ARGENTUM SILVER CORPORATION (formerly Silex Ventures Ltd.)

Transcription

1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2011

2 NOTICE TO READER Our auditors have not reviewed these unaudited consolidated financial statements for the period ended March 31, Argentum Silver Corporation s management prepared these financial statements in accordance with accounting principles generally accepted in Canada, consistent with previous quarters and years, except for the adoption of new accounting policies described in note 3. You should read these unaudited consolidated financial statements in conjunction with Argentum Silver Corporation s audited financial statements for the year ended June 30,

3 Interim Consolidated Balance Sheets Note March June ASSETS Current Cash $ 737,355 $ 18,096 Amounts receivable 36,664 10,758 Advance 4-25, ,019 53,854 Mineral properties 4, ,130 - LIABILITIES $ 1,624,149 $ 53,854 Current Accounts payable and accrued liabilities $ 8,055 $ 38,958 SHAREHOLDERS EQUITY Share capital 4 1,940, ,887 Contributed surplus 5 390,105 30,105 Broker warrants 7 205,000 - Deficit (919,728) (281,096) Ability to continue as a going concern (note 2) Commitments (note 11) Subsequent events (note 12) 1,616,094 14,896 $ 1,624,149 $ 53,854 On behalf of the board of directors: Geoff Balderson Director Jeff Sheremeta Director Geoff Balderson Jeff Sheremeta The accompanying notes are an integral part of these financial statements. 2

4 Interim Consolidated Statements of Operations and Comprehensive Loss Note Three Months Ended March 31 Nine Months Ended March Expenses 10 Consulting fees $ 31,488 $ 6,241 $ 31,488 $ 6,241 Filing fees - 5,163-16,109 Management and consulting fees 9 87,750-87,750 - Office and general 8,658 1,567 9,380 3,421 Professional fees 32,117 22,717 55,670 59,031 Property investigation 4 35,000-35,000 - Rent 6,268-6,268 - Salaries 5,205-5,205 - Shareholder communication 15,210-15,210 - Stock-based compensation 5 310, ,000 - Transfer agent and filing fees 9, ,895 4,137 Travel 67,332-67,332 - Loss before other item (608,987) (36,541) (639,198) (88,939) Other item Interest income Loss and comprehensive loss for the period $ (608,987) $ (36,541) $ (638,632) $ (88,939) Basic and diluted loss per share $ (0.06) $ (0.02) $ (0.11) $ (0.04) Weighted average number of shares outstanding, basic and diluted 10,392,132 2,200,000 5,739,021 2,116,788 The accompanying notes are an integral part of these consolidated financial statements. 3

5 Interim Consolidated Statements of Cash Flows Note Three Months Ended March 31 Nine Months Ended March 31 Cash generated by (used in) Operating activities Loss for the period $ (608,987) $ (36,541) $ (638,632) $ (88,939) Less non-cash expense Stock-based compensation 6 310, ,000 - (298,987) (36,541) (328,632) (88,939) Changes in working capital items: Amounts receivable (21,374) (1,790) (25,906) (4,774) Accounts payable and accrued liabilities (27,162) (10,410) (30,903) 13,269 (347,523) (48,741) (385,441) (80,444) Investing activities Advance to Arco Resources 4 - (25,000) 25,000 (25,000) Mineral properties 4 (150,130) - (150,130) - (150,130) (25,000) (125,130) (25,000) Financing activities Issuance of shares, net of offering costs 5 1,229,830-1,229,830 20,000 1,229,830-1,229,830 20,000 Increase (decrease) in cash 732,177 (73,741) 719,259 (85,444) Cash, beginning of period 5, ,541 18, ,244 Cash, end of period $ 737,355 $ 83,800 $ 737,355 $ 83,800 Cash paid during the period for: Interest expense $ - $ - $ - $ - Income taxes $ - $ - $ - $ - Transactions not involving cash Shares issued for mineral properties $ 700,000 $ - $ 700,000 $ - Fair value of broker warrants issued $ 205,000 $ - $ 205,000 $ - The accompanying notes are an integral part of these consolidated financial statements 4

