ENERGOLD DRILLING CORP. CONSOLIDATED FINANCIAL STATEMENTS

Transcription

1 ENERGOLD DRILLING CORP. CONSOLIDATED FINANCIAL STATEMENTS December 31, 2010 and 2009

2 Management s Responsibility For Financial Reporting The accompanying financial statements of Energold Drilling Corp. ( the Company ) have been prepared by management in accordance with accounting principles generally accepted in Canada, and within the framework of the summary of significant accounting policies in these consolidated financial statements, and reflect management s best estimate and judgment based on currently available information. Management has developed and maintains a system of internal controls to provide reasonable assurance that the Company s assets are safeguarded, transactions are authorized and financial information is accurate and reliable. The Audit Committee of the Board of Directors meets periodically with management and with the Company s independent auditors to review the scope and results of their annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board of Directors for approval. The consolidated financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the shareholders and their report follows. F.W. Davidson President and Chief Executive Officer R. S. Younker Chief Financial Officer April 14, 2011

3 April 14, 2011 Independent Auditor s Report PricewaterhouseCoopers LLP Chartered Accountants PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia Canada V6C 3S7 Telephone Facsimile To the Shareholders of Energold Drilling Corp. We have audited the accompanying consolidated financial statements of Energold Drilling Corp., which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of earnings and retained earnings and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the 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 to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial 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 the auditor s 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, the auditor considers 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 evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Energold Drilling Corp. as at December 31, 2010 and 2009 and its results of operations and cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Signed PricewaterhouseCoopers LLP Chartered Accountants Vancouver, BC PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

4 Consolidated Balance Sheets As at December 31 Statement 1 ASSETS Current Cash and cash equivalents $ 28,224,579 $ 18,460,268 Restricted cash (Note 5) 252,981 2,218,750 Accounts receivable and prepaid expenses 12,123,663 6,922,090 Due from IMPACT Silver Corp. (Note 11c) 414, ,902 Income taxes receivable 478, ,289 Short-term investments 2,491,542 1,412,493 Inventories (Note 6) 29,598,023 23,629,283 Future income taxes (Note 16) 36,182-73,620,124 53,512,075 Investment in a private corporation (Note 8d) 2,000,000 - Investment in IMPACT Silver Corp. (Note 7) 5,289,922 3,660,757 Resource properties (Note 8 ) 1,368,278 1,370,934 Property, plant and equipment (Note 9) 9,817,298 7,664,099 Goodwill 1,710,000 1,710,000 Future income taxes (Note 16) 1,468, ,971 $ 95,274,165 $ 68,912,836 LIABILITIES Current Accounts payable and accrued liabilities $ 7,170,082 $ 3,569,728 Income taxes payable 505,178 69,444 Deferred revenue current portion 552, ,647 Future income taxes (Note 16) 3,930,693 2,847,617 12,158,822 6,993,436 Future income taxes (Note 16) 885, ,029 Deferred revenue 98,694 - Leases Payable 167,511-13,310,404 7,463,465 SHAREHOLDERS' EQUITY Share capital (Note 10a) 56,257,452 41,062,153 Contributed surplus (Note 10b) 2,079,783 1,137,831 Warrants (Note 10c) 2,060,276 Accumulated other comprehensive income (Note10d) 1,021, ,785 Retained earnings 20,545,110 19,096,602 81,963,761 61,449,371 $ 95,274,165 $ 68,912,836 Commitments (Note 12) Subsequent events (Note 18) ON BEHALF OF THE BOARD: F.W. Davidson H.W. Sellmer, Director, Director - The accompanying notes form an integral part of these consolidated financial statements

5 Consolidated Statements of Earnings (Loss) and Retained Earnings For the Years Ended December 31 Statement Revenue from drilling contracts $ 54,591,578 $ 23,719,367 Direct drilling costs 43,061,923 18,044,138 11,529,655 5,675,229 Indirect and administrative expenses Accounting, audit and legal 796, ,693 Amortization 1,457,636 1,330,726 Bad debt (recovery) expense 8,667 (1,034,992) Investor relations, promotion and travel 469, ,435 Management fees and consulting 697, ,909 Office, rent, insurance and sundry 1,249,282 1,032,355 Office salaries and services 3,501,420 2,456,399 Stock-based compensation 979, ,816 9,159,057 5,497,341 Earnings before the following 2,370, ,888 Other income (expenses) Dilution gain on investment in IMPACT Silver Corp. (Note 7) 936,332 55,737 Equity increase in IMPACT Silver Corp. (Note 7) 417, ,388 Foreign exchange (loss) gain (693,042) (2,334,121) Gain on acquisition of assets 411,910 - Gain on disposal of assets 350, ,849 Interest (164,699) 55,878 Other income 29, ,067 1,287,435 (1,581,202) Earnings (loss) before taxes 3,658,033 (1,403,314) Current and other income taxes (Note 16 ) (1,494,040) (317,501) Future income taxes (Note 16) (715,485) (230,078) Net earnings (loss) 1,448,508 (1,950,893) Retained earnings Beginning of year 19,096,602 21,047,495 Retained earnings - End of year $ 20,545,110 $ 19,096,602 Earnings (loss) per share Basic $ 0.04 $ (0.06) Earnings (loss) per share - Diluted $ 0.04 $ (0.06) Weighted average number of shares outstanding - Basic 34,869,083 34,132,281 Weighted average number of shares outstanding - Diluted 35,176,417 34,350,781 - The accompanying notes form an integral part of these consolidated financial statements

