MANAGEMENT DISCUSSION AND ANALYSIS INTRODUCTION

Transcription

1 MANAGEMENT DISCUSSION AND ANALYSIS INTRODUCTION The following Management Discussion and Analysis ( MD&A ) is for the three month period ended June 30, 2010 and is provided as of August 6, This MD&A is to be read in conjunction with the interim unaudited consolidated financial statements of Scorpio Gold Corporation (the Company or Scorpio Gold ) for the period ended June 30, 2010 and the audited consolidated financial statements and MD&A for the year ended December 31, These documents are available on the Company s website ( and filed on SEDAR ( All dollar amounts are in Canadian dollars unless otherwise indicated. Scorpio Gold was incorporated under the Business Corporations Act (British Columbia). The Company is a reporting issuer in the Provinces of British Columbia and Alberta. Scorpio Gold is listed on the TSX Venture Exchange (the TSX-V ) under the trading symbol SGN. The Company conducts the evaluation, acquisition, exploration and development of precious metal mineral properties in Canada and the United States. MINERAL PROPERTIES Mr. Peter J. Hawley, the Company s Chairman and CEO, is the Company s qualified person under NI , and has reviewed the following technical disclosure. Mineral Ridge property On March 10, 2010, the Company acquired an initial 70% interest in the Mineral Ridge property and related assets, a former producing gold mining operation in Nevada, in consideration for the payment to Golden Phoenix Minerals Inc. ( Golden Phoenix ) of US$3,750,000 in cash and the issuance of 7,824,750 common shares with a fair value of $0.74 per share. The Mineral Ridge property, a former gold producer, is located about 56 km southwest of Tonopah, Nevada. The property consists of several consolidated claim blocks and historic mining operations dating from the 1860's up through World War II. Open pit mining began again in the area in the early 1990's primarily in the Mary-Drinkwater open pits. Gold mineralization is hosted in the lowest unit of the Wyman Limestone formation, typically referred to as the "Mary Limestone". Historic mining properties consolidated by Mineral Ridge property included the old Drinkwater, Mary and Brodie mines. These properties are the focus of current production plans by both open pit and possibly underground methods. The Mineral Ridge property has historically produced almost 575,000 ounces of gold, including ~170,000 ounces from open pit and ~405,000 ounces from underground mining operations. The property is currently bonded and has been permitted for heap leach gold processing and production, and was in production as recently as The mine project hosts multiple gold bearing structures, veins and bodies. It features a well-developed infrastructure consisting of roadways, power grid, heap leach pad, crushing circuit, Adsorption/Desorption/Recovery ("ADR") plant, water supply, maintenance shop, refuelling and storage facilities and administrative buildings. 1

2 The Company initially entered into a non-binding letter of intent with Golden Phoenix in May 2009 to acquire up to a 100% interest on the Mineral Ridge property. As part of its assessment and due diligence, it completed an initial surface exploration program. The 2010 pit area drilling to date is the first of a three-phase drill program directed to expand and tightly define the mineral resource base. Drill results received to date are presented in Company news releases dated January 13, 2010, February 3, 2010, March 30, 2010, May 6, 2010 and June 30, The results have exceeded expected grades and widths within the known mineralized areas and indicate the potential for quickly expanding the resource base with the planned aggressive surface drill program in summer The presence of high-grade lenses within widespread, lower-grade mineralization could allow for selective mining should gold prices warrant. All information collected to date from surface sampling, mapping and reverse circulation ( RC ) and core drilling, as well as re-evaluation of the previous operator s data, supports Scorpio Gold s theory that the majority of the mineralization is confined to the Mary Limestone unit. Management believes there is considerable potential for discovering other mineralized bodies within the Mary Limestone unit outside of the known deposit areas. An initial mineral resource estimate and NI technical report prepared by Micon International Limited was filed on SEDAR on July 23, 2010 and is intended to be followed by a full feasibility study. Current and future results from drilling will be incorporated in future updates to this resource estimate. The second phase of drilling is directed at expanding the currently defined pit mineralization by drilling the pit extensions and adjoining walls. To this end, the Company has mobilized a tracked drill that is smaller in size and will allow access to the pit bench areas and between pits. The third phase of drilling will be directed on a property-wide scale to target numerous gold-bearing mineralized zones/structures recently discovered by the Company s surface exploration program. The scale of the three-phase program is as yet open-ended, and any or all of the three phases may be ongoing at any given time. Results will continue to be reported as received and compiled. Follow-up exploration to extend the prospective mineralized Mary Limestone unit and structures outwards from the existing pit areas led the Company to extend the original two km radius to four km. The program continues to meet with success in expanding the overall mineralized area. Follow-up definition work is planned for the newly identified mineralized zones. During the first quarter of 2010, the Company completed a 2,789 metres (9,150 ft) RC drilling program. A total of twenty-eight reverse circulation holes were drilled in the Drinkwater pit area and 2 RC holes were drilled over the Mary underground mine in the area of the proposed Mary open pit. This phase 1 drill program is directed at expanding and tightly defining the mineral resource base in and around the existing open pit by filling in gaps recognized during the 2009 resource estimation process, and testing downdip projections of the mineralization. Thirteen of the thirty holes intersected significant thicknesses and grades ranging from 17m/6.84 g/t (55 /0.220 ounce per ton ( opt )) gold in hole MR10045 to 8m/1.24 g/t (25 /0.040 opt) gold in hole MR Twelve holes intersected weak mineralization and five holes were barren. During the second quarter of 2010, the Company continued the phase 1 drilling program with 762 metres (2,500 ft) of RC drilling. A total of thirty-three RC holes were drilled in the Drinkwater / Mary and Brodie pit areas. Drill production was significantly less than expected in the second quarter due to a series of mechanical issues with the track rig and difficult drilling conditions. 2

