FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2012 AND 2011 AND AS AT JULY 1, 2010 NEMASKA LITHIUM INC. TSX V : NMX OTCQX : NMKEF

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1 FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 2012 AND 2011 AND AS AT JULY 1, , RUE DE LA GARE DU PALAIS 1 ST FLOOR QUÉBEC (QUÉBEC) G1K 3X2 TEL.: FAX.: TSX V : NMX OTCQX : NMKEF

2 Financial Statements Financial Statements Management s Report... 1 Independent Auditors Report... 2 Statements of Financial Position... 4 Statements of Comprehensive Loss... 5 Statements of Changes in Shareholders Equity... 6 Statements of Cash Flows... 8 Notes to Financial Statements... 9

3 Management s Report Management s responsibility for financial reporting The accompanying financial statements have been prepared by management and are in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. The management is responsible for the preparation, integrity and objectivity of the financial statements and other financial information presented in this Annual Report. Other information included in these financial statements are based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly in all material respects. A system of administrative, internal accounting and disclosure controls have been developed and are maintained by management to provide reasonable assurance that assets are safeguarded and that financial information is accurate and reliable. The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board and is mainly composed of independent outside directors. The Audit Committee meets periodically with management and the independent auditors to review accounting, auditing and internal control matters. These financial statements have been reviewed and approved by the Board of Directors on the recommendation of the Audit Committee. The financial statements for the years ended June 30, 2012 and 2011 and as at July 1, 2010 have been audited by KPMG LLP, the independent auditors, in accordance with the Canadian generally accepted auditing standards. The independent auditors have full and free access to the Audit Committee. Internal control over financial reporting The Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that all transactions are being made only in accordance with the authorizations of management and/or directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company s assets that could have a material effect on the financial statements. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. /s/ Guy Bourassa Guy Bourassa, President and CEO /s/ Steve Nadeau Steve Nadeau, Chief Financial Officer 1

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6 Statements of Financial Position June 30, 2012, June 30, 2011 and July 1, 2010 June 30, June 30, July 1, Note Assets $ $ $ Current assets: Cash and cash equivalents 12 d) 4,565,506 3,065,329 2,003,675 Term deposit ,000 Sales tax receivable 453, , ,375 Other receivables 17 71, ,787 24,700 Subscriptions receivable ,000 Mining rights and tax credits related to resources receivable 985,723-46,137 Prepaid expenses 39,042 27,315 56,871 Total current assets 6,115,860 3,839,803 2,846,758 Non-current asset: Deposits to suppliers for exploration and evaluation expenses 202, ,100 Investment in an equity accounted investee 4 2,062,379 6,008,893 - Equipment 5 86,732 30,413 8,643 Mining properties 6 1,927,968 1,120,500 4,542,288 Exploration and evaluation assets 7 13,124,681 6,928,843 4,180,448 Total non-current assets 17,404,274 14,088,649 8,843,479 Total assets 23,520,134 17,928,452 11,690,237 Liabilities and Equity Current liabilities: Accounts payable and accrued liabilities 1,140, , ,474 Liability related to flow-through shares 9 a) 252,120-93,334 Total current liabilities 1,392, , ,808 Non-current liabilities: Debt component of the convertible debenture ,272 Deferred income and mining taxes 13 2,066,799 1,108,614 1,689,132 Total non-current liabilities 2,066,799 1,108,614 2,489,404 Total liabilities 3,459,232 1,797,590 3,123,212 Equity: Share capital and warrants 9 34,149,113 23,458,663 11,358,929 Equity component of the convertible debenture ,111 Contributed surplus 2,735,463 2,334, ,270 Deficit (16,823,674) (9,662,759) (3,681,285) Total equity 20,060,902 16,130,862 8,567,025 Total liabilities and equity 23,520,134 17,928,452 11,690,237 Contingencies (Note 11); Commitments (Note 12); Effects of transition to IFRS (Note 20) The notes on pages 9 to 57 are an integral part of these financial statements. On behalf of the Board: Guy Bourassa, Director Michel Baril, Director 4

