(an exploration of stage company) Consolidated Financial Statements
May 9, 2013 Independent Auditor s Report To the Shareholders of Nortec Minerals Corp. We have audited the accompanying consolidated financial statements of Nortec Minerals Corp. and its subsidiaries, which comprise the consolidated balance sheets as at and the consolidated statements of net loss and comprehensive loss, changes in shareholders equity and statements of cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: +1 604 806 7000, F: +1 604 806 7806 PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Nortec Minerals Corp. and its subsidiaries as at December 31, 2012 and December 31, 2011 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. (Signed) PricewaterhouseCoopers LLP Chartered Accountants
Consolidated Balance Sheets As at Note 2012 Assets Current assets Cash and cash equivalents 129,104 841,027 Short-term investments 4 1,517,654 1,508,529 Other receivables and deposits 5 77,175 209,784 Asset of disposal group classified as held for sale 7(a) 55,000 - Marketable securities 4(b) - 332,082 Prepaid expenses 42,295 17,695 2011 1,821,228 2,909,117 Other investments 4 205,980 - Equipment 6 39,598 44,825 Exploration and evaluation assets 7 7,104,883 8,790,652 Liabilities 9,171,689 11,744,594 Current liabilities Accounts payable and accrued liabilities 509,800 274,093 Due to related parties 36,339 149,250 Shareholders Equity 546,139 423,343 Share capital 8 17,924,712 17,507,212 Contributed surplus 4,307,994 4,607,994 Accumulated other comprehensive loss - (167,918) Accumulated deficit (16,627,985) (10,626,037) 5,604,721 11,321,251 Non-controlling interests 3,020,829 - Nature of operations and liquidity risk 1 8,625,550 11,321,251 9,171,689 11,744,594 Subsequent events 17 Approved by the Board of Directors (signed) Mohan R. Vulimiri Director (signed) Balraj Mann Director The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Net Loss and Comprehensive Loss For the years ended General and administrative expenses Accounting and audit 89,790 67,549 Advertising and promotion 48,490 122,870 Consulting fees 11,100 16,321 Depreciation 15,413 20,026 Insurance 14,245 14,139 Legal fees 20,130 30,923 Management consulting fees 94,500 126,750 Office rental and storage 82,731 76,790 Office services 21,073 23,618 Property research and analysis 114,416 96,978 Regulatory compliance 21,246 12,387 Shareholder information 9,285 12,532 Technical services 8,700 - Telecommunications 7,515 10,361 Transfer agent fees 12,348 9,530 Travel and accommodation 3,994 30,106 Wages and salaries 472,282 439,201 Loss from operations 1,047,258 1,110,081 Other (income) and expenses Foreign exchange loss 66,889 6,681 Interest income (22,364) (8,633) Loss on marketable securities 580,463 - Write off of exploration and evaluation assets 7 4,404,873 - Note 2012 2011 5,029,861 (1,952) Net loss for the year 6,077,119 1,108,129 Net loss attributable to: Shareholders of the Company 6,001,948 1,108,129 Non-controlling interest 75,171 - Net loss for the year 6,077,119 1,108,129 Loss per share - basic and diluted 0.04 0.01 Weighted average number of common shares outstanding 138,309,817 131,887,448 Net loss for the year 6,077,119 1,108,129 Other comprehensive loss Fair value of marketable securities 412,545 167,918 Net comprehensive loss for the year 6,489,664 1,276,047 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Changes in Shareholders Equity For the years ended Common shares. Share capital Contributed surplus Accumulated other comprehensive loss Accumulated deficit Total Noncontrolling interests Total shareholder s equity Balance - December 31, 2010 122,257,339 14,593,582 4,389,964 - (9,517,908) 9,465,638-9,465,638 Shares issued on exercise of warrants 12,933,300 2,591,240 (4,580) - - 2,586,660-2,586,660 Shares issued on exercise of options 550,000 187,390 (77,390) - - 110,000-110,000 Shares issued for mineral property acquisition 900,000 135,000 - - - 135,000-135,000 Other comprehensive loss - - - (167,918) - (167,918) - (167,918) Shares to be issued (note 8(b)) - - 300,000 - - 300,000-300,000 Net loss for the year - - - - (1,108,129) (1,108,129) - (1,108,129) Balance - December 31, 2011 136,640,639 17,507,212 4,607,994 (167,918) (10,626,037) 11,321,251-11,321,251 Shares issued for mineral property acquisition 3,500,000 417,500 (300,000) - - 117,500-117,500 Fair value of marketable securities to date of acquisition of control - - - (412,545) - (412,545) - (412,545) Items subsequently reclassified to net loss - - - 580,463-580,463-580,463 Non-controlling interest at acquisition - - - - - - 3,096,000 3,096,000 Net loss for the year - - - - (6,001,948) (6,001,948) (75,171) (6,077,119) Balance - December 31, 2012 140,140,639 17,924,712 4,307,994 - (16,627,985) 5,604,721 3,020,829 8,625,550 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows For the years ended 2012 2011 Cash from operating activities Net loss for the year (6,077,119) (1,108,129) Items not affecting cash Depreciation 15,413 23,944 Write off of exploration and evaluation assets 7 4,404,873 - Unrealized foreign exchange loss 66,889 - Loss of marketable securities 580,463 - Interest income (4,882) - (1,014,363) (1,084,185) Changes in non-cash working capital 14 44,073 (63,621) (970,290) (1,147,806) Cash flows from investing activities Exploration and evaluation asset - net of recoveries 246,457 718,529 Purchase of equipment (10,195) (5,804) Short-term investment - (1,508,529) Acquisition of other investments 4(c) (205,980) - 30,282 (795,804) Cash flows from financing activities Issuance of share capital - net proceeds - 2,696,660 (Decrease) increase in cash (940,008) 753,050 Cash acquired 3 228,085 - Cash - Beginning of year 841,027 87,977 Cash - End of year 129,104 841,027 The accompanying notes are an integral part of these consolidated financial statements.
