Western Silver (WTC) 40-F 2005 FY Annual report (Canada)

Western Silver Corporation
(an exploration stage company)

Consolidated Financial Statements
September 30, 2005, 2004, and 2003
(expressed in Canadian dollars)

Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of the company have been prepared by management in accordance with accounting principles generally accepted in Canada which have been reconciled to accounting principles generally accepted in the United States as set out in note 13, and contain estimates based on management’s judgment. Management maintains an appropriate system of internal controls to provide reasonable assurance that transactions are authorized, assets safeguarded, and proper records maintained.

The Audit Committee of the Board of Directors has met with the company’s auditors to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board of Directors for approval.

The company’s auditors, PricewaterhouseCoopers LLP, are appointed by the shareholders to conduct an audit in accordance with Canadian and United States generally accepted auditing standards, and their report follows.

“R. Joseph Litnosky”	“F. Dale Corman”
R. Joseph Litnosky	F. Dale Corman
Vice President, Finance	Chief Executive Officer
December 22, 2005

PricewaterhouseCoopers LLP
Chartered Accountants
PricewaterhouseCoopers Place
250 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 3S7
Telephone +1 (604) 806 7000
Facsimile +1 (604) 806 7806

AUDITORS’ REPORT

To the Shareholders of Western Silver Corporation

We have audited the consolidated balance sheets of Western Silver Corporation (an exploration stage company) as at September 30, 2005 and 2004 and the consolidated statements of loss and deficit, cash flows and shareholders’ equity for the years ended September 30, 2005, 2004 and 2003. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at September 30, 2005 and 2004 and the results of its operations and its cash flows for the years ended September 30, 2005, 2004 and 2003 in accordance with Canadian generally accepted accounting principles.

(signed) PricewaterhouseCoopers LLP

Chartered Accountants
Vancouver, B.C.
November 14, 2005

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Western Silver Corporation

(an exploration stage company)

Consolidated Balance Sheets

(expressed in Canadian dollars)

As at September 30,	2005		2004
	$		$
Assets
Current assets
Cash and cash equivalents (note 9)	60,513,188		13,528,534
Accounts receivable and prepaid expense	1,093,748		693,521
	61,606,936		14,222,055
Long-term investment(note 3)	267,092		267,092
Property, plant and equipment- net of accumulated amortization
of $17,313 (2004 - $4,537)	116,630		44,794
Mineral properties(note 4)	56,968,576		43,194,729
	118,959,234		57,728,670
Liabilities
Current liabilities
Accounts payable and accrued liabilities	2,924,940		1,509,410
Shareholders’ Equity
Capital stock(note 5)
Authorized
Unlimited common shares
Issued and outstanding
48,298,581 (2004 – 41,241,581) common shares	143,273,203		79,249,498
Value assigned to stock options and warrants(note 5)	5,805,078		3,853,483
Deficit	(33,043,987	)	(26,883,721	)
	116,034,294		56,219,260
	118,959,234		57,728,670

Nature of operations(note 1)

Contract commitments(note 7)

Subsequent event(note 14)

Approved by the Board of Directors

“Robert J. Gayton” Director “Klaus Zeitler” Director

The accompanying notes are an integral part of these consolidated financial statements.

Western Silver Corporation

(an exploration stage company)

Consolidated Statements of Loss and Deficit

(expressed in Canadian dollars)

For the years ended September 30,	2005		2004		2003
	$		$		$
General exploration expenditures	881,289		49,872		20,005
Impairment of mineral properties(note 4)	1,849,259		4,020,565		329,503
	2,730,548		4,070,437		349,508
Administrative expenses
Accounting and legal	307,601		212,645		159,735
Capital taxes	-		-		9,551
Consulting	750,235		387,840		381,046
Filing and transfer fees	223,883		181,089		176,262
Foreign exchange	121,426		23,741		(26,569	)
Office and administration	1,309,045		469,502		252,645
Shareholder communications and travel	585,567		534,359		350,644
Stock-based compensation (note 5(e))	1,486,405		3,698,659		269,257
	4,784,162		5,507,835		1,572,571
Loss before interest income	(7,514,710	)	(9,578,272	)	(1,922,079	)
Interest income	1,354,444		244,988		82,098
Loss for the year	(6,160,266	)	(9,333,284	)	(1,839,981	)
Deficit - Beginning of year	(26,883,721	)	(17,550,437	)	(15,710,456	)
Deficit - End of year	(33,043,987	)	(26,883,721	)	(17,550,437	)
Basic and diluted loss per common share	(0.13	)	(0.24	)	(0.06	)
Weighted average number of common shares
outstanding	46,569,864		39,192,449		33,087,922

The accompanying notes are an integral part of these consolidated financial statements.

Western Silver Corporation

(an exploration stage company)

Consolidated Statements of Cash Flows

(expressed in Canadian dollars)

For the years ended September 30,	2005		2004		2003
	$		$		$
Cash flows provided by (used in)
OPERATING ACTIVITIES
Loss for the year	(6,160,266	)	(9,333,284	)	(1,839,981	)
Items not affecting cash
Impairment of mineral properties	1,849,259		4,020,565		329,503
Amortization	12,776		3,674		541
Stock-based compensation	1,486,405		3,698,659		269,257
	3,348,440		7,722,898		599,301
Change in non-cash working capital	(112,196	)	(463,237	)	(98,795	)
	(2,924,022	)	(2,073,623	)	(1,339,475	)
FINANCING ACTIVITIES
Shares issued for cash – net of costs	63,323,646		20,071,050		7,603,438
INVESTING ACTIVITIES
Purchase of property, plant, and equipment	(84,612	)	(46,629	)	-
Mineral properties expenditures	(13,330,358	)	(7,166,302	)	(7,639,729	)
Exploration commitments	-		-		(348,821	)
Restricted cash and securities	-		-		348,821
	(13,414,970	)	(7,212,931	)	(7,639,729	)
Increase (decrease) in cash and cash
equivalents	46,984,654		10,784,496		(1,375,766	)
Cash and cash equivalents - Beginning of
year	13,528,534		2,744,038		4,119,804
Cash and cash equivalents - End of year	60,513,188		13,528,534		2,744,038
Supplemental cash flow information(note 9)

The accompanying notes are an integral part of these consolidated financial statements.