6 Interim Consolidated Statements of Shareholders Equity Note Number of common shares Common shares Contributed surplus Broker warrants Deficit Total shareholders equity Balance June 30, ,300,000 $ 265,887 $ 30,105 $ - $ (281,096) $ 14,896 - Share cancellation 5 (1,000,000) (50,000) 50, Private placement 5 11,902,270 1,309, ,309,249 Broker warrants 5 - (205,000) - 205, Finders fees and other offering costs 5 - (105,659) (105,659) Option exercise 6 262,400 26, ,240 Stock-based compensation , ,000 Arco properties 4 2,500, , ,000 Loss for the period (638,632) (638,632) Balance March 31, ,964,670 $ 1,940,717 $ 390,105 $ 205,000 $ (919,728) $ 1,616,094 The accompanying notes are an integral part of these consolidated financial statements. 5

7 1. Nature of Operations and Basis of Presentation Argentum Silver Corporation, formerly Silex Ventures Ltd., ( Argentum or the Company ) was incorporated under the Business Corporations Act (British Columbia) on March 21, The Company was classified as a Capital Pool Company as defined in Policy 2.4 of the TSX Venture Exchange ( TSX-V ). The Company obtained a listing on the TSX-V on October 25, The Company was required to complete a Qualifying Transaction (as defined in TSX-V Policy 2.4) prior to July 16, 2010, but did not do so and was subsequently transferred to the NEX. In February 2011, the Company completed a Qualifying Transaction (see Argentum Option ) and a financing, changed its name to Argentum Silver Corporation, and was relisted on the TSX-V. While the information presented in the accompanying interim consolidated financial statements is unaudited, it includes all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. These interim consolidated financial statements follow the same accounting policies and methods of their application as the Company s June 30, 2010 audited financial statements, except as described below. It is suggested that these interim financial consolidated statements be read in conjunction with the Company s audited June 30, 2010 financial statements. In March 2011, the Company incorporated a wholly owned Mexican subsidiary, Plata de Argentum SA de CV. Note 12 of these financial statements has been amended to reflect accurate information concerning the second tranche of the private placement undertaken after March 31, Ability to Continue as a Going Concern These consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for the next 12 months. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At March 31, 2011, the Company had not yet achieved profitable operations, has accumulated a deficit of $919,728, and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company s ability to continue as a going concern. The Company s ability to continue as a going concern is dependent upon its ability to generate future profitable operations. Subsequent to March 31, 2011, the Company completed the first tranche of a financing (note 12) that provides sufficient funds to support the Company for more than 12 months. 3. Significant Accounting Policies These interim consolidated financial statements follow the same accounting policies and methods of application as the annual financial statements except as described below: 6

8 3. Significant Accounting Policies (continued) Mineral property interests Mineral interests represent acquisition, property holding and deferred exploration costs, net of amounts recovered, depleted, written-off or written-down. Costs are reduced by amounts received from joint ventures or received as option payments related to each property. Gains are recognized on a property by property basis only when payments received exceed costs. If production is attained, these costs will be amortized using the unit-of-production method based on estimated reserves. Accumulated costs related to properties which are abandoned or considered uneconomic in the foreseeable future are written down to their fair value. Mineral properties in the exploration stage are classified as exploration properties. Once the Company has made a formal decision to commence development of a property for commercial production, the property is classified as a development property and subsequent development expenditures are capitalized. When properties are acquired under agreements requiring future acquisition payments to be made at the sole discretion of the Company, those future payments, whether in cash or shares, are recorded only when the Company has made the payment or issued the shares. The amounts shown for mineral properties and related costs represent acquisition, holding, and exploration costs and, when applicable, development expenditures. The amounts shown for mineral properties do not necessarily represent present or future recoverable values. The recoverability of amounts is dependent upon the confirmation of economically recoverable reserves from exploration properties, the ability of the Company to obtain the necessary financing to successfully complete development and upon future profitable production. A mineral property is reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. Although the Company has taken steps to verify the title to mineral properties in which it has an interest, in accordance with industry practice for the current stage of exploration of such properties, these procedures do not guarantee the Company s title. Property title may be subject to unregistered prior agreements or transfers; title may be affected by undetected defects. Foreign currency translation The Company s functional and reporting currency is the Canadian dollar. Transactions in foreign currencies are translated into the Canadian dollar at exchange rates in effect on the transaction date. Monetary items expressed in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in the statement of operations. The operations of the Company's foreign subsidiary, which is considered to be an integrated foreign operation, are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities are translated at year-end exchange rates. Non-monetary assets and liabilities are translated using historical rates of exchange. Revenues and expenses are translated at exchange rates approximating those in effect on the date of the transactions. Exchange gains and losses on translation are included in operating results. 7

