HIGHLAND RESOURCES INC.

Transcription

1 Form F1 HIGHLAND RESOURCES INC. MANAGEMENT DISCUSSION & ANALYSIS For the period ended Directors and Officers as at January 27, 2012 Directors: Robert Eadie Gary Arca David Salmon Ken Sumanik Officers: President, Chief Executive Officer and Lead Director Robert Eadie Chief Financial Officer and Corporate Secretary Gary Arca Contact Name: Robert Eadie Contact telephone: Contact TSX Venture Exchange Symbol: HI

2 Form F1 HIGHLAND RESOURCES INC. MANAGEMENT DISCUSSION & ANALYSIS For the period ended 1.1 Date of This Report This Management Discussion and Analysis ( ) should be read in conjunction with the unaudited condensed interim consolidated financial statements of Highland Resources Inc. ( Highland, or the Company ) for the period ended. All dollar amounts herein are expressed in Canadian Dollars unless stated otherwise. This is prepared as of January 27, This includes certain statements that may be deemed forward-looking statements. All statements in this discussion, other than statements of historical facts, that address exploration drilling, exploitation 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 the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, exploitation and exploration successes, continued availability of capital and financing and general economic, market or business conditions. Investors are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements. Application of IFRS The financial information for the Company for the year ending May 31, 2012, will be prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ), having previously prepared its financial statements in accordance with pre-changeover Canadian Generally Accepted Accounting Principles ( Pre-changeover GAAP ). The accompanying condensed interim financial statements for the three and six month period ended, have been prepared in accordance with International Accounting Standard ( IAS ) 34 Interim Financial Reporting, and as they are part of the Company s first IFRS annual reporting period, IFRS 1 First-Time Adoption of International Financial Reporting Standards has been applied. As the condensed interim financial statements are the Company s first financial statements prepared using IFRS, certain disclosures that are required to be included in annual financial statements prepared in accordance with IFRS that were not included in the Company s most recent annual financial statements prepared in accordance with pre-changeover GAAP have been included in these financial statements for the comparative annual period. However, the condensed interim financial statements do not include all of the information required for full annual financial statements. The condensed interim financial statements should be read in conjunction with the Company s 2011 annual financial statements and the explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided Section Telephone: (604) Fax: (604) rob@highlandresources.ca

3 Page Overall Performance Description of Business Highland Resources Inc. (the Company ) is the parent company of its consolidated group (the Group ) and was incorporated in the Province of British Columbia on June 7, 2006 under the Business Corporations Act of British Columbia. The Company is listed on the TSX Venture Exchange (the Exchange ), having the symbol HI-V, as a Tier 2 issuer and is in the process of exploring and evaluating its mineral properties Recent Events On October 15, 2011, the Company agreed to sell its 51-per-cent interest in the Rickaby Property to CPI for consideration of the return of 2,911,042 shares of the Company and a 3-per-cent net smelter royalty granted to the Company (see Section 1.4.1) 1.3 Selected Annual Information The highlights of financial data for the Company s three most recently completed year-ends are as follows: May 31, 2011 IFRS May 31, 2010 May 31, 2009 Pre-changeover Pre-changeover GAAP GAAP (a) Revenue 6,023 Nil Nil (b) Total expenses (680,396) (745,498) (263,057) (c) Net loss (674,373) (532,137) (296,199) (d) Loss per share basic and diluted (0.02) (0.03) (0.07) (e) Total assets 3,897,804 2,510,316 1,325,867 (f) Total long-term liabilities Nil Nil Nil (g) Cash dividends declared per-share Nil Nil Nil 1.4 Results of Operations Discussion of Acquisitions, Operations and Financial Condition The following should be read in conjunction with the unaudited condensed interim financial statements of the Company and notes attached thereto Property Activity Rickaby Property During the year ended May 31, 2010, the Company earned an undivided 51% interest in 88 mineral claims located in the Beardmore-Geraldton Belt of the Thunder Bay Mining District, Ontario ( Rickaby Property ) by exercising its option under a Property Purchase & Joint Venture Agreement (the Agreement ), entered into in January 2009 and amended on January 23, 2009, with Canadian Prospector Inc. ( CPI ). The Agreement was accepted by regulatory authorities on May 6, 2009 (the Approval Date ). Consideration payable is as follows: (i) (ii) (iii) payment of an aggregate $250,000 (paid); expenditures by the Company in the aggregate amount of $1,000,000 by May 6, 2010 (incurred); and issuance of 2,916,666 shares (issued). These shares were valued using the market value of the shares as of the Approval Date.

