Filed by Continental Minerals Corporation
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to
Rule 14a-12 of the Securities Exchange Act of 1934
Subject Company: Great China Mining Inc.
Commission File Number: 000-26217
The following press release filed by Continental Minerals Corporation (“Continental”) with the Securities and Exchange Commission (the “Commission”) under cover of Form 6-K was filed with the Commission pursuant to Rule 425 in connection with the proposed merger transaction between Continental and Great China Mining Inc. (“Great China”):
| Description of Document | Date of Filing of Form 6-K with the SEC |
| Press Release dated August 25, 2006 | August 28, 2006 |
| Interim Financial Statements for the Quarter Ended June 30, 2006 | August 25, 2006 |
| Amended and Restated Interim Financial Statements for the Quarter Ended March 31, 2006 | August 24, 2006 |
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
In connection with the proposed transaction, Continental and Great China have filed relevant materials with the Securities and Exchange Commission (the "SEC"), including the filing by Continental with the SEC of a Registration Statement on Form F-4 (the "Registration Statement"), which includes a preliminary prospectus and related materials to register the common shares of Continental to be issued in exchange for Great China common shares. The Registration Statement incorporates a proxy statement/ prospectus (the “Proxy Statement/Prospectus”) that Great China plans to mail to its stockholders in connection with obtaining approval to the proposed merger. The Registration Statement and the Proxy Statement/Prospectus contains important information about Great China, Continental, the transaction and related matters. Investors and security holders are urged to read the Registration Statement and the Proxy Statement/Prospectus carefully. Investors and security holders can obtain free copies of the Registration Statement and the Proxy Statement/Prospectus and other documents filed with the SEC by Great China and Continental through the web site maintained by the SEC at www.sec.gov.
Great China and its directors and executive officers also may be deemed to be participants in the solicitation of proxies from the stockholders of Great China in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein are included in the Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in Great China's annual report on Form 10-KSB, which was filed with the SEC on March 31, 2006. This document is available free of charge at the SEC's web site at www.sec.gov.
Continental and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of Great China in connection with the transaction described herein. Information regarding the special interests of these directors and executive officers in the transaction described herein are included in the Proxy Statement/Prospectus described above. Additional information regarding these directors and executive officers is also included in Continental's Form 20-F filed with the SEC on June 30, 2006. This document is available free of charge at the SEC's web site at www.sec.gov.
Continental Minerals Corporation
1020-800 W Pender St.
Vancouver, BC
V6C 2V6 Canada
Tel. 604-684-6365
Fax 604-684-8092
Toll Free: 1-800-667-2114
www.continentalminerals.com
CONTINENTAL SECURES $11.5 MILLION CONVERTIBLE NOTE FINANCING
August 25, 2006, Vancouver, BC– Continental Minerals Corporation (“Continental”) (TSX.V-KMK; OTC.BB-KMKCF) announces that it has reached an agreement with Taseko Mines Limited (“Taseko”) whereby Taseko will purchase an.$11.5 million Convertible Secured Promissory Note of Continental (the “Note”), for the purposes of funding continued exploration on the Xietongmen property in Tibet, China and for working capital. The Note, if not earlier converted, redeemed or repaid, is due one year from its date of issuance (the “Closing”).
Taseko has the right to convert any or all of the principal then outstanding under the one year Note, plus a 5% premium into Continental common shares at $2.05 per share if the Note is exercised within the first six months or, at $2.25 per share if exercised in the second six months. Taseko also receives the right to participate in Continental’s future financings (the “Participation Right”) and in such event can redeem the Note at 105% of the $11.5 million principal amount of the Note and use the proceeds to subscribe for securities offered under such future financing. In addition, upon conversion of the Note or its redemption in the event that the Participation Right is exercised, Taseko will acquire a right of first refusal (the “Pre-Emptive Right”) for up to five years, during which time Taseko may purchase up to 50% of any equity or convertible securities, excepting certain normal course securities issuances, offered by Continental in a subsequent financing until a maximum of 19.9% of Continental’s then outstanding shares on a fully diluted basis are held by Taseko. If Taseko fails to exercise the PreEmptive Right in regards to any offered securities under a future financing, the Pre-Emptive Right thereupon expires.
The Note provides for interest at the rate of 16% per annum payable monthly. Interest is payable in cash, or at Taseko’s election, in Continental common shares based upon the higher of the five day volume weighted average of the closing price of Continental’s common shares at the time the interest payment is due or at Closing. Repayment of the Note is secured by an indirect pledge of Continental’s 60% interest in the Xietongmen property, which security interest will be subordinated, if necessary, to any security interest granted by Continental in respect of senior debt. Continental retains the right to pre-pay the Note on 10 days notice, after 180 days from closing.
Continental and Taseko are both members of the Hunter Dickinson Inc. operated companies and have certain directors in common and, accordingly, the independent directors of each company have approved this financing. Completion of this financing is subject to regulatory approval. Any Continental shares issued pursuant to conversion of the Note will be subject to a four month hold period from Closing.
Arrangements to finalize the merger of Continental and Great China Mining Inc. to unify 100% ownership in the Xietongmen property in Continental (see joint news releases of June 12, 2006 and July 10, 2006) are progressing. Completion is subject to a number of conditions, including shareholder and regulatory approvals and will likely occur at or about the end of the third quarter of 2006.
Gerald Panneton
President and CEO
Continental Minerals Corporation
For further information:
Continental Minerals Corporation
Tel 604 684-63656365
Toll Free 1 800 667-63652114
www.continentalminerals.com
All currencies expressed in Canadian dollars.
No regulatory authority has approved or disapproved the information contained in this news release.
This release includes certain statements that may be deemed "forward-looking statements". All statements in this release, other than statements of historical facts, that address the proposed merger, acquisition of additional property, exploration drilling, exploitation activities and events or developments that the company expects are forward-looking statements. Although the company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, exploitation and exploration successes, and continued availability of capital and financing, and general economic, market or business conditions. Investors are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements.
