<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 20-F
(Mark One)
[x] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-----------------
Commission file number
DIADEM RESOURCES LTD.
(Exact name of Registrant as specified in its charter)
NOT APPLICABLE
(Translation of Registrant's Name into English)
CANADA
(Jurisdiction of incorporation or organization)
110 MEADOWVALE ROAD
SCARBOROUGH, ONTARIO
M1C 1S1
(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 Shares
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT.
(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.
* COMMON SHARES
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 13(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIODS THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
REPORTING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [ ] NO [x]
INDICATE BY CHECK MARK WHICH FINANCIAL STATEMENT ITEM THE REGISTRANT HAS
ELECTED TO FOLLOW.
ITEM 17 [x] ITEM 18 [ ]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES [ ] NO [ ]
<PAGE> 2
GLOSSARY OF TERMS
ABITIBI BELT OF A vast area of ancient volcanic rocks
QUEBEC-ONTARIO extending from Kenora to Sudbury, Ontario to
Chibougamau, Quebec.
ADITS: An opening driven horizontally into the side
of a mountain or hill for providing access to
a mineral deposit.
AGGLOMERATES: A volcanic breccia formed by disruption of a
solidified crust or hardened plug of lava;
blocks may fit together or be completely
disordered.
ALKALINE: Having the qualities of a base.
ALLUVIAL: Relatively recent deposits of sedimentary
material laid down in river beds, flood
plains, lakes or at the base of mountain
slopes.
AIRBORNE MAGNETIC/ A survey made from the air for the purpose of
AEROMAGNETIC SURVEY: recording the magnetic characteristics of
rocks on and below the surface of the earth.
AMPHIBOLES: Metamorphic rock of primarily mafic minerals,
chiefly hornblende.
ANDESITE: A dark-coloured, fine-grained extrusive rock.
ARCHEAN AGE: The oldest rocks of the Precambrian Era,
formed prior to 2.5 billion years ago.
ASHUANIPI FORMATION: A unit of ancient sedimentary rocks in New
Quebec and Labrador, with an age of two
billion years.
BASAL: Situated at base of a rock unit or structure.
BRECCIA: The texture displayed by a rock which has
been fragmented and dislocated since initial
lithification.
CARAT (ct): A unit of weight for diamonds, equivalent to
0.2 of a gram.
CASSITERITE: A brown or black tetragonal mineral, it is
the principle ore of tin.
CHALCOPYRITE: A sulphide mineral of copper and iron; the
most important ore mineral of copper.
CHROMIUM-DIOPSIDE: A bright-green variety of pyroxene which can
occur in kimberlite.
CHROMITE: An iron-chromium oxide often found as small
grains in ultrabasic igneous rocks and
kimberlitic rocks.
COBBING: The separation, generally with a hand-held
hammer, of worthless minerals from desired
minerals in a mining operation.
COLLUVIUM: A general term applied to loose and
incoherent deposits, usually at the foot of a
slope or cliff and brought there chiefly by
gravity.
CUT-OFF GRADE: The lowest grade of mineralized material that
qualifies as ore in a given deposit.
DIAMOND: A cubic variety of crystalline carbon which
may be of gem quality.
DIAMOND DRILL HOLES: Rotary drilling using diamond impregnated
bits to produce a solid continuous core
sample of the rock.
DIAMONDIFEROUS: Containing diamond.
2
<PAGE> 3
DIATREME: A volcanic vent piercing country rock,
usually the result of an explosive eruption.
DIOPSIDE: A white to green mineral of the clinopyroxene
group.
DIORITE: An intrusive igneous rock composed chiefly of
sodic plagioclase, hornblende, biotite or
pyroxene
DISSEMINATED: Fine particles of mineral dispensed through
the enclosing rock.
ECOLOGITE: An ultrabasic rock consisting mainly of
garnet and clinopyroxene.
ELECTROMAGNETIC A geophysical method employing the generation
(PROSPECTING): of electromagnetic waves at the earth's
surface when the waves impinge on a
conducting formation or ore body at depth
they induce currents that are the source of
new waves radiated from the conductors and
detected by instruments at the surface.
EPITHERMAL: A term applied to low temperature (100-200C)
hydrothermal processes.
FEASIBILITY: Program to establish whether a mineral
deposit can be successfully mined considering
technical and economic parameters.
GABBRO: A dark, course-grained igneous rock.
GEM QUALITY A diamond free of flaws, as far as can be
DIAMOND: determined by a trained observer with the aid
of a 10-power magnifying glass, and having a
colour and other characteristics that do not
deleteriously affect its value for use as a
faceted ornamental (gem) diamond.
GEOCHEMISTRY: Study of variation of chemical elements in
rocks or soils.
GEOPHYSICS: Study of the earth by quantitative physical
methods.
GNEISS: A layered or banded crystalline metamorphic
rock the grains of which are aligned or
elongated into a roughly parallel
arrangement.
GOSSAN: A surface capping of oxides of iron from the
weathering of metallic sulphide.
GRADE: (To contain a particular) quantity of ore or
mineral relative to other constituents, in a
specified quantity of rock.
GRANODIORITES: The intrusive rock with intermediate
composition.
GREENOCKITE: A yellow or orange mineral containing cadmium
and sulfur.
HYDRAULIC MINING: The extraction of desired earth material by
means of strong jets of water, such as
washing gold-bearing gravel into sluices.
HYDROTHERMAL Pertaining to hot water, especially with
respect to its action in dissolving,
re-depositing, and otherwise producing
mineral changes within the crust of the
globe.
INDICATOR MINERALS: In connection with kimberlite exploration,
indicator minerals include: pyrope garnet;
picroilmenite (also called
magnesianilmenite); chrome-diopside;
chromite; and diamond.
INTRUSION/INTRUSIVE: A volume of igneous rock that was injected,
while still molten, into the earth's crust or
other rocks.
KIMBERLITE/OLIVINE Uneven-grained, ultramafic rock in which the
visible minerals may include olivine,
phlogopite, pyrope
3
<PAGE> 4
LAMPROITE: garnet, picroilmenite and chrome/diopside,
which are cemented by a groundmass that may
include serpentine, calcite, and chromite.
Kimberlite and olivine lamproite are the only
known types of intrusive rock (primary source
rocks) that may carry diamonds from the
depths of the earth to the surface and may
form primary diamond deposits. The principal
distinction between kimberlite and olivine
lamproite is based on geochemical grounds.
LABRADOR TROUGH: A major geological structure extending for
900 kilometres in Quebec and Labrador.
LAHAR: A landslide or mudflow of pyroclastic
material on the flank of a volcano; also, the
deposit produced.
LENS OR LENSES: Generally used to describe a body of
mineralization that is thick in the middle
and tapers towards the ends.
LODE: A tubular or vein like deposit of valuable
mineral between well defined walls of rock.
MAGNETIC SURVEY: A geophysical survey that measures the
intensity of the Earth's magnetic field.
MAFIC: Igneous rocks composed mostly of dark, iron
and magnesium-rich minerals.
MAGNETOMETER: An instrument used to measure the magnetic
attraction of underlying rocks.
MAGNETITE: Black, magnetic iron ore, an iron oxide.
MASSIVE SULPHIDE: Mineralized rock rich in sulphide minerals
(greater than 50%).
MEHRTENS (VOLCANICS): A widespread local unit of volcanic flows and
mudslides in eastern California approximately
12 million years old.
MICRODIAMOND: Natural diamonds, generally of a size less
than 0.4 millimetres. Although these
diamonds do not have monetary value, they are
significant in that their presence indicates
the possible occurrence of larger diamonds.
MINERALIZATION: The concentration of metals and their
chemical compounds within a body of rock.
NET SMELTER RETURN: A share of the net revenues generated from
the sale of metal produced by a mine.
NIOBIUM: An exotic alloy metal, sometimes called
columbium.
OLIVINE: A rock-forming silicate mineral series
ranging from iron-rich to magnesium-rich.
Important in mafic and ultramafic rocks.
OPEN CUT, OPEN PIT: A mine worked at the surface.
ORE: A natural aggregate of one or more minerals
which, at a specific time and place, may be
mined and sold at profit, or from which some
part may be profitably separated.
ORTHOMAGMATIC: The main stage of crystallization of
silicates from a typical magma, during which
as much as 90% of the magma may crystallize.
OVERBURDEN: Loose or consolidated rock that overlies a
mineral deposit and must be removed prior to
mining
OXIDIZED: Decomposed by exposure to the atmosphere and
ground water.
PAYSTREAK: That portion of a vein which carries the
profitable ore.
PENTLANDITE: Nickel iron sulphide, the most common nickel
ore.
4
<PAGE> 5
PERIDOTITE: An intrusive igneous rock consisting mainly
of olivine.
PIPE: A common term for a vertical cylindrical or
column-like mass of rock that cooled and
solidified in the neck of a volcano.
PLACER: A deposit of sand and gravel containing
valuable metals such as gold, tin or
diamonds, normally resulting from erosion.
PLATFORM COVER: Generally used to describe areas formed by
relatively undeformed sediments lying on
basement rocks.
PLIOCENE: An epoch of the Tertiary period, after the
Miocene and before the Pleistocene; it is
considered to be a period when the Tertiary
is designated as an era.
PLUG: A common name for a small offshoot from a
large body of molten rock.
PORPHYRY: Any igneous rock in which relatively large
conspicuous crystals ae set in a
finer-grained groundmass.
PRECAMBRIAN: All geologic time, and its corresponding
rocks, before the beginning of the Paleozoic;
it is equivalent to about 90% of all geologic
time.
PROPYLITIC: A term that may be applied to any kind of a
vein, meaning that the ore solution which has
furnished the vein filling has also effected
a decomposition or alteration of the wall
rock as well, so that the walls of the vein
consist of clay, talc, etc.
PROSPECT: Mineral occurrence with potential for an
economic deposit.
PYROCLASTIC: Pertaining to clastic rock material formed by
volcanic explosion or aerial expulsion from a
volcanic vent.
PYROPE GARNET: A variety of garnet (cubic iron-, magnesium-,
calcium-, or manganese-aluminosilicates)
which contains mainly magnesium and a little
iron; many pyrope garnets also contain
chromium.
RADIOLARIAN CHERT: A well-bedded microcrystalline rock with
fossil shells and silica.
RECONNAISSANCE: First-pass exploration of a large area.
SCHIST: A foliated metamorphic rock the grains of
which have a roughly parallel arrangement;
generally developed by shearing.
SERICITE A white, fine-grained potassium mica
occurring in small scales and flakes as an
alteration product of various aluminosilicate
minerals, having a silky lustre, and found in
various metamorphic rocks, especially schists
and phyllites or in the wall rocks, fault
gouge and vein fillings of ore deposits.
SERPENTINE: A family of minerals which are the alteration
products of olivine and pyroxenes.
SILL: An intrusive sheet of igneous rock of roughly
uniform thickness that has been forced
between the bedding planes of existing rock.
STOCKWORK: An interlacing system of small veins or
lodes.
STRANGE LAKE: A lake near the Quebec/Labrador boundary.
SULPHIDE: A metallic mineral containing unoxidized
sulphur.
TAILINGS: Reject products from a mineral treatment
plant.
5
<PAGE> 6
TUFF: A rock formed from compacted volcanic origin
containing clastic fragments.
ULTRABASIC: An igneous rock having a silica content lower
than that of a basic rock, or less than about
45%.
ULTRAMAFIC: An igneous rock composed chiefly of mafic
minerals, such as monomineralic rocks
composed of hypersthene, augite or olivene.
VEIN: Sheet-like body of minerals formed by
fracture-filling or replacement of the host
rock.
XENOCRYST: A mineral found in an igneous rock but which
did not crystallize in the same place at the
same time as the containing rock.
XENOLITH: An inclusion of a pre-existing rock in an
igneous rock.
6
<PAGE> 7
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was formed in Ontario under the Business Corporations Act on June
1, 1989 by the amalgamation of Howe Exploration & Development Co. Limited and
Merigomish Investments Limited. On April 20, 1993, the Company filed Articles
of Amendment changing its name from Howe Exploration & Development Co. Limited
to Howex Enterprises Ltd. These Articles of Amendment also served to remove
the private company restrictions from its Articles. On September 23, 1994, the
Company filed Articles of Amendment changing its name to Diadem Resources Ltd.
and consolidating its issued common shares on the basis of one
post-consolidation common share for each two and one-half pre-consolidation
common shares. The registered head office of the Company is located at 350 Bay
Street, 7th Floor, Toronto, Ontario, M5H 2S6, while its principal office is
located at 110 Meadowvale Road, Scarborough, Ontario, M1C 1S1.
THE BUSINESS OF THE COMPANY
The Company and its predecessor company prior to amalgamation, Howe Exploration
& Development Co. Limited, have been in the mineral exploration business in
Canada and elsewhere since May, 1965. The Company was a contractor for mine
development in the years 1965-1975 and has been an investor in properties and
shares of mining companies and a consultant to mining companies since then.
The Company currently has interests in mining properties situated in Amador
County and Eldorado County, California; Northern Quebec/Labrador and the
Northwest Territories, Canada, and on Kalimantan Island and Belitung Island in
Indonesia. The Company also owns a 46% interest in Waseco Resources Inc.
("Waseco") which is engaged in the exploration and development of an alluvial
gold prospect and a hard rock gold prospect on the Island of Kalimantan,
Indonesia and two hard rock gold prospects on the Island of Java, Indonesia.
RANCHERIA, AMADOR COUNTY, CALIFORNIA
LOCATION AND ACCESS
The property is located in Amador County in Sierra Nevada, California,
forty-eight miles southeast of the state capital, Sacramento, and ten miles
north-northeast of the town of Jackson. The property is well served by paved
roads, with some accessible gravel tracks. Electric power, skilled miners and
service industries are available in the area. The median altitude of the
project area is 2,200 feet above sea level.
MINING RIGHTS AND TITLES
By agreement dated July 13, 1994 as amended by letter agreements of August 2,
1994, October 14, 1994 and December 8, 1994 between the Company and Silverstone
Prospecting Syndicate ("Silverstone"), the Company optioned a 15% interest in
thirteen recorded placer claims described below, technical data and any other
claims or mining rights acquired by Silverstone within a specified area of
interest. Mr. Derek Bartlett, a director of the Company, was appointed by the
Company to negotiate on its behalf, the transaction with Silverstone, the
latter being represented by Mr. George Silverman, who is also a director of the
Company. To acquire an initial 15% interest in these claims, the Company was
required, on or before February 28, 1995, to (i) pay to Silverstone the sum of
$50,000 U.S. and (ii) issue a total of 150,000 common shares of the Company.
The Company paid the $50,000 cash on February 28, 1995, and issued the 150,000
shares on March 6, 1995. Exercise of this option by the Company secured an
option for the Company to acquire an additional 15% interest in the claims.
The option to acquire a further 15% interest, which increased the Company's
position on the claims to an aggregate of 30%, had to be exercised within 210
days from February 28, 1995. The Company was required to (i) pay Silverstone an
additional fee of $50,000 U.S., (ii) deliver 150,000 additional common shares
of the Company to Silverstone, and (iii) provide technical data and financial
statements establishing expenditures of
7
<PAGE> 8
not less than $350,000 U.S. on the properties. The Company paid the $50,000
U.S. cash on October 2, 1995, and issued the shares on September 19, 1995. The
Company also provided technical data and financial statements to Silverstone
establishing expenditures exceeding the $350,000 U.S. threshold prior to May
31, 1996. Exercise of this option provided the Company with an option to
increase its interest in the claims by a further 15% on the terms described
below.
To increase its interest by a further 15%, bringing its aggregate position in
the claims to 45%, the Company would be required, within 400 days from February
28, 1995, to (i) pay Silverstone an additional fee of $100,000 U.S., (ii)
deliver 150,000 additional common shares of the Company to Silverstone, and
(iii) deliver technical data and financial statements establishing a further
$650,000 U.S. in expenditures on the properties. By letter agreements dated
January 10, 1996, February 27, 1996 and November 1, 1996, the date by which the
cash payment, share issue and expenditure amount must be completed has been
extended to February 1, 1997. The extension was necessitated by the
difficulties experienced in securing equipment to commence the next stage of
work. Despite the extended deadline, the Company issued the 150,000 common
shares on February 27, 1996. Exercise of this option would also provide the
Company with an option to increase its interest in the claims by a further 15%.
To acquire an additional 15% interest, bringing its aggregate position in the
claims to 60%, the Company would be required to deliver technical data and
financial statements establishing additional expenditures on the property of
not less than $1,000,000 U.S. within 766 days from February 28, 1995. Pursuant
to the extensions granted in the January 10, 1996 and February 27, 1996 letter
agreements, the deadline by which the Company must complete the foregoing steps
is October 4, 1997.
A total of thirteen claims have been staked by Silverstone to date. Seven
recorded placer claims are located in the Rancheria East area, while an eighth
placer claim has been staked in the Volcano West area. The seven Rancheria
East placer claims are each 40 acres in size, and the one Volcano West placer
claim is approximately 34 acres in size. Five additional placer claims have
been staked by Ryder on behalf of Silverstone and these have been called the
Sophie claims. The 13 claims which have been recorded are registered in the
name of Silverstone Prospecting (Cal.) Inc. on behalf of Silverstone.
The agreement with Silverstone also provides that if Silverstone is successful
in acquiring additional claims within a certain area in Amador County defined
in the agreement, these claims will be included in the agreement with the 13
claims currently staked and recorded. The Company will be entitled to acquire
up to a 60% interest in each additional claim or mining right acquired by
Silverstone without payment of additional consideration, save and except for
reimbursement to Silverstone of its costs and expenses of acquiring these
additional claims. On November 7, 1994, Silverstone entered into an option
agreement with the owner of a further three parcels of placer mining rights in
the Rancheria West area. This option agreement provides for exclusive rights to
prospect, explore and mine minerals on this area totalling 260 acres in
exchange for option payments totalling $600 U.S. and a royalty equal to 10% of
all gold recovered.
Silverstone's principal office is located at 75 Acton Avenue, North York,
Ontario, M3H 4H2. Silverstone was formed for the purpose of financing
prospecting expeditions or preliminary mining development or the acquisition of
mining properties in Canada and elsewhere.
REGIONAL HISTORY
Gold
The first important discoveries of placer gold in California occurred in 1848.
The succeeding gold rush continued until 1863, reaching an annual maximum of
four million ounces in 1852. From 1863 to 1933, placer gold was obtained from
hydraulic mining and dredging at an average annual production rate of 600,000
ounces. Large scale dredging led to an increase in production to 1.5 million
annual ounces in 1940. Increased costs in the 1950's curtailed production to a
low of 8,000 ounces in 1969. The first quartz mining for gold followed closely
on the
8
<PAGE> 9
placer discoveries in 1848 to 1850. In the succeeding century, 27 million
ounces were produced from underground, compared to 79 million ounces from
placer deposits. Lode mining essentially ceased in the fifties but has
undergone a significant revival in the 1970's and 1980's. The first diamond
found in California was reported from placer workings in 1848. In subsequent
years at least 800 diamonds were encountered in the course of placer gold
production. At the same time, a significant number of diamonds were destroyed
in stamp mills. The total number of diamonds which can be calculated from
available data is approximately 810. The diamonds were generally medium in
weight, ranging from 1/4 carat to 6 carats. No estimate has been published of
the ratio between gem and industrial stones. From historic descriptions there
is an impression of a ratio as high as 50%.