3 Sixteen of the thirty-three holes intersected significant thicknesses and grades ranging from 6.1m/3.29 g/t (20 /0.096 ounce per ton ( opt )) gold in hole MR10085A to 8m/1.13 g/t (40 /0.033 opt) gold in hole MR Thirteen holes intersected weak mineralization and four holes were barren. Definition drilling will continue through the summer and fall of 2010, along strike and downdip of the Mary-Drinkwater deposit. The downdip drilling is expected to provide information that will allow the Company to either expand the planned open pits or plan for underground extraction of the deposit. Exploration drilling is also planned for areas adjacent to the previous Oromonte underground mine. Wide spaced drilling conducted by previous companies in the 1990 s intersected significant intervals of gold mineralization which warrant additional, closer space drilling. Exploration drill targets are currently being developed in the Bluelite area where drilling by previous operators intersected multiple, shallow horizons of gold mineralization. There is also evidence for the presence of a high angle, mineralized structure that has not been adequately tested. Exploration drilling is expected to commence once modifications to the Mineral Ridge Environmental Assessment ("EA") have been approved by the Bureau of Land Management. Scorpio Gold s successful exploration and modeling of the mineralized unit and related structures at Mineral Ridge has led to an aggressive staking program adding an additional 2,934 hectares (7,250 acres) to the property. The overall land package of 351 claims now encompasses 4,118 hectares (10,176 acres), representing an increase of 348% from the original Golden Phoenix holdings. Site renovation was begun in the second quarter. The existing fuel containment area and all associated contamination had been removed from the site. The new fuel island will be installed in the third quarter. The carbon columns in the ADR plant were removed and sent out for refurbishment. They are back on site now and will be installed in the third quarter. Pumping systems for the pond and pad system have been rebuilt and are now operational. The excess water in the process ponds has been evaporated. AMEC Earth and Environmental performed a liner inspection and evaluation of the pond and pad area and submitted a report of its findings to the Nevada Department of Environmental Protection ("NDEP"). NDEP has concurred that the liner will continue to perform to its approved design. The Company representatives also determined that the barren pond design did not include a carbon fines pond. As a result there appears to be material from the heap leach pad that was allowed to wash into the pregnant pond. Sampling of the barren pond sludge has returned significant results. The Company is in the process of contacting companies experienced with this type of carbonaceous material for the potential processing and recovery of the precious metals. At this time it is unknown if it will be economic to process the sludge material. SRK Consulting prepared and submitted the renewal application for the Water Pollution Control Permit ("WPCP") to NDEP as required. SRK has also prepared and submitted a draft Environmental Assessment to the BLM in support of further exploration drilling activities. Mineral Ridge has had a clean operating history and no environmental, permitting, legal, taxation, marketing or political factors are known that could impact future operations Further information on the Mineral Ridge project is available in a NI technical report entitled Technical Report on the Mineral Ridge Gold Project, Nevada, USA by Micon International Limited, dated May 31, 2010 and filed on SEDAR ( The Company is continuing to update and define the drill data base, and continues with metallurgical studies, and the rehabilitation of the existing infrastructure with guidance from various engineering firms in preparation to having all required data and infrastructure in place for the completion of a feasibility study in late fourth quarter of this year. 3