4 Page 4 In connection with the Agreement, a finder s fee was paid by the issuance of 393,749 shares of the Company. These shares were valued using the market value of the shares as of the Issue Date. During the period ended, the Company agreed to sell its 51-per-cent interest in the Rickaby Property back to CPI for consideration of: (i) The return of 2,911,042 shares of the Company; (ii) A 3-per-cent net smelter royalty granted to the Company, of which CPI has the right to purchase 1.5 per cent by paying $1.5-million. The value of the 2,911,042 shares returned to the Company s treasury and cancelled, and consequently the value of the Rickaby Property on the date of disposition, was determined to be the market price of the Company s shares on the date they were returned, totalling $422,101. As a result of the sale of the Rickaby Property, the Company recognized the impairment of the Rickaby Property, of $2,042,346. On November 9, 2011 the Company completed the disposition of the Rickaby Property upon receiving the 2,911,042 shares. The $422,101 market value of these shares was deducted from the carrying value of the property on that date. Keweenaw Property On July 15, 2011, the Company entered into a Joint Venture Agreement (the Agreement ) and acquired the right to earn up to a 65% interest in copper resources located in Keweenaw and Houghton Counties, Michigan (the Property ) from the Optionor, which holds the rights of exploration and development on the Property. Under the terms of the Agreement, the Company will: Pay to the Optionor: (i) US$250,000 on Exchange approval (paid October 26, 2011); (ii) an additional US$250,000 on or before October 26, 2012; and (iii) an additional US$250,000 on or before October 26, Issue to the Optionor: (i) 333,334 common shares on Exchange approval (issued October 26, 2011); (ii) an additional 333,333common shares on or before October 26, 2012; and (iii) an additional 333,333common shares on or before October 26, Incur exploration expenditures: (i) as recommended by a qualified independent consultant before October 26, 2012, but not less than US$2,000,000; (ii) further amounts as recommended by a qualified independent consultant before October 26, 2013, but not less than a cumulative total since the date of the Agreement of US$7,500,000; and (iii) before October 26, 2014 a cumulative amount since the date of the Agreement of US$11,500,000. The Optionor will have the option to retain a minimum 35% interest in the Property and will receive a sliding scale net smelter return from production depending on the price per pound of copper with a minimum of 2% for copper priced at less than U.S. $1.70 per pound to a maximum of 5% for copper priced at U.S. $3.00 per pound and above. The Agreement provides that at the end of the earn-in period and as a condition to earning its 65% interest, the Company will produce a feasibility study on the Property by an independent consultant selected by the Management Committee. The Company has been appointed as the initial Manager of the Joint Venture with overall responsibility for operations. In conjunction with the joint venture agreement, during the period ended, the Company issued 95,000 common shares and paid $15,000 as finder s fees on the transaction.

5 Page 5 Property Description and Location All of the properties are located in the Copper Country located in the Keweenaw Peninsula, which in turn is located in the north-western part of the Upper Peninsula of Michigan. The entire property position is 13,000 acres and hosts the Centennial Mine, Kingston Mine, and the 543S, G-2 and other chalcocite deposits along with many of the older historic mines. The Centennial Mine is located immediately north of the small town of Calumet near the northern boundary of Houghton County, Michigan. The Kingston Mine is 2 to 3 miles northeast of the Centennial Mine between Calumet and Mohawk, Michigan. The southern portion of the Kingston Mine is on the Houghton-Keweenaw County line. The 543S property is also located in Keweenaw County and lies about 21 miles north of Calumet, Michigan and immediately west of Gratiot Lake. The 543S property lies in the southern portion of the zone of chalcocite prospects. The other chalcocite properties lie 1 to 2 miles southwest to about 13 miles to the northeast. All of the properties are held through private but separated mineral and surface rights. Mining History in the Upper Peninsula Native copper mining by prehistoric races in the Lake Superior range dates back at least 5,000 years. This is evidenced by the numerous ancient pits found along a distance of 60 miles, containing masses of native copper in various stages of removal together with crude stone tools used in mining, and by implements, tools, and decorative and ceremonial objects made from copper. The copper district stretches about 100 miles in length, from the Copper Harbour area in the far north to the White Pine Mine at the far south western end of the belt. However, the majority of native copper mines are located along narrow, 2 to 3 mile wide, 30 mile long belt. The majority of the historic production was found near Houghton and Calumet. Although the White Pine region, to the south in Ontonagon County, produced 4 billion pounds of copper, the most famous portion of the district was the native copper mines of Houghton and Keweenaw counties. During its productive period, from 1845 to 1977, the district produced in excess of 11 billion pounds of copper. It is one of the major copper mining districts in the United States and is truly worthy of the term, the Copper Country Results of Operations The Company incurred a loss for the period ended of $2,415,669 as compared to a loss for the comparative period ended November 30, 2010 of $295,574 as follows: Period ended 2010 Finance revenue $ (3,069) $ (208) Accounting and audit fees 35,161 13,501 Depreciation 6, Finance cost 1, Impairment of exploration and evaluation asset 2,042,346 - Legal and corporate services 73,639 49,566 Loss on debt settlement for shares - 22,426 Management activities 105, ,983 Office, rent and administration 72,711 34,689 Pre-exploration costs 8, Shareholder communications 64,347 40,304 Transfer agent and filing fees 8,748 10,867 Loss for the period $ 2,415,669 $ 295,574 Expenditures during the current period ended were higher than expenditures incurred during the comparative period ended November 30, Compared to the period ended November 30, 2010, the

