Namibia Rare Earths Inc.

Transcription

1 Namibia Rare Earths Inc. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2011 (EXPRESSED IN CANADIAN DOLLARS) The accompanying financial statements for the three and six months ended May 31, 2011 have not been reviewed by the Company s auditors. NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS This management's discussion and analysis of the financial condition and results of operations ("MD&A") of Namibia Rare Earths Inc. (the Company ) is dated July 13, 2011 and provides an analysis of the Company s financial results and progress for the three and six months ended May 31, This MD&A should be read in conjunction with the Company's unaudited consolidated financial statements for the three and six months ended May 31, 2011 and related notes thereto, which were prepared in accordance with Canadian generally accepted accounting principles. All amounts are expressed in Canadian dollars unless otherwise noted. This discussion includes certain statements that may be deemed forward-looking statements. All statements in this discussion, other than statements of historical fact, that address exploration drilling, exploitation activities and events or developments that the Company expects, are forward-looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, exploitation and exploration results, continued availability of capital and financing and general economic, market or business conditions. Investors are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements. The information contained herein is subject to change and the Company does not assume the obligation to revise or update these forward-looking statements, except as may be required under applicable securities laws Overall Performance The Company is engaged in the exploration for rare earth elements in Namibia through its 100% owned subsidiary, Namibia Rare Earths (Pty) Ltd., a Namibian company ( Namibia Pty ). Since incorporation in 2004, Namibia Pty has established a presence in Namibia and has applied for and been granted a number of exclusive prospecting licenses. The major focus of the Company s activities during the period, and during the same period in the prior year, has been in relation to the Lofdal Rare Earths Project, which comprises an exclusive prospecting license ( EPL 3400 ) located approximately 450 kilometres northwest of the capital city of Windhoek and 25 kilometres northwest of the town of Khorixas in the Kunene Region of north-western Namibia. The Lofdal property covers a total area of 74,000 hectares centered on the Lofdal carbonatite complex, a regional geological feature known to be associated with numerous occurrences of rare earth mineralization hosted by carbonatitic dykes, dyke swarms and to a lesser extent by intrusive plugs. EPL 3400, which provides for mineral rights to base metals, rare metals, precious metals and industrial minerals, was originally granted in November 2005 with a surface area of 99,900 hectares and has been renewed twice with a reduction in surface area to 74,000 hectares. The current license is valid until November 14, Pursuant to the Minerals Act of Namibia, no further renewals of EPL 3400 are possible unless the Minister of Mines and Energy deems this desirable in the interests of the development of mineral resources in Namibia. Although it is not known what criteria the Minister applies to decide whether a third or further renewal of an Exclusive Prospecting License is in the interests of the development of the mineral resources of Namibia, it is not likely that the Minister would refuse a third renewal of an exclusive prospecting license if: NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 1

3 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS a) the Exclusive Prospecting License is in good standing with the Ministry of Mines and Energy in Namibia, specifically in relation to all required filings and returns; and b) the license holder: i. is not in breach of any of the license conditions and, more specifically, has complied with its obligations under the work program and incurred all the agreed exploration expenditures on the basis of which the license (or its respective renewal) was granted; ii. is able to provide reasons why further prospecting operations are necessary; iii. is able to show that it has the technical and financial capabilities and resources to continue the prospecting operations; and iv. the exploration results reported to the Minister are not indicative that there is no substantial mineral resource which may economically be mined in the future. It is the opinion of management that EPL 3400 will be in compliance with all of the above conditions when application may be made for a third renewal in Development Strategy The Company intends to implement a phased approach in the development of the Lofdal Rare Earths Project, as recommended in the Technical Report (see Lofdal Rare Earths Project below). Phase I of the program, with a budget of 6.4 million, is expected to take twelve months and will be directed at continued exploration and delineation of NI compliant mineral resources within priority targets already identified. Phase I is expected to be complete by May, Based on the successful outcome of Phase I, the Company would move to Phase II, with the objective of delineating a NI compliant mineral reserve and completing a feasibility study. Phase II has a budget of 7 million and is expected to take eighteen months. The timing and development of a viable mining operation will be dependent upon the exploration success and achievement of the subsequent milestones. Lofdal Rare Earths Project The first systematic exploration for rare earths over Lofdal was initiated by Namibia Pty in 2008 and since that time exploration results have demonstrated the occurrence of rare earth mineralization on a district scale. The project remains in an exploration stage with no identified mineral resources; however, the substantial geological, geochemical and geophysical data collected to date indicate that there is a high potential to discover a potentially economic rare earth deposit within the 200 square kilometre area that is occupied by the Lofdal Carbonatite Complex. In the fall of 2010, the Company completed the first comprehensive trenching and diamond drilling program on the property over a selected carbonatite dyke known as the 2B Zone to produce a National Instrument compliant technical report ( Technical Report ), for which consultants Swinden Geoscience Consultants Ltd. and GeoAfrica Prospecting Services cc were retained. The Technical Report, entitled The Amended Technical Report on the Rare Earths Element occurrences in the Lofdal Carbonatite Complex, Kunene Region, Khorixas District, Namibia dated February 18, 2011, amended April 4, 2011, is available on SEDAR at In the first quarter of 2011, the Company completed geological mapping on selected areas to establish drill priorities. In May 2011, drills were mobilized for an initial 7,500 metre diamond NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 2

