sulane Holdings, Inc., of a 7% Senior Secured Convertible Debenture in the amount of $13,500,000. Proceeds from the debenture were issued in accordance with a pre-determined funding schedule related to the Summit project’s anticipated construction requirements. The term of the debenture is 60 months, at the end of which time all remaining principal and interest shall be due. The debenture bears interest at the rate of 7% per annum. Interest on the outstanding principal balance is payable in quarterly installments, commencing on July 1, 2009. Interest may be paid in cash or stock at the investor’s election. The entire amount of principal and any unpaid interest will be due December 31, 2012. The investor may at any time convert unpaid principal and interest into shares of the Company’s common stock at the rate of $1.00 per share. In connection with the transaction, for every $2.00 of the original principal amount of the debenture, the investor will receive a warrant to purchase one share of common stock at a price of $1.00. The warrants are exercisable from July 1, 2010 to December 31, 2014. The Company received total advances under the agreement of $13,500,000, and the Company issued an aggregate of 6,750,000 warrants under the debenture advances. At December 31, 2011, accrued interest due on the Senior Secured Convertible Subordinated Debentures was $386,911, which was paid in early January 2012.

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     On December 23, 2011, the Company issued 13,500,000 shares of its common stock in connection with the conversion of $13.5 million principal amount of its Senior Secured Convertible Debentures held by Sulane Holdings Inc., at a conversion price of $1.00 per share. The Company did not receive any cash proceeds in connection with the debt conversion.

     The components of the convertible notes payable and debentures are as follows:

December 31, 2011   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $ 450,000   $  (12,819 ) $  437,181  
Long-term portion, net of current   -     -     -  
                   
  $ 450,000   $  (12,819 ) $  437,181  

June 30, 2011   Principal     Unamortized        
    Amount     Discount     Net  
Current portion $  -   $  -   $  -  
Long-term portion, net of current   13,950,000     (2,517,749 )   11,432,251  
                   
  $ 13,950,000   $ (2,517,749 ) $ 11,432,251  

Aggregate yearly maturities of long term debt based upon payment terms at December 31, 2011, are as follows:

2012 $  450,000  
Less: unamortized original discount   (12,819 )
  $  437,181  

NOTE 9 – SENIOR SECURED GOLD STREAM CREDIT AGREEMENT

     On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provides for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche, which is subject to several funding conditions, is earmarked to fund the strategic acquisition of Columbus Silver.

     Proceeds from the initial $10 million tranche of the Credit Agreement were used to retire the Company’s $5 million, 15% Senior Secured Bridge loan with Victory Park Capital Advisors, LLC, in addition to the payment of transaction fees and expenses. The Company will use the remaining net proceeds for general corporate purposes, including but not limited to, working capital for the Summit silver-gold project.

     The Credit Agreement provides for a 9% coupon and amortizes over a 30-month term (assuming both tranches are drawn) with an initial 6-month grace period during which the Company is not required to make any payments. As part of the transaction, the Company has agreed pursuant to a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell the gold and silver originating from the Summit property and, upon closing of the Columbus Silver transaction, the Mogollon property, to Waterton, see NOTE 13.

     Pursuant to a series of guarantees, security agreements, deeds of trust, a mortgage and a stock pledge agreement, the senior obligations are secured by a first priority lien on the stock of the Company’s subsidiaries and on liens covering substantially all of the Company’s assets, with the exception of the Ortiz gold project, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. Existing creditor, Sandstorm Gold (Barbados) Ltd., executed an intercreditor agreement that provides for subordination of its security interests in favor of Waterton.

13


     The Credit Agreement calls for a fee of 1.5% of the gross amount borrowed to each of Global Hunter Securities and Source Capital Group, Inc. who are registered broker dealers and members of FINRA and SIPC. The fees are to be paid half upon closing of the first tranche of $10,000,000 and half upon closing of the second tranche of $10,000,000. No fees are payable in connection with the revolving credit facility of $5,000,000. Fees aggregating $300,000 were paid in relation to the closing of the first tranche for the quarter ended December 31, 2011. The outstanding amounts owed for the Senior Secured Gold Stream Credit Agreement, including discounts, are aggregated with Notes Payable for financial statement presentation, see NOTE 10.

NOTE 10 – NOTES PAYABLE

     On June 5, 2008, the Company agreed to exercise the option to purchase the Planet MIO property, consisting of thirty-one patented mining claims totaling 523 acres in La Paz County, Arizona. The Company originally leased the property in 2000 from New Planet Copper Mining Company under the terms of a Lease with Option to Purchase. The Company agreed to exercise the purchase option in connection with settlement of an action the Company commenced in March 2007 seeking to confirm that the lease remained in good standing. The purchase price was $250,000. The Company signed a promissory note for $200,000 with interest payable at 10% per annum from the date of closing of the transaction. The original provisions of the note called for a $50,000 payment at the signing of the note, which occurred in August 2008, and four subsequent principal payments of $50,000 plus interest due each anniversary date of the agreement. In August 2009, the amortization schedule of the note was amended to reflect four equal annual payments of principal and interest of $63,094. The due date for the first annual payment was extended with the interest rate increased to 20% per annum during the extension period. The Company also agreed to pay an additional $2,000 in legal and miscellaneous fees to document the amendment. All other provisions of the original agreement remain unchanged including the provision for a 5% royalty to be paid on any future production from the property.

     On July 25, 2008, the Company entered into an installment sales contract for $94,613 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 6.75%, with the equipment securing the loan.

     On September 30, 2009, the Company entered into an installment sales contract for $16,825 to purchase certain equipment. The term of the agreement is for 36 months at an interest rate of 9.25%, with the equipment securing the loan.

     On September 27, 2010, the Company entered into an agreement to finance insurance premiums in the amount of $77,306 at an interest rate of 6.99% with equal payments due monthly beginning November 1, 2010 and continuing until September 1, 2011.

     On August 2, 2011, the Company entered into a financing agreement for a $5 million senior secured loan for working capital. The loan bears interest at 15% per annum payable in monthly installments in arrears. The loan becomes due in six months from the anniversary date of the loan and the loan may be repaid at any time without penalty. The senior obligations are secured by a first priority lien on the stock of the Company’s subsidiaries and first priority liens covering substantially all of the assets of the Company, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. In connection with the loan, the Company issued warrants to purchase 500,000 shares of its common stock. The warrants have an exercise price of $1.00 per share and a term of five years. The financing agreement was retired with proceeds from the December 23, 2011 Credit Agreement entered into by the Company, see NOTE 9.