6 Page 6 Company s accounting and audit fees increased by $21,660 to $35,161 and office, rent and administration costs increased by $38,022 to $72,711 for the period ended due mainly to the opening of a satellite office in Michigan, near the Company s Keweenaw project and related activity. The Company s shareholder communications incurred in the current period of $64,347 were higher compared to the period ended November 30, 2010, due to the Company s new manager of investor relations, discussed below. The Company s management activities decreased as compared to the period ended November 30, 2010 due to the resignation of the Company s president. Transfer agent and filing fees for the period ended were slightly lower at $8,748. The Company s legal and corporate services and pre-exploration costs were higher in the current period at $73,639 and $8,415 compared to the period ended November 30, 2010 due to activity surrounding the Company s new Joint Venture Agreement and its right to earn up to a 65% interest in the Keweenaw Property (see Section 1.4.1). The most significant expense reported by the Company during the period ended was the reported impairment of its exploration and evaluation asset, the Rickaby Property. The Company sold its interest in this property in exchange for the return of 2,911,042 of the Company s shares and a 3% net smelter royalty. The value of the shares returned was $422,101, being the closing market price on the date the shares were returned. As the proceeds of the disposition were lower than the book value of the asset, the Company recognized the impairment of $2,042,346. Investor Relations Activities At May 31, 2011, there were no formal investor relations agreements in place. During the period ended, the Company announced that Christopher Haldane had joined the Company as Manager of Investor Relations, to lead the Company's IR and shareholder relations program. Mr. Haldane brings with him his previous experience as IR consultant with CHF Investor Relations in Toronto where he was in charge of corporate communications for numerous junior mining clients with properties all over the world. Other than stock options that may be granted at a future date subject to TSX Venture Exchange approval, Mr. Haldane has no rights or intent to acquire any shares of the Company. Financings, Principal Purposes & Milestones During the period ended, the Company issued the following: (i) 290,000 shares pursuant to the exercise of agent warrants at $0.10 per warrant; (ii) 100,000 shares pursuant to the exercise of share-purchase options at $0.10 per option by a former director; (iii) 333,334 shares pursuant to the joint venture agreement on the Keweenaw Property; and (iv) 95,000 shares as a finder s fee on the Keweenaw Property.