4 Other properties Scorpio Gold s interests in the Cochrane Hill and Caribou properties located in Nova Scotia and the Lac Arseneault property located in Quebec were transferred from Scorpio Mining Corporation ( Scorpio Mining ) to Scorpio Gold on August 9, 2007, as part of a reorganization of Scorpio Mining s assets. In consideration for the transfer, Scorpio Mining was issued an aggregate of 26,830,763 common shares of Scorpio Gold and remains as its largest shareholder, holding approximately 36% of the Company s outstanding shares. Caribou Property The Caribou gold property is located 80 km northeast of Halifax and 10 km south of the rural community of Upper Musquodoboit, in Halifax County, Nova Scotia. The property comprises 16 contiguous mineral claims covering approximately 256 hectares. As per the original option agreement, dated April 25, 2005, Scorpio Gold has an option to acquire a 100% interest in the property in consideration of total payments of $255,000, over a three year period and exploration work commitment of $1,600,000 over a four year period. Upon exercise of the option, the property will remain subject to a 2.5% Net Smelter Return ( NSR ) royalty in favour of the vendor. Scorpio Gold retains the right to purchase 1% of the NSR royalty for the sum of $1,000,000. Furthermore, upon exercise of the option, Scorpio Gold must also make an advance royalty payment of $250,000 which will be credited against future NSR royalty payments. In May 2009, the Company and the property owner entered into an amending agreement under which the Company paid $60,000 upon execution of the amending agreement and agreed to pay an additional $60,000 (paid) if the option is not exercised prior to April 25, In any event, the option must be exercised on or before April 25, 2011, failing which the option will terminate. The $60,000 paid under the amending agreement and the additional $60,000 payment, made this year, will be considered advances against and will be credited towards the obligations of the Company under the NSR royalty payable. To date, approximately $851,000 of the required exploration work commitments have been fulfilled and $375,000 of acquisition payments have been made. The Company intends to proceed with the work program recommended under the National Instrument ( NI ) technical report filed by the Company, consisting of surface exploration totalling approximately $740,000 within the next 12 months and anticipates that such work will begin once all reentry permits into the mine have been issued as discussed below. The Company has received from the Nova Scotia Department of Natural Resources ( NSDNR ) a Crown Permit for the construction of buildings (hoist, head frame and office) and has obtained a lease from the NSDNR for land usage. The Company is currently compiling a work schedule for bidding for site construction. On December 21, 2009 the Department of Occupational Health and Safety division of the Nova Scotia Labour and Workforce Development government agency issued a compliance order whereby the agency granted the COP permit for the Caribou mine allowing the Company to dewater, inspect and rehabilitate the mine workings and proceed with the removal of some grab or chip samples. On April 15, 2010 the Company received the de-watering permit from the Nova Scotia Department of the Environment for the approval of the disposal of the water that occupies the mine. 4

