3 rd Quarter Report 2006

Transcription

1 3 rd Quarter Report 2006

2 MANAGEMENT S DISCUSSION & ANALYSIS For the quarter ended September 30, 2006 The following Management s Discussion and Analysis is prepared as of November 8, 2006 and should be read in conjunction with the unaudited consolidated financial statements for the period ended September 30, Shore Gold Inc. ( Shore, SGF, or the Company ) prepares its financial statements in accordance with Canadian generally accepted accounting principles ( GAAP ). All amounts are reported in Canadian dollars unless otherwise indicated. Overview The Company concluded a significant initiative during the third quarter 2006 regarding the ownership of the Fort à la Corne Joint Venture ( FALC-JV ). Effective September 29, 2006, Shore acquired the remaining % in the FALC-JV and concurrently sold 40% of its FALC-JV interest to Newmont Mining Corporation of Canada Limited ( Newmont ). As a result of these transactions, Kensington Resources Ltd. ( Kensington ), a wholly owned subsidiary of Shore, retained a 60% controlling interest in the FALC-JV and became operator. Subsequent to these changes regarding the FALC-JV, technical teams from each of Shore and Newmont met to re-evaluate all available FALC-JV data to re-assess the balance of the 2006 exploration program as well as to establish a program and budget for On November 8, 2006, Shore announced a 20.3 million dollar budget for the remainder of 2006 and a 46.2 million budget for the 2007 exploration program. The primary focus of these programs being the Orion North group of kimberlites. During the quarter ended September 30, 2006, the formerly approved 2006 exploration program moved ahead as planned. During this time 5 core drill rigs had been working on the FALC-JV property to delineate the Orion Kimberlite Cluster to assist with the placement of future large diameter drill hole (1.2 metre) programs. As of the end of October core holes had been completed, resulting in 6 new feeder vents being discovered in the Orion Cluster, bringing the total number of feeder vents discovered on the FALC-JV to ten (See SGF News Release October 30, 2006). Considerable advancement was also achieved on Shore s 100% owned Star Kimberlite Property s pre-feasibility study resulting in the Company announcing that a geological model had been constructed of the Star Kimberlite; including the portion referred to as Star West, which contained approximately million tonnes of kimberlite (see SGF News Release October 17, 2006). This tonnage estimate will continue to be refined as Phase III bulk sampling continues and as results of grade and value estimates from bulk sampling and large diameter drilling are incorporated into the model. By October 23, 2006, approximately 10,000 tonnes of Phase III bulk sampling had been processed through the on-site processing plant. Thus far, the majority of the tonnes have come from drifting to the Pense and Cantuar Kimberlite types; however two batches of Pense Kimberlite have been shipped to a third party for concentrate processing (See SGF News Release October 23, 2006). Underground bulk-sampling also commenced during the quarter on Star-West in order to obtain a representative sample of the Cantuar Kimberlite type. Large diameter drilling continues to produce samples and by the end of the quarter 1

3 43 holes of the 60-hole program were completed. The collected samples are at various stages of processing. The results of the first 15 holes were released in August (see SGF press release August 14, 2006) and those results confirm lateral continuity of grade and stone size within the Early Joli Fou ( EJF ) Kimberlite. By mid October the large diameter drills had moved to Orion North on the FALC-JV property in order to expedite results from this highly prospective area. Once the first phase of large diameter drilling has been completed in early 2007, the drills will return to the Star Kimberlite to complete the remaining holes on the Star Kimberlite Property. The relocation of the large diameter drill rigs is expected to result in only a minimal disruption to Star s pre-feasibility program. FALC-JV Transactions On September 25, 2006 (see SGF News Release September 25, 2006), Shore announced that Kensington had entered into agreements to acquire De Beer s % participating interest in the FALC-JV for 180 million and to acquire Cameco s and UEM s interests for a combined cash price of 66.1 million. Concurrent with these acquisitions, Kensington on-sold a 40% interest in the FALC-JV to Newmont for 170.4M on the same terms and conditions as those associated with the De Beers, Cameco and UEM acquisitions. These transactions result in Kensington now holding a 60% interest in the FALC-JV with Shore maintaining a sufficient cash position to fund exploration programs on both Star and the FALC-JV through to Bankable feasibility. Kensington also became operator of the FALC-JV which will also allow for a more synergistic use of resources in moving this region forward. FALC-JV Property 2006 Exploration Plan The former FALC-JV Management Committee agreed to a 2006 FALC-JV Exploration program on April 21, The program was to include some 200 core drill holes and between five and nine large diameter drill holes on the Orion Kimberlite Cluster (kimberlites 133, 140/141, 145, 147, 148, 219, 220, and 120), the Star West Kimberlite and 3 other selected kimberlites (kimberlites 118, 123, and 152). Figure 1 illustrates the relative size and proximity of the above kimberlites to Shore s Star Kimberlite based on current information. Pending agreement among the JV Participants, a limited amount of tonnes were to be taken from the Star West Kimberlite during Phase III of the underground bulk-sample on the Star Kimberlite to make up the total tonnage required to recover 1,000 carats from the Cantuar Kimberlite type. The Orion Cluster is made up of a group of eight defined kimberlites that are believed to form a seven-kilometer long continuous belt of kimberlite, while Star West is defined as that part of the Star Kimberlite that falls within the claim boundaries of the FALC-JV. Star West is presently estimated to include 22 percent of the Star Kimberlite. To the end of October, of the original 2006 FALC-JV Exploration program, 11 of 18 core holes had been completed on Star West; 218 PQ core drill holes exceeding 50,000 metres 2

