SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 2

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

For the fiscal year ended December 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-23042

MK RESOURCES COMPANY

(Exact name of registrant as specified in charter)

Delaware

82-0487047

(State or other jurisdiction of

incorporation or organization)

(I. R. S. employer

identification number)

60 East South Temple, Suite 1225

Salt Lake City, Utah 84111

(801) 297-6900

(Address of principal executive offices and telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

As of June 30, 2004, the aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant based upon the average bid and asked prices reported for such date on the OTC Bulletin Board was approximately $26,253,081.

The number of shares of the registrant’s common stock outstanding as of March 21, 2005 was 37,733,359.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A amends and restates all of Items 6, 7, 8, 9A and 15 of the Annual Report on Form 10-K, as amended, of MK Resources Company (“we,” “us,” “our,” the “Company” or “MK Resources”) for the fiscal year ended December 31, 2004. This Amendment No. 2 does not amend any other item of our Annual Report on Form 10-K for the year ended December 31, 2004.

We are filing this Amendment No. 2 to amend and restate our consolidated audited financial statements for the year ended December 31, 2004 and other information contained herein with respect to the accounting for the amortization of the debt discount on our convertible credit facility with Leucadia National Corporation (“Leucadia”). In the fourth quarter of 2004, we amended our convertible credit facility with Leucadia to, among other things, increase the amount available for borrowing, increase the interest rate and include a conversion feature. Because the conversion price was below the trading price for our common stock on the date the credit facility was amended, there was an initial beneficial conversion feature of approximately $30.9 million. As a result of additional borrowings under the convertible credit facility during the fourth quarter, an aggregate of approximately $37.3 million was recorded in the fourth quarter of 2004 as a debt discount. During the fourth quarter of 2004, the amortized debt discount on the convertible credit facility was incorrectly recorded as an expense. Upon further analysis, we have determined that the amortized debt discount should have been treated as interest cost subject to capitalization under Statement of Financial Accounting Standards, or SFAS, No. 34 because the related debt was used to finance development activities associated with our Las Cruces copper mining project in Spain. This accounting treatment is consistent with the treatment of interest paid to Leucadia under the convertible credit facility.

The effect of the adjustment is to reduce our net loss by approximately $6.0 million or $0.16 per share; increase our total assets by approximately $6.0 million, which is reflected as an increase to mining properties, plant and mine development, net; and increase stockholders’ equity by $6.0 million, which is reflected as a decrease to the accumulated deficit. After giving effect to this restatement, our net loss for the year ended December 31, 2004 was $5.8 million, or $0.15 per share, and as of December 31, 2004, we had mining properties, plant and mine development, net of $110.5 million, total assets of $123.8 million, accumulated deficit of $58.6 million and total stockholders’ equity of $80.2 million.

Although our long-term debt presented on our December 31, 2004 balance sheet has decreased significantly through the recording of the debt discount, that decrease is temporary as it will increase as the discount is amortized over the remaining term of our convertible credit facility. Consistent with the restatement, the amortized debt discount will be subject to capitalization under SFAS No. 34 and, if capitalized, will be reflected as an increase in assets during periods that mining properties are being developed rather than as an expense. However, there is no effect on the aggregate amount of outstanding indebtedness we are obligated to repay under the convertible credit facility.

Upon discovery of the incorrect application of SFAS No. 34, management reported its findings to PricewaterhouseCoopers LLP, our independent registered public accounting firm, and to the audit committee of the board of directors. After discussions with the audit committee and PricewaterhouseCoopers LLP, management recommended to the audit committee that our previously reported 2004 financial statements should be restated to correct this error. On May 12, 2005, the audit committee agreed with this recommendation and, in light of the restatement, determined that the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004 should no longer be relied upon.

We have also determined that the failure to correctly apply SFAS No. 34 to the amortized debt discount associated with the amendment to our convertible credit facility constituted a material weakness in our internal control over financial reporting. Solely as a result of this material weakness, we have concluded that our disclosure controls and procedures were not effective as of December 31, 2004. As of the date of this filing, we believe we have remediated the material weakness in our internal control over financial reporting with respect to accounting for capitalization of interest costs. See “Item 9A - Controls and Procedures.”

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We have also determined that a control deficiency related to the failure to correctly apply SFAS No. 34 “Capitalization of Interest Cost” to the amortization of debt discount with respect to the Leucadia convertible credit facility giving rise to the restatement constituted a material weakness in our internal control over financial reporting. The material weakness related to accounting for the debt discount with respect to the beneficial conversion feature of the Leucadia convertible credit facility that was created in October 2004 with the amendment of that credit facility to make the pre-existing credit facility convertible into shares of the our common stock at a rate that was below market at the date of the amendment. We have fully remediated that weakness as of the date of this report. See “Item 9A - Controls and Procedures.”

We have also amended certain disclosures regarding our registration statement filed with the U.S. Securities and Exchange Commission and regulatory authorities in Canada for a proposed public offering of up to 70,150,000 shares of our common stock. On May 9, 2005, we filed an application for withdrawal with the U.S. Securities and Exchange Commission to withdraw the registration statement.

This report contains forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement for Forward-Looking Information” and elsewhere in this report. Unless the context otherwise requires, “MK Resources,” “the Company,” “we,” “our” and “us” refer to MK Resources Company.

Various amounts in this report are quoted in euros and translated into U.S. dollars. All U.S. dollar/euro conversion amounts, except for amounts included in our consolidated financial statements and related disclosures, which are translated in accordance with generally accepted accounting principles, were converted using the currency exchange rate in effect on March 21, 2005, which was approximately 0.7593 euro per U.S. dollar.

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PART II

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data have been summarized from our consolidated financial statements and are qualified in their entirety by reference to, and should be read together with, our consolidated financial statements and notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below.

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MK RESOURCES COMPANY

SELECTED FIVE-YEAR FINANCIAL DATA

(in thousands, except share and ounce amounts, per share and per ounce data)


	Year Ended December 31
	2004			2003			2002			2001			2000
	(Restated)(a)
OPERATING DATA
Revenue:
Product sales (b)	$	993		$	1,441		$	4,841		$	6,002		$	11,314
Mining services (b)		—			—			—			1,297			6,088

Total revenue		993			1,441			4,841			7,299			17,402
Gross profit (loss):
Product sales		639			858			2,612			550			4,107
Mining services		—			—			—			(154	)		434
Project development		(304	)		(565	)		(279	)		(665	)		(465	)

Total gross profit (loss)		335			293			2,333			(269	)		4,076
Exploration costs		(398	)		(523	)		(674	)		(717	)		(1,018	)
General and administrative expenses		(3,161	)		(2,492	)		(1,662	)		(2,413	)		(1,975	)
Gain (loss) on disposal of assets		59			106			(224	)		202			13

INCOME (LOSS) FROM OPERATIONS		(3,165	)		(2,616	)		(227	)		(3,197	)		1,096

NET INCOME (LOSS)	$	(5,772	)	$	201		$	(153	)	$	(3,179	)	$	1,017

BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE	$	(0.15	)	$	0.01		$	(0.00	)	$	(0.09	)	$	0.03
BALANCE SHEET DATA (At end of period)
Total assets	$	123,795		$	90,158		$	70,355		$	60,441		$	60,323
Line of credit (c)		35,131			41,500			31,900			29,000			23,300
Stockholders’ equity (c)		80,181			41,021			31,424			24,851			29,668
Book value per common share		2.12			1.09			0.84			0.66			0.79
OTHER FINANCIAL DATA:
Depreciation, depletion and amortization:
Product Sales		3			5			—			653			485
Mining services		—			—			—			6			28
Capital expenditures		16,264			7,516			3,505			4,777			10,632
OTHER DATA
Gold ounces sold		2,435			3,900			15,510			19,900			32,100
Gold ounces produced		2,122			3,538			14,029			19,167			29,419
Gold ounces in inventory, at end of year		18			331			693			2,174			2,907
Average gold price realized (per ounce)	$	406		$	363		$	309		$	277		$	314
Average spot gold price (per ounce) (d)		410			363			310			271			279

(a)

As a result of the restatement discussed in Notes 1 and 18 to the consolidated financial statements, we have capitalized approximately $6.0 million of interest resulting from amortization of debt discount. This adjustment reduced the net loss for the year ended December 31, 2004 by approximately $6.0 million or $0.16 per share.

(b)

Product sales revenue for the five years ended December 31, 2004 resulted from our gold production at the Castle Mountain mine in which we hold a 25% undivided interest. We also performed contract mining services at the mine until May of 2001, at which time reserves were exhausted and the mine was closed. Revenue since May 2001 has resulted from declining residual gold production which ceased in December 2004 when rinsing of the leach pads was completed.

(c)

In connection with an amendment of our credit facility with Leucadia and the creation of a right to convert the outstanding balance under the credit facility at a conversion price of $1.75 per share (which was below the $2.75 per share trading price for our common stock on the date the credit facility was amended) we recorded an initial beneficial conversion feature of approximately $30.9 million. As additional borrowings under the credit facility occur, additional beneficial conversion features may be recognized depending upon the relationship between the conversion price per share and the trading price per share at the time of the borrowing. In total, approximately $37.3 million was recorded in the fourth quarter of 2004 as a debt discount with a corresponding increase in capital in excess of par value. Although this resulted in a significant decrease to our long-term liabilities, those changes are temporary and will reverse over the remaining term of the credit facility as the debt discount is amortized. We expect that the amortization of the debt discount will be capitalized as an increase to mining properties during periods that mining properties are being developed. For further information, see Note 10 to our consolidated financial statements.

(d)	London PM Fix.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement

As discussed in Notes 1 and 18 to the consolidated financial statements, we have restated the consolidated financial statements for the year ended December 31, 2004. The restatement decreased the net loss for the year ended December 31, 2004 by approximately $6.0 million or $0.16 per share. This restatement was necessary to capitalize, pursuant to SFAS No. 34, $6.0 million of interest resulting from amortization of debt discount. The debt discount resulted from the October 13, 2004 amendment to the convertible credit facility with Leucadia. All amounts in the following discussion have been adjusted for this restatement as appropriate.

General

You should read the following discussion and analysis together with our selected consolidated financial data, our consolidated financial statements and the notes to our consolidated financial statements, which appear elsewhere in this report. We report undivided interests in joint ventures using pro rata consolidation, whereby we consolidate our proportionate share of assets, liabilities, revenues and expenses.

This section contains forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under “Cautionary Statement for Forward-Looking Information” below and elsewhere in this report.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of these financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates about the effect of matters that are uncertain, and to make difficult, subjective and complex judgments. These estimates and assumptions affect the reported amounts in the financial statements and disclosure of contingent assets and liabilities. On an on-going basis, we evaluate all of these estimates and judgments. Actual results could differ from these estimates. We believe that the following accounting estimates are the most critical because they have the greatest impact on our financial condition and results of operations and require our management’s most difficult, subjective and complex judgments.

Proven and Probable Ore Reserves

Reserves are defined as those parts of a mineral deposit that can be economically and legally extracted or produced at the time of determination. Reserves are customarily stated in terms of “ore” when dealing with metals. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart. The degree of assurance for probable reserves, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

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Reserves for the Las Cruces project are reported in the technical report prepared for us by Pincock Allen Holt. The estimates were determined through the use of mapping, drilling, metallurgical testing and other standard evaluation methods applied by the mining industry, including computer block modeling. The estimates are based on an assumed copper price of $0.76 per pound, a cut-off grade of 1.00% copper and projected average cash operating costs of 0.33 euro, or approximately $0.43, per pound. Based on historical fluctuations in copper prices, we believe $0.76 per pound is a reasonable estimate for purposes of determining reserves at the Las Cruces project. Further, an 8% decrease in the assumed copper price, to $0.70 per pound, would not have a material effect on the reserves. On December 31, 2004, the spot price for copper was approximately $1.48 per pound.

Our reserve estimates could change as a result of changes in estimates relating to production costs or copper prices. Because the Las Cruces project has not commenced production, it is highly likely that the ore reserves for Las Cruces will require revision based on actual production experience. In addition, during the course of developing the Las Cruces project, we may revise the ore reserves based on information we obtain from additional drilling or other testing.

Declines in the market price for copper, as well as increased production or capital costs or reduced recovery rates, may render ore reserves at the Las Cruces project uneconomic. If copper prices decline substantially below $0.76 per pound, the level set for calculation of reserves, for an extended period, there could be material delays in developing the Las Cruces project. Reserves should not be interpreted as assurances of mine life or of the profitability of future operations. No assurance can be given that the estimates of the amount of copper or the indicated level of recovery of copper will be realized at the Las Cruces project.

Asset Retirement Obligation

We estimate future asset retirement obligation costs on the basis of legal and regulatory requirements. Statement of Financial Accounting Standards, or SFAS, No. 143, “Accounting for Asset Retirement Obligations,” requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. SFAS No. 143 requires us to record a liability for the present value of estimated asset retirement costs and the related asset created with it. The related asset is then amortized over the life of the asset on a units-of-production basis and an accretion expense relating to the liability is recognized using our credit-adjusted, risk-free interest rate. At various times we review the adequacy of our asset retirement obligations based on our current estimates of future costs and set aside adequate cash reserves to fund those costs. In the event that actual costs differ from those estimates, our results of operations, liquidity and financial condition will be affected.

During May 2001, mining operations ceased and closure and reclamation activities began at the Castle Mountain mine. The Castle Mountain Venture has set aside a cash reserve to fund the projected closure and reclamation costs. Our share of the funded cash reserve was $1.4 million at December 31, 2004. At December 31, 2004, the asset retirement obligation for our share of these projected closure and reclamation costs was $0.8 million. We reviewed the Castle Mountain Venture’s asset retirement cost estimate and believe it reflects the future costs of closure. We have not recorded asset retirement obligations relating to the Las Cruces project as there has been no disturbance that would require reclamation or remediation.

Impairment of Long-Lived Assets

We evaluate our long-lived assets for impairment when, in our judgment, events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on our estimate of undiscounted future net cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than the fair value.

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As of December 31, 2004, the carrying value of our investment in the mineral rights and mining properties of the Las Cruces project was approximately $110 million. The recoverability of these assets is entirely dependent upon our success in obtaining required permits, obtaining financing for the project, and managing engineering and construction costs. The amount of financing that can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders and equity investors of the current and expected future market price of copper and the current market for investments in businesses similar to ours. In addition, the actual price of copper, the operating cost of the mine and the capital cost (in U.S. dollars) to build the project and bring the mine into production will affect the recoverability of these assets. Based on the current status of the project and our estimate of future financing costs and future cash flows, we believe the carrying amount of this investment is recoverable. However, if we are unable to obtain the final permits and financing required to begin construction of the mine and commence mining activities, we are unable to recover the investment through a sale of the project, or the capital cost of the project changes significantly, it is likely that this investment will be impaired.

Debt Discount

Effective October 13, 2004, our credit facility with Leucadia was amended to, among other things, include a conversion feature that (1) provides for the automatic conversion of all outstanding loans under the credit facility into shares of our common stock at the public offering price in the event our then proposed public offering of common stock were consummated and (2) permits Leucadia, assuming the proposed public offering is withdrawn, to convert from time to time all or a portion of the outstanding loans under the credit facility into shares of common stock at a conversion price of $1.75 per share. Because the $1.75 per share conversion price was below the $2.75 per share trading price for our common stock on the date the credit facility was amended, there was an initial beneficial conversion feature of approximately $30.9 million. As additional borrowings under the credit facility occur, additional beneficial conversion features may be recognized depending upon the relationship between the conversion price per share and the trading price per share at the time of the borrowing.