7 NEMASKA LITHIUM INC Statements of Comprehensive Loss Years ended June 30, 2012 and 2011 Note $ $ Income: Other income - 96,499 Expenses: Salaries and fringe benefits 365, ,344 Share-based payments 252,187 1,266,131 Rent, office expense and other expenses 88, ,091 Depreciation and amortization expense 23,139 6,221 Registration, listing fees and shareholders information 305, ,361 Promotion and advertising 118, ,472 Representation, missions and trade shows 261, ,177 Fees and expenses of external directors 70,480 60,002 Subcontract - 62,577 Consultants fees 194, ,527 Professional fees 235, ,732 Total expenses 1,915,122 3,355,635 Net finance expense (income): Finance income (31,755) (27,754) Finance expense 15 21,348 72,900 (10,407) 45,146 Loss before the undernoted 1,904,715 3,304,282 Others: Other income related to flow-through shares 9 a) (37,430) (93,334) Impairment of mining properties - 380,000 Impairment of exploration and evaluation assets - 10,171 Gain on debt settlement 9 a) (35,000) (79,057) Loss incurred by loss of control of a subsidiary - 71,021 Impairment of investment in an equity accounted investee and other adjustments 4 3,314,943 - Loss on dilution of an investment in an equity accounted investee 4 183,799 - Share of loss in an equity accounted investee 4 562,408 16,889 Change in fair value of the dividend in kind on settlement ,565 3,988, ,255 Loss before income taxes 5,893,435 3,978,537 Current income taxes recovery 13 (723,579) - Deferred income and mining taxes , , , ,885 Comprehensive loss for the year 6,128,041 4,082,422 Basic and diluted loss per share Weighted average number of shares outstanding 14 85,607,677 62,659,090 The notes on pages 9 to 57 are an integral part of these financial statements. 5

8 Statements of Changes in Shareholders Equity Years ended June 30, 2012 and 2011 Share capital Equity component Contributed Deficit Total and warrants of the convertible surplus debenture $ $ $ $ $ Balance, July 1, ,358, , ,270 (3,681,285) 8,567,025 Net loss (4,082,422) (4,082,422) Equity financing: Paid in cash 5,698, ,698,234 Flow-through shares 5,851, ,851,000 Mining properties 438, ,000 Shares and warrants to be issued for the acquisition of mining properties 112, ,500 Share issuance costs (1,477,762) (1,477,762) Recognition of deferred tax assets related to share issuance costs , ,403 Options: Granted to employees, officers, directors, consultants or I.R. representatives - - 1,199,693-1,199,693 Granted to brokers or intermediaries , ,121 Adjustments of options ,438-66,438 Gain on settlement of equity component of the convertible debenture ,436-24,436 Settlement of equity component of the convertible debenture - (236,111) - - (236,111) Dividend in kind (1,105,693) (1,105,693) Balance, June 30, ,458,663-2,334,958 (9,662,759) 16,130,862 The notes on pages 9 to 57 are an integral part of these financial statements. 6

9 Statements of Changes in Shareholders Equity (continued) Years ended June 30, 2012 and 2011 Share capital Contributed Deficit Total and warrants surplus $ $ $ $ Balance, June 30, ,458,663 2,334,958 (9,662,759) 16,130,862 Loss for the year - - (6,128,041) (6,128,041) Equity financing: Paid in cash 8,700, ,700,000 Flow-through shares 1,615, ,615,000 Flow-through shares premium (289,550) - - (289,550) Mining properties 665, ,000 Share issuance costs - - (1,032,874) (1,032,874) Options: Granted to employees, officers, directors, consultants or I.R. representatives - 252, ,187 Granted to brokers or intermediaries - 148, ,318 Balance, June 30, ,149,113 2,735,463 (16,823,674) 20,060,902 The notes on pages 9 to 57 are an integral part of these financial statements. 7