For more information on Continental Minerals Corporation, Investors should review the Continental’s annual Form 20-F filing with the United States Securities and Exchange Commission atwww.sec.gov and its home jurisdiction filings that are available atwww.sedar.com.
CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED
JUNE 30, 2006
(Expressed in Canadian Dollars, unless otherwise stated)
CONTINENTAL MINERALS CORPORATION
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
| June 30 | December 31 | |||||
| 2006 | 2005 | |||||
| (unaudited) | (restated - note 2(b)) | |||||
| Assets | ||||||
| Current assets | ||||||
| Cash and equivalents | $ | 745,957 | $ | 4,009,244 | ||
| Accounts receivable | 481,640 | 200,588 | ||||
| Amounts due from related party (note 5) | – | 152,319 | ||||
| Prepaid expenses and other items | 518,289 | 56,669 | ||||
| 1,745,886 | 4,418,820 | |||||
| Mineral property interests | 1,903,525 | 1,903,525 | ||||
| Equipment (note 3) | 497,197 | 132,241 | ||||
| Investments | 1 | 1 | ||||
| $ | 4,146,609 | $ | 6,454,587 | |||
| Liabilities and Shareholders' Equity | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 853,000 | $ | 500,346 | ||
| Amounts due to related party (note 5) | 1,704,479 | – | ||||
| 2,557,479 | 500,346 | |||||
| Non-controlling interest (note 2) | – | 944,880 | ||||
| Shareholders' equity | ||||||
| Share capital (note 4) | 24,548,183 | 19,465,518 | ||||
| Contributed surplus (notes 4) | 1,189,767 | 545,035 | ||||
| Deficit | (24,148,820 | ) | (15,001,192 | ) | ||
| 1,589,130 | 5,009,361 | |||||
| Continuing operations (note 1) | ||||||
| Subsequent event (note 4(c) and 7) | ||||||
| Proposed merger transaction (note 6) | ||||||
| $ | 4,146,609 | $ | 6,454,587 |
See accompanying notes to the consolidated financial statements
Approved by the Board of Directors
| /s/ Gerald Panneton | /s/ Jeffrey Mason |
| Gerald Panneton | Jeffrey Mason |
| Director | Director |
CONTINENTAL MINERALS CORPORATION
Consolidated Statements of Operations
(Unaudited - Expressed in Canadian Dollars)
| Three months ended June 30 | Six months ended June 30 | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
| Expenses (income) | ||||||||||||
| Conference and travel | $ | 197,044 | $ | 31,552 | $ | 346,488 | $ | 35,428 | ||||
| Exploration (schedule) | 5,246,327 | 1,525,594 | 7,442,880 | 2,033,017 | ||||||||
| Foreign exchange | 33,019 | (13,546 | ) | 26,822 | (16,422 | ) | ||||||
| Interest | (7,634 | ) | (39,966 | ) | (24,731 | ) | (78,970 | ) | ||||
| Legal, accounting and audit | 227,975 | 88,691 | 383,270 | 146,281 | ||||||||
| Office and administration | 476,002 | 197,051 | 884,616 | 328,275 | ||||||||
| Stock-based compensation - administration (note 4) | 371,896 | 86,965 | 600,422 | 199,186 | ||||||||
| Stock-based compensation - exploration (note 4) | 162,199 | 61,866 | 194,814 | 179,324 | ||||||||
| Project investigation | – | 20,634 | – | 20,634 | ||||||||
| Shareholder communications | 107,029 | 48,560 | 206,229 | 76,354 | ||||||||
| Trust and filing | 17,318 | 20,809 | 31,698 | 30,012 | ||||||||
| Loss before non-controlling interest | 6,831,175 | 2,028,210 | 10,092,508 | 2,953,119 | ||||||||
| Non-controlling interest | – | – | 944,880 | – | ||||||||
| Loss for the period | $ | 6,831,175 | $ | 2,028,210 | $ | 9,147,628 | $ | 2,953,119 | ||||
| Basic and diluted loss per common share | $ | 0.13 | $ | 0.05 | $ | 0.19 | $ | 0.08 | ||||
| Weighted average number of common shares outstanding | 51,080,722 | 37,796,256 | 49,223,744 | 37,703,156 | ||||||||
See accompanying notes to the consolidated financial statements
Consolidated Statements of Deficit
(Unaudited - Expressed in Canadian Dollars)
| Six months ended June 30 | ||||||
| 2006 | 2005 | |||||
| Deficit, beginning of period | $ | 15,001,192 | $ | 6,420,405 | ||
| Loss for the period | 9,147,628 | 2,953,119 | ||||
| Deficit, end of period | $ | 24,148,820 | $ | 9,373,524 | ||
See accompanying notes to the consolidated financial statements
CONTINENTAL MINERALS CORPORATION
Consolidated Statements of Cash Flows
(Unaudited - Expressed in Canadian Dollars)
| Three months ended June 30 | Six months ended June 30 | |||||||||||
| Cash provided by (used for) | 2006 | 2005 | 2006 | 2005 | ||||||||
| Operating activities | ||||||||||||
| Loss for the period | $ | (6,831,175 | ) | $ | (2,028,210 | ) | $ | (9,147,628 | ) | $ | (2,953,119 | ) |
| Items not involving cash | ||||||||||||
| Non-controlling interest | – | – | (944,880 | ) | – | |||||||
| Stock-based compensation | 534,095 | 148,831 | 795,236 | 378,510 | ||||||||
| Amortization | 27,484 | 1,403 | 48,061 | 1,403 | ||||||||
| Changes in non-cash operating working capital | ||||||||||||
| Amounts receivable | (91,276 | ) | (142,866 | ) | (281,052 | ) | (163,421 | ) | ||||
| Prepaid expenses | (462,121 | ) | 39,222 | (461,620 | ) | 72,079 | ||||||
| Accounts payable and accrued liabilities | 262,960 | 1,016,116 | 352,654 | 890,736 | ||||||||
| Cash used for operating activities | (6,560,033 | ) | (965,504 | ) | (9,639,229 | ) | (1,773,812 | ) | ||||
| Investing activities | ||||||||||||
| Acquisition of equipment | (195,901 | ) | (14,030 | ) | (413,017 | ) | (14,030 | ) | ||||
| Cash used for investing activities | (195,901 | ) | (14,030 | ) | (413,017 | ) | (14,030 | ) | ||||
| Financing activities | ||||||||||||
| Issuance of common shares, net of issue costs | 4,769,861 | 419,091 | 4,932,161 | 431,571 | ||||||||
| Due to (from) related parties, net | 1,597,750 | (152,520 | ) | 1,856,798 | (194,588 | ) | ||||||
| Cash provided by financing activities | 6,367,611 | 266,571 | 6,788,959 | 236,983 | ||||||||
| Decrease in cash and equivalents | (388,323 | ) | (712,963 | ) | (3,263,287 | ) | (1,550,859 | ) | ||||
| Cash and equivalents, beginning of period | 1,134,280 | 6,558,412 | 4,009,244 | 7,396,308 | ||||||||
| Cash and equivalents, end of period | $ | 745,957 | $ | 5,845,449 | $ | 745,957 | $ | 5,845,449 | ||||
| Supplementary information | ||||||||||||
| Taxes paid | $ | – | $ | – | $ | – | $ | – | ||||
| Interest paid | $ | – | $ | – | $ | – | $ | – | ||||
| Non-cash financing and investing activities | ||||||||||||
| Fair value of stock options transferred to share capital | ||||||||||||
| on options exercised from contributed surplus | $ | 104,281 | $ | 299,910 | $ | 150,504 | $ | 299,910 | ||||
See accompanying notes to the consolidated financial statements
CONTINENTAL MINERALS CORPORATION
Consolidated Schedules of Exploration Expenses
(Unaudited - Expressed in Canadian Dollars)
| Three months ended June 30 | Six months ended June 30 | |||||||||||
| Xietongmen Property, China | 2006 | 2005 | 2006 | 2005 | ||||||||
| Exploration Costs | ||||||||||||
| Amortization | $ | 27,484 | $ | 1,403 | $ | 48,061 | $ | 1,403 | ||||
| Assays and analysis | 558,366 | 86,691 | 900,382 | 101,975 | ||||||||
| Drilling | 1,851,605 | 894,826 | 2,570,649 | 1,007,770 | ||||||||
| Engineering | 953,944 | – | 1,043,687 | 6,920 | ||||||||
| Environmental | 171,533 | – | 171,533 | – | ||||||||
| Equipment rentals and leases | 161,658 | 26,939 | 248,430 | 54,129 | ||||||||
| Freight | 16,155 | – | 16,155 | – | ||||||||
| Geological | 603,337 | 268,324 | 954,859 | 410,859 | ||||||||
| Graphics | 32,708 | 7,712 | 50,888 | 21,563 | ||||||||
| Property Fees/Assessments | 22,001 | – | 22,001 | – | ||||||||
| Reclamation fees | – | 24,398 | – | 28,106 | ||||||||
| Site activities | 487,646 | 116,939 | 759,782 | 175,490 | ||||||||
| Socioeconomic | 146,375 | 35,957 | 314,353 | 93,272 | ||||||||
| Transportation | 213,515 | 62,405 | 342,100 | 131,530 | ||||||||
| Incurred during the period | 5,246,327 | 1,525,594 | 7,442,880 | 2,033,017 | ||||||||
| Non-cash stock based compensation | 162,199 | 61,866 | 194,814 | 179,324 | ||||||||
| 5,408,526 | 1,587,460 | 7,637,694 | 2,212,341 | |||||||||
| Cumulative balance, beginning of period | 11,945,744 | 3,997,613 | 9,716,576 | 3,372,732 | ||||||||
| Cumulative balance, end of period | $ | 17,354,270 | $ | 5,585,073 | $ | 17,354,270 | $ | 5,585,073 | ||||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 1. | NATURE OF OPERATIONS |
These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and are presented in Canadian dollars. They do not include all the disclosures as required for annual financial statements under generally accepted accounting principles. However, these interim consolidated financial statements follow the same accounting policies and methods of application as the Company’s most recent annual financial statements. These interim consolidated financial statements should be read in conjunction with the Company’s amended and restated annual consolidated financial statements for the year ended December 31, 2005 as filed on SEDAR on August 24, 2006. | |
Operating results for the three month and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006 or for any other period. | |
These consolidated financial statements are prepared on the basis that the Company will continue as a going concern. Management recognizes that the Company will need to generate additional financial resources in order to discharge current liabilities and meet its planned business objectives. However, there can be no assurances that the Company will continue to obtain additional financial resources and/or achieve profitability or positive cash flows. If the Company is unable to obtain adequate additional financing, the Company will be required to curtail operations and exploration activities. Furthermore, failure to continue as a going concern would require that the Company’s assets and liabilities be restated on a liquidation basis which would differ significantly from the going concern basis. | |
| 2. | BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION |
| (a) | These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and its wholly owned and controlled subsidiaries. |
All material intercompany balances and transactions have been eliminated. NCI has been reduced to zero to reflect its share of the loss incurred by Highland Mining Inc. | |
| (b) | Restatement |
The consolidated balance sheet as at December 31, 2005 has been amended and restated to increase the value assigned to non-controlling interest and mineral property interests recorded as a result of the acquisition of 50% of Highland Mining Corporation by $904,519, which amendment reflects the non-controlling interest at their fair value, instead of at the book value of the assets acquired as previously recorded, at the date the Company became the primary beneficiary, in order to comply with the provisions of AcG-15 on variable interest entities. This restatement had no impact on working capital, shareholders’ equity or on any amounts or totals reported in the statements of operations, deficit or cash flows or the schedule of exploration expenses as at and for the year ended December 31, 2005 (refer to notes 2(r) and 4(a) of the |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
amended and restated consolidated financial statements as at and for the year ended December 31, 2005 which were filed on SEDAR on August 24, 2006). | |
The consolidated balance sheet as at December 31, 2005 has been amended and restated to increase the value assigned to mineral property interests recorded by $904,519. The consolidated statements of operations and cash flows for the three months ended March 31, 2006 were amended prior to this filing to increase the amount allocated to the non-controlling interest and decrease the net loss by $904,519, which reflects the non-controlling interest’s share of the joint venture losses after giving effect to the amended value assigned to the non-controlling interest at the date of combination. This amendment is reflected in the results of operations and cash flows for the three and six month periods ended June 30, 2006. | |
