-----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, QpzHpYgCOWu/54T3Kyy+Yy/DAQJPwlu5kZXIEoRVienJ+O5SNeq3dMnXv4l39wj8 uhWKTbKi5YXSHIq65khc2A== 0001140661-07-000077.txt : 20070315 0001140661-07-000077.hdr.sgml : 20070315 20070315133906 ACCESSION NUMBER: 0001140661-07-000077 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20060831 FILED AS OF DATE: 20070315 DATE AS OF CHANGE: 20070315 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: 07695973 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 form20f2006.txt FORM 20F FOR Y/E AUG 31, 2006 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, 2006 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ 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, CANADA 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. 31,138,216 COMMON SHARES AS OF AUGUST 31, 2006 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: AMPHIBOLITE a rock consisting mainly of hornblende amphibole, the use of the term being restricted, however, to metamorphic rocks. Amphibolite is a grouping of rocks composed mainly of amphibole (as hornblende) and plagioclase feldspars, with little or no quartz. It is typically dark-colored and heavy, with a weakly foliated or schistose (flaky) structure. The small flakes of black and white in the rock often give it a salt-and-pepper appearance. ANDESITE a fine grained intermediate volcanic rock composed of andesine and one or more mafic constituents. CHALCOPYRITE copper bearing sulphide 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. FELSIC igneous rock composed principally of feldspars and quartz. A mnemonic adj. derived from (fe) for feldspar, (l) for lenad or feldspathoid, and (s) for silica, and applied to light-colored rocks containing an abundance of one or all of these constituents. Also applied to the minerals themselves, the chief felsic minerals being quartz, feldspar, feldspathoid and muscovite. G gram G/T grams per tonne. GABBRO a dark, coarse-grained, intrusive igneous rock chemically equivalent to basalt. It is a plutonic rock, formed when molten magma is trapped beneath the earth's surface and cools into a crystalline mass. Gabbro is dense, greenish or dark-colored and contains varied percentages of pyroxene, plagioclase, amphibole, and olivine (olivine gabbro when olivine is present in large quantities) GNEISS a common and widely distributed type of rock formed by high-grade regional metamorphic processes from pre-existing formations that were originally either igneous or sedimentary rocks. Gneissic rocks are coarsely foliated and largely recrystallized but do not carry large quantities of micas, chlorite or other platy minerals. - 3 - 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. 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. KOMATIITIC komatiitic rocks are ultramafic mantle-derived volcanic rocks. They have low SiO2, low K2O, low Al2O3, and high to extremely high MgO. True komatiitic rocks are very rare and essentially restricted to rocks of Achaean age and most are greater than two billion years old, restricted in distribution to the Achaean shield areas. Komatiitic rocks occur with other ultramafic and high-magnesian mafic volcanic rocks in Achaean greenstone belts. KM kilometer LITHOGEOCHEMICAL a geochemical survey that involves the sampling of rocks. M meters MAFIC descriptive of rocks composed dominantly of magnesium and iron forming silicates. Pertaining to or composed dominantly of the ferromagnesian rock-forming silicates; said of some igneous rocks and their constituent minerals. 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. - 4 - 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. NAPPE a large sheet-like body of rock that has been moved far from its original position. Nappes form during continental plate collisions, when folds are sheared so much that they fold back over on themselves and break apart. The resulting structure is a large-scale recumbent fold. The term stems from the French word for tablecloth. Nappes or nappe belts are a major feature of the Alps of Europe. The concept was developed by the geologists who unraveled the complex tectonic history of the Alps. PEGMATITE a very coarse-grained igneous rock that has a grain size of 20 mm or more; such rocks are referred to as pegmatitic. Most pegmatites are composed of quartz, feldspar and mica; in essence a "granite". Rarer "intermediate" and "mafic" pegmatite containing amphibole, Ca-plagioclase feldspar, pyroxene and other minerals are known, found in recrystallized zones and apophyses associated with large layered intrusions. Crystal size is the most striking feature of pegmatite, with crystals usually over 50mm in size. However, individual crystals over 10 meters across have been found, and the world's largest crystal was found within a pegmatite. PETROGRAPHIC the description and classification of rocks. PORPHYRY rock type with mixed crystal sizes, i.e. containing phenocrysts of one or more minerals. PPM parts per million 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. 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 - 5 - 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. SPHALERITE zinc bearing sulphide 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. THOLEIITIC tholeiitic basalt is an igneous rock, a type of basalt. Like all basalt, the rock type is dominated by clinopyroxene plus plagioclase, with minor iron-titanium oxides. Orthopyroxene or pigeonite may also be present in tholeiitic basalt, and olivine, if present, may be rimmed by either of these calcium-poor pyroxenes. Tridymite or quartz may be present in the fine-grained groundmass of tholeiitic basalt, and feldspathoids are absent. Tholeiitic rocks may have a fine, glassy groundmass as may other types of basalt. ULTRAMAFIC ultramafic (or ultrabasic) rocks are igneous and meta-igneous rocks with very low silica content (less than 45%), generally >18% MgO, high FeO, low potassium, and are composed of usually greater than 90% mafic minerals (dark colored, high magnesium and iron content). The earth's mantle is considered to be composed of ultramafic rocks. VMS (VOLCANOGENIC MASSIVE SULPHIDES) volcanogenic massive sulfide ore deposits or "VMS" are a type of metal sulfide ore deposit, mainly Cu-Zn which are associated with and created by volcanic-associated hydrothermal events. They are predominantly stratiform accumulations of sulphide minerals that precipitate from hydrothermal fluids at or below the seafloor, in a wide range of ancient and modern geological settings. They occur within volcano-sedimentary stratigraphic successions, and are commonly coeval and coincident with volcanic rocks. As a class, they represent a significant source of the world's Cu, Zn, Pb, Au, and Ag ores, with Co, Sn, Ba, S, Se, Mn, Cd, In, Bi, Te, Ga and Ge as co- or by-products. VMS deposits are forming today on the seafloor around undersea volcanoes, mid ocean ridges and trench systems, notably the Tongan Arc. Mineral exploration companies are exploring for Seafloor Massive Sulfide deposits. 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. - 6 - 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, 2006, 2005 and 2004, was derived from the financial statements of the Company which have been audited by D & H Group LLP, independent Chartered Accountants, as indicated in their report which is included elsewhere in this annual report. The selected financial data set forth for the years ended August 31, 2003 and 2002, 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 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 17 of the Company's financial statements included herein for a discussion of the material differences between Canadian generally accepted accounting principles ("GAAP") and US GAAP, and their effect on the Company's financial statements.
----------------------------------------------------------- ($ IN 000, EXCEPT PER SHARE DATA) ----------------------------------------------------------- YEAR ENDED AUGUST 31, ----------------------------------------------------------- 2006 2005 2004 2003 2002 --------- --------- --------- --------- --------- Revenues $17 $31 $82 $69 $163 Production expenses - - $22 $17 $135 Depreciation, depletion and impairment $39 $4 $10 $1,252 $6,011 General and administrative expenses $1,268 $1,060 $184 $177 $242 Stock-based compensation $551 $559 $180 - - Net loss $(2,200) $(368) $(257) $(1,473) $(6,567) Loss per share $(0.08) $(0.02) $(0.05) $(0.50) $(2.24) Weighted average number of shares 28,448 16,050 5,654 2,927 2,927 Dividends per share - - - - - Working capital (deficiency) $152 $507 $279 $(2) $77 Resource interests $23,846 $22,759 $76 $76 $1,111 Other assets $299 $78 - - $115 Shareholders' equity $10,449 $9,078 $355 $(945) $528 Capital stock $32,396 $28,488 $20,914 $19,537 $19,537 Contributed surplus $1,361 $739 $180 - - Total assets $24,553 $23,929 $418 $93 $1,631
- 7 - ADJUSTMENT TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The 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 financial statements, are summarized in the tables below. Statements of Loss
2006 2005 2004 $ $ $ Net loss under Canadian GAAP (2,199,935) (368,110) (257,022) Unproven mineral interests expensed (i) (545,409) (11,025,762) - Other compensation expense (ii) - (12,144) (15,503) Gain on settlement (iii) - - (97,207) Deferred income tax expense (v) (491,326) (1,103,364) - ------------ ------------ ------------ Net loss under US GAAP (3,236,670) (12,509,380) (369,732) ============ ============ ============ Loss per share under US GAAP (0.11) (0.78) (0.07) ============ ============ ============
Balance Sheets
2006 2005 $ $ Total assets under Canadian GAAP 24,552,668 23,928,682 Unproven mineral interests expensed (i) (11,571,171) (11,025,762) ------------ ------------ Total assets under US GAAP 12,981,497 12,902,920 ============ ============ Total liabilities under Canadian GAAP 14,103,188 14,850,721 ------------ ------------ Total liabilities under US GAAP 14,103,188 14,850,721 ============ ============ Total shareholders' equity under Canadian GAAP 10,449,480 9,077,961 Unproven mineral interests expensed (i) (11,571,171) (11,025,762) ------------ ------------ Total shareholders' deficiency under US GAAP (1,121,691) (1,947,801) ============ ============
Statements of Cash Flows
2006 2005 2004 $ $ $ Operating Activities Cash used per Canadian GAAP (2,199,935) (368,110) (257,022) Unproven mineral interests (2,469,647) (5,842,760) (75,906) ------------ ------------ ------------ Cash used per US GAAP (4,669,582) (6,210,870) (332,928) ============ ============ ============ Investing Activities Cash provided per Canadian GAAP (2,744,397) (5,879,653) (21,211) Unproven mineral interests 2,469,647 5,842,760 75,906 ------------ ------------ ------------ Cash (used) provided per US GAAP (274,750) (36,893) 54,695 ============ ============ ============
(i) Unproven Mineral Interests Mineral property costs and related exploration expenditures are accounted for in accordance with Canadian GAAP. For US GAAP purposes, the Company expenses exploration costs relating to mineral interests. When proven and probable reserves are determined for an interest and a feasibility study prepared, then subsequent exploration and development costs of the property would be capitalized. The capitalized costs of such properties would then be amortized using the unit of production method over the estimated life of the ore body based on proven and probable reserves and would be assessed periodically for recoverability of carrying values. - 8 - For US GAAP purposes, the Company has adopted the provisions of EITF 04-2, "Whether Mineral Rights are Tangible or Intangible Assets" and FSP FAS 141-1 and 142-1 which concluded that mineral rights are tangible assets. Accordingly, the Company capitalizes certain costs related to the acquisition of mineral rights. The effect of adoption of EITF 04-2 is to reduce previously reported loss and loss per share for fiscal 2005 and 2004 by $12,986,665 and $75,906, and $0.81 and $0.01, respectively. In addition, total assets is increased by $11,733,571 and shareholders' deficiency is decreased by $11,733,571 as at December 31, 2005. (ii) 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 Exchange ("TSXV"), 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 fiscal 2006 would increase by $nil (2005 - $12,144; 2004 - $15,503) and $158,413 (2005 - $966,502; 2004 - $206,497), respectively, and share capital, as at August 31, 2006, would increase by $2,320,461 (2005 - $2,162,048; 2004 - $1,183,402). There is no net change to shareholders' equity. (iii) 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. (iv) Functional Currency The Company's functional currency is the Canadian dollar. (v) Canadian Flow-Through Shares During fiscal 2006, the Company issued 3,293,070 flow-through common shares (2005 - 4,626,364 shares) for gross proceeds of $2,305,149 (2005 - $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 the loss for fiscal 2006 and shareholders' deficiency as at August 31, 2006, would increase by $491,326 (2005 - $1,103,364; 2004 - $nil). (vi) 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. - 9 - 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, $50,000 (2005 - $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. (vii) 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, 2006, the Company has accumulated a deficit of $15,912,247 while in the development stage. RECENT ACCOUNTING PRONOUNCEMENTS UNITED STATES PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for consistently measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS 157 is effective beginning January 1, 2008, and the provisions of SFAS 157 will be applied prospectively as of that date. The adoption of SFAS 157 is not expected to have an effect on the Company's financial position. The FASB has also issued FAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FAS Interpretation No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have an effect on the Company's financial position. CANADIAN PRONOUNCEMENTS The Company believes that there are no new Canadian pronouncements which will have a material effect on the Company's financial position or results of operations. 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, 2006, 2005, 2004, 2003 and 2002. ----------------------------------- ------- PERIOD AVERAGE ----------------------------------- ------- September 1, 2005 - August 31, 2006 0.8761 September 1, 2004 - August 31, 2005 0.7518 September 1, 2003 - August 31, 2004 0.6767 September 1, 2002 - August 31, 2003 0.6355 September 1, 2001 - August 31, 2002 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, 2007. -------------- ------ ------ MONTH HIGH LOW -------------- ------ ------ February 2007 0.8631 0.8437 January 2007 0.8586 0.8457 December 2006 0.8760 0.8582 November 2006 0.8869 0.8715 October 2006 0.8965 0.8784 September 2006 0.9048 0.8872 - 10 - 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, 2007, reported by the United States Federal Reserve Bank of New York for the conversion of Canadian dollars into United States dollars was CDN $1.17 (US $0.8547 = CDN $1.00). RISK FACTORS The Company is a resource exploration company currently engaged in the acquisition, exploration and development of mineral interests located in Canada. The Company has, in the past, conducted business in the petroleum and natural gas industry. During fiscal 2004, the Company ceased activities in the petroleum and natural gas industry. 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 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. - 11 - 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 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. 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 $0.30 to a high of $0.75 during the 12-month period ending January 31, 2007. 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. - 12 - 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. 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. - 13 - 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. 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. As of the date of this annual report, all material conflicts of interests which have arisen since September 1, 2004, 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. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". 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 - 14 - 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. 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, Ms. Lynda Bloom, a director, President and Chief Executive Officer of the Company, Mr. Marc Cernovitch, a director and Chairman of the Company, Mr. Nick DeMare, a director 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 Ms. Bloom and Messrs. Cernovitch, DeMare 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, 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 - 15 - 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. 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; - 16 - 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; 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. Effective November 16, 2004, the Company changed its domicile through continuation from the Yukon Territory to British Columbia under the BCBCA. See "Item 10. Additional Information - Memorandum and Articles of Association". The primary market for the Company's common stock is the TSXV. 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. On December 23, 2006, the Series A and Series B Warrants expired without having any trades made. 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 principal business office is located at Suite 1280, 625 Howe Street, Vancouver, British Columbia, V6C 2T6. The Company's executive office is located at Suite 2900, 25 King Street West, Toronto, Ontario, M5L 1G3. The Company also has an exploration office located at Suite 2, 54 Main Street, Flin Flon, Manitoba, R8A 1J6. The contact person is Marc Cernovitch, Chairman 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 Since 2004, the Company has been a resource 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. - 17 - MINERAL INTERESTS DUPORT PROPERTY 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 issued in connection with the Duport HOA 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". BACHELOR LAKE PROPERTY 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 also agreed to pay Wolfden a net smelter return royalty of 0.5% on the Company's share of the net smelter return and assumed Wolfden's $3 million exploration funding commitment at the Bachelor Lake Property. 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. On May 2, 2006, as amended August 28, 2006, the Company and Metanor entered into a purchase agreement (the "Metanor Purchase") whereby Metanor agreed to purchase the Company's 50% interest in the Bachelor Lake JV in consideration of $3.5 million cash, $750,000 in common shares of Metanor and a 1% NSR in favour of the Company. Closing of the Metanor Purchase (the "Closing") was scheduled to occur (the "Completion Date") on the earlier of: i) 30 days after Metanor completes a $5 million financing; or ii) November 10, 2006. The Metanor Purchase contemplated total consideration of a minimum of $4.25 million. Accordingly, during fiscal 2006, the Company recognized an impairment of $1,538,655 to reflect the difference between the Company's recorded costs and the anticipated proceeds. On November 17, 2006, Metanor and the Company agreed to a new agreement (the "Revised Metanor Purchase") under which Metanor has now agreed to purchase the Company's 50% interest in the Bachelor Lake JV for total consideration of $4 million, as follows: i) $2 million cash (received); - 18 - ii) $500,000 cash on or before March 30, 2007; and iii) $500,000 in cash or common shares of Metanor each on or before May 31, 2007, August 31, 2007 and November 30, 2007. Metanor continues to be responsible for all on-going costs, expenses and obligations of the Bachelor Lake JV. In addition Metanor has granted the Company a 1% NSR and the Company will retain its beneficial interest in the Bachelor Lake JV until completion of the sale. The Company will recognize a further write-down of approximately $225,000 in fiscal 2007 to reflect the terms of the Revised Metanor Agreement. See "Item 4. Information on the Company - Principal Properties". QUARTER MOON LAKE GOLD PROPERTY On February 9, 2005, as amended February 9, 2006, 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. On December 3, 2006, the Company and Endowment Lakes entered into a formal purchase agreement (the "Quarter Moon Purchase Agreement") under which the Company has purchased a 100% interest in ten mining claims, including the original five mining claims under the Quarter Moon LOI, in north-central Manitoba, for $90,000 cash and the issuance of 160,000 common shares of the Company. Endowment Lakes holds a 1% NSR, of which a 0.5% NSR can be purchased at any time for $500,000. See "Item 4. Information on the Company - Principal Properties - Quarter Moon Lake Property and Sherridon Property". DUNLOP HOA On February 9, 2006, the Company and W. Bruce Dunlop Limited NPL entered into a heads of agreement (the "Dunlop HOA"), whereby the Company was granted the option to earn a 100% undivided interest in three unproven mineral claims, covering 536 hectares located in the Sherridon area, north-central Manitoba, for $90,000 cash ($15,000 paid), issuance of 250,000 common shares of the Company (25,000 shares issued) and expending a total of $170,000 in work expenditures over a four year period. See "Item 4. Information on the Company - Principal Properties - Sherridon Property". HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED. On March 19, 2006, the Company and Hudson Bay Exploration and Development Company Limited ("HBED") entered into three option agreements (the "HBED Options"), whereby the Company was granted options to acquire 100% interests in 24 unproven mineral claims and one mining lease covering approximately 3,226 hectares located in the Sherridon area, north-central Manitoba. In order to earn 100% interests in all of the mineral claims and the mining lease the Company will be required to make option payments totalling $650,000 and incur expenditures totalling $4,300,000 over a five year period. Upon agreement by both the Company and HBED, up to $187,500 of the option payments may be paid in common shares of the Company. Should the Company acquire a 100% interest in any of the claim groups under the HBED Options, HBED has the option to back-in for a 51% interest in the subject claims group by paying 135% of the expenditures incurred by the Company. HBED will also hold a 2% NSR. See "Item 4. Information on the Company - Principal Properties - Sherridon Property". WEST RED LAKE PROPERTY On April 18, 2006, the Company entered into a letter of intent (the "West Red Lake LOI") with Goldcorp. Inc. ("Goldcorp") regarding the option to earn a 60% interest in 67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten mining claims (collectively the "West Red Lake Property") located in Ball Township, Red Lake, - 19 - Ontario. On June 20, 2006, the Company and Goldcorp completed a formal option agreement (the "West Red Lake Option") on the West Red Lake Property. Under the terms of the West Red Lake Option, the Company is required to perform minimum exploration programs totalling $3 million on or before December 31, 2008. Upon spending the $3.0 million, the Company is entitled to elect to exercise the option of its interests. Upon notification of the Company's election, Goldcorp has 90 days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75% interest in two mining claims and a 12.5% interest in the ten mining claims by paying $6 million to the Company. If Goldcorp does not exercise its back-in right, the Company will then be required to issue one million common shares of its share capital to Goldcorp. See "Item 4. Information on the Company - - Principal Properties - West Red Lake Property". DISCONTINUED OIL AND GAS OPERATIONS Beginning October 1990, the Company was active in the business of acquiring, exploring and developing oil and gas prospects in the United States and the Company's main focus were its oil and gas 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 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. PRIVATE PLACEMENTS 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. 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. The proceeds from the Company's private placements were used for exploration and development and for general corporate purposes. DISPOSITIONS During fiscal 2006, the Company entered into the Metanor Purchase, whereby the Company agreed to dispose of its 50% interest in the Bachelor Lake JV for total consideration of a minimum of $4.25 million. As a result, the Company recognized an impairment of approximately $1.54 million to reflect the difference between the Company's recorded costs and anticipated proceeds. On November 17, 2006, the Company and Metanor entered into the Revised Metanor Purchase Agreement whereby Metanor revised its offer to purchase the Company's 50% interest in the Bachelor Lake JV for total consideration of $4 million and as a result, the Company will recognize a further write-down of approximately $225,000 in fiscal 2007 to reflect the terms of the Revised Metanor Agreement. The Company did not conduct any disposition of its unproven mineral interests during fiscal 2005. - 20 - 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. EXPLORATION EXPENDITURES During fiscal 2006, the Company incurred costs of $232,244 for mineral property acquisitions and $2,034,064, net of $228,708 of recoveries, for exploration on unproven mineral properties. During fiscal 2005, the Company incurred costs of $17,690,832 for mineral property acquisitions and $4,992,595 for exploration on unproven mineral properties. During fiscal 2004, the Company incurred costs of $75,906 for mineral property acquisition and $23,935 for development of petroleum interests. 2007 EXPLORATION BUDGET The total work programs budgeted for the Company's mineral exploration projects for fiscal 2007, amount to approximately $9.0 million. SALES AND REVENUE DISTRIBUTION As of the date of this annual report, the Company has not generated any revenues from its mineral properties. As of the date of this annual report, the Company does not generate any petroleum, natural gas and natural gas liquids revenue and it has ceased its activities in this area. The Company's share of petroleum, natural gas and natural gas liquids produced from its wells was sold to a variety of purchasers at the wellhead in the United States. All of its sales were conducted with unaffiliated customers. These purchasers provided a ready market for all of the Company's production and paid the local market price, which fluctuated based upon prevailing market conditions. Due to the number of purchasers in each area, the loss of one or a number of purchasers did not pose a significant risk to the continuity of the Company's operations. During fiscal 2004, the Company sold its remaining interest in oil and natural gas properties. Total revenues, interest and other income reported for fiscal 2006, 2005 and 2004, were as follows: ($ IN 000) ---------------------------------- YEARS ENDED AUGUST 31, ---------------------------------- 2006 2005 2004 Petroleum and Natural Gas Sales - United States $ - $ - $ 81 ---------- ---------- ---------- Interest and Other Income - United States - - - - Canada 17 31 1 ---------- ---------- ---------- 17 31 1 ---------- ---------- ---------- Total Revenue, Interest and Other Income $ 17 $ 31 $ 82 ========== ========== ========== PRINCIPAL PROPERTIES 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. - 21 - DUPORT PROPERTY, ONTARIO Much of 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"). Messrs. Graham C. Clow, P. Eng and Wayne W. Valliant, P. Geo were the Qualified Persons who authored the Duport Report. The individuals who contributed to this report were supervised by these Qualified Persons. RPA prepared a previous NI 43-101 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. Any information provided subsequent to the Duport Report has been prepared under the supervision of Mr. Kevin Leonard, who is also designated as a "Qualified Person" under the definition of NI 43-101. 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. 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: - 22 - [GRAPHIC OMITTED][GRAPHIC OMITTED][OBJECT OMITTED] Omitted Graphic is: a Property Location Map showing the location of the Duport Project in northwestern Ontario showing the provinces of Manitoba, Ontario,Qubec, and the all the Great Lakes. 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. 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 -7.8(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 - 23 - 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 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. - 24 - 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. 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 - 25 - 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 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. - 26 - 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. The Company 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 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. - 27 - [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted Graphic is: Area of Interest Map showing Zone 15 and the co-ordinates 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 - 28 - 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 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. - 29 - 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 Company 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 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 Company 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. - 30 - 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, 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 the Company 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 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. - 31 -
- ------------------------------------------------------------------------------------------------------------------- MINERAL RESOURCE SUMMARY DUPORT PROPERTY - ------------------------------------------------------------------------------------------------------------------- INDICATED INFERRED ------------------------------------ ------------------------------------ ZONE SUB-ZONE 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. The Company 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. 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. - 32 - 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. 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. - 33 - 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 objective of the work was to expand the resource base of the property by testing airborne electromagnetic anomalies with IP surveys and diamond drilling. The proposed work plan was divided into two phases, with the second phase contingent on success in the first. The estimated total cost of the first phase was $435,000 and the second phase, consisting of data compilation, geophysics, surface diamond drilling, community relations, environmental monitoring, resource estimation, and a scoping study was estimated to cost $467,000. During January, 2007 the Company commenced preparations for the Phase 1 exploration program to expand the existing to expand the existing resource by focusing on areas of structural complexity within the deposit for the discovery of high-grade ounces and to test a number of airborne magnetometer and electromagnetic ("EM") anomalies covering attractive geology within a short distance of Duport infrastructure. In February, 2007, however, the Company announced the cancellation of this drill program due to mild temperature conditions that have not allowed the building of sufficient ice thickness to support the drill rigs. During October 2006 a partial follow up to the airborne survey was carried out by completing a reconnaissance mapping and sampling program over a portion of the East Group of claims that were accessible by land. Anomalous gold values were returned from limited sampling of sulphide-bearing intrusive rocks corresponding to an area showing a uniform low magnetic signature and subtle EM response. The samples were collected on claim 3007334 which is underlain by quartz diorite rocks of the Canoe Lake Stock. The stock is a multi-phased intrusion that is host to gold mineralization near the contact with mafic volcanic rocks of the Cedar Island Formation. Samples collected on this claim are similar in appearance to that found at other targets along the periphery of the stock including the Granozone, McKinnon Reef, Crown Point Mine, Sirdar No 1 and 2 Veins and the Gold Coin Occurrences. These targets are examples of "veins in extensional fractures and stockwork zones". The nature and exploration potential of these gold targets have not yet been fully investigated. The extensional veins of the partially-drilled Granozone deposit located 400 meters to the southwest occur as en echelon veins hosted within altered, sericitized, chloritized quartz diorite that have returned 10.54 grams per tonne gold over 2.4 meters TW and 71.9 grams per tonne gold over 0.9 meters TW from holes drilled by Denison Mines in 1982. (Refer to Denison Report on Drill Results 1980-82, C.F. Desson). The altered margin of the Canoe Lake Stock is an exciting new target area for the Company. Additional work will be directed towards the evaluation and further definition of high priority targets in this area. Following this work, prior to the recommencement of diamond drilling, the Company decided to initiate a study that would better define the requirements for bringing the Duport project to feasibility level. The initial focus of this study is to develop an exploration plan to increase the property wide resource base. An assessment of all potential drill targets will be made and targets will be prioritized by consideration to factors such cost of drilling and suitability of the potential resource to become satellite mining operation to the main Duport resource. Following this assessment, an exploration and development strategy will be selected to fast track the project towards a bankable feasibility study. This plan will also form the basis for attracting a suitable exploration and mine development partner. In December 2006, a program to reassess all potential drill targets was commenced. Condor Consulting, Inc has commenced a detailed reprocessing and analysis of the original data collected by Dighem frequency-domain EM survey carried by Fugro Airborne Surveys during its August/September, 2005 survey. The EM data is currently being examined for additional anomalies that might indicate zones of mineralization. It is expected that this work will be completed during March 2007. A revised work program and budget will be established upon completion of the new exploration and development plan. It is anticipated that any major direct exploration costs for Duport will be deferred until 2008. Budgeted expenses for 2007 are estimated at $150,000 and include the completion of a detailed exploration plan. BACHELOR LAKE PROPERTY, QUEBEC 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 - 34 - 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. In December of 2005, a report entitled "NI 43-101 Technical Report on the 2005 Drilling Program and Mineral Resource Estimate for the Bachelor Lake Property" (the "Bachelor Lake Report") was 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. This report can be accessed through the Halo website www.halores.com at the System for Electronic Document Analysis and Retrieval (SEDAR). In May, 2006, the Company concluded an agreement for the sale of its 50% interest in the Bachelor Lake property to its joint venture partner Metanor Resources to allow it to focus its full attention and resources on its ongoing exploration of the Sherridon VMS Property (see below). The agreement with Metanor provides for the payment on closing of $3,500,000 and the issuance of $750,000 worth of shares of Metanor, calculated at a value per common share equal to the volume weighted average of the closing price of the common shares of Metanor for the last 10 trading days on the TSX Venture Exchange immediately prior to the date of the Agreement and a 1% net smelter return royalty on all minerals or mineral products derived from all or any part of the Bachelor property or from other ore bodies owned or controlled by Metanor and processed at the Bachelor property. On August 31, 2006, the Company and Metanor Resources Inc. ("Metanor") agreed to extend the Purchase Agreement signed in May whereby Metanor agreed to purchase from the Company its 50% undivided ownership interest in the Bachelor Lake Property, the Hewfran Property and the MJL-Hansen Property (collectively, the "Bachelor Lake Property") located in Quebec. It was agreed that the transaction would be completed on or before November 10, 2006. On November 13, 2006, the Company announced that Metanor did not complete its acquisition of the Company's 50% undivided ownership interest in the Bachelor Lake Property. As a result, the Company had the option to purchase Metanor's 50% undivided ownership interest in the Bachelor Property, together with Metanor's 50% participating interest therein, on the same terms and for the same consideration as was applicable to the purchase by Metanor of the Company's 50% interest in such properties. Pursuant to the Purchase Agreement, the Company had ten (10) days, commencing on November 10, 2006, to either exercise such option or to continue negotiations with Metanor concerning a restructured sale arrangement or a restructured joint venture agreement. On November 17, 2006, the Company and Metanor agreed to a new agreement under which Metanor has now agreed to purchase the Company's 50% undivided ownership interest in the Bachelor Lake Property for a total consideration of $4 million, as follows: - Metanor paid $2 million to the Company. The $2 million shall be applied to the purchase price for the Bachelor Lake Property and is freely transferable by the Company and is non-refundable. - Metanor will pay $500,000 to the Company on or before March 30, 2007. - Metanor will pay $500,000 to the Company in cash or, at the sole discretion of Metanor, in common voting shares of Metanor on or before each of the following dates (for a total of $1.5 million): (a) May 31, 2007, (b) August 31, 2007 and (c) November 30, 2007. - 35 - - On or before Friday, November 30, 2007, Metanor shall enter into a binding net smelter returns royalty agreement with the Company, on terms satisfactory to the Company, granting to the Company a 1% net smelter returns royalty on all mineral production (in any form whatsoever) from the Bachelor Lake Property. - If Metanor fully satisfies each of the foregoing obligations in accordance with the respective timeframes, then the Company shall complete the transfer of its 50% undivided ownership interest in the Bachelor Property, together with the Company's 50% participating interest therein, to Metanor with effect on November 30, 2007. - If Metanor fails to complete any one of the foregoing obligations, then the extension of time for the completion of the acquisition by Metanor of the Company's 50% undivided interest in the Bachelor Lake Property shall terminate immediately and the Company shall have the option to acquire Metanor's 50% undivided ownership interest in the Bachelor lake Property, together with Metanor's 50% participating interest therein. - All other terms of the Purchase Agreement remain in force and effect as previously disclosed by the Company on May 5, 2006 (including the obligation of Metanor to pay all costs and expenses of the Bachelor Lake Joint Venture until completion by Metanor of the purchase of the Company's 50% undivided ownership interest in the Bachelor Lake Property, together with the Company's 50% participating interest therein). Metanor has paid all costs and expenses of the Bachelor Lake Joint Venture since May 2006 and will continue to pay until the acquisition process is complete in November, 2007. QUARTER MOON LAKE PROPERTY, MANITOBA On December 3, 2006, the Company and Endowment Lakes (2002) Limited Partnership ("EL") entered into a formal purchase agreement (the "Quarter Moon Purchase Agreement") which was completed on January 12, 2007, under which the Company purchased a 100% interest in ten mining claims, including the original five mining claims under the Quarter Moon letter of intent (the "EL Claims"), in north-central Manitoba, for $90,000 cash and issued 160,000 common shares of the Company. EL holds a 1% NSR, of which a 0.5% NSR can be purchased at any time for $500,000. The EL Claims are strategically located within the Sherridon dome structure and Meat Lake basin structure respectively and will play an important role in the Company's plans to explore for high-grade volcanogenic massive sulphide deposits. The Company also has acquired the right to acquire any additional rights acquired by EL in and to any mining claims within a one kilometer area from the perimeter boundaries of the EL Claims. Now that this transaction is complete, the Quarter Moon Lake Property will be included with the Sherridon VMS Property. SHERRIDON PROPERTY Background 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. This report is available on SEDAR and can be accessed through the Company web site WWW.HALORES.COM. The information contained in the Sherridon Report has been updated to reflect the exploration activities carried out by the Company during 2006. The Company has followed the principal recommendations and plans as laid out in the Sherridon Report. The work has been carried out under the direction and supervision of either Kevin Leonard or Eckart Buhlmann, both of whom are designated as a "Qualified Person" as defined in NI 43-101 with the ability and authority to verify the authenticity and validity of the data presented in this report. PROPERTY DESCRIPTION AND LOCATION The Company has now staked a total of 74 claims (approximately 14,750 ha) and together with the purchase of the 2,072 ha land package from EL (see "Quarter Moon Lake Property" above), the Company held ground is now 16,822 hectares. Through three option agreements the Company also has the right to acquire a 100% interest in 30 other mining claims and one mineral lease in the Sherridon area bringing the total land package to approximately 20,876 hectare. The most significant of these agreements are those with Hudson Bay Exploration and Development Company Limited ("HBED") which allow the Company to acquire 100% of the substantial Jungle and Park copper-zinc deposits. Continued ownership of the claims staked and held by the Company is subject to meeting work commitments set forth by the Mines and Minerals Act of Manitoba and its accompanying Regulations. In total, the property currently hosts approximately 11 mt of historic copper-zinc resources. - 36 - [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted graphic is: Sherrridon VMS Project Location Map showing a close up of the location is respect to the cities /towns of Sherridon, Flin Flon, Snow Lake and Leaf Rapids. Also showing the location in respect to the contry of Canada showing all the Provinces. Figure 1: Property Location - 37 - 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 Government of Canada 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. Figure 1 identifies the location of the Sherridon Property and Figure 2 shows the property geology, infrastructure, deposit locations and claim boundaries. [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted Grphic is: Sherridon Project showing the geology, infrastructure, deposit locations and claim boundaries Figure 2: Property geology, infrastructure, deposit locations and claim boundaries 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 and 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 and 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 - 38 - 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. The Company expects to complete such a report for exploration work in close proximity to the historic Sherridon Mine. 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 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, pass 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 - 6,500), Cranberry Portage (population - 1,000) 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. The Company believes that potential future development of the Sherridon Property will be greatly facilitated by the existing rail link to the Hudson Bay Mining and Smelting Co. Ltd. (HBMS) mining/metallurgical complex located approximately 70 km to the southwest and also by the presence of the all weather road to provincial Hwy 10, a power line and a communication tower. - 39 - 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 and 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 and 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, 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. 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. - 40 - 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 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. - 41 - 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. Several of the Company's claims are primarily 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, the Fidelity zone and the Ake zone occur on the Company's property. The remainder, the Jungle, Park and Bob deposits are held under option. 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 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 - 42 - 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. The Park Lake deposit was discovered in 1959 by Hudson Bay Exploration and Development Co. Ltd. from a surface exploration program. This deposit strikes WNW with a length of 365m and an average width of 6m and was drilled to a maximum vertical depth of 670m. The deposit dips to the N at 45 degrees and is open at depth. The area is underlain by an east-trending sequence of Sherridon Suite quartz-rich paragneiss and amphibolitic gneiss. The mineralization is hosted by quartz-feldspar-biotite, garnet, sillimanite gneiss and also interlayered with quartz-rich gneiss, hornblende-biotite-quartz gneiss, and calc-siliciate gneiss. The main sulphide ore is contained within four lenses and composed of both solid and disseminated sulphide zones with medium- to coarse-grained crystalline pyrite and interstitial blebs of pyrrhotite, sphalerite, and chalcopyrite. The Jungle Lake deposit was discovered in 1958 by Hudson Bay Exploration and Development Co. Ltd. The deposit has an E to W strike with a known strike length of 365m and an average thickness of 5.6m that extends to a vertical depth of 400m. The zone dips approximately 40(degree) to the N. The underlying host rocks consist of an east-trending sequence of Sherridon Metamorphic Suite quartz-rich paragneiss and amphibolitic gneiss. The mineralization is hosted by quartz-biotite gneiss that is in turn interlayered with quartz-rich, quartz-feldspar-biotite, and quartz hornblende gneiss. The near solid to solid sulphide zone contains predominantly pyrrhotite and pyrite with lesser amounts of chalcopyrite and sphalerite as blebs and stringers. On the north side of the deposit there are sections within the hanging wall that occasionally contain graphite. There is little to no alteration surrounding the Park Lake sulphide bodies. Exploration in the area of the Cold Lake deposit commenced in 1928 by Cold Lake Mines Ltd. with several geophysical surveys including an airborne radiation survey in 1954, airborne EM survey in 1972, and an airborne magnetic and EM survey in 1980. This Cold Lake deposit strikes NW with a length of approximately 180m, a true width of 3m, and extends to a vertical depth to 180m. The deposit has a variable dip from 50 - 80 degrees NE with a shallow plunge NW. The Cold Lake deposit is underlain by a sequence of NW trending Sherridon Suite, quartz-rich paragneiss and amphibolitic gneiss that are very similar to the host rocks of Sherritt Gordon Deposit. Cold Lake mineralization comprises well mineralized, massive sulphides of pyrrhotite and pyrite with lesser, variable amounts of sphalerite and chalcopyrite. The mineralization is constrained within the quartz-feldspar-biotite gneiss, which are in turn interlayered with quartz-feldspar-hornblende-biotite and amphibolitic gneiss. In 1941 Sherritt Gordon Mines Limited discovered the Bob Lake deposit by drilling and followed it up with an intensive drilling campaign in the first half of 1942. The geological characteristics of the Bob Lake deposit offer important clues as to the structural and stratigraphic controls of VMS deposits on the east flank of the Sherridon dome structure. Based on historic documentation available at the Manitoba Mines Department, the true width varies to 33 metres and averages 4.5 metres. The main significance of the Bob Lake deposit is that it demonstrates the lithostratigraphic and structural position of the mineralized horizon. Mineralized beds strike northwest, dip 50(degree) northeast and plunge 20(degree) to the east. Mineralization is hosted in felsic gneiss and is associated with pegmatite. Discovered in 1965 by Fidelity Mining Investments Ltd. from drilling EM and magnetic geophysical targets, the Fidelity deposit is within a structurally complex area. The deposit has an east limb that strikes ESE and dips NE, and a west limb that strikes WSW and dips SE. The strike length of the deposit is approximately 120m and extends to a vertical depth of 150m. Most drill holes within the east limb intersected two sulphide-bearing zones that vary in thickness from 1 to 10m (core length). The drill holes within the western limb intersected disseminated pyrite and pyrrhotite mineralization. This area is underlain by Sherridon Suite biotite- or hornblende-bearing quartzofeldspathic gneiss, and pelitic schists. Sulphide-rich layers are typically structurally overlain and/or underlain by altered rocks that contain variable concentrations of garnet, sillimanite, chlorite, sericite, biotite, and disseminated sulphides. The massive sulphide mineralization within this area consists primarily of solid to near solid pyrite, pyrrhotite, chalcopyrite, and sphalerite rich horizons. - 43 - The Ake zone is located at the eastern limit of the Sherridon property and was discovered by Hudson Bay Exploration and Development Company in 1971. Drill hole projections, drill logs and assay data from HBED's 1972 and 1984 drilling campaigns show a mineralized zone up to 4.6 m thick and that averages 1.5 m width. In 1982, at a depth of 293m, a drill hole cut 3.7 m grading 2.18% copper, 0.50% zinc, 0.5g/t gold and 10 g/t silver. At surface the zone strikes 210(degree), dips 50(degree) west and has a strike length of 183 m. At 305 m depth the zone strikes 270(degree) and dips less than 10(degree) north. The Ake Zone occurs in siliceous quartz-feldspar-biotite gneiss with sericite, chlorite, epidote and sillimanite alteration on the east limb of the Meat Lake synform. The Ake zone is within an embayment of low metamorphic grade within the Meat Lake basin and drill results from some 40 to 50 holes define important stratigraphic and structural controls of VMS style mineralization within the Meat Lake basin. The Ake zone is a valuable starting point from where to follow the extensive potentially mineralized horizon. The above information was taken from documentation by Hudson Bay Mining and Exploration Company Ltd., dated between 1971 and 1985. The Sherridon Report summarizes the historical estimates of significant mineral deposits as follows:
- --------------------------------------------------------------------------------------------------------------- SHERRIDON VMS PROPERTY. HISTORICAL ESTIMATES OF SIGNIFICANT MINERAL DEPOSITS - --------------------------------------------------------------------------------------------------------------- MINERAL DEPOSIT TONNAGE CU ZN AU AG COMMENT REFERENCE (TONNE) (%) (%) (G/T) (G/T) - --------------------------------------------------------------------------------------------------------------- Sherridon: 7,739,000 2.46 0.80 0.41 42.0 Mined out Froese and Goetz (1981) West and East Zone - --------------------------------------------------------------------------------------------------------------- Cold Lake 240,000 1.05 1.50 0.34 11.0 Ostry et al (1998) - --------------------------------------------------------------------------------------------------------------- Park Lake 6,142,000 0.42 2.16 0.14 2.4 To 670 m Ostry et al (1998) - --------------------------------------------------------------------------------------------------------------- Jungle 3,356,581 1.42 1.10 Ostry et al (1998) - --------------------------------------------------------------------------------------------------------------- Bob 2,159,098 1.33 1.18 0.31 8.5 Ostry et al (1998) - --------------------------------------------------------------------------------------------------------------- Fidelity - Not calculated Ostry et al (1998) - --------------------------------------------------------------------------------------------------------------- Ake - Not calculated Ostry et al (1998) - ---------------------------------------------------------------------------------------------------------------
Note: The information contained in the table relies on the January31, 2006 NI 43-101 Technical Report on the Sherridon Property that is available at www.halores.com. This report includes all of the available references regarding the source of these historical estimates. The deposit estimates are presented as historical estimates and use historical terminology. These estimates are given to provide an important frame of reference for the Company's ongoing exploration program for VMS type mineral deposits. The Company has carried out no work to classify these historical estimates under current mineral resource or mineral reserve terminology. As noted in the January 31, 2006 NI 43-101 Technical Report, the historical estimates are not to be interpreted as current estimates as defined in section 1.2 and 1.3 of NI 43-101 and therefore should not be relied upon. In the Company's exploration program these deposits serve to demonstrate the stratigraphic and structural positions of mineralized horizons, and also the style of mineralization. The known deposits also serve to test the effectiveness and depth penetration of latest geophysical survey techniques in the high grade metamorphic Sherridon area with its dominantly flat dips. Other styles of mineralization known from outcrop or drill core have been identified on the Sherridon Property: - 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 - 44 - 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 and Development Co. Ltd. and under option to the Company. 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 approximately 4 km southeast of the central portion of the Sherridon Property. 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 future gold exploration in the area. RECENT EXPLORATION CARRIED OUT BY THE COMPANY During 2006 the Company has assembled a competent exploration team and has completed the following: - Compilation of a large body of government assessment data and also detailed historic exploration data provided by HBED. - During July 2006, the completion of 2,684 line km of deep-penetrating and high resolution helicopter-borne Versatile Time-Domain Electro-Magnetics ("VTEM") geophysical survey covering the entire property at a 100m line spacing. - Reconnaissance geological mapping and prospecting within specific target areas in the vicinity of the existing Cu-Zn deposits. The work is being used to ground truth anomalies and features outlined from historical exploration work. - Preliminary review was conducted on the gross controls of mineralization that appear to favour contacts between contrasting lithologies, that being primarily felsic and mafic assemblages. Late-stage pegmatite bodies are intimately associated with Cu-Zn mineralization at the past-producing Sherritt Gordon West Zone and the Bob Lake and Cold Lake deposits. The pegmatite bodies appear to have intruded the same stratigraphic zones of weakness that focused the mineralization facilitating in the redistribution and/or concentration of the ore. - A lithogeochemical sampling program has been undertaken to "fingerprint" primary types of hydrothermal alteration within areas of known mineralization. It is anticipated that this program will be used in conjunction with geophysical information to greatly increase the efficiency of deposit discovery by developing more specific drilling targets. - A study of VMS camps in general show that clustering of massive sulfide deposits can be found along specific stratigraphic marker horizons. Relatively untested stratigraphy with respect to their stratigraphic position and geochemical signature exist along strike of base metal deposits covered by the Sherridon property. - Key historical drill hole information for the Bob, Jungle, Park and Cold deposits has been recovered and preliminary geological modeling completed. Preliminary model results are being used to assist in establishing exploration targets adjacent to each of the known mineralized deposits. - During September and October, preliminary data processing of the airborne geophysical data was carried out with early results revealing numerous new EM conductors. - 45 - - In October, the Company agreed to conduct joint research in the Geological Survey of Canada's Flin Flon Project, part of the Government of Canada's national Targeted Geoscience Initiative III (TGI-3) Program. The Flin Flon Project is a five year integrated geoscience study aimed at helping in the discovery of new base metal deposits in established mining communities of the Flin Flon-La Ronge-Lynn Lake district of northern Manitoba and Saskatchewan. The Company places great importance on engaging its technical staff collaboratively with technical experts from the provincial and federal government, from academia and also HBMS. - In November, the Company commenced a 30,000 m drill program designed to test numerous, previously untested VMS target areas identified by the recently completed helicopter-borne deep penetration and high resolution VTEM survey and also to expand historical base metal resources. The initial drill locations were within an area that covers the postulated extension of the historic Sherritt Gordon East Zone ore body (the Eastern Areas). Subsequent drilling has focused on the Bob deposit. - Work continues to develop specific drilling targets from approximately 120 new EM targets that have been identified by the geophysics program. During January 2007, the results of Condor Consulting Inc.'s (Condor) interpretation of the July 2006 geophysical survey covering the 200 square kilometer Sherridon VMS District in northern Manitoba. Geotech carried out a helicopter-borne magnetic and VTEM survey covering over 2,700 line kilometers at a 100 m-line spacing. The VTEM heli-time domain EM system entered commercial service in late 2002 and has been proven to match or exceed the performance of existing airborne and ground EM technologies in identifying zones of high conductivity associated with sulphide ore bodies. Condor has developed Conductivity Depth Imaging and time constant analysis modeling techniques to aid in the discrimination between conductivity associated with mineralization versus background (non-economic overburden or host rock) responses that based on traditional interpretation methods may appear similar. The Sherridon Property is prospective for volcanogenic massive sulphide (VMS) copper-zinc mineralization and hosts the past producing Sherridon Mine, which produced 7.7 million tonnes grading 2.46% copper and 0.8% zinc as well as several other known VMS deposits. VMS ore bodies occur in clusters and are the target of Halo's exploration program. Condor reported "Based on similar VMS settings, there are a larger than normal number of Priority 1 and Priority 2 targets due to several factors. The main reason is that there are simply a significant number of quality targets that are present in the environment which show a strong geophysical similarity to areas of known mineralization. Another reason is that unlike most VMS settings where long conductors (>1 km) can normally be downgraded as probable formational conductors, this is not possible at Sherridon, with the primary example being the Sherridon Mine ore body which is almost 4 km long." DRILLING The Company commenced exploration drilling on November 19, 2006 and to January 31, 2007, a total of 9 holes and 2,752 meters have been completed of a planned 30,000 m drill program initiated to test 66-line kilometers of EM conductors identified in the recent VTEM airborne survey and also to expand historical base metal resources. Drilling is currently being performed by Rodren Drilling, Winnipeg, Manitoba. Assay results have been received and compiled for samples taken from the first eight drill holes (DH-01 to DH-08). The first three holes were drilled between 200 and 600 m east of the East Zone sulphides lens which was estimated to contain 785,621 tonnes at 2.14% copper, 5.78% zinc, 0.65g/t gold and 26.6g/t silver and was mined in the 1940s. This three (3) hole program is the first systematic attempt to explore the East Zone fold structure for continuations of the sulphide ore based on modern reinterpretations of the complex geological structures. A recent grab sample taken by the Company from surface near an open stope on the East Zone returned results of 14.5% copper, 2.9% zinc and 7.4 g/t gold. Drill holes DH06-01 and DH06-03 intersected alteration zones commonly associated with the mine horizon and mineralization at depths up to 159 m below surface. The highest grade intersection was from hole DH-6-03 at 43.0 to 45.2 m which assayed 0.53% copper, 0.77% zinc and anomalous gold and silver. The success of these drill holes indicates that the East Zone mine horizon can be traced at least 600 m from the eastern part of the historical mine working and that the airborne geophysics identifies important geological features beneath the previously unexplored granites and at depths that have not previously been tested. - 46 - Drill hole DH-04 to DH-08 were located at the Bob Lake deposit and are the first five part of a twelve hole program planned to confirm and expand the historical resource. The Bob Deposit has been modeled as multiple sulphide horizons with a northwest strike over a length of 780 m. The lenses of pyrrhotite, pyrite, chalcopyrite and sphalerite have been described as having an average width of 4 m, a southeast-plunge and a vertical extension to 180m. The initial drilling at the Bob Lake deposit has intersected up to 4 m of 1.26% copper and 1.47% zinc within a massive sulphide zone approximately 25 m thick grading 0.76% copper and 0.49% zinc. All mineralized intervals for holes DH-04 to DH-08, are shown in the table on page 47. Borehole Pulse EM geophysical surveys will be conducted on all the recent drill holes to test for continuity and extension of the newly identified sulphides zones at depth and along strike and will be used to define follow-up drilling. Drilling continues at Bob Lake and other targets defined by recent airborne geophysical surveys. Halo expects to continue drilling throughout 2007 at Sherridon. DRILL HOLE DESCRIPTIONS DH06-1 The first hole on the East Zone, DH06-1 was drilled vertically to test a strong VTEM conductor, approximately 500 metres east of Sherritt Gordon Mine's East Zone ore body. The hole cut a strongly graphitic zone between 73 to 79 metres and the projected East Zone mineralized horizon from 159 to161 metres. The mineralized zone reported 0.61% copper and low silver and zinc values over 0.9 m between 159.4 to 160.5 m. The hole continued to a depth of 298 metres and was stopped in mafic volcanic rocks. DH06-2 The second hole on the East Zone, DH06-2 at -50(0) to the southwest, tested a strong steeply dipping VTEM conductor, located approximately 200 m south DH06-01. The hole intersected a sulphide enriched zone with trace amounts of chalcopyrite and sphalerite between 86.2 to 99.2 m and the strongly graphitic zone of DH06-1 at 157 to179 metres. The hole was stopped at 191 metres in intermediate, calcareous volcanic rocks. DH06-3 The third hole on the East Zone, DH06-3 at -90 (0), tested an area 100 metres east of the East Ore body. It cut an altered, mineralized zone, equivalent to the East Zone mine horizon from 43 to 45 metres, with strongly anomalous values of 0.53% copper, 0.77% zinc and elevated silver and gold over 2 m. The projected horizon continues northeast and dips southeast. The hole was continued through a succession of intermediate and felsic volcanic rocks to a depth of 505 metres, testing for the folded repetition of the East zone horizon but not reaching it. Assays for all mineralized zones in diamond drill holes DH-01 toDH-03 are reported in the following table: - -------------------------------------------------------------------------------- HOLE NO FROM TO INTERVAL CU ZN AG AU (M) (M) (M) (%) (%) (G/T) (G/T) - -------------------------------------------------------------------------------- DH06-01 159.35 160.45 0.90 0.61 0.07 4.57 - Including 159.85 160.45 0.60 0.75 0.10 5.30 - - -------------------------------------------------------------------------------- DH06-02 no significant results - -------------------------------------------------------------------------------- DH06-03 43.00 45.20 2.20 0.49 0.67 3.76 - Including 43.00 44.80 1.80 0.53 0.77 3.76 - - -------------------------------------------------------------------------------- DH-04, 05 AND 06 These holes were drilled from the same location, at the northwest end of the Bob Lake deposit, and intersected broad sulphides-rich zones that included intervals returning 1.26% copper and 1.47% zinc over 4.0 m (DH-05). Semi-massive to massive sulphides zones were encountered in this hole returning 0.76% copper and 0.49% zinc over 24.9 m. DH-04 encountered five significant mineralized zones totaling 47 m including an intercept of 2.4 m grading 1.51% copper, 1.05% zinc, 1.05 g/t gold and 29.8 g/t silver and another of 7.3 m grading 0.95% copper and 0.90% zinc. These mineralized intervals appear representative of the grade and widths historically reported for the Bob Lake deposit. Drilling in the 1940s at Bob Lake did not extend beyond a vertical depth of 180 m. Drill hole DH-06 intersected a massive sulphide zone grading 0.03% copper and 1.95% zinc over 2.5 m at a depth of 260 m. This new zinc-rich mineralized zone represents an exciting new target and the potential to expand the resource. - 47 - DH-07 This hole was drilled 200 m southeast of the Bob Lake deposit to test the on-strike extension of the deposit. Five mineralized zones were intersected of 1.4 to 3.2 m widths, with grades up to 2.79% zinc or 1.06% copper, at shallow vertical depths of less than 125 m. Additional drilling is required to test the structural relationship between the multiple sulphide zones encountered in the drilling to date and their continuity along the entire 850 m strike length. DH-08 This hole, drilled 175 m southeast of DH-07, successfully defined zinc-rich semi-massive sulphides with grades up to 1.11% zinc over 4 m approximately 200 m from surface. DH-07 and 08 are the first drill holes to test the new airborne geophysical target zone that extends for approximately 500 m southeast of the Bob Lake deposit. The Company is greatly encouraged by the indication of such a significant extension of mineralization and future drilling will concentrate on the continuation of two untested geophysical target zones that extend a further 750 m to the southeast. Sulphides in the region are noteworthy for their gold enrichment. Two sulphide-rich zones in DH-04 reported gold grades of 1.37 g/t gold over 9.7 m and 1.87 g/t gold over 7.5 m with one sample assaying 21.54 g/t gold over 0.5 m. An additional sample from DH-08 assayed 19.55 g/t gold over 0.5 m while DH-07 included a broader zone of 3.2 m with an average grade of 1.38 g/t gold. Assays for all mineralized zones in diamond drill holes 04 to 08 are reported in the following table: - -------------------------------------------------------------------------------- HOLE DIP/AZIMUTH FROM TO WIDTH CU ZN AG AU (degrees) (m) (m) (m) (%) (%) (g/t) (g/t) - -------------------------------------------------------------------------------- DH04 54 / 226 174.7 182.0 7.3 0.94 0.90 8.0 0.26 206.8 218.4 11.6 0.33 0.32 5.9 0.15 224.4 229.0 4.6 0.01 0.50 3.6 0.11 234.7 244.4 9.7 0.56 0.82 17.8 1.37 250.4 257.9 7.5 0.16 0.98 9.0 1.87 - -------------------------------------------------------------------------------- DH05 54 / 222 181.6 206.6 24.9 0.76 0.49 7.2 0.19 including 181.6 185.6 4.0 1.26 1.47 10.1 0.53 - -------------------------------------------------------------------------------- DH06 72 / 222 151.9 156.7 4.8 0.64 0.85 5.8 0.20 300.7 303.1 2.4 0.04 2.13 16.3 0.73 - -------------------------------------------------------------------------------- DH07 45 / 221 160.6 177.1 16.5 0.26 0.73 9.0 0.57 including 160.5 163.2 2.6 0.11 2.79 9.5 0.22 165.3 168.2 2.9 0.06 0.55 19.1 0.94 169.6 171.0 1.4 1.06 0.61 12.0 0.26 173.2 176.4 3.2 0.53 0.35 7.8 1.38 - -------------------------------------------------------------------------------- DH08 45 / 152 268.8 273.1 4.3 0.08 1.12 13.0 0.36 277.6 278.8 1.2 0.21 1.48 4.8 0.11 - -------------------------------------------------------------------------------- Most intersections are expected to be near true widths but further drilling is required to resolve the structural complexity of the deposit SAMPLING AND ANALYSIS A total of 964 meters were drilled by Rodren Drilling on the first 3 holes using NQ core. 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 - 48 - and the other half was sent for assay. The core was sawn in half using a diamond core saw 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 TSL Laboratories, Saskatoon, Saskatchewan which is an ISO17025-accredited facility, for preparation and analysis. The entire core was crushed and a 300 g split was pulverized. Base metals were determined by inductively coupled plasma spectrometry (ICP) after an aqua regia digestion and gold by standard fire assay with an ICP instrumental finish on a 30 g charge. Analysis for samples that reported greater than 5000 ppm copper or zinc were repeated using a four acid digestion and atomic absorption spectrometry (AAS) determination. A quality control program consisting of blank, duplicate and analytical control standards has been implemented to monitor laboratory performance and no significant discrepancies are reported. 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. MINERAL RESOURCE ESTIMATE There are no Industry Guide 7 or NI 43-101 compliant mineral resources on the Sherridon Property. EXPLORATION PROGRAM It is the Company's vision to see a copper and zinc concentrate production capability established at its Sherridon VMS Property within the next four years and an ongoing exploration program capable of sustaining this production for a minimum of ten years. The Company believes that the application of advanced technology and the best available exploration tools will enhance its ability to identify new base metal deposits and extend the known historical resources on the Sherridon property. Over the next two years the Company will apply a multi-disciplined approach to systematically and aggressively follow up on the 66 line kilometers of EM conductor targets identified by Condor. It will also complete a thorough exploration program within and adjacent to all the existing historic resource areas with a view to increase the quality and quantity of the resources sufficiently to support a bankable feasibility study. Over the next 12 months, it is the Company's objective to bring all historic resources into NI 43-101 compatible resource categories. A preliminary economic evaluation will also be conducted to define the requirements for production feasibility. Geophysical techniques will continue to be used to assist in prioritizing and generating specific primary exploration targets for drill testing. Geochemical sampling and lithogeochemical and other sampling programs will be conducted over all primary target areas as a means to better refine and prioritize potential drill targets. Drill testing of all targets will continue. The Company will continue to follow the principal recommendations of the Sherridon Report. The initial Phase 1 exploration program; to use modern, deep-penetrating airborne electromagnetic and magnetic geophysical surveys to locate deeper, high-quality exploration targets, is essentially complete. The proposed Phase 2 work program has been revised and is as follows: 1. Carry out a drill program totaling 20,000 m over 1 year within and adjacent to all known deposits to: a. Develop a revised geological model of each deposit b. To allow NI 43-101 compatible resource estimates to be completed c. To test new target areas adjacent to the current known mineralized envelopes and identify future drilling requirements 2. Carry out modern ground geophysical techniques to screen new target areas prior to drill testing: a. Line cutting and advanced super-sensitive ground geophysical follow-up surveys to better rank the known airborne anomalies and possibly identify barren conductors b. Gravity surveys in selected areas of the property to test suitable conductivity anomalies for coincident gravity anomalies 3. Carry out field exploration and other geological programs over all known deposits and newly identified target areas to refine the current exploration model and identify high priority target areas a. Continue program of lithostratigraphic mapping in selected areas to confirm presence and determine continuation of strata favourable for VMS exploration. b. Carry out 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. - 49 - c. Use advanced modeling techniques to create a 3D data base of all structural information to trace continuation of deformed strata favourable for VMS exploration. d. Integration of results of the new geophysical surveys with other geological information to develop and prioritize drill targets with favourable stratigraphic and structural attributes. 4. Drill testing of new exploration targets, subject to definition above. a. A drill program totaling approximately 30,000 meters, would likely be carried out over at least two exploration seasons b. Down-the-hole Pulse EM on each drill hole to better define areas of mineralization The budget for the fiscal 2007 exploration program is summarized as follows: AMOUNT $ Diamond Drilling (full direct cost) 4,875,000 Field Geological Support and Programs 378,200 Site Support and Services 220,800 Geophysical Programs 513,100 Litho and Geochemical Assays 114,300 Engineering, Geological and Environmental Studies 331,500 Management and Technical Support 533,000 ---------- 6,965,900 Contingencies 696,600 ---------- Grand Total 7,662,500 ========== WEST RED LAKE PROPERTY Much of the following information on the West Red Lake Property is derived from an internal report provided by Goldcorp Canada Ltd. This report summarizes the geology, deposits and significant mineralization of the Middle, Pipestone and Biron Bay properties, located in the Red Lake Greenstone Belt (Balmer and Ball Assemblages). The Red Lake greenstone belt is host to the richest gold deposit in the world. The high-grade zone at the Red Lake Mine contains 4.6 million ounces at a grade of 2.35 oz/ton gold. The Red Lake Camp has produced over 20 million ounces and is currently being explored by a number of senior gold companies that include AngloGold, Teck Cominco, Barrick and Goldcorp. PROPERTY DESCRIPTION The West Red Lake Property is located about 32 km west of the prolific Campbell and Red Lake Mines in the Red Lake Camp. The property is in the Ball Township of the Red Lake Area, Ontario (NTS 52M/1, 52L/16) and covers widespread gold mineralization from surface showings and small gold deposits. Previous exploration by a number of companies including Hemlo Gold Mines Ltd., Goldcorp, Cochenour-Willans Gold Mines Ltd, Dumont Nickel and May-Spiers Gold Mines Ltd. have carried out intermittent exploration in this area since 1935 and surface trenching has returned significant surface gold values including up to1.87 opt over 1.8 meters and 0.38 opt over 7.3 meters respectively. The property has now been consolidated into a larger package of contiguous claims. Goldcorp Inc. has a 100% interest in 70 mining claims on the Middle Bay and Pipestone Bay properties and 50% interest in 10 patented claims on the Biron Bay property with Biron Bay Resources. The three properties contain mineralized occurrences and zones within a western portion of the Red Lake greenstone belt. - 50 - LOCATION AND ACCESS (SEE FIG. 1- LOCATION MAP) The properties are located some 25-30 kilometres west of the town of Red Lake, Ontario, in Ball Township. Access is afforded primarily by boat, from Red Lake, West, into Trout Bay, thence to Middle and Pipestone bays. The properties can also be accessed in part on land, via Highway 618, south of Red Lake, to Madsen, then west along Suffel Lake (`Flat Lake') Road, where a boat launch is located a few km Southeast of the Middle Bay property. Pipestone Bay can then be accessed by passing through the Middle-Pipestone Bay narrows. Middle and Biron Bay can be accessed by vehicle under seasonal conditions along the Pine Ridge Road, which comes within 2 km of the west boundary of Biron Bay. Using winter trails off this road, from the Mt. Jamie Mine, west Todd Township, the East portion of Pipestone Bay may be accessed. [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted graphic is: Halo Resources West Red Lake Project - Location Map showing location with respect to Lake Superior and the cities of Thunder Bay, Winnipeg, Balmertown and Kenora FIGURE 1 - LOCATION MAP - 51 - PROPERTY AGREEMENTS (SEE FIGURE 2 - PROPERTY HOLDINGS) On June 20, 2006, the Company completed a formal option agreement with Goldcorp Inc. ("Goldcorp") on its Middle Bay, Pipestone Bay and Biron Bay properties (collectively the "West Red Lake Property") located in Ball Township, Red Lake, Ontario. Under the terms of the option agreement the Company can earn a 60% interest in 67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten mining claims by spending $3 million on exploration by December 31, 2008. Upon spending the $3 million, the Company is entitled to elect to exercise the option of its interests. Upon notification of the Company's election, Goldcorp has 90 days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75% interest in two mining claims and a 12.5% interest in the ten mining claims by paying $6 million to the Company. If Goldcorp does not exercise its back-in right, the Company will then be required to issue one million common shares of its share capital to Goldcorp. [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted Graphic is: West Red Lake Property showing Patentd/Leases nad Mineral Claims Figure 2 - Property Holdings REGIONAL GEOLOGY The region is dominated by the Red Lake Greenstone Belt, and forms part of the Uchi subprovince. The Belt consists of two main assemblages; the earlier sequence, (Balmer assemblage, dated at around 2.99-2.96 Ga.), is composed of tholeiitic to komatiitic volcanic rocks and associated subvolcanic intrusions, lesser intercalated clastic and chemical sedimentary lithologies, felsic volcanic rocks and intrusions (Pirie, 1982; Stott & Corfu, 1991). The upper sequence or Confederation assemblage, has been dated at 2750 to 2730 Ma (cf. Balmer assemblage, dated at 2992 to 2925 Ma), and is characterised by a calc-alkalic, mafic to felsic volcanic rock sequence with abundant clastic and chemical sediments (Pirie, 1982; Corfu and Andrews, 1987; Stott and Corfu, 1991). It likely rests unconformably on the Balmer. Granitoid intrusions intruded the aforementioned around 2730-2700 Ma (Pirie, 1982; Corfu and Andrews, 1987). The structure of the Red Lake greenstone belt may be characterised by an approximately east-west trending, steeply dipping sequence with generally moderate penetrative strain, with, often, the preservation of primary volcanic and sedimentary textures (Sanborn-Barrie, Skulski, Parker, and Dube, 2000). Several phases of deformation have been noted by several authors: most recently, Sanborn-Barrie et al., (2000), have (also) postulated a minimum of two major episodes of deformation. The greenstone belt has been ascribed by the preceding authors, as consisting of four major Mesoarchaean metavolcanic assemblages: Balmer, Ball, Trout Bay and Bruce Channel. - 52 - The three properties are underlain predominantly by Balmer Assemblage komatiitic to tholeiitic volcanic sequences and Ball Assemblage (calc-alkaline), intermediate to felsic volcanic rocks. Sedimentary sequences are prominent also, and characterised by both clastic and significant chemical units. Pipestone Bay and adjacent land is underlain by a large ultramafic, probably peridotitic intrusion, which periodically, has been the focus of limited Ni and PGE exploration. Significant showings and deposits in the region include the Goldcorp Inc. High Grade Lake VMS deposit, on the Trout Bay property, and the No. 2 Nickel Showing, (Trout Bay Property), which was recently explored for PGE, with Pd results exceeding 7000 ppb from grab and chip samples. Gold showings include the Bridget Lake Au occurrence, a quartz vein-hosted brittle fracture system within clastic and chemical metasediments. Intermittent work by a number of concerns, including Cochenour-Willans in the 1960's, indicated the presence of a wide carbonate-silica altered volcanosedimentary sequence by Bridget Lake. Cochenour Willans prospected more areas, including quartz veining hosted by carbonatised mafic volcanics North of Bridget Lake. PROPERTY GEOLOGY (SEE FIGURE 3 - WEST RED LAKE GEOLOGY) [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted graphic is: Map showing Middle, Pipestocn BironBay Properties in showing formation of Ball assemblage rocks Figure 3 - West Red Lake Geology Dating of the sequence has been conducted by several authors in recent years. Stott and Corfu (1991), correlated the supracrustal sequence to be of Balmer-age (2900-3000 Ma), with overlying dacite tuffs dated by Riley and reported by Parker (2000b), at 2735 +/- Ma. (correlating with Ball Assemblage rocks). BIRON BAY The Biron Bay area is underlain by Northwest-Southeast trending sequence of intermediate to mafic volcanic rocks and intercalated cherty sediments or chert-magnetite iron formations. The lithologies are believed to form part of the regional Ball Assemblage. Minor, late serpentinitic ultramafic intrusions underlie the far southeast of the property, whilst granodiorite to feldspar porphyritic intrusions crop out in the North. Both iron formation and late kinematic, felsic-intermediate intrusions are known to carry limited, anomalous gold values, usually associated with brittle quartz vein systems. Several occurrences have been discovered on the property, notably - 53 - the Consolidated Rowan Prospects in the North (see below). MIDDLE BAY The Middle Bay area is underlain by Ball and possibly Balmer Assemblage mafic to ultramafic volcanics, (mafic flows to gabbroic phases), with the ultramafics characterised by peridotitic flows and sills within the supracrustal sequence. The Ball Assemblage calc-alkalic intermediate to felsic volcanic units are generally intercalated, and characterised by thick sections of quartz or feldspar phyric crystal to lapilli tuffs. True flows are as yet unknown. Minor metasediments crop out over the property, with a much wider section transecting the property and characterised by a predominantly cherty to chert-magnetite sequence which hosts the Bridget Lake prospect. The majority of mineralised occurrences are spatially related to mafic volcanic-ultramafic volcanic contacts with others within altered intermediate to felsic volcanics. Nearly all are within fracture systems hosting quartz vein sets within a brittle to semi-brittle deformational setting. Associated alteration is sericite-quartz-(carbonate) within so-called intermediate to mafic volcanic sequences, & strong to intense carbonate (dolomite-ankerite)-serpentine +/-quartz in mafic-ultramafic settings. At least two major alteration `corridors' are known on Middle Bay, both trending approximately East-West. One trends through Middle bay itself, & `hosts' the May-Spiers deposit, is strongly carbonatised & variably serpentinitic, and another trends through Bridget Lake, and hosts the namesake prospect & Pancake Bay showings, farther West. The second is variably serpentinitic, sericitic and carbonatised, depending on host lithology. They form primary targets for further exploration. The sequence, viewed as a whole trends northwest in the west area, turning East-West around Middle Bay, with a more East-North-easterly trend in the far East, this due in part to the effects of the large serpentinised ultramafic, (peridotitic) intrusion underlying Pipestone Bay. Exposures of this crop out on the shores of the Bay and on the scattered islands. PIPESTONE BAY The Pipestone Bay area is probably underlain by a large strongly to intensely serpentinised peridotitic intrusion, based upon shoreline lithologies and very limited, lake drilling. The strong magnetic signature outlines the intrusion and a gravity response is also associated with the body. Limited lithogeochemical sampling and drilling has yet to indicate significant alteration other than that mentioned, nor apparent chemical differentiation within the body, though lack of outcrop prevents a definitive evaluation of the PGE potential for the intrusion. Weak, `anomalous' (few hundred ppm) Ni values can be obtained from shoreline sampling. MINERALIZATION In large part, the regional gold mineralization and setting is characterised by brittle quartz veining hosting pyrite and lesser to negligible, varying percentages of chalcopyrite, pyrrhotite, sphalerite, scheelite, galena hosted by a number of lithologies, specifically, feldspar porphyries, (effusive or intrusive in nature), chert-magnetite formation, and mafic to intermediate, tholeiitic to calc-alkaline volcanics. Alteration is less variable, predominantly moderate to intense dolomite to ankerite, accompanied by variable silicification. Several concerns have prospected and explored broad, metre to 100 metre plus wide, generally East-West trending carbonate alteration zones. Major gold occurrences and other showings or occurrences on and around Middle Bay, are described, below: The May-Spiers shaft, Middle Bay property, with gold hosted by a feldspar porphyry in intermediate to mafic volcanics, the Miles Red Lake shaft, where selected grabs have run up to 3.4 oz/ton with an average of 0.7 oz/ton. The host is sulphide rich quartz veins in intermediate to felsic tuffaceous volcanic rocks. Drill intersections to depths of 30 metres or less, include 0.33oz/ton over 4 ft, 0.63 oz/ton over 3 ft., 0.24 oz/ton over 3.3 ft, 0.58 oz/ton over 2.8 ft, & 0.94 oz/ton over 2.2 ft. The majority of work on the Miles Red Lake shaft some 2 km West of the Middle Bay property, was conducted in the mid-1940's, though work dates back to 1924. Sulphide rich quartz veins are hosted by or adjacent to a feldspar porphyry - 54 - dyke intruding a serpentinised ultramafic lithology. Gold values over a 9 m width & a strike length of 150 m were targeted & mined by way of a 91 m shaft, with 2 underground levels developed. The Mine operated from 1946 to 1947. Pancake Bay Area. Work dating back to the mid-1940's uncovered a series of sulphide rich metasediments and quartz veining immediately North of Pancake Bay. Drilling following trenching returned up to 3.26 oz/ton over 3 ft. The veining, of which additional sets were discovered in 2001 reconnaissance work by Goldcorp Inc., trend approximately North-South, and are in a similar setting to those found on the Bridget Lake property, some 1.5 km along strike to the East, on the Tribute Minerals property, the subject of winter 2002 drilling. North Bridget Lake. Several quartz-gold occurrences have been explored by way of trenching and shallow drilling 200-300 metres North of Bridget Lake over an approximately East-West strike length exceeding 1.5 km. Moderate to intense carbonate-quartz alteration in mafic-intermediate volcanic rocks hosts varying percentages of pyrite, chalcopyrite, pyrrhotite and sphalerite. Gold and silver values have been reported. Sulphide mineralization is also reported and has been noted within amphibolitic rocks within and adjacent to this sequence, by Bridget Lake, and on close to the shore of Middle Bay, itself. Galena Is., located just West of the narrows leading to Trout Bay to the West, and Middle Bay, via Phillips Channel, to the North, is the site for several multi-element showings within clastic and chemical metasediments associated with mafic-ultramafic metavolcanics to the North, and felsic-intermediate volcanics to the South, respectively. The sequence is likely the east extension of that around Bridget Lake. The majority of mineralization is hosted by quartz veining, in particular one massive quartz-carbonate vein, with associated strong to intense dolomitisation. Documented results from trenching were rarely made. Messrs. Kornell, Stupack and Johnson and the Lake Bed Lead Syndicate have, at various times, conducted work in 1928, 1960 and 1948, respectively. Trenching and diamond drilling were performed. Phillips Showing, located on the West side of Pipestone Narrows, at the entrance to Pipestone Bay. It is a poorly documented, tending 060(degree), 60 m wide gold-bearing zone within (mafic)-ultramafic carbonatised volcanic rocks that was discovered in the 1930's. Phillips' work returned gold up to 1.87 opt/1.8 m and 0.38 opt/7.3 m. from a trenching programme. An unknown amount of shallow drilling was also performed on a showing to the Southeast. The A. Jerome Prospect, located at the southern tip of a small peninsula in Middle Bay, West of Phillips Channel was the subject of trenching and limited drilling. The latter, comprising 4 holes totalling 139 m, and conducted by Cochenour Explorations Ltd., returned up to 0.27 oz/ton Au over 0.46 m, and 0.24 oz/ton Au over 0.61m. The Piper Northeast (or `Stupack') Occurrence, on the North shore of Bridget Lake, is a variably quartz carbonate veined, mafic volcanic hosted occurrence cropping out intermittently over 18 by 9 metres, but with associated alteration and sparse quartz veins cropping out over 200 metres. The generally East-West striking occurrence has returned up to 2.28 oz Au/ton over 0.3 metres. Most of the prospecting, mapping, trenching Self-potential geophysical surveys plus limited drilling, was performed by Cochenour Willans GML. Showings on Biron Bay property are poorly documented, though anomalous gold has been reported from the northwestern and south-eastern areas of the property. Gold showings are known along strike to the southeast and northwest of the property, including the A. Jerome showing, which is reported to be characterised by a 1.5 m wide quartz vein hosted by sulphide rich iron formation. No values are know, though gold was panned. The Rowan Consolidated Showing on Biron Bay property has a history of exploration dating back to the 1930's. Rowan Red Lake Gold Mines Ltd., performed mapping, stripping, trenching and pitting on quartz stringers within a small granodiorite plug located in the North of the property, and also on quartz mineralised fracture zones in an iron formation, some 250 metres to the Southeast, on claim KRL 11082. In both areas, quartz-sulphide mineralization was exposed over widths of several inches to 1 foot. Exposures, respectively were of 40 metres and 100 by 4.5 metres. Grades, from channel sampling ran up to 0.3 and 0.47 oz Au/ton over 0.3 metres. The OGS took grab samples from a quartz vein on the W. Stupack property west adjacent to Biron Bay, returning up to 0.46 oz/ton. Mineralization and the vein is hosted within metasediments. The limited exposure on the Pipestone Bay property precludes any significant shoreline exploration. Water depths in excess of 50 metres have also limited the efforts of companies to conduct any serious drill programme to test the (Ni-PGE) potential of the postulated ultramafic intrusive body. Significant, often extreme serpentinisation of shoreline and island exposures and spatially associated outcrops of serpentinised, or feldspathised metagabbroic lithologies bear witness to the potential of a large ultramafic - 55 - body. Limited sampling was performed in 2001 by Goldcorp Inc., though no anomalous Ni and PGE results were obtained. STRUCTURAL SETTING Known gold mineralization appears to be associated with brittle to semi-brittle, largely East-West trending, 100-200 metre wide, transpressive deformation `corridors', characterised by variable, but often intense carbonate alteration. The associated quartz vein system appears to be a late brittle phenomenon with highest gold values hosted by oblique arrays sub-perpendicular to the plane of flattening. Mafic-ultramafic volcanic contacts are host to en-echelon brittle quartz sets which are less pronounced within the highly carbonate-serpentine altered ultramafic volcanics. Historically, the latter lithology has yielded only very low gold. The apparent disparity is likely related to simple ductility contrast. This is readily observed in the Bridget Lake property, (Tribute Minerals), where Riedel, quartz-filled fractures trend NW, oblique to the East-West trend of the host lithology, cherty metasediments or iron formations. The host carries low anomalous to negligible gold values. Future targets will focus on assessing local strain gradients at or near mafic-ultramafic contacts. The intensity of carbonate alteration is not indicative of higher Au potential, rather, pervasive silicification. Known gold-bearing quartz vein systems appear localised, sporadic. Sericite alteration associated with and commonly bounding the carbonate-serpentine altered zones are likely the target. An analogy would be for example, the Glimmer Gold Deposit, Northeast Ontario. Aside from determining the internal geometry of the alteration corridors in the Middle Bay area, the presence of spatially and possibly genetically associated brittle fracture or semi-brittle deformation systems outside of these corridors should be examined. Relatively weak East-northeast trending lineaments appear to be associated with the majority of known gold occurrences. They could be representative of Riedel 1 fractures associated with a regional wrench strike-slip system. This phenomena can be investigated quite readily with a few days field examination. The boundaries of the strike-slip system would be the North shore of Pipestone Bay and in the South, West Narrows leading to Trout Bay, with a west termination marked by a transgressive northwest trending `jog'. MINERAL RESERVES/RESOURCE There are no Industry Guide 7 or NI 43-101 compliant mineral resources or mineral reserves on the West Red Lake Property EXPLORATION HISTORY Exploration on the properties dates back some seventy years with the discovery of a number of showings and several small gold deposits. These include the following: - The May-Spiers Mine - Phillips showing - Bridget North showings A list of the significant work on the three properties is provided, below. As the majority of claims are leased or patented, a complete list of work performed is not provided. Several companies who have optioned the ground did not report any work conducted. 