The beneficial conversion feature is recognized in the financial statements by recording a debt discount (which has the effect of reducing long-term liabilities on our consolidated balance sheet) and a corresponding increase in capital in excess of par value (which has the effect of increasing stockholders’ equity on our consolidated balance sheet). The debt discount is being amortized over the remaining term of the debt and will be capitalized to mining properties during periods that mining properties are being developed. As a result of additional borrowings under the credit facility during the fourth quarter, an aggregate of approximately $37.3 million of debt discount was recorded in the fourth quarter of 2004, of which approximately $6.0 million was amortized and capitalized to mining properties during 2004. If the debt is converted to equity, any remaining unamortized debt discount will be reversed with a corresponding decrease in capital in excess of par value.

We calculate the debt discount based upon the difference between the conversion price and the trading price on the date the credit facility was amended and additional amounts are borrowed. The initial debt discount recorded is based on the borrowings outstanding on the date of the amendment. Although this resulted in a significant increase to our stockholders’ equity and decrease to our long-term liabilities, the changes to long-term liabilities are temporary and will reverse over the remaining term of the credit facility as the debt discount is amortized.

In March 2005, Leucadia’s optional conversion price was reduced from $1.75 per share to $1.30 per share pursuant to another amendment to the credit facility. This reduction also resulted in a beneficial conversion feature. Accordingly, during the first quarter of 2005, the unamortized debt discount will be adjusted to reflect the beneficial conversion feature associated with the $1.30 per share conversion price.

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Foreign Currency Translation

Since our consolidated financial statements are stated in U.S. dollars, and we have operations in foreign countries, we are required to account for the exchange rate differences between the U.S. dollar and foreign currencies in our financial statements. SFAS No. 52, “Foreign Currency Translation,” which sets forth the procedures for reporting foreign currency transactions and translating foreign currency financial statements, requires us to determine the primary currency in which a foreign subsidiary conducts its business which is referred to as its functional currency. If the functional currency of a foreign subsidiary is determined to be a foreign currency, then we are required to record translation adjustments when translating the financial statements of a foreign subsidiary into U.S. dollars, which are recorded as a separate component of accumulated other comprehensive income and are excluded from net income. If the functional currency of a foreign subsidiary is determined to be the U.S. dollar, then foreign currency translation gains or losses related to monetary assets and liabilities are included in determining net income for the period.

Our most significant foreign subsidiary is Cobre Las Cruces, which is developing the Las Cruces project in Spain, and we have determined that Cobre Las Cruces’ functional currency is the euro. In reaching that conclusion, we considered the guidance outlined in SFAS No. 52 as well as relevant economic factors. Particular emphasis was given to the following:

•

the expenses and capital expenditures of Cobre Las Cruces are primarily in euros;

•

the financing provided by us to Cobre Las Cruces is (a) denominated in euros, and (b) is for the purpose of expanding its operations through the development of the Las Cruces project. It is expected that Cobre Las Cruces will ultimately be able to service the financing provided by the Company;

•

it is our intent to obtain additional euro-denominated debt financing for Cobre Las Cruces and have Cobre Las Cruces be the primary obligor on such financing;

•

there are no significant intercompany transactions between us and Cobre Las Cruces other than the financing we provide to it; and

•

Cobre Las Cruces has a full-time managing director and other full-time personnel who independently manage the daily operations of Cobre Las Cruces.

As a result, we have recorded cumulative translation gains in accumulated other comprehensive income of $16.1 million as of December 31, 2004, substantially all of which relates to Cobre Las Cruces. Should relevant economic factors or other indicators substantially change in the future, we will reassess our selection of the euro as the functional currency for Cobre Las Cruces. A change in the functional currency for Cobre Las Cruces could have a significant impact on our results of operations.

Deferred Tax Asset and Tax Valuation Allowance

We have recorded a valuation allowance to fully reserve for our deferred tax assets (net of certain deferred tax liabilities which can be offset by our net operating loss carryforwards). We have recorded the valuation allowance because we determined it is likely that we will not be able to utilize the deferred tax asset in the future. If we determine that we will be able to use all or a portion of our deferred tax asset in the future, we will record an adjustment to reduce the valuation allowance, thereby increasing income in that period. If and when we make this determination, it will be based upon our projections of taxable

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income in the future, which are based on numerous judgments and assumptions and are inherently uncertain. Prior to that time, we do not expect to reflect any federal income tax benefit in our consolidated statements of operations for reported losses, and we will not record any federal income tax expense on income that can be offset by our net operating loss carryforwards.

Results of Operations for the Twelve Months Ended December 31, 2004 Compared to the Twelve Months Ended December 31, 2003

Gold Production. Our attributable share of gold production from the Castle Mountain Venture decreased 40% to 2,122 ounces in 2004 from 3,538 ounces in 2003. Residual gold production ceased during the fourth quarter of 2004.

Revenue. Our revenues come from the sale of gold from the Castle Mountain mine. Gold production during 2004 was limited to residual production during reclamation and closure at the mine. Residual gold production ceased during the fourth quarter of 2004. Therefore, based on our current operations, we will have no revenues until production begins at the Las Cruces project.

Our product sales revenue decreased $0.44 million, or 31%, to $1.0 million for 2004, compared to $1.4 million for 2003. The decrease in revenue is due to declining gold production, partially offset by higher realized gold prices.

During 2004, we sold 2,435 ounces of gold compared to 3,900 ounces of gold for 2003. All gold sales for 2004 and 2003 were at spot prices. We had no gold sales under forward sales contracts as of December 31, 2004 or December 31, 2003. For 2004, the average price realized per ounce of gold was $406, compared to $363 per ounce for 2003. The average spot price for 2004 was $410 per ounce, compared to $363 per ounce for 2003.

Gross Profit. We recognized gross profit from product sales of $0.6 million for 2004, compared to $0.9 million for 2003. The decrease in gross profit is primarily due to declining gold production, partially offset by higher realized gold prices. Based on our current operations, we will have no revenue or gross profit until production begins at the Las Cruces project.

Project Development Costs. Project development costs for 2004 and 2003 represent certain costs related to the Las Cruces project that have not been capitalized, such as public relations and severance costs.

Exploration Costs. Our exploration costs decreased 24% to $0.40 million compared to $0.52 million in 2003. Our exploration costs decreased in 2004 because we acquired interests in fewer properties and we focused our mapping and sampling activities on fewer properties. In addition to our exploration programs in Nevada and Spain, we conducted 26 field examinations during 2004, compared to 57 in 2003.

General and Administrative Expenses. Our general and administrative expenses for 2004 increased $0.7 million, or 27%, to $3.2 million, compared to $2.5 million in 2003. The increase in expenses is due primarily to project financing costs and executive bonus costs.

Gain (Loss) on Disposal of Assets. We recognized a gain on disposal of assets of $0.06 million in 2004 compared to $0.11 million in 2003 from sales of mining equipment and assets as part of closure activities at the Castle Mountain mine.

Unconsolidated Affiliate. In July 2000, we became a limited partner in Peru Exploration Venture LLLP. The principal objective of the partnership was to acquire precious and base metal properties in Peru. We have accounted for this investment using the equity method of accounting. Our commitment to the partnership was $1.0 million over a two-year period, which was fully funded as of December 31, 2001.

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On April 21, 2003, we exchanged all of our limited partnership units of Peru Exploration Venture LLLP for a total of 4,821,905 common shares, or approximately 17.8% of total common shares at December 31, 2004, of Bear Creek Mining Corporation, a publicly traded Canadian mineral exploration company (TSX Venture Exchange: BCM). The exchange was made in connection with the acquisition by Bear Creek, formerly EVEolution Ventures, Inc., of all outstanding limited partnership interests of Peru Exploration and all outstanding shares of Peru Exploration’s general partner. In addition, we have non-transferable preemptive rights, until April 25, 2005, to participate in any offering of common stock undertaken by Bear Creek on a pro rata basis in order to allow us to maintain our percentage interest in the common shares of Bear Creek.

We recorded, in the second quarter of 2003, a non-cash gain of $1.9 million, net of related expenses, based on the estimated value of the common shares received. This gain does not necessarily reflect the value we may ultimately realize from this investment. Our ability to realize the recorded value of our shares of Bear Creek is subject to various risks, including Bear Creek’s performance in the future, volatility in the market price for the shares and the existence of sufficient market liquidity to absorb our position, all of which are beyond our control. As a result, the amount we will realize from this investment is uncertain.

Offering Costs. In June 2004, we filed a registration statement with the Securities and Exchange Commission and a Canadian preliminary prospectus with securities regulatory authorities in Canada for the proposed public offering of up to 70,150,000 shares of our common stock to finance a portion of the development costs of the Las Cruces project. In anticipation of the proposed public offering, we increased our authorized common stock to 125,000,000 shares. Due to unfavorable market conditions, our efforts to complete the offering were unsuccessful. The Canadian preliminary prospectus expired during the fourth quarter of 2004, and we filed an application to withdraw the registration statement with the U.S. Securities and Exchange Commission on May 9, 2005. We charged $3.6 million of deferred offering and other financing related costs to expense in the fourth quarter of 2004. The amount charged during the fourth quarter does not include certain advisory fees we may be obligated to pay under agreements with our financial advisors if we complete a sale of the project, merger or other transaction.

Litigation Settlement. During 2003, we recognized a gain on litigation settlement of $0.04 million, after deducting related legal expenses, relating to a property dispute in Montana.

Bankruptcy Recovery. As part of a court approved bankruptcy plan of Washington Group International, Inc. (“Washington Group”), we received, as an unsecured creditor, various distributions of common stock and warrants to purchase additional common shares of Washington Group. For the year ended December 31, 2004, we received distributions of common shares and warrants to purchase additional common shares of Washington Group, with a combined market value of $1.0 million, and sold them immediately upon receipt. For the year ended December 31, 2003, we received distributions of common shares and warrants to purchase additional common shares of Washington Group, with a combined market value of $0.4 million, and sold them in 2003. We have recorded these amounts as income in the periods in which they were received.

Gain on Sale of Securities. During the fourth quarter of 2003, we sold all of our shares of common stock and warrants of Washington Group we held at the time on the open market for approximately $1.2 million. The amount realized in excess of the amortized cost of those securities of $0.5 million was reported as income in 2003.

Interest Expense. Interest expense for 2004 and 2003 consisted primarily of the cost of the commitment fee on our Credit Facility with Leucadia, which is based on the amount available under the facility. For 2004 and 2003, we capitalized $8.6 million (including amortized debt discount in 2004) and $1.5 million, respectively, in interest relating to the Las Cruces project.

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Effective October 13, 2004, our credit facility with Leucadia was amended to, among other things, increase the amount available for borrowing from $55 million to $75 million, increase the interest rate from the prime rate to the prime rate plus 3.0% and include the conversion feature described above. See “Critical Accounting Policies and Estimates – Debt Discount” above. On the date the credit facility was amended, there was an initial beneficial conversion feature of approximately $30.9 million. As a result of additional borrowings under the credit facility during the fourth quarter, an aggregate of approximately $37.3 million was recorded in the fourth quarter of 2004 as a debt discount with a corresponding increase in capital in excess of par value. The debt discount is being amortized over the remaining term of the debt and will be capitalized to mining properties during periods that mining properties are being developed. During the fourth quarter of 2004, approximately $6.0 million of debt discount was amortized and capitalized to mining properties. If the debt is converted to equity, any unamortized debt discount will be reversed with a corresponding decrease in capital in excess of par value. In March 2005, in connection with an amendment to the credit facility and a $35 million loan to our wholly-owned subsidiary, Cobre Las Cruces, S.A., Leucadia’s optional conversion price was reduced from $1.75 per share to $1.30 per share. This reduction also resulted in a beneficial conversion feature. Accordingly, during the first quarter of 2005, the unamortized debt discount will be adjusted to reflect the beneficial conversion feature associated with the $1.30 per share conversion price. See “Liquidity and Capital Resources” below.

Income Taxes. The benefit for income taxes for 2004 primarily represents state taxes. We recorded no federal tax benefit for our loss in 2004 since we determined that it was unlikely we would be able to realize that tax benefit in the future. The provision for income taxes for 2003 primarily represents state taxes. We recorded no federal income tax provision for 2003 because any tax that otherwise would have been due was fully offset by our net operating loss carryforwards.

Results of Operations for the Twelve Months Ended December 31, 2003 Compared to the Twelve Months Ended December 31, 2002

Gold Production. Our attributable share of gold production from the Castle Mountain Venture decreased 75% to 3,538 ounces in 2003 from 14,029 ounces in 2002. Residual gold production ceased during the fourth quarter of 2004.

Revenue. Our revenues during 2003 and 2002 came from the sale of gold from the Castle Mountain mine. Our product sales revenue decreased $3.4 million, or 70%, to $1.4 million for 2003, compared to $4.8 million for 2002. The decrease in revenue was due to declining gold production, partially offset by higher realized gold prices.

During 2003, we sold 3,900 ounces of gold compared to 15,510 ounces of gold for 2002. All gold sales for 2003 and 2002 were at spot prices. We had no gold sales under forward sales contracts as of December 31, 2003. For 2003, the average price realized per ounce of gold was $363, compared to $309 per ounce for 2002. The average spot price for 2003 was $363 per ounce, compared to $310 per ounce for 2002.

Gross Profit. We recognized a gross profit from product sales of $0.9 million for 2003, compared to $2.6 million for 2002. The decrease in gross profit is primarily due to declining gold production, partially offset by higher realized gold prices and by a favorable adjustment for royalties that were paid in an amount less than previously accrued.

Project Development Costs. Project development costs for 2003 and 2002 represent certain costs related to the Las Cruces project that have not been capitalized, such as public relations and severance costs.

Exploration Costs. Our exploration costs decreased 22% to $0.5 million compared to $0.7 million in 2002. Our exploration costs decreased in 2003 because we acquired interests in fewer properties and we focused our mapping and sampling activities on fewer properties. In addition to our exploration programs in Nevada and Spain, we conducted 57 field examinations during 2003, compared to 68 in 2002.

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General and Administrative Expenses. Our general and administrative expenses for 2003 increased $0.8 million, or 50%, to $2.5 million, compared to $1.7 million in 2002. The increase in expenses is due primarily to higher legal and audit costs relating to increased regulatory requirements and payroll costs resulting from a one-time accrual relating to severance payments for an executive officer.

Gain (Loss) on Disposal of Assets. We recognized a gain on disposal of assets of $0.1 million in 2003 compared to $0.6 million in 2002, from sales of mining equipment and assets as part of closure activities at the Castle Mountain mine. In addition, during 2002, we decided not to renew a purchase option on a portion of the land needed to develop the Las Cruces project. We wrote off the book value of the purchase option as a loss on disposal of assets of $0.9 million in the third quarter of 2002. In March 2004, we entered into an agreement to purchase most of the land previously covered by the purchase option for an amount less than the purchase price of that option.

On April 21, 2003, we exchanged all of our limited partnership units of Peru Exploration Venture LLLP for a total of 4,821,905 common shares, or approximately 17.8% of total common shares at December 31, 2003, of Bear Creek Mining Corporation, a publicly traded Canadian mineral exploration company (TSX Venture Exchange: BCM). The exchange was made in connection with the acquisition by Bear Creek, formerly EVEolution Ventures, Inc., of all outstanding limited partnership interests of Peru Exploration and all outstanding shares of Peru Exploration’s general partner. In addition, we have non-transferable preemptive rights, until April 25, 2005, to participate in any offering of common stock undertaken by Bear Creek on a pro rata basis in order to allow us to maintain our percentage interest in the common shares of Bear Creek.