     On September 30, 2011, the Company entered into an agreement to finance insurance premiums in the amount of $105,121 at an interest rate of 4.99% with equal payments due monthly beginning November 1, 2011 and continuing until September 1, 2012.

     The following summarizes notes payable, including the Senior Secured Gold Stream Credit Agreement, at December 31, 2011 and June 30, 2011:

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    December 31,        
     2011      June 30, 2011  
    (Unaudited)        
Note payable for mineral property,
                     interest at 10%, payable in 4 annual installments 
                     of $63,094, including interest through August 2012
 

$ 57,359
   

$ 109,502
 
             
Installment sales contract on equipment, 
                     interest at 6.75%, payable in 36 monthly installments 
                     of $2,911, including interest through September 2011
 

--
   

5,777
 
             
Installment sales contract on equipment, 
                     interest at 9.25%, payable in 36 monthly installments 
                     of $537, including interest through October 2012
 

4,686
   

7,635
 
             
Financing contract on insurance premiums 
                     interest at 6.99%, payable in 11 monthly installments 
                     of $7,276, including interest through September 2011
 

--
   

14,427
 
             
Financing contract on insurance premiums 
                     interest at 4.99%, payable in 11 monthly installments 
                     of $9,797, including interest through September 2012
 

76,925
   

--
 
             
Senior Secured Gold Stream Credit Agreement, interest at 9% per 
                     annum, payable monthly in arrears, principal payments 
                     deferred to July 2012; principal installments are $425,000 
                     for July and August 2012, $870,455 monthly for September 
                     2012 through June 2013 and $445,450 in July 2013, 
                     net of discount of $565,901
 




9,434,099
   




--
 
Total Outstanding Notes Payable   9,573,069     137,341  
Less: Current maturities   (4,030,024 )   (78,384 )
Obligations of notes payable due after one year $ 5,543,045   $  58,957  

     The aggregate maturities for notes payable, including the Senior Secured Gold Stream Credit Agreement, as of December 31, 2011, is as follows:

Fiscal year ending June 30,      
                                                                         2012 $  60,543  
                                                                         2013   9,632,977  
                                                                         2014   445,450  
                                                                         Less: unamortized discount   (565,901 )
             Total Outstanding Notes Payable $ 9,573,069  

NOTE 11 – CAPITAL LEASES

     The Company utilizes capital leases for the purchase of equipment. Lease terms and interest rates for the equipment are 60 months at 6.25%, 36 months at 5.34%, and 36 months at 5.78% . The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized or depreciated over the lower of their related lease terms or their estimated productive lives.

15


     Minimum future lease payments under capital leases, as of December 31, 2011, for each of the following years and in aggregate, are as follows:

Fiscal year ended June 30,      
               2012 $  21,520  
               2013   43,041  
               2014   3,587  
Total minimum lease payments   68,148  
       
Amount representing interest   (3,250 )
       
Present value of future minimum lease payments   64,898  
       
Current portion of capital lease obligations   (40,276 )
       
Obligations of capital leases due after one year $  24,622  

NOTE 12 – FAIR VALUE MEASUREMENTS

      U.S. accounting standards require disclosure of a fair-value hierarchy of inputs the Company uses to value an asset or a liability. In September 2006, the FASB issued new accounting guidance, which establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. The Company previously partially adopted this guidance for all instruments recorded at fair value on a recurring basis. In the second quarter of fiscal 2010, the Company adopted the remaining provisions of the guidance for all non-financial assets and liabilities that are not re-measured at fair value on a recurring basis. The adoption of these provisions did not have an impact on the Company’s consolidated financial statements.

      Fair value standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the standards establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of the fair-value hierarchy are described as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, Level 1 inputs include quoted prices on the Company’s securities that are actively traded.

Level 2: Inputs other than Level 1 which are observable, either directly or indirectly. For the Company, Level 2 inputs include assumptions such as estimated life; risk free rate and volatility estimates used in determining the fair values of the Company’s option and warrant securities issued derivative financial instruments.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flows methodologies and similar techniques that use significant unobservable inputs.

     The Company’s financial instruments consist of marketable securities and derivative instruments which are measured at fair value on a recurring basis. Marketable securities are comprised of 1,000,000 shares of common stock of Columbus Silver Corporation which is traded on the TSX Venture Exchange (TSXV: CSC). The stock was purchased in accordance with a Memorandum of Understanding entered into on September 24, 2010 for the purpose of consummating a business combination. The Company’s derivative instruments consist of certain embedded features contained within its debt instruments and certain warrant contracts. The Company's derivatives are measured on their respective origination dates, at the end of each reporting period and at other points in time when necessary, such as modifications, using Level 3 inputs in accordance with GAAP. The Company does not report any financial assets or liabilities that it measures using Level 2 inputs. The fair value measurement of financial instruments and other assets as of December 31, 2011 are as follows:

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                      December 31,  
    Level 1     Level 2     Level 3     2011  
Marketable securities $  176,241     ---     ---   $  176,241  
                         
Other Assets:                        
         Idle equipment, net   ---     ---   $  1,223,528     1,223,528  
                         
Value of derivative instruments liability   ---     ---     4,797,174     4,797,174  

     Idle equipment includes equipment associated with the mica project, for which the Company has ceased operations, and are classified as Level 3. The fair value of the idle equipment was determined based upon an independent third party appraisal. The appraised value was established based upon comparable sales of similar assets and certain assumptions regarding market demand for these assets. As this valuation was based upon unobservable inputs, we classified the idle equipment as Level 3. There was no change in the carrying valuation of the idle equipment during the six months ended December 31, 2011.

NOTE 13 – COMMITMENTS

     On September 11, 2009, the Company entered into a definitive gold sale agreement with Sandstorm Gold Ltd. (TSX-V: SSL) (“Sandstorm”) to sell a portion of the life-of-mine gold production (but not silver production) from our Summit silver-gold mine. Under the agreement we received an upfront cash deposit of $4.0 million, plus we will receive ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. The amount of payable gold can be reduced from 22% to 15% provided that within 36 months the Summit mine reaches certain performance levels in any consecutive 12 month period, in compliance with prefeasibility estimates, including 1) the rate of ore mined and processed must average 400 tons per day or more, and 2) payable gold production must exceed 11,500 ounces during such consecutive 12 month period. Sandstorm made an initial payment of $500,000 and on October 7, 2009 paid the remaining $3,500,000 balance of the upfront cash deposit. The Company will receive credit against the $4,000,000 upfront cash deposit for the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits will be recognized as revenue in addition to the ongoing production payments received for gold delivered pursuant to the agreement. In certain circumstances, including failure to meet minimum production rates, interruption in production due to permitting issues and customary events of default, the agreement may be terminated. In such event, the Company may be required to return to Sandstorm the upfront cash deposit of $4.0 million less a credit for gold delivered up to the date of that event, which is determined using the difference between the market price and $400 per ounce for gold deliveries where the prevailing market price exceeded $400 per ounce.

