Condensed Consolidated Interim Financial Statements of Cornerstone Capital Resources Inc. For the nine months ended September 30, 2011 and 2010

Transcription

1 Condensed Consolidated Interim Financial Statements of Cornerstone Capital Resources Inc. For the nine months ended September 30, 2011 and 2010 (Unaudited)

2 NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed interim financial statements of Cornerstone Capital Resources Inc. for the three months and nine months ended September 30, 2011 and 2010 have been prepared by and are the responsibility of the Company s management. The Company s independent auditors have not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity s auditor.

3 Table of Contents PAGE Condensed Consolidated Statements of Financial Position 2 Condensed Consolidated Statements of Operations, Comprehensive Loss and Deficit 3 Condensed Consolidated Statements of Changes in Shareholders Equity 4 Condensed Consolidated Statements of Cash Flows

4 Condensed Consolidated Statements of Financial Position As at As at As at September 30, December 31, January 1, $ $ $ ASSETS CURRENT Cash 4,305,068 1,331, ,722 Marketable securities 351, , ,020 Receivables 254, , ,657 Refundable staking deposits - 14,800 4,400 Prepaid expenses 136, ,671 48,005 5,047,404 2,238,779 1,085,804 MINERAL PROPERTIES (Note 8) 6,876,231 4,557,365 4,227,008 PROPERTY AND EQUIPMENT (Note 9) 216, , ,256 12,140,190 7,048,600 5,623,068 LIABILITIES CURRENT Trade payables and accrued liabilities 1,129, , ,780 SHAREHOLDERS' EQUITY (Note 10) Share capital 32,601,181 25,517,510 23,583,146 Warrants 566,900 1,528,500 1,816,176 Reserves 7,688,465 7,157,083 5,522,673 Deficit (29,845,590) (27,591,350) (25,720,707) BASIS OF PREPARATION (Note 2) 11,010,956 6,611,743 5,201,288 12,140,190 7,048,600 5,623,068 APPROVED BY THE BOARD OF DIRECTORS ON NOVEMBER 25, 2011: "Glen H. McKay" Director "John Fleming" Director See accompanying notes to the condensed consolidated interim financial statements Page 2

5 Condensed Consolidated Statements of Operations, Comprehensive Loss and Deficit For the three For the three For the nine For the nine months ended months ended months ended months ended September September September September 30, , , , 2010 $ $ $ $ REVENUE Unrealized gain on value of marketable securities - 93, ,617 Other income 44,182 16, ,151 42,592 Investment income 2,731 2,430 7,840 3,118 46, , , ,327 EXPENSES General and administrative 362, ,392 1,112, ,707 Share-based payments 101,823 54, ,510 99,058 Accounting, audit and legal 74,270 25, , ,838 Consulting fees 114,459 33, ,453 85,918 Unrealized loss on value of marketable securities 109,551-45,301 - Public relations 12,528 9,000 50,069 27,000 Write-down of mineral properties 34,943 26,472 55, ,572 Amortization 15,789 20,046 46,500 57,495 Foreign exchange loss (gain) (44,399) 3,052 (20,905) (13,830) Interest and bank charges 2,108 1,281 5,640 3, , ,173 2,536,231 1,595,469 NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD (736,468) (233,316) (2,254,240) (1,439,142) DEFICIT, BEGINNING OF PERIOD (29,109,122) (26,926,533) (27,591,350) (25,720,707) DEFICIT, END OF PERIOD (29,845,590) (27,159,849) (29,845,590) (27,159,849) LOSS PER SHARE - BASIC AND DILUTED (0.01) (0.01) (0.02) (0.01) WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 123,889,052 83,883, ,740,533 83,400,889 See accompanying notes to the condensed consolidated interim financial statements Page 3

6 Condensed Consolidated Statements of Changes in Shareholders' Equity Number of shares $ Share-based Share purchase Share capital Warrants payment reserve warrant reserve Deficit Total equity Balance, January 1, ,197,178 23,583,146 1,816,176 3,486,893 2,035,780 (25,720,707) 5,201,288 Total comprehensive loss January 1 - September 30, 2010 (1,439,142) (1,439,142) Shares issued for private placements 13,163, , , ,800,209 Shares issued for proprty acquisitions 684,932 89, ,041 Share-based payment , ,057 Warrants expired during the period - - (1,503,676) - 1,503, Share issuance costs - (117,664) (117,664) Balance, September, ,045,637 24,532,732 1,134,500 3,585,950 3,539,456 (27,159,849) 5,632,789 Total comprehensive loss October 1 - December 31, 2010 (431,501) (431,501) Shares issued for private placements 9,343,688 1,102, , ,496,242 Share-based payment , ,677 Share issuance costs - (117,464) (117,464) Balance, December 31, ,389,325 25,517,510 1,528,500 3,617,627 3,539,456 (27,591,350) 6,611,743 Total comprehensive loss January 1 - September 30, 2011 (2,254,240) (2,254,240) Shares issued for private placements 13,355,000 2,671, , ,237,900 Exercise of agents' warrants 607, , ,336 Stock options exercised 172,082 32,191 - (10,128) ,063 Exercise of warrants 19,175,026 4,498,354 (1,528,500) ,969,854 Share-based payment , ,510 Share issuance costs - (233,210) (233,210) - Balance, September 30, ,698,463 32,601, ,900 4,149,009 3,539,456 (29,845,590) 11,010,956 See accompanying notes to the condensed consolidated interim financial statements Page 4