Smaller scale placer operations, including drift mines, were unregulated and
untaxed and little information is available on gold recovery rates, mining
costs and productivity. Only the larger dredging and hydraulic operations
reported specific costs, and general gold values. Site preparation and
restoration costs were omitted. To the north of Rancheria, the Pigeon drift
mines reported about 0.086 ounces per cubic yard recovery. To the north of
Volcano, the Elephant hydraulic mines reported 1932 washing costs of $0.22 per
cubic yard. Gravels of three foot thickness were overlain by 45 feet of
volcanic ash, which was removed. Only the gravels were directed to the sluice
box. Since this operation continued from 1923 to 1937, when the overburden
height increased to 100 feet, Scott estimated it was profitable in 1932 despite
its high cost. Another drift mine, northwest of Rancheria, is estimated to have
produced 13,000 cubic yards of gravel from which 0.53 ounces per cubic yard
were recovered. To the east of Volcano, a conventional dredge was operated in
previously worked recent stream gravels, five to fifteen feet thick, from 1940
to 1988. Gold recoveries were around .004 ounces per cubic yard. The 1889
report of the State Mineralogist indicated average channel width of 100 yards,
one yard thick. The gold recoveries were reported as equivalent to between 0.55
to 0.82 ounces per yard.
All the Volcano production was obtained either directly or indirectly from
basal Valley Springs gravels, which by all reports, had an average thickness of
three feet. The geology indicates that there was a single channel which
supplied all the Volcano gold, and the area eroded contained 3.2 million cubic
yards. To provide the 900,000 ounces recovered in mining, the initial in situ
gold content had to average 0.28 ounces per cubic yard.
Literature research and field work by Silverstone geologists and prospectors
has identified 44 former placer mines in the district, all related to ancestral
channels of the Valley Springs formation. They demonstrated that reasonable
gold recoveries were attainable wherever Valley Springs gravels were
accessible.
DIAMONDS
References in the literature are common on the discovery of diamonds in sluice
boxes from Valley Springs cemented gravels. In the vicinity of Oleta north of
Rancheria, five diamonds of unknown size were recovered by gold miners. In the
town of Plymouth, on the Volcano ancestral channel, a 2.65 carat stone was
picked up in 1934. At Rancheria, in 1883, placer miners recovered one quality
stone of 1.28 carats. At Jackass Gulch, near Volcano, 60 or more diamonds, many
from 1.0 to 1.6 carats survived the stamp mills of placer operations between
1870 and 1885. In 1875, a tunnel was driven by a prospector named Wisner for
three months on a cemented gravel bed at the base of the Valley Springs
formation. The tunnel did not encounter enough gold to be mineable, but Wisner
did collect 20 authenticated diamonds from his occasional test pannings. The
existence of this discovery and the presence of frequent diamond fragments in
stamp mill operations in the Volcano district provoked a recommendation from
the State Mineralogist that the gold recovery techniques be modified to
conserve diamonds. Prospect tunnels at that time were six feet by three feet in
size, and advanced two and one half feet per day. Wisner's advance would have
been approximately 175 feet, yielding 97 cubic yards of gravels. Although
there are authenticated reports of diamonds recovered and sold from other
Volcano placer operations, this is the only case where diamond count can be
related to gravel volumes.
REGIONAL GEOLOGY AND MINERALIZATION
Most of the 106 million ounces of gold mined from California was originally
deposited in the Mother Lode, a 250 mile long "break" marked by the Melones and
Weimar "down to basin" faults, a series of ultramafic sills, and an
9
<PAGE> 10
almost continuous stretch of lode gold deposits. The California Gold District
Map shows 375 former producers along the central part of the Mother Lode break,
and another 200 on ancillary structures. Lenses and beds of quartz-rich
polymictic (multiple pebble types) gravel occur for the length of the Mother
Lode, frequently down slope from the gold mines. These gold rich gravels were
the source of most of California's gold production. They are now essentially
depleted. Fifteen miles east of the Mother Lode and 1,500 feet higher in
elevation is a series of gold mines along a 140 mile trend parallel to the
Mother Lode. Unlike the Mother Lode, there is no obvious unifying structure
and the mines are, on the average, smaller. Like the Mother Lode, mill feed
would range from 0.25 to 0.50 ounces per ton. Some mines produced over 250,000
ounces of gold. It is assumed that the erosion of this area, known as the
Eastern Gold Belt produced the gold in the gravels of the area known as the
Valley Springs Formation, where the Company's Rancheria project is located.
The Volcano Rancheria District comprises some 40 square miles where Valley
Springs gravels (25 million years) were laid down and subsequently covered by
Mehrtens volcanic flows (20 million years). The gravels were deposited over a
rolling, eroded surface by a series of wide ranging rivers whose flood plains
are described as ancestral channels. After further uplift of the Sierra Nevada
mountains, prolonged erosion removed 75% of the Valley Springs gravels and the
covering Mehrtens volcanics. The areas remaining represent ancient topographic
lows, the terrain best suited for placer mineral deposits.
Most of the production of placer gold in the Volcano Rancheria area has come
from drift mines or high pressure hydraulic mines from the Valley Springs
gravels and from erosion from the Valley Springs outcrops. These secondary
deposits were mined from four environments: (i) hillside (colluvial) deposits
from movement of wet soils due to gravity; (ii) stream (alluvial) deposits,
with concentration at the base of the valley; (iii) fissure deposits in the
bedrock beneath stream beds; and (iv) river (distant alluvial) deposits beyond
the point of formation of higher grade placers. The placer deposits of Volcano
when they were described as among the richest in California, were included in
the first three environments. In the Volcano Rancheria district, records show
44 separate mines in the Valley Springs gravels or derived sediments. From data
derived from these mines, Scott determined that: (i) the thickness of gravels
ranged from two to nine feet and averaged three feet; (ii) gold also occurs in
the volcanic ash above the gravels; (iii) all of the basal gravels that have
been prospected have contained recoverable gold; (iv) the highest gold
concentration occurs where gravels have been concentrated by later sedimentary
processes; and (v) all of the larger gold operations reported diamonds in the
sluice boxes.
EXPLORATION TO DATE
The targets in the Volcano-Rancheria project are placer concentrations of gold
and diamonds, either together or separately. While the historic miners were
able to recognize the gravels, they were unable to predict the enriched areas.
When the paystreak had to be followed beneath volcanics, hard work and blind
luck were the only prospecting tools, and the miners were rarely successful.
There is no technique which will allow the direct detection of gold or diamonds
beneath covering rock. Certain advanced techniques will allow prediction of
the likeliest areas for richer mineralization.
Geological mapping conducted by the Company outlined an area of approximately
4.5 square miles of lava covered basal gravels. The western and eastern
extremities were mined for gold and diamonds. The properties, Rancheria West
and Rancheria East, cover an area of 540 acres of the lava cap remnant on
tertiary river gravels. Detailed geophysical surveys over limited areas of the
Rancheria West claims detailed a 1,200 foot long and 300 foot wide magnetic
feature corresponding to a river gravel; the feature is open eastward for
another 6,000 feet. Inspection of an existing abandoned tunnel and the face
of adjacent outcrop revealed a 1,000 foot wide area of cemented gravel between
8 and 12 feet thick. Sampling of the wall of the abandoned tunnel gave a
minimum gold recovery value of 0.12 ounces per cubic yard for what has been
deemed waste by historic standards in the cemented gravels. Based on face
exposure and reconnaissance magnetic surveys conducted by the Company, an
estimated 2.07 million cubic yards of concentrated gravels underlie the claims
at an estimated minimum grade of 0.125 ounces gold per cubic yard.
10
<PAGE> 11
The interpreted gravel bed from which the 1.28 carat diamond was recovered, is
300 feet wide and has been followed for 1,200 feet by magnetic survey. It is
believed to extend for a further 6,000 feet with an average thickness of three
feet, and an expected grade greater than the cemented gravels. Two other river
gravels are also interpreted as occurring parallel to the main river channel
throughout the claims, but require further definition by geophysics and
drilling.
Upon completion of the Company's initial public offering in March, 1995, field
work on the Rancheria property commenced. Heavy late spring rains initially
slowed the field activities which consisted of the following: (i) the surface
location of the Valley Springs Formation and its basal gravels were to be
mapped, with elevations determined; (ii) the gravel areas identified were to be
sampled by backhoe, with land then restored to its original contour and
re-seeded; and (iii) all of the available Upper Valley Springs Formation and
Mehrtens Formation areas were to be subject to detailed magnetometer surveys to
detect any buried concentrations of magnetite.
The data obtained and compiled from the work program led to a re-evaluation of
the approach to test-mine the gravels. The extensive nature of the gravels on
the cliff face, the imprecise nature of the magnetic response and the discovery
of the extensive old workings, required further subsurface data on the
distribution of the gravels prior to test mining.
Initial work on the property focused on the establishment of a surface grid
which was utilized for prospecting, geological mapping, geophysical surveying
and general access on the property. Spring rains continued to the end of June,
which slowed the initial phase of work and delayed the start-up of the backhoe
trenching program at the cliff face.
A magnetometer survey was conducted over the Rancheria property using the cut
grid lines. Based on field visits and geological data it was determined that
drilling would be appropriate to locate the extensions of the channels and to
obtain samples to determine their viability.
A trenching program of work was aimed at the determination of the location,
width, thickness and gold grades of the tertiary gravels partially exposed
along a 2,000 foot long, north-south oriented cliff face or escarpment, and the
location and recovery of diamonds and/or associated minerals from the trenched
gravels.
The trenching program commenced in mid-May and was completed by mid-August,
1995. Re-seeding and reclamation of disturbed sites was completed in the spring
of 1996. Initially, a total of 19 trenches and pits were dug by backhoe into
the cliff face at approximately 100 yard intervals over its entire length. The
aim of the trenching was to expose the basal Valley Springs gravels for bulk
sampling. At each trench site, the excavations were mapped and gravel
thickness and type were determined. The gravel horizons were marked and sample
thicknesses and lengths outlined. The gravels were sampled and processed on
site.
A processing sample plant was erected on site and followed normal placer gold
recovery techniques. The end product was a table concentrate, or black sands.
This material was panned and visible gold recovered, separated and weighed.
Based on initial results, further trenches were excavated and this program
exposed a 1,450 foot tertiary river channel containing gold-bearing gravels,
with two pay streaks identified within the channel. Previously unknown mining
tunnels were discovered during these excavations, but a full section access to
the paystreak was not achieved. A total of 30 gravel samples were taken and
processed through the on-site plant. Gravel sample size ranged from 1 to 10
cubic yards. The gold recovered by tabling and panning when plotted outlined
two wide gold-bearing paystreaks along the cliff face. Indicator minerals
normally associated with diamonds were also recovered from the gravels.
The first of the two identified paystreaks, the "Telegraph" has an average
width of 360 feet and thickness of 9 feet, with gold recoveries of 0.068 to
0.11 ounces per cubic yard in the highly cemented gravels. The second of the
two, the "Evans" paystreak has an average width of 350 to 400 feet and a
thickness of 2 to 5.5 feet, based
11
<PAGE> 12
on face sampling only. Gold recoveries of up to 0.037 ounces per cubic yard
in cobble-filled excavations is indicative of a rich paystreak, which was
previously mined to air shafts located 600 feet east of the face.
Detailed ground magnetic surveys show the continuation of the Evans paystreak
eastward for 1,000 feet below the volcanic capping. The paystreak magnetic
signature is lost due to thick Andesitic volcanic capping further eastward. Low
magnetic content in the Telegraph paystreak did not allow sub-surface
delineation. Two negative magnetic features, possibly indicative of
intrusions, were identified and require investigation.
WORK PROGRAM
The Company has made the following observations and conclusions based on its
review of available information: (i) two gold-bearing paystreaks, the Telegraph
and the Evans, were located by trenching on the main north-south
cliff/escarpment. The paystreaks ranged from 360 to 400 feet in width, and
from 4.5 to 9 feet in thickness; (ii) the Telegraph contained gold values from
0.068 to 0.11 ounces gold per cubic yard; the Evans paystreak was delineated by
the distribution of old mine workings, currently filled with hand stacked
cobbles and boulders. Gold values in the clay-covered cobbles which were used
to fill the old mining tunnels ranged from 0.012 to 0.037 ounces gold per cubic
yard, indicative of a high gold content in the mined gravels; (iii) indicator
minerals found associated with diamonds were recovered from the Evans paystreak
gravels; and (iv) results of the trenching and interpretation of the ground
magnetometer survey indicate sufficient volume and gold grade to justify
further expenditure on exploration on the property.
The Company intends to complete a two step, or phased drilling program on the
property to delineate the subsurface gravel gold-bearing paystreaks. The program
is designed to determine (i) the subsurface extent, width, thickness and length
of the Evans and the Telegraph paystreaks; (ii) the gold grade/content of the
gravels; (iii) the presence/abundance of diamonds and/or diamond indicator
minerals; (iv) the gravel composition to evaluate mining techniques; and (v) the
source of two unusual magnetic low features.
LEEK SPRINGS, ELDORADO COUNTY, CALIFORNIA
LOCATION AND ACCESS
The property is located in the Eldorado National Forest, in Eldorado County,
California, in Sierra Nevada, California. The property is made up of two claim
blocks, separated by a narrow strip of private land. The nearest habitation is
a ski resort located three miles east of the property. Placerville is the
nearest large town and the administrative centre of the county, located 28
miles west-northwest of the property, while Lake Tahoe is located 22 miles to
the northeast.
Access to the property is from Highway 88, one of the main paved access roads
through the Sierra Nevada mountains from the Great Valley of California.
Highway 88 connects Stockton in the Great Valley with Carson City, Nevada. The
property is well served by paved roads and gravel tracks. The area was
recently logged, so logging tracks and dirt roads provide additional access on
the property.
The climate is Alpine. The area experiences warm, dry, short summers and long,
cold winters with snow accumulations in excess of 10 feet. The property is at
7,000 feet elevation, experiences considerable snowfall in the winter months
and is generally snow-covered from November to May.
The main Leek Springs Valley is a typical "Alpine Meadow" of grasses and
flowers, with continuous flowing small streams fed by numerous year-round
springs. The springs originate at the geological contact of the Mehrten
Formation andesite and the granite. The Valley sides on the north are gently
sloping while the southern sides are steep. The sides are covered by mature
conifers, thinly spread, due to active logging operations over the past fifty
years. The valley slopes at higher elevation have a more sparse conifer
population, due to outcropping Mehrten Formation andesites and poor soil
formation.
Regulations in Eldorado County prevent mineral exploration within one mile of
any dwelling.
12
<PAGE> 13
MINING RIGHTS AND TITLES
By agreement dated November 6, 1995 between the Company and Silverstone, the
Company optioned a 10% interest in 56 recorded claims described below,
technical data and any other claims or mining rights acquired by Silverstone
within a specified area of interest (herein, the "Area of Interest"). The
property consists of 56 unpatented mining claims which cover approximately
1,120 acres. The larger, northern claim group, known as the Judy Claims
("Judy"), comprise 46 claims and the smaller, southern group, known as the
Adrienne Claims ("Adrienne") consists of 10 claims. The Adrienne claims were
staked between June and September, 1994. The Judy claims, were staked during
November and December, 1995. The total area claimed encompasses the known
outline of the Adrienne pipe lamproitic diatreme breccia ("Adrienne Pipe").
The majority of the work conducted by the Company was completed on the large
claim group, on the Adrienne Pipe, north of Leek Springs Meadow.
Mr. Derek Bartlett was appointed by the Company to negotiate on its behalf, the
transaction with Silverstone, the latter being represented by Mr. George
Silverman. To acquire an initial 10% interest in these claims, the Company was
required, on or before December 6, 1995, to (i) pay Silverstone the sum of
$50,000 U.S. and (ii) deliver to Silverstone a total of 150,000 common shares
of the Company. Compliance with the Decenber 6, 1995 deadline for payment was
waived by Silverstone, and the Company paid the $50,000 U.S. on January 16,
1996 and issued the common shares on January 18, 1996. Exercise of this option
secured an option for the Company to acquire an additional 15% interest in the
claims.
To acquire a further 15% interest, increasing the Company's interest in the
claims to 25%, the Company has (i) paid Silverstone an additional fee of
$100,000 U.S., (ii) delivered to Silverstone an additional 200,000 common
shares of the Company, and (iii) provided technical data and financial
statements establishing cumulative expenditures of not less than $500,000 U.S.
on the properties. Exercise of this option also provided the Company with an
option to increase its interest in the claims by a further 15%.
To increase its interest by an additional 15%, bringing its aggregate position
in the claims to 40%, the Company would be required, on or before March 20,
1997, to (i) pay Silverstone an additional $100,000 U.S., (ii) deliver an
additional 200,000 common shares of the Company, and (iii) provide technical
data and financial statements establishing expenditures of a further $500,000
U.S. Exercise of this option will secure an option for the Company to acquire
an additional 15% interest in the claims. The Company intends to pay the
$100,000 U.S. option fee with proceeds from this offering. The $1,000,000 U.S.
aggregate expenditure would be increased to $1,500,000 U.S. upon the discovery
of other potential diamond host rock targets within the area of interest, but
excluding those on Adrienne #1, #2, #4, #11 and #12 Lode Claims.
To acquire an additional 15% interest, bringing its aggregate position to 55%,
the Company would be required, on or before August 2, 1998, to (i) pay
Silverstone an additional sum of $100,000 U.S., (ii) deliver an additional
200,000 common shares of the Company, and (iii) provide technical data and
financial statements establishing additional expenditures of $4,000,000 U.S.
REGIONAL HISTORY
Since 1848, approximately 810 alluvial diamonds have been found in California.
No accurate records were kept. The majority of diamonds were found by chance in
the sluices used in gold mines. The only attempt at diamond exploration
occurred at the Cherokee Diggins in Butte County, where between 400 and 500
small diamonds were recovered from gold-bearing gravels. A small eclogite, a
potential diamond source rock, was located nearby, but proved to be barren.
Based on the geographical distribution of the alluvial diamonds and their
secondary source environments, Ryder divided diamond occurrences in California
into two distinct zones, the Sierra Nevada Diamond Province and the Klamath
Mountain Diamond Belt. The majority of the California alluvial diamond finds
are located in the Sierra Nevada Diamond Province. Within this Province,
greater than 90% of the recorded diamonds are recovered from three locations or
mining districts: Cherokee Diggings (300-600 diamonds); Placerville Mining
District (90 diamonds); and Volcano - Rancheria District (100 diamonds). The
latter location is where the Company's
13
<PAGE> 14
Rancheria placer gold and diamond prospect is located. The majority of recorded
diamonds in the above districts were recovered from Tertiary gravels left by
ancient rivers draining and eroding the emerging Sierra Nevada Mountains.
Plotting the locations of the alluvial diamonds by Silverstone demonstrated
that one ancient river - the Tertiary Mokelumne River - has consistently
yielded numerous large and small, gem quality diamonds from it's gravels.
The Leek Springs property is located at the headwaters of the present-day north
fork of the Cosumnes River and coincidentally at the ancestral headwaters of
the Tertiary Mokelumne River, twelve miles east-northeast of the
Volcano-Rancheria district. The Tertiary Mokelumne River contained widespread
gold-bearing and diamond-bearing gravels. The richest diamond-bearing gravels
were in the Volcano - Rancheria mining district. Alluvial diamonds were also
found throughout the channel gravels as well as the tributaries flowing into
the main channel. Recorded recoveries of diamonds decreased during the later
part of the nineteenth century due to the introduction of stamp mills that
crushed the gravels and diamonds. Interpretation of the available historical
records on diamonds in California by Silverstone indicates that the majority of
the stones recovered were of gem quality. This interpretation is consistent
with worldwide experience with alluvial diamonds; flawed diamonds will not
survive in a river environment. Diamonds recovered and authenticated range in
size from microscopic particles up to 6 carats with an average size estimated
at 0.8 carats.
