UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark one)
[ ] Registration Statement Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
or
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
or
[ ] Shell Company Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-30196
HALO RESOURCES LTD.
(Exact name of Registrant as specified in its charter)
HALO RESOURCES LTD.
(Translation of Registrant's name into English)
BRITISH COLUMBIA, CANADA
(Jurisdiction of incorporation or organization)
SUITE 1280, 625 HOWE STREET, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 2T6
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON STOCK, NO PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NOT APPLICABLE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
31,138,216 COMMON SHARES AS OF AUGUST 31, 2006
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
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If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes No X
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Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 X Item 18
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If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes No X
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GENERAL INFORMATION:
Unless otherwise indicated, all references herein are to Canadian dollars.
The Company is required under Canadian law (National Instrument 43-101 Standards
Of Disclosure For Mineral Projects) ("NI 43-101") to calculate and categorize
"mineral reserve", "proven mineral reserve", "probable mineral reserve",
"mineral resource", "measured mineral resource", "indicated mineral resource"
and "inferred mineral resource" under the Canadian Institute of Mining
Metallurgy and Petroleum ("CIM") Standards on Mineral Resources and Reserves -
Definitions and Guidelines dated December 11, 2005. These standards establish
definitions and guidelines for the reporting of exploration information, mineral
resources and mineral reserves in Canada. These definitions have not been
adopted for use in the United States of America by the Securities and Exchange
Commission (the "SEC"). Under these guidelines, the CIM definitions of proven
and probable mineral reserves equate to the definitions of proven and probable
reserves as set out in Guide 7 of the Securities Act Industry Guides adopted by
the SEC ("Guide 7"). In addition, Canadian law requires disclosure of mineral
resources that equate to measured, indicated and inferred resources.
GLOSSARY
The following is a glossary of geological terms used in this report:
AMPHIBOLITE a rock consisting mainly of hornblende
amphibole, the use of the term being
restricted, however, to metamorphic
rocks. Amphibolite is a grouping of
rocks composed mainly of amphibole (as
hornblende) and plagioclase feldspars,
with little or no quartz. It is
typically dark-colored and heavy, with a
weakly foliated or schistose (flaky)
structure. The small flakes of black and
white in the rock often give it a
salt-and-pepper appearance.
ANDESITE a fine grained intermediate volcanic
rock composed of andesine and one or
more mafic constituents.
CHALCOPYRITE copper bearing sulphide
CM centimeter
DIAMOND DRILL a type of rotary drill in which the
cutting is done by abrasion using
diamonds embedded in a matrix rather
than by percussion. The drill cuts a
core of rock which is recovered in long
cylindrical sections.
EPITHERMAL hydrothermal mineral deposit formed
within about 1 kilometer of the earth's
surface and within a temperature range
of 50 to 200 degrees centigrade,
occurring mainly as veins.
FELSIC igneous rock composed principally of
feldspars and quartz. A mnemonic adj.
derived from (fe) for feldspar, (l) for
lenad or feldspathoid, and (s) for
silica, and applied to light-colored
rocks containing an abundance of one or
all of these constituents. Also applied
to the minerals themselves, the chief
felsic minerals being quartz, feldspar,
feldspathoid and muscovite.
G gram
G/T grams per tonne.
GABBRO a dark, coarse-grained, intrusive
igneous rock chemically equivalent to
basalt. It is a plutonic rock, formed
when molten magma is trapped beneath the
earth's surface and cools into a
crystalline mass. Gabbro is dense,
greenish or dark-colored and contains
varied percentages of pyroxene,
plagioclase, amphibole, and olivine
(olivine gabbro when olivine is present
in large quantities)
GNEISS a common and widely distributed type of
rock formed by high-grade regional
metamorphic processes from pre-existing
formations that were originally either
igneous or sedimentary rocks. Gneissic
rocks are coarsely foliated and largely
recrystallized but do not carry large
quantities of micas, chlorite or other
platy minerals.
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GRADE the concentration of each ore metal in a
rock sample, usually given as weight
percent. Where extremely low
concentrations are involved, the
concentration may be given in grams per
tonne (g/t) or ounces per ton (oz/t).
The grade of an ore deposit is
calculated, often using sophisticated
statistical procedures, as an average of
the grades of a very large number of
samples collected from throughout the
deposit.
INDICATED RESOURCE (NI 43-101 definition) means that part
of a mineral resource for which
quantity, grade or quality, densities,
shape and physical characteristics can
be estimated with a level of confidence
sufficient to allow the appropriate
application of technical and economic
parameters, to support mine planning and
evaluation of the economic viability of
the deposit. The estimate is based on
detailed and reliable exploration and
testing information gathered through
appropriate techniques from locations
such as outcrops, trenches, pits,
workings and drill holes that are spaced
closely enough for geological and grade
continuity to be reasonably assumed.
INDUCED POLARIZATION (I.P.) METHOD the method used to measure various
electrical responses to the passage of
alternating currents of different
frequencies through near-surface rocks
or to the passage of pulses of
electricity.
INFERRED RESOURCE (NI 43-101 definition) means that part
of a mineral resource for which quantity
and grade or quality can be estimated on
the basis of geological evidence and
limited sampling and reasonably assumed,
but not verified, geological and grade
continuity. The estimate is based on
limited information and sampling
gathered through appropriate techniques
from locations such as outcrops,
trenches, pits, workings and drill
holes.
INTRUSION general term for a body of igneous rock
formed below the surface.
KOMATIITIC komatiitic rocks are ultramafic
mantle-derived volcanic rocks. They have
low SiO2, low K2O, low Al2O3, and high
to extremely high MgO. True komatiitic
rocks are very rare and essentially
restricted to rocks of Achaean age and
most are greater than two billion years
old, restricted in distribution to the
Achaean shield areas. Komatiitic rocks
occur with other ultramafic and
high-magnesian mafic volcanic rocks in
Achaean greenstone belts.
KM kilometer
LITHOGEOCHEMICAL a geochemical survey that involves the
sampling of rocks.
M meters
MAFIC descriptive of rocks composed dominantly
of magnesium and iron forming silicates.
Pertaining to or composed dominantly of
the ferromagnesian rock-forming
silicates; said of some igneous rocks
and their constituent minerals.
MEASURED RESOURCE (NI 43-101 definition) means that part
of a mineral resource for which
quantity, grade or quality, densities,
shape and physical characteristics are
so well established that they can be
estimated with confidence sufficient to
allow the appropriate application of
technical and economic parameters, to
support production planning and
evaluation of the economic viability of
the deposit. The estimate is based on
detailed and reliable exploration,
sampling and testing information
gathered through appropriate techniques
from locations such as outcrops,
trenches, pits, workings and drill holes
that are spaced closely enough to
confirm both geological and grade
continuity.
MINERAL RESERVE (NI 43-101 definition) means the
economically mineable part of a measured
or indicated resource demonstrated by at
least a preliminary feasibility study.
This study must include adequate
information on mining, processing,
metallurgical, economic and other
relevant factors that demonstrate, at
the time of reporting, that economic
extraction can be justified. A mineral
reserve includes diluting materials and
allowances for losses that may occur
when the material is mined.
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MINERAL RESOURCE (NI 43-101 definition) is a
concentration or occurrence of diamonds,
natural solid inorganic material, or
natural solid fossilized organic
material including base and precious
metals, coal, and industrial minerals in
or on the Earth's crust in such form and
quantity and of such grade or quality
that is has reasonable prospects for
economic extraction. The location,
quantity, grade, geological
characteristics and continuity of a
mineral resource are known, estimated or
interpreted from specific geologic
evidence and knowledge.
NAPPE a large sheet-like body of rock that has
been moved far from its original
position. Nappes form during continental
plate collisions, when folds are sheared
so much that they fold back over on
themselves and break apart. The
resulting structure is a large-scale
recumbent fold. The term stems from the
French word for tablecloth. Nappes or
nappe belts are a major feature of the
Alps of Europe. The concept was
developed by the geologists who
unraveled the complex tectonic history
of the Alps.
PEGMATITE a very coarse-grained igneous rock that
has a grain size of 20 mm or more; such
rocks are referred to as pegmatitic.
Most pegmatites are composed of quartz,
feldspar and mica; in essence a
"granite". Rarer "intermediate" and
"mafic" pegmatite containing amphibole,
Ca-plagioclase feldspar, pyroxene and
other minerals are known, found in
recrystallized zones and apophyses
associated with large layered
intrusions. Crystal size is the most
striking feature of pegmatite, with
crystals usually over 50mm in size.
However, individual crystals over 10
meters across have been found, and the
world's largest crystal was found within
a pegmatite.
PETROGRAPHIC the description and classification of
rocks.
PORPHYRY rock type with mixed crystal sizes, i.e.
containing phenocrysts of one or more
minerals.
PPM parts per million
PROBABLE MINERAL RESERVE (NI 43-101 definition) the economically
mineable part of an indicated, and in
some circumstances a measured mineral
resource demonstrated by at least a
preliminary feasibility study. This
study must include adequate information
on mining, processing, metallurgical,
economic, and other relevant factors
that demonstrate, at the time of
reporting, that economic extraction can
be justified.
PROBABLE (INDICATED) RESERVES (SEC Guide 7 definition) reserves for
which quantity and grade and/or quality
are computed from information similar to
that used for proven (measured)
reserves, but the sites for inspection,
sampling, and measurement are farther
apart or are otherwise less adequately
spaced. The degree of assurance,
although lower than that for proven
(measured) reserves, is high enough to
assume continuity between points of
observation.
PROVEN (MEASURED) RESERVES (SEC Guide 7 definition) reserves for
which (a) quantity is computed from
dimensions revealed in outcrops,
trenches, workings or drill holes; grade
and/or quality are computed from the
results of detailed sampling; and (b)
the sites for inspection, sampling and
measurement are spaced so closely and
the geologic character is so well
defined that size, shape, depth and
mineral content of reserves are
well-established.
PROVEN MINERAL RESERVE (NI 43-101 definition) means the
economically mineable part of a measured
resource demonstrated by at least a
preliminary feasibility study. This
study must include adequate information
on mining, processing, metallurgical,
economic, and other relevant factors
that demonstrate, at the time of
reporting, that economic extraction is
justified.
PYRITE iron sulphide
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QUALIFIED PERSON means an individual who (a) is an
engineer or geoscientist with at least
five years of experience in mineral
exploration, mine development or
operation or mineral project assessment,
or any combination of these; (b) has
experience relevant to the subject
matter of the mineral project and the
technical report; and (c) is a member in
good standing of a professional
association.
RESERVE (SEC Guide 7 definition) that part of a
mineral deposit which could be
economically and legally extracted or
produced at the time of the reserve
determination.
RHYOLITE a fine-grained extrusive volcanic rock,
similar to granite in composition.
SHEAR ZONE where a fault affects a width of rock
rather than being a single clean break,
the width of affected rock is referred
to as the shear zone. The term implies
movement, i.e. shearing.
SPHALERITE zinc bearing sulphide
STRIKE the direction of a horizontal line on
the surface of the bed, or other planar
feature.
TAILINGS material rejected from a mill after
recoverable valuable minerals have been
extracted.
THOLEIITIC tholeiitic basalt is an igneous rock, a
type of basalt. Like all basalt, the
rock type is dominated by clinopyroxene
plus plagioclase, with minor
iron-titanium oxides. Orthopyroxene or
pigeonite may also be present in
tholeiitic basalt, and olivine, if
present, may be rimmed by either of
these calcium-poor pyroxenes. Tridymite
or quartz may be present in the
fine-grained groundmass of tholeiitic
basalt, and feldspathoids are absent.
Tholeiitic rocks may have a fine, glassy
groundmass as may other types of basalt.
ULTRAMAFIC ultramafic (or ultrabasic) rocks are
igneous and meta-igneous rocks with very
low silica content (less than 45%),
generally >18% MgO, high FeO, low
potassium, and are composed of usually
greater than 90% mafic minerals (dark
colored, high magnesium and iron
content). The earth's mantle is
considered to be composed of ultramafic
rocks.
VMS (VOLCANOGENIC MASSIVE SULPHIDES) volcanogenic massive sulfide ore
deposits or "VMS" are a type of metal
sulfide ore deposit, mainly Cu-Zn which
are associated with and created by
volcanic-associated hydrothermal events.
They are predominantly stratiform
accumulations of sulphide minerals that
precipitate from hydrothermal fluids at
or below the seafloor, in a wide range
of ancient and modern geological
settings. They occur within
volcano-sedimentary stratigraphic
successions, and are commonly coeval and
coincident with volcanic rocks. As a
class, they represent a significant
source of the world's Cu, Zn, Pb, Au,
and Ag ores, with Co, Sn, Ba, S, Se, Mn,
Cd, In, Bi, Te, Ga and Ge as co- or
by-products. VMS deposits are forming
today on the seafloor around undersea
volcanoes, mid ocean ridges and trench
systems, notably the Tongan Arc. Mineral
exploration companies are exploring for
Seafloor Massive Sulfide deposits.
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding forward looking statements found in the
following discussion and elsewhere in this annual report and in any other
statement made by, or on the behalf of the Company, whether or not in future
filings with the Securities Exchange Commission ("SEC"). Forward looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which, with respect to future business decisions, are subject to
change. See "Item 3. Key Information - Risk Factors". These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward looking statements made by or on
behalf of the Company. The Company disclaims any obligation to update forward
looking statements.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
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Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
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Not applicable.
ITEM 3. KEY INFORMATION.
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SELECTED FINANCIAL DATA
The selected financial data of the Company for the years ended August 31, 2006,
2005 and 2004, was derived from the financial statements of the Company which
have been audited by D & H Group LLP, independent Chartered Accountants, as
indicated in their report which is included elsewhere in this annual report. The
selected financial data set forth for the years ended August 31, 2003 and 2002,
are derived from the Company's audited consolidated financial statements, not
included herein.
The information in the following table was extracted from the more detailed
financial statements and related notes included herein and should be read in
conjunction with such financial statements and with the information appearing
under the heading "Item 5. Operating and Financial Review and Prospects".
Reference is made to Note 17 of the Company's financial statements included
herein for a discussion of the material differences between Canadian generally
accepted accounting principles ("GAAP") and US GAAP, and their effect on the
Company's financial statements.
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($ IN 000, EXCEPT PER SHARE DATA)
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YEAR ENDED AUGUST 31,
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2006 2005 2004 2003 2002
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Revenues $17 $31 $82 $69 $163
Production expenses - - $22 $17 $135
Depreciation, depletion and impairment $39 $4 $10 $1,252 $6,011
General and administrative expenses $1,268 $1,060 $184 $177 $242
Stock-based compensation $551 $559 $180 - -
Net loss $(2,200) $(368) $(257) $(1,473) $(6,567)
Loss per share $(0.08) $(0.02) $(0.05) $(0.50) $(2.24)
Weighted average number of shares 28,448 16,050 5,654 2,927 2,927
Dividends per share - - - - -
Working capital (deficiency) $152 $507 $279 $(2) $77
Resource interests $23,846 $22,759 $76 $76 $1,111
Other assets $299 $78 - - $115
Shareholders' equity $10,449 $9,078 $355 $(945) $528
Capital stock $32,396 $28,488 $20,914 $19,537 $19,537
Contributed surplus $1,361 $739 $180 - -
Total assets $24,553 $23,929 $418 $93 $1,631
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ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements of the Company are presented in accordance with
Canadian GAAP. Canadian GAAP differs in certain material respects from US GAAP.
The material differences between Canadian and US GAAP, in respect of these
financial statements, are summarized in the tables below.
Statements of Loss
2006 2005 2004
$ $ $
Net loss under Canadian GAAP (2,199,935) (368,110) (257,022)
Unproven mineral interests expensed (i) (545,409) (11,025,762) -
Other compensation expense (ii) - (12,144) (15,503)
Gain on settlement (iii) - - (97,207)
Deferred income tax expense (v) (491,326) (1,103,364) -
------------ ------------ ------------
Net loss under US GAAP (3,236,670) (12,509,380) (369,732)
============ ============ ============
Loss per share under US GAAP (0.11) (0.78) (0.07)
============ ============ ============
Balance Sheets
2006 2005
$ $
Total assets under Canadian GAAP 24,552,668 23,928,682
Unproven mineral interests expensed (i) (11,571,171) (11,025,762)
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Total assets under US GAAP 12,981,497 12,902,920
============ ============
Total liabilities under Canadian GAAP 14,103,188 14,850,721
------------ ------------
Total liabilities under US GAAP 14,103,188 14,850,721
============ ============
Total shareholders' equity under Canadian GAAP 10,449,480 9,077,961
Unproven mineral interests expensed (i) (11,571,171) (11,025,762)
------------ ------------
Total shareholders' deficiency under US GAAP (1,121,691) (1,947,801)
============ ============
Statements of Cash Flows
2006 2005 2004
$ $ $
Operating Activities
Cash used per Canadian GAAP (2,199,935) (368,110) (257,022)
Unproven mineral interests (2,469,647) (5,842,760) (75,906)
------------ ------------ ------------
Cash used per US GAAP (4,669,582) (6,210,870) (332,928)
============ ============ ============
Investing Activities
Cash provided per Canadian GAAP (2,744,397) (5,879,653) (21,211)
Unproven mineral interests 2,469,647 5,842,760 75,906
------------ ------------ ------------
Cash (used) provided per US GAAP (274,750) (36,893) 54,695
============ ============ ============
(i) Unproven Mineral Interests
Mineral property costs and related exploration expenditures are
accounted for in accordance with Canadian GAAP. For US GAAP purposes,
the Company expenses exploration costs relating to mineral interests.
When proven and probable reserves are determined for an interest and a
feasibility study prepared, then subsequent exploration and development
costs of the property would be capitalized. The capitalized costs of
such properties would then be amortized using the unit of production
method over the estimated life of the ore body based on proven and
probable reserves and would be assessed periodically for recoverability
of carrying values.
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For US GAAP purposes, the Company has adopted the provisions of EITF
04-2, "Whether Mineral Rights are Tangible or Intangible Assets" and
FSP FAS 141-1 and 142-1 which concluded that mineral rights are
tangible assets. Accordingly, the Company capitalizes certain costs
related to the acquisition of mineral rights. The effect of adoption of
EITF 04-2 is to reduce previously reported loss and loss per share for
fiscal 2005 and 2004 by $12,986,665 and $75,906, and $0.81 and $0.01,
respectively. In addition, total assets is increased by $11,733,571 and
shareholders' deficiency is decreased by $11,733,571 as at December 31,
2005.
(ii) Private Placements of Common Stock
The Company conducts the majority of its equity financings pursuant to
private placements. Under the policies of the TSX Venture Exchange
("TSXV"), the Company may provide a discount off the market price of
the Company's common stock. US GAAP does not permit a discount from the
market price. US GAAP requires the recognition of the market value of
the Company's common stock as a credit to share capital, with a charge
to operations for the portion of the discount relating to equity
financings conducted with officers and directors of the Company and a
charge to shareholders' equity, as a capital distribution, for the
discount relating to the remaining portion of the equity financings.
Under US GAAP, loss and capital distributions for fiscal 2006 would
increase by $nil (2005 - $12,144; 2004 - $15,503) and $158,413 (2005 -
$966,502; 2004 - $206,497), respectively, and share capital, as at
August 31, 2006, would increase by $2,320,461 (2005 - $2,162,048; 2004
- $1,183,402). There is no net change to shareholders' equity.
(iii) Settlement with Related Parties
US GAAP requires that gains on settlement of advances with related
parties be credited to deficit. There is no net change in shareholders'
equity.
(iv) Functional Currency
The Company's functional currency is the Canadian dollar.
(v) Canadian Flow-Through Shares
During fiscal 2006, the Company issued 3,293,070 flow-through common
shares (2005 - 4,626,364 shares) for gross proceeds of $2,305,149 (2005
- $4,395,046). Resource expenditure deductions for income tax purposes
related to exploration and development activities funded by
flow-through share arrangements are renounced to investors in
accordance with Canadian income tax legislation. Under Canadian GAAP,
the flow-through shares are recorded at their face value when issued
and the renunciation of such expenditures is accounted for as a
financing cost related to the flow-through issuance and results in a
reduction of share capital with a corresponding increase in the
Company's future income tax liability.
US GAAP requires that the proceeds from issuance should be allocated
between the offering of shares and the sale of tax benefits. The
allocation is made between the quoted price of the existing shares and
the amount the investor pays for the shares. A liability is recognized
for this difference. This liability is reversed when tax benefits are
renounced and a deferred tax liability is recognized at that time.
Income tax expense is the difference between the amount of the deferred
tax liability and the liability recognized on issuance.
Under US GAAP the loss for fiscal 2006 and shareholders' deficiency as
at August 31, 2006, would increase by $491,326 (2005 - $1,103,364; 2004
- $nil).
(vi) Capitalization of Dividend on Redeemable Preferred Shares
As part of the Duport Property acquisition, the Company issued
mandatory redeemable preferred shares. Due to the characteristics of
these preferred shares, for both Canadian and US GAAP, the preferred
shares are accounted for as liabilities.
Under Canadian GAAP, dividends paid on shares accounted for as
liabilities should be disclosed as interest rather than as a charge to
capital. As such, the Company has decided to capitalize the dividends
paid as a carrying cost directly attributable to the unproven mineral
interest.
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Under US GAAP, SFAS 34 - Capitalization of Interest Cost ("SFAS 34")
lists assets qualifying for interest capitalization. The exploration of
unproven mineral interests does not qualify. As such, $50,000 (2005 -
$41,667) of capitalized dividends on redeemable preferred shares would
be separately charged to earnings. There is no net change to net loss
under US GAAP.
(vii) Development Stage Company
The Company is in the exploration stage and, as of July 1, 2004, is
considered a development stage company as defined by SFAS 7. To August
31, 2006, the Company has accumulated a deficit of $15,912,247 while in
the development stage.
RECENT ACCOUNTING PRONOUNCEMENTS
UNITED STATES PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") 157, "Fair Value Measurements" ("SFAS
157"), which defines fair value, establishes a framework for consistently
measuring fair value under GAAP and expands disclosures about fair value
measurements. SFAS 157 is effective beginning January 1, 2008, and the
provisions of SFAS 157 will be applied prospectively as of that date. The
adoption of SFAS 157 is not expected to have an effect on the Company's
financial position.
The FASB has also issued FAS Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FAS Interpretation No. 109, "Accounting for Income Taxes". FIN 48
prescribes a recognition threshold and measurement attributable for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 is not expected to
have an effect on the Company's financial position.
CANADIAN PRONOUNCEMENTS
The Company believes that there are no new Canadian pronouncements which will
have a material effect on the Company's financial position or results of
operations.
EXCHANGE RATE HISTORY
The following table sets forth the average exchange rate for one Canadian dollar
expressed in terms of one US dollar for the fiscal years ended August 31, 2006,
2005, 2004, 2003 and 2002.
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PERIOD AVERAGE
----------------------------------- -------
September 1, 2005 - August 31, 2006 0.8761
September 1, 2004 - August 31, 2005 0.7518
September 1, 2003 - August 31, 2004 0.6767
September 1, 2002 - August 31, 2003 0.6355
September 1, 2001 - August 31, 2002 0.6537
The following table sets forth high and low exchange rates for one Canadian
dollar expressed in terms of one US dollar for the six-month period ended
February 28, 2007.
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MONTH HIGH LOW
-------------- ------ ------
February 2007 0.8631 0.8437
January 2007 0.8586 0.8457
December 2006 0.8760 0.8582
November 2006 0.8869 0.8715
October 2006 0.8965 0.8784
September 2006 0.9048 0.8872
- 10 -
Exchange rates are based upon the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The noon rate of exchange on February 28, 2007, reported by the United States
Federal Reserve Bank of New York for the conversion of Canadian dollars into
United States dollars was CDN $1.17 (US $0.8547 = CDN $1.00).
RISK FACTORS
The Company is a resource exploration company currently engaged in the
acquisition, exploration and development of mineral interests located in Canada.
The Company has, in the past, conducted business in the petroleum and natural
gas industry. During fiscal 2004, the Company ceased activities in the petroleum
and natural gas industry. See "Item 4. Information on the Company - Principal
Properties". The following risk factors apply to the Company's mineral
exploration activities.
THE COMPANY HAS LIMITED FINANCIAL RESOURCES AND IF THE COMPANY IS UNABLE TO
SECURE ADDITIONAL FUNDING AND/OR IF THE COMPANY's EXPLORATION PROGRAMS ARE
UNSUCCESSFUL, THE COMPANY MAY FAIL.
Mineral exploration involves significant risk and few properties that are
explored are ultimately developed into producing mines. Substantial expenditures
may be required to establish ore reserves through drilling, to develop
metallurgical processes to extract the metals from the ore and to construct the
mining and processing facilities at any site chosen for mining. The Company's
proposed exploration programs may not result in any commercial mining operation.
The Company's interests relate to unproved mineral claims which are without a
known body of commercial ore and the proposed programs are an exploratory search
for ore. The Company intends to carry out exploration with the objective of
establishing an economic body of ore. If the Company's proposed exploration
programs are successful, additional funds will be required for the development
of an economic ore body and to place it into commercial production. The only
sources of future funds presently available to the Company are the sale of
equity capital, the exercise of warrants and options or the offering by the
Company of an interest in the mineral claim to be earned to another party or
parties. If the Company is unable to secure additional funding, the Company may
lose its interest in one or more of its mineral claims and/or may be required to
cease operations.
IT IS UNLIKELY THAT ANY OF THE PROPERTY INTERESTS OWNED BY THE COMPANY WILL
CONTAIN "RESERVES"; THEREFORE, IT IS LIKELY THAT THE FUNDS SPENT BY THE COMPANY
ON ITS EXPLORATION ACTIVITIES WILL BE LOST.
All of the Company's property interests are in the exploration stage and do not
contain any "reserves", as that term is defined in Industry Guide 7 adopted by
the SEC. The term "reserves" is defined in Industry Guide 7 as "that part of a
mineral deposit which could be economically and legally extracted or produced at
the time of the reserve determination." Industry Guide 7 is available from the
SEC's website at:
http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7.
Mineral exploration involves significant risk and few properties that are
explored are ultimately developed into producing mines. The probability of an
individual prospect ever having reserves that meet the requirements of Industry
Guide 7 is extremely remote. The Company's property interests, in all
probability, do not contain any reserves and any funds spent on exploration of
the Company's property interests will probably be lost. If any of the Company's
exploration programs are successful, the Company will require additional funds
to advance the property beyond the exploration stage. Substantial expenditures
are required to establish reserves through drilling, to develop metallurgical
processes to extract the metal from the ore and, in the case of new properties,
to develop the mining and processing facilities and infrastructure at any site
chosen for mining. If the Company is unable to secure additional funding, the
Company may lose its interest in one or more of its mineral claims and/or may be
required to cease all activities.
IF THE COMPANY ISSUES SHARES OR OPTIONS TO ITS OFFICERS, DIRECTORS OR KEY
EMPLOYEES, OR IF THE COMPANY OBTAINS FUNDING THROUGH THE SALE OF ADDITIONAL
COMMON SHARES, THE SHAREHOLDERS WILL EXPERIENCE DILUTION.
The Company may in the future grant to some or all of its directors, officers,
insiders and key employees options to purchase the Company's common shares as
non-cash incentives to those employees. Such options may be granted at exercise
prices equal to market prices, or at prices as allowable under the policies of
the TSXV, when the public market is depressed. To the extent that significant
numbers of such options may be granted and exercised, the interests of then
existing shareholders of the Company will be subject to additional dilution.
- 11 -
The Company is currently without a source of revenue and will most likely be
required to issue additional shares to settle its debentures, to pay the
interest on the preferred stock and/or to redeem or retract the preferred stock
issued in connection with the Duport Property acquisition, to finance its
activities and, depending on the outcome of its proposed exploration programs,
may issue additional shares to finance additional exploration programs on any or
all of its projects or to acquire additional properties. The issuance of
additional shares will cause the Company's existing shareholders to experience
dilution of their ownership interests.
THE PRICE OF THE COMPANY'S COMMON SHARES IS SUBJECT TO MARKET FLUCTUATIONS AND
VOLATILITY WHICH MAY NOT BE RELATED TO THE COMPANY'S OPERATIONS AND SUCH
FLUCTUATIONS MAY IMPACT THE COMPANY'S ABILITY TO COMPLETE EQUITY FINANCINGS; IF
THE COMPANY CANNOT COMPLETE ADDITIONAL EQUITY FINANCINGS, IT MAY NOT BE ABLE TO
CONTINUE ITS OPERATIONS.
In recent years, the securities markets in Canada have experienced a high level
of price and volume volatility, and the market price of securities of many
companies, particularly junior natural resources exploration companies, have
experienced wide fluctuations in price which have not necessarily been related
to the operating performance, underlying asset values or prospects of such
companies. In particular, the per share price of the Company's common shares
fluctuated from a low of $0.30 to a high of $0.75 during the 12-month period
ending January 31, 2007. Continued price fluctuations will have a significant
impact on the Company's ability to complete equity financings.
THE COMPANY'S OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS WHICH MAY SUBJECT
THE COMPANY TO PENALTIES FOR FAILURE TO COMPLY AND MAY LIMIT THE COMPANY'S
ABILITY TO CONDUCT EXPLORATION ACTIVITIES AND COULD CAUSE THE COMPANY TO DELAY
OR ABANDON ITS PROJECTS.
Exploration activities are also subject to national and local laws and
regulations governing prospecting, taxes, labor standards, occupational health,
land use, environmental protection, mine safety, and others which currently or
in the future may have a substantial adverse impact on the Company. In order to
comply with applicable laws, the Company may be required to make capital
expenditures until a particular problem is remedied. Existing and possible
future environmental legislation, regulation and action could cause additional
expense, capital expenditures, restriction and delays in the activities of the
Company, the extent of which cannot be reasonably predicted. Violators may be
required to compensate those suffering loss or damage by reason of their mining
activities and may be fined if convicted of an offence under such legislation.
Amendments to current laws, regulations and permits governing activities of
mineral exploration companies or more stringent implementation thereof could
require increases in exploration expenditures, or require delays in exploration
or abandonment of new mineral properties.
The Company's proposed exploration activities may be subject to federal,
provincial and local laws and regulations governing the protection of the
environment, including laws and regulations relating to air and water quality,
waste disposal, and the protection of endangered or threatened species.
The Company may be required to obtain pre-construction environmental and land
use review and comply with permitting, control and mitigation requirements of
the jurisdictions in which the projects are located. Compliance with these
requirements could impose costs on the Company in the future, the materiality of
which cannot reasonably be predicted at this time. Any change in the applicable
laws or regulations could have an adverse effect on any project in which the
Company might have an interest. Also, the Company may require additional permits
for its future operations, which may or may not be obtainable on reasonable
terms. It is unlikely that the Company will not be able to obtain the required
permitting. If the permitting process becomes extended the Company may be
required to obtain additional financial resources.
If the Company is unable to obtain the necessary permits, the Company might have
to change its planned exploration for such non-permitted properties and/or to
seek other joint venture arrangements. If the Company were unable to mitigate
the problem, the Company might not be able to proceed with exploration. In this
event, the Company might seek to mitigate any losses through sale of the
property, prior to abandonment.
- 12 -
BECAUSE THE COMPANY IS SUBJECT TO COMPLIANCE WITH GOVERNMENTAL REGULATION, THE
COST OF ITS PROPOSED EXPLORATION PROGRAMS MAY INCREASE, WHICH MAY CAUSE THE
COMPANY TO HAVE TO ABANDON SUCH PROGRAMS.
The Company's activities will be subject to environmental regulations
promulgated by government agencies from time to time. Environmental legislation
provides for restrictions and prohibitions on spills, releases or emissions of
various substances produced in association with certain mining industry
operations, such as seepage from tailings disposal areas, which would result in
environmental pollution. A breach of such legislation may result in the
imposition of fines and penalties. In addition, certain types of operations
require the submission and approval of environmental impact assessments.
Environmental legislation is evolving in a manner which means stricter
standards, and enforcement, fines and penalties for non-compliance are more
stringent. Environmental assessments of proposed projects carry a heightened
degree of responsibility for companies and directors, officers and employees.
The cost of compliance with changes in governmental regulations has a potential
to reduce the profitability of operations.
EXPLORATION FOR MINERALS ON THE COMPANY'S PROJECTS IS SUBJECT TO SIGNIFICANT
RISKS WHICH COULD INCREASE THE COSTS OF EXPLORATION AND COULD CAUSE THE COMPANY
TO DELAY OR ABANDON ITS PROJECTS.
The Company's projects are without a known ore body of commercial ore and its
proposed programs are exploratory in nature. Mineral exploration involves a high
degree of risk and few properties which are explored are ultimately developed
into producing mines. The long-term profitability of the Company's activities
will be, in part, directly related to the cost and success of its proposed
exploration programs, which may be affected by a number of factors beyond the
Company's control.
Mineral exploration involves many risks, which even a combination of experience,
knowledge and careful evaluation may not be able to overcome. Operations in
which the Company has a direct or indirect interest will be subject to all the
hazards and risks normally incidental to exploration for gold (also "Au"), and
other metals, any of which could result in work stoppages, damage to property,
and possible environmental damage.
The Company will rely upon consultants and others for exploration expertise. If
any of the Company's property interests or option interests merit development,
substantial expenditures will be required to advance the projects beyond the
exploration stage. The Company may not discover minerals in sufficient
quantities to justify commercial operations and the Company may not be able to
obtain the funds required for its activities on a timely basis. The economics of
exploring for gold, silver and other mineral properties is affected by many
factors including the cost of operations, variations in the grade of ore,
fluctuations in metal markets, costs of processing equipment and such other
factors as government regulations, including regulations relating to royalties,
allowable production, importing and exporting of minerals and environmental
protection.
THE COMPANY MAY INCUR LIABILITY FOR CERTAIN RISKS AGAINST WHICH THE COMPANY DOES
NOT HAVE INSURANCE, WHICH COULD REDUCE OR ELIMINATE ANY FUTURE PROFITABILITY AND
NEGATIVELY IMPACT THE PRICE OF THE COMPANY'S SHARES.
In the course of exploration of mineral concessions, certain risks, and in
particular, unexpected or unusual geological operating conditions including rock
bursts, cave-ins, fires, flooding and earthquakes may occur. It is not always
possible to fully insure against such risks and the Company may decide not to
take out insurance against such risks as a result of high premiums or other
reasons. Should such liabilities arise, they could reduce or eliminate any
future profitability and result in increasing costs and a decline in the value
of the securities of the Company. The Company currently does not have any
insurance coverage on its property holdings or its mineral option interests.
THE COMPANY (OR THE OPTIONOR OF THE PROPERTY) MAY NOT HAVE PROPER TITLE TO ITS
PROPERTIES AND, AS A RESULT, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO
OBTAIN PROPER TITLE, OR MAY HAVE TO ABANDON ANY SUCH PROPERTIES.
The Company owns and has under option, unpatented and patented mining claims,
mineral claims or concessions which constitute the Company's property holdings.
The ownership and validity of unpatented mining claims and concessions are often
uncertain and may be contested.
In those jurisdictions where the Company has property interests, the Company
makes a search of mining records in accordance with mining industry practices to
confirm that it has acquired, or upon exercise of any option, can acquire,
satisfactory title to the properties but does not intend to obtain title
insurance with respect to such properties. The possibility exists that title to
one or more of the concessions in which the Company has an interest,
particularly title to undeveloped claims, might be defective because of errors
or omissions in the chain of title, including defects in conveyances and defects
in locating or maintaining such claims, or concessions.
- 13 -
The boundaries of some of the Company's property interests have not been
surveyed and, therefore, the precise location and area of these mining
properties may be in doubt. The Company is not aware of challenges to the
location or area of the unpatented mining claims in which the Company has
acquired an interest.
IF THE COMPANY IS UNABLE TO EFFECTIVELY COMPETE AGAINST OTHER COMPANIES, OR IF
THE COMPANY CANNOT MARKET ANY MINERALS DISCOVERED ON THE PROPERTIES IN WHICH THE
COMPANY HAS AN INTEREST, THE COMPANY MAY HAVE TO CEASE OPERATIONS.
The mineral industry is intensely competitive in all its phases. The Company
competes with many companies possessing greater financial resources and
technical facilities than itself for the acquisition of mineral concessions,
claims, leases and other mineral interests as well as for the recruitment and
retention of qualified employees.
Factors beyond the control of the Company may affect the marketability of any
substances discovered. These factors include market fluctuations, the proximity
and capacity of natural resource markets and processing equipment, government
regulations, including regulations relating to prices, taxes, royalties, land
tenure, land use, importing and exporting of minerals and environmental
protection. The exact effect of these factors cannot be accurately predicted,
but the combination of these factors may result in the Company not receiving an
adequate return on invested capital or losing its investment capital.
CONFLICTS OF INTEREST MAY ARISE AMONG THE MEMBERS OF OUR BOARD OF DIRECTORS AND
SUCH CONFLICTS MAY CAUSE THE COMPANY TO ENTER INTO TRANSACTIONS ON TERMS WHICH
ARE NOT BENEFICIAL TO THE COMPANY.
Several of the Company's directors are also directors, officers or shareholders
of other companies. Some of the directors and officers are engaged and will
continue to be engaged in the search for additional business opportunities on
behalf of other corporations, and situations may arise where these directors and
officers will be in direct competition with the Company. Such associations may
give rise to conflicts of interest from time to time. Such a conflict poses the
risk that the Company may enter into a transaction on terms which could place
the Company in a worse position than if no conflict existed. Conflicts, if any,
will be dealt with in accordance with the relevant provisions of the BUSINESS
CORPORATIONS ACT (British Columbia) (the "BCBCA"). The directors of the Company
are required by law to act honestly and in good faith with a view to the best
interests of the Company and to disclose any interest which they many have in
any project or opportunity of the Company. However, each director has a similar
obligation to other companies for which such director serves as an officer or
director. In order to avoid the possible conflict of interest which may arise
between the directors' duties to the Company and their duties to the other
companies on whose boards they serve, the directors and officers of the Company
have agreed to the following:
1. participation in other business ventures offered to the directors will
be allocated between the various companies and on the basis of prudent
business judgment and the relative financial abilities and needs of the
companies to participate;
2. no commissions or other extraordinary consideration will be paid to
such directors and officers; and
3. business opportunities formulated by or through other companies in
which the directors and officers are involved will not be offered to
the Company except on the same or better terms than the basis on which
they are offered to third party participants.
As of the date of this annual report, all material conflicts of interests which
have arisen since September 1, 2004, have been described in "Item 7. Major
Shareholders and Related Party Transactions."
If a conflict of interest arises at a meeting of the board of directors, any
director in a conflict will disclose his interest and abstain from voting on
such matter, and the minutes of the meeting will reflect such disclosure and
abstention from voting. In determining whether or not the Company will
participate in any project or opportunity, the board of directors will primarily
consider the degree of risk to which the Company may be exposed and its
financial position at that time. See "Item 7. Major Shareholders and Related
Party Transactions - Related Party Transactions - Conflicts of Interest".
THE PRICES OF METALS FLUCTUATE IN THE MARKET AND SUCH FLUCTUATIONS COULD
NEGATIVELY IMPACT THE COMPANY'S ABILITY TO RAISE FUNDING AND MAY CAUSE CERTAIN
ACTIVITIES TO BECOME UNECONOMIC.
Factors beyond the control of the Company may affect the marketability of any
substances discovered. The prices of various metals have experienced significant
movement over short periods of time, and are affected by numerous factors
- 14 -
beyond the control of the Company, including international economic and
political trends, expectations of inflation, currency exchange fluctuations,
interest rates and global or regional consumption patterns, speculative
activities and increased production due to improved mining and production
methods. The supply of and demand for metals are affected by various factors,
including political events, economic conditions and production costs in major
mineral producing regions. Variations in the market prices of metals may impact
on the Company's ability to raise funding to conduct exploration of its
properties. In addition, any significant fluctuations in metal prices will
impact on the Company's decision to accelerate or reduce its proposed
exploration activities.
THE COMPANY DOES NOT PAY DIVIDENDS ON ITS COMMON SHARES; THEREFORE, INVESTORS
SEEKING DIVIDEND INCOME SHOULD NOT PURCHASE THE COMMON SHARES.
The Company has never declared or paid cash dividends on its common shares and
does not anticipate doing so in the foreseeable future. Additionally, the
determination as to the declaration of dividends is within the discretion of the
Company's Board of Directors, which may never declare cash dividends on the
Company's common stock. Investors cannot expect to receive a dividend on the
Company's common shares in the foreseeable future, if at all.
THE COMPANY IS DEPENDENT UPON ITS MANAGEMENT AND THE LOSS OF ANY OF ITS
MANAGEMENT AND/OR IF THE COMPANY IS UNABLE TO RECRUIT ADDITIONAL MANAGERS COULD
NEGATIVELY IMPACT THE COMPANY'S ABILITY TO CONTINUE ITS OPERATIONS.
The success of the operations and activities of the Company is dependent to a
significant extent on the efforts and abilities of its key officers, Ms. Lynda
Bloom, a director, President and Chief Executive Officer of the Company, Mr.
Marc Cernovitch, a director and Chairman of the Company, Mr. Nick DeMare, a
director and Chief Financial Officer of the Company and Mr. Tom Healy, a
director, Senior Vice-President and Chief Operating Officer for the Company. The
loss of services of Ms. Bloom and Messrs. Cernovitch, DeMare or Healy,
respectively, could have a material adverse effect on the Company. The Company
has not obtained key-man life insurance on any of its officers or directors. The
Company's ability to recruit and retain highly qualified management personnel is
critical to its success; if it is unable to do so this may materially affect the
Company's financial performance.
THE MAJORITY OF THE COMPANY'S CURRENT CORPORATE OPERATIONS ARE PERFORMED BY
OTHER THAN COMPANY PERSONNEL AND IF SUCH PERSONNEL ARE NOT AVAILABLE IN THE
FUTURE, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO FIND SUITABLE REPLACEMENTS
AND/OR TO HIRE OTHER PERSONNEL.
Corporate accounting, management and administration are provided, in part, by
Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, Chief
Financial Officer of the Company. In the event the Company needs to employ
additional personnel, it will need to recruit qualified personnel to staff its
operations. The Company believes that such personnel currently are available at
reasonable salaries and wages in the geographic areas in which the Company
operates. There can be no assurance, however, that such personnel will be
available in the future. In addition, it cannot be predicted whether the labor
staffing at any of the Company's projects will be unionized, which may result in
potentially higher operating costs.
THE COMPANY'S SHARES ARE SUBJECT TO THE SEC'S PENNY STOCK RULES, WHICH MAY
RESTRICT THE ABILITY OF BROKERS TO SELL THE COMPANY'S COMMON STOCK AND MAY
REDUCE THE SECONDARY MARKET FOR THE COMMON STOCK.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stock". Generally, penny stocks are equity
securities with a price of less than US $5.00 (other than securities registered
on certain national securities exchanges or quoted on the NASDAQ system). If the
Company's shares are traded for less than US $5 per share, as they currently
are, the shares will be subject to the SEC's penny stock rules unless (1) the
Company's net tangible assets exceed US $5,000,000 during the Company's first
three years of continuous operations or US $2,000,000 after the Company's first
three years of continuous operations; or (2) the Company has had average revenue
of at least US $6,000,000 for the last three years. The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prescribed by the SEC that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from those rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. Since the Company's shares are traded for less
than US $5.00 per share, the
- 15 -
Company's common stock is subject to the penny stock rules. Therefore, the
holders of the common stock may find it difficult to sell the common stock of
the Company. These rules may restrict the ability of brokers to sell the common
stock and may reduce the secondary market for the common stock. A limited
secondary market may result in a decrease in the value of the shares and/or a
partial or total loss of an investor's investment.
THE COMPANY AND/OR ITS SUBSIDIARIES (IF ANY) MAY BE DEEMED TO BE A "PASSIVE
FOREIGN INVESTMENT COMPANY" FOR U.S. TAX PURPOSES WHICH COULD SUBJECT U.S.
SHAREHOLDERS TO INCREASED TAX LIABILITY.
The Company and/or its subsidiaries may be deemed to be a "Passive Foreign
Investment Company". See "Item 10. Additional Information - Taxation." If the
Company or any of its subsidiaries is deemed to be a Passive Foreign Investment
Company, a United States holder of the Company's common shares would be required
to pay an interest charge together with tax calculated at maximum tax rates on
certain "excess distributions" (defined to include certain dividends from a
Passive Foreign Investment Company and any gain on the sale of stock of a
Passive Foreign Investment Company) unless such holder made an election either
to (1) include in his or her taxable income his or her pro rata share of the
Passive Foreign Investment Company's ordinary earnings and net capital gains
under the Qualified Electing Fund rules or (2) mark to market his or her Company
common shares at the end of each taxable year as set forth in Section 1296 of
the Internal Revenue Code of 1986, as amended. The elections require certain
conditions be met such as filing on or before the due date, as extended, for
filing the shareholder's income tax return for the first taxable year to which
the election will apply.
THIS ANNUAL REPORT CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND RESULTS WHICH MAY
NOT BE ACCURATE.
Statements contained in this annual report that are not historical facts are
forward-looking statements that involve risks and uncertainties. Such statements
may not prove to be accurate as actual results and future events could differ
materially from those anticipated in such statements. Without limiting the
generality of the foregoing, such risks and uncertainties include interpretation
of results and geology, results of pre-feasibility and feasibility studies,
recovery, accidents, equipment breakdowns, labor disputes or other unanticipated
difficulties with or interruptions in production, delays in exploration
activities, the inherent uncertainty of production fluctuations and failure to
obtain adequate financing on a timely basis.
INVESTORS IN THE UNITED STATES MAY NOT BE ABLE TO ENFORCE THEIR CIVIL
LIABILITIES AGAINST THE COMPANY OR ITS DIRECTORS AND OFFICERS.
It may be difficult to bring and enforce suits against the Company. The Company
is a corporation domiciled in British Columbia. None of the Company's directors
and officers are residents of the United States, and all or a substantial
portion of their assets are located outside of the United States. As a result,
it may be difficult for U.S. holders of the Company's common shares to effect
service of process on these persons within the United States or to enforce
judgments obtained in the U.S. based on the civil liability provisions of the
U.S. federal securities laws against the Company or its officers and directors.
In addition, a shareholder should not assume that the courts of Canada (i) would
enforce judgments of U.S. courts obtained in actions against the Company, its
officers or directors predicated upon the civil liability provisions of the U.S.
federal securities laws or other laws of the United States, or (ii) would
enforce, in original actions, liabilities against the Company, its officers or
directors predicated upon the U.S. federal securities laws or other laws of the
United States.
However, U.S. laws would generally be enforced by a Canadian court provided that
those laws are not contrary to Canadian public policy, are not foreign penal
laws or laws that deal with taxation or the taking of property by a foreign
government and provided that they are in compliance with applicable Canadian
legislation regarding the limitation of actions. Also, a judgment obtained in a
U.S. court would generally be recognized by a Canadian court except, for
example:
a) where the U.S. court where the judgment was rendered had no
jurisdiction according to applicable Canadian law;
b) the judgment was subject to ordinary remedy (appeal, judicial
review and any other judicial proceeding which renders the
judgment not final, conclusive or enforceable under the laws
of the applicable state) or not final, conclusive or
enforceable under the laws of the applicable state;
c) the judgment was obtained by fraud or in any manner contrary
to natural justice or rendered in contravention of fundamental
principles of procedure;
- 16 -
d) a dispute between the same parties, based on the same subject
matter has given rise to a judgment rendered in a Canadian
court or has been decided in a third country and the judgment
meets the necessary conditions for recognition in a Canadian
court;
e) the outcome of the judgment of the U.S. court was inconsistent
with Canadian public policy;
f) the judgment enforces obligations arising from foreign penal
laws or laws that deal with taxation or the taking of property
by a foreign government; or
g) there has not been compliance with applicable Canadian law
dealing with the limitation of actions.
ITEM 4. INFORMATION ON THE COMPANY.
- --------------------------------------------------------------------------------
HISTORY AND DEVELOPMENT OF THE COMPANY
NAME AND INCORPORATION
The Company was incorporated under the laws of British Columbia, Canada, under
the name of Golden Chance Resources Inc. on June 16, 1983. On October 15, 1990,
the Company's name was changed to Trimark Resources Ltd. On December 14, 1993,
the Company was continued under the BUSINESS CORPORATIONS ACT (Yukon Territory).