9 4. Mineral Properties Arco Option In February 2011, the Company signed a definitive option agreement under which Arco Resources Corp. ( Arco ) granted the Company the right to earn up to a 100% interest in three of Arco s mineral claim blocks (the Arco Properties ) located in Oaxaca State, Mexico. The Arco Properties comprise the Lachiguiri, Silacayoapan and Nino Perdido mining claim blocks. This transaction with Arco constituted the Company s Qualifying Transaction and was deemed to be a non-arm s length transaction as the two companies had a director in common. Under the terms of the option with Arco (the Arco Option ), the Company may earn a 90% interest in the Arco Properties over a three-year period in consideration for total cash payments of $250,000 and 2,500,000 common shares of the Company. Date Consideration Shares Cash Closing 1 2,500,000 $ 100,000 February 15, ,000 February 15, ,000 February 15, ,000 Total 2,500,000 $ 250,000 1 Issued / paid At any time during the term of the Arco Option, the Company may earn a 90% interest by making all remaining cash payments. Arco will retain a 10% carried interest in the Arco Properties. However, once the Company exercises the Arco Option, it may then elect to purchase Arco s 10% carried interest in the Arco Properties by paying cash of $1,000,000. Once such election is made, the Company will have one year to pay this amount to Arco. On closing, the Company also paid a property tax reimbursement of $19,013 to Arco in respect of the Arco Properties. The properties optioned from Arco are: Lachiguiri - The 4,200-hectare Lachiguiri property covers a quartz-rich carbonate replacement alteration system focused on a silver-lead-zinc-bearing vein system. Silacayoapan - The 20,787-hectare Silocayopan property located in the western part of the state covers multiple known vein systems. Nino Perdido - The 2,256-hectare Nino Perdido property lies in a gold-silver-rich district southwest of the capital of Oaxaca. Before completing the Qualifying Transaction, the Company advanced $25,000 to Arco. Arco repaid the advance with interest of $566 in July

10 4. Mineral Properties (continued) Analysis of mineral property investment by property: Note June Acquisition Deferred exploration expenditures March Lachiguiri $ - $ 739,165 $ 11,431 $ 750,596 Silacayaopan - 41,065 2,704 43,769 Nino Perdido - 41, , ,295 15, ,344 Prepaid exploration ,786 13,786 Total $ - $ 821,295 $ 28,835 $ 850,130 Analysis of mineral property investment by type of expenditure: June Additions March Acquisition $ - $ 821,295 $ 821,295 Deferred exploration expenditures Claims and maintenance Geological consultants - 12,322 12,322 Field labour and supplies - 1,868 1,868 Reclamation and remediation Transportation ,049 15,049 Prepaid exploration - 13,786 13,786 Total $ $ 850,130 $ 850,130 9

11 4. Mineral Properties (continued) Soltoro Option In March 2011, the Company signed a letter of intent with Soltoro Ltd. ( Soltoro ) whereby the Company may earn a 100% interest in two of Soltoro s properties located in Jalisco, Mexico. In March 2011, the Company paid a non-refundable $35,000 payment to Soltoro so that it could undertake due diligence on the properties. The Company expensed this due diligence payment. In April 2011, a formal option agreement succeeded the letter of intent and the TSX-V approved the transaction. The Company now has the right to acquire a 100% undivided interest in Soltoro s Victoria and Coyote silver-gold projects in exchange for cash payments of $255,000 (including the $35,000 due diligence payment), issuing an aggregate 5,000,000 common shares of the Company and spending a total of $1,100,000 on exploration over two years. Date Consideration Work Commitment Shares Cash Cumulative Obligation Incurred 2 March 5, $ 35, April 28, ,500, , April 28, ,500, ,000 $ 350,000 - April 28, $1,100,000 - Total 5,000,000 $ 255,000 1 Paid / issued 2 To March 31, 2011 Soltoro retains a 3% net smelter return ( NSR ) interest in each project, and the Company has the right to purchase 1% of each NSR for US$1.5 million to a maximum of 2% for each project. The earnin period can be accelerated at the discretion of the Company. In connection with the closing of the option, the Company paid finder s fees of $120,250 in cash pursuant to TSX-V policies. All securities issued to Soltoro are subject to a four-month hold period expiring August 29, The properties optioned from Soltoro are: Victoria - The 11,105-hectare Victoria silver-gold project covers a large portion of the historic Mascota-Navidad mining district in Jalisco, Mexico, focusing on high-grade gold and silver veins. Coyote - The 1,053-hectare Coyote silver-gold project hosts silver mineralization with lesser gold in banded and brecciatied quartz veins. 10