We recorded, in the second quarter of 2003, a non-cash gain of $1.9 million, net of related expenses, based on the estimated value of the common shares received. Due to the significant restrictions on our ability to transfer these shares, the shares were initially valued at less than traded market prices.

Litigation Settlement. During 2003, we recognized a gain on litigation settlement of $0.04 million, after deducting related legal expenses, relating to a property dispute in Montana.

Bankruptcy Recovery. As part of a court approved bankruptcy plan of Washington Group International, Inc. (“Washington Group”), we received, as an unsecured creditor, various distributions of common stock and warrants to purchase additional common shares of Washington Group. For the year ended December 31, 2003, we received distributions of common shares and warrants to purchase additional common shares of Washington Group, with a combined market value of $0.4 million and sold them in 2003. For the year ended December 31, 2002, we received distributions of common shares and warrants to purchase additional common shares of Washington Group, with a combined market value of $0.3 million. We have recorded these amounts as income in the periods in which they were received.

Gain on Sale of Securities. During the fourth quarter of 2003, we sold all of our investment in shares of common stock and warrants of Washington Group we held at the time on the open market for approximately $1.2 million. The amount realized in excess of the amortized cost of those securities of $0.5 million was reported as income.

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Interest Expense. Interest expense for 2003 and 2002 consisted primarily of the cost of the commitment fee on our credit facility with Leucadia, which is based on the amount available under the facility. For 2003 and 2002, we capitalized $1.5 million and $1.4 million, respectively, in interest relating to the Las Cruces project.

Income Taxes. The provision for income taxes for 2003 primarily represents state taxes. We recorded no federal income tax provision for 2003 because any tax that otherwise would have been due was fully offset by our net operating loss carryforwards. We recorded no federal tax benefit for our pre-tax loss in 2002 since we determined that it was unlikely we would be able to realize that tax benefit in the future.

Liquidity and Capital Resources

Our principal sources of funds are our credit facility, available resources of cash and cash equivalents and equity securities. At December 31, 2004, we had cash and cash equivalents of $7.1 million and equity securities of $3.6 million which are available for sale within 12 months, representing an increase in cash and cash equivalents and equity securities of $5.9 million from December 31, 2003. At December 31, 2004, we had $8.5 million of available borrowings under our credit facility. As of March 21, 2005, we had $10.5 million of available borrowings under our credit facility due to the recent increase in our credit facility, as discussed below.

Our cash resources are not sufficient to cover all projected costs and expenses necessary to commence mining at the Las Cruces project. We estimate that the initial capital cost will be approximately 280 million euro, or approximately $369 million, to bring the Las Cruces project into production, excluding reclamation bonding requirements, inflation, interest and other financing costs. We are exploring various financing alternatives for projected costs and expenses associated with the Las Cruces project. Over the past year, we have retained financial advisors and engaged in numerous efforts to obtain financing for the Las Cruces project. Debt financing is very difficult to obtain for mining projects in the permitting and development phase, particularly in the absence of completion guarantees or a significant equity investment in the project. We are not in a position to provide or obtain completion guarantees and, therefore, our efforts have been focused primarily on obtaining equity financing. We originally planned to raise a significant portion of the required funds pursuant to a public offering of common stock. In June 2004, we filed a registration statement with the Securities and Exchange Commission and a Canadian preliminary prospectus with securities regulatory authorities in Canada for a proposed public offering of up to 70,150,000 shares of our common stock. We spent several months preparing for the proposed public offering and conducted significant marketing efforts. Due to unfavorable market conditions, however, our efforts to complete the offering were unsuccessful, and the Canadian preliminary prospectus expired during the fourth quarter of 2004, and we filed an application to withdraw the registration statement with the U.S. Securities and Exchange Commission on May 9, 2005. We have obtained a limited amount of additional financing from Leucadia, as described below, and we are currently focusing on alternative sources of funding for the Las Cruces project.

As described in more detail below, we recently entered into additional financing arrangements with Leucadia. These financing arrangements included an amendment to our existing credit facility which, among other things, increased the available borrowings by $5 million to a total of $80 million. Also pursuant to these financing arrangements, our wholly-owned Dutch subsidiary entered into a $35 million credit agreement with Leucadia, pursuant to which it borrowed approximately $34.6 for the purpose of making a capital contribution to its wholly-owned Spanish subsidiary, Cobre Las Cruces, S.A. This capital contribution was required for Cobre Las Cruces to remain eligible to receive certain Spanish government subsidies relating to the Las Cruces project. The additional funding provided by Leucadia is intended to allow us to preserve our eligibility to receive the subsidies while we seek an extension of certain deadlines relating to the subsidies, and will allow us to continue to prepare for construction of the Las Cruces project while we seek additional financing. However, we must obtain additional debt and equity financing before construction of the mine can begin. We expect that to be able to obtain debt

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financing for the project, we will be required to have financed approximately 50% of the initial capital cost of the project from other sources. We continue to evaluate our options with respect to additional equity financing, which could be accomplished through a joint venture, sale of the project, merger and/or other transaction, a consequence of which could include the sale or exchange of our outstanding stock to third parties and/or Leucadia at a price that could be lower than the current trading price of our outstanding shares of common stock.

Until May 2001, our revenues came from two sources: contract mining at the Castle Mountain Mine and the sale of gold from the mine. Since the completion of mining activities at the Castle Mountain Mine in May 2001, our only source of revenue has been sales of residual gold recovered from the leach pads during the closure and reclamation phase at the mine. This residual gold production ceased during the fourth quarter of 2004. Based on our current operations, expected overhead expenses and exploration costs, we will not have positive cash flow from operations before production of refined copper begins at the Las Cruces project.

Net cash used by operating activities was $6.7 million for the twelve months ended December 31, 2004 compared to net cash used by operating activities of $3.1 million in 2003 and net cash provided by operating activities of $1.3 million in 2002. The increase in net cash used by operating activities in 2004 is primarily due to the write-off of $3.6 million of deferred offering and other financing related costs.

Net cash used by investing activities was $14.4 million, $5.5 million and $3.7 million for the twelve months ended December 31, 2004, 2003 and 2002, respectively.

Additions to mining properties, plant and mine development totaled $22.2 million (including $6.0 million of amortized and capitalized debt discount) for the year ended December 31, 2004, compared to $7.5 million for 2003 and $3.5 million for 2002. For all periods presented, additions to mining properties, plant and mine development consisted of: (1) mine development expenditures; (2) construction expenditures for buildings, machinery, plant and equipment; (3) expenditures for mobile mining service equipment; and (4) capitalized interest (including amortized debt discount for 2004). The principal source of funds that we used to fund project development at the Las Cruces project was our credit facility with Leucadia.

In March 1998, we entered into our credit facility with Leucadia. Through various amendments, the most recent of which was effective March 4, 2005, our credit facility has been amended to increase the facility to $80 million. Our credit facility has an expiration date of January 3, 2007. Leucadia may terminate our credit facility on December 15 of any year, provided Leucadia notifies us of the termination prior to September 15 of that year. Leucadia has the right to terminate our credit facility at any time when it owns less than 45% of our outstanding common stock. Leucadia has notified us that it does not intend to terminate our credit facility prior to December 15, 2006. At December 31, 2004, we had outstanding borrowings under our credit facility of $66.5 million. Loans outstanding under our credit facility bear interest equal to the prime rate plus 3% and interest and commitment fees are payable quarterly. The prime rate at March 21, 2005 was 5.5%. Interest paid to Leucadia under our credit facility for the twelve months ended December 31, 2004 and 2003 was approximately $2.6 million and $1.5 million, respectively. A substantial portion of these interest payments relates to financing for the Las Cruces project. Interest related to the Las Cruces project is capitalized and is not reflected as interest expense in our consolidated statements of operations. Instead, capitalized interest is added to mining properties, plant and mine development on our consolidated balance sheets.

The credit facility requires us to maintain certain financial ratios. From time to time, we have requested waivers with respect to certain of these financial ratios. Although Leucadia has granted to us the waivers necessary for us to comply with the financial covenants contained in the credit facility, we may need additional waivers in the future, and we cannot provide any assurance that Leucadia would grant any such additional waivers. As of December 31, 2004, we were in compliance with the financial covenants under the credit facility.

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The credit facility, as amended on March 4, 2005, provides that Leucadia will have the right to convert our outstanding debt under our credit facility at any time at a conversion price of $1.30 per share assuming we withdraw our registration statement relating to the proposed public offering. We filed an application to withdraw the registration statement with the U.S. Securities and Exchange Commission on May 9, 2005. The beneficial conversion feature associated with Leucadia’s conversion option resulted in a significant increase to our stockholders’ equity and a decrease to our long-term liabilities. The decrease to our long-term liabilities is temporary and will reverse over the remaining term of the credit facility as the debt discount is amortized. See “Critical Accounting Policies and Estimates – Debt Discount” above.

In connection with the most recent amendment to our credit facility, on March 4, 2005, our wholly-owned Dutch subsidiary, MK Gold Exploration B.V., entered into a credit agreement with Leucadia. The Dutch subsidiary credit agreement provides for borrowings of up to $35 million. Outstanding loans under the Dutch subsidiary credit agreement bear interest at a rate equal to the Eurodollar rate plus 2.5%, and accrued interest is capitalized quarterly. The termination date of the Dutch subsidiary credit agreement is January 3, 2007. Commencing in 2006, Leucadia may terminate the facility on December 15 of any year, provided Leucadia notifies the Dutch subsidiary of the termination prior to September 15 of that year. As required by the Dutch subsidiary credit agreement, $34.6 million of available borrowings under the Dutch subsidiary credit agreement were used by the Dutch subsidiary to make an immediate capital contribution of approximately 26 million euros to its wholly-owned subsidiary, Cobre Las Cruces, which owns the Las Cruces project. This capital contribution was required for Cobre Las Cruces to remain eligible to receive certain Spanish government subsidies relating to the Las Cruces project. If Cobre Las Cruces does not receive a substantial portion of the subsidies, the Dutch subsidiary must immediately cause Cobre Las Cruces to declare and pay a dividend to it in an amount equal to all (or the maximum amount permitted by law) of the funds contributed to Cobre Las Cruces by the Dutch subsidiary, and the Dutch subsidiary must in turn use the dividend to immediately repay the Dutch subsidiary’s borrowings under the Dutch subsidiary credit agreement.

To obtain the amendment to our credit facility and obtain the Dutch subsidiary credit facility, we agreed to (1) guarantee the obligations of the Dutch subsidiary under the Dutch subsidiary credit agreement and (2) secure our obligations under the credit facility and our guarantee of the Dutch subsidiary credit agreement by pledging to Leucadia 65% of the issued and outstanding stock of the Dutch subsidiary. We executed a Guaranty dated March 4, 2005, in favor of Leucadia and an Agreement and Deed of Pledge, dated March 7, 2005, as required by the terms of the amendment to the credit facility and the Dutch subsidiary credit agreement.

We are exploring various debt financing alternatives for projected costs and expenses associated with the Las Cruces project. We are also considering other sources of financing, including product off-take agreements, which are a type of product sales agreement, supplier financing and equipment leasing. If we obtain a sufficient level of financing from other sources, we believe we can secure debt financing for a portion of the initial capital requirements of the Las Cruces project. We expect this debt financing to be primarily funded through a new credit facility using a consortium of international banks experienced in mining project financing. We have retained Cutfield Freeman & Co., Ltd. to assist us, and they have had preliminary discussions with a number of such banks. Based on discussions with Cutfield Freeman & Co., Ltd. and other financial advisors, however, we do not expect to be able to obtain any bank financing until we have financed at least 50% of the initial capital requirements from other sources. While we believe that we will be able to obtain debt financing for the Las Cruces project, we cannot assure you that we will be able to obtain debt financing on favorable terms or at all. If we are unable to obtain financing when needed or if we are unable to obtain subsidies from the Spanish government as described in this report, the development of the Las Cruces project could be delayed significantly. Any significant delay could increase the costs of developing the Las Cruces project or prohibit us from completing development of the project.

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To the extent that any amounts remain outstanding under the credit facility at the time we enter into any new credit facility, we expect that we would be required under any new credit facility to amend the credit facility to provide that it will be subordinated to such anticipated credit facility and that any repayment of the credit facility will be restricted to available cash provided by operations.

Our sources of funds available to fund new mining projects are limited. We used a significant portion of our existing sources of funds to acquire the Las Cruces project for $42 million in September 1999. Accordingly, our ability to begin new mining projects depends on our ability to obtain additional sources of funds to finance these mining projects. While we believe that we may be able to obtain financing for new mining projects through project financing or otherwise, we cannot assure you that we will be able to obtain financing on favorable terms or at all.

Upon completion of production at a mine, we must make expenditures for reclamation and closure of the mine. Effective January 1, 2003, we account for future reclamation and mine closure costs in accordance with SFAS No. 143. At December 31, 2004, we had a recorded asset retirement obligation of $0.8 million for these costs for the Castle Mountain Mine. We and Quest Capital Corporation, formerly Viceroy Resource Corporation, the owner of the remaining 75% interest in the Castle Mountain Venture, are depositing cash, including all proceeds from the sale of plant and equipment, in a separate fund to cover current and future reclamation costs at the venture properties. At December 31, 2004, our share of this fund was $1.4 million. This fund is classified as restricted cash and investments. During the year ended December 31, 2004, approximately $0.9 million of restricted investments were sold and are now classified as restricted cash. We have not recorded any asset retirement liabilities relating to the Las Cruces project as there has been no disturbance that would require reclamation or remediation. We review the adequacy of our reclamation and mine closure liabilities in light of current laws and regulations and adjust our liabilities as necessary.

For the years ended December 31, 2004, 2003 and 2002, other comprehensive income (loss) includes approximately $6.0 million, $8.9 million and $6.8 million, respectively, resulting from the recognition of unrealized gains and losses from foreign currency translation adjustments. While the recognition of these adjustments results in decreases and increases in total stockholders’ equity, these adjustments had no impact on our consolidated results of operations. These adjustments are required in order to convert our euro denominated assets and liabilities into U.S. dollars and, therefore, reflect the change in the value of the euro against the U.S. dollar over these periods. We do not believe these adjustments reflect any decrease or increase in the economic value of our assets, and we are unable to predict whether these unrealized losses and gains from foreign currency translation adjustments will continue in the future. Foreign currency exchange rates can have a significant impact on our consolidated financial statements. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” and Note 1 to the consolidated financial statements that are located elsewhere in this report.

As shown below, at December 31, 2004, our contractual cash obligations totaled approximately $72.59 million.

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Contractual Obligations


	Payments Due by Period (in millions)
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 years
Operating leases	$	0.54	$	0.20	$	0.25	$	0.09	$	—
Line of credit (1)		66.50		—		66.50		—		—
Estimated interest on line of credit (2)		5.55		5.50		0.05		—		—

Total contractual cash obligations	$	72.59	$	5.70	$	66.80	$	0.09	$	—

(1)

This amount represents the outstanding principal balance at December 31, 2004 under our credit facility. Leucadia may terminate our credit facility on December 15 of any year, provided Leucadia notifies us of the termination prior to September 15 of that year. Leucadia has the right to terminate our credit facility at any time when it owns less than 45% of our outstanding common stock. Leucadia has notified us that it does not intend to terminate our credit facility prior to December 15, 2006. As of December 31, 2004, our credit facility had an expiration date of January 3, 2006, but in March 2005, the expiration date was extended to January 3, 2007. The credit facility will terminate upon conversion of all outstanding amounts under the credit facility.