1 Nature of operations and liquidity risk Nortec Minerals Corp. (the Company ) was incorporated on June 1, 1999 in the province of British Columbia and is engaged in the acquisition and exploration of mineral properties. The Company is listed on the TSX Venture Exchange, having the symbol NVT.V. At December 31, 2012, the Company held 45% equity interest in Finore and included the results of operations of Finore from the date of acquisition of de facto control in the consolidated financial statements (note 3). The Company s corporate head office is located at Suite 875-555 Burrard Street, Vancouver, British Columbia, Canada, V7X 1M8. Liquidity risk is the risk that the Company will be unable to meet its obligations as they become due. As the Company is in the exploration stage, no mineral producing revenue has been generated to date. The ability of the Company to meet its obligations and continue the exploration and development of its mineral properties is dependent upon its ability to continue to raise adequate financing. Historically, operating capital and exploration requirements have been funded primarily from equity financing, joint ventures, disposition of mineral properties and investments. There can be no assurance that such financing will be available to the Company in the amount required at any time or for any period or, if available, that it can be obtained on terms satisfactory to the Company. Based on the amount of funding raised, the Company s exploration program may be tailored accordingly. 2 Significant accounting policies a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). The consolidated financial statements have been prepared under the historical cost convention, as modified by the available-for-sale financial assets. The accounting policies applied in these consolidated financial statements are based on IFRS effective for the year ended December 31, 2012. The Board of Directors authorized these financial statements for issue on May 9, 2013. b) Basis of measurement The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated. (1)
c) Critical accounting estimates and judgments The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on the historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. Critical accounting estimates and assumptions Critical accounting estimates are estimates and assumptions made by management that may result in material adjustments to the carrying amount of assets and liabilities within the next financial year. Consolidation of Finore On September 10, 2012 the Company received an additional 27 million common shares in Finore as per the terms of the amended Option Agreement. Management examined the guidance under International Accounting Standards ( IAS ) 27, Consolidated and Separate Financial Statements, specifically as it applies to the assessment of control when a company owns less than one-half of the voting power. Based on the examination of IAS 27, the Company concluded based on the existing Option Agreement with Finore and the Company s voting control over Finore, it should fully consolidate Finore at the time when the voting interest increased to 45%. Management utilized estimates to determine the fair value of the noncontrolling interest (note 3). The value of the non-controlling interest included estimates of the fair value of the interest held by the non-controlling interest holders and estimates of expenditures incurred to date and expected under the agreement. Capitalization of exploration and evaluation assets The application of the Company s accounting policy for exploration and evaluation expenditure requires judgement in determining whether it is likely that future economic benefits will flow 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 expenditure is capitalized, information becomes available suggesting that the recovery of the expenditure is unlikely, the amount capitalized is written off in the profit or loss in the period the new information becomes available. Impairment of non-financial assets The Company reviews and evaluates its property, including exploration and evaluation assets, plant and equipment for indications of impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable or at least at the end of each reporting period. The asset's recoverable amount is estimated if an indication of impairment exists. (2)
Impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount. Management also considered other factors such as: i) Whether substantive expenditure for further exploration for evaluation of mineral resource in the specific area is neither budgeted nor planned; ii) Exploration for and evaluation of mineral resource in the specific area have not led to discovery of commercially viable quantities of mineral resource and the entity has decided to discontinue such activities in the specific area. At December 31, 2012, management examined the factors noted above and concluded that certain exploration and evaluation assets were impaired (note 7). Fair value of other investments The fair value of other investments is determined using valuation techniques. The Company uses its estimates and judgment to select a variety of methods as prescribed under the relevant accounting standards. At year-end, management utilized recent financing transaction as a metric in determining the fair value of other investments. d) Basis of consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Subsidiaries are those entities over which the