5 In addition, the Company continues the planning for rehabilitation of a head frame in preparation for installation and re-entry into the mine once all surface construction and head frame foundations are completed. Currently the Company has entered into talks with certain junior mining companies with respect to forming a joint venture or option on the Caribou property Cochrane Hill Property The Cochrane Hill property is 100% owned by Scorpio Gold, subject to an option agreement with Atlantic Gold NL ( ATV ) discussed below. It consists of 53 contiguous mineral claims covering approximately 848 hectares of land in Guysborough County, Nova Scotia and encompassing one portal adit and three shallow shafts from former mining operations. The claim group is located approximately 35 km south of the town of Antigonish, and is accessible via Highway ( Hwy ) #7, which passes within 300 metres of the Cochrane Hill mine site. Ninety percent (90%) of the property is located on Crown land, while ten percent (10%) (west of Hwy #7) is privately held. Prior to any mining activity, a mining permit and a surveyed surface lease are required. The Cochrane Hill former mine site is located on Crown land east of Hwy #7 and the Crows Nest deposit is located on privately held land to the west of Hwy #7. Permits to conduct exploration work on Crown land are available from the Nova Scotia Department of Natural Resources. Permission from the private land owner will be required prior to working the private lands. In June 2007, Scorpio Mining entered into a Letter of Intent, (subsequently assigned to Scorpio Gold) with ATV, whereby ATV has the right to acquire a 60% joint venture interest in the Cochrane Hill property by making staged cash payments totalling $100,000 (received) and performing scheduled work programs totalling $4.75 million over a four year period. An amount of $50,000 was received in May 2010 from ATV to extend by one additional year the period required to meet the minimum cumulative expenditure. As per the original agreement, such extension may not occur more than twice. At the time ATV exercises its option and acquires a 60% interest, Scorpio Gold may thereafter elect to participate pro-rata in ongoing joint venture work programs or elect to receive a 20% carried interest in the project and have no further responsibility to fund expenditures up to commercial production. A 3% NSR royalty is payable to the original property owner of which 2% may be bought back in consideration for $500,000 for the first 1% and $1,000,000 for the second 1%. Lac Arseneault Property The Lac Arseneault property is 100% owned by Scorpio Gold and it is located in Bonaventure County, 36 km north of the town of Paspebiac on the south coast of the Gaspe Peninsula, Quebec. The property consists of 30 contiguous unpatented claims covering approximately 480 hectares. The property is subject to a 2% NSR royalty to the previous owner. This is an early stage exploration property and no significant work has been conducted on the property since The Company does not expect to further explore this property at this time as it focuses its resources on its other properties. Environmental Regulation Exploration activities are subject to various federal, state and provincial laws and regulations which govern the protection of the environment. These laws and regulations are continually changing and becoming more restrictive. 5

6 Scorpio Gold conducts its operations so as to protect public health and the environment and believes its operations are materially in compliance with all applicable laws and regulations. The Company expects to incur expenditures in the future to comply with such laws and regulations. RESULTS OF OPERATIONS Scorpio Gold reported a net loss of $534,821 ($0.01 per share) for the three month period ended June 30, 2010, compared to a net loss of $1,024,699 ($0.03 per share) for the three month period ended June 30, The net loss for the first six months of 2010 was $1,897,703 (0.03 per share) compared to a net loss of $1,185,165 ($0.04 per share) for the first six months of The major differences between the 2010 and 2009 results are explained below. The Company had no operating revenue in any of these periods. Revenue consisted solely of interest income in the amounts of $5,912 for the three month period ended June 30, 2010 ($6,159 for the six month period ended June 30, 2010) compared to $260 for the three month period ended June 30, 2009 ($518 for the six month period ended June 30, 2009). Stock-based compensation which is non-cash in nature, totalled $172,375 for the three month period ended June 30, 2010, compared to $836,389 in the comparative 2009 period. An aggregate of 300,000 stock options were granted during the three month period ended June 30, 2010 (3,062,000 in 2009). Stock-based compensation increased to $1,162,409 for the six month period ended June 30, 2010 from $836,389 in the comparative 2009 period. 2,600,000 stock options were granted during the six month period ended June 30, 2010 (3,062,000 in the 2009 comparative period). General and administrative expenses totalled $350,409 for the three month period ended June 30, 2010, compared to $65,431 for the three month period ended June 30, For the six month period ended June 30, 2010, the general and administrative expenses increase from $125,020 in 2009 to $526,482 in Included in general and administrative expenses for the three month period ended June 30, 2010, is an amount of $32,100 ($64,200 for the six month period ended June 30, 2010) charged by Scorpio Mining as management fees. No management fees were charged to the Company in the 2009 comparative periods. Furthermore, salaries and fringe benefits of $222,869 and $314,495, respectively, for the three and six month periods ended June 30, 2010 explain most of the remaining difference for General and administrative expenses. There were no employees during the comparative 2009 periods. Professional fees decreased from $130,155 and $148,488, respectively, during the three and six month periods ended June 30, 2009 to $43,401 and $146,903, respectively, during the three and six month periods ended June 30, During the second quarter of 2009, the Company incurred significant professional fees in relation to the Qualifying Transaction with Cincoro Capital Corp. Business development expenses total $nil and $3,667 during the three and six month periods ended June 30, 2010, compared to $7,570 and $89,805 for the three and six month periods ended June 30, The 2009 business development expenses related to the Qualifying Transaction and the evaluation cost of certain potential mergers and acquisitions that were not completed. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2010, the Company had $3,900,668 in cash compared to $65,240 as of December 31, This increase is directly related to funds generated as part of the $12.5 million private placement financing which closed on March 10, 2010 in excess of cash portion of the purchase price of the Mineral Ridge property as well as the exercise of approximately 4.5 million warrants for proceeds of $2,716,687 during the period. This also explain the increase in working capital from negative $1,682,686 as of December 31, 2009 to $2,105,767 as of June 30,

