TEAL Exploration & Mining Incorporated Consolidated Financial Statements for the year ended June 30, 2006 (in thousands of United States Dollars)

Transcription

1 Consolidated Financial Statements for the year ended June 30, (in thousands of United States Dollars)

2 AUDITORS REPORT To the Shareholders of We have audited the consolidated balance sheet of TEAL Exploration & Mining Incorporated as at June 30, and the consolidated statements of loss and deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Vancouver, Canada, August 29,. Chartered Accountants Page 2

3 Consolidated Statement of Loss and Deficit (in thousands of United States Dollars) $'000 REVENUE Interest and other revenue EXPENSES Exploration and development costs [note 4] 5,621 Corporate and administration costs 1,017 Stock based compensation [note 9] 1,947 Reorganisation cost and professional fees 1,015 Foreign exchange loss 5 9,605 Net loss before taxes (8,897) Income taxes [note 10] 119 Net loss for the year (9,016) Deficit, beginning of year - Deficit arising on acquisition [note 1] (1,076) Deficit, end of year (10,092) Basic and diluted loss per share ($0.27) Weighted average number of common shares outstanding (thousands) 33,688 See accompanying notes to consolidated financial statements Page 3

4 Consolidated Balance Sheet As at June 30, (in thousands of United States Dollars) $'000 ASSETS Current Cash and cash equivalents [note 3] 26,560 Accounts receivable 600 Prepaid expenses 40 Total current assets 27,200 Capital assets, net [note 7] ,493 LIABILITIES AND SHAREHOLDERS' EQUITY Current Amounts due to related party [note 11] 455 Taxes payable [note 10] 119 Accounts payable and accrued liabilities [note 6] 1,801 Total current liabilities 2,375 Commitments and contingencies [note 13] Shareholders' equity Share capital [note 8] 33,263 Contributed surplus [note 9] 1,947 Deficit (10,092) Total shareholders' equity 25,118 27,493 See accompanying notes to consolidated financial statements Page 4

5 Consolidated Statement of Cash Flows (in thousands of United States Dollars) $'000 OPERATING ACTIVITIES Net loss for the year (9,016) (Deduct)/add items not affecting cash: Depreciation and amortization 13 Stock based compensation 1,947 Net changes in non-cash working capital items: Accounts receivable and prepaid expenses (576) Accounts payable and accrued liabilities 1,610 Taxes payable (note 12) 119 Cash used in operating activities (5,903) FINANCING ACTIVITIES Proceeds from public offering 33,263 Cash provided by financing activities 33,263 INVESTING ACTIVITIES Purchase of capital assets (273) Acquisition of subsidiaries [note 12] (527) Cash used in investing activities (800) Increase in cash and cash equivalents 26,560 during the year Cash and cash equivalents, beginning of year - Cash and cash equvalents, end of year [note 3] 26,560 Supplementary cash flow infornation (note 12) See accompanying notes to consolidated financial statements Page 5

6 1. FORMATION OF COMPANY AND NATURE OF OPERATIONS ( TEAL or the Company ) is the holding company of a group of exploration and mining companies previously owned by African Rainbow Minerals Limited ( ARM ), a company incorporated in South Africa. These companies comprise exploration and development mineral assets situated in Namibia, Zambia and the Democratic Republic of Congo. TEAL was incorporated under the laws of the Yukon Territory on June 1, On November 15, 2005, TEAL entered into a Share and Asset Transfer Agreement with ARM and acquired the common shares and other assets comprising the mineral rights, mining and exploration permits and related assets of ARM's non-south African minerals and exploration interests. These companies are held through Barbados, DRC, Zambian and South African incorporated holding companies. The Company is a development stage enterprise that has yet to generate revenues from its projects. The development of these projects involves significant financial risk. These consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations. The Company has recorded the acquisition at carrying amounts in accordance with CICA 3840 paragraph 36, Related Party Transactions, which requires the Company to evaluate whether there has been a substantive change in ownership interests of the transferred assets at the time the transfer is arranged, rather than when the transfer occurs. As the carrying value of liabilities acquired exceeds the carrying value of assets acquired, no value has been recorded for the 35,000,001 common shares issued to ARM and a debit to the accumulated deficit of $1.1 million has been recorded (see note 12(b)). TEAL s subsidiaries which are all 100% owned unless otherwise stated, are: Barbados TEAL Exploration & Mining (B) Incorporated TEAL Namibia (B) Inc. Copperbelt (B) Inc. Konnoco (B) Inc. Lukali Holdings (B) Inc TEAL Holdings (B) Inc. Katanga (B) Inc. Kasonta (B) Inc. South Africa TEAL Exploration and Mining Investment Holdings (Pty) Ltd Zambia Mwambashi Holdings Zambia Ltd Konnoco Holdings Zambia Ltd Millberg Holdings Zambia Ltd TEAL Group Zambia Ltd Page 6