12 5. Share Capital Authorized Unlimited common shares without par value Issued There were 17,964,670 common shares outstanding at March 31, 2011 (June 30, ,300,000) Share Cancellation In July 2010, the Company was obliged to cancel 1,000,000 common shares as it had not completed a Qualifying Transaction within the time prescribed by the TSX-V. Private Placement In February 2011, the Company closed a non-brokered private placement of 11,902,270 units at a price of $0.11 per unit for gross proceeds of $1,309,250. Each unit consisted of one common share and one share purchase warrant. Each warrant will be exercisable for one additional common share for a period of one year at an exercise price of $0.15 per share. As part of this private placement, the Company paid cash finders fees of $92,194 and issued 1,160,227 finders warrants with a fair value of $205,000. Each finder s warrant is exercisable to acquire one common share at $0.15 per share for one year. The Company incurred other financing costs of $13,465. Issued for Property Purchase On completing its Qualifying Transaction, the Company issued 2,500,000 common shares to Arco. See note 4. The Company has ascribed a value of $700,000 corresponding to $0.28 per share, being the closing price on February 15, 2011, the date that the qualifying transaction completed. Escrow Shares As at March 31, 2011, 3,240,000 (June 30, ,100,000) common shares were subject to escrow to be released as follows: August 15, ,000 February 15, ,000 August 15, ,000 February 15, ,000 August 15, ,000 February 15, ,000 3,240,000 11

13 6. Stock Options The Company has a stock option plan ( the Plan ) under which it is authorized to grant options to directors, officers, consultants or employees of the Company. The number of options granted under the Plan is limited to 10% in the aggregate of the number of issued and outstanding common shares of the Company at the date of the grant of the options. The exercise price of options granted under the Plan may not be less than the fair market value of the Company s common shares at the date the options are granted. Options granted under the Plan have a maximum life of five years and vest according to conditions set at the time the options are granted. A summary of stock option activity is as follows: Number of Options Weighted Average Exercise Price Balance June 30, ,000 $ 0.10 Granted 1,312,500 $ 0.22 Exercised (262,400) $ 0.10 Balance March 31, ,460,100 $ 0.21 A summary of the Company s outstanding and exercisable stock options at March 31, 2011 is presented below: Outstanding Options Exercisable Options Exercise Price Number Weighted Average Remaining Life Weighted Average Exercise Price Number Weighted Average Exercise Price $ , years $ ,600 $ 0.10 $ , years $ ,500 $ 0.15 $ , years $ ,250 $ ,460, years $ ,366,350 $ 0.20 The weighted average grant-date fair value of options awarded in the nine months ended March 31, 2011 was $0.25. The Company employed the Black-Scholes option-pricing model using the following weighted average assumptions: 2011 Expected annual volatility 125% Risk-free interest rate 2.8% Expected life 5 years Expected dividend yield 0% 12

14 7. Warrants A summary of the Company s share purchase warrants and the changes in the nine months ended March 31, 2011 is presented below: Financing Warrants Warrants Outstanding Weighted Average Exercise Price Broker Warrants Warrants Outstanding Weighted Average Exercise Price At June 30, Issued 11,902,270 $ ,160,227 $ 0.15 Exercised Expired At March 31, ,902,270 $ ,160,227 $ 0.15 Number of Financing Warrants Number of Broker Warrants Exercise Price Expiry Date 11,902,270 - $ 0.15 February 15, ,160,227 $ 0.15 February 15, ,902,270 1,160,227 The Company employed the Black-Scholes option-pricing model to value broker warrants using the following weighted average assumptions: 2011 Expected annual volatility 125% Risk-free interest rate 0% Expected life 1 year Expected dividend yield 1.81% 8. Capital Management The Company considers its management of capital to include all components of debt and shareholders equity. Its objectives are to ensure that the Company continues to operate as a going concern, if possible, in order to pursue the operation of its mine property and the development of its mineral properties, to sustain future development and growth as well as to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue new shares, seek debt financing, or acquire or dispose of assets. The Company, with approval from its board of directors, makes changes to its capital structure as it deems appropriate under specific circumstances. 13