4 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS drilling program. The first phase of the 2011 drilling program will employ two rigs and the Company expects it will take three months to complete the drilling. The drill plans have been designed to test eighteen priority targets on the property within a 25 square kilometre portion of the 200 square kilometre Lofdal Carbonatite Complex. To date, the field team has completed 2,300 metres of diamond drilling in 28 holes on the first six of eighteen drill targets. Sampling is progressing well with the first five shipments of core samples delivered to the Activation Laboratories preparation facility. The focus of the drilling is on areas of significant heavy rare earth enrichment with the objective of identifying one or more zones in which to develop mineral resources. An additional 15,000 metres of diamond drilling has been budgeted over the next eight to twelve months for this purpose. Rare earth mineralization at Lofdal is hosted in carbonatite dykes and plugs with the dykes typically grading between 0.5-3% total rare earths including yttrium ( TREE ) and often exhibiting exceptional heavy rare earth ( HREE ) enrichment greater than 50% HREE. Rare earth deposits containing greater than 10% HREE can be considered to be enriched in HREE. Dyke thicknesses are variable from less than 1 metre to 15 metres at surface and can be traced in some cases up to three kilometres in strike length. The more significant mineralized structures have associated alteration haloes which can carry anomalous concentrations of rare earth elements. As per industry norms, HREE comprise europium (Eu), gadolinium (Gd), terbium (Tb), dysprosium (Dy), holmium (Ho), erbium (Er), thulium (Tm), ytterbium (Yb), lutetium (Lu) and yttrium (Y). Light rare earths ( LREE ) comprise lanthanum (La), cerium (Ce), praseodymium (Pr), neodymium (Nd) and samarium (Sm). Heavy rare earth enrichment is the ratio of HREE:TREE, expressed as a percentage. The first eight drill targets at Lofdal occur along such structures in Area 4 and in Area 5. One drill has been deployed to the 800 metre long east-west trending structure in Area 4 where HREE enrichment of 96% carrying up to 4,400 ppm dysprosium has been sampled at surface. The second rig has been deployed and will start in Area 5 along a 1.6 kilometre long northeast trending structure where HREE enrichment of 72% carrying up to 3,540 ppm dysprosium has been sampled. Three additional dyke-related targets have been identified elsewhere in Area 5 and two targets in Area 1. Deeper drilling is also planned in Area 2 where drilling last year intersected narrow, HREE enriched structures over a strike length of 600 metres in the 2B Zone. The first analytical results from Area 4 and Area 5 are anticipated towards the end of July. Phase 1 drilling will also test the large, lower grade light rare earth target at the Emanya intrusion in Area 8. Emanya forms a prominent hill of carbonatite and is exposed over a surface area of approximately 300 metres in diameter with 218 grab samples from surface averaging 0.6% TREE+Y. Interpretation of airborne geophysical data (versatile time domain electromagnetic VTEM ) over Emanya suggest that intrusion may be more than twice that size. Rare earth mineralization has also been documented in gneissic rocks in Area 6 associated with a radiometric anomaly which measures 400 metres long by 175 metres wide. A single rock sampling traverse across this feature returned TREE+Y values in the range of %, with HREE enrichment of 10-30%. Further investigations are planned including systematic soil and rock sampling to develop more specific drill targets. Management recently met in Namibia with technical teams and contractors in preparation for this important phase of exploration. Geological management of the drilling program will be carried out under the supervision of Remote Exploration Services Namibia (Pty) Ltd. and the drilling contract has been awarded to JGM Drilling and Exploration of Windhoek. NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 3