No modern exploration or mining of alluvial diamonds has been previously
undertaken in California. This may be due, in part, to: (i) ignorance of the
early miners - gold was the desired object of the gold rush era miners. The
South African diamond fields had not yet been discovered, and diamonds were
regarded as a "curiosity"; (ii) enthusiasm for diamonds from the "experts" of
the time was not forthcoming. Experts from South Africa as well as the
California Geological Institute did not believe California to be a promising
area for diamond mining; (iii) mining methods used, such as hydraulics, were
disliked by mine managers as well as state mineralogists; (iv) the nature of
alluvial diamonds - most of the stones (diamonds) pick up a coating of salts
during their course down the river and they could not be collected using the
gold recovery techniques used; and (v) the nature of the gravels - diamonds
found during mining were invariably found in cemented or compact gravels. The
gravels were crushed in stamp mills to recover the gold, which also resulted in
the destruction of the diamonds.
Serious consideration has only been given to the concept that economic deposits
of diamonds in host rocks could be found in North America since the 1970's.
Exploration during the 1970's resulted in the discovery of diamondiferous
kimberlites in Colorado and in the early 1990's in the Northwest Territories of
Canada. In California, no diamondiferous source rocks for the alluvial
diamonds were found until April 1996 when the Company announced that diamond
fragments were recovered from drill cuttings at Leek Springs.
REGIONAL GEOLOGY AND MINERALIZATION
The greater part of the Judy Claims are underlain by dark, andesitic lahar
mudflows-agglomerates, with sparse outcropping of granite at the lower
elevation. The claims have not been geologically mapped in detail. Ryder mapped
the Adrienne Claims in detail in the fall of 1995. The geological mapping and
geophysical ground magnetic mapping correlated well. Outcrop is limited on the
Adrienne Claims. The greater part of the claims are covered by a light brown to
tan-coloured soil containing small pebbles and fragments of andesitic rocks. In
the western claims, similar soils contain granite fragments.
The western Adrienne Claims have irregular rugged topography and are 80%
underlain by medium to coarse granites and granodiorites. Large round and
sub-round boulders of granite are common, forming boulder fields on partially
denuded granite "hills".
The granite rocks are unconformably overlain by Pliocene Mehrten Formation
Andesitic volcanics. In one area, geophysical data partially supported by
geological mapping indicates a fault contact between the granite and Mehrten
volcanics. The lowest Mehrten Formation Volcanics, where outcropping, are
andesitic mud slides and flow breccias composed of angular to sub-rounded,
cobble sized blocks of andesitic rocks in a hard, fine-grained, mud matrix. At
higher elevations, in the northern and north eastern part of the claims, no
outcrops are exposed. Abundant boulders and cobbles, sub-rounded to
sub-angular, of a light coloured massive, medium grained
14
<PAGE> 15
andesitic rock with scattered, occasional, large amphiboles predominate. The
distribution of the "boulder fields" of this andesitic rock type coincides with
elevated magnetic intensity, and are clearly visible on the contoured magnetic
map. The area between the massive andesites and outcropping granites is covered
by buff to light brown soils which contain small fragments of different
andesite rocks.
No surface evidence of the diamondiferous diatreme breccia was found during the
geological mapping. The surface of the diatreme is covered by either a 20 foot
thick blanket of grey, brown soil or Mehrten Formation Andesite.
EXPLORATION TO DATE
Based on the results of a three month literature study completed by Silverstone
and field visits to alluvial diamond localities by Silverstone, a three
thousand square mile area was targeted for reconnaissance and heavy mineral
stream sediment sampling. A lack of detailed magnetic or other data precluded
target selection by available geophysics. Testing of tertiary gravels allowed
Silverstone to select optimum sampling conditions. Sample and mineral size
helped in the determination of alluvial diamond indicator mineral association.
Orientation sampling of present day rivers and creeks helped refine the
sampling and processing methods.
The main creeks and river draining the target areas were sampled along their
courses at approximately five mile intervals back to their present day
headwaters. At each sample site between 30 and 50 litres of stream sediment
was collected. At each location optimum heavy mineral sediment traps were
selected. The samples were screened on site at the minus 1/4 inch fraction
retained for processing. An initial heavy mineral concentrate was prepared from
the sample and was further processed again by screening, magnetic separation
and the use of density liquids (lithium metatungstate). The final heavy
mineral concentrate was microscopically examined, minerals identified and
counted. Selected mineral grains were picked, and identification of the grains
was undertaken. A total of 250 stream sediment samples were taken, processed
and the heavy mineral content for each sample plotted.
Silverstone used conventional and non-coventional indicator minerals to target
a number of drainages for follow-up exploration and prospecting. After
follow-up sampling, the north fork of the Consumes River, with Leek Springs
Meadow at its headwaters, proved to be Silverstone's number one target in the
area, based on: (i) red garnet content found; (ii) the unusual abundance of
green-diopside minerals; (iii) the meadow, the topographic low, at the
headwaters of the river; (iv) the presence of chrome spinels; and (v) the
paleoheadwaters of the ancestral, diamondiferous Mokelumne River.
Microprobe analyses on the green diopside minerals showed that many
(approximately 15%) had a chrome and calcium ratio within the stability field
of diamond occurrences world-wide. The downstream samples also showed
appreciable olivines that continued to the head of the valley. Although olivine
is not an "indicator mineral", it is present in significant amounts in both
kimberlites and lamproite volcanics.
Based on the heavy mineral data, Silverstone staked a number of unpatented
mining claims, the "Adrienne Claims", in 1994. Detailed sediment sampling of
creeks and dry gulches draining the Adrienne Claims was undertaken in the
summer of 1995 by Silverstone. Heavy mineral concentrates (total 18) contained
the following suite of minerals: clinopyroxenes, diopside, olivine, amphiboles,
chrome spinels, ilmenite, orthopyroxenes, aluminium spinels, and an assorted
variety of garnets, zircons and other minerals. These minerals included
conventional indicator minerals, chrome spinels and chromium diopside, as well
as many other minerals. Plotting of the heavy mineral results, in conjunction
with the geophysical data, helped select drill sites for the fall drilling of
1995.
In conjunction with the heavy mineral sediment sampling, Silverstone conducted
a detailed ground magnetic survey over the northern Adrienne Claims. A north-
south trending magnetic anomalous zone, approximately 600 feet wide, was
identified. Five separate magnetic anomaly zones of interest were outlined.
The correlation of the magnetic data with the heavy mineral survey, field
mapping, prospecting and drilling in this anomalous zone determined the source
of the indicator minerals.
15
<PAGE> 16
Upon the execution of the Diadem-Silverstone agreement on November 6, 1995, a
budget and program of work was agreed upon for the Adrienne Claims. The time of
the year restricted field activities to: (i) core drilling the initial
geophysical targets, coincident with heavy mineral targets; (ii) commencing
infill heavy mineral stream sediment sampling within the Area of Interest in
the vicinity of the Adrienne Claims; and (iii) prospecting/geological mapping
of the Area of Interest.
The heavy mineral sampling programme that proved successful in targeting the
Adrienne Claims for core drilling and eventual discovery of diamondiferous
breccia was extended to cover the Company's Area of Interest centred on these
claims. All minor creeks and dry gulches were sampled, to the north of the
Adrienne Claims.
A total of 50 sites were sampled prior to the arrival of the first snows. The
samples were processed in the same way as described above. It became apparent
during the sampling and the preliminary screening of the samples that indicator
minerals used to locate the Adrienne Claims were present in the majority of the
gulches/creeks to the north of the Adrienne Claims. The sediment sampling
program continued until mid-December 1995. The last samples were processed by
mid-February. Plotting of the indicator minerals resulted in the identification
of other targets.
The intersection of diatreme breccia material with indicator minerals in the
first drill hole and the discovery of abundant indicator minerals in sediments
to the north of the Adrienne Claims resulted in a change in program. The area
north of the Adrienne Claims was staked (the "Judy Claims"), resulting in the
curtailment of the geological mapping and infill sampling. The arrival of
winter snows in mid-December 1995 halted all field operations at Leek Springs.
DRILLING AND CORE PROCESSING RESULTS
Core drilling commenced in early November. By mid-December 1995 three drill
holes (drill holes #1, 2 & 3) had commenced, but only the third had been
completed. A total of 504.5 feet of core drilling was completed prior to the
onset of winter. A small processing plant to treat the drill cuttings, cores
and the heavy mineral sediment samples was erected close to Leek Springs. It
was the intention of the Company to process the drill material to determine
indicator mineral content and to check for microdiamonds, by preparing heavy
mineral concentrations to reduce the volume of material for shipment to Canada
for analysis. All drill cores and cuttings were crushed, screened, milled and
concentrates collected. Small samples (2 to 3 ounces) of concentrates were
taken for heavy mineral identification.
The drilling confirmed the presence of diamondiferous breccias on the property
at Leek Springs. This is the first known/confirmed diamond host rock in the
history of California. A total of 234 diamond fragments were identified in the
final caustic leach residues of samples from drill hole #1. Only one diamond
fragment was recorded from drill hole #3. The diamonds are clear, white,
angular, shard-like fragments of different sizes, ranging from 0.06 mm to 0.68
mm and weighing from 3,616 to 216,972 octacarats. One octacarat equals one
hundred-millionth of a carat.
The existing core sample information is insufficient to make determination of
diamond grade at the property. Accompanying the diamonds in drill hole #1 were
a number of classical diamond indicator minerals, namely: G-9 garnets, chrome
spinels ("chromites"), picroilmenites, and eclogitic pyrope garnets. In
addition, exotic or rare minerals/metals were found in the diamond deposits
such as moissonite and gold. Visual inspection of the insoluble residues from
drill hole #3 showed a presence of these minerals in approximately the same
amounts. Gold was also present.
STREAM SEDIMENT RESULTS
The stream sediment sampling program for heavy minerals showed that the
conventional and non-conventional indicator minerals used to locate the Leek
Springs diamondiferous breccia were present in the same amounts to the north of
Leek Springs. The distribution of the indicator minerals helped define the
continuation of the
16
<PAGE> 17
favourable geology to the north of the Adrienne deposit. In addition, other
sample locations in the Company's Area of Interest contained similar indicator
minerals from different primary watersheds. Very limited prospecting and
follow-up in these areas located breccia and tuff outcrops similar to the
material in the drill cores.
The type and distribution of outcrop and indicator minerals in the vicinity of
the drill holes infers a minimum size of 125 acres for the diamondiferous
breccias or 7,000 feet in a northwest-southeast direction along its main axis
and a width of 800 feet. Recent exploration, based on bedrock exposures,
suggests the Adrienne Pipe has the potential to be larger. The data generated
to date suggests the Adrienne deposit has many similarities to the Argyle
Diamond District in Northwestern Australia.
However, based on the limited detailed data available and on recent outcrop
information it is entirely possible that the Adrienne deposit may reflect the
volcanic rock that fell back into the crater of the volcano, with the real
"pipe" buried hundreds of feet below, and be neither a lamproite or a
kimberlite.
WORK PROGRAM
Based on a review of the historical data, Silverstone information and data,
and the results of the dissolution of drill cores samples, and stream sediment
samples, the Company has reached the following conclusions: (i) the presence
in the breccia of diamond fragments in conjunction with indicator minerals from
the diamond stability field, possibly explains the source of the alluvial
diamonds downstream; (ii) the breccia body, the Adrienne deposit, may be
approximately 7,000 feet long with a width of 800 feet. It covers an area of
125 acres; (iii) outcrops of similar breccias, tuffs and sediments of volcanic
origin are present in the Company's area of interest and require further
exploration; (iv) the Adrienne deposit (based on indicator minerals, whole
rock chemistry, geometry, diamonds, etc.), has characteristics similar to the
Argyle deposit in Australia; (v) additional targets for diamonds exist in the
Area of Interest; (vi) visible gold was detected in leach residues from drill
holes and sulphides, including pyrite were recorded in lab analysis; (vii) the
presence of a diamondiferous breccia with lamproitic characteristics and of
similar size and shape as the Argyle deposit may be present on the property;
(viii) further exploration for diamonds in the Area of Interest is justified;
and (ix) detailed evaluation of the Leek Springs breccia is justified.
The evaluation of diamond deposits is problematic due to the very low
concentration of diamonds in an economical deposit. Economic deposits may grade
from one part per million for high grade mines to one part per 100 million for
the lowest grade deposits. Thus, large sample sizes are required to obtain
representative results.
The Company is in the process of completing an initial evaluation program of
the Adrienne deposit, designed to: (i) examine the geology and the shape of the
Adrienne deposit; (ii) obtain information on the diamonds in the pipe, such as
type, shape, size, quality and age; (iii) obtain data on mineral associations
and chemistry of indicator minerals to help in evaluation of the deposit and
location of other similar deposits; (iv) obtain information on diamond
liberation characteristics and metallurgical data for plant processing; and (v)
provide an initial idea of reserves.
The evaluation program will consist of the following parts: (i) drilling for
geology and reserve calculations; (ii) large diameter core drilling for
semi-bulk samples for preliminary estimate of grade; (iii) ground magnetic
surveys and geological mapping to define pipe boundaries; and (iv) surface bulk
sampling and drilling as appropriate.
PEKAN RIVER AND SARAH LAKE, QUEBEC
LOCATION AND ACCESS
The Pekan River Prospect is located in Courchesne Township, 50 kilometers south
of the nearest town, Fermont, Quebec. The Sarah Lake Project is located in
Desportes Township, 90 kilometers southeast of Fermont. Both properties are
accessible by float-equipped or ski-equipped aircraft from Wabush, Labrador.
There is limited road access along the lines supplying hydroelectric power to
the areas. Fermont has rail access to the port of Port Cartier.
17
<PAGE> 18
MINING RIGHTS AND TITLES
By agreement dated July 21, 1995 as amended by letter agreements dated June 4,
1996, and July 31, 1996 between the Company and Beaver Syndicate ("Beaver"),
Suite 360, 4100 Yonge Street, Toronto, Ontario, M2P 2B5, the Company agreed to
purchase a majority interest in two Mineral Exploration Permits (the
"Permits"). The first Permit, #1017, located in Courchesne Township, Quebec
was designated the Pekan River Prospect. By letter agreement dated June 4,
1996, Beaver confirmed that they have staked another property, Permit #1106
located in Desportes Township, Quebec and known as the Sarah Lake Project
(formerly referred to as Lac Edgar Project), and other than a fee of $5,000, no
additional consideration was paid by the Company to include the additional
permit in the July 21, 1995 agreement.
Pursuant to the July 21, 1995 agreement, as amended, the Company optioned a 51%
interest in the Permits. To acquire the 51% interest, the Company was
required, on or before May 30, 1996, to (i) pay to Beaver the sum of $9,200.00,
representing Beaver's out-of-pocket expenses in prospecting and rental fee
payments on the Permits (ii) deliver to Beaver $40,000.00 worth of the
Company's common shares, and (iii) commit to complete one year's assessment
work on the Permits. These conditions have been fulfilled by the Company and by
doing so, the Company secured an option to acquire a further 19% interest in
the Permits. The Company has been advised by Beaver that the #1017 exploration
permit is valid until May 23, 2000 and is in good standing until May 24, 1997
at which time renewal fees must be paid and suitable assessment work filed.
Exploration permit 1106 is valid until October 25, 2000, provided the Company
pays annual renewal fees and files assessment work within the time required.
The option to acquire a further 19% interest, increasing the Company's interest
in the Permits to an aggregate of 70%, had to be exercised by the earlier of
(i) October 31, 1996, and (ii) 30 days from receipt of Montreal Exchange
approval to the issue and listing of the $60,000 worth of common shares in the
capital of the Company. To exercise the option, the Company was required to
(i) deliver to Beaver $60,000 worth of common shares in the capital of the
Company; (ii) complete the first year's annual rental payments; and (iii)
commit to complete a second year of assessment work on the properties. The
Company has obtained Montreal Exchange approval and anticipates issuing the
shares upon receipt of a report from Beaver confirming that the property
remains in good standing. Exercise of this option will provide an option for
the Company to acquire an additional 10% interest in the Permits.
To increase its interest by an additional 10%, bringing its aggregate position
in the Permits to 80%, the Company would be required, on or before May 30, 1997
to deliver to Beaver an additional $60,000 worth of common shares in the
capital of the Company. Exercise of this option will provide an option for the
Company to acquire an additional 10% interest in the Permits.
To increase its aggregate position in the Permits to 90%, the Company would be
required, on or before May 30, 1998 to deliver to Beaver $60,000 worth of
common shares in the capital of the Company. Beaver retains a one and one half
percent net smelter return on the property.
REGIONAL HISTORY
Copper and nickel were discovered on the Pekan River Property in 1952, as part
of the exploration activity seeking the extension of the Wabush iron range. The
claims were acquired by a junior exploration company, whose geologists carried
out a detailed program of surface prospecting and trenching, a reconnaissance
magnetometer survey, and surface mapping.
This program indicated sulfide mineralization in a hill of ultramafic rock
near Pegma Lake overlain by unmineralized gabbro and gneiss, and traceable for
600 feet along strike. The lower contact of the ultramafic unit was not
exposed. A series of 27 packsack drill holes was completed in an attempt to
sample the base of the sill, considered to be favourable from the information
from surface prospecting. Because of the attitude of the sill,
18
<PAGE> 19
dipping fairly steeply into the hill, only two of the 27 packsack holes
succeeded in reaching their targets since target depth exceeded the 25 meter
capacity of the drill.
In 1988, another junior mining company acquired rights over the property and
carried out a reconnaissance sampling program over various sulfide occurrences
in the district. Only the Pegma Lake copper-nickel occurrences and a nearby
zinc occurrence showed any significant base metal values.
REGIONAL GEOLOGY AND MINERALIZATION
The properties are included in the Grenville geological province of late
Precambrian (Hadrynian) age. The most recent metamorphic event occurred around
900 million years ago. The Grenville Geological Province is a major sequence of
highly metamorphosed rocks to the south and east of the Archean Keewatin Rocks,
predominantly the Abitibi Belt of Quebec and Ontario. The contact, which is
occasionally a fault between the Archean (2-3 to 3-5 million years) and the
Grenville rocks is called the Grenville Front.
In the Fermont-Wabush region the Grenville Front is a metamorphic boundary,
where the Early Proterozoic (1.5 million years) sediments are metamorphosed to
schists, gneisses, and recrystallized iron formation (taconite). In the
Grenville rocks of Quebec, ten nickel deposits have been identified, of which
two have been in production. All ten are located in sills, with sulfide
mineralization controlled by the mafic or ultramafic intrusives.
Bedrock in the immediate vicinity of the Pegma Lake Deposit is the highly
metamorphosed equivalent of the sediments of the Ashuanipi formation consisting
of high grade schists and gneisses, crystalline dolomite and minor
recrystallized iron formation. These units are derived from the sandstones,
shales, carbonates and iron formations which are the source of production at
Schefferville, Labrador City, Wabush and Fermont.
The ultramafic sill at Pegma Lake is intruded along the contact at a
garnet-quartz biotite gneiss below and a more aluminous graphite-bearing
biotite gneiss above. Ultramafic rocks and the intruded gneisses dip
moderately to the east. To the east, in the Sarah Lake area, the pervasive
rock types are gneissic granite representing a higher degree of metamorphism
and depth of burial.
In addition to the Pegma Lake and Sarah Lake ultramafic sills, Quebec M.E.R.
Report No. ET9101 describes the location of ten other ultramafic bodies
extending south from Pegma Lake. Sulfide mineralization including pyrrhotite,
pyrite, chalcopyrite and pentlandite attains proportions of up to 10% at the
Sarah Lake, Pegma Lake and Guillimin occurrences. The ultramafic massif at
Sarah Lake is impoverished in sulfides in its southern (upper) part. At Pegma
Lake the sulfides are richest in the lower portion. The lower contact at Sarah
Lake is not exposed. All of these deposits are classified as "orthomagmatic".