7 Condensed Consolidated Statements of Cash Flows For the nine For the nine months ended months ended September September 30, , 2010 $ $ OPERATING ACTIVITIES Net loss (2,254,240) (1,439,142) Items not affecting cash: Amortization 46,500 57,495 Write-down of mineral properties 55, ,572 Unrealized loss (gain) on value of marketable securities 45,301 (110,617) Share-based payments 541,510 99,058 Changes in non-cash operating working capital 855,106 (131,413) (710,148) (992,047) INVESTING ACTIVITIES Mineral properties expenditures - net (2,417,141) (803,639) Purchase of property and equipment (10,599) (17,431) (2,427,740) (821,070) FINANCING ACTIVITIES Proceeds from issuance of share capital - net 5,545, ,545 Proceeds from issuance of warrants 566, ,000 6,111,942 1,682,545 INCREASE (DECREASE) IN CASH 2,974,054 (130,572) CASH, BEGINNING OF PERIOD 1,331, ,722 CASH, END OF PERIOD 4,305, ,150 SUPPLEMENTAL CASH FLOW INFORMATION (NOTE 12) See accompanying notes to the condensed consolidated interim financial statements Page 5

8 1. DESCRIPTION OF BUSINESS Cornerstone Capital Resources Inc. ( Cornerstone or the Company ), through its wholly-owned subsidiaries, Cornerstone Resources Inc., Cornerstone Ecuador S.A., La Plata Minerales S.A., Minera Cornerstone Chile Limitada and Exploraciones Novomining S.A. (formerly Santa Barbara Copper and Gold S.A.), is engaged in the evaluation, acquisition and exploration of mineral properties in Canada and South America, of which substantially all of the exploration activities of the Company are carried on with joint parties. The Company plans to ultimately develop the properties as joint ventures, bring them into production, option or lease properties to third parties, or sell the properties outright. The Company has not determined whether these properties contain ore reserves that are economically recoverable and the Company is considered to be in the exploration stage. 2. BASIS OF PREPARATION Statement of Compliance These interim condensed consolidated financial statements, (the financial statements ), are unaudited and have been prepared in accordance with IAS 34, Interim Financial Reporting, ( IAS 34 ), using accounting policies consistent with the International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations of the IFRS Interpretations Committee ( IFRIC ). These are the Company s second IFRS interim condensed consolidated financial statements for part of the period covered by the Company s first IFRS consolidated annual financial statements for the year ending December 31, Previously, the Company prepared its consolidated annual and interim consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles ( Canadian GAAP ). As this is the Company s first year of preparing its interim condensed consolidated financial statements in accordance with IFRS, the Company s disclosures exceed the minimum requirements under IAS 34. The Company has elected to exceed the minimum requirements for all quarters during 2011, in order to present the Company s accounting policies in accordance with IFRS, and the additional disclosures required under IFRS, which also highlight the changes from the Company s 2010 annual consolidated financial statements prepared in accordance with Canadian GAAP. In 2012 and beyond, the Company may not provide the same amount of disclosure in the interim condensed consolidated financial statements under IFRS as the reader will be able to refer to the annual consolidated financial statements which will be prepared in accordance with IFRS. Basis of presentation The financial statements of the Company have been prepared in accordance with IFRS on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Several adverse conditions, however, cast substantial doubt on the validity of this assumption. The Company does not have any proven economically recoverable reserves, has continuous losses, and at September 30, 2011, the Company had an accumulated deficit of $29,845,590 (December 31, $27,591,350). The success of the Company and the recoverability of exploration costs are dependent upon the existence of Page 6

