IN THE SUPREME COURT OF THE YUKON TERRITORY. IN THE MATTER OF THE JUDICATURE ACT R.S.Y. 2002, c. 128 AND

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1 No. 04-A0004 WHITEHORSE REGISTRY IN THE SUPREME COURT OF THE YUKON TERRITORY IN THE MATTER OF THE JUDICATURE ACT R.S.Y. 2002, c. 128 AND IN THE MATTER OF THE CANADA BUSINESS CORPORATIONS ACT R.S.C c. C-44 AND IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT R.S.C. 1985, c. B-3 AND IN THE MATTER OF THE RECEIVERSHIP OF October 13, 2006

2 TABLE OF CONTENTS 1 INTRODUCTION ACTIVITIES OF THE INTERIM RECEIVER LAPSED MINERAL CLAIMS RECEIPTS AND DISBURSEMENTS OF THE INTERIM RECEIVER SUMMARY OF ASSETS AND MARKETING PLAN CREDITOR CLAIMS BANKRUPTCY OF BYG BUDGET...14 APPENDICES A B C Statement of Receipts and Disbursements for the period April 6, 2004 to September 30, 2006 Interim Receiver s Marketing Plan Listing of Lapsed Mineral Claims

3 1 INTRODUCTION 1.1 PricewaterhouseCoopers Inc. ( PwC ) was appointed Interim Receiver and Receiver-Manager of the Company (in such capacities, the Interim Receiver ) pursuant to a Court Order made by the Supreme Court of the Yukon Territory (the Court ) on April 6, 2004 (the Order ). 1.2 The Interim Receiver s First Report to the Court with respect to these proceedings was dated August 31, 2004 and described the financial position of BYG. The Second Report to the Court as Interim Receiver updated the Court on the activities of the Interim Receiver and request approval of a further budget to June 30, Pursuant to that report, the Court approved the Interim Receiver s budget to June 30, This the Third Report to the Court as Interim Receiver. The purpose of this report is as follows: update the Court on the activities of the Interim Receiver since our last report; request approval from the Court of the Interim Receiver s proposed plan to market for sale of the assets of the Company; update the Court on the status of creditor claims; obtain from the Court an order requiring AGT Financial Corporation ( AGT ) to deliver to the Interim Receiver the remaining shares of YGC in its possession that are owned by BYG on terms that preserve AGT s claim against the shares and proceeds thereof; and request approval from the Court for the Interim Receiver to assign BYG into bankruptcy for the general benefit of the Company s creditors. 1

4 2 ACTIVITIES OF THE INTERIM RECEIVER 2.1 The activities of the Interim Receiver since the Second Report to the Court are summarized as follows: General discussions with representatives of the Government of Yukon and Government of Canada to discuss the sale process surrounding BYG; Assessment of the potential options for a sale of BYG s assets and deal with the significant environmental issues on the portion of the property where mining activity has occurred and where a mill is located (the Core Area ) Correspondence and discussion with Little Salmon Carmacks First Nation group to discuss the BYG property and the Interim Receiver s strategy to sell the mine site; Discussions with several prospective purchasers with respect to selling the assets of BYG, the nature of the Mt. Nansen site, and the timing of its potential sale; Obtain and review reports from Robert Stroshein of Protore Geological Services summarizing the geological exploration potential of the Mt. Nansen site; Discussions with Century Services Ltd. regarding current valuations of used mining equipment and other assets; Development of a memorandum describing the proposed asset realization plan for the BYG assets and meetings with Government officials to discuss same; Review and assessment of the claims of potential secured creditors; 2

5 2.1.9 Further research into the financial matters of BYG, including its debt position at specific dates, related party loan positions, and the appointment and resignation of Directors; Correspondence and meetings with three parties who claim to be secured creditors of BYG; Ongoing assessment and estimation of value of the YGC Resources Ltd. shares owned by BYG, including discussions and meetings with Canaccord Capital regarding strategies to realize on the share value; and Arranging for updating of mineral claims and leases. 3 LAPSED MINERAL CLAIMS 3.1 At the time of the receivership, BYG owned 286 mineral claims and leases in the Mt. Nansen area. The claims and leases are required to be renewed on a periodic basis by either performing provided mining activity on the site or by payment of a renewal fee. The Interim Receiver has been generally renewing the claims and leases as required. 3.2 Unfortunately, the Interim Receiver recorded incorrect information relating to the renewal date of 26 of the claims. As a result, the renewal date passed prior to the renewal fee being submitted. The effect of this was that the claims became available for re-staking. 22 of the 26 claims were re-staked by another party and the Interim Receiver re-staked the remaining 4 claims. 3.3 The net effect of the re-staking process is that 22 of the mineral claims are no longer held by BYG. A complete listing of the 22 lapsed mineral claims is attached as Appendix C. 3