group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of voting rights. The group also assesses existence of control where it does not have more than 50% of voting power but are able to govern the financial and operating policies by virtue of de facto control. De facto control may arise in circumstances where the size of the group s voting rights relative to the size and dispersion of holdings of other shareholders gives the group the power to govern the financial and operating policies. Subsidiaries are fully consolidated from the date in which control is transferred to the group. They are recorded from the date that control ceases. Identifiable assets and liabilities and contingent liabilities are acquired in a business combination and initially at their fair value. At the acquisition date, the group recognized any non-controlling interest in the acquired entity either at fair value or at the non-controlling interest proportionate share of recognized amounts of acquirer s identifiable net assets. All intercompany transaction and balances are eliminated on consolidation. (3)
The subsidiaries of the Company are as follows: Portion of ownership interest and voting power held Principal activity Place of incorporation December 31, 2012 December 31, 2011 Name of subsidiary Nortec Ecuador S.A ( NESA ) Nortec Minerals Oy ( NMO ) Mineral Property Exploration Ecuador 100% 100% Mineral Property Exploration Finland 100% 100% Tammela Minerals Oy ( TMO ) Mineral Property Exploration Finland 100% 100% Fennor Minerals Corp. ( FMC ) Mineral Property Exploration Canada 100% 100% Finore Mining Inc. ( Finore ) e) Functional and presentation currency Mineral Property Exploration Canada 45% 4% The Company s and its subsidiaries functional currency is the Canadian Dollar ( CAD ). The consolidated financial statements are presented in CAD. All amounts in these consolidated financial statements are rounded to the nearest dollar. f) Exploration and evaluation assets Exploration and evaluation expenditures are capitalized once the legal right to explore a property has been acquired. Exploration and evaluation assets are recorded at cost less accumulated impairment losses. Direct costs related to the acquisition, exploration and evaluation of mineral properties are capitalized until the commercial viability of the asset is established, at which time the capitalized costs are reclassified to mineral properties under development. To the extent that the expenditures are spent to establish ore reserves within the rights to explore, the Company will consider those costs as intangible assets in nature. The depreciation of a capital asset in connection with exploring or evaluating a property of this nature will be included in the cost of the intangible asset. When a project is deemed to no longer have commercially viable prospects to the Company, exploration and evaluation expenditures in respect of the project are deemed to be impaired. As a result, those exploration and expenditure costs, in excess of estimated recoveries, are written off to the statement of net loss and comprehensive loss. (4)
Management reviews the facts and circumstances to determine the carrying amount of the exploration and evaluation assets exceeds their recoverable amount on a regular basis. If the facts and circumstances suggest the carrying value exceeds the recoverable amount, the Company will perform an impairment test on the property in accordance with the provisions of IAS 36. Exploration stage assets and development stage assets are considered separate CGUs for impairment testing purposes. The amount shown for mineral properties does not necessarily represent present or future values. Recoverability is dependent upon the discovery of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the development, and future profitable production or proceeds from the disposition thereof. g) Foreign currency translation Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of foreign currency transactions and from the translation at the exchange rates of monetary assets and liabilities denominated in currencies other than the functional currency are recognized in the consolidated statement of net loss. h) Cash and cash equivalents The Company considers cash and cash equivalents to include amounts held in banks and highly liquid investments with remaining maturities at point of purchase of 90 days or less. i) Deferred income taxes Deferred tax assets and liabilities are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the substantive enactment occurs. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and when the Company intends to settle its current tax assets and liabilities on a net basis. (5)