Western Silver Corporation

(an exploration stage company)

Consolidated Statements of Shareholders’ Equity

(expressed in Canadian dollars)

					Value
		Common			assigned to
		shares			stock options		Total
	Number of		Cumulative		and		shareholders’
	shares	Amount	deficit		warrants		equity
		$	$		$		$
Balance - September 30, 2002	30,984,048	51,460,577	(15,710,456	)	-		35,750,121
Issue of shares
Private placements	415,616	1,384,000	-		-		1,384,000
Exercise of warrants	2,303,417	3,367,636	-		-		3,367,636
Exercise of stock options	1,481,000	2,851,802	-		-		2,851,802
Options granted to consultants	-	-	-		269,257		269,257
Loss for the year	-	-	(1,839,981	)	-		(1,839,981	)
Balance - September 30, 2003	35,184,081	59,064,015	(17,550,437	)	269,257		41,782,835
Issue of shares
Private placements	2,400,000	11,268,930	-		-		11,268,930
Exercise of warrants	2,190,000	5,477,200	-		-		5,477,200
Exercise of stock options	1,467,500	3,022,900	-		-		3,022,900
Stock options	-	-	-		3,698,659		3,698,659
Value assigned to warrants issued to agents as stock
issuance fees	-	-	-		302,020		302,020
Transfer of value on exercise of stock
options/warrants	-	416,453	-		(416,453	)	-
Loss for the year	-	-	(9,333,284	)	-		(9,333,284	)
Balance - September 30, 2004	41,241,581	79,249,498	(26,883,721	)	3,853,483		56,219,260
Issue of shares
Private placements	6,325,000	60,414,626	-		-		60,414,626
Exercise of warrants	120,000	693,600	-		-		693,600
Exercise of stock options	612,000	2,215,420	-		-		2,215,420
Stock options	-	-	-		2,651,654		2,651,654
Transfer of value on exercise of stock
options/warrants	-	700,059	-		(700,059	)	-
Loss for the year	-	-	(6,160,266	)	-		(6,160,266	)
Balance - September 30, 2005	48,298,581	143,273,203	(33,043,987	)	5,805,078		116,034,294

The accompanying notes are an integral part of these consolidated financial statements.

1	Nature of operations
	Western Silver Corporation (the Company) is an exploration stage company that is incorporated under the British Columbia Business Corporations Act and is engaged directly, and through joint ventures and subsidiaries, in exploring the future development of mineral properties in Mexico and Canada. The recoverability of the amounts shown for mineral property assets is dependent upon the existence of economically recoverable reserves, securing and maintaining title and beneficial interest in the properties, and the ability of the Company to obtain the necessary financing to continue the exploration and future development of its mining properties, or realizing the carrying amount through a sale.
2	Significant accounting policies
	Principles of consolidation
	These consolidated financial statements include the accounts of Western Silver Corporation and its wholly owned subsidiaries, as listed below. All material intercompany transactions and balances have been eliminated. Western Copper International Ltd. (BVI) WCI (Peñasquito) Limited (BVI) Minera Peñasquito, S.A. de C.V. (Mexico) WCI (Nicolas) Limited (BVI) Minera Western Copper, S.A. de C.V. (Mexico) Minera Faja de Plata Limited, (BVI) Minera Faja de Plata, S.A. de C.V. (Mexico) WCI (Geronimo) Limited (BVI) WCI Jeronimo Mexico, S.A. de C.V. (Mexico) Carmacks Copper Ltd. Western Silver Corporation has mineral properties that it operates through interests in joint ventures where the Company shares joint control. These joint ventures are accounted for using the proportionate consolidation method. Use of estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Significant areas where management’s judgement is applied include the calculation of net present value of mineral properties, the realization of future income tax benefits, and the assumptions used to calculate stock-based compensation and the value assigned to warrants. Actual results could differ from those reported by a material amount. Cash and cash equivalents Cash and cash equivalents comprise cash and short-term investments at banks with original maturities of three months or less from the date of acquisition.

Long-term investments

Long-term investments are categorized as available for sale and valued at cost unless there has been an other than temporary impairment in value, in which case they are written down to net realizable value.

Property, plant, and equipment

Plant, property and equipment are carried at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful lives of the assets.

Mineral properties

The Company records its interest in mineral properties at cost. Exploration and development expenditures relating to properties that have indicated economically recoverable reserves or significant mineralization requiring additional exploration, as well as interest and costs to finance those expenditures, are deferred and will be amortized against future production following commencement of commercial production, or written off if the properties are sold, allowed to lapse, abandoned, or become impaired.

Option payments are made at the discretion of the optionee and, accordingly, are accounted for on a cash basis.

