ARGENTUM SILVER CORPORATION (formerly Silex Ventures Ltd.)

Transcription

1 AUDITOR S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2011

2 Tel: Fax: BDO Canada LLP 600 Cathedral Place 925 West Georgia Street Vancouver BC V6C 3L2 Canada Independent Auditor s Report To the Shareholders of Argentum Silver Corporation We have audited the accompanying financial statements of Argentum Silver Corporation (formerly Silex Ventures Ltd.) and its subsidiary which comprise the consolidated balance sheets as at June 30, 2011 and 2010, and the consolidated statements of operations and comprehensive loss, cashflows and shareholders equity for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 Argentum Silver Corporation and its subsidiary as at June 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. (signed) BDO Canada LLP Chartered Accountants Vancouver, Canada October 28, 2011 BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent firms.

3 Consolidated Balance Sheets As at June 30 Note $ $ ASSETS Current Cash and cash equivalents 3 3,865,340 18,096 Amounts receivable 4 89,025 10,758 Due from Arco Resources Corp. 5 43,309 25,000 3,997,674 53,854 Equipment 6 70,771 - Exploration and evaluation assets 7 1,211,530 - LIABILITIES 5,279,975 53,854 Current Accounts payable and accrued liabilities 69,787 38,958 SHAREHOLDERS EQUITY Share capital 8 5,886, ,887 Contributed surplus 376,837 30,105 Warrants ,281 - Deficit (1,325,080) (281,096) Nature of operations (note 1) Commitments (notes 7, 9 and 10) Subsequent events (note 17) 5,210,188 14,896 5,279,975 53,854 On behalf of the board of directors: Warren McIntyre Director Geoff Balderson Director Warren McIntyre Geoff Balderson The accompanying notes are an integral part of these financial statements. 2

4 Consolidated Statements of Operations and Comprehensive Loss For the Year Ended June 30 Note $ $ Expenses Amortization 6 1,302 - Consulting fees ,582 6,241 Management fees ,780 - Office and general 28,758 4,818 Professional fees 116, ,214 Property investigation 36,663 - Rent 13,204 - Salaries 5,958 - Shareholder communication 37,215 - Stock-based compensation 9 316,000 - Transfer agent and filing fees 30,833 25,639 Travel 111,835 - Loss before other items (1,028,155) (156,912) Other items Interest income Provision for collectability of sales taxes 4 (10,526) - Foreign exchange loss (5,869) - Loss and comprehensive loss for the year (1,043,984) (156,912) Basic and diluted loss per share (0.10) (0.07) Weighted average number of shares outstanding, basic and diluted 10,332,993 2,200,000 The accompanying notes are an integral part of these consolidated financial statements. 3

5 Consolidated Statements of Cash Flows For the Year Ended June 30 Note $ $ Operating activities Loss for the year (1,043,984) (156,912) Less non-cash expense Amortization 1,302 - Stock-based compensation 9 316,000 - Changes in non-cash working capital items: Amounts receivable (78,267) (7,305) Accounts payable and accrued liabilities 30,829 18,069 Cash used in operating activities (774,120) (146,148) Investing activities Equipment purchases 6 (72,073) - Net advances to Arco Resources Corp 5 (18,309) (25,000) Exploration and evaluation expenditures (411,530) - Cash used investing activities (501,912) (25,000) Financing activities Issuance of shares, net of offering costs 8 5,123,276 20,000 Cash from financing activities 5,123,276 20,000 Increase (decrease) in cash and cash equivalents 3,847,244 (151,148) Cash and cash equivalents, beginning of year 18, ,244 Cash and cash equivalents, end of year 3 3,865,340 18,096 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest expense - - Income taxes - - Transactions not involving cash Shares issued for mineral properties 1,250,000 - Fair value of broker warrants issued 283,000 - Fair value of warrants exercised 10,719 - The accompanying notes are an integral part of these consolidated financial statements 4