7 During the six month period ended June 30, 2010, the Company received further advances from Scorpio Mining Corporation, which owns approximately 36% of the issued and outstanding shares of the Company as of June 30, 2010, to permit the Company to move forward with its planned acquisition of the Mineral Ridge property. $1,500,000 of these advances were repaid on March 10, 2010 as part of the proceeds from the recent private placement financing. Advances from Scorpio Mining totalled $1,464,311 as of June 30, 2010 and are expected to be repaid during the third quarter of The Company considers that a cash infusion will be required to complete the development of the Mineral Ridge property with a view to bringing it to commercial production. Such development will be dependant upon the Company s ability to raise capital by way of an equity or debt financing or by other means. NON-PRODUCING MINING PROPERTIES AND DEFERRED EXPLORATION AND DEVELOPMENT EXPENDITURES Non-producing mining property cost was $20,049,557 as of June 30, 2010, compared to $1,198,875 as of December 31, Additions in 2010 relate mostly the acquisition of a 70% interest in the Mineral Ridge property for a cost of $18,880,682. Deferred exploration and development expenditures totalled $3,058,026 as of June 30, 2010, compared to $625,424 as of December 31, 2009 with the increase being mostly related to exploration and development at the Mineral Ridge property. DEPOSITS AND DEFERRED EXPENDITURES-MINERAL RIDGE PROPERTY The amount of $2,660,668 recorded as of December 31, 2009 in relation to Mineral Ridge property was reclassified when the Company finalized the acquisition of Mineral Ridge property on March 10, $950,160 (US$925,000) of deposits were deducted from the cash portion of the acquisition purchase price. The balance of deferred expenditures constitutes a portion of the purchase price and has been allocated to the net assets acquired. LIABILITIES Current liabilities amounted to $2,081,517 as of June 30, 2010 compared to $1,795,219 as of December 31, Accounts payable and accrued liabilities have increased by $381,954 during the period from $235,252 to $617,206 mainly due to the higher levels of activity at the Mineral Ridge property. $1,464,311 of the current liabilities were advances to Scorpio Mining that were repaid in early August. EQUITY There was an increase of $19,662,906 in equity attributable to equity shareholders of the Company in the six month period ended June 30, 2010 to $22,972,500 from $3,309,594 as of December 31, Share capital increased from $4,255,278 as of December 31, 2009 to $21,748,030 as of June 30, 2010 mainly as a result of the completion of the private placement of March 2010, the issuance of shares in relation with the acquisition of the Mineral Ridge property as well as the exercise of approximately 4.5 million warrants. Contributed surplus increased by $4,078,204 during the six month period ended June 30, 2010 mainly as a result of the grant of stock options to directors, officers, employees and consultants, the issuance of warrants as part of the private placement of March 2010, diminished by the reclassification to share capital of the attributed value of the warrants exercised during the period. 7

8 Non-controlling interest amounted to $6,557,555 as of June 30, 2010 compared to $nil as of December 31, The increase essentially reflects the impact of the acquisition of the Company s 70% interest in the Mineral Ridge property. SUMMARY OF QUARTERLY RESULTS The following table sets out selected quarterly financial information for each of the last eight quarters: Quarter Ending Interest Income $ Net Loss $ Loss per share $ June 30, ,912 (534,821) (0.01) March 31, (1,362,882) (0.03) December 31, (220,645) (0.01) September 30, (167,154) (0.00) June 30, 2009 ( 1,024, 699) March 31, (160,466) (0.01) December 31, (139,348) (0.01) September 30, 2008 (116,337) (0.00) CASH FLOWS Cash flow used in operating activities was $538,900 and $773,081 for the three and six month periods ended June 30, 2010, compared to $277,504 and $261,652 for the same period in Cash flow from financing activities was $2,666,087 and $14,146,136, respectively, for the three and six month periods ended June 30, Financing activities during the three month period ended June 30, 2010 related to the exercise of approximately 4.5 million warrants for proceeds of $2,716,687. Financing activities for the first half of 2010 included, in addition, the issuance of shares and warrants as part of the $12.5 million private placement financing closed on March 10, This compares to $1,985,648 for the three month and six month periods ended June 30, 2009 which was mostly related to advances received from Scorpio Mining. Cash flow used in investing activities was $2,207,791 and $9,467,706, respectively, for the three and six month periods ended June 30, 2010, compared to $346,618 and $356,728 for the same periods of The use of cash flows in the first half of 2010 was primarily related to the cash portion of the acquisition of Mineral Ridge property on March 2010 as well as its ongoing development. CONTINGENCIES The Company is not a party to any legal or administrative claims. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements as at June 30, RECENT TRANSACTIONS Mineral Ridge Property On March 10, 2010, the Company acquired an initial 70% interest in the Mineral Ridge property and related assets in consideration for the payment to Golden Phoenix of US$3,750,000 in cash which included previously paid deposits totalling US$1,100,000 and the issuance of 7,824,750 common shares with a fair value of $0.74 per share. 8