The term implies that the sulfides were precipitated at the same time as the
crystallization of the rock-forming minerals. Such deposits are marked by
disseminated "net-textured" sulfides in the upper part of the intrusive and
frequently contain more massive sulfides at the base.
EXPLORATION TO DATE
PEGMA LAKE SULFIDE DEPOSIT
At Pegma Lake, the ultramafic portion of the sill is up to 50 meters in true
thickness, with the western and northwestern sectors removed by erosion. Two
kilogram samples of the available outcrops were taken from a series of
exposures for a length of 220 feet. The average of the clusters of samples was
0.981% copper with 0.30% nickel and 0.02% cobalt. The highest assays in a
single cluster was 1.43% copper and 0.72% nickel.
The geophysical survey over this area showed a strong magnetometer response
from the ultramafic sill, extending for 4,100 feet from a line 1,500 feet north
to 2,600 feet south. Two inclined diamond drill holes and six vertical holes
were drilled to a grid roughly 300 feet by 300 feet (90 meters by 90 meters).
All of these holes cut copper-nickel mineralization. The assays can be
separated into two zones, aggregating from 3 to 50 meters in thickness. The
content of both copper and nickel increase as the lower content of the sill is
approached. From the results to
19
<PAGE> 20
date, there is an improvement in base metal grades and thickness of
mineralization to the south and east. These holes together with a coinciding
magnetic anomaly have confirmed a north-south strike length of at least 860
metres of an ultramafic sill. The sill outcrops on the property and continues
with a flat dip for at least one kilometre to the east. Each of the eight holes
intersected an upper and lower zone with continuous mineralization throughout.
The upper zone, ranging from 6 to 35 metres in true thickness, has a
copper-nickel-cobalt content ranging from 0.54% to 1.27% combined metals. The
lower zone is higher grade, ranging from 3 to 13 metres in true thickness, with
0.66% to 1.73% combined metals. The intercepts of the mineralization in the
drill holes indicates that the deposit increases in thickness to the south and
the east, with a higher nickel content. The deposit is open for extension in
both directions. Assays were reported as high as 2.46% copper, 1.70% nickel
and 0.05% cobalt. Drilling resumed in July, 1996, and of 15 additional holes
drilled, preliminary results from the first three holes have indicated a true
thickness of mineralization ranging from 41 to 64 metres, with assays ranging
from 0.13% to 6.24% copper, 0.13% to 4.06% nickel and 0.01% to 0.17% cobalt.
These values indicate the holes intersected greater thickness of mineralization
and higher base metal values than the original discovery.
THE SARAH LAKE PERIDOTITE
The Sarah Lake ultramafic body is located seven kilometers southeast of the
Pegma Lake Deposit. There are ten other ultramafic deposits along the general
trend. The Sarah Lake ultramafic body is roughly 2 kilometers by 2 kilometers
in size. In 1991, twelve 2 kilogram rock samples were taken from an area of
1.5 kilometers by 1.7 kilometers of the Sarah Lake body. Most of these
samples represented the upper part of the intrusive. All of the rock samples
showed anomalous quantities of gold, copper, nickel, palladium and platinum.
Electron microprobe analyses of minerals from Sarah Lake showed a clean
differentiation of copper into chalcopyrite and nickel into pentlandite.
The Pekan River property was selected as one of the many untested gossans or
showings of copper-nickel-copper mineralization in the area to the east or
south of the Labrador Trough. There are some similarities to the geology of
the recent copper-nickel discovery at Voisey's Bay, Labrador. Both occurrences
are in gneissic rocks of Archean age. Both occurrences have copper-nickel and
cobalt mineralization, with negligible platinum and gold. Pekan River and
Voisey's Bay sulfides both occur at the base of ultramafic rock, which are
overlain by lighter coloured rocks. The two deposits differ in that Pekan
River deposit is conformable with the overlying rock, while at Voisey's Bay,
the nickel-bearing rocks cut across both the underlying and overlying rock
units.
The Company carried out a surface sampling program together with a review of
available geological data. This sampling confirmed widespread mineralization at
the base of an ultramafic sill. Based on this information, Diadem carried out
magnetometer and electromagnetic surveys of part of the Pekan River property.
In February, 1996 Diadem carried out a 3,000 meter diamond drilling program.
This program consisted of 24 drill holes, including eight drill tests down dip
from the original find. The other 16 holes tested various electromagnetic
conductors in other parts of the survey area. In July, 1996, the Company
announced that mobilization was underway to resume drilling of the
copper-nickel deposit at Pekan River.
From data obtained through a study of other copper-nickel bearing ultramafic
sills in the region, Beaver acquired a nearby 5,200 hectare permit, #1106,
designated as the Sarah Lake property. The objective of exploration on this
property was to determine the location of enriched areas at the base of the
sill, similar to the Pekan River property. Thirteen random sites were sampled
from one square kilometre of the five square kilometre intrusive. All sites
showed copper mineralization ranging from 0.10% to 0.75% and nickel
mineralization ranging from 0.01% to 0.06%. Five of the sites averaged from
0.45% to 0.50% copper. The area average is 0.50% copper. Cobalt was present
in minor amounts. This work also confirmed the presence of gold, platinum and
palladium mineralization. The sites were concentrated in the upper part of the
sill, where values are expected to be lower than in the basal portion. The
next stage of activity on this project will be detailed mapping to determine
geological structure, for the design of a drilling program.
20
<PAGE> 21
DIHOURSE, QUEBEC
LOCATION AND ACCESS
The Dihourse Prospect covers an area of 5,900 hectares, and is located south of
Dihourse Lake on the Quebec/Labrador border. There is access to an airstrip
named Strange Lake, which is located on an esker at Lake Brisson at the south
end of the property. The airstrip is 144 miles from Schefferville, Quebec.
MINING RIGHTS AND TITLES
By letter agreement signed October 12, 1995, between the Company and Beaver,
the Company was granted an option to purchase a majority interest (51%) in one
Quebec Mineral Exploration Permit (the "Permit"), #1093. To acquire a 51%
interest in the Permit, the Company was required to (i) pay to Beaver the sum
of $9,200, representing Beaver's out-of-pocket expenses, (ii) pay to Beaver the
sum of $40,000 or, subject to regulatory approval, an equivalent amount of
common shares in the capital of the Company, at the Company's option, and (iii)
commit to complete one year's worth of assessment work on the Permit. On
January 29, 1996, the Company issued 30,075 common shares to Beaver, at a price
of $1.33 per common share in payment of this obligation. Exercise of this
option also secured an option for the Company to acquire an additional 19%
interest in the Permit.
To acquire a further 19% interest in the Permit, bringing the Company's
position to an aggregate of 70%, the Company would be required to (i) pay to
Beaver the sum of $60,000 in cash or, subject to regulatory approval, $40,000
worth of common shares in the capital of the Company, at the Company's option,
(ii) pay the first year's annual rentals on the property, and (iii) commit to
complete a second year's assessment work. The Company has obtained the
approval of the Montreal Exchange to the issuance of the shares and is
anticipating issuing the shares upon receipt of a report from Beaver confirming
that the property remains in good standing. Exercise of this option would also
provide the Company with an option to acquire an additional 10% interest in the
Permit.
To increase its interest by an additional 10%, bringing its aggregate interest
in the Permit to 80%, the Company would be required, by September 19, 1997, to
pay to Beaver the sum of $60,000 or, subject to regulatory approval, an
equivalent amount of common shares in the capital of the Company, at the
Company's option. Exercise of this option will secure an option for the
Company to acquire a further 10% interest in the Permit.
To acquire a further 10%, bringing its aggregate position in the Permit to 90%,
the Company would be required, by September 19, 1998, to pay to Beaver the sum
of $60,000 or, subject to regulatory approval, an equivalent amount of common
shares in the capital of the Company, at the Company's option. Beaver retains a
one and one half percent net smelter return on the property.
The permit is valid until September 17, 2000, provided that payment of renewal
fees and suitable assessment work is completed by September 18, 1997, and
annually thereafter.
On November 23, 1995, the Company agreed to form a joint venture with Ateba
Mines Inc. which holds an option on a 3,100 hectare property in Labrador, known
as the Weird Prospect, permit number #3983M, which runs parallel along the
Quebec-Labrador border with the #1093 permit. The joint venture agreement
contemplates that the parties will participate equally in the costs of
exploration and development of the properties as well as the benefits, and
contribute their respective interests in the permits to the venture. A.C.A.
Howe and George Silverman serve as directors of each of the Company and Ateba
and they each abstained from voting on resolutions of both Boards regarding
this matter. The Company and Ateba have also applied to acquire an interest in
an adjacent permit, #988. The permit had previously been held by Beaver and
had lapsed for failure to file adequate assessment work. In the event that the
application is successful, the property will be included in the October 1995
agreement with Beaver. No assurances can be given that the application will be
successful. Beaver will retain a one and one-half percent net smelter return.
21
<PAGE> 22
Outcrops of bedrock are scarce in the area. Most of the till cobbles and
boulders can be described as granite gneiss. These gneissic rocks are
considered to be Archean (2.5 billion years) or Aphebian (2 billion years) in
age. These rocks are compatible with the gneissic rocks which have been
invaded by the mineralized systems comprising the Voisey's Bay nickel deposits
located 120 kilometers to the east. There are no known outcrops of magnetic
rocks.
Three occurrences of base metal sulfide mineralization were located during
prospecting. Overburden limited sampling but samples from two areas of a gossan
outcrop assayed 0.31% nickel. 0.19% copper, 0.04% cobalt and 0.36% nickel,
0.16% copper and 0.05% cobalt respectively. While analysis of these occurrences
indicated less than economic content, their occurrence at several locations is
believed to be indication of mineral potential. The three occurrences appear
to represent valid exploration targets.
The Company and Ateba are currently engaged in a geophysical exploration
program on the property.
MERCURY, QUEBEC
LOCATION AND ACCESS
The property covers an area of 11,500 hectares in northern Quebec, near the
Labrador border. The property covers seven peridotite intrusives, and four
have been found to contain measurable nickel-iron sulfides traceable for up to
eight kilometers.
MINING RIGHTS AND TITLES
The Company entered into a letter agreement with Trinity Syndicate ("Trinity")
on July 21, 1995, subsequently amended by letter agreement dated July 31, 1996,
whereby the Company agreed to acquire a majority interest (51%) in Quebec
Mineral Exploration Permit (the "Permit") #991. To acquire this interest, the
Company was required to pay to Trinity the sum of $16,300 to cover Trinity's
out-of-pocket expenses, deliver $40,000 of common shares in the capital of the
Company and commit to complete one year's worth of assessment work. The
Company completed the delivery of an aggregate of 80,000 common shares of the
Company on January 29, 1996, at a price of $0.50 per share. Exercise of this
option secured an option for the Company to earn a further 19% interest in the
Permit. Trinity has advised the Company that the Permit is valid to May 11,
2000 and the property is in good standing until May 21, 1997, at which time
additional renewal fees will be payable and assessment work would need to be
filed, and annually thereafter.
The option to earn a further 19% in the Permit, bringing the Company's
aggregate interest to 70%, must be exercised by the earlier of (i) December 31,
1996, and (ii) 30 days from receipt of Montreal Exchange approval to the issue
of $80,000 worth of common shares in the capital of the Company. To exercise
the option, the Company is required (i) to deliver to Trinity $80,000 worth of
common shares of the Company, (ii) complete the first year's annual rentals on
the property and (iii) commit to complete a second year of assessment work. The
Company has obtained approval of the Montreal Exchange and anticipates issuing
the shares upon receipt of a report from Trinity confirming that the property
remains in good standing. Exercise of this option will secure an option for the
Company to acquire a further 10% interest in the Permit.
To acquire an additional 10% interest in the Permit, the Company would be
required, on or before May 16, 1997 to deliver to Trinity $80,000 worth of
common shares in the capital of the Company. This will secure an option for
the Company to acquire a final 10% interest in the Company.
To bring its aggregate interest in the Permit to 90%, the Company would be
required, on or before May 16, 1998 to deliver to Trinity $80,000 of common
shares in the capital of the Company. Trinity also retains a one and one-half
percent net smelter return on the property.
22
<PAGE> 23
MINERAL RESOURCE EXPLORATION AND DEVELOPMENT IN INDONESIA
GEOGRAPHY
Indonesia is the world's largest archipelago, with over 13,000 islands covering
an area of over 5,000 kilometers, located along the equator. The land area of
Indonesia is approximately 1.2 million square kilometers. The five largest
islands are Sumatra, Java, Kalimantan (formerly Borneo), Sulawesi and Irian
Jaya. Kalimantan, where the Mahakam and Mirah properties are located, is in
the central part of Indonesia, and is the third largest island in the world.
With over 4,400 volcanoes, including active, dormant and extinct, Indonesia is
the most volcanic country in the world. The population of Indonesia is
estimated at approximately 180 million people, making it the fourth most
populous country in the world.
MINING HISTORY IN INDONESIA
Indonesia was a Dutch colony from the turn of the 16th century until Japanese
occupation in World War II. The present-day mining industry started with Dutch
exploration and development in the mid-19th century. Following World War II,
when Indonesia declared itself independent, all mining activities were carried
out by government-owned companies. Foreign companies were not allowed in until
1967, when revisions to the mining laws were enacted.
The Mining Law and Foreign Investment Law of 1967 allowed foreign companies
into Indonesia to commence mining activities in two ways, through a Contract of
Work ("COW") or through a Kuasa Pertambangan mining authorization ("KP"). For
the purposes of discussing the Company's interests in Indonesian properties for
this offering, a description of the KP facility is not applicable.
CONTRACTS OF WORK
The COW facility has been in use since 1967, when Freeport McMoran Copper &
Gold Inc. began development of the Grasberg/Erstberg copper-gold deposit in
Irian Jaya. This was a "first generation" COW; the current COW applications are
for sixth generation agreements, with a seventh generation expected later this
year. Each generation of COW has varied from the earlier ones, to reflect such
things as changes in socio-economic benefits, environmental concerns, revisions
to the government's share of proceeds or incentives for the attraction of
investors.
COWs are essentially non-negotiable agreements with the Indonesian government,
pertaining to a particular project or area of land, covering all aspects of a
project, from exploration through development and production. A COW is held by
a limited liability Indonesian joint venture company, known as a Penanaman
Model Asing company ("PMA"), which must be formed by the foreign company and
its Indonesian partner before the COW is granted. There is currently a six to
twelve month wait to have COW applications processed. Companies are able to
commence exploration activities during this application period by applying for
a preliminary survey permit known as a "SIPP" and posting the required
performance bond of U.S. $100,000.00 per COW application and U.S. $0.025 per
hectare. The bond can be credited toward the performance bond required for the
granting of the COW.
COWs are divided into separate phases, with the same general timetable: the
general survey period is usually one year, but may be extended for one further
year; the exploration period is three years, with a possible two year
extension; the feasibility study period is one year; the mine and plant
construction period is three years; and the operation period can be up to
thirty years. The PMA is subject to minimum expenditure requirements during
the general survey and exploration periods, and must complete approved budgets
and pay rental fees on the area under the COW throughout the term of the
agreement. When a COW reaches the production stage, a monthly royalty is
applicable.
23
<PAGE> 24
THE COMPANY'S INTERESTS IN INDONESIA
(i) BELITUNG ISLAND, INDONESIA
LOCATION AND ACCESS
Belitung Island is located between Sumatra and Kalimantan, 400 kilometers north
of Jakarta. It is the most southerly of the 1,000 kilometer string of "Tin
Islands". The Kelapa Kampit Mining camp is located via paved road 60
kilometers northeast of the capital city of Tannung Pandan, and the airport
there offers daily air service to Jakarta. The Kelapa Kampit townsite is owned
by PT Gunung Ki-Kara Mining ("GKM") and includes 50 houses and offices, change
houses, laboratory, and guest house. The property is located 32 kilometers
northwest of the Port of Manggar, which is capable of handling 1,250 tonne
cargos. There is a reasonable road network and a reservoir that supplies
process water and water for domestic use. The climate is moderate and
tropical, with an annual precipitation of 250 cm.
MINING RIGHTS AND TITLES
By agreement dated September 30, 1995 between the Company and GKM, the Company
and GKM agreed to form a joint venture to develop base metal deposits and tin
deposits on Belitung Island. The property which is the subject of the
agreement contains one of the most important known primary tin deposits in the
southeast Asian tin belt. Pursuant to this agreement, the Company acquired the
right to earn a 90% interest in the property for an expenditure of $1,000,000
U.S. over two years and payment of 100,000 common shares in the capital of the
Company. By agreement made with Bresea Resources Ltd. ("Bresea") on February
6, 1996, the Company agreed to include Bresea in the joint venture and
transfer to Bresea a right to acquire a 60% working interest in the property,
with the Company retaining a right to acquire a 30% working interest in the
property. Bresea is to pay the first $100,000 U.S. of exploration expenditures
on the property. The farm-in by Bresea is subject to the consent of GKM which
is pending. The parties are in the course of settling a definitive form of
joint venture agreement to formalize these arrangements. The agreement will
provide that Bre-X Minerals Ltd. will be the manager/operator of all
exploration activities on the property.
REGIONAL HISTORY
Underground mining was performed by the Dutch mining company, Billiton Mines,
through the colonial period of 1906 to 1942. An area extending for 3,500
meters with narrow veins extracted to 300 meter depths was developed by two
main shafts. During the Japanese invasion of 1942, the plant was sabotaged,
the mine was flooded and production was ceased. This was followed by a 29 year
period when there was no production.
In 1971 Broken Hill Proprietary Mines ("BHP") acquired the property from the
Indonesian government under a second generation COW. A comprehensive
geophysical study located a larger and richer tin deposit, Nam Salu, in iron
formation cut by cross structures. BHP resumed mining around 1975 and
continued until 1983, when the application of tin production quotas led to a
decision to shut down operations. In addition to the tin reserves discovered,
the BHP geologists and miners encountered high grade lead-zinc mineralization
in both drill holes and cross cuts.
In May, 1985, Preussag GmbH of Hanover, Germany ("Preussag"), operators of the
historic Rammelsberg lead-zinc mine, purchased the property from BHP. Tin
mining was carried out for five months and electromagnetic surveys, mapping and
drilling continued until July, 1986.
Tin mining was taken over by GKM in 1989 and production was carried out until
1991. The venture was not profitable and other sources of tin-bearing mill
feed were sought. All activities were suspended in 1993. The requirements for
the Kelapa Kampit COW are presently in abeyance as the property has been in
continuous production in the past.
24
<PAGE> 25
REGIONAL GEOLOGY AND MINERALIZATION
The mineralized area covers shallow to deep water marine sediments and
interbedded tuffs. These sediments have been described as sandstone,
claystone, phyllite, and radiolarian chert in order of increasing water depth.
Included in all rock units are continuous layers of iron-formation, or
magnetite-bearing tuff.
There are two basic classes of mineral deposits on the property, tin deposits
and lead-zinc-silver deposits.
TIN DEPOSITS
Two types of classic veins have been mined, fissure veins and bedding veins.
The veins range up to 3 kilometres long and average 1.5 metres in width. The
production from both types between 1906 and 1992 was 2.8 million tonnes from
which 31,000 tonnes of tin were recovered at an average mill rate of 250 tons
per day. The average recoveries for the life of the mine were 1.8% tin.