10 Statements of Cash Flows Years ended June 30, 2012 and $ $ Cash flows from operating activities: Net loss for the year (6,128,041) (4,082,422) Adjustments for: Share-based payments 252,187 1,266,131 Depreciation and amortization expense 23,139 6,221 Other income related to flow-through shares (37,430) (93,334) Impairment of mining properties - 380,000 Impairment of exploration and evaluation assets - 10,171 Gain on debt settlement (35,000) (86,947) Loss incurred by loss of control of a subsidiary - 71,021 Impairment of investment in an equity accounted investee 3,314,943 - Loss on dilution of an interest in an equity accounted investee 183,799 - Share of loss of an equity accounted investee 562,408 16,889 Change in fair value of the dividend in kind on settlement - 368,565 Current income taxes recovery (723,579) - Deferred income and mining taxes 958, ,885 Net change in non-cash operating working capital 121,997 (251,810) (1,507,392) (2,291,630) Cash flows from financing activities: Shares paid in cash 8,700,000 6,198,234 Flow-through shares 1,615,000 5,851,000 Reimbursement of the debenture - (925,000) Share issuance expenses (884,556) (1,086,641) 9,430,444 10,037,593 Cash flows from investing activities: Term deposit - 10,000 Cashed tax credit - 42,563 Investment in an equity accounted investee (114,636) (40) Addition to equipment (79,458) (27,991) Addition to mining properties (142,468) (243,500) Increase in exploration and evaluation assets (6,086,313) (6,465,341) (6,422,875) (6,684,309) Net increase in cash and cash equivalents 1,500,177 1,061,654 Cash and cash equivalents, beginning of the year 3,065,329 2,003,675 Cash and cash equivalents, end of the year 4,565,506 3,065,329 Items not affecting cash flows: See note 16 The notes on pages 9 to 57 are an integral part of these financial statements. 8

11 Notes to Financial Statements 1. Reporting entity and nature of operations: Nemaska Lithium Inc. (the Company ) (formerly Nemaska Exploration Inc.), is a company domiciled in Canada, incorporated under the Canada Business Corporations Act. Its shares are listed on the TSX Venture Stock Exchange under the symbol NMX and on the American stock exchange Over-the-Counter QX (OTCQX) under the symbol NMKEF. The Company is engaged in the acquisition and exploration of mining properties. Its activities are in Canada and the Company has not yet determined whether any of its mining properties have economically recoverable ore reserves. Although the Company has taken steps to verify and confirm title to mineral properties in which it has an interest, property title might be subject to unregistered prior agreements or noncompliance with regulatory requirements. The recoverability of amounts shown for mining properties and related exploration and evaluation assets is dependent upon the discovery of economically recoverable ore reserves, the ability of the Company to obtain necessary financing to complete the development, and future profitable production or proceeds from the disposition thereof. As at the date of the financial statements, management determined that the net carrying value of mining properties represents the best estimate of their net recoverable value. This value may nonetheless be reduced in the future. The address of the head office of the Company is 450, rue de la Gare-du-Palais, 1 st floor, Québec (Québec), Canada G1K 3X2. 2. Basis of preparation: (a) Statement of compliance: The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards ("IFRS"), which require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, Accordingly, these financial statements have been prepared in accordance with IFRS. In the financial statements the term "previous Canadian GAAP" refers to Canadian GAAP before the adoption of IFRS. 9

12 2. Basis of preparation (continued): (a) Statement of compliance (continued): These are the Company s first financial statements prepare in accordance with IFRS, and IFRS 1, First-Time Adoption of International Financial Reporting Standards as been applied. Subject to certain transition elections disclosed in note 20, the Company has consistently applied the same accounting policies in its opening IFRS statement of financial position at July 1, 2010 and throughout all years presented, as if these policies had always been in effect. Note 20 discloses the impact of the transition to IFRS on the Company's reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies, from those used in the Company's audited financial statements for the year ended June 30, The accounting policies applied in these financial statements are based on IFRS issued and in effect as of October 23, 2012, the date on which the Board of Directors approved the issuance of these financial statements. (b) Basis of measurement: The financial statements have been prepared on the historical cost basis. The financial statements have been prepared on a going concern basis, meaning the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. (c) Functional and presentation currency: These financial statements are presented in Canadian dollars, which is the Company s functional currency. (d) Use of estimates and judgments: The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is included in note 3 and consists in the determination of capitalizable costs as exploration and evaluation assets. 10