1929 - 1930 Trenching at Pipestone Narrows, by B. Phillips returned Au up to 1.87 opt/1.8 m & 0.38 opt/7.3 m. 1930 - 1935 West Red Lake Gold Mines Ltd. conducted gold exploration on property around the Phillips Channel, culminating in the sinking of a 200 ft. vertical shaft and over 600 ft. of drifting. The target, a quartz vein at a carbonatised porphyry-mafic volcanic contact, returned up to 0.16 oz/ton Au over 112 ft., (along the vein). Material at 200 ft. averaged 0.40 oz/ton over 42 inches along 22 ft. The ore shoot had dimensions of approximately 110 ft by 42 inches. 1934 - 35 May-Spiers Gold Mines Ltd. developed the gold prospect in Middle Bay, culminating in the sinking to 114 m - 56 - of a shaft, with 602 m of lateral work on three levels, 2 drifts at the 225 and 350 ft levels, and 754 m of underground drilling. The main zone was traced for 108 m along the east-west strike to a depth of 107 m. After mining began however, the grade was lower than expected (0.09 oz/ton compared to 0.32 oz/ton found in surface drilling) and mining was stopped the same year. The property has sat idle for some time, though Dumont Nickel did option it in 1980, and conducted a property review plus VLF and magnetometer surveys. 1935 - 1937 Rowan Red Lake Gold Mines Ltd. conducted extensive exploration on claims on and South of Biron Bay, (west portion of Pipestone Bay), part of which is now covered by the Goldcorp Inc. Biron Bay property. Several prospects were stripped, trenched and sampled including two on the property, plus at least three occurrences immediately South of Biron Bay. The mineralization is quartz vein-hosted within cherty iron formations or late kinematic granodiorite. Records are sparse, but assays from grabs and chip sampling ran up to.0.47 oz Au/ton over narrow, inch wide quartz stringers in carbonate-quartz altered zones from several to 5 metres in width. 1944 I. Kornell trenched and drilled on Galena Island. 1949 Lake Bed Lead Syndicate also trenched and drilled on the island. 1963, 1965-66 Cochenour Willans Gold Mines Ltd. conducted widespread exploration on several properties including portions of the Middle Bay Property. Self-potential, magnetometer, geology, trenching and drilling was undertaken, with values returned from locales between Bridget lake and the South shore of Middle Bay including: Grabs of 3.55 opt Au and 1.8% Cu, and 0.16 opt Au and 0.7% Cu. From 2 holes, 7.24 opt Au/0.58 m, 2.94 opt Au/0.3 m, and 2.28 opt Au/0.3 m. From 4 holes, assays including 0.24 opt Au/0.61 m, 0.27 opt Au/0.46 m. 1966 On Biron Bay, an EM survey was run for Cochenour Mines Ltd. Subsequently, 3 holes were drilled on the property. To the North of the present Goldcorp Inc. property, but on then contiguous claims, in 1985, Biron Bay Resources ran a VLF- EM survey. As part of a Ni programme, the same company drilled 5 holes on Pipestone Bay, intersecting serpentinised peridotite. Highest assays were 0.2% Ni, 0.01% Co, 0.001% Cu. 1970 - 1971 Cochenour Willans Gold Mines Ltd. conducted exploration over several claims covering portions of and others adjacent to, the Middle Bay property. Gridding and prospecting were conducted, including close to the Pipestone Narrows, west shore. 1975 Cochenour-Willans Gold Mines Ltd., conducted prospecting, channel sampling, trenching, geophysical surveying and drilling on the now Bridget Lake property. 1980 Dome Exploration (Canada) Ltd. drilled NE of Galena Island, and West of Trout Bay, as part of a more comprehensive exploration on and around the now Middle Bay Property. 1981 Biron Bay Resources Ltd. conducted geophysical surveys (magnetometer and MaxMin II) on the namesake property, the southern portion of which comprises the present Goldcorp Inc., Biron Bay property. Little work was recorded on Biron Bay, this, despite active exploration dating back to the mid-1940's. Trenching in the South of the property, and farther North, close to the shore of Biron Bay itself, located gold. In 1950, in the centre-North of the property, 20 short holes were drilled for 1119 ft. In 1958, an additional 11 holes were drilled for a total of 1998 ft. 1981 Golden Chance partnership conducted geophysical surveys over portions of their Biron Bay property, parts of which are covered by the present Goldcorp Biron Bay claims. 1981 Camflo Mines Ltd. undertook a semi-regional geological appraisal which covered all three properties, with evaluations of the known deposits, occurrences and showings, including the Miles Red Lake Shaft area, Scott-Stupack and Kelly-Foley showings, the Trout Bay property to the South, and the Bridget Lake Property, the latter enclosed by the Goldcorp Middle Bay Property. 1981 Gold Fields Resources Ltd. conducted VLF EM and magnetometer surveys on the ice, on portions of the Pipestone and Middle Bay properties. Anomalies were interpreted as (shoreline) iron formations. 1986 - 1987 A portion of the east end of the Middle Bay property forms part of the then Shane Resources Ltd. ground, - 57 - which was the subject of a satellite interpretation and lineament study. Prior to this, the property was in the hands of the Gold Syndicate (1930's), and subsequently, West Red Lake Gold Mines Ltd., in 1934, which undertook exploration work including the sinking of a shallow shaft on a quartz vein at a carbonatised porphyry-mafic volcanic contact, located at the North shore of the Phillips Channel. Shane Resources conducted VLF and magnetometer surveying in addition to humus sampling, these on a grid covering the east and central portions of the Middle Bay and the far South of the Pipestone Bay properties. 1990 Aur Resources performed mapping and sampling on the May-Spiers GML property. Data is in-house. 1996 Hemlo Gold Mines Inc. optioned the T. Maciejewski ground, part of the Middle Bay property. The company undertook property-wide mapping and sampling, magnetometer, selected IP. The IP survey indicated several responses recommended for follow-up, whilst grab samples from several showings on and adjacent to the property, returned up gold assays including 10 g/t, 5.35 g/t, 14.25 g/t. 2000 On behalf of Goldcorp Inc., Sial Geosciences Inc. flew combined magnetic, EM, VLF and radiometric helicopter surveys over the Trout, Middle, Pipestone Bay properties. 2001 Goldcorp Inc. conducted preliminary reconnaissance work on the Middle Bay and Pipestone Bay properties. In addition to work performed by mining companies, various government agencies have conducted work in the region. The first significant recorded work was by Horwood who prepared a map and report for the Ontario Department of Mines (ODM) (see Horwood, 1940). R.A. Riley and his assistants produced township scale geological maps of Ball and Mulcahy townships in the late sixties and early seventies for the ODM (see Riley, 1975, 1976). The OGS completed an airborne magnetometer and electromagnetic survey in 1978. The (GSC) produced a detailed study on the geochemistry and structure of the belt during the summers of 1999 and 2000 as part of NATMAP (see Sanborn-Barrie et al., 2001). The OGS completed a mineralization and wall rock alteration report for the belt during the summer of 2000 (see Parker, 2000a, 2000b). CURRENT EXPLORATION WORK The Company has subdivided the project into four broad exploration target areas: Biron Bay, Middle Bay-May Spiers, West Trout-Bridget Lake and Pipestone-Phillips Channel. During October 2006, work commenced on a mapping, sampling and prospecting program focused on the Middle Bay-May Spiers target with the objective of developing an understanding of the geological setting and to confirm the presence of gold mineralization west of Middle Bay. A total of 97 rock samples were submitted for assay and whole rock analysis to ALS Chemex in Thunder Bay. Sampling of old trenches located between the historic Miles Red Lake showing and the May-Spiers deposit successfully confirmed the presence of significant gold, silver and copper mineralization. Whole rock geochemistry revealed that the underlying geology is favourable for these elements. A series of old trenches exposing silicified shear zones containing pyrite represents the North Zone. Trench 8-01, apparently undisturbed under brush for several years returned up to 4.93 g/t Au, 75.5 g/t Ag and 3.63% Cu over 0.80 metres. This mineralized occurrence lies 125m south of the North Zone. The South Zone, located 350m to the south, is exposed within a series of trenches and steep-walled pits over a strike length of 100 meters. The mineralization is hosted within intermediate to-felsic lapilli tuffs and is concentrated in silicified, sulphidized shears up to 2 meters in width containing pyrite and locally sphalerite, chalcopyrite, galena and arsenopyrite. A sample collected near the 9-44 "shaft" returned 81 g/t Au, 100 g/t Ag and 4.61% Cu over a width of 0.70m. In addition, a sample taken from the 10-23 pit located along strike about 82m west of the 9-44 location yielded 3.62 g/t Au, 100 g/t Ag and 8040 ppm As. The program was suspended prematurely due to deteriorating weather conditions that included heavy snow accumulation and below normal temperatures. EXPLORATION PROGRAM & BUDGET In early 2007, the Company commenced a 30 line km of grid work covering both the North and South Zones, extending to the east to include the May-Spiers deposit. This will be followed-up with detailed induced polarization (IP) and magnetometer surveying and diamond drilling of the highest priority targets. Work will also be carried out on the West Trout-Bridget Lake, Pipestone-Phillips Channel and Biron Bay areas of the property in preparation for a significant - 58 - follow up exploration and diamond drilling program later in the year and into 2008. The work program and budget planned for fiscal 2007 is as follows: $ Data Base Compilation 45,000 Grid Work 105,000 Ground Geophysics 374,500 Geological Mapping and Trenching 52,500 Soil and Rock Geochemistry 35,000 Target Drilling 500,000 Assessment Report and Drafting 27,800 ---------- GRAND TOTAL $1,139,800 ========== 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 four full-time employees, one directly employed by the Company and three providing their services as consultants. In addition, the Company is in the process of hiring employees for administration and related exploration of its mineral properties. 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. - 59 - PRINCIPAL OFFICES The Company's principal business office is located at Suite 1280, 625 Howe Street, Vancouver, British Columbia, Canada. The business 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 executive office is located at Suite 2900A, 25 King Street West, Toronto, Ontario, Canada, under a sub-lease arrangement with an unrelated third party. The executive office comprises 650 square feet and is rented for approximately $5,000 per month for a term ending April 14, 2007. The Company's registered office is located at Suite #1305, 1090 West Georgia Street, Vancouver, British Columbia, Canada. The Company also has had an exploration office located at Suite 2, 54 Main Street, Flin Flon, Manitoba. The exploration office comprises 158 square meters and is rented for approximately $1,346 per month for a term ending June 1, 2008. 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, 2006, 2005, and 2004 should be read in conjunction with the financial statements of the Company and related notes included therein. The Company's 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 17 of the financial statements of the Company included herein. The noon rate of exchange on February 28, 2007, reported by the United States Federal Reserve Bank of New York, for the conversion of Canadian dollars into United States dollars was CDN $1.17 (US $0.8547 = 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 The Company is a resource exploration company engaged in the acquisition of and exploration for precious metals on mineral interests located in Canada. Previously, the Company was engaged in the acquisition, exploration for and development of crude oil and natural gas interests in the United States, but effective March 1, 2004, the Company sold its remaining oil and gas interests. As described in Item 4 above, the Company entered into a series of agreements in the 2004, 2005 and 2006 fiscal years in connection with its mineral interests. 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. - 60 - 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. 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 its U.S. shareholders. RESULTS OF OPERATIONS YEAR ENDED AUGUST 31, 2006 COMPARED TO YEAR ENDED AUGUST 31, 2005 During the year ended August 31, 2006 ("Fiscal 2006"), the Company reported a net loss of $2,199,935, an increase in loss of $1,831,825, from the $368,110 loss reported during the year ended August 31, 2005 ("Fiscal 2005"). The increase in the net loss in Fiscal 2006 compared to Fiscal 2005, is primarily attributed to a $266,201 increase in general and administrative expenses and a $1,538,655 write-down of the Bachelor Lake Property. General and administrative costs increased from $1,060,276 in Fiscal 2005 to $1,267,825 in Fiscal 2006, as follows: 2006 2005 $ $ Accounting and administration 99,700 81,450 Advertising and related 52,430 17,679 Compensation and benefits 95,288 89,864 Consulting and professional fees 208,056 192,534 Filing fees and transfer agent 39,827 38,220 Investment conferences 78,823 169,776 Investor relations and shareholder communications 124,908 162,259 Legal and audit 209,615 88,418 Office and general 137,728 71,477 Office rent and operating costs 19,052 29,760 Printing 13,558 18,036 Telephone 14,274 14,719 Travel and related costs 159,907 72,521 Website and internet costs 14,659 13,563 ---------- ---------- 1,267,825 1,060,276 ========== ========== General and administration expenses increased during Fiscal 2006, due to increased activities relating to the Company's property acquisitions, ongoing financing activities and increased legal and audit fees. Significant expenditures incurred during Fiscal 2006, include $159,060 for legal costs incurred primarily for the preparation of the Company's various - 61 - securities filings, general legal advice on financings and a general increase in activities; $50,555 for independent audit costs; $208,056 for incurred consulting and professional fees provided for financing opportunities; $52,430 for advertising and related costs for advertising made in industry trade magazine publications; $159,907 for travel and related costs, primarily to attend investment conferences and meetings with the investment communities in Canada and Europe; $137,728 for office and miscellaneous. During Fiscal 2006, $93,000 was paid to Marc Cernovitch, the former President of the Company for compensation and benefits, and accounting and administration expenses of $99,700 was billed by Chase Management Ltd. ("Chase"), a private company owned by Nick DeMare, a director and the CFO of the Company for bookkeeping, accounting, administration and corporate filing services provided by Chase personnel. The increase in general and administrative expenses is partially offset by: (i) a decrease of $90,953 for investment conferences; and (ii) a decrease of $37,351 for investor relations and shareholder communications. The Company also recorded a stock-based compensation charge of $550,817 in Fiscal 2006 on the granting of 2,168,000 stock options, compared to $559,031 in Fiscal 2005, when the Company granted 1,078,000 stock options. 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. In September 2005, the Company completed a private placement financing whereby it issued a total of 5,273,236 common shares for $3,493,249 cash proceeds. Of the total financing, 3,293,070 common shares were issued on a flow-through share basis, for $2,305,149 cash proceeds. The Company also received $1,591,450 in 2006 from the exercise of stock options and warrants to purchase 4,748,500 common shares. During Fiscal 2006, the Company exercised its option on the Bachelor Lake Property and subsequently acquired additional claims, for a total consideration of $165,782. The Company also paid $15,282 for legal costs associated with property acquisitions and documentation; $142,287 for claims staking, $66,462 for option payments and $107,206 legal costs on the Sherridon VMS Property, $5,165 for lease rental costs, $50,000 for capitalized dividend on the Duport Property and $38,952 legal costs associated with Red Lake Property acquisition. The Company also recorded a total of $2,034,064 for exploration expenditures. As a result of an agreement to sell its 50% interest in the Bachelor Lake Joint Venture, the Company has written down the carrying value of the joint venture interest by $1,538,655, reflecting its intrinsic fair value, as of August 31, 2006, of $4.25 million. On November 17, 2006, the Company entered into a new agreement whereby Metanor has agreed to purchase the Company's 50% interest for total consideration of $4.0 million. A further write-down of approximately $225,000 will be made in Fiscal 2007. Detailed discussion of the Company's proposed sale of its Bachelor Lake interest and exploration activities conducted is discussed in "Item 4. Information on the Company - Business Overview - Mining Interests - Bachelor Lake Property." As a result of the application of previously unrecognized losses in Fiscal 2006, the Company recognized a future income tax recovery and a reduction of the future income tax liability of $1,316,633. 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 - 62 - 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) were 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 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. 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, 2006, the Company had working capital of $151,522. In October 2006, the Company raised $1,537,350 on the sale of common shares on a flow-through basis. The Company also received a further $2.0 million, on a non-refundable basis from Metanor from the proposed sale of the Company's 50% interest in the Bachelor Lake project. The Company has budgeted approximately $9.0 million for exploration activities, approximately $1.3 million for corporate overhead and approximately $300,000 for dividend payments on its Series 1 Preferred Shares for the calendar 2007 fiscal year. The Company will require additional financings to maintain its core operations, planned exploration and current levels of corporate overhead. 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. As at August 31, 2006, the Company has $8 million in Series 1 Preferred shares outstanding. 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. - 63 - 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 2006, 2005 and 2004, the Company incurred $591,086, $17,690,832 and $75,906 respectively, for mineral property acquisition costs. During fiscal 2006 and 2005 the Company incurred $2,034,064 and $4,992,595 respectively, for exploration expenditures on its mineral properties. No exploration expenditures were incurred in fiscal 2004. No petroleum interest acquisitions or exploration and development occurred in fiscal 2006 and 2005. During fiscal 2004 the Company incurred $23,935 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. 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) - --------------- ------------------------------------- ------------------------------------- LYNDA BLOOM Director November 2006 to present President and Chief Executive Officer March 2007 to present MARC CERNOVITCH Director February 2005 to present Chairman February 2007 to present President and Chief Executive Officer February 2005 to March 2007 NICK DEMARE(1) Director January 1996 to Present Chief Financial Officer July 2003 to present Chairman February 2005 to March 2007 TOM HEALY Director, Senior Vice President and February 2005 to present Chief Operating Officer 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
(1) Member of the Audit Committee. - 64 - 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. LYNDA BLOOM (AGE 50), DIRECTOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER Ms. Bloom is a professional geologist and earned a Masters of Science degree from Queen's University. Ms. Bloom is recognized as a world-expert on assay methods and has traveled extensively worldwide to review sampling and analytical procedures. Over the past 20 years Ms. Bloom has also acted as a consultant to some of the largest exploration and mining companies in the world including Barrick, Falconbridge, AngloAmerican and Cameco. Ms. Bloom is a director of the Prospectors and Developers Association of Canada and recently completed her term as Chair of the Canadian Institute of Mining and Metallurgy-Toronto Branch, as well as serving on several government advisory boards. Ms. Bloom is also a director of Canadian Shield Resources Inc. and Augen Capital Corp. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions - Conflicts of Interest". MARC CERNOVITCH (AGE 33), DIRECTOR AND CHAIRMAN 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 52), DIRECTOR 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 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." TOM HEALY (AGE 62), DIRECTOR, SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER Mr. Healy is a professional mining engineer, a graduate of the University of Melbourne and holds a postgraduate 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. ANDREW CARTER (AGE 59), 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 - 65 - 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 40), 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 53), 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 48), 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". COMPENSATION During fiscal 2006, the directors and officers of the Company, as a group, had received or charged the Company a total of $309,100 (fiscal 2005 - $209,850) for compensation and services rendered by the directors and officers or companies owned by the individuals. As of August 31, 2006, accounts payable and accrued liabilities include $4,637 (2005 - $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 $150,000 whether or not they are an executive officer at the end of the fiscal year. During the fiscal year ended August 31, 2006, the Company had two Named Executive Officers, Mr. Marc Cernovitch, the Company's current Chairman and former President and CEO, and Mr. Nick DeMare, the Company's current CFO - 66 - and former Chairman. The following table sets forth the compensation awarded, paid to or earned by the Named Executive Officers during the financial years ended August 31, 2006, 2005 and 2004:
--------------------------- ---------------------------------- ANNUAL COMPENSATION LONG TERM COMPENSATION --------------------------- ---------------------------------- AWARDS PAYOUTS ------------------------ ------- SECURITIES RESTRICTED --------- OTHER UNDER SHARES OR ALL - ------------------ ----- ANNUAL OPTIONS/ RESTRICTED OTHER NAME AND PRINCIPAL COMPEN- SARS SHARE LTIP COMPEN- POSITION YEAR(1) SALARY BONUS SATION GRANTED UNITS PAYOUTS SATION ($) ($) ($) (#)(2) ($) ($) ($) - ------------------ ----- --------------------------- ------------------------ ------- --------- Marc Cernovitch(3) 2006 93,000 Nil Nil 330,000 N/A N/A Nil former President and 2005 51,500 Nil Nil 275,000 N/A N/A Nil CEO(4),, Chairman and 2004 N/A N/A N/A N/A N/A N/A N/A Director - ------------------------------------------------------------------------------------------------------------------- Nick DeMare 2006 Nil Nil 30,000(5) 133,000 N/A N/A 69,700(5) former Chairman (4), 2005 Nil Nil 28,000(5) 73,000 N/A N/A 62,450(5) CFO and Director 2004 Nil Nil 8,000(5) 150,000(6) N/A N/A 55,638(5) - -------------------------------------------------------------------------------------------------------------------
NOTES: (1) Financial years ended August 31, 2006, 2005 and 2004. (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) On March 1, 2007 Marc Cernovitch resigned as President and CEO of the Company and Nick DeMare resigned as Chairman of the Company. Mr. Cernovitch was then appointed as Chairman of the Company and Lynda Bloom was appointed as President and CEO of the Company. (5) 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". (6) 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. 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 2006:
- ----------------------------------------------------------------------------------------------------------------------- % 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) ($/SECURITY) - ----------------------------------------------------------------------------------------------------------------------- Marc Cernovitch 80,000 3.69% 0.75 0.74 Sept. 29, 2008 250,000 11.53% 0.45 0.50 Feb. 02, 2009 ------- ----- 330,000 15.22% ======= ===== - ----------------------------------------------------------------------------------------------------------------------- Nick DeMare 60,000 2.77% 0.75 0.74 Sept. 29, 2008 73,000 3.36% 0.45 0.50 Feb. 02, 2009 ------- ----- 133,000 6.13% ======= ===== - -----------------------------------------------------------------------------------------------------------------------
- 67 - AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION/SAR VALUES The following table sets out details of all the incentive stock options, both exercised and unexercised, for the Named Executive Officers during fiscal 2006:
- ---------------------------------------------------------------------------------------------------------------------- UNEXERCISED VALUE OF UNEXERCISED SECURITIES OPTIONS/SARS AT IN THE MONEY OPTIONS AT ACQUIRED ON AGGREGATE VALUE FINANCIAL YEAR -END FINANCIAL YEAR -END (1) NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (#) ($) (#) ($) - ---------------------------------------------------------------------------------------------------------------------- Marc Cernovitch Nil N/A 480,000/N/A Nil/N/A - ---------------------------------------------------------------------------------------------------------------------- Nick DeMare Nil N/A 283,000(2)/N/A Nil/N/A - ----------------------------------------------------------------------------------------------------------------------
NOTES: (1) The closing price of the Company's common shares on August 31, 2006 was $0.40. (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 2006, the Company paid $116,400 for professional fees to a director who is not a Named Executive Officer of the Company. See "Item 7. Major Shareholders and Related Party Transactions - Related Party Transactions." NON-CASH COMPENSATION The following table sets forth stock options granted by the Company during fiscal 2006 to the directors who are not the Named Executive Officers of the Company:
- -------------------------------------------------------------------------------------------------------------------- % OF TOTAL MARKET VALUE OF SECURITIES OPTIONS/SARS SECURITIES UNDER GRANTED TO UNDERLYING OPTIONS/SARS EMPLOYEES IN EXERCISE OR OPTIONS/SARS ON NAME GRANTED FINANCIAL YEAR BASE PRICE THE DATE OF GRANT EXPIRATION (#) (%) ($/SECURITY) ($/SECURITY) DATE - -------------------------------------------------------------------------------------------------------------------- Directors as a group 180,000 25.05% 0.75 0.74 Sept. 29, 2008 who are not Named 295,000 13.61% 0.45 0.50 Feb. 02, 2009 Executive Officers ------- ----- 475,000 21.91% ======= ===== - --------------------------------------------------------------------------------------------------------------------
- 68 - The following table sets forth details of all exercises of stock options during fiscal 2006 by the directors who are not the Named Executive Officers of the Company, and the financial year end value of unexercised options:
- -------------------------------------------------------------------------------------------------------------------- UNEXERCISED VALUE OF UNEXERCISED IN OPTIONS/SARS AT THE MONEY OPTIONS AT SECURITIES FINANCIAL YEAR -END FINANCIAL YEAR -END (1) ACQUIRED ON AGGREGATE EXERCISABLE / EXERCISABLE / NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE (#) ($) (#) ($) - -------------------------------------------------------------------------------------------------------------------- Directors as a group Nil N/A 935,000 / 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, 2006 was $0.40. 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, 2006, 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 AVAILABLE FOR FUTURE ISSUANCE BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION OF OUTSTANDING OPTIONS, PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES WARRANTS AND RIGHTS OPTIONS, WARRANTS AND REFLECTED IN COLUMN (A)) RIGHTS - -------------------------------------------------------------------------------------------------------------------- Plan Category (a) (b) (c) - -------------------------------------------------------------------------------------------------------------------- Equity compensation plans 2,903,000(1) $0.56 See Note (1) approved by securityholders - -------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by N/A N/A N/A securityholders - -------------------------------------------------------------------------------------------------------------------- Total 2,903,000 $0.56 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. 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, 2005. 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 - 69 - 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 Effective March 1, 2006, Lynda Bloom entered into an employment agreement whereby the Company has retained Ms. Bloom as the President and CEO of the Company. Under the terms of the employment agreement, Ms. Bloom is paid an annual salary of $175,000, payable monthly, plus an annual bonus to be determined by the Board of Directors of the Company. In the event Ms. Bloom is terminated without cause, then the Company will pay Ms. Bloom, three months severance compensation plus one month's severance compensation per completed year of service, to a maximum of 12 months monthly severance compensation in total. Ms. Bloom will also be entitled to accrued but unused vacation. 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". Other than as noted above, there are no service contracts with the Company providing for benefits upon termination of employment of any director of the Company. DISCLOSURE OF CORPORATE GOVERNANCE PRACTICES Effective June 30, 2005, National Instrument 58-101 - Disclosure of Corporate Governance Practices ("NI 58-101") was adopted by the Canadian Securities Administrators. NI 58-101 requires issuers to disclose their governance practices in accordance with that instrument. The Company is a "venture issuer" within the meaning of NI 58-101. A discussion of the Company's governance practices within the context of NI 58-101 is set out below: BOARD OF DIRECTORS The Company has three independent directors, namely: Messrs. William Lee, Andrew Carter and Ewan Downie. The Company has four directors who are not independent because they are executive officers of the Company, namely: Ms. Lynda Bloom, President and CEO, Mr. Marc Cernovitch, Chairman, Mr. Nick DeMare, CFO and Mr. Tom Healy, Senior Vice-President and Chief Operating Officer. BOARD PRACTICES ORIENTATION AND CONTINUING EDUCATION The CEO and/or the CFO are responsible for providing an orientation for new directors. Director orientation and on-going training will include presentations by senior management to familiarize directors with the Company's strategic plans, its significant financial, accounting and risk management issues, its compliance programs, its principal officers and its internal and independent auditors. ETHICAL BUSINESS CONDUCT The Company does not have a written code of ethical business conduct for its directors, officers and employees. Each director, officer and employee is expected to comply with relevant corporate and securities laws and, where applicable, the terms of their employment agreements. NOMINATION OF DIRECTORS When a board vacancy occurs or is contemplated, any director may make recommendations to the board as to qualified individuals for nomination to the board. - 70 - In identifying new candidates, the directors will take into account the mix of director characteristics and diverse experiences, perspectives and skills appropriate for the Company at that time. COMPENSATION From time to time, the independent directors of the Board will review the compensation payable to the CEO and CFO. The directors receive no compensation in their capacity as directors other than the grant of stock options from time to time, which allocation is made by the Board as a whole. OTHER BOARD COMMITTEES The board has no standing committees other than the Audit Committee. ASSESSMENTS The Board of Directors of the Company does not conduct any formal evaluation of the performance and effectiveness of the members of the Board, the Board as a whole or any committee of the Board. 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 (the "Auditor"). - Provide an open avenue of communication among the Company's auditors, management and the Board of Directors. COMPOSITION The Committee shall be comprised of at least three members. Each member must be a director of the Company. A majority of the members of the Committee shall not be officers or employees of the Company or of an affiliate of the Company. At least one member of the Committee shall be financially literate. All members of the Committee who 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 this Audit Committee Charter, the term "financially literate" means 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 reasonably be expected to be raised by the Company's financial statements. The members of the Committee shall be appointed 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. 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 - 71 - 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. (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. - 72 - (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. 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. - 73 - (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. AUTHORITY The Committee is authorized to: (a) seek any information it requires from any employee of the Company in order to perform its duties; (b) engage, at the Company's expense, independent legal counselor other professional advisors on any matter within the scope of the role and duties of the Committee under this Charter; (c) set and pay the compensation for any advisors engaged by the Committee; and (d) communicate directly with the internal and external auditors of the Company. This Charter supersedes and replaces all prior charters and other terms of reference pertaining to the Committee." - 74 - 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 MI 52-110. RELEVANT EDUCATION AND EXPERIENCE Mr. Lee is a Chartered Accountant with significant experience working with resource issuers as a Chief Financial Officer. In addition, from 2004 to January 2006, Mr. Lee provided consulting services to a resource energy group in meeting their compliance obligations under the Sarbanes-Oxley Act. Mr. DeMare is a Chartered Accountant with significant experience working with resource issuers as a Chief Financial Officer and Mr. Carter is a business executive with extensive experience in the industry. As such each has acquired knowledge and understanding of the financial issues and accounting principles that are relevant in assessing this Company's financial disclosures and internal control systems. 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 MI 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 "Item 6. Directors, Senior Management and Employees - Employment/Management Agreements" and 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. Other than as described above, 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. - 75 - EMPLOYEES As of the date of this annual report the Company has four full-time employees, one directly employed by the Company and three providing their services as consultants. In addition, the Company is in the process of hiring employees for administration and related exploration of its mineral properties. 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 currently provides his services as 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, 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 January 31, 2007:
- ---------------------------------------------------------------------------------------------------------- SHARES AND RIGHTS BENEFICIALLY PERCENT TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1) OF CLASS (1) - ---------------------------------------------------------------------------------------------------------- Common Stock Marc Cernovitch 567,800(2) 1.61% Toronto, Ontario, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Nick DeMare 784,028(3) 2.23% Burnaby, British Columbia, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Andrew Carter 187,000(4) 0.52% North Vancouver, British Columbia, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Ewan Downie 1,147,500(5) 3.27% Thunder Bay, Ontario, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock William Lee 165,300(6) 0.47% Delta, British Columbia, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Harvey Lim 170,143(7) 0.49% Burnaby, British Columbia, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Tom Healy 425,000(8) 1.21% Calgary, Alberta, Canada - ---------------------------------------------------------------------------------------------------------- Common Stock Lynda Bloom 250,000(9) 0.71% Toronto, 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 January 31, 2007, 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 34,777,049 shares of common stock outstanding as of January 31, 2007. (2) Includes 92,800 common shares held and options to acquire 475,000 common shares. (3) Includes 319,691 common shares held directly by Mr. DeMare, 97,404 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 275,000 common shares held by Mr. DeMare directly, options to acquire 50,000 common shares held by Chase and warrants to acquire 33,067 common shares held directly by Mr. DeMare. (4) Includes 22,000 common shares held, and options to acquire 160,000 common shares. - 76 - (5) Includes 810,000 common shares held, options to acquire 300,000 common shares and warrants to acquire 37,500 common shares. Mr. Downie, a director of the Company, is the President, CEO and a director of Wolfden Resources Inc. ("Wolfden"), a publicly traded company, which holds 2,100,000 shares of the Company. However, the shares held by Wolfden are not attributed to Mr. Downie, as he has no discretionary authority in connection with such shares. (6) Includes 5,300 common shares held and options to acquire 160,000 common shares. (7) Includes 143 common shares held and options to acquire 170,000 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 275,000 common shares and warrants to acquire 50,000 common shares held by Kamcot. (9) Option to acquire 250,000 common shares. 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 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 - 77 - 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. As of January 31, 2007, an aggregate of 3,460,000 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 200,000 0.60 May 31, 2009 Nick DeMare Director 100,000 0.60 May 31, 2009 Harvey Lim Officer 50,000 0.60 May 31, 2009 Andrew Carter Director 50,000 0.60 May 31, 2009 William Lee Director 50,000 0.60 May 31, 2009 Scott Walters Consultant 150,000 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 Richard Cohen I/R 200,000 0.45 March 11, 2011 Tim German I/R 200,000 0.45 March 11, 2011 Ewan Downie Director 75,000 0.45 November 27, 2009 Chase Management Ltd. Mgmt Co. 50,000 0.45 November 27, 2009 Nick DeMare Director 102,000 0.45 November 27, 2009 Harvey Lim Officer 60,000 0.45 November 27, 2009 Andrew Carter Director 50,000 0.45 November 27, 2009 William Lee Director 50,000 0.45 November 27, 2009 Tom Healy Director 125,000 0.45 November 27, 2009 Marc Cernovitch Director 225,000 0.45 November 27, 2009 Kevin Leonard Consultant 110,000 0.45 November 27, 2009 Ken Pride Consultant 50,000 0.45 November 27, 2009 Peter Dietrich Consultant 50,000 0.45 November 27, 2009 Value Relations Consultant 250,000 0.45 November 27, 2009 Jeff Tindale Consultant 100,000 0.45 November 27, 2009 Lynda Bloom Director 250,000 0.45 November 27, 2009 --------- TOTAL: 3,460,000 ========= As of January 31, 2007, the directors and officers of the Company, as a group (eight persons), held options to purchase 1,785,000 shares of the Company's common stock. WARRANTS As of January 31, 2007, there were non-transferable common share purchase warrants exercisable for the purchase of 4,701,503 common shares, which expire at various times until April 12, 2008 and may be exercised at various prices ranging from $0.45 per share to $1.50 per share, as follows: COMMON SHARES ISSUABLE ON EXERCISE EXERCISE OF WARRANTS PRICE/SHARE EXPIRY $ 2,071,015 0.70 September 14, 2007 432,474 0.70 September 29, 2007 85,715 0.75 October 14, 2007 - 78 - COMMON SHARES ISSUABLE ON EXERCISE EXERCISE OF WARRANTS PRICE/SHARE EXPIRY $ 1,708,166 0.60 April 12, 2008 404,133 0.45 April 12, 2008 --------- 4,701,503 ========= As of January 31, 2007, the directors and officers of the Company, as a group (eight persons), held warrants to purchase 120,567 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 January 31, 2007. - -------------------------------------------------------------------------------- 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 6.04% 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 January 31, 2007, 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 34,777,049 shares of common stock outstanding as of January 31, 2007. (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; however, the shares held by Wolfden are not attributed to Mr. Downie, as he has no discretionary authority in connection with such 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. CHANGES IN SHAREHOLDINGS As of January 31, 2007, Wolfden Resources Inc. beneficially owned 2,100,000 shares (6.04%) 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". 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 common 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". - 79 - 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 outstanding share capital as at January 31, 2007, 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 34.79% of the Company's outstanding common shares, calculated as follows: Shares outstanding (1) 34,777,049 Shares issuable upon retraction (2) 17,021,276 ------------- Shares outstanding after retraction 51,798,325 ============= Shares currently held by vendors 1,000,000 Shares acquired by vendors upon retraction 17,021,276 ------------- Shares held by vendors after retraction 18,021,276 ============= % of shares held by vendors after retraction 34.79% NOTES: (1) As at January 31, 2007. (2) Calculated as $8 million divided by $0.47 per share, being the closing price of the Company's common shares on January 31, 2007. 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 January 31, 2007, there were approximately nine registered holders of the Company's common shares in the United States, with combined holdings of 554,412 shares, representing 1.59% 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. RELATED PARTY TRANSACTIONS Other than as disclosed below, for the period from September 1, 2004 through January 31, 2007, 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. On February 9, 2005, Mr. Marc Cernovitch was appointed President and CEO of the Company and provided his services as the Company's President and CEO on a full-time basis until March 1, 2007, when he resigned as the Company's President and CEO and assumed the role as the Company's Chairman. In consideration therefore, Mr. Cernovitch is currently paid a monthly salary of $7,750. During the years ended August 31, 2005 and 2006 and the period from September 1, 2006 to January 31, 2007, Mr. Cernovitch was paid $51,500, $93,000 and $38,750, 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- - 80 - 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 years ended August 31, 2004, 2005, 2006 and the period from September 1, 2006 to January 31, 2007, the Company paid Chase $55,638, $62,450, $36,000 and $15,000, 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. On March 1, 2007, Mr. DeMare resigned as Chairman of the Company. 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 years ended August 31, 2004, 2005, 2006 and the period from September 1, 2006 to January 31, 2007, the Company paid Chase $8,000, $28,000, $30,000 and $12,500, 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 years ended August 31, 2005 and 2006, and the period from September 1, 2006 to January 31, 2007, the Company paid Kamcot $67,900, $116,400 and $48,500 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 yearsended August 31, 2004, 2005 and 2006, and the period from September 1, 2006 to January 31, 2007, the Company conducted the following private placements of common stock:
PARTICIPATION BY PURCHASE MARKET INSIDERS PRICE PRICE(1) PLACEE $ $ PERIOD SEPTEMBER 1, 2006 TO JANUARY 31, 2007 3,416,333 flow-through units (one common share and one-half warrant) 0.45 0.41 - Nick DeMare 20,000 ======= YEAR ENDED AUGUST 31, 2006 3,293,070 flow-through common shares 0.70 0.68 - 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 ======= YEAR ENDED AUGUST 31, 2004 3,400,000 units (one common share and one warrant) 0.15 0.20 - Nick DeMare 281,667 ======= 2,600,000 units (one common share and one warrant) 0.30 0.32 - DNG Capital Corp.(2) 71,000 =======
(1) Quoted closing price on date of announcement of private placement. (2) 100% owned by Nick DeMare. 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 - 81 - 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. Mr. Ewan Downie, a director of the Company is also the President, Chief Executive Officer and a director of Wolfden. See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property, Quebec." 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, 2004. 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 Cumbre Ventures Inc. Director, President, CEO and CFO April 2006 Nick DeMare Aguila American Resources Ltd. Director January 2003 Andean American Mining Corp. Director August 2002 Astral Mining Corporation. Director February 2004 Blue Sky Uranium Corp. Director June 2006 CFO February 2007 Centrasia Mining Corp. Director October 2002 CFO September 2005 Salazar Resources Ltd. Director June 1988 Cumbre Ventures Inc. Director April 2006 GGL Diamond Corp. Director May 1989
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DIRECTOR REPORTING ISSUER CAPACITY COMMENCED SERVICE Golden Peaks Resources Ltd. Director January 1992 Goldmarca Limited Director September 2000 Gold Point Energy Corp. Director August 2003 CFO June 2005 Lara Exploration Ltd. Director March 2004 Lariat Energy Ltd. Director August 2002 Mawson Resources Limited Director March 2004 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 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 Golden Peaks Resources Ltd. Director March 2006 Jinshan Gold Mines Inc. CFO January 2006 Tinka Resources Limited Director October 2002 Tom Healy N/A N/A N/A Lynda Bloom Augen Capital Corp. Director September 2006 Canadian Shield Resources Inc. Director December 1996 Harvey Lim Astral Mining Corporation Secretary & CFO February 2004 Blue Sky Uranium Corp. Secretary June 2006 Gold Point Energy Corp. Director & Secretary October 2003 Rochester Resources Ltd. Secretary June 1997 Tumi Resources Limited Director January 2002 Golden Peaks Resources Ltd. Secretary March 2006 CFO June 2006
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. 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, 2006, 2005 and 2004 F-1 to F-28 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. - 83 - 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 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, 2006 33,230,953 $0.75 $0.35 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 SALES PRICE --------------------- QUARTER ENDED VOLUME HIGH LOW November 30, 2006 4,180,100 $0.47 $0.30 August 31, 2006 2,651,629 $0.57 $0.35 May 31, 2006 12,812,414 $0.75 $0.40 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 SALES PRICE ---------------------- MONTH ENDED VOLUME HIGH LOW January 31, 2007 1,672,798 $0.58 $0.39 December 31, 2006 1,479,338 $0.44 $0.37 November 30, 2006 2,290,425 $0.47 $0.31 October 31, 2006 1,427,619 $0.38 $0.30 September 30, 2006 462,056 $0.45 $0.35 August 31, 2006 624,888 $0.47 $0.35 - 84 - 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. On December 23, 2006, the Series A and B Warrants expired without having any trades made. 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 SALES PRICE (US $) ---------------------- YEAR ENDED VOLUME HIGH LOW August 31, 2006 1,486,299 $0.78 $0.30 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 SALES PRICE (US $) ---------------------- QUARTER ENDED VOLUME HIGH LOW November 31, 2006 422,569 $0.52 $0.25 August 31, 2006 237,483 $0.41 $0.30 May 31, 2006 396,487 $0.70 $0.35 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 SALES PRICE (US $) ---------------------- MONTH ENDED VOLUME HIGH LOW January 31, 2007 311,614 $0.42 $0.33 December 31, 2006 167,355 $0.38 $0.30 November 30, 2006 52,659 $0.52 $0.25 October 31, 2006 111,498 $0.33 $0.25 September 30, 2006 258,412 $0.41 $0.31 August 31, 2006 63,248 $0.41 $0.30 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 - 85 - 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 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 - 86 - 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. 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. - 87 - 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 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. - 88 - 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. 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 34,777,049 common shares were issued and outstanding as of January 31, 2007. 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 January 31, 2007. 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 - 89 - 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 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 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. - 90 - 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. 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, - 91 - 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 between Halo Resources Ltd. and Endowment Lakes (2002) Limited Partnership, dated February 9, 2005, as amended dated February 9, 2006. See "Item 4. Information on the Company - Principal Properties - Quarter Moon Lake Gold Property". 2. Purchase Agreement by and among Halo Resources Ltd., Sheridan Platinum Group, dated February 18, 2005. See "Item 4. Information on the Company - Principal Properties - Duport Property". 3. Assignment and Assumption Agreement by and between the Company and Wolfden, 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 See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property". 4. Joint Venture Agreement by and between the Company and Metanor 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 "Bachelor Lake JV"). See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property". 5. Purchase Agreement by and between the Company and Metanor executed May 2, 2006, as amended August 28, 2006, (the "Metanor Purchase Agreement") whereby Metanor agreed to purchase the Company's 50% interest in the Bachelor Lake JV in consideration of $3.5 million cash, $750,000 in common shares of Metanor and a 1% NSR in favour of the Company. 6. The Metanor Purchase Agreement was superceded by a new Purchase Agreement between Metanor and the Company executed November 17, 2006 (the "Revised Metanor Purchase") under which Metanor has now agreed to purchase the Company's 50% interest in the Bachelor Lake JV for total consideration of $4 million. See "Item 4. Information on the Company - Principal Properties - Bachelor Lake Property". 7. Heads of Agreement by and between the Company and W. Bruce Dunlop Limited NPL, dated February 9, 2006, whereby the Company was granted the option to earn a 100% undivided interest in three unproven mineral claims, covering 536 hectares, for $90,000 cash, issuance of 250,000 common shares of the Company and expending a total of $170,000 in work expenditures over a four year period. See "Item 4. Information on the Company - Principal Properties - Sherridon Property". 8. Option Agreements, between the Company and Hudson Bay Exploration and Development Company Limited ("HBED"), dated March 19, 2006, (the "HBED Options") whereby the Company was granted options to acquire 100% interests in 24 unproven mineral claims and one mining lease covering approximately 3,226 hectares. In order to earn 100% interests in all of the mineral claims and the mining lease the Company will be required to make option payments totalling $650,000 and incur expenditures totalling $4,300,000. Should the Company acquire a 100% interest in any of the claim groups under the HBED Options, HBED has the option to back-in for a 51% interest in the subject claims group by paying 135% of the expenditures incurred by the Company. - 92 - HBED will also hold a 2% NSR. See "Item 4. Information on the Company - Principal Properties - Sherridon Property". 9. Letter of Intent by and between the Company and Goldcorp. Inc. ("Goldcorp") dated April 18, 2006. See "Item 4. Information on the Company - Principal Properties - West Red Lake Property". 10. Option Agreement by and between the Company and Goldcorp dated June 20, 2006, (the "Red Lake Option") whereby the Company was granted the option to earn a 60% interest in 67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten mining claims (collectively the "Red Lake Property") located in Ball Township, Red Lake, Ontario. Under the terms of the Red Lake Option, the Company is required to perform minimum exploration programs totalling $3 million on or before December 31, 2008. Upon spending the $3.0 million, the Company is entitled to elect to exercise the option of its interests. Upon notification of the Company's election, Goldcorp has 90 days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75% interest in two mining claims and a 12.5% interest in the ten mining claims by paying $6 million to the Company. If Goldcorp does not exercise its back-in right, the Company will then be required to issue one million common shares of its share capital to Goldcorp. See "Item 4. Information on the Company - Principal Properties - West Red Lake Property". 11. Purchase Agreement by and between the Company and Endowment Lakes dated December 3, 2006 (the "Quarter Moon Purchase Agreement"), whereby the Company purchased a 100% interest in ten mining claims, including the original five mining claims under the Quarter Moon LOI, in north-central Manitoba, for $90,000 cash and the issuance of 160,000 common shares of the Company. Endowment Lakes holds a 1% NSR, of which a 0.5% NSR can be purchased at any time for $500,000. See "Item 4. Information on the Company - Principal Properties - Quarter Moon Lake Gold Property". 12. Employment agreement by and between the Company and Lynda Bloom dated February 28, 2007 whereby, effective March 1, 2006, Ms. Bloom was employed as the President and CEO of the Company. See "Item 6. Directors, Senior Management and Employees - Employment/ Management Agreements". 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 - 93 - 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. 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. - 94 - 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 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 - 95 - 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. 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. - 96 - 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. 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. These actions have affected the rights of the Company's common shareholders. 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". ITEM 15. CONTROLS AND PROCEDURES - -------------------------------------------------------------------------------- An evaluation was commenced under the supervision and with the participation of the Company's management, including Mr. Cernovitch, the Company's current Chairman and former CEO, and Mr. DeMare, the Company's 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, 2006. As the date of this filing, the Company expects to complete its evaluation in fiscal 2007. Based upon the evaluation to date, Messrs. Cernovitch and DeMare have concluded that certain weaknesses existed in the Company's internal controls over financial reporting that must be corrected in order for the Company's disclosure controls and procedures to be effective and 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. As is indicative of many small companies, the lack of segregation of duties and effective risk assessment were identified as areas where weaknesses existed. The existence of these weaknesses is to be compensated for by existing senior management monitoring. Further, the Company is exploring corrective measures to augment and improve the design of its disclosure controls and procedures impacting these areas of weakness. There have not been any changes in the Company's internal control over financial reporting that occurred during the period covered by this Form 20-F that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 16. [RESERVED] - -------------------------------------------------------------------------------- Not applicable. - 97 - 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. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - -------------------------------------------------------------------------------- AUDIT FEES For the fiscal years ended August 31, 2006 and 2005, the Company's principal accountant billed $23,831 and $13,356, 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, 2006 and 2005, the Company's principal accountant billed $5,637 and $1,419, 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, 2006 and 2005, the Company's principal accountant billed $22,944 and $2,202, respectively, for tax compliance, tax advice, and tax planning services. ALL OTHER FEES For the fiscal years ended August 31, 2006 and 2005, 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, 2006, that were attributed to work performed by persons other than the principal accountant's full-time permanent employees was less than fifty percent (50%). - 98 - 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. PART III ITEM 17. FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- See pages F-1 through F-28 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) 4.1 Purchase and Sale Agreement by and between TMK Oil & Gas, Inc. and Westport Petroleum Inc., dated March 1, 2004. (1) 4.2 Stock Option Plan 2004 (2) 4.3 Letter of Intent by and between Halo Resources Ltd. and Endowment Lakes (2002) Limited Partnership, dated February 9, 2005, and amendment, dated February 9, 2006. (3) 4.4 Purchase Agreement by and among Halo Resources Ltd., Sheridan Platinum Group, dated February 18, 2005. (3) 4.5 Assignment and Assumption Agreement by and between Halo Resources Ltd. and Wolfden Resources Inc., dated April 15, 2005. (3) 4.6 Bachelor Lake Joint Venture Agreement by and between Halo Resources Ltd. and Metanor Resources Inc. dated Sept 8, 2005. (3) 4.7 Purchase Agreement by and between Halo Resources Ltd. and Metanor executed May 2, 2006, as amended August 28, 2006. 4.8 Heads of Agreement by and between Halo Resources Ltd. and W. Bruce Dunlop Limited NPL, dated February 9, 2006. 4.9 Option Agreements, between Halo Resources Ltd. and Hudson Bay Exploration and Development Company Limited, dated March 19, 2006. 4.10 Letter of Intent by and between Halo Resources Ltd. and Goldcorp. Inc., dated April 18, 2006. 4.11 Option Agreement by and between the Company and Goldcorp. Inc., dated June 20, 2006. 4.12 Purchase Agreement by and between the Company and Endowment Lakes dated December 3, 2006. 4.13 Employment Agreement by and between the Company and Lynda Bloom dated February 28, 2007. - 99 - EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------- 12.1 Certification of Lynda Bloom Pursuant to Rule 13a-14(a) 12.2 Certification of Nick DeMare Pursuant to Rule 13a-14(a) 13.1 Certification of Lynda Bloom 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. (3) Previously filed as an exhibit to the Company's Annual Report on Form 20-F, filed with the Commission on March 13, 2006. File number 0-30196. - 100 - 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 14, 2007 /s/ Lynda Bloom ---------------------- ----------------------------------- Lynda Bloom, President, Chief Executive Officer, and Director - 101 - - -------------------------------------------------------------------------------- HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 - -------------------------------------------------------------------------------- F-1 D + H Group LLP Chartered Accountants AUDITORS' REPORT To the Shareholders of Halo Resources Ltd. We have audited the consolidated balance sheets of Halo Resources Ltd. as at August 31, 2006 and 2005 and the consolidated statements of loss, deficit and cash flows for the years ended August 31, 2006, 2005 and 2004. 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, 2006 and 2005 and the results of its operations and cash flow for the years ended August 31, 2006, 2005 and 2004 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, 2006 and 2005 and results of operations for the years ended August 31, 2006, 2005 and 2004 to the extent summarized in Note 17 to the consolidated financial statements. On December 11, 2006 we reported separately to the shareholders of Halo Resources Ltd. on consolidated financial statements as at, and for the years ended, August 31, 2006 and 2005 audited in accordance with Canadian generally accepted auditing standards. /s/D&H GROUP LLP Vancouver, B.C. December 11, 2006 CHARTERED ACCOUNTANTS D+H Group LLP Chartered Accountants 10th Floor, 1333 West Broadway Telephone 604 731 5881 www.DHgroup.ca Vancouver, British Columbia Facsimile 604 731 9923 Email: info@dhgroup.ca Canada V6H 4C1 A BC Limited Liaibility Partnership of Corporations Member of BHD Association with affiliated offices across Canada and internationally F-2 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) BALANCE SHEETS AS AT AUGUST 31 2006 2005 $ $ ASSETS CURRENT ASSETS Cash 271,935 893,525 Amounts receivable and prepaids (Note 3) 136,275 197,507 ------------ ------------ 408,210 1,091,032 CAPITAL ASSETS (Note 4) 298,630 32,761 UNPROVEN MINERAL INTERESTS (Note 5) 23,845,828 22,759,333 DEFERRED SHARE ISSUE COSTS (Note 7(a)) - 45,556 ------------ ------------ 24,552,668 23,928,682 ============ ============ LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities 256,688 584,221 REDEEMABLE PREFERRED SHARES (Note 6) 8,000,000 8,000,000 ASSET RETIREMENT OBLIGATION (Note 16) 1,014,500 938,500 FUTURE INCOME TAX LIABILITY (Note 10) 4,832,000 5,328,000 ------------ ------------ 14,103,188 14,850,721 ------------ ------------ LEASE COMMITMENTS (Note 15) SHAREHOLDERS' EQUITY SHARE CAPITAL (Note 7) 32,395,855 28,487,576 CONTRIBUTED SURPLUS (Note 9) 1,360,767 738,642 SHARE SUBSCRIPTIONS RECEIVED (Note 7(a)) - 958,950 DEFICIT (23,307,142) (21,107,207) ------------ ------------ 10,449,480 9,077,961 ------------ ------------ 24,552,668 23,928,682 ============ ============ SUBSEQUENT EVENTS (Note 18) APPROVED BY THE BOARD /S/ MARC CERNOVITCH , Director - --------------------- /S/ NICK DEMARE , Director - --------------------- The accompanying notes are an integral part of these financial statements. F-3 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) STATEMENTS OF LOSS AND DEFICIT FOR THE YEARS ENDED AUGUST 31
2006 2005 2004 $ $ $ (NOTE 2) REVENUES Oil and gas sales - - 81,347 Interest and other 16,729 31,331 695 ------------ ------------ ------------ 16,729 31,331 82,042 ------------ ------------ ------------ EXPENSES Accretion (Note 16) 76,000 38,000 - Production - - 21,832 Depreciation, depletion and impairment 39,373 4,132 10,441 General exploration 17,627 27,002 - General and administrative 1,267,825 1,060,276 183,539 Stock-based compensation 550,817 559,031 179,611 Part XII.6 tax expense (Note 10) 43,000 40,000 - Write-down of unproven mineral interest (Note 5) 1,538,655 - - ------------ ------------ ------------ 3,533,297 1,728,441 395,423 ------------ ------------ ------------ LOSS BEFORE THE FOLLOWING (3,516,568) (1,697,110) (313,381) INTEREST EXPENSE - - (29,817) LOSS ON SALE OF PETROLEUM AND NATURAL GAS INTERESTS - - (11,031) GAIN ON SETTLEMENT OF ADVANCES (Notes 11(b) and 11(c)) - - 97,207 ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (3,516,568) (1,697,110) (257,022) FUTURE INCOME TAX RECOVERY (Note 10) 1,316,633 1,329,000 - ------------ ------------ ------------ NET LOSS FOR THE YEAR (2,199,935) (368,110) (257,022) DEFICIT - BEGINNING OF YEAR (21,107,207) (20,739,097) (20,482,075) ------------ ------------ ------------ DEFICIT - END OF YEAR (23,307,142) (21,107,207) (20,739,097) ============ ============ ============ LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.08) $(0.02) $(0.05) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 28,447,710 16,049,812 5,654,354 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-4 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) STATEMENTS OF CASH FLOW FOR THE YEARS ENDED AUGUST 31
2006 2005 2004 $ $ $ (NOTE 2) CASH PROVIDED FROM (USED FOR) OPERATING ACTIVITIES Net loss for the year (2,199,935) (368,110) (257,022) Items not involving cash Accretion 76,000 38,000 - Depreciation, depletion and impairment 39,373 4,132 10,441 Stock-based compensation 550,817 559,031 179,611 Write-down of unproven mineral interests 1,538,655 - - Loss on sale of petroleum and natural gas interests - - 11,031 Gain on settlement of advances - - (97,207) Interest expense - - 29,817 Future income tax recovery (1,316,633) (1,329,000) - ------------ ------------ ------------ (1,311,723) (1,095,947) (123,329) Decrease (increase) in amounts receivable and prepaids 61,232 (184,897) (5,497) Increase (decrease) in accounts payable and accrued liabilities (495,278) 517,089 43,919 ------------ ------------ ------------ (1,745,769) (763,755) (84,907) ------------ ------------ ------------ FINANCING ACTIVITIES Common shares issued for cash 4,125,749 6,941,897 1,377,000 Common share subscriptions received - 958,950 - Common share issue costs (257,173) (692,979) - Repayment of advances - - (951,622) ------------ ------------ ------------ 3,868,576 7,207,868 425,378 ------------ ------------ ------------ INVESTING ACTIVITIES Additions to unproven mineral interests (2,469,647) (5,842,760) (75,906) Purchase of capital assets (274,750) (36,893) - Additions to petroleum and natural gas interests - - (23,935) Proceeds from sale of petroleum and natural gas interests - - 78,630 ------------ ------------ ------------ (2,744,397) (5,879,653) (21,211) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH (621,590) 564,460 319,260 CASH - BEGINNING OF YEAR 893,525 329,065 9,805 ------------ ------------ ------------ CASH - END OF YEAR 271,935 893,525 329,065 ============ ============ ============
SUPPLEMENTARY CASH FLOW INFORMATION - See Note 14. The accompanying notes are an integral part of these financial statements. F-5 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 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. The Company subsequently focused on the acquisition, exploration and development of unproven mineral interests in Canada. 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. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The 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 17. 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 Company did not have any subsidiaries during the 2006 and 2005 fiscal years. 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. Examples of significant estimates made by management include depreciation, the provision for future income tax recoveries and composition of future income tax assets and future income tax liabilities, valuations of mineral interests, capital assets, asset retirement obligations and stock-based compensation. Actual results may differ from those estimates. 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 are 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. F-6 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 2. SIGNIFICANT ACCOUNTING POLICIES (continued) 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. Although the Company has taken steps to verify title to mineral properties in which it has an interest, according to the usual industry standards for the stage of exploration of such properties, these procedures do not guarantee the Company's title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects. 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 financial statements reflected the Company's proportionate interest in such activities. F-7 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 2. SIGNIFICANT 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% Leasehold improvements 50% 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. Where possible, the Company 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-8 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 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 2006 2005 $ $ Commodity taxes receivable 43,424 146,162 Prepaids 55,011 25,302 Other 37,840 26,043 ------------ ------------ 136,275 197,507 ============ ============ F-9 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 4. CAPITAL ASSETS
-------------------------------------------- ------------ 2006 2005 -------------------------------------------- ------------ ACCUMULATED NET BOOK NET BOOK COSTS DEPRECIATION VALUE VALUE $ $ $ $ Office furniture and equipment 46,313 5,896 40,417 5,693 Computer and telephone equipment 29,557 8,127 21,430 15,512 Field equipment and facility 254,741 28,041 226,700 11,556 Leasehold improvements 11,524 1,441 10,083 - ------------ ------------ ------------ ------------ 342,135 43,505 298,630 32,761 ============ ============ ============ ============
5. UNPROVEN MINERAL INTERESTS
-------------------------------------------- -------------------------------------------- 2006 2005 -------------------------------------------- -------------------------------------------- DEFERRED DEFERRED ACQUISITION EXPLORATION TOTAL ACQUISITION EXPLORATION TOTAL COSTS COSTS COSTS COSTS COSTS COSTS $ $ $ $ $ $ Duport 14,957,409 2,241,773 17,199,182 14,902,244 1,932,540 16,834,784 Bachelor Lake 1,399,289 3,647,500 5,046,789 2,756,880 2,829,076 5,585,956 Sherridon 423,519 1,127,370 1,550,889 107,614 230,979 338,593 Red Lake 38,952 10,016 48,968 - - - ------------ ------------ ------------ ------------ ------------ ------------ 16,819,169 7,026,659 23,845,828 17,766,738 4,992,595 22,759,333 ============ ============ ============ ============ ============ ============
(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 3,800 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 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, 10 mineral claims in the area of the Duport property, covering an area of approximately 1,744 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 F-10 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 5. UNPROVEN MINERAL INTERESTS (continued) "Assignment and Assumption Agreement"). Under the agreed terms, the Company acquired Wolfden's option by paying $650,000 cash and issuing 1,400,000 common shares, at a 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 $1,818,123 by paying $1,293,123 cash and issuing 700,000 common shares, at a value of $525,000. Upon exercising the option and after 50,000 ounces of gold or gold equivalent have been produced from the Bachelor Lake Property, the Company will be required to pay to Wolfden a bonus payment of $250,000 cash and issue 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. 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 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. On September 21, 2005, the Company exercised its option and paid the $100,000. The Bachelor Lake Property was then operated under a joint venture agreement (the "Bachelor Lake JV"). On May 2, 2006, as amended August 28, 2006, the Company and Metanor entered into a purchase agreement (the "Metanor Purchase") whereby Metanor agreed to purchase the Company's 50% interest in the Bachelor Lake JV in consideration of $3.5 million cash, $750,000 in common shares of Metanor and a 1% NSR in favour of the Company. Closing of the Metanor Purchase (the "Closing") is scheduled to occur (the "Completion Date") on the earlier of: i) 30 days after Metanor completes a $5 million financing; or ii) November 10, 2006. Until Closing occurs, Metanor assumes all costs, expenses and obligations relating to maintaining the Bachelor Lake Property in good standing until the Completion Date. In the event the Closing does not occur within the Completion Date, the Company may elect to purchase Metanor's 50% interest in the Bachelor Lake Property under the same terms as the Metanor Purchase. The Company will then have four months to complete its acquisition. The Company would also assume all costs, expenses and obligations of the Bachelor Lake Property from its election until closing of the Company's purchase. If the Company does not elect to purchase Metanor's 50% interest then both parties will retain their respective 50% interests in the Bachelor Lake Property and operations would continue under the Bachelor Lake JV. The Metanor Purchase contemplates for total consideration of a minimum of $4.25 million. Accordingly, during fiscal 2006, the Company recognized an impairment of $1,538,655 to reflect the difference between the Company's recorded costs and the anticipated proceeds. Subsequent to August 31, 2006, the Company and Metanor negotiated a new agreement, as described in Note 18(b). F-11 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 5. UNPROVEN MINERAL INTERESTS (continued) (c) Sherridon VMS Project, Manitoba The Company has acquired, through staking and various acquisition agreements, an interest in 15,025 hectares located in the Sherridon area, north-central Manitoba. Details of the acquisitions are as follows: i) 66 unproven claims covering approximately 12,755 hectares, staked by the Company; ii) on February 9, 2005, as amended February 9, 2006, the Company entered into a letter of intent ("Quarter Moon 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 Quarter Moon LOI, the Company had the right to acquire an initial 51% interest in the Quarter Moon Lake Property in which the Company has paid $40,000 cash, issued 50,000 common shares of the Company, at a value of $60,000, and was required to complete a $500,000 work commitment, pay a further $40,000 cash and issue 50,000 common shares. See also Note 18(c). iii)heads of agreement (the "Dunlop HOA") dated February 9, 2006, entered into by the Company and W. Bruce Dunlop Limited NPL, whereby the Company was granted the option to earn a 100% undivided interest in three unproven mineral claims, covering 536 hectares, for $90,000 cash ($15,000 paid), issuance of 250,000 common shares of the Company (25,000 shares issued) and expending a total of $170,000 in work expenditures over a four year period; and iv) three option agreements (the "HBED Options"), dated March 19, 2006, entered into by the Company and Hudson Bay Exploration and Development Company Limited ("HBED"), whereby the Company was granted options to acquire 100% interests in 24 unproven mineral claims and one mining lease covering approximately 3,226 hectares. In order to earn 100% interests in all of the mineral claims and the mining lease the Company will be required to make option payments totalling $650,000 and incur expenditures totalling $4,300,000, as follows: OPTION WORK DATE PAYMENTS EXPENDITURES $ $ On signing 30,000(paid) - First Anniversary 70,000 30,000 Second Anniversary 120,000 100,000 Third Anniversary 80,000 790,000 Fourth Anniversary 350,000 3,380,000 ------------ ------------ 650,000 4,300,000 ============ ============ Upon agreement by both the Company and HBED, up to $187,500 of the option payments may be paid in common shares of the Company. F-12 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 5. UNPROVEN MINERAL INTERESTS (continued) Should the Company acquire a 100% interest in any of the claim groups under the HBED Options, HBED has the option to back-in for a 51% interest in the subject claims group by paying 135% of the expenditures incurred by the Company. HBED will also hold a 2% NSR. (d) Red Lake Property, Ontario On April 18, 2006, the Company entered into a letter of intent (the "Red Lake LOI") with Goldcorp. Inc. ("Goldcorp") regarding the option to earn a 60% interest in 67 mining claims, a 45% interest in two mining claims, and a 30% interest in ten mining claims (collectively the "Red Lake Property") located in Ball Township, Red Lake, Ontario. On June 20, 2006, the Company and Goldcorp completed a formal option agreement (the "Red Lake Option") on the Red Lake Property. Under the terms of the Red Lake Option, the Company is required to perform minimum exploration programs totalling $3 million on or before December 31, 2008. Upon spending the $3.0 million, the Company is entitled to elect to exercise the option of its interests. Upon notification of the Company's election, Goldcorp has 90 days to back-in and reacquire a 25% interest in the 67 mining claims, a 18.75% interest in two mining claims and a 12.5% interest in the ten mining claims by paying $6 million to the Company. If Goldcorp does not exercise its back-in right, the Company will then be required to issue one million common shares of its share capital to Goldcorp. 6. REDEEMABLE PREFERRED SHARES The series 1 redeemable preferred shares (the "Redeemable Preferred Shares") were issued by the Company 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. 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. F-13 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 6. REDEEMABLE PREFERRED SHARES (continued) 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 fiscal 2006, the Company recorded $50,000 of dividends on the Redeemable Preferred Shares, which have been capitalized as part of resource interests. As at August 31, 2006, $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: 2006 2005 2004 ------------------------- ------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT $ $ $ Balance, beginning of year 21,005,765 28,487,57 6 9,443,859 20,914,102 2,926,859 19,537,102 ----------- ----------- ----------- ----------- ----------- ----------- Issued during the year For cash Private placements 5,273,236 3,493,249 7,324,894 6,688,797 6,000,000 1,290,000 Exercise of options 150,000 67,500 - - - - Exercise of warrants 4,598,500 1,523,950 1,048,500 253,100 435,000 87,000 For fiscal advisory services 85,715 32,458 - - - - For finder's fees - - - - 82,000 24,600 For corporate finance fee - - 40,000 34,000 - - For unproven mineral interests 25,000 18,250 3,150,000 2,845,000 - - Cancellation of escrow shares - - (1,488) - - - Reallocation from contributed surplus on exercise of options - 69,413 - - - - ----------- ----------- ----------- ----------- ----------- ----------- 10,132,451 5,204,820 11,561,906 9,820,897 6,517,000 1,401,600 Less flow-through share renunciation - (820,633) - (1,566,000) - - Less share issue costs - (475,908) - (681,423) - (24,600) ----------- ----------- ----------- ----------- ----------- ----------- 10,132,451 3,908,279 11,561,906 7,573,474 6,517,000 1,377,000 ----------- ----------- ----------- ----------- ----------- ----------- Balance, end of year 31,138,216 32,395,855 21,005,765 28,487,576 9,443,859 20,914,102 =========== =========== =========== =========== =========== ===========
(a) During fiscal 2006, the Company completed a private placement of 3,293,070 flow-through common shares, at a price of $0.70 per flow-through share, 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 non-flow-through unit consisted of one common share and one share purchase warrant entitling the holder to purchase one further share for a period of two years at a price of $0.70 per share. The Company paid a finder's fee of $262,194 and issued 523,323 warrants (the "Finder's Warrants") to the finder. The Company also issued 85,715 units (the "Finder's Units") in settlement of $60,000 billed by the finder for fiscal advisory services rendered. F-14 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 7. SHARE CAPITAL (continued) The Finder's Warrants have the same terms as the private placement warrants. The fair value of the Finder's Warrants has been estimated using the Black-Scholes option price model. The assumptions used were: dividend yield of 0%; expected volatility of 61.41%; a risk-free interest rate of 3.09% - 3.30%; and an expected life of two years. The value assigned to the Finder's Warrants was $113,179. Each Finder's Unit consisted of one common share and one purchase warrant entitling the finder to purchase one further share, for a period of two years at a price of $0.75 per share. The fair value of the warrants has been estimated using the Black-Scholes option price model. The assumptions used were: dividend yield of 0%; expected volatility of 62.05%; a risk-free interest rate of 3.39%; and an expected life of two years. The value assigned to the warrants was $27,542. The Company incurred a total of $40,535 for legal, filing and other share issue costs relating to the private placement. As at August 31, 2005, the Company had received $958,950 in common share subscriptions and incurred $45,556 of share issue costs with respect to this private placement. A director of the Company purchased 20,000 flow-through shares for $14,000. (b) During fiscal 2005, 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 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 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 purchased 121,435 flow- through units for $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 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 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 $5,305; and F-15 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 7. SHARE CAPITAL (continued) 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 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. (c) A summary of the number of common shares reserved pursuant to the Company's warrants outstanding at August 31, 2006, 2005 and 2004 and the changes for the years ending on those dates is as follows:
----------- ----------- ----------- 2006 2005 2004 ----------- ----------- ----------- Balance, beginning of year 10,331,859 5,647,000 - Issued pursuant to private placements 2,589,204 5,733,359 6,000,000 Issued for finder's fee - - 82,000 Exercised (4,598,500) (1,048,500) (435,000) ----------- ----------- ----------- Balance, end of year 8,322,563 10,331,859 5,647,000 =========== =========== ===========
Common shares reserved pursuant to warrants outstanding at August 31, 2006, are as follows: ------------ -------------- ------------------ NUMBER EXERCISE PRICE EXPIRY DATE $ ------------ -------------- ------------------ 2,313,182 1.50 December 23, 2006 2,718,530 1.35 December 23, 2006 701,647 1.05 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 ------------ 8,322,563 ============ (d) See also Note 18. 8. STOCK OPTIONS AND STOCK-BASED COMPENSATION 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 share price on the day before the grant date, less allowable discounts in accordance with the policies of the TSX Venture Exchange. During fiscal 2006, the Company granted 2,168,000 stock options (2005 - 1,078,000; 2004 - 810,000) to its employees, directors and consultants and recorded compensation expense of $550,817 (2005 - $559,031; 2004 - $179,611). F-16 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 8. STOCK OPTIONS AND STOCK-BASED COMPENSATION (continued) 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 fiscal 2006, 2005 and 2004:
----------------- ----------------- ----------------- 2006 2005 2004 ----------------- ----------------- ----------------- Risk-free interest rate 3.38% - 4.11% 2.28% - 2.92% 2.28% - 2.53% Estimated volatility 61.41% - 85.48% 52.44% - 105% 105% - 106% Expected life 3 years - 5 years 1.5 years 1.5 years Expected dividend yield 0% 0% 0%
The weighted average fair value of all stock options, calculated using the Black-Scholes option pricing model, granted during the year to the Company's employees, directors and consultants was $0.25 (2005 - $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, 2006, 2005 and 2004 and the changes for the fiscal years ending on those dates is presented below:
----------------------- ----------------------- ----------------------- 2006 2005 2004 ----------------------- ----------------------- ----------------------- 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 1,688,000 0.80 810,000 0.61 92,857 0.40 Granted 2,168,000 0.54 1,078,000 0.92 810,000 0.61 Exercised (150,000) 0.75 - - - - Expired (803,000) 0.95 (200,000) 0.66 (92,857) 0.40 ----------- ----------- ----------- Balance, end of year 2,903,000 0.56 1,688,000 0.80 810,000 0.61 =========== =========== ============
The following table summarizes information about the stock options outstanding and exercisable at August 31, 2006: OPTIONS OPTIONS EXERCISE OUTSTANDING EXERCISABLE PRICE EXPIRY DATE $ 600,000 600,000 0.60 May 31, 2007 60,000 60,000 0.75 July 22, 2007 150,000 150,000 0.70 September 27, 2007 200,000 200,000 0.45 September 28, 2008 580,000 580,000 0.75 September 29, 2008 913,000 913,000 0.45 February 2, 2009 400,000 100,000 0.45 March 10, 2011 ----------- ----------- 2,903,000 2,603,000 =========== =========== See also Note 18(d). F-17 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 9. CONTRIBUTED SURPLUS Contributed surplus for fiscal 2006, 2005 and 2004 is comprised of the following:
----------- ----------- ----------- 2006 2005 2004 ----------- ----------- ----------- $ $ $ Balance, beginning of year 738,642 179,611 - Stock-based compensation on warrants (Note 7) 140,721 - - Stock-based compensation on stock options (Note 8) 550,817 559,031 179,611 Stock options exercised (69,413) - - ----------- ----------- ----------- Balance, end of year 1,360,767 738,642 179,611 =========== =========== ===========
10. 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: 2006 2005 $ $ Future income tax assets: Financing costs 272,000 200,000 Capital assets 15,000 - Losses available for future periods 1,630,000 1,129,000 ----------- ----------- 1,917,000 1,329,000 Future income tax liabilities: Difference between book value and income tax costs of unproven mineral interests (6,749,000) (6,657,000) ----------- ----------- Net future income tax liabilities (4,832,000) (5,328,000) =========== =========== The recovery of income taxes shown in the statements of loss and deficit differ from the amounts obtained by applying statutory rates to the loss before income taxes due to the following: 2006 2005 $ $ Combined federal and provincial income tax rate 34.12% 35.36% =========== =========== Expected income tax recovery 1,205,600 600,100 Non-deductible stock-based compensation (188,000) (197,700) Write-down of unproven mineral interest (525,000) - Effect of change in tax rates (48,000) - Unrecognized tax losses (497,900) (381,900) Recovery of valuation allowance 1,316,633 1,329,000 Other 53,300 (20,500) ----------- ----------- Future income tax recovery 1,316,633 1,329,000 =========== =========== As at August 31, 2006, the Company has accumulated non-capital losses of approximately $4.8 million and cumulative resource and other tax pools of approximately $5.2 million carried forward for Canadian income tax purposes and are available to reduce taxable income of future years. The non-capital losses expire F-18 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 10. INCOME TAXES (continued) commencing in 2007 through 2016. The cumulative resource and other tax pools can be carried forward indefinitely. In fiscal 2006, the Company issued 3,293,070 flow-through common shares for gross proceeds of $2,305,149 (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 fiscal 2006 the Company incurred a $43,000 Part XII.6 tax expense on the monthly unspent balance of flow-through funds. All of the flow-through funds were spent by September 2006. 11. RELATED PARTY TRANSACTIONS (a) The Company was charged for various services provided by companies controlled by directors and officers of the Company, as follows:
2006 2005 2004 $ $ $ Accounting and administration 99,700 90,450 63,638 Professional and consulting 116,400 67,900 6,000 Compensation and benefits 93,000 51,500 3,000 ----------- ----------- ----------- 309,100 209,850 72,638 =========== =========== ===========
These fees have been either expensed to operations or capitalized to unproven mineral interests, based on the nature of the expenditures. As at August 31, 2006, accounts payable and accrued liabilities include $4,637 (2005 - $24,369) due to these related parties. These transactions were measured at the exchange amount, which was the amount of consideration established and agreed to by 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. F-19 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 11. RELATED PARTY TRANSACTIONS (continued) (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) Other related party transactions are disclosed elsewhere in these financial statements. 12. 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, 2006, 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: ----------------------------------------- 2006 ----------------------------------------- IDENTIFIABLE NET ASSETS REVENUES LOSS $ $ $ Canada - mineral operations 23,845,828 - (1,538,655) Canada - corporate 706,840 16,729 (661,280) ----------- ----------- ----------- 24,552,668 16,729 (2,199,935) =========== =========== =========== ----------------------------------------- 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) =========== =========== =========== F-20 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 13. FINANCIAL INSTRUMENTS The fair values of financial instruments at August 31, 2006 and 2005, 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, 2006 and 2005, may differ significantly from that presented. 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. 14. SUPPLEMENTARY CASH FLOW INFORMATION Non-cash financing and investing activities were conducted by the Company as follows:
2006 2005 2004 $ $ $ Operating activities Accounts payable for unproven mineral interests 137,253 4,167 - Accounts payable for capital assets 30,492 - - ----------- ----------- ------------ 167,745 4,167 - =========== =========== ============ Financing activities Issuance of common shares for unproven mineral interests 18,250 2,845,000 - Issuance of common shares for fiscal advisory services 60,000 - - Issuance of common shares for corporate finance fee - 34,000 - Issuance of common shares for finder's fee - - 24,600 Common share issue costs (60,000) (34,000) (24,600) Issuance of Redeemable Preferred Shares for unproven mineral interests - 8,000,000 - Share capital - future income tax adjustment (820,633) (1,566,000) - Future tax liability 820,633 6,657,000 - ----------- ----------- ----------- 18,250 15,936,000 - =========== =========== ============ Investing activities Accounts payable for unproven mineral interest (137,253) (4,167) - Accounts payable for capital assets (30,492) - - Common shares issued for unproven mineral interests (18,250) (2,845,000) - Redeemable Preferred Shares issued for unproven mineral interests - (8,000,000) - Unproven mineral interests - future income tax adjustment - (5,091,000) - ----------- ----------- ----------- (185,995) (15,940,167) - =========== =========== ===========
F-21 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 14. SUPPLEMENTARY CASH FLOW INFORMATION (continued) Other supplementary cash flow information: 2006 2005 2004 $ $ $ Interest paid in cash - - 105,484 =========== =========== =========== Dividends paid in cash 50,000 37,500 - =========== =========== =========== Income taxes paid in cash - - - =========== =========== =========== 15. LEASE COMMITMENTS The Company has entered into lease agreements for its offices and certain vehicles under operating leases. Minimum payments under these leases are as follows: YEAR $ 2007 87,124 2008 39,077 2009 11,396 ----------- 137,597 =========== 16. ASSET RETIREMENT OBLIGATION 2006 2005 2004 $ $ $ Balance, beginning of year 938,500 - - Liabilities assumed on acquisition - 900,500 - Accretion expense 76,000 38,000 - ----------- ----------- ----------- Balance, end of year 1,014,500 938,500 - =========== =========== =========== 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. See also Notes 5(b) and 18(b). F-22 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (a) The 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 financial statements, are summarized in the tables below. Statements of Loss
2006 2005 2004 $ $ $ Net loss under Canadian GAAP (2,199,935) (368,110) (257,022) Unproven mineral interests expensed (i) (545,409) (11,025,762) - Other compensation expense (ii) - (12,144) (15,503) Gain on settlement (iii) - - (97,207) Deferred income tax expense (v) (491,326) (1,103,364) - ----------- ----------- ----------- Net loss under US GAAP (3,236,670) (12,509,380) (369,732) =========== =========== =========== Loss per share under US GAAP (0.11) (0.78) (0.07) =========== =========== ===========
Balance Sheets
2006 2005 $ $ Total assets under Canadian GAAP 24,552,668 23,928,682 Unproven mineral interests expensed (i) (11,571,171) (11,025,762) ----------- ----------- Total assets under US GAAP 12,981,497 12,902,920 =========== =========== Total liabilities under Canadian GAAP 14,103,188 14,850,721 ----------- ----------- Total liabilities under US GAAP 14,103,188 14,850,721 =========== =========== Total shareholders' equity under Canadian GAAP 10,449,480 9,077,961 Unproven mineral interests expensed (i) (11,571,171) (11,025,762) ----------- ----------- Total shareholders' deficiency under US GAAP (1,121,691) (1,947,801) =========== ===========
Statements of Cash Flows
2006 2005 2004 $ $ $ Operating Activities Cash used per Canadian GAAP (2,199,935) (368,110) (257,022) Unproven mineral interests (2,469,647) (5,842,760) (75,906) ----------- ----------- ----------- Cash used per US GAAP (4,669,582) (6,210,870) (332,928) =========== =========== =========== Investing Activities Cash provided by per Canadian GAAP (2,744,397) (5,879,653) (21,211) Unproven mineral interests 2,469,647 5,842,760 75,906 ----------- ----------- ----------- Cash (used) provided by per US GAAP (274,750) (36,893) 54,695 =========== =========== ===========
F-23 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (i) Unproven Mineral Interests Mineral property costs and related exploration expenditures are accounted for in accordance with Canadian GAAP as disclosed in Note 2. For US GAAP purposes, the Company expenses exploration costs relating to mineral interests. When proven and probable reserves are determined for an interest and a feasibility study prepared, then subsequent exploration and development costs of the property would be capitalized. The capitalized costs of such properties would then be amortized using the unit of production method over the estimated life of the ore body based on proven and probable reserves and would be assessed periodically for recoverability of carrying values. For US GAAP purposes, the Company has adopted the provisions of EITF 04-2, "Whether Mineral Rights are Tangible or Intangible Assets" and FSP FAS 141-1 and 142-1 which concluded that mineral rights are tangible assets. Accordingly, the Company capitalizes certain costs related to the acquisition of mineral rights. The effect of adoption of EITF 04-2 is to reduce previously reported loss and loss per share for fiscal 2005 and 2004 by $12,986,665 and $75,906, and $0.81 and $0.01, respectively. In addition, total assets is increased by $11,733,571 and shareholders' deficiency is decreased by $11,733,571 as at December 31, 2005. (ii) 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 fiscal 2006 would increase by $nil (2005 - $12,144; 2004 - $15,503) and $158,413 (2005 - $966,502; 2004 - $206,497), respectively, and share capital, as at August 31, 2006, would increase by $2,320,461 (2005 - $2,162,048; 2004 - $1,183,402). There is no net change to shareholders' equity. (iii) 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. (iv) Functional Currency The Company's functional currency is the Canadian dollar. F-24 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (v) Canadian Flow-Through Shares During fiscal 2006, the Company issued 3,293,070 flow-through common shares (2005 - 4,626,364 shares) for gross proceeds of $2,305,149 (2005 - $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 the loss for fiscal 2006 and shareholders' deficiency as at August 31, 2006, would increase by $491,326 (2005 - $1,103,364; 2004 - $nil). (vi) 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, $50,000 (2005 - $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. (vii) 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, 2006, the Company has accumulated a deficit of $15,912,247 while in the development stage. F-25 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 17. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued) (b) Recent Accounting Pronouncements UNITED STATES PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards ("SFAS") 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for consistently measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS 157 is effective beginning January 1, 2008, and the provisions of SFAS 157 will be applied prospectively as of that date. The adoption of SFAS 157 is not expected to have an effect on the Company's financial position. The FASB has also issued FAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FAS Interpretation No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not expected to have an effect on the Company's financial position. CANADIAN PRONOUNCEMENTS The Company believes that there are no new Canadian pronouncements which will have a material effect on the Company's financial position or results of operations. 18. SUBSEQUENT EVENTS (a) In October 2006, the Company completed a brokered private placement and issued 3,416,333 flow- through units at a price of $0.45 per flow-through unit, for total gross proceeds of $1,537,350. 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 common share of the Company, for a period of two years at a price of $0.60 on or before April 12, 2008. A director of the Company purchased 20,000 flow-through units for $9,000. The Company paid an agent a cash commission of $115,301 and issued 341,633 warrants (the "Agent Warrants") and incurred $67,067 of costs relating to the financing. Each Agent's Warrant is exercisable to purchase one common share at a price of $0.45 on or before April 12, 2008. The Company also issued 62,500 units, at a fair value of $0.45 per unit, for corporate finance fees (the "Corporate Finance Units"). Each Corporate Finance Unit, comprising of one common share and one share purchase warrant, having the same terms as the Agent's Warrants. (b) On November 17, 2006, Metanor and the Company agreed to a new agreement (the "Revised Metanor Purchase") under which Metanor has now agreed to purchase the Company's 50% interest in the Bachelor Lake JV for total consideration of $4 million, as follows: F-26 HALO RESOURCES LTD. (AN EXPLORATION STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2006, 2005 AND 2004 18. SUBSEQUENT EVENTS (continued) i) $2 million cash (received); ii) $500,000 cash on or before March 30, 2007; and iii) $500,000 in cash or common shares of Metanor each on or before May 31, 2007, August 31, 2007 and November 30, 2007. Metanor continues to be responsible for all on-going costs, expenses and obligations of the Bachelor Lake JV. In addition Metanor has granted the Company a 1% NSR and the Company will retain its beneficial interest in the Bachelor Lake JV until completion of the sale. The Company will recognize a further write-down of approximately $225,000 in fiscal 2007 to reflect the terms of the Revised Metanor Agreement. (c) On December 3, 2006, the Company and EL entered into a formal purchase agreement (the "Quarter Moon Purchase Agreement") under which the Company has purchased a 100% interest in ten mining claims, including the original five mining claims under the Quarter Moon LOI, in north-central Manitoba, for $90,000 cash and the issuance of 160,000 common shares of the Company. EL holds a 1% NSR, of which a 0.5% NSR can be purchased at any time for $500,000. (d) On November 27, 2006, the Company cancelled 790,000 stock options with an exercise price of $0.70 per share, 150,000 stock options with an exercise price of $0.65 per share and 50,000 stock options with an exercise price of $0.45 per share. The Company also extended the expiry date of 450,000 stock options with an exercise price of $0.60 per share, from May 31, 2007 to May 31, 2009. In addition, the Company granted 1,547,000 stock options with an exercise price of $0.45 per share, expiring November 27, 2009. F-27 SCHEDULE I HALO RESOURCES LTD. SCHEDULE OF UNPROVEN MINERAL INTERESTS FOR THE YEARS ENDED AUGUST 31
----------------------------------------------------------------------- ----------- 2006 2005 ----------------------------------------------------------------------- ----------- BACHELOR RED DUPORT LAKE SHERRIDON LAKE PROPERTY PROPERTY VMS PROJECT PROPERTY TOTAL TOTAL $ $ $ $ $ $ BALANCE - BEGINNING OF YEAR 16,834,784 5,585,956 338,593 - 22,759,333 75,906 ----------- ----------- ----------- ----------- ----------- ----------- AMOUNTS INCURRED DURING THE YEAR EXPLORATION EXPENDITURES Accounting - 13,272 - - 13,272 - Airborne surveying - - 350,270 - 350,270 250,268 Assays - 23,065 9,445 - 32,510 56,036 Camp and equipment costs 110,727 115,474 13,050 - 239,251 209,549 Consulting 63,114 211,082 420,284 3,201 697,681 301,200 Data - - 25,000 - 25,000 - Drilling - 296,768 - - 296,768 1,373,524 Due diligence 6,054 - 8,160 - 14,214 23,296 Engineering 26,856 23,020 - - 49,876 - Exploration office costs 27,843 16,545 19,595 - 63,983 25,018 Field personnel 41,252 126,517 - - 167,769 179,253 Field supplies - - 4,456 2,103 6,559 41,332 Filing - 2,250 1,000 - 3,250 14,035 Geological - - - - - 199,030 Insurance - 16,719 - - 16,719 - Maintenance - 16,388 - - 16,388 - Mobilization, demobilization - 6,132 - - 6,132 88,766 Rent and utilities - 106,577 - - 106,577 30,669 Site preparation - - - - - 232,706 Surveying 3,573 - - - 3,573 16,223 Technical report - - 10,859 - 10,859 10,000 Telephone 949 7,176 1,455 - 9,580 4,847 Travel 28,865 49,389 49,575 4,712 132,541 118,720 Reimbursement / Recoveries - (211,950) (16,758) - (228,708) 1,818,123 ----------- ----------- ----------- ----------- ----------- ----------- 309,233 818,424 896,391 10,016 2,034,064 4,992,595 ----------- ----------- ----------- ----------- ----------- ----------- OTHER ITEMS Acquisition costs and payments - 165,782 66,462 - 232,244 11,260,000 Claims staking and lease rental cost 5,165 - 142,237 - 147,402 12,458 Legal - 15,282 107,206 38,952 161,440 385,207 Capitalized dividend 50,000 - - - 50,000 41,667 Future income tax adjustment - - - - - 5,091,000 Asset retirement obligation - - - - - 900,500 ----------- ----------- ----------- ----------- ----------- ----------- 55,165 181,064 315,905 38,952 591,086 17,690,832 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE BEFORE WRITE-DOWN 17,199,182 6,585,444 1,550,889 48,968 25,384,483 22,759,333 WRITE-DOWN (Note 5(b)) - (1,538,655) - - (1,538,655) - ----------- ----------- ----------- ----------- ----------- ----------- BALANCE - END OF YEAR 17,199,182 5,046,789 1,550,889 48,968 23,845,828 22,759,333 =========== =========== =========== =========== =========== ===========
F-28 EX-10 2 exh4_7.txt EXH 4.7 A/G HALO AND METANOR EXHIBIT 4.7 PURCHASE AGREEMENT, BY AND BETWEEN HALO RESOURCES LTD., AND METANOR RESOURCES INC. EXECUTED MAY 2, 2006 AS AMENDED AUGUST 28, 2006 PURCHASE AGREEMENT Made on the 27th day of April, 2006 BETWEEN: METANOR RESOURCES INC. a corporation organized under the Canada Business Corporations Act, having its head office at 2872 chemin Sullivan, Suite 2, in the City of Val-d'Or, Quebec, Canada J0Y 2N0, (hereinafter called the "PURCHASER") AND: HALO RESOURCES LTD., a corporation existing under the laws of the Province of British Columbia having its head office at 1280 -- 625 Howe Street, in the City of Vancouver, B.C., Canada V6C 2E5, (hereinafter called the "VENDOR" ) WHEREAS the Vendor and the Purchaser each own a 50% undivided ownership interest in and to (a) the Bachelor Lake Property comprising two mining concessions and fifty-one (51) mining claims for a surface area of 1,851.54 hectares, (b) the Hewfran Property comprising thirty-eight (38) mining claims totalling 683 hectares, and (c) the Hansen Property comprising eighty-eight (88) mining claims totalling 2,286.69 hectares, all as more fully described in Schedule "A" attached hereto (which schedule forms a part of this Agreement), together with the buildings, the equipment and the surface and underground infrastructures thereon erected ( such property and erections collectively the "BACHELOR PROPERTY"); WHEREAS the Vendor and the Purchaser are parties to a Joint Venture Agreement dated September 8, 2005 (the "JOINT VENTURE Agreement"), which Joint Venture Agreement governs the joint ownership and conduct of operations on the Bachelor Property as a mining property; WHEREAS the Vendor has agreed to sell to the Purchaser, and the Purchaser has agreed to purchase from the Vendor, the Vendor's 50% undivided ownership interest in the Bachelor Property, together with its 50% Participating Interest (as such term is defined in the Joint Venture Agreement) on and subject to the terms and conditions of this Agreement (such purchase and sale transaction, the "PURCHASE TRANSACTION"); and WHEREAS the Vendor and the Purchaser agree that by purchasing the Participating Interest of the Vendor, the Joint Venture Agreement shall terminate pursuant to and in accordance with the terms of Section 13.2(ii) of said Joint Venture Agreement; NOW THEREFORE, in consideration of the premises, and other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each of the Vendor and the Purchaser), the Vendor and the Purchaser hereby agree as follows: ARTICLE 1 -- PURCHASE AND SALE 1.1 Subject to the terms and conditions herein, the Vendor hereby agrees to sell, assign, convey and transfer to the Purchaser, and the Purchaser hereby agrees to purchase from the Vendor, the Vendor's 50% undivided ownership right, title and interest in and to the Bachelor Property, together with the Vendor's 50% Participating Interest. ARTICLE 2 -- OWNERSHIP 2.1 Upon the completion of the Purchase Transaction the Purchaser shall become the owner of the Vendor's 50% undivided ownership interest in and to the Bachelor Property, in addition to the existing 50% undivided ownership interest of the Purchaser in and to the Bachelor Property, subject to the Existing Royalties (as such term is defined in the Joint Venture Agreement), the Wolfden Royalty (as such term is defined in section 3.2(b) below) and the Halo Royalty (as such term is defined in section 3.1(c) below). 2.2 For greater certainty, notwithstanding the terms of section 2.1, the Vendor makes no representation, warranty or covenant in respect of the Purchaser's existing 50% undivided ownership interest in and to the Bachelor Property. ARTICLE 3 -- CONSIDERATION 3.1 PURCHASE PRICE. The purchase price payable by the Purchaser to the Vendor for the Vendor's 50% undivided ownership interest in and to the Bachelor Property and its 50% Participating Interest is: (a) $3,500,000 payable at Closing (as such term is defined in section 6.1); (b) The issuance by the Purchaser to the Vendor at Closing of such number of common shares of the Purchaser (the "Purchase Shares") representing an amount equal to $750,000, calculated at a value per common share equal to the volume weighted average of the closing price of the common shares of the Purchaser at the close of trading for the last ten trading days on the TSX Venture Exchange immediately prior to the date of this Agreement; and (c) The grant by the Purchaser to the Vendor at Closing of a 1% net smelter returns royalty (the "HALO ROYALTY") on all minerals or mineral products derived from all or any part of the Bachelor Property or from other ore bodies owned or controlled by the Purchaser and processed at the Bachelor Property. 3.2 ASSUMPTION OF LIABILITY. The Purchaser hereby agrees to assume and to pay for and/or discharge or perform: (a) all costs, charges, expenses and liabilities of the Vendor arising under the Joint Venture Agreement or arising or related to or otherwise incurred in connection with the Bachelor Property and any activities thereon; and (b) the Existing Royalties and the 1/2% net smelter return royalty in favour of Wolfden Resources Inc. on the Vendor's 50% undivided interest in and to the Bachelor Property (the "WOLFDEN ROYALTY"). -2- ARTICLE 4 -- REPRESENTATIONS AND WARRANTIES FROM THE VENDOR The Vendor hereby represents and warrants to the Purchaser as follows: 4.1 The Vendor is a corporation existing under the laws of the province of British Columbia, is qualified to do business and is in good standing under the laws of British Columbia and those jurisdictions where necessary in order to carry out the purposes of this Agreement. 4.2 All corporate actions required to authorize and to enter into and perform this Agreement have been properly taken by the Vendor. 4.3 The execution of this Agreement will not result in any material default under the articles or by-laws of the Vendor or under any legally binding instrument or applicable law by which the Vendor is bound. 4.4 This Agreement has been duly executed and delivered by the Vendor and is valid, binding and enforceable upon it in accordance with its terms. 4.5 The mining titles related to the Bachelor Property are registered in the name of the Vendor for a 50% undivided ownership interest and, as a result of the completion of the purchase and sale pursuant to article 1 of this Agreement and the due registration of the Purchase Agreement between the Parties hereto, the Purchaser will acquire the Vendor's 50% undivided ownership interest in and to the Bachelor Property, free and clear of all hypothecs, liens and encumbrances of any nature or kind whatsoever, other than the Existing Royalties (as such term is defined in the Joint Venture Agreement), the Wolfden Royalty (as defined in section 3.2(b)) and the Halo Royalty (as such term is defined in section 3.1). 4.6 No individual, corporation, partnership, trust or any other form of legal business entity has any agreement, option, right of first refusal or right, title or interest, or any right capable of becoming any of the foregoing in, to or in respect of the Vendor's 50% undivided ownership interest in and to the Bachelor Property. ARTICLE 5 -- REPRESENTATIONS AND WARRANTIES FROM THE PURCHASER The Purchaser hereby represents and warrants to the Vendor as follows: 5.1 The Purchaser is a corporation existing under the Canada Business Corporations Act, is qualified to do business and is in good standing in the federal jurisdiction of Canada and those jurisdictions where necessary in order to carry out the purpose of this Agreement. 5.2 All corporate actions and other actions required to authorize the Purchaser to enter into and perform this Agreement have been properly taken. 5.3 The execution of this Agreement will not result in any material default under the articles, by-laws of the Purchaser or under any legally binding instrument or applicable law by which the Purchaser is bound. 5.4 This Agreement has been duly executed and delivered by the Purchaser and is valid, binding and enforceable upon it in accordance with its terms. -3- ARTICLE 6 -- COVENANTS 6.1 The completion of the transactions contemplated in this Agreement (the "CLOSING") will take place at the offices of Gowling Lafleur Henderson LLP, counsel to Metanor, in Montreal, Quebec at 2:00 p.m. on the Completion Date (as defined in section 6.2) or at such other time or place as the parties may agree in writing. 6.2 The Vendor and the Purchaser shall complete the Closing on the date (the "COMPLETION DATE") that is the earlier of: (a) the date that is 30 days after the date that the Purchaser has completed a Cdn. $5,000,000 financing (debt or equity); and (b) the date that is 4 months from the date of this Agreement (the "PURCHASE CLOSING DATE"). 6.3 The Purchaser shall use its best efforts and take all reasonable actions as are necessary or prudent in order to complete the financing referenced in section 6.2(a) on or before the Purchase Closing Date. 6.4 In the event that the Closing does not occur on or before the Purchase Closing Date as a result of the Purchaser not completing such Closing, then the Vendor shall have the option, in its sole and absolute discretion, exercisable by notice in writing from the Vendor to the Purchaser within ten days of the Purchase Closing Date, to purchase the Purchaser's 50% undivided ownership interest in and to the Bachelor Property, together with its 50% Participating Interest, on the same terms (including representations and warranties) and for the same consideration as is to be paid by the Purchaser to the Vendor as provided in section 3.1 of this Agreement, mutatis mutandis. The completion of any such purchase by the Vendor shall be completed on the date that is 4 months from the Purchase Closing Date or such earlier date as the Vendor and Purchaser may agree. In the event that the Vendor completes such purchase, then the shares of the Vendor to be issued to the Purchaser pursuant to section 3.1(b) shall be valued on the same basis as the Purchase Shares but based on the ten trading days immediately preceding the Purchase Closing Date. 6.5 The Purchaser hereby agrees that it will irrevocably assume and pay all costs, charges and expenses relating to maintaining the Bachelor Property in good standing and to maintain all buildings, equipment and surface and/or underground infrastructures located thereon, and to maintain all operating permits and other obligations related to the Bachelor Property in good standing, from the date of this Agreement until the Completion Date. In the event that the Closing does not occur on or before the Purchase Closing Date then the Vendor shall re-assume its obligation to contribute 50% to the costs, charges and expenses related to the Bachelor Property from and after such date in accordance with the terms of the Joint Venture Agreement. 6.6 In the event that the Purchase Transaction is not completed and the Vendor does not exercise and complete its option to purchase as set out in section 6.4, then neither party shall be liable to the other for such transactions not being completed and, subject to section 6.5, the Parties respective interests in and to the Bachelor Property shall continue to be governed by the Joint Venture Agreement. In the event that the Vendor exercises its option to purchase as set out in section 6.4 and the sale of the Purchaser's 50% undivided interest in and to -4- the Bachelor Property to the Vendor is not completed as a result of the Purchaser not completing such transaction, then the Purchaser shall be liable to the Vendor for, and the Purchaser shall and hereby agrees to indemnify and save harmless the Vendor from, any and all costs, expenses, losses, damages, liabilities and deficiencies suffered or incurred by the Vendor and directly or indirectly arising from, related to or in any way connected with any breach or non-performance of any representation, warranty, covenant, obligation or agreement made or to be performed by the Purchaser as a vendor of its 50% undivided interest in and to the Bachelor Property under this Agreement. 6.7 The Vendor and the Purchaser shall enter into a net smelter returns royalty agreement (the "NSR AGREEMENT") at Closing in respect of the Halo Royalty based on the terms set out in this Agreement and in Schedule "B" (which schedule shall form part of this Agreement) and such other terms as the Parties shall agree. 6.8 The NSR Agreement shall provide that, subject to the rights of the Vendor in this section 6.8 below, the Purchaser shall have the right to buy back the Halo Royalty for $1,000,000 or to buy 1/2 of the Halo Royalty (i.e. such that the Halo Royalty will become a .05% net smelter royalty in favour of the Vendor) for $500,000, within 18 months of the date of commencement of production from the Bachelor Property, by delivering written notice to such effect to the Vendor within such 18 month period. In the event that the Purchaser gives notice to the Vendor that it wishes to exercise the buy back for all of the Halo Royalty at $1,000,000, the Vendor will have the option, in its sole and absolute discretion, to sell all of the Halo Royalty to the Purchaser for $1,000,000 or to sell 1/2 of the Halo Royalty to the Purchaser (i.e. such that the Halo Royalty will become a 0.05% net smelter return royalty in favour of the Vendor) for $500,000 and the Vendor shall thereafter be entitled to retain the 0.05% net smelter return royalty in respect of the entirety of the Bachelor Property. 6.9 The NSR Agreement shall provide that the $1,000,000 or $500,000 payable by the Purchaser to the Vendor to buy back the Halo Royalty may be paid, at the option of the Vendor in its sole and absolute discretion, by immediately available cash or by common shares of the Purchaser. 6.10 Any common shares to be issued by the Purchaser to the Vendor pursuant to the terms of this Agreement, including the Purchase Shares, shall be fully paid common shares of the Purchaser listed for trading on the TSX Venture Exchange and shall be subject to section 6.11 below. 6.11 The Purchaser shall take all necessary corporate action to issue and deliver any shares to be issued to the Vendor pursuant to this Agreement, including the Purchase Shares, and to record all such shares on the books of the Purchaser in the name of the Vendor. The Purchaser shall comply with applicable securities laws in connection with the issuance of any shares to be issued to be Vendor pursuant to this Agreement, including such Purchase Shares. 6.12 Any shares to be issued by the Purchaser to the Vendor pursuant to this Agreement, including the Purchase Shares, shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange (but not to exceed four months from the date of issuance). The issuance of any common shares pursuant to this Agreement, including the Purchase Shares, shall be conditional upon the Purchaser obtaining all regulatory consents or approvals, including those of the TSX Venture Exchange, and the Purchaser will ensure that -5- all filings required in order to obtain all regulatory consents and approvals are made with all applicable securities regulatory authorities in a prompt and timely manner to allow for the issuance of such shares on a basis that is exempt from all prospectus and registration requirements under applicable securities laws and with a hold period of no greater than four months. In the event that the Purchaser is unable to issue any shares, including the Purchase Shares, to be issued to the Vendor pursuant to this Agreement on an exempt basis on the date which such shares are to be issued, then the Purchaser shall pay to the Vendor on such date the value of the Purchase Shares, as set out in section 3.1, in cash by certified cheque or by wire transfer in immediately available funds. 6.13 Subject to the representations and warranties of the Vendor set out in Article 4, the Vendor makes no other representation or warranty to the Purchaser and the Purchaser agrees to purchase the Purchaser's 50% interest in and to the Bachelor Property on an "as is, where is" basis. ARTICLE 7 -- CONDITIONS TO CLOSING 7.1 CONDITIONS PRECEDENT IN FAVOUR OF THE PURCHASER. The obligation of the Purchaser to complete the Purchase Transaction contemplated in this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Completion Date, each of the following conditions precedent (each of which is hereby acknowledged to be inserted for the exclusive benefit of Purchaser and may be waived by it in writing in whole or in part): (a) Each of the representations and warranties of the Vendor contained in this Agreement shall be true, complete and accurate as and when made and at and as of the Closing; (b) The Vendor shall have performed and complied with all of the covenants, terms and conditions in this Agreement to be performed or complied with by it at or before Closing; (c) The Purchaser shall have received at or before the Closing from the Vendor the following documents, dated as of the Completion Date, prepared and/or delivered at the expense of the Vendor: (i) such instruments or agreements of sale, transfer, conveyance, assignment or delivery, in registrable form or otherwise, in respect of the Vendor's 50% interest in and to the Bachelor Property, together with its 50% Participating Interest, and the Vendor's rights in respect of the Existing Royalties and the Wolfden Royalty, as the Purchaser may reasonably require to effect the full and effective sale, transfer, conveyance, assignment or delivery thereof to the Purchaser; and (ii) such other documents, certificates and other instruments as would be usual in respect of the transactions contemplated herein or as the Purchaser may reasonably require. 7.2 CONDITIONS PRECEDENT IN FAVOUR OF THE VENDOR. The obligations of the Vendor to complete the Purchase Transaction contemplated in this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Completion Date, each of the following conditions -6- precedent (each of which is hereby acknowledged to be inserted for the exclusive benefit of the Vendor and may be waived by it in writing in whole or in part): (a) Each of the representations and warranties of the Purchaser contained in this Agreement shall be true, complete and accurate as and when made and at and as of the Closing; (b) The Purchaser shall have performed and complied with all of the covenants, terms and conditions in this Agreement to be performed or complied with by it at or before Closing; (c) The Vendor shall have received at the Closing from the Purchaser the following payments and documents, dated as of the Completion Date, prepared at the expense of the Purchaser and in form and substance satisfactory to the Vendor: (i) $3,500,000 in cash or by certified cheque or bank draft or by wire transfer in immediately available funds; (ii) a duly registered and issued share certificate, dated as of the Completion Date, representing the Purchase Shares and embossed in the name of the Vendor; (iii) such documents, certificates, legal opinions and other instruments in respect of the completion of the Purchase Transaction and the issuance and listing for trading of the Purchase Shares, as the Vendor may reasonably require; and (iv) an assumption agreement in respect of the costs, charges, expenses and liabilities contemplated in section 3.2(a), the 50% Participating Interest of the Vendor and in respect of the Existing Royalties and the Wolfden Royalty; and (d) The Purchaser shall have entered into with, and delivered the NSR Agreement to, the Vendor. ARTICLE 8 -- MISCELLANEOUS -- GENERAL 8.1 FURTHER ASSURANCES. Each Party shall do such acts and shall execute such further documents, conveyances, deeds, assignments, transfers and other instruments, and will cause the doing of such acts and will cause the execution of such further documents as are within its power as the other Party may in writing at any time and from time to time reasonably request be done and/or executed, in order to complete the Purchase Transaction and to give full effect to the provisions of this Agreement and all documents delivered at Closing. 8.2 NOTICE. Any notice to be given to one Party hereto by another Party hereto may be sent by facsimile or e-mail or may be personally delivered as follows: -7- In the case of the Purchaser: Metanor Resources Inc. 2872 chemin Sullivan Suite 2 Val-d'Or, Quebec J0Y 2N0 Attention: President Fax: (819) 825-8224 e-mail: ressources.metanor@cablevision.qc.ca In the case of the Vendor: Halo Resources Ltd. 1280 - 625 Howe Street Vancouver, British Columbia V6C 2T6 Attention: President Fax: (604) 484-0069 e-mail: mcernovitch@halores.com or to any other addresses or persons that any Party may at any time designate by written notice to the other Party. Any notice, request, consent or other communication shall be conclusively deemed to have been given and received (i) on the day of actual delivery if given by personal delivery; or (ii) on the day of transmittal if given by facsimile or e-mail prior to 5:00 p.m. on a business day and on the next following business day if given by facsimile or e-mail after 5:00 p.m. on a business day. 8.3 GOVERNING LAWS. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Quebec. 8.4 PERFORMANCE ON HOLIDAYS. If any action is required to be taken pursuant to this Agreement on or by a specified date that is not a business day in the Province of Quebec, then such action shall be valid if taken on or by the next succeeding business day. 8.5 EXPENSES. Each Party hereto shall pay all expenses it incurs in authorizing, preparing, executing and performing this Agreement and the transactions contemplated hereunder, whether or not the Closing occurs, including all fees and expenses of its legal counsel, accountants or other representatives or consultants. 8.6 TIME. Time is of the essence of each provision of this Agreement. 8.7 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. -8- 8.8 PUBLIC ANNOUNCEMENTS. No Party shall publicly disclose the specific terms of this Agreement except as may be necessary in the opinion of counsel to the Party making such disclosure to comply with the requirements of any Governmental authority or regulatory authority having jurisdiction. No public statement or press release shall be made by any Party unless such Party intending to make such disclosure shall consult with the other Party prior to making such statement or press release, and each Party shall use all reasonable efforts, acting in good faith, to agree upon a text for such statement or press release which is satisfactory to each Party. 8.9 COUNTERPARTS. This Agreement may be executed in counterparts and delivered by facsimile transmission. Each executed counterpart shall be deemed to be an original and each executed counterpart taken together shall constitute one agreement. In the event that either Party delivers this Agreement by facsimile transmission then such Party shall forthwith deliver the original executed copy of this Agreement to the other Party. 8.10 CURRENCY. All amounts in this Agreement are stated and are payable in Canadian funds. 8.11 ASSIGNMENT. Neither Party may assign any rights or benefits under this Agreement, including the benefit of any representation or warranty, to any third party without the prior written consent of the other Party. Each Party agrees to perform its obligations under this Agreement, and shall not arrange in any way for any other third party to perform those obligations. No assignment of benefits or arrangement for substituted performance by one Party shall be of any effect against any other Party except to the extent that such other Party has consented to it in writing. IN WITNESS WHEREOF this Agreement has been done and executed in Montreal, Province of Quebec as to the Purchaser and Toronto, Ontario as to the Vendor, with effect on the date hereinabove mentioned. METANOR RESOURCES INC. ________________________ By: _____________________________ Witness Serge Roy, President ________________________ Witness -9- HALO RESOURCES LTD. ________________________ By: _____________________________ Witness Marc Cernovitch, President and Chief Executive Officer ________________________ Witness -10- SCHEDULE "A" THIS IS SCHEDULE "A" OF THE AGREEMENT ENTERED INTO AS OF THE 27TH DAY OF APRIL 2006 BETWEEN HALO RESOURCES LTD. AND RESOURCES METANOR INC. DESCRIPTION OF PROPERTY A) THE BACHELOR PROPERTY - -------------------------------------------------------------------------------- CLAIMS RANGE LOT TOWNSHIP - -------------------------------------------------------------------------------- CLO257181 IV 27 Le Sueur - -------------------------------------------------------------------------------- CLO257182 V 24,25 Le Sueur - -------------------------------------------------------------------------------- CLO257183 V 22,23 Le Sueur - -------------------------------------------------------------------------------- CLO257184 V 20 Le Sueur - -------------------------------------------------------------------------------- CLO257185 V 18,19,20 Le Sueur - -------------------------------------------------------------------------------- CLO257191 IV 26 Le Sueur - -------------------------------------------------------------------------------- CLO257192 IV 24 Le Sueur - -------------------------------------------------------------------------------- CLO257193 IV 21 Le Sueur - -------------------------------------------------------------------------------- CLO257194 IV 19 Le Sueur - -------------------------------------------------------------------------------- CLO257205 III 18 Le Sueur - -------------------------------------------------------------------------------- CLO257225 III 19 Le Sueur - -------------------------------------------------------------------------------- CLO257231 IV 25 Le Sueur - -------------------------------------------------------------------------------- CLO257232 IV 23 Le Sueur - -------------------------------------------------------------------------------- CLO257233 IV 22 Le Sueur - -------------------------------------------------------------------------------- CLO257234 IV 20 Le Sueur - -------------------------------------------------------------------------------- CLO257235 IV 18 Le Sueur - -------------------------------------------------------------------------------- CLO267941 V 17 Le Sueur - -------------------------------------------------------------------------------- CLO267942 V 15 Le Sueur - -------------------------------------------------------------------------------- CLO267955 V 18 Le Sueur - -------------------------------------------------------------------------------- CL3742541 II 13 Le Sueur - -------------------------------------------------------------------------------- CL3742542 II 14 Le Sueur - -------------------------------------------------------------------------------- CL3742551 II 15 Le Sueur - -------------------------------------------------------------------------------- CL3742552 II 16 Le Sueur - -------------------------------------------------------------------------------- CL3742561 II 17 Le Sueur - -------------------------------------------------------------------------------- CL3742562 II 18 Le Sueur - -------------------------------------------------------------------------------- CL3742571 II 19 Le Sueur - -------------------------------------------------------------------------------- CL3742572 II 20 Le Sueur - -------------------------------------------------------------------------------- CL3742581 III 13 Le Sueur - -------------------------------------------------------------------------------- CL3742582 III 14 Le Sueur - -------------------------------------------------------------------------------- CL3742583 III 15 Le Sueur - -------------------------------------------------------------------------------- CL3742584 III 16 Le Sueur - -------------------------------------------------------------------------------- CL3742712 II 10 Le Sueur - -------------------------------------------------------------------------------- CL3742721 II 11 Le Sueur - -------------------------------------------------------------------------------- CL3742722 II 12 Le Sueur - -------------------------------------------------------------------------------- CL3742731 III 17 Le Sueur - -------------------------------------------------------------------------------- CL3812031 Row 19 Col 18 Le Sueur - -------------------------------------------------------------------------------- Cl3734191 III 27 Le Sueur - -------------------------------------------------------------------------------- Cl3734192 III 28 Le Sueur - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CLAIMS RANGE LOT TOWNSHIP - -------------------------------------------------------------------------------- CL3734201 III 29 Le Sueur - -------------------------------------------------------------------------------- CL3734202 III 30 Le Sueur - -------------------------------------------------------------------------------- CL3734211 III 31 Le Sueur - -------------------------------------------------------------------------------- CL3734212 II 21 Le Sueur - -------------------------------------------------------------------------------- CL3734221 II 22 Le Sueur - -------------------------------------------------------------------------------- CL3742651 III 19 Le Sueur - -------------------------------------------------------------------------------- CL3742652 III 20 Le Sueur - -------------------------------------------------------------------------------- CL3742661 III 21 Le Sueur - -------------------------------------------------------------------------------- CL3742662 III 22 Le Sueur - -------------------------------------------------------------------------------- CL3742771 III 23 Le Sueur - -------------------------------------------------------------------------------- CL3742772 III 24 Le Sueur - -------------------------------------------------------------------------------- CL3742781 III 25 Le Sueur - -------------------------------------------------------------------------------- CL3742782 III 26 Le Sueur - -------------------------------------------------------------------------------- CM478 - - Le Sueur - -------------------------------------------------------------------------------- CM510 - - Le Sueur - -------------------------------------------------------------------------------- B) THE HEWFRAN PROPERTY CLAIM TOWNSHIP EXPIRY DATE ----- -------- ----------- 3252153 Lesueur Oct 16,2005 3252154 Lesueur Oct 16,2005 3252155 Lesueur Oct 16,2005 3197781 Lesueur Jan 07,2007 3197782 Lesueur Jan 07,2007 3197783 Lesueur Jan 07,2007 3197784 Lesueur Jan 07,2007 3197785 Lesueur Jan 07,2007 3197791 Lesueur Jan 07,2007 3645873 Lesueur Feb 06,2007 3145911 Lesueur Feb 08,2007 3145912 Lesueur Feb 08,2007 3645604 Lesueur Feb 09,2007 3645605 Lesueur Feb 09,2007 3645611 Lesueur Feb 09,2007 3645762 Lesueur Feb 08,2007 3645694 Lesueur Feb 11,2007 3069781 Lesueur May 14,2007 3069783 Lesueur May 14,2007 -2- CLAIM TOWNSHIP EXPIRY DATE ----- -------- ----------- 3069791 Lesueur May 14,2007 3069812 Lesueur May 14,2007 3069813 Lesueur May 14,2007 3080441 Lesueur May 14,2007 3011591 Lesueur Jun 15,2007 3011592 Lesueur Jun 15,2007 3083911 Lesueur Jun 15,2007 3083912 Lesueur Jun 15,2007 3083913 Lesueur Jun 15,2007 3083914 Lesueur Jun 15,2007 3083921 Lesueur Jun 15,2007 3083922 Lesueur Jun 15,2007 3083923 Lesueur Jun 15,2007 3083924 Lesueur Jun 15,2007 3083925 Lesueur Jun 15,2007 3087671 Lesueur Aug 18,2007 3087672 Lesueur Aug 18,2007 3087681 Lesueur Aug 18,2007 3087682 LESUEUR AUG 18,2007 -------------------------------------------------------------- 38 CLAIM C) THE HANSEN PROPERTY MJL EXPLORATION
- ---------------------------------------------------------------------------------------------------------------- CLAIM RANGE LOT TITLE NO. DATE MATURITY DATE SURFACE (HA) - ---------------------------------------------------------------------------------------------------------------- 32F08 2 1 0003270 2003/09/15 2005/09/14 31.44 32F08 2 2 0003271 2003/09/15 2005/09/14 42.31 32F08 2 3 0003272 2003/09/15 2005/09/14 42.31 32F08 2 4 0003273 2003/09/15 2005/09/14 42.31 32F08 2 5 0003274 2003/09/15 2005/09/14 42.32 32F08 2 6 0003275 2003/09/15 2005/09/14 42.32 32F08 2 7 0003276 2003/09/15 2005/09/14 42.32 32F08 2 8 0003277 2003/09/15 2005/09/14 42.33 32F08 2 9 0003278 2003/09/15 2005/09/14 42.32 32F08 3 5 0003279 2003/09/15 2005/09/14 43.02 32F08 3 6 0003280 2003/09/15 2005/09/14 43.00 32F08 3 7 0003281 2003/09/15 2005/09/14 42.98 32F08 3 8 0003282 2003/09/15 2005/09/14 10.32 -3- - ---------------------------------------------------------------------------------------------------------------- CLAIM RANGE LOT TITLE NO. DATE MATURITY DATE SURFACE (HA) - ---------------------------------------------------------------------------------------------------------------- 32F08 & F09 4 7 0003283 2003/09/15 2005/09/14 41.85 32F08 & F09 4 8 0003284 2003/09/15 2005/09/14 38.35 32F08 (25) (33) 0003285 2003/09/15 2005/09/14 55.96 32F08 (25) (34) 0003286 2003/09/15 2005/09/14 55.96 32F08 (25) (35) 0003287 2003/09/15 2005/09/14 40.52 32F08 (26) (33) 0003288 2003/09/15 2005/09/14 55.96 32F08 (26) (34) 0003289 2003/09/15 2005/09/14 55.96 32F08 (26) (35) 0003290 2003/09/15 2005/09/14 40.44 32F09 5 26 0003291 2003/09/15 2005/09/14 15.63 32F09 5 27 0003292 2003/09/15 2005/09/14 15.64 32F09 5 28 0003293 2003/09/15 2005/09/14 36.69 32F09 5 29 0003294 2003/09/15 2005/09/14 36.69 32F09 6 28 0003295 2003/09/15 2005/09/14 42.58 32F09 6 29 0003296 2003/09/15 2005/09/14 41.84 32F08 BLOC 11 0008367 2003/12/09 2005/12/08 18.70 32F08 BLOC 14 0008368 2003/12/09 2005/12/08 19.22 32F09 (2) (39) 0013637 2004/02/17 2006/02/16 16.59 32F09 (2) (40) 0013638 2004/02/17 2006/02/16 17.24 32F09 (3) (39) 0013639 2004/02/17 2006/02/16 53.29 32F09 (3) (40) 0013640 2004/02/17 2006/02/16 55.89 32F09 (4) (39) 0013641 2004/02/17 2006/02/16 23.16 32F09 (4) (40) 0013642 2004/02/17 2006/02/16 24.44 32F08 BLOC 10 0015481 2004/02/17 2006/03/04 23.46 32F09 (20) (13) 5268741 2003/11/07* 2005/11/06 16.00 32F09 (21) (11) 5268742 2003/11/07* 2005/11/06 16.00 32F09 (21) (10) 5268743 2003/11/07* 2005/11/06 16.00 32F09 (21) (09) 5268744 2003/11/07* 2005/11/06 16.00 32F09 (22) (09) 5268745 2003/11/07* 2005/11/06 16.00 32F09 (22) (10) 5268746 2003/11/07* 2005/11/06 16.00 32F09 (22) (11) 5268747 2003/11/07* 2005/11/06 16.00 32F09 (23) (11) 5268748 2003/11/07* 2005/11/06 16.00 32F09 (23) (10) 5268749 2003/11/07* 2005/11/06 16.00 32F09 (23) (09) 5268750 2003/11/07* 2005/11/06 16.00 32F09 (24) (09) 5268751 2003/11/07* 2005/11/06 16.00 32F09 (24) (10) 5268752 2003/11/07* 2005/11/06 16.00 32F09 (24) (11) 5268753 2003/11/07* 2005/11/06 16.00 32F09 (24) (12) 5268754 2003/11/07* 2005/11/06 16.00 32F09 (23) (12) 5268755 2003/11/07* 2005/11/06 16.00 32F09 (22) (12) 5268756 2003/11/07* 2005/11/06 16.00 32F09 (22) (13) 5268757 2003/11/07* 2005/11/06 16.00 32F09 (23) (13) 5268758 2003/11/07* 2005/11/06 16.00 32F09 (24) (13) 5268759 2003/11/07* 2005/11/06 16.00 32F09 (24) (14) 5268760 2003/11/07* 2005/11/06 16.00 32F09 (24) (15) 5268761 2003/11/07* 2005/11/06 16.00 32F09 (23) (15) 5268762 2003/11/07* 2005/11/06 16.00 32F09 (23) (14) 5268763 2003/11/07* 2005/11/06 16.00 32F09 (22) (14) 5268764 2003/11/07* 2005/11/06 16.00 32F09 (22) (15) 5268765 2003/11/07* 2005/11/06 16.00 32F09 (24) (16) 5268766 2003/11/07* 2005/11/06 16.00 32F09 (24) (17) 5268767 2004/02/20* 2006/02/19 16.00 -4- - ---------------------------------------------------------------------------------------------------------------- CLAIM RANGE LOT TITLE NO. DATE MATURITY DATE SURFACE (HA) - ---------------------------------------------------------------------------------------------------------------- 32F09 (23) (17) 5268768 2004/02/20* 2006/02/19 16.00 32F09 (23) (16) 5268769 2003/11/07* 2005/11/06 16.00 32F09 (22) (16) 5268770 2003/11/07* 2005/11/06 16.00 32F09 (22) (17) 5268771 2004/02/20* 2006/02/19 16.00 32F09 (21) (17) 5268772 2004/02/20* 2006/02/19 16.00 32F09 (21) (16) 5268773 2003/11/07* 2005/11/06 16.00 32F09 (21) (15) 5268774 2003/11/07* 2005/11/06 16.00 32F09 (20) (15) 5268775 2003/11/07* 2005/11/06 16.00 32F09 (20) (16) 5268776 2003/11/07* 2005/11/06 16.00 32F09 (20) (17) 5268777 2003/11/07* 2005/11/06 16.00 32F09 (19) (17) 5268778 2003/11/07* 2005/11/06 16.00 32F09 (19) (16) 5268779 2003/11/07* 2005/11/06 16.00 32F09 (19) (15) 5268780 2003/11/07* 2005/11/06 16.00 ------- TOTAL : 1975.36 =======
JENSHANSEN
- ---------------------------------------------------------------------------------------------------------------- CLAIM RANGE LOT TITLE NO. DATE MATURITY DATE SURFACE (HA) - ---------------------------------------------------------------------------------------------------------------- 32F09 6 7 0003206 2003/09/15 2005/09/14 42.32 32F09 6 8 0003207 2003/09/15 2005/09/14 42.30 32F08 Bloc 2 0 0003208 2003/09/15 2005/09/14 27.51 32F08 Bloc 3 0 0003209 2003/09/15 2005/09/14 22.36 32F08 Bloc 4 0 0003210 2003/09/15 2005/09/14 17.87 32F08 Bloc 5 0 0003211 2003/09/15 2005/09/14 15.80 32F08 Bloc 6 0 0003212 2003/09/15 2005/09/14 9.92 32F08 Bloc 7 0 0003213 2003/09/15 2005/09/14 19.96 32F08 Bloc 8 0 0003214 2003/09/15 2005/09/14 27.08 32F08 Bloc 9 0 0003215 2003/09/15 2005/09/14 29.10 32F08 Bloc 15 0 0003216 2003/09/15 2005/09/14 25.20 32F08 Bloc 16 0 0003217 2003/09/15 2005/09/14 31.91 ------ TOTAL: 311.33 ======
-5- SCHEDULE "B" THIS IS SCHEDULE "B" OF THE AGREEMENT ENTERED INTO AS OF THE 27TH DAY OF APRIL 2006 BETWEEN HALO RESOURCES LTD. AND RESOURCES METANOR INC. NET SMELTER RETURNS ROYALTY 1. INTERPRETATION Where used in this Schedule "B": (a) "Agreement" means the Purchase Agreement to which this schedule is attached, including any amendments thereto or renewals or extensions thereof. (b) "Bachelor Property" means those mining properties described in Schedule "A" of the Agreement. (c) "Fiscal Period" means each calendar year or other period of 12 consecutive months adopted by the payor of the Halo Royalty for accounting and tax purposes. (d) "Halo Royalty" means the 1.0% Net Smelter Returns royalty payable pursuant to the terms of the Agreement. (e) Other defined terms used but not defined in this Schedule "B" shall have the meanings ascribed thereto in the Agreement. 2. NET SMELTER RETURNS "Net Smelter Returns" shall mean the gross proceeds received by the payor of the Halo Royalty from the sale or other disposition of minerals, ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Bachelor Property or from other ore bodies controlled or owned by the Purchaser and sold, less the following expenses if actually incurred: (a) taxes specifically based on mining production, but excluding any and all taxes (i) based upon the net or gross income of the owner or other operator of the Property or the payor of the Royalty Interest and (ii) based upon the value of the Property, the privilege of doing business and other similarly based taxes; (b) charges and costs, if any, for transportation and insurance of ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Property to any mint, smelter, or refinery; and (c) charges, costs (including assaying and sampling costs) and all penalties, if any, charged by a smelter or refiner of ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Property. 3. PAYMENT (a) The Halo Royalty shall be paid in cash only on a quarterly basis within 15 days after the end of each fiscal quarter during the relevant Fiscal Period; (b) Each payment under subsection 3(a) shall be accompanied by a statement indicating the calculation of Net Smelter Returns. The Halo Royalty holder shall be entitled to audit, during normal business hours, such books and records as are necessary to determine the correctness of the payment of the Halo Royalty provided, however, that such audit may be made once only on an annual basis and within 12 months of the end of the Fiscal Period in respect of which such audit is made; and (c) Payment of the Halo Royalty shall be made to the Halo Royalty holder at such place or places as the Halo Royalty holder shall advise the payor from time to time. 4. REGISTRATION/TRANSFER OF THE PROPERTY The Halo Royalty holder shall be entitled to register the NSR Agreement against title to the Bachelor Property with the intention of the Parties that it shall run with and bind the title to the Bachelor Property and be binding on all successive title holders thereof. The owner of the Bachelor Property shall be entitled to transfer all or part of such title in and to the Bachelor Property to any third party, provided that such third party shall agree in writing to be bound by the terms of the NSR Agreement to the extent of such interest in the Bachelor Property acquired and, in such circumstances, the transferor of such interest in and to the Bachelor Property shall be released from all obligations in respect of the Halo Royalty accruing from and after the date of such transfer. -2- EX-10 3 exh4_8.txt EXH 4.8 A/G BETWEEN HALO AND DUNLOP EXHIBIT 4.8 HEADS OF AGREEMENT, BY AND BETWEEN HALO RESOURCES LTD., AND W. BRUCE DUNLOP LIMITED NPL DATED FEBRUARY 9, 2006 THIS OPTION AGREEMENT dated as of the 18th day of April, 2006. BETWEEN: HALO RESOURCES LTD. a corporation continued under the laws of British Columbia ("HALO") OF THE FIRST PART - and - W. BRUCE DUNLOP LIMITED NPL and W. BRUCE DUNLOP (collectively, "DUNLOP") OF THE SECOND PART WHEREAS Dunlop is the registered or recorded and beneficial owner of certain unpatented mining claims located in the Sherridon area of Manitoba known as the Bob Lake Claim, the Batty Claim and the Bess 1 Claim, as outlined and more particularly described in Schedule "A" attached hereto (the "PROPERTY"); AND WHEREAS Dunlop has agreed to grant Halo an exclusive option (the "OPTION") to acquire an undivided 100% legal and beneficial interest in the Property, in accordance with and subject to the terms and conditions hereinafter set forth; 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 by each of the Parties) 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 Agreement and all schedules hereto and any and all written 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. (b) "AGENTS" means consultants (including financial advisors), servants, employees, agents, workmen, contractors and subcontractors. - 2 - (c) "EARN-IN DATE" shall have the meaning set forth in section 6.1. (d) "EFFECTIVE DATE" means the date of this Agreement set forth on the first page hereof. (e) "ENCUMBRANCES" means any and all mortgages, pledges, security interests, liens, charges, encumbrances, contractual obligations and rights and claims of others, whether recorded or unrecorded, registered or unregistered. (f) "EXPENDITURES" means all expenditures, expenses, obligations and liabilities of whatever kind or nature reasonably spent or incurred by Halo in doing Work from and after the Effective Date, including for greater certainty and without limitation, moneys expended in maintaining the Property in good standing, expenses paid for or incurred in connection with any program of surface or underground prospecting, exploring, geological, geophysical and geochemical surveying, diamond drilling, drifting, raising and other underground work, assaying, metallurgical testing, environmental studies, submissions to any Governmental Authority and other agencies with respect to all required Exploration or production and other permits, licenses and approvals, moneys expended in acquiring or constructing facilities and in exploring, developing and mining the Property and all field costs incurred by employees and Agents with respect to Work conducted on the Property, together with all administrative and overhead costs directly incurred by the Operator and relating directly to the administration of the Property or Work done on the Property, provided that in no event shall such administrative and overhead costs exceed ten percent of all other Expenditures directly related to the Property or Work done on the Property and directly incurred or performed by Halo or five percent of the contract price in respect of all other Expenditures directly related to the Property or Work done on the Property performed by any Agent, contractor or subcontractor of Halo and provided always that in no event shall such costs include non-project related overhead or legal or other consultants' fees related to the negotiation (including the conduct of due diligence) execution and delivery of this Agreement. (g) "EXPENDITURE DATE" means each date upon which Expenditures must have been incurred as provided in the schedule set out in section 5.1. (h) "EXPLORATION" means all activities directed toward ascertaining the existence, location, quantity, quality or commercial value of deposits of minerals on the Property. (i) "GOVERNMENTAL AUTHORITY" means any federal, provincial or municipal governmental department, commission, board, bureau, agency, state owned corporation or instrumentality, or any court, including, for greater certainty, any stock exchange or securities regulatory commission or agency having jurisdiction. (j) "OPERATOR" means the operator of the Property during the term of this Agreement. (k) "OPTION" has the meaning set forth in the preambles to this Agreement. (l) "OPTION PERIOD" means the period during which the Option is in full force and effect as provided herein. - 3 - (m) "PARTY" means Halo or Dunlop, as the case may be. (n) "PERSON" means any natural person, partnership, company, corporation, unincorporated association, Governmental Authority or other agency, trust, trustee or other entity howsoever designated or constituted. (o) "PROPERTY" shall have the meaning ascribed thereto in the preambles to this Agreement. (p) "WORK" means Exploration or other mining and milling work performed exclusively on or directly in relation to the Property. 2. SCHEDULES, GENDER AND CANADIAN DOLLARS 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" - Net Smelter Returns Royalty Agreement Schedule "C" - Forms of Release Schedule "D" - Current Holdings of Halo in the Sherridon Area Schedule "E" - Halo Claims Within the Sherridon Community Boundary Schedule "F" - Rules for Arbitration 2.2 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. 2.3 CANADIAN DOLLARS. All references to currency in this Agreement including "dollars" and "$" are in Canadian funds. 2.4 BUSINESS DAYS. All references in this Agreement to business days are to days excluding Saturdays, Sundays and banking holidays in the Province of Manitoba. 2.5 PERIOD OF TIME. 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 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. 2.6 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. - 4 - 3. REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATION AND WARRANTIES OF THE PARTIES. Halo hereby represents and warrants in respect of itself to Dunlop and W. Bruce Dunlop Limited NPL and W. Bruce Dunlop hereby jointly and severally represent and warrant to Halo in respect of W. Bruce Dunlop Limited NPL and W. Bruce Dunlop (as applicable) and each of Halo and Dunlop acknowledges that the other Party is relying on such representations and warranties in entering into this Agreement: (a) It 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. (b) It has full corporate power, authority and capacity to carry on its business and to enter into this Agreement and to carry out and perform all of its obligations and duties hereunder. (c) It has duly obtained all corporate and regulatory authorizations for the execution, delivery and performance of this Agreement and, except as expressly set out in this Agreement, 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 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) There is no Person acting or purporting to act at its request who is entitled to any brokerage or finder's fee in connection with the transactions contemplated herein. (f) 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 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. 3.2 REPRESENTATIONS AND WARRANTIES OF DUNLOP. W. Bruce Dunlop Limited NPL and W. Bruce Dunlop hereby jointly and severally represent and warrant to Halo as follows and acknowledges that Halo is relying on such representations and warranties in entering into this Agreement: (a) upon the exercise of the Option, Halo will be entitled to and will receive by transfer from Dunlop a 100% undivided legal and beneficial interest in and to the Property; - 5 - (b) Dunlop is the 100% undivided legal and beneficial owner of all right, title and interest in and to the mining claims that comprise the Property and has good and marketable title thereto; (c) there are no significant (over $5,000) outstanding tax or other liabilities or other Encumbrances on or in respect of the Property; (d) the condition of the Property is in material compliance with all applicable laws, regulations and orders of all Governmental Authorities having jurisdiction, including in respect of any environmental liability related to or arising out of the Property; (e) there are no outstanding, pending or threatened, actions, suits or claims affecting or in respect of the Property or any part thereof, including in respect of any environmental liability related to or arising out of the Property; and (f) Dunlop has delivered to Halo all material information in their possession or control relating to the Property. Such deliveries are for the information and convenience of Halo only and Dunlop does not represent the accuracy or completeness of such deliveries and shall not be liable for any errors or omissions with respect thereto or contained therein. 4. GRANT OF OPTION 4.1 GRANT. In consideration of the covenants and agreements of Halo set forth herein, Dunlop does hereby give and grant to Halo an exclusive option to acquire an undivided 100% legal and beneficial interest in and to the Property free and clear of all Encumbrances, by Halo satisfying within the time limits therefor, those obligations set forth in Article 5. The Option shall commence on the Effective Date and shall terminate on the date that is the 4th annual anniversary of the Effective Date (the "Option Period") unless exercised, extended or otherwise terminated, in accordance with the terms of this Agreement. 5. OPTION PAYMENTS 5.1 MAINTAINING OPTION. In order to maintain the Option in good standing, Halo shall: (a) issue to Dunlop the following common shares in the capital of Halo on or before the following respective dates: - -------------------------------------------------------------------------------- DATE NUMBER OF COMMON SHARES - -------------------------------------------------------------------------------- Effective Date 25,000 - -------------------------------------------------------------------------------- First Anniversary of Effective Date 50,000 - -------------------------------------------------------------------------------- Second Anniversary of Effective Date 75,000 - -------------------------------------------------------------------------------- Third Anniversary of Effective Date 100,000 - -------------------------------------------------------------------------------- - 6 - (b) pay to Dunlop the following amounts on or before the following respective dates: - -------------------------------------------------------------------------------- DATE AMOUNT (CANADIAN DOLLARS) - -------------------------------------------------------------------------------- Effective Date $15,000 - -------------------------------------------------------------------------------- First Anniversary of Effective Date $20,000 - -------------------------------------------------------------------------------- Second Anniversary of Effective Date $25,000 - -------------------------------------------------------------------------------- Third Anniversary of Effective Date $30,000 - -------------------------------------------------------------------------------- ; and (c) incur Expenditures on Exploration Work (other than on the Bess 1 Claim) in the following minimum amounts on or before the respective Expenditure Dates set out below (per year on a non-cumulative basis): - -------------------------------------------------------------------------------- EXPENDITURE DATE MINIMUM EXPENDITURE AMOUNT (CANADIAN DOLLARS) - -------------------------------------------------------------------------------- On or before the First Anniversary $10,000 of the EffectiveDate - -------------------------------------------------------------------------------- On or before the Second Anniversary $10,000 of the EffectiveDate - -------------------------------------------------------------------------------- On or before the Third Anniversary $50,000 of the EffectiveDate - -------------------------------------------------------------------------------- On or before the Fourth Anniversary $100,000 of the EffectiveDate - -------------------------------------------------------------------------------- 5.2 ISSUE OF SHARES. All shares, warrants, units and other securities issued or to be issued by Halo to Dunlop under and pursuant to this Agreement (the "HALO SECURITIES") shall be subject to all applicable hold periods required by applicable securities laws, by any Governmental Authority and by any stock exchange having jurisdiction, including the TSX Venture Exchange. 5.3 RELEASES. In consideration of the execution and delivery of this Agreement, Dunlop shall execute and deliver to and unto Halo and its successors and assigns and to and unto the Government of Manitoba, a complete, unconditional and irrevocable release of any claim to any right title or interest in and to any current or future mining claim staked and recorded by Halo, or in which it acquires any direct or indirect interest, in or around the Sherridon area of Manitoba (including, without limitation, those claims set out on Schedule "D" attached hereto), such release shall be in the form attached as Schedule "C" and shall be against and binding upon Dunlop, his estate, his executors, administrators and heirs and all other persons or legal entities associated with or under the control of Dunlop or in which Dunlop has a direct or indirect interest (including, without limitation, all corporations, joint ventures and partnerships). - 7 - 5.4 REQUIRED APPROVALS. Halo's obligation to issue the shares pursuant to section 5.1 and to otherwise complete the transactions herein, shall be subject to receipt of all approvals from all Governmental Authorities and all stock exchanges having jurisdiction and the receipt of any required consent from any third party. 6. EXERCISE OF OPTION 6.1 OPTION EXERCISE. If Halo has made the payments, incurred the Expenditures and issued the shares in accordance with the provisions of section 5.1, Halo shall provide a written notice of exercise of the Option to Dunlop stating the amount of Expenditures incurred and an itemized detailed statement of such Expenditures. Following receipt of such notice of exercise of the Option, and subject to the rights of Dunlop to request more information, to dispute the accuracy of any item in the statutory declaration or itemized statement of Expenditures and to receive an audited report of such Expenditures prepared by the statutory auditor of Halo, Halo shall be deemed to have exercised the Option as at the date of such written notice of exercise (the "Earn-In Date") and Halo shall have earned an undivided 100% legal and beneficial interest in the Property free and clear of all Encumbrances, subject to any Encumbrance which has arisen as a result of Work carried out on the Property by Halo. 6.2 NSR ROYALTY. On the Earn-in Date, Dunlop and Halo will enter into a net smelter returns royalty agreement (the "NET SMELTER RETURNS ROYALTY AGREEMENT") in the form set out in Schedule "B", pursuant to which Halo will grant to Dunlop: (a) a 3% net smelter returns ("NSR") royalty on the Bob Lake Claim, Batty Claim and Bess 1 Claim calculated and payable in accordance with the terms of the Royalty Agreement; (b) a 2% NSR royalty on two mining claims owned by Halo and lying adjacent to the Bob Lake Claim and known as Halo 6 (MB6189) and Halo 3 (MB6186) calculated and payable in accordance with the terms of the Royalty Agreement (provided that such 2% NSR royalty on such claims shall terminate and be void in respect of either of such claims in the event that such royalty has received in aggregate $1 million from the production of minerals from each of such claims); and (c) a 1/2% NSR royalty on all claims owned by Halo and located within the Sherridon Community Boundary (as defined and set out on Schedule "E" attached hereto) calculated and payable in accordance with the terms of the Royalty Agreement (provided that such 1/2% NSR royalty shall terminate and be void in respect of all such claims in the event that such royalty has received in aggregate $2.5 million from the production of minerals from any of such claim or claims). 6.3 The Royalty Agreement shall provide that Halo has the right to buy back one third of the 3% NSR royalty on the Bob Lake Claim, Batty Claim and Bess 1 Claim so that such royalty is a 2 % NSR royalty on such claims, for a purchase price of $500,000.00 per half of one percent bought back. - 8 - 7. DELIVERY OF DATA AND PROPERTY 7.1 DATA. Dunlop hereby covenants that it has or will forthwith deliver to Halo all maps, reports, results of surveys and drilling and any other reports of information Dunlop may have prepared or caused to be prepared with respect to the Property, provided that all such maps, reports, results of surveys and drilling and other reports of information shall be kept confidential by Halo as provided in Article 13 and further provided that Dunlop shall retain exclusive title thereto until Halo has exercised the Option, at which time title to such information shall transfer to Halo. Such deliveries are for the information and convenience of Halo only and Dunlop does not represent the accuracy or completeness of such deliveries and shall not be liable for any errors or omissions with respect thereto. 7.2 TITLE TO PROPERTY. Title to the Property shall remain registered and/or recorded in the name of Dunlop until such time as Halo shall have duly and properly exercised the Option in accordance with the terms of this Agreement, whereupon title to the Property shall be transferred and assigned to, and registered or recorded in the name of, Halo, and Dunlop shall deliver to Halo such transfers or other documents of conveyance as required to transfer the Property to and into the name of Halo. Halo shall be entitled to register, record or file notice of this Agreement in all appropriate government offices upon the due execution and delivery of this Agreement by the Parties provided that, in the event that Halo does not exercise the Option or this Agreement is otherwise terminated prior to the exercise of the Option, Halo shall forthwith discharge and remove such registrations, recordings or filings from such government offices, and in the event Halo does not complete such discharge and removal within 30 days of its obligation to do so arising, Dunlop shall be entitled to complete and register, record or file such discharges and remove all such filings and for such limited purposes Halo hereby appoints Dunlop as its attorney with full power of substitution. 8. OPERATOR OF THE PROPERTY 8.1 HALO AS OPERATOR. Halo shall act as Operator during the Option Period and as such, Halo shall be responsible in its sole discretion for carrying out and administering Work on the Property, including the completion of all activities necessary to fulfill its obligations under this Agreement. Halo shall be entitled to carry out its activities as Operator through its Agents and Halo, as Operator, and its Agents shall have the right to enter upon, explore, develop and mine the Property and have possession of the Property, including sample, examine, diamond drill, prospect, explore, develop and mine the Property in such manner as Halo may determine (subject to the applicable laws, regulations, policies or orders of all Governmental Authorities having jurisdiction), including without limitation, the right to erect, bring and install thereon all buildings, machinery, equipment and supplies as they shall deem necessary and proper and to remove therefrom reasonable quantities of ores, minerals or metals for assay, testing and milling purposes. Halo shall be responsible for obtaining and/or maintaining in good standing all permits and licenses and other approvals from all Governmental Authorities having jurisdiction as are necessary in order to conduct Work on the Property. 8.2 MAINTENANCE OF PROPERTY. During the Option Period, Halo shall do, record and/or pay when due or in advance, all such matters and amounts as are - 9 - necessary, including assessment work on the Property, and shall pay such taxes, fees and rents, as are required to keep the Property in good standing. 8.3 WORK ON CLAIMS. All Work by Halo or its Agents on the Property as Operator during the Option Period shall be done in a prudent and workmanlike manner in accordance with good mining practice and in compliance with all laws of all Governmental Authorities having jurisdiction. 8.4 INSURANCE. During the Option Period, Halo, as Operator shall maintain adequate insurance coverage in accordance with normal industry standards and practice protecting the interests of the Parties (including from third party claims) and shall cause its Agents to obtain and maintain similar adequate insurance. For greater certainty and without limitation, Halo shall acquire public liability and property damage insurance in accordance with normal industry standards naming the Parties as insureds, with severability of interest and protecting the interests of the Parties (including from third party claims). 8.5 REMOVAL OF LIENS. During the Option Period, Halo as Operator shall pay or cause to be paid all Agents including, without limitation, workers or wage earners employed by Halo on the Property and for all material purchased by Halo in connection with Work on the Property which might give rise to a lien or privilege thereon. Should any such lien or privilege be recorded against the Property in consequence of any Work done thereon by or for Halo, Halo shall forthwith take all such actions, including initiating proceedings, as may be necessary to have such lien or privilege removed and/or discharged from the Property and shall have the same removed and/or discharged with all reasonable dispatch provided, however, that upon such removal or discharge of such lien or privilege, Halo may proceed to contest any such claim of lien or privilege in good faith and diligently. 8.6 REPORTS AND INSPECTION. During the Option Period, Halo as Operator shall, when Work is being conducted, provide Dunlop with: (i) quarterly reports indicating the status of Exploration Work on the Property and any significant or potentially significant results obtained or received by Halo in connection with Work in respect of the Property; (ii) annual reports within 60 days of each anniversary of each Expenditure Date indicating any results obtained or received by Halo in connection with Work on the Property and the compilation and interpretation thereof as well as a breakdown of the Expenditures incurred in carrying out such Work and conclusions of tonnages of ore and waste rock and mineral resource calculations; and (iii) timely current reports and information forthwith upon the occurrence of any material results or other events, supported by copies of relevant data in respect of such material results or events. 8.7 ACCESS. During the Option Period, Halo shall permit Dunlop and its Agents at their own risk and expense, access to the Property at reasonable times, and with advance prior notice to Halo and to all information obtained, results produced, samples, core and data collected from the Property and records, maps, sections and reports prepared by Halo in connection with any Work done on or with respect to the Property. All such information shall be subject to the confidentiality provisions set out in Article 13. - 10 - 9. TERMINATION OF OPTION 9.1 TERMINATION EVENTS. Subject to the obligations of the Parties which expressly survive the termination of this Agreement in accordance with its terms, this Agreement shall terminate: (a) if Halo fails to deliver notice to Dunlop in accordance with section 6.1, fails to make the deliveries to Dunlop on a timely basis pursuant to section 5.1 or fails to incur the required Expenditures (or to make payments to Dunlop in lieu thereof) on or before the relevant Expenditure Dates as set forth in section 5.1, upon the date immediately following the date such notice or other deliveries were deliverable or the date immediately following such relevant Expenditure Date, as the case may be; (b) upon receipt by Dunlop of notice from Halo given prior to the exercise of the Option that Halo will not incur the Expenditures, make the payments or issue the shares in accordance with section 5.1; (c) if Halo does not exercise the Option on or before the date that is the 4th anniversary of the Effective Date; or (d) upon exercise of the Option by Halo, provided that for greater certainty, and without limitation, sections 9.2 through 9.6 inclusive as well as Article 13 shall survive the termination of this Agreement. 9.2 RELEASE AND QUITCLAIM OF PROPERTY. If the Option is terminated, Halo shall forthwith, and in any event within 30 days of such termination, deliver to Dunlop a release and quitclaim in form and content satisfactory to Dunlop, with respect to the Property and this Agreement. 9.3 PROPERTY IN GOOD STANDING. Upon termination of the Option, Halo shall ensure that the Property remains in good standing for not less than 6 months after termination. 9.4 DELIVERY OF DATA. Upon termination of the Option, Halo shall deliver to Dunlop within 30 days of the date of termination all originals or copies of maps, reports, results of surveys and drilling and all other reports of information provided to Halo by Dunlop as well as copies of any assay plans, diamond drill records, information, maps and other pertinent exploration reports produced by Halo or its Agents and related to the Property. 