7 Page Summary of Quarterly Results The following is a summary of the Company s financial results for the financial past eight quarters: Q2 30-November-11 Q1 31-August-11 Q4 31-May-11 Q3 28-Feb-11 IFRS IFRS IFRS IFRS Revenue: $ - $ 3,069 $ 4,235 $ 1,580 Income (Loss) $ (234,712) $ (2,180,957) $ (183,021) $ (195,778) Per share basic and fully diluted income (loss) $ (0.01) $ (0.06) $ (0.01) $ (0.01) Q2 30-Nov-10 Q1 31-Aug-10 Q4 31-May-10 Q3 28-Feb-10 IFRS IFRS Pre-changeover GAAP Pre-changeover GAAP Revenue $ 4 $ 204 $ - $ - Income (Loss) $ (181,277) $ (114,297) $ 3,539 $ (151,203) Per share basic and fully diluted income (loss) $ (0.01) $ (0.01) $ 0.00 $ (0.01) Discussion For the discussion of results for the period ended, please refer to Section Results of Operations. 1.6 Liquidity and Capital Resources In management s view, given the nature of the operations, which currently consists of its interest in certain resource properties, the most relevant financial information relates primarily to current liquidity, solvency and planned expenditures. The Company s financial success will be dependent upon the extent to which it can determine whether its resource properties contain reserves, which are economically recoverable. Such development may take years to complete and the amount of resulting income, if any, is difficult to determine. The Company does not expect to receive significant income in the foreseeable future. Management has estimated that the company will have adequate funds from existing working capital to meet corporate development and administrative obligations for the coming year, but may require additional funds to meet property obligations. As at, the Company had $144,845 in cash and $351,050 in short-term investments, working capital of $538,303 and no long-term debt. The Company s ability to continue as a going concern is dependent upon its existing working capital and obtaining the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due. While the Company has been successful in raising equity financing through the issuances of common shares in the past, there is no assurance that it will be able to obtain adequate financing in the future or that such financing will be available on acceptable terms in the future.

8 Page Capital Resources The capital resources of the Company are the Keweenaw Property, with a historical cost of $499,081 and its equipment with a historical cost (net of accumulated depreciation) of $74,700 as at. The Company is committed to further expenditures on the properties, as detailed in Section 1.4 Results of Operations. 1.8 Off Balance Sheet Arrangements There are no off-balance sheet arrangements to which the Company is committed. 1.9 Transactions with Related Parties The following is a summary of charges incurred by the Company with related parties: Six months ended November 30, 2011 November 30, 2010 Accounting and audit fees $ 10,500 $ 10,500 Legal and corporate services - 1,000 Management activities 82, ,000 Office, rent and administration 29,500 26,325 Shareholder communications 7,500 7,250 Total $ 129,833 $ 158,075 During the period ended, the Company incurred office, rent and administration charges of $29,500 (November 30, 2010: $26,325), accounting fees of $10,500 (November 30, 2010: $10,500), shareholders communications of $7,500 (November 30, 2010: $7,250), and legal and corporate services of $Nil (November 30, 2010: $1,000) to a company controlled by a director and officer of the Company. The Company also paid management fees of $82,333 (November 30, 2010: $113,000) to two officers and the Company s president who are also directors of the Company. Included in prepaid expenses at, is $5,500 (May 31, 2011: $5,000; June 1, 2010: $5,523) for prepaid rent and refundable expenses advance with a company controlled by a director. These charges were measured at the exchange amount, which is the amount agreed upon by the transacting parties Second Quarter The second quarter ended differs significantly from the comparative quarter in the prior year. See Section for a discussion Proposed Transactions N/A

9 Page Critical Accounting Estimates a) Exploration and Evaluation Expenditures The application of the Company accounting policy for E&E expenditures requires judgment in determining whether it is likely that future economic benefits will follow to the Company, which may be based on assumptions about future events or circumstances. Estimates and assumptions made may change if new information becomes available. If, after expenditures are capitalized, information becomes available suggesting that the recovery of expenditure is unlikely, the amount capitalized is written off in the Company s profit or loss in the period the new information becomes available. b) Title to Mineral Property Interests Although the Company takes steps to verify title to mineral properties in which it has an interest, these procedures do no guarantee the Company s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects. c) Income Taxes Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The company recognizes liabilities and contingencies for anticipated tax audit issues based on the Company s current understanding of tax law. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. In addition, the Company recognizes deferred tax assets relating to tax losses carried forward to the extent there are sufficient taxable temporary differences (deferred tax liabilities) relating to the same taxation authority and the same taxable entity against which the unused tax losses can be utilized. However, utilization of the tax losses also depends on the ability of the taxable entity to satisfy certain tests at the time the losses are recuperated. d) Share-Based Payment Transactions The Company measures the cost of equity-settled transactions with employees, and some with non-employees, by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 8 of the Company s condensed interim financial statements.

