FORM FV2 CERTIFICATION OF INTERIM FILINGS - VENTURE ISSUER BASIC CERTIFICATE

Transcription

1 FORM FV2 CERTIFICATION OF INTERIM FILINGS - VENTURE ISSUER BASIC CERTIFICATE I, Tawn Albinson, President and Chief Executive Officer of Prospero Silver Corp. (the Issuer ), certify the following: 1. Review: I have reviewed the interim financial report and interim MD&A (together, the interim filings ) of the issuer for the interim period ended June 30, No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. Date: August 28, 2012 Tawn Albinson Tawn Albinson President and Chief Executive Officer NOTE TO READER In contrast to the certificate required for non-venture issuers under National Instrument Certification of Disclosure in Issuers Annual and Interim Filings (NI ), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of: (i) (ii) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer s GAAP. The issuer s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

2 FORM FV2 CERTIFICATION OF INTERIM FILINGS - VENTURE ISSUER BASIC CERTIFICATE I, David Huffer, Chief Financial Officer of Prospero Silver Corp. (the Issuer ), certify the following: 1. Review: I have reviewed the interim financial report and interim MD&A (together, the interim filings ) of the issuer for the interim period ended June 30, No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. 3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. Date: August 28, 2012 David Huffer David Huffer Chief Financial Officer NOTE TO READER In contrast to the certificate required for non-venture issuers under National Instrument Certification of Disclosure in Issuers Annual and Interim Filings (NI ), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of: (i) (ii) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer s GAAP. The issuer s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

3 Condensed Consolidated Interim Financial Statements Six Months Ended June 30, 2012 Expressed in Canadian Dollars

4 NOTICE TO READER The accompanying unaudited interim consolidated financial statements have been prepared by and are the responsibility of the management. The Company's independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity's auditor.

5 Consolidated statements of financial position (Expressed in Canadian dollars unaudited) Notes June 30, 2012 December 31, 2011 ASSETS Current assets Cash and cash equivalents $ 886,745 $ 685,783 Receivables 38,017 78,345 Prepaid expenses 39,348 17, , ,876 Non-current assets Property, plant and equipment 3 48,449 54,242 Exploration and evaluation assets 4 3,729,423 3,514,613 3,777,872 3,568,855 TOTAL ASSETS $ 4,741,982 $ 4,350,731 LIABILITIES Current liabilities Trade payables and accrued liabilities $ 109,292 $ 40,983 TOTAL LIABILIITES 109,292 40,983 SHAREHOLDERS EQUITY Share capital 5 6,566,840 6,021,744 Reserves 6 1,081,582 1,072,437 Deficit (3,015,732) (2,784,433) TOTAL EQUITY 4,632,690 4,309,748 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 4,741,982 $ 4,350,731 Nature and Continuance of Operations (Note 1) Commitments (Note 4) On behalf of the board: [signed]:"tawn Dewey Albinson", Director [signed]:'william Murray" Director See accompanying notes to the consolidated financial statements 3

6 Consolidated statements of comprehensive loss (Expressed in Canadian dollars unaudited) Three month periods ended Notes June 30, 2012 June 30, 2011 Six month periods ended June 30, June 30, Expenses Communications $ 10,416 $ 941 $ 11,836 $ 2,172 Consulting fees ,000 Directors fees 12,000 12,000 24,000 24,000 Filing fees 1,423 8,512 9,151 17,783 Foreign exchange gain 2,842 8,867 (3,152) (158) Investor relations 18,000 18,000 36,000 36,000 Office and miscellaneous 13,692 2,981 20,269 10,884 Professional fees 25,034 30,292 37,448 39,880 Project investigation costs 40 1,219 1,319 11,931 Rent 8,400 8,400 16,800 16,800 Salaries and wages 29,091 21,939 60,957 44,415 Stock-based compensation - 126, ,087 Travel 2,468 19,518 17,314 34,530 $ (123,406) $(258,756) $ (232,878) $ (365,324) Other items Interest income 408-1,579 - Net loss and comprehensive loss for the period $ (122,998) $(258,756) $ (231,299) $ (365,324) Loss per share basic and diluted 5 $ (0.004) $ (0.009) $ (0.008) $ (0.014) See accompanying notes to the consolidated financial statements 4