9 As a result of the agreement with Golden Phoenix, the parties have created a new limited liability company to explore, develop and exploit the Mineral Ridge property under the name Mineral Ridge Gold LLC whose ownership is proportional to the interests held in the property (initially 70% Scorpio Gold (US) Corporation and 30% Golden Phoenix). The Company has agreed to solely fund all costs of bringing the Mineral Ridge property into commercial production, which has been defined as two consecutive quarters of throughput of products from mining operations averaging greater than 70 % of the average life of mine projected capacity. The Company has the right to increase its interest by 10%, to 80%, by funding all costs of placing the property into commercial production and commencing commercial production within 30 months of closing. The Company also has an option to purchase Golden Phoenix s remaining 20% interest for 24 months following the commencement of commercial production. If this option is exercised, the purchase price of the 20% interest will be based on the net asset value of the project, using a 10 percent discount rate, to be determined at that time by an independent valuation firm. On March 10, 2010, Scorpio Gold acquired a net smelter return ( NSR ) royalty affecting certain areas of the Mineral Ridge property in consideration for a cash payment of US$3 million including US$75,000 of previously paid deposits. The Company contributed the NSR royalty to Mineral Ridge Gold LLC as part of its agreement with Golden Phoenix. This transaction enhances the economics of the Mineral Ridge project since the area of the Mineral Ridge property which is expected to be placed into production was previously subject to an 8% NSR, at current gold prices. The acquisition has been accounted for as an acquisition of assets. The cost of the acquisition has been preliminary allocated as follows: Purchase price $ Cash paid 6,933,600 Common shares of the Company issued (7,824,750 shares) 5,790,315 Other costs incurred 2,615,905 15,339,820 Net assets acquired: $ Reclamation bonds 2,289,336 Property, plant and equipment 3,002,288 Mining property 18,880,682 Asset retirement obligation (2,258,278) 21,914,028 Non-controlling interest (6,574,208) 15,339,820 9

10 Brokered Private Placement On March 10, 2010, the Company completed a brokered private placement and issued a total of 27,775,444 units for gross proceeds of $12.5 million. Each unit consists of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share of the Company at a price of $0.60 per share until September 10, The Company paid $1,262,862 of issue costs including a cash commission of $874,926 to the agents. The Company also issued a total of 1,111,018 broker warrants to the agents, each broker warrant entitling the holder to purchase a common share at a price of $0.45 until September 11, In the normal course of business, the Company evaluates potential property and project acquisitions and, in some cases, makes proposals to acquire such properties. These proposals, which are usually subject to Board, regulatory and sometimes, shareholder approvals, may involve future payments, share issuances and property work commitments. As of this date, the Company has a number of possible transactions that it is pursuing. Management is uncertain whether any of these proposals will ultimately be completed. TRANSACTIONS WITH RELATED PARTIES The Company incurred the following expense with Scorpio Mining a company holding significant influence: Three months Three months Six months Six months ended ended ended ended June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009 $ $ $ $ General and administrative management fees 32,100-64,200 - As of June 30, 2010, an amount of $10,700 resulting from these transactions is included in the advances from a company holding significant influence. These transactions occurred within the normal course of business and are measured at exchange amount which is the amount of consideration established and agreed to by the related parties. FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS The Company currently does not own, hold or have any material interest in, or liability associated with, any derivative instruments. As at June 30, 2010, the Company is exposed to foreign currency risk through the following financial assets and liabilities denominated in U.S. dollars ("$US"). June 30, 2010 $US Cash 509,306 Accounts receivable and other 201,406 Accounts payable 368,889 Reclamation bonds 2,334,141 10