     On March 29, 2011, the Company entered into Amendment 1 for the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. In exchange for the amended completion guarantee date, the Company agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Under the terms of the amendment the delivery of the additional gold was to be made prior to June 30, 2011.

     On June 28, 2011, the Company entered into Amendment 2 for the definitive gold sale agreement. The amendment extended the delivery date for the additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011 until October 15, 2011. In exchange for the deferred delivery date the Company agreed to pay a per diem of 3 ounces of gold for each day the additional 700 ounces of gold under Amendment 1 remain outstanding past June 30, 2011 until the actual date of delivery, in no event later than October 15, 2011. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $773,850 for 700 ounces of gold based upon the closing gold price on June 30, 2011. On August 9, 2011 the Company satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The net cost of delivering the gold after receiving payment from Sandstorm of $400 per ounce delivered was $1,075,785. In order to recognize the final cost of delivering the gold, the accrued liability of $773,850 at June 30, 2011 was adjusted by an additional $301,935 and recognized during the quarter ended September 30, 2011 as a non-recurring component of costs applicable to sales.

     On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (“Waterton”). The Credit Agreement provides for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, the Company closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche, which is subject to several funding conditions, is earmarked to fund the strategic acquisition of Columbus Silver. As part of the transaction, the Company has agreed pursuant to a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell refined gold and silver to Waterton for the life of each mine subject to the agreement. Gold and silver subject to the agreement includes all gold and silver originating from the Summit property that is not otherwise committed to delivery to and purchased by Sandstorm Gold, Ltd, pursuant to the September 9, 2011 definitive gold sale agreement. Upon closing of the Columbus Silver transaction, gold and silver subject to the agreement will also include all gold and silver originating from the Mogollon property. The sales price for refined gold and silver is based upon a formulation which considers the London Bullion Market Association (“LBMA”) PM fix settlement price for each respective metal, less a discount of three percent for each metal, and a transaction cost of $1.75 per ounce for gold and $0.07 per ounce for silver. The discount on gold and silver is only applicable until and ceases after the later of either, three years after all outstanding amounts due under the Senior Secured Gold Stream Credit Agreement have been repaid, or the date on which the Company has sold 125,000 gold equivalent ounces under the Gold and Silver Supply Agreement.

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NOTE 14 – LEGAL MATTERS

     On August 31, 2011, the Company filed a Complaint in the United States District Court for the District of New Mexico against Ortiz Mines, Inc. (“OMI”) in connection with OMI’s purported termination of the Company’s exclusive leasehold rights to explore, develop and mine gold, silver, copper and other minerals on the Ortiz Mine Grant in Santa Fe County, New Mexico and OMI’s demand for significant additional consideration to allow the lease to continue. The Complaint alleges several causes of action, including breach of contract and breach of the covenant of good faith and fair dealing. The Complaint seeks both declaratory and injunctive relief. The Company believes OMI’s purported termination of the Lease was wrongful and intends to vigorously prosecute legal claims to enforce its rights under the Lease and recover all applicable damages. On September 2, 2011, in relation to the Complaint, the Company filed a Current Report on Form 8-K.

NOTE 15- STOCKHOLDERS’ (DEFICIT) EQUITY

Issuances of Common Stock

     On December 23, 2011, 13,500,000 shares of common stock were issued in connection with the conversion of $13.5 million principal amount of its Senior Secured Convertible Debentures, at a conversion price of $1.00 per share. The Company did not receive any cash proceeds in connection with the debt conversion.

     On July 1, 2011, 50,000 shares of common stock were issued to a consultant for services, valued at $48,000 based on the closing market price on the date of the transaction.

     On July 1, 2011, the Company issued 337,500 shares of previously recorded vested stock grants to employees of the Company.

Issuances of Options

     During the six months ended December 31, 2011, the Company issued no new options and 95,000 options were cancelled.

Issuances of Warrants

     During the six months ended December 31, 2011, the Company issued 750,000 five year warrants at an exercise price of $1.00 and 1,323,581 warrants expired.

     Stock option and warrant activity, both within the 1989 stock Option Plan and the 2007 Equity incentive Plan and outside of these plans, for the six months ended December 31, 2011, are as follows:

    Stock Options     Stock Warrants  
          Weighted           Weighted  
          Average           Average  
          Exercise           Exercise  
    Shares     Price     Shares     Price  
Outstanding at June 30, 2011   7,355,000   $ 0.48     15,942,862   $ 1.22  
   Granted   ---     ---     750,000   $ 1.00  
   Canceled   (95,000 ) $ 0.86     ---     ---  
   Expired   ---     ---     (1,323,581 ) $ 1.00  
   Exercised   ---     ---     ---     ---  
Outstanding at December 31, 2011   7,260,000   $ 0.48     15,369,281   $ 1.23  

     Stock options and warrants exercisable at December 31, 2011, are as follows:

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Outstanding and Exercisable Options     Outstanding and Exercisable Warrants
            Weighted                     Weighted      
            Average                     Average      
            Contractual   Weighted                 Contractual   Weighted  
Exercise           Remaining   Average     Exercise           Remaining   Average  
Price   Outstanding    Exercisable    Life   Exercise     Price   Outstanding   Exercisable   Life   Exercise  
Range   Number   Number   (in Years)   Price     Range   Number   Number   (in Years)   Price  
$0.11   4,000,000   4,000,000   1.77   $0.11     $1.00   9,659,622   9,659,622   2.53   $1.00  
$0.46   100,000   100,000   0.57   $0.46     $1.06   253,773   253,773   2.53   $1.06  
$0.55   175,000   175,000   1.00   $0.55     $1.25   214,858   214,858   0.95   $1.25  
$0.60   610,000   610,000   1.93   $0.60     $1.50   933,334   933,334   3.88   $1.50  
$0.86   820,000   820,000   3.44   $0.86     $1.625   461,539   461,539   3.00   $1.625  
$0.88   50,000   50,000   4.17   $0.88     $1.70   3,846,155   3,846,155   3.06   $1.70  
$1.01   785,000   785,000   4.38   $1.01                        
$1.165   20,000   20,000   2.38   $1.165                        
$1.21   150,000   150,000   4.00   $1.21                        
$1.30   125,000   125,000   1.33   $1.30                        
$1.30   150,000   150,000   1.86   $1.30                        
$1.38   150,000   150,000   3.00   $1.38                        
$1.70   125,000   125,000   1.33   $1.70                        
    7,260,000   7,260,000                 15,369,281   15,369,281          
                         