7 Katanga Holdings Zambia Ltd ARM (Zambia) Limited (formerly Avmin (Zambia) Limited) ARM Development (Zambia) Limited (formerly Avmin Development (Zambia) Limited) ARM Venture Limited (formerly Avmin Venture Limited) ARM Exploration (Zambia) Limited (formerly Anglovaal Exploration (Zambia) Limited) Konnoco Zambia Limited Namibia TEAL Namibia (Pty) Ltd (formerly African Rainbow Minerals Development (Pty) Ltd and previously Avmin Namibia (Pty) Ltd)) Avdale Namibia (Pty) Ltd Democratic Republic of Congo TEAL Mining (DRC) s.p.r.l (formerly Avco s.p.r.l) Kasonta Lupoto Mines s.p.r.l. (60% owned) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and are presented in United States dollars. The significant accounting policies of the Company are summarized as follows a) Basis of Consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation. b) Use of estimates The preparation of the consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities at that date of the financial statements and revenues and expenses for the periods reported. Management has made a number of significant estimates and valuation assumptions, including the useful lives of capital assets and determination of accruals. By their nature, these estimates are subject to measurement uncertainty and the effect of the consolidated financial statements of changes in such estimates in future periods could be significant. Actual results will likely differ from those estimates. c) Exploration and evaluation costs Exploration and development costs are expensed as incurred. Exploration costs include valueadded taxes incurred in foreign jurisdictions when recoverability of those taxes is uncertain. When it has been established that a mineral deposit is commercially mineable and a decision has been made to formulate a mining plan (which occurs upon completion of a positive economic analysis of the mineral deposit), the costs subsequently incurred to develop the mine on the property prior to the start of mining operations are capitalized. Capitalized amounts may be written down if future undiscounted cash flows, including potential sale Page 7

8 proceeds, related to a mineral property are estimated to be less than the carrying value of the property. d) Mineral property acquisition costs Mineral property acquisition costs are capitalized until the viability of the mineral interest is determined. Capitalized acquisition costs are expensed in the period in which it is determined that the mineral property has no future economic value. Capitalized amounts may be written down if future cash flows, including potential sales proceeds, related to the property are estimated to be less than the carrying value of the property. Management reviews the carrying value of each mineral property interest periodically, and whenever events or changes in circumstances indicate the carrying value may not be recoverable. Reductions in the carrying value of each property would be recorded to the extent the carrying value exceeds the estimated future cash flows. e) Foreign currency transactions and balances Monetary assets and liabilities denominated in foreign currencies have been translated into United States dollars at the year end exchange rates. Non-monetary assets have been translated at the rates prevailing at the dates of acquisition. Revenue and expense items other than depreciation are translated at the average rates of exchange prevailing for the period. Any exchange gain or loss that arises on translation is included in the determination of net loss for the period. f) Capital assets Capital assets are carried at cost, less depreciation and amortization. Depreciation and amortization of capital assets, that have been placed in service is calculated on a straight line basis over the following terms: Vehicles Office furniture & equipment 5 years 6 years g) Leases Finance leases, which transfer to the group substantially all the risks and benefits incidental to ownership of the leased item, are capitilised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Operating lease payments are recognised as an expense in the income statement on a straightline basis over the term of the lease agreement. h) Cash and cash equivalents Cash equivalents include those short term money market instruments which have an original term to maturity of 3 months or less when acquired. Page 8