5 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS Other Prospecting Rights The Company, through Namibia Pty, holds mineral rights, or has applications pending, on eight other exclusive prospecting licenses ( EPLs ) in Namibia. While the Company s focus is clearly on rare earths, certain of these EPLs hold potential for other commodities which will be evaluated in conjunction with the exploration commitments related to these other permits. Selected Annual Information The following table sets out selected financial information for the periods indicated. Expressed in Canadian dollars, except per share amounts. OPERATIONS Fiscal Years Ended November Revenue Nil Nil Nil Net Loss (394,896) (2,138,037) (108,235) Basic and diluted loss per share (0.01) (0.07) (0.00) BALANCE SHEET Total assets 9,763,823 4,120,263 4,986,596 Amounts due to related parties (38,560) (6,480,075) (5,183,231) Total mineral properties and related deferred costs 5,828,072 3,840,650 4,658,212 The increase in total assets from 2009 to 2010 reflects the increased exploration expenditure on the Lofdal Rare Earths Project and the private placement financing completed by the Company in The decrease in total assets from 2008 to 2009, and the significant net loss in 2009, reflects the write-down of mineral properties for which the Company terminated certain option agreements. Results of Operations Three months ended May 31, 2011 and 2010 The Company commenced its exploration activities in 2005 with the application for various prospecting rights in Namibia. As the Company s projects are all at the exploration and evaluation stage, it has generated no revenue from operations to date. The Company capitalizes all exploration costs. For the three months ended May 31, 2011, the Company capitalized exploration costs of 723,851 ( ,453), primarily related to expenditures on the Lofdal Rare Earths Project. For the three months ended May 31, 2011, the Company reported a net loss of 2,005,670, compared to 84,565 during the same period the prior year. The increase in net loss was primarily related to an increase in non-cash stock-based compensation expense of 1,676,400 and an increase in other administration expenses of 285,000. The increase in administration expenses is primarily related to the Company enhancing its staffing and shareholder relations activities in conjunction with its initial public offering completed in April Other income was 39,960 in the period, compared with other expense of 335 in the prior year, primarily NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 4

6 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS related to interest revenue of 45,322 in the period (2010 interest expense of 29) due to an increase in cash available for investment from proceeds of the initial public offering. Six months ended May 31, 2011 and 2010 For the six months ended May 31, 2011, the Company capitalized exploration costs of 1,453,927 ( ,315), primarily related to expenditures on the Lofdal Rare Earths Project. For the six months ended May 31, 2011, the Company reported a net loss of 2,195,442 compared to 95,797 during the same period the prior year. The increase in net loss was primarily related to an increase in non-cash stock-based compensation expense of 1,676,400 and an increase in other administration expenses of 471,963. The increase in administration expenses is due to the Company enhancing its staffing and shareholder relations activities in conjunction with its initial public offering completed in April Other income was 48,118 in the period, compared with other expense of 600 in the prior year, primarily related to interest revenue of 52,063 in the period (2010 interest expense of 29) due to an increase in cash available for investment from proceeds of the initial public offering. Summary of Quarterly Results The following table sets out selected financial information for the periods indicated. Expressed in Canadian dollars, except per share amounts. For the quarters ended May 31, 2011 Feb. 28, 2011 May 31, 2010 Feb. 28, 2010 Revenue Nil Nil Nil Nil Administration expenses (2,045,630) (197,930) (84,230) (10,967) Foreign exchange gain (loss) (5,362) 1,417 (306) (265) Other income (expenses) 45,322 6,741 (29) - Net loss and comprehensive loss (2,005,670) (189,772) (84,565) (11,232) Loss per share basic and diluted (0.03) (0.00) (0.00) (0.00) Total assets 35,925,673 9,789,330 4,506,338 4,436,546 As the Company has capitalized all exploration and development related expenditures to date, the expenses are primarily related to administration and shareholder relations. The Company s administration expenses increased during the quarters reported as the Company began to put in place internal structures appropriate for a publicly listed entity. The increase in net loss in the quarter ended May 31, 2011 was primarily due to non-cash stock-based compensation expense of 1,676,400 for stock options issued that vested in the quarter. The Company has foreign exchange gains and losses arising mainly due to variations in the Canadian dollar and the Namibian dollar exchange rate during the periods, as certain of the Company s expenditures are paid in Namibian dollars, while the Company s functional and reporting currency is the Canadian dollar. The Company has interest revenue in 2011 related to excess cash invested in a highinterest account with a major chartered bank. The significant increase in total assets in the current quarter relates to proceeds received from the Company s initial public offering. The NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 5