9 2. BASIS OF PREPARATION (Continued) economically recoverable reserves, the ability of the Company to obtain financing to find and complete the development of such reserves, the ability of the Company to satisfy obligations as they come due and upon future profitable production from the properties or proceeds from disposition. The Company, however, believes it has properties which will continue to attract equity investors. The amounts shown as deferred exploration costs represent net costs to date less write offs and do not necessarily represent present or future values. Although the Company has taken steps to verify title to mineral properties in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company s title. Property title may be subject to unregistered prior agreements or transfers and may be affected by undetected defects. If the going concern assumption was not appropriate for these financial statements, adjustments would be necessary to the carrying value of assets and liabilities, the reported net loss and the balance sheet classifications used. 3. FIRST TIME ADOPTION OF IFRS The Company has adopted IFRS on January 1, 2011 with a transition date of January 1, 2010 (the transition date ). As 2011 represents our initial presentation of the Company s results and financial position under IFRS, these financial statements were prepared in accordance with IFRS 1, First Time Adoption of International Financial Reporting Standards ( IFRS 1 ). Under IFRS 1, the IFRS standards are applied retrospectively at the transition date with certain mandatory exceptions and optional exemptions, which are described further in this Note. The accounting policies described in Note 4 have been applied consistently to all periods presented in our Consolidated Financial Statements with the exception of the optional exemptions elected and the mandatory exceptions required. At the Transition Date, an opening balance sheet was prepared under IFRS. First time adoption mandatory exceptions and optional exemptions to retrospective application of IFRS In preparing these financial statements in accordance with IFRS 1, the Company has applied certain mandatory exceptions and certain optional exemptions from full retrospective application of IFRS as described below. Mandatory exceptions Estimates Hindsight was not used to create or revise estimates. The estimates made under IFRS at the date of transition are consistent with those previously made under Canadian GAAP. Page 7

10 3. FIRST TIME ADOPTION OF IFRS (Continued) Optional exemptions The Company has applied the following optional transition exemptions to full retrospective application of IFRS: - IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries that occurred before January 1, IFRS 2 Share-based payments has not been applied to equity instruments that were granted on or before November 7, 2002, or equity instruments that were granted subsequent to November 7, 2002 and vested before January 1, The Company has elected not to apply IFRS 2 to awards that vested prior to January 1, 2010, which has been accounted for in accordance with Canadian GAAP. IFRS Reconciliation Reconciliation of Balance Sheet The following reconciles our Canadian GAAP Consolidated Balance Sheet to our IFRS Consolidated Balance Sheet at the Transition Date: Page 8

11 3. FIRST TIME ADOPTION OF IFRS (Continued) IFRS ADJUSTMENTS 1 2 Canadian Stock-based Flow-Through Reclassify As at January 1, 2010 GAAP Compensation Shares IFRS ASSETS $ $ $ $ $ CURRENT Cash 740, ,722 Marketable securities 114, ,020 Receivables 178, ,657 Refundable staking deposits 4, ,400 Prepaid expenses 48, ,005 1,085, ,085,804 MINERAL PROPERTIES 4,227, ,227,008 PROPERTY AND EQUIPMENT 310, ,256 TOTAL ASSETS 5,623, ,623,068 LIABILITIES CURRENT Trade payables and accrued liabilities 421, ,780 SHAREHOLDERS' EQUITY Share capital 22,433,113-1,150,033-23,583,146 Warrants 1,816, ,816,176 Contributed surplus 5,540,656 (17,983) - (5,522,673) - Reserves ,522,673 5,522,673 Deficit (24,588,657) 17,983 (1,150,033) - (25,720,707) TOTAL EQUITY 5,201, ,201,288 - TOTAL EQUITY AND LIABILITIES 5,623, ,623,068 Page 9

12 3. FIRST TIME ADOPTION OF IFRS (Continued) IFRS ADJUSTMENTS Deferred Canadian Stock-based Flow-Through Option Reclassify As at December 31, 2010 GAAP Compensation Shares Payments IFRS ASSETS $ $ $ $ $ $ CURRENT Cash 1,331, ,331,014 Marketable securities 353, ,867 Receivables 235, ,427 Refundable staking deposits 14, ,800 Prepaid expenses 303, ,671 2,238,779 2,238,779 MINERAL PROPERTIES 4,893, (336,342) - 4,557,365 PROPERTY AND EQUIPMENT 252, ,456 TOTAL ASSETS 7,384, (336,342) - 7,048,600 LIABILITIES CURRENT Trade payables and accrued liabilities 436, ,857 DEFERRED OPTION PAYMENTS 344, (344,475) , ,857 SHAREHOLDERS' EQUITY Share capital 24,077,477-1,440, ,517,510 Warrants 1,528, ,528,500 Contributed surplus 7,189,592 (32,509) - - (7,157,083) - Reserves ,157,083 7,157,083 Deficit (26,191,959) 32,509 (1,440,033) 8,133 - (27,591,350) TOTAL EQUITY 6,603, ,611,743 - TOTAL EQUITY AND LIABILITIES 7,384, (336,342) - 7,048,600 Reconciliation of total equity The following table reconciles our total equity as previously reported under Canadian GAAP to the amounts reported under IFRS as at the Transition Date, September 30, 2010 and December 31, Explanations for each of the adjustments to equity are included in the section that follows the reconciliation. Page 10