Management of the Company reviews the net carrying value of each mineral property when events or changes in circumstances indicate that the carrying amount may not be recoverable. Where information is available and conditions suggest impairment, estimated future net cash flows from each property are calculated using estimated future prices, reserves and resources, and operating, capital and reclamation costs on an undiscounted basis. If the net carrying value of the property exceeds the estimated future net cash flows, the property will be written down to the fair value as determined by using discounted cash flows.

Where estimates of future net cash flows are not available and where other conditions suggest impairment, management assesses whether carrying value can be recovered. This assessment may be estimated by using quantifiable evidence of a geological resource or reserve or the Company’s assessment of its ability to sell the property for an amount greater than the carrying value.

Management’s estimates of mineral prices, recoverable proven and probable reserves and resources, and operating, capital and reclamation costs are subject to certain risks and uncertainties which may affect the assessment of recoverability of mineral property costs. Although management has made its best estimate of these factors, it is possible that changes could occur in the near term which could have a material adverse effect on the estimate of future net cash flows to be generated from the properties.

The acquisition of title to mineral properties is a detailed and time-consuming process. The Company has taken steps, in accordance with industry standards, to verify title to mineral properties in which it has an interest. Although the Company has taken reasonable precautions to ensure that legal title to its properties is properly recorded in the name of the Company, there can be no assurance that such title will ultimately be secured.

Loss per common share

Loss per share is calculated based on the weighted average number of common shares issued and outstanding during the year. The effect of potential issuances of shares under options and warrants would be anti-dilutive, and therefore basic and diluted losses per share are the same.

Translation of foreign currency

The accounts of certain of the Company’s subsidiaries are translated into Canadian dollars using the temporal method of translating integrated operations. The temporal method is consistent with the method used by the Canadian operation to translate its foreign currency transactions.

Monetary assets and liabilities are translated into Canadian dollars using year-end exchange rates. Non-monetary items are translated at rates prevailing at acquisition or transaction date. Expense items are translated into Canadian dollars at the rate of exchange in effect at the date of the related transaction. All exchange gains or losses arising on translation are included in results of operations for the year.

Stock-based compensation

Effective October 1, 2003, pursuant to the amendments to the CICA standard on accounting for stock-based compensation, the fair value of all stock options granted by the Company to employees, and non-employees, are treated as compensation costs. These costs are charged to the statement of loss, or are capitalized, over the vesting period of the stock options granted. The Company’s allocation of stock-based compensation is consistent with its treatment of other types of compensation. The value of stock-based compensation awards is determined by using the Black-Scholes option pricing model. The standard was adopted on a prospective basis in 2004.

Prior to 2004, stock options granted to employees and directors were shown on a pro-forma basis only. The granting of stock options to non-employees was required to be accounted for using the fair value method.

Income taxes

The Company uses the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are recognized for temporary differences between tax and accounting basis of assets and liabilities. Future income tax assets or liabilities are calculated using the tax rates anticipated to apply in the periods that the temporary differences are expected to reverse. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized.

3 Long-term investment

 

			2005
	Number of	Net book
	shares	value	Market value
		$	$
Quaterra Resources Inc.
Common shares	1,498,460	267,092	516,969
			2004
	Number of	Net book
	shares	value	Market value
		$	$
Quaterra Resources Inc.
Common shares	1,498,460	267,092	644,338

The Company has officers and directors in common with Quaterra Resources Inc.

4 Mineral properties

 

		Costs	Disposition/			Costs	Disposition/
	Total costs to	incurred	write-offs		Total costs to	incurred	write-offs		Total costs to
	September 30,	during	during		September 30,	during	during,		September 30,
	2003	2004	2004		2004	2005	2005		2005
	$	$	$		$	$	$		$
Mexico
Faja de Plata
Peñasquito
Acquisition	13,872,012	241,966	-		14,113,978	592,100	-		14,706,078
Exploration	6,707,198	5,963,778	-		12,670,976	9,975,647	-		22,646,623
Feasibility
studies	323,702	1,245,878	-		1,569,580	4,690,852	-		6,260,432
San Jeronimo	1,701,243	24,646	(1,725,889	)	-	-	-		-
Ramos	2,268,173	26,503	(2,294,676	)	-	-	-		-
	24,872,328	7,502,771	(4,020,565	)	28,354,534	15,258,599	-		43,613,133
El Salvador
Acquisition	1,889,672	-	-		1,889,672	-	-		1,889,672
Exploration
El Salvador	2,424,236	39			2,424,275	-	-		2,424,275
San Nicolas	4,312,095	198,730			4,510,825	181,922	-		4,692,747
Tamara	1,849,259	-			1,849,259	-	(1,849,259	)	-
	10,475,262	198,769	-		10,674,031	181,922	(1,849,259	)	9,006,694
Almoloya
Acquisition	25,443	57,283	-		82,726	53,431	-		136,157
Exploration	40,020	2,132	-		42,152	14,346	-		56,498
	65,463	59,415	-		124,878	67,777	-		192,655
Bacanora
Acquisition	3,555	7,104	-		10,659	6,432	-		17,091
Exploration	30,627	-	-		30,627	8,376	-		39,003
	34,182	7,104	-		41,286	14,808	-		56,094
Canada
Carmacks
Acquisition	4,000,000	-	-		4,000,000	100,000	-		4,100,000
	39,447,235	7,768,059	(4,020,565	)	43,194,729	15,623,106	(1,849,259	)	56,968,576