j) Equipment Office and exploration equipment is recorded at cost less accumulated depreciation. Where an item of equipment comprises significant components with different useful lives, the components are accounted for as separate items of equipment. The Company depreciates its assets as follows: Category Method Useful life Computer hardware Straight-line 3 years Computer software Straight-line 7 years Exploration equipment Straight-line 4 years Furniture Straight-line 5 years Vehicle Straight-line 5 years The depreciation method, useful life and residual values are assessed annually. k) Loss per share Basic loss per share is computed by dividing the net loss attributable to common shareholders by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share is computed similar to basic loss per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the reporting periods. Diluted loss per share is not separately presented, as the effect of securities exercisable into common shares would reduce the amount presented as loss per share. l) Share-based payments The cost of incentive share options and other equity-settled share-based compensation and payment arrangements is recorded based on the estimated fair-value at the grant date and charged to the consolidated statement of net loss over the vesting period. Where incentive share options are subject to vesting, each vesting tranche is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period by a charge to the consolidated statement of net loss, with a corresponding increase to contributed surplus based on the number of awards expected to vest. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. (6)
m) Accounting policies issued but not effective as at December 31, 2012 IFRS 9 - Financial Instruments The new standard is a partial replacement of IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Application of IFRS 9 is mandatory for annual periods beginning on or after January 1, 2015. This standard has not yet been adopted by the Company, and the Company has not yet completed the process of assessing the impact that it will have on its financial statements. IFRS 7 - Financial Instruments, Disclosures IFRS 7, Financial Instruments, Disclosures, requires more extensive quantitative disclosures for financial instruments that are offset in the balance sheet or that are subject to enforceable master netting similar arrangements; IFRS 10 - Consolidated Financial Statements IFRS 10, Consolidated Financial Statements, builds on existing principles and standards and identifies the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company; IFRS 11 - Joint Arrangements IFRS 11, Joint Arrangements, establishes the principles for financial reporting by entities when they have an interest in arrangements that are jointly controlled; IFRS 13 - Fair Value Measurement IFRS 13, Fair Value Measurement, defines fair value and requires disclosure about fair value measurements and provides a framework for measuring fair value when it is required or permitted within the IFRS standards. Each standard is effective for annual periods beginning on or after January 1, 2013. These standards have not yet been adopted by the Company, and the Company has not yet completed the process of assessing the impact that they will have on its financial statements. (7)
3 Acquisition of control of Finore On September 10, 2012, the Company received an additional 27 million common shares of Finore in exchange for a 70% interest in the Company's LK Property in Finland. As a result of the transaction, the Company owned 45% of the shares of Finore and concluded, after evaluating additional indicators, that it had de facto control of Finore as of the date of the transaction. Accordingly, it has accounted for the transaction as an acquisition of control under IFRS 3. The following table summarizes the fair value of identifiable assets and liabilities at the acquisition date, as well as the value of the consideration. Net assets acquired Cash 228,085 Exploration and evaluation assets 3,024,499 Liabilities assumed (203,471) Other assets 46,887 Total identifiable net assets 3,096,000 Consideration Non-controlling interest (3,096,000) Included in the fair value estimate of exploration and evaluation assets is a fair value estimate of the modification of the option agreement, the now 70% option agreement and the fair value estimate of the reacquired rights by the Company. 4 Short-term investment and marketable securities a) Short-term investment On March 14th, 2011, the Company purchased a term deposit for 500,000. The term deposit accrued interest at 1.05% per annum, is redeemable early at the option of the Company and matures March 12th 2012. On June 30, 2011, the Company purchased a term deposit for 500,000 with interest at 1.05% per annum, which was redeemable early at the option of the Company and matured June 22, 2012. On September 14, 2011, the Company purchased a term deposit for 500,000 with interest at 1.05% per annum which was redeemable early at the option of the Company and matured in September 12, 2012. These were reinvested at December 31, 2012 bearing interest at 1.95% per annum maturing September 12, 2013. The balance of 1,517,654 as at December 31, 2012 (2011-1,508,529) includes accrued interest of 4,882 (2011-8,529). The Company also has 11,500 in a guaranteed investment certificate. (8)
b) Marketable securities As at December 31, 2011, marketable securities are 1,660,408 shares of Finore valued at 332,082 received as part of the option payment on the LK Property (note 7(c)). An additional 1,566,800 shares were received on March 6, 2012. Prior to the acquisition of control on September 10, 2012 (note 3), the shares held in Finore were recorded as an available-for-sale investments that were fair valued with gains or losses arising from re-measurement each reporting period recorded in other comprehensive loss. On acquisition of de facto control of Finore, cumulative losses of 580,463 were recorded in the consolidated statement of loss. c) Other investments The other investments are 200,000 common shares of The Golden Rule Ltd. ( Golden Rule ). Golden Rule explores gold properties in the Republic of Guinea, Africa. The registered office of Golden Rule is in Hong Kong. Management estimates the fair value of the investment at December 31, 2012 to be 205,980. 5 Other receivables and deposits Due from Finore (a) a - 109,419 Credit card deposit 36,851 36,732 HST/VAT receivable and other 40,324 63,633 a) Due from Finore Note 2012 2011 77,175 209,784 The Company s subsidiary NMO previously provided certain exploration services for Finore (note 3). (9)