4 had been completed on the Orion Cluster; 2 large diameter drill holes had been completed and underground bulk sampling had commenced on Star West. Figure 1: FALC-JV Southern Kimberlite Cluster Star Diamond Property Pre-feasibility Program Phase I of the pre-feasibility program started in 2003 with management s objective being to extract a 25,000 tonne bulk sample. In early 2005, the results of the first 3,050 carats extracted from the 25,000 bulk sample were released (see SGF News Release February 23, 2005), indicating an average modeled value of 135 US per carat. By May of 2005, Shore had announced a pre-feasibility program on the Star Property that included Phase II of bulk sampling and an extensive core and large diameter drilling program to help define the size and grade of the Star Kimberlite. By March 2006 (see SGF News Release March 20, 2006), the results of a second valuation exercise were released that took the original 3,050 carat parcel of diamonds together with the balance of the diamonds recovered from the initial bulk sample as well as diamonds recovered from Phase II of bulk sampling and revalued the total 5,950 carat parcel. The results of this second valuation exercise increased confidence in the original modeled diamond value. As a result of work done during the first two bulk sample phases, the Star Kimberlite has been broken down into five principal kimberlite types and include the Early ( EJF ), Mid ( MJF ) and Late ( LJF ) Joli Fou, Cantuar and Pense. The first two bulk samples focused on the Early Joli Fou Kimberlite type with approximately 82% of the tonnes recovered coming from this kimberlite type. As additional types were identified, on April 12, 2006 management announced a third phase to the Star pre-feasibility study to 3

5 bulk sample both the Pense and Cantuar Kimberlite types in order to get a representative sample of all kimberlite types identified on the Star Kimberlite. Shore believes, based on minerals and textures observed in the core drilling intersections, that these two kimberlite types are highly prospective and could significantly impact the future economics of the Star Kimberlite. The third phase of the pre-feasibility program will also see additional infill drilling to better define areas containing Pense Kimberlite. On August 14, 2006 (see SGF New Release August 14, 2006), Shore announced the results of the first 15 holes from the large diameter drilling part of the pre-feasibility program. A total of 2,249 dry tonnes of EJF Kimberlite type had been sampled which resulted in 266 carats for an average grade of carats per hundred tonne ( cpht ). The results of these samples when compared to the grades achieved from the initial 2,200 tonne underground bulk sample of EJF are encouraging due to the consistency in stone size and grade compared to the original bulk samples considering the distance from the shaft that these samples were collected. Figure 2 illustrates the relative distance and cpht recovered from the bulk samples from the 15 large diameter drilling samples reported to date. Bulk sampling of Phase III is well underway with an aim to recover in excess of 1,000 carats from each of the Cantuar and Pense kimberlite types. On September 6, 2006, the progress related to the Cantuar and Pense Kimberlite sampling was announced. Most recoveries thus far are coming from the EJF Kimberlite as the samples processed to date Figure 2: Results of first 15 large diameter drilling mini-bulk samples Star Kimberlite Star West Kimberlite 4

6 relate to samples taken while advancing to the Cantuar and Pense kimberlite types. A sample has been taken from the Pense, and the mineralogy of this kimberlite encountered suggests that it has significant carrying capacity for diamonds. By the end of September, bulk sampling had commenced on Star West to increase the tonnage sampled from the Cantuar kimberlite type. The on-site processing plant continues to process both bulk and large diameter drilling samples. The concentrates recovered from the on-site processing plant have been sent to a third party to process final diamond recoveries. The results of many of these samples are pending and will be released once available. The results of future samples from both underground and large diameter drilling will help refine the recently announced million tonne geological model of the Star Kimberlite, including Star West. Financial Highlights Selected financial information of the Company for the quarters ended September 30, 2006 and 2005 is summarized as follows: Highlights Three Months Ended September 30, 2006 Three Months Ended September 30, 2005 Six Months Ended September 30, 2006 Six Months Ended September 30, 2005 Revenues (000 s) 3, ,841 1,898 Net loss (000 s) 122,698 1,159 76,734 2,939 Net loss per share (1) Total assets (000 s) 792, , , ,304 Working capital (000 s) 134, , , ,553 (1) Basic and diluted. Third Quarter Results of Operations For the quarter ended September 30, 2006, the Company recorded a net loss of million or 0.70 per share compared to a net loss of 1.2 million or 0.01 per share for the same period in The increase in loss from September 30, 2005 compared to September 30, 2006 is related to the loss on the sale of a property interest of million net of a 55.8 million future income tax recovery. The Company generated positive cash flows from operations for the third straight quarter as a result of earning a better than expected return on its investment portfolio. Once the effect of the loss on the property interest (net of the income tax recovery) is removed from the quarterly results, the Company generated net income of 1.4 million. Revenues The Company invested excess cash reserves in short-term deposits to maximize returns while ensuring funds would be available for significant cash outflow requirements associated with the Star Diamond and FALC-JV properties. For the quarter ended September 30, 2006 the Company reported interest and other income of 3.1 million as 5

