CONSOLIDATED FINANCIAL STATEMENTS. Years Ended December 31, 2010 and 2009

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1 CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2010 and 2009

2 INDEPENDENT AUDITORS REPORT To the Shareholders of: ChesapeakeGold Corp. We have audited the accompanying consolidated financial statements of Chesapeake Gold Corp. and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of operations and comprehensive loss, shareholders equity and cash flows for the years ended December 31, 2010 and 2009 and the related notes comprising a summary of significant accounting policies and other explanatory information. Management s Responsibilityforthe Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due tofraudor error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our auditsinaccordancewith Canadian generally accepted auditing standards. Thosestandards require that wecomplywithethical requirementsandplanandperform theaudits toobtain reasonableassuranceabout whether the consolidatedfinancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluatingtheoverall presentationoftheconsolidated financial statements. We believe that the audit evidence we have obtained based on our audits is sufficient and appropriate to provide a basisfor our auditopinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Chesapeake Gold Corp. and its subsidiaries as at December 31, 2010 and 2009, and its financial performance and cash flows for the years ended December 31, 2010 and 2009 in accordance with Canadian generally accepted accounting principles. Emphasisof Matter Without qualifying our opinion, we draw attention to Note 19 of the consolidated financial statements describing the effects of restating certain of the 2009 comparative figures. Chartered Accountants Vancouver, British Columbia May 4, 2011

3 Consolidated Balance Sheets As at December 31, 2010 and 2009 (Expressed in Canadian Dollars) ASSETS (Restated Note 19) Current Assets Cash and cash equivalents $ 19,968,682 $ 11,096,387 Marketable securities (Notes 5 and 6) 4,275,117 4,327,609 Amounts receivable 383, ,617 Accrued interest receivable 13,221 13,447 Prepaid expenses 198,585 96,181 24,838,863 15,732,241 Asset Backed Commercial Paper (Notes 5 and 6) 6,946,983 6,236,237 Portfolio Investments (Notes 5 and 6) 1,246, ,199 Investment in Mineral Properties (Note 7) 42,385,748 39,244,818 Reclamation Bond 172, ,705 Equipment (Note 8) 228, ,535 Assets Held for Sale 308,250 - TOTAL ASSETS $ 76,127,908 $ 62,405,735 LIABILITIES Current liabilities Accounts payable $ 279,261 $ 684,908 Amounts due to related parties (Note 13) 911, ,718 Margin balance payable (Note 15) 2,219,444 5,000,216 Income taxes payable(note 12) 2,999,402 2,744,636 6,409,270 9,012,478 Future Income Tax Liabilities (Note 12) 5,251,073 5,349,947 Reclamation Obligations (Note 14) 230, ,705 11,891,048 14,593,130 SHAREHOLDERS EQUITY Share Capital (Note 9) 102,857,478 88,721,584 Contributed Surplus (Note 10) 15,413,068 11,927,229 Non-Controlling Interest (Note 4) 2,967, ,237, ,648,813 Accumulated Other Comprehensive Income (Loss) 788,507 (889,603) Deficit (57,789,536) (51,946,605) (57,001,029) (52,836,208) 64,236,860 47,812,605 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 76,127,908 $ 62,405,735 COMMITMENTS (Note 16) SUBSEQUENT EVENT (Note 20) APPROVED ON BEHALF OF THE BOARD: /s/ P. Randy Reifel Mr. P. Randy Reifel, Director /s/ Gerald Sneddon Mr. Gerald Sneddon, Director See Accompanying

4 Consolidated Statements of Loss and Comprehensive Loss (Expressed in Canadian Dollars) GENERAL AND ADMINISTRATION EXPENSES (Restated Note 19) Amortization $ 37,418 $ 43,713 Bank charges and interest 130, ,925 Geological consulting fees 181, ,984 General exploration 81,037 - Filing and transfer agent fees 55,557 35,002 Management fees (Note 13) 175, ,000 Office and administration 817,163 1,042,882 Professional fees 545, ,725 Stock-based compensation (Note 11) 3,505,450 2,337,731 Travel and investor communications 113, ,057 OPERATING LOSS (5,643,368) (4,507,019) OTHER INCOME (EXPENSES) Interest and other income 300, ,479 Foreign exchange translation gain 367,809 1,553,031 Loss on settlement of debt - (18,335) Impairment of VAT recoverable (21,362) - Gain on disposals of mineral properties (Note 7) 62,681 - Loss on available for sale investment (160,000) - Impairment of asset backed commercial paper (Notes 5 and 6) - (791,436) Impairment of mineral properties (Note 7) (660,878) (28,233,653) (111,182) (27,115,914) LOSS BEFORE INCOME TAXES (5,754,550) (31,622,933) Provision for current income taxes (Note 12) (254,766) (106,209) Recovery of future income taxes (Note 12) 98,873 9,507,497 (155,893) 9,401,288 NET LOSS BEFORE DISCONTINUED OPERATIONS (5,910,443) (22,221,645) Loss from discontinued operations, net of taxes (Note 7(f)) - (27,108) NET LOSS (5,910,443) (22,248,753) OTHER COMPREHENSIVE INCOME Unrealized gain on available for sale investments 1,678,110 2,041,171 COMPREHNSIVE INCOME (LOSS) $ (4,232,333) $ (20,207,582) NET LOSS ATTRIBUTABLE TO: Controlling equity holders of the Company $ (5,842,931) $ (22,248,753) Non-controlling interest (Note 4) (67,512) - (5,910,443) (22,248,753) OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO: Controlling equity holders of the Company 1,678,110 2,041,171 Non-controlling interest (Note 4) - - 1,678,110 2,041,171 (4,232,333) (20,207,582) LOSS PER SHARE BASIC AND DILUTED Continuing operations and discontinued operations $ (0.16) $ (0.58) Weighted average number of shares outstanding basic and diluted 38,352,649 38,309,797 See Accompanying

