EXHIBIT 10.3 SECURITY AGREEMENT

 

                                                                    EXHIBIT 10.3

                               SECURITY AGREEMENT

 

      THIS SECURITY   AGREEMENT (this "Agreement") is made as of October 28, 2005

by and between El Capitan   Precious   Metals,   Inc.,   a Nevada   corporation   ("El

Capitan"),   and Whitebox   Intermarket   Partners,   L.P., a British Virgin Islands

limited partnership ("WIP").

 

                                    RECITALS

 

      A. El Capitan and WIP have entered into a Purchase   Agreement   dated as of

this date (the   "Purchase   Agreement"),   pursuant to which WIP is   purchasing   a

secured   convertible   promissory   note   in the   aggregate   principal   amount   of

$750,000   (the "Note") and a warrant to purchase   shares of El Capitan's   Common

Stock (the "Warrant") in consideration   of a $750,000 loan (the "Loan").   WIP is

referred to herein as the "Secured Party."

 

      B. As part of the   Purchase   Agreement,   El Capitan has granted to WIP and

its   affiliates   an   option   to   purchase   an   additional   secured    convertible

promissory note in the aggregate   principal   amount of $550,000 (the "Additional

Note") and an   additional   warrant to   purchase   Common   Stock (the   "Additional

Warrant").

 

      C. As a condition   to making the Loan,   El Capitan has agreed to pledge to

Secured Party all of its assets, subject to no other security interest except as

noted herein.

 

      NOW, THEREFORE,   in consideration of the agreements herein and in reliance

upon the   representations   and   warranties   set forth   herein and   therein,   the

parties agree as follows:

 

                                   ARTICLE 1.

                                  DEFINED TERMS

 

      1.1   DEFINITIONS.   Unless   otherwise   defined herein or unless the context

otherwise   requires,   terms used in this   Agreement,   including its preamble and

recitals, have the meanings provided in the Uniform Commercial Code in effect in

the State of Nevada (the "UCC").   In addition,   the following terms when used in

this   Agreement,   including its preamble and recitals,   shall have the following

meanings:

 

      "Loan   Documents"   means   (a)   this   Agreement,   (b)   the   Notes,   (c) the

Warrants,   (d) a Registration   Rights   Agreement of this date between El Capitan

and WIP (the "Registration Rights Agreement"), and (e) the Purchase Agreement.

 

      "Notes" means each of the Note and the Additional Note.

 

      "Obligations"   means the payment and other   performance   obligations under

the Loan Documents.

 

      "Warrants" means each of the Warrant and the Additional Warrant.

 

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                                   ARTICLE 2.

                                SECURITY INTEREST

 

      2.1   GRANT   OF   SECURITY   INTEREST.   To   secure   the   timely   payment   and

performance in full of the Obligations, El Capitan does hereby assign, grant and

pledge to Secured Party,   subject to no other secured rights, all of the estate,

right,   title and interest of El Capitan in and to the   Collateral as more fully

described on Exhibit A hereto,   whether now owned or later   acquired or created,

and   including   all proceeds of the   Collateral,   whether cash or non-cash   (the

"Collateral").

 

      2.2 FINANCING STATEMENTS.

 

            (a) El Capitan hereby authorizes Secured Party to file all financing

statements,   continuation   statements,   assignments,    certificates,   and   other

documents and instruments with respect to the Collateral pursuant to the UCC and

otherwise   as may be   necessary   or   reasonably   requested   by Secured   Party to

perfect or from time to time to   publish   notice   of, or   continue   or renew the

security   interests   granted   hereby   (including,    such   financing   statements,

continuation statements,   certificates,   and other documents as may be necessary

or   reasonably   requested   to   perfect a   security   interest   in any   additional

property   rights   hereafter   acquired   by El   Capitan   or in   any   replacements,

products or proceeds thereof),   in each case in form and substance   satisfactory

to Secured Party.

 

            (b) Secured Party will pay the cost of filing the same in all public

offices where filing is necessary or   reasonably   requested by Secured Party and

will   pay any and all   recording,   transfer   or   filing   taxes   that   may due in

connection   with any such filing.   El Capitan grants Secured Party the right, at

any time   and at   Secured   Party's   option,   to file   any or all such   financing

statements, continuation statements, and other documents pursuant to the UCC and

otherwise as Secured Party reasonably may deem necessary or desirable.