7 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS increase in net loss in the current quarter is primarily related to stock-based compensation expense for options issued in the quarter that have vested. Liquidity and Capital Resources At May 31, 2011, the Company has working capital of 28,051,814 compared to working capital of 2,386,099 at February 28, 2011, and working capital of 3,422,614 at November 30, 2010 as follows: May 31, 2011 February 28, 2011 November 30, 2010 Cash and cash equivalents 28,261,733 2,687,968 3,664,429 Amounts receivable 247, , ,264 Deposits and prepaid expenses 35,979 5,110 1,665 Accounts payable and accrued liabilities (493,892) (551,950) (385,744) Working capital 28,051,814 2,386,099 3,422,614 During the six months ended May 31, 2011, the Company used cash of 651,726 for operating activities ( ,242) and 1,074,114 for exploration activities ( ,315), and generated net cash of 26,323,143 from financing activities ( ,744). The Company s principal asset is at an advanced exploration and evaluation stage and as a result the Company has no current source of operating cash flow. The Company's activities prior to April 2011 were funded by advances from related parties and a private placement. In recognition of the increased funding required to develop the Lofdal Rare Earths Project in accordance with the work program set out in the Technical Report, the Company completed a public offering of its common shares and concurrent listing on the Toronto Stock Exchange on April 14, The Company issued 35,937,500 common shares at 0.80 per share for gross proceeds (including a 15% over-allotment option which closed on April 27, 2011) of 28,750,000, with net proceeds to the Company of 26,328,324. The principal expenditure will be on the Lofdal Rare Earths Project, based on the work program recommended in the Technical Report and related project costs, the cost of which is estimated to be 13.4 million over two years. This is classified as exploration and development expenditure and is being capitalized. The balance of the funds will be used for operating costs, other EPL work programs in Namibia, other opportunities, and general working capital. The Company has sufficient working capital to fund its budgeted expenditures for the next two years. Contractual Obligations As of May 31, 2011, the Company is committed to the following obligations: In May, 2011, the Company s wholly-owned subsidiary, Namibia Rare Earths (PTY) Ltd., entered into a drilling contract for a minimum of 5,000 metres of diamond drilling on the Lofdal Rare Earths Project. The total cost of the drill contract is expected to be approximately 750,000 over a four month period. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements. NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 6

8 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS Transactions with Related Parties In the three and six months ended May 31, 2011, the Company paid or accrued 128,145 and 262,710 respectively ( Nil and Nil) in salaries and management fees to officers, of which 92,055 and 181,710 was charged to the statement of loss and 36,090 and 81,000 was charged to mineral properties. In the three and six months ended May 31, 2011, the Company paid or accrued 1,784,945 ( Nil) in stock-based compensation to directors and officers, of which 1,582,757 ( Nil) was charged to the statement of loss and 202,188 ( Nil) was charged to mineral properties. In the three and six months ended May 31, 2011, the Company paid or accrued 5,000 ( Nil) in director fees to a non-executive director of a subsidiary, which was charged to the statement of loss. The Company has a cost sharing arrangement with Endeavour Resources Inc. until August 31, 2011 in which the Company pays a flat fee of 10,000 per month for rent, utilities, personnel and other miscellaneous amounts. For the three and six months ended May 31, 2011, the Company incurred aggregate fees of 30,000 and 60,000 pursuant to this arrangement, and charges of 3,272 and 22,237 for technical staff and related costs. The amounts owing are non-interest bearing with no fixed terms of repayment. Accounts payable and accrued liabilities includes 25,210 ( Nil) in amounts owing to related parties. Prepaid expenses and deposits include 3,500 ( Nil) for a retainer paid to an officer of the Company, pursuant to a services contract. Share Capital The Company s authorized capital consists of an unlimited number of common shares without nominal or par value. As of the date of this MD&A, the Company has issued and outstanding 77,828,500 common shares. Stock options outstanding: Exercise price Number of Shares Expiry Date ,925,000 April 14, ,000 April 26, ,300,000 June 12, ,525,000 Warrants outstanding: Exercise price Number of Shares Expiry Date ,405,000 July 28, ,156,250 April 14, ,561,250 NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 7

9 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS Critical Accounting Estimates and Judgments The Company makes estimates and assumptions concerning the future, which, by definition, will seldom result in actual results that match the accounting estimate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are: (i) (ii) (iii) (iv) Valuation of mineral properties and related deferred costs: The value of the Company s mineral properties and related deferred costs is dependent upon the success of the Company in discovering economic and recoverable mineral resources. The estimation of future revenue flows relating to these assets is uncertain and will also be affected by competition, relative exchange rates between the Canadian dollar and the Namibian dollar and potential new legislation and related environmental requirements. Rehabilitation provisions: The Company makes estimates of future site restoration costs (rehabilitation provisions) based upon current legislation in Namibia, technical reports and estimates provided by the Company s senior employees and advisors. These estimates will be affected by actual legislation in place, actual mining activity to be performed and actual conditions of the relevant sites when the restoration activity is to be performed in future periods. Impairment testing: On an annual basis or when impairment indicators arise, the Company evaluates the future recoverability of its mineral property costs. Impairment losses or write downs are recorded in the event the net book value of such assets exceeds the estimated indicated future cash flows attributable to such assets. Expected future cash flows used to determine the value in use of goodwill, tangible and intangible assets are inherently uncertain and could materially change over time. Realizable Amount of Deferred Tax Assets: The Company reviews its deferred tax assets at each balance sheet date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Changes in Accounting Policies The Company reports under Canadian generally accepted accounting principles. There have been no material changes in accounting policies in the period under review. Future Accounting Changes - International financial reporting standards ( IFRS ) On February 13, 2008, the Canadian Accounting Standards Board confirmed that the transition to IFRS from Canadian GAAP will occur for interim and annual financial statements for fiscal years beginning on or after January 1, 2011 for public entities. While IFRS is based on a conceptual framework similar to Canadian GAAP, there are significant differences with respect to recognition, measurement and disclosure which the Company is beginning to assess. The Company will commence reporting under the new standards for the fiscal year ending November 30, 2012 and the first interim period will be the quarter ending February 28, The Company s date of transition to IFRS is December 1, 2010, which is the beginning of the NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 8

