LIONORE MINING INTERNATIONAL LTD.

Transcription

1 Auditors Report and Consolidated Financial Statements of December 31, 2006 and 2005

2 Auditors Report To the Shareholders of LionOre Mining International Ltd.: We have audited the consolidated balance sheets of LionOre Mining International Ltd. as at December 31, 2006 and 2005 and the consolidated statements of earnings (loss) and retained earnings (deficit) and cash flows for the years then ended. 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. 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 December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Vancouver, British Columbia February 23, 2007

3 Consolidated Balance Sheets As at December 31, 2006 and 2005 (Expressed in thousands of US Dollars) ASSETS CURRENT Cash and cash equivalents (Note 4) $ 411,688 $ 127,329 Restricted cash (Note 4) - 94,656 Accounts receivable (Note 5) 328, ,264 Inventories (Note 6) 72,056 29,009 Other 10,557 7, , ,367 Restricted cash (Note 4) - 7,500 Property, plant and equipment (Note 7) 534, ,157 Mineral exploration and development properties (Note 8) 323, ,073 Deferred stripping costs (Note 10) 12,890 5,192 Long-term investments and other assets (Note 13) 26,598 15,159 $ 1,720,636 $ 1,070,448 LIABILITIES CURRENT Accounts payable and accrued liabilities $ 108,570 $ 75,263 Deferred revenue 24,184 - Income taxes payable 22,205 4,401 Current portion of long-term debt (Note 15) 67,116 8,925 Current portion of asset retirement obligations (Note 16) 25,126 - Current portion of future income tax liabilities (Note 17) 59,623 41,413 Current portion of metal contract obligations (Note 23) 11,749 7,714 Short-term financing (Note 14) 4,336 90, , ,864 Long-term debt (Note 15) 186, ,311 Asset retirement obligations (Note 16) 61,976 44,386 Future income tax liabilities (Note 17) 141, ,230 Metal contract obligations (Note 23) 1,689 8,678 Other liabilities 4,587 3,967 Non-controlling interests (Note 18) 75,862 36, , ,224 SHAREHOLDERS EQUITY Share capital (Note 19) 470, ,473 Equity component of convertible notes (Note 15 (a)) 24,780 24,780 Contributed surplus (Note 20 (c)) 5,865 4,530 Retained earnings (deficit) 403,584 (24,964) Cumulative translation adjustments (Note 21) 21,499 13, , ,224 $ 1,720,636 $ 1,070,448 See accompanying APPROVED BY THE BOARD Colin Steyn Ted Mayers Director Director 3

4 Consolidated Statements of Earnings (Loss) and Retained Earnings (Deficit) Years ended December 31, 2006 and 2005 (Expressed in thousands of US Dollars, except per share amounts) REVENUES Gross mineral sales $ 1,116,444 $ 518,337 Third party treatment and refining costs (148,368) (100,780) Net mineral sales 968, ,557 Contract revenue and other 1,399 1, , ,731 EXPENSES Operating costs 303, ,078 Depreciation and amortization 93,032 84,899 General and administrative 30,355 20,825 Other expenses 9,760 4, , ,346 OPERATING EARNINGS 533,314 90,385 Foreign exchange gain 6,228 30,026 Impairment of gold and nickel assets (Notes 11 and 12) - (183,709) Interest expense (Note 15 (f)) (25,756) (20,543) Interest and investment income 14,023 12,906 Loss from metal forward sales contracts (Note 23) (8,959) (11,990) Other income (Note 24) 49,623 - EARNINGS (LOSS) BEFORE TAXATION AND NON-CONTROLLING INTERESTS 568,473 (82,925) Current income tax (expense) recovery (Note 17) (68,358) 421 Future income tax (expense) recovery (Note 17) (29,926) 15,625 EARNINGS (LOSS) BEFORE NON-CONTROLLING INTERESTS 470,189 (66,879) Non-controlling interests (Note 18) (41,641) (9,535) NET EARNINGS (LOSS) 428,548 (76,414) RETAINED EARNINGS (DEFICIT), BEGINNING OF YEAR (24,964) 51,450 RETAINED EARNINGS (DEFICIT), END OF YEAR $ 403,584 $ (24,964) Basic earnings (loss) per share (Note 19) $ 1.97 $ (0.35) Diluted earnings (loss) per share (Note 19) $ 1.80 $ (0.35) Weighted average number of common shares outstanding (Note 19) 217,697, ,516,750 Diluted weighted average number of common shares outstanding (Note 19) 243,387, ,516,750 See accompanying 4

5 Consolidated Statements of Cash Flows Years ended December 31, 2006 and 2005 (Expressed in thousands of US Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ 428,548 $ (76,414) Items not involving cash: Depreciation and amortization 93,032 84,899 Future income tax expense (recovery) 29,926 (15,625) Gain on sale of exploration properties (Note 24 (a)) (24,179) - Gain on sale of investments (561) (4,595) Impairment of gold and nickel assets - 183,709 Non-controlling interests 41,641 9,535 Stock based compensation 2,242 2,062 Unrealized (gain) loss on metal forward sales contracts (4,160) 13,350 Other 1,896 (710) Changes in non-cash working capital (Note 25 (a)) (171,373) (33,668) 397, ,543 CASH FLOWS FROM INVESTING ACTIVITIES Cash paid to acquire MPI Mines Limited, net of cash acquired - (109,579) Cash paid to acquire Nkomati, net of cash acquired (Note 3) - (20,102) Cash security for credit facilities (Note 4) 102,156 (94,656) Development of mineral properties (107,978) (66,488) Exploration (23,267) (15,497) Investment in property, plant and equipment (119,618) (45,876) Proceeds from sale of assets 19,820 7,117 Other 2,161 (1,088) (126,726) (346,169) CASH FLOWS FROM FINANCING ACTIVITES Gross proceeds of borrowings 136, ,477 Repayment of borrowings (131,764) (35,722) Proceeds from the issue of share capital 5, Other 10 (1,261) 10,385 79,051 Effect of exchange rate changes on cash and cash equivalents 3,688 (23,085) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 284,359 (127,660) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 127, ,989 CASH AND CASH EQUIVALENTS, END OF YEAR (Note 4) $ 411,688 $ 127,329 See Notes 4 and 25 for supplemental cash flow information See accompanying 5