7 compared to 0.8 million for the quarter ended September 30, The increased interest revenue is the result of a substantially larger cash position after the completion of equity financings during the first and fourth quarters of In addition, the Company s consolidated cash increased upon the merger with Kensington which held approximately 35 million in cash and cash equivalents at that time. Expenses Total operating costs for the quarter ended September 30, 2006 equaled 1.0 million compared to 1.9 million for the quarter ended September 30, This represents a decrease of 0.9 million or 47%. This decrease is predominately related to the fair-value of stock based compensation expensed during the third quarter of 2005 totaling 1.4 million. The Company s cash costs went from 0.6 million in the third quarter of 2005 to 0.9 million in the comparable period of The 50% increase compared to a year ago is due to the growth the Company has experienced which includes the merger with Kensington, managing multi-million dollar exploration projects, and most recently the acquisition of an additional interest in the FALC-JV. To provide a more meaningful analysis regarding expenses for the quarter ended September 30, 2006, the following discussion related to the variances removes the effect of stock-based compensation for comparative purposes. Administration expense for the third quarter of 2006 increased from 0.3 million in 2005 to 0.5 million or 67% for the quarter ended September 30, The increase is due to increased lease costs from the tripling of office space, increased personnel, and general compensation increases that were implemented in the second quarter of Consulting and professional fees increased from 0.1 million in the third quarter of 2005 to 0.3 million in 2006 and are primarily the result of increased legal fees associated with general consultations regarding joint venture dealings as well as other contract management. Finally, corporate development costs remain relatively unchanged from respective quarters at 0.1 million for the third quarter of 2005 to 0.1 million for the third quarter of Loss on sale of property interest On September 29, 2006, Shore, through it 100% owned subsidiary Kensington, completed a series of transactions to affect the purchase of the remaining participating interest in the Fort à la Corne Property from the other joint venture participants. Concurrent with these transactions, the Company sold a 40% interest in the property. The disposal of the 40% property interest resulted in a loss for accounting purposes since the pro rata share of the carrying value of the mineral property exceeded the cash proceeds by approximately million. After the future income tax recovery of 55.8 million was applied, the net loss on the sale equaled million. The loss is attributable to the build up of costs on the FALC-JV mineral property. When Shore merged with Kensington in October of 2005, the transaction was accounted for using the fair-values of the shares, options and warrants given up to Kensington shareholders on October 28, Additionally, because shares were acquired with virtually no tax base an additional increase to the fair value had to be determined to factor in the future income 6

8 tax expense associated with these fair values. The series of transactions in late September 2006 leading to the acquisition of a 100% interest in the FALC-JV were done through a purchase of assets, resulting in an accounting and tax base of equal values. The combination of the two accounting methods for the specific circumstances has resulted in a carrying value on a pro rata basis in excess of the 40% interest that was sold. Management is of the belief that the resulting loss on this transaction is the result of the accounting treatments for the various steps in the acquisitions as opposed to a reflection of the true economic value of the project. Investing Mineral property additions during the quarter totaled 77.1 million related to the purchase of the additional % interest in the FALC-JV, plus transaction costs of 1.4 million. In addition, the Company spent a further 24.5 million during the quarter on the Star pre-feasibility study and the FALC-JV 2006 exploration program compared to 12.9 million for the quarter ended September 30, The expenditures on the Star Property relate to continued bulk sampling, sample processing, and large diameter drilling. The expenditures on the FALC-JV property predominately relate to core drilling on the Orion Cluster as five core drill rigs were mobilized to the property during the quarter to drill approximately 50,000 meters of core. The 2005 expenditures on the Star Kimberlite related to bulk sampling, sample processing and core drilling as well as certain of Shore s expenses for the merger between Shore and Kensington that were incurred prior to the end of the third quarter. Additionally, 0.7 million of the additions in 2005 related to the fair-value of stock-based compensation of employees working on the Star Kimberlite property compared to 0.1 million of additions in the third quarter of Financing The exercise of 287,000 options during the quarter resulted in additional cash flows from financing activities of 0.5 million. For the quarter ended September 30, 2005, 5.5 million warrants were exercised for gross proceeds of 15.2 million, 0.9 million broker units and attached warrants were exercised for gross proceeds of 2.2 million and 140,000 options were exercised that generated another 0.1 million of cash to the Company. Year to Date Results of Operations For the nine-month period ended September 30, 2006, the Company recorded a net loss of 76.7 million or 0.44 per share compared to a net loss of 2.9 million or 0.03 per share for the same period in The reason for the large loss for the nine-month period ended September 30, 2006 compared to September 30, 2005 relates to the loss on the sale of a property interest of million net of a 55.8 million future income tax recovery. This loss was offset by the 44.9 million future income tax recovery that was recorded during the second quarter of 2006 resulting from the federal and provincial governments enacting a decrease in corporate income tax rates. Furthermore, an 7