| 3. | EQUIPMENT |
| June 30, 2006 | December 31, 2005 | ||||||||||||||||||
| Accumulated | Net book | Accumulated | Net book | ||||||||||||||||
| Cost | amortization | value | Cost | amortization | value | ||||||||||||||
| Vehicles | $ | 385,855 | $ | 30,130 | $ | 355,725 | $ | 109,702 | $ | 2,806 | $ | 106,896 | |||||||
| Buildings | 12,767 | 3,192 | 9,575 | 12,767 | – | 12,767 | |||||||||||||
| Field | 79,157 | 10,606 | 68,551 | 5,356 | – | 5,356 | |||||||||||||
| Computers | 54,604 | 5,143 | 49,461 | 6,269 | – | 6,269 | |||||||||||||
| Furniture | 15,681 | 1,796 | 13,885 | 953 | – | 953 | |||||||||||||
| $ | 548,064 | $ | 50,867 | $ | 497,197 | $ | 135,047 | $ | 2,806 | $ | 132,241 | ||||||||
| 4. | SHAREHOLDERS’ EQUITY |
| (a) | Authorized share capital |
The Company’s authorized share capital consists of an unlimited number of common shares without par value and an unlimited number of non-voting, redeemable preferred shares. | |
| (b) | Issued and outstanding common share capital |
| Number of | Dollar | ||||||
| common shares | Amount | ||||||
| Balance, December 31, 2005 | 47,306,185 | $ | 19,465,518 | ||||
| Share purchase warrants exercised | 158,000 | 183,461 | |||||
| Share purchase options exercised, net of issuance costs (note 4(c)) | 4,954,000 | 4,748,700 | |||||
| Fair value of stock options allocated to shares issued on exercise | – | 150,504 | |||||
| Balance, June 30, 2006 | 52,418,185 | $ | 24,548,183 |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| (c) | Warrants |
The continuity of share purchase warrants is as follows: |
| Expiry date | July 12, 2006 | |
| Exercise price | $1.05 | |
| Balance, December 31, 2005 | 5,640,000 | |
| Issued | – | |
| Exercised | (4,954,000 | ) |
| Expired | – | |
| Balance, June 30, 2006 | 686,000 |
A total of 4,311,000 warrants of the 4,954,000 warrants exercised during the period were subject to a commission fee of 10% of the exercised amounts. Hence, a total of $453,000 issuance costs was recorded during the period. | |
Subsequent to June 30, 2006, a total of 686,000 warrants were exercised for gross proceeds of $720,300. | |
| (d) | Share purchase option plan |
The continuity schedule of share purchase options of which 994,000 are exercisable is as follows: |
| Weighted | |||||
| Share purchase options outstanding | Number of | average | |||
| options | exercise price | ||||
| Balance, December 31, 2005 | 1,859,267 | $ 1.44 | |||
| Granted | 3,195,000 | 1.72 | |||
| Exercised | (158,000 | ) | 1.16 | ||
| Expired or cancelled | (5,000 | ) | 1.33 | ||
| Balance, June 30, 2006 | 4,891,267 | $ 1.63 |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
Options outstanding and exercisable at June 30, 2006 were as follows:
| Number of | Number of | |||
| options | options | |||
| Expiry date | Option price | outstanding | exercisable | |
| November 30, 2006 | $ 1.10 | 316,600 | 316,600 | |
| November 30, 2006 | $ 1.33 | 204,667 | 204,667 | |
| September 28, 2007 | $ 1.70 | 900,000 | 300,000 | |
| November 30, 2007 | $ 1.20 | 260,000 | 173,333 | |
| December 24, 2007 | $ 1.50 | 15,000 | – | |
| February 29, 2008 | $ 1.61 | 40,000 | – | |
| February 27, 2009 | $ 1.61 | 50,000 | – | |
| April 30, 2009 | $ 2.01 | 855,000 | – | |
| November 30, 2009 | $ 1.61 | 250,000 | – | |
| February 28, 2011 | $ 1.61 | 2,000,000 | – | |
| Total | 4,891,267 | 994,000 | ||
| Average option price | $ 1.63 | $ 1.35 |
The exercise prices of all share purchase options granted were at or above the market price at the grant date. Using an option pricing model with the assumptions noted below, the estimated fair value of all options granted in the six months ended June 30, 2006, and which have been reflected in the consolidated statements of operations, is as follows:
| Three months ended | Six months ended | ||||||||||||
| June 30 | June 30 | ||||||||||||
| 2006 | 2005 | 2006 | 2005 | ||||||||||
| Exploration | |||||||||||||
| Engineering | $ | 3,871 | $ | 2,731 | $ | 5,052 | $ | 13,524 | |||||
| Environmental, socioeconomic and land | 976 | 3,967 | 1,407 | 9,910 | |||||||||
| Geological | 105,323 | 55,168 | 136,326 | 155,890 | |||||||||
| Exploration | 110,170 | 61,866 | 142,785 | 179,324 | |||||||||
| Administration | 352,275 | 86,965 | 580,801 | 199,186 | |||||||||
| Total compensation cost recognized in | |||||||||||||
| operations, credited to contributed | |||||||||||||
| surplus | $ | 462,445 | $ | 148,831 | $ | 723,586 | $ | 378,510 | |||||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
The weighted-average assumptions used to estimate the fair value of options vesting during the respective periods were as follows:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||
| 2006 | 2005 | 2006 | 2005 | ||||||||||
| Risk free interest rate | 4.25% | 3% | 4.25% | 3% | |||||||||
| Expected life | 2.9 years | 2.1 years | 2.9 years | 2.1 years | |||||||||
| Expected volatility | 69% | 95% | 69% | 95% | |||||||||
| Expected dividends | nil | nil | nil | nil | |||||||||
| (e) | Contributed surplus |
| Balance, December 31, 2005 | $ | 545,035 | ||
| Changes during the period | ||||
| Non-cash stock-based compensation | 723,586 | |||
| Share purchase options exercised, credited to share capital | (150,504 | ) | ||
| Balance, June 30, 2006 | $ | 1,118,117 |
| 5. | RELATED PARTY BALANCES AND TRANSACTIONS |
| Due from (to) related parties | June 30 2006 | December 31 2005 | |||||
| Hunter Dickinson Inc. | $ | (1,704,479 | ) | $ | 152,319 |
| Three months ended | Six months ended | ||||||||||||
| Reimbursement for third party | June 30 | June 30 | |||||||||||