6 1. DESCRIPTION OF BUSINESS LionOre Mining International Ltd. (the Company or LionOre ) is an international mining company headquartered in Canada, with mining and exploration interests in Australia and southern Africa. 2. ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and reflect the following policies: (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiary companies with provisions for non controlling interests. Inter company transactions and balances have been eliminated. Investments in joint ventures subject to joint control are consolidated on a proportionate basis. Under this method, the Company includes in its financial statements its proportionate share of the assets and liabilities, revenues and expenses and cash flows of the entities. (Note 9) Other long term investments in companies where the Company does not exercise significant influence are recorded at cost less provisions for impairment, if applicable, to recognize other than temporary declines in value. (b) Use of estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Examples of significant estimates made by management include revenue recognition, reserves and resources, depreciation and amortization, the provision for income taxes and composition of future income tax assets and future income tax liabilities, valuations of mineral properties, property, plant and equipment, and asset retirement obligations. Actual results may differ from those estimates. (c) Revenue recognition Revenue from the sale of nickel is recorded when risk and title passes to the buyer, the price is fixed or determinable and collection of the proceeds is reasonably assured. The passing of title and risk occurs based on the terms of the off take contracts. Revenue from the sale of gold is recorded when refined gold is sold to a third party purchaser. Revenue is recognized based on the prevailing commodity prices during the period of delivery. Prices used for provisionally priced shipments are based on London Metal Exchange ( LME ) prices and are adjusted to actual prices at the time of final settlement. Provisionally priced shipments are assessed 6

7 2. ACCOUNTING POLICIES (continued) (c ) Revenue recognition (continued) periodically between the time of the shipment and final settlement. If the value of metal in receivables is recorded at prices in excess of the market values, then the receivables are reduced through a negative adjustment to sales in the current period. Contract revenues are recorded as the related services are provided. Cash received in advance of the passing of title and risk is deferred. (d) Cash and cash equivalents Cash and cash equivalents include cash and money market instruments with an original term to maturity of ninety days or less. (e) Inventories Inventories of nickel concentrate, metal ore and gold in process are valued at the lower of actual production cost and net realizable value. Net realizable value is the amount estimated to be obtained from sale of the item of inventory in the normal course of business, less any anticipated costs to be incurred prior to its sale. Inventories of consumable supplies and spare parts expected to be used in production are valued at cost, less provisions for obsolescence. (f) Deferred stripping costs Effective January 1, 2006, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to stripping costs, EIC 160 Stripping Costs Incurred in the Production Phase of a Mining Operation. The new recommendations require the costs associated with the removal of overburden and other mine waste materials that are incurred in the production phase of mining operations be charged to income in the period in which they are incurred, except when the costs represent a betterment to the mineral property. Stripping costs represent a betterment to the mineral property when the stripping activity provides access to reserves that will be produced in future periods and that would otherwise not have been accessible without the stripping activity. When stripping costs are deferred in relation to a betterment, the costs are amortized to operations over the reserve accessed by the stripping activity using the units of production method. The standard has been applied prospectively and prior years financial statements have not been restated. Application of this new accounting policy did not have a material impact on the financial position or results of operations as at, or for the year ended, December 31,

8 2. ACCOUNTING POLICIES (continued) (f) Deferred stripping costs (continued) At December 31, 2005, the balance of deferred stripping costs was $5.2 million (Note 10). In accordance with EIC 160, the carrying value of the deferred stripping costs as at December 31, 2005 will be amortized over the life of the related mining assets on a units of production basis. Deferred stripping costs are included with related mining property, plant and equipment for impairment testing purposes. (g) Foreign currency translation Financial statements of all self sustaining foreign operations are translated into US dollars using the current rate method. Under this method, assets and liabilities are translated at the rate of exchange in effect at the year end while revenue and expense items are translated at the average exchange rates prevailing during the year. Exchange gains and losses from the translation are deferred and recorded as cumulative translation adjustments in shareholders equity until realized. The Company translates other monetary assets and liabilities that are denominated in foreign currencies at the rate of exchange in effect at the balance sheet date and non monetary assets and liabilities at historical exchange rates. Revenues and expenses are translated at average rates in the month incurred except for depreciation and amortization, which are translated using the same rates as the related assets. Foreign exchange gains and losses on the translation of monetary items are recorded on the statement of earnings as they occur. (h) Debt issue costs Debt issue costs are deferred and amortized over the term of the related debt using the straight line method. (i) Stock based compensation plan The Company has a stock based compensation plan which is described in Note 20. The Company accounts for stock options using the fair value method. Under this method, compensation expense for stock options granted after January 1, 2002 is measured at fair value at the date of the grant using the Black Scholes valuation model and is expensed in the statement of earnings over the vesting period of the options granted. Upon the exercise of the stock option, the recorded fair value of the option is reclassified within shareholders equity from contributed surplus to share capital. 8