10 Page Changes in Accounting Policies Including Initial Adoption The Company s financial statements for the year ending May 31, 2012, are the first annual financial statements that will be prepared in accordance with IFRS. IFRS 1, First time Adoption of International Financial Reporting Standards, requires that comparative financial information be provided. As a result, the first date at which the Company has applied IFRS was June 1, 2010 (the Transition Date ). IFRS 1 requires first time adopters to retrospectively apply all effective IFRS standards as of the reporting date, which for the Company will be May 31, However, it also provides certain optional exemptions and certain mandatory exceptions for first time IFRS adoption. Prior to Transition to IFRS, the Company prepared its financial statements in accordance with Pre-changeover GAAP. In preparing the Company s opening IFRS financial statements, the Company has adjusted amounts reported previously in the financial statements prepared in accordance with Pre-changeover GAAP. Optional Exemptions The IFRS 1 applicable exemptions and exceptions applied in the conversion from Pre-changeover GAAP to IFRS are as follows: Business Combinations The Company elected to not retrospectively apply IFRS 3 Business Combinations to any business combinations, as no business combinations had occurred prior to its Transition Date. Share-Based Payment Transactions The Company has elected to not retrospectively apply IFRS 2 to equity instruments that were granted and had vested before the Transition date. As a result of applying this exemption, the Company will apply the provision of IFRS 2 only to all outstanding equity instruments that are unvested at the Transition Date. Compound Financial Instruments The Company has elected to not retrospectively separate the liability and equity components of compound instruments for which the liability component is no longer outstanding at the Transition Date. Changes in Existing Decommissioning, Restoration and Similar Liabilities The Company has elected to apply the exemption from full retrospective application of decommissioning provisions as allowed under IFRS 1. As a result, the Company has re-measured the provisions at June 1, 2010 under IAS 37 Provisions, Contingent Liabilities and Contingent Assets and estimated the amount to be included in the cost of the related asset by discounting the liability to the date at which the liability first arose. Borrowing Costs The Company has elected to no apply the transitional provisions of IAS 23 Borrowing Costs, which permits prospective capitalization of borrowing costs on qualifying assets from the Transition Date.

11 Page 11 Mandatory Exemptions Derecognition of Financial Assets and Liabilities The Company has applied the derecognition requirements of IAS 39 Financial Instruments: Recognition and Measurement, prospectively from the Transition Date. As a result, any non-derivative financial assets or non-derivative financial liabilities derecognized prior to the Transition Date in accordance with Pre-changeover GAAP have not been reviewed for compliance with IAS 39. Estimates The estimates previously made by the Company under Pre-changeover GAAP were not revised for the application of IFRS except where necessary to reflect any differences in accounting policy or where there was objective evidence that those estimates were in error. As a result, the Company has not used hindsight to reverse estimates. Effect on Significant Accounting Policies in the Transition from Pre-Changeover GAAP to IFRS In the course of transitioning from Pre-changeover GAAP to IFRS, Management was required to review its accounting policies to ensure compliance with IFRS. While the wording for all accounting policies has been revised, the majority of the Company s policies are substantially the same under IFRS when compared to Pre-changeover GAAP. However there are some exceptions: i) Depreciation of Equipment Under pre-changeover GAAP, the Company computed depreciation of equipment using the declining balance method. Under IFRS, this method is no longer allowable and as such, all equipment is now depreciated on a straight-line basis over the useful life of the asset while taking into account residual values. This change had no effect on the Company s financial statements. ii) Exploration and Evaluation ( E&E ) Expenditures Under IFRS 6, upon transition to IFRS, an entity may continue to follow the accounting policies applied prior to transition, thereby allowing companies to capitalize or elect to expense E&E expenditures, provided that upon transition, the policy is applied consistently. Current industry practice on the capitalization versus expensing of E&E activities varies by company. Significant management judgment is required to determine appropriate accounting policies relating to the treatment of E&E expenditures upon transition to IFRS. The Company has elected to continue to capitalize E&E activities that are directly related to E&E activities. Such expenditures include materials used, surveying and sampling costs, drilling costs, payments made to contractors, geologists, consultants, and depreciation on plant and equipment during the exploration phase. Costs not directly attributable to E&E activities, including general and administrative overhead costs, are expensed in the period in which they occur. iii) Financial Instruments For IFRS, the measurement and allocation of fair values between the debt and equity components of compound financial instruments issued by the Company is performed differently from the pro-rata method applied under Canadian GAAP. Although the Company s election under IFRS relating to compound financial instruments has eliminated transition variances relating to those debt instruments fully repaid prior to the June 1, 2010 transition date, outstanding debt instruments and compound instruments denominated in foreign currencies would have required retrospective restatement on transition to IFRS. However, the Company did not have any outstanding debt instruments or compound instruments at June 1, 2010 or May 31, 2011 and so there was no effect on the Company s financial statements.