On the continuance the Company changed its authorized capital into "unlimited
common shares without par value." On December 13, 1996, the Company's name was
changed to International Trimark Resources Ltd. On June 16, 1997, the Company
changed its name to Trimark Oil & Gas Ltd. On March 21, 2002, the Company
changed its name to Trimark Energy Ltd. On February 23, 2004, the Company
changed its name to its current name, Halo Resources Ltd. Effective November 16,
2004, the Company changed its domicile through continuation from the Yukon
Territory to British Columbia under the BCBCA. See "Item 10. Additional
Information - Memorandum and Articles of Association".
The primary market for the Company's common stock is the TSXV. The Company
trades on the TSXV under the symbol "HLO" and is classified as a Tier 2 company.
Effective November 23, 2005, the Company's Series A Warrants and Series B
Warrants were listed and posted for trading on the TSXV under the symbols
"HLO.WT.A" and "HLO.WT.B", respectively. On December 23, 2006, the Series A and
Series B Warrants expired without having any trades made.
Effective August 7, 2000, the Company's common stock was listed for quotation on
the Over-the-Counter Bulletin Board (the "OTC Bulletin Board") operated by the
National Association of Securities Dealers, where it currently trades under the
symbol "HLOSF.OB".
In addition, since February 2005, the Company's common stock has been listed on
the Frankfurt Stock Exchange ("FSE") and XETRA (Electronic Dealing System) under
the trading symbol "HRL".
The Company's principal business office is located at Suite 1280, 625 Howe
Street, Vancouver, British Columbia, V6C 2T6. The Company's executive office is
located at Suite 2900, 25 King Street West, Toronto, Ontario, M5L 1G3. The
Company also has an exploration office located at Suite 2, 54 Main Street, Flin
Flon, Manitoba, R8A 1J6. The contact person is Marc Cernovitch, Chairman of the
Company. The telephone number is (604) 484-0068 and the facsimile number is
(604) 484-0069. The Company's registered office is located at Suite 1305, 1090
West Georgia Street, Vancouver, British Columbia, V6E 3V7. The Company does not
have a registered agent in the United States.
BUSINESS OVERVIEW
Since 2004, the Company has been a resource exploration company engaged in the
acquisition of and exploration for precious metals on mineral interests located
in Canada. At this stage of development, the Company has no producing properties
and, consequently, has no current operating income or cash flow. The Company has
not yet determined whether the properties owned by the Company or in which the
Company has an option to acquire an interest have ore reserves that are
economically recoverable. As a result, the Company is considered an exploration
stage company.
- 17 -
MINERAL INTERESTS
DUPORT PROPERTY
On July 5, 2004, the Company entered into an agreement to acquire a 100%
interest in the Duport Property (the "Duport HOA") with the Sheridan Platinum
Group and Mr. Pat Sheridan (collectively, the "Sheridan Group"). Under the
Duport HOA, the Company had the right to acquire a 100% interest in the property
by paying $250,000 on closing, together with the issuance of one million common
shares and $8 million in series 1 preferred shares (the "Series 1 Preferred
Shares") and the grant of a 2.5% net smelter return royalty ("NSR") on the first
1.5 million ounces of gold produced and a 5% NSR on all amounts in excess
thereof. The transaction received shareholder approval at the Company's November
2, 2004 special meeting of shareholders and the February 9, 2005 annual and
special meeting of shareholders. The option was exercised pursuant to the
execution of a definitive agreement between Halo and The Sheridan Group dated
February 18, 2005 (the "Duport Agreement") and the transaction closed effective
March 24, 2005. The Series 1 Preferred Shares issued in connection with the
Duport HOA have a term of five years and are subject to the dividend,
redemption, retraction and voting privileges set forth below. See "Item 4.
Information on the Company - Principal Properties".
BACHELOR LAKE PROPERTY
On November 12, 2004, the Company entered into an option agreement to earn a 50%
interest in the Bachelor Lake Property with Wolfden Resources Inc. ("Wolfden").
A definitive agreement (the "Assignment and Assumption Agreement") was
subsequently executed on April 15, 2005.
Under the terms of the Assignment and Assumption Agreement, Wolfden assigned to
the Company its option to earn a 50% interest in the Bachelor Lake Property from
Metanor Resources Inc. ("Metanor") by paying to Wolfden an aggregate of
$1,943,123 (comprised of $650,000 in acquisition costs and $1,293,123 in
reimbursement of exploration expenditures) and issuing 2.1 million common shares
subject to a 12-month contractual hold period. Upon securing project financing
and the commencement of commercial production on the property resulting in a
minimum of 50,000 ounces of gold or silver equivalent being produced, the
Company will pay a bonus payment to Wolfden in the amount of $250,000 cash and
250,000 common shares. The Company also agreed to pay Wolfden a net smelter
return royalty of 0.5% on the Company's share of the net smelter return and
assumed Wolfden's $3 million exploration funding commitment at the Bachelor Lake
Property.
Effective May 18, 2005, the Company and Metanor entered into an agreement
whereby Metanor acknowledged the Assignment and Assumption Agreement, and the
terms of the underlying option agreement on the Bachelor Lake Property were
amended. Under the amendment, the Company could exercise its option to earn the
50% interest in the Bachelor Lake Property by spending a minimum of $500,000 of
exploration on the Bachelor Lake Property and paying $100,000 to Metanor. All of
the required exploration funding has subsequently been expended. On September
21, 2005, the Company exercised its option and paid $100,000 to Metanor. The
Company and Metanor subsequently executed a definitive joint venture agreement
(the "Bachelor Lake JV Agreement") setting forth the terms and conditions
governing the relationship between the parties and providing for the means by
which each of them shall participate in the exploration, development and mining
activities on the Bachelor Lake Property dated July 1, 2005.
On May 2, 2006, as amended August 28, 2006, the Company and Metanor entered into
a purchase agreement (the "Metanor Purchase") whereby Metanor agreed to purchase
the Company's 50% interest in the Bachelor Lake JV in consideration of $3.5
million cash, $750,000 in common shares of Metanor and a 1% NSR in favour of the
Company. Closing of the Metanor Purchase (the "Closing") was scheduled to occur
(the "Completion Date") on the earlier of:
i) 30 days after Metanor completes a $5 million financing; or
ii) November 10, 2006.
The Metanor Purchase contemplated total consideration of a minimum of $4.25
million. Accordingly, during fiscal 2006, the Company recognized an impairment
of $1,538,655 to reflect the difference between the Company's recorded costs and
the anticipated proceeds.
On November 17, 2006, Metanor and the Company agreed to a new agreement (the
"Revised Metanor Purchase") under which Metanor has now agreed to purchase the
Company's 50% interest in the Bachelor Lake JV for total consideration of $4
million, as follows:
i) $2 million cash (received);
- 18 -
ii) $500,000 cash on or before March 30, 2007; and
iii) $500,000 in cash or common shares of Metanor each on or before
May 31, 2007, August 31, 2007 and November 30, 2007.
Metanor continues to be responsible for all on-going costs, expenses and
obligations of the Bachelor Lake JV. In addition Metanor has granted the Company
a 1% NSR and the Company will retain its beneficial interest in the Bachelor
Lake JV until completion of the sale.
The Company will recognize a further write-down of approximately $225,000 in
fiscal 2007 to reflect the terms of the Revised Metanor Agreement. See "Item 4.
Information on the Company - Principal Properties".
QUARTER MOON LAKE GOLD PROPERTY
On February 9, 2005, as amended February 9, 2006, the Company signed a letter of
intent (the "Quarter Moon LOI") with Endowment Lakes (2002) Limited Partnership
("Endowment Lakes") granting the Company the option to earn up to an 80%
interest in the Quarter Moon Lake Gold Property in north-central Manitoba. Under
the Quarter Moon LOI, the Company was granted the right to acquire an initial
51% interest in the property by paying $40,000 and issuing 50,000 common shares
upon regulatory approval of the transaction, completing a $250,000 minimum work
commitment in the first year, paying a further $40,000 and issuing 50,000 common
shares on the first anniversary and completing a further $300,000 minimum work
commitment in the second year. The Company was granted the further option to
earn an additional 29% interest by completing an additional $1.5 million in
exploration and development over a subsequent two year period and paying an
additional $40,000 and issuing 50,000 common shares on or before the third
anniversary of the Quarter Moon LOI.
On December 3, 2006, the Company and Endowment Lakes entered into a formal
purchase agreement (the "Quarter Moon Purchase Agreement") under which the
Company has purchased a 100% interest in ten mining claims, including the
original five mining claims under the Quarter Moon LOI, in north-central
Manitoba, for $90,000 cash and the issuance of 160,000 common shares of the
Company. Endowment Lakes holds a 1% NSR, of which a 0.5% NSR can be purchased at
any time for $500,000. See "Item 4. Information on the Company - Principal
Properties - Quarter Moon Lake Property and Sherridon Property".
DUNLOP HOA
On February 9, 2006, the Company and W. Bruce Dunlop Limited NPL entered into a
heads of agreement (the "Dunlop HOA"), whereby the Company was granted the
option to earn a 100% undivided interest in three unproven mineral claims,
covering 536 hectares located in the Sherridon area, north-central Manitoba, for
$90,000 cash ($15,000 paid), issuance of 250,000 common shares of the Company
(25,000 shares issued) and expending a total of $170,000 in work expenditures
over a four year period. See "Item 4. Information on the Company - Principal
Properties - Sherridon Property".
HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED.
On March 19, 2006, the Company and Hudson Bay Exploration and Development
Company Limited ("HBED") entered into three option agreements (the "HBED
Options"), whereby the Company was granted options to acquire 100% interests in
24 unproven mineral claims and one mining lease covering approximately 3,226
hectares located in the Sherridon area, north-central Manitoba. In order to earn
100% interests in all of the mineral claims and the mining lease the Company
will be required to make option payments totalling $650,000 and incur
expenditures totalling $4,300,000 over a five year period. Upon agreement by
both the Company and HBED, up to $187,500 of the option payments may be paid in
common shares of the Company.
Should the Company acquire a 100% interest in any of the claim groups under the
HBED Options, HBED has the option to back-in for a 51% interest in the subject
claims group by paying 135% of the expenditures incurred by the Company. HBED
will also hold a 2% NSR. See "Item 4. Information on the Company - Principal
Properties - Sherridon Property".
WEST RED LAKE PROPERTY
On April 18, 2006, the Company entered into a letter of intent (the "West Red
Lake LOI") with Goldcorp. Inc. ("Goldcorp") regarding the option to earn a 60%
interest in 67 mining claims, a 45% interest in two mining claims, and a 30%
interest in ten mining claims (collectively the "West Red Lake Property")
located in Ball Township, Red Lake,
- 19 -
Ontario. On June 20, 2006, the Company and Goldcorp completed a formal option
agreement (the "West Red Lake Option") on the West Red Lake Property. Under the
terms of the West Red Lake Option, the Company is required to perform minimum
exploration programs totalling $3 million on or before December 31, 2008. Upon
spending the $3.0 million, the Company is entitled to elect to exercise the
option of its interests. Upon notification of the Company's election, Goldcorp
has 90 days to back-in and reacquire a 25% interest in the 67 mining claims, a
18.75% interest in two mining claims and a 12.5% interest in the ten mining
claims by paying $6 million to the Company. If Goldcorp does not exercise its
back-in right, the Company will then be required to issue one million common
shares of its share capital to Goldcorp. See "Item 4. Information on the Company
- - Principal Properties - West Red Lake Property".
DISCONTINUED OIL AND GAS OPERATIONS
Beginning October 1990, the Company was active in the business of acquiring,
exploring and developing oil and gas prospects in the United States and the
Company's main focus were its oil and gas interests in the East Lost Hills Joint
Venture and the San Joaquin Joint Venture. These ventures were unsuccessful and
the Company ceased participation in these activities in February 2002. During
fiscal 2002, the Company also participated in the drilling of an exploratory
well in regional California. A side-track well was subsequently drilled and
determined to be uneconomic. The well was plugged and abandoned in September
2002. Effective March 1, 2004, the Company sold its remaining interests in
certain oil and gas leases in the West Ranch Field. The Company no longer holds
any oil and gas interests, nor is it conducting any further activities in the
oil and gas industry.
PRIVATE PLACEMENTS
On December 23, 2004, the Company completed a brokered private placement whereby
it issued 4,317,951 flow-through units at a price of $0.95 per flow-through unit
and 2,673,530 non flow-through units at a price of $0.85 per unit for aggregate
gross proceeds of $6.4 million. Each flow-through unit was comprised of one
flow-through common share and one-half of one common share purchase warrant
(each whole warrant a "Series A Warrant"), with each Series A Warrant
exercisable to purchase one additional non flow-through common share for a
period of two years at a price of $1.25 during the first year and $1.50 during
the second year. Each non flow-through unit is comprised of one common share and
one common share purchase warrant ("Series B Warrant") exercisable to purchase
one additional common share for a period of two years at a price of $1.10 during
the first year and $1.35 during the second year.
On January 20, 2005, the Company issued an additional 151,834 flow-through units
and 25,000 non flow-through units on a non-brokered private placement basis on
substantially similar terms as described above for aggregate gross proceeds of
$165,492.
On February 3, 2005, the Company completed a further non-brokered private
placement of 131,579 flow-through units at a price of $0.95 per unit on
substantially similar terms as described above for aggregate gross proceeds of
$125,000.
On September 14, 2005, the Company completed a non-brokered private placement
whereby it issued 2,319,642 flow-through common shares at $0.70 per share and
1,675,500 non flow-through units at $0.60 per share, for aggregate gross
proceeds of $2,629,049. Each unit was comprised of one common share and one
common share purchase warrant exercisable to purchase one additional common
share for a period of two years at a price of $0.70. On September 29, 2005, the
Company issued an additional 973,428 flow-through common shares and 304,666
units on substantially similar terms as described above for aggregate gross
proceeds of $864,200.
The proceeds from the Company's private placements were used for exploration and
development and for general corporate purposes.
DISPOSITIONS
During fiscal 2006, the Company entered into the Metanor Purchase, whereby the
Company agreed to dispose of its 50% interest in the Bachelor Lake JV for total
consideration of a minimum of $4.25 million. As a result, the Company recognized
an impairment of approximately $1.54 million to reflect the difference between
the Company's recorded costs and anticipated proceeds. On November 17, 2006, the
Company and Metanor entered into the Revised Metanor Purchase Agreement whereby
Metanor revised its offer to purchase the Company's 50% interest in the Bachelor
Lake JV for total consideration of $4 million and as a result, the Company will
recognize a further write-down of approximately $225,000 in fiscal 2007 to
reflect the terms of the Revised Metanor Agreement.
The Company did not conduct any disposition of its unproven mineral interests
during fiscal 2005.
- 20 -
During fiscal 2004, the Company sold its 3% working interest in the West Ranch
Field for $78,630. On August 31, 2004, the Company formally abandoned its
investments in its wholly-owned subsidiaries, Safari Petroleum LLC ("Safari")
and TMK Oil and Gas Inc. ("TMK"). Both of these companies were inactive at the
time of abandonment.
EXPLORATION EXPENDITURES
During fiscal 2006, the Company incurred costs of $232,244 for mineral property
acquisitions and $2,034,064, net of $228,708 of recoveries, for exploration on
unproven mineral properties. During fiscal 2005, the Company incurred costs of
$17,690,832 for mineral property acquisitions and $4,992,595 for exploration on
unproven mineral properties. During fiscal 2004, the Company incurred costs of
$75,906 for mineral property acquisition and $23,935 for development of
petroleum interests.
2007 EXPLORATION BUDGET
The total work programs budgeted for the Company's mineral exploration projects
for fiscal 2007, amount to approximately $9.0 million.
SALES AND REVENUE DISTRIBUTION
As of the date of this annual report, the Company has not generated any revenues
from its mineral properties.
As of the date of this annual report, the Company does not generate any
petroleum, natural gas and natural gas liquids revenue and it has ceased its
activities in this area. The Company's share of petroleum, natural gas and
natural gas liquids produced from its wells was sold to a variety of purchasers
at the wellhead in the United States. All of its sales were conducted with
unaffiliated customers. These purchasers provided a ready market for all of the
Company's production and paid the local market price, which fluctuated based
upon prevailing market conditions. Due to the number of purchasers in each area,
the loss of one or a number of purchasers did not pose a significant risk to the
continuity of the Company's operations. During fiscal 2004, the Company sold its
remaining interest in oil and natural gas properties.
Total revenues, interest and other income reported for fiscal 2006, 2005 and
2004, were as follows:
($ IN 000)
----------------------------------
YEARS ENDED AUGUST 31,
----------------------------------
2006 2005 2004
Petroleum and Natural Gas Sales
- United States $ - $ - $ 81
---------- ---------- ----------
Interest and Other Income
- United States - - -
- Canada 17 31 1
---------- ---------- ----------
17 31 1
---------- ---------- ----------
Total Revenue, Interest and Other Income $ 17 $ 31 $ 82
========== ========== ==========
PRINCIPAL PROPERTIES
CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF INDICATED AND INFERRED
RESOURCES. THIS SECTION USES THE TERMS "INDICATED" AND "INFERRED" RESOURCES. THE
COMPANY ADVISES U.S. INVESTORS THAT WHILE THOSE TERMS ARE RECOGNIZED AND
REQUIRED BY CANADIAN REGULATIONS, THESE DEFINITIONS HAVE NOT BEEN ADOPTED FOR
USE BY THE SEC. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY PART OR ALL
OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO RESERVES.
"INFERRED" RESOURCES HAVE A GREAT AMOUNT OF UNCERTAINTY AS TO THEIR EXISTENCE,
AND GREAT UNCERTAINTY AS TO THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE
ASSUMED THAT ALL OR ANY PART OF AN INFERRED RESOURCE WILL EVER BE UPGRADED TO A
HIGHER CATEGORY. UNDER CANADIAN RULES, ESTIMATES OF INFERRED RESOURCES MAY NOT
FORM THE BASIS OF FEASIBILITY OR PRE-FEASIBILITY STUDIES, EXCEPT IN RARE CASES.
U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR PART OF AN INFERRED
RESOURCE EXISTS, OR IS ECONOMICALLY MINEABLE.
- 21 -
DUPORT PROPERTY, ONTARIO
Much of the following information on the Duport Property is derived from the
report dated January 31, 2006 entitled "Technical Report on the Duport Project,
Northwest Ontario, Canada" (the "Duport Report") prepared by Roscoe Postle
Associates Inc. ("RPA"). Messrs. Graham C. Clow, P. Eng and Wayne W. Valliant,
P. Geo were the Qualified Persons who authored the Duport Report. The
individuals who contributed to this report were supervised by these Qualified
Persons. RPA prepared a previous NI 43-101 report for the Duport Property dated
November 8, 2004. The purpose of the updated Duport Report was to review the
additional exploration data compiled in 2005, prepare a revised mineral resource
estimate, and provide recommendations as to future work programs on the
property.
Any information provided subsequent to the Duport Report has been prepared under
the supervision of Mr. Kevin Leonard, who is also designated as a "Qualified
Person" under the definition of NI 43-101.
PROPERTY AGREEMENTS
On July 5, 2004, the Company entered into an agreement to acquire a 100%
interest in the Duport Property (the "Duport HOA") with the Sheridan Platinum
Group and Mr. Pat Sheridan (collectively, the "Sheridan Group"). Under the
Duport HOA, the Company had the right to acquire a 100% interest in the property
by paying $250,000 on closing, together with the issuance of one million common
shares and $8 million in series 1 preferred shares (the "Series 1 Preferred
Shares") and the grant of a 2.5% net smelter return royalty ("NSR") on the first
1.5 million ounces of gold produced and a 5% NSR on all amounts in excess
thereof. The transaction received shareholder approval at the Company's November
2, 2004 special meeting of shareholders and the February 9, 2005 annual and
special meeting of shareholders. The option was exercised pursuant to the
execution of a definitive agreement between Halo and The Sheridan Group dated
February 18, 2005 (the "Duport Agreement") and the transaction closed effective
March 24, 2005. The Series 1 Preferred Shares have a term of five years and are
subject to the dividend, redemption, retraction and voting privileges set forth
below.
PROPERTY DESCRIPTION AND LOCATION
The Duport Property is located on Stevens Island in Shoal Lake. Shoal Lake is on
the border of Ontario and Manitoba and is 45 km southwest of the City of Kenora.
The Duport Property consists of 104 mineral claims over an area of approximately
5,201 hectares in the Kenora Mining Division.
A significant amount of environmental work was carried out in the Duport
Property area by a former owner of the property. AMEC Earth & Environmental
("AMEC") reviewed environmental aspects of the Duport Property in connection
with an ongoing scoping study. AMEC and its predecessor companies have
undertaken all previous major environmental studies associated with the
property. The most important environmental considerations for the Duport
Property relate to permitting, the application of progressive technologies to
limit adverse environmental effects, considerations related to the Winnipeg
water supply intake and cottage and other recreational developments and
activities on Shoal Lake, First Nations and traditional land uses, the potential
for spills and accidents, and reclamation at closure. The land use surrounding
the Duport Property area is characterized by forestry activity and mineral
exploration, two First Nations reserves situated near Indian Bay, and cottage
recreation. Shoal Lake itself provides important resources including drinking
water, fisheries, wild rice harvests, and recreation. The water supply intake
for the City of Winnipeg is located in Indian Bay, in the western reaches of
Shoal Lake. In RPA's opinion, the public perceptions concerning the Duport
Property can be overcome through diligent and thorough technical studies
combined with significant and detailed public information and consultation,
including a special emphasis on gaining and maintaining the support of First
Nations residents on Shoal Lake.
The following map identifies the location of the Duport Property:
- 22 -
[GRAPHIC OMITTED][GRAPHIC OMITTED][OBJECT OMITTED]
Omitted Graphic is: a Property Location Map showing the location of the
Duport Project in northwestern Ontario showing the
provinces of Manitoba, Ontario,Qubec, and the all the
Great Lakes.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY
The Duport Property is accessed from Kenora, Ontario, west along the
Trans-Canada Highway, a distance of 40 km, south by gravel road for 14 km, and
then 8 km by boat. The property may also be reached by float-equipped aircraft.
The Shoal Lake area terrain is generally flat with numerous low rolling hills
which are typical of glaciated Pre-Cambrian Shield areas. Overburden is thin and
rock outcrop is abundant. The area is covered with growths of white spruce,
balsam, white birch, and aspen. Ground cover varies according to slope and soil
buildup. Cedar is abundant along the shorelines.
The Shoal Lake area experiences long, cold winters and warm, humid summers. Mean
daily temperatures range from -17.8(0)C in January to 19.6(0)C in July. Winter
temperatures (December-February) range from -14.1(0)C to -7.8(0)C, with minimum
mean daily temperatures occurring in January (-22.7(0)C). Average summer
temperatures (June-August) range from 16(0)C to 20(0)C, with maximum mean daily
temperatures reaching 24.7(0)C in July. Extremes of -43.9(0)C in January and
35.8(0)C in July have been recorded in Kenora. Total annual precipitation
averages 632 mm of which 473 mm falls as rain and the remaining 159 mm (water
equivalent) as snow. Snowfall occurs mostly from November to March.
There are two First Nations communities with land holdings and residents on
Shoal Lake - Iskutewisakaygun #39 Independent First Nation and Shoal Lake #40
First Nation. The First Nations residents collectively number approximately 700.
In addition to the resident First Nations, two other First Nations have land
holdings on Shoal Lake but do not reside there.
HISTORY
Exploration and mining activities have been carried out on the Duport Property
at various times since 1897. The original discovery of a gold bearing sulphide
zone was made on Cameron Island, where a small exploratory inclined shaft was
sunk in 1899. Limited bulk sampling and mining by the Duport Mining Company
("DMC") produced 1,100 tonnes of
- 23 -
material, grading 115 g/t, which was shipped to smelters at Tacoma, Washington
and Flin Flon, Manitoba for processing during the period 1934-1936. Matachewan
Consolidated Mines Ltd., (1950) and Westfield Minerals Ltd. (1965) extended the
known gold bearing zone both laterally and vertically by diamond drilling.
Consolidated Professor Mines Ltd. ("CPM") obtained an option on the Duport
Property in 1973 and carried out an initial program of exploration and sampling.
CPM acquired a 100% interest in the Duport Property by amalgamating with DMC in
1981. During joint venture arrangements with Selco Inc. in 1982 and with Union
Carbide Corporation from 1983-1985, drilling and underground exploration took
place from a new 1,100 m underground decline on Stevens Island. The program
confirmed the presence of a mineral resource and led to the extension of known
geological structures along strike to the northeast and southwest. Prior to
1983, underground development consisted of approximately 104 m of shaft and
winzes and 664 m of lateral development. From 1984 to 1987 inclusive a 1,360 m
decline was completed as well as 1,463 m of lateral development and 112 m of
raising.
CPM continued underground development on the Duport Property during 1986 and
1987 with a program to further define the extent of the gold bearing horizon.
The program included extending the existing decline to a vertical depth of 200
m, and diamond drilling, to establish continuity of the gold bearing horizon to
500 m below surface. Three raises were driven in mineralized material and a 90
tonne bulk sample was mined and shipped to Lakefield Research for pilot plant
metallurgical testing. Based on the resultant resource estimate and
metallurgical work, CPM commissioned Wright Engineers Ltd. ("Wright") to conduct
a feasibility study in 1988.
During the time the Wright study was being prepared, CPM commenced the formal
permitting process. The most important aspect of the potential environmental
impact of proposed mine development is its location on Shoal Lake. CPM
recognized very early during its ownership of the Duport Property that
environmental concerns regarding development and operation of the property were
important. Between 1979 and 1988, CPM collected baseline environmental data and
commissioned Agra Earth and Environmental to study the issues and prepare an
environmental impact study. The design for plant and infrastructure was intended
to mitigate any environmental effects of the operation. Despite the fact that
the technical aspects of the environmental management plan were relatively
straightforward, the Duport Property received considerable scrutiny from the
local cottagers and, eventually, the City of Winnipeg and the Province of
Manitoba. The public perceptions were such that in 1989 the Ontario permitting
process was stopped and the Duport Property was designated for review under the
CANADIAN ENVIRONMENTAL ASSESSMENT ACT. From 1989 to 1993, essentially no
activity took place on any aspect of the Duport Property.
Commencing in 1993, CPM reactivated the environmental aspects of the Duport
Property with the objective of restarting the approval process. As a first step,
the property development plan was significantly revised from the Wright study in
that all processing was moved to a location outside the Shoal Lake watershed.
Ore was to be mined on Stevens Island and hauled by truck to the proposed plant
site approximately 10 km away on the mainland. Two processing options were
considered - production of concentrate at the plant followed by gold recovery at
Placer Dome's Campbell Mine in Red Lake, and production of gold at the plant.
The former option had the advantage of eliminating the use of cyanide in the
Shoal Lake area. No physical or technical work was carried out on the Duport
Property during this time other than environmental baseline work and minor
fieldwork in support of the revised property development plan. During this time,
CPM re-established a working relationship with the two First Nations on Shoal
Lake. An extensive program of community relations was carried out including
workshops and public consultation sessions in the communities. Impact and
benefit agreements were signed with both communities. CPM also implemented a
buyout program with affected cottagers on Shoal Lake. Outside the area, CPM
carried out extensive consultations with key officials at the City of Winnipeg,
the Provinces of Manitoba and Ontario, and the federal government in order to
describe the revised project and to establish the process for formal
environmental approval.
In 1996, Royal Oak Mines Inc. ("ROM") made a successful takeover bid for all the
shares of CPM, whereupon CPM became a wholly owned subsidiary of ROM. ROM
updated the CPM work and initiated an internal feasibility study based on the
revised development plan instituted by CPM previously, but rather than using the
Campbell Red Lake option, concentrate was to be railed to the ROM plant in
Timmins, Ontario, where it would be treated using a bio-oxidation process. ROM
did not carry out any physical work on the site other than a limited diamond
drilling program during 1996-1997. RPA was unable to locate ROM diamond drill
logs. In 1997, ROM filed for bankruptcy and the Duport Property became inactive.
Subsequent to the ROM bankruptcy, the Duport Property was purchased by the
Sheridan Group. No site work was carried out by the Sheridan Group during its
ownership period. In July 2004, Halo negotiated the acquisition of the Duport
Property from the Sheridan Group, as described above.
- 24 -
REGIONAL GEOLOGY
The Shoal Lake area is underlain by Precambrian (Archean) volcanic and
sedimentary rocks, which are part of a broad greenstone belt striking in a
general east-west direction across the northern end of the Lake of the Woods
district. It extends for a distance of several hundreds of kilometres from
Savant Lake to the east to beyond the Manitoba border to the west. Stocks and
dykes of acid and basic rocks intrude these older rocks. The belt is within the
Wabigoon Sub-province of the Superior Province.
LOCAL GEOLOGY
In the northern part of the Shoal Lake area there are two principal granodiorite
intrusives, identified as the Canoe Lake and Snowshoe Bay stocks, each several
kilometers in diameter, separated by a northeasterly trending volcanic series
some seven kilometers wide. The series includes steeply dipping felsic to
ultramafic flows and fragmentals, tops facing west, minor clastic sediments, and
sulphide facies iron formations. Also present are coarse anorthosites, gabbros,
diorites and quartz-diorites, some of which may represent volcanic flows. Within
this extrusive-intrusive assemblage are irregular dykes and/or sills of
quartz-feldspar porphyry, quartz diorite, and lamprophyre. All the rock types
have been exposed to regional and local dynamic and thermal metamorphism, which
has altered the intermediate, mafic, and ultramafic lavas to the greenschist and
/or amphibolite facies.
The deposit lies within a northeast trending band of mafic volcanics flanked to
the northwest and southeast by a sequence of intermediate to felsic volcanics
and related volcanoclastic sediments, which may be correlated through folding.
The Cameron Island volcanic sequence forms the west limb of one of a number of
relatively small anticlines whose axes strike northeast. The core of the
anticline is the Stevens Island anorthosite-diorite complex. A major zone of
deformation, which hosts the Duport deposit follows the same general strike and
is characterized by strongly developed foliation or fracturing.
PROPERTY GEOLOGY
The predominant rock types on Cameron and Stevens Islands and the mine area are
andesites, amphibolites, tholeiitic and komatiitic basalts and porphyritic
basalts, talc-chlorite schist and narrow sheared horizons of felsic and
intermediate tuffs and interflow material with buff colored cherty sections.
Dykes and sills of various thicknesses are comprised of feldspar porphyry,
quartz feldspar porphyry, quartz diorite, diorite, and lamprophyre. The dykes
and sills cut, separate, or replace the gold-bearing mineralized horizons.
Gold mineralization strikes N30-35(Degree)E and dips 65-75(Degree) west. Grades
of possible economic interest have been intersected to a depth of approximately
600m. The mineralization has been subdivided into three zones. The "Main Zone"
is approximately 800 m long, strikes N30oE, dips 70o west, and extends to 300m
below surface. Grade-thickness contours of the Main Zone indicate the
mineralization plunges north at about 30(Degree). However, within the
mineralization there appears to be several local areas that plunge 45(Degree) to
75(Degree) south. The secondary plunge has important exploration implications.
The mineralization extends over a drill indicated strike length of 1,200 m and
is associated with highly sheared, narrow, thinly bedded, conformable felsic and
intermediate tuffs and cherty units that contain sulphide mineralization,
generally in the range of 5-10%. These mineralized tuffs are identified as the
"Main Zone" and the parallel "East Zone," plus a number of en-echelon and
parallel associated units in the hangingwall and footwall of each of these
principal horizons. The Main Zone is between massive chloritic and amphibolitic
basalts while the northern section of the Main Zone is at the contact between
basaltic flows and amphibolites, or within the amphibolites further north. The
East Zone is approximately 450 m long, extends from 10m to 250m below surface
and is hosted by intensely sheared ultramafics altered to talc schists. The
favorable tuffs range in thickness from one to ten metres and dip steeply west.
Talc schist occurs in two prominent zones of shearing and alteration, which
parallel the footwall of both the Main and East Zones over widths of up to
twenty metres. The schist below the East Zone footwall has an average thickness
of eight metres and is more persistent than the Main Zone schist. The
"Hangingwall Zone" is parallel and west of the Main Zone. It is the smallest of
the three zones at 150m long and extends from 150m to 300m below surface.
The principal Duport gold zones are sheared, fractured, narrow, and often highly
silicified felsic and intermediate tuffs and/or interflow material which has
cherty sections and sulphide mineralization consisting of pyrite, arsenopyrite,
and lesser amounts of pyrrhotite. Less frequently, gold occurs in association
with sulphides within thick sections of felsite, close to or within the
gold-bearing tuff units. The mineralized horizons are persistent along strike
and down dip although they may change mineralogically, including variations in
gold and sulphide content. The horizons are frequently separated or split into
several narrower units by the intercalation of narrow sheared chloritized and
silicified basalt sections. These separated gold bearing lenses often exhibit an
en-echelon configuration. Also felsite dykes occasionally
- 25 -
cut the mineralized horizon at a low angle. These and other minor variable
characteristics often make correlation problematic. Numerous faults cut and
occasionally displace the mineralized horizon.
EXPLORATION
In 2005, the Company completed a ground magnetometer survey, airborne
geophysical surveys and a diamond drilling program.
GROUND MAGNETOMETER SURVEY
The surface magnetometer survey was conducted from February 18 to March 28,
2005, over three grids, by JVX Limited using a Scintrex ENVIMAG proton
precession magnetometer. Total field magnetometer readings were taken on 15 m
(50 ft.) intervals on a 60 m (200 ft.) line spacing. The total survey covered 70
line-km. A portion of the planned work was stopped prematurely due to poor ice
conditions. The objective of the survey was to gain geological and structural
information for the purpose of locating drill targets along the strike of
lithological units known to host significant gold mineralization.
The grids are an extension of the original Duport grid and utilize the same
co-ordinate system. The baseline trends northeast at 032(degree) azimuth and was
re-established at the north end of Cameron Island. The East Grid is connected to
the North and South Grids by a tie line (TL 14000E). The North Grid shows
positive, elongate magnetic responses as defined by an nT isoanomaly contour
centered over two following areas: the "10500E" anomoly and the "12250E"
anomoly.
The "10500E" anomaly is, in part, coincident with a sheared pyroxenite unit
found on the eastern shore of Cameron Island. This unit may correlate with
talc-chlorite schist intersected in the footwall of the Main Zone by drill
holes. The "10500E" anomaly represents the northern portion of a more extensive
magnetic high response that is located over the Duport deposit. The deposit is
underlain by tholeiitic and komatiitic basalts as well as intrusive derivatives
containing pyrrhotite and magnetite. One drill hole tested a magnetic high
response defined by an arcuate nT isoanomaly contour. The area shows some
structural discontinuity and a discrete "bull's-eye" pattern. The hole
intersected altered quartz dioritic rocks containing disseminated pyrrhotite. A
sheared, sulphide-bearing, silicified zone encountered approximately 232 m down
the hole returned only low gold values.
The "12250E" anomaly parallels the "10500E" anomaly and extends north of Stevens
Island to the limit of ground coverage. The anomaly is underlain by anorthositic
gabbro containing disseminated magnetite and pyrrhotite. This unit comprises the
Stevens Island subvolcanic intrusive and is spatially associated with the
Stevens Island Deformation Zone, a high strain zone in which the rocks show a
pervasive shear fabric relative to the enclosing stratigraphy. The contours are
disrupted, folded and show bull's-eye patterns. A series of intersecting fault
structures trending east-west and northwest-southeast occur north of Cameron
Island and are responsible for the discontinuous magnetic patterns exhibited in
this area.
The East Grid lies immediately east of Stevens Island and covers the historic
Golden Reef gold showing. The anomalies are conspicuously folded and disrupted
since faults extending northwest across Stevens Island pass through this area
that is underlain by anorthositic gabbro and undifferentiated ultramafic rocks.
The coverage proposed for the South Grid remains incomplete. The stratigraphy
west of Dominique Island shows a definite, irregular contact between tholeiitic
basalts and anorthositic gabbro of the Stevens Island Complex. Several lines
show a narrow segment of the strong, irregular contact between these contrasting
rock types.
The magnetometer survey was successful in delineating irregular contacts between
contrasting lithologies in areas of known gold mineralization. However, the
survey did not include the Duport deposit and was insufficient in covering
potential targets east of the North Grid and in the vicinity of Dominique Island
covered by the South Grid.
AIRBORNE GEOPHYSICAL SURVEYS
The Company contracted Fugro Airborne Surveys to conduct 2,743 line-km of
coverage at 50 m and 100 m line spacing between August 15 and September 2, 2005.
This was accomplished by using a DIGHEM multi-coil, multifrequency
electromagnetic system, supplemented by a high-sensitivity cesium magnetometer.
The information from these sensors was processed to produce maps that display
the magnetic and conductive properties of the survey area. A GPS electronic
navigation system was used for accurate positioning of the geophysical data with
respect to the base maps.
- 26 -
The main objective of the program was to identify additional, untested,
Duport-style gold targets, i.e., altered shear zones containing sulphides
related to fault structures, intrusive bodies, and competency contrasts between
different lithologies. The total field and vertical gradient magnetic maps
outlined several significant structural and lithological features very similar
to those observed at the Duport deposit. Halo geological staff interpreted a
series of ovoid or annular features as buried intrusive bodies that are aligned
through the central portion of the property. These intrusive features modify the
strong linear northeast fabric of the enclosing volcanic stratigraphy. The
Duport deposit is situated on the western flank of the second most southerly of
these bodies that correlates to an anorthosite complex. Halo staff also conclude
that the trends on the magnetic maps represent regional ENE faults. The
prominent fault that trends through the southernmost and largest circular
feature abruptly truncates roof pendants capping this intrusive and demarcates
two structural domains. One domain, to the south, demonstrates more regular
magnetic patterns and the other, to the north, elicits patterns that are
noticeably more discontinuous and broken up.
A considerable number of weak to moderate EM conductive features were detected
and delineated by the DIGHEM data, mostly displaying a NNE orientation aligned
with the regional fabric.
Jerry Roth, Senior Geophysicist with Stratagex Ltd., conducted a preliminary
review of the survey results and noted that the contoured aeromagnetic data are
discerned to outline a predominantly NNE fabric to the structural and lithologic
components of the Shoal Lake greenstone assemblage. The rather striking NNE
trend of distinct lenticular to elongate magnetic lows that extends across the
centre of the survey area could reflect felsic lithologies in the core of the
assemblage or a thick sequence of dominantly metasediments. Roth proposes that
features previously interpreted as a concealed felsic are more likely folded and
faulted metavolcanics. Roth also notes that the three broadly drawn, NE to NNE
trending deformation zones are locally inconsistent with the detailed
aeromagnetic data, suggesting that they are complex, variable structural
features, with splays and en echelon elements.
The Company selected fifteen targets for follow-up, consisting of conductive
features within a one kilometre wide band extending NNE and SSW of the Duport
Deposit. Roth conducted a preliminary review of the targets and proposed that
six of the fifteen conductors are of probable bedrock origin and warrant
follow-up diamond drilling. Roth further advised additional interpretation and
verification, consisting of examination of the actual EM profiles as well as
ground MaxMin HLEM and magnetometer surveys prior to drilling.
The remaining nine conductors require further interpretation of the airborne
geophysics and further ground geophysical surveys prior to a diamond drilling
decision.
In addition to the fifteen anomalies selected for follow-up, RPA advised that
consideration should be given to a comprehensive evaluation of the entire
airborne geophysical survey. In view of the importance of weakly to
non-conductive Au-sulphide mineralization, IP/resistivity surveys are
recommended to delineate chargeability and resistivity trends in geologically
favourable sectors.
The Company is currently conducting a thorough compilation of previous work to
ensure that the anomalies have not been previously tested by diamond drilling.
- 27 -
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted Graphic is: Area of Interest Map showing Zone 15 and the co-ordinates
DEPOSIT TYPES AND MINERALIZATION
The Duport deposit is related to an epigenetic, hydrothermal system. The
lithology and structural setting of the deposit is broadly similar to most of
the gold deposits in the Red Lake and Timmins areas, in that they are shear
hosted in mafic to ultramafic volcanic rocks and spatially associated with
granitoid batholiths.
Gold in the Duport deposit occurs both as fine grains of free gold, less than
0.05 mm, and in association with grains of arsenopyrite and pyrite. Gold is
found within narrow often highly silicified felsic and intermediate shear zones
that have recognizable cherty mylonotized sections and sulphide mineralization
consisting of pyrite, arsenopyrite and minor pyrrhotite and chalcopyrite. The
mineralization often exhibits a banded or laminated appearance, which parallels
the tuff pseudobedding and shearing. The gold grade is proportional to the
percentage of arsenopyrite and associated pyrite, the degree of silicification
and to a lesser extent the incidence of mariposite. A combination of
arsenopyrite with one or both of these secondary conditions usually results in
high grade intersection, while the lack of arsenopyrite usually indicates
negligible gold.
DRILLING
In 2005, the Company completed a 23-hole, 7,053 m diamond drilling program from
the ice on Shoal Lake. The drilling was performed by Cyr International Drilling
using two Longyear 38 drills and one Boyles 37 drill, both machines drilling NQ
size core (476 mm). Drill hole collars were planned and surveyed with a Garmin
GPS unit. Downhole surveys were
- 28 -
taken at approximately 60 m intervals using a Reflex EZ Shot or Maxibor
directional instrument. On average, the mineralization strikes
030(Degree)-35(Degree) azimuth and dips 70(Degree) west. Therefore the holes
were drilled at 122(Degree) azimuth to intersect the mineralization as close as
possible to normal to the strike. Similarly, the inclination of the holes was
planned to optimize both hole length and the angle at which the holes
intersected the dip of the mineralization. Inclinations ranged from -45(Degree)
to -67(Degree); hence, the true width of the mineralized intersections was
approximately 70% to 90% of the core length.
Core recovery was not recorded although the project geologists report that it
was very high. Wayne Valliant inspected 50 m sections of three holes as well
mineralized sections of ten holes and concurs with the assessment of very high
core recovery. Rock quality designation was not recorded.
Two holes were drilled to verify historical resources. Nineteen holes were
drilled on a 30 m to 100 m spacing over a strike extension of approximately one
km to test the possible downward and/or southern extension of historical
resources. One hole was drilled to test for possible mineralization in a
structural feature indicated by the ground magnetometer survey.
SAMPLING METHOD AND APPROACH
Diamond drill core was logged based on lithology, alteration, and
mineralization. Logging was done on-site, manually, by four project geologists.
Collar data, down-hole survey data, major lithologies, and assay results were
converted to spreadsheet format.
Core sampling intervals were determined by the project geologist according to
lithology, mineralization type, and visually anticipated grade. Thus, 1,859
intervals were selected for sampling. The nominal maximum sample interval was
0.91 m (3 ft.); however, a few samples in barren or poorly mineralized sections
were 1.21 m (4 ft.). Barren core on the margins of mineralized zones was also
sampled. Although mineralized zones are occasionally greater than ten metres
wide, the grade variance within the zone can be very high. Therefore, the
minimum sample interval was 0.30 m (one foot) to ensure sufficient detail was
assembled for realistic grade correlation.
Core selected for sampling was halved with a diamond saw, and one half was
placed in a plastic sample bag. Sample tags were in duplicate, with one half
inserted into the sample bag and the other half remaining in the sample book as
a permanent record. The sample number was written on the outside of the plastic
bags with indelible marker. Metal tags, stamped with the sample number, were
stapled to the wooden core boxes. The remaining half of the core from 24
samples, or approximately 20 percent of the samples in mineralized zones, were
quartered with the diamond saw and submitted as duplicates with different sample
numbers from the original. Five percent of the samples submitted were control
blanks, comprised of barren core or a blank pulp, to test for contamination in
the assay lab. In order to test for assay precision and accuracy, an additional
five percent of the samples were reference control standards. These procedures
are discussed further in Section 13.
Plastic bags were placed in rice bags, sealed with fibre tape, and delivered to
Greyhound Bus Lines in Kenora by the project manager for shipment to Accurassay
Laboratories in Thunder Bay.
In RPA's opinion, the sampling was of high quality, representative, and did not
introduce any bias into the database.
SAMPLING PREPARATION, ANALYSIS AND SECURITY
Sample preparation and gold analyses were done at Accurassay Laboratories in
Thunder Bay, Ontario ("Accurassay"). The lab is accredited by the Standards
Council of Canada to ISO/IEC 17025 Guidelines. Accurassay employs an internal
quality control system that tracks certified reference materials and in-house
quality assurance standards. Accurassay uses a combination of reference
materials, including standard samples purchased from CANMET Energy Technology
Centre, the research arm of Natural Resources Canada, standards created in-house
by the laboratory, and certified calibration standards.
The sample information was entered into the Accurassay Local Information System
("LIMS"). The samples were dried, if necessary, jaw crushed to -8 mesh, and then
riffle split. A 250 g to 400 g cut was taken and pulverized to 90% passing -150
mesh, and then matted to ensure homogeneity. Silica sand was used to clean out
the pulverizing dishes between each sample to prevent cross contamination.
Analysis for gold was by standard fire assay procedures using a 30 g sample with
an atomic absorption ("AA") finish.
- 29 -
Assay results were forwarded to the Company by email, followed later by a hard
copy. No aspect of the preparation or analyses was conducted by Company
employees.
In RPA's opinion, the sample preparation and analyses were adequate for use in
mineral resource estimation.
CONFIRMATION HOLES
Two holes were drilled to verify historical data. The location of the first hole
was selected to verify narrow, high grade gold mineralization in a section of
the Main Zone. The hole was designed to intersect mineralization within 10 m of
two previously drilled holes that intersected 15.92 g/t Au over a true width of
1.0 m, and 40.42 g/t Au over a true width of 1.2 m. This first confirmation hole
intersected 34.55 g/t Au over a true width of 0.6 m.
A second hole was drilled to verify wide, low grade gold mineralization in
another section of the Main Zone. The hole was designed to intersect the Main
Zone within 25 m of a hole which previously cut 9.12 g/t gold over a true width
of 7.4 m. This second confirmation hole returned 8.16 g/t gold over 9.5 m and
therefore, in RPA's opinion, verifies the presence of wide, low grade gold
mineralization as previously reported.
Given the nature of the mineralization, i.e., coarse gold in shear zones, the
results of the twinned holes compare well with the previous drill in both grade
range and width.
BLANK SAMPLES
Ninety-seven, or five percent, of the samples submitted to Accurassay were
control blanks, comprised of barren core (22) or a blank pulp (75) to test for
contamination in the assay lab. The blank pulps were purchased from CDN
Laboratories Ltd. in Delta, BC. Two of the results were above a maximum
acceptance threshold of three times the detection limit of 0.03 g/t. The results
indicate that there was no problem with contamination or drift in the Accurassay
lab.
STANDARD CONTROL SAMPLES
In order to test for assay precision and accuracy, five percent of the samples
were reference control standards, prepared by and purchased from CDN
Laboratories Ltd. in Delta, BC. Reference standard CDN-GS-5A has a recommended
gold concentration of 5.10 g/t +/- 0.27 g/t (+/-2SD). Reference standard
CDN-GS-12 has a recommended gold concentration of 9.98 g/t +/- 0.37 g/t
(+/-2SD). Approximately 50% of the Accurassay results were greater than the
control limits recommended by CDN Laboratories Ltd. The average of the
Accurassay results was three percent less than the mean value of the standard
samples. The results of the standard control sample program did not materially
affect the resource estimation. RPA has recommended that in subsequent drill
programs Company geological staff should request that sample batches be repeated
when standards begin to show a trend outside the recommended limits.
DUPLICATE SAMPLES
Diamond drill core selected for sampling was halved with a diamond saw, and half
the core was submitted to Accurassay. The remaining half of the core from 24
samples, or approximately 20 percent of the samples in mineralized zones, was
quartered with the diamond saw and submitted as duplicates to Accurassay, using
different sample numbers from the original. For the most part, the duplicates
show a reasonable agreement with the original samples. However, the duplicate
pairs from two holes display a wide variance, likely due to the high effect of
the mineralization.