From the tons mined 31,000 tonnes of tin were recovered. Mill recoveries
averaged 65%, from a run-of-mine grade of 2.77%. Depending on rock conditions,
stoping of one meter veins will result in dilution of 33% to 66%. If the
dilution were 50%, the in situ tin content can be calculated at 4.15%. The
tin deposits were initially sampled by vertical pits in areas where cassiterite
could be recognized in overburden. Further pits were dug along strike until a
mineable structure was ready for development. In later years, magnetometer
surveys, followed by pits, then diamond drilling located the tin lodes.
LEAD-ZINC-SILVER DEPOSITS
The mineralization consists of dark-coloured zinc sulfide (sphalerite), iron
sulfides (pyrite and pyrrhotite), lead sulfide (galena) and other accessory
minerals, including copper-iron sulfide (chalcopyrite), copper sulfide
(covellite), arsenic-iron sulfide (arsenopyrite), cadmium sulfide (greenockite)
and arsenic-copper-silver sulfide (tennantite). The host rocks containing the
lead-zinc-silver-copper deposits vary along the strike. These host rocks have
been logged as sandstones, cherts, breccias, tuffs and phyllites.
ORE RESERVES AND MINERAL RESOURCES
(i) TIN DEPOSITS
The previous operator reported proven and probable resources of 80,700 tonnes
grading 1.4% tin, possible resources of 28,000 tonnes grading 1.3% tin and
300,000 tonnes of tailings grading 0.70% tin.
Additional reserves are known to exist beneath the mined out area, requiring
shaft deepening or ramp mining for access. These reserves cannot be qualified
at this time. The above reserves are partially or completely developed and
would be mineable at higher prices.
(ii) LEAD-ZINC-SILVER DEPOSITS
Based on analysis of data from the previous operators on the property, the
current density of data points on the three sulfide-bearing horizons is not
adequate for the calculation of conventional reserves. The three linear zones
are designated as the hanging wall, Nam Salu, and footwall veins. Although
grades of 10% combined were cut in all three veins, only the footwall structure
has enough information for assessment. The greatest drilling density is
located between section 2000 west and 700E (2.7 kilometers). In this area 24
drill holes are spaced in random fashion, ranging from 50 meters to 500 meters
apart. All 24 holes cut mineralization, ranging from 1.2% to 26.4% combined
lead and zinc over an average width of five meters. Fifteen of the 24 random
holes assayed over 4% combined lead and zinc, over an average width of seven
meters, 12 of the 24 holes assayed over 8% over an average width of 6.5 meters,
and six of the 24 holes assayed over 12% over an average width of eight meters.
These results indicate that the better mineralization occurs in shoots, with
grades and widths improving
25
<PAGE> 26
simultaneously. The dimensions of these shoots is unknown; one rich shoot in
the Nam Salu IV level can be traced for 150 meters, open at both ends. All of
the intercepts cut mineralization within the footwall target zones.
The term "potential resources" is not a common description in property
evaluation. With reference to Kelapa Kampit it describes material, considered
to be stratabound, but for which data points are too widely spaced to prove
continuity. The mineral aggregate is assumed to be profitably extractable and
definable as "ore". However, more data is necessary to confirm this assumption
and the term "mineralization" is preferred.
Studies of the various reports and descriptions of work carried out on the
property suggests that other saleable metals may be found with both the tin and
lead-zinc-silver concentration. With respect to the tin deposits, there are
frequent references to other base metals, notably copper, as accessories in tin
veins. Also, there have been verbal, uncorroborated descriptions that mention
gold streaks on gravity tables. Similar tin veins usually contain tungsten
minerals. With respect to the lead-zinc-silver deposits, two references to
the early exploration of the lead-zinc deposits report tin content of 0.90% and
0.40%. There are no further tin assays, despite the high probability of
significant accessory tin being present with the other base metals. Also,
recent limited sampling for gold should represent at least 1.5 grams per tonne
in concentrate. Depending where the gold reports, there could be a small
positive contribution. As well, limited sampling for silver shows assays
ranging between 1 gram and 16 grams per percent of lead. Silver normally
reports with lead, so a tonne of high quality (65%) lead concentrate will
probably carry 750 grams (22oz.) of silver. At current lead and silver prices,
the silver content improves the lead concentrate prices by 50%. Finally,
mineralization studies report the rare cadmium mineral, greenockite to be
present. The ratio of cadmium to zinc appears to well exceed 100 grams cadmium
per percent zinc. This ratio translates into plus 0.5% or 10 pounds in
concentrate.
The Kelapa Kampit project has a 90 year history of tin production. Some
reserves of tin mineralization remain but probably are not sufficient for
production resumption. In the latter years of tin operations, three stratiform
lead-zinc-silver bodies were discovered and partially drilled and developed.
These bodies appear to extend for over eight kilometers. The width of
mineralization identified ranges from one meter to twenty meters.
Based on limited evidence, the average width of the better lead-zinc-silver
mineralization is five meters. Mineralization appears to be continuous, with
lenses, or shoots of higher grade material striking into lower grade areas with
less than four per cent combined metal. Available information will not permit
the prediction of the ratio between low grade and high grade areas. The major
mineralized lead-zinc trend, which runs parallel to the previous tin workings
is confirmed by geochemical and geophysical responses. These surveys suggest
that the favourable mineralized unit includes a volume of 35 million cubic
meters. Within this volume a significant number of higher grade lenses can be
located.
RECENT EXPANSION OF BELITUNG ISLAND AREA OF INTEREST
The Company and Bresea have applied for two additional areas on Belitung
Island. One area, 57,850 hectares, surrounds the 2nd Generation COW Kelapa
Kampit area currently held and covers prospective tin/tungsten mineralization.
A second 58,590 hectare application covers an epithermal gold prospect. These
applications have been approved in principle by the Indonesian Mines Dept.
TIN/TUNGSTEN - TIKUS PROJECT
Several highly prospective tin mineralized areas were covered by the new
application covering 57,850 hectare, the most promising of which is the Tikus
project. This prospect area was mined by the Dutch for 6 years, commencing
operations in 1914 and closing in April 1920 due to flooding with heavy loss of
life. The Tikus porphyry tin-tungsten deposit occurs in the core of the
Tanjung Pandan granite as a 300 metre diameter pipe-like body containing,
according to the Dutch mine records, 2% combined tin tungsten in a ratio of
60%/40% respectively. An underground reserve was blocked out containing 2.5
million tonnes, over a 100 metre vertical column. The objective of work that
may be conducted on the property will be to outline a potential open pit
tin-tungsten resource.
26
<PAGE> 27
GOLD - LILANGAN PROJECT
A 58,590 hectare COW application has been approved. This application was
designed to cover two prospective epithermal gold areas. Initial activities
will include regional and detailed geological work.
(ii) MIRAH NORTH EAST, KALIMANTAN, INDONESIA
LOCATION AND ACCESS
The property is in the Kalimantan gold belt that produced the Kelian and Mt.
Muro deposits in the 1980's, and recently, the Busang deposit. The property
has the same geology as the other discoveries - situated on the Kalimantan gold
belt, northeast and northwest faults cutting across the property, volcanic
intrusives of the right age and gold being mined by the locals in the rivers
indicates a hard-rock source. The property consists of 10,300 hectares and is
located 6 kilometers west of the sawmill village and district headquarters at
Tambangmanggo (See Figure 3). A lumber road leads westward to the claims.
Access to Tambangmanggo is via the Katingan River, 150 kilometers from the
bridge/boat terminal town of Gunung Mas. Gunung Mas is 100 kilometers north of
the provincial capital of Palang Karaya where office accommodation, support and
service personnel and aircraft service are available. A reasonably educated,
healthy and willing labour force is available. The village population, within
four hours boat travel from Tambangmanggo is estimated at 25,000 people. The
climate is tropical, with a rainy season from September to February.
MINING RIGHTS AND TITLES
On January 8, 1996 the Company entered into a joint venture agreement among Pt
Anjarsamba Kencana, ("PTK") the Indonesian joint venture party, with a 15%
interest, Bresea with a 55% interest and Diadem with a 30% interest. Bresea
later assigned a 30% interest to Tandem Resources Ltd. ("Tandem"), leaving
Bresea with a 25% interest. All joint venture expenditures are to be incurred
by each joint venture party in the proportion that each their respective
interests bears to their combined interests with PTK to have a carried
interest. Upon commencement of mining operations, all costs and expenses
incurred shall be borne by all parties on a pro rata basis. The agreement also
provides that Bre-X Minerals Ltd. shall be the manager/operator of all
exploration activities on the property.
REGIONAL HISTORY
There is no record of serious work on the property other than incomplete
references to limited alluvial mining. The exact location of this alluvial
work has yet to be determined.
REGIONAL GEOLOGY AND MINERALIZATION
Scarcity of outcrop and a lack of detailed studies prevents the development of
a regional, precise geological picture of the property. Two separate ages of
granodiorite outcrops were noted on the property, one fresh and the second
metamorphosed. These granodiorites are considered to be of Mesozoic (Triassic)
or older ages.
The granitic rocks are overlain by volcanics (Miocene) including andesite flows
and tuffs which appear to be related to gold mineralization elsewhere in the
district. These volcanics have not yet been identified on the Mirah NE
property. Post Cretaceous faulting, igneous intrusion and local volcanism are
present in the area. The youngest rocks in the district are Tertiary Sediments
and Recent Alluvium.
Published description of the important developing or producing bedrock gold
mines on Kalimantan Island suggest that ore structural control may be the
proximity to northerly or northwesterly cross-faults or linears. Several of
these linears have been interpreted on the Mirah NE property.
27
<PAGE> 28
ALLUVIAL GOLD
Rivers to the east, south and southwest of the property are the focus of
current alluvial gold dredging. Some seasonal sluicing is reported on an
intermittent stream immediately south of the property. These alluvial placers
can not be related to one or more gold concentration(s) on the property. The
placers do indicate that gold has been deposited in the bedrock geological
units in the district.
POTENTIAL BEDROCK GOLD DEPOSITS
Gold mineralization has been reported in quartz veins immediately southeast of
the property. The prospect has been described as "not impressive". In the
north part of the property, northwest of the junction of Montikeh and Samba
Rivers, a series of narrow quartz veins cut a granite/granodiorite intrusive.
Samples from these veins have been shown to carry pyrite (iron sulfide),
chalcopyrite (copper sulfide), galena (lead sulfide) and sphalerite (zinc
sulfide). In the northwest corner of the property, geologists have recently
discovered an altered intrusive of unknown size, a fine-grained diorite. This
intrusive has been strongly altered by heated waters, by carbon dioxide, and by
potassium-rich solutions. This evidence of hydrothermal activity commonly
accompanies gold deposits throughout the world. Near the southwest corner of
the concession, 11 kilometers west of the district centre of Tumbangkaman, two
outcrops of an interesting structure have recently been discovered.
Immediately south of a forestry planting station, a disused bulldozed road
exposes a quartz-bearing stockworks deformation zone for a minimum width of 150
meters. In addition to quartz, samples from the poorly exposed roadside show
both saprolitic and primary hematite (iron oxide), pyrolusite (manganese
oxide), and pyrite (iron oxide) as well as a black prismatic mineral
tentatively identified as amphibole or tourmaline. Four hundred feet west of
the tree farm mineralization is an exposure of ten meters containing in situ
quartz fragments. The host rock is sericited and carbonated, and contains
pyrite mineralization. It is almost a certainty that these two structures are
related.
Fifteen kilometers south of the property is the COW containing the Mirah Gold
Deposit and the Pandu or other prospects. Near the village of Tumbang-Mango
there are reported to be both alluvial deposits and hardrock gold-bearing pits.
No data is available.
The Mirah NE property lies in an area of Kalimantan which is currently subject
to intensive gold exploration. The current alluvial gold producing sites in
the vicinity indicate that the property is in the focus of potential source of
bedrock gold mineralization. The extent of rock alteration, structure, and
quartz, sulfide, and hematite mineralization indicate a high priority for gold
exploration.
(iii) UPPER MAHAKAM "A" AND "B", KALIMANTAN, INDONESIA
LOCATION AND ACCESS
Located in the headwaters area of the Mahakam river close to the Central
Kalimantan border, the two 10,000 hectare properties are approximately 20
kilometres from the town of Data Dawai which has an airstrip. Both properties
are strategically located to cover major structural features and are underlain
by prominent clusters of porphyritic andesite/diorite plugs intruding
meta-sediments. Drainages throughout the area are noted for their common
occurrence of alluvial gold which is being mined by local people where the gold
is considered to be originally of epithermal origin from hydrothermal activity
associated with the intrusion of the cluster of plugs as part of the Sintang
Intrusive Complex.
MINING RIGHTS AND TITLES
The Company entered into two separate Joint Venture Agreements on January 8,
1996 with Bresea and PTK for the exploration and development of the mineral
resources in the Kasogan Area of East Kalimantan, Indonesia. The agreements
relate to two properties located 20 kilometres apart and each relates to a
10,000 hectare property. One project is described as the Upper Mahakam Project
"A", while the other is described as the Upper Mahakam
28
<PAGE> 29
Project "B". Each agreement, priovides that PTK, as the Indonesian partner, is
to hold a 15% interest, with Bresea holding a 55% interest and Diadem with a
30% interest. Bresea later assigned a 30% interest to Tandem, leaving Bresea
with a 25% interest. All joint venture expenditures incurred in respect of
each of the two agreements are to be incurred by each joint venture partner in
the proportion that each of their respective interests bears to their combined
interests, with PTK to have a carried interest. Upon commencement of mining
operations, all costs and expenses incurred shall be borne by all parties on a
pro rata basis. The agreements each provide that Bre-X shall be the
manager/operator of all exploration activities on the properties.
NORTHWEST TERRITORIES
LOCATION AND ACCESS, WORKING CONDITIONS
This property initially consisted of 100,000 acres including the south half of
Fletcher Lake. Fletcher Lake is 300 kilometres by ski-equipped aircraft from
the city of Yellowknife, the capital of the Northwest Territories. There are
no roads to the property, but winter road access via Artillery Lake, 35
kilometres south of Fletcher Lake is feasible. The climate is subarctic, with
winter conditions affecting field work from October to June.
MINING RIGHTS
Pursuant to an agreement dated April 21, 1993, the Company initially acquired
an option to secure a 60% interest in the property from Noront Resources
Limited, 11th Floor, 365 Bay Street, Toronto, Ontario, M5H 2V1 ("Noront").
The agreement, as subsequently amended, provided that in order to exercise this
option the Company would be required to:
(a) Issue 100,000 common shares of its capital stock to Noront
following the signing of the agreement; these shares were
issued on December 22, 1993;
(b) Issue a further 100,000 common shares of its capital stock to
Noront prior to April 21, 1995; and
(c) Complete $1,000,000 in work prior to February 12, 1999.
The original staker of the property, Northern Geophysics Ltd., Box 2045
Yellowknife, Northwest Territories, retained a royalty of 3% on any diamond
production and a 1-1/2% net smelter royalty on any base metal or gold
production.
On February 12, 1994, the Company and Noront entered into an agreement with
Pure Gold Resources Inc. ("Pure Gold"), which was amended by an agreement dated
with effect June 7, 1994, (the "Pure Gold Agreement") pursuant to which Pure
Gold agreed to purchase a 40% undivided interest in the Fletcher Lake property
pro rata from each of the Company and Noront by issuing 100,000 common shares
of its capital (60,000 to the Company), incurring $500,000 of expenditures on
the property prior to February 12, 1996 and maintaining the property in good
standing to March 15, 1996. As a consequence, the Company had no financial
obligations with respect to the property until the completion of Pure Gold's
work. Pure Gold failed to complete the work, with the result that several of
the claims were forfeited. In order to mitigate damages, Pure Gold offered to
re-stake some of the lost claims, and this resulted in the re-aquisition of
certain of the claims. The Company and Noront are attempting to reach an
accommodation with Pure Gold concerning its breach, and in the interim, the
Company and Noront have agreed between themselves that the Company will
complete a magnetic survey of the area in an attempt to locate drilling targets
which was completed in June, 1996. The Company is currently interpreting the
results of the survey. By agreement dated July 31, 1996, Noront and the Company
agreed that the Company may earn a 60% interest in the claims maintained and in
additional staked claims by spending an aggregate of $250,000 of additional
expenditure on or before March 15, 1999.
29
<PAGE> 30
ACQUISITION OF INTERESTS IN WASECO RESOURCES INC.
On September 29, 1995, the Company entered into an agreement to jointly develop
an alluvial gold property in and along the Kahayan River Valley in Kalimantan,
Indonesia (described as the "Tewah Project"). The joint venture agreement is
between the Company and P.T. Ashton Mercu Buana Mining (AMBM). Pursuant to this
agreement, the Company or an associated company could indirectly acquire a 60%
interest in the property through the acquisition of a 60% voting interest in
AMBM for an expenditure of the greater of $1,500,000 U.S. or the cost of
completing a full feasibility study on the property. During the feasibility
study period, the shares of AMBM were to be held in escrow by a trustee and
delivered to the Company on the basis of one third of the shares for each
$500,000 U.S. of expenditure. The agreement provides that if a decision is
made by the parties to proceed with the development of a commercial mining and
treatment operation, AMBM would seek project financing, with any shortfall to
be provided by the Company and AMBM in proportion to their equity interests.
By agreement dated February 1, 1996, as amended by agreement dated February 27,
1996, the Company agreed to option its earn-in rights to Waseco Resources Inc.
("Waseco"). Pursuant to the initial agreement with Waseco, the Company agreed
to assign its 60% interest in the joint venture to Waseco on the following
terms and conditions: Waseco may earn a 20% participation interest in the
joint venture from the Company in consideration for the issuance to the Company
of 2,750,000 common shares and incurring U.S. $500,000 in feasibility study
expenditures related to the Tewah Project prior to September 30, 1996. Upon
completion of the initial phase, Waseco also has an option to earn an
additional 20% interest in the joint venture by issuing a further 2,250,000
common shares to the Company (within 60 days after completion of the first
phase) and by expending a further U.S. $500,00 in project related expenses
prior to March 31, 1997. Upon the completion of the conditions necessary to
increase the interest to 40%, Waseco has a further option to acquire an
additional 20% interest in the joint venture (bringing its total interest to
60%) by issuing a further 2,000,000 common shares to the Company (within 60
days following the completion of the second phase) and by expending a further
$500,000 U.S. in project related expenses, (bringing the total cash expenditues
to $1,500,000 U.S.) by October 31, 1997. If the entire option were to be
exercised by Waseco, the full 60 % interest that the Company could earn
pursuant to its September 29, 1995 agreement with AMBM will be acquired by
Waseco, and the Company would then own 7,000,000 common shares of Waseco. The
agreement provided that the Company would act as operator on the property and
Waseco would fund all feasibility study expenditures as incurred.
The initial agreement with Waseco also provided that the Company would assist
Waseco in acquiring mineral resource properties of merit in Indonesia on a
right of first refusal basis, with the exception of the Company's Belitung
Island interests, the North East Mirah property and the two Upper Mahakam
properties. Three properties were subsequently acquired by Waseco in this
fashion. All are hard rock gold prospects, with one located on the Island of
Kalimantan, while the other two are located on the Island of Java. With
respect to the Kalimantan property (described as the "Seruyan Property"), the
Company acquired, on Waseco's behalf, the right to acquire a 90% interest in a
25,270 hectare property. Waseco will acquire the interests in three stages
which are tied to the conditions necessary to earn the full Tewah Project 60 %
interest and by spending an aggregate of $200,000 U.S. on the property by March
31, 1997.
The first Java property, described as the Tikukur Property is a 34,200 hectare
property is located immediately south-west of the Cikondang Mine Property and
covers a strategic portion of the Bayah Dome south-eastern margin. This
property was first identified by the State Mining Company, PT Aneka Tambang
("ANTAM") as a priority area for repetitions of Pongkor style mineralization.