5 Consolidated Statements of Cash Flows (Expressed in Canadian Dollars) CASH PROVIDED BY (USED IN) (Restated - Note 19) OPERATING ACTIVITIES Net loss $ (5,910,443) $ (22,221,645) Items not affecting cash: Amortization 37,418 43,713 Foreign translation gain (367,809) (1,553,031) Future income tax recovery (98,873) (9,507,497) Impairment of asset backed commercial paper - 791,436 Impairment of mineral properties 660,878 28,233,653 Stock-based compensation 3,505,450 2,337,731 Loss on available for sale investment 160,000 - Impairment of VAT recoverable 21,362 - Impairment of investment - 18,335 Gain on disposals of mineral properties (62,681) - (2,054,698) (1,857,305) Changes in other non-cash items: Amounts receivable 169, ,714 Accrued interest receivable Prepaid expenses (47,930) 145,129 Accounts payable (600,766) 195,849 Amounts owed to related parties 328,445 - Income taxes payable 254, ,209 (1,950,045) (835,404) Disposition of subsidiary - (27,108) INVESTING ACTIVITIES Long term interest receivable on ABCP - 27,685 Proceeds from sale of marketable securities 522,414 2,959,729 Cash acquired from transaction with Gunpoint 215,583 - Proceeds from the sale of mineral properties 58,324 - Mineral property expenditures (3,232,173) (3,772,138) Purchase of property and equipment (5,673) (21,088) (2,441,525) (805,812) FINANCING ACTIVITIES Proceeds from private placement, net 14,073,131 - Proceeds from Gunpoint private placement, net 1,583,996 Proceeds from the exercise of options and warrants 43,152 - Increase in margin payable balance 1,493,025 Payment of margin payable balance (3,929,439) (2,383,644) 13,263,865 (2,383,644) CHANGE IN CASH AND CASH EQUIVALENTS 8,872,295 (4,051,968) CASH AND CASH EQUIVALENTS, beginning of year 11,096,387 15,148,355 CASH AND CASH EQUIVALENTS, end of year $ 19,968,682 $ 11,096,387 Supplementary Information Interest paid $ - $ 252,925 Shares issued for mineral properties - - Portfolio investments received as option proceeds - - See Accompanying

6 Consolidated Statements of Shareholders Equity (Expressed in Canadian Dollars) Share Capital Contributed Surplus (Restated Note 19) Non- Controlling Interest Accumulated Other Comprehensive Income (Loss) Deficit (Restated Note 19) Shareholders Equity Total (Restated Note 19) Balance, December 31, 2008 restated $ 88,721,584 $ 9,589,498 $ - $ (2,930,775) $ (29,697,852) $ 65,682,455 Net loss (22,248,753) (22,248,753) Unrealized gain on investments in current year ,041,172-2,041,172 Stock-based compensation charged to operations - 2,337, ,337,731 Balance, December 31, 2009 $ 88,721,584 11,927,229 - (889,603) (51,946,605) 47,812,605 Balance, December 31, 2009 $ 88,721,584 $ 11,927,229 $ - $ (889,603) $ (51,946,605) $ 47,812,605 Net loss - - (67,512) - (5,842,931) (5,910,443) Unrealized gain on investments in current year ,678,110-1,678,110 Recognition of 14.74% on acquisition of Gunpoint - - 1,450, ,450,859 Financing by Gunpoint, net - - 1,583, ,583,996 Shares issued for cash on exercise of stock options 33, ,000 Shares issued for cash on exercise of warrants 10, ,152 Shares issued for private placement, net 14,073, ,073,131 Stock-based compensation charged to operations - 3,505, ,505,450 Transfer from contributed surplus on exercise of options 19,611 (19,611) Balance, December 31, 2010 $ 102,857,478 $ 15,413,068 $ 2,967,343 $ 788,507 $ (57,789,536) $ 64,236,860 See Accompanying