(2)

Estimated interest on the line of credit facility with Leucadia was calculated based on the outstanding borrowings at December 31, 2004 of $66.5 million. Interest was calculated using the prime rate in effect at December 31, 2004 of 5.25% plus 3% as specified in the credit agreement. At December 31, 2004, the credit facility had an expiration date of January 3, 2006. On March 4, 2005, the expiration date was extended to January 3, 2007.

During the years ended December 31, 2004, 2003 and 2002, we were not a party to any derivative instruments, forward sales contracts or other contracts designed to hedge market risks. In the past we have entered into option contracts and forward sales contracts to establish a minimum price on a portion of the ounces of gold that we produce. In the future, we may seek to mitigate the risk of fluctuations in copper prices through periodic forward sales. We do not enter into option or sales contracts for the purpose of speculative trading.

We do not currently have a foreign currency program to mitigate risks associated with fluctuations in foreign currency. In addition, we have not undertaken any hedging activities with respect to our credit facility with Leucadia, which carries a variable interest rate.

Off-Balance Sheet Arrangements

Surety bonds and letters of credit totaling $2.5 million, of which our share is $0.6 million, have been provided as required by various governmental agencies for environmental protection, including reclamation bonds at the Castle Mountain mine and the American Girl Mine. We have provided surety bonds and letters of credit of $0.5 million for water management at the Las Cruces project. Reclamation at the American Girl mine was completed, except for ground water and re-vegetation monitoring, in 2000. If the requirements of the agreements that require the bonds and letters of credit are not met, the respective governmental agencies could draw on the bonds and letters of credit to fund the costs of meeting the applicable requirements.

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Share Repurchases

In October 1998, our board of directors authorized the repurchase of up to two million shares of our common stock. We repurchased 173,700 shares under the repurchase program, all of which were purchased prior to 2000. The repurchase program was terminated on March 26, 2004.

Recently Issued Accounting Standards

Based upon our review of new accounting standards released during the year ended December 31, 2004, we did not identify any standard requiring adoption that would have a significant impact on our consolidated financial statements.

The mineral rights relating to the Las Cruces project had been classified as an intangible asset at December 31, 2003. Effective April 2004, the Financial Accounting Standards Board, or FASB, ratified the Emerging Issues Task Force consensus that mineral rights should be accounted for as tangible assets and classified as a component of property and equipment. In accordance with this pronouncement, we reclassified this asset, which had a balance of $48.4 million, from intangible assets to mining properties, plant and mine development, net, on our consolidated balance sheet as of December 31, 2003.

In December 2004, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 123R, “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. That cost will be recognized as an expense over the vesting period of the award. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. In addition, we will be required to determine fair value in accordance with SFAS No. 123R. SFAS No. 123R is effective for reporting periods beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged, and requires the application of a transition methodology for stock options that have not vested as of the date of adoption. We intend to adopt SFAS No. 123R effective July 1, 2005 using the modified prospective application without restatement of prior interim periods. We do not expect the adoption of SFAS No. 123R to have a material impact on our financial position or results of operations.

Cautionary Statement for Forward-Looking Information

Certain information set forth in this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, exploration efforts, project development schedules, financing needs, plans or intentions relating to potential acquisitions or similar transactions and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. All subsequent forward-looking statements, whether written or oral and whether made by us or on our behalf, are also expressly qualified by these cautionary statements.

Our forward-looking statements are based on our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. However, we cannot assure you that management’s expectations, beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

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There are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report. In addition to the other factors and matters discussed elsewhere in this report, the following factors are among the factors that could cause actual results to differ materially from the forward-looking statements. Any forward-looking statements made by us or on our behalf should be considered in light of these factors.

Our profitability depends entirely on the success of our Las Cruces project.

We are focused primarily on the development of our Las Cruces project. Accordingly, our profitability depends entirely upon the successful development and operation of this project. We are currently incurring losses, and we expect to continue to incur losses until copper production begins at the Las Cruces project. We cannot assure you that we will achieve production at the Las Cruces project or that we will ever be profitable even if production is achieved. The failure to successfully develop the Las Cruces project would have a material adverse effect on our financial condition, results of operations and cash flows. Even if we are successful in achieving production, an interruption in operations at Las Cruces that prevents us from extracting ore from the Las Cruces project for any reason would have a material adverse impact on our business.

We will need substantial additional financing to complete the development of the Las Cruces project.

We estimate that the initial capital costs for the development of the Las Cruces project are approximately 280 million euros, or approximately $369 million, including working capital, land purchases and contingencies, but excluding reclamation bonding requirements, inflation, interest and other financing costs. The estimated capital costs of the Las Cruces project are based on PAH’s review of the DMT-Outokumpu feasibility study, and those estimates could change after the detailed engineering process has been completed. We are exploring various financing alternatives to finance the projected costs and expenses of the Las Cruces project. We cannot assure you that we will be able to obtain the necessary financing for the Las Cruces project on favorable terms or at all. Additionally, if the actual costs to complete the development of the Las Cruces project are significantly higher than we expect or if we are unable to obtain subsidies from the Spanish government as described in this report, we may not have enough funds to cover these costs and we may not be able to obtain other sources of financing. The failure to obtain all necessary financing would prevent us from achieving production at the Las Cruces project and impede our ability to become profitable.

We depend on government subsidies to partially fund the Las Cruces Project.

The European Commission has approved the grant by the Spanish central and regional governments of subsidies to us in connection with the Las Cruces project of 52.8 million euros, or approximately $69.5 million. We base estimates regarding the potential for economic copper production at, timing for development of, and the amount of financing required for, the Las Cruces project on the assumption that we will receive the entire 52.8 million euros approved by the European Commission, which includes 47.5 million euros, or approximately $62.6 million, of subsidies previously granted to us. We cannot predict, however, the amount of subsidies we will actually receive, if any. Furthermore, we must meet several conditions to receive the 47.5 million euros in previously granted subsidies. Our ability to satisfy these conditions depends on, among other things, our ability to obtain financing, and we cannot predict when, if at all, we will be able to satisfy these conditions. In order for us to receive the subsidies, the Spanish central and regional governments required us to have incurred 25% of a targeted amount of capital expenditures relating to the project by March 27, 2004 and the remaining 75% by March 27, 2006. Since we did not receive all of the necessary permits and financing by the 2004 deadline, we were not in a

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position to incur the requisite capital expenditures and, accordingly, did not meet this condition at that time. We obtained an extension of this deadline until March 27, 2005, but we were not in a position to meet the extended deadline. Therefore, we have requested an additional extension. If we are unable to meet this deadline or future deadlines without obtaining extensions, we will lose the right to receive these subsidies. In addition, to the extent that we have received any subsidies, we will be required to return them, with interest, to the Spanish central and regional governments. The loss of the subsidies would significantly increase our costs to develop the Las Cruces project and would require us to obtain additional funds from other sources, which may not be available on favorable terms or at all. If we do not receive the amount of subsidies that we expect, it could delay the development of the Las Cruces project and reduce its profitability.

The development of the Las Cruces project may be delayed.

We have experienced delays in developing the Las Cruces project, and we may experience further delays. These delays may affect the timing of development of the project and could increase its development costs, affect its economic viability, or prevent us from completing its development.

The timing of development of the Las Cruces project depends on many factors, some of which are beyond our control, including the:

•

timely issuance of permits and municipal licenses;

•

procurement of additional financing;

•

acquisition of surface land and easement rights required to develop and operate the project, particularly if we are required to acquire surface land through expropriation in connection with our mining concession;

•

completion of basic engineering; and

•

construction of the project.

Adverse political and environmental developments in Spain could also delay or preclude the issuance of permits or the expropriation of land necessary to develop the Las Cruces project. In addition, factors such as fluctuations in the market price of copper and in foreign exchange or interest rates, as well as international political unrest, could adversely affect our ability to obtain adequate financing to fund the development of the project.

We may not be able to obtain or renew all of the permits necessary to develop and operate the Las Cruces project.

Pursuant to Spanish law, we must obtain various permits in connection with the operation and development of the Las Cruces project. While we have secured several key permits, including the mining concession, we must obtain a variety of licenses or permits, including air quality control, water, electrical, steam deflection, hydraulic public domain utilization and municipal licenses. Additionally, under the Spanish appeals system, licenses and concessions granted for the Las Cruces project are subject to appeals. If the Spanish authorities were to rule in favor of the party lodging the appeal, the concession or license, in certain cases, could be voided. See “Items 1 and 2. Business and Properties—Las Cruces Project—Regulatory Matters—Spanish Law—Appeals,” “Items 1 and 2. Business and Properties—Las Cruces Project—Permits” and “Item 3. Legal Proceedings.” In addition to requiring permits for the development of the mine, we will need to obtain permits during the life of the project. Obtaining and renewing the necessary governmental permits is a complex and time-consuming process. We cannot

II-20

assure you that all the permits will be granted to us or whether we will be able to fulfill all the requirements imposed pursuant to these permits. The failure to obtain the necessary permits or meet their requirements could delay development, increase our costs or, in some cases, require us to discontinue operating the mine.

Our business may be negatively affected by inaccurate estimates of our ore reserves.

The ore reserve figures for the Las Cruces project presented in this report are estimates, and we cannot assure you that we will recover the indicated levels of copper. Reserve estimates are imprecise and depend on geological analysis based partly on statistical inferences drawn from drilling and sample analysis, which may prove unreliable, and assumptions about operating costs and copper prices. Valid estimates may change significantly when new information becomes available. The reserve estimates for the Las Cruces project are based on, among other things, an assumed long-term copper price of $0.76 per pound of copper, a cut-off grade of 1.00% copper and projected average cash operating costs of 0.33 euro, or approximately $0.43, per pound of copper, based on the technical report prepared by PAH. These assumptions may not be accurate, and increases in production costs, fluctuations in the market price of copper or changes in grade estimates may result in changes to our reserve estimates.

Because we have not begun production at the Las Cruces project, there is additional risk that we may need to reduce or adjust the reserves and the extent of mineralization (including grade estimates) for the Las Cruces project based upon actual production experience. In addition, during the course of developing the Las Cruces project, we may revise the ore reserves based on information we obtain from additional drilling or other testing. A material reduction in the estimates of our reserves, or in our ability to extract these reserves, could require material write downs in investment in the Las Cruces project and increase amortization, reclamation and closure costs.

We may never achieve our production estimates.

We have prepared estimates of future copper production. We cannot assure you that we will ever achieve our production estimates or any production at all. Our production estimates depend on, among other things:

•

the accuracy of our reserve estimates;

•

the accuracy of assumptions regarding ore grades and recovery rates;

•

ground conditions and physical characteristics of the mineralization, such as hardness and the presence or absence of particular metallurgical characteristics;

•

the accuracy of estimated rates and costs of mining and processing; and

•

our ability to obtain all permits and construct a processing facility at Las Cruces.

Our actual production may vary from our estimates if any of these assumptions prove to be incorrect. With respect to the Las Cruces project, we do not have the benefit of actual mining and production experience in verifying our estimates, which increases the likelihood that actual production results will vary from the estimates.

Copper price volatility may reduce our revenues and operating profits.

Our future profitability and long-term viability will depend, in large part, on the market price of copper. Market prices for copper are volatile and are affected by numerous factors beyond our control, including

II-21

expectations regarding inflation, global and regional demand, speculative activities, political and economic conditions and production costs in major copper-producing regions. The aggregate effect of these factors on copper prices is impossible for us to predict. A $0.10 decrease in the price per pound of copper could reduce the annual cash flows from the Las Cruces project by up to $14 million. A decrease in copper prices could adversely affect our ability to finance the development of the Las Cruces project.

We are subject to unpredictable fluctuations in currency exchange rates that may negatively affect the profitability of the Las Cruces project.

Because Spain is a member of the European Monetary Union, we will incur a substantial portion of the development and operating costs associated with the Las Cruces project in euros. Our estimated capital costs for the Las Cruces project are based in euros, but our current indebtednesses is in U.S. dollars, and potential financing alternatives and our future copper sales will be in U.S. dollars. The amount of U.S. dollars necessary to fund the development and operating costs associated with the Las Cruces project is dependent on the euro to U.S. dollar exchange rate. Our expenses could be higher than our prior U.S. dollar estimates if the value of the U.S. dollar relative to the euro weakens. A 10% increase in the value of the euro relative to the U.S. dollar could increase our estimate of the cost to develop the Las Cruces project by $37 million. Exchange rates fluctuate, and we cannot predict what exchange rates will be over the course of the development and operation of the Las Cruces project. Any weakening in the value of the U.S. dollar relative to the euro could adversely affect our business.

Unexpected and adverse changes in Spain or other foreign countries could result in project disruptions, increased costs and potential losses.

Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, such as the September 11, 2001 attacks in the United States and the attacks in Madrid, Spain, heightened national security measures, uncertainties relating to the ongoing military action in Iraq and Afghanistan, strained international relations with North Korea and other countries, and conflicts in the Middle East, Asia and elsewhere may halt or hinder our ability to develop the Las Cruces project and conduct exploration activities. This increased instability may, for example, negatively impact the reliability and cost of transportation, negatively affect the desire of our employees to travel, adversely affect our ability to obtain adequate insurance at reasonable rates or require us to take extra security precautions. In addition, this international political instability has had, and may continue to have, negative effects on financial markets, which could adversely affect our ability to finance the development of the Las Cruces project.

Our substantial indebtedness could adversely affect our ability to operate our business.

We have a large amount of indebtedness compared to our equity capitalization, and we intend to raise a significant portion of the funds necessary to develop the Las Cruces project through additional debt financing. As a result, we will have significant debt service obligations that will limit our flexibility and impose significant restrictions on us. Our substantial indebtedness and the terms of our existing or future credit agreements or other instruments governing our indebtedness could make it more difficult for us to satisfy our debt covenants and debt service, lease payments and other obligations. Our indebtedness may also increase our vulnerability to general adverse economic and industry conditions and limit our ability to obtain additional financing to fund additional exploration or development projects, working capital, capital expenditures or other general corporate requirements. Our debt service obligations will reduce the availability of cash flow from operations for other purposes and limit our flexibility in planning for, or reacting to, changes in our business, the mining industry or metals prices. These restrictions and limitations may place us at a disadvantage compared to competitors with relatively lower amounts of debt.

II-22

Any increases in interest rates will increase the amount of interest we are obligated to pay under our credit facilities with Leucadia. In addition, because we intend to finance a significant portion of the Las Cruces project through debt financing, increases in interest rates will increase our costs to finance the Las Cruces project and could significantly affect the profitability and long-term economic viability of the project.

Mining is inherently dangerous and subject to conditions or events beyond our control, which could have a material adverse effect on our business.

Mining at the Las Cruces mine involves various types of risks and hazards, including:

•

environmental hazards;

•

industrial accidents;

•

metallurgical and other processing problems;

•

unusual or unexpected rock formations;

•

structural cave-ins or slides;

•

flooding;

•

fires;

•

metals losses; and

•

periodic interruptions due to inclement or hazardous weather conditions.

These risks could result in damage to, or destruction of, mineral properties, production facilities or other properties, personal injury, environmental damage, delays in mining, increased production costs, monetary losses and possible legal liability. We may not be able to obtain insurance to cover these risks at economically feasible premiums. Insurance against certain environmental risks, including potential liability for pollution or other hazards as a result of the disposal of waste products occurring from production, is not generally available to us or to other companies within the mining industry. We may suffer a material adverse effect on our business if we incur losses related to any significant events that are not covered by our insurance policies.

Our primary operations are subject to the risks of doing business in foreign countries.