6 Equipment Vehicle Computer equipment Furniture Exploration equipment Total Balance at December 31, 2010 14,575 92,718 23,218 8,502 139,013 Additions - 5,804 - - 5,804 Disposals - (2,446) - - (2,446) Balance at December 31, 2011 14,575 96,076 23,218 8,502 142,371 Additions - 10,185 - - 10,185 Balance at December 31, 2012 14,575 106,261 23,218 8,502 152,556 Balance at December 31, 2010 11,721 51,383 11,010 1,934 76,048 Depreciation 2,460 15,950 4,076 1,459 23,945 Disposals - (2,447) - - (2,447) Balance at December 31, 2011 14,181 64,886 15,086 3,393 97,546 Depreciation 394 9,920 4,076 1,022 15,412 Balance at December 31, 2012 14,575 74,806 19,162 4,415 112,958 Carrying amounts Balance at December 31, 2010 2,854 41,335 12,208 6,568 62,965 Balance at December 31, 2011 394 31,190 8,132 5,109 44,825 Balance at December 31, 2012-31,455 4,056 4,087 39,598 (10)
7 Exploration and evaluation assets TL Property, Labrador Ganarin Property, Ecuador Karhujupukka Property Finland Seinajoki Property Finland LK Property, Finland Tammela Property, Finland As at December 31, 2010 2,744,279 1,425,740-456,730 4,790,577 65,044 9,482,370 Additions Explorations costs Administrative - 35,220-2,421 66,738 6,310 110,689 Project management fees - - - 1,332 13,150-14,482 Geological - 7,708-1042 51,166 386 60,302 Geophysical survey - - - - 206,915 6,933 213,848 Metallurgical consulting fees - - - - 13,775-13,775 Drilling - - - - 157,048-157,048 Assay - - - 7,724 13,251-20,975 Camp expense - 11,689-3,410 15,648-30,747 Travel - - - 1,241 28,405-29,646 IVA sales tax - 8,932 - - - - 8,932 Option payments and cost recoveries - - - - (1,828,417) - (1,828,417) Acquisition costs - - - 176,255 300,000-476,255 As at December 31, 2011 2,744,279 1,489,289-650,155 3,828,256 78,673 8,790,652 Additions Explorations costs Administrative office expenses - 18,632-35 37,336 569 56,572 Assay - - - 22,099 1,898-23,997 Camp expenses - 1,600-2,583 31,832-36,015 Community relations - - - - 937-937 Geological - 8,736-5,247 - - 13,983 Geophysical survey and mapping - - 113,231 12,421 351,622-477,274 Government fees, licenses and permits - 20,477 4,133 2,501 250 96 27,457 Landowner costs - - - - 37,603-37,603 Professional fees - 1,903 - - 22,729 2,369 27,001 Project management fees - - 375 41,094 - - 41,469 Drilling - - - 234,500 930,113-1,164,613 Travel - - - 2,311 78,027-80,338 IVA Sales tax - 9,718-22,209 - - 31,927 Option payments and cost recoveries - - - - (2,387,081) - (2,387,081) Acquisition costs - - 47,500 70,000 3,024,499 * - 3,141,999 Write off of properties - (1,550,355) (165,239) - - - (1,715,594) Assets held for disposal (2,744,279) - - - - - (2,744,279) As at December 31, 2012 - - - 1,065,155 5,958,021 81,707 7,104,883 Total *The acquisition cost relating to the LK Property is described note 3. a) TL Property, Labrador The Company has earned a 51% interest in the TL Property by completing initial exploration work as per the option agreement. Dependent on the level of participation by the optionor the Company has the option to earn up to a 100% interest in the TL property by issuing an additional 400,000 common shares and incurring an additional 10,000,000 in cumulative exploration expenditures over a ten-year period, and granting a 2.5% net smelter return to the optionor. (11)
On June 25, 2009, the Company issued a further 200,000 common shares of the Company to have the option to acquire a further interest in the TL Property. The Company now has the option to incur additional exploration expenditures in the amount of 3,000,000 within two years to earn a further 14% working interest in the property for an aggregate 65% interest. At the expiry of this two-year period, the Company will have the option to earn a further 10% by incurring additional exploration expenditures in the amount of 2,000,000 within one year for an aggregate 75% interest. If the optionor elects not to participate at the 25% working interest level, the Company has the option to earn a further 15% by issuing a further 200,000 shares and incurring additional are 5,000,000 exploration expenditures within a three-year period for an aggregate 90% interest. Subsequent to the year-end, the Company entered into a Letter Agreement with Vulcan Minerals Inc. ( Vulcan ) to sell its interest in the TL Property. The consideration of the sale of the TL Property is 1,000,000 fully paid and non-assessable common shares in the capital of Vulcan, subject to regulatory hold periods, with Vulcan having a first right of refusal to purchase the Consideration Shares from the Company. Vulcan shall grant to the Company a 1% net smelter royalty in the TL Property with buyback provision on a 0.5% of the royalty for 1,000,000, with cumulative royalty of 0.5% or 1% to be capped at 3,000,000 depending on the buy-back provision. Based on the uncertainty surrounding the timing of expected cash flows, management estimates the amount to be nil at year-end. As at year-end, the Company has plans in place to dispose of the TL Property for consideration of 1,000,000 common shares of Vulcan valued at 55,000. Accordingly, at December 31, 