Outstanding Options   2.30   $0.48     Outstanding Warrants   2.73   $1.23  
Exercisable Options   2.30   $0.48     Exercisable Warrants   2.73   $1.23  

     As of December 31, 2011, the aggregate intrinsic value of all stock options and warrants vested and expected to vest was approximately $3,884,900 and the aggregate intrinsic value of currently exercisable stock options and warrants was approximately $3,884,900. The intrinsic value of each option share is the difference between the fair market value of the common stock and the exercise price of such option or warrant share to the extent it is "in-the-money". Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the quarter and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.97 closing stock price of the Common Stock on December 31, 2011. The total number of in-the-money options and warrants vested and exercisable as of December 31, 2011, was 5,755,000.

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     The total intrinsic value of options exercised during the six months ended December 31, 2011, was $-0-. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option or warrant holder to exercise the options.

     The total fair value of options and warrants granted during the six months ended December 31, 2011, was approximately $477,673. The total grant-date fair value of option and warrant shares vested during the six months ended December 31, 2011, was approximately $15,894.

NOTE 16 – SUBSEQUENT EVENTS

     The Company has evaluated events and transactions that occurred subsequent to December 31, 2011 for possible disclosure or recognition in the consolidated financial statements. A listing of these items is included below.

     On January 3, 2012, the Company granted 75,000 five-year options at an exercise price of $0.95 per share, the market price at the date of grant, to each of the two outside directors.

     On January 9, 2012, the Company granted 350,000 five-year options to employees at an exercise price of $0.94 per share, the market price at the date of grant.

     On January 12, 2012, the Company issued 700,000 shares of its common stock at $1.00 per share pursuant to Regulation S of the Securities Act of 1933. In connection with the issuance the Company also issued 350,000 five-year warrants at an exercise price of $1.00 per share.

     On January 26, 2012, the Company granted 250,000 three-year warrants to an outside consultant at an exercise price of $1.25 per share.

     On January 30, 2012, an employee exercised 10,000 options at $0.86 per share, and 10,000 options at $1.01 per share, both on a cashless basis. Under the cashless basis exercise, 3,598 shares were issued.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q may contain certain “forward-looking” statements as such term is defined in the private securities litigation reform act of 1995 and by the securities and exchange commission in its rules, regulations and releases, which represent the Company’s expectations or beliefs, including but not limited to, statements concerning the Company’s operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “will”, “expect”, “believe”, “anticipate”, “intent”, “could”, “estimate”, “might”, “Plan”, “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the operations of the company and its subsidiaries, volatility of stock price and any other factors discussed in this and other registrant filings with the securities and exchange commission. The company does not intend to undertake to update the information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate.

     The following discussion summarizes the results of our operations for the three and six month periods ended December 31, 2011, and compares those results to the three and six month periods ended December 31, 2010. It also analyzes our financial condition at December 31, 2011. This discussion should be read in conjunction with the Management’s Discussion and Analysis, including the audited financial statements for the years ended June 30, 2011, 2010 and 2009 and Notes to the financial statements, in our Form 10-K for our fiscal year ended June 30, 2011.

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Overview

     Santa Fe Gold Corporation (“the Company”, “our” or “we”) is a U.S. mining company, incorporated in August 1991 in the state of Delaware, with a general business strategy to acquire and develop mining properties amenable to low cost production. We currently are focused on: (1) continuing the ramp up of production at our Summit silver-gold property located in New Mexico during the first quarter of 2012, (2) conducting further studies on our Ortiz gold project located in New Mexico and (3) continuing to raise working capital for operating and administrative expenses.

     We commenced processing operations at the Banner Mill in March 2010. Commissioning of the mill proceeded satisfactorily and in July 2010, the mill facilities were placed into service and depreciation started to be recognized on the plant. The Company is in process of the final stages of ramping up full production from the Summit mine and increased throughput at the Banner Mill.

Basis of Presentation and Going Concern

     The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.

     The Company had a net loss of $1,811,474 for the six months ended December 31, 2011, has a working capital deficit of $8,821,131 which includes a non-cash financial derivative liability of $4,797,174 and deferred revenue of $3,159,612 and has a total accumulated deficit of $61,558,617 at December 31, 2011.

     The Company has increased revenue-generating operations during the current six months as we ramp up to commercial production at our Summit mine site and attain full throughput at our Banner Mill. To continue as a going concern, the Company is dependent on continued fund raising for project development and payment of general and administration expenses until production at the Summit mine site ramps up to full production and profitable operations are achieved. The Company, other than its current financing facilities, has no additional commitment from any party to provide additional working capital should it be required and there is no assurance that such funding will be available as needed, or if available, that its terms will be favorable or acceptable to the Company.

     The Company’s consolidated financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Derivative Financial Instruments

     In connection with the issuance of debt or equity instruments, we may issue options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances, may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

     The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are revalued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For warrants that are accounted for as a derivative instrument liability, we determined the fair value of these warrants using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the warrants. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our consolidated financial statements.

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RESULTS OF OPERATIONS

Operating Results for the Three Months Ended December 31, 2011 and 2010

     Sales

     We had revenues of $1,918,495 for the three months ended December 31, 2011, as compared to $473,440 for the three months ended December 31, 2010. The increase of $1,445,055 is due to increased production at the Summit mine and related shipments of precious metals concentrate, flux material and the sale of refined gold. Sales for the current quarter consisted of concentrate sales of $978,323, flux material of $940,172 and refined gold of $-0-.

     The definitive gold sale agreement entered into on September 11, 2009 stipulates that we deliver the contractual production quantity in refined gold. See the Liquidity and Capital Resources section within this Item 2 for additional information. The Summit Project is not currently configured or permitted to produce refined gold. To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of $400 per ounce plus the upfront advance, representing deferred revenue, which is to be credited by the difference between the market price and the fixed price of gold for the number of ounces delivered. There was no revenue related to the delivery of refined gold during the quarter.