9 2. ACCOUNTING POLICIES (continued) (j) Derivative instruments Derivative instruments may be used to hedge interest rate, commodity price and exchange rate exposures. Where appropriate, hedge accounting principles are applied, under which gains and losses on derivatives are recognized in the statement of earnings on the same basis as the underlying hedged items. Gains and losses realized on forward commodity sales contracts that qualify for hedge accounting treatment are recognized as adjustments to sales revenue when the related mineral sales are recorded. All other derivative financial instruments, which do not meet the hedge criteria, are recorded as an asset or liability with changes in the fair value of the instrument in each period recorded in investment income or loss. The Company s metal forward sale contracts do not qualify for hedge accounting treatment (Note 23). (k) Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization, including provisions for impairment. Maintenance, repairs and renewals are charged to operations. Major betterments and replacements are capitalized. Any gains or losses on disposition of property, plant and equipment are included in earnings in the period they occur. Depreciation and amortization are calculated on a straight line or units of production basis, as appropriate, over the lesser of an asset s estimated useful life and the life of the mineral property to which it relates. (l) Mineral exploration and development properties Acquisition costs of mineral exploration and development properties and direct exploration and development expenditures are capitalized. Once in production, these costs will be amortized on a units of production basis over a property s expected economic life. The recoverability of amounts shown for exploration properties is dependent upon the discovery of economically recoverable reserves, confirmation of the Company s interest in the underlying mineral interest, the ability of the Company to finance the development of the properties and on the future profitable production or proceeds from the disposition thereof. (m) Asset retirement obligations The Company records a liability for its asset retirement obligations, equal to the fair value of the legal obligations for asset retirements, and records a corresponding increase to the carrying value of the related mining asset. The asset is amortized and charged to depreciation expense over the life of the associated asset on a units of production basis. The related liability is accreted over the period of expected cash flows with a corresponding charge to operations. The fair value of the legal obligations for asset retirement obligations are assessed annually. 9

10 2. ACCOUNTING POLICIES (Continued) (n) Impairment of long lived assets The Company reviews and evaluates the recoverability of the carrying amounts of all its property, plant and equipment, and mineral exploration and development properties annually, or when events or changes in circumstances indicate that the carrying amount may not be recoverable. A two step process determines impairment of long lived assets held for use. The first step determines whether an impairment exists, and if so, the second step measures the amount of the impairment. An impairment exists if the carrying amount of a long lived asset exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of the impairment loss is determined as the amount by which the long lived asset s carrying value exceeds its fair value. See Notes 11 and 12 for the impairment recorded during 2005 to the Company s gold related property and assets and nickel exploration properties. (o) Income taxes Future income taxes are recognized for the future income tax consequences attributable to differences between the financial statement carrying values of assets and liabilities and their respective income tax basis (temporary differences), and on tax losses and other deductions carried forward. Future income tax assets and liabilities are measured using enacted, or substantively enacted, income tax rates expected to apply in the years in which temporary differences are expected to be recovered or settled, or the tax losses and other deductions are expected to be utilized. The effect on future income tax assets and liabilities of a change in tax rates is included in earnings in the period in which the change occurs. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. (p) Convertible Notes The convertible notes are separated into their debt and equity components according to the fair values of the components at the date of issue. The carrying value of the notes will be less than their face value because a portion of the face value of the convertible notes is attributed to the value ascribed to the holders option to convert the principal amount into common shares and is classified in Shareholders Equity as Equity component of convertible notes. The liability component of the notes will be accreted to its face value over the period to maturity. The non cash accretion will serve to increase the interest expense over the cash interest paid, thereby increasing the effective rate of interest on the convertible notes reflected in the consolidated financial statements. The issue costs attributed to the liability component of the notes are recorded as deferred financing costs in other assets and are amortized into earnings over the period to maturity. 10

11 2. ACCOUNTING POLICIES (continued) (q) Research and development The Company incurs research and development costs in connection with the development and potential commercialization of a new nickel processing technology. Research costs are expensed as incurred. Development costs are deferred to the extent that their recovery can reasonably be regarded as assured. Revenues from testing of pre production prototypes are applied to reduce research and development costs. (r) Earnings per share Basic earnings per share are computed by dividing the net earnings by the weighted average number of common shares outstanding during the year. The diluted earnings per share reflects the potential dilution by common share equivalents, including outstanding stock options, using the treasury stock method, and convertible notes, using the if converted method, in the weighted average number of common shares outstanding during the year, if dilutive. In addition, the related interest, accretion, and amortization of deferred financing fees on convertible debt, when dilutive, (net of tax) are added back to net earnings, since these would not have been paid or incurred if the convertible notes were converted into common shares. (s) Accounting developments During 2006, the CICA introduced financial instrument standards effective for fiscal years beginning on or after October 1, These standards are Section 1530, Comprehensive Income; Section 3855, Financial Instruments Recognition and Measurement and Section 3865, Hedges. The Company has adopted the standards effective January 1, Management is currently assessing the impact of these new standards. (t) Comparative figures Certain comparative figures have been reclassified to conform with the current year s presentation. 3. ACQUISITIONS Purchase of 50% interest in Nkomati nickel mine On June 1, 2005, LionOre completed the acquisition of a 50% interest in the Nkomati nickel mine ( Nkomati ) in South Africa. LionOre purchased its interest from African Rainbow Minerals Limited ( ARM ) which retains the remaining 50% ownership of Nkomati. The acquisition was effective from January 1, The purchase price as stated in the agreement, of $28.5 million, was adjusted for cash flows that would have been attributable to LionOre from January 1, 2005 to the date of completion of the transaction. An amount of $6.7 million was determined to be the cash flow adjustment and this amount was deducted from the stated purchase price to result in the actual cash consideration at June 1, 2005 of $21.8 million. 11