13 3. FIRST TIME ADOPTION OF IFRS (Continued) January 1, September 30, December 31, As at Note $ $ $ Total equity as reported under Canadian GAAP 5,201,288 5,625,177 6,603,610 Adjustments to total equity under IFRS Mineral properties - Deferred option payments (3) - 7,612 8,133 Total adjustments to equity under IFRS - 7,612 8,133 Total equity as reported under IFRS 5,201,288 5,632,789 6,611,743 Reconciliation of Net Loss and Comprehensive Loss The following table reconciles total net loss and total comprehensive loss as reported under Canadian GAAP to the amounts reported under IFRS for the periods presented. For the three For the nine For the months ended months ended year ended Note Sept. 30, 2010 Sept. 30, 2010 December 31, 2010 $ $ $ Net loss and comprehensive loss under Canadian GAAP (239,407) (1,457,760) (1,603,302) Adjustments to conform to IFRS (1) 6,091 11,006 14,526 (2) - - (290,000) (3) - 7,612 8,133 Total adjustments to net loss and comprehensive loss 6,091 18,618 (267,341) Net loss and comprehensive loss as reported under IFRS (233,316) (1,439,142) (1,870,643) Page 11

14 3. FIRST TIME ADOPTION OF IFRS (Continued) Reconciliation of cash flows The adoption of IFRS has had no impact on the net cash flows of the Company. The changes made to the consolidated statements of financial position and consolidated statements of operations have resulted in reclassifications of various amounts on the consolidated statements of cash flows, however as there have been no changes to the net cash flows, no cash flow reconciliations have been presented. Notes to the reconciliations above (1) Share-based payments In calculating share-based compensation, the Company s policy under Canadian GAAP was to account for forfeitures as incurred. Under IFRS, forfeitures must be estimated at the time of the grant. The Company has made an adjustment to its stock-based compensation for the three months and nine months ended September 30, 2010 and to its opening balance sheet at January 1, The forfeiture rate has been estimated at 10%, based on historical forfeitures. The adjustment has reduced the stock-based compensation in the periods adjusted. (2) Flow-through shares Flow-through shares are a unique Canadian tax incentive which is the subject of specific guidance under Canadian GAAP. Under Canadian GAAP the Company accounted for the issue of flow-through shares in accordance with the provisions of CICA Emerging Issues Committee Abstract 146 Flow-through Shares. At the time of issue, the funds received are recorded as share capital. At the time of the filing of the renunciation of the qualifying flow-through expenditures to investors, the Company recorded a future income tax liability with a charge directly to shareholders equity. Also under Canadian GAAP the Company recorded any deferred tax recovery eligible to be recognized to offset the deferred tax charge to equity as a tax recovery in the statement of operations. IFRS does not contain explicit guidance pertaining to this tax incentive. Therefore, the Company has adopted a policy whereby the premium paid for flow-through shares in excess of the market value of the shares without the flow-through features at the time of issue is initially recorded as a flow-through tax liability and included in trade payables and accrued liabilities. Upon renouncement by the Company of the tax benefits associated with the related expenditures, a deferred tax liability is recognized and the flow-through tax liability will be reversed. To the extent that suitable deferred tax assets are available, the Company will reduce the deferred tax liability and record a deferred tax recovery. The adjustment of $1,150,033 to the January 1, 2010 balance sheet represents a reduction of share capital of ($348,500) from prior year s premiums and an increase in share capital of $1,498,533 to reverse the prior year s recording of the flow-through tax benefit under Canadian GAAP. The December 31, 2010 balance sheet includes the $1,150,033 adjustment plus an amount of $290,000 as a reversal of the 2010 recording of a flow-through tax benefit from a 2009 share issue, for a total adjustment of $1,440,033. (3) Mineral properties deferred option payments The Company receives option payments from its joint venture partners. These payments may be in cash or in shares of the partner, and they represent agreed upon payments to the Company Page 12