7 1. OPERATIONS Chesapeake Gold Corp. ( Chesapeake or the Company ) is a Canadian mining company focused on the exploration, development and recovery of precious metals. The Company is in the exploration stage and does not generate mining revenues from operations. The Company s operations during the year ended December 31, 2010 were principally directed towards the exploration and development of the Company s Metates project in Durango State, Mexico. The Company s common shares are listed on the TSX Venture Exchange under the trading symbol CKG.V. On November 26, 2010, the Company acquired an 81.93% interest in Gunpoint Exploration Ltd. ( Gunpoint ) through an acquisition of Gunpoint s shares followed by an financing of Gunpoint. As a result of this transaction the Company acquired control of Gunpoint (Note 4). In late 2008, the Company ceased its exploration operations in Nicaragua and the dissolution of the Company s Nicaraguan subsidiary, Nica Gold S.A. was finalized in 2009 (Note 7(f)). These consolidated financial statements have been prepared on the basis that the Company is a going concern, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company had a consolidated net loss of $5,910,443 for the year ended December 31, 2010, and an accumulated deficit of $57,789,536. To date, the Company has not generated operating revenue from its mineral properties. The ability of the Company to continue as a going concern is dependent upon obtaining additional equity and/or debt financing to complete the exploration and development of its mineral property interests and to commence profitable operations. Despite the general economic slow-down and changes to key economic variables, the Company currently has sufficient resources to fund its exploration and development operations for more than a year. These consolidated financial statements do not reflect the adjustments or reclassifications which would be necessary if the Company was unable to continue to fund its operations in the normal course of business. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company have been prepared by management in accordance with Canadian generally accepted accounting principles ( GAAP ) and include the following significant accounting policies: Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Minerales El Prado S.A. de C.V. (Mexico), Nica Gold S.A. (Nicaragua) and American Gold Capital Corporation (British Columbia). The accounts of American Gold Capital Corporation s wholly-owned subsidiaries, Metates Mining Enterprises LLC (Delaware) and its wholly-owned subsidiary American Gold Metates S. de R.L. de C.V. (Mexico) are also included in these consolidated financial statements. During 2010, the Company acquired an 81.93% interest in Gunpoint Exploration Ltd. (British Columbia) (formerly Christopher James Gold Corp.) ( Gunpoint ) in exchange for transferring all of its interest in American Gold Capital US Inc. (Nevada) ( American Gold US ) to Gunpoint. These consolidated financial statements include the accounts of American Gold US for 2009 and From March 26, 2010 onwards, they also include the accounts of Gunpoint as well as the recognition of an 18.07% non-controlling interest in Gunpoint and American Gold US. During 2009, the Company substantially completed the wind up of Nica Gold S.A. (Note 7(f)) and these operations have been presented as discontinued operations in All significant inter-company balances and transactions have been eliminated upon consolidation. Cash and cash equivalents Cash and cash equivalents include cash on account, highly liquid short term deposits and guaranteed investment certificates with major financial institutions, and fixed income securities with a term to maturity of three months or less at the date of acquisition that are readily convertible into known amounts of cash. Reclamation bond The Company maintains cash deposits that are restricted to the funding of reclamation costs. For the Talapoosa property in Nevada State, USA, the Company has placed cash on deposit to fund future reclamation costs anticipated under a reclamation plan approved by the State of Nevada. Reclamation deposits are designated as held-for-trading are recorded at fair value, and are classified as a non-current asset.

8 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Use of estimates The preparation of consolidated financial statements in conformity with Canadian GAAP requires the Company s management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. Actual results may differ from those estimates. Significant areas requiring the use of management estimates in the preparation of these consolidated financial statements relate to the recoverability of amounts receivable and accrued interest receivable, the valuation of asset backed commercial paper, the measurement of the fair values of marketable securities, estimated accruals for reclamation obligations, amortization, determination of the net recoverable value of assets held for sale, estimation of mineral property impairments, measurement of stock-based transactions, the determination of the future tax assets and liabilities, disclosures about contingencies, determination of consideration transferred for acquisitions and determination of non-controlling interests, and the expected economic lives of and the estimated future operating results and net cash flows from mineral properties and long-lived assets. Comprehensive income or loss Comprehensive income or loss is the change in equity (net assets) of an enterprise during a period from transactions, events and circumstances other than those under the control of management and the owners. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. In accordance with this standard, the Company reports comprehensive income or loss in its statement of operations and accumulated other comprehensive income or loss in its statement of shareholders equity. The components of other comprehensive income or loss include unrealized gains and losses on financial assets classified as available-for-sale. Foreign currency translation All of the Company s assets and operations located in foreign jurisdictions are dependent on the parent company for financing and operational support and are considered to be integrated operations which are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the end of each period and non-monetary assets and liabilities are translated using historical exchange rates. Revenue and expenses are translated at the average exchange rate for the period. Foreign currency transaction gains and losses are included in the determination of net income or loss. Investment in mineral properties The Company s mineral property interests are composed of rights to explore for, develop and mine minerals under permit, and licences from or leases with governments in Mexico and the United States. These agreements require fees, rentals, deposits and work commitments. The Company s rights to mineral properties are described in Note 7. The Company accounts for resource properties in accordance with the Canadian Institute of Chartered Accountants Handbook Section 3061, Property, plant and equipment ( CICA 3061 ), and EIC abstract 174, Mining Exploration Costs ( EIC 174 ). CICA 3061 provides for the capitalization of the acquisition and exploration costs of a mining property where such costs are considered to have the characteristics of property, plant and equipment. EIC 174 provides that a mining enterprise is not precluded from considering exploration costs to have the characteristics of property, plant and equipment when it has not established mineral reserves objectively and, therefore, does not have a basis for preparing a projection of the estimated future net cash flow from the property. Resource properties include initial acquisition costs and related option payments, which are recorded when paid. Exploration and development costs are capitalized on specific properties until properties are sold, are abandoned, or are brought into production, at which time costs are amortized on a unit of production basis over economically recoverable reserves. Option payments and cost recoveries are credited against resource property costs when received. No gain or loss on disposition of a partial interest in a property is recorded until all carrying costs of the interest have been offset by proceeds of sale or option payments received.