11 The sensitivity analysis below has been determined as at June 30, Reasonably possible changes $US/CDN Exchange rate +/- 10% $ Approximate impact on net loss and comprehensive loss 284,000 As at June 30, 2010, the $US/CDN exchange rate was Fair values The carrying amount of cash, accounts receivable, accounts payable and advances from a company holding significant influence approximate their fair value due to their short-term nature. Investment, which is designated as available-for-sale, is recorded at fair value. The fair value is based on the quoted closing price on the stock market at the balance sheet date or the closing price on the last day the security trade if there was no trade at the balance sheet date. The carrying amount of reclamation bonds approximates their fair value due to their short remaining life before their maturity. Financial Condition and Liquidity The primary factors that will affect the future financial condition of the Company include the ability to raise equity, debt or other types of financing and the level of exploration and development expenditures required to meet commitments until its mining operations reach positive cash flow. The Company expects that cash infusion will be required in the coming months to fund the ongoing exploration and development program on the Mineral Ridge property. As a mineral exploration company with no current commercial production, the Company s cash flows consist of cash outflows for administrative expenses, salaries, property acquisition and evaluation costs, exploration, development and expenditures for depreciable equipment such as mobile equipment and computers required for office and field operations in addition to the cash flows for future acquisition transactions. Financing activities, such as share issuances, also result in cash inflows to the Company. Since its inception, the Company has relied on equity capital markets and on the support of Scorpio Mining Corporation to fund its exploration and development activities. The Company repaid the outstanding advances in early August and expects that it will be financially independent from Scorpio Mining in the future. Industry, Economic and Environmental Risk Factors Affecting Performance As a mineral exploration and development company, Scorpio Gold s performance is affected by a number of industry and economic factors and exposure to certain environmental risks, and other regulatory requirements. These have been detailed in the Company s December 31, 2009 annual MD&A. 11

12 OTHER MD&A REQUIREMENTS Controls and Procedures Certification The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed the Company s disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them, and by others, within those entities. Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Canadian generally accepted accounting principles. There has been no change in the design of the Company s internal controls over financial reporting during the quarter ended June 30, 2010, that would materially affect, or is reasonably likely to materially affect, the Company s internal control over financial reporting. CHANGES IN ACCOUNTING POLICIES Business combinations On January 1, 2010, the Company early adopted the CICA Section 1582, Business Combinations. This section, which replaces the former Section 1581, Business Combinations, establishes standards for the accounting for a business combination. The section applies prospectively to business combinations for which the acquisition date is on or after January 1, Consolidated financial statements On January 1, 2010, the Company early adopted CICA Section 1601, Consolidated Financial Statements. This section, which, together with new Section 1602, replaces the former Section 1600, Consolidated Financial Statements, establishes standards for the preparation of consolidated financial statements. Non-controlling interests On January 1, 2010, the Company early adopted the CICA Section 1602, Non-Controlling Interests. This new section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. It is equivalent to the corresponding provisions of IFRS IAS 27, Consolidated and Separate Financial Statements (January 2008). Comprehensive revaluation of assets and liabilities On January 1, 2010, the Company early adopted the CICA Section 1625, Comprehensive Revaluation of Assets and Liabilities. This Section has been amended as a result of issuing Business Combinations, Section 1582, Consolidated Financial Statements, Section 1601, and Non-Controlling Interests, Section 1602, in January The amendments apply prospectively to comprehensive revaluations of assets and liabilities occurring after January 1, Equity On January 1, 2010, the Company early adopted, the CICA amended Section 3251, Equity. The amendments were issued in order to conform this Section to new Section 1602 and apply only to entities that have adopted Section