9.5 REMOVAL OF LIENS. Upon termination of the Option, if at that time or subsequently thereafter a lien on the Property shall arise in connection with work done thereon by Halo or its Agents and Halo shall wish to contest such lien, Halo shall post security sufficient to permit such lien to be discharged and shall forthwith take all such measures as are necessary in order to discharge such lien. 9.6 REMOVAL OF BUILDINGS AND ENVIRONMENTAL MATTERS. Upon termination of the Option: (a) All buildings, plant, equipment, machinery, tools, appliances and supplies which may have been brought upon the Property by or on behalf of Halo as Operator shall be removed by Halo at any time not later than twelve months after termination unless other arrangements on terms - 11 - satisfactory to Dunlop are made between Halo and Dunlop and if not so removed, such buildings, plant, equipment, machinery, tools, appliances and supplies shall, at the sole option of Dunlop, become the property of Dunlop or may be removed by Dunlop or its Agents at the expense of Halo. (b) Halo shall perform all rehabilitation, reclamation or pollution control on the Property which is required as a result of Halo's or its Agent's activities thereon, to the standard required in accordance with all applicable laws as approved by the appropriate Governmental Authorities having jurisdiction. 10. ARBITRATION 10.1 BINDING ARBITRATION. Any matter in this Agreement in dispute between the Parties which has not been resolved by the Parties within fifteen (15) days of the delivery of notice by either Party of such dispute may be referred by either Party to binding arbitration. Such referral to binding arbitration shall be to a qualified single arbitrator pursuant to the Arbitrations Act, 1991 (Ontario) and its successor legislation, which act shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules for arbitration set out in Schedule "F". 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. 11. FORCE MAJEURE 11.1 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, 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; - 12 - (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. Any Party asserting an event of force majeure shall provide ongoing periodic notice in writing to the other Party 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. 12. RELATIONSHIP AND OTHER OPPORTUNITIES 12.1 RELATIONSHIP OF PARTIES. The rights, privileges, duties, obligations and liabilities, as between Halo and Dunlop, shall be separate and not joint or collective and nothing herein contained shall be construed as creating a partnership, an association, agency or subject as herein specifically provided, a trust of any kind or as imposing upon either of the Parties any partnership duty, obligation or liability. No Party is liable for the acts, covenants and agreements of any other Party. Notwithstanding the foregoing, the duties, obligations and liabilities of W. Bruce Dunlop Limited NPL and W. Bruce Dunlop shall be joint and several and each is liable for the acts, failures to act, covenants, agreements and representations and warranties of the other. 12.2 OTHER OPPORTUNITIES. Each of the Parties shall have the free and unrestricted right independently to engage in and receive the full benefits of any and all business endeavours of any sort whatsoever whether or not competitive with the endeavours contemplated herein without consulting the other Party or inviting or allowing the other Party to participate therein. No Party shall be under any fiduciary or other duty to the other Party which shall prevent it from engaging in or enjoying the benefits of competing endeavours within the general scope of endeavours contemplated by this Agreement. 13. CONFIDENTIALITY 13.1 CONFIDENTIALITY. All information received by any Party as a result of or in connection with the Property or this Agreement shall be confidential, shall be treated as confidential and shall not be disclosed to any other Person without the prior written consent of the other Party, which consent shall not be withheld unless such other Party can reasonably establish that it would suffer material damage or would be in violation of any laws or regulations of any Governmental Authority to which it is subject as a result of such disclosure. 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 13 shall not apply to a disclosure: (i) to an Agent that has a bona fide need to be informed; and (ii) to any third Person to whom the disclosing Party bona fide and in good faith contemplates a transfer of all or any part of its interest in or to the Property and this Agreement. Only such confidential information as such third Person shall have a legitimate business need to know shall be disclosed and such - 13 - 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 13. The provisions of this Article 13 shall continue to apply to any Party notwithstanding any termination of the Option. Where disclosure is required in connection with a third Person transfer, any intended third Person transferee must sign a confidentiality agreement with the other non-disclosing Party containing provisions similar to this Article 13. 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. 14. NOTICE - GENERAL 14.1 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 by fax, addressed to such other Party or delivered to such other Party as follows: (i) to Halo at: 1305-1090 West Georgia Street Vancouver BC V6E 3V7 Attention: Marc Cernovitch Fax No.: (604)484-0069 with a copy to: Cassels Brock & Blackwell Scotia Plaza, Suite 2100 40 King Street West Toronto ON M5H 3C2 Attention: Brian P. Dominique Fax No.: (416) 640-3051 (ii) to Dunlop at: 201-2639 Portage Avenue Winnipeg, MB R3J 0P7 Attention: W. Bruce Dunlop Fax No.: (204) 623-5666 or at such other addresses and to such other Person that may be given by any of them to the others in writing from time to time on 10 days' prior written notice and such notices, requests, demands or other communications shall be deemed to have been received when delivered. - 14 - 15. MISCELLANEOUS - GENERAL 15.1 PETER DUNLOP. Peter Dunlop hereby acknowledges and agrees that he, and his estate, executors, administrators, and heirs and any legal entity associated with or under the control of Peter Dunlop or in which he owns a direct or indirect interest, are subject to and bound by the terms of this Agreement and the terms of the releases contemplated in subsection 5.3 hereof, as evidenced by his due execution of this Agreement. 15.2 EXPENSES. Halo and Dunlop agree that all out-of-pocket expenses and disbursements incurred in connection with this Agreement and the transactions contemplated herein, including fees and expenses relating to legal, tax, accounting matters and financial advisor fees, will be paid by the Party incurring such expenses. 15.3 ACTS IN GOOD FAITH. The Parties shall at all times during the currency of this Agreement and after the termination of the Option, act in good faith with respect to the other Party and shall do or cause to be done all things within their respective powers which may be necessary or desirable to give full effect to the provisions hereof. 15.4 SEVERABILITY. Any provision of this Agreement which is invalid or unenforceable shall not effect any other provision and shall be deemed to be severable herefrom. 15.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. 15.6 FURTHER ASSURANCES. The Parties shall sign such further and other documents and do such further acts or things as may be necessary or desirable in order to give full force and effect to this Agreement and every part hereof. 15.7 AMENDMENT. This Agreement may not be amended or modified in any respect except by written instrument signed by the Parties. 15.8 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. 15.9 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon the Parties and each of their respective heirs, executors, administrators, successors and permitted assigns. Any assignment of a party's interest hereunder may be assigned only with the consent of the other Party which consent shall not be unreasonably withheld, and which consent will be conditional upon the assignee agreeing in writing with the non-assigning Party to be bound by the terms of this Agreement. - 15 - 15.10 COUNTERPARTS. This Agreement may be executed in counterparts and by facsimile transmission, 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: /s/ MARC CERNOVITCH ------------------------------- Marc Cernovitch W. BRUCE DUNLOP LIMITED NPL Per /s/ W. BRUCE DUNLOP ------------------------------- W. Bruce Dunlop SIGNED, SEALED & DELIVERED IN THE PRESENCE OF: /s/ JOSEPHINE DUNLOP /s/ W. BRUCE DUNLOP - -------------------------- ------------------------------------ WITNESS: JOSEPHINE DUNLOP NAME: BRUCE DUNLOP SIGNED, SEALED & DELIVERED IN THE PRESENCE OF: /s/ ERNIE GIULANE /s/ PETER DUNLOP - -------------------------- ------------------------------------ WITNESS: ERNIE GIULANE NAME: PETER DUNLOP SCHEDULE "A" THE PROPERTY Those unpatented mining claims located in the Province of Manitoba and known as Bob - MB2318, Batty 1 - MB4786, Bess 1 - MB4934, as such claims are shown on the map below. [GRAPHIC OMITTED][GRAPHIC OMITTED] Omitted graphic is a map of the Sherridon VMS Project showing the claims covered under Schedule A and the Halo claims subject to NSR under Schedule B SCHEDULE "B" NET SMELTER RETURNS ROYALTY THIS NET SMELTER RETURN ROYALTY DATED WITH EFFECT AS OF , 2006 B E T W E E N: HALO RESOURCES LTD. (the "Owner") - and - W. BRUCE DUNLOP LIMITED NPL (the "Holder") In consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, it is agreed as follows: 1. Definitions (a) "MINERALS" means all naturally occurring metallic and non-metallic minerals that are mined, produced or otherwise recovered from the Property by or on behalf of the Owner, whether in the form of dore bars, concentrates or otherwise including, without limitation, gold, silver, copper, lead or zinc, and all beneficiated or derivative products thereof. (b) "NET SMELTER RETURNS" and "NSR" means the gross proceeds received by or payable to the Owner from the sale or other disposition of Minerals (other than in the circumstances of a sale of Minerals by the Owner after such Minerals have been credited to the account of the Owner at the Processor) or, in the event that the account of the Owner at the Processor is credited with Minerals refined by the Processor, the gross value of such Minerals so credited to the Owner calculated on the basis of the aggregate quantity of such Product so credited during the relevant time period multiplied by the Spot Price (if applicable), less the following expenses: (i) all taxes based directly on or assessed against the value or quantity of Minerals produced from the Property, including the following: (a) direct sales tax; (b) use taxes; (c) gross receipts taxes; - 2 - (d) severance taxes; and (e) crown royalties; but excluding any and all taxes based upon the net or gross income of the Owner or other operator of the Property, the value of the Property or the privilege of doing business and other taxes assessed on a similar basis; and (ii) all transportation costs, including related insurance costs, for transportation of Minerals from the Property to the Processor, and all direct charges and/or costs charged by any smelter, refiner, mint and/or other Processor of the Minerals, including sales costs and penalties, if any. Provided that if the smelting, refining, minting and/or further processing is carried out at facilities owned or controlled, in whole or in part, by the Owner, then the charges and costs for such smelting, refining, minting and/or further processing of such Minerals shall be the lesser of: (A) the charges and costs the Owner would have incurred if such smelting, refining, minting and/or further processing was carried out at facilities that are not owned or controlled by the Owner and that are offering comparable services for comparable products; and (B) the actual charges and costs incurred by the Owner with respect to such smelting, refining, minting and/or further processing; (c) "PLACE OF DELIVERY" means in the case of payment of the Royalty, the deposit account of the Holder as the Holder shall direct in writing. (d) "PROPERTY" means certain unpatented mining claims located in the Sherridon area of Manitoba known as the Bob Lake Claim, the Batty Claim, the Bess 1 Claim, Halo 6 (MB 6189) and Halo 3 (MB 6186) Claims and those claims referenced in section 2 (c) of this Agreement. (e) "PRIME" means at any particular time, the reference rate of interest, expressed as a rate per annum, that the Toronto-Dominion Bank establishes as its prime rate of interest in order to determine interest rates that it will charge for demand loans in Canadian dollars to its most credit worthy Canadian customers. (f) "PROCESSOR" means collectively any smelter, refiner, mint or processor or other purchaser or user of the Minerals. (g) "ROYALTY" means the payments to the Holder described in Section 2 of this Agreement. (h) "SPOT PRICE" means (i) in respect of Minerals that is gold, the price of gold in U.S. Dollars on the London Bullion Market Afternoon Fix on the day that Product that is Refined Gold is sold by the Owner (other than in the circumstances of a sale of Product by the Owner after Product has been credited to the account of the Owner at the Processor) or credited to the account of the Owner by the Processor, (ii) in respect of Minerals that is silver, the price in U.S. dollars determined by the Processor in purchasing such silver from the Owner or crediting such silver to the account of the Owner, and (iii) for any - 3 - other Minerals other than gold or silver, the price of such Mineral quoted in U.S. dollars at the close of business on a specified day by the New York Commodity Exchange. If for any reason the London Bullion Market or the New York Commodity Exchange is no longer in operation or the spot price of a particular Mineral is not quoted by the London Bullion Market or the New York Commodity Exchange, the "Spot Price" of such Mineral shall be determined by reference to the price of such Mineral on another similar commercial exchange entity having the largest volume of trading in such Mineral on such day. The exchange rate used to convert a "Spot Price" for any Minerals from U.S. dollars to any other currency on a particular date shall be determined on the basis of the Bank of Canada noon exchange rate for U.S. dollars on such day. 2. RESERVATION AND GRANT OF ROYALTY Subject to the terms of this Agreement, the Owner, for and in consideration of the sum of TEN DOLLARS ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Owner, hereby grants and agrees to pay to the Holder the following: (a) 3% of the Net Smelter Returns from that part of the Property being the Bob Lake Claim, Batty Claim and Bess 1 Claim, calculated and payable in accordance with the terms of this Agreement; (b) 2% of the Net Smelter Returns from that part of the Property being two mining claims owned by Halo and lying adjacent to the Bob Lake Claim and known as Halo 6 (MB6189) and Halo 3 (MB6186), calculated and payable in accordance with the terms of this Agreement (provided that such 2% NSR Royalty on such claims shall terminate and be void in respect of either of such claims in the event that such Royalty has received in aggregate $1 million from the production of minerals from each of such claims); and (c) 1/2% of the Net Smelter Returns from that part of the Property being the claims owned by Halo and located within the Sherridon Community Boundary (as defined and set out on Schedule "I" attached hereto), calculated and payable in accordance with the terms of this Agreement (provided that such 1/2% NSR royalty shall terminate and be void in respect of all such claims in the event that such royalty has received in aggregate $2.5 million from the production of minerals from any one or more of such claims). The Owner has the right to buy back one third of the 3% NSR Royalty on the Bob Lake Claim, Batty Claim and Bess 1 Claim referred in 2 (a) above, so that such Royalty is a 2 % NSR royalty on such claims, such buy back for a purchase price of $500,000.00 per one half of one percent bought back. 3. TIME AND MANNER OF ROYALTY PAYMENTS (a) All Royalty payments shall be made in cash to the Place of Delivery. The Royalty shall be calculated and paid, and the Owner shall cause the Royalty to be calculated and paid, to the Holder as follows: (i) The Royalty shall be calculated for each three (3) month period (a "Quarter") during the term of this Agreement, the first quarter commencing on the date this Agreement becomes - 4 - effective. The Royalty payable for each Quarter shall be paid to the Holder by the Owner by bank draft or wire transfer (in the sole and absolute discretion of the Holder) in Canadian dollars, on or before the last day of the calendar month following the Quarter for which the Royalty is payable. To the extent that the Owner is unable to calculate the Royalty with certainty on the last day of such month, the Owner shall pay the Royalty for the particular Quarter on the basis of the Owner's best good faith estimate thereof, and a final determination in respect of the Royalty payment with respect to such Quarter shall be made by the Owner with all due dispatch and, in any event, by the end of the next Quarter. Any adjustment required by such final determination shall be paid to the Holder within two (2) days of the date of such final determination but in any event no later than the end of the next Quarter following the Quarter for which the Royalty is payable. All such Royalty payments shall be delivered to the Holder at the Place of Delivery in such manner contemplated by this Section 3(a) as specified in writing by the Holder; (ii) The Holder shall have no right to receive Royalty payments by delivery of Minerals in kind; (iii) At the time each Royalty payment is paid to the Holder, the Owner shall prepare and deliver to the Holder a statement setting out in reasonable detail the manner in which such Royalty payment was calculated, including: (i) the quantities of Minerals sold or otherwise disposed of by the Owner with respect to such period or the amount of Minerals credited to the account of the Owner, as the case may be; (ii) the quantities of Minerals to which such Royalty payment is applicable; (iii) the calculation of the applicable Net Smelter Returns; (iv) the Spot Price for the applicable Minerals, (v) the calculation of interest accrued on such Royalty payment, if any and (vi) in the event of any commingling as contemplated in Section 5, a summary of the determination by the Owner of the quantity of Minerals subject to the Royalty; (iv) Notwithstanding the terms of any other provision in this Agreement, the Owner shall not be obligated to make any Royalty payment before the Owner has received or been credited with payment for the sale or other disposition of such Minerals. (b) The Holder may object in writing to any statement, Royalty payment amount and invoice within 2 months after receipt of the relevant statement, payment or invoice. If any Royalty payment has not been properly paid or credited in full as provided herein, the Holder may give to the Owner notice in writing of such default and, unless the Holder has received such payment within 15 business days after receipt of such notice by the Owner, the Owner shall pay interest on any payment determined to be delinquent at a rate of Prime plus 2% per annum, commencing on the date on which such delinquent payment was properly due and continuing until the Holder receives payment in full of such delinquent payment and all accrued interest thereon; and for the purposes of this subsection, Prime shall be determined as of the date on which such delinquent payment was properly due. - 5 - (c) All Royalty payments, including interest and penalties, if any, will be made subject to withholding or deduction in respect of the Royalty for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of the Canadian Government, the Government of Manitoba or any political subdivision thereof or any other governmental authority (foreign or domestic), or department, authority or agency therein or thereof having power and jurisdiction to tax and for which the Processor or Owner is obligated in law to withhold or deduct and remit to such taxing authority having such power and jurisdiction. 4. TERM This Agreement shall continue in perpetuity unless terminated in accordance with its terms. If any right, power or interest of either party under this Agreement would violate the rule against perpetuities, then such right, power or interest shall terminate at the expiration of 20 years after the death of the last survivor of all the lineal descendants of Her Majesty, Queen Elizabeth II of England, living on the date of this Agreement. 5. COMMINGLING The Owner shall be entitled to commingle Minerals from the various Properties and from any other properties during production, milling (concentrating), refining, minting or further processing of Minerals produced from the Properties. 6. HEDGING TRANSACTIONS All profits and losses resulting from the Owner engaging in any commodity futures trading, option trading, metals trading, gold loans or any combination thereof, and any other hedging transactions (collectively "hedging transactions") are specifically excluded from calculations of Royalty payments pursuant to this agreement. All hedging transactions by the Owner shall be for the Owner's sole account. 7. STOCKPILING The Owner or operator shall be entitled to temporarily stockpile, store or place ores or mined rock containing Minerals produced from the Property in any locations owned by the Owner or the Processor on or off the Property site provided the same are appropriately secured from theft or tampering. 8. BOOKS; RECORDS; INSPECTIONS The Owner shall keep true and accurate books and records of all of its operations and activities with respect to the Property, and the Minerals, prepared on an accrual basis in accordance with Canadian generally accepted accounting principles, consistently applied. The Holder shall be entitled to perform audits or other examinations of the Owner's books and records relevant to the calculation and payment of the Royalty pursuant to this Agreement once per calendar year to confirm compliance with the terms of this Agreement, including without limitation, calculations of Net Smelter Returns. In particular, the Holder shall have the right to audit all invoices and other records relating to the transportation of Minerals from the Property to the mill - 6 - at which ore and Minerals from the Property may be milled (concentrated) and relating to the transportation of Minerals in the form of concentrates, dore, slag or other waste products from the mill at which ore and Minerals from the Property may be milled, to the Processor. The Holder shall promptly commence, and diligently complete, any audit or other examination permitted hereunder. The reasonable expenses of any audit or other examination permitted hereunder shall be paid by the Holder, unless the results of such audit or other examination permitted hereunder disclose a deficiency in respect of the Royalty payments paid to the Holder hereunder in an amount greater than 5% of the amount of the Royalty properly payable, in which event the costs of such audit or other examination shall be paid by the Owner. 9. CONFIDENTIALITY (a) Neither party shall, without the express written consent of the other (which consent shall not be unreasonably withheld), disclose any non-public information in respect of the terms of this Agreement or otherwise received under or in conjunction with this Agreement and, in the case of the Holder, concerning Minerals and operations on the Property, other than to its employees, agents and consultants for purposes related to the administration of this Agreement and no party shall issue any press releases concerning the terms of this Agreement or, in the case of the Holder, in respect of the operations of the Owner, without the consent of the other party after such party having first reviewed the terms of such press release. Each party agrees to reveal such information only to its employees, agents and consultants who need to know, who are informed of the confidential nature of the information and who agree to be bound by the terms of this Section 9. In addition neither party shall use any such information for its own use or benefit except for the purpose of enforcing its rights under this Agreement. (b) The parties may disclose data or information obtained under or in conjunction with this Agreement and otherwise prohibited by this Section 9 after providing the other party with a copy of the proposed disclosure and if the other party does not object, acting reasonably, to such disclosure by notice in writing to such party within 48 hours after receipt of such copy: (i) to any third person to whom such party in good faith anticipates selling or assigning its interest hereunder; or (ii) to a prospective lender or other financier; provided that in each case the other parties shall first have been provided with a confidentiality agreement executed by such third party purchaser or lender which agreement shall include the confidentiality provisions of this section. Each party hereby agrees to indemnify and save the other harmless from any damages resulting from any breach of this Section 9 by such party, its employees, agents and consultants or any claim made by third parties receiving information provided hereunder. (c) The parties may disclose data or information obtained under this Agreement if required to do so for compliance with applicable laws, rules, regulations or orders of a governmental agency or stock exchange having jurisdiction over such parties, provided that such party shall disclose only such data or information as, in the opinion of its counsel, is required to be disclosed and provided further that where - 7 - possible (time permitting after reasonable efforts on the part of such disclosing party) the other party shall be given the right to review and object to the data or information to be disclosed prior to any public release subject to any reasonable changes proposed by such other parties. 10. CONDUCT OF OPERATIONS (a) All decisions concerning methods, the extent, times, procedures and techniques of any (i) exploration, development and mining related to the Property, (ii) leaching, milling, processing, extraction treatment and refining, if any, including, without limitation, the choice of refiner and (iii) materials to be introduced on or to the Property or produced therefrom and all decisions concerning the sale or other disposition of ore and Minerals from the Property (including, without limitation, decisions as to buyers, times of sale, whether to store or stockpile ore and Minerals derived from the Property for a reasonable length of time without selling, refining or otherwise processing the same) shall be made by the Owner, in its sole discretion. (b) The Owner shall not be responsible for nor obliged to make any Royalty payments for Minerals or Mineral value lost in any mining or processing of the Minerals conducted pursuant to good mining practices. The Owner shall not be required to mine or to preserve or protect the Minerals which under good mining industry practices cannot be mined or shipped at a reasonable profit by the Owner at the time mined. 11. NO IMPLIED COVENANTS The parties agree that there are no implied covenants or duties relating to or affecting any of their respective rights or obligations hereunder, and that the only covenants or duties which affect such rights and obligations shall be those expressly set forth and provided for in this Agreement. 12. NO RESTRICTIONS ON ASSIGNMENT The Holder shall have the right, at any time and from time to time, to assign, transfer, convey, mortgage, pledge or charge any portion or all of the Royalty and its interest in and to this Royalty Agreement, in its sole discretion, free from any restrictions from the Owner. 13. REGISTRATION The Holder may or may cause, at its own expense, the due registration of this Agreement or notice of this Agreement against the title to the Property. The Owner shall co-operate with such registration and provide its written consent or signature to any documents or things reasonably necessary to accomplish such registration in order to ensure that any successor or assignee or other acquiror of the Property, or any interest therein, shall have public notice of the terms of this Agreement. - 8 - 14. DISPUTE RESOLUTION Any matter in this Agreement in dispute between the Parties which has not been resolved by the Parties within fifteen (15) days of the delivery of notice by either Party of such dispute may be referred by either Party to binding arbitration. Such referral to binding arbitration shall be to a qualified single arbitrator pursuant to the Arbitrations Act, 1991 (Ontario) and its successor legislation, which act shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules for arbitration set out in Schedule "II". 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. 15. GENERAL PROVISIONS (a) FURTHER ASSURANCES: Each party shall execute all such further instruments and documents and do all such further actions as may be necessary to effectuate the documents and transactions contemplated in this Agreement, in each case at the cost and expense of the party requesting such further instrument, document or action, unless expressly indicated otherwise. (b) BINDING EFFECT: All covenants, conditions, and terms of this Agreement shall be binding upon and enure to the benefit of the parties hereto and their respective successors and assigns. In the event that the Owner sells, transfers, charges or assigns the Property or any part thereof, the Owner shall be entitled to charge, novate or assign this Agreement, as the case may be, to such purchaser, transferee, chargee or assignee, provided that the Owner shall ensure that contemporaneous with the consummation of any such sale, transfer, charge or assignment, the Owner shall procure from the transferee or chargee pursuant to such transaction, a written agreement with and in favour of the Holder, in form and content satisfactory to the Holder acting reasonably, wherein such transferee or chargee covenants and agrees to and in favour of the Holder to be bound by the terms and conditions of this Agreement as if it were an original signatory hereto (or in the case of a chargee, to obtain such a written agreement from any transferee of such chargee) and the Holder shall execute all such documentation as is required in respect thereof and the Owner shall thereafter be released from all obligations pursuant to the terms of this Agreement in respect of that part of the Property so sold, transferred or assigned. (c) RELATIONSHIP OF THE PARTIES: Nothing herein shall be construed to create, expressly or by implication, a joint venture, mining partnership, commercial partnership, or other partnership relationship between the Owner and the Holder. - 9 - (d) GOVERNING LAW: This Agreement shall be governed by and construed under the laws of the Province of Manitoba and the laws of Canada applicable therein. (e) TIME OF ESSENCE: Time is of the essence in this Agreement. (f) SEVERABILITY: If any provision of this Agreement is wholly or partially invalid, this Agreement shall be interpreted as if the invalid provision had not been a part hereof so that the invalidity shall not affect the validity of the remainder of the Agreement which shall be construed as if the Agreement had been executed without the invalid portion. It is hereby declared to be the intention of the parties that this Agreement would have been executed without reference to any portion which may, for any reason, hereafter be declared or held invalid. (g) ACCOUNTING PRINCIPLES: All calculations hereunder shall be made in accordance with Canadian generally accepted accounting principles as the same may be in effect from time to time. (h) 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 by fax, addressed to such other Party or delivered to such other Party as follows: (i) to Halo at: 1305-1090 West Georgia Street Vancouver BC V6E 3V7 Attention: Marc Cernovitch Fax No.: (604)484-0069 with a copy to: Cassels Brock & Blackwell Scotia Plaza, Suite 2100 40 King Street West Toronto ON M5H 3C2 Attention: Brian P. Dominique Fax No.: (416) 640-3051 (ii) to Dunlop at: 201-2639 Portage Avenue Winnipeg, MB R3J 0P7 Attention: W. Bruce Dunlop Fax No.: (204) 623-5666 - 10 - or at such other addresses and to such other Person that may be given by any of them to the others in writing from time to time on 10 days' prior written notice and such notices, requests, demands or other communications shall be deemed to have been received when delivered. (i) SCHEDULES: The schedules which are attached to this Agreement are incorporated into this Agreement by reference and are deemed to form part hereof. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. HALO RESOURCES LTD. Per -------------------------------- W. BRUCE DUNLOP LIMITED NPL Per -------------------------------- SCHEDULE "I" HALO CLAIMS WITHIN THE SHERRIDON COMMUNITY BOUNDARY - -------------------------------------------------------------------------------- Sub- Name Number Area Recorded Expires Map Holder Project (ha) Ref. (*) - -------------------------------------------------------------------------------- Sherridon Halo 15 MB 6198 256 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 16 MB 6199 250 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 17 MB 6023 233 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 18 MB 6024 96 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 19 MB 6048 64 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 20 MB 6049 72 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 21 MB 6050 70 14-Oct-05 12-Dec-07 63N3 HALO * Full name is Halo Resources Ltd. SCHEDULE "II" RULES OF ARBITRATION The following rules and procedures shall apply with respect to any matter to be arbitrated by the parties under the terms of the Agreement. 1. Initiation of Arbitration Proceedings (a) If any party to this Agreement wishes to have any matter under this Agreement arbitrated in accordance with the provisions of this Agreement, it shall give notice to the other party hereto specifying particulars of the matter or matters in dispute and proposing the name of the person it wishes to be the single arbitrator. Within 5 days after receipt of such notice, the other party to this Agreement shall give return notice to the first party advising whether such party accepts the arbitrator proposed by the first party and if such party does not accept the arbitrator proposed by the first party, proposing the name of the person it wishes to be the single arbitrator. If such return notice is not given by the other party within such 5 day period, it shall be deemed to have accepted the arbitrator proposed by the first party. If such return notice is given within such 5 day period and does not accept the proposed arbitrator of the first party and proposes another person to be arbitrator, the first party shall, within 5 days after receipt of such return notice, give notice to the other party advising whether such first party accepts the arbitrator proposed by the other party. If the parties do not agree upon a single arbitrator within such second 5 day period, the single arbitrator shall be chosen in accordance with the Arbitrations Act, 1991 (Ontario). (b) The individual selected as Arbitrator shall be qualified by education and experience to decide the matter in dispute. The Arbitrator shall be at arm's length from both parties and shall not be a member of the audit or legal firm or firms who advise either party, nor shall the Arbitrator be a person who is otherwise regularly retained by either of the parties. 2. Submission of Written Statements (a) Within 5 days of the appointment of the Arbitrator, the party initiating the arbitration (the "Claimant") shall send the other party (the "Respondent") a statement of claim setting out in sufficient detail the facts and any contentions of law on which it relies, and the relief that it claims. (b) Within 10 days of the receipt of the statement of claim, the Respondent shall send the Claimant a statement of defence stating in sufficient detail which of the facts and contentions of law in the statement of claim it admits or denies, on what grounds, and on what other facts and contentions of law he relies. (c) Within 5 days of receipt of the statement of defence, the Claimant may send the Respondent a statement of reply. (d) All statements of claim, defence and reply shall be accompanied by copies (or, if they are especially voluminous, lists) of all - 2 - essential documents on which the party concerned relies and which have not previously been submitted by any party, and (where practicable) by any relevant samples. (e) After submission of all the statements, the Arbitrator will give directions for the further conduct of the arbitration. 3. Meetings and Hearings (a) The arbitration shall take place in the City of Winnipeg, or in such other place as the Claimant and the Respondent shall agree upon in writing. The arbitration shall be conducted in English. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive working days until it is concluded. (b) All meetings and hearings will be in private unless the parties otherwise agree. (c) Any party may be represented at any meetings or hearings by legal counsel. (d) Each party may examine, cross-examine and re-examine all witnesses at the arbitration. 4. The Decision (a) The Arbitrator will make a decision in writing and, unless the parties otherwise agree, will set out reasons for decision in the decision. (b) The Arbitrator will send the decision to the parties as soon as practicable after the conclusion of the final hearing, but in any event no later than 10 days thereafter, unless that time period is extended for a fixed period by the Arbitrator on written notice to each party because of illness or other cause beyond the Arbitrator's control. (c) The decision shall determine and award costs to the successful party in the arbitration. (d) The decision shall be final and binding on the parties and shall not be subject to any appeal or review procedure provided that the Arbitrator has followed the rules provided herein in good faith and has proceeded in accordance with the principles of natural justice. In the event either party initiates any court proceeding in respect of the decision of the Arbitration or the matter arbitrated, such party shall, if unsuccessful in the court proceeding, shall pay the other parties costs on a solicitor/client basis plus all other reasonable expenses incurred by such other party from the date of delivery of the notice commencing arbitration to the date of determination of such court proceeding. 5. Jurisdiction and Powers of the Arbitrator (a) By submitting to arbitration under these Rules, the parties shall be taken to have conferred on the Arbitrator the following jurisdiction and powers, to be exercised at the Arbitrator's discretion subject only to these - 3 - Rules and the relevant law with the object of ensuring the just, expeditious, economical and final determination of the dispute referred to arbitration. (b) Without limiting the jurisdiction of the Arbitrator at law, the parties agree that the Arbitrator shall have jurisdiction to: (i) determine any question of law arising in the arbitration; (ii) determine any question as to the Arbitrator's jurisdiction; (iii) determine any question of good faith, dishonesty or fraud arising in the dispute; (iv) order any party to furnish further details of that party's case, in fact or in law; (v) proceed in the arbitration notwithstanding the failure or refusal of any party to comply with these Rules or with the Arbitrator's orders or directions, or to attend any meeting or hearing, but only after giving that party written notice that the Arbitrator intends to do so; (vi) receive and take into account such written or oral evidence tendered by the parties as the Arbitrator determines is relevant, whether or not strictly admissible in law; (vii) make one or more interim awards; (viii) hold meetings and hearings, and make a decision (including a final decision) in Winnipeg, Manitoba or elsewhere with the concurrence of the parties thereto; (ix) order the parties to produce to the Arbitrator, and to each other for inspection, and to supply copies of, any documents or other evidence or classes of documents in their possession or power which the Arbitrator determines to be relevant; and (x) make interim orders to secure all or part of any amount in dispute in the arbitration. SCHEDULE "C" RELEASE TO: THE GOVERNMENT OF THE PROVINCE OF MANITOBA - INDUSTRY, ECONOMIC DEVELOPMENT AND MINES, MINES BRANCH RE: CURRENT AND FUTURE STAKED MINING CLAIMS IN THE SHERRIDON AREA OF THE PROVINCE OF MANITOBA For good and valuable consideration, the undersigned Bruce Dunlop and Peter Dunlop, for and on behalf of themselves and with effect against and binding upon their respective estates, executors, administrators, and heirs and all other persons or legal entities associated with or under the control of Bruce Dunlop or Peter Dunlop or in which Bruce Dunlop or Peter Dunlop have a direct or indirect interest (including, without limitation, any corporation, joint venture or partnership) (collectively, the "Releasors") do hereby unconditionally and irrevocably remise, release, disclaim and quit claim any and all claims, and all rights to claim, any right, title or interest in and to any current or future mining claim staked and recorded by Halo Resources Ltd., or in which Halo Resources Ltd. acquires any direct or indirect right, title or interest, in and around the Sherridon Area of the Province of Manitoba (including, without limitation, those claims set out on Schedule D attached hereto) (all such current or future mining claims collectively, the "Mining Claims") with the intention that from and after this date the Releasors are and shall be estopped from making any such claims as described herein). This Release shall be governed by the laws of the Province of Manitoba. DATED AT WINNIPEG, MANITOBA, THIS DAY OF , 2006 WITNESS: ) ) ) - --------------------------- ) -------------------------------- ) BRUCE DUNLOP ) ) - --------------------------- ) -------------------------------- ) PETER DUNLOP ) SCHEDULE "C" RELEASE TO: HALO RESOURCES LTD. RE: CURRENT AND FUTURE STAKED MINING CLAIMS IN THE SHERRIDON AREA OF THE PROVINCE OF MANITOBA In consideration of the execution and delivery of an Option Agreement between Bruce Dunlop and Halo Resources Ltd. of even date herewith, each of the undersigned Bruce Dunlop and Peter Dunlop, for and on behalf of themselves and with effect against and binding upon their respective estates, executors, administrators, and heirs and all other persons or legal entities associated with or under the control of Bruce Dunlop or Peter Dunlop or in which Bruce Dunlop or Peter Dunlop have a direct or indirect interest (including, without limitation, any corporation, joint venture or partnership) (collectively, the "Releasors") do hereby unconditionally and irrevocably remise, release, disclaim, and quit claim to and unto Halo Resources Ltd., any and all claims, and all rights to claim, any right, title or interest in and to any current or future mining claim staked and recorded by Halo Resources Ltd., or in which Halo Resources Ltd. acquires any direct or indirect right, title or interest, in and around the Sherridon Area of the Province of Manitoba (including, without limitation, those claims set out on Schedule D attached hereto) (all such current or future mining claims collectively, the "Mining Claims") with the intention that from and after this date the Releasors are and shall be estopped from making any such claims as described herein. This Release shall be binding upon and may be enforced by the successors and assigns, including the successors in title to any of the Mining Claims, of Halo Resources Ltd. This Release shall be governed by the laws of the Province of Manitoba. DATED AT WINNIPEG, MANITOBA, THIS DAY OF , 2006 WITNESS: ) ) ) ) - --------------------------- ) -------------------------------- ) BRUCE DUNLOP ) ) - --------------------------- ) -------------------------------- ) PETER DUNLOP ) SCHEDULE "D" ALL MINING CLAIMS IN THE SHERRIDON, MANITOBA AREA IN WHICH HALO CURRENTLY HAS AN INTEREST - -------------------------------------------------------------------------------- Sub- Name Number Area Recorded Expires Map Holder Project (ha) Ref. (*) - -------------------------------------------------------------------------------- Sherridon Halo 1 MB 6184 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 2 MB 6185 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 3 MB 6186 236 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 4 MB 6187 111 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 5 MB 6188 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 6 MB 6189 252 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 7 MB 6190 247 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 8 MB 6191 253 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 9 MB 6192 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 10 MB 6193 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 11 MB 6194 247 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 12 MB 6195 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 13 MB 6196 148 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 14 MB 6197 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 15 MB 6198 256 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 16 MB 6199 250 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 17 MB 6023 233 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 18 MB 6024 96 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 19 MB 6048 64 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 20 MB 6049 72 14-Oct-05 12-Dec-07 63N3 Halo Sherridon Halo 21 MB 6050 70 14-Oct-05 12-Dec-07 63N3 Halo East East 1 MB6251 90 30-Nov-05 29-Jan-08 63N3 Halo East East 2 MB6252 100 30-Nov-05 29-Jan-08 63N3 Halo East East 3 MB6253 64 30-Nov-05 29-Jan-08 63N3 Halo East East 4 MB6254 90 30-Nov-05 29-Jan-08 63N3 Halo East East 5 MB6255 190 30-Nov-05 29-Jan-08 63N3 Halo East East 6 MB6256 224 30-Nov-05 29-Jan-08 63N3 Halo East East 7 MB6257 216 30-Nov-05 29-Jan-08 63N3 Halo East East 8 MB6258 76 30-Nov-05 29-Jan-08 63N3 Halo East East 9 MB6259 96 30-Nov-05 29-Jan-08 63N3 Halo East East 10 MB6260 212 30-Nov-05 29-Jan-08 63N3 Halo East East 11 MB6261 256 30-Nov-05 29-Jan-08 63N3 Halo East East 12 MB6262 256 30-Nov-05 29-Jan-08 63N3 Halo East East 13 MB6263 256 30-Nov-05 29-Jan-08 63N3 Halo East East 14 MB6264 256 30-Nov-05 29-Jan-08 63N3 Halo East East 15 MB6265 256 30-Nov-05 29-Jan-08 63N3 Halo East East 16 MB6266 120 30-Nov-05 29-Jan-08 63N3 Halo Meat Lake Meat 1 MB6200 256 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 2 MB6267 256 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 3 MB6268 256 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 4 MB6269 220 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 5 MB6270 253 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 6 MB6271 256 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 7 MB6272 256 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 8 MB6273 40 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 9 MB6274 218 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 10 MB6275 200 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 11 MB6308 184 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 12 MB6309 160 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 13 MB6310 100 30-Nov-05 29-Jan-08 63N2 Halo Meat Lake Meat 14 MB6311 160 30-Nov-05 29-Jan-08 63N2 Halo - -------------------------------------------------------------------------------- * Full name is Halo Resources Ltd. SCHEDULE "E" HALO CLAIMS WITHIN THE SHERRIDON COMMUNITY BOUNDARY - -------------------------------------------------------------------------------- Sub- Name Number Area Recorded Expires Map Holder Project (ha) Ref. (*) - -------------------------------------------------------------------------------- Sherridon Halo 15 MB 6198 256 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 16 MB 6199 250 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 17 MB 6023 233 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 18 MB 6024 96 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 19 MB 6048 64 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 20 MB 6049 72 14-Oct-05 12-Dec-07 63N3 HALO Sherridon Halo 21 MB 6050 70 14-Oct-05 12-Dec-07 63N3 HALO * Full name is Halo Resources Ltd. SCHEDULE "F" RULES OF ARBITRATION The following rules and procedures shall apply with respect to any matter to be arbitrated by the parties under the terms of the Agreement. 1. Initiation of Arbitration Proceedings (a) If any party to this Agreement wishes to have any matter under this Agreement arbitrated in accordance with the provisions of this Agreement, it shall give notice to the other party hereto specifying particulars of the matter or matters in dispute and proposing the name of the person it wishes to be the single arbitrator. Within 5 days after receipt of such notice, the other party to this Agreement shall give return notice to the first party advising whether such party accepts the arbitrator proposed by the first party and if such party does not accept the arbitrator proposed by the first party, proposing the name of the person it wishes to be the single arbitrator. If such return notice is not given by the other party within such 5 day period, it shall be deemed to have accepted the arbitrator proposed by the first party. If such return notice is given within such 5 day period and does not accept the proposed arbitrator of the first party and proposes another person to be arbitrator, the first party shall, within 5 days after receipt of such return notice, give notice to the other party advising whether such first party accepts the arbitrator proposed by the other party. If the parties do not agree upon a single arbitrator within such second 5 day period, the single arbitrator shall be chosen in accordance with the Arbitrations Act, 1991 (Ontario). (b) The individual selected as Arbitrator shall be qualified by education and experience to decide the matter in dispute. The Arbitrator shall be at arm's length from both parties and shall not be a member of the audit or legal firm or firms who advise either party, nor shall the Arbitrator be a person who is otherwise regularly retained by either of the parties. 2. Submission of Written Statements (a) Within 5 days of the appointment of the Arbitrator, the party initiating the arbitration (the "Claimant") shall send the other party (the "Respondent") a statement of claim setting out in sufficient detail the facts and any contentions of law on which it relies, and the relief that it claims. (b) Within 10 days of the receipt of the statement of claim, the Respondent shall send the Claimant a statement of defence stating in sufficient detail which of the facts and contentions of law in the statement of claim it admits or denies, on what grounds, and on what other facts and contentions of law he relies. (c) Within 5 days of receipt of the statement of defence, the Claimant may send the Respondent a statement of reply. (d) All statements of claim, defence and reply shall be accompanied by copies (or, if they are especially voluminous, lists) of all essential documents on which the party concerned relies and which have not - 2 - previously been submitted by any party, and (where practicable) by any relevant samples. (e) After submission of all the statements, the Arbitrator will give directions for the further conduct of the arbitration. 3. Meetings and Hearings (a) The arbitration shall take place in the City of Winnipeg, or in such other place as the Claimant and the Respondent shall agree upon in writing. The arbitration shall be conducted in English. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive working days until it is concluded. (b) All meetings and hearings will be in private unless the parties otherwise agree. (c) Any party may be represented at any meetings or hearings by legal counsel. (d) Each party may examine, cross-examine and re-examine all witnesses at the arbitration. 4. The Decision (a) The Arbitrator will make a decision in writing and, unless the parties otherwise agree, will set out reasons for decision in the decision. (b) The Arbitrator will send the decision to the parties as soon as practicable after the conclusion of the final hearing, but in any event no later than 10 days thereafter, unless that time period is extended for a fixed period by the Arbitrator on written notice to each party because of illness or other cause beyond the Arbitrator's control. (c) The decision shall determine and award costs to the successful party in the arbitration. (d) The decision shall be final and binding on the parties and shall not be subject to any appeal or review procedure provided that the Arbitrator has followed the rules provided herein in good faith and has proceeded in accordance with the principles of natural justice. In the event either party initiates any court proceeding in respect of the decision of the Arbitration or the matter arbitrated, such party shall, if unsuccessful in the court proceeding, shall pay the other parties costs on a solicitor/client basis plus all other reasonable expenses incurred by such other party from the date of delivery of the notice commencing arbitration to the date of determination of such court proceeding. 5. Jurisdiction and Powers of the Arbitrator (a) By submitting to arbitration under these Rules, the parties shall be taken to have conferred on the Arbitrator the following jurisdiction and powers, to be exercised at the Arbitrator's discretion subject only to these - 3 - Rules and the relevant law with the object of ensuring the just, expeditious, economical and final determination of the dispute referred to arbitration. (b) Without limiting the jurisdiction of the Arbitrator at law, the parties agree that the Arbitrator shall have jurisdiction to: (i) determine any question of law arising in the arbitration; (ii) determine any question as to the Arbitrator's jurisdiction; (iii) determine any question of good faith, dishonesty or fraud arising in the dispute; (iv) order any party to furnish further details of that party's case, in fact or in law; (v) proceed in the arbitration notwithstanding the failure or refusal of any party to comply with these Rules or with the Arbitrator's orders or directions, or to attend any meeting or hearing, but only after giving that party written notice that the Arbitrator intends to do so; (vi) receive and take into account such written or oral evidence tendered by the parties as the Arbitrator determines is relevant, whether or not strictly admissible in law; (vii) make one or more interim awards; (viii) hold meetings and hearings, and make a decision (including a final decision) in Winnipeg, Manitoba or elsewhere with the concurrence of the parties thereto; (ix) order the parties to produce to the Arbitrator, and to each other for inspection, and to supply copies of, any documents or other evidence or classes of documents in their possession or power which the Arbitrator determines to be relevant; and (x) make interim orders to secure all or part of any amount in dispute in the arbitration. EX-10 4 exh4_9.txt EXH 4.9 A/G BETWEEN HALO AND HUDON BAY EXHIBIT 4.9 OPTION AGREEMENTS BETWEEN HALO RESOURCES LTD. AND HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED. DATED MARCH 19, 2006. PARK AGREEMENT THIS AGREEMENT made as of the day of , 2006. BETWEEN: HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED, a corporation incorporated under the laws of Canada, (hereinafter referred to as the "Optionor") OF THE FIRST PART, - and - HALO RESOURCES LTD., a corporation continued under the laws of British Columbia, (hereinafter referred to as the "Optionee") OF THE SECOND PART. WHEREAS the Optionor is the sole recorded and beneficial owner of a 100% undivided interest in the Property (as hereinafter defined); AND WHEREAS the Optionor desires to grant to the Optionee and the Optionee desires to receive from the Optionor an option to acquire a 100% interest in the Property, subject to Sections 13 and 14 herein; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the terms and conditions hereinafter contained and the sum of $2.00 now paid by the Optionee to the Optionor (receipt of which is hereby acknowledged) the parties hereto agree as follows: 1. DEFINITIONS In this Agreement and in all schedules hereto the following words and terms where capitalized shall have the following meanings unless the context clearly indicates a contrary meaning: (a) "Agreement" means this agreement between the Optionor and the Optionee, including all Schedules hereto and any documents incorporated by reference and other amendments as permitted hereunder, and the expressions this "Agreement", "herein", "hereto" and other similar expressions refer to all of this agreement, including the Schedules, any documents incorporated by reference and other amendments permitted hereunder, and not to any particular Article, Section or Subsection; - 2 - (b) "Anniversary Date" means an anniversary date of this Agreement; (c) "Area of Interest" means the area within one (1) kilometre from the existing boundaries of the Property as of the date of this Agreement but excluding any claims held by any other party as of the date of this Agreement, which excluded claims are more particularly described in Schedule "A" attached hereto; (d) "Back-in Right" means the right of the Optionor to acquire the Back-in Interest pursuant to Section 14; (e) "Back-in Interest" has the meaning given to it in Section 14; (f) "Back-in Interest Expenditures" means the expenditures required to be made by the Optionor upon exercise of the Back-in Right as set out in Section 14 hereof; (g) "Commencement of Commercial Production" means the date upon which Product from the Property, for other than testing purposes, has been processed for a period of thirty (30) consecutive production days at a rate equal to not less than seventy-five (75%) percent of the rate projected in the feasibility report, if any, prepared by or for the Optionee in respect of the Property; (h) "Environmental Laws" means all laws, statutes, regulations, ordinances, rules, requirements, policies, guidelines, by-laws, codes, orders, permits, directives, notices and approvals of all federal, territorial, provincial, municipal or local governmental or administrative authorities and related to environmental or occupational or public health or safety matters, or to the generation, handling, treatment, storage, transportation, disposal or clean up of pollutants, contaminants, hazardous or toxic substances, dangerous goods, ozone-depleting substances or other harmful substances or materials or to the reclamation, site rehabilitation, restoration, remediation, or other mine and related facilities closure requirements; (i) "Expenditures" means: A. all cash payments made by the Optionee in respect of the Property towards fulfillment of the expenditure requirements for this Agreement which meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); plus - 3 - B. up to ten (10%) percent per annum of the amount of such qualifying expenditures referred to in Section 1(j)A. above, which may be applied towards overhead and expenditures that do not otherwise meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); (j) "Feasibility Report" means a report prepared to analyze whether or not to proceed with mine development and exploration with respect to the Property in a form and of a scope that is generally acceptable to reputable financial institutions that provide financing to the mining industry; (k) "Joint Venture" means the entity formed upon the execution of the Joint Venture Agreement; (l) "Joint Venture Agreement" means an agreement relating to the development and operation of a joint venture formed pursuant to Section 14 (d); (m) "Net Sales Revenue" shall mean the actual proceeds received from any independent custom smelter, mill, mint or other purchaser for the sale of any Product extracted and derived from the Property, after deducting all charges and penalties for smelting and refining and the cost of transportation (to the smelter and thereafter to the mint), insurance premiums, sampling and assaying charges incurred after the Product has left the Property, and all appropriate mint charges; (n) "Net Smelter Return Royalty" has the meaning described in Section 13 hereof; (o) "Option" means the option described in Section 3 hereof; (p) "Option Exercise Date" has the meaning described in Section 6 hereof; (q) "Option Period" means the four (4) year time period set out in Section 3 hereof; (r) "Option Shares" means the shares described in Section 4 (f) hereof; (s) "Prime" means the prime interest rate charged by the Bank of Nova Scotia from time to time; - 4 - (t) "Product" means all metals, ores, concentrates, minerals and mineral resources extracted or produced from the Property; (u) "Property" means those claims more particularly described in Schedule "A" attached hereto, all of which are situated in the Sherridon area of Manitoba, or such of them as at any relevant time have not been released by the Optionee under this Agreement together with any claims added to the definition by virtue of Section 10 hereof; (v) "Quarter" means each period of 3 calendar months starting on a Quarterly Date but so that the first Quarter under this Schedule shall start on the date of the Commencement of Commercial Production and end on the date immediately preceding the second Quarterly Date to occur after the date of the Commencement of Commercial Production; (w) "Quarterly Date" means 1 January, 1 April, 1 June and 1 October of each calendar year; and (x) "Vesting of the Back-in Right" has the meaning described in Section 14. All monies referred to in this Agreement, unless otherwise noted, are expressed in Canadian dollars. 2. REPRESENTATIONS (a) The Optionor represents and warrants to the Optionee that, as of the date hereof: (i) it is the sole recorded and beneficial owner of the Property and, save for any rights granted to the Optionee, is in exclusive possession thereof; (ii) it is duly incorporated and validly existing under the laws of Canada; (iii) the Property is free and clear of all liens, charges, encumbrances, royalties or other third party interests of any kind whatsoever except for a charge noted by a registration in favour of BNY Trust Company of Canada pursuant to a debenture dated December 10, 2004, given by the Optionor as security under a Trust Indenture dated December 21, 2004 which charge and registration will be discharged by the Option or forthwith upon the Optionee exercising the Option in accordance with the terms of this Agreement. - 5 - (iv) to the best of its knowledge, there are no pending or threatened actions, suits, claims or proceedings affecting the Property; (v) except as disclosed in writing to the Optionee, it has not entered into any agreements in respect of the Property save for any agreements entered into with the Optionee; (vi) all taxes, rates and assessments owing on the Property have been paid and discharged in full; (vii) the Optionor is not a party to any judicial or administrative proceeding which could have an adverse effect on the Optionee's rights under this Agreement; (viii) the Property, as described in this Agreement, is correct as to claim number and all of the claims comprising the Property has been validly and properly staked, tagged and recorded in accordance with applicable law; and (ix) except as disclosed in writing to the Optionee, there are no commitments of the Optionor to third parties relating to the Property which do or could have any direct or indirect effect on the rights granted to the Optionee hereunder. (b) The Optionee represents and warrants to the Optionor that, as of the date hereof: (i) it is duly continued and existing under the laws of the Province of British Columbia; (ii) the execution of this Agreement and the compliance with its provisions by it do not breach or contravene any provision of its constating documents and by-laws or any of its licenses, permits, agreements or privileges pursuant to which consent is necessary or which has not been obtained; (iii) it does not have any undisclosed relationship or agreement with any other group or company that may be interested in acquiring the Property; and (iv) it is not, to its knowledge, a party to any actual judicial or administrative procedure which is materially adverse to this Agreement. - 6 - 3. GRANT OF OPTION Subject to Sections 13 and 14 hereof, the Optionor grants to the Optionee an exclusive and irrevocable option (the "Option") to earn a one hundred (100%) percent undivided interest in the Property together with all mining rights appertaining thereto exercisable in the manner referred to in Section 6, at any time for a period of four (4) years commencing from the date hereof until 5:00 p.m. central time on the fourth Anniversary Date of this Agreement or such earlier date as this Agreement is terminated in accordance with its terms (the "Option Period"), for the consideration and upon the terms and conditions hereinafter set forth. 4. CONSIDERATION In consideration for the Optionor granting the Option to the Optionee, the Optionee shall make the following non-cumulative payments by way of cash as follows: (a) $10,000 upon the signing of this Agreement; (b) $20,000 payable on or before the first Anniversary Date of this Agreement; (c) $30,000 payable on or before the second Anniversary Date of this Agreement; (d) $40,000 payable on or before the third Anniversary Date of this Agreement; and (e) $200,000 payable on or before the fourth Anniversary Date of this Agreement. (f) If the Optionee and the Optionor agree in writing, up to twenty-five (25%) percent of the payments to be made under Section 4 (a) - (e) above may be paid to the Optionor by the issuance of common shares in the capital of the Optionee (the "Option Shares") to the Optionor in lieu of such payments. For the purposes of this paragraph, the Option Shares shall be deemed to have a value per share equal to the fifteen day average price of Option Shares at the end of trading for the fifteen trading days immediately prior to the date that the Optionee advises the Optionor that it will make the payment with Option Shares. The Optionee shall take all necessary corporate action to issue the Option Shares to the Optionor and to record the Option Shares on the books of the Optionee in the name of the Optionor. The issuance of the Option Shares to the Optionor hereunder shall be subject to compliance with applicable securities laws and the Optionee shall take all steps required to comply with applicable securities laws in - 7 - connection with the issuance of such Option Shares. The Optionee shall provide such documents, certificates, opinions of its counsel and other information as may reasonably be requested by the Optionor to satisfy itself as to the compliance of the issuance of the Option Shares with the terms of this Agreement and with applicable securities law. (g) All Option Shares issued or to be issued by the Optionee to the Optionor under and pursuant to this Agreement shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange. The issuance of any Option Shares shall be conditional upon (i) the Optionee 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 Option Shares to the Optionor. In the event that the Optionee is unable to obtain such consents within six months of application therefore, the Optionee's obligation to make payments shall be payment in cash only. 5. EXPENDITURES (a) As further consideration for the Optionor granting the Option to the Optionee, the Optionee shall incur non-cumulative Expenditures in the following amounts: (i) $10,000 prior to the first Anniversary Date; (ii) $50,000 prior to the second Anniversary Date; and (iii) $1,940,000 prior to the fourth Anniversary Date. (b) Except for the payment described in Section 4 (a) and any payments payable pursuant to Section 13 hereof, nothing in this Agreement shall be construed as obligating the Optionee to make any further payments or incur any further Expenditures, or to exercise the Option. 6. EXERCISE OF OPTION (a) Upon the Optionee making the cash payments as required by Section 4 and incurring total Expenditures of not less than two million ($2,000,000) dollars on or before the applicable dates as required by Section 5 (a) hereof, the Optionee may exercise the Option by written notice thereof to the Optionor and upon so doing, the Optionee shall have purchased, and the Optionor shall have sold, on the date the notice is received - 8 - by the Optionor (the "Option Exercise Date"), the Property and all of the Optionor's right, title and interest therein, subject only to the payment of the Net Smelter Return Royalty and the Back-in Right of the Optionor. (b) Upon exercise of the Option by the Optionee, the Optionor shall forthwith deliver to the Optionee transfers of the Property which, upon recording thereof, will be sufficient to register the Optionee as the sole recorded holder of the Property free of all liens, encumbrances, charges and claims of any nature or kind whatsoever. The Optionor shall execute and deliver to the Optionee all other documents, and shall do or cause to be made all such further actions in order to properly register the transfers and title in the name of the Optionee. Upon the receipt of the transfer documents described in this section, the Optionee shall forthwith record them at its own cost with the appropriate government office to effect the legal transfer of the Property to the Optionee, provided that the Optionee shall hold the Property subject to the terms of this Agreement and the Optionee shall record the Optionor's interest hereunder with the appropriate government office 7. TERMINATION OF OPTION (a) Upon making the payment described in Section 4 (a), the Optionee may thereafter terminate the Option at any time and return all of the mining claims forming the Property to the Optionor by giving the Optionor written notice thereof. (b) Subject to earlier termination pursuant to this Section 7 (a), the Option shall automatically terminate if the Optionee does not make a payment or does not incur Expenditures in the amount and within the time period required by Sections 4 and 5, respectively, hereof. Notwithstanding the termination of the Option under this Section 7 (b), the Optionee shall not be released from its obligation to make the payment under Section 4 (a). (c) Subject to earlier termination pursuant to Sections 7 (a) or 7 (b) hereof, the Option shall automatically terminate at 5:00 p.m. central time on the fourth Anniversary Date of this Agreement unless the Optionee has made the payments or incurred the Expenditures required by Sections 4 and 5, respective, hereof, and provided notice has been given to the Optionor in accordance with Section 6 hereof. (d) Upon termination in accordance with Sections 7 (a), 7 (b) or 7 (c) hereof, the Optionee shall not suffer or incur any cost, penalty, damage, claim or expense of any kind whatsoever or have no further liabilities or unreleased obligations of any - 9 - kind whatsoever hereunder, save that the Optionee shall ensure that the Property shall remain in good standing for at least one (1) year after such termination. (e) Upon the termination of this Agreement, the Optionee shall have the right for thirty (30) days beyond the date of such termination to enter on, in or under that part of the Property affected by the termination, to remove therefrom such equipment, tools, materials, structures, apparatus or supplies brought thereon by the Optionee or on its behalf, and to the extent that the Optionee does not remove them they shall become the Property of the Optionor. (f) Upon termination of the Option pursuant to Section 7 herein, the Optionee shall forthwith record with the Mining Recorder and any other applicable government offices, such documents of the Property as shall be sufficient and as may be required to designate the Optionor as the sole recorded holder of the Property, free of all liens, encumbrances, charges and valid claims created by the act or omission of the Optionee (including those arising under applicable Environmental Laws), and the Optionee shall bear any and all costs related thereto. (g) Any shares of the Optionee issued to the Optionor pursuant to Section 4 prior to the termination of the Option for any reason shall remain the property of the Optionor. 8. COVENANTS OF THE OPTIONOR The Optionor shall: (a) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof not being transferred to the Optionee pursuant to Section 6 free and clear of all liens, charges, encumbrances or liabilities, including those pursuant to applicable Environmental Laws, of any kind whatsoever; (b) promptly transmit to the Optionee any notices pertaining to taxes, assessments and other charges received by the Optionor; and (c) not make any agreement whereby any third party may acquire any portion of the Optionor's interest in the Property otherwise than in accordance with this Agreement. 9. COVENANTS OF OPTIONEE The Optionee shall: - 10 - (a) maintain the Property in good standing and submit assessment work with respect to the Expenditures set out in Section 5 hereof according to applicable laws and regulations; (b) maintain the Property in good standing by the payment of taxes, assessments and rentals and the performance of all other actions which may be reasonably necessary in that regard; (c) permit the Optionor or its authorized representatives, at their own risk, with five (5) days prior notice to the Optionee, access to the Property at all reasonable times, provided that the Optionor agrees to indemnify the Optionee against and to save it harmless from all costs, claims, liabilities and expenses that the Optionee may incur or suffer as a result of any property or other damage or injury (including injury causing death) to the Optionor or its authorized representatives while on the Property, except for any costs, claims, liabilities and expenses incurred as a result of any negligent act or omission of the Optionee or its employees and agents; (d) permit the Optionor, at its sole discretion, to participate in any management reviews of the exploration programs relating to the Property; (e) do all work on the Property in a good and workmanlike fashion in accordance with all applicable laws, regulations, orders and ordinances of any governmental authority; (f) indemnify and save the Optionor harmless in respect of any and all costs claims, liabilities and expenses that the Optionor may incur or suffer, including those pursuant to the Environmental Laws, arising out of the Optionee's activities on the Property and, without limiting the generality of the foregoing shall, during the Option Period carry third party liability insurance of not less than Five Million ($5,000,000) Dollars in respect of its operations on the Property for the benefit of the Optionee and the Optionor as their interests may appear; (g) not make any agreement whereby any third party may acquire any portion of its interest in the Property or under this Agreement otherwise than in accordance with the provisions of this Agreement; and (h) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof, not being free and clear of all liens, charges, encumbrances, obligations or liabilities, including those pursuant to applicable Environmental Laws. - 11 - 10. AREA OF INTEREST During the term of this Agreement, the Optionor and the Optionee shall both be entitled to stake claims or otherwise acquire property within the Area of Interest. If either of the Optionee or the Optionor acquires, directly or indirectly, any interest in any claims (including by way of staking, option or joint venture) within the Area of Interest, any such claims shall be included in the definition of "Property", subject to any previous retained interest agreements in such claims. The cost (including by way of staking, option or joint venture) thereof will be paid by the Optionee within thirty (30) days of the acquisition of the interest by the Optionee. 11. RIGHT TO ENTER IN, UNDER OR ON PROPERTY (a) The Optionee, its employees, agents and independent contractors shall have the exclusive right: (i) to enter in, under or on the Property; (ii) to bring upon the Property such vehicles, equipment, portable structures and other apparatus as the Optionee shall in its sole discretion deem advisable; (iii) to do such work and conduct and manage such programs on or under the Property as the Optionee shall in its sole discretion from time to time deem advisable; (iv) to remove from the Property such materials for analysis and testing as the Optionee shall in it sole discretion deem advisable; and (v) to have quiet and exclusive possession of the Property from the date hereof and thereafter during the currency of the Option Period. (b) The Optionee shall keep full and complete records of all exploration work, diamond drilling and development of the said Property, together with the results of assays made, and, subject always to the terms of this Agreement, all of such records shall, at a minimum advance notice of thirty (30) days, be available for inspection, prior to exercise of the Option by the Optionor or its agent who may make copies thereof at the Optionor's sole cost and take extracts therefrom. If the Option is terminated or otherwise not exercised by the Optionee, the Optionee shall on request by the Optionor, deliver to the Optionor a copy of any part or all of such records. - 12 - 12. OPTIONEE'S RIGHT TO RELEASE PROPERTY The Optionee shall, in its sole discretion, upon written notice to the Optionor, have the right to release from the provisions of this Agreement from time to time any or all of the mining claims forming the Property, provided that the Optionee shall ensure that any such mining claim or part thereof so released will remain in good standing for a period of at least one (1) year after the giving of the notice of release. If the Optionee gives notice of such release, it shall specify therein the mining claims or part thereof it is so releasing and shall forthwith execute and attend to the registration, at the Optionee's cost, of such transfers as may be required to transfer to the Optionor all right, title and interest of the Optionee in and to the mining claims or part thereof so released, free and clear of all liens, claims, and other encumbrances of any kind whatsoever, including those arising pursuant to applicable Environmental Laws, save those which are the result of any act or omission of the Optionor or any employee or agent thereof. 13. NET SMELTER RETURN ROYALTY (a) If the Option is exercised, the Optionor shall be entitled to receive the Net Smelter Return Royalty from the Optionee, payable from the date of the Commencement of Commercial Production, calculated and paid in accordance with Schedule "B" attached hereto, provided that if the Optionor exercises its Back-in Right in accordance with Section 14 hereof, the Optionor's right to receive the Net Smelter Return Royalty shall terminate. (b) The Net Smelter Return Royalty shall be payable by the Optionee in Canadian Dollars and shall be paid quarterly in arrears within sixty (60) days of the end of the quarter to which it relates. (c) To the extent permitted by the applicable law, the Net Smelter Return Royalty shall run with, attach to, and bind the land underlying the Property. Upon becoming entitled to the Net Smelter Return Royalty, and subject to the Optionor's exercise of the Back-in Right, nothing contained in this Agreement shall be construed as conferring on the Optionor any right to or interest in the Property, except the right to receive the Net Smelter Return Royalty as and when due. (d) All payments of the Net Smelter Return Royalty to the Optionor shall be deemed final and in full satisfaction of all obligations of the Optionee in respect thereof if such payments or the calculation thereof are not disputed by the Optionor within sixty (60) days after receipt of the Net Smelter Return Royalty payment and statement. - 13 - (e) Unless the Optionor has exercised its Back-in Right, any decision regarding the Commencement of Commercial Production shall be at the sole discretion of the Optionee, and the Optionee shall be under no obligation, and nothing in this Agreement shall be construed as creating an obligation upon the Optionee, to place the Property into production and, in the event the Property is placed into production and operated as a mine, the Optionee shall have the unfettered right to suspend or curtail any such operation as it in its sole discretion may determine. 14. BACK-IN RIGHT (a) For a period of sixty (60) days following the date of the Optionor receiving all of the exploration results and confirmation of Expenditures from the Optionee, the Optionor shall, at its discretion, have the right to elect by notice in writing delivered to the Optionee: (i) to hold the two (2%) percent Net Smelter Return Royalty as set out in Section 13 hereof and, in such case, the Optionee will hold a one hundred (100%) percent undivided participating interest in the Property; or (ii) to exercise its right (the "Back-in Right") to acquire a fifty-one (51%) percent undivided interest in the Property by giving notice of such election in writing to the Optionee on or before the expiration of such sixty (60) day period. If the Optionor fails or neglects to give such a notice, it shall have no interest in the Property other than the Net Smelter Return Royalty pursuant to Section 13 hereof. (b) If the Optionor exercises its Back-in Right by giving notice to the Optionee pursuant to Section 14 (a) hereof, the Back-in Right shall vest in the Optionor when the Optionor incurs one hundred and thirty-five (135) percent of the Expenditures incurred by the Optionee on the Property (the "Back-in Interest Expenditures") within two (2) years after receipt by the Optionee of such notice by the Optionor (the "Vesting of the Back-in Right"). During this two (2) year period, the provisions of this Agreement hereof shall apply, mutatis mutandis, so that the Optionor, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionee, and its employees, agents and independent contractors, set forth in this Agreement and the Optionee, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionor, the employees, agents and independent contractors set for in this Agreement provided, that this shall not relieve either the Optionor or Optionee for responsibility under those Articles for their acts and omissions for the period prior to the two (2) year period. - 14 - (c) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions of the Joint Venture Agreement contemplated by Section 14 (d) upon the Optionor incurring the Back-in Interest Expenditures in accordance with Section 14 (b), with the initial undivided participating interests of the Optionor and Optionee in the Property being fifty-one (51%) percent and forty-nine (49%) percent, respectively; provided, if the Optionor does not incur the Back-in Interest Expenditures in accordance with Section 14 (b), the Optionee shall be deemed to have a retained one hundred (100%) percent undivided participating interest in the Property and the Optionor shall be entitled to the Net Smelter Royalty pursuant to Section 13. (d) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions usual in the mining industry for the purpose of further exploring, developing and exploiting the Property. The Joint Venture Agreement shall include INTER ALIA: (i) rights of first refusal so that if either party wishes to dispose of its interest in the Property the other party shall have the right to purchase that interest; and (ii) all decisions to be made concerning the Property, including the approval of programs, budgets, and the determination of amounts to be expended by the Joint Venture, shall be made by votes of representatives of the parties holding an interest in the Property, in proportion to the respective interest then held by them in the Property. The initial undivided participating interests of the Optionor and Optionee in the Property shall be fifty-one (51%) percent and forty-nine (49%) percent, respectively. (e) Upon the parties entering into a Joint Venture Agreement pursuant to Section 14 (d), the parties shall immediately form a joint venture (the "Joint Venture") after which the parties shall share all future funding of exploration and other expenditures proportionately to their interest in the Property (each, a "Venture Interest"). The parties shall use their best efforts to execute a definitive agreement governing the Joint Venture which shall incorporate the terms set out herein in respect of their relationship in the Joint Venture and such other terms as the parties may agree. (f) If either party elects not to fund its share of future Joint Venture expenditures its Venture Interest shall be diluted based on expenditures incurred, with the Optionor being initially deemed to have spent $2,500,000 for a fifty-one (51%) percent interest and the Optionee being initially deemed to have spent $2,000,000 for a forty-nine (49%) percent interest upon formation of the Joint Venture. Each party's interest in the Property shall be calculated and re-calculated from time to time to the nearest four decimal places expressed as a percent, so that each party's interest shall be that percentage obtained by multiplying by 100 the result obtained - 15 - when the aggregate of that party's deemed and actual expenditures on the Property is divided by the aggregate of both parties' deemed and actual expenditures on the Property. Actual expenditures are those incurred after Vesting of the Back-in Right to the Optionor. If either party's Venture Interest is reduced to ten (10%) percent or less, its Venture Interest shall be converted to a two (2%) percent Net Smelter Return Royalty calculated and paid in the manner described in Schedule "B". (g) Subject to available capacity and compatibility with the then current facilities and through put of Hudson Bay Mining and Smelting Co., Limited, the parties confirm that it is their intention that any Product derived from the Property be milled, concentrated, refined or otherwise treated at existing facilities owned or operated by Hudson Bay Mining and Smelting Co., Limited, whether pursuant to the Joint Venture or in the event that the Optionor has not exercised the Back-in-Right, at cost plus a reasonable fee to be negotiated by the Optionee and Hudson Bay Mining and Smelting Co., Limited. 15. ARBITRATION In the event of any dispute between the Optionor and the Optionee with respect to this Agreement or any matter governed by this Agreement which the Optionor and Optionee are unable to resolve, the matter shall be decided by arbitration. The party desiring arbitration shall nominate one arbitrator and shall notify the other party of such nomination and the other party shall within thirty (30) days after receiving such notice nominate one arbitrator, and the two arbitrators shall select an umpire to act jointly with them. If the said arbitrators shall be unable to agree upon the selection of such umpire, the umpire shall be designated by any Justice of the Court of Queen's Bench of Manitoba. If the party receiving the notice of nomination of an arbitrator by the party desiring arbitration fails within the said thirty (30) days to nominate an arbitrator, then the arbitrator nominated by the party desiring arbitration may proceed alone to determine the dispute. Any decision reached pursuant to this Section 15 shall be final and binding upon the parties. Insofar as they do not conflict with the provisions hereof, the provisions of THE ARBITRATION ACT (Manitoba) as amended from time to time shall be applicable. 16. CONFIDENTIALITY All information, data and results relating to or derived from the Property and operations thereon that either the Optionee or Optionor may receive or become aware of through the provisions of this Agreement, shall be kept confidential and shall not be disclosed or used in any manner by the Optionee or Optionor except as such - 16 - disclosure may otherwise be required by law, or required to enforce any provision hereof, or as may be mutually agreed in writing by the parties. 17. NOTICE (a) Any notice, document, cheque or thing required or permitted to be given or delivered hereunder shall be deemed to be properly given or delivered if: (i) delivered in person and left with any person who must be an employee of the party receiving such notice at the relevant address set forth below; or (ii) sent in a prepaid registered letter deposited in a post office; or (iii) sent by facsimile; and if to the Optionor, addressed to, Hudson Bay Exploration and Development Company Limited Box 1500 Flin Flon, Manitoba R8A 1N9 Attention: President Facsimile No. 204-687-2769 and if to the Optionee, addressed to: Halo Resources Ltd. 1280 - 625 Howe Street Vancouver, BC V6C 2T6 Attention: President Facsimile No. 604-484-0069 Any notice or delivery so given shall be deemed to have been given and received on actual receipt of the letter, facsimile received or on the day of delivery in person as the case may be (provided that such day is a business day and, if it is not, on the following business day). (b) Any party may from time to time by notice in writing delivered in accordance with the provisions of Section 17 (a) herein change its address for the purposes of this Section 17; (c) Any payment that the Optionee shall make to the Optionor hereunder shall be deemed to have been properly made if a cheque payable to the Optionor in the amount thereof, has been - 17 - delivered to the Optionor in accordance with the provisions of this Section 17, unless such cheques are not honoured on presentation for payment. 