9 i) Revenue recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Company and the revenue can be reliably measured. Incidental revenue is set off against related project & exploration expenditure. Interest Revenue is recognised as the interest accrues. j) Impairment The carrying value of assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indication exists, the recoverable amount of the asset is estimated. Where the carrying value exceeds the estimated undiscounted cash flows from the use of the assets, such assets are written down to their recoverable amount. k) Income taxes Income taxes are provided for in accordance with the liability method. Under the liability method of accounting for income taxes, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. If on the basis of available evidence, it is more likely than not that all or a portion of the future tax asset will not be realized, the future tax asset is reduced by a valuation allowance. l) Joint ventures Joint venture arrangements in which the companies within the TEAL group have a controlling stake are consolidated as though they are subsidiaries. Unincorporated joint ventures are accounted for net of joint venture partner contributions. Arrangements whereby the TEAL group is incurring costs in order to earn a stake in a project are accounted for by expensing the costs until the interest is earned. The entity in which the interest is earned is then consolidated if the TEAL group has control, equity accounted if the TEAL group has significant influence, or proportionately consolidated if there is joint control. m) Loss per common share Basic loss per share The loss per common share is calculated as the consolidated loss for the period, divided by the weighted average number of common shares. Diluted loss per share Diluted loss comprises profit as used in calculating basic profit per share. The loss figure is divided by the weighted average number of common shares, adjusted for any financial instruments or other contracts that entitle the holder thereof to ordinary shares, to arrive at diluted profit per share. No diluted loss per share is calculated if all share issuances are antidilutive. n) Accrued site closure costs Page 9

10 Accrued site closure costs relate to TEAL s legal obligation to remove exploration equipment and other assets from its mineral property sites and to perform other site reclamation work. Site closure costs are expensed when incurred. As at the end of June 30,, TEAL did not have any outstanding liabilities in this regard. o) Stock based compensation The Company accounts for share appreciation rights granted to directors, officers, employees and non-employees of the group as equity settled using the fair value method of accounting. The fair value of share appreciation rights at their grant dates are determined using the Black- Scholes option pricing model, as required by generally accepted accounting principles. p) Employee benefits The group contributes to a defined contribution pension scheme, which contributions are made to a separately administered fund 3. CASH AND CASH EQUIVALENTS $'000 Cash at bank and in hand 26,560 26,560 There are no restrictions on cash movements. Page 10

11 4. EXPLORATION AND DEVELOPMENT COSTS The Company is organized and managed geographically. Currently this includes Zambia, Namibia and the Democratic Republic of the Congo ( DRC ). The following is a summary of exploration and development costs incurred by the Company related to its mineral property interests for the year ended June 30, : $'000 Zambia Drilling 1,048 Transportation 288 Contractors and personnel 1,194 Other exploration & development costs 432 Total 2,962 Namibia Drilling 945 Transportation 130 Contractors and personnel 781 Geophysics survey 186 Other exploration & development costs 435 Total 2,477 DRC Transportation 48 Contractors and personnel 128 Other exploration & development costs 6 Total 182 Total exploration and development costs 5,621 Exploration and development costs in Zambia include expenditures incurred on all the Zambian projects being Konkola North, the Copperbelt Joint Venture, the Kafue Joint Venture and Mwambashi. It also includes general business development work not associated with specific projects or prospects, in Zambia. In Namibia, exploration and development cost comprise expenditure incurred on the Otjikoto gold project and general exploration work in the greater Otavi area. Exploration and development costs in the DRC reflect the establishment & staffing of office to commence the resource and exploration programme. Page 11

12 5. JOINT VENTURE AGREEMENTS a) Mwambashi Copper Project (TEAL 70%) The Mwambashi Copper Project is situated within a large scale prospecting license number 72. Korea Zinc Company Limited (KZC) was granted a 30% participating interest in the project. Funding is mandatory for both parties, except with respect to declared project areas set aside for specific evaluation and development, in which case a party may withdraw or dilute its interest by failing to fund. The Mwambashi Copper Project was declared a project area during the past financial year. Neither of the parties participating interests have been diluted to date. b) Copperbelt Joint Venture Exploration Area (TEAL 70%) The area consists of five large scale prospecting licenses (one of which contains the Mwambashi Copper Project above) and is subject to a joint venture agreement with KZC granting them a 30% participating interest. Exploration work is continuing and funding is mandatory for both parties. c) Kafue Joint Venture Exploration Area (TEAL 51%) The area consists of three exclusive exploration licenses and each is subject to a separate joint venture agreement with Billiton Development (Zambia) Limited, a subsidiary of BHP Billiton. TEAL has met the vesting requirements with regard to two of the licenses. It is TEAL s intention to continue with further exploration work on these licenses. BHP is required to make a participation decision with regards to these two licenses. Should they elect to participate they will have to contribute their 49% share of expenditure. Meanwhile TEAL is continuing with exploration activities to meet its vesting requirements with regards to the third license. d) Kalumines Copper-Cobalt Project (TEAL 60%) The Kalumines Copper-Cobalt Project consists of one mining license held by TEAL s 60% owned subsidiary Kasonta Lupoto Mines s.p.r.l. (Kalumines). The remaining 40% is held by Gecamines who contributed all of the mining rights to the area. TEAL is responsible to conduct and fund a feasibility study on Kalumines to retain its interest. Thereafter TEAL must arrange all financing for the development of a mine should a development decision be taken. 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $'000 Ground rent Other 1,189 1,801 1 Ground rent on surface rights held by Konnoco Zambia Limited payable in terms of the Lands Act, Chapter 185 of the Laws of Zambia. Page 12