EXTERNAL CHECK ASSAYS
Duport selected 170 pulps of samples originally assayed at Accurassay. The
samples were split and renumbered. One half of the sample was returned to
Accurassay for analysis by fire assay and the other half of the sample was
delivered to Acme Analytical Laboratories Ltd. ("Acme") for analysis by fire
assay. RPA prepared relative difference plots wherein the difference of each
duplicate pair is compared to the mean of the duplicate pair. RPA also conducted
relative standard deviation analyses to test for assay precision. The results
indicate that the assay precision for assays less than 10 g/t is poor, but the
precision for assays greater than 10 g/t is acceptable. The resource estimate is
heavily dependent on assays greater than 10 g/t. Therefore, RPA considers the
overall precision acceptable.
- 30 -
DATA CHECKS
RPA checked approximately five percent of the original assay certificates
against the resource database. RPA also checked approximately five percent of
the sample intervals and lengths from the diamond drill logs against the
resource database. Some problems were discovered in the digital update of the
historical diamond drill information. Any errors were corrected.
RPA SAMPLES
Wayne Valliant collected ten samples of quartered core from mineralized zones
from the first ten diamond drill holes of the 2005 program. He also collected
half core from two holes drilled during the 1987 underground program. The latter
were selected only for convenience as most of the core was not accessible during
the site visit. He also collected one grab sample from a muck pile from the
underground bulk sample program. The results confirm the presence of gold
mineralization in the diamond drilling. Given the small sample size and coarse
nature of the gold mineralization, the results show reasonable agreement.
ACCURASSAY INTERNAL QA/QC SYSTEM
A certified standard and a blank sample were run with each batch of samples. In
addition, a replicate assay was run on every 10th sample to be used for checking
the reproducibility of the assays. All standards were graphed to monitor the
performance of the laboratory. The warning limit was two times the standard
deviation and the control limit was three times the standard deviation. Any work
order with a standard running outside the warning limit had selected reassays
performed, and any work order with a standard running outside the control limit
had the entire batch of samples reanalysed. All QC/QA data run with each work
order was kept with the clients file. In the sample preparation area, samples
were randomly selected for screen analysis to ensure grain size was achieved
(90% passing -150 mesh). The AA instrument was calibrated using ISO traceable
calibration standards. The instrument is directly tied to the LIMS program
eliminating the need for manual data entry, hence, reducing human error.
MINERAL PROCESSING AND METALLURGICAL TESTING
In 1988, SMS supervised a program of bench testing and a pilot plant at
Lakefield Research, Lakefield, Ontario, to determine the optimum method for
concentration of the arsenical gold deposit. The gold is considered to be
refractory, and testwork demonstrated that oxidation of the arsenopyrite would
be necessary for optimum gold extraction. Based on the foregoing testwork, the
1988 Wright feasibility study recommended a flowsheet including crushing,
grinding, gravity gold separation, bulk flotation, pressure oxidation,
cyanidation of the oxidation product, carbon adsorption, hot caustic cyanide
stripping, electrowinning, and refining. Gold recovery to flotation concentrate
was estimated at 93.7%, followed by a 97% recovery in the pressure oxidation
through refining stages, for an overall estimated recovery of approximately 90%.
A subsequent study by Kilborn Engineering Pacific Ltd. in 1996, for Royal Oak
Mines Ltd., recommended bio-oxidation as the preferred method of treating the
flotation concentrate. The study, although order of magnitude, concluded that
bio-oxidation would obtain similar gold recovery as pressure oxidation, but at
lower capital and operating costs.
In 2005, RPA reviewed the process options as part of an economic review filed by
the Company on the SEDAR website. RPA assumed that a mill would be located near
Love Lake, approximately ten kilometres from the mainland ferry landing at
Starting Point. The site is outside the Shoal Lake watershed. The mill would
consist of crushing, grinding, flotation, and gravity concentration circuits.
Mill recovery is anticipated to be 91%. High-grade gravity concentrates and
lower-grade flotation concentrates would be shipped by highway truck to Placer
Dome's facility at Red Lake for refining. Tailings would be stored in a facility
near the mill site.
Based on historical data and the 2005 drilling program, RPA estimated mineral
resources, reviewed mining and processing methods, environmental considerations
and conducted a preliminary financial analysis. RPA concluded that a larger,
higher grade resource is required to generate positive economic results at a
gold price of US$400 per ounce.
MINERAL RESOURCE ESTIMATES
The resources are summarized in the following table. Given the precision of the
data, nugget effect, and methodology, resource tonnes are rounded to the nearest
thousand and grades, expressed in g/t, are rounded to two decimal points.
- 31 -
- -------------------------------------------------------------------------------------------------------------------
MINERAL RESOURCE SUMMARY
DUPORT PROPERTY
- -------------------------------------------------------------------------------------------------------------------
INDICATED INFERRED
------------------------------------ ------------------------------------
ZONE SUB-ZONE TONNES GRADE (G/T) CONT. AU (OZ) TONNES GRADE (G/T) CONT. AU (OZ)
- -------------------------- ------------------------------------ ------------------------------------
MAIN 1 159,000 10.12 51,000
2 84,000 15.21 41,000 15,000 7.29 3,000
3 10,000 9.96 3,000
4 107,000 13.43 46,000
5 30,000 13.11 13,000
6 84,000 12.66 34,000
7 15,000 8.92 4,000
8 14,000 14.48 6,000
9 18,000 8.31 5,000
10 27,000 8.55 7,000
- -------------------------------------------------------------------------------------------------------------------
SUBTOTAL 315,000 13.56 137,000 248,000 9.81 76,000
- -------------------------------------------------------------------------------------------------------------------
EAST 1 58,000 14.05 26,000 14,000 8.57 4,000
2 38,000 11.31 14,000
3 75,000 9.94 24,000
- -------------------------------------------------------------------------------------------------------------------
SUBTOTAL 96,000 12.97 40,000 89,000 9.73 28,000
- -------------------------------------------------------------------------------------------------------------------
HANGINGWALL 1 13,000 12.82 5,000
2 50,000 16.77 27,000
- -------------------------------------------------------------------------------------------------------------------
SUBTOTAL 13,000 12.82 5,000 50,000 16.77 27,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL 424,000 13.40 182,000 387,000 10.69 131,000
===================================================================================================================
Notes:
1. CIM definitions were followed for Mineral Resources.
2. Mineral Resources are estimated at cut-off grades of 6.9 g/t Au.
3. Mineral Resources are estimated using an average long-term gold price
of US$400 per ounce, and a US$/C$ exchange rate of 1.25.
4. A minimum mining width of 1.5 metres was used.
DATABASE
All the available data regarding the Duport Property was stored at the Company's
office in Kenora. Technical data included diamond drill logs, original assay
certificates, geological reports, historical resource calculations, diamond
drill cross sections, mineral resource longitudinal sections, and survey log
books. Unfortunately, level plans with geological mapping, and underground
sampling, were incomplete. The pre-2005 database was in Imperial units, and the
Company elected to continue the 2005 diamond drill program using the same
system. Hence RPA received the database with distances expressed in feet (ft.)
and gold grades expressed as troy ounces per short ton (opt).
The resource estimate is based on 74,337 m of historical drilling and 7,054 m of
drilling performed by the Company in 2005. Buhlmann and Associates Inc., Flin
Flon, Manitoba, was contracted to assemble the historical diamond drill data
(1951 to 1988 inclusive) into spreadsheet format. Data fields included collar
information, downhole survey data, lithology, sample interval, sample length,
and gold assays. RPA revised various sections of the lithological data for
consistency with the correlation methodology. The Company and RPA performed the
data entry for the 2005 diamond drilling program. The spreadsheet data was
converted to Gemcom format for subsequent plotting and modeling.
CUTTING
The gold grade distribution was studied to determine whether anomalous high
grade gold assays affected the mean disproportionately. The Main, Footwall, and
Hangingwall mineralized zones are spatially divided and possibly represent
different mineralizing events, and were therefore analyzed independently. The
"Footwall" zone lies in the structural footwall below the Main Zone. It
comprises up to three sub-zones, similar in appearance to the Main Zone although
somewhat weaker and discontinuous in nature.
- 32 -
The histograms prepared to illustrate the gold distribution in each of the zones
indicate that appropriate cutting factors for the Main, Footwall, and Hanging
Wall mineralized zones are 68.6 g/t (2.0 opt), 85.7 g/t (2.5 opt), and 51.4 g/t
(1.5 opt) respectively. Given that the Main Zone is volumetrically greater than
the other two zones combined, a cutting factor of 68.6 g/t was chosen for all
three zones.
METHODOLOGY
Vertical cross sections, including diamond drill hole trace, lithology and gold
values, were plotted at a scale of 1:600, on 30 m spacing. In some areas the
data was obscured due to an excess of information and additional sections were
plotted at a scale of 1:300 on 15 m spacing.
The shear zones were previously identified as tuffaceous units and classified
based on the degree of silicification, i.e., felsic tuff, high silicification;
intermediate tuff, medium silicification; and mafic tuff, low silicification.
The shear zones host virtually all the gold mineralization in the deposit and
were therefore modeled as the initial step in the resource estimation. The shear
zones were correlated on both cross sections and plans to ensure continuity. The
zones often include two or more narrower shears and hence many intersections of
a shear zone include sections of unsheared, apparently barren material.
Wireframes were constructed for three principal shear zones, i.e., Main Zone,
East Zone, and Hangingwall Zone. These domains were used to constrain subsequent
resource estimations. They were also used for structural interpretation. The
mineralized zones are planar, and high values produce a nugget effect. The
contour method was chosen as the most effective method of estimating mineral
resources.
Intersections of potential economic mineralization were also correlated on
vertical cross sections, incorporating a cut-off gold grade of 6.9 g/t gold
(0.20 opt) and a minimum horizontal thickness of 1.5 m. The cut-off grade is
based on the following assumptions.
Gold Price US $400
Exchange Rate (US$/CDN$) 1.25
Metallurgical Recovery 95%
Operating Cost CDN $120
Incremental/Breakeven Cut-off 80%
The mid-points of the intersections were transferred to vertical longitudinal
sections for each of the three zones. The longitudinal sections displayed the
diamond drill pierce points, with associated horizontal thickness and average
cut grade ("G"), as well as the width x grade ("GT").
GT values were contoured on the longitudinal sections. The gold grade
distribution is lognormal, showing a large number of low assay values and few
high values. The same applies to the average intersection values. Therefore, the
contours were drawn on a geometric basis as opposed to linearly. The outermost
contour defined the economic cut-off, and therefore delineated several economic
subzones within each mineralized zone. The Main, East, and Hangingwall Zones
were subdivided into 10, 3, and 2 subzones respectively. As the work was
performed in Imperial units the outermost GT contour was 1.0 opt-ft (10.28
g/t-m), i.e. 0.20 opt x 5.0 ft. Successive contours were 2.0 opt-ft , 4.0 opt-ft
, 8.0 opt-ft, etc. Figure 16-4, Figure 16-5, and Figure 16-6 illustrate the 1.0
opt-ft GT contour in the Main, East, and Hangingwall Zones, respectively.
Thickness contours were also drawn on longitudinal sections. The outermost
boundary was the economic limit, established by the previously drawn 1.0 opt-ft.
GT contour. Contours inside the economic subzones were drawn on a linear basis.
The total volume of each subzone is the sum of the area between each contour
multiplied by the average thickness represented by that area. Volume was
converted to tonnage using a factor of 11.0 ft.(3)/ton (Specific Gravity =
2.92), which was established by tests conducted during the Wright feasibility
study in 1988. A similar exercise was undertaken to determine total "GV", i.e.,
the sum of the areas between each GT contour multiplied by the corresponding
area. The average grade was estimated by dividing the total GV by the total
volume.
The resource classification of each subzone was determined based on the drill
hole density and grade continuity. A minor tonnage, immediately above and below
some of the underground workings, may have qualified as measured resources based
on closely spaced underground sampling and diamond drilling. However, since the
economics of the Project will be based on the sum of measured plus indicated
resources, the measured category was not estimated.
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MINERAL RESERVES
There are no mineral reserves estimated for the Duport Property.
EXPLORATION AND DEVELOPMENT
The Duport Report recommended a two-phase work plan for the Duport Property. The
overall objective of the work was to expand the resource base of the property by
testing airborne electromagnetic anomalies with IP surveys and diamond drilling.
The proposed work plan was divided into two phases, with the second phase
contingent on success in the first. The estimated total cost of the first phase
was $435,000 and the second phase, consisting of data compilation, geophysics,
surface diamond drilling, community relations, environmental monitoring,
resource estimation, and a scoping study was estimated to cost $467,000.
During January, 2007 the Company commenced preparations for the Phase 1
exploration program to expand the existing to expand the existing resource by
focusing on areas of structural complexity within the deposit for the discovery
of high-grade ounces and to test a number of airborne magnetometer and
electromagnetic ("EM") anomalies covering attractive geology within a short
distance of Duport infrastructure. In February, 2007, however, the Company
announced the cancellation of this drill program due to mild temperature
conditions that have not allowed the building of sufficient ice thickness to
support the drill rigs.
During October 2006 a partial follow up to the airborne survey was carried out
by completing a reconnaissance mapping and sampling program over a portion of
the East Group of claims that were accessible by land. Anomalous gold values
were returned from limited sampling of sulphide-bearing intrusive rocks
corresponding to an area showing a uniform low magnetic signature and subtle EM
response. The samples were collected on claim 3007334 which is underlain by
quartz diorite rocks of the Canoe Lake Stock. The stock is a multi-phased
intrusion that is host to gold mineralization near the contact with mafic
volcanic rocks of the Cedar Island Formation.
Samples collected on this claim are similar in appearance to that found at other
targets along the periphery of the stock including the Granozone, McKinnon Reef,
Crown Point Mine, Sirdar No 1 and 2 Veins and the Gold Coin Occurrences. These
targets are examples of "veins in extensional fractures and stockwork zones".
The nature and exploration potential of these gold targets have not yet been
fully investigated. The extensional veins of the partially-drilled Granozone
deposit located 400 meters to the southwest occur as en echelon veins hosted
within altered, sericitized, chloritized quartz diorite that have returned 10.54
grams per tonne gold over 2.4 meters TW and 71.9 grams per tonne gold over 0.9
meters TW from holes drilled by Denison Mines in 1982. (Refer to Denison Report
on Drill Results 1980-82, C.F. Desson).
The altered margin of the Canoe Lake Stock is an exciting new target area for
the Company. Additional work will be directed towards the evaluation and further
definition of high priority targets in this area.
Following this work, prior to the recommencement of diamond drilling, the
Company decided to initiate a study that would better define the requirements
for bringing the Duport project to feasibility level. The initial focus of this
study is to develop an exploration plan to increase the property wide resource
base. An assessment of all potential drill targets will be made and targets will
be prioritized by consideration to factors such cost of drilling and suitability
of the potential resource to become satellite mining operation to the main
Duport resource. Following this assessment, an exploration and development
strategy will be selected to fast track the project towards a bankable
feasibility study. This plan will also form the basis for attracting a suitable
exploration and mine development partner.
In December 2006, a program to reassess all potential drill targets was
commenced. Condor Consulting, Inc has commenced a detailed reprocessing and
analysis of the original data collected by Dighem frequency-domain EM survey
carried by Fugro Airborne Surveys during its August/September, 2005 survey. The
EM data is currently being examined for additional anomalies that might indicate
zones of mineralization. It is expected that this work will be completed during
March 2007. A revised work program and budget will be established upon
completion of the new exploration and development plan. It is anticipated that
any major direct exploration costs for Duport will be deferred until 2008.
Budgeted expenses for 2007 are estimated at $150,000 and include the completion
of a detailed exploration plan.
BACHELOR LAKE PROPERTY, QUEBEC
On November 12, 2004, the Company entered into an option agreement to earn a 50%
interest in the Bachelor Lake Property with Wolfden Resources Inc. ("Wolfden").
A definitive agreement (the "Assignment and Assumption Agreement") was
subsequently executed on April 15, 2005. Under the terms of the Assignment and
Assumption
- 34 -
Agreement, Wolfden assigned to the Company its option to earn a 50% interest in
the Bachelor Lake Property from Metanor Resources Inc. ("Metanor") by paying to
Wolfden an aggregate of $1,943,123 (comprised of $650,000 in acquisition costs
and $1,293,123 in reimbursement of exploration expenditures) and issuing 2.1
million common shares subject to a 12-month contractual hold period. Upon
securing project financing and the commencement of commercial production on the
property resulting in a minimum of 50,000 ounces of gold or silver equivalent
being produced, the Company will pay a bonus payment to Wolfden in the amount of
$250,000 cash and 250,000 common shares. The Company has also agreed to pay
Wolfden a net smelter return royalty of 0.5% on the Company's share of the net
smelter return. The Company also assumed Wolfden's $3 million exploration
funding commitment at Bachelor Lake. All of the required exploration funding has
subsequently been expended. The transaction closed on May 18, 2005. The Company
and Metanor subsequently executed a definitive joint venture agreement dated
effective July 1, 2005 (the "Bachelor Lake JV Agreement") setting forth the
terms and conditions governing the relationship between the parties and
providing for the means by which each of them shall participate in the
exploration, development and mining activities on the Bachelor Lake Property.
In December of 2005, a report entitled "NI 43-101 Technical Report on the 2005
Drilling Program and Mineral Resource Estimate for the Bachelor Lake Property"
(the "Bachelor Lake Report") was prepared by InnovExplo Inc. ("InnovExplo").
Each of the individuals who contributed to the Bachelor Lake Report was, or was
supervised by a Qualified Person. Messrs. Alain Carrier, MSc., P. Geo and Julien
Davy, MSc., P. Geo were the Qualified Persons who authored the report. This
report can be accessed through the Halo website www.halores.com at the System
for Electronic Document Analysis and Retrieval (SEDAR).
In May, 2006, the Company concluded an agreement for the sale of its 50%
interest in the Bachelor Lake property to its joint venture partner Metanor
Resources to allow it to focus its full attention and resources on its ongoing
exploration of the Sherridon VMS Property (see below). The agreement with
Metanor provides for the payment on closing of $3,500,000 and the issuance of
$750,000 worth of shares of Metanor, calculated at a value per common share
equal to the volume weighted average of the closing price of the common shares
of Metanor for the last 10 trading days on the TSX Venture Exchange immediately
prior to the date of the Agreement and a 1% net smelter return royalty on all
minerals or mineral products derived from all or any part of the Bachelor
property or from other ore bodies owned or controlled by Metanor and processed
at the Bachelor property.
On August 31, 2006, the Company and Metanor Resources Inc. ("Metanor") agreed to
extend the Purchase Agreement signed in May whereby Metanor agreed to purchase
from the Company its 50% undivided ownership interest in the Bachelor Lake
Property, the Hewfran Property and the MJL-Hansen Property (collectively, the
"Bachelor Lake Property") located in Quebec. It was agreed that the transaction
would be completed on or before November 10, 2006.
On November 13, 2006, the Company announced that Metanor did not complete its
acquisition of the Company's 50% undivided ownership interest in the Bachelor
Lake Property. As a result, the Company had the option to purchase Metanor's 50%
undivided ownership interest in the Bachelor Property, together with Metanor's
50% participating interest therein, on the same terms and for the same
consideration as was applicable to the purchase by Metanor of the Company's 50%
interest in such properties.
Pursuant to the Purchase Agreement, the Company had ten (10) days, commencing on
November 10, 2006, to either exercise such option or to continue negotiations
with Metanor concerning a restructured sale arrangement or a restructured joint
venture agreement.
On November 17, 2006, the Company and Metanor agreed to a new agreement under
which Metanor has now agreed to purchase the Company's 50% undivided ownership
interest in the Bachelor Lake Property for a total consideration of $4 million,
as follows:
- Metanor paid $2 million to the Company. The $2 million shall be applied
to the purchase price for the Bachelor Lake Property and is freely
transferable by the Company and is non-refundable.
- Metanor will pay $500,000 to the Company on or before March 30, 2007.
- Metanor will pay $500,000 to the Company in cash or, at the sole
discretion of Metanor, in common voting shares of Metanor on or before
each of the following dates (for a total of $1.5 million): (a) May 31,
2007, (b) August 31, 2007 and (c) November 30, 2007.
- 35 -
- On or before Friday, November 30, 2007, Metanor shall enter into a
binding net smelter returns royalty agreement with the Company, on
terms satisfactory to the Company, granting to the Company a 1% net
smelter returns royalty on all mineral production (in any form
whatsoever) from the Bachelor Lake Property.
- If Metanor fully satisfies each of the foregoing obligations in
accordance with the respective timeframes, then the Company shall
complete the transfer of its 50% undivided ownership interest in the
Bachelor Property, together with the Company's 50% participating
interest therein, to Metanor with effect on November 30, 2007.
- If Metanor fails to complete any one of the foregoing obligations, then
the extension of time for the completion of the acquisition by Metanor
of the Company's 50% undivided interest in the Bachelor Lake Property
shall terminate immediately and the Company shall have the option to
acquire Metanor's 50% undivided ownership interest in the Bachelor lake
Property, together with Metanor's 50% participating interest therein.
- All other terms of the Purchase Agreement remain in force and effect as
previously disclosed by the Company on May 5, 2006 (including the
obligation of Metanor to pay all costs and expenses of the Bachelor
Lake Joint Venture until completion by Metanor of the purchase of the
Company's 50% undivided ownership interest in the Bachelor Lake
Property, together with the Company's 50% participating interest
therein).
Metanor has paid all costs and expenses of the Bachelor Lake Joint Venture since
May 2006 and will continue to pay until the acquisition process is complete in
November, 2007.
QUARTER MOON LAKE PROPERTY, MANITOBA
On December 3, 2006, the Company and Endowment Lakes (2002) Limited Partnership
("EL") entered into a formal purchase agreement (the "Quarter Moon Purchase
Agreement") which was completed on January 12, 2007, under which the Company
purchased a 100% interest in ten mining claims, including the original five
mining claims under the Quarter Moon letter of intent (the "EL Claims"), in
north-central Manitoba, for $90,000 cash and issued 160,000 common shares of the
Company. EL holds a 1% NSR, of which a 0.5% NSR can be purchased at any time for
$500,000. The EL Claims are strategically located within the Sherridon dome
structure and Meat Lake basin structure respectively and will play an important
role in the Company's plans to explore for high-grade volcanogenic massive
sulphide deposits. The Company also has acquired the right to acquire any
additional rights acquired by EL in and to any mining claims within a one
kilometer area from the perimeter boundaries of the EL Claims.
Now that this transaction is complete, the Quarter Moon Lake Property will be
included with the Sherridon VMS Property.
SHERRIDON PROPERTY
Background information on the Sherridon Property is derived from the report
dated January 31, 2006 entitled, Technical Report on the Sherridon VMS Property,
North-Central Manitoba, Canada (the "Sherridon Report"), prepared by Karen J.
Ferreira, M.Sc., P.Geo., who is a qualified person as defined in NI 43-101. This
report is available on SEDAR and can be accessed through the Company web site
WWW.HALORES.COM. The information contained in the Sherridon Report has been
updated to reflect the exploration activities carried out by the Company during
2006. The Company has followed the principal recommendations and plans as laid
out in the Sherridon Report. The work has been carried out under the direction
and supervision of either Kevin Leonard or Eckart Buhlmann, both of whom are
designated as a "Qualified Person" as defined in NI 43-101 with the ability and
authority to verify the authenticity and validity of the data presented in this
report.
PROPERTY DESCRIPTION AND LOCATION
The Company has now staked a total of 74 claims (approximately 14,750 ha) and
together with the purchase of the 2,072 ha land package from EL (see "Quarter
Moon Lake Property" above), the Company held ground is now 16,822 hectares.
Through three option agreements the Company also has the right to acquire a 100%
interest in 30 other mining claims and one mineral lease in the Sherridon area
bringing the total land package to approximately 20,876 hectare. The most
significant of these agreements are those with Hudson Bay Exploration and
Development Company Limited ("HBED") which allow the Company to acquire 100% of
the substantial Jungle and Park copper-zinc deposits. Continued ownership of the
claims staked and held by the Company is subject to meeting work commitments set
forth by the Mines and Minerals Act of Manitoba and its accompanying
Regulations. In total, the property currently hosts approximately 11 mt of
historic copper-zinc resources.
- 36 -
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted graphic is: Sherrridon VMS Project Location Map showing a close
up of the location is respect to the cities /towns of
Sherridon, Flin Flon, Snow Lake and Leaf Rapids. Also
showing the location in respect to the contry of
Canada showing all the Provinces.
Figure 1: Property Location
- 37 -
The Sherridon Property is in The Pas Mining Division of Manitoba, in NTS areas
63N/02 NW and 63N/03 NE, with a small portion of the claims extending into
63N/02SW and 63N/03SE. The main shaft of the past-producing Sherridon Mine is
located at 55(0)08'22"N 101(0)06'25"W.
The Government of Canada owns surface rights for the areas covered by all of the
claims except for seven claims within the Sherridon Community Boundary. Within
subdivisions of the Sherridon Community Boundary, surface rights are held by a
variety of parties, including private individuals, commercial enterprises, the
community council; some lots are under the jurisdiction of the Crown Lands
Branch. Ownership, zoning and other matters are covered in the Sherridon
Community Council Land Use Policy, which was implemented in 1991 by Manitoba
Northern Affairs. The Kississing Lake management strategy, implemented in 1986
and formally supported in the Sherridon Community Council Land Use Policy, was
developed to protect water quality of Kississing Lake and its surrounding
environs in order to encourage and maintain the tourist recreational industry.
The mineral claims have not been legally surveyed. Figure 1 identifies the
location of the Sherridon Property and Figure 2 shows the property geology,
infrastructure, deposit locations and claim boundaries.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted Grphic is: Sherridon Project showing the geology,
infrastructure, deposit locations and claim
boundaries
Figure 2: Property geology, infrastructure, deposit locations
and claim boundaries
The past-producing Sherridon Mine, the Cold Lake deposit, and the Fidelity zone
(also known as Jonah Lake zone) occur on the Company's property. Claims
containing the Park Lake deposit, owned by Hudson Bay Mining and Smelting Co.,
Ltd., are contiguous with the Company's claims in the Sherridon area. The Bob
Lake deposit, owned by W. Bruce Dunlop Limited, is surrounded by the Company
claims. The mineral lease containing the Jungle Lake deposit, owned by Hudson
Bay Mining and Smelting Co., Ltd., is contiguous with the Company ground in the
Sherridon East area. The claim containing the Ake Zone, owned by W. Bruce Dunlop
Limited, is contiguous with the Company ground in the Meat Lake area.
Capped or fenced shafts and mine openings, tailings area, and other relics from
the mining operation that ceased in 1952 are present in and around the community
of Sherridon. The Company is in receipt of a letter of indemnification from the
Manitoba Director of Mines that "confirms that the Company will not be held
liable or responsible for any environmental contamination or degradation of or
alteration to the natural environment which presently exists or can be shown to
exist or to have occurred" prior to the Company's ownership of the claims, under
authority of clause 127(2) of the Mines and Minerals Act (Manitoba) (the "Mines
and Minerals Act"), which provides that where rehabilitation of land is required
in respect of work performed thereon before April 1992 under a mineral lease
that expired or was surrendered or cancelled before that date, the person who
held the mineral lease is as liable for the rehabilitation as he or she would
have been if
- 38 -
such legislation had not been enacted; and, where the land or any part of the
land is staked and recorded on or after April 1992, the holder of the claim or
mineral lease issued in respect of the land or any part of the land is not
otherwise liable under the Mines and Minerals Act for the rehabilitation. The
same letter advises that the Company, or its potential development partners, may
use an existing report prepared in November 2004 by UMA Engineering Ltd. and
Senes Consultants Ltd. as a baseline environmental impact study for the purposes
of identifying the existing environmental conditions of the tailings area, but
that the Company may need to update or upgrade the report with additional work
if the Company plans work in the immediate area of the tailings. The Company
expects to complete such a report for exploration work in close proximity to the
historic Sherridon Mine.
Exploration operations on the property are subject to the usual laws that
regulate mineral exploration and development throughout the Province of
Manitoba, including the Mines and Minerals Act and its Regulations and the
Environment Act. A work permit is required from Manitoba Conservation to
undertake field work. The federal Department of Fisheries and Oceans recommends
that proponents obtain a letter of advice where exploration work is planned in
areas with fish habitat.
Fifteen claims lie within a Sanitary Area designated by Manitoba's chief medical
officer of health under the authority of the Sanitary Areas Regulation of the
Public Health Act. Sanitary Areas are designed to ensure water quality in a
community. If a proponent plans to conduct an activity within a Sanitary Area
that may impact water quality by either depositing material into the water or
establishing a camp or buildings for commercial purposes (including mining),
then the proponent must obtain written permission from the Minister of Health or
the chief medical officer of health.
Six claims lie within the Sherridon Community Boundary. Of these claims, three
claims include areas designated as Sherridon Subdivisions. Written consent was
granted prior to staking by the Minister of Mines to stake and apply for mining
claims within the subdivisions of Sherridon and Cold Lake. This written consent,
as well as support for mining exploration and development within the community,
was expressed in a letter from Sherridon Community Council to the Director of
Mines.
ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY
The Sherridon Property is located approximately 65 km northeast of the city of
Flin Flon, Manitoba near the Northern Affairs Community of Sherridon, Manitoba
and the adjacent community of Cold Lake. Year-round access to Sherridon
(population - 115) is by a gravel road that extends 78 km from Provincial
Highway 10, from approximately 15 km north of the community of Cranberry
Portage. East of Sherridon, the claims can be accessed in the summer by float
plane, and parts by quad trails and boat. In the winter, these claims are
accessible by snowmobile or ski-plane. Winter roads, logging roads and trails
are available throughout the area.
The Sherridon area is typical of the Precambrian boreal forest in Manitoba.
Relief is generally low, with rolling hills separated by lakes and swamps.
Glacial overburden is relatively thin, generally less than 10 metres. The claims
that constitute the Sherridon Property are located at approximately 300-340 m
above mean sea level. Upland areas are forested by jackpine, poplar and white
spruce; lowlands have abundant black spruce and tamarack. Flin Flon and The Pas
are the nearest places for which climate data are maintained by Environment
Canada; their data are similar, and are averaged here to provide information
about the Sherridon area: Average daily temperatures range from about
18(degree)C in July to -20.5(degree)C in January. Annual rainfall totals about
330 mm; annual snowfall totals about 135 cm. For areas with road access,
exploration may continue throughout the year. In more remote parts of the
property, exploration may be carried on year-round with interruptions for
freeze-up and spring thaw of the waterways.
Power lines, owned and operated by Manitoba Hydro, and a rail line, operated by
Hudson Bay Railway Company, a subsidiary of OmniTRAX Canada, pass through
Sherridon. In addition to the Sherridon road, numerous active logging roads and
trails transect the project area. Sufficient water for exploration, and
potentially for mining, operations is readily available in many lakes in the
area. Flin Flon (population - 6,500), Cranberry Portage (population - 1,000) and
The Pas (population - 5800) all have well-developed road, rail, and air
transportation and businesses that service the mining, forestry, recreation, and
commercial fishing industries.
The Company believes that potential future development of the Sherridon Property
will be greatly facilitated by the existing rail link to the Hudson Bay Mining
and Smelting Co. Ltd. (HBMS) mining/metallurgical complex located approximately
70 km to the southwest and also by the presence of the all weather road to
provincial Hwy 10, a power line and a communication tower.
- 39 -
HISTORY
Prospecting in the Sherridon area dates back to the early 1920's, not long after
the Flin Flon copper-zinc deposit and other mineralization in the Flin Flon area
was discovered. Many claims were held by various parties through the years.
Claims that were staked, but had no work filed for assessment, are not included
in the exploration history of this report. In the last twenty years, claims of
this nature were held by numerous parties including (but not limited to) Aur
Resources Ltd., Foran Mining Corporation, Esso Minerals Canada, Homestake Mining
(Canada) Limited, Varna Gold Inc., Granges Exploration Ltd., Noranda Exploration
Company Limited, and a number of prospectors.
The Sherritt Gordon deposit was discovered and first staked by prospector Philip
Sherlett in 1922. Claims lapsed in 1924 and were restaked by other parties.
Sherritt Gordon Mines, Limited, was formed in 1927 to explore, develop, and mine
the property. The Sherritt Gordon mine at Sherridon operated from 1931 to 1932
and 1937 to 1951. Production took place from the West Lens from 1931 to 1932 and
1937 to 1951; production took place from the East Lens from 1940 to 1946. A
total of 166,093 tonnes copper, 135,108 tonnes zinc concentrate (50%), 2,867 kg
gold and 91,320 kg silver were extracted from 7,737,936 tonnes mined. As mine
closure at Sherridon became imminent, Sherritt Gordon Mines Limited, began
moving most of the buildings and equipment from Sherridon to Lynn Lake,
Manitoba, approximately 260 km away, where it was opening a nickel mine. From
1946 to 1953, Sherritt Gordon Mines Limited, moved more than 200 buildings via
tractor train over a winter road.
From 1924 to 1977, the ground near the Sherritt Gordon deposit was covered by
mineral leases owned by Sherritt Gordon Mines Limited. Sherritt engaged in
geological mapping, carried out an extensive geophysical survey of the northern
claims, and undertook considerable exploratory diamond drilling. Sherritt's work
is not included in government assessment files. Hudson Bay Exploration and
Development Co. Ltd. restaked the ground in 1977 and held it until 1994. The
ground was open for staking from 1994 to 1997. Peter C. Dunlop staked the ground
in 1997 and held it until 1999. From 1999 to 2002 the area near the deposit was
held by W. Bruce Dunlop (NPL) Limited. Some prospecting work was done adjacent
to the old tailings area. The ground was open for staking from 2002 to 2005,
when the Company staked it.
The Sherridon East and Meat Lake areas had a similar history with many early
prospectors' claims. Parts were covered by Sherritt Gordon Mines Limited mineral
leases, which lapsed at various times in the 1950's and 1970's. Hudson Bay
Exploration and Development Co. Ltd. carried out the most widespread work
throughout the intervening period, mostly by coverage with horizontal loop
electromagnetic and magnetic surveys, generally using coil separations of 400
ft. (120 m) for the HLEM surveys. HBED drilled numerous holes to test conductors
throughout the area. Most of these holes were about 120 m or less in length.
Various other parties held claims in the area throughout the 1980s and 1990s.
Much of the exploration focus during this period was gold exploration.
The area of the Quarter Moon Lake claims was similarly held by numerous
prospectors through the years. Emphasis in this area has traditionally been
toward gold exploration closer to the Nokomis Lake deposit southeast of the
Company's property. On the Quarter Moon Lake property, the most recent work was
done in 2003-2005 by Endowment Lakes, the company from whom the Company optioned
five claims. Geochemical survey work was previously conducted that included
seven lake sediment samples, 1 stream sediment sample, six soil samples, and 21
lithogeochemical samples. The samples were collected to follow-up a regional
gold-arsenic lake sediment anomaly noted by the Geological Survey of Canada in
1986. The lithogeochemical samples contained up to 159 ppb gold, up to 36 ppm
tungsten, and up to 14.4% MgO in amphibolite. Further geochemical work and
prospecting in the area of these anomalies led to the discovery of the Emily
gold prospect, 250 m upstream from the stream sediment anomaly. Further work
continued in 2004 with additional soil geochemical sampling to better
characterize the rock units in the area and prepare for additional ground
follow-up. Four cuts were channel sampled (total 24 samples) with a diamond saw
in May 2005; the best values were 8.7 g/t Au over 0.4 m in one pit and 7.2 g/t
Au over 0.5 m in another. Nineteen holes totalling 1215 m were drilled in May
and June 2005 to test the showing at depth; a discontinuous area, approximately
200 x 30 m, was outlined that contained, on average, about 1 g/t Au over about 1
m. Further drilling on the Emily prospect was not recommended.
GEOLOGICAL SETTING
Geologists from the Geological Survey of Canada noted mineralization in the
Sherridon area as early as the late 1920's. The area was first mapped at a scale
of 1:63 360 and 1:31 680 from the mid-1940's to the early-1950's by the
Geological Survey of Canada. Additional geological mapping (mostly 1:50 000
scale) was conducted from the mid-1980s to the mid-1990s. This latter activity
was coordinated with NATMAP (National Mapping Program) multidisciplinary
geological studies throughout the Flin Flon, Snow Lake and Kisseynew regions.
This most recent, comprehensive work included geological mapping, geochemical,
and geochronological work that led to the recognition of their common
stratigraphy and related recognition of tectonic environments that led to the
assemblage of these related terranes.
- 40 -
Regional Geology
The Sherridon Property is in the south flank of the Kisseynew gneiss belt, a
metasedimentary terrane that is part of the Paleoproterozoic Trans-Hudson
Orogen. The Trans-Hudson Orogen consists of several Proterozoic belts of
metavolcanic, metasedimentary and intrusive rocks that occupy the area between
the Archean Hearne Province to the northwest and the Archean Superior Province
to the southeast. The Kisseynew gneiss belt represents a sedimentary basin
flanked to the north and south by magmatic arc terranes, notably the Flin Flon -
Snow Lake metavolcanic belt to the south and the Lynn Lake - La Ronge
metavolcanic belt to the north. The central part of the Kisseynew basin is
dominated by Burntwood suite migmatized greywacke (-1.86-1.84 Ga). The north and
south flanks of the Kisseynew domain consist of structurally interlayered
gneisses that include rocks directly related to the flanking arc terranes. The
boundary between gneisses of the south flank of the Kisseynew belt, which
includes Sherridon area, and the Flin Flon - Snow Lake belt is transitional. The
adjoining Flin Flon - Snow Lake belt consists of a tectonic collage of volcanic,
volcaniclastic, and related intrusive rocks of the Amisk Group, an unconformably
overlying Missi Suite of mainly clastic and subordinate volcanic rocks, and
plutons of various ages. Gneisses have been thrust faulted over volcanic rocks
along the south flank of the Kisseynew at the Kisseynew - Flin Flon belt margin.
LOCAL GEOLOGY
The south flank of the Kisseynew belt includes the following four major rock
groups:
- Orthogneisses derived from mafic to felsic volcanic, intrusive and
volcaniclastic rocks (1.92-1.85 Ga), which are equivalent to the
Amisk Group of the Flin Flon - Snow Lake belt. Amphibolites are
interlayered with felsic gneisses are interpreted as metagabbros
and Amisk metabasalts.
- Some orthogneisses in the immediate Sherridon area that make up
the crescent-shaped Sherridon structure have an uncertain origin.
The orthogneisses of the Sherridon structure include siliceous,
pelitic and calc-silicate gneisses interlayered with amphibolite,
which are interpreted as being derived from volcanic and plutonic
rocks. The Sherridon gneisses may be an assemblage of metavolcanic
and intrusive rocks equivalent with the Amisk Group.
- Paragneisses derived from marine turbidites (1.866-1.84 Ga) are
assigned to the Burntwood Suite. These paragneisses are generally
graphitic (garnet)-biotite gneisses in the Kisseynew's south
flank.
- Paragneisses derived from terrestrial clastic and volcanic rocks
(1.866-1.84 Ga) are considered equivalent to the Missi Suite of
the Flin Flon - Snow Lake belt. These include mainly
magnetite-bearing quartz-rich gneisses with lesser
volcanic-derived amphibolite and felsic gneiss.
Earlier workers had subdivided rocks of the Kisseynew belt into Nokomis Group
paragneisses and hornblende-plagioclase gneiss and unconformably overlying
Sherridon Group siliceous paragneisses, and post-Sherridon intrusions. Nokomis
Group rocks were correlated with sediments of the Amisk Group from the Flin Flon
belt and Sherridon Group with the Missi Group of the Flin Flon belt, and this
was the usage for other work, with some acknowledged unresolved difficulties in
correlation, for some time. As work continued and understanding improved for
both and Flin Flon and Kisseynew domains and relationships between the two, the
use of `Nokomis Group' and `Sherridon Group' terminology for rocks of the
Kisseynew has been replaced with the Flin Flon belt's `Amisk Group' and `Missi
Suite' terminology in more recent literature. This change was significant, not
only because of this recognition of equivalency, but also because geologists
recognized the ample presence of felsic volcanic rocks, with calc-alkaline
composition, in the area directly around Sherridon; this has positive
implications for VMS mineralization potential. Structural, geochronologic and
geochemical studies support the validity of considering units of the Flin Flon -
Snow Lake belt as stratigraphic equivalents of the south flank of the Kisseyne.
This equivalency in stratigraphy between parts of the Kisseynew south flank and
the Flin Flon - Snow Lake belt has particular relevance for mineral exploration,
because the Flin Flon - Snow Lake belt is a well-known host to many
past-producing, producing and subeconomic copper-zinc deposits.
Upper amphibolite facies metamorphism resulted in extensive destruction of
primary structures and extensive granitization in the Kisseynew gneisses. Five
deformational stages have complexly deformed the Kisseynew belt into refolded
recumbent-fold packages. Two interfering fold events yielded the notable hook
shapes that characterize the map view of rocks in the Sherridon area and in the
Meat Lake area. Rocks in the Sherridon region have experienced notable
attenuation parallel to compositional layering.
- 41 -
Cordierite-anthophyllite and garnet-anthophyllite assemblages in various places
throughout the south flank of the Kisseynew belt represent hydrothermally
altered rocks. Some of this alteration accompanies sulphide mineralization. Some
alteration assemblages do not have an apparent relationship with sulphide
mineralization. This may represent hydrothermal alteration material that was
clastically transported paleotopographically down-slope from its initial source
in the basin. Alternatively, it has been suggested that the attenuation due to
the extreme strain that affected Kisseynew rocks may have transposed alteration
zones along strike from massive sulphide mineralization, dislocated from a more
typical original orientation where the alteration assemblages represent a
crosscutting pipe-like feeder beneath a sulphide zone.
PROPERTY GEOLOGY
The Company's land holdings are centred on the Sherridon - Hutchinson Lake
Complex and the Walton Lake nappe. Both structural complexes include gneisses
derived from various Amisk Group juvenile arc volcanic rocks, mainly felsic
volcanic and intrusive with a lesser interlayered mafic component. In the core
of the Sherridon complex, gneisses with an uncertain origin (see "Sherridon
gneisses" above) comprise interlayered graphitic volcaniclastic wackes,
quartz-carbonate rock (an impure marble), and calc-silicate rock. Smaller plugs
of gabbro and amphibolite occur near the centre of the structural complex, and
amphibolite forms a "rim" around the western part. The latter is correlated with
the Amisk Group. Porphyroblastic garnet-anthophyllite +/- cordierite gneiss and
sillimanite gneiss in the Star Lake area (i.e., near the Company's Sherridon
East claims) and in the Sherridon area are strongly foliated and are associated
with shear zones. These rocks are interpreted as hydrothermal alteration
assemblages.
The Walton - Meat Lake area, centred on the Walton Lake nappe, consists of Amisk
Group volcanic arc assemblage rocks of the Batty Lake - Meat Lake Sequence.
Dominant lithologies are various amphibolites and felsic gneisses that are
interpreted as metamorphosed mafic and felsic volcanic flows and fragmental
rocks, felsic volcanic and subvolcanic rocks; calc-silicate rocks interpreted as
altered felsic volcanic breccia; and cordierite-garnet +/- sillimanite +/-
hercynite +/- anthophyllite gneiss and biotite-garnet +/- hornblende gneiss
interlayered with garnetiferous felsic gneiss interpreted as extensive,
prominent, hydrothermal alteration assemblages.
DEPOSIT TYPES
Volcanogenic copper-zinc-(gold)-(silver) massive sulphide (VMS) deposits are the
main mineral deposits in the Kisseynew domain. This style of deposit is the
major target for exploration on the Company's Sherridon property. Gold
mineralization also is known at a number of locations in the south flank of the
Kisseynew. Several of the Company's claims are primarily gold exploration
property, however this deposit type is of secondary importance for the Company
in its current exploration outlook.
MINERALIZATION
Massive sulphides including copper- and zinc-bearing sulphides are known to
occur as discontinuous lenses in Sherridon Suite quartz-rich gneisses (felsic
volcanic and volcanic-derived rocks) near the contact with
hornblende-plagioclase gneisses (intermediate to mafic metavolcanic rocks) in
the Sherridon - Hutchinson Lake complex and in garnet-biotite +/- cordierite +/-
sillimanite gneiss on the east limb of the Meat Lake synform. Known deposits
with this style of mineralization in the area include the past-producing
Sherritt Gordon Mine (West and East Lenses), the Cold Lake deposit, and the
Fidelity zone, all discussed below, as well as the Park Lake, Bob Lake, Jungle
Lake, and Ake Zone deposits. The past-producing Sherridon Mine, the Cold Lake
deposit, the Fidelity zone and the Ake zone occur on the Company's property. The
remainder, the Jungle, Park and Bob deposits are held under option.
An association has been identified between mineralization known in the area at
the time, which included both the Sherritt Gordon Mine and the Bob Lake deposit,
their stratigraphic position between a quartz-rich gneiss and hornblende
amphibolite (metabasalt), and the multiple folds. Their findings have been
confirmed by later work. An association has also been identified between
mineralization and pegmatites, which particularly occur along zones of weakness
such as lithologic contacts.
Cordierite-anthophyllite or garnet-anthophyllite rocks likely represent
metamorphosed equivalents of chloritic hydrothermal alteration zones in the
Sherridon area. Some of the altered rocks are known to be associated with
sulphide mineralization, while others do not show an apparent association with
sulphides.
The Sherritt Gordon mine has been described as having consisted of two zones,
the West and East Lenses, with a combined length of almost 4900 m; of this
total, 1100 m of barren rock separated the two zones. The average width was
- 42 -
about 4.6 m. The East Lens was about 75 m deep, and the West Lens was about
150-245 m deep. The West Lens rakes north, flattening with depth, to about 460 m
maximum depth. The ore was in sharp contact with enclosing rocks. The structural
footwall (which is the overturned stratigraphic hanging wall) to the deposit is
quartz-rich gneiss; the structural hanging wall is hornblende gneiss. They
describe "bulges or offsets" (up to ~0.5 Mt) composed of pegmatite in the
hanging wall of the West Lens that were sufficiently mineralized to make
subsidiary orebodies. Mineralization from these folded pegmatite offshoots
provided 25% of the Sherritt Gordon Mine's production. Mineralization was mostly
pyrrhotite, with pyrite, chalcopyrite and sphalerite and rarely magnetite. The
East Lens was more zinc-rich than the West Lens. Uncommon to rare occurrences
have been identified of cubanite, arsenopyrite, and gahnite in the Sherritt
Gordon ore. Gangue minerals include the constituents of the host quartz-rich
gneiss, i.e., quartz, plagioclase and biotite, with minor to rare hornblende,
clinopyroxene, scapolite and calcite.
The Park Lake deposit was discovered in 1959 by Hudson Bay Exploration and
Development Co. Ltd. from a surface exploration program. This deposit strikes
WNW with a length of 365m and an average width of 6m and was drilled to a
maximum vertical depth of 670m. The deposit dips to the N at 45 degrees and is
open at depth. The area is underlain by an east-trending sequence of Sherridon
Suite quartz-rich paragneiss and amphibolitic gneiss. The mineralization is
hosted by quartz-feldspar-biotite, garnet, sillimanite gneiss and also
interlayered with quartz-rich gneiss, hornblende-biotite-quartz gneiss, and
calc-siliciate gneiss. The main sulphide ore is contained within four lenses and
composed of both solid and disseminated sulphide zones with medium- to
coarse-grained crystalline pyrite and interstitial blebs of pyrrhotite,
sphalerite, and chalcopyrite.
The Jungle Lake deposit was discovered in 1958 by Hudson Bay Exploration and
Development Co. Ltd. The deposit has an E to W strike with a known strike length
of 365m and an average thickness of 5.6m that extends to a vertical depth of
400m. The zone dips approximately 40(degree) to the N. The underlying host rocks
consist of an east-trending sequence of Sherridon Metamorphic Suite quartz-rich
paragneiss and amphibolitic gneiss. The mineralization is hosted by
quartz-biotite gneiss that is in turn interlayered with quartz-rich,
quartz-feldspar-biotite, and quartz hornblende gneiss. The near solid to solid
sulphide zone contains predominantly pyrrhotite and pyrite with lesser amounts
of chalcopyrite and sphalerite as blebs and stringers. On the north side of the
deposit there are sections within the hanging wall that occasionally contain
graphite. There is little to no alteration surrounding the Park Lake sulphide
bodies.