12 3. ACQUISITIONS (continued) The acquisition has been accounted for using the purchase method. Joint venture accounting is being used to account for LionOre s interest in the mine and LionOre has proportionally consolidated the net assets and operations of 50% of the Nkomati Mine from June 1, The allocation of the purchase price based on the consideration paid and the fair value of the Nkomati net assets acquired was as follows: $ millions Cash $ 1.6 Other current assets 12.4 Mineral properties, plant and equipment 9.7 Other assets Less: Liabilities $ Comprised of : Cash consideration $ 21.8 Costs of acquisition 0.1 $ CASH, CASH EQUIVALENTS AND RESTRICTED CASH Cash and cash equivalents consist of the following at December 31: Cash 181,172 70,045 Cash equivalents 230,516 57,284 Total cash and cash equivalents 411, ,329 Restricted cash - 102,156 (a) (b) As at December 31, 2005, an amount of $94.7 million of cash was pledged as security against an Australian dollar (A$) denominated temporary credit facility of A$130.0 million ($101.5 million). In January 2006, this temporary credit facility was replaced by a A$150.0 million ($112.0 million) credit facility, and resulted in the release of restrictions on $94.7 million of cash. During the second quarter of 2006, Tati Nickel s loan from Rand Merchant Bank was fully retired (Note 15(c)(i)). This resulted in the release of restrictions on $7.5 million which was recorded as long term restricted cash at December 31,

13 5. ACCOUNTS RECEIVABLE Australia Botswana South Africa Other Total 2006 Total 2005 Mineral sales receivable $ 97,906 $ 177,022 $ 28,465 $ $ 303,393 $ 95,193 Other 15,970 6,212 1, ,783 10,071 $ 113,876 $ 183,234 $ 30,376 $ 690 $ 328,176 $ 105,264 In Australia, mineral sales receivable consists of receivables for sales of nickel concentrate and gold. A substantial portion of estimated amounts due on shipments of nickel concentrate from the port of Esperance are received within a few weeks from the date of shipment, in accordance with the off take agreements. The final amount is determined after the ore has been processed and the quality of the concentrate assessed. This final determination is typically made within five to six months from the date of shipment. In Botswana (Tati), payment terms are set out in the related ore and concentrate purchase agreement, which stipulates that payment is to be received within 150 days for base metals, and between 240 and 300 days for precious metals. Certain provisional payments for 70% of the estimated amount due in respect of nickel and 90% of that due in respect of the remaining metals, less applicable charges, are receivable within 60 days. In South Africa (Nkomati), payment terms are set out in the various concentrate sales agreements that stipulate payments between 60 and 90 days for the base metals, and between 90 and 180 days for precious metals. For one of the agreements, certain provisional payments for 80% of the nickel, copper and cobalt sales, less applicable charges, are receivable within 15 days. All nickel concentrate sales of the Company are invoiced in US dollars. Gold sales are principally denominated in Australian dollars. Other receivables include amounts related to GST/VAT, interest, rebates and other miscellaneous receivables. 6. INVENTORIES Nickel concentrate $ 41,651 $ 12,405 Metal ore in process 10,593 4,058 Gold in process 4,624 1,344 Parts and supplies 15,188 11,202 $ 72,056 $ 29,009 13

14 7. PROPERTY, PLANT AND EQUIPMENT 2006 Accumulated Depreciation and Net Book Cost Amortization Value Producing mining properties $ 454,038 $ 240,280 $ 213,758 Plant, equipment and other 429, , ,916 $ 883,500 $ 348,826 $ 534, Accumulated Depreciation and Net Book Cost Amortization Value Producing mining properties $ 269,465 $ 151,520 $ 117,945 Plant, equipment and other 308, , ,212 $ 578,311 $ 280,154 $ 298,157 During 2005, the Company recorded an impairment (included in accumulated depreciation and amortization) to certain of its gold related properties, plant and equipment in the amount of $24.2 million. See Note MINERAL EXPLORATION AND DEVELOPMENT PROPERTIES Mineral exploration and development properties, beginning of year $ 381,073 $ 442,731 Expenditures made during the year 109,212 76,039 Change in estimates of fair value of net assets acquired 37,942 Impairment in carrying value of gold and nickel properties (146,125) Transfer to property, plant and equipment (194,957) Other (885) (1,760) Effect of translation of foreign currencies 29,554 (27,754) Mineral exploration and development properties, end of year $ 323,997 $ 381,073 14