10 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS comparative year in the first set of IFRS financial statements. The transition will require the restatement of comparative amounts for The conversion project includes four phases: scoping, detailed assessment, implementation and post-implementation. The scoping phase, which is now complete, included an initial assessment of the key areas where IFRS transition may have significant impact. The Company has prepared an initial diagnostic of the key areas in which adjustments may be required, recent developments, the transition exceptions and exemptions available under IFRS 1 First Time Adoption of International Financial Reporting Standards, and the accounting policy choices available to the Company upon adoption. The detailed assessment phase, which the Company expects to complete by the end of the third quarter, will involve technical analysis that will result in understanding potential impacts, quantification of alternatives where there are accounting policy choices, detailed analysis and decisions taken regarding IFRS 1 exceptions and exemptions available to the Company and drafting of accounting policies in accordance with IFRS. This phase will also result in identifying resource and training requirements, processes for preparing financial statements, and identifying financial system requirements. The implementation phase, which the Company expects to complete in the fourth quarter, will involve identifying and carrying out the implementation requirements to effect management s accounting choices, developing sample financial statements, implement business and internal control requirements, calculating the opening balance sheet as at December 1, 2010 and addressing other transitional reconciliations and disclosure requirements. Post-implementation will involve continuous monitoring of changes in IFRS and continuing to develop and maintain IFRS competencies by addressing training requirements throughout the organization. Controls and Procedures Disclosure controls and procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported on a timely basis to senior management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this management s discussion and analysis, management evaluated the effectiveness of the Corporation s disclosure controls and procedures as required by Canadian Securities Law. Based on that evaluation, the CEO and CFO have concluded, that as of the end of the three month period covered by this Management s Discussion and Analysis, the disclosure controls and procedures were designed to provide reasonable assurance that information required to be disclosed in the Company s annual and interim filings (as such terms are defined under National Instrument Certification of Disclosure in Issuers Annual and Interim Filings) and other reports filed or submitted under Canadian securities law is recorded, processed, summarized and reported within the time periods specified by those laws, and that material information is accumulated and communicated to management including the CEO and CFO as appropriate to allow timely decisions regarding required disclosure. NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 9

11 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS Internal controls and procedures The Company s management, with the participation of its CEO and CFO, are responsible for establishing and maintaining adequate internal controls over financial reporting. Under the supervision of the CFO, the Corporation s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As at the end of the period covered by this Management s Discussion and Analysis, management evaluated the effectiveness of the Corporation s internal control over financial reporting as required by Canadian securities laws. Based on that evaluation, the CEO and CFO have concluded that, as of the end of the three month period covered by this Management s Discussion and Analysis, the internal controls over financial reporting were designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. There have been no material changes in the Company s internal controls over financial reporting during the three month period ended May 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company s internal controls over financial reporting. Financial Instruments The Company s financial instruments consist principally of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities and amounts due to related parties. Financial assets and financial liabilities are measured on an ongoing basis at fair value or amortized cost. Cash is designated as held-for-trading and measured at fair value. Amounts receivable are designated as loans and receivables and measured at amortized cost. Accounts payable and accrued liabilities and advances from related parties are designated as other financial liabilities and measured at amortized cost. The recorded values of all financial instruments approximate their current fair values because of their nature and respective maturity dates or durations. The Company may be affected by liquidity risk, exchange rate risk, interest rate risk and commodity price risk. Liquidity risk arises as the Company will continue to require equity financing and there is no assurance that it can continue to raise the capital required to maintain liquidity. Exchange rate risk arises as the Company s functional currency is the Canadian dollar while the majority of exploration expenditures are denominated in Namibian dollars. The Company does not currently undertake any hedging activities to mitigate exchange rate risk. The Board will continue to monitor the situation and will consider various options to mitigate this risk as it deems appropriate as the business develops. Interest rate risk arises as the Company invests cash at floating rates of interest. Fluctuations in interest rates therefore impact the value of cash equivalents. The Company does not have any interest-bearing liabilities. Commodity price risk arises as the value of the Company s mineral resource properties is highly dependent on the market price of rare earth elements. Rare earth elements prices historically have fluctuated widely and are affected by numerous factors outside of the NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 10