7 Consolidated statements of changes in shareholders equity (Expressed in Canadian dollars unaudited) Share capital Share-based Notes Number of shares Amount payment reserve Deficit Total Balance at January 1, ,458,611 $ 4,034,784 $ 951,932 $ (1,465,110) $ 3,521,606 Comprehensive loss: Loss for the period (365,324) (365,324) Total comprehensive loss for the period (365,324) (365,324) Transactions with owners, in their capacity as owners, and other transfers: Shares issued for cash private placement 5,622,855 1,967, ,967,999 Shares issued to acquire exploration and evaluation asset 210, , ,200 Share issue costs - cash - (151,813) - - (151,813) Share issue costs Agents warrants issued - (50,350) 50, Stock-based compensation , ,087 Total transactions with owners and other transfers 5,832,855 1,896, ,437-2,072,473 Balance at June 30, ,291,466 $ 5,930,820 $ 1,128,369 $ (1,830,434) $ 5,228,755 Balance at January 1, ,491,466 $ 6,021,744 $ 1,072,437 $ (2,784,433) $ 4,309,748 Comprehensive income: Loss for the period (231,299) (231,299) Total comprehensive loss for the period (231,299) (231,299) Transactions with owners, in their capacity as owners, and other transfers: Shares issued for cash private placement 6,055, , ,500 Share issue costs - cash - (52,195) - - (52,195) Share issue costs Agents warrants issued - (8,209) 8, Stock-based compensation Total transactions with owners and other transfers 6,055, ,096 9, ,241 Balance at June 30, ,546,466 $ 6,566,840 $ 1,081,582 $ (3,015,732) $ 4,632,690 See accompanying notes to the consolidated financial statements 5

8 Consolidated statements of cash flows (Expressed in Canadian dollars unaudited) Six month periods ended June 30, 2012 June 30, 2011 Operating activities Loss for the period $ (231,299) $ (365,324) Adjustments for: Stock based compensation ,087 Other items (1,579) - (231,942) (239,237) Changes in working capital items: Accounts receivable 40,328 (8,443) Prepaid expenses (21,600) (2,338) Trade payables and accrued liabilities 68,309 (7,182) Interest received 1,579 - Net cash flows from (used in) operating activities (143,326) (257,200) Investing activities Expenditures on exploration and evaluation assets (209,017) (977,152) Expenditures on property, plant and equipment - (9,887) Net cash flows from (used in) investing activities (209,017) (987,039) Financing activities Proceeds on issuance of common shares 605,500 1,967,999 Share issue costs (52,195) (151,813) Net cash flows from (used in) financing activities 553,305 1,816,186 Increase (decrease) in cash and cash equivalents 200, ,947 Cash and cash equivalents, beginning 685,783 1,014,338 Cash and cash equivalents, ending $ 886,745 $ 1,586,285 See accompanying notes to the consolidated financial statements 6

9 1. Nature and continuance of operations Prospero Silver Corp. (the Company or Prospero ) was incorporated on March 31, 2008, under the laws of the province of British Columbia, Canada, and its principal activity is the acquisition and exploration of mineral properties. At the date of this report, the Company had mineral property interests located in Mexico that were all undergoing preliminary evaluation and exploration. On December 23, 2009, the Company had completed its initial public offering ( IPO ) and on January 5, 2010, the common shares commenced trading on the TSX Venture Exchange ( TSX-V ) under the symbol PSL. The Company is currently evaluating its mineral properties and has not yet determined the existence of economically recoverable reserves. The recoverability of amounts shown for property and acquisition costs and deferred exploration expenditures depends upon many factors, including; the discovery of economically recoverable reserves on its mineral properties, confirmation of the Company s interest in the underlying mineral claims, the ability of the Company to obtain the necessary financing to complete their development, and the sustainability of future profitable production or disposition thereof. The head office, principal address and records office of the Company are located at Lysander Lane Richmond, BC V7B 1C3. These unaudited condensed consolidated interim financial statements have been prepared on the assumption that the Company and its subsidiary (the Group ) will continue as a going concern, meaning it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. Different bases of measurement may be appropriate if the Company is not expected to continue operations for the foreseeable future. As at June 30, 2012 the Company had not advanced a property to commercial production and is not able to finance day to day activities through operations. The Company s continuation as a going concern is dependent upon the successful results from its mineral property exploration activities and its ability to attain profitable operations and generate funds there from and/or raise equity capital or borrowings sufficient to meet current and future obligations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Management intends to finance operating costs over the next twelve months with existing working capital, private placements of common shares and loans from directors and companies controlled by directors. While management has been successful in obtaining sufficient funding for its operating, capital and exploration requirements from the inception of the Company to date, there is no assurance that additional funding will be available to the Company, or that, when it is required it will be available on terms which are acceptable to management. 2. Significant accounting policies and basis of preparation Statement of compliance to International Financial Reporting Standards These condensed consolidated interim financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ) as issued by the IASB applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. 7