15 3. FIRST TIME ADOPTION OF IFRS (Continued) as part of the partner s requirements to earn a percentage interest in the Company s property. In the past these option payments have been recorded as a deferred liability. While there is no specific IFRS guidance on the accounting treatment for these option payments, the most appropriate treatment is to deduct the option payments received from the applicable mineral property, until such time as the property has been completely written off, after which the option payments will be shown as income. The adjustment to the December 31, 2010 balance sheet includes $336,342 as a reduction to mineral properties and a reduction in the deficit of $8,133 as some of the properties were completely written off. For the nine months ended September 30, 2010, mineral properties have been reduced by $302,113 and income of $7,612 has been recorded. 4. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation These consolidated financial statements reflect the financial position, results of operations and cash flows of Cornerstone and its wholly owned subsidiaries. All inter-company transactions have been eliminated upon consolidation. Refundable staking deposits The Company makes staking deposits on its various Canadian exploration claims which are refundable when and if the Company incurs sufficient exploration expenditures within a specified time frame and files a related exploration report with the appropriate government authorities. Should the Company not incur the applicable exploration expenditures or post a bond in lieu thereof or fail to submit the related exploration report within the applicable timeframe, the staking fee becomes non-refundable and is added to mineral properties. Mineral properties The Company is in the exploration stage and defers all expenditures related to its mineral properties until such time as the properties are put into commercial production, sold or abandoned. Under this method, all amounts shown as mineral properties represent costs incurred to date less amounts amortized, received from exploration partners and/or written off, and do not necessarily represent present or future values. Costs are only capitalized subsequent to gaining the legal rights to the property. If the properties are put into commercial production, the expenditures will be depleted following the unit of production method. If the properties are sold or abandoned, or considered to be impaired in value, the expenditures will be charged to operations. The Company does not accrue the estimated future costs of maintaining its mineral properties in good standing. Mineral properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. These events may include the following: Page 13

16 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) -the period for which the Company has exploration rights has expired or will shortly -there is no further exploration planned for a property -continued unfavourable exploration results If a property s recoverable amount is less than the assets carrying amount, an impairment loss is recognized. The ultimate recoverability of the amounts capitalized for the mineral properties is dependent upon the delineation of economically recoverable ore reserves, the Company s ability to obtain the necessary financing to complete their development and realize profitable production or proceeds from the disposition thereof. Management s estimates of recoverability of the Company s investment in its various projects have been based on current conditions. However, it is reasonably possible that changes could occur in the near term which could adversely affect management s estimates and may result in future writedowns of capitalized property carrying values. Property and equipment Property and equipment are recorded at cost. Amortization is calculated on a declining balance basis at rates which will reduce original cost to estimated residual value over the estimated useful lives of the assets, except for leasehold improvements, which are amortized over the period of the lease. Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. If an asset s recoverable amount is less than the asset s carrying amount, an impairment loss is recognized. The rates applicable to each category of property, plant and equipment are as follows: Class of property, plant and equipment Depreciation rate Equipment 20% Computers 45% Vehicles 20% Joint ventures The Company has agreements with other companies whereby the Company either owns a project jointly with a partner and shares in the costs and ownership of the project, or allows the other company to earn a right to a certain percentage ownership in one of the Company s projects, by spending an agreed upon amount in exploration costs over an agreed upon period of time. The Company also has arrangements with others whereby the Company may earn an interest in a property by spending an agreed upon amount for exploration. In all cases the property is jointly controlled by the Company and its partners, and each accounts for its own expenditures. Flow-through shares Any premium received by the Company on the issuance of flow-through shares is initially recorded as a liability ( flow-through tax liability ) and included in trade payables and accrued liabilities. Page 14

17 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) Flow-through shares (Continued) Upon renouncement by the Company of the tax benefits associated with the related expenditures, a deferred tax liability is recognized and the flow-through tax liability will be reversed. To the extent that suitable deferred tax assets are available, the Company will reduce the deferred tax liability and record a deferred tax recovery. Share-based payments The Company uses the fair value method to measure compensation expense at the date of grant of stock options. The fair value of options is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to share-based payment reserve. When options are exercised, the corresponding share-based payment reserve and the proceeds received by the Company are credited to share capital. Forfeitures are estimated at the time of the grant. Income taxes Income tax expense comprises current and deferred income tax. Current tax and deferred tax are recognized in earnings or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income. Current tax expense comprises the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous periods. 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 measured at the tax rates that are expected to apply when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. 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 either the same taxable entity, or on different taxable entities, which intend to settle current tax liabilities and assets on a net basis or realize their tax assets and liabilities simultaneously. A deferred tax asset is recognized for unused tax losses, unused tax credits and deductible temporary differences, to the extent that it is probable that future taxable income will be available against which the unused tax losses, unused tax credits and temporary differences 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 all or part of the related tax benefit will be realized. Loss per share Basic loss per share is computed by dividing the loss for the period by the weighted-average number of shares outstanding during the period. Diluted loss per share is equivalent to basic loss per share as the inclusion of outstanding options and warrants is anti-dilutive. Page 15