a)	Faja de Plata
	i)	Peñasquito
		Effective June 28, 2001, the Company’s interest in Peñasquito, through its subsidiary Minera Peñasquito, S.A. de C.V., reverted back to 100% following the termination of an option agreement with Mauricio Hochschild & Cia. Ltda. (Hochschild). During the term of the agreement, Hochschild, besides incurring exploration expenditures, made a US$500,000 land purchase payment, leaving two such payments to be made by the Company.
		The Company negotiated a deferral of the remaining Peñasquito property payments, and US$621,000 was paid on July 3, 2002 and a further US$654,000 was paid on July 3, 2003. These payments represent the major portion of the total Peñasquito acquisition costs incurred during 2002 and 2003, respectively.
		On November 11, 2005, the Company released an independent feasibility study relating to its wholly owned Peñasquito property. Refer to the Subsequent Event note (note 14) for more information.
		Kennecott Exploration Company (Kennecott) retains an uncapped royalty on Peñasquito of 2%. Minera Catasillas also retains a 3% NSR royalty on 100 hectares centered on Peñasco, which the Company can buy out at any time for US$5 million. The Minera Catasillas royalty would include production from Peñasco but not from Chile Colorado.
	ii)	San Jeronimo
		The Company, through its subsidiary WCI Jeronimo Mexico, S.A. de C.V., signed a definitive agreement dated August 24, 2000 with Hochschild, whereby Hochschild could earn a 68% interest in San Jeronimo by making exploration expenditures totalling US$1.75 million over the next three years.
		On July 10, 2001, Hochschild terminated its option to earn the 68% interest. As a result, the Company’s interest in San Jeronimo reverted back to 100% effective September 8, 2001.
		Effective June 1, 2002, the Company and Apex Silver Mines Limited (Apex) entered into an agreement whereby Apex had an option to earn a 70% interest in the property by making US$45,000 in option payments to the Company, and making all underlying option and tax payments on the property through March 2005. The underlying option payments totalled US$1,180,000.
		As at September 28, 2004, Apex terminated the agreement after drilling six core holes. As a result, the Company’s interest in San Jeronimo reverted back to 100% effective September 28, 2004. The Company wrote down the costs associated with the property during fiscal 2004.
		Subsequent to September 30, 2005, the Company made a US$25,000 payment to acquire the core claims at San Jeronimo.

		Kennecott retains an uncapped royalty on San Jeronimo of 2%.
	iii)	Ramos
		Minera Teck S.A. de C.V. (Minera Teck) and Minera Western Copper, S.A. de C.V. (Minera Western) formed a joint venture in fiscal 1999 with each having a 55% and 45% interest, respectively, by merging their respective land positions adjacent to the El Salvador joint venture area. During fiscal 2003, Minera Teck agreed to drop its interest in Ramos. Minera Western dropped a portion of Ramos, but retained the most promising portion of the property. After reviewing the results of a drilling program carried out in December 2004, the Company decided to write off the costs associated with the property in fiscal 2004.
b)	El Salvador, San Nicolas and Tamara
	The El Salvador, San Nicolas and Tamara properties are located in the state of Zacatecas, Mexico. The Company, through its subsidiary Minera Western, holds the properties as a joint venture with Minera Teck (a subsidiary of Teck Cominco Ltd.), pursuant to a July 1, 1997 agreement. The joint venture has no other significant assets. Minera Western’s proportionate share of the mineral properties is disclosed.
	Under this agreement, Minera Western held a 45% interest and Minera Teck held a 55% interest in the joint venture, with each Company being responsible for its share of the exploration costs.
	As a result of amendments to the agreement in 1999 and 2000, Minera Teck holds 65% of the shares of Minera Tama, a Mexican corporation formed to hold the properties, and Minera Western holds the remaining 35%. Within the El Salvador project, approximately one-third of the property, including the San Nicolas deposit area, is held 60% by Minera Tama (participating interest) and 40% by Teck Cominco Limited (Teck Cominco) through its acquisition of Sanluis Corporacion, S.A. de C.V. (the Sanluis Interest) in the form of a carried interest. On completion of a positive feasibility study, Teck Cominco has the right to elect to convert the Sanluis Interest to a 15% carried interest or a 25% participating interest. The balance of the El Salvador project is held by Minera Tama.
	Future funding will be on a Minera Teck 65% - Minera Western 35% basis. Minera Teck retains the right to elect to acquire an additional 10% participating interest by arranging 100% of the financing required to put San Nicolas into production. Depending on the options Minera Teck and Teck Cominco elect to exercise, Minera Western will retain an interest in San Nicolas ranging from 19% to 30%.
	The San Nicolas massive sulphide deposit, along with the adjoining El Salvador and Tamara properties, has been on care and maintenance status since 2002. Costs incurred include tenure holding costs, limited drilling and acquisition of small parcels of land.
	During 2005, the Company reevaluated its long-term plan for the El Salvador properties and concluded that the Tamara property does not contain economic mineral deposits. The Company does not expect there to be any future cash flow from the property. As a result, all costs associated with the Tamara property were written off.