9 approximate 6.0 million increase in interest and other income was offset by a 1.9 million increase in operating expenditures. The increase in these areas is indicative of the level of funding being experienced by the Company and the Company s related growth over the past twelve months. Non-cash expenses in 2005 of approximately 2.8 million, relating to the fair value of stock-based compensation were twice that of the non-cash expense in 2006 and were the result of the non-cash future income tax expense of 1.4 million. The future income tax expense is from the approximate 3.9 million of taxable income that will utilize certain tax pools of the Company. Revenues The Company invested excess cash reserves in short-term deposits to maximize return while ensuring funds would be available for significant cash outflow requirements associated with the Star and FALC-JV properties. For the nine-month period ended September 30, 2006 the Company reported interest and other income of 7.8 million as compared to 1.9 million for the comparable period of The increased interest revenue is the result of substantially larger cash reserves resulting from equity financings during the first and fourth quarters of 2005 as well as rising interest rates over the last 12- month period. Expenses Total operating costs for the nine-month period ended September 30, 2006 of 3.9 million compared to 4.7 million for the nine-month period ended September 30, This represents a decrease of 0.8 million or 17%. Even though total expenses look fairly similar period over period, the first three quarters of 2005 had non-cash expenses of approximately 2.7 million more than the same period of These non-cash expenses related to the fair-value of stock-based compensation granted during the period. Once the effect of accounting for stock-based compensation is removed, the comparison between specific categories of expenses becomes more meaningful. The following discussion related to expense variances removes the effect of stock-based compensation for comparative purposes for the nine-month period ended September 30, 2006 and Administration increased from 0.7 million in 2005 to 1.8 million for the nine-month period ended September 30, The 1.1 million increase is due to increased lease costs from the tripling of office space, increased personnel, increased listing fees from the Toronto Stock Exchange, and bonuses paid to senior management. These increases are representative of the growth the Company has experienced over the last year. Consulting and professional fees increased by 117% from 0.6 for the first nine months of 2005 to 1.3 million for the same period in The increase is partially the result of bonuses paid to certain consultants; however, the majority of the increase relates to increased legal fees associated with defending the claim filed against the Company, and its wholly owned subsidiary, Kensington, by De Beers regarding the Voting Agreement between Kensington, Cameco and UEM. Finally, corporate development costs of 0.4 million for the nine-month period ended September 30, 2006 are slightly less than the 0.5 million reported for the corresponding 2005 period. The decrease is attributable to reduced marketing requirements upon the completion of two major financings in

10 Investing Mineral properties additions totaled 77.1 million from the purchase of the additional % interest in the FALC-JV, plus transition costs of 1.4 million. Additionally, the Company spent a total of 62.5 million advancing its mineral properties for the period ended September 30, 2006 compared to 22.4 million for the same period of The additions in 2006 represent approximately 50.2 million on the Star Diamond Property for the completion of Phase II bulk sampling, Phase III bulk sampling, sample processing, large diameter and core drilling. The remaining 12.3 million of expense was for the FALC-JV property to process samples from the 2005 Advanced Exploration and Evaluation plan, core drilling on Star West, and approximately 50,000 meters of core drilling on the Orion Kimberlite Cluster. The Company recently announced that the FALC-JV participants agreed to spend 20.3 million for the remainder of 2006 of which Kensington s cost share will be 60%. The 2005 expenditures related to the completion of the first 25,000 tonne bulk sample and the commencement of Phase II of the prefeasibility study on the Star Diamond Property. Financing The exercise of 5.9 million warrants, broker warrants and options during the nine-month period ended September 30, 2006 resulted in additional cash flow from financing activities of 18.3 million. For the nine-month period ended September 30, 2005, the Company completed a public offering of 21.2 million common shares for gross proceeds of million and issued another 11.2 million shares for the exercise of warrants, broker warrants and options for gross proceeds of 27.5 million. This public offering saw Newmont Mining Corporation of Canada Limited ( Newmont ) subscribe for 9.25 million shares, resulting in Newmont acquiring a 9.9% interest in Shore at the time of the offering. Summary of Quarterly Results Selected financial information of the Company for each of the last 8 fiscal quarters is as follows: Qtr 3 Qtr 2 Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1 Qtr 4 Restated Revenues (1) (000 s) 3,080 2,641 2,120 1, Net income (loss) (2) (000 s) (122,698) 45, (5,551) (1,159) (180) (1,600) (246) Net income (loss)/share (3) (0.44) (0.05) (0.01) (0.00) (0.02) (0.01) Shares outstanding (4) (000 s) 176, , , , ,951 94,395 93,682 68,539 (1) The increase in revenue in the last three quarters of 2005 and the first three quarters of 2006 is the result of having increased cash balances from the closing of equity financings in the 1 st and 4 th quarters of

11 (2) The 1 st, 3 rd and 4 th quarters of 2005 saw marked increases in operating costs primarily associated with the fair-value of stock-based compensation granted during the respective quarters. Interest revenue from cash reserves generated earnings from operations in the 1 st and 2 nd quarters of The 2 nd quarter of 2006 had significant income as the result of a future income tax recovery after the federal and provincial governments enacted reduced corporate income tax rates. In the 3 rd quarter of 2006, the Company disposed of a 40% interest in a mineral property which resulted in a loss of million net of a 55.8 million income tax recovery. (3) Basic and diluted. (4) The Company completed a public offering on March 22, 2005 resulting in the issuance of 21.2 million shares from treasury. To culminate the merger between the Company and Kensington, the Company issued an aggregate of 51.7 million common shares, representing 0.64 common shares for each issued and outstanding common share of Kensington to the former shareholders of Kensington as at October 28, The Company completed its second public offering of 2005 by issuing 17.2 million common shares on November 29, Newmont participated in this financing to retain their 9.9% interest in the Company. Other changes in the number of shares outstanding are the result of warrant and option exercises. Liquidity & Financial Resources The Company does not currently operate any producing properties and is dependent upon the issuance of new equity as well as interest income to finance its ongoing obligations and advance its exploration properties. The first and fourth quarters of 2005 have proven to be highly successful in this regard allowing the Company to fully finance the expanded 60 million pre-feasibility study on the Star Diamond Property and the recently revised 45 million FALC-JV 2006 exploration program. Upon completion of the 2006 spending relating to these programs, the Company anticipates having cash reserves of approximately 110 million to continue its exploration and development efforts. Shore s share of the 2007 anticipated budgets on both the FALC-JV and Star Properties is estimated to be 57 million. As at September 30, 2006, the Company has working capital of million as compared to million at December 31, 2005 and million at September 30, As at November 7, 2006, the Company had a total of 176,592,460 common shares issued and outstanding and 5.9 million options outstanding. In the event all options were exercised, the Company would receive a further 24.1 million however approximately 2.0 million of these options are currently out of the money. Accounting Estimates A summary of the Company s significant accounting policies is contained in Note 3 to the restated audited consolidated financial statements for the years ended December 31, 2005 and The critical accounting estimate in determining the Company s financial results relates to the recoverability of the carried amounts of mineral properties. Management periodically assesses carrying values of non-producing properties. As at September 30, 2006, the Company has not yet determined whether any of its mineral properties contain economically recoverable reserves. 10