6 4 RECEIPTS AND DISBURSEMENTS OF THE INTERIM RECEIVER 4.1 A copy of the Interim Receiver s Statement of Receipts and Disbursements for the period from our appointment on April 6, 2004 to September 30, 2006 is attached as Appendix A. As detailed in the Statement, total receipts were $1,054,159 and total disbursements were $272,372. The Excess of Receipts over Disbursements as at September 30, 2006 totalled $781,787, and is represented by a combination of cash in the Bank and cash held by Canaccord Capital on behalf of the Interim Receiver. 4.2 There have been no material cash transactions from September 30 th to the date of this report. 5 SUMMARY OF ASSETS AND MARKETING PLAN 5.1 The full particulars of BYG s assets together with the Interim Receiver s proposed marketing plan is attached as Appendix B to this report. In summary, the Interim Receiver makes the following recommendations to the Court in respect of realizing on the assets of BYG: With respect to the YGC shares: recover the shares currently in the possession of AGT; and pay to AGT the balance of its loan from BYG in the amount of approximately $100,000 from the proceeds of selling the YGC shares. resume marketing all of the YGC shares in an orderly fashion as set out in the Marketing Plan. 4

7 5.1.2 Market for sale of the 199 mineral claims and leases in the Peripheral Area, including the claims in block R-31A Assist the Governments with the reclamation of the Core Area over the next 5 to 6 years Once the Core Area has been reclaimed develop a marketing plan for these assets and apply to this Court for direction of same. 6 CREDITOR CLAIMS 6.1 In this section we summarize creditor claims and issues related to each. 6.2 The potential creditors of BYG consist of the Governments in respect of environmental care and maintenance costs incurred, miners liens, three creditors claiming to hold security over BYG property, and unpaid property taxes. Amounts claimed by creditors, excluding any claim for interest, total $16.5 million. We note that the Yukon Government is continually increasing ongoing costs in respect of care and maintenance, and therefore, the amount ultimately claimed by it will be higher than the amount set out below. Creditor $000s Federal Government 6,938 Yukon Government 4,800 Miner s Liens 2,386 Cosman et al 1,731 Ellake Services 524 AGT Financial Corp. 73 Property Taxes 83 Total 16,538 5

8 6.3 The Governments The Federal and Yukon Governments are owed in excess of $6.9 million and $4.8 million, respectively, for costs incurred for environmental care and maintenance of the mine site subsequent to it being abandoned. The Governments continue to incur costs in respect of dealing with the environmental matters and accordingly, the amounts owed are increasing continually. Furthermore, the Governments have not yet determined the amount of accrued interest on these payments that they may be entitled to receive The Governments are claiming that they enjoy a first ranking charge over real property assets of BYG pursuant to S of the Bankruptcy and Insolvency Act. 6.4 Miners Lien Claimants There are five creditors that have filed Miners Liens totalling some $2.4 million. A summary of these claims is set out below: Lien Claimant $ Northern Metallic Sales 74,500 Omni Resources Inc. 242,300 Ketza Construction Corp. 1,235,600 Frizzell Petroleum Ltd. 636,600 Cando International Food 196,900 Total 2,385,900 6

9 6.4.2 Although the Interim Receiver has not yet sought an opinion on the matter, if one assumes that the Governments statutory environmental charge ranks ahead of the miners liens, the Interim Receiver expects that the Miner s lien claimants will not benefit from the proceeds of realization as the Interim Receiver anticipates a material shortfall with respect to the Governments claims, currently at $11.7 million and expected to grow by several million dollars. 6.5 Cosman et. al Based on information that the Interim Receiver has obtained, it appears that on November 10, 1998, Robert Chafee (a shareholder, a former Director and Chairman of the Board of BYG) and Bryan Rowntree, signed a loan agreement with BYG in the amount of $1.28 million. Mark Cosman was appointed trustee of the loan by Chafee and Rowntree ( Cosman ) The Cosman creditor claim amount has been provided to the Interim Receiver by Robert Chafee. It includes the shareholder loan, receivership and legal costs from a 1999 proceedings, and accrued interest at 10% per annum. A summary of the amounts claimed by Cosman up to April 30, 2006 is set out below: Principal $ Accum. Interest $ Total $ Cosman Debenture 1,280,000 1,319,761 2,599,761 Receivership Cost 384, , ,071 Legal Cost 66,684 58, ,341 Total 1,731,348 1,739,825 3,471,173 7