The Pongkor Mine, which is owned by ANTAM, has reported reserves of 6 million
tonnes grading 16 grams of gold per tonne. After conducting preliminary field
work on the property, ANTAM concluded that indeed the concession warrants a
major follow-up on numerous target zones identified as prospective Pongkor
style epithermal deposits. Of particular note, is the legal framework
underlying the transaction. The property is held under a Memorandum of
Understanding with ANTAM. For the first time, on Java, the legal relationship
is directly between the foreign entity and ANTAM without the risk and
complications brought on by the introduction of a private Indonesian
intermediary. Waseco will earn a 70% interest in the property by funding
through to the completion of a feasibility study report. ANTAM has an option
to purchase an additional 10% working interest in the property within 90 days
of receipt of the Feasibility Study Report.
30
<PAGE> 31
The second Java property, described as the Walang Property, is a 7,625 hectare
prospect located on the northwestern margin of the Bayah Dome, in West Java.
This property was selected to cover known extensions of the epithermal gold
veins discovered by ANTAM on the immediately adjacent Cibaliung Property, where
5 mineralized zones averaging 1.5 metres in width, with a combined strike
length of 1.5 kilometres have been confirmed, and where trenching has yielded
grades of 0.6 to 70.85 grams of gold per tonne, including 15 samples which
exceeded 5 grams of gold per tonne.
Title to the Walang Property is currently held as an Exploration Status
Concession under a Joint Venture Agreement with PT Anjarsamba Kencana (10%) and
Blue Emerald Resources Inc. (45%). A bond has been posted and issuance of a
licence is pending necessary approvals.
Under the initial agreement with Waseco, the Company was entitled to nominate
two individuals for membership on the Waseco Board. Mr. A.C.A. Howe became the
President and a director of Waseco on May 8, 1996 and on the same date, Mr.
Derek Bartlett, a director of the Company and Mr. Michael Bird became directors
of Waseco. Mr. Bird became an officer of the Company on May 17, 1996. The
Waseco board of directors currently has six members, three of whom are
representatives of the Company.
Waseco has funded the initial $500,000 U.S. in Tewah Project feasibility
expenditures and has delivered to the Company an aggregate of 5,000,000 common
shares, (representing a 49% undiluted interest) and has thereby earned a 20%
working interest in the Tewah and Seruyan projects. If Waseco delivers
2,000,000 additional shares to the Company as contemplated in the initial
agreement to earn its full interest in the Tewah Project and the Seruyan
Project, the 7,000,000 shares of Waseco that the Company would hold would
represent less than 50% of the Waseco shares on a fully diluted basis.
Waseco will continue to operate as a separate entity and the Company does not
intend to provide funding for Waseco either by way of direct advances or loan
guarantees. Waseco had a working capital deficiency of approximately $84,800 as
at May 31, 1996. Waseco is currently seeking equity financing from external
sources in order to settle this working capital deficiency and provide funding
for the exploration expenditures required on its existing properties. In the
interim, the Company entered into an agreement with Waseco dated July 15, 1996
which served to further amend the February 1, 1996 agreement. This agreement
provides that the Company would begin the funding of the second phase of the
Tewah earn-in on the basis that the Company would be working towards the
acquisition of the next 20% interest in the Tewah Project, and upon the
expenditure by the Company of an aggregate of $500,000 U.S. on the Tewah
property, the Company will have acquired a freely transferable 20% interest.
This is not a binding commitment on the part of the Company, and Waseco
agreed that the Company would incur these expenditures on a discretionary
basis, and may withdraw therefrom at any time at the Company's sole
discretion, without legal consequences to the Company. Waseco has the right at
any time prior to December 31, 1996 to acquire the 20% interest from the
Company for the sum of $500,000 U.S. In the event that Waseco is able to
complete a suitable financing prior to December 31, 1996 and/or in the event
that sufficient outstanding Waseco Series "A" Warrants are exercised prior to
the date of their expiry, September 30, 1996, generating in excess of $500,000
U.S. of net proceeds to Waseco, Waseco shall purchase from the Company its
right to acquire the next 20% interest in the Tewah Project for a price equal
to the lesser of $500,000 U.S. or the amount actually spent by the Company on
the Tewah property to the date of such payment by Waseco. In the event that
such payment amount shall be less than $500,000 U.S., Waseco shall continue to
spend, under the provisions of the February 1, 1996 agreement, the difference
between $500,000 U.S. and the amount of such payment to complete the
acquisition of the 20% interest. In the event that Waseco has not exercised
such rights of buy-back by December 31, 1996, the Company may transfer or sell
the 20% interest or any part thereof to any third party at the Company's
discretion at any time thereafter. In addition, should Waseco not exercise
such rights of buy-back by December 31, 1996, Waseco shall have been deemed to
have consented to the termination of the February 1, 1996 agreement, with
effect December 31, 1996. In the event of such deemed termination on December
31, 1996, Waseco's interest in AMBM shall be fixed at 20% and the shares of
Waseco delivered to the Company shall be non-refundable and shall remain the
property of the Company. Similarly, as the acquisition by Waseco of working
interests in the Seruyan Property are tied in the February 1, 1996 agreement to
Waseco's acquisition of interests in the Tewah Project, termination of the
agreement on December 31, 1996 will also crystallize Waseco's working interest
in such property at 30%.
31
<PAGE> 32
Finally, under the July 15, 1996 agreement, Waseco also agreed to the
termination of the right of first refusal provision in the February 1, 1996
agreement. Messrs. Howe and Bartlett declared their interest and abstained
from voting on a resolution of the board of directors approving the July 15,
1996 agreement.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company owns no real property other than its interests in mineral
properties as described in the preceding section. The Company leases
registered head office space from an affiliated company, A.C.A. Howe
International Ltd., at a cost of $300 per month. The Company also leases
office space from the Secretary/Treasurer at a cost of $250 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in nor is aware of any litigation or impending
litigation.
ITEM 4. CONTROL OF REGISTRANT.
(a) Not applicable.
(b) The following table lists, as at November 20, 1996, the
beneficial share holdings in the Company of all persons or companies
who are known to the Company that beneficially own, directly or
indirectly, ten percent or more of the issued and outstanding common
shares, and the directors and officers of the Company as a group:
<TABLE>
<CAPTION>
(2)
(1) IDENTITY OF PERSON (3) (4)
TITLE OF CLASS OR GROUP AMOUNT OWNED PERCENT OF CLASS
- -------------- ----------------- ------------ ----------------
<S> <C> <C> <C>
Common Shares Directors and Senior
Officers as a group 1,541,561(1) 7.0%
(seven persons)
</TABLE>
(1) Total does not include common shares issuable upon exercise of incentive
stock options granted by the Company.
(c) None.
ITEM 5. NATURE OF TRADING MARKET.
The Company was listed on the Montreal Exchange on March 24, 1995. The closing
price range and trading volume of the Company's common shares on the Montreal
Exchange during the periods indicated are as follows:
<TABLE>
<CAPTION>
CLOSING PRICE
-------------
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
March 24-31, 1995 $0.60 $0.40
2nd Quarter, 1995 0.71 0.47
3rd Quarter, 1995 1.81 0.42
4th Quarter, 1995 3.25 0.75
1st Quarter, 1996 2.90 1.15
2nd Quarter, 1996 8.25 2.75
3rd Quarter, 1996 8.65 5.15
October, 1996 8.30 6.20
November, 1996 7.20 6.05
(to November 19)
</TABLE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are no governmental laws, decrees or regulations in Canada relating to
restrictions on the import/export of capital affecting the remittance of
interest, dividends or other payments to non-residential holders of the
32
<PAGE> 33
Company's shares. Any such remittances to United States residents, however,
are subject to a 15% withholding tax pursuant to Article X of the reciprocal
tax treaty between Canada and the United States. See Item 7, "Taxation".
Except as provided in the Investment Canada Act (the "Act"), there are no
limitations under the laws of Canada, the Province of Ontario or in the charter
or any other constituent documents of the Company on the right of foreigners to
hold and/or vote the shares of the Company.
The Act requires a non-Canadian making an investment to acquire control of a
Canadian business, the gross assets of which exceed certain defined threshold
levels, to file an application for review with Investment Canada, the federal
agency created by the Act.
As a result of the Canada-U.S. Free Trade Agreement, the Act was amended in
January 1989 to provide distinct threshold levels for Americans who acquire
control of a Canadian business.
A Canadian business is defined in the Act as a business carried on in Canada
that has a place of business in Canada, an individual or individuals in Canada
who are employed or self-employed in connection with the business, and assets
in Canada used in carrying on the business.
An American, as defined in the Act, includes: an individual who is an American
national or a lawful permanent resident of the United States; a government or
government agency of the United States; an American-controlled entity,
corporation or limited partnership or trust which is not controlled in fact
through ownership of its voting interests of which two-thirds of its board of
directors, general partners or trustees, as the case may be, are any
combination of Canadians or Americans.
The following investments by a non-Canadian are subject to review by Investment
Canada:
(a) all direct acquisitions of control of Canadian businesses with
assets of $5 million or more;
(b) all indirect acquisitions of control of Canadian businesses
with assets of $50 million or more if such assets represent
less than 50% of the value of the assets of the entities, the
control of which is being acquired; and
(c) all indirect acquisitions of control of Canadian businesses
with assets of $5 million or more if such assets represent
more than 50% of the value of the assets of the entities, the
control of which is being acquired.
Review by Investment Canada is required when investments by Americans exceed
$150 million for direct acquisitions of control. For the purposes of the Act,
direct acquisition of control means:
a purchase of the voting interest on a corporation,
partnership, joint venture or trust carrying on a Canadian
business, or any purchase of all or substantially all of the
assets used in carrying on a Canadian business; and
indirect acquisition of control means:
a purchase of the voting interest of a corporation,
partnership, joint venture or trust, whether a Canadian or
foreign entity, which controls a corporation, partnership,
joint venture or trust carrying on a Canadian business in
Canada.
The acquisition of certain Canadian businesses is excluded from the higher
thresholds set out for Americans. These excluded businesses include oil, gas,
uranium, financial services (except insurance); transportation services and
cultural services (i.e. the publication, distribution or sale of books,
magazines, periodicals (other than printing
33
<PAGE> 34
or typesetting businesses), music in print or machine readable form, radio,
television, cable and satellite services; the publication, distribution, sale
or exhibitions of film or video recordings or audio or video music recordings).
Direct or indirect acquisitions of control of these excluded businesses are
reviewable at the $5 and $50 million thresholds.
A non-Canadian shall not implement an investment reviewable under the Act
unless the investment has been reviewed and the Minister responsible for
Investment Canada is satisfied or is deemed to be satisfied that the investment
is likely to be of net benefit to Canada. If the Minister is not satisfied
that the investment is likely to be a net benefit to Canada, the non-Canadian
shall not implement the investment or, if the investment has been implemented,
shall divest himself of control of the business that is the subject of the
investment.
A non-Canadian or American making the following investments:
(i) an investment to establish a new Canadian business; and
(ii) an investment to acquire control of a Canadian business which
investment is not subject to review under the Act
must notify Investment Canada, within prescribed time limits, of such
investments.
ITEM 7. TAXATION.
Management of the Company considers that the following discussion respecting
taxation fairly describes the principal and material Canadian federal income
tax consequences applicable to shareholders of the Company who are residents of
the United States and are not residents of Canada and do not hold, and are
deemed not to hold, shares of the Company in connection with carrying on a
business in Canada (a "non-resident").
Generally, dividends paid by Canadian corporations to non-resident shareholders
are subject to a withholding tax of 25% of the gross amount of such dividends.
However, Article X of the reciprocal tax treaty between Canada and the United
States reduced to 15% the withholdings tax on the gross amount of dividends
paid to residents of the United States. A further 9 % reduction in 1996, and a
10% reduction in 1997 and thereafter in the withholding tax rates on the gross
amount of dividends is applicable when a U.S. corporation owns at least 10% of
the voting stock of the Canadian corporation paying the dividends.
A non-resident who holds shares of the Company as capital property will not
subject to tax on capital gains realized on the disposition of such shares
unless such shares are "taxable Canadian property" within the meaning of the
Income Tax Act (Canada), and no relief is afforded under any applicable tax
treaty. The shares of the Company would be taxable Canadian property of a
non-resident if, at any time during the five year period immediately preceding
a disposition by the non-resident of such shares (a) not less than 25% of the
issued shares of any class of the Company belonged to the non-resident, (b) the
person with whom the non-resident deal did not deal at arm's length, or (c) the
non-resident and any person with whom the non-resident did not deal at arm's
length.
Certain United States Federal Income Tax Consequences
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulation, 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.
This discussion does not consider the potential effects, both adverse and
beneficial, of any recently proposed legislation that, if enacted, could be
applied, possibly on a retroactive basis, at any time. The following discussion
is for general information only and it is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
shares of the Company and no opinion or representation with respect to the
United States Federal income tax
34
<PAGE> 35
consequences to any such holder or prospective holder is made. Accordingly,
holders and prospective holders of shares of the Company should consult their
own tax advisors about the Federal, state, local and foreign tax consequences
of purchasing, owning and disposing of shares of the Company.
U.S. Holders
As used herein, a "U.S. Holder" includes a holder of shares of the Company who
is a citizen or resident of the United States, a corporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, any entity that is taxable as a corporation for U.S. tax
purposes and any other person or entity whose ownership of shares of the
Company is effectively connected with the conduct of a trade or business in the
United States. A U.S. Holder does not include 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 whose ownership of shares
of the Company is not effectively connected with conduct of trade or business
in the United States, shareholders who acquired their stock through the
exercise of employee stock options or otherwise as compensation and
shareholders who holds their stock as ordinary assets and not as capital
assets.
Distributions on Shares of the Company
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to shares of the Company are required to include in
gross income for United States Federal income tax purposes the gross amount of
such distributions to the extent that he Company has current or accumulated
earnings and profits as defined under U.S. Federal tax law, without reduction
for any Canadian income tax withheld from such distributions. Such Canadian tax
withheld may be credited, subject to certain limitations, against the U.S.
Holder's United States Federal income tax liability or, alternatively, may be
deducted in computing the U.S. Holder's United Sates 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 upon to the U.S. Holder's adjusted basis in the shares and thereafter
as gain from the sale or exchange of the shares. Preferential tax rates for
net capital gains are applicable to a U.S. Holder that is an individual, estate
or trust. There are currently no preferential tax rates for long term capital
gains for a U.S. Holder that is a corporation.
Dividends paid on the shares of the Company will not generally be eligible for
the dividends received deduction provided to corporations receiving dividends
from certain United States corporations. A U.S. Holder that is a corporation
may, under certain circumstances, be entitled to a 70% deduction of the United
States source portion of dividends received from the Company (unless the
Company qualifies as a "foreign personal holding company" or a "passive foreign
investment company", as defined below) if such U.S. Holder owns shares
representing at least 10% of the voting power and value of the Company. The
availability of this deduction is subject to several complex limitations that
are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of shares of the Company may be entitled, at the
option of the U.S. Holder, to ether 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 U.S. Holder during that year.
There are significant and complex limitations that apply to the credit, among
which is the general limitation that the credit cannot exceed the proportionate
share of the U.S. Holder's United States Federal income tax liability that the
U.S. Holder's foreign source income bears to his or its worldwide taxable
income. In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
35
<PAGE> 36
"passive income", "high withholding tax interest", "financial services income",
"shipping income", and certain other classifications of income. 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 shares
of the Company should consult their own tax advisors regarding their individual
circumstances.
Disposition of Shares of the Company
A U.S. Holder will recognize a gain or loss upon the sale of shares of the
Company 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 shares of the Company. This gain or loss will be a capital gain or
loss if the shares are a capital asset in the hands of the U.S. Holder, and
will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. 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 U.S. Holders which 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 U.S. 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.
ITEM 8. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected historical information
concerning the Company and is qualified by reference to the consolidated
financial statements and notes thereto included elsewhere in this Application.
See "Financial Statements".
<TABLE>
<CAPTION>
As at May 31, 1996 As at May 31, 1995 As at May 31, 1994 As at May 31, 1993 As at May 31, 1992
or the Year then or the Year then or the Year then or the Year then or the Year then
Ended Ended Ended Ended Ended
[Canadian Dollars and Share Numbers in Thousands except per share amounts]
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $2,616 $1,249 $(60) $45 $9
Cash and Term Deposits 2,863 1,264 34 116 8
Mineral Properties 3,172 507 82 15 -
Share Capital 8,001 3,563 1,227 1,154 990
Deficit (1,810) (1,755) (1,193) (1,079) (969)
Net Loss for the Year (42) (160) (114) (41) (177)
Interest Income 55 16 - 1 -
Administrative Expenses 270 122 101 44 137
Property Write Downs 35 58 23 - -
Gain on Marketable 208 4 9 (4) (53)
Securities and Investment
Net Loss per Share ($0.01) ($0.03) ($0.02) ($0.01) ($0.04)
Shares Outstanding 21,916 12,400 4,654 4,573 3,960
Fully Diluted Shares 23,391 21,022 4,894 4,906 4,080
Outstanding
Total Assets 6,423 1,927 194 173 40
</TABLE>
36
<PAGE> 37
EXCHANGE RATES
The following table sets forth certain information with respect to the
Buying Rate of Canadian dollars in terms of U.S. dollars as reported by the
Bank of Canada during the periods indicated.
<TABLE>
<CAPTION>
Period
Average (1) High Low End
----------- ---- ------- ------
<S> <C> <C> <C> <C>
Fiscal Year Ended May 31,
1992 .................................................. 0.8621 0.8278 0.8934 0.8311
1993 .................................................. 0.8033 0.7729 0.8460 0.7866
1994 .................................................. 0.7487 0.7148 0.7879 0.7233
1995 .................................................. 0.7258 0.7009 0.7463 0.7298
1996 .................................................. 0.7344 0.7212 0.7533 0.7306
June 1, 1996-November 6, 1996 ......................... 0.7372 0.7255 0.7522 0.7509
</TABLE>
(1) The average represents the average of the Noon Buying Rates on the last
business day of each month during the period. On November 6, 1996, the Buying
Rate was US$0.7509=Cdn.$1.00. For further information regarding the currency
translation policies of the Company, see Note 2 of the Consolidated Financial
Statements.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion and analysis of the operating results and the financial
position of the Company should be read in conjunction with the financial
statements and the notes thereto forming a part of this prospectus
OPERATING RESULTS
Prior to the year ended May 31, 1992, the Company was involved primarily in the
business of offering consulting services to the mining industry and investing
in marketable securities in the mining sector. During the years ended May 31,
1992 and 1993, the Company redirected its efforts towards the search for mining
properties to invest in and develop. Consulting income was $12,300 for the
year ended May 31, 1992, and $6,300 for the year ended May 31, 1993. There
have been no sources of operating revenue in the past three fiscal years. The
Company has incurred operating losses during the entire five year period ended
May 31, 1996. Expenses during this period consisted primarily of general
administrative expenses and expenses related to the search for new properties.
Expenses have risen from approximately $101,000 in fiscal 1994 to approximately
$122,000 in fiscal 1995 and approximately $270,000 in fiscal 1996. These
increases have related primarily to shareholder relations costs associated with
being a public company and increased salaries, accounting and legal costs
associated with the acquisition of new properties.