     Operating Costs and Expenses

     Costs applicable to sales aggregate $1,032,488 for the three months ended December 31, 2011, as compared to $304,335 for the three months ended December 31, 2010. The increase of $728,153 is attributable to the costs associated with the shipments of concentrate and flux material for smelting feedstock totaling $641,802 and the accrual of costs for purchasing refined gold of $86,351 in order to satisfy the delivery requirements of the definitive gold sale agreement. The Summit project is in the process of completing the development of its initial targets of full production. Costs applicable to sales are higher than normally expected until full production is attained. We anticipate these costs will decrease in relation to sales once we achieve full production at the mine and corresponding full throughput at the mill site during the first calendar quarter of 2012.

     Exploration, mine and mill start up costs were $713,067 for the three months ended December 31, 2011, as compared to $682,378 for the three months ended December 31, 2010, an increase of $30,689. The increase is attributable to expanding production operations at the Summit mine site and a related increase in the throughput at the Banner Mill The increase in costs is primarily comprised of: $42,099 related royalties; mine and mill general operating costs of $83,675; repairs and maintenance aggregating $136,964; shop supplies aggregating $19,511 and property taxes of $24,323. These increases were offset by decreases in labor burden of $195,208; property and casualty insurance of $50,770; and exploration costs of $12,600. The decreases in labor burden and property and casualty insurance are a direct result of the ramp up of shipments and corresponding classification of these expenses to costs applicable to sales during the current quarter.

     General and administrative expenses increased to $920,470 for the three months ended December 31, 2011, from $726,456 for the comparative three month period ended December 31, 2010, an increase of $194,014. The increase is mainly attributable to legal fees of $74,885; financing costs of $271,155 and investor relations of $26,154. These increases were offset by decreased expenses in the following areas: costs associated with stock-based compensation of $162,715 and corporate filing fees of $22,442 which were related to Security and Exchange Commission filings. The increase in legal fees was mainly related to the on-going Columbus Silver acquisition, Ortiz litigation and bridge financing facility.

     Depreciation and amortization expense increased to $658,312 for the quarter ended December 31, 2011, as compared to $575,844 for the quarter ended December 31, 2010, an increase of $82,468. The increase is attributable primarily to additional equipment put into service during the ramp up to achieve commercial production and additional equipment purchased and placed into service.

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     Other Income and Expenses

     Other income and (expenses) for the three months ended December 31, 2011, were $(1,242,920) as compared to $(3,694,905) for the comparable three months ended December 31, 2010. The decrease in net other expenses of $2,451,985 is primarily attributable to the decrease loss recognized on derivative instruments liability of $3,107,553. The decrease was offset by increase in interest expense of $190,422 and accretion of discounts on notes payable of $472,046.

     The increase in interest expense was due primarily to interest on the five million dollar working capital bridge loan that was placed in August 2011 and retired in December 2011.

     Gain (Loss) on Derivative Financial Instruments

     We recognized a loss on derivative financial instruments of $89,636 for the three months ended December 31, 2011, as compared to a loss of $3,197,189 for the prior year’s comparable period, resulting in a decreased loss of $3,107,553. The non-cash decreased loss arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The derivative financial instruments arose in connection with senior secured convertible notes and the issuance of warrants attached to stock subscriptions and warrants issued under our registered direct offerings. Otherwise, we generally do not use derivative financial instruments for other purposes, such as hedging cash flow or fair-value risks. The decrease in the derivative loss for the three months ended December 31, 2011, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, the warrants previously issued under our registered direct offerings, changes in the market price of our common stock, which is a component of the calculation model, and the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

Operating Results for the Six Months Ended December 31, 2011 and 2010

     Sales

     We had revenues of $4,469,219 for the six months ended December 31, 2011, as compared to $1,250,262 for the six months ended December 31, 2010. The increase of $3,218,957 is due to increased production at the Summit mine and related shipments of precious metals concentrate, flux material and the sale of refined gold. Sales for the current six months consisted of concentrate sales of $1,872,343, flux material of $1,679,491 and refined gold of $917,385.

     The definitive gold sale agreement entered into on September 11, 2009 stipulates that we deliver the contractual production quantity in refined gold. See the Liquidity and Capital Resources section within this Item 2 for additional information. The Summit Project is not currently configured or permitted to produce refined gold. To fulfill the contractual terms per the definitive gold sale agreement, refined gold is purchased for delivery. The agreement calls for the sale of gold at the fixed price of $400 per ounce plus the upfront advance, representing deferred revenue, which is to be credited by the difference between the market price and the fixed price of gold for the number of ounces delivered. The revenue component of $917,385 for the delivery of refined gold is comprised of $465,731 representing sales of gold at the fixed price of $400 per ounce, and $451,654 representing the realization of deferred revenue related to the upfront cash advance.

     Operating Costs and Expenses

     Costs applicable to sales aggregate $2,652,978 for the six months ended December 31, 2011, as compared to $699,422 for the six months ended December 31, 2010. The increase of $1,953,556 is attributable to the costs associated with the shipments of concentrate and flux material for smelting feedstock totaling $773,795 and the cost of purchasing refined gold of $1,179,762 in order to satisfy the delivery requirements of the definitive gold sale agreement. Of this amount, approximately $301,935 is non-recurring and attributable to the completion guarantee extension as discussed in NOTE 13 to the unaudited consolidated financial statements. The Summit project is in process of completing the development of its initial targets of full production. Costs applicable to sales are higher than normally expected until full production is attained. We anticipate these costs will decrease in relation to sales once as we achieve full production at the mine and corresponding full throughput at the mill site during the first calendar quarter of 2012.

     Exploration, mine and mill start up costs were $1,242,021 for the six months ended December 31, 2011, as compared to $1,072,397 for the six months ended December 31, 2010, an increase of $169,624. The increase is attributable to expanding production operations at the Summit mine site and a related increase in the throughput at the Banner Mill. The increase in costs is primarily comprised of: $179,877 related royalties; general mine and mill general operating costs of $120,551; repairs and maintenance aggregating $215,138 and property taxes of $39,732. These increases were offset by decreases in labor burden of $276,550; property and casualty insurance of $69,510 and exploration costs of $27,791. The decreases in labor burden and property and casualty insurance are a direct result of the ramp up of shipments and corresponding classification of these expenses to costs applicable to sales during the current six month period.

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     General and administrative expenses increased to $1,692,160 for the six months ended December 31, 2011, from $1,491,540 for the comparative six month period ended December 31, 2010, an increase of $200,620. The increase is mainly attributable to legal fees of $147,597; financing costs of $356,155; consulting fees of $32,517; audit and accounting fees of $25,544 and increased costs of our subsidiaries of $15,986. These increases were offset by decreased expenses in the following areas: costs associated with stock-based compensation of $348,651 and corporate filing fees of $17,369 which were related to Security and Exchange Commission filings.