c)	Almoloya
	The Company staked claims at the Almoloya silver prospect, about 45 kilometres northeast of Parral, state of Chihuahua, Mexico.
	Pursuant to a letter agreement dated May 22, 2002, the Company and Anglo American Exploration (Canada) Ltd. (Anglo) agreed to combine certain properties held by each company into a single joint venture. During fiscal 2003, Anglo decided to abandon the project. The Company therefore controls all the property formerly included in the joint venture.
	On July 28, 2005, the Company and Queenston Mining Inc. signed a letter of intent. Under the agreement Queenston Mining Inc. can earn a 60% interest in the property through staged exploration expenditures of US$1.5 million over a four year period, with minimum expenditures of US$200,000 in the first year. Queenston can earn an additional 15% interest by completing a feasibility study and making a production decision at which time the Company can either elect to contribute 25% of capital expenditures required to achieve production or convert its participating interest to a 15% net profits interest.
d)	Bacanora
	In fiscal 2003, the Company entered into an agreement to acquire 100% of the Bacanora property located in the state of Sonora. Further exploration is anticipated.
e)	Carmacks Copper Project
	In 1989, the Company acquired 50% of the Carmacks Copper Project, which consists of 232 unpatented mineral claims in the Whitehorse Mining district of the Yukon Territory, Canada. Under an arrangement dated September 30, 1996, the Company acquired the remaining 50% of the Carmacks Copper Project. At the time, the Company was in the process of obtaining the necessary permits to commence commercial production. This process was suspended when copper prices fell below the break-even point for the project and remained at levels for which the project was not economic. Accordingly, in the year ended September 30, 2001, the property was written down to its estimated realizable value of $4,000,000. Deferred acquisition and exploration costs and a deferred gain, totalling $7,902,556, were written off.
	The previous owners of the property shall, at the Company’s election, retain either a 15% net profits royalty or a 3% net smelter royalty. The Company is required to make an advance royalty payment of $100,000 for any year in which the average daily copper price reported by the London Metal Exchange is US$1.10 per pound or greater. A payment of $100,000 was made by the Company on December 31, 2004.
	The Company has signed a project agreement with the Yukon Government and has recommenced the permitting process. An updated project description has been accepted by the Yukon Government and the assessment process is in progress.

5 Capital stock Authorized Unlimited common shares without par value Issued

	Number	Amount
	Of shares	$
Balance at September 30, 2002	30,984,048	51,460,577
Pursuant to a private placement at $3.33 per share	415,616	1,384,000
Pursuant to the exercise of warrants	2,303,417	3,367,636
Pursuant to the exercise of stock options	1,481,000	2,851,802
Balance at September 30, 2003	35,184,081	59,064,015
Pursuant to a private placement at $5.15 per share	2,400,000	11,268,930
Pursuant to the exercise of warrants	2,190,000	5,477,200
Pursuant to the exercise of stock options	1,467,500	3,022,900
Transfer of value on exercise of stock options and warrants	-	416,453
Balance at September 30, 2004	41,241,581	79,249,498
Pursuant to a financing at $10.25 per share	6,325,000	60,414,626
Pursuant to the exercise of warrants	120,000	693,600
Pursuant to the exercise of stock options	612,000	2,215,420
Transfer of value on exercise of stock options and warrants	-	700,059
Balance at September 30, 2005	48,298,581	143,273,203

a)	The following summarizes the issuances of capital stock during the year ended September 30, 2005:
		The Company received $693,600 from the exercise of 120,000 warrants at an exercise price of $5.78 per warrant.
		The Company received $2,215,420 from the exercise of 612,000 stock options at exercise prices ranging from $1.00 to $9.54 per stock option.
		The Company received proceeds of $64,831,250, less issuance costs of $4,416,624 from the issuance of 6,325,000 shares through a financing at $10.25 per share.

b)	The following summarizes the issuances of capital stock during the year ended September 30, 2004:
		The Company received $5,477,200 from the exercise of 2,190,000 warrants at exercise prices ranging from $1.00 to $5.78 per warrant.
		The Company received $3,022,900 from the exercise of 1,467,500 stock options at exercise prices ranging from $1.00 to $4.60 per stock option.
		The Company received $11,570,950 (net of cash offering costs of $789,050) from the issuance of 2,400,000 shares through a private placement at $5.15 per share. Warrants were issued as stock issuance fees and assigned a value of $302,020.
c)	The following summarizes the issuances of capital stock during the year ended September 30, 2003:
		The Company received $3,367,636 from the exercise of 2,303,417 warrants at exercise prices ranging from $0.65 to $2.00 per warrant.
		The Company received $2,851,802 from the exercise of 1,481,000 stock options at exercise prices ranging from $1.00 to $3.28 per stock option.
		The Company received $1,384,000 from the issuance of 415,616 shares through a private placement at $3.33 per share.

d)	Warrants
	During the year ended September 30, 2004, 240,000 warrants were granted at an average value per warrant of $1.26. The fair value of warrants that were issued in 2004 was $302,020, which was charged against share capital.
	A summary of the Company’s warrants outstanding at September 30, 2005, 2004 and 2003, and the changes for the years then ended, is presented below:

			Weighted			Weighted			Weighted
			average			average			average
	September 30,		exercise	September 30,		exercise	September 30,		exercise
	2005		price	2004		price	2003		price
			$			$			$
Balance outstanding -
Beginning of year	120,000		5.78	2,070,000		2.31	4,350,340		1.80
Issued	-		-	240,000		5.78	23,077		0.80
Exercised	(120,000	)	5.78	(2,190,000	)	2.50	(2,303,417	)	1.43
Balance outstanding
and exercisable -
End of year	-		-	120,000		5.78	2,070,000		2.31

There are no warrants outstanding and exercisable as of September 30, 2005.