9 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Investment in mineral properties (continued) CICA 3061 also provides that property, plant and equipment should be written down when the long-term expectation is that the net carrying amount will not be recovered. EIC 174 provides that a mining enterprise which has not objectively established mineral reserves and, therefore, does not have a basis for preparing a projection of the estimated future cash flow from a property is not obliged to conclude that the capitalized costs have been impaired. EIC 174 references certain conditions that should be considered in determining subsequent write-downs, such as significant changes or abandonment of a work program, the sufficiency of the remaining lease terms to conduct exploration work, a delay in development that extends beyond three years or poor exploration results. Management reviews such conditions to determine whether a write-down of capitalized costs is required. When the carrying value of a property exceeds its net recoverable amount, provision is made for the impairment in value. Equipment Equipment is recorded at cost. Amortization is provided at annual rates on a declining balance basis over the estimated useful lives of the equipment as follows: Office, furniture and computer equipment 10% Vehicles 25% Exploration equipment 10% The Company reviews the carrying value of equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company s policy is to record an impairment loss in the period when it is determined that the carrying amount of the asset exceeds the estimate of undiscounted future cash flows from the asset. At that time, the carrying amount is written down to fair value. Asset retirement obligations and reclamation bond The Company recognizes statutory, contractual and other legal obligations related to the retirement of tangible long-lived assets. These obligations are initially measured at fair value and subsequently adjusted for the accretion of any discount and changes in the underlying future cash flows. The asset retirement cost is capitalized to the related asset and amortized to operations over time. The Company follows CICA Handbook Section 3110, Asset Retirement Obligations. This standard requires liability recognition for retirement obligations associated with the Company s resource properties. The standard requires the Company to recognize the fair value of the liability for an asset retirement obligation in the period in which it is incurred and record a corresponding increase in the carrying value of the related long-lived asset. Fair value is estimated using the present value of the estimated future cash outflows to retire the obligation. The liability is subsequently adjusted for the passage of time, and is recognized as an accretion expense in the statement of operations. The increase in the carrying value of the asset is amortized on the same basis as the resource properties. Share-based compensation The Company has a plan for granting stock options to directors, employees and consultants as described in Note 9(d). The Company recognizes compensation expense under this plan using the fair value method in accordance with CICA Handbook section 3870 Stock-Based Compensation and Other Stock-Based Payments. Under this method, the fair value of stock options granted to employees is recognized as stock-based compensation expense over the vesting period and credited to contributed surplus. Stock options granted to non-employees are measured at their fair value on the vesting date. Prior to the vesting date, the then-current fair value of stock options granted to non-employees is recognized as stock-based compensation expense from the date of grant to the reporting date and charged to contributed surplus using a graded vesting assumption. Prior to 2010, the Company used a straight-line assumption. Upon the exercise of stock options, consideration paid and the related contributed surplus are recorded as share capital. The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted.