     Depreciation and amortization expense increased to $1,316,719 for the six months ended December 31, 2011, as compared to $1,148,001 for the six months ended December 31, 2010, an increase of $168,718. The increase is attributable primarily to additional equipment put into service during the ramp up to achieve commercial production and additional equipment purchased and placed into service.

Other Income and Expenses

     Other income and (expenses) for the six months ended December 31, 2011, were 629,312 as compared to $(6,301,086) for the comparable six month ended December 31, 2010. The increase in net other income of $6,930,398 is primarily attributable to the increase gain recognized on derivative instruments liability of $8,122,686. The increase was offset by increases in interest expense of $316,619; accretion of discounts on notes payable of $729,528 and a loss on disposal of assets of $152,587.

     The increase in interest expense was due primarily to interest on the five million dollar working capital bridge loan that was placed in August 2011 and retired in December 2011.

Gain (Loss) on Derivative Financial Instruments

     We recognized a gain on derivative financial instruments of $2,798,124 for the six months ended December 31, 2011, as compared to a (loss) of $(5,324,562) for the prior year’s comparable period, resulting in a increased gain of $8,122,686. The non-cash increased gain arises from adjustments to record the derivative financial instruments at fair values in accordance with current accounting standards. The derivative financial instruments arose in connection with senior secured convertible notes and the issuance of warrants attached to stock subscriptions and warrants issued under our registered direct offerings. Otherwise, we generally do not use derivative financial instruments for other purposes, such as hedging cash flow or fair-value risks. The increase in the derivative gain for the six months ended December 31, 2011, is attributable mainly to adjustments to record the change in fair value for the embedded conversion feature of derivative financial instruments, the warrants previously issued under our registered direct offerings, changes in the market price of our common stock, which is a component of the calculation model, and the issuance of additional warrants resulting in derivative treatment. We use the Black-Scholes option pricing model to estimate the fair value of this derivative. Because Black-Scholes uses our stock price, changes in the stock price will result in volatility in the earnings in future periods as we continue to reflect the derivative financial instruments at fair values.

Liquidity and Capital Resources

     To continue with the deployment of our business strategies, we will require significant additional working capital. We also will require additional working capital for employment of necessary corporate personnel, and related general and administrative expenses until we reach profitable operations.

     As of December 31, 2011, we have cash and cash equivalents of $3,480,057, accounts receivable for product sales of $1,769,830, a working capital deficit of $8,821,131, which includes a non-cash financial derivative liability of $4,797,174 and deferred revenue of $3,159,612, and an accumulated deficit of $61,558,017.

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     We are continuing to pursue a joint venture or sale of the Black Canyon mica project. Management has determined to deploy its resources in the area of precious metals based upon the current and projected market trends in this area.

     We continue to seek funding to advance our business plan and strategies. Historically, we have relied upon equity related financing to fund our deployment of our business plan. We will require additional funding to meet our corporate general and administrative commitments over and above our current financing facilities to continue feasibility studies on our mineral properties and to initiate exploration programs until we reach profitability. The Summit project is expected to achieve commercial production in the first quarter calendar year 2012. Currently our operations for our remaining fiscal year 2012 will be funded mainly from anticipated sales of precious metals, our current financing facilities, the sale of our equity securities, possibly through the exercise of certain options and warrants, and through additional financing facilities as required. We believe we will be able to finance our continuing future activities as required, although there are no assurances of success in this regard or in our ability to obtain continued financing through capital markets, joint ventures, or other acceptable arrangements. If our plans are not successful, future operations and liquidity may be adversely impacted. In the event that we are unable to obtain required capital, we may be forced to reduce our exploration and operating expenditures or to cease development operations altogether.

     On September 11, 2009, we entered into a definitive gold sale agreement with Sandstorm Gold Ltd. (TSX-V: SSL) (“Sandstorm”) to sell a portion of the life-of-mine gold production (but not silver production) from our Summit silver-gold mine. Under the agreement we received an upfront cash deposit of $4.0 million, plus we will receive ongoing production payments equal to the lesser of $400 per ounce or the prevailing market price, for each ounce of gold delivered pursuant to the agreement for the life of the mine. Gold production subject to the agreement includes 50% of the first 10,000 ounces of gold produced, and 22% of the gold thereafter. The amount of payable gold can be reduced from 22% to 15% provided that within 36 months the Summit mine reaches certain performance levels in any consecutive 12 month period, in compliance with prefeasibility estimates, including 1) the rate of ore mined and processed must average 400 tons per day or more, and 2) payable gold production must exceed 11,500 ounces during such consecutive 12 month period. We will receive credit against the $4,000,000 upfront cash deposit for the difference between the market price and $400 per ounce for those gold deliveries where the prevailing market price exceeds $400 per ounce. These credits will be recognized as revenue, in addition to the ongoing production payments received for gold delivered pursuant to the agreement. In certain circumstances, including failure to meet minimum production rates, interruption in production due to permitting issues and customary events of default, the agreement may be terminated. In such event, we may be required to return to Sandstorm the upfront cash deposit of $4.0 million less a credit for gold delivered up to the date of that event, which is determined using the difference between the market price and $400 per ounce for gold deliveries where the prevailing market price exceeded $400 per ounce.

     On January 20, 2010, the we entered into definitive security purchase agreements with 23 institutional investors (collectively, “Purchasers") to sell an aggregate of $10.0 million of units, each unit consisting of one Share and one-half of a Warrant to purchase a Share by way of a registered direct offering. Pursuant to the transaction, we sold to the Purchasers an aggregate of 7,692,310 Shares and Warrants to purchase up to 3,846,155 additional Shares. The Warrants are exercisable at an exercise price of $1.70 per share upon issuance and have a term of five years. In connection with the placement we issued 461,539 warrants to placement agents, exercisable at $1.625 per share and having a term of approximately 4.9 years. These placement agent warrants vested six months from the date of issuance. We received net proceeds from the offering of approximately $9,375,000, after deducting placement agent fees and other offering expenses.

     The securities were issued pursuant to the Company's effective S-3 Registration Statement under which the securities are registered. The units, including the Shares and Warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants were issued pursuant to a prospectus supplement dated as of January 20, 2010, which was filed with the Securities and Exchange Commission ("SEC") in connection with a takedown from the Company’s shelf registration statement on Form S-3, which became effective on December 29, 2009, and the base prospectus contained in such registration statement.