Exploration in the area of the Cold Lake deposit commenced in 1928 by Cold Lake
Mines Ltd. with several geophysical surveys including an airborne radiation
survey in 1954, airborne EM survey in 1972, and an airborne magnetic and EM
survey in 1980. This Cold Lake deposit strikes NW with a length of approximately
180m, a true width of 3m, and extends to a vertical depth to 180m. The deposit
has a variable dip from 50 - 80 degrees NE with a shallow plunge NW. The Cold
Lake deposit is underlain by a sequence of NW trending Sherridon Suite,
quartz-rich paragneiss and amphibolitic gneiss that are very similar to the host
rocks of Sherritt Gordon Deposit. Cold Lake mineralization comprises well
mineralized, massive sulphides of pyrrhotite and pyrite with lesser, variable
amounts of sphalerite and chalcopyrite. The mineralization is constrained within
the quartz-feldspar-biotite gneiss, which are in turn interlayered with
quartz-feldspar-hornblende-biotite and amphibolitic gneiss.
In 1941 Sherritt Gordon Mines Limited discovered the Bob Lake deposit by
drilling and followed it up with an intensive drilling campaign in the first
half of 1942. The geological characteristics of the Bob Lake deposit offer
important clues as to the structural and stratigraphic controls of VMS deposits
on the east flank of the Sherridon dome structure. Based on historic
documentation available at the Manitoba Mines Department, the true width varies
to 33 metres and averages 4.5 metres. The main significance of the Bob Lake
deposit is that it demonstrates the lithostratigraphic and structural position
of the mineralized horizon. Mineralized beds strike northwest, dip 50(degree)
northeast and plunge 20(degree) to the east. Mineralization is hosted in felsic
gneiss and is associated with pegmatite.
Discovered in 1965 by Fidelity Mining Investments Ltd. from drilling EM and
magnetic geophysical targets, the Fidelity deposit is within a structurally
complex area. The deposit has an east limb that strikes ESE and dips NE, and a
west limb that strikes WSW and dips SE. The strike length of the deposit is
approximately 120m and extends to a vertical depth of 150m. Most drill holes
within the east limb intersected two sulphide-bearing zones that vary in
thickness from 1 to 10m (core length). The drill holes within the western limb
intersected disseminated pyrite and pyrrhotite mineralization. This area is
underlain by Sherridon Suite biotite- or hornblende-bearing quartzofeldspathic
gneiss, and pelitic schists. Sulphide-rich layers are typically structurally
overlain and/or underlain by altered rocks that contain variable concentrations
of garnet, sillimanite, chlorite, sericite, biotite, and disseminated sulphides.
The massive sulphide mineralization within this area consists primarily of solid
to near solid pyrite, pyrrhotite, chalcopyrite, and sphalerite rich horizons.
- 43 -
The Ake zone is located at the eastern limit of the Sherridon property and was
discovered by Hudson Bay Exploration and Development Company in 1971. Drill hole
projections, drill logs and assay data from HBED's 1972 and 1984 drilling
campaigns show a mineralized zone up to 4.6 m thick and that averages 1.5 m
width. In 1982, at a depth of 293m, a drill hole cut 3.7 m grading 2.18% copper,
0.50% zinc, 0.5g/t gold and 10 g/t silver. At surface the zone strikes
210(degree), dips 50(degree) west and has a strike length of 183 m. At 305 m
depth the zone strikes 270(degree) and dips less than 10(degree) north. The Ake
Zone occurs in siliceous quartz-feldspar-biotite gneiss with sericite, chlorite,
epidote and sillimanite alteration on the east limb of the Meat Lake synform.
The Ake zone is within an embayment of low metamorphic grade within the Meat
Lake basin and drill results from some 40 to 50 holes define important
stratigraphic and structural controls of VMS style mineralization within the
Meat Lake basin. The Ake zone is a valuable starting point from where to follow
the extensive potentially mineralized horizon. The above information was taken
from documentation by Hudson Bay Mining and Exploration Company Ltd., dated
between 1971 and 1985.
The Sherridon Report summarizes the historical estimates of significant mineral
deposits as follows:
- ---------------------------------------------------------------------------------------------------------------
SHERRIDON VMS PROPERTY.
HISTORICAL ESTIMATES OF SIGNIFICANT MINERAL DEPOSITS
- ---------------------------------------------------------------------------------------------------------------
MINERAL DEPOSIT TONNAGE CU ZN AU AG COMMENT REFERENCE
(TONNE) (%) (%) (G/T) (G/T)
- ---------------------------------------------------------------------------------------------------------------
Sherridon: 7,739,000 2.46 0.80 0.41 42.0 Mined out Froese and Goetz (1981)
West and East Zone
- ---------------------------------------------------------------------------------------------------------------
Cold Lake 240,000 1.05 1.50 0.34 11.0 Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Park Lake 6,142,000 0.42 2.16 0.14 2.4 To 670 m Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Jungle 3,356,581 1.42 1.10 Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Bob 2,159,098 1.33 1.18 0.31 8.5 Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Fidelity - Not calculated Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Ake - Not calculated Ostry et al (1998)
- ---------------------------------------------------------------------------------------------------------------
Note: The information contained in the table relies on the January31, 2006 NI
43-101 Technical Report on the Sherridon Property that is available at
www.halores.com. This report includes all of the available references
regarding the source of these historical estimates. The deposit
estimates are presented as historical estimates and use historical
terminology. These estimates are given to provide an important frame of
reference for the Company's ongoing exploration program for VMS type
mineral deposits. The Company has carried out no work to classify these
historical estimates under current mineral resource or mineral reserve
terminology. As noted in the January 31, 2006 NI 43-101 Technical
Report, the historical estimates are not to be interpreted as current
estimates as defined in section 1.2 and 1.3 of NI 43-101 and therefore
should not be relied upon. In the Company's exploration program these
deposits serve to demonstrate the stratigraphic and structural
positions of mineralized horizons, and also the style of
mineralization. The known deposits also serve to test the effectiveness
and depth penetration of latest geophysical survey techniques in the
high grade metamorphic Sherridon area with its dominantly flat dips.
Other styles of mineralization known from outcrop or drill core have been
identified on the Sherridon Property:
- Zones of disseminated pyrrhotite +/- pyrite that are barren or
have low-grade chalcopyrite and sphalerite are present in similar
settings throughout the area representing sulphide facies iron
formations.
- Calc-silicate gneisses contain cherty sections that include
disseminated pyrrhotite, but have not been known to contain
appreciable copper and zinc.
- Gold is structurally controlled in the Nokomis Lake area. Recent
exploration on the Quarter Moon Lake portion of the property was
directed toward gold exploration.
On one of the Meat claims, a series of altered mineralized outcrops and trenches
constitute a mineral occurrence known as the Douglas claims since the late
1920's. The occurrence has been summarized as consisting of disseminated to
near-massive pyrrhotite +/- pyrite. The mineralization is associated with layers
of very fine-grained, highly siliceous, garnetiferous quartzofeldspathic gneiss
and garnet-anthophyllite gneiss.
Along and near the southwest shore of Star Lake on one of the present-day East
claims, several mineral occurrences are known. Along the southwest shore of Star
Lake, a minor occurrence of pyrite has been known since the 1950's as the Star
- 44 -
Lake sulphide occurrence. The host rocks are calc-silicate gneiss, more
specifically hornblende-rich gneiss with interbeds rich in diopside and
clinozoisite. At another occurrence approximately 400 m to the southwest, a
cordierite-anthophyllite sequence includes the following layers:
quartz-garnet-anthophyllite-biotite, garnet-anthophyllite +/- cordierite, and
anthophyllite-cordierite. Previous work included a geochemical analysis of the
anthophyllite-cordierite layer with 5660 ppb Au, 3220 ppm Te and 4400 ppm Zn.
On another East claim, a mineral occurrence known simply as the "Cu-sulphide
property" consists of pyrrhotite, minor chalcopyrite, and variable alteration
(chlorite, sericite, sillimanite, graphite, carbonate, garnet) in quartzite
(metamorphosed chert) in outcrop, trenches, and drillcore.
The Elken Lake area is now covered by some of the East claims as well as part by
claims owned by Hudson Bay Exploration and Development Co. Ltd. and under option
to the Company. Trenches blasted in the late 1920's by Phillip Sherlett and
Sherritt Gordon Mines Limited exposed pyrrhotite, minor chalcopyrite, galena and
sphalerite in garnetiferous quart-biotite gneiss, a 60 cm wide shear zone, and
narrow quartz veins. Over the years, this area has been tested by various
geological and geophysical surveys and shallow drill holes.
The Nokomis Lake deposit located on the southeast side of Nokomis Lake is
approximately 4 km southeast of the central portion of the Sherridon Property.
Its owner, Pioneer Metals Corporation, categorizes the deposit as a
"shear-related intrusive-hosted (tonalite) lode gold system. This style of
deposit is the model for future gold exploration in the area.
RECENT EXPLORATION CARRIED OUT BY THE COMPANY
During 2006 the Company has assembled a competent exploration team and has
completed the following:
- Compilation of a large body of government assessment data and also
detailed historic exploration data provided by HBED.
- During July 2006, the completion of 2,684 line km of
deep-penetrating and high resolution helicopter-borne Versatile
Time-Domain Electro-Magnetics ("VTEM") geophysical survey covering
the entire property at a 100m line spacing.
- Reconnaissance geological mapping and prospecting within specific
target areas in the vicinity of the existing Cu-Zn deposits. The
work is being used to ground truth anomalies and features outlined
from historical exploration work.
- Preliminary review was conducted on the gross controls of
mineralization that appear to favour contacts between contrasting
lithologies, that being primarily felsic and mafic assemblages.
Late-stage pegmatite bodies are intimately associated with Cu-Zn
mineralization at the past-producing Sherritt Gordon West Zone and
the Bob Lake and Cold Lake deposits. The pegmatite bodies appear
to have intruded the same stratigraphic zones of weakness that
focused the mineralization facilitating in the redistribution
and/or concentration of the ore.
- A lithogeochemical sampling program has been undertaken to
"fingerprint" primary types of hydrothermal alteration within
areas of known mineralization. It is anticipated that this program
will be used in conjunction with geophysical information to
greatly increase the efficiency of deposit discovery by developing
more specific drilling targets.
- A study of VMS camps in general show that clustering of massive
sulfide deposits can be found along specific stratigraphic marker
horizons. Relatively untested stratigraphy with respect to their
stratigraphic position and geochemical signature exist along
strike of base metal deposits covered by the Sherridon property.
- Key historical drill hole information for the Bob, Jungle, Park
and Cold deposits has been recovered and preliminary geological
modeling completed. Preliminary model results are being used to
assist in establishing exploration targets adjacent to each of the
known mineralized deposits.
- During September and October, preliminary data processing of the
airborne geophysical data was carried out with early results
revealing numerous new EM conductors.
- 45 -
- In October, the Company agreed to conduct joint research in the
Geological Survey of Canada's Flin Flon Project, part of the
Government of Canada's national Targeted Geoscience Initiative III
(TGI-3) Program. The Flin Flon Project is a five year integrated
geoscience study aimed at helping in the discovery of new base
metal deposits in established mining communities of the Flin
Flon-La Ronge-Lynn Lake district of northern Manitoba and
Saskatchewan. The Company places great importance on engaging its
technical staff collaboratively with technical experts from the
provincial and federal government, from academia and also HBMS.
- In November, the Company commenced a 30,000 m drill program
designed to test numerous, previously untested VMS target areas
identified by the recently completed helicopter-borne deep
penetration and high resolution VTEM survey and also to expand
historical base metal resources. The initial drill locations were
within an area that covers the postulated extension of the
historic Sherritt Gordon East Zone ore body (the Eastern Areas).
Subsequent drilling has focused on the Bob deposit.
- Work continues to develop specific drilling targets from
approximately 120 new EM targets that have been identified by the
geophysics program.
During January 2007, the results of Condor Consulting Inc.'s (Condor)
interpretation of the July 2006 geophysical survey covering the 200 square
kilometer Sherridon VMS District in northern Manitoba.
Geotech carried out a helicopter-borne magnetic and VTEM survey covering over
2,700 line kilometers at a 100 m-line spacing. The VTEM heli-time domain EM
system entered commercial service in late 2002 and has been proven to match or
exceed the performance of existing airborne and ground EM technologies in
identifying zones of high conductivity associated with sulphide ore bodies.
Condor has developed Conductivity Depth Imaging and time constant analysis
modeling techniques to aid in the discrimination between conductivity associated
with mineralization versus background (non-economic overburden or host rock)
responses that based on traditional interpretation methods may appear similar.
The Sherridon Property is prospective for volcanogenic massive sulphide (VMS)
copper-zinc mineralization and hosts the past producing Sherridon Mine, which
produced 7.7 million tonnes grading 2.46% copper and 0.8% zinc as well as
several other known VMS deposits. VMS ore bodies occur in clusters and are the
target of Halo's exploration program.
Condor reported "Based on similar VMS settings, there are a larger than normal
number of Priority 1 and Priority 2 targets due to several factors. The main
reason is that there are simply a significant number of quality targets that are
present in the environment which show a strong geophysical similarity to areas
of known mineralization. Another reason is that unlike most VMS settings where
long conductors (>1 km) can normally be downgraded as probable formational
conductors, this is not possible at Sherridon, with the primary example being
the Sherridon Mine ore body which is almost 4 km long."
DRILLING
The Company commenced exploration drilling on November 19, 2006 and to January
31, 2007, a total of 9 holes and 2,752 meters have been completed of a planned
30,000 m drill program initiated to test 66-line kilometers of EM conductors
identified in the recent VTEM airborne survey and also to expand historical base
metal resources. Drilling is currently being performed by Rodren Drilling,
Winnipeg, Manitoba.
Assay results have been received and compiled for samples taken from the first
eight drill holes (DH-01 to DH-08). The first three holes were drilled between
200 and 600 m east of the East Zone sulphides lens which was estimated to
contain 785,621 tonnes at 2.14% copper, 5.78% zinc, 0.65g/t gold and 26.6g/t
silver and was mined in the 1940s.
This three (3) hole program is the first systematic attempt to explore the East
Zone fold structure for continuations of the sulphide ore based on modern
reinterpretations of the complex geological structures. A recent grab sample
taken by the Company from surface near an open stope on the East Zone returned
results of 14.5% copper, 2.9% zinc and 7.4 g/t gold.
Drill holes DH06-01 and DH06-03 intersected alteration zones commonly associated
with the mine horizon and mineralization at depths up to 159 m below surface.
The highest grade intersection was from hole DH-6-03 at 43.0 to 45.2 m which
assayed 0.53% copper, 0.77% zinc and anomalous gold and silver. The success of
these drill holes indicates that the East Zone mine horizon can be traced at
least 600 m from the eastern part of the historical mine working and that the
airborne geophysics identifies important geological features beneath the
previously unexplored granites and at depths that have not previously been
tested.
- 46 -
Drill hole DH-04 to DH-08 were located at the Bob Lake deposit and are the first
five part of a twelve hole program planned to confirm and expand the historical
resource. The Bob Deposit has been modeled as multiple sulphide horizons with a
northwest strike over a length of 780 m. The lenses of pyrrhotite, pyrite,
chalcopyrite and sphalerite have been described as having an average width of 4
m, a southeast-plunge and a vertical extension to 180m.
The initial drilling at the Bob Lake deposit has intersected up to 4 m of 1.26%
copper and 1.47% zinc within a massive sulphide zone approximately 25 m thick
grading 0.76% copper and 0.49% zinc. All mineralized intervals for holes DH-04
to DH-08, are shown in the table on page 47.
Borehole Pulse EM geophysical surveys will be conducted on all the recent drill
holes to test for continuity and extension of the newly identified sulphides
zones at depth and along strike and will be used to define follow-up drilling.
Drilling continues at Bob Lake and other targets defined by recent airborne
geophysical surveys. Halo expects to continue drilling throughout 2007 at
Sherridon.
DRILL HOLE DESCRIPTIONS
DH06-1
The first hole on the East Zone, DH06-1 was drilled vertically to test a strong
VTEM conductor, approximately 500 metres east of Sherritt Gordon Mine's East
Zone ore body. The hole cut a strongly graphitic zone between 73 to 79 metres
and the projected East Zone mineralized horizon from 159 to161 metres. The
mineralized zone reported 0.61% copper and low silver and zinc values over 0.9 m
between 159.4 to 160.5 m. The hole continued to a depth of 298 metres and was
stopped in mafic volcanic rocks.
DH06-2
The second hole on the East Zone, DH06-2 at -50(0) to the southwest, tested a
strong steeply dipping VTEM conductor, located approximately 200 m south
DH06-01. The hole intersected a sulphide enriched zone with trace amounts of
chalcopyrite and sphalerite between 86.2 to 99.2 m and the strongly graphitic
zone of DH06-1 at 157 to179 metres. The hole was stopped at 191 metres in
intermediate, calcareous volcanic rocks.
DH06-3
The third hole on the East Zone, DH06-3 at -90 (0), tested an area 100 metres
east of the East Ore body. It cut an altered, mineralized zone, equivalent to
the East Zone mine horizon from 43 to 45 metres, with strongly anomalous values
of 0.53% copper, 0.77% zinc and elevated silver and gold over 2 m. The projected
horizon continues northeast and dips southeast. The hole was continued through a
succession of intermediate and felsic volcanic rocks to a depth of 505 metres,
testing for the folded repetition of the East zone horizon but not reaching it.
Assays for all mineralized zones in diamond drill holes DH-01 toDH-03 are
reported in the following table:
- --------------------------------------------------------------------------------
HOLE NO FROM TO INTERVAL CU ZN AG AU
(M) (M) (M) (%) (%) (G/T) (G/T)
- --------------------------------------------------------------------------------
DH06-01 159.35 160.45 0.90 0.61 0.07 4.57 -
Including 159.85 160.45 0.60 0.75 0.10 5.30 -
- --------------------------------------------------------------------------------
DH06-02 no significant results
- --------------------------------------------------------------------------------
DH06-03 43.00 45.20 2.20 0.49 0.67 3.76 -
Including 43.00 44.80 1.80 0.53 0.77 3.76 -
- --------------------------------------------------------------------------------
DH-04, 05 AND 06
These holes were drilled from the same location, at the northwest end of the Bob
Lake deposit, and intersected broad sulphides-rich zones that included intervals
returning 1.26% copper and 1.47% zinc over 4.0 m (DH-05). Semi-massive to
massive sulphides zones were encountered in this hole returning 0.76% copper and
0.49% zinc over 24.9 m. DH-04 encountered five significant mineralized zones
totaling 47 m including an intercept of 2.4 m grading 1.51% copper, 1.05% zinc,
1.05 g/t gold and 29.8 g/t silver and another of 7.3 m grading 0.95% copper and
0.90% zinc. These mineralized intervals appear representative of the grade and
widths historically reported for the Bob Lake deposit.
Drilling in the 1940s at Bob Lake did not extend beyond a vertical depth of 180
m. Drill hole DH-06 intersected a massive sulphide zone grading 0.03% copper and
1.95% zinc over 2.5 m at a depth of 260 m. This new zinc-rich mineralized zone
represents an exciting new target and the potential to expand the resource.
- 47 -
DH-07
This hole was drilled 200 m southeast of the Bob Lake deposit to test the
on-strike extension of the deposit. Five mineralized zones were intersected of
1.4 to 3.2 m widths, with grades up to 2.79% zinc or 1.06% copper, at shallow
vertical depths of less than 125 m. Additional drilling is required to test the
structural relationship between the multiple sulphide zones encountered in the
drilling to date and their continuity along the entire 850 m strike length.
DH-08
This hole, drilled 175 m southeast of DH-07, successfully defined zinc-rich
semi-massive sulphides with grades up to 1.11% zinc over 4 m approximately 200 m
from surface. DH-07 and 08 are the first drill holes to test the new airborne
geophysical target zone that extends for approximately 500 m southeast of the
Bob Lake deposit. The Company is greatly encouraged by the indication of such a
significant extension of mineralization and future drilling will concentrate on
the continuation of two untested geophysical target zones that extend a further
750 m to the southeast.
Sulphides in the region are noteworthy for their gold enrichment. Two
sulphide-rich zones in DH-04 reported gold grades of 1.37 g/t gold over 9.7 m
and 1.87 g/t gold over 7.5 m with one sample assaying 21.54 g/t gold over 0.5 m.
An additional sample from DH-08 assayed 19.55 g/t gold over 0.5 m while DH-07
included a broader zone of 3.2 m with an average grade of 1.38 g/t gold.
Assays for all mineralized zones in diamond drill holes 04 to 08 are reported in
the following table:
- --------------------------------------------------------------------------------
HOLE DIP/AZIMUTH FROM TO WIDTH CU ZN AG AU
(degrees) (m) (m) (m) (%) (%) (g/t) (g/t)
- --------------------------------------------------------------------------------
DH04 54 / 226 174.7 182.0 7.3 0.94 0.90 8.0 0.26
206.8 218.4 11.6 0.33 0.32 5.9 0.15
224.4 229.0 4.6 0.01 0.50 3.6 0.11
234.7 244.4 9.7 0.56 0.82 17.8 1.37
250.4 257.9 7.5 0.16 0.98 9.0 1.87
- --------------------------------------------------------------------------------
DH05 54 / 222 181.6 206.6 24.9 0.76 0.49 7.2 0.19
including 181.6 185.6 4.0 1.26 1.47 10.1 0.53
- --------------------------------------------------------------------------------
DH06 72 / 222 151.9 156.7 4.8 0.64 0.85 5.8 0.20
300.7 303.1 2.4 0.04 2.13 16.3 0.73
- --------------------------------------------------------------------------------
DH07 45 / 221 160.6 177.1 16.5 0.26 0.73 9.0 0.57
including 160.5 163.2 2.6 0.11 2.79 9.5 0.22
165.3 168.2 2.9 0.06 0.55 19.1 0.94
169.6 171.0 1.4 1.06 0.61 12.0 0.26
173.2 176.4 3.2 0.53 0.35 7.8 1.38
- --------------------------------------------------------------------------------
DH08 45 / 152 268.8 273.1 4.3 0.08 1.12 13.0 0.36
277.6 278.8 1.2 0.21 1.48 4.8 0.11
- --------------------------------------------------------------------------------
Most intersections are expected to be near true widths but further drilling is
required to resolve the structural complexity of the deposit
SAMPLING AND ANALYSIS
A total of 964 meters were drilled by Rodren Drilling on the first 3 holes using
NQ core. All drill core sections with visible sulphide mineralization were
sampled continuously. Individual samples were collected in 0.25 to 1.90 m
widths, with individual sample intervals chosen to correspond to similar
quantities of sulphide minerals or some other lithologic inhomogeneity. The
Company is not aware of any drilling, sampling or recovery factors that could
have materially impacted the accuracy and reliability of the results. Standard
procedures for handling core in the field were used by the diamond drill
contractors and the field geologist. Drill core recovery was typically quite
high, with virtually 100% recovery. The sample quality of the samples for assay
was excellent; where sulphide mineralization was observed in drill core, it was
apparently evenly distributed through both halves of the split core.
Drill core was placed in wooden core trays, logged, marked and sampled on the
property. Drill core is stored on the property. Diamond drill core to be
analysed was split so that half of the core was retained as a permanent sample
record
- 48 -
and the other half was sent for assay. The core was sawn in half using a diamond
core saw in the drill camp. Rock and drill core samples were transported from
the field camp by the field crew to Sherridon, where they were shipped by bus to
TSL Laboratories, Saskatoon, Saskatchewan which is an ISO17025-accredited
facility, for preparation and analysis. The entire core was crushed and a 300 g
split was pulverized. Base metals were determined by inductively coupled plasma
spectrometry (ICP) after an aqua regia digestion and gold by standard fire assay
with an ICP instrumental finish on a 30 g charge. Analysis for samples that
reported greater than 5000 ppm copper or zinc were repeated using a four acid
digestion and atomic absorption spectrometry (AAS) determination. A quality
control program consisting of blank, duplicate and analytical control standards
has been implemented to monitor laboratory performance and no significant
discrepancies are reported. The sampling methods, sample preparation procedures,
security procedures, and analytical techniques employed are all standard
techniques within Canada's mineral exploration industry and are considered
adequate and acceptable.
MINERAL RESOURCE ESTIMATE
There are no Industry Guide 7 or NI 43-101 compliant mineral resources on the
Sherridon Property.
EXPLORATION PROGRAM
It is the Company's vision to see a copper and zinc concentrate production
capability established at its Sherridon VMS Property within the next four years
and an ongoing exploration program capable of sustaining this production for a
minimum of ten years. The Company believes that the application of advanced
technology and the best available exploration tools will enhance its ability to
identify new base metal deposits and extend the known historical resources on
the Sherridon property.
Over the next two years the Company will apply a multi-disciplined approach to
systematically and aggressively follow up on the 66 line kilometers of EM
conductor targets identified by Condor. It will also complete a thorough
exploration program within and adjacent to all the existing historic resource
areas with a view to increase the quality and quantity of the resources
sufficiently to support a bankable feasibility study. Over the next 12 months,
it is the Company's objective to bring all historic resources into NI 43-101
compatible resource categories. A preliminary economic evaluation will also be
conducted to define the requirements for production feasibility. Geophysical
techniques will continue to be used to assist in prioritizing and generating
specific primary exploration targets for drill testing. Geochemical sampling and
lithogeochemical and other sampling programs will be conducted over all primary
target areas as a means to better refine and prioritize potential drill targets.
Drill testing of all targets will continue.
The Company will continue to follow the principal recommendations of the
Sherridon Report. The initial Phase 1 exploration program; to use modern,
deep-penetrating airborne electromagnetic and magnetic geophysical surveys to
locate deeper, high-quality exploration targets, is essentially complete. The
proposed Phase 2 work program has been revised and is as follows:
1. Carry out a drill program totaling 20,000 m over 1 year within and adjacent
to all known deposits to:
a. Develop a revised geological model of each deposit
b. To allow NI 43-101 compatible resource estimates to be completed
c. To test new target areas adjacent to the current known mineralized
envelopes and identify future drilling requirements
2. Carry out modern ground geophysical techniques to screen new target areas
prior to drill testing:
a. Line cutting and advanced super-sensitive ground geophysical follow-up
surveys to better rank the known airborne anomalies and possibly
identify barren conductors
b. Gravity surveys in selected areas of the property to test suitable
conductivity anomalies for coincident gravity anomalies
3. Carry out field exploration and other geological programs over all known
deposits and newly identified target areas to refine the current
exploration model and identify high priority target areas
a. Continue program of lithostratigraphic mapping in selected areas to
confirm presence and determine continuation of strata favourable for
VMS exploration.
b. Carry out geochemical surveys in selected areas as an extension of
lithostratigraphic mapping to determine locations of favourable
stratigraphic horizons. Choices of lithogeochemical or soil geochemical
surveys, and potentially lake sediment geochemical surveys or
overburden drilling, would depend on the availability of sampling media
in the specific areas needing to be sampled.
- 49 -
c. Use advanced modeling techniques to create a 3D data base of all
structural information to trace continuation of deformed strata
favourable for VMS exploration.
d. Integration of results of the new geophysical surveys with other
geological information to develop and prioritize drill targets with
favourable stratigraphic and structural attributes.
4. Drill testing of new exploration targets, subject to definition above.
a. A drill program totaling approximately 30,000 meters, would likely be
carried out over at least two exploration seasons
b. Down-the-hole Pulse EM on each drill hole to better define areas of
mineralization
The budget for the fiscal 2007 exploration program is summarized as follows:
AMOUNT
$
Diamond Drilling (full direct cost) 4,875,000
Field Geological Support and Programs 378,200
Site Support and Services 220,800
Geophysical Programs 513,100
Litho and Geochemical Assays 114,300
Engineering, Geological and Environmental Studies 331,500
Management and Technical Support 533,000
----------
6,965,900
Contingencies 696,600
----------
Grand Total 7,662,500
==========
WEST RED LAKE PROPERTY
Much of the following information on the West Red Lake Property is derived from
an internal report provided by Goldcorp Canada Ltd. This report summarizes the
geology, deposits and significant mineralization of the Middle, Pipestone and
Biron Bay properties, located in the Red Lake Greenstone Belt (Balmer and Ball
Assemblages). The Red Lake greenstone belt is host to the richest gold deposit
in the world. The high-grade zone at the Red Lake Mine contains 4.6 million
ounces at a grade of 2.35 oz/ton gold. The Red Lake Camp has produced over 20
million ounces and is currently being explored by a number of senior gold
companies that include AngloGold, Teck Cominco, Barrick and Goldcorp.
PROPERTY DESCRIPTION
The West Red Lake Property is located about 32 km west of the prolific Campbell
and Red Lake Mines in the Red Lake Camp. The property is in the Ball Township of
the Red Lake Area, Ontario (NTS 52M/1, 52L/16) and covers widespread gold
mineralization from surface showings and small gold deposits. Previous
exploration by a number of companies including Hemlo Gold Mines Ltd., Goldcorp,
Cochenour-Willans Gold Mines Ltd, Dumont Nickel and May-Spiers Gold Mines Ltd.
have carried out intermittent exploration in this area since 1935 and surface
trenching has returned significant surface gold values including up to1.87 opt
over 1.8 meters and 0.38 opt over 7.3 meters respectively. The property has now
been consolidated into a larger package of contiguous claims.
Goldcorp Inc. has a 100% interest in 70 mining claims on the Middle Bay and
Pipestone Bay properties and 50% interest in 10 patented claims on the Biron Bay
property with Biron Bay Resources. The three properties contain mineralized
occurrences and zones within a western portion of the Red Lake greenstone belt.
- 50 -
LOCATION AND ACCESS (SEE FIG. 1- LOCATION MAP)
The properties are located some 25-30 kilometres west of the town of Red Lake,
Ontario, in Ball Township. Access is afforded primarily by boat, from Red Lake,
West, into Trout Bay, thence to Middle and Pipestone bays. The properties can
also be accessed in part on land, via Highway 618, south of Red Lake, to Madsen,
then west along Suffel Lake (`Flat Lake') Road, where a boat launch is located a
few km Southeast of the Middle Bay property. Pipestone Bay can then be accessed
by passing through the Middle-Pipestone Bay narrows. Middle and Biron Bay can be
accessed by vehicle under seasonal conditions along the Pine Ridge Road, which
comes within 2 km of the west boundary of Biron Bay. Using winter trails off
this road, from the Mt. Jamie Mine, west Todd Township, the East portion of
Pipestone Bay may be accessed.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted graphic is: Halo Resources West Red Lake Project - Location Map showing
location with respect to Lake Superior and the cities of
Thunder Bay, Winnipeg, Balmertown and Kenora
FIGURE 1 - LOCATION MAP
- 51 -
PROPERTY AGREEMENTS (SEE FIGURE 2 - PROPERTY HOLDINGS)
On June 20, 2006, the Company completed a formal option agreement with Goldcorp
Inc. ("Goldcorp") on its Middle Bay, Pipestone Bay and Biron Bay properties
(collectively the "West Red Lake Property") located in Ball Township, Red Lake,
Ontario.
Under the terms of the option agreement the Company can earn a 60% interest in
67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten
mining claims by spending $3 million on exploration by December 31, 2008. Upon
spending the $3 million, the Company is entitled to elect to exercise the option
of its interests. Upon notification of the Company's election, Goldcorp has 90
days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75%
interest in two mining claims and a 12.5% interest in the ten mining claims by
paying $6 million to the Company. If Goldcorp does not exercise its back-in
right, the Company will then be required to issue one million common shares of
its share capital to Goldcorp.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted Graphic is: West Red Lake Property showing Patentd/Leases nad Mineral
Claims
Figure 2 - Property Holdings
REGIONAL GEOLOGY
The region is dominated by the Red Lake Greenstone Belt, and forms part of the
Uchi subprovince. The Belt consists of two main assemblages; the earlier
sequence, (Balmer assemblage, dated at around 2.99-2.96 Ga.), is composed of
tholeiitic to komatiitic volcanic rocks and associated subvolcanic intrusions,
lesser intercalated clastic and chemical sedimentary lithologies, felsic
volcanic rocks and intrusions (Pirie, 1982; Stott & Corfu, 1991).
The upper sequence or Confederation assemblage, has been dated at 2750 to 2730
Ma (cf. Balmer assemblage, dated at 2992 to 2925 Ma), and is characterised by a
calc-alkalic, mafic to felsic volcanic rock sequence with abundant clastic and
chemical sediments (Pirie, 1982; Corfu and Andrews, 1987; Stott and Corfu,
1991). It likely rests unconformably on the Balmer. Granitoid intrusions
intruded the aforementioned around 2730-2700 Ma (Pirie, 1982; Corfu and Andrews,
1987).
The structure of the Red Lake greenstone belt may be characterised by an
approximately east-west trending, steeply dipping sequence with generally
moderate penetrative strain, with, often, the preservation of primary volcanic
and sedimentary textures (Sanborn-Barrie, Skulski, Parker, and Dube, 2000).
Several phases of deformation have been noted by several authors: most recently,
Sanborn-Barrie et al., (2000), have (also) postulated a minimum of two major
episodes of deformation. The greenstone belt has been ascribed by the preceding
authors, as consisting of four major Mesoarchaean metavolcanic assemblages:
Balmer, Ball, Trout Bay and Bruce Channel.
- 52 -
The three properties are underlain predominantly by Balmer Assemblage komatiitic
to tholeiitic volcanic sequences and Ball Assemblage (calc-alkaline),
intermediate to felsic volcanic rocks. Sedimentary sequences are prominent also,
and characterised by both clastic and significant chemical units.
Pipestone Bay and adjacent land is underlain by a large ultramafic, probably
peridotitic intrusion, which periodically, has been the focus of limited Ni and
PGE exploration.
Significant showings and deposits in the region include the Goldcorp Inc. High
Grade Lake VMS deposit, on the Trout Bay property, and the No. 2 Nickel Showing,
(Trout Bay Property), which was recently explored for PGE, with Pd results
exceeding 7000 ppb from grab and chip samples.
Gold showings include the Bridget Lake Au occurrence, a quartz vein-hosted
brittle fracture system within clastic and chemical metasediments. Intermittent
work by a number of concerns, including Cochenour-Willans in the 1960's,
indicated the presence of a wide carbonate-silica altered volcanosedimentary
sequence by Bridget Lake. Cochenour Willans prospected more areas, including
quartz veining hosted by carbonatised mafic volcanics North of Bridget Lake.
PROPERTY GEOLOGY (SEE FIGURE 3 - WEST RED LAKE GEOLOGY)
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Omitted graphic is: Map showing Middle, Pipestocn BironBay Properties in showing
formation of Ball assemblage rocks
Figure 3 - West Red Lake Geology
Dating of the sequence has been conducted by several authors in recent years.
Stott and Corfu (1991), correlated the supracrustal sequence to be of Balmer-age
(2900-3000 Ma), with overlying dacite tuffs dated by Riley and reported by
Parker (2000b), at 2735 +/- Ma. (correlating with Ball Assemblage rocks).
BIRON BAY
The Biron Bay area is underlain by Northwest-Southeast trending sequence of
intermediate to mafic volcanic rocks and intercalated cherty sediments or
chert-magnetite iron formations. The lithologies are believed to form part of
the regional Ball Assemblage. Minor, late serpentinitic ultramafic intrusions
underlie the far southeast of the property, whilst granodiorite to feldspar
porphyritic intrusions crop out in the North.
Both iron formation and late kinematic, felsic-intermediate intrusions are known
to carry limited, anomalous gold values, usually associated with brittle quartz
vein systems. Several occurrences have been discovered on the property, notably
- 53 -
the Consolidated Rowan Prospects in the North (see below).
MIDDLE BAY
The Middle Bay area is underlain by Ball and possibly Balmer Assemblage mafic to
ultramafic volcanics, (mafic flows to gabbroic phases), with the ultramafics
characterised by peridotitic flows and sills within the supracrustal sequence.
The Ball Assemblage calc-alkalic intermediate to felsic volcanic units are
generally intercalated, and characterised by thick sections of quartz or
feldspar phyric crystal to lapilli tuffs. True flows are as yet unknown.
Minor metasediments crop out over the property, with a much wider section
transecting the property and characterised by a predominantly cherty to
chert-magnetite sequence which hosts the Bridget Lake prospect.
The majority of mineralised occurrences are spatially related to mafic
volcanic-ultramafic volcanic contacts with others within altered intermediate to
felsic volcanics. Nearly all are within fracture systems hosting quartz vein
sets within a brittle to semi-brittle deformational setting. Associated
alteration is sericite-quartz-(carbonate) within so-called intermediate to mafic
volcanic sequences, & strong to intense carbonate (dolomite-ankerite)-serpentine
+/-quartz in mafic-ultramafic settings.
At least two major alteration `corridors' are known on Middle Bay, both trending
approximately East-West. One trends through Middle bay itself, & `hosts' the
May-Spiers deposit, is strongly carbonatised & variably serpentinitic, and
another trends through Bridget Lake, and hosts the namesake prospect & Pancake
Bay showings, farther West. The second is variably serpentinitic, sericitic and
carbonatised, depending on host lithology. They form primary targets for further
exploration.
The sequence, viewed as a whole trends northwest in the west area, turning
East-West around Middle Bay, with a more East-North-easterly trend in the far
East, this due in part to the effects of the large serpentinised ultramafic,
(peridotitic) intrusion underlying Pipestone Bay. Exposures of this crop out on
the shores of the Bay and on the scattered islands.
PIPESTONE BAY
The Pipestone Bay area is probably underlain by a large strongly to intensely
serpentinised peridotitic intrusion, based upon shoreline lithologies and very
limited, lake drilling. The strong magnetic signature outlines the intrusion and
a gravity response is also associated with the body.
Limited lithogeochemical sampling and drilling has yet to indicate significant
alteration other than that mentioned, nor apparent chemical differentiation
within the body, though lack of outcrop prevents a definitive evaluation of the
PGE potential for the intrusion. Weak, `anomalous' (few hundred ppm) Ni values
can be obtained from shoreline sampling.
MINERALIZATION
In large part, the regional gold mineralization and setting is characterised by
brittle quartz veining hosting pyrite and lesser to negligible, varying
percentages of chalcopyrite, pyrrhotite, sphalerite, scheelite, galena hosted by
a number of lithologies, specifically, feldspar porphyries, (effusive or
intrusive in nature), chert-magnetite formation, and mafic to intermediate,
tholeiitic to calc-alkaline volcanics.
Alteration is less variable, predominantly moderate to intense dolomite to
ankerite, accompanied by variable silicification. Several concerns have
prospected and explored broad, metre to 100 metre plus wide, generally East-West
trending carbonate alteration zones.
Major gold occurrences and other showings or occurrences on and around Middle
Bay, are described, below:
The May-Spiers shaft, Middle Bay property, with gold hosted by a feldspar
porphyry in intermediate to mafic volcanics, the Miles Red Lake shaft, where
selected grabs have run up to 3.4 oz/ton with an average of 0.7 oz/ton. The host
is sulphide rich quartz veins in intermediate to felsic tuffaceous volcanic
rocks. Drill intersections to depths of 30 metres or less, include 0.33oz/ton
over 4 ft, 0.63 oz/ton over 3 ft., 0.24 oz/ton over 3.3 ft, 0.58 oz/ton over 2.8
ft, & 0.94 oz/ton over 2.2 ft.
The majority of work on the Miles Red Lake shaft some 2 km West of the Middle
Bay property, was conducted in the mid-1940's, though work dates back to 1924.
Sulphide rich quartz veins are hosted by or adjacent to a feldspar porphyry
- 54 -
dyke intruding a serpentinised ultramafic lithology. Gold values over a 9 m
width & a strike length of 150 m were targeted & mined by way of a 91 m shaft,
with 2 underground levels developed. The Mine operated from 1946 to 1947.
Pancake Bay Area. Work dating back to the mid-1940's uncovered a series of
sulphide rich metasediments and quartz veining immediately North of Pancake Bay.
Drilling following trenching returned up to 3.26 oz/ton over 3 ft. The veining,
of which additional sets were discovered in 2001 reconnaissance work by Goldcorp
Inc., trend approximately North-South, and are in a similar setting to those
found on the Bridget Lake property, some 1.5 km along strike to the East, on the
Tribute Minerals property, the subject of winter 2002 drilling.
North Bridget Lake. Several quartz-gold occurrences have been explored by way of
trenching and shallow drilling 200-300 metres North of Bridget Lake over an
approximately East-West strike length exceeding 1.5 km. Moderate to intense
carbonate-quartz alteration in mafic-intermediate volcanic rocks hosts varying
percentages of pyrite, chalcopyrite, pyrrhotite and sphalerite. Gold and silver
values have been reported. Sulphide mineralization is also reported and has been
noted within amphibolitic rocks within and adjacent to this sequence, by Bridget
Lake, and on close to the shore of Middle Bay, itself.
Galena Is., located just West of the narrows leading to Trout Bay to the West,
and Middle Bay, via Phillips Channel, to the North, is the site for several
multi-element showings within clastic and chemical metasediments associated with
mafic-ultramafic metavolcanics to the North, and felsic-intermediate volcanics
to the South, respectively. The sequence is likely the east extension of that
around Bridget Lake. The majority of mineralization is hosted by quartz veining,
in particular one massive quartz-carbonate vein, with associated strong to
intense dolomitisation.
Documented results from trenching were rarely made. Messrs. Kornell, Stupack and
Johnson and the Lake Bed Lead Syndicate have, at various times, conducted work
in 1928, 1960 and 1948, respectively. Trenching and diamond drilling were
performed.
Phillips Showing, located on the West side of Pipestone Narrows, at the entrance
to Pipestone Bay. It is a poorly documented, tending 060(degree), 60 m wide
gold-bearing zone within (mafic)-ultramafic carbonatised volcanic rocks that was
discovered in the 1930's. Phillips' work returned gold up to 1.87 opt/1.8 m and
0.38 opt/7.3 m. from a trenching programme. An unknown amount of shallow
drilling was also performed on a showing to the Southeast.
The A. Jerome Prospect, located at the southern tip of a small peninsula in
Middle Bay, West of Phillips Channel was the subject of trenching and limited
drilling. The latter, comprising 4 holes totalling 139 m, and conducted by
Cochenour Explorations Ltd., returned up to 0.27 oz/ton Au over 0.46 m, and 0.24
oz/ton Au over 0.61m.
The Piper Northeast (or `Stupack') Occurrence, on the North shore of Bridget
Lake, is a variably quartz carbonate veined, mafic volcanic hosted occurrence
cropping out intermittently over 18 by 9 metres, but with associated alteration
and sparse quartz veins cropping out over 200 metres. The generally East-West
striking occurrence has returned up to 2.28 oz Au/ton over 0.3 metres. Most of
the prospecting, mapping, trenching Self-potential geophysical surveys plus
limited drilling, was performed by Cochenour Willans GML.
Showings on Biron Bay property are poorly documented, though anomalous gold has
been reported from the northwestern and south-eastern areas of the property.
Gold showings are known along strike to the southeast and northwest of the
property, including the A. Jerome showing, which is reported to be characterised
by a 1.5 m wide quartz vein hosted by sulphide rich iron formation. No values
are know, though gold was panned.
The Rowan Consolidated Showing on Biron Bay property has a history of
exploration dating back to the 1930's. Rowan Red Lake Gold Mines Ltd., performed
mapping, stripping, trenching and pitting on quartz stringers within a small
granodiorite plug located in the North of the property, and also on quartz
mineralised fracture zones in an iron formation, some 250 metres to the
Southeast, on claim KRL 11082. In both areas, quartz-sulphide mineralization was
exposed over widths of several inches to 1 foot. Exposures, respectively were of
40 metres and 100 by 4.5 metres. Grades, from channel sampling ran up to 0.3 and
0.47 oz Au/ton over 0.3 metres.
The OGS took grab samples from a quartz vein on the W. Stupack property west
adjacent to Biron Bay, returning up to 0.46 oz/ton. Mineralization and the vein
is hosted within metasediments. The limited exposure on the Pipestone Bay
property precludes any significant shoreline exploration. Water depths in excess
of 50 metres have also limited the efforts of companies to conduct any serious
drill programme to test the (Ni-PGE) potential of the postulated ultramafic
intrusive body. Significant, often extreme serpentinisation of shoreline and
island exposures and spatially associated outcrops of serpentinised, or
feldspathised metagabbroic lithologies bear witness to the potential of a large
ultramafic
- 55 -
body. Limited sampling was performed in 2001 by Goldcorp Inc., though no
anomalous Ni and PGE results were obtained.
STRUCTURAL SETTING
Known gold mineralization appears to be associated with brittle to semi-brittle,
largely East-West trending, 100-200 metre wide, transpressive deformation
`corridors', characterised by variable, but often intense carbonate alteration.
The associated quartz vein system appears to be a late brittle phenomenon with
highest gold values hosted by oblique arrays sub-perpendicular to the plane of
flattening.
Mafic-ultramafic volcanic contacts are host to en-echelon brittle quartz sets
which are less pronounced within the highly carbonate-serpentine altered
ultramafic volcanics. Historically, the latter lithology has yielded only very
low gold. The apparent disparity is likely related to simple ductility contrast.
This is readily observed in the Bridget Lake property, (Tribute Minerals), where
Riedel, quartz-filled fractures trend NW, oblique to the East-West trend of the
host lithology, cherty metasediments or iron formations. The host carries low
anomalous to negligible gold values.
Future targets will focus on assessing local strain gradients at or near
mafic-ultramafic contacts. The intensity of carbonate alteration is not
indicative of higher Au potential, rather, pervasive silicification. Known
gold-bearing quartz vein systems appear localised, sporadic. Sericite alteration
associated with and commonly bounding the carbonate-serpentine altered zones are
likely the target. An analogy would be for example, the Glimmer Gold Deposit,
Northeast Ontario.
Aside from determining the internal geometry of the alteration corridors in the
Middle Bay area, the presence of spatially and possibly genetically associated
brittle fracture or semi-brittle deformation systems outside of these corridors
should be examined. Relatively weak East-northeast trending lineaments appear to
be associated with the majority of known gold occurrences. They could be
representative of Riedel 1 fractures associated with a regional wrench
strike-slip system. This phenomena can be investigated quite readily with a few
days field examination. The boundaries of the strike-slip system would be the
North shore of Pipestone Bay and in the South, West Narrows leading to Trout
Bay, with a west termination marked by a transgressive northwest trending `jog'.
MINERAL RESERVES/RESOURCE
There are no Industry Guide 7 or NI 43-101 compliant mineral resources or
mineral reserves on the West Red Lake Property
EXPLORATION HISTORY
Exploration on the properties dates back some seventy years with the discovery
of a number of showings and several small gold deposits. These include the
following:
- The May-Spiers Mine
- Phillips showing
- Bridget North showings
A list of the significant work on the three properties is provided, below. As
the majority of claims are leased or patented, a complete list of work performed
is not provided. Several companies who have optioned the ground did not report
any work conducted.
1929 - 1930 Trenching at Pipestone Narrows, by B. Phillips returned Au up to
1.87 opt/1.8 m & 0.38 opt/7.3 m.
1930 - 1935 West Red Lake Gold Mines Ltd. conducted gold exploration on property
around the Phillips Channel, culminating in the sinking of a 200 ft. vertical
shaft and over 600 ft. of drifting. The target, a quartz vein at a carbonatised
porphyry-mafic volcanic contact, returned up to 0.16 oz/ton Au over 112 ft.,
(along the vein). Material at 200 ft. averaged 0.40 oz/ton over 42 inches along
22 ft. The ore shoot had dimensions of approximately 110 ft by 42 inches.
1934 - 35 May-Spiers Gold Mines Ltd. developed the gold prospect in Middle Bay,
culminating in the sinking to 114 m
- 56 -
of a shaft, with 602 m of lateral work on three levels, 2 drifts at the 225 and
350 ft levels, and 754 m of underground drilling. The main zone was traced for
108 m along the east-west strike to a depth of 107 m. After mining began
however, the grade was lower than expected (0.09 oz/ton compared to 0.32 oz/ton
found in surface drilling) and mining was stopped the same year. The property
has sat idle for some time, though Dumont Nickel did option it in 1980, and
conducted a property review plus VLF and magnetometer surveys.
1935 - 1937 Rowan Red Lake Gold Mines Ltd. conducted extensive exploration on
claims on and South of Biron Bay, (west portion of Pipestone Bay), part of which
is now covered by the Goldcorp Inc. Biron Bay property. Several prospects were
stripped, trenched and sampled including two on the property, plus at least
three occurrences immediately South of Biron Bay. The mineralization is quartz
vein-hosted within cherty iron formations or late kinematic granodiorite.