 

            (c) El   Capitan   hereby   authorizes   the   filing   of   any   financing

statements or continuation   statements,   and amendments to financing statements,

or any similar   document   in any   jurisdictions   and with any filing   offices as

Secured Party may reasonably determine are necessary or advisable to perfect the

security   interests   granted to Secured   Party.   Such   financing   statements may

describe the Collateral in the same manner as described herein or may contain an

indication or   description   of collateral   that   describes   such property in any

other manner as Secured Party may reasonably   determine is necessary,   advisable

or prudent to ensure the   perfection of the security   interest in the Collateral

granted to Secured Party herein.

 

      2.3 DEBTOR REMAINS LIABLE.

 

            (a) Anything herein   contained to the contrary   notwithstanding,   El

Capitan shall remain liable under any contracts,   agreements and other documents

included in the Collateral,   to perform all of the obligations   undertaken by it

thereunder,   all in   accordance   with and   pursuant to the terms and   provisions

thereof,   and Secured Party shall have no obligations   or liabilities   under any

such   contracts,   agreements   or other   documents by reason of or arising out of

this   Agreement,   nor shall Secured Party be required or obligated in any manner

to perform or fulfill any   obligations   of El Capitan   thereunder or to make any

payment,   or to make any inquiry as to the nature or   sufficiency of any payment

received by their or present or file any claim, or take any action to collect or

enforce the payment of any   amounts   which may have been   assigned to them or to

which they may be entitled at any time or times.

 

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            (b)   If any   default   by El   Capitan   under   any   of the   contracts,

agreements or other documents   shall occur,   Secured Party shall, at its option,

be permitted   (but shall not be   obligated) to remedy any such default by giving

written notice of such intent to El Capitan and to the parties to such contract,

agreement or other document.   Any cure by Secured Party of El Capitan's   default

under any such   contract,   agreement or other document shall not be construed as

an assumption by Secured Party of any obligations, covenants or agreements of El

Capitan   contained in such contract,   agreement or other   document,   and Secured

Party   shall not incur any   liability   to El   Capitan   or any other   person as a

result of any actions   undertaken   by Secured   Party in curing or   attempting to

cure any such   default.   This   Agreement   shall not be deemed to   release   or to

affect in any way the   obligations   of El Capitan   under any of such   contracts,

agreements or other documents.

 

      2.4 DELIVERY OF CERTIFICATES.   Secured Party   acknowledges that El Capitan

has granted a security   interest   in   1,000,000   shares of common   stock of U.S.

Canadian Minerals, Inc., a Nevada corporation ("UCAD"), owned by El Capitan to a

third   party   ("UCAD   Security   Interest")   and   that   such   shares   are   in the

possession of such third party.   Other than   certificates   or other   instruments

evidencing   shares securing the UCAD Security   Interest,   all   certificates   and

other instruments representing or evidencing El Capitan's ownership of shares of

capital    stock   of   UCAD   and   El   Capitan,    Ltd.,    an   Arizona    corporation

(collectively, the "Pledged Equity Interests") shall be delivered to and held by

or on behalf of   Secured   Party,   or its   designee   in the   manner   set forth in

Section 4.12 below.

 

      2.5 SALE OF UCAD   COMMON   STOCK.   Notwithstanding   any other   term of this

Agreement,   El   Capitan   shall be   entitled   to sell any and all   shares of UCAD

common stock to a third party in an arms-length   transaction;   provided that, in

the event of such sale of UCAD common stock,   El Capitan shall, at the option of

Secured   Party,   use no less than 35% of the net   proceeds   from the sale of the

UCAD common   stock   constituting   a portion of the Pledged   Equity   Interests to

satisfy all or a portion of its obligations to Secured Party under the Notes. In

the event of such sale, Secured Party shall promptly deliver to El Capitan, upon

the request of El Capitan, any certificates or other instruments representing or

evidencing   such   ownership   in such number of shares of UCAD common stock to be

sold by El Capitan,   and shall further   provide written consent for such sale by

El Capitan in such form as   reasonably   requested by El Capitan or the purchaser

of such UCAD common stock.   In such written request to Secured party, El Capitan

shall set forth the terms of the proposed sale and the anticipated closing date.

 

      2.6 VOTING   RIGHTS;   DIVIDENDS.   As long as no Event of Default,   or event

which with the giving of notice or lapse of time   would   constitute   an Event of

Default shall have occurred and be continuing:

 

            (a) El Capitan   shall be entitled to exercise   any and all voting or

consensual   rights relating to the Pledged Equity   Interests for any purpose not

inconsistent   with   the   terms of this   Agreement;   provided,   however,   that El

Capitan   shall not   exercise or refrain from   exercising   any such right if such

action would have a material adverse effect on the value of the Collateral; and

 

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            (b) El Capitan   shall be   entitled to receive and retain any and all

ordinary cash dividends payable in respect of the Pledged Equity Interests.