6 Consolidated Statements of Shareholders Equity Note Number of common shares Common shares Contributed surplus Warrants Deficit Total shareholders equity $ $ $ $ $ Balance June 30, ,100, ,028 39,964 - (124,184) (151,808) Broker warrant exercise 200,000 29,859 (9,859) ,000 Loss for the year (156,912) (156,912) Balance June 30, ,300, ,887 30,105 - (281,096) 14,896 Share cancellation 8 (1,000,000) (50,000) 50, Private placement 8 23,776,312 5,465, ,465,165 Issuance of broker warrants 8, 10 - (283,000) - 283, Finders fees and other offering costs 8 - (392,233) (392,233) Option exercises 9 262,400 45,508 (19,268) ,240 Warrant exercises 160,694 34,823 - (10,719) - 24,104 Stock-based compensation , ,000 Property options 7 4,000, , ,000 Loss for the year (1,043,984) (1,043,984) Balance June 30, ,499,406 5,886, , ,281 (1,325,080) 5,210,188 The accompanying notes are an integral part of these consolidated financial statements. 5

7 1. Organization and Nature of Operations Argentum Silver Corporation, formerly Silex Ventures Ltd., ( Argentum ) was incorporated under the Business Corporations Act (British Columbia) on March 21, Argentum and its subsidiaries (collectively, the Company ) engage in the acquisition, exploration and development of mineral properties. The Company is in the exploration stage and has not yet determined whether any of its properties contain economically recoverable ore reserves. Argentum 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 Arco Option, note 7) and a financing, changed its name to Argentum Silver Corporation and was relisted on the TSX-V. The Company s head office and principal place of business is Suite 906, 595 Howe Street, Vancouver, British Columbia, Canada, V6C 2T5. In March 2011, the Company incorporated a wholly owned Mexican subsidiary, Plata de Argentum SA de CV. Management estimates that the Company will have adequate funds from existing working capital and funds obtained after June 30, 2011 (see note 17) to meet corporate development, administrative and property obligations for the coming year. As of June 30, 2011, the Company had $3,865,340 in cash and cash equivalents, working capital of $3,927,887 and no long-term debt. The Company will require additional financing from time to time, and while the Company has been successful in raising equity financing through the issuance of common shares in the past, there is no assurance that it will be able to obtain adequate financing in the future or that such financing will be available on acceptable terms. 6

8 2. Summary of Significant Accounting Policies The financial statements of the Company have been prepared in accordance with Canadian GAAP and are stated in Canadian dollars. The financial statements have, in management s opinion, been properly prepared within reasonable limits of materiality and within the framework of significant accounting policies summarized below: Principles of Consolidation These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All inter-company transactions and balances have been eliminated. Basic and Diluted Loss per Share Basic loss per share is calculated by dividing the net loss available to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity. In a loss year, potentially dilutive common shares are excluded from the loss per share calculation, as the effect would be antidilutive. Basic and diluted loss per share are the same for the years presented. For the year ended June 30, 2011, potentially dilutive common shares (relating to stock options and warrants outstanding) totalling 21,038,645 (June 30, ,000) were not included in the computation of loss per share because their effect was anti-dilutive. As at June 30, 2010, 2,100,000 common shares held in escrow were also excluded in the computation of loss per share. Income Taxes Future income taxes relate to the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future income tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likelythan-not that future income tax assets will be realized. Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates at the date of enactment or substantive enactment. Stock-Based Compensation The Company records all stock option awards at fair value as determined using the Black-Scholes option pricing model. All stock awards to employees and non-employees are measured at the time of grant, or revision, and the fair value attributed is charged to operations, or allocated to specific balance sheet accounts, and recognized over the vesting period. Upon exercise, the fair value of share purchase options or specified warrants is allocated from the contributed surplus account to share capital. Shares, Warrants and Options Agent s warrants, stock options and other equity instruments issued as purchase consideration in non-cash transactions are recorded at fair value determined by management using the Black-Scholes option-pricing model. The fair value of the shares issued as purchase consideration is based on the trading price of those shares on the TSX-V on the date of the agreement to issue shares as determined by the board of directors. 7