12 NAMIBIA RARE EARTHS INC. MANAGEMENT S DISCUSSION AND ANALYSIS Company s control, including, but not limited to, industrial and retail demand, speculators, levels of worldwide production, short-term changes in supply and demand, and other factors. Risks and Uncertainties Under Canadian reporting requirements, management of the Company is required to identify and comment on significant risks and uncertainties associated with its business activities. For a summary of potentially significant risks and uncertainties, refer to the Company s Prospectus, dated April 7, 2011, which is available on SEDAR at Additional Information The financial statements and additional information regarding the Company are available on SEDAR at NAMIBIA RARE EARTHS INC. - MANAGEMENT S DISCUSSION AND ANALYSIS - MAY 31, 2011 PAGE 11

13 Namibia Rare Earths Inc. 1 Unaudited Consolidated Balance Sheets As at May 31, 2011 and November 30, 2010 Note 1 Assets May 31, 2011 November 30, 2010 Current assets Cash and cash equivalents 28,261,733 3,664,429 Amounts receivable 247, ,264 Deposits and prepaid expenses 35,979 1,665 28,545,706 3,808,358 Property, plant and equipment (note 4) 97, ,393 Mineral properties and related deferred costs (note 5) 7,281,999 5,828,072 Liabilities 35,925,673 9,763,823 Current liabilities Accounts payable and accrued liabilities (note 6) 493, , , ,744 Amounts due to related parties (note 6) 33,272 38,560 Shareholders Equity Capital stock (note 7) 36,147,817 10,802,985 Contributed surplus 1,926,000 - Warrants (note 7) 2,281,600 1,298,000 Deficit (4,956,908) (2,761,466) 35,398,509 9,339,519 35,925,673 9,763,823 NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

14 Namibia Rare Earths Inc. 2 Unaudited Consolidated Statements of Operations, Comprehensive Loss and Deficit For the three and six months ending May 31 Note 1 Three months Three months Six months Six months ended May 31, ended May 31, ended May 31, ended May 31, Expenses General and administrative (note 6) 47,016 8,072 91,595 15,254 Consulting fees (note 6) 61,399-91,781 - Directors fees 5,000-5,000 - Listing and filing fees 15,475-15,475 - Professional fees 49,233 24,876 66,713 28,661 Shareholder communications 92,720-93,817 - Stock-based compensation 1,676,400-1,676,400 - Travel and promotion 35,638 51,282 75,150 51,282 Wages and benefits (note 6) 62, ,629-2,045,630 84,230 2,243,560 95,197 Loss before other items (2,045,630) (84,230) (2,243,560) (95,197) Other income (expenses) Interest income (expense) 45,322 (29) 52,063 (29) Foreign currency exchange gain (loss) (5,362) (306) (3,945) (571) 39,960 (335) 48,118 (600) Net loss and comprehensive loss (2,005,670) (84,565) (2,195,442) (95,797) Deficit Beginning of period (2,951,238) (2,377,802) (2,761,466) (2,366,570) Deficit End of period (4,956,908) (2,462,367) (4,956,908) (2,462,367) Loss per share - Basic and diluted (0.03) (0.00) (0.04) (0.00) Weighted average number of shares outstanding (note 7) 59,782,484 30,000,000 50,850,074 30,000,000 NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15 Namibia Rare Earths Inc. 3 Unaudited Consolidated Statements of Shareholders Equity As at May 31 Common Shares Without Par Value Contributed Surplus Warrants Deficit Total Shareholders Equity Number Balance, November 30, (2,366,570) (2,366,570) Elimination of predecessor company, shares (100) (20) Settlement of debt with equity 30,000,000 6,949, ,949,045 Issue of securities for cash, private placement at 0.50 per unit 10,810,000 5,405, ,405,000 Issuance of X warrants at fair value - (1,298,000) - 1,298, Share issuance costs (253,060) (253,060) Net loss for the year (394,896) (394,896) Balance, November 30, ,810,000 10,802,985-1,298,000 (2,761,466) 9,339,519 Issue of securities for cash, exercise - of Y warrants 1,081, Issuance of shares for cash, initial - public offering at 0.80 per share 35,937,500 28,750, ,750,000 Share issuance costs (3,405,276) - 983,600 - (2,421,676) Stock-based compensation - - 1,926, ,926,000 Net loss for the period (2,195,442) (2,195,442) Balance, May 31, ,828,500 36,147,817 1,926,000 2,281,600 (4,956,908) 35,398,509 NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