Included in the determination of the losses incurred in the past five years
have been charges to the income statement related to the termination of various
mining interests. As mining interests have been terminated, the Company has
expensed the accumulated costs associated with the property. In the fiscal
year ended May 31, 1994, an amount of $22,275 was expensed, relating to the
termination of the Republic of Central Africa mining claims. In the year ended
May 31, 1995, a portion of the property in the North West Territories had
mining claims that expired and accordingly a charge to the income statement in
the amount of $57,545 was recorded. During the year ended May 31, 1996, the
mining claims in Namibia were terminated and a charge of $35,382 was recorded
to the income statement.
During the five year period ended May 31, 1996, the Company has experienced
gains and losses from the investment in various mining-related securities and
ventures. During the year ended May 31, 1996, the total earnings on
investments amounted to $208,107, which together with interest earned of
$55,240, almost offset the operating expenses of $270,147. The earnings from
investments during the year ended May 31, 1996
37
<PAGE> 38
included a gain of $7,999 from the sale of marketable securities and $200,108
from cash distributions made from the Silverstone Prospecting Syndicate, in
which the Company continues to hold an 8% interest.
As at May 31, 1996, the Company had $6,422,644 in assets of which $2,863,181
consisted of cash and term deposits. In addition, the Company holds marketable
securities which have a book value of $55,500. Included in the marketable
securities are $14,000 in securities which may have to be returned to a third
party and accordingly, an offsetting amount is included in accrued charges.
However, the remaining marketable securities with a book value of approximately
$41,500 had a market value of approximately $163,000 as at May 31, 1996. In
addition, the Company holds options to purchase 300,000 additional common
shares of Blue Emerald Resources Inc. at a price of $0.25 per share, until
March 16, 1997. The market value of the common shares of Blue Emerald
Resources Inc. was $0.60 per share as at May 31, 1996.
The Company's total investment in mining properties was approximately
$3,172,400 as at May 31, 1996, of which approximately $1,253,200 relates to
acquisition costs and the remainder relates to deferred exploration
expenditures.
The Company holds an 8% interest in each of the Silverstone Prospecting
Syndicate and the Beaver Syndicate. These syndicates hold interests in mining
properties in California, Labrador and Northern Quebec. The Company made an
investment of approximately $138,000 in Randgold Resources Limited ("Randgold")
during the year ended May 31, 1996. This investment represents less than 1% of
the outstanding shares of a company that is exploring mining properties in
Africa. The Company understands that Randgold is taking steps to become a
publicly traded company in the foreseeable future.
The Company also currently holds 5,000,000 common shares in Waseco Resources
Inc. ("Waseco"). This represents approximately 46% of the outstanding shares
in the publicly traded company. If Waseco fulfills the remaining requirements
to earn a 40% interest in the Tewah property and thereafter elects to increase
its interest in the Tewah property to a 60% working interest, the Company would
receive a further 2,000,000 common shares of Waseco, which when added to the
Company's current holdings, on a fully diluted basis, would represent slightly
less than 50 % of the common shares of Waseco. The shares that the Company
holds in Waseco are subject to resale restrictions under applicable securities
legislation, and constitute a control block for the purposes of the Securities
Act, Ontario.
The Company's investment in fixed assets of approximately $25,400 consists of
office furniture and equipment and computer equipment. As at May 31, 1996, the
Company had accounts payable and accrued charges of approximately $231,300.
The operations during the years ended May 31, 1992 through May 31, 1994 were
financed primarily by a combination of funds raised through private placements
totalling $150,000, and advances from a shareholder. These private placement
proceeds and shareholder advances were also used to pay for the expenses of
approximately $70,200 associated with the unsuccessful offer to purchase the
shares of a publicly traded company, and to fund the Company's investment in
its mining properties during this three year period. The advances from a
shareholder have since been re-paid.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the receipt of proceeds from the Company's initial public
offering in January, 1995, from the subsequent exercise of common share
purchase warrants and promoters warrants issued in connection therewith, and
from the exercise of stock options pursuant to the Company's share option plan,
the Company has had adequate cash resources to meet its commitments during the
fiscal year ended May 31, 1996. During the period ended May 31, 1995, the
initial public offering generated net proceeds of approximately $1,933,500. In
addition, during the year ended May 31, 1996, the Company received net proceeds
of approximately $3,264,000, relating to the exercise of the common share
purchase warrants and promoters options issued pursuant to the initial public
offering. Options exercised during the year ended May 31, 1996 under the
Company's share option plan provided additional proceeds of approximately
$291,000.
38
<PAGE> 39
As at May 31, 1996 the Company had cash and term deposits of $2,863,181. This
amount is substantially in excess of the total liabilities of $231,266 as at
May 31, 1996. The excess of cash and term deposits over liabilities was
$2,631,915 which will be sufficient to continue the exploration and development
in the foreseeable future of those mineral resource properties of the Company
whose programs of exploration and development are not being funded from the
proceeds of this offering. The balance, if any, together with the $500,000 of
working capital allocated from the proceeds of this offering will be sufficient
to fund the administrative operating costs of the Company in the foreseeable
future with the excess used to fund further exploration and development
expenditures and to invest in new mineral resource property opportunities of
merit which may be presented to the Company.
During the year ended May 31, 1996 the Company acquired a 47% non-diluted
interest in Waseco, which has since been decreased to approximately 46%. Waseco
will continue to operate as a separate entity and the Company does not intend
to provide funding for Waseco either by way of direct advances or loan
guarantees.
The Company has total shareholders' equity of approximately $6,191,400 as at
May 31, 1996. The Company does not have a credit facility with a financial
institution. The Company anticipates that its existing commitments with respect
to its mining properties will be funded through cash on hand and the
application of the funds raised through the issue of the Special Warrants. The
Company may also elect to raise additional funds through the optioning of a
portion of the Company's mining interests to third parties in exchange for a
commitment from the optionees to fulfill certain obligations with respect to
the subject properties.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL
NAME TITLE OCCUPATION
- ---- ----- ----------
<S> <C> <C>
A.C.A. Howe President and Director Mining Engineer and Consultant, President of the
Company, President of
Ateba Mines Inc. and President of
Waseco Resources Inc.
Lina Noble Secretary, Treasurer and Administrative Manager of the Company
Director and General Manager of Ateba Mines Inc.
Derek Bartlett* Director Independent Geologist and President, Blue Emerald
Resources Inc. and Braddick Resources Ltd.
George Silverman* Director Prospector and Mining Executive, Consultant to La Fosse
Platinum Inc. and Hollinger North Shore Mining Co.,
General Manager, Silverstone Prospecting Syndicate
William McLucas Director Managing Director, Waverley Asset Management Ltd.
Robin Ross* Director Senior Vice President/Branch Manager, Midland Walwyn
Capital Inc.
Michael Bird Vice President, Asian Development Independent Geologist, Vice President of
Waseco Resources Inc., Vice President of the
Company
Paul Heney Assistant Secretary Lawyer, Heney & Associates
</TABLE>
* Member - Audit Committee
39
<PAGE> 40
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with Mr. Howe and Mrs. Noble
effective June 1, 1994 pursuant to which they are each paid a monthly salary of
Cdn.$1,000 in their respective capacities as officers of the Company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
(a) For the fiscal year ended May 31, 1996, the aggregate amountof
compensation paid by the Company and its subsidiaries to all officers
and directors as a group was Cdn.$24,000.
(b) None.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Diadem has a stock option plan (the "Plan") which was approved by
shareholders of the Company on April 9, 1992, and subsequently amended by the
board of directors with the consent of the share holders under which options to
purchase common shares in the capital of the Company may be granted by the
board of directors to directors, officers and employees of the Company. The
purpose of the Plan is to advance the interests of the Company by affording
such persons the opportunity of acquiring equity interests in the Company.
Options granted under the Plan will have an exercise price of not less than the
market price of the common shares of the Company at the time of the grant or
such other price determined in accordance with applicable regulation and will
be exercisable over a number of years specified at the time of the grant, which
term will not exceed five years from the date of grant. The aggregate number
of common shares in the capital of the Company available for issuance under the
Plan has been fixed at 2,190,000 and while this number may be increased with
the approval of the shareholders, the aggregate number of common shares of the
Company that may be reserved for issuance under the Plan shall not in the
aggregate exceed ten percent of the number of common shares of the Company that
are issued and outstanding from time to time on a non-diluted basis. In
addition, the number of common shares of the Company reserved for issuance to
any one person pursuant to options must not exceed five percent of the issued
common shares of the Company, on a fully diluted basis and no one person shall
hold options entitling such person on the exercise of such options to more than
50% of the maximum number of common shares of the Company that may be reserved
under the Plan for issuance from time to time. Option agreements entered into
in conjunction with options granted under the Plan terminate 30 days following
the termination of the optionee's employment or six months following the death
of the optionee but in no event will exceed five years from the date of grant.
Options granted under the Plan are not transferable.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning grants of stock options
pursuant to the rules and policies of the Montreal Exchange during the
financial year ended May 31, 1996 to the Named Executive Officer of the
Company:
<TABLE>
<CAPTION>
==================================================================================================================================
Name and Securities Under % of Total Exercise or Market Value of
Principal Position Options/SARS Options/SARS Base Price Securities
Granted (#) Granted to ($/Security) Underlying
Employees in Options/SARS on the Expiration Date
Fiscal Year Date of Grant
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A.C.A. Howe 115,000 15.6% $0.62 $0.62 June 5, 2000
President and
Chief Executive
Officer
==================================================================================================================================
</TABLE>
40
<PAGE> 41
AGGREGATED OPTION EXERCISES
The following table sets forth details of all exercises of stock
options during the financial year ended May 31, 1996 by the Named Executive
Officer, and the fiscal year end values of unexercised options on an aggregated
basis:
<TABLE>
<CAPTION>
==================================================================================================================================
Name and Principal Securities Acquired on Aggregate Value Unexercised Options At Value of Unexercised
Position Exercise Realized May 31, 1996 in the Money Options
(Exercisable/ at May 31, 1996
Unexercisable) (Exercisable/
Unexercisable)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A.C.A. Howe 450,000 (1) $2,546,500 115,000/NIL $877,450/NIL
President and Chief
Executive Officer
==================================================================================================================================
</TABLE>
(1) These shares continued to be held by Mr. Howe as at May 31, 1996.
TOTAL AMOUNT OF OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Date of Grant Expiry Date Number of Options Outstanding Exercise Price
(Held by Directors and Officers)(1) (CDN$/Security)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 5, 1995 June 5, 2000 540,000
(530,000) $0.62
- -------------------------------------------------------------------------------------------------------------
November 28, 1995 November 28, 2000 30,000 $1.27
- -------------------------------------------------------------------------------------------------------------
January 26, 1996 January 26, 2001 200,000
(200,000) $1.86
- -------------------------------------------------------------------------------------------------------------
June 7, 1996 June 7, 2001 620,000
(575,000) $5.50
- -------------------------------------------------------------------------------------------------------------
October 18, 1996 October 18, 2001 10,000 $6.50
- -------------------------------------------------------------------------------------------------------------
October 21, 1996 October 21, 2001 7,500 $6.80
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Incudes options held by A.C.A. Howe indicated in table above.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
From time to time, the Company may engage either A.C.A. Howe
International Ltd., a U.K.-based geological consulting company, or A.C.A. Howe
International Limited, a Canadian-based geological consulting company, to
provide professional services on a contract basis and the Company will pay only
reasonable, arms-length commercial rates for such services. Mr. Howe serves as
both a director and as President of each of the companies, but he is not
actively involved in their business operations. He owns a 49% voting interest
in A.C.A. Howe International Ltd. and a 39% voting interest in A.C.A. Howe
International Limited. During the year ended May 31, 1996, A.C.A. Howe
International Limited received $73,141 in aggregate fees for geological
consulting services rendered during the period. No payments were made to
A.C.A. Howe International Ltd. Mr. Howe also received compensation directly
in the form of professional consulting fees during the year ended May 31, 1996
totalling $56,640. These expenditures were allocated to the mineral resource
properties for which the services were rendered. Mr. Howe may receive similar
consulting fees in the future at reasonable commercial rates and such payments
to Mr. Howe will be made in accordance with the applicable rules set out in
Ontario Securities Commission Policy 5.2.
Mr. Howe also received 350,000 promoters' options in connection with
the Company's January 9, 1995 prospectus offering, that were exercised April
15, 1996 at a price of $0.40 per common share of the Company. Mr. Howe also
received options to purchase 100,000 common shares of Waseco in May, 1996, and
will, in appropriate circumstances, declare and refrain from voting on, any
matter in which he may have a conflict of interest.
41
<PAGE> 42
Mr. Derek Bartlett, a director of the Company, has also served as a
director of Noront Resources Ltd. since April, 1993. Noront has also granted
the Company an option on its Fletcher Lake, Northwest Territories Property.
Mr. Bartlett beneficially owns 48,000 common shares of Noront and has been
granted stock options in his capacity as a director of Noront. Mr. Bartlett
also received options to purchase 100,000 common shares of Waseco in May, 1996.
Any decision made by Mr. Bartlett involving the Company will be made in
accordance with his fiduciary duties and obligations to deal fairly and in good
faith with the Company and Noront or Waseco. In addition, Mr. Bartlett will,
in appropriate circumstances, declare and refrain from voting on, any matter in
which he may have a conflict of interest. Mr. George Silverman, Ateba Mines
Inc. ("Ateba") and the Company will abstain from voting as unitholders of the
Silverstone Prospecting Syndicate ("Silverstone") on any matters affecting the
interests of the Company.
The Company owns a total of four of a total of 50 units of
Silverstone. Mr. George Silverman, a director of the Company, owns four units
of Silverstone, representing eight percent of the total number of issued units.
Mr. Silverman also serves as the Manager of Silverstone. Ateba owns four units
or eight percent of Silverstone. Messrs. Howe and Silverman serve as directors
of Ateba. Mr. Howe also serves as President of Ateba, while Mrs. Noble serves
as Ateba's general manager. To the knowledge of the directors and senior
officers of the Company, no other units of Silverstone are owned by any
associate or affiliate of the Company or by any other director or senior
officer of the Company, or any associate of them, nor are any securities of the
Company owned by any person or company which beneficially owns, directly or
indirectly, more than 10% of the units of Silverstone. To the knowledge of the
directors and senior officers of the Company, no person or company owns more
than five percent of the units of Silverstone or is to receive a greater than
five percent interest in the shares or other consideration to be received by
Silverstone from the Company other than the Company, Ateba, Mr. Silverman and
one other individual who is neither a director nor an officer of the Company or
an associate or affiliate thereof who holds four units or eight percent of the
issued units of Silverstone. The Silverstone Prospecting Syndicate agreement
provides that no mining properties may be acquired or disposed of by
Silverstone without the prior consent of the holders of two-thirds of
Silverstone units. Ateba, the Company and Mr. George Silverman, each of which
owns an eight percent interest in Silverstone, abstain from voting as
Silverstone unitholders in matters relating to transactions with the Company,
and Mr. Silverman abstains from voting as a director of the Company on matters
affecting Silverstone.
An aggregate of 23,809 common shares in the capital of the Company
were issued to Mr. Michael Bird in payment of finders fees with respect to the
acquisition by the Company of interests in the Belitung, Mirah North East, and
Upper Mahakam A and B, Indonesia properties.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
CAPITAL STOCK TO BE REGISTERED
The Company wishes to register common shares in the capital of the Company.
The shares carry a voting right on the basis of one vote per common share. The
common shares carry no dividend rights, liquidation rights or conversion
rights, there are no sinking fund provisions. The shares are not liable to
further calls or to assessment by the Company.
On September 20, 1996, the board of directors of the Company authorized and
approved the adoption of a Shareholder Rights Plan, which was confirmed by the
shareholders of the Company, on October 30, 1996. The Rights Plan entitles
each holder of common shares to one right for each voting share held at the
close of business on September 20, 1996. The rights become exercisable only
when a person or persons announce their intention to acquire 20% or more of the
Company without complying with the "Permitted Bid" provisions of the Plan or
without the approval of the board of directors of the Company. Upon exercise,
the rights entitle the holder to purchase additional common shares of the
Company at a price which is equal to one-half of the prevailing market value of
the common shares.
42
<PAGE> 43
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not Applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
See Item 19 below for Financial Statements filed as part of this
Application.
ITEM 18. FINANCIAL STATEMENTS.
Not Applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following documents are filed as Attachment A hereto and are
included as part of this Application on Form 20-F.
DIADEM RESOURCES LTD. CONSOLIDATED FINANCIAL STATEMENTS
Description of Document Page
- ----------------------- ----
Consent of Independent Auditors
Auditors Report
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Changes in Financial Position
Notes to Consolidated Financial Statements
(b) The following exhibits are filed as Attachment B hereto and are
included as part of this Application on Form 20-F.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document Page
- ------- ----------------------- ----
<S> <C>
3.1 By-Law No. 1, dated June 1, 1989
3.2 Articles of Amalgamation, dated June 1, 1989
3.3 Articles of Amendment dated April 20, 1993
3.4 Articles of Amendment dated September 23, 1994
4.1 Shareholder Rights Plan, adopted by the Board of Directors on
September 20, 1996 and ratified by the shareholders on October
30, 1996
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C>
4.2 Warrant Indenture between Montreal Trust Company of Canada and
the Company, dated September 10, 1996.
4.3 Stock Option Plan, as amended, dated October 30, 1996
</TABLE>
44
<PAGE> 45
DIADEM RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
<PAGE> 46
DIADEM RESOURCES LTD.
CONTENTS
<TABLE>
<S> <C>
Auditors' report 1
Balance sheet 2
Consolidated statement of income and deficit 3
Consolidated statement of changes in financial position 4
Notes to consolidated financial statements 5 to 19
</TABLE>
<PAGE> 47
AUDITORS' REPORT
To the Shareholders of
Diadem Resources Ltd.:
We have audited the consolidated balance sheets of Diadem Resources Ltd.
as at May 31, 1995 and May 31, 1996 and the consolidated statements of income
and deficit and changes in financial position for each of the years in the three
year period ended May 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at May 31,
1995 and May 31, 1996 and the results of its operations and the changes in its
financial position for each of the years in the three year period ended May 31,
1996 in accordance with generally accepted accounting principles.