15 8. MINERAL EXPLORATION AND DEVELOPMENT PROPERTIES (continued) The balance of exploration and development properties consists of the following: Australia Nickel Interests Honeymoon Well and other MPI (a) $ 301,342 $ 268,573 Maggie Hays (b) 1,243 73,264 Black Swan Disseminated (c) 14,364 Northeastern Goldfields Wildara (d) 9,596 Other (f) 3,416 3, , ,467 Africa Nickel (e) 17,996 11,606 $ 323,997 $ 381,073 Details of the exploration and development properties are as follows: (a) The Company owns the Honeymoon Well project, a nickel sulfide deposit with an estimated nickel resource of approximately 1 million tonnes of contained nickel. Amounts attributable to Honeymoon Well include the original cost and capitalized costs such as mineral studies on the ore body and tenement costs. (b) During 2006, the Company commissioned the Maggie Hays Upgrade project which included capital development on the Maggie Hays mineral property. Upon commissioning, the balance related to the mineral development property at Maggie Hays was transferred to Property, plant and equipment and amortization commenced. The Company continues to evaluate mineral resources to extend the life of mine of Maggie Hays. (c) During 2006, the Company completed the Black Swan Disseminated Project which was an expansion of the existing open pit mine and an upgrade of the processing plant capacity. This project was commissioned by the end of 2006 and the balance was transferred to Property, plant and equipment. (d) The Company holds mineral and exploration rights to various nickel tenements in the Northeastern Goldfields including the Waterloo and Amorac nickel deposits. During 2006, the Waterloo mine entered into commercial production and the amounts related to mineral development was transferred to Property, plant and equipment. Certain other tenements were disposed of during 2006 (Note 24(a)). (e) The Company has mineral and exploration rights related to a mining lease held in Northeastern Botswana together with a prospecting license for an area adjacent to the mining lease. The Company also has capitalized costs related to the expansion projects in South Africa. (f) The Company has interests in a number of other exploration projects. 15

16 9. JOINT VENTURES For those investments in joint ventures subject to joint control, the Company uses the proportionate consolidation method of accounting. Consequently, these consolidated financial statements include amounts for the Company s proportionate share of the joint ventures assets and liabilities, revenues and expenses and cash flows related to the Nkomati mine and are presented as follows: Current assets $ 34,100 $ 15,165 Capital assets 22,251 15,774 Other long-term assets $ 56,811 $ 31,335 Current liabilities $ 7,438 $ 2,106 Long-term liabilities $ 8,047 $ 2,837 Revenue $ 93,815 $ 22,523 Net earnings for the year before income taxes $ 64,319 $ 13,581 Cash flows provided by operating activities $ 71,628 $ 13,126 Cash flows used in investing activities $ (11,222) $ (2,063) Cash flows provided by financing activities $ - $ DEFERRED STRIPPING COSTS The Company has adopted EIC 160 as discussed in Note 2(f). Accordingly, the Company has recorded the following deferred stripping costs: Deferred stripping costs, beginning of year $ 5,192 $ 6,078 Expenditures incurred during the year 8,128 4,663 Amortization (90) (5,020) Effect of translation of foreign currencies (340) (529) Deferred stripping costs, end of year $ 12,890 $ 5,192 16

17 11. IMPAIRMENT OF GOLD RELATED PROPERTIES AND ASSETS During the fourth quarter of 2005, the Company s Board of Directors approved a change of strategic focus for 2006 and beyond to become a vertically integrated nickel producer through the commercialization of its Activox related projects. This new strategic focus prompted a review of the Company s gold related assets in light of the Company s intention to limit its exploration expenditures and focus instead on developing its large scale nickel deposits. As a result, the Company determined that the producing gold related property and exploration assets were impaired and a write down in the amount of $111.7 million was recorded, as follows: Thunderbox gold mine producing asset Thunderbox regional exploration and development properties Other gold properties and assets Total $ 24.2 million 74.2 million 13.3 million $ million The impairment write down of the gold related properties and assets resulted in a future income tax recovery of $26.0 million. The determination of the fair value of the gold related properties and assets was based on an analysis of the estimated future cash flows for operating assets and an estimation of the fair value for the exploration projects. 12. IMPAIRMENT OF NICKEL EXPLORATION PROPERTIES During the fourth quarter of 2005, the Company s board approved a change of strategic focus for 2006 and beyond to become a vertically integrated nickel producer through the commercialization of its Activox related projects. The intention was to limit exploration expenditures and focus on developing the Company s large scale deposits. Based on an estimation of fair value, the Company determined that there was an impairment of the value of its non strategic nickel exploration properties, and recorded a writedown in the amount of $72.0 million. The write down of the nickel exploration properties resulted in a future tax recovery of $17.9 million. 13. LONG TERM INVESTMENTS AND OTHER ASSETS Debt issue costs $ 4,015 $ 3,231 Publicly traded shares, at cost (a) 8,140 6,025 Convertible notes (b) 7,095 2,570 Patents and trademarks (c) 5, Other 1,655 2,778 $ 26,598 $ 15,159 17