16 Namibia Rare Earths Inc. 4 Unaudited Consolidated Statements of Cash Flow For the three and six months ending May 31 Cash provided by (used in) Three months Three months Six months Six months ended May 31, ended May 31, ended May 31, ended May 31, Operating activities Net loss for the period (2,005,670) (84,565) (2,195,442) (95,797) Items not involving cash Stock-based compensation 1,676,400-1,676,400 - Net change in non-cash working capital balances related to operations (Increase) decrease in amounts receivable (3,023) 313 (105,730) 636 (Increase) decrease in deposits and prepaid expenses (30,869) 12 (34,314) 66 Increase (decrease) in accounts payable and accrued liabilities (211,449) (15,880) 7,360 1,853 (574,611) (100,120) (651,726) (93,242) Financing activities Proceeds from issuance of capital stock - net of issue costs 26,508,471-26,328,432 - (Repayment of advances) advances from related parties (54,253) 238,961 (5,289) 548,744 26,454, ,961 26,323, ,744 Investing activities Expenditures on mineral properties and related deferred costs (305,841) (180,453) (1,074,114) (518,315) Net change in cash during the period 25,573,766 (41,612) 24,597,303 (62,813) Cash and cash equivalents Beginning of period 2,687,967 51,121 3,664,430 72,322 Cash and cash equivalents End of period 28,261,733 9,509 28,261,733 9,509 Supplemental cash flow information (note 10) NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

17 Namibia Rare Earths Inc. 5 Notes to Unaudited Consolidated Financial Statements For the three and six months ended May 31, Nature of operations and going concern Namibia Rare Earths Inc. (NRE or the Company) was incorporated pursuant to the Canada Business Corporations Act on April 26, 2010 for the purpose of acquiring ownership of the rare earth assets held by Endeavour Resources Inc. (ERI), (formerly Etruscan Resources Inc., a publicly-traded entity, now a whollyowned subsidiary of Endeavour Mining Corporation). On April 30, 2010, ERI transferred all of its intercorporate debt and equity interest in its wholly-owned subsidiary Etruscan Resources Namibia (Pty) Ltd. (Namibia Pty), a Namibia-based company holding its rare earth assets, to the Company and its wholly owned subsidiary Cayman Namibia Rare Earth Ltd. (CNRE) in exchange for 30 million common shares of the Company. There was no substantive change in ownership. The consolidated financial statements of the Company comprise the financial statements of the Company and its subsidiaries using the historical results of operations and the historical basis of assets and liabilities of these companies. The consolidated financial statements of the subsidiaries are considered, for financial reporting purposes, to be the predecessor company of the Company and its results are considered to be the historical results of the Company under the continuity of interest basis of accounting. The Company is in the business of exploring and developing rare earth properties in Namibia. The amounts shown as property, plant and equipment, and mineral properties and related deferred costs, all of which are located in Namibia, represent costs net of recoveries to date, less amounts amortized and/or written off, and do not necessarily represent present or future values. The Company has not yet determined whether its mineral properties contain economically recoverable reserves. The recoverability of the amounts shown for mineral properties and related deferred costs is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of the properties, and future profitable production or proceeds of disposition thereof. These financial statements have been prepared using Canadian generally accepted accounting principles (GAAP) applicable to a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business as the liabilities come due. For the year ended November 30, 2010, the Company reported a loss of 394,896 and an accumulated deficit of 2,761,466 at that date. For the six months ended May 31, 2011, the Company reported a loss of 2,195,442 and an accumulated deficit of 4,956,908 at that date. The Company's ability to continue as a going concern is dependent upon rare earths prices, successful results from its mineral property acquisitions and exploration activities, its ability to maintain title and beneficial interest in the mineral properties, and its ability to raise additional financing. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary were the going concern assumption inappropriate, and these adjustments could be material. 2. Significant accounting policies Financial statement presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, using the same accounting policies and methods as per the annual financial statements for the year ended November 30, 2010, except as indicated below. These statements do not include all the disclosures required by generally accepted accounting principles and should be read in conjunction with the most recent annual financial statements of the Company. All amounts are expressed in Canadian dollars, unless otherwise stated. Share issuance costs Costs directly identifiable with the raising of capital are charged against the related share capital. Costs related to shares not yet issued are recorded as deferred share issuance costs. These costs will be deferred until the issuance of the shares to which the costs relate, at which time the costs will be charged against the related share capital or charged to operations if the shares are not issued. Stock-based compensation The Company uses the fair value method of accounting for employee share-based compensation and other sharebased payments made in exchange for goods and services. Under this method, the Company recognizes a compensation expense for all awards made to employees, based on the fair value of the options or units on the date of grant, which is determined by using a valuation model. The fair value of employee options is estimated on the date of grant using an option pricing model and is expensed over the vesting period of the options. The fair value of options granted to non-employees is re-measured at the earlier of each financial reporting or vesting date, and any adjustment is charged or credited to income upon re-measurement. Upon the exercise or settlement of stock options, consideration received, together with amounts previously recorded in contributed surplus, are recorded as an increase in share capital. NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18 Namibia Rare Earths Inc. 6 Notes to Unaudited Consolidated Financial Statements For the three and six months ended May 31, Changes in Accounting Policies Future accounting changes International Financial Reporting Standards In February 2008 the Canadian Accounting Standards Board announced that the transition to International Financial Reporting Standards (IFRS) from Canadian GAAP will occur on January 1, 2011 for public entities. The implementation of IFRS will apply to the Company s interim and annual financial statements for the fiscal year beginning December 1, 2011, including the restatement of comparative amounts for Business Combinations In January 2009, the CICA issued the new handbook Section 1582, Business Combinations effective for fiscal years beginning on or after January 1, Earlier adoption of Section 1582 is permitted. This pronouncement further aligns Canadian GAAP with United States GAAP and IFRS and changes the accounting for business combinations in a number of areas. It establishes principles and requirements governing how an acquiring company recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, any non-controlling interest in the acquiree, and goodwill acquired. The section also establishes disclosure requirements that will enable users of the acquiring company s financial statements to evaluate the nature and financial effects of its business combinations. The Company is considering the impact of adopting this pronouncement on the consolidated financial statements in fiscal 2012 in connection with the conversion to IFRS. Consolidated Financial Statements and Noncontrolling Interests In January 2009, the CICA issued the new handbook Section 1601, Consolidated Financial Statements, and Section 1602, Non-controlling Interests, effective for fiscal years beginning on or after January 1, Earlier adoption of these recommendations is permitted. These pronouncements further align Canadian GAAP with US GAAP and IFRS. Sections 1601 and 1602 change the accounting and reporting for ownership interest in subsidiaries held by parties other than the parent. Noncontrolling interests are to be presented in the consolidated statement of financial position within equity but separate from the parent s equity. The amount of consolidated net income attributable to the parent and to the non-controlling interest is to be clearly identified and presented on the face of the consolidated statement of income. In addition, these pronouncements establish standards for a change in a parent s ownership interest in a subsidiary and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. They also establish reporting requirements for providing sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The Company is currently considering the impact of adopting these pronouncements on its consolidated financial statements in fiscal 2012 in connection with the conversion to IFRS. NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