Records are sparse, but assays from grabs and chip sampling ran up to.0.47 oz
Au/ton over narrow, inch wide quartz stringers in carbonate-quartz altered zones
from several to 5 metres in width.
1944 I. Kornell trenched and drilled on Galena Island.
1949 Lake Bed Lead Syndicate also trenched and drilled on the island.
1963, 1965-66 Cochenour Willans Gold Mines Ltd. conducted widespread exploration
on several properties including portions of the Middle Bay Property.
Self-potential, magnetometer, geology, trenching and drilling was undertaken,
with values returned from locales between Bridget lake and the South shore of
Middle Bay including:
Grabs of 3.55 opt Au and 1.8% Cu, and 0.16 opt Au and 0.7% Cu. From 2
holes, 7.24 opt Au/0.58 m, 2.94 opt Au/0.3 m, and 2.28 opt Au/0.3 m.
From 4 holes, assays including 0.24 opt Au/0.61 m, 0.27 opt Au/0.46 m.
1966 On Biron Bay, an EM survey was run for Cochenour Mines Ltd. Subsequently, 3
holes were drilled on the property. To the North of the present Goldcorp Inc.
property, but on then contiguous claims, in 1985, Biron Bay Resources ran a VLF-
EM survey. As part of a Ni programme, the same company drilled 5 holes on
Pipestone Bay, intersecting serpentinised peridotite. Highest assays were 0.2%
Ni, 0.01% Co, 0.001% Cu.
1970 - 1971 Cochenour Willans Gold Mines Ltd. conducted exploration over several
claims covering portions of and others adjacent to, the Middle Bay property.
Gridding and prospecting were conducted, including close to the Pipestone
Narrows, west shore.
1975 Cochenour-Willans Gold Mines Ltd., conducted prospecting, channel sampling,
trenching, geophysical surveying and drilling on the now Bridget Lake property.
1980 Dome Exploration (Canada) Ltd. drilled NE of Galena Island, and West of
Trout Bay, as part of a more comprehensive exploration on and around the now
Middle Bay Property.
1981 Biron Bay Resources Ltd. conducted geophysical surveys (magnetometer and
MaxMin II) on the namesake property, the southern portion of which comprises the
present Goldcorp Inc., Biron Bay property. Little work was recorded on Biron
Bay, this, despite active exploration dating back to the mid-1940's.
Trenching in the South of the property, and farther North, close to the shore of
Biron Bay itself, located gold. In 1950, in the centre-North of the property, 20
short holes were drilled for 1119 ft. In 1958, an additional 11 holes were
drilled for a total of 1998 ft.
1981 Golden Chance partnership conducted geophysical surveys over portions of
their Biron Bay property, parts of which are covered by the present Goldcorp
Biron Bay claims.
1981 Camflo Mines Ltd. undertook a semi-regional geological appraisal which
covered all three properties, with evaluations of the known deposits,
occurrences and showings, including the Miles Red Lake Shaft area, Scott-Stupack
and Kelly-Foley showings, the Trout Bay property to the South, and the Bridget
Lake Property, the latter enclosed by the Goldcorp Middle Bay Property.
1981 Gold Fields Resources Ltd. conducted VLF EM and magnetometer surveys on the
ice, on portions of the Pipestone and Middle Bay properties. Anomalies were
interpreted as (shoreline) iron formations.
1986 - 1987 A portion of the east end of the Middle Bay property forms part of
the then Shane Resources Ltd. ground,
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which was the subject of a satellite interpretation and lineament study. Prior
to this, the property was in the hands of the Gold Syndicate (1930's), and
subsequently, West Red Lake Gold Mines Ltd., in 1934, which undertook
exploration work including the sinking of a shallow shaft on a quartz vein at a
carbonatised porphyry-mafic volcanic contact, located at the North shore of the
Phillips Channel.
Shane Resources conducted VLF and magnetometer surveying in addition to humus
sampling, these on a grid covering the east and central portions of the Middle
Bay and the far South of the Pipestone Bay properties.
1990 Aur Resources performed mapping and sampling on the May-Spiers GML
property. Data is in-house.
1996 Hemlo Gold Mines Inc. optioned the T. Maciejewski ground, part of the
Middle Bay property. The company undertook property-wide mapping and sampling,
magnetometer, selected IP. The IP survey indicated several responses recommended
for follow-up, whilst grab samples from several showings on and adjacent to the
property, returned up gold assays including 10 g/t, 5.35 g/t, 14.25 g/t.
2000 On behalf of Goldcorp Inc., Sial Geosciences Inc. flew combined magnetic,
EM, VLF and radiometric helicopter surveys over the Trout, Middle, Pipestone Bay
properties.
2001 Goldcorp Inc. conducted preliminary reconnaissance work on the Middle Bay
and Pipestone Bay properties.
In addition to work performed by mining companies, various government agencies
have conducted work in the region. The first significant recorded work was by
Horwood who prepared a map and report for the Ontario Department of Mines (ODM)
(see Horwood, 1940).
R.A. Riley and his assistants produced township scale geological maps of Ball
and Mulcahy townships in the late sixties and early seventies for the ODM (see
Riley, 1975, 1976). The OGS completed an airborne magnetometer and
electromagnetic survey in 1978. The (GSC) produced a detailed study on the
geochemistry and structure of the belt during the summers of 1999 and 2000 as
part of NATMAP (see Sanborn-Barrie et al., 2001). The OGS completed a
mineralization and wall rock alteration report for the belt during the summer of
2000 (see Parker, 2000a, 2000b).
CURRENT EXPLORATION WORK
The Company has subdivided the project into four broad exploration target areas:
Biron Bay, Middle Bay-May Spiers, West Trout-Bridget Lake and Pipestone-Phillips
Channel. During October 2006, work commenced on a mapping, sampling and
prospecting program focused on the Middle Bay-May Spiers target with the
objective of developing an understanding of the geological setting and to
confirm the presence of gold mineralization west of Middle Bay.
A total of 97 rock samples were submitted for assay and whole rock analysis to
ALS Chemex in Thunder Bay. Sampling of old trenches located between the historic
Miles Red Lake showing and the May-Spiers deposit successfully confirmed the
presence of significant gold, silver and copper mineralization. Whole rock
geochemistry revealed that the underlying geology is favourable for these
elements.
A series of old trenches exposing silicified shear zones containing pyrite
represents the North Zone. Trench 8-01, apparently undisturbed under brush for
several years returned up to 4.93 g/t Au, 75.5 g/t Ag and 3.63% Cu over 0.80
metres. This mineralized occurrence lies 125m south of the North Zone.
The South Zone, located 350m to the south, is exposed within a series of
trenches and steep-walled pits over a strike length of 100 meters. The
mineralization is hosted within intermediate to-felsic lapilli tuffs and is
concentrated in silicified, sulphidized shears up to 2 meters in width
containing pyrite and locally sphalerite, chalcopyrite, galena and arsenopyrite.
A sample collected near the 9-44 "shaft" returned 81 g/t Au, 100 g/t Ag and
4.61% Cu over a width of 0.70m. In addition, a sample taken from the 10-23 pit
located along strike about 82m west of the 9-44 location yielded 3.62 g/t Au,
100 g/t Ag and 8040 ppm As. The program was suspended prematurely due to
deteriorating weather conditions that included heavy snow accumulation and below
normal temperatures.
EXPLORATION PROGRAM & BUDGET
In early 2007, the Company commenced a 30 line km of grid work covering both the
North and South Zones, extending to the east to include the May-Spiers deposit.
This will be followed-up with detailed induced polarization (IP) and
magnetometer surveying and diamond drilling of the highest priority targets.
Work will also be carried out on the West Trout-Bridget Lake, Pipestone-Phillips
Channel and Biron Bay areas of the property in preparation for a significant
- 58 -
follow up exploration and diamond drilling program later in the year and into
2008.
The work program and budget planned for fiscal 2007 is as follows:
$
Data Base Compilation 45,000
Grid Work 105,000
Ground Geophysics 374,500
Geological Mapping and Trenching 52,500
Soil and Rock Geochemistry 35,000
Target Drilling 500,000
Assessment Report and Drafting 27,800
----------
GRAND TOTAL $1,139,800
==========
GOVERNMENT REGULATIONS
The Company's proposed exploration and development activities will be subject to
extensive Canadian federal, provincial, and local laws and regulations governing
various matters, including:
- environmental protection;
- management and use of toxic substances and explosives;
- management of natural resources;
- exploration, development of mines, production and post-closure
reclamation;
- taxation;
- labour standards and occupational health and safety, including mine
safety; and
- historic and cultural preservation.
The costs associated with compliance with these laws and regulations are
substantial and possible future laws and regulations, or more stringent
enforcement of current laws and regulations by governmental authorities, could
cause additional expense, capital expenditures, restrictions on or suspensions
of the Company's activities and delays in the development of its properties.
OTHER ASSETS
As at the date of this annual report, the Company does not hold any material
assets other than its property, option and mineral claim interests described
above.
EMPLOYEES
As of the date of this annual report the Company has four full-time employees,
one directly employed by the Company and three providing their services as
consultants. In addition, the Company is in the process of hiring employees for
administration and related exploration of its mineral properties. The Company's
management functions are provided by private companies owned by officers and
directors of the Company. See "Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions". In addition, the Company employs a
number of consultants to perform specific functions, on an as needed basis.
ORGANIZATIONAL STRUCTURE
Effective November 30, 2002, the Company wrote off its investment in its
wholly-owned subsidiary, Trimark Inc., which was engaged in the petroleum and
natural gas operations in the United States. Accordingly, the Company ceased to
record the activities of Trimark Inc. Effective August 31, 2004, the Company
wrote-off Safari, which was inactive throughout the 2004 fiscal year, and TMK,
which had sold its remaining asset.
As of the date of this annual report, the Company has no subsidiaries.
- 59 -
PRINCIPAL OFFICES
The Company's principal business office is located at Suite 1280, 625 Howe
Street, Vancouver, British Columbia, Canada. The business office comprises 1,017
square feet and is rented from an unrelated third party for an initial term
ending February 29, 2008. The Company currently is paying approximately $2,500
per month for base rent, property taxes and occupancy costs. The Company's
executive office is located at Suite 2900A, 25 King Street West, Toronto,
Ontario, Canada, under a sub-lease arrangement with an unrelated third party.
The executive office comprises 650 square feet and is rented for approximately
$5,000 per month for a term ending April 14, 2007. The Company's registered
office is located at Suite #1305, 1090 West Georgia Street, Vancouver, British
Columbia, Canada. The Company also has had an exploration office located at
Suite 2, 54 Main Street, Flin Flon, Manitoba. The exploration office comprises
158 square meters and is rented for approximately $1,346 per month for a term
ending June 1, 2008.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
- --------------------------------------------------------------------------------
The following discussion of the results of operations of the Company for the
fiscal years ended August 31, 2006, 2005, and 2004 should be read in conjunction
with the financial statements of the Company and related notes included therein.
The Company's financial statements are prepared in accordance with Canadian
GAAP, the application of which, in the case of the Company, conforms in all
material respects for the periods presented with US GAAP except for the
differences referred to in Note 17 of the financial statements of the Company
included herein. The noon rate of exchange on February 28, 2007, reported by the
United States Federal Reserve Bank of New York, for the conversion of Canadian
dollars into United States dollars was CDN $1.17 (US $0.8547 = CDN $1.00). The
effects of inflation and price changes have not had a material impact on the
Company's income or net sales revenues during the past three years. To date, the
Company has not engaged in any formal hedging program.
OVERVIEW
The Company is a resource exploration company engaged in the acquisition of and
exploration for precious metals on mineral interests located in Canada.
Previously, the Company was engaged in the acquisition, exploration for and
development of crude oil and natural gas interests in the United States, but
effective March 1, 2004, the Company sold its remaining oil and gas interests.
As described in Item 4 above, the Company entered into a series of agreements in
the 2004, 2005 and 2006 fiscal years in connection with its mineral interests.
At this stage of development, the Company has no producing properties and,
consequently, has no current operating income or cash flow. The Company has not
yet determined whether the properties owned by the Company or in which the
Company has an option to acquire an interest have ore reserves that are
economically recoverable. As a result, the Company is considered an exploration
stage company.
The Company is actively reviewing additional resource properties at various
stages of development and may make additional acquisitions through staking,
options, purchases or joint ventures. If so, significant additional financing
may be required, and there is no assurance that funds would be available on
terms acceptable to the Company or at all.
The Company expects the properties which it owns and in which it has option
interests will be moved toward determining individual viability over the next
two to three years. There is no assurance that any property will prove to be
mineable or, that if such a determination is made, that the Company will be able
to secure financing for capital costs.
Nearly all of the Company's activities are directed to such exploration
programs. Yearly variations in individual property expenditures generally
reflect increases or decreases in specific exploration and development costs
based on previous results and the Company's decisions regarding the allocation
of exploration expenditures between its projects.
The Company intends to conduct exploration activities on both its owned and
optioned properties. None of the properties in which the Company has interests
are in production and, consequently, the properties do not produce any revenue.
As a result there is little variation expected in operating results from year to
year and little is to be expected until such time, if any, as the Company
discovers sufficient mineralization on a property to advance the property beyond
the exploration stage. The Company's level of exploration expenditures is
dependent upon exploration results and the Company's ability to maintain
sufficient financial resources.
- 60 -
The Company derives interest income on its bank deposits and other short-term
deposits, which depend on the Company's ability to raise funds. Of most
significance would be further cash received from issuance of shares to fund
ongoing operations.
Through the exploration process, management intends to periodically reviews
results, both internally and externally, through mining related professionals.
Decisions to abandon, reduce or expand exploration efforts are based upon many
factors including general and specific assessments of mineral deposits, the
likelihood of increasing or decreasing those deposits, land costs, estimates of
future mineral prices, potential extraction methods and costs, the likelihood of
positive or negative changes to the environment, permitting, taxation, labor and
capital costs. Geological and/or economic circumstances render each property
unique. Consequently, it is not possible to have any predetermined hold period
for a specific property interest.
Costs incurred for general exploration that do not result in the acquisition of
mineral properties with ongoing exploration or developmental potential are
charged to operations. Exploration costs relating to the Company's property
interests are capitalized as mineral properties and deferred costs. Should the
Company abandon a property interest or project, the related deferred costs will
be charged to operations.
The recoverability of amounts shown for mineral properties and deferred costs is
dependent upon the discovery of economically recoverable reserves, completion of
positive feasibility studies, confirmation of the Company's interest in the
underlying mineral claims, the ability of the Company to obtain necessary
financing to complete exploration and development and future profitable
production, or from the disposition of such properties.
To the best of the Company's knowledge, there are no governmental economic,
fiscal, monetary, or political policies or factors that have materially
affected, or could materially affect, directly or indirectly, the Company's
operations or investments by its U.S. shareholders.
RESULTS OF OPERATIONS
YEAR ENDED AUGUST 31, 2006 COMPARED TO YEAR ENDED AUGUST 31, 2005
During the year ended August 31, 2006 ("Fiscal 2006"), the Company reported a
net loss of $2,199,935, an increase in loss of $1,831,825, from the $368,110
loss reported during the year ended August 31, 2005 ("Fiscal 2005"). The
increase in the net loss in Fiscal 2006 compared to Fiscal 2005, is primarily
attributed to a $266,201 increase in general and administrative expenses and a
$1,538,655 write-down of the Bachelor Lake Property.
General and administrative costs increased from $1,060,276 in Fiscal 2005 to
$1,267,825 in Fiscal 2006, as follows:
2006 2005
$ $
Accounting and administration 99,700 81,450
Advertising and related 52,430 17,679
Compensation and benefits 95,288 89,864
Consulting and professional fees 208,056 192,534
Filing fees and transfer agent 39,827 38,220
Investment conferences 78,823 169,776
Investor relations and shareholder communications 124,908 162,259
Legal and audit 209,615 88,418
Office and general 137,728 71,477
Office rent and operating costs 19,052 29,760
Printing 13,558 18,036
Telephone 14,274 14,719
Travel and related costs 159,907 72,521
Website and internet costs 14,659 13,563
---------- ----------
1,267,825 1,060,276
========== ==========
General and administration expenses increased during Fiscal 2006, due to
increased activities relating to the Company's property acquisitions, ongoing
financing activities and increased legal and audit fees. Significant
expenditures incurred during Fiscal 2006, include $159,060 for legal costs
incurred primarily for the preparation of the Company's various
- 61 -
securities filings, general legal advice on financings and a general increase in
activities; $50,555 for independent audit costs; $208,056 for incurred
consulting and professional fees provided for financing opportunities; $52,430
for advertising and related costs for advertising made in industry trade
magazine publications; $159,907 for travel and related costs, primarily to
attend investment conferences and meetings with the investment communities in
Canada and Europe; $137,728 for office and miscellaneous. During Fiscal 2006,
$93,000 was paid to Marc Cernovitch, the former President of the Company for
compensation and benefits, and accounting and administration expenses of $99,700
was billed by Chase Management Ltd. ("Chase"), a private company owned by Nick
DeMare, a director and the CFO of the Company for bookkeeping, accounting,
administration and corporate filing services provided by Chase personnel.
The increase in general and administrative expenses is partially offset by:
(i) a decrease of $90,953 for investment conferences; and
(ii) a decrease of $37,351 for investor relations and shareholder
communications.
The Company also recorded a stock-based compensation charge of $550,817 in
Fiscal 2006 on the granting of 2,168,000 stock options, compared to $559,031 in
Fiscal 2005, when the Company granted 1,078,000 stock options. The calculation
is based on the fair value of stock options granted by the Company using the
Black-Scholes option pricing model, which uses estimates and assumptions.
In September 2005, the Company completed a private placement financing whereby
it issued a total of 5,273,236 common shares for $3,493,249 cash proceeds. Of
the total financing, 3,293,070 common shares were issued on a flow-through share
basis, for $2,305,149 cash proceeds. The Company also received $1,591,450 in
2006 from the exercise of stock options and warrants to purchase 4,748,500
common shares.
During Fiscal 2006, the Company exercised its option on the Bachelor Lake
Property and subsequently acquired additional claims, for a total consideration
of $165,782. The Company also paid $15,282 for legal costs associated with
property acquisitions and documentation; $142,287 for claims staking, $66,462
for option payments and $107,206 legal costs on the Sherridon VMS Property,
$5,165 for lease rental costs, $50,000 for capitalized dividend on the Duport
Property and $38,952 legal costs associated with Red Lake Property acquisition.
The Company also recorded a total of $2,034,064 for exploration expenditures. As
a result of an agreement to sell its 50% interest in the Bachelor Lake Joint
Venture, the Company has written down the carrying value of the joint venture
interest by $1,538,655, reflecting its intrinsic fair value, as of August 31,
2006, of $4.25 million. On November 17, 2006, the Company entered into a new
agreement whereby Metanor has agreed to purchase the Company's 50% interest for
total consideration of $4.0 million. A further write-down of approximately
$225,000 will be made in Fiscal 2007. Detailed discussion of the Company's
proposed sale of its Bachelor Lake interest and exploration activities conducted
is discussed in "Item 4. Information on the Company - Business Overview - Mining
Interests - Bachelor Lake Property."
As a result of the application of previously unrecognized losses in Fiscal 2006,
the Company recognized a future income tax recovery and a reduction of the
future income tax liability of $1,316,633.
YEAR ENDED AUGUST 31, 2005 COMPARED TO YEAR ENDED AUGUST 31, 2004
During the 2005 fiscal year, the Company reported a net loss of $368,110, an
increase in net loss of $111,088 from the $257,022 loss reported during the 2004
fiscal year. Although there was no significant overall increase in the net loss,
fiscal 2005 reflects a $1,329,000 future income tax recovery ($nil in 2004)
offsetting the $379,420 increase in stock-based compensation and $876,737
increase in general and administrative expenses experienced in fiscal 2005.
During fiscal 2004, the Company recorded $81,347 in oil and gas revenues.
Production costs of $21,832 were incurred and depletion of $10,441 was recorded
for fiscal 2004. Effective March 1, 2004, the Company sold its 3% interest in
the West Ranch Field and with the sale of the Company's working interest in the
West Ranch Field, the Company no longer holds any oil and gas interests.
Accordingly, no oil and gas activities occurred in fiscal 2005.
General and administration expenses increased in fiscal 2005 due to increased
activities relating to the Company's property acquisitions and financing
activities and increased shareholder communications and investor relations
activities. Significant expenditures in fiscal 2005 include $60,571 (2004 -
$23,324) for legal costs incurred, primarily for the continuance of the
Company's domicile from the Yukon Territory to British Columbia,
extra-provincial registrations and preparation of the Company's information
circular and regulatory filings and $27,847 (2004 - $11,000) for audit related
costs; $38,220 (2004 - $27,077) for transfer agent and regulatory filings for
the Company's Annual General Meeting and various financing and property filings;
$192,534 (2004 - $27,500) for consulting and professional fees provided on
- 62 -
corporate development and services to introduce the Company to the investment
community in Canada, United States and Europe; $162,259 (2004 - $5,386) for
shareholder communications costs; $169,776 (2004 - $2,248) for attendance and
presentations at numerous investment conferences in Canada and the United
States; $13,563 (2004 - $3,217) for website design and maintenance costs;
$72,521 (2004 - $2,614) for travel and related costs, primarily to attend
investment conferences and meetings with the investment community; $71,477 (2004
- - $2,845) for office and miscellaneous; and $89,864 (2004 - $3,217) for salaries
and benefits paid to the President of the Company. Commencing July 2004, the
Company rented office space to accommodate its personnel. In fiscal 2005, the
Company paid $29,760 (2004 - $3,367) for the office rent and occupancy costs.
Accounting and administration expenses of $81,450 (2004 - $63,638) were billed
by Chase Management Ltd. ("Chase"), a private company owned by Nick DeMare,
Chairman and CFO of the Company. Chase is currently paid a base amount of $3,000
per month for bookkeeping, accounting, administration and corporate filing
services provided by Chase personnel, exclusive of Mr. DeMare, and $2,000 per
month related to Mr. DeMare's services as the CFO of the Company.
In fiscal 2005, the Company recorded a non cash stock-based compensation charge
of $559,031, compared to $179,611 in fiscal 2004. The calculation is based on
the fair value of stock options granted by the Company using the Black-Scholes
option pricing model, which uses estimates and assumptions. It does not
necessarily provide a reliable measure of the fair value of the Company's stock
options. During fiscal 2005, the Company granted 1,078,000 options with a
weighted average exercise price of $0.92 per share, compared to fiscal 2004 when
the Company granted 810,000 options with a weighted average exercise price of
$0.61 per share.
During fiscal 2005, the Company completed a number of private placement
financings whereby it issued a total of 7,324,894 common shares for $6,688,797
cash proceeds. Of the total financings, 4,626,364 common shares were conducted
on a flow-through share basis. Resource expenditure deductions for income tax
purposes related to exploration and development activities funded by
flow-through share arrangements have been renounced by the Company to investors
in accordance with Canadian income tax legislation. The renunciation of such
expenditures is accounted for as a financing cost related to the flow-through
issuance and resulted in a $1,566,000 reduction in share capital with a
corresponding increase in the Company's future tax liability.
The Company is permitted under Canadian income tax legislation to renounce
flow-through related resource expenditures to investors in advance of the
Company incurring the expenditure. In accordance with this legislation the
Company has twelve months following the effective date of renunciation to incur
the expenditures. The Company begins incurring interest charges for unspent
funds after one month and fees for unspent funds at the end of the calendar year
following the effective date of renunciation, and until such time as funds are
fully expended. During fiscal 2005, the Company incurred a $40,000 Part XII.6
tax expense on the monthly unspent balance of flow-through funds. All of the
flow-through funds were spent by May 31, 2005.
The Company also received a further $253,100 from the exercise of warrants to
purchase 1,048,500 common shares.
LIQUIDITY AND CAPITAL RESOURCES
The Company's practice is to proceed with staged exploration, where each stage
is dependent on the successful results of the preceding stage. To date the
Company has not received any revenues from its mining activities and has relied
on equity financing to fund its commitments and discharge its liabilities as
they come due. As at August 31, 2006, the Company had working capital of
$151,522. In October 2006, the Company raised $1,537,350 on the sale of common
shares on a flow-through basis. The Company also received a further $2.0
million, on a non-refundable basis from Metanor from the proposed sale of the
Company's 50% interest in the Bachelor Lake project. The Company has budgeted
approximately $9.0 million for exploration activities, approximately $1.3
million for corporate overhead and approximately $300,000 for dividend payments
on its Series 1 Preferred Shares for the calendar 2007 fiscal year. The Company
will require additional financings to maintain its core operations, planned
exploration and current levels of corporate overhead. In addition, results from
its exploration programs and/or additional mineral property acquisitions may
result in additional financial requirements. There is no assurance that funding
will be available on terms acceptable to the Company or at all. If such funds
cannot be secured, the Company may be forced to curtail additional exploration
efforts to a level for which funding can be secured.
As at August 31, 2006, the Company has $8 million in Series 1 Preferred shares
outstanding. The Company does not have any loans or bank debt and there are no
restrictions on the use of its cash resources.
There are no material commitments for capital expenditures during fiscal 2006.
- 63 -
The Company holds the majority of its cash and cash equivalents in Canadian
funds.
TREND INFORMATION
The Company is not aware of any trends which might affect its financial results
or business.
RESEARCH AND DEVELOPMENT
During fiscal 2006, 2005 and 2004, the Company incurred $591,086, $17,690,832
and $75,906 respectively, for mineral property acquisition costs. During fiscal
2006 and 2005 the Company incurred $2,034,064 and $4,992,595 respectively, for
exploration expenditures on its mineral properties. No exploration expenditures
were incurred in fiscal 2004.
No petroleum interest acquisitions or exploration and development occurred in
fiscal 2006 and 2005. During fiscal 2004 the Company incurred $23,935 on the
acquisition, exploration and development of its petroleum interests.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
CONTRACTUAL OBLIGATIONS
The Company does not have any contractual obligations.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
- --------------------------------------------------------------------------------
DIRECTORS AND SENIOR MANAGEMENT
The names, positions held with the Company and terms of office of each director
and officer of the Company as of the date of this annual report, are as follows:
- ----------------------------------------------------------------------------------------------------
NAME POSITION WITH THE COMPANY TERM OF OFFICE (FOR EACH OFFICE HELD)
- --------------- ------------------------------------- -------------------------------------
LYNDA BLOOM Director November 2006 to present
President and Chief Executive Officer March 2007 to present
MARC CERNOVITCH Director February 2005 to present
Chairman February 2007 to present
President and Chief Executive Officer February 2005 to March 2007
NICK DEMARE(1) Director January 1996 to Present
Chief Financial Officer July 2003 to present
Chairman February 2005 to March 2007
TOM HEALY Director, Senior Vice President and February 2005 to present
Chief Operating Officer
ANDREW CARTER(1) Director February 2004 to present
EWAN DOWNIE Director May 2004 to present
WILLIAM LEE(1) Director February 2004 to present
HARVEY LIM Corporate Secretary December 1998 to present
(1) Member of the Audit Committee.
- 64 -
Each officer's and director's term of office shall expire at the Company's next
annual general meeting. The Company does not have an executive committee or a
compensation committee. The Company's audit committee is responsible for
reviewing the Company's financial statements before they are approved by the
Company's directors.
There are no family relationships between any directors or executive officers of
the Company. To the best of the Company's knowledge, there are no arrangements
or understandings with major shareholders, customers, suppliers, or others,
pursuant to which any of the Company's officers or directors was selected as an
officer or director of the Company.
Set forth below are brief descriptions of recent employment and business
experience of the Company's officers and directors.
LYNDA BLOOM (AGE 50), DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Ms. Bloom is a professional geologist and earned a Masters of Science degree
from Queen's University. Ms. Bloom is recognized as a world-expert on assay
methods and has traveled extensively worldwide to review sampling and analytical
procedures. Over the past 20 years Ms. Bloom has also acted as a consultant to
some of the largest exploration and mining companies in the world including
Barrick, Falconbridge, AngloAmerican and Cameco. Ms. Bloom is a director of the
Prospectors and Developers Association of Canada and recently completed her term
as Chair of the Canadian Institute of Mining and Metallurgy-Toronto Branch, as
well as serving on several government advisory boards. Ms. Bloom is also a
director of Canadian Shield Resources Inc. and Augen Capital Corp. See "Item 7.
Major Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest".
MARC CERNOVITCH (AGE 33), DIRECTOR AND CHAIRMAN
Mr. Cernovitch holds a bachelors degree in Economics from McGill University. Mr.
Cernovitch started his career in the financial sector as an investment advisor
and has lived and worked in Montreal, Calgary, Vancouver and New York. Mr.
Cernovitch currently resides in Vancouver and, since September 2004, has been
employed by the Company as Vice-President, Corporate Development. Mr. Cernovitch
has focused on corporate development, funding and building companies primarily
in the resource and energy technology fields.
NICK DEMARE (AGE 52), DIRECTOR AND CHIEF FINANCIAL OFFICER
Mr. DeMare holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Since May, 1991, Mr. DeMare has been the
President of Chase, a private company which provides a broad range of
administrative, management and financial services to private and public
companies engaged in mineral exploration and development, gold and silver
production, oil and gas exploration and production and venture capital. Mr.
DeMare indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer
and director of other public reporting companies. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest."
TOM HEALY (AGE 62), DIRECTOR, SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER
Mr. Healy is a professional mining engineer, a graduate of the University of
Melbourne and holds a postgraduate degree from the Royal School of Mines. He has
30 years' of open pit and underground mine design, operations, and management
experience for base and precious metals, coal, oil sands, diamonds and
industrial minerals projects. Mr. Healy is also President of Kamcot
International Ltd., an independent company providing management and engineering
services to the international mining community.
ANDREW CARTER (AGE 59), DIRECTOR
Mr. Carter obtained a certificate in accounting from the Midland College of TAFE
(Western Australia) in 1987. Since 1992, Mr. Carter has been a member of the
Australian Institute of Credit Management. Mr. Carter has an extensive
background in the mining industry and as a commercial finance executive. During
the 1970's, Mr. Carter was involved in the mining industry, where he managed
exploration crews in the Leonora and Kimberly regions in Western Australia. In
1988, he was appointed Chief Executive of RAC Finance Limited, a non-bank owned
commercial financier in Western Australia. During this time, he was appointed
Chairman and Director of Australian Finance Conference Limited and represented
the industry as a panel member of the Commercial Tribunal for Western Australia.
Since 1999, Mr. Carter has been providing services as an independent corporate
consultant based in Vancouver. Mr. Carter is currently the
- 65 -
President of Tinka Resources Ltd., a public company trading on the TSXV, and
serves as an officer and director of other public reporting companies. See "Item
7.Major Shareholders and Related Party Transactions - Related Party Transactions
- - Conflicts of Interest".
EWAN DOWNIE (AGE 40), DIRECTOR
President, CEO and a director of Wolfden Resources Inc., a TSX Exchange traded
company, and Vice-President of Sabina Silver Corporation, a TSXV traded company.
Since 1989, Mr. Downie has been the owner of Vytyl Exploration Services, a
contracting business in mineral development and exploration for a wide variety
of major and junior mining companies. Mr. Downie currently serves as an officer
and director of other public reporting companies. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Conflicts of Interest".
WILLIAM LEE (AGE 53), DIRECTOR
Mr. Lee holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. He has been a financial officer or controller
of several public and private companies since 1986 and, prior, thereto, was a
Senior Audit Manager at Deloitte & Touche. Prior to March, 1995, Mr. Lee was
employed as the Chief Financial Officer of Sanctuary Woods Multimedia Corp. From
March 1995 to June 1996, Mr. Lee was employed as the Chief Financial Officer of
Wildwood Interactive Inc. From June, 1996 to March, 2004, Mr. Lee was employed
as the Chief Financial Officer of IMA Exploration Inc., a public company engaged
in the exploration of mineral properties. From July 2004 to January 2006, Mr.
Lee was employed as a business analyst of Ivanhoe Energy Inc., a public company
engaged in the exploration for and production of oil and natural gas. In January
2006, Mr. Lee was appointed CFO of Jinshan Gold Mines Inc., a public company
engaged in the exploration for and development of gold and copper projects in
China. Mr. Lee currently serves as an officer and director of other public
reporting companies. See "Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions - Conflicts of Interest".
HARVEY LIM (AGE 48), CORPORATE SECRETARY
Mr. Lim holds a Bachelor of Commerce degree from the University of British
Columbia and is a member in good standing of the Institute of Chartered
Accountants of British Columbia. Mr. Lim was employed by Coopers & Lybrand (now
PricewaterhouseCoopers LLP) from 1981 to 1988. From 1988 to 1991, Mr. Lim was
employed as a controller with Ingot Management Ltd. Since 1991, Mr. Lim has been
employed by Chase as a controller. Mr. Lim currently serves as an officer and
director of other public reporting companies. See "Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions - Conflicts of
Interest".
COMPENSATION
During fiscal 2006, the directors and officers of the Company, as a group, had
received or charged the Company a total of $309,100 (fiscal 2005 - $209,850) for
compensation and services rendered by the directors and officers or companies
owned by the individuals. As of August 31, 2006, accounts payable and accrued
liabilities include $4,637 (2005 - $24,369) due to these related parties.
The Company is required, under applicable securities legislation in Canada, to
disclose to its shareholders details of compensation paid to its directors and
officers. The following fairly reflects all material information regarding
compensation paid by the Company to its directors and officers, which
information has been disclosed to the Company's shareholders in accordance with
applicable Canadian law.
"Named Executive Officers" means the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO") of the Company, regardless of the amount of
compensation of those individuals, and each of the Company's three most highly
compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the most recent fiscal year and whose total
salary and bonus amounted to $150,000 or more. In addition, disclosure is also
required for any individuals whose total salary and bonus during the most recent
fiscal year was $150,000 whether or not they are an executive officer at the end
of the fiscal year.
During the fiscal year ended August 31, 2006, the Company had two Named
Executive Officers, Mr. Marc Cernovitch, the Company's current Chairman and
former President and CEO, and Mr. Nick DeMare, the Company's current CFO
- 66 -
and former Chairman. The following table sets forth the compensation awarded,
paid to or earned by the Named Executive Officers during the financial years
ended August 31, 2006, 2005 and 2004:
--------------------------- ----------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------- ----------------------------------
AWARDS PAYOUTS
------------------------ -------
SECURITIES RESTRICTED ---------
OTHER UNDER SHARES OR ALL
- ------------------ ----- ANNUAL OPTIONS/ RESTRICTED OTHER
NAME AND PRINCIPAL COMPEN- SARS SHARE LTIP COMPEN-
POSITION YEAR(1) SALARY BONUS SATION GRANTED UNITS PAYOUTS SATION
($) ($) ($) (#)(2) ($) ($) ($)
- ------------------ ----- --------------------------- ------------------------ ------- ---------
Marc Cernovitch(3) 2006 93,000 Nil Nil 330,000 N/A N/A Nil
former President and 2005 51,500 Nil Nil 275,000 N/A N/A Nil
CEO(4),, Chairman and 2004 N/A N/A N/A N/A N/A N/A N/A
Director
- -------------------------------------------------------------------------------------------------------------------
Nick DeMare 2006 Nil Nil 30,000(5) 133,000 N/A N/A 69,700(5)
former Chairman (4), 2005 Nil Nil 28,000(5) 73,000 N/A N/A 62,450(5)
CFO and Director 2004 Nil Nil 8,000(5) 150,000(6) N/A N/A 55,638(5)
- -------------------------------------------------------------------------------------------------------------------
NOTES:
(1) Financial years ended August 31, 2006, 2005 and 2004.
(2) Figures represent options granted during a particular year; see
"Aggregate Option" table for the aggregate number of options
outstanding at year end.
(3) Mr. Cernovitch was appointed on February 9, 2005 as the President and
CEO of the Company.
(4) On March 1, 2007 Marc Cernovitch resigned as President and CEO of the
Company and Nick DeMare resigned as Chairman of the Company. Mr.
Cernovitch was then appointed as Chairman of the Company and Lynda
Bloom was appointed as President and CEO of the Company.
(5) Paid to Chase Management Ltd. ("Chase"), a private company owned by Mr.
DeMare, for accounting, administration, management and professional
services rendered by Mr. DeMare and Chase personnel. See "Management
Contracts".
(6) Includes 50,000 options granted to Chase.
LONG TERM INCENTIVE PLAN AWARDS
The Company has no long-term incentive plans in place and therefore there were
no awards made under any long-term incentive plan to the Name Executive Officers
during the Company's most recently completed financial year. A "Long-Term
Incentive Plan" is a plan under which awards are made based on performance over
a period longer than one financial year, other than a plan for options, stock
appreciation rights ("SARs") or restricted share compensation.
OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table sets forth stock options granted to the Named Executive
Officers during fiscal 2006:
- -----------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
SECURITIES OPTIONS/SARS SECURITIES
UNDER GRANTED TO UNDERLYING
OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON EXPIRATION
NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT DATE
(#) (%) ($/SECURITY) ($/SECURITY)
- -----------------------------------------------------------------------------------------------------------------------
Marc Cernovitch 80,000 3.69% 0.75 0.74 Sept. 29, 2008
250,000 11.53% 0.45 0.50 Feb. 02, 2009
------- -----
330,000 15.22%
======= =====
- -----------------------------------------------------------------------------------------------------------------------
Nick DeMare 60,000 2.77% 0.75 0.74 Sept. 29, 2008
73,000 3.36% 0.45 0.50 Feb. 02, 2009
------- -----
133,000 6.13%
======= =====
- -----------------------------------------------------------------------------------------------------------------------
- 67 -
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR-END OPTION/SAR VALUES
The following table sets out details of all the incentive stock options, both
exercised and unexercised, for the Named Executive Officers during fiscal 2006:
- ----------------------------------------------------------------------------------------------------------------------
UNEXERCISED VALUE OF UNEXERCISED
SECURITIES OPTIONS/SARS AT IN THE MONEY OPTIONS AT
ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1)
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(#) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------
Marc Cernovitch Nil N/A 480,000/N/A Nil/N/A
- ----------------------------------------------------------------------------------------------------------------------
Nick DeMare Nil N/A 283,000(2)/N/A Nil/N/A
- ----------------------------------------------------------------------------------------------------------------------
NOTES:
(1) The closing price of the Company's common shares on August 31, 2006 was
$0.40.
(2) Includes 50,000 options granted to Chase.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Company does not have any compensatory plan(s), contract(s) or
arrangement(s) with respect to the resignation, retirement or any other
termination of the Named Executive Officers' employment, a change of control of
our Company or a change in the Named Executive Officers' responsibilities
following a change in control, which entitle a Named Executive Officer to
receive from the Company an amount, including all period payments or
installments, exceeding $100,000.
DIRECTOR COMPENSATION
CASH COMPENSATION
During fiscal 2006, the Company paid $116,400 for professional fees to a
director who is not a Named Executive Officer of the Company. See "Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions."
NON-CASH COMPENSATION
The following table sets forth stock options granted by the Company during
fiscal 2006 to the directors who are not the Named Executive Officers of the
Company:
- --------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
SECURITIES OPTIONS/SARS SECURITIES
UNDER GRANTED TO UNDERLYING
OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON
NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT EXPIRATION
(#) (%) ($/SECURITY) ($/SECURITY) DATE
- --------------------------------------------------------------------------------------------------------------------
Directors as a group 180,000 25.05% 0.75 0.74 Sept. 29, 2008
who are not Named 295,000 13.61% 0.45 0.50 Feb. 02, 2009
Executive Officers ------- -----
475,000 21.91%
======= =====
- --------------------------------------------------------------------------------------------------------------------
- 68 -
The following table sets forth details of all exercises of stock options during
fiscal 2006 by the directors who are not the Named Executive Officers of the
Company, and the financial year end value of unexercised options:
- --------------------------------------------------------------------------------------------------------------------
UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS/SARS AT THE MONEY OPTIONS AT
SECURITIES FINANCIAL YEAR -END FINANCIAL YEAR -END (1)
ACQUIRED ON AGGREGATE EXERCISABLE / EXERCISABLE /
NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
(#) ($) (#) ($)
- --------------------------------------------------------------------------------------------------------------------
Directors as a group Nil N/A 935,000 / N/A Nil / N/A
who are not Named
Executive Officers
- --------------------------------------------------------------------------------------------------------------------
NOTE:
(1) The closing price of the Company's common shares on August 31, 2006 was
$0.40.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets out, as of the end of the Company's financial year
ended August 31, 2006, all information required with respect to compensation
plans under which equity securities of the Company are authorized for issuance:
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OF OUTSTANDING OPTIONS, PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND REFLECTED IN COLUMN (A))
RIGHTS
- --------------------------------------------------------------------------------------------------------------------
Plan Category (a) (b) (c)
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,903,000(1) $0.56 See Note (1)
approved by
securityholders
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by N/A N/A N/A
securityholders
- --------------------------------------------------------------------------------------------------------------------
Total 2,903,000 $0.56 See Note (1)
- --------------------------------------------------------------------------------------------------------------------
NOTE:
(1) The Company has in place a "rolling" stock option plan (the "Plan")
whereby the maximum number of common shares that may be reserved for
issuance pursuant to the Plan will not exceed 10% of the issued shares
of the Company at the time of the stock option grant. As of the date
hereof, common shares may be reserved for issuance pursuant to the
Plan.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS OF THE COMPANY
No executive officers, directors, employees or former executive officers and
directors of the Company are indebted to the Company. None of the directors,
executive officers or proposed nominees of the Company, nor any associate or
affiliate of these individuals, is or has been indebted to the Company since
September 1, 2005.
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
Other than as disclosed in "Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions", no informed person of the Company,
any proposed director of the Company, or any associate or affiliate of any
informed person or proposed director has any material interest, direct or
indirect, in any transaction since the commencement of our most recently
completed financial year or in any proposed transaction which has materially
affected or would materially affect the Company. An "informed person" means a
director or executive office of a reporting issuer; a director or executive
officer of a person or company that is itself an informed person or subsidiary
of a reporting issuer; any person or company who beneficially owns, directly or
indirectly, voting shares of a reporting issuer or who exercises control or
direction over shares of the reporting issuer or a combination of both carrying
more than 10% of the voting
- 69 -
rights attached to all outstanding voting securities of the reporting issuer;
and a reporting issuer that has purchased, redeemed or otherwise acquired any of
its securities, for so long as it holds any of its securities.
EMPLOYMENT / MANAGEMENT AGREEMENTS
Effective March 1, 2006, Lynda Bloom entered into an employment agreement
whereby the Company has retained Ms. Bloom as the President and CEO of the
Company. Under the terms of the employment agreement, Ms. Bloom is paid an
annual salary of $175,000, payable monthly, plus an annual bonus to be
determined by the Board of Directors of the Company. In the event Ms. Bloom is
terminated without cause, then the Company will pay Ms. Bloom, three months
severance compensation plus one month's severance compensation per completed
year of service, to a maximum of 12 months monthly severance compensation in
total. Ms. Bloom will also be entitled to accrued but unused vacation.
The Company has a management contract with Chase, whereby the Company has
retained Chase to provide ongoing administrative, accounting, professional and
management services. In return for providing such services, Chase is paid a
monthly fee of $3,000 plus any out-of-pocket disbursements made by Chase on the
Company's behalf. In addition, the Company may engage Chase to perform extra
services in which case Chase will charge the Company for its employees at
competitive rates. The Company is also paying Chase $2,000 per month for the
services of Mr. DeMare in his capacity as Chairman and CFO of the Company.
Payment for these services have been included as part of "Other Annual
Compensation" and "All Other Compensation" of the Summary Compensation Table for
Mr. DeMare. See "Item 7. Major Shareholders and Related Party Transactions -
Related Party Transactions".
Other than as noted above, there are no service contracts with the Company
providing for benefits upon termination of employment of any director of the
Company.
DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES
Effective June 30, 2005, National Instrument 58-101 - Disclosure of Corporate
Governance Practices ("NI 58-101") was adopted by the Canadian Securities
Administrators. NI 58-101 requires issuers to disclose their governance
practices in accordance with that instrument. The Company is a "venture issuer"
within the meaning of NI 58-101. A discussion of the Company's governance
practices within the context of NI 58-101 is set out below:
BOARD OF DIRECTORS
The Company has three independent directors, namely: Messrs. William Lee, Andrew
Carter and Ewan Downie. The Company has four directors who are not independent
because they are executive officers of the Company, namely: Ms. Lynda Bloom,
President and CEO, Mr. Marc Cernovitch, Chairman, Mr. Nick DeMare, CFO and Mr.
Tom Healy, Senior Vice-President and Chief Operating Officer.
BOARD PRACTICES
ORIENTATION AND CONTINUING EDUCATION
The CEO and/or the CFO are responsible for providing an orientation for new
directors. Director orientation and on-going training will include presentations
by senior management to familiarize directors with the Company's strategic
plans, its significant financial, accounting and risk management issues, its
compliance programs, its principal officers and its internal and independent
auditors.
ETHICAL BUSINESS CONDUCT
The Company does not have a written code of ethical business conduct for its
directors, officers and employees. Each director, officer and employee is
expected to comply with relevant corporate and securities laws and, where
applicable, the terms of their employment agreements.
NOMINATION OF DIRECTORS
When a board vacancy occurs or is contemplated, any director may make
recommendations to the board as to qualified individuals for nomination to the
board.
- 70 -
In identifying new candidates, the directors will take into account the mix of
director characteristics and diverse experiences, perspectives and skills
appropriate for the Company at that time.
COMPENSATION
From time to time, the independent directors of the Board will review the
compensation payable to the CEO and CFO. The directors receive no compensation
in their capacity as directors other than the grant of stock options from time
to time, which allocation is made by the Board as a whole.
OTHER BOARD COMMITTEES
The board has no standing committees other than the Audit Committee.
ASSESSMENTS
The Board of Directors of the Company does not conduct any formal evaluation of
the performance and effectiveness of the members of the Board, the Board as a
whole or any committee of the Board.
AUDIT COMMITTEE
THE AUDIT COMMITTEE'S CHARTER
MANDATE
The primary function of the audit committee (the "Committee") is to assist the
Board of Directors in fulfilling its financial oversight responsibilities by
reviewing the financial reports and other financial information provided by the
Company to regulatory authorities and shareholders, the Company's systems of
internal controls regarding finance and accounting and the Company's auditing,
accounting and financial reporting processes. The Committee's primary duties and
responsibilities are to:
- Serve as an independent and objective party to monitor the Company's
financial reporting and internal control system and review the
Company's financial statements.
- Review and appraise the performance of the Company's external auditors
(the "Auditor").
- Provide an open avenue of communication among the Company's auditors,
management and the Board of Directors.
COMPOSITION
The Committee shall be comprised of at least three members. Each member must be
a director of the Company. A majority of the members of the Committee shall not
be officers or employees of the Company or of an affiliate of the Company. At
least one member of the Committee shall be financially literate. All members of
the Committee who are not financially literate will work towards becoming
financially literate to obtain a working familiarity with basic finance and
accounting practices. For the purposes of this Audit Committee Charter, the term
"financially literate" means the ability to read and understand a set of
financial statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of
the issues that can reasonably be expected to be raised by the Company's
financial statements.
The members of the Committee shall be appointed by the Board of Directors at its
first meeting following the annual shareholders' meeting. Unless a Chair is
elected by the full Board of Directors, the members of the Committee may
designate a Chair by a majority vote of the full Committee membership. The Chair
shall be financially literate.
The Chair shall be financially literate.
MEETINGS
The Committee shall meet a least twice annually, or more frequently as
circumstances dictate. As part of its job to foster open communication, the
Committee will meet at least annually with the CFO and the external auditors in
separate
- 71 -
sessions. Unless all members are present and waive notice, or those absent waive
notice before or after a meeting, the Chairman will give Committee members 24
hours advance notice of each meeting and the matters to be discussed at it.
Notice may be given personally, by telephone, facsimile or e-mail.
The Auditor shall be given reasonable notice of, and be entitled to attend and
speak at, each meeting of the Committee concerning the Company's annual
financial statements and, if the Committee feels it is necessary or appropriate,
at any other meeting. On request by the Auditor, the Chair shall call a meeting
of the Committee to consider any matter that the Auditor believes should be
brought to the attention of the Committee, the Board of Directors or the
shareholders of the Company.