| expenses and services rendered | 2006 | 2005 | 2006 | 2005 | |||||||||
| Hunter Dickinson Inc. | $ | 1,051,526 | $ | 305,135 | $ | 1,811,139 | $ | 481,961 | |||||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 6. | PROPOSED MERGER TRANSACTION |
| (a) | In April 2006, the Company completed the exploration expenditure requirement to exercise the Second Option to earn-in additional 10% (to a total of 60%) interest in Highland Mining Inc. pursuant to the Highland Mining Option Agreement. On July 1, 2006, the Company served notice to Great China Mining Inc (“GCMI”) of its intention to exercise the Second Option. GCMI is currently undertaking the review of the expenditures incurred effective from the date of the earn-in. Under the terms of the Option Agreement, once the Second Option is exercised and the first US$8 million in exploration expenditures is funded, further equity and/or loan funding of Highland will be proportional to interests held in the project, with a proportionate reduction in the shareholdings of any shareholder which fails to match the funding of the others. | |
| (b) | In April 2006, the Company announced that it had entered into agreements with shareholders holding approximately 67% of GCMI’s common shares who have agreed to support a merger among GCMI and the Company, whereby GCMI shares will be exchanged for Continental common shares on a ratio of 8.7871 GCMI shares for each Continental common share. The Company will also issue 136,607 options at exercise prices ranging from $1.02 to $1.23 with expiry dates ranging from August 2, 2006 to December 2, 2008, to replace certain GCMI options currently outstanding. If for any reason the corporate merger cannot complete, the majority shareholders of GCMI have agreed to exchange their shares at the above ratio in a series of private transactions, subject to regulatory approval. | |
The Company will also acquire three mineral property interests totalling approximately 100 square kilometers, lying within an area of interest near the Xietongmen Property, in exchange for 1,500,000 units, with each unit consisting of one Continental common share and one common share purchase warrant exercisable at $1.59 per common share for two years, from the date of the completion of the merger and US$3,250,000 cash, with US$1,250,000 payable on completion of the merger and the remaining balance in four equal annual installments of US$500,000. | ||
Pursuant to the terms of the merger agreement, Continental will increase its board of directors to 11 and appoint to it three GCMI nominees. Two of these nominees are Messrs. Wang Zhi and Yang (Jack) Jie, both of whom currently serve as directors of GCMI. Continental will also issue 700,000 options exercisable at $1.61 per common share expiring February 28, 2011. The Company has also agreed to retain Mr. Wang under an incentive arrangement and has agreed to pay a bonus of 2,500,000 units of Continental (one share plus one one-year share purchase warrant exercisable at $1.59 per common share) in the event that all necessary mining permits are received in a timely manner, but in any event, no later than June 30, 2010. | ||
As at June 30, 2006, completion of the merger is pending shareholder and regulatory approvals. |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements |
| For the six months ended June 30, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 7. | SUBSEQUENT EVENT |
Subsequent to June 30, 2006, the Company entered into an agreement with Taseko Mines Ltd. (“Taseko”), a public company with certain directors in common with the Company, whereby the Company will issue to Taseko a $11.5 million Convertible Secured Promissory Note of Continental (the “Note”).
Taseko has the right to convert any or the entire principal then outstanding under the one year Note, plus a 5% premium into Continental common shares at $2.05 per share if the Note is exercised within the first six months or, at $2.25 per share if exercised in the second six months. Taseko also receives the right to participate in Continental’s future financings (the “Participation Right”) and in such event can redeem the Note at 105% of the $11.5 million principal amount of the Note and use the proceeds to subscribe for securities offered under such future financing. In addition, upon conversion of the Note or its redemption in the event that the Participation Right is exercised, Taseko will acquire a right of first refusal (the “Pre-Emptive Right”) for up to five years, during which time Taseko may purchase up to 50% of any equity or convertible securities, excepting certain normal course securities offerings and strategic alliances, offered by Continental in a subsequent financing until a maximum of 19.9% of Continental’s then outstanding shares on a fully diluted basis are held by Taseko. If Taseko fails to exercise the PreEmptive Right in regards to any offered securities under a future financing, the Pre-Emptive Right thereupon expires.
The Note provides for interest at the rate of 16% per annum payable monthly. Interest is payable in cash, or at Taseko’s election, in Continental common shares based upon the higher of the five day volume weighted average of the closing price of Continental’s common shares at the time the interest payment is due or at Closing. Repayment of the Note is secured by an indirect pledge of Continental’s 60% interest in the Xietongmen property, which security interest will be subordinated, if necessary, to any security interest granted by Continental in respect of senior debt. Continental retains the right to pre-pay the Note on 10 days notice, after 180 days from closing.
Completion of this financing is subject to regulatory approval. Any Continental shares issued pursuant to the conversion of the Note will be subject to a four month hold period from closing.