13 7. CAPITAL ASSETS Accumulated Net Cost amortization book value $'000 $'000 $'000 Office furniture & equipment Vehicles SHARE CAPITAL Authorised The Company has unlimited authorised common shares of no par value. Issued Number Value $ 000 June 1, 2005 On incorporation 1 - November 15, 2005 On acquisition of exploration and 35,000,000 - mineral properties (note 1) November 15, 2005 By initial public offering 17,800,000 31,268 December 14, 2005 Over allotment exercised 1,100,000 1,995 53,900,001 33,263 The value of the issued share capital is net of underwriter s commission. On November 4, 2005, TEAL filed a prospectus with all provincial and territorial securities regulatory authorities in Canada and completed an initial public offering on November 15, The Company issued 17.8 million treasury common shares at Cdn$2.25 per share for aggregate proceeds of Cdn$37.5 million, net of expenses. As part of the IPO, TEAL had granted the underwriting syndicate an option to purchase up to 2.67 million additional common shares. The option was exercisable, in whole or in part, within 30 days from November 15, 2005 to cover over-allotments. On December 14, 2005, it was announced that the underwriters had purchased 1.1 million treasury common shares from TEAL at the IPO price of Cdn.$2.25 per share for net proceeds of Cdn$2.3 million. This brought the total net proceeds raised from the IPO to Cdn$39.8 million, or $33.3 million. The Company listed on the JSE Limited (JSE), the stock exchange in Johannesburg, South Africa, as a secondary listing by way of an introduction of all of the TEAL Common shares with effect from April 3,. No new shares were issued at this time. The listing was done as part of the requirements imposed on the group by the South African Reserve Bank. Page 13

14 9. STOCK BASED COMPENSATION $ 000 Contributed Surplus 1,947 Participation in the group s stock based compensation plan is voluntary. Share appreciation rights granted under the plan are non-transferable other than in accordance with the rules of the plan and must be exercised no later than 8 years after the date of the grant or such shorter period as determined by the compensation committee of the board of directors. All grants are subject to a vesting schedule whereby 40% of any award will vest on the second anniversary of the grant with 30% of any award vesting on each of the third and fourth anniversaries of the date of the grant except for grants to non-executive directors which vest on date of grant. A maximum of commons shares are available for issuance upon the exercise of share appreciation rights granted under the plan. Certain restrictions on the plan apply, including the maximum number of common shares that may be granted to any individual within a twelve month period cannot exceed 5% of the number of outstanding common shares. The contributed surplus arose from the issue of stock appreciation rights to employees of the Company adjusted to fair value as follows: Number of rights Exercise price (Cdn$) Fair value (Cdn$) *Rights granted November 15, ,594, Rights granted February 9, 90, Rights granted May 29, 34, ,718,745 * includes rights granted to non-executive directors which is exercisable from date of grant. The fair value of share appreciation rights ( SARS ) granted to directors, officers, employees and non-employees of TEAL is estimated on the date of grants using the Black-Scholes option pricing model with the following assumptions used for the grants made during the year: Risk-free interest rate 4% Expected volatility 100% Expected life (years) 4 Expected dividend yield 0% There were no options exercised, forfeited or that expired during the year. Page 14

15 10. INCOME TAXES Normal taxation $ 000 Canada - Barbados 20 South Africa 27 Zambia 72 Namibia Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company s future income tax assets are as follows: Canada Zambia Namibia DRC $'000 $'000 $'000 $'000 Future income tax assets: Net Operating losses carry forwards (839) (13,792) (5,976) (120) Total future income tax assets (839) (13,792) (5,976) (120) Valuation allowance for future income tax ass ,792 5, Net future income tax assets The above amounts are estimated and have not been assessed and confirmed by the revenue authorities in the countries in which the Company operates. This includes Canada, Barbados, Zambia, Namibia, South Africa, the Democratic Republic of the Congo and Mauritius. In Zambia, the unused income tax losses expire after ten years from the tax year in which the expenditure were incurred. For the future income tax assets calculated above, the majority of this expenditure was incurred from 1999 onwards. In Namibia unused income tax losses do not expire. The statutory income tax rates for mining companies in the various countries in which the group operates are: Canada 36.12% Barbados 2.5% South Africa 29% Zambia 25% Namibia 37.5% DRC Up to 40% Mauritius 15% Page 15