6 Statement 3 Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December Net earnings (loss) $ 1,448,508 $ (1,950,893) Other comprehensive income (loss) Unrealized gain on available for sale short-term investments (net of taxes) 868, ,683 Total comprehensive income (loss) $ 2,316,863 $ (1,785,210) - The accompanying notes form an integral part of these consolidated financial statements

7 Consolidated Statements of Cash Flows For the Years Ended December 31 Statement 4 Cash resources provided by (used in) Operating activities Net earnings (loss) $ 1,448,508 $ (1,950,893) Items not affecting cash Amortization 1,457,636 1,330,726 Bad debt expense (recovery) 8,667 (1,034,992) Dilution gain on investment in IMPACT Silver Corp. (936,332) (55,737) Equity decrease (increase) in IMPACT Silver Corp. (417,833) (262,388) Future income taxes 715, ,078 Gain on acquisition of assets (411,910) - Loss on disposal of assets 3,083 16,239 Gain on disposal of short-term investments (353,108) (134,088) Stock-based compensation 979, ,816 Unrealized loss (gain) on foreign exchange 523,976 2,021,922 Increase (decrease) in deferred revenue 98,694 (507,297) Changes in non cash working capital (Note 13) (7,550,044) (429,146) (4,434,096) (535,760) Investing activities Decrease (increase) in restricted cash 1,965,769 (50,325) Investment in a private corporation 2,000,000 - Investment in IMPACT Silver Corp. (275,000) - Proceeds on sale of assets 35,194 28,723 Proceeds on sale of short-term investments 1,087, ,164 Purchase of property, plant and equipment (2,895,171) (1,061,091) Purchase of short-term investments (2,404,574) (1,461,690) Resource property recoveries 2,656 67,000 (2,483,799) (2,096,219) Financing activities Share capital issued 16,955,746 18,000 16,955,746 18,000 Effect of exchange rate changes on cash and cash equivalents (273,540) (1,499,633) Net increase (decrease) in cash and cash equivalents 9,764,311 (4,113,612) Cash and cash equivalents - Beginning of year 18,460,268 22,573,880 Cash and cash equivalents End of year $ 28,224,579 $ 18,460,268 Supplementary cash flow information (Note 13) - The accompanying notes form an integral part of these consolidated financial statements

8 Notes to the Consolidated Financial Statements December 31, Nature of operations Energold Drilling Corp. (the Company ) provides, directly and through its subsidiaries, contract diamond drilling services for parties principally in Mexico, the Caribbean, Central America, South America, Africa and Asia. The Company also holds mineral exploration properties in Latin America, primarily in the Dominican Republic and Mexico, both directly and through the 6.87 million shares that it holds in IMPACT Silver Corp. ( IMPACT ). The Company s interest in IMPACT is currently accounted for on an equity basis. 2. Significant accounting policies These consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles GAAP. a) Principles of consolidation These consolidated financial statements include the accounts of the Company and all of its subsidiaries, including: Omniterra International Drilling Inc. ( OID ) (formerly Kluane International Drilling Inc.) and FMI Technologies Inc. located in Canada; Energold de Mexico S.A. de C.V. ( EDM ) and Silver Servicios de Personal, S. de R.L. de C.V. ( SSP ) located in Mexico; Energold Drilling Dominicana, S.A. ( EDD ) located in the Dominican Republic; Energold Drilling Peru, S.A.C. ( EDP ) located in Peru; Energold Perfuracoes Ltda. ( EPB ) located in Brazil; Energold de Chile S.A. ( EDC ) located in Chile; Energold de Colombia S.A.S. ( EDCOL ) located in Colombia; Energold de Argentina S.A. ( EDA ) located in Argentina; and E Global Drilling Corp. ( E Global ) located in Barbados Recursos de los Andes located in Peru All intercompany transactions and balances have been eliminated. b) Use of estimates The preparation of consolidated financial statements in conformity with Canadian GAAP requires that the Company s management 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 these estimates. Significant areas requiring the use of management estimates include, but are not limited to, the recoverability of accounts receivable, the net realizable value of inventory, the useful lives of property, plant and equipment for amortization purposes, the provision for current and future income taxes, the assumptions used in calculating stockbased compensation expense and fair value of warrants issued in conjunction with the issuance of the Company s common shares, the valuation of the investment in IMPACT Silver Corp., the valuation of the investment in private company, the assumptions used in calculating the fair value of goodwill for impairment testing purposes, the recoverability of resource properties, and the fair value of assets and liabilities acquired in business combinations. c) Revenue recognition Revenue from drilling contracts is recognized on the basis of actual meters drilled for each contract. Revenue from ancillary services is recorded when the services are rendered. Revenue is recognized when collection is reasonably assured. Contract prepayments are recorded as deferred revenue until performance is achieved and are credited against contract billings in accordance with the contract terms.