13 2. Basis of preparation (continued): (d) Use of estimates and judgments (continued): Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 3 - assessment of refundable tax credits related to resources and credit on mining duties; Note 4 - impairment of investment in an equity accounted investee; Notes 6 and 7 - recoverability of mining properties and exploration and evaluation assets; Note 13 - recoverability of deferred income tax assets. 3. Significant accounting policies: The accounting policies set out below have been applied consistently to all years presented in these financial statements and in preparing the opening IFRS statement of financial position at July 1, 2010 for the purpose of the transition to IFRS, unless otherwise indicated. (a) Basis of consolidation: Subsidiary and investment in an equity accounted investee Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company. Associates are those entities in which the Company has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method and are recognized initially at cost. The financial statements include the Company s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. When the Company s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil, and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. 11

14 3. Significant accounting policies (continued): (a) Basis of consolidation (continued): These financial statements include the accounts of the Company and the accounts of its former subsidiary, Monarques Resources Inc. ( MQR ), from the date MQR was created and wholly-owned on March 27, 2011, to the date when control over MQR ceased on June 9, Since that date, the Company recorded its investment at equity method since the Company considers that it has a significant influence with a 43.27% (47.4% as at June 30, 2011) holding of the voting shares of MQR. Transactions eliminated between associates Unrealized gains arising from transactions with an equity accounted investee are eliminated against the investment to the extent of the Company s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency: Foreign currency transactions Transactions in foreign currencies are translated to the functional currencies of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (c) Financial instruments: (i) Non-derivative financial assets Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. 12

15 3. Significant accounting policies (continued): (c) Financial instruments (continued): (i) Non-derivative financial assets (continued) Loans and receivables (continued) Loans and receivables comprise cash and cash equivalents, term deposit, other receivables and subscriptions receivable. Cash and cash equivalents comprise cash balances and short-term investments with original maturities of three months or less from the acquisition date or that can be cashed at any time. Cash and term deposits include proceeds of flow-through financing not yet expensed. The Company must use these funds for exploration of mining properties in accordance with restrictions imposed by those financing. (ii) Non-derivative financial liabilities: The Company classifies its accounts payable and accrued liabilities and debt component of the convertible debenture as financial liabilities, which are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. (iii) Fair value of financial instruments: In establishing fair value, the Company uses a fair value hierarchy based on levels as defined below: Level 1: defined as observable inputs such as quoted prices (unadjusted) in active markets. Level 2: defined as inputs other than quoted prices included in Level 1, that are either directly or indirectly observable. Level 3: defined as inputs that are based on little or no observable market data, therefore requiring entities to develop its own assumptions. (d) Mining properties and exploration and evaluation assets: Mining properties correspond to acquired interests in mining exploration permits / claims which include the rights to explore for mine, extract and sell all minerals from such claims. All pre-exploration costs, i.e. costs incurred prior to obtaining the legal right to undertake exploration and evaluation activities on an area of interest, are expensed as incurred. 13

16 3. Significant accounting policies (continued): (d) Mining properties and exploration and evaluation assets (continued): Once the legal right to explore has been acquired, exploration and evaluation expenditures are capitalized on the basis of specific claim blocks or areas of geological interest until the mining properties to which they relate are placed into production, sold or abandoned. Costs incurred include appropriate technical and administrative overheads as well as borrowing costs related to the financing of exploration activities. Mining properties and exploration and evaluation assets are carried at historical cost less any impairment losses recognized. When technical feasibility and commercial viability of extracting a mineral resource are demonstrable for an area of interest, the Company stops capitalizing mining properties and exploration and evaluation costs for that area, tests recognized exploration and evaluation assets for impairment and reclassifies any unimpaired exploration and evaluation assets either as tangible or intangible mine development assets according to the nature of the assets. (e) Equipment: Items of equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. The costs of the day to day servicing of equipment are recognized in profit or loss as incurred. Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. The estimated useful lives, depreciation methods and rates for the current and comparative year are as follows: Asset Basis Rate Office and computer equipment Declining balance 30% Vehicle Declining balance 25% Depreciation methods, useful lives and residual values are reviewed at each financial yearend and adjusted, if appropriate. 14