12 Disclosure Controls and Procedures Disclosure controls and procedures, as defined by Multilateral Instrument , were evaluated by the Chief Executive Officer and Chief Financial Officer as at the end of September 30, 2006 and they have determined that such disclosure controls and procedures were effective. Related Party Transactions During the nine-month period ended September 30, 2006, management and consulting fees of 1,206,515 ( ,333) were paid to directors, officers and companies controlled by common directors; 347,025 ( ,183) of these fees was capitalized as additions to mineral properties; 452,040 ( ,433) was included as administration expense and 407,450 ( ,717) was included as consulting and professional fees expense. The fair-value of stock-based compensation related to directors and officers of the Company for the nine-month period ended September 30, 2006 was 0 (2005-2,488,444). During the nine-month period ended September 30, 2006, the Company charged 320,000 ( ,000) to Wescan Goldfields Inc. for rent of office space, administration services, and rental of equipment. Accounts receivable includes 247,591 due from Wescan Goldfields Inc. ( ,844). The above transactions were in the normal course of operations and are measured at an amount agreed to by the related parties. The fair-value of stock-based compensation was determined using the Black-Scholes model. Outlook As at November 8, 2006, the Company had approximately million in cash and cash equivalents. This will be used to complete certain aspects of the Phase II as well as Phase III of the Star Diamond Property pre-feasibility study and to fund the Company s share of the 2006 exploration program on the FALC-JV Property and the recently announced 46.2 million 2007 FALC-JV exploration program, of which Shore, through it wholly owned subsidiary, will fund approximately 27.7 million. The exploration projects on the Star Diamond Property and the FALC-JV Property will be conducted in order to assist in determining both projects viability under current economic conditions. This will entail the collection of additional exploration information, such as geological, geotechnical, geometallurgical, geochemical, assaying and other relevant information to delineate and define the properties with a sufficient level of confidence, to estimate a Mineral Resource conforming to National Instrument and Canadian Institute of Mining, Metallurgy and Petroleum ("CIM") standards. The balance of cash and cash equivalents will be used to fund various other exploration activities, acquisition and exploration of additional diamond properties (as opportunities warrant), and for general corporate matters. 11

13 Caution regarding Forward-looking Information From time to time, Shore makes written or oral forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Ontario Securities Act and the United States Private Securities Litigation Reform Act of Shore may make such statements in press releases, in other filings with Canadian regulators or the United States Securities and Exchange Commission, in reports to shareholders or in other communications. These forward-looking statements include, among others, statements with respect to Shore's objectives for the ensuing year, our medium and long-term goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions. The words "may," "could," "should," "would," "suspect," "outlook," "believe," "plan," "anticipate," "estimate," "expect," "intend," and words and expressions of similar import are intended to identify forward-looking statements. In particular, statements regarding Shore's future operations, future exploration and development activities or the anticipated results of Shore's prefeasibility study or other development plans contain forward-looking statements. All forward-looking statements and information are based on Shore's current beliefs as well as assumptions made by and information currently available to Shore concerning anticipated financial performance, business prospects, strategies, regulatory developments, development plans, exploration, development and mining activities and commitments. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, developments in world diamond markets, changes in diamond valuations, risks relating to fluctuations in the Canadian dollar and other currencies relative to the US dollar, changes in exploration, development or mining plans due to exploration results and changing budget priorities of Shore or its joint venture partners; the effects of competition in the markets in which Shore operates; the impact of changes in the laws and regulations regulating mining exploration and development; judicial or regulatory judgments and legal proceedings; operational and infrastructure risks and the additional risks described in Shore's most recently filed Annual Information Form, annual and interim MD&A and short form prospectus, and Shore's anticipation of and success in managing the foregoing risks. Shore cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Shore, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Shore does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by Shore or on our behalf. Additional Information Press releases referenced in this document can be found on SEDAR at or on the Company s website at Additional information related to the Company, including the latest available Annual Information Form, is available on SEDAR. 12

14 SHORE GOLD INC. Unaudited Interim Consolidated Financial Statements For the Nine-Month Period Ended September 30, 2006 Notice to Reader Management has compiled the unaudited consolidated financial statements of Shore Gold Inc. for the nine-month period ended September 30, 2006 (along with the comparative interim period in 2005). The Corporation s external auditors have not reviewed these statements. 13