9 Notes to the Consolidated Financial Statements December 31, 2010 d) Cash and cash equivalents Cash and cash equivalents include cash, term deposits and short-term highly liquid money market investments with an original term to maturity of three months or less and which are readily convertible to known amounts of cash. e) Inventories The principal components of inventories include drill tubes, drill rods, casings, drill bits, and consumable supplies and lubricants necessary to carry out drilling operations which are normally consumed during drilling operations either during a single contract or over the course of a business year. The Company maintains inventories in each country in which it operates of significant drilling equipment, parts, and supplies (including pumps, motors, generators, and water and hydraulic hoses), together with a base inventory of smaller value parts and equipment necessary to allow its drilling staff to provide field support and maintenance to its man portable drilling equipment. Procurement, transportation and import duties are included in inventory cost. The Company applies the following policies with respect to inventory accounting and valuation: i) Higher value drilling equipment parts and supplies as well as consumable inventories are valued at landed cost on a first-in, first-out basis, based upon country of use, less an allowance for obsolescence (wear and tear) based upon management s judgment of the expected remaining field service life of the equipment parts and supplies. ii) Each drill has a base inventory of smaller value equipment parts and supply items which are valued at landed cost. f) Investments Investments in entities over which the Company exercises significant influence are accounted for using the equity method. The Company reviews and evaluates its investments for impairment annually or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. A significant or prolonged decline in the fair value of an investment below its carrying value that is considered to be other than temporary would be recognized by writing down the investment. g) Resource properties The Company is in the process of exploring its resource properties and has not yet determined whether these properties contain ore reserves that are economically recoverable. Resource exploration and development costs are capitalized on an individual prospect basis until such time as an economic ore body is defined or the prospect is abandoned. Management reviews and evaluates the carrying values of its resource properties for impairment on an annual basis or when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The recoverability of the amounts capitalized for the undeveloped resource properties is dependent upon the determination of economically recoverable ore reserves, confirmation of the Company's interest in the underlying mineral claims, the ability to obtain the necessary financing to complete their development, and future profitable production or proceeds from the disposition thereof. Title to resource properties involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many resource properties. The Company has investigated title to all of its mineral properties and, to the best of its knowledge, title to all of its properties are in good standing.

10 Notes to the Consolidated Financial Statements December 31, Significant accounting policies - continued From time to time, the Company may acquire or dispose of properties pursuant to the terms of option agreements. Due to the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as resource property costs or recoveries when the payments are made or received. The Company does not accrue the estimated costs of maintaining its mineral interests in good standing. h) Property, plant and equipment Property, plant and equipment are valued at cost less accumulated amortization. operations using the declining balance method as follows: Amortization is charged to Exploration and drilling equipment 20% per annum Vehicles 20% per annum Office furniture and equipment 20% per annum Computer equipment 30% per annum One-half of the amortization is recorded in the year of acquisition. Costs for repairs and maintenance are charged to operations as incurred. i) Goodwill Business acquisitions are accounted for using the purchase method whereby assets and liabilities acquired are recorded at their fair values as of the date of acquisition and any excess of the purchase price over such fair value is recorded as goodwill. Goodwill is identified and allocated to reporting units by preparing estimates of the fair value of each reporting unit and comparing this amount to the fair value of assets and liabilities in the reporting unit. Goodwill is not amortized. The Company assesses goodwill impairment on at least an annual basis, or more frequently if events or circumstances indicate there may be impairment. To accomplish this assessment, the Company estimates the fair value of its reporting units that include goodwill and compares those fair values to the reporting units carrying amounts. If the carrying value of a reporting unit exceeds its fair value, the Company compares the implied fair value of the reporting unit s goodwill to its carrying amount, and any excess of the carrying amount over the fair value is charged to operations. Assumptions underlying the fair value estimates are subject to significant risks and uncertainties. The Company performed impairment tests at December 31, 2010 and December 31, 2009 and determined there was no impairment in the carrying value. j) Income taxes The Company accounts for income taxes using the asset and liability method. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are recognized for temporary differences between the tax and accounting basis of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes that are more likely than not to be realized.