17 3. Significant accounting policies (continued): (f) Impairment: (i) Financial assets: A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (ii) Non-financial assets: The carrying amounts of equipment are reviewed at each reporting date to determine whether there is any indication of impairment. The carrying amount of the investment in an equity accounted investee is assessed at each reporting period to determine whether there is objective evidence that it is impaired, such as a significant or prolonged decline in the fair value of the investment below its cost. Because goodwill that form part of the carrying amount of the investment is not separately recognised, it is not tested for impairment separately, and instead the entire carrying amount of the investment is tested for impairment as a single asset, by comparing its recoverable amount, the higher of its value in use and fair value less costs to sell, with its carrying amount. Any impairment loss recognised in those circumstances is not allocated to any asset, including goodwill, that forms part of the carrying amount of the investment in the equity accounted investee. The carrying amounts of mining properties and exploration and evaluation assets are assessed for impairment only when indicators of impairment exist, typically when one of the following circumstances apply: Exploration rights have or will expire in the near future; No future substantive exploration expenditures are budgeted; No commercially viable quantities are discovered and exploration and evaluation activities will be discontinued; Exploration and evaluation assets are unlikely to be fully recovered from successful development or sale. 15

18 3. Significant accounting policies (continued): (f) Impairment (continued): (ii) Non-financial assets (continued): (g) Provision: If any such indication exists, then the asset s recoverable amount is estimated. Mining properties and exploration and evaluation assets are also assessed for impairment upon the transfer of exploration and evaluation assets to development assets regardless of whether facts and circumstances indicate that the carrying amount of the exploration and evaluation assets is in excess of their recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit", or "CGU"). The level identified by the Company for the purposes of testing exploration and evaluation assets for impairment corresponds to each mining property. An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated to the assets in the unit (group of units) on a pro rata basis. Impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance costs. 16

19 3. Significant accounting policies (continued): (h) Revenue and other income: Services Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. (i) Finance income and finance costs: Finance income comprises interest income on funds invested. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings and impairment losses recognized on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. Interests received and interests paid are classified under operating activities in the statements of cash flows. (j) Share capital and warrants: Common shares Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares, share options and warrants are recognized as an increase to deficit, net of any tax effects. Flow-through shares The Canadian tax legislation permits an entity to issue securities to investors whereby the deductions for tax purposes relating to resource expenditures may be claimed by the investors and not by the entity. These securities are referred to as flow-through shares. The Company finances a portion of its exploration programs with flow-through share issues. At the time of the share issuance, the Company allocates the proceeds between share capital and an obligation to deliver the tax deductions, which is recorded as a liability for flow-through shares obligation. The Company estimates the fair value of the obligation using the residual method, i.e. by comparing the price of the flow-through share to the quoted price of common share at the date of the financing announcement. A company may renounce the deductions for tax purposes under either what is referred to as the general method or the look-back method. 17

20 3. Significant accounting policies (continued): (j) Share capital and warrants (continued): Flow-through shares (continued) When tax deductions are renounced under the general method, and the Company has the expectation of renouncing and has capitalized the expenditures during the current year, then the entity records a deferred tax liability with the corresponding charge to income tax expense. The obligation is reduced to zero, with a corresponding income recorded. When tax deductions are renounced under the look-back method, the Company records a deferred tax liability with a corresponding charge to income tax expense when expenditures are made and capitalized. At that time, the obligation would be reduced to zero, with a corresponding income recorded. Warrants Warrants are classified as equity when they are derivatives over the Company s own equity that will be settled only by the Company exchanging a fixed amount of cash for a fixed number of the Company s own equity instruments; otherwise they are classified as liabilities. (k) Share-based payments: The grant date fair value of share-based payment awards granted to employees, directors and consultants is recognized as an expense, with a corresponding increase in contributed surplus, over the years during which the participants unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service conditions at the vesting date. For share-based payment awards with nonvesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Share-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Company. The Company measures the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, except when that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted. 18