The value of warrants was based on the following assumptions:

	2004
Average risk-free interest rate	3.30%
Expected dividend yield	-
Expected stock price volatility	70%
Expected warrant life in years	1.00

Pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the warrants issued by the Company during the year.

e)	Stock options
	Effective April 4, 2005, the shareholders adopted a 10% rolling stock option plan (“Rolling Plan”). All previously existing plans and stock options were incorporated into the Rolling Plan. At any point in time, the Company may issue stock options for the purchase of up to 10% of issued capital. The exercise price of the stock options shall be not less than the market value of the common shares on the last trading day immediately preceding the date of grant. Stock options are fully vested and exercisable in full at the date of grant unless otherwise determined by the directors. The maximum stock option term is 10 years. As at September 30, 2005, the Company can issue an additional 1,868,858 stock options.
	A summary of the Company’s stock options outstanding at September 30, 2005, 2004 and 2003, and the changes for the years then ended, is presented below:

			Weighted			Weighted			Weighted
			average			average			average
	September 30,		exercise	September 30,		exercise	September 30,		exercise
	2005		price	2004		price	2003		price
			$			$			$
Balance outstanding -
Beginning of year	2,713,000		4.19	3,205,500		1.92	4,111,500		1.68
Granted	860,000		10.25	975,000		8.47	575,000		3.64
Exercised	(612,000	)	3.62	(1,467,500	)	2.06	(1,481,000	)	1.93
Balance outstanding -
End of year	2,961,000		6.07	2,713,000		4.19	3,205,500		1.92

As at September 30, 2005, 2,387,667 of the 2,961,000 outstanding stock options were exercisable at a weighted average exercise price of $5.07. As at September 30, 2004, 2,415,500 of the 2,713,000 outstanding stock options were exercisable at a weighted average exercise price of $3.53. All stock options outstanding as at September 30, 2003 were exercisable.

	Options
	outstanding at
	September 30,	Weighted average	Average remaining
Exercise price	2005	exercise price	contractual life
$		$	(years)
1.00 - 1.50	917,500	1.27	1.42
2.00	300,000	2.00	0.35
3.28	38,500	3.28	2.19
6.00 – 7.30	280,000	6.70	3.29
9.54 – 10.25	1,425,000	9.97	4.18
	2,961,000	6.07	2.83

During the year ended September 30, 2005, 860,000 options were granted at an average value per option of $4.82. The fair value of options that vested during 2005 was $2,651,654. Of this amount $1,486,405 was charged to the statement of loss and $1,165,249 was allocated to mineral properties.

During the year ended September 30, 2004, 975,000 options were granted at an average value per option of $4.39. The fair value of options that vested in 2004 was $3,698,659. This amount was charged to the statement of loss.

During the year ended September 30, 2003, the fair value, as determined by the Black-Scholes option pricing model, of options granted to directors and employees that vested was $835,819. The total amount was disclosed as pro forma information only, and was not charged to the statement of loss. Had the fair value of the options been charged to the statement of loss, the pro forma net loss for the year would have been $2,675,800 and the basic and diluted loss per share would have been $0.08.

During the year ended September 30, 2003, the Company also granted options to non-employees. The fair value of these options was $269,257. This amount was charged to the statement loss.

The fair value of stock options granted was based on the following assumptions:

	2005	2004	2003
Average risk-free interest rate	3.27%	3.28%	3.70%
Expected dividend yield	-	-	-
Expected stock price volatility	65%	70%	75%
Expected option life in years	3.58	3.50	3.50

Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options granted and/or vested during the year.

6	Related party transactions
	a)	Included in accounts payable and accrued liabilities is $nil (2004 - $42,452) owing to companies/proprietorships controlled by directors and officers of the Company.
	b)	Included in accounts receivable is $nil (2004 - $4,751) owed by companies with common directors.
	c)	During the year ended September 30, 2005, the Company incurred:
		i)	$194,413 (2004 - $75,467; 2003 - $72,000) in charges for administrative services and rent from a Company controlled by a director
		ii)	Fees totalling $798,994 (2004 - $328,976; 2003 - $382,938) for financial, corporate, exploration and engineering consulting from directors and officers, and companies controlled by directors and officers of the Company.
	d)	During the year ended September 30, 2005, the Company charged rent to one of its directors in the amount of $1,748 (2004 - $nil).

e) All other related party transactions are disclosed elsewhere in these consolidated financial statements.

	Related party transactions are measured at the exchange amount.
7	Contract commitments
	On May 4, 2005, the Company entered into an agreement to sublease office space. The agreement expires October 29, 2009. The total amount of payments remaining during the course of the agreement is $979,128, of which $239,787 is due during the 2006 fiscal year. The remaining $739,341 is due between October 1, 2006 and October 29, 2009.
8	Income taxes
	As at September 30, 2005, the Company has accumulated non-capital losses available for carry-forward of approximately $6,800,000, which will expire between 2006 and 2012. The Company also has available Canadian and foreign Exploration and Development Expenditures of approximately $9,000,000, which are available to reduce future taxable income. In addition, the Company’s Mexican subsidiaries have accumulated tax balances that may give rise to future tax benefits. No future tax benefit has been recognized in the accounts for these losses or accumulated tax balances.
	a)	The Company does not have any current or future income tax expense or recovery. This differs from the amounts obtained by applying statutory rates to the loss before provision for income taxes due to the following:

	2005		2004
Statutory tax rate	35.62%		35.62%
	$		$
Loss for the year	6,160,266		9,333,284
Recovery of income taxes based on statutory Canadian
combined federal and provincial income tax rates	2,194,287		3,324,516
Non-deductible items	(534,279	)	(1,339,784	)
Difference between Canadian and foreign tax rates	(178,973	)	(16,669	)
Losses for which no income tax benefit has been
recognized	(1,481,035	)	(1,968,063	)
	-		-

b) The significant components of the Company’s future tax assets are as follows:

 