11 Notes to the Consolidated Financial Statements December 31, Significant accounting policies - continued k) Earnings per share Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of diluted common shares outstanding during the year. Diluted common shares reflect the potential dilutive effect of exercising the stock options and warrants based on the treasury stock method. l) Foreign currency translation All amounts are presented in Canadian dollars. The Company has determined that all of its foreign subsidiaries are integrated operations; therefore local currencies are translated into Canadian dollars under the temporal method as follows: Monetary assets and liabilities at year-end rates, All other assets and liabilities at historical rates, and Revenue and expense and exploration and development items at the average rate of exchange prevailing during the period. Exchange gains and losses arising from these transactions are reflected in income or expense in the year. m) Comprehensive income Comprehensive income consists of net income and other comprehensive income ( OCI ). OCI represents changes in shareholders equity during a period arising from transactions and other events with non-owner sources and includes unrealized gains and losses on financial assets classified as available-for-sale. n) Financial instruments The Company s financial instruments comprise primarily cash and cash equivalents, restricted cash, accounts receivable, short-term investments and accounts payable and accrued liabilities. The Company has designated cash and cash equivalents and restricted cash as held-for-trading, which are measured at fair value. Accounts receivable are designated as loans and receivables, which are measured at amortized cost. Short-term investments are designated as available-for-sale and measured at fair value as determined by reference to quoted market prices. Accounts payable and accrued liabilities are designated as other liabilities, which are measured at amortized cost. o) Stock-based compensation and warrants The Company accounts for stock options at fair value pursuant to CICA Handbook Section 3870, which establishes standards for the recognition, measurement and disclosure of stock-based compensation. Stock-based compensation expense for stock options granted is determined based on the fair value of the options at the time of grant using the Black-Scholes option pricing model. The proceeds from the issue of units is allocated between common shares and common share purchase warrants on a prorated basis on relative fair values as follows: the fair value of common shares is based on the market close on the date the units are issued; and the fair value of the common share purchase warrants is determined using the Black- Scholes pricing model.

12 Notes to the Consolidated Financial Statements December 31, Changes in accounting policies Adoption of new accounting policies In January 2009, the Canadian Institute of Chartered Accountants ( CICA ) issued Section 1582 Business Combinations to replace Section Prospective application of the standard is effective January 1, 2011, with early adoption permitted. This new standard effectively harmonizes the business combinations standard under Canadian GAAP with International Financial Reporting Standards ( IFRS ). The new standard revises guidance on the determination of the carrying amount of the assets acquired and liabilities assumed, goodwill and accounting for non-controlling interests at the time of the business combination. The CICA concurrently issued Section 1601 Consolidated Financial Statements and Section 1602 Non- Controlling Interests, which replace Section 1600 Consolidated Financial Statements. Section 1601 provides revised guidance on the preparation of consolidated financial statements and Section 1602 addresses accounting for non-controlling interests in consolidated financial statements subsequent to a business combination. These standards are effective January 1, 2011, unless they are early adopted at the same time as Section 1582 Business Combinations. We have chosen to early adopt Sections 1582, 1601 and 1602 effective January 1, There is no effect on previous business combinations.

13 Notes to the Consolidated Financial Statements December 31, Business Combination a) On March 8, 2010 the Company acquired nine drilling rigs with related support equipment and inventories, as well as existing drilling contracts, and management and operating personnel from Envirodrill (UK) Ltd. The acquired assets are primarily located in West Africa. Consideration for the acquired assets included cash, common shares of the Company and the assumption of leases related to certain acquired assets as detailed in the table below. Fair value of assets and liabilities acquired Inventories $ 362,819 Property, plant and equipment 1,271,681 Leases payable (483,477) Net assets acquired $ 1,151,023 Consideration Cash paid or payable $ 795,594 Common shares issued 107, ,699 Total consideration $ 1,058,293 Gain on acquisition $ 92, Restricted cash Restricted cash represents funds held as at December 31: Funds held in trust pending investment in third party initial public offering (Note 8d) $ - $ 2,000,000 Other 252, ,750 $ 252,981 $ 2,218, Inventories The cost of inventories recognized as an expense and included in direct drilling costs for the year ended December 31, 2010 was $16,829,701 ( $6,446,397).

14 Notes to the Consolidated Financial Statements December 31, Investment in IMPACT Silver Corp. (IMPACT) At December 31, 2010 the Company owned 6,870,001 (2009-6,650,001) shares of IMPACT Silver Corp. The Company s interest in IMPACT decreased from 13.74% to 11.22% during the year ended December 31, 2010 as a result of the issuance of shares by IMPACT. The Company, through mutual management at the executive level and its shareholding and directorship in IMPACT, exercises significant influence over that company. As a result, the investment in IMPACT is accounted for using the equity method. The dilution gain represents the fair value of the Company s share of the consideration paid by the new investors in IMPACT in excess of the carrying value of the Company s investment in IMPACT. Equity has been reduced by the elimination of 100% of the net profits realized on drilling services provided to IMPACT. Details of the investment in IMPACT are as follows: Balance December 31, 2008 $ 3,342,632 Equity income for the period 159,409 Reversal of profits on intercompany drilling revenues 102,979 Dilution gain 55,737 Balance December 31, 2009 $ 3,660,757 Equity income for the period 417,543 Reversal of losses on intercompany drilling revenues 290 Dilution gain 936,332 Purchase of shares 275,000 Balance December 31, 2010 $ 5,289,922 Based upon year end TSX.V closing market prices of $1.74 and $1.17 per share, this investment has a quoted market value $11,953,802 at December 31, 2010 and $7,780,501 at December 31, 2009.