21 3. Significant accounting policies (continued): (l) Leases: All leases are classified as operating leases and, as such, the leased assets are not recognized in the Company s statement of financial position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. (m) Income tax: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss, except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred taxes are recognized as income or expense in profit or loss, except to the extent that tax arises from business combinations and transactions recognized in equity. Therefore, when deferred taxes relate to equity items, a backwards tracing is necessary to determine the adjustment to taxes (e.g. change in tax rates and change in unrecognized tax assets) that should be recorded in equity. For this purpose, the accounting policy of the Company is to first allocate changes in the recognition of deferred tax assets based on their expected maturity date. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized for unused tax losses and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 19

22 3. Significant accounting policies (continued): (n) Refundable credit on mining duties and refundable tax credit related to resources: The Company is eligible for a refundable credit on mining duties under the Québec Mining Duties Act. This refundable credit on mining duties is equal to 8% (7.5% before January 1, 2012 and 12% before January 1, 2011) of expenses incurred for mining exploration activities in Québec, and 16% (15% before January 1, 2012 and 14% before January 1, 2011) of expenses incurred in Québec for the purpose of bringing a new mine into production. The accounting treatment for refundable credit on mining duties depends on management s intention to go into production in the future or rather to sell its mining properties to another mining producer once the technical feasibility and the economic viability of the properties have been demonstrated. This assessment is made at the level of each mining property. In the first case, the credit on mining duties is recorded as an income tax recovery under IAS 12, Income Taxes, which generates at the same time a deferred tax liability and deferred tax expense since the exploration and evaluation assets have no more tax basis following the Company s election to claim the refundable credit. In the second case, it is expected that no mining duties will be paid in the future and, accordingly, the credit on mining duties is recorded as a government grant under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, which is recorded against exploration and evaluation assets. Currently, it is management s intention to have the Company become a producer in the future, as such, credit on mining duties are recorded in compliance with IAS 12, Income Taxes. The Company is also eligible for a refundable tax credit related to resources for mining industry companies in relation to eligible expenses incurred. The refundable tax credit related to resources can represent up to 38.75% of the amount of eligible expenses incurred and is recorded as a government grant against exploration and evaluation assets. Credits related to resources and credits for mining duties recognized against exploration and evaluation expenditures are recorded at fair value when there is reasonable assurance that they will be received and the Company will comply with the conditions associated with the grant. They are recognized in profit or loss on a systematic basis over the useful life of the related assets. (o) Earnings per share: The Company presents basic and diluted earnings per share ( EPS ) data for its common shares issued, which include flow-through shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, for the effects of all dilutive potential common shares, which comprise warrants and share options granted. 20

23 3. Significant accounting policies (continued): (p) New standards, interpretations and amendments issued but not yet effective: Annual improvements to IFRS: In May 2012, the IASB published Annual Improvements to IFRS Cycle as part of its annual improvements process to make non-urgent but necessary amendments to IFRS. These amendments are effective for annual periods beginning on or after January 1, 2013 with retrospective application. The Company intends to adopt the amendments to the standards in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of the amendments has not yet been determined. The following new standards, interpretations and amendments have been issued but are not yet effective and therefore have not been applied in preparing these financial statements: (i) IFRS 7, Financial Instruments: disclosures: In October 2010, the IASB issued amendments to IFRS 7, Disclosures Transfers of Financial Assets which will be effective for annual periods beginning on or after January 1, These amendments clarify the disclosures in regards to the transfer of financial assets not derecognized in their entirety and for which there is continuing involvement. The extent of the impact of adoption of this new standard has not yet been determined. (ii) IFRS 9, Financial instruments: IFRS 9 (2010) is effective for annual periods beginning on or after January 1, 2015, with earlier adoption permitted. As part of the project to replace IAS 39, Financial Instruments: Recognition and Measurement, this standard retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets. More specifically, the standard: deals with classification and measurement of financial assets; establishes two primary measurement categories for financial assets: amortized cost and fair value; prescribes that classification depends on entity's business model and the contractual cash flow characteristics of the financial asset; eliminates the existing categories: held to maturity, available for sale, and loans and receivables. 21