9 2. Summary of Significant Accounting Policies (continued) Financial Instruments The Company designated cash and cash equivalents as held for trading assets, measured at fair value. Advances are designated as loans and receivables and are measured at amortized cost. Accounts payable and accrued liabilities are designated as other financial liabilities and measured at amortized cost. Management did not identify any material embedded derivatives, which require separate recognition and measurement. The Company had neither available-for-sale, nor held-tomaturity instruments during the year ended June 30, 2011 or CICA Section 3862, Amendment to Financial Instruments Disclosures requires disclosure about the inputs to fair value measurements, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The three levels of the fair value hierarchy are: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 Inputs that are not based on observable market data All of the Company s financial instruments which are measured at fair value are included in Level 1. Resource Properties and Deferred Exploration and Evaluation Expenditures 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 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 periodically or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. 8

10 2. Summary of Significant Accounting Policies (continued) 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. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment when changes in circumstances suggest their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the estimated undiscounted future projected cash flows to result from the use of the asset and its eventual disposition. If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a discounted cash flow analysis. The amount of the impairment loss is determined as the amount by which the long-lived assets carrying value exceeds its estimated fair value. There have been no impairments of the Company s long-lived assets as at June 30, 2011 and Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of expenses for the periods then ended. Due to the inherent uncertainty involved with making such estimates and assumptions, actual results reported in future periods could differ materially from those estimates. Significant areas requiring the use of management estimates relate to the determination of impairment of assets, resource property and deferred exploration expenditure carrying values, the values of transactions with related parties, estimates to account for the abandonment of long-lived assets, amortization of equipment, fair value of stock-based compensation transactions, warrant valuation, future tax valuations and determining whether contingent assets or liabilities exist. Management reviews significant estimates periodically and, where necessary, makes adjustments prospectively. Cash and cash equivalents Cash and cash equivalents comprises cash on hand and demand deposits. Cash and cash equivalents is considered held for trading. Equipment Equipment is recorded at cost. The Company provides for amortization using the straight line method at the following annual rates: Computers 20% Field equipment 20% Vehicles 35% Amortization in the year of acquisition is recorded from the date the asset is put into use. 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. 9

11 2. Summary of Significant Accounting Policies (continued) 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. Asset Retirement Obligations The Company recognizes the estimated fair value of the legal obligations in the period incurred, at the net present value of the cash flows required to settle the future obligations. A corresponding amount is capitalized to the related asset and asset retirement obligations are subject to accretion over time for increases in the fair value of the liabilities. It is possible that the Company s estimates of its ultimate asset retirement obligations could change as a result of changes in regulations, the extent of environmental remediation required, and the means of reclamation or cost estimates. Changes in estimates are accounted for prospectively from the period the estimate is revised. The initial fair value of the liability is accreted, by charges to operations, to its estimated future settlement value. At June 30, 2011 and 2010, the Company does not have any asset retirement obligations. 10

12 3. Cash and Cash Equivalents Balance at June $ $ Cash 1,865,340 18,096 GICs 2,000,000 - Cash and cash equivalents 3,865,340 18, Amounts Receivable Balance at June $ $ Sales taxes 60,668 10,758 Other amounts receivable 28,357-89,025 10,758 The Company records a provision for doubtful collectability of Mexican sales taxes until received. The provision in the year ended June 30, 2011 was $10,526 ( $nil). 5. Due from Arco Resources Corp. $ At June 30, Advanced 25,000 Repaid - At June 30, ,000 Repaid (25,000) Advanced 100,150 Expended by Arco on the Company s behalf (56,841) At June 30, ,309 The amount due from Arco Resources Corp. ( Arco ) is unsecured, due on demand and does not bear interest. 11

13 6. Equipment Computers Field Vehicles Total equipment $ $ $ $ Cost At June 30, Purchases 1,857 48,045 22,171 72,073 Disposals At June 30, ,857 48,045 22,171 72,073 Accumulated amortization At June 30, Amortization expense ,302 Disposals At June 30, ,302 Net book value At June 30, At June 30, ,818 47,244 21,709 70,771 The Company did not own any equipment before June 30,

14 7. Exploration and Evaluation Assets Arco Option In February 2011, the Company signed a definitive option agreement under which Arco granted the Company the right to acquire up to a 100% interest in three of Arco s mineral claim blocks (the Arco Properties ) located in Oaxaca State, Mexico. This transaction with Arco constituted the Company s Qualifying Transaction. 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 as follows: Date Consideration Shares Cash $ Closing 1 2,500, ,000 February 15, ,000 February 15, ,000 February 15, ,000 Total 2,500, ,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. Before completing the Qualifying Transaction, the Company advanced $25,000 to Arco. Arco repaid the advance in July