18 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) Foreign currency translation The functional currency of the Company and its subsidiaries is the Canadian dollar. Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date for monetary items and at exchange rates prevailing at the transaction date for non-monetary items. Revenue and expenses are translated at the average exchange rates prevailing during the period except for amortization, which is translated at historical exchange rates. Gains and losses on translation are included in the determination of net loss for the period. Decommissioning and restoration provision The Company recognizes the fair value of the liability for asset decommissioning and restoration in the period in which it is incurred and records a corresponding increase in the carrying value of the related long-lived asset. Fair value is estimated using the present value of the estimated future cash outflows to abandon the asset at the Company s risk-free interest rate. The liability is subsequently adjusted for the passage of time, and is recognized as an accretion expense in the consolidated statement of loss and deficit. The liability is also adjusted due to revisions in either the timing or the amount of the original estimated cash flows associated with the liability. The increase in the carrying value of the asset is amortized on the same basis as mineral properties. In management s estimation, there is no liability at this time. Financial instruments Cash and cash equivalents are classified as loans and receivables. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. Marketable securities are classified as fair value through profit or loss ( FVTPL ). These assets are marked-to-market through net income (loss) at each period end. Receivables and refundable staking deposits are classified as Loans and Receivables. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. For the Company, the measured amount generally corresponds to cost, due to the shortterm nature of financial assets. Trade payables and accrued liabilities are classified as Other Financial Liabilities. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. For the Company, the measured amount generally corresponds to cost, due to the shortterm nature of financial liabilities. Transaction costs are included in the initial carrying amount of financial instruments, except for FVTPL items which are expensed as incurred. The Company has determined that it does not have derivatives or embedded derivatives. Page 16

19 4. SIGNIFICANT ACCOUNTING POLICIES (Continued) Significant accounting judgments, estimates and assumptions The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of the assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. The Company has identified the following critical accounting policies under which significant judgments, estimates and assumptions are made and where actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Mineral properties The Company makes certain estimates and assumptions regarding the recoverability of the carrying values of exploration assets. These assumptions are changed when conditions exist that indicates that the carrying value may be impaired, at which time an impairment loss is recorded. Receivables The company reviews its receivables on a regular basis and makes estimates of any amounts which are not expected to be collected. If such doubt exists, an allowance for doubtful accounts will be recorded. Property and equipment The Company reviews the estimated useful lives of property and equipment at the end of each reporting period to ensure assumptions are still valid. Share-based payments The Company makes certain estimates and assumptions when calculating the fair values of stock options and warrants granted. The significant assumptions used include estimate of expected volatility, expected life and expected risk-free rate of return. Changes in these assumptions may result in a material change to the expense recorded for the issuance of stock options and warrants. 5. FUTURE ACCOUNTING CHANGES The following standards are effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company has not early adopted these standards and is currently assessing the impact they will have on the condensed consolidated financial statements. Page 17

20 5. FUTURE ACCOUNTING CHANGES (Continued) IFRS 10, Consolidated Financial Statements: IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 supersedes IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation Special Purpose Entities. IFRS 11, Joint Arrangements: IFRS 11 establishes principles for financial reporting by parties to a joint arrangement. IFRS 11 supersedes current IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities - Non - Monetary Contributions by Venturers. IFRS 12, Disclosure of Interests in Other Entities: IFRS 12 applies to entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 13, Fair Value Measurements: IFRS 13 defines fair value, sets out in a single IFRS framework for measuring value and requires disclosures about fair value measurements. The IFRS 13 applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances. In July 2011, the IASB agreed to defer the effective date of IFRS 9, Financial Instruments from 2013 to The standard is the first part of a multi-phase project to replace IAS 39, Financial Instruments: Recognition and Measurement. IAS 27, Separate Financial Statements: IAS 12 has been updated to require an entity presenting separate financial statements to account for those investments at cost or in accordance with IFRS 9 Financial Instruments. The new IAS 27 excludes the guidance on the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent, which is within the scope of the current IAS 27 Consolidated and Separate Financial Statements, and is replaced by IFRS 10. IAS 28, Investments in Associates and Joint Ventures: IAS 28 has been updated and it is to be applied by all entities that are investors with joint control of, or significant influence over, an investee. The scope of the current IAS 28 Investments in Associates does not include joint ventures. IAS 1 Presentation of Financial Statements: In June 2011, the IAS issued amendments to IAS 1 that requires an entity to group items presented in the statement of comprehensive income on the basis of whether they may be reclassified to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. The amendments are effective for annual periods beginning on or after July 1, 2012, with earlier adoptions permitted. The Company does not anticipate the application of the amendments to IAS 1 to have a material impact on its consolidated financial statements. Page 18