Because our exploration and mine development activities are located primarily in foreign countries, principally the Las Cruces project in Spain and other exploration activities in Spain, as well as other countries, we are subject to risks associated with conducting business in a foreign country. These risks include:

•

uncertain political and economic environments;

•

limits on repatriation of earnings;

•

war, terrorism and civil disturbances;

•

expropriation or nationalization;

II-23

•

high rates of inflation;

•

submitting to the jurisdiction of a foreign court or panel or enforcing the judgment of a foreign court or arbitration panel against a sovereign nation within its own territory; and

•

forced modification of existing contracts and unenforceability of contractual rights.

Changes in mining or investment policies or shifts in the prevailing political climate in any of the countries in which we conduct exploration and development activities, or changes in U.S. regulations relating to foreign trade, investment and taxation, could adversely affect our business.

Our activities are subject to environmental laws and regulations that may increase our costs of doing business and may restrict our operations.

All of our exploration, development and production activities in Spain and the United States are subject to regulation by governmental agencies under various environmental laws. To the extent we conduct exploration activities or undertake new mining activities in other foreign countries, we will also be subject to environmental laws and regulations in those jurisdictions. These laws address emissions into the air, discharges into water, management of waste, management of hazardous substances, protection of natural resources, antiquities and endangered species, and reclamation of lands disturbed by mining operations. Environmental legislation in many countries is evolving and the trend has been towards stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and increasing responsibility for companies and their officers, directors and employees. Compliance with environmental laws and regulations may require significant capital outlays and may cause material changes or delays in our intended activities. We cannot assure you that future changes in environmental regulations will not adversely affect our business, and it is possible that future changes in these laws or regulations could have a significant adverse impact on some portion of our business, causing us to re-evaluate those activities at that time.

We are subject to significant governmental regulations.

Our mining activities in Spain and the United States are subject to extensive federal, state, provincial, territorial and local laws and regulations governing various matters, including:

•

environmental protection;

•

management and use of toxic substances;

•

management of natural resources;

•

exploration, development of mines, production and post-closure reclamation;

•

export and import controls and restrictions;

•

price controls;

•

taxation;

•

labor standards and occupational health and safety, including mine safety; and

•

historic and cultural preservation.

II-24

The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations, or more stringent enforcement of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of our operations and delays in the development of our properties, including the Las Cruces project. These laws and regulations may allow governmental authorities and private parties to bring lawsuits based upon damages to property and injury to persons resulting from the environmental, health and safety impacts of our past and current operations, and could lead to the imposition of substantial fines, penalties or other civil or criminal sanctions. In addition, our failure to comply strictly with applicable laws, regulations and local practices relating to permitting applications or reporting requirements could result in loss, reduction or expropriation of entitlements, or the imposition of additional local or foreign parties as joint venture partners. Any such loss, reduction, expropriation or imposition of partners could have a materially adverse effect on our operations or business.

Our limited exploration activities may not be successful in identifying new projects.

We maintain a small exploration program to evaluate potential mining projects. Our ability to acquire and fund additional projects, however, is limited. In addition, there are uncertainties inherent in any mineral exploration program that could make it difficult for us to successfully acquire additional projects. These risks include the location of economically viable ore bodies, the development of appropriate metallurgical processes, the receipt of necessary governmental permits and the construction of mining and processing facilities. Even if we identify and acquire an economically viable ore body, several years may elapse from the initial stages of development until we commence commercial production. We cannot assure you that our current exploration programs will result in any new commercial mining operations or yield new reserves to replace or expand current copper reserves.

Our metallurgical processes have not yet been commercially tested, and if they are not commercially viable, the Las Cruces project could be delayed.

While the commercial viability of the proposed metallurgical processes for the Las Cruces project has been demonstrated in both batch and mini-continuous pilot-scale test work using Las Cruces ore, and the same process has been used for extracting other base metals at comparable projects, we cannot assure you that our proposed metallurgical processes will be commercially successful upon implementation at the Las Cruces project. If, upon implementation at the Las Cruces project, our metallurgical processes are not commercially viable, the Las Cruces project could be delayed while any necessary modifications are implemented to the processes.

The mining industry is an intensely competitive industry, and we may have difficulty effectively competing with other mining companies in the future.

Mines have limited lives and, as a result, we must continually seek to replace and expand our reserves through the acquisition of new properties. Significant competition exists for the acquisition of properties producing or capable of producing copper, gold and other metals. We may be at a competitive disadvantage in acquiring additional mining properties because we must compete with other individuals and companies, many of which may have greater financial resources and larger technical staffs than we have. As a result of this competition, we may be unable to acquire attractive mining properties on acceptable terms.

Our ability to operate our Company effectively could be impaired if we lose key personnel.

We depend on the services of key executives, including G. Frank Joklik, our chairman and chief executive officer, and a small number of experienced executives and personnel focused on the development of the Las Cruces project. We have not entered into employment agreements with any key executives other than Francisco Fernando Fernandez Torres, the managing director of Cobre Las Cruces.

II-25

Additionally, the number of persons skilled in the development and operation of mining properties is limited and significant competition exists for these individuals. We cannot assure you that we will be able to employ key personnel or that we will be able to attract and retain qualified personnel in the future. We do not maintain “key person” life insurance to cover our executive officers. Due to the relatively small size of our company, our failure to retain or attract key personnel may delay or otherwise adversely affect the development of the Las Cruces project, which would have a material adverse effect on our business.

We face other risks and uncertainties.

In addition to the factors described above, we face a number of other risks and uncertainties, including those discussed under “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY FINANCIAL DATA (Unaudited)

(Thousands of dollars except share data)

Selected quarterly financial data for the years ended December 31, 2004 and 2003 is presented below.


2004 Quarters	First			Second			Third			Fourth
										(Restated)
Revenue	$	339		$	239		$	176		$	239
Gross profit		137			67			44			87
Net income (loss)		(572	)		167			(561	)		(4,806	)(c)(d)
Basic and diluted income (loss) per share (a)		(0.02	)		0.00			(0.01	)		(0.13	)

2003 Quarters	First			Second			Third			Fourth
Revenue	$	425		$	405		$	281		$	330
Gross profit (loss)		197			203			(204	)		97
Net income (loss)		(342	)		1,649	(b)		(728	)		(378	)
Basic and diluted income (loss) per share (a)		(0.01	)		0.04			(0.02	)		(0.01	)

(a)	The total of the four quarters’ basic and diluted income (loss) per share does not equal the earnings per share for the year due to rounding.

(b)	We recorded a non-cash gain of $1.9 million, net of related expenses, on the estimated value of the common shares of Bear Creek Mining Corporation received in exchange for all of our limited partnership units of Peru Exploration Venture LLLP.

(c)	We wrote off $3.6 million in deferred offering and other financing related costs relating to our abandoned stock offering.

(d)

As a result of the restatement discussed in Notes 1 and 18 to the consolidated financial statements, we have capitalized approximately $6.0 million, or $0.16 per share, of interest resulting from amortization of debt discount. This adjustment reduced the net loss for the year and quarter ended December 31, 2004 by approximately $6.0 million, or $0.16 per share.

II-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of MK Resources Company:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of MK Resources Company (a majority-owned subsidiary of Leucadia National Corporation) and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As explained in Notes 1 and 18 to the consolidated financial statements, the Company has restated its consolidated financial statements for the year ended December 31, 2004.

PricewaterhouseCoopers LLP

Salt Lake City, Utah

March 10, 2005, except for the third paragraph

of Note 1 and Note 18 for which the date is

May 12, 2005

II-27

MK RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2004, 2003 and 2002

(Thousands of dollars except share data)


	2004			2003			2002
	(Restated)
REVENUE:

Product sales	$	993		$	1,441		$	4,841

Total revenue		993			1,441			4,841

COSTS AND OPERATING EXPENSES:
Product sales		294			506			2,142
Accretion of asset retirement obligations		60			77			87
Project development		304			565			279

Total costs and operating expenses		658			1,148			2,508

GROSS PROFIT		335			293			2,333

Exploration costs		(398	)		(523	)		(674	)
General and administrative expenses		(3,161	)		(2,492	)		(1,662	)
Gain (loss) on disposal of assets		59			106			(224	)

LOSS FROM OPERATIONS		(3,165	)		(2,616	)		(227	)

Equity in loss of unconsolidated affiliate		—			—			(301	)
Litigation settlement, net		—			36			—
Bankruptcy recovery, net		994			315			318
Other income		5			—			—
Abandoned offering costs		(3,600	)		—			—
Gain on sale of securities		—			498			—
Gain on exchange of partnership interest, net		—			1,945			—
Investment income and dividends, net		26			50			84
Interest expense		(34	)		(23	)		(24	)

Income (loss) before income taxes		(5,774	)		205			(150	)
Income tax benefit (provision)		2			(4	)		(3	)

Net income (loss)	$	(5,772	)	$	201		$	(153	)

Basic and diluted income (loss) per common share	$	(0.15	)	$	0.01		$	(0.00	)

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

II-28

MK RESOURCES COMPANY

CONSOLIDATED BALANCE SHEETS

As of December 31, 2004 and 2003

(Thousands of dollars except par value)


	2004			2003
	(Restated)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	7,098		$	2,634
Restricted cash		642			874
Equity securities		3,590			2,167
Receivables		1,079			344
Inventories		—			133
Other		107			68

Total current assets		12,516			6,220

Mining properties, plant and mine development, net		110,521			82,589
Equity securities		32			97
Restricted investment securities		—			873
Restricted cash		726			379

TOTAL ASSETS	$	123,795		$	90,158

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	1,340		$	1,732
Current portion of asset retirement obligation		667			874
Other accrued liabilities		2,382			467

Total current liabilities		4,389			3,073

Line of credit-Leucadia, net of unamortized debt discount of $31,369 at December 31, 2004		35,131			41,500
Asset retirement obligation		127			597
Deferred income tax liability		3,967			3,967

Total liabilities		43,614			49,137

COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS’ EQUITY:
Common stock, par value $0.01; 125,000,000 and 80,000,000 shares authorized at December 31, 2004 and 2003, respectively; 37,733,359 shares issued and outstanding at December 31, 2004, 37,545,500 shares issued and 37,525,649 shares outstanding at December 31, 2003		377			375
Capital in excess of par value		120,578			83,023
Accumulated deficit		(58,558	)		(52,786	)
Treasury stock at cost, 19,851 shares at December 31, 2003		—			(19	)
Accumulated other comprehensive income		17,784			10,428

Total stockholders’ equity		80,181			41,021

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	123,795		$	90,158

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

II-29

MK RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the years ended December 31, 2004 (as restated), 2003 and 2002

(Thousands of dollars except share data)


	Common Stock $0.01 Par Value		Capital in Excess of Par Value			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
January 1, 2002	$	374		82,869			(52,834	)		(19	)		(5,539	)		24,851

Net loss							(153	)								(153	)
Other comprehensive income (loss):
Net change in unrealized loss on investments													(66	)		(66	)
Net change in translation adjustment													6,792			6,792

Comprehensive income																6,573

December 31, 2002		374		82,869			(52,987	)		(19	)		1,187			31,424

Net income							201									201

Other comprehensive income:
Net change in unrealized gain on investments													361			361

Net change in translation adjustment													8,880			8,880

Comprehensive income																9,442

Restricted stock grants		1		154												155

December 31, 2003		375		83,023			(52,786	)		(19	)		10,428	(1)		41,021

Net loss (restated)							(5,772	)								(5,772	)
Other comprehensive income:

Net change in unrealized gain on investments													1,358			1,358

Net change in translation adjustment													5,998			5,998

Comprehensive loss																1,584

Cancellation of treasury stock				(19	)					19
Debt discount on credit facility				37,334												37,334
Exercise of stock options		2		240												242

December 31, 2004, restated	$	377	$	120,578		$	(58,558	)	$	—		$	17,784	(2)	$	80,181

(1)	As of December 31, 2003, this balance was comprised of $295 in unrealized gains on investments and $10,133 in translation adjustments on foreign currency.

(2)	As of December 31, 2004, this balance was comprised of $1,653 in unrealized gains on investments and $16,131 in translation adjustments on foreign currency.

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

II-30

MK RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2004, 2003 and 2002

(Thousands of dollars)


	2004			2003			2002
	(Restated)
OPERATING ACTIVITIES:
Net income (loss)	$	(5,772	)	$	201		$	(153	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Restricted stock grants		—			155			—
Equity in loss of unconsolidated affiliate		—			—			301
Depreciation, depletion and amortization		19			25			29
Accretion expense		60			77			87
Litigation settlement		—			(38	)		—
Bankruptcy recovery		(994	)		(315	)		(365	)
Gain on sale of securities		—			(498	)		—
Gain on exchange of partnership interest		—			(1,945	)		—
Gain (loss) on disposal of assets		(59	)		(106	)		224
Changes in operating assets and liabilities:
Receivables		(735	)		78			(181	)
Inventories		133			40			729
Other current assets		(39	)		30			37
Restricted cash		(115	)		(764	)		222
Accounts payable and other accrued liabilities		1,523			434			218
Asset retirement obligation		(677	)		(505	)		136

Net cash provided (used) by operating activities		(6,656	)		(3,131	)		1,284

INVESTING ACTIVITIES:
Additions to mining properties, plant and mine development		(16,264	)		(7,516	)		(3,505	)
Proceeds from disposal of assets		24			111			671
Purchase of restricted investment securities		—			—			(1,621	)
Purchase of equity securities		—			(45	)		—
Proceeds from sale of equity securities		994			1,224			—
Proceeds from sale of restricted investment securities		873			748			750

Net cash used by investing activities		(14,373	)		(5,478	)		(3,705	)

(continued)

II-31

MK RESOURCES COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

For the years ended December 31, 2004, 2003 and 2002

(Thousands of dollars)


	2004			2003		2002
	(Restated)
FINANCING ACTIVITIES:
Net borrowings under line-of-credit agreement – Leucadia	$	25,000		$	9,600	$	2,900
(Increase) decrease in other assets		—			211		(211	)
Exercise of stock options		242			—		—

Net cash provided by financing activities		25,242			9,811		2,689

EFFECT OF EXCHANGE RATES ON CASH		251			6		(207	)

INCREASE IN CASH		4,464			1,208		61

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		2,634			1,426		1,365

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	7,098		$	2,634	$	1,426

*Supplemental disclosures of cash flow information*
Interest paid, net of amounts capitalized	$	32		$	23	$	24
Income taxes paid, net	$	(2	)	$	4	$	3
Amortization of debt discount capitalized as a component of mining properties, plant and mining development	$	5,965		$	—	$	—

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

II-32

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

1. ORGANIZATION, OPERATIONS AND BASIS OF ACCOUNTING

MK Resources Company (the “Company”) is engaged in the business of exploring for, acquiring, developing and mining mineral properties. The Company owns a 53% undivided interest in the American Girl Mining Joint Venture (the “AGMJV”), a 25% undivided interest in the Castle Mountain Venture (the “CMV”), and 100% of Cobre Las Cruces, S.A. (see Note 3). The Company is a 72.1% owned subsidiary of Leucadia National Corporation (“Leucadia”).

The Company’s principal sources of funds are its available resources of cash and cash equivalents, equity securities, cash generated from residual gold production at the Castle Mountain Mine and its credit facility with Leucadia (the “Credit Facility”). At December 31, 2004, the Company had cash and cash equivalents of $7,098 and equity securities of $3,622, representing an increase in cash and cash equivalents and equity securities of $5,887 from December 31, 2003. At December 31, 2004, the Company had $8,500 of available borrowings under the Credit Facility. The Company expects that its cash and cash equivalents and available borrowings under the Credit Facility will be sufficient to cover operating expenses through 2005. However, the Company’s cash resources will not be sufficient to cover all projected costs and expenses necessary to commence mining at the Las Cruces project. The Company estimates that the capital cost will be approximately 280 million euros, or approximately $369,000, to bring the Las Cruces project into production, excluding interest and other financing costs.