10 6.5.3 The Interim Receiver has attempted to assess the appropriateness of the claim amount and the validity of the security of Cosman through various means. There remain a number of unanswered questions regarding the nature of the transaction, including the timing of the security arrangements vis-à-vis when the shareholder loan was purportedly made It appears that the Cosman security is in the nature of a General Security Agreement. It ranks behind the Ellake Services security interest described below. The Interim Receiver has also received correspondence from the Counsel for Cosman and from Counsel for the Government of Canada which make clear that the parties do not agree on the respective priorities of entitlements of the other. As a result, it seems clear that litigation will be required to resolve the various issues. 6.6 Ellake Services On May 29, 1996, BYG issued a $US 2 million debenture to Gerald Metals, Inc. ( Gerald ). On August 30, 1999, Ellake Services Ltd. ( Ellake ), a holding company that we understand is owned jointly by Robert Chafee and his spouse, purchased Gerald s indebtedness and security interest in BYG. Robert Chafee has advised us that he is the principal representing the interests of both Cosman and Ellake The Ellake creditor claim has also been provided to the Interim Receiver by Robert Chafee. A summary of the amount claimed by Ellake up to April 30, 2006 is set out below: Principal $ Accum. Interest $ Total $ Gerald Metals Debenture 524, , , The Interim Receiver has attempted to obtain more detail on how the principal amount owed was determined, but without success. 8

11 6.6.4 The Interim Receiver has also attempted to assess the appropriateness of the claim amount and the validity of the security of Ellake. As with the Cosman claim, there remain many unanswered questions The Interim Receiver also notes that in 1999, a privately appointed receivership occurred at the invitation of Gerald and then Ellake. There are also several unanswered questions surrounding this receivership and what effect that had on the claims The Interim Receiver has also received correspondence from the Counsel for Ellake and from Counsel for the Government of Canada which make clear that the parties do not agree on the respective priorities of entitlements of the other. As a result, as with the Cosman security, it seems clear that litigation will be required to resolve the various issues. 6.7 AGT Financial Corporation As detailed in the Marketing Plan set out in Appendix B, AGT is claiming to be owed approximately $100,000 and holds security in respect of this indebtedness. In an attempt to perfect its security interest, AGT took possession from BYG of certain shares of YGC that were owned by BYG. AGT initially had possession of 1,842,105 shares of YGC and these shares were consolidated on a 5 to 1 basis, leaving AGT with 368,421 shares. 18,500 of these consolidated shares were sold in May, 2005 leaving 349,921 shares as security for its claim. The 18,500 shares were sold for proceeds of $9,155. 9

12 6.7.2 A summary of the amount claimed by AGT up to October 13, 2006 is set out below. The AGT loan balance is net of the proceeds of sale of the 18,500 shares. We note that the interest rate charged varies between 1.75% and 5.5%. Principal $ Accum. Interest $ Total $ AGT Loan 72,887 19,996 92,996 Legal Fees 7,416 Unspecified - Total 84,874 19, , The Interim Receiver has reviewed the secured claim of AGT and has sought a legal opinion in respect of same. On balance, the Interim Receiver is satisfied with the amount claimed and has concluded the security is effective to give to AGT priority over the shares held to the extent of its claim. As detailed in the Marketing Plan, the value of the remaining security that AGT holds is approximately $500,000 compared to the amount of its claim of $100,000. Accordingly, there is net equity to the BYG estate totalling approximately $400, Based on the foregoing, the Interim Receiver recommends that the Court direct AGT to deliver to the Interim Receiver the remaining shares of YGC in its possession, and that the Interim Receiver realize on these shares as part of the other YGC shares owned by BYG. As part of this direction and order, the Interim Receiver could undertake to pay AGT its claim amount from the proceeds of the shares turned over or, alternatively, be subject to terms in an order which protect AGT s right to priority until paid. 6.8 Property Taxes The Yukon Government is owed approximately $82,700 for property taxes by BYG with respect to the Mt. Nansen mine site property. The property taxes include all arrears as well as the current balances owed for

13 6.8.2 The Interim Receiver has discussed the relative priority ranking of this claim with both its own counsel and that of the Governments, although no formal opinion has been sought. The Interim Receiver is of the preliminary view that the taxes are likely subordinate to the environmental charge of the Federal and Yukon Governments in respect of the care and maintenance costs incurred. Accordingly, assuming this is determined to be the case, there will be no funds available to pay the claim for property taxes Based on the foregoing preliminary ranking and an estimate of the total realizations, the Interim Receiver does not expect any amounts will be available to pay the outstanding property taxes. 7 BANKRUPTCY OF BYG 7.1 As noted earlier in this report, there are many unanswered questions with respect to the creditor claims of Cosman and Ellake. These questions include, among other things, the nature of the purported loan advances, the security held in respect of the loans, as well as the relationship of the creditors with BYG. 7.2 At the time of our appointment as Interim Receiver, each of Cosman and Ellake were represented by common counsel. There were no books and records of BYG at its offices when the Interim Receiver attended the Mt. Nansen mine site and accordingly, the full extent of BYG s creditors could not be determined through a typical review of these books and records. The Interim Receiver wrote to Cosman and Ellake to inquire as to the nature and extent of their positions. These initial inquiries made soon after the Receiver s appointment were not responded to for some time. 11

14 7.3 Relatively recently, Mr. Chafee has made efforts to provide the Interim Receiver with information regarding the position of both Cosman and Ellake. In addition, counsel representing Cosman and Ellake has now filed an application in this receivership seeking to have the Interim Receiver deliver to them assets to which they claim priority, namely the shares of YGC and the non-contiguous mineral claims owned by BYG. 7.4 At this stage, the Interim Receiver has many questions that need to be addressed in order for it to better understand the relative positions of the creditors. These questions, among others, include: if to the extent that Cosman and Ellake have priority to certain claims as well as the YGC shares, why were these not dealt with through their privately appointed receiver in Mr. Chafee has advised the Interim Receiver that he has a significant interest in both Cosman and Ellake. Mr. Chafee was also a Director, Chair of the Board of Directors, and a significant shareholder of BYG at the time of certain transactions between Cosman/Ellake and BYG. Furthermore, Mr. Chafee has involvement with YGC. Accordingly, it appears that the creditors and BYG were closely related parties, which warrants a detailed review. It appears that BYG may have been insolvent at the time certain transactions took place between Cosman/Ellake and BYG. Since Mr. Chafee was a principal of Cosman/Ellake and a Director of BYG, the full details of these transactions should be closely reviewed. 12

15 BYG was a publicly traded company as is YGC. As such, each prepared financial statements which were subject to financial audit. The financial statements of BYG and YGC refer to certain transactions between them which negatively impact the financial position of BYG. Since there was common Directors of BYG and YGC, clarification of these transactions would be helpful in understanding the affairs of BYG. Mr. Chafee represents a common link between YGC and BYG. 7.5 The material submitted by Cosman and Ellake in support of their application to have the Interim Receiver deliver to them the mineral claims and the YGC shares is voluminous. This material was received by the Interim Receiver during the time that this report was being finalized and consequently, the review of this material has been an overview only. 7.6 At this time, the Interim Receiver is of the view that further work is required to better understand the position of Cosman and Ellake. Furthermore, the Interim Receiver is of the view that transactions between parties that are related or appear to be related should be closely reviewed to ensure that these parties did not receive preferential treatment. The Interim Receiver believes that such a detailed review is required in this instance. 7.7 The Bankruptcy and Insolvency Act ( BIA ) has many provisions that deal with and assist in resolving situations such as this. The assistance is provided in the form of direction as to when parties are related, what constitutes reviewable type transactions, and how should they be dealt with. In addition, the BIA provides for specific investigative powers and obliges parties to cooperate with such investigations. This would be extremely beneficial under the current circumstances. 7.8 If the Cosman and Ellake security are determined to be valid and the amount of their claims are established, the relative ranking of the Governments statutory charge under the BIA and the claim of the secured creditors must be determined. The provisions of the BIA may also be helpful in determining the priority ranking of these competing claims. 13