12 Page 12 iv) Foreign Operations The assets and liabilities of foreign operations, including fair value adjustments arising on acquisition, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at average exchange rates for the period. The Company s foreign currency differences are recognised and presented in other comprehensive income and in the foreign currency translation reserve ( Translation Reserve ) in equity. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the profit or loss on disposal. However, the Company did not have any foreign operations at June 1, 2010 or May 31, 2011 and so there was no effect on the Company s financial statements. Reconciliation of Pre-Changeover GAAP Equity and Comprehensive Loss to IFRS IFRS 1 requires an entity to reconcile equity, comprehensive income and cash flows for prior periods. While, there were no changes to the Company s reported figures as a result of the conversion from Pre-changeover GAAP to IFRS, the statements of financial position and statements of comprehensive income are shown below as emphasis of this fact. As there were no adjustments to the net cash flows, no reconciliation of the statement of cash flows has been prepared. i) Private Placement Warrants Historically, the Company has raised funds through private placement financings, which often include the issuance of warrants as a component of each unit that is sold in these financings. Under Pre-changeover GAAP, the company has used the residual method in determining the fair value of the warrant component of the unit. Utilising this method, the Company would calculate the fair value of the share component to be lesser of the market price for the shares on the date of grant, and the offering price. The fair value of the warrant component of the unit would then be assigned the residual of the private placement proceeds, less the fair value of the share component. IFRS calls for the Company to determine the fair value of the warrant component separately, using a valuation technique. Using the Black-Scholes valuation model to determine a fair value for the warrant and the market value of the shares, under IFRS, the Company has allocated the proceeds from financings to the shares and warrants. As a result of this difference, the Company has increased the value assigned to the warrant component of its financings. At November 30, 2010 and May 31, 2011, the Company has relcassed $103,000 and $456,940, respectively, from share capital to contributed surplus.

13 Page 13 Reconciliation of Statement of Financial Position as at June 1, 2010 Transition Date Effect of Pre-Changeover Transition to GAAP IFRS IFRS ASSETS Current Cash $ 308,925 $ - $ 308,925 Harmonized sales taxes recoverable 68,412-68,412 Prepaid expenses 5,523-5, , ,860 Non-current assets Equipment Exploration and evaluation assets 2,126,732-2,126,732 2,127,456-2,127,456 Total assets $ 2,510,316 $ - $ 602,047 LIABILITIES Current liabilities Trade and other payables $ 376,826 $ - $ 376,826 SHAREHOLDERS EQUITY Share capital 2,139,232-2,139,232 Contributed surplus 1,047,897-1,047,897 Accumulated deficit (1,053,639) - (1,053,639) 2,133,490-2,133,490 Total liabilities and shareholders equity $ 2,510,316 $ - $ 2,510,316

14 Page 14 Reconciliation of Statement of Financial Position as at November 30, 2010 Effect of Pre-Changeover Transition to GAAP IFRS IFRS ASSETS Current Cash $ 32,100 $ - $ 32,100 Harmonized sales taxes recoverable 22,905-22,905 Prepaid expenses 9,812-9,812 64,817-64,817 Non-current assets Equipment Exploration and evaluation assets 2,158,447-2,158,447 2,158,910-2,158,910 Total assets $ 2,223,727 $ - $ 2,223,727 LIABILITIES Current liabilities Trade and other payables $ 86,131 $ - $ 86,131 SHAREHOLDERS EQUITY Share capital 2,430,912 (103,000) 2,327,912 Contributed surplus 1,055, ,000 1,158,897 Accumulated deficit (1,349,213) - (1,349,213) 2,137,596-2,137,596 Total liabilities and shareholders equity $ 2,223,727 $ - $ 2,223,727