10 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Income taxes The Company follows the asset and liability method of accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax losses and other deductions carried forward. The liability method results in a gross-up of mineral properties to reflect the recognition of the future tax liabilities for the tax effects caused by their financial statement carrying amounts being different from their tax bases at the time those properties are acquired. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply when the asset is realized or the liability settled. A reduction in respect of the benefit of a future tax asset (a valuation allowance) is recorded against any future tax asset if it is not more likely than not to be realized. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is substantively enacted. Recognition of interest income Interest from cash and cash equivalents, fixed income marketable securities and ABCP is recorded on an accrual basis when collection is reasonably assured. Loss per share Loss per share is calculation using the weighted average number of shares outstanding during the reporting period. The Company uses the treasury stock method for computing diluted loss per share. This method assumes that any proceeds obtained upon exercise of outstanding options or warrants would be used to purchase common shares at the average market price during the period. As the Company has recorded a net loss for each of the periods presented, basic and diluted net loss per share are the same as the exercise of stock options or share purchase warrants are anti-dilutive. Comparative amounts Certain prior period amounts have been reclassified to conform to the classifications adopted in the current year s presentation. Share Issue Costs Professional, consulting, regulatory and other costs directly attributable to financing transactions are recorded as deferred financing costs until the financing transactions are completed, if the completion of the transaction is considered likely; otherwise they are expensed as incurred. Share issue costs are charged to share capital when the related shares are issued. Deferred financing costs related to financing transactions that are not completed are charged to expenses. Financing Instruments recognition and measurement All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. Financial assets and liabilities classified as held-for-trading are required to be measured at fair value, with gains and losses recognized in net earnings. Financial assets classified as held-to-maturity, loans and receivables and financial liabilities (other than those held-for-trading) are required to be measured at amortized cost using the effective interest method of amortization. Available-for-sale financial assets are required to be measured at fair value, with unrealized gains and losses recognized in Other Comprehensive Income (loss). Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market should be measured at cost.

11 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Financing Instruments recognition and measurement (continued) The Company has implemented the following classification: Cash and cash equivalents are classified as held-for-trading Marketable securities, portfolio investments, asset backed commercial paper ( ABCP ) and reclamation bond are classified as available-for-sale. Accounts payable and margin balance payable are classified as other financial liabilities. Transaction costs related to financial instruments classified as held-for-trading are recognized immediately into income. For financial instruments classified as other than held-for-trading, transaction costs are added to the financial instrument in accordance with the provision of CICA Handbook Section CHANGES IN SIGNIFICANT ACCOUNTING POLICIES Business Combinations, Consolidated Financial Statements and Non-Controlling Interests Outlined below are three recent accounting pronouncements which the Company has early adopted effective January 1, All of these standards are substantially converged with International Financial Reporting Standards ( IFRS ): Business Combinations, Section 1582, which replaces the previous Business Combinations standard, Section The standard requires assets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies to be measured at their fair values as of the date of the acquisition. In addition, acquisition-related and restructuring costs are to be recognized separately from the business combination and included in the statement of operations. The adoption of this standard impacted the Company s consolidated financial statements in that the Gunpoint acquisition was accounted as outlined in Note 4. Consolidated Financial Statements, Section 1601, which together with Section 1602, replaces the former consolidated financial statement standard, Section Section 1601 establishes the requirements for the preparation of consolidated financial statements. The adoption of this standard impacted the Company s consolidated financial statements as explained in Note 4. Non-controlling Interests, Section 1602, which establishes the accounting treatment and presentation for a non-controlling interest in a subsidiary in consolidated financial statements. The standard requires a non-controlling interest to be classified as a separate component of equity. In addition, net earnings and components of other comprehensive income are attributed to both the parent and non-controlling interest. See Note 4 for the accounting treatment of the Gunpoint acquisition transaction during International Financial Reporting Standards The Canadian Accounting Standards Board confirmed that publicly accountable entities will be required to prepare financial statements in accordance with International Financial Reporting Standards ( IFRS ) for interim and annual financial statements for fiscal years beginning on or after January 1, Companies will be required to provide comparative IFRS information for the previous fiscal year. The process of changing from current Canadian GAAP to IFRS will be a significant undertaking that may materially affect the reported financial position and results of operations, and may also affect certain business functions. The Company is nearing the completion of its evaluation and the adoption of IFRS and its impact on its financial position and results of operations. The transition from Canadian GAAP to IFRS will be applicable for the Company for the first quarter 2011 when the Company will report both the current and comparative information using IFRS.