2012 the property is recorded as an asset of disposal group classified as held for sale. b) Ganarin Property, Ecuador On April 18, 2005 the Company entered into an option agreement to acquire a 49% undivided interest in the Ganarin Property consisting of the Ganarin and Ganarin II mineral concessions, located near the town of Santa Isabel, Southern Ecuador. The Company, at its option, may earn a 49% interest by making cash payments, incurring minimum exploration expenditures and issuing common shares as follows: Option payments US Shares Exploration expenditures US TSX approval May 4, 2005 25,000 100,000 - On or before May 4, 2006-200,000 250,000 On or before May 4, 2005 * ** - 200,000 250,000 On or before May 4, 2006 * ** - 250,000 500,000 On or before May 4, 2012-250,000 500,000 25,000 1,000,000 1,500,000 * Paid ** Issued (12)
During December of 2012, the Board of Directors approved the closure of the operations in Ecuador and recorded an impairment loss in the amount of 1,550,355. c) LK Property, Finland formally known as Kaukua Property, Finland On July 29, 2008, the Company earned a 70% interest in the Kaukua platinum, palladium, gold property in northeastern Finland by making option payments of 190,000 and incurring exploration expenditures of 600,000 over three years from the date of the option agreement. On September 4, 2009, the Company earned the remaining 30% interest in the Kaukua property in exchange for outstanding VAT refund claims allowable on Kaukua exploration expenditures of 269,076 and a 2% Net Smelter Royalty on any future production. In October 2009, the Company acquired the nearby Haukiaho palladium, platinum, gold, copper and nickel property in northern Finland in exchange for ten million common shares of the Company. The transaction was to be completed in two Closings. The First Closing was completed on October 21, 2009 when the Company issued eight million common shares. The Company recorded this transaction at the share price of 0.15 being the closing price of the Company s shares on October 21, 2009, for a total value of 1,200,000. The Company issued the remaining two million common shares in July 2012. The Company has grouped the Haukiaho and Kaukua properties together and on December 1, 2009 the Company announced the project name LK Property. On July 27, 2011, the Company announced that it had signed a binding Letter of Intent ( LOI ) with Otterburn Ventures Inc. which subsequently changed its name to Finore Mining Inc. ( Finore ). The LOI gives Finore the option to earn up to an 80% interest the LK Property. Under the terms of the LOI, Finore could earn an 80% interest in the LK Project on payment of 10,500,000 in cash and securities to the Company and by expending 10,000,000 in exploration work within three years of signing the Option Agreement ( OA ). The effective date of the OA was within five business days after receipt of both CNSX and TSX Venture Exchange approval. The TSX Venture Exchange and Canadian National Securities Exchange approval was received on September 6, 2011. (13)
The original terms of the Finore option agreement are summarized as follows: Key dates Cash Shares Exploration expenditures Earned interest Initial 49% July 27, 2011 100,000 * - - - September 12, 2011 900,000 * 500,000 *** - - March 6, 2012 1,000,000 * 500,000 *** - - September 6, 2012 1,250,000 500,000 2,000,000 - March 6, 2013 1,250,000 500,000 - - September 6, 2013 - - 3,000,000-4,500,000 2,000,000 5,000,000 49% Additional 31% September 6, 2015 3,000,000 1,000,000 5,000,000 31% 7,500,000 3,000,000 10,000,000 80% * Received ** The optionor will issue the equivalent amount of common shares based on the volume weighted average closing market price of the optionor s common shares over twenty (20) consecutive trading days immediately prior to the key dates applying the maximum discount allowed of 25% by the CNSX. On September 6, 2012, the Company announced that it had agreed to amend the original option agreement of August 30, 2011. Under the terms of the amended agreement dated September 10, 2012, Finore can earn a 70% interest in the LK Project by issuing 27,000,000 common shares of Finore to the Company (received September 17, 2012). In addition, Finore has agreed to pay all outstanding balances owed for exploration work completed to date within sixty days of the signing of the amended agreement. The parties have agreed to extend the date to January 10, 2013. As a result of the amended terms and condition, the Company was considered to have control in Finore and has consolidated the interest in Finore from the date of acquisition of control, September 10, 2012 (note 3). Finore has also agreed that upon earning the 70% Interest it shall use its best efforts to raise new funding of 2,500,000 Euros as soon as possible for ongoing exploration programs on the LK Property. The 2,500,000 Euros is required to be spent prior to the formation of the joint venture (note 17). Subsequent to the year-end (note 17), the Company granted Finore an option to earn a 100% interest in the LK Property. (14)