 

                                   ARTICLE 3.

                    REPRESENTATIONS AND WARRANTIES OF DEBTOR

 

      El Capitan makes the following   representations   and   warranties to and in

favor of Secured Party as of the date hereof. All of these   representations   and

warranties shall survive the execution and delivery of this Agreement:

 

      3.1 ORGANIZATION. El Capitan:

 

            (a) is a corporation   duly   incorporated and validly existing and in

good standing under the laws of the State of Nevada;

 

            (b) is   duly   qualified,   authorized   to do   business   as a   foreign

corporation   in each U.S. and foreign   jurisdiction   where the   character of its

properties or the nature of its activities makes such   qualification   necessary;

and

 

            (c) has the corporate power (A) to enter into the Loan Documents and

to   perform   its   obligations   thereunder   and to   consummate   the   transactions

contemplated thereby, (B) to carry on its business as now being conducted and as

proposed   to be   conducted   by it, (C) to   execute,   deliver   and   perform   this

Agreement,   (D) to   take   all   action   as may be   necessary   to   consummate   the

transactions   contemplated   hereunder,   and (E) to grant the liens and   security

interests provided for in this Agreement.

 

      3.2 OFFICES,   LOCATION OF COLLATERAL.   The chief executive office or chief

place of   business   of El   Capitan   is   located   at   14301   North   87th   Street,

Scottsdale, Arizona, 85260.

 

      3.3 TITLE AND LIENS. Except for the UCAD Security Interest, El Capitan has

good,   valid,   and marketable   title to the Collateral,   free from all liens and

encumbrances of any kind. As a result of this Agreement, Secured Party will have

a first priority   security   interest in the Collateral,   subordinate to no other

security   interest other than the UCAD Security   Interest,   in which the Secured

Party shall have a secondary security interest.

 

      3.4 AUTHORIZATION;   NO CONFLICT. El Capitan has duly authorized,   executed

and delivered this Agreement, and El Capitan's execution and delivery hereof and

its consummation of the transactions contemplated hereby and the compliance with

the terms thereof:

 

            (a)   does   not   or   will   not   contravene   any   legal    requirements

applicable   to or binding on El Capitan   which could   reasonably   be expected to

have a material   adverse   effect upon the   Collateral or Secured   Party's rights

therein;

 

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            (b) does not or will not   contravene   or result in any   breach of or

constitute   any   default,   or result in or require the creation of any lien upon

any of El Capitan's   property,   under any   agreement or   instrument   to which El

Capitan   is a party   or by   which   it or any of its   properties   may be bound or

affected; and

 

            (c) does not or will not   require   the   consent or   approval   of any

third party which has not already been obtained.

 

      3.5   ENFORCEABILITY.    This   Agreement   is   a   legal,   valid   and   binding

obligation of Secured Party,   enforceable   against El Capitan in accordance with

its terms, except to the extent that enforceability may be limited by applicable

bankruptcy,   insolvency,   moratorium,    reorganization   or   other   similar   laws

affecting   the   enforcement   of   creditors'   rights or by the   effect of general

equitable principles.

 

      3.6 UCC   ARTICLE   8. All   shares of common   stock of UCAD and El   Capitan,

Ltd., an Arizona corporation,   owned by the Company, and shares of capital stock

of any   subsidiary of the Company that are part of the Collateral are securities

governed by Article 8 of the UCC.

 

                                   ARTICLE 4.

                               COVENANTS OF DEBTOR

 

      El Capitan covenants to and in favor of Secured Party as follows:

 

      4.1 COMPLIANCE   WITH   OBLIGATIONS.   El Capitan shall perform and comply in

all material   respects   with all   obligations   and   conditions on its part to be

performed with respect to the Collateral.

 

      4.2 INFORMATION   CONCERNING   COLLATERAL.   El Capitan shall,   promptly upon

request,   provide   to   Secured   Party   all   information   and   evidence   they   it

reasonably   request concerning the Collateral to enable Secured Party to enforce

the provisions of this Agreement.

 

      4.3   DEFENSE   OF   COLLATERAL.   El   Capitan   shall   defend its title to the

Collateral   and   the   interests   of   Secured   Party   in the   Collateral   pledged

hereunder against the claims and demands of all third parties whomsoever.