12 4. ACQUISITION On November 26, 2010, the Company initially acquired an 85.26% interest in the assets and operations of Gunpoint Exploration Ltd. ( Gunpoint ) (formerly Christopher James Gold Corp.), through an acquisition of Gunpoint s shares involving the Company s wholly owned subsidiary, American Gold Capital US Inc. ( American Gold US ), and Gunpoint. Prior to this transaction the Company held a 0.72% interest in Gunpoint comprising 40,000 post-consolidated common shares. The Company acquired 31,977,899 post-consolidated common shares of Gunpoint in exchange for transferring all of the issued and outstanding shares of the Company s wholly-owned subsidiary, American Gold US to Gunpoint. At the time of the transfer, American Gold US held the Talapoosa gold-silver project located in Lyon County, Nevada (Note 7(b)). Under the terms of the acquisition agreement, the Company contributed cash of $1,000,000, and certain mineral property assets comprising the La Gitana and La Cecilia claims (Note 7(b)) of El Prado S.A. de C.V. ( MEP ), a wholly owned subsidiary of the Company, to American Gold US. The Company also forgave a $3,595,766 intercompany loan between itself and American Gold US as required under the agreement. Upon completion of the transaction, the Company initially, directly and indirectly, controlled a total of 32,017,899 common shares of Gunpoint, representing 85.26% of the issued and outstanding shares of Gunpoint. The result of this transaction was that the Company effectively acquired the net assets and operations of Gunpoint in exchange for giving up a 14.74% interest in the $1,000,000 cash contribution, the $3,796,378 interest in the La Gitana and La Cecilia claims, and the forgiveness of the $3,595,766 intercompany loan, to the 14.74% non-controlling interest in Gunpoint. Concurrently with the closing of the agreement, Gunpoint also closed a $1,583,996 financing by issuing 1,500,000 shares to non-controlling interests, which effectively reduced the Company s ownership of Gunpoint to 81.93%. The fair value of consideration transferred and net assets acquired is comprised as follows: Consideration transferred by the Company: Cash $ 1,000,000 Forgiveness of loan owed to the Company by American Gold US 3,595,766 La Gitana and La Cecilia mineral claims 3,796,378 Fair value of 85.26% ownership interest effectively retained 8,392,144 Implied fair value of 100% ownership interest 9,843,003 Fair value of 14.74% non-controlling interest effectively given up $ 1,450,859 Net assets of Gunpoint acquired Cash $ 215,583 Other current assets 430,390 Equipment 50,927 Mineral claims 949,069 Accounts payable and accrued liabilities (195,110) $ 1,450,859 These consolidated financial statements reflect all of the assets, liabilities and results of operations of Gunpoint from the date of acquisition on November 26, 2010 onwards as well the 14.74% non-controlling interest in Gunpoint and American Gold US on a consolidated basis after the transaction. The 81.93% non-controlling interest in Gunpoint, including American Gold US, is comprised as follows: Non-controlling interest in net assets given up $ 1,450,859 Change in non-controlling interest in Gunpoint as a result of financing 1,583,996 Net loss of Gunpoint attributable to non-controlling interest (67,512) Non-controlling interest as at December 31, 2010 $ 2,967,343

13 5. FINANCIAL INSTRUMENTS, FAIR VALUE MEASUREMENT AND RISKS Fair Values of Financial Instruments The fair values of financial instruments are summarized as follows: December 31, 2010 December 31, 2009 Carrying Value $ Fair Value $ Carrying Value $ Fair Value $ Financial Assets Held-for-trading Cash and cash equivalents 19,968,682 19,968,682 11,096,387 11,096,387 Reclamation bond 172, , , ,705 Available-for-sale Marketable securities 4,675,032 4,275,117 4,933,931 4,327,609 Portfolio investments 800,000 1,246, , ,199 Asset backed commercial paper 9,207,677 6,946,983 9,207,677 6,236,237 Financial Liabilities Other financial liabilities Accounts payable 279, , , ,908 Amounts due to related parties 911, , , ,718 Margin balance payable 2,219,444 2,219,444 5,000,216 5,000,216 Fair Value Measurements CICA Section 3862, Financial Instruments Disclosures, requires an entity to maximize the use of observable inputs and minimize the used of unobservable inputs when measuring fair value. CICA 3862 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. CICA 3862 prioritizes the inputs into three levels that may be used to measure fair value: Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active market); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

14 5. FINANCIAL INSTRUMENTS AND RISK (continued) The following table sets forth the Company s assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Fair Value Measurement Using Level 1 Level 2 Level 3 Total December 31, 2010 Cash and cash equivalents $ 19,968,682 $ - $ - $ 19,968,682 Marketable securities 4,275, ,275,117 Asset backed commercial paper (i) - 6,946,983-6,946,983 Portfolio investments 1,246, ,246,641 Margin balance payable (2,219,444) - - (2,219,444) The fair values of other financial instruments, which include accounts payable and reclamation bond approximate their carrying values due to the relatively short-term maturity of these instruments. i. In 2009, the Company assessed the estimated fair value of its ABCP using a basic discounted cash flow model and considered the fair value to be within Level 3 of the fair value hierarchy. During 2010, there were a limited number of trades in the ABCP market, however, the Company does not consider them to be of sufficient volume or value to constitute an active market. The Company estimated the fair value of its ABCP at December 31, 2010 using a basic discounted cash flow model in conjunction with market Bid-Ask prices (Note 6) and considered the fair value to be within Level 2 of the fair value hierarchy, as a result of changes in the inputs used to determine fair value. A reconciliation is presented below: Credit Risk Fair value of ABCP, December 31, 2009 (Level 3) $ 6,236,237 Redemption of ABCP during 2010 (3,719) Unrealized gain (recognized through other comprehensive income) 714,465 Fair value of ABCP, December 31, 2010 (Level 2) $ 6,946,983 Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and the ABCP. The Company s cash and cash equivalents are held through large Canadian financial institutions. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure as described in Note 18. The margin balance payable, accounts payable and income taxes payable are due within the current operating period. Market Risk The Company s financial instruments include investments which are publicly traded and therefore subject to the risks related to the fluctuation in market prices of publicly traded securities. Some of these investments have been acquired as a result of property transactions and, to a large extent, represent strategic investments in related mining companies and their properties. The Company closely monitors market values to determine the most appropriate course of action. Some of these investments including the ABCP are thinly traded which may result in lower quoted market values.