d) Tammela Property, Finland In 2009, the Company was granted two lithium claim reservations by the Finland Ministry of Employment and the Economy in southwest Finland, known as Kietyonmaki Lithium Prospect and Hirvikallio Lithium Prospect collectively known as the Tammela Property. e) Seinajoki Property, Finland On September 22, 2009, the Company announced that it will enter into a Memorandum of Understanding ( MOU ) to acquire a 100% interest in the Seinajoki gold property in south western Finland. On October 13, 2009 the Company announced the acquisition of an additional 900 hectares Kaatiala Claim Reservation within the Seinajoki Rare Earth Metals Area Reservation. This acquisition will be included under the existing MOU signed September 22, 2009, referred to above, to earn a 100% interest in the Seinajoki property. The Option Agreement for the Seinajoki Project was signed September 15, 2010. The option agreement for the Seinajoki property was signed September 15, 2010. The option agreement payment and exploration work schedule are as follows: Option payments Shares Exploration expenditures Within fifteen days of signing the MOU 10,000 400,000 * - On or before April 1, 2010 - - 50,000 ** Upon claim ownership confirmation and signing of option agreement September 15, 2010 20,000 * 600,000 * - On or before September 15, 2011 30,000 * 900,000 * - On or before September 15, 2012 50,000 * 1,000,000 * - On or before September 17, 2013*** 50,000 1,000,000 1,000,000 *Paid, issued **Incurred The vendor will retain a 2% Net Smelter Royalty. 160,000 3,900,000 1,050,000 (15)
On October 13, 2012, the Company entered into an amended option agreement whereby the completion of the exploration work has been extended to September 17, 2013. The Company agreed to further pay an additional 50,000 and issue an additional 1,000,000 common shares of the Company on or before September 17, 2013. f) Karhujupukka Property, Finland On January 24, 2012, the Company entered into a MOU to acquire an 80% interest in the Karhujupukka gold property in north eastern Finland. The TSX Venture Exchange approved the terms of the Option Agreement on March 2, 2012. The Option Agreement was signed on March 8, 2012 with the issuance of 250,000 common shares to the Optionee. The option agreement was dated March 27, 2012. The Option Agreement payment and exploration work schedule are as follows: Option payment shares Exploration expenditures On March 8,2012 250,000 * - On April 5, 2012 250,000 * - On or before March 27, 2013 1,000,000 200,000 On or before March 27, 2014 1,500,000 - On or before the March 27, 2015 2,000,000 - On or before the March 27, 2016-1,300,000 5,000,000 1,500,000 * Issued The Company decided not to proceed with the Option Agreement and accordingly, recorded an impairment charge in the amount of 165,239. (16)
8 Shareholder s equity a) Authorized Unlimited number of shares at no par value. b) Share issuance A summary of changes in share capital is contained on the statement of changes in shareholders equity for the years ended and is as follows: i) On March 8, 2012, the Company issued 250,000 common shares as per the Option Agreement for the Karhujupukka Property. These shares were valued at 0.09 per share being the closing price of the Company s shares on the date the shares were issued or 22,500. ii) iii) iv) On April 5, 2012, the Company issued 250,000 common shares upon signing of the Option Agreement for the Karhujupukka Property. These shares were valued at 0.10 per share being the closing price of the Company s shares on the date the shares were issued or 25,000. On July 4, 2012 the Company issued the remaining 2,000,000 common shares for gross proceeds of 300,000 to complete the second closing (See note 7(c) LK Property, Finland) after having received the transfer, conveyance, assignment of rights and titles to the mineral claims on the LK Property from the Finland Ministry of Employment and the Economy. These shares were valued as part of the acquisition and recorded at that time to contributed surplus with the corresponding amount to the property. When the shares were issued in July 2012 the amounts were recorded to share capital with the corresponding amount recorded to contributed surplus. On September 25, 2012, the Company issued 1,000,000 common shares option payment on the Seinajoki Property. These shares were valued at 0.07 per share being the closing price of the Company s shares on the date of issue; value was 70,000. v) On September 21, 2011, the Company issued 900,000 common shares as per the Option Agreement for the Seinajoki Property. These shares were valued at 0.15 per share being the closing price of the Company s shares on the date of issue; value 135,000. (17)
9 Warrants Warrant activity was as follows: Number of warrants Weighted average exercise price Balance at December 31, 2010 26,098,805 0.25 Expired (103,050) 0.20 Exercised (12,933,300) 0.20 Balance at December 31, 2011 13,062,455 0.31 Expired (10,955) 0.20 Balance at December 31, 2012 13,051,500 0.32 Warrants outstanding at December 31, 2012 and December 31, 2011 were as follows: 2012 2011 Expiry date Number of warrants Weighted average exercise price Number of warrants Weighted average exercise price July 7, 2013* 6,916,500 0.20 6,727,455 0.20 August 6, 2013* 635,000 0.45 835,000 0.45 August 14, 2013 4,927,593 0.45 4,927,593 0.45 September 5, 2013 572,407 0.45 572,407 0.45 13,051,500 0.32 13,062,455 0.31 Weighted average remaining contractual life (years) - 2.41-0.57 *During the year, the Company extended the expiry dates of the unexercised and outstanding warrants from July 7 and August 6, 2012 to July 7 and August 6, 2013 respectively. There were no incremental costs as a result of this modification. (18)