15 Shore Gold Inc. (A Development Stage Entity) Consolidated Balance Sheets Assets September 30, December 31, (in thousands) (in thousands) Restated - Note 2 Current assets: Cash and cash equivalents 149, ,677 Receivables 3,129 5,160 Prepaids , ,425 Mineral properties (notes 4 & 5) 637, ,422 Investment in Wescan Goldfields Inc. (note 6) 1,149 1,212 Property and equipment 1, Liabilities & Shareholders Equity Current liabilities: 792, ,886 Accounts payable and accrued liabilities 17,886 14,777 Future income tax liability (note 7) 117, ,803 Shareholders equity: Share capital (note 8) 731, ,985 Contributed surplus (note 8) 19,680 39,466 Deficit (93,879) (17,145) 657, , , ,886 14

16 Shore Gold Inc. (A Development Stage Entity) Consolidated Statements of Loss and Deficit Three Months Ended Nine Months Ended September 30, September 30, (in thousands) (in thousands) (in thousands) (in thousands) Revenue Interest and other income 3, ,841 1,898 Expenses Administration 512 1,215 1,930 2,610 Consulting & professional fees ,334 1,133 Corporate development Amortization and accretion ,880 3,906 4,654 Income (loss) before the undernoted items 2,083 (1,075) 3,935 (2,756) Loss on sale of property interest (note 5) (179,900) - (179,900) - Income (loss) from Wescan Goldfields Inc. (116) (16) (63) 5 Net loss before income taxes (177,933) (1,091) (176,028) (2,751) Income tax recovery (expense) 55,235 (68) 99,294 (188) Net loss (122,698) (1,159) (76,734) (2,939) Earnings (deficit), beginning of period As previously reported (16,101) (10,434) (17,145) (8,654) Restatement (note 2(b)) 44, Earnings (deficit), restated 28,819 (10,434) (17,145) (8,654) Deficit, end of period (93,879) (11,593) (93,879) (11,593) Net loss per share Basic and diluted (0.70) (0.01) (0.44) (0.03) Weighted average number of shares outstanding (000's) 176,289 95, ,218 87,518 15

17 Shore Gold Inc. (A Development Stage Entity) Consolidated Statements of Cash Flows Cash provided by (used in): Operations: Three Months Ended Nine Months Ended September 30, September 30, (in thousands) (in thousands) (in thousands) (in thousands) Net loss (122,698) (1,159) (76,734) (2,939) Non-cash items: Depreciation and accretion Share of loss (income) in Wescan Goldfields Inc (5) Fair value of stock options expensed 33 1, ,840 Future income tax recovery (55,235) - (99,289) - Loss on sale of property interest 179, ,900 - Net change in non-cash operating working capital items: Prepaids 169 (44) 383 (137) Payables and accrued liabilities (11) 90 (169) 272 2, , Investing: Mineral properties (103,368) (12,901) (139,572) (22,451) Property and Equipment (60) (471) (764) (496) Net change in non-cash investing working capital items: Receivables 501 (555) 2,031 (58) Payables and accrued liabilities 9,235 2,966 3,278 2,378 (93,692) (10,961) (135,027) (20,627) Financing: Issue of common shares (net of issue costs) ,415 18, , ,415 18, ,933 Increase (decrease) in cash and cash equivalents (90,886) 6,743 (112,260) 118,359 Cash and cash equivalents, beginning of period 240, , ,677 28,684 Cash and cash equivalents, end of year 149, , , ,043 16

18 SHORE GOLD INC. (A Development Stage Entity) Notes to Consolidated Financial Statements (for the nine-month period ended September 30, 2006) 1. Nature of operations Shore Gold Inc. was incorporated under the Canada Business Corporations Act on April 29, Shore Gold Inc. and its subsidiaries (collectively, Shore or the Company ) are engaged primarily in the exploration for and the development, mining and sale of precious metals and gems. Substantially all of the Company s efforts are devoted to the exploration and development of its mineral properties. The Company has not earned significant revenue and is therefore, considered to be in the development stage with respect to its current mineral property holdings. 2. Restatements a) During the preparation of the Company s interim financial statements for the third quarter of 2006, an error was identified in the original assessment regarding the accounting for the merger with Kensington Resources Ltd. ( Kensington ) as originally reported in the Company s consolidated financial statements for the year ended December 31, The original accounting treatment afforded the merger with Kensington valued the transaction using the average share price of the Company s shares commencing two days prior to and ending two days subsequent to August 15, 2005, the date the merger was agreed to and announced between Shore and Kensington. This average price was used to value the common shares, options and warrants issued by Shore, to the shareholders of Kensington, on October 28, 2005, the closing date of the transaction. During the preparation of the 2006 third quarter interim financial statements, the accounting treatment of this transaction was reassessed and it was concluded that the original treatment of accounting for the transaction was incorrect and, based on the definitions of a business by the Canadian Institute of Chartered Accountants, it was determined that Kensington did not constitute a business as it was a development stage entity. As such, the merger between Shore and Kensington should have been treated as a purchase of an asset versus the purchase of a business. The result of this reinterpretation was that the transaction should have been valued using the price of the Company s shares on the closing date of 7.02 per share versus the 5.25 per share originally used. This change results in a larger value being assigned to the Company s mineral properties together with a larger future income tax liability and an increase in share capital to reflect the value of the shares, options and warrants issued as consideration for the merger with Kensington. This restatement does not impact either the consolidated statement of loss and deficit or the consolidated statement of cash flows for the year ended December 31, A summary of the effects of the aforementioned adjustments required to the December 31, 2005 balance sheets follows. b) During the second quarter of 2006, the federal and provincial governments enacted amendments to current tax legislation, which provided for a reduction in corporate tax rates. The cumulative effect of the change on Shore s future income tax liability was a reduction of 44,920,000 resulting in income of the same amount. The impact on these consolidated financial statements is an increase to opening retained earnings of 44,920,000 from what was previously reported in the unaudited consolidated financial statements for the period ended June 30, Consolidated Balance Sheet for the Year Ended December 31, 2005 As originally reported (in thousands) Adjustments for item (a) As restated Assets: Mineral Properties 507, , ,422 Liabilities: Future Income tax liability 147,649 69, ,803 Shareholders equity: Share Capital 600,447 92, ,985 Contributed Surplus 31,024 8,442 39,466 17