24 3. Significant accounting policies (continued): (p) New standards, interpretations and amendments issued but not yet effective (continued): (ii) IFRS 9, Financial instruments (continued): Certain changes were also made regarding the fair value option for financial liabilities and accounting for certain derivatives linked to unquoted equity instruments. The Company intends to adopt IFRS 9 (2010) in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of this new standard has not yet been determined. (iii) IFRS 10, Consolidated Financial Statements Effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. If an entity applies this standard earlier, it shall also apply IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) at the same time. IFRS 10 provides a single model to be applied in the control analysis for all investees, including entities that currently are special purpose entities in the scope of SIC 12. In addition, the consolidation procedures are carried forward substantially unmodified from IAS 27, Consolidated and Separate Financial Statements. The Company intends to adopt IFRS 10 in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of IFRS 10 has not yet been determined. (iv) IFRS 11, Joint Arrangements: In May 2011, the IASB issued IFRS 11, Joint Arrangements, which is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. If an entity applies this standard earlier, it shall also apply IFRS 10, IFRS 12, IAS 27 (2011) and IAS 28 (2011) at the same time. IFRS 11 replaces the guidance in IAS 31, Interests in Joint Ventures. Under IFRS 11, joint arrangements are classified as either joint operations or joint ventures. IFRS 11 essentially carves out of previous jointly controlled entities, those arrangements which although structured through a separate vehicle, such separation is ineffective and the parties to the arrangement have rights to the assets and obligations for the liabilities and are accounted for as joint operations in a fashion consistent with jointly controlled assets/operations under IAS 31. In addition, under IFRS 11 joint ventures are stripped of the free choice of equity accounting or proportionate consolidation; these entities must now use the equity method. 22

25 3. Significant accounting policies (continued): (p) New standards, interpretations and amendments issued but not yet effective (continued): (iv) IFRS 11, Joint Arrangements (continued): The Company intends to adopt IFRS 11 in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of IFRS 11 has not yet been determined. (v) IFRS 12, Disclosure of Interests in Other Entities: In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities, which is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. If an entity applies this standard earlier, it needs to apply IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) at the same time. IFRS 12 contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and/or unconsolidated structured entities. Interests are widely defined as contractual and noncontractual involvement that exposes an entity to variability of returns from the performance of the other entity. The required disclosures aim to provide information in order to enable users to evaluate the nature of, and the risks associated with, an entity s interest in other entities, and the effects of those interests on the entity s financial position, financial performance and cash flows. The Company intends to adopt IFRS 12 in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of IFRS 12 has not yet been determined (vi) IFRS 13, Fair Value Measurement In May 2011, the IASB published IFRS 13, Fair Value Measurement, which is effective prospectively for annual periods beginning on or after January 1, The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application. IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. 23

26 3. Significant accounting policies (continued): (p) New standards, interpretations and amendments issued but not yet effective (continued): (vi) IFRS 13, Fair Value Measurement (continued): The standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income. IFRS 13 explains how to measure fair value when it is required or permitted by other IFRS. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. The Company intends to adopt IFRS 13 prospectively in its financial statements for the annual period beginning on July 1, The Company does not believe the amendments to have a material impact on the financial statements, because of the nature of the Company s interests in other entities. (vii) Amendments to IAS 28, Investments in Associates and Joint Ventures: In May 2011, the IASB issued Amendments to IAS 28, Investments in Associates and Joint Ventures, which is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. If an entity applies this standard earlier, it shall also apply IFRS 10, IFRS 11, IFRS 12 and IAS 27 (2011) at the same time. IAS 28 (2011) carries forward the requirements of IAS 28 (2008) with several limited amendments. The Company intends to adopt the amendments in its financial statements for the annual period beginning on July 1, The extent of the impact of adoption of the amendments has not yet been determined. (viii) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine In October 2011 the IFRS Interpretations Committee issued IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine, which is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The interpretation applies prospectively to production stripping costs incurred on or after the beginning of the earliest period presented. Specific transitional provisions are applied to asset balances relating to stripping activity which exist on the transition. 24