	2005		2004
	$		$
Future income tax assets
Mineral property interests	1,425,340		1,683,199
Operating loss carry-forward	2,428,710		1,740,317
Other			15,040
Benefit from losses	3,895,649		3,438,556
Valuation allowance for future tax assets	(3,895,649	)	(3,438,556	)
	-		-

		The realization of income tax benefits related to these future potential tax deductions is uncertain and cannot be viewed as more likely than not. Accordingly, no future income tax asset has been recognized for accounting purposes.
9	Supplemental cash flow information
	a)	Cash and cash equivalents

As at September 30,	2005	2004	2003
	$	$	$
Cash on hand held with banks	6,827,704	2,478,336	2,744,038
Short-term deposits	53,685,484	11,050,198	-
	60,513,188	13,528,534	2,744,038

b) Changes in non-cash working capital related to operating activities

For the years ended September 30,	2005		2004		2003
	$		$		$
Accounts receivable and prepaid expense	(400,227	)	(499,323	)	(143,538	)
Accounts payable and accrued liabilities	288,031		36,086		44,743
	(112,196	)	(463,237	)	(98,795	)

c) Non-cash financing and investing activities

 

For the years ended September 30,	2005	2004		2003
	$	$		$
Value assigned to warrants issued to agent
as stock issuance costs	-	(302,020	)	-
Change in accounts payable relating to
property, plant, and equipment	48,234	-		-
Change in accounts payable relating to
mineral properties	1,127,499	601,757		(1,848,700	)
Stock-based compensation capitalized to
mineral properties	1,165,249	-		-

10 Segmented information Industry information The Company operates in one reportable operating segment, being the acquisition, exploration and future development of resource properties. Geographic information Interest income in the years ended September 30, 2005, 2004 and 2003 was earned in Canada. The Company’s non-current assets by geographic location are as follows:

	2005	2004
	$	$
Canada	4,483,722	4,311,886
Mexico	52,868,576	39,194,729
	57,352,298	43,506,615

11	Financial instruments
	a)	Fair value
		The fair values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate carrying values because of the short-term nature of these instruments.
		The fair value of the Company’s long-term investment will fluctuate with market prices (note 3). The Company is exposed to a risk of loss if the market price of the investment permanently falls below cost.
	b)	Foreign exchange risk
		Foreign exchange risk is the risk arising from foreign currency fluctuations. The Company does not use any derivative instruments to reduce its exposure to fluctuations in foreign currency exchange rates.
	c)	Credit risk exposure
		Financial instruments that potentially subject the Company to credit risk consist primarily of cash and cash equivalents. The Company deposits cash and cash equivalents with high credit quality financial institutions.
12	Shareholder rights plan
	On December 11, 2003, the board of directors of the Company adopted a shareholder rights plan (the Plan) which is designed to encourage the fair treatment of the Company’s shareholders in connection with any take-over offer and, in particular, any unsolicited take-over bid for the Company. The Plan was approved by the shareholders on March 4, 2004.
	Pursuant to the Plan, rights have been created and attached to the common shares of the Company. If a person (the Bidder) acquires 20% or more of the outstanding voting shares of the Company without complying with the Plan, each right, other than the rights held by the Bidder, will entitle the holder to purchase, for $100, common shares of the Company having a market value of $200.

13	Material differences between Canadian and United States generally accepted accounting principles (GAAP)
	The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada (Canadian GAAP), which differ in certain material respects from those principles that the Company would have followed had its consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The major measurement differences between Canadian and U.S. GAAP are described below, and their effect on the consolidated financial statements is summarized as follows:
	a)	Consolidated Balance Sheets

 

As at September 30,	2005		2004		2003
	$		$		$
Long-term investment - under Canadian
GAAP	267,092		267,092		267,092
Unrealized gain (e)	249,877		377,246		85,046
Long-term investment - under U.S. GAAP	516,969		644,338		352,138
Mineral properties - under Canadian
GAAP	56,968,576		43,194,729		39,447,235
Cumulative exploration expenditures
written off under U.S. GAAP (d)	(50,057,104	)	(36,283,257	)	(32,777,729	)
Mineral properties - under U.S. GAAP	6,911,472		6,911,472		6,669,506
Shareholders’ equity - under Canadian
GAAP	116,034,294		56,219,260		41,782,835
Measurement differences
Deficit - under Canadian GAAP	33,043,987		26,883,721		17,550,437
Deficit - under U.S. GAAP	(83,101,091	)	(63,166,978	)	(50,328,166	)
Accumulated other comprehensive
gain	249,877		377,246		85,046
Shareholders’ equity - under U.S. GAAP	66,227,067		20,313,249		9,090,152

b) Consolidated Statements of Loss and Deficit

 

For the years ended September 30,	2005		2004		2003
	$		$		$
Loss for the year - under Canadian GAAP	6,160,266		9,333,284		1,839,981
Exploration expenditures for the year (d)	15,623,106		7,526,093		4,549,783
Exploration costs written off during the
year that would have been expensed
in the year incurred	(1,849,259	)	(4,020,565	)	(329,503	)
Loss for the year - under U.S. GAAP	19,934,113		12,838,812		6,060,261
Unrealized (gain) loss on available-for-sale
securities (e)	127,369		(292,200	)	(262,230	)
Comprehensive loss - under U.S. GAAP	20,061,482		12,546,612		5,798,031
Loss per common share before
comprehensive income - under U.S.
GAAP	0.43		0.32		0.18
Deficit - under U.S. GAAP - Beginning of
year	63,166,978		50,328,166		44,267,905
Loss for the year - under U.S. GAAP	19,934,113		12,838,812		6,060,261
Deficit - under U.S. GAAP - End of year	83,101,091		63,166,978		50,328,166
Accumulated other comprehensive
loss (gain)
Beginning of year - under U.S. GAAP	(377,246	)	(85,046	)	177,184
Other comprehensive (gain) loss	127,369		(292,200	)	(262,230	)
End of year - under U.S. GAAP	(249,877	)	(377,246	)	(85,046	)

The consolidated statements of loss and deficit include a subtotal before interest income. No similar subtotal would be presented under US GAAP.