Restatement – As further discussed in Note 18 to the consolidated financial statements, the Company has determined that certain adjustments are required to restate the consolidated financial statements for the year ended December 31, 2004. All amounts in the accompanying footnotes have been adjusted for this restatement as appropriate.

Critical Accounting Estimates - The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the Company to make estimates about the effect of matters that are uncertain and to make difficult, subjective and complex judgments. These estimates and assumptions affect the reported amounts in the financial statements and disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and judgments. Actual results could differ from these estimates. The Company believes that the following accounting policies are the most critical because they have the greatest impact on the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Proven and Probable Ore Reserves – Reserves are defined as those parts of a mineral deposit that can be economically and legally extracted or produced at the time of determination and are customarily stated in terms of “ore” when dealing with metals. Proven reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; (b) grade and/or quality are computed from the results of detailed sampling; and (c) the sites for inspection, sampling and measurements are spaced so closely and the geologic character is sufficiently defined that size, shape, depth and mineral content of reserves are well established. Probable reserves are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart. The degree of assurance for probable reserves, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

II-33

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The Company’s reserve estimates could change as a result of changes in estimates relating to production costs or copper prices. Because the Las Cruces project has not commenced production, it is highly likely that the ore reserves for Las Cruces will require revision based on actual production experience.

A change in the Company’s ore reserve estimate, declines in the market price for copper, as well as increased production or capital costs or reduced recovery rates, could render ore reserves at the Las Cruces project uneconomic and could result in an impairment to the Company’s mining properties. If copper prices decline substantially below $0.76 per pound, the levels set for calculation of reserves, for an extended period, there could be material delays in developing the Las Cruces project. Reserves should not be interpreted as assurances of mine life or the profitability of future operations. No assurance can be given that the estimates of the amount of copper or the indicated level of recovery of copper will be realized at the Las Cruces project.

Asset Retirement Obligation – The Company estimates future asset retirement obligation costs mainly on the basis of legal and regulatory requirements. Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accounting for Asset Retirement Obligations,” requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. SFAS No. 143 requires the Company to record a liability for the present value of estimated asset retirement costs and the related asset created with it. The related asset is then amortized over the life of the asset on a units of production basis and accretion expense relating to the liability is recognized using the Company’s credit-adjusted risk-free interest rate. At various times the Company reviews the adequacy of its asset retirement obligations based on current estimates of future costs and sets aside adequate cash reserves to fund those costs. In the event that actual costs differ from those estimates, the Company’s results of operations, liquidity and financial condition will be affected.

The Company has put in place ongoing pollution control and monitoring programs at its mine sites and posted surety bonds as required for compliance with state and local closure, reclamation and environmental obligations. Estimated future reclamation and mine closure costs are based principally on legal and regulatory requirements. Through December 31, 2002, such costs were accrued and charged over the expected operating lives of the Company’s mines on a units-of-production method. On January 1, 2003, the Company adopted SFAS No. 143. The impact of adopting SFAS No. 143 was not material.

During May 2001, mining operations ceased and closure and reclamation activities began at the Castle Mountain Mine. The Company has reviewed the closure and reclamation accrual and believes it is sufficient.

Impairment of Long–Lived Assets - The Company evaluates its long-lived assets for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on management’s estimate of undiscounted future net cash flows attributable to the assets as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment is determined by estimating the fair value for the assets and recording a provision for loss if the carrying value is greater than fair value.

As of December 31, 2004, the carrying value of the Company’s investment in the mineral rights and mining properties of the Las Cruces project was approximately $104,000. The Company periodically evaluates the recoverability of the mining properties. Estimated future net cash flows from each property

II-34

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

are calculated using estimates of proven and probable ore reserves, estimated future metal prices (considering historical and current prices, price trends and related factors) and operating capital and reclamation costs on an undiscounted basis. Impairment is measured based on discounted future net cash flows. The recoverability of these assets is entirely dependent upon the Company’s success in obtaining required permits, obtaining both debt and equity financing for the project, engineering and construction costs. The amount of financing that can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders and equity investors of the current and expected future market price of copper and the current market for investments in businesses similar to ours. In addition, the actual price of copper, the operating cost of the mine and the capital cost (in U.S. dollars) to build the project and bring the mine into production will affect the recoverability of these assets. Based on the current status of the project and the Company’s estimate of future financing costs and future cash flows, the Company believes the carrying amount of its investment is recoverable. However, if the Company is unable to obtain the final permits and financing required to begin construction of the mine and commence mining activities, the Company is unable to recover the investment through a sale of the project, or the capital cost of the project changes significantly, it is likely that this investment will be impaired.

Debt Discount - Effective October 13, 2004, the Credit Facility with Leucadia was amended to, among other things, include a conversion feature that (1) provides for the automatic conversion of all outstanding loans under the credit facility into shares of the Company’s common stock at the public offering price in the event the proposed public offering by the Company of its common stock is consummated and (2) permits Leucadia, assuming the proposed public offering is withdrawn, to convert from time to time all or a portion of the outstanding loans under the Credit Facility into shares of common stock at a conversion price of $1.75 per share. Because the $1.75 per share conversion price was below the $2.75 per share trading price for the Company’s common stock on the date the Credit Facility was amended, there was an initial beneficial conversion feature of approximately $30,900. As additional borrowings under the Credit Facility occur, additional beneficial conversion features may be recognized depending upon the relationship between the conversion price per share and the trading price per share at the time of the borrowing.

The beneficial conversion feature is recognized in the financial statements by recording a debt discount (which has the effect of reducing long-term liabilities on the Company’s consolidated balance sheet) and a corresponding increase in capital in excess of par value (which has the effect of increasing stockholders’ equity on the Company’s consolidated balance sheet). The debt discount is being amortized over the remaining term of the debt and will be capitalized to mining properties during periods that mining properties are being developed. As a result of additional borrowings under the Credit Facility during the fourth quarter, an aggregate of approximately $37,300 of debt discount was recorded in the fourth quarter of 2004, of which approximately $6,000 was amortized and capitalized to mining properties during 2004. If the debt is converted to equity, any remaining unamortized debt discount will be reversed with a corresponding decrease in capital in excess of par value.

The Company calculates the debt discount based upon the difference between the conversion price and the trading price on the date the Credit Facility was amended and additional amounts are borrowed. The initial debt discount recorded is based on the borrowings outstanding on the date of the amendment. Although this resulted in a significant decrease to our long-term liabilities, those changes are temporary and will reverse over the remaining term of the Credit Facility as the debt discount is amortized.

II-35

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

In March 2005, Leucadia’s optional conversion price was reduced from $1.75 per share to $1.30 per share pursuant to another amendment to the Credit Facility. This reduction also resulted in a beneficial conversion feature. Accordingly, during the first quarter of 2005, the unamortized debt discount will be adjusted to reflect the beneficial conversion feature associated with the $1.30 per share conversion price.

Deferred Tax Asset and Tax Valuation Allowance - The Company has recorded a valuation allowance that fully reserves for its deferred tax asset (net of certain deferred tax liabilities which can be offset by its net operating loss carryforwards). The valuation allowance was recorded because the Company determined it is likely that it will not be able to utilize the deferred tax asset in the future. If the Company determines that it will be able to use all or a portion of its deferred tax asset in the future, it will record an adjustment to reduce the valuation allowance, thereby increasing income in that period. If and when this determination is made, it will be based upon projections of taxable income in the future, which are based on numerous judgments and assumptions, and is inherently uncertain. Prior to that time, the Company does not expect to reflect any federal income tax benefit in its consolidated statements of operations for reported losses, and it will not record any federal income tax expense on income in the future which can be offset by its net operating loss carryforwards.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, after elimination of intercompany accounts. The Company owns an undivided interest in each asset and, pursuant to its agreements, is severally liable for its share of each liability of the AGMJV and the CMV. The consolidated financial statements include the Company’s pro rata share of each of the joint ventures’ assets, liabilities, revenues and expenses, after elimination of intercompany accounts.

Reclassification - Certain amounts for prior periods have been reclassified to be consistent with the 2004 presentation.

Cash Equivalents - Cash equivalents consist of investments in short-term commercial paper, having a remaining maturity at date of acquisition of three months or less, and money market mutual funds.

Restricted Cash and Investments –CMV is funding its asset retirement obligations with amounts included in separate bank and investment accounts. The funding amount is based on the estimated ultimate net liability.

Inventories - Gold bullion and materials and supplies are stated at the lower of average cost or net realizable value.

Mining Properties, Plant and Mine Development - Depreciation, depletion and amortization of mining properties, mine development costs and major plant facilities is computed principally by the units-of-production method based on estimated proven and probable ore reserves. Proven and probable ore reserves reflect estimated quantities of economically recoverable reserves which can be recovered in the future from known mineral deposits. Mining equipment and other plant facilities are depreciated using straight-line or accelerated methods principally over estimated useful lives of 3 to 10 years.

Income Taxes - The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes.

II-36

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

Revenue Recognition - Revenue from product sales is recognized when title and risk of ownership transfers to customers.

Earnings Per Share - For each of the three years in the period ended December 31, 2004, there were no differences in the numerators for the basic and diluted per share computations. These numerators were $(5,772), $201 and $(153) for 2004, 2003 and 2002, respectively. The denominators for basic per share computations were 37,536,461, 37,425,457 and 37,395,649 for 2004, 2003 and 2002, respectively. The denominators for fully diluted per share computations were 37,536,461, 37,437,899 and 37,395,649 for 2004, 2003 and 2002, respectively. Options to purchase 1,630,000, 1,740,000 and 1,910,000 shares of common stock outstanding during 2004, 2003 and 2002, respectively, were not included in the computation of diluted per share amounts because the related impact was antidilutive. For 2004, the 38,000,000 shares that would be issuable with respect to Leucadia’s conversion option under the Credit Facility were not included in the computation of diluted loss per share because the facility was not then convertible as described in Note 10.

Stock Options - The Company accounts for stock options granted using Accounting Principles Board APB Opinion No. 25. As all options were granted with exercise prices equal to the market value of the Company’s common stock on the date of grant, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value of the stock options at the grant dates for awards under those plans consistent with SFAS No. 123, the Company’s net income (loss) and net income (loss) per common share would have changed to the pro forma amounts indicated below:


	Year Ended December 31,
	2004			2003			2002
	(Restated)
Net income (loss) as reported	$	(5,772	)	$	201		$	(153	)
Deduct: Total stock-based compensation expense determined using the fair value method for all awards, net of related tax effects		(45	)		(9	)		(26	)

Pro forma net income (loss)	$	(5,817	)	$	192		$	(179	)

Net income (loss) per share:
Basic – as reported	$	(0.15	)	$	0.01		$	(0.00	)
Basic – pro forma	$	(0.15	)	$	0.01		$	(0.00	)
Diluted – as reported	$	(0.15	)	$	0.01		$	(0.00	)
Diluted – pro forma	$	(0.15	)	$	0.01		$	(0.00	)

Translation of Foreign Currency - Foreign currency subsidiary financial statements are translated into U.S. dollars at current exchange rates, except that revenues and expenses are translated at average exchange rates during each reporting period; resulting translation gains (losses) are reported as a component of other comprehensive income (loss). Cumulative translation gains and (losses) were $16,131 and $10,133 at December 31, 2004 and 2003, respectively. Net realized foreign exchange gains (losses) were not material for the years ended December 31, 2004, 2003 and 2002.

Recently Issued Accounting Standards - In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123 and supersedes APB Opinion No. 25,

II-37

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

“Accounting for Stock Issued to Employees.” SFAS No. 123R requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. That cost will be recognized as an expense over the vesting period of the award. The pro forma disclosures previously permitted under SFAS No. 123 (which are shown above) no longer will be an alternative to financial statement recognition. In addition, the Company will be required to determine fair value in accordance with SFAS No. 123R. SFAS No. 123R is effective for reporting periods beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged, and requires the application of a transition methodology for stock options that have not vested as of the date of adoption. The Company is currently evaluating the impact of SFAS No. 123R on its consolidated financial statements.

2. ASSET RETIREMENT OBLIGATION

The gold reserves at the Castle Mountain Mine were exhausted in May 2001. At that time, mining operations ceased and closure and reclamation began. Residual gold production from leaching ceased during the fourth quarter of 2004.

The Company has recorded asset retirement obligations of $794 including $769 for its share of closure and reclamation costs at the CMV as of December 31, 2004. The CMV has set aside a cash reserve to fund the projected closure and reclamation costs. The Company’s share of this fund was $1,357 at December 31, 2004. The Company has reviewed its recorded asset retirement obligation estimates and believes it reflects the future costs of closure and reclamation.

Following is a reconciliation of the asset retirement obligations from December 31, 2002 to December 31, 2004:


Accrued reclamation as of December 31, 2002	$	1,899
Addition to obligation due to change in reclamation plan		0
2003 accretion expense		77
Current settlements of asset retirement obligation		(505	)

Asset retirement obligation as of December 31, 2003		1,471
Reduction in obligation due to change in reclamation plan		(32	)
2003 accretion expense		60
Current settlements of asset retirement obligation		(705	)

Asset retirement obligation as of December 31, 2004	$	794

3. PROJECT DEVELOPMENT

The Company, through its wholly owned subsidiary Cobre Las Cruces, S.A., owns the exploration and mineral rights to the Las Cruces project, a development stage copper project in the Pyrite Belt of Spain. The Las Cruces project was acquired by the Company on September 1, 1999 when the Company acquired Cobre Las Cruces, formerly known as RioMin Exploraciones, S.A., from Rio Tinto plc.

Mining at the Las Cruces project will be subject to permitting, obtaining financing, engineering and construction. Although the Company believes necessary permitting for the project will be obtained, the

II-38

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

Company cannot guarantee that such will be the case, and no assurance can be given that the Company will obtain financing for the project. Further, there may be other political and economic circumstances that could prevent the Company from completing development of the project.

4. INVESTMENTS

At December 31, 2004, the Company had investments of $3,622, consisting of common shares of Bear Creek Mining Corporation (Note 5). At December 31, 2003, the Company had investments of $3,137, consisting of U.S. government agency bonds and notes of $873 relating to restricted investments at the CMV, and common shares of Bear Creek Mining Corporation of $2,264. The investments have been classified as available-for-sale. The investments are reported at fair value with unrealized gains and losses, if any, recorded as a component of accumulated other comprehensive income. The cost basis of the equity securities at December 31, 2004 was $1,969 and an unrealized gain on investment of $1,653 has been recorded to report the securities at their fair value of $3,622. At December 31, 2003, the Company had recorded an unrealized gain of $295 to report the securities at their fair value of $2,264.

5. UNCONSOLIDATED AFFILIATE

In July 2000, the Company acquired 20 of 39 limited partner units of Peru Exploration Venture LLLP (“Peru Exploration”), an Arizona limited liability limited partnership. The partnership was formed in June 2000 with Bear Creek Mining Company, an Arizona corporation, as the general partner. The Company’s commitment to the partnership was $1,000 over a two-year period, which was fully funded as of December 31, 2001.

The Company accounted for this investment using the equity method of accounting and, as a result of recording its share of Peru Exploration’s losses, had reduced its investment balance to zero as of December 31, 2002. Since the Company had no obligation or commitment to provide any additional funds to Peru Exploration, application of the equity method of accounting was suspended once its investment was reduced to zero. The Company’s recognized share of loss from the partnership for the year ended December 31, 2002 was $301.