18. AGREEMENT OPTION ONLY Subject to Section 14 hereof, this Agreement is an option only and shall not be construed to create a partnership or the relationship of principal and agent or any other similar relationship between the Optionor and the Optionee. 19. TIME OF ESSENCE Time shall be of the essence hereof. 20. FORCE MAJEURE The Option Period and the time or times within which payments may or shall be made hereunder and all other time limitations hereunder shall be extended for a period of time equal to the total of all periods of time during which the Optionee is prevented from or seriously impeded in doing any prospecting, exploration, development and/or other mining work in, on or under the Property by reason of fires, power shortages, strikes, walk-outs, inability to obtain suitable machinery, labour or supplies, wars, riots, acts of God or the Queen's enemies, actions by aboriginal peoples or environmentalists, interference by civil or military authorities, litigation, governmental regulations or any other cause or causes (whether or not of the same class or kind as those enumerated above) beyond the reasonable control of the Optionee. The Optionee shall provide to the Optionor notice of the beginning of the period of the force majeure and the end of the period of force majeure in accordance with the terms of Section 17 hereof. 21. ENTIRE AGREEMENT This Agreement supersedes all prior negotiations and agreements and contains the entire understanding between the parties hereto, including the Letter of Intent, and may be modified only by instrument in writing signed by the party or parties against which the modification is asserted. 22. INDEMNITY The Optionor and the Optionee agree to indemnify and save the other harmless from all claims, charges, suits, liens, costs, damages, penalties, or other liabilities of any kind whatsoever suffered or incurred by a party and which arise out of or are incidental to a breach of any warranty, covenant, representation, term, or condition of this Agreement. - 18 - 23. FURTHER ASSURANCES The Optionee and the Optionor agree that either before or after the termination of this Agreement they will execute all documents and do all acts and things as the other party may reasonably request and as may be lawful and within their power to do to carry out the intent of this Agreement. 24. ASSIGNMENT The Optionor may, at its sole discretion, transfer, assign, or convey its rights and obligations in this Agreement to Hudson Bay Mining & Smelting Co., Limited or any other affiliate of the Optionor. Otherwise, this Agreement and the rights and obligations of either party hereto shall not be transferred, assigned or conveyed without the prior written consent of the other party, such consent not to be unreasonably withheld. 25. JURISDICTION This Agreement shall be governed by the laws of the Province of Manitoba and the parties hereto submit to such jurisdiction. 26. HEADINGS The headings herein are inserted for convenience of reference only and shall not be used in interpreting or construing this Agreement. 27. ENUREMENT This Agreement shall enure to and be binding upon the parties hereto and their respective successors and assigns. - 19 - 28. SURVIVAL The parties hereto agree that all covenants, representations, warranties, terms and conditions contained in this Agreement shall not merge on closing or upon the delivery of any documents contemplated herein, but shall, in respect of the Property, survive thereafter for a period of two (2) years from the date that it is released by the Optionee under Section 12, the date that the Option is terminated under Section 7 hereof or the date that the Option is exercised under Section 6 hereof, as the case may be. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED Per: ------------------------------------- Per: ------------------------------------- HALO RESOURCES LTD. Per: ------------------------------------- Per: ------------------------------------- SCHEDULE "A" PROPERTY Par #203 P74157 Par #204 P74158 Par #205 P74159 Par #242 P74196 Par #243 P74197 Par #214 P74168 Par #215 P74169 Par #216 P74170 Par #241 P74195 SCHEDULE "B" NET SMELTER RETURN ROYALTY 1. Net Smelter Return Royalty (a) There shall accrue for each Quarter following the date of the Commencement of Commercial Production an amount in dollars equal to two (2%) percent of the Net Sales Revenue. Each sum so accrued shall be payable by the Optionee to the Optionor in accordance with the provisions of paragraph 2 below. (b) The Optionee shall, as soon as practicable after the end of each Quarter following the date of Commencement of Commercial Production and in any event within thirty (30) business days, determine the Net Smelter Return Royalty for the previous Quarter in accordance with this Section 1(a) and shall deliver to the Optionor promptly thereafter a statement (the "NET SMELTER RETURN STATEMENT") showing such Net Smelter Return Royalty and setting out in detail its calculations of such Net Smelter Return Royalty. (c) If the amount of Net Smelter Returns is not ascertainable for a calendar quarter, it shall be estimated as nearly as possible at the time for payment and an adjustment shall be made at the end of each calendar year. Within ninety (90) days following the end of each calendar year, commencing with the year in which the date of the Commencement of Commercial Production falls, the Optionee shall deliver a statement of the Net Smelter Returns for the year duly certified as correct by an independent Chartered Accountant appointed by the Optionee for such purposes. The Optionor shall have the right within a period of three (3) months from receipt of such certified statement to conduct an independent audit at its own cost and expense, the right to review the Optionee's books and records relating thereto and an opportunity to discuss issues raised with the independent Chartered Accountant. The Optionee shall immediately pay to the Optionor any additional Net Smelter Return Royalty found by such independent audit to be payable in respect of the previous calendar year. In the event such audit indicates that the Optionee's statements were more than five (5%) percent different than that assessed by the independent audit, then the cost of such independent audit shall be borne by the Optionee. (d) If any portion of the Product extracted and derived from the Property are sold to a purchaser owned or controlled by the Optionee or treated by a smelter owned or controlled by the Optionee, the actual proceeds received shall be deemed to be - 2 - an amount equal to what could be obtained from a purchaser or a smelter not so owned or controlled in respect of Product of like quality and quantity after deducting therefrom a charge equal to the transportation cost which would have been incurred had the material been sold to such third party purchaser or smelter. 2. Payment (a) Each sum which shall accrue pursuant to Section 1(a) above shall be payable by the Optionee to the Optionor in full upon the Optionee's delivery of the Net Smelter Return Royalty Statement or as soon as possible thereafter and, in any event, within forty (40) business days of the end of the Quarter to which such sum relates. (b) All payments to be made by the Optionee under this Schedule shall be made in Canadian dollars in same day funds to such account at such bank or office as the Optionor shall designate by not less than two (2) business days' notice to Optionee. (c) The Optionee shall, if requested to do so by any of the Optionor, produce to the Optionor the underlying evidence supporting each of the Net Smelter Return Royalty Statements delivered with a view to the Optionor verifying each such statement. (d) Each payment by the Optionee under this Schedule shall be made (except to the extent required by law) without set-off or counterclaim and free and clear of and without deduction or withholding for or on account of any taxes unless the Optionee is required by law to make such payment subject to the deduction or withholding of any taxes in which case the sum payable by the Optionee in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Optionor receive and retain (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or required to be made. FUD AGREEMENT THIS AGREEMENT made as of the day of , 2006. BETWEEN: HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED, a corporation incorporated under the laws of Canada, (hereinafter referred to as the "Optionor") OF THE FIRST PART, - and - HALO RESOURCES LTD., a corporation continued under the laws of British Columbia, (hereinafter referred to as the "Optionee") OF THE SECOND PART. WHEREAS the Optionor is the sole recorded and beneficial owner of a 100% undivided interest in the Property (as hereinafter defined); AND WHEREAS the Optionor desires to grant to the Optionee and the Optionee desires to receive from the Optionor an option to acquire a 100% interest in the Property, subject to Sections 13 and 14 herein; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the terms and conditions hereinafter contained and the sum of $2.00 now paid by the Optionee to the Optionor (receipt of which is hereby acknowledged) the parties hereto agree as follows: 1. DEFINITIONS In this Agreement and in all schedules hereto the following words and terms where capitalized shall have the following meanings unless the context clearly indicates a contrary meaning: (a) "Agreement" means this agreement between the Optionor and the Optionee, including all Schedules hereto and any documents incorporated by reference and other amendments as permitted hereunder, and the expressions this "Agreement", "herein", "hereto" and other similar expressions refer to all of this agreement, including the Schedules, any documents incorporated by reference and other amendments permitted hereunder, and not to any particular Article, Section or Subsection; Page 2 (b) "Anniversary Date" means an anniversary date of this Agreement; (c) "Back-in Right" means the right of the Optionor to acquire the Back-in Interest pursuant to Section 14; (d) "Back-in Interest" has the meaning given to it in Section 14; (e) "Back-in Interest Expenditures" means the expenditures required to be made by the Optionor upon exercise of the Back-in Right as set out in Section 14 hereof; (f) "Commencement of Commercial Production" means the date upon which Product from the Property, for other than testing purposes, has been processed for a period of thirty (30) consecutive production days at a rate equal to not less than seventy-five (75%) percent of the rate projected in the feasibility report, if any, prepared by or for the Optionee in respect of the Property; (g) "Environmental Laws" means all laws, statutes, regulations, ordinances, rules, requirements, policies, guidelines, by-laws, codes, orders, permits, directives, notices and approvals of all federal, territorial, provincial, municipal or local governmental or administrative authorities and related to environmental or occupational or public health or safety matters, or to the generation, handling, treatment, storage, transportation, disposal or clean up of pollutants, contaminants, hazardous or toxic substances, dangerous goods, ozone-depleting substances or other harmful substances or materials or to the reclamation, site rehabilitation, restoration, remediation, or other mine and related facilities closure requirements; (h) "Expenditures" means: A. all cash payments made by the Optionee in respect of the Property towards fulfillment of the expenditure requirements for this Agreement which meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); plus B. up to ten (10%) percent per annum of the amount of such qualifying expenditures referred to in Section 1(h)A. above, which may be applied towards overhead and expenditures that do not otherwise meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); Page 3 (i) "Feasibility Report" means a report prepared to analyze whether or not to proceed with mine development and exploration with respect to the Property in a form and of a scope that is generally acceptable to reputable financial institutions that provide financing to the mining industry; (j) "Joint Venture" means the entity formed upon the execution of the Joint Venture Agreement; (k) "Joint Venture Agreement" means an agreement relating to the development and operation of a joint venture formed pursuant to Section 14 (d); (l) "Net Sales Revenue" shall mean the actual proceeds received from any independent custom smelter, mill, mint or other purchaser for the sale of any Product extracted and derived from the Property, after deducting all charges and penalties for smelting and refining and the cost of transportation (to the smelter and thereafter to the mint), insurance premiums, sampling and assaying charges incurred after the Product has left the Property, and all appropriate mint charges; (m) "Net Smelter Return Royalty" has the meaning described in Section 13 hereof; (n) "Option" means the option described in Section 3 hereof; (o) "Option Exercise Date" has the meaning described in Section 6 hereof; (p) "Option Period" means the three (3) year time period set out in Section 3 hereof; (q) "Option Shares" means the shares described in Section 4(b) hereof; (r) "Prime" means the prime interest rate charged by the Bank of Nova Scotia from time to time; (s) "Product" means all metals, ores, concentrates, minerals and mineral resources extracted or produced from the Property; (t) "Property" means those claims more particularly described in Schedule "A" attached hereto, all of which are situated in the Sherridon area of Manitoba, or such of them as at any relevant time have not been released by the Optionee under this; Page 4 (u) "Quarter" means each period of 3 calendar months starting on a Quarterly Date but so that the first Quarter under this Schedule shall start on the date of the Commencement of Commercial Production and end on the date immediately preceding the second Quarterly Date to occur after the date of the Commencement of Commercial Production; (v) "Quarterly Date" means 1 January, 1 April, 1 June and 1 October of each calendar year; and (w) "Vesting of the Back-in Right" has the meaning described in Section 14. All monies referred to in this Agreement, unless otherwise noted, are expressed in Canadian dollars. 2. REPRESENTATIONS (a) The Optionor represents and warrants to the Optionee that, as of the date hereof: (i) it is the sole recorded and beneficial owner of the Property and, save for any rights granted to the Optionee, is in exclusive possession thereof; (ii) it is duly incorporated and validly existing under the laws of Canada; (iii) the Property is free and clear of all liens, charges, encumbrances, royalties or other third party interests of any kind whatsoever except for a charge noted by a registration in favour BNY Trust Company of Canada pursuant to a debenture dated December 10, 2004, given by the Optionor as security under a Trust Indenture dated December 21, 2004, which charge and registration will be discharged by the Option or forthwith upon the Optionee exercising the Option in accordance with the terms of this Agreement; (iv) to the best of its knowledge, there are no pending or threatened actions, suits, claims or proceedings affecting the Property; (v) except as disclosed in writing to the Optionee, it has not entered into any agreements in respect of the Property save for any agreements entered into with the Optionee; Page 5 (vi) all taxes, rates and assessments owing on the Property have been paid and discharged in full; (vii) the Optionor is not a party to any judicial or administrative proceeding which could have an adverse effect on the Optionee's rights under this Agreement; (viii) the Property, as described in this Agreement, is correct as to claim number and all of the claims comprising the Property has been validly and properly staked, tagged and recorded in accordance with applicable law; and (ix) except as disclosed in writing to the Optionee, there are no commitments of the Optionor to third parties relating to the Property which do or could have any direct or indirect effect on the rights granted to the Optionee hereunder. (b) The Optionee represents and warrants to the Optionor that, as of the date hereof: (i) it is duly continued and validly existing under the laws of the Province of British Columbia; (ii) the execution of this Agreement and the compliance with its provisions by it do not breach or contravene any provision of its constating documents and by-laws or any of its licenses, permits, agreements or privileges pursuant to which consent is necessary or which has not been obtained; (iii) it does not have any undisclosed relationship or agreement with any other group or company that may be interested in acquiring the Property; and (iv) it is not, to its knowledge, a party to any actual judicial or administrative procedure which is materially adverse to this Agreement. 3. GRANT OF OPTION Subject to Sections 13 and 14 hereof, the Optionor grants to the Optionee an exclusive and irrevocable option (the "Option") to earn a one hundred (100%) percent undivided interest in the Property together with all mining rights appertaining thereto exercisable in the manner referred to in Section 6, at any time for a period of three (3) years Page 6 commencing from the date hereof until 5:00 p.m. central time on the third Anniversary Date of this Agreement or such earlier date as this Agreement is terminated in accordance with its terms (the "Option Period"), for the consideration and upon the terms and conditions hereinafter set forth. 4. CONSIDERATION (a) In consideration for the Optionor granting the Option to the Optionee, the Optionee shall make the following non-cumulative payments by way of cash or the equivalent amount of shares of the Optionee as follows: (i) $10,000 upon the signing of this Agreement; (ii) $30,000 payable on or before the first Anniversary Date of this Agreement; and (iii) $60,000 payable on or before the second Anniversary Date of this Agreement. (b) If the Optionee and the Optionor agree in writing, up to fifty (50%) percent of the payments to be made under Section 4 (a) above may be paid to the Optionor by the issuance of common shares in the capital of the Optionee (the "Option Shares") to the Optionor in lieu of such payments. For the purposes of this paragraph, the Option Shares shall be deemed to have a value per share equal to the fifteen day average price of Option Shares at the end of trading for the fifteen trading days immediately prior to the date that the Optionee advises the Optionor that it will make the payment with Option Shares. The Optionee shall take all necessary corporate action to issue the Option Shares to the Optionor and to record the Option Shares on the books of the Optionee in the name of the Optionor. The issuance of the Option Shares to the Optionor hereunder shall be subject to compliance with applicable securities laws and the Optionee shall take all steps required to comply with applicable securities laws in connection with the issuance of such Option Shares. The Optionee shall provide such documents, certificates, opinions of its counsel and other information as may reasonably be requested by the Optionor to satisfy itself as to the compliance of the issuance of the Option Shares with the terms of this Agreement and with applicable securities law. (c) All Option Shares issued or to be issued by the Optionee to the Optionor under and pursuant to this Agreement shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange. The issuance of any Option Shares shall be conditional upon (i) the Optionee obtaining all regulatory and third party consents or approvals being received, including those of the TSX Venture Exchange Page 7 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 Option Shares to the Optionor. In the event that the Optionee is unable to obtain such consents within six months of application therefore, the Optionee's obligation to make payments shall be payment in cash only. 5. EXPENDITURES (a) As further consideration for the Optionor granting the Option to the Optionee, the Optionee shall incur non-cumulative Expenditures in the following amounts: (i) $10,000 prior to the first Anniversary Date; and (ii) $790,000 prior to the third Anniversary Date. (b) Except for the payment described in Section 4 (a) (i) and any payments payable pursuant to section 13 hereof, nothing in this Agreement shall be construed as obligating the Optionee to make any further payments or incur any further Expenditures, or to exercise the Option. 6. EXERCISE OF OPTION (a) Upon the Optionee making the cash payments, or issuing to the Optionor the Option Shares, as required by Section 4 and incurring total Expenditures of not less than eight hundred thousand ($800,000) dollars on or before the applicable dates as required by Section 5 (a) hereof, the Optionee may exercise the Option by written notice thereof to the Optionor and upon so doing, the Optionee shall have purchased, and the Optionor shall have sold, on the date the notice is received by the Optionor (the "Option Exercise Date"), the Property and all of the Optionor's right, title and interest therein, subject only to the payment of the Net Smelter Return Royalty and the Back- in Right of the Optionor. (b) Upon exercise of the Option by the Optionee, the Optionor shall forthwith deliver to the Optionee transfers of the Property which, upon recording thereof, will be sufficient to register the Optionee as the sole recorded holder of the Property free of all liens, encumbrances, charges and claims of any nature or kind whatsoever. The Optionor shall execute and deliver to the Optionee all other documents, and shall do or cause to be made all such further actions in order to properly register the transfers and title in the name of the Optionee. Upon the receipt of the transfer documents described in this section, the Optionee shall forthwith record them at its own cost with the appropriate government office to effect Page 8 the legal transfer of the Property to the Optionee, provided that the Optionee shall hold the Property subject to the terms of this Agreement and the Optionee shall record the Optionor's interest hereunder with the appropriate government office. 7. TERMINATION OF OPTION (a) Upon making the payment described in Section 4 (a) (i), the Optionee may thereafter terminate the Option at any time and return all of the mining claims forming the Property to the Optionor by giving the Optionor written notice thereof. (b) Subject to earlier termination pursuant to this Section 7 (a), the Option shall automatically terminate if the Optionee does not make a payment or does not incur Expenditures in the amount and within the time period required by Sections 4 and 5, respectively, hereof. Notwithstanding the termination of the Option under this Section 7 (b), the Optionee shall not be released from its obligation to make the payment under Section 4 (a) (i). (c) Subject to earlier termination pursuant to Sections 7 (a) or 7 (b) hereof, the Option shall automatically terminate at 5:00 p.m. central time on the third Anniversary Date of this Agreement unless the Optionee has made the payments or incurred the Expenditures required by Sections 4 and 5, respective, hereof, and provided notice has been given to the Optionor in accordance with Section 6 hereof. (d) Upon termination in accordance with Sections 7 (a), 7 (b) or 7 (c) hereof, the Optionee shall not suffer or incur any cost, penalty, damage, claim or expense of any kind whatsoever or have no further liabilities or unreleased obligations of any kind whatsoever hereunder, save that the Optionee shall ensure that the Property shall remain in good standing for at least one (1) year after such termination. (e) Upon the termination of this Agreement, the Optionee shall have the right for thirty (30) days beyond the date of such termination to enter on, in or under that part of the Property affected by the termination, to remove therefrom such equipment, tools, materials, structures, apparatus or supplies brought thereon by the Optionee or on its behalf, and to the extent that the Optionee does not remove them they shall become the Property of the Optionor. (f) Upon termination of the Option pursuant to Section 7 herein, the Optionee shall forthwith record with the Mining Recorder and any other applicable government offices, such documents of Page 9 the Property as shall be sufficient and as may be required to designate the Optionor as the sole recorded holder of the Property, free of all liens, encumbrances, charges and valid claims created by the act or omission of the Optionee (including those arising under applicable Environmental Laws), and the Optionee shall bear any and all costs related thereto. (g) Any shares of the Optionee issued to the Optionor pursuant to Section 4 prior to the termination of the Option for any reason shall remain the property of the Optionor. 8. COVENANTS OF THE OPTIONOR The Optionor shall: (a) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof not being transferred to the Optionee pursuant to Section 6 free and clear of all liens, charges, encumbrances or liabilities, including those pursuant to applicable Environmental Laws, of any kind whatsoever; (b) promptly transmit to the Optionee any notices pertaining to taxes, assessments and other charges received by the Optionor; and (c) not make any agreement whereby any third party may acquire any portion of the Optionor's interest in the Property otherwise than in accordance with this Agreement. 9. COVENANTS OF OPTIONEE The Optionee shall: (a) maintain the Property in good standing and submit assessment work with respect to the Expenditures set out in Section 5 hereof according to applicable laws and regulations; (b) maintain the Property in good standing by the payment of taxes, assessments and rentals and the performance of all other actions which may be reasonably necessary in that regard; (c) permit the Optionor or its authorized representatives, at their own risk, and with five (5) days prior notice to the Optionee, access to the Property at all reasonable times, provided that the Optionor agrees to indemnify the Optionee against and to save it harmless from all costs, claims, Page 10 liabilities and expenses that the Optionee may incur or suffer as a result of any property or other damage or injury (including injury causing death) to the Optionor or its authorized representatives while on the Property, except for any costs, claims, liabilities and expenses incurred as a result of any negligent act or omission of the Optionee or its employees and agents; (d) do all work on the Property in a good and workmanlike fashion in accordance with all applicable laws, regulations, orders and ordinances of any governmental authority; (e) indemnify and save the Optionor harmless in respect of any and all costs claims, liabilities and expenses that the Optionor may incur or suffer, including those pursuant to the Environmental Laws, arising out of the Optionee's activities on the Property and, without limiting the generality of the foregoing shall, during the Option Period carry third party liability insurance of not less than Five Million ($5,000,000) Dollars in respect of its operations on the Property for the benefit of the Optionee and the Optionor as their interests may appear; (f) not make any agreement whereby any third party may acquire any portion of its interest in the Property or under this Agreement otherwise than in accordance with the provisions of this Agreement; and (g) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof, not being free and clear of all liens, charges, encumbrances, obligations or liabilities, including those pursuant to applicable Environmental Laws. 10. ADDITIONAL LAND Notwithstanding anything to the contrary contained herein, each of the Optionor and the Optionee retains the right to stake or otherwise acquire additional land which shall not form a part of this Agreement. 11. RIGHT TO ENTER IN, UNDER OR ON PROPERTY (a) The Optionee, its employees, agents and independent contractors shall have the exclusive right: (i) to enter in, under or on the Property; Page 11 (ii) to bring upon the Property such vehicles, equipment, portable structures and other apparatus as the Optionee shall in its sole discretion deem advisable; (iii) to do such work and conduct and manage such programs on or under the Property as the Optionee shall in its sole discretion from time to time deem advisable; (iv) to remove from the Property such materials for analysis and testing as the Optionee shall in it sole discretion deem advisable; and (v) to have quiet and exclusive possession of the Property from the date hereof and thereafter during the currency of the Option Period. (b) The Optionee shall keep full and complete records of all exploration work, diamond drilling and development of the said Property, together with the results of assays made, and, subject always to the terms of this Agreement, all of such records shall, at a minimum advance notice of thirty (30) days, be available for inspection, prior to exercise of the Option by the Optionor or its agent who may make copies thereof at the Optionor's sole cost and take extracts therefrom. If the Option is terminated or otherwise not exercised by the Optionee, the Optionee shall on request by the Optionor, deliver to the Optionor a copy of any part or all of such records. 12. OPTIONEE'S RIGHT TO RELEASE PROPERTY The Optionee shall, in its sole discretion, upon written notice to the Optionor, have the right to release from the provisions of this Agreement from time to time any or all of the mining claims forming the Property, provided that the Optionee shall ensure that any such mining claim or part thereof so released will remain in good standing for a period of at least one (1) year after the giving of the notice of release. If the Optionee gives notice of such release, it shall specify therein the mining claims or part thereof it is so releasing and shall forthwith execute and attend to the registration, at the Optionee's cost, of such transfers as may be required to transfer to the Optionor all right, title and interest of the Optionee in and to the mining claims or part thereof so released, free and clear of all liens, claims, and other encumbrances of any kind whatsoever, including those arising pursuant to applicable Environmental Laws, save those which are the result of any act or omission of the Optionor or any employee or agent thereof. Page 12 13. NET SMELTER RETURN ROYALTY (a) If the Option is exercised, the Optionor shall be entitled to receive the Net Smelter Return Royalty from the Optionee, payable from the date of the Commencement of Commercial Production, calculated and paid in accordance with Schedule "B" attached hereto, provided that if the Optionor exercises its Back-in Right in accordance with Section 14 hereof, the Optionor's right to receive the Net Smelter Return Royalty shall terminate. (b) The Net Smelter Return Royalty shall be payable by the Optionee in Canadian Dollars and shall be paid quarterly in arrears within sixty (60) days of the end of the quarter to which it relates. (c) To the extent permitted by the applicable law, the Net Smelter Return Royalty shall run with, attach to, and bind the land underlying the Property. Upon becoming entitled to the Net Smelter Return Royalty, and subject to the Optionor's exercise of the Back-in Right, nothing contained in this Agreement shall be construed as conferring on the Optionor any right to or interest in the Property, except the right to receive the Net Smelter Return Royalty as and when due. (d) All payments of the Net Smelter Return Royalty to the Optionor shall be deemed final and in full satisfaction of all obligations of the Optionee in respect thereof if such payments or the calculation thereof are not disputed by the Optionor within sixty (60) days after receipt of the Net Smelter Return Royalty payment and statement. (e) Unless the Optionor has exercised its Back-in Right, any decision regarding the Commencement of Commercial Production shall be at the sole discretion of the Optionee, and the Optionee shall be under no obligation, and nothing in this Agreement shall be construed as creating an obligation upon the Optionee, to place the Property into production and, in the event the Property is placed into production and operated as a mine, the Optionee shall have the unfettered right to suspend or curtail any such operation as it in its sole discretion may determine. 14. BACK-IN RIGHT (a) For a period of sixty (60) days following the date of the Optionor receiving all of the exploration results and confirmation of Expenditures from the Optionee, the Optionor shall, at its discretion, have the right to elect by notice in writing delivered to the Optionee: Page 13 (i) to hold the two (2%) percent Net Smelter Return Royalty as set out in Section 13 hereof and, in such case, the Optionee will hold a one hundred (100%) percent undivided participating interest in the Property; or (ii) to exercise its right (the "Back-in Right") to acquire a fifty-one (51%) percent undivided interest in the Property by giving notice of such election in writing to the Optionee on or before the expiration of such sixty (60) day period. If the Optionor fails or neglects to give such a notice, it shall have no interest in the Property other than the Net Smelter Return Royalty pursuant to Section 13 hereof. (b) If the Optionor exercises its Back-in Right by giving notice to the Optionee pursuant to Section 14 (a) hereof, the Back-in Right shall vest in the Optionor when the Optionor incurs one hundred and thirty-five (135) percent of the Expenditures incurred by the Optionee on the Property (the "Back-in Interest Expenditures") within two (2) years after receipt by the Optionee of such notice by the Optionor (the "Vesting of the Back-in Right"). During this two (2) year period, the provisions of this Agreement hereof shall apply, mutatis mutandis, so that the Optionor, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionee, and its employees, agents and independent contractors, set forth in this Agreement and the Optionee, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionor, the employees, agents and independent contractors set for in this Agreement provided, that this shall not relieve either the Optionor or Optionee for responsibility under those Articles for their acts and omissions for the period prior to the two (2) year period. (c) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions of the Joint Venture Agreement contemplated by Section 14 (d) upon the Optionor incurring the Back-in Interest Expenditures in accordance with Section 14 (b), with the initial undivided participating interests of the Optionor and Optionee in the Property being fifty-one (51%) percent and forty-nine (49%) percent, respectively; provided, if the Optionor does not incur the Back-in Interest Expenditures in accordance with Section 14 (b), the Optionee shall be deemed to have a retained one hundred (100%) percent undivided participating interest in the Property and the Optionor shall be entitled to the Net Smelter Royalty pursuant to Section 13. (d) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions usual in the mining industry for the purpose of further exploring, developing and exploiting the Property. The Joint Venture Agreement shall include INTER Page 14 ALIA: (i) rights of first refusal so that if either party wishes to dispose of its interest in the Property the other party shall have the right to purchase that interest; and (ii) all decisions to be made concerning the Property, including the approval of programs, budgets, and the determination of amounts to be expended by the Joint Venture, shall be made by votes of representatives of the parties holding an interest in the Property, in proportion to the respective interest then held by them in the Property. The initial undivided participating interests of the Optionor and Optionee in the Property shall be fifty-one (51%) percent and forty-nine (49%) percent, respectively. (e) Upon the parties entering into a Joint Venture Agreement pursuant to Section 14 (d), the parties shall immediately form a joint venture (the "Joint Venture") after which the parties shall share all future funding of exploration and other expenditures proportionately to their interest in the Property (each, a "Venture Interest"). The parties shall use their best efforts to execute a definitive agreement governing the Joint Venture which shall incorporate the terms set out herein in respect of their relationship in the Joint Venture and such other terms as the parties may agree. (f) If either party elects not to fund its share of future Joint Venture expenditures its Venture Interest shall be diluted based on expenditures incurred, with the Optionor being initially deemed to have spent $1,000,000 for a fifty-one (51%) percent interest and the Optionee being initially deemed to have spent $800,000 for a forty-nine (49%) percent interest upon formation of the Joint Venture. Each party's interest in the Property shall be calculated and re- calculated from time to time to the nearest four decimal places expressed as a percent, so that each party's interest shall be that percentage obtained by multiplying by 100 the result obtained when the aggregate of that party's deemed and actual expenditures on the Property is divided by the aggregate of both parties' deemed and actual expenditures on the Property. Actual expenditures are those incurred after Vesting of the Back-in Right to the Optionor. If either party's Venture Interest is reduced to ten (10%) percent or less, its Venture Interest shall be converted to a two (2%) percent Net Smelter Return Royalty calculated and paid in the manner described in Schedule "B". (g) Subject to available capacity and compatibility with the then current facilities and through put of Hudson Bay Mining and Smelting Co., Limited, the parties confirm that it is their intention that any Product derived from the Property be milled, concentrated, refined or otherwise treated at existing facilities owned or operated by Hudson Bay Mining and Smelting Co., Limited, whether pursuant to the Joint Venture or in the event that the Optionor has not exercised the Back-in-Right, Page 15 at cost plus a reasonable fee to be negotiated by the Optionee and Hudson Bay Mining and Smelting Co., Limited. 15. ARBITRATION In the event of any dispute between the Optionor and the Optionee with respect to this Agreement or any matter governed by this Agreement which the Optionor and Optionee are unable to resolve, the matter shall be decided by arbitration. The party desiring arbitration shall nominate one arbitrator and shall notify the other party of such nomination and the other party shall within thirty (30) days after receiving such notice nominate one arbitrator, and the two arbitrators shall select an umpire to act jointly with them. If the said arbitrators shall be unable to agree upon the selection of such umpire, the umpire shall be designated by any Justice of the Court of Queen's Bench of Manitoba. If the party receiving the notice of nomination of an arbitrator by the party desiring arbitration fails within the said thirty (30) days to nominate an arbitrator, then the arbitrator nominated by the party desiring arbitration may proceed alone to determine the dispute. Any decision reached pursuant to this Section 15 shall be final and binding upon the parties. Insofar as they do not conflict with the provisions hereof, the provisions of THE ARBITRATION ACT (Manitoba) as amended from time to time shall be applicable. 16. CONFIDENTIALITY All information, data and results relating to or derived from the Property and operations thereon that either the Optionee or Optionor may receive or become aware of through the provisions of this Agreement, shall be kept confidential and shall not be disclosed or used in any manner by the Optionee or Optionor except as such disclosure may otherwise be required by law, or required to enforce any provision hereof, or as may be mutually agreed in writing by the parties. 17. NOTICE (a) Any notice, document, cheque or thing required or permitted to be given or delivered hereunder shall be deemed to be properly given or delivered if: (i) delivered in person and left with any person who must be an employee of the party receiving such notice at the relevant address set forth below; or (ii) sent in a prepaid registered letter deposited in a post office; or (iii) sent by facsimile; Page 16 and if to the Optionor, addressed to, Hudson Bay Exploration and Development Company Limited Box 1500 Flin Flon, Manitoba R8A 1N9 Attention: President Facsimile No. 204-687-2769 and if to the Optionee, addressed to: Halo Resources Ltd. 1280 - 625 Howe Street Vancouver, BC V6C 2T6 Attention: President Facsimile No. 604-484-0069 Any notice or delivery so given shall be deemed to have been given and received on actual receipt of the letter, facsimile received or on the day of delivery in person as the case may be (provided that such day is a business day and, if it is not, on the following business day). (b) Any party may from time to time by notice in writing delivered in accordance with the provisions of Section 17 (a) herein change its address for the purposes of this Section 17; (c) Any payment that the Optionee shall make to the Optionor hereunder shall be deemed to have been properly made if a cheque payable to the Optionor in the amount thereof, has been delivered to the Optionor in accordance with the provisions of this Section 18, unless such cheques are not honoured on presentation for payment. 18. AGREEMENT OPTION ONLY Subject to Section 14 hereof, this Agreement is an option only and shall not be construed to create a partnership or the relationship of principal and agent or any other similar relationship between the Optionor and the Optionee. 19. TIME OF ESSENCE Time shall be of the essence hereof. 20. FORCE MAJEURE The Option Period and the time or times within which payments may or shall be made hereunder and all other time limitations hereunder shall be extended for a period of time equal to the total of all periods of Page 17 time during which the Optionee is prevented from or seriously impeded in doing any prospecting, exploration, development and/or other mining work in, on or under the Property by reason of fires, power shortages, strikes, walk-outs, inability to obtain suitable machinery, labour or supplies, wars, riots, acts of God or the Queen's enemies, actions by aboriginal peoples or environmentalists, interference by civil or military authorities, litigation, governmental regulations or any other cause or causes (whether or not of the same class or kind as those enumerated above) beyond the reasonable control of the Optionee. The Optionee shall provide to the Optionor notice of the beginning of the period of the force majeure and the end of the period of force majeure in accordance with the terms of Section 17 hereof. 21. ENTIRE AGREEMENT This Agreement supersedes all prior negotiations and agreements and contains the entire understanding between the parties hereto, including the Letter of Intent, and may be modified only by instrument in writing signed by the party or parties against which the modification is asserted. 22. INDEMNITY The Optionor and the Optionee agree to indemnify and save the other harmless from all claims, charges, suits, liens, costs, damages, penalties, or other liabilities of any kind whatsoever suffered or incurred by a party and which arise out of or are incidental to a breach of any warranty, covenant, representation, term, or condition of this Agreement. 23. FURTHER ASSURANCES The Optionee and the Optionor agree that either before or after the termination of this Agreement they will execute all documents and do all acts and things as the other party may reasonably request and as may be lawful and within their power to do to carry out the intent of this Agreement. 24. ASSIGNMENT The Optionor may, at its sole discretion, transfer, assign, or convey its rights and obligations in this Agreement to Hudson Bay Mining & Smelting Co., Limited or any other affiliate of the Optionor. Otherwise, this Agreement and the rights and obligations of either party hereto shall not be transferred, assigned or conveyed without the prior written consent of the other party, such consent not to be unreasonably withheld. Page 18 25. JURISDICTION This Agreement shall be governed by the laws of the Province of Manitoba and the parties hereto submit to such jurisdiction. 26. HEADINGS The headings herein are inserted for convenience of reference only and shall not be used in interpreting or construing this Agreement. 27. ENUREMENT This Agreement shall enure to and be binding upon the parties hereto and their respective successors and assigns. 28. SURVIVAL The parties hereto agree that all covenants, representations, warranties, terms and conditions contained in this Agreement shall not merge on closing or upon the delivery of any documents contemplated herein, but shall, in respect of the Property, survive thereafter for a period of two (2) years from the date that it is released by the Optionee under Section 12, the date that the Option is terminated under Section 7 hereof or the date that the Option is exercised under Section 6 hereof, as the case may be. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. HUDSON BAY EXPLORATION AND DEVELOPMENT COMPANY LIMITED Per: ------------------------------------- Per: ------------------------------------- HALO RESOURCES LTD. Per: ------------------------------------- Per: ------------------------------------- SCHEDULE "A" PROPERTY --------- FUD 54488 FUD 54489 FUD 54490 FUD 54672 FUD 54673 FUD 54487 FUD 54674 FUD 54493 FUD 54849 FUD 54675 FUD 54656 FUD 54696 FUD 54697 FUD 54698 FUD 54492 SCHEDULE "B" NET SMELTER RETURN ROYALTY 1. Net Smelter Return Royalty (a) There shall accrue for each Quarter following the date of the Commencement of Commercial Production an amount in dollars equal to two (2%) percent of the Net Sales Revenue. Each sum so accrued shall be payable by the Optionee to the Optionor in accordance with the provisions of paragraph 2 below. (b) The Optionee shall, as soon as practicable after the end of each Quarter following the date of Commencement of Commercial Production and in any event within thirty (30) business days, determine the Net Smelter Return Royalty for the previous Quarter in accordance with this Section 1(a) and shall deliver to the Optionor promptly thereafter a statement (the "NET SMELTER RETURN STATEMENT") showing such Net Smelter Return Royalty and setting out in detail its calculations of such Net Smelter Return Royalty. (c) If the amount of Net Smelter Returns is not ascertainable for a calendar quarter, it shall be estimated as nearly as possible at the time for payment and an adjustment shall be made at the end of each calendar year. Within ninety (90) days following the end of each calendar year, commencing with the year in which the date of the Commencement of Commercial Production falls, the Optionee shall deliver a statement of the Net Smelter Returns for the year duly certified as correct by an independent Chartered Accountant appointed by the Optionee for such purposes. The Optionor shall have the right within a period of three (3) months from receipt of such certified statement to conduct an independent audit at its own cost and expense, the right to review the Optionee's books and records relating thereto and an opportunity to discuss issues raised with the independent Chartered Accountant. The Optionee shall immediately pay to the Optionor any additional Net Smelter Return Royalty found by such independent audit to be payable in respect of the previous calendar year. In the event such audit indicates that the Optionee's statements were more than five (5%) percent different than that assessed by the independent audit, then the cost of such independent audit shall be borne by the Optionee. (d) If any portion of the Product extracted and derived from the Property are sold to a purchaser owned or controlled by the Optionee or treated by a smelter owned or controlled by the Optionee, the actual proceeds received shall be - 2 - deemed to be an amount equal to what could be obtained from a purchaser or a smelter not so owned or controlled in respect of Product of like quality and quantity after deducting therefrom a charge equal to the transportation cost which would have been incurred had the material been sold to such third party purchaser or smelter. 2. Payment (a) Each sum which shall accrue pursuant to Section 1(a) above shall be payable by the Optionee to the Optionor in full upon the Optionee's delivery of the Net Smelter Return Royalty Statement or as soon as possible thereafter and, in any event, within forty (40) business days of the end of the Quarter to which such sum relates. (b) All payments to be made by the Optionee under this Schedule shall be made in Canadian dollars in same day funds to such account at such bank or office as the Optionor shall designate by not less than two (2) business days' notice to Optionee. (c) The Optionee shall, if requested to do so by any of the Optionor, produce to the Optionor the underlying evidence supporting each of the Net Smelter Return Royalty Statements delivered with a view to the Optionor verifying each such statement. (d) Each payment by the Optionee under this Schedule shall be made (except to the extent required by law) without set-off or counterclaim and free and clear of and without deduction or withholding for or on account of any taxes unless the Optionee is required by law to make such payment subject to the deduction or withholding of any taxes in which case the sum payable by the Optionee in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Optionor receive and retain (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or required to be made. JUNGLE AGREEMENT THIS AGREEMENT made as of the day of , 2006. BETWEEN: HUDSON BAY MINING AND SMELTING CO., LIMITED, a corporation incorporated under the laws of Canada, (hereinafter referred to as the "Optionor") OF THE FIRST PART, - and - HALO RESOURCES LTD., a corporation continued under the laws of British Columbia, (hereinafter referred to as the "Optionee") OF THE SECOND PART. WHEREAS the Optionor is the sole recorded and beneficial owner of a 100% undivided interest in the Property (as hereinafter defined); AND WHEREAS the Optionor desires to grant to the Optionee and the Optionee desires to receive from the Optionor an option to acquire a 100% interest in the Property, subject to Sections 13 and 14 herein; NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the terms and conditions hereinafter contained and the sum of $2.00 now paid by the Optionee to the Optionor (receipt of which is hereby acknowledged) the parties hereto agree as follows: 1. DEFINITIONS In this Agreement and in all schedules hereto the following words and terms where capitalized shall have the following meanings unless the context clearly indicates a contrary meaning: (a) "Agreement" means this agreement between the Optionor and the Optionee, including all Schedules hereto and any documents incorporated by reference and other amendments as permitted hereunder, and the expressions this "Agreement", "herein", "hereto" and other similar expressions refer to all of this agreement, including the Schedules, any documents incorporated by reference and other amendments permitted hereunder, and not to any particular Article, Section or Subsection; Page 2 (b) "Anniversary Date" means an anniversary date of this Agreement; (c) "Area of Interest" means the area within one (1) kilometre from the existing boundaries of the Property as of the date of this Agreement but excluding any claims held by any other party as of the date of this Agreement, which excluded claims are more particularly described in Schedule "A" attached hereto; (d) "Back-in Right" means the right of the Optionor to acquire the Back-in Interest pursuant to Section 14; (e) "Back-in Interest" has the meaning given to it in Section 14; (f) "Back-in Interest Expenditures" means the expenditures required to be made by the Optionor upon exercise of the Back-in Right as set out in Section 14 hereof; (g) "Commencement of Commercial Production" means the date upon which Product from the Property, for other than testing purposes, has been processed for a period of thirty (30) consecutive production days at a rate equal to not less than seventy-five (75%) percent of the rate projected in the feasibility report, if any, prepared by or for the Optionee in respect of the Property; (h) "Environmental Laws" means all laws, statutes, regulations, ordinances, rules, requirements, policies, guidelines, by-laws, codes, orders, permits, directives, notices and approvals of all federal, territorial, provincial, municipal or local governmental or administrative authorities and related to environmental or occupational or public health or safety matters, or to the generation, handling, treatment, storage, transportation, disposal or clean up of pollutants, contaminants, hazardous or toxic substances, dangerous goods, ozone-depleting substances or other harmful substances or materials or to the reclamation, site rehabilitation, restoration, remediation, or other mine and related facilities closure requirements; (i) "Expenditures" means: A. all cash payments made by the Optionee in respect of the Property towards fulfillment of the expenditure requirements for this Agreement which meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); plus Page 3 B. up to ten (10%) percent per annum of the amount of such qualifying expenditures referred to in Section 1(j)A. above, which may be applied towards overhead and expenditures that do not otherwise meet the requirements for obtaining assessment credits as set out in the MINERAL DISPOSITION AND MINERAL LEASE REGULATION, 1992 made under THE MINES AND MINERALS ACT (Manitoba); (j) "Feasibility Report" means a report prepared to analyze whether or not to proceed with mine development and exploration with respect to the Property in a form and of a scope that is generally acceptable to reputable financial institutions that provide financing to the mining industry; (k) "Joint Venture" means the entity formed upon the execution of the Joint Venture Agreement; (l) "Joint Venture Agreement" means an agreement relating to the development and operation of a joint venture formed pursuant to Section 15(d); (m) "Net Sales Revenue" shall mean the actual proceeds received from any independent custom smelter, mill, mint or other purchaser for the sale of any Product extracted and derived from the Property, after deducting all charges and penalties for smelting and refining and the cost of transportation (to the smelter and thereafter to the mint), insurance premiums, sampling and assaying charges incurred after the Product has left the Property, and all appropriate mint charges; (n) "Net Smelter Return Royalty" has the meaning described in Section 13 hereof; (o) "Option" means the option described in Section 3 hereof; (p) "Option Exercise Date" has the meaning described in Section 6 hereof; (q) "Option Period" means the four (4) year time period set out in Section 3 hereof; (r) "Option Shares" means the shares described in Section 4 (f) hereof; (s) "Prime" means the prime interest rate charged by the Bank of Nova Scotia from time to time; Page 4 (t) "Product" means all metals, ores, concentrates, minerals and mineral resources extracted or produced from the Property; (u) "Property" means the lease more particularly described in Schedule "A" attached hereto, covering land situated in the Sherridon area of Manitoba; (v) "Quarter" means each period of 3 calendar months starting on a Quarterly Date but so that the first Quarter under this Schedule shall start on the date of the Commencement of Commercial Production and end on the date immediately preceding the second Quarterly Date to occur after the date of the Commencement of Commercial Production; (w) "Quarterly Date" means 1 January, 1 April, 1 June and 1 October of each calendar year; and (x) "Vesting of the Back-in Right" has the meaning described in Section 14. All monies referred to in this Agreement, unless otherwise noted, are expressed in Canadian dollars. 2. REPRESENTATIONS (a) The Optionor represents and warrants to the Optionee that, as of the date hereof: (i) it is the sole recorded and beneficial owner of the Property and, save for any rights granted to the Optionee, is in exclusive possession thereof; (ii) it is duly incorporated and validly existing under the laws of Canada; (iii) the Property is free and clear of all liens, charges, encumbrances, royalties or other third party interests of any kind whatsoever except for a charge noted by a registration in favour BNY Trust Company of Canada pursuant to a debenture dated December 10, 2004, given by HBED as security under a Trust Indenture dated December 21, 2004,which charge and registration will be discharged by the Option or forthwith upon the Optionee exercising the Option in accordance with the terms of this Agreement; (iv) to the best of its knowledge, there are no pending or threatened actions, suits, claims or proceedings affecting the Property; Page 5 (v) except as disclosed in writing to the Optionee, it has not entered into any agreements in respect of the Property save for any agreements entered into with the Optionee; (vi) all taxes, rates and assessments owing on the Property have been paid and discharged in full; (vii) the Optionor is not a party to any judicial or administrative proceeding which could have an adverse effect on the Optionee's rights under this Agreement; (viii) the Property, as described in this Agreement, is correct as to claim number and all of the claims comprising the Property has been validly and properly staked, tagged and recorded in accordance with applicable law; and (ix) except as disclosed in writing to the Optionee, there are no commitments of the Optionor to third parties relating to the Property which do or could have any direct or indirect effect on the rights granted to the Optionee hereunder. (b) The Optionee represents and warrants to the Optionor that, as of the date hereof: (i) it is duly continued and validly existing under the laws of the Province of British Columbia; (ii) the execution of this Agreement and the compliance with its provisions by it do not breach or contravene any provision of its constating documents and by-laws or any of its licenses, permits, agreements or privileges pursuant to which consent is necessary or which has not been obtained; (iii) it does not have any undisclosed relationship or agreement with any other group or company that may be interested in acquiring the Property; and (iv) it is not, to its knowledge, a party to any actual judicial or administrative procedure which is materially adverse to this Agreement. Page 6 3. GRANT OF OPTION Subject to Sections 13 and 14 hereof, the Optionor grants to the Optionee an exclusive and irrevocable option (the "Option") to earn a one hundred (100%) percent undivided interest in the Property together with all mining rights appertaining thereto exercisable in the manner referred to in Section 6, at any time for a period of four (4) years commencing from the date hereof until 5:00 p.m. central time on the fourth Anniversary Date of this Agreement or such earlier date as this Agreement is terminated in accordance with its terms (the "Option Period"), for the consideration and upon the terms and conditions hereinafter set forth. 4. CONSIDERATION In consideration for the Optionor granting the Option to the Optionee, the Optionee shall make the following non-cumulative payments by way of cash as follows: (a) $10,000 upon the signing of this Agreement; (b) $20,000 payable on or before the first Anniversary Date of this Agreement; (c) $30,000 payable on or before the second Anniversary Date of this Agreement; (d) $40,000 payable on or before the third Anniversary Date of this Agreement; and (e) $150,000 payable on or before the fourth Anniversary Date of this Agreement. (f) If the Optionee and the Optionor agree in writing, up to twenty-five (25%) percent of the payments to be made under Section 4 (a) - (e) above may be paid to the Optionor by the issuance of common shares in the capital of the Optionee (the "Option Shares") to the Optionor in lieu of such payments. For the purposes of this paragraph, the Option Shares shall be deemed to have a value per share equal to the fifteen day average price of Option Shares at the end of trading for the fifteen trading days immediately prior to the date that the Optionee advises the Optionor that it will make the payment with Option Shares. The Optionee shall take all necessary corporate action to issue the Option Shares to the Optionor and to record the Option Shares on the books of the Optionee in the name of the Optionor. The issuance of the Option Shares to the Optionor hereunder shall be subject to compliance with applicable securities laws and the Optionee shall take all Page 7 steps required to comply with applicabl securities laws in connection with the issuance of such Option Shares. The Optionee shall provide such documents, certificates, opinions of its counsel and other information as may reasonably be requested by the Optionor to satisfy itself as to the compliance of the issuance of the Option Shares with the terms of this Agreement and with applicable securities law. (g) All Option Shares issued or to be issued by the Optionee to the Optionor under and pursuant to this Agreement shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange. The issuance of any Option Shares shall be conditional upon (i) the Optionee 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 Option Shares to the Optionor. In the event that the Optionee is unable to obtain such consents within six months of application therefore, the Optionee's obligation to make payments shall be payment in cash only. 5. EXPENDITURES (a) As further consideration for the Optionor granting the Option to the Optionee, the Optionee shall incur non-cumulative Expenditures in the following amounts: (i) $10,000 prior to the first Anniversary Date; (ii) $50,000 prior to the second Anniversary Date; and (iii) $1,440,000 prior to the fourth Anniversary Date. (b) Except for the payment described in Section 4 (a) and any payments payable pursuant to Section 13 hereof, nothing in this Agreement shall be construed as obligating the Optionee to make any further payments or incur any further Expenditures, or to exercise the Option. 6. EXERCISE OF OPTION (a) Upon the Optionee making the cash payments as required by Section 4 (a) and incurring total Expenditures of not less than one million five hundred thousand ($1,500,000) dollars on or before the applicable dates as required by Section 5 (a) hereof, the Optionee may exercise the Option by written notice thereof to the Optionor and upon so doing, the Optionee shall have purchased, and the Optionor shall have sold, on the date Page 8 the notice is received by the Optionor (the "Option Exercise Date"), the Property and all of the Optionor's right, title and interest therein, subject only to the payment of the Net Smelter Return Royalty and the Back-in Right of the Optionor. (b) Upon exercise of the Option by the Optionee, the Optionor shall forthwith deliver to the Optionee transfers of the Property which, upon recording thereof, will be sufficient to register the Optionee as the sole recorded holder of the Property free of all liens, encumbrances, charges and claims of any nature or kind whatsoever. The Optionor shall execute and deliver to the Optionee all other documents, and shall do or cause to be made all such further actions in order to properly register the transfers and title in the name of the Optionee. Upon the receipt of the transfer documents described in this section, the Optionee shall forthwith record them at its own cost with the appropriate government office to effect the legal transfer of the Property to the Optionee, provided that the Optionee shall hold the Property subject to the terms of this Agreement and the Optionee shall record the Optionor's interest hereunder with the appropriate government office. 7. TERMINATION OF OPTION (a) Upon making the payment described in Section 4 (a), the Optionee may thereafter terminate the Option at any time and return all of the mining claims forming the Property to the Optionor by giving the Optionor written notice thereof. (b) Subject to earlier termination pursuant to this Section 7 (a), the Option shall automatically terminate if the Optionee does not make a payment or does not incur Expenditures in the amount and within the time period required by Sections 4 and 5, respectively, hereof. Notwithstanding the termination of the Option under this Section 7 (b), the Optionee shall not be released from its obligation to make the payment under Section 4 (a). (c) Subject to earlier termination pursuant to Sections 7 (a) or 7 (b) hereof, the Option shall automatically terminate at 5:00 p.m. central time on the fourth Anniversary Date of this Agreement unless the Optionee has made the payments or incurred the Expenditures required by Sections 4 and 5, respective, hereof, and provided notice has been given to the Optionor in accordance with Section 6 hereof. (d) Upon termination in accordance with Sections 7 (a), 7 (b) or 7 (c) hereof, the Optionee shall not suffer or incur any cost, penalty, damage, claim or expense of any kind whatsoever or have no further liabilities or unreleased obligations of any kind whatsoever hereunder, save that the Optionee shall ensure Page 9 that the Property shall remain in good standing for at least one (1) year after such termination. (e) Upon the termination of this Agreement, the Optionee shall have the right for thirty (30) days beyond the date of such termination to enter on, in or under that part of the Property affected by the termination, to remove therefrom such equipment, tools, materials, structures, apparatus or supplies brought thereon by the Optionee or on its behalf, and to the extent that the Optionee does not remove them they shall become the Property of the Optionor. (f) Upon termination of the Option pursuant to Section 7 herein, the Optionee shall forthwith record with the Mining Recorder and any other applicable government offices, such documents of the Property as shall be sufficient and as may be required to designate the Optionor as the sole recorded holder of the Property, free of all liens, encumbrances, charges and valid claims created by the act or omission of the Optionee (including those arising under applicable Environmental Laws), and the Optionee shall bear any and all costs related thereto. (g) Any shares of the Optionee issued to the Optionor pursuant to Section 4 prior to the termination of the Option for any reason shall remain the property of the Optionor. 8. COVENANTS OF THE OPTIONOR The Optionor shall: (a) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof not being transferred to the Optionee pursuant to Section 6 free and clear of all liens, charges, encumbrances or liabilities, including those pursuant to applicable Environmental Laws, of any kind whatsoever; (b) promptly transmit to the Optionee any notices pertaining to taxes, assessments and other charges received by the Optionor; and (c) not make any agreement whereby any third party may acquire any portion of the Optionor's interest in the Property otherwise than in accordance with this Agreement. 9. COVENANTS OF OPTIONEE The Optionee shall: Page 10 (a) make the annual lease payments in respect of the Property as such payments become due and to such party as set out in Lease No. ML 038; (b) maintain the Property in good standing and submit assessment work with respect to the Expenditures set out in Section 5 hereof according to applicable laws and regulations; (c) maintain the Property in good standing by the payment of taxes, assessments and rentals and the performance of all other actions which may be reasonably necessary in that regard; (d) permit the Optionor or its authorized representatives, at their own risk, with five (5) days prior notice to the Optionee, access to the Property at all reasonable times, provided that the Optionor agrees to indemnify the Optionee against and to save it harmless from all costs, claims, liabilities and expenses that the Optionee may incur or suffer as a result of any property or other damage or injury (including injury causing death) to the Optionor or its authorized representatives while on the Property, except for any costs, claims, liabilities and expenses incurred as a result of any negligent act or omission of the Optionee or its employees and agents; (e) permit the Optionor, at its sole discretion, to participate in any management reviews of the exploration programs relating to the Property; (f) do all work on the Property in a good and workmanlike fashion in accordance with all applicable laws, regulations, orders and ordinances of any governmental authority; (g) indemnify and save the Optionor harmless in respect of any and all costs claims, liabilities and expenses that the Optionor may incur or suffer, including those pursuant to applicable Environmental Laws, arising out of the Optionee's activities on the Property and, without limiting the generality of the foregoing shall, during the Option Period carry third party liability insurance of not less than Five Million ($5,000,000) Dollars in respect of its operations on the Property for the benefit of the Optionee and the Optionor as their interests may appear; (h) not make any agreement whereby any third party may acquire any portion of its interest in the Property or under this Agreement otherwise than in accordance with the provisions of this Agreement; and (i) not act or fail to do any act which it is required to do under this Agreement or otherwise which would result in the Property or any part thereof, not being free and clear of all liens, Page 11 charges, encumbrances, obligations or liabilities, including those pursuant to applicable Environmental Laws. 10. AREA OF INTEREST During the term of this Agreement, the Optionor and the Optionee shall both be entitled to stake claims or otherwise acquire property within the Area of Interest. If either of the Optionee or the Optionor acquires, directly or indirectly, any interest in any claims (including by way of staking, option or joint venture) within the Area of Interest, any such claims shall be included in the definition of "Property", subject to any previous retained interest agreements in such claims. The cost (including by way of staking, option or joint venture) thereof will be paid by the Optionee within thirty (30) days of the acquisition of the interest by the Optionee. 11. RIGHT TO ENTER IN, UNDER OR ON PROPERTY (a) The Optionee, its employees, agents and independent contractors shall have the exclusive right: (i) to enter in, under or on the Property; (ii) to bring upon the Property such vehicles, equipment, portable structures and other apparatus as the Optionee shall in its sole discretion deem advisable; (iii) to do such work and conduct and manage such programs on or under the Property as the Optionee shall in its sole discretion from time to time deem advisable; (iv) to remove from the Property such materials for analysis and testing as the Optionee shall in it sole discretion deem advisable; and (v) to have quiet and exclusive possession of the Property from the date hereof and thereafter during the currency of the Option Period. (b) The Optionee shall keep full and complete records of all exploration work, diamond drilling and development of the said Property, together with the results of assays made, and, subject always to the terms of this Agreement, all of such records shall, at a minimum advance notice of thirty (30) days, be available for inspection, prior to exercise of the Option by the Optionor or its agent who may make copies thereof at the Optionor's sole cost and take extracts Page 12 therefrom. If the Option is terminated or otherwise not exercised by the Optionee, the Optionee shall on request by the Optionor, deliver to the Optionor a copy of any part or all of such records. 12. OPTIONEE'S RIGHT TO RELEASE PROPERTY The Optionee shall, in its sole discretion, upon written notice to the Optionor, have the right to release from the provisions of this Agreement from time to time any or all of the mining claims forming the Property, provided that the Optionee shall ensure that any such mining claim or part thereof so released will remain in good standing for a period of at least one (1) year after the giving of the notice of release. If the Optionee gives notice of such release, it shall specify therein the mining claims or part thereof it is so releasing and shall forthwith execute and attend to the registration, at the Optionee's cost, of such transfers as may be required to transfer to the Optionor all right, title and interest of the Optionee in and to the mining claims or part thereof so released, free and clear of all liens, claims, and other encumbrances of any kind whatsoever, including those arising pursuant to applicable Environmental Laws, save those which are the result of any act or omission of the Optionor or any employee or agent thereof. 13. NET SMELTER RETURN ROYALTY (a) If the Option is exercised, the Optionor shall be entitled to receive the Net Smelter Return Royalty from the Optionee, payable from the date of the Commencement of Commercial Production, calculated and paid in accordance with Schedule "B" attached hereto, provided that if the Optionor exercises its Back-in Right in accordance with Section 14 hereof, the Optionor's right to receive the Net Smelter Return Royalty shall terminate. (b) The Net Smelter Return Royalty shall be payable by the Optionee in Canadian Dollars and shall be paid quarterly in arrears within sixty (60) days of the end of the quarter to which it relates. (c) To the extent permitted by the applicable law, the Net Smelter Return Royalty shall run with, attach to, and bind the land underlying the Property. Upon becoming entitled to the Net Smelter Return Royalty, and subject to the Optionor's exercise of the Back-in Right, nothing contained in this Agreement shall be construed as conferring on the Optionor any right to or interest in the Property, except the right to receive the Net Smelter Return Royalty as and when due. (d) All payments of the Net Smelter Return Royalty to the Optionor shall be deemed final and in full satisfaction of all obligations of the Optionee in respect thereof if such Page 13 payments or the calculation thereof are not disputed by the Optionor within sixty (60) days after receipt of the Net Smelter Return Royalty payment and statement. (e) Unless the Optionor has exercised its Back-in Right, any decision regarding the Commencement of Commercial Production shall be at the sole discretion of the Optionee, and the Optionee shall be under no obligation, and nothing in this Agreement shall be construed as creating an obligation upon the Optionee, to place the Property into production and, in the event the Property is placed into production and operated as a mine, the Optionee shall have the unfettered right to suspend or curtail any such operation as it in its sole discretion may determine. 14. BACK-IN RIGHT (a) For a period of sixty (60) days following the date of the Optionor receiving all of the exploration results and confirmation of Expenditures from the Optionee, the Optionor shall, at its discretion, have the right to elect by notice in writing delivered to the Optionee: (i) to hold the two (2%) percent Net Smelter Return Royalty as set out in Section 13 hereof and, in such case, the Optionee will hold a one hundred (100%) percent undivided participating interest in the Property; or (ii) to exercise its right (the "Back-in Right") to acquire a fifty-one (51%) percent undivided interest in the Property by giving notice of such election in writing to the Optionee on or before the expiration of such sixty (60) day period. If the Optionor fails or neglects to give such a notice, it shall have no interest in the Property other than the Net Smelter Return Royalty pursuant to Section 13 hereof. (b) If the Optionor exercises its Back-in Right by giving notice to the Optionee pursuant to Section 14 (a) hereof, the Back-in Right shall vest in the Optionor when the Optionor incurs one hundred and thirty five (135) percent of the Expenditures incurred by the Optionee on the Property (the "Back-in Interest Expenditures") within two (2) years after receipt by the Optionee of such notice by the Optionor (the "Vesting of the Back-in Right"). During this two (2) year period, the provisions of this Agreement hereof shall apply, mutatis mutandis, so that the Optionor, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionee, and its employees, agents and independent contractors, set forth in this Agreement and the Optionee, its employees, agents and independent contractors, shall have the exclusive rights and obligations of the Optionor, the employees, agents and independent contractors Page 14 set for in this Agreement provided, that this shall not relieve either the Optionor or Optionee for responsibility under those Articles for their acts and omissions for the period prior to the two (2) year period. (c) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions of the Joint Venture Agreement contemplated by Section 14 (d) upon the Optionor incurring the Back-in Interest Expenditures in accordance with Section 14 (b), with the initial undivided participating interests of the Optionor and Optionee in the Property being fifty-one (51%) percent and forty-nine (49%) percent, respectively; provided, if the Optionor does not incur the Back-in Interest Expenditures in accordance with Section 14 (b), the Optionee shall be deemed to have a retained one hundred (100%) percent undivided participating interest in the Property and the Optionor shall be entitled to the Net Smelter Royalty pursuant to Section 13. (d) Upon the Vesting of the Back-in Right, the Optionor and Optionee shall forthwith enter into a Joint Venture Agreement on the terms and conditions usual in the mining industry for the purpose of further exploring, developing and exploiting the Property. The Joint Venture Agreement shall include INTER ALIA: (i) rights of first refusal so that if either party wishes to dispose of its interest in the Property the other party shall have the right to purchase that interest; and (ii) all decisions to be made concerning the Property, including the approval of programs, budgets, and the determination of amounts to be expended by the Joint Venture, shall be made by votes of representatives of the parties holding an interest in the Property, in proportion to the respective interest then held by them in the Property. The initial undivided participating interests of the Optionor and Optionee in the Property shall be fifty-one (51%) percent and forty-nine (49%) percent, respectively. (e) Upon the parties entering into a Joint Venture Agreement pursuant to Section 14 (d), the parties shall immediately form a joint venture (the "Joint Venture") after which the parties shall share all future funding of exploration and other expenditures proportionately to their interest in the Property (each, a "Venture Interest").The parties shall use their best efforts to execute a definitive agreement governing the Joint Venture which shall incorporate the terms set out herein in respect of their relationship in the Joint Venture and such other terms as the parties may agree. (f) If either party elects not to fund its share of future Joint Venture expenditures its Venture Interest shall be diluted based on expenditures incurred, with the Optionor being initially deemed to have spent $1,875,000 for a 51% interest Page 15 and the Optionee being initially deemed to have spent $1,500,000 for a 49% interest upon formation of the Joint Venture. Each party's interest in the Property shall be calculated and re-calculated from time to time to the nearest four decimal places expressed as a percent, so that each party's interest shall be that percentage obtained by multiplying by 100 the result obtained when the aggregate of that party's deemed and actual expenditures on the Property is divided by the aggregate of both parties' deemed and actual expenditures on the Property. Actual expenditures are those incurred after the Vesting of the Back-in Right to the Optionor. If either party's Venture Interest is reduced to 10% or less, its Venture Interest shall be converted to a two (2% percent Net Smelter Return Royalty calculated and paid in the manner described in Schedule "B". (g) Subject to available capacity and compatibility with the then current facilities and through put of the Optionor, the parties confirm that it is their intention that any Product derived from the Property be milled, concentrated, refined or otherwise treated at existing facilities owned or operated by the Optionor, whether pursuant to the Joint Venture or in the event that the Optionor has not exercised the Back-in-Right, at cost plus a reasonable fee to be negotiated by the parties. 15. ARBITRATION In the event of any dispute between the Optionor and the Optionee with respect to this Agreement or any matter governed by this Agreement which the Optionor and Optionee are unable to resolve, the matter shall be decided by arbitration. The party desiring arbitration shall nominate one arbitrator and shall notify the other party of such nomination and the other party shall within thirty (30) days after receiving such notice nominate one arbitrator, and the two arbitrators shall select an umpire to act jointly with them. If the said arbitrators shall be unable to agree upon the selection of such umpire, the umpire shall be designated by any Justice of the Court of Queen's Bench of Manitoba. If the party receiving the notice of nomination of an arbitrator by the party desiring arbitration fails within the said thirty (30) days to nominate an arbitrator, then the arbitrator nominated by the party desiring arbitration may proceed alone to determine the dispute. Any decision reached pursuant to this Section 15 shall be final and binding upon the parties. Insofar as they do not conflict with the provisions hereof, the provisions of THE ARBITRATION ACT (Manitoba) as amended from time to time shall be applicable. 16. CONFIDENTIALITY All information, data and results relating to or derived from the Property and operations thereon that either the Optionee or Optionor may receive or become aware of through the provisions of this Agreement, shall be kept confidential and shall not be disclosed or Page 16 used in any manner by the Optionee or Optionor except as disclosure may otherwise be required by law, or required to enforce any provision hereof, or as may be mutually agreed in writing by the parties. 17. NOTICE (a) Any notice, document, cheque or thing required or permitted to be given or delivered hereunder shall be deemed to be properly given or delivered if: (i) delivered in person and left with any person who must be an employee of the party receiving such notice at the relevant address set forth below; or (ii) sent in a prepaid registered letter deposited in a post office; or (iii) sent by facsimile; and if to the Optionor, addressed to, Hudson Bay Mining and Smelting Co., Limited Box 1500 Flin Flon, Manitoba R8A 1N9 Attention: President Facsimile No. 204-687-2769 and if to the Optionee, addressed to: Halo Resources Ltd. 1280 - 625 Howe Street Vancouver, BC V6C 2T6 Attention: President Facsimile No. 604-484-0069 Any notice or delivery so given shall be deemed to have been given and received on actual receipt of the letter, facsimile received or on the day of delivery in person as the case may be (provided that such day is a business day and, if it is not, on the following business day). (b) Any party may from time to time by notice in writing delivered in accordance with the provisions of Section 17 (a) herein change its address for the purposes of this Section 17; (c) Any payment that the Optionee shall make to the Optionor hereunder shall be deemed to have been properly made if a Page 17 cheque payable to the Optionor in the amount thereof, has been delivered to the Optionor in accordance with the provisions of this Section 17, unless such cheques are not honoured on presentation for payment. 18. AGREEMENT OPTION ONLY Subject to Section 14 hereof, this Agreement is an option only and shall not be construed to create a partnership or the relationship of principal and agent or any other similar relationship between the Optionor and the Optionee. 19. TIME OF ESSENCE Time shall be of the essence hereof. 20. FORCE MAJEURE The Option Period and the time or times within which payments may or shall be made hereunder and all other time limitations hereunder shall be extended for a period of time equal to the total of all periods of time during which the Optionee is prevented from or seriously impeded in doing any prospecting, exploration, development and/or other mining work in, on or under the Property by reason of fires, power shortages, strikes, walk-outs, inability to obtain suitable machinery, labour or supplies, wars, riots, acts of God or the Queen's enemies, actions by aboriginal peoples or environmentalists, interference by civil or military authorities, litigation, governmental regulations or any other cause or causes (whether or not of the same class or kind as those enumerated above) beyond the reasonable control of the Optionee. The Optionee shall provide to the Optionor notice of the beginning of the period of the force majeure and the end of the period of force majeure in accordance with the terms of Section 17 hereof. 21. ENTIRE AGREEMENT This Agreement supersedes all prior negotiations and agreements and contains the entire understanding between the parties hereto, including the Letter of Intent, and may be modified only by instrument in writing signed by the party or parties against which the modification is asserted. 22. INDEMNITY The Optionor and the Optionee agree to indemnify and save the other harmless from all claims, charges, suits, liens, costs, damages, penalties, or other liabilities of any kind whatsoever suffered or Page 18 incurred by a party and which arise out of or are incidental to a breach of any warranty, covenant, representation, term, or condition of this Agreement. 23. FURTHER ASSURANCES The Optionee and the Optionor agree that either before or after the termination of this Agreement they will execute all documents and do all acts and things as the other party may reasonably request and as may be lawful and within their power to do to carry out the intent of this Agreement. 24. ASSIGNMENT The Optionor may, at its sole discretion, transfer, assign, or convey its rights and obligations in this Agreement to any affiliate of the Optionor. Otherwise, this Agreement and the rights and obligations of either party hereto shall not be transferred, assigned or conveyed without the prior written consent of the other party. 25. JURISDICTION This Agreement shall be governed by the laws of the Province of Manitoba and the parties hereto submit to such jurisdiction. 26. HEADINGS The headings herein are inserted for convenience of reference only and shall not be used in interpreting or construing this Agreement. 27. ENUREMENT This Agreement shall enure to and be binding upon the parties hereto and their respective successors and assigns. Page 19 28. SURVIVAL The parties hereto agree that all covenants, representations, warranties, terms and conditions contained in this Agreement shall not merge on closing or upon the delivery of any documents contemplated herein, but shall, in respect of the Property, survive thereafter for a period of two (2) years from the date that it is released by the Optionee under Section 12, the date that the Option is terminated under Section 7 hereof or the date that the Option is exercised under Section 6 hereof, as the case may be. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. HUDSON BAY MINING AND SMELTING CO., LIMITED Per: ------------------------------------- Per: ------------------------------------- HALO RESOURCES LTD. Per: ------------------------------------- Per: ------------------------------------- SCHEDULE "A" PROPERTY -------- ML 038 SCHEDULE "B" NET SMELTER RETURN ROYALTY 1. Net Smelter Return Royalty (a) There shall accrue for each Quarter following the date of the Commencement of Commercial Production an amount in dollars equal to two (2%) percent of the Net Sales Revenue. Each sum so accrued shall be payable by the Optionee to the Optionor in accordance with the provisions of paragraph 2 below. (b) The Optionee shall, as soon as practicable after the end of each Quarter following the date of Commencement of Commercial Production and in any event within thirty (30) business days, determine the Net Smelter Return Royalty for the previous Quarter in accordance with this Section 1(a) and shall deliver to the Optionor promptly thereafter a statement (the "NET SMELTER RETURN STATEMENT") showing such Net Smelter Return Royalty and setting out in detail its calculations of such Net Smelter Return Royalty. (c) If the amount of Net Smelter Returns is not ascertainable for a calendar quarter, it shall be estimated as nearly as possible at the time for payment and an adjustment shall be made at the end of each calendar year. Within ninety (90) days following the end of each calendar year, commencing with the year in which the date of the Commencement of Commercial Production falls, the Optionee shall deliver a statement of the Net Smelter Returns for the year duly certified as correct by an independent Chartered Accountant appointed by the Optionee for such purposes. The Optionor shall have the right within a period of three (3) months from receipt of such certified statement to conduct an independent audit at its own cost and expense, the right to review the Optionee's books and records relating thereto and an opportunity to discuss issues raised with the independent Chartered Accountant. The Optionee shall immediately pay to the Optionor any additional Net Smelter Return Royalty found by such independent audit to be payable in respect of the previous calendar year. In the event such audit indicates that the Optionee's statements were more than five (5%) percent different than that assessed by the independent audit, then the cost of such independent audit shall be borne by the Optionee. (d) If any portion of the Product extracted and derived from the Property are sold to a purchaser owned or controlled by the Optionee or treated by a smelter owned or controlled by the Optionee, the actual proceeds received shall be deemed to be -2- an amount equal to what could be obtained from a purchaser or a smelter not so owned or controlled in respect of Product of like quality and quantity after deducting therefrom a charge equal to the transportation cost which would have been incurred had the material been sold to such third party purchaser or smelter. 2. Payment (a) Each sum which shall accrue pursuant to Section 1(a) above shall be payable by the Optionee to the Optionor in full upon the Optionee's delivery of the Net Smelter Return Royalty Statement or as soon as possible thereafter and, in any event, within forty (40) business days of the end of the Quarter to which such sum relates. (b) All payments to be made by the Optionee under this Schedule shall be made in Canadian dollars in same day funds to such account at such bank or office as the Optionor shall designate by not less than two (2) business days' notice to Optionee. (c) The Optionee shall, if requested to do so by any of the Optionor, produce to the Optionor the underlying evidence supporting each of the Net Smelter Return Royalty Statements delivered with a view to the Optionor verifying each such statement. (d) Each payment by the Optionee under this Schedule shall be made (except to the extent required by law) without set-off or counterclaim and free and clear of and without deduction or withholding for or on account of any taxes unless the Optionee is required by law to make such payment subject to the deduction or withholding of any taxes in which case the sum payable by the Optionee in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Optionor receive and retain (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or required to be made. EX-10 5 exh4_10.txt EXH 4.10 A/G BETWEEN HALO AND GOLDCORP EXHIBIT 4.10 LETTER OF INTENT BY AND BETWEEN HALO RESOURCES LTD. AND GOLDCORP INC. DATED APRIL 18, 2006 April 18, 2006 Goldcorp Inc. 200 Burrard Street, Suite 1560 Vancouver BC V6C 3L6 ATTENTION: JAMES ROGERS Dear Sirs: RE: HALO RESOURCES LTD. ("HALO") OPTION TO EARN A 60% INTEREST IN AND TO CERTAIN UNPATENTED MINING CLAIMS AND A 30% INTEREST IN AND TO CERTAIN OTHER PATENTED MINING CLAIMS IN THE RED LAKE DISTRICT OF ONTARIO This Letter of Intent ("LOI") sets out the terms and conditions whereby Goldcorp Inc. ("GOLDCORP") agrees to grant to Halo Resources Ltd. ("HALO") the sole and exclusive right and option (the "OPTION") to acquire an undivided 60% legal and beneficial interest in and to certain unpatented mining claims located in the Red Lake District of Ontario and known as the Middle Property and the Pipestone Property (collectively the "UNPATENTED PROPERTY") and an undivided 30% legal and beneficial interest in and to certain patented mining claims located in the Red Lake District of Ontario and known as the Biron Bay Property (the "PATENTED PROPERTY"), as such upatented and patented mining claims are set out and listed on Schedule "A" hereto (the Unpatented Property and the Patented Property collectively, the "PROPERTY"), in consideration of Halo performing certain exploration work on the Property. The term of the Option (the "TERM") shall commence on the date of the Definitive Agreement (as defined below) (the "EFFECTIVE DATE") and end on the date that is the third (3rd) anniversary of the Effective Date. The general terms and conditions of this LOI are as follows: 1. (a) Halo shall have sixty (60) days from the date of this LOI (the "DUE DILIGENCE PERIOD") to conduct legal, technical and environmental due diligence with respect to the Property and to completely satisfy itself in respect of such due diligence, in its sole discretion. During the Due Diligence Period Goldcorp shall maintain the title to the Property in good standing and shall not grant any other right, title or interest in and to the Property to any third party. - 2 - (b) Subject to the terms and conditions of this LOI, Goldcorp and Halo shall, as expeditiously as possible, negotiate in good faith and, in the event that Halo confirms in writing that it is satisfied in its sole discretion with its due diligence review (the "DUE DILIGENCE WAIVER"), settle and execute a formal option agreement (the "DEFINITIVE AGREEMENT") whereby Goldcorp will grant the Option to Halo, within five (5) days of Halo delivering the Due Diligence Waiver. Such Definitive Agreement shall include the terms set out in this LOI and such other mutually acceptable terms and conditions as the parties may agree, including such terms, conditions, representations, warranties and covenants as are customary in transactions involving the grant of an option to acquire an interest in mining properties. (c) This LOI shall terminate and be of no further force or effect at the expiry of the Due Diligence Period if Halo has not delivered the Due Diligence Waiver to Goldcorp at or before the expiry of the Due Diligence Period. 2. In consideration of Goldcorp entering into and delivering the Definitive Agreement, and in order to maintain the Option in good standing, Halo shall perform an exploration program on the Property at the following minimum expenditures per year (on a non-cumulative basis): ----------------------------------------------------------------------- YEAR OF TERM MINIMUM EXPENDITURE AMOUNT (CANADIAN DOLLARS) ----------------------------------------------------------------------- 1 Cdn. $750,000.00 ----------------------------------------------------------------------- 2 Cdn. $1,000,000.00 ----------------------------------------------------------------------- 3 Cdn. $1,250,000.00 ----------------------------------------------------------------------- The first Cdn.$750,000.00 of expenditures shall be committed and Halo shall not be entitled to terminate the Option or the Definitive Agreement prior to incurring Cdn.$750,000.00 of exploration expenditures in respect of the Property. For greater certainty, Halo shall during the Option Period incur such expenditures and perform such work commitments and pay Goldcorp's proportionate share of any taxes or assessments payable as may be necessary in order to keep the Property in good standing during the Option Period, and such expenditures, payments or work commitments shall be credited against Halo's commitment to incur expenditures pursuant to this Section 2. - 3 - 3. As soon as possible following the execution of this LOI, Goldcorp will make available to Halo for review, as part of Halo's due diligence review, copies of all records and data in its possession or control respecting the Property, including all reports prepared by or for Goldcorp in respect of the Property and Halo shall be entitled to make copies of all such records, data and reports, provided that it shall keep all such information confidential and shall not disclose it or use it in any manner contrary to the intent of this LOI without the prior written consent of Goldcorp. If Halo does not deliver the Due Diligence Waiver to Goldcorp within the Due Diligence Period, Halo shall immediately destroy or deliver to Goldcorp all copies of all information related to the Property in the possession of Halo and a senior officer of Halo shall deliver a certificate to Goldcorp certifying that all such information has been destroyed or returned to Goldcorp. Goldcorp does not represent or warrant the accuracy or completeness of any records, data or reports provided to Halo in accordance with this Section 3. 4. (a) During the Due Diligence Period, Halo, its employees, agents and independent contractors shall have the right (subject to the rights of the other co-owner of the Patented Property), at its sole risk and expense, to enter in, on or under the Property in order to conduct its due diligence review, but shall not conduct any mining exploration activities or other work on the Property during such time. (b) From and after the Effective Date, Halo, its employees, agents and independent contractors shall have the right (subject to the rights of the other co-owner of the Patented Property): (i) to enter in, on or under the Property; (ii) to bring upon the Property such vehicles, equipment, portable structures and other apparatus as the Halo shall in its sole discretion deem advisable; (iii) to do such work and conduct and manage such mining programs on or under the Property as Halo shall in its sole discretion deem advisable; (iv) to remove from the Property such materials for analysis and testing as Halo shall in it sole discretion deem advisable; and - 4 - (v) to have possession of the Property during the currency of the Option Period. In the event that Halo determines that it needs to reach agreement with any person other than Goldcorp that holds an interest in and to the Patented Property in order for Halo to meet its commitments and exercise its rights under this LOI, Goldcorp shall take all such reasonable actions as are reasonably required by Halo, or such other person with an interest in the Patented Property, in order to assist Halo to reach such agreement. Halo shall not be entitled to credit any payments it may agree to make to such person in order to reach such agreement, against Halo's commitment to incur expenditures pursuant to Section 2. 5. Halo shall keep full and complete records of all exploration work and development of the Property, together with the results of assays made, and all such records and results shall be available for inspection by Goldcorp prior to the exercise of the Option by Halo. If the Option is terminated or otherwise not exercised by Halo, Halo shall deliver to Goldcorp all such records and results and all such records and results shall become the property of Goldcorp. 6. For a period of ninety (90) days following the date of the exercise of the Option by Halo, Goldcorp shall, at its sole discretion, have the right to elect by notice in writing delivered to Halo to exercise the right (the "BACK-IN RIGHT") to acquire from Halo (i) a twenty-five (25%) percent interest in and to the Unpatented Property such that Goldcorp will thereafter have a sixty-five (65%) percent undivided legal and beneficial interest in and to the Unpatented Property and Halo will have a thirty-five (35%) percent undivided legal and beneficial interest in and to the Unpatented Property and (ii) a twelve and one-half (12.5%) percent interest in and to the Patented Property such that Goldcorp will thereafter have a thirty-two and one-half (32.5%) percent undivided legal and beneficial interest in and to the Patented Property and Halo will have a seventeen and one half (17.5%) percent undivided legal and beneficial interest in and to the Patented Property, by giving notice of such election in writing to Halo and by paying Halo Cdn. $6,000,000.00 on or before the expiration of such ninety (90) day period. If Goldcorp advises Halo in writing that it does not intend to exercise the Back-in Right or fails to give such a notice and make such payment within the ninety (90) day time frame for doing so, Halo shall issue and deliver one million (1,000,000) fully paid and non-assessable common shares of Halo (the "OPTION SHARES") to Goldcorp in accordance with and subject to Sections 7 and 8 below. Halo - 5 - shall during the Due Diligence Period seek the regulatory and stock exchange conditional pre-approval to the issuance and delivery of the Option Shares. 7. For the purposes of Section 6, any Option Shares issued shall be deemed to have a value per share equal to the volume-weighted average closing price of Halo's common shares on the TSX Venture Exchange for the thirty trading days immediately prior to the date that Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in-Right. If Goldcorp does not exercise the Back-in Right Halo shall take all necessary corporate action to issue and deliver the Option Shares to Goldcorp and to record the Option Shares on the books of Halo in the name of Goldcorp. Halo shall comply with applicable securities laws in connection with the issuance of such Option Shares. 8. The Option Shares to be issued by Halo to Goldcorp shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange (not to exceed four months from the date of issuance). The issuance of any Option Shares shall be conditional upon Halo obtaining all regulatory consents or approvals being received, including those of the TSX Venture Exchange and Halo will ensure that all filings required to be made with all applicable securities regulatory authorities are made in a prompt and timely manner to allow for the issuance of the Option Shares on a basis that is exempt from all prospectus and registration requirements under applicable securities laws. In the event that Halo is unable to issue the Option Shares to Goldcorp on an exempt basis within ten business days of the date Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in Right, Halo shall promptly pay Goldcorp the cash value of the Option Shares, as determined in accordance with Section 7, in cash, by certified cheque or wire transfer in immediately available funds. 9. In the event Halo exercises the Option, Halo and Goldcorp shall forthwith enter into a definitive joint venture agreement, on terms and conditions usual in the mining industry and satisfactory to both parties, acting reasonably, for the purpose of jointly further exploring, developing and exploiting the Property (the "JOINT VENTURE"). The parties shall share all future funding of exploration and other expenditures and liabilities proportionately to their respective interests in the Property (each, a "VENTURE INTEREST"). The joint venture agreement shall include provisions pertaining to, INTER - 6 - ALIA: (i) reciprocal rights of first refusal concerning each party's Venture Interest; (ii) the manner in which decisions will be made concerning the Property, including the approval of programs, budgets, and the determination of amounts to be expended by the Joint Venture, and (iii) dispute resolution procedures. 10. If either party elects not to fund its share of future Joint Venture expenditures where the other party does fund its share, the non-funding party's Venture Interest shall be diluted in accordance with standard mining industry dilution provisions. If either party's Venture Interest is reduced to ten (10%) percent or less, its Venture Interest shall be converted to a one and a half (1.5%) percent Net Smelter Return Royalty calculated and paid in the manner described in Schedule "B". 11. Subject to the committed expenditure requirements set out in Section 2 of this LOI, Halo may terminate the Option and its obligations to incur expenditures at any time and return possession of all of the mining claims forming the Property to Goldcorp by giving Goldcorp written notice thereof. 12. Upon termination of the Option, Halo shall ensure that the Property shall remain in good standing for at least six (6) months after the date of such termination. 13. Upon the termination of the Option, Halo shall have the right for sixty (60) days beyond the date of such termination to enter on, in or under the Property in order, to remove therefrom such equipment, tools, materials, structures, apparatus or supplies brought thereon by Halo or on its behalf, and to the extent that Halo does not remove them they shall become the property of Goldcorp. 14. The obligation of the parties to complete the transactions contemplated by this LOI is subject to the following conditions precedent: (i) Halo being completely satisfied, in its sole discretion, with its legal, technical and environmental due diligence undertaken with respect to the Property during the Due Diligence Period; and (ii) execution of the Definitive Agreement. 15. The terms of this LOI, including the terms of the transactions contemplated hereby and the fact that Halo and Goldcorp are pursuing the proposed transactions contemplated herein are confidential and - 7 - neither Halo nor Goldcorp shall disclose any such information to any person or entity without the prior written consent of the other, except as may otherwise be required by applicable law, rule or regulation. Notwithstanding the foregoing and for greater certainty, either party may make a public announcement of the existence of this LOI and the transactions contemplated hereby provided that the timing and content thereof have been agreed upon by both parties, acting reasonably. 16. Halo and Goldcorp agree that all out-of-pocket expenses and disbursements incurred in connection with this LOI and the completion of the transactions contemplated herein, including fees and expenses relating to legal, tax, accounting matters and financial advisor fees, will be paid by the party incurring such expenses. 17. This LOI, the Definitive Agreement, the joint venture agreement and any other agreement or instrument contemplated by this LOI shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. 18. Any assignment of a party's interest hereunder may be assigned only with the prior written consent of the other party. 19. This LOI shall enure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 20. This LOI may be executed by facsimile transmission in counterparts, each of which so executed and delivered shall be deemed to be an original and such counterparts together shall constitute one and the same document Yours truly, HALO RESOURCES LTD. Per: /s/ MARC CERNOVITCH - ---------------------------- Name: Marc Cernovitch Title: President - 8 - GOLDCORP HEREBY CONFIRMS ITS AGREEMENT WITH THE TERMS HEREOF AS EVIDENCED BY ITS DUE EXECUTION BELOW, WITH EFFECT AS OF THE DATE OF THIS LOI. GOLDCORP INC. Per: /s/ LINDSAY HALL - ------------------------- Name: Lindsay Hall Title: VP and CFO SCHEDULE "A" THE PROPERTY ------------------------------------------------------- OFFICIAL PROPERTY TYPE TOWNSHIP NUMBER ------------------------------------------------------- Biron Bay Patent Ball 11077 Biron Bay Patent Ball 11078 Biron Bay Patent Ball 11079 Biron Bay Patent Ball 11080 Biron Bay Patent Ball 11081 Biron Bay Patent Ball 11082 Biron Bay Patent Ball 11083 Biron Bay Patent Ball 11104 Biron Bay Patent Ball 11105 Biron Bay Patent Ball 11106 ------------------------------------------------------- ------------------------------------------------------------------ ACTION OFFICIAL PROPRTY TYPE DUE TOWNSHIP NUMBER ------------------------------------------------------------------ Pipestone Bay STK 6/7/2007 Ball 1234170 Pipestone Bay STK 7/4/2008 Ball 1234140 Pipestone Bay STK 7/4/2008 Ball 1234141 Pipestone Bay STK 7/4/2007 Ball 1234142 Pipestone Bay STK 7/4/2006* Ball 1234143 Pipestone Bay STK 7/4/2007 Ball 1234144 ------------------------------------------------------------------ * Assessment ($6,000) required on these mineral claims by July 4, 2006 -2- ------------------------------------------------------------------ ACTION OFFICIAL PROPRTY TYPE DUE TOWNSHIP NUMBER ------------------------------------------------------------------ Middle Bay LP 2/1/2008 Ball 40860 Middle Bay LP 2/1/2008 Ball 40861 Middle Bay LP 2/1/2008 Ball 40862 Middle Bay LP 2/1/2008 Ball 40863 Middle Bay LP 2/1/2008 Ball 40864 Middle Bay LP 2/1/2008 Ball 40865 Middle Bay LP 8/1/2014 Ball 46181 Middle Bay LP 8/1/2014 Ball 46182 Middle Bay LP 8/1/2014 Ball 46183 Middle Bay LP 8/1/2014 Ball 46184 Middle Bay LP 8/1/2014 Ball 47707 Middle Bay LP 8/1/2014 Ball 47708 Middle Bay LP 3/1/2011 Ball 49874 Middle Bay LP 3/1/2011 Ball 49875 Middle Bay LP 3/1/2011 Ball 49896 Middle Bay LP 3/1/2011 Ball 49897 Middle Bay LP 3/1/2011 Ball 49898 Middle Bay LP 3/1/2011 Ball 49899 Middle Bay LP 3/1/2019 Ball 49900 Middle Bay LP 3/1/2011 Ball 49901 Middle Bay LP 3/1/2011 Ball 49902 Middle Bay LP 3/1/2011 Ball 49903 Middle Bay LP 3/1/2011 Ball 49904 Middle Bay LP 12/1/2018 Ball 52174 Middle Bay LP 12/1/2018 Ball 52175 Middle Bay LP 3/1/2019 Ball 53397 Middle Bay LP 3/1/2011 Ball 53398 Middle Bay LP 3/1/2011 Ball 53399 Middle Bay STK 8/29/2007 Ball 870130 Middle Bay STK 8/29/2008 Ball 870131 Middle Bay STK 8/29/2007 Ball 870132 Middle Bay STK 5/31/2007 Ball 1143622 Middle Bay STK 5/31/2007 Ball 1143623 Middle Bay STK 5/31/2007 Ball 1143624 Middle Bay STK 5/31/2007 Ball 1143625 Middle Bay STK 5/31/2007 Ball 1143646 Middle Bay STK 5/31/2007 Ball 1143647 Middle Bay STK 3/17/2007 Ball 1184230 Middle Bay STK 6/1/2007 Ball 1184316 Middle Bay STK 6/1/2007 Ball 1184317 Middle Bay STK 6/4/2007 Ball 1185055 Middle Bay STK 6/28/2008 Ball 1234022 Middle Bay STK 6/28/2007 Ball 1234029 Middle Bay STK 6/28/2007 Ball 1234030 Middle Bay STK 6/28/2008 Ball 1234039 Middle Bay STK 6/28/2007 Ball 1234051 - 3 - ------------------------------------------------------------------ ACTION OFFICIAL PROPRTY TYPE DUE TOWNSHIP NUMBER ------------------------------------------------------------------ Middle Bay STK 11/24/2008 Ball 1234081 Middle Bay STK 11/24/2007 Ball 1234082 Middle Bay STK 11/24/2008 Ball 1234083 Middle Bay STK 10/5/2007 Ball 1234155 Middle Bay STK 10/5/2007 Ball 1234156 Middle Bay STK 10/5/2008 Ball 1234157 Middle Bay STK 6/12/2006(1) Ball 1248154 Middle Bay STK 6/21/2007 Ball 1234259 Middle Bay STK 7/4/2008 Ball 1234245 Middle Bay STK 11/24/2006(2) Ball 1234084 Middle Bay STK 6/2/2006(1) Ball 3004674 Middle Bay STK 6/2/2006(1) Ball 3004676 Middle Bay STK 6/2/2006(1) Ball 1247933 Middle Bay STK 10/23/2007 Ball 1234401 Middle Bay STK 10/23/2007 Ball 1234402 Middle Bay STK 6/2/2006(1) Ball 1248171 Middle Bay STK 07/16/2007 Ball 1248129 Middle Bay STK 6/4/2006(3) Ball 1248169 (1) Assessment ($4,000) required on these mineral cliams by June 2, 2006. (2) Assessment ($1,538) required on these mineral cliams by November 24, 2006. (3) Assessment ($800) required on these mineral cliams by June 2, 2006. SCHEDULE "B" NET SMELTER RETURNS ROYALTY 1. INTERPRETATION Where used in this Schedule "B": (a) "Agreement" means the LOI and the Definitive Agreement to which this schedule is or becomes attached, including any amendments thereto or renewals or extensions thereof. (b) "Property" means those mining Properties described in Schedule "A" of the LOI to which this Schedule "B" is attached. (c) "Fiscal Period" means each calendar year or other period of 12 consecutive months adopted by the payor of the Royalty Interest for accounting and tax purposes. (d) "Royalty Interest" means the 1.5% Net Smelter Returns royalty which may become payable pursuant to the terms of the LOI to which this Schedule "B" is attached. 2. NET SMELTER RETURNS "Net Smelter Returns" shall mean the gross proceeds received by the payor of the Royalty Interest in accordance with its proportionate ownership interest in and to the Property from the sale or other disposition of minerals, ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Property and sold, less the following expenses if actually incurred: (a) taxes specifically based on mining production, but excluding any and all taxes (i) based upon the net or gross income of the owner or other operator of the Property or the payor of the Royalty Interest and (ii) based upon the value of the Property, the privilege of doing business and other similarly based taxes; (b) charges and costs, if any, for transportation and insurance of ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Property to any mint, smelter, or refinery; and - 2 - (c) charges, costs (including assaying and sampling costs) and all penalties, if any, charged by a smelter or refiner of ores, metals (metals shall include, precious metals and metals other than precious metals) or concentrates of metals produced from the Property. 3. PAYMENT (a) The Royalty Interest shall be paid in cash only on a quarterly basis within 45 days after the end of each fiscal quarter during the relevant Fiscal Period; (b) Each payment under subsection 3(a) shall be accompanied by a statement indicating the calculation of Net Smelter Returns. The Royalty Interest holder shall be entitled to audit, during normal business hours, such books and records as are necessary to determine the correctness of the payment of the Royalty Interest provided, however, that such audit may be made once only on an annual basis and within 12 months of the end of the Fiscal Period in respect of which such audit is made; and (c) Payment of the Royalty Interest shall be made to the Royalty Interest holder at such place or places as the Royalty Interest holder shall advise the payor from time to time. 4. TRANSFER OF THE PROPERTY The owner of the Property shall be entitled to transfer all or part of such title in and to the Property to any third party, provided that such third party shall agree in writing to be bound by the terms of the Royalty Interest to the extent of such interest in the Property acquired and, in such circumstances, the transferor of such interest in and to the Property shall be released from all obligations in respect of the Royalty Interest accruing from and after the date of such transfer. EX-10 6 exh4_11.txt EXH 4.11 OPTION BETWEEN HALO AND GOLDCORP EXHIBIT 4.11 OPTION AGREEMENT BY AND BETWEEN HALO RESOURCES LTD. AND GOLDCORP INC. DATED JUNE 20, 2006 THIS OPTION AGREEMENT dated as of the 20th day of June, 2006. BETWEEN: GOLDCORP INC. a corporation duly existing under the laws of the Province of Ontario ("Goldcorp") OF THE FIRST PART - and - HALO RESOURCES LTD. a corporation duly continued under the laws of the Province of British Columbia ("Halo") OF THE SECOND PART WHEREAS: A. Goldcorp is the recorded and beneficial owner of a 100% interest in and to certain unpatented mining claims and the registered and beneficial owner of a l00% interest in and to certain leasehold mining claims located in the Red Lake District of Ontario, as such unpatented and leasehold mining claims are more particularly described in Schedule "A" attached hereto (collectively, save and except for the Seventy-Five % Claims (as defined below), the "Unpatented Property"); B. Goldcorp has agreed to grant Halo an exclusive option (the "Unpatented Option") to acquire an undivided 60% recorded or registered and beneficial interest in and to the Unpatented Property in accordance with and subject to the terms and conditions hereinafter set forth; C. Goldcorp is the registered and beneficial owner of a 75% interest in and to leasehold patent mining claims KRL47707 and KRL47708 (the "Seventy-Five % Claims") as such leasehold patent mining claims are described in Schedule "A" attached hereto; D. Goldcorp has agreed to grant to Halo an exclusive option (the "Seventy-Five % Claims Option") to acquire an undivided 45% registered and beneficial interest in and to the Seventy-Five % Claims in accordance with and subject to the terms and conditions hereinafter set forth; E. Goldcorp is the registered and beneficial owner of a 50% interest in and to certain patented mining claims located in the Red Lake District of Ontario, as such patented mining claims are more particularly described in Schedule "A1" attached hereto (collectively the "Patented Property"); F. Goldcorp has agreed to grant Halo an exclusive option (the "Patented Option") to acquire an undivided 30% registered and beneficial interest in and to the Patented Property in accordance with and subject to the terms and conditions hereinafter set forth; and - 2 - G. The Unpatented Property, the Seventy-Five % Claims and the Patented Property are sometimes hereinafter referred to collectively as the "Property" and the Unpatented Option, the Seventy-Five % Claims Option and the Patented Option are sometime collectively referred to as the "Option". 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 by each of the Parties) the Parties do hereby covenant and agree as follows: 1. DEFINITIONS 1.1 DEFINITIONS. In this Agreement: "this Agreement", "herein", "hereby", "hereof", "hereunder" and similar expressions shall mean or refer to this Agreement and all schedules hereto and any and all written 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. "Agents" shall mean consultants (including financial advisors), servants, employees, agents, workmen, contractors and subcontractors. "Back-in Right" shall have the meaning set forth in section 6.3. "Development" shall mean all preparation for the removal and recovery of minerals from the Property. "Earn-In Date" shall have the meaning set forth in section 6.1. "Effective Date" shall mean the date of this Agreement set forth on the first page hereof. "Encumbrances" shall mean any and all mortgages, pledges, security interests, liens, charges, encumbrances, contractual obligations and rights and claims of others, whether recorded or unrecorded, registered or unregistered. "Excess Expenditures" shall have the meaning set forth in section 5.1. "Expenditures" shall mean all expenditures, expenses, obligations and liabilities of whatever kind or nature reasonably spent or incurred by Halo in doing Work on the Property from and after the Effective Date, including for greater certainty and without limitation, expenses paid for or incurred in connection with any program of surface or underground prospecting, exploring, geological, geophysical and geochemical surveying, diamond drilling, drifting, raising and other - 3 - underground work, assaying, metallurgical testing, environmental studies, submissions to any Governmental Authority and other agencies with respect to all required production and other permits, licenses and approvals, moneys expended in keeping the Property and the title thereto in good standing, and moneys expended in acquiring or constructing facilities and in developing and mining the Property and all field costs incurred by employees and Agents with respect to Work conducted on the Property together with all administrative and overhead costs directly incurred by the Operator and relating directly to the administration of the Property or Work done on the Property, provided that in no event shall such administrative and overhead costs exceed seven and one half percent (7.5%) of all other Expenditures directly related to the Property or Work done on the Property and directly incurred or performed by Halo, or seven and one half percent (7.5%) of the contract price in respect of all other Expenditures directly related to the Property or Work done on the Property performed by any agent, contractor or subcontractor of Halo, and provided always that in no event shall such costs include non-project related overhead or legal or other consultants' fees related to the negotiation (including the conduct of due diligence) execution and delivery of this Agreement. "Expenditure Date" means each date upon which Expenditures must have been incurred as provided in the schedule set out in section 4.1. "Exploration" shall mean all activities directed toward ascertaining the existence, location, quantity, quality or commercial value of deposits of minerals on the Property. "Governmental Authority" means any federal, provincial, municipal or other governmental department, commission, board, bureau, agency, government-owned corporation or instrumentality, or any court. "Joint Venture Agreement" shall mean the joint venture agreement in the form set forth in Schedule "B" attached hereto, which agreement shall be executed and delivered by the Parties upon the due exercise of the Option. "Losses" shall mean actual losses, liabilities, damages, injuries, costs or expenses. "Operator" shall mean Halo. "Option" shall have the meaning set forth in the recitals to this Agreement. "Option Period" shall mean the period during which the Option is in full force and effect as provided herein. "Option Shares" shall have the meaning set forth in section 6.3. "Party" shall mean Halo or Goldcorp, as the case may be. "Permitted Encumbrances" means any Encumbrance in respect of the Property constituted by the following: - 4 - (a) inchoate or statutory liens for taxes not at the time overdue; (b) inchoate or statutory liens for overdue taxes or utilities, the validity of which is being contested in good faith but only for so long as such contestation effectively postpones enforcement of any such liens or taxes; (c) security given to a public utility or any Governmental Authority when required in the ordinary course of business; (d) any reservations or exceptions contained in the original grants of land and the terms of any lease in respect of any real property comprising the Property; (e) minor discrepancies in the legal description of the Property or any adjoining real property which would be disclosed in an up-to-date survey and any registered easements and registered restrictions or covenants that run with the land which do not materially detract from the value of, or materially impair the use of, or affect the right to transfer, the Property; and (f) rights of way for or reservations or rights of others for, sewers, water lines, gas lines, electric lines, telegraph and telephone lines, and other similar utilities, or zoning by-laws, ordinances or other restrictions as to the use of real property, which do not in the aggregate materially detract from the value of, or materially impair the use of, or affect the right to transfer, the Property; "Person" shall mean any natural person, partnership, company, corporation, unincorporated association, Governmental Authority or other agency, trust, trustee or other entity howsoever designated or constituted. "Prime Rate" shall mean the interest rate quoted from time to time as "Prime" by The Toronto-Dominion Bank to its most creditworthy customers. "Property" shall have the meaning ascribed thereto in the preambles to this Agreement. "Work" means Exploration, Development or other mining and milling work performed exclusively on or directly in relation to the Property. 2. SCHEDULES, GENDER AND CANADIAN DOLLARS 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 Unpatented Property and the Seventy-Five % Claims Schedule "A1" - Description of the Patented Property - 5 - Schedule "B" - Joint Venture Agreement Schedule "C" - Rules for Arbitration 2.2 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. 2.3 CANADIAN DOLLARS. All references to currency in this Agreement, including "dollars" and "$", are in Canadian funds. 2.4 BUSINESS DAYS. All references in this Agreement to business days are to days excluding Saturdays, Sundays and banking or statutory holidays in the Province of Ontario. 2.5 PERIOD OF TIME. 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 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. 2.6 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. 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 Party 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 corporate power and authority to carry on its business and to enter into this Agreement and to carry out and perform all of its obligations and duties hereunder. (c) It has duly obtained all corporate and regulatory authorizations for the execution, delivery and performance of this Agreement and, except as expressly set out in this Agreement, 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 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. - 6 - (d) This Agreement has been duly executed and delivered by it and is valid, binding and enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other laws of general application limiting the enforcement of creditors' rights generally and to the fact that specific performance is an equitable remedy available only in the discretion of a court. (e) There is no Person acting or purporting to act at its request who is entitled to any brokerage or finders fee in connection with the transactions contemplated herein. (f) 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 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. 3.2 REPRESENTATIONS AND WARRANTIES OF GOLDCORP. Goldcorp hereby represents and warrants to Halo as follows and acknowledges that Halo is relying on such representations and warranties in entering into this Agreement: (a) Goldcorp is the holder of record and is the beneficial holder of a 100% undivided interest in and to those unpatented mining claims forming part of the Unpatented Property, is the registered owner of record and is the beneficial holder of a 100% undivided interest in and to those leasehold mining claims forming part of the Unpatented Property and is the registered owner of record and is the beneficial holder of a 75% interest in and to the Seventy-Five % Claims, with good and marketable (to the extent permitted by applicable laws) title thereto, and is a registered owner and is a beneficial holder of an undivided 50% interest in and to the Patented Property, with good and marketable title thereto, all free and clear of any and all Encumbrances, other than Permitted Encumbrances. (b) There are no other agreements, adverse interests or options to acquire or purchase the Unpatented Property, Goldcorp's 75% interest in and to the Seventy-Five % Claims or Goldcorp's 50% interest in and to the Patented Property, or any portion thereof. Save for the terms of the leasehold patents related to those leased mining claims forming part of the Unpatented Property and the Seventy-Five % Claims and save for the rights of the other 50% owner of the Patented Property in and to the Patented Property and the other 25% owner of the Seventy-Five % Claims in and to the Seventy-Five % Claims, no Person has any proprietary or possessory interest in or to the Property other than Goldcorp and, save for the terms of the leasehold patents related to those leased mining claims forming part of the Unpatented Property and the Seventy-Five % Claims and save for the rights of the other 50% owner of the Patented Property in and to the Patented property and the other 25% owner of the - 7 - Seventy-Five % Claims in and to the Seventy-Five % Claims, no Person is entitled to any royalty or other payment in the nature of rent or royalty on any minerals, metals or concentrates or any other such products removed or produced from the Property. (c) The title to the Unpatented Property (including all leases related thereto), the 75% interest of Goldcorp in and to the Seventy-Five % Claims (including Goldcorp's 75% interest in and to the leases related thereto) and the 50% interest of Goldcorp in and to the Patented Property, are in good standing and the condition of the Property is in material compliance with all applicable laws, regulations and orders of all Governmental Authorities having jurisdiction, including in respect of any material environmental liability related to or arising out of the Property. (d) To the best of its knowledge, there are no outstanding, pending or threatened, actions, suits or claims affecting or in respect of the Unpatented Property, Goldcorp's 75% interest in and to the Seventy-Five % Claims or Goldcorp's 50% interest in and to the Patented Property, or any part thereof. (e) To the best of its knowledge, Goldcorp has made available to Halo all material information in its possession or control relating to the Property as contemplated in section 7.1. Such deliveries are for the information and convenience of Halo only and Goldcorp does not represent the accuracy or completeness of such deliveries and shall not be liable for any errors or omissions with respect thereto or contained therein. 3.3 REPRESENTATIONS AND WARRANTIES OF HALO. Halo hereby represents and warrants to Goldcorp, and acknowledges that Goldcorp is relying on such representations and warranties in entering into this Agreement; (a) Halo is, and has not received any notice from any Governmental Authority advising it that it is not or will not be, authorized, permitted or licensed to conduct business in the Province of Ontario and to perform such operations or obligations within the jurisdiction of each Governmental Authority having jurisdiction of the nature and scope of the operations and obligations to be performed by Halo pursuant to and in accordance with the terms of this Agreement and the Joint Venture Agreement; (b) The outstanding common shares of Halo are listed and posted for trading on the TSX Venture Exchange; and (c) Halo has obtained regulatory and TSX Venture Exchange conditional pre-approval of the issuance and delivery of the Option Shares in accordance with the terms of this Agreement. 3.4 REPRESENTATIONS AND WARRANTIES AS CONDITIONS. Each Party: (a) Acknowledges and agrees that the other Party is entering into this Agreement relying upon the representations and warranties made by it herein and the correctness of each such - 8 - representation and warranty is a condition upon which such other Party is relying upon entering into this Agreement, each of which conditions or breach thereof may be waived in whole or in part solely by such other Party in writing without prejudice to its rights in respect of any other breach of such conditions and all such representations and warranties shall survive the execution, delivery and termination of this Agreement and the completion of the transactions contemplated hereby for a period of one year from the Effective Date notwithstanding any independent investigations either Party has made or may make. (b) Agrees to indemnify and hold harmless the other Party from all Losses actually incurred by such other Party in connection with a breach of any representation or warranty made by it and contained herein. 4. GRANT OF OPTION 4.1 GRANT. In consideration of the covenants and agreements of Halo set forth herein, Goldcorp does hereby give and grant the Option to Halo. In order to maintain the Option in good standing, Halo shall perform an exploration program on the Property at the following minimum expenditures per year on or before the annual date set out below (on a non-cumulative basis): ----------------------------------------------------------------------- YEAR OF TERM AND MINIMUM EXPENDITURE AMOUNT EXPENDITURE DATE (CANADIAN DOLLARS) ----------------------------------------------------------------------- Year 1 - on or before December 31, 2006 Cdn $750,000.00 ----------------------------------------------------------------------- Year 2 - on or before December 31, 2007 Cdn $1,000,000.00 ----------------------------------------------------------------------- Year 3 - on or before December 31, 2008 Cdn $1,250,000.00 ----------------------------------------------------------------------- The first Cdn.$750,000.00 of expenditures shall be committed and Halo shall not be entitled to terminate the Option prior to incurring Cdn.$750,000.00 worth of Exploration Expenditures in respect of the Property. For greater certainty, Halo shall during the Option Period incur such Expenditures and perform such Work and pay Goldcorp's proportionate share of any taxes, rents or assessments payable as may be necessary in order to keep the Property in good standing during the Option Period, and such expenditures, payments or Work shall be credited against Halo's commitment to incur Expenditures pursuant to this section 4.1. Halo and Goldcorp each acknowledge and agree that extraneous circumstances may make it difficult for Halo to fully expend the Expenditure amounts for each of Year 1 and Year 2 before the requisite Expenditure Date. Goldcorp agrees that the requirement to spend such Expenditure amounts may be carried into the subsequent year, provided that (i) Halo uses, and Halo hereby agrees to use, reasonable commercial efforts to expend the scheduled Expenditure amounts in the scheduled year and (ii) in order to exercise the Option, Halo must expend a minimum of $3,000,000 of Expenditures on or before December 31, 2008 as contemplated in section 6.1. - 9 - 4.2 OPTION PERIOD. The Option shall commence on the Effective Date and shall terminate on December 31, 2008 (the "Option Period") unless exercised or otherwise terminated, in accordance with the terms of this Agreement. 5. EXPENDITURES 5.1 EXCESS EXPENDITURES. Expenditures actually incurred exceeding the Expenditures required from time to time to maintain the Option in good standing in any period (the "Excess Expenditures") shall be carried forward and credited to future Expenditure requirements of Halo in subsequent periods. Any excess Expenditures as at the Earn-In-Date shall be carried forward and credited under the Joint Venture Agreement. 5.2 OBLIGATIONS OF HALO. Subject to the firm obligation of Halo to fund Expenditures aggregating a minimum of $750,000 in the first year, if Halo notifies Goldcorp in writing that it will not incur Expenditures for the next scheduled period or periods or if Halo fails to incur Expenditures for any scheduled period for any reason whatsoever, save and except for a continuing event of Force Majeure, the provisions of section 9.1 shall be applicable and the Option shall be at an end. 5.3 ITEMIZED EXPENDITURES. Halo shall deliver to Goldcorp within 60 days after each Expenditure Date, an itemized statement setting out the details of such Expenditures for the preceding Expenditure period. In the event that Goldcorp requires further information in respect of, or disputes the accuracy of, any item in an itemized statement of Expenditures so delivered by Halo, Goldcorp shall be entitled to an audited report of such Expenditures by the statutory auditor of Halo. In the event that such matters in dispute are not settled between the Parties within 30 days of delivery of notice by Goldcorp to Halo advising of such dispute, then the matter shall be referred to arbitration for determination as provided in Article 11. 5.4 REMAINING INTEREST IN PATENTED PROPERTY AND SEVENTY-FIVE % CLAIMS. In the event that Halo determines that it needs to reach agreement with any Person other than Goldcorp that holds an interest in and to the Patented Property or the Seventy-Five % Claims in order for Halo to meet its commitments and exercise its rights under this Agreement, Goldcorp shall take all such reasonable actions as are reasonably required by Halo, or such other Person with an interest in the Patented Property, in order to assist Halo to reach such agreement. Halo shall not be entitled to credit any payments it may agree to make to such Person in order to reach such agreement, against Halo's commitment to incur expenditures pursuant to section 4.1. 6. EXERCISE OF OPTION 6.1 OPTION EXERCISE. If Halo has made Expenditures aggregating a minimum of $3,000,000 in accordance with the provisions of section 4.1, Halo shall be entitled to provide a written notice of exercise of the Option to Goldcorp stating the amount of Expenditures incurred and an itemized statement of such Expenditures. Following receipt of such notice of exercise of the Option, and subject to the rights of Goldcorp to request more information, to dispute the accuracy of any item in the statutory declaration or itemized statement of Expenditures and to receive an audited report of such Expenditures prepared by the statutory auditor of Halo as set out in section 5.3, which rights shall apply equally to the statutory declaration and itemized statements delivered by Halo pursuant to this section, Halo shall be deemed to have exercised the Option - 10 - as at the date of such written notice of exercise (the "Earn-In Date") and Halo shall have earned an undivided 60% interest in and to the Unpatented Property, an undivided 45% interest in and to the Seventy-Five % Claims and an undivided 30% interest in and to the Patented Property, free and clear of all Encumbrances, other than Permitted Encumbrances and such other Encumbrances as may otherwise have been agreed to by the Parties during the Option Period. 6.2 JOINT VENTURE. In the event Halo exercises the Option, Halo and Goldcorp shall forthwith enter into the Joint Venture Agreement; for the purpose of jointly further exploring, developing and exploiting the Property. Goldcorp and Halo shall thereafter share all future funding of exploration and other expenditures and liabilities proportionately to their respective interests in the Property in accordance with and subject to the terms of the Joint Venture Agreement. 6.3 BACK-IN RIGHT. For a period of ninety (90) days following the date of the exercise of the Option by Halo, Goldcorp shall, at its sole discretion, have the right to elect by notice in writing delivered to Halo to exercise the right (the "Back-in Right") to acquire from Halo (i) a twenty-five (25%) percent interest in and to the Unpatented Property such that Goldcorp will thereafter have a sixty-five (65%) percent undivided recorded and beneficial interest in and to the Unpatented Property and Halo will have a thirty-five (35%) percent undivided recorded and beneficial interest in and to the Unpatented Property, (ii) an eighteen and three-quarters (18.75%) percent interest in and to the Seventy-Five % Claims such that Goldcorp will thereafter have a forty-eight and three quarters (48.75%) percent undivided registered and beneficial interest in and to the Seventy-Five % Claims and Halo will have a twenty-six and one-quarter (26.25%) percent undivided registered and beneficial interest in and to the Seventy-Five % Claims and (iii) a twelve and one-half (12.5%) percent interest in and to the Patented Property such that Goldcorp will thereafter have a thirty-two and one-half (32.5%) percent undivided registered and beneficial interest in and to the Patented Property and Halo will have a seventeen (17.5%) percent undivided registered and beneficial interest in and to the Patented Property, by giving notice of such election in writing to Halo and by paying Halo $6,000,000.00 on or before the expiration of such ninety (90) day period. If Goldcorp advises Halo in writing that it does not intend to exercise the Back-in Right or fails to give such a notice and make such payment within the ninety (90) day time frame for doing so, Halo shall issue and deliver one million (1,000,000) fully paid and non-assessable common shares of Halo, free and clear of all Encumbrances (the "Option Shares") to Goldcorp in accordance with and subject to section 6.4 below. This section 6.3 shall survive the termination of this Agreement if this Agreement is terminated pursuant to section 9.1(f). 6.4 OPTION SHARES. (a) For the purposes of section 6.3, the Option Shares issued shall be deemed to have a value per share equal to the volume weighted average closing price of Halo's common shares on the TSX Venture Exchange for the thirty trading days immediately prior to the date that Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in-Right. If Goldcorp does not exercise the Back-in Right, Halo shall take all necessary corporate action to issue and deliver the Option Shares to Goldcorp and to record the Option Shares on the books of Halo in the name of Goldcorp. - 11 - Halo shall comply with applicable securities laws in connection with the issuance of such Option Shares. (b) The Option Shares to be issued by Halo to Goldcorp shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange (not to exceed four months from the date of issuance). The issuance of any Option Shares shall be conditional upon Halo obtaining all regulatory consents or approvals being received, including those of the TSX Venture Exchange and Halo will ensure that all filings required to be made with all applicable securities regulatory authorities are made in a prompt and timely manner to allow for the issuance of the Option Shares on a basis that is exempt from all prospectus and registration requirements under applicable securities laws. In the event that Halo is unable to issue the Option Shares to Goldcorp on an exempt basis within ten business days of the date Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in Right, Halo shall promptly pay Goldcorp the cash value of the Option Shares, as determined in accordance with section 7, in cash, by certified cheque or wire transfer in immediately available funds. (c) The Option Shares shall be listed and posted for trading on the TSX Venture Exchange at the time they are issued and delivered to Goldcorp in accordance with the terms hereof. (d) At the time of issuance of the Option Shares, Halo will be for the preceding four months a reporting issuer, not in default of the requirements of the SECURITIES ACT (British Columbia) and no order ceasing or suspending trading in any securities of Halo will have been issued or pending. (e) This section 6.4 shall survive the termination of this Agreement if this Agreement is terminated pursuant to section 9.1(f). 7. DELIVERY OF DATA AND PROPERTY 7.1 DATA. Goldcorp agrees to make available to Halo copies or originals for copy by Halo (and returned to Goldcorp forthwith) of all maps, reports, data, drill case, results of surveys and drilling and any other reports of information Goldcorp may have prepared or caused to be prepared with respect to the Property, provided that all such maps, reports, data, drill case results of surveys and drilling and other reports of information shall be kept confidential by Halo as provided in Article 14 and further provided that Goldcorp shall retain exclusive title thereto. Such deliveries are for the information and convenience of Halo only and Goldcorp does not represent the accuracy or completeness of such deliveries and shall not be liable for any errors or omissions with respect thereto. 7.2 TITLE TO PROPERTY. Title to Goldcorp's 50% interest in and to the Patented Property, Goldcorp's 75% interest in and to the Seventy-Five % Claims and Goldcorp's 100% interest in and to the Unpatented Property shall remain registered and recorded, as the case may be, in the name of Goldcorp until such time as Halo shall have duly and properly exercised the Option in accordance with the terms of this Agreement, whereupon subject to section 6.3, title shall - 12 - thereto be transferred and assigned to, and registered or recorded in the name of, Halo in accordance with its earned title interest. Halo shall be entitled to register, record or file notice of this Agreement in all appropriate government offices upon the due execution and delivery of this Agreement by the Parties provided that, in the event that Halo does not exercise the Option or this Agreement is otherwise terminated prior to the exercise of the Option, Halo shall forthwith discharge and remove such registrations, recordings or filings from such government offices, and in the event Halo does not complete such discharge and removal within 30 days of its obligation to do so arising, Goldcorp shall be entitled to complete and register, record or file such discharges and remove all such filings and for such limited purposes Halo hereby appoints Goldcorp as its attorney with full power of substitution. 8. OPERATOR OF THE PROPERTY 8.1 APPOINTMENT OF OPERATOR. Halo shall act as Operator during the Option Period and as such, Halo shall be responsible in its sole discretion for carrying out and administering Work on the Property, including the completion of all activities necessary to fulfill its Expenditures obligations under this Agreement. Halo as Operator, shall, subject to the rights of the other 50% owner of the Patented Property in and to that property and the rights of the other 25% owner of the Seventy-Five % Claims in and to that property, have the right to enter in, upon and under the Property and to explore, develop, mine, and do such work upon the Property and to have possession of the Property, including in order to sample, examine, diamond drill, prospect, explore, develop and mine the Property in such manner as Halo may determine (subject to the applicable laws, regulations, policies or orders of all Governmental Authorities having jurisdiction), including without limitation, the right to erect, bring and install thereon all buildings, vehicles, machinery, equipment and supplies as Halo shall deem necessary or advisable and to remove therefrom for analysis and testing quantities of ores, minerals or metals for assay, testing and milling purposes only as Halo shall in its sole discretion deem advisable. Halo shall be responsible for obtaining and/or maintaining in good standing all permits and licenses and other approvals, from all Governmental Authorities having jurisdiction as are necessary in order to conduct Work on the Property. 8.2 DELIVERY OF ANNUAL PROGRAMS AND BUDGETS. During the Option Period, not less than 60 days prior to each year of the term of the Option Period and before June 30, 2006 for the first $750,000 of Expenditures, Halo shall deliver to Goldcorp a written program and budget specifying in reasonable detail an outline of any and all research, prospecting, exploration and development proposed to be carried out during the next scheduled period and the estimated Expenditures together with an activities schedule and timetable. 8.3 INFORMAL ADVISORY COMMITTEE. During the Option Period, an informal committee consisting of Halo and Goldcorp management and technical personnel shall meet on a semi-annual basis or on such other basis as mutually deemed necessary by Halo and Goldcorp to address matters relating to Work to be conducted by Halo as Operator pursuant to this Agreement. Halo shall take into account in good faith any technical and managerial comments made by the representatives of Goldcorp. 8.4 MAINTENANCE OF PROPERTY. During the Option Period, Halo shall do, record and/or pay when due or in advance, all such matters and amounts as are - 13 - necessary, including assessment work on the Property, and shall pay such taxes, fees and rents, as are required to keep the Property in good standing. 8.5 WORK ON CLAIMS. All work by Halo on the Property as Operator during the Option Period shall be done in a prudent and workmanlike manner in accordance with good mining practice, in compliance with all laws of all Governmental Authorities having jurisdiction, including without limitation, all environmental laws, and in accordance with the terms of all applicable leases relating to the Unpatented Property. 8.6 INSURANCE. During the Option Period, Halo as Operator shall maintain adequate insurance coverage in accordance with normal industry standards and practice protecting the interests of the Parties (including from third party claims) and shall cause its Agents to obtain and maintain similar adequate insurance. For greater certainty and without limitation, Halo shall acquire public liability and property damage insurance (including in respect of all airstrips located on the Property) in accordance with normal industry standards naming the Parties as insureds, with severability of interest and protecting the interests of the Parties (including from third party claims). 8.7 REMOVAL OF LIENS. During the Option Period, Halo as Operator shall pay or cause to be paid all Agents including, without limitation, workers or wage earners employed by Halo on the Property and for all material purchased by Halo in connection with Work on the Property which might give rise to a lien or privilege thereon. Should any such lien or privilege be recorded against the Property in consequence of any Work done thereon by or for Halo, Halo shall forthwith take all such actions, including initiating proceedings, as may be necessary to have such lien or privilege removed and/or discharged from the Property and shall have the same removed and/or discharged with all reasonable dispatch provided, however, that upon such removal or discharge of such lien or privilege, Halo may proceed to contest any such claim of lien or privilege in good faith and diligently. 8.8 REPORTS AND INSPECTION. (a) Halo shall keep full and complete records of all exploration work and development of the Property, together with the results of assays made, and all such records and results shall be available for inspection by Goldcorp prior to the exercise of the Option by Halo. (b) During the Option Period, Halo as Operator shall provide Goldcorp with any information forthwith upon the occurrence of any material results, supported by copies of relevant data in respect of such material results. 8.9 ACCESS. During the Option Period, Halo shall permit Goldcorp and its Agents at their own risk and expense, access at all reasonable times to the Property and to all information obtained, results produced, samples, core and data collected from the Property and records, maps, sections and reports prepared by Halo in connection with any Work done on or with respect to the Property. 8.10 INDEMNIFICATION BY OPERATOR. Halo as Operator shall indemnify and hold Goldcorp and its directors, officers, employees and consultants harmless against and in respect of any and all Losses actually incurred by such Persons arising - 14 - out of operations conducted on the Property or other actions by Halo as Operator or by Halo' Agents. Such indemnity shall survive the termination of this Agreement. 9. TERMINATION OF OPTION 9.1 TERMINATION EVENTS. Subject to the obligation of the Parties which expressly survive the termination of this Agreement, this Agreement shall terminate: (a) if Halo fails to use reasonable commercial efforts to incur the required Expenditures on or before the relevant Expenditure Dates as set forth in section 4.1; (b) if Halo fails to incur $3,000,000 of Expenditures on or before December 31, 2008; (c) upon receipt by Goldcorp of notice from Halo given prior to the exercise of the Option that Halo will not incur the Expenditures in accordance with section 5.2; (d) upon 30 days prior written notice to Halo from Goldcorp in the event that Halo shall fail to maintain the Property or any part thereof in good standing, including any leases related to the Unpatented Property; (e) if Halo does not exercise the Option on or before December 31, 2008; or (f) upon exercise of the Option and execution and delivery by the Parties of the Joint Venture Agreement; provided that, for greater certainty, and without limitation, sections 9.2 through 9.6 inclusive as well as Article 14 shall survive the termination of this Agreement. 9.2 RELEASE AND QUITCLAIM OF PROPERTY. If the Option is terminated, Halo shall forthwith, and in any event within 30 days of such termination, deliver to Goldcorp a release and quitclaim in form and content satisfactory to Goldcorp, with respect to the Property and this Agreement. 9.3 TAXES AND RENTS. Upon termination of the Option, Halo shall ensure that all taxes, fees, rents and payments in respect of the Property and all related leases have been paid to the date of termination and that the Property and all related leases remain in good standing for not less than 6 months after termination. 9.4 DELIVERY OF DATA UPON TERMINATION. Upon termination of the Option, Halo shall deliver to Goldcorp within 30 days of the date of termination all originals or copies of maps, reports, results of surveys and drilling and all other reports of information provided to Halo by Goldcorp as well as copies of any assay plans, diamond drill records, information, maps and other pertinent exploration reports produced by Halo or its Agents and related to the Property. 9.5 REMOVAL OF LIENS. Upon termination of the Option, if at that time or subsequently thereafter a lien on the Property shall arise in connection with - 15 - work done thereon by Halo or its Agents and Halo shall wish to contest such lien, Halo shall post security sufficient to permit such lien to be discharged and shall forthwith take all such measures as are necessary in order to discharge such lien. 9.6 REMOVAL OF BUILDINGS AND ENVIRONMENTAL MATTERS. UPON TERMINATION OF THE OPTION: (a) All buildings, plant, equipment, machinery, tools, appliances and supplies which may have been brought upon the Property by or on behalf of Halo as Operator shall be removed by Halo at any time not later than sixty (60) days after termination unless other arrangements on terms satisfactory to Goldcorp are made between Halo and Goldcorp and, if not so removed, such buildings, plant, equipment, machinery, tools, appliances and supplies shall, at the sole option of Goldcorp, become the property of Goldcorp or may be removed by Goldcorp or its Agents at the expense of Halo. (b) Halo shall perform all rehabilitation, reclamation or pollution control on the Property which is required as a result of the activities of Halo or its Agents thereon, to the standard required in accordance with all applicable laws as approved by the appropriate Governmental Authorities having jurisdiction. 10. INDEMNIFICATION 10.1 INDEMNIFICATION OF GOLDCORP. Halo shall indemnify and hold Goldcorp and its directors, officers, employees and consultants harmless against and in respect of any and all Losses incurred by Goldcorp and its directors, officers, employees and consultants arising from, relating to or in any way connected with any loss of life, injury to persons or property or damage to the Property or the natural environment caused by any act or omission on the part of Halo or its Agents. 11. ARBITRATION 11.1 BINDING ARBITRATION. Any matter in this Agreement in dispute between the Parties which has not been resolved by the Parties within fifteen (15) days of the delivery of notice by either Party of such dispute may be referred by either Party to binding arbitration. Such referral to binding arbitration shall be to a qualified single arbitrator pursuant to the ARBITRATIONS ACT, 1991 (Ontario) and its successor legislation, which act shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules for arbitration set out in Schedule "C". 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. 12. FORCE MAJEURE 12.1 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 - 16 - place of business or the Property (other than the inability to access the Property because of the seasonality of weather conditions for which Halo has not adequately or properly planned), 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 Halo 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 aboriginal or aboriginal 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. Any Party asserting an event of force majeure shall provide ongoing periodic notice in writing to the other Party 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. 13. RELATIONSHIP AND OTHER OPPORTUNITIES - GENERAL 13.1 RELATIONSHIP OF PARTIES. The rights, privileges, duties, obligations and liabilities, as between the Parties, shall be separate and not joint or collective and nothing herein contained shall be construed as creating a partnership, an association, agency or subject as herein specifically provided, a trust of any kind or as imposing upon either of the Parties any partnership duty, obligation or liability. No Party is liable for the acts, covenants and agreements of any other Party. 13.2 OTHER OPPORTUNITIES. Each of the Parties shall have the free and unrestricted right independently to engage in and receive the full benefits of any and all business endeavours of any sort whatsoever whether or not competitive with the endeavours contemplated herein without consulting the other - 17 - Party or inviting or allowing the other Party to participate therein. No Party shall be under any fiduciary or other duty to the other Party which shall prevent it from engaging in or enjoying the benefits of competing endeavours within the general scope of endeavours contemplated by this Agreement. The legal doctrine of "corporate opportunity" sometimes applied to persons engaged in a joint venture or having fiduciary status shall not apply in the case of either Party. Each Party hereby waives its rights to partition of the Property and agrees that it will not seek or be entitled to partition of the Property, whether by way of physical partition, judicial sale or otherwise. 14. CONFIDENTIALITY 14.1 CONFIDENTIALITY. All information received by any Party as a result of or in connection with the Property or this Agreement shall be confidential, shall be treated as confidential and shall not be disclosed to any other Person without the prior written consent of the other Party, which consent shall not be withheld unless such other Party can reasonably establish that it would suffer material damage or would be in violation of any laws or regulations of any Governmental Authority to which it is subject as a result of such disclosure. Where disclosure is required by law or a Governmental 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 14 shall not apply to a disclosure: (i) to an Agent that has a bona fide need to be informed; and (ii) to any third Person to whom the disclosing Party bona fide and in good faith contemplates a transfer of all or any part of its interest in or to the Property 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 14. The provisions of this Article 14 shall continue to apply to any Party notwithstanding any termination of the Option. Where disclosure is required in connection with a third Person transfer, any intended third Person transferee must sign a confidentiality agreement with the other non-disclosing Party containing provisions similar to this Article 14. 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. 15. NOTICE - GENERAL 15.1 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 by fax, addressed to such other Party or delivered to such other Party as follows: - 18 - (i) to Goldcorp at: Bag 2000 17 Mine Road Balmertown, Ontario P0V 1C0 Attention: Regional Exploration Manager Fax No.: 807-735-3120 and to: 3201-130 Adelaide Street West Toronto, Ontario M5H 3P5 Attention: Executive Vice President, Canada and USA Fax No.: 416-363-5950 (ii) to Halo at: 1305-1090 West Georgia Street Vancouver BC V6E 3V7 Attention: Marc Cernovitch Fax No.: 604-484-0069 or at such other addresses and to such other Person that may be given by any of them to the others in writing from time to time on 10 days' prior written notice and such notices, requests, demands or other communications shall be deemed to have been received when delivered. 16. GENERAL 16.1 ACTS IN GOOD FAITH. The Parties shall at all times during the currency of this Agreement and after the termination of the Option, act in good faith with respect to the other Party and shall do or cause to be done all things within their respective powers which may be necessary or desirable to give full effect to the provisions hereof. 16.2 SEVERABILITY. Any provision of this Agreement which is invalid or unenforceable shall not effect any other provision and shall be deemed to be severable herefrom. 16.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. - 19 - 16.4 FURTHER ASSURANCES. The Parties shall sign such further and other documents and do such further acts or things as may be necessary or desirable in order to give full force and effect to this Agreement and every part hereof. 16.5 AMENDMENT. This Agreement may not be amended or modified in any respect except by written instrument signed by the Parties. 16.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes the letter of intent between the parties dated April 18, 2006. 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. 16.7 ENUREMENT. This Agreement shall enure to the benefit of and be binding upon the Parties and each of their successors and permitted assigns. For greater certainty and without limitation, Halo shall not have the right to mortgage, charge, transfer or assign this Agreement to any Person without the prior written consent of Goldcorp. Goldcorp shall have the right to transfer or assign this Agreement provided that such assignment is in effected in conjunction with the transfer of the interests of Goldcorp in and to the Property and provided that the transferee shall have covenanted in assisting with Halo in advance to be bound by the terms of this Agreement. 16.8 WAIVER. A Waiver of any breach of a provision of this Agreement shall not be binding upon a party unless the waiver is in writing and such waiver shall not affect such Party's rights in respect of any subsequent breach. 16.9 COUNTERPARTS. This Agreement may be executed in several counterparts and by facsimile transmission, 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. GOLDCORP INC. Per: --------------------------------- Name: Title: HALO RESOURCES LTD. Per: /s/ Marc Cernovitch --------------------------------- Name: Marc Cernovitch Title: President & CEO THIS IS SCHEDULE "A" TO THE OPTION AGREEMENT DATED AS OF JUNE 20, 2006 BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. UNPATENTED PROPERTY AND SEVENTY-FIVE % CLAIMS (STK = UNPATENTED, LP = LEASE PATENT) -------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. -------------------------------------------------------------- UNPATENTED PROPERTY -------------------------------------------------------------- Pipestone Bay STK 1234170 Pipestone Bay STK 1234140 Pipestone Bay STK 1234141 Pipestone Bay STK 1234142 Pipestone Bay STK 1234143 Pipestone Bay STK 1234144 Middle Bay LP 40860 Middle Bay LP 40861 Middle Bay LP 40862 Middle Bay LP 40863 Middle Bay LP 40864 Middle Bay LP 40865 Middle Bay LP 46181 Middle Bay LP 46182 Middle Bay LP 46183 Middle Bay LP 46184 Middle Bay LP 49874 Middle Bay LP 49875 - 2 - -------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. -------------------------------------------------------------- Middle Bay LP 49897 Middle Bay LP 49898 Middle Bay LP 49899 Middle Bay LP 49900 Middle Bay LP 49901 Middle Bay LP 49902 Middle Bay LP 49903 Middle Bay LP 49904 Middle Bay LP 52174 Middle Bay LP 52175 Middle Bay LP 53397 Middle Bay LP 53398 Middle Bay LP 53399 Middle Bay STK 870130 Middle Bay STK 870131 Middle Bay STK 870132 Middle Bay STK 1143622 Middle Bay STK 1143623 Middle Bay STK 1143624 Middle Bay STK 1143645 Middle Bay STK 1143646 Middle Bay STK 1143647 Middle Bay STK 1184230 - 3 - -------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. -------------------------------------------------------------- Middle Bay STK 1184316 Middle Bay STK 1184317 Middle Bay STK 1185055 Middle Bay STK 1234022 Middle Bay STK 1234029 Middle Bay STK 1234030 Middle Bay STK 1234039 Middle Bay STK 1234051 Middle Bay STK 1234081 Middle Bay STK 1234082 Middle Bay STK 1234083 Middle Bay STK 1234155 Middle Bay STK 1234156 Middle Bay STK 1234157 Middle Bay STK 1248154 Middle Bay STK 1234259 Middle Bay STK 1234245 Middle Bay STK 1234084 Middle Bay STK 3004674 Middle Bay STK 3004676 Middle Bay STK 1247933 Middle Bay STK 1234401 Middle Bay STK 1234402 - 4 - -------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. -------------------------------------------------------------- Middle Bay STK 1248171 Middle Bay STK 1248129 Middle Bay STK 1248169 SEVENTY-FIVE % CLAIMS Middle Bay LP 47707 Middle Bay LP 47708 -------------------------------------------------------------- THIS IS SCHEDULE "A-1" TO THE OPTION AGREEMENT DATED AS OF JUNE 20, 2006 BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. PATENTED PROPERTY ----------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ----------------------------------------------------------- Biron Bay Patent 11077 Biron Bay Patent 11078 Biron Bay Patent 11079 Biron Bay Patent 11080 Biron Bay Patent 11081 Biron Bay Patent 11082 Biron Bay Patent 11083 Biron Bay Patent 11104 Biron Bay Patent 11105 Biron Bay Patent 11106 ----------------------------------------------------------- THIS IS SCHEDULE "C" TO THE JOINT VENTURE AGREEMENT DATED AS OF JUNE 20, 2006 BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. RULES FOR ARBITRATION The following rules and procedures shall apply with respect to any matter to be arbitrated by the Parties under the terms of the Agreement. 1. INITIATION OF ARBITRATION PROCEEDINGS (a) If any Party to this Agreement wishes to have any matter under this Agreement arbitrated in accordance with the provisions of this Agreement, it shall give notice to the other Party hereto specifying particulars of the matter or matters in dispute and proposing the name of the person it wishes to be the single arbitrator. Within 20 days after receipt of such notice, the other Party to this Agreement shall give notice to the first Party advising whether such Party accepts the arbitrator proposed by the first Party. If such notice is not given within such 20 day period, the other Party shall be deemed to have accepted the arbitrator proposed by the first Party. If the Parties do not agree upon a single arbitrator within such 20 day period such arbitrator shall be chosen in accordance with the ARBITRATION ACT, 1991 (Ontario) (the "Arbitration Act"). (b) The individual selected as Arbitrator shall be qualified by education and experience to decide the matter in dispute. The Arbitrator shall be at arm's length from both Parties and shall not be a member of the audit or legal firm or firms who advise either Party, nor shall the Arbitrator be a person who is otherwise regularly retained by either of the Parties. 2. SUBMISSION OF WRITTEN STATEMENTS (a) Within 20 days of the appointment of the Arbitrator, the Party initiating the arbitration (the "Claimant") shall send the other Party (the "Respondent") a statement of claim setting out in sufficient detail the facts and any contentions of law on which it relies, and the relief that it claims. (b) Within 15 days of the receipt of the statement of claim, the Respondent shall send the Claimant a statement of defence stating in sufficient detail which of the facts and contentions of law in the statement of claim it admits or denies, on what grounds, and on what other facts and contentions of law he relies. (c) Within 10 days of receipt of the statement of defence, the Claimant may send the Respondent a statement of reply. - 2 - (d) All statements of claim, defence and reply shall be accompanied by copies (or, if they are especially voluminous, lists) of all essential documents on which the Party concerned relies and which have not previously been submitted by any Party, and (where practicable) by any relevant samples. (e) After submission of all the statements, the Arbitrator will give directions for the further conduct of the arbitration. 3. MEETINGS AND HEARINGS (a) The arbitration shall take place in the City of Toronto, Ontario or in such other place as the Claimant and the Respondent shall agree upon in writing. The arbitration shall be conducted in English unless otherwise agreed by such Parties and the Arbitrator. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive working days until it is concluded. (b) All meetings and hearings will be in private unless the Parties otherwise agree. (c) Any Party may be represented at any meetings or hearings by legal counsel. (d) Each Party may examine, cross-examine and re-examine all witnesses at the arbitration. 4. THE DECISION (a) The Arbitrator will make a decision in writing and, unless the Parties otherwise agree, will set out reasons for decision in the decision. (b) The Arbitrator will send the decision to the Parties as soon as practicable after the conclusion of the final hearing, but in any event no later than 30 days thereafter, unless that time period is extended for a fixed period by the Arbitrator on written notice to each Party because of illness or other cause beyond the Arbitrator's control. (c) The decision shall determine and award costs. (d) The decision shall be final and binding on the Parties and shall not be subject to any appeal or review procedure provided that the Arbitrator has followed the rules provided herein in good faith and has proceeded in accordance with the principles of natural justice. In the event either Party initiates any court proceeding in respect of the decision of the Arbitrator or the matter arbitrated, such Party, if unsuccessful in the court proceeding, shall pay the other Party's costs on a solicitor/client basis, all reasonable - 3 - expenses incurred by such other Party and related to such court proceeding. 5. JURISDICTION AND POWERS OF THE ARBITRATOR (a) By submitting to arbitration under these Rules, the Parties shall be taken to have conferred on the Arbitrator the following jurisdiction and powers, to be exercised at the Arbitrator's discretion subject only to these Rules and the relevant law with the object of ensuring the just, expeditious, economical and final determination of the dispute referred to arbitration. (b) Without limiting the jurisdiction of the Arbitrator at law, the Parties agree that the Arbitrator shall have jurisdiction to: (i) determine any question of law arising in the arbitration; (ii) determine any question as to the Arbitrator's jurisdiction; (iii) determine any question of good faith, dishonesty or fraud arising in the dispute; (iv) order any Party to furnish further details of that Party's case, in fact or in law; (v) proceed in the arbitration notwithstanding the failure or refusal of any Party to comply with these Rules or with the Arbitrator's orders or directions, or to attend any meeting or hearing, but only after giving that Party written notice that the Arbitrator intends to do so; (vi) receive and take into account such written or oral evidence tendered by the Parties as the Arbitrator determines is relevant, whether or not strictly admissible in law; (vii) make one or more interim awards; (viii) hold meetings and hearings, and make a decision (including a final decision) in Toronto, Ontario or elsewhere with the concurrence of the Parties thereto; (ix) order the Parties to produce to the Arbitrator, and to each other for inspection, and to supply copies of, any documents or other evidence or classes of documents in their possession or power which the Arbitrator determines to be relevant; and (x) make interim orders to secure all or part of any amount in dispute in the arbitration. THIS IS SCHEDULE "B" TO THE OPTION AGREEMENT DATED AS OF JUNE 20, 2006 BETWEEN GOLDCORP INC. AND HALO RESOURCES LTD. JOINT VENTURE AGREEMENT made between GOLDCORP INC. and HALO RESOURCES LTD. Dated as of , . TABLE OF CONTENTS 1. DEFINITIONS...........................................................1 1.1 DEFINITIONS..................................................1 1.2 GENDER AND EXTENDED MEANINGS.................................7 1.3 CURRENCY.....................................................7 1.4 BUSINESS DAYS................................................7 1.5 PERIOD OF TIME/TIME OF ESSENCE...............................7 1.6 SECTION HEADINGS.............................................7 2. SCHEDULES.............................................................7 2.1 SCHEDULES....................................................7 3. REPRESENTATIONS AND WARRANTIES........................................7 3.1 REPRESENTATION AND WARRANTIES OF THE PARTIES.................7 4. COMMENCEMENT OF AGREEMENT.............................................8 4.1 EFFECTIVE DATE...............................................8 5. NAME, PURPOSES AND TERM...............................................8 5.1 GENERAL......................................................8 5.2 NAME.........................................................8 5.3 PURPOSES.....................................................8 5.4 TERM OF THE VENTURE..........................................9 5.5 FISCAL YEAR..................................................9 6. RELATIONSHIP..........................................................9 6.1 NO PARTNERSHIP...............................................9 6.2 OTHER BUSINESS OPPORTUNITIES.................................9 6.3 TITLE.......................................................10 6.4 WAIVER OF RIGHT TO PARTITION................................10 6.5 PREPARATION OF TECHNICAL REPORTS............................10 7. INTERESTS OF PARTICIPANTS............................................10 7.1 INITIAL CONTRIBUTIONS.......................................10 7.2 INITIAL PARTICIPATING INTERESTS.............................10 7.3 BACK-IN RIGHT...............................................11 7.4 OPTION SHARES...............................................11 7.5 CASH CONTRIBUTIONS..........................................12 7.6 CHANGES IN PARTICIPATING INTERESTS..........................12 7.7 VOLUNTARY REDUCTION IN PARTICIPATION........................12 7.8 DEFAULT IN MEETING CASH CALLS...............................13 7.9 ELIMINATION OF MINORITY INTEREST............................13 7.10 CONTINUING LIABILITIES UPON ADJUSTMENT OF PARTICIPATING INTERESTS...............................................14 8. MANAGEMENT COMMITTEE.................................................14 8.1 ORGANIZATION AND COMPOSITION................................14 8.2 DECISION....................................................14 8.3 MEETING.....................................................14 8.4 ACTION WITHOUT MEETING......................................15 8.5 MATTERS REQUIRING APPROVAL..................................15 8.6 MATTERS REQUIRING UNANIMOUS APPROVAL........................15 8.7 PARTICIPANT MAY REQUIRE OPERATIONS TO BE SHUT DOWN..........16 8.8 RESUMPTION OF OPERATIONS....................................16 8.9 MINE MAINTENANCE PLAN.......................................16 8.10 MINE CLOSURE PLAN...........................................17 8.11 IMPLEMENTATION OF MINE CLOSURE PLAN.........................17 8.12 NON-APPROVAL OF MINE CLOSURE PLAN...........................17 -ii- 9. MANAGER..............................................................17 9.1 APPOINTMENT.................................................17 9.2 POWERS AND DUTIES OF MANAGER................................18 9.3 STANDARD OF CARE............................................21 9.4 RESIGNATION; DEEMED OFFER TO RESIGN.........................21 9.5 PAYMENTS TO MANAGER.........................................22 9.6 TRANSACTIONS WITH AFFILIATES................................22 10. PROGRAMS AND BUDGETS.................................................22 10.1 OPERATIONS PURSUANT TO PROGRAMS AND BUDGETS.................22 10.2 PRESENTATION OF PROGRAMS AND BUDGETS........................22 10.3 REVIEW AND APPROVAL OF PROPOSED PROGRAMS AND BUDGETS........23 10.4 PREPARATION OF FEASIBILITY STUDY............................23 10.5 REQUEST FOR FEASIBILITY STUDY...............................23 10.6 APPROVAL OF FEASIBILITY STUDY...............................24 10.7 ELECTION TO PARTICIPATE.....................................24 10.8 BUDGET DECREASES............................................24 10.9 BUDGET OVERRUNS; PROGRAM CHANGES............................24 10.10 EMERGENCY OR UNEXPECTED EXPENDITURES........................25 11. ACCOUNTS AND SETTLEMENTS.............................................25 11.1 MONTHLY STATEMENTS..........................................25 11.2 CASH CALLS..................................................25 11.3 SPECIAL CASH CALLS..........................................26 11.4 PAYMENT OF CASH CALLS.......................................26 11.5 FAILURE TO MEET CASH CALLS..................................26 11.6 AUDITS AND ADJUSTMENTS......................................26 12. DISPOSITION OF PRODUCTS..............................................26 12.1 DIVISION OF PRODUCTION......................................26 12.2 LIENS.......................................................27 12.3 FAILURE OF PARTICIPANT TO TAKE IN KIND......................27 13. WITHDRAWAL AND TERMINATION...........................................28 13.1 TERMINATION BY EXPIRATION OR AGREEMENT......................28 13.2 WITHDRAWAL..................................................28 13.3 CONTINUING OBLIGATIONS......................................28 13.4 DISPOSITION OF ASSETS ON TERMINATION........................28 13.5 RIGHT TO DATA AFTER TERMINATION.............................29 13.6 CONTINUING AUTHORITY........................................29 14. TRANSFER OF INTEREST.................................................29 14.1 HALO'S RIGHTS TO TRANSFER...................................29 14.2 GOLDCORP'S RIGHT TO TRANSFER................................29 14.3 RIGHT OF FIRST REFUSAL......................................30 14.4 LIMITATIONS ON FREE TRANSFERABILITY.........................30 14.5 RESTRICTIONS ON MORTGAGES...................................31 15. ARBITRATION..........................................................31 15.1 BINDING ARBITRATION.........................................31 16. FORCE MAJEURE........................................................31 16.1 FORCE MAJEURE...............................................31 17. CONFIDENTIALITY......................................................32 17.1 CONFIDENTIALITY.............................................32 18. EVENT OF DEFAULT OF PARTICIPANT......................................33 18.1 EVENT OF DEFAULT............................................33 18.2 ADDITIONAL REMEDIES.........................................33 -iii- 19. NOTICE - GENERAL.....................................................33 19.1 NOTICES.....................................................33 20. MISCELLANEOUS - GENERAL..............................................33 20.1 ACTS IN GOOD FAITH..........................................33 20.2 SEVERABILITY................................................33 20.3 GOVERNING LAW...............................................33 20.4 FURTHER ASSURANCES..........................................33 20.5 AMENDMENT...................................................33 20.6 ENTIRE AGREEMENT............................................33 20.7 ENUREMENT...................................................33 20.8 COUNTERPARTS................................................33 SCHEDULE "I"................................................................33\\ SCHEDULE "II-1".............................................................33\\ SCHEDULE "III-1"............................................................33\\ SCHEDULE "IV-1".............................................................33\\ SCHEDULE "V-1"..............................................................33\\ THIS JOINT VENTURE AGREEMENT dated as of the _________day of ____________, 2006 BETWEEN: GOLDCORP INC. a corporation duly existing under the laws of [o] ("Goldcorp") OF THE FIRST PART - and - HALO RESOURCES LTD. a corporation duly continued under the laws of [o] ("Halo") OF THE SECOND PART WHEREAS Goldcorp and Halo entered into an option agreement dated as of the day of June, 2006 (the "Option Agreement") with respect to the Property (as hereinafter defined) wherein Goldcorp granted Halo an exclusive option (the "Option") to earn (i) an undivided 60% recorded or registered and beneficial interest in and to the Unpatented Property (as hereinafter defined), (ii) an undivided 45% registered and beneficial interest in and to the Seventy-Five % Claims (as hereinafter defined), and (iii) a 30% registered and beneficial interest in and to the Patented Property (as hereinafter defined); AND WHEREAS the Option Agreement provides that upon the due exercise of the Option by Halo, Goldcorp and Halo shall enter into this Agreement; and AND WHEREAS Halo has duly exercised the Option. 