15 5. FINANCIAL INSTRUMENTS AND RISK (continued) Interest Rate Risk Interest rate risk is the risk that the fair value of future cash flows from a financial instrument will fluctuate because of changes to market interest rates. The Company is exposed from time to time to interest rate risk as a result of holding fixed income cash equivalents and investments, including ABCP, of varying maturities. A 1% change in market interest rates would result in no significant change in value of cash and cash equivalents. A 1% change in market interest rates would result in a change of approximately $7,207 in the value of those fixed income securities directly affected by market interest rates. The risk that the Company will realize a loss as a result of a decline in the fair value of these assets, other than ABCP, is limited as they are generally held to maturity. Foreign Exchange Risk Currency risk is the risk of a loss due to the fluctuation of foreign exchange rates and the effects of those fluctuations on the Company s foreign currency denominated monetary assets and liabilities. The Company currently operates in the United States and Mexico. Certain costs and expenses are incurred in US dollars and Mexican pesos. The Company attempts to mitigate currency risk through the preparation of short and long term expenditure budgets in the foreign currencies and planning for the conversion of Canadian dollars into foreign currencies whenever exchange rates are favourable. 6. INVESTMENTS December 31, 2009 Fair Value $ Permanent Impairment $ Purchase $ Redemption $ Realized & Unrealized Gain/(loss) $ December 31, 2010 Fair Value $ Marketable securities 4,327, (525,103) 472,611 4,275,117 ABCP 6,236,237 - (3,719) 714,465 6,946,983 Portfolio investments 810, ,000 (226,000) 497,442 1,246,641 Asset Backed Commercial Paper On July 26, 2007 the Company invested $9,209,641 in third party sponsored ABCP, which had a principal amount of $9,250,000 and was rated as "R1-High" by Dominion Bond Rating Service at the time of purchase. In mid-august 2007 a number of sponsors of non-bank managed ABCP, including those with whom the Company had invested, announced that they could not repay the ABCP due to unfavorable conditions in the Canadian capital markets. In September 2007, a Pan-Canadian Committee (the Committee ) consisting of a panel of major ABCP investors was formed to restructure the affected ABCP trusts. A press release issued by the Committee on December 23, 2007 outlined a proposal to restructure ABCP for new notes that have maturities based on the maturities of the assets of underlying ABCP (the New Notes ). Based on the information obtained from the proposed restructuring plan, the Company, in 2007, reclassified its investment in ABCP on the balance sheet from a current asset to a long term asset as the New Notes were expected to have a maturity greater than one year. The Company was issued the following New Notes on January 21, 2009 in exchange for its ABCP under the Restructuring Plan: New Notes Face Value Expected Coupon Rate Maturity Date MAV II Class A-1 $ 6,140,214 January 22, 2017 Banker s Acceptance rate less 0.5% MAV II Class A-2 2,362,393 January 22, 2017 Banker s Acceptance rate less 0.5% MAV II Class B 428,840 January 22, 2017 Banker s Acceptance rate less 0.5% MAV II Class C 276,230 January 22, % $ 9,207,677