     On December 29, 2010, we entered into a definitive security purchase agreements with three institutional investors to sell an aggregate of $2 million of units, each unit consisting of one share and one-half warrant per share to purchase a share by way of the placement. Under the agreement, we sold 1,666,668 shares and warrants to purchase 833,334 additional shares of our common stock. The warrants will be exercisable at an exercise price of $1.50 per share immediately upon the issuance of the stock and will expire five years from the date they are first exercisable. In connection with the transaction, we paid the placement agent a fee of $136,000 and issued 100,000 warrants exercisable at $1.50 per share which have an exercise period of approximately 3.92 years. The warrants are exercisable immediately after issuance. We received $1,864,001 net cash proceeds from the placement, after deducting placement agent fees and other offering expenses.

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     The units, including the shares and warrants (including the Placement Agent warrants) and shares issuable upon exercise of the Warrants are issued pursuant to the prospectus supplement dated as of December 29, 2010, which was filed with the Securities and Exchange Commission (“SEC”) in connection with a takedown from the Company’s shelf registration statement on Form S-3 (File No. 333-163112), which became effective on December 29, 2009, and the base prospectus contained in such registration statement.

     On March 29, 2011, we amended the definitive gold sale agreement dated September 11, 2009. The amendment extended the original completion guarantee date from April 2011 to June 30, 2012. In exchange for the amended completion guarantee date, we agreed to deliver an additional 700 ounces of gold at equivalent sales terms over and above what is currently due under the agreement. Based upon the sale terms of the agreement, the Company recorded an accrued liability of $727,300 based upon the closing gold price on March 31, 2011. Under the terms of the amendment the delivery was to be made prior to June 30, 2011.

     On June 28, 2011, we entered into Amendment 2 for the definitive gold sale agreement. The amendment extended the delivery date for the additional 700 ounces of gold agreed upon in Amendment 1 from June 30, 2011 until October 15, 2011. In exchange for the deferred delivery date we agreed to pay a per diem of 3 ounces of gold for each day the additional 700 ounces of gold under Amendment 1 remain outstanding past June 30, 2011 until the actual date of delivery, but no later than October 15, 2011. Based upon the sale terms of the agreement, we recorded an accrued liability of $773,850 for 700 ounces of gold based upon the closing gold price on June 30, 2011. On August 9, 2011 the Company satisfied the requirements of Amendment 2 and delivered 817 ounces of gold. The net cost of delivering the gold after receiving payment from Sandstorm of $400 per ounce delivered was $1,075,785. In order to recognize the final cost of delivering the gold, the accrued liability of $773,850 at June 30, 2011 was adjusted by an additional $301,935 and recognized during the quarter ended September 30, 2011 as a non-recurring component of costs applicable to sales.

     On August 2, 2011, we entered into a financing agreement for $5 million senior secured bridge loan for working capital. The loan charged interest at 15% per annum payable in monthly installments in arrears. The loan covered a term of six months with the ability to be repaid at any time without penalty. The senior obligations were secured by a first priority lien on the stock of our subsidiaries and on liens covering substantially all of the assets of the Company, including the Summit silver-gold project, the Black Canyon mica project and the Planet micaceous iron oxide project. In connection with the loan, we issued warrants to purchase 500,000 shares of our common stock. The warrants have an exercise price of $1.00 per share and a term of five years. The financing agreement was retired in conjunction with proceeds from the Senior Secured Gold Stream Credit Agreement consummated on December 23, 2011.

     On December 23, 2011, the Company and its subsidiaries entered into a Senior Secured Gold Stream Credit Agreement (the “Credit Agreement”) with Waterton Global Value, L.P. (Waterton”). The Credit Agreement provides for two $10 million tranches and a $5 million revolving working capital facility. On December 23, 2011, we closed the first $10 million tranche of the Credit Agreement. The second $10 million tranche, which is subject to several funding conditions, is earmarked to fund the strategic acquisition of Columbus Silver.

     Proceeds from the initial $10 million tranche of the Credit Agreement were used to retire the Company’s $5 million, 15% Senior Secured Bridge loan with Victory Park Capital Advisors, LLC, in addition to the payment of transaction fees and expenses. We will use the remaining net proceeds for general corporate purposes, including but not limited to, working capital for the Summit silver-gold project.

      The Credit Agreement provides for a 9% coupon and amortizes over a 30-month term (assuming both tranches are drawn) with an initial 6-month grace period during which the Company is not required to make any payments. As part of the transaction, the Company agreed pursuant to a gold and silver sale agreement (the “Gold and Silver Supply Agreement”) to sell refined gold and silver to Waterton for the life of each mine subject to the agreement. Gold and silver subject to the agreement includes all gold and silver originating from the Summit property that is not otherwise committed to delivery to and purchased by Sandstorm Gold, Ltd, pursuant to the September 9, 2011 definitive gold sale agreement. Upon closing of the Columbus Silver transaction, gold and silver subject to the agreement will also include all gold and silver originating from the Mogollon property. The sales price for refined gold and silver is based upon a formulation which considers the London Bullion Market Association (“LBMA”) PM fix settlement price for each respective metal, less a discount of three percent for each metal, and a transaction cost of $1.75 per ounce of gold and $0.07 per ounce of silver. The discount on gold and silver is only applicable until and ceases after the later of either, three years after all outstanding amounts due under the Senior Secured Gold Stream Credit Agreement have been repaid, or the date on which the Company has sold 125,000 gold equivalent ounces under the Gold and Silver Supply Agreement.

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     On December 23, 2011, we issued 13,500,000 shares of our common stock in connection with the conversion of $13.5 million principal amount of its Senior Secured Convertible Debentures at a conversion price of $1.00 per share. We did not receive any cash proceeds in connection with the debt conversion.

Factors Affecting Future Operating Results

     We continue to deploy our plan to place the Company on an improved financial footing. In addition to the significant capital raisings in 2010 and the $5 million working capital facility in 2011, we placed the $25 million Credit Agreement in December 2011. The first tranche of Credit Agreement was used to retire the Company’s $5 million, 15% senior secured bridge loan and for working capital purposes. The second $10 million tranche, which is subject to several funding conditions, is earmarked to fund the strategic acquisition of Columbus Silver.

     We plan to procure capital with long term financing arrangements and/or equity placements as required. If we continue to secure required financing on acceptable terms, we believe we will be in a position to execute our business plan on our property sites.