15 9. Financial Instruments Risk Management Credit Risk The Company is exposed to credit risk with respect to amounts receivable if a creditor fails to meet its contractual obligations. The Company undertakes credit evaluations on creditors as necessary and has monitoring processes intended to mitigate credit risks and maintain appropriate provisions for potential credit losses. The Company is exposed to credit risk with respect to cash, amounts receivable, refundable deposits, due from related party and reclamation deposits. The carrying amount of assets included on the balance sheet represents the maximum credit exposure. Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. The Company s growth strategy requires additional cash from debt, the issuance of equity or a combination. As at March 31, 2011, the Company was holding cash of $737,355. The Company plans to undertake further share capital financings but there can be no guarantee that management s efforts to raise additional funds will be successful. Interest Rate Risk The Company is not exposed to significant interest rate risks arising from financial instruments. Commodity Price Risk The Company is exposed to price risk with respect to commodity prices of precious minerals. The Company considers the risk exposure to fluctuating market prices and trends will have significant impact on the ability to secure financing. Currency Price Risk The Company is exposed to foreign exchange risk as its financial statements are expressed in Canadian dollars and finances its operations in Canadian dollars but undertakes a large proportion of its operations in US dollars and Mexican pesos. The Company does not engage in any form of derivative or hedging instruments. 14

16 10. Related Party Transactions The Company entered into the following related party transactions the current fiscal period. The Company did not have any transactions with related parties in the comparative period. Three and nine months ended March 31, 2011 Management and consulting fees Exploration Expenditures Administration Expenses Total Warren McIntyre 1 $ 75,000 $ - $ - $ 75,000 Jeff Sheremeta 2 9, ,000 S2 Management Inc. 3 3, ,750 Geoff Balderson 4 10, ,000 Arco Resources Corp. 4-28,835 38,566 67,401 Total $ 97,750 $ 28,835 $ 38,566 $ 165, Mr. McIntyre is the CEO of the Company Mr. Sheremeta is a director and corporate secretary of the Company Beneficially owned by the Company s CFO. The fees include related administrative and secretarial services. Mr. Balderson is a director of the Company. A company with a director and two officers in common with the Company. Represents administration expenses incurred on the Company s behalf in Mexico of $16,602 and Canadian administration expenses of $21,964. In addition to the transactions summarized above, the Company entered into an option agreement with Arco as described in note 4. The carrying value of mineral properties includes $13,786 of prepaid exploration costs paid to Arco. Apart from the Arco option agreement, transactions with related parties were in the normal course of business and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 11. Commitments The Company is committed to make payments under consulting contracts as follows: Period Ending June $ 17, ,500 $ 65,313 15

17 12. Subsequent Events In April 2011, the Company announced a non-brokered private placement of up to 15,000,000 units for gross proceeds of up to $5,250,000, subject to TSX-V approval. The units are priced at $0.35 and consist of one common share and one-half of one share purchase warrant. Each whole warrant is exercisable for one additional common share at a price of $0.50 for one year from the date of issue. The Company will pay qualified parties a finder s fee in cash equal to 7% of the total proceeds invested by subscribers introduced to the Company by such parties, subject TSX-V approval. In May 2011, the Company closed the first and second tranches of the private placement and issued 11,874,042 units at a price of $0.35 per unit for gross proceeds of $4,155,915. In connection with the closing of the first and second tranches, the Company paid finder s fees of $264,846 in cash and issued 736,221 finder s warrants exercisable on the same terms as the financing warrants, except they are non-transferable. The proceeds of the private placement will be used to fund exploration and drilling programs at the Company s Lachiguiri, Coyote and Victoria properties. 16