16 7.9 Based on the foregoing, the Interim Receiver recommends to the Court that it be authorized to cause BYG to make an assignment into bankruptcy and to name PricewaterhouseCoopers Inc. as the Trustee in bankruptcy. In order to keep the receivership and bankruptcy administrations under common Court control, we recommend that the Court authorize the assignment to be filed in Whitehorse and be adjudicated by this Court. 8 BUDGET 8.1 A budget for the Interim Receiver was last provided in the Interim Receiver s Second Report to the Court dated November 28, This budget reflected the fees and expenses associated with the sale process described in the Marketing Plan as well as other receivership activities. The marketing process has been delayed and accordingly, the funds previously advanced have not been consumed. 8.2 The Interim Receiver believes that the available cash on hand is sufficient to meet the budget requirements for the period to June 30, 2007 and does not seek any additional funds at this time. 14

17 All of which is respectfully submitted this 13 th day of October PricewaterhouseCoopers Inc. Court Appointed Interim Receiver and Receiver-Manager of B.Y.G. Natural Resources Inc. Michael J. Vermette Senior Vice President W:\FASData\B\BYG Natural Resources - IR\Reports\Report to court\3rd Report\Receiver's Third Report to Court.doc 15

18 APPENDIX A Statement of Receipt and Disbursement for the period April 6, 2004 to September 30, 2006

19 APPENDIX A PRICEWATERHOUSECOOPERS INC. IN ITS CAPACITY AS RECEIVER-MANAGER AND INTERIM RECEIVER OF STATEMENT OF RECEIPTS AND DISBURSEMENTS FOR THE PERIOD APRIL 6, 2004 TO SEPTEMBER 30, 2006 RECEIPTS $ Advances from Government of Yukon 552, Gross Proceeds on sale of shares 483, GST Refund 6, Interest 12, DISBURSEMENTS Total Receipts 1,054, Interim Receiver fees 184, Legal fees and disbursements 55, Registration, transfer and renewal of Mineral claims & leases 4, Commissions on sale of shares 4, Appraisal 3, Travel 1, Meals and Accomodation Contract labour 1, Title searches Advertising Filing fees Registration of land title Other administrative costs 7, GST Paid 7, Total Disbursements 272, EXCESS OF RECEIPTS OVER DISBURSEMENTS 781, REPRESENTED BY: Cash in bank 302, Funds held by securities broker 478, ,786.70

20 APPENDIX B Interim Receiver s Marketing Plan

21 APPENDIX C Listing of Lapsed Mineral Claims

22 Appendix C BYG Natural Resources Inc. Schedule of Lapsed Claims Full/Partial No. Claim Name Claim # Grant # Expiry Quartz Owner Owned NTS #s Lease 1 Tawa 1 YA Jan-05 BYG 100% 115I03 2 Tawa 2 YA Jan-05 BYG 100% 115I03 3 Tawa 3 YA Jan-05 BYG 100% 115I03 4 Tawa 4 YA Jan-05 BYG 100% 115I03 5 Tawa 5 YA Jan-05 BYG 100% 115I03 6 Tawa 6 YA Jan-05 BYG 100% 115I03 7 Tawa 7 YA Jan-05 BYG 100% 115I03 8 Tawa 8 YA Jan-05 BYG 100% 115I03 9 Tawa 9 YA Jan-05 BYG 100% 115I03 10 Tawa 10 YA Jan-05 BYG 100% 115I03 11 Tawa 11 YA Jan-05 BYG 100% 115I03 12 Tawa 12 YA Jan-05 BYG 100% 115I03 13 Tawa 15 YA Jan-05 BYG 100% 115I03 14 Tawa 16 YA Jan-05 BYG 100% 115I03 15 Tawa 17 YA Jan-05 BYG 100% 115I03 16 Tawa 18 YA Jan-05 BYG 100% 115I03 17 Tawa 19 YA Jan-05 BYG 100% 115I03 18 Tawa 20 YA Jan-05 BYG 100% 115I03 19 Tawa 21 YA Jan-05 BYG 100% 115I03 20 Tawa 22 YA Jan-05 BYG 100% 115I03 21 Tawa 23 YA Jan-05 BYG 100% 115I03 22 Tawa 24 YA Jan-05 BYG 100% 115I04 Quartz Fraction Appendix C to 3rd report- Listing of of Lapsed Mineral Claims.xls Updated Feb 27, 2006