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: "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 - 2 - or ancillary hereto and the expression "section" followed by a number means and refers to the specified section of this Agreement. "Accounting Procedure" shall mean the procedures set forth in Schedule "III". "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. "Agents" shall mean consultants (including financial advisors), servants, employees, agents, workmen, contractors and subcontractors. "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. "Auditor" means the auditors for the Venture as determined by a unanimous decision of the Management Committee. "Back-in Right" has the meaning set forth in section 7.3. "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. "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. "Claims" shall mean any and all debts, claims, actions, lawsuits, causes of action, demands, duties and obligations of whatsoever nature and howsoever incurred. "Commercial Production" shall mean the commercial exploitation of Products, 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 60% of the initial rated capacity of such plant; or (ii) If no 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 shipped from the Property on a reasonably regular basis for the purpose of earning revenue. - 3 - "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. "Effective Date" shall mean the date of this Agreement. "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. "Expenditures" shall mean all expenditures, expenses, obligations and liabilities of whatever kind or nature reasonably spent or incurred by the Manager in doing Work from and after the Effective Date, including for greater certainty and without limitation, moneys expended in maintaining the Property in good standing, expenses paid for or incurred in connection with any program of surface or underground prospecting, exploring, geological, geophysical and geochemical surveying, diamond drilling, drifting, raising and other underground work, assaying, metallurgical testing, environmental studies, submissions to any Governmental Authority and other agencies with respect to all required production and other permits, licenses and approvals, moneys expended in acquiring or constructing facilities and in developing and mining the Property and all field costs incurred by employees and Agents with respect to Work conducted on the Property together with all administrative and overhead costs directly incurred by the Manager and relating directly to the administration of the Property or Work done on the Property, provided that in no event shall such administrative and overhead costs exceed seven and one half percent (7.5%) of all other Expenditures directly related to the Property or Work done on the Property and directly incurred or performed by the Manager or seven and one half percent (7.5%) of the contract price in respect of all other Expenditures directly related to the Property or Work done on the Property performed by any agent, contractor or subcontractor of Halo and provided always that in no event shall such costs include non-project related overhead or legal or other consultants' fees related to the negotiation (including the conduct of due diligence) execution and delivery of this Agreement. "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. "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. "Feasibility Study" means a detailed report or reports prepared by or for the Manager evaluating the feasibility of placing the Property, or any part thereof, into production and operation as a mine, which - 4 - 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 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 Manager shall select in good faith, in such form and of such substance which is normally accepted by substantial, 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; - 5 - (x) such other data and information as are reasonably necessary to substantiate the existence of a mineral 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. "Governmental Authority" means any federal, provincial, municipal or other governmental department, commission, board, bureau, agency, government-owned corporation or instrumentality, or any court having jurisdiction. "Initial Contributions" shall have the meanings set forth in section 7.1. "Initial Participating Interests" shall mean the Initial Participating Interest of each Participant as set forth in section 7.2. "Management Committee" shall mean the committee established under Article 8. "Manager" shall mean the person or entity appointed under Article 9 to manage Operations and any successor Manager. "Mining" shall mean the mining, extracting, producing, treating, handling, milling or other processing of Products. "Non-Manager's Program and Budget" shall have the meaning set forth in section 10.2. "Operations" shall mean Exploration, Development, Mining and all other activities carried out pursuant to this Agreement. "Party" shall mean Halo or Goldcorp, as the case may be and "Parties" means such parties together. - 6 - "Participant" and "Participants" mean the Persons that from time to time have Participating Interests being initially, Goldcorp and Halo. "Participating Interest" shall mean the percentage interest representing the ownership interest of a Participant in and to the Assets and all other rights and obligations arising under this Agreement, as such interest may from time to time be adjusted hereunder. "Patented Property" means the interests of the Participants in and to the patented mining claims described in Schedule "II". "Penalty Amount" shall have the meaning set forth in section 7.8(a). "Permitted Encumbrances" shall have the meaning set forth in the Option Agreement. "Person" shall mean any natural person, partnership, company, corporation, unincorporated association, joint venture, trust, trustee, Governmental Authority or other entity howsoever designated or constituted. "Prime Rate" shall mean the interest rate quoted from time to time as "Prime" by The Toronto-Dominion Bank to its most creditworthy customers. "Products" shall mean all ores, minerals and mineral products located on, in or under or delivered from the Property and all beneficiated and other products produced therefrom under this Agreement. "Program" shall mean a description in reasonable detail of Operations to be conducted and objectives to be accomplished by the Manager with respect to the Property. "Property" shall mean the Unpatented Property, the Seventy-Five % Claims and the Patented Property collectively. "Seventy-Five % Claims" means the leasehold patent mining claims KRL47707 and KRL47708 described in Schedule "I". "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. "Unpatented Property" means the unpatented mining claims and leased mining claims described in Schedule "I", save and except for the Seventy-Five % Claims. "Venture" shall mean the business arrangement of the Participants under this Agreement. "Work" means Exploration, Development or Mining work performed exclusively on or directly in relation to the Property or Products by - 7 - 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 or statutory holidays in the Province of Ontario. 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 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. 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 "I" - Description of the Unpatented Property Schedule "II" - Description of the Patented Property Schedule "III" - Accounting Procedure Schedule "IV" - Net Smelter Returns Royalty Interest Schedule "V" - Rules for Arbitration 3. REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATION AND WARRANTIES OF THE PARTIES. Each Party hereby represents and warrants to the other Party as follows and acknowledges that the other Party 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 - 8 - 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 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 of any Governmental Authority. (d) This Agreement has been duly executed and delivered by it and is valid, binding and enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, and other laws of general application limiting the enforcement of creditors rights generally and to the fact that specific performance is an equitable remedy available only in the discretion of a court. (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, other than the Permitted Encumbrances. 4. COMMENCEMENT OF AGREEMENT 4.1 EFFECTIVE DATE. This Agreement shall be operative and shall take effect as of the Effective Date. 5. NAME, PURPOSES AND TERM 5.1 GENERAL. The Parties hereby enter into this Agreement for the purposes herein stated. All of the Participants' rights with respect to the Assets and all of the Operations on or in connection with the Property shall be subject to and governed by this Agreement. 5.2 NAME. The name of the Venture may be as determined by mutual agreement of the Participants in writing. 5.3 PURPOSES. The 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: - 9 - (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. Unless the Participants otherwise agree in writing, Operations shall be limited to the purposes described in this section. 5.4 TERM OF THE VENTURE. The term of the Venture shall be for 50 years from the Effective Date and for so long thereafter as Products are produced from the Property unless this Agreement is terminated earlier as herein provided. If any right, power or interest of any Party under this Agreement would violate the rule against perpetuities, then such right, power or interest shall terminate at the expiration of 20 years after the death of the last survivor of all the lineal descendants of Her Majesty, Queen Elizabeth II of England, living on the date of this Agreement. 5.5 FISCAL YEAR. The fiscal year end of the 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, it being the express purpose and intention of the Participants that their ownership of Assets and their respective rights acquired under this Agreement shall be as tenants in common. 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 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 - 10 - 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. Unless otherwise agreed in writing by the Participants, neither Participant shall have any obligation to mill, beneficiate or otherwise treat any Products or any other Participant's share of Products in any facility owned or controlled by such Participant. 6.3 TITLE. Title to the Assets shall be held jointly in the name of the Participants in accordance with their Initial Participating Interests provided, however, that each of the Participants shall be entitled to file and record such documents as may be required to document or provide notice of its Participating Interest in and to any or all of the Assets. 6.4 WAIVER OF RIGHT TO PARTITION. The Participants hereby waive and release all rights of partition or of sale in lieu thereof or other division of the Assets including any such rights provided by statute. 6.5 PREPARATION OF TECHNICAL REPORTS. Nothing in this Agreement will obligate either Party to (i) prepare, or assist the other Party in the preparation of, any technical report or reports relating to the Property that the other Party 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) provide the services of, or assist the other Party in procuring the services of, a "qualified person" (as that term is defined in National Instrument 43-101) to produce, or to oversee the production of, any such technical report or reports. 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 provisions of the Option Agreement or the amounts spent by each Participant in acquiring its right, title and interest in and to the Property: Halo - $3,000,000 Goldcorp - $2,000,000 In the event that Goldcorp exercises its Back-in Right pursuant to section 7.3, the value of each Participants Initial Contribution shall be deemed to be as set forth below: Halo - $3,000,000 Goldcorp - $5,571,428.50 7.2 INITIAL PARTICIPATING INTERESTS. Subject to section 7.3, the Participants shall have the following initial Participating Interests (an "Initial Participating Interest"): Halo - 60% Goldcorp - 40% - 11 - In the event that Goldcorp exercises its Back-in Right pursuant to section 7.3, the Participants shall have the following Initial Participating Interests: Halo - 35% Goldcorp - 65% 7.3 BACK-IN RIGHT. For a period of ninety (90) days following the date of this Agreement, Goldcorp shall, at its sole discretion, have the right to elect by notice in writing delivered to Halo to exercise the right (the "Back-in Right") to acquire from Halo (i) a twenty-five (25%) percent interest in and to the Unpatented Property such that Goldcorp will thereafter have a sixty-five (65%) percent undivided recorded and beneficial interest in and to the Unpatented Property and Halo will have a thirty-five (35%) percent undivided recorded and beneficial interest in and to the Unpatented Property, (ii) an eighteen and three-quarters (18.75%) percent interest in and to the Seventy-Five % Claims such that Goldcorp will thereafter have a forty-eight and three quarters (48.75%) percent undivided registered and beneficial interest in and to the Seventy-Five % Claims and Halo will have a twenty-six and one-quarter (26.25%) percent undivided registered and beneficial interest in and to the Seventy-Five % Claims and (iii) a twelve and one-half (12.5%) percent interest in and to the Patented Property such that Goldcorp will thereafter have a thirty-two and one-half (32.5%) percent undivided registered and beneficial interest in and to the Patented Property and Halo will have a seventeen (17.5%) percent undivided registered and beneficial interest in and to the Patented Property, by giving notice of such election in writing to Halo and by paying Halo $6,000,000.00 on or before the expiration of such ninety (90) day period. If Goldcorp advises Halo in writing that it does not intend to exercise the Back-in Right or fails to give such a notice and make such payment within the ninety (90) day time frame for doing so, Halo shall issue and deliver one million (1,000,000) fully paid and non-assessable common shares of Halo, free and clear of all Encumbrances (the "Option Shares") to Goldcorp in accordance with and subject to section 7.4 below. 7.4 OPTION SHARES. (a) For the purposes of section 7.3, the Option Shares issued shall be deemed to have a value per share equal to the volume weighted average closing price of Halo's common shares on the TSX Venture Exchange for the thirty trading days immediately prior to the date that Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in-Right. If Goldcorp does not exercise the Back-in Right, Halo shall take all necessary corporate action to issue and deliver the Option Shares to Goldcorp and to record the Option Shares on the books of Halo in the name of Goldcorp. Halo shall comply with applicable securities laws in connection with the issuance of such Option Shares. (b) The Option Shares to be issued by Halo to Goldcorp shall be subject to all applicable hold periods required by applicable securities laws and the TSX Venture Exchange (not to exceed four months from the date of issuance). The issuance of any Option Shares shall be conditional upon Halo obtaining all regulatory consents or approvals being received, including those of the TSX Venture Exchange and Halo will ensure that all filings required to be made with all applicable securities regulatory authorities are made in a prompt and timely manner - 12 - to allow for the issuance of the Option Shares on a basis that is exempt from all prospectus and registration requirements under applicable securities laws. In the event that Halo is unable to issue the Option Shares to Goldcorp on an exempt basis within ten business days of the date Goldcorp advises Halo that it will not exercise the Back-in Right or otherwise fails to exercise the Back-in Right, Halo shall promptly pay Goldcorp the cash value of the Option Shares, as determined in accordance with section 7.4(a), in cash, by certified cheque or wire transfer in immediately available funds. (c) The Option Shares shall be listed and posted for trading on the TSX Venture Exchange at the time they are issued and delivered to Goldcorp in accordance with the terms hereof. (d) At the time of issuance of the Option Shares, Halo will be for the preceding four months a reporting issuer, not in default of the requirements of the SECURITIES ACT (British Columbia) and no order ceasing or suspending trading in any securities of Halo will have been issued or pending. (e) Halo represents and warrants to Goldcorp that (i) the outstanding common shares of Halo are listed and posted for trading on the TSX Venture Exchange; and (ii) Halo has obtained regulatory and TSX Venture Exchange conditional pre-approval of the issuance and delivery of the Option Shares. 7.5 CASH CONTRIBUTIONS. Subject to any election permitted by section 7.7 the Participants shall be obligated to contribute funds to approved Programs and Budgets in proportion to their respective Participating Interests. 7.6 CHANGES IN PARTICIPATING INTERESTS. The Participants' Participating Interests shall be changed as follows: (a) In the event of an election by a Participant pursuant to section 7.7 to not contribute to an approved Program and Budget or contribute to Expenditures which are a part of an approved Program and Budget less than the percentage reflected by its then current Participating Interest; or (b) In the event of default by a Participant in making its agreed contribution to an approved Program and Budget; or (c) In the event of an acquisition of less than all of the Participating Interest of any Participant however arising. 7.7 VOLUNTARY REDUCTION IN PARTICIPATION. 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 Participating Interest, the Participating Interest of that Participant shall be recalculated at the time - 13 - 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 become the difference between 100% and the recalculated Participating Interest of the Participant that made such election pursuant to this section 7.7. 7.8 DEFAULT IN MEETING CASH CALLS. (a) If a default by a Participant in paying a cash contribution toward an approved Program and Budget for which a Participant has agreed to contribute is not cured within 15 days after notice from the Manager to such defaulting Participant of the default, the defaulting Participant shall have until the date that is 30 days after the date of receipt of such notice to cure the default by paying the Manager an amount equal to the amount of the cash contribution for which the Participant is in default plus interest calculated at the Prime Rate plus two percent calculated from the date of such default to the date of payment (in the aggregate the "Penalty Amount"). During the period of default commencing after the initial 15-day period, the Manager shall be entitled to any proceeds from the defaulting Participant's share of Products during such 30 day period to fund the required cash call up to a maximum of the Penalty Amount. If such proceeds are sufficient to pay the entire Penalty Amount, the defaulting Participant shall be deemed to have cured the default. If such proceeds are insufficient to pay the entire Penalty Amount, the defaulting Participant may cure the default by paying to the Manager, the difference between the Penalty Amount and the amount received from such proceeds within the 30-day period for curing such default. (b) If a Participant defaults in paying a cash contribution pursuant to this Agreement then, in its sole discretion, the non-defaulting Participant may advance the defaulted amount on behalf of the defaulting Participant and treat such amount, together with accrued interest thereon, as a demand loan bearing interest at the Prime Rate plus two percent from the date of such advance until repaid. Failure by the defaulting Participant to repay the loan upon demand shall be a default in paying a cash contribution under this Agreement. (c) In the event of the failure of a Participant to cure a default in paying a cash contribution in accordance with the terms of sections 7.8(a) and (b) above, then the defaulting Participant's Participating Interest shall be diluted in accordance with section 7.7 above. 7.9 ELIMINATION OF MINORITY INTEREST. Upon the dilution of a Participating Interest to less than 10%, such Participating Interest shall convert to a 1.5% Net Smelter Returns Royalty interest and the Participant whose Participating Interest is so converted shall be entitled to receive ongoing royalty payments equal to 1.5% of net smelter returns as calculated and paid in accordance with the terms set out in Schedule "IV", and subject as set out in section 7.10 - 14 - below, such Participant shall be relieved of all obligations to contribute to Programs and Budgets, shall be relieved of its share of any liabilities, costs, penalty or fine arising out of Operations conducted after such conversion and shall forfeit all of its rights under this Agreement, including the right to have its representatives appointed as members of the Management Committee, the right to receive notice of and to attend at Management Committee Meetings, the right to become Manager, and the right to receive and participate in Feasibility Studies and Programs and Budgets, except for the rights under this section 7.9 and Schedule "IV" attached hereto. 7.10 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 7.9, 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 be constituted as at the Effective Date. The Management Committee shall consist of two members appointed by each of the Participants. Each Participant may appoint one or more alternates to act in the absence of a regular member. 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 DECISION. Each Participant acting through its appointed members shall have the number of votes on the Management Committee equal to its Participating Interest. Unless otherwise provided in this Agreement, decisions of the Management Committee shall be determined by a majority vote and the Manager shall have a tie or casting vote. 8.3 MEETING. The Management Committee shall hold regular meetings at least every three months in Vancouver, British Columbia or at such other locations agreed to by the Participants. The Manager shall give 30 days' advance notice to - 15 - the Participants of such regular meetings. Additionally, 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 by the Manager and distributed for review, 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 and the Manager shall not have a tie or casting vote with respect to such items: (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. (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. - 16 - (g) Giving financial assistance to any Participant or Affiliate of a Participant or any associate or other related party thereof. (h) Commencing any litigious or administrative claim for an amount in excess of $50,000.00. (i) Amending this Agreement. (j) Appointing the Auditor. 8.7 PARTICIPANT MAY REQUIRE OPERATIONS TO BE SHUT DOWN. Either Participant shall be entitled, by notice in writing to the Manager and 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 Manager, the Manager shall prepare a Program and Budget for placing the mine on care and maintenance and shall convene a meeting of the Management Committee to approve such Program and Budget. 8.8 RESUMPTION OF OPERATIONS. If at any time after the suspension of Operations pursuant to section 8.7, the Manager determines that the mine can be placed back into Commercial Production with the Participants' proportionate 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 shall convene a meeting of the Management Committee to approve such Program and Budget. 8.9 MINE MAINTENANCE PLAN. In addition to the rights of the Participants under section 8.7, the Manager may, at any time subsequent to the commencement of Commercial Production, on at least 30 days notice to all Participants, recommend that the Management Committee approve the suspension of Mining Operations. In considering whether to make such a recommendation, the Manager will take into account good and reasonable mining, environmental and commercial reasons for making the recommendations but will not make a recommendation on the basis of matters particular to the party acting as Manager. The Manager's recommendation will include a Program and Budget (the "Mine Maintenance Plan"), in reasonable detail, of the activities to be performed to maintain the Assets during the period of suspension and the Expenditures to be incurred. The Management Committee may: (a) if the Mine Maintenance Plan provides for a suspension of 180 days or less, then by simple majority; or (b) if the Mine Maintenance Plan provides for a suspension of more than 180 days, then by unanimous approval, approve the Mine Maintenance Plan with such changes as the Management Committee deems necessary. If the Management Committee approves the Mine Maintenance Plan, with or without modifications, then the Participants will be committed to pay their proportionate share of Expenditures incurred in connection with the Mine - 17 - Maintenance Plan based on their then Participating Interest. The Manager will call a meeting of the Management Committee upon the reasons for the suspension of Mining Operations ceasing to have effect and, in any event, within 90 days of approval of the Mine Maintenance Plan. The Management Committee may cause Mining Operations to be resumed at any time (for greater certainty, by unanimous approval if the suspension has lasted for more than 180 days) and will take all reasonable steps to cause Mining Operations to be resumed upon the reasons for the suspension of Mining Operations ceasing to have effect. 8.10 MINE CLOSURE PLAN. The Manager may, at any time following a period of at least 180 days during which Mining Operations have been suspended, upon at least 30 days notice to all Participants, recommend that the Management Committee approve the permanent termination of Mining Operations. The Manager's recommendation will include a Program and Budget (the "Mine Closure Plan"), in reasonable detail, of the activities to be performed to cease Mining Operations and reclaim the Property and the estimated Expenditures to implement the Mine Closure Plan. The Management Committee may approve the Manager's recommendation by unanimous approval with such changes to the Mine Closure Plan as the Management Committee deems necessary. 8.11 IMPLEMENTATION OF MINE CLOSURE PLAN. If the Management Committee unanimously approves the Mine Closure Plan, then the Manager will: (a) implement the Mine Closure Plan, whereupon the Participants will be committed to pay their proportionate share of the Expenditures required to implement that Mine Closure Plan based on their then Participating Interest; and (b) remove, sell and dispose of such Assets as may reasonably be removed and disposed of profitably and such other Assets as the Manager may be required to remove pursuant to applicable environmental and mining laws. 8.12 NON-APPROVAL OF MINE CLOSURE PLAN. If the Management Committee does not approve the Mine Closure Plan, then the Manager will, unless obliged to implement the Mine Closure Plan by order or direction of applicable Government Authorities, maintain Mining Operations in accordance with the Mine Maintenance Plan as approved pursuant to Section 8.9. If the Mining Operations have been suspended for a period of one year or more and the Management Committee does not approve a Mine Closure Plan, either Participant may refer the matter to arbitration in accordance with section 15.1. 9. MANAGER 9.1 APPOINTMENT. Commencing on the Effective Date, and provided that Halo holds a minimum 50% Participating Interest in the Venture, Halo shall be entitled to be and is hereby appointed to be the Manager of the Venture, which Manager shall have overall management responsibility for Operations, and Goldcorp hereby agrees to such appointment. In the event that Goldcorp exercises the Back-in Right, and provided that Goldcorp holds a minimum 50% Participating Interest in the Venture, Goldcorp shall be entitled to be and is hereby appointed to be the Manager of the Venture. Any other Participant shall be entitled to be Manager if such other Participant shall acquire a minimum 51% Participating Interest in the Venture. - 18 - 9.2 POWERS AND DUTIES OF MANAGER. Subject to the general oversight and direction of the Management Committee, the Manager is vested with the full authority to manage and carry out the day to day management of the Property and to conduct all Operations pursuant to the terms of this Agreement and the most recently approved Program and Budget. The Manager agrees 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 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 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, the terms of any leases and permits related to the Property and those encumbrances contemplated in this Agreement, any construction, mechanic's or materialmen's liens which shall 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; (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 equalization thereof, but in no event shall the Manager permit or allow title to the Assets to be lost as the result of the non-payment of any taxes, assessments or like charges); and (iii) do or cause to be done all other acts reasonably - 19 - 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 applicable 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 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. (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 - 20 - 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 Part IX of the EXCISE TAX ACT S.C. 1990, c.45, (the "Act"), the Manager shall account for all GST 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 section 273 of the Act, confirming that the Manager shall account for all GST in respect of any supplies made to or by the Venture and the Manager shall file the Election with Revenue Canada, Customs and Excise along with the Manager's return as and when required under Part IX and section 273 of the Act. Accounting for GST shall include paying GST 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, but shall be and remain liable during the term of this Agreement for any acts or omissions of its Agents. (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. (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) periodic summaries of data acquired as reasonably required by the Participants; (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. At all reasonable times the Manager shall provide the Management 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, provided that such inspection does not unreasonably interfere with Operations. - 21 - (p) The Manager shall undertake all other activities reasonably necessary to fulfill its obligations as Manager under this Agreement and shall undertake and is hereby empowered on behalf of the Venture to take all such other actions and do all such other things as are reasonably necessary 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, be responsible for 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. 9.3 STANDARD OF CARE. The Manager shall conduct all Operations in a good, workmanlike and efficient manner to the best of its ability, skill and judgment in accordance with sound mining and other applicable industry standards and practices and, in accordance with all applicable laws of 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. 9.4 RESIGNATION; DEEMED OFFER TO RESIGN. The Manager may resign as Manager of the Venture upon 90 days prior written notice to the other Participant, in which case the other Participant may elect to become the new Manager by notice to the resigning Participant to such effect within 60 days after receipt of the notice of resignation. Such appointment of the new Manager shall take effect immediately upon the resignation of the outgoing Manager taking effect. If any - 22 - of the following shall occur, the Manager shall be deemed to have offered to resign as Manager, which offer shall be rejected or accepted by the other Participant within 90 days following such deemed offer (and if accepted the other Participant may elect to become the new Manager by notice to the resigning Participant) and in the absence of written acceptance of such resignation by the other Participant within such 90 day period, the Manager shall continue to be Manager hereunder: (a) The Participating Interest of the Manager becomes less than 50%; (b) The Manager fails to perform a material obligation imposed upon the Manager under this Agreement and fails to commence curing or contesting such default within 30 days after notice from the other Participant demanding performance of such material obligation; or (c) 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. 9.5 PAYMENTS TO MANAGER. The Manager shall be reimbursed for its costs hereunder in accordance with the Accounting Procedure. 9.6 TRANSACTIONS WITH AFFILIATES. If the 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. Except as otherwise provided in section 10.9, Operations shall be conducted, Expenditures shall be made or incurred and Assets shall be acquired only pursuant to approved Programs and Budgets. 10.2 PRESENTATION OF PROGRAMS AND BUDGETS. In each calendar year during the Venture, the Manager shall submit to the Participants, a proposed Program and Budget on or before October 31, covering the period from January 1 to December 31 of the following year or such other period as the Management Committee may unanimously determine having regard to, INTER ALIA, the then current fiscal year end of the Venture. 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. If at any time during the term of the Venture no Work is conducted on the Property during any 18 month period, the non-Manager Participant shall have the right to submit to the Manager a proposed Program and Budget for a minimum period of 12 months (the "Non-Manager's Program - 23 - and Budget"). The Non-Manager's Program and Budget shall be reviewed at a meeting of the Management Committee, which meeting shall be called forthwith for such purpose pursuant to section 8.3. 10.3 REVIEW AND APPROVAL OF PROPOSED PROGRAMS AND BUDGETS. Within 30 days after submission of a proposed Program and Budget or a Non-Manager's Program and Budget, each Participant shall submit to the Management Committee: (a) Notice that the Participant approves the proposed Program and Budget or the Non-Manager's Program and Budget, as the case may be; or (b) Proposed modifications of the proposed Program and Budget or the Non-Manager's Program and Budget, as the case may be; or (c) Notice that the Participant rejects the proposed Program and Budget or the proposed Non-Manager's Program and Budget, as the case may be. If a Participant fails to give any of the foregoing responses within such 30 day period, such failure shall be deemed to be an approval by the Participant of the Manager's proposed Program and Budget or the Non-Manager's Program and Budget. If a Participant makes a timely submission to the Management Committee pursuant to section 10.3(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 unanimously approve a Program and Budget or a Non-Manager's Program and Budget within 30 days after the Manager's receipt of a notice pursuant to section 10.3(b) or (c), a proposed Program and Budget or Non-Manager's Program and Budget may be approved by a majority vote of the Management Committee. If a non-Manager's Program and Budget is not approved or modified and approved by the Management Committee, then the Non-Manager who has proposed the Non-Manager's Program and Budget may submit the matter to arbitration pursuant to Article 15 for determination as to whether such non-approval is reasonable in the circumstances. If a Non-Manager's Program and Budget is approved by the Management Committee, then the same shall be deemed to be a Program and Budget for the purposes of this Agreement. 10.4 PREPARATION OF FEASIBILITY STUDY. At the 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 of a mine and such other related facilities as may be desirable, including, a beneficiation plant for processing Products. 10.5 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 preparation of a Feasibility Study or pre-Feasibility Study, and if the Management Committee fails or refuses to direct the Manager to prepare such - 24 - 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. 10.6 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 non-Manager in its decision to proceed to place the Property into Commercial Production, it shall reimburse the non-Manager 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 Manager shall 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. 10.7 ELECTION TO PARTICIPATE. By notice to the Management Committee within 20 days after the final vote of the Management Committee approving a Program and Budget, a Participant may elect to contribute to Expenditures which are a part of such 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 7.4. If a Participant fails to so notify the Management Committee, the Participant shall be deemed to have elected to contribute to such Program and Budget, including Capital Expenditures, in proportion to its respective Participating Interest as of the beginning of the period covered by the Program and Budget. 10.8 BUDGET DECREASES. If a Program and Budget is subsequently modified to decrease Expenditures by 15% 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 85% or less than as originally adopted, the Manager shall notify the non-contributing or partially-contributing Participant. Within 30 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 share of the modified Program and Budget to the date of the payment. 10.9 BUDGET OVERRUNS; PROGRAM CHANGES. The Manager shall immediately notify the Management Committee of any departure from an adopted Program and Budget of an amount equal to ten percent or more of the original budgeted amount of such Program. The Manager may not exceed an approved Program or Budget by more than ten percent without the unanimous approval of the Management Committee and the Manager shall not have a tie or casting vote in respect thereof. If the Manager exceeds an approved Program or Budget by more than ten percent without the unanimous approval of the Management Committee; (i) the Manager shall be solely responsible for Exploration Expenditures which exceed the approved Program or Budget; (ii) the Manager shall advance the non-Manager's proportionate share of - 25 - Development Expenditures which exceed the approved Program or Budget and the Manager shall be entitled to receive, for its own benefit, interest at an annual rate equal to the Prime Rate plus one percent calculated from the date of such advance until the date of repayment and shall be entitled to repayment by the non-Manager of such advances on the date that is one year from the date of each such advance; (iii) the Manager shall advance the non-Manager's proportionate share of Mining Expenditures which exceed the approved Program or Budget and the Manager shall be entitled to repayment by Goldcorp of such advances 120 days after the date of each advance. 10.10 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 provided that the Participant that is not the Manager shall have 120 days to contribute its proportionate share of such excess costs. 11. ACCOUNTS AND SETTLEMENTS 11.1 MONTHLY STATEMENTS. Within 30 days of the end of each calendar month, the Manager shall deliver to each Participant financial statements and other relevant information reflecting in reasonable detail all transactions of the Venture during the preceding month. 11.2 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 - 26 - (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 60 days. 11.3 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 and for which such Participant is responsible pursuant to the terms of this Agreement. 11.4 PAYMENT OF CASH CALLS. Each Participant shall advance to the Manager its proportionate share of the invoicing within 15 days of receipt of the invoicing. 11.5 FAILURE TO MEET CASH CALLS. A Participant that fails to meet cash calls in the amount and at the times specified in sections 11.2, 11.3 and 11.4 respectively shall be deemed to be in default of its obligations under this Agreement and the amounts of the defaulted cash call shall bear interest from the date due in accordance with section 7.5 and the non-defaulting Participant shall have those rights, remedies and elections specified in section 7.5. 11.6 AUDITS AND ADJUSTMENTS. The financial records of the Venture shall be audited annually by the Auditor. The Manager 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 take in kind and separately dispose of its Participating Share of all Products 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 - 27 - 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 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, to cure such default in accordance with section 7.8 or to repay a loan to the non-defaulting Participant in accordance with section 7.8, 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 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 7.8, the defaulting Participant shall be deemed to be back in good standing under the terms of this Agreement. 12.3 FAILURE OF PARTICIPANT TO TAKE IN KIND. If after reasonable notice by the Manager, a Participant fails to take in kind its share of Products, the Manager shall have the right, but not the obligation, to purchase the Participant's share of Products for its own account or to sell such share as agent for the Participant on terms and conditions that are not less than the then prevailing fair market value having regard to the quantity, advanced sales and other applicable market conditions. The Manager shall facilitate the sale of Products on behalf of each Participant on such terms as may be agreed in writing. Subject to the terms of any contracts of sale then outstanding, during any period that the Manager is purchasing or selling a Participant's share of production, the Participant may elect by notice to the Manager to take Product in kind. The Manager shall be entitled to deduct from proceeds of any sale by it for the account of a Participant reasonable expenses incurred in such a sale. - 28 - 13. WITHDRAWAL AND TERMINATION 13.1 TERMINATION BY EXPIRATION OR AGREEMENT. This Agreement shall terminate as expressly provided in section 13.2 and additionally shall terminate by written agreement of both Participants. 13.2 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 Permitted Encumbrances and those to which both Participants have given their written consent after the date of this Agreement, and subject to the terms and conditions of all leases, permits, licences or other approvals related to the Property. No withdrawal under this section 13.2 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 13.2, 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. 13.3 CONTINUING OBLIGATIONS. On termination of this Agreement under section 13.1, but subject to 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 Manager shall 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 - 29 - 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 13.2 shall be entitled to all information acquired in the conduct of the Venture prior to such withdrawal and pursuant to any Work Plan of which the withdrawing Participant has duly paid its Proportionate Share of costs and expenses, including copies of maps, data and 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 Work Plan, 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, if any, 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 14.1 HALO'S RIGHTS TO TRANSFER. Halo may at any time after execution of this Agreement Transfer all of its rights, title and interest in and to the Property and under this Agreement to an Affiliate of Halo or, subject to sections 14.3 and 14.4 below, to a third party, provided Halo provides Goldcorp 30 days notice of such Transfer and provided such Affiliate or third party shall have agreed in writing with Goldcorp to be bound by the terms and conditions of this Agreement and to perform all obligations of Halo hereunder. Notwithstanding such Transfer to an Affiliate by Halo, Halo shall remain at all times liable for the due performance of all covenants and obligations of Halo to be performed hereunder. In the event Halo completes a Transfer to a third party in accordance with the terms of this section 14.1 Halo shall be released from its obligations under this Agreement to the extent such third party has agreed in writing to be bound by and perform the obligations of Halo under this Agreement. 14.2 GOLDCORP'S RIGHT TO TRANSFER. Goldcorp may at any time after execution of this Agreement Transfer all of its rights, title and interest in and to the Property and under this Agreement to an Affiliate of Goldcorp or, subject to sections 14.3 and 14.4 below, to a third party, provided Goldcorp provides Halo 30 days notice to such Transfer and provided such Affiliate or third party shall have agreed in writing with Halo to be bound by the terms and conditions of this Agreement and to perform all obligations of Goldcorp hereunder. Notwithstanding such Transfer by Goldcorp to an Affiliate of Goldcorp, Goldcorp shall remain at all times liable for the due performance of all covenants and obligations of - 30 - Goldcorp to be performed hereunder. In the event Goldcorp completes a Transfer to a third party in accordance with the terms of this section 14.2 Goldcorp shall be released from its obligations under this Agreement to the extent such third party has agreed in writing to be bound by and perform the obligations of Goldcorp under this Agreement. 14.3 RIGHT OF FIRST REFUSAL. Neither Participant shall transfer all or any part of its Participating Interest or its interest in this Agreement other than in accordance with this Article 14. If a Participant should desire to transfer to a third party all or part 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 Third Party Offer shall state the price and all other pertinent terms and conditions upon which it wishes to complete the Transfer and the Participant (the "Transferring Participant") shall have delivered a copy of the Third Party Offer to the other Participant (the "Other Participant") together with the Transferring Participant's own offer to sell to the Other Participant on the same terms and conditions (the "Offer"). The Other Participant shall have 30 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 Other Participant. If the Other 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 sections 14.1 or 14.2 above, as the case may be, in this section, the right of first refusal herein contained shall be deemed to be revived. Any subsequent proposal to Transfer a Participating Interest and an interest in this Agreement by the Transferring Participant shall be conducted in accordance with the procedures set forth in this section 14.3. 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 Other Participant an agreement in writing covenanting to be bound by this Agreement and the terms hereof in accordance with sections 14.1 or 14.2, as the case may be. 14.4 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 transferee of all or part of the interest of a Participating Interest or an interest in this Agreement shall have the rights of a Participant unless and until the transferring Participant has provided to the other Participant notice of the Transfer and the transferee, as of the effective date of the Transfer, has committed in writing to be bound by the terms of this Agreement and the terms of the Venture to the same extent as the transferring Participant. (b) 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. (c) The transferring Participant and the transferee shall bear all tax consequences of the Transfer. - 31 - 14.5 RESTRICTIONS ON MORTGAGES. (a) Other than as set out below neither Party shall mortgage, pledge, charge, hypothecate or otherwise encumber its Participating Interest or any part thereof without the approval of the other Party. (b) Notwithstanding the provisions of subparagraph 14.5(a) above, each of the Parties shall be entitled to mortgage, pledge, hypothecate or otherwise encumber its Participating Interest provided that the proceeds of such mortgage, charge, pledge or hypothec are applied by such Party 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 with the other Participant upon realization of its security to 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. 15. ARBITRATION 15.1 BINDING ARBITRATION. Any matter in this Agreement in dispute between the Parties which has not been resolved by the Parties within fifteen (15) days of the delivery of notice by either Party of such dispute shall be referred to binding arbitration. Such referral to binding arbitration shall be to a single arbitrator pursuant to the ARBITRATIONS ACT, 1991 (Ontario) and its successor legislation, which act shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules for arbitration set out in Schedule "V". Such arbitrator shall be qualified by education and experience to determine the matter in dispute. 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 (other than the inability to access the Property because of the seasonality of weather conditions for which a Party has not properly or adequately planned), 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 where the Manager has filed timely and complete applications for approval 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 - 32 - 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. Any Party asserting an event of force majeure shall provide ongoing periodic notice in writing to the other Party 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. CONFIDENTIALITY 17.1 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 to any other Person without the prior written consent of the other Party. 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 17. The provisions of this Article 17 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 - 33 - 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. 18. EVENT OF DEFAULT OF PARTICIPANT 18.1 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 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 - 34 - (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. 18.2 ADDITIONAL REMEDIES. In the event of the occurrence with respect to any Participant of any of the events referred to in section 18.1, 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 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. 19. NOTICE - GENERAL 19.1 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 delivered by facsimile transmission, addressed to such other Party or delivered to such other Party as follows: (a) to Goldcorp at: Bag 2000 17 Mine Road Balmertown, Ontario P0V 1C0 Attention: Regional Exploration Manager Fax No.: 807-735-3120 and to: 3201-130 Adelaide Street West Toronto, Ontario M5H 3P5 Attention: Executive Vice President, Canada and USA Fax No.: 416-363-5950 (b) to Halo at: 1305-1090 West Georgia Street Vancouver BC V6E 3V7 Attention: Marc Cernovitch Fax No.: 604-484-0069 - 35 - 20. MISCELLANEOUS - GENERAL 20.1 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, 6.2, 6.4, 7.8, 7.9, 11.3, 13.2, 13.3, 13.4, 13.5, 13.6, 15.1 and 17.1. 20.2 SEVERABILITY. Any provision of this Agreement which is invalid or unenforceable shall not affect any other provision and shall be deemed to be severable herefrom. 20.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. 20.4 FURTHER ASSURANCES. The Parties shall sign such further and other documents and do such further acts or things as may be reasonably within their control as may be necessary or desirable in order to give full force and effect to this Agreement and every part hereof. 20.5 AMENDMENT. This Agreement may not be amended or modified in any respect except by written instrument signed by the Parties. 20.6 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. 20.7 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. 20.8 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. GOLDCORP INC. Per: ---------------------------------- Name: Title: - 36 - HALO RESOURCES LTD. Per: /s/ Marc Cernovitch ---------------------------------- Name: Marc Cernovitch Title: President & CEO THIS IS SCHEDULE "I" TO THE JOINT VENUTRE AGREEMENT DATED AS OF ____________,___________ BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. UNPATENTED PROPERTYAND SEVENTY-FIVE % CLAIMS (STK = UNPATENTED, LP = LEASE PATENT) ----------------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ----------------------------------------------------------------------- UNPATENTED PROPERTY ----------------------------------------------------------------------- Pipestone Bay STK 1234170 Pipestone Bay STK 1234140 Pipestone Bay STK 1234141 Pipestone Bay STK 1234142 Pipestone Bay STK 1234143 Pipestone Bay STK 1234144 Middle Bay LP 40860 Middle Bay LP 40861 Middle Bay LP 40862 Middle Bay LP 40863 Middle Bay LP 40864 Middle Bay LP 40865 Middle Bay LP 46181 Middle Bay LP 46182 Middle Bay LP 46183 Middle Bay LP 46184 Middle Bay LP 49874 - 2 - ----------------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ----------------------------------------------------------------------- Middle Bay LP 49875 Middle Bay LP 49897 Middle Bay LP 49898 Middle Bay LP 49899 Middle Bay LP 49900 Middle Bay LP 49901 Middle Bay LP 49902 Middle Bay LP 49903 Middle Bay LP 49904 Middle Bay LP 52174 Middle Bay LP 52175 Middle Bay LP 53397 Middle Bay LP 53398 Middle Bay LP 53399 Middle Bay STK 870130 Middle Bay STK 870131 Middle Bay STK 870132 Middle Bay STK 1143622 Middle Bay STK 1143623 Middle Bay STK 1143624 Middle Bay STK 1143645 Middle Bay STK 1143646 Middle Bay STK 1143647 - 3 - ----------------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ----------------------------------------------------------------------- Middle Bay STK 1184230 Middle Bay STK 1184316 Middle Bay STK 1184317 Middle Bay STK 1185055 Middle Bay STK 1234022 Middle Bay STK 1234029 Middle Bay STK 1234030 Middle Bay STK 1234039 Middle Bay STK 1234051 Middle Bay STK 1234081 Middle Bay STK 1234082 Middle Bay STK 1234083 Middle Bay STK 1234155 Middle Bay STK 1234156 Middle Bay STK 1234157 Middle Bay STK 1248154 Middle Bay STK 1234259 Middle Bay STK 1234245 Middle Bay STK 1234084 Middle Bay STK 3004674 Middle Bay STK 3004676 Middle Bay STK 1247933 Middle Bay STK 1234401 - 4 - ----------------------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ----------------------------------------------------------------------- Middle Bay STK 1234402 Middle Bay STK 1248171 Middle Bay STK 1248129 Middle Bay STK 1248169 SEVENTY-FIVE % CLAIMS ----------------------------------------------------------------------- Middle Bay LP 47707 Middle Bay LP 47708 ----------------------------------------------------------------------- THIS IS SCHEDULE "H" TO THE JOINT VENUTRE AGREEMENT DATED AS OF ____________,___________ BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. PATENTED PROPERTY LIST OF PROPERTIES ------------------------------------------------------- PROPERTY TYPE OFFICIAL NO. ------------------------------------------------------- Biron Bay Patent 11077 Biron Bay Patent 11078 Biron Bay Patent 11079 Biron Bay Patent 11080 Biron Bay Patent 11081 Biron Bay Patent 11082 Biron Bay Patent 11083 Biron Bay Patent 11104 Biron Bay Patent 11105 Biron Bay Patent 11106 ------------------------------------------------------- THIS IS SCHEDULE "III" TO THE JOINT VENUTRE AGREEMENT DATED AS OF ____________,___________ BETWEEN GOLDCORP. INC. AND HALO RESOURCES LTD. ACCOUNTING PROCEDURE SECTION I. GENERAL PROVISIONS 1. DEFINITIONS (a) "Agreement" shall mean the Agreement to which this Accounting Procedure is attached as Schedule "III". (b) "Field Office" means any necessary office in each place where Work is being performed on or solely in relation to the Property. (c) "Material" shall mean personal property, equipment or supplies acquired or held for use in Operations. (d) "section" or "paragraph" followed by a number shall mean and refer to the specified section or paragraph of this schedule. All other terms defined in the Agreement and used herein shall, unless otherwise defined herein, have the same meaning ascribed thereto in the Agreement. 2. GENERAL ACCOUNTING RECORDS The Manager shall maintain detailed and comprehensive cost accounting records in accordance with the requirements of the laws of Canada and in accordance with this Accounting Procedure and Canadian generally accepted accounting principles, including general ledgers, supporting and subsidiary journals, invoices, cheques and other customary documentation sufficient to provide a record of revenues and expenditures and periodic statements of financial position and the results of operations for managerial, tax, regulatory or other financial reporting purposes. Such records shall be retained for the longer of the duration of the period allowed the Participants for audit or the period necessary to comply with tax or other regulatory requirements. The records shall include accounts for each Participant which shall reflect all obligations, advances and credits of the Participants in accordance with their Participating Interests. 3. REPORTING The Manager shall provide, not later than 30 days after the end of each fiscal year financial statements, reports and other information required by Participants to complete their accounting procedures. - 2 - 4. BANK ACCOUNTS The Manager shall maintain one or more separate bank accounts for the payment of all expenses and the deposit of all cash receipts in respect of Operations. 5. CONFLICT WITH AGREEMENT In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement, the provisions of the Agreement shall take precedence. 6. STATEMENTS AND INVOICES The Manager shall invoice each Participant for its proportionate share of Expenditures in accordance with the terms of the Agreement in respect of a Program in which such Participant has agreed to participate in accordance with the terms of the Agreement. Such invoices will be accompanied by complete and accurate statements reflecting all charges and credits summarized by appropriate classifications indicative of the nature thereof. Expenditures for all tangible and intangible assets and any unusual charges shall be detailed. If the Manager does not request a Participant to pay its share of estimated Expenditures in advance, the Participant shall pay its share of actual Expenditures within twenty (20) days following receipt of a Manager's invoice related thereto. 7. ADJUSTMENTS Payments of invoices shall not prejudice the rights of a Participant to protest or question the correctness thereof; provided, however, all invoices and statements rendered to a Participant by the Manager during any fiscal year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of such fiscal year, unless within the said twenty-four (24) month period a Participant takes written exception thereto and makes a claim on the Manager for adjustment. No adjustment favourable to the Manager shall be made unless a claim is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of the Material purchased for Operations. 8. REVIEW OF ACCOUNTS (a) A Participant, upon reasonable notice to the Manager, shall have access and the right, at its sole expense, to audit all records relating to the accounting and Operations hereunder, including any records originating from an Affiliate or other offices of the Manager for any fiscal year of the Venture or portion thereof, within the twenty-four (24) month period following the end of such fiscal year. (b) The Manager's verification of contractors' invoices shall not be construed as constituting a bona fide audit of contractors' records of original entry. In the event that an audit of contractors' records of original entry is deemed necessary by the Manager or by a Participant the cost of such audit shall be charged to the account for Operations. - 3 - SECTION II. DIRECT CHARGES Subject to limitations hereinafter prescribed, the Manager shall charge the account for Operations for all costs necessary to conduct Operations as follows: 1. FIELD OFFICE EXPENSE All costs incurred in maintaining and operating a Field Office for Operations. 2. RENTALS AND ROYALTIES All fees, rent and royalties, including the Existing Royalties, paid in respect of mining claims, exploration permits, leases, licences, or other similar grants, forming part of the Property. 3. LABOUR (a) Salaries and wages of all employees, including the Manager's employees, directly engaged on a full time basis in the conduct of the Operations, and a charge for the salaries or wages of employees who are temporarily assigned on a full time basis to and directly employed in the Operations in proportion to the time spent by such employees to provide such services. No costs will be charged to the Venture for salaries and wages that relate to employment other than employment in the Operations. (b) A percentage of the salaries and wages chargeable to the account for Operations under paragraph 3(a) of this Section II, to cover the cost of payroll burden for employee benefits including vacations, statutory holidays, sickness and disability benefits, group life insurance, hospitalization, pensions, dental, major medical and other benefit plans of a like nature and for mandatory payments to the local, provincial and federal governments for worker's compensation, unemployment insurance, pension and any other similar charges that any government may impose on the Manager based on salary and wage costs. The percentage will be established based on the Manager's cost experience and the amount charged will be adjusted retroactively on an annual basis to reflect the actual percentage for the previous year when actual costs are determined. No costs shall be charged to the Venture for benefits that relate to employment other than employment directly related to Operations. (c) Out of pocket expenses applicable to the Operations of those employees whose salaries and wages are chargeable to the account for Operations under paragraph 3 (a) and (d) of this Section II and for which expenses the employees are reimbursed under the Manager's usual practice (including, without restriction, any relocation expenses necessarily incurred in order to properly staff a Program). (d) A charge for the salaries and the wages of the Manager's employees and the employees of the other Participant at the request of the Manager, including corporate office employees and officers and senior management personnel, not involved in Operations on a full time or contractual basis, as follows: - 4 - (i) during the Exploration phase - the actual costs directly incurred by the Manager for such employees in respect of Work actually performed, provided that in no event shall such costs exceed in aggregate five percent of all other Expenditures directly related to the Property or Work done on the Property and directly incurred or performed by Halo or five percent of the contract price in respect of all other Expenditures directly related to the Property or Work done on the Property performed by any agent, contractor or subcontractor of Halo; and (ii) during the Development and Mining phases - the actual costs directly incurred by the Manager for such employees in respect of Work actually performed, provided that in no event shall such costs exceed two percent of all other Expenditures directly related to the Property or Work done on the Property whether directly incurred or performed by the Manager or performed by any agent, contractor or subcontractor of the Manager. 4. MATERIAL All Material purchased or furnished by the Manager for use in Operations. So far as it is reasonably practical and consistent with efficient and economical operation, only such Material shall be purchased for or transferred to the Operations as may be required for immediate use. The accumulation of surplus stocks shall be avoided. 5. TRANSPORTATION Reasonable transportation costs of Agents of the Manager (and the Agents of the other Participant as necessary for the conduct of Operations) and Material necessary for the conduct of Operations. Such costs shall include transportation of such Agents' families and their personal effects, household effects, and all other relocation costs incurred in the staffing of the Operations. 6. SERVICES (a) The cost of contract services and utilities procured from outside sources other than services covered by paragraph 8 of this Section II. (b) Use and service of equipment and facilities furnished by the Manager as provided in Section III. 7. DAMAGES AND LOSSES TO ASSETS All costs or expenses necessary for the repair or replacement of Assets made necessary because of damages or losses resulting from fire, flood, storm, theft, accident, or any other cause. The Manager shall furnish the other Participant with written notice of damages or losses incurred forthwith after a report thereof has been received by the Manager. - 5 - 8. LEGAL EXPENSES All reasonable costs and expenses of handling, investigating, and settling litigation or claims arising in respect of the Operations, including but not limited to, independent counsel's fees, court costs, costs of investigation or procuring evidence and amounts paid in settlement or satisfaction of any such litigation or claims, provided that no settlement shall be entered into when the amount of such settlement exceeds $50,000.00 without the unanimous approval of the Management Committee as set out in the Agreement. 9. TAXES All taxes of every kind and nature assessed or levied upon or in connection with the Operations, which have been paid by or for the benefit of the Venture. 10. INSURANCE PREMIUMS Premiums paid for insurance required to be carried in respect of the Operations. 11. MARKETING COSTS All costs incurred in the sale of Products including, but not limited to, labour costs, as set out in Section II, paragraph 3 of this Schedule, transportation, insuring sampling, assaying, impurity penalties and marketing fees, including such marketing fees as are contemplated by the Agreement. 12. OTHER EXPENDITURES Any other expenditures not covered or dealt with in the foregoing provisions of this Section II and which are reasonably incurred by the Manager for the necessary and proper conduct of the Operations. SECTION III. MATERIAL FURNISHED BY THE MANAGER 1. PURCHASE Material and equipment purchased and services procured shall be charged at the price paid by the Manager after deduction of all discounts actually received. 2. MATERIAL FURNISHED BY THE MANAGER Material required for Operations shall be purchased for direct charge to the account for Operations whenever practicable, except that the Manager may furnish such Material from the Manager's own stocks under the following conditions: (a) New Material (Condition "A") New Material transferred from the Manager's own warehouse or other properties shall be priced f.o.b. the nearest reputable supply store or railway receiving point, where such Material - 6 - is available, at current replacement cost of the same kind of Material. (b) Used Material (Conditions "B" and "C") (i) Material which is in sound and serviceable condition and suitable for reuse without reconditioning shall be classed as Condition "B" and priced at seventy-five per cent (75%) of new price. (ii) Material which cannot be classified as Condition "B" but which; after reconditioning will be further serviceable for its original function as good second-hand Material (Condition "B"); or is serviceable for its original function but is substantially not suitable for reconditioning, shall be classified as Condition "C" and priced at fifty per cent (50%) of new price. (iii) Material which cannot be classified as Condition "B" or Condition "C" shall be priced at a value commensurate with its use. (c) Material Furnished by the Manager when not Readily Available When Material or supplies are not readily available from reputable sources, the Manager may furnish such material from its stock or properties at its nearest available supply and charge the Manager's full cost of same to the account for Operations including, without limitation, purchase price, procurement, warehousing, handling, transportation and all other costs incurred in connection therewith up to the time of delivery to the Property. (d) Material Over $50,000.00 The Manager shall obtain two quotes in advance in respect of any Material and equipment purchased, other than New Material, or services procured at a price over $50,000.00 (calculated on an aggregate basis in respect of all Material or services procured in any one transaction) and shall make such quotes available for review to the non-Manager Participant. The non-Manager Participant shall be entitled to appoint a third party evaluator when Used Material over $50,000.00 is furnished by the Manager. 3. PREMIUM PRICES Whenever Material is not readily obtainable at the customary supply point or at prices specified in paragraphs 1 and 2 of this Section III because of causes over which the Manager has no control, the Manager may charge the account for Operations for the required Material on the basis of the Manager's direct cost and expense incurred in procuring such Material, in making it suitable for use, - 7 - and in moving it to the required location, provided, however, that notice in writing is furnished to the Participants of the proposed charge prior to invoicing the Participants for such Material, whereupon the Participants shall have the right, by so electing and notifying the Manager, within fifteen (15) days after receiving such notice from the Manager, to furnish in kind, all or part of its share of such Material which shall be reasonably suitable for use and acceptable to the Manager. Transportation costs on such Material furnished by a Participant, at any point other than at the required location, shall be borne by the Participant. If, a Participant furnishes Material pursuant to the provisions of this paragraph, the Manager shall make appropriate credits therefor to the account of such Participant. 4. WARRANTY OF MATERIAL FURNISHED BY THE MANAGER The Manager does not warrant the Material furnished beyond the dealer's or manufacturer's guarantee; and in case of defective Material, credit shall not be passed until adjustment has been received by the Manager from the manufacturers or their agents. SECTION IV. DISPOSAL OF EQUIPMENT AND MATERIAL 1. DISPOSITION OF SURPLUS MATERIAL The Manager shall be under no obligation to purchase surplus, new or second-hand Material. The disposition of items with a replacement value in excess of $50,000 of surplus Material shall be subject to the unanimous approval of the Management Committee; provided that the Manager shall dispose of normal accumulations of junk and scrap Material either by transfer or sale from the Property. Proceeds of such sale shall be credited to the account for Operations. 2. MATERIAL PURCHASED BY THE MANAGER OR A PARTICIPANT Material purchased by either the Manager or a Participant shall be credited by the Manager to the account for Operations at an amount equal to the reasonable fair market value thereof for the month in which the Material is removed by the purchaser. 3. SALES TO PARTICIPANTS OR TO THIRD PARTIES Sales to Participants or third parties of Material from the Operations shall be credited by the Manager to the account for Operations at the net amount collected by the Manager from such purchaser. All sales to Participants or third parties of Material from Operations in excess of $50,000.00 (calculated on an aggregate basis in respect of all Material or services procured in any one transaction) shall require prior unanimous approval of the Management Committee. Any claims by a purchaser for defective Material or otherwise shall be charged back to the account for Operations if and when paid by the Manager. SECTION V. INVENTORIES 1. INVENTORIES (a) At reasonable intervals and, in any event, at least once per fiscal year of the Venture, inventories shall be taken by the Manager, which shall include all such Material as is - 8 - ordinarily considered controllable by Managers of mining properties and the expense of conducting such periodic inventories shall be charged to the account for Operations. The Manager shall give written notice to the Participants of its intent to take any inventory at least thirty (30) days before such inventory is scheduled to take place. A Participant shall be deemed to have accepted the results of any inventory taken by the Manager if the Participant fails to be represented at such inventory. (b) Reconciliation of the inventory with charges to the account for Operations shall be made, and a list of overages and shortages shall be furnished to the Participants within one month after the inventory is taken. Inventory adjustments shall be made by the Manager to the accounting records for overages and shortages, but the Manager shall be held accountable only for shortages due to lack of reasonable diligence. THIS IS SCHEDULE "IV" TO THE JOINT VENTURE AGREEMENT DATED AS OF ________________, _____ BETWEEN GOLDCORP INC. AND HALO RESOURCES LTD. 1.5% NET SMELTER RETURNS ROYALTY INTEREST 1. DEFINITIONS Where used herein: (a) "Agreement" means the letter agreement to which this schedule is attached, including any amendments thereto or renewals or extensions thereof. (b) "Fiscal Period" means each calendar year or other period of 12 consecutive months adopted by the Venture for accounting purchases. (c) "Net Smelter Returns" shall mean the gross proceeds received from the sale or other disposition of ores, metals (metals shall include bullion, precious metals and other than precious metals) or concentrates produced from the Property and sold, less the following expenses if actually incurred: (i) Taxes specifically based on mining production, but excluding any and all taxes (a) based upon the net or gross income of the owner or other operator of the Property and (b) based upon the value of the Property, the privilege of doing business and other similarly based taxes; and (ii) Charges and costs, if any, for sales fees, transportation and insurance of ores, metals (metals shall include bullion, precious metals and other than precious metals) or concentrates produced from the Property to any mint, smelter, or refinery. (iii) Charges, costs (including assaying and sampling costs) and all penalties, if any, charged by a smelter or refiner of ores, metals (metals shall include bullion, precious metals and other than precious metals) or concentrates produced from the Property. (d) "Payee" means the party under the Agreement entitled to the payment of the Royalty Interest thereunder. (e) "Payor" means the Participant or Participants under the Agreement obligated to make the Royalty Interest payments thereunder. (f) "Property" has the meaning ascribed to such definition in the Agreement. (g) "Royalty Interest" means the 1.5% Net Smelter Returns which may become payable under the Agreement. - 2 - 2. PAYMENT (a) The Royalty Interest shall be paid in cash only on a quarterly basis within 45 days after the end of each fiscal quarter in respect of the actual proceeds received in such fiscal quarter. (b) Each payment under subsection 2(a) shall be accompanied by a statement indicating the calculation of Net Smelter Returns hereunder. The Payee shall be entitled to audit, during normal business hours, such books and records as are necessary to determine the correctness of the payment of the Royalty Interest, provided however, that such audit shall be made once only on an annual basis and within 12 months of the end of the Fiscal Period in respect of which such audit is made. (c) Payment of the Royalty Interest shall be made to the Payee at such place or places as it shall advise the Payor from time to time. 3. TRANSFER OF THE PROPERTY No sale, assignment or transfer by the Payor of all or any part of its Participating Interest including all or any part of its right, title and interest in and to the Property, may be completed unless and until the purchaser, assignee or transferee therein and thereof delivers a written agreement with and for the benefit of the Payee, in a form satisfactory to the Payee, acting reasonably, to assume and agree to pay and perform or guarantee all or a pro rata portion of the liabilities and obligations of the Payor under the Agreement in respect of the payment of the Royalty Interest of the Payee and to comply with this covenant in respect of any subsequent sale, transfer or assignment. Such assumption shall not serve to release or discharge the Payor from any of the said liabilities or obligations theretofore accrued with respect to the Royalty Interest of the Payee or portion thereof being transferred, but shall release and discharge a transferring Payor from all of the said liabilities and obligations thereafter accruing with respect to the Royalty Interest of the Payee or portion thereof being transferred. 4. UNDERPAYMENT In the event the Payor defaults in payment or is found to have underpaid the Payee in respect of any Royalty Interest payment due hereunder, the Payor shall pay interest on such delinquent payment at a rate equal to the Prime Rate plus two (2%) percent per annum commencing on the date on which such delinquent payment was due and payable and continuing until the Payee receives payment in full of such delinquent payment and all accrued interest thereon. Such delinquent amount and all interest accrued thereon shall be paid with the next quarterly payment. For the purposes of this subsection, the Prime Rate shall be determined as of the date on which such delinquent payment was due. 5. REGISTRATION To the extent permitted by applicable law, the Payee shall be entitled to register or record a copy of this Agreement establishing its Royalty Interest, or a notice or memorandum thereof, against title to the Property and to file such agreement or notice or memorandum in the office of any appropriate - 3 - Governmental Authority, with the intent of the Parties, including the Payor and the Payee, that such Royalty Interest run with and bind the Property and the title thereto and the interests of any successor owner, mortgagee, lessee, or other encumbrancer thereof or therein. 6. DISPUTES Any dispute between the Parties, including between the Payor and the Payee, arising in respect of matters related to the net profits royalty interest of the Payee shall be submitted to and decided by binding arbitration in accordance with the arbitration provisions of the Agreement. THIS IS SCHEDULE "V" TO THE JOINT VENTURE AGREEMENT DATED AS OF ________________, _____ BETWEEN GOLDCORP INC. AND HALO RESOURCES LTD. RULES FOR ARBITRATION The following rules and procedures shall apply with respect to any matter to be arbitrated by the Parties under the terms of the Agreement. 1. INITIATION OF ARBITRATION PROCEEDINGS (a) If any Party to this Agreement wishes to have any matter under this Agreement arbitrated in accordance with the provisions of this Agreement, it shall give notice to the other Party hereto specifying particulars of the matter or matters in dispute and proposing the name of the person it wishes to be the single arbitrator. Within 20 days after receipt of such notice, the other Party to this Agreement shall give notice to the first Party advising whether such Party accepts the arbitrator proposed by the first Party. If such notice is not given within such 20 day period, the other Party shall be deemed to have accepted the arbitrator proposed by the first Party. If the Parties do not agree upon a single arbitrator within such 20 day period such arbitrator shall be chosen in accordance with the ARBITRATION ACT, 1991 (Ontario) (the "Arbitration Act"). (b) The individual selected as Arbitrator shall be qualified by education and experience to decide the matter in dispute. The Arbitrator shall be at arm's length from both Parties and shall not be a member of the audit or legal firm or firms who advise either Party, nor shall the Arbitrator be a person who is otherwise regularly retained by either of the Parties. 2. SUBMISSION OF WRITTEN STATEMENTS (a) Within 20 days of the appointment of the Arbitrator, the Party initiating the arbitration (the "Claimant") shall send the other Party (the "Respondent") a statement of claim setting out in sufficient detail the facts and any contentions of law on which it relies, and the relief that it claims. (b) Within 15 days of the receipt of the statement of claim, the Respondent shall send the Claimant a statement of defence stating in sufficient detail which of the facts and contentions of law in the statement of claim it admits or denies, on what grounds, and on what other facts and contentions of law he relies. (c) Within 10 days of receipt of the statement of defence, the Claimant may send the Respondent a statement of reply. (d) All statements of claim, defence and reply shall be accompanied by copies (or, if they are especially voluminous, lists) of all essential documents on which the Party concerned - 2 - relies and which have not previously been submitted by any Party, and (where practicable) by any relevant samples. (e) After submission of all the statements, the Arbitrator will give directions for the further conduct of the arbitration. 3. MEETINGS AND HEARINGS (a) The arbitration shall take place in the City of Toronto, Ontario, or in such other place as the Claimant and the Respondent shall agree upon in writing. The arbitration shall be conducted in English unless otherwise agreed by such Parties and the Arbitrator. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive working days until it is concluded. (b) All meetings and hearings will be in private unless the Parties otherwise agree. (c) Any Party may be represented at any meetings or hearings by legal counsel. (d) Each Party may examine, cross-examine and re-examine all witnesses at the arbitration. 4. THE DECISION (a) The Arbitrator will make a decision in writing and, unless the Parties otherwise agree, will set out reasons for decision in the decision. (b) The Arbitrator will send the decision to the Parties as soon as practicable after the conclusion of the final hearing, but in any event no later than 30 days thereafter, unless that time period is extended for a fixed period by the Arbitrator on written notice to each Party because of illness or other cause beyond the Arbitrator's control. (c) The decision shall determine and award costs. (d) The decision shall be final and binding on the Parties and shall not be subject to any appeal or review procedure provided that the Arbitrator has followed the rules provided herein in good faith and has proceeded in accordance with the principles of natural justice. In the event either Party initiates any court proceeding in respect of the decision of the Arbitrator or the matter arbitrated, such Party, if unsuccessful in the court proceeding, shall pay the other Party's costs on a solicitor/client basis, all reasonable expenses incurred by such other Party and related to such court proceeding. 