At each meeting of the Committee, a quorum shall consist of a majority of
members that are not officers or employees of the Company or of an affiliate of
the Company. A member may participate in a meeting of the Committee in person or
by telephone if all members participating in the meeting, whether in person or
by telephone or other communications medium, are able to communicate with each
other. A member may participate in a meeting of the Committee by a
communications medium other than telephone if all members participating in the
meeting, whether in person or by telephone or other communications medium, are
able to communicate with each other and if all members who wish to participate
in the meeting agree to such participation.
As part of its goal to foster open communication, the Committee may periodically
meet separately with each of management and the Auditor to discuss any matters
that the Committee or any of these groups believes would be appropriate to
discuss privately. In addition, the Committee should meet with the Auditor and
management annually to review the Company's financial statements.
The Committee may invite to its meetings any director, any manager of the
Company, and any other person whom it deems appropriate to consult in order to
carry out its responsibilities. The Committee may also exclude from its meetings
any person it deems appropriate to exclude in order to carry out its
responsibilities.
RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties, the Committee shall:
DOCUMENTS/REPORTS REVIEW
(a) Review and update the Charter annually.
(b) Review the Company's financial statements, MD&A and any annual and
interim earnings, press releases before the Company publicly discloses
this information and any reports or other financial information
(including quarterly financial statements), which are submitted to any
governmental body, or to the public, including any certification,
report, opinion, or review rendered by the external auditors.
(c) Review and satisfy itself that adequate procedures are in place for the
review of the Company's public disclosure of financial information
extracted or derived from its financial statements, other than
disclosure described in the previous paragraph, and periodically assess
the adequacy of those procedures.
EXTERNAL AUDITORS
(a) Be directly responsible for overseeing the work by the Auditor
(including resolution of disagreements between management and the
Auditor regarding financial reporting) engaged for the purpose of
preparing or issuing an audit report or performing other audit or
review services for the Company.
(b) Require the Auditor to report directly to the Committee.
(c) Review, annually, the performance of the Auditor who shall be
ultimately accountable to the Board of Directors and the Committee as
representatives of the shareholders of the Company.
(d) Review and discuss with the Auditor any disclosed relationships or
services that may impact the objectivity and independence of the
Auditor.
- 72 -
(e) Take, or recommend that the Board of Directors take, appropriate action
to oversee the independence of the Auditor.
(f) Recommend to the Board of Directors the external auditor to be
nominated at the annual general meeting for appointment as the Auditor
for the ensuing year and the compensation for the Auditors, or, if
applicable, the replacement of the Auditor.
(g) Review and approve the Company's hiring policies regarding partners,
employees and former partners and employees of the Auditor and former
independent external auditor of the Company.
(h) Be directly responsible for the oversight of the work by the Auditor
(including resolution of disagreements between management and the
Auditor regarding financial reporting) for the purpose of preparing or
issuing an audit report or related work.
(i) Review with management and the Auditor the audit plan for the annual
financial statements.
(j) Review and pre-approve all audit and audit-related services and the
fees and other compensation related thereto, and any non-audit services
provided by the Auditor. The pre-approval requirement is waived with
respect to the provision of non-audit services if:
(i) the aggregate amount of all such non-audit services that were
not pre-approved is reasonably expected to constitute not more
than 5% of the total amount of fees paid by the Company and
its subsidiary entities to the Auditor during the fiscal year
in which the non-audit services are provided;
(ii) such services were not recognized by the Company at the time
of the engagement to be non-audit services; and
(iii) such services are promptly brought to the attention of the
Committee and approved, prior to the completion of the audit,
by the Committee or by one or more members of the Committee to
whom authority to grant such approvals has been delegated by
the Committee.
The Committee may delegate to one or more independent members of the Committee
the authority to pre-approve non-audit services in satisfaction of the
pre-approval requirement set out in this section provided the pre-approval of
non-audit services by any member to whom authority has been delegated must be
presented to the Committee at its first scheduled meeting following such
pre-approval.
FINANCIAL REPORTING PROCESSES
(a) In consultation with the Auditor, review with management the integrity
of the Company's financial reporting process, both internal and
external.
(b) Consider the Auditor's judgments about the quality and appropriateness
of the Company's accounting principles as applied in its financial
reporting.
(c) Consider and approve, if appropriate, changes to the Company's auditing
and accounting principles and practices as suggested by the Auditor and
management.
(d) Review significant judgments made by management in the preparation of
the financial statements and the view of the Auditor as to the
appropriateness of such judgments.
(e) Following completion of the annual audit, review separately with
management and the Auditor any significant difficulties encountered
during the course of the audit, including any restrictions on the scope
of work or access to required information.
- 73 -
(f) Review any significant disagreement among management and the Auditor in
connection with the preparation of the financial statements.
(g) Review with the Auditor and management the extent to which changes and
improvements in financial or accounting practices have been
implemented.
(h) Discuss with the Auditor the Auditor's perception of the Company's
financial and accounting personnel, any material recommendations which
the Auditor may have, the level of cooperation which the Auditor
received during the course of their review and the adequacy of their
access to records, data and other requested information.
(i) Review any complaints or concerns about any questionable accounting,
internal accounting controls or auditing matters.
(j) Review certification process.
(k) Establish procedures for:
(i) the receipt, retention and treatment of complaints received by
the Company regarding accounting, internal accounting
controls, or auditing matters; and
(ii) the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or
auditing matters.
OTHER
(a) Perform such other duties as may be assigned to it by the Board of
Directors from time to time or as may be required by applicable
regulatory authorities or legislation.
(b) Report regularly and on a timely basis to the Board of Directors on
matters coming before the Committee.
(c) Review and reassess the adequacy of this Charter annually and recommend
any proposed changes to the Board of Directors for approval.
AUTHORITY
The Committee is authorized to:
(a) seek any information it requires from any employee of the Company in
order to perform its duties;
(b) engage, at the Company's expense, independent legal counselor other
professional advisors on any matter within the scope of the role and
duties of the Committee under this Charter;
(c) set and pay the compensation for any advisors engaged by the Committee;
and
(d) communicate directly with the internal and external auditors of the
Company.
This Charter supersedes and replaces all prior charters and other terms of
reference pertaining to the Committee."
- 74 -
COMPOSITION OF THE AUDIT COMMITTEE
The following are the members of the Committee (1):
- --------------------------------------------------------------------------------
INDEPENDENT (1) FINANCIALLY LITERATE
- --------------------------------------------------------------------------------
Nick DeMare N Y
- --------------------------------------------------------------------------------
William Lee Y Y
- --------------------------------------------------------------------------------
Andrew Carter Y Y
- --------------------------------------------------------------------------------
NOTE:
(1) As defined by Multilateral Instrument 52-110 ("MI 52-110").
The Company is relying on the exemption provided under Section 6.1 of MI 52-110.
RELEVANT EDUCATION AND EXPERIENCE
Mr. Lee is a Chartered Accountant with significant experience working with
resource issuers as a Chief Financial Officer. In addition, from 2004 to January
2006, Mr. Lee provided consulting services to a resource energy group in meeting
their compliance obligations under the Sarbanes-Oxley Act. Mr. DeMare is a
Chartered Accountant with significant experience working with resource issuers
as a Chief Financial Officer and Mr. Carter is a business executive with
extensive experience in the industry. As such each has acquired knowledge and
understanding of the financial issues and accounting principles that are
relevant in assessing this Company's financial disclosures and internal control
systems.
AUDIT COMMITTEE OVERSIGHT
At no time since the commencement of the Company's most recently completed
financial year was a recommendation of the Committee to nominate or compensate
an external auditor not adopted by the Board of Directors.
RELIANCE ON CERTAIN EXEMPTIONS
At no time since the commencement of the Company's most recently completed
financial year has the Company relied on the exemption in Section 2.4 of MI
52-110 (De Minimis Non-audit Services), or an exemption from MI 52-110, in whole
or in part, granted under Part 8 of MI 52-110.
PRE-APPROVAL POLICIES AND PROCEDURES
The Committee has adopted specific policies and procedures for the engagement of
non-audit services as described above under the heading "External Auditors".
REMUNERATION COMMITTEE
The Company does not have a separate Remuneration Committee.
TERMINATION OF EMPLOYMENT OR CHANGE OF CONTROL
Other than as described in "Item 6. Directors, Senior Management and Employees -
Employment/Management Agreements" and the Summary Compensation Table and above,
the Company has no plans or arrangements in respect of remuneration received or
that may be received by the Named Executive Officer in the Company's most
recently completed financial year or current financial year in view of
compensating such officers in the event of termination of employment (as a
result of resignation, retirement, change of control, etc.) or a change in
responsibilities following a change of control, where the value of such
compensation exceeds $100,000 per executive officer.
Other than as described above, the Company and its subsidiaries do not have any
contracts with the directors of the Company (or any entities controlled by the
directors of the Company) providing for benefits upon termination of employment.
- 75 -
EMPLOYEES
As of the date of this annual report the Company has four full-time employees,
one directly employed by the Company and three providing their services as
consultants. In addition, the Company is in the process of hiring employees for
administration and related exploration of its mineral properties.
Corporate accounting, management and administration are provided, in part, by
Chase, a company owned by Mr. Nick DeMare. Chase provides its services to a
number of public and private companies and currently employs six full-time
employees, including Mr. Lim (excluding Mr. DeMare). Mr. DeMare currently
provides his services as CFO of the Company. The Company also retains
consultants to handle specific projects on a case-by-case basis. In the event
the Company needs to employ personnel, it will need to recruit qualified
personnel to staff its operations. The Company believes that such personnel
currently are available at reasonable salaries and wages in the geographic areas
in which the Company and its subsidiaries operate. There can be no assurance,
however, that such personnel will be available in the future. Exploration
activities are conducted by consultants, laborers and technicians hired for the
duration of the exploration program.
SHARE OWNERSHIP
The following table sets forth certain information regarding ownership of the
Company's common shares by the Company's officers and directors as of January
31, 2007:
- ----------------------------------------------------------------------------------------------------------
SHARES AND RIGHTS BENEFICIALLY PERCENT
TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1) OF CLASS (1)
- ----------------------------------------------------------------------------------------------------------
Common Stock Marc Cernovitch 567,800(2) 1.61%
Toronto, Ontario, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Nick DeMare 784,028(3) 2.23%
Burnaby, British Columbia, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Andrew Carter 187,000(4) 0.52%
North Vancouver,
British Columbia, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Ewan Downie 1,147,500(5) 3.27%
Thunder Bay, Ontario, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock William Lee 165,300(6) 0.47%
Delta, British Columbia, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Harvey Lim 170,143(7) 0.49%
Burnaby, British Columbia, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Tom Healy 425,000(8) 1.21%
Calgary, Alberta, Canada
- ----------------------------------------------------------------------------------------------------------
Common Stock Lynda Bloom 250,000(9) 0.71%
Toronto, Ontario, Canada
- ----------------------------------------------------------------------------------------------------------
NOTES:
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from January 31, 2007, these additional shares
are deemed to be outstanding for the purpose of computing the
percentage of common stock owned by such persons, but are not deemed to
be outstanding for the purpose of computing the percentage owned by any
other person. Based on 34,777,049 shares of common stock outstanding as
of January 31, 2007.
(2) Includes 92,800 common shares held and options to acquire 475,000
common shares.
(3) Includes 319,691 common shares held directly by Mr. DeMare, 97,404
common shares held by DNG Capital Corp. ("DNG"), a private corporation
wholly-owned by Mr. DeMare, and 8,866 common shares held by 888 Capital
Corp., a private corporation 50% owned by Mr. DeMare. Also includes
options to acquire 275,000 common shares held by Mr. DeMare directly,
options to acquire 50,000 common shares held by Chase and warrants to
acquire 33,067 common shares held directly by Mr. DeMare.
(4) Includes 22,000 common shares held, and options to acquire 160,000
common shares.
- 76 -
(5) Includes 810,000 common shares held, options to acquire 300,000 common
shares and warrants to acquire 37,500 common shares. Mr. Downie, a
director of the Company, is the President, CEO and a director of
Wolfden Resources Inc. ("Wolfden"), a publicly traded company, which
holds 2,100,000 shares of the Company. However, the shares held by
Wolfden are not attributed to Mr. Downie, as he has no discretionary
authority in connection with such shares.
(6) Includes 5,300 common shares held and options to acquire 160,000 common
shares. (7) Includes 143 common shares held and options to acquire
170,000 common shares.
(8) Includes 100,000 common shares held by Kamcot International Ltd.
("Kamcot"), a private corporation owned 50% by Mr. Healy and 50% by
Ulrica Healy, Mr. Healy's spouse, options to acquire 275,000 common
shares and warrants to acquire 50,000 common shares held by Kamcot.
(9) Option to acquire 250,000 common shares.
All of the Company's common shareholders have the same voting rights. Holders of
the Company's Series 1 Preferred Shares do not have the right to vote unless the
Company is in default on the payment of dividends and the dividends remain
unpaid for a period of 60 days. See "Item 10. Additional Information -
Description of Authorized Shares - Preferred Shares."
STOCK OPTION PLAN
The Company has a rolling stock option plan (the "Plan"), which makes a total of
10% of the issued and outstanding common shares of the Company available for
issuance thereunder. The Company's Plan is approved annually by the
shareholders. In accordance with the policies of the TSXV, a rolling plan, which
is the type of plan the Company has adopted, requires the approval of the
shareholders of the Company on an annual basis.
The purpose of the Plan is to provide the Company with a share related mechanism
to enable the Company to attract, retain and motivate qualified directors,
officers, employees and other service providers, to reward directors, officers,
employees and other service providers for their contribution toward the long
term goals of the Company and to enable and encourage such individuals to
acquire shares of the Company as long term investments.
The Plan provides that it is solely within the discretion of the Board to
determine who should receive options and in what amounts. The Board of Directors
may issue a majority of the options to insiders of the Company. However, the
Plan provides that in no case will the Plan or any existing share compensation
arrangement of the Company result, at any time, in the issuance to any option
holder, within a one-year period, of a number of shares exceeding 5% of the
Company's issued and outstanding share capital.
The following information is intended to be a brief description of the Plan:
1. The maximum number of common shares that may be issued upon exercise of
stock options granted under the Plan will be that number of shares
which is 10% of the issued and outstanding shares of the Company. Any
outstanding options will form a part of the foregoing 10%. The exercise
price of the stock options, as determined by the Board of Directors in
its sole discretion, shall not be less than the closing price of the
Company's shares traded through the facilities of the TSXV on the date
prior to the date of grant, less allowable discounts, in accordance
with the policies of the TSXV or, if the shares are no longer listed
for trading on the TSXV, then such other exchange or quotation system
on which the shares are listed and quoted for trading.
2. The Board of Directors will not grant options to any one person which
will, when exercised, exceed 5% of the issued and outstanding shares of
the Company.
3. Upon expiry of the option, or in the event an option is otherwise
terminated for any reason, without having been exercised in full, the
number of shares in respect of the expired or terminated option shall
again be available for the purposes of the Plan. All options granted
under the Plan may not have an expiry date exceeding five years from
the date on which the Board of Directors grant and announce the
granting of the option.
4. If the option holder ceases to be a director of the Company or ceases
to be employed by the Company (other than by reason of death), as the
case may be, then the option granted shall expire on the 90th day
following the date that the option holder ceases to be a director or
ceases to be employed by the Company, subject to the terms and
conditions set out in the Plan.
The Plan may be administered by the Company's secretary or such other senior
officer or employee as may be designated by the Board of Directors from time to
time. Upon the approval of the Plan by the Company's shareholders, shareholder
approval will not be required or sought on a case-by-case basis for the purpose
of the granting of options to and the
- 77 -
exercise of options by employees of the Company regularly employed on a
full-time or part-time basis, directors of the Company and persons who perform
services for the Company on an ongoing basis or who have provided, or are
expected to provide, services of value to the Company.
As of January 31, 2007, an aggregate of 3,460,000 incentive stock options to
purchase shares of the Company's common stock remain outstanding to the
following persons:
- --------------------------------------------------------------------------------
EXERCISE
NATURE NO. OF PRICE/
OPTIONEE OF OPTION OPTIONS SHARE EXPIRY DATE
$
- --------------------------------------------------------------------------------
Ewan Downie Director 200,000 0.60 May 31, 2009
Nick DeMare Director 100,000 0.60 May 31, 2009
Harvey Lim Officer 50,000 0.60 May 31, 2009
Andrew Carter Director 50,000 0.60 May 31, 2009
William Lee Director 50,000 0.60 May 31, 2009
Scott Walters Consultant 150,000 0.75 September 29, 2008
Andrew Carter Director 60,000 0.45 February 2, 2009
David Henstridge Consultant 50,000 0.45 February 2, 2009
Ewan Downie Director 25,000 0.45 February 2, 2009
Harvey Lim Officer 60,000 0.45 February 2, 2009
Kevin Leonard Consultant 60,000 0.45 February 2, 2009
Marc Cernovitch Director 250,000 0.45 February 2, 2009
Nick DeMare Director 73,000 0.45 February 2, 2009
Scott Koyich Consultant 75,000 0.45 February 2, 2009
Tom Healy Director 150,000 0.45 February 2, 2009
Tony Keen Consultant 50,000 0.45 February 2, 2009
William Lee Director 60,000 0.45 February 2, 2009
Richard Cohen I/R 200,000 0.45 March 11, 2011
Tim German I/R 200,000 0.45 March 11, 2011
Ewan Downie Director 75,000 0.45 November 27, 2009
Chase Management Ltd. Mgmt Co. 50,000 0.45 November 27, 2009
Nick DeMare Director 102,000 0.45 November 27, 2009
Harvey Lim Officer 60,000 0.45 November 27, 2009
Andrew Carter Director 50,000 0.45 November 27, 2009
William Lee Director 50,000 0.45 November 27, 2009
Tom Healy Director 125,000 0.45 November 27, 2009
Marc Cernovitch Director 225,000 0.45 November 27, 2009
Kevin Leonard Consultant 110,000 0.45 November 27, 2009
Ken Pride Consultant 50,000 0.45 November 27, 2009
Peter Dietrich Consultant 50,000 0.45 November 27, 2009
Value Relations Consultant 250,000 0.45 November 27, 2009
Jeff Tindale Consultant 100,000 0.45 November 27, 2009
Lynda Bloom Director 250,000 0.45 November 27, 2009
---------
TOTAL: 3,460,000
=========
As of January 31, 2007, the directors and officers of the Company, as a group
(eight persons), held options to purchase 1,785,000 shares of the Company's
common stock.
WARRANTS
As of January 31, 2007, there were non-transferable common share purchase
warrants exercisable for the purchase of 4,701,503 common shares, which expire
at various times until April 12, 2008 and may be exercised at various prices
ranging from $0.45 per share to $1.50 per share, as follows:
COMMON SHARES ISSUABLE ON EXERCISE
EXERCISE OF WARRANTS PRICE/SHARE EXPIRY
$
2,071,015 0.70 September 14, 2007
432,474 0.70 September 29, 2007
85,715 0.75 October 14, 2007
- 78 -
COMMON SHARES ISSUABLE ON EXERCISE
EXERCISE OF WARRANTS PRICE/SHARE EXPIRY
$
1,708,166 0.60 April 12, 2008
404,133 0.45 April 12, 2008
---------
4,701,503
=========
As of January 31, 2007, the directors and officers of the Company, as a group
(eight persons), held warrants to purchase 120,567 shares of the Company's
common stock.
There are no assurances that the options or warrants described above will be
exercised in whole or in part.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
- --------------------------------------------------------------------------------
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth certain information regarding ownership of the
Company's common shares by the Company's major shareholders as of January 31,
2007.
- --------------------------------------------------------------------------------
SHARES AND RIGHTS
BENEFICIALLY
TITLE OF OWNED OR PERCENT OF
CLASS NAME AND ADDRESS OF OWNER CONTROLLED(1) CLASS (1)
- --------------------------------------------------------------------------------
Common Stock Wolfden Resources Inc.(2) 2,100,000 6.04%
Thunder Bay, Ontario, Canada
- --------------------------------------------------------------------------------
NOTES:
(1) Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from January 31, 2007, these additional shares are
deemed to be outstanding for the purpose of computing the percentage of
common stock owned by such persons, but are not deemed to be outstanding
for the purpose of computing the percentage owned by any other person.
Based on 34,777,049 shares of common stock outstanding as of January 31,
2007.
(2) Wolfden Resources Inc. ("Wolfden") is a publicly traded company. Mr. Ewan
Downie, a director of the Company, is the President, CEO and a director of
Wolfden; however, the shares held by Wolfden are not attributed to Mr.
Downie, as he has no discretionary authority in connection with such
shares.
To the best of the Company's knowledge, it is not directly or indirectly owned
or controlled by another Company or by any foreign government.
None of the Company's common shareholders have different voting rights than any
of the Company's other common shareholders.
ESCROW SHARES
As of the date of this annual report, no shares are held in escrow.
CHANGES IN SHAREHOLDINGS
As of January 31, 2007, Wolfden Resources Inc. beneficially owned 2,100,000
shares (6.04%) of the Company's common stock. The common shares were issued to
Wolfden on May 18, 2005, by the Company under the Assignment and Assumption
Agreement on the Bachelor Lake Property. See "Item 4. Information on the
Company. Principal Properties - Bachelor Lake Property, Quebec".
CHANGE OF CONTROL
As of the date of this annual report, there are no arrangements known to the
Company which may at a subsequent date result in a change of control of the
Company, except the possible issuance of common shares to The Sheridan Platinum
Group Ltd. and Pat Sheridan in connection with the redemption or retraction of
the Series 1 Preferred Shares. See "Item 4. Information on the Company -
Principal Properties - Duport Property, Ontario" and "Item 10. Additional
Information - Description of Authorized Shares - Preferred Shares".
- 79 -
In the event that the Company exercises its right to retract or redeem the
Series 1 Preferred Shares in exchange for common shares of the Company, this may
result in a change of control of the Company. Based on the Company's outstanding
share capital as at January 31, 2007, if the Company retracted or redeemed the
Series 1 Preferred Shares in exchange for common shares, The Sheridan Platinum
Group Ltd. and Pat Sheridan would own in the aggregate approximately 34.79% of
the Company's outstanding common shares, calculated as follows:
Shares outstanding (1) 34,777,049
Shares issuable upon retraction (2) 17,021,276
-------------
Shares outstanding after retraction 51,798,325
=============
Shares currently held by vendors 1,000,000
Shares acquired by vendors upon retraction 17,021,276
-------------
Shares held by vendors after retraction 18,021,276
=============
% of shares held by vendors after retraction 34.79%
NOTES:
(1) As at January 31, 2007.
(2) Calculated as $8 million divided by $0.47 per share, being the
closing price of the Company's common shares on January 31, 2007.
The foregoing calculation is for illustrative purposes only and does not take
account of additional common shares which may be issued by the Company, or any
purchases or sales of shares by The Sheridan Platinum Group Ltd. or Mr.
Sheridan, subsequent to the date hereof but prior to redemption or retraction,
or any change in the market price of the Company's common shares, all of which
may materially change the calculation.
UNITED STATES SHAREHOLDERS
As of January 31, 2007, there were approximately nine registered holders of the
Company's common shares in the United States, with combined holdings of 554,412
shares, representing 1.59% of the issued shares of the Company. The Company does
not know how many beneficial shareholders it has in the United States, but
management believes there are less than 300 such shareholders.
CONTROL BY FOREIGN GOVERNMENT OR OTHER PERSONS
To the best of the Company's knowledge, the Company is not directly or
indirectly owned or controlled by another corporation, any foreign government,
or any other natural or legal person jointly or severally.
RELATED PARTY TRANSACTIONS
Other than as disclosed below, for the period from September 1, 2004 through
January 31, 2007, the Company has not entered into any transactions or loans
between the Company and any (a) enterprises that directly or indirectly through
one or more intermediaries, control or are controlled by, or are under common
control with, the Company; (b) associates; (c) individuals owning, directly or
indirectly, an interest in the voting power of the Company that gives them
significant influence over the Company, and close members of any such
individuals' family; (d) key management personnel and close members of such
individuals' families; or (e) enterprises in which a substantial interest in the
voting power is owned, directly or indirectly, by any person described in (c) or
(d) or over which such a person is able to exercise significant influence.
1. On February 9, 2005, Mr. Marc Cernovitch was appointed President and
CEO of the Company and provided his services as the Company's President
and CEO on a full-time basis until March 1, 2007, when he resigned as
the Company's President and CEO and assumed the role as the Company's
Chairman. In consideration therefore, Mr. Cernovitch is currently paid
a monthly salary of $7,750. During the years ended August 31, 2005 and
2006 and the period from September 1, 2006 to January 31, 2007, Mr.
Cernovitch was paid $51,500, $93,000 and $38,750, respectively.
2. The Company has retained Chase, a company wholly-owned by Mr. Nick
DeMare, the Chairman and Chief Financial Officer of the Company, to
provide office premises, administrative, accounting and management
services. In consideration therefore, Chase is paid a monthly fee of
$3,000. Chase is also reimbursed for out-
- 80 -
of-pocket disbursements incurred on behalf of the Company. In addition,
Chase also provides additional services to the Company which are billed
at rates which Chase charges to unrelated third parties. Management
believes the arrangement with Chase is fair to the Company and similar
to terms which could be obtained from unrelated third parties. During
the years ended August 31, 2004, 2005, 2006 and the period from
September 1, 2006 to January 31, 2007, the Company paid Chase $55,638,
$62,450, $36,000 and $15,000, respectively.
3. From July 4, 2003 through February 9, 2005, the Company paid Chase a
monthly fee for the services of Mr. Nick DeMare in his former capacity
as President, Chief Executive Officer and Chief Financial Officer of
the Company. Commencing February 9, 2005, the Company paid Chase a
monthly fee for the services of Mr. Nick DeMare in his current capacity
as Chairman and Chief Financial Officer. On March 1, 2007, Mr. DeMare
resigned as Chairman of the Company. See "Item 6. Directors, Senior
Management and Employees - Compensation." Management believes the
arrangement with Chase for Mr. DeMare's services is fair to the
Company. During the years ended August 31, 2004, 2005, 2006 and the
period from September 1, 2006 to January 31, 2007, the Company paid
Chase $8,000, $28,000, $30,000 and $12,500, respectively.
4. Mr. Tom Healy was elected as a director of the Company, and appointed
Senior Vice President and Chief Operating Officer on February 9, 2005.
Mr. Healy provides his services on a full-time basis through his
wholly-owned corporation, Kamcot. In consideration therefore, Kamcot is
paid a monthly fee of $9,700. During the years ended August 31, 2005
and 2006, and the period from September 1, 2006 to January 31, 2007,
the Company paid Kamcot $67,900, $116,400 and $48,500 respectively.
5. The Company has completed previous private placements of securities,
the subscribers of which include companies wholly-owned by directors
and officers of the Company. The securities issued pursuant to such
private placements were issued in accordance with the pricing policies
of the TSXV. During the yearsended August 31, 2004, 2005 and 2006, and
the period from September 1, 2006 to January 31, 2007, the Company
conducted the following private placements of common stock:
PARTICIPATION
BY PURCHASE MARKET
INSIDERS PRICE PRICE(1)
PLACEE $ $
PERIOD SEPTEMBER 1, 2006 TO JANUARY 31, 2007
3,416,333 flow-through units
(one common share and one-half warrant) 0.45 0.41
- Nick DeMare 20,000
=======
YEAR ENDED AUGUST 31, 2006
3,293,070 flow-through common shares 0.70 0.68
- Ewan Downie 20,000
=======
YEAR ENDED AUGUST 31, 2005
4,342,951 units (one common share and one-half warrant) 0.95 1.05
- Ewan Downie 75,000
- Nick DeMare 26,135
- Judy Eng (spouse of Harvey Lim) 10,000
- William Lee 5,300
- Andrew Carter 5,000
-------
121,435
=======
151,834 units (one common share and one-half warrant) 0.95 0.92
- Marc Cernovitch 5,300
=======
YEAR ENDED AUGUST 31, 2004
3,400,000 units (one common share and one warrant) 0.15 0.20
- Nick DeMare 281,667
=======
2,600,000 units (one common share and one warrant) 0.30 0.32
- DNG Capital Corp.(2) 71,000
=======
(1) Quoted closing price on date of announcement of private placement.
(2) 100% owned by Nick DeMare.
6. On November 12, 2004, the Company entered into an option agreement to
earn a 50% interest in the Bachelor Lake Property with Wolfden
Resources Inc. ("Wolfden"). A definitive agreement (the "Assignment and
- 81 -
Assumption Agreement") was subsequently executed on April 15, 2005.
Under the terms of the Assignment and Assumption Agreement, Wolfden
assigned to the Company its option to earn a 50% interest in the
Bachelor Lake Property from Metanor Resources Inc. ("Metanor") by
paying to Wolfden an aggregate of $1,943,123 (comprised of $650,000 in
acquisition costs and $1,293,123 in reimbursement of exploration
expenditures) and issuing 2.1 million common shares subject to a
12-month contractual hold period. Upon securing project financing and
the commencement of commercial production on the property resulting in
a minimum of 50,000 ounces of gold or silver equivalent being produced,
the Company will pay a bonus payment to Wolfden in the amount of
$250,000 cash and 250,000 common shares. The Company has also agreed to
pay Wolfden a net smelter return royalty of 0.5% on the Company's share
of the net smelter return. The Company also assumed Wolfden's $3
million exploration funding commitment at Bachelor Lake. The
transaction closed on May 18, 2005. Mr. Ewan Downie, a director of the
Company is also the President, Chief Executive Officer and a director
of Wolfden. See "Item 4. Information on the Company - Principal
Properties - Bachelor Lake Property, Quebec."
7. During the year ended August 31, 2004, the Company negotiated a
settlement with Hilton Resources Ltd., a public corporation which
certain of its directors and officers are also officers and directors
of the Company, in which the Company paid $688,079 to settle $748,687
owed, resulting in a gain of $60,608.
8. During the year ended August 31, 2004, the Company negotiated
settlements with six creditors in which the Company paid $263,543 to
settle a total of $300,142 owed, resulting in a gain of $36,599. The
creditors are corporations owned by current and former officers and
directors of the Company.
9. During the year ended August 31, 2004, the Company paid $1,000 to Ewan
Downie for consulting services.
10. See also "Item 6. Directors, Senior Management and Employees -
Compensation."
INDEBTEDNESS OF DIRECTORS, OFFICERS, PROMOTERS AND OTHER MANAGEMENT
No executive officers, directors, employees or former executive officers and
directors of the Company are indebted to the Company. None of the directors,
executive officers or proposed nominees of the Company, nor any associate or
affiliate of these individuals, is or has been indebted to the Company since
September 1, 2004.
CONFLICTS OF INTEREST
The table below shows that certain officers and directors of the Company are
also directors, officers or shareholders of other companies which are engaged in
the business of acquiring, developing and exploiting natural resource
properties. Such associations may give rise to conflicts of interest from
time-to-time. The directors of the Company are required by law to act honestly
and in good faith with a view to the best interest of the Company and to
disclose any interest which they may have in any project or opportunity of the
Company. However, each director has a similar obligation to other companies for
which such director serves as an officer or director. As of the date of this
report, no conflicts of interest have arisen, except as described below and
above. Where conflicts of interests arose, the directors of the Company
disclosed their interests and abstained from voting on the transaction.
The following table identifies the name of each director and officer of the
Company and any company, which is a reporting issuer in Canada or the United
States, and for which such director or officer currently serves as an officer or
director, other than the Company:
DIRECTOR REPORTING ISSUER CAPACITY COMMENCED SERVICE
Marc Cernovitch Cumbre Ventures Inc. Director, President,
CEO and CFO April 2006
Nick DeMare Aguila American Resources Ltd. Director January 2003
Andean American Mining Corp. Director August 2002
Astral Mining Corporation. Director February 2004
Blue Sky Uranium Corp. Director June 2006
CFO February 2007
Centrasia Mining Corp. Director October 2002
CFO September 2005
Salazar Resources Ltd. Director June 1988
Cumbre Ventures Inc. Director April 2006
GGL Diamond Corp. Director May 1989
- 82 -
DIRECTOR REPORTING ISSUER CAPACITY COMMENCED SERVICE
Golden Peaks Resources Ltd. Director January 1992
Goldmarca Limited Director September 2000
Gold Point Energy Corp. Director August 2003
CFO June 2005
Lara Exploration Ltd. Director March 2004
Lariat Energy Ltd. Director August 2002
Mawson Resources Limited Director March 2004
Mirasol Resources Limited Director February 2005
Tinka Resources Limited Director October 2003
Tumi Resources Limited Director January 2002
Andrew Carter Astral Mining Corporation Director February 2004
Gold Point Energy Corp. Director October 2003
Tinka Resources Ltd. Director, President & CEO February 2003
Ewan Downie Anaconda Gold Corp. Director May 2003
Benton Resources Corp. Director December 2003
Newstrike Resources Corp. Director July 2005
Pediment Exploration Ltd. Director March 2005
Sabina Silver Corporation Director November 2002
Wolfden Resources Ltd. Director, President & CEO October 1995
William Lee Golden Peaks Resources Ltd. Director March 2006
Jinshan Gold Mines Inc. CFO January 2006
Tinka Resources Limited Director October 2002
Tom Healy N/A N/A N/A
Lynda Bloom Augen Capital Corp. Director September 2006
Canadian Shield Resources Inc. Director December 1996
Harvey Lim Astral Mining Corporation Secretary & CFO February 2004
Blue Sky Uranium Corp. Secretary June 2006
Gold Point Energy Corp. Director & Secretary October 2003
Rochester Resources Ltd. Secretary June 1997
Tumi Resources Limited Director January 2002
Golden Peaks Resources Ltd. Secretary March 2006
CFO June 2006
There are no known existing or potential conflicts of interest among the
Company, promoters, directors, officers, principal holders of securities and
persons providing professional services to the Company which could reasonably be
expected to affect an investor's investment decision except as described in this
section.
The Company does not have any agreements with its officers or directors,
including any officers or directors with a conflict of interest, with respect to
the amount of time they must spend on the Company's business.
ITEM 8. FINANCIAL INFORMATION.
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DESCRIPTION PAGE
- ----------- -----------
Audited Consolidated Financial Statements for the Years Ended
August 31, 2006, 2005 and 2004 F-1 to F-28
DIVIDEND POLICY
The Company has not paid any dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate future. Any decision to
pay dividends on its common shares in the future will be made by the board of
directors on the Company on the basis of earnings, financial requirements and
other such conditions that may exist at that time.
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LEGAL PROCEEDINGS
The Company knows of no material, active or pending legal or arbitration
proceedings against it; nor is the Company involved as a plaintiff in any
material proceeding or pending litigation.
The Company knows of no active or pending proceedings against anyone that might
materially adversely affect an interest of the Company.
There are no legal or arbitration proceedings (including governmental
proceedings pending or known to be contemplated) which may have, or have had in
the recent past, significant effects on the Company's financial position or
profitability.
There are no proceedings in which any director, any member of senior management,
or any affiliate of the Company is a party adverse to the Company or has a
material adverse interest to the Company.
ITEM 9. THE OFFER AND LISTING.
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PRICE HISTORY
The Company trades on the TSXV under the symbol "HLO" and is classified as a
Tier 2 company.
There have been no trading suspensions imposed by the TSXV or any other
regulatory authorities in the past three years.
The following table sets forth the market price ranges and the aggregate volume
of trading of the common shares of the Company on the TSXV, and predecessor
exchanges, for the periods indicated:
TSXV STOCK TRADING ACTIVITY
SALES PRICE
---------------------
YEAR ENDED VOLUME HIGH LOW
August 31, 2006 33,230,953 $0.75 $0.35
August 31, 2005 10,825,208 $1.59 $0.60
August 31, 2004 2,866,231 $0.96 $0.05
August 31, 2003 735,039 $0.18 $0.06
August 31, 2002 934,326 $1.89 $0.12
SALES PRICE
---------------------
QUARTER ENDED VOLUME HIGH LOW
November 30, 2006 4,180,100 $0.47 $0.30
August 31, 2006 2,651,629 $0.57 $0.35
May 31, 2006 12,812,414 $0.75 $0.40
February 28, 2006 11,106,426 $0.61 $0.38
November 30, 2005 6,660,484 $0.92 $0.57
August 31, 2005 3,980,129 $0.81 $0.60
May 31, 2005 3,183,669 $1.59 $0.65
February 28, 2005 2,338,610 $1.37 $0.90
SALES PRICE
----------------------
MONTH ENDED VOLUME HIGH LOW
January 31, 2007 1,672,798 $0.58 $0.39
December 31, 2006 1,479,338 $0.44 $0.37
November 30, 2006 2,290,425 $0.47 $0.31
October 31, 2006 1,427,619 $0.38 $0.30
September 30, 2006 462,056 $0.45 $0.35
August 31, 2006 624,888 $0.47 $0.35
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TSXV WARRANT TRADING ACTIVITY
Effective November 23, 2005, the Company's Series A and Series B Warrants were
listed and posted for trading on the TSXV under the symbols "HLO.WT.A" and
"HLO.WT.B", respectively. On December 23, 2006, the Series A and B Warrants
expired without having any trades made.
On August 7, 2000, the Company's common shares were approved for quotation on
the Over-the-Counter Bulletin Board ("OTCBB") system operated by the National
Association of Securities Dealers. The Company currently trades on the OTCBB
under the symbol "HLOSF.OB". The following tables set forth the market price
ranges and the aggregate volume of trading of the common shares of the Company
on the OTCBB system for the periods indicated:
OTCBB TRADING ACTIVITY
SALES PRICE (US $)
----------------------
YEAR ENDED VOLUME HIGH LOW
August 31, 2006 1,486,299 $0.78 $0.30
August 31, 2005 1,989,688 $1.18 $0.35
August 31, 2004 109,396 $0.75 $0.05
August 31, 2003 177,000 $0.09 $0.03
August 31, 2002 309,935 $1.19 $0.06
SALES PRICE (US $)
----------------------
QUARTER ENDED VOLUME HIGH LOW
November 31, 2006 422,569 $0.52 $0.25
August 31, 2006 237,483 $0.41 $0.30
May 31, 2006 396,487 $0.70 $0.35
February 28, 2006 518,586 $0.53 $0.34
November 30, 2005 333,743 $0.78 $0.35
August 31, 2005 696,742 $0.70 $0.35
May 31, 2005 475,932 $1.18 $0.52
February 29, 2005 476,287 $1.08 $0.70
SALES PRICE (US $)
----------------------
MONTH ENDED VOLUME HIGH LOW
January 31, 2007 311,614 $0.42 $0.33
December 31, 2006 167,355 $0.38 $0.30
November 30, 2006 52,659 $0.52 $0.25
October 31, 2006 111,498 $0.33 $0.25
September 30, 2006 258,412 $0.41 $0.31
August 31, 2006 63,248 $0.41 $0.30
These above quotations reflect inter-dealer prices without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
The OTCBB is smaller and less liquid than the major securities markets in the
United States. The trading volume of the Company's shares on the OTCBB has been
volatile. Consequently, shareholders in the United States may not be able to
sell their shares at the time and at the price they desire.
Since February 2005, the Company's common stock has been listed on the Frankfurt
Stock Exchange ("FSE") and XETRA (Electronic Dealing System) under the trading
symbol "HRL".
ITEM 10. ADDITIONAL INFORMATION.
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ARTICLES OF CONTINUANCE AND ARTICLES
The Company was incorporated under the laws of British Columbia, Canada on June
16, 1983 by registration of its Memorandum and Articles with the B.C. Registrar
of Companies (the "BC Registrar") under the incorporation number 372193. On
December 14, 1993, the Company was continued to the Yukon Territory, Canada by
the registration of its
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Articles of Continuance with the Yukon Registrar of Corporations under the
access number 29383 (the "Yukon Registrar").
On March 29, 2004, the British Columbia legislature enacted the BCBCA and
repealed the BC COMPANY ACT. The BCBCA removes many of the restrictions
contained in the BC COMPANY ACt, including restrictions on the residency of
directors, the location of annual general meetings and limits on authorized
share capital, as well, the BCBCA uses new forms and terminology and has
replaced the Memorandum with a Notice of Articles.
On November 16, 2004, the Company was continued to British Columbia, Canada by
the registration of a Certificate of Continuance with the BC Registrar under
incorporation number C0708624.
The Company's Articles of Continuance place no restriction upon the Company's
objects and purposes.
The Company is of the view that the BCBCA provides to shareholders of the
Company substantively the same rights as were available to shareholders under
the YBCA, including rights of dissent and appraisal and rights to bring
derivative and oppression actions. The following is a comparison of some of the
principal provisions of the YBCA and the BCBCA that the Company believes may be
relevant to shareholders. This summary is not intended to be exhaustive and
shareholders should consult their legal advisors with respect to the detailed
provisions of the BCBCA and their rights under it. Reference should be made to
the full text of both statutes for particulars of the differences.
Note: Within this summary, the term "Articles" when referring to the BCBCA is
the equivalent to the "by-laws" under the YBCA. The term "Notice of Articles"
when referring to the BCBCA is the equivalent of the "articles" under the YBCA.
SALE OF COMPANY'S UNDERTAKING. Under the BCBCA, a sale of all or substantially
all the property of a corporation, other than in the ordinary course of
business, of the corporation requires approval by special resolution. The
Company's Articles confirm a special resolution, being a resolution passed by a
majority of not less than two-thirds of the votes cast by shareholders who voted
in respect of the resolution (the "Special Resolution"), must be approved in
respect of the proposed sale. The provisions of the YBCA are substantially the
same.
ALTERATION TO NOTICE OF ARTICLES OF THE COMPANY. Under the BCBCA, any
substantive change to the Notice of Articles of a corporation, such as a change
in the name of the corporation and certain changes to the share capital of a
corporation, require approval of a Special Resolution in respect of the change.
The provisions of the YBCA are substantially the same.
ARTICLE AMENDMENTS. The BCBCA provides that unless the Articles or a unanimous
shareholder agreement otherwise provide, the directors may, by resolution, make,
amend, or repeal any Articles that regulate the business or affairs of a
corporation. However, the directors must submit an Article, or an amendment or a
repeal of an Article, to the shareholders of the corporation, and the
shareholders may, with approval by way of Special Resolution, confirm, reject or
amend the article, amendment or repeal. The provisions of the YBCA are
substantially the same in connection with amendments to the by-laws.
AUTHORIZATION OF UNLIMITED NUMBER OF SHARES. The BCBCA permits a corporation to
have an unlimited number of shares without par value. The provisions of the YBCA
are substantially the same.
RIGHTS OF DISSENT AND APPRAISAL. The BCBCA provides that shareholders who
dissent to certain actions being taken by a corporation may exercise a right of
dissent and require the corporation to purchase the shares held by such
shareholder at the fair value of such shares. The dissent right is applicable
where the corporation proposes to (a) amend its articles to alter the
restrictions on the powers of the corporation or on the business that the
corporation may carry on, (b) adopt an amalgamation agreement, (c) in respect of
a resolution to approve an amalgamation under the BCBCA (d) in respect of a
resolution approving an arrangement, the terms of which arrangement permits
dissent, (e) continue out of the jurisdiction, (f) in respect of a resolution to
authorize and ratify the lease or other disposition of all or substantially all
its undertaking, (g) in respect of any other resolution, if dissent is
authorized by the resolution, or (h) in respect of any court order that permits
dissent. The dissenting shareholder is required to strictly comply with the
provisions of the BCBCA in order to exercise this remedy. The YBCA provides
similar rights to shareholders.
OPPRESSION REMEDIES. Under the BCBCA, a shareholder of a corporation has the
right to apply to a court for an order where the business or affairs are being
or have been conducted, or the exercise of the directors' of the corporation's
or any of its affiliates' powers, in a manner oppressive or unfairly prejudicial
to or would unfairly disregard the interests of
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any shareholder of the corporation. On such an application, the court may make
any interim or final order it considers appropriate, including regulating the
conduct of the corporation's affairs. Under the YBCA, the oppression remedy is
substantially the same as that contained in the BCBCA.
SHAREHOLDER DERIVATIVE ACTIONS. Pursuant to the BCBCA, a complainant, which
includes a shareholder, may apply to the court for leave to bring an action in
the name of and on behalf of a corporation or any subsidiary, or to intervene in
an existing action to which the corporation is a party for the purpose of
prosecuting, defending or discontinuing the action on behalf of the corporation.
On such an application, the court may make any order it thinks fit, including an
order authorizing the complainant or any other person to control the conduct of
the action. Pursuant to the YBCA, derivative actions are dealt with in
substantially the same manner as the BCBCA.
FINANCIAL ASSISTANCE. The BCBCA does not restrict a corporation from giving
financial assistance to shareholders or directors of the corporation or an
affiliated corporation. The provisions of the YBCA are substantially the same
except that in certain cases a solvency test is met.
RECORD DATE FOR VOTING. The BCBCA provides the Company with the ability to fix a
record date for voting purposes. Transfers of shares after the record date are
not recognized for voting entitlement purposes. The YBCA also provides for the
setting of a fixed record date for voting purposes but a transferee of shares
requesting to have its name included in the relevant shareholder list at least
ten days (or such shorter time as is provided in the by-laws) prior to the
meeting is entitled to vote, provided that the transferee can establish that the
transferee owns the shares.
REQUISITION OF MEETINGS. The BCBCA provides that holders of not less than five
per cent of the issued shares of a corporation that carry the right to vote at a
meeting sought to be held may requisition the directors to call a meeting of
shareholders for the purposes stated in the requisition. The provisions of the
YBCA are substantially the same.
FORM OF PROXY AND INFORMATION CIRCULAR. The BCBCA requires that management of a
distributing corporation (public company), concurrently with giving notice of a
meeting of shareholders, send a form of proxy in prescribed form to each
shareholder who is entitled to receive notice of the meeting. Where management
of a corporation solicits proxies, an information circular in prescribed form
must also accompany the notice of the meeting. The YBCA contains similar
provisions.
PLACE OF MEETINGS. The BCBCA provides that meetings of shareholders of a
corporation must be held at the place within the Province of British Columbia
provided in the articles. A meeting of shareholders of a corporation may however
be held at a place outside of British Columbia if the location is approved by
the resolution required by the Articles for the purpose, or if no resolution is
required for that purpose by the Articles, approved by ordinary resolution.
Under the YBCA, meetings of shareholders of a corporation must be held at a
location in the Yukon Territory or, if the articles so provide at one or more
places specified in the articles, or in the absence of such determination, at
the place where the registered office of the corporation is located.
QUORUM OF SHAREHOLDERS. The BCBCA states that the quorum of shareholders of the
corporation at a meeting of shareholders is established in the articles of the
corporation. If no quorum is established by the articles, the quorum is two
shareholders entitled to vote at the meeting whether present in person or by
proxy. Under the YBCA, unless the articles of a corporation otherwise provide, a
quorum of shareholders is present at a meeting of shareholders (irrespective of
the number of persons actually present at the meeting) if holders of a majority
of the shares entitled to vote at the meeting are present in person or
represented by proxy.
SHAREHOLDER PROPOSALS. The BCBCA contains eligibility requirements for
shareholders that wish to submit proposals for inclusion in a corporation's
proxy materials. The YBCA imposes similar requirements.
DUTIES OF DIRECTORS. The BCBCA provides that subject to any unanimous
shareholder agreement, the directors manage, or supervise the management of, the
business and affairs of the Company. The YBCA contains substantially the same
provisions.
REMOVAL OF DIRECTORS. The BCBCA permits the removal of directors by special
resolution. Unless otherwise provided in the articles of a corporation, a quorum
of directors may fill a vacancy among the directors, except for a vacancy
resulting from an increase in the number or the minimum or maximum number of
directors or the failure to elect the number or minimum number of directors
provided for in the articles. The YBCA contains substantially the same
provisions.
- 87 -
The following is a summary of all material provisions of the Company's
Continuation Application and Articles and certain provisions of the BCBCA,
applicable to the Company:
A. DIRECTOR'S POWER TO VOTE ON A PROPOSAL, ARRANGEMENT OR
CONTRACT IN WHICH THE DIRECTOR IS MATERIALLY INTERESTED.