On April 21, 2003, the Company exchanged all of its limited partnership units of Peru Exploration for a total of 4,821,905 common shares (representing approximately 17.8% of total common shares at December 31, 2004) of Bear Creek Mining Corporation (“Bear Creek”), a publicly traded Canadian mineral exploration company (TSX Venture Exchange: BCM). The exchange was made in connection with the acquisition by Bear Creek (formerly EVEolution Ventures, Inc.) of all outstanding limited partnership interests of Peru Exploration and all outstanding shares of Peru Exploration’s general partner. In addition, the Company has non-transferable preemptive rights, until April 25, 2005, to participate in any offering of common stock undertaken by Bear Creek on a pro rata basis in order to allow it to maintain its percentage interest in the common shares of Bear Creek.

In April 2003, the Company recorded a non-cash gain of $1,945, net of related expenses, based upon the estimated value of the common shares of Bear Creek received. The common shares of Bear Creek that could be sold without restriction within 12 months are classified as a current asset and carried at the quoted market price of the Bear Creek common stock. The remainder of the shares are classified as a long term asset and carried at the amount recorded upon receipt in April 2003, unless there is a decline in market value which is other than temporary. Any unrealized gains and losses on these securities are reflected as a component of accumulated other comprehensive income.

II-39

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The Company’s ability to realize the recorded value of its shares of Bear Creek is subject to various risks, including Bear Creek’s performance in the future, volatility in the market price for the shares and the existence of sufficient market liquidity to absorb the Company’s position, all of which are beyond the Company’s control.

6. INVENTORIES

The components of inventory are shown below:


	December 31
	2004		2003
Gold bullion	$	—	$	96
Materials and supplies		—		37

	$	—	$	133

7. MINING PROPERTIES, PLANT AND MINE DEVELOPMENT

The components of mining properties, plant and mine development are shown below:


	December 31
	2004			2003
	(Restated)
Mining properties	$	110,077		$	82,312
Mine development		7,023			7,023
Plant and equipment		4,985			5,062

		122,085			94,397

Less accumulated depreciation, depletion and amortization		(11,564	)		(11,808	)

	$	110,521		$	82,589

Interest (including amortized debt discount in 2004) capitalized to mining properties was $8,582, $1,487 and $1,417 for the years ended December 31, 2004, 2003 and 2002, respectively.

Maintenance and repair expenses charged to operations were $37, $50 and $27 for the years ended December 31, 2004, 2003 and 2002, respectively.

8. INDUSTRY SEGMENT INFORMATION

The Company is not economically dependent on a limited number of customers for the sale of its gold because gold commodity markets are well-developed worldwide. The Company operates primarily in two reportable segments: gold operation through its undivided interest in CMV and its Las Cruces copper project, which is currently under development in Spain.

II-40

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)


	Year Ended December 31
	2004			2003			2002
	(Restated)
Revenue:
Gold sales	$	993		$	1,441		$	4,841

Total revenue	$	993		$	1,441		$	4,841

Gross profit (loss):
Gold sales	$	639		$	858		$	2,612
Copper project		(304	)		(565	)		(279	)

Total gross profit (loss)	$	335		$	293		$	2,333

Identifiable assets:
Gold sales	$	1,580		$	2,264		$	2,387
Copper project		117,350			84,590			65,567
Corporate and eliminations		4,865			3,304			2,401

Total assets	$	123,795		$	90,158		$	70,355

Depreciation, depletion and amortization:
Gold sales	$	3		$	5		$	—
Corporate and eliminations		16			20			29

Total depreciation, depletion and amortization	$	19		$	25		$	29

Capital expenditures:
Gold sales	$	—		$	59		$	—
Copper project		16,240			7,447			3,487
Corporate and eliminations		24			10			18

Total capital expenditures	$	16,264		$	7,516		$	3,505

II-41

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

9. INCOME TAXES

The provision (benefit) for income taxes consists of:


	Year Ended December 31, 2004			Year Ended December 31, 2003		Year Ended December 31, 2002
Currently (receivable) payable:
U.S. federal	$	—		$	—	$	—
State		(2	)		4		3

Total currently (receivable) payable		(2	)		4		3

Deferred:
U.S. federal		—			—		—
State		—			—		—

Total deferred		—			—		—

Total	$	(2	)	$	4	$	3

Deferred tax assets and liabilities consist of the following:


	December 31, 2004									December 31, 2003
	Assets			Liabilities			Total			Assets			Liabilities			Total
Depreciation, depletion and amortization				$	(4,343	)	$	(4,343	)				$	(3,547	)	$	(3,547	)
Reclamation and other liabilities		310						310			847						847
Inventory valuation		—						—			4						4
AMT credit carryforward		140						140			140						140
Net operating loss carryforward		23,797						23,797			20,645						20,645
Valuation allowance		(20,607	)					(20,607	)		(18,089	)					(18,089	)
Other		1			—			1			—			—			—
Stock offering costs		702			—			702			—			—			—
Basis difference in mining properties					(3,967	)		(3,967	)					(3,967	)		(3,967	)

	$	4,343		$	(8,310	)	$	(3,967	)	$	3,547		$	(7,514	)	$	(3,967	)

A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The net deferred tax asset reflects management’s estimate of the amount which will be realized from future taxable income of the character necessary to recognize such asset.

Primarily due to past net operating losses, the Company has recorded a gross deferred tax asset of approximately $24,950 as of December 31, 2004. The Company has also recorded a valuation allowance of $20,607 against this asset, resulting in a net deferred tax asset of $4,343. Gross deferred tax liabilities are partially offset by this deferred tax asset, resulting in a net deferred tax liability of $3,967.

II-42

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The provision (benefit) for income taxes differs from the amounts computed by applying the U.S. corporate income tax statutory rate of 34% for the following reasons:


	Year Ended December 31,
	2004			2003			2002
	(Restated)
U.S. corporate income tax (benefit) provision at statutory rate	$	(1,962	)	$	70		$	(51	)
Change in valuation allowance		2,394			(84	)		39
State income taxes, net of federal tax (benefit) provision		(288	)		10			(8	)
Non-deductible interest		4			—			—
Other, net		(150	)		4			23

Provision (benefit) for income taxes	$	(2	)	$	—		$	3

10. LINE OF CREDIT FROM LEUCADIA, PROPOSED PUBLIC OFFERING AND DEBT CONVERSION

At December 31, 2004, the amount of the Credit Facility was $75,000 and borrowings of $66,500 were outstanding ($35,131 net of unamortized discount). At December 31, 2003, the amount of the Credit Facility was $50,000 and borrowings of $41,500 were outstanding. Through various amendments, the most recent of which was effective March 4, 2005, the Credit Facility has been amended to increase the facility to $80 million. The Credit Facility has an expiration date of January 3, 2007. Leucadia may terminate the Credit Facility on December 15 of any year, provided Leucadia notifies the Company of the termination prior to September 15 of that year. Leucadia has the right to terminate the Credit Facility at any time when it owns less than 45% of our outstanding common stock. Leucadia has notified the Company that it does not intend to terminate the Credit Facility prior to December 15, 2006. Loans outstanding under the Credit Facility bear interest equal to the prime rate plus 3% and interest and commitment fees are payable quarterly. The prime rate at March 21, 2005 was 5.5%. Interest paid to Leucadia under the Credit Facility for the twelve months ended December 31, 2004 and 2003 was approximately $2.7 million and $1.5 million, respectively. A substantial portion of these interest payments relates to financing for the Las Cruces project. Interest related to the Las Cruces project is capitalized and is not reflected as interest expense in our consolidated statements of operations. Instead, capitalized interest is added to mining properties, plant and mine development on our consolidated balance sheets.

During 2004, the Company filed a registration statement with the U.S. Securities and Exchange Commission and a Canadian preliminary prospectus with securities regulatory authorities in Canada for a proposed public offering of up to 70,150,000 shares of its common stock to finance a portion of the development costs of the Las Cruces project. In anticipation of the proposed public offering, the Company increased its authorized common stock to 125,000,000 shares. Due to unfavorable market conditions, the Company’s efforts to complete the offering were unsuccessful. The Canadian preliminary

II-43

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

prospectus expired during the fourth quarter of 2004, and we filed an application to withdraw the registration statement with the U.S. Securities and Exchange Commission on May 9, 2005. The Company is currently focusing on alternative sources of funding for the Las Cruces project, including debt financing from other sources, entering into one or more joint ventures or an outright sale of its interest in the Las Cruces project. Due to the delay and uncertainty surrounding the offering, the Company charged $3,600 of deferred offering and other financing related costs to expense in the fourth quarter of 2004.

Effective October 13, 2004, the Credit Facility with Leucadia was amended to, among other things, increase the amount available for borrowing from $55,000 to $75,000, increase the interest rate from the prime rate to the prime rate plus 3.0% and include a conversion feature which (1) provides for the automatic conversion of all outstanding loans under the Credit Facility into shares of common stock at the public offering price in the event the proposed public offering is consummated and (2) permits Leucadia to convert from time to time all or a portion of the outstanding loans under the Credit Agreement into shares of Common Stock at a conversion price of $1.75 per share if the proposed public offering is withdrawn. Because the $1.75 conversion price was below the $2.75 trading price for the Company’s Common Stock on the date the Credit Facility was amended, there was an initial beneficial conversion feature of approximately $30,900. As a result of additional borrowings under the Credit Facility during the fourth quarter, an aggregate of approximately $37,300 was recorded in the fourth quarter of 2004 as a debt discount with a corresponding increase in capital in excess of par value. Although the Company’s long-term debt decreased significantly through the recording of the debt discount, that increase is temporary as it will reverse over the remaining term of the Credit Facility as the debt discount is amortized. During the fourth quarter, approximately $6,000 of amortization expense was capitalized to mining properties. If the debt is converted to equity, any remaining unamortized debt discount will be reversed with a corresponding decrease in capital in excess of par value.

In March 2005, Leucadia’s option conversation price was reduced from $1.75 per share to $1.30 per share pursuant to an amendment to the Credit Facility. This reduction also resulted in a beneficial conversion feature. Accordingly, during the first quarter of 2005, the unamortized debt discount will be adjusted to reflect the beneficial conversion feature associated with the $1.30 per share conversion price.

11. GAIN (LOSS) ON DISPOSAL OF ASSETS

The Company recognized a gain on disposal of assets of $59, $106 and $620 in 2004, 2003 and 2002, respectively, from sales of mining equipment and assets as part of closure activities at the Castle Mountain Mine. In addition, during 2002, the Company decided not to renew a purchase option on a portion of land needed to develop the Las Cruces project. The Company wrote off the book value of the purchase option as a loss on disposal of assets of $884 in 2002.

II-44

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

12. BANKRUPTCY RECOVERY

As part of a court approved bankruptcy plan of Washington Group International, Inc. (“Washington Group”), the Company has received distributions of common stock and warrants to purchase additional common shares of Washington Group, beginning in the second quarter of 2002. During 2002, the Company received 18,734 shares of common stock and warrants to purchase an additional 31,924 common shares of Washington Group, with a combined market value of $365. During 2003, the Company received 11,774 shares of common stock and warrants to purchase an additional 16,214 common shares of Washington Group, with a combined market value of $315. During 2004, the Company received 20,856 shares of common stock and warrants to purchase an additional 35,541 common shares of Washington Group, with a combined market value of $994. The Company sold the Washington Group securities received in 2002 and 2003 during the fourth quarter of 2003. The Company sold the Washington Group securities received in 2004 immediately upon receipt. The Company has recorded these amounts, net of related legal expenses, as income in the periods received.

13. GAIN ON SALE OF SECURITIES

During the fourth quarter of 2003, the Company sold all of its investment in shares of common stock and warrants of Washington Group on the open market for approximately $1,200. The amount realized in excess of the amortized cost of those securities of $498 was reported as income in 2003.

14. BENEFIT PLANS

The Company maintains a 401(k) Savings Plan (the “Plan”) for all full-time active employees and matches 50% of employee contributions to the Plan up to 5% of eligible pay. The cost of the Plan was $29, $26 and $22 for the years ended December 31, 2004, 2003 and 2002, respectively.

15. COMMITMENTS AND CONTINGENCIES

Environmental - The Company’s mining operations and exploration activities are subject to various federal, state, local and foreign laws and regulations governing protection of the environment. These laws are continually changing and, as a general matter, are becoming more restrictive. The Company’s policy is to conduct its business in a manner that safeguards public health and mitigates the environmental effects of its mining operations. To comply with these laws and regulations, the Company has made and in the future may be required to make capital and operating expenditures. The Company does not anticipate incurring any material unforeseen capital or operating expenditures for environmental compliance during 2005.

Surety bonds and letters of credit totaling $2,457 (of which the Company’s share is $637) have been provided as required by various governmental agencies for environmental protection, including reclamation bonds at the American Girl Mine and Castle Mountain Mine. The Company has provided surety bonds and letters of credit totaling $531 as required by various governmental agencies in Spain relating to water management at the Las Cruces project.

Other - The CMV is committed to pay royalties to landowners generally based on a percent of refined gold bullion. Effective net smelter return royalties paid as a percent of the realized gold price were 0.03%, 0.2% and 1.0% for the years ended December 31, 2004, 2003 and 2002, respectively.

II-45

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The CMV has rented certain mining equipment under non-cancelable operating leases with terms generally varying from one to four years. The Company’s share of rental expense charged to operations was $15 in 2003. These leases expired in 2003.

The Company rents certain equipment and office and storage properties under non-cancelable operating leases with terms varying from one to five years. Rental expense relating to these properties and equipment charged to operations was $219 in 2004, $257 in 2003 and $171 in 2002. Minimum annual rentals (exclusive of taxes) relating to these properties and equipment under leases in effect at December 31, 2004 are $199 for 2005, $123 for 2006, $125 for 2007, $87 for 2008, and $1 for 2009.

Due to the delay and uncertainty associated with the proposed equity offering, the Company charged $3,600 of deferred offering and other financing related costs to expense in the fourth quarter of 2004. The amount charged during the fourth quarter does not include certain advisory fees the Company may be obligated to pay under agreements with the Company’s financial advisors if the Company completes a sale of the project, merger or other transaction.

16. RELATED PARTY TRANSACTIONS

The Company’s joint venture partner, Quest Capital Corporation (“Quest”) (formerly Viceroy Resource Corp.), is the manager of the CMV and, as such, is entitled to receive a management fee of 1% of capital expenditures and 2% of allowable costs as defined in the Castle Mountain Venture Agreement. Management fees charged by Quest attributable to the Company amounted to $14, $20 and $21 for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company is the manager of the AGMJV and under the terms of the American Girl Mining Joint Venture Agreement is entitled to receive a management fee. Management fees received by the Company amounted to $14 for each of the three years ended December 31, 2004, 2003 and 2002, respectively.

For the years ended December 31, 2004, 2003 and 2002, approximately $2,649, $1,509 and $1,441, respectively, in interest and commitment fees were paid to Leucadia under the Credit Facility. For the years ended December 31, 2004, 2003 and 2002, approximately $8,582, $1,487 and $1,417, respectively, in interest (including amortized debt discount in 2004) relating to the Las Cruces project was capitalized.

17. STOCK PLANS

Stock Incentive Plan for Non-Employee Directors - The Company has 500,000 authorized options in a non-employee director stock incentive plan. As of December 31, 2004, 15,000 non-employee director stock options are outstanding and 455,000 non-employee director stock options are available for grant under the plan. The exercise price, vesting period and expiration date of options granted under the plan are determined by the Executive Committee of the Board of Directors of the Company.