     We originally entered into a non-binding Memorandum of Understanding (“MOU”) on September 24, 2010 with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”), pursuant to which we agreed to acquire all the outstanding shares of common stock of Columbus Silver in exchange for the Company’s common stock. In accordance with the Memorandum of Understanding, we purchased 1,000,000 shares of Columbus Silver common stock on October 28, 2010 in a private placement valued at $98,058. Proceeds of the issuance were used by Columbus Silver as bridge financing for operational expenses through December 31, 2010. Additionally on January 27, 2011, we advanced $200,000 to Columbus Silver in exchange for a promissory note bearing interest at 4% per annum. All accrued interest and principal is due and payable on December 31, 2012. The loan was extended for the purpose of providing Columbus Silver with working capital in connection with the MOU.

     On September 6, 2011, the we entered into a new Memorandum of Understanding with Columbus Silver Corporation (TSXV: CSC) (“Columbus Silver”) pursuant to which we conditionally agreed to acquire all of Columbus Silver’s outstanding common stock for a cash amount of Cdn $0.20 per outstanding share in a transaction valued at $10 million. Until closing of the transaction, we agreed to provide advances for bridge financing to Columbus Silver to fund leasehold payments and for working capital, which through the end of December 2011 totaled $513,716.

     On December 15, 2011, we entered into definitive agreements governing the proposed acquisition of Columbus Silver in a transaction valued at approximately $10 million. The definitive agreement contemplates a business combination by way of a Plan of Arrangement, which is subject to Canadian court approval. In addition, the proposed transactions are subject to the final approval of the boards of directors of the Company and Columbus Silver, stock exchange and regulatory approvals, and Columbus Silver shareholder approval. The Senior Secured Gold Stream Credit Agreement entered into on December 23, 2011 provides for a conditional $10 million facility earmarked for the acquisition of Columbus Silver and satisfies the financing requirement under the definitive agreement. Under certain circumstances listed in the definitive agreement in which the transaction is unable to consummate, the advances of $513,716 and note receivable of $207,511, including accrued interest, may not be refundable to the Company.

Off-Balance Sheet Arrangements

     During the three months ended December 31, 2011, we did not engage in any off-balance sheet arrangements defined in Item 303(a) (4) of the SEC’s Regulation S-K.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There has been no material change in the market risks discussed in Item 7A of Santa Fe Gold’s Form 10-K for the fiscal year ended June 30, 2011.

ITEM 4 – CONTROLS AND PROCEDURES

     We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(d) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that our disclosure controls and procedures are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports. Under the supervision of, and the participation of our management, our Chief Executive Officer and Principal Financial Officer, or persons performing similar functions, has conducted an evaluation of our disclosure controls and procedures as of December 31, 2011. This evaluation included certain areas in which we have made, and are continuing to make, changes to improve and enhance controls. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer has concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods required, and are effective in alerting management on a timely basis to material information required to be disclosed in our periodic reports.

     During the quarter ended December 31, 2011, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      On August 31, 2011, we filed a Complaint in the United States District Court for the District of New Mexico against Ortiz Mines, Inc. (“OMI”) in connection with OMI’s purported termination of our exclusive leasehold rights to explore, develop and mine gold, silver, copper and other minerals on the Ortiz Mine Grant in Santa Fe County, New Mexico and OMI’s demand for significant additional consideration to allow the lease to continue. The Complaint alleges several causes of action, including breach of contract and breach of the covenant of good faith and fair dealing. The Complaint seeks both declaratory and injunctive relief. We believe OMI’s purported termination of the Lease was wrongful and intend to vigorously prosecute legal claims to enforce our rights under the Lease and recover all applicable damages.

     Except for the Complaint filed against Ortiz Mines, Inc., we are not currently subject to any legal proceedings, and to the best of our knowledge, no such proceedings are threatened, the results of which would have a material impact on our properties, results of operation, or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.

ITEM 1A. RISK FACTORS

     Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described in our annual report on Form 10-K for our year fiscal ended June 30, 2011, in addition to the other information included in this quarterly report. If any of the risks described actually occurs, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall.

     As of December 31, 2011, there have not been any material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, although we may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

     On December 23, 2011, the Company issued 13,500,000 shares of its common stock in connection with the conversion of $13.5 million principal amount of its Senior Secured Convertible Debentures at a conversion price of $1.00 per share. The Company did not receive any cash proceeds in connection with the debt conversion

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

ITEM 5. OTHER INFORMATION Mine Safety Disclosures

     The Dodd-Frank Wall Street Reform and Consumer Protection Act (“The Act”) requires the operators of mines, including gold and silver mines, to include in each periodic report filed with the Securities and Exchange Commission certain specified disclosures regarding the company’s history of mine safety.

     In evaluating these disclosures, consideration should be given to factors such as: (i) the number of citations and orders may vary depending on the size of the mine, (ii) the number of citations issued will vary from inspector to inspector and mine to mine, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

     Specified disclosures relating to The Act and pertaining to the Summit Mine for the six months ended December 31, 2011 are as follows:

(i)

Total number of violations of mandatory health or safety standards that could “significantly and substantially” (“S&S”) contribute to a safety or health hazard under the Federal Mine Safety and Health Act of 1977 (the “Mine Safety Act”) for which the Company received a citation from the Mine Safety and Health Administration (“MSHA”): - Two; (These are violations that could "significantly and substantially" contribute to a safety or health hazard as issued.);

   
(ii)

Total number of orders and citations issued under Section 104(b) of the Mine Safety Act (a “failure to abate”): - None;

   
(iii)

Total number of citations and orders for unwarrantable failure to comply with mandatory health and safety standards under Section 104(b): - None;

   
(iv)

Total number of imminent danger orders under Section 107(a) of the Mine Safety Act issued to the Company: - None;

   
(v)

Total dollar value of proposed assessments from MSHA: - $1,033;

   
(vi)

Total number of mining related fatalities: - None;

   
(vii)

Mines for which the operator has received written notice of a pattern of violations or the potential to have such a pattern: - None;

   
(viii)

Pending legal action before the Mine Safety and Health Review Commission: - We have multiple citation protests pending before the Commission.

ITEM 6. EXHIBITS

  (a)

The following exhibits are filed as part of this report:


  31.1

Certification of Chief Executive Officer and Principal Accounting Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

     
  32.1

Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. – Section 1350.

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SIGNATURES:

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

  /s/ W. Pierce Carson
Dated: February 8, 2012 W. Pierce Carson,
  Chief Executive Officer, President, Director
  and Principal Accounting Officer

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