15 Page 15 Reconciliation of Statement of Financial Position as at May 31, 2011 Effect of Pre-Changeover Transition to GAAP IFRS IFRS ASSETS Current Cash $ 204,057 $ - $ 204,057 Harmonized sales taxes recoverable 43,379-43,379 Prepaid expenses 56,312-56,312 Short-term investments 1,305,300-1,305,300 1,609,048-1,609,048 Non-current assets Equipment Exploration and evaluation assets 2,288,553-2,288,553 2,288,756-2,288,756 Total assets $ 3,897,804 $ - $ 3,897,804 LIABILITIES Current liabilities Trade and other payables $ 36,947 $ - $ 36,947 SHAREHOLDERS EQUITY Share capital 4,509,975 (456,940) 4,053,035 Contributed surplus 1,078, ,940 1,535,834 Accumulated deficit (1,728,012) - (1,728,012) 3,860,857-3,860,857 Total liabilities and shareholders equity $ 3,897,804 $ - $ 3,897, Significant Accounting Policies Pre-Exploration Costs Pre-exploration costs are expensed in the period in which they are incurred. Exploration and Evaluation Expenditures Once the legal right to explore a property has been acquired, costs directly related to exploration and evaluation ( E&E ) expenditures are recognized and capitalized, in addition to the acquisition costs. These direct expenditures include such costs as materials used, surveying and sampling costs, drilling costs, payments made to contractors, geologists, consultants, and depreciation on plant and equipment during the exploration phase. Costs not directly attributable to E&E activities, including general and administrative overhead costs, are expensed in the period in which they occur.

16 Page 16 When a project is deemed to no longer have commercially viable prospects to the Company, E&E expenditures in respect of that project are deemed to be impaired. As a result, those E&E expenditures, in excess of estimated recoveries, are written off to the Company s profit or loss. The Company assesses E&E assets for impairment when facts and circumstances suggest that the carrying amount of an asset may exceed its recoverable amount. Once the technical feasibility and commercial viability of extracting the mineral resource has been determined, the property is considered to be a mine under development and is classified as mines under construction. E&E assets are also tested for impairment before the assets are transferred to development properties. As the Company currently has no operational income, any incidental revenues earned in connection with exploration activities are applied as a reduction to capitalized exploration costs. Mineral exploration and evaluation expenditures are classified as intangible assets Financial and Other Instruments Interest Rate Risk The Company s cash earns interest at a variable interest rate. Because of the nature of this financial instrument, fluctuations in market rates do not have a significant impact on estimated fair values as of. Future cash flows from interest income on cash will be affected by interest rate fluctuations. Interest rate risk consists of two components: To the extent that payments made or received on the Company s monetary assets and liabilities are affected by changes in the prevailing market interest rates, the Company is exposed to interest rate cash flow risk. To the extent that changes in prevailing market interest rates differ from the interest rates in the Company s monetary assets and liabilities, the Company is exposed to interest rate price risk. Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company is exposed to credit risk with respect to its cash and short-term investments, the balance of which at is $144,845 and $351,050, respectively. As at that date, $81,585 in cash and $351,050 in short-term investments were held at a chartered Canadian financial institution and $63,260 was held at a financial institution in the United States. Liquidity Risk Liquidity risk arises from the excess of financial obligations over available financial assets due at any point in time. The Company s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements. The Company achieves this by maintaining sufficient cash reserves and highly liquid short-term investments. As at, the Company was holding cash of $144,845 and short-term investments of $351,050. The Company s trade and other payables and amounts due to related parties are due in the short term. Currency Risk Currency risk is the risk that funds held in currencies other than the operating currency will fluctuate negatively, resulting in a foreign exchange loss. The Company is exposed to currency risk with respect to its cash and short-term investments, the balance of which at was $144,845 and $351,050, respectively. At November 30, 2011, the Company held US$62,020 in United States Dollars in a financial institution in the United States.

17 Page Other Disclosure of Outstanding Share Capital as at January 27, 2012: Number Book Value Common Shares 33,816,122 $ 3,738,998 At, the Company had the following stock options outstanding: Grant Expiry Date Date Exercise Closing mm/dd/yy mm/dd/yy Price Balance 09/22/06 09/22/16 $ ,000 08/18/09 08/18/14 $ ,000 10/08/09 10/08/14 $ ,000 11/18/09 11/18/14 $ ,000 04/28/10 04/28/15 $ ,000 1,190,000 At, there were 8,567,500 warrants exercisable to purchase one common share for each option held as follows: Number of Exercise Warrants Price Expiry Date 465,500 $0.30 January 26, ,500,000 $0.10 September 24, ,602,000 $0.40 January 26, ,567,500 $0.24 Subsequent to, 465,500 share purchase warrants, exercisable at $0.30 per warrant, expired unexercised.