10 Stock options In August 2004 the Company adopted a Stock Option Plan (amended May 27, 2010) whereby the Company may grant stock options to officers, directors, consultants and eligible employees at an exercise price to be determined by the Board of Directors, provided the exercise price is not lower than the market price at the time of issue. The Plan provides for the issuance of up to 20% of the Company s issued common shares as at the date of shareholder approval with each stock option having a maximum term of five years. The Board of Directors has the exclusive authority over the granting of options. There were no options granted in 2012 and 2011. Option activity was as follows: Number of options Weighted average exercise price Balance at December 31, 2010 12,515,000 0.17 Expired (1,600,000) 0.20 Exercised (550,000) 0.20 Balance at December 31, 2011 10,365,000 0.15 Expired (2,700,000) 0.10-0.30 Balance at December 31, 2012 7,665,000 0.11 (19)
Options outstanding at December 31, 2012 and December 31, 2011 were as follows: Expiry date Number of options outstanding* 2012 2011 Weighted average exercise price Number of options outstanding Weighted average exercise price November 14, 2012-600,000 0.30 March 10, 2012-200,000 0.10 April 1, 2012-900,000 0.25 September 4, 2012-300,000 0.30 October 15, 2012-700,000 0.30 November 3, 2013 1,825,000 0.11 1,825,000 0.11 January 19, 2014 1,200,000 0.11 1,200,000 0.11 September 4, 2014 2,790,000 0.11 2,790,000 0.11 October 5, 2014 200,000 0.11 200,000 0.11 November 12, 2014 400,000 0.11 400,000 0.11 February 17, 2015 950,000 0.10 950,000 0.10 September 24, 2015 300,000 0.10 300,000 0.10 7,665,000 0.11 10,365,000 0.15 Weighted average remaining contractual life years 1.49 2.04 11 Related party transactions Except as disclosed elsewhere in these financial statements, related party transactions for the twelve months ended December 31, 2012 are as follows: 2012 2011 Details Management consulting and management fees Geological consulting Paid or accrued to: Companies with directors in common 94,500 149,250 Consulting firm affiliated to a director of the Company 3,285 - As at December 30, 2012, 15,960 (2011-149,250) is payable to a company with a director in common for financial consulting and management services and is non-interest bearing and has no terms and dates for repayment. (20)
12 Segmented information The Company has one reportable segment, being that of acquisition, exploration and evaluation of mineral properties. The Company s mineral properties are located in Canada, Ecuador and Finland. The properties and locations are as follows: Property TL Property Ganarin Property Kaukua Property Tammela Property Seinajoki Property Haukiaho Property Location Canada Ecuador Finland Finland Finland Finland Geographic information for the year ended December 31, 2012: Canada Ecuador Finland Total Year ended December 31, 2012 Net loss for the year 4,107,726 1,667,795 301,598 6,077,119 Assets Cash and cash equivalents 21,933 (3,261) 110,432 129,104 Short-term investments 1,517,654 - - 1,517,654 Exploration and evaluation assets 7,104,883 7,104,883 Other investments and assets 349,909 17,782 52,357 420,048 Total assets 1,889,496 14,521 7,267,672 9,171,689 (21)
Geographic information for the period ended December 31, 2011; Canada Ecuador Finland Total Year ended December 31, 2011 Net loss for the year 1,012,854 90,470 4,805 1,108,129 Assets Cash and cash equivalents 741,708 6,488 92,831 841,027 Short-term investments 1,508,529 - - 1,508,529 Exploration and evaluation assets 2,744,279 1,489,289 4,557,084 8,790,652 Marketable securities and other assets 425,499 5,481 173,406 604,386 Total assets 5,420,015 1,501,258 4,823,321 11,744,594 13 Capital disclosures The Company s objectives when managing capital are: To maintain and safeguard its accumulated capital in order to provide an adequate return to shareholders by maintaining a sufficient level of funds, to support continued evaluation and maintenance at the Company s existing properties, and to acquire, explore, and develop other precious and base metal deposits in North America, South America, and Europe. To invest cash on hand in highly liquid and highly rated financial instruments with high credit quality issuers, thereby minimizing the risk of loss of principal. To obtain the necessary financing to complete exploration and development of its properties, if and when it is required. In the management of capital, the Company includes shareholders equity in the definition of capital. The Company manages the capital structure and makes adjustments to it, based on the level of funds required to manage its operations in light of changes in economic conditions and the risk characteristics of its underlying assets, especially with respect to exploration results on properties in which the Company has an interest. In order to facilitate the management of capital and development of its exploration and evaluation assets, the Company prepares annual expenditure budgets, which are updated as necessary and are reviewed and approved by the Company s Board of Directors. In addition, the Company may issue new equity, incur additional debt, option its mineral properties for cash and/or expenditure commitments from optionees, enter into joint venture arrangements, or dispose of certain assets. The Company s investment policy is to hold cash in interest-bearing accounts at a major Canadian banking institution to maximize liquidity. In order to maximize ongoing development efforts, the Company does not pay dividends. The Company is not exposed to any externally imposed capital requirements. (22)