5. JURISDICTION AND POWERS OF THE ARBITRATOR (a) By submitting to arbitration under these Rules, the Parties shall be taken to have conferred on the Arbitrator the following jurisdiction and powers, to be exercised at the Arbitrator's discretion subject only to these Rules and the - 3 - relevant law with the object of ensuring the just, expeditious, economical and final determination of the dispute referred to arbitration. (b) Without limiting the jurisdiction of the Arbitrator at law, the Parties agree that the Arbitrator shall have jurisdiction to: (i) determine any question of law arising in the arbitration; (ii) determine any question as to the Arbitrator's jurisdiction; (iii) determine any question of good faith, dishonesty or fraud arising in the dispute; (iv) order any Party to furnish further details of that Party's case, in fact or in law; (v) proceed in the arbitration notwithstanding the failure or refusal of any Party to comply with these Rules or with the Arbitrator's orders or directions, or to attend any meeting or hearing, but only after giving that Party written notice that the Arbitrator intends to do so; (vi) receive and take into account such written or oral evidence tendered by the Parties as the Arbitrator determines is relevant, whether or not strictly admissible in law; (vii) make one or more interim awards; (viii) hold meetings and hearings, and make a decision (including a final decision) in Toronto, Ontario or elsewhere with the concurrence of the Parties thereto; (ix) order the Parties to produce to the Arbitrator, and to each other for inspection, and to supply copies of, any documents or other evidence or classes of documents in their possession or power which the Arbitrator determines to be relevant; and (x) make interim orders to secure all or part of any amount in dispute in the arbitration. EX-10 7 exh4_12.txt EXH 4.12 A/G BETWEEN HALO AND ENDOWMENT LAKES EXHIBIT 4.12 PURCHASE AGREEMENT BY AND BETWEEN HALO RESOURCES LTD. AND ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP DATED DECEMBER 3, 2006 FINAL PURCHASE AGREEMENT This Agreement is made as of December 3, 2006. BETWEEN: ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP, a limited partnership formed under the laws of the province of Manitoba (hereinafter referred to as the "VENDOR") - and - HALO RESOURCES LTD., a corporation incorporated under the laws of the province of British Columbia (hereinafter referred to as the "PURCHASER") WHEREAS the Vendor is the legal and beneficial owner of an undivided 100% interest in and to the unpatented mining claims described in Schedule "A" attached hereto (the "PROPERTIES"); AND WHEREAS the Parties entered into a letter of intent, dated November 3, 2006 (the "LETTER OF INTENT"), whereby the Vendor agreed to sell to the Purchaser and Purchaser has agreed to purchase from the Vendor, all of the Vendor's right, title and interest in and to the Properties; AND WHEREAS the Parties wish to formalize the terms of the Letter of Intent by entering into this Agreement; NOW THEREFORE IN CONSIDERATION of the premises and the mutual covenants in this Agreement, and of other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by each Party), the Parties agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Agreement and the Schedules attached hereto, the following terms shall have the following meanings: - 2 - "AGREEMENT" means this purchase agreement and all attached schedules, as supplemented, amended, restated or replaced from time to time in accordance with the terms hereof; "APPLICABLE LAW" means any federal, provincial or municipal statute, law, ordinance, rule, regulation, restriction, regulatory policy or guideline, by-law (zoning or otherwise) or order that applies to the Parties or to the Properties and includes the applicable by-laws or rules of any stock exchange or securities commission having jurisdiction; "APPROVALS" means any and all approvals, authorizations, consents or other orders of any Government Authority or any third party, including any stock exchange or securities commission having jurisdiction; "BUSINESS DAY" means any calendar day other than a Saturday or Sunday or any day that is a statutory or civic holiday in Manitoba; "CASH CONSIDERATION" has the meaning ascribed to such term in subsection 2.2(a)(i) hereof; "CLOSING" means the completion of the sale, transfer, assignment and/or conveyance to and the purchase by the Purchaser of the Properties from the Vendor in accordance with the terms of this Agreement; "CLOSING DATE" means January 12, 2007 or such other date as the Parties may mutually agree in writing; "CLOSING DOCUMENT" means any document required to be delivered at the Closing Time pursuant to this Agreement, which shall include, without limitation, such officers' certificates and instruments of conveyance as may be prescribed by this Agreement or as are customary in transactions of the nature contemplated herein, and such other documents as the Parties may reasonably deem to be necessary or advisable; "CLOSING TIME" means 2:00 p.m. on the Closing Date, or such other time and date as the Parties agree in writing that the Closing shall take place; "ENCUMBRANCE" means any encumbrance, security interest, mortgage, lien, hypothec, pledge, assignment, charge, or right, title or interest affecting the Properties or the title thereto; "ENVIRONMENTAL LIABILITIES" means any and all actions, demands, claims, debts, costs, liabilities, damages, duties, obligations, penalties, fines and charges of any nature imposed, issued, rendered or arising under or pursuant to common law or any past, present or future statute, regulation, by-law or other law, or any permit, licence, certificate, approval, order, directive or other authorization of any Governmental Authority in respect of or pertaining to the impairment or contamination of the natural environment, the undertaking of mineral resource exploration, development, - 3 - extraction or processing operations and the decommissioning, abandonment or closure of such operations or any matter ancillary to all of the above including, without limitation, the abatement, reclamation, rehabilitation, remediation and restoration of mining properties and assets and the natural environment; "GOVERNMENTAL AUTHORITY" means any Canadian federal, provincial or municipal government including any governmental agency, department, ministry, authority, tribunal, commission or official, stock exchange or securities commission having jurisdiction; "INCLUDING" means "INCLUDING WITHOUT LIMITATION" and shall not be construed to limit any general statement which it follows to the specific or similar items or matters immediately following it; "LETTER OF INTENT" has the meaning ascribed to such term in the second recital of this Agreement; "LOSS" in respect of any matter includes any and all costs, expenses, penalties, fines, losses, damages, liabilities and deficiencies (including, without limitation, all amounts paid in settlement, all interest and penalties and all reasonable legal and other professional fees and disbursements, including those incurred in defending any claim) arising directly or indirectly as a consequence of such matter; "MINERALS" means all marketable metal bearing material in whatever form or state that is mined, extracted, removed, produced or otherwise recovered and sold from the Properties after commencement of commercial production from the Properties. "PARTIES" means the parties to this agreement collectively, and "PARTY" means either of them; "PERSON" shall be broadly interpreted and includes an individual, body corporate, partnership, unincorporated joint venture, trust, association, unincorporated organization, any Governmental Authority or any other entity recognized by law; "PROPERTIES" has the meaning ascribed to such term in the first recital of this Agreement; "PURCHASE PRICE" means the consideration to be paid, granted or given by the Purchaser to the Vendor for the Properties as provided in section 2.2; and "ROYALTY" has the meaning ascribed to such term in subsection 2.2(c) hereof. "ROYALTY AGREEMENT" has the meaning ascribed to such term in subsection 2.2(c) hereof; - 4 - 1.2 HEADINGS The division of this Agreement into articles, sections, subsections and schedules and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. The article, section, subsection and schedule headings in this Agreement are not intended to be full or precise descriptions of the text to which they refer and are not to be considered part of this Agreement. All uses of the words "hereto", "herein", "hereof", "hereby" and "hereunder" and similar expressions refer to this Agreement and not to any particular section or portion of it. 1.3 NUMBER AND GENDER In this Agreement, words in the singular include the plural and vice-versa and words in one gender include all genders. 1.4 ENTIRE AGREEMENT This Agreement, together with the Closing Documents, constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, negotiations, discussions and understandings, written or oral, between the Parties, including the Letter of Intent. Except as may be specifically set forth in this Agreement, there are no representations, warranties, conditions, (including any representation, warranty or condition of merchantability or fitness for a particular purpose), or other agreements or acknowledgments, whether direct or collateral, express or implied, that form part of or affect this Agreement, or which induced any Party to enter into this Agreement or on which reliance is placed by any Party. 1.5 AMENDMENT This Agreement may be amended, modified or supplemented only by a written agreement signed by both Parties. 1.6 WAIVER OF RIGHTS Any waiver of, or consent to depart from, the requirements of any provision of this Agreement shall be effective only if it is in writing and signed by the Party giving it, and only in the specific instance and for the specific purpose for which it has been given. No failure on the part of any Party to exercise, and no delay in exercising, any right under this Agreement shall operate as a waiver of such right, except as shall be specified herein. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right. - 5 - 1.7 SCHEDULES The following Schedules form part of this Agreement: SCHEDULE DESCRIPTION OF SCHEDULE A List of Properties B Form of Royalty Agreement 1.8 APPLICABLE LAW This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the Province of Manitoba and the federal laws of Canada applicable therein. Each Party irrevocably submits and attorns to the jurisdiction of the courts of Manitoba with respect to any matter arising hereunder or related hereto. 1.9 CURRENCY All statements of or references to dollar amounts in this Agreement are to lawful money of Canada. 1.10 PERFORMANCE ON HOLIDAYS If any action is required to be taken pursuant to this Agreement on or by a specified date that is not a Business Day, then such action shall be valid if taken on or by the next succeeding Business Day. ARTICLE 2 ASSET PURCHASE AND SALE 2.1 PURCHASE AND SALE Subject to the terms and conditions hereof, the Vendor hereby agrees to sell, transfer, assign and convey to the Purchaser, and the Purchaser hereby agrees to purchase and acquire, all of the Vendor's right, title and interest in and to the Properties. 2.2 PURCHASE PRICE (a) The aggregate purchase price payable by the Purchaser to the Vendor for the Properties shall consist of: (i) the payment of $90,000 (the "CASH CONSIDERATION") in accordance with Section 2.2(b) hereof; - 6 - (ii) the issuance by the Purchaser to the Vendor of 160,000 common shares in the share capital of the Purchaser. The issuance of such shares shall be at a per share value equal to the fifteen day volume weighted average price of the Purchaser's common shares at the end of trading for the fifteen trading days immediately prior to the date of such issuance; and (iii) the grant of the Royalty by the Purchaser to and in favour of the Vendor. (b) The Cash Consideration is payable by the Purchaser by bank draft or wire transfer on the Closing Date as directed by the Vendor in writing. (c) At the Closing Time the Vendor and the Purchaser shall enter into a net smelter returns royalty agreement (the "ROYALTY AGREEMENT") in the form attached hereto as Schedule "B", pursuant to which the Purchaser will issue and grant to the Vendor a 1% net smelter returns royalty calculated and payable in accordance with the Royalty Agreement (the "ROYALTY") on the Purchaser's share of Net Smelter Returns (as defined in the Royalty Agreement) derived from production from the Properties following commencement of commercial production from the Properties. All Royalty payments will be payable in cash only. The Purchaser will be under no obligation whatsoever to place the Properties into commercial production and, if the Properties are placed into commercial production by the Purchaser, the Purchaser will have the right at any time to curtail, suspend or terminate such commercial production as the Purchaser in its sole discretion deems advisable. At the option of the Purchaser, which option may be exercised at any time by the Purchaser by notice in writing to the Vendor, the Purchaser may acquire the rights under the Royalty Agreement to one half of the Royalty for a purchase price of $500,000.00 so that the Royalty interest of the Vendor thereafter shall be 0.5% of Net Smelter Returns. 2.3 TAXES The Purchaser shall pay directly to or make the appropriate filings with the appropriate taxing authorities in respect of any sales or transfer taxes (including land transfer taxes), registration charges and transfer fees and GST or other value added taxes applicable in respect of the purchase and sale of the Properties under this Agreement. 2.4 AREA OF INFLUENCE Any interest in and to a mining claim(s) staked or otherwise acquired, or any right, title or interest acquired therein, by the Vendor or any of its affiliates from and after the date of this Agreement that lies outside of the perimeter boundaries of the Properties, or any part thereof, and wholly or partly within the area (the "AREA OF INFLUENCE") comprised of those lands that lie within one (1) kilometre of the perimeters/boundaries of the Properties, as such perimeters exist as at the date hereof, shall be subject to this Agreement and the Vendor shall sell or cause its affiliate to sell such right, title or interest to the Purchaser. The Parties shall negotiate in good faith the value of consideration for such mining claim(s) or interest therein. Each Party shall be free to acquire properties outside the Area of Influence, in its own interest and without any obligation or liability to the other Party. - 7 - 2.5 ISSUANCE OF THE SECURITIES All shares issued or to be issued by the Purchaser to the Vendor under and pursuant to this Agreement (the "HALO SECURITIES") shall be subject to all applicable hold periods required by Applicable Laws and the TSX Venture Exchange. The issuance of any Halo Securities shall be conditional upon (i) the Purchaser obtaining all regulatory and third party consents or approvals being required, 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 the Vendor. In the event that the Purchaser has not received the required consents on or before the Closing Date and as a result is unable to deliver the shares contemplated in Section 2.2 (a) (ii) within six months of the date thereof, then the Purchaser shall have the option to pay the value of such shares in cash based on the per share value referenced in section 2.2 (a) (ii) for the fifteen day period immediately prior to the date of such payment. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES OF THE VENDOR The Vendor, acknowledging that the Purchaser is entering into this Agreement in reliance thereon, represents and warrants to the Purchaser as follows: (a) It is a limited partnership validly formed and existing under the laws of the Province of Manitoba and is up to date in respect of all filings required by law or by any Governmental Authority; (b) All requisite corporate and partnership acts and proceedings have been done and taken by the Vendor, including obtaining all requisite board of directors', shareholders' and limited partners' approval with respect to entering into this Agreement or completing the transactions contemplated herein; (c) The Vendor has the requisite corporate and partnership power and authority to enter into this Agreement and to perform its respective obligations hereunder; (d) 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 it in accordance with its terms; (e) Except for the rights of the Purchaser pursuant to the Letter of Intent and this Agreement, no Person has any agreement, option, right of first refusal or right, title or interest or right capable of becoming an agreement, option, right of first refusal or right, title or interest, in or to the Properties; (f) The Vendor has all necessary corporate and partnership power to own the Properties and, to the best of the knowledge of the Vendor, the Vendor is in compliance with all Applicable Laws - 8 - and licences, registrations, permits, consents and qualifications to which the Properties are subject; (g) No Approvals are required of the Vendor in connection with the execution and delivery or with the performance by it of this Agreement or the Closing Documents or to effectively complete the transactions contemplated by this Agreement; (h) The Vendor has an undivided 100% legal and beneficial good, valid, marketable and exclusive right, title and interest in and to, and actual and exclusive possession of, the Properties, free and clear of all Encumbrances; (i) All taxes, local improvements, assessment rates, utilities and any and all other payments to or assessments of any Governmental Authority having jurisdiction in respect of the Properties have been paid by the Purchaser in respect of the Properties to and including the Closing Date; (j) The sale of the Properties to the Purchaser and the completion of the transactions contemplated in this Agreement do not breach (i) the constating documents of the Vendor or any directors, shareholders or partnership resolutions, (ii) any agreements, documents, instruments, covenants or undertakings to which the Vendor is a party or is bound or otherwise affected, or (iii) any Applicable Law; (m) There are no finder's fees, commissions or other payments payable by the Vendor in relation to the transactions contemplated herein; (n) At the time the Vendor transfers all of its rights, title and interests in and to the Properties to the Purchaser, such rights, title and interests will be free and clear of all Encumbrances; (o) Subject to the Royalty contemplated in this Agreement, neither the Properties nor any Minerals derived from the Properties are subject to or bound by any royalty or royalty interest, whether registered or unregistered, and the Vendor has not granted any royalty interest in or affecting the Properties; (p) There is no action, suit, order, work order, petition, prosecution or other similar proceeding of which process initiating the same has been served on the Vendor or threatened against the Vendor and affecting any of the Properties at law or in equity or before or by any Governmental Authority; (q) There are no Environmental Liabilities relating to the Properties, nor, to the best of the knowledge of the Vendor, any legal or administrative actions existing, pending or threatened against the Vendor nor the Properties in respect of any Environment Liabilities and to the best of the knowledge of the Vendor, 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 Properties (including watercourses, improvements thereon and contents thereof) or nearby areas; - 9 - (r) The Vendor has not received notice of any breach of any Applicable Law in respect of its conduct on or under the Properties which could have an adverse effect on the Properties or the right, title and/or interest of the Vendor therein and thereto and neither the Vendor nor, to the Vendor'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 Properties; (s) The sale, transfer, assignment and conveyance by the Vendor of all of its right, title and interest in, and to the Properties to the Purchaser in accordance with the terms of this Agreement does not constitute a sale of all or substantially all of the assets, property or undertaking of the Vendor; (t) The Vendor is not and will not on the Closing Date be a non-resident of Canada for the purposes of the INCOME TAX ACT (Canada); (u) The mining claims that comprise the Properties 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, and at closing will be, owned by and duly registered in the name of Endowment Lakes (2002) Ltd. as general partner of the Vendor, free and clear of any registered, or to the knowledge of the Vendor any unregistered encumbrances, royalties or underlying rights or interests whatsoever; (v) Upon completion of the transactions contemplated herein, the Purchaser shall acquire a 100% undivided legal and beneficial interest in and to the Properties; (w) The Vendor has not assigned, encumbered or covenanted to assign or encumber any of the mining claims that comprise the Properties or the rights which derive therefrom and the Vendor has not acquired, with respect to third parties, any obligation whatsoever that would prevent the Vendor from entering into the Letter of Intent or this Agreement; and (x) The Vendor has no information or knowledge pertaining to the Properties or the lands comprising the Properties or substances thereon, therein or therefrom not disclosed in writing to the Purchaser which, if known to the Purchaser, might reasonably be expected to deter the Purchaser from completing the transactions contemplated hereby on the terms and conditions contained herein. 3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser, acknowledging that the Vendor is entering into this Agreement in reliance thereon, represents and warrants to the Vendor as follows: - 10 - (a) It is a corporation duly incorporated and validly existing under the laws of British Columbia and is up to date in respect of all filings required by law; (b) All requisite corporate acts and proceedings have been done and taken by the Purchaser with respect to entering into this Agreement and completing the transactions contemplated herein; (c) The Purchaser has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder; (d) This Agreement has been duly and validly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser enforceable against it in accordance with the terms hereof; (e) There are no finder's fees, commissions or other payments payable by the Purchaser, in cash or shares or otherwise, in relation to the transactions contemplated herein; (f) The Purchaser has all necessary authority and capacity to enter into the Agreement and all necessary acts, actions and authorizations have been performed by the Purchaser in respect thereof; and (g) The Purchaser, or any affiliate the Purchaser proposes to use to perform any operations contemplated by this Agreement, is registered in the Province of Manitoba to carry on business, has the capacity to own property in the Province of Manitoba 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 or the Province of Manitoba or to perform such operations or obligations within the jurisdiction of any Governmental Authority having jurisdiction of the nature and scope of the obligations to be performed by the Purchaser or any of its affiliates pursuant to and in accordance with the terms of this Agreement. 3.3 QUALIFICATION OF REPRESENTATIONS AND WARRANTIES Any representation or warranty made by a Party as to the enforceability of this Agreement against such Party is subject to the following qualifications: (a) specific performance, injunction and other equitable remedies are discretionary and, in particular, may not be available where damages are considered an adequate remedy; and (b) enforcement may be limited by bankruptcy, insolvency, liquidation, reorganization, reconstruction and other laws generally affecting enforceability of creditors' rights. - 11 - 3.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES The respective representations and warranties of the Vendor and of the Purchaser contained in sections 3.1 and 3.2 shall survive the Closing and will continue in full force and effect for a period of two (2) years after the Closing. ARTICLE 4 INDEMNITY 4.1 INDEMNIFICATION BY THE VENDOR The Vendor hereby indemnifies and saves harmless the Purchaser from any Loss suffered or incurred by the Purchaser arising from a claim against the Purchaser arising from, related to or in any way connected with: (a) any failure by the Vendor to sell, transfer, assign and convey to the Purchaser all of the Vendor's rights, title and interests in and to the Properties; (b) any breach or non-performance of any representation, warranty, covenant or agreement made or to be performed by the Vendor under this Agreement; or (c) any activities of or performed on behalf of the Vendor on or under the surface of Properties up to and including the Closing Date. 4.2 INDEMNIFICATION BY THE PURCHASER The Purchaser hereby indemnifies and saves harmless the Vendor from any Loss suffered or incurred by the Vendor arising from a claim against the Vendor arising from, related to or in any way connected with any breach or non-performance of any representation, warranty, covenant or agreement made or to be performed by the Purchaser under this Agreement. ARTICLE 5 CLOSING 5.1 CLOSING The Closing will take place by escrow arrangements to be agreed between the Vendor and the Purchaser and their respective legal counsel, at 2:00 p.m. on the Closing Date or at such other time and date as the Parties may agree in writing. - 12 - 5.2 CONDITIONS PRECEDENT IN FAVOUR OF THE PURCHASER The obligation of the Purchaser to complete the transactions contemplated in this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Date, each of the following conditions precedent (each of which is hereby acknowledged to be inserted for the exclusive benefit of the Purchaser and may be waived by it in writing in whole or in part): (a) Each of the representations and warranties of the Vendor contained in this Agreement shall be true, complete and accurate as and when made and at and as of the Closing Time; (b) The Vendor shall have performed and complied with all of the covenants, terms and conditions in this Agreement to be performed or complied with by it at or before Closing; (c) The Purchaser shall have received at the Closing from the Vendor the following Closing Documents, dated as of the Closing Date, prepared and/or delivered at the expense of the Vendor and in form and substance satisfactory to the Purchaser including, without limitation: (i) such instruments of sale, transfer, conveyance, assignment or delivery, in registrable form or otherwise, in respect of the Properties as the Purchaser may reasonably require to assure the full and effective sale, transfer, conveyance, assignment or delivery of all of the Vendor's right, title and interest in and to the Properties to the Purchaser; (ii) an officer's certificate, dated as of the Closing Date, in form and substance reasonably satisfactory to the Purchaser, as to: (1) resolutions of the board of directors of the Vendor authorizing the execution and delivery of this Agreement and the Royalty Agreement and the completion of the transactions contemplated hereby, and (2) incumbency and signatures of the officers of the Vendor executing the Agreement and Closing Documents; and (iii) such other documents, certificates and other instruments as would be usual in respect of the transactions contemplated herein or as the Purchaser may reasonably require; and (e) The Vendor shall have entered into the Royalty Agreement. 5.3 CONDITIONS PRECEDENT IN FAVOUR OF THE VENDOR The obligations of the Vendor to complete the transactions contemplated in this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Date, each of the following conditions - 13 - precedent (each of which is hereby acknowledged to be inserted for the exclusive benefit of the Vendor and may be waived by it in writing in whole or in part): (a) Each of the representations and warranties of the Purchaser contained in this Agreement shall be true, complete and accurate as and when made and at and as of the Closing Time; (b) The Purchaser shall have performed and complied with all of the covenants, terms and conditions in this Agreement to be performed or complied with by it at or before Closing; (c) The Vendor shall have received at the Closing from the Purchaser the following Closing Documents, dated as of the Closing Date, prepared at the expense of the Purchaser and in form and substance satisfactory to the Vendor including, without limitation, an officer's certificate, dated as of the Closing Date, in form and substance reasonably satisfactory to the Vendor, as to incumbency and signatures of the officers of the Purchaser executing this Agreement and the Closing Documents; and (d) The Purchaser shall have entered into the Royalty Agreement. ARTICLE 6 GENERAL 6.1 EXPENSES Subject as otherwise set out in this Agreement, each Party shall pay all expenses it incurs in authorizing, preparing, executing and performing this Agreement and the transactions contemplated hereunder, whether or not the Closing occurs, including all fees and expenses of its legal counsel, accountants or other representatives or consultants. 6.2 TIME Time is of the essence of each provision of this Agreement. 6.3 NOTICES Any notice or any communication required or permitted to be given under this Agreement by either Party to the other Party, in any capacity (hereinafter called a "NOTICE") shall be in writing and shall be deemed to have been sufficiently given if sent by facsimile transmission or delivered to the address of such other Party set forth as follows: - 14 - (i) if to the Purchaser at: Halo Resources Ltd. 1305 - 1090 West Georgia Street Vancouver, BC V6E 3V7 Attention: Marc Cernovitch, President Fax No.: 604-484-0069 Telephone No.: 604-484-0068 (ii) if to Vendor at: Endowment Lakes (2002) Limited Partnership c/o the General Partner #1 -102 Main Street Flin Flon, MB 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 Party given in accordance with this section, and any such Notice shall be deemed to have been received, if sent by facsimile transmission, on the first Business Day after the date of facsimile 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. Each notice sent in accordance with this section 6.3 shall be deemed to have been received: (a) on the day it was delivered; or (b) on the same day that it was sent by facsimile transmission, or on the first Business Day thereafter if the day on which it was sent by facsimile transmission was not a Business Day. Any Party may change its address for notice by giving notice to the other Party in accordance with this section 6.3. 6.4 ASSIGNMENT Neither Party may assign any rights or benefits under this Agreement, including the benefit of any representation or warranty, to any Person without the prior written consent of the other Party. Each Party agrees to perform its obligations under this Agreement itself, and not to arrange in any way for any other Person to perform those obligations. No assignment of benefits or arrangement for substituted performance by one Party shall be of any effect against any other Party except to the extent that the other Party has consented to it in writing. - 15 - 6.5 FURTHER ASSURANCES Each Party shall do such acts and shall execute such further documents, conveyances, deeds, assignments, transfers and other instruments, and will cause the doing of such acts and will cause the execution of such further documents as are within its power as any other Party may in writing at any time and from time to time reasonably request be done and or executed, in order to give full effect to the provisions of this Agreement and the Closing Documents. 6.6 CONFIDENTIALITY (a) The terms of this 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 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 related to the settlement of this Agreement and agrees not to use, in relation to the Properties and the Area of Influence, any such information except for or in respect of the completion of the proposed transactions contemplated by this Agreement, except to the extent that disclosure may be required by or under any law or under the rules and regulations of any Governmental Authority. 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 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 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, in the opinion of the announcing Party acting reasonably, be required by Applicable Law. 6.7 LIABILITY OF LIMITED PARTNERS The parties hereto acknowledge that the Vendor is a limited partnership formed under the laws of Manitoba and that the covenants, agreements and obligations of the Vendor hereunder shall not be personally binding upon, nor shall resort be had to the personal property of any of, the limited partners of the Vendor, nor their heirs, successors and assigns, and that resort shall only be had to the property of the Vendor and the property of its general partner, other than with respect to and to the extent of their investment and interests in such limited partnership. - 16 - 6.8 COUNTERPARTS This Agreement may be executed in counterparts. Each executed counterpart shall be deemed to be an original. Executed counterparts taken together shall constitute one agreement. 6.9 FACSIMILE EXECUTION An executed copy of this Agreement may be delivered by any Party by facsimile. In such event, such Party shall forthwith deliver to the other Party the original copy of this Agreement executed by such Party. IN WITNESS WHEREOF the Parties hereto have duly executed this Agreement as of the date first written above. ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP, BY ITS GENERAL PARTNER, ENDOWMENT LAKES (2002) LTD. Per: /s/ ECKART BUHLMANN ----------------------------------- Name: Eckart Buhlmann Title: President Per: ----------------------------------- Name: Title: HALO RESOURCES LTD. Per: /s/ MARC CERNOVITCH ----------------------------------- Name: Marc Cernovitch Title: President Per: ----------------------------------- Name: Title: THIS IS SCHEDULE "A" TO THE PURCHASE AGREEMENT DATED AS OF DECEMBER 3, 2006 BETWEEN ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP AND HALO RESOURCES LTD. ----------------------------------------------------------- LIST OF PROPERTIES ----------------------------------------------------------- PROJECT CLAIM NAME CLAIM NUMBER ----------------------------------------------------------- Eagle's Nest L. Elm 16 MB 3459 Meat Lake Elm 13 MB 3457 Meat Lake Elm 14 MB 3458 QM Lake Elm 08 MB 3637 QM Lake Elm 09 MB 3638 QM Lake Elm 12 MB 3456 QM Lake Elm 10 MB 3639 QM Lake Elm 07 MB 3636 QM Lake Elm 24 MB 5146 QM Lake Elm 25 MB 5145 FINAL THIS IS SCHEDULE "B" TO THE PURCHASE AGREEMENT DATED AS OF DECEMBER 3, 2006 BETWEEN ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP AND HALO RESOURCES LTD. FORM OF ROYALTY AGREEMENT THIS ROYALTY AGREEMENT MADE AS OF THIS 12TH DAY OF JANUARY, 2007, B E T W E E N: HALO RESOURCES LTD., a corporation incorporated under the laws of the province of British Columbia (the "Owner") - and - ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP, a limited partnership formed under the laws of the province of Manitoba (the "Holder") WITNESSES THAT: WHEREAS the Owner owns an undivided 100% interest in and to the properties described on Schedule "A" attached hereto (the "Properties"); AND WHEREAS the Owner has agreed to grant to and in favour of the Holder a 1 % net smelter return royalty in respect of any Minerals mined and sold from the Properties; AND WHEREAS all of the defined terms used in this Royalty Agreement have the meaning ascribed thereto in Section 1 hereof unless otherwise defined herein. NOW THEREFORE in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. DEFINITIONS (a) "AFFILIATE" shall have the meaning ascribed thereto in THE CORPORATIONS ACT (Manitoba). (b) "BUSINESS DAY" means any calendar day other than a Saturday or Sunday or any statutory holiday or civic holiday in the Province of Manitoba. - 2 - (c) "ENCUMBRANCES" means any encumbrance as set out on Schedule "B"; (d) "FISCAL PERIOD" means each calendar year or other period of 12 consecutive months adopted by the Purchaser for tax purposes; (e) "MINERALS" means all naturally occurring metallic minerals that are mined, produced or otherwise recovered from the Properties after the date of commencement of commercial production, whether in the form of Ore, dore, concentrates or otherwise, including without limitation, gold, silver and copper and other base metals and all beneficiated or derivative products thereof. (f) "NET SMELTER RETURNS" means the gross proceeds received by or payable to the Owner of the Properties, from the sale or other disposition of Minerals, less the following expenses, if actually incurred: (i) direct sales, use, gross receipts and severance taxes and all mining taxes, payable by the Owner of the Properties or other operator of the Properties (and which taxes payable by such operator are charged to the account of the Owner), that are based directly upon, and actually assessed against, the value or quantity of Minerals sold or otherwise disposed of from the Properties; but excluding any and all taxes based upon the net or gross income of the Owner of the Properties or other operator of the Properties, the value of the Properties or the privilege of doing business, and other taxes assessed on a similar basis; (ii) all transportation, marketing and sales and insurance costs associated with transporting, smelting and/or refining and selling any Minerals from the Properties and all charges and costs charged by a Processor of the Minerals; but, if smelting and/or refining are carried out in facilities owned or controlled, in whole or in part, by the Owner, then the charges and costs for such smelting or refining of such Minerals shall be the lesser of: (A) the charges and costs the Owner would have incurred if such smelting or refining was carried out at facilities that are not owned or controlled by the Owner and that are offering comparable services for comparable products; and (B) the actual costs incurred by the Owner with respect to such smelting and refining; and (iii) charges, costs (including assaying and sampling costs) and all penalties, if any, charged by any Processor of Minerals produced from the Properties. (g) "ORE" means all mineralized rock mined and/or milled from the Properties or any part thereof; (h) "PRIME" means at any particular time, the reference rate of interest, expressed as a rate per annum, that the Canadian Imperial Bank of - 3 - Commerce establishes as its prime rate of interest in order to determine interest rates that it will charge for demand loans in Canadian dollars to its Canadian customers. (i) "PROCESSOR" means collectively any smelter, refiner or other processor of the Minerals, including the Owner. (j) "PROPERTIES" means the properties described in Schedule "A" attached hereto. (k) "ROYALTY" means the net smelter royalty payments to the Holder described in Section 2 of this Agreement. 2. GRANT OF ROYALTY Subject to the terms of this Agreement and subject to the Encumbrances, the Owner, for and in consideration of the sum of TEN DOLLARS ($10.00), the receipt and sufficiency of which are hereby acknowledged by the Owner, hereby grants, sells, conveys and covenants to pay to the Holder, with effect from the date of this Agreement, a net smelter return royalty in respect of Minerals mined and sold from the Properties at a rate equal to 1% of Net Smelter Returns. 3. TIME AND MANNER OF ROYALTY PAYMENTS (a) The Royalty shall be calculated and paid to the Holder by the Owner quarterly during the Fiscal Year within 45 Business Days of the end of such fiscal quarter. (b) All Royalty payments shall be payable in cash (or cash equivalent) only and shall be delivered to the Holder at its principal place of business or paid at such other place as the Holder may specify in writing. (c) At the time each Royalty payment is paid by the Owner, the Owner shall prepare and deliver to the Holder, or cause to be prepared and delivered to the Holder, a detailed statement of the manner in which such Royalty payment was calculated. (d) The Holder may object in writing to any statement and payment amount within two months after receipt of the relevant statement or payment. If any Royalty payment is determined pursuant to the terms of this Agreement not to have been paid in full as provided herein, the Owner shall pay interest on the delinquent payment at a rate of Prime plus 1% per annum, commencing on the date on which such delinquent payment was due and continuing until the Holder receives payment in full of such delinquent payment and all accrued interest thereon; and for the purposes of this subsection, Prime shall be determined as of the date on which such delinquent payment was due. (e) All Royalty payments, including interest, if any, will be made subject to withholding or deduction in respect of the Royalty for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of any governmental authority having power and jurisdiction to tax and for which the Owner is obligated in law to withhold or deduct and remit to such taxing authority having such power and jurisdiction. - 4 - 4. TERM This Agreement shall continue for the term of the Properties (including any related Crown mining lease or unpatented mining claims) and any renewals, replacements and successions thereof, including any conversion of interest to lease or fee simple and whether created privately or through governmental action. If any right, power or interest of any party under this Agreement would violate the rule against perpetuities, then such right, power or interest shall terminate at the expiration of 20 years after the death of the last survivor of all the lineal descendants of Her Majesty, Queen Elizabeth II of England, living on the date of this Agreement. 5. STOCKPILING The Owner, and any operator of the Owner and any Processor shall be entitled, in the sole discretion of the Owner, to stockpile, store or place Minerals in locations on or off the Properties. 6. COMMINGLING Before any Minerals are commingled with minerals from any other properties, the Minerals shall be measured and sampled in accordance with sound mining and metallurgical practices for moisture, metal, and other appropriate content. Representative samples of the Minerals shall be retained by the Owner and assays (including penalty substances) and other appropriate analyses of these samples shall be made before commingling to determine metal, mineral and other appropriate content and penalty substances of the Minerals. From this information, the Owner shall determine the quantity of the Minerals subject to the Royalty notwithstanding that the Minerals have been commingled with minerals from other properties. Following the expiration of the period for objections described above in Subsection 3(d) above, and absent timely objection, if any, the Owner may dispose of the materials and data required to be produced pursuant to this section. 7. HEDGING TRANSACTIONS All profits and losses resulting from any owner of the Properties, including the Owner, engaging in any commodity futures trading, option trading, metals trading, gold loans or any combination thereof, and any other hedging transactions are specifically excluded from calculations of Royalty payments pursuant to this agreement. 8. BOOKS; RECORDS; INSPECTIONS (a) The Owner shall keep true and accurate books and records of all of its operations and activities with respect to the Properties and the Minerals, in accordance with Canadian generally accepted accounting principles, consistently applied. The Holder may, once per Fiscal Year, perform audits or other examinations of the Owner's relevant books and records to confirm all calculations of Royalty payments made by the Owner and compliance with the terms of this Agreement. The Holder shall promptly commence, and diligently complete, any audit or other examination permitted hereunder. The reasonable expenses of - 5 - any audit or other examination permitted hereunder shall be paid by the Holder, unless the results of such audit or other examination permitted hereunder discloses a deficiency in respect of the Royalty payments paid to the Holder hereunder in an amount greater than $25,000, in which event the costs of such audit or other examination shall be paid by the Owner. (b) Within 120 days following the end of each Fiscal Year, the Owner shall prepare and deliver to the Holder, or cause to be prepared and delivered to the Holder, an annual report in respect of such Fiscal Year summarizing (i) the quantities of Ore mined from the Properties, (ii) the quantities of Ore milled, and (iii) calculations in respect of the Royalty. 9. CONFIDENTIALITY (a) Subject to subsections 9(b) and 9(c), the Holder shall not, without the express written consent of the Owner, disclose any non-public information received under this Agreement relating to the Owner, the Properties or any Minerals (the "Confidential Information"), or issue any press releases relating to the Owner. In addition, the Holder shall not use any Confidential Information for its own use or benefit except for the purpose of enforcing its rights under this Agreement. (b) The Holder may disclose Confidential Information to any third party to whom the Holder, in good faith, anticipates selling or assigning its interest hereunder, or to a prospective lender to whom the Holder may grant an interest in Royalty payments as security for its obligations to such lender, in each case only if the Owner has been provided with a confidentiality agreement in its favour from such third party or lender that includes the confidentiality provisions of subsection 9(a), and that has been executed by such third party or lender, as the case may be. (c) The Holder may disclose Confidential Information if such disclosure is required for compliance with applicable laws, rules, regulations or orders of any governmental agency or stock exchange having jurisdiction. 10. CONDUCT OF OPERATIONS All decisions concerning the methods, the extent, times, procedures and techniques of any exploration, development, mining, leaching, milling, stockpiling, transporting, processing, extraction or treatment or sale or other disposition, if any, of Ore or Minerals from the Properties, shall be made by the Owner in its sole and absolute discretion. The Owner shall not be liable for nor obliged to make any Royalty payments for Mineral values lost in any mining or processing of the Minerals conducted pursuant to customary mining practice. The Owner shall not be required to mine or to sell or otherwise dispose of or preserve or protect any Minerals, which under customary mining practices cannot be mined, milled, sold or shipped at a reasonable profit by the Owner at the time mined. 11. NO IMPLIED COVENANTS The parties agree that there are no implied covenants or duties relating to the exploration, development or mining of, or the production of - 6 - Minerals from, the Properties and that the only covenants, duties, rights and obligations of the parties shall be those expressly set forth and provided for in this Agreement. 12. SALE OF PROPERTIES The Owner shall be entitled to sell, transfer, mortgage or charge the Properties or any part thereof without the prior written consent of the Holder provided that any such transferee, mortgagee, chargee or secured party of the Properties agrees in writing to assume and perform (upon enforcement of its security only) and to cause any transferee therefrom to assume and perform, the obligations of the Owner pursuant to the terms of this Agreement, in which event the Owner shall be released from its obligations herein and therein in respect of such part or parts so transferred and the Holder shall execute such release in respect of the foregoing in such form as the Owner deems advisable. 13. THE OWNER'S RIGHT OF FIRST REFUSAL/BUYBACK In consideration of the covenants and agreements of the parties herein contained, the Holder hereby grants to and in favour of the Owner a right of first refusal to acquire the Royalty. The Holder hereby agrees that any right of the Holder to sell the Royalty and/or to assign this Agreement shall be limited to a cash only purchase price and to such a sale or assignment of a 100% interest only. In the event that the Holder receives an offer to purchase the Royalty and/or to take an assignment of this Agreement from a bona fide purchaser at arm's length to the Holder, which offer the Holder has accepted or is willing to accept, the Holder shall give the Owner written notice thereof, including the terms and conditions of such offer to purchase, and the Owner shall have the right, within 30 days from the date of delivery to the Owner of such notice, to exercise its right of first refusal in respect thereof and to acquire the Royalty on the same terms and conditions as are set forth in the offer to purchase. In addition to the foregoing right of first refusal, the Owner shall be entitled at any time, commencing on the date of this Agreement, to purchase 50% of the Royalty from the Holder and, if the Owner provides written notice to the Holder to such effect, the Holder shall be obligated to sell 50% of the Royalty to the Owner, for a purchase price of $500,000.00, such that the Royalty interest of the Holder under this Agreement thereafter shall be ..5% of Net Smelter Returns. 14. DISPUTE RESOLUTION Any matter in this Agreement in dispute between the parties which has not been resolved by the parties within fifteen (15) days of the delivery of notice by either party of such dispute shall be referred to binding arbitration. Such referral to binding arbitration shall be to a qualified single arbitrator pursuant to THE ARBITRATIONS ACT (Manitoba), which Act, including its successors, shall govern such arbitration proceeding in accordance with its terms except to the extent modified by the rules for arbitration set out in Schedule "C". 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 minimizing the cost and expediting the final resolution of such arbitration. - 7 - 15. NOTICES Any notice or any communication required or permitted to be given under this Agreement by either party to the other party, in any capacity (hereinafter called a "Notice") shall be in writing and shall be deemed to have been sufficiently given if sent by facsimile transmission or delivered to the address of such other party set forth as follows: if to the Owner at: Halo Resources Ltd. 1305 - 1090 West Georgia Street Vancouver, BC V6E 3V7 Attention: Marc Cernovitch, President Fax No.: 604-484-0069 Telephone No.: 604-484-0068 if to the Holder at: Endowment Lakes (2002) Limited Partnership c/o the General Partner #1 -102 Main Street Flin Flon, MB 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 party given in accordance with this section, and any such Notice shall be deemed to have been received, if sent by facsimile transmission, on the first Business Day after the date of facsimile 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. Each notice sent in accordance with this section 15 shall be deemed to have been received: (c) on the day it was delivered; or (d) on the same day that it was sent by facsimile transmission, or on the first Business Day thereafter if the day on which it was sent by facsimile transmission was not a Business Day. Any party may change its address for notice by giving notice to the other party in accordance with this section 15. 16. GENERAL PROVISIONS (a) FURTHER ASSURANCES; SUBORDINATION OF INTEREST Each party shall execute all such further instruments and documents and do all such further actions as may be necessary to effectuate the transactions contemplated in this Agreement, in each case at the cost and expense of the party requesting such further instrument, document or action, unless expressly indicated otherwise. The Holder shall be entitled to register this Agreement or notice of this Agreement against title to the Properties and covenants and agrees to subordinate its interests pursuant to this Agreement to all mortgages, charges and security interests in favour of any lender to the Owner provided that such mortgagee, chargee or secured party agrees in writing with the Holder to assume (upon enforcement of its security only), and to cause any purchaser from such mortgagee, chargee or secured party to assume, the obligations of the Owner, as the case may be, pursuant to the terms of this Agreement. In the event of any enforcement by or purchase from such mortgagee, chargee or secured party, the Owner, as the case may be, shall be released from its obligations herein arising thereafter in respect of such part or parts of the Properties subject to such enforcement by or purchase from such mortgagee, chargee or secured party and the Holder shall execute such release in such form as the Owner deems advisable. (b) GOVERNING LAW This Agreement shall be governed by and construed under the laws of the Province of Manitoba and the laws of Canada applicable therein. (c) TIME OF ESSENCE Time is of the essence in this Agreement. (d) SEVERABILITY If any provision of this agreement is wholly or partially invalid, this Agreement shall be interpreted as if the invalid provision had not been a part hereof so that the invalidity shall not affect the validity of the remainder of the agreement which shall be construed as if the agreement had been executed without the invalid portion. It is hereby declared to be the intention of the parties that this Agreement would have been executed without reference to any portion which may, for any reason, hereafter be declared or held invalid. (e) ACCOUNTING PRINCIPLES All calculations hereunder shall be made in accordance with Canadian generally accepted accounting principles. - 8 - (f) CURRENCY All dollar amounts or references herein are in Canadian currency. (g) LIABILITY OF LIMITED PARTNERS The parties hereto acknowledge that the Holder is a limited partnership formed under the laws of Manitoba and that the covenants, agreements and obligations of the Holder hereunder shall not be personally binding upon, nor shall resort be had to the personal property of any of, the limited partners of the Holder, nor their heirs, successors and assigns, and that resort shall only be had to the property of the Holder and the property of its general partner, other than with respect to and to the extent of their investment and interests in such limited partnership. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. HALO RESOURCES LTD. Per: -------------------------------------- Name: Title: Per: -------------------------------------- Name: Title: ENDOWMENT LAKES (2002) LIMITED PARTNERSHIP, BY ITS GENERAL PARTNER, ENDOWMENT LAKES (2002) LTD. Per: -------------------------------------- Name: Title: Per: -------------------------------------- Name: Title: THIS IS SCHEDULE "A" TO THE ROYALTY AGREEMENT DATED AS OF JANUARY 12, 2007 BETWEEN HALO RESOURCES LTD. AND ENDOWMENT LAKES --------------------------------------------------------- LIST OF PROPERTIES --------------------------------------------------------- PROJECT CLAIM NAME CLAIM NUMBER --------------------------------------------------------- Eagle's Nest L. Elm 16 MB 3459 Meat Lake Elm 13 MB 3457 Meat Lake Elm 14 MB 3458 QM Lake Elm 08 MB 3637 QM Lake Elm 09 MB 3638 QM Lake Elm 12 MB 3456 QM Lake Elm 10 MB 3639 QM Lake Elm 07 MB 3636 QM Lake Elm 24 MB 5146 QM Lake Elm 25 MB 5145 THIS IS SCHEDULE "B" TO THE ROYALTY AGREEMENT DATED AS OF JANUARY 12, 2007 BETWEEN HALO RESOURCES LTD. AND ENDOWMENT LAKES ENCUMBRANCES 1. Liens for property taxes, assessments or governmental charges or levies not at the time due and delinquent or the validity of which is being contested at the time in good faith by the Owner. 2. Any undetermined or inchoate liens and charges incidental to construction on the Properties or operations in respect of the Properties which have not been filed against the Owner or which relate to obligations not due or delinquent. 3. Any right reserved to or vested in any governmental or public authority by any statute, regulation, lease, licence, franchise, grant or permit in respect of the Properties including any statutory provision to terminate any such lease, licence, franchise, grant or permit, or to require annual or other periodic payments as a condition of the continuance thereof. 4. Easements, rights of way, servitudes or other similar rights in lands granted to or taken by other persons in respect of the Properties. 5. Rights, reservations, limitations, provisos and conditions in respect of the Properties expressed in any original grant from the Crown or in any applicable statute or regulation. 6. Subject to the terms of section 16 (a) of the Agreement, all charges, mortgages, pledges, liens or security interests to and in favour of any lender to the Owner. 7. Any Existing Royalties on the Properties THIS IS SCHEDULE "C" TO THE ROYALTY AGREEMENT DATED AS OF JANUARY 12, 2007 BETWEEN HALO RESOURCES LTD. AND ENDOWMENT LAKES RULES FOR ARBITRATION The following rules and procedures shall apply with respect to any matter to be arbitrated by the parties under the terms of the Agreement. 2. Initiation of Arbitration Proceedings (a) If any party to this Agreement wishes to have any matter under this Agreement arbitrated in accordance with the provisions of this Agreement, it shall give notice to the other party hereto specifying particulars of the matter or matters in dispute and proposing the name of the person it wishes to be the single arbitrator. Within 10 days after receipt of such notice, the other party to this Agreement shall give return notice to the first party advising whether such party accepts the arbitrator proposed by the first party and if such party does not accept the arbitrator proposed by the first party, proposing the name of the person it wishes to be the single arbitrator. If such return notice is not given by the other party within such 10 day period, it shall be deemed to have accepted the arbitrator proposed by the first party. If such return notice is given within such 10 day period and does not accept the proposed arbitrator of the first party and proposes another person to be arbitrator, the first party shall, within 10 days after receipt of such return notice, give notice to the other party advising whether such first party accepts the arbitrator proposed by the other party. If the parties do not agree upon a single arbitrator within such second 5 day period, the single arbitrator shall be chosen in accordance with THE ARBITRATIONS ACT (Manitoba). (b) The individual selected as Arbitrator shall be qualified by education and experience to decide the matter in dispute. The Arbitrator shall be at arm's length from both parties and shall not be a member of the audit or legal firm or firms who advise either party, nor shall the Arbitrator be a person who is otherwise regularly retained by either of the parties. 2. Submission of Written Statements (a) Within 10 days of the appointment of the Arbitrator, the party initiating the arbitration (the "Claimant") shall send the other party (the "Respondent") a statement of claim setting out in sufficient detail the facts and any contentions of law on which it relies, and the relief that it claims. (b) Within 10 days of the receipt of the statement of claim, the Respondent shall send the Claimant a statement of defence stating in sufficient detail which of the facts and contentions of law in the statement of claim it admits or denies, on what grounds, and on what other facts and contentions of law he relies. - 2 - (c) Within 10 days of receipt of the statement of defence, the Claimant may send the Respondent a statement of reply. (d) All statements of claim, defence and reply shall be accompanied by copies (or, if they are especially voluminous, lists) of all essential documents on which the party concerned relies and which have not previously been submitted by any party, and (where practicable) by any relevant samples. (e) After submission of all the statements, the Arbitrator will give directions for the further conduct of the arbitration. 3. Meetings and Hearings (a) The arbitration shall take place in the City of Winnipeg, or in such other place as the Claimant and the Respondent shall agree upon in writing. The arbitration shall be conducted in English. Subject to any adjournments which the Arbitrator allows, the final hearing will be continued on successive working days until it is concluded. (b) All meetings and hearings will be in private unless the parties otherwise agree. (c) Any party may be represented at any meetings or hearings by legal counsel. (d) Each party may examine, cross-examine and re-examine all witnesses at the arbitration. 4. The Decision (a) The Arbitrator will make a decision in writing and, unless the parties otherwise agree, will set out reasons for decision in the decision. (b) The Arbitrator will send the decision to the parties as soon as practicable after the conclusion of the final hearing, but in any event no later than 20 days thereafter, unless that time period is extended for a fixed period by the Arbitrator on written notice to each party because of illness or other cause beyond the Arbitrator's control. (c) The decision shall determine and award costs to the successful party in the arbitration. (d) The decision shall be final and binding on the parties and shall not be subject to any appeal or review procedure provided that the Arbitrator has followed the rules provided herein in good faith and has proceeded in accordance with the principles of natural justice. In the event either party initiates any court proceeding in respect of the decision of the Arbitration or the matter arbitrated, such party shall, if unsuccessful in the court proceeding, shall pay the other parties costs on a solicitor/client basis plus all other reasonable expenses incurred by such other party from the date of delivery of the notice commencing arbitration to the date of determination of such court proceeding. - 3 - 5. Jurisdiction and Powers of the Arbitrator (a) By submitting to arbitration under these Rules, the parties shall be taken to have conferred on the Arbitrator the following jurisdiction and powers, to be exercised at the Arbitrator's discretion subject only to these Rules and the relevant law with the object of ensuring the just, expeditious, economical and final determination of the dispute referred to arbitration. (b) Without limiting the jurisdiction of the Arbitrator at law, the parties agree that the Arbitrator shall have jurisdiction to: (i) determine any question of law arising in the arbitration; (ii) determine any question as to the Arbitrator's jurisdiction; (iii) determine any question of good faith, dishonesty or fraud arising in the dispute; (iv) order any party to furnish further details of that party's case, in fact or in law; (v) proceed in the arbitration notwithstanding the failure or refusal of any party to comply with these Rules or with the Arbitrator's orders or directions, or to attend any meeting or hearing, but only after giving that party written notice that the Arbitrator intends to do so; (vi) receive and take into account such written or oral evidence tendered by the parties as the Arbitrator determines is relevant, whether or not strictly admissible in law; (vii) make one or more interim awards; (viii) hold meetings and hearings, and make a decision (including a final decision) in Toronto, Ontario or elsewhere with the concurrence of the parties thereto; (ix) order the parties to produce to the Arbitrator, and to each other for inspection, and to supply copies of, any documents or other evidence or classes of documents in their possession or power which the Arbitrator determines to be relevant; and (x) make interim orders to secure all or part of any amount in dispute in the arbitration. EX-10 8 exh4_13.txt EXH 4.13 EMPLOYMENT CONTRACT L BLOOM EXHIBIT 4.13 EMPLOYMENT AGREEMENT BY AND BETWEEN HALO RESOURCES LTD. AND LYNDA BLOOM DATED FEBRUARY 28, 2007 EMPLOYMENT AGREEMENT THIS AGREEMENT made the 28th day of February, 2007. BETWEEN: HALO RESOURCES LTD., a corporation existing under the laws of the Province of British Columbia ("Halo" or the "Corporation") OF THE FIRST PART - and - LYNDA BLOOM, of the City of Toronto, Ontario (the "Executive") OF THE SECOND PART WHEREAS Halo wishes to employ the Executive and the Executive wishes to be employed by Halo in connection with the continuing operation of the business carried on by Halo (the "Business"). AND WHEREAS Halo and the Executive wish to set out the terms of the Executive's employment. NOW THEREFORE IN CONSIDERATION OF the payment of the sum of $1.00, the covenants and agreements continued in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: DEFINITIONS 1. In this Agreement, in addition to those terms defined above and unless there is something in the subject matter inconsistent therewith, the terms set forth below shall have the following corresponding meanings: "Affiliate" means any Person which, directly or indirectly, controls or is controlled by or is under common control with a Party, and the term "Affiliated" has a corresponding meaning. For the purposes of this Agreement "control" and "controlled" shall have the meanings ascribed thereto in the BUSINESS CORPORATIONS ACT (Ontario). "Agreement" means this agreement between the Parties. "Associate" has the meaning ascribed thereto in the SECURITIES ACT (Ontario). - 2 - "Board" means the board of directors of Halo from time to time. "Change of Control" means the occurrence of any one or more of the following events: (a) less than 50% of the Board being composed of Continuing Directors; (b) any person, entity or group of persons or entities acting jointly or in concert (an "Acquiror") acquires or acquires control (including, without limitation, the right to vote or direct the voting) of Voting Securities of the Corporation which, when added to the Voting Securities owned of record or beneficially by the Acquiror or which the Acquiror has the right to vote or in respect of which the Acquiror has the right to direct the voting, would entitle the Acquiror and/or Associates and/or Affiliates of the Acquiror to cast or to direct the casting of 40% or more of the votes attached to all of the Corporation's outstanding Voting Securities which may be cast to elect directors of the Corporation or the successor corporation (regardless of whether a meeting has been called to elect directors); (c) the shareholders of the Corporation approve all necessary resolutions required to permit any person to accomplish the result set forth in paragraph (b), above, even if the securities have not yet been issued to or transferred to that Person; (d) the Corporation shall sell or otherwise transfer, including by way of the grant of a leasehold interest or joint venture interest (or one or more subsidiaries of the Corporation shall sell or otherwise transfer, including without limitation by way of the grant of a leasehold interest or joint venture interest) property or assets (A) aggregating more than 50% of the consolidated assets (measured by either book value or fair market value) of the Corporation and its subsidiaries as at the end of the most recently completed financial year of the Corporation or (B) which during the most recently completed financial year of the Corporation generated, or during the then current financial year of the Corporation are expected to generate, more than 50% of the consolidated operating income or cash flow of the Corporation and its subsidiaries, to any other Person or Persons (other than one or more Affiliates of the Corporation), in which case the Change in Control shall be deemed to occur on the date of transfer of the assets representing one dollar more than 50% of the consolidated assets in the case of clause (A) or 50% of the consolidated operating income or cash flow in the case of clause (B), as the case may be; (e) the shareholders of the Corporation approve all necessary resolutions required to permit any person to accomplish the result set forth in paragraph (d), above; or - 3 - (f) the Corporation: (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, a. to adjudicate it bankrupt or insolvent; b. 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 or compromise or arrangement or other corporate proceeding involving or affecting its creditors; c. the entry of an order for the 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 thirty (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. For the purposes of the foregoing, "Voting Securities" means Common Shares and any other shares entitled to vote for the election of directors and shall include any security, whether or not issued by the Corporation, which are not shares entitled to vote for the election of directors but are convertible into or exchangeable for shares which are entitled to vote for the election of directors including any options or rights to purchase such shares or securities. "Common Shares" means the common shares in the capital of the Corporation. "Continuing Director" shall mean either: (a) an individual who is a member of the Board on the Effective Date; or (b) an individual who becomes a member of the Board subsequent to the date of this Agreement with the agreement of at least a - 4 - majority of the Continuing Directors who are members of the Board at the date that the individual became a member of the Board. "Effective Date" means March 1, 2007. "Employment" means the employment of the Executive in connection with the Business and in accordance with the terms and conditions of this Agreement. "Party" means a party to this Agreement, and "Parties" has a similar extended meaning. "Permanent Disability" means any physical or mental incapacity, disease or affliction which: (a) prevents the Executive from performing substantially all her obligations as an executive officer of Halo; and (b) has existed for a continuous period of one hundred and eighty (180) days in any period of three hundred and sixty-five (365) consecutive days. "Person" includes any individual, partnership, joint venture, trust, unincorporated organization or any other association, corporation, or any government or any department or agency thereof. "Plan" means the Halo Resources Ltd. Share Option Plan. "Policies" means the Halo Corporate Disclosure Policy and the Halo Insider Trading Policy, both of which are incorporated by reference in and form part of this Agreement, and include such amendments as may occur from time to time. "Securities Act" means the SECURITIES ACT (Ontario). "Subsidiary" means a body corporate which is a subsidiary of the Corporation as defined in the BUSINESS CORPORATIONS ACT (Ontario). "Triggering Event" means any one of the following events which occurs without the express agreement in writing of the Executive; (i) a material adverse change in any of the duties, powers, rights, discretion, prestige, salary, benefits, perquisites of the Executive as they exist, and with respect to financial entitlements, the conditions under and manner in which they were payable, immediately prior to the Change of Control; (ii) a material diminution of the title of the Executive as it exists immediately prior to the Change of Control; - 5 - (iii) a change in the person or body to whom the Executive reports immediately prior to the Change of Control, except if such person or body is of equivalent rank or stature or such change is as a result of the resignation or removal of such person or the persons comprising such body, as the case may be, provided that this shall not include a change resulting from a promotion in the normal course of business; or (iv) a material change in the hours during or location at which the Executive is regularly required immediately prior to the Change of Control to carry out the terms of her employment with the Corporation, or a material increase in the amount of travel the Executive is required to conduct on behalf of the Corporation. AGREEMENT TO EMPLOY 2. Halo agrees to employ the Executive as of the Effective Date in connection with the Business on the terms and conditions set out herein and the Executive agrees to accept employment on such terms. TERM 3. The term of this Agreement and the Employment shall be for an indefinite period, provided that: (a) Halo may terminate this Agreement and the Employment at any time as set out in paragraphs 10, 11 and 14 hereof; (b) the Executive may terminate this Agreement and the Employment at any time as set out in paragraph 12 hereof; (c) the Corporation or the Executive may terminate this Agreement and the Employment upon the occurrence of a Change of Control as set out in paragraph 13 hereof; and (d) this Agreement and the Employment are automatically terminated when the Executive dies. DUTIES AND RESPONSIBILITIES 4. The Executive shall serve as President and Chief Executive Officer of Halo and shall perform such duties and assume such responsibilities inherent in and consonant with her position as an executive of Halo, and further will perform such reasonable additional duties and responsibilities as the board of directors may require and assign to her including serving as an officer of Affiliates of Halo at no additional compensation. The Executive shall report to - 6 - the chair of the board of directors of Halo, or such other position as the Board may designate. The Executive shall work out of the Corporation's head office in Toronto, Ontario. The Executive acknowledges that her employment will entail frequent travel to places including where the Corporation has operations, other than her regular place of employment. CONFLICT OF INTEREST/DUTY OF LOYALTY 5. The Executive agrees to fully and faithfully perform her duties and responsibilities hereunder, and not to engage or have an interest in any other enterprise, occupation or profession, directly or indirectly, or become a principal, agent, director, officer or employee of another company, firm or person, as applicable, which will or may interfere with or conflict with the Executive's duties and responsibilities hereunder without the written approval of the chair of the Board. For greater certainty, the Executive shall be entitled to sit on external boards of directors and accept incidental consulting assignments set out on Schedule "A", or otherwise if the consent of the chair of the Board is first obtained in writing. If the Corporation determines that the Executive is in breach of this provision and such breach is capable of cure, it shall provide written notice of the breach and afford the Executive 30 days to cure the breach. Failure by the Executive to cure the breach within such 30 day period shall constitute just cause for termination of the Executive's employment. In the event of breach not capable of cure, the breach by the Executive of this provision shall constitute immediate grounds for termination of the Executive's employment for just cause. CONFIDENTIALITY 6. The Executive agrees to keep the affairs of the Business, financial and otherwise, strictly confidential and shall not disclose the same to any person, company or firm, directly or indirectly, during or after her Employment by Halo except as reasonably necessary to carry out her Employment duties or as otherwise authorized in writing by the chair of the board. The Executive agrees not to use such information, directly or indirectly, for her own interests, or any interests other than those of the Business, whether or not those interests conflict with the interests of the Business, during or after her employment by Halo. The Executive agrees that all trade secrets, trade names, client information, client files, processing and marketing techniques, information respecting existing or potential mineral properties, mineral exploration data or information, and mining and exploration proposals relating to the Business or disclosed to the Executive in the course of pre-employment communications or her Employment shall become, on execution of this Agreement, and shall be thereafter, as the case may be, the sole property of Halo whether arising before or after the execution of this Agreement. REMUNERATION 7. (a) The Executive shall be remunerated as follows during the term of this Agreement: - 7 - (i) initial base salary of CDN$175,000.00 per annum payable monthly less any amount paid to the Executive pursuant to any other employment or consulting agreement or arrangement between the Executive and the Corporation or any of its Affiliates, and to be reviewed annually by the Board; (ii) an annual bonus as may be determined by the Board having in mind performance criteria to be established by the Executive and the Board having regard to such market or other advice or guidance as the Board considers appropriate; and (iii) four (4) weeks' vacation annually. (b) All payments required to be made under this Agreement are subject to statutory deductions, as applicable, including without limitation for income tax. 8. (a) The Executive shall also be granted incentive stock options to acquire Common Shares of the Corporation under the Plan in such amounts as approved by the Board from time to time. The Board shall make a determination as to whether additional options shall be granted in or about six months after the Effective Date, and annually thereafter. REIMBURSEMENT OF EXPENSES 9. All the Executive's reasonable expenses related to the Business will be reimbursed upon the submittal by the Executive of an expense report with appropriate supporting documentation to Halo. TERMINATION 10. This Agreement and the Employment may be terminated by Halo summarily and without notice, or payment in lieu of notice, severance payments, benefits, damages or any sums whatsoever, in the event that there is just cause for termination of the Executive's Employment at common law. Notwithstanding the generality of the foregoing, just cause shall be deemed to exist in the event the Executive: (a) engages in conduct which is detrimental to the reputation of the Corporation or any of its Affiliates in any material respect; (b) has committed an act of fraud or material dishonesty in connection with her Employment or the Business; (c) is the subject of any enforcement proceeding by a securities regulatory authority or agency; or - 8 - (d) materially breaches her duties under this Agreement, including the Policies. 11. Despite the Term of this Agreement and the Employment set forth in paragraph 3, above: (a) This Agreement and the Employment may be terminated on notice by Halo to the Executive without cause, upon payment to the Executive at termination of three months' Monthly Severance Compensation plus one month's Monthly Severance Compensation per completed year of service hereunder, to a maximum of 12 months Monthly Severance Compensation in total. For the purposes of this paragraph 11, "Monthly Severance Compensation" means one twelfth of her annual base salary plus the greater of means one twelfth of her annual bonus at target or means one twelfth of the bonus received by her in the previous bonus year. The Executive shall also be entitled to accrued but unused vacation to the date of termination. (b) The parties agree that any payment to the Executive pursuant to this paragraph 11 is not intended and will not be of the nature of a penalty and shall be considered by the parties as liquidated damages. 12. Subject to paragraph 13, this Agreement and the Employment may be terminated on notice by the Executive to Halo by giving ninety (90) days' written notice. CHANGE OF CONTROL 13. If at any time during the term of this Agreement there is a Change of Control and within twelve (12) months of such Change of Control: (i) the Corporation gives notice of its intention to terminate the employment of the Executive for any reason other than just cause, or (ii) a Triggering Event occurs and the Executive elects to terminate this Agreement and her Employment the Executive shall be entitled to receive from Halo the compensation set out in paragraph 11 above in the manner and within the time periods set out therein. DISABILITY 14. (a) If the Executive suffers a Permanent Disability, Halo may replace the Executive either on a temporary or permanent basis without terminating the Employment of the Executive. (b) If the Executive recovers from the Permanent Disability, Halo may offer to the Executive the position that the Executive formerly occupied prior to the Executive's Permanent - 9 - Disability or another comparable other executive position. If no comparable position is offered by Halo to the Executive, the Executive shall be entitled to the compensation set out in paragraph 11(a) above. (c) Notwithstanding the foregoing, in the event the Executive continues to suffer from a Permanent Disability for in excess of 24 months, Halo may, at its option and subject to its obligation to make reasonable accommodation of the disability as required by applicable human rights legislation, terminate the Executive's employment, provided that: (i) such termination does not and will not prejudice the Executive's eligibility for disability and other group insured benefits; and (ii) Halo provides the Executive forthwith the compensation set out in paragraph 11(a) above. SEVERABILITY 15. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision, and any invalid provision will be severable from this Agreement. GOVERNING LAW 16. This Agreement is governed by and is to be considered, interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein. The Executive hereby attorns to the non-exclusive jurisdiction of the courts of the Province of Ontario. HEIRS/SUCCESSORS BOUND 17. This Agreement inures to the benefit of and is binding upon the parties and their respective heirs, administrators, executors, successors and assigns as appropriate. The Corporation will require any successor (whether direct or indirect, by purchase, amalgamation, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place, provided that, if the Executive agrees, an express agreement may not be required if such results by operation of law. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Corporation at the same amount and on the same terms as the Executive would be entitled hereunder pursuant to paragraph 13 as if such succession had not occurred, except that for purposes of implementing the - 10 - foregoing, the date of which any such succession becomes effective shall be deemed the date of termination of the Executive's employment. ASSIGNMENT 18. This Agreement is not assignable by either party without the consent in writing of the other party, which consent may be unreasonably withheld, provided that Halo shall be entitled to assign this Agreement, without the Executive's consent to an Affiliate of Halo provided the Affiliate offers comparable employment and there is not material prejudice, including diminution of responsibilities, to the Executive by reason of such assignment. ENTIRE AGREEMENT 19. As of its date execution, this Agreement supersedes all prior agreements, whether written or oral, express or implied, between the parties, and constitutes the entire agreement between the parties. The parties agree that there are no other collateral agreements or understandings between them except as set out in this Agreement. AMENDMENT 20. This Agreement may be amended only in writing signed by the parties and witnessed. HEADINGS 21. All headings in this Agreement are for convenience only and shall not be used for the interpretation of this Agreement. RECOURSE ON BREACH 22. The Executive acknowledge that damages would be an insufficient remedy for a breach of this Agreement and agrees that Halo may apply for and obtain any relief available to it in a court of law or equity, including injunctive relief, to restrain breach or threat of breach of this Agreement or to enforce the covenants contained herein, and, in particular, the covenant contained in paragraph 6 herein, in addition to rights Halo may have to damages arising from said breach or threat of breach. CONFIDENTIALITY OF AGREEMENT 23. The parties agree that this Agreement is confidential and shall remain so. The parties agree that this Agreement or the contents hereof shall not be divulged by any party without the consent in writing of the other party, with the exception of disclosure to personal advisors, disclosure that may be required by the laws of any jurisdiction in which the Business is conducted or may be conducted in future and disclosure pursuant to applicable securities laws - 11 - and the rules and policies of any stock exchange on which Halo securities are traded. Each party agrees to request of its personal advisors that they enter into similar agreements of confidentiality if requested to do so by the other party to this Agreement. INDEPENDENT LEGAL ADVICE 24. The Executive agrees that she has had independent legal advice or the opportunity to receive same in connection with the execution of this Agreement and has read this Agreement in its entirety, understands its contents and is signing this Agreement freely and voluntarily, without duress or undue influence from any party. NOTICE 25. Any notice required or permitted to be made or given under this Agreement to either party shall be in writing and shall be sufficiently given if delivered personally, or if sent by prepaid registered mail to the intended recipient of such notice at: (a) in the case of Halo, to: Commerce Court North 25 King Street West, Suite 2900 Toronto, ON M5L 1G3 Attention: Chair, Board of Directors with a copy (which shall not constitute notice hereunder) to: Cassels Brock & Blackwell LLP 2100 Scotia Plaza 40 King Street West Toronto, Ontario M5H 3C2 Attention: Jason Bullen (b) in the case of the Executive, to: 12-1000 Dundas St. E. Toronto, Ontario M4M 1R7 or at such other address as the party to whom such writing is to be given shall provide in writing to the party giving the said notice. Any notice delivered to the party to whom it is addressed shall be deemed to have been given and received on the day it is so delivered or, if such day is not a business day, - 12 - then on the next business day following any such day. Any notice mailed shall be deemed to have been given and received on the fifth business day following the date of mailing. PRIVACY 26. By accepting employment with the Corporation, the Executive consents to the Corporation collecting, using and disclosing her personal information for purposes relating to the maintenance of the employment relationship. The purposes of the Corporation's collection, use and disclosure include, but are not limited to: (a) ensuring that the Executive is properly remunerated for her services to the Corporation which shall include disclosure to third party payroll providers; (b) administering and/or facilitating the provision of any benefits to which the Executive is or may become entitled, including bonuses, benefits, pensions, registered retirement savings plan, short, medium and long-term incentive plans; this shall include the disclosure of the Executive's personal information to the Corporation's third party service providers and administrators; (c) ensuring that the Corporation is able to comply with any regulatory, reporting and withholding requirements relating to the Executive's employment; (d) performance evaluation; (e) monitoring the Executive's access to and use of the Corporation's electronic media services in order to ensure that the use of such services is in compliance with the Corporation's policies and procedures and is not in violation of any applicable laws; (f) complying with the Corporation's obligations to report improper or illegal conduct by any director, officer, employee or agent of the Corporation under any applicable securities, criminal or other law; (g) allowing a potential purchaser of the shares or assets of the Corporation to conduct due diligence with respect to employment obligations of the Corporation, subject to compliance with the treatment of such information as required by applicable legislation respecting privacy; and (h) any other purpose for which the Executive is given notice and which is reasonably related to the maintenance of the Executive's employment relationship. - 13 - SURVIVAL 27. Paragraphs 6, 22, 23 and 27 shall survive the termination of this Agreement and the Employment and shall continue in full force and effect according to their terms. IN WITNESS WHEREOF the parties hereto have executed these presents under their respective seals and hands of their proper offices authorized in that behalf, as applicable. The Corporate Seal of HALO INC. ) was hereunto affixed ) in the presence of: ) ) /s/ Marc Cernovitch ) - -------------------------------- ) Authorized Signatory ) ) c/s ) - -------------------------------- ) Authorized Signatory ) SIGNED in the presence of: ) ) ) ) ) /s/ Lynda Bloom - -------------------------------- ) -------------------------------- Witness ) - 14 - Schedule "A" Directorships: Prospectors and Developers Association of Canada Canadian Shield Resources Inc. Augen Capital Corp. President: Analytical Solutions Ltd. EX-31 9 exh12_1.txt EXH 12.1 CERT BY CEO RULE 13A EXHIBIT 12.1 CERTIFICATION OF LYNDA BLOOM PURSUANT TO RULE 13A-14(A) -1- EXHIBIT 12.1 CERTIFICATION PURSUANT TO RULE 13A-14(A) OF CHIEF EXECUTIVE OFFICER I, Lynda Bloom, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 14, 2007 /s/ Lynda Bloom - ------------------------------------- Lynda Bloom, Chief Executive Officer, President, and Director - 2 - EX-31 10 exh12_2.txt EXH 12.2 CERT BY CFO RULE 13A 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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 14, 2007 /s/ nick DeMare - ------------------------------------- Nick DeMare, Chief Financial Officer, and Director -2- EX-32 11 exh13_1.txt EXH 13.1 CERT BY CEO SECTION 1350 EXHIBIT 13.1 CERTIFICATION OF LYNDA BLOOM 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, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lynda Bloom, 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/ Lynda Bloom - ---------------------------------- Lynda Bloom, Chief Executive Officer, President and Director -2- EX-32 12 exh13_2.txt EXH 13.2 CERT BY CFO RULE 1350 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, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Nick DeMare, Chief Financial Officer 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 and Director -2- -----END PRIVACY-ENHANCED MESSAGE-----