CONSOLIDATED FINANCIAL STATEMENTS - Amended and Restated
THREE MONTHS ENDED
MARCH 31, 2006
(Expressed in Canadian Dollars, unless otherwise stated)
| CONTINENTAL MINERALS CORPORATION |
| Consolidated Balance Sheets - Amended and Restated |
| (Expressed in Canadian Dollars) |
| March 31 | December 31 | |||||
| 2006 | 2005 | |||||
| (restated - note 2(b)) | (restated - note 2(b)) | |||||
| (unaudited) | ||||||
| Assets | ||||||
| Current assets | ||||||
| Cash and equivalents | $ | 1,134,280 | $ | 4,009,244 | ||
| Accounts receivable | 390,364 | 200,588 | ||||
| Amounts due from related party (note 5) | – | 152,319 | ||||
| Prepaid expenses | 56,168 | 56,669 | ||||
| 1,580,812 | 4,418,820 | |||||
| Mineral property interests | 1,903,525 | 1,903,525 | ||||
| Equipment (note 3) | 328,780 | 132,241 | ||||
| Investments | 1 | 1 | ||||
| $ | 3,813,118 | $ | 6,454,587 | |||
| Liabilities and Shareholders' Equity | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 590,040 | $ | 500,346 | ||
| Amounts due to related party (note 5) | 106,729 | – | ||||
| 696,769 | 500,346 | |||||
| Non-controlling interest | – | 944,880 | ||||
| Shareholders' equity | ||||||
| Share capital (note 4) | 19,732,099 | 19,465,518 | ||||
| Contributed surplus (notes 4) | 701,895 | 545,035 | ||||
| Deficit | (17,317,645 | ) | (15,001,192 | ) | ||
| 3,116,349 | 5,009,361 | |||||
| Continuing operations (note 1) | ||||||
| Subsequent events (notes 4 and 6) | ||||||
| $ | 3,813,118 | $ | 6,454,587 |
See accompanying notes to the consolidated financial statements
Approved by the Board of Directors
| /s/ Gerald Panneton | /s/ Jeffrey Mason |
| Gerald Panneton | Jeffrey Mason |
| Director | Director |
| CONTINENTAL MINERALS CORPORATION |
| Consolidated Statements of Operations - Amended and Restated |
| (Unaudited - Expressed in Canadian Dollars) |
| Three months ended March 31 | ||||||
| 2006 | 2005 | |||||
| (restated - note 2(b)) | ||||||
| Expenses | ||||||
| Conference and travel | $ | 149,444 | $ | 3,876 | ||
| Exploration (schedule) | 2,196,553 | 507,423 | ||||
| Exploration - stock-based compensation (note 4) | 32,615 | 117,458 | ||||
| Foreign exchange | (6,197 | ) | (2,876 | ) | ||
| Interest expense (income) | (17,097 | ) | (39,004 | ) | ||
| Legal, accounting and audit | 155,295 | 57,590 | ||||
| Office and administration | 408,614 | 131,224 | ||||
| Office and administration - stock-based compensation (note 4) | 228,526 | 112,221 | ||||
| Shareholder communications | 99,200 | 27,794 | ||||
| Trust and filing | 14,380 | 9,203 | ||||
| Loss before non-controlling interest | 3,261,333 | 924,909 | ||||
| Non-controlling interest | 944,880 | – | ||||
| Loss for the period | $ | 2,316,453 | $ | 924,909 | ||
| Basic and diluted loss per common share | $ | (0.05 | ) | $ | (0.03 | ) |
| Weighted average number of common shares outstanding | 47,360,195 | 32,602,615 | ||||
See accompanying notes to the consolidated financial statements
| Consolidated Statements of Deficit |
| (Unaudited - Expressed in Canadian Dollars) |
| Three months ended March 31 | ||||||
| 2006 | 2005 | |||||
| (restated - note 2(b)) | ||||||
| Deficit, beginning of period | $ | 15,001,192 | $ | 6,420,405 | ||
| Loss for the period | 2,316,453 | 924,909 | ||||
| Deficit, end of period | $ | 17,317,645 | $ | 7,345,314 | ||
See accompanying notes to the consolidated financial statements
| CONTINENTAL MINERALS CORPORATION |
| Consolidated Statements of Cash Flows - Amended and Restated |
| (Unaudited - Expressed in Canadian Dollars) |
| Three months ended March 31 | ||||||
| Cash provided by (used for) | 2006 | 2005 | ||||
| (restated - note 2(b)) | ||||||
| Operating activities | ||||||
| Loss for the period | $ | (2,316,453 | ) | $ | (924,909 | ) |
| Items not involving cash | ||||||
| Non-controlling interest | (944,880 | ) | – | |||
| Stock-based compensation | 261,141 | 229,679 | ||||
| Amortization | 20,577 | – | ||||
| Changes in non-cash operating working capital | ||||||
| Amounts receivable | (189,776 | ) | (20,555 | ) | ||
| Prepaid expenses | 501 | 32,857 | ||||
| Accounts payable and accrued liabilities | 89,694 | (125,380 | ) | |||
| Cash used for operating activities | (3,079,196 | ) | (808,308 | ) | ||
| Investing activities | ||||||
| Acquisition of fixed assets | (217,116 | ) | – | |||
| Cash used for investing activities | (217,116 | ) | – | |||
| Financing activities | ||||||
| Issuance of common shares, net of issue costs | 162,300 | 12,480 | ||||
| Due to related parties | 259,048 | (42,068 | ) | |||
| Cash provided by (used for) financing activities | 421,348 | (29,588 | ) | |||
| Decrease in cash and equivalents | (2,874,964 | ) | (837,896 | ) | ||
| Cash and equivalents, beginning of period | 4,009,244 | 7,396,308 | ||||
| Cash and equivalents, end of period | $ | 1,134,280 | $ | 6,558,412 | ||
| Supplementary information | ||||||
| Taxes paid | $ | – | $ | – | ||
| Interest paid | $ | – | $ | – | ||
| Non-cash financing and investing activities | ||||||
| Fair value of stock options transferred to share capital on options | ||||||
| exercised from contributed surplus | $ | 104,281 | $ | – | ||
See accompanying notes to the consolidated financial statements
| CONTINENTAL MINERALS CORPORATION |
| Consolidated Schedules of Exploration Expenses - Amended and Restated |
| (Unaudited - Expressed in Canadian Dollars) |
| Three months ended March 31 | ||||||
| Xietongmen Property | 2006 | 2005 | ||||
| Exploration Costs | ||||||
| Assays and analysis | $ | 342,016 | $ | 15,284 | ||
| Amortization | 20,577 | – | ||||
| Drilling | 719,044 | 112,944 | ||||
| Engineering | 89,743 | 6,920 | ||||
| Equipment rentals and leases | 86,772 | 27,190 | ||||
| Geological | 351,522 | 142,535 | ||||
| Graphics | 18,180 | 13,851 | ||||
| Reclamation fees | – | 3,708 | ||||
| Site activities | 272,136 | 58,551 | ||||
| Socioeconomic | 167,978 | 57,315 | ||||
| Transportation | 128,585 | 69,125 | ||||
| Incurred during the period | 2,196,553 | 507,423 | ||||
| Non-cash stock based compensation | 32,615 | 117,458 | ||||
| 2,229,168 | 624,881 | |||||
| Cumulative balance, beginning of period | 9,716,576 | 3,372,732 | ||||
| Cumulative balance, end of period | $ | 11,898,397 | $ | 3,997,613 | ||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 1. | NATURE OF OPERATIONS |
These interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles and are presented in Canadian dollars. They do not include all the disclosures as required for annual financial statements under generally accepted accounting principles. However, these interim consolidated financial statements follow the same accounting policies and methods of application as the Company’s most recent annual financial statements. These interim consolidated financial statements should be read in conjunction with the Company’s amended and restated annual consolidated financial statements for the year ended December 31, 2005 as filed on SEDAR on August 24, 2006.
Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006 or for any other period.
These consolidated financial statements are prepared on the basis that the Company will continue as a going concern. Management recognizes that the Company will need to generate additional financial resources in order to meet its planned business objectives. However, there can be no assurances that the Company will continue to obtain additional financial resources and/or achieve profitability or positive cash flows. If the company is unable to obtain adequate additional financing, the Company will be required to curtail operations and exploration activities. Furthermore, failure to continue as a going concern would require that the Company’s assets and liabilities be restated on a liquidation basis which would differ significantly from the going concern basis.
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 2. | BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION |
| (a) | These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. |
| (b) | Restatement |
The consolidated balance sheet as at December 31, 2005 has been amended and restated to increase the value assigned to non-controlling interest and mineral property interests recorded as a result of the acquisition of 50% of Highland Mining Corporation by $904,519, which amendment reflects the non-controlling interest at their fair value, instead of at the book value of the assets acquired as previously recorded, at the date the Company became the primary beneficiary, in order to comply with the provisions of AcG-15 on variable interest entities. This restatement had no impact on working capital, shareholders’ equity or on any amounts or totals reported in the statements of operations, deficit or cash flows or the schedule of exploration expenses as at and for the year ended December 31, 2005 (refer to notes 2(r) and 4(a) of the amended and restated consolidated financial statements as at and for the year ended December 31, 2005 which were filed on SEDAR on August 24, 2006). | |
The consolidated balance sheet as at March 31, 2006 has been amended and restated to increase the value assigned to mineral property interests recorded by $904,519. The consolidated statements of operations and cash flows for the three months ended March 31, 2006 have been amended to increase the amount allocated to the non-controlling interest and decrease the net loss by $904,519, which reflects the non-controlling interest’s share of the joint venture losses after giving effect to the amended value assigned to the non-controlling interest at the date of combination. | |
All material inter-company balances and transactions have been eliminated. |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 3. | EQUIPMENT |
| March 31, 2006 | December 31, 2005 | ||||||||||||||||||
| Accumulated | Net book | Accumulated | Net book | ||||||||||||||||
| Cost | amortization | value | Cost | amortization | value | ||||||||||||||
| Vehicles | $ | 288,695 | $ | 16,408 | $ | 272,287 | $ | 109,702 | $ | 2,806 | $ | 106,896 | |||||||
| Buildings | 12,767 | 1,596 | 11,171 | 12,767 | – | 12,767 | |||||||||||||
| Field | 35,793 | 3,688 | 32,105 | 5,356 | – | 5,356 | |||||||||||||
| Computers | 13,346 | 1,496 | 11,850 | 6,269 | – | 6,269 | |||||||||||||
| Furniture | 1,562 | 195 | 1,367 | 953 | – | 953 | |||||||||||||
| $ | 352,163 | $ | 23,383 | $ | 328,780 | $ | 135,047 | $ | 2,806 | $ | 132,241 | ||||||||
| 4. | SHAREHOLDERS’ EQUITY |
| (a) | Authorized share capital |
The Company’s authorized share capital consisted of an unlimited number of common shares without par value and an unlimited number of non-voting, redeemable preferred shares. | |
| (b) | Issued and outstanding common share capital |
| Number of | |||||||
| common | Dollar | ||||||
| shares | Amount | ||||||
| Balance, December 31, 2005 | 47,306,185 | $ | 19,465,518 | ||||
| Share purchase warrants exercised | 35,000 | 36,750 | |||||
| Share purchase options exercised | 111,000 | 125,550 | |||||
| Fair value of stock options allocated to shares issued on exercise | – | 104,281 | |||||
| Balance, March 31, 2006 | 47,457,185 | $ | 19,732,099 |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| (c) | Warrants |
The continuity of share purchase warrants is as follows: |
| Expiry date | July 12, 2006 | |||
| Exercise price | $1.05 | |||
| Balance, December 31, 2005 | 5,640,000 | |||
| Issued | – | |||
| Exercised | (35,000 | ) | ||
| Expired | – | |||
| Balance, March 31, 2006 | 5,605,000 |
Subsequent to March 31, 2006, a total of 4,461,000 warrants were exercised for cash proceeds of $4,684,050. | |
| (d) | Share purchase option plan |
The continuity schedule of share purchase options of which 779,932 are exercisable is as follows: |
| Weighted | |||||||
| Share purchase options outstanding | Number of | average | |||||
| options | exercise price | ||||||
| Balance, December 31, 2005 | 1,859,267 | $ 1.44 | |||||
| Granted | 1,040,000 | 1.61 | |||||
| Exercised | (111,000 | ) | 1.46 | ||||
| Expired or cancelled | (5,000 | ) | 1.33 | ||||
| Balance, March 31, 2006 | 2,783,267 | $ 1.52 |
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
Options outstanding and exercisable at March 31, 2006 were as follows:
| Number of | Number of | |||||||||
| Option | options | options | ||||||||
| Expiry date | price | outstanding | exercisable | |||||||
| November 29, 2006 | $ 1.10 | 336,600 | 336,600 | |||||||
| November 30, 2006 | $ 1.33 | 231,667 | 180,000 | |||||||
| November 30, 2007 | $ 1.20 | 260,000 | 123,332 | |||||||