19 3. General These unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and follow the same accounting principles and methods of application as the most recent annual audited consolidated financial statements. These consolidated financial statements should be read in conjunction with the Company s restated annual audited consolidated financial statements filed on SEDAR. Certain prior year balances have been reclassified to conform to the current financial statement presentation. 4. Mineral properties Mineral properties for the nine-month period ended September 30, 2006 is made up of the following: Fort à la Corne Property Other Diamond Properties Star Property Total (in thousands) Balance - December 31, , , ,422 Expenditures during 2006 Acquisition & staking - 77,071-77,071 Loss on disposal of property interest (note 4) - (179,900) - (179,900) Exploration: Equipment 1, ,489 Personnel 5, ,805 Recording fees & permits Drilling/Pre feasibility 40,763 12,239-53,002 Geophysical Sampling/assaying Travel Balance September 30, , , , Purchase and sale of property interest On September 29, 2006, Shore, through it 100% owned subsidiary Kensington Resources Ltd., completed a series of transactions to affect the purchase of the remaining participating interest in the Fort à la Corne Property for million. Concurrent to these transactions, the Company also sold a 40% interest in the property for 170.4, of which 0.1 was assigned to net identifiable assets. As a result of these transactions, the Company increased its ownership interest in the Fort à la Corne Property by % to 60% for 77.1 million, including transaction costs. The sale transaction was accounted for as follows: (in millions) Proceeds on sale of property interest Less carrying value of 40% share of property interest Loss on disposition before future income tax recovery (179.9) Future income tax recovery 55.8 Loss on sale of property interest (124.1) Due to the timing of these transactions certain costs were estimated and as a result the final determination of values are subject to change. 6. Investment in Wescan Goldfields Inc. The Company accounts for its 17.1% investment in Wescan Goldfields Inc. ( Wescan ) on an equity basis. Wescan is publicly traded on the TSX Venture exchange. At September 30, 2006, Shore and its wholly owned subsidiaries held 8,474,086 (2005 8,470,105) shares of Wescan. The market value of the Company s equity interest in Wescan at September 30, 2006 is 3,200,000 (2005-4,300,000). 18

20 7. Future income tax liability (in thousands) Balance - December 31, 2005 (note 2) 216,803 Recovery - rate change (44,920) Recovery - disposal of property interest (note 4) (55,769) Future income tax expense 1,400 Balance September 30, ,514 During the nine-month period ended September 30, 2006, the federal and provincial governments enacted amendments to current tax legislation which provided for a reduction in corporate tax rates. The cumulative effect of the change on the Company s future income tax liability was a reduction of 44,920,000. The future income tax expense is the result of the Company generating income before the loss from the disposal of the property interest. 8. Share capital Authorized The authorized share capital of the Company consists of unlimited common shares. Issued and outstanding Common Shares Warrants Amount (in thousands) Balance - December 31, 2005 (note 2) 170,515 5, ,985 Warrants exercised (a) 400 (625) 2,519 Broker warrants exercised (b) 296-2,010 Options exercised (c) 1,410-8,201 Issue costs Balance - March 31, ,621 4, ,715 Warrants exercised/expired (a) 3,066 (4,809) 22,259 Broker warrants exercised (b) Options exercised (c) 304-1,378 Issue costs Balance June 30, , ,251 Warrants exercised/expired (a) Broker warrants exercised (b) Options exercised (c) 287-1,110 Issue costs Balance September 30, , ,361 a) Warrants As part of the merger between the Company and Kensington Resources Ltd. ( Kensington ), each outstanding warrant of Kensington became a warrant of the Company. At October 28, 2005 there were 5,434,358 warrants of Kensington which entitled the holder to 0.64 shares of Shore for a total of 3,477,989 shares of Shore being issued upon exercise. During the first two quarters of 2006, 5,416,038 warrants were exercised that converted to 3,466,264 shares of Shore being issued and 18,320 expired. A summary of outstanding warrants (in thousands) is as follows: Warrants Average Price Balance - December 31, , Expiry Dates March 24, 2006 to May 6, 2006 Exercised (625) 1.89 Balance - March 31, , May 6, 2006 Exercised (4,791) 2.50 May 6, 2006 Expired (18) 2.50 May 6, 2006 Balance - June 30 and September 30,