 

      4.4 MAINTENANCE OF COLLATERAL. El Capitan shall not (i) fail to deliver to

Secured   Party a copy of each demand or notice   received or given by it relating

to any   contract or   agreement   of El Capitan or to any other   Collateral   which

could   reasonably   be   expected   to have a   material   adverse   effect   upon   the

Collateral   or Secured   Party's   rights   therein,   or (ii)   except as   otherwise

permitted herein, sell, contract to sell, assign,   transfer or dispose of any of

the Collateral,   except in the ordinary course of business,   or with the consent

of Secured Party, which consent will not be unreasonably withheld.

 

      4.5 EVENTS OF   DEFAULT.   El Capitan   shall   give to Secured   Party   prompt

notice of any   material   default   with   respect   to the   Collateral   of which El

Capitan has knowledge or has received notice.

 

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      4.6 PRESERVATION OF VALUE;   LIMITATION OF LIENS. El Capitan shall not take

any action in connection with the Collateral   which would impair in any material

respect   the   interests   or rights of   Secured   Party   therein   or with   respect

thereto, except as expressly permitted hereby;   provided,   however, that nothing

in this   Agreement   shall   prevent El Capitan,   prior to the exercise by Secured

Party of any rights pursuant to the terms hereof,   from undertaking El Capitan's

operations in the ordinary course of business.   El Capitan shall not directly or

indirectly create, incur, assume or suffer to exist any liens on or with respect

to all or any   part of the   Collateral   (other   than the   lien   created   by this

Agreement).   El Capitan   shall at its own cost and   expense   promptly   take such

action as may be necessary to discharge any such liens.

 

      4.7 NO OTHER   FILINGS.   El Capitan shall not file or authorize to be filed

in any jurisdiction any financing statements under the UCC or any like statement

relating to the Collateral.

 

      4.8 MAINTENANCE OF RECORDS.   El Capitan shall, at all times, keep accurate

and complete records of the Collateral.   El Capitan shall permit representatives

of Secured   Party,   upon   reasonable   prior   notice,   at any time during   normal

business   hours of El Capitan to inspect and make   abstracts   from El   Capitan's

books and records   pertaining to the Collateral.   Upon the occurrence and during

the continuation of any Event of Default, at Secured Party's request, El Capitan

shall promptly deliver copies of any and all such records to Secured Party.

 

      4.9 PAYMENT OF TAXES. El Capitan shall pay or cause to be paid, before any

fine,   penalty,   interest or cost attaches thereto,   all taxes,   assessments and

other governmental or non-governmental charges or levies (other than those taxes

that it is   contesting   in good   faith and by   appropriate   proceedings,   and in

respect of which it has   established   adequate   reserves   for such taxes) now or

hereafter   assessed or levied against the   Collateral   pledged by them hereunder

and shall retain copies of, and, upon request,   permit   Secured Party to examine

receipts showing payment of any of the foregoing.

 

      4.10 NAME;   JURISDICTION   OF   ORGANIZATION.   El Capitan shall give Secured

Party at least 30 days prior written notice before El Capitan   changes its name,

jurisdiction   of   organization   or entity   type and shall at the   expense   of El

Capitan execute and deliver such instruments and documents as may be required by

Secured Party or applicable   legal   requirements   to maintain a first   perfected

security interest in the Collateral.

 

      4.11 PROCEEDS OF   COLLATERAL.   Except as otherwise   specified   herein,   El

Capitan shall,   at all times,   keep pledged to Secured Party pursuant hereto all

Collateral   and all   dividends,   distributions,   interest,   principal   and other

proceeds   received by El Capitan with respect thereto,   and all other Collateral

and   other   securities,   instruments,   proceeds   and   rights   from   time to time

received by or   distributable   to El Capitan in respect of any   Collateral,   and

shall not permit any issuer of such   Collateral   to issue any shares of stock or

other equity   interests   which shall not have been   immediately   duly pledged to

Secured Party hereunder.

 

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      4.12 DELIVERY OF PLEDGED   EQUITY   INTERESTS.   Except for   certificates   or

instruments   representing   or   evidencing   shares   securing   the   UCAD   Security

Interest,   certificates   or instruments   representing   or evidencing the Pledged

Equity Interests shall be delivered to and held by or on behalf of Secured Party

pursuant hereto.   All such certificates or instruments shall be in suitable form

for transfer by delivery,   or shall be accompanied by duly executed   instruments

of transfer or   assignment   in blank,   all in form and   substance   acceptable to

Secured Party. Secured Party shall have the right, at any time in its discretion

and without prior notice to El Capitan,   following the occurrence