18 13. LONG TERM INVESTMENTS AND OTHER ASSETS (continued) (a) Publicly traded shares LionOre holds shares in several resource companies traded on the Australian Stock Exchange. LionOre s holdings include 7.8 million shares of Thundelarra Explorations Ltd. and 33.4 million shares of Breakaway Resources NL Limited ( Breakaway ). As at December 31, 2006 the total market value of the Company s publicly traded shares totaled $14.3 million (2005 $2.9 million). (b ) Convertible notes LionOre holds unsecured redeemable convertible notes of Breakaway with a face value of A$9.0 million ($7.1 million). The convertible notes are non interest bearing and mature in August The convertible notes are convertible into 22.5 million shares of Breakaway at a conversion price of A$0.40 ($0.31) per share. The convertible notes were received in consideration for the sale of certain non core exploration assets to Breakaway during 2006 (Note 24). In 2005, LionOre held convertible notes with a face value of A$3.5 million ($2.6 million). These convertible notes were converted into 15.6 million common shares of Breakaway during These shares form part of the holding as described in Note 13(a). (c) Patents and trademarks During 2006, the Company acquired an interest in patents and trademarks related to the Activox technology as part of the acquisition of the remaining 20% interest in Western Mineral Technology, the holder of the trademarks and patents for the Activox technology, that was not already owned by the Company. The fair value of the consideration was applied to reflect the fair value of the net assets acquired, which consisted primarily of patents and trademarks. 14. SHORT TERM FINANCING (a) During the second quarter of 2006, LionOre Australia drew down A$5.5 million ($4.3 million) on an existing facility between MPI Pty Ltd. ( MPI ) and Australia and New Zealand Banking Group Limited. This loan bears a rate of interest of LIBOR + 2.1%. (b) In 2005, the Company had drawn down on an outstanding short term credit facility in the amount of $90.1 million. The short term facility was replaced with a longer term facility during (Note 15(b)). (c) Through its 85% owned subsidiary Tati Nickel, the Company has a revolving credit facility with Barclay s Bank (Botswana) for Botswana pula (BP) 40 million ($6.6 million). The facility bears interest at Botswana prime rate less 1%. As at December 31, 2006 and 2005, there were no amounts outstanding under the facility. 18

19 14. SHORT TERM FINANCING (continued) (d) Tati Nickel has an available credit facility with a major international bank for up to $10 million. The facility bears interest at LIBOR + 1.5%. As at December 31, 2006 and 2005, there were no amounts drawn on the facility. 15. LONG TERM DEBT 3.8% convertible notes, due July 2011 (a) $ 125,821 $ 122,573 Australia corporate credit facility (b) 118,260 - MPI Nickel loan (Note 18 (c)) 7,410 - Tati Nickel project loans (c) 2,030 13,663 Nkomati purchase loan (d) - 10,000 Tati Nickel purchase loan - 5, , ,236 Less: Current portion of Australian corporate credit facility 59,130 - Current portion of MPI Nickel loan 7,410 - Current portion of Tati Nickel project loans 576 3,925 Current portion of Tati Nickel purchase loan - 5,000 $ 67,116 $ 8,925 Total long-term debt $ 186,405 $ 142,311 (a) 3.8% Convertible Notes LionOre has outstanding senior unsecured convertible notes with a face value of $144.0 million due in July 2011 ( Notes ). The Notes are convertible into approximately 23.5 million common shares of the Company. The Notes trade on the Luxembourg Stock Exchange. The Notes carry a coupon of 3.8% per annum with a conversion price of US$6.13 per common share. The Notes are redeemable at the option of the holder on August 31, 2009 at a price equal to 100% of the principal amount together with interest accrued but unpaid at that date. The Notes may be redeemable at the option of the Company in whole or in part at any time prior to July 29, 2011 at a redemption price equal to the aggregate of: 1) their principal amount together with the accrued but unpaid interest to the date fixed for redemption; and 2) the Make Whole Payment, which is an amount of $2,183 in respect of each $10,000 principal amount of Notes, and which decreases pro rata on a daily basis to the maturity date. The Company also has the option to effect redemption with either a combination of cash and shares, or shares, in lieu of cash. 19

20 15. LONG TERM DEBT (continued) (a) 3.8% Convertible Notes (continued) On the date of the issue, the value of the convertible feature of the Notes was determined to be $24.8 million, and the liability component was valued at $118.3 million. The value of the convertible feature was determined using the residual method. Accordingly, the liability component of the debenture was valued by calculating the present value of the future interest and principal payments to be made to the note holders using the Company s estimated borrowing rate at the date of issue of 7% for similar notes without a conversion privilege. The remaining value, after deducting the liability component from the face value of the Notes, was attributed to the convertible features and has been classified as equity (net of related issue costs) on the balance sheet. The discount on the liability component is being amortized into earnings as interest expense and will, over the term of the Notes, serve to increase the liability component to the face value of $144.0 million at maturity. The interest expense recorded in the financial statements will reflect an effective rate of approximately 7% over the life of the instrument, while cash interest will be paid annually on the face value of the notes at a rate of 3.8%. (b) Australia corporate credit facility The Company has drawn down A$150.0 million ($118.3 million) on a corporate credit facility with an international banking syndicate which is secured by certain mining assets located in Australia. Principal repayments are due commencing in March 2007 and concluding in December The interest rate on this facility is Australian Bank Bill Rate ( BBSY ) % to BBSY %. The BBSY was 6.44% at December 31, (c) Tati Nickel project loans (i) During the second quarter of 2006, Tati Nickel retired the Phoenix Expansion loan. The original loan repayment schedule would have resulted in the loan being repaid during (ii) Tati Nickel has a loan for $2.0 million, proceeds from which are used for exploration. The loan bears interest at 8% per annum. The loan is repayable in equal semi annual installments ending in (d) Nkomati purchase loan During the second quarter of 2006, the Nkomati purchase loan was repaid early without penalty. The loan was originally scheduled to be repaid in one lump sum principal repayment at June 30,