21 b) Broker warrants As part of the merger with Kensington, each outstanding broker warrant of Kensington became a broker warrant of the Company. At October 28, 2005 there were 543,579 broker warrants and attached underlying warrants of 162,000 of Kensington which entitled the holder to 347,890 and 103,680 shares of Shore being issued upon exercise, respectively. During the first two quarters of 2006, 325,012 broker warrants and 103,680 underlying warrants were exercised. A summary of the outstanding broker warrants (in thousands) is as follows: Broker Warrants Average Price Underlying Warrants Average Price Balance - December 31, Exercised (219) 3.28 (77) 3.91 Balance - March 31, Exercised (106) 3.28 (27) 3.91 Balance June 30 and September 30, Kensington broker warrants and underlying warrants were scheduled to expire May 6, c) Share option plan The Company has established a share option plan whereby options may be granted to directors, officers, consultants and employees to purchase common shares of the Company. As at September 30, 2006, the number of shares reserved under the plan is 12,612,920. Options granted have an exercise price of not less than the closing price quoted on the Toronto Stock Exchange for the common shares of Shore on the trading day prior to the date on which the option is granted. Options vest six to twelve months after grant date and have varying expiration dates between 4 and 5 years from the date of the grant of the options. The fair value of stock options issued in the nine-month period was estimated using the Black-Scholes option-pricing model with the following assumptions: 5 year weighted average expected option life, no expected forfeiture rate, dividend yield of 0.0%, a volatility factor ranging from 54.9% to 63.1% ( % to 62.7%) and a risk free rate ranging from 4.18% to 4.50% ( %). During the quarter ended September 30, 2006, the Company granted 135,000 ( ,000) options to officers, directors, consultants and employees at an average strike price of 4.79 ( ). During the nine-months ended September 30, 2006, the Company granted 307,000 (2005 1,671,000) options to officers, directors, consultants and employees at an average strike price of 5.68 ( ). The fair value in respect of stock options granted for the quarter ended September 30, 2006 was 342,707 (2005 2,052,485). The amount that vested during the quarter was 166,942 (2005-2,052,485). Of this amount 134,009 ( ,295) was capitalized as an addition to mineral properties and 32,933 (2005 1,375,190) was expensed. The fair value in respect of stock options granted for the nine-month period ended September 30, 2006 was 881,507 (2005-4,193,602). The amount that vested during the nine-month period was 325,039 (2005 4,193,602). Of this amount 185,027 (2005 1,353,823) was capitalized as an addition to mineral properties and 140,012 (2005 2,839,779) was expensed. For options outstanding at September 30, 2006, weighted average exercise prices are as follows: Options Average Price Balance December 31, ,901, Granted 20, Exercised (1,409,680) 1.77 Balance March 31, ,511, Granted 152, Exercised (303,800) 2.22 Expired (62,000) 7.13 Balance June 30, ,297, Granted 135, Exercised (287,000) 1.62 Expired (135,000) 6.82 Balance September 30, ,010, The options expire between the dates of October 2006 to August

22 d) Contributed surplus The fair-value of certain stock options, warrants and broker warrants have been valued using the Black- Scholes option-pricing model. The fair-value of these securities is added to contributed surplus over the vesting period of the securities. Upon exercise, the corresponding amount of contributed surplus related to the security is removed from contributed surplus and added to share capital. A summary of the contributed surplus activity is as follows: (in thousands) Balance December 31, 2005 (note 2) 39,466 Fair value of options vested 90 Less: contributed surplus related to options exercised (5,702) Less: contributed surplus related to warrants exercised (1,341) Less: contributed surplus related to broker warrants exercised (992) Balance March 31, ,521 Fair value of options vested 68 Less: contributed surplus related to options exercised (704) Less: contributed surplus related to warrants exercised (10,281) Less: contributed surplus related to broker warrants exercised (446) Balance June 30, ,158 Fair value of options vested 167 Less: contributed surplus related to options exercised (645) Balance September 30, , Related party transactions During the nine-month period ended September 30, 2006, management and consulting fees of 1,206,515 ( ,333) were paid to directors, officers and companies controlled by common directors; 347,025 ( ,183) of these fees was capitalized as additions to mineral properties; 452,040 ( ,433) was included as administration expense and 407,450 ( ,717) was included as consulting and professional fees expense. The fair-value of stock-based compensation related to directors and officers of the Company for the nine-month period ended September 30, 2006 was 0 (2005-2,488,444). During the nine-month period ended September 30, 2006, the Company charged 320,000 ( ,000) to Wescan Goldfields Inc. for rent of office space, administration services, and rental of equipment. Accounts receivable includes 247,591 due from Wescan Goldfields Inc. ( ,844). The above transactions were in the normal course of operations and are measured at an amount agreed to by the related parties. The fair-value of stock-based compensation was determined using the Black-Scholes model. 21

23 SHORE GOLD INC. CORPORATE INFORMATION Head Office 300, 224 4th Ave. S. Saskatoon, Saskatchewan Canada S7K 5M5 Tel: (306) Fax: (306) Directors Harvey J. Bay Arnie E. Hillier Kenneth E. MacNeill Robert A. McCallum A. Neil McMillan Brian M. Menell James R. Rothwell William E. Stanley Officers Kenneth E. MacNeill President, C.E.O. Harvey J. Bay C.O.O., C.F.O. Garnet M. Schulhauser Corporate Secretary George H. Read Senior Vice President Exploration and Development Pieter I. Du Plessis Vice President Exploration Solicitors Bennett Jones LLP Calgary, Alberta Auditors KPMG LLP Saskatoon, Saskatchewan Bank Canadian Western Bank Saskatoon, Saskatchewan Exchange Listing TSX 176,592,460 common shares issued and outstanding as at November 8, 2006 Trading Symbol: SGF Website 22