Under the BCBCA, subject to certain exceptions, a director or
senior officer of the Company must disclose any material
interest that he personally has, or that he as a director or
senior officer of another corporation has in a contract or
transaction that is material to the Company and which the
Company has entered into or proposes to enter into.
A director or senior officer of the Company does not hold a
disclosable interest in a contract or transaction if:
1. the situation that would otherwise constitute a
disclosable interest arose before the coming into
force of the BCBCA, and the interest was disclosed
and approved under, or was not required to be
disclosed under legislation that applied to the
Company before the coming into effect of the BCBCA;
2. both the Company and the other party to the contract
or transaction are wholly owned subsidiaries of the
same corporation;
3. the Company is a wholly owned subsidiary of the other
party to the contract or transaction;
4. the other party to the contract or transaction is a
wholly owned subsidiary of the Company; or
5. the director or senior officer is the sole
shareholder of the Company or of a corporation of
which the Company is a wholly owned subsidiary.
A director or senior officer of the Company does not hold a
disclosable interest in a contract or transaction merely
because:
1. the contract or transaction is an arrangement by way
of a security granted by the Company for money loaned
to, or obligations undertaken by, the director or
senior officer, or a person in whom the director or
senior officer has a material interest, for the
benefit of the Company or an affiliate of the
Company;
2. the contract or transaction relates to an indemnity
or insurance under the BCBCA;
3. the contract or transaction relates to the
remuneration of the director or senior officer, in
that person's capacity as director, officer, employee
or agent of the Company or of an affiliate of the
Company;
4. the contract or transaction relates to a loan to the
Company, and the director or senior officer, or a
person in whom the director or senior officer has a
material interest, is or is to be a guarantor of some
or all of the loan; or
5. the contract or transaction has been or will be made
with or for the benefit of a corporation that is
affiliated with the Company and the director or
senior officer is also a director or senior officer
of that corporation or an affiliate of that
corporation.
A director or senior officer who holds such a material
interest must disclose the nature and extent of such interest
in writing. The disclosure must be evidenced in writing in a
consent resolution, the minutes of a meeting or any other
record deposited with the Company's record office. A director
who has a disclosable interest in a contract or transaction is
not entitled to vote on any directors' resolution to approve
that contract or transaction, but may be counted in the quorum
at the directors' meeting at which such vote is taken.
B. DIRECTORS' POWER, IN THE ABSENCE OF AN INDEPENDENT QUORUM, TO
VOTE COMPENSATION TO THEMSELVES OR ANY MEMBERS OF THEIR BODY.
The compensation of the directors is decided by the directors
unless the Board of Directors specifically requests approval
of the compensation from the shareholders. If the issuance of
compensation to the directors is decided by the directors, a
quorum is the majority of the directors in office.
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C. BORROWING POWERS EXERCISABLE BY THE DIRECTORS AND HOW SUCH
BORROWING POWERS MAY BE VARIED.
The Company, if authorized by the directors, may:
1. borrow money in the manner and amount, on the
security, from the sources and on the terms and
conditions that they consider appropriate;
2. issue bonds, debentures and other debt obligations
either outright or as security for any liability or
obligation of the Company or any other person and at
such discounts or premiums and on such other terms as
they consider appropriate;
3. guarantee the repayment of money by any other person
or the performance of any obligation of any other
person; and
4. mortgage, charge, whether by way of specific or
floating charge, grant a security interest in, or
give other security on, the whole or any part of the
present and future assets and undertaking of the
Company.
The borrowing powers may be varied by amendment to the
Articles of the Company which requires approval of the
shareholders of the Company by Special Resolution.
D. RETIREMENT AND NON-RETIREMENT OF DIRECTORS UNDER AN AGE LIMIT
REQUIREMENT.
There are no such provisions applicable to the Company under
the Certificate of Continuance , Notice of Articles, Articles
or the BCBCA.
E. NUMBER OF SHARES REQUIRED FOR A DIRECTOR'S QUALIFICATION.
A director of the Company is not required to hold a share in
the capital of the Company as qualification for his office.
DESCRIPTION OF AUTHORIZED SHARES
The authorized capital of the Company consists of an unlimited number of common
shares without par value and an unlimited number of preferred shares without par
value. A complete description is contained in the Company's Continuation
Application.
COMMON SHARES
Of the Company's unlimited common share capital, a total of 34,777,049 common
shares were issued and outstanding as of January 31, 2007.
All of the common shares are fully paid and not subject to any future call or
assessment. All of the common shares of the Company rank equally as to voting
rights, participation in a distribution of the assets of the Company on a
liquidation, dissolution or winding-up of the Company and the entitlement to
dividends. The holders of the common shares are entitled to receive notice of
all shareholder meetings and to attend and vote at such meetings. Shareholders
are not entitled to cumulative voting. Each common share carries with it the
right to one vote. The common shares do not have preemptive or conversion
rights. In addition, there are no sinking fund or redemption provisions
applicable to the common shares or any provisions discriminating against any
existing or prospective holders of such securities as a result of a shareholder
owning a substantial number of common shares. The Company's board of directors
does not stand for re-election at staggered intervals.
PREFERRED SHARES
Of the Company's unlimited preferred share capital, a total of $8,000,000
preferred shares (the "Series 1 Preferred Shares") were issued and outstanding
as of January 31, 2007. The Series 1 Preferred Shares are entitled to a
liquidation preference over the holders of any other shares together with an
amount equal to all accrued and unpaid dividends thereon which for such purpose
shall be calculated as if such dividends were accruing up to the date of such
distribution.
The preference shares of each series rank on a priority with the preference
shares of every other series and are entitled to preference over the common
shares and any other shares ranking subordinate to the preference shares with
respect to
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priority and payment of dividends and distribution of assets in the event of
liquidation, dissolution or winding-up of the Company.
The holders of the Series 1 Preferred Shares are entitled to receive and the
Company shall pay thereon out of the monies of the Company properly applicable
to the payment of dividends fixed cumulative cash dividends, at the following
rates:
(i) for each of the two years commencing on November 1, 2004, an annual
dividend of $0.00625 per share payable in quarterly installments of
$0.0015625 per share on February 1, May 1, August 1, and November 1 of
each year, commencing on February 1, 2005 and ending on November 1,
2006; and
(ii) for each of the three years commencing on November 1, 2006, an annual
dividend of $0.04 per share payable in quarterly installments of $0.01
per share on February 1, May 1, August 1, and November 1, of each year,
commencing on February 1, 2007 and ending on November 1, 2009.
The Company may, in its sole discretion, upon written notice given to the
holders of the Series 1 Preferred Shares at least 40 days before a dividend is
due, elect to pay such dividend in common shares of the Company. If the Company
so elects, the number of common shares issuable will be determined by dividing
the amount of the dividend due by the weighted average trading price of the
common shares of the Company on the TSXV for the 15 trading days immediately
prior to the date the dividend is due.
The Company may at any time prior to November 1, 2009, redeem the Series 1
Preferred Shares in whole or in part without the consent of the holders thereof
on payment to the holders thereof of the amount of $1.05 per share plus an
amount equal to all accrued and unpaid dividends thereon which for such purpose
shall be calculated as if such dividends were accruing up to the date of
redemption (collectively the "Redemption Amount"). The Company, in its sole
discretion may elect to pay the Redemption Amount in cash or common shares of
the Company. If the Company elects to pay the Redemption Amount in common
shares, the number of common shares issuable will be determined by dividing the
Redemption Amount by the weighted average trading price of the common shares of
the Company on the TSXV for the 15 trading days immediately prior to the date
specified for redemption upon notice thereof. Provided all dividends payable on
the Series 1 Preferred Shares have been paid up to date, the Company may at any
time prior to November 1, 2009, redeem the Series 1 Preferred Shares without the
consent of the holders thereof by transferring to the holders thereof, in
proportion to the percentage of issued and outstanding Series 1 Preferred
Shares, held by each holder, the Company's title to the Duport Property.
If the Series 1 Preferred Shares have not been redeemed by November 1, 2009, the
Company will, effective November 1, 2009, retract the Series 1 Preferred Shares
by payment to the holders thereof of the retraction amount (the "Retraction
Amount") in respect of each Preferred Share, Series 1, which shall be $1.00 per
share plus an amount equal to all accrued and unpaid dividends thereon which for
such purposes shall be calculated as if such dividends were accruing up to the
date of retraction. The Company, in its sole discretion may elect to pay the
Retraction Amount in cash or common shares of the Company. If the Company elects
to the pay the Retraction Amount in common shares, the number of common shares
issuable will be determined by dividing the Retraction Amount by the weighted
average trading price of the common shares of the Company on the TSXV for the 15
trading days immediately prior to the date specified for retraction.
In the event of the liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, or other distribution of its property or
assets among its shareholders for the purpose of winding up its affairs, the
holders of the Series 1 Preferred Shares are entitled to receive, before any
distribution of any part of the property or assets of the Company among the
holders of any other shares, an amount equal to $1.00 per share together with an
amount equal to all accrued and unpaid dividends thereon which for such purpose
shall be calculated as if such dividends were accruing up to the date of such
distribution. Thereafter, the holders of the Series 1 Preferred Shares will not
participate further in the capital of the Company.
The holders of the Series 1 Preferred shares are not entitled to receive notice
of or to attend and vote at any meetings of the shareholders of the Company
unless a dividend payable thereon remains unpaid for a period of 60 days past
the date the dividend was due, in which case the holders of Series 1 Preferred
Shares shall have one vote per share at all meetings of shareholders until such
dividend is paid.
No Series 1 Preferred Shares shall be transferred unless the transferee agrees
in writing to be bound by the provisions of the escrow agreement dated March 24,
2005 among the Company, the Sheridan Platinum Group Ltd. and McLean & Kerr LLP,
as amended from time to time, as if the transferee were the "Vendor" under such
agreement.
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The Series 1 Preferred Shares do not carry any pre-emptive, subscription, or
conversion rights, nor do they contain any sinking or purchase fund provisions.
DIVIDEND RECORD
The Company has not paid any dividends on its common shares and has no policy
with respect to the payment of dividends.
OWNERSHIP OF SECURITIES AND CHANGE OF CONTROL
Except for the Investment Canada Act, discussed below, there are no limitations
on the rights to own securities, including the rights of non-resident or foreign
shareholders to hold or exercise voting rights on the securities imposed by
foreign law or by the constituent documents of the Company.
Any person who beneficially owns or controls, directly or indirectly, more than
10% of the Company's voting shares is considered an insider, and must file an
insider report with the British Columbia, Alberta and Ontario Securities
Commissions within ten days of becoming an insider disclosing any direct or
indirect beneficial ownership of, or control over direction over securities of
the Company. In addition, if the Company itself holds any of its own securities,
the Company must disclose such ownership.
There are no provisions in the Company's Continuation Application, Notice of
Articles and Articles that would have an effect of delaying, deferring or
preventing a change in control of the Company operating only with respect to a
merger, acquisition or corporate restructuring involving the Company or its
subsidiaries.
CHANGES TO RIGHTS AND RESTRICTIONS OF SHARES
Under the BCBCA and the Company's Articles, if the Company wishes to change the
rights and restrictions of the common shares or the preferred shares the Company
must obtain the approval of the shareholders by Special Resolution.
SHAREHOLDER MEETINGS
ANNUAL AND EXTRAORDINARY GENERAL MEETINGS
Under the BCBCA and the Company's Articles, the Company's annual general meeting
is to be held once in each calendar year and not more than 15 months after the
previous meeting. No advance notice will be required to be published at a
meeting where directors are to be elected. The Company, under the BCBCA, must
give shareholders not less than 21 days' notice of any general meeting of the
shareholders.
The Directors may fix in advance a date, which is no fewer than 35 days or no
more than 60 days prior to the date of the meeting, as the record date for the
meeting. All the holders of common shares as at the record date are entitled to
attend and vote at a general meeting.
On a show of hands, every person who is present, a shareholder or proxy holder
and entitled to vote shall have one vote. Whenever a vote by show of hands shall
have been taken upon a question, unless a ballot thereon is so required or
demanded, a declaration by the Chairman of the meeting that the vote upon the
resolution has been carried or carried by the necessary majority or is defeated
must be entered in the minutes of the meeting and shall be conclusive evidence
of the fact without proof of the number or proportion of the votes recorded in
favor of or against the resolution and the result of the vote so taken shall be
the decision of the members upon the said question.
DIFFERENCES FROM REQUIREMENTS IN THE UNITED STATES
Except for the Company's quorum requirements, certain requirements related to
related party transactions, the requirement for notice of shareholder meetings,
the approval of amendments to the Company's articles and disclosures by certain
shareholders of their ownership, which are discussed above, there are no
significant differences in the law applicable to the Company, in the areas
outlined above, in British Columbia versus the United States. In most states in
the United States, a quorum must consist of a majority of the shares entitled to
vote. Some states allow for a reduction of the quorum requirements to less than
a majority of the shares entitled to vote. Having a lower quorum threshold may
allow a minority of the shareholders to make decisions about the Company, its
management and activities. In addition,
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most states in the United States require that a notice of meeting be mailed to
shareholders prior to the meeting date. Additionally, in the United States, a
director may not be able to vote on the approval of any transaction in which the
director has a interest. Generally, most states in the United States require
amendments to a company's articles of incorporation to be approved by at least a
majority of the votes cast by the holders of the issued and outstanding shares.
Some states, or some older corporations, may require approval of amendments by
2/3 of the votes cast by the holders of the issued and outstanding shares. In
addition, in the United States voting by separate voting groups may be required
on the approval of any such amendments. The Company's common shares are
registered with the Securities and Exchange Commission under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result, under Section 13 of the Act, shareholders beneficially owning more than
five percent (5%) of the Company's common shares may be required to make filings
with the Securities and Exchange Commission relating to their ownership of the
Company's common shares.
MATERIAL CONTRACTS
The following are material contracts entered into by the Company during the two
years preceding the date of this annual report:
1. Letter of Intent by and between Halo Resources Ltd. and Endowment Lakes
(2002) Limited Partnership, dated February 9, 2005, as amended dated
February 9, 2006. See "Item 4. Information on the Company - Principal
Properties - Quarter Moon Lake Gold Property".
2. Purchase Agreement by and among Halo Resources Ltd., Sheridan Platinum
Group, dated February 18, 2005. See "Item 4. Information on the Company
- Principal Properties - Duport Property".
3. Assignment and Assumption Agreement by and between the Company and
Wolfden, executed April 15, 2005, whereby the Company acquired
Wolfden's option to earn a 50% interest in the Bachelor Lake Property
by paying $650,000 cash and issuing 2,100,000 common shares, at a fair
value of $1,575,000. The Company also reimbursed Wolfden $1,293,123 for
a portion of exploration costs incurred by Wolfden from the date of
signing the head of agreement See "Item 4. Information on the Company -
Principal Properties - Bachelor Lake Property".
4. Joint Venture Agreement by and between the Company and Metanor dated
September 28, 2005, whereby the parties have agreed to jointly explore,
develop and operate the Bachelor Lake Property as a 50:50 joint venture
(the "Bachelor Lake JV"). See "Item 4. Information on the Company -
Principal Properties - Bachelor Lake Property".
5. Purchase Agreement by and between the Company and Metanor executed May
2, 2006, as amended August 28, 2006, (the "Metanor Purchase Agreement")
whereby Metanor agreed to purchase the Company's 50% interest in the
Bachelor Lake JV in consideration of $3.5 million cash, $750,000 in
common shares of Metanor and a 1% NSR in favour of the Company.
6. The Metanor Purchase Agreement was superceded by a new Purchase
Agreement between Metanor and the Company executed November 17, 2006
(the "Revised Metanor Purchase") under which Metanor has now agreed to
purchase the Company's 50% interest in the Bachelor Lake JV for total
consideration of $4 million. See "Item 4. Information on the Company -
Principal Properties - Bachelor Lake Property".
7. Heads of Agreement by and between the Company and W. Bruce Dunlop
Limited NPL, dated February 9, 2006, whereby the Company was granted
the option to earn a 100% undivided interest in three unproven mineral
claims, covering 536 hectares, for $90,000 cash, issuance of 250,000
common shares of the Company and expending a total of $170,000 in work
expenditures over a four year period. See "Item 4. Information on the
Company - Principal Properties - Sherridon Property".
8. Option Agreements, between the Company and Hudson Bay Exploration and
Development Company Limited ("HBED"), dated March 19, 2006, (the "HBED
Options") whereby the Company was granted options to acquire 100%
interests in 24 unproven mineral claims and one mining lease covering
approximately 3,226 hectares. In order to earn 100% interests in all of
the mineral claims and the mining lease the Company will be required to
make option payments totalling $650,000 and incur expenditures
totalling $4,300,000. Should the Company acquire a 100% interest in any
of the claim groups under the HBED Options, HBED has the option to
back-in for a 51% interest in the subject claims group by paying 135%
of the expenditures incurred by the Company.
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HBED will also hold a 2% NSR. See "Item 4. Information on the Company -
Principal Properties - Sherridon Property".
9. Letter of Intent by and between the Company and Goldcorp. Inc.
("Goldcorp") dated April 18, 2006. See "Item 4. Information on the
Company - Principal Properties - West Red Lake Property".
10. Option Agreement by and between the Company and Goldcorp dated June 20,
2006, (the "Red Lake Option") whereby the Company was granted the
option to earn a 60% interest in 67 mining claims, a 45% interest in
two mining claims, and a 30% interest in ten mining claims
(collectively the "Red Lake Property") located in Ball Township, Red
Lake, Ontario. Under the terms of the Red Lake Option, the Company is
required to perform minimum exploration programs totalling $3 million
on or before December 31, 2008. Upon spending the $3.0 million, the
Company is entitled to elect to exercise the option of its interests.
Upon notification of the Company's election, Goldcorp has 90 days to
back-in and reacquire a 25% interest in the 67 mining claims, a 18.75%
interest in two mining claims and a 12.5% interest in the ten mining
claims by paying $6 million to the Company. If Goldcorp does not
exercise its back-in right, the Company will then be required to issue
one million common shares of its share capital to Goldcorp. See "Item
4. Information on the Company - Principal Properties - West Red Lake
Property".
11. Purchase Agreement by and between the Company and Endowment Lakes dated
December 3, 2006 (the "Quarter Moon Purchase Agreement"), whereby the
Company purchased a 100% interest in ten mining claims, including the
original five mining claims under the Quarter Moon LOI, in
north-central Manitoba, for $90,000 cash and the issuance of 160,000
common shares of the Company. Endowment Lakes holds a 1% NSR, of which
a 0.5% NSR can be purchased at any time for $500,000. See "Item 4.
Information on the Company - Principal Properties - Quarter Moon Lake
Gold Property".
12. Employment agreement by and between the Company and Lynda Bloom dated
February 28, 2007 whereby, effective March 1, 2006, Ms. Bloom was
employed as the President and CEO of the Company. See "Item 6.
Directors, Senior Management and Employees - Employment/ Management
Agreements".
EXCHANGE CONTROLS
There are no governmental laws, decrees, or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance of
interest, dividends, or other payments to non-resident holders of the Company's
common stock. Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (10% if the shareholder is a
corporation owning at least 10% of the outstanding common stock of the Company)
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. See "Item 10. Additional Information - Taxation".
Except as provided in the Investment Canada Act, there are no limitations
specific to the rights of non-Canadians to hold or vote the common stock of the
Company under the laws of Canada or the Province of British Columbia or in the
charter documents of the Company.
The following discussion summarizes the principal features of the Investment
Canada Act for a non-resident who proposes to acquire the common shares.
The Investment Canada Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture (each an "entity") that is not a "Canadian"
as defined in the Investment Canada Act (a "non-Canadian"), unless after review,
the Director of Investments appointed by the minister responsible for the
Investment Canada Act is satisfied that the investment is likely to be of net
benefit to Canada. An investment in the common shares by a non-Canadian other
than a "WTO Investor" (as that term is defined by the Investment Canada Act, and
which term includes entities which are nationals of or are controlled by
nationals of member states of the World Trade Organization) when the Company was
not controlled by a WTO Investor, would be reviewable under the Investment
Canada Act if it was an investment to acquire control of the Company and the
value of the assets of the Company, as determined in accordance with the
regulations promulgated under the Investment Canada Act, equals or exceeds $5
million for direct acquisition and over $50 million for an indirect acquisition,
or if an order for review was made by the federal cabinet on the grounds that
the investment related to Canada's cultural heritage or national identity,
regardless of the value of the assets of the Company. An investment in the
common shares by a WTO Investor, or by a non-Canadian when the Company was
controlled by a WTO Investor, would be reviewable under the Investment Canada
Act if it was an investment to acquire control of the Company and the value of
the assets of the Company, as determined
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in accordance with the regulations promulgated under the Investment Canada Act
was not less than a specified amount. A non-Canadian would acquire control of
the Company for the purposes of the Investment Canada Act if the non-Canadian
acquired a majority of the common shares. The acquisition of one third or more,
but less than a majority of the common shares would be presumed to be an
acquisition of control of the Company unless it could be established that, on
the acquisition, the Company was not controlled in fact by the acquirer through
the ownership of the common shares.
Certain transactions relating to the common shares would be exempt from the
Investment Canada Act, including: (a) an acquisition of the common shares by a
person in the ordinary course of that person's business as a trader or dealer in
securities; (b) an acquisition of control of the Company in connection with the
realization of security granted for a loan or other financial assistance and not
for a purpose related to the provisions of the Investment Canada Act; and (c) an
acquisition of control of the Company by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate direct or
indirect control in fact of the Company, through the ownership of the common
shares, remained unchanged.
TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Management of the Company considers that the following discussion fairly
describes the material Canadian federal income tax consequences applicable to a
holder of common stock of the Company who is a resident of the United States and
who is not a resident of Canada and who does not use or hold, and is not deemed
to use or hold, his shares of common stock of the Company in connection with
carrying on a business in Canada (a "non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act (Canada)
(the "ITA"), the regulations thereunder (the "Regulations"), the current
publicly announced administrative and assessing policies of Revenue Canada,
Taxation and all specific proposals (the "Tax Proposals") to amend the ITA and
Regulations announced by the Minister of Finance (Canada) prior to the date
hereof. This description is not exhaustive of all possible Canadian federal
income tax consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action.
DIVIDENDS
Dividends paid on the common stock of the Company to a non-resident will be
subject to withholding tax. The Canada-US Income Tax Convention (1980) (the
"Treaty") provides that the normal 25% withholding tax rate is reduced to 15% on
dividends paid on shares of a corporation resident in Canada (such as the
Company) to residents of the United States, and also provides for a further
reduction of this rate to 5% where the beneficial owner of the dividends is a
corporation which is a resident of the United States which owns at least 10% of
the voting shares of the corporation paying the dividend.
CAPITAL GAINS
In general, a non-resident of Canada is not subject to tax under the ITA with
respect to a capital gain realized upon the disposition of a share of a
corporation resident in Canada that is listed on a prescribed stock exchange.
For purposes of the ITA, the Company is listed on a prescribed stock exchange.
Non-residents of Canada who dispose of shares of the Company will be subject to
income tax in Canada with respect to capital gains if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's length;
or
(c) the non-resident holder and persons with whom the non-resident holder
did not deal with at arm's length,
owned not less than 25% of the issued shares of any class or series of the
Company at any time during the five-year period preceding the disposition. In
the case of a non-resident holder to whom shares of the Company represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will be payable on a capital gain realized on such shares by reason of the
Treaty unless the value of such shares is derived principally from real property
situated in Canada. However, in such a case, certain transitional relief under
the Treaty may be available.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal income
tax consequences, under current law, applicable to a US Holder (as defined
below) of the Company's common stock. This discussion does not address
consequences peculiar to persons subject to special provisions of federal income
tax law, such as tax-exempt organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, nonresident alien individuals or foreign
corporations, and shareholders owning common stock representing 10% of the vote
and value of the Company. In addition, this discussion does not cover any state,
local or foreign tax consequences.
The following discussion is based upon the sections of the Internal Revenue Code
of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
In addition, this discussion does not consider the potential effects, both
adverse and beneficial of recently proposed legislation which, if enacted, could
be applied, possibly on a retroactive basis, at any time. Holders and
prospective holders of the Company's common stock should consult their own tax
advisors about the federal, state, local and foreign tax consequences of
purchasing, owning and disposing of shares of common stock of the Company.
US HOLDERS
As used herein, a "US Holder" is defined as (i) citizens or residents of the US,
or any state thereof, (ii) a corporation or other entity created or organized
under the laws of the US, or any political subdivision thereof, (iii) an estate
the income of which is subject to US federal income tax regardless of source or
that is otherwise subject to US federal income tax on a net income basis in
respect of the common stock, or (iv) a trust whose administration is subject to
the primary supervision of a US court and which has one or more US fiduciaries
who have the authority to control all substantial decisions of the trust, whose
ownership of common stock is not effectively connected with the conduct of a
trade or business in the United States and shareholders who acquired their stock
through the exercise of employee stock options or otherwise as compensation.
DISTRIBUTIONS ON SHARES OF COMMON STOCK
US Holders receiving dividend distributions (including constructive dividends)
with respect to the Company's common stock are required to include in gross
income for United States federal income tax purposes the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the US Holder's United States federal income tax liability
or, alternatively, may be deducted in computing the US Holder's United States
federal taxable income by those who itemize deductions. (See more detailed
discussion at "Foreign Tax Credit" below.) To the extent that distributions
exceed current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital up to the US Holder's adjusted basis in the
common stock and thereafter as gain from the sale or exchange of such shares.
Preferential tax rates for long-term capital gains are applicable to a US Holder
which is an individual, estate or trust. There are currently no preferential tax
rates for long-term capital gains for a US Holder which is a corporation.
Dividends paid on the Company's common stock will not generally be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations.
FOREIGN TAX CREDIT
A US Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of the Company's common stock may be entitled, at
the option of the US Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid by (or withheld from) the US Holder during that year. Subject
to certain limitations, Canadian taxes withheld will be eligible for credit
against the US Holder's United States federal income taxes. Under the Code, the
limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. Dividends paid by the Company generally
will be either "passive" income or "financial services" income, depending on the
particular US Holder's circumstances. Foreign tax credits allowable with respect
to each class of income cannot exceed the US federal income tax otherwise
payable with respect to such class of income. The consequences of the separate
- 95 -
limitations will depend on the nature and sources of each US Holder's income and
the deductions appropriately allocated or apportioned thereto. The availability
of the foreign tax credit and the application of the limitations on the credit
are fact specific and holders and prospective holders of common stock should
consult their own tax advisors regarding their individual circumstances.
DISPOSITION OF SHARES OF COMMON STOCK
A US Holder will recognize gain or loss upon the sale of shares of common stock
equal to the difference, if any, between (i) the amount of cash plus the fair
market value of any property received; and (ii) the shareholder's tax basis in
the common stock. This gain or loss will be capital gain or loss if the shares
are a capital asset in the hands of the US Holder, and such gain or loss will be
long-term capital gain or loss if the US Holder has held the common stock for
more than one year. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For US Holders who are individuals, any unused portion of such net
capital loss may be carried over to be used in later tax years until such net
capital loss is thereby exhausted. For US Holders which are corporations (other
than corporations subject to Subchapter S of the Code), an unused net capital
loss may be carried back three years from the loss year and carried forward five
years from the loss year to be offset against capital gains until such net
capital loss is thereby exhausted.
OTHER CONSIDERATIONS
The Company has not determined whether it meets the definition of a "passive
foreign investment company" (a "PFIC"). It is unlikely that the Company meets
the definition of a "foreign personal holding company" (a "FPHC") or a
"controlled foreign corporation" (a "CFC") under current US law.
If more than 50% of the voting power or value of the Company were owned
(actually or constructively) by US Holders who each owned (actually or
constructively) 10% or more of the voting power of the Company's common shares
("10% Shareholders"), then the Company would become a CFC and each 10%
Shareholder would be required to include in its taxable income as a constructive
dividend an amount equal to its share of certain undistributed income of the
Company. If (1) more than 50% of the voting power or value of the Company's
common shares were owned (actually or constructively) by five or fewer
individuals who are citizens or residents of the United States and (2) 60% or
more of the Company's income consisted of certain interest, dividend or other
enumerated types of income, then the Company would be a FPHC. If the Company
were a FPHC, then each US Holder (regardless of the amount of the Company's
common shares owned by such US Holder) would be required to include in its
taxable income as a constructive dividend its share of the Company's
undistributed income of specific types.
If 75% or more of the Company's annual gross income has ever consisted of, or
ever consists of, "passive" income or if 50% or more of the average value of the
Company's assets in any year has ever consisted of, or ever consists of, assets
that produce, or are held for the production of, such "passive" income, then the
Company would be or would become a PFIC. The Company has not provided assurances
that it has not been and does not expect to become a PFIC. Please note that the
application of the PFIC provisions of the Code to resource companies is somewhat
unclear.
If the Company or any of its subsidiaries (if any) is deemed to be a PFIC, a
United States holder of the Company's common shares would be required to pay an
interest charge together with tax calculated at maximum tax rates on certain
"excess distributions" (defined to include certain dividends from a PFIC and any
gain on the sale of stock of a PFIC) unless such holder made an election either
to (1) include in his or her taxable income his or her pro rata share of the
PFIC's ordinary earnings and net capital gains under the Qualified Electing Fund
rules or (2) mark to market his or her Company common shares at the end of each
taxable year as set forth in Section 1296 of the Internal Revenue Code of 1986,
as amended. The elections require certain conditions be met such as filing on or
before the due date, as extended, for filing the shareholder's income tax return
for the first taxable year to which the election will apply.
INFORMATION REPORTING AND BACKUP WITHHOLDING
US information reporting requirements may apply with respect to the payment of
dividends to US Holders of the Company's shares. Under Treasury regulations
currently in effect, non-corporate holders may be subject to backup withholding
at a 31% rate with respect to dividends when such holder (1) fails to furnish or
certify a correct taxpayer identification number to the payor in the required
manner, (2) is notified by the IRS that it has failed to report payments of
interest or dividends properly or (3) fails, under certain circumstances, to
certify that it has been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend payments.
- 96 -
INSPECTION OF DOCUMENTS
Copies of the documents referred to in this report may be inspected at the
Company's registered office at Suite 1305 - 1090 West Georgia Street, Vancouver,
British Columbia V6E 3V7, during normal business hours.
The Company's documents publicly filed with the SEC may also be viewed and
inspected at the SEC's Public Reference Room located at 450 Fifth Street, NW,
Washington, D.C. 20549. Copies may also be obtained from the SEC at prescribed
rates.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
- --------------------------------------------------------------------------------
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
- --------------------------------------------------------------------------------
The Company has changed its domicile and created Series 1 Preferred Shares.
These actions have affected the rights of the Company's common shareholders. See
"Item 4. Information on the Company - History and Development of the Company",
"Item 10. Additional Information - Articles of Continuance and Articles" and
"Item 10. Additional Information - Description of Authorized Shares - Preferred
Shares".
ITEM 15. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
An evaluation was commenced under the supervision and with the participation of
the Company's management, including Mr. Cernovitch, the Company's current
Chairman and former CEO, and Mr. DeMare, the Company's CFO, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934
(the "Exchange Act") as of August 31, 2006. As the date of this filing, the
Company expects to complete its evaluation in fiscal 2007. Based upon the
evaluation to date, Messrs. Cernovitch and DeMare have concluded that certain
weaknesses existed in the Company's internal controls over financial reporting
that must be corrected in order for the Company's disclosure controls and
procedures to be effective and to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission's rules and forms. As is
indicative of many small companies, the lack of segregation of duties and
effective risk assessment were identified as areas where weaknesses existed. The
existence of these weaknesses is to be compensated for by existing senior
management monitoring. Further, the Company is exploring corrective measures to
augment and improve the design of its disclosure controls and procedures
impacting these areas of weakness.
There have not been any changes in the Company's internal control over financial
reporting that occurred during the period covered by this Form 20-F that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 16. [RESERVED]
- --------------------------------------------------------------------------------
Not applicable.
- 97 -
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
- --------------------------------------------------------------------------------
The Board of Directors has determined that the Company has at least two audit
committee financial experts, Messrs. Nick DeMare and William Lee, who serve on
the Company's audit committee. Mr. Lee is considered to be an "independent
director" and Mr. DeMare is not considered to be an "independent director" as
that term is defined in Rule 4200(a)(15) of the National Association of
Securities Dealers.
ITEM 16B. CODE OF ETHICS.
- --------------------------------------------------------------------------------
The Company has not yet adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, or controller, or persons performing similar functions. Given the
Company's current operations, management does not believe a code of ethics is
necessary at this stage of the Company's development.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- --------------------------------------------------------------------------------
AUDIT FEES
For the fiscal years ended August 31, 2006 and 2005, the Company's principal
accountant billed $23,831 and $13,356, respectively, for the audit of the
Company's annual financial statements or services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years.
AUDIT-RELATED FEES
For the fiscal years ended August 31, 2006 and 2005, the Company's principal
accountant billed $5,637 and $1,419, respectively, for assurance and related
services that were reasonably related to the performance of the audit or review
of the Company's financial statements outside of those fees disclosed above
under "Audit Fees".
TAX FEES
For the fiscal years ended August 31, 2006 and 2005, the Company's principal
accountant billed $22,944 and $2,202, respectively, for tax compliance, tax
advice, and tax planning services.
ALL OTHER FEES
For the fiscal years ended August 31, 2006 and 2005, the Company's principal
accountant billed $nil and $nil respectively, for products and services other
than those set forth above.
PRE-APPROVAL POLICIES AND PROCEDURES
Prior to engaging the Company's accountants to perform a particular service, the
Company's audit committee obtains an estimate for the service to be performed.
The Company's audit committee reviews and pre-approves all audit and
audit-related services and the fees and other compensation related thereto, and
any non-audit services provided by the Company's external auditors. Provided the
pre-approval of the non-audit services is presented to the audit committee's
first scheduled meeting following such approval such authority may be delegated
by the audit committee to one or more independent members of the audit
committee. The audit committee in accordance with procedures for the Company
approved all of the services described above.
At no time since the commencement of the Company's most recently completed
financial year has the Company relied on the waiver in paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X.
PRINCIPAL ACCOUNTANT SERVICES
To the best of the Company's knowledge, the percentage of hours expended on the
Company's principal accountant's engagement to audit the Company's financial
statements for the fiscal year ended August 31, 2006, that were attributed to
work performed by persons other than the principal accountant's full-time
permanent employees was less than fifty percent (50%).
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS.
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
See pages F-1 through F-28
ITEM 18. FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
Not applicable.
ITEM 19. EXHIBITS.
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EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
1.1 Certificate of Continuation and Notice of Articles for Halo
Resources Ltd. (1)
1.2 Articles for Halo Resources Ltd. (1)
4.1 Purchase and Sale Agreement by and between TMK Oil & Gas, Inc.
and Westport Petroleum Inc., dated March 1, 2004. (1)
4.2 Stock Option Plan 2004 (2)
4.3 Letter of Intent by and between Halo Resources Ltd. and
Endowment Lakes (2002) Limited Partnership, dated February 9,
2005, and amendment, dated February 9, 2006. (3)
4.4 Purchase Agreement by and among Halo Resources Ltd., Sheridan
Platinum Group, dated February 18, 2005. (3)
4.5 Assignment and Assumption Agreement by and between Halo
Resources Ltd. and Wolfden Resources Inc., dated April 15,
2005. (3)
4.6 Bachelor Lake Joint Venture Agreement by and between Halo
Resources Ltd. and Metanor Resources Inc. dated Sept 8, 2005.
(3)
4.7 Purchase Agreement by and between Halo Resources Ltd. and
Metanor executed May 2, 2006, as amended August 28, 2006.
4.8 Heads of Agreement by and between Halo Resources Ltd. and W.
Bruce Dunlop Limited NPL, dated February 9, 2006.
4.9 Option Agreements, between Halo Resources Ltd. and Hudson Bay
Exploration and Development Company Limited, dated March 19,
2006.
4.10 Letter of Intent by and between Halo Resources Ltd. and
Goldcorp. Inc., dated April 18, 2006.
4.11 Option Agreement by and between the Company and Goldcorp.
Inc., dated June 20, 2006.
4.12 Purchase Agreement by and between the Company and Endowment
Lakes dated December 3, 2006.
4.13 Employment Agreement by and between the Company and Lynda
Bloom dated February 28, 2007.
- 99 -
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------
12.1 Certification of Lynda Bloom Pursuant to Rule 13a-14(a)
12.2 Certification of Nick DeMare Pursuant to Rule 13a-14(a)
13.1 Certification of Lynda Bloom Pursuant to 18 U.S.C. Section
1350
13.2 Certification of Nick DeMare Pursuant to 18 U.S.C. Section
1350
(1) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on February 2, 2005. File number 0-30196.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on March 12, 2004. File number 0-30196.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 20-F,
filed with the Commission on March 13, 2006. File number 0-30196.
- 100 -
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
HALO RESOURCES LTD.
Dated: MARCH 14, 2007 /s/ Lynda Bloom
---------------------- -----------------------------------
Lynda Bloom,
President, Chief Executive Officer,
and Director
- 101 -
- --------------------------------------------------------------------------------
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
AUGUST 31, 2006, 2005 AND 2004
- --------------------------------------------------------------------------------
F-1
D + H Group LLP
Chartered Accountants
AUDITORS' REPORT
To the Shareholders of
Halo Resources Ltd.
We have audited the consolidated balance sheets of Halo Resources Ltd. as at
August 31, 2006 and 2005 and the consolidated statements of loss, deficit and
cash flows for the years ended August 31, 2006, 2005 and 2004. These 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 and the standards of the Public Company Accounting Oversight Board
(United States). 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 August 31, 2006
and 2005 and the results of its operations and cash flow for the years ended
August 31, 2006, 2005 and 2004 in accordance with Canadian generally accepted
accounting principles.
Canadian generally accepted accounting principles vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected assets, liabilities and shareholders' equity as at August
31, 2006 and 2005 and results of operations for the years ended August 31, 2006,
2005 and 2004 to the extent summarized in Note 17 to the consolidated financial
statements.
On December 11, 2006 we reported separately to the shareholders of Halo
Resources Ltd. on consolidated financial statements as at, and for the years
ended, August 31, 2006 and 2005 audited in accordance with Canadian generally
accepted auditing standards.
/s/D&H GROUP LLP
Vancouver, B.C.
December 11, 2006 CHARTERED ACCOUNTANTS
D+H Group LLP Chartered Accountants
10th Floor, 1333 West Broadway Telephone 604 731 5881 www.DHgroup.ca
Vancouver, British Columbia Facsimile 604 731 9923 Email: info@dhgroup.ca
Canada V6H 4C1
A BC Limited Liaibility Partnership of Corporations
Member of BHD Association with affiliated offices across
Canada and internationally
F-2
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
BALANCE SHEETS
AS AT AUGUST 31
2006 2005
$ $
ASSETS
CURRENT ASSETS
Cash 271,935 893,525
Amounts receivable and prepaids (Note 3) 136,275 197,507
------------ ------------
408,210 1,091,032
CAPITAL ASSETS (Note 4) 298,630 32,761
UNPROVEN MINERAL INTERESTS (Note 5) 23,845,828 22,759,333
DEFERRED SHARE ISSUE COSTS (Note 7(a)) - 45,556
------------ ------------
24,552,668 23,928,682
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 256,688 584,221
REDEEMABLE PREFERRED SHARES (Note 6) 8,000,000 8,000,000
ASSET RETIREMENT OBLIGATION (Note 16) 1,014,500 938,500
FUTURE INCOME TAX LIABILITY (Note 10) 4,832,000 5,328,000
------------ ------------
14,103,188 14,850,721
------------ ------------
LEASE COMMITMENTS (Note 15)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 7) 32,395,855 28,487,576
CONTRIBUTED SURPLUS (Note 9) 1,360,767 738,642
SHARE SUBSCRIPTIONS RECEIVED (Note 7(a)) - 958,950
DEFICIT (23,307,142) (21,107,207)
------------ ------------
10,449,480 9,077,961
------------ ------------
24,552,668 23,928,682
============ ============
SUBSEQUENT EVENTS (Note 18)
APPROVED BY THE BOARD
/S/ MARC CERNOVITCH , Director
- ---------------------
/S/ NICK DEMARE , Director
- ---------------------
The accompanying notes are an integral part of these
financial statements.
F-3
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF LOSS AND DEFICIT
FOR THE YEARS ENDED AUGUST 31
2006 2005 2004
$ $ $
(NOTE 2)
REVENUES
Oil and gas sales - - 81,347
Interest and other 16,729 31,331 695
------------ ------------ ------------
16,729 31,331 82,042
------------ ------------ ------------
EXPENSES
Accretion (Note 16) 76,000 38,000 -
Production - - 21,832
Depreciation, depletion and impairment 39,373 4,132 10,441
General exploration 17,627 27,002 -
General and administrative 1,267,825 1,060,276 183,539
Stock-based compensation 550,817 559,031 179,611
Part XII.6 tax expense (Note 10) 43,000 40,000 -
Write-down of unproven mineral interest (Note 5) 1,538,655 - -
------------ ------------ ------------
3,533,297 1,728,441 395,423
------------ ------------ ------------
LOSS BEFORE THE FOLLOWING (3,516,568) (1,697,110) (313,381)
INTEREST EXPENSE - - (29,817)
LOSS ON SALE OF PETROLEUM AND
NATURAL GAS INTERESTS - - (11,031)
GAIN ON SETTLEMENT OF
ADVANCES (Notes 11(b) and 11(c)) - - 97,207
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (3,516,568) (1,697,110) (257,022)
FUTURE INCOME TAX RECOVERY (Note 10) 1,316,633 1,329,000 -
------------ ------------ ------------
NET LOSS FOR THE YEAR (2,199,935) (368,110) (257,022)
DEFICIT - BEGINNING OF YEAR (21,107,207) (20,739,097) (20,482,075)
------------ ------------ ------------
DEFICIT - END OF YEAR (23,307,142) (21,107,207) (20,739,097)
============ ============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.08) $(0.02) $(0.05)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 28,447,710 16,049,812 5,654,354
============ ============ ============
The accompanying notes are an integral part of these
financial statements.
F-4
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED AUGUST 31
2006 2005 2004
$ $ $
(NOTE 2)
CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES
Net loss for the year (2,199,935) (368,110) (257,022)
Items not involving cash
Accretion 76,000 38,000 -
Depreciation, depletion and impairment 39,373 4,132 10,441
Stock-based compensation 550,817 559,031 179,611
Write-down of unproven mineral interests 1,538,655 - -
Loss on sale of petroleum and natural gas interests - - 11,031
Gain on settlement of advances - - (97,207)
Interest expense - - 29,817
Future income tax recovery (1,316,633) (1,329,000) -
------------ ------------ ------------
(1,311,723) (1,095,947) (123,329)
Decrease (increase) in amounts receivable and prepaids 61,232 (184,897) (5,497)
Increase (decrease) in accounts payable and accrued liabilities (495,278) 517,089 43,919
------------ ------------ ------------
(1,745,769) (763,755) (84,907)
------------ ------------ ------------
FINANCING ACTIVITIES
Common shares issued for cash 4,125,749 6,941,897 1,377,000
Common share subscriptions received - 958,950 -
Common share issue costs (257,173) (692,979) -
Repayment of advances - - (951,622)
------------ ------------ ------------
3,868,576 7,207,868 425,378
------------ ------------ ------------
INVESTING ACTIVITIES
Additions to unproven mineral interests (2,469,647) (5,842,760) (75,906)
Purchase of capital assets (274,750) (36,893) -
Additions to petroleum and natural gas interests - - (23,935)
Proceeds from sale of petroleum and natural gas interests - - 78,630
------------ ------------ ------------
(2,744,397) (5,879,653) (21,211)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (621,590) 564,460 319,260
CASH - BEGINNING OF YEAR 893,525 329,065 9,805
------------ ------------ ------------
CASH - END OF YEAR 271,935 893,525 329,065
============ ============ ============
SUPPLEMENTARY CASH FLOW INFORMATION - See Note 14.
The accompanying notes are an integral part of these
financial statements.
F-5
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
1. NATURE OF OPERATIONS
Halo Resources Ltd. (the "Company") is a resource exploration company
which was previously engaged in the acquisition, exploration and
development of crude oil and natural gas interests in the United
States. Effective March 1, 2004, the Company sold its remaining oil and
natural gas interest. The Company subsequently focused on the
acquisition, exploration and development of unproven mineral interests
in Canada.
The Company presently has no proven or probable reserves and on the
basis of information to date, it has not yet determined whether these
unproven mineral interests contain economically recoverable ore
reserves. Consequently the Company considers itself to be an
exploration stage company. The amounts shown as unproven mineral
interests and deferred costs represent costs incurred to date, less
amounts amortized and/or written off, and do not necessarily represent
present or future values. The underlying value of the unproven mineral
interests is entirely dependent on the existence of economically
recoverable reserves, securing and maintaining title and beneficial
interest, the ability of the Company to obtain the necessary financing
to complete development, and future profitable production.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP"). The
significant differences between these principles and those that would
be applied under United States generally accepted accounting principles
("US GAAP") are disclosed in Note 17.
The consolidated financial statements for the 2004 fiscal year included
the accounts of the Company and its former wholly-owned subsidiaries,
Safari Petroleum, LLC ("Safari") and TMK Oil & Gas Inc. ("TMK"). On
August 31, 2004, the Company abandoned its investment in Safari, which
was inactive throughout the 2004 fiscal year, and TMK, which had sold
its remaining asset, and became inactive. The Company did not have any
subsidiaries during the 2006 and 2005 fiscal years.
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian
GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and the
reported amounts of revenues and expenditures during the year. Examples
of significant estimates made by management include depreciation, the
provision for future income tax recoveries and composition of future
income tax assets and future income tax liabilities, valuations of
mineral interests, capital assets, asset retirement obligations and
stock-based compensation. Actual results may differ from those
estimates.
UNPROVEN MINERAL INTERESTS
Unproven mineral interests costs and exploration, development and field
support costs directly relating to mineral interests are deferred until
the interests to which they relate are placed into production, sold or
abandoned. The deferred costs will be amortized over the life of the
orebody following commencement of production or written off if the
mineral interest is sold or abandoned. Administration costs and other
exploration costs that do not relate to any specific mineral interest
are expensed as incurred.
F-6
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
On a periodic basis, management reviews the carrying values of deferred
unproven mineral interest acquisition and exploration expenditures with
a view to assessing whether there has been any impairment in value.
Management takes into consideration various information including, but
not limited to, results of exploration activities conducted to date,
estimated future metal prices, and reports and opinions of outside
geologists, mine engineers and consultants. When it is determined that
a project or interest will be abandoned or its carrying value has been
impaired, a provision is made for any expected loss on the project or
interest.
Although the Company has taken steps to verify title to mineral
properties in which it has an interest, according to the usual industry
standards for the stage of exploration of such properties, these
procedures do not guarantee the Company's title. Such properties may be
subject to prior agreements or transfers and title may be affected by
undetected defects.
From time to time, the Company acquires or disposes of mineral
interests pursuant to the terms of option agreements. Options are
exercisable entirely at the discretion of the optionee and,
accordingly, are recorded as mineral interest costs or recoveries when
the payments are made or received.
PETROLEUM AND NATURAL GAS INTERESTS
The Company followed the full cost method of accounting for petroleum
and natural gas operations. Under this method all costs related to the
exploration for and development of petroleum and natural gas reserves
were capitalized on a country-by-country basis. Costs included lease
acquisition costs, geological and geophysical expenses, overhead
directly related to exploration and development activities and costs of
drilling both productive and non-productive wells. Proceeds from the
sale of properties were applied against capitalized costs, without any
gain or loss being recognized, unless such a sale would significantly
alter the rate of depletion and depreciation.
Depletion of exploration and development costs and depreciation of
production equipment was provided using the unit-of-production method
based upon estimated proven petroleum and natural gas reserves. The
costs of significant unevaluated properties were excluded from costs
subject to depletion. For depletion and depreciation purposes, relative
volumes of petroleum and natural gas production and reserves were
converted into equivalent units based upon relative energy content.
In applying the full cost method, the Company performed a ceiling test
whereby the carrying value of petroleum and natural gas properties and
production equipment, net of recorded future income taxes and the
accumulated provision for site restoration and abandonment costs, was
compared annually to an estimate of future net cash flow from the
production of proven reserves. Net cash flow was estimated using year
end prices, less estimated future general and administrative expenses,
financing costs and income taxes. Should this comparison indicate an
excess carrying value, the excess was charged against earnings.