21 15. LONG TERM DEBT (continued) (e) Details of the minimum future principal repayments of all long term debt are as follows: 2007 $ 67, , $ 125, ,521 (f) Interest expense on long term debt totaled $19.4 million in 2006 (2005: $9.9 million). 16. ASSET RETIREMENT OBLIGATIONS The asset retirement obligations consist of mine closure provisions as well as retirement obligations for processing facilities. The Company has recorded the following asset retirement obligations: Balance, beginning of year $ 44,386 $ 34,442 Addition of provisions for assets acquired during the year Accretion of provisions 2,069 2,191 Changes in estimates 37,376 11,723 Effect of translation of foreign currencies 3,271 (4,657) 87,102 44,386 Less: Current portion 25,126 - Balance, end of year $ 61,976 $ 44,386 The total undiscounted amount of estimated cash flows as at December 31, 2006 required to settle the obligations is $133.7 million (December 31, 2005 $77.0 million), which has been discounted using a credit adjusted, risk free rate of 5.8%. The mine closure obligations, on an undiscounted basis, for the Thunderbox mine of A$33.6 million or $26.5 million (2005 A$12.2 million or $9.0 million) are expected to be satisfied in This balance has been classified as a current liability. The undiscounted mine closure obligations for the Lake Johnston operations of A$20.8 million or $16.4 million (2005 A$12.4 million or $9.1 million), and the Black Swan operations of A$25.1 million or $19.8 million (2005 A$5.5 million or $4.0 million) are expected to be satisfied in The mine closure obligations, on an undiscounted basis, of BP million or $19.7 million (2005 BP million or $19.7 million) related to the Phoenix mine are expected to be satisfied in 2016 under current mine plans. For the Nkomati mine, the Company s 50% share of the mine closure obligation, on an undiscounted basis, is (South African Rand) ZAR 7.8 million or $1.1 million (2005 ZAR 6.0 million or $0.9 million) and is scheduled to be satisfied in

22 16. ASSET RETIREMENT OBLIGATIONS (continued) The obligations are principally payable in the domestic currency of the country in which the operations are located. The amounts and timing of payments for these obligations will vary depending on a number of factors including exploration success and alternative mining plans. The asset retirement obligation for the Bulong Nickel Processing Plant on an undiscounted basis has been estimated at A$63.8 million or $50.2 million (2005 A$46.7 million or $34.4 million). The Company uses a credit adjusted risk free rate in the range of 5.82% to 6.5% to discount the estimated cash flows. 17. INCOME TAXES The Company s provision for income taxes reported differs from the amounts computed by applying the cumulative Canadian federal and provincial income tax rates to the earnings (loss) before taxation as a result of the following: Statutory tax rates 36.1% 36.1% Provision for (recovery of) income taxes computed at the statutory rates $ 205,332 $ (29,952) Lower effective tax rate on earnings in foreign jurisdictions (80,353) (1,773) Reduction in foreign tax rate applicable to future tax liability (20,505) Tax benefits not recognized on current year losses 6,746 Reduction in valuation allowance due to recognition of benefit of prior yearsʹ tax losses carried forward (1,963) Non deductible items and other (4,227) 8,933 Provision for (recovery of) income taxes $ 98,284 $ (16,046) Consisting of: Current income tax expense (recovery) 68,358 (421) Future income tax expense (recovery) 29,926 (15,625) $ 98,284 (16,046) The tax effects of temporary differences that give rise to significant components of the future tax assets and future tax liabilities are as follows: 22

23 17. INCOME TAXES (continued) Future income tax assets: Non capital loss carry forwards $ 17,746 $ 38,019 Capital loss carryforwards 2,797 2,605 Other 2,320 7,462 22,863 48,086 Less: valuation allowance (15,468) (17,874) 7,395 30,212 Future income tax liabilities: Mineral exploration and development properties $ 101,548 $ 107,068 Property, plant and equipment 44,768 48,374 Deferred sales 59,623 41,413 Other 2, , ,855 Net future income tax liabilities $ 200,930 $ 166,643 Less: current portion of net future income tax liabilities 59,623 41,413 Net long term future income tax liabilities $ 141,307 $ 125,230 As at December 31, 2006, the Company has estimated non capital loss carry forwards in Canada of approximately Canadian ( C )$24.7 million ($21.2 million), which can be applied to reduce future Canadian income taxes payable and will expire in 2010 to In addition, the Company has estimated non capital loss carry forwards in Australia of A$46.0 million ($36.3 million) and capital loss carry forwards of A$11.8 million ($9.3 million). Non capital losses in Australia can be carried forward indefinitely and applied to reduce future income taxes payable. Capital losses in Australia can be carried forward indefinitely and applied to reduce income taxes payable on future capital gains. The tax benefit on all loss carry forwards in Canada, as well as A$12.9 million ($10.2 million) of non capital loss carry forwards and A$11.8 million ($9.3 million) of capital loss carry forwards in Australia, has not been recognized in the financial statements. The government of Botswana has agreed to provide a reduction in the tax rate from 25% to 12.5% to Tati Nickel effective January 1, The Company has recognized the tax benefit of this reduced rate during the year. The formal agreement regarding the reduced tax rates is expected to be executed during