15 7. Exploration and Evaluation Assets (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 to property investigation. 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 as follows: Date Consideration Work Commitment Shares Cash Cumulative Incurred 2 Obligation $ $ $ March 5, , April 28, ,500, , April 28, ,500, , ,000 - April 28, ,100,000 - Total 5,000, ,000 1 Paid / issued 2 To June 30, 2011 The Company is also obliged to make advance royalty payments contracted by Soltoro to various parties in connection with the Soltoro properties. These payments total US$65,000 in 2011 and US$100,000 in 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 earn-in 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. 14

16 7. Exploration and Evaluation Assets (continued) The Company did not own any exploration and evaluation assets before June 30, The following is an analysis of exploration and evaluation assets investment by property: June 30, 2010 Acquisition Deferred exploration expenditures June 30, 2011 $ $ $ $ Coyote - 186,313 13, ,389 Victoria - 558,938 14, ,561 Lachiguiri - 356,664 35, ,559 Silacayoapan - 19,815 5,078 24,893 Nino Perdido - 19,815 1,313 21,128 Total - 1,141,545 69,985 1,211,530 Analysis of exploration and evaluation assets investment by type of expenditure: June 30, Additions June 30, $ $ $ Acquisition - 1,141,545 1,141,545 Deferred exploration expenditures Claims and maintenance Drilling - 2,927 2,927 Geological consultants - 51,888 51,888 Field labour and supplies - 6,610 6,610 Maps and reports - 2,277 2,277 Office and administrative - 2,119 2,119 Reclamation and remediation - 1,749 1,749 Transportation - 2,368 2,368 69,985 69,985 Total 1,211,530 1,211,530 15

17 8. Share Capital Authorized Unlimited common shares without par value Issued There were 31,499,406 common shares outstanding at June 30, 2011 (June 30, ,300,000; June 30, ,100,000) 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 Placements February 2011 In February 2011, the Company closed a 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 is exercisable into one common share of the Company until February 15, 2012 at $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 (note 10). 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. May/June 2011 In May 2011, the Company closed the first and second tranches of a non-brokered private placement issuing 11,824,042 units and in June 2011 closed the third tranche issuing 50,000 units. In total, the Company issued an aggregate 11,874,042 units in three tranches under the private placement at a price of $0.35 per unit for gross proceeds of $4,155,915. Each unit consisted of one common share and one-half of one share purchase warrant. Each whole warrant is exercisable into one common share of the Company at $0.50 per share until May 30, 2012 and June 23, 2012, respectively. In aggregate, the Company paid finder s fees of $266,071 in cash and issued 739,721 finder s warrants with a fair value of $78,000. The finder s warrants are exercisable on the same terms as the financing warrants, except they are non-transferable (note 10). 16

18 8. Share Capital (continued) Issued for Property Purchases On completing its Qualifying Transaction, the Company issued 2,500,000 common shares to Arco. The Company has ascribed a value of $275,000 corresponding to $0.11 per share, being the price of the financing undertaken concurrently with the Qualifying Transaction (see note 7). In April 2011, the Company issued 1,500,000 common shares to Soltoro (note 7). The Company has ascribed a value of $525,000, corresponding to $0.35 per share, being the closing price immediately before the issuance to Soltoro. Escrow Shares As at June 30, 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 17

19 9. 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, 2010 and ,000 $ 0.10 Granted 1,312,500 $ 0.22 Exercised (262,400) $ 0.10 Balance June 30, ,460,100 $ 0.21 A summary of the Company s outstanding and exercisable stock options at June 30, 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 year ended June 30, 2011 was $0.25. The total expense was $316,000 ( $nil). 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% 18