21 6. CAPITAL MANAGEMENT The capital structure of the Company consists of capital and equity comprised of share capital, reserves and deficit. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company s management to sustain future development of the business. The properties in which the Company has an interest are in the exploration stage; as such the Company has historically relied on the equity markets to fund its activities. In addition, the Company holds shares in several companies, which will also assist the Company to carry out exploration programs and fund administrative costs. The Company will continue to assess new properties and seek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so. Management reviews its capital management approach on an ongoing basis. The Company is not subject to externally imposed capital requirements. 7. FINANCIAL INSTRUMENTS Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities Level 2 valuation techniques based on inputs that are quoted prices or similar instruments in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or corroborated by observable market data by correlation or other means Level 3 valuation techniques with significant unobservable market inputs The Company does not have any level 2 or 3 fair value measurements, and there have been no transfers between levels. Page 19

22 7. FINANCIAL INSTRUMENTS (Continued) Total financial assets/financial liabilities at fair As at September 30, 2011 Level 1 Level 2 Level 3 value Financial assets $ $ $ $ Marketable securities 351, ,165 Financial liabilities Total financial assets/financial liabilities at fair As at December 31, 2010 Level 1 Level 2 Level 3 value Financial assets $ $ $ $ Marketable securities 353, ,867 Financial liabilities Total financial assets/financial liabilities at fair As at January 1, 2010 Level 1 Level 2 Level 3 value Financial assets $ $ $ $ Marketable securities 114, ,020 Financial liabilities Financial Risk Factors The Company has exposure to credit risk, liquidity risk and market risk. The Company s Board of Directors has the overall responsibility for the oversight of these risks and reviews the Company s policies on an ongoing basis to ensure that these risks, which are summarized below, are appropriately managed: Credit risk Credit risk is the risk of loss associated with a counterparty s inability to fulfill its payment obligations. The Company s credit risk is primarily attributable to accounts receivable and marketable securities. Accounts receivable are either from the government for tax refunds or from Page 20

23 7. FINANCIAL INSTRUMENTS (Continued) joint venture partners, who have a history of paying quickly when invoiced. The marketable securities are held in an account at the Company s financial institution. Management believes that the credit risk concentration with respect to financial instruments included in the accounts receivable and marketable securities is remote. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. As at September 30, 2011, the Company had a cash balance of $4,305,068 (December 31, $1,331,014), to settle current liabilities of $1,129,234 (December 31, $436,857). To the extent that the Company does not believe it has sufficient liquidity to meet its current obligations, the Board of Directors considers securing additional funds through equity or partnering transactions. All of the Company s financial liabilities are normally paid within 30 days and are subject to normal trade terms. The Company has no source of operating cash flow to fund its exploration and development projects. Any further significant work would likely require additional equity or debt financing. The Company has limited financial resources and there is no assurance that additional funding will be available to allow the Company to fulfill its obligations on existing or future exploration projects. Failure to obtain additional financing could result in delay or indefinite postponement of further exploration. Market risk Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates, and equity prices will affect the Company s income or the value of its financial instruments. (a) Interest rate risk The Company has cash balances subject to interest rate risk. The Company s current policy is to invest excess cash in interest bearing deposit accounts with its banking institutions. A 1% change in interest rates would have an impact on the Company s net loss of approximately $43,051. (b) Price risk The Company is exposed to price risk with respect to commodity and equity prices. Equity price risk is defined as the potential adverse impact on the Company s earnings due to movements in individual equity prices or general movements in the level of the stock market. Commodity price risk is defined as the potential adverse impact on earnings and economic value due to commodity price movements and volatilities. The Company monitors commodity prices of gold, copper and other metals, individual equity movements, and the stock market to determine the appropriate course of action to be taken by the Company. The Company believes that both commodity and equity price movements can have a substantial effect on the market value of the Company s investments. Such price movements are monitored by the Company. (c) Foreign exchange risk - The Company transacts certain business in U.S. Dollars, and therefore is subject to foreign exchange risk on U.S. dollar receivables, trade payables and cash balances. The Company attempts to mitigate these risks by managing its U.S. Dollar inflows and outflows. No hedging instruments have been used by the Company, however, depending upon the nature and level of future foreign exchange transactions, consideration may be given to the use of hedging Page 21