16 The reconciliation of income tax attributable to operations computed at the statutory income tax rates to income tax expense / (recovery), using weighted average income tax rates are as follows: % Income tax at statutory rates -36.1% Expenses not deductible for income tax purposes 7.9% Revenue & unrealised gains not taxable -7.8% Assessed losses utilised 24.0% Valuation allowance against income tax assets 16.3% Effect due to different income tax rates -3.1% Effective rate of taxation 1.3% 11. RELATED PARTY TRANSACTIONS $'000 African Rainbow Minerals Limited ("ARM") The amount outstanding relates to services provided in terms of the shared services and office lease agreements and is stated at its carrying value. The amount is due on a 30 day account. Shared Services Agreement The Company entered into a shared services agreement with ARM on November 15, In terms of this agreement ARM will provide to TEAL and its subsidiaries risk management advice, cash management and investment services, accounting and financial services, human resources and other staffing services. Office Lease Agreement TEAL has an office lease agreement with an ARM subsidiary, Venture Building Trust. Corporate Opportunity Agreement On November 15, 2005, TEAL entered into a corporate opportunity agreement with ARM whereby it was agreed that all opportunities available to TEAL with respect to the acquisition of an interest in a project located within the Republic of South Africa shall be referred to ARM and all opportunities available to ARM with respect to the acquisition of an interest in a project located within the Continent of Africa, excluding the Republic of South Africa and large scale projects, shall be referred to TEAL except for Ferrous Metal Projects, coal and Platinum Group Metals ( PGM ) Projects. Should TEAL determine that a project held by it is a Ferrous Metal Project, coal or a PGM Metals Project as a result of exploration work, then where TEAL has not incurred expenditures in excess of US$1,000,000, the project shall be offered to ARM in consideration of two times such expenditures, and where TEAL has incurred expenditure in excess of US$1,000,000, ARM shall be offered a Joint Venture Agreement with respect to the project. Should ARM fail to give notice of its acceptance of such offer within 30 days, then TEAL Page 16

17 may further explore, develop, produce Minerals from, sell and otherwise deal with the project without further reference to this Agreement. Maintenance Agreement TEAL and ARM entered into a maintenance agreement dated November 15, 2005 (the Maintenance Agreement ) pursuant to which ARM was granted the right (the Maintenance Right ), subject to applicable law, to participate in future offerings and other issuances of Common Shares or securities convertible into Common Shares (subject to certain exceptions, including the issue of Common Shares pursuant to the Offering or on the exercise, conversion or exchange of any previously issued securities convertible into Common Shares or rights issued in a rights offering) by purchasing that number of securities in the offering necessary for ARM to maintain its relative percentage beneficial ownership of Common Shares (on a fully-diluted basis in the case of an offering of convertible securities). The Maintenance Right is exercisable by ARM, from time to time, at any time during a period of ten business days following receipt of a triggering event notice until the date ARM ceases to beneficially own at least 35% of TEAL's outstanding Common Shares. In exercising its Maintenance Right, ARM must acquire its securities on the same terms and conditions as third party subscribers, subject to any applicable stock exchange or securities regulatory authority requirements. ARM must exercise the Maintenance Right to maintain its percentage beneficial holding of Common Shares at the level established, from time to time, by the South African Reserve Bank ( SARB ), currently 50% plus 1 of the issued and outstanding Common Shares, in order not to trigger the SARB requirement for ARM to sell all of its Common Shares. Page 17

18 12. NOTES TO STATEMENT OF CASH FLOWS a) Taxes payable $'000 Current taxation as per income statement Normal taxation 119 Balance at the end of the year (119) Income taxes paid in cash - b) Acquisition of subsidiaries In November 2005 the Company acquired the common shares and other assets of ARM's non-south Africa mineral and exploration interests The following assets and liablities were acquired Capital Assets 33 Accounts receivable & prepaid expenses 64 Accounts payable & provisions (646) Cash & cash equivalents 48 Net Liabilities (501) Purchase price (in cash) (575) Deficit arising on acquisition (1,076) Cash acquired 48 Cash purchase price (575) Net cash paid on acquisition (527) Page 18