10 2. Significant accounting policies and basis of preparation (cont d) Statement of compliance to International Financial Reporting Standards (cont d) These condensed consolidated interim financial report does not include all of the information required of a full annual financial report and is intended to provide users with an update in relation to events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the end of the last annual reporting period. It is therefore recommended that this financial report be read in conjunction with the annual financial statements of the Group for the year ended 31 December 2011, which have been prepared in accordance with IFRS as issued by the IASB. Basis of preparation The condensed consolidated interim financial statements of the Group have been prepared on an accrual basis and are based on historical costs, modified where applicable. The condensed consolidated interim financial statements are presented in Canadian dollars unless otherwise noted. These condensed interim consolidated financial statements follow the same accounting policies and methods of application as the Company s annual consolidated financial statements for the year ended December 31, The consolidated financial statements include the accounts of the Company and its controlled entity. Details of the controlled entity is as follows: Percentage owned Country of incorporation June 30, 2012 December 31, 2011 Minera Fumarola S.A., de C.V. Mexico 100% 100% Inter-company balances and transactions, including unrealized income and expenses arising from intercompany transactions, are eliminated on consolidation. 3. Property, plant and equipment December 31 June 30, Accumulated Net Book Net Book Cost Amortization Value Value - $ - - $ - - $ - - $ - Computer equipment 5,029 4, Office equipment 8,801 2,051 6,750 7,649 Geophysical equipment 27,478 9,458 18,020 19,211 Transport equipment 38,048 14,751 23,297 26,904 79,356 30,907 48,449 54,242 8

11 Property acquisition costs 4. Exploration and evaluation assets Mexico Cordero Baborigame Campana El Dorado Santa Maria Del Oro Other Total for six month period ended June 30, 2012 Total for year ended December 31, 2011 Balance, beginning of period $ 293,033 $ 122,203 $ 122,418 $ 103,293 $ - $ 37,595 $ 678,542 $ 315,813 Costs incurred in the period cash ,529 Costs incurred in the period shares ,200 Balance, end of period 293, , , ,293-37, ,542 $ 678,542 Exploration and evaluation costs Balance, beginning of period $ 1,050,743 $ 673,210 $ 785,065 $ 827,391 $ 34,716 $ 195,630 $ 3,566,755 $ 2,053,474 Costs incurred during period: Drilling and related costs ,125 Fees, taxes and duties 8,737 31,084 16, ,790 11, , ,039 Geological consulting ,195-1, ,877 Laboratory analysis and assays - 3,227 3,160-36,851 2,940 46, ,273 Logistics and support - 5, ,763 2,044 31,783 78,496 Stock-based compensation Field administration 1,453 7,580 3, ,771 3,114 35, ,471 Balance, end of period $ 1,060,933 $ 721,077 $ 808,603 $ 827,663 $ 148,086 $ 215,203 $ 3,781,565 $ 3,566,755 Impairment Balance, beginning of period $ - $ - $ - $ (730,684) $ - $ - $ (730,684) $ - Charges during the period (730,684) Balance, end of period $ - $ - $ - $ (730,684) $ - $ - $ (730,684) $ (730,684 Total $ 1,353,966 $ 843,280 $ 931,021 $ 200,272 $ 148,086 $ 252,798 $ 3,729,423 $ 3,514,613 9