24 7. FINANCIAL INSTRUMENTS (Continued) instruments. The Company believes that it adequately manages its foreign exchange risk, and the risk is minimal. The following table shows the net exposures in US dollars. September 30, December 31, January 1, $US $US $US Cash 525,240 96,899 34,080 Receivables 97,169 93,774 32,568 Trade payables and accrued liabilities (175,546) (118,565) (23,447) Net US dollar exposure 446,863 72,108 43,201 Based upon the above net exposures to the US dollar, as at September 30, 2011, a 1% change in the value of the US dollar to the Canadian dollar exchange rate would impact the Company s net loss by approximately $4,469. Sensitivity analysis The Company has share investments in the following companies: Donnybrook Energy Inc., Mountain Lake Resources Inc., Great Western Minerals Group Inc., Rare Earth Metals Inc. and Thundermin Resources Inc. All these companies are listed on either the Toronto Stock Exchange or the Toronto Venture Stock Exchange. Share investments are classified by the Company as F.V.T.P.L. and are measured at fair value. Based on management s knowledge and experience of the financial markets, the Company believes the following movements are reasonably possible during the third quarter of 2011: the Company s investments in publicly traded companies are denominated in Canadian dollars. During the last two years there have been significant changes in the values of these investments. A 20% change in the September 30, 2011 value of these investments would result in an increase or decrease in net loss and the carrying value of the investments of $70,233. The carrying amount of cash, receivables, refundable staking deposits, trade payables and accrued liabilities approximate fair value due to their short-term nature. 8. MINERAL PROPERTIES As at September 30, 2011, the Company has been issued 35 ( ) licenses by the Government of Newfoundland and Labrador which consist of 1,868 (2010 1,996) mineral exploration claims covering various areas of Newfoundland and Labrador. Of these 1,868 mineral exploration claims, 44 are held 50% by Thundermin Resources Inc. The Government of New Brunswick has issued 4 (2010 4) licenses to the Company which cover 830 ( ) claims in New Brunswick. The Government of Nova Scotia has issued 3 (2010 3) licenses to the Company which covers 143 ( ) claims in Nova Scotia. The Company also holds 20 ( ) mineral concessions in Ecuador and 35 (2010 Nil) in Chile. A summary of mineral properties is as follows: Page 22

25 8. MINERAL PROPERTIES (Continued) As at September 30, 2011 Geographical Balance, JV Payments Properties Balance, Area Number Beginning of and Government Written End of of Claims Period Additions Grants Off Period $ $ $ $ $ Canada 2,841 3,424,569 1,719,811 (41,825) (40,122) 5,062,433 Chile ,359 - (15,553) 651,806 Ecuador 20 1,132,796 2,010,349 (1,981,153) - 1,161,992 2,896 4,557,365 4,397,519 (2,022,978) (55,675) 6,876,231 As at December 31, 2010 Geographical Balance, JV Payments Properties Balance, Area Number Beginning of and Government Written End of of Claims Year Additions Grants Off Year $ $ $ $ $ Canada 2,969 2,524,505 1,320,090 (242,182) (177,844) 3,424,569 Ecuador 13 1,702,503 1,020,194 (1,149,551) (440,350) 1,132,796 2,982 4,227,008 2,340,284 (1,391,733) (618,194) 4,557,365 Page 23

26 9. PROPERTY AND EQUIPMENT Equipment Computers Vehicles Total $ $ $ $ Cost: At December 31, , , , ,168 Additions 6,617 3,982-10,599 Disposals At September 30, , , , ,767 Depreciation: At December 31, , , , ,712 Additions 14,213 14,682 17,605 46,500 Disposals At September 30, , , , ,212 Carrying value: At December 31, ,315 41, , ,456 At September 30, ,719 31,075 99, ,555 Leasehold Improvements Equipment Computers Vehicles Total $ $ $ $ $ Cost: At January 1, , , , , ,557 Additions ,498-20,060 Disposals At December 31, , , , , ,617 Depreciation: At January 1, , , , , ,301 Additions ,294 24,851 29,341 77,860 Disposals At December 31, , , , , ,161 Carrying value: At January 1, ,047 47, , ,256 At December 31, ,315 41, , ,456 Page 24

27 10. SHAREHOLDERS EQUITY Share Capital Authorized An unlimited number of common shares with no par value. An unlimited number of first preferred and second preferred shares with no par value. Issued and outstanding September 30, 2011 December 31, 2010 January 1, 2010 Number of Number of Number of Shares $ Shares $ Shares $ Common shares 137,698,463 32,601, ,389,325 25,517,510 81,197,178 23,583,146 On September 29, 2011, the Company completed a non-brokered private placement for total proceeds of $2.5 million. The financing consisted of the issuance of 12,500,000 units. Each unit was priced at $0.20 per unit and consisted of one common share and one non-transferable common share purchase warrant. Each warrant entitles the holder to purchase one common share for a period of five years at a purchase price of $0.30. If, after January 29, 2012, the volume weighted average price of the Company s shares on the TSX Venture Exchange for any consecutive 20 days of trading is equal to or greater than $0.40, the Company may, at its discretion within the following five trading days, provide notice of an earlier expiry date of the warrants, in which case the warrants will expire 30 trading days after giving such notice. Finders' fees of 7.5% in Units and 7.5% Finder Warrants were issued to eligible finders. Each Finder Warrant entitles the finder to purchase one share for $0.30 during a period of five years and is subject to the same acceleration provisions as the unit warrants. Preferred shares The first and second preferred shares which have been authorized may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, rights, privileges, restrictions and conditions attached to the shares of each series. No first or second preferred shares have been issued. Page 25