15 Notes to the Consolidated Financial Statements December 31, Resource properties a) Details are as follows: i) As at December 31, 2010: Acquisition Costs ($) Deferred Exploration (net of recoveries) ($) Sale of Resource Properties ($) Accumulated Write-off ($) Dominican Republic Concessions Actividades Mineras, S.A. ( AMSA ) 142, , ,772 Casa Real, S.A. ( Casa ) 302, , ,413 Energold Drilling Dominicana, S.A. ( EDD ) 1,265,275 2,260,691 (684,074) (2,743,801) 98,091 1,710,609 3,085,542 (684,074) (2,743,801) 1,368,276 ii) As at December 31, 2009: Acquisition Costs ($) Deferred Exploration (net of recoveries) ($) Sale of Resource Properties ($) Accumulated Write-off ($) 2010 ($) 2009 ($) Dominican Republic Concessions AMSA 142, , ,473 Casa 302, , ,280 EDD 1,265,275 2,279,781 (684,074) (2,743,801) 117,181 1,710,609 3,088,200 (684,074) (2,743,801) 1,370,934 b) AMSA By agreement dated July 25, 1996 and subsequently amended, the Company acquired the right from MJD Agency Ltd. to purchase a 40% interest in the Dominican Republic company, AMSA for an exploration work commitment of $300,000 which has been completed. The Company has the right to purchase another 20% for an additional $300,000 work commitment to be completed by July 25, All costs incurred to date with regard to the purchase of AMSA have been recorded as resource property costs. This agreement is subject to a 1% net smelter royalty. c) Option agreements Dominican Republic In November 2007, the Company entered into an option agreement with a third party on the Majagual (EDD) concession in the Dominican Republic. The third party has paid $125,000 and issued 300,000 shares to the Company. The third party is required to pay $50,000 and issue 100,000 shares on the second through fourth anniversaries. In addition, the third party must spend $500,000 on the property over a period of four years.

16 Notes to the Consolidated Financial Statements December 31, Resource properties - continued d) Purchase agreement Dominican Republic The Company entered into a binding letter of agreement, effective June 29, 2007 and amended December 21, 2007 and June 30, 2008, with a Canadian controlled private corporation ( CCPC ) to transfer all of its rights and obligations in the La Parcela Concession, located in the Dominican Republic, in exchange for $2.0 million. The Company in turn agreed to invest in an initial public offering ( IPO ) to be undertaken by that CCPC. In July 2010 the Company completed the transfer arrangements with respect to the La Parcela Concession and the CCPC agreed to the release of the $2.0 million of restricted cash funds through an investment in shares of the CCPC at a price of $0.40 per share. The shares acquired have been treated as an equity investment. Subsequent to the year-end the CCPC entered into a letter agreement for a proposed transaction whereby the CCPC would be acquired by a public company on a basis to be mutually agreed. If this occurs, the Company will carry its equity investment as a shortterm available for sale investment.. 9. Property, plant and equipment Cost $ Accumulated amortization $ 2010 Net Book Value $ Cost $ Accumulated amortization $ 2009 Net Book Value $ Drilling Equipment 13,853,118 5,096,198 8,756,920 10,730,035 3,836,110 6,893,925 Exploration Equipment 48,294 45,298 2,996 48,294 45,199 3,095 Vehicles 1,048, , , , , ,600 Office Furniture and Equipment 800, , , , , ,479 15,570,102 5,932,804 9,817,298 12,160,076 4,495,977 7,664, Share capital a) Details are as follows: Authorized: Unlimited common shares without par value Number Amount Issued and outstanding: Balance December 31, ,128,048 $ 41,035,907 Stock options exercised 15,000 18,000 Fair value assigned to options exercised - 8,246 Balance December 31, ,143,048 $ 41,062,153 Stock options exercised 735, ,765 Fair value assigned to options exercised - 419,920 Share issued in relation to Envirodrill (Note 4) 107, ,699 Shares issued in relation to private placement (i) 4,662,162 14,988,651 Share issue costs - (1,403,646) Balance December 31, ,647,434 56,257,542

17 Notes to the Consolidated Financial Statements December 31, Share capital - continued i) On December 23, 2010, the Company completed a private placement and issued 4,662,162 units at a price of $3.70 per unit for a total of $17.25 million. Each unit consists of one common share and one half of one common share purchase warrant. Each whole warrant entitles the holder to purchase one common share of the Company at an exercise price of $4.50 per share until December 23, The Company paid a cash commission of $1,035,000 and issued the agent an option to acquire 279,729 units, consisting of one share and one half of one share purchase warrant, at a price of $3.70 until December 23, All securities issued under this private placement are subject to a four-month hold period expiring on April 24, The estimated fair value of the agent s warrants totalled $2,060,276 and has been allocated to the warrant component of the units. The fair value of the warrants was determined using the Black-Scholes Option Pricing model using the following assumption: risk-free interest rate of 1.69%; expected dividend yield of 0%; expected stock price volatility of 60%; expected option life in years of 2. The estimated fair value of the agent s options totalled $382,701. This amount has been allocated to contributed surplus and share issue costs. The fair value of the warrants was determined using the Black- Scholes Option Pricing model using the following assumption: risk-free interest rate of 1.69%; expected dividend yield of 0%; expected stock price volatility of 60%; expected option life in years of 2. b) Contributed surplus Balance December 31, 2008 $ 906,261 Value assigned to stock options exercised 239,816 Value assigned to expired warrants (8,246) Balance December 31, 2009 $ 1,137,831 Fair value of stock options granted 979,081 Value assigned to options exercised (419,920) Fair value of Compensation Options issued - Note 10 a (i) 382,701 Balance December 31, 2010 $ 2,079,693 c) Warrants Number Amount Balance December 31, Fair value of warrants issued - Note 10 a (i) 2,331,081 2,060,276 Balance December 31, ,331,081 2,060,276

18 Notes to the Consolidated Financial Statements December 31, Share capital - continued d) Accumulated other comprehensive income (loss) Balance December 31, 2008 $ (12,898) Unrealized (losses) on available-for-sale short-term investments 165,683 Balance December 31, 2009 $ 152,785 Unrealized gains on available-for-sale short-term investments 868,355 Balance December 31, 2010 $ 1,021,140 e) Stock options The Company has established a stock option plan whereby the board of directors may, from time to time, grant options to directors, officers, employees or consultants. Under the stock option plan 4,591,070 options have been authorized for issuance, of which 2,466,000 have been allocated as at December 31, Options granted must be exercised no later than five years from date of grant or such lesser period as determined by the Company s board of directors. The exercise price of an option is not less than the closing price on the Exchange on the last trading day preceding the grant. The directors, subject to the policies of the TSX Venture Exchange, may determine and impose terms upon how each grant of options shall become vested. A summary of the Company s stock option plan at December 31, 2010 and the changes for the periods ended on these dates is as follows: Weighted Average Number Exercise Price At December 31, ,000 $1.20 Granted 1,155, Exercised (15,000) 1.20 Cancelled (20,000) 1.20 At December 31, ,833, Granted 1,395, Exercised (735,000) 1.26 Cancelled (27,500) 2.01 At December 31, ,466, The following table summarizes information about the stock options outstanding at December 31, 2010: Exercise Price Per Share Expiry Date Options Outstanding Options Exercisable $2.01 October 1, ,071, ,000 $2.30 May 7, ,000 75,000 $3.45 October 20, ,245, ,250 On October 1, 2009, the Company granted stock options under its Stock Option Plan to directors, officers, and employees exercisable for up to 1,155,000 shares of the Company, with an estimated value of $959,263 on the grant date. The options are exercisable on or before October 1, 2014 at a price of $2.01 per share. The options vest 25% on the date of the grant and 12.5% every quarter thereafter. On May 7, 2010, the Company granted stock options under its Stock Option Plan to employees exercisable for up to 150,000 shares of the Company, with an estimated value of $140,443 on the grant date. The options are exercisable on or before May 7, 2015 at a price of $2.30 per share. The options vest 25% on the date of the grant and 12.5% every quarter thereafter.

19 Notes to the Consolidated Financial Statements December 31, 2010 On October 21, 2010, the Company granted incentive stock options under its Stock Option Plan to directors, officers, employees and consultants exercisable for 1,245,000 shares of the Company, with an estimated value of $1,752,213. The options are exercisable on or before October 20, 2015 at a price of $3.45 per share. The options vest 25% on the date of the grant and 12.5% every quarter thereafter. The Black Scholes Option Pricing Model is used to estimate the fair value of stock options for calculating stock-based compensation expense. The Company recognized a stock-based compensation expense and an increase to contributed surplus based on a grading vesting schedule using the assumptions as follows: Date Granted October 1, 2009 May 7, 2010 October 21, 2010 Number of options granted 1,155, ,000 1,245,000 Risk-free interest rate 1.83% 2.19% 1.59% Expected dividend yield Nil Nil Nil Expected stock price volatility 60% 60% 60.52% Expected option life in years Option pricing models require the input of highly subjective assumptions including the expected price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company s stock options. The total fair value of stock-based compensation expense on stock options granted to employees and consultants of the Company for the year ended December 31, 2010 is $979,082 ( $239,816).

20 Notes to the Consolidated Financial Statements December 31, Related party transactions Related party transactions are recorded at the exchange amount which is the amount of consideration paid or received as agreed by the parties. Related party transactions not disclosed elsewhere are as follows: a) During the year ended December 31, 2010, the Company paid directors fees in the amount of $50,100 ( $211,733) and accrued directors fees of $49,300 ( $nil). b) During the year ended December 31, 2010, legal fees in the amount of $400,047 ( $126,878) were accrued or paid to a firm related to a director. c) During the year ended December 31, 2010, fees in the amount of $1,946,218 (2009 $2,132,053) were charged to IMPACT for contract drilling services performed in Mexico. At December 31, 2010 $414,419 ( $274,902) was due from IMPACT for contract drilling, exploration and administrative services provided by the Company. These services were provided in the normal course of business at similar rates offered to any other mining company. Monies owed to the Company are unsecured, non-interest bearing and without specific repayment terms. Management anticipates that the amount will be repaid within one year and accordingly it has been classified as current. The loss of $290 at December 31, 2010 (2009 loss of $102,979) on drilling services provided to IMPACT has been eliminated from these financial statements. 12. Commitments a) The Company has signed a lease for office premises until May 31, Lease obligations, net of operating costs, are $242,385 per year during this period. b) In May 2008, the Company signed a lease for warehouse premises which commenced August 1, 2008 and ends July 31, Lease obligations, net of operating costs, are $43,009 per year for the first year, $44,058 per year for the second year, and $46,156 per year for the third year. c) As part of the acquisition of the Envirodrill assets (Note 4) the Company assumed leases related to a limited number of these assets. At December 31, 2010 the lease obligations total $325,070 of which $157,559 is current and $167,511 is long-term. The lease agreements terminate between 2011 and 2013 at interest rates between 6.97% and 16.35%. 13. Additional information to the statements of cash flows Changes in non cash working capital: Accounts receivable and prepaid expenses $ (5,672,170) $ 2,772,863 Due from IMPACT Silver Corp. (151,545) 513,968 Income taxes receivable 90,624 (248,542) Inventories (5,968,740) (3,316,695) Accounts payable and accrued liabilities 3,548,540 (228,245) Income taxes payable 444,095 (347,540) Deferred revenue 118, ,570 Future income taxes 41,096 (59,525) $ (7,550,044) $ (429,146) Income taxes paid: Income taxes paid $ 793,642 $ 991,673

21 Notes to the Consolidated Financial Statements December 31, Capital management The Company s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide an adequate return to shareholders, to meet external capital requirements on credit facilities and to support any growth plans. In the management of its capital, the Company includes its cash and cash equivalent balances. The Company monitors capital based on the debt to debt-plus-equity ratio. Debt is total debt shown on the balance sheet, less cash and cash equivalents. Debt-plus-equity is calculated as debt shown on the balance sheet, plus total shareholders equity which includes accumulated other comprehensive income (loss), share capital, warrants, contributed surplus and retained earnings. The Company s policy is to keep its debt to debt-plus-equity ratio at a manageable level consistent with the current business cycle and the business opportunities outlook foreseen by the Company. As a general guideline, the Company s policy will be to keep its debt to debt-plus-equity ratio to a minimal level, except in unusual circumstances such as a major acquisition. Currently the Company is in full compliance with its capital risk management policies. The Company s Board of Director s approves management s annual capital expenditures plans and reviews and approves any material debt borrowing plans proposed by the Company s management. To effectively manage the entity s capital requirements, the Company has in place a planning and budgeting process to help determine the funds required to ensure the Company has the appropriate liquidity to meet its operating and growth objectives. The Company ensures that there are sufficient cash and cash equivalents to meet its short-term business requirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents.

22 Notes to the Consolidated Financial Statements December 31, Financial instruments Financial assets and liabilities The Company s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, shortterm investments and accounts payable and accrued liabilities. For cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities, carrying value is considered to be fair value due to the short-term nature of these instruments. The fair value of short-term investments is determined by quoted prices in active markets for identical assets at the balance sheet date. At December 31, 2010 all short-term investments held were classified as Level 1 and cash and cash equivalents were classified as Level 2 on the fair value hierarchy of Handbook Section 3862 Financial Instruments - Disclosures. Financial instrument risk exposure The Company s financial instruments are exposed to a number of financial and market risks including credit, liquidity, currency and interest rate risks. The Company may, or may not, establish from time to time active policies to manage these risks. The Company does not currently have in place any active hedging or derivative trading policies to manage these risks since the Company s management does not believe that the current size, scale and pattern of cash flow of its operations would warrant such hedging activities. Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents, restricted cash, accounts receivable and short-term investments. The Company deposits its cash and cash equivalents with high credit quality financial institutions as determined by ratings agencies, with the majority deposited with a Canadian Tier 1 Bank. The Company provides credit to its customers in the normal course of its operations. The Company diversifies its credit risk by dealing with a large number of customers in various countries. The Company s maximum exposure to credit risk at the reporting date is the carrying value of its cash and cash equivalents, restricted cash, accounts receivable and short-term investments. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company manages liquidity by maintaining cash and cash equivalent balances available to meet its anticipated operational needs. The Company has not been required to establish committed credit facilities but will do so as necessary. Liquidity requirements are managed based on expected cash flow to ensure that there is adequate capital to meet short-term and long-term obligations. The Company has in place a planning and budgeting process to help determine the funds required to support the Company s normal operating requirements on an ongoing basis and its growth plans. At December 31, 2010 the Company s accounts payable and accrued liabilities were $7.8 million, of which $7.6 million falls due for payment within twelve months of the balance sheet date. The Company has minimal long-term commitments (Note 12). Currency risk The Company operates on an international basis on five continents and therefore, currency risk exposures arise from transactions denominated in foreign currencies. The majority of its international sales contracts are denominated in U.S. dollars. Thus its currency risk arises primarily with respect to the U.S. dollar. However, the Company also incurs operating costs in local currencies in various countries in which it carries on active business operations. The Company has elected not to actively manage our currency risk at this time. At December 31, 2010 the Company is exposed to currency risk through cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities held in U.S. dollars, Mexican pesos and Brazilian reais. Based on these foreign currency exposures at December 31, 2010, a 5% depreciation or appreciation of all the above currencies against the Canadian dollar would result in an approximate $0.57 million decrease or increase in the Company s net earnings.

23 Notes to the Consolidated Financial Statements December 31, Financial instruments continued Interest rate risk Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its cash and cash equivalents. The Company did not have any borrowings outstanding as at December 31, Income taxes Income tax expense differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes. These differences result from the following items: Earnings before income taxes $ 3,658,033 $ (1,403,314) Canadian federal and provincial income tax rates 28.50% 30.0% Income tax expense (recovery) based on the above rates 1,042,539 (420,994) Increase (decrease) due to: Non-deductible expenses 1,194, ,082 Foreign exchange and other 52, ,687 Losses and temporary differences for which no future income tax asset has not been recognized - 525,623 Withholding tax 211, ,231 Previously unrecognized tax assets (142,722) - Change in tax rate 31, ,419 Difference between foreign and Canadian tax rates (179,629) (183,469) Income tax expense $ 2,209,526 $ 547,579 The components of future income taxes are as follows: Future income tax assets Non-capital losses $ 1,732,911 $ 1,538,148 Property, Plant and Equipment 556, ,740 Resource Property costs 521, ,382 Other 923, ,084 Total future tax assets 3,735,345 2,859,354 Valuation allowance (1,041,703) (1,029,497) Net future income tax assets $ 2,693,642 $ 1,829,857 Future income tax liabilities Investments $ 727,025 $ 361,373 Property, Plant and Equipment 867, ,420 Inventories 3,738,453 2,823,334 Other 672, ,405 Future income tax liabilities 6,004,986 4,152,532 Future income tax liabilities, net $ 3,311,345 $ 2,322,675

24 Notes to the Consolidated Financial Statements December 31, Income taxes - continued This is represented on the balance sheet as: Current future income tax assets $ (36,182) $ - Long-term future income tax assets (1,468,544) (994,971) Current future income tax liabilities 3,930,694 2,847,617 Long-term future income tax liabilities 885, ,029 $ 3,311,345 $ 2,322,675 The Company has non-capital loss carry-forwards of $7,173,272 that may be available for tax purposes. The loss carry-forwards are in respect of operations in Barbados, Canada, Chile, and Colombia and expire as follows: , , , ,811, ,228,496 No expiry 930,665 $ 7,173,272 A full valuation allowance has been recorded against the net potential future income tax assets associated with a portion of deductible temporary differences in Canada and the Dominican Republic as their utilization is not considered more likely than not at this time. 17. Segmented information The Company has four reportable segments based on geographic area: Mexico, the Caribbean, and Central America; South America; Africa, Asia and Other; and Canada (Corporate). Details at December 31 are as follows: Revenue by geographic area Mexico, Caribbean, Central America $ 25,811,338 $ 13,326,868 South America 18,833,560 7,434,622 Africa, Asia and Other 9,946,680 2,957,877 $ 54,591,578 $ 23,719,367 Net earnings (loss) by geographic area Mexico, Caribbean, Central America $ 3,409,465 $ 2,449,311 South America 884,652 (286,219) Africa, Asia and Other 930, ,652 Canada (3,776,303) (4,722,637) $ 1,448,508 $ (1,950,893)