Stock Incentive Plan - The Company has a stock incentive plan which allows for a maximum of 2,500,000 options to be awarded. Options granted under the stock incentive plan have an exercise price equal to the fair market value of the stock on the date of grant, vest over one to three years and expire 10 years after the date of grant.

II-46

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The following table summarizes the activities for the Company’s two stock plans for the three years ended December 31, 2004:


	Number of Options		Weighted Average Exercise Price		Options Exercisable		Weighted Average Exercise Price
Balance, December 31, 2001	1,965,000		$	1.66	1,890,000		$	1.69
Granted	100,000			0.58	—			—
Exercised	—			—	—			—
Vested during year	—			—	50,000			0.93
Cancelled	(30,000	)		2.91	(30,000	)		2.91

Balance, December 31, 2002	2,035,000		$	1.59	1,910,000		$	1.65
Granted	5,000			1.40	—			—
Exercised	—			—	—			—
Vested during year	—			—	62,500			0.73
Cancelled	(145,000	)		1.56	(120,000	)		1.77

Balance, December 31, 2003	1,895,000		$	1.59	1,852,500		$	1.62
Granted	210,000			2.27	—			—
Exercised	(250,000	)		1.43	(250,000	)		1.43
Vested during year	—			—	42,500			0.68
Cancelled	(15,000	)		2.72	(15,000	)		2.72

Balance, December 31, 2004	1,840,000		$	1.69	1,630,000			1.90

The following table summarizes information for options outstanding and exercisable at December 31, 2004:


	Options Outstanding				Options Exercisable
Range of Prices	Number	Weighted Average Remaining Life	Weighted Average Exercise Price		Number	Weighted Average Remaining Life	Weighted Average Exercise Price
$0.58-1.22	150,000	6.50	$	0.73	150,000	6.50	$	0.73
$1.23-1.83	1,480,000	2.02		1.70	1,480,000	2.02		1.70
$1.84-2.79	210,000	10.00		2.27	—	—		—

$0.81-3.09	1,840,000	3.30	$	1.69	1,630,000	3.66	$	1.90

The fair value of stock-based awards to employees and directors is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:


	Year Ended December 31,
	2004	2003	2002
Risk-free interest rate	0.0490	0.0384	0.0449
Expected life	9.33 years	7 years	7 years
Expected volatility	1.14	0.2	0.2

II-47

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

The weighted average fair value of options granted during the years ended December 31, 2004, 2003 and 2002 is as follows:

Options with an exercise price equal to the market price on the grant date:


	2004		2003		2002
Fair value of each option granted	$	2.27	$	1.40	$	0.58
Total number of options granted		210,000		5,000		100,000
Total fair value of all options granted	$	477,500	$	7,000	$	57,500

There were no options granted during 2004, 2003 or 2002 with an exercise price less than the market price on the date of grant.

18. RESTATEMENT

The Company restated its 2004 financial statements for an accounting error in the application of SFAS No. 34 “Capitalization of Interest Cost” for interest costs related to the amortization of debt discount. Specifically, amortization of the debt discount on the Company’s convertible credit facility with Leucadia was erroneously omitted from interest costs subject to capitalization under SFAS No. 34. Upon further analysis, the Company has determined that the amortized debt discount should have been capitalized under SFAS No. 34 because it related to debt that was used to finance development activities associated with the Company’s Las Cruces copper mining project in Spain. The effect of the adjustment is to reduce the Company’s fiscal 2004 net loss by $5,965, or $0.16 per share, increase the Company’s mining properties, plan and mine development, net, and total assets at December 31, 2004 by $5,965 and increase stockholders’ equity by $5,965, which is reflected as a decrease to the accumulated deficit.

The following sets forth the effects of the restatement of the Company’s consolidated statement of operations for the year ended December 31, 2004 and the consolidated balance sheet at December 31, 2004. The revision had no effect on net cash used by operating activities, net cash used by investing activities or net cash provided by financing activities. (In thousands of dollars except per share data.)

II-48

MK RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Thousands of dollars except share data)

Consolidated Statement of Operations

Year ended December 31, 2004


	As Reported			Restated
Amortization of debt discount	$	(5,965	)	$	—
Income (loss) before income taxes		(11,739	)		(5,774	)
Net income (loss)		(11,737	)		(5,772	)
Basic and diluted income (loss) per common share		(0.31	)		(0.15	)

Consolidated Balance Sheet
December 31, 2004

	As Reported			Restated
Mining properties, plant and mine development, net	$	104,556		$	110,521
Total assets		117,830			123,795

Accumulated deficit		(64,523	)		(58,558	)
Total stockholders’ equity		74,216			80,181
Total liabilities and stockholders’ equity		117,830			123,795

Consolidated Statement of Cash Flows
Year ended December 31, 2004

	As Reported			Restated
Supplemental disclosures of cash flow information
Amortization of debt discount capitalized as a component of mining properties, plant and mine development	$	—		$	5,965

II-49

Item 9A. Controls and Procedures

As further discussed in Notes 1 and 18 to the consolidated financial statements, we have restated our consolidated financial statements for the year ended December 31, 2004. This restatement was necessary to correct an accounting error related to the application of SFAS No. 34, “Capitalization of Interest Cost” to the amortization of debt discount. In the fourth quarter of 2004, we amended our credit facility with Leucadia to, among other things, increase the amount available for borrowing, increase the interest rate and include a conversion feature. Because the conversion price was below the trading price for our common stock on the date the credit facility was amended, there was an initial beneficial conversion feature of approximately $30.9 million. As a result of additional borrowings under the convertible credit facility during the fourth quarter, an aggregate of approximately $37.3 million was recorded in the fourth quarter of 2004 as a debt discount. During the fourth quarter of 2004, the amortized debt discount on the convertible credit facility was incorrectly recorded as an expense. Upon further analysis, we determined that the amortized debt discount should have been treated as interest cost subject to capitalization under SFAS No. 34 because the related debt was used to finance development activities associated with our Las Cruces project.

Disclosure Controls and Procedures

As of the end of the period covered by this report, December 31, 2004, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the restatement, under the direction of our Chief Executive Officer and Chief Financial Officer, we reevaluated our disclosure controls and procedures. Based on this evaluation and the identification of the material weakness in internal control over financial reporting described below, we have concluded that our disclosure controls and procedures were not effective as of December 31, 2004.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004, we did not maintain effective controls over our determination and recording of capitalized interest costs in accordance with generally accepted accounting principles. Specifically, our controls failed to ensure the correct application of SFAS No. 34 to the amortized debt discount associated with the amendment to our convertible credit facility and subsequent borrowings under the convertible credit facility during the fourth quarter of 2004. This control deficiency resulted in the error requiring the restatement of our 2004 financial statements, as reflected in this amended Form 10-K, to correct for the misstatement in interest expense, capitalized interest cost and accumulated deficit. Accordingly, management has concluded that the control deficiency constituted a material weakness.

As of the date of this filing, we believe we have remediated the material weakness in our internal control over financial reporting with respect to accounting for capitalization of interest costs. The remedial actions included additional research and education to ensure that all relevant personnel involved in transactions involving interest costs understand and apply accounting in compliance with SFAS No. 34.

In connection with this amended Form 10-K, under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated our disclosure controls and procedures as currently in effect, including the remedial actions discussed above, and we have concluded that, as of May 16,2005, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

As previously reported, there was no change in our internal control over financial reporting during the quarter ended December 31, 2004, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, subsequent to March 31, 2005, we took the remedial actions described above.

II-50

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


		PAGE
(a)	Financial Statements, Schedules and Exhibits.

1.	Financial Statements included in Part II of this Form 10-K/A:

	Report of Independent Registered Public Accounting Firm	II-27

	Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002	II-28

	Consolidated Balance Sheets at December 31, 2004 and 2003	II-29

	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2003 and 2002	II-30

	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002	II-31

	Notes to Consolidated Financial Statements	II-33

2.	Schedules are omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto.

3.	Exhibits.

	The exhibits to this Form 10-K/A are listed in the Exhibit Index contained elsewhere in this Form 10-K.

IV-1

SIGNATURES

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


MK RESOURCES COMPANY

By:		/s/ John C. Farmer
		John C. Farmer
		Chief Financial Officer and Secretary
		(Principal Financial and Accounting Officer)

Date: May 16, 2005

EXHIBIT INDEX

Exhibits marked with an asterisk are filed with this report. The remaining exhibits have previously been filed with the Securities and Exchange Commission and are incorporated by reference into this report.


Exhibit Number		Exhibit
3.1		Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).

3.2		Certificate of Amendment of Certificate of Incorporation of the Registrant (filed as Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (SEC File No. 0-23042) and incorporated herein by reference).

3.3		Certificate of Amendment of Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (SEC File No. 0-23042) and incorporated herein by reference).

3.4		Certificate of Ownership and Merger of MK Resources Company with and into MK Gold Company (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (SEC File No. 0-23042) and incorporated herein by reference).

3.5		Bylaws of the Registrant (filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).

4.1		Form of Common Stock Certificate (filed as Exhibit 4.1 to the Registrant’s Amendment No. 2 on Form S-1/A (333-116344) filed with the SEC on October 18, 2004 and incorporated herein by reference).

4.2		Stock Purchase Agreement, dated as of September 1, 1999, between the Registrant and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated September 1, 1999 (SEC File No. 0-23042) and incorporated herein by reference).

10.1		Form of Indemnification Agreement to be entered into with Officers and Directors of the Registrant (filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1995 (SEC File No. 0-23042) and incorporated herein by reference).

10.2		Castle Mountain Venture Contract Mining Agreement (filed as Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).

10.3		Castle Mountain Joint Venture Agreement (filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed on October 14, 1993 (Registration No. 33-70348) and incorporated herein by reference).

10.4		Settlement Agreement, dated December 19, 1995, between Viceroy Gold Corporation, the Registrant and the Castle Mountain Venture (filed as Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).

10.5		Amendment No. 2 to Castle Mountain Venture Agreement, dated December 19, 1995, between the Registrant and Viceroy Gold Corporation (filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).


10.6		American Girl Venture Agreement (filed as Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 dated October 14, 1993 (Registration No. 33-70348) and incorporated herein by reference).

10.7		Oro Cruz Memorandum of Understanding (Memorandum of Agreement) (filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 dated October 14, 1993 (Registration No. 33-70348) and incorporated herein by reference).

10.8		Representative Arrangement with Johnson Mathey & Co. (filed as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 dated October 14, 1993 (Registration No. 33-70348) and incorporated herein by reference).

10.9		American Girl Amended and Restated Mining Joint Venture Agreement, dated January 1, 1994 (filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1995 (SEC File No. 0-23042) and incorporated herein by reference).

10.10		Credit Agreement, effective as of March 1, 1998, between Leucadia National Corporation and MK Gold Company (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (SEC File No. 0-23042) and incorporated herein by reference).

10.11		Amended and Restated MK Gold Company Executive Incentive Plan, dated January 9, 1995 (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1995 (SEC File No. 0-23042) and incorporated herein by reference).

10.12		List of additional signers of the Indemnification Agreement submitted under Exhibit 10.1 (filed as Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).

10.13		Stock Incentive Plan, as approved and amended by stockholders through August 5, 1996 (filed as Exhibit 10.22 to the Registrant’s Transition Report on Form 10-K for the transition period from April 1, 1996 to December 31, 1996 (SEC File No. 0-23042) and incorporated herein by reference).¹

10.14		Amendment No. 1 to Credit Agreement, dated as of March 1, 2000, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (SEC File No. 0-23042) and incorporated herein by reference).

10.15		Amendment No. 2 to Credit Agreement, dated as of October 17, 2000, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (SEC File No. 0-23042) and incorporated herein by reference).

10.16		Amendment No. 3 to Credit Agreement, dated as of December 31, 2000, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (SEC File No. 0-23042) and incorporated herein by reference).

10.17		Reserved.


10.18		Amendment No. 4 to Credit Agreement, dated as of April 1, 2001, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (SEC File No. 0-23042) and incorporated herein by reference).

10.19		Amendment No. 5 to Credit Agreement, dated as of July 1, 2001, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (SEC File No. 0-23042) and incorporated herein by reference).

10.20		Amendment No. 6 to Credit Agreement, dated as of September 30, 2002, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (SEC File No. 0-23042) and incorporated herein by reference).

10.21		Amendment No. 7 to Credit Agreement, dated as of January 2, 2003, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (SEC File No. 0-23042) and incorporated herein by reference).

10.22		MK Gold Company Stock Incentive Plan for Non-Employee Directors, dated September 5, 2003 (filed as Annex A to the Registrant’s Definitive Proxy Statement dated August 7, 2003 (SEC File No. 0-23042) and incorporated herein by reference.)¹

10.23		Amendment No. 8 to Credit Agreement, dated as of September 12, 2003, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (SEC File No. 0-23042) and incorporated herein by reference).

10.24		Amendment No. 9 to Credit Agreement, dated as of December 31, 2003, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (SEC File No. 0-23042) and incorporated herein by reference).

10.25		Amendment No. 10 to Credit Agreement, dated as of March 31, 2004, between MK Gold Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (SEC File No. 0-23042) and incorporated herein by reference).

10.26		Purchase Agreement dated January 30, 2004 between Cobre Las Cruces, S.A. and Seroncillo, S.L. (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (SEC File No. 0-23042) and incorporated herein by reference).

10.27		Senior Executive Employment Contract dated May 1, 2004 between Cobre Las Cruces, S.A. and Francisco Fernando Fernandez Torres (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (SEC File No. 0-23042) and incorporated herein by reference). ¹

10.28		Sale and Purchase Agreement, dated September 1, 1999, between Rio Tinto Metals Limited and MK Gold Company (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed September 14, 1999 (SEC File No. 0-23042) and incorporated herein by reference).

10.29		Loan Conversion Agreement, dated July 26, 2004, between MK Resources Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on 10-Q for the quarter ended June 30, 2004 (SEC File No. 0-23042 and incorporated herein by reference).


10.30		Amendment No. 11 Credit Agreement, dated as of October 13, 2004 between MK Resources Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated October 13, 2004 (SEC File No. 0-23042) and incorporated herein by reference).

10.31		MK Resources Company Executive Severance Plan dated November 18, 2004 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated November 18, 2004 (SEC File No. 0-23042) and incorporated herein by reference).¹

10.32		Amendment No. 12 to Credit Agreement, dated as of March 4, 2005, between MK Resources Company and Leucadia National Corporation (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated March 4, 2005 (SEC File No. 0-23042) and incorporated herein by reference).

10.33		Credit Agreement, dated as of March 4, 2005, between MK Gold Exploration B.V. and Leucadia National Corporation (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, dated March 4, 2005 (SEC File No. 0-23042) and incorporated herein by reference).

10.34		Guaranty, dated as of March 4, 2005, between MK Resources Company and Leucadia National Corporation (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, dated March 4, 2005 (SEC File No. 0-23042) and incorporated herein by reference).

10.35		Agreement and Deed of Pledge, dated as of March 7, 2005 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, dated March 4, 2005 (SEC File No. 0-23042) and incorporated herein by reference).

21.1		Subsidiaries of the Registrant (filed as Exhibit 21 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (SEC File No. 0-23042) and incorporated herein by reference).

23		Consent of PricewaterhouseCoopers LLP.*

31.1		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Section 1350 Certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Section 1350 Certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*	Filed with this report.

¹	Management contracts and compensatory plans and arrangements identified pursuant to Item 15(a)(3) of Form 10-K.

MK RESOURCES CO 10-K/A