16 6. INVESTMENTS (continued) Asset Backed Commercial Paper (continued) Although the expected repayment dates for the majority of the assets securing these New Notes is prior to 2017, the legal maturity date of the New Notes is in 2056 as some of the underlying assets do not mature until that date. There is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the ABCP Notes. The Company has estimated the fair value of the ABCP Notes considering information provided on the restructuring, the best available public information regarding market conditions and other factors that a market participant would consider for such investments. The Company is aware of a limited number of trades in the ABCP Notes that occurred prior to December 31, 2010, but does not consider them to be of sufficient volume to constitute an active market. However, the Company has factored in these Bid-Ask prices when determining the fair value of its ABCP Notes. The Company also has considered the value of the ABCP notes as calculated using a basic discounted cash flow model when determining the fair value of its ABCP Notes. The following assumptions were used when calculating the discounted cash flow of the ABCP Notes: Bankers Acceptance Rate: 1.21% Discount Rate: 3.20% Repayment Dates 6 years Expected Return of Principal: A 1 Notes 100% A 2 Notes 100% B Notes 100% C Notes 100% Based on a 6 year discounted cash flow model as at December 31, 2010, the fair value of the ABCP Notes was estimated at $7,734,998. Based on the current Bid-Ask prices for the ABCP Notes the fair value was estimated at $6,158,966. Averaging the discounted cash flow value and the current market value, management s best estimate of the fair value for the ABCP Notes as at December 31, 2010 is $6,946,983. Continuing uncertainties regarding the value of the assets that underlie the notes, the amount and timing of cash flows and changes in general economic conditions could give rise to further changes in the fair value of the Company s investment in the notes, which would impact the Company s results from operations. The most significant variable in the valuation of the Company s ABCP Notes is the discount rate or the yield that prospective investors will require. A 1.0% increase, representing 100 basis points, in the discount rate will decrease the fair value of the ABCP Notes by approximately $427, MINERAL PROPERTIES a) As at December 31, 2010 the Company owns 100% interest in the following mineral properties: Metates Property, Durango State, Mexico The Company holds a 100% interest in five exploration concessions totaling 2,420 hectares. The concessions are registered in the name of American Gold Metates S. de R.L. de C.V., a wholly- owned subsidiary of the Company. A 1.5% net smelter royalty ( NSR ) is payable to Lusimin S.A. de C.V. ( Lusimin ), a subsidiary of Goldcorp Inc., in respect of these concessions. MEP has acquired an additional concession comprising 2,772 hectares from the Consejo de Recursos Minerales de Mexico ( CRM ) at a cost of US$19,800 and staked four other concessions totaling 13,769 hectares. In October 2008, the Company signed a five year agreement with the Community of San Juan de Camarones ( SJC ) which permits the Company to undertake exploration and development work at Metates. The Company has agreed to annual payments to SJC as follows: 2008 US$53,580 (paid) 2009 US$64,296 (paid) 2010 US$77,155 (paid) 2011 US$92, US$111,104

17 7. MINERAL PROPERTIES (continued) Metates Property, Durango State, Mexico (continued) In addition the Company has agreed to upgrade and improve the forty-five kilometers of off-highway road access to Metates and contribute to community improvements in the amount of MXP$11,380,000 (pesos) over the term of the agreement. As at December 31, 2010 the Company had fulfilled the amount contracted under this commitment. Rio Minas Property, Oaxaca State, Mexico The Rio Minas Property comprises one mineral concession that was acquired through staking by MEP totaling 7,425 hectares. Tatatila Project, Veracruz State, Mexico MEP has acquired through purchase and staking the Tatatila project which collectively encompasses 28,290 hectares in Veracruz State. MEP acquired seven concessions totaling 2,767 hectares from the CRM, a mining division of the Mexican government, for the price of US$56,000. MEP staked one adjacent mineral concession comprising 25,523 hectares. The Company has agreed to sell the Tatatila project to Quimicos Y Minerales de Mexico S.A. de C.V., a private Mexican company ( Quimicos ), for US$300,000 in staged payments over four years. The Company has received the 2010 US$40,000 payment pursuant to the purchase agreement. The Company will retain a 1% NSR in the project. b) As at December 31, 2010 the Company owns an 81.93% interest in the following mineral properties through Gunpoint Exploration Ltd. (Note 4). Talapoosa Property, Nevada State, U.S.A. The Talapoosa property consists of 535 unpatented lode mining claims, including 509 claims owned by Gunpoint and 26 claims subject to a lease agreement with a third party (the Unpatented Leased Land ). In addition, there are certain payments required for the land owned by American Gold US and certain payments required on the land subject to a lease with a private land holder (the Fee Leased Land ). These claims are administered by the Bureau of Land Management ("BLM") and the annual maintenance fees for these claims payable to the BLM are approximately US$75,000. Pursuant to an amendment dated July 13, 2010 on the Unpatented Leased Land agreement, the lease term is extended by 10 years from July 14, 2010 and may be extended for two additional five year periods, provided the Talapoosa project has commenced production and continues to pay a production royalty and the deferred payments. Gunpoint paid US$10,000 on signing of the amended agreement and US$25,000 for the annual payment due July 14, 2010 out of a US$75,000 annual assessment as required under the original agreement. Beginning with the payments due July 14, 2011 and thereafter, the minimum annual lease payment will be $35,000 per year with $40,000 per year being considered as a deferred payment. The deferred payment balance as at July 14, 2010 is US$635,000 and will only be payable from the proceeds of future production, if any. The minimum payments of US$35,000 can be applied against any amounts owing from the 5% net smelter return royalty on production from the Unpatented Leased Land. Pursuant to amendments dated July 13, 2010 on the Fee Leased Land agreements, the lease terms of both agreements are extended by 20 years to September 10, 2029 and June 1, 2037, respectively. Monthly lease payments on the Fee Lease Land are US$3,000 per month through September 11, 2015, which increases up to US$3,200 per month beginning on September 11, 2016 through September 11, 2020, with an increase of 10% every five years thereafter to a maximum of US$4,800 per month. The option to purchase would require a payment of $1,000,000 per Section, with a credit for all advance and production royalty amounts previously paid. In addition, future production from the Fee Leased Land is subject to a 4.5% net smelter return royalty.