19 Namibia Rare Earths Inc. 7 Notes to Unaudited Consolidated Financial Statements For the three and six months ended May 31, Property, plant and equipment Cost Accumulated amortization May 31, 2011 Net Motor vehicles 303, ,297 97,968 Cost Accumulated amortization November 30, 2010 Net Motor vehicles 303, , , Mineral properties and related deferred cost Property description Balance Feb. 28, 2011 Acquisitions and expenditures during the period Balance May 31, 2011 Lofdal rare earths property 4,426, ,490 5,122,375 Other mineral properties 2,131,263 28,361 2,159,624 Rare earth properties, Namibia 6,558, ,851 7,281,999 Property description Balance Nov. 30, 2009 Acquisitions and expenditures during the year Balance Nov. 30, 2010 Lofdal rare earths property 1,855,307 1,871,128 3,726,435 Other mineral properties 1,985, ,294 2,101,637 Rare earth properties, Namibia 3,840,650 1,987,422 5,828,072 Carrying value of mineral properties The Company s recorded amount of its mineral properties is accumulated based upon costs incurred to date, net of recoveries and provisions. This approach to recording mineral properties is consistent with industry standards and the Company believes that this represents its best estimate of the appropriate carrying amount for each property. The economic feasibility of each property is assessed regularly by management based upon current geological exploration results, independent geological reports, surrounding exploration and development activities, ongoing assessment of the political environment in the countries where properties are held and the availability of funding. When a property is deemed impaired, the cost thereof is written down to fair value. 6. Related parties transactions In the three months ended May 31, 2011, the Company paid or accrued 128,145 ( Nil) in salaries and management fees to officers, of which 92,055 was charged to the statement of loss, and 36,090 was charged to mineral properties. NAMIBIA RARE EARTHS INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS