-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKIISPKb5c/ZrmisZOwShQFij2LisdkPaNDTJcXSrRqtdWbhQRIMoD4otCSffWh5 yojNSJlxsy8gxTicS03WeA== 0001140661-06-000100.txt : 20060314 0001140661-06-000100.hdr.sgml : 20060314 20060313181414 ACCESSION NUMBER: 0001140661-06-000100 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050831 FILED AS OF DATE: 20060314 DATE AS OF CHANGE: 20060313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALO RESOURCES LTD CENTRAL INDEX KEY: 0001050807 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 000000000 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-30196 FILM NUMBER: 06683180 BUSINESS ADDRESS: STREET 1: 1090 W GEORGIA ST #1305 STREET 2: VANCOUVER CITY: BC V6E 3V7 STATE: A1 ZIP: 00000 BUSINESS PHONE: 6046859316 MAIL ADDRESS: STREET 1: 1090 W GEORGIA ST #1305 STREET 2: VANCOUVER CITY: BC V6E 3V7 FORMER COMPANY: FORMER CONFORMED NAME: TRIMARK ENERGY LTD DATE OF NAME CHANGE: 20020402 FORMER COMPANY: FORMER CONFORMED NAME: TRIMARK OIL & GAS LTD DATE OF NAME CHANGE: 19990730 20-F 1 form20f.txt HALO FORM 20 F - Y/E AUG 31, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 - FOR THE FISCAL YEAR ENDED AUGUST 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 000-30196 HALO RESOURCES LTD. (Exact name of Registrant as specified in its charter) HALO RESOURCES LTD. (Translation of Registrant's name into English) BRITISH COLUMBIA, CANADA (Jurisdiction of incorporation or organization) SUITE 1280, 625 HOWE STREET, VANCOUVER, BRITISH COLUMBIA, V6C 2T6 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. NONE Securities registered or to be registered pursuant to Section 12(g) of the Act. COMMON STOCK, NO PAR VALUE (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NOT APPLICABLE (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 21,005,765 COMMON SHARES AS OF AUGUST 31, 2005 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X ------ ------ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No X ------ ------ Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer X ---- ---- --- Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 X Item 18 ------ ------ If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes No X ----- ----- -2- GENERAL INFORMATION: UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN ARE TO CANADIAN DOLLARS. THE COMPANY IS REQUIRED UNDER CANADIAN LAW (NATIONAL INSTRUMENT 43-101 STANDARDS OF DISCLOSURE FOR MINERAL PROJECTS) ("NI 43-101") TO CALCULATE AND CATEGORIZE "MINERAL RESERVE", "PROVEN MINERAL RESERVE", "PROBABLE MINERAL RESERVE", "MINERAL RESOURCE", "MEASURED MINERAL RESOURCE", "INDICATED MINERAL RESOURCE" AND "INFERRED MINERAL RESOURCE" UNDER THE CANADIAN INSTITUTE OF MINING METALLURGY AND PETROLEUM ("CIM") STANDARDS ON MINERAL RESOURCES AND RESERVES - DEFINITIONS AND GUIDELINES DATED DECEMBER 11 2005. THESE STANDARDS ESTABLISH DEFINITIONS AND GUIDELINES FOR THE REPORTING OF EXPLORATION INFORMATION, MINERAL RESOURCES AND MINERAL RESERVES IN CANADA. THESE DEFINITIONS HAVE NOT BEEN ADOPTED FOR USE IN THE UNITED STATES OF AMERICA BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). UNDER THESE GUIDELINES, THE CIM DEFINITIONS OF PROVEN AND PROBABLE MINERAL RESERVES EQUATE TO THE DEFINITIONS OF PROVEN AND PROBABLE RESERVES AS SET OUT IN GUIDE 7 OF THE SECURITIES ACT INDUSTRY GUIDES ADOPTED BY THE SEC ("GUIDE 7"). IN ADDITION, CANADIAN LAW REQUIRES DISCLOSURE OF MINERAL RESOURCES THAT EQUATE TO MEASURED, INDICATED AND INFERRED RESOURCES. GLOSSARY The following is a glossary of geological terms used in this report: andesite a fine grained intermediate volcanic rock composed of andesine and one or more mafic constituents. cm centimeter diamond drill a type of rotary drill in which the cutting is done by abrasion using diamonds embedded in a matrix rather than by percussion. The drill cuts a core of rock which is recovered in long cylindrical sections. epithermal hydrothermal mineral deposit formed within about 1 kilometer of the earth's surface and within a temperature range of 50 to 200 degrees centigrade, occurring mainly as veins. g gram g/t grams per tonne. grade the concentration of each ore metal in a rock sample, usually given as weight percent. Where extremely low concentrations are involved, the concentration may be given in grams per tonne (g/t) or ounces per ton (oz/t). The grade of an ore deposit is calculated, often using sophisticated statistical procedures, as an average of the grades of a very large number of samples collected from throughout the deposit. indicated resource (NI 43-101 definition) means that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. induced polarization (I.P.) method the method used to measure various electrical responses to the passage of alternating currents of different frequencies through near-surface rocks or to the passage of pulses of electricity. -3- inferred resource (NI 43-101 definition) means that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. intrusion general term for a body of igneous rock formed below the surface. km kilometer m meters measured resource (NI 43-101 definition) means that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity. mineral reserve (NI 43-101 definition) means the economically mineable part of a measured or indicated resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined. mineral resource (NI 43-101 definition) is a concentration or occurrence of diamonds, natural solid inorganic material, or natural solid fossilized organic material including base and precious metals, coal, and industrial minerals in or on the Earth's crust in such form and quantity and of such grade or quality that is has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geologic evidence and knowledge. petrographic the description and classification of rocks. porphyry rock type with mixed crystal sizes, i.e. containing phenocrysts of one or more minerals. probable mineral reserve (NI 43-101 definition) the economically mineable part of an indicated, and in some circumstances a measured mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. probable (indicated) reserves (SEC Guide 7 definition) reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. proven (measured) reserves (SEC Guide 7 definition) reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. -4- proven mineral reserve (NI 43-101 definition) means the economically mineable part of a measured resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction is justified. pyrite iron sulphide Qualified Person means an individual who (a) is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these; (b) has experience relevant to the subject matter of the mineral project and the technical report; and (c) is a member in good standing of a professional association. reserve (SEC Guide 7 definition) that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. rhyolite a fine-grained extrusive volcanic rock, similar to granite in composition. shear zone where a fault affects a width of rock rather than being a single clean break, the width of affected rock is referred to as the shear zone. The term implies movement, i.e. shearing. strike the direction of a horizontal line on the surface of the bed, or other planar feature. tailings material rejected from a mill after recoverable valuable minerals have been extracted. FORWARD LOOKING STATEMENTS The Company cautions readers regarding forward looking statements found in the following discussion and elsewhere in this annual report and in any other statement made by, or on the behalf of the Company, whether or not in future filings with the Securities Exchange Commission ("SEC"). Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which, with respect to future business decisions, are subject to change. See "Item 3. Key Information - Risk Factors". These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. The Company disclaims any obligation to update forward looking statements. -5- PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS. - -------------------------------------------------------------------------------- Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. - -------------------------------------------------------------------------------- Not applicable. ITEM 3. KEY INFORMATION. - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA The selected financial data of the Company for the years ended August 31, 2005, 2004 and 2003, was derived from the consolidated financial statements of the Company which have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and audited by D & H Group LLP, independent Chartered Accountants, as indicated in their report which is included elsewhere in this report. The selected financial data set forth for the years ended August 31, 2002 and 2001 are derived from the Company's audited consolidated financial statements, not included herein. The information in the following table was extracted from the more detailed consolidated financial statements and related notes included herein and should be read in conjunction with such financial statements and with the information appearing under the heading "Item 5. Operating and Financial Review and Prospects". Reference is made to Note 16 of the Company's consolidated financial statements included herein for a discussion of the material differences between Canadian GAAP and US GAAP, and their effect on the Company's financial statements.
----------------------------------------------------------- ($ IN 000, EXCEPT PER SHARE DATA) ----------------------------------------------------------- YEAR ENDED AUGUST 31, ----------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- --------- Revenues $31 $82 $69 $163 $635 Production expenses - $22 $17 $135 $185 Depreciation, depletion and impairment $4 $10 $1,252 $6,011 $5,168 General and administrative expenses $1,060 $184 $177 $242 $330 Stock-based compensation $559 $180 - - - Net loss $(368) $(257) $(1,473) $(6,567) $(5,048) Loss per share $(0.02) $(0.05) $(0.50) $(2.24) $(2.03) Weighted average number of shares 16,050 5,654 2,927 2,927 2,480 Dividends per share - - - - - Working capital (deficiency) $507 $279 $(2) $77 $6 Resource interests $22,759 $76 $76 $1,111 $7,022 Other assets $78 - - $115 $619 Shareholders' equity $9,078 $355 $(945) $528 $7,094 Capital stock $28,488 $20,914 $19,537 $19,537 $19,537 Contributed surplus $739 $180 - - - Total assets $23,929 $418 $93 $1,631 $8,168 -----------------------------------------------------------
-6- ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The consolidated financial statements of the Company are presented in accordance with Canadian GAAP. Canadian GAAP differs in certain material respects from US GAAP. The material differences between Canadian and US GAAP, in respect of these consolidated financial statements, are summarized in the tables below. Consolidated Statement of Loss
2005 2004 2003 $ $ $ Net loss under Canadian GAAP (1,697,110) (257,022) (1,472,642) Unproven mineral interest expensed (i) (22,683,427) (75,906) - Other compensation expense (iii) (12,144) (15,503) - Gain on settlement (iv) - (97,207) - Additional depreciation, depletion and amortization (vi) - - (500) Deferred income tax expense (vii) (1,103,364) - - ------------ ------------ ------------ Net loss under US GAAP (25,496,045) (445,638) (1,473,142) ============ ============ ============ Loss per share under US GAAP (1.59) (0.08) (0.50) ============ ============ ============
Consolidated Balance Sheet
2005 2004 $ $ Total assets under Canadian GAAP 23,928,682 417,581 Unproven mineral interest expensed (i) (22,759,333) (75,906) Deferred tax asset (ii) - 890,000 Less: Valuation allowance (ii) - (890,000) ------------ ------------ Total assets under US GAAP 1,169,349 341,675 ============ ============ Total liabilities under Canadian GAAP 14,850,721 62,965 ------------ ------------ Total liabilities under US GAAP 14,850,721 62,965 ============ ============ Total shareholders' equity under Canadian GAAP 9,077,961 354,616 Unproven mineral interest expensed (i) (22,759,333) (75,906) ------------ ------------ Total shareholders' equity (deficiency) under US GAAP (13,681,372) 278,710 ============ ============
(i) Unproven Mineral Interests Unproven mineral interests and deferred exploration costs are accounted for in accordance with Canadian GAAP . The Company has determined for US GAAP purposes to expense the acquisition and exploration costs relating to unproven mineral interests as incurred. In addition, US GAAP requires that exploration costs not be capitalized until a positive feasibility study is completed. The capitalized costs of such claims would then be assessed for impairment, on a periodic basis, to ensure that the carrying value can be recovered on an undiscounted cash flow basis. If the carrying value cannot be recovered on this basis, the mineral claims would be written down to net recoverable value on a discounted cash flow basis. (ii) Income Tax Under Canadian GAAP, deferred tax assets relating to the potential benefit of income tax loss carryforwards are not recognized unless the realization of the benefit is more likely than not. US GAAP provides similar treatment, but requires the benefit be recognized and a valuation allowance be recognized to fully offset the deferred tax asset. -7- As at August 31, 2004, the Company had fully reserved the $890,000 tax benefit of operating loss carryforwards, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit could not be determined. Of the total tax benefit, $145,000 was attributable to the 2004 fiscal year. During the 2005 fiscal year, the Company recognized a future income tax asset of its entire loss carryforward amount as the taxable temporary differences related to the Company's issuance of flow-through common shares are expected to reverse during the loss carryforward period. As a result, there is no longer a US GAAP difference as the future income tax asset for Canadian GAAP is the same as the deferred income tax asset for US GAAP. (iii) Private Placements of Common Stock The Company conducts the majority of its equity financings pursuant to private placements. Under the policies of the TSX Venture, the Company may provide a discount off the market price of the Company's common stock. US GAAP does not permit a discount from the market price. US GAAP requires the recognition of the market value of the Company's common stock as a credit to share capital, with a charge to operations for the portion of the discount relating to equity financings conducted with officers and directors of the Company and a charge to shareholders' equity, as a capital distribution, for the discount relating to the remaining portion of the equity financings. Under US GAAP, loss and capital distributions for the 2005 fiscal year would increase by $12,144 (2004 - $15,503; 2003 - $nil) and $966,502 (2004 - $206,497; 2003 - $nil), respectively, and share capital, as at August 31, 2005, would increase by $2,162,048 (2004 - $1,183,402; 2003 - $961,402). There is no net change to shareholders' equity. (iv) Settlement with Related Parties US GAAP requires that gains on settlement of advances with related parties be credited to deficit. There is no net change in shareholders' equity. (v) Functional Currency The Company's functional currency is the Canadian dollar. (vi) Asset Retirement Obligations On September 1, 2003, the Company adopted SFAS 143 - Asset Retirement Obligations ("SFAS 143") for US GAAP reporting purposes. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The liability is capitalized as part of the related long-lived asset's carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. The Company's asset retirement obligations relate primarily to the plugging, dismantlement, removal, site reclamation and similar activities of its petroleum and natural gas interests. Prior to adoption of SFAS 143, such obligations were accrued ratably over the productive lives of the assets through its depreciation, depletion and amortization of petroleum and natural gas interests without recognizing a separate liability for such amounts. At the time of adoption, during the 2003 fiscal year, total assets and total liabilities increased by $7,500. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of petroleum and natural gas, future inflation rates and the credit-adjusted risk free interest rate. During the 2004 fiscal year, the petroleum and natural gas interest was sold and the asset retirement obligation was settled. Changes in asset retirement obligations during the 2004 and 2003 fiscal years were: -8-
2004 2003 $ $ Asset retirement obligations, beginning of year 7,900 - Liabilities incurred - 7,500 Liabilities settled (7,900) - Accretion expense (included in depreciation) - 400 ------------ ------------ Asset retirement obligation, end of year - 7,900 Less: current portion - - ------------ ------------ Long-term portion - 7,900 ============ ============
On September 1, 2004, the Company adopted Section 3110 "Asset Retirement Obligations" of the CICA Handbook, which is harmonious with SFAS 143. As such, there is no longer a US GAAP difference. (vii) Canadian Flow-Through Shares During the 2005 fiscal year, the Company issued 4,626,364 flow-through common shares for gross proceeds of $4,395,046. Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with Canadian income tax legislation. Under Canadian GAAP, the flow-through shares are recorded at their face value when issued and the renunciation of such expenditures is accounted for as a financing cost related to the flow- through issuance and results in a reduction of share capital with a corresponding increase in the Company's future income tax liability. US GAAP requires that the proceeds from issuance should be allocated between the offering of shares and the sale of tax benefits. The allocation is made between the quoted price of the existing shares and the amount the investor pays for the shares. A liability is recognized for this difference. This liability is reversed when tax benefits are renounced and a deferred tax liability is recognized at that time. Income tax expense is the difference between the amount of the deferred tax liability and the liability recognized on issuance. Under US GAAP loss for the 2005 fiscal year and share capital as at August 31, 2005, would increase by $1,103,364. There is no net change in shareholders' equity. (viii) Capitalization of Dividend on Redeemable Preferred Shares As part of the Duport Property acquisition, the Company issued mandatory redeemable preferred shares. Due to the characteristics of these preferred shares, for both Canadian and US GAAP, the preferred shares are accounted for as liabilities. Under Canadian GAAP, dividends paid on shares accounted for as liabilities should be disclosed as interest rather than as a charge to capital. As such, the Company has decided to capitalize the dividends paid as a carrying cost directly attributable to the unproven mineral interest. Under US GAAP, SFAS 34 - Capitalization of Interest Cost ("SFAS 34") lists assets qualifying for interest capitalization. The exploration of unproven mineral interests does not qualify. As such, $41,667 of capitalized dividends on redeemable preferred shares would be separately charged to earnings. There is no net change to net loss under US GAAP. (ix) Development Stage Company The Company is in the exploration stage and, as of July 1, 2004, is considered a development stage company as defined by SFAS 7. To August 31, 2005, the Company has accumulated a deficit of $25,662,242 while in the development stage. The Company's consolidated statements of cash flow comply with US GAAP. -9- New Technical Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued its final standard on accounting for employee stock options, SFAS No. 123 (Revised 2004) - Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) replaces SFAS No. 123 - Accounting for Stock-Based Compensation ("SFAS 123"), and supersedes APB 25 - Accounting for Stock Issued to Employees. SFAS 123(R) requires companies to measure compensation costs for all share-based payments, including grants of employee stock options, based on the fair value of the awards on the grant date and to recognize such expense over the period during which an employee is required to provide services in exchange for the award. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. SFAS 123(R) is effective for all awards granted, modified, repurchased or cancelled after, and to unvested portions of previously issued and outstanding awards vesting after, interim or annual periods, beginning after December 15, 2005, which for the Company will be the second quarter of fiscal 2006. This Company is currently evaluating the effect of adopting SFAS 123(R) on our financial position and results of operations. The Company currently estimates the adoption of SFAS 123(R) will result in expenses in amounts that are similar to the current pro forma disclosures under SFAS 123. The FASB has also issued SFAS No. 153 - Exchange of Non-Monetary Assets ("SFAS 153") which is effective for fiscal years ending after June 15, 2005. SFAS 153 refines the circumstances under which non-monetary transactions should be accounted for at fair value. The adoption of SFAS 153 is not expected to have an effect on the Company's financial position. The FASB has also issued SFAS No. 154 - Accounting Changes and Error Corrections - - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which is effective for fiscal years ending after December 15, 2005. SFAS 154 requires that changes in accounting policy be accounted for on a retroactive basis. The adoption of SFAS 154 is not expected to have an effect on the Company's financial position. EXCHANGE RATE HISTORY The following table sets forth the average exchange rate for one Canadian dollar expressed in terms of one US dollar for the fiscal years ended August 31, 2005, 2004, 2003, 2002 and 2001. ----------------------------------------------------------- PERIOD AVERAGE ----------------------------------------------------------- September 1, 2004 - August 31, 2005 0.8160 September 1, 2003 - August 31, 2004 0.7518 September 1, 2002 - August 31, 2003 0.6767 September 1, 2001 - August 31, 2002 0.6355 September 1, 2000 - August 31, 2001 0.6537 The following table sets forth high and low exchange rates for one Canadian dollar expressed in terms of one US dollar for the six-month period ended February 28, 2006. ---------------------------------------------------------- MONTH HIGH LOW ---------------------------------------------------------- February 2006 0.8788 0.8638 January 2006 0.8744 0.8526 December 2005 0.8690 0.8521 November 2005 0.8579 0.8361 October 2005 0.8579 0.8413 September 2005 0.8615 0.8418 Exchange rates are based upon the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The noon rate of exchange on February 28, 2006, reported by the United States Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars was CDN $1.1379 (US $0.8788 = CDN $1.00). -10- RISK FACTORS The Company has, in the past, conducted business primarily in the petroleum and natural gas industry. As of the date of this annual report, the Company no longer is active in this industry. The Company currently owns or has an interest in three projects which will result in the Company conducting mineral exploration activities. See "Item 4. Information on the Company - Principal Properties". The following risk factors apply to the Company's mineral exploration activities. THE COMPANY HAS LIMITED FINANCIAL RESOURCES AND IF THE COMPANY IS UNABLE TO SECURE ADDITIONAL FUNDING AND/OR IF THE COMPANY'S EXPLORATION PROGRAMS ARE UNSUCCESSFUL, THE COMPANY MAY FAIL. Mineral exploration involves significant risk and few properties that are explored are ultimately developed into producing mines. Substantial expenditures may be required to establish ore reserves through drilling, to develop metallurgical processes to extract the metals from the ore and to construct the mining and processing facilities at any site chosen for mining. The Company's proposed exploration programs may not result in any commercial mining operation. The Company's interests relate to unproved mineral claims which are without a known body of commercial ore and the proposed programs are an exploratory search for ore. The Company intends to carry out exploration with the objective of establishing an economic body of ore. If the Company's proposed exploration programs are successful, additional funds will be required for the development of an economic ore body and to place it into commercial production. The only sources of future funds presently available to the Company are the sale of equity capital, the exercise of warrants and options or the offering by the Company of an interest in the mineral claim to be earned to another party or parties. If the Company is unable to secure additional funding, the Company may lose its interest in one or more of its mineral claims and/or may be required to cease operations. IT IS UNLIKELY THAT ANY OF THE PROPERTY INTERESTS OWNED BY THE COMPANY WILL CONTAIN "RESERVES"; THEREFORE, IT IS LIKELY THAT THE FUNDS SPENT BY THE COMPANY ON ITS EXPLORATION ACTIVITIES WILL BE LOST. All of the Company's property interests are in the exploration stage and do not contain any "reserves", as that term is defined in Industry Guide 7 adopted by the SEC. The term "reserves" is defined in Industry Guide 7 as "that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination." Industry Guide 7 is available from the SEC's website at HTTP://WWW.SEC.GOV/DIVISIONS/CORPFIN/forms/ industry.htm#secguide7. Mineral exploration involves significant risk and few properties that are explored are ultimately developed into producing mines. The probability of an individual prospect ever having reserves that meet the requirements of Industry Guide 7 is extremely remote. The Company's property interests, in all probability, do not contain any reserves and any funds spent on exploration of the Company's property interests will probably be lost. If any of the Company's exploration programs are successful, the Company will require additional funds to advance the property beyond the exploration stage. Substantial expenditures are required to establish reserves through drilling, to develop metallurgical processes to extract the metal from the ore and, in the case of new properties, to develop the mining and processing facilities and infrastructure at any site chosen for mining. If the Company is unable to secure additional funding, the Company may lose its interest in one or more of its mineral claims and/or may be required to cease all activities. IF THE COMPANY ISSUES SHARES OR OPTIONS TO ITS OFFICERS, DIRECTORS OR KEY EMPLOYEES, OR IF THE COMPANY OBTAINS FUNDING THROUGH THE SALE OF ADDITIONAL COMMON SHARES, THE SHAREHOLDERS WILL EXPERIENCE DILUTION. The Company may in the future grant to some or all of its directors, officers, insiders and key employees options to purchase the Company's common shares as non-cash incentives to those employees. Such options may be granted at exercise prices equal to market prices, or at prices as allowable under the policies of the TSX Venture Exchange ("TSXV"), when the public market is depressed. To the extent that significant numbers of such options may be granted and exercised, the interests of then existing shareholders of the Company will be subject to additional dilution. The Company is currently without a source of revenue and will most likely be required to issue additional shares to settle its debentures, to pay the interest on the preferred stock and/or to redeem or retract the preferred stock issued in connection with the Duport Property acquisition, to make any bonus payments in connection with the Bachelor Lake transaction, to finance its activities and, depending on the outcome of its proposed exploration programs, may issue additional shares to finance additional exploration programs on any or all of its projects or to acquire additional properties. The issuance of additional shares will cause the Company's existing shareholders to experience dilution of their ownership interests. -11- THE PRICE OF THE COMPANY'S COMMON SHARES IS SUBJECT TO MARKET FLUCTUATIONS AND VOLATILITY WHICH MAY NOT BE RELATED TO THE COMPANY'S OPERATIONS AND SUCH FLUCTUATIONS MAY IMPACT THE COMPANY'S ABILITY TO COMPLETE EQUITY FINANCINGS; IF THE COMPANY CANNOT COMPLETE ADDITIONAL EQUITY FINANCINGS, IT MAY NOT BE ABLE TO CONTINUE ITS OPERATIONS. In recent years, the securities markets in Canada have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly junior natural resources exploration companies, have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. In particular, the per share price of the Company's common shares fluctuated from a low of $0.38 to a high of $1.59 during the 12-month period ending February 28, 2006. Continued price fluctuations will have a significant impact on the Company's ability to complete equity financings. THE COMPANY'S OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS WHICH MAY SUBJECT THE COMPANY TO PENALTIES FOR FAILURE TO COMPLY AND MAY LIMIT THE COMPANY'S ABILITY TO CONDUCT EXPLORATION ACTIVITIES AND COULD CAUSE THE COMPANY TO DELAY OR ABANDON ITS PROJECTS. Exploration activities are also subject to national and local laws and regulations governing prospecting, taxes, labor standards, occupational health, land use, environmental protection, mine safety, and others which currently or in the future may have a substantial adverse impact on the Company. In order to comply with applicable laws, the Company may be required to make capital expenditures until a particular problem is remedied. Existing and possible future environmental legislation, regulation and action could cause additional expense, capital expenditures, restriction and delays in the activities of the Company, the extent of which cannot be reasonably predicted. Violators may be required to compensate those suffering loss or damage by reason of their mining activities and may be fined if convicted of an offence under such legislation. Amendments to current laws, regulations and permits governing activities of mineral exploration companies or more stringent implementation thereof could require increases in exploration expenditures, or require delays in exploration or abandonment of new mineral properties. The Company's proposed exploration activities may be subject to federal, provincial and local laws and regulations governing the protection of the environment, including laws and regulations relating to air and water quality, waste disposal, and the protection of endangered or threatened species. The Company may be required to obtain pre-construction environmental and land use review and comply with permitting, control and mitigation requirements of the jurisdictions in which the projects are located. Compliance with these requirements could impose costs on the Company in the future, the materiality of which cannot reasonably be predicted at this time. Any change in the applicable laws or regulations could have an adverse effect on any project in which the Company might have an interest. Also, the Company may require additional permits for its future operations, which may or may not be obtainable on reasonable terms. It is unlikely that the Company will not be able to obtain the required permitting. If the permitting process becomes extended the Company may be required to obtain additional financial resources. If the Company is unable to obtain the necessary permits, the Company might have to change its planned exploration for such non-permitted properties and/or to seek other joint venture arrangements. If the Company were unable to mitigate the problem, the Company might not be able to proceed with exploration. In this event, the Company might seek to mitigate any losses through sale of the property, prior to abandonment. BECAUSE THE COMPANY IS SUBJECT TO COMPLIANCE WITH GOVERNMENTAL REGULATION, THE COST OF ITS PROPOSED EXPLORATION PROGRAMS MAY INCREASE, WHICH MAY CAUSE THE COMPANY TO HAVE TO ABANDON SUCH PROGRAMS. The Company's activities will be subject to environmental regulations promulgated by government agencies from time to time. Environmental legislation provides for restrictions and prohibitions on spills, releases or emissions of various substances produced in association with certain mining industry operations, such as seepage from tailings disposal areas, which would result in environmental pollution. A breach of such legislation may result in the imposition of fines and penalties. In addition, certain types of operations require the submission and approval of environmental impact assessments. Environmental legislation is evolving in a manner which means stricter standards, and enforcement, fines and penalties for non-compliance are more stringent. Environmental assessments of proposed projects carry a heightened degree of responsibility for companies and directors, officers and employees. The cost of compliance with changes in governmental regulations has a potential to reduce the profitability of operations. -12- EXPLORATION FOR MINERALS ON THE COMPANY'S PROJECTS IS SUBJECT TO SIGNIFICANT RISKS WHICH COULD INCREASE THE COSTS OF EXPLORATION AND COULD CAUSE THE COMPANY TO DELAY OR ABANDON ITS PROJECTS. The Company's projects are without a known ore body of commercial ore and its proposed programs are exploratory in nature. Mineral exploration involves a high degree of risk and few properties which are explored are ultimately developed into producing mines. The long-term profitability of the Company's activities will be, in part, directly related to the cost and success of its proposed exploration programs, which may be affected by a number of factors beyond the Company's control. Mineral exploration involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Operations in which the Company has a direct or indirect interest will be subject to all the hazards and risks normally incidental to exploration for gold (also "Au"), and other metals, any of which could result in work stoppages, damage to property, and possible environmental damage. The Company will rely upon consultants and others for exploration expertise. If any of the Company's property interests or option interests merit development, substantial expenditures will be required to advance the projects beyond the exploration stage. The Company may not discover minerals in sufficient quantities to justify commercial operations and the Company may not be able to obtain the funds required for its activities on a timely basis. The economics of exploring for gold, silver and other mineral properties is affected by many factors including the cost of operations, variations in the grade of ore, fluctuations in metal markets, costs of processing equipment and such other factors as government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals and environmental protection. THE COMPANY MAY INCUR LIABILITY FOR CERTAIN RISKS AGAINST WHICH THE COMPANY DOES NOT HAVE INSURANCE, WHICH COULD REDUCE OR ELIMINATE ANY FUTURE PROFITABILITY AND NEGATIVELY IMPACT THE PRICE OF THE COMPANY'S SHARES. In the course of exploration of mineral concessions, certain risks, and in particular, unexpected or unusual geological operating conditions including rock bursts, cave-ins, fires, flooding and earthquakes may occur. It is not always possible to fully insure against such risks and the Company may decide not to take out insurance against such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the securities of the Company. The Company currently does not have any insurance coverage on its property holdings or its mineral option interests. THE COMPANY (OR THE OPTIONOR OF THE PROPERTY) MAY NOT HAVE PROPER TITLE TO ITS PROPERTIES AND, AS A RESULT, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO OBTAIN PROPER TITLE, OR MAY HAVE TO ABANDON ANY SUCH PROPERTIES. The Company owns and has under option, unpatented and patented mining claims, mineral claims or concessions which constitute the Company's property holdings. The ownership and validity of unpatented mining claims and concessions are often uncertain and may be contested. In those jurisdictions where the Company has property interests, the Company makes a search of mining records in accordance with mining industry practices to confirm that it has acquired, or upon exercise of any option, can acquire, satisfactory title to the properties but does not intend to obtain title insurance with respect to such properties. The possibility exists that title to one or more of the concessions in which the Company has an interest, particularly title to undeveloped claims, might be defective because of errors or omissions in the chain of title, including defects in conveyances and defects in locating or maintaining such claims, or concessions. The boundaries of some of the Company's property interests have not been surveyed and, therefore, the precise location and area of these mining properties may be in doubt. The Company is not aware of challenges to the location or area of the unpatented mining claims in which the Company has acquired an interest. IF THE COMPANY IS UNABLE TO EFFECTIVELY COMPETE AGAINST OTHER COMPANIES, OR IF THE COMPANY CANNOT MARKET ANY MINERALS DISCOVERED ON THE PROPERTIES IN WHICH THE COMPANY HAS AN INTEREST, THE COMPANY MAY HAVE TO CEASE OPERATIONS. The mineral industry is intensely competitive in all its phases. The Company competes with many companies possessing greater financial resources and technical facilities than itself for the acquisition of mineral concessions, claims, leases and other mineral interests as well as for the recruitment and retention of qualified employees. -13- Factors beyond the control of the Company may affect the marketability of any substances discovered. These factors include market fluctuations, the proximity and capacity of natural resource markets and processing equipment, government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in the Company not receiving an adequate return on invested capital or losing its investment capital. CONFLICTS OF INTEREST MAY ARISE AMONG THE MEMBERS OF OUR BOARD OF DIRECTORS AND SUCH CONFLICTS MAY CAUSE THE COMPANY TO ENTER INTO TRANSACTIONS ON TERMS WHICH ARE NOT BENEFICIAL TO THE COMPANY. Several of the Company's directors are also directors, officers or shareholders of other companies. Some of the directors and officers are engaged and will continue to be engaged in the search for additional business opportunities on behalf of other corporations, and situations may arise where these directors and officers will be in direct competition with the Company. Such associations may give rise to conflicts of interest from time to time. Such a conflict poses the risk that the Company may enter into a transaction on terms which could place the Company in a worse position than if no conflict existed. Conflicts, if any, will be dealt with in accordance with the relevant provisions of the BUSINESS CORPORATIONS ACT (British Columbia) (the "BCBCA"). The directors of the Company are required by law to act honestly and in good faith with a view to the best interests of the Company and to disclose any interest which they many have in any project or opportunity of the Company. However, each director has a similar obligation to other companies for which such director serves as an officer or director. In order to avoid the possible conflict of interest which may arise between the directors' duties to the Company and their duties to the other companies on whose boards they serve, the directors and officers of the Company have agreed to the following: 1. participation in other business ventures offered to the directors will be allocated between the various companies and on the basis of prudent business judgment and the relative financial abilities and needs of the companies to participate; 2. no commissions or other extraordinary consideration will be paid to such directors and officers; and 3. business opportunities formulated by or through other companies in which the directors and officers are involved will not be offered to the Company except on the same or better terms than the basis on which they are offered to third party participants. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". As of the date of this annual report all material conflicts of interests which have arisen since September 1, 2003, have been described in "Item 7. Major Shareholders and Related Party Transactions." If a conflict of interest arises at a meeting of the board of directors, any director in a conflict will disclose his interest and abstain from voting on such matter, and the minutes of the meeting will reflect such disclosure and abstention from voting. In determining whether or not the Company will participate in any project or opportunity, the board of directors will primarily consider the degree of risk to which the Company may be exposed and its financial position at that time. THE PRICES OF METALS FLUCTUATE IN THE MARKET AND SUCH FLUCTUATIONS COULD NEGATIVELY IMPACT THE COMPANY'S ABILITY TO RAISE FUNDING AND MAY CAUSE CERTAIN ACTIVITIES TO BECOME UNECONOMIC. Factors beyond the control of the Company may affect the marketability of any substances discovered. The prices of various metals have experienced significant movement over short periods of time, and are affected by numerous factors beyond the control of the Company, including international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates and global or regional consumption patterns, speculative activities and increased production due to improved mining and production methods. The supply of and demand for metals are affected by various factors, including political events, economic conditions and production costs in major mineral producing regions. Variations in the market prices of metals may impact on the Company's ability to raise funding to conduct exploration of its properties. In addition, any significant fluctuations in metal prices will impact on the Company's decision to accelerate or reduce its proposed exploration activities. -14- THE COMPANY DOES NOT PAY DIVIDENDS ON ITS COMMON SHARES; THEREFORE, INVESTORS SEEKING DIVIDEND INCOME SHOULD NOT PURCHASE THE COMMON SHARES. The Company has never declared or paid cash dividends on its common shares and does not anticipate doing so in the foreseeable future. Additionally, the determination as to the declaration of dividends is within the discretion of the Company's Board of Directors, which may never declare cash dividends on the Company's common stock. Investors cannot expect to receive a dividend on the Company's common shares in the foreseeable future, if at all. THE COMPANY IS DEPENDENT UPON ITS MANAGEMENT AND THE LOSS OF ANY OF ITS MANAGEMENT AND/OR IF THE COMPANY IS UNABLE TO RECRUIT ADDITIONAL MANAGERS COULD NEGATIVELY IMPACT THE COMPANY'S ABILITY TO CONTINUE ITS OPERATIONS. The success of the operations and activities of the Company is dependent to a significant extent on the efforts and abilities of its key officers, Mr. Marc Cernovitch, a director, President, and Chief Executive Officer of the Company, Mr. Nick DeMare, Chairman and Chief Financial Officer of the Company and Mr. Tom Healy, a director, Senior Vice-President and Chief Operating Officer for the Company. The loss of services of Messrs. DeMare, Cernovitch or Healy, respectively, could have a material adverse effect on the Company. The Company has not obtained key-man life insurance on any of its officers or directors. The Company's ability to recruit and retain highly qualified management personnel is critical to its success; if it is unable to do so this may materially affect the Company's financial performance. THE MAJORITY OF THE COMPANY'S CURRENT CORPORATE OPERATIONS ARE PERFORMED BY OTHER THAN COMPANY PERSONNEL AND IF SUCH PERSONNEL ARE NOT AVAILABLE IN THE FUTURE, THE COMPANY MAY INCUR SIGNIFICANT EXPENSES TO FIND SUITABLE REPLACEMENTS AND/OR TO HIRE OTHER PERSONNEL. Corporate accounting, management and administration are provided, in part, by Chase Management Ltd. ("Chase"), a company owned by Mr. Nick DeMare, Chairman and Chief Financial Officer of the Company. In the event the Company needs to employ additional personnel, it will need to recruit qualified personnel to staff its operations. The Company believes that such personnel currently are available at reasonable salaries and wages in the geographic areas in which the Company operates. There can be no assurance, however, that such personnel will be available in the future. In addition, it cannot be predicted whether the labor staffing at any of the Company's projects will be unionized, which may result in potentially higher operating costs. THE COMPANY'S SHARES ARE SUBJECT TO THE SEC'S PENNY STOCK RULES, WHICH MAY RESTRICT THE ABILITY OF BROKERS TO SELL THE COMPANY'S COMMON STOCK AND MAY REDUCE THE SECONDARY MARKET FOR THE COMMON STOCK. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stock". Generally, penny stocks are equity securities with a price of less than US $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). If the Company's shares are traded for less than US $5 per share, as they currently are, the shares will be subject to the SEC's penny stock rules unless (1) the Company's net tangible assets exceed US $5,000,000 during the Company's first three years of continuous operations or US $2,000,000 after the Company's first three years of continuous operations; or (2) the Company has had average revenue of at least US $6,000,000 for the last three years. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prescribed by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Since the Company's shares are traded for less than US $5.00 per share, the Company's common stock is subject to the penny stock rules. Therefore, the holders of the common stock may find it difficult to sell the common stock of the Company. These rules may restrict the ability of brokers to sell the common stock and may reduce the secondary market for the common stock. A limited secondary market may result in a decrease in the value of the shares and/or a partial or total loss of an investor's investment. -15- THE COMPANY AND/OR ITS SUBSIDIARIES (IF ANY) MAY BE DEEMED TO BE A "PASSIVE FOREIGN INVESTMENT COMPANY" FOR U.S. TAX PURPOSES WHICH COULD SUBJECT U.S. SHAREHOLDERS TO INCREASED TAX LIABILITY. The Company and/or its subsidiaries may be deemed to be a "Passive Foreign Investment Company". See "Item 10. Additional Information - Taxation." If the Company or any of its subsidiaries is deemed to be a Passive Foreign Investment Company, a United States holder of the Company's common shares would be required to pay an interest charge together with tax calculated at maximum tax rates on certain "excess distributions" (defined to include certain dividends from a Passive Foreign Investment Company and any gain on the sale of stock of a Passive Foreign Investment Company) unless such holder made an election either to (1) include in his or her taxable income his or her pro rata share of the Passive Foreign Investment Company's ordinary earnings and net capital gains under the Qualified Electing Fund rules or (2) mark to market his or her Company common shares at the end of each taxable year as set forth in Section 1296 of the Internal Revenue Code of 1986, as amended. The elections require certain conditions be met such as filing on or before the due date, as extended, for filing the shareholder's income tax return for the first taxable year to which the election will apply. THIS ANNUAL REPORT CONTAINS STATEMENTS ABOUT FUTURE EVENTS AND RESULTS WHICH MAY NOT BE ACCURATE. Statements contained in this annual report that are not historical facts are forward-looking statements that involve risks and uncertainties. Such statements may not prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Without limiting the generality of the foregoing, such risks and uncertainties include interpretation of results and geology, results of pre-feasibility and feasibility studies, recovery, accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in production, delays in exploration activities, the inherent uncertainty of production fluctuations and failure to obtain adequate financing on a timely basis. INVESTORS IN THE UNITED STATES MAY NOT BE ABLE TO ENFORCE THEIR CIVIL LIABILITIES AGAINST THE COMPANY OR ITS DIRECTORS AND OFFICERS. It may be difficult to bring and enforce suits against the Company. The Company is a corporation domiciled in British Columbia. None of the Company's directors and officers are residents of the United States, and all or a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for U.S. holders of the Company's common shares to effect service of process on these persons within the United States or to enforce judgments obtained in the U.S. based on the civil liability provisions of the U.S. federal securities laws against the Company or its officers and directors. In addition, a shareholder should not assume that the courts of Canada (i) would enforce judgments of U.S. courts obtained in actions against the Company, its officers or directors predicated upon the civil liability provisions of the U.S. federal securities laws or other laws of the United States, or (ii) would enforce, in original actions, liabilities against the Company, its officers or directors predicated upon the U.S. federal securities laws or other laws of the United States. However, U.S. laws would generally be enforced by a Canadian court provided that those laws are not contrary to Canadian public policy, are not foreign penal laws or laws that deal with taxation or the taking of property by a foreign government and provided that they are in compliance with applicable Canadian legislation regarding the limitation of actions. Also, a judgment obtained in a U.S. court would generally be recognized by a Canadian court except, for example: a) where the U.S. court where the judgment was rendered had no jurisdiction according to applicable Canadian law; b) the judgment was subject to ordinary remedy (appeal, judicial review and any other judicial proceeding which renders the judgment not final, conclusive or enforceable under the laws of the applicable state) or not final, conclusive or enforceable under the laws of the applicable state; c) the judgment was obtained by fraud or in any manner contrary to natural justice or rendered in contravention of fundamental principles of procedure; d) a dispute between the same parties, based on the same subject matter has given rise to a judgment rendered in a Canadian court or has been decided in a third country and the judgment meets the necessary conditions for recognition in a Canadian court; -16- e) the outcome of the judgment of the U.S. court was inconsistent with Canadian public policy; f) the judgment enforces obligations arising from foreign penal laws or laws that deal with taxation or the taking of property by a foreign government; or g) there has not been compliance with applicable Canadian law dealing with the limitation of actions. ITEM 4. INFORMATION ON THE COMPANY. - -------------------------------------------------------------------------------- HISTORY AND DEVELOPMENT OF THE COMPANY NAME AND INCORPORATION The Company was incorporated under the laws of British Columbia, Canada, under the name of Golden Chance Resources Inc. on June 16, 1983. On October 15, 1990, the Company's name was changed to Trimark Resources Ltd. On December 14, 1993, the Company was continued under the BUSINESS CORPORATIONS ACT (Yukon Territory). On the continuance the Company changed its authorized capital into "unlimited common shares without par value." On December 13, 1996, the Company's name was changed to International Trimark Resources Ltd. On June 16, 1997, the Company changed its name to Trimark Oil & Gas Ltd. On March 21, 2002, the Company changed its name to Trimark Energy Ltd. On February 23, 2004, the Company changed its name to its current name, Halo Resources Ltd. On March 29, 2004, the British Columbia legislature enacted the BCBCA and repealed the BC Company Act. At the Company's special meeting of shareholders held on November 2, 2004, the Company received shareholder approval to continue its corporate jurisdiction into British Columbia under the BCBCA. See "Item 10. Additional Information - Memorandum and Articles of Association". Effective November 16, 2004, the Company changed its domicile through continuation from the Yukon Territory to British Columbia under the BCBCA. The primary market for the Company's common stock is the TSXV, which classifies listed companies into two different tiers based on standards, which include historical financial performance, stage of development, and financial resources of the listed company. Tier 1 is the TSXV's premier tier and is reserved for the TSXV's most advanced issuers with the most significant financial resources. Tier 1 issuers benefit from decreased filing requirements and improved service standards. The majority of the companies listed on the TSXV are Tier 2 companies. The Company trades on the TSXV under the symbol "HLO" and is classified as a Tier 2 company. Effective November 23, 2005, the Company's Series A Warrants and Series B Warrants were listed and posted for trading on the TSXV under the symbols "HLO.WT.A" and "HLO.WT.B", respectively. Effective August 7, 2000, the Company's common stock was listed for quotation on the Over-the-Counter Bulletin Board (the "OTC Bulletin Board") operated by the National Association of Securities Dealers, where it currently trades under the symbol "HLOSF.OB". In addition, since February 2005, the Company's common stock has been listed on the Frankfurt Stock Exchange ("FSE") and XETRA (Electronic Dealing System) under the trading symbol "HRL". The Company's executive and principal business office is located at Suite 1280, 625 Howe Street, Vancouver, British Columbia, V6C 2T6. The contact person is Marc Cernovitch, President and Chief Executive Officer of the Company. The telephone number is (604) 484-0068 and the facsimile number is (604) 484-0069. The Company's registered office is located at Suite 1305, 1090 West Georgia Street, Vancouver, British Columbia, V6E 3V7. The Company does not have a registered agent in the United States. BUSINESS OVERVIEW Beginning October 1990, the Company was active in the business of acquiring, exploring and developing oil and gas prospects in the United States. Over the past years the Company's main focus were its interests in the East Lost Hills Joint Venture and the San Joaquin Joint Venture. These ventures were unsuccessful and the Company ceased participation in these activities in February 2002. During fiscal 2002, the Company also participated in the drilling -17- of an exploratory well in regional California. A side-track well was subsequently drilled and determined to be uneconomic. The well was plugged and abandoned in September 2002. Effective March 1, 2004, the Company sold its remaining interests in certain oil and gas leases in the West Ranch Field. The Company no longer holds any oil and gas interests, nor is it conducting any further activities in the oil and gas industry. On July 5, 2004, the Company entered into an agreement to acquire a 100% interest in the Duport Property (the "Duport HOA") with the Sheridan Platinum Group and Mr. Pat Sheridan (collectively, the "Sheridan Group"). Under the Duport HOA, the Company had the right to acquire a 100% interest in the property by paying $250,000 on closing, together with the issuance of one million common shares and $8 million in series 1 preferred shares (the "Series 1 Preferred Shares") and the grant of a 2.5% net smelter return royalty ("NSR") on the first 1.5 million ounces of gold produced and a 5% NSR on all amounts in excess thereof. The transaction received shareholder approval at the Company's November 2, 2004 special meeting of shareholders and the February 9, 2005 annual and special meeting of shareholders. The option was exercised pursuant to the execution of a definitive agreement between Halo and The Sheridan Group dated February 18, 2005 (the "Duport Agreement") and the transaction closed effective March 24, 2005. The Series 1 Preferred Shares have a term of five years and are subject to the dividend, redemption, retraction and voting privileges set forth below. See "Item 4. Information on the Company - Principal Properties". On November 12, 2004, the Company entered into an option agreement to earn a 50% interest in the Bachelor Lake Property with Wolfden Resources Inc. ("Wolfden"). A definitive agreement (the "Assignment and Assumption Agreement") was subsequently executed on April 15, 2005. Under the terms of the Assignment and Assumption Agreement, Wolfden assigned to the Company its option to earn a 50% interest in the Bachelor Lake Property from Metanor Resources Inc. ("Metanor") by paying to Wolfden an aggregate of $1,943,123 (comprised of $650,000 in acquisition costs and $1,293,123 in reimbursement of exploration expenditures) and issuing 2.1 million common shares subject to a 12-month contractual hold period. Upon securing project financing and the commencement of commercial production on the property resulting in a minimum of 50,000 ounces of gold or silver equivalent being produced, the Company will pay a bonus payment to Wolfden in the amount of $250,000 cash and 250,000 common shares. The Company has also agreed to pay Wolfden a net smelter return royalty of 0.5% on the Company's share of the net smelter return. The Company also assumed Wolfden's $3 million exploration funding commitment at Bachelor Lake. Effective May 18, 2005, the Company and Metanor entered into an agreement whereby Metanor acknowledged the Assignment and Assumption Agreement and the terms of the underlying option agreement on the Bachelor Lake Property were amended. Under the amendment, the Company could exercise its option to earn the 50% interest in the Bachelor Lake Property by spending a minimum of $500,000 of exploration on the Bachelor Lake Property and paying $100,000 to Metanor. All of the required exploration funding has subsequently been expended. On September 21, 2005, the Company exercised its option and paid $100,000 to Metanor. The Company and Metanor subsequently executed a definitive joint venture agreement (the "Bachelor Lake JV Agreement") setting forth the terms and conditions governing the relationship between the parties and providing for the means by which each of them shall participate in the exploration, development and mining activities on the Bachelor Lake Property dated July 1, 2005. See "Item 4. Information on the Company - Principal Properties". On February 9, 2005, the Company signed a letter of intent (the "Quarter Moon LOI") with Endowment Lakes (2002) Limited Partnership ("Endowment Lakes") granting the Company the option to earn up to an 80% interest in the Quarter Moon Lake Gold Property in north-central Manitoba. Under the Quarter Moon LOI, the Company was granted the right to acquire an initial 51% interest in the property by paying $40,000 and issuing 50,000 common shares upon regulatory approval of the transaction, completing a $250,000 minimum work commitment in the first year, paying a further $40,000 and issuing 50,000 common shares on the first anniversary and completing a further $300,000 minimum work commitment in the second year. The Company was granted the further option to earn an additional 29% interest by completing an additional $1.5 million in exploration and development over a subsequent two year period and paying an additional $40,000 and issuing 50,000 common shares on or before the third anniversary of the Quarter Moon LOI. The Company is responsible for advancing the property to production and will recover all costs out of production prior to sharing in profits on an 80:20 basis. Endowment Lakes will hold a 1% net smelter returns royalty on production from the property which may be purchased at any time by the Company for $1 million. See "Item 4. Information on the Company - Principal Properties". During the period from October 14 to November 30, 2005, the Company staked and submitted for recording a total of 51 mining claims comprising approximately 9,500 hectares in the Sherridon area in north-central Manitoba (the "Sherridon Property"). The claims were subsequently accepted by the Mining Recorder's office. The claims are located approximately 70 kilometres north of Flin Flon Manitoba in the immediate vicinity of the historic Sherritt Gordon Mine and also -18- the Quarter Moon Lake Gold Property where the Company has an option to acquire an 80% interest in five additional claims bringing the total in the area to 56 claims and 10,972 hectares. See "Item 4. Information on the Company - Principal Properties". On December 23, 2004, the Company completed a brokered private placement whereby it issued 4,317,951 flow-through units at a price of $0.95 per flow-through unit and 2,673,530 non flow-through units at a price of $0.85 per unit for aggregate gross proceeds of $6.4 million. Each flow-through unit was comprised of one flow-through common share and one-half of one common share purchase warrant (each whole warrant a "Series A Warrant"), with each Series A Warrant exercisable to purchase one additional non flow-through common share for a period of two years at a price of $1.25 during the first year and $1.50 during the second year. Each non flow-through unit is comprised of one common share and one common share purchase warrant ("Series B Warrant") exercisable to purchase one additional common share for a period of two years at a price of $1.10 during the first year and $1.35 during the second year. The proceeds were used for exploration and development and for general corporate purposes. On January 20, 2005, the Company issued an additional 151,834 flow-through units and 25,000 non flow-through units on a non-brokered private placement basis on substantially similar terms as described above for aggregate gross proceeds of $165,492. On February 3, 2005, the Company completed a further non-brokered private placement of 131,579 flow-through units at a price of $0.95 per unit on substantially similar terms as described above for aggregate gross proceeds of $125,000. On September 14, 2005, the Company completed a non-brokered private placement whereby it issued 2,319,642 flow-through common shares at $0.70 per share and 1,675,500 non flow-through units at $0.60 per share, for aggregate gross proceeds of $2,629,049. Each unit was comprised of one common share and one common share purchase warrant exercisable to purchase one additional common share for a period of two years at a price of $0.70. On September 29, 2005, the Company issued an additional 973,428 flow-through common shares and 304,666 units on substantially similar terms as described above for aggregate gross proceeds of $864,200. DISPOSITIONS During fiscal 2005, the Company did not conduct any disposition of its unproven mineral interests. During fiscal 2004, the Company sold its 3% working interest in the West Ranch Field for $78,630. On August 31, 2004, the Company formally abandoned its investments in its wholly-owned subsidiaries, Safari Petroleum LLC ("Safari") and TMK Oil and Gas Inc. ("TMK"). Both of these companies were inactive at the time of abandonment. During fiscal 2003, the Company wrote-off its net investment in its wholly-owned subsidiary, Trimark Resources Inc. ("Trimark Inc."), which held substantially all of the Company's petroleum and natural gas interests at that time. Accordingly, it recorded a net charge of $1,240,794 for depreciation, depletion and impairment to reflect the abandonment of Trimark Inc. EXPLORATION EXPENDITURES During fiscal 2005, the Company incurred $17,690,832 for mineral property acquisition costs and $4,992,595 for exploration on the unproven mineral properties. During fiscal 2004, the Company incurred $75,906 for mineral property acquisition costs and $23,935 for development of petroleum interests. During fiscal 2003 the Company incurred $319,757 on the acquisition, exploration and development of its petroleum interests. No mineral property acquisitions or exploration expenditures were made in fiscal 2003. 2006 EXPLORATION BUDGET The total staged work programs for the Company's mineral exploration projects, as recommended by the NI 43-101 technical reports for the Duport, Bachelor Lake and Sherridon properties amount to approximately $11 million. Using these recommendations as a basis, the Company has budgeted total expenditures of approximately $2.5 million for the remainder of calendar 2006. The Company will assess the results of its 2006 exploration activities before committing to the balance of the recommended work programs -19- SALES AND REVENUE DISTRIBUTION As of the date of this annual report, the Company has not generated any revenues from its mineral properties. The Company's share of petroleum, natural gas and natural gas liquids produced from its wells was sold to a variety of purchasers at the wellhead in the United States. All of its sales were conducted with unaffiliated customers. These purchasers provided a ready market for all of the Company's production and paid the local market price, which fluctuated based upon prevailing market conditions. Due to the number of purchasers in each area, the loss of one or a number of purchasers did not pose a significant risk to the continuity of the Company's operations. During fiscal 2004, the Company sold its remaining interest in oil and natural gas properties. As of the date of this annual report, the Company does not generate any petroleum, natural gas and natural gas liquids revenue. Total revenues, interest and other income reported for fiscal 2005, 2004 and 2003, were as follows: ($ IN 000) ------------------------------------ YEARS ENDED AUGUST 31, ------------------------------------ 2005 2004 2003 Petroleum and Natural Gas Sales - United States $ - $ 81 $ 45 ---------- ---------- ---------- Interest and Other Income - United States - - 23 - Canada 31 1 1 ---------- ---------- ---------- 31 1 24 ---------- ---------- ---------- Total Revenue, Interest and Other Income $ 31 $ 82 $ 69 ========== ========== ========== PRINCIPAL PROPERTIES DUPORT PROPERTY, ONTARIO The following information on the Duport Property is derived from the report dated January 31, 2006 entitled "Technical Report on the Duport Project, Northwest Ontario, Canada" (the "Duport Report") prepared by Roscoe Postle Associates Inc. ("RPA"). Each of the individuals who contributed to the Duport Report was, or was supervised by a Qualified Person Messrs. Graham C. Clow, P. Eng and Wayne W. Valliant, P. Geo were the Qualified Persons who authored the Duport Report. RPA prepared a previous NI43-101 report for the Duport Property dated November 8, 2004. The purpose of the updated Duport Report was to review the additional exploration data compiled in 2005, prepare a revised mineral resource estimate, and provide recommendations as to future work programs on the property. PROPERTY AGREEMENTS On July 5, 2004, the Company entered into an agreement to acquire a 100% interest in the Duport Property (the "Duport HOA") with the Sheridan Platinum Group and Mr. Pat Sheridan (collectively, the "Sheridan Group"). Under the Duport HOA, the Company had the right to acquire a 100% interest in the property by paying $250,000 on closing, together with the issuance of one million common shares and $8 million in series 1 preferred shares (the "Series 1 Preferred Shares") and the grant of a 2.5% net smelter return royalty ("NSR") on the first 1.5 million ounces of gold produced and a 5% NSR on all amounts in excess thereof. The transaction received shareholder approval at the Company's November 2, 2004 special meeting of shareholders and the February 9, 2005 annual and special meeting of shareholders. The option was exercised pursuant to the execution of a definitive agreement between Halo and The Sheridan Group dated February 18, 2005 (the "Duport Agreement") and the transaction closed effective March 24, 2005. The Series 1 Preferred Shares have a term of five years and are subject to the dividend, redemption, retraction and voting privileges set forth below. -20- PROPERTY DESCRIPTION AND LOCATION The Duport Property is located on Stevens Island in Shoal Lake. Shoal Lake is on the border of Ontario and Manitoba and is 45 km southwest of the City of Kenora. The Duport Property consists of 104 mineral claims over an area of approximately 5,201 hectares in the Kenora Mining Division. A significant amount of environmental work was carried out in the Duport Property area by a former owner of the property. AMEC Earth & Environmental ("AMEC") reviewed environmental aspects of the Duport Property in connection with an ongoing scoping study. AMEC and its predecessor companies have undertaken all previous major environmental studies associated with the property. The most important environmental considerations for the Duport Property relate to permitting, the application of progressive technologies to limit adverse environmental effects, considerations related to the Winnipeg water supply intake and cottage and other recreational developments and activities on Shoal Lake, First Nations and traditional land uses, the potential for spills and accidents, and reclamation at closure. The land use surrounding the Duport Property area is characterized by forestry activity and mineral exploration, two First Nations reserves situated near Indian Bay, and cottage recreation. Shoal Lake itself provides important resources including drinking water, fisheries, wild rice harvests, and recreation. The water supply intake for the City of Winnipeg is located in Indian Bay, in the western reaches of Shoal Lake. In RPA's opinion, the public perceptions concerning the Duport Property can be overcome through diligent and thorough technical studies combined with significant and detailed public information and consultation, including a special emphasis on gaining and maintaining the support of First Nations residents on Shoal Lake. The following map identifies the location of the Duport Property: [GRAPHIC OMITTED][GRAPHIC OMITTED][OBJECT OMITTED] Omitted Graphic is a Property Location Map of the Duport Property showing the property location in respect to Kenora, Red Lake, Pickle Lake Sioux Lookout, Thunder Bay, Timmins, Toronto,and Ottawa, Ontario ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY The Duport Property is accessed from Kenora, Ontario, west along the Trans-Canada Highway, a distance of 40 km, south by gravel road for 14 km, and then 8 km by boat. The property may also be reached by float-equipped aircraft. -21- The Shoal Lake area terrain is generally flat with numerous low rolling hills which are typical of glaciated Pre-Cambrian Shield areas. Overburden is thin and rock outcrop is abundant. The area is covered with growths of white spruce, balsam, white birch, and aspen. Ground cover varies according to slope and soil buildup. Cedar is abundant along the shorelines. The Shoal Lake area experiences long, cold winters and warm, humid summers. Mean daily temperatures range from -17.8(0)C in January to 19.6(0)C in July. Winter temperatures (December-February) range from -14.1(0)C to -17.8(0)C, with minimum mean daily temperatures occurring in January (-22.7(0)C). Average summer temperatures (June-August) range from 16(0)C to 20(0)C, with maximum mean daily temperatures reaching 24.7(0)C in July. Extremes of -43.9(0)C in January and 35.8(0)C in July have been recorded in Kenora. Total annual precipitation averages 632 mm of which 473 mm falls as rain and the remaining 159 mm (water equivalent) as snow. Snowfall occurs mostly from November to March. There are two First Nations communities with land holdings and residents on Shoal Lake - Iskutewisakaygun #39 Independent First Nation and Shoal Lake #40 First Nation. The First Nations residents collectively number approximately 700. In addition to the resident First Nations, two other First Nations have land holdings on Shoal Lake but do not reside there. HISTORY Exploration and mining activities have been carried out on the Duport Property at various times since 1897. The original discovery of a gold bearing sulphide zone was made on Cameron Island, where a small exploratory inclined shaft was sunk in 1899. Limited bulk sampling and mining by the Duport Mining Company ("DMC") produced 1,100 tonnes of material, grading 115 g/t, which was shipped to smelters at Tacoma, Washington and Flin Flon, Manitoba for processing during the period 1934-1936. Matachewan Consolidated Mines Ltd., (1950) and Westfield Minerals Ltd. (1965) extended the known gold bearing zone both laterally and vertically by diamond drilling. Consolidated Professor Mines Ltd. ("CPM") obtained an option on the Duport Property in 1973 and carried out an initial program of exploration and sampling. CPM acquired a 100% interest in the Duport Property by amalgamating with DMC in 1981. During joint venture arrangements with Selco Inc. in 1982 and with Union Carbide Corporation from 1983-1985, drilling and underground exploration took place from a new 1,100 m underground decline on Stevens Island. The program confirmed the presence of a mineral resource and led to the extension of known geological structures along strike to the northeast and southwest. Prior to 1983, underground development consisted of approximately 104 m of shaft and winzes and 664 m of lateral development. From 1984 to 1987 inclusive a 1,360 m decline was completed as well as 1,463 m of lateral development and 112 m of raising. CPM continued underground development on the Duport Property during 1986 and 1987 with a program to further define the extent of the gold bearing horizon. The program included extending the existing decline to a vertical depth of 200 m, and diamond drilling, to establish continuity of the gold bearing horizon to 500 m below surface. Three raises were driven in mineralized material and a 90 tonne bulk sample was mined and shipped to Lakefield Research for pilot plant metallurgical testing. Based on the resultant resource estimate and metallurgical work, CPM commissioned Wright Engineers Ltd. ("Wright") to conduct a feasibility study in 1988. During the time the Wright study was being prepared, CPM commenced the formal permitting process. The most important aspect of the potential environmental impact of proposed mine development is its location on Shoal Lake. CPM recognized very early during its ownership of the Duport Property that environmental concerns regarding development and operation of the property were important. Between 1979 and 1988, CPM collected baseline environmental data and commissioned Agra Earth and Environmental to study the issues and prepare an environmental impact study. The design for plant and infrastructure was intended to mitigate any environmental effects of the operation. Despite the fact that the technical aspects of the environmental management plan were relatively straightforward, the Duport Property received considerable scrutiny from the local cottagers and, eventually, the City of Winnipeg and the Province of Manitoba. The public perceptions were such that in 1989 the Ontario permitting process was stopped and the Duport Property was designated for review under the CANADIAN ENVIRONMENTAL ASSESSMENT ACT. From 1989 to 1993, essentially no activity took place on any aspect of the Duport Property. Commencing in 1993, CPM reactivated the environmental aspects of the Duport Property with the objective of restarting the approval process. As a first step, the property development plan was significantly revised from the Wright study in that all processing was moved to a location outside the Shoal Lake watershed. Ore was to be mined on Stevens Island and hauled by truck to the proposed plant site approximately 10 km away on the mainland. Two processing options were considered - production of concentrate at the plant followed by gold recovery at Placer Dome's Campbell Mine in Red Lake, and production of gold at the plant. The former option had the advantage of eliminating the use of cyanide in the -22- Shoal Lake area. No physical or technical work was carried out on the Duport Property during this time other than environmental baseline work and minor fieldwork in support of the revised property development plan. During this time, CPM re-established a working relationship with the two First Nations on Shoal Lake. An extensive program of community relations was carried out including workshops and public consultation sessions in the communities. Impact and benefit agreements were signed with both communities. CPM also implemented a buyout program with affected cottagers on Shoal Lake. Outside the area, CPM carried out extensive consultations with key officials at the City of Winnipeg, the Provinces of Manitoba and Ontario, and the federal government in order to describe the revised project and to establish the process for formal environmental approval. In 1996, Royal Oak Mines Inc. ("ROM") made a successful takeover bid for all the shares of CPM, whereupon CPM became a wholly owned subsidiary of ROM. ROM updated the CPM work and initiated an internal feasibility study based on the revised development plan instituted by CPM previously, but rather than using the Campbell Red Lake option, concentrate was to be railed to the ROM plant in Timmins, Ontario, where it would be treated using a bio-oxidation process. ROM did not carry out any physical work on the site other than a limited diamond drilling program during 1996-1997. RPA was unable to locate ROM diamond drill logs. In 1997, ROM filed for bankruptcy and the Duport Property became inactive. Subsequent to the ROM bankruptcy, the Duport Property was purchased by the Sheridan Group. No site work was carried out by the Sheridan Group during its ownership period. In July 2004, Halo negotiated the acquisition of the Duport Property from the Sheridan Group, as described above. REGIONAL GEOLOGY The Shoal Lake area is underlain by Precambrian (Archean) volcanic and sedimentary rocks, which are part of a broad greenstone belt striking in a general east-west direction across the northern end of the Lake of the Woods district. It extends for a distance of several hundreds of kilometres from Savant Lake to the east to beyond the Manitoba border to the west. Stocks and dykes of acid and basic rocks intrude these older rocks. The belt is within the Wabigoon Sub-province of the Superior Province. LOCAL GEOLOGY In the northern part of the Shoal Lake area there are two principal granodiorite intrusives, identified as the Canoe Lake and Snowshoe Bay stocks, each several kilometers in diameter, separated by a northeasterly trending volcanic series some seven kilometers wide. The series includes steeply dipping felsic to ultramafic flows and fragmentals, tops facing west, minor clastic sediments, and sulphide facies iron formations. Also present are coarse anorthosites, gabbros, diorites and quartz-diorites, some of which may represent volcanic flows. Within this extrusive-intrusive assemblage are irregular dykes and/or sills of quartz-feldspar porphyry, quartz diorite, and lamprophyre. All the rock types have been exposed to regional and local dynamic and thermal metamorphism, which has altered the intermediate, mafic, and ultramafic lavas to the greenschist and /or amphibolite facies. The deposit lies within a northeast trending band of mafic volcanics flanked to the northwest and southeast by a sequence of intermediate to felsic volcanics and related volcanoclastic sediments, which may be correlated through folding. The Cameron Island volcanic sequence forms the west limb of one of a number of relatively small anticlines whose axes strike northeast. The core of the anticline is the Stevens Island anorthosite-diorite complex. A major zone of deformation, which hosts the Duport deposit follows the same general strike and is characterized by strongly developed foliation or fracturing. PROPERTY GEOLOGY The predominant rock types on Cameron and Stevens Islands and the mine area are andesites, amphibolites, tholeiitic and komatiitic basalts and porphyritic basalts, talc-chlorite schist and narrow sheared horizons of felsic and intermediate tuffs and interflow material with buff colored cherty sections. Dykes and sills of various thicknesses are comprised of feldspar porphyry, quartz feldspar porphyry, quartz diorite, diorite, and lamprophyre. The dykes and sills cut, separate, or replace the gold-bearing mineralized horizons. Gold mineralization strikes N30-35(Degree)E and dips 65-75(Degree) west. Grades of possible economic interest have been intersected to a depth of approximately 600m. The mineralization has been subdivided into three zones. The "Main Zone" is approximately 800 m long, strikes N30oE, dips 70o west, and extends to 300m below surface. Grade-thickness contours of the Main Zone indicate the mineralization plunges north at about 30(Degree). However, within the mineralization there appears to be several local areas that plunge 45(Degree) to 75(Degree) south. The secondary plunge has important exploration implications. -23- The mineralization extends over a drill indicated strike length of 1,200 m and is associated with highly sheared, narrow, thinly bedded, conformable felsic and intermediate tuffs and cherty units that contain sulphide mineralization, generally in the range of 5-10%. These mineralized tuffs are identified as the "Main Zone" and the parallel "East Zone," plus a number of en-echelon and parallel associated units in the hangingwall and footwall of each of these principal horizons. The Main Zone is between massive chloritic and amphibolitic basalts while the northern section of the Main Zone is at the contact between basaltic flows and amphibolites, or within the amphibolites further north. The East Zone is approximately 450 m long, extends from 10m to 250m below surface and is hosted by intensely sheared ultramafics altered to talc schists. The favorable tuffs range in thickness from one to ten metres and dip steeply west. Talc schist occurs in two prominent zones of shearing and alteration, which parallel the footwall of both the Main and East Zones over widths of up to twenty metres. The schist below the East Zone footwall has an average thickness of eight metres and is more persistent than the Main Zone schist. The "Hangingwall Zone" is parallel and west of the Main Zone. It is the smallest of the three zones at 150m long and extends from 150m to 300m below surface. The principal Duport gold zones are sheared, fractured, narrow, and often highly silicified felsic and intermediate tuffs and/or interflow material which has cherty sections and sulphide mineralization consisting of pyrite, arsenopyrite, and lesser amounts of pyrrhotite. Less frequently, gold occurs in association with sulphides within thick sections of felsite, close to or within the gold-bearing tuff units. The mineralized horizons are persistent along strike and down dip although they may change mineralogically, including variations in gold and sulphide content. The horizons are frequently separated or split into several narrower units by the intercalation of narrow sheared chloritized and silicified basalt sections. These separated gold bearing lenses often exhibit an en-echelon configuration. Also felsite dykes occasionally cut the mineralized horizon at a low angle. These and other minor variable characteristics often make correlation problematic. Numerous faults cut and occasionally displace the mineralized horizon. EXPLORATION In 2005, the Company completed a ground magnetometer survey, airborne geophysical surveys and a diamond drilling program. GROUND MAGNETOMETER SURVEY The surface magnetometer survey was conducted from February 18 to March 28, 2005, over three grids, by JVX Limited using a Scintrex ENVIMAG proton precession magnetometer. Total field magnetometer readings were taken on 15 m (50 ft.) intervals on a 60 m (200 ft.) line spacing. The total survey covered 70 line-km. A portion of the planned work was stopped prematurely due to poor ice conditions. The objective of the survey was to gain geological and structural information for the purpose of locating drill targets along the strike of lithological units known to host significant gold mineralization. The grids are an extension of the original Duport grid and utilize the same co-ordinate system. The baseline trends northeast at 032(degree) azimuth and was re-established at the north end of Cameron Island. The East Grid is connected to the North and South Grids by a tie line (TL 14000E). The North Grid shows positive, elongate magnetic responses as defined by an nT isoanomaly contour centered over two following areas: the "10500E" anomoly and the "12250E" anomoly. The "10500E" anomaly is, in part, coincident with a sheared pyroxenite unit found on the eastern shore of Cameron Island. This unit may correlate with talc-chlorite schist intersected in the footwall of the Main Zone by drill holes. The "10500E" anomaly represents the northern portion of a more extensive magnetic high response that is located over the Duport deposit. The deposit is underlain by tholeiitic and komatiitic basalts as well as intrusive derivatives containing pyrrhotite and magnetite. One drill hole tested a magnetic high response defined by an arcuate nT isoanomaly contour. The area shows some structural discontinuity and a discrete "bull's-eye" pattern. The hole intersected altered quartz dioritic rocks containing disseminated pyrrhotite. A sheared, sulphide-bearing, silicified zone encountered approximately 232 m down the hole returned only low gold values. The "12250E" anomaly parallels the "10500E" anomaly and extends north of Stevens Island to the limit of ground coverage. The anomaly is underlain by anorthositic gabbro containing disseminated magnetite and pyrrhotite. This unit comprises the Stevens Island subvolcanic intrusive and is spatially associated with the Stevens Island Deformation Zone, a high strain zone in which the rocks show a pervasive shear fabric relative to the enclosing stratigraphy. The contours are -24- disrupted, folded and show bull's-eye patterns. A series of intersecting fault structures trending east-west and northwest-southeast occur north of Cameron Island and are responsible for the discontinuous magnetic patterns exhibited in this area. The East Grid lies immediately east of Stevens Island and covers the historic Golden Reef gold showing. The anomalies are conspicuously folded and disrupted since faults extending northwest across Stevens Island pass through this area that is underlain by anorthositic gabbro and undifferentiated ultramafic rocks. The coverage proposed for the South Grid remains incomplete. The stratigraphy west of Dominique Island shows a definite, irregular contact between tholeiitic basalts and anorthositic gabbro of the Stevens Island Complex. Several lines show a narrow segment of the strong, irregular contact between these contrasting rock types. The magnetometer survey was successful in delineating irregular contacts between contrasting lithologies in areas of known gold mineralization. However, the survey did not include the Duport deposit and was insufficient in covering potential targets east of the North Grid and in the vicinity of Dominique Island covered by the South Grid. AIRBORNE GEOPHYSICAL SURVEYS The Company contracted Fugro Airborne Surveys to conduct 2,743 line-km of coverage at 50 m and 100 m line spacing between August 15 and September 2, 2005. This was accomplished by using a DIGHEM multi-coil, multifrequency electromagnetic system, supplemented by a high-sensitivity cesium magnetometer. The information from these sensors was processed to produce maps that display the magnetic and conductive properties of the survey area. A GPS electronic navigation system was used for accurate positioning of the geophysical data with respect to the base maps. The main objective of the program was to identify additional, untested, Duport-style gold targets, i.e., altered shear zones containing sulphides related to fault structures, intrusive bodies, and competency contrasts between different lithologies. The total field and vertical gradient magnetic maps outlined several significant structural and lithological features very similar to those observed at the Duport deposit. Halo geological staff interpreted a series of ovoid or annular features as buried intrusive bodies that are aligned through the central portion of the property. These intrusive features modify the strong linear northeast fabric of the enclosing volcanic stratigraphy. The Duport deposit is situated on the western flank of the second most southerly of these bodies that correlates to an anorthosite complex. Halo staff also conclude that the trends on the magnetic maps represent regional ENE faults. The prominent fault that trends through the southernmost and largest circular feature abruptly truncates roof pendants capping this intrusive and demarcates two structural domains. One domain, to the south, demonstrates more regular magnetic patterns and the other, to the north, elicits patterns that are noticeably more discontinuous and broken up. A considerable number of weak to moderate EM conductive features were detected and delineated by the DIGHEM data, mostly displaying a NNE orientation aligned with the regional fabric. Jerry Roth, Senior Geophysicist with Stratagex Ltd., conducted a preliminary review of the survey results and noted that the contoured aeromagnetic data are discerned to outline a predominantly NNE fabric to the structural and lithologic components of the Shoal Lake greenstone assemblage. The rather striking NNE trend of distinct lenticular to elongate magnetic lows that extends across the centre of the survey area could reflect felsic lithologies in the core of the assemblage or a thick sequence of dominantly metasediments. Roth proposes that features previously interpreted as a concealed felsic are more likely folded and faulted metavolcanics. Roth also notes that the three broadly drawn, NE to NNE trending deformation zones are locally inconsistent with the detailed aeromagnetic data, suggesting that they are complex, variable structural features, with splays and en echelon elements. Halo selected fifteen targets for follow-up, consisting of conductive features within a one kilometre wide band extending NNE and SSW of the Duport Deposit. Roth conducted a preliminary review of the targets and proposed that six of the fifteen conductors are of probable bedrock origin and warrant follow-up diamond drilling. Roth further advised additional interpretation and verification, consisting of examination of the actual EM profiles as well as ground MaxMin HLEM and magnetometer surveys prior to drilling. The remaining nine conductors require further interpretation of the airborne geophysics and further ground geophysical surveys prior to a diamond drilling decision. In addition to the fifteen anomalies selected for follow-up, RPA advised that consideration should be given to a comprehensive evaluation of the entire airborne geophysical survey. In view of the importance of weakly to -25- non-conductive Au-sulphide mineralization, IP/resistivity surveys are recommended to delineate chargeability and resistivity trends in geologically favourable sectors. The Company is currently conducting a thorough compilation of previous work to ensure that the anomalies have not been previously tested by diamond drilling. DEPOSIT TYPES AND MINERALIZATION The Duport deposit is related to an epigenetic, hydrothermal system. The lithology and structural setting of the deposit is broadly similar to most of the gold deposits in the Red Lake and Timmins areas, in that they are shear hosted in mafic to ultramafic volcanic rocks and spatially associated with granitoid batholiths. Gold in the Duport deposit occurs both as fine grains of free gold, less than 0.05 mm, and in association with grains of arsenopyrite and pyrite. Gold is found within narrow often highly silicified felsic and intermediate shear zones that have recognizable cherty mylonotized sections and sulphide mineralization consisting of pyrite, arsenopyrite and minor pyrrhotite and chalcopyrite. The mineralization often exhibits a banded or laminated appearance, which parallels the tuff pseudobedding and shearing. The gold grade is proportional to the percentage of arsenopyrite and associated pyrite, the degree of silicification and to a lesser extent the incidence of mariposite. A combination of arsenopyrite with one or both of these secondary conditions usually results in high grade intersection, while the lack of arsenopyrite usually indicates negligible gold. DRILLING In 2005, the Company completed a 23-hole, 7,053 m diamond drilling program from the ice on Shoal Lake. The drilling was performed by Cyr International Drilling using two Longyear 38 drills and one Boyles 37 drill, both machines drilling NQ size core (476 mm). Drill hole collars were planned and surveyed with a Garmin GPS unit. Downhole surveys were taken at approximately 60 m intervals using a Reflex EZ Shot or Maxibor directional instrument. On average, the mineralization strikes 030(Degree)-35(Degree) azimuth and dips 70(Degree) west. Therefore the holes were drilled at 122(Degree) azimuth to intersect the mineralization as close as possible to normal to the strike. Similarly, the inclination of the holes was planned to optimize both hole length and the angle at which the holes intersected the dip of the mineralization. Inclinations ranged from -45(Degree) to -67(Degree); hence, the true width of the mineralized intersections was approximately 70% to 90% of the core length. Core recovery was not recorded although the project geologists report that it was very high. Wayne Valliant inspected 50 m sections of three holes as well mineralized sections of ten holes and concurs with the assessment of very high core recovery. Rock quality designation was not recorded. Two holes were drilled to verify historical resources. Nineteen holes were drilled on a 30 m to 100 m spacing over a strike extension of approximately one km to test the possible downward and/or southern extension of historical resources. One hole was drilled to test for possible mineralization in a structural feature indicated by the ground magnetometer survey. SAMPLING METHOD AND APPROACH Diamond drill core was logged based on lithology, alteration, and mineralization. Logging was done on-site, manually, by four project geologists. Collar data, down-hole survey data, major lithologies, and assay results were converted to spreadsheet format. Core sampling intervals were determined by the project geologist according to lithology, mineralization type, and visually anticipated grade. Thus, 1,859 intervals were selected for sampling. The nominal maximum sample interval was 0.91 m (3 ft.); however, a few samples in barren or poorly mineralized sections were 1.21 m (4 ft.). Barren core on the margins of mineralized zones was also sampled. Although mineralized zones are occasionally greater than ten metres wide, the grade variance within the zone can be very high. Therefore, the minimum sample interval was 0.30 m (one foot) to ensure sufficient detail was assembled for realistic grade correlation. Core selected for sampling was halved with a diamond saw, and one half was placed in a plastic sample bag. Sample tags were in duplicate, with one half inserted into the sample bag and the other half remaining in the sample book as a permanent record. The sample number was written on the outside of the plastic bags with indelible marker. Metal tags, stamped with the sample number, were stapled to the wooden core boxes. The remaining half of the core from 24 -26- samples, or approximately 20 percent of the samples in mineralized zones, were quartered with the diamond saw and submitted as duplicates with different sample numbers from the original. Five percent of the samples submitted were control blanks, comprised of barren core or a blank pulp, to test for contamination in the assay lab. In order to test for assay precision and accuracy, an additional five percent of the samples were reference control standards. These procedures are discussed further in Section 13. Plastic bags were placed in rice bags, sealed with fibre tape, and delivered to Greyhound Bus Lines in Kenora by the project manager for shipment to Accurassay Laboratories in Thunder Bay. In RPA's opinion, the sampling was of high quality, representative, and did not introduce any bias into the database. SAMPLING PREPARATION, ANALYSIS AND SECURITY Sample preparation and gold analyses were done at Accurassay Laboratories in Thunder Bay, Ontario ("Accurassay"). The lab is accredited by the Standards Council of Canada to ISO/IEC 17025 Guidelines. Accurassay employs an internal quality control system that tracks certified reference materials and in-house quality assurance standards. Accurassay uses a combination of reference materials, including standard samples purchased from CANMET Energy Technology Centre, the research arm of Natural Resources Canada, standards created in-house by the laboratory, and certified calibration standards. The sample information was entered into the Accurassay Local Information System ("LIMS"). The samples were dried, if necessary, jaw crushed to -8 mesh, and then riffle split. A 250 g to 400 g cut was taken and pulverized to 90% passing -150 mesh, and then matted to ensure homogeneity. Silica sand was used to clean out the pulverizing dishes between each sample to prevent cross contamination. Analysis for gold was by standard fire assay procedures using a 30 g sample with an atomic absorption ("AA") finish. Assay results were forwarded to the Company by email, followed later by a hard copy. No aspect of the preparation or analyses was conducted by Halo employees. In RPA's opinion, the sample preparation and analyses were adequate for use in mineral resource estimation. CONFIRMATION HOLES Two holes were drilled to verify historical data. The location of the first hole was selected to verify narrow, high grade gold mineralization in a section of the Main Zone. The hole was designed to intersect mineralization within 10 m of two previously drilled holes that intersected 15.92 g/t Au over a true width of 1.0 m, and 40.42 g/t Au over a true width of 1.2 m. This first confirmation hole intersected 34.55 g/t Au over a true width of 0.6 m. A second hole was drilled to verify wide, low grade gold mineralization in another section of the Main Zone. The hole was designed to intersect the Main Zone within 25 m of a hole which previously cut 9.12 g/t gold over a true width of 7.4 m. This second confirmation hole returned 8.16 g/t gold over 9.5 m and therefore, in RPA's opinion, verifies the presence of wide, low grade gold mineralization as previously reported. Given the nature of the mineralization, i.e., coarse gold in shear zones, the results of the twinned holes compare well with the previous drill in both grade range and width. BLANK SAMPLES Ninety-seven, or five percent, of the samples submitted to Accurassay were control blanks, comprised of barren core (22) or a blank pulp (75) to test for contamination in the assay lab. The blank pulps were purchased from CDN Laboratories Ltd. in Delta, BC. Two of the results were above a maximum acceptance threshold of three times the detection limit of 0.03 g/t. The results indicate that there was no problem with contamination or drift in the Accurassay lab. STANDARD CONTROL SAMPLES In order to test for assay precision and accuracy, five percent of the samples were reference control standards, prepared by and purchased from CDN Laboratories Ltd. in Delta, BC. Reference standard CDN-GS-5A has a recommended gold concentration of 5.10 g/t +/- 0.27 g/t (+/-2SD). Reference standard CDN-GS-12 has a recommended gold concentration of 9.98 g/t +/- 0.37 g/t (+/-2SD). Approximately 50% of the Accurassay results were greater than the -27- control limits recommended by CDN Laboratories Ltd. The average of the Accurassay results was three percent less than the mean value of the standard samples. The results of the standard control sample program did not materially affect the resource estimation. RPA has recommended that in subsequent drill programs Halo geological staff should request that sample batches be repeated when standards begin to show a trend outside the recommended limits. DUPLICATE SAMPLES Diamond drill core selected for sampling was halved with a diamond saw, and half the core was submitted to Accurassay. The remaining half of the core from 24 samples, or approximately 20 percent of the samples in mineralized zones, was quartered with the diamond saw and submitted as duplicates to Accurassay, using different sample numbers from the original. For the most part, the duplicates show a reasonable agreement with the original samples. However, the duplicate pairs from two holes display a wide variance, likely due to the high effect of the mineralization. EXTERNAL CHECK ASSAYS Duport selected 170 pulps of samples originally assayed at Accurassay. The samples were split and renumbered. One half of the sample was returned to Accurassay for analysis by fire assay and the other half of the sample was delivered to Acme Analytical Laboratories Ltd. ("Acme") for analysis by fire assay. RPA prepared relative difference plots wherein the difference of each duplicate pair is compared to the mean of the duplicate pair. RPA also conducted relative standard deviation analyses to test for assay precision. The results indicate that the assay precision for assays less than 10 g/t is poor, but the precision for assays greater than 10 g/t is acceptable. The resource estimate is heavily dependent on assays greater than 10 g/t. Therefore, RPA considers the overall precision acceptable. DATA CHECKS RPA checked approximately five percent of the original assay certificates against the resource database. RPA also checked approximately five percent of the sample intervals and lengths from the diamond drill logs against the resource database. Some problems were discovered in the digital update of the historical diamond drill information. Any errors were corrected. RPA SAMPLES Wayne Valliant collected ten samples of quartered core from mineralized zones from the first ten diamond drill holes of the 2005 program. He also collected half core from two holes drilled during the 1987 underground program. The latter were selected only for convenience as most of the core was not accessible during the site visit. He also collected one grab sample from a muck pile from the underground bulk sample program. The results confirm the presence of gold mineralization in the diamond drilling. Given the small sample size and coarse nature of the gold mineralization, the results show reasonable agreement. ACCURASSAY INTERNAL QA/QC SYSTEM A certified standard and a blank sample were run with each batch of samples. In addition, a replicate assay was run on every 10th sample to be used for checking the reproducibility of the assays. All standards were graphed to monitor the performance of the laboratory. The warning limit was two times the standard deviation and the control limit was three times the standard deviation. Any work order with a standard running outside the warning limit had selected reassays performed, and any work order with a standard running outside the control limit had the entire batch of samples reanalysed. All QC/QA data run with each work order was kept with the clients file. In the sample preparation area, samples were randomly selected for screen analysis to ensure grain size was achieved (90% passing -150 mesh). The AA instrument was calibrated using ISO traceable calibration standards. The instrument is directly tied to the LIMS program eliminating the need for manual data entry, hence, reducing human error. MINERAL PROCESSING AND METALLURGICAL TESTING In 1988, SMS supervised a program of bench testing and a pilot plant at Lakefield Research, Lakefield, Ontario, to determine the optimum method for concentration of the arsenical gold deposit. The gold is considered to be refractory, and testwork demonstrated that oxidation of the arsenopyrite would be necessary for optimum gold extraction. Based on the foregoing testwork, the 1988 Wright feasibility study recommended a flowsheet including crushing, grinding, gravity gold separation, bulk flotation, pressure oxidation, -28- cyanidation of the oxidation product, carbon adsorption, hot caustic cyanide stripping, electrowinning, and refining. Gold recovery to flotation concentrate was estimated at 93.7%, followed by a 97% recovery in the pressure oxidation through refining stages, for an overall estimated recovery of approximately 90%. A subsequent study by Kilborn Engineering Pacific Ltd. in 1996, for Royal Oak Mines Ltd., recommended bio-oxidation as the preferred method of treating the flotation concentrate. The study, although order of magnitude, concluded that bio-oxidation would obtain similar gold recovery as pressure oxidation, but at lower capital and operating costs. In 2005, RPA reviewed the process options as part of an economic review filed by Halo on the SEDAR website. RPA assumed that a mill would be located near Love Lake, approximately ten kilometres from the mainland ferry landing at Starting Point. The site is outside the Shoal Lake watershed. The mill would consist of crushing, grinding, flotation, and gravity concentration circuits. Mill recovery is anticipated to be 91%. High-grade gravity concentrates and lower-grade flotation concentrates would be shipped by highway truck to Placer Dome's facility at Red Lake for refining. Tailings would be stored in a facility near the mill site. Based on historical data and the 2005 drilling program, RPA estimated mineral resources, reviewed mining and processing methods, environmental considerations and conducted a preliminary financial analysis. RPA concluded that a larger, higher grade resource is required to generate positive economic results at a gold price of US$400 per ounce. MINERAL RESOURCE ESTIMATES CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF INDICATED AND INFERRED RESOURCES. THIS SECTION USES THE TERMS "INDICATED" AND "INFERRED" RESOURCES. THE COMPANY ADVISES U.S. INVESTORS THAT WHILE THOSE TERMS ARE RECOGNIZED AND REQUIRED BY CANADIAN REGULATIONS, THESE DEFINITIONS HAVE NOT BEEN ADOPTED FOR USE BY THE SEC. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ANY PART OR ALL OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO RESERVES. "INFERRED" RESOURCES HAVE A GREAT AMOUNT OF UNCERTAINTY AS TO THEIR EXISTENCE, AND GREAT UNCERTAINTY AS TO THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE ASSUMED THAT ALL OR ANY PART OF AN INFERRED RESOURCE WILL EVER BE UPGRADED TO A HIGHER CATEGORY. UNDER CANADIAN RULES, ESTIMATES OF INFERRED RESOURCES MAY NOT FORM THE BASIS OF FEASIBILITY OR PRE-FEASIBILITY STUDIES, EXCEPT IN RARE CASES. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR PART OF AN INFERRED RESOURCE EXISTS, OR IS ECONOMICALLY MINEABLE. The resources are summarized in the following table. Given the precision of the data, nugget effect, and methodology, resource tonnes are rounded to the nearest thousand and grades, expressed in g/t, are rounded to two decimal points. -29-
MINERAL RESOURCE SUMMARY DUPORT PROPERTY ZONE SUB-ZONE INDICATED INFERRED TONNES GRADE (G/T) CONT. AU (OZ) TONNES GRADE (G/T) CONT. AU (OZ) - ---------------------------------------------------------------------------------------------------------- MAIN 1 159,000 10.12 51,000 2 84,000 15.21 41,000 15,000 7.29 3,000 3 10,000 9.96 3,000 4 107,000 13.43 46,000 5 30,000 13.11 13,000 6 84,000 12.66 34,000 7 15,000 8.92 4,000 8 14,000 14.48 6,000 9 18,000 8.31 5,000 10 27,000 8.55 7,000 - ---------------------------------------------------------------------------------------------------------- SUBTOTAL 315,000 13.56 137,000 248,000 9.81 76,000 EAST 1 58,000 14.05 26,000 14,000 8.57 4,000 2 38,000 11.31 14,000 3 75,000 9.94 24,000 - ---------------------------------------------------------------------------------------------------------- SUBTOTAL 96,000 12.97 40,000 89,000 9.73 28,000 HANGINGWALL 1 13,000 12.82 5,000 2 50,000 16.77 27,000 - ---------------------------------------------------------------------------------------------------------- SUBTOTAL 13,000 12.82 5,000 50,000 16.77 27,000 - ---------------------------------------------------------------------------------------------------------- TOTAL 424,000 13.40 182,000 387,000 10.69 131,000 - ----------------------------------------------------------------------------------------------------------
Notes: 1. CIM definitions were followed for Mineral Resources. 2. Mineral Resources are estimated at cut-off grades of 6.9 g/t Au. 3. Mineral Resources are estimated using an average long-term gold price of US$400 per ounce, and a US$/C$ exchange rate of 1.25. 4. A minimum mining width of 1.5 metres was used. DATABASE All the available data regarding the Duport Property was stored at the Company's office in Kenora. Technical data included diamond drill logs, original assay certificates, geological reports, historical resource calculations, diamond drill cross sections, mineral resource longitudinal sections, and survey log books. Unfortunately, level plans with geological mapping, and underground sampling, were incomplete. The pre-2005 database was in Imperial units, and the Company elected to continue the 2005 diamond drill program using the same system. Hence RPA received the database with distances expressed in feet (ft.) and gold grades expressed as troy ounces per short ton (opt). The resource estimate is based on 74,337 m of historical drilling and 7,054 m of drilling performed by the Company in 2005. Buhlmann and Associates Inc., Flin Flon, Manitoba, was contracted to assemble the historical diamond drill data (1951 to 1988 inclusive) into spreadsheet format. Data fields included collar information, downhole survey data, lithology, sample interval, sample length, and gold assays. RPA revised various sections of the lithological data for consistency with the correlation methodology. Halo and RPA performed the data entry for the 2005 diamond drilling program. The spreadsheet data was converted to Gemcom format for subsequent plotting and modeling. -30- CUTTING The gold grade distribution was studied to determine whether anomalous high grade gold assays affected the mean disproportionately. The Main, Footwall, and Hangingwall mineralized zones are spatially divided and possibly represent different mineralizing events, and were therefore analyzed independently. The "Footwall" zone lies in the structural footwall below the Main Zone. It comprises up to three sub-zones, similar in appearance to the Main Zone although somewhat weaker and discontinuous in nature. The histograms prepared to illustrate the gold distribution in each of the zones indicate that appropriate cutting factors for the Main, Footwall, and Hanging Wall mineralized zones are 68.6 g/t (2.0 opt), 85.7 g/t (2.5 opt), and 51.4 g/t (1.5 opt) respectively. Given that the Main Zone is volumetrically greater than the other two zones combined, a cutting factor of 68.6 g/t was chosen for all three zones. METHODOLOGY Vertical cross sections, including diamond drill hole trace, lithology and gold values, were plotted at a scale of 1:600, on 30 m spacing. In some areas the data was obscured due to an excess of information and additional sections were plotted at a scale of 1:300 on 15 m spacing. The shear zones were previously identified as tuffaceous units and classified based on the degree of silicification, i.e., felsic tuff, high silicification; intermediate tuff, medium silicification; and mafic tuff, low silicification. The shear zones host virtually all the gold mineralization in the deposit and were therefore modeled as the initial step in the resource estimation. The shear zones were correlated on both cross sections and plans to ensure continuity. The zones often include two or more narrower shears and hence many intersections of a shear zone include sections of unsheared, apparently barren material. Wireframes were constructed for three principal shear zones, i.e., Main Zone, East Zone, and Hangingwall Zone. These domains were used to constrain subsequent resource estimations. They were also used for structural interpretation. The mineralized zones are planar, and high values produce a nugget effect. The contour method was chosen as the most effective method of estimating mineral resources. Intersections of potential economic mineralization were also correlated on vertical cross sections, incorporating a cut-off gold grade of 6.9 g/t gold (0.20 opt) and a minimum horizontal thickness of 1.5 m. The cut-off grade is based on the following assumptions. Gold Price US $400 Exchange Rate (US$/CDN$) 1.25 Metallurgical Recovery 95% Operating Cost CDN $120 Incremental/Breakeven Cut-off 80% The mid-points of the intersections were transferred to vertical longitudinal sections for each of the three zones. The longitudinal sections displayed the diamond drill pierce points, with associated horizontal thickness and average cut grade ("G"), as well as the width x grade ("GT"). GT values were contoured on the longitudinal sections. The gold grade distribution is lognormal, showing a large number of low assay values and few high values. The same applies to the average intersection values. Therefore, the contours were drawn on a geometric basis as opposed to linearly. The outermost contour defined the economic cut-off, and therefore delineated several economic subzones within each mineralized zone. The Main, East, and Hangingwall Zones were subdivided into 10, 3, and 2 subzones respectively. As the work was performed in Imperial units the outermost GT contour was 1.0 opt-ft (10.28 g/t-m), i.e. 0.20 opt x 5.0 ft. Successive contours were 2.0 opt-ft , 4.0 opt-ft , 8.0 opt-ft, etc. Figure 16-4, Figure 16-5, and Figure 16-6 illustrate the 1.0 opt-ft GT contour in the Main, East, and Hangingwall Zones, respectively. Thickness contours were also drawn on longitudinal sections. The outermost boundary was the economic limit, established by the previously drawn 1.0 opt-ft. GT contour. Contours inside the economic subzones were drawn on a linear basis. The total volume of each subzone is the sum of the area between each contour multiplied by the average thickness represented by that area. Volume was converted to tonnage using a factor of 11.0 ft.(3)/ton (Specific Gravity = 2.92), which was established by tests conducted during the Wright feasibility study in 1988. A similar exercise was undertaken to determine total "GV", i.e., the sum of the areas between each GT contour multiplied by the corresponding area. The average grade was estimated by dividing the total GV by the total volume. -31- The resource classification of each subzone was determined based on the drill hole density and grade continuity. A minor tonnage, immediately above and below some of the underground workings, may have qualified as measured resources based on closely spaced underground sampling and diamond drilling. However, since the economics of the Project will be based on the sum of measured plus indicated resources, the measured category was not estimated. MINERAL RESERVES There are no mineral reserves estimated for the Duport Property. EXPLORATION AND DEVELOPMENT The Duport Report recommended a two-phase work plan for the Duport Property. The overall objectives of the work are to expand the resource base of the property by testing airborne electromagnetic anomalies with IP surveys and diamond drilling. The proposed work plan has been divided into two phases, with the second phase contingent on success in the first. The estimated total cost of the first phase is $435,000. The second phase is estimated to cost $467,000, consisting of data compilation, geophysics, surface diamond drilling, community relations, environmental monitoring, resource estimation, and a scoping study. The estimated cost of the program was $2.3 million. The costs for each phase are broken down as follows:
- ------------------------------------------------------------------------------------------------- PROPOSED PHASE 1 WORK PROGRAM AND BUDGET - ------------------------------------------------------------------------------------------------- PHASE 1 WORK PLAN UNITS UNIT COSTS TOTAL COST ($) ($) - ------------------------------------------------------------------------------------------------- IP SURVEYS Site prep/line cutting 45 line-km 500 23,000 45 line-km 1,500 68,000 ------- SUBTOTAL 91,000 ------- Diamond Drilling Contractor 3,400 77 262,000 Board & Lodging 72 250 18,000 Geology Staff 72 300 22,000 Expenses-vehicle, communications, supplies 72 400 29,000 Assays 1,000 13 13,000 ------- SUBTOTAL 344,000 - ------------------------------------------------------------------------------------------------- TOTAL PHASE 1 $435,000 =======
- ------------------------------------------------------------------------------------------------- PROPOSED PHASE 2 WORK PROGRAM AND BUDGET - ------------------------------------------------------------------------------------------------- PHASE 2 WORK PLAN UNITS UNIT COSTS TOTAL COST ($) ($) - ------------------------------------------------------------------------------------------------- DIAMOND DRILLING Contractor 5,000 77 385,000 Board & Lodging 72 250 18,000 Geology Staff 72 300 22,000 Expenses-vehicle, communications, supplies 72 400 29,000 Assays 1,000 13 13,000 - -------------------------------------------------------------------------------------------------- TOTAL PHASE 2 $467,000 =======
-32- BACHELOR LAKE PROPERTY, QUEBEC PROPERTY AGREEMENTS On November 12, 2004, the Company entered into an option agreement to earn a 50% interest in the Bachelor Lake Property with Wolfden Resources Inc. ("Wolfden"). A definitive agreement (the "Assignment and Assumption Agreement") was subsequently executed on April 15, 2005. Under the terms of the Assignment and Assumption Agreement, Wolfden assigned to the Company its option to earn a 50% interest in the Bachelor Lake Property from Metanor Resources Inc. ("Metanor") by paying to Wolfden an aggregate of $1,943,123 (comprised of $650,000 in acquisition costs and $1,293,123 in reimbursement of exploration expenditures) and issuing 2.1 million common shares subject to a 12-month contractual hold period. Upon securing project financing and the commencement of commercial production on the property resulting in a minimum of 50,000 ounces of gold or silver equivalent being produced, the Company will pay a bonus payment to Wolfden in the amount of $250,000 cash and 250,000 common shares. The Company has also agreed to pay Wolfden a net smelter return royalty of 0.5% on the Company's share of the net smelter return. The Company also assumed Wolfden's $3 million exploration funding commitment at Bachelor Lake. All of the required exploration funding has subsequently been expended. The transaction closed on May 18, 2005. The Company and Metanor subsequently executed a definitive joint venture agreement dated effective July 1, 2005 (the "Bachelor Lake JV Agreement") setting forth the terms and conditions governing the relationship between the parties and providing for the means by which each of them shall participate in the exploration, development and mining activities on the Bachelor Lake Property. The following information on the Bachelor Lake Property is derived from the report dated December 15, 2005 entitled "NI 43-101 Technical Report on the 2005 Drilling Program and Mineral Resource Estimate for the Bachelor Lake Property" (the "Bachelor Lake Report") prepared by InnovExplo Inc. ("InnovExplo"). Each of the individuals who contributed to the Bachelor Lake Report was, or was supervised by a Qualified Person. Messrs. Alain Carrier, MSc., P. Geo and Julien Davy, MSc., P. Geo were the Qualified Persons who authored the report. PROPERTY DESCRIPTION AND LOCATION The property is located within the Abitibi Greenstone Belt (Northwestern Quebec, Canada) in the Township of Le Sueur, approximately 225 km north of the town of Val-d'Or. The mine site is situated 3.5 km east of the village of Desmaraisville and 30 km south of the Cree community of Waswanipi. Desmaraisville is serviced by bus and truck transport, and is connected to the 113 Provincial highway, railroad, power grid and telecommunication systems. An experienced labour force in the mining industry is available within a 240-km radius of the project site (Val-d'Or, Lebel-sur-Quevillon, Chapais, Chibougamau). Val-d'Or is a major full service centre for exploration, mining and economic activity in Northwestern Quebec. The following map identifies the location of the Bachelor Lake property: -33- [GRAPHIC OMITTED][GRAPHIC OMITTED][OBJECT OMITTED] Omitted graphic is Location Map of Bachelor Lake showing location of Bachelor Lake Joint Venture in respect to the Provinces of Quebec and Ontario and distance from the city of Val d'Or quebec. -34- The property of the BLJV consists in two claim blocks: the eastern block (the "Bachelor Claims"), comprising 51 claims and two mining concessions covering an area of 1,867.67 ha; and the western block (the "Hewfran Claims"), comprising 38 claims covering 683.5 hectares. With the addition of the Hewfran Claims, the property now comprises eighty-nine (89) mining claims and two mining concessions for a total area of 2,551.17 hectares. Since December 2004, the Bachelor Claims have been registered 100% to Metanor. These claims were acquired from Exploration GeoNova Inc. ("GeoNova"), MSV Resources Inc. ("MSV") and Campbell Resources Inc. ("Campbell"). The Bachelor Lake JV has the right to acquire 100% of the Hewfran claims from Aur Resources Inc. ("Aur") upon satisfying a work commitment of $1.6 million in mineral exploration over a 3-year period ($200,000 in the first year, $400,000 in the second year and $1 million in the third year). The Bachelor Lake JV will also have to pay to Aur a total amount of $375,000 over the course of those three years ($75,000 upon signing, $100,000 after 24 months and $200,000 after 36 months), payable in cash or shares. The transaction also includes a 2% NSR, of which 1% can be repurchased in counterpart for the sum of $1,000,000. Metanor, for the first payment, will issue 99,180 common shares (which represent the amount of $75,000) according to the calculation method agreed upon in the option agreement with Aur. For the Bachelor Claims, an NSR royalty is owned by Concopper Enterprise Ltd. ("Concopper"). A maximum sum of $1,750,000 is payable on ore derived from the Bachelor Lake Property and from other ore bodies controlled by the Bachelor Lake JV and processed at the Bachelor Lake Property, to be calculated as follows: On ore from the Bachelor Lake Property: (a) 0.50% NSR for a price of gold (b) between $425 and $450 per ounce (c) 1.00% NSR for a price of gold (d) between $450 and $485 per ounce (e) 1.50% NSR for a price of gold (f) between $485 and $560 per ounce (g) 2.00% NSR for a price of gold (h) greater than $560 per ounce On ore originating from other ore bodies controlled by the Bachelor Lake JV and processed at the mill located at the Bachelor Lake Property: (i) 0.25% NSR for a price of gold (j) between $425 and $450 per ounce (k) 0.50% NSR for a price of gold (l) between $450 and $485 per ounce (m) 0.75% NSR for a price of gold (n) between $485 and $560 per ounce (o) 1.00% NSR for a price of gold (p) greater than $560 per ounce The agreement on the Hewfran Claims between Aur and Metanor also included a 2% NSR royalty, of which 1% can be repurchased for the sum of $1,000,000. The claims were not surveyed with the exception of the two mining concessions. The Bachelor Lake JV has the mining rights on the entire claims, and both the mining and surface rights on the two mining concessions. There are no land claim issues, ownership disputes pending on the property or major environmental issues. Adjacent and contiguous to the property, to the North and to the West, the Bachelor Lake JV also holds 88 claims covering 2,287.69 hectares including 74 claims for 1,975.36 hectares (the "MJL Claims") and 14 claims for 311.33 hectares (the "Hansen Claims"), currently registered 100% to Metanor. These claims host the Coniagas polymetallic past producer. The status of the mining titles was verified by InnovExplo on October 3, 2005 using the GESTIM system from the Ministere des Ressources Naturelles, de la Faune et des Parcs ("MRNFP"), the Quebec government claim management system, accessible online at: HTTP://GESTIM.MRNFP.GOUV.QC.CA. On the property, two blocks of claims are presently in process for permit renewal. Communications between InnovExplo and the Litigation Office of the MRNFP confirmed a temporary renewal status. These claims correspond to four claims on Hewfran and three claims on Bachelor. The Company believes that the current landholdings are sufficient in size to adequately test all known targets at this time. -35- ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY The property is easily accessible by a 3-hour drive (225 km) on the Provincial highway 113 from Val-d'Or to Chibougamau in the Province of Quebec. From Val-d'Or, the access is via the 117 provincial highway heading east and then heading north on the highway 113 and by driving through to Senneterre, Lebel-sur-Quevillon and Desmaraisville. At Desmaraisville, a 3.5-km gravel road heads east to the property. The area is relatively flat (maximum elevation variation of 20 m) and lies at a general elevation of 295 metres above sea level. Coarse and sandy glacial deposits cover the area. Outcrop exposure is less than 2% and swampy areas are prevalent in the central and southern portions of the property. The area is characterized by a continental climate. Winter temperatures range from - -10(degree)C to -35(degree)C with an average snow accumulation of 83 cm. Summer temperatures range from 10(degree)C to 22(degree)C with an average rainfall of 115 mm. No rivers cross the immediate mining site area and the closest water source is Lake Bachelor approximately 3 km to the north. Access to a drinking water source is possible with a well and pumping station located on one of the mining concessions. Production at the Bachelor mine terminated in 1989 after seven years of operation. Desmaraisville significantly decreased in population and in services after the mine closure. However, the area is still well provided with public services as it lies directly on a regional highway with power and telephone lines. The proximity of an active mining centre such as Val-d'Or still guarantees the availability of material and manpower for exploration and mining. The mine site includes surface infrastructure, hoist room, shaft house, mill (500 tonnes per day), tailing pond, and core shack. The infrastructure is in good condition but will require upgrading and rehabilitation if future exploration programs require underground work, particularly the mill, hoist and headframe. The Bachelor gold deposit was mined by underground mining methods, mainly by shrinkage stopping. The mine was dewatered during the winter of 2004-2005 for the realization of an underground drilling program in 2005. The mine is currently accessible by a three-compartment shaft to the 7th Level and a four-compartment shaft beyond the 7th Level. The shaft sump is at a depth of 562.66m. Twelve levels, with ventilation and egress, have been developed. Underground access from the Bachelor mine on the Hewfran Claims already exists on the 4th, 6th and 8th Levels. Recent engineering assessments are in progress. HISTORY The Bachelor Lake Property was originally staked by O'Brien Gold Mines Ltd. ("O'Brien") in 1946 following to the discovery of the "Main" Zone on the eastern part of the O'Brien pluton. This discovery rapidly led to trenching, geophysical surveys and numerous drill holes. In the 1960s, Sturgeon River Mines Ltd. ("Sturgeon") sank a shaft and drilled underground to the 7th Level (1961-64). From 1972 to 1975, 739,000 short tons at a grade of 0.18 oz/t Au were outlined. In the 1980's, Bachelor Lake Gold Mines, a subsidiary of Sturgeon, conducted several underground development work phases in order to start mining in 1982. They deepened the shaft to the 12th Level in 1987, and stopped production in 1989. Approximately 958,368 short tons at a grade of 0.136 oz/t Au were mined, for a total of 131,029 oz of refined gold. Since the mine closure, several resource estimates were published on the Bachelor Claims and the Hewfran Claims. On the Bachelor Claims, InnovExplo estimated in 2004 that the claims contained an estimated measured resource of 204,454 short tonnes at 0.257 oz/t Au; an indicated resource of 216,685 short tonnes at 0.315 oz/t Au; and an inferred resource of 256,285 short tonnes at 0.304 oz/t Au. On the Hewfran Claims, after several exploration drilling programs in June 1989, Aur reported an estimated gold resource of 594,000 short tonnes at 0.170 oz/t Au for the West Zone (100,900 ounces of gold). The East Zone resource has been recently re-evaluated and downsized from 120,000 short tonnes at 0.210 oz/t to 68,000 short tonnes 0.259 oz/t. The mine was flooded in 1992, and dewatered in November 2004 in anticipation of the underground drilling program. The mining contractor's employees are presently keeping the mine dewatered. In 1990, under a joint venture agreement with Acadia Mineral Venture Ltd. ("Acadia"), controlled by Hecla Mining Company of Canada ("Hecla"), 34 drill holes were drilled from the 12th Level and 5 drill holes from the 11th Level. In 1994, Espalau Mining ("Espalau") acquired 100% of the property and 10 surface drill holes were drilled in 1995. Since December 2004, the Bachelor Claims have been registered 100% to Metanor, after acquiring the property from GeoNova, MSV and Campbell. Since September 2005, Halo satisfied its work agreement on the property and acquired a 50% interest which has led to the formation of the Bachelor Lake JV. In 2004-2005, Halo dewatered the Bachelor mine and initiated a 13,346 m (69 hole) underground drilling program in order to fulfill its option agreement. -36- Additional details concerning the exploration history of the Bachelor Claims and Hewfran Claims based on compilation work previously provided by InnovExplo, as well as information from an internal report prepared by Aur and from the SIGEOM database of the "Ministere des Ressources Naturelles, de la Faune et des Parcs" database is presented in the Bachelor Lake Report filed on SEDAR at www.sedar.com. REGIONAL GEOLOGY The Bachelor Lake area is located within the Northern Volcanic Zone of the Abitibi Subprovince, Superior Province. The Bachelor Lake area is situated near the western limit of the Chibougamau-Chapais greenstone belt. The mafic to felsic volcanic and volcaniclastic rocks of the Bachelor Lake area are part of the basal mafic-dominated sequence referred to as the Volcanic Cycle I. The Volcanic Cycle I formed between 2730 and 2720 Ma, and is composed of massive, pillowed and brecciated, tholeiitic basalt flows with local felsic and sedimentary units. The Northern Volcanic Zone of the Abitibi Subprovince is interpreted as a diffuse arc passing laterally into a back-arc environment with numerous felsic and mafic-felsic edifices and intra-arc sedimentary basins. The Bachelor Lake property lies along a local northeast-trend which is deviated from the general east-west pattern of the Abitibi Subprovince due to significant synvolcanic pluton emplacement and the influence of the major northeast-trending Wedding-Lamarck fault in the Bachelor Lake area. LOCAL GEOLOGY The property is underlain by Archean volcanic rocks of the Obatogamau Formation in a poorly known and poorly explored area of the Abitibi greenstone belt. Because of the absence of marker horizons and the paucity of outcrops, it is difficult to establish a well-defined rock sequence in the Coniagas-Bachelor Lake area. The Obatogamau Formation includes mafic, intermediate and felsic flows and their synvolcanic intrusive equivalents which are the host for the volcanogenic massive sulphide occurrences. A local composite stratigraphic section shows a typical complex volcano-sedimentary assemblage. This stratigraphic sequence includes the 280 m thick Coniagas mine sequence represented by a mafic-dominated volcanoclastic sequence. Porphyritic lava flows, prominent in the immediate area of the Coniagas zinc-lead-silver deposit (1.5 km west of Bachelor Lake deposit), cover the volcanoclastic unit. A significant 500-700 m thick, lenticular and dome-shaped felsic unit composed of massive to brecciated rhyolitic to rhyodacitic lava flows occurs up-section. This felsic-dominated unit corresponds to the Bachelor Lake gold deposit host rocks. Mafic volcanic and volcanoclastic rocks make up the upper part of the sequence. The Auger Lake and Bachelor Lake sedimentary rocks remain enigmatic but probably mark the top of the sequence. The late emplacement of several plutons (e.g. O'Brien granodiorititic pluton located east of the Bachelor Lake deposit), adds to the complexity of the region. Gold mineralization at Bachelor Lake has been interpreted to be related to the late granodioritic O'Brien pluton. Intrusive rocks related to the O'Brien pluton include granitic porphyry and biotite-hornblende granodiorite. Post-tectonic lamprophyre dykes are also common at the Bachelor Lake mine and kimberlitic dykes were documented in the Desmaraisville area. This later intrusive phase has recently been investigated for their diamond potential in the Desmaraisville area. The local northeast-trending sequence deviates from the general east-west pattern of the Abitibi Subprovince due to the presence of significant pluton emplacement and the influence of the major northeast-trending Wedding-Lamarck fault. The folded volcanic rock sequence shows local changes in trend from N025(degree) to N065(degree), with vertical to steep northwest dips (60(degree) to 77(degree)). Folding and faulting are responsible for stratigraphic repetition and disruption of the volcano-sedimentary sequence. Foliation relationships indicate a possible third phase of deformation . PROPERTY GEOLOGY At the Bachelor Lake mine, most deformational features are brittle (faults, fractures, veinlets) to brittle-ductile (shear zone). Based on previous studies and the last drilling program, five (5) post-ore fault systems striking N110(degree) are recognized on the property and affect the gold-bearing zones at Bachelor Lake: - Flat-lying faults, generally small displacement which appears to be along strike of Main Zone. These veins are well illustrated on level plan views where mineralized zones show local metric discontinuities. - ENE brittle-ductile, rotational faults moderately dipping at 60(degree), namely the WAC (Waconichi faults system) and showing an oblique slip with dextral and reverse movement. - ENE brittle-ductile rotational faults steeply dipping at 80(degree), namely the WAC and which could be interpreted as a conjugate to the WAC. -37- - NNE to NE late brittle faults steeply dipping to the NW, transverse faults. A good example of this fault is shown on the 12th level plan view between sections 50 W and 1+00 E where the "Main", "B" and "A" zones are all dislocated as blocks in a late brittle fault corridor. - NW brittle faults moderately to steeply dipping (65(degree) to 90(degree)), could be interpreted as conjugates to the brittle fault system. In the Waconichi fault system, the Big WAC fault is one of the most significant and, according to the upper description, should be related to the WAC fault system. The last underground drilling campaign demonstrates that the Big WAC may have two major impacts at Bachelor: (i) by locally remobilizing gold (higher grade) and (ii) by dislocating or displacing the "Main" and "B" Zones (missing in the footwall of the Big WAC fault). The movement on it may be approximately 15 m (50'), it often tends to be adjacent to the "Main" Zone (10th to 12th Levels) and, at depth, on 13th to 15th Levels, it tends to occur between the "Main" and "B" zones. Interpretation also demonstrates that when faults cross the "Main" and "B" zones, thickening of the zones occurs. EXPLORATION The most recent exploration work program was executed from May to August 2005, by InnovExplo for Halo and then for the Bachelor Lake JV. The program consisted in 13,345 m of underground drilling, described in detail below under the heading "Drilling." Metanor and Halo have not conducted any other exploration program on the property. Previous exploration programs are discussed above under the heading "History". DEPOSIT TYPES The property hosts a wide variety of deposit types from volcanogenic polymetallic type to syn- to late-orogenic gold mineralization. On the property, volcanic-hosted massive sulphide potential is illustrated by the Coniagas Horizon, Zinc showing #1 and #2, Area-Opawica showings and by the Coniagas deposit located on the adjacent property. The Bachelor Lake gold mineralization is related to brittle deformational features and dilatational zones (stockwork) and to brittle-ductile shear zones. The Bachelor gold deposit can be either classified an "orogenic lode gold deposit" or an "intrusion-related gold deposit". The gold distribution appears to be controlled by both structural and lithological features (e.g. the rhyolite being more fractured compared to the agglomerate). The Bachelor Lake gold mineralization has also been interpreted to be associated with the late-tectonic granitic to granodioritic intrusion (O'Brien pluton located east of the deposit and associated dykes documented at the mine). The link between the late intrusive rocks and the gold distribution can be interpreted as either the result of a litho-structural relationship (i.e. lithological contrasts) or as a magmatic process (intrusion-related, oxydized magma). The O'Brien granodioritic stock probably provided the concentrating mechanisms through heat and hydrothermal solutions. The late phase dykes related to the O'Brien stock were introduced later than the shearing event, and the gold mineralization event has been bracketed between the occurrence of these late dykes and the earlier granodioritic phase. The high fluorine content of the hydrothermal biotite in the ore zone alteration correlates with that of magmatic biotite within the intrusive phases. There is probably a direct genetic link between the O'Brien stock and the gold mineralization. In this perspective, the Bachelor Lake gold deposit may well correspond to the new class of gold deposits in the southern Abitibi Belt known as a "Syenite-Associated Disseminated Gold Deposit". In this class of deposits, the ore bodies usually consist of zones of disseminated sulphides and variably developed stockworks associated with intensely altered wallrocks. The mineralization, with sharp to diffuse limits, is defined by a decrease in sulphide content, gold grades and intensity of stockwork fracturing. The more appropriate class heading to describe the Bachelor Lake gold deposit may be an "Intrusion-Related Disseminated Gold Deposit", rather than Syenite-Associated Disseminated Gold Deposit. Gold remobilization along the "A" shear and mineralized zone may well represent another event. From a descriptive point of view, two main types of gold mineralization occurring in the Bachelor Lake area and in the Wachigamau Member: gold-bearing quartz veins with gold disseminated sulphides in wallrocks; and disseminated gold-bearing sulphide zones. During the last drilling program, these differences have been recognized and can be illustrated as the "B" and "Main" zones. They were interpreted as contemporaneous disseminated gold-bearing sulphide zones, the B Zone just superseding the Main Zone formation. In both types, the mineralization is characterized and dominated by pyrite. Gold is either: (i) native and is in close association with pyrite or, (ii) free in quartz predominant veins. The mineralization is found in close association with hydrothermal alteration zones (silica-hematite alteration) which have been superimposed on the regional metamorphic minerals. -38- PROPERTY SURFACE SHOWINGS Mineralization on the property was discovered from surface exploration in 1946. The property hosts several gold and base metal showings occurring on surface and illustrated by numerous showings. The property also hosts the eastern extension of the Coniagas marker horizon (zinc-lead-silver). BACHELOR-TYPE GOLD-BEARING ZONES The property hosts six gold-bearing zones ("Main", "A", "B", "C", "A West" and "B West" zones) which were all included in the 2005 resource estimate. The Bachelor Lake gold deposit is located along an ESE-trending, SW-dipping, silicified shear zone with hematitic alteration. It transects NE-trending, steeply dipping volcanic rocks and the O'Brien granitic to granodioritic pluton. Major W-SW and N-NE trending faults have affected the ore zone and the emplacement of the granite intrusions. Movements along the WSW set may have opened the fractures filled by mineralization. Two types of gold-bearing zones have been identified at Bachelor Lake: silica-flooding and hematite-altered stockwork zones, illustrated by the "Main Zone" and the "B Zone". In both cases, gold is spatially associated with pyrite and the gold content correlates well with the pyrite content. Gold mineralization at Bachelor occurs predominately within the pyrite (>70%), as grains attached to the pyrite (-18%) or as free gold enclosed in the gangue (-10%). This was demonstrated in a polished-thin section examination done on the Hewfran Claims. The gold is fine grained with an average diameter between 6 to 8 mm, and visible gold is more characteristic of the "B Zone". Pyrite is usually finely disseminated (2 to 10%) hosted in strongly altered rocks, often brecciated and occasionally injected by quartz/carbonate veins and veinlets. At surface, traces of gold, chalcopyrite and ilmenite occurrences have been observed. Gold has been introduced late in the paragenetic sequence as were fluorite and some of the carbonates. THE MAIN ZONE The "Main Zone" has contributed 90% of the ore derived from the Bachelor Lake mine. The Main Zone is characterized by pervasive moderate to strong silicification and hematitization with 2-10% pyrite generally associated with hematite alteration. It is cross-cut by quartz-carbonate veinlets usually less than 2 cm, and some local narrow late siliceous hydraulic breccias are described. Some intense altered zone intersections show association with ankeritisation. The Main Zone contains also minor amounts of epidote, chlorite, amethyst, micas, magnetite and base metal sulphides. A distinctive deep brick red hematite alteration characterizes the zone. The Main Zone trends N110(degree), dipping at 55(degree) southwest near the surface, steepens to near vertical at the 12th Level, and changes to 60(degree) to 75(degree) at depth. The Main Zone alteration envelope increases in width with depth below the 12th Level, while ore values are not uniformly distributed within the zone, which results in an anastomosing mineralized pattern. The last drilling program also demonstrated the recurrent presence of a weaker and narrower alteration zone of 3 to 5 m in the foot wall of the Main Zone. This "northern branch" is clearly related to the same event but rarely shows economic interest. The average width of the Main Zone above the 6th Level was 1.82 m (6'), and increased to an average of 2.44 m (8') below this level. The 2005 drilling program below the 12th Level has confirmed that the average width of the Main Zone increased. Based on the 2005 resource database, the Main Zone has an average horizontal width of 2.8m (9.2') (median at 2.1m (7')) and reached a maximum horizontal width of 12.8m (42'). This alteration system, which constitutes the main mineralized zone, is recognized over 1,150 m (N110(degree)- N290(degree) trend) and was mined over 335 m from the western limit of the Bachelor Claims to the western contact of the O'Brien pluton. The new interpretation proved the Main Zone continuity, with the drill hole intersections, to be over 488 m (from section 1,000' W to 600' E) horizontally and 900 m vertically (from surface to the elevation 7,000'). THE B ZONE The "B Zone" was recognized on the 11th and the 12th Levels and may also represent a potential for additional resources, but until now very little mining has taken place in this zone. It was previously described as being similar to the Main Zone but the last drilling campaign illustrated their differences. Test mining has also indicated that the B Zone has competent walls. Based on the resource database, the B Zone has an average horizontal width of 3.1 m (10.3') (median at 2.1 m (7')) and reaches a maximum horizontal width of 10.5 m (34.5'). The B Zone was previously considered to be generally narrower than the Main Zone but the 2005 drill program confirmed that this zone has similar width. The B Zone dips generally steeper than the Main Zone, at about 75(degree) to 85(degree) to the south-southwest. The B Zone is interpreted to be the result of -39- a younger geological event and formed after the Main Zone mineralization. It is characterized by a hydraulic glassy to white silica breccia with angular fragments of the altered unit and cut by quartz veins. Its alteration is similar to the Main Zone and is represented by strong to intense silicification and hematitization and generally by moderate ankeritization. Mineralization is characterized by 2% to 7% pyrite generally associated with the late quartz breccias. The presence of visible gold is often seen in this alteration zone and especially in the sections east of the T1 fault. THE A ZONE The "A Zone" was discovered by drilling from the 9th Level and has been traced up to the 4th Level. Test mining at the Bachelor Lake mine, using shrinkage techniques, has shown an unacceptable level of dilution on this zone. The A Zone is visually distinct from the "Main" and "B" zones. It is a highly altered and sheared zone which strikes N060-070(degree) and dips 45(degree) to 50(degree) to the southeast and cross-cuts the "Main" and "B" zones. It has previously been interpreted as a gold-bearing zone as well, but the last underground drilling campaign demonstrated a poor grade development of this zone when alone. The best values in the A Zone are related to its junction with other zones. Significant intersections have been documented while crossing the "Main" or "B" zones, probably due to gold remobilization. The last interpretation showed increases in thickness at these junctions, especially around section 100' E. The general aspect and trend of the A Zone could lead to a correlation interpretation between the A Zone and the Waconichi fault system. THE C ZONE The newly interpreted "C Zone" has been incorporated into the updated resource estimate. This zone has similar characteristics to the Main Zone and it appears that it can be a branch of the Main Zone. The C Zone actually seems to be less continuous than the Main Zone. The C Zone has been documented in the Bachelor Lake mine area between the sections 150' E and 600' E, in the eastern portion of the 2005 interpretation. THE A WEST AND B WEST ZONES The "A West Zone" and "B West Zone" have been delineated in the West Zone area of the Hewfran Claims. These zones are interpreted to be the continuity of the "A" and "B" zones identified at the Bachelor mine area. The A West Zone lies within the western extension of the "A" shear and the mineralized zone documented at the Bachelor Lake mine. A discovery hole (0.168 oz/t Au over 6 ft) intersected the zone, 487 m (1,600') west of the last encountered ore grade within the "A" Zone at 13,500 E. The hole was drilled to test the eastern extension of the mineralized shear structure (N080(degree)) identified in the Agar #1 outcrop which had been mechanically stripped, washed and channel sampled during the summer of 1987. Most of the ore grade intersects occur along two converging subhorizontally plunging ore shoots. Several spectacular intersections were encountered within these ore shoots which indicate that the West Zone is laterally continuous for more than 800 ft, and remains untested to the west. However, sub-economic intersections above and below the ore shoots suggest the ore lenses are vertically discontinuous. Lateral continuity of the structure from section to section is obvious but gold mineralization appears sporadic and essentially concentrated in the vicinity of Sections 12,100E and 12,300E. The B West Zone seems to be the extension of the B Zone documented at the Bachelor Lake mine. The zone dips at about 80 to 85(degree) (almost vertically) and shows only very sporadic grades over a cut-off grade of 3.43 g/t Au (0.10 oz/t Au). This zone is characterized by a strong silica and hematite alteration, and by local brecciation. DRILLING On the Hewfran Claims, the last drilling campaign was done between 1987 and 1989 by Aur. Their program has included 47 surface holes for 14,255.5 m (46 770`) and 96 underground holes for 10,401 m (34 125`). Between 1990 and the 2005 underground drilling program, two drilling programs were completed on the Bachelor Claims. In 1990, Acadia Mineral Ventures Ltd, a subsidiary of Hecla, drilled 34 holes for a total of 4,807m (15,722') from the underground workings at various locations on the 11th and 12th Levels. In 1995, Espalau drilled 10 holes from surface for a total of 2,572m (8,438'). This surface drilling program was executed by Geospex Sciences Inc. ("Geospex"). From 1987 to 1989, the western block of the property (Hewfran Claims) was the site of a major drilling program: 47 holes drilled from surface for a total of 14,259 m (46,770'), and 96 holes drilled from underground for a total of 10,404 m (34,125'). In 2005, the Bachelor Lake JV conducted a major underground drilling program comprised of 69 holes for a total of 13,345 m. This program was initiated by Halo and later followed by Metanor and the Bachelor Lake JV. A surface drilling program is presently underway by the Bachelor Lake JV on the property. The main goals of the 2005 underground drilling program were to upgrade and increase the resources. The drilling program was originally designed by Yves A. Buro, geological consultant for Wolfden and was initiated by Y. Buro for Halo. The complete 2005 drilling program (69 holes) was finally performed from two fixed drill stations located on the 12th Level by performing azimuth drilling. The drill program was initiated with the objective of upgrading the resources by performing 20-25 m (75') drill centers on the Main Zone and to some extents on -40- the "B" and "A" zones, which are located closer to the two drill stations. The 2005 drilling program was also designed to further define and build tonnage, and to improve the understanding of the geological setting and the continuity of the ore lenses. Despite the fact that this program was performed in restricted area, it successfully: - filled the central gap between the T1 fault and the A Zone and also between the two main ore shoots with seventeen holes; - infilled the gaps left with the previous exploration programs (the 1990 Hecla program) with twenty-four drill holes; - extended the mineralized zones laterally to the west, on the footwall of the Waconichi fault and at depth with nineteen holes; - extended and connected the Bachelor resources to the west with the Hewfran Claims with six holes; and - extended the mineralized zones to the east side with three holes. Initially, the underground program (dewatering and drilling) was carried out to complete the work requirement of Wolfden (later transferred to Halo) for the acquisition of 50% of the property. During the fall of 2004, the dewatering of the Bachelor Lake mine was initiated by Wolfden in order to facilitate the underground drilling program. The dewatering of the mine was performed by CMAC and was completed during the winter of 2005. From April 6 to July 26, 2005, sixty-nine holes (BQ size) were drilled by Forage Orbit of Val-d'Or for a total of 13,345.55 m (44,977.36'). At the beginning and for the period from April 6 to May 2, 2005, the drilling program was completed, planned and logged by Yves A. Buro (for Halo). At the end of April, Halo mandated InnovExplo to continue the drilling program already in progress. A meeting between Y. Buro, A. Carrier and J. Davy (InnovExplo) was organized at Bachelor Lake Property on April 27, 2005. The local geology, main geological features, sampling protocol and drilling parameters were then transmitted. These parameters could be summarized as follows: - core logging, sample intervals, RQD in meters on Excel spreadsheets; - deviation tests were obtained from a Flex-It instrument; - planning was done on the Bachelor Lake local grid in feet and oriented 24(degree) east from the geographic North; - drill holes were planned using quick logs (brief descriptive follow-up), plotted on plan views and azimuth sections (usually without assay results); - holes were stopped generally 6m (20') after the targeted alteration zones; no exploration holes were then attempted; - pictures of the entire core were taken systematically; - three standards were used and inserted in each batch of 20 samples; - blanks were taken from an "assumed" barren local rock source (homogeneous intermediate volcanic tuff between 108 and 132m and inserted into regular sample sequence every 20 to 30 samples, preferentially after a mineralized zone; - no visible gold documented and no special treatment for sample with visible gold; and - samples were sawed in halves and sent by bus to ALS Chemex laboratory in Val d'Or. On May 2, 2005, more than 25% of the entire program was already drilled (3,500 m with 22 holes). Some of these holes were twinning historic drill holes and others were following a 20-25 m (75') centers infill program with the Main Zone as the principal target. The three mineralized zones ("Main", "A" and "B" zones) were usually intersected in each hole. Nine holes out of twenty-two were already logged by Yves Buro. Thirteen holes were not described (back log) and fifteen holes were not sampled. Logging and sampling of these holes were performed by InnovExplo. From May 2, 2005, to July 26, 2005, InnovExplo's geologists and Qualified Persons, Julien Davy, P.Geo, M.Sc. and Eddy Canova, P.Geo, B.Sc., were on site, on scheduled rotations of 7 days in and 7 days out (12 hours per day) for planning, interpretation, follow-up and core logging. During this period, Alain Carrier, P.Geo, M.Sc. (InnovExplo) made about ten visits on site to follow up and supervise as a Qualified Person for the program. Sampling, core moving and technical support were performed by InnovExplo's exploration technicians, also on a rotation schedule of 7 days in and 7 days out (12 hours per day). On site, InnovExplo had the support of Halo's geologist, Patrick McLaughlin, B.Sc., to catch up with the logging. InnovExplo also logged drill holes during P. McLaughlin's vacation. To catch up with the sampling, some of the core was sent to Val-d'Or and sampled at Metanor's core shack and at InnovExplo's core shack. Data management (core logging database, assay tables, data entry and validation for 2005 drill holes) was performed by InnovExplo in collaboration with Tech2Mine Inc. During the drilling program, discussions were held periodically -41- with Tom Healy (Halo). Follow-ups and press releases were accomplished in collaboration between InnovExplo and the Company. Denis Blais, Yves Buro (consultants for Halo) and Andre Tremblay (Metanor) were also involved in the drilling program. Some logistical aspects of the drilling program were changed. Core logging was done using "access format" logging software (Geotic Log). Sampling, security and sample shipping and laboratory protocols were established or changed during May 2005. Deviation tests obtained from the Flex-It instrument and assay results from ALS-Chemex were electronically transferred in the Geotic Log database. By June 23, 2005, all the holes in the back log were completed and the geologists were following the production of the two rigs. By the end of the program, in July 2005, all the collar locations were surveyed and all the assay results were received within fifteen days after the end of the program. From April to July, 2005, a total of 13,345.55 m (44,977.36') was drilled from 69 holes (BQ size). A total of 3,555 samples were taken from these holes. Approximately 24.8% of the total drilled length was sampled for an amount of 3,307.63 m. Drilling was performed by Forage Orbit of Val-d'Or, on a basis of two 12-hour shifts per day using two rotating crews per drill to ensure non-stop drilling during the program. The program was performed with azimuth holes drilled from two fixed drill stations located on the 12th Level of the Bachelor Lake. The two drill stations were located 45 m (150') apart. From the total of 13,345.55 m, 6,854.55 m were drilled from drill station #1 and 6,496.00 m from drill station #2. The whole program was drilled from the deepest level of the Bachelor Lake mine, 12th Level (level at 8,328' elevation). The 12th Level is at - -516 meters (1,692') below the surface level. The entire drill campaign was logged using Geotic Log core logging software. All sample results were regularly imported to this database which also contains collar location, deviation test, assay results, RQD and recovery information that were measured during logging by the geologists. The program was conducted while taking into account all the recent MRNFP environmental standards and procedures. All holes (collars) were identified using aluminium ID tags. It should be noted that neither the recent underground holes nor the historic underground drill holes have been cemented. All the underground diamond drill holes must be cemented before any further underground works are performed. Plan views, azimuth cross-section and longitudinal views were used as follow-up and planning purposes, using final logs when available or more often quick logs results. Regular north-south cross-sections (grid 24(degree)E) were drafted occasionally during the program in order to help with the planning aspect. Final interpretation was realized on north-south cross-sections. Reaching a specific target (every 20-25 m (75')) with an azimuth hole was challenging, especially when the mineralized zones showed changes in strike and dip. With azimuth drilling, thicknesses are apparent and the real picture of the geology is difficult to establish. Core lengths of a zone can be four times its true width. Estimated horizontal widths for the mineralized zones were obtained on the north-south cross-sections. A slight deviation of 2(degree) has a real impact on the final locations of a drill intercept when the hole is drilled with an azimuth in the range 60(degree) to 75(degree). Furthermore, the mineralized zones at Bachelor Lake are discordant (in plan and in section) to the volcano-sedimentary sequence (stratigraphy is folded and overturned); in this particular case, the deviation of a hole is hard to predict. Underground, the planned holes were spotted using front sight and back sight aluminium ID tag ("spade") each 10(degree) by a surveyor crew (using the Bachelor mine grid at 24(degree)E of the true north). Drill hole planning (collar azimuth and plunge) was prepared to fit either these 10(degree) surveyed tags or their mid-distance. The planning indications were transferred to the drilling team using a single information sheet per drill rig with the hole number, azimuth and plunge at the collar and planned length. Holes were spotted by Forage Orbit's driller under the supervision of Francois Faucher (foreman). The method was to bring the drill rig parallel to a rope attached from the front to the back sight tags. No central point was used as a rotation point for the drill rig which resulted in the variation of the collar location in the drill stations. Each collar location was later surveyed by the surveyor crew. Deviation tests for the drilled holes were obtained from down-hole surveys with Flex-It instrument rented from Fordia Canada and used by the drilling contractor. Measurements (azimuth, dip, and magnetism) were taken every 3m when the hole was completed while pulling out the rods. In some long holes, measurements were taken several times to be able to follow the deviation of the hole during its progression and to ensure that the target would be attained. Strong magnetism associated with some of the volcanic units may have influenced the electronic multi-shot instrument. A statistical mean for non-magnetic rocks at Bachelor has been determined to calibrate the instrument. Twenty-three multi-shot surveys representing 379 non-magnetic measurements have been used for the mean of 56,279 nano tesla ("nt") with outer limits of +/- 1,500nt. This value was used for all down-hole surveys completed during the 2005 drilling program. The azimuth and dip surveys for each hole have been compiled, checked and transferred in the database. -42- RESULTS AND HIGHLIGHTS OF THE 2005 DRILL PROGRAM Out of the 69 holes drilled during the 2005 drill campaign, 40 holes intercepted composite grades over a cut-off of 3.43 g/t Au (0.10 oz/t Au) on a minimum horizontal width of 1.5 m (5'). Eight holes intercepted a mineralized interval having a horizontal width over 6m (20'): 6.97 g/t Au over 7.92m; 13.08 g/t Au over 7.62m; 7.03 g/t Au over 6.40m; 9.72 g/t Au over 7.92m; 12.62 over 6.10m; 9.88 g/t Au over 7.92m; 10.35 g/t Au over 8.53m; and 7.40 g/t Au over 8.23m. Fourteen composite mineralized intervals have a grade higher than 10 g/t Au (0.29 oz/t Au): 14.84 g/t Au over 1.98m; 14.31 g/t Au over 5.64m; 17.76 g/t Au over 3.66m; 16.83 g/t Au over 3.05m; 14.22 g/t Au over 4.57m; 16.36 g/t Au over 1.52m; 16.00 g/t Au over 2.29m; 10.35 g/t Au over 8.53m; and 26.47 g/t Au over 1.52m. For the overall program and from the 29 holes that did not intercept a significant grade, nine holes do not seem to have reached the targeted area. From these nine holes: two holes ended in the O'Brien granite; one hole was dyked out (porphyritic monzonite intercepted at the location of the "Main" zone); one hole was planned to reach the O'Brien granite contact at depth and not the "Main" zone; two holes were planned using a natural deviation which did not happen; and three holes appeared to be too short according to the final geological interpretation. The drill program has greatly enhanced the understanding of the geological structure at depth and has led to the generation of significant new drill targets. This knowledge has the potential to significantly increase resource tonnage. Geological review has demonstrated that significant increase in both gold grade and thicknesses appeared particularly at the intersection between major structures. Sampling Method and Approach Sampling method and approach for both historic and new exploration are considered by InnovExplo to be appropriate and accurate. SAMPLING METHOD BEFORE 2005 UNDERGROUND DRILLING PROGRAM Met-Chem Canada Inc. ("Met-Chem") completed a review of the sampling protocol employed at the Bachelor Lake Mine during the production period. Sampling of the drill holes (BQ and AQ size) is very regular with geology being the first criteria to determine the sample length and that did not exceed 1.5 m (5'). During the Hecla drilling program, some gaps were noted in the sampling. Except for the Met-Chem review, there was no systematic review of the sampling method and approach in the historical assessment works. However, it can be stated that the sampling method and approach used were essentially core samples, chip samples and muck samples from underground development at the Bachelor Lake mine and the Hewfran East area. During the Aur drilling program on the Hewfran Claims, similar sampling protocols were used with the AQ and BQ size core. For Hewfran, the zones were either sawed or split in half for the sampling. Aur has also used chip and muck samples from underground levels. Moreover, Aur did a bulk sample test on the Hewfran Claims. Prior to the publication of NI 43-101 standards, it was generally assumed that the data provided was accurate and reproducible. 2005 DRILLING SAMPLING METHOD From April 6 to July 26, 2005, 69 BQ size (36.5 mm diameter) drill holes were performed by Forage Orbit Inc., for a total of 13,345.55m (44,977.36') using the industry standard wire line methods. All of them were drilled from two underground drill stations at the 12th Level. Fifty-two reached the mineralized zones in the Bachelor Claims, while 17 reached the mineralized zones in the Hewfran Claims. Holes were planned using the Main Zone longitudinal section with intercepts every 22.8 m (75'). The 2005 drill hole database contains a total of 3,555 samples. One hundred percent of the 2005 drilling program was stored and categorized for future reference purposes in the core library located at the Bachelor Lake site. Due to limited access, the 2005 drilling was performed with azimuth holes from two drill stations. For azimuth holes, the difference between the core length and true thickness could be considerable (core length can be 10 times the true thickness for drilled holes at 85(degree) azimuth). All thicknesses are horizontal width and were calculated on sections. For the 2005 drilling program, the core sampling protocol was established by InnovExplo. CORE SAMPLE QUALITY AND REPRESENTATIVENESS During the 2005 drilling, 3,251 samples were submitted for gold analysis, representing 3,347.63m (24.4% of total drilled length). Inserted throughout these samples, 304 blanks and standards (8.55%) were also shipped for a controlled follow-up for a total of 3,555 samples. Every altered zone containing pyrite or every wide altered zone was considered potentially mineralized and therefore sampled. This systematic exploration sampling allowed to confirm the attitude of mineralization within the altered zones as well as other lateral small mineralized zones. Samples collected through the diamond drilling are of -43- good quality. The mineralization in the core is generally intact with no possibility of loss due to wash out. The hardness nature of the mineralized zones (hematization and silicification) explains the excellent recovery for the mineralized zones. The core was rarely ground on short distances (less than 0.5 m). Overall, the drill core sample recovery from the mineralized zones can be considered to be representative. SAMPLE PREPARATION, ANALYSIS AND SECURITY Sampling, preparation, security and analytical procedures used on the property were judged to be adequate. Results from the pre-2005 sampling and assaying are considered to be good. The performance of the laboratory during the 2005 drilling program was good. SAMPLE PREPARATION AND ANALYSIS BEFORE 2005 During the mine operation, assays were performed at the local laboratory of the Bachelor Lake mill. This local laboratory did not have any accreditation and the method used to determine the primary gold assays was by atomic absorption ("AA") and not by fire assay ("FA"). Check assays were occasionally made by fire assay in an independent and accredited laboratory (Bourlamaque Laboratory in Val-d'Or, Quebec). There was clearly a positive correlation between the AA assay values and the FA check assay values. Furthermore, a total of 46 samples selected from five holes showed a direct correlation between original and check assay values from the Hecla drilling program. Met-Chem cited that no problems were reported for the in situ analyses. Sampling protocol employed at the mine during the production period was reviewed by Met-Chem in 2001. SAMPLE PREPARATION AND ANALYSIS DURING 2005 UNDERGROUND DRILLING Sampling and laboratory protocol for the 2005 drilling program were defined by InnovExplo. During the program, core samples were sent to ALS Chemex Chimitec in Val-d'Or. At the laboratory, all the bags were opened and conformed to the laboratory protocols. The laboratory delivered results in electronic format through the ALS Chemex webtrieve Internet access as well as an e-mail sent to the data manager. Assay results were reported in grams per tonne and transferred directly in the central assay data base (GeoticLog and Gems). QUALITY ASSURANCE / QUALITY CONTROL (QA/QC) PROGRAM No contamination was discovered during the 2005 drill program. The good performance of the laboratory for external standards (field standard) is an evidence of accurate determinations being made by the laboratory. The QA/QC analysis of the pulp duplicate demonstrates a reasonable level of precision with overall approximate errors of 12%. This level of error is not uncommon for Archean gold deposits where the principal component of the ore is often "freely" liberated gold. In fact, many coarse "nuggety" gold deposits demonstrate much poorer levels of precision in pulp duplicate sample results. Precision of metallic screen assay (150 mesh pulp duplicate) was analyzed. The metallic sieve method incorporates duplicate fire assay determinations of the -150 mesh fraction of the screened pulp. The results demonstrate that precision levels of the screened pulp duplicate assays are overall approximately 6.5%. A 5% residual "nugget" effect at 150 mesh is quite acceptable for this type of gold mineralization. The result for the coarse duplicate was not that good. The extremely large introduction of error between coarse and pulp duplicates is clearly indicative of unrepresentative 1 kg coarse crush sample splits. The cause may be inappropriate crush/splitting specifications or related to original field sample size, while this type of error may not result in any global change in resource estimation. DATA VERIFICATION The Gemcom (GEMS 5.51) database used for the 2005 resource estimation included 15,192 assay results from 394 diamond drill hole records (each having hole ID, collar location, deviation test, geology, assay result, etc.). From the total, 325 were historical holes that were compiled and 69 holes were new. Both the historical and the new data acquired were validated. DATA ENTRY AND VALIDATION On the Bachelor Claims, 80 underground drill holes from the Bachelor Lake mine and 2,315 assays have been compiled by Halo. No original assay certificates were available but 100% of the assay results were checked against the original logs by Tech2Mine, an independent database management firm. Tech2Mine has compiled and entered some surface holes and underground drill holes located below the 9th Level of the Bachelor Lake mine. Sixty drill holes and 1,978 -44- assay results were added to the database. Forty-two assays have been checked against original assay certificates and all the others were checked against the original logs. InnovExplo reviewed the geological setting of the gold mineralization at Bachelor Lake. Selected intervals from the hole 12-33 were examined. Core from mineralized intervals in seven other holes were reviewed . On the Hewfran Claims, 185 holes and 7,650 assay results were transferred from the Aur Gemcom database into the new database. Verification by Tech2Mine has included the verification of assay results against original assay certificates (for 2,557 results) and all other results were checked against the original logs. Verification has also included the 2005 drilling program, where nine holes were checked and transferred from logging in Excel to the new logging software GeoticLog. All the assay results obtained during the 2005 campaign were checked against the original assay certificates for the 69 new holes. Existing maps with stopes and drifts were used by Tech2Mine to support new drilling information. This data was provided to InnovExplo by Genivar (formerly Leandre Gervais & Associes Inc.) in AutoCad format. Tech2Mine has also validated collar location and surveys when available for the data from 9th to 12th Levels. Numerous holes did not have deviation data and were then plotted linearly. Bachelor grid orientation appears on several plans at 24(degree) east of true north. A grid orientation of 24(degree) east was used for data entry and during the whole 2005 program. Some deviation, typically related to grid variation as collar holes in the drift wall, appears. Until now, no adjustment has been made to correct this deviation, but the author recommended fixing this situation by rotating the whole database 0.5(degree) to the west. The real Bachelor Lake grid orientation is more likely to be at 23.5(degree) east and not 24(degree) east. 2004-2005 CHECK ASSAYING RESULTS In 2004, Wolfden, in the course of their due diligence, took some check samples and assaying of selected intervals from drill core. In October, 2005, InnovExplo re-sampled 24 samples within the "A West" mineralized zones from six drill holes on the Hewfran Claims. Fifteen samples were coming from the Hewfran West area and nine from the Hewfran East area. Core boxes containing mineralized zones intersections were already in Val d'Or, at the Alexis Minerals Corporation core shack. Selected cores were transported at Metanor's core shack where they were examined and re-sampled by InnovExplo's team. Quarter splitting was then performed by Metanor's technician for the fifteen Hewfran West BQ core samples while the other nine were entirely sampled because of their AQ size. Two high grade certified standards were also inserted into sequences, and samples were sent to ALS Chemex laboratory in Val d'Or. The same analytical package as the last underground drilling program was requested. Focus was made on several high grade assay results obtained by Aur. All check samples were assembled and separated into 4 groups: - 2 samples below the cut-off grade (under 0.1 oz/t Au) have a difference of 0.003 oz/t Au; - 6 samples close to the cut-off grade (from 0.1 to 0.15 oz/t Au) have an average difference of 0.004 oz/t Au. This important verification minimized the risk associated to misclassification of ore and waste block material; - 10 samples close to the resource average grade (from 0.15 to 0.3 oz/t Au) have an average difference of 0.015 oz/t Au. This significant low difference also means that the overall average may not change drastically. Although some absolute difference can be as high as 0.284 oz/t Au, meaning that on a local basis, some ore blocks may have been overestimated or underestimated; and - 10 samples with high grade assay results (over 0.3 oz/t Au) have a greater average grade difference (0.043 oz/t Au). Locally, some grade can be either over or underestimated. CONFIRMATION DRILL HOLE FROM CURRENT BACHELOR LAKE JV EXPLORATION PROGRAM The Bachelor Lake JV is presently realizing a surface exploration program at Bachelor. The current drilling exploration program includes one confirmation drill hole located in the Hewfran East area in order to confirm Aur results. The drilling program is performed by the geologist, Patrick McLaughlin (Halo), under the supervision of Kevin Leonard (Halo). The mineralized zone has been confirmed in the hole B05-117A and the Main Zone was intercepted between 366.1m and 373.2m with results of 9.27 g/t Au over 1.8 m (0.27 oz/t Au over 5.9') contained within 3.56 g/t Au over 7.1 m (0.10 oz/t Au over 23.62'). MINERAL RESOURCE ESTIMATES CAUTIONARY NOTE TO U.S. INVESTORS CONCERNING ESTIMATES OF MEASURED, INDICATED AND INFERRED RESOURCES. THIS SECTION USES THE TERMS "MEASURED", "INDICATED" AND "INFERRED" RESOURCES. THE COMPANY ADVISES U.S. INVESTORS THAT WHILE THOSE TERMS ARE RECOGNIZED AND REQUIRED BY CANADIAN REGULATIONS, THESE DEFINITIONS HAVE NOT BEEN ADOPTED FOR USE BY THE SEC. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT -45- ANY PART OR ALL OF MINERAL DEPOSITS IN THESE CATEGORIES WILL EVER BE CONVERTED INTO RESERVES. "INFERRED" RESOURCES HAVE A GREAT AMOUNT OF UNCERTAINTY AS TO THEIR EXISTENCE, AND GREAT UNCERTAINTY AS TO THEIR ECONOMIC AND LEGAL FEASIBILITY. IT CANNOT BE ASSUMED THAT ALL OR ANY PART OF AN INFERRED RESOURCE WILL EVER BE UPGRADED TO A HIGHER CATEGORY. UNDER CANADIAN RULES, ESTIMATES OF INFERRED RESOURCES MAY NOT FORM THE BASIS OF FEASIBILITY OR PRE-FEASIBILITY STUDIES, EXCEPT IN RARE CASES. U.S. INVESTORS ARE CAUTIONED NOT TO ASSUME THAT ALL OR PART OF AN INFERRED RESOURCE EXISTS, OR IS ECONOMICALLY MINEABLE. The following table sets forth the estimated mineral resources at Bachelor Lake as of October 5, 2005. - -------------------------------------------------------------------------------- BACHELOR LAKE MAINERAL RESORUCES (METRIC UNITS) (1)(2)(3)(4)(5)(6)(7)(8) - -------------------------------------------------------------------------------- BACHELOR HEWFRAN TOTAL - -------------------------------------------------------------------------------- Measured Metric Tons(t) 177,898 14,696 192,594 Grade (g/t) 8.83 8.50 8.80 ---------------------------------------------------------------- Oz. of Gold 50,487 4,018 54,504 ---------------------------------------------------------------- kg of Gold 1,570 125 1,695 ---------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Indicated Metric Tons(t) 465,928 183,069 648,997 Grade (g/t) 7.63 7.14 7.49 ---------------------------------------------------------------- Oz. of Gold 114,329 42,024 156,352 ---------------------------------------------------------------- kg of Gold 3,556 1,307 4,861 ---------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Measured + Metric Tons(t) 643,826 197,765 841,591 Indicated Grade (g/t) 7.96 7.24 7.79 ---------------------------------------------------------------- Oz. of Gold 164,815 46,042 210,857 ---------------------------------------------------------------- kg of Gold 5,126 1,432 6,556 ---------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Inferred Metric Tons(t) 207,517 218,630 426,148 Grade (g/t) 6.76 6.30 6.52 ---------------------------------------------------------------- Oz. of Gold 45,083 44,283 89,366 ---------------------------------------------------------------- kg of Gold 1,402 1,377 2,778 ---------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.) The Qualified Persons for the mineral resource estimate were Alain Carrier, M.Sc., P.Geo. and Julien Davy, M.Sc., P.Geo. (InnovExplo Inc.), and the effective date of the estimate is October 5, 2005. 2.) Mineral resources are not mineral reserves and do not have demonstrated economic viability. Due to the uncertainty which may attach to inferred mineral resources, there is no assurance that inferred mineral resources will be upgraded to proven and probable mineral reserves as a result of continued exploration. 3.) Results are presented undiluted and in situ, and some resource blocks may be locked in pillars. The estimate included six (6) gold-bearing zones ("Main", "A", "B", "C", "A West" and "B West") and covers the Bachelor Lake, Hewfran East and West areas. 4.) The resources were compiled using a cut-off grade of 3.43g/t Au. This cut-off must be re-evaluated in the light of the present market conditions: gold price, exchange rate and mining cost. A fixed density of 2.755g/cm(3) was used. A minimum of 1.5m horizontal width was applied, using the grade of the adjacent material when assayed, or a value of zero when not assayed. High grade capping were fixed at 51.4g/t Au for the "Main" zone, and to 34.3g/t Au for the "A", "B", "C", "A" West and "B" West zones and were done on 0.75 m drill hole composite interval. 5.) Measured resources were evaluated from a polygonal method using underground geological mapping and face sampling assay results. 6.) Indicated and inferred resources were evaluated from drill hole results using a block model approach (inverse distance squared interpolation) constrained within six (6) individual 3D wire frames ("Main", "A", "B", "C", "A West" and "B West" zones). 7.) Calculations used Imperial units (feet, short tons and oz/short ton Au) and results were rounded to reflect their "estimate" nature. These results were later converted into Metric using a factor of 0.90178 for the conversion of short tons into tonnes and a factor of 34.2865 for the conversion of oz/t Au into g/t Au. 8.) The Company is not aware of any known environmental, permitting, legal, title, taxation, socio-political, marketing, or other relevant issues that could materially affect the mineral resource estimates. -46- MINERAL RESERVES There are no mineral reserves estimated for the Bachelor Lake property. MINERAL PROCESSING AND METALLURGICAL TESTING Results from previous metallurgical testing were not available for Bachelor. InnovExplo presumed that metallurgical tests were conducted prior to the mill opening. The historic mill recovery rate during a period of seven years (between 1982 and 1989) ranges from 91.8% to 93.7% (refer to the Table below). The average gold recovery rate of 93.0% obtained from historic milling at Bachelor Lake may be an appropriate estimate for the Bachelor Lake resources. - -------------------------------------------------------------------------------- BACHELOR MILL OPERATING STATISTIC - -------------------------------------------------------------------------------- YEAR MILLED HEAD GRADE RECOVERY RATE MILL AVAIL. OUNCES PRODUCED (SHORT TONS) (OZ/T) (%) (%) - -------------------------------------------------------------------------------- 1982 73,178 0.124 - - 8,077 1983 166,894 0.166 92.0 91.0 25,627 1984 156,086 0.140 92.4 85.5 20,104 1985 164,081 0.141 93.6 87.1 21,729 1986 136,520 0.158 93.7 83.3 20,140 1987 31,650 0.151 91.8 92.2 4,391 1988 144,298 0.146 92.7 86.9 19,516 1989 85,661 0.141 92.7 93.1 11,445 - -------------------------------------------------------------------------------- TOTAL 958,368 0.147 93.0 88.4 131,029 ================================================================================ The Bachelor Lake JV is presently revising the actual conditions of the Bachelor Lake mill. This mandate has been given to Genivar (formerly Leandre Gervais & associes engineering firm) and will include a review of adequate mineral processing for the Bachelor Lake gold mineralization. In September 1988, Aur performed a mill test from a bulk sampling from their 6th and 8th Level in the Hewfran east area. According to Aur memorandums, +/- 3,300 tons (784 skips @ 4.0 tons per skip) were taken from the "Main" zone at the 8th Level and +/- 2,300 tons (601 skips at 4.0 tons per skip) were taken from the "A" zone at the 6th Level. Bulk samples were milled at the Bachelor mill under the supervision of Aur engineers. No official final report on the mill test was found by InnovExplo. However, several memorandums indicated that they first milled the A Zone but also mixed it with the Main Zone muck samples. This mix was proposed to avoid documented dilution problems on the "A" zone (probably due to the presence of a chlorite rich footwall as suggested by Aur's geologists). Before the mill test, Aur anticipated 2,800 to 3,300 st at 0.148oz/t Au (from the Main Zone at the 8th Level) and 2,300 st at 0.091oz/t Au (from the "A" zone at the 6th Level) for a total of 5,600 st at 0.123oz/t Au (underground mucking sampling average). The last daily report from the Bachelor mill (September 25, 1988) stated that 5,783 short dry tons were milled at an average of 0.1094 oz/t Au, and yielded a bullion bar of 736.46 ounces, of which 632.84 ounces were gold. The calculated mill recovery was 91.96 %. The results correspond to a discrepancy with the Aur calculated stock pile grades (0.123 oz/t Au). The extra 175 to 200 tons of waste (0.001 oz/t Au) was explained by surface pod scraping, in view of the large surface area covered by the muck and was even considered as an excellent execution by scoop operators. However, these added waste tons did not explain the discrepancy (11%). Following operation at the Bachelor Lake underground mine, the owner at that time, Espalau, gave Geospex the mandate to prepare a restoration plan proposal (phase 1) for the Bachelor Lake mining site. The restoration plan proposal was described in a report dated January 1997 and submitted for approval to the Service du developpement et du milieu miniers of Quebec government for which no offical response was given because of the "temporary closing" status of the site. However, the property was considered conform in the conclusion of a preliminary report in February 1998. This report also mentioned that the -47- Ministere de l'Environnement did not add any recommendations. The mining contrator on site is currently keeping the mine dewatered. The water is pumped from the underground workings into the tailing pond in conformity with the Certificate of Authorization delivered by the Ministere de l'Environnement du Quebec on June 28th, 2004. Exploration activities on the property conform to the Quebec regulations. EXPLORATION AND DEVELOPMENT The Bachelor Lake JV is obligated to satisfy a $1.6 million work commitment to acquire a 100% interest in the Hewfran Claims from Aur. In addition, the Bachelor Lake Report recommended a two-phase work program for the Bachelor Lake Property comprised of: (1) expansion of the underground mineral resource base and completion of a pre-feasibility study; and (2) improving the knowledge and definition of the mineral resources on the property and the preparation of a feasibility study. The pre-feasibility study will have to demonstrate the economic viability of the mine as a justification for proceeding with the second phase of the work program. The second phase activities will lead to the preparation of a feasibility study that will confirm that the economic viability of the mineral resources is suitable to solicit funds from external sources. The costs of the first phase work program is estimated at $4.9 million and the second phase is estimated at $8.5 million. The costs of each phase are broken down as follows:
- ------------------------------------------------------------------------------------------------------------ PHASE I - UNDERGROUND EXPLORATION PROGRAM AND PRE-FEASIBILITY STUDY - ------------------------------------------------------------------------------------------------------------ PHASE I WORK PLAN AND BUDGET UNITS UNIT COST TOTAL COST $ $ - ------------------------------------------------------------------------------------------------------------ 1.) SURFACE EXPLORATION PROGRAM - ------------------------------------------------------------------------------------------------------------ Test the West extension and develop underground targets 7,500 m $ 100 $ 750,000 - ------------------------------------------------------------------------------------------------------------ Compile regional and local data base Lump sum $ 30,000 $ 30,000 - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL $ 780,000 - ------------------------------------------------------------------------------------------------------------ 2.) UNDERGROUND EXPLORATION PROGRAM - ------------------------------------------------------------------------------------------------------------ Planning and design of the program Lump sum $ 30,000 $ 30,000 - ------------------------------------------------------------------------------------------------------------ Upgrade mine infrastructure Lump sum $ 1,450,000 $ 1,450,000 - ------------------------------------------------------------------------------------------------------------ Underground development 350 m $ 2,600 $ 910,000 - ------------------------------------------------------------------------------------------------------------ Underground diamond drilling program 12 000 m $ 100 $ 1,200,000 - ------------------------------------------------------------------------------------------------------------ Underground support and services 5 months $ 75,000 $ 375,000 - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL $ 3,965,000 - ------------------------------------------------------------------------------------------------------------ 3.) RESOURCE ESTIMATE AND PRE-FEASIBILITY STUDY - ------------------------------------------------------------------------------------------------------------ Validation, interpretation, resource estimate Lump sum $ 70,000 $ 70,000 - ------------------------------------------------------------------------------------------------------------ Pre-feasibility study Lump sum $ 70,000 $ 70,000 - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL $ 140,000 - ------------------------------------------------------------------------------------------------------------ 4.) ENVIRONMENTAL AND PERMITTING - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL Lump sum $ 70,000 $ 70,000 - ------------------------------------------------------------------------------------------------------------ 5.) INFORMATION PROGRAM - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL Lump sum $ 15,000 $ 15,000 - ------------------------------------------------------------------------------------------------------------ TOTAL PHASE I $ 4,970,000 - ------------------------------------------------------------------------------------------------------------
-48-
- ------------------------------------------------------------------------------------------------------------ PHASE II - UNDERGROUND EXPLORATION PROGRAM AND FEASIBILITY STUDY - ------------------------------------------------------------------------------------------------------------ PHASE II WORK PLAN AND BUDGET UNITS UNIT COST TOTAL COST $ $ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ 1.) UNDERGROUND PROGRAM - ------------------------------------------------------------------------------------------------------------ Infrastructure work and shaft rehabilitation Lump sum $ 460,000 $ 460,000 - ------------------------------------------------------------------------------------------------------------ Shaft extension 200 m $ 12,000 $ 2,400,000 - ------------------------------------------------------------------------------------------------------------ Underground development 300 m $ 2,600 $ 780,000 - ------------------------------------------------------------------------------------------------------------ Extraction of a bulk sample Lump sum $ 100,000 $ 100,000 - ------------------------------------------------------------------------------------------------------------ Underground development for drill program 800 m $ 2,600 $ 2,080,000 - ------------------------------------------------------------------------------------------------------------ Underground support services 13 months $ 75,000 $ 975,000 - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL $ 6,795,000 - ------------------------------------------------------------------------------------------------------------ 2.) RESOURCE INFILL AND EXPANSION DRILLING - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL 15 000 m $ 100 $ 1,500,000 - ------------------------------------------------------------------------------------------------------------ 3.) FEASIBILITY STUDY - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL Lump sum $ 200,000 $ 200,000 - ------------------------------------------------------------------------------------------------------------ 4.) CONTINUE ENVIRONMENTAL AND PERMITTING - ------------------------------------------------------------------------------------------------------------ SUB-TOTAL Lump sum $ 50,000 $ 50,000 - ------------------------------------------------------------------------------------------------------------ TOTAL PHASE II $ 8,545,000 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL PHASE I AND PHASE II $ 13,515,000 - ------------------------------------------------------------------------------------------------------------
ADJACENT PROPERTIES The Bachelor Lake JV also owns claims adjacent and contiguous to the Bachelor property. Subsequent to August 10th, 2005, Metanor acquired the MJL Claims and Hansen Claims respectively located adjacent to the north and to the west of its property from MJL Explorations and J. Hansen. The MJL Claims are comprised of 74 claims (1,976.36 ha) and the Hansen Claims are comprised of 14 claims (311.33 ha). Metanor paid a sum of $10,000 and issued 50,000 common shares from its capital stock to the vendors. Metanor will pay the same amount to the vendors every year over a three-year period (2006 to 2008 inclusively). The acquisition amounts to $40,000 and 200,000 Shares. The vendors were also granted a 2% NSR, redeemable under certain conditions. QUARTER MOON LAKE PROPERTY, MANITOBA On February 9, 2005, the Company signed a letter of intent (the "Quarter Moon LOI") with Endowment Lakes (2002) Limited Partnership ("Endowment Lakes") granting the Company the option to earn up to an 80% interest in the Quarter Moon Lake Gold Property in north-central Manitoba. Under the Quarter Moon LOI, the Company was granted the right to acquire an initial 51% interest in the property by paying $40,000 and issuing 50,000 common shares upon regulatory approval of the transaction, completing a $250,000 minimum work commitment in the first year, paying a further $40,000 and issuing 50,000 common shares on the first anniversary and completing a further $300,000 minimum work commitment in the second year. The Company was granted the further option to earn an additional 29% interest by completing an additional $1.5 million in exploration and development over a subsequent two-year period and paying an additional $40,000 and issuing 50,000 common shares on or before the third anniversary of the Quarter Moon LOI. The Company is responsible for advancing the property to production and will recover all costs out of production prior to sharing in profits on an 80:20 basis. Endowment Lakes will hold a 1% net smelter returns royalty on production from the property which may be purchased at any time by the Company for $1 million. -49- SHERRIDON PROPERTY The following information on the Sherridon Property is derived from the report dated January 31, 2006 entitled "Technical Report on the Sherridon VMS Property, North-Central Manitoba, Canada (the "Sherridon Report") prepared by Karen J. Ferreira, M.Sc., P.Geo., who is a qualified person as defined in NI 43-101. PROPERTY DESCRIPTION AND LOCATION The Sherridon Property includes 56 mineral claims that total 10,972 hectares. The Sherridon Property holdings are informally subdivided by the company in four groups: the Sherridon, Sherridon East, Meat Lake, and Quarter Moon Lake. These subdivisions are for the convenience of the Company only, and do not reflect any regulatory designation by the Manitoba Government. The Sherridon and Sherridon East claims are contiguous. The Meat Lake and Quarter Moon Lake claims are contiguous. The Sherridon East claims are separated from the Quarter Moon Lake claims by a distance of 1 km. The Sherridon Property is in The Pas Mining Division of Manitoba, in NTS areas 63N/02 NW and 63N/03 NE, with a small portion of the claims extending into 63N/02SW and 63N/03SE. The main shaft of the past-producing Sherridon Mine is located at 55(0)08'22"N 101(0)06'25"W. The centre of the Meat Lake claims is located at about 55(0)08'N 100(0)48'W. The Sherridon East and Meat claims were staked and are held by the Company. Continued ownership of these claims by The Company is subject to meeting work commitments set forth by the Mines and Minerals Act of Manitoba and its accompanying Regulations. The Quarter Moon Lake claims (i.e., Elm 7, Elm 8, Elm 9, Elm 10 and Elm 12) were optioned by the Company from Endowment Lakes pursuant to the Quarter Moon LOI. The Company has the right to acquire up to an 80% interest in the Quarter Moon Lake claims pursuant to the terms of the Quarter Moon LOI. See "Item 4. Information on the Company. Principal Properties - Quarter Moon Lake Property, Mantitoba" for a summary of the terms of the Quarter Moon LOI. The Crown owns surface rights for the areas covered by all of the claims except for seven claims within the Sherridon Community Boundary. Within subdivisions of the Sherridon Community Boundary, surface rights are held by a variety of parties, including private individuals, commercial enterprises, the community council; some lots are under the jurisdiction of the Crown Lands Branch. Ownership, zoning and other matters are covered in the Sherridon Community Council Land Use Policy, which was implemented in 1991 by Manitoba Northern Affairs. The Kississing Lake management strategy, implemented in 1986 and formally supported in the Sherridon Community Council Land Use Policy, was developed to protect water quality of Kississing Lake and its surrounding environs in order to encourage and maintain the tourist recreational industry. The mineral claims have not been legally surveyed. The following map identifies the location of the Sherridon Property: -50- Figure 1: Property Location [GRAPHIC OMITTED][GRAPHIC OMITTED][OBJECT OMITTED] Omitted graphic is Location Map of Sherridon Property on map of the Province of Manitoba showing location in reference to Flin Flon, Cranberry Portage, The Pas, and Snow Lake -51- The past-producing Sherridon Mine, the Cold Lake deposit, and the Fidelity zone (also known as Jonah Lake zone) occur on the Company's property. Claims containing the Park Lake deposit, owned by Hudson Bay Mining & Smelting Co., Ltd., are contiguous with the Company's claims in the Sherridon area. The Bob Lake deposit, owned by W. Bruce Dunlop Limited, is surrounded by the Company claims. The mineral lease containing the Jungle Lake deposit, owned by Hudson Bay Mining & Smelting Co., Ltd., is contiguous with the Company ground in the Sherridon East area. The claim containing the Ake Zone, owned by W. Bruce Dunlop Limited, is contiguous with the Company ground in the Meat Lake area. Capped or fenced shafts and mine openings, tailings area, and other relics from the mining operation that ceased in 1952 are present in and around the community of Sherridon. The Company is in receipt of a letter of indemnification from the Manitoba Director of Mines that "confirms that the Company will not be held liable or responsible for any environmental contamination or degradation of or alteration to the natural environment which presently exists or can be shown to exist or to have occurred" prior to the Company's ownership of the claims, under authority of clause 127(2) of the MINES AND MINERALS ACT (Manitoba) (the "Mines and Minerals Act"), which provides that where rehabilitation of land is required in respect of work performed thereon before April 1992 under a mineral lease that expired or was surrendered or cancelled before that date, the person who held the mineral lease is as liable for the rehabilitation as he or she would have been if such legislation had not been enacted; and, where the land or any part of the land is staked and recorded on or after April 1992, the holder of the claim or mineral lease issued in respect of the land or any part of the land is not otherwise liable under the Mines and Minerals Act for the rehabilitation. The same letter advises that the Company, or its potential development partners, may use an existing report prepared in November 2004 by UMA Engineering Ltd. and Senes Consultants Ltd. as a baseline environmental impact study for the purposes of identifying the existing environmental conditions of the tailings area, but that the Company may need to update or upgrade the report with additional work if the Company plans work in the immediate area of the tailings. Exploration operations on the property are subject to the usual laws that regulate mineral exploration and development throughout the Province of Manitoba, including the Mines and Minerals Act and its Regulations and the ENVIRONMENT ACT. A work permit is required from Manitoba Conservation to undertake field work. The federal Department of Fisheries and Oceans recommends that proponents obtain a letter of advice where exploration work is planned in areas with fish habitat. Fifteen claims lie within a Sanitary Area designated by Manitoba's chief medical officer of health under the authority of the Sanitary Areas Regulation of the PUBLIC HEALTH ACT. Sanitary Areas are designed to ensure water quality in a community. If a proponent plans to conduct an activity within a Sanitary Area that may impact water quality by either depositing material into the water or establishing a camp or buildings for commercial purposes (including mining), then the proponent must obtain written permission from the Minister of Health or the chief medical officer of health. Six claims lie within the Sherridon Community Boundary. Of these claims, three claims include areas designated as Sherridon Subdivisions. Written consent was granted prior to staking by the Minister of Mines to stake and apply for mining claims within the subdivisions of Sherridon and Cold Lake. This written consent, as well as support for mining exploration and development within the community, was expressed in a letter from Sherridon Community Council to the Director of Mines. ACCESSIBILITY, CLIMATE, LOCAL RESOURCES, INFRASTRUCTURE AND PHYSIOGRAPHY The Sherridon Property is located approximately 65 km northeast of the city of Flin Flon, Manitoba near the Northern Affairs Community of Sherridon, Manitoba and the adjacent community of Cold Lake. Year-round access to Sherridon (population ~115) is by a gravel road that extends 78 km from Provincial Highway 10, from approximately 15 km north of the community of Cranberry Portage. East of Sherridon, the claims can be accessed in the summer by float plane, and parts by quad trails and boat. In the winter, these claims are accessible by snowmobile or ski-plane. Winter roads, logging roads and trails are available throughout the area. The Sherridon area is typical of the Precambrian boreal forest in Manitoba. Relief is generally low, with rolling hills separated by lakes and swamps. Glacial overburden is relatively thin, generally less than 10 metres. The claims that constitute the Sherridon Property are located at approximately 300-340 m above mean sea level. Upland areas are forested by jackpine, poplar and white spruce; lowlands have abundant black spruce and tamarack. Flin Flon and The Pas are the nearest places for which climate data are maintained by Environment Canada; their data are similar, and are averaged here to provide information about the Sherridon area: Average daily temperatures range from about 18(degree)C in July to -20.5(degree)C in January. Annual rainfall totals about 330 mm; annual snowfall totals about 135 cm. For areas with road -52- access, exploration may continue throughout the year. In more remote parts of the property, exploration may be carried on year-round with interruptions for freeze-up and spring thaw of the waterways. Power lines, owned and operated by Manitoba Hydro, and a rail line, operated by Hudson Bay Railway Company, a subsidiary of OmniTRAX Canada, go through Sherridon. In addition to the Sherridon road, numerous active logging roads and trails transect the project area. Sufficient water for exploration, and potentially for mining, operations is readily available in many lakes in the area. Flin Flon (population ~6500), Cranberry Portage (population ~1000) and The Pas (population ~5800) all have well-developed road, rail, and air transportation and businesses that service the mining, forestry, recreation, and commercial fishing industries. HISTORY Prospecting in the Sherridon area dates back to the early 1920's, not long after the Flin Flon copper-zinc deposit and other mineralization in the Flin Flon area was discovered. Many claims were held by various parties through the years. Claims that were staked, but had no work filed for assessment, are not included in the exploration history of this report. In the last twenty years, claims of this nature were held by numerous parties including (but not limited to) Aur Resources Ltd., Foran Mining Corporation, Esso Minerals Canada, Homestake Mining (Canada) Limited, Varna Gold Inc., Granges Exploration Ltd., Noranda Exploration Company Limited, and a number of prospectors. The Sherritt Gordon deposit was discovered and first staked by prospector Philip Sherlett in 1922. Claims lapsed in 1924 and were restaked by other parties. Sherritt Gordon Mines, Limited, was formed in 1927 to explore, develop, and mine the property. The Sherritt Gordon mine at Sherridon operated from 1931 to 1932 and 1937 to 1951. Production took place from the West Lens from 1931 to 1932 and 1937 to 1951; production took place from the East Lens from 1940 to 1946. A total of 166,093 tonnes copper, 135,108 tonnes zinc concentrate (50%), 2,867 kg gold and 91,320 kg silver were extracted from 7,737,936 tonnes mined. As mine closure at Sherridon became imminent, Sherritt Gordon Mines Limited, began moving most of the buildings and equipment from Sherridon to Lynn Lake, Manitoba, approximately 260 km away, where it was opening a nickel mine. From 1946 to 1953, Sherritt Gordon Mines Limited, moved more than 200 buildings via tractor train over a winter road. From 1924 to 1977, the ground near the Sherritt Gordon deposit was covered by mineral leases owned by Sherritt Gordon Mines Limited. Sherritt engaged in geological mapping, carried out an extensive geophysical survey of the northern claims, and undertook considerable exploratory diamond drilling. Sherritt's work is not included in government assessment files. Hudson Bay Exploration & Development Co. Ltd. restaked the ground in 1977 and held it until 1994. The ground was open for staking from 1994 to 1997. Peter C. Dunlop staked the ground in 1997 and held it until 1999. From 1999 to 2002 the area near the deposit was held by W. Bruce Dunlop (NPL) Limited. Some prospecting work was done adjacent to the old tailings area. The ground was open for staking from 2002 to 2005, when the Company staked it. The Sherridon East and Meat Lake areas had a similar history with many early prospectors' claims. Parts were covered by Sherritt Gordon Mines Limited mineral leases, which lapsed at various times in the 1950's and 1970's. Hudson Bay Exploration & Development Co. Ltd. carried out the most widespread work throughout the intervening period, mostly by coverage with horizontal loop electromagnetic and magnetic surveys, generally using coil separations of 400 ft. (120 m) for the HLEM surveys. HBED drilled numerous holes to test conductors throughout the area. Most of these holes were about 120 m or less in length. Various other parties held claims in the area throughout the 1980s and 1990s. Much of the exploration focus during this period was gold exploration. The area of the Quarter Moon Lake claims was similarly held by numerous prospectors through the years. Emphasis in this area has traditionally been toward gold exploration closer to the Nokomis Lake deposit southeast of the Company's property. On the Quarter Moon Lake property, the most recent work was done in 2003-2005 by Endowment Lakes, the company from whom the Company optioned five claims. Geochemical survey work was previously conducted that included seven lake sediment samples, 1 stream sediment sample from claim, six soil samples, and 21 lithogeochemical samples. The samples were collected to follow-up a regional gold-arsenic lake sediment anomaly noted by the Geological Survey of Canada in 1986. The lithogeochemical samples contained up to 159 ppb gold, up to 36 ppm tungsten, and up to 14.4% MgO in amphibolite. Further geochemical work and prospecting in the area of these anomalies led to the discovery of the Emily gold prospect, 250 m upstream from the stream sediment anomaly. Further work continued in 2004 with additional soil geochemical sampling to better characterize the rock units in the area and prepare for additional ground follow-up. Four cuts were channel sampled (total 24 samples) with a diamond saw in May 2005; the best values were 8.7 g/t Au over 0.4 m in one pit and 7.2 g/t Au over 0.5 m in another. Nineteen holes totalling 1215 m were drilled in May and June 2005 to test the showing at depth; a discontinuous area, approximately 200 x 30 m, was outlined that contained, on average, about 1 g/t Au over about 1 m. Further drilling on the Emily prospect was not recommended. -53- GEOLOGICAL SETTING Geologists from the Geological Survey of Canada noted mineralization in the Sherridon area as early as the late 1920's. The area was first mapped at a scale of 1:63 360 and 1:31 680 from the mid-1940's to the early-1950's by the Geological Survey of Canada. Additional geological mapping (mostly 1:50 000 scale) was conducted from the mid-1980s to the mid-1990s. This latter activity was coordinated with NATMAP (National Mapping Program) multidisciplinary geological studies throughout the Flin Flon, Snow Lake and Kisseynew regions. This most recent, comprehensive work included geological mapping, geochemical, and geochronological work that led to the recognition of their common stratigraphy and related recognition of tectonic environments that led to the assemblage of these related terranes. REGIONAL GEOLOGY The Sherridon Property is in the south flank of the Kisseynew gneiss belt, a metasedimentary terrane that is part of the Paleoproterozoic Trans-Hudson Orogen. The Trans-Hudson Orogen consists of several Proterozoic belts of metavolcanic, metasedimentary and intrusive rocks that occupy the area between the Archean Hearne Province to the northwest and the Archean Superior Province to the southeast. The Kisseynew gneiss belt represents a sedimentary basin flanked to the north and south by magmatic arc terranes, notably the Flin Flon - Snow Lake metavolcanic belt to the south and the Lynn Lake - La Ronge metavolcanic belt to the north. The central part of the Kisseynew basin is dominated by Burntwood suite migmatized greywacke (~1.86-1.84 Ga). The north and south flanks of the Kisseynew domain consist of structurally interlayered gneisses that include rocks directly related to the flanking arc terranes. The boundary between gneisses of the south flank of the Kisseynew belt, which includes Sherridon area, and the Flin Flon - Snow Lake belt is transitional. The adjoining Flin Flon - Snow Lake belt consists of a tectonic collage of volcanic, volcaniclastic, and related intrusive rocks of the Amisk Group, an unconformably overlying Missi Suite of mainly clastic and subordinate volcanic rocks, and plutons of various ages. Gneisses have been thrust faulted over volcanic rocks along the south flank of the Kisseynew at the Kisseynew - Flin Flon belt margin. LOCAL GEOLOGY The south flank of the Kisseynew belt includes the following four major rock groups: - Orthogneisses derived from mafic to felsic volcanic, intrusive and volcaniclastic rocks (1.92-1.85 Ga), which are equivalent to the Amisk Group of the Flin Flon - Snow Lake belt. Amphibolites are interlayered with felsic gneisses are interpreted as metagabbros and Amisk metabasalts. - Some orthogneisses in the immediate Sherridon area that make up the crescent-shaped Sherridon structure have an uncertain origin. The orthogneisses of the Sherridon structure include siliceous, pelitic and calc-silicate gneisses interlayered with amphibolite, which are interpreted as being derived from volcanic and plutonic rocks. The Sherridon gneisses may be an assemblage of metavolcanic and intrusive rocks equivalent with the Amisk Group. - Paragneisses derived from marine turbidites (1.866-1.84 Ga) are assigned to the Burntwood Suite. These paragneisses are generally graphitic (garnet)-biotite gneisses in the Kisseynew's south flank. - Paragneisses derived from terrestrial clastic and volcanic rocks (1.866-1.84 Ga) are considered equivalent to the Missi Suite of the Flin Flon - Snow Lake belt. These include mainly magnetite-bearing quartz-rich gneisses with lesser volcanic-derived amphibolite and felsic gneiss. Earlier workers had subdivided rocks of the Kisseynew belt into Nokomis Group paragneisses and hornblende-plagioclase gneiss and unconformably overlying Sherridon Group siliceous paragneisses, and post-Sherridon intrusions. Nokomis Group rocks were correlated with sediments of the Amisk Group from the Flin Flon belt and Sherridon Group with the Missi Group of the Flin Flon belt, and this was the usage for other work, with some acknowledged unresolved difficulties in correlation, for some time. As work continued and understanding improved for both and Flin Flon and Kisseynew domains and relationships between the two, the use of "Nokomis Group" and "Sherridon Group" terminology for rocks of the Kisseynew has been replaced with the Flin Flon belt's "Amisk Group" and "Missi Suite" terminology in more recent literature. This change was significant, not -54- only because of this recognition of equivalency, but also because geologists recognized the ample presence of felsic volcanic rocks, with calc-alkaline composition, in the area directly around Sherridon; this has positive implications for VMS mineralization potential. Structural, geochronologic and geochemical studies support the validity of considering units of the Flin Flon - Snow Lake belt as stratigraphic equivalents of the south flank of the Kisseyne. This equivalency in stratigraphy between parts of the Kisseynew south flank and the Flin Flon - Snow Lake belt has particular relevance for mineral exploration, because the Flin Flon - Snow Lake belt is a well-known host to many past-producing, producing and subeconomic copper-zinc deposits. Upper amphibolite facies metamorphism resulted in extensive destruction of primary structures and extensive granitization in the Kisseynew gneisses. Five deformational stages have complexly deformed the Kisseynew belt into refolded recumbent-fold packages. Two interfering fold events yielded the notable hook shapes that characterize the map view of rocks in the Sherridon area and in the Meat Lake area. Rocks in the Sherridon region have experienced notable attenuation parallel to compositional layering. Cordierite-anthophyllite and garnet-anthophyllite assemblages in various places throughout the south flank of the Kisseynew belt represent hydrothermally altered rocks. Some of this alteration accompanies sulphide mineralization. Some alteration assemblages do not have an apparent relationship with sulphide mineralization. This may represent hydrothermal alteration material that was clastically transported paleotopographically down-slope from its initial source in the basin. Alternatively, it has been suggested that the attenuation due to the extreme strain that affected Kisseynew rocks may have transposed alteration zones along strike from massive sulphide mineralization, dislocated from a more typical original orientation where the alteration assemblages represent a crosscutting pipe-like feeder beneath a sulphide zone. PROPERTY GEOLOGY The Company's land holdings are centred on the Sherridon - Hutchinson Lake Complex and the Walton Lake nappe. Both structural complexes include gneisses derived from various Amisk Group juvenile arc volcanic rocks, mainly felsic volcanic and intrusive with a lesser interlayered mafic component. In the core of the Sherridon complex, gneisses with an uncertain origin (see "Sherridon gneisses" above) comprise interlayered graphitic volcaniclastic wackes, quartz-carbonate rock (an impure marble), and calc-silicate rock. Smaller plugs of gabbro and amphibolite occur near the centre of the structural complex, and amphibolite forms a "rim" around the western part. The latter is correlated with the Amisk Group. Porphyroblastic garnet-anthophyllite +/- cordierite gneiss and sillimanite gneiss in the Star Lake area (i.e., near the Company's Sherridon East claims) and in the Sherridon area are strongly foliated and are associated with shear zones. These rocks are interpreted as hydrothermal alteration assemblages. The Walton - Meat Lake area, centred on the Walton Lake nappe, consists of Amisk Group volcanic arc assemblage rocks of the Batty Lake - Meat Lake Sequence. Dominant lithologies are various amphibolites and felsic gneisses that are interpreted as metamorphosed mafic and felsic volcanic flows and fragmental rocks, felsic volcanic and subvolcanic rocks; calc-silicate rocks interpreted as altered felsic volcanic breccia; and cordierite-garnet +/- sillimanite +/- hercynite +/- anthophyllite gneiss and biotite-garnet +/- hornblende gneiss interlayered with garnetiferous felsic gneiss interpreted as extensive, prominent, hydrothermal alteration assemblages. DEPOSIT TYPES Volcanogenic copper-zinc-(gold)-(silver) massive sulphide (VMS) deposits are the main mineral deposits in the Kisseynew domain. This style of deposit is the major target for exploration on the Company's Sherridon property. Gold mineralization also is known at a number of locations in the south flank of the Kisseynew. The Company's Quarter Moon Lake claims are primarily a gold exploration property, however this deposit type is of secondary importance for the Company in its current exploration outlook. MINERALIZATION Massive sulphides including copper- and zinc-bearing sulphides are known to occur as discontinuous lenses in Sherridon Suite quartz-rich gneisses (felsic volcanic and volcanic-derived rocks) near the contact with hornblende-plagioclase gneisses (intermediate to mafic metavolcanic rocks) in the Sherridon - Hutchinson Lake complex and in garnet-biotite +/- cordierite +/- sillimanite gneiss on the east limb of the Meat Lake synform. Known deposits with this style of mineralization in the area include the past-producing Sherritt Gordon Mine (West and East Lenses), the Cold Lake deposit, and the Fidelity zone, all discussed below, as well as the Park Lake, Bob Lake, Jungle Lake, and Ake Zone deposits. The past-producing Sherridon Mine, the Cold Lake deposit, and the Fidelity zone occur on the Company's property. An association has been identified between mineralization known in the area at the time, which included both the Sherritt Gordon Mine and the Bob Lake deposit, their stratigraphic position between a quartz-rich gneiss and hornblende -55- amphibolite (metabasalt), and the multiple folds. Their findings have been confirmed by later work. An association has also been identified between mineralization and pegmatites, which particularly occur along zones of weakness such as lithologic contacts. Cordierite-anthophyllite or garnet-anthophyllite rocks likely represent metamorphosed equivalents of chloritic hydrothermal alteration zones in the Sherridon area. Some of the altered rocks are known to be associated with sulphide mineralization, while others do not show an apparent association with sulphides. The Sherritt Gordon mine has been described as having consisted of two zones, the West and East Lenses, with a combined length of almost 4900 m; of this total, 1100 m of barren rock separated the two zones. The average width was about 4.6 m. The East Lens was about 75 m deep, and the West Lens was about 150-245 m deep. The West Lens rakes north, flattening with depth, to about 460 m maximum depth. The ore was in sharp contact with enclosing rocks. The structural footwall (which is the overturned stratigraphic hanging wall) to the deposit is quartz-rich gneiss; the structural hanging wall is hornblende gneiss. They describe "bulges or offsets" (up to ~0.5 Mt) composed of pegmatite in the hanging wall of the West Lens that were sufficiently mineralized to make subsidiary orebodies. Mineralization from these folded pegmatite offshoots provided 25% of the Sherritt Gordon Mine's production. Mineralization was mostly pyrrhotite, with pyrite, chalcopyrite and sphalerite and rarely magnetite. The East Lens was more zinc-rich than the West Lens. Uncommon to rare occurrences have been identified of cubanite, arsenopyrite, and gahnite in the Sherritt Gordon ore. Gangue minerals include the constituents of the host quartz-rich gneiss, I.E., quartz, plagioclase and biotite, with minor to rare hornblende, clinopyroxene, scapolite and calcite. Other styles of mineralization known from outcrop or drill core have been identified in the area: - Zones of disseminated pyrrhotite +/- pyrite that are barren or have low-grade chalcopyrite and sphalerite are present in similar settings throughout the area representing sulphide facies iron formations. - Calc-silicate gneisses contain cherty sections that include disseminated pyrrhotite, but have not been known to contain appreciable copper and zinc. - Gold is structurally controlled in the Nokomis Lake area. Recent exploration on the Quarter Moon Lake portion of the property was directed toward gold exploration. On one of the Meat claims, a series of altered mineralized outcrops and trenches constitute a mineral occurrence known as the Douglas claims since the late 1920's. The occurrence has been summarized as consisting of disseminated to near-massive pyrrhotite +/- pyrite. The mineralization is associated with layers of very fine-grained, highly siliceous, garnetiferous quartzofeldspathic gneiss and garnet-anthophyllite gneiss. Along and near the southwest shore of Star Lake on one of the present-day East claims, several mineral occurrences are known. Along the southwest shore of Star Lake, a minor occurrence of pyrite has been known since the 1950's as the Star Lake sulphide occurrence. The host rocks are calc-silicate gneiss, more specifically hornblende-rich gneiss with interbeds rich in diopside and clinozoisite. At another occurrence approximately 400 m to the southwest, a cordierite-anthophyllite sequence includes the following layers: quartz-garnet-anthophyllite-biotite, garnet-anthophyllite +/- cordierite, and anthophyllite-cordierite. Previous work included a geochemical analysis of the anthophyllite-cordierite layer with 5660 ppb Au, 3220 ppm Te and 4400 ppm Zn. On another East claim, a mineral occurrence known simply as the "Cu-sulphide property" consists of pyrrhotite, minor chalcopyrite, and variable alteration (chlorite, sericite, sillimanite, graphite, carbonate, garnet) in quartzite (metamorphosed chert) in outcrop, trenches, and drillcore. The Elken Lake area is now covered by some of the East claims as well as part by claims owned by Hudson Bay Exploration & Development Co. Ltd. Trenches blasted in the late 1920's by Phillip Sherlett and Sherritt Gordon Mines Limited exposed pyrrhotite, minor chalcopyrite, galena and sphalerite in garnetiferous quart-biotite gneiss, a 60 cm wide shear zone, and narrow quartz veins. Over the years, this area has been tested by various geological and geophysical surveys and shallow drill holes. The Nokomis Lake deposit located on the southeast side of Nokomis Lake is ~4 km southeast of the Quarter Moon Lake claims. Its owner, Pioneer Metals Corporation, categorizes the deposit as a "shear-related intrusive-hosted (tonalite) lode gold system. This style of deposit is the model for exploration on the Quarter Moon Lake claims previously undertaken by the Company and Endowment Lakes. -56- EXPLORATION On the Quarter Moon Lake claims, channel sampling and diamond drilling were carried out by Buhlmann and Associates Ltd. for the Company. Four cuts were channel sampled (total 24 samples) with a diamond saw in May 2005. The best values were 8.7 g/t Au over 0.4 m in one pit and 7.2 g/t Au over 0.5 m in another. Nineteen holes were drilled to test the showing at depth in May and June of 2005. A discontinuous area, approximately 200 x 30 m, which contained, on average, about 1 g/t Au over about 1 m, was outlined by drilling. Howard Poulsen, consulting geologist, was engaged by the Company to prepare a provisional "desktop analysis" of structural data from previously published maps and reports on the Sherridon area. Dr. Poulsen used SpheriStatTM software in processing ~2400 structural measurements compiled from literature. From his analysis, Poulsen notes several issues for practical consideration: (1) Hydrothermal alteration and their accompanying sulphide deposits are expected to be attenuated and transposed from their original stratigraphic positions because of the high strain they experienced during deformation. (2) Recumbent folds are dominant with shallow east dips or plunges. (3) Two stratigraphic horizons have particular interest for mineral exploration; these horizons may be stratigraphically separate or may represent a single horizon repeated by folding. (4) The lack of stratigraphic facing indicators is problematic to resolving some structural questions. Lithogeochemistry is suggested as a possible tool to help answer these questions. DRILLING The Company drilled nineteen diamond drill holes totalling 1215 metres on two Elm claims from June 30 to July 14, 2005 to test the Emily gold prospect at depth. Drilling was done by Forage Orbit Inc., Val-d'Or, Quebec. Core was logged and sampled by geologist Slobodan Jankovic, P.Geo. of Edmonton, Alberta. Drill core was logged in detail in the field, with lithologic, structural, mineralogic, and alteration characteristics reported on standardized logging sheets. Core axis angle measurements were made at all lithologic contacts, and varied from 50(degree) to 85(degree), roughly averaging 70(degree). Drill holes ranged from 42 to 105 m in length, average 63 m. All holes were drilled vertically. Drill hole collar locations were located with reference to a cut grid. The core size is BQ. Downhole surveys were not done. A discontinuous area, approximately 200 x 30 m at 20-28 m depth, which contained, on average, about 1 g/t Au over about 1 m, was outlined by drilling. Mineralization was present in a silicified +/- carbonatized granodiorite to tonalite to ferrodiorite with minor disseminated pyrite, pyrrhotite, +/- arsenopyrite. SAMPLING AND ANALYSIS Sixty-five drill core rock samples of the mineralized granodiorite - tonalite - ferrodiorite from the nineteen drillholes were collected for analysis of Au, in ppb and g/t, and As, in ppm and per cent. All drill core sections with visible sulphide mineralization were sampled continuously. Individual samples were collected in 0.25 to 1.90 m widths, with individual sample intervals chosen to correspond to similar quantities of sulphide minerals or some other lithologic inhomogeneity. The Company is not aware of any drilling, sampling or recovery factors that could have materially impacted the accuracy and reliability of the results. Standard procedures for handling core in the field were used by the diamond drill contractors and the field geologist. Drill core recovery was typically quite high, with virtually 100% recovery. The sample quality of the samples for assay was excellent; where sulphide mineralization was observed in drill core, it was apparently evenly distributed through both halves of the split core. Drill core was placed in wooden core trays, logged, marked and sampled on the property. Drill core is stored on the property. Diamond drill core to be analysed was split so that half of the core was retained as a permanent sample record and the other half was sent for assay. The core was split using a core splitter in the drill camp. Rock and drill core samples were transported from the field camp by the field crew to Sherridon, where they were shipped by bus to the analytical laboratory in Saskatoon, Saskatchewan. Field geologist S. Jankovic was responsible for sample selection, splitting, bagging, and recording. TSL Laboratories of Saskatoon, Saskatchewan carried out sample preparation and ICP analysis of the drill core and channel-cut samples. Pulps and rejects are retained in storage by TSL Laboratories. For drill core, Au (ppb) was analyzed by fire assay and atomic absorption; Au (g/t) was fire assayed. Samples with >1000 ppb Au were assayed for Au (g/t). Arsenic, both ppm and per cent measurements, were done by atomic absorption after an HCl-HNO3 digestion. The channel-cut samples were also subjected to aqua regia digestion, then analyzed by ICP-MS for a standard packaged range of elements and by atomic absorption for Au (ppb). The sampling methods, sample preparation procedures, security procedures, and analytical techniques employed are all standard techniques within Canada's mineral exploration industry and are considered adequate and acceptable. -57- MINERAL RESOURCE ESTIMATE There are no NI 43-101 compliant mineral resources on the Sherridon Property. EXPLORATION PROGRAM The Sherridon Report concluded that the property holds potential for the discovery of additional volcanogenic massive sulphide mineralization and that additional exploration work is warranted. The Company plans a multifaceted approach to integrate new deeper penetrating geophysical data with new and existing surface and near-surface geological information. The goal of this geological modeling combined with information from deeper-coverage, high-resolution geophysical data is to identify both potential extensions to known deposits and new "grass roots" drill targets. A modern, deep-penetrating airborne electromagnetic survey would provide complete coverage for the entire Sherridon Property. A high-resolution aeromagnetic survey in the Sherridon area would offer additional geological and structural control over the main Sherridon structural complex. Gravity surveys would be done in selected areas of the property to test suitable conductivity anomalies for coincident gravity anomalies. A combination of geological techniques including detailed structural geology analysis, lithogeochemistry, and targeted stratigraphic mapping would be used to interpret the targets for preference in drill testing. The geological analysis would be done to resolve the effects of multiple deformation and metamorphism on the rocks, and to trace favourable stratigraphic horizons. The Sherridon Report recommended a two-phase exploration program on the Sherridon property. In Phase One, specific exploration targets are identified by a combination of geophysical and geological methods. Proposed costs for Phase One activities total $1,120,000. Phase One would include the following components: 1. (a) Modern deep-penetrating airborne electromagnetic and magnetic geophysical surveys to locate deeper, high-quality exploration targets. (b) High-resolution dedicated airborne magnetic geophysical surveys to locate deeper, high-quality exploration targets. This survey is to be done over the Sherridon area in Phase One; a decision to extend the survey over other parts of the property would be made later, contingent on results from this survey. 2. Gravity surveys would be done in selected areas of the property to test suitable conductivity anomalies for coincident gravity anomalies. 3. Detailed structural analysis using compiled structural geology measurements from previous mapping surveys to trace continuation of deformed strata favourable for VMS exploration. 4. Lithostratigraphic mapping in selected areas to confirm presence and determine continuation of strata favourable for VMS exploration. 5. Geochemical surveys in selected areas as an extension of lithostratigraphic mapping to determine locations of favourable stratigraphic horizons. Choices of lithogeochemical or soil geochemical surveys, and potentially lake sediment geochemical surveys or overburden drilling, would depend on the availability of sampling media in the specific areas needing to be sampled. 6. Integration of results of the new geophysical surveys with other geological information to develop and prioritize drill targets with favourable stratigraphic and structural attributes. Phase Two involves drill testing of the exploration targets, subject to definition in Phase One. A drill program totalling approximately 20,000 metres, would likely be carried out over at least two exploration seasons, subject to definition/revision upon completion of Phase One. Proposed costs for Phase Two activities total $4,110,000. Phase Two would include the following components: 1. Linecutting and ground geophysical follow-up surveys to ground-truth the airborne anomalies. Ground geophysical work would include transient electromagnetic and magnetic surveys capable of detecting deeper targets than traditional horizontal loop electromagnetic methods. -58- 2. Exploration diamond drilling totalling approximately 20,000 metres. Part of this drilling would be allocated to identifying potential extensions to known deposits and part to "grass roots" targets. This allocation would be made as a consequence of Phase One work and on an ongoing basis as Phase Two progresses. 3. Geological and geophysical data analysis and interpretation throughout Phase Two to manage the project effectively and integrate results as exploration proceeds. The budget for the exploration program is summarized as follows: - -------------------------------------------------------------------------------- PHASE ONE: - -------------------------------------------------------------------------------- 1. AIRBORNE ELECTROMAGNETIC & MAGNETIC SURVEYS ~1,750 LINE KM Airborne electromagnetic survey $ 250,000 Aeromagnetic survey of Sherridon area 210,000 Mobilization and demobilization 80,000 Geophysical data analysis, additional processing, interpretation 210,000 ---------- $ 750,000 2. (GROUND) GRAVITY SURVEYS ON SELECTED TARGETS 125,000 3. STRUCTURAL GEOLOGY ANALYSIS 30,000 4. SELECTED GEOCHEMICAL SAMPLING, ANALYSIS 30,000 5. SELECTED LITHOSTRATIGRAPHIC MAPPING, SITE VISITS 75,000 6. DATA ANALYSIS, INTERPRETATION 110,000 ---------- TOTAL FOR PHASE ONE $1,120,000 ---------- - -------------------------------------------------------------------------------- PHASE TWO: - -------------------------------------------------------------------------------- 1. GROUND GEOPHYSICAL SURVEYS Linecutting $ 130,000 TEM survey 320,000 Magnetic survey 30,000 Data analysis, map and report preparation 20,000 ---------- $ 500,000 2. EXPLORATION DIAMOND DRILLING 20,000 metres 2,000,000 Mobilization, demobilization 30,000 Downhole PULSEM geophysical surveys 300,000 Assays, geochemical analyses 100,000 Geologist, technician 500,000 Transportation, board, communications, supplies 225,000 Environmental monitoring and compliance 80,000 Map and report preparation 100,000 ---------- $3,335,000 3. DATA ANALYSIS, INTERPRETATION, PROJECT MANAGEMENT $275,000 ---------- TOTAL FOR PHASE TWO $4,110,000 ---------- - -------------------------------------------------------------------------------- TOTAL FOR PHASES ONE AND TWO $5,230,000 ================================================================================ -59- GOVERNMENT REGULATIONS The Company's proposed exploration and development activities will be subject to extensive Canadian federal, provincial, and local laws and regulations governing various matters, including: - environmental protection; - management and use of toxic substances and explosives; - management of natural resources; - exploration, development of mines, production and post-closure reclamation; - taxation; - labour standards and occupational health and safety, including mine safety; and - historic and cultural preservation. The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations, or more stringent enforcement of current laws and regulations by governmental authorities, could cause additional expense, capital expenditures, restrictions on or suspensions of the Company's activities and delays in the development of its properties. OTHER ASSETS As at the date of this annual report, the Company does not hold any material assets other than its property, option and mineral claim interests described above. EMPLOYEES As of the date of this annual report the Company has one full-time employee, Marc Cernovitch, the Company's President and CEO. The majority of the Company's management functions are provided by private companies owned by officers and directors of the Company. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." In addition, the Company employs a number of consultants to perform specific functions, on an as needed basis. ORGANIZATIONAL STRUCTURE Effective November 30, 2002, the Company wrote off its investment in its wholly-owned subsidiary, Trimark Inc., which was engaged in the petroleum and natural gas operations in the United States. Accordingly, the Company ceased to record the activities of Trimark Inc. Effective August 31, 2004, the Company wrote-off Safari, which was inactive throughout the 2004 fiscal year, and TMK, which had sold its remaining asset. As of the date of this annual report, the Company has no subsidiaries. PRINCIPAL OFFICES The Company's executive and principal office is located at Suite 1280, 625 Howe Street, Vancouver, British Columbia, Canada. The executive office comprises 1,017 square feet and is rented from an unrelated third party for an initial term ending February 29, 2008. The Company currently is paying approximately $2,500 per month for base rent, property taxes and occupancy costs. The Company's registered office is located at Suite #1305, 1090 West Georgia Street, Vancouver, British Columbia, Canada. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS. - -------------------------------------------------------------------------------- The following discussion of the results of operations of the Company for the fiscal years ended August 31, 2005, 2004, and 2003 should be read in conjunction with the consolidated financial statements of the Company and related notes included therein. The Company's consolidated financial statements are prepared in accordance with Canadian GAAP, the application of which, in the case of the Company, conforms in all material respects for the periods presented with US GAAP except for the differences referred to in Note 16 of the consolidated financial statements of the Company included herein. The noon rate of exchange on February 28, 2006, reported by the United States Federal Reserve Bank of New York, for the -60- conversion of Canadian dollars into United States dollars was CDN $1.1379 (US $0.8788 = CDN $1.00). The effects of inflation and price changes have not had a material impact on the Company's income or net sales revenues during the past three years. To date, the Company has not engaged in any formal hedging program. OVERVIEW Since inception the Company has primarily been engaged in the mineral resource and petroleum and natural gas industries. Most recently it had been engaged in the acquisition, exploration for and development of crude oil and natural gas interests in the United States. The Company entered into a series of agreements in the 2004 and 2005 fiscal years as described in Item 4 above. The Company is now considered to be a junior mineral exploration company engaged in the acquisition of and exploration for precious metals on mineral interests located in Canada. At this stage of development, the Company has no producing properties and, consequently, has no current operating income or cash flow. The Company has not yet determined whether the properties owned by the Company or in which the Company has an option to acquire an interest have ore reserves that are economically recoverable. As a result, the Company is considered an exploration stage company. The Company is actively reviewing additional resource properties at various stages of development and may make additional acquisitions through staking, options, purchases or joint ventures. If so, significant additional financing may be required, and there is no assurance that funds would be available on terms acceptable to the Company or at all. The Company expects the properties which it owns and in which it has option interests will be moved toward determining individual viability over the next two to three years. There is no assurance that any property will prove to be mineable or, that if such a determination is made, that the Company will be able to secure financing for capital costs. Nearly all of the Company's activities are directed to such exploration programs. Yearly variations in individual property expenditures generally reflect increases or decreases in specific exploration and development costs based on previous results and the Company's decisions regarding the allocation of exploration expenditures between its projects. The Company intends to conduct exploration activities on both its owned and optioned properties. None of the properties in which the Company has interests are in production and, consequently, the properties do not produce any revenue. As a result there is little variation expected in operating results from year to year and little is to be expected until such time, if any, as the Company discovers sufficient mineralization on a property to advance the property beyond the exploration stage. The Company's level of exploration expenditures is dependent upon exploration results and the Company's ability to maintain sufficient financial resources. The Company derives interest income on its bank deposits and other short-term deposits, which depend on the Company's ability to raise funds. Of most significance would be further cash received from issuance of shares to fund ongoing operations. Through the exploration process, management intends to periodically reviews results, both internally and externally, through mining related professionals. Decisions to abandon, reduce or expand exploration efforts are based upon many factors including general and specific assessments of mineral deposits, the likelihood of increasing or decreasing those deposits, land costs, estimates of future mineral prices, potential extraction methods and costs, the likelihood of positive or negative changes to the environment, permitting, taxation, labor and capital costs. Geological and/or economic circumstances render each property unique. Consequently, it is not possible to have any predetermined hold period for a specific property interest. Costs incurred for general exploration that do not result in the acquisition of mineral properties with ongoing exploration or developmental potential are charged to operations. Exploration costs relating to the Company's property interests are capitalized as mineral properties and deferred costs. Should the Company abandon a property interest or project, the related deferred costs will be charged to operations. The recoverability of amounts shown for mineral properties and deferred costs is dependent upon the discovery of economically recoverable reserves, completion of positive feasibility studies, confirmation of the Company's interest in the underlying mineral claims, the ability of the Company to obtain necessary financing to complete exploration and development and future profitable production, or from the disposition of such properties. -61- To the best of the Company's knowledge, there are no governmental economic, fiscal, monetary, or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the Company's operations or investments by U.S. shareholders. RESULTS OF OPERATIONS YEAR ENDED AUGUST 31, 2005 COMPARED TO YEAR ENDED AUGUST 31, 2004 During the 2005 fiscal year, the Company reported a net loss of $368,110, an increase in net loss of $111,088 from the $257,022 loss reported during the 2004 fiscal year. Although there was no significant overall increase in the net loss, fiscal 2005 reflects a $1,329,000 future income tax recovery ($nil in 2004) offsetting the $379,420 increase in stock-based compensation and $876,737 increase in general and administrative expenses experienced in fiscal 2005. During fiscal 2004, the Company recorded $81,347 in oil and gas revenues. Production costs of $21,832 were incurred and depletion of $10,441 was recorded for fiscal 2004. Effective March 1, 2004, the Company sold its 3% interest in the West Ranch Field and with the sale of the Company's working interest in the West Ranch Field, the Company no longer holds any oil and gas interests. Accordingly, no oil and gas activities occurred in fiscal 2005. General and administration expenses increased in fiscal 2005 due to increased activities relating to the Company's property acquisitions and financing activities and increased shareholder communications and investor relations activities. Significant expenditures in fiscal 2005 include $60,571 (2004 - $23,324) for legal costs incurred, primarily for the continuance of the Company's domicile from the Yukon Territory to British Columbia, extra-provincial registrations and preparation of the Company's information circular and regulatory filings and $27,847 (2004 - $11,000) for audit related costs; $38,220 (2004 - $27,077) for transfer agent and regulatory filings for the Company's Annual General Meeting and various financing and property filings; $192,534 (2004 - $27,500) for consulting and professional fees provided on corporate development and services to introduce the Company to the investment community in Canada, United States and Europe; $162,259 (2004 - $5,386) for shareholder communications costs; $169,776 (2004 - $2,248) for attendance and presentations at numerous investment conferences in Canada and the United States; $13,563 (2004 - $3,217) for website design and maintenance costs; $72,521 (2004 - $2,614) for travel and related costs, primarily to attend investment conferences and meetings with the investment community; $71,477 (2004 - - $2,845) for office and miscellaneous; and $89,864 (2004 - $3,217) for salaries and benefits paid to the President of the Company. Commencing July 2004, the Company rented office space to accommodate its personnel. In fiscal 2005, the Company paid $29,760 (2004 - $3,367) for the office rent and occupancy costs. Accounting and administration expenses of $81,450 (2004 - $63,638) was billed by Chase Management Ltd. ("Chase"), a private company owned by Nick DeMare, Chairman and CFO of the Company. Chase is currently paid a base amount of $3,000 per month for bookkeeping, accounting, administration and corporate filing services provided by Chase personnel, exclusive of Mr. DeMare, and $2,000 per month related to Mr. DeMare's services as the CFO of the Company. In fiscal 2005, the Company recorded a non cash stock-based compensation charge of $559,031, compared to $179,611 in fiscal 2004. The calculation is based on the fair value of stock options granted by the Company using the Black-Scholes option pricing model, which uses estimates and assumptions. It does not necessarily provide a reliable measure of the fair value of the Company's stock options. During fiscal 2005, the Company granted 1,078,000 options with a weighted average exercise price of $0.92 per share, compared to fiscal 2004 when the Company granted 810,000 options with a weighted average exercise price of $0.61 per share. During fiscal 2005, the Company completed a number of private placement financings whereby it issued a total of 7,324,894 common shares for $6,688,797 cash proceeds. Of the total financings, 4,626,364 common shares were conducted on a flow-through share basis. Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements have been renounced by the Company to investors in accordance with Canadian income tax legislation. The renunciation of such expenditures is accounted for as a financing cost related to the flow-through issuance and resulted in a $1,566,000 reduction in share capital with a corresponding increase in the Company's future tax liability. The Company is permitted under Canadian income tax legislation to renounce flow-through related resource expenditures to investors in advance of the Company incurring the expenditure. In accordance with this legislation the Company has twelve months following the effective date of renunciation to incur the expenditures. The Company begins incurring interest charges for unspent funds after one month and fees for unspent funds at the end of the calendar year following the effective date of renunciation, and until such time as funds are -62- fully expended. During fiscal 2005, the Company incurred a $40,000 Part XII.6 tax expense on the monthly unspent balance of flow-through funds. All of the flow-through funds were spent by May 31, 2005. The Company also received a further $253,100 from the exercise of warrants to purchase 1,048,500 common shares. YEAR ENDED AUGUST 31, 2004 COMPARED TO YEAR ENDED AUGUST 31, 2003 The Company received oil and gas sales from its remaining oil and gas property until March 1, 2004, the effective date of the sale of the West Ranch Field. During fiscal 2004, the Company reported a net loss of $257,022, an improvement of $1,215,620 from the $1,472,642 loss reported during fiscal 2003. During fiscal 2003, the Company recorded an impairment charge of $1,240,794, representing the Company's net investment in its wholly-owned subsidiary, Trimark Inc., which held the Company's East Lost Hills and regional California petroleum interests. During fiscal 2004, the Company recorded $81,347 in oil and gas revenues, comprising of $15,447 of oil (378 barrels) and $65,900 of gas (8,921 mcf). Production costs of $21,832 were incurred and depletion of $10,441 was recorded for 2004. Effective March 1, 2004, the Company sold its 3% interest in the West Ranch Field for $78,630, recording a net loss of $11,031. With the sale of the Company's working interest in the West Ranch Field, the Company no longer holds any oil and gas interests. General and administrative costs increased in fiscal 2004 by $6,592, from $176,947 in 2003 to $183,539 in fiscal 2004. Expenses incurred in fiscal 2004 includes $11,000 for audit fees, $23,324 for legal costs incurred for preparation of the Company's year-end Form 20-F and regulatory filings; $27,077 for transfer agent and regulatory filings for the Company's name change and financing filings; $27,500 for consulting services with respect to the Company's restructuring, name change and financing plans; $5,386 for shareholder communications costs; $11,025 for investment conference, website designs and maintenance cost; $2,165 for travel costs; and $16,125 for office and miscellaneous. Included in general and administration expenses was $63,638 charged by Chase for bookkeeping, accounting, administration and corporate filing services provided. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." During fiscal 2004, the Company recorded a non-cash compensation expense of $179,611 relating to stock options granted to the Company's directors, officers and consultants. No stock options were granted during fiscal 2003. During fiscal 2004, the Company negotiated settlements with certain arms-length and related parties in which it paid $951,622 to settle a total of $1,048,829 owed, which was recorded as advances payable, resulting in a gain of $97,207. See "Item 7. Major Shareholders and Related Party Transactions". During fiscal 2004, the Company recorded interest expense of $29,817, compared to $60,741 in fiscal 2004. The decrease in fiscal 2004 occurred as a result of the retirement of the advances. As of August 31, 2004, the Company had incurred $75,906 for staking, due diligence, professional and legal costs pertaining to the purchase of the Duport Property. LIQUIDITY AND CAPITAL RESOURCES The Company's practice is to proceed with staged exploration, where each stage is dependent on the successful results of the preceding stage. To date the Company has not received any revenues from its mining activities and has relied on equity financing to fund its commitments and discharge its liabilities as they come due. As at August 31, 2005, the Company had working capital of $506,811. The Company has financed a significant portion of its exploration activities through the issue of flow-through shares, which transfer the tax deductibility of exploration expenditures to the investor. Proceeds received on the issue of such shares have been credited to stock capital and the related exploration costs have been charged to resource properties. Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with income tax legislation. When these expenditures are made, temporary taxable differences created by the renunciation will reduce share capital. As of August 31, 2005, the Company had incurred all of its $4.4 million spending commitment related to flow-through shares issuances made. During September 2005, the Company completed a further private placement of 3,293,070 flow-through units, comprising of flow-through common shares and warrants, for $2,305,149 and 1,980,166 units, comprising of common shares and warrants, for $1,188,100. The Company anticipates that further exploration on its mineral properties will enable the Company to satisfy 100% of the spending commitment. -63- As at August 31, 2005, the Company had received $958,950 relating to the September 2005 private placement. Accordingly, the remaining $2,534,299 was received in September 2005. Although final budgets have not been completed, the Company expects to continue significant exploration work on its Bachelor Lake and Duport Properties and commence exploration activities on its newly acquired Sheridan Property. Total anticipated exploration costs and corporate overhead for fiscal 2006 are expected to be approximately $2.5 million and $852,000, respectively. The Company will require additional financings to maintain its core operations and planned exploration. In addition, results from its exploration programs and/or additional mineral property acquisitions may result in additional financial requirements. There is no assurance that funding will be available on terms acceptable to the Company or at all. If such funds cannot be secured, the Company may be forced to curtail additional exploration efforts to a level for which funding can be secured. The Company does not have any loans or bank debt and there are no restrictions on the use of its cash resources. There are no material commitments for capital expenditures during fiscal 2006. The Company holds the majority of its cash and cash equivalents in Canadian funds. TREND INFORMATION The Company is not aware of any trends which might affect its financial results or business. RESEARCH AND DEVELOPMENT During fiscal 2005 and 2004, the Company incurred $17,690,832 and $75,906 for mineral property acquisition costs, respectively. During fiscal 2005 the Company incurred $4,992,595 for exploration expenditures on its mineral properties. No exploration expenditures were made in fiscal 2004. No mineral property acquisitions or exploration expenditures were made in fiscal 2003. No petroleum interest acquisitions or exploration and development occurred in fiscal 2005. During fiscal 2004,and 2003 the Company incurred $23,935 and $319,757 respectively, on the acquisition, exploration and development of its petroleum interests. OFF BALANCE SHEET ARRANGEMENTS The Company does not have any material off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. CONTRACTUAL OBLIGATIONS The Company does not have any contractual obligations. -64- ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. DIRECTORS AND SENIOR MANAGEMENT The names, positions held with the Company and terms of office of each director and officer of the Company as of the date of this annual report, are as follows:
- ---------------------------------------------------------------------------------------------------- NAME POSITION WITH THE COMPANY TERM OF OFFICE (FOR EACH OFFICE HELD) - --------------- ------------------------------------- ------------------------------------- MARC CERNOVITCH President and Chief Executive Officer February 2005 to present Director February 2005 to present Vice-President, Corporate Development September 2004 to February 2005 - ---------------------------------------------------------------------------------------------------- NICK DEMARE(1) Chairman February 2005 to present Chief Financial Officer July 2003 to present Director January 1996 to Present President, Chief Executive Officer July 2003 to February 2005 - ---------------------------------------------------------------------------------------------------- ANDREW CARTER(1) Director February 2004 to present - ---------------------------------------------------------------------------------------------------- EWAN DOWNIE Director May 2004 to present - ---------------------------------------------------------------------------------------------------- WILLIAM LEE(1) Director February 2004 to present - ---------------------------------------------------------------------------------------------------- HARVEY LIM Corporate Secretary December 1998 to present - ---------------------------------------------------------------------------------------------------- TOM HEALY Senior Vice President, Chief February 2005 to present Operating Officer and Director - ----------------------------------------------------------------------------------------------------
(1) Member of the Audit Committee. Each officer's and director's term of office shall expire at the Company's next annual general meeting. The Company does not have an executive committee or a compensation committee. The Company's audit committee is responsible for reviewing the Company's financial statements before they are approved by the Company's directors. There are no family relationships between any directors or executive officers of the Company. To the best of the Company's knowledge, there are no arrangements or understandings with major shareholders, customers, suppliers, or others, pursuant to which any of the Company's officers or directors was selected as an officer or director of the Company. Set forth below are brief descriptions of recent employment and business experience of the Company's officers and directors. Marc Cernovitch (Age 32), Director, President and Chief Executive Officer Mr. Cernovitch holds a bachelors degree in Economics from McGill University. Mr. Cernovitch started his career in the financial sector as an investment advisor and has lived and worked in Montreal, Calgary, Vancouver and New York. Mr. Cernovitch currently resides in Vancouver and, since September 2004, has been employed by the Company as Vice-President, Corporate Development. Mr. Cernovitch has focused on corporate development, funding and building companies primarily in the resource and energy technology fields. Nick DeMare (Age 51), Chairman and Chief Financial Officer Mr. DeMare holds a Bachelor of Commerce degree from the University of British Columbia and is a member in good standing of the Institute of Chartered Accountants of British Columbia. Since May, 1991, Mr. DeMare has been the President of Chase, a private company which provides a broad range of administrative, management and financial services to private and public companies engaged in mineral exploration and development, gold and silver -65- production, oil and gas exploration and production and venture capital. Mr. DeMare indirectly owns 100% of Chase. Mr. DeMare currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest." Andrew Carter (Age 58), Director Mr. Carter obtained a certificate in accounting from the Midland College of TAFE (Western Australia) in 1987. Since 1992, Mr. Carter has been a member of the Australian Institute of Credit Management. Mr. Carter has an extensive background in the mining industry and as a commercial finance executive. During the 1970's, Mr. Carter was involved in the mining industry, where he managed exploration crews in the Leonora and Kimberly regions in Western Australia. In 1988, he was appointed Chief Executive of RAC Finance Limited, a non-bank owned commercial financier in Western Australia. During this time, he was appointed Chairman and Director of Australian Finance Conference Limited and represented the industry as a panel member of the Commercial Tribunal for Western Australia. Since 1999, Mr. Carter has been providing services as an independent corporate consultant based in Vancouver. Mr. Carter is currently the President of Tinka Resources Ltd., a public company trading on the TSXV, and serves as an officer and director of other public reporting companies. See "Item 7.Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". Ewan Downie (Age 39), Director President, CEO and a director of Wolfden Resources Inc., a TSX Exchange traded company, and Vice-President of Sabina Silver Corporation, a TSXV traded company. Since 1989, Mr. Downie has been the owner of Vytyl Exploration Services, a contracting business in mineral development and exploration for a wide variety of major and junior mining companies. Mr. Downie currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". William Lee (Age 52), Director Mr. Lee holds a Bachelor of Commerce degree from the University of British Columbia and is a member in good standing of the Institute of Chartered Accountants of British Columbia. He has been a financial officer or controller of several public and private companies since 1986 and, prior, thereto, was a Senior Audit Manager at Deloitte & Touche. Prior to March, 1995, Mr. Lee was employed as the Chief Financial Officer of Sanctuary Woods Multimedia Corp. From March 1995 to June 1996, Mr. Lee was employed as the Chief Financial Officer of Wildwood Interactive Inc. From June, 1996 to March, 2004, Mr. Lee was employed as the Chief Financial Officer of IMA Exploration Inc., a public company engaged in the exploration of mineral properties. From July 2004 to January 2006, Mr. Lee was employed as a business analyst of Ivanhoe Energy Inc., a public company engaged in the exploration for and production of oil and natural gas. In January 2006, Mr. Lee was appointed CFO of Jinshan Gold Mines Inc., a public company engaged in the exploration for and development of gold and copper projects in China. Mr. Lee currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". Harvey Lim (Age 47), Corporate Secretary Mr. Lim holds a Bachelor of Commerce degree from the University of British Columbia and is a member in good standing of the Institute of Chartered Accountants of British Columbia. Mr. Lim was employed by Coopers & Lybrand (now PricewaterhouseCoopers LLP) from 1981 to 1988. From 1988 to 1991, Mr. Lim was employed as a controller with Ingot Management Ltd. Since 1991, Mr. Lim has been employed by Chase as a controller. Mr. Lim currently serves as an officer and director of other public reporting companies. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". Tom Healy (Age 61), Senior Vice President, Chief Operating Officer and Director Mr. Healy is a professional mining engineer, a graduate of the University of Melbourne and holds a post graduate degree from the Royal School of Mines. He has 30 years' of open pit and underground mine design, operations, and management experience for base and precious metals, coal, oil sands, diamonds and industrial minerals projects. Mr. Healy is also President of Kamcot International Ltd., an independent company providing management and engineering services to the international mining community. -66- COMPENSATION During fiscal 2005, the directors and officers of the Company, as a group, had received or charged the Company a total of $158,350 (fiscal 2004 - $69,638) for services rendered by the directors and officers or companies owned by the individuals. As of August 31, 2005, accounts payable and accrued liabilities include $24,369 due to these related parties. The Company is required, under applicable securities legislation in Canada, to disclose to its shareholders details of compensation paid to its directors and officers. The following fairly reflects all material information regarding compensation paid by the Company to its directors and officers, which information has been disclosed to the Company's shareholders in accordance with applicable Canadian law. "Named Executive Officers" means the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the Company, regardless of the amount of compensation of those individuals, and each of the Company's three most highly compensated executive officers, other than the CEO, who were serving as executive officers at the end of the most recent fiscal year and whose total salary and bonus amounted to $150,000 or more. In addition, disclosure is also required for any individuals whose total salary and bonus during the most recent fiscal year was $150,000 whether or not they are an executive officer at the end of the fiscal year. During fiscal 2005, the Company had two Named Executive Officers, Mr. Marc Cernovitch, the Company's President and CEO, and Mr. Nick DeMare, the Company's Chairman and CFO. The following table sets forth the compensation awarded, paid to or earned by the Named Executive Officers during fiscal 2005, 2004 and 2003:
--------------------------- ---------------------------------- ANNUAL COMPENSATION LONG TERM COMPENSATION --------------------------- ---------------------------------- AWARDS PAYOUTS ------------------------ ------- SECURITIES RESTRICTED --------- OTHER UNDER SHARES OR ALL - ------------------ ----- ANNUAL OPTIONS/ RESTRICTED OTHER NAME AND PRINCIPAL COMPEN- SARS SHARE LTIP COMPEN- POSITION YEAR(1) SALARY BONUS SATION GRANTED UNITS PAYOUTS SATION ($) ($) ($) (#)(2) ($) ($) ($) - ------------------ ----- --------------------------- ------------------------ ------- --------- Marc Cernovitch(3) 2005 51,500 Nil Nil 275,000 N/A N/A Nil President, CEO and 2004 N/A N/A N/A N/A N/A N/A N/A Director 2003 N/A N/A N/A N/A N/A N/A N/A - ------------------ ----- --------------------------- ------------------------ ------- --------- Nick DeMare 2005 Nil Nil 28,000(4) 73,000 N/A N/A 62,450(4) Chairman, CFO and 2004 Nil Nil 8,000(4) 150,000(5) N/A N/A 55,638(4) Director 2003 Nil Nil Nil Nil/Nil N/A N/A 52,215(4) - ------------------ ----- --------------------------- ------------------------ ------- ---------
NOTES: (1) Financial years ended August 31, 2003, 2004 and 2005. (2) Figures represent options granted during a particular year; see "Aggregate Option" table for the aggregate number of options outstanding at year end. (3) Mr. Cernovitch was appointed on February 9, 2005 as the President and CEO of the Company. (4) Paid to Chase Management Ltd. ("Chase"), a private company owned by Mr. DeMare, for accounting, administration, management and professional services rendered by Mr. DeMare and Chase personnel. See "Management Contracts". (5) Includes 50,000 options granted to Chase. LONG TERM INCENTIVE PLAN AWARDS The Company has no long-term incentive plans in place and therefore there were no awards made under any long-term incentive plan to the Name Executive Officers during the Company's most recently completed financial year. A "Long-Term Incentive Plan" is a plan under which awards are made based on performance over a period longer than one financial year, other than a plan for options, stock appreciation rights ("SARs") or restricted share compensation. -67- OPTION/SAR GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR The following table sets forth stock options granted to the Named Executive Officers during fiscal 2005:
- --------------- ------------ -------------- ------------ ----------------- ---------- % OF TOTAL MARKET VALUE OF SECURITIES OPTIONS/SARS SECURITIES UNDER GRANTED TO UNDERLYING OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON EXPIRATION NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT DATE (#) (%) ($/SECURITY) ($/SECURITY) - --------------- ------------ -------------- ------------ ----------------- ---------- Marc Cernovitch 150,000 13.91% 0.70 0.86 Sept. 27/07 125,000 11.60% 0.96 1.20 Feb. 17/08 ------- ----- 275,000 25.51% ======= ===== - --------------- ------------ -------------- ------------ ----------------- ---------- Nick DeMare 73,000 6.8% 0.96 1.20 Feb. 17/08 ======= ===== - --------------- ------------ -------------- ------------ ----------------- ----------
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES The following table sets out details of all the incentive stock options, both exercised and unexercised, for the Named Executive Officers during fiscal 2005:
- --------------- ----------- --------------- ------------------------- ------------------------- UNEXERCISED VALUE OF UNEXERCISED SECURITIES OPTIONS/SARS AT IN THE MONEY OPTIONS AT ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1) NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (#) ($) (#) ($) - --------------- ----------- --------------- ------------------------- ------------------------- Marc Cernovitch Nil N/A 275,000/N/A Nil/N/A - --------------- ----------- --------------- ------------------------- ------------------------- Nick DeMare Nil N/A 223,000(2)/N/A Nil/N/A - --------------- ----------- --------------- ------------------------- -------------------------
NOTES: (1) The closing price of the Company's common shares on August 31, 2005 was $0.60. (2) Includes 50,000 options granted to Chase. TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS The Company does not have any compensatory plan(s), contract(s) or arrangement(s) with respect to the resignation, retirement or any other termination of the Named Executive Officers' employment, a change of control of our Company or a change in the Named Executive Officers' responsibilities following a change in control, which entitle a Named Executive Officer to receive from the Company an amount, including all period payments or installments, exceeding $100,000. DIRECTOR COMPENSATION CASH COMPENSATION During fiscal 2005, the Company paid $67,900 for professional fees to a director who is not a Named Executive Officer of the Company. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." -68- NON-CASH COMPENSATION The following table sets forth stock options granted by the Company during fiscal 2005 to the directors who are not the Named Executive Officers of the Company:
- --------------------------------------------------------------------------------------------------------------------- % OF TOTAL MARKET VALUE OF SECURITIES OPTIONS/SARS SECURITIES UNDER GRANTED TO UNDERLYING OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON EXPIRATION NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT DATE (#) (%) ($/SECURITY) ($/SECURITY) - --------------------------------------------------------------------------------------------------------------------- Directors as a group 270,000 25.05% $0.96 $1.20 Feb. 17/08 who are not Named Executive Officers - ---------------------------------------------------------------------------------------------------------------------
The following table sets forth details of all exercises of stock options during fiscal 2005 by the directors who are not the Named Executive Officers of the Company, and the financial year end value of unexercised options:
- ---------------------------------------------------------------------------------------------------------------------- UNEXERCISED VALUE OF UNEXERCISED IN THE SECURITIES OPTIONS/SARS AT MONEY OPTIONS AT ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1) NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (#) ($) (#) ($) - ---------------------------------------------------------------------------------------------------------------------- Directors as a group Nil N/A 730,000 / N/A Nil / N/A who are not Named Executive Officers - ----------------------------------------------------------------------------------------------------------------------
NOTE: (1) The closing price of the Company's common shares on August 31, 2005 was $0.60. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table sets out, as of the end of the Company's financial year ended August 31, 2005, all information required with respect to compensation plans under which equity securities of the Company are authorized for issuance:
- ----------------------------------------------------------------------------------------------------------------------- NUMBER OF SECURITIES REMAINING NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION OUTSTANDING OPTIONS, PRICE OF OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)) - ----------------------------------------------------------------------------------------------------------------------- Plan Category (a) (b) (c) - ----------------------------------------------------------------------------------------------------------------------- Equity compensation 1,688,000(1) $0.80 See Note (1) plans approved by securityholders - ----------------------------------------------------------------------------------------------------------------------- Equity compensation N/A N/A N/A plans not approved by securityholders - ----------------------------------------------------------------------------------------------------------------------- Total 1,688,000 $0.80 See Note (1) - -----------------------------------------------------------------------------------------------------------------------
NOTE: (1) The Company has in place a "rolling" stock option plan (the "Plan") whereby the maximum number of common shares that may be reserved for issuance pursuant to the Plan will not exceed 10% of the issued shares of the Company at the time of the stock option grant. As of the date hereof, common shares may be reserved for issuance pursuant to the Plan. -69- INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS OF THE COMPANY No executive officers, directors, employees or former executive officers and directors of the Company are indebted to the Company. None of the directors, executive officers or proposed nominees of the Company nor any associate or affiliate of these individuals is or has been indebted to the Company since September 1, 2004. INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS Other than as disclosed in "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions", no informed person of the Company, any proposed director of the Company, or any associate or affiliate of any informed person or proposed director has any material interest, direct or indirect, in any transaction since the commencement of our most recently completed financial year or in any proposed transaction which has materially affected or would materially affect the Company. An "informed person" means a director or executive office of a reporting issuer; a director or executive officer of a person or company that is itself an informed person or subsidiary of a reporting issuer; any person or company who beneficially owns, directly or indirectly, voting shares of a reporting issuer or who exercises control or direction over shares of the reporting issuer or a combination of both carrying more than 10% of the voting rights attached to all outstanding voting securities of the reporting issuer; and a reporting issuer that has purchased, redeemed or otherwise acquired any of its securities, for so long as it holds any of its securities. EMPLOYMENT / MANAGEMENT AGREEMENTS The Company has a management contract with Chase, whereby the Company has retained Chase to provide ongoing administrative, accounting, professional and management services. In return for providing such services, Chase is paid a monthly fee of $3,000 plus any out-of-pocket disbursements made by Chase on the Company's behalf. In addition, the Company may engage Chase to perform extra services in which case Chase will charge the Company for its employees at competitive rates. The Company is also paying Chase $2,000 per month for the services of Mr. DeMare in his capacity as Chairman and CFO of the Company. Payment for these services have been included as part of "Other Annual Compensation" and "All Other Compensation" of the Summary Compensation Table for Mr. DeMare. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions". There are no service contracts with the Company providing for benefits upon termination of employment of any director of the Company. BOARD PRACTICES AUDIT COMMITTEE THE AUDIT COMMITTEE'S CHARTER MANDATE The primary function of the audit committee (the "Committee") is to assist the board of directors in fulfilling its financial oversight responsibilities by reviewing the financial reports and other financial information provided by the Company to regulatory authorities and shareholders, the Company's systems of internal controls regarding finance and accounting and the Company's auditing, accounting and financial reporting processes. The Committee's primary duties and responsibilities are to: - Serve as an independent and objective party to monitor the Company's financial reporting and internal control system and review the Company's financial statements. - Review and appraise the performance of the Company's external auditors. - Provide an open avenue of communication among the Company's auditors, financial and senior management and the Board of Directors. -70- COMPOSITION The Committee shall be comprised of three directors as determined by the Board of Directors, the majority of whom shall be free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of his independent judgment as a member of the Committee. At least one member of the Committee shall have accounting or related financial management expertise. All members of the Committee that are not financially literate will work towards becoming financially literate to obtain a working familiarity with basic finance and accounting practices. For the purposes of the Audit Committee Charter, the definition of "financially literate" is the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can presumably be expected to be raised by the Company's financial statements. The members of the Committee shall be elected by the Board of Directors at its first meeting following the annual shareholders' meeting. Unless a Chair is elected by the full Board of Directors, the members of the Committee may designate a Chair by a majority vote of the full Committee membership. The Chair shall be financially literate. MEETINGS The Committee shall meet a least twice annually, or more frequently as circumstances dictate. As part of its job to foster open communication, the Committee will meet at least annually with the CFO and the external auditors in separate sessions. Unless all members are present and waive notice, or those absent waive notice before or after a meeting, the Chairman will give Committee members 24 hours' advance notice of each meeting and the matters to be discussed at it. Notice may be given personally, by telephone, facsimile or e-mail. The Auditor shall be given reasonable notice of, and be entitled to attend and speak at, each meeting of the Committee concerning the Company's annual financial statements and, if the Committee feels it is necessary or appropriate, at any other meeting. On request by the Auditor, the Chair shall call a meeting of the Committee to consider any matter that the Auditor believes should be brought to the attention of the Committee, the Board of Directors or the shareholders of the Company. At each meeting of the Committee, a quorum shall consist of a majority of members that are not officers or employees of the Company or of an affiliate of the Company. A member may participate in a meeting of the Committee in person or by telephone if all members participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A member may participate in a meeting of the Committee by a communications medium other than telephone if all members participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other and if all members who wish to participate in the meeting agree to such participation. As part of its goal to foster open communication, the Committee may periodically meet separately with each of management and the Auditor to discuss any matters that the Committee or any of these groups believes would be appropriate to discuss privately. In addition, the Committee should meet with the Auditor and management annually to review the Company's financial statements. The Committee may invite to its meetings any director, any manager of the Company, and any other person whom it deems appropriate to consult in order to carry out its responsibilities. The Committee may also exclude from its meetings any person it deems appropriate to exclude in order to carry out its responsibilities. RESPONSIBILITIES AND DUTIES To fulfill its responsibilities and duties, the Committee shall: DOCUMENTS/REPORTS REVIEW (a) Review and update the Charter annually. -71- (b) Review the Company's financial statements, MD&A and any annual and interim earnings, press releases before the Company publicly discloses this information and any reports or other financial information (including quarterly financial statements), which are submitted to any governmental body, or to the public, including any certification, report, opinion, or review rendered by the external auditors. (c) Review and satisfy itself that adequate procedures are in place for the review of the Company's public disclosure of financial information extracted or derived from its financial statements, other than disclosure described in the previous paragraph, and periodically assess the adequacy of those procedures. EXTERNAL AUDITORS (a) Be directly responsible for overseeing the work by the Auditor (including resolution of disagreements between management and the Auditor regarding financial reporting) engaged for the purpose of preparing or issuing an audit report or performing other audit or review services for the Company. (b) Require the Auditor to report directly to the Committee. (c) Review, annually, the performance of the Auditor who shall be ultimately accountable to the Board of Directors and the Committee as representatives of the shareholders of the Company. (d) Review and discuss with the Auditor any disclosed relationships or services that may impact the objectivity and independence of the Auditor. (e) Take, or recommend that the Board of Directors take, appropriate action to oversee the independence of the Auditor. (f) Recommend to the Board of Directors the external auditor to be nominated at the annual general meeting for appointment as the Auditor for the ensuing year and the compensation for the Auditors, or, if applicable, the replacement of the Auditor. (g) Review and approve the Company's hiring policies regarding partners, employees and former partners and employees of the Auditor and former independent external auditor of the Company. (h) Be directly responsible for the oversight of the work by the Auditor (including resolution of disagreements between management and the Auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. (i) Review with management and the Auditor the audit plan for the annual financial statements. (j) Review and pre-approve all audit and audit-related services and the fees and other compensation related thereto, and any non-audit services provided by the Auditor. The pre-approval requirement is waived with respect to the provision of non-audit services if: (i) the aggregate amount of all such non-audit services that were not pre-approved is reasonably expected to constitute not more than 5% of the total amount of fees paid by the Company and its subsidiary entities to the Auditor during the fiscal year in which the non-audit services are provided; (ii) such services were not recognized by the Company at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved, prior to the completion of the audit, by the Committee or by one or more members of the Committee to whom authority to grant such approvals has been delegated by the Committee. -72- The Committee may delegate to one or more independent members of the Committee the authority to pre-approve non-audit services in satisfaction of the pre-approval requirement set out in this section provided the pre-approval of non-audit services by any member to whom authority has been delegated must be presented to the Committee at its first scheduled meeting following such pre-approval. FINANCIAL REPORTING PROCESSES (a) In consultation with the Auditor, review with management the integrity of the Company's financial reporting process, both internal and external. (b) Consider the Auditor's judgments about the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. (c) Consider and approve, if appropriate, changes to the Company's auditing and accounting principles and practices as suggested by the Auditor and management. (d) Review significant judgments made by management in the preparation of the financial statements and the view of the Auditor as to the appropriateness of such judgments. (e) Following completion of the annual audit, review separately with management and the Auditor any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information. (f) Review any significant disagreement among management and the Auditor in connection with the preparation of the financial statements. (g) Review with the Auditor and management the extent to which changes and improvements in financial or accounting practices have been implemented. (h) Discuss with the Auditor the Auditor's perception of the Company's financial and accounting personnel, any material recommendations which the Auditor may have, the level of cooperation which the Auditor received during the course of their review and the adequacy of their access to records, data and other requested information. (i) Review any complaints or concerns about any questionable accounting, internal accounting controls or auditing matters. (j) Review certification process. (k) Establish procedures for: (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. OTHER (a) Perform such other duties as may be assigned to it by the Board of Directors from time to time or as may be required by applicable regulatory authorities or legislation. (b) Report regularly and on a timely basis to the Board of Directors on matters coming before the Committee. (c) Review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board of Directors for approval. -73- COMPOSITION OF THE AUDIT COMMITTEE The following are the members of the Committee (1): - -------------------------------------------------------------------------------- INDEPENDENT (1) FINANCIALLY LITERATE - -------------------------------------------------------------------------------- Nick DeMare N Y - -------------------------------------------------------------------------------- William Lee Y Y - -------------------------------------------------------------------------------- Andrew Carter Y Y - -------------------------------------------------------------------------------- NOTE: (1) As defined by Multilateral Instrument 52-110 ("MI 52-110"). The Company is relying on the exemption provided under Section 6.1 of MI52-110. AUDIT COMMITTEE OVERSIGHT At no time since the commencement of the Company's most recently completed financial year was a recommendation of the Committee to nominate or compensate an external auditor not adopted by the Board of Directors. RELIANCE ON CERTAIN EXEMPTIONS At no time since the commencement of the Company's most recently completed financial year has the Company relied on the exemption in Section 2.4 of MI 52-110 (De Minimis Non-audit Services), or an exemption from MI 52-110, in whole or in part, granted under Part 8 of Multilateral Instrument 52-110. PRE-APPROVAL POLICIES AND PROCEDURES The Committee has adopted specific policies and procedures for the engagement of non-audit services as described above under the heading "External Auditors". REMUNERATION COMMITTEE The Company does not have a separate Remuneration Committee. TERMINATION OF EMPLOYMENT OR CHANGE OF CONTROL Other than as described in the Summary Compensation Table and above, the Company has no plans or arrangements in respect of remuneration received or that may be received by the Named Executive Officer in the Company's most recently completed financial year or current financial year in view of compensating such officers in the event of termination of employment (as a result of resignation, retirement, change of control, etc.) or a change in responsibilities following a change of control, where the value of such compensation exceeds $100,000 per executive officer. The Company and its subsidiaries do not have any contracts with the directors of the Company (or any entities controlled by the directors of the Company) providing for benefits upon termination of employment. EMPLOYEES As at August 31, 2005, the Company had one full-time employee, Mr. Cernovitch, in the area of management and administration. During the year ended August 31, 2004 the Company had two full-time employees in the area of management and administration, including Mr. Cernovitch. During the year ended August 31, 2003, the Company had no full-time or part-time employees in the area of management and administration. Corporate accounting, management and administration are provided, in part, by Chase, a company owned by Mr. Nick DeMare. Chase provides its services to a number of public and private companies and currently employs six full-time employees, including Mr. Lim (excluding Mr. DeMare). Mr. DeMare provides his services as Chairman and CFO of the Company. The Company also retains consultants to handle specific projects on a case by case basis. In the event the Company needs to employ personnel, it will need to recruit qualified personnel to staff its operations. The Company believes that such personnel currently are available at reasonable salaries and wages in the geographic areas in which the Company and its subsidiaries operate. There can be no assurance, -74- however, that such personnel will be available in the future. Exploration activities are conducted by consultants, laborers and technicians hired for the duration of the exploration program. SHARE OWNERSHIP The following table sets forth certain information regarding ownership of the Company's common shares by the Company's officers and directors as of February 28, 2006:
SHARES AND RIGHTS BENEFICIALLY TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1) PERCENT OF CLASS (1) Common Stock Marc Cernovitch 547,450(2) 1.92% Vancouver, British Columbia, Canada Common Stock Nick DeMare 752,028(3) 2.65% Burnaby, British Columbia, Canada Common Stock Andrew Carter 174,500(4) 0.62% North Vancouver, British Columbia, Canada Common Stock Ewan Downie 1,707,500(5) 5.90% Thunder Bay, Ontario, Canada Common Stock William Lee 157,950(6) 0.56% Delta, British Columbia, Canada Common Stock Harvey Lim 160,143(7) 0.57% Burnaby, British Columbia, Canada Common Stock Tom Healy 420,000(8) 1.48% Calgary, Alberta, Canada
NOTES: (1) Where persons listed on this table have the right to obtain additional shares of common stock through the exercise of outstanding options or warrants within 60 days from February 28, 2006, these additional shares are deemed to be outstanding for the purpose of computing the percentage of common stock owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person. Based on 28,017,716 shares of common stock outstanding as of February 28, 2006. (2) Includes 64,800 common shares held, options to acquire 480,000 common shares and warrants to acquire 2,650 common shares. (3) Includes 349,691 common shares held directly by Mr. DeMare, 26,404 common shares held by DNG Capital Corp. ("DNG"), a private corporation wholly-owned by Mr. DeMare, and 8,866 common shares held by 888 Capital Corp., a private corporation 50% owned by Mr. DeMare. Also includes options to acquire 233,000 common shares held by Mr. DeMare directly, options to acquire 50,000 common shares held by Chase, warrants to acquire 13,067 common shares held directly by Mr. DeMare and warrants to acquire 71,000 common shares held by DNG. (4) Includes 22,000 common shares held, options to acquire 150,000 common shares and warrants to acquire 2,500 common shares. (5) Includes 805,000 common shares held, options to acquire 365,000 common shares and warrants to acquire 537,500 common shares. (6) Includes 5,300 common shares held, options to acquire 150,000 common shares and warrants to acquire 2,650 common shares. (7) Includes 143 common shares held and options to acquire 160,000 common shares. (8) Includes 100,000 common shares held by Kamcot International Ltd. ("Kamcot"), a private corporation owned 50% by Mr. Healy and 50% by Ulrica Healy, Mr. Healy's spouse, options to acquire 210,000 common shares held directly by Mr. Healy, options to acquire 60,000 common shares held by Kamcot and warrants to acquire 50,000 common shares held by Kamcot. All of the Company's common shareholders have the same voting rights. Holders of the Company's Series 1 Preferred Shares do not have the right to vote unless the -75- Company is in default on the payment of dividends and the dividends remain unpaid for a period of 60 days. See "Item 10. Additional Information - Description of Authorized Shares - Preferred Shares." STOCK OPTION PLAN The Company has a rolling stock option plan (the "Plan"), which makes a total of 10% of the issued and outstanding common shares of the Company available for issuance thereunder. The Company's Plan is approved annually by the shareholders. In accordance with the policies of the TSXV, a rolling plan, which is the type of plan the Company has adopted, requires the approval of the shareholders of the Company on an annual basis. The purpose of the Plan is to provide the Company with a share related mechanism to enable the Company to attract, retain and motivate qualified directors, officers, employees and other service providers, to reward directors, officers, employees and other service providers for their contribution toward the long term goals of the Company and to enable and encourage such individuals to acquire shares of the Company as long term investments. The Plan provides that it is solely within the discretion of the Board to determine who should receive options and in what amounts. The Board of Directors may issue a majority of the options to insiders of the Company. However, the Plan provides that in no case will the Plan or any existing share compensation arrangement of the Company result, at any time, in the issuance to any option holder, within a one-year period, of a number of shares exceeding 5% of the Company's issued and outstanding share capital. The following information is intended to be a brief description of the Plan: 1. The maximum number of common shares that may be issued upon exercise of stock options granted under the Plan will be that number of shares which is 10% of the issued and outstanding shares of the Company. Any outstanding options will form a part of the foregoing 10%. The exercise price of the stock options, as determined by the Board of Directors in its sole discretion, shall not be less than the closing price of the Company's shares traded through the facilities of the TSXV on the date prior to the date of grant, less allowable discounts, in accordance with the policies of the TSXV or, if the shares are no longer listed for trading on the TSXV, then such other exchange or quotation system on which the shares are listed and quoted for trading. 2. The Board of Directors will not grant options to any one person which will, when exercised, exceed 5% of the issued and outstanding shares of the Company. 3. Upon expiry of the option, or in the event an option is otherwise terminated for any reason, without having been exercised in full, the number of shares in respect of the expired or terminated option shall again be available for the purposes of the Plan. All options granted under the Plan may not have an expiry date exceeding five years from the date on which the Board of Directors grant and announce the granting of the option. 4. If the option holder ceases to be a director of the Company or ceases to be employed by the Company (other than by reason of death), as the case may be, then the option granted shall expire on the 90th day following the date that the option holder ceases to be a director or ceases to be employed by the Company, subject to the terms and conditions set out in the Plan. The Plan may be administered by the Company's secretary or such other senior officer or employee as may be designated by the Board of Directors from time to time. Upon the approval of the Plan by the Company's shareholders, shareholder approval will not be required or sought on a case-by-case basis for the purpose of the granting of options to and the exercise of options by employees of the Company regularly employed on a full-time or part-time basis, directors of the Company and persons who perform services for the Company on an ongoing basis or who have provided, or are expected to provide, services of value to the Company. -76- As of February 28, 2006, an aggregate of 2,703,000 incentive stock options to purchase shares of the Company's common stock remain outstanding to the following persons: - -------------------------------------------------------------------------------- EXERCISE NATURE NO. OF PRICE/ OPTIONEE OF OPTION OPTIONS SHARE EXPIRY DATE $ - -------------------------------------------------------------------------------- Ewan Downie Director 300,000 0.60 May 31, 2007 Chase Management Ltd. Consultant 50,000 0.60 May 31, 2007 Nick DeMare Director 100,000 0.60 May 31, 2007 Harvey Lim Officer 50,000 0.60 May 31, 2007 Andrew Carter Director 50,000 0.60 May 31, 2007 William Lee Director 50,000 0.60 May 31, 2007 Kamcot International Ltd. Consultant 60,000 0.75 July 22, 2007 Marc Cernovitch Officer 150,000 0.70 September 27, 2007 Chris Brown Consultant 125,000 0.75 February 17, 2008 Scott Walters Consultant 200,000 0.75 September 29, 2008 Marc Cernovitch Director 80,000 0.75 September 29, 2008 Tom Healy Director 60,000 0.75 September 29, 2008 Nick DeMare Director 60,000 0.75 September 29, 2008 Ewan Downie Director 40,000 0.75 September 29, 2008 Andrew Carter Director 40,000 0.75 September 29, 2008 William Lee Director 40,000 0.75 September 29, 2008 Harvey Lim Officer 50,000 0.75 September 29, 2008 Kevin Leonard Consultant 60,000 0.75 September 29, 2008 Chris Brown Consultant 75,000 0.75 September 29, 2008 Ken Pride Consultant 50,000 0.75 September 29, 2008 Peter Dietrich Consultant 50,000 0.75 September 29, 2008 James Paterson Consultant 50,000 0.75 September 29, 2008 Andrew Carter Director 60,000 0.45 February 2, 2009 David Henstridge Consultant 50,000 0.45 February 2, 2009 Ewan Downie Director 25,000 0.45 February 2, 2009 Harvey Lim Officer 60,000 0.45 February 2, 2009 Kevin Leonard Consultant 60,000 0.45 February 2, 2009 Marc Cernovitch Director 250,000 0.45 February 2, 2009 Nick DeMare Director 73,000 0.45 February 2, 2009 Scott Koyich Consultant 75,000 0.45 February 2, 2009 Tom Healy Director 150,000 0.45 February 2, 2009 Tony Keen Consultant 50,000 0.45 February 2, 2009 William Lee Director 60,000 0.45 February 2, 2009 --------- TOTAL: 2,703,000 ========= As of February 28, 2006, the directors and officers of the Company, as a group (seven persons), held options to purchase 1,858,000 shares of the Company's common stock. -77- WARRANTS As of February 28, 2006, there were non-transferable common share purchase warrants exercisable for the purchase of 11,268,063 common shares, which expire at various times until October 14, 2007 and may be exercised at various prices ranging from $0.25 per share to $1.50 per share, as follows: - -------------------------------------------------------------------------------- COMMON SHARES ISSUABLE ON EXERCISE EXERCISE OF WARRANTS PRICE/SHARE EXPIRY $ - -------------------------------------------------------------------------------- 550,000 0.25 March 4, 2006 2,395,500 0.40 April 15, 2006 701,647 1.05 December 23, 2006 2,313,182 1.50 December 23, 2006 2,718,530 1.35 December 23, 2006 2,071,015 0.70 September 14, 2007 432,474 0.70 September 29, 2007 85,715 0.75 October 14, 2007 ---------- 11,268,063 ========== As of February 28, 2006, the directors and officers of the Company, as a group (seven persons), held warrants to purchase 679,367 shares of the Company's common stock. There are no assurances that the options or warrants described above will be exercised in whole or in part. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. PRINCIPAL HOLDERS OF VOTING SECURITIES The following table sets forth certain information regarding ownership of the Company's common shares by the Company's major shareholders as of February 28, 2006. - -------------------------------------------------------------------------------- SHARES AND RIGHTS BENEFICIALLY TITLE OF OWNED OR PERCENT OF CLASS NAME AND ADDRESS OF OWNER CONTROLLED(1) CLASS (1) - -------------------------------------------------------------------------------- Common Stock Wolfden Resources Inc.(2) 2,100,000 7.50% Thunder Bay, Ontario, Canada Common Stock Ewan Downie 1,707,500(3) 5.90% Thunder Bay, Ontario, Canada - -------------------------------------------------------------------------------- NOTES: (1) Where persons listed on this table have the right to obtain additional shares of common stock through the exercise of outstanding options or warrants within 60 days from February 28, 2006, these additional shares are deemed to be outstanding for the purpose of computing the percentage of common stock owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage owned by any other person. Based on 28,017,716 shares of common stock outstanding as of February 28, 2006. (2) Wolfden Resources Inc. ("Wolfden") is a publicly traded company. Mr. Ewan Downie, a director of the Company, is the President, CEO and a director of Wolfden. (3) Includes 805,000 common shares held, options to acquire 365,000 common shares and warrants to acquire 537,500 common shares. To the best of the Company's knowledge, it is not directly or indirectly owned or controlled by another Company or by any foreign government. None of the Company's common shareholders have different voting rights than any of the Company's other common shareholders. ESCROW SHARES As of the date of this annual report, no shares are held in escrow. -78- CHANGES IN SHAREHOLDINGS As of February 28, 2006, Wolfden Resources Inc. beneficially owned 2,100,000 shares (7.50%) of the Company's common stock. The common shares were issued to Wolfden on May 18, 2005, by the Company under the Assignment and Assumption Agreement on the Bachelor Lake Property. See "Item 4. Information on the Company. Principal Properties - Bachelor Lake Property, Quebec". As of February 28, 2006, Ewan Downie beneficially owned 1,707,500 shares (5.90%) of the Company's common stock. Mr. Downie's holdings were comprised of 805,000 shares of common stock, options to acquire 365,000 of common stock and warrants to acquire 537,500 common shares. As of December 31, 2004, Mr. Downie beneficially owned 2,012,500 shares (11.41%) of the Company's stock. Mr. Downie's holdings were comprised of 875,000 of common stock, options to acquire 300,000 common shares and warrants to acquire 837,500 common shares. As of December 31, 2003, Mr. Downie did not beneficially own any shares of the Company's common stock. CHANGE OF CONTROL As of the date of this annual report, there are no arrangements known to the Company which may at a subsequent date result in a change of control of the Company, except the possible issuance of shares to The Sheridan Platinum Group Ltd. and Pat Sheridan in connection with the redemption or retraction of the Series 1 Preferred Shares. See "Item 4. Information on the Company - Principal Properties - Duport Property, Ontario" and "Item 10. Additional Information - Description of Authorized Shares - Preferred Shares". In the event that the Company exercises its right to retract or redeem the Series 1 Preferred Shares in exchange for common shares of the Company, this may result in a change of control of the Company. Based on the Company's currently outstanding share capital, if the Company retracted or redeemed the Series 1 Preferred Shares in exchange for common shares, The Sheridan Platinum Group Ltd. and Pat Sheridan would own in the aggregate approximately 43.73% of the Company's outstanding common shares, calculated as follows: Shares currently outstanding (1) 28,017,716 Shares issuable upon retraction (2) 19,277,108 ---------- Shares outstanding after retraction 47,294,824 ========== Shares currently held by vendors 1,000,000 Shares acquired by vendors upon retraction 20,000,000 ---------- Shares held by vendors after retraction 21,000,000 ========== % of shares held by vendors after retraction 44.4% ========== NOTES: (1) As at February 28, 2006. (2) Calculated as $8 million divided by $0.415 per share, being the closing price of the Company's common shares on February 28, 2006. The foregoing calculation is for illustrative purposes only and does not take account of additional common shares which may be issued by the Company, or any purchases or sales of shares by The Sheridan Platinum Group Ltd. or Mr. Sheridan, subsequent to the date hereof but prior to redemption or retraction, or any change in the market price of the Company's common shares, all of which may materially change the calculation. UNITED STATES SHAREHOLDERS As of February 28, 2006, there were approximately eight registered holders of the Company's common shares in the United States, with combined holdings of 549,903 shares, representing 1.96% of the issued shares of the Company. The Company does not know how many beneficial shareholders it has in the United States, but management believes there are less than 300 such shareholders. CONTROL BY FOREIGN GOVERNMENT OR OTHER PERSONS To the best of the Company's knowledge, the Company is not directly or indirectly owned or controlled by another corporation, any foreign government, or any other natural or legal person jointly or severally. -79- RELATED PARTY TRANSACTIONS Other than as disclosed below, for the period from September 1, 2003 through February 28, 2006, the Company has not entered into any transactions or loans between the Company and any (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the Company, and close members of any such individuals' family; (d) key management personnel and close members of such individuals' families; or (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. 1. Mr. Marc Cernovitch provides his services as the Company's President and CEO on a full-time basis. In consideration therefore, Mr. Cernovitch is currently paid a monthly salary of $7,750. During the year ended August 31, 2005 and the period from September 1, 2005 to February 28, 2006, Mr. Cernovitch was paid $51,500 and $46,500, respectively. 2. The Company has retained Chase, a company wholly-owned by Mr. Nick DeMare, the Chairman and Chief Financial Officer of the Company, to provide office premises, administrative, accounting and management services. In consideration therefore, Chase is paid a monthly fee of $3,000. Chase is also reimbursed for out-of-pocket disbursements incurred on behalf of the Company. In addition, Chase also provides additional services to the Company which are billed at rates which Chase charges to unrelated third parties. Management believes the arrangement with Chase is fair to the Company and similar to terms which could be obtained from unrelated third parties. During the year ended August 31, 2005 and the period from September 1, 2005 to February 28, 2006, the Company paid Chase $62,450 and $18,000, respectively. 3. From July 4, 2003 through February 9, 2005, the Company paid Chase a monthly fee for the services of Mr. Nick DeMare in his former capacity as President, Chief Executive Officer and Chief Financial Officer of the Company. Commencing February 9, 2005, the Company paid Chase a monthly fee for the services of Mr. Nick DeMare in his current capacity as Chairman and Chief Financial Officer. The Company is currently paying $2,000 per month. See "Item 6. Directors, Senior Management and Employees - Compensation." Management believes the arrangement with Chase for Mr. DeMare's services is fair to the Company. During the year ended August 31, 2005 and the period from September 1, 2005 to February 28, 2006, the Company paid Chase $28,000 and $38,000, respectively. 4. Mr. Tom Healy was elected as a director of the Company, and appointed Senior Vice President and Chief Operating Officer on February 9, 2005. Mr. Healy provides his services on a full-time basis through his wholly-owned corporation, Kamcot. In consideration therefore, Kamcot is paid a monthly fee of $9,700. During the period from February 9, 2005 to August 31, 2005, and the period from September 1, 2005 to February 28, 2006, the Company paid Kamcot $67,900 and $58,200 respectively. 5. The Company has completed previous private placements of securities, the subscribers of which include companies wholly-owned by directors and officers of the Company. The securities issued pursuant to such private placements were issued in accordance with the pricing policies of the TSXV. During the year ended August 31, 2005, and the period from September 1, 2005 to February 28, 2006, the Company conducted the following private placements of common stock: -80-
PARTICIPATION BY PURCHASE MARKET INSIDERS PRICE PRICE(1) PLACEE $ $ PERIOD SEPTEMBER 1, 2005 TO FEBRUARY 28, 2006 3,293,070 flow-through common shares 0.70 0.83 - Ewan Downie 20,000 ======= YEAR ENDED AUGUST 31, 2005 4,342,951 units (one common share and one-half warrant) 0.95 1.05 - Ewan Downie 75,000 - Nick DeMare 26,135 - Judy Eng (spouse of Harvey Lim) 10,000 - William Lee 5,300 - Andrew Carter 5,000 ------- 121,435 ======= 151,834 units (one common share and one-half warrant) 0.95 0.92 - Marc Cernovitch 5,300 =======
(1) Quoted closing price on date of announcement of private placement. 6. On November 12, 2004, the Company entered into an option agreement to earn a 50% interest in the Bachelor Lake Property with Wolfden Resources Inc. ("Wolfden"). A definitive agreement (the "Assignment and Assumption Agreement") was subsequently executed on April 15, 2005. Under the terms of the Assignment and Assumption Agreement, Wolfden assigned to the Company its option to earn a 50% interest in the Bachelor Lake Property from Metanor Resources Inc. ("Metanor") by paying to Wolfden an aggregate of $1,943,123 (comprised of $650,000 in acquisition costs and $1,293,123 in reimbursement of exploration expenditures) and issuing 2.1 million common shares subject to a 12-month contractual hold period. Upon securing project financing and the commencement of commercial production on the property resulting in a minimum of 50,000 ounces of gold or silver equivalent being produced, the Company will pay a bonus payment to Wolfden in the amount of $250,000 cash and 250,000 common shares. The Company has also agreed to pay Wolfden a net smelter return royalty of 0.5% on the Company's share of the net smelter return. The Company also assumed Wolfden's $3 million exploration funding commitment at Bachelor Lake. The transaction closed on May 18, 2005. See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property, Quebec." Mr. Ewan Downie, a director of the Company is also the President, Chief Executive Officer and a director of Wolfden. 7. During the year ended August 31, 2004, the Company negotiated a settlement with Hilton Resources Ltd., a public corporation which certain of its directors and officers are also officers and directors of the Company, in which the Company paid $688,079 to settle $748,687 owed, resulting in a gain of $60,608. 8. During the year ended August 31, 2004, the Company negotiated settlements with six creditors in which the Company paid $263,543 to settle a total of $300,142 owed, resulting in a gain of $36,599. The creditors are corporations owned by current and former officers and directors of the Company. 9. During the year ended August 31, 2004, the Company paid $1,000 to Ewan Downie for consulting services. 10. See also "Item 6. Directors, Senior Management and Employees - Compensation." INDEBTEDNESS OF DIRECTORS, OFFICERS, PROMOTERS AND OTHER MANAGEMENT No executive officers, directors, employees or former executive officers and directors of the Company are indebted to the Company. None of the directors, executive officers or proposed nominees of the Company nor any associate or affiliate of these individuals, is or has been indebted to the Company since September 1, 2003. -81- CONFLICTS OF INTEREST The table below shows that certain officers and directors of the Company are also directors, officers or shareholders of other companies which are engaged in the business of acquiring, developing and exploiting natural resource properties. Such associations may give rise to conflicts of interest from time-to-time. The directors of the Company are required by law to act honestly and in good faith with a view to the best interest of the Company and to disclose any interest which they may have in any project or opportunity of the Company. However, each director has a similar obligation to other companies for which such director serves as an officer or director. As of the date of this report, no conflicts of interest have arisen, except as described below and above. Where conflicts of interests arose, the directors of the Company disclosed their interests and abstained from voting on the transaction. The following table identifies the name of each director and officer of the Company and any company, which is a reporting issuer in Canada or the United States, and for which such director or officer currently serves as an officer or director, other than the Company:
DIRECTOR REPORTING ISSUER CAPACITY COMMENCED SERVICE Marc Cernovitch N/A N/A N/A Nick DeMare Aguila American Resources Ltd. Director January 2003 Andean American Mining Corp. Director August 2002 Astral Mining Corporation. Director February 2004 Centrasia Mining Corp. Director October 2002 CFO September 2005 GGL Diamond Corp. Director May 1989 Golden Peaks Resources Ltd. Director January 1992 Goldmarca Limited Director September 2000 Gold Point Energy Corp. Director August 2003 CFO June 2005 Kookaburra Resources Ltd. Director June 1988 Lara Exploration Ltd. Director March 2004 Lariat Energy Ltd. Director August 2002 Mawson Resources Limited Director March 2004 Medina International Corp. Director, Secretary & Treasurer May 2002 Mirasol Resources Limited Director February 2005 Tinka Resources Limited Director October 2003 Tumi Resources Limited Director January 2002 Andrew Carter Astral Mining Corporation Director February 2004 Gold Point Energy Corp. Director October 2003 Rochester Resources Ltd. Director July 2003 Tinka Resources Ltd. Director, President & CEO February 2003 Ewan Downie Anaconda Gold Corp. Director May 2003 Benton Resources Corp. Director December 2003 Newstrike Resources Corp. Director July 2005 Pediment Exploration Ltd. Director March 2005 Sabina Silver Corporation Director November 2002 Wolfden Resources Ltd. Director, President & CEO October 1995 William Lee Rochester Resources Ltd. Director September 1995 Jinshan Gold Mines Inc. CFO January 2006 Tinka Resources Limited Director October 2002 Tom Healy N/A N/A N/A Harvey Lim Astral Mining Corporation Secretary & CFO February 2004 Gold Point Energy Corp. Director & Secretary October 2003 Rochester Resources Ltd. Secretary June 1997 Kookaburra Resources Ltd. Secretary June 2004 Tumi Resources Limited Director January 2002
There are no known existing or potential conflicts of interest among the Company, promoters, directors, officers, principal holders of securities and persons providing professional services to the Company which could reasonably be expected to affect an investor's investment decision except as described in this section. -82- The Company does not have any agreements with its officers or directors, including any officers or directors with a conflict of interest, with respect to the amount of time they must spend on the Company's business. ITEM 8. FINANCIAL INFORMATION. - -------------------------------------------------------------------------------- DESCRIPTION PAGE - ----------- ----------- Audited Consolidated Financial Statements for the Years Ended August 31, 2005, 2004 and 2003 F-1 to F-27 DIVIDEND POLICY The Company has not paid any dividends on its common shares and does not intend to pay dividends on its common shares in the immediate future. Any decision to pay dividends on its common shares in the future will be made by the board of directors on the Company on the basis of earnings, financial requirements and other such conditions that may exist at that time. LEGAL PROCEEDINGS The Company knows of no material, active or pending legal or arbitration proceedings against it; nor is the Company involved as a plaintiff in any material proceeding or pending litigation. The Company knows of no active or pending proceedings against anyone that might materially adversely affect an interest of the Company. There are no legal or arbitration proceedings (including governmental proceedings pending or known to be contemplated) which may have, or have had in the recent past, significant effects on the Company's financial position or profitability. There are no proceedings in which any director, any member of senior management, or any affiliate of the Company is a party adverse to the Company or has a material adverse interest to the Company. ITEM 9. THE OFFER AND LISTING. - -------------------------------------------------------------------------------- PRICE HISTORY The TSXV classifies listed companies into two different tiers based on standards, which include historical financial performance, stage of development, and financial resources of the listed company. Tier 1 is the TSXV's premier tier and is reserved for the TSXV's most advanced issuers with the most significant financial resources. Tier 1 issuers benefit from decreased filing requirements and improved service standards. The majority of the companies listed on the TSXV are Tier 2 companies. The Company trades on the TSXV under the symbol "HLO" and is classified as a Tier 2 company. There have been no trading suspensions imposed by the TSXV or any other regulatory authorities in the past three years. The following table sets forth the market price ranges and the aggregate volume of trading of the common shares of the Company on the TSXV, and predecessor exchanges, for the periods indicated: TSXV STOCK TRADING ACTIVITY SALES PRICE --------------------- YEAR ENDED VOLUME HIGH LOW August 31, 2005 10,825,208 $1.59 $0.60 August 31, 2004 2,866,231 $0.96 $0.05 August 31, 2003 735,039 $0.18 $0.06 August 31, 2002 934,326 $1.89 $0.12 August 31, 2001 2,925,311 $7.49 $1.40 -83- SALES PRICE --------------------- MONTH ENDED VOLUME HIGH LOW February 28, 2006 11,106,426 $0.61 $0.38 November 30, 2005 6,660,484 $0.92 $0.57 August 31, 2005 3,980,129 $0.81 $0.60 May 31, 2005 3,183,669 $1.59 $0.65 February 28, 2005 2,338,610 $1.37 $0.90 November 30, 2004 1,322,800 $1.09 $0.76 August 31, 2004 1,761,300 $0.96 $0.72 May 31, 2004 512,300 $0.85 $0.50 SALES PRICE --------------------- MONTH ENDED VOLUME HIGH LOW February 28, 2006 2,680,100 $0.55 $0.39 January 31, 2006 7,207,517 $0.57 $0.38 December 31, 2005 1,218,809 $0.61 $0.38 November 30, 2005 1,270,701 $0.80 $0.57 October 31, 2005 3,629,359 $0.92 $0.66 September 30, 2005 1,760,424 $0.78 $0.59 TSXV WARRANT TRADING ACTIVITY Effective November 23, 2005, the Company's Series A and Series B Warrants were listed and posted for trading on the TSXV under the symbols "HLO.WT.A" and "HLO.WT.B", respectively. No trading of the Series A or Series B Warrants have taken place to February 28, 2006. On August 7, 2000, the Company's common shares were approved for quotation on the Over-the-Counter Bulletin Board ("OTCBB") system operated by the National Association of Securities Dealers. The Company currently trades on the OTCBB under the symbol "HLOSF.OB". The following tables set forth the market price ranges and the aggregate volume of trading of the common shares of the Company on the OTCBB system for the periods indicated: OTCBB TRADING ACTIVITY BID PRICE (US$) --------------------- YEAR ENDED VOLUME HIGH LOW August 31, 2005 1,989,688 $1.18 $0.35 August 31, 2004 109,396 $0.75 $0.05 August 31, 2003 177,000 $0.09 $0.03 August 31, 2002 309,935 $1.19 $0.06 August 31, 2001 504,571 $4.27 $1.12 BID PRICE (US$) --------------------- QUARTER ENDED VOLUME HIGH LOW February 28, 2006 518,586 $0.53 $0.34 November 30, 2005 333,743 $0.78 $0.35 August 31, 2005 696,742 $0.70 $0.35 May 31, 2005 475,932 $1.18 $0.52 February 29, 2005 476,287 $1.08 $0.70 November 31, 2004 340,727 $0.90 $0.52 August 31, 2004 59,477 $0.75 $0.50 May 31, 2004 19,240 $0.50 $0.35 -84- BID PRICE (US$) --------------------- MONTH ENDED VOLUME HIGH LOW February 28, 2006 293,920 $0.50 $0.35 January 31, 2006 135,923 $0.53 $0.34 December 31, 2005 88,743 $0.50 $0.35 November 30, 2005 77,500 $0.71 $0.50 October 31, 2005 172,286 $0.78 $0.55 September 30, 2005 83,957 $0.69 $0.35 These above quotations reflect inter-dealer prices without retail mark-up, markdown, or commissions and may not necessarily represent actual transactions. The OTCBB is smaller and less liquid than the major securities markets in the United States. The trading volume of the Company's shares on the OTCBB has been volatile. Consequently, shareholders in the United States may not be able to sell their shares at the time and at the price they desire. Since February 2005, the Company's common stock has been listed on the Frankfurt Stock Exchange ("FSE") and XETRA (Electronic Dealing System) under the trading symbol "HRL". ITEM 10. ADDITIONAL INFORMATION. ARTICLES OF CONTINUANCE AND ARTICLES The Company was incorporated under the laws of British Columbia, Canada on June 16, 1983 by registration of its Memorandum and Articles with the B.C. Registrar of Companies (the "BC Registrar") under the incorporation number 372193. On December 14, 1993, the Company was continued to the Yukon Territory, Canada by the registration of its Articles of Continuance with the Yukon Registrar of Corporations under the access number 29383 (the "Yukon Registrar"). On March 29, 2004, the British Columbia legislature enacted the BCBCA and repealed the BC COMPANY ACT. The BCBCA removes many of the restrictions contained in the BC COMPANY ACt, including restrictions on the residency of directors, the location of annual general meetings and limits on authorized share capital, as well, the BCBCA uses new forms and terminology and has replaced the Memorandum with a Notice of Articles. On November 16, 2004, the Company was continued to British Columbia, Canada by the registration of a Certificate of Continuance with the BC Registrar under incorporation number C0708624. The Company's Articles of Continuance place no restriction upon the Company's objects and purposes. The Company is of the view that the BCBCA provides to shareholders of the Company substantively the same rights as were available to shareholders under the YBCA, including rights of dissent and appraisal and rights to bring derivative and oppression actions. The following is a comparison of some of the principal provisions of the YBCA and the BCBCA that the Company believes may be relevant to shareholders. This summary is not intended to be exhaustive and shareholders should consult their legal advisors with respect to the detailed provisions of the BCBCA and their rights under it. Reference should be made to the full text of both statutes for particulars of the differences. Note: Within this summary, the term "Articles" when referring to the BCBCA is the equivalent to the "by-laws" under the YBCA. The term "Notice of Articles" when referring to the BCBCA is the equivalent of the "articles" under the YBCA. SALE OF COMPANY'S UNDERTAKING. Under the BCBCA, a sale of all or substantially all the property of a corporation, other than in the ordinary course of business, of the corporation requires approval by special resolution. The Company's Articles confirm a special resolution, being a resolution passed by a majority of not less than two-thirds of the votes cast by shareholders who voted in respect of the resolution (the "Special Resolution"), must be approved in respect of the proposed sale. The provisions of the YBCA are substantially the same. ALTERATION TO NOTICE OF ARTICLES OF THE COMPANY. Under the BCBCA, any substantive change to the Notice of Articles of a corporation, such as a change in the name of the corporation and certain changes to the share capital of a -85- corporation, require approval of a Special Resolution in respect of the change. The provisions of the YBCA are substantially the same. ARTICLE AMENDMENTS. The BCBCA provides that unless the Articles or a unanimous shareholder agreement otherwise provide, the directors may, by resolution, make, amend, or repeal any Articles that regulate the business or affairs of a corporation. However, the directors must submit an Article, or an amendment or a repeal of an Article, to the shareholders of the corporation, and the shareholders may, with approval by way of Special Resolution, confirm, reject or amend the article, amendment or repeal. The provisions of the YBCA are substantially the same in connection with amendments to the by-laws. AUTHORIZATION OF UNLIMITED NUMBER OF SHARES. The BCBCA permits a corporation to have an unlimited number of shares without par value. The provisions of the YBCA are substantially the same. RIGHTS OF DISSENT AND APPRAISAL. The BCBCA provides that shareholders who dissent to certain actions being taken by a corporation may exercise a right of dissent and require the corporation to purchase the shares held by such shareholder at the fair value of such shares. The dissent right is applicable where the corporation proposes to (a) amend its articles to alter the restrictions on the powers of the corporation or on the business that the corporation may carry on, (b) adopt an amalgamation agreement, (c) in respect of a resolution to approve an amalgamation under the BCBCA (d) in respect of a resolution approving an arrangement, the terms of which arrangement permits dissent, (e) continue out of the jurisdiction, (f) in respect of a resolution to authorize and ratify the lease or other disposition of all or substantially all its undertaking, (g) in respect of any other resolution, if dissent is authorized by the resolution, or (h) in respect of any court order that permits dissent. The dissenting shareholder is required to strictly comply with the provisions of the BCBCA in order to exercise this remedy. The YBCA provides similar rights to shareholders. OPPRESSION REMEDIES. Under the BCBCA, a shareholder of a corporation has the right to apply to a court for an order where the business or affairs are being or have been conducted, or the exercise of the directors' of the corporation's or any of its affiliates' powers, in a manner oppressive or unfairly prejudicial to or would unfairly disregard the interests of any shareholder of the corporation. On such an application, the court may make any interim or final order it considers appropriate, including regulating the conduct of the corporation's affairs. Under the YBCA, the oppression remedy is substantially the same as that contained in the BCBCA. SHAREHOLDER DERIVATIVE ACTIONS. Pursuant to the BCBCA, a complainant, which includes a shareholder, may apply to the court for leave to bring an action in the name of and on behalf of a corporation or any subsidiary, or to intervene in an existing action to which the corporation is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the corporation. On such an application, the court may make any order it thinks fit, including an order authorizing the complainant or any other person to control the conduct of the action. Pursuant to the YBCA, derivative actions are dealt with in substantially the same manner as the BCBCA. FINANCIAL ASSISTANCE. The BCBCA does not restrict a corporation from giving financial assistance to shareholders or directors of the corporation or an affiliated corporation. The provisions of the YBCA are substantially the same except that in certain cases a solvency test is met. RECORD DATE FOR VOTING. The BCBCA provides the Company with the ability to fix a record date for voting purposes. Transfers of shares after the record date are not recognized for voting entitlement purposes. The YBCA also provides for the setting of a fixed record date for voting purposes but a transferee of shares requesting to have its name included in the relevant shareholder list at least ten days (or such shorter time as is provided in the by-laws) prior to the meeting is entitled to vote, provided that the transferee can establish that the transferee owns the shares. REQUISITION OF MEETINGS. The BCBCA provides that holders of not less than five per cent of the issued shares of a corporation that carry the right to vote at a meeting sought to be held may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition. The provisions of the YBCA are substantially the same. FORM OF PROXY AND INFORMATION CIRCULAR. The BCBCA requires that management of a distributing corporation (public company), concurrently with giving notice of a meeting of shareholders, send a form of proxy in prescribed form to each shareholder who is entitled to receive notice of the meeting. Where management of a corporation solicits proxies, an information circular in prescribed form must also accompany the notice of the meeting. The YBCA contains similar provisions. -86- PLACE OF MEETINGS. The BCBCA provides that meetings of shareholders of a corporation must be held at the place within the Province of British Columbia provided in the articles. A meeting of shareholders of a corporation may however be held at a place outside of British Columbia if the location is approved by the resolution required by the Articles for the purpose, or if no resolution is required for that purpose by the Articles, approved by ordinary resolution. Under the YBCA, meetings of shareholders of a corporation must be held at a location in the Yukon Territory or, if the articles so provide at one or more places specified in the articles, or in the absence of such determination, at the place where the registered office of the corporation is located. QUORUM OF SHAREHOLDERS. The BCBCA states that the quorum of shareholders of the corporation at a meeting of shareholders is established in the articles of the corporation. If no quorum is established by the articles, the quorum is two shareholders entitled to vote at the meeting whether present in person or by proxy. Under the YBCA, unless the articles of a corporation otherwise provide, a quorum of shareholders is present at a meeting of shareholders (irrespective of the number of persons actually present at the meeting) if holders of a majority of the shares entitled to vote at the meeting are present in person or represented by proxy. SHAREHOLDER PROPOSALS. The BCBCA contains eligibility requirements for shareholders that wish to submit proposals for inclusion in a corporation's proxy materials. The YBCA imposes similar requirements. DUTIES OF DIRECTORS. The BCBCA provides that subject to any unanimous shareholder agreement, the directors manage, or supervise the management of, the business and affairs of the Company. The YBCA contains substantially the same provisions. REMOVAL OF DIRECTORS. The BCBCA permits the removal of directors by special resolution. Unless otherwise provided in the articles of a corporation, a quorum of directors may fill a vacancy among the directors, except for a vacancy resulting from an increase in the number or the minimum or maximum number of directors or the failure to elect the number or minimum number of directors provided for in the articles. The YBCA contains substantially the same provisions. The following is a summary of all material provisions of the Company's Continuation Application and Articles and certain provisions of the BCBCA, applicable to the Company: A. DIRECTOR'S POWER TO VOTE ON A PROPOSAL, ARRANGEMENT OR CONTRACT IN WHICH THE DIRECTOR IS MATERIALLY INTERESTED. Under the BCBCA, subject to certain exceptions, a director or senior officer of the Company must disclose any material interest that he personally has, or that he as a director or senior officer of another corporation has in a contract or transaction that is material to the Company and which the Company has entered into or proposes to enter into. A director or senior officer of the Company does not hold a disclosable interest in a contract or transaction if: 1. the situation that would otherwise constitute a disclosable interest arose before the coming into force of the BCBCA, and the interest was disclosed and approved under, or was not required to be disclosed under legislation that applied to the Company before the coming into effect of the BCBCA; 2. both the Company and the other party to the contract or transaction are wholly owned subsidiaries of the same corporation; 3. the Company is a wholly owned subsidiary of the other party to the contract or transaction; 4. the other party to the contract or transaction is a wholly owned subsidiary of the Company; or 5. the director or senior officer is the sole shareholder of the Company or of a corporation of which the Company is a wholly owned subsidiary. A director or senior officer of the Company does not hold a disclosable interest in a contract or transaction merely because: 1. the contract or transaction is an arrangement by way of a security granted by the Company for money loaned to, or obligations undertaken by, the director or senior officer, or a person in whom the director or -87- senior officer has a material interest, for the benefit of the Company or an affiliate of the Company; 2. the contract or transaction relates to an indemnity or insurance under the BCBCA; 3. the contract or transaction relates to the remuneration of the director or senior officer, in that person's capacity as director, officer, employee or agent of the Company or of an affiliate of the Company; 4. the contract or transaction relates to a loan to the Company, and the director or senior officer, or a person in whom the director or senior officer has a material interest, is or is to be a guarantor of some or all of the loan; or 5. the contract or transaction has been or will be made with or for the benefit of a corporation that is affiliated with the Company and the director or senior officer is also a director or senior officer of that corporation or an affiliate of that corporation. A director or senior officer who holds such a material interest must disclose the nature and extent of such interest in writing. The disclosure must be evidenced in writing in a consent resolution, the minutes of a meeting or any other record deposited with the Company's record office. A director who has a disclosable interest in a contract or transaction is not entitled to vote on any directors' resolution to approve that contract or transaction, but may be counted in the quorum at the directors' meeting at which such vote is taken. B. DIRECTORS' POWER, IN THE ABSENCE OF AN INDEPENDENT QUORUM, TO VOTE COMPENSATION TO THEMSELVES OR ANY MEMBERS OF THEIR BODY. The compensation of the directors is decided by the directors unless the Board of Directors specifically requests approval of the compensation from the shareholders. If the issuance of compensation to the directors is decided by the directors, a quorum is the majority of the directors in office. C. BORROWING POWERS EXERCISABLE BY THE DIRECTORS AND HOW SUCH BORROWING POWERS MAY BE VARIED. The Company, if authorized by the directors, may: 1. borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that they consider appropriate; 2. issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person and at such discounts or premiums and on such other terms as they consider appropriate; 3. guarantee the repayment of money by any other person or the performance of any obligation of any other person; and 4. mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of the present and future assets and undertaking of the Company. The borrowing powers may be varied by amendment to the Articles of the Company which requires approval of the shareholders of the Company by Special Resolution. D. RETIREMENT AND NON-RETIREMENT OF DIRECTORS UNDER AN AGE LIMIT REQUIREMENT. There are no such provisions applicable to the Company under the Certificate of Continuance , Notice of Articles, Articles or the BCBCA. E. NUMBER OF SHARES REQUIRED FOR A DIRECTOR'S QUALIFICATION. A director of the Company is not required to hold a share in the capital of the Company as qualification for his office. -88- DESCRIPTION OF AUTHORIZED SHARES The authorized capital of the Company consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. A complete description is contained in the Company's Continuation Application. COMMON SHARES Of the Company's unlimited common share capital, a total of 28,017,716 common shares were issued and outstanding as of February 28, 2006. All of the common shares are fully paid and not subject to any future call or assessment. All of the common shares of the Company rank equally as to voting rights, participation in a distribution of the assets of the Company on a liquidation, dissolution or winding-up of the Company and the entitlement to dividends. The holders of the common shares are entitled to receive notice of all shareholder meetings and to attend and vote at such meetings. Shareholders are not entitled to cumulative voting. Each common share carries with it the right to one vote. The common shares do not have preemptive or conversion rights. In addition, there are no sinking fund or redemption provisions applicable to the common shares or any provisions discriminating against any existing or prospective holders of such securities as a result of a shareholder owning a substantial number of common shares. The Company's board of directors does not stand for re-election at staggered intervals. PREFERRED SHARES Of the Company's unlimited preferred share capital, a total of $8,000,000 preferred shares (the "Series 1 Preferred Shares") were issued and outstanding as of February 28, 2006. The Series 1 Preferred Shares are entitled to a liquidation preference over the holders of any other shares together with an amount equal to all accrued and unpaid dividends thereon which for such purpose shall be calculated as if such dividends were accruing up to the date of such distribution. The preference shares of each series rank on a priority with the preference shares of every other series and are entitled to preference over the common shares and any other shares ranking subordinate to the preference shares with respect to priority and payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of the Company. The holders of the Series 1 Preferred Shares are entitled to receive and the Company shall pay thereon out of the monies of the Company properly applicable to the payment of dividends fixed cumulative cash dividends, at the following rates: (i) for each of the two years commencing on November 1, 2004, an annual dividend of $0.00625 per share payable in quarterly installments of $0.0015625 per share on February 1, May 1, August 1, and November 1 of each year, commencing on February 1, 2005 and ending on November 1, 2006; and (ii) for each of the three years commencing on November 1, 2006, an annual dividend of $0.04 per share payable in quarterly installments of $0.01 per share on February 1, May 1, August 1, and November 1, of each year, commencing on February 1, 2007 and ending on November 1, 2009. The Company may, in its sole discretion, upon written notice given to the holders of the Series 1 Preferred Shares at least 40 days before a dividend is due, elect to pay such dividend in common shares of the Company. If the Company so elects, the number of common shares issuable will be determined by dividing the amount of the dividend due by the weighted average trading price of the common shares of the Company on the TSXV for the 15 trading days immediately prior to the date the dividend is due. The Company may at any time prior to November 1, 2009, redeem the Series 1 Preferred Shares in whole or in part without the consent of the holders thereof on payment to the holders thereof of the amount of $1.05 per share plus an amount equal to all accrued and unpaid dividends thereon which for such purpose shall be calculated as if such dividends were accruing up to the date of redemption (collectively the "Redemption Amount"). The Company, in its sole discretion may elect to pay the Redemption Amount in cash or common shares of the Company. If the Company elects to the pay the Redemption Amount in common shares, the number of common shares issuable will be determined by dividing the Redemption Amount by the weighted average trading price of the common shares of the Company on the TSXV for the 15 trading days immediately prior to the date specified for redemption upon notice thereof. Provided all dividends payable on the Series 1 Preferred Shares have been paid up to date, the Company may at any -89- time prior to November 1, 2009, redeem the Series 1 Preferred Shares without the consent of the holders thereof by transferring to the holders thereof, in proportion to the percentage of issued and outstanding Series 1 Preferred Shares, held by each holder, the Company's title to the Duport Property. If the Series 1 Preferred Shares have not been redeemed by November 1, 2009, the Company will, effective November 1, 2009, retract the Series 1 Preferred Shares by payment to the holders thereof of the retraction amount (the "Retraction Amount") in respect of each Preferred Share, Series 1, which shall be $1.00 per share plus an amount equal to all accrued and unpaid dividends thereon which for such purposes shall be calculated as if such dividends were accruing up to the date of retraction. The Company, in its sole discretion may elect to pay the Retraction Amount in cash or common shares of the Company. If the Company elects to the pay the Retraction Amount in common shares, the number of common shares issuable will be determined by dividing the Retraction Amount by the weighted average trading price of the common shares of the Company on the TSXV for the 15 trading days immediately prior to the date specified for retraction. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or other distribution of its property or assets among its shareholders for the purpose of winding up its affairs, the holders of the Series 1 Preferred Shares are entitled to receive, before any distribution of any part of the property or assets of the Company among the holders of any other shares, an amount equal to $1.00 per share together with an amount equal to all accrued and unpaid dividends thereon which for such purpose shall be calculated as if such dividends were accruing up to the date of such distribution. Thereafter, the holders of the Series 1 Preferred Shares will not participate further in the capital of the Company. The holders of the Series 1 Preferred shares are not entitled to receive notice of or to attend and vote at any meetings of the shareholders of the Company unless a dividend payable thereon remains unpaid for a period of 60 days past the date the dividend was due, in which case the holders of Series 1 Preferred Shares shall have one vote per share at all meetings of shareholders until such dividend is paid. No Series 1 Preferred Shares shall be transferred unless the transferee agrees in writing to be bound by the provisions of the escrow agreement dated March 24, 2005 among the Company, the Sheridan Platinum Group Ltd. and McLean & Kerr LLP, as amended from time to time, as if the transferee were the "Vendor" under such agreement. The Series 1 Preferred Shares do not carry any pre-emptive, subscription, or conversion rights, nor do they contain any sinking or purchase fund provisions. DIVIDEND RECORD The Company has not paid any dividends on its common shares and has no policy with respect to the payment of dividends. OWNERSHIP OF SECURITIES AND CHANGE OF CONTROL Except for the Investment Canada Act, discussed below, there are no limitations on the rights to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by foreign law or by the constituent documents of the Company. Any person who beneficially owns or controls, directly or indirectly, more than 10% of the Company's voting shares is considered an insider, and must file an insider report with the British Columbia, Alberta and Ontario Securities Commissions within ten days of becoming an insider disclosing any direct or indirect beneficial ownership of, or control over direction over securities of the Company. In addition, if the Company itself holds any of its own securities, the Company must disclose such ownership. There are no provisions in the Company's Continuation Application, Notice of Articles and Articles that would have an effect of delaying, deferring or preventing a change in control of the Company operating only with respect to a merger, acquisition or corporate restructuring involving the Company or its subsidiaries. CHANGES TO RIGHTS AND RESTRICTIONS OF SHARES Under the BCBCA and the Company's Articles, if the Company wishes to change the rights and restrictions of the common shares or the preferred shares the Company must obtain the approval of the shareholders by Special Resolution. -90- SHAREHOLDER MEETINGS ANNUAL AND EXTRAORDINARY GENERAL MEETINGS Under the BCBCA and the Company's Articles, the Company's annual general meeting is to be held once in each calendar year and not more than 15 months after the previous meeting. No advance notice will be required to be published at a meeting where directors are to be elected. The Company, under the BCBCA, must give shareholders not less than 21 days' notice of any general meeting of the shareholders. The Directors may fix in advance a date, which is no fewer than 35 days or no more than 60 days prior to the date of the meeting, as the record date for the meeting. All the holders of common shares as at the record date are entitled to attend and vote at a general meeting. On a show of hands, every person who is present, a shareholder or proxy holder and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the Chairman of the meeting that the vote upon the resolution has been carried or carried by the necessary majority or is defeated must be entered in the minutes of the meeting and shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favor of or against the resolution and the result of the vote so taken shall be the decision of the members upon the said question. DIFFERENCES FROM REQUIREMENTS IN THE UNITED STATES Except for the Company's quorum requirements, certain requirements related to related party transactions, the requirement for notice of shareholder meetings, the approval of amendments to the Company's articles and disclosures by certain shareholders of their ownership, which are discussed above, there are no significant differences in the law applicable to the Company, in the areas outlined above, in British Columbia versus the United States. In most states in the United States, a quorum must consist of a majority of the shares entitled to vote. Some states allow for a reduction of the quorum requirements to less than a majority of the shares entitled to vote. Having a lower quorum threshold may allow a minority of the shareholders to make decisions about the Company, its management and activities. In addition, most states in the United States require that a notice of meeting be mailed to shareholders prior to the meeting date. Additionally, in the United States, a director may not be able to vote on the approval of any transaction in which the director has a interest. Generally, most states in the United States require amendments to a company's articles of incorporation to be approved by at least a majority of the votes cast by the holders of the issued and outstanding shares. Some states, or some older corporations, may require approval of amendments by 2/3 of the votes cast by the holders of the issued and outstanding shares. In addition, in the United States voting by separate voting groups may be required on the approval of any such amendments. The Company's common shares are registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result, under Section 13 of the Act, shareholders beneficially owning more than five percent (5%) of the Company's common shares may be required to make filings with the Securities and Exchange Commission relating to their ownership of the Company's common shares. MATERIAL CONTRACTS The following are material contracts entered into by the Company during the two years preceding the date of this annual report: 1. Letter of Intent by and among The Company Resources Ltd., The Sheridan Platinum Group Ltd. and Mr. Pat Sheridan, dated July 5, 2004. See "Item 4. Information on the Company - Principal Properties - Duport Property". 2. Head of Agreement by and between Halo Resources Ltd. and Wolfden Resources Inc., dated November 12, 2004. See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property". 3. Letter of Intent by and between Halo Resources Ltd. and Endowment Lakes (2002) Limited Partnership dated February 9, 2005. See "Item 4. Information on the Company - Principal Properties - Quarter Moon Lake Property, Manitoba". -91- 4. Assignment and Assumption Agreement by and among Halo Resources Ltd., The Sheridan Platinum Group Ltd. and Mr. Pat Sheridan dated March 24, 2005, whereby the Company acquired a 100% interest in 93 mineral claims over an area of approximately 5,000 hectares, located near Kenora, Ontario, for which the Company paid $250,000 cash and issued one million common shares at a fair value of $1,210,000 and $8 million in preferred shares; the Company has also agreed to pay a 2.5% net smelter return royalty ("NSR") on the first 1.5 million ounces of gold produced and a 5% NSR on the excess. The Company has the right to buy back a portion of the NSR. See "Item 4. Information on the Company - Principal Properties - Duport Property". 5. Assignment and Assumption Agreement by and between Halo Resources Ltd. and Wolfden Resources Inc., executed April 15, 2005, whereby the Company acquired Wolfden's option to earn a 50% interest in the Bachelor Lake Property by paying $650,000 cash and issuing 2,100,000 common shares, at a fair value of $1,575,000. The Company also reimbursed Wolfden $1,293,123 for a portion of exploration costs incurred by Wolfden from the date of signing the head of agreement; if the Company exercises the option, and after 50,000 ounces of gold or gold equivalent have been produced from the Bachelor Lake Property, the Company shall pay to Wolfden a bonus payment of $250,000 cash and issue to Wolfden a further 250,000 common shares. The Company also agreed to pay a 0.5% royalty on the Company's share of the NSR. . See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property". 6. Joint Venture Agreement by and between Halo Resources Ltd. and Metanor Resources Inc. dated September 28, 2005, whereby the parties have agreed to jointly explore, develop and operate the Bachelor Lake Property as a 50:50 joint venture (the "BLJV"). EXCHANGE CONTROLS There are no governmental laws, decrees, or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends, or other payments to non-resident holders of the Company's common stock. Any remittances of dividends to United States residents are, however, subject to a 15% withholding tax (10% if the shareholder is a corporation owning at least 10% of the outstanding common stock of the Company) pursuant to Article X of the reciprocal tax treaty between Canada and the United States. See "Item 10. Additional Information - Taxation". Except as provided in the Investment Canada Act, there are no limitations specific to the rights of non-Canadians to hold or vote the common stock of the Company under the laws of Canada or the Province of British Columbia or in the charter documents of the Company. The following discussion summarizes the principal features of the Investment Canada Act for a non-resident who proposes to acquire the common shares. The Investment Canada Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture (each an "entity") that is not a "Canadian" as defined in the Investment Canada Act (a "non-Canadian"), unless after review, the Director of Investments appointed by the minister responsible for the Investment Canada Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in the common shares by a non-Canadian other than a "WTO Investor" (as that term is defined by the Investment Canada Act, and which term includes entities which are nationals of or are controlled by nationals of member states of the World Trade Organization) when the Company was not controlled by a WTO Investor, would be reviewable under the Investment Canada Act if it was an investment to acquire control of the Company and the value of the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Canada Act, equals or exceeds $5 million for direct acquisition and over $50 million for an indirect acquisition, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada's cultural heritage or national identity, regardless of the value of the assets of the Company. An investment in the common shares by a WTO Investor, or by a non-Canadian when the Company was controlled by a WTO Investor, would be reviewable under the Investment Canada Act if it was an investment to acquire control of the Company and the value of the assets of the Company, as determined in accordance with the regulations promulgated under the Investment Canada Act was not less than a specified amount. A non-Canadian would acquire control of the Company for the purposes of the Investment Canada Act if the non-Canadian acquired a majority of the common shares. The acquisition of one third or more, but less than a majority of the common shares would be presumed to be an acquisition of control of the Company unless it could be established that, on the acquisition, the Company was not controlled in fact by the acquirer through the ownership of the common shares. -92- Certain transactions relating to the common shares would be exempt from the Investment Canada Act, including: (a) an acquisition of the common shares by a person in the ordinary course of that person's business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Canada Act; and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of the common shares, remained unchanged. TAXATION MATERIAL CANADIAN FEDERAL INCOME TAX CONSEQUENCES Management of the Company considers that the following discussion fairly describes the material Canadian federal income tax consequences applicable to a holder of common stock of the Company who is a resident of the United States and who is not a resident of Canada and who does not use or hold, and is not deemed to use or hold, his shares of common stock of the Company in connection with carrying on a business in Canada (a "non-resident shareholder"). This summary is based upon the current provisions of the Income Tax Act (Canada) (the "ITA"), the regulations thereunder (the "Regulations"), the current publicly announced administrative and assessing policies of Revenue Canada, Taxation and all specific proposals (the "Tax Proposals") to amend the ITA and Regulations announced by the Minister of Finance (Canada) prior to the date hereof. This description is not exhaustive of all possible Canadian federal income tax consequences and, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action. DIVIDENDS Dividends paid on the common stock of the Company to a non-resident will be subject to withholding tax. The Canada-US Income Tax Convention (1980) (the "Treaty") provides that the normal 25% withholding tax rate is reduced to 15% on dividends paid on shares of a corporation resident in Canada (such as the Company) to residents of the United States, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation which is a resident of the United States which owns at least 10% of the voting shares of the corporation paying the dividend. CAPITAL GAINS In general, a non-resident of Canada is not subject to tax under the ITA with respect to a capital gain realized upon the disposition of a share of a corporation resident in Canada that is listed on a prescribed stock exchange. For purposes of the ITA, the Company is listed on a prescribed stock exchange. Non-residents of Canada who dispose of shares of the Company will be subject to income tax in Canada with respect to capital gains if: (a) the non-resident holder; (b) persons with whom the non-resident holder did not deal at arm's length; or (c) the non-resident holder and persons with whom the non-resident holder did not deal with at arm's length, owned not less than 25% of the issued shares of any class or series of the Company at any time during the five-year period preceding the disposition. In the case of a non-resident holder to whom shares of the Company represent taxable Canadian property and who is resident in the United States, no Canadian taxes will be payable on a capital gain realized on such shares by reason of the Treaty unless the value of such shares is derived principally from real property situated in Canada. However, in such a case, certain transitional relief under the Treaty may be available. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material United States federal income tax consequences, under current law, applicable to a US Holder (as defined below) of the Company's common stock. This discussion does not address consequences peculiar to persons subject to special provisions of federal income tax law, such as tax-exempt organizations, qualified retirement plans, financial institutions, insurance companies, real estate investment trusts, regulated -93- investment companies, broker-dealers, nonresident alien individuals or foreign corporations, and shareholders owning common stock representing 10% of the vote and value of the Company. In addition, this discussion does not cover any state, local or foreign tax consequences. The following discussion is based upon the sections of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal Revenue Service ("IRS") rulings, published administrative positions of the IRS and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time. In addition, this discussion does not consider the potential effects, both adverse and beneficial of recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time. Holders and prospective holders of the Company's common stock should consult their own tax advisors about the federal, state, local and foreign tax consequences of purchasing, owning and disposing of shares of common stock of the Company. US HOLDERS As used herein, a "US Holder" is defined as (i) citizens or residents of the US, or any state thereof, (ii) a corporation or other entity created or organized under the laws of the US, or any political subdivision thereof, (iii) an estate the income of which is subject to US federal income tax regardless of source or that is otherwise subject to US federal income tax on a net income basis in respect of the common stock, or (iv) a trust whose administration is subject to the primary supervision of a US court and which has one or more US fiduciaries who have the authority to control all substantial decisions of the trust, whose ownership of common stock is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their stock through the exercise of employee stock options or otherwise as compensation. DISTRIBUTIONS ON SHARES OF COMMON STOCK US Holders receiving dividend distributions (including constructive dividends) with respect to the Company's common stock are required to include in gross income for United States federal income tax purposes the gross amount of such distributions to the extent that the Company has current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions. Such Canadian tax withheld may be credited, subject to certain limitations, against the US Holder's United States federal income tax liability or, alternatively, may be deducted in computing the US Holder's United States federal taxable income by those who itemize deductions. (See more detailed discussion at "Foreign Tax Credit" below.) To the extent that distributions exceed current or accumulated earnings and profits of the Company, they will be treated first as a return of capital up to the US Holder's adjusted basis in the common stock and thereafter as gain from the sale or exchange of such shares. Preferential tax rates for long-term capital gains are applicable to a US Holder which is an individual, estate or trust. There are currently no preferential tax rates for long-term capital gains for a US Holder which is a corporation. Dividends paid on the Company's common stock will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. FOREIGN TAX CREDIT A US Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of the Company's common stock may be entitled, at the option of the US Holder, to either a deduction or a tax credit for such foreign tax paid or withheld. Generally, it will be more advantageous to claim a credit because a credit reduces United States federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income subject to tax. This election is made on a year-by-year basis and applies to all foreign taxes paid by (or withheld from) the US Holder during that year. Subject to certain limitations, Canadian taxes withheld will be eligible for credit against the US Holder's United States federal income taxes. Under the Code, the limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. Dividends paid by the Company generally will be either "passive" income or "financial services" income, depending on the particular US Holder's circumstances. Foreign tax credits allowable with respect to each class of income cannot exceed the US federal income tax otherwise payable with respect to such class of income. The consequences of the separate limitations will depend on the nature and sources of each US Holder's income and the deductions appropriately allocated or apportioned thereto. The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of common stock should consult their own tax advisors regarding their individual circumstances. -94- DISPOSITION OF SHARES OF COMMON STOCK A US Holder will recognize gain or loss upon the sale of shares of common stock equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received; and (ii) the shareholder's tax basis in the common stock. This gain or loss will be capital gain or loss if the shares are a capital asset in the hands of the US Holder, and such gain or loss will be long-term capital gain or loss if the US Holder has held the common stock for more than one year. Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year. Deductions for net capital losses are subject to significant limitations. For US Holders who are individuals, any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted. For US Holders which are corporations (other than corporations subject to Subchapter S of the Code), an unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted. OTHER CONSIDERATIONS The Company has not determined whether it meets the definition of a "passive foreign investment company" (a "PFIC"). It is unlikely that the Company meets the definition of a "foreign personal holding company" (a "FPHC") or a "controlled foreign corporation" (a "CFC") under current US law. If more than 50% of the voting power or value of the Company were owned (actually or constructively) by US Holders who each owned (actually or constructively) 10% or more of the voting power of the Company's common shares ("10% Shareholders"), then the Company would become a CFC and each 10% Shareholder would be required to include in its taxable income as a constructive dividend an amount equal to its share of certain undistributed income of the Company. If (1) more than 50% of the voting power or value of the Company's common shares were owned (actually or constructively) by five or fewer individuals who are citizens or residents of the United States and (2) 60% or more of the Company's income consisted of certain interest, dividend or other enumerated types of income, then the Company would be a FPHC. If the Company were a FPHC, then each US Holder (regardless of the amount of the Company's common shares owned by such US Holder) would be required to include in its taxable income as a constructive dividend its share of the Company's undistributed income of specific types. If 75% or more of the Company's annual gross income has ever consisted of, or ever consists of, "passive" income or if 50% or more of the average value of the Company's assets in any year has ever consisted of, or ever consists of, assets that produce, or are held for the production of, such "passive" income, then the Company would be or would become a PFIC. The Company has not provided assurances that it has not been and does not expect to become a PFIC. Please note that the application of the PFIC provisions of the Code to resource companies is somewhat unclear. If the Company or any of its subsidiaries (if any) is deemed to be a PFIC, a United States holder of the Company's common shares would be required to pay an interest charge together with tax calculated at maximum tax rates on certain "excess distributions" (defined to include certain dividends from a PFIC and any gain on the sale of stock of a PFIC) unless such holder made an election either to (1) include in his or her taxable income his or her pro rata share of the PFIC's ordinary earnings and net capital gains under the Qualified Electing Fund rules or (2) mark to market his or her Company common shares at the end of each taxable year as set forth in Section 1296 of the Internal Revenue Code of 1986, as amended. The elections require certain conditions be met such as filing on or before the due date, as extended, for filing the shareholder's income tax return for the first taxable year to which the election will apply. INFORMATION REPORTING AND BACKUP WITHHOLDING US information reporting requirements may apply with respect to the payment of dividends to US Holders of the Company's shares. Under Treasury regulations currently in effect, non-corporate holders may be subject to backup withholding at a 31% rate with respect to dividends when such holder (1) fails to furnish or certify a correct taxpayer identification number to the payor in the required manner, (2) is notified by the IRS that it has failed to report payments of interest or dividends properly or (3) fails, under certain circumstances, to certify that it has been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. INSPECTION OF DOCUMENTS Copies of the documents referred to in this report may be inspected at the Company's registered office at Suite 1305 - 1090 West Georgia Street, Vancouver, British Columbia V6E 3V7, during normal business hours. The Company's documents publicly filed with the SEC may also be viewed and inspected at the SEC's Public Reference Room located at 450 Fifth Street, NW, Washington, D.C. 20549. Copies may also be obtained from the SEC at prescribed rates. -95- ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------------------- Not applicable. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. - -------------------------------------------------------------------------------- Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES. - -------------------------------------------------------------------------------- Not applicable. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. - -------------------------------------------------------------------------------- The Company has changed its domicile and created Series 1 Preferred Shares. See "Item 4. Information on the Company - History and Development of the Company", "Item 10. Additional Information - Articles of Continuance and Articles" and "Item 10. Additional Information - Description of Authorized Shares - Preferred Shares". These actions have effected the rights of the Company's common shareholders. ITEM 15. CONTROLS AND PROCEDURES - -------------------------------------------------------------------------------- An evaluation was performed under the supervision and with the participation of the Company's management, including Mr. DeMare, the Company's Chairman and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act") as of August 31, 2005. Based upon that evaluation, Mr. DeMare, concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms. During the fiscal year ended August 31, 2005, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 16. [RESERVED] - -------------------------------------------------------------------------------- Not applicable. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT. - -------------------------------------------------------------------------------- The Board of Directors has determined that the Company has at least two audit committee financial experts, Messrs. Nick DeMare and William Lee, who serve on the Company's audit committee. Mr. Lee is considered to be an "independent director" and Mr. DeMare is not considered to be an "independent director" as that term is defined in Rule 4200(a)(15) of the National Association of Securities Dealers. ITEM 16B. CODE OF ETHICS. - -------------------------------------------------------------------------------- The Company has not yet adopted a code of ethics that applies to the Company's principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. Given the Company's current operations, management does not believe a code of ethics is necessary at this stage of the Company's development. -96- ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - -------------------------------------------------------------------------------- AUDIT FEES For the fiscal years ended August 31, 2005 and 2004, the Company's principal accountant billed $13,356 and $11,615, respectively, for the audit of the Company's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. AUDIT-RELATED FEES For the fiscal years ended August 31, 2005 and 2004, the Company's principal accountant billed $1,419 and $nil, respectively, for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial statements outside of those fees disclosed above under "Audit Fees". TAX FEES For the fiscal years ended August 31, 2005 and 2004, the Company's principal accountant billed $2,202 and $nil, respectively, for tax compliance, tax advice, and tax planning services. ALL OTHER FEES For the fiscal years ended August 31, 2005 and 2004, the Company's principal accountant billed $nil and $nil respectively, for products and services other than those set forth above. PRE-APPROVAL POLICIES AND PROCEDURES Prior to engaging the Company's accountants to perform a particular service, the Company's audit committee obtains an estimate for the service to be performed. The Company's audit committee reviews and pre-approves all audit and audit-related services and the fees and other compensation related thereto, and any non-audit services provided by the Company's external auditors. Provided the pre-approval of the non-audit services is presented to the audit committee's first scheduled meeting following such approval such authority may be delegated by the audit committee to one or more independent members of the audit committee. The audit committee in accordance with procedures for the Company approved all of the services described above. At no time since the commencement of the Company's most recently completed financial year has the Company relied on the waiver in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. PRINCIPAL ACCOUNTANT SERVICES To the best of the Company's knowledge, the percentage of hours expended on the Company's principal accountant's engagement to audit the Company's financial statements for the fiscal year ended August 31, 2005, that were attributed to work performed by persons other than the principal accountant's full-time permanent employees was less than fifty percent (50%). ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. - -------------------------------------------------------------------------------- Not applicable. ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS. - -------------------------------------------------------------------------------- Not applicable. -97- PART III ITEM 17. FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- See pages F-1 through F-27. ITEM 18. FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- Not applicable. ITEM 19. EXHIBITS. - -------------------------------------------------------------------------------- EXHIBIT NUMBER DESCRIPTION 1.1 Certificate of Continuation and Notice of Articles for Halo Resources Ltd. (1) 1.2 Articles for Halo Resources Ltd. (1) Purchase and Sale Agreement by and between TMK Oil & Gas, Inc. and Westport Petroleum Inc., dated 4.1 March 1, 2004. (1) Letter of Intent by and among Halo Resources Ltd., The Sheridan Platinum Group Ltd. and 4.2 Mr. Pat Sheridan, dated July 5, 2004. (1) Heads of Agreement by and between Halo Resources Ltd. and Wolfden Resources Inc., 4.3 dated November 12, 2004. (1) 4.4 Stock Option Plan 2004 (2) Letter of Intent by and between Halo Resources Ltd. and Endowment Lakes (2002) Limited 4.5 Partnership, dated February 9, 2005, and amendment dated February 9, 2006 Purchase Agreement by and among Halo Resources Ltd., Sheridan Platinum Group, 4.6 dated February 18, 2005. Assignment and Assumption Agreement by and between Halo Resources Ltd. and 4.7 Wolfden Resources Inc., dated April 15, 2005. Bachelor Lake Joint Venture Agreement by and between Halo Resources Ltd. and 4.8 Metanor Resources Inc. dated Sept 8, 2005. 12.1 Certification of Marc Cernovitch Pursuant to Rule 13a-14(a) 12.2 Certification of Nick DeMare Pursuant to Rule 13a-14(a) 13.1 Certification of Marc Cernovitch Pursuant to 18 U.S.C. Section 1350 13.2 Certification of Nick DeMare Pursuant to 18 U.S.C. Section 1350 (1) Previously filed as an exhibit to the Company's Annual Report on Form 20-F, filed with the Commission on February 2, 2005. File number 0-30196. (2) Previously filed as an exhibit to the Company's Annual Report on Form 20-F, filed with the Commission on March 12,2004. File number 0-30196. -98- SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. HALO RESOURCES LTD. Dated: MARCH 10, 2006 /s/ MARC CERNOVITCH ----------------------------------- Marc Cernovitch, President, Chief Executive Officer, and Director -99- - -------------------------------------------------------------------------------- HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 - -------------------------------------------------------------------------------- F-1 AUDITORS' REPORT To the Shareholders of Halo Resources Ltd. We have audited the consolidated balance sheets of Halo Resources Ltd. as at August 31, 2005 and 2004 and the consolidated statements of loss, deficit and cash flows for the years ended August 31, 2005, 2004 and 2003. 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 audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). 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 August 31, 2005 and 2004 and the results of its operations and cash flow for the years ended August 31, 2005, 2004 and 2003 in accordance with Canadian generally accepted accounting principles. Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected assets, liabilities and shareholders' equity as at August 31, 2005 and 2004 and results of operations for the years ended August 31, 2005, 2004 and 2003 to the extent summarized in Note 16 to the consolidated financial statements. On December 1, 2005 we reported separately to the shareholders of Halo Resources Ltd. on consolidated financial statements as at, and for the years ended, August 31, 2005 and 2004 audited in accordance with Canadian generally accepted auditing standards. Vancouver, B.C. /s/ D&H GROUP LLP December 1, 2005 CHARTERED ACCOUNTANTS D&H Group LLP A B.C. LIMITED LIABILITY PARTNERSHIP OF CORPORATIONS member of BHD Association with affiliated offices across Canada and Internationally 10th Floor, 1333 West Broadway, Vancouver, B.C. V6H 4C1 www.dhgroup.ca F (604) 731-9923 T (604) 731-5881 F-2 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Company's ability to continue as a going concern, such as those described in Note 1 to the financial statements. Our report to the shareholders dated December 1, 2005, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors' report when these are adequately disclosed in the financial statements. Vancouver, B.C. /s/ D&H GROUP LLP December 1, 2005 CHARTERED ACCOUNTANTS D&H Group LLP A B.C. LIMITED LIABILITY PARTNERSHIP OF CORPORATIONS member of BHD Association with affiliated offices across Canada and Internationally 10th Floor, 1333 West Broadway, Vancouver, B.C. V6H 4C1 www.dhgroup.ca F (604) 731-9923 T (604) 731-5881 F-3 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) CONSOLIDATED BALANCE SHEETS AS AT AUGUST 31 2005 2004 $ $ ASSETS CURRENT ASSETS Cash 893,525 329,065 Amounts receivable and prepaids (Note 3) 197,507 12,610 ------------ ------------ 1,091,032 341,675 CAPITAL ASSETS (Note 4) 32,761 - UNPROVEN MINERAL INTERESTS (Note 5) 22,759,333 75,906 DEFERRED SHARE ISSUE COSTS (Note 17(a)) 45,556 - ------------ ------------ 23,928,682 417,581 ============ ============ LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities 584,221 62,965 REDEEMABLE PREFERRED SHARES (Note 6) 8,000,000 - ASSET RETIREMENT OBLIGATION (Note 15) 938,500 - FUTURE INCOME TAX LIABILITY (Notes 5(a) and 9) 5,328,000 - ------------ ------------ 14,850,721 62,965 ------------ ------------ COMMITMENT (Note 14) SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 7) 28,487,576 20,914,102 CONTRIBUTED SURPLUS (Note 8) 738,642 179,611 SHARE SUBSCRIPTIONS RECEIVED (Note 17(a)) 958,950 - DEFICIT (21,107,207) (20,739,097) ------------ ------------ 9,077,961 354,616 ------------ ------------ 23,928,682 417,581 ============ ============ NATURE OF OPERATIONS (Note 1) SUBSEQUENT EVENTS (Note 17) APPROVED BY THE BOARD /s/ MARC CERNOVITCH , Director - --------------------- /s/ NICK DEMARE , Director - --------------------- The accompanying notes are an integral part of these consolidated financial statements. F-4 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT FOR THE YEARS ENDED AUGUST 31
2005 2004 2003 $ $ $ REVENUES Oil and gas sales - 81,347 45,346 Interest and other 31,331 695 23,878 ------------ ------------ ------------ 31,331 82,042 69,224 ------------ ------------ ------------ EXPENSES Accretion (Note 15) 38,000 - - Production - 21,832 16,810 Depreciation, depletion and impairment 4,132 10,441 1,251,882 General exploration 27,002 - - General and administrative 1,060,276 183,539 176,947 Stock-based compensation 559,031 179,611 - Part XII.6 tax expense (Note 9) 40,000 - - ------------ ------------ ------------ 1,728,441 395,423 1,445,639 ------------ ------------ ------------ LOSS BEFORE THE FOLLOWING (1,697,110) (313,381) (1,376,415) INTEREST EXPENSE - (29,817) (60,741) LOSS ON SALE OF PETROLEUM AND NATURAL GAS INTERESTS - (11,031) - GAIN ON SETTLEMENT OF ADVANCES (Notes 10(b) and 10(c)) - 97,207 - WRITE-OFF OF AMOUNTS RECEIVABLE - - (19,959) LOSS ON SALE OF MARKETABLE SECURITIES - - (15,527) ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (1,697,110) (257,022) (1,472,642) FUTURE INCOME TAX RECOVERY (Note 9) 1,329,000 - - ------------ ------------ ------------ NET LOSS FOR THE YEAR (368,110) (257,022) (1,472,642) DEFICIT - BEGINNING OF YEAR (20,739,097) (20,482,075) (19,009,433) ------------ ------------ ------------ DEFICIT - END OF YEAR (21,107,207) (20,739,097) (20,482,075) ============ ============ ============ LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.02) $(0.05) $(0.50) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,049,812 5,654,354 2,926,859 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED AUGUST 31
2005 2004 2003 $ $ $ CASH PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net loss for the year (368,110) (257,022) (1,472,642) Items not involving cash Accretion 38,000 - - Depreciation, depletion and impairment 4,132 10,441 1,251,882 Stock-based compensation 559,031 179,611 - Loss on sale of petroleum and natural gas interests - 11,031 - Gain on settlement of advances - (97,207) - Write-off of amounts receivable - - 19,959 Loss on sale of marketable securities - - 15,527 Interest expense - 29,817 60,741 Future income tax recovery (1,329,000) - - ------------ ------------ ------------ (1,095,947) (123,329) (124,533) Increase in amounts receivable and prepaids (184,897) (5,497) (4,223) Increase in accounts payable and accrued liabilities 517,089 43,919 9,197 ------------ ------------ ------------ (763,755) (84,907) (119,559) ------------ ------------ ------------ FINANCING ACTIVITIES Common shares issued for cash 6,941,897 1,377,000 - Common share subscriptions received 958,950 - - Common share issue costs (692,979) - - Repayment of advances - (951,622) (117,405) ------------ ------------ ------------ 7,207,868 425,378 (117,405) ------------ ------------ ------------ INVESTING ACTIVITIES Additions to unproven mineral interests (5,842,760) (75,906) - Additions to petroleum and natural gas interests - (23,935) (319,757) Proceeds from sale of petroleum and natural gas interests - 78,630 84,907 Purchase of capital assets (36,893) - - Proceeds from sale of marketable securities - - 30,594 Other assets - - 114,843 ------------ ------------ ------------ (5,879,653) (21,211) (89,413) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH 564,460 319,260 (326,377) CASH - BEGINNING OF YEAR 329,065 9,805 336,182 ------------ ------------ ------------ CASH - END OF YEAR 893,525 329,065 9,805 ============ ============ ============
SUPPLEMENTARY CASH FLOW INFORMATION - See Note 13. The accompanying notes are an integral part of these consolidated financial statements. F-6 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) CONSOLIDATED SCHEDULE OF UNPROVEN MINERAL INTERESTS FOR THE YEARS ENDED AUGUST 31
2005 2004 ------------------------------------------------------------ ------------ BACHELOR QUARTER DUPORT LAKE MOON LAKE PROPERTY PROPERTY PROPERTY TOTAL TOTAL $ $ $ $ $ BALANCE - BEGINNING OF YEAR 75,906 - - 75,906 - ------------ ------------ ------------ ------------ ------------ AMOUNTS INCURRED DURING THE YEAR EXPLORATION EXPENDITURES Airborne surveying 250,268 - - 250,268 - Assays 35,492 19,778 766 56,036 - Camp and equipment costs 205,343 4,206 - 209,549 - Consulting 127,925 78,129 95,146 301,200 - Drilling 690,858 552,289 130,377 1,373,524 - Due diligence 23,296 - - 23,296 - Field personnel 153,436 25,817 - 179,253 - Field supplies 38,888 2,444 - 41,332 - Filing 3,075 9,663 1,297 14,035 - Geological 199,030 - - 199,030 - Miscellaneous 13,572 11,421 25 25,018 - Mobilization, trucking and backhoe 88,766 - - 88,766 - Rent and utilities 9,350 21,319 - 30,669 - Site preparation - 232,706 - 232,706 - Surveying 16,223 - - 16,223 - Technical report - 10,000 - 10,000 - Telephone 1,513 3,334 - 4,847 - Travel 75,505 39,847 3,368 118,720 - Reimbursement - 1,818,123 - 1,818,123 - ------------ ------------ ------------ ------------ ------------ 1,932,540 2,829,076 230,979 4,992,595 - ------------ ------------ ------------ ------------ ------------ ACQUISITION COSTS AND OTHER ITEMS Acquisition costs 9,460,000 1,700,000 100,000 11,260,000 - Claims staking and lease rental costs 12,458 - - 12,458 2,325 Consulting - - - - 39,037 Legal 221,213 156,380 7,614 385,207 20,944 Others - - - - 13,600 Capitalized dividend on redeemable preferred shares 41,667 - - 41,667 - Future income tax adjustment 5,091,000 - - 5,091,000 - Asset retirement obligation - 900,500 - 900,500 - ------------ ------------ ------------ ------------ ------------ 14,826,338 2,756,880 107,614 17,690,832 75,906 ------------ ------------ ------------ ------------ ------------ 16,758,878 5,585,956 338,593 22,683,427 75,906 ------------ ------------ ------------ ------------ ------------ BALANCE - END OF YEAR 16,834,784 5,585,956 338,593 22,759,333 75,906 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-7 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 1. NATURE OF OPERATIONS Halo Resources Ltd. (the "Company") is a resource exploration company which was previously engaged in the acquisition, exploration and development of crude oil and natural gas interests in the United States. Effective March 1, 2004, the Company sold its remaining oil and natural gas interest. On July 5, 2004, the Company entered into an agreement to acquire an unproven mineral interest. On November 12, 2004 and February 9, 2005, the Company entered into further option agreements to acquire additional unproven mineral interests. See also Note 5. The Company presently has no proven or probable reserves and on the basis of information to date, it has not yet determined whether these unproven mineral interests contain economically recoverable ore reserves. Consequently the Company considers itself to be an exploration stage company. The amounts shown as unproven mineral interests and deferred costs represent costs incurred to date, less amounts amortized and/or written off, and do not necessarily represent present or future values. The underlying value of the unproven mineral interests is entirely dependent on the existence of economically recoverable reserves, securing and maintaining title and beneficial interest, the ability of the Company to obtain the necessary financing to complete development, and future profitable production. See also Note 17. 2. ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). The significant differences between these principles and those that would be applied under United States generally accepted accounting principles ("US GAAP") are disclosed in Note 16. The consolidated financial statements for the 2004 fiscal year included the accounts of the Company and its former wholly-owned subsidiaries, Safari Petroleum, LLC ("Safari") and TMK Oil & Gas Inc. ("TMK"). On August 31, 2004, the Company abandoned its investment in Safari, which was inactive throughout the 2004 fiscal year, and TMK, which had sold its remaining asset, and became inactive. The consolidated financial statements for the 2003 fiscal year included the accounts of the Company and Safari, TMK and another wholly-owned subsidiary, Trimark Resources Inc. ("Trimark Inc."). During the 2003 fiscal year the Company abandoned its net investment in Trimark Inc. The Company did not have any subsidiaries during the 2005 fiscal year. USE OF ESTIMATES The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the year. Actual results may differ from those estimates. F-8 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 2. ACCOUNTING POLICIES (continued) UNPROVEN MINERAL INTERESTS Unproven mineral interests costs and exploration, development and field support costs directly relating to mineral interests are deferred until the interests to which they relate is placed into production, sold or abandoned. The deferred costs will be amortized over the life of the orebody following commencement of production or written off if the mineral interest is sold or abandoned. Administration costs and other exploration costs that do not relate to any specific mineral interest are expensed as incurred. On a periodic basis, management reviews the carrying values of deferred unproven mineral interest acquisition and exploration expenditures with a view to assessing whether there has been any impairment in value. Management takes into consideration various information including, but not limited to, results of exploration activities conducted to date, estimated future metal prices, and reports and opinions of outside geologists, mine engineers and consultants. When it is determined that a project or interest will be abandoned or its carrying value has been impaired, a provision is made for any expected loss on the project or interest. From time to time, the Company acquires or disposes of mineral interests pursuant to the terms of option agreements. Options are exercisable entirely at the discretion of the optionee and, accordingly, are recorded as mineral interest costs or recoveries when the payments are made or received. PETROLEUM AND NATURAL GAS INTERESTS The Company followed the full cost method of accounting for petroleum and natural gas operations. Under this method all costs related to the exploration for and development of petroleum and natural gas reserves were capitalized on a country-by-country basis. Costs included lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from the sale of properties were applied against capitalized costs, without any gain or loss being recognized, unless such a sale would significantly alter the rate of depletion and depreciation. Depletion of exploration and development costs and depreciation of production equipment was provided using the unit-of-production method based upon estimated proven petroleum and natural gas reserves. The costs of significant unevaluated properties were excluded from costs subject to depletion. For depletion and depreciation purposes, relative volumes of petroleum and natural gas production and reserves were converted into equivalent units based upon relative energy content. In applying the full cost method, the Company performed a ceiling test whereby the carrying value of petroleum and natural gas properties and production equipment, net of recorded future income taxes and the accumulated provision for site restoration and abandonment costs, was compared annually to an estimate of future net cash flow from the production of proven reserves. Net cash flow was estimated using year end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess carrying value, the excess was charged against earnings. Substantially all of the Company's oil and gas exploration, development and production activities were conducted jointly with others and, accordingly, these consolidated financial statements reflected the Company's proportionate interest in such activities. F-9 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 2. ACCOUNTING POLICIES (continued) CAPITAL ASSETS Capital assets are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the assets, as follows: Office furniture and equipment 20% Computer and telephone equipment 25% Field equipment and facility 20% ASSET RETIREMENT OBLIGATIONS Effective September 1, 2004, the Company adopted the recommendations of the CICA Handbook Section 3110, "Asset Retirement Obligations". Under this Section, future obligations to retire an asset, including dismantling, remediation and ongoing treatment and monitoring of the site, are recognized and recorded as a liability at fair value as at the time in which they are incurred or the event occurs giving rise to such an obligation. The liability is increased (accreted) over time through periodic charges to earnings. The corresponding asset retirement cost is capitalized as part of the asset's carrying value, and is amortized over the asset's estimated useful life. The amount of the liability will be subject to re-measurement at each reporting period. The Company, where possible, has estimated asset retirement obligations based on current best practice. These estimates are subject to change as a result of changes in regulations, the extent of environmental remediation required, the means of reclamation, or cost estimates. Changes in estimates are accounted for prospectively from the period the estimate is revised. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are assessed for impairment when events and circumstances warrant. The carrying value of a long-lived asset is impaired when the carrying amount exceeds the estimated undiscounted net cash flow from use and fair value. In that event, the amount by which the carrying value of an impaired long-lived asset exceeds its fair value is charged to earnings. REVENUE RECOGNITION The Company recognized petroleum and natural gas revenues from its interests in producing wells as oil and gas was produced and sold from these wells. The Company has no gas balancing arrangements in place. Oil and gas sold was not significantly different from the Company's product entitlement. FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities are translated into Canadian dollars at the balance sheet date rate of exchange and non-monetary assets and liabilities at historical rates. Revenues and expenses are translated at appropriate transaction date rates except for amortization, depreciation and depletion, which are translated at historical rates. Gains and losses resulting from the fluctuation of foreign exchange rates have been included in the determination of income. F-10 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 2. ACCOUNTING POLICIES (continued) STOCK-BASED COMPENSATION Stock-based compensation is accounted for at fair value as determined by the Black-Scholes option pricing model using amounts that are believed to approximate the volatility of the trading price of the Company's stock, the expected lives of awards of stock-based compensation, the fair value of the Company's stock and the risk-free interest rate. The estimated fair value of awards of stock-based compensation are charged to expense as awards vest, with offsetting amounts recognized as contributed surplus. INCOME TAXES Income tax liabilities and assets are recognized for the estimated income tax consequences attributable to differences between the amounts reported in the consolidated financial statements and their respective tax bases, using enacted income tax rates. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. EARNINGS (LOSS) PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on earnings per share. The dilutive effect of convertible securities is reflected in diluted earnings per share by application of the "if converted" method. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method. 3. AMOUNTS RECEIVABLE AND PREPAIDS 2005 2004 $ $ Commodity taxes receivable 146,162 7,927 Prepaids 25,302 - Other 26,043 4,683 ------------ ------------ 197,507 12,610 ============ ============ 4. CAPITAL ASSETS
2005 2004 -------------------------------------------- ------------ ACCUMULATED NET BOOK NET BOOK COSTS DEPRECIATION VALUE VALUE $ $ $ $ Office furniture and equipment 6,326 633 5,693 - Computer and telephone equipment 17,727 2,215 15,512 - Field equipment and facility 12,840 1,284 11,556 - ------------ ------------ ------------ ------------ 36,893 4,132 32,761 - ============ ============ ============ ============
F-11 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 5. UNPROVEN MINERAL INTERESTS
2005 2004 -------------------------------------------- -------------------------------------------- DEFERRED DEFERRED ACQUISITION EXPLORATION TOTAL ACQUISITION EXPLORATION TOTAL COSTS COSTS COSTS COSTS COSTS COSTS $ $ $ $ $ $ Duport 14,902,244 1,932,540 16,834,784 75,906 - 75,906 Bachelor Lake 2,756,880 2,829,076 5,585,956 - - - Quarter Moon Lake 107,614 230,979 338,593 - - - ------------ ------------ ------------ ------------ ------------ ------------ 17,766,738 4,992,595 22,759,333 75,906 - 75,906 ============ ============ ============ ============ ============ ============
(a) Duport Property, Ontario Pursuant to an agreement dated February 18, 2005, the Company acquired from The Sheridan Platinum Group Ltd. ("Sheridan") a 100% interest in 93 mineral claims (the "Duport Property") covering an area of approximately 5,000 hectares, located near Kenora, Ontario. The Company paid $250,000 cash and issued one million common shares, at a fair value of $1,210,000, and $8 million in redeemable preferred shares (see Note 6). The purchase of the Duport Property was conducted on a tax-free roll-over basis to Sheridan and, accordingly, $9,210,000 of costs have no tax value. The Company has also agreed to pay a 2.5% net smelter return royalty ("NSR") on the first 1.5 million ounces of gold produced and a 5% NSR on the excess. The Company will have the right to buy back a 1% NSR for $2.5 million cash. The Company has also acquired, through staking, four mineral claims in the area of the Duport property, covering an area of approximately 5.5 hectares. (b) Bachelor Lake Property, Quebec On November 12, 2004, the Company entered into a heads of agreement with Wolfden Resources Inc. ("Wolfden"), whereby Wolfden would assign to the Company, Wolfden's option from Metanor Resources Inc. ("Metanor"), to earn a 50% undivided interest in two mining concessions and 51 mineral claims for a total of 1,851 hectares (the "Bachelor Lake Property"), located in the La Sueur Township, Quebec. On April 15, 2005, the Company and Wolfden signed the final agreement (the "Assignment and Assumption Agreement"). Under the agreed terms, the Company acquired Wolfden's option to earn a 50% interest in the Bachelor Lake Property by paying $650,000 cash and issuing 1,400,000 common shares, at a fair value of $1,050,000. The Company was also responsible for all exploration costs incurred on the Bachelor Lake Property by Wolfden from the date of signing the heads of agreement and accordingly, reimbursed Wolfden $1,293,123 cash and issued 700,000 common shares, at a fair value of $525,000. If the Company exercises the option, and after 50,000 ounces of gold or gold equivalent have been produced from the Bachelor Lake Property, the Company shall pay to Wolfden a bonus payment of $250,000 cash and issue to Wolfden a further 250,000 common shares. The Company also agreed to pay a 0.5% royalty on the Company's share of the NSR. A director of the Company is also a director and officer of Wolfden. F-12 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 5. UNPROVEN MINERAL INTERESTS (continued) Effective May 18, 2005, the Company and Metanor entered an agreement whereby Metanor acknowledged the Assignment and Assumption Agreement and the terms of the underlying option agreement on the Bachelor Lake Property were amended. Under the amendment, the Company can exercise its option to earn the 50% interest in the Bachelor Lake Property by spending a minimum of $500,000 of exploration on the Bachelor Lake Property and paying $100,000 to Metanor. On September 21, 2005, the Company exercised its option and paid $100,000. (c) Quarter Moon Lake Property, Manitoba On February 9, 2005 the Company signed a letter of intent ("LOI") with Endowment Lakes (2002) Limited Partnership ("EL") regarding the option to earn up to an 80% interest in the Quarter Moon Lake Property, Manitoba. The Quarter Moon Lake Property comprises five mining claims covering a total of 1,072 hectares and is located 75 kilometres northeast of Flin Flon and 61 kilometres northwest of Snow Lake. Under the terms of the LOI, the Company has the right to acquire an initial 51% interest in the Quarter Moon Lake Property in which the Company paid $40,000 cash, issued 50,000 common shares of the Company, at a fair value of $60,000, and is required to complete a $250,000 minimum work commitment in the first year, paying a further $40,000 cash and issuing 50,000 common shares on the first anniversary, and completing a further $250,000 work commitment in the second year. The Company has the option to earn an additional 29% interest by providing notice after the initial earn-in by completing an additional $1.5 million in exploration and development over a subsequent two year period, and paying an additional $40,000 and issuing 50,000 common shares on or before the third anniversary. The Quarter Moon Lake Property will then be held 80% by the Company and 20% by EL. The Company will be responsible for advancing the property to production and will recover all costs out of production prior to sharing profits on an 80/20 basis. EL will hold a 1% NSR which can be purchased at any time for $1 million. 6. REDEEMABLE PREFERRED SHARES The Company has issued $8 million of its series 1 redeemable preferred shares (the "Redeemable Preferred Shares") as partial consideration of its purchase of the Duport Property described in Note 5(a). The Redeemable Preferred Shares have a term of five years with payment of cumulative cash dividends, at the following rates: i) for each of the two years commencing November 1, 2004, an annual dividend of $50,000, payable in quarterly instalments, commencing on February 1, 2005 and ending on November 1, 2006; and ii) for each of the three years commencing November 1, 2006, an annual dividend of 4% of the Redeemable Preferred Shares outstanding, payable in quarterly instalments, commencing on February 1, 2007 and ending on November 1, 2009. The Company may elect to pay any of its dividends in common shares of its capital stock based on a 15 day average price prior to the date the dividend is due. F-13 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 6. REDEEMABLE PREFERRED SHARES (continued) The Redeemable Preferred Shares are non-voting, non-convertible and can be redeemed in whole or in part by the Company at any time prior to November 1, 2009, as follows: (i) make a cash payment of $8 million plus a $400,000 bonus, together with any accrued and unpaid dividends; or (ii) provided all dividends payable pursuant to the terms of the Redeemable Preferred Shares have been paid, the Company may return the Duport Property to Sheridan. The Company may elect to redeem the Redeemable Preferred Shares through the issuance of common shares in its capital stock based on a 15 day average price prior to the date of redemption. If the Redeemable Preferred Shares have not been redeemed the Company will, effective November 1, 2009, retract the Redeemable Preferred Shares in consideration of $8 million plus accrued unpaid dividends (collectively the "Retraction Amount"), payable in cash or common shares of the Company based on a 15 trading day average price prior to the date of retraction. During the 2005 fiscal year, the Company recorded $41,667 of dividends on the Redeemable Preferred Shares, which have been capitalized as part of resource interests. As at August 31, 2005, $4,167 of accrued dividends were included as part of accounts payable and accrued liabilities. 7. SHARE CAPITAL Authorized: unlimited common shares without par value unlimited preferred shares
Issued common shares: 2005 2004 2003 ------------------------ ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT $ $ $ Balance, beginning of year 9,443,859 20,914,102 2,926,859 19,537,102 2,926,859 19,537,102 ----------- ----------- ----------- ----------- ----------- ----------- Issued during the year For cash Private placements 7,324,894 6,688,797 6,000,000 1,290,000 - - Exercise of warrants 1,048,500 253,100 435,000 87,000 - - For finder's fees - - 82,000 24,600 - - Corporate finance 40,000 34,000 - - - - For unproven mineral interests 3,150,000 2,845,000 - - - - Cancellation of escrow shares (1,488) - - - - - ----------- ----------- ----------- ----------- ----------- ----------- 11,561,906 9,820,897 6,517,000 1,401,600 2,926,859 19,537,102 Less: flow-through share renunciation (Note 9) - (1,566,000) - - - - share issue costs - (681,423) - (24,600) - - ----------- ----------- ----------- ----------- ----------- ----------- 11,561,906 7,573,474 6,517,000 1,377,000 - - ----------- ----------- ----------- ----------- ----------- ----------- Balance, end of year 21,005,765 28,487,576 9,443,859 20,914,102 2,926,859 19,537,102 =========== =========== =========== =========== =========== ===========
F-14 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 7. SHARE CAPITAL (continued) (a) During the 2005 fiscal year the Company completed private placements, as follows: i) on December 23, 2004, the Company issued 4,342,951 flow-through units at a price of $0.95 per flow-through unit and 2,673,530 non-flow-through units at a price of $0.85 per non- flow-through unit, for total gross proceeds of $6,398,304. Each flow-through unit consisted of one common share and one-half share purchase warrant with each full warrant entitling the holder to purchase one further share of the Company for a period of two years, at a price of $1.25 on or before December 23, 2005 and, thereafter, at a price of $1.50 on or before December 23, 2006. Each non flow-through unit consisted of one common share and one share purchase warrant entitling the holder to purchase one further share of the Company for a period of two years, at a price of $1.10 on or before December 23, 2005 and, thereafter, at a price of $1.35 on or before December 23, 2006. Certain directors and officers of the Company and their immediate family members have purchased 121,435 flow-through units for gross proceeds of $115,363. The Company paid the agents a cash commission of $510,643 and issued 701,647 warrants (the "Agents' Warrants") and incurred $107,731 of costs relating to the financing. Each Agents' Warrant is exercisable to purchase one common share at a price of $1.05 on or before December 23, 2006. The Company also issued 40,000 units at a fair value of $0.85 per unit, each unit comprising of one common share and one-half share purchase warrant having the same terms as the non-flow-through units; ii) on January 20, 2005, the Company issued 151,834 flow-through units at a price of $0.95 per flow-through unit; and 25,000 non-flow-through units at a price of $0.85 per non-flow- through unit, for total gross proceeds of $165,492. Each flow-through unit consisted of one common share and one-half share purchase warrant with each full warrant entitling the holder to purchase one further share of the Company for a period of two years, at a price of $1.25 on or before January 20, 2006 and, thereafter, at a price of $1.50 on or before January 20, 2007. Each non-flow-through unit consisted of one common share and one share purchase warrant with each full warrant entitling the holder to purchase one further share of the Company for a period of two years, at a price of $1.10 on or before January 20, 2006 and, thereafter, at a price of $1.35 on or before January 20, 2007. The Company paid a cash finder's fee of $16,549. A director of the Company purchased 5,300 flow-through units for gross proceeds of $5,305; and iii) on February 3, 2005, the Company issued 131,579 flow-through units at a price of $0.95 per flow-through unit for total gross proceeds of $125,000. Each flow-through unit consisted of one common share and one-half share purchase warrant with each full warrant entitling the holder to purchase one further share of the Company for a period of two years, at a price of $1.25 on or before February 3, 2006 and, thereafter, at a price of $1.50 on or before February 3, 2007. The Company paid a cash finder's fee of $12,500. See also Note 17(c). (b) The Company has established a rolling stock option plan (the "Plan"), in which the maximum number of common shares which can be reserved for issuance under the Plan is 10% of the issued and outstanding shares of the Company. The exercise price of the options is set at the Company's closing F-15 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 7. SHARE CAPITAL (continued) share price on the day before the grant date, less allowable discounts in accordance with the policies of the TSX Venture Exchange ("TSXV"). The options have a maximum term of ten years. During the 2005 fiscal year the Company granted 1,078,000 stock options (2004 - 810,000) to its employees, directors and consultants and recorded compensation expense of $559,031 (2004 - $179,611). No stock options were granted during the 2003 fiscal year. The fair value of stock options granted to employees, directors and consultants is estimated on the dates of grants using the Black-Scholes option pricing model with the following assumptions used for the grants made during the periods: 2005 2004 -------------- ------------- Risk-free interest rate 2.28% - 2.92% 2.28% - 2.53% Estimated volatility 52.44% - 105% 105% - 106% Expected life 1.5 years 1.5 years Expected dividend yield 0% 0% The fair value per share of stock options, calculated using the Black-Scholes option pricing model, granted during the year to the Company's employees, directors and consultants was $0.43 (2004 - $0.40) per share. Option-pricing models require the use of estimates and assumptions including the expected volatility. Changes in the underlying assumptions can materially affect the fair value estimates and, therefore, existing models do not necessarily provide reliable measure of the fair value of the Company's stock options. A summary of the Company's options at August 31, 2005, 2004 and 2003 and the changes for the fiscal years ending on those dates is presented below:
2005 2004 2003 ----------------------- ------------------------ ---------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF OPTIONS EXERCISE OF OPTIONS EXERCISE OF OPTIONS EXERCISE OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE $ $ $ Balance, beginning of year 810,000 0.61 92,857 0.40 125,000 0.40 Granted 1,078,000 0.92 810,000 0.61 - - Cancelled/expired (200,000) 0.66 (92,857) 0.40 (32,143) 0.40 ----------- ----------- ----------- Balance, end of year 1,688,000 0.80 810,000 0.61 92,857 0.40 =========== =========== ===========
F-16 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 7. SHARE CAPITAL (continued) The following table summarizes information about the stock options outstanding and exercisable at August 31, 2005: WEIGHTED OPTIONS AVERAGE WEIGHTED OUTSTANDING REMAINING AVERAGE AND EXERCISE CONTRACTUAL EXERCISE EXERCISABLE PRICE LIFE PRICE EXPIRY DATE 600,000 $0.60 1.75 years $0.60 May 31, 2007 60,000 $0.75 1.89 years $0.75 July 22, 2007 150,000 $0.70 2.08 years $0.70 September 27, 2007 878,000 $0.96 2.47 years $0.96 February 17, 2008 --------- 1,688,000 ========= (c) A summary of the number of common shares reserved pursuant to the Company's warrants outstanding at August 31, 2005, 2004 and 2003 and the changes for the years ending on those dates is as follows:
2005 2004 2003 Balance, beginning of year 5,647,000 - 468,857 Issued pursuant to private placements 5,733,359 6,000,000 - Issued for finder's fee - 82,000 - Exercised (1,048,500) (435,000) (468,857) ------------ ------------ ------------ Balance, end of year 10,331,859 5,647,000 - ============ ============ ============
Common shares reserved pursuant to warrants outstanding at August 31, 2005, are as follows: NUMBER EXERCISE PRICE EXPIRY DATE $ 2,103,000 0.25 March 4, 2006 2,495,500 0.40 April 15, 2006 2,171,476 1.25 / 1.50 December 23, 2005 / 2006 2,673,530 1.10 / 1.35 December 23, 2005 / 2006 701,647 1.05 December 23, 2006 20,000 1.10 / 1.35 December 23, 2005 / 2006 75,917 1.25 / 1.50 January 20, 2006 / 2007 25,000 1.10 / 1.35 January 20, 2006 / 2007 65,789 1.25 / 1.50 February 3, 2006 / 2007 ---------- 10,331,859 ========== (d) See also Notes 5 and 17. F-17 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 8. CONTRIBUTED SURPLUS Contributed surplus is comprised of the following:
2005 2004 2003 $ $ $ Balance, beginning of year 179,611 - - Stock-based compensation (Note 7(b)) 559,031 179,611 - ------------ ------------ ------------ Balance, end of year 738,642 179,611 - ============ ============ ============
9. INCOME TAXES The income tax effects of temporary differences that give rise to significant components of future income tax assets and liabilities are as follows: 2005 2004 Future income tax assets: Financing costs 200,000 - Losses available for future periods 1,129,000 - ------------ ------------ 1,329,000 - Future income tax liabilities: Difference between book value and income tax costs of unproven mineral interests (6,657,000) - ------------ ------------ Net future income tax liabilities (5,328,000) - ============ ============ As at August 31, 2005, the Company has accumulated non-capital losses of approximately $3.2 million and cumulative resource and other tax pools of approximately $4.3 million carried forward for Canadian income tax purposes and are available to reduce taxable income of future years. The non-capital losses expire commencing in 2006 through 2015. The cumulative resource and other tax pools can be carried forward indefinitely. During the 2005 fiscal year, the Company issued a total of 4,626,364 flow-through common shares for gross proceeds of $4,395,046 (see Note 7(a)). Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with Canadian income tax legislation. The renunciation of such expenditures is accounted for as a financing cost related to the flow-through issuance and results in a reduction in share capital with a corresponding increase in the Company's future income tax liability. The Company is permitted under Canadian income tax legislation to renounce flow-through related resource expenditures to investors in advance of the Company incurring the expenditure. In accordance with this legislation the Company has twelve months following the effective date of renunciation to incur the expenditures. The Company begins incurring interest charges for unspent funds after one month and fees for unspent funds at the end of the calendar year following the effective date of renunciation, and until such time as funds are fully expended. During the 2005 fiscal year the Company incurred a $40,000 Part XII.6 tax F-18 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 9. INCOME TAXES (continued) expense on the monthly unspent balance of flow-through funds. All of the flow-through funds were spent by May 31, 2005. See also Note 5(a). 10. RELATED PARTY TRANSACTIONS (a) During the 2005 fiscal year, the Company was charged $158,350 (2004 - $69,638; 2003 - $153,064) for management, professional, accounting and administrative services provided by companies controlled by officers of the Company. Of this amount, $50,806 (2004 - $nil; 2003 - $nil) was directly related to resource interests and was deferred. As at August 31, 2005, accounts payable and accrued liabilities include $24,369 due to these related parties. (b) The Company had previously received advances from a related party and a non-related third party. The related party is a public company which certain of its officers and directors are also officers and directors of the Company. During the 2004 fiscal year, the Company negotiated a settlement of the $748,687 which was outstanding and paid $688,079 cash, resulting in a gain of $60,608. (c) Advances had been previously made to the Company by shareholders and directors of the Company for working capital purposes. During the 2004 fiscal year, the Company negotiated a settlement of the $300,142 which was outstanding and paid $263,543 cash, resulting in a gain of $36,599. (d) During the 2003 fiscal year, the former President of the Company repaid the outstanding principal balance of $114,843 and interest income of $2,242 to the Company. (e) Other related party transactions are disclosed elsewhere in these consolidated financial statements. These transactions were measured at the exchange amount, which was the amount of consideration established and agreed to by related parties. F-19 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 11. SEGMENTED INFORMATION During the 2004 fiscal year, the Company's principal activities were the development of petroleum properties in the United States and the acquisition of unproven mineral interests in Canada. Effective March 1, 2004, the Company sold its remaining oil and natural gas interests. As at August 31, 2005, the Company had only recorded deferred costs relating to its agreements on unproven mineral interests. The unproven mineral interest and the Company's corporate assets are located in Canada. Identifiable assets, revenues and net loss in each of these geographic areas are as follows:
2005 -------------------------------------------- IDENTIFIABLE NET ASSETS REVENUES LOSS $ $ $ Canada -mineral operations 22,759,333 - - Canada - corporate 1,169,349 31,331 (368,110) ------------ ------------ ------------ 23,928,682 31,331 (368,110) ============ ============ ============
2004 -------------------------------------------- IDENTIFIABLE NET ASSETS REVENUES INCOME (LOSS) $ $ $ United States - petroleum operations - 81,347 169,728 Canada - mineral operations 75,906 - - Canada - corporate 341,675 695 (426,750) ------------ ------------ ------------ 417,581 82,042 (257,022) ============ ============ ============
2003 -------------------------------------------- IDENTIFIABLE NET ASSETS REVENUES LOSS $ $ $ United States - petroleum operations 80,226 68,800 (967,993) Canada - corporate 12,859 424 (504,649) ------------ ------------ ------------ 93,085 69,224 (1,472,642) ============ ============ ============
12. FINANCIAL INSTRUMENTS The fair values of financial instruments at August 31, 2005 and 2004, were estimated based on relevant market information and the nature and terms of financial instruments. Management is not aware of any factors which would significantly affect the estimated fair market amounts, however, such amounts have not been comprehensively revalued for purposes of these financial statements. Disclosure subsequent to the balance sheet dates and estimates of fair value at dates subsequent to August 31, 2005 and 2004, may differ significantly from that presented. F-20 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 12. FINANCIAL INSTRUMENTS (continued) Fair value approximates the amounts reflected in the financial statements for cash, amounts receivable and accounts payable and accrued liabilities. It is not practicable to estimate the fair value of the Redeemable Preferred Shares. 13. SUPPLEMENTARY CASH FLOW INFORMATION Non-cash financing and investing activities were conducted by the Company as follows:
2005 2004 2003 $ $ $ Financing activities Issuance of common shares for corporate finance fees 34,000 - - Common share issue costs (34,000) (24,600) - Common shares issued for finder's fees - 24,600 - Issuance of common shares for unproven mineral interests 2,845,000 - - Issuance of Redeemable Preferred Shares for unproven mineral interests 8,000,000 - - Share capital - future income tax adjustment (1,566,000) - - Future tax liability 6,657,000 - - ------------ ------------ ------------ 15,936,000 - - ============ ============ ============ Investing activities Common shares issued for unproven mineral interests (2,845,000) - - Redeemable Preferred Shares issued for unproven mineral interests (8,000,000) - - Unproven mineral interests - accrued dividend (4,167) - - Unproven mineral interests - future income tax adjustment (5,091,000) - - ------------ ------------ ------------ (15,940,167) - - ============ ============ ============ Operating activity Accrued dividend payable 4,167 - - ============ ============ ============ Other supplementary cash flow information: 2005 2004 2003 $ $ $ Interest paid in cash - 105,484 - ============ ============ ============ Income taxes paid in cash - - - ============ ============ ============
14. COMMITMENT The Company leases an office premise, expiring February 29, 2008. The minimum annual rental amounts to approximately $30,000. F-21 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 15. ASSET RETIREMENT OBLIGATION
2005 2004 2003 $ $ $ Balance, beginning of year - - - Liabilities assumed on acquisition 900,500 - - Accretion expense 38,000 - - ------------ ------------ ------------ Balance, end of year 938,500 - - ============ ============ ============
The total undiscounted amount of estimated cash flows required to settle the Company's estimated obligation is $1,018,567 which has been discounted using a credit adjusted risk free rate of 8.5%. The reclamation obligation relates to the Bachelor Lake Property. The present value of the reclamation liability may be subject to change based on management's current estimates, changes in remediation technology or changes to the applicable laws and regulations. Such changes will be recorded in the accounts of the Company as they occur. 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (a) The consolidated financial statements of the Company are presented in accordance with Canadian GAAP. Canadian GAAP differs in certain material respects from US GAAP. The material differences between Canadian and US GAAP, in respect of these consolidated financial statements, are summarized in the tables below. Consolidated Statement of Loss
2005 2004 2003 $ $ $ Net loss under Canadian GAAP (1,697,110) (257,022) (1,472,642) Unproven mineral interest expensed (i) (22,683,427) (75,906) - Other compensation expense (iii) (12,144) (15,503) - Gain on settlement (iv) - (97,207) - Additional depreciation, depletion and amortization (vi) - - (500) Deferred income tax expense (vii) (1,103,364) - - ------------ ------------ ------------ Net loss under US GAAP (25,496,045) (445,638) (1,473,142) ============ ============ ============ Loss per share under US GAAP (1.59) (0.08) (0.50) ============ ============ ============
F-22 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) Consolidated Balance Sheet
2005 2004 $ $ Total assets under Canadian GAAP 23,928,682 417,581 Unproven mineral interest expensed (i) (22,759,333) (75,906) Deferred tax asset (ii) - 890,000 Less: Valuation allowance (ii) - (890,000) ------------ ------------ Total assets under US GAAP 1,169,349 341,675 ============ ============ Total liabilities under Canadian GAAP 14,850,721 62,965 ------------ ------------ Total liabilities under US GAAP 14,850,721 62,965 ============ ============ Total shareholders' equity under Canadian GAAP 9,077,961 354,616 Unproven mineral interest expensed (i) (22,759,333) (75,906) ------------ ------------ Total shareholders' equity (deficiency) under US GAAP (13,681,372) 278,710 ============ ============
(i) Unproven Mineral Interests Unproven mineral interests and deferred exploration costs are accounted for in accordance with Canadian GAAP as disclosed in Note 2. The Company has determined for US GAAP purposes to expense the acquisition and exploration costs relating to unproven mineral interests as incurred. In addition, US GAAP requires that exploration costs not be capitalized until a positive feasibility study is completed. The capitalized costs of such claims would then be assessed for impairment, on a periodic basis, to ensure that the carrying value can be recovered on an undiscounted cash flow basis. If the carrying value cannot be recovered on this basis, the mineral claims would be written down to net recoverable value on a discounted cash flow basis. (ii) Income Tax Under Canadian GAAP, deferred tax assets relating to the potential benefit of income tax loss carryforwards are not recognized unless the realization of the benefit is more likely than not. US GAAP provides similar treatment, but requires the benefit be recognized and a valuation allowance be recognized to fully offset the deferred tax asset. As at August 31, 2004, the Company had fully reserved the $890,000 tax benefit of operating loss carryforwards, by a valuation allowance of the same amount, because the likelihood of realization of the tax benefit could not be determined. Of the total tax benefit, $145,000 was attributable to the 2004 fiscal year. F-23 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) During the 2005 fiscal year, the Company recognized a future income tax asset of its entire loss carryforward amount (see Note 9) as the taxable temporary differences related to the Company's issuance of flow-through common shares (see Note 7(a)) are expected to reverse during the loss carryforward period. As a result, there is no longer a US GAAP difference as the future income tax asset for Canadian GAAP is the same as the deferred income tax asset for US GAAP. (iii) Private Placements of Common Stock The Company conducts the majority of its equity financings pursuant to private placements. Under the policies of the TSX Venture, the Company may provide a discount off the market price of the Company's common stock. US GAAP does not permit a discount from the market price. US GAAP requires the recognition of the market value of the Company's common stock as a credit to share capital, with a charge to operations for the portion of the discount relating to equity financings conducted with officers and directors of the Company and a charge to shareholders' equity, as a capital distribution, for the discount relating to the remaining portion of the equity financings. Under US GAAP, loss and capital distributions for the 2005 fiscal year would increase by $12,144 (2004 - $15,503; 2003 - $nil) and $966,502 (2004 - $206,497; 2003 - $nil), respectively, and share capital, as at August 31, 2005 would increase by $2,162,048 (2004 - $1,183,402; 2003 - $961,402). There is no net change to shareholders' equity. (iv) Settlement with Related Parties US GAAP requires that gains on settlement of advances with related parties be credited to deficit. There is no net change in shareholders' equity. (v) Functional Currency The Company's functional currency is the Canadian dollar. (vi) Asset Retirement Obligations On September 1, 2003, the Company adopted SFAS 143 - Asset Retirement Obligations ("SFAS 143") for US GAAP reporting purposes. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The liability is capitalized as part of the related long-lived asset's carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. The Company's asset retirement obligations relate primarily to the plugging, dismantlement, removal, site reclamation and similar activities of its petroleum and natural gas interests. Prior to adoption of SFAS 143, such obligations were accrued ratably over the productive lives of the assets through its depreciation, depletion and amortization of petroleum and natural gas interests without recognizing a separate liability for such amounts. F-24 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) At the time of adoption, during the 2003 fiscal year, total assets and total liabilities increased by $7,500. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of petroleum and natural gas, future inflation rates and the credit-adjusted risk free interest rate. During the 2004 fiscal year, the petroleum and natural gas interest was sold and the asset retirement obligation was settled. Changes in asset retirement obligations during the 2004 and 2003 fiscal years were:
2004 2003 $ $ Asset retirement obligations, beginning of year 7,900 - Liabilities incurred - 7,500 Liabilities settled (7,900) - Accretion expense (included in depreciation) - 400 ------------ ------------ Asset retirement obligation, end of year - 7,900 Less: current portion - - ------------ ------------ Long-term portion - 7,900 ============ ============
On September 1, 2004, the Company adopted Section 3110 "Asset Retirement Obligations" of the CICA Handbook, which is harmonious with SFAS 143. As such, there is no longer a US GAAP difference. See also Note 15. (vii) Canadian Flow-Through Shares During the 2005 fiscal year, the Company issued 4,626,364 flow-through common shares for gross proceeds of $4,395,046. Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with Canadian income tax legislation. Under Canadian GAAP, the flow-through shares are recorded at their face value when issued and the renunciation of such expenditures is accounted for as a financing cost related to the flow- through issuance and results in a reduction of share capital with a corresponding increase in the Company's future income tax liability. US GAAP requires that the proceeds from issuance should be allocated between the offering of shares and the sale of tax benefits. The allocation is made between the quoted price of the existing shares and the amount the investor pays for the shares. A liability is recognized for this difference. This liability is reversed when tax benefits are renounced and a deferred tax liability is recognized at that time. Income tax expense is the difference between the amount of the deferred tax liability and the liability recognized on issuance. Under US GAAP loss for the 2005 fiscal year and share capital as at August 31, 2005, would increase by $1,103,364. There is no net change in shareholders' equity. F-25 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (viii) Capitalization of Dividend on Redeemable Preferred Shares As part of the Duport Property acquisition, the Company issued mandatory redeemable preferred shares. Due to the characteristics of these preferred shares, for both Canadian and US GAAP, the preferred shares are accounted for as liabilities. Under Canadian GAAP, dividends paid on shares accounted for as liabilities should be disclosed as interest rather than as a charge to capital. As such, the Company has decided to capitalize the dividends paid as a carrying cost directly attributable to the unproven mineral interest. Under US GAAP, SFAS 34 - Capitalization of Interest Cost ("SFAS 34") lists assets qualifying for interest capitalization. The exploration of unproven mineral interests does not qualify. As such, $41,667 of capitalized dividends on redeemable preferred shares would be separately charged to earnings. There is no net change to net loss under US GAAP. (ix) Development Stage Company The Company is in the exploration stage and, as of July 1, 2004, is considered a development stage company as defined by SFAS 7. To August 31, 2005, the Company has accumulated a deficit of $25,662,242 while in the development stage. (b) The Company's consolidated statements of cash flow comply with US GAAP. (c) New Technical Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued its final standard on accounting for employee stock options, SFAS No. 123 (Revised 2004) - Share-Based Payment ("SFAS 123(R)"). SFAS 123(R) replaces SFAS No. 123 - Accounting for Stock-Based Compensation ("SFAS 123"), and supersedes APB 25 - Accounting for Stock Issued to Employees. SFAS 123(R) requires companies to measure compensation costs for all share-based payments, including grants of employee stock options, based on the fair value of the awards on the grant date and to recognize such expense over the period during which an employee is required to provide services in exchange for the award. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. SFAS 123(R) is effective for all awards granted, modified, repurchased or cancelled after, and to unvested portions of previously issued and outstanding awards vesting after, interim or annual periods, beginning after December 15, 2005, which for the Company will be the second quarter of fiscal 2006. This Company is currently evaluating the effect of adopting SFAS 123(R) on our financial position and results of operations. The Company currently estimates the adoption of SFAS 123(R) will result in expenses in amounts that are similar to the current pro forma disclosures under SFAS 123. The FASB has also issued SFAS No. 153 - Exchange of Non-Monetary Assets ("SFAS 153") which is effective for fiscal years ending after June 15, 2005. SFAS 153 refines the circumstances under which non-monetary transactions should be accounted for at fair value. The adoption of SFAS 153 is not expected to have an effect on the Company's financial position. F-26 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2005, 2004 AND 2003 16. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) The FASB has also issued SFAS No. 154 - Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which is effective for fiscal years ending after December 15, 2005. SFAS 154 requires that changes in accounting policy be accounted for on a retroactive basis. The adoption of SFAS 154 is not expected to have an effect on the Company's financial position. 17. SUBSEQUENT EVENTS (a) During September 2005, the Company completed a private placement of 3,293,070 flow-through units at a price of $0.70 per flow-through unit and 1,980,166 non-flow-through units at a price of $0.60 per non-flow-through unit, for total gross proceeds of $3,493,249. Each unit consisted of one common share and one share purchase warrant entitling the holder to purchase one further share of the Company for a period of two years at a price of $0.70. The Company paid a cash finder's fee of $266,394 and 523,323 warrants having the same terms as the private placement warrants. As at August 31, 2005, the Company had received $958,950 in common share subscriptions and incurred $45,556 of share issue costs. (b) Subsequent to August 31, 2005, the Company granted options to its directors, employees and consultants to purchase 855,000 common shares of the Company at an exercise price of $0.75 per share, for a period of three years. (c) On November 22, 2005, the Company listed an aggregate of 5,011,711 warrants for trading on the TSXV. These warrants were originally issued pursuant to the private placements conducted during the 2005 fiscal year, as described in Note 7(a). In addition, the expiry dates of the warrants issued in Notes 7(a)(ii) and 7(a)(iii) were modified, with expiry dates of December 23, 2005 and December 23, 2006. (d) See Note 5(b). F-27 EX-10 2 exh4_5.txt L/I HALO AND ENDOWMENT LAKES DATED FEB 9/05 EXHIBIT 4.5 Letter of Intent by and between Halo Resources Ltd. and Endowment Lakes (2002) Limited Partnership, dated February 9, 2005 [HALO RESOURCES LTD. LETTERHEAD] AMENDMENT February 9, 2006 Endowment Lakes (2002) Limited Partnership c/o Endowment Lakes (2002) Ltd. #1 -102 Main Street Flin Flon, Manitoba R8A 1K1 Attention : Eckhart Buhlmann, President Dear Eckhart: RE: LETTER AGREEMENT DATED FEBRUARY 9, 2005 BETWEEN HALO RESOURCES LTD. ("HALO") AND ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP ("EL") CONCERNING THE ACQUISITION OF AN INTEREST BY HALO IN THE MINING CONCESSIONS COMPRISING THE EMILY PROPERTY FROM EL (THE "LETTER AGREEMENT") Further to the Letter Agreement, we are writing to set out the agreed revisions to such Letter Agreement. This amending letter (the "AMENDING LETTER") constitutes an amendment and supplement of, and not a replacement of, the Letter Agreement. The Letter Agreement, as amended and supplemented hereby, remains in full force and effect and the Letter Agreement and this Amending Letter shall be read together and have effect so far as practicable as though all the provisions thereof and hereof were contained in one instrument. The Letter Agreement is hereby amended as follows: 1. The words "on or before the first anniversary of the date of this Agreement" in Subsection 1(c)(ii) of the Letter Agreement are hereby deleted and replaced with the words "on or before March 9, 2006". 2. The words "on the first anniversary of the date of this Agreement" in Subsection 1(c)(iii) of the Letter Agreement are hereby deleted and replaced with the words "on or before March 9, 2006". 3. Capitalized terms used in this Amending Letter and not defined herein shall have the meaning ascribed thereto in the Letter Agreement. 4. This Amending Letter may be executed in two or more counterparts, all of which taken together shall constitute one instrument. Delivery of this Amending Letter may be made by facsimile transmission. -2- 5. This Amending Letter shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. 6. If the foregoing terms are acceptable to you, please sign and return a copy of this Amending Letter to us at the address indicated above on or prior to the close of business (Vancouver time) on February 9, 2006, after which this Amending Letter shall cease to have effect. Yours very truly, HALO RESOURCES LTD. Per: ------------------------------------ Name: Title: I have the authority to bind the company. Confirmed, agreed to and accepted this ______ day of February, 2006. ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP BY ITS GENERAL PARTNER, ENDOWMENT LAKES (2002) LTD. Per: ------------------------------------ Name: Title: I have the authority to bind the company. [LETTERHEAD OF HALO RESOURCES LTD.] February 9, 2005 Endowment Lakes (2002) Limited Partnership c/o Endowment Lakes (2002) Ltd. #1 -102 Main Street Flin Flon, Manitoba R8A 1K1 Attention : Eckart Buhlmann, President Dear Sirs: RE: ACQUISITION OF AN INTEREST BY HALO RESOURCES LTD. ("HALO") IN THE MINING CONCESSIONS COMPRISING THE EMILY PROPERTY FROM ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP ("EL") This letter agreement sets forth the principal terms and conditions upon which Halo Resources Ltd. or, at its election, a wholly-owned subsidiary of Halo, will acquire an option to earn up to an eighty percent (80%) interest in certain exploration and exploitation mining concessions owned by EL, located in Manitoba, and more particularly described in Schedule A attached to this letter agreement and shown on the map attached as Schedule B to this letter agreement (the "Property"). 1. OPTION AGREEMENT (a) The parties shall negotiate in good faith, enter into and deliver to each other an option agreement (the "Option Agreement") as soon as possible following the execution of this letter agreement, which agreement shall reflect the provisions regarding the First Option and the Second Option (both as hereinafter defined) and such other terms as are usual and customary for agreements of this nature. (b) EL hereby grants to Halo the sole and exclusive right and option to earn an undivided fifty-one percent (51%) beneficial interest in the Property (the "First Option") on or before the date which is two years from the date of this Agreement (the "First Option Period"). (c) In order to maintain the First Option in good standing, Halo shall incur and fund expenditures on the Property in the aggregate amount of $500,000 (the "Work Costs") and pay certain fees and issue certain shares, collectively (the "Payments") on or before the date which is two years from the date of this Agreement as follows: (i) contemporaneous with the signing of this Agreement, Halo shall pay to EL the sum of $40,000 and subject to section 7, shall cause to be issued to Endowment Lakes (2002) Ltd. (the "General Partner") as General Partner in trust for EL 50,000 common shares in the capital of Halo; (ii) on or before the first anniversary of the date of this Agreement Halo shall incur and fund expenditures on the Property of at least $250,000; (iii) on the first anniversary of the date of this Agreement, Halo shall pay to EL the sum of $40,000 and, subject to section 7 issue to the General Partner in trust for EL 50,000 common shares in the capital of Halo; and (iv) during the period from the date of the first anniversary of the date of this Agreement until the date of the Second Anniversary of the date of this Agreement, Halo shall incur and fund expenditures on the Property of at least $250,000. provided, however, that if Halo incurs and funds the Work Costs and makes the payments and issues the shares in full prior to and in advance of the time frame provided herein, then it will be deemed to have exercised the First Option at the time that both the Work Costs are incurred and funded and the payments are paid in full and it will not be required to incur and fund any further expenditures or pay any further amounts or issue any further shares in accordance with the terms of this section 1(c). (d) EL hereby grants to Halo the sole and exclusive right and option to earn an additional undivided twenty-nine percent (29%) beneficial interest in the Property (the "Second Option" and collectively with the First Option, the "Options" and each individually an "Option"), on or before the date which is two years from the date upon which the First Option is exercised. The period commencing on the date the First Option is exercised and ending on the second anniversary of such date is hereinafter referred to as the "Second Option Period". The Second Option shall vest upon the exercise of the First Option by Halo and the delivery by Halo to EL of a notice in writing electing to earn the Second Option, which notice must be delivered to EL not more than 45 days following the date upon which the First Option is exercised. (e) In order to maintain the Second Option in good standing, Halo shall incur and fund expenditures on the Property in the aggregate amount of $1,500,000 (the "Second Work Costs") and pay certain fees and issue -2- certain shares (the "Second Payments") on or before the date which is two years from the date of the exercise of the First Option as follows: (i) on or before the first anniversary of the exercise of the First Option, Halo shall pay to EL the sum of $40,000 and, subject to section 7, issue to the General Partner in trust for EL 50,000 common shares in the capital of Halo; and (ii) during the Second Option Period incur and fund expenditures on the Property of at least $1,500,000, provided, however, that if Halo incurs and funds the Second Work Costs and the Second Payments in full prior to and in advance of the time frame provided herein, then it will be deemed to have exercised the Second Option at the time that both the Second Work Costs and the Second Payments are paid in full and it will not be required to incur and fund any further expenditures or pay any further amounts or issue any further shares in accordance with the terms of this Section 1(e). (f) The Work Costs shall be as defined in Schedule C to this letter agreement. For greater certainty, Halo may, at any time during the First Option Period or the Second Option Period, terminate this letter agreement or the Option on thirty (30) days' prior written notice to EL without any obligation to incur Work Costs or pay any further fees or issue any further shares. (g) In order to provide for (i) the manner in which the development, exploration and operation of the Property shall be conducted (including without limitation, the appointment of Halo or its affiliate as manager to conduct development and mining activities on the Property and to propose work programs); (ii) the respective rights and obligations of the parties arising out of or in connection with the of the Property; (iii) the management fees that Halo shall be entitled to charge; and (iv) the manner in which the rights in the Property may be transferred, immediately upon the earlier of (A) the exercise of the Second Option by Halo; and (B) the expiry of the Second Option, EL and Halo shall enter into a joint venture agreement. The form of joint venture agreement between EL and Halo (the "Joint Venture Agreement") shall be attached as a schedule to and form part of the Option Agreement. (h) The Work Costs are not committed and may be made in Halo's sole discretion. If the annual Work Costs to be incurred on or before the dates provided in section 1(c)(i)-(iv) or (1)(e)(i) - (ii) above are less than the minimum annual requirement, then Halo may pay the deficiency to or to the direction of EL in cash within sixty (60) days after the expiry of the respective annual period in order to maintain the First Option or Second Option, as applicable. If the aggregate Work Costs incurred on or before -3- the second anniversary of the date of the Option Agreement are less than $500,000, or if the Second Work Costs incurred on or before second anniversary of the exercise of the First Option are less than $1,500,000, Halo may pay the deficiency to or to the direction of EL in cash within sixty (60) days after the applicable date in order to exercise the First Option or Second Option, as applicable. Any and all expenditures made under section 1(c) above, or any payments made pursuant to this section 1(h) are not reimbursable if Halo does not exercise the First Option. If Halo does not incur and fund the Work Costs in accordance with the schedule provided in section 1(c) hereof, or if it does not make the payments to EL in lieu of the annual Work Costs as provided herein, other than in circumstances of a force majeure event, the First Option shall terminate and any expenditures previously incurred or funded, or any payments previously made to EL, shall be forfeited. If Halo does not incur and fund the Second Work Costs in accordance with the schedule provided in Section 1(e) hereof or if it doesn't make the payments to El in lieu of the Second Work Costs as provided herein, other than in circumstances of a force majeure event, the Second Option will terminate and any expenditures previously incurred or funded, or any payments previously made to EL, shall be forfeited. (i) Halo or an affiliate shall have the exclusive right to manage and operate all work programs carried out on the Property for so long as the Options remain outstanding, including the right to prospect, explore, conduct drilling, environmental tests, metallurgical tests, geochemistry and geophysics tests and to conduct any other exploration, development testing or determining of feasibility and test mining that it deems desirable, and all work programs shall be in the sole discretion of Halo or an affiliate permitted to exercise such rights. Thereafter, work programs shall be carried out by Halo in accordance with the terms of the Joint Venture Agreement. (j) Notwithstanding any other provision in this letter agreement, Halo shall not conduct any drilling or perform any underground developments on the Property unless and until the parties have executed and delivered to each other the Option Agreement in accordance with Section 1(a) hereof. (k) EL shall indemnify and hold Halo and its directors, officers, employees and consultants harmless from and against any losses, liabilities, damages, injuries, costs or expenses (including legal costs) incurred by such persons arising out of, resulting from or in any way connected with the operations conducted on the Property by EL or its affiliates prior to the date of this letter agreement or reclaiming any of the concessions that comprise the Property in respect of any work performed by EL or its affiliates on such concessions prior to the date of this letter agreement. -4- Such indemnity shall survive the termination of the First Option Period or the failure of Halo to exercise the First or Second Option. (l) The Option Agreement shall contain the terms and provisions set out in this letter agreement and such other representations, warranties, covenants, conditions and indemnities that are usual and customary to a mining transaction of this nature or are otherwise necessary or appropriate to implement the terms of this letter agreement and as are mutually acceptable and agreed upon by the parties, including, without limitation, those representations and warranties contained in section 8 hereof. (m) Upon the exercise of each of the First and Second Options, as applicable, the appropriate registrations shall be made to reflect each party's ownership interest, on title to the Property. 2. CONTRIBUTION TO COSTS (a) During the Option Periods, Halo shall be responsible for the conduct and cost of all minimum assessment work and exploration programs conducted on the Property and, from and after the date of this letter agreement, Halo shall maintain the Property in good standing with all appropriate authorities and under the laws of Canada and the provincial authorities, including, without limitation, the payment of any mining duties, property taxes, instruction fees, service fees or stamp duties, the filing of reports with respect to minimum assessment work, and the performance of any and all obligations required by the terms and conditions of the mining concessions that comprise the Property (the "Maintenance Costs"), and Halo shall fund and pay such Maintenance Costs, until the earlier of: (i) the expiry or termination of the First Option; (ii) the date upon which Halo has exercised the Second Option; or (ii) the Second Option expires or is terminated without having been exercised by Halo, If the First Option expires or is terminated without having been exercised by Halo, EL shall be responsible for, pay and fund all Maintenance Costs from and after the date of such expiration or termination. Where Halo has exercised the First Option, and the Second Option expires or is terminated without having been exercised by Halo, EL and Halo in accordance with their proportional interests shall be responsible for, pay and fund all Maintenance Costs and all other costs in respect of the Property from and after the date of such expiration or termination of the Second Option and shall be responsible for all liabilities incurred in accordance with their proportionate interests. For greater certainty, Halo's obligation to pay Maintenance Costs applies only to Maintenance Costs the liability for -5- which did not arise prior to the date of this letter agreement. Maintenance Costs shall form part of the Work Costs for the purposes of the First Option and Second Option. If either EL or Halo fails to contribute to the expenditures related to the Property, following the termination or expiry of the Second Option, whichever is earlier, in accordance with their respective proportionate interests, and pursuant to this section 2(a), and the other of EL or Halo (the "contributing party") contributes not less than the full amount of the contributing party's required funding pursuant to this Section 2(a), then the non-contributing party's percentage holdings in the Property shall be recalculated in accordance with the following formula: Property shareholding of party = (A X 100) --------- B Where: A = actual contributions of party to expenditures related to the Property and required by the Joint Venture Agreement (excluding Work Costs incurred by Halo pursuant to the Options); B = total contributions of both parties to the expenditures related to the Property and required in the Joint Venture Agreement. For greater certainty, a non-contributing party's percentage holdings in the Property shall not be recalculated in accordance with the formula contained herein if the contributing party does not contribute the full amount of the contributing party's required funding pursuant to this section 2(a). (b) Any recalculation of percentage holdings in the Property shall be implemented by the transfer of interest to the other party. If a party's percentage interest is diluted to less than ten percent (10%), then such other party's interest is automatically converted to a one percent (1%) net smelter royalty upon substantially the same terms and conditions contained in the Royalty Agreement. In such event the joint venture shall immediately be terminated provided that all terms set out therein which are stated to survive termination shall remain in full force and effect and any liabilities which have been incurred or accrued shall remain in effect. (c) A non-contributing party's percentage holdings in the Property shall be deemed to be recalculated immediately after the time for making a contribution has lapsed and the other party has made the contributing party's contribution in full. The parties shall execute and deliver all necessary instruments and documents and take such actions required to effect such transfer of interest. (d) Following the exercise of the Second Option, Halo shall be responsible for all costs necessary to advance the Property to production and EL shall not be required to expend monies in relation to the Property provided however, that each of EL and Halo shall be liable for any liabilities of the -6- Project in proportion to their joint venture interests and provided that Halo shall be entitled to recover all costs incurred in respect of the Property, including without limitation all capital expenditures, prior to any payment of profit to Halo or EL on the basis of their proportionate joint venture interests. 3. NET SMELTER RETURNS ROYALTY On the date that the Second Option is exercised, EL and Halo will enter into a net smelter returns royalty agreement (the "Royalty Agreement") on terms mutually satisfactory to both parties, pursuant to which Halo will issue and grant to EL a 1% net smelter returns royalty calculated and payable in accordance with Schedule D attached (the "NSR") on Halo's share of any gold and silver production from the Property following commencement of commercial production, with the price of gold being determined on the basis of the monthly average price of gold, calculated by dividing the sum of all London Bullion Market Association P.M. Gold Fix prices reported for the calendar month in question by the number of days for which such prices were quoted, and for silver on the basis of the monthly average price of silver, calculated by dividing the sum of all London Bullion Market Association prices for silver reported for the calendar month in question by the number of days for which such prices were quoted. All royalty payments will be paid in cash only. Notwithstanding this Section 3, if Halo is the operator or manager or the Property, Halo will be under no obligation whatsoever to place the Property into commercial production, and if the Property is placed into commercial production by Halo, Halo will have the right at any time to curtail, suspend or terminate such commercial production as Halo in its sole discretion deems advisable. At the option of Halo, which may be exercised at any time by notice in writing to EL, Halo may acquire the rights under the Royalty Agreement for a purchase price of $1,000,000. 4. AREA OF INFLUENCE Any mining concession located or otherwise acquired by or on behalf of Halo or EL or any of their affiliates from and after the date of this letter agreement that lies wholly or partly within a five (5) kilometre radius of the perimeter of the Property, as such perimeter exists as at the date hereof (the "Area of Influence"), or any right, title or interest therein, shall be subject to this letter agreement. Each party shall be free to acquire properties outside the Area of Influence, in its own interest and without any obligation or liability to any other party. -7- 5. ACCESS TO INFORMATION (a) Subject to the terms and conditions hereof, EL shall have, at all reasonable times from and after the date of this letter agreement, timely access to the Property and to all data, studies, maps, drill core and all other information generated by Halo in respect of or derived from the Property. Halo shall, from the date of this letter agreement until exercising the earlier of (i) the expiry or termination of the Second Option; and (ii) the exercise of the Second Option, provide EL, all information generated from exploration and development on the Property on a timely basis, which information shall be treated as confidential in accordance with the provisions hereof. EL acknowledges that nothing in this letter agreement will obligate Halo: (i) to prepare, or to assist in the preparation of, any technical report or reports relating to the Property which EL might be required to prepare and file with any Canadian regulatory authority at any time pursuant to National Instrument 43-101 "Standards of Disclosure for Mineral Projects", or any similar regulatory policy; or (ii) to provide the services of, or to assist EL in procuring the services of, a "qualified person" (as that term is defined in the National Instrument) to produce, or to oversee the production of, any such technical report or reports. (b) Within thirty (30) days of the date of this letter agreement, EL shall disclose or make available to Halo copies of all information and data within its control or possession concerning the Property, including, without limitation, all historical documentation with respect to title, all geological, geophysical and assay results, maps, environmental studies, tests and assessments and notifications from regulatory authorities and prior exploration, development, reclamation and remediation work carried out thereon and within its knowledge. 6. REPRESENTATIONS AND WARRANTIES (a) EL represents and warrants to Halo that: (i) the concessions that comprise the Property are in good standing with respect to the performance of all obligations (including, without limitation, payment of mining duties, performance of minimum assessment work and filing of reports with respect to minimum assessment work) applicable under all laws of Canada and the Province of Manitoba (including, without limitation, applicable mining and environmental laws and regulations) and are owned by and duly registered in the name of EL free and clear of any encumbrances, royalties or underlying interests whatsoever; (ii) to the knowledge of EL after due inquiry, nothing in the mining laws of Canada and the Province of Manitoba prohibits EL from granting to Halo the right to hold exploration rights in respect of the Property in order to carry out prospecting, exploration, pre-development and -8- feasibility activities on the Property as to gold and minerals for as long as the concessions that comprise the Property are in force; (iii) upon exercise of the First Option by Halo, EL shall have the legal right and authority to transfer an undivided fifty-one percent (51%) beneficial interest in the Property to Halo and to register such interest on the legal title to the Property; (iv) to the knowledge of EL, there are no actions, suits, investigations or proceedings before any court, arbitrator, administrative agency or other tribunal or governmental authority, whether current, pending or threatened, which directly or indirectly relate to or affect the Property; (v) to the knowledge of EL, no contaminants, pollutants, wastes or toxic substances (collectively "Hazardous Substances") have been released, discharged, placed, escaped, leached or disposed of on, into, under or through the Property (including watercourses, improvements thereon and contents thereof) or nearby areas; (vi) neither EL nor, to EL's knowledge, any other person is subject to any obligations or commitments for reclamation, closure or other environmental corrective, clean-up or remediation action directly or indirectly relating to the Property; (vii) the activities on and the use of the Property by EL have been in compliance with all laws of Canada and the Province of Manitoba and EL has not received any notice of any breach or violation of such laws; (viii) as at the date of this letter agreement, no adverse claims or challenges have been made to EL's interest in or to the Property; (ix) EL has not assigned, encumbered or covenanted to assign or encumber any of the concessions that comprise the Property or the rights which derive therefrom and EL has not acquired, with respect to third parties, any obligation whatsoever that would prevent EL from entering into this letter agreement; and (x) EL has no any information or knowledge pertaining to the Property or the lands comprising the Property or substances thereon, therein or therefrom not disclosed in writing to Halo which, if known to Halo, might reasonably be expected to deter Halo from completing the transactions contemplated hereby on the terms and conditions contained herein. (b) Halo represents and warrants to EL that Halo, or any affiliate Halo proposes to use to perform any operations contemplated by this letter agreement, is, and has not received any notice from any governmental authority advising it that it is not, authorized, permitted or licensed to conduct business in Canada and the Province of Manitoba and to perform -9- such operations or obligations within the jurisdiction of any governmental authority having jurisdiction of the nature and scope of the operations and obligations to be performed by Halo or any of its affiliates pursuant to and in accordance with the terms of this letter agreement. (c) Halo, on the one hand, and EL on the other hand, represent and warrant to each other that: (i) Halo is a company duly incorporated under the laws of the jurisdiction of its incorporation and it is duly organized and validly subsisting under such laws; (ii) EL is a limited partnership duly registered under the laws of Manitoba, and it is duly organized and validly subsisting under such laws; (iii) each party has full corporate power and authority to carry on its business and to enter into this letter agreement and to carry on and perform all of its obligations and duties hereunder; (iv) each party has duly obtained all corporate and regulatory authorizations for the execution, delivery and performance of this letter agreement and, except as expressly set out in this letter agreement, and such execution, delivery and performance and the consummation of the transactions herein contemplated will not conflict with or result in a breach of any covenants or agreements contained in the provisions of its constating documents or any shareholders' or directors' resolution or any indenture, agreement or other instrument whatsoever to which it is a party or by which it is bound and does not contravene any applicable laws; (v) this letter agreement has been duly executed and delivered by each party and is valid, binding and enforceable against each party in accordance with its terms. 7. ISSUANCE OF THE SECURITIES All shares, warrants, units and other securities issued or to be issued by Halo to EL under and pursuant to this letter of intent on under the Option Agreement (the "Halo Securities") shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange. The issuance of any Halo Securities shall be conditional upon (i) Halo obtaining all regulatory and third party consents or approvals being received, including those of the TSX Venture Exchange and applicable securities regulatory bodies; and (ii) the existence of an exemption from prospectus and registration requirements under applicable securities laws for the issuance of the Halo Securities to EL. In the event that Halo has not received the required consents on the date this letter -10- agreement is signed and fails to deliver the shares contemplated in Section 1(c)(i) within six months of the date hereof, this letter agreement shall be null and void, save for the provisions of Section 8. 8. CONFIDENTIALITY (a) The terms of this letter agreement, including the terms of the proposed transactions contemplated hereunder and the fact that the parties are pursuing such transactions, are confidential and except as expressly permitted by this letter agreement neither party shall disclose any of such information to any person or entity without the prior written consent of the other. (b) Each party agrees to keep confidential any and all information made available to it by the other party or its representatives or advisors in the course of the investigations and negotiations contemplated hereunder and agrees not to use, in relation to the Property and the Area of Influence, any such information except for or in respect of the completion of the proposed transactions contemplated by this letter agreement, except to the extent that disclosure may be required by or under any law or under the rules and regulations of any securities commission or stock exchange. The foregoing restriction does not apply to any information (i) that is or becomes generally available to the public, except through a breach of this letter agreement, (ii) that was known to a party prior to the receipt of such information from the other party, (iii) that is developed by a party independently of information received from the other party, or (iv) that a party obtained from an independent third party who obtained such information lawfully and was under no obligation of secrecy in respect of such information. Notwithstanding the foregoing and for greater certainty, no public announcement of the existence of this letter agreement or the transactions contemplated hereby shall be made by either party unless the timing and content thereof have been agreed upon by both parties, acting reasonably, except as may otherwise be required by applicable law, rule or regulation. 9. BINDING PROVISIONS (a) This letter agreement shall be binding upon the parties and contains the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understanding, duties or obligations between the parties respecting the subject matter hereof. (b) In addition to any other remedies Halo or EL may have: (i) Halo may, subject to a force majeure event, terminate this letter agreement if EL fails to perform or breaches any of its material obligations under this letter agreement, and such party fails to cure any such non-performance or breach within sixty (60) days after receipt of written notice thereof from Halo; and (ii) EL may, subject to a force majeure event, terminate this letter agreement if Halo fails to perform or breaches any of its material -11- obligations under this letter agreement, and such party fails to cure any such non-performance or breach within sixty (60) days after receipt of written notice thereof from EL. (c) This letter agreement shall remain binding on the parties if the Option Agreement is not executed and delivered for any reason whatsoever other than Halo terminating this letter agreement in accordance with the terms hereof. (d) The parties hereto acknowledge that EL is a limited partnership formed under the laws of Manitoba. The parties hereto acknowledge that the obligations of EL shall not be personally binding upon, nor shall resort be had to, the property of any of the Limited Partners, their heirs, successors and assigns, and that resort shall only be had to the property of EL and the property of the General Partner. 10. FORCE MAJEURE Neither Halo or EL shall be liable to the other, and neither Halo or EL shall be deemed in default hereunder, for any failure to perform or delay in performing any of its covenants and agreements or in incurring Work Costs caused by or arising out of any event (a "force majeure event") beyond the reasonable control of such party, excluding lack of funds, but including, without limitation, lack of rights from or permission by indigenous peoples' groups to enter upon the Property to conduct exploration, development and mining operations thereon, war in Canada, earthquake, fire, storm, flood, explosion, strike, labour trouble, accident, riot, act of restraint of any lawful authority, act of God, protest or demonstrations by environmental lobbyists or indigenous peoples' groups, delays in transportation, breakdown of machinery, inability to obtain necessary materials in the open market, unavailability of equipment or delays by any governmental authority or agency in providing any permission, licence or permit required to perform any such covenant or agreement (so long as such delays are not themselves the result of delays by the party seeking to rely upon this clause). No right of Halo or EL shall be affected for failure or delay to perform any of its covenants and agreements or to incur Work Costs, if the failure or delay is caused by one of the events referred to above. All times provided for in this letter agreement shall be extended for the period commensurate with the period of delay and, so far as possible, the party affected shall take all reasonable steps to remedy the cause of the delay attributable to the events referred to above; provided, however, that nothing contained in this section shall require Halo or EL to settle any labour dispute, protest or demonstration, or to question or test the validity of any governmental order, regulation, or law or claim of right by indigenous peoples' groups. -12- 11. MISCELLANEOUS (a) Any notice or any communication required or permitted to be given under this letter agreement by any party to the other parties, in any capacity (hereinafter called a "Notice") shall be in writing and shall be deemed to have been sufficiently given if telefaxed or delivered to the address of such other parties set forth as follows: (i) if to Halo at: 1305 - 1090 West Georgia Street Vancouver, BC V6E 3V7 Attention: Marc Cernovitch, President & CEO Fax No.: 604-601-8209 Telephone No.: 604-601-8208 (ii) if to EL at: c/o the General Partner #1 -102 Main Street Flin Flon, Manitoba R8A 1K1 Attention: Eckart Buhlmann, President Fax No.: 204-687-3133 Telephone No. 204-687-5577 or such substitute address or fax number as is specified by a party by notice to the other parties given in accordance with this section, and any such Notice shall be deemed to have been received, if telefaxed, on the first business day after the date of transmission, and if delivered, upon the day of delivery, or if such day is not a business day, then on the first business day thereafter. (b) None of the provisions of this letter agreement shall be amended or modified, and no waivers, consents or approval in respect hereof shall be effective unless made in writing and signed by the parties. (c) No party shall sell, transfer, assign or convey this letter agreement, or any of its rights, benefits, privileges or obligations thereunder, without the prior written consent of the other parties, provided that EL or Halo may sell, transfer, assign or convey this letter agreement (or, in the case of EL, the Property) and its rights, benefits and privileges thereunder, to an affiliate of such party, provided that: (i) such party delivers to the other party notice of such assignment; -13- (ii) such affiliate agrees in writing with the non-assigning party to be bound by the terms of this letter agreement; (iii) before such affiliate ceases to be an affiliate of such party, the interest assigned must be assigned back to such party; and (iv) notwithstanding such assignment and shall continue to be bound by the terms of this Letter agreement. The Option Agreement and Joint Venture Agreement shall contain right of first refusal provisions binding on the parties with respect to their respective interests in the Option Agreement, the Joint Venture Agreement and the Property. (d) Nothing in this letter agreement shall be deemed to constitute any party the partner, agent or legal representative of the other parties for any purpose whatsoever. (e) The letter agreement enures to and is binding upon the successors and assigns of the parties. (f) This letter agreement and its application and interpretation will be governed by and interpreted in accordance with the laws of Province of Manitoba with respect to any property situated in the Province of Manitoba or any obligations to be performed in Province of Manitoba pursuant to documents or other writings prepared under or subject to the laws of the Province of Manitoba, or the performance of which is sought before the courts of the Province of Manitoba, and, as to all other matters, this letter agreement shall be construed in accordance with the laws of Ontario and the applicable federal laws of Canada. (g) The letter agreement may be signed in counterpart by original or faxed copy, each of which will be deemed to be an original and all of which together shall constitute one and the same instrument. (h) For purposes of this letter agreement, the Option Agreement, the Joint Venture Agreement and the Royalty Agreement, the term "affiliate" shall mean, as to any party, any person, partnership, joint venture, corporation or other form of enterprise which directly or indirectly controls, is controlled by or is under common control with that party, and for the purposes of this definition "control" means possession, directly or indirectly, of the power to direct or cause the direction of management and policies through ownership of voting securities, contract, voting trust or otherwise. -14- If the terms of this letter agreement are acceptable to you, please sign and return the enclosed copy of this letter agreement to us at the address indicated above on or before 5:00 PM, Vancouver time, on February 9, 2005. Yours truly, HALO RESOURCES LTD. Per: _________________________ I have the authority to bind the company ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP BY ITS GENERAL PARTNER, ENDOWMENT LAKES (2002) LTD. Per: _________________________ I have the authority to bind the company -15- LIST OF SCHEDULES [Not Attached] Schedule A List Of Properties Schedule B MAP - Quarter Moon Lake Property Schedule C Description of Work Costs Schedule D Description of Net Smelter Returns Royalty -16- EX-10 3 exh4_6.txt PURCH A/G HALO AND SHERIDAN FEB 18/05 EXHIBIT 4.6 Purchase Agreement, by and among Halo Resources Ltd., and Sheridan Platinum Group dated February 18, 2005 PURCHASE AGREEMENT AMONG THE SHERIDAN PLATINUM GROUP LTD. AND HALO RESOURCES LTD. February 18, 2005 TABLE OF CONTENTS PURCHASE AGREEMENT ARTICLE 1 INTERPRETATION.......................................................1 1.1 DEFINITIONS...........................................................1 1.2 SCHEDULES.............................................................5 1.3 INTERPRETATION........................................................5 ARTICLE 2 PURCHASE AND SALE....................................................6 2.1 PURCHASE AND SALE.....................................................6 2.2 PURCHASE PRICE........................................................6 2.3 SECTION 85 ELECTION...................................................7 2.4 ALLOCATION OF PURCHASE PRICE AMONG ASSETS.............................7 2.5 GOODS AND SERVICES TAX ON PROPERTIES AND BUILDINGS....................7 2.6 TRANSFER TAXES........................................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE VENDOR.........................7 3.1 REPRESENTATIONS AND WARRANTIES OF THE VENDOR..........................7 3.2 SURVIVAL.............................................................10 3.3 RELIANCE.............................................................10 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.....................11 4.1 REPRESENTATIONS AND WARRANTIES.......................................11 4.2 SURVIVAL.............................................................12 4.3 RELIANCE.............................................................13 ARTICLE 5 COVENANTS OF THE VENDOR.............................................13 5.1 PRIOR TO CLOSING DATE................................................13 5.2 CONFIDENTIALITY......................................................14 ARTICLE 6 COVENANTS OF PURCHASER..............................................14 6.1 PURCHASER'S COVENANTS................................................14 ARTICLE 7 CONDITIONS OF THE PURCHASER.........................................15 7.1 PURCHASER'S CONDITIONS...............................................15 7.2 WAIVER/SURVIVAL......................................................16 ARTICLE 8 CONDITIONS OF THE VENDOR............................................16 8.1 VENDOR'S CONDITIONS..................................................16 8.2 WAIVER/SURVIVAL......................................................17 ARTICLE 9 CLOSING AND TERMINATION.............................................17 9.1 CLOSING DATE AND LOCATION............................................17 9.2 VENDOR'S CLOSING DOCUMENTS...........................................17 9.3 PURCHASER'S CLOSING DOCUMENTS........................................18 9.4 CONVEYANCE OF ASSETS.................................................19 9.5 TRUST REGARDING ASSETS NOT CONVEYED..................................19 9.7 EFFECT OF TERMINATION................................................20 ARTICLE 10 INDEMNITIES........................................................20 10.1 GENERAL INDEMNIFICATION OF PURCHASER.................................20 10.2 VENDOR'S LIMITATIONS.................................................20 10.3 GENERAL INDEMNIFICATION OF VENDOR....................................20 10.4 SPECIFIC INDEMNIFICATION OF PURCHASER IN RELATION TO EARLY ENTRY AND DRILLING......................................21 10.5 PURCHASER'S LIMITATIONS..............................................21 10.6 CLAIMS UNDER VENDOR'S INDEMNITY......................................21 10.7 CLAIMS UNDER PURCHASER'S INDEMNITY...................................22 10.8 CERTIFICATES.........................................................22 -ii- ARTICLE 11 POST CLOSING MATTERS...............................................23 11.1 PROPERTY MAINTENANCE.................................................23 11.2 RETURN OF ASSETS.....................................................23 11.3 CONDITION OF ASSETS..................................................23 11.4 REGISTRATION.........................................................23 11.5 RENEGOTIATION OF TERMS OF REGISTRATION...............................23 11.6 DISCHARGE OF SECURITY................................................24 ARTICLE 12 AREA OF INTEREST...................................................24 12.1 AREA OF INTEREST.....................................................24 ARTICLE 13 EVENTS OF DEFAULT..................................................24 13.1 EVENTS OF DEFAULT....................................................24 13.2 REMEDIES UPON DEFAULT................................................25 13.3 ESCROW ARRANGEMENT...................................................25 13.4 COVENANT NOT TO TRANSFER PROPERTIES..................................25 13.5 APPLICATION FOR SECTION 118 RESTRICTION..............................26 13.6 SURVIVAL............................................................ 26 ARTICLE 14 ARBITRATION........................................................26 14.1 SETTLING DISPUTES....................................................26 14.2 ARBITRATION..........................................................26 14.3 AVAILABILITY OF OFFICERS, EMPLOYEES, ETC.............................27 14.4 ARBITRATION DOES NOT APPLY...........................................27 ARTICLE 15 GENERAL............................................................27 15.1 TENDER...............................................................27 15.2 EXPENSES.............................................................28 15.3 TIME.................................................................28 15.4 ASSIGNMENT...........................................................28 15.5 NOTICES..............................................................28 15.6 ANNOUNCEMENTS........................................................29 15.7 MODIFICATIONS, APPROVALS AND CONSENTS................................29 15.8 GOVERNING LAW........................................................29 15.9 SEVERABILITY.........................................................29 15.10 ENTIRE AGREEMENT.....................................................29 15.11 FURTHER ASSURANCES...................................................29 15.12 ENUREMENT............................................................30 15.13 COUNTERPARTS.........................................................30 -1- THIS AGREEMENT is made as of February 18, 2005 AMONG: THE SHERIDAN PLATINUM GROUP LTD., a company incorporated under the laws of Canada, having a place of business at 14 Park Lane Circle, Toronto, Ontario, M5B 1Z7 (the "VENDOR") AND: HALO RESOURCES LTD., a company continued under the laws of British Columbia, having a registered office at 1305, 1090 West Georgia Street, Vancouver, British Columbia, V1E 3V7 (the "PURCHASER") WHEREAS: The Vendor has agreed to sell and the Purchaser has agreed to purchase all of the Assets on the terms and subject to the conditions hereinafter contained. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of one dollar and the premises and mutual agreements and covenants herein contained (the receipt and adequacy of such consideration being mutually acknowledged by each party), the Parties covenant and agree with each other as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Agreement the following words and phrases shall have the following meanings: "Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority; "Applicable Laws" means, with respect to any Person, any national or foreign federal, state, provincial or local Laws, ordinance, regulation, rule, code, order, other requirement or rule of law or stock exchange rule applicable to such Person or any of its respective properties, assets, officers, directors, employees, independent contractors, consultants or agents; "Area of Interest" has the meaning ascribed to it in Article 12; "Assets" means: (a) the Properties; (b) the Buildings; (c) the Equipment; (d) the Inventory; and (e) the Technical Information; -2- "Buildings" means all plants, mills, hoists, buildings, structures, erections, improvements, appurtenances and fixtures (including fixed machinery and fixed equipment) situated on, under or in or forming part of the Properties; "Business Day" means any day upon which banks and financial markets are open during regular business hours in Toronto, Ontario; "Closing" means the completion of the sale to, and the purchase by the Purchaser of, the Assets and the completion of all other transactions contemplated by this Agreement to occur contemporaneously therewith; "Closing Date" means the date that is the earlier of the following (a) the Business Day upon which conditions 7.1(h) and 8.1(e) are both completed or waived by the Parties and the registrations and records are engrossed with such registrations and do not reveal any encumbrances that are not Permitted Encumbrances which the Purchaser is not willing to then waive; and (b) April 1, 2005. Notwithstanding the foregoing, if conditions 7.1(h) and 8.1(e) or any other condition of Closing cannot be satisfied before or on April 1, 2005 because one or more of the Parties have constructive or actual notice of a Lien which purports to affect any of the Properties, other than a Permitted Encumbrance under this Agreement, and which is not acceptable to either Purchaser or Vendor, then the Closing Date shall be extended as reasonably required to deal with such Lien in a manner which is reasonably acceptable to both Vendor and Purchaser. "Closing Time" means 4:00 p.m. (Eastern Standard Time) or such other time as may be agreed upon by the parties; "Dispute" has the meaning ascribed to it in Section 14.1; "Dividends" means the dividends payable on the Preferred Shares, the terms of which are described in Schedule E attached hereto; "Escrow Agreement" has the meaning given to it in Section 13.3; "Employment Legislation" means, collectively, all Applicable Laws currently in effect including respective regulations and orders promulgated thereunder, and any similar federal, state or other legislation applicable in Ontario relating to employment of Persons in Ontario; "Equipment" includes all fixed assets and tangible personal property, wherever situated, used in connection with the Properties; "Event of Default" has the meaning given to it in Section 13.1; "Governmental Authority" means any Canadian or foreign federal, state, provincial, municipal or local governmental, regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body; "Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award issued or entered by or with any Governmental Authority; "Inventory" means all inventories or ore, raw materials, minerals-in-progress, stock-in-trade, concentrated or refined gold and supplies situated on the Properties as of the Closing Date (including any tailings, tailings pond, tailings dams and other tailings impound facilities); "Laws" means any Canadian or foreign, federal, state, provincial or local law, ordinance, regulation, rule, code, Order, principle of common and civil law and equity, other requirement or rule of law or stock exchange rule, including any judicial or administrative interpretation thereof; -3- "Legal Proceeding" means any judicial, administrative or arbitral action, suit, proceeding (public or private), claim or governmental proceeding; "Liabilities" means any and all debts, trade accounts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or undeterminable, including, without limitation, those arising under any Law, Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking or otherwise, including, without limitation, arising directly or indirectly under or pursuant to any loan, credit agreement, loan or credit facility transaction or arrangement or any off-balance sheet transaction or arrangement, in each case of the Vendor affecting or relating to the Assets; "Lien" means any encumbrance of any nature or kind whatever and includes a security interest, mortgage, lien, hypothec, pledge, hypothecation, assignment, charge or security, including arising under or by operation of any Applicable Laws, including any banking legislation, trust or deemed trust (whether contractual, statutory or otherwise arising), any easement, agreement, reservation, right of way, restriction, encroachment, burden, bond, guarantee or any other right or claim of others of any kind whatever or any restrictive covenant or other agreement, restriction or limitation on title or use; "Material Contracts" means those subsisting commitments, contracts, instruments, leases and other agreements, oral or written, entered into by the Vendor, by which it is bound or to which it or its assets are subject and which have total payment obligations on the part of the Vendor which exceed $25,000 or are for a term of or in excess of one year; "Mining Rights" has the meaning given to it in Section 3.1(g); "Minister" means the Ontario Minister of Northern Development and Mines; "Mortgage" has the meaning given to it in Section 9.3(g); "Order" means any order, (including any judicial or administrative order and the terms of any administrative consent) injunction, judgment, decree, ruling, writ, assessment or arbitration award; "Ordinary course" or "normal course" means any action which constitutes an ordinary day-to-day business activity or is consistent with past practices; "Parties" means the Vendor and the Purchaser, and "Party" means any one of them; "Permit" means any and all permits, licences, concessions, approvals, certificates, consents, certificates of approval, rights, privileges or franchises, registrations (including any required export/import approvals) and exemptions of any nature and other authorizations, conferred or otherwise granted by any Governmental Authority and related to any Asset; "Permitted Encumbrances" means: (a) in relation to the Assets, those Liens set out in Schedule B; (b) security given to a public utility or any Governmental Authority when required in the ordinary course; (c) any reservations or exceptions contained in the concessions or other original grant of rights underlying or related to the Properties; (d) easements and any registered restrictions or covenants that run with the Properties that do not in the aggregate detract from the value of the Properties; -4- (e) rights of way for, or easements, reservations or rights of others relating to, sewers, water lines, gas lines, pipelines, electric lines, telegraph and telephone lines and other similar products or services, provided that they do not in the aggregate materially interfere with the use of the Properties and which are on the Properties; and (f) zoning by-laws, ordinances or other restrictions as to the use of real property, and agreements with other Persons registered against title to the Properties, provided that they do not in the aggregate materially interfere with the use of the Properties and which are on the Properties; "Person" includes an individual, corporation, limited liability corporation, body corporate, partnership, limited partnership, limited liability partnership, unlimited liability company, joint stock company, joint venture, association, trust or unincorporated organization or any trustee, executor, administrator or other legal representative thereof; "Preferred Shares" means the preferred shares in the capital of Purchaser to be issued pursuant to Article 2 herein and to be created prior to Closing, the terms of which are attached hereto as Schedule E; "Properties" means the lands and mineral property interests in the Kenora Mining Division, Ontario as set out in Schedule A hereto and any other properties acquired within the Area of Interest; "Purchase Price" has the meaning specified in Section 2.2; "Purchaser" means Halo Resources Ltd. "Purchaser's Solicitors" means, the law firm of Axium Law Group, 3350 - 1055 Dunsmuir Street, PO Box 49222, Vancouver, British Columbia V7X 1L2 and/or Cassels Brock & Blackwell LLP of Toronto, Ontario, as the case may be; "Royalty" means the net smelter return royalty payable to the Vendor in accordance with Article 2 herein and having the terms set out in the Royalty Agreement; "Royalty Agreement" means the royalty agreement attached as Schedule F hereto; "Section 118 Restriction" has the meaning specified in Section 13.5; "Shares" means the 1,000,000 common shares without par value in the capital of the Purchaser to be issued to the Vendor pursuant to Article 2 herein; "Tax Return" means all reports, estimates, information statements and returns relating to, or required to be filed in connection with, any Taxes pursuant to the statutes, rules and regulations of any federal, state, local or foreign government taxing authority; "Taxes" means all taxes, including any interest or penalties that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limitation, all income taxes, payroll taxes, sales and use taxes, excise taxes, environmental taxes, franchise taxes, gross receipts taxes, occupation taxes, real and personal property taxes, value added taxes, stamp taxes, transfer taxes, withholding taxes, workers' compensation, social security payments, health taxes, unemployment insurance payments, public works payments and any other contributions under Applicable Laws and other obligations of the same or of a similar nature; "Technical Information" means all information and all know-how owned, leased or licensed by the Vendor or in which the Vendor has a right, title or interest, or which is otherwise related to the Properties, including: -5- (a) information of a scientific, technical or business nature, whether in written, graphic, machine readable, electronic or physical form; (b) maps, plans, designs, research data, research plans, development plans, drill core samples, trade secrets, processes, formulas, drawings, technology, computer software and related manuals, unpatented blueprints, flow sheets, equipment and parts lists, instructions, manuals, records and procedures; and (c) all geological reports, technical reports or similar disclosure documents prepared in connection with the Properties; "TSX-V" means the TSX Venture Exchange Inc.; "Vendor" means The Sheridan Platinum Group Ltd.; and "Vendor's Solicitors" means the law firm of Stikeman Elliott LLP, 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario M5L 1B9. 1.2 SCHEDULES The following are the schedules to this Agreement: Schedule A - Properties Schedule B - Liens Schedule C - Material Contracts Schedule D - Licences, Permits and Authorizations Schedule E - Summary of Terms of Preferred Shares Schedule F - Net Smelter Return Royalty Agreement Schedule G - Escrow Agreement Schedule H - Mortgage Schedule I - GST Certificate and Indemnity 1.3 INTERPRETATION For the purposes of this Agreement, except as otherwise expressly provided herein: (a) "this Agreement" means this Agreement, including the Schedules hereto, as it may from time to time be supplemented or amended; (b) all references in this Agreement to a designated Article, section, subsection, paragraph, clause, subclause or other subdivision, or to a Schedule, is to the designated Article, section, subsection, paragraph, clause, subclause or other subdivision of or Schedule to this Agreement unless otherwise specifically stated; (c) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, section, subsection, paragraph, clause, subclause or other subdivision or Schedule; (d) the singular of any term includes the plural and vice versa and the use of any term is equally applicable to any gender and where applicable to a body corporate; -6- (e) the word "or" is not exclusive and the word "including" is not limiting (whether or not non-limiting language such as "without limitation" or "but not limited to" or other words of similar import are used with reference thereto); (f) except as otherwise provided, any reference to a statute includes and is a reference to such statute and to the regulations made pursuant thereto with all amendments made thereto and in force from time to time, and to any statute or regulations that may be passed which have the effect of supplementing or superseding such statute or such regulations; (g) where the phrase "to the best of the knowledge of" or phrases of similar import are used in this Agreement, it shall be a requirement that the Person in respect of whom the phrase is used shall have made such due enquiries as are reasonably necessary to enable such person to make the statement or disclosure; (h) the headings to the Articles and other subdivisions of this Agreement are inserted for convenience only and do not form a part of this Agreement and are not intended to interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof; (i) any reference to a corporate entity includes and is also a reference to any corporate entity that is a successor to such entity; (j) the Parties acknowledge that this Agreement is the product of arm's length negotiation between the parties, each having obtained its own independent legal advice, and that this Agreement shall be construed neither strictly for nor strictly against any party irrespective of which party was responsible for drafting this Agreement; and (k) the representations, warranties, covenants and agreements contained in this Agreement shall not merge at the Closing and shall continue in full force and effect from and after the Closing Date for the applicable period set out in this Agreement. ARTICLE 2 PURCHASE AND SALE 2.1 PURCHASE AND SALE Relying on the warranties and representations in this Agreement and subject to the Royalty and the terms and conditions hereof, on the Closing Date the Purchaser will purchase from the Vendor and the Vendor will sell, assign and transfer to the Purchaser the Assets free and clear of all Liens, except the Permitted Encumbrances, in consideration for the Purchase Price. 2.2 PURCHASE PRICE The Purchase Price is the fair market value of the Assets to be satisfied by: (a) CAD$250,000 payable by cheque of the Purchaser; (b) 1,000,000 common shares of the Purchaser; and (c) Preferred Shares of the Purchaser with a face value of CAD$8,000,000. The Vendor acknowledges receipt of a payment of $250,000.00, satisfying Section 2.2(a), and a Preferred Share dividend for the month of February, 2005 of $12,500.00, both of which amounts were paid by Purchaser to Vendor upon execution of this Agreement and both of which amounts shall be non-refundable. The Assets are being transferred subject to the Royalty. -7- 2.3 SECTION 85 ELECTION The Purchaser and the Vendor covenant and agree to elect, in the prescribed form and within the time specified in the relevant legislation for such election pursuant to subsection 85(1) of the Income Tax Act (Canada) and the corresponding provisions of any applicable provincial tax legislation in respect of the transfer by the Vendor of the Assets under this Agreement. The elected amount shall be determined by the Vendor and shall be not less than the adjusted cost base to the Vendor of the Assets and not greater than the Purchase Price for the Assets and the Parties agree to otherwise fully cooperate in such regard. 2.4 ALLOCATION OF PURCHASE PRICE AMONG ASSETS The Purchase Price shall be allocated among the Assets in such manner as the Purchaser determines at Closing. 2.5 GOODS AND SERVICES TAX ON PROPERTIES AND BUILDINGS To the extent GST is legally exigible, the Purchaser hereby represents and warrants to the Vendor that: (i) it is registered for the purposes of Part IX of the Excise Tax Act (Canada) in accordance with the requirements of Subdivision (d) of Division V thereof; (ii) it will continue to be so registered at the time of Closing; and (iii) it is buying the Properties on its own account and not as agent. The Purchaser covenants to deliver to the Vendor upon Closing: (i) a notarial copy of the certificate evidencing its registration for purposes of the goods and services tax ("GST"), including the registration number assigned to it; and (ii) the declaration and indemnity of the Purchaser confirming the accuracy, as at Closing, of the representations and warranties set out in this paragraph and agreeing to indemnify the Vendor for any amounts for which the Vendor may become liable as a result of any failure by the Purchaser to pay the GST payable in respect of the sale of the Properties and Buildings under Part IX of the Excise Tax Act (Canada) in the form attached as Schedule I. Provided that the Purchaser delivers a notarial copy of the certificate and the declaration and indemnity as set out above, then the Purchaser shall not be required to pay to the Vendor, nor shall the Vendor be required to collect from the Purchaser, the GST in respect of the Properties and the Buildings. In the event that the Purchaser shall fail to deliver the certificate, declaration and indemnity as set out above, then the Purchaser shall be responsible for any GST which might be exigible in respect of the Properties and the Buildings. 2.6 TRANSFER TAXES Purchaser shall pay all land transfer taxes, sales taxes, GST and registration fees or other like charges properly payable upon the transfer of the Assets from the Vendor to the Purchaser hereunder. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE VENDOR 3.1 REPRESENTATIONS AND WARRANTIES OF THE VENDOR To induce the Purchaser to enter into and complete the transactions contemplated by this Agreement, the Vendor hereby represents and warrants, as representations and warranties that are true and correct as at the date of this Agreement and that will be true and correct on the Closing Date as if such representations and warranties were made on each of the date of this Agreement and the Closing Date (except insofar as such representations and warranties are stated to be given as of a particular date or for a particular period and relate solely to such date or period), as follows: (a) Organization and Good Standing - The Vendor is duly incorporated, amalgamated, or continued, validly existing, and in good standing with respect to the filing of annual reports under the laws of its jurisdiction of incorporation, amalgamation, or continuance, and has all the corporate power, -8- authority and capacity to own its Assets and to carry on its business as presently conducted; (b) Authority to Sell - The execution and delivery of this Agreement has been duly authorized by all necessary corporate action on the part of the Vendor and this Agreement has been duly and validly executed and delivered by the Vendor and constitutes a legal, valid and binding obligation of the Vendor enforceable against the Vendor in accordance with its terms except as may be limited by laws of general application affecting the rights of creditors; (c) Sale will not cause Default - Neither the execution nor the delivery of this Agreement, or the other agreements and instruments contemplated hereby, nor the completion of the transactions contemplated hereby will: (i) constitute or result in a material breach of or a material default under any terms, provisions or conditions of, or conflict with, violate or cause any, or give to any Person or Governmental Authority any right of, after the giving of a notice or lapse of time or otherwise, acceleration, termination or cancellation in or with respect to any of the following: (A) any constating documents, charter documents or by-laws of the Vendor or any resolution of directors or shareholders of the Vendor; (B) any indenture, mortgage, deed of trust, agreement, contract, lease, franchise, certificate, consent, Permit, license, authority, registration or other instrument or commitment to which the Vendor is a party or is subject, or by which it is bound, or from which it derives benefit; or (C) to the best of the knowledge of the Vendor any law, judgment, decree, order, injunction, rule, statute or regulation of any court, arbitrator or Governmental Authority by which any of the Assets are bound or to which any of the Assets are subject; or (ii) result in the creation of any Lien, except the Permitted Encumbrances, on any of the Assets; (d) Tax Liens - There are no Liens for Taxes upon any of the Assets; (e) Absence of Other Interests - Except for the interest of the Vendor, no other Person has any interest in the Assets; (f) Title to Assets - The Vendor has an undivided 100% legal and beneficial good, valid, marketable and exclusive right, title and interest in and to all of the Assets, free and clear of all Liens except for Permitted Encumbrances and none of the Assets are in the possession of or under the control of any other Person; (g) Property Rights (i) Schedule A contains accurate descriptions of all mineral concessions, mineral claims, patents, licences of occupation, or mineral or mining rights of whatsoever nature or kind (the "Mining Rights") and options to acquire the mineral interests in respect of which the Vendor holds an interest in the Kenora Mining Division, Ontario in relation to the Assets. All rental and other payments required to be paid by the Vendor under such Mining Rights and options to acquire the mineral interests have been duly paid and the Vendor is not otherwise -9- in default in meeting its obligations under any such concessions and options to acquire the mineral interests. All such mining concessions and/or Mining Rights are in good standing; (ii) All mining concessions and/or Mining Rights underlying the Properties have been duly and validly transferred to the Vendor; (h) No Expropriation - The Vendor has not received any notice of expropriation of all or any part of the Assets nor does the Vendor have knowledge of any expropriation proceeding pending or threatened against or affecting the Assets nor of any discussions or negotiations which could lead to any such expropriation; (i) No Joint Venture Interests Etc. - None of the Assets, including the Properties, are subject to any options or rights of first refusal of any Person; (j) Material Contracts - The Vendor is not party to or bound by any Material Contract, whether oral or written with respect to the Assets, except for the contracts and agreements listed in Schedule C and the leases, licenses and staked claims referred to in Schedule A, all of which are all valid and subsisting, in full force and effect and unamended, and in respect of which, no material default exists on the part of the Vendor or, to the best of the knowledge of the Vendor, on the part of any of the other parties thereto. The Vendor is not aware of any intention on the part of any of the other parties to any Material Contract to terminate or materially alter any of them; (k) Employees - There are no employees of the Vendor or other individuals engaged on contract to provide employment or similar services or who are sales or other agents or representatives of the Vendor (in this subsection, "employees") in relation to the Assets and there are no wages, fees, severance or other similar obligations owing to past employees of the Vendor under Employment Laws; (l) Workers' Compensation - No employees are in receipt of benefits under workers' compensation legislation. There are no appeals pending involving the Vendor and all levies, assessments and penalties made against the Vendor pursuant to workers' compensation legislation have been paid. The Vendor is not aware of any audit currently being performed by any Governmental Authority, and all payments required to be made in respect of termination or severance pay under Employment Legislation in respect of former employees or employees have been made; (m) Union Contracts - The Vendor has not entered into any collective agreement with any labour union or employee association or made any commitments to or conducted any negotiations with any labour union or employee association with respect to any future collective agreement; (n) Litigation - There is no Action, suit, litigation, Legal Proceeding, arbitration proceeding, governmental proceeding, investigation or claim, including appeals and applications for review, in progress, or to the best of the knowledge of the Vendor threatened or pending against, or relating to the Vendor or affecting the Assets which might materially and adversely affect the Assets, and there is no judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Vendor relating to the Assets, which could in any way affect the Vendor's ownership of the Assets; (o) Absence of Approvals Required - Other than the approval of the Minister pursuant to the Mining Act (Ontario) to be obtained by the Purchaser with the appropriate authorizations of the Vendor, no authorization, approval, order, license, permit, release, waiver or consent of any -10- Governmental Authority, any municipal, regional, or other authority, regulatory body, stock exchange or agency, including any governmental department, commission, bureau, board or administrative agency or court or any other Person and, other than the registration or filing by the Purchaser of any transfer/deed of land or other transfer document with respect to the Properties with the appropriate land registry office or mining recorder's office, no registration, declaration or filing by the Vendor with any such Governmental Authority, regulatory body, stock exchange, or agency, court or any other Person is required in order for the Vendor: (i) to consummate the transactions contemplated by this Agreement, (ii) to execute and deliver all of the documents and instruments to be delivered by the Vendor under this Agreement, (iii) to duly perform and observe the terms and provisions of this Agreement, and (iv) to render this Agreement legal, valid, binding and enforceable; (p) Permits and Licences - All Permits or consents issued by any Governmental Authority which are held by the Vendor in connection with the ownership, leasing or use of the Assets as the same are now owned, leased, used conducted or operated are listed in Schedule D, and the Vendor is not in breach of or in default under any of the terms or conditions thereof; (q) Trade-marks - The Vendor does not have and do not use any service marks, trade names, design marks or trade marks with respect to the operation of the Assets; and (r) Taxes - The Vendor will pay all of the Vendor's taxes if any are payable in connection with the transfer of the Assets. 3.2 SURVIVAL The representations and warranties of the Vendor hereunder shall survive the Closing and the payment of the Purchase Price and, notwithstanding the Closing and the payment of the Purchase Price, and notwithstanding the waiver of any condition by the Purchaser, the representations, warranties, covenants and agreements of the Vendor shall (except where otherwise specifically provided in this Agreement) survive the Closing and shall continue in full force and effect for a period of three years from the Closing Date for all matters except: (a) the representations, warranties, covenants and agreements of the Vendor with respect to the title to the Assets shall survive the Closing and continue in full force and effect for five years; and (b) a claim for breach of any of the representations and warranties made by the Vendor in or pursuant to this Agreement involving fraud or fraudulent misrepresentation on the part of the Vendor shall survive the Closing and continue in full force and effect for five years, subject only to applicable limitation periods imposed by law. 3.3 RELIANCE The Vendor acknowledges and agrees that the Purchaser has entered into this Agreement relying on the warranties and representations and other terms and conditions of this Agreement notwithstanding any independent searches or investigations that have been or may be undertaken by or on behalf of the Purchaser and that no information which is now known or should be known or which -11- may hereafter become known to the Purchaser or its officers, directors or professional advisers shall limit or extinguish the right to indemnification hereunder. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 4.1 REPRESENTATIONS AND WARRANTIES To induce the Vendor to enter into and complete the transactions contemplated by this Agreement, the Purchaser hereby represents and warrants, as representations and warranties that are true and correct as at the date of this Agreement and that will be true and correct on the Closing Date as if such representations and warranties were made on each of the date of this Agreement and the Closing Date (except insofar as such representations and warranties are stated to be given as of a particular date or for a particular period and relate solely to such date or period), as follows : (a) Organization and Good Standing - The Purchaser is a company duly continued and validly existing and in good standing under the laws of the Province of British Columbia; (b) Authority Relative to this Agreement - The Purchaser has all necessary corporate power, authority and capacity to acquire the Assets and to perform its obligations hereunder. The execution and delivery of this Agreement has been duly authorized by all necessary corporate action on the part of the Purchaser and this Agreement has been duly executed and delivered by the Purchaser and constitutes a valid and binding obligation of the Purchaser in accordance with its terms except as may be limited by laws of general application affecting the rights of creditors; (c) Purchase will not cause Default - neither the execution nor the delivery of this Agreement, or the other agreements and instruments contemplated hereby, nor the completion of the transactions contemplated hereby will constitute or result in a material breach of or a material default under any terms, provisions or conditions of, or conflict with, violate or cause any, or give to any Person or Governmental Authority any right of, after the giving of a notice or lapse of time or otherwise, acceleration, termination or cancellation in or with respect to any of the following: (i) any constating documents, charter documents or by-laws of the Purchaser or any resolution of directors or shareholders of the Purchaser; (ii) any indenture, mortgage, deed of trust, agreement, contract, lease, franchise, certificate, consent, Permit, license, authority, registration or other instrument or commitment to which the Purchaser is a party or is subject, or by which it is bound, or from which it derives benefit; or (iii) to the best of the knowledge of the Purchaser any law, judgment, decree, order, injunction, rule, statute or regulation of any court, arbitrator or Governmental Authority by which any of the Purchaser's assets are bound or to which any of the Purchaser's assets are subject; (d) No Approvals - Other than the approval of the TSX-V and the Minister, no authorization, approval, order, licence, permit or consent of any governmental authority of Canada, any province of Canada, any municipal, regional or other authority, regulatory body or agency, including any governmental department, commission, bureau, board or -12- administrative agency or court, and no registration, declaration or filing by the Purchaser with any such governmental authority, regulatory body or agency, or court is required in order for the Purchaser: (i) to consummate the transactions contemplated by this Agreement, (ii) to execute and deliver all of the documents and instruments to be delivered by the Purchaser under this Agreement, (iii) to duly perform and observe the terms and provisions of this Agreement, (iv) to render this Agreement legal, valid, binding and enforceable; (e) Capitalization - The authorized capital stock of the Purchaser consists of an unlimited number of common shares and an unlimited number of preference shares of which 16,888,753 common shares and no preference shares are issued and outstanding on the date hereof. All such issued and outstanding shares are validly issued, fully paid and non-assessable and free of pre-emptive rights. Except as publicly disclosed by the Purchaser, there are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments which obligate the Purchaser or any of its subsidiaries to issue, transfer or sell any shares of the capital of the Purchaser. The issuance and delivery by the Purchaser of the Shares in connection with the transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action on the part of the Purchaser; (f) Issuance of Shares and Preferred Shares - The Shares and Preferred Shares to be issued to the Vendor in connection with the transactions contemplated by this Agreement will, when issued in accordance with the terms of this Agreement, be validly issued, fully paid and non-assessable and will be freely tradeable subject to (a) a four month hold period under applicable securities laws and (b) control block restrictions (if applicable). Such issuance of Shares and Preferred Shares will be effected in such a way that it is in compliance with all applicable securities laws; and (g) Taxes - The Purchaser will pay all land transfer taxes, federal and provincial sales taxes and goods and services tax and all other taxes, duties, registration charges or other like charges properly payable by a buyer upon and in connection with the conveyance and transfer of the Assets by the Vendor to the Purchaser. 4.2 SURVIVAL The representations and warranties of the Purchaser hereunder shall survive the Closing and the payment of the Purchase Price and, notwithstanding the Closing and the payment of the Purchase Price, and notwithstanding the waiver of any condition by the Vendor the representations, warranties, covenants and agreements of the Purchaser shall (except where otherwise specifically provided in this Agreement) survive the Closing and shall continue in full force and effect for a period of three years from the Closing Date for all matters except: (a) the representations, warranties, covenants and agreements of the Purchaser with respect to the Shares and Preferred Shares, including those in Section 4.1(e) and (f), shall survive the Closing and continue in full force and effect for five years; and (b) a claim for breach of any of the representations and warranties made by the Purchaser in or pursuant to this Agreement involving fraud or fraudulent misrepresentation on the part of the Purchaser shall survive the Closing and continue in full force and effect for five years, subject only to applicable limitation periods imposed by law. -13- 4.3 RELIANCE The Purchaser acknowledges and agrees that the Vendor has entered into this Agreement relying on the warranties and representations and other terms and conditions of this Agreement notwithstanding any independent searches or investigations that have been or may be undertaken by or on behalf of the Vendor and that no information which is now known or should be known or which may hereafter become known to the Vendor or its officers, directors or professional advisers shall limit or extinguish the right to indemnification hereunder. ARTICLE 5 COVENANTS OF THE VENDOR 5.1 PRIOR TO CLOSING DATE The Vendor covenants and agrees with the Purchaser that from and after the date of execution of this Agreement to the Closing Date: (a) As soon as the Vendor has determined that a state of facts exist which results in or will result in: (i) a representation or warranty contained in subsection 3.1 being untrue or incorrect in any material respect; or (ii) the non-fulfilment of any of the conditions precedent set forth in subsection 8.1, the Vendor will notify the Purchaser of such state of facts. (b) Except with the prior written consent of the Purchaser the Vendor shall not do or fail to do anything that would result in any of the representations and warranties set forth in subsection 3.1 not being true and correct in all material respects at the time of Closing. (c) The Vendor will obtain any release, waiver, consent or approval that the Purchaser, acting reasonably, may advise is required in order that none of the execution and delivery of this Agreement, the completion of the transactions contemplated hereby, or the observance and performance of the obligations of the Vendor herein will: (i) constitute or result in a material breach of or a material default under, or an event which, with the giving of notice or lapse of time or otherwise, would constitute or result in a material breach of or material default under, or (ii) give to any other Person, after the giving of notice or otherwise, any right of termination, cancellation or acceleration in or with respect to, any indenture, mortgage, deed of trust, agreement, contract, lease, franchise, certificate, consent, Permit, licence or other instrument or commitment to which the Vendor is a party or is subject, or by which it is bound, or from which it derives benefit, or which is required or desirable for the conduct in the usual and ordinary course of the operation of the business of the Vendor. (d) The Vendor will take or cause to be taken all proper steps, actions and corporate proceedings on its part (including the approval of the sale by its directors) to enable the Vendor to vest a good and marketable title in the Purchaser to the Assets free and clear of all Liens, except the Permitted Encumbrances. -14- (e) The Vendor will not sell, consume, or dispose of or transfer possession of any of the Assets. (f) The Vendor will make all necessary, governmental and other filings for which it is responsible under this Agreement in a timely fashion and shall supply the Purchaser with whatever consent or authorization Purchaser reasonably requires to complete its filings. 5.2 CONFIDENTIALITY The Vendor, and any and all of its agents, employees, representatives, relatives and other persons who acted on behalf of the Vendor and were or are involved in any negotiations relating to this Agreement, or had, have, will or may have any knowledge about any part in such negotiations, will not, without the prior written consent of the Purchaser, reveal or disclose any of the terms of this Agreement, any portion of this Agreement or any of the transactions contemplated hereby, and will keep strictly confidential the terms of this Agreement, all information, communications, documents and material of any kind and in any form whatsoever, whether written, oral, technical, copied or relating to this Agreement and any of the transactions contemplated hereby; notwithstanding the generality of the foregoing, the Vendor shall be permitted to disclose the terms of this Agreement to any Governmental Authority which lawfully requires the Vendor to do so, and the Vendor shall be permitted to disclose any information which is within the public domain. The Vendor acknowledges that a breach of any of the covenants contained in this paragraph will result in damage to the Purchaser, that such damage will be difficult to determine and that the Purchaser could not be adequately compensated for such damage by monetary award. Accordingly, in the event of a breach of any of the covenants contained in this paragraph, in addition to any and all other remedies available to the Purchaser in law or in equity, the Vendor hereby consents to the covenants, and each of them, contained in this paragraph being enforced by temporary or permanent injunction, restraining order or declaration, or all of such relief, and to such enforcement being without the necessity of a bond; the Vendor acknowledges and agrees that the scope of this paragraph is reasonable and commensurate with the protection of the legitimate interests of the Purchaser. ARTICLE 6 COVENANTS OF PURCHASER 6.1 PURCHASER'S COVENANTS The Purchaser covenants and agrees with the Vendor that from and after the date of execution of this Agreement to the Closing Date: (a) As soon as the Purchaser has determined that a state of facts exist which results in or will result in: (i) a representation or warranty contained in subsection 4.1 being untrue or incorrect in any material respect; or (ii) the non-fulfilment of any of the conditions precedent set forth in subsection 7.1, the Purchaser will notify the Vendor of such state of facts. (b) The Purchaser, and any and all of its agents, employees, representatives, relatives and other persons who acted on behalf of the Purchaser and were or are involved in any negotiations relating to this Agreement, or had, have, will or may have any knowledge about any part in such negotiations, will not, without the prior written consent of the Vendor reveal or disclose any of the terms of this Agreement, any portion of this Agreement or any of the transactions contemplated hereby, and will keep strictly confidential the terms of this Agreement, all information, communications, documents and material of any kind and in any form whatsoever, whether written, oral, technical, copied or relating to this -15- Agreement and any of the transactions contemplated hereby; notwithstanding the generality of the foregoing, the Purchaser shall be permitted to disclose the terms of this Agreement to any Governmental Authority which lawfully requires the Purchaser to do so, and the Purchaser shall be permitted to disclose any information which is within the public domain. The Purchaser acknowledges that a breach of any of the covenants contained in this paragraph will result in damage to the Vendor, that such damage will be difficult to determine and that the Vendor could not be adequately compensated for such damage by monetary award. Accordingly, in the event of a breach of any of the covenants contained in this paragraph, in addition to any and all other remedies available to the Vendor in law or in equity, the Purchaser hereby consents to the covenants, and each of them, contained in this paragraph being enforced by temporary or permanent injunction, restraining order or declaration, or all of such relief, and to such enforcement being without the necessity of a bond; the Purchaser acknowledges and agrees that the scope of this paragraph is reasonable and commensurate with the protection of the legitimate interests of the Vendor. (c) Except with the prior written consent of the Vendor, the Purchaser will not do or fail to do anything that would result in any of the representations and warranties set forth in subsection 4.1 not being true and correct in all material respects at the time of Closing. (d) The Purchaser will take or cause to be taken all proper steps, actions and corporate proceedings on its part (including approval of such vesting by the directors of the Purchaser) to enable the Purchaser to vest a good and marketable title in the shares which comprise a portion of the Purchase Price to the Vendor subject to the restrictions mentioned in this Agreement. (e) The Purchaser will make all necessary governmental filings for which it is responsible under this Agreement in a timely fashion and shall supply the Vendor with whatever consent or authorization the Vendor requires to complete Vendor's filings. ARTICLE 7 CONDITIONS OF THE PURCHASER 7.1 PURCHASER'S CONDITIONS The obligations of the Purchaser to complete the purchase of the Assets shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent: (a) Truth and Accuracy of Representations of the Vendor at Closing - The representations and warranties of the Vendor contained in this Agreement are true and correct and the covenants and agreements of the Vendor to be performed on or before the Closing Date pursuant to the terms of this Agreement have been duly performed; (b) Absence of Injunction - No Law or Governmental Order by any Governmental Authority, nor any Order of any court under any Applicable Law nor any Legal Proceeding or Action, shall have been entered, issued or commenced which is in effect or is outstanding and has the effect, or seeks an Order having the effect, of making the sale of the Assets to the Purchaser illegal, or otherwise prohibiting consummation thereof or of any of the other transactions contemplated in this Agreement; (c) Consents Obtained - The Purchaser where applicable, shall have obtained all consents of Government Authorities, the TSX-V and of all Persons, as are required, including shareholder -16- approval to the creation of the Preferred Shares, to permit the completion of the transactions contemplated in this Agreement; (d) Absence of Change of Conditions - No event shall have occurred or condition or situation shall have arisen or legislation (whether by statute, rule, regulation, by-law or otherwise) shall have been introduced which might reasonably be expected to have a materially adverse effect upon the Assets; (e) Approval of the Board of Directors - The approval of the Board of Directors of the Purchaser to complete the purchase of the Assets on the terms and conditions of this Agreement shall have been obtained; (f) Closing Documentation - The Purchaser shall have received from the Vendor the closing documentation listed in Article 9.2 of this Agreement; (g) Absence of Damages - No damage, destruction or loss to any Assets, whether owned, leased or licensed, that is not adequately covered by the Purchaser's insurance, and no damage, destruction or loss to any Assets where the cost of repairing or replacing all such Assets exceeds $50,000 in total, shall have occurred other than as caused by the Purchaser and those for whom it is at law responsible; and (h) Registrations and Consents- Purchaser shall have confirmed that it has made all public record filings and registrations for the transfer of the Properties that are contemplated by this Agreement. The Purchaser will act with due haste in making all such registrations. The Vendor and the Purchaser will cooperate in order that the registrations and filings contemplated in Sections 7.1(h) and 8.1(e) are filed and/or registered, as the case may be, consecutively in the following order: (a) transfer of the Properties; (b) notice of Royalty Agreement; (c) Mortgage; and (d) the Section 118 Restriction. 7.2 WAIVER/SURVIVAL The conditions set forth in this Article are for the exclusive benefit of the Purchaser and may be waived by the Purchaser in writing in whole or in part on or before the Closing Date. Notwithstanding any such waiver, the completion of the purchase and sale contemplated by this Agreement by the Purchaser shall not prejudice or affect in any way the rights of the Purchaser in respect of the warranties and representations of the Vendor in this Agreement. ARTICLE 8 CONDITIONS OF THE VENDOR 8.1 VENDOR'S CONDITIONS The obligations of the Vendor to complete the sale of the Assets shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent: (a) Truth and Accuracy of Representations of the Purchaser at Closing - The representations and warranties of the Purchaser contained in this Agreement are true and correct and the covenants and agreements of the Purchaser to be performed on or before the Closing Date pursuant to the terms of this Agreement have been duly performed; -17- (b) Absence of Injunctions - No injunction or restraining order of any court or administrative tribunal of competent jurisdiction shall be in effect prohibiting the transactions contemplated by this Agreement and no action or proceeding shall have been instituted or be pending before any court or administrative tribunal to restrain or prohibit the transactions between the Parties contemplated by this Agreement; (c) Closing Documentation - The Vendor shall have received from the Purchaser the closing documentation listed in section 9.3 of this Agreement; (d) Consents Obtained - except for Ministerial approvals under the Mining Act (Ontario), the Vendor shall have obtained all consents of Governmental Authorities, and of all other Persons, as are required to permit completion of the transactions contemplated in this Agreement; and (e) Registrations and Consents - Vendor will have confirmed to the Purchaser that all public record filings and registrations contemplated by this Agreement in its favour have been made, including the Mortgage, notice of the Royalty Agreement, and entries on the register for the Properties of the Section 118 Restriction to the effect that no transfer shall be made or charge created unless (i) notice of an application for transfer or for the creation of a charge has been transmitted by registered mail to the Vendor at its address for notice under this Agreement, and (ii) the consent of the Vendor has been given to the transfer or the creation of the charge. The Vendor will act with due haste to complete all such registrations for which it is responsible. The Vendor and the Purchaser will cooperate in order that the registrations and filings contemplated in Sections 7.1(h) and 8.1(e) are filed and/or registered, as the case may be, consecutively in the following order: (a) transfer of the Properties; (b) notice of Royalty Agreement; (c) Mortgage; and (d) the Section 118 Restriction. 8.2 WAIVER/SURVIVAL The conditions set forth in this Article are for the exclusive benefit of the Vendor and may be waived by the Vendor in writing in whole or in part on or before the Closing Date. Notwithstanding any such waiver, completion of the purchase and sale contemplated by this Agreement by the Vendor shall not prejudice or affect in any way the rights of the Vendor in respect of the warranties and representations of the Purchaser set forth in this Agreement. ARTICLE 9 CLOSING AND TERMINATION 9.1 CLOSING DATE AND LOCATION The transactions contemplated by this Agreement shall be completed at the Closing Time on the Closing Date at the offices of Cassels Brock & Blackwell LLP in Toronto, Ontario, or at such other time or at such other location as may be mutually agreed upon in writing by the Parties. 9.2 VENDOR'S CLOSING DOCUMENTS On the Closing Date, the Vendor shall deliver, or cause to be delivered, to the Purchaser's Solicitors: -18- (a) All deeds of conveyance, bills of sale, transfer and assignments, duly executed, in form and content satisfactory to the Purchaser's Solicitors, appropriate to effectively vest good and marketable title to the Assets in the Purchaser to the extent contemplated by this Agreement, and immediately registerable in all places where registration of such instruments is necessary or desirable; (b) Possession of the Assets; (c) A duly executed statutory declaration of the President of the Vendor, dated the Closing Date, to the effect that the representations and warranties of the Vendor contained in this Agreement are true and correct and that the covenants and agreements of the Vendor to be performed on or before the Closing Date pursuant to the terms of this Agreement have been duly performed; (d) A certified copy of a resolution of the directors of the Vendor duly passed, with a certification that it has not been rescinded and continues to be in effect, authorizing the execution, delivery and implementation of this Agreement and of all transactions contemplated hereby and of all documents to be delivered by the Vendor pursuant hereto; (e) A certificate of an officer of the Vendor, dated as of the Closing Date, in form and substance reasonably satisfactory to the Purchaser, as to: (i) the validity of the constating or other constituent documents of the Vendor; and (ii) the incumbency and validity of the signatures of the officers of the Vendor who executed this Agreement or any other Transaction Documents; (f) Legal Opinions - an opinion of the Vendor's Solicitors in form and substance satisfactory to the Purchaser's Solicitors as to the validity of the incorporation of the Vendor and the due authorization, execution and delivery of this document by the Vendor; (g) The Escrow Agreement duly executed by the Vendor; and (h) Such other documents as the Purchaser may reasonably require to perfect the purchase and sale intended hereby. 9.3 PURCHASER'S CLOSING DOCUMENTS On the Closing Date, the Purchaser shall deliver to the Vendor's Solicitors: (a) the certificates representing the Shares and the Preferred Shares; (b) a certified copy of a resolution of the directors of the Purchaser authorizing the purchase of the Assets on the terms and conditions set forth in this Agreement and the issuance of the Shares and the Preferred Shares in accordance with the terms of this Agreement; (c) a certified copy of a resolution of the directors of the Purchaser approving the creation of the Preferred Shares: (d) a copy of the letter of the TSX-V approving the purchase of the Assets; (e) an opinion of the Purchaser's Solicitors in form and substance satisfactory to the Vendor's Solicitors as to (i) the validity of the incorporation of the Purchaser and the due authorization, execution and delivery of this document by the Purchaser, and (ii) the validity of the creation and issuance of the Shares and the Preferred Shares; (f) a certificate of an officer of the Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to the Vendor, as to: -19- (i) the validity of the constating or other constituent documents of the Purchaser; and (ii) the incumbency and validity of the signatures of the officers of the Purchaser who executed this Agreement or any other Transaction Documents; (g) a first ranking mortgage substantially in the form set out in Schedule H (the "Mortgage") of the Properties in registrable form securing all obligations of the Purchaser to the Vendor arising as a result of an Event of Default defined in Section 13.1 below; (h) the Escrow Agreement duly executed by the Purchaser; (i) the instruments of transfer referred to in Section 13.3 in respect of the Properties; and (j) such other documents as the Vendor may reasonably require to perfect the purchase and sale intended hereby. 9.4 CONVEYANCE OF ASSETS On completion of the Closing, except as provided for in section 9.5, this Agreement shall, without further act or formality, operate as a transfer to the Purchaser of all Assets to be sold and purchased hereunder. The Vendor shall nevertheless, at the Closing and from time to time after the Closing, execute and deliver to the Purchaser all such conveyances, transfers, assignments and other instruments in writing and further assurances as the Purchaser or the Purchaser's Solicitors shall reasonably require from the Vendor, and the Purchaser shall execute and deliver to the Vendor all such agreements of assumptions and other instruments in writing and further assurances as the Vendor or the Vendor's Solicitors shall reasonably require, in order to give effect to the provisions of this Agreement. 9.5 TRUST REGARDING ASSETS NOT CONVEYED Should any of the Assets intended to be transferred hereunder not be transferred to the Purchaser at the completion of the Closing on the Closing Date, the Vendor shall hold all such assets as bare trustee in trust for the Purchaser from the commencement of business on the Closing Date until such Assets are effectively transferred. 9.6 TERMINATION RIGHTS This Agreement may be terminated: (a) By written agreement of the Parties; and (b) By the Purchaser or the Vendor by notice in writing given to the other Party: i. If the Closing has not occurred on or before April 1, 2005, in which case this Agreement may be terminated on any Business Day after April 1, 2005, unless conditions 7.1(h) and 8.1(e) or any other condition of Closing cannot be satisfied before or on April 1, 2005 because one or more of the Parties have constructive or actual notice of a Lien which purports to affect any of the Properties, other than a Permitted Encumbrance under this Agreement, and which is not acceptable to either Purchaser or Vendor; or ii. If conditions 7.1(h) and 8.1(e) or any other condition of Closing cannot be satisfied before or on April 1, 2005 because one or more of the Parties have constructive or actual notice of a Lien which purports to affect any of the Properties, other than a Permitted Encumbrance under this Agreement, and which is not acceptable to either Purchaser or -20- Vendor, and the Closing Date has therefore been extended as reasonably required to deal with such Lien in a manner which is reasonably acceptable to both Vendor and Purchaser, in which case this Agreement may be terminated on the first Business Day after such extended Closing Date if the Closing has not occurred on or before such Closing Date. 9.7 EFFECT OF TERMINATION. Each Party's right of termination under this Article is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. Nothing in this Article limits or affects any other rights or causes of action any Party may have with respect to the representations, warranties, covenants and indemnities in its favour contained in this Agreement. ARTICLE 10 INDEMNITIES 10.1 GENERAL INDEMNIFICATION OF PURCHASER Subject to the limitations set out herein, the Vendor covenants and agrees with the Purchaser to indemnify the Purchaser against all liabilities, claims, demands, actions, causes of action, damages, losses, costs and expenses (including legal fees on a solicitor and own client basis) suffered or incurred by the Purchaser, directly or indirectly, by reason of or arising out of: (a) any warranties or representations on the part of the Vendor hereunder being untrue; or (b) a breach of any agreement, term or covenant on the part of the Vendor made or to be observed or performed under this Agreement; which liabilities, claims, demands, actions, causes of action, damages, losses, costs and expenses are collectively referred to as the "Purchaser's Losses". 10.2 VENDOR'S LIMITATIONS The indemnity obligations of the Vendor under section 10.1 shall be limited in the following respects: (a) the Vendor shall only be liable for the Purchaser's Losses in respect of which a claim for indemnity is made by the Purchaser on or before the applicable expiry dates for the survival of such representations and warranties as set out in section 3.2; and (b) no obligation on the part of the Vendor to indemnify the Purchaser for the Purchaser's Losses shall arise until the aggregate amount of all Purchaser's Losses in respect of which a claim for indemnity has been made by the Purchaser exceeds CAD$25,000, and such obligation shall only apply to the aggregate amount of such Purchaser's Losses in excess of CAD$25,000. 10.3 GENERAL INDEMNIFICATION OF VENDOR Subject to the limitations set out in herein, the Purchaser covenants and agrees with the Vendor to indemnify the Vendor against all liabilities, claims, demands, actions, causes of action, damages, losses, costs and expenses (including legal fees on a solicitor and own client basis) suffered or incurred by the Vendor, directly or indirectly, by reason of or arising out of: (a) any warranties or representations on the part of the Purchaser hereunder being untrue; or -21- (b) a breach of any agreement, term or covenant on the part of the Purchaser made or to be observed or performed under this Agreement; which liabilities, claims, demands, actions, causes of action, damages, losses, costs and expenses are collectively referred to as the "Vendor's Losses". 10.4 SPECIFIC INDEMNIFICATION OF PURCHASER IN RELATION TO EARLY ENTRY AND DRILLING Whereas Vendor hereby agrees that Purchaser may enter onto any of the Properties and drill for its purposes of testing only at any time before until the Closing Date, the Purchaser covenants and agrees with the Vendor as follows: (a) The Purchaser shall add the Vendor as an additional named insured on any insurance policies of the Purchaser relating to the Properties for the period ending on the Closing Date and shall deliver a certificate of insurance evidencing same forthwith; and (b) The Purchaser shall indemnify the Vendor against all liabilities, claims, demands, actions, causes of action, damages, losses, costs and expenses (including legal fees on a solicitor and own client basis) suffered or incurred by the Vendor, directly or indirectly, by reason of or arising out of, any occurrence in, on or under the Properties, during the period commencing on February 1, 2005 and ending on the Closing Date: (i) that is caused by the Purchaser or its employees, agents or contractors or those for whom it is responsible at law or (ii) that arises from the activity or directly from the presence of the Purchaser or of its employees, agents or contractors or those for whom it is responsible at law, in, on or under the Properties; except any such occurrence that arises directly from the negligence of the Vendor. 10.5 PURCHASER'S LIMITATIONS The indemnity obligations of the Purchaser under section 10.3 shall be limited in the following respects: (a) the Purchaser shall only be liable for the Vendor's Losses in respect of which a claim for indemnity is made by the Vendor on or before the applicable expiry dates for the survival of such representations and warranties as set out in section 4.2; and (b) no obligation on the part of the Purchaser to indemnify the Vendor for the Vendor's Losses shall arise until the aggregate amount of all Vendor's Losses in respect of which a claim for indemnity has been made by the Vendor exceeds CAD$25,000, and such obligation shall only apply to the aggregate amount of such Vendor's Losses in excess of CAD$25,000. 10.6 CLAIMS UNDER VENDOR'S INDEMNITY If any claim is made by any Person against the Purchaser in respect of which the Purchaser may incur or suffer damages, losses, costs or expenses that might reasonably be considered to be subject to the indemnity obligation of the Vendor in section 10.1, the Purchaser will notify the Vendor as soon as reasonably practicable of the nature of such claim and the Vendor shall be entitled (but not required) to assume the defence of any suit brought to enforce such claim. The defence of any such claim (whether assumed by the Vendor or not) shall be through legal counsel, and shall be conducted in a manner, acceptable to the Purchaser and the Vendor acting reasonably, and no settlement may be made by the Vendor or the Purchaser without the prior written consent of the others. If the Vendor assumes the defence of any claim then: (a) the Purchaser and the Purchaser's counsel shall co-operate with the Vendor and its counsel in the course of the defence, such co-operation to include providing or making available to -22- the Vendor, and its counsel documents and information and witnesses for attendance at examinations for discovery and trials; (b) the reasonable legal fees and disbursements and other costs of such defence shall, from and after such assumption, be borne by the Vendor; and (c) if the Purchaser retains additional counsel to act on its behalf, the Vendor and its counsel shall co-operate with the Purchaser and its counsel, such co-operation to include providing or making available to the Purchaser and its counsel documents and information and witnesses for attendance at examinations for discovery and trials; provided that all fees and disbursements of such additional counsel shall be paid by the Purchaser. If the Vendor and the Purchaser are or become parties to the same action, and the representation of all parties by the same counsel would be inappropriate due to a conflict of interest, then the Purchaser and the Vendor shall be represented by separate counsel and, subject to the indemnity obligations of the Vendor as set out herein, the costs associated with the action shall be borne by the parties incurring such costs. 10.7 CLAIMS UNDER PURCHASER'S INDEMNITY If any claim is made by any Person against the Vendor in respect of which the Vendor may incur or suffer damages, losses, costs or expenses that might reasonably be considered to be subject to the indemnity obligation of the Purchaser as provided in section 10.3 and 10.4, the Vendor will notify the Purchaser as soon as reasonably practicable of the nature of such claim and the Purchaser shall be entitled (but not required) to assume the defence of any suit brought to enforce such claim. The defence of any such claim (whether assumed by the Purchaser or not) shall be through legal counsel and shall be conducted in a manner acceptable to the Vendor and the Purchaser, acting reasonably, and no settlement may be made by the Purchaser, or the Vendor without the prior written consent of the others. If the Purchaser assumes the defence of any claim, then: (a) the Vendor and its counsel shall co-operate with the Purchaser and its counsel in the course of the defence, such co-operation to include providing or making available to the Purchaser and its counsel documents and information and witnesses for attendance at examinations for discovery and trials; (b) the reasonable legal fees and disbursements and other costs of such defence shall be borne by the Purchaser; and (c) if the Vendor retains additional counsel to act on its behalf, the Purchaser and its counsel shall co-operate with the Vendor and its counsel, such co-operation to include providing or making available to the Vendor and its counsel documents and information and witnesses for attendance at examinations for discovery and trials, provided that all fees and disbursements of such additional counsel shall be paid by the Vendor. If the Purchaser and the Vendor are or become parties to the same action, and the representation of all parties by the same counsel would be inappropriate due to a conflict of interest, then the Vendor and the Purchaser shall be represented by separate counsel and, subject to the indemnity obligations of the Purchaser as set out herein, the costs associated with the action shall be borne by the parties incurring such costs. 10.8 CERTIFICATES Notwithstanding anything contained herein, the Purchaser shall be entitled to fully pursue all rights or remedies available to it in law or in equity if a certificate of the Vendor is untrue, and nothing contained in this Agreement shall limit or restrict the claims or remedies of the Purchaser against the persons declaring such certificates, it being acknowledged by the Parties that the Purchaser shall be relying on the truth of the Vendor's certificates in completing the transaction contemplated by this Agreement. Notwithstanding -23- anything contained herein, the Vendor shall be entitled to fully pursue all rights or remedies available to it in law or in equity if a certificate of the Purchaser is untrue, and nothing contained in this Agreement shall limit or restrict the claims or remedies of the Vendor against the persons declaring such certificates, it being acknowledged by the Parties that the Vendor shall be relying on the truth of the Purchaser's certificates in completing the transaction contemplated by this Agreement. ARTICLE 11 POST CLOSING MATTERS 11.1 PROPERTY MAINTENANCE The Purchaser agrees to perform all work requirements including but not limited to all repairs, renewals, replacements, additions and improvements and pay and file when due (and maintain all documentary evidence of such performance, payments and filings) all rents, fees, Taxes, local improvement charges, rates, assurances, deposits, security, levies, royalties, registration and filing fees and utilities charges or rates and all other payments to and assessments of any Governmental Authority or any other Person, that are to be performed, paid or filed with respect to the Assets for a period of five years from the Closing Date or until the day which is six months following the date the Assets are returned to the Vendor in accordance with Article 11.2 or 13.2 herein, whichever date is the earlier. 11.2 RETURN OF ASSETS Provided the Dividends payable pursuant to the terms of the Preferred Shares have been paid to date, the Purchaser may, at any time within five years of issuance of the Preferred Shares, redeem the Preferred Shares by returning the Assets and all engineering and technical data to the Vendor or its assigns upon not less than 90 days notice to the Vendor (and as otherwise described in Section 29.4 of Schedule "E"), as a going concern, in which case the Vendor shall return the Preferred Shares to the Purchaser and the Purchaser shall have no further liability to the Vendor under this Agreement or in respect of the Preferred Shares or the Royalty Agreement. Vendor shall indemnify Purchaser for any claims against Purchaser, related, in any way, to the return of Assets as contemplated by Section 29.4 of Schedule "E". 11.3 CONDITION OF ASSETS Prior to returning the Assets under Section 11.2 or Section 13.2, the Purchaser will remove all Liens that were not on the Assets as at Closing except for any Liens that: (i) were not created by and did not result from any act of commission or omission by the Purchaser, its agents, employees, contractors or those for whom it is at law responsible and were not consented to by the Purchaser; or (ii) resulted directly from any act or omission of the Vendor. 11.4 REGISTRATION The Purchaser and the Vendor agree that the Royalty constitutes an interest in land and claims and the Vendor may register notice of the Royalty Agreement and of its interest in the Preferred Shares against the Properties in the appropriate land registry office and the mining office. 11.5 RENEGOTIATION OF TERMS OF REGISTRATION The Vendor agrees to negotiate with the Purchaser in good faith at any time should the registration or its interest in the Preferred Shares, notice of the Royalty Agreement or the Mortgage on title have the effect of impairing the Purchaser's ability to conduct business including but not limited to arranging joint venture agreements or debt financings. -24- 11.6 DISCHARGE OF SECURITY Immediately upon redemption under Section 29.3 of Schedule E or retraction under Section 29.5 of Schedule E, Vendor and/or its assignees, as applicable, will: (a) discharge all of their security on the Assets and any other registrations which limit the Purchaser's ability to mortgage, transfer or otherwise deal with the Properties, save for the Mortgage and the Royalty Agreement (except that the Parties agree that after such discharge, the definition of Event of Default in Section 13.1 hereof and in the Mortgage and all related documentation shall no longer include Subsection 13.1(b) hereof and such definition will be deemed to be amended by deleting such Subsection); (b) without limiting the generality of the foregoing, the Vendor will delete, or assist the Purchaser as may be necessary to effect the deletion of, the Section 118 Restriction; and (c) forthwith deliver, or execute and deliver a joint direction with the Purchaser that directs the Escrow Agent under the Escrow Agreement to deliver, as applicable, all transfers held in escrow under section 13.3 to the Purchaser. ARTICLE 12 AREA OF INTEREST 12.1 AREA OF INTEREST The Parties agree that an area of interest (the "Area of Interest") shall include all mineral property and surface interests within an area of one mile from any point on the outer perimeter of the Properties. In the event that the Vendor, or any "associate " or "affiliate" (as those terms are defined in the Securities Act (Ontario)) of it acquires, an interest in the Area of Interest within five years of the date of issuance of the Preferred Shares, such interest shall be deemed to form a part of the Properties and shall be transferred to the Purchaser at no cost to the Purchaser. In the event that the Purchaser acquires an interest in the Area of Interest within five years of the date of issuance of the Preferred Shares, such interest shall be deemed to form a part of the Properties and the Purchaser shall pay the Royalty in respect of those additional property interests and the Mortgage shall, without further action of either Party, be amended to include the additional interests and the Vendor may register the Mortgage against such additional properties. ARTICLE 13 EVENTS OF DEFAULT 13.1 EVENTS OF DEFAULT If any of the following occurs and is continuing it shall constitute an event of default (an "Event of Default"): (a) The Purchaser fails to pay any amount owing, including the Dividends on the Preferred Shares, to the Vendor hereunder or under the Royalty Agreement when that amount becomes due and payable and the Purchaser has not rectified such default within 60 days of receipt of written notice of such default from the Vendor; (b) The Purchaser fails to perform, observe or comply with any of the covenants contained in Section 11.1 and the Purchaser has not rectified such default within 60 days of receipt of written notice of such default from the Vendor; (c) Except for a judgement or order arising from an event that occurred prior to the Closing, or as a result of actions or inactions of the Vendor, any judgment or order for the payment -25- of money in excess of CAD$1,000,000 (the equivalent amount in any other currency) is rendered against the Purchaser and either (i) enforcement proceedings have been commenced by a creditor upon the judgment or order, or (ii) there is any period of fifteen consecutive days during which a stay of enforcement of the judgment or order, by reason of a pending appeal or otherwise, is not in effect; or (d) The Purchaser (i) becomes insolvent or generally not able to pay its debts as they become due, (ii) admits in writing its inability to pay its debts generally or makes a general assignment for the benefit of creditors, (iii) institutes or has instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y) liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors including any plan of compromise or arrangement or other corporate proceeding involving or affecting its creditors, or (z) the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its properties and assets, and in the case of any such proceeding instituted against it (but not instituted by it), either the proceeding remains undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its properties and assets) occurs, or (iv) takes any corporate action to authorize any of the above actions. 13.2 REMEDIES UPON DEFAULT Upon the occurrence of an Event of Default, the Vendor may either: (a) register the transfer documentation with respect to the Assets referred to in Section 13.3 below in order to effect the transfer of such Assets and all engineering and technical data back to the Vendor, require the Purchaser immediately to return possession of such Assets with all improvements and equipment on the Properties to the Vendor and the Purchaser shall execute all such other documents and do all such other things as are reasonable necessary to effect the transfer of the Assets and all engineering and technical data to the Vendor as contemplated in this paragraph, all in exchange for the Preferred Shares, in which case no Party shall have any further liability to any other Party hereunder or in respect of the Preferred Shares or the Royalty Agreement; or (b) pursue such other remedies as it, in its sole discretion, wishes to pursue. 13.3 ESCROW ARRANGEMENT The Purchaser will place executed documents in registerable form, transferring the Properties back to the Vendor or its nominees in escrow subject to the terms and conditions of the Escrow Agreement in the form attached hereto as Schedule G. 13.4 COVENANT NOT TO TRANSFER PROPERTIES The Purchaser shall not transfer, charge or grant any financial interest or enter into an agreement to transfer, charge or grant any financial interest in any or all of the Properties without the prior written consent of the Vendor, and the Purchaser agrees to negotiate with the Vendor in good faith at any time should the registration or the Vendor interest in the Preferred Shares, notice of the Royalty Agreement or the Mortgage on title have the effect of impairing the Purchaser's ability to conduct business including but not limited to arranging joint venture agreements or debt financings. -26- 13.5 APPLICATION FOR SECTION 118 RESTRICTION The Purchasers shall apply to the appropriate land registrar to make an entry on the register for the Properties under Section 118 of the Land Titles Act (the "Section 118 Restriction") to the effect that no transfer shall be made or charge created unless (i) notice of an application for transfer or for the creation of a charge has been transmitted by registered mail to the Vendor at its address for notice under this Agreement, and (ii) the consent of the Vendor has been given to the transfer or the creation of the charge. 13.6 SURVIVAL Article 13 and any other provisions hereof that, by their terms, shall survive the Closing and the payment of the Purchase Price shall, notwithstanding the Closing and the payment of the Purchase Price, and notwithstanding the waiver of any condition by the Purchaser, (except where otherwise specifically provided in this Agreement) survive the Closing and shall continue in full force and effect. ARTICLE 14 ARBITRATION 14.1 SETTLING DISPUTES Subject to Section 14.4, if any dispute, claim, question or difference arises with respect to this Agreement or its performance, enforcement, breach, termination or validity (a "Dispute"); the Parties will use their reasonable efforts to settle the Dispute. 14.2 ARBITRATION Subject to Section 14.4, except as is expressly provided in this Agreement, if the Parties do not reach a solution pursuant to Section 14.1 within a period of 30 Business Days following the first notice of the Dispute by any Party to the other, then upon written notice by any Party to the other, the Dispute shall be finally settled by arbitration in accordance with the provisions of the Arbitration Act, 1991 (Ontario), based upon the following: (a) The arbitration tribunal shall consist of one arbitrator appointed by mutual agreement of the Parties, or in the event of failure to agree within 10 Business Days following delivery of the written notice to arbitrate, any Party may apply to a judge of the Ontario Superior Court of Justice to appoint an arbitrator. The arbitrator shall be qualified by education and training to rule upon the particular matter to be decided. (b) The arbitrator shall be instructed that time is of the essence in the arbitration proceeding and, in any event, the arbitration award must be made within 60 days of the submission of the Dispute to arbitration. (c) After written notice is given to refer any Dispute to arbitration, the Parties will meet within 15 Business Days of delivery of the notice and will negotiate in good faith any changes in these arbitration provisions or the rules of arbitration which are herein adopted, in an effort to expedite the process and otherwise ensure that the process is appropriate given the nature of the Dispute and the values at risk. (d) The Parties agree that s.52(1) of the Arbitrations Act (Ontario) does not apply to any Dispute submitted to arbitration. (e) The arbitration shall take place in Toronto, Ontario. (f) The arbitration award shall be given in writing and shall be final and binding on the Parties, not subject to any appeal, and shall deal with the question of costs of arbitration and all related matters, subject to the next sentence. A Party to a Dispute may, at any time, make an offer to the other Party to the Dispute to settle all or any part of the Dispute. Any -27- offer to settle shall be deemed to be an offer of compromise made in confidence and without prejudice. The fact that an offer to settle has been made shall not be communicated to the arbitrator until the arbitrator has made a final determination of all aspects of the Dispute other than costs. If an offer to settle is not accepted and the arbitration award is no more favourable to the Party to which the offer was made, the Party making the offer shall be entitled to all of its costs in connection with the arbitration in respect of the period from the date the offer to settle was made to the making of the arbitration award. The costs of arbitration include the arbitrators' fees and expenses, the provision of a reporter and transcripts, reasonable legal fees and reasonable costs of preparation. (g) Judgment upon any award may be entered in any Court having jurisdiction or application may be made to the Court for a judicial recognition of the award or an order of enforcement, as the case may be. (h) All Disputes referred to arbitration (including the scope of the agreement to arbitrate, any statute of limitations, set-off claims, conflict of laws rules, tort claims and interest claims) shall be governed by the substantive law of Ontario. (i) The Parties agree that the arbitration shall be kept confidential and that the existence of the proceeding and any element of it (including any pleadings, briefs or other documents submitted or exchanged, any testimony or other oral submissions and any awards) shall not be disclosed beyond the arbitrator, the Parties, their counsel and any person necessary to the conduct of the proceeding, except as may lawfully be required in judicial proceedings relating to the arbitration or otherwise or as may be required by Law. 14.3 AVAILABILITY OF OFFICERS, EMPLOYEES, ETC. Each Party to a Dispute agrees to use all reasonable efforts to make available to the other Party to the Dispute, upon reasonable request, those current and former officers, employees, agents and representatives of the Party or any of its affiliates (as such term is defined in the Business Corporations Act (Ontario)) whose assistance, testimony or presence is necessary or desirable to assist the other Party in preparing for and participating in the arbitration of the Dispute, but only for such purpose. The Party making the request shall be responsible for paying all costs, including the salary and out-of-pocket expenses, of the other Party and its affiliates associated with making such individuals available. 14.4 ARBITRATION DOES NOT APPLY. Section 14.1 and Section 14.2 do not apply to third party claims which will be resolved in the manner set forth in Section 10.6 and Section 10.7. Nothing in this Article 14 shall limit or prevent a Party from seeking to enforce the performance of this Agreement by injunction or specific performance upon application to a court of competent jurisdiction without proof of actual damage (and without the requirement of posting a bond or other security). ARTICLE 15 GENERAL 15.1 TENDER. Any tender of documents or money hereunder may be made upon the Vendor or the Purchaser or their respective solicitors on the day set for Closing. -28- 15.2 EXPENSES (a) All costs and expenses incurred in connection with the preparation of this Agreement and the transactions contemplated by this Agreement shall be paid by the Party incurring such expenses. (b) All costs pertaining to the escrow arrangement referred to in Section 13.3 hereof shall be paid by the Vendor. 15.3 TIME Time shall be of the essence hereof. 15.4 ASSIGNMENT This Agreement or any interest herein is personal to the Purchaser and cannot be assigned, transferred or conveyed by the Purchaser without the prior written consent of the Vendor. This Agreement or any interest herein, including without limitation the Preferred Shares, is assignable by the Vendor to any Person provided that: (a) The Vendor provides written notice of such assignment to the Purchaser; and (b) No such assignment shall relieve the Vendor of any of its obligations hereunder. 15.5 NOTICES Any notice or other writing required or permitted to be given hereunder or for the purposes hereof shall be sufficiently given if delivered or telecopied to the party to whom it is given or, if mailed, by prepaid registered mail addressed to such party at: If to the Purchaser at: Halo Resources Ltd. Suite # 1305, 1090 West Georgia Street Vancouver, B.C. VIE 3V7 Attention: Nick DeMare Fax No.: 604-683-1585 with a copy to Purchaser's Solicitors at: Cassels Brock & Blackwell LLP 2100 Scotia Plaza 40 King Street West Toronto, Ontario, M5H 3C2 Attention: Jason Bullen Fax No.: 416-360-8877 If to the Vendor at: The Sheridan Platinum Group Ltd. 14 Park Lane Circle Toronto, Ontario M5B 1Z7 Attention: Pat Sheridan Fax No.: 416-447-1381 -29- with a copy to the Vendor's Solicitors at: Stikeman Elliott LLP 5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Attention: Brian Pukier Fax No.: 416-947-0866 Or at such other address as the Party to whom such writing is to be given shall have last notified to the Party giving the same in the manner provided in this clause. Any notice mailed shall be deemed to have been given and received on the fifth Business Day next following the date of its mailing unless at the time of mailing or within five Business Days thereafter there occurs a postal interruption which could have the effect of delaying the mail in the ordinary and usual course, in which case any notice shall only be effectively given if actually delivered or sent by telecopy. Any notice delivered or telecopied to the Party to whom it is addressed shall be deemed to have been given and received on the Business Day next following the day it was delivered or telecopied. 15.6 ANNOUNCEMENTS The Purchaser and the Vendor agree that neither Party will issue a press release regarding the Properties or this Agreement without giving the other Party a reasonable opportunity to comment on the press release. 15.7 MODIFICATIONS, APPROVALS AND CONSENTS No amendment, modification, supplement, termination or waiver of any provision of this Agreement will be effective unless in writing signed by the appropriate Party and then only in the specific instance and for the specific purpose given. 15.8 GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of Ontario and the parties submit and attorn to the jurisdiction of the courts of Ontario. 15.9 SEVERABILITY If a court or other tribunal of competent jurisdiction determines that any one or more of the provisions contained in this Agreement is invalid, illegal or unenforceable in any respect in any jurisdiction, the validity, legality and enforceability of such provision or provisions shall not in any way be affected or impaired thereby in any other jurisdiction and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless in either case as a result of such determination this Agreement would fail in its essential purpose. 15.10 ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, oral or written, by and between any of the Parties with respect to the subject matter hereof. 15.11 FURTHER ASSURANCES The Parties shall with reasonable diligence, do all such things and provide all such reasonable assurances as may be required to consummate the transactions contemplated by this Agreement, and each Party shall provide such further -30- documents or instruments required by the other Party as may be reasonably necessary or desirable to give effect to the purpose of this Agreement and carry out its provisions whether before or after the Closing Date. 15.12 ENUREMENT This Agreement and each of the terms and provisions hereof shall enure to the benefit of and be binding upon the Parties and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. 15.13 COUNTERPARTS This Agreement may be executed in as many counterparts as may be necessary or by facsimile and each such counterpart agreement or facsimile so executed shall be deemed to be an original and such counterparts and facsimile copies together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties have duly executed this Agreement as of the day and year first above written. -31- THE SHERIDAN PLATINUM GROUP LTD. Per: _________________________________ Authorized Signatory HALO RESOURCES LTD. Per: _________________________________ Authorized Signatory SCHEDULES TO BE ATTACHED SCHEDULE A - PROPERTIES SCHEDULE B - LIENS SCHEDULE C - MATERIAL CONTRACTS SCHEDULE D - LICENCES, PERMITS AND AUTHORIZATIONS SCHEDULE E - TERMS OF PREFERRED SHARES SCHEDULE F - NET SMELTER RETURN ROYALTY AGREEMENT SCHEDULE G - ESCROW AGREEMENT SCHEDULE H - MORTGAGE SCHEDULE I - GST CERTIFICATE AND INDEMNITY SCHEDULE A PROPERTIES A. PATENTS PARCEL NUMBERS CLAIM NUMBERS APPROX AREA 3457 JES96toJES105 172 10524 K1332 7 10525 K1333 17 10526 K1334 16 10527 K1335 24 30433 K13464, K13467 25 16650 K1328 20 16651 K1329 16 3922 McA11 16 16121 S158 1 3456 S170, S172 14 2063 S173 3 1420 S185 136 LEASEHOLD PARCEL NUMBERS 2440 K2554 16 2927 K268722 & K268728-K268732 86 2926 K268723-K268727 & K268733 76 2449 K2555, K2689, K2690, K2691 64 2450 K2556, K3026, K1330 41 -2- B. LICENCES OF OCCUPATION LICENCES OF OCCUPATION 12126 K12113-K12120,K3014-K3015,K3028-K3029 133 12369 K13791-K13797&K13811 163 12548 K13802 2 2702 K2284, D493 16 2871 K2374 10 10381 K6127 16 10383 K6I28 16 10382 K6129 16 10385 K6130 16 10386 K6131, K3019 16 10387 K6132 18 10388 K6I33, K3018 15 C. STAKED CLAIMS STAKED CLAIMS K3007239,K3007240,K3007250 (EXPIRY NOV 6/05) K3007296-K300299 K3007303 K3007322-K3007326,K3007332 2256 K3007333-K3007334 224 TOTAL 93 Claims 3667 ha (approximately) SCHEDULE B LIENS None. SCHEDULE C MATERIAL CONTRACTS None. SCHEDULE D LICENCES, PERMITS AND AUTHORIZATIONS None. SCHEDULE E TERMS OF PREFERRED SHARES Rights and Restrictions Attaching to Preferred Shares, Series 1 29. Provisions Attaching to Preferred Shares, Series 1 Subject to the provisions of the BUSINESS CORPORATIONS ACT (British Columbia), there shall be attached to the Preferred Shares, Series 1 the following special rights, privileges, restrictions and conditions: Dividends 29.1 The holders of the Preferred Shares, Series 1 shall be entitled to receive and the Corporation shall pay thereon out of the monies of the Corporation properly applicable to the payment of dividends fixed cumulative cash dividends, at the following rates: for each of the two years commencing on November 1, 2004, an annual dividend of $0.00625 per share payable in quarterly instalments of $0.0015625 per share on February 1, May 1, August 1, and November 1 of each year, commencing on February 1, 2005 and ending on November 1, 2006; and for each of the three years commencing on November 1, 2006, an annual dividend of $0.04 per share payable in quarterly instalments of $0.01 per share on February 1, May 1, August 1, and November 1, of each year, commencing on February 1, 2007 and ending on November 1, 2009. 29.2 The Corporation may, in its sole discretion, upon written notice given to the holders of the Preferred Shares, Series 1 at least 40 days before a dividend is due, elect to pay such dividend in Common Shares of the Corporation. If the Corporation so elects, the number of Common Shares issuable will be determined by dividing the amount of the dividend due by the weighted average trading price of the Common Shares of the Corporation on the TSX Venture Exchange or such other stock exchange or quotation system on which the Common Shares of the Corporation trade, for the 15 trading days immediately prior to the date the dividend is due. Redemption 29.3 The Corporation may at any time prior to November 1, 2009, redeem the Preferred Shares, Series 1 in whole or in part without the consent of the holders thereof on payment to the holders thereof of the amount of $1.05 per share plus an amount equal to all accrued and unpaid dividends thereon which for such purpose shall be calculated as if such dividends were accruing up to the date of redemption (collectively the " Redemption Amount"). The Corporation, in its sole discretion may elect to pay the Redemption Amount in cash or Common Shares of the Corporation. If the Corporation elects to the pay the Redemption Amount in Common Shares, the number of Common Shares issuable will be determined by dividing the Redemption Amount by the weighted average trading price of the Common Shares of the Corporation on the TSX Venture Exchange or such other stock exchange or quotation system on which the Common Shares of the Corporation trade, for the 15 trading days immediately prior to the date specified for redemption in the Redemption Notice (defined below). The Corporation shall provide the holders with not less than 15 days written notice (the "Redemption Notice") sent to the holders' latest address on the Corporation's central securities register, of its intention to redeem the Preferred Shares, Series 1 pursuant to this section 29.3. The Redemption Notice shall specify the number of shares being redeemed and whether the Corporation has elected to pay the Redemption Amount in cash or Common Shares. On or after the date so specified in the notice for redemption, the Corporation shall pay or cause to be paid to the holders, the Redemption Amount on presentation and surrender, at the -2- Corporation's registered office or such other place specified in the Redemption Notice, of the certificate(s) for the Preferred Shares, Series 1 being redeemed. Notwithstanding the failure of the holders to present the aforesaid share certificate, the redemption shall be effective as of the date specified for redemption in the Redemption Notice, and the holders shall have no further rights as a shareholder of the Corporation from and after such effective date, other than the right to receive the Redemption Amount. 29.4 Provided all dividends payable on the Preferred Shares, Series 1 have been paid up to date, the Corporation may at any time prior to November 1, 2009, redeem the Preferred Shares, Series 1 without the consent of the holders thereof by transferring to the holders thereof, in proportion to the percentage of issued and outstanding Preferred Shares, Series 1, held by each holder, the Corporation's title to the Assets (defined below). The Corporation shall provide the holders with not less than 90 days written notice to each holders' latest address on the Corporation's central securities register, of its intention to redeem the Preferred Shares, Series 1 pursuant to this section 29.4. On or after the date so specified in the notice for redemption, the Corporation shall deliver all documentation, in registrable form, necessary to transfer title to the Assets to the holders, on presentation and surrender, at the Corporation's registered office or such other place specified in the notice of redemption, of all certificates for the Preferred Shares, Series 1. If the Preferred Shares, Series 1 are held by more than one holder, the title transfer documents will be made out in the names of all holders as tenants in common with each holder's undivided interest being equal to his/her percentage holdings of all outstanding Preferred Shares, Series 1. Notwithstanding the failure of any holder to present the aforesaid share certificate, the redemption shall be effective as of the date specified for redemption in the notice, and no holder shall have any further rights as a shareholder of the Corporation from and after such effective date, other than the right to receive his, her or its proportionate share of title to the Assets. For the purposes of this section 29.4, "Assets" shall have the meaning set forth in the Purchase Agreement dated February ________, 2005 among The Sheridan Platinum Group Ltd. and the Corporation. Retraction 29.5 If the Preferred Shares, Series 1 have not been redeemed by November 1, 2009, the Corporation will, effective November 1, 2009, retract the Preferred Shares, Series 1 by payment to the holders thereof of the Retraction Amount (defined below). The retraction amount (the "Retraction Amount") in respect of each Preferred Share, Series 1 shall be $1.00 per share plus an amount equal to all accrued and unpaid dividends thereon which for such purposes shall be calculated as if such dividends were accruing up to the date of retraction. The Corporation, in its sole discretion may elect to pay the Retraction Amount in cash or Common Shares of the Corporation. If the Corporation elects to the pay the Retraction Amount in Common Shares, the number of Common Shares issuable will be determined by dividing the Retraction Amount by the weighted average trading price of the Common Shares of the Corporation on the TSX Venture Exchange or such other stock exchange or quotation system on which the Common Shares of the Corporation trade, for the 15 trading days immediately prior to the date specified for retraction. On or after the date specified for retraction, the Corporation shall pay or cause to be paid to the holders, the Retraction Amount on presentation and surrender, at the Corporation's registered office or such other place specified by the Corporation, of the certificate(s) for the Preferred Shares, Series 1 being retracted. Notwithstanding the failure of the holders to present the aforesaid share certificate(s), the retraction shall be effective as of the retraction date specified herein, and the holders shall have no further rights as shareholders of the Corporation from and after such date, other than the right to receive the Retraction Amount. Return of Capital 29.6 In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or other distribution of its property or assets among its shareholders for the purpose of winding up its affairs, the holders of the Preferred Shares, Series 1 shall be entitled to receive, before any distribution of any part of the property or assets of the Corporation among the holders of any other shares, an amount equal to $1.00 per share together with an amount equal to all accrued and unpaid dividends thereon -3- which for such purpose shall be calculated as if such dividends were accruing up to the date of such distribution. Thereafter, the holders of the Preferred Shares, Series 1 will not participate further in the capital of the Corporation. Non-Voting 29.7 The holders of the Preferred Shares shall not as such be entitled to receive notice of or to attend and vote at any meetings of the shareholders of the Corporation unless a dividend payable on a due date specified in section 29.1 above remains unpaid for a period of 60 days past the date the dividend was due, in which case each Preferred Share, Series 1 shall have one vote per share at all meetings of shareholders until such dividend is paid. Transfer of Preferred Shares, Series 1 29.8 No Preferred Shares, Series 1 shall be transferred unless the transferee agrees in writing to be bound by the provisions of sections 4, 5, and 6 of the Escrow Agreement dated _____, 2005 among the Corporation, The Sheridan Platinum Group Ltd. and McLean & Kerr LLP, as amended from time to time, as if the transferee were the "Vendor" under such agreement. SCHEDULE F NET SMELTER RETURN ROYALTY AGREEMENT AMONG THE SHERIDAN PLATINUM GROUP LTD. AND HALO RESOURCES LTD. DATED [CLOSING DATE] ROYALTY AGREEMENT THIS AGREEMENT dated as of the ___ day of ______, 2005. AMONG: HALO RESOURCES LTD. (the "PURCHASER") AND: THE SHERIDAN PLATINUM GROUP LTD. (the "VENDOR") For good and valuable consideration, the receipt and sufficiency of which is acknowledged by each of the Parties, the Parties covenant and agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Agreement, unless otherwise provided: (v) "ACT" means the Securities Act (Ontario); (vi) "AFFILIATE" has the meaning given such term under the Act; (vii) "AGREEMENT" means this royalty agreement; (viii) "ALLOWABLE DEDUCTIONS" means, for any Product, (i) the cost of transportation of such Product to a smelter or other place of treatment, and (ii) smelter and treatment charges but does not include the costs of milling or concentration; (ix) "AREA OF INTEREST" means all mineral property and surface interests within an area of one mile from any point on the outer perimeter of the Properties; (x) "BUSINESS DAY" means a day on which banks are generally open for business in Toronto, Ontario; (xi) "DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION" shall be the date upon which Ore from the Property is being consistently milled on a continuous basis at 75% of the rate projected in the final feasibility study, if any, prepared by or for the Purchaser in respect of the Properties or 180 days after the date on which Ore from the Properties is first mined, whichever shall first occur, but in any event the Royalty shall be payable on all production; (xii) "GROSS PROCEEDS" means, for any Product, the aggregate proceeds received by the Purchaser for the Sale of such Product; -2- (xiii) "NET SMELTER RETURN" means the Gross Proceeds received by the Purchaser in any year from the sale of Product from the mining operation on the Property less Allowable Deductions; (xiv) "ORE" shall mean any material containing a mineral or minerals of commercial economic value mined from the Properties or any production sold from the Property of any nature whatsoever. (xv) "PARTY" or "Parties" means one or more of the parties to this Agreement; (xvi) "PERSON" has the meaning given such term under the Act; (xvii) "PRODUCT" means Ore mined from the Properties and any concentrates or other materials or products derived therefrom, provided, however, that if any such Ore, concentrates or other materials or products are further treated as part of the mining operation in respect of the Properties, such Ore, concentrates or other materials or products shall not be considered to be "Product" until after they have been so treated; (xviii) "PROPERTIES" means the mineral property interests in the Kenora Mining Division, Ontario as set out in Schedule A hereto and any other properties acquired within the Area of Interest; (xix) "PURCHASE AGREEMENT" means the purchase agreement among The Sheridan Platinum Group Ltd. and Halo Resources Ltd., dated as of ___, 2004. (xx) "ROYALTY" has the meaning ascribed thereto in Section 2.2; (xxi) "SALE" means a sale of a Product by or on behalf of the Purchaser or any Affiliate of the Purchaser to any other Person; 1.2 EXHIBITS Exhibit A, which is attached to this Agreement, is incorporated into and forms part of this Agreement: 1.3 GOVERNING LAW This Agreement will in all respects be governed by and be construed in accordance with the laws in force in the Province of Ontario and will be under the exclusive jurisdiction of the courts of such jurisdiction. 1.4 SEVERABILITY If any one or more of the provisions contained in this Agreement is held to be invalid, illegal or unenforceable in any respect under the laws of any jurisdiction, the validity, legality and enforceability of such provision will not in any way be affected or impaired thereby under the laws of any other jurisdiction and the validity, legality and enforceability of the remaining provisions contained herein will not in any way be affected or impaired thereby. 1.5 CALCULATION OF TIME If any time period set forth in this Agreement ends of a day which is not a Business Day, then notwithstanding any other provision of this Agreement, such period will be extended until the end of the next following day which is a Business Day. -3- 1.6 HEADINGS The headings to the articles and sections of this Agreement are inserted for convenience only and will not affect the construction hereof. 1.7 OTHER MATTERS OF INTERPRETATION In this Agreement: (xxii) the singular includes the plural and vice versa; (xxiii) the masculine includes the feminine and vice versa; (xxiv) references to "article", "section" and "subsection" are to articles, sections and subsections of this Agreement, respectively; (xxv) all provisions requiring a Party to do or refrain from doing something will be interpreted as the covenant of that Party with respect to that matter notwithstanding the absence of the words "covenants" or "agrees" or "promises"; and (xxvi) the words "hereto", "herein", "hereby", "hereunder", "hereof" and similar expressions when used in this Agreement refer to the whole of this Agreement and not to any particular article, part, section, exhibit or portion thereof. ARTICLE 2 ROYALTY 2.1 ROYALTY Subject to paragraph 2.2 hereof, the Purchaser will pay to the Vendor a royalty equal to 2.5% of Net Smelter Returns until 1,500,000 ounces of gold are produced from the Properties and then shall pay a royalty equal to 5% of Net Smelter Returns after 1,500,000 ounces of gold are produced from the Properties (the "ROYALTY"). 2.2 PURCHASER'S BUYBACK RIGHT The Purchaser shall have the option to purchase from the Vendor a Royalty of 1% by the payment of the sum of CDN$2,500,000 to the Vendor at any time until the Date of Commencement of Commercial Production, and thereafter such option shall no longer exist. ARTICLE 3 OPERATION OF THE PROPERTIES 3.1 REMOVAL OF ORE The Purchaser may remove reasonable quantities of Ore and rock from the Properties for the purpose of bulk sampling and of testing, and there shall be no Royalty payable to the Vendor with respect thereto unless revenues are derived therefor. 3.2 COMMINGLING The Purchaser shall have the right to commingle with Ores from the Property, ore produced from other properties provided that prior to such commingling, the Purchaser shall adopt and employ reasonable practices and procedures for weighing, determination of moisture content, sampling and assaying, as well as utilize reasonable accurate recovery factors in order to determine the amount of -4- products derived from, or attributable to Ore mined and produced from the Properties. The Purchaser shall maintain accurate records of the results of such sampling, weighing and analysis as pertaining to Ore mined and produced from the Properties. ARTICLE 4 ASSIGNMENT 4.1 ASSIGNMENT BY THE VENDOR The Vendor may transfer, sell, assign or otherwise dispose of all or any part of the Royalty on the Property, without the consent of the Purchaser. 4.2 ASSIGNMENT BY PURCHASER The Purchaser may not transfer, sell, assign or otherwise dispose of all or any portion of its interest in the Properties until the fifth anniversary of the date of issue of the Preferred Shares without the prior written consent of the Vendor and after such time, may transfer, sell, assign or otherwise dispose of all or any portion of its interest in the Properties provided that such disposition will not be effective as against the Vendor until the purchaser has delivered to the Vendor a written and enforceable agreement agreeing to be bound, to the extent of the interest disposed of, by all of the terms and conditions of this Agreement. ARTICLE 5 PAYMENTS 5.1 PAYMENTS The obligation to pay the Royalty on any Product will accrue upon any Sale, provided that where a Sale is made on a provisional basis, the amount of the Royalty payable will be initially based upon the value of Product credited by such provisional settlement, with later adjustment to account for the value of Product established by final settlement. 5.2 TIMING OF PAYMENTS Each Royalty payment shall be calculated by the Purchaser at the end of each quarter and will be due and payable quarterly on the last day of the month next following the end of the calendar quarter in which the same accrued. 5.3 STATEMENTS On or before the last day of each quarter of each year after the Date of Commencement of Commercial Production, the Purchaser shall deliver to the Vendor a statement showing in reasonable detail for the quarter due: (i) the quantities and grades of Product outturned to the Purchaser's account and for all other Products for which there has been a Sale in the quarter; (ii) the Gross Proceeds received during such quarter; (iii) the Allowable Deductions for such quarter; and (iv) other pertinent information in sufficient detail to explain the calculation of the Royalty payment due. -5- 5.4 CURRENCY All payments to be made under this Agreement will be made in Canadian dollars. 5.5 PAYMENT MECHANISM Each payment hereunder will be made by wire transfer in immediately available funds, to such account at a banking institution as the Vendor may designate pursuant to instructions provided by the Vendor to the Purchaser not less than three (3) Business Days prior to the date upon which such payment is to be made. Payment by the Purchaser in accordance with this paragraph 5.5 will constitute payment duly received by the Vendor. If the banking institution nominated by the Vendor does not accept a payment prior to its due date from the Purchaser, then the Purchaser will be entitled to make payment to the Vendor by delivery within ten (10) Business Days of such due date of a bank draft to the Vendor at the address specified under or in accordance with the paragraph 7.3 below. 5.6 BOOKS AND RECORDS The Purchaser agrees to maintain for each mining operation on the Properties up to date and complete records relating to the production and sale of Product including accounts, records, statements and returns relating to treatment and smelting arrangements of the Product, and the Vendor or its agents shall have the right at all times, including for a period of twelve (12) months following the expiration or termination of this Agreement, to inspect such records, statements, and returns and make copies thereof at its own expense for the purpose of verifying the amount of Royalty payments to be made by the Purchaser to the Vendor pursuant hereto. The Vendor shall have the right to have such account audited by independent auditors once a year. If such audit determines that there has been a deficiency in the payment made to the Vendor, such deficiency will be resolved by adjusting the next quarterly Royalty payment due hereunder. If production has ceased, settlement will be made between the Parties by cash payment. The Vendor will pay all costs of such audit unless a deficiency of five percent or more of the amount due to the Vendor is determined to exist, in which event the Purchaser will pay such costs. 5.7 AUDITED STATEMENT The Purchaser shall have an audited statement prepared by its auditors for each year with respect to the Royalty payable to the Vendor hereunder, by the 30th day of July in the following year, and the Purchaser shall forthwith deliver a copy of such statement to the Vendor. ARTICLE 6 ARBITRATION 6.1 SETTLING DISPUTES Subject to Section 6.4, if any dispute, claim, question or difference arises with respect to this Agreement or its performance, enforcement, breach, termination or validity (a "Dispute"), the Parties will use their reasonable efforts to settle the Dispute. 6.2 ARBITRATION Subject to Section 6.4, except as is expressly provided in this Agreement, if the Parties do not reach a solution pursuant to Section 6.1 within a period of 30 Business Days following the first notice of the Dispute by any Party to the other, then upon written notice by any Party to the other, the Dispute shall be finally settled by arbitration in accordance with the provisions of the Arbitration Act, 1991 (Ontario), based upon the following: (a) The arbitration tribunal shall consist of one arbitrator appointed by mutual agreement of the Parties, or in the event of failure to agree within 10 Business Days following delivery of the written notice to arbitrate, any Party may apply to a -6- judge of the Ontario Superior Court of Justice to appoint an arbitrator. The arbitrator shall be qualified by education and training to rule upon the particular matter to be decided. (b) The arbitrator shall be instructed that time is of the essence in the arbitration proceeding and, in any event, the arbitration award must be made within 60 days of the submission of the Dispute to arbitration. (c) After written notice is given to refer any Dispute to arbitration, the Parties will meet within 15 Business Days of delivery of the notice and will negotiate in good faith any changes in these arbitration provisions or the rules of arbitration which are herein adopted, in an effort to expedite the process and otherwise ensure that the process is appropriate given the nature of the Dispute and the values at risk. (d) The Parties agree that s.52(1) of the Arbitrations Act (Ontario) does not apply to any Dispute submitted to arbitration. (e) The arbitration shall take place in Toronto, Ontario. (f) The arbitration award shall be given in writing and shall be final and binding on the Parties, not subject to any appeal, and shall deal with the question of costs of arbitration and all related matters, subject to the next sentence. A Party to a Dispute may, at any time, make an offer to the other Party to the Dispute to settle all or any part of the Dispute. Any offer to settle shall be deemed to be an offer of compromise made in confidence and without prejudice. The fact that an offer to settle has been made shall not be communicated to the arbitrator until the arbitrator has made a final determination of all aspects of the Dispute other than costs. If an offer to settle is not accepted and the arbitration award is no more favourable to the Party to which the offer was made, the Party making the offer shall be entitled to all of its costs in connection with the arbitration in respect of the period from the date the offer to settle was made to the making of the arbitration award. The costs of arbitration include the arbitrators' fees and expenses, the provision of a reporter and transcripts, reasonable legal fees and reasonable costs of preparation. (g) Judgment upon any award may be entered in any Court having jurisdiction or application may be made to the Court for a judicial recognition of the award or an order of enforcement, as the case may be. (h) All Disputes referred to arbitration (including the scope of the agreement to arbitrate, any statute of limitations, set-off claims, conflict of laws rules, tort claims and interest claims) shall be governed by the substantive law of Ontario. (i) The Parties agree that the arbitration shall be kept confidential and that the existence of the proceeding and any element of it (including any pleadings, briefs or other documents submitted or exchanged, any testimony or other oral submissions and any awards) shall not be disclosed beyond the arbitrator, the Parties, their counsel and any person necessary to the conduct of the proceeding, except as may lawfully be required in judicial proceedings relating to the arbitration or otherwise or as may be required by Law. 6.3 AVAILABILITY OF OFFICERS, EMPLOYEES, ETC. Each Party to a Dispute agrees to use all reasonable efforts to make available to the other Party to the Dispute, upon reasonable request, those current and former officers, employees, agents and representatives of the Party or any of its affiliates (as such term is defined in the Business Corporations Act (Ontario)) whose assistance, testimony or presence is necessary or desirable to -7- assist the other Party in preparing for and participating in the arbitration of the Dispute, but only for such purpose. The Party making the request shall be responsible for paying all costs, including the salary and out-of-pocket expenses, of the other Party and its affiliates associated with making such individuals available. 6.4 ARBITRATION DOES NOT APPLY. Nothing in this Article 6 shall limit or prevent a Party from seeking to enforce the performance of this Agreement by injunction or specific performance upon application to a court of competent jurisdiction without proof of actual damage (and without the requirement of posting a bond or other security). ARTICLE 7 MISCELLANEOUS 7.1 FIRST CHARGE The Purchaser and the Vendor agree that the Royalty constitutes an interest in land and claims, and the Vendor may register notice of the Royalty Agreement on title to the Properties in the appropriate land registry office and appropriated mining office as a first charge on the Property. The Vendor agrees to negotiate with the Purchaser in good faith at any time should the registration of the Royalty on title have the effect of impairing the Purchaser's ability to conduct business including but not limited to arranging joint venture agreements or debt financings. 7.2 NO PARTNERSHIP This Agreement is not intended to, and will not be deemed to, create any partnership relation between the Parties including, without limitation, a mining partnership or commercial partnership. The obligations and liabilities of the Parties will be several and not joint and neither Party will have or purport to have any authority to act for or to assume any obligations or responsibility on behalf of the other Party except as expressly contemplated herein. Nothing herein contained will be deemed to constitute a Party the partner, agent or legal representative of the other Party or to create any fiduciary relationship between the Parties. 7.3 NOTICE Any notice, election, proposal, consent objection or other document required or permitted to be given hereunder ("Notices") will be in writing addressed to the Parties as follows: Purchaser: HALO RESOURCES LTD. Suite #1305, 1090 West Georgia Street, Vancouver, BC V1E 3V7 Attention: Nick DeMare Fax No.: 604-683-1585 with a copy to Purchaser's Solicitors at: CASSELS BROCK & BLACKWELL LLP 2100 Scotia Plaza 40 King Street West Toronto, Ontario, M5H 3C2 Attention: Jason Bullen Fax No.: 416-360-8877 -8- Vendor: THE SHERIDAN PLATINUM GROUP LTD. 14 Park Lane Circle Toronto, ON M5B 1Z7 Attention: Patrick Sheridan Fax No.: 416-447-1381 with a copy to the Vendor's Solicitors at: STIKEMAN ELLIOTT LLP 5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Attention: Brian Pukier Fax No.: 416-947-0866 All Notices will be given by personal delivery, facsimile transmission or prepaid registered mail, return receipt requested. All Notices will be effective and will be deemed delivered as follows: (i) if by personal delivery, on the date of delivery if delivered during normal business hours, and, if not delivered during normal business hours, on the next Business Day following delivery; (ii) if by electronic communication, on the next Business Day following receipt of the electronic communication; and (iii) if by mail, on the next Business Day after actual receipt. A Party may at any time change its address for future Notices hereunder by Notice in accordance with this section. 7.4 FURTHER ASSURANCES Each Party will, at the request of another Party and at the requesting Party's expense, execute all such documents and take all such actions as may be reasonably required to effect the purposes and intent of this Agreement. 7.5 ENTIRE AGREEMENT Subject to the terms of the Purchase Agreement, this Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof, all previous agreements and promises in respect thereto being hereby expressly rescinded and replaced hereby. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, express, implied or statutory, between the Parties other than those expressly set forth in this Agreement and the Purchase Agreement. 7.6 NO WAIVERS No waiver of or with respect to any term or condition of this Agreement will be effective unless it is in writing and signed by the waiving Party, and then such waiver will be effective only in the specific instance and for the purpose of which given. No course of dealing among the Parties, nor any failure to exercise, nor any delay in exercising, any right, power, or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise of any specific waiver of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. -9- 7.7 TIME OF THE ESSENCE Time is of the essence in the performance of any and all of the obligations of the Parties, including, without limitation, the payment of monies. 7.8 COUNTERPARTS This Agreement may be executed in multiple counterparts, each of which will constitute an original, but all of which together will constitute one and the same instrument. 7.9 PARTIES IN INTEREST This Agreement will enure to the benefit of and be binding on the Parties and their respective successors and permitted assigns. IN WITNESS WHEREOF the parties have duly executed this Agreement as of the day and year first above written. THE SHERIDAN PLATINUM GROUP LTD. Per: _________________________________ Authorized Signatory HALO RESOURCES LTD. Per: _________________________________ Authorized Signatory SCHEDULE G ESCROW AGREEMENT THIS ESCROW AGREEMENT is made as of _____, 2005, by and among HALO RESOURCES LTD. (the"PURCHASER") with an address at Suite 1305 - 1090 West Georgia Street, Vancouver, British Columbia V6E 3V7, THE SHERIDAN PLATINUM GROUP LTD. (the "VENDOR") with an address at 14 Park Lane Circle, Toronto, Ontario M5B 1Z7 and McLEAN & KERR LLP (the "ESCROW AGENT") with an address at 130 Adelaide Street West, Toronto, Ontario M5H 3P5. WHEREAS: A. The Vendor and the Purchaser have entered into an Asset Purchase Agreement dated February ___, 2005 (the "ASSET PURCHASE AGREEMENT") whereby the Vendor has agreed to sell to the Purchaser and the Purchaser has agreed to purchase from the Vendor certain assets as described in the Asset Purchase Agreement (the "ASSETS"); B. Under the Asset Purchase Agreement, the purchase price for the Assets is to be satisfied in part by the issuance of the Preferred Shares (as such term is defined in the Asset Purchase Agreement) in the capital of the Purchaser to the Vendor; C. Pursuant to section 11.2 of the Asset Purchase Agreement the Vendor and the Purchaser agreed, subject to the provisions of the Asset Purchase Agreement, that the Purchaser may, at any time until November 1, 2009, redeem the Preferred Shares by returning the Assets to the Vendor. D. Pursuant to section 13.2 of the Asset Purchase Agreement upon the occurrence of an Event of Default (as such term is defined in the Asset Purchase Agreement) the Vendor has the right to, among other things, have the Purchaser transfer the Assets to the Vendor in exchange for the transfer by the Vendor of the Preferred Shares to the Purchaser; E. Pursuant to the rights and restrictions attached to the Preferred Shares (attached as Schedule "E" to the Asset Purchase Agreement) the Purchaser may redeem the Preferred Shares and may elect to pay the redemption amount in common shares of the Purchaser; F. Pursuant to the rights and restrictions attached to the Preferred Shares, if the Preferred Shares have not been redeemed prior to November 1, 2009, the Purchaser will retract the Preferred Shares on November 1, 2009 and may elect to pay the retraction amount in common shares of the Purchaser; G. The Vendor and the Purchaser have agreed that on the closing of the transaction contemplated in the Asset Purchase Agreement the Purchaser shall deliver into trust to the Escrow Agent duly executed good and sufficient transfers of the Properties (as such term is defined in the Asset Purchase Agreement) comprising in part the Assets and all other documents (the "ESCROW DOCUMENTATION") which in the opinion of counsel for the Vendor are necessary or desirable to permit the registration or recording of such transfers into the name of the Vendor free and clear of all liens, charges and encumbrances of every nature and kind whatsoever, which documentation shall be held in accordance with this agreement; H. The Vendor and the Purchaser have also agreed that if any common shares of the Purchaser are issued to the Vendor pursuant to the rights of retraction or redemption attached to the Preferred Shares, the Purchaser shall, in certain circumstances, deliver into trust to the Escrow Agent the certificates representing such common shares (the "COMMON ESCROW SHARES") which shares shall be held in escrow in accordance with this agreement; and I. The parties desire to enter into this agreement to establish the obligations and rights of the parties with respect to the Escrow Documentation and the Common Escrow Shares. -2- NOW THEREFORE in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. The Purchaser has delivered the Escrow Documentation to the Escrow Agent. 2. The Escrow Agent hereby acknowledges receipt of the Escrow Documentation and agrees that the Escrow Documentation and, when deposited hereunder, the Common Escrow Shares, shall be held by the Escrow Agent in escrow to be dealt with pursuant to the provisions of this agreement. 3. The Escrow Agent agrees to hold the Escrow Documentation in escrow until receipt by the Escrow Agent of an irrevocable joint direction signed by each of the Purchaser and the Vendor to release the Escrow Documentation to the party named in such direction. The Purchaser and the Vendor agree that if, as a result of the issuance of the Common Escrow Shares, the Vendor becomes an "Insider" or "Control Person" of the Purchaser (as such terms are defined in section 1.2 of Policy 1.1 of the TSX Venture Exchange Company Manual) and the Purchaser's common shares are listed on the TSX-V at such time, the Purchaser shall deliver the certificates respecting the Common Escrow Shares, to the Escrow Agent, forthwith upon the issuance of such shares. 4. The Escrow Agent agrees to hold the certificates representing any Common Escrow Shares it receives in escrow to be dealt with pursuant to the provisions of this agreement. The Escrow Agent will hold such certificates in escrow until Patrick Sheridan (or if the Preferred Shares have been transferred, a transferee of such shares) has filed a TSX-V Form 2A - Personal Information Form with the TSX Venture Exchange, and the Escrow Agent has received a copy of the written approval of the TSX Venture Exchange ("TSX Approval") to the release of the Common Escrow Shares to the Vendor. Upon receipt of TSX Approval, the Escrow Agent will release such certificates to the Vendor or as directed by it. 5. The Vendor shall not transfer the Preferred Shares unless the transferee agrees in writing with the Purchaser and the Escrow Agent to be bound by sections 4, 5, and 6 of this agreement as if they were the "Vendor" hereunder. 6. The Vendor shall be liable to pay the Escrow Agent its reasonable fees, disbursements and other charges in connection with the performance of its duties hereunder. 7. The terms and conditions set out in Schedule A annexed hereto form part of this agreement. 8. All notices and other communications which may be or are required to be given under this agreement shall be in writing, shall be delivered personally or sent by registered mail addressed to the parties at their respective addresses set forth on the first page hereof or at such other place as such party may from time to time designate by written notice to the other given in accordance with this section, and shall conclusively be deemed received for all purposes hereof, in the case of those personally delivered, on the day of such delivery and, in the case of those given by registered mail on the fourth business day following that upon which the notice or other communication was so mailed. 9. This agreement enures to the benefit of and is binding upon the parties hereto and their successors and assigns. This agreement may not be amended nor shall any waiver of any provisions hereof be effective, except only by an instrument in writing and signed by all the parties. 10. This agreement may be executed in any number of counterparts, each of which shall be determined to be an original and all of which taken together shall be deemed to constitute one and the same instrument. Counterparts may be executed either in original or facsimile form and the parties adopt any signatures received by facsimile as original signatures of the parties; provided however, that any party providing its signature in such manner shall promptly forward to the others an original of the signed copy of this agreement which was so provided by facsimile. -3- IN WITNESS WHEREOF the parties have executed this agreement as of the date first above written. HALO RESOURCES LTD. Per: _______________________________________ Name: Title: A.S.O. THE SHERIDAN PLATINUM GROUP LTD. Per: _______________________________________ Name: Title: A.S.O. MCLEAN & KERR LLP Per: _______________________________________ Name: Title: SCHEDULE A STANDARD TERMS AND CONDITIONS FOR ESCROW AGREEMENT Acceptance by MCLEAN & KERR LLP (the "ESCROW AGENT") of its duties under the agreement to which this is attached (the "AGREEMENT") is subject to the following terms and conditions, which the parties to the Agreement hereby agree shall govern and control the rights, duties and privileges of the Escrow Agent and shall be deemed incorporated by reference into the Agreement as if set forth in full therein: 1. Capitalized terms not specifically defined in this Schedule shall have the meanings given to such terms in the Agreement. 2. The duties of the Escrow Agent are to be determined solely by the express provisions of the Agreement; accordingly, the Escrow Agent shall only be responsible for the performance of those duties and obligations as are specifically set forth in the Agreement. 3. The Escrow Agent shall be fully protected in acting on or relying upon any written notice, direction, request, waiver, consent, receipt or other paper or document which the Escrow Agent in good faith believes to have been signed or presented by the proper party or parties as contemplated by the Agreement. 4. The Escrow Agent shall be entitled to rely on any judgment, demand or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any facts stated therein, the validity thereof or the jurisdiction of a Court or duly appointed arbitrator issuing any judgment. The Escrow Agent may act in reliance upon any instrument, direction or signature believed by it in good faith to be genuine and duly authorized and upon advice of counsel in reference to any matters connected herewith. 5. The Escrow Agent shall not be liable for any error of judgment, or for any act done or step taken or omitted by it in good faith or for any mistake in fact or law, or for anything which it may do or refrain from doing in good faith in connection herewith, except its own wilful misconduct or negligence. 6. In the event of any dispute or question as to the construction by the Escrow Agent of its duties, neither party shall hold the Escrow Agent liable with respect to any action taken or omitted by it in good faith. 7. In the event of any dispute between the parties, the Escrow Agent may (at its option) transmit the escrow property to a court of competent jurisdiction and upon doing so the Escrow Agent shall be relieved of all further obligations under the Agreement. 8. Save and except as the parties may have expressly otherwise agreed to in the Agreement, the parties, jointly and severally, agree to indemnify and hold harmless the Escrow Agent from any and all loss, cost, claim, liability and expense (including legal fees paid to outside attorneys or amounts representing the fair value of legal services rendered to itself) which may be incurred by reason of it acting as Escrow Agent, provided that it acted in accordance with the terms of the Agreement. -2- 9. The Escrow Agent shall not be bound or in any way affected by any notice of any modification or cancellation of the Agreement or of any fact or circumstance affecting or alleged to affect rights or liabilities hereunder or otherwise other than as is hereinafter set forth, unless notice of the same is delivered to the Escrow Agent in writing signed by the parties to the Agreement. 10. The parties each acknowledge that the Escrow Agent is acting only in the capacity of escrow agent and not as counsel to any of the parties and that each party has retained independent legal representation in connection with the Agreement and the related transactions. 11. The Escrow Agent and any successor escrow agent, as the case may be, may resign its duties and be discharged from all further duties or obligations hereunder at any time upon giving 30 days written notice to the parties to the Agreement. The parties shall thereupon jointly designate a successor escrow agent hereunder within said 30 day period to whom the escrow property shall be delivered. In default of such designation of a successor escrow agent, the Escrow Agent shall retain the escrow property in escrow as custodian thereof until otherwise jointly directed by the parties to the Agreement, without further liability or responsibility. SCHEDULE H MORTGAGE DEMAND DEBENTURE HALO RESOURCES LTD. (THE "OBLIGOR") SECTION 1 ACKNOWLEDGEMENT AND PROMISE TO PAY. For value received, the Obligor acknowledges itself indebted and promises to pay ON DEMAND, to or to the order of the Holder the principal sum of THIRTY-THREE MILLION DOLLARS ($33,000,000.00) in lawful money of Canada in accordance with the terms of this Debenture. The Obligor promises to pay the principal amount and other amounts owing under this Debenture at the offices of the Holder at which any notice may be given to the Holder in connection with this Debenture or at such other place as the Holder may designate by notice in writing to the Obligor. SECTION 2 DEFINED TERMS. Terms defined in the Personal Property Security Act (Ontario) and used but not otherwise defined in this Debenture have the same meanings. As used in this Debenture, the following terms have the following meanings: "BUSINESS DAY" means any day of the year, other than a Saturday, Sunday or any day on which major banks are closed for business in Toronto, Ontario. "CHARGED PREMISES" means the property and undertaking subject to the Security. "DEBENTURE" means this demand debenture and all schedules attached to it, as it may be amended, modified, extended, renewed, restated, replaced or supplemented from time to time. "HOLDER" means The Sheridan Platinum Group Ltd. and its successors and assigns, and any subsequent holder or holders of this Debenture. "LIEN" means (i) any mortgage, charge, pledge, hypothecation, security interest, assignment by way of security, encumbrance, lien (statutory or otherwise), hire purchase agreement, conditional sale agreement, deposit arrangement, title retention agreement or arrangement, or any other assignment, arrangement or condition that in substance secures payment or performance of an obligation, (ii) any trust arrangement, (iii) any arrangement which creates a right of set-off out of the ordinary course of business, or (iv) any agreement to grant any such rights or interests. "OBLIGOR" means Halo Resources Ltd., a corporation continued and existing under the laws of British Columbia, and its successors and permitted assigns. "PERSON" means a natural person, partnership, limited partnership, limited liability partnership, corporation, limited liability corporation, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or Governmental Entity, and pronouns have a similarly extended meaning. "PURCHASE AGREEMENT" means the purchase agreement dated as of February 18, 2005, between the Obligor and the Holder as the same may be amended, modified, extended, renewed, replaced, restated or supplemented from time to time. "SECURITY" means the grants, mortgages, charges and security interests constituted by this Debenture. -2- SECTION 3 INTERPRETATION (1) In this Debenture the words "including", "includes" and "include" mean "including (or includes or include) without limitation". The expressions "Article", "Section" and other subdivision followed by a number mean and refer to the specified Article, Section or other subdivision of this Debenture. (2) Any reference in this Debenture to gender includes all genders. Words importing the singular number only include the plural and vice versa. Except as otherwise provided in this Debenture, any reference to this Debenture is a reference to this Debenture as the same may have been or may from time to time be amended, modified, extended, renewed, restated, replaced or supplemented and includes all schedules to it. Except as otherwise provided in this Debenture, any reference in this Debenture to a statute is a reference to such statute and all rules and regulations made under it as the same may have been or may from time to time be amended or re-enacted. (3) The division of this Debenture into Articles, Sections and other subdivisions and the insertion of headings are for convenient reference only and do not affect its interpretation. The schedules attached to this Debenture form an integral part of it for all purposes of it. SECTION 4 GRANT OF SECURITY - FIXED CHARGE. Subject to Section 6, as security for the due payment of the principal amount and other amounts owing under this Debenture, the Obligor grants, assigns, conveys, transfers, mortgages, pledges and charges, as and by way of a fixed and specific mortgage, charge and pledge, to and in favour of the Holder and otherwise grants to the Holder a security interest in, all of the Obligor's right, title and interest in and to the real and immoveable property, both freehold and leasehold, and other interests, including without limitation staked claims and licences of occupation, in the property described in Schedule "A" (collectively, the "Properties"); all rights, leases, licences, easements, rights-of-way, profits a prendre and interests in real property with respect to the Properties (and all renewals, extensions and amendments or substitutions thereof); all facilities relating to or required for use in connection with the Properties; and all buildings, erections, structures, improvements, underground facilities, power, fuel and water supply, storage, waste disposal, roads and other transportation facilities and fixed plant, machinery and equipment presently situated on or under the Properties or which may at any time hereafter be constructed or brought or placed on or under the Properties or used in connection with the Properties. SECTION 5 EFFECTIVENESS AND ATTACHMENT. (1) The Security is effective whether or not any monies or liabilities so secured are advanced or incurred before or after or at the same time as this Debenture is issued. The Security will remain effective until such time as this Debenture is discharged as provided in Section 19, irrespective of whether, at any prior time, there may have been no indebtedness, liabilities or obligations (direct, indirect, absolute, contingent or otherwise) of the Obligor to the Holder outstanding. (2) The Obligor acknowledges that (i) value has been given, (ii) it has rights in the Charged Premises (other than after-acquired Charged Premises), (iii) it has not agreed to postpone the time of attachment of the Security and (iv) it has received a duplicate original copy of this Debenture. SECTION 6 SCOPE OF SECURITY. (1) To the extent that an assignment of amounts payable and other proceeds arising under or in connection with, or the grant of a security interest in any agreement, licence, permit or quota of the Obligor would result in the termination of such agreement, licence, permit or quota (each, a "Restricted Asset"), the Security will constitute a trust created in -3- favour of the Holder, pursuant to which the Obligor shall hold as trustee all proceeds arising under or in connection with the Restricted Asset in trust for the Holder. (2) The Security does not extend or apply to the last day of the term of any lease or sublease of real property or agreement for a lease or sublease of real property, now held or hereafter acquired by the Obligor, but the Obligor will stand possessed of any such last day upon trust to assign and dispose of it as the Holder may direct. SECTION 7 PROTECTIVE DISBURSEMENTS. If the Obligor fails to perform any of its covenants in this Debenture or otherwise, then the Holder may, in its absolute discretion, perform any covenant capable of being performed by it and, if the covenant requires the payment or expenditure of money, the Holder may make the payment but is under no obligation to do so. All sums so paid or expended by the Holder shall be immediately payable by the Obligor and shall be secured by this Debenture, having the benefit of the Security in priority to the indebtedness evidenced by this Debenture. No such performance or payment will relieve the Obligor from any default under this Debenture or the consequences of such default. SECTION 8 COVENANTS. Subject to the terms of the Purchase Agreement, the Obligor will not sell, assign, convey, exchange, lease, release or abandon or otherwise dispose of any Charged Premises except as permitted by the Holder in writing. The Obligor will not create or suffer to exist any Lien on the Charged Premises, except as permitted by the Holder in writing. Enforcement. SECTION 9 ENFORCEMENT. The Security becomes and is enforceable against the Obligor if and when the Obligor fails to repay the principal amount and other amounts owing under this Debenture on demand or otherwise when the same become due and payable. SECTION 10 REMEDIES. Whenever the Security is enforceable, the Holder may realize upon the Charged Premises and enforce its rights by: (a) entry into possession of the Charged Premises by any method permitted by law; (b) sale, grant of options to purchase, or lease of all or any part of the Charged Premises; (c) holding, storing and keeping idle or operating all or any part of the Charged Premises; (d) collection of any proceeds arising in respect of the Charged Premises; (e) institution of proceedings in any court of competent jurisdiction for the appointment of a receiver (which term as used in this Debenture includes a receiver and manager) of all or any part of the Charged Premises; (f) institution of proceedings in any court of competent jurisdiction for sale or foreclosure of all or any part of the Charged Premises; (g) filing of proofs of claim and other documents to establish claims to the Charged Premises in any proceeding relating to the Obligor; -4- (h) appointment by instrument in writing of a receiver or agent of all or any part of the Charged Premises and removal or replacement from time to time of any such receiver or agent; and (i) any other remedy or proceeding authorized or permitted in this Debenture or otherwise by law or equity. SECTION 11 ADDITIONAL RIGHTS. In addition to the rights of the Holder set forth in Section 9, whenever the Security is enforceable, the Holder may: (a) require the Obligor, at the Obligor's expense, to assemble the Charged Premises, to the extent reasonably practicable, at a place or places designated by notice in writing and the Obligor agrees to so assemble the Charged Premises immediately upon receipt of such notice; (b) require the Obligor, by notice in writing, to disclose to the Holder the location or locations of the Charged Premises and the Obligor agrees to make such disclosure when so required; (c) repair, process, modify, complete or otherwise deal with the Charged Premises, and prepare for the disposition of the Charged Premises, whether on the premises of the Obligor or otherwise; (d) pay any liability secured by any Lien against any Charged Premises other than Liens in existence at the time the Obligor acquired the Charged Premises or arising out of action or inaction by the Holder (the Obligor will immediately on demand reimburse the Holder for all such payments); (e) borrow for the maintenance, preservation or protection of the Charged Premises and mortgage, charge or grant a security interest in the Charged Premises, whether or not in priority to the Security, to secure repayment; (f) commence, continue or defend any judicial or administrative proceedings for the purpose of protecting, seizing, collecting, realizing or obtaining possession or payment of the Charged Premises, and give good and valid receipts and discharges and compromise or give time for the payment or performance of all or any part of the accounts or any other obligation of any third party to the Obligor; and (g) at any public sale, and to the extent permitted by law on any private sale, bid for and purchase any or all of the Collateral offered for sale and upon compliance with the terms of such sale, hold, retain and dispose of such Collateral without any further accountability to the Obligor or any other Person with respect to such holding, retention or disposition, except as required by law. In any such sale to the Holder, the Holder may, for the purpose of making payment for all or any part of the Collateral so purchased, use any claim for Secured Obligations then due and payable to it as a credit against the purchase price. SECTION 12 EXERCISE OF REMEDIES. The remedies under Section 9 and Section 11 may be exercised from time to time separately or in combination and are in addition to, and not in substitution for, any other rights of the Holder however arising or created. The Holder is not bound to exercise any right or remedy and the exercise of any right or remedy is without prejudice to any other rights of the Holder including the right to claim for any deficiency. The taking of any action or proceeding or refraining from so doing, or any other dealings with any other security for the monies secured by this Debenture shall not release or affect the Security. -5- SECTION 13 RECEIVER'S POWERS. (1) Any receiver appointed by the Holder is vested with the rights and remedies which could have been exercised by the Holder in respect of the Obligor or the Charged Premises and such other powers and discretions as are granted in the instrument of appointment and any supplemental instruments. The identity of the receiver, any replacement and any remuneration are within the sole and unfettered discretion of the Holder. (2) Any receiver appointed by the Holder will act as agent for the Holder for the purposes of taking possession of the Charged Premises, but otherwise and for all other purposes (except as provided below), as agent for the Obligor. The receiver may sell, lease, or otherwise dispose of the Charged Premises as agent for the Obligor or as agent for the Holder as the Holder may determine in its discretion. The Obligor agrees to ratify and confirm all actions of the receiver acting as agent for the Obligor, and to release and indemnify the receiver in respect of all such actions. (3) The Holder, in appointing or refraining from appointing any receiver, does not incur liability to the receiver, the Obligor or otherwise and is not responsible for any misconduct or negligence of such receiver. (4) All moneys from time to time received by the receiver may be applied as follows (i) first, in discharge of all operating expenses and other outgoings affecting the Charged Premises, (ii) second, in keeping in good standing all charges and liens on the Charged Premises having priority over the Security, (iii) third, in payment of the remuneration and disbursements of the receiver, (iv) fourth, in payment to the Holder of the moneys payable hereunder, and (v) the balance, if any, shall be paid to the Obligor or as a court of competent jurisdiction may otherwise direct. SECTION 14 APPOINTMENT OF ATTORNEY. The Obligor hereby irrevocably constitutes and appoints the Holder (and any officer of the Holder) the true and lawful attorney of the Obligor. As the attorney of the Obligor, the Holder has the power to exercise for and in the name of the Obligor with full power of substitution, whenever the Security becomes enforceable, any of the Obligor's right (including the right of disposal), title and interest in and to the Charged Premises including the execution, endorsement, delivery and transfer of the Charged Premises to the Holder, its nominees or transferees, and the Holder and its nominees or transferees are hereby empowered to exercise all rights and powers and to perform all acts of ownership with respect to the Charged Premises to the same extent as the Obligor might do. All acts of the attorney are ratified and approved, and the attorney is not liable for any act, failure to act or any other matter or thing, except for its own gross negligence or wilful misconduct. This power of attorney is irrevocable, is coupled with an interest, has been given for valuable consideration (the receipt and adequacy of which is acknowledged) and survives, and does not terminate upon, the bankruptcy, dissolution, winding up or insolvency of the Obligor. This power of attorney extends to and is binding upon the Obligor's successors and permitted assigns. The Obligor authorizes the Holder to delegate in writing to another Person any power and authority of the Holder under this power of attorney as may be necessary or desirable in the opinion of the Holder, and to revoke or suspend such delegation. SECTION 15 DEALING WITH THE CHARGED PREMISES. (1) The Holder is not obliged to exhaust its recourse against the Obligor or any other Person or against any other security it may hold before realizing upon or otherwise dealing with the Charged Premises in such manner as it may consider desirable. -6- (2) The Holder may grant extensions or other indulgences, take and give up securities, accept compositions, grant releases and discharges and otherwise deal with the Obligor and with other Persons, sureties or securities as it may see fit without prejudice to the obligations and liability of the Obligor or the rights of the Holder in respect of the Charged Premises. (3) The Holder is not (i) liable or accountable for any failure to collect, realize or obtain payment in respect of the Charged Premises, (ii) bound to institute proceedings for the purpose of collecting, enforcing, realizing or obtaining payment of the Charged Premises or for the purpose of preserving any rights of any Persons in respect of the Charged Premises, (iii) responsible for any loss occasioned by any sale or other dealing with the Charged Premises or by the retention of or failure to sell or otherwise deal with the Charged Premises, or (iv) bound to protect the Charged Premises from depreciating in value or becoming worthless. (4) The Holder has no obligation to keep the Charged Premises in its possession identifiable. (5) The Holder may, after the Security is enforceable, (i) notify any Person obligated on an account or on chattel paper or any obligor on an instrument to make payments to the Holder, whether or not the Obligor was previously making collections on such accounts, chattel paper, instruments, and (ii) assume control of any proceeds arising from the Charged Premises. SECTION 16 STANDARDS OF SALE. Without prejudice to the ability of the Holder to dispose of the Charged Premises in any manner which is commercially reasonable, the Obligor acknowledges that: (a) the Charged Premises may be disposed of in whole or in part; (b) the Charged Premises may be disposed of by public auction, public tender or private contract, with or without advertising and without any other formality; (c) any assignee of the Charged Premises may be a customer of the Holder; (d) any sale conducted by the Holder will be at such time and place, on such notice and in accordance with such procedures as the Holder, in its sole discretion, may deem advantageous; (e) the Charged Premises may be disposed of in any manner and on any terms necessary to avoid violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that the prospective bidders and purchasers have certain qualifications, and restrict the prospective bidders and purchasers to Persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of the Charged Premises) or in order to obtain any required approval of the disposition (or of the resulting purchase) by any governmental or regulatory authority or official; (f) a disposition of the Charged Premises may be on such terms and conditions as to credit or otherwise as the Holder, in its sole discretion, deems advantageous; and (g) the Holder may establish an upset or reserve bid or price in respect of the Charged Premises. SECTION 17 DEALINGS BY THIRD PARTIES. No Person dealing with the Holder or its agent or a receiver is required to determine (i) whether the Security has become enforceable, (ii) whether the powers which the Holder or its agent or a receiver is purporting to exercise have become exercisable, (iii) whether any money remains due upon the Security, (iv) the necessity or expediency of the stipulations and conditions subject to which any sale or lease is made, (v) the propriety or regularity of any sale or any other dealing by the Holder or its agent or a receiver with the Charged -7- Premises, or (vi) how any money paid to the Holder has been applied. Any bona fide purchaser of all or any part of the Charged Premises from the Holder or any receiver or agent will hold the Charged Premises absolutely, free from any claim or right of whatever kind, including any equity of redemption, of the Obligor, which it specifically waives (to the fullest extent permitted by law) as against any such purchaser and all rights of redemption, stay or appraisal which the Obligor has or may have under any rule of law now existing or hereafter adopted. SECTION 18 NO RIGHT OF SET-OFF. The principal and other amounts and liabilities secured by this Debenture will be paid by the Obligor when due without regard to any equities existing between the Obligor and any other party including the Holder and without regard to any right of set-off or cross-claim or of any other claim or demand of the Obligor against the Holder or otherwise. SECTION 19 DISCHARGE. The Security will be discharged upon, but only upon, full and indefeasible payment of all principal and other amounts secured and performance of all obligations of the Obligor to the Holder and the Holder having no obligations to the Obligor. At the request and expense of the Obligor, the Holder will execute and deliver to the Obligor such releases, discharges, financing statements and other documents or instruments as the Obligor may reasonably require to effect the discharge of the Security. SECTION 20 NOTICES. Any notice, direction or other communication (each a "Notice") given under this Debenture must be in writing, sent by personal delivery, courier or facsimile (but not by electronic mail) and addressed: (a) to the Obligor at: Suite #1305, 1090 West Georgia Street Vancouver, British Columbia V1E 3V7 Attention: Nick DeMare Telephone: 604-685-9316 Facsimile: 604-683-1585 (b) to the Holder at: 14 Park Lane Circle Toronto, Ontario M5B 1Z7 Attention: Patrick Sheridan -8- With a copy to: Stikeman Elliott LLP 5300 Commerce Court West 199 Bay Street Toronto, Ontario M5L 1B9 Attention: Brian Pukier A Notice is deemed to be delivered and received (i) if sent by personal delivery, on the date of delivery if it is a Business Day and the delivery was made prior to 4:00 p.m. (local time in place of receipt) and otherwise on the next Business Day, (ii) if sent by same-day service courier, on the date of delivery if sent on a Business Day and delivery was made prior to 4:00 p.m. (local time in place of receipt) and otherwise on the next Business Day, (iii) if sent by overnight courier, on the next Business Day, or (iv) if sent by facsimile, on the Business Day following the date of confirmation of transmission by the originating facsimile. The Obligor or the Holder may change its address for notice from time to time by providing a Notice in accordance with the foregoing. Any subsequent Notice must be sent to the Obligor or the Holder at its changed address. Any element of an address that is not specifically changed in a Notice will be assumed not to be changed. SECTION 21 NO MERGER, SURVIVAL OF REPRESENTATIONS AND WARRANTIES. This Debenture does not operate by way of merger of any of the principal and other amounts owing under this Debenture and no judgment recovered by the Holder will operate by way of merger of, or in any way affect, the Security, which is in addition to, and not in substitution for, any other security now or hereafter held by the Holder in respect of the principal and other amounts owing under this Debenture. SECTION 22 REIMBURSEMENT OF HOLDER'S EXPENSES. The Obligor is liable for and will pay on demand by the Holder any and all Expenses. "Expenses" means all expenses, costs and charges incurred by or on behalf of the Holder in connection with this Debenture, the Security or the Charged Premises, including all legal fees, court costs, receiver's or agent's remuneration and other expenses of taking possession of, repairing, protecting, insuring, preparing for disposition, realizing, collecting, selling, transferring, delivering or obtaining payment for the Charged Premises, and of taking, defending or participating in any action or proceeding in connection wit any of the foregoing matters or otherwise in connection with the Holder's interest in any Charged Premises, whether or not directly relating to the enforcement of this Debenture. All such sums shall be added to the indebtedness secured by this Debenture and shall also be secured, together with all other indebtedness, by this Debenture. SECTION 23 FURTHER ASSURANCES. The Obligor will do all acts and things and execute and deliver or cause to be executed and delivered all deeds, transfers, assignments and instruments that the Holder may require for (i) protecting the Charged Premises, (ii) perfecting the Security, and (iii) exercising all powers, authorities and discretions conferred upon the Holder. After the Security becomes enforceable the Obligor will do all acts and things and execute and deliver all deeds, transfers, assignments and instruments that the Holder may require for facilitating the sale of the Charged Premises in connection with its realization. SECTION 24 SUCCESSORS AND ASSIGNS. This Debenture is binding upon the Obligor, its successors and assigns, and enures to the benefit of the Holder and its successors and assigns. This Debenture may be assigned by the Holder without the consent of the Obligor, to such Person as the Holder may determine and, in such event, such Person will be entitled to all of the rights and remedies of the Holder as set forth in this -9- Debenture or otherwise. The Holder will provide notice to the Obligor of any such assignment, specifying the identity of the assignee and the date on which the assignment took place. In any action brought by an assignee to enforce any such right or remedy, the Obligor will not assert against the assignee any claim or defence which the Obligor now has or may have against the Holder. The Obligor may not assign, transfer or delegate any of its rights or obligations under this Debenture without the prior written consent of the Holder which may be unreasonably withheld. SECTION 25 AMENDMENT. This Debenture may only be amended, supplemented or otherwise modified by written agreement executed by the Holder and the Obligor. SECTION 26 SEVERABILITY. If any court of competent jurisdiction from which no appeal exists or is taken, determines any provision of this Debenture to be illegal, invalid or unenforceable, that provision will be severed from this Debenture and the remaining provisions will remain in full force and effect. SECTION 27 WAIVERS, ETC. No consent or waiver by the Holder is binding unless made in writing and signed by an authorized officer of the Holder. Any consent or waiver given under this Debenture is effective only in the specific instance and for the specific purpose for which given. No waiver of any of the provisions of this Debenture constitutes a waiver of any other provision. A failure or delay on the part of the Holder in exercising a right under this Debenture does not operate as a waiver of, or impair, any right of the Holder however arising. A single or partial exercise of a right on the part of the Holder does not preclude any other or further exercise of that right or the exercise of any other right by the Holder. So long as The Sheridan Platinum Group Ltd. is the Holder of this Debenture, the Obligor waives presentation and surrender of this Debenture against payment. In any other case, the Holder of this Debenture is required to present and surrender this Debenture against payment. SECTION 28 GOVERNING LAW. This Debenture will be governed by, interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. The Obligor irrevocably attorns and submits to the exclusive jurisdiction of any court of competent jurisdiction of the Province of Ontario sitting in Toronto, Ontario in any action or proceeding arising out of or relating to this Debenture. The Obligor irrevocably waives objection to the venue of any action or proceeding in such court or that such court provides an inconvenient forum. Nothing in this Section limits the right of the Holder to bring proceedings against the Obligor in the courts of any other jurisdiction. The Obligor hereby irrevocably consents to the service of any and all process in any such action or proceeding by the delivery of copies of such process to the Obligor at 1305, 1090 West Georgia Street, Vancouver, British Columbia, V1E 3V7. Nothing in this Section affects the right of the Holder to serve process in any manner permitted by law. SECTION 29 NEGOTIABLE INSTRUMENT. This Debenture is a negotiable instrument and all holders from time to time are invited by the Obligor to treat it accordingly. -10- HALO RESOURCES LTD. By: -------------------------------------- Authorized Signing Officer By: -------------------------------------- Authorized Signing Officer -11- SCHEDULE "A" THE PROPERTIES A. PATENTS PARCEL NUMBER CLAIM NUMBERS APPROX AREA 3457 JES96toJES105 172 10524 K1332 7 10525 K1333 17 10526 K1334 16 10527 K1335 24 30433 K13464, K13467 25 16650 K1328 20 16651 K1329 16 3922 McA11 16 16121 S158 1 3456 S170, S172 14 2063 S173 3 1420 S185 136 -12- LEASEHOLD PARCEL NUMBER 2440 K2554 16 2927 K268722 & K268728-K268732 86 2926 K268723-K268727 & K268733 76 2449 K2555, K2689, K2690, K2691 64 2450 K2556, K3026, K1330 41 B. LICENCES OF OCCUPATION LICENCE OF OCCUPATION 12126 K121I3-K12I20,K3014-K3015,K3028-K3029 133 12369 K13791-KI3797&K13811 163 12548 K13802 2 2702 K2284, K3019 16 2871 K2374 10 10381 K6127 16 10383 K6I28 16 10382 K6129 16 10385 K6130 16 10386 K6131, D493 16 10387 K6132 18 10388 K6I33, K3018 15 -13- C. STAKED CLAIMS STAKED CLAIMS K3007239,K3007240,K3007250 (EXPIRY NOV 6/05) K3007296-K300299 K3007303 K3007322-K3007326,K3007332 2256 K3007333-K3007334 224 K3016925-K3016928 896 TOTAL 100 Claims 4563 ha SCHEDULE I GST CERTIFICATE AND INDEMNITY GOODS AND SERVICES TAX DECLARATION AND INDEMNITY TO: THE SHERIDAN PLATINUM GROUP LTD. (the "VENDOR") RE: Purchase by Halo Resources Ltd. (the "PURCHASER") from the Vendor of the properties described in Schedule "B" (the "PROPERTY") pursuant to an agreement of purchase and sale dated as of__________________, as amended from time to time ________________________________________________________________________________ The undersigned hereby represents, warrants and agrees as follows: 1. The Purchaser is registered under Subdivision (d) of Division V of Part IX of the EXCISE TAX ACT (Canada) for the collection and remittance of the goods and services tax ("GST") and its registration number is ________________________, and such registration is in good standing and has not been revoked or terminated; 2. Attached hereto as Schedule "A" is a notarial copy of the Purchaser's Goods and Services Tax registration certificate; 3. The Property is being purchased by the Purchaser as principal for its own account and is not being purchased by the Purchaser as an agent, trustee, or otherwise on behalf of or for another person; 4. The Purchaser shall self-assess, be liable for and remit to the appropriate governmental authority all GST which is payable in connection with its purchase of the Property; and 5. The Purchaser shall indemnify and save harmless the Vendor from any GST, penalty, costs, interest or other amount which may be payable by or assessed against the Vendor under the EXCISE TAX ACT as a result of or in connection with the Vendor's failure to collect and remit any GST applicable in this transaction or as a result of any failure by the Purchaser to comply with the provisions of this Declaration and Indemnity. DATED as of _____________________, 2005. HALO RESOURCES LTD. Per: _________________________________ Name: Title EX-10 4 exh4_7.txt ASSIGNMENT HALO AND WOLFDEN DATED APR 15/05 EXHIBIT 4.7 Assignment and Assumption Agreement by and between Halo Resources Ltd. and Wolfden Resources Inc. dated April 15, 2005. ASSIGNMENT AND ASSUMPTION AGREEMENT THIS AGREEMENT is made effective as of the 15th day of April, 2005. BETWEEN: WOLFDEN RESOURCES INC., a corporation incorporated under the laws of the Province of Ontario (hereinafter referred to as "Assignor") OF THE FIRST PART - and - HALO RESOURCES LTD., a corporation existing under the laws of the Province of British Columbia (hereinafter referred to as "Assignee") OF THE SECOND PART WHEREAS pursuant to the terms of the Option Agreement (as hereinafter defined), the Assignor has the option to acquire from GeoNova Explorations Inc. a 50 per cent interest in the mining claims and mining concessions located in Lesueur Township in the Abitibi Region of Quebec comprising what is commonly known as the Bachelor Lake Property, as such mining claims and mining concessions are more particularly described in schedule A to the Option Agreement; AND WHEREAS the Assignor and the Assignee entered into a heads of agreement dated November 12, 2004 pursuant to which the Assignor agreed to assign, sell, transfer and convey to the Assignee, among other things, its option to acquire up to a 50 per cent interest in the Bachelor Lake Property pursuant to the Option Agreement and the Assignee agreed to assume all liabilities and obligations of the Assignor under and in connection with the Option Agreement and the Bachelor Lake Property; AND WHEREAS pursuant to a sale and purchase agreement dated November 10, 2004, GeoNova Explorations Inc. transferred its 100 per cent interest in the Bachelor Lake Property and all of its right, title and interest in and to, and all of its obligations under, the Option Agreement to Metanor Resources Inc. and Metanor Resources Inc. agreed to be bound by, and agreed that its right, title and interest in and to the Bachelor Lake Property is bound by, the Option Agreement; AND WHEREAS the Assignor and Assignee wish to enter into an agreement providing for the assignment by the Assignor to the Assignee of, among other things, the Assignor's right, title and interest in and to the Option Agreement and the option to acquire up to a 50 per cent interest in the Bachelor Lake Property pursuant to the Option Agreement, and the assumption by the Assignee of the liabilities and obligations of the Assignor under the Option Agreement and in respect of the Bachelor Lake Property, on the terms and conditions set forth in this Agreement. -2- NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements herein contained, the parties hereto covenant and agree as follows: 1. DEFINITION, INTERPRETATION AND SCHEDULES (a) DEFINITIONS Where used in this Agreement the following words and terms with the initial letter or letters thereof capitalized shall have the meanings ascribed to them below: (i) "Affiliate" of a Person means any Person that is an "affiliated entity" of the first-mentioned Person under Rule 45-501 of the Securities Commission as such rule exists on the date of this Agreement; (ii) "Agreement" means this assignment and assumption agreement, including the schedules attached hereto, as the same may be amended, supplemented or replaced from time to time; (iii) "Ancillary Documents" means all agreements, certificates, acknowledgements, deeds, conveyances, assurances, transfers, assignments and other documents executed and delivered, or to be executed and delivered, by the Assignor or the Assignee, as the case may be, in connection with the completion of the transactions contemplated hereby, including the assignment of the Assigned Assets and the assumption of the Assumed Obligations; (iv) "Applicable Law" means, with respect to any Person, any federal, provincial, local or municipal law, ordinance, regulation, rule, code, order, other requirement or rule of law or rule, instrument or policy of any stock exchange or securities commission applicable to such Person or to any of the properties, assets, officers, directors, employees, independent contractors or agents of such Person; (v) "Assigned Assets" means all of the Assignor's right, title and interest in and to the Bachelor Lake Option and the Bachelor Lake Property and in, to and under the Option Agreement; (vi) "Assignee Regulatory Approval" means the approval of the Exchange; (vii) "Assumed Obligations" means all liabilities and obligations of the Assignee under and in connection with the Option Agreement and the Bachelor Lake Property, including those described in subsection 2(e) hereof; (viii) "Bachelor Lake Option" means the right of the Assignor to acquire up to a 50 per cent interest in the Bachelor Lake Property pursuant to the Option Agreement; (ix) "Bachelor Lake Property" means the mining claims and mining concessions described in schedule A to the Option Agreement, and after the date hereof includes any renewal thereof and any form of successor or substitute title thereto; (x) "Bonus Consideration" means $250,000; -3- (xi) "Bonus Shares" means 250,000 Common Shares provided that, in the event that, prior to the time which the Bonus Shares would otherwise be required to be issued hereunder, there shall occur A. a reclassification or redesignation of the Common Shares, a change of the Common Shares into other shares or securities or any other capital reorganization involving the Common Shares, B. a consolidation or subdivision of the Common Shares or an amalgamation, arrangement or merger of the Corporation with or into another body corporate which results in a change to the Common Shares, or C. the transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another Person, (any of such events being called a "Capital Reorganization"), "Bonus Shares" shall thereafter mean the kind and number of shares and other securities or property resulting from the Capital Reorganization which the Assignor would have been entitled to receive as a result of the Capital Reorganization if, on the effective date thereof, the Assignor had been the registered holder of 250,000 Common Shares and provided further that if any successive event or events as set out in subparagraphs A, B and C above shall occur (any such events being called an "Additional Capital Reorganization") after a Capital Reorganization, "Bonus Shares" shall thereafter mean, for each and every Additional Capital Reorganization, the kind and number of shares and other securities or property resulting from such Additional Capital Reorganization which the Assignor would have been entitled to receive as a result of such Additional Capital Reorganization if, on the effective date of such Additional Capital Reorganization, the Assignor had been the registered holder of the kind and number of shares and other securities or property which the Assignor was entitled to receive as a result of the Capital Reorganization and each prior Additional Capital Reorganization; (xii) "Business Day" means any day other than a Saturday, Sunday or any holiday when banks in the Province of Ontario are normally closed for business; (xiii) "Cash Consideration" means the aggregate amount of cash to be paid by the Assignee to the Assignor pursuant to subsection 2(b) hereof; (xiv) "Closing" means the completion of the assignment by the Assignor to the Assignee of the Assigned Assets and the assumption by the Assignee of the Assumed Obligations; (XV) "Closing Date" means April 20, 2005 or such other date as the Assignor and the Assignee may mutually agree upon in writing, provided that such date occurs prior to the commencement of drilling on the Bachelor Lake Property by the Operator; (xvi) "Common Shares" means the common shares which the Assignee is authorized to issue as constituted on the date hereof; -4- (xvii) "Consideration Shares" means that number of Common Shares to be issued by the Assignee to the Assignor pursuant to subsection 2(b) hereof; (xviii) "Exchange" means the TSX Venture Exchange; (xix) "GeoNova" means GeoNova Explorations Inc. a corporation existing under the CANADA BUSINESS CORPORATIONS ACT and includes any successor thereto; (xx) "Governmental Authority" means any Canadian federal, provincial, local or municipal governmental, regulatory or administrative authority, agency or commission or any court, tribunal or judicial or arbitral body; (xxi) "Jurisdictions" means the Provinces of British Columbia, Alberta and Quebec collectively (any of which may be referred to as a "Jurisdiction"); (xxii) "Lien" means any encumbrance of any nature or kind whatever and includes a security interest, mortgage, lien, hypothec, pledge, hypothecation, assignment, charge or other security; (xxiii) "Losses" means, in respect of any matter or thing, all claims, demands, proceedings, losses, damages, liabilities, obligations, deficiencies, costs and expenses (including, without limitation, all legal and other professional fees and disbursements, interest, penalties and amounts paid in settlement) arising directly or indirectly as a consequence of such matter; (xxiv) "Metanor" means Metanor Resources Inc., a corporation incorporated under the CANADA BUSINESS CORPORATIONS ACT and includes any successor thereto; (xxv) "MI 45-102" means Multilateral Instrument 45-102 - RESALE OF SECURITIES of the Canadian Securities Administrators; (xxvi) "Operator" means the current operator of the Bachelor Lake Property, being the Assignor; (xxvii) "Option Agreement" means the letter agreement dated April 24, 2003 between the Assignor and GeoNova, a copy of which is attached hereto as schedule A, and which has been assigned by GeoNova to Metanor; (xxviii) "Person" means an individual, a firm, a corporation, a syndicate, a partnership, a trust, an association, an unincorporated organization, a joint venture, an investment club, a government or an agency or political subdivision thereof and every other form of legal or business entity of whatsoever nature or kind; (xxix) "Securities Commission" means the Ontario Securities Commission; and (xxx) "Securities Laws" means the securities legislation and regulations of, and the instruments, policies, rules, orders, codes, notices and interpretation notes of the securities regulatory authorities (including the Exchange) of, the applicable jurisdiction or jurisdictions collectively. -5- (b) INTERPRETATION (i) References herein to sections, subsections, paragraphs or subparagraphs shall be construed as references to sections, subsections, paragraphs or subparagraphs, as the case may be, of this Agreement. (ii) The headings of sections and subsections herein are inserted for convenience of reference only and shall not affect the meaning or intent of the provisions hereof. (iii) In this Agreement, unless the context otherwise requires, words importing the singular number only shall include the plural and VICE VERSA, words importing persons shall include individuals, corporations, partnerships, associations, trusts, unincorporated organizations, governmental bodies and all other entities whatsoever and words importing the masculine gender shall include the feminine gender and the neuter and VICE VERSA. (iv) Unless otherwise specifically indicated, all dollar amounts referred to in this Agreement are expressed in Canadian funds. (c) KNOWLEDGE The term "knowledge", when used herein to modify or describe the state of knowledge of factual or legal matters, whether or not used with any other limiting or expansive language, means to the knowledge of the Person so stating after reasonable inquiry. With respect to the Assignor, "reasonable inquiry" shall comprise inquiry of appropriate and knowledgeable employees, directors and officers of the Assignor. (d) SCHEDULES The following schedules are attached to this Agreement and are deemed to be a part of and incorporated into this Agreement: SCHEDULE TITLE A Option Agreement B Net Smelter Returns Royalty C Details of Assignor's Expenditures D Sale and Purchase Agreement dated November 10, 2004 between GeoNova and Metanor 2. ASSIGNMENT OF ASSIGNED ASSETS AND ASSUMPTION OF ASSUMED OBLIGATIONS (a) Upon and subject to the terms and conditions set out herein, (i) the Assignor hereby agrees: A. to sell, transfer, assign, convey and set over to the Assignee, effective as of the Closing, all of the Assignor's right, title, benefit and interest in and to, the Assigned Assets, with the Bachelor Lake Option, the interest of the Assignor in the Option -6- Agreement and the rights of the Assignor in and under the Option Agreement being free and clear of all Liens, options, rights of first refusal or other rights, title or interests or any right capable of becoming any of the foregoing; and B. to delegate to the Assignee, effective as of the Closing, all of the Assignor's duties, obligations and liabilities under and in connection with the Assigned Assets; and (ii) the Assignee hereby agrees to acquire, effective as of the Closing, all of the Assignor's right, title, benefit and interest in and to the Assigned Assets and to assume, effective as of the Closing, all of the Assignor's duties, obligations and liabilities under and in connection with the Assumed Obligations; in each case on and subject to the terms and conditions hereinafter set out. (b) The aggregate consideration for the assignment of the Assigned Assets to the Assignee shall consist of: (i) the amount of $650,000, which amount shall be paid by the Assignee to the Assignor at the Closing in accordance with subsection 9(b) hereof; (ii) 1,400,000 Common Shares, which Common Shares shall be issued by the Assignee to the Assignor at the Closing in accordance with subsection 9(b) hereof; (iii) the amount equal to 50 per cent of the aggregate amount in excess of $1,600,000 to a maximum of $3,000,000, spent by the Assignor up to the time of Closing on exploration programs pursuant to the Option Agreement, which amount shall be paid by the Assignee to the Assignor at the Closing in accordance with subsection 9(b) hereof; (iv) that number of Common Shares at a deemed price of $1.00 per Common Share equal to 50 per cent of the amount in excess of $1,600,000 to a maximum of $3,000,000, spent by the Assignor up to the time of Closing on exploration programs pursuant to the Option Agreement, which number of Common Shares shall be issued by the Assignee to the Assignor at the Closing in accordance with subsection 9(b) hereof; (v) the amount equal to the aggregate amount in excess of $3,000,000 spent by the Assignor up to the time of Closing on exploration programs pursuant to the Option Agreement, which amount shall be paid by the Assignee to the Assignor at the Closing in accordance with subsection 9(b) hereof; and (vi) the assumption of the Assumed Obligations, the payment of the Bonus Consideration, the issuance of the Bonus Shares and the grant of the net smelter returns royalty, all pursuant to and in accordance with the terms of this Agreement. (c) In the event that the Assignee exercises the Bachelor Lake Option and acquires a 50% right, title and interest in and to the Bachelor Lake Property and the Bachelor Lake Property is thereafter placed into production, the Assignee shall pay to the Assignor the Bonus Consideration by certified cheque or -7- bank draft (or the Assignee shall pay the Bonus Consideration to the Assignor by wire transfer or other means acceptable to the Assignor) and issue to the Assignor the Bonus Shares, in each case within five Business Days after 50,000 ounces of gold or gold equivalent have been produced from the Bachelor Lake Property. (d) In the event that after the Closing the Assignee exercises the Bachelor Lake Option and acquires a 50% right, title and interest in and to the Bachelor Lake Property, the Assignor shall be entitled to a one-half of one per cent (0.5%) net smelter returns royalty on 50% of any ore, metal or concentrate produced from the Bachelor Lake Property, such net smelter returns royalty to be calculated and payable in accordance with the terms of schedule B attached hereto. The Assignor and the Assignee hereby acknowledge and agree that the net smelter returns royalty referenced in this subsection 2(d) is not only a contractual right or interest but shall, and it is intended that it shall, bind and run with the right, title and interest in and to the Bachelor Lake Property acquired by the Assignee upon the exercise of the Bachelor Lake Option. The Assignee further hereby acknowledges and agrees that, in the event that the Assignee wishes to transfer all or any portion of its right, title or interest in the Bachelor Lake Property, such transfer shall not be effective unless and until the transferee has delivered to and in favour of the Assignor a written undertaking in a form acceptable to the Assignor whereby such transferee agrees to be bound, to the extent of the right, title or interest transferred, by all of the terms and conditions of this subsection 2(d) and schedule B attached hereto, whereupon the Assignee shall be released from any further obligation or liability in respect of this subsection 2(d) and schedule B attached hereto to the extent of the right, title or interest so transferred. The Assignee hereby agrees that it shall not transfer all or any portion of its right, title or interest in the Bachelor Lake Property unless and until the transferee has delivered to the Assignor a written undertaking in a form acceptable to the Assignor whereby such transferee agrees to be bound, to the extent of the right, title or interest transferred, by all of the terms and conditions of this subsection 2(d) and schedule B attached hereto. (e) From the Closing, and subject to the terms of this Agreement, including the representations and warranties of the Assignor made in this Agreement, the Assignee shall be responsible for the Assigned Assets and liable for the Assumed Obligations. Without limitation to the foregoing sentence, from the Closing, the Assignee shall, to the extent that such liabilities, duties or obligations, or the factual circumstances giving rise to such liabilities, duties or obligations, do not constitute a breach of the representations or warranties of the Assignor made in this Agreement (and if such liabilities, duties or obligations, or the factual circumstances giving rise thereto constitute a breach of such representations and warranties, the Assignee shall only be relieved to the extent of such breach), assume and be bound by and liable and responsible for, and undertakes to discharge, perform and fulfill, all liabilities, duties and obligations of the Assignor pursuant to the Option Agreement and the Bachelor Lake Option or related to the Bachelor Lake Property and the Assignee hereby covenants and agrees that the Assignee shall, to the extent that such liabilities, duties or obligations, or the factual circumstances giving rise to such liabilities, duties or obligations, do not constitute a breach of the representations or warranties of the Assignor made in this Agreement (and if such liabilities, duties or obligations, or the factual circumstances giving rise thereto -8- constitute a breach of such representations and warranties, the Assignee shall only be relieved to the extent of such breach), observe and perform all covenants, conditions, agreements and obligations of the Assignor to be observed or performed by the Assignor from the Closing pursuant to the Option Agreement and the Bachelor Lake Option or related to the Bachelor Lake Property. The liabilities and obligations which the Assignee has agreed to assume under this subsection are hereinafter collectively referred to as the "Assumed Obligations". (f) The Assignor acknowledges that the Consideration Shares and the Bonus Shares will be subject to a statutory hold period under the Securities Laws of the Province of Ontario and the resale restriction under the policies of the Exchange for a period of four months and one day from the date on which any such shares are issued to the Assignor and that a suitable legend or legends will be placed on the certificates representing the Consideration Shares and the Bonus Shares to reflect the applicable restricted period and statutory hold period to which the Consideration Shares and the Bonus Shares are subject. 3. REPRESENTATIONS AND WARRANTIES OF THE ASSIGNOR (a) The Assignor hereby represents and warrants to the Assignee as follows (and acknowledges that the Assignee is relying on such representations and warranties in entering into this Agreement and in completing the assignment of the Assigned Assets): (i) the Assignor is a corporation existing under the BUSINESS CORPORATIONS ACT (Ontario) and has all necessary corporate power, capacity and authority to enter into this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignor and to complete the transactions contemplated hereby and thereby to be completed by the Assignor; (ii) the Assignor has full corporate power, capacity and authority to own, lease or acquire an interest in and to, and to operate its properties and to carry on its business as now conducted and the Assignor is qualified, authorized, registered or licensed to conduct its business and is in good standing under the laws of each jurisdiction in which it conducts its business or owns, leases or otherwise has an interest in its properties and assets, including the Province of Quebec; (iii) the execution and delivery of this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignor, and the performance of the terms hereof and thereof by the Assignor, have been authorized by all necessary corporate proceedings of the Assignor and each of this Agreement and the Option Agreement constitutes a legal, valid and binding agreement enforceable against the Assignor in accordance with its terms and, upon being executed and delivered, each of the Ancillary Documents to be executed and delivered by the Assignor will constitute a valid and legally binding obligation of the Assignor enforceable against the Assignor in accordance with its terms, except in each case to the extent that enforcement may be limited by laws of general application affecting the enforcement of creditor's rights and the provisions of the LIMITATIONS ACT, 2002 (Ontario) and that certain remedies are discretionary in nature and may not be available in all circumstances; (iv) the Assignor has the right to assign the Assigned Assets and all of its right, title, benefit and interest in and to the Assigned Assets, to the Assignee subject to obtaining the consent of Metanor pursuant to subjection 2(j) of the Option Agreement and the execution and delivery of this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignor and the performance of the -9- terms hereof and thereof by the Assignor will not conflict with or result in a breach or violation of any of the provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Assignor is a party or by which the Assignor or any of the assets or properties thereof is bound or conflict with or result in any violation of the provisions of the articles, by-laws or resolutions of the directors (including any committee thereof) or shareholders of the Assignor or of any Applicable Law; (v) none of the sale, assignment or transfer of the Assigned Assets to the Assignee, the execution and delivery of this Agreement or any Ancillary Document by the Assignor, the compliance by the Assignor with the provisions of this Agreement or any Ancillary Document to be executed and delivered by the Assignor or the completion of the transactions contemplated hereby or thereby, do or will require the Assignor to obtain the consent, approval, or authorization, or any order or agreement of, or registration or qualification with, any Governmental Authority or other Person, except the consent of Metanor pursuant to subsection 2(j) of the Option Agreement; (vi) the Assignor has performed all of its obligations required to be performed to the date hereof by the Assignor under the Option Agreement including, but not limited to, incurring an aggregate expenditure of at least $3,000,000 on exploration on the Bachelor Lake Property pursuant to and in accordance with the terms of the Option Agreement (as such expenditures are set out in detail on schedule C attached hereto) and making aggregate payments of $200,000 in accordance with section 1.1 of the Option Agreement, and is not in default under or in breach of, any representation, warranty, covenant, agreement or condition or any other provision set out in the Option Agreement; (vii) to the knowledge of the Assignor, Metanor is the registered or recorded owner of an undivided 100% right, title and interest in and to the Bachelor Lake Property and, upon the exercise and completion of the Bachelor Lake Option in accordance with the terms of the Option Agreement, the holder of the Bachelor Lake Option will be entitled to a 50 per cent undivided legal and beneficial right, title and interest in and to the Bachelor Lake Property subject only to the provisions of the Option Agreement, the royalty granted by GeoNova to Ced-Or Corporation pursuant to the purchase and sale agreement dated March 30, 2001 between GeoNova and Ced-Or Corporation, which royalty was assigned by Ced-Or Corporation to Concopper Enterprises Inc. pursuant to the assignment of royalties dated September 21, 2001 between Ced-Or Corporation, Concopper Enterprises Inc. and GeoNova a copy of which is attached as schedule B to the Option Agreement and to the net smelter return royalty of the Assignor pursuant to subsection 2(d) hereof; (viii) other than the rights of the Assignee set out in this Agreement, to the knowledge of the Assignor, no Person has any Lien, agreement, option, right of first refusal or right, title or interest or any right capable of becoming any of the foregoing, in or to the Bachelor Lake Property, and other than the rights of the Assignee set out in this Agreement, no Person has any Lien, agreement, option, right of first refusal or right, title or interest or any -10- right capable of becoming any of the foregoing, in or to the Bachelor Lake Option, the interest of the Assignor in the Option Agreement or the rights of the Assignor in and under the Option Agreement and, to the knowledge of the Assignor, there are no outstanding tax liabilities (other than accrued taxes which are not yet due) on or in respect of the Bachelor Lake Property; (ix) to the knowledge of the Assignor, the Bachelor Lake Property is in good standing and all amounts required to be expended or work to be performed to maintain the Bachelor Lake Property in good standing have been and will continue to be expended or performed until the Closing; (x) the Assignor is acquiring the Consideration Shares as principal for its own account and is an "accredited investor" within the meaning of Rule 45-501 of the Ontario Securities Commission by virtue of the fact that the Assignor is a company, other than a mutual fund or non-redeemable investment fund, that had net assets of at least $5,000,000 as reflected on its most recently prepared financial statements; (xi) there is no claim, action, suit, proceeding or governmental investigation pending or, to the knowledge of the Assignor, threatened against the Assignor by or before any Governmental Authority or by any other Person which challenges the validity of this Agreement or the Option Agreement or which would be reasonably likely to adversely affect or restrict the Assignor's ability to consummate the transactions contemplated hereby; (xii) other than this Agreement and the sale and purchase agreement dated November 10, 2004 between GeoNova and Metanor (a copy of which is attached hereto as schedule D), there are no agreements, adverse interests or options to acquire or purchase the Bachelor Lake Property, the Bachelor Lake Option or the Option Agreement or any portion thereof to which the Assignor is a party or by which the Assignor is bound, to the knowledge of the Assignor, other than GeoNova and Metanor, no Person has any possessory interest in the Bachelor Lake Property, and, to the knowledge of the Assignor, other than a net smelter returns royalty of up to 2% in favour of Concopper Enterprises Inc. as referred to in the Option Agreement, no Person, is entitled to any royalty or other payment in the nature of a royalty on any minerals, metals or concentrates or any other such products removed or produced from the Bachelor Lake Property; (xiii) to the knowledge of the Assignor, other than with respect to reclamation and closure liabilities and costs, the condition of the Bachelor Lake Property is in material compliance with all Applicable Laws including in respect of any environmental liability related to or arising out of the Bachelor Lake Property; (xiv) to the knowledge of the Assignor, the Assignor has conducted its activities on the Bachelor Lake Property in accordance with all Applicable Laws and has not caused an environmental liability with respect to the Bachelor Lake Property other than those reclamation or rehabilitation obligations ordinarily related to the conduct of preliminary exploration work or dewatering; -11- (xv) to the knowledge of the Assignor, there are no outstanding, pending or threatened, actions, suits or claims affecting or in respect of, or arising out of or in connection with any activities conducted on, in or under, the Bachelor Lake Property, or affecting or in respect of the right, title or interest therein or thereto, or affecting or in respect of the Bachelor Lake Option or the Option Agreement; (xvi) the Assignor has made available to the Assignee all material information in its possession or control relating to the Bachelor Lake Property, or relating to the right, title or interest therein or thereto, or relating to the Bachelor Lake Option or the Option Agreement; (xvii) the Assigned Assets do not constitute all or substantially all of the assets of Assignor; (xviii) the Option Agreement and the Bachelor Lake Option are valid and subsisting, in good standing and all material covenants and obligations contained in the Option Agreement to be observed or performed to the date hereof by the Assignor and, to the knowledge of the Assignor, any other party thereto, have been observed and performed to the date hereof; (xix) none of the rights of the Assignor arising under or pursuant to the Option Agreement and the Bachelor Lake Option have been waived nor allowed to lapse over time; (xx) the Assignor has not received notice with respect to, nor is aware of, any matter of fact which with notice or lapse of time or both would constitute, a default of the obligations of the Assignor to the Option Agreement; (xxi) the Assignor is not and at the time of Closing will not be a non-resident of Canada within the meaning of section 116 of the INCOME TAX ACT (Canada); and (xxii) other than as provided in this Agreement, the Assignor has not assigned its right, title and interest in and to the Bachelor Lake Option or the Option Agreement, or any part thereof, to any Person, nor entered into any agreement or granted any right to any person capable of becoming an assignment or right to an assignment of it's right, title and interest in and to the Bachelor Lake Option or the Option Agreement. 4. REPRESENTATIONS AND WARRANTIES OF THE ASSIGNEE (a) The Assignee hereby represents and warrants to the Assignor as follows (and acknowledges that the Assignor is relying on such representations and warranties in entering into this Agreement and in completing the assignment of the Assigned Assets): (i) the Assignee is a corporation existing under the BUSINESS CORPORATIONS ACT (British Columbia) and has all necessary corporate power and capacity to enter into this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignee and to complete the transactions contemplated hereby and thereby to be completed by the Assignee; -12- (ii) the Assignee has full corporate power, capacity and authority to own, lease and operate its properties and to carry on its business as now conducted and the Assignee is qualified, authorized, registered or licensed to conduct its business and is in good standing in the laws of each jurisdiction in which it conducts its business or owns or leases its properties and assets, including the Province of Quebec; (iii) the execution and delivery of this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignee and the performance of the terms hereof and thereof by the Assignee have been authorized by all necessary corporate proceedings of the Assignee and this Agreement constitutes a legal, valid and binding agreement enforceable against Assignee in accordance with its terms and, upon being executed and delivered, each of the Ancillary Documents to be executed and delivered by the Assignee will constitute a valid and legally binding obligation of the Assignee enforceable against the Assignee in accordance with its terms, except to the extent that enforcement may be limited by laws of general application affecting the enforcement of creditor's rights and the provisions of the LIMITATIONS ACT, 2002 (Ontario) and that certain remedies are discretionary in nature and may not be available in all circumstances; (iv) the execution and delivery of this Agreement and each of the Ancillary Documents to be executed and delivered by the Assignee and the performance of the terms hereof and thereof by the Assignee will not conflict with or result in a breach or violation of any of the provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Assignee is a party or by which the Assignee or any of the assets or properties thereof is bound or conflict with or result in any violation of the provisions of its articles, by-laws or resolutions of its directors (including any committee thereof) or shareholders or any Applicable Law; (v) the Assignee is a reporting issuer in each of the Jurisdictions not in default under the Securities Laws of the Jurisdictions and (i) the Assignee has filed on a timely basis with the securities regulatory authorities in each of the Jurisdictions all forms, reports and documents required to be filed by it pursuant to the Securities Laws of the Jurisdictions and all such filings, when made, complied in all material respects with the Securities Laws of each of the Jurisdictions, and all information required to be stated therein or necessary in light of the circumstances in which they were made, not misleading in any material respect, (ii) as of their respective dates, none of any such filings contained any untrue statement of a material fact or omitted to state a material fact, and (iii) no confidential disclosure has been made by Assignee under any Securities Laws of the Jurisdictions; (vi) the Assignee is, and on the Closing Date will be, a Canadian within the meaning of the INVESTMENT CANADA ACT (Canada), as amended to the Closing Date; (vii) there is no claim, action, suit, proceeding or governmental investigation pending or, to the knowledge of the Assignee, threatened against the Assignee by or before any Governmental Authority or by any other Person which challenges the validity of -13- this Agreement or which would be reasonably likely to adversely affect or restrict the Assignee's ability to consummate the transactions contemplated hereby; (viii) the Assignee is authorized to issue an unlimited number of Common Shares of which 16,757,174 Common Shares are issued and outstanding as fully paid and non-assessable common shares of the Assignee as at the date of this Agreement; (ix) the outstanding Common Shares are listed on the Exchange and no order ceasing or suspending trading in any securities of the Assignee has been issued and no proceedings for such purpose are pending, or to the knowledge of the Assignee, threatened; (x) upon the issue thereof on the Closing Date, the Consideration Shares will be authorized and issued to the Assignor as fully paid and non-assessable Common Shares and will be conditionally approved for listing on the Exchange; (xi) upon the issue thereof in accordance with subsection 2(c) hereof, the Bonus Shares will be authorized and issued to the Assignor as fully paid and non-assessable Common Shares and will be, on the Closing Date conditionally approved for listing on the Exchange; (xii) the issue by the Assignee to the Assignor of the Consideration Shares is, and the issue by the Assignee to the Assignor of the Bonus Shares, if and when issued, will be, exempt from the registration and prospectus requirements of the Securities Laws of the Province of Ontario and no document is required to be filed, proceeding taken or approval, consent or authorization of any regulatory authority required to be obtained by the Assignee in connection therewith other than the Assignee Regulatory Consent provided, however, that the Assignee is required to file with the Ontario Securities Commission within 10 days of the date of issue of each of the Consideration Shares and the Bonus Shares, a report prepared and executed in accordance with Form 45-501F1 prescribed by Rule 45-501 of the Securities Commission in respect of the issue and delivery of the Consideration Shares and the Bonus Shares; (xiii) the Consideration Shares will not be subject to a restricted period or statutory hold period under the Securities Laws of the Province of Ontario or any Jurisdiction or to any resale restriction under the policies of the Exchange which extends beyond four months and one day after the Closing Date (and after the expiry of such four month restricted period, the first trade of Consideration Shares will be exempt from the prospectus requirements of the Securities Laws of the Province of Ontario and each Jurisdiction and no document will be required to be filed and no proceeding taken or approval, permit, consent, order or authorization obtained by the Assignee under the Securities Laws of the Province of Ontario and the Jurisdictions in respect of such first trade), provided that the conditions set out in paragraphs 2.5(2), 4, 5, 6 and 7 of MI 45-102 are satisfied; and (xiv) if and when issued, the Bonus Shares will not be subject to a restricted period or statutory hold period under the Securities Laws of the Province of Ontario or any Jurisdiction or to any resale restriction under the policies of the Exchange which extends beyond four months and one day after the date of issue thereof (and after the expiry of such four month restricted period, the first trade of Bonus -14- Shares will be exempt from the prospectus requirements of the Securities Laws of the Province of Ontario and each Jurisdiction and no document will be required to be filed and no proceeding taken or approval, permit, consent, order or authorization obtained by the Assignee under the Securities Laws of the Province of Ontario and the Jurisdictions in respect of such first trade), provided that the conditions set out in paragraphs 2.5(2), 4, 5, 6 and 7 of MI 45-102 are satisfied. 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES All of the representations and warranties of the parties hereto contained in this Agreement or in any Ancillary Document shall be true and complete at the time of Closing as if made at the time of Closing. Subject to the following sentence, the representations and warranties of the parties hereto contained in this Agreement or in any Ancillary Document shall survive the Closing and shall continue in full force and effect thereafter for a period of three years after the Closing Date and such representations and warranties shall not merge in any agreement or instrument effecting any of the transactions contemplated hereby. Notwithstanding the preceding sentence the representations and warranties of the Assignee contained in this Agreement or any Ancillary Document with respect to the Bonus Shares shall survive the Closing and shall continue in full force and effect thereafter for a period of three years after the date on which the Bonus Shares are issued to the Assignor. 6. COVENANTS OF THE ASSIGNOR AND THE ASSIGNEE (a) COVENANTS OF THE ASSIGNEE The Assignee hereby covenants and agrees with the Assignor that the Assignee will: (i) forthwith seek to obtain, in a diligent manner using commercially reasonable efforts, to the extent not already obtained, the necessary regulatory consents from the Exchange and, to the extent necessary, from the Securities Commission for the issue of the Consideration Shares and the Bonus Shares; (ii) forthwith seek to arrange, in a diligent manner using commercially reasonable efforts, the listing of the Consideration Shares and the Bonus Shares, on the Stock Exchange as soon as possible; (iii) forthwith make all necessary filings to obtain all other necessary regulatory and other consents and approvals required in connection with the transactions contemplated by this Agreement; (iv) maintain the listing of the Common Shares on the Exchange and the status thereof as a reporting issuer not in default under the securities legislation of each of the Jurisdictions for a period of 18 months after the Closing Date; and (v) as soon as practicable after the Closing Date (and in any event within the time required) file such documents as may be required under the Securities Laws of the Province of Ontario and each Jurisdiction relating to the issue of the Consideration Shares which, without limiting the generality of the foregoing, shall include a Form 45-501F1 as prescribed by Rule 45-501 of the Securities Commission. -15- (b) COVENANTS OF ASSIGNOR The Assignor hereby covenants and agrees with the Assignee that the Assignor will: (i) forthwith use its reasonable commercial efforts to obtain all necessary consents, approvals and waivers for the completion of the transactions contemplated hereby required to be obtained by the Assignor, including without limitation, any necessary consent or approval required from any Governmental Authority having jurisdiction in respect of such transactions or any third party consents or approvals as may be necessary under the Option Agreement to the extent not already obtained; and (ii) not sell, transfer, hypothecate or otherwise trade any of the Consideration Shares or Bonus Shares issued to the Assignor hereunder for a period of one year from the date on which any such shares are issued to the Assignor other than pursuant to a take-over bid made for all of the Common Shares, provided that, this section shall not apply to any transfer of Consideration Shares or Bonus Shares to an Affiliate of the Assignor provided that if such transfer to an Affiliate of the Assignor occurs within one year of the date of issue of the Consideration Shares or the Bonus Shares being transferred, such Affiliate agrees in writing with the Assignee at the time of such transfer to be bound by the terms of this paragraph 6(b)(ii). 7. INTENTIONALLY DELETED 8. CONDITION PRECEDENT (a) The obligation of the Assignor to complete the transactions contemplated hereby and to assign the Assigned Assets to the Assignee is subject to the fulfilment of each of the following conditions: (i) the representations and warranties of the Assignee contained herein shall be true and correct in all material respects as of the Closing Date; (ii) the Assignee shall have performed all covenants and agreements of the Assignee contained in this Agreement to be performed by the Assignee prior to Closing; (iii) all necessary consents and approvals for the completion of the transactions contemplated hereby shall have been obtained in form reasonably satisfactory to the Assignor, including all necessary consents and approvals of the Securities Commission and the Exchange to the issue and listing of the Consideration Shares and the Bonus Shares; (iv) delivery by the Assignee to the Assignor of the Cash Consideration and the certificates representing the Consideration Shares; and (v) delivery by the Assignee to the Assignor of the documents described in subsection 9(b) hereof. The conditions set out in this subsection are for the exclusive benefit of the Assignor and may be waived in whole or in part by the Assignor at any time. If any of the conditions set out in this subsection shall not be fulfilled or performed at or before the Closing or the Closing has not -16- been completed prior to the earlier of May 14, 2005 and the commencement of drilling by the Operator on the Bachelor Lake Property, the Assignor may rescind the obligations thereof under this Agreement by notice in writing to the Assignee and in such event the Assignor shall be released from all of its obligations hereunder. (b) The obligation of the Assignee to complete the transactions contemplated hereby and to acquire the Assigned Assets and assume the Assumed Obligations are subject to the fulfillment of each of the following conditions: (i) the representations and warranties of the Assignor contained herein shall be true and complete as of the Closing Date; (ii) the Assignor shall have performed all covenants and agreements contained in this Agreement to be performed by the Assignor prior to Closing; (iii) all necessary consents and approvals for the completion of the transactions contemplated hereby shall have been obtained prior to Closing in form reasonably satisfactory to the Assignee, including all consents required under the terms of the Option Agreement and including all necessary consents and approvals of the Securities Commission and the Exchange to the issue and listing of the Consideration Shares and the Bonus Shares; (iv) the Assignee being satisfied, in its sole discretion, that A. Metanor has consented in favour of the Assignee in writing prior to Closing to the assignment by the Assignor to the Assignee, and the assumption by the Assignee, all as contemplated by this Agreement and on terms that are satisfactory to the Assignee; B. at the time of Closing, Metanor has confirmed in writing that it holds an undivided 100% legal and beneficial right, title and interest in and to the Bachelor Lake Property, free and clear of all Liens; and C. at the time of Closing, the Option Agreement and the Bachelor Lake Option are valid and subsisting and is in full force and effect, unamended free and clear of all Liens and no material default exists thereunder; (v) delivery by the Assignor to the Assignee of the documents described in subsection 9(c) hereof. The conditions set out in this subsection are for the exclusive benefit of the Assignee and may be waived in whole or in part by the Assignee at any time. If any of the conditions set out in this subsection shall not be fulfilled or performed at or before the Closing or the Closing has not been completed prior to the earlier of May 14, 2005 and the commencement of drilling by the Operator on the Bachelor Lake Property, the Assignee may rescind the obligations thereof under this Agreement by notice in writing to the Assignor and in such event the Assignee shall be released from all of its obligations hereunder. -17- 9. CLOSING (a) The completion of the transactions contemplated hereby shall take place at 10:00 a.m. (Toronto Time) on the Closing Date at the offices of Fraser Milner Casgrain LLP, Suite 3900, 1 First Canadian Place, 100 King Street West, Toronto, Ontario, M5X 1B2. (b) At the Closing, the Assignee shall deliver to the Assignor: (i) a certificate of an officer of the Assignee dated the Closing Date certifying that as of the Closing Date the representations and warranties of the Assignee contained in this Agreement are true and correct in all material respects and all covenants and agreements required by this Agreement to be performed or complied with by the Assignee prior to or at the Closing have been performed and complied with except as otherwise specifically agreed by the Assignor; (ii) all documents, in form and substance satisfactory to the Assignor, acting reasonably, required under the Option Agreement and the laws of the Province of Quebec to validly effect the transfer and assignment of the Assigned Assets to the Assignee and required to be executed by the Assignee (such documents to be executed by the Assignee and to be in registerable form to the extent required); (iii) a certificate or certificates representing the Consideration Shares, registered in the name of the Assignor or as the Assignor may otherwise direct (the Assignor acknowledging that a suitable legend or legends will be placed on such certificates to reflect the applicable restricted period and statutory hold period to which the Consideration Shares are subject); (iv) a certified cheque or bank draft representing the aggregate of the Cash Consideration (or the Assignee shall otherwise arrange to pay the Cash Consideration to the Assignor by wire transfer or other means acceptable to the Assignor); (v) an assignment and assumption agreement, in form and substance satisfactory to the Assignor and the Assignee, each acting reasonably, regarding the assumption by the Assignee of the Assumed Obligations executed by the Assignee; (vi) the consent of Metanor to the assignment of the Assigned Assets to the Assignee pursuant to subsection 2(j) of the Option Agreement and the assumption by the Assignee of the Assumed Obligations; (vii) release by Metanor of the Assignor in connection with all liabilities and obligations of the Assignor under and in connection with the Option Agreement; and (viii) such further documents as may be contemplated by this Agreement or as the Assignor may reasonably require. (c) At the Closing, the Assignor shall deliver to the Assignee: (i) a certificate of an officer of the Assignor dated the Closing Date certifying that as of the Closing Date the representations and warranties of the Assignor respectively contained in this Agreement are true and correct in all material respects and all covenants -18- and agreements required by this Agreement to be performed or complied with by the Assignor respectively prior to or at the Closing have been performed and complied with except as otherwise specifically agreed by the Assignee; (ii) all documents, in form and substance satisfactory to the Assignee, acting reasonably, including in registrable or recordable form, required under the Option Agreement and the laws of the Province of Quebec to validly effect the transfer and assignment, and to register or record notice against title to the Bachelor Lake Property of the transfer and assignment, of the Assigned Assets to the Assignee; (iii) all forms required by the Exchange and such other forms, if any, as are required by the Securities Commission in respect of the acquisition by the Assignor of the Consideration Shares and the Bonus Shares; (iv) an assignment and assumption agreement, in form and substance satisfactory to the Assignor and the Assignee, each acting reasonably, regarding the assumption by the Assignee of the Assumed Obligations executed by the Assignee; (v) the consent of Metanor to the assignment of the Assigned Assets to the Assignee pursuant to subsection 2(j) of the Option Agreement and the assumption by the Assignee of the Assumed Obligations, together with the other written confirmations of Metanor pursuant to subsection 8(b)(iv) of this Agreement; (vi) release by Metanor of the Assignor in connection with all liabilities and obligations of the Assignor under and in connection with the Option Agreement; and (vii) such further documents as may be contemplated by this Agreement or as the Assignee may reasonably require. (d) Where the consent or approval of any Governmental Authority or any registration is required for the transfer or assignment of any of the Assigned Assets to the Assignee and such consent or approval has not been obtained or such registration has not been made on or before the Closing Date and the Assignee and the Assignor have waived the delivery of such consent or approval as a condition precedent to the completion of the Closing, then the Assignor shall hold such Assigned Asset in trust for the Assignee pending receipt of such consent or approval or such registration; provided that the sole obligation of the Assignor will be to hold such Assigned Asset and, at the request and expense of the Assignee, to perform such acts in compliance with Applicable Laws as an owner of such Assigned Asset would perform. The maximum period of time that the Assignor shall be required to hold any Assigned Asset pursuant to this subsection 9(d) shall be for one year after the Closing Date. 10. INDEMNITY (a) The Assignee hereby agrees to indemnify and save harmless the Assignor from all Losses suffered or incurred by the Assignor directly or indirectly as a result of, arising out of, associated with or in connection with: -19- (i) the Assignor having held a right, title or interest in and to, or the Assignor having exercised any right pursuant to, the Assigned Assets; (ii) any failure to assume or discharge, perform or fulfill any of the Assumed Obligations; (iii) a breach of any representation or warranty made by the Assignee in this Agreement; or (iv) a breach by the Assignee of any of its covenants or obligations in this Agreement. (b) The Assignor hereby agrees to indemnify and save harmless the Assignee from all Losses suffered or incurred by the Assignee directly or indirectly as a result of, arising out of, associated with or in connection with: (i) a breach of any representation or warranty made by the Assignor in this Agreement; or (ii) a breach by the Assignor of any of its covenants or obligations in this Agreement. 11. INTENTIONALLY DELETED 12. CONFIDENTIAL INFORMATION (a) Except as specifically otherwise provided for herein, each party hereto will keep confidential the terms of, and all information with respect to, this Agreement and all other information received in conjunction with this Agreement and will refrain from using such information other than for activities contemplated hereunder or from publicly disclosing such terms and information unless required by law or regulation or by the rules or policies of any regulatory authority or stock exchange having jurisdiction, or with the written consent of the other party hereto, such consent not to be unreasonably withheld. The provisions of this section 12 do not apply to information which is or becomes part of the public domain other than through a breach of the terms hereof by a party hereto. Nothing in this section 12 shall prevent either party hereto from making any disclosure with respect to this Agreement, or filing a copy of this Agreement, pursuant to any requirement of the Securities Laws or from disclosing information to an Affiliate, or an employee, agent or consultant of a party hereto for purposes related to the administration of this Agreement or to a third party for purposes of a transaction or reorganization, financing, review of materials, data and results by a consultant and similar matters provided that the person or company to whom disclosure is made shall first agree in writing to be bound by these provisions of confidentiality. (b) Where a request is made for permission to disclose information hereunder, a reply thereto will be made within three Business Days after receipt of such request, failing which the party hereto requesting such permission will be entitled to disclose such information in the limited circumstances specified in such request as if such consent had been given. (c) The parties hereto will consult with each other prior to issuing any press release or other public statement regarding this terms of this Agreement. In addition, each party hereto -20- will obtain prior approval from the other party hereto before issuing any press release or public statement using the name of the other party hereto or of any of the officers, directors or employees of the other party hereto. 13. GENERAL (a) The expenses incurred by each party hereto in connection with this Agreement and the transactions contemplated hereby shall be borne by such party. (b) Time shall be of the essence of this Agreement and each of the terms and conditions of this Agreement. (c) This Agreement shall not be assigned by either party hereto without the prior written consent of the other party hereto. (d) Any notice to be given to one party hereto by any other party hereto may be sent by facsimile or e-mail or may be personally delivered and all payments on account of the smelter returns royalty payable under subsection 2(d) hereof shall be made to the Assignor, as follows: in the case of the Assignor: Wolfden Resources Inc. 309 Court Street South Thunder Bay, Ontario P7B 2Y1 Attention: Chief Financial Officer Fax: (807) 345-0284 in the case of the Assignee: Halo Resources Ltd. 1305 - 1090 West Georgia Street Vancouver, British Columbia V6E 3V7 Attention: Marc Cernovitch, President Fax: (604) 601-8209 (e) Each party hereto shall from time to time and at all times after the Closing Date at the request of the other party hereto, but without further consideration, do, or cause to be done, all such acts and things and execute and deliver, or cause to be executed and delivered, all such further agreements, transfers, assurances, instruments or documents as shall be reasonably required in order to fully perform and carry out the provisions and intent of this Agreement. (f) No party hereto shall be liable for or otherwise incur any obligation to any other party hereto in respect of any commissions or finder's fees to any broker, intermediary or finder payable in connection with any transaction contemplated hereby. (g) If any one or more of the provisions of this Agreement are held to be illegal, invalid or unenforceable for any reason, then such illegality, invalidity or unenforceability shall not -21- affect any other provision hereof, but this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision or provisions had never been contained herein. (h) This Agreement supersedes the heads of agreement dated November 12, 2004 between the Assignor and the Assignee, and all understandings and agreements heretofore made by the parties hereto (including such agreement) in respect of the transactions contemplated hereby are merged in the Agreement and of no further effect. (i) This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. (j) The provisions of this Agreement may only be amended with the written consent of each of the parties hereto. No waiver of any provision of this Agreement shall be effective, unless in writing, and no waiver of any provision of this Agreement shall constitute a waiver of any other provision of this Agreement or, unless expressly provided in writing, constitute a continuing waiver. (k) The parties hereto acknowledge and confirm that they have requested that this Agreement as well as all notices and other documents contemplated hereby be drawn up in the English language. Les parties aux presentes reconnaissent et conferment qu'elles ont convenu que la presente convention ainsi que tous les avis et documents qui s'y rattachent soient rediges dans la lnague anglaise. (l) This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the Province of Ontario and the laws of Canada applicable therein and each party hereto hereby irrevocably attorns to the jurisdiction of the courts of the Province of Ontario in respect of all matters arising from the transactions contemplated hereby. (m) This Agreement may be executed in counterparts and, upon the execution of one such counterpart by each party hereto, such counterparts shall together constitute one agreement and shall be construed as if all parties hereto had executed one copy of this Agreement. IN WITNESS WHEREOF this Agreement is effective as of the day and year first above written. WOLFDEN RESOURCES INC. By: ____________________________________ John Seaman Chief Financial Officer HALO RESOURCES LTD. By: ____________________________________ Marc Cernovitch President - 22 - LIST OF SCHEDULES [NOT ATTACHED] SCHEDULE A OPTION AGREEMENT SCHEDULE B CORPORATION CED-OR NSR AGREEMENT SCHEDULE C DETAILS OF ASSIGNOR'S EXPENDITURES SCHEDULE D SALE AND PURCHASE AGREEMENT DATED NOVEMBER 10, 2004 BETWEEN GEONOVA AND METANOR EX-10 5 exh4_8.txt BACHELOR LAKE J.V. AGREEMENT SEPT 8/05 EXHIBIT 4.8 Bachelor Lake Joint Venture Agreement by and between Halo Resources Ltd. and Metanor Resources Inc. Dated September 8, 2005 JOINT VENTURE AGREEMENT made between HALO RESOURCES LTD. and RESSOURCES METANOR INC./METANOR RESOURCES INC. Dated September 8, 2005. TABLE OF CONTENTS DEFINITIONS....................................................................1 DEFINITIONS.................................................................1 GENDER AND EXTENDED MEANINGS................................................7 CURRENCY....................................................................7 BUSINESS DAYS...............................................................7 PERIOD OF TIME/TIME OF ESSENCE..............................................8 SECTION HEADINGS............................................................8 GOVERNING LAW...............................................................8 FURTHER ASSURANCES..........................................................8 SCHEDULES......................................................................8 SCHEDULES...................................................................8 REPRESENTATIONS AND WARRANTIES.................................................8 REPRESENTATION AND WARRANTIES OF THE PARTIES................................8 COMMENCEMENT OF AGREEMENT......................................................9 EFFECTIVE DATE..............................................................9 JOINT VENTURE.................................................................10 PURPOSES...................................................................10 AUTHORITY..................................................................10 CONTINUING INTERESTS.......................................................10 TERM.......................................................................10 FISCAL YEAR................................................................10 RELATIONSHIP..................................................................11 NO PARTNERSHIP.............................................................11 OTHER BUSINESS OPPORTUNITIES...............................................11 RELATIONSHIP OF PARTICIPANTS...............................................11 RESPONSIBILITY FOR EXPENDITURES............................................11 INTERESTS OF PARTICIPANTS.....................................................12 INITIAL CONTRIBUTIONS......................................................12 CASH CONTRIBUTIONS.........................................................12 CHANGES IN PARTICIPATING INTERESTS.........................................12 VOLUNTARY REDUCTION IN PARTICIPATION.......................................12 FAILURE TO MEET CASH CALLS.................................................13 ELIMINATION OF MINORITY INTEREST...........................................13 CONTINUING LIABILITIES UPON ADJUSTMENT OF PARTICIPATING INTERESTS..........13 MANAGEMENT COMMITTEE..........................................................14 ORGANIZATION AND COMPOSITION...............................................14 DECISIONS..................................................................14 MEETING AND QUORUM.........................................................14 ACTION WITHOUT MEETING.....................................................15 MATTERS REQUIRING APPROVAL.................................................15 MATTERS REQUIRING UNANIMOUS APPROVAL.......................................15 -2- DECISIONS BINDING..........................................................16 EXPENSES...................................................................16 RULES......................................................................16 PARTICIPANT MAY REQUIRE OPERATIONS TO BE SHUT DOWN.........................16 RESUMPTION OF OPERATIONS...................................................16 LOSS OF RIGHTS.............................................................16 MANAGER.......................................................................17 MANAGER DURING EXPLORATION OPERATIONS......................................17 MANAGEMENT OF ACCOUNTS DURING EXPLORATION OPERATIONS.......................17 MANAGER DURING DEVELOPMENT, MINING AND OTHER OPERATIONS....................17 STANDARD OF CARE...........................................................21 DEEMED RESIGNATION OF THE MANAGER..........................................21 PAYMENTS TO MANAGER........................................................22 TRANSACTIONS WITH AFFILIATES...............................................22 PROGRAMS AND BUDGETS..........................................................22 OPERATIONS PURSUANT TO PROGRAMS AND BUDGETS................................22 PRESENTATION OF PROGRAMS AND BUDGETS.......................................22 REVIEW OF PROGRAMS.........................................................23 REVIEW AND APPROVAL OF PROPOSED PROGRAMS AND BUDGETS.......................23 ELECTION TO PARTICIPATE....................................................23 NO CONTRIBUTION - LIMITED CONTRIBUTION.....................................23 BUDGET DECREASES...........................................................24 BUDGET OVERRUNS; PROGRAM CHANGES...........................................24 EMERGENCY OR UNEXPECTED EXPENDITURES.......................................24 MANDATORY EXPENDITURES.....................................................25 FUNDS SPENT PROPORTIONATELY................................................25 ELECTION NOT TO CONTRIBUTE.................................................25 ALLOCATION OF EXPENDITURES.................................................25 FEASIBILITY STUDY..........................................................25 ACCOUNTS AND SETTLEMENTS......................................................26 VENTURE BANK ACCOUNT.......................................................26 MANAGER'S FUNDS............................................................26 MONTHLY STATEMENTS.........................................................26 CASH CALLS.................................................................27 SPECIAL CASH CALLS.........................................................27 PAYMENT OF CASH CALLS......................................................28 FAILURE TO MEET CASH CALLS.................................................28 AUDITS AND ADJUSTMENTS.....................................................28 DISPOSITION OF PRODUCTS.......................................................28 DIVISION OF PRODUCTION.....................................................28 EXISTING ROYALTIES.........................................................28 LIENS......................................................................28 WITHDRAWAL AND TERMINATION....................................................29 WITHDRAWAL.................................................................29 OCCURRENCE OF TERMINATION..................................................30 CONTINUING OBLIGATIONS.....................................................30 DISPOSITION OF ASSETS ON TERMINATION.......................................30 RIGHT TO DATA AFTER TERMINATION............................................31 CONTINUING AUTHORITY.......................................................31 -3- TRANSFER OF INTEREST AND FINANCING............................................31 RIGHTS TO TRANSFER.........................................................31 RIGHT OF FIRST REFUSAL.....................................................32 LIMITATIONS ON FREE TRANSFERABILITY........................................32 ACQUISITION OF INTEREST....................................................33 FINANCING..................................................................33 DISPUTES......................................................................34 DISPUTE RESOLUTION.........................................................34 FORCE MAJEURE.................................................................34 FORCE MAJEURE..............................................................34 AREA OF INTEREST..............................................................35 AREA OF INTEREST...........................................................35 NOTICE OF ACQUISITION......................................................35 INFORMATION, DATA AND CONFIDENTIALITY.........................................36 ACCESS.....................................................................36 PROGRESS REPORTS...........................................................36 CONFIDENTIALITY............................................................36 EVENT OF DEFAULT OF PARTICIPANT...............................................37 EVENT OF DEFAULT...........................................................37 ADDITIONAL REMEDIES........................................................38 INSURANCE.....................................................................38 INSURANCE..................................................................38 NOTICE........................................................................38 NOTICES....................................................................38 MISCELLANEOUS - GENERAL.......................................................39 ACTS IN GOOD FAITH.........................................................39 AMENDMENT..................................................................39 ENTIRE AGREEMENT...........................................................39 ENUREMENT..................................................................39 COUNTERPARTS...............................................................40 SCHEDULE "A" SCHEDULE "B" SCHEDULE "C" SCHEDULE "D" SCHEDULE "E" THIS JOINT VENTURE AGREEMENT dated the 8th day of September, 2005. BETWEEN: HALO RESOURCES LTD. a corporation existing under the laws of the Province of British Columbia ("Halo") OF THE FIRST PART - and - RESSOURCES METANOR INC./METANOR RESOURCES INC. a corporation existing under the laws of the Province of Quebec ("Metanor") OF THE SECOND PART WHEREAS each of Metanor and Halo owns an undivided 50% interest in and to the Property (as hereinafter defined). AND WHEREAS Metanor and Halo have determined to jointly develop and operate the Property as a joint venture pursuant to and in accordance with the terms of this Agreement. NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants, conditions and premises herein contained, the sum of Two Dollars now paid by each of the Parties (as hereinafter defined) to the other and for other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged) the Parties do hereby covenant and agree as follows: 1. DEFINITIONS 1.1 DEFINITIONS. IN THIS AGREEMENT: (A) "THIS AGREEMENT", "HEREIN", "HEREBY", "HEREOF", "HEREUNDER" and similar expressions shall mean or refer to this Joint Venture Agreement and all schedules hereto and any and all agreements or instruments supplemental or ancillary hereto and the expression "section" followed by a number means and refers to the specified section of this Agreement. -2- (B) "ACCOUNTING PROCEDURE" shall mean the procedures set forth in Schedule "B". (C) "AFFILIATE" shall mean any person, partnership, joint venture, corporation or other form of enterprise which directly or indirectly controls, is controlled by or is under common control with, a Participant. "Control" means possession, directly or indirectly, of the power to direct or cause direction of management decisions and policies through ownership of voting securities, contract, voting trust or otherwise. (D) "AGENTS" shall mean consultants (including financial advisors), servants, employees, agents, workmen, contractors and subcontractors. (E) "ASSETS" shall mean the Property, all Products and all other real and personal property, tangible and intangible, held by or for the benefit of the Participants hereunder including, without limiting the generality of the foregoing, all equipment, machinery, vehicles, tools, furniture and other assets used in connection with the Operations or appurtenant to the Property and all buildings, structures, improvements, mills, concentrators and facilities situated on or appurtenant to the Property on the Effective Date and thereafter in the course of the Operations. (F) "AUDITOR" means the auditors for the Venture as determined by a unanimous decision of the Management Committee. (G) "BUDGET" shall mean a detailed estimate of all costs to be incurred with respect to a Program and a schedule of cash advances to be made by the Participants. (H) "CAPITAL EXPENDITURES" shall mean those items presented in Programs and Budgets approved by the Management Committee and which are capital expenditures under Canadian generally accepted accounting principles. (I) "CLAIMS" shall mean any and all debts, claims, actions, lawsuits, causes of action, demands, duties and obligations of whatsoever nature and howsoever incurred. (J) "COMMERCIAL PRODUCTION" shall mean the exploitation of Products from the Property, but shall not include treating, shipping or milling of Products for the purposes of testing or milling or leaching by a pilot plant or during an initial tune-up period of a plant. Commercial Production shall be deemed to have commenced: (i) If a plant is located on the Property, on the first day of the month following the first period of 30 consecutive days during which Products have been processed through such plant at an average rate of not less than 70% of the initial rated capacity of such plant; or -3- (ii) If no plant is located on the Property, on the first day of the month following the first 30 consecutive days during which Products have been shipped from the Property on a reasonably regular basis for the purpose of earning revenue. (K) "DEVELOPMENT" shall mean all preparation for the removal and recovery of Products including the construction or installation of a mill, processing plant, leach pads or any other improvements to be used for the mining, handling, milling, treatment, processing or other beneficiation of Products and the preparation of feasibility studies and financing plans. (L) "EFFECTIVE DATE" shall mean July 1st, 2005. (M) "ENCUMBRANCES" shall mean any and all mortgages, pledges, security interests, liens, charges, encumbrances, contractual obligations and claims of others, whether recorded or unrecorded, or registered or unregistered. (N) "EXPENDITURES" shall mean all costs, charges, expenses and liabilities of whatever kind or nature incurred and actually paid or accrued, including, without limitation, Capital Expenditures, in accordance with good and reasonable mining practices and in accordance with Canadian generally accepted accounting principles and the Accounting Procedure, with respect to Operations from and after the Effective Date. (O) "EXISTING ROYALTIES" shall mean those royalties set forth in Schedule "C" attached hereto. (P) "EXPLORATION" shall mean all activities directed toward ascertaining the existence, location, quantity, quality or commercial value of deposits of Products on, in or under the Property. (Q) "FACILITIES" shall mean all mines and plants including without limitation all pits, shafts, drifts, haulage ways and other underground workings and all buildings, plants and other structures, fixtures and improvements and all other property, whether fixed or moveable, as the same may exist at any time in or on the Property if for the exclusive benefit of the Property. (R) "FEASIBILITY STUDY" means a detailed report or reports prepared by or for the Operator evaluating the feasibility of placing the Property, or any part thereof, into production and operation as a mine, which detailed report or reports shall include, without limitation, a reasonable assessment of the mineable mineral reserves and their amenability to metallurgical treatment, a complete description of the Work, equipment and supplies required to bring the Property into -4- mineral production and the estimated cost thereof, a description of the mining methods to be employed and a financial appraisal of possible mining operations. Such detailed report or reports shall be, in the opinion of the person or firm commissioning such report or reports, or, in the event of a dispute between the Parties, in the opinion of such qualified independent firm of consultants as the Management Committee shall select in good faith, in such form and of such substance which is normally accepted by substantial and recognized financial institutions for the purpose of lending funds for the development of mineral deposits, and shall include and be supported by at least the following: (i) a description of the Property and that part of the Property proposed to be the subject of a Mine; (ii) the estimated recoverable reserves of minerals and the estimated composition and content thereof; (iii) the procedure for the Development, Mining and production of Products from the Property; (iv) results of mineral processing tests and ore amenability tests; (v) the nature and extent of the Facilities which it might be necessary to acquire or construct, which may include ore processing facilities if the nature, volume and location of the ore makes such ore processing facilities necessary and feasible, in which event the study shall also include a design for such ore processing facilities; (vi) a detailed cost and timing analysis, including a capital cost budget, of the total estimated costs and expenses required to develop a mine on the Property and to purchase, construct and install all structures, machinery and equipment required for such Mine including an ore processing facility, if so included in accordance with the terms hereof; (vii) detailed operating cost estimates, including working capital requirements for the initial three months of operation of the mine or such longer period as may be reasonably justified; (viii) all necessary environmental impact and mitigation studies and costs including planned rehabilitation of the Property with estimated costs thereof; (ix) a critical path time schedule for bringing the Property or any part thereof to Commercial Production; (x) such other data and information as are reasonably necessary to substantiate the existence of a mineral -5- deposit of sufficient size and grade to justify development of a mine on the Property, taking into account all relevant business, tax and other economic considerations; (xi) disclosure of all price assumptions, together with a market analysis; (xii) a transportation cost analysis; (xiii) a proposed procedure or method of disposing of tailings as required under the environmental and mining laws of all Governmental Authorities having jurisdiction; (xiv) a detailed discussion and analysis of governmental requirements with respect to the development of a mine on the Property including time schedules; (xv) a discounted cash flow (net of income taxes) and return on investment analysis, including an economic forecast for the life of the proposed mine; and (xvi) appropriate sensitivity analyses. (S) "GOVERNMENTAL AUTHORITY" means any federal, provincial, state, municipal or other governmental department, commission, board, bureau, agency, state owned corporation or instrumentality, or any court, including, for greater certainty, the governing body of any Inuit organization having jurisdiction. (T) "INITIAL CONTRIBUTIONS" shall have the meanings set forth in section 7.1. (U) "INITIAL PARTICIPATING INTERESTS" shall mean the Initial Participating Interest of each Participant as set forth in section 7.2. (V) "MANAGEMENT COMMITTEE" shall mean the committee established under Article 8. (W) "MANAGER" shall mean the person or entity appointed under Article 9 to manage Operations and any successor Manager. (X) "MINE" shall mean a mine constructed by Mining on the Property and shall include all mine workings established on the Property and the Assets acquired, improved or rehabilitated in respect of such Mine, including the related ore body and all development headings, plant and concentrator installations, infrastructure and other Facilities constructed on the Property in the conduct of Mining Operations. (Y) "MINING" shall mean the mining, extracting, producing, treating, handling, milling or other processing of Products. -6- (Z) "OPERATIONS" shall mean every kind of Work performed exclusively on or in respect of the Property by or under the direction of the Management Committee including, without limiting the generality of the foregoing, the work of assessment, geophysical, geochemical and geological surveys, studies and mapping, investigating, drilling, designing, examining, equipping, improving, surveying, shaft-sinking, raising, cross-cutting and drifting, searching for, digging, trucking, sampling, working and procuring minerals, ores and metals, surveying and bringing any mining claims to lease, and all other work usually considered to be prospecting, exploration, development and mining work. (AA) "PARTY" or "PARTIES" shall mean either of, or collectively, Halo and Metanor, as the context may require, as parties to this Agreement and includes their respective successors and permitted assigns which become parties to this Agreement in accordance with its terms. (BB) "PARTICIPANT" and "PARTICIPANTS" mean initially, Metanor and Halo, and includes (i) any permitted transferee of a Participating Interest from either of Halo and Metanor in accordance with this Agreement and (ii) any other Person having a Participating Interest. (CC) "PARTICIPATING INTEREST" shall mean the percentage interest representing the undivided ownership interest of a Participant in the Assets and all other rights and obligations arising under this Agreement, as such undivided ownership interest may from time to time be adjusted hereunder. (DD) "PERSON" shall mean any natural person, partnership, company, corporation, unincorporated association, joint venture, trust, trustee, Governmental Authority or other entity howsoever designated or constituted. (EE) "PRIME RATE" shall mean the interest rate quoted from time to time as "Prime" by The Toronto-Dominion Bank to its most creditworthy customers. (FF) "PRODUCTS" shall mean all ores, minerals and mineral products located on, in or under or extracted from the Property and all beneficiated and other products produced therefrom under this Agreement. (GG) "PROGRAM" shall mean a description in reasonable detail in accordance with good mining industry practice of Operations to be conducted and objectives to be accomplished by the Manager with respect to the Property and includes, as the context requires: (i) a document or documents wherein there is specified in reasonable detail an outline of any and all research, prospecting and Exploration and Development Work proposed to be carried out during the program, the -7- estimated Expenditures to be incurred in carrying out the Work and the area of the Property on which the Work is to be undertaken, and (ii) the preparation of any Feasibility Study, and shall include any amendments to a Program as may be agreed upon by the Management Committee. (HH) "PROPERTY" shall mean the mining claims and mining concessions commonly referred to as the Bachelor Lake Property located in Canton Le Sueur in the Abitibi Region of Quebec, as more particularly described in Schedule "A" attached hereto and all other interest in mineral properties made subject to this Agreement by the Parties in accordance with its terms, including, without limiting the generality of the foregoing, all related surface rights, lands subject to land use permit and all tailings located on the Property and all easements and rights of way in connection therewith. (II) "TRANSFER" when used as a verb, shall mean to sell, grant, assign, or otherwise dispose of, directly or indirectly, including through mergers, consolidations or asset purchases and when used as a noun, shall mean a sale, grant, assignment, or disposal or the commitment to do any of the foregoing, directly or indirectly, including through mergers, consolidation or asset purchase. (JJ) "VENTURE" or "JOINT VENTURE" shall mean the business arrangement of the Participants under this Agreement. (KK) "WORK" means Exploration, Development or Mining work performed exclusively on or directly in relation to the Property or Products by or through the Manager for the benefit of and on the account of the Venture and the Participants in accordance with the terms of this Agreement. 1.2 GENDER AND EXTENDED MEANINGS. In this Agreement all words and personal pronouns relating thereto shall be read and construed as the number and gender of the party or parties referred to in each case require and the verb shall be construed as agreeing with the required word and pronoun. In this Agreement words importing the singular number include the plural and vice versa. 1.3 CURRENCY. All references to currency in this Agreement including "dollars" and "$" are in Canadian funds. 1.4 BUSINESS DAYS. All references in this Agreement to business days are to days excluding Saturdays, Sundays and banking holidays in the Province of Quebec or British Columbia. 1.5 PERIOD OF TIME/TIME OF ESSENCE. When calculating the period of time within which or following which any act is to be done or step is to be taken pursuant to this Agreement, the date which is the reference date in calculating -8- such period shall be excluded. If the last day of such period is a non-business day, the period in question shall end on the next business day. Time is of the essence of this Agreement. 1.6 SECTION HEADINGS. The section and other headings contained in this Agreement or in the Schedules are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 1.7 GOVERNING LAW. This Agreement and the rights and obligations and relations of the parties shall be governed by and construed in accordance with the laws of the Province of Quebec and the federal laws of Canada applicable therein. The Parties agree that the courts of Quebec shall have jurisdiction to hear any action or other legal proceedings based on any provisions of this Agreement and each Party hereby attorns to the jurisdiction of the courts of the Province of Quebec. 1.8 FURTHER ASSURANCES. Each Party agrees from time to time, subsequent to the date hereof, to execute and deliver or cause to be executed and delivered to the other Party such instruments or further assurances as may be necessary or desirable to give effect to the provisions of this Agreement or as may be reasonably required for registering or recording changes in ownership interests in the Property. 2. SCHEDULES 2.1 SCHEDULES. The following are the schedules attached to and incorporated in this Agreement by reference and deemed to be a part hereof: Schedule "A" - Description of the Property Schedule "B" - Accounting Procedure Schedule "C" - Existing Royalties Schedule "D" - Net Smelter Returns Royalty Interest Schedule "E" - Rules for Arbitration 3. REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATION AND WARRANTIES OF THE PARTIES. Each of the Parties hereby represents and warrants to the other as follows and acknowledges that the other is relying on such representations and warranties in entering into this Agreement: (a) It is a company duly existing under the laws of its governing jurisdiction and it is duly organized and validly subsisting under such laws. (b) It has full power and authority to carry on its business and to enter into this Agreement and any agreement or instrument referred to or contemplated by this Agreement and to carry out and perform all of its obligations and duties hereunder and thereunder. (c) It has duly obtained all corporate and regulatory authorizations for the execution, delivery and performance of this Agreement and such execution, delivery and performance -9- and the consummation of the transactions herein and therein contemplated does not conflict with or result in a breach of any covenants or agreements contained in or constitute a default under or result in the creation of any Encumbrance, under the provisions of its constating documents or any shareholders' or directors' resolution or any indenture, agreement or other instrument whatsoever to which it is a party or by which it is bound and does not contravene any applicable laws. (d) This Agreement has been duly executed and delivered by it and is valid, binding and enforceable against it in accordance with its terms. (e) It has not committed an act of bankruptcy, is not insolvent, has not proposed a compromising arrangement to its creditors generally, has not had any petition for a receiving order in bankruptcy filed against it, has not made a voluntary assignment in bankruptcy, has not taken any proceedings with respect to a compromise or arrangement, has not taken any proceeding to have itself declared bankrupt or wound-up, has not taken any proceeding to have a receiver appointed in respect of any part of its assets, has not had any encumbrancer take possession of any of its property and has not had any execution or distress become enforceable or become levied upon any of its property. (f) As of the Effective Date it owns its right, title and interest in and to the Property free and clear of all Encumbrances, subject to the Existing Royalties and the terms and conditions of any and all leases, permits, licences or other approvals related to the Property. 4. COMMENCEMENT OF AGREEMENT 4.1 EFFECTIVE DATE. This Agreement shall be operative and shall take effect as of the Effective Date. 5. JOINT VENTURE 5.1 PURPOSES. The Joint Venture shall be entered into for the following purposes and shall serve as the exclusive means by which the Participants or either of them accomplish such purposes: (a) To conduct Exploration on, in and under the Property. (b) To engage in Development and Mining on the Property. (c) To evaluate the possible further Development of the Property. (d) To perform any other activity necessary, appropriate or incidental to any of the foregoing, including providing custom milling services to any Participant in respect of any ore of -10- any Participant which ore is not subject to this Agreement, or to any third party, on such terms as the Management Committee may agree. Unless the Participants otherwise agree in writing, Operations shall be limited to the purposes described in this section. 5.2 AUTHORITY. Subject as otherwise set out in this Agreement, all transactions, contracts, employments, purchases, operations, negotiations with third parties and any other matter or act undertaken on behalf of the Participants in connection with the Property shall be done, transacted, undertaken or performed in the name of the Manager, and no Participant shall do, transact, perform or undertake anything in the name of the other Participant or in the joint names of the Participants. 5.3 CONTINUING INTERESTS. Each Participant shall have a Participating Interest as determined in accordance with the provisions of this Agreement from time to time, and any legal title to any of the Assets or Property held by any Participant shall be subject to this Agreement. 5.4 TERM. Unless earlier terminated pursuant to Section 13, or as a result of one party acquiring a 100% Participating Interest and a 100% of the net smelter returns royalty interest, this Agreement shall remain in full force and effect for so long as any Party has any right, title or interest in and to the Assets. Termination of the Agreement shall not, however, relieve any Party from any obligations accrued but unsatisfied at the time of such termination. 5.5 FISCAL YEAR. The fiscal year end of the Joint Venture shall be December 31 commencing on December 31 in the year in which this Agreement takes effect, unless otherwise determined in accordance with the terms of this Agreement. 6. RELATIONSHIP 6.1 NO PARTNERSHIP. Nothing contained in this Agreement shall be deemed to constitute either Party the partner of the other nor, except as otherwise herein expressly provided, to constitute either Party the agent or legal representative of the other nor to create any fiduciary relationship between the Parties. It is not the intention of the Parties to create nor shall this Agreement be construed to create any mining, commercial or other partnership. Neither Party shall have any authority to act for or to assume any obligation or responsibility on behalf of the other Party except as otherwise expressly provided herein. The rights, duties, obligations and liabilities of the Parties shall be several and not joint or collective. Each Participant shall be responsible only for its obligations as herein set out and shall be liable only for its share of the costs and expenses as provided herein. Each Party shall indemnify, defend and hold harmless the other Party, its directors, officers and Agents from and against any and all losses, claims, damages and liabilities arising out of any -11- act or any assumption of liability by the indemnifying Party or any of its directors, officers and Agents done or undertaken or apparently done or undertaken on behalf of the other Party, except pursuant to the authority expressly granted herein or as otherwise agreed in writing between the Parties. 6.2 OTHER BUSINESS OPPORTUNITIES. Except as expressly provided in this Agreement, each Party shall have the right independently to engage in and receive full benefits from other business activities, whether or not competitive with Operations, without consulting the other Party. The doctrines of "corporate opportunity" or "business opportunity" shall not be applied to any other activity, venture or operation of either Participant and, except as expressly provided in this Agreement, neither Party shall have any obligation to the other with respect to any opportunity to acquire property at any time. 6.3 RELATIONSHIP OF PARTICIPANTS. (a) Claims by third parties arising out of the activities of the Joint Venture shall be borne by the Participants in proportion to their respective Participating Interests. (b) Subject to the terms of this Agreement, the right of each Party to mine and market production from other sources in competition with the other Parties and of each Participant to market its share of any Product in competition with any other Participant is confirmed. 6.4 RESPONSIBILITY FOR EXPENDITURES. Except as otherwise provided in this Agreement, the Participants shall bear all Expenditures and all liabilities arising under this Agreement, and shall own the Assets, in proportion to their respective Participating Interests. 7. INTERESTS OF PARTICIPANTS 7.1 INITIAL CONTRIBUTIONS. The value of each Participant's initial contribution (an "Initial Contribution") shall be deemed to be as set forth below, notwithstanding the amounts spent by each Participant in acquiring its right, title and interest in and to the Property: Halo - $3,700,000 Metanor - $3,700,000 7.2 INITIAL PARTICIPATING INTEREST. On the Effective Date, Metanor shall have a 50% Participating Interest and Halo shall have a 50% Participating Interest. Thereafter, each Participant shall have a Participating Interest as is determined from time to time in accordance with the provisions of this Agreement. 7.3 CASH CONTRIBUTIONS. Subject to any election permitted by section 7.5 the Participants shall be obligated to contribute funds to approved Programs and Budgets in proportion to their respective Participating Interests. 7.4 CHANGES IN PARTICIPATING INTERESTS. The Participants' Participating Interests shall be changed in the event of the following: -12- (a) an election by a Participant not to contribute an approved Program and Budget, or to contribute to Expenditures which are a part of an approved Program and Budget less than the percentage reflected by its Participating Interest; or (b) default by a Participant in making its agreed contribution to an approved Program and Budget; or (c) an acquisition of less than all of the Participating Interest of any Participant however arising. 7.5 REDUCTION IN PARTICIPATING INTEREST. A Participant may elect not to contribute to an approved Program and Budget or to limit its contributions toward Expenditures which are a part of an approved Program and Budget to some amount less than its respective Participating Interest (other than in respect of the then current Program and Budget to the extent to which such Participant has previously elected to contribute). If a Participant elects not to contribute to an approved Program and Budget or elects to contribute to an approved Program and Budget some amount toward Expenditures less than its respective Participating Interest, the Participating Interest of that Participant shall be recalculated at the time of such election by dividing the sum of, (i) such Participant's Initial Contribution set forth in section 7.1, (ii) the total of all of such Participant's contributions toward the Venture's Expenditures to the date of such election, and (iii) the amount, if any, that such Participant elects to contribute toward the Venture's Expenditures in the approved Program and Budget, by the sum of (i), (ii) and (iii) above for both Participants; and then multiplying the result by 100. The Participating Interest of the other Participant shall thereupon increase and become the difference between 100% and the recalculated Participating Interest of the Participant that made such election pursuant to this section 7.5. 7.6 FAILURE TO MEET CASH CALLS. If a Participant fails to meet cash calls to which it has agreed to contribute pursuant to the terms of this Agreement in the amounts and at the times specified under this Agreement, it shall be deemed to be in default of its obligations under this Agreement and the Manager shall, by written notice to such Participant, demand payment. If no payment is made by such Participant within the period of fifteen days next succeeding the receipt of the demand notice by the Participant, the other Participant may elect to increase their contributions to satisfy the shortfall, or the Manager shall curtail any applicable Program, and the defaulting Participant shall have its Participating Interest reduced in the manner contemplated in section 7.5. 7.7 ELIMINATION OF MINORITY INTEREST. Upon the dilution or other reduction of a Participating Interest to 15% or less, such Participating Interest shall convert to a 1% net smelter returns royalty interest and the Participant whose Participating Interest is so converted shall be entitled to receive ongoing royalty payments equal to 1% of net smelter returns as calculated and paid in accordance with the terms set out in Schedule "D" and, subject as set out in section 7.8 below, such Participant shall be relieved of all obligations to contribute to Programs and Budgets, shall be relieved of its share of any -13- liabilities, costs, penalty or fine arising out of Operations conducted after such conversion and shall forfeit all of its rights to have its representatives appointed as members of the Management Committee, to receive notice of and to attend at Management Committee Meetings and to receive and participate in Feasibility Studies and Programs and Budgets. 7.8 CONTINUING LIABILITIES UPON ADJUSTMENT OF PARTICIPATING INTERESTS. Any reduction or conversion of a Participant's Participating Interest under this Article 7 shall not relieve such Participant of its share of any liability, cost, penalty or fine arising out of Operations conducted prior to such reduction; provided, that notwithstanding the foregoing, upon the conversion of a Participating Interest to a net smelter returns royalty interest pursuant to section 7.7, the holder of such net smelter returns royalty interest shall not be obligated to pay or incur any expense or liability related to the costs of the closure of any mine or processing facility located on the Property or related to rehabilitation or reclamation of the Property upon the closure of such mine or processing facility located on the Property. For the purposes of this Article 7, such Participant's share of such liability, cost, penalty or fine shall be equal to its Participating Interest at the time the liability, cost, penalty or fine was incurred and shall continue thereafter to be equal to its Participating Interest at the time such liability, cost, penalty or fine was incurred. The increased Participating Interest accruing to a Participant as a result of the reduction of another Participant's Participating Interest shall be free of Encumbrances other than those existing at the date of this Agreement or those arising out of Operations or to which both Participants have given their written consent. At any time upon the request of any other Participant, a Participant whose Participating Interest has been adjusted, shall execute and acknowledge such instruments and perform such acts as may be necessary to evidence such adjustment, including in such form as may be necessary for recording or registering notice of such adjustment in the relevant public offices of all Governmental Authorities having jurisdiction. 8. MANAGEMENT COMMITTEE 8.1 ORGANIZATION AND COMPOSITION. The Participants hereby establish a Management Committee to determine overall policies, objectives, procedures, methods and actions under this Agreement. The Management Committee shall oversee all Operations conducted by the Manager on or related to the Property. The Management Committee shall consist of two members appointed by each of the Participants. At least one of the members appointed by each Participant shall be an engineer or geoscientist or any other person with experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of the foregoing (a "Qualified Member"). Each Participant may appoint one or more alternates to act in the absence of a regular member, provided that each Participant shall be represented by at least one Qualified Member at all times. Any alternate so acting shall be deemed a member of the Management Committee. Appointments shall be made or changed by notice to the other Participant. 8.2 DECISIONS. The Management Committee shall determine matters it addresses by way of vote of the Management Committee members. Each Participant acting through its appointed Management Committee members shall have the number -14- of votes on the Management Committee equal to its Participating Interest. Unless otherwise provided in this Agreement, including pursuant to section 8.6, decisions of the Management Committee shall be determined by a majority vote. 8.3 MEETING AND QUORUM. The Management Committee shall hold regular meetings at least every three months in Val d'Or, Quebec or at such other locations agreed to by the Participants. The Manager shall give 15 days' advance notice to the Participants of such regular meetings. Notice of a meeting shall not be required if both representatives of each Participant are present at a meeting and unanimously waive notice. Either Participant may call a special meeting upon 15 days' advance notice to the Manager and the other Participant. In the case of an emergency, reasonable notice of a special meeting shall suffice. A quorum of the Management Committee shall consist of at least one member representing each Participant present at a duly called meeting of the Management Committee or in attendance by telephone conference. Each notice of a meeting shall include an itemized agenda prepared by the Manager in the case of a regular meeting or by the Participant calling the meeting in the case of a special meeting, but any matters may be considered with the consent of both Participants. The Manager shall prepare detailed minutes of all meetings and shall distribute copies of such minutes to the Participants within 15 days after each meeting. Failure by a Participant to sign or furnish written detailed notice of objection to the minutes within 15 days after receipt from the Manager shall be deemed acceptance of such minutes by the Participants. When signed or deemed accepted by both Participants, the minutes shall be the official record of the decisions made by the Management Committee and shall be binding on the Manager and the Participants. If personnel employed in Operations are required to attend a Management Committee meeting, reasonable costs incurred in connection with such attendance shall be a Venture cost. All other costs shall be paid by the Participants individually. 8.4 ACTION WITHOUT MEETING. In lieu of meetings, the Management Committee may hold telephone conference meetings provided that all decisions of the Management Committee are immediately confirmed in minutes in writing and distributed for review or objection and accepted by the Participants in accordance with section 8.3. 8.5 MATTERS REQUIRING APPROVAL. Except as otherwise provided by this Agreement, the Management Committee shall have exclusive authority to determine all management matters related to this Agreement. 8.6 MATTERS REQUIRING UNANIMOUS APPROVAL. Notwithstanding any other provision of this Agreement the following matters shall require the unanimous approval of the Management Committee: (a) Changing the fiscal year end of the Venture. (b) Selling or otherwise disposing of all or substantially all of the Assets or any Asset or Assets or Surplus Material in accordance with Section IV of the Accounting Procedure. -15- (c) Entering into any transaction with an Affiliate of a Participant or any party related to a Participant other than on an arm's length basis. (d) Entering into any acquisition or investment other than in the ordinary course of the business of the Venture. (e) Executing and delivering any agreement with respect to the disposition or encumbrance of all or any part of the Property. (f) Carrying on any business other than Operations, including any custom milling contemplated in section 5.1 (d) of this Agreement. (g) Commencing any litigious or administrative claim for an amount in excess of $50,000.00. (h) Amending this Agreement. (i) Appointing the Auditor. (j) The approval of any Program and Budget and any decision in relation to such approved Program and Budget and the conduct of Work pursuant thereto, having a budget over $500,000. (k) Appointing the Manager. 8.7 DECISIONS BINDING. Management Committee decisions made in accordance with this Agreement shall be binding on the Parties. 8.8 EXPENSES. Each party shall bear the expenses incurred by its representatives and alternate representatives in attending meetings of the Management Committee. 8.9 RULES. The Management Committee may, by unanimous agreement of the representatives of the Participants on the Management Committee, establish rules of procedure for the conduct of the business of the Management Committee, not inconsistent with the terms of this Agreement. 8.10 PARTICIPANT MAY REQUIRE OPERATIONS TO BE SHUT DOWN. Either Participant shall be entitled, by notice in writing to the other Participant, to require that Operations be suspended if such Participant can demonstrate (as set forth in such notice) that its proportionate share of Expenditures based on its Participating Interest has exceeded its proceeds from the sale of Products for a period of three consecutive months. If such notice is given to the other Participant, the Management Committee shall cause the Manager to prepare a Program and Budget for placing the Mine on care and maintenance and the Parties shall convene a meeting of the Management Committee to approve such Program and Budget. 8.11 RESUMPTION OF OPERATIONS. If at any time after the suspension of Operations pursuant to section 8.10, the Manager determines that the Mine can be placed back into Commercial Production with the Participants' proportionate -16- share of Expenditures based on its Participating Interest being not more than 80% of the proceeds which they should realize on the sale of their share of Products, the Manager shall prepare a Program and Budget for the resumption of Operations and the Parties shall convene a meeting of the Management Committee to approve such Program and Budget. 8.12 LOSS OF RIGHTS. In the event that the Participating Interest of any Party shall be diluted or otherwise reduced to 35% or less, then such Participant shall forfeit all of its rights to have its representatives appointed as members of the Management Committee and to receive notice of, attend and vote at any Management Committee meetings. 9. MANAGER 9.1 MANAGER DURING EXPLORATION OPERATIONS. During the period from and after the Effective Date that the Joint Venture is conducting Exploration Operations on the Property, the Management Committee shall unanimously appoint any single person having the same qualifications as a Qualified Member of the Management Committee as Manager of the Joint Venture to carry out the day to day management of such Exploration Operations on the Property for and on behalf of, and subject to the discretion of, the Management Committee. Such Manager shall have the powers and duties of the Manager set out in Section 9.3, as may be applicable to Exploration Operations, and shall act in accordance with the standard of care set out in Section 9.4. Such individual shall be entitled to such form of compensation from the Joint Venture as the Management Committee may unanimously determine. 9.2 MANAGEMENT OF ACCOUNTS DURING EXPLORATION OPERATIONS. During the period from and after the Effective Date that the Joint Venture is conducting Exploration Operations on the Property, the books and records of account and the accounts and cash flow of the Joint Venture shall be managed by a controller that shall be a qualified bookkeeper or chartered accountant located in Val d'Or, Quebec and unanimously chosen by the Management Committee. Such controller shall be subject at all times to the general oversight and direction of the Manager and the Management Committee and the provisions of section 8.6. 9.3 MANAGER DURING DEVELOPMENT, MINING AND OTHER OPERATIONS. During any Development Mining and other stage of Operations other than Exploration Operations, the Management Committee shall (i) choose between either of the Participants to act as Manager on such terms as such Party and the Management Committee shall unanimously agree; or (ii) contract with an experienced and financially sound mining company that is independent of each of the Participants to act as the Manager under this Agreement on such terms as the Management Committee shall unanimously agree. Such Manager shall have the responsibility for the conduct of Operations and shall be subject at all times to the general oversight and direction of the Management Committee and the provisions of section 8.6. The Manager shall be vested with the authority to manage and carry out the day to day management of the Property and to conduct Operations pursuant -17- to the terms of this Agreement and the most recently approved Program and Budget. The Manager shall agree to carry out its duties as Manager itself or through its Agents in accordance with the terms and intent of this Agreement and on behalf of and for the account of the Participants in accordance with their Participating Interests. Without limiting the generality of the foregoing, the Manager shall have the following powers and duties: (a) The Manager shall manage, direct and control day to day Operations. (b) The Manager shall implement the decisions of the Management Committee, make all expenditures necessary to carry out approved Programs and promptly advise the Management Committee if it lacks sufficient funds to carry out its responsibilities under this Agreement. (c) The Manager shall: (i) purchase or otherwise acquire all material, supplies, equipment, water, utility and transportation services required for Operations from independent parties and on the best terms available, taking into account all of the circumstances; (ii) obtain such customary warranties and guarantees as are available in connection with such purchases and acquisitions; and (iii) keep the Assets free and clear of all Encumbrances except for those existing at the time of or created concurrent with the acquisition of such Assets, and except for the Existing Royalties, the terms of those encumbrances contemplated in this Agreement, any construction, mechanic's or materialmen's liens which shall be caused to be released or discharged in a diligent manner by the Manager or Encumbrances specifically approved by the Management Committee. (d) The Manager shall preserve and protect title to the Property at all times (including the renewal of any and all related leases, mining claims, permits, licences or other approvals or grants of interest as required) and shall conduct such title examinations and cure such title defects as may be advisable in the reasonable judgment of the Manager. (e) The Manager shall: (i) make or arrange for all payments required by all leases, licenses, permits, contracts and other agreements related to the Assets including, without limitation, the Existing Royalties; (ii) pay or arrange for payment of all taxes, assessments and like charges on Operations and Assets except taxes determined or measured by a Participant's sales revenue or net income (if authorized by the Management Committee, the Manager shall have the right to contest in court or otherwise, the validity or amount of any taxes, assessments or charges if the Manager deems them to be unlawful, unjust, unequal or excessive or to undertake such other steps or proceedings as the Manager may deem reasonably necessary to secure a cancellation, reduction, readjustment or -18- equalization thereof, but in no event shall the Manager permit or allow title to the Assets to be lost as the result of the nonpayment of any taxes, assessments or like charges); and (iii) do or cause to be done all other acts reasonably necessary to maintain the Assets and to maintain the title thereto in good standing including, without limitation, the performance of all assessment and other Work that is required by law. (f) The Manager shall: (i) apply for all permits, licenses and approvals necessary to conduct Operations; (ii) use reasonable best efforts to comply with all laws, regulations, orders or policy directions of any Governmental Authority having jurisdiction; (iii) notify promptly the Management Committee of any allegations of substantial violation of the foregoing; and (iv) prepare and file all reports or notices required for or arising out of the conduct of Operations. (g) With respect to any joint sale or other joint disposition of Products that may be agreed to pursuant to section 12.1, procure and negotiate on behalf of the Participants such contracts as are required, deposit the proceeds from such sales to the account of the Venture to the extent applicable under the terms of this Agreement and distribute the surplus proceeds to the Participants in accordance with their respective Participating Interests. (h) Invest all cash contributions and other revenues of the Venture for the benefit of the Venture and the participants and any undistributed proceeds of the sale of Product for the benefit of the Participants on such short term basis as will maximize the returns on such investments but will enable the Manager and the Venture to comply with their contractual obligations and to exercise their contractual rights, including pursuant to the terms of this Agreement. (i) The Manager shall prosecute and defend, but shall not initiate without the consent of the Management Committee, all litigation or administrative proceedings arising out of the conduct of Operations. The other Participant shall have the right to participate in such litigation or administrative proceedings at its own expense. The other Participant shall approve in advance any settlement of litigation or administrative proceedings involving payments, commitments or obligations of the Venture in excess of $50,000.00. (j) The Manager shall obtain or arrange and keep in force insurance for the benefit of the Participants, including comprehensive general public liability and property damage insurance and automobile insurance, insuring against claims for bodily injury or death or property damage arising out of or resulting from Operations, in such amounts and covering such claims, losses and risks as will adequately protect the interests of the Participants, including by enabling the Manager to repair or cause to be repaired or rebuilt all Facilities on the Property and to continue operations of any mine or mineral processing facility relating thereto, all in accordance with sound mining practice and customary industry standards. -19- (k) The Manager may dispose of Assets (other than the Property or part thereof) whether by abandonment, surrender or Transfer in the ordinary course of business but subject to the terms of this Agreement, including the Accounting Procedure. The Manager shall not enter into any sales contracts or commitments for Product without the prior authorization of each Participant in respect of its share of Product. (l) The Manager shall prepare and shall file after approval of the Management Committee any tax returns or other tax filings required to be filed on behalf of the Venture. With respect to the Goods and Services Tax (the "GST") under the Excise Tax Act S.C. 1990, c.45, (the "ITA") or Quebec sales tax ("QST") under the Quebec Sales Tax Act (the "QSTA"), the Manager shall account for all GST and QST in respect of any supplies made to or by the Venture. The Participants shall be registrants and will each execute and provide to the Manager a joint venture election (the "Election") pursuant to the ITA and QSTA, confirming that the Manager shall account for all GST and QST in respect of any supplies made to or by the Venture and the Manager shall file the required elections along with the Manager's return as and when required under the ITA and QSTA. Accounting for GST and QST shall include paying GST and QST on all taxable purchases and claiming the corresponding input tax credits on behalf of the Venture. (m) The Manager shall have the right to carry out its responsibilities hereunder through its Agents or subcontractors. (n) The Manager shall keep and maintain all required accounting and financial records pursuant to Canadian generally accepted accounting principles, the Accounting Procedure and in accordance with customary accounting practices in the mining industry in Canada. (o) The Manager shall keep the Management Committee advised of all Operations by submitting in writing to the Management Committee: (i) monthly progress reports in respect of Operations, which reports shall include statements of Expenditures and comparisons of such Expenditures to the adopted Program and Budget and all other pertinent data including, without limitation, drill and assay results, survey results, geological and reserve figures and production reports; (ii) monthly summaries of data acquired; (iii) copies of all reports concerning Operations, including the immediate delivery to the Management Committee of all significant results; (iv) a detailed final report within 30 days after completion of each Program and Budget which shall include comparisons between actual and budgeted Expenditures and comparisons between the objectives and results of the Program; and (v) such other reports as the Management Committee may request or as either Participant may reasonably request. At all reasonable times the Manager shall provide the Management -20- Committee or the representative of any Participant access to and the right to copy all maps, drill logs, core tests, reports, surveys, assays, analyses, production reports, operations, technical, accounting and financial records and other information acquired in Operations. In addition, the Manager shall allow the other Participant, at its sole risk and expense and subject to reasonable safety regulations, to inspect the Assets and Operations at all reasonable times. (p) The Manager shall undertake all other activities reasonably necessary to fulfill its obligations as Manager under this Agreement and to advance and conduct the business of the Venture. (q) The Manager shall keep the financial and accounting records, to the extent and in such detail and at such places as the Management Committee may determine, such books and records pertaining to the Venture and Operations and to the costs and expenses thereof and the performance of the Manager hereunder, and to the receipt and disposition of proceeds from any joint sales agreed to pursuant to section 12.1, as will properly reflect, in accordance with generally accepted accounting principles in Canada, to the extent applicable and not in conflict with the provisions hereof, all transactions of the Manager in relation to the Venture and Operations and the performance of its duties hereunder and all costs paid by it in the performance thereof and for which it will seek reimbursement hereunder, all of which books and records shall be made available to each of the Participants and the Management Committee, upon reasonable notice and at all reasonable times, for inspection, audit and reproduction. As soon as possible after the close of each fiscal year of the Venture, all the books and accounts of the Manager relating to the Venture and Operations for such fiscal year of the Venture shall be audited by the Auditor at the expense of the Venture and Operations and copies of the report of the Auditor shall be provided to each Participant within 60 days of each fiscal year end. Any claim of a Participant against the Manager, and vice versa, relating to any transactions during the period covered by such audit shall be made within two years after the receipt of such audit report by the Participant. (r) Upon termination of the Venture, the Manager shall, at the cost and expense of the Venture, manage the rehabilitation and reclamation of the Property as required by applicable environmental and mining laws and to the standard required by all Governmental Authorities having jurisdiction including, without limitation, filing or posting or causing to be filed or posted, all letters of credit, surety, bonds or other forms of security for all reclamation or rehabilitation obligations of the Venture as may be required by any Governmental Authority having jurisdiction. 9.4 STANDARD OF CARE. The Manager and its Agents shall agree to conduct all Operations in a good, workmanlike and efficient manner to the best of their ability, skill and judgment in accordance with sound mining and other applicable industry standards and practices and, in accordance with all applicable laws of -21- all Governmental Authorities having jurisdiction and in compliance with the terms and provisions of all leases, licenses, permits, contracts and other agreements relating to the Property. 9.5 DEEMED RESIGNATION OF THE MANAGER. Any contract between the Parties and any third party Manager shall provide that if any of the following shall occur, the Manager shall be deemed to have resigned as Manager: (a) The Manager fails to perform a material obligation imposed upon the Manager under this Agreement or its contract for Managership and fails to commence curing or contesting such default within 30 days after notice from the Management Committee demanding performance of such material obligation; or (b) The Manager shall generally not pay its debts as such debts become due or has committed an act of bankruptcy, is insolvent, has proposed a compromising arrangement to its creditors generally, has had any petition for a receiving order in bankruptcy filed against it, has made a voluntary assignment in bankruptcy, has taken proceedings with respect to a compromise or arrangement, has taken proceeding to have itself declared bankrupt or wound-up, has taken proceeding to have a receiver appointed of any part of its assets, has had any encumbrancer take possession of any of its property and has had any execution or distress become enforceable or become levied upon any of its property. 9.6 PAYMENTS TO MANAGER. Any third party Manager shall be reimbursed for its costs and paid such fees for service as set out in the Accounting Procedure and in the contract appointing it as Manager. 9.7 TRANSACTIONS WITH AFFILIATES. If any third party Manager engages Affiliates to provide services hereunder, it shall do so on terms no less favourable to such Affiliate than would be the case with unrelated persons in arm's-length transactions. 10. PROGRAMS AND BUDGETS 10.1 OPERATIONS PURSUANT TO PROGRAMS AND BUDGETS. Commencing on the Effective Date, Operations shall be conducted, Expenditures shall be made or incurred and Assets shall be acquired pursuant to Programs and Budgets prepared by the Manager and delivered and approved by the Management Committee as provided in this Article 10. 10.2 PRESENTATION OF PROGRAMS AND BUDGETS. Immediately after the Effective Date and thereafter in each calendar year during the Venture or within ninety (90) days after the completion of the last Program, or otherwise at the request of the Management Committee, the Manager shall submit to the Participants, a proposed Program and Budget on or before October 31, covering the period from -22- January 1 to December 31 of the following year or such other period as the Management Committee may unanimously determine. Each approved Program and Budget shall, regardless of the term of such Program and Budget, be reviewed at least once a year at a regular meeting of the Management Committee. 10.3 REVIEW OF PROGRAMS. The Management Committee shall review the Program prepared and if it deems fit, adopt the Program with those modifications, if any, as the Management Committee deems necessary. The Manager shall be entitled to an allowance for a cost overrun of 10% in addition to any budgeted Expenditures and any overrun Expenditures so incurred shall be deemed to be included in the Program, as adopted. 10.4 SUBMISSION OF PROGRAMS AND BUDGETS. The Manager shall immediately submit the adopted Program and budget to the Participants. Within 30 days after submission of the adopted Program and Budget, each Participant shall submit to the Management Committee: (a) Notice that the Participant approves the adopted Program; (b) Proposed modifications of the adopted Program and; (c) Notice that the Participant rejects the adopted Program and Budget. If a Participant fails to give any of the foregoing responses within such 30 day period, such failure shall be deemed to be an acceptance by the Participant of the adopted Program and Budget. If a Participant makes a timely submission to the Management Committee pursuant to section 10.4(b) or (c), then the Management Committee shall meet to consider and develop a Program and Budget acceptable to the Participants. If the Management Committee does not approve a Program and Budget within 30 days after the Manager's receipt of a notice pursuant to section 10.4(b) or (c), then either of the Participants may submit the matter to arbitration pursuant to Section 15 for determination as to whether such non-acceptance is reasonable in the circumstances. If it is determined that such non-acceptance is not reasonable in the circumstances, then such Program and Budget shall be deemed to be an adopted Program and Budget for the purposes of this Agreement. 10.5 ELECTION TO PARTICIPATE. Within 20 days after the final vote of the Management Committee approving a Program and Budget, each Party shall give written notice to the Manager committing to contribute its proportionate share, based on the respective Participating Interest at the time of such election, of the Expenditures on that Program. A Participant may elect to contribute to Expenditures which are a part of an approved Program and Budget an amount less than its Participating Interest, or to not contribute to such Expenditures at all, in which case the Participating Interests shall be recalculated as provided in section 7.5. If a Participant fails to so notify the Manager, the Participant shall be deemed to have elected to not contribute to such Program and Budget. 10.6 NO CONTRIBUTION - LIMITED CONTRIBUTION. If any Participant elected or is deemed to have elected not to contribute to a Program, or have elected to contribute to the Program an amount less than its Participating Interest, the other Participant may give notice in writing to the Manager stating that it will contribute all Expenditures under or pursuant to the Program and the Manager -23- will proceed with that Program and thereafter the Participating Interests of the Participants shall be adjusted in accordance with paragraph 7.5. The Manager will not proceed with any Program which is not fully subscribed. 10.7 BUDGET DECREASES. If a Program and Budget is subsequently modified to decrease expenditures by 20% or more, a non-contributing or partially contributing Participant shall have the right to contribute the difference between the amount, if any, it has already contributed and its full proportionate share, based on its Participating Interest prior to the reduction, of the modified Program and Budget and thereby avoid any reduction in its Participating Interest. At such time as the Manager becomes aware that expenditures for the Budget shall be 80% or less than as originally adopted, the Manager shall notify the non-contributing or partially-contributing Participant. Within 10 days thereafter the non-contributing or partially-contributing Participant may notify the Manager of its election to contribute to its full share of the modified Program and Budget. Such notice shall include full payment of the non-contributing or partially-contributing Participant's proportionate share of the modified Program and Budget to the date of the payment. 10.8 BUDGET OVERRUNS; PROGRAM CHANGES. The Manager shall immediately notify the Management Committee of any departure (including either less or more) from an adopted Program and Budget of an amount equal to ten percent or more of the original budgeted amount of such Program outlining the nature and extent of the additional costs and expenses (the "Program Overruns"). The Manager may not exceed an approved Program or Budget by more than ten percent without the unanimous approval of the Management Committee. If Program Overruns are approved by the Participants contributing to that Program through the Management Committee of this Agreement, then within thirty days after the receipt of a written request from the Manager, the Participants contributing to that Program shall provide the Manager with their respective shares of the Program Overruns. If Program Overruns are not approved by the Participants contributing to that Program through the Management Committee of this Agreement, the Manager shall have the right to curtail the Program to the approved Budget. 10.9 EMERGENCY OR UNEXPECTED EXPENDITURES. In the case of an emergency, the Manager may take any reasonable action it deems necessary to protect life, limb or property, to protect the Assets or to comply with all laws, regulations, orders or policy directives of any Governmental Authority having jurisdiction. The Manager may also make reasonable expenditures for unexpected events which are beyond its reasonable control and which do not result from a breach by it of its standard of care. The Manager shall promptly notify the Participants of the emergency or unexpected expenditures and the Manager shall be reimbursed for all resulting costs by the Participants in proportion to their respective Participating Interests at the time the emergency or unexpected expenditures are incurred. -24- 10.10 MANDATORY EXPENDITURES. Notwithstanding section 10.1, if, in any year in which there is no Program adopted pursuant to this Agreement, circumstances are such that the Manager must incur costs in order to maintain tenure to the Property, to satisfy contractual obligations or obligations imposed by law, to prevent waste or to protect life and property (in the paragraph called "non-discretionary costs"), the Manager shall immediately propose a program (in this paragraph called the "mandatory program") to incur those non-discretionary costs and provide each party with one copy of it. The mandatory program shall be deemed to be approved and each of the Parties shall be obligated to contribute to the non-discretionary costs incurred in proportion to their respective Participating Interest within thirty days of receipt of the Manager's invoice. Section 10.6 shall apply to any party failing to make its contribution under a mandatory program. 10.11 FUNDS SPENT PROPORTIONATELY. The Manager shall expend all moneys advanced by a Participant proportionately with the advances of the other Participants. If the Manager suspends or prematurely terminates a Program, any funds advanced by a Participant in excess of that Participant's proportionate share of Expenditures incurred prior to the suspension or premature termination shall be refunded immediately to the Participant that advanced such funds. 10.12 ELECTION NOT TO CONTRIBUTE. Notwithstanding that a Participant has or is deemed to have elected not to contribute to a Program under section 10.6, it shall, unless its Participating Interest has been converted to a Net Profits Royalty Interest or been terminated pursuant to this Agreement, be entitled to elect to participate in and contribute to future Programs. 10.13 ALLOCATION OF EXPENDITURES. All Expenditures incurred under this Agreement shall be for the account of the Parties in proportion to their respective Participating Interests, and each Party on whose behalf any Expenditures have been incurred shall be entitled to claim all tax benefits, write-offs and deductions with respect to such Expenditures. 10.14 FEASIBILITY STUDY. (i) PREPARATION OF A FEASIBILITY STUDY. At the unanimous request of the Management Committee, the Manager shall prepare or have prepared and submit (i) a Feasibility Study, or (ii) a pre-Feasibility Study (which study shall be based on such terms as the Management Committee shall determine), the purpose of which shall be to establish whether a mineralized deposit on the Property is of sufficient size and grade to justify development and the development of such other related facilities as may be desirable, including, a beneficiation plant for processing Products. (ii) REQUEST FOR FEASIBILITY STUDY. Any Participant may request the Management Committee to instruct the Manager to prepare or have prepared (i) a Feasibility Study or (ii) a pre-Feasibility Study (which study shall be based on such terms as such Participant shall propose), prepared when, in the reasonable good faith opinion of such Participant, sufficient mineralization has been found to justify -25- preparation of a Feasibility Study or pre-Feasibility Study, and if the Management Committee fails or refuses to direct the Manager to prepare such Feasibility Study or pre-Feasibility Study, such Participant may at its own expense, prepare and submit such Feasibility Study or pre-Feasibility Study along with its recommendation to the Management Committee. (iii) APPROVAL OF FEASIBILITY STUDY. The Management Committee shall have ninety (90) days after receipt of any Feasibility Study or pre-Feasibility Study and the recommendations of the Participant commissioning or conducting such Feasibility Study or pre-Feasibility Study to meet and consider, and to approve or reject, the Feasibility Study or pre-Feasibility Study and its recommendations. If the Management Committee approves or makes substantial use of the Feasibility Study or pre-Feasibility Study prepared by a Participant in its decision to proceed to place the Property into Commercial Production, it shall reimburse the Participant for the reasonable costs of preparing the same. If the Management Committee rejects a Feasibility Study or pre-Feasibility Study, it may in its discretion direct the Manager to perform or have performed such additional work as the Management Committee deems necessary to revise the Feasibility Study or pre-Feasibility Study. In such event, the Management Committee shall direct the Manager to promptly perform such additional work, revise the Feasibility Study or pre-Feasibility Study accordingly and submit it to the Management Committee for approval or rejection. 11. ACCOUNTS AND SETTLEMENTS 11.1 VENTURE BANK ACCOUNT. The Manager shall establish a bank account (the "Venture Bank Account") with a Canadian chartered bank into which shall be paid all payments to be made by the Participants pursuant to the provisions of this Agreement and from which all disbursements made by the Manager shall be paid. The Manager shall designate appropriate employees of it to be signing officers for the Venture's Bank Account. Any interest earned on funds deposited in the Venture Bank Account will accrue to the Participants in proportion to their respective Participating Interest. Any amounts deposited in the Venture Bank Account will accrue to the Participants in proportion to their respective Participating Interest. Any amounts deposited in the Venture Bank Account shall be deemed to be held in trust for the Participants. 11.2 MANAGER'S FUNDS. Neither Party nor the Manager shall in any manner commingle the Venture's funds with its own funds. 11.3 MONTHLY STATEMENTS. Within 15 days of the end of each calendar month, the Manager shall deliver to each Participant financial statements and other relevant information, including copies of the monthly account statements for the Venture Bank Account, reflecting in reasonable detail all transactions of the Venture during the preceding month. -26- 11.4 CASH CALLS. The Manager shall, at least seven days but not more than 21 days, prior to the start of each calendar month present to each Participant an invoice based on the most recently approved Program and Budget to each Participant for their proportionate share based on their then Participating Interest of: (i) if advances for the prior month are less than actual Expenditures, an amount equal to actual Expenditures less advances for the prior month; and (ii) estimated Expenditures for the succeeding month; and (iii) estimated Expenditures for the second succeeding month to maintain a minimum 30 day cash balance; less: (iv) if advances for the prior month are greater than actual Expenditures, an amount equal to advances less actual Expenditures for the prior month; and (v) estimated Expenditures for the second succeeding month from the prior month billing; and (vi) interest or other revenues received by the Manager for the account of the Venture; and (vii) any cash receipts from the sale of Assets received by the Manager for the account of the Venture; plus or less: (viii) any other adjustment necessary to comply with this Agreement. Where a monthly invoicing results in a negative amount the Manager shall at the sole option of each Participant, refund to the Participants their proportionate share of the over-contribution or apply such amount as a credit to amounts invoiced for the next ensuing month. The Manager shall use all reasonable efforts to maintain at all times a minimum cash balance approximately equal to the estimated disbursements for the next 90 days. 11.5 SPECIAL CASH CALLS. The Manager may present an invoice at any time to each Participant for significant Expenditures requiring payment in a timely manner that were unforeseen at the time of the prior monthly invoicing. 11.6 PAYMENT OF CASH CALLS. EACH Participant shall deposit in the Venture Bank Account its proportionate share of the invoicing within 15 days of receipt of the invoicing. -27- 11.7 FAILURE TO MEET CASH CALLS. If a Participant fails to meet cash calls in the amounts and at the times specified under this Agreement the provisions of section 7.6 of this Agreement shall be applicable in accordance with its terms. 11.8 AUDITS AND ADJUSTMENTS. The financial records of the Venture shall be audited annually by the Auditor. The Management Committee shall arrange to have the audit report prepared and distributed to each Participant not later than 60 days after the end of each fiscal year end. Each Participant shall also have the right to audit the Venture's records on reasonable notice to the Manager and at its own expense in accordance with the Accounting Procedure. All claims for adjustment made as a result of audits must be made within twenty-four months of delivery of the audit report to the Participants making the claim. 12. DISPOSITION OF PRODUCTS 12.1 DIVISION OF PRODUCTION. Each Participant shall be entitled and shall take in kind and separately dispose of its share of all Products based on its Participating Interest produced by the Venture from the Property at their highest state of beneficiation on the Property, and for that purpose shall take delivery of its share of the Products as the same are produced and placed in the storage facilities for the account of such Participant. Individual ownership of its share of said Products shall pass to each Participant concurrently with the taking of delivery thereof in kind. Notwithstanding the foregoing the Participants may, upon mutual agreement at any time and from time to time, jointly sell or otherwise dispose of their respective shares of the Products and make such arrangements in connection therewith as they deem mutually advisable, without in any way causing them to be deemed to be in partnership. The proceeds from such joint sales shall be to the account of the Participants in accordance with their Participating Shares or as they may otherwise agree in writing. 12.2 EXISTING ROYALTIES. Each Participant hereby acknowledges that the Property and all Products derived from the Property are subject to the Existing Royalties and further acknowledges that it is liable for and shall direct the Manager to pay from time to time on its behalf its Participating Share of the Existing Royalties. Each Participant shall deliver to the Manager on a timely basis all such information as the Manager needs in order to enable the Manager to pay the Existing Royalties from time to time on behalf of such Participant. 12.3 LIENS. Each Participant shall have a lien on the other Participant's share of Products to secure payment of such Participant's proportionate share of Expenditures based on its Participating Interest. If a Participant defaults in making a cash contribution in accordance with the terms of this Agreement or to cure such default in accordance with section 7.6, then the non-defaulting Participant may without limitation to its other rights at law, in equity or under this Agreement: (a) Elect to treat the default as an immediate and automatic assignment to the non-defaulting Participant of the defaulting Participant's share of the Products and from and after the non-defaulting Participant making such election, the -28- non-defaulting Participant may require the purchaser of the defaulting Participant's share of Products to make payment therefor to the non-defaulting Participant while the default continues; and (b) Enforce the lien created by the default in payment by taking possession of all or any part of the defaulting Participant's share of Products and selling the same. The proceeds of the sale shall be firstly applied by the non-defaulting Participant in payment of any Expenditures to be paid by the defaulting Participant and not paid by it and any balance remaining shall be paid to the defaulting Participant after deducting reasonable costs of the sale. Any sale made aforesaid shall be a perpetual bar both at law and in equity against any claims to the Products sold by the defaulting Participant and its assigns and against all other Persons claiming the Products or any part or parcel thereof, sold as aforesaid, from, through or under the defaulting Participant or its assigns. In the event that the value of such Products so assigned to the non-defaulting Participant or the proceeds thereof are sufficient to cure a default or repay a loan pursuant to the terms of section 7.5, the defaulting Participant shall be deemed to be back in good standing under the terms of this Agreement. 13. WITHDRAWAL AND TERMINATION 13.1 WITHDRAWAL. A Participant may elect to withdraw as a Participant from this Agreement by giving notice to the other Participant of the effective date of withdrawal, which date shall be the later of the end of the then current Program and Budget or 60 days after the date of the notice. Upon any such withdrawal this Agreement shall terminate and the withdrawing Participant shall be deemed to have transferred to the remaining Participant or those existing at the date of this Agreement, all of its Participating Interest in the Assets and in this Agreement without cost and free and clear of any and all Encumbrances arising by, through or under such withdrawing Participant, except those to which both Participants have given their written consent after the date of this Agreement, and subject to the Existing Royalties and the terms and conditions of all leases, permits, licences or other approvals related to the Property. No withdrawal under this section 13.1 shall relieve the withdrawing Participant of its share of liabilities, costs, penalties or fines to Governmental Authority having jurisdiction or to third Persons (whether such accrues before or after such withdrawal) arising out of Operations conducted prior to such withdrawal. For the purposes of this section 13.1, the withdrawing Participant's proportionate share of such liabilities shall be equal to its Participating Interest at the time that the conduct of Operations giving rise to such liability, cost, penalty or fine occurred. 13.2 TERMINATION. The Joint Venture shall terminate on the first to occur of: (i) the written agreement of the Participants to terminate the Joint Venture; -29- (ii) the purchase by one Participant of the Participating Interest of all other Participating Interests in accordance with the terms of this Agreement; and (iii) 11:59 p.m. (Montreal time) on that date which is the second anniversary of the date upon which the last interest of the Participating Interests in the Assets is surrendered, terminated, assigned, transferred or otherwise permanently disposed of; provided that, subject to applicable law to the contrary, the surrender, termination, assignment, transfer or other permanent disposition of such last interest of the Participating Interests in the Assets shall not occur until the Participants shall have agreed to terminate the Commercial Production, if it has commenced and is ongoing. 13.3 CONTINUING OBLIGATIONS. On termination of this Agreement under section 13.3, but subject to the terms of section 13.2, the Participants shall each remain liable for continuing obligations hereunder as set out herein until final settlement of all accounts and for any liability whether it accrues before or after termination if it arises out of Operations during the term of the Agreement. 13.4 DISPOSITION OF ASSETS ON TERMINATION. Promptly after termination of the Venture and this Agreement, the Management Committee shall direct the Manager to take all action necessary to wind up the activities of the Venture and all costs and expenses incurred in connection with the termination of the Venture shall be expenses chargeable to the Venture. Any Participant that has a negative capital account balance when the Venture is terminated for any reason shall contribute to the Assets of the Venture an amount sufficient to raise such balance to zero. The Assets shall first be paid, applied or distributed in satisfaction of all liabilities of the Venture to third Persons and then to satisfy any debts, obligations or liabilities owed to the Participants. Before distributing any funds or Assets to Participants the Manager shall have the right to segregate amounts which are necessary to discharge continuing obligations or to purchase for the account of Participants, all required letters of credit, surety bonds or other security for the performance of such obligations as may be required by any Governmental Authority having jurisdiction. The foregoing shall not be construed to include the repayment of any Participant's capital contributions. Thereafter any remaining cash and all other Assets shall be distributed to the Participants in proportion to their respective Participating Interests, first in the ratio and to the extent of their respective capital accounts and then in proportion to their respective Participating Interests subject to any dilution, reduction or termination of such Participating Interests as may have occurred pursuant to the terms of this Agreement. No Participant shall receive a distribution of any interest in Products or proceeds from the sale thereof if such Participant's Participating Interest therein has been terminated pursuant to this Agreement other than by conversion to a royalty interest in accordance with the terms of this Agreement. 13.5 RIGHT TO DATA AFTER TERMINATION. Each withdrawing Participant under section 13.1 shall be entitled to all information acquired in the conduct of the Venture prior to such withdrawal and pursuant to any Program of which the withdrawing Participant has duly paid its pro rata share of costs and expenses, based upon its Participating Interest, including copies of maps, data and -30- reports which can be reproduced and which have not theretofore been furnished to such withdrawing Participant, but such withdrawing Participant shall for a period of two years from the date of such withdrawal or the completion of the aforementioned Program, whichever is the later, hold in strict confidence all information acquired by it in the conduct of the Venture. 13.6 CONTINUING AUTHORITY. On termination of the Venture or the deemed withdrawal of a Participant from the Venture or the withdrawal of a Participant pursuant to section 13.2 the Manager shall have the power and authority, subject to control of the Management Committee, to do all things on behalf of the Participants which are reasonably necessary or convenient to; (a) wind up Operations; and (b) complete any transaction and satisfy any obligation, unfinished or unsatisfied at the time of such termination or withdrawal if the transaction or obligation arises out of Operations prior to such termination or withdrawal. The Manager shall have the power and authority to grant or receive extensions of time or change the method of payment of an existing liability or obligation, prosecute and defend actions on behalf of the Participants and the Venture, mortgage Assets and take any other reasonable action in any matter with respect to which the former Participants continue to have or appear or are alleged to have, a common interest or a common liability. 14. TRANSFER OF INTEREST AND FINANCING 14.1 RIGHTS TO TRANSFER. Neither Participant shall transfer its Participating Interest or its interest in this Agreement other than in accordance with this Article 14. Either Participant may, at any time after execution of this Agreement, Transfer all of its rights, title and interest under this Agreement to an Affiliate of that Participant or, subject to and in compliance with sections 14.2 and 14.3 below, to a third party, provided such transferring Participant shall provide to the other Participant 30 days notice of such Transfer and provided (i) that in the case of a Transfer to such an Affiliate, the transferring Participant shall ensure that such subsidiary shall remain as an Affiliate for so long as it is entitled to the benefit of and bound by the terms of this Agreement and (ii) such Affiliate shall have agreed in writing with the other Participant, on terms satisfactory to the other Participant, to be bound by the terms and conditions of this Agreement and to perform all obligations of the transferring Participant hereunder. Notwithstanding such Transfer to an Affiliate by a Participant, such transferring Participant shall remain at all times liable for the due performance of all covenants and obligations of such transferring Participant to be performed hereunder. In the event a Participant completes a Transfer to a third party in accordance with the terms of this Article 14 such Participant shall be released from its obligations under this Agreement to the extent such third party has agreed in writing to be bound by and to perform the obligations of the transferring Participant under this Agreement. 14.2 RIGHT OF FIRST REFUSAL. If a Participant should desire to transfer to a third party all of its Participating Interest and its interest in this Agreement (the "Offered Interest"), it shall first have received an all cash BONA FIDE written offer from an arm's length third party (the "Third Party Offer") which shall state the price and all other pertinent terms and conditions upon which it wishes to complete the Transfer and the transferring Participant shall have delivered a copy of the Third Party Offer to the other Participant together with -31- its own offer to sell to the other Participant on the same terms and conditions (the "Offer"). The other Participant shall have 60 days from the date the Offer is delivered to it, to notify the transferring Participant whether it elects to acquire the Offered Interest at the price and on the terms and conditions set forth in the Offer. If the other Participant does so elect the Transfer shall be consummated promptly after notice of such election is delivered by the transferring Participant. If the transferring Participant fails to so elect, within the period provided for in this section, the transferring Participant shall have 90 days following the expiration of such period to consummate the Transfer to a third Person at a price and on terms no less favourable than those offered in the Offer and in accordance with this Article 14. If the transferring Participant fails to consummate the Transfer to a third Person within the period set forth in this section, the right of first refusal herein contained shall be deemed to be revived. Any subsequent proposal to Transfer its Participating Interest and an interest in this Agreement to a third party by the transferring Participant shall be conducted in accordance with the procedures set forth in this section 14.2 and the balance of this Article 14. If the transferring Participant transfers the Offered Interest pursuant to this section, it shall be released from all liabilities and obligations under this Agreement provided that the third Person delivers to the remaining Participant an agreement in writing covenanting to be bound by this Agreement and the terms hereof in accordance with section 14.3 below. 14.3 LIMITATIONS ON FREE TRANSFERABILITY. The Transfer right of a Participant in this Article 14 shall be subject to the following terms and conditions: (a) No Transfer shall be for less than all of a Participating Interest and related interest in this Agreement. (b) No transferee of all of the interest of a Participating Interest and related interest in this Agreement shall have the rights of a Participant unless and until (i) the non-transferring Participant shall have consented to such Transfer, such consent not to be unreasonably withheld having regard to the mining experience and reputation and the financial strength of the proposed transferee, and (ii) the transferee has, as of the effective date of the Transfer, committed in writing on terms satisfactory to the non-transferring Participant to be bound by the terms of this Agreement and the terms of the Venture to the same extent as the transferring Participant. (c) No Transfer permitted by this Article 14 shall relieve the transferring Participant of its share of any liability, cost, penalty or fine whether accruing before or after such Transfer, which arises out of Operations conducted prior to such Transfer. (d) The transferring Participant and the transferee shall bear all tax consequences of the Transfer. -32- 14.4 ACQUISITION OF INTEREST. Upon the completion of the transfer of a Participating Interest pursuant to the terms of this Agreement, the Participants or the third party acquiring such Participating Interest will be deemed to have acquired a corresponding portion of the transferring Party's Expenditures. Such transferee shall be entitled to all the rights and benefits accruing, and will be subject to the same duties and obligations attributable, to the Participating Interest which it has purchased from the transferring Party, including the right to participate in any further Programs and Budgets and the right to have its Participating Interest increased or reduced in the same manner as the transferring Party. 14.5 FINANCING. (a) Other than as set out below neither Participant shall mortgage, pledge, charge, hypothecate or otherwise encumber its Participating Interest or any part thereof without the prior written approval of the other Participant. (b) Notwithstanding the provisions of subparagraph 14.5(a) above, each of the Participants shall be entitled to mortgage, pledge, hypothecate or otherwise encumber its Participating Interest provided that all of the proceeds of such mortgage, charge, pledge or hypothec are applied by such Participant to fund its participation in Programs and Budgets pursuant to this Agreement and then only if the holder of the mortgage, pledge, charge, hypothecation or other encumbrance shall have agreed in writing on terms satisfactory to the other Participant that, (i) upon realization of its security, its recourse shall be limited to the sale of all, but not less than all, of the Participating Interest in which it has security and (ii) such holder is and shall be bound by the provisions of this Agreement, including this Article 14, and shall have agreed in writing with the other Participant to require any purchaser of the Participating Interest from it to be bound by the terms of this Agreement, including this Article 14. 15. DISPUTES 15.1 DISPUTE RESOLUTION. (a) In the event the Management Committee members of the Participants are unable to resolve any dispute between the Participants arising out of this Agreement or out of Operations, within twenty (20) days of being seized of the matter in dispute, then the matter in dispute shall be referred to the Chief Executive Officers of the Participants specifying in detail the matter in dispute, and the Chief Executive Officers of each Participant shall meet and use reasonable efforts to resolve the dispute. (b) If the Chief Executive Officers of the Participants are unable to resolve the dispute within fifteen (15) days of the matter being referred to them by the Management Committee then the matter shall be referred to binding arbitration with no appeal from the arbitration. Such referral to binding arbitration -33- shall be to a single arbitrator (qualified by education and experience to decide the matter and fluent in both English and French) pursuant to Book VII - Arbitrations - Code of Civil Procedure (Quebec) and its successor legislation, which act shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules of arbitration set out in Schedule "E". The determination of such arbitrator shall be final and binding upon the Parties hereto and the costs of such arbitration shall be as determined by the arbitrator. The Parties covenant that they shall conduct all aspects of such arbitration having regard at all times to expediting the final resolution of such arbitration. 16. FORCE MAJEURE 16.1 FORCE MAJEURE. Time shall be of the essence of this Agreement, provided however that notwithstanding anything to the contrary contained herein, if either Party should at any time or times during the currency of this Agreement be delayed in or prevented from complying with this Agreement by reason of wars, acts of God, strike, lockouts or other labour disputes, inability to access its place of business or the Property, acts of public insurrection, riots, fire, storm, flood, explosion, government restriction, failure to obtain any approvals required from any Governmental Authority having jurisdiction (but only in the circumstances that the Manager has filed timely and complete applications for such approvals from such Governmental Authorities having jurisdiction), including environmental protection agencies, interference of persons primarily concerned about environmental issues or native rights groups or other causes whether of the kind enumerated above or otherwise which are not reasonably within the control of the applicable Party, but excluding for greater certainty, unavailability of funds, the period of all such delays resulting from such causes or any of them, shall be excluded in computing the time within which anything required or permitted by the applicable Party to be done, is to be done hereunder, and the time within which anything is to be done hereunder shall be extended by the total period of all such delays. Nothing contained in this Article shall require the applicable Party to settle any labour dispute or to test the constitutionality of any enacted law. In the event that any Party asserts that an event of force majeure has occurred, it shall complete such reasonable actions or cause such reasonable actions to be completed as may be necessary to correct or terminate the alleged event of force majeure and give notice in writing to the other Party specifying the following: (a) the cause and nature of the alleged event of force majeure; (b) a summary of the action it or its Agents have taken to the date of such notice to correct the alleged event of force majeure; (c) confirmation as to all acts, actions and things done by it or its Agents to terminate the event of force majeure; and (d) the reasonably expected duration of the period of force majeure. -34- Any Party asserting an event of force majeure shall provide ongoing periodic notice in writing to the other Party including updates with respect to such events of force majeure, including the matters set out above, within 15 days of the end of each calendar month during the period of force majeure and shall provide prompt notice in writing to the other Party upon the termination of the event of force majeure. 17. AREA OF INTEREST 17.1 AREA OF INTEREST. Any mineral claim, mineral lease or mineral property or any direct or indirect right, title or interest therein, including a royalty interest, (such right, title or interest hereafter collectively a "Mineral Interest"), which is located or otherwise acquired by or on behalf of any Party and which lies wholly or partly within 1 kilometer of the circumambient boundaries of any part of the Property as they exist on the date hereof (the "Area of Interest"), including any Mineral Interest into which such Mineral Interest may hereafter be converted, shall if the other Party so elects as set out in section 17.2, form part of the Property and become subject to this Agreement. 17.2 NOTICE OF ACQUISITION. If any Party acquires any Mineral Interest during the term of this Agreement which lies wholly or partly within the Area of Interest as set out in section 17.1 hereof, the acquiring Party shall within 30 days of such acquisition give notice of such acquisition or right to the same to the other Party, together with copies of all related geological and other data in its possession, and such other Party shall have the right during the 30 days next following the receipt of such notice and data, by written notice to the acquiring Party and upon payment of its pro rata share of the costs of acquisition of such Mineral Interest, to elect that such Mineral Interest be included as part of the Property under this Agreement. Failure to provide such notice to the acquiring Party shall be deemed to constitute an election by the other Party that such Mineral Interest not be included as part of the Property under this Agreement. Any agreement entered into by the acquiring Party for the acquisition of a Mineral Interest shall contain a term permitting the disposition of an interest therein to the other Party. If the other Party elects that such Mineral Interest not be included as part of the Property under this Agreement, the acquiring Party shall be free to deal with such Mineral Interest as it sees fit, free of any obligations contained in this Agreement. If the other Party elects that such Interest shall be included as part of the Property under this Agreement, all acquisition costs incurred (or the cash equivalent thereof) with respect to such Mineral Interest shall be included as part of the Expenditures under this Agreement and the other Party shall, within 120 days of delivering notice electing that such Mineral Interest form part of the Property under this Agreement, reimburse the acquiring Party or contribute cash to the Venture in an amount equal to its proportionate share of such acquisition costs as determined by its Participating Interest at the time of such acquisition. 18. INFORMATION, DATA AND CONFIDENTIALITY 18.1 ACCESS. At all times during the term of this Agreement the duly authorized representatives of each Participant shall, at their sole risk and expense and at reasonable intervals and times, have access to the Property and -35- to all technical records and other factual engineering data and information relating to the Property which is in the possession or control of the Manager. 18.2 PROGRESS REPORTS. During the period of any Exploration Operations the Manager shall furnish the Participants with semi-annual progress reports and with a final report on conclusion of each Exploration Program. The final report shall show the Operations performed and the results obtained and shall be accompanied by a statement of Expenditures and copies of pertinent plans, assay maps, diamond drill records and other factual engineering data. During the period of Development Operations the Manager shall provide monthly progress reports to the Participants, which reports shall include information on any material changes or affecting the development of a Mine or the related Mine Development plan. 18.3 CONFIDENTIALITY. All information received by any Party as a result of or in connection with the Assets or this Agreement shall be confidential, shall be treated as confidential and shall not be disclosed, without the prior written consent of the other Party to any other Person. Such consent shall not be unreasonably withheld. Where disclosure is required by law or a regulatory authority having jurisdiction, a copy of the information required to be disclosed including without limitation, any press release shall be provided to the other Party in advance of its disclosure. The consent required by this Article 18 shall not apply to a disclosure: (i) to an Affiliate or Agent that has a bona fide need to be informed; and (ii) to any third Person to whom the disclosing Party contemplates a Transfer of all or any part of its interest in or to the Assets and this Agreement. Only such confidential information as such third Person shall have a legitimate business need to know shall be disclosed and such third Person shall first agree in writing to protect the confidential information from further disclosure to the same extent as the Parties are obligated under this Article 18. The provisions of this Article 18 shall continue to apply to any Party which withdraws or which is deemed to have withdrawn from this Agreement. Where disclosure is required in connection with a third Person Transfer, any intended third Person transferee must sign a confidentiality agreement containing provisions similar to this Article 18. No Party shall be liable to the disclosing Person in respect of any interpretations, opinions, findings, conclusions or other non-factual information included by the disclosing Person in any report or other document provided to the other Party whether included by negligence or otherwise. Each disclosing Person shall jointly and severally indemnify and save harmless the other Party from and against all Losses actually incurred by the other Party in respect of the release by the disclosing Person of such non-factual information to third Persons, irrespective of whether such release was consented to by the other Party. 19. EVENT OF DEFAULT OF PARTICIPANT 19.1 EVENT OF DEFAULT . In the event of an occurrence with respect to any Participant of any one or more of the following: (a) if the whole or any material part of the Participating Interest of the Participant shall be the subject of a lien, charge or attachment other than in accordance with the terms -36- of this Agreement and such lien, charge or attachment shall not have been discharged within sixty days thereafter; or (b) It has committed an act of bankruptcy, is insolvent, has proposed a compromising arrangement to its creditors generally, has had any petition for a receiving order in bankruptcy filed against it, has made a voluntary assignment in bankruptcy, has taken any proceedings with respect to a compromise or arrangement, has taken any proceeding to have itself declared bankrupt or wound-up, has taken any proceeding to have a receiver appointed in respect of any part of its assets, has had any encumbrancer take possession of any of its property and has had any execution or distress become enforceable or become levied upon any of its property; then: (c) if such event occurs, such event shall be a default of such Participant under this Agreement and the other Participant, without prejudice to any other remedy it may have, shall have the right to purchase the Participating Interest of the defaulting Participant in accordance with the following: (i) by giving concurrent written notice of its election to do so to the defaulting Participant and to the Manager (if it is not the defaulting Participant); (ii) the completion of the purchase of the said defaulting Participating Interest shall take place at the time and place, and the defaulting Participant shall perform such acts and execute such documents, as the purchasing Participant may reasonably specify or provide. The purchase price of the aforesaid Participating Interest to the purchasing Participant shall be the fair market value thereof to be determined, within seventy five days of receipt by the defaulting Participant of the notice provided for herein, by an independent appraiser appointed by mutual agreement of the Participant or failing such agreement, by arbitration pursuant to Article 15; and (iii) payment of any purchase price made as aforesaid shall be a perpetual bar both at law and in equity by the defaulting Participant and its successors and assigns against the other Participant, and its successors and assigns. 19.2 ADDITIONAL REMEDIES. In the event of the occurrence with respect to any Participant of any of the events referred to in section 19.1, each non-defaulting Participant, without prejudice to any other remedy it may have, shall have the right to pursue any remedy available at law or in equity, it -37- being acknowledged by each of the Participants that specific performance, injunctive relief (mandatory or otherwise) or other equitable relief may be the only adequate remedy for a default. 20. INSURANCE 20.1 INSURANCE. Commencing on the Effective Date, the Management Committee shall cause the Manager to place and maintain with a reputable insurer or insurers such insurance, if any, as the Management Committee in its discretion deems advisable in order to protect the Parties together with any other insurance as any Participant may by notice reasonably request. The Manager shall, on the written request of any Participant, provide it with evidence of such insurance. This paragraph shall not preclude any Party from placing, for its own account, insurance for greater or other coverage than that placed by the Manager. 21. NOTICE 21.1 NOTICES. All notices, requests, demands or other communications which by the terms hereof are permitted to be given by either Party to the other shall be given in writing by personal delivery or delivered by facsimile transmission, addressed to such other Party or delivered to such other Party as follows: (i) to Halo at: 1280 - 625 Howe Street Vancouver BC V6C 2E5 Attention: Chief Executive Officer Fax No.: (604) 484-0069 (ii) to Metanor at: 2872, chemin Sullivan Bureau 2 Val D'Or, Quebec Attention: President Fax No.: (819) 825-8224 22. MISCELLANEOUS - GENERAL 22.1 ACTS IN GOOD FAITH. The Parties shall at all times during the currency of this Agreement and after the termination of this Agreement during the period, if any, when the provisions of this Agreement continue to apply, act in good faith with respect to the other Party and shall do or cause to be done all reasonable things within their respective control which may be necessary or desirable to give full effect to the provisions hereof. The following clauses shall survive termination of this Agreement: 3.1, 6.1, 6.2, 7.6, 7.7, 11.5, 13.1, 13.3, 13.4, 13.5, 13.6, 15.1, 18.3, 19.1 and 19.2. -38- 22.2 AMENDMENT. This Agreement may not be amended or modified in any respect except by written instrument signed by the Parties. 22.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof. The execution of this Agreement has not been induced by nor do the Parties rely upon or regard as material, any covenants, representations or warranties whatsoever not incorporated herein and made a part hereof. 22.4 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon the Parties and each of their successors and permitted assigns, but no other Person. -39- 22.5 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which so executed shall be deemed to be an original and such counterparts together shall constitute one and the same document. IN WITNESS WHEREOF the Parties have executed these presents as of the Effective Date. HALO RESOURCES LTD. Per: ________________________________________ Name: Title: RESSOURCES METANOR INC./METANOR RESOURCES INC. Per: ________________________________________ Name: Title: LIST OF SCHEDULES [Not Attached] Schedule A DESCRIPTION OF PROPERTY Schedule B ACCOUNTING PROCEDURE Schedule C EXISTING ROYALTIES Schedule D NET SMELTER RETURNS ROYALTY Schedule E RULES FOR ARBITRATION EX-31 6 exh12_1.txt CERT- CEO EXHIBIT 12.1 CERTIFICATION OF MARC CERNOVITCH PURSUANT TO RULE 13A-14(A) -1- EXHIBIT 12.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) OF CHIEF EXECUTIVE OFFICER I, Marc Cernovitch, certify that: 1. I have reviewed this annual report on Form 20-F of Halo Resources Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 10 , 2006 /S/ Marc Cernovitch - ------------------------------------------ March Cernovitch, Chief Executive Officer, President, and Director -2- EX-31 7 exh12_2.txt CERT - CFO EXHIBIT 12.2 CERTIFICATION OF NICK DEMARE PURSUANT TO RULE 13A-14(A) -1- EXHIBIT 12.2 CERTIFICATION PURSUANT TO RULE 13A-14(A) OF CHIEF FINANCIAL OFFICER I, Nick DeMare, certify that: 1. I have reviewed this annual report on Form 20-F of Halo Resources Ltd..; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Date: March 10 , 2006 /s/ Nick Demare - ------------------------------------- Nick DeMare, Chief Financial Officer, Chairman and Director -2- EX-32 8 exh13_1.txt CERT - CEO EXHIBIT 13.1 CERTIFICATION OF MARC CERNOVITCH PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 -1- EXHIBIT 13.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Halo Resources Ltd. (the "Company") on Form 20-F for the year ending August 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Marc Cernovitch, Chief Executive Officer, President and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. /s/ Marc Cernovitch - ---------------------------------- Marc Cernovitch, Chief Executive Officer, President and Director -2- EX-32 9 exh13_2.txt CERT - CFO EXHIBIT 13.2 CERTIFICATION OF NICK DEMARE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 -1- EXHIBIT 13.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Halo Resources Ltd. (the "Company") on Form 20-F for the year ending August 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nick DeMare, Chief Financial Officer, Chairman and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request. /s/ Nick Demare - ------------------------ Nick DeMare, Chief Financial Officer, Chairman and Director -2- -----END PRIVACY-ENHANCED MESSAGE-----