13 International Financial Reporting Standards ( IFRS ) In February 2008, the CICA s Accounting Standards Board confirmed that IFRS will replace Canadian GAAP in 2011 for profit-oriented Canadian publicly accountable enterprises. The Company will be required to report its results in accordance with IFRS beginning in The Company has an IFRS conversion project to complete the transition to IFRS by January 1, 2011, including the preparation of 2010 required comparative information. The Company IFRS conversion project consists of three phases: scoping and diagnostics, analysis and development and implementation and review. The Company has made significant progress on its IFRS conversion project during the last few months. Phase one of the conversion project is now complete and the Company has identified the current International Accounting Standards ( IAS ) pronouncements that are different from Canadian GAAP and could impact the Corporation s consolidated financial statements. Phase two of the IFRS conversion project is nearing completion of which the Company needs only to complete the summarization of 2011 IFRS disclosure requirements. The Company anticipates finalizing this phase by the end of The identification and design of operational and financial business processes, the initial staff training as well as the analysis of IFRS 1 optional exemptions and mandatory exceptions to the general requirement for full retrospective application upon transition to IFRS is completed. Phase three of the conversion project includes the implementation and review of the Corporation s IFRS conversion plan. The execution of changes to information systems and business processes is complete. The formal authorization processes to approve recommended accounting policy changes and training across the Company is in progress. Audit committee approval of IFRS compliant financial statements is expected to take place towards the end of The Company will continue to update its IFRS conversion project to reflect new and amended accounting standards issued by the International Accounting Standards Board. Following is the analysis of expected IFRS 1 accounting policy impacts: The company has identified the following balance sheet items which will have an impact upon transition to IFRS: property, plant and equipment ( PP&E ), asset retirement obligation ( ARO ) and stock-based compensation. The following discussion provides an overview of these areas and the impact of applying the exemptions available under IFRS 1, First-time Adoption of International Financial Reporting Standards. Property, Plant and Equipment Under International Accounting Standard (IAS) 16, Property, Plant and Equipment, an entity is required to choose, for each class of property, plant and equipment, to account for each class using either the cost model or the revaluation model. IFRS 1 contains an elective exemption in which an entity may elect fair market value as the new cost basis for machinery and equipment at the date of transition. The Company will benefit from this exemption and deemed the December 31, 2009 fair value to be the deemed cost from January 1, 2010 going forward. IAS 16 also requires an entity to break an asset down to its significant components upon initial measurement and depreciate assets based on the useful life of the significant individual components as opposed to the assets as a whole. Following our analysis, the Company does not expect any significant impact on the way its components are tracked and depreciated. 13

14 Asset Retirement Obligation Under Canadian GAAP, the discount rate used to estimate the liability is not updated to current market discount rates, while under IFRS, the rate is updated each reporting period. The Company will benefit of the IFRS 1 exemption and measure the liability as at the date of transition in line with IAS 37. Stock-based compensation For the options not vested at the transition date (January 1, 2010), the Company will apply IFRS 2. Under the Canadian GAAP forfeitures can be recorded when they occur or based on an expected rate. Under IFRS 2, a forfeiture rate must be applied at time of issuance so that in the stock option expenses model, a forfeiture rate needs to be applied at all issuance. The Company has introduced a forfeiture rate at the transition date to IFRS. Furthermore, under Canadian GAAP, an option grant may be valued using a consistent set of assumptions and the value as calculated by a fair value model may be amortized over the expected life of the entire grant. Each tranche will also require a separate risk free rate and estimated life. The Company estimates that there will be no significant differences for the opening balance sheet as its accounting method for those items already complies with IFRS. Financial statements disclosures In addition to the sections noted above, there are generally more extensive presentation and disclosure requirements under IFRS compared to Canadian GAAP. These will be incorporated into the model financial statements, and will result in additional data collection where required. Internal Controls Management does not expect to make material changes to internal controls due to transition to IFRS. Management will continue to monitor and assess any impact on internal controls and will disclose any such changes in future disclosures. OUTLOOK With the positive surface sample results and pit surface drilling at Mineral Ridge reported to date, the Company will aggressively move forward to complete a feasibility study, by late fourth quarter of this year with a view to advancing the development of the Mineral Ridge property and position the Company to become a potential gold producer. The Company continues to seek new projects that will increase its asset base as well as enhance value for its shareholders and divest itself by the sale or joint venture of assets which do not fit its current agenda to become a low cost gold producer. DISCLOSURE OF OUTSTANDING SECURITIES AS AT AUGUST 6, 2010 Outstanding common shares 77,710,520 Share purchase warrants 13,887,722 Broker warrants 1,111,018 Stock options 5,878,666 Fully diluted 98,587,926 14

15 FORWARD LOOKING STATEMENTS This discussion includes certain statements that may be deemed forward-looking statements. All statements in this discussion, other than statements of historical facts that address future exploration drilling, exploration and development activities, production activities and events or developments that the Company expects, are forward looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include exploration successes, continued availability of capital and financing, and general economic, market or business conditions and other factors discussed under Risk Factors in the Company s Management Discussion and Analysis filed on March 31, 2010 and available at under the Company s name. 15