24 18. NON CONTROLLING INTERESTS The Company s non controlling interests are determined as follows: Tati Nickel (a) MPI Nickel (b) Total Balance at January 1, 2005 $ 28,541 $ 9,923 $ 38,464 Non-controlling interest in net earnings 7,331 2,204 9,535 Dividends paid to non-controlling shareholders (1,280) - (1,280) Effect of translation of foreign currencies (9,189) (742) (9,931) Balance at December 31, ,403 11,385 36,788 Non controlling interest in net earnings 35,538 6,103 41,641 Dividends paid to non-controlling shareholders (1,687) - (1,687) Effect of translation of foreign currencies (1,982) 1,102 (880) Balance at December 31, 2006 $ 57,272 $ 18,590 $ 75,862 (a) The Government of the Republic of Botswana holds a 15% interest in Tati Nickel, LionOre s 85% owned subsidiary. (b) OMG Kokkola Chemicals Holdings BV owns a 20% interest in MPI Nickel. MPI Nickel owns the Black Swan Nickel Operations and the Honeymoon Well nickel sulfide deposit. (c) LionOre s 80% owned subsidiary MPI Nickel has an off take agreement with OMG Kokkola Chemicals Holdings BV (OMG) to sell concentrates produced from the Black Swan Operations. As at December 31, 2006 the Company has receivables due from OMG in the amount of $18.3 million (2005 $14.0 million). In addition, to support the development of the Black Swan Disseminated 2 project, OMG advanced a loan in the amount of A$9.4 million ($7.4 million) to MPI Nickel. The interest rate on the loan is LIBOR + 1% per annum. OMG owns a 20% interest in MPI Nickel which holds the Black Swan Operations. 19. SHARE CAPITAL The Company s authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of preferred shares, issuable in series. At December 31, 2006, the Company has issued the following common shares: Number of Shares Amount Balance at December 31, ,113,600 $ 357,359 Issuance of shares pursuant to the 2004 MPI acquisition 21,691, ,556 Exercise of stock options (Note 20) 275, Balance at December 31, ,079,895 $ 463,473 Exercise of stock options (Note 20) 1,780,000 6,700 Balance at December 31, ,859,895 $ 470,173 There are no preference shares issued and outstanding at December 31,

25 19. SHARE CAPITAL (continued) Earnings per share The basic weighted average number of common shares outstanding for the year ended December 31, 2006 was 217,697,224 ( ,516,750 ). The total incremental shares added to the basic weighted average number of common shares to arrive at the fully diluted number of shares for the year ended December 31, 2006 is comprised of 2,210,590 shares which relate to the outstanding stock options and 23,479,920 shares which relate to the 3.8% convertible notes. The dilution effect of the convertible notes to net earnings is that the interest expense related to the convertible notes of $9.3 million is added back. In 2005, the potential effect of the outstanding convertible notes and stock options were anti dilutive. 20. STOCK OPTIONS The Company has a plan whereby it may grant options to its employees, directors and officers to purchase common shares. Under the plan, the exercise price of each option equals the average of the market closing price of the Company s shares for the preceding five days prior to the date of the grant and an option s maximum term is 10 years. (a) Stock Option and Share Compensation Plan On May 17, 2006, shareholders of the Company approved the new 2006 Stock Option and Share Compensation Plan ( Plan ) which increases the maximum number of common shares that can be issued in stock options and provides for the issuance of bonus shares to employees and directors of the Company. The new Plan permits bonus shares to be granted pursuant to which a cash bonus or other amount paid or payable to a participant can be applied towards the payment for the subscription for the issue of common shares. The grant and issuance of bonus shares are subject to certain restrictions as the Board of Directors may determine. The aggregate maximum number of bonus shares which may be issued and outstanding under the Plan and common shares which may be made subject to option shall not exceed 10% of the total number of common shares outstanding at the time of any grant on a non diluted basis. A total of 21,751,489 common shares may currently be issued under the new Plan. Prior to the approval of the new Plan, the maximum number of common shares that could be issued for stock options was 10 million. 25

26 20. STOCK OPTIONS (continued) (a) Stock Option and Share Compensation Plan (continued) At December 31, 2006, 20,406,489 (December 31, ,220,000) common shares were reserved for issuance under the Plan, including 15,341,489 (December 31, ,620,000) shares for options and bonus shares which have not yet been granted. For the year ended December 31, 2006, a total of 1,670,000 stock options with an exercise price of C$5.49 to C$9.31 were granted to certain employees, directors and officers of the Company. The stock options have a term of ten years. A summary of the status of the Company s stock option plan as of December 31, 2006 and 2005, and changes during the years ended on those dates is presented below: Outstanding Average Exercise Stock Option Activity Options Price (Cdn$) Balance at December 31, ,630,000 $ 4.51 Exercised (275,000) 2.48 Granted Cancelled 1,400,000 (155,000) Balance at December 31, 2005 Exercised 5,600,000 (1,780,000) Granted 1,670, Cancelled (425,000) 6.67 Balance at December 31, ,065,000 $ 6.07 The following table summarizes the stock options outstanding and exercisable at December 31, 2006: (Exercise prices in Canadian dollars) Weighted- Weighted- Weighted- Weighted- Range of Number Average Average Number Average Average Exercise of Options Remaining Exercise of Options Remaining Exercise Prices Outstanding Contractual Life Price Exercisable Contractual Life Price (Years) (Years) $ $ , $ , $ 1.23 $ $ , $ , $ 2.67 $ $ , $ , $ 3.84 $ $5.88 1,710, $ , $ 5.80 $ $ , $ , $ 7.13 $ $9.31 1,425, $ , $ ,065, $ ,275, $