Substantially all of the Company's oil and gas exploration, development
and production activities were conducted jointly with others and,
accordingly, these financial statements reflected the Company's
proportionate interest in such activities.
F-7
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
CAPITAL ASSETS
Capital assets are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of the assets,
as follows:
Office furniture and equipment 20%
Computer and telephone equipment 25%
Field equipment and facility 20%
Leasehold improvements 50%
ASSET RETIREMENT OBLIGATIONS
Effective September 1, 2004, the Company adopted the recommendations of
the CICA Handbook Section 3110, "Asset Retirement Obligations". Under
this Section, future obligations to retire an asset, including
dismantling, remediation and ongoing treatment and monitoring of the
site, are recognized and recorded as a liability at fair value as at
the time in which they are incurred or the event occurs giving rise to
such an obligation. The liability is increased (accreted) over time
through periodic charges to earnings. The corresponding asset
retirement cost is capitalized as part of the asset's carrying value,
and is amortized over the asset's estimated useful life. The amount of
the liability will be subject to re-measurement at each reporting
period.
Where possible, the Company has estimated asset retirement obligations
based on current best practice. These estimates are subject to change
as a result of changes in regulations, the extent of environmental
remediation required, the means of reclamation, or cost estimates.
Changes in estimates are accounted for prospectively from the period
the estimate is revised.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are assessed for impairment when events and
circumstances warrant. The carrying value of a long-lived asset is
impaired when the carrying amount exceeds the estimated undiscounted
net cash flow from use and fair value. In that event, the amount by
which the carrying value of an impaired long-lived asset exceeds its
fair value is charged to earnings.
REVENUE RECOGNITION
The Company recognized petroleum and natural gas revenues from its
interests in producing wells as oil and gas was produced and sold from
these wells. The Company has no gas balancing arrangements in place.
Oil and gas sold was not significantly different from the Company's
product entitlement.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities are translated into Canadian dollars at
the balance sheet date rate of exchange and non-monetary assets and
liabilities at historical rates. Revenues and expenses are translated
at appropriate transaction date rates except for amortization,
depreciation and depletion, which are translated at historical rates.
Gains and losses resulting from the fluctuation of foreign exchange
rates have been included in the determination of income.
F-8
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
2. ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for at fair value as determined
by the Black-Scholes option pricing model using amounts that are
believed to approximate the volatility of the trading price of the
Company's stock, the expected lives of awards of stock-based
compensation, the fair value of the Company's stock and the risk-free
interest rate. The estimated fair value of awards of stock-based
compensation are charged to expense as awards vest, with offsetting
amounts recognized as contributed surplus.
INCOME TAXES
Income tax liabilities and assets are recognized for the estimated
income tax consequences attributable to differences between the amounts
reported in the consolidated financial statements and their respective
tax bases, using enacted income tax rates. The effect of a change in
income tax rates on future income tax liabilities and assets is
recognized in income in the period that the change occurs. Future
income tax assets are recognized to the extent that they are considered
more likely than not to be realized.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per
share assumes the conversion, exercise or contingent issuance of
securities only when such conversion, exercise or issuance would have a
dilutive effect on earnings per share. The dilutive effect of
convertible securities is reflected in diluted earnings per share by
application of the "if converted" method. The dilutive effect of
outstanding options and warrants and their equivalents is reflected in
diluted earnings per share by application of the treasury stock method.
3. AMOUNTS RECEIVABLE AND PREPAIDS
2006 2005
$ $
Commodity taxes receivable 43,424 146,162
Prepaids 55,011 25,302
Other 37,840 26,043
------------ ------------
136,275 197,507
============ ============
F-9
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
4. CAPITAL ASSETS
-------------------------------------------- ------------
2006 2005
-------------------------------------------- ------------
ACCUMULATED NET BOOK NET BOOK
COSTS DEPRECIATION VALUE VALUE
$ $ $ $
Office furniture and equipment 46,313 5,896 40,417 5,693
Computer and telephone equipment 29,557 8,127 21,430 15,512
Field equipment and facility 254,741 28,041 226,700 11,556
Leasehold improvements 11,524 1,441 10,083 -
------------ ------------ ------------ ------------
342,135 43,505 298,630 32,761
============ ============ ============ ============
5. UNPROVEN MINERAL INTERESTS
-------------------------------------------- --------------------------------------------
2006 2005
-------------------------------------------- --------------------------------------------
DEFERRED DEFERRED
ACQUISITION EXPLORATION TOTAL ACQUISITION EXPLORATION TOTAL
COSTS COSTS COSTS COSTS COSTS COSTS
$ $ $ $ $ $
Duport 14,957,409 2,241,773 17,199,182 14,902,244 1,932,540 16,834,784
Bachelor Lake 1,399,289 3,647,500 5,046,789 2,756,880 2,829,076 5,585,956
Sherridon 423,519 1,127,370 1,550,889 107,614 230,979 338,593
Red Lake 38,952 10,016 48,968 - - -
------------ ------------ ------------ ------------ ------------ ------------
16,819,169 7,026,659 23,845,828 17,766,738 4,992,595 22,759,333
============ ============ ============ ============ ============ ============
(a) Duport Property, Ontario
Pursuant to an agreement dated February 18, 2005, the Company
acquired from The Sheridan Platinum Group Ltd. ("Sheridan") a
100% interest in 93 mineral claims (the "Duport Property")
covering an area of approximately 3,800 hectares, located near
Kenora, Ontario. The Company paid $250,000 cash and issued one
million common shares, at a fair value of $1,210,000, and $8
million in redeemable preferred shares (see Note 6). The
purchase of the Duport Property was conducted on a tax-free
roll-over basis to Sheridan and, accordingly, $9,210,000 of
costs have no tax value.
The Company has agreed to pay a 2.5% net smelter return
royalty ("NSR") on the first 1.5 million ounces of gold
produced and a 5% NSR on the excess. The Company will have the
right to buy back a 1% NSR for $2.5 million cash.
The Company has also acquired, through staking, 10 mineral
claims in the area of the Duport property, covering an area of
approximately 1,744 hectares.
(b) Bachelor Lake Property, Quebec
On November 12, 2004, the Company entered into a heads of
agreement with Wolfden Resources Inc. ("Wolfden"), whereby
Wolfden would assign to the Company, Wolfden's option from
Metanor Resources Inc. ("Metanor"), to earn a 50% undivided
interest in two mining concessions and 51 mineral claims for a
total of 1,851 hectares (the "Bachelor Lake Property"),
located in the La Sueur Township, Quebec. On April 15, 2005,
the Company and Wolfden signed the final agreement (the
F-10
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
5. UNPROVEN MINERAL INTERESTS (continued)
"Assignment and Assumption Agreement"). Under the agreed
terms, the Company acquired Wolfden's option by paying
$650,000 cash and issuing 1,400,000 common shares, at a value
of $1,050,000. The Company was also responsible for all
exploration costs incurred on the Bachelor Lake Property by
Wolfden from the date of signing the heads of agreement and
accordingly, reimbursed Wolfden $1,818,123 by paying
$1,293,123 cash and issuing 700,000 common shares, at a value
of $525,000. Upon exercising the option and after 50,000
ounces of gold or gold equivalent have been produced from the
Bachelor Lake Property, the Company will be required to pay to
Wolfden a bonus payment of $250,000 cash and issue a further
250,000 common shares. The Company also agreed to pay a 0.5%
royalty on the Company's share of the NSR. A director of the
Company is also a director and officer of Wolfden.
Effective May 18, 2005, the Company and Metanor entered an
agreement whereby Metanor acknowledged the Assignment and
Assumption Agreement and the terms of the underlying option
agreement on the Bachelor Lake Property were amended. Under
the amendment, the Company could exercise its option to earn
the 50% interest in the Bachelor Lake Property by spending a
minimum of $500,000 of exploration on the Bachelor Lake
Property and paying $100,000 to Metanor. On September 21,
2005, the Company exercised its option and paid the $100,000.
The Bachelor Lake Property was then operated under a joint
venture agreement (the "Bachelor Lake JV").
On May 2, 2006, as amended August 28, 2006, the Company and
Metanor entered into a purchase agreement (the "Metanor
Purchase") whereby Metanor agreed to purchase the Company's
50% interest in the Bachelor Lake JV in consideration of $3.5
million cash, $750,000 in common shares of Metanor and a 1%
NSR in favour of the Company.
Closing of the Metanor Purchase (the "Closing") is scheduled
to occur (the "Completion Date") on the earlier of:
i) 30 days after Metanor completes a $5 million financing; or
ii) November 10, 2006.
Until Closing occurs, Metanor assumes all costs, expenses and
obligations relating to maintaining the Bachelor Lake Property
in good standing until the Completion Date.
In the event the Closing does not occur within the Completion
Date, the Company may elect to purchase Metanor's 50% interest
in the Bachelor Lake Property under the same terms as the
Metanor Purchase. The Company will then have four months to
complete its acquisition. The Company would also assume all
costs, expenses and obligations of the Bachelor Lake Property
from its election until closing of the Company's purchase. If
the Company does not elect to purchase Metanor's 50% interest
then both parties will retain their respective 50% interests
in the Bachelor Lake Property and operations would continue
under the Bachelor Lake JV.
The Metanor Purchase contemplates for total consideration of a
minimum of $4.25 million. Accordingly, during fiscal 2006, the
Company recognized an impairment of $1,538,655 to reflect the
difference between the Company's recorded costs and the
anticipated proceeds.
Subsequent to August 31, 2006, the Company and Metanor
negotiated a new agreement, as described in Note 18(b).
F-11
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
5. UNPROVEN MINERAL INTERESTS (continued)
(c) Sherridon VMS Project, Manitoba
The Company has acquired, through staking and various
acquisition agreements, an interest in 15,025 hectares located
in the Sherridon area, north-central Manitoba. Details of the
acquisitions are as follows:
i) 66 unproven claims covering approximately 12,755 hectares,
staked by the Company;
ii) on February 9, 2005, as amended February 9, 2006, the
Company entered into a letter of intent ("Quarter Moon
LOI") with Endowment Lakes (2002) Limited Partnership
("EL") regarding the option to earn up to an 80% interest
in the Quarter Moon Lake Property, Manitoba. The Quarter
Moon Lake Property comprises five mining claims covering a
total of 1,072 hectares and is located 75 kilometres
northeast of Flin Flon and 61 kilometres northwest of Snow
Lake. Under the terms of the Quarter Moon LOI, the Company
had the right to acquire an initial 51% interest in the
Quarter Moon Lake Property in which the Company has paid
$40,000 cash, issued 50,000 common shares of the Company,
at a value of $60,000, and was required to complete a
$500,000 work commitment, pay a further $40,000 cash and
issue 50,000 common shares. See also Note 18(c).
iii)heads of agreement (the "Dunlop HOA") dated February 9,
2006, entered into by the Company and W. Bruce Dunlop
Limited NPL, whereby the Company was granted the option to
earn a 100% undivided interest in three unproven mineral
claims, covering 536 hectares, for $90,000 cash ($15,000
paid), issuance of 250,000 common shares of the Company
(25,000 shares issued) and expending a total of $170,000
in work expenditures over a four year period; and
iv) three option agreements (the "HBED Options"), dated March
19, 2006, entered into by the Company and Hudson Bay
Exploration and Development Company Limited ("HBED"),
whereby the Company was granted options to acquire 100%
interests in 24 unproven mineral claims and one mining
lease covering approximately 3,226 hectares. In order to
earn 100% interests in all of the mineral claims and the
mining lease the Company will be required to make option
payments totalling $650,000 and incur expenditures
totalling $4,300,000, as follows:
OPTION WORK
DATE PAYMENTS EXPENDITURES
$ $
On signing 30,000(paid) -
First Anniversary 70,000 30,000
Second Anniversary 120,000 100,000
Third Anniversary 80,000 790,000
Fourth Anniversary 350,000 3,380,000
------------ ------------
650,000 4,300,000
============ ============
Upon agreement by both the Company and HBED, up to
$187,500 of the option payments may be paid in common
shares of the Company.
F-12
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
5. UNPROVEN MINERAL INTERESTS (continued)
Should the Company acquire a 100% interest in any of the
claim groups under the HBED Options, HBED has the option
to back-in for a 51% interest in the subject claims group
by paying 135% of the expenditures incurred by the
Company. HBED will also hold a 2% NSR.
(d) Red Lake Property, Ontario
On April 18, 2006, the Company entered into a letter of intent
(the "Red Lake LOI") with Goldcorp. Inc. ("Goldcorp")
regarding the option to earn a 60% interest in 67 mining
claims, a 45% interest in two mining claims, and a 30%
interest in ten mining claims (collectively the "Red Lake
Property") located in Ball Township, Red Lake, Ontario. On
June 20, 2006, the Company and Goldcorp completed a formal
option agreement (the "Red Lake Option") on the Red Lake
Property. Under the terms of the Red Lake Option, the Company
is required to perform minimum exploration programs totalling
$3 million on or before December 31, 2008. Upon spending the
$3.0 million, the Company is entitled to elect to exercise the
option of its interests. Upon notification of the Company's
election, Goldcorp has 90 days to back-in and reacquire a 25%
interest in the 67 mining claims, a 18.75% interest in two
mining claims and a 12.5% interest in the ten mining claims by
paying $6 million to the Company. If Goldcorp does not
exercise its back-in right, the Company will then be required
to issue one million common shares of its share capital to
Goldcorp.
6. REDEEMABLE PREFERRED SHARES
The series 1 redeemable preferred shares (the "Redeemable Preferred
Shares") were issued by the Company as partial consideration of its
purchase of the Duport Property described in Note 5(a). The Redeemable
Preferred Shares have a term of five years with payment of cumulative
cash dividends, at the following rates:
i) for each of the two years commencing November 1, 2004, an annual
dividend of $50,000, payable in quarterly instalments, commencing
on February 1, 2005 and ending on November 1, 2006; and
ii) for each of the three years commencing November 1, 2006, an annual
dividend of 4% of the Redeemable Preferred Shares outstanding,
payable in quarterly instalments, commencing on February 1, 2007
and ending on November 1, 2009.
The Company may elect to pay any of its dividends in common shares of
its capital stock based on a 15 day average price prior to the date the
dividend is due.
The Redeemable Preferred Shares are non-voting, non-convertible and can
be redeemed in whole or in part by the Company at any time prior to
November 1, 2009, as follows:
i) make a cash payment of $8 million plus a $400,000 bonus, together
with any accrued and unpaid dividends; or
ii) provided all dividends payable pursuant to the terms of the
Redeemable Preferred Shares have been paid, the Company may return
the Duport Property to Sheridan.
The Company may elect to redeem the Redeemable Preferred Shares through
the issuance of common shares in its capital stock based on a 15 day
average price prior to the date of redemption.
F-13
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
6. REDEEMABLE PREFERRED SHARES (continued)
If the Redeemable Preferred Shares have not been redeemed the Company
will, effective November 1, 2009, retract the Redeemable Preferred
Shares in consideration of $8 million plus accrued unpaid dividends
(collectively the "Retraction Amount"), payable in cash or common
shares of the Company based on a 15 trading day average price prior to
the date of retraction.
During fiscal 2006, the Company recorded $50,000 of dividends on the
Redeemable Preferred Shares, which have been capitalized as part of
resource interests. As at August 31, 2006, $4,167 of accrued dividends
were included as part of accounts payable and accrued liabilities.
7. SHARE CAPITAL
Authorized: unlimited common shares without par value
unlimited preferred shares
------------------------- ------------------------- -------------------------
Issued common shares: 2006 2005 2004
------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
$ $ $
Balance, beginning of year 21,005,765 28,487,57 6 9,443,859 20,914,102 2,926,859 19,537,102
----------- ----------- ----------- ----------- ----------- -----------
Issued during the year
For cash
Private placements 5,273,236 3,493,249 7,324,894 6,688,797 6,000,000 1,290,000
Exercise of options 150,000 67,500 - - - -
Exercise of warrants 4,598,500 1,523,950 1,048,500 253,100 435,000 87,000
For fiscal advisory services 85,715 32,458 - - - -
For finder's fees - - - - 82,000 24,600
For corporate finance fee - - 40,000 34,000 - -
For unproven mineral interests 25,000 18,250 3,150,000 2,845,000 - -
Cancellation of escrow shares - - (1,488) - - -
Reallocation from contributed
surplus on exercise of options - 69,413 - - - -
----------- ----------- ----------- ----------- ----------- -----------
10,132,451 5,204,820 11,561,906 9,820,897 6,517,000 1,401,600
Less flow-through share
renunciation - (820,633) - (1,566,000) - -
Less share issue costs - (475,908) - (681,423) - (24,600)
----------- ----------- ----------- ----------- ----------- -----------
10,132,451 3,908,279 11,561,906 7,573,474 6,517,000 1,377,000
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 31,138,216 32,395,855 21,005,765 28,487,576 9,443,859 20,914,102
=========== =========== =========== =========== =========== ===========
(a) During fiscal 2006, the Company completed a private placement
of 3,293,070 flow-through common shares, at a price of $0.70
per flow-through share, and 1,980,166 non-flow-through units,
at a price of $0.60 per non-flow-through unit, for total gross
proceeds of $3,493,249. Each non-flow-through unit consisted
of one common share and one share purchase warrant entitling
the holder to purchase one further share for a period of two
years at a price of $0.70 per share. The Company paid a
finder's fee of $262,194 and issued 523,323 warrants (the
"Finder's Warrants") to the finder. The Company also issued
85,715 units (the "Finder's Units") in settlement of $60,000
billed by the finder for fiscal advisory services rendered.
F-14
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
7. SHARE CAPITAL (continued)
The Finder's Warrants have the same terms as the private
placement warrants. The fair value of the Finder's Warrants
has been estimated using the Black-Scholes option price model.
The assumptions used were: dividend yield of 0%; expected
volatility of 61.41%; a risk-free interest rate of 3.09% -
3.30%; and an expected life of two years. The value assigned
to the Finder's Warrants was $113,179.
Each Finder's Unit consisted of one common share and one
purchase warrant entitling the finder to purchase one further
share, for a period of two years at a price of $0.75 per
share. The fair value of the warrants has been estimated using
the Black-Scholes option price model. The assumptions used
were: dividend yield of 0%; expected volatility of 62.05%; a
risk-free interest rate of 3.39%; and an expected life of two
years. The value assigned to the warrants was $27,542.
The Company incurred a total of $40,535 for legal, filing and
other share issue costs relating to the private placement. As
at August 31, 2005, the Company had received $958,950 in
common share subscriptions and incurred $45,556 of share issue
costs with respect to this private placement. A director of
the Company purchased 20,000 flow-through shares for $14,000.
(b) During fiscal 2005, the Company completed private placements,
as follows:
i) on December 23, 2004, the Company issued 4,342,951
flow-through units, at a price of $0.95 per flow-through
unit, and 2,673,530 non-flow-through units, at a price of
$0.85 per non-flow- through unit, for total gross proceeds
of $6,398,304. Each flow-through unit consisted of one
common share and one-half share purchase warrant with each
full warrant entitling the holder to purchase one further
share for a period of two years, at a price of $1.25 on or
before December 23, 2005 and, thereafter, at a price of
$1.50 on or before December 23, 2006. Each non-flow-
through unit consisted of one common share and one share
purchase warrant entitling the holder to purchase one
further share for a period of two years, at a price of
$1.10 on or before December 23, 2005 and, thereafter, at a
price of $1.35 on or before December 23, 2006. Certain
directors and officers of the Company and their immediate
family members purchased 121,435 flow- through units for
$115,363.
The Company paid the agents a cash commission of $510,643
and issued 701,647 warrants (the "Agents' Warrants") and
incurred $107,731 of costs relating to the financing. Each
Agents' Warrant is exercisable to purchase one common
share at a price of $1.05 on or before December 23, 2006.
The Company also issued 40,000 units at a fair value of
$0.85 per unit, each unit comprising of one common share
and one-half share purchase warrant having the same terms
as the non-flow-through units;
ii) on January 20, 2005, the Company issued 151,834
flow-through units, at a price of $0.95 per flow-through
unit, and 25,000 non-flow-through units, at a price of
$0.85 per non-flow-through unit, for total gross proceeds
of $165,492. Each flow-through unit consisted of one
common share and one-half share purchase warrant with each
full warrant entitling the holder to purchase one further
share for a period of two years, at a price of $1.25 on or
before January 20, 2006 and, thereafter, at a price of
$1.50 on or before January 20, 2007. Each non-flow-through
unit consisted of one common share and one share purchase
warrant with each full warrant entitling the holder to
purchase one further share for a period of two years, at a
price of $1.10 on or before January 20, 2006 and,
thereafter, at a price of $1.35 on or before January 20,
2007. The Company paid a cash finder's fee of $16,549. A
director of the Company purchased 5,300 flow-through units
for $5,305; and
F-15
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
7. SHARE CAPITAL (continued)
iii)on February 3, 2005, the Company issued 131,579
flow-through units at a price of $0.95 per flow-through
unit for total gross proceeds of $125,000. Each
flow-through unit consisted of one common share and
one-half share purchase warrant with each full warrant
entitling the holder to purchase one further share for a
period of two years, at a price of $1.25 on or before
February 3, 2006 and, thereafter, at a price of $1.50 on
or before February 3, 2007. The Company paid a cash
finder's fee of $12,500.
(c) A summary of the number of common shares reserved pursuant to
the Company's warrants outstanding at August 31, 2006, 2005
and 2004 and the changes for the years ending on those dates
is as follows:
----------- ----------- -----------
2006 2005 2004
----------- ----------- -----------
Balance, beginning of year 10,331,859 5,647,000 -
Issued pursuant to private placements 2,589,204 5,733,359 6,000,000
Issued for finder's fee - - 82,000
Exercised (4,598,500) (1,048,500) (435,000)
----------- ----------- -----------
Balance, end of year 8,322,563 10,331,859 5,647,000
=========== =========== ===========
Common shares reserved pursuant to warrants outstanding at
August 31, 2006, are as follows:
------------ -------------- ------------------
NUMBER EXERCISE PRICE EXPIRY DATE
$
------------ -------------- ------------------
2,313,182 1.50 December 23, 2006
2,718,530 1.35 December 23, 2006
701,647 1.05 December 23, 2006
2,071,015 0.70 September 14, 2007
432,474 0.70 September 29, 2007
85,715 0.75 October 14, 2007
------------
8,322,563
============
(d) See also Note 18.
8. STOCK OPTIONS AND STOCK-BASED COMPENSATION
The Company has established a rolling stock option plan (the "Plan"),
in which the maximum number of common shares which can be reserved for
issuance under the Plan is 10% of the issued and outstanding shares of
the Company. The exercise price of the options is set at the Company's
closing share price on the day before the grant date, less allowable
discounts in accordance with the policies of the TSX Venture Exchange.
During fiscal 2006, the Company granted 2,168,000 stock options (2005 -
1,078,000; 2004 - 810,000) to its employees, directors and consultants
and recorded compensation expense of $550,817 (2005 - $559,031; 2004 -
$179,611).
F-16
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
8. STOCK OPTIONS AND STOCK-BASED COMPENSATION (continued)
The fair value of stock options granted to employees, directors and
consultants is estimated on the dates of grants using the Black-Scholes
option pricing model with the following assumptions used for the grants
made during fiscal 2006, 2005 and 2004:
----------------- ----------------- -----------------
2006 2005 2004
----------------- ----------------- -----------------
Risk-free interest rate 3.38% - 4.11% 2.28% - 2.92% 2.28% - 2.53%
Estimated volatility 61.41% - 85.48% 52.44% - 105% 105% - 106%
Expected life 3 years - 5 years 1.5 years 1.5 years
Expected dividend yield 0% 0% 0%
The weighted average fair value of all stock options, calculated using
the Black-Scholes option pricing model, granted during the year to the
Company's employees, directors and consultants was $0.25 (2005 - $0.43;
2004 - $0.40) per share.
Option-pricing models require the use of estimates and assumptions
including the expected volatility. Changes in the underlying
assumptions can materially affect the fair value estimates and,
therefore, existing models do not necessarily provide reliable measure
of the fair value of the Company's stock options.
A summary of the Company's options at August 31, 2006, 2005 and 2004
and the changes for the fiscal years ending on those dates is presented
below:
----------------------- ----------------------- -----------------------
2006 2005 2004
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS EXERCISE OF OPTIONS EXERCISE OF OPTIONS EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
$ $ $
Balance, beginning of year 1,688,000 0.80 810,000 0.61 92,857 0.40
Granted 2,168,000 0.54 1,078,000 0.92 810,000 0.61
Exercised (150,000) 0.75 - - - -
Expired (803,000) 0.95 (200,000) 0.66 (92,857) 0.40
----------- ----------- -----------
Balance, end of year 2,903,000 0.56 1,688,000 0.80 810,000 0.61
=========== =========== ============
The following table summarizes information about the stock options
outstanding and exercisable at August 31, 2006:
OPTIONS OPTIONS EXERCISE
OUTSTANDING EXERCISABLE PRICE EXPIRY DATE
$
600,000 600,000 0.60 May 31, 2007
60,000 60,000 0.75 July 22, 2007
150,000 150,000 0.70 September 27, 2007
200,000 200,000 0.45 September 28, 2008
580,000 580,000 0.75 September 29, 2008
913,000 913,000 0.45 February 2, 2009
400,000 100,000 0.45 March 10, 2011
----------- -----------
2,903,000 2,603,000
=========== ===========
See also Note 18(d).
F-17
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
9. CONTRIBUTED SURPLUS
Contributed surplus for fiscal 2006, 2005 and 2004 is comprised of the
following:
----------- ----------- -----------
2006 2005 2004
----------- ----------- -----------
$ $ $
Balance, beginning of year 738,642 179,611 -
Stock-based compensation on warrants (Note 7) 140,721 - -
Stock-based compensation on stock options (Note 8) 550,817 559,031 179,611
Stock options exercised (69,413) - -
----------- ----------- -----------
Balance, end of year 1,360,767 738,642 179,611
=========== =========== ===========
10. INCOME TAXES
The income tax effects of temporary differences that give rise to
significant components of future income tax assets and liabilities are
as follows:
2006 2005
$ $
Future income tax assets:
Financing costs 272,000 200,000
Capital assets 15,000 -
Losses available for future periods 1,630,000 1,129,000
----------- -----------
1,917,000 1,329,000
Future income tax liabilities:
Difference between book value and
income tax costs of unproven
mineral interests (6,749,000) (6,657,000)
----------- -----------
Net future income tax liabilities (4,832,000) (5,328,000)
=========== ===========
The recovery of income taxes shown in the statements of loss and
deficit differ from the amounts obtained by applying statutory rates to
the loss before income taxes due to the following:
2006 2005
$ $
Combined federal and provincial
income tax rate 34.12% 35.36%
=========== ===========
Expected income tax recovery 1,205,600 600,100
Non-deductible stock-based compensation (188,000) (197,700)
Write-down of unproven mineral interest (525,000) -
Effect of change in tax rates (48,000) -
Unrecognized tax losses (497,900) (381,900)
Recovery of valuation allowance 1,316,633 1,329,000
Other 53,300 (20,500)
----------- -----------
Future income tax recovery 1,316,633 1,329,000
=========== ===========
As at August 31, 2006, the Company has accumulated non-capital losses
of approximately $4.8 million and cumulative resource and other tax
pools of approximately $5.2 million carried forward for Canadian income
tax purposes and are available to reduce taxable income of future
years. The non-capital losses expire
F-18
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
10. INCOME TAXES (continued)
commencing in 2007 through 2016. The cumulative resource and other tax
pools can be carried forward indefinitely.
In fiscal 2006, the Company issued 3,293,070 flow-through common shares
for gross proceeds of $2,305,149 (see Note 7(a)). Resource expenditure
deductions for income tax purposes related to exploration and
development activities funded by flow-through share arrangements are
renounced to investors in accordance with Canadian income tax
legislation. The renunciation of such expenditures is accounted for as
a financing cost related to the flow-through issuance and results in a
reduction in share capital with a corresponding increase in the
Company's future income tax liability.
The Company is permitted under Canadian income tax legislation to
renounce flow-through related resource expenditures to investors in
advance of the Company incurring the expenditure. In accordance with
this legislation the Company has twelve months following the effective
date of renunciation to incur the expenditures. The Company begins
incurring interest charges for unspent funds after one month and fees
for unspent funds at the end of the calendar year following the
effective date of renunciation, and until such time as funds are fully
expended. During fiscal 2006 the Company incurred a $43,000 Part XII.6
tax expense on the monthly unspent balance of flow-through funds. All
of the flow-through funds were spent by September 2006.
11. RELATED PARTY TRANSACTIONS
(a) The Company was charged for various services provided by
companies controlled by directors and officers of the Company,
as follows:
2006 2005 2004
$ $ $
Accounting and administration 99,700 90,450 63,638
Professional and consulting 116,400 67,900 6,000
Compensation and benefits 93,000 51,500 3,000
----------- ----------- -----------
309,100 209,850 72,638
=========== =========== ===========
These fees have been either expensed to operations or
capitalized to unproven mineral interests, based on the nature
of the expenditures.
As at August 31, 2006, accounts payable and accrued
liabilities include $4,637 (2005 - $24,369) due to these
related parties.
These transactions were measured at the exchange amount, which
was the amount of consideration established and agreed to by
related parties.
(b) The Company had previously received advances from a related
party and a non-related third party. The related party is a
public company which certain of its officers and directors are
also officers and directors of the Company. During the 2004
fiscal year, the Company negotiated a settlement of the
$748,687 which was outstanding and paid $688,079 cash,
resulting in a gain of $60,608.
F-19
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
11. RELATED PARTY TRANSACTIONS (continued)
(c) Advances had been previously made to the Company by
shareholders and directors of the Company for working capital
purposes. During the 2004 fiscal year, the Company negotiated
a settlement of the $300,142 which was outstanding and paid
$263,543 cash, resulting in a gain of $36,599.
(d) Other related party transactions are disclosed elsewhere in
these financial statements.
12. SEGMENTED INFORMATION
During the 2004 fiscal year, the Company's principal activities were
the development of petroleum properties in the United States and the
acquisition of unproven mineral interests in Canada. Effective March 1,
2004, the Company sold its remaining oil and natural gas interests. As
at August 31, 2006, the Company had only recorded deferred costs
relating to its agreements on unproven mineral interests. The unproven
mineral interest and the Company's corporate assets are located in
Canada. Identifiable assets, revenues and net loss in each of these
geographic areas are as follows:
-----------------------------------------
2006
-----------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Canada - mineral operations 23,845,828 - (1,538,655)
Canada - corporate 706,840 16,729 (661,280)
----------- ----------- -----------
24,552,668 16,729 (2,199,935)
=========== =========== ===========
-----------------------------------------
2005
-----------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES LOSS
$ $ $
Canada - mineral operations 22,759,333 - -
Canada - corporate 1,169,349 31,331 (368,110)
----------- ----------- -----------
23,928,682 31,331 (368,110)
=========== =========== ===========
-----------------------------------------
2004
-----------------------------------------
IDENTIFIABLE NET
ASSETS REVENUES INCOME (LOSS)
$ $ $
United States
- petroleum operations - 81,347 169,728
Canada - mineral operations 75,906 - -
Canada - corporate 341,675 695 (426,750)
----------- ----------- -----------
417,581 82,042 (257,022)
=========== =========== ===========
F-20
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
13. FINANCIAL INSTRUMENTS
The fair values of financial instruments at August 31, 2006 and 2005,
were estimated based on relevant market information and the nature and
terms of financial instruments. Management is not aware of any factors
which would significantly affect the estimated fair market amounts,
however, such amounts have not been comprehensively revalued for
purposes of these financial statements. Disclosure subsequent to the
balance sheet dates and estimates of fair value at dates subsequent to
August 31, 2006 and 2005, may differ significantly from that presented.
Fair value approximates the amounts reflected in the financial
statements for cash, amounts receivable and accounts payable and
accrued liabilities. It is not practicable to estimate the fair value
of the Redeemable Preferred Shares.
14. SUPPLEMENTARY CASH FLOW INFORMATION
Non-cash financing and investing activities were conducted by the
Company as follows:
2006 2005 2004
$ $ $
Operating activities
Accounts payable for unproven mineral interests 137,253 4,167 -
Accounts payable for capital assets 30,492 - -
----------- ----------- ------------
167,745 4,167 -
=========== =========== ============
Financing activities
Issuance of common shares for unproven mineral interests 18,250 2,845,000 -
Issuance of common shares for fiscal advisory services 60,000 - -
Issuance of common shares for corporate finance fee - 34,000 -
Issuance of common shares for finder's fee - - 24,600
Common share issue costs (60,000) (34,000) (24,600)
Issuance of Redeemable Preferred Shares for
unproven mineral interests - 8,000,000 -
Share capital - future income tax adjustment (820,633) (1,566,000) -
Future tax liability 820,633 6,657,000 -
----------- ----------- -----------
18,250 15,936,000 -
=========== =========== ============
Investing activities
Accounts payable for unproven mineral interest (137,253) (4,167) -
Accounts payable for capital assets (30,492) - -
Common shares issued for unproven mineral interests (18,250) (2,845,000) -
Redeemable Preferred Shares issued for unproven
mineral interests - (8,000,000) -
Unproven mineral interests - future income tax
adjustment - (5,091,000) -
----------- ----------- -----------
(185,995) (15,940,167) -
=========== =========== ===========
F-21
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
14. SUPPLEMENTARY CASH FLOW INFORMATION (continued)
Other supplementary cash flow information:
2006 2005 2004
$ $ $
Interest paid in cash - - 105,484
=========== =========== ===========
Dividends paid in cash 50,000 37,500 -
=========== =========== ===========
Income taxes paid in cash - - -
=========== =========== ===========
15. LEASE COMMITMENTS
The Company has entered into lease agreements for its offices and
certain vehicles under operating leases. Minimum payments under these
leases are as follows:
YEAR $
2007 87,124
2008 39,077
2009 11,396
-----------
137,597
===========
16. ASSET RETIREMENT OBLIGATION
2006 2005 2004
$ $ $
Balance, beginning of year 938,500 - -
Liabilities assumed
on acquisition - 900,500 -
Accretion expense 76,000 38,000 -
----------- ----------- -----------
Balance, end of year 1,014,500 938,500 -
=========== =========== ===========
The total undiscounted amount of estimated cash flows required to
settle the Company's estimated obligation is $1,018,567 which has been
discounted using a credit adjusted risk free rate of 8.5%. The
reclamation obligation relates to the Bachelor Lake Property. The
present value of the reclamation liability may be subject to change
based on management's current estimates, changes in remediation
technology or changes to the applicable laws and regulations. Such
changes will be recorded in the accounts of the Company as they occur.
See also Notes 5(b) and 18(b).
F-22
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(a) The financial statements of the Company are presented in
accordance with Canadian GAAP. Canadian GAAP differs in
certain material respects from US GAAP. The material
differences between Canadian and US GAAP, in respect of these
financial statements, are summarized in the tables below.
Statements of Loss
2006 2005 2004
$ $ $
Net loss under Canadian GAAP (2,199,935) (368,110) (257,022)
Unproven mineral interests expensed (i) (545,409) (11,025,762) -
Other compensation expense (ii) - (12,144) (15,503)
Gain on settlement (iii) - - (97,207)
Deferred income tax expense (v) (491,326) (1,103,364) -
----------- ----------- -----------
Net loss under US GAAP (3,236,670) (12,509,380) (369,732)
=========== =========== ===========
Loss per share under US GAAP (0.11) (0.78) (0.07)
=========== =========== ===========
Balance Sheets
2006 2005
$ $
Total assets under Canadian GAAP 24,552,668 23,928,682
Unproven mineral interests expensed (i) (11,571,171) (11,025,762)
----------- -----------
Total assets under US GAAP 12,981,497 12,902,920
=========== ===========
Total liabilities under Canadian GAAP 14,103,188 14,850,721
----------- -----------
Total liabilities under US GAAP 14,103,188 14,850,721
=========== ===========
Total shareholders' equity under Canadian GAAP 10,449,480 9,077,961
Unproven mineral interests expensed (i) (11,571,171) (11,025,762)
----------- -----------
Total shareholders' deficiency under US GAAP (1,121,691) (1,947,801)
=========== ===========
Statements of Cash Flows
2006 2005 2004
$ $ $
Operating Activities
Cash used per Canadian GAAP (2,199,935) (368,110) (257,022)
Unproven mineral interests (2,469,647) (5,842,760) (75,906)
----------- ----------- -----------
Cash used per US GAAP (4,669,582) (6,210,870) (332,928)
=========== =========== ===========
Investing Activities
Cash provided by per Canadian GAAP (2,744,397) (5,879,653) (21,211)
Unproven mineral interests 2,469,647 5,842,760 75,906
----------- ----------- -----------
Cash (used) provided by per US GAAP (274,750) (36,893) 54,695
=========== =========== ===========
F-23
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(i) Unproven Mineral Interests
Mineral property costs and related exploration
expenditures are accounted for in accordance with
Canadian GAAP as disclosed in Note 2. For US GAAP
purposes, the Company expenses exploration costs
relating to mineral interests. When proven and
probable reserves are determined for an interest and
a feasibility study prepared, then subsequent
exploration and development costs of the property
would be capitalized. The capitalized costs of such
properties would then be amortized using the unit of
production method over the estimated life of the ore
body based on proven and probable reserves and would
be assessed periodically for recoverability of
carrying values.
For US GAAP purposes, the Company has adopted the
provisions of EITF 04-2, "Whether Mineral Rights are
Tangible or Intangible Assets" and FSP FAS 141-1 and
142-1 which concluded that mineral rights are
tangible assets. Accordingly, the Company capitalizes
certain costs related to the acquisition of mineral
rights. The effect of adoption of EITF 04-2 is to
reduce previously reported loss and loss per share
for fiscal 2005 and 2004 by $12,986,665 and $75,906,
and $0.81 and $0.01, respectively. In addition, total
assets is increased by $11,733,571 and shareholders'
deficiency is decreased by $11,733,571 as at December
31, 2005.
(ii) Private Placements of Common Stock
The Company conducts the majority of its equity
financings pursuant to private placements. Under the
policies of the TSX Venture, the Company may provide
a discount off the market price of the Company's
common stock. US GAAP does not permit a discount from
the market price. US GAAP requires the recognition of
the market value of the Company's common stock as a
credit to share capital, with a charge to operations
for the portion of the discount relating to equity
financings conducted with officers and directors of
the Company and a charge to shareholders' equity, as
a capital distribution, for the discount relating to
the remaining portion of the equity financings.
Under US GAAP, loss and capital distributions for
fiscal 2006 would increase by $nil (2005 - $12,144;
2004 - $15,503) and $158,413 (2005 - $966,502; 2004 -
$206,497), respectively, and share capital, as at
August 31, 2006, would increase by $2,320,461 (2005 -
$2,162,048; 2004 - $1,183,402). There is no net
change to shareholders' equity.
(iii) Settlement with Related Parties
US GAAP requires that gains on settlement of advances
with related parties be credited to deficit. There is
no net change in shareholders' equity.
(iv) Functional Currency
The Company's functional currency is the Canadian
dollar.
F-24
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(v) Canadian Flow-Through Shares
During fiscal 2006, the Company issued 3,293,070
flow-through common shares (2005 - 4,626,364 shares)
for gross proceeds of $2,305,149 (2005 - $4,395,046).
Resource expenditure deductions for income tax
purposes related to exploration and development
activities funded by flow-through share arrangements
are renounced to investors in accordance with
Canadian income tax legislation. Under Canadian GAAP,
the flow-through shares are recorded at their face
value when issued and the renunciation of such
expenditures is accounted for as a financing cost
related to the flow-through issuance and results in a
reduction of share capital with a corresponding
increase in the Company's future income tax
liability.
US GAAP requires that the proceeds from issuance
should be allocated between the offering of shares
and the sale of tax benefits. The allocation is made
between the quoted price of the existing shares and
the amount the investor pays for the shares. A
liability is recognized for this difference. This
liability is reversed when tax benefits are renounced
and a deferred tax liability is recognized at that
time. Income tax expense is the difference between
the amount of the deferred tax liability and the
liability recognized on issuance.
Under US GAAP the loss for fiscal 2006 and
shareholders' deficiency as at August 31, 2006, would
increase by $491,326 (2005 - $1,103,364; 2004 -
$nil).
(vi) Capitalization of Dividend on Redeemable Preferred
Shares
As part of the Duport Property acquisition, the
Company issued mandatory redeemable preferred shares.
Due to the characteristics of these preferred shares,
for both Canadian and US GAAP, the preferred shares
are accounted for as liabilities.
Under Canadian GAAP, dividends paid on shares
accounted for as liabilities should be disclosed as
interest rather than as a charge to capital. As such,
the Company has decided to capitalize the dividends
paid as a carrying cost directly attributable to the
unproven mineral interest.
Under US GAAP, SFAS 34 - Capitalization of Interest
Cost ("SFAS 34") lists assets qualifying for interest
capitalization. The exploration of unproven mineral
interests does not qualify. As such, $50,000 (2005 -
$41,667) of capitalized dividends on redeemable
preferred shares would be separately charged to
earnings. There is no net change to net loss under US
GAAP.
(vii) Development Stage Company
The Company is in the exploration stage and, as of
July 1, 2004, is considered a development stage
company as defined by SFAS 7. To August 31, 2006, the
Company has accumulated a deficit of $15,912,247
while in the development stage.
F-25
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (continued)
(b) Recent Accounting Pronouncements
UNITED STATES PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standards ("SFAS") 157,
"Fair Value Measurements" ("SFAS 157"), which defines fair
value, establishes a framework for consistently measuring fair
value under GAAP and expands disclosures about fair value
measurements. SFAS 157 is effective beginning January 1, 2008,
and the provisions of SFAS 157 will be applied prospectively
as of that date. The adoption of SFAS 157 is not expected to
have an effect on the Company's financial position.
The FASB has also issued FAS Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in
accordance with FAS Interpretation No. 109, "Accounting for
Income Taxes". FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement
recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transitions. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The adoption of FIN 48 is not
expected to have an effect on the Company's financial
position.
CANADIAN PRONOUNCEMENTS
The Company believes that there are no new Canadian
pronouncements which will have a material effect on the
Company's financial position or results of operations.
18. SUBSEQUENT EVENTS
(a) In October 2006, the Company completed a brokered private
placement and issued 3,416,333 flow- through units at a price
of $0.45 per flow-through unit, for total gross proceeds of
$1,537,350. Each flow-through unit consisted of one common
share and one-half share purchase warrant with each full
warrant entitling the holder to purchase one further common
share of the Company, for a period of two years at a price of
$0.60 on or before April 12, 2008. A director of the Company
purchased 20,000 flow-through units for $9,000.
The Company paid an agent a cash commission of $115,301 and
issued 341,633 warrants (the "Agent Warrants") and incurred
$67,067 of costs relating to the financing. Each Agent's
Warrant is exercisable to purchase one common share at a price
of $0.45 on or before April 12, 2008. The Company also issued
62,500 units, at a fair value of $0.45 per unit, for corporate
finance fees (the "Corporate Finance Units"). Each Corporate
Finance Unit, comprising of one common share and one share
purchase warrant, having the same terms as the Agent's
Warrants.
(b) On November 17, 2006, Metanor and the Company agreed to a new
agreement (the "Revised Metanor Purchase") under which Metanor
has now agreed to purchase the Company's 50% interest in the
Bachelor Lake JV for total consideration of $4 million, as
follows:
F-26
HALO RESOURCES LTD.
(AN EXPLORATION STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004
18. SUBSEQUENT EVENTS (continued)
i) $2 million cash (received);
ii) $500,000 cash on or before March 30, 2007; and
iii) $500,000 in cash or common shares of Metanor each on
or before May 31, 2007, August 31, 2007 and November
30, 2007.
Metanor continues to be responsible for all on-going costs,
expenses and obligations of the Bachelor Lake JV. In addition
Metanor has granted the Company a 1% NSR and the Company will
retain its beneficial interest in the Bachelor Lake JV until
completion of the sale.
The Company will recognize a further write-down of
approximately $225,000 in fiscal 2007 to reflect the terms of
the Revised Metanor Agreement.
(c) On December 3, 2006, the Company and EL entered into a formal
purchase agreement (the "Quarter Moon Purchase Agreement")
under which the Company has purchased a 100% interest in ten
mining claims, including the original five mining claims under
the Quarter Moon LOI, in north-central Manitoba, for $90,000
cash and the issuance of 160,000 common shares of the Company.
EL holds a 1% NSR, of which a 0.5% NSR can be purchased at any
time for $500,000.
(d) On November 27, 2006, the Company cancelled 790,000 stock
options with an exercise price of $0.70 per share, 150,000
stock options with an exercise price of $0.65 per share and
50,000 stock options with an exercise price of $0.45 per
share. The Company also extended the expiry date of 450,000
stock options with an exercise price of $0.60 per share, from
May 31, 2007 to May 31, 2009. In addition, the Company granted
1,547,000 stock options with an exercise price of $0.45 per
share, expiring November 27, 2009.
F-27
SCHEDULE I
HALO RESOURCES LTD.
SCHEDULE OF UNPROVEN MINERAL INTERESTS
FOR THE YEARS ENDED AUGUST 31
----------------------------------------------------------------------- -----------
2006 2005
----------------------------------------------------------------------- -----------
BACHELOR RED
DUPORT LAKE SHERRIDON LAKE
PROPERTY PROPERTY VMS PROJECT PROPERTY TOTAL TOTAL
$ $ $ $ $ $
BALANCE - BEGINNING OF YEAR 16,834,784 5,585,956 338,593 - 22,759,333 75,906
----------- ----------- ----------- ----------- ----------- -----------
AMOUNTS INCURRED DURING THE YEAR
EXPLORATION EXPENDITURES
Accounting - 13,272 - - 13,272 -
Airborne surveying - - 350,270 - 350,270 250,268
Assays - 23,065 9,445 - 32,510 56,036
Camp and equipment costs 110,727 115,474 13,050 - 239,251 209,549
Consulting 63,114 211,082 420,284 3,201 697,681 301,200
Data - - 25,000 - 25,000 -
Drilling - 296,768 - - 296,768 1,373,524
Due diligence 6,054 - 8,160 - 14,214 23,296
Engineering 26,856 23,020 - - 49,876 -
Exploration office costs 27,843 16,545 19,595 - 63,983 25,018
Field personnel 41,252 126,517 - - 167,769 179,253
Field supplies - - 4,456 2,103 6,559 41,332
Filing - 2,250 1,000 - 3,250 14,035
Geological - - - - - 199,030
Insurance - 16,719 - - 16,719 -
Maintenance - 16,388 - - 16,388 -
Mobilization, demobilization - 6,132 - - 6,132 88,766
Rent and utilities - 106,577 - - 106,577 30,669
Site preparation - - - - - 232,706
Surveying 3,573 - - - 3,573 16,223
Technical report - - 10,859 - 10,859 10,000
Telephone 949 7,176 1,455 - 9,580 4,847
Travel 28,865 49,389 49,575 4,712 132,541 118,720
Reimbursement / Recoveries - (211,950) (16,758) - (228,708) 1,818,123
----------- ----------- ----------- ----------- ----------- -----------
309,233 818,424 896,391 10,016 2,034,064 4,992,595
----------- ----------- ----------- ----------- ----------- -----------
OTHER ITEMS
Acquisition costs and payments - 165,782 66,462 - 232,244 11,260,000
Claims staking and lease
rental cost 5,165 - 142,237 - 147,402 12,458
Legal - 15,282 107,206 38,952 161,440 385,207
Capitalized dividend 50,000 - - - 50,000 41,667
Future income tax adjustment - - - - - 5,091,000
Asset retirement obligation - - - - - 900,500
----------- ----------- ----------- ----------- ----------- -----------
55,165 181,064 315,905 38,952 591,086 17,690,832
----------- ----------- ----------- ----------- ----------- -----------
BALANCE BEFORE WRITE-DOWN 17,199,182 6,585,444 1,550,889 48,968 25,384,483 22,759,333
WRITE-DOWN (Note 5(b)) - (1,538,655) - - (1,538,655) -
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - END OF YEAR 17,199,182 5,046,789 1,550,889 48,968 23,845,828 22,759,333
=========== =========== =========== =========== =========== ===========
F-28