12 4. Exploration and evaluation assets (cont d) The following is a description of the Group s exploration and evaluation assets and the related spending commitments: a) Cordero Property Exploration and Option Agreement The Cordero Property was acquired pursuant to the terms of an Exploration and Option Agreement, dated August 29, 2008 and as amended (the Cordero Option Agreement ), with Exploraciones del Altiplano, S.A. de C.V. ( Altiplano ). Altiplano is a private company, incorporated under the laws of Mexico, managed by a Director of the Company. Altiplano is the holder of a 100% interest in the mineral rights and title to the Cordero Property. The Company secured the exclusive right and option to acquire a 100% interest to and in the Cordero Property, subject to Altiplano s retained 2% net smelter return royalty ( NSR ). In accordance with the terms of the Cordero Option Agreement, in order to exercise its option, the Company is required to make cash payments, issue shares and incur drilling or property expenditures as follows: (i) Cash payments a) US$25,000 payment was made on the execution of the agreement (paid); b) a total of US$37,500, in installments, prior to December 31, 2009 (paid); c) payments of US$50,000 as follows: a total of US$12,500 on or before August 28, extended to January 31, 2011 (paid); a total of US$12,500 on or before February 28, 2011 (paid); a total of US$12,500 on or before August 28, 2011 (paid); a total of US$12,500 on or before February 28, d) a payment of US$150,000 on or before August 29, 2013, and e) a payment of US$200,000 on or before February 28, (ii) Issue common shares: 20,000 shares (issued) plus a number of shares that will depend on the market price per share on the delivery date as follows: Market Price per Share Less than $1.25 to $2.50 to Greater than Delivery date $1.25 $2.49 $7.50 $7.50 Not later than: January 19, 2010 (Issued) 60,000 50,000 40,000 30,000 February 28, 2010 (Issued) 50,000 40,000 35,000 25,000 January 31, 2011 (Issued) 50,000 40,000 35,000 25,000 February 28, 2011 (Issued) 100,000 80,000 70,000 50,000 August 29, 2011 (Issued) 100,000 80,000 70,000 50,000 February 28, , , , ,000 August 28, ,500,000 1,100, , ,000 10

13 4. Exploration and evaluation assets (cont d) a) Cordero Property Exploration and Option Agreement (cont d) The Company issued the following shares under the Cordero Option agreement: Within 10 days of listing: 20,000 shares with a market value of $0.53 per share for gross consideration of $10,600; January 19, 2010 delivery date: 60,000 shares with a market value of $0.53 per share for gross consideration of $31,800; February 28, 2010 delivery date: 50,000 shares with a market value of $0.46 per share for gross consideration of $23,000; January 31, 2011 delivery date: 50,000 shares with a market value of $0.62 per share for gross consideration of $31,000; February 28, 2011 delivery date: 100,000 shares with a market value of $0.62 per share for gross consideration of $62,000; and August 29, 2011 delivery date: 100,000 shares with a market value of $0.35 per share for gross consideration of $35,000. (iii) Drilling or property expenditure commitment by not later than: a) April 28, 2010 US$250,000 or 1,500 meters of drilling (completed); b) February 28, a further US$400,000 (completed); c) February 29, 2012 a further US$400,000 (completed); and d) February 28, 2013 a further US$600,000. b) Baborigame and Campana Option Agreements On May 19, 2009, for consideration of US$25,000 each (paid), pursuant to the terms of two exploration and option agreements, as amended, the Company secured the exclusive right to explore and evaluate and an option to acquire a 100% interest in the Campana and Baborigame properties, subject to a 2% NSR on each property (the "Baborigame and Campana Option Agreement(s)"). One agreement with Altiplano, the holder of a 100% interest in a property known as the Campana El Carmen Property ( Campana ) and the other agreement with Compañia Mineria Terciario, S.A. de C,V. ( Terciario ), a private company managed by a Director of the Company, incorporated under the laws of Mexico and the holder of a 100% interest in a property known as the Baborigame Property ( Baborigame ), In order to exercise each of its options, the Company is required to make cash payments, issue shares and incur drilling or property expenditures as follows: 11

14 4. Exploration and evaluation assets (cont d) b) Baborigame and Campana Option Agreements (cont d) (i) Option cash payments for each property: a) a total of US$75,000 payable as follows: US$12,500 paid on or before July 5, 2010 (Paid); US$12,500 paid on or before January 5, 2011 (Paid); US$12,500 to be paid on or before July 5, 2011 (Paid); US$12,500 to be paid on or before January 5, 2013; US$12,500 to be paid on or before July 5, 2013; US$12,500 to be paid on or before January 5, b) a payment of US$150,000 to be paid on or before July 5, 2014; and c) a payment of US$200,000 to be paid on or before January 5, (ii) Issue Prospero common shares For each property 20,000 shares (Issued); Plus a number of shares dependent on the market price per share on the delivery date as follows: Market Price per Share Less than $1.25 to $2.50 to Greater than Delivery date $1.25 $2.49 $7.50 $7.50 Not later than: July 5, 2010 (Issued) 30,000 25,000 20,000 15,000 January 5, 2011 (Issued) 30,000 25,000 20,000 15,000 July 5, 2011 (Issued) 50,000 40,000 35,000 25,000 January 5, ,000 40,000 35,000 25,000 July 5, ,000 80,000 70,000 50,000 January 5, ,000 80,000 70,000 50,000 July 5, , , , ,000 January 5, ,500,000 1,100, , ,000 The Company issued the following shares, for each property under the Baborigame and Campana Option agreements: Within 10 days of listing: 20,000 shares for each property with a market value of $0.53 per share for gross consideration of $10,600 per property; July 5, 2010 delivery date: 30,000 shares for each property with a market value of $0.335 per share for gross consideration of $10,050 per property; January 5, 2011 delivery date: 30,000 shares for each property with a market value of $0.62 per share for gross consideration of $18,600 per property; and 12

15 4. Exploration and evaluation assets (cont d) b) Baborigame and Campana Option Agreements (cont d) July 5, 2011 delivery date: 50,000 shares for each property with a market value of $0.34 per share for gross consideration of $17,000 per property; (iii) Drilling or property expenditure commitment for each property by not later than: a) January 5, US$250,000 or 1,500 meters of drilling (completed); b) January 5, a further US$400,000 (completed); c) January 5, 2013 a further US$400,000; and d) January 5, 2014 a further US$600,000. See note 10 c) subsequent event. c) El Dorado agreements The Company entered two option agreements in 2010 and also staked 397 hectares of open ground adjacent to the optioned areas. During the year ended December 31, 2011, management reviewed the exploration results of the optioned claims and weighed what it considered to be limited potential for developing a mine against steeply rising cash commitments. Based on this review, it was determined that the optioned interests would be abandoned and only the staked claims retained. Management recorded an impairment provision of $730,684 to record the area of interest at its estimated recoverable value. d) Santa Maria del Oro During the year ended December 31, 2011 and during the first quarter of 2012, the Company acquired the Santa Maria del Oro property by staking. The property consists of approximately 33,800 hectares in the Western portion of Mexico s Santa Maria del Oro district in the Durango state. e) Other properties Bermudez Property During the year ended December 31, 2010, the Company acquired the Bermudez property by staking. Ocampo and Gambusino Properties On August 29, 2008, the Company entered into a Promissory Agreement with a related party (note 6(b)) in which it was granted an option to acquire four mining concessions. On March 9, 2009, the Company entered into an assignment agreement with the related party and completed the acquisition of these concessions for cash consideration of $9,

16 5. Share capital Authorized share capital Unlimited number of common shares without par value. Issued share capital At June 30, 2012 there were 35,546,466 issued and fully paid common shares outstanding. (December 31, ,491,466) For the period ended June 30, 2012: On June 14, 2012, the Company completed a non-brokered private placement consisting of 6,055,000 units at $0.10 per unit for proceeds of $605,500. Each unit consists of one common share and one half share purchase warrant with one whole share purchase warrant exercisable at a price of $0.20 per share expiring on December 14, The entire value of the unit, share and share purchase warrant, was included within share capital. In connection with the private placement, the Company paid $35,809 in finders fees, which consisted of $27,600 cash and 138,000 finder s warrants with the same terms and conditions as the private placements warrants. The fair value of the finder s warrants under the Black-Scholes model was $8,209, recorded as a share issuance cost. Other share issuance costs of $24,595 were incurred in connection with this transaction. The fair value of the finder s warrants was estimated with the Black-Scholes option pricing model using current market assumptions: Expected life of 1,5 years, expected volatility of 112%, dividend yield 0.0%, and a Risk-free interest rate of 1.30%. Basic and diluted loss per share The calculation of basic and diluted loss per share for the period ended June 30, 2012 was based on the loss attributable to common shareholders of $231,299 ( $365,324) and the weighted average number of common shares outstanding of 30,023,774 ( ,728,634). Diluted loss per share did not include the effect of stock options and warrants as the effect would be antidilutive. Stock options The Company has adopted an incentive stock option plan, which provides that the Board of Directors of the Company may from time to time, in its discretion, and in accordance with the TSX-V requirements, grant to directors, officers, employees and technical consultants, including investor relations advisors, non-transferable stock options to purchase common shares, provided that the number of common shares reserved for issuance will not exceed 10% of the Company s issued and outstanding common shares at the time each option is granted. The Plan contains restrictions on the number of options, including share compensation arrangements, to which any one service provider is entitled. Such options will be exercisable for a maximum period of up to 10 years from the date of grant. Options may be exercised no later than 90 days following cessation of the optionee s position with the Company or 30 days following cessation of an optionee conducting investor relations activities position. Options granted typically vest immediately upon issuance, except for investor relation options that vest quarterly subsequent to the grant date. 14

17 5. Share capital (cont d) The changes in options during the six month period ended June 30, 2012 and the year ended December 31, 2011 are as follows: March 31, 2012 December 31, 2011 Weighted average exercise Number of price options Weighted average exercise price Number of options Options outstanding, beginning of period 2,350,000 $ ,230,000 $ 0.37 Options granted , Options forfeited - - (300,000) 0.38 Options outstanding, end of period 2,350,000 $ ,350,000 $ 0.38 Options exercisable, end of period 2,350,000 $ ,250,000 $ 0.38 Details of options outstanding as at June 30, 2012 are as follows: Exercise price Number of options outstanding $0.35 1,400,000 $ ,000 $ ,000 $ ,000 $ ,000 Total 2,350,000 The grant date fair value of options vesting during the six month period ended June 30, 2012 was $960 ( $92,079). The fair value was determined using the Black-Scholes option pricing model using the following weighted average assumptions: Six month period ended June 30, 2012 Year ended December 31, 2011 Expected life of options 5 years 5 years Annualized volatility 100% 100% Risk-free interest rate 2.34% 2.34% Dividend rate 0% 0% 15

18 5. Share capital (cont d) Share purchase warrants The following table summarises the continuity of the Company s share purchase warrants: Number of warrants Outstanding, December 31, Issued 5,943,082 Outstanding, December 31, ,943,082 Expired (5,943,082) Issued 3,165,500 Outstanding, June 30, ,165,000 Details of share purchase warrants outstanding as at June 30, 2012 are as follows: Exercise price Number of warrants outstanding $0.20 3,165,500 Total 3,165,000 Restricted Share Capital: Effective September 18, 2009, an amount of 7,270,217 common shares were voluntary placed in escrow pursuant to an escrow agreement. The escrow shares will be released in stages, as follows: 727,021 Shares released after January 5, 2010 (released); 1,090,533 Shares released after July 5, 2010 (released); 1,090,533 Shares released after January 5, 2011 (released); 1,090,533 Shares to be released after July 5, 2011 (released); 1,090,533 Shares to be released after January 5, 2012 (released); 1,090,533 Shares to be released after July 5, 2012 (Note 10); 1,090,531 Shares to be released after January 5, 2013; 7,270,217 Total 6. Reserves Share-based payment reserve The share-based payment reserve represents the fair value of stock options or compensation warrants until such time that the share-based instruments are exercised, at which time the corresponding amount will be transferred to share capital. 16

19 7. Related party transactions Related party balances The following amounts due to related parties are included in trade payables and accrued liabilities: June 30, 2012 December 31, 2011 Companies controlled by directors of the Company $ 8,400 $ 8,400 Directors of the Company or its subsidiary 4,589 4,500 $ 12,989 $ 12,900 These amounts are unsecured, non-interest bearing and have no fixed terms of repayment. Related party transactions The Company incurred the following transactions with company s that are controlled or managed by directors of the Company. Period ended Year ended June 30, 2012 December 31, 2011 Directors fees $ 15,000 $ 30,000 Rent 16,800 33,600 Geological consulting included in deferred exploration services 1,195 - Property acquisition costs cash (Note 7) - 86,249 Property acquisition costs shares (Note 7) - 199,200 $ 32,995 $ 349,049 Transactions with related parties have been recorded at their exchange amount Key management personnel compensation Period ended Year ended June 30, 2012 December 31, 2011 Directors fees $ 9,000 $ 18,000 Company officer and director geological and administrative services included in deferred exploration services 3,212 21,710 Company officer geological and administrative services included in deferred exploration services 9,150 51,760 Stock-based compensation - 71,920 $ 21,362 $ 163,390 The Cordero and Campana Properties (notes 4(a) and 4(b) respectively) were acquired under option agreements with Altiplano. The Baborigame (note 4(b)) property was acquired under an option agreement with Terciario. An officer, director and shareholder of Altiplano and Terciario is also an officer, director and shareholder of the Company. The Company acquired the Ocampo and Gambusino mineral property interests, included in Other Properties (note 4(d)), from an individual who is an officer of Fumarola. 17

20 8. Segmented information Operating segments The Group operates in a single reportable operating segment the acquisition, exploration and development of mineral properties. Geographic segments At June 30, 2012 and December 31, 2011, all of the Company s non-current assets are located in Mexico. 9. Non-cash transactions During the six month period ended June 30, 2012, the Company incurred the following non-cash transactions that are not reflected in the statement of cash flows: Six month periods ended June 30, 2012 June 30, 2011 Fair value of shares issued on acquisition of exploration and evaluation assets $ - $ 130,200 Amortization of property, plant and equipment $ 5,793 $ 3, Subsequent event a. Subsequent to the quarter end, the Company issued 1,025,000 Options to buy shares at $0.10 per share, for a period of five years. b. Subsequent to the quarter end, 1,090,533 shares held in escrow, were released. c. Subsequent to the quarter end, the Company announced that its wholly owned Mexican subsidiary Minera Fumarola, SA de CV, and underlying claimholder Compañia Minera Terciario, SA de CV ( Terciario ), signed a joint venture agreement with Minera Hochschild Mexico, SA de CV ( Hochschild, a subsidiary of Hochschild Mining, PLC), to advance Prospero s Baborigame project in southwestern Chihuahua State, Mexico. Under the terms of the agreement, Minera Hochschild Mexico has the option to earn a 51% interest within 3 years by making total property expenditures of US$3.7M, including a minimum of 3,500 meters of drilling in Year 1, and total cash payments of US$1.9M. If Prospero elects not to participate in the 51%/49% joint venture at Year 4, Hochschild will have the option to earn an additional 14% with property expenditures of at least US$4M and a cash payment of US$200,000. If Prospero elects not to participate in the resulting 65%/35% joint venture, Hochschild will have the option to earn an additional 10% during years 5 and 6 by financing the project through to completion of a Definitive Feasibility Study, and making cash payments of US$200,000 (by the end of Year 5) and US$600,000 (by the end of Year 6). For the 75%/25% joint venture, each party will be responsible for contributing funding for the development of the property on a basis proportionate to their ownership percentages. If either party elects not to participate fully in funding, its ownership percentage will be diluted accordingly. Either party that dilutes below 10% ownership will revert to a 1% NSR (net smelter royalty). The underlying claimholder, Terciario, will have the right to receive 50% of the cash payments referred to above and a separate 2.5% NSR. The NSR can be reduced to 1% with a cash payment of US$1.5M made any time prior to the first anniversary of the start of commercial production. Terciario and Prospero will also have a separate agreement that provides Terciario with up to 910,000 shares 18

21 of Prospero during the initial 3 year earn in period (Year 1: 60,000 shares, Year 2: 100,000 shares, Year 3: 750,000 shares). 19