For US GAAP purposes, stock-based compensation on the consolidated statements of loss and deficit would be allocated in the following manner:

For the years ended September 30,	2005	2004	2003
	$	$	$
Consulting	10,597	70,133	212,985
General and administration	1,465,211	2,647,814	-
General exploration expenditures	-	908,927	-
Shareholder communication and travel	10,597	71,785	56,272
Total stock-based compensation	1,486,405	3,698,659	269,257

c) Consolidated Statements of Cash Flows

For the years ended September 30,	2005		2004		2003
	$		$		$
Cash provided by (used in) operating
activities, under Canadian GAAP	(2,924,022	)	(2,073,623	)	(1,339,475	)
Adjustment for mineral properties and
deferred exploration	(13,330,358	)	(6,924,336	)	(6,398,483	)
Cash provided by (used in) operating
activities, under US GAAP	(16,254,380	)	(8,997,959	)	(7,737,958	)

For the years ended September 30,	2005		2004		2003
	$		$		$
Cash provided by (used in) investing
activities, under Canadian GAAP	(13,414,970	)	(7,212,931	)	(7,639,729	)
Adjustment for mineral properties and
deferred exploration	13,330,358		6,924,336		6,398,483
Cash provided by (used in) investing
activities, under US GAAP	(84,612	)	(288,595	)	(1,241,246	)

 

	The consolidated statements of cash flows include a subtotal before changes in non-cash working capital items under operating activities. No such subtotal would be presented under US GAAP.
d)	Mineral property exploration expenditures
	Mineral property exploration expenditures are accounted for in accordance with Canadian GAAP as disclosed in note 2.

	For U.S. GAAP purposes, the amounts shown for mineral properties represent acquisition costs, less recoveries, incurred to date and do not necessarily reflect present or future values. The Company capitalizes all acquisition costs on a property-by-property basis. Mineral property acquisition costs include the cash consideration and the fair value of common shares and warrants issued for mineral property interests, pursuant to the terms of the relevant agreement. Mineral properties are written off if the property is sold, allowed to lapse or abandoned, or when impairment in value has been determined to have occurred. Mineral property sales proceeds or option payments received for exploration rights are treated as cost recoveries. Mineral property exploration expenditures, periodic option payments relating to mineral properties for which commercial feasibility has not yet been established, and administrative expenditures are expensed as incurred.
	Mineral property acquisition costs and development expenditures incurred subsequent to the determination of the feasibility of mining operations are deferred until the property to which they relate is placed into production, sold, allowed to lapse or abandoned, or when impairment in value has been determined to have occurred.
	The accumulated costs of properties that are developed to the stage of commercial production will be amortized to operations by unit-of-production depletion.
e)	Available-for-sale securities
	Under U.S. GAAP, securities that are available-for-sale are recorded at fair value and unrealized gains or losses are excluded from earnings and recorded in Other Comprehensive Income.
f)	Recent accounting developments
	In December 2004, the FASB issued FAS No. 123 (revised 2004) (“FAS 123R”), “Share-Based Payment”, which is a revision of FAS No. 123, “Accounting for Stock-based Compensation”. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. Liability classified awards are remeasured to fair value at each balance sheet date until the award is settled. FAS 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees”, and related interpretations and amends FAS No. 95 “Statement of Cash Flows”. FAS 123R is scheduled to be effective beginning fiscal 2006 for the Company. On August 31, 2005, the FASB issued FSP FAS 123R-1 to defer the requirement that a freestanding financial instrument originally subject to FAS 123R becomes subject to the recognition and measurement requirements of other applicable generally accepted accounting principles when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. On October 18, 2005, the FASB issued FSP FAS 123R-2 to provide further guidance on the application of grant date as defined in FAS 123R. The Company is currently assessing the impact of FAS 123R and related FSPs on its consolidated financial statements.

In December 2004, the FASB issued FAS No. 153 “Exchanges of Non-monetary Assets”, which amends APB Opinion No. 20, “Accounting for Non-monetary Transactions” to require that all non-monetary exchanges be accounted for at fair value except for exchanges of non-monetary assets that do not have commercial substance. An exchange is considered to have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for non-monetary asset exchanges occurring in periods beginning after June 15, 2005.

In May 2005, the FASB issued FAS No. 154 “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FAS Statement No. 3”. FAS 154 requires an entity to account for the adoption of a new accounting policy by applying the new principle to prior accounting periods as if the principle had always been adopted, or “retrospective application”. Under existing GAAP, a new principle is not applied to prior periods; rather, the cumulative effect of the change is recognized in earnings in the period of the change. FAS 154 also carries forward without change the guidance from Opinion No. 20 for reporting the correction of an error in previously issued financial statements and the accounting for changes in estimate. The provisions of FAS 154 will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

14 Subsequent event

On November 11, 2005, the Company announced that an independent feasibility study has concluded that the Peñasco and Chile Colorado deposits contained within its wholly owned Peñasquito property in Central Mexico can be developed economically.