| September 28, 2007 | $ 1.70 | 900,000 | 140,000 | |||||||
| December 24, 2007 | $ 1.50 | 15,000 | – | |||||||
| February 28, 2008 | $ 1.61 | 40,000 | – | |||||||
| February 27, 2009 | $ 1.61 | 50,000 | – | |||||||
| November 30, 2009 | $ 1.61 | 250,000 | – | |||||||
| February 28, 2011 | $ 1.61 | 700,000 | – | |||||||
| Total | 2,783,267 | 779,932 | ||||||||
| Average option price | $ 1.52 | $ 1.28 |
The exercise prices of all share purchase options granted were at or above the market price at the grant date. Using an option pricing model with the assumptions noted below, the estimated fair value of all options granted in the three months ended March 31, 2006, and which have been reflected in the consolidated statements of operations, is as follows:
| Three months ended March 31 | |||||||
| 2006 | 2005 | ||||||
| Exploration | |||||||
| Engineering | $ | 1,181 | $ | 10,793 | |||
| Environmental, socioeconomic and land | 431 | 5,943 | |||||
| Geological | 31,003 | 100,722 | |||||
| Exploration | 32,615 | 117,458 | |||||
| Office and administration | 228,526 | 112,221 | |||||
| Total compensation cost recognized in operations, credited | |||||||
| to contributed surplus | $ | 261,141 | $ | 229,679 | |||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
The weighted-average assumptions used to estimate the fair value of options vesting during the respective periods were as follows:
| Three months ended March 31 | |||||||
| 2006 | 2005 | ||||||
| Risk free interest rate | 4% | 3% | |||||
| Expected life | 2.4 years | 2 years | |||||
| Expected volatility | 70% | 121% | |||||
| Expected dividends | nil | nil | |||||
Subsequent to March 31, 2006, a total of 487,500 options were granted, and 37,000 options were exercised for proceeds of $46,910. | |
| (e) | Contributed surplus |
| Balance, December 31, 2005 | $ | 545,035 | ||
| Changes during the period | ||||
| Non-cash stock-based compensation | 261,141 | |||
| Share purchase options exercised, credited to share capital | (104,281 | ) | ||
| Balance, March 31, 2006 | $ | 701,895 |
| 5. | RELATED PARTY BALANCES AND TRANSACTIONS |
| March 31 | December 31 | ||||||
| Due from (to) related party | 2006 | 2005 | |||||
| Hunter Dickinson Inc. | $ | (106,729 | ) | $ | 152,319 | ||
| Reimbursement for third party expenses and | |||||||
| services rendered by: | Three months ended March 31 | ||||||
| 2006 | 2005 | ||||||
| Hunter Dickinson Inc. | $ | 759,613 | $ | 176,826 | |||
| CONTINENTAL MINERALS CORPORATION |
| Notes to Consolidated Financial Statements – Amended and Restated |
| For the three months ended March 31, 2006 |
| (Unaudited - Expressed in Canadian Dollars) |
| 6. | SUBSEQUENT EVENTS | |
| (a) | In April 2006, the Company completed the exploration expenditure requirement to exercise the Second Option to earn-in additional 10% (to a total of 60%) interest in Highland Mining Inc. pursuant to the Highland Mining Option Agreement. The expenditures incurred are currently under review by Great China Mining Inc (“GCMI”). | |
| (b) | In April 2006, the Company announced that it had entered into agreements with shareholders holding approximately 67% of GCMI’s common shares who have agreed to support a merger among GCMI and a wholly owned subsidiary of the Company, whereby GCMI shares will be exchanged for Continental common shares on a ratio of 8.7871 GCMI shares for each Continental common share. If completed as contemplated, the merger will result in the Company owning a 100% interest in the Xietongmen property. Completion of the merger is subject to a number of conditions, including execution of definitive merger documentation, as well as shareholder and regulatory approvals. The Company will also issue 136,607 options to current GCMI option holders, at exercise prices ranging from $1.02 to $1.23, with expiry dates ranging from August 2, 2006 to December 2, 2008, to replace certain GCMI options currently outstanding. If for any reason the corporate merger cannot complete, the majority shareholders of GCMI have agreed to exchange their shares at the above ratio in a series of private transactions, subject to regulatory approval. | |
The Company will also acquire three minerals property interests totalling approximately 100 square kilometers, lying within an area of interest near the Xietongmen Property, through the issuance of an additional 1,500,000 units, with each unit consisting of one Continental common share and one common share warrant exercisable at $1.59 per common share for two years, from the date of the completion of the merger. The Company is also required to pay US$3,250,000 cash, with US$1,250,000 payable on completion of the merger and the remaining balance in four equal annual instalments of US$500,000 to certain property holders. | ||
Pursuant to the terms of the merger agreement, Continental will increase its board of directors to 11 and appoint to it three GCMI nominees. Two of these nominees are Messrs. Wang Zhi and Yang (Jack) Jie, both of whom currently serve as directors of GCMI. Continental will also issue 700,000 options to Mr. Wang, exercisable at $1.61 per common share, expiring February 28, 2011. The Company has also agreed to retain Mr. Wang under an incentive arrangement and has agreed to pay him a bonus of 2,500,000 units of Continental (one share plus one one-year share purchase warrant exercisable at $1.59 per common share) in the event that all necessary mining permits are received in a timely manner, but in any event, no later than March 31, 2010. | ||