19 13. COMMITMENTS AND CONTINGENCIES a) In terms of an agreement dated March 6, 1997 among Zambia Consolidated Copper Mines Limited (now ZCCM-IH), Avmin Limited, a subsidiary of ARM, Konnoco and the Government of Zambia, Konnoco acquired the Konkola North Copper Project in consideration of an initial payment on signing of $500,000, additional payments which have been made, totalling $500,000 upon the commencement of a feasibility study and the commitment to pay a further $7,500,000 upon the taking of a development decision after the completion of a final feasibility study. Konnoco undertook to spend certain amounts to complete a pre-feasibility study, which the Company has done, and produce a feasibility study within a further 24 to 48 months. In terms of an amending agreement dated September 19, 2005, the parties agreed to extend the date on which Konnoco was required to produce a final feasibility study until the earlier of the date that is 24 months following the closing of the Offering and November 30, Should a feasibility study be completed and a mine development decision be taken by Konnoco, then TEAL will be obligated to subscribe for that number of new Konnoco shares so as to equity finance one third of the total financing requirements for mine development and, as well, settle all inter-company loans between Konnoco and TEAL. Thereafter, ZCCM-IH has the right to a 15% or 20% equity interest in Konnoco, of which 5% shall be a free-carried interest. ZCCM-IH s residual 10% or 15% respectively, paying equity interest will obligate ZCCM-IH to fund its share of equity to develop a mine, although ZCCM-IH may elect to be debt funded by TEAL at an interest rate of LIBOR plus 4.5% (should ZCCM-IH elect to have a 15% interest) or a fixed rate of 20% (should ZCCM-IH elect to have a 20% interest). b) In terms of an agreement made May 6, 2003 between AVCO, a wholly-owned subsidiary of the Company, and Gécamines, Gécamines agreed to contribute all of the mining rights to the area located within the Kasonta-Lupoto Polygon (an area now known as Permits d Exploitation No. 2590) to Kalumines, a corporation owned 60% by AVCO and 40% by Gécamines. On August 18, 2005, Gécamines and AVCO agreed that AVCO would be given until May 2007 to complete a feasibility study, which is a condition to AVCO s right to maintain its interest in Kalumines. Thereafter, AVCO must arrange all financing for the development of a mine should a development decision be taken. Royalty payments of between 3% and 4.5% of gross sales must be made upon the commencement of production. AVCO has the right to appoint a majority of members to the board of Kalumines and to any management committee established. c) The Company is committed to future minimum annual rent payments under operating lease agreements over the next five years as follows: $ Page 19

20 14. COMPARATIVE FIGURES There are no comparative figures as it is the Company s first year of trading, as the Company was incorporated in June 2005 and acquired the non-south African minerals rights and exploration interests of ARM in November SUBSEQUENT EVENTS a) Memorandum of Understanding (MOU) Otjikoto Project A MOU between Avdale Namibia (Pty) Limited ( AVDALE ) and EVI Mining Company Limited ( EVI ) and NedCapital Namibia (Pty) Limited ( NEDCAP ), the financial advisors to EVI, was signed in July. AVDALE is the wholly-owned Namibian subsidiary of TEAL holding the Otjikoto Gold Project. The MOU contemplates the acquisition by EVI of an initial 10% interest in AVDALE, with the right to acquire a further 5% upon completion of a feasibility study, both on commercial terms. Management expects this transaction to be concluded during the second quarter of the /07 financial year. b) Acquisition of electric arc furnace In July, TEAL acquired on behalf of a nominee an electric arc furnace with the capacity to produce approximately tonnes per annum of black copper ingots grading 85% to 95% copper. Capital expenditure to commission the furnace, including the acquisition price and associated infrastructure, is anticipated to total $4 million and will be funded from existing cash resources. TEAL plans to seek local minority equity partners to participate in the operation. TEAL has further entered into a letter of intent to acquire a property in the Democratic Republic of Congo ( DRC ) for the sum of approximately Euro to establish the furnace on a permanent site. Material feed for the furnace will be derived from TEAL s Kalumines Copper-Cobalt Project as well as locally available feedstock. The intention is to acquire up to tonnes a month of mineralized material, grading higher than 25% copper once the furnace is commissioned. Page 20