20 10. Warrants A summary of the Company s share purchase warrants and the changes in the year ended June 30, 2011 is presented below: Financing Warrants Warrants Outstanding Weighted Average Exercise Price Broker Warrants Warrants Outstanding Weighted Average Exercise Price $ $ At June 30, 2010 and Issued 17,839, ,899, Exercised (100,000) 0.15 (60,694) 0.15 At June 30, ,739, ,839, Number of Financing Warrants Number of Broker Warrants Exercise Price $ Expiry Date 11,802,270 1,099, February 15, ,912, , May 30, ,000 3, June 23, ,739,291 1,839,254 Subsequent to June 30, 2011, the Company issued 45,000 common shares with respect to the exercise of 45,000 warrants for proceeds of $6,750. The Company employed the Black-Scholes option-pricing model to value broker and finder warrants using the following weighted average assumptions: 2011 Expected annual volatility 110% - 125% Risk-free interest rate %% Expected life 1 year Expected dividend yield 0% 19

21 11. 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 in order to pursue 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. The Company is not subject to any externally imposed capital requirements and did not make any changes in capital management compared to the prior year. 12. 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 and cash equivalents, amounts receivable and due from Arco. 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 thereof. As at June 30, 2011, the Company was holding cash of $3,865,340. 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. 20

22 12. Financial Instruments Risk Management (continued) 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 Mexican pesos. The Company does not engage in any form of derivative or hedging instruments. Balance June 30, 2011 Mexican Pesos Cash 677,025 Receivables 27,304 Accounts payable 97,932 The Company did not have any foreign currency at June 30,

23 13. Income Taxes A reconciliation of income taxes at statutory rates, with the reported income taxes, is as follows: $ $ Loss before income taxes (1,043,984) (156,912) Income tax recovery - statutory rates at 27.5% ( %) Expected tax recovery on net loss before income taxes 287,000 46,000 Effect of reduction in statutory rate (17,000) (6,000) Permanent differences (90,000) (2,000) Change in the valuation allowance for future income tax assets (279,000) (38,000) Foreign income taxed at other than Canadian statutory rate 1,000 - Share issue cost 98,000 - Total income taxes (recovery) - - Significant components of the Company s future income tax assets are as follows: $ $ Future income tax assets Non-capital losses carried forward 261,000 70,000 Financing costs 81,000 6,000 Mineral properties 12,000 - Other 1, ,000 76,000 Less: valuation allowance (355,000) (76,000) - - The Company has recorded a valuation allowance against its net future income tax assets based on the extent to which it is more likely-than-not that sufficient taxable income will not be realized during the carry-forward period to utilize all the net future tax assets. As at June 30, 2011, the Company has available non-capital losses for income tax purposes of approximately $1,033,881 (June 30, $278,000) which may be carried forward through to 2031 and applied against future taxable income when earned. 22

24 14. Related Party Transactions Included in the results of operations are related party transactions as follows: Year ended June 30, 2011 Management and consulting fees Exploration Expenditures Administration Expenses Total $ $ $ $ Warren McIntyre 1 105, ,000 Jeff Sheremeta 2 27, ,000 S2 Management Inc. 3 11, ,250 Geoff Balderson 4 16, ,000 The Company did not have any transactions with related parties during the year ended June 30, 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. Transactions with related parties were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 23

25 15. Segment Information All of the Company s operations are within the mineral resource sector and, in the current and comparative periods, conducted operations in two countries. The Company s assets are allocated to each country as follows: June 30, 2011 Canada Mexico Total $ $ $ Assets Cash 3,809,350 55,990 3,865,340 Amounts receivable 86,543 2,482 89,025 Due from Arco 43,309-43,309 Equipment 47,837 22,934 70,771 Mineral property interests - 1,211,530 1,211,530 3,987,039 1,292,936 5,279,975 June 30, 2010 Canada Mexico Total $ $ $ Assets Cash 18,096-18,096 Amounts receivable 10,758-10,758 Due from Arco 25,000-25,000 53,854-53,854 24

26 16. Commitments The Company is committed to make payments under consulting contracts as follows: Year Ending June 30 $ , Subsequent Events In August 2011, the Company granted incentive stock options to certain directors, officers, employees and consultants to purchase up to 1,475,900 common shares of the Company, each exercisable at $0.25 per share on or before August 2, In October 2011, the Company granted incentive stock options to a consultant of the Company to purchase up to 100,000 common shares of the Company, exercisable at $0.25 per share on or before October 6,