[SIG]
Toronto, Canada
August 13, 1996 Chartered Accountants
(September 13, 1996 as to note 11)
1
<PAGE> 48
<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
AS AT MAY 31, (IN CANADIAN DOLLARS) 1996 1995
$ $
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and term deposits 2,863,181 1,264,443
Marketable securities (note 3) 55,491 68,135
Prepaid expenses and sundry receivables (notes 5 and 11) 128,173 35,411
------------ ------------
3,046,845 1,367,989
INTEREST IN MINING PROPERTIES (note 4) 3,172,373 507,234
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (note 5) 177,978 40,000
FIXED ASSETS (note 6) 25,448 11,305
------------ ------------
6,422,644 1,926,528
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued charges (notes 3, 7 and 11) 231,266 118,898
------------ ------------
COMMITMENTS AND CONTINGENCIES (note 11)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 8) 8,001,389 3,562,799
DEFICIT (1,810,011) (1,755,169)
------------ ------------
6,191,378 1,807,630
------------ ------------
6,422,644 1,926,528
============ ============
</TABLE>
ON BEHALF OF THE BOARD:
Director
- --------------------------------------
Director
- --------------------------------------
2
<PAGE> 49
<TABLE>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
YEAR ENDED MAY 31, (IN CANADIAN DOLLARS) 1996 1995 1994
$ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSES
Amortization 2,669 2,648 3,220
Business development 28,110 7,224 -
General 10,405 (962) 6,607
Insurance 6,215 5,697 6,215
Interest and bank charges 614 3,177 -
Legal, audit and accounting fees 57,482 5,000 20,243
Office expenses 30,346 18,038 9,523
Salaries and benefits 57,880 27,557 45,428
Search for new properties 1,479 3,779 3,830
Shareholder relations 62,496 36,389 -
Travel 12,451 13,678 5,598
----------- ----------- -----------
270,147 122,225 100,664
----------- ----------- -----------
Loss before undernoted items (270,147) (122,225) (100,664)
----------- ----------- -----------
OTHER INCOME (LOSS)
Expiration of mining interest (note 4) (35,382) (57,545) (22,275)
Interest 55,240 15,851 531
Gain on securities and investments 208,107 4,217 8,498
----------- ----------- -----------
227,965 (37,477) (13,246)
----------- ----------- -----------
NET LOSS (42,182) (159,702) (113,910)
DEFICIT, BEGINNING OF YEAR (1,755,169) (1,193,182) (1,079,272)
----------- ----------- -----------
(1,797,351) (1,352,884) (1,193,182)
Costs associated with issuance of shares (note 8) (12,660) (402,285) -
----------- ----------- -----------
DEFICIT, END OF YEAR (1,810,011) (1,755,169) (1,193,182)
=========== =========== ===========
NET LOSS PER COMMON SHARE .01 .03 .02
=========== =========== ============
</TABLE>
3
<PAGE> 50
<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
YEAR ENDED MAY 31, (IN CANADIAN DOLLARS) 1996 1995 1994
$ $ $
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net loss (42,182) (159,702) (113,910)
Items not affecting cash
Amortization 2,669 2,648 3,220
Expiration of mining interest 35,382 57,545 22,275
Loss (gain) on marketable securities and investments (208,107) (4,217) (8,498)
----------- ---------- ----------
(212,238) (103,726) (96,913)
Net change in non-cash working capital
balances related to operations 19,606 (45,113) 67,300
----------- ---------- ----------
(192,632) (148,839) (29,613)
----------- ---------- ----------
FINANCING ACTIVITIES
Costs associated with issuance of shares (note 8) (12,660) (402,285) -
Increase (decrease) in advances from shareholder - - (3,649)
Issuance of common shares (note 8) 4,438,590 2,335,800 73,414
----------- ---------- ----------
4,425,930 1,933,515 69,765
----------- ---------- ----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (2,700,521) (482,512) (89,507)
Acquisition of fixed assets (16,812) (2,422) (518)
Acquisition of marketable securities - (51,600) (79,737)
Investment in mining syndicates and mining companies (137,978) (27,500) (12,500)
Proceeds on gain on marketable securities and investments 220,751 9,655 60,040
----------- ---------- ----------
(2,634,560) (554,379) (122,222)
----------- ---------- ----------
Change in cash and cash equivalents 1,598,738 1,230,297 (82,070)
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 1,264,443 34,146 116,216
----------- ---------- ----------
CASH AND TERM DEPOSITS,END OF YEAR 2,863,181 1,264,443 34,146
=========== ========== ==========
</TABLE>
4
<PAGE> 51
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- -------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
The Company, directly and through joint ventures, is in the process of
exploring its mineral properties and has not yet determined whether these
properties contain ore reserves that are economically recoverable.
The recoverability of amounts shown for mineral properties and related
deferred costs is dependent upon the discovery of economically
recoverable reserves, confirmation of the Company's interest in the
underlying mineral claims, the ability of the Company to obtain necessary
financing to complete the development, and future profitable production
or proceeds from the disposition thereof.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
corporation and its subsidiaries and a proportionate share of the
accounts of joint ventures in which Diadem Resources Ltd. and its
subsidiaries have an interest.
FIXED ASSETS AND AMORTIZATION
Fixed assets are recorded at cost and are amortized over their
estimated useful lives using the declining balance method at the
following annual rates:
<TABLE>
<S> <C>
Furniture and fixtures 20%
Computer and equipment 30%
</TABLE>
FOREIGN CURRENCY TRANSLATION
Monetary and non-monetary items carried at market are translated at the
rate of exchange in effect at the balance sheet date. All other
non-monetary items are translated at historical rates. Revenue and
expense items are translated at the average rate of exchange for the
year.
MARKETABLE SECURITIES
Marketable securities are carried at the lower of cost and quoted
market value.
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES
Investment in mining syndicates and a private mining company are
carried at cost.
Investment in Waseco Resources Inc. is accounted for on the equity
basis of accounting.
5
<PAGE> 52
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST IN MINING PROPERTIES
The company's interest in mining properties is carried at cost on a
property by property basis. Costs include capitalized expenditures for
acquisition, geological surveys, exploration and development. When
shares of the company are issued from treasury as consideration for the
acquisition of mining properties, the market value of the shares is
considered a cost of acquisition. Costs for each property are written
off to the statement of income if future recovery is determined to be
unlikely.
All capitalized costs for each property will be amortized as depletion
to the statement of income when commercial production commences.
3. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
MAY 31, May 31,
1996 1995
$ $
<S> <C> <C>
Marketable securities 55,491 68,135
======== ========
</TABLE>
The estimated market value of the marketable securities is $246,991 (May
31, 1995 - $84,187).
The company also holds options to purchase 300,000 additional common
shares of Blue Emerald Resources Inc. at a price of $0.25 per share up to
March 16, 1997. The market value of the common shares was $0.60 per
share as at May 31, 1996.
Included in marketable securities are 100,000 shares of Noront Resources
Limited which are carried at $14,000. The current market value as at May
31, 1995 is $84,000. These shares were received from Noront Resources
Limited pursuant to an agreement whereby the company optioned a portion
of its interest in certain mining claims. Since these mining claims have
been terminated, the company may have to return the shares to Noront
Resources Limited. Included in accounts payable is $14,000 which is
equivalent to the carrying value of the shares.
6
<PAGE> 53
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES
Interest in mining properties is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Acquisition costs
Fletcher Lake, Northwest Territories (note 4b) 10,355 10,355
Rancheria, California (note 4c) 652,733 123,593
Leek Springs, California (note 4d) 254,711 -
Crystal Valley Region, Quebec (note 4e) 72,500 72,500
Dihourse Permit, Quebec (note 4f) 49,200 -
Pekan River and Sarah Lake, Quebec (note 4g) 54,400 -
Mercury Permit, Quebec (note 4h) 56,300 -
Belitung Island, Indonesia (note 4i) 103,000 -
--------- ---------
1,253,199 206,448
--------- ---------
Deferred exploration costs
Republic of Namibia (note 4a) - 35,382
Fletcher Lake, Northwest Territories 64,512 5,914
Rancheria, California 539,477 177,580
Leek Springs, California 292,127 -
Crystal Valley Region, Quebec 167,597 81,910
Dihourse Permit, Quebec 52,156 -
Pekan River and Sarah Lake, Quebec 621,458 -
Mercury Permit, Quebec 23,515 -
Belitung Island, Indonesia 111,010 -
Tewah, Indonesia (note 4l) 47,322 -
--------- ---------
1,919,174 300,786
--------- ---------
3,172,373 507,234
========= =========
</TABLE>
(a) REPUBLIC OF NAMIBIA
During the current year, the accumulated deferred exploration expenditure
of $35,382 related to the property in The Republic of Namibia, was
written off as the licenses were not renewed.
(b) FLETCHER LAKE, NORTHWEST TERRITORIES
The company holds an option with Noront Resources Ltd. to earn a 60%
mining interest in a 100,000 acre property in the Northwest Territories.
In order to exercise this option, the company was originally required to:
1) issue 200,000 shares of its capital stock to Noront Resources Ltd.
which were issued during the years ended May 31, 1994 and May 31,
1995;
7
<PAGE> 54
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
2) complete $1,000,000 in work prior to February 12, 1999.
The original stakers of the property retain a royalty of 3% on any
diamond production and a 1.5% net smelter royalty on any base metal or
gold production.
The company and Noront Resources Ltd. then entered into an agreement with
Pure Gold Resources Inc. whereby Pure Gold Resources Inc. would earn a
40% undivided interest in the property by issuing 100,000 of its capital
(60,000 to the company) and incurring $500,000 of expenditures on the
property prior to February 12, 1996 and maintaining the property in good
standing to March 15, 1996. The company received 30,000 of these shares
during the year ended May 31, 1994 when the market value of the shares
was $18,000 in aggregate and an additional 30,000 shares during the year
ended May 31, 1995 when the market value of the shares was $6,600 in
aggregate. The company reduced its carrying value of the property by the
market value of the shares of Pure Gold Resources Inc. received.
During the current year ended May 31, 1995, sufficient assessment work
was completed to ensure that approximately 15,000 acres of the 100,000
acres were in good standing until March 11, 1996. The company
relinquished any interest in the remaining 85,000 acres. Accordingly, a
charge to the income statement in the amount of $57,545 was recorded in
the year ended May 31, 1995. This charge was calculated as 85% of
accumulated acquisition costs.
The company then had no financial obligations with respect to the
property until the completion of Pure Gold Resources Inc.'s work.
However, Pure Gold Resources Inc. failed to complete the work and,
accordingly, several of the claims were forfeited. In order to mitigate
damages, Pure Gold Resources Inc. restaked some of the lost claims which
resulted in the reacquisition of certain of the claims. Noront Resources
Limited and the company have now entered into an amending agreement
whereby the company may earn a 60% interest in the claims maintained and
in additional staked claims by spending an aggregate of $250,000 of
additional expenditures by March 15, 1999.
(c) RANCHERIA, CALIFORNIA
The company has obtained an option to acquire up to a 60% interest in
mining claims in the Rancheria area of Amador County in California. This
option was granted by Silverstone Prospecting Syndicate which will
continue to hold the remaining unearned interest in the property.
Silverstone Prospecting Syndicate has registered 13 claims.
During the year ended May 31, 1995, the company acquired a 15% interest
in these claims by paying the sum of U.S. $50,000 to Silverstone
Prospecting Syndicate and issuing to Silverstone Prospecting Syndicate
150,000 common shares of the company, valued at $0.30 per share.
8
<PAGE> 55
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
During the current year, the company increased its interest in the
property to 30% by paying the sum of U.S. $50,000 to Silverstone
Prospecting Syndicate, issuing to Silverstone Prospecting Syndicate
150,000 common shares valued at $0.60 per share and spending a cumulative
amount of approximately $539,000 on the property.
The company also issued to Silverstone Prospecting Syndicate an
additional 150,000 common shares valued at $2.48 per share during the
current year as a step to increasing its interest to 45%. In order to
complete the acquisition of 45% in the property, the company must
complete the following by February 1, 1997:
1) pay an additional $100,000 U.S. to Silverstone Prospecting
Syndicate, and
2) complete $1,000,000 U.S. in cumulative expenditures on the
property.
In order to increase its interest to 60%, the company will be required to
complete $2,000,000 U.S. in cumulative expenditures on the property by
October 4, 1997.
The agreement also provides that if Silverstone Prospecting Syndicate is
successful in acquiring additional claims in the subject area, these
claims will also be included in the agreement. The company will be
entitled to earn a 60% interest in each additional claim without payment
of additional consideration except for the reimbursement of the actual
costs of acquiring these additional claims.
(d) LEEK SPRINGS, CALIFORNIA
The company has obtained an option to acquire up to a 55% interest in 56
unpatented mining claims covering approximately 1,120 acres in the Leek
Springs area of Eldorado County in California. This option was also
granted by Silverstone Prospecting Syndicate which will continue to hold
the remaining unearned interest in the property.
During the year ended May 31, 1996, the company earned a 10% interest in
the property by paying the sum of U.S. $50,000 to Silverstone Prospecting
Syndicate and issuing to Silverstone Prospecting Syndicate 150,000 common
shares valued at $1.24 per share. The company had incurred total
exploration expenditures of approximately $292,000 as at May 31, 1996.
To earn an additional 15% interest, thereby increasing its interest to
25%, the company must complete the following by October 21, 1996:
1) pay an additional $100,000 U.S. to Silverstone Prospecting
Syndicate;
2) issue 200,000 additional common shares to Silverstone Prospecting
Syndicate; and
3) complete $500,000 U.S. of cumulative exploration expenditures.
9
<PAGE> 56
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
To earn an additional 15% interest, thereby increasing its interest to
40%, the company must complete the following by March 20, 1997:
1) pay an additional $100,000 U.S. to Silverstone Prospecting
Syndicate;
2) issue 200,000 additional common shares to Silverstone Prospecting
Syndicate; and
3) complete $1,000,000 U.S. of cumulative exploration expenditures.
Depending upon exploration results, the cumulative expenditures could be
increased to $1,500,000 to obtain this additional 15% interest.
To earn the final 15% interest in the property, thereby increasing its
interest to 55%, the company must complete the following by August 2,
1998:
1) pay an additional $100,000 U.S. to Silverstone Prospecting
Syndicate;
2) issue 200,000 additional common shares to Silverstone Prospecting
Syndicate; and
3) complete $5,000,000 U.S. of cumulative exploration expenditures.
(e) CRYSTAL VALLEY REGION, QUEBEC
The company has acquired a 100% interest in 144 registered claims,
totalling 5,036 hectares, in the Crystal Valley Region near Montreal in
the Province of Quebec. To acquire the mining rights, the company made a
cash payment of $12,500 and issued 200,000 common shares when the market
value of the shares was $0.30 per share. The agreement also provides
that the company will pay a royalty of 2% of gross proceeds for the sale
of diamonds recovered from the property. The claims are in good standing
until October 1996.
(f) DIHOURSE PERMIT, QUEBEC
The company has entered into an option agreement with Beaver Syndicate
which will enable it to earn a 90% interest in a 5,900 hectare property
in Quebec. Beaver Syndicate will continue to hold the remaining unearned
interest in the property and will retain a 1.5% net smelter return on
production.
The company satisfied the requirements to earn a 51% interest during the
current year by paying $9,200 to Beaver Syndicate and issuing 30,075
common shares valued at $1.33 per share. A total of $52,156 was expended
on the property during the current year.
10
<PAGE> 57
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
To earn an additional 19% interest, thereby increasing its interest to
70%, the company will be required by September 19, 1996 to:
1) issue to Beaver Syndicate $40,000 worth of additional common shares
or pay $60,000 in cash at the company's option;
2) pay the first year's annual rentals; and
3) commit to complete a second year's assessment work.
To earn an additional 10% interest, thereby increasing its interest to
80%, the company will be required by September 19, 1997 to issue to
Beaver Syndicate $60,000 worth of additional common shares or pay $60,000
in cash at the company's option. To earn the final 10% interest, thereby
increasing its interest to 90%, the company will be required by September
19, 1998 to issue to Beaver Syndicate $60,000 worth of additional common
shares or pay $60,000 in cash at the company's option.
The permit is valid until September 17, 2000 and remains in good standing
until September 18, 1997 at which time renewal fees are payable and
assessment work is due.
During the current year, the company formed a joint venture with Ateba
Mines Inc. which holds an option on a 3,100 hectare property in Labrador
which runs parallel to the property covered by the Dihourse permit. The
joint venture agreement contemplates that the parties will participate
equally in the costs of exploration and development of the properties as
well as the benefits and contribute their respective interests in the
permit to the venture.
(g) PEKAN RIVER AND SARAH LAKE, QUEBEC
The company entered into an option agreement which enables it to purchase
a 90% interest in 5,000 hectares of property in Quebec known as the Pekan
River Prospect. This option was granted by Beaver Syndicate which will
continue to hold the remaining unearned interest in the property. A
further agreement was reached with Beaver Syndicate to also acquire an
interest in an additional property in Quebec known as the Sarah Lake
Project. This second property is included in the earlier agreement for
no additional consideration other than a fee of $5,200. The original
permit holder will retain a 1.5% net smelter return on production.
The company earned a 51% interest in the properties by paying the sum of
$9,200 to Beaver Syndicate and issuing to Beaver Syndicate 80,000 common
shares valued at $0.50 per share. A total of $621,458 was expended on
the properties during the current year.
11
<PAGE> 58
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
The company can earn an additional 19% interest, thereby increasing its
interest to 70%, by completing the following by October 31, 1996:
1) issue to Beaver Syndicate $60,000 worth of common shares or pay
$60,000 in cash, at the company's option
2) pay the first year's annual rentals
3) commit to complete a second year's assessment work
The company can earn an additional 10% interest, thereby increasing its
interest to 80%, up to May 30, 1997, by issuing to Beaver Syndicate
$60,000 worth of common shares or by paying $60,000 in cash, at the
company's option.
The company can earn an additional 10% interest, thereby increasing its
interest to 90%, up to May 30, 1998, by issuing to Beaver Syndicate
$60,000 worth of common shares or by paying $60,000 in cash, at the
company's option.
The company has been advised that the Pekan River permit is valid until
May 23, 2000 and is in good standing until May 24, 1997, at which time
renewal fees must be paid and suitable assessment work filed. The Sarah
Lake permit is valid until October 25, 2000 and remains in good standing
until September 26, 1996, at which time renewal fees are payable and
assessment work is due.
(h) MERCURY PERMIT, QUEBEC
The company has also entered into an agreement with Trinity Syndicate to
purchase a 90% mining interest in 11,500 hectares of property in Quebec.
Trinity Syndicate will continue to hold the unearned interest and will
retain a 1.5% net smelter return on production.
The company earned a 51% interest in the property by paying the sum of
$16,300 to Trinity Syndicate and issuing to Trinity Syndicate 80,000
common shares valued at $0.50 per share. A total of $23,515 was expended
on the property during the current year.
The company can earn an additional 19% interest, thereby increasing its
interest to 70%, by completing the following by December 31, 1996:
1) Issue to Trinity Syndicate $80,000 worth of common shares or pay
$80,000 in cash, at the company's option
2) Pay the first year's annual rentals
12
<PAGE> 59
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
3) Commit to complete a second year's assessment work
The company can earn an additional 10% interest, thereby increasing its
interest to 80%, up to May 16, 1997, by issuing to Trinity Syndicate
$80,000 worth of common shares or by paying $80,000 in cash, at the
company's option.
The company can earn an additional 10% interest, thereby increasing its
interest to 90%, up to May 16, 1998, by issuing to Trinity Syndicate
$80,000 worth of common shares or by paying $80,000 in cash, at the
company's option. Trinity Syndicate has advised the company that the
permit is valid to May 11, 2000 and the property is in good standing
until May 21, 1997, at which time renewal fees will be payable and
assessment work will need to be filed.
(i) BELITUNG ISLAND, INDONESIA
The company has entered into an option agreement with an Indonesian
company whereby it can acquire a 90% interest in mining property on
Belitung Island in Indonesia. The company is required to spend a total
of U.S. $1,000,000 in exploration and development expenditures. The
company issued 100,000 shares valued at $1.03 per share for the
opportunity of entering into the agreement. The Indonesian company will
retain a 10% working interest in the property. The company has entered
into an agreement with Bresea Resources Ltd. whereby Bresea Resources
Ltd. has the right to acquire a 60% working interest in the property with
the company retaining a right to acquire a 30% working interest in the
property. Bresea Resources Ltd. is to pay the first U.S. $100,000 of
exploration expenditures on the property.
(j) MIRAH NORTH EAST, KALAMANTAN, INDONESIA
The company has entered into a joint venture arrangement to acquire a 30%
interest in a 10,300 hectare property in the Kalamantan gold belt in
Indonesia. The remaining interest will be held 15% by an Indonesian
company, 30% by Tandem Resources Ltd. and 25% by Bresea Resources Ltd.
All joint venture exploration expenditures are to be incurred by each
non-Indonesian joint venture party in proportion to their interest in the
property. Upon commencement of mining operations, all costs and expenses
incurred are to be borne by all parties on a pro rata basis.
(k) MAHAKAM, KALAMANTAN, INDONESIA
The company has entered into two separate joint venture arrangements to
acquire a 30% interest in two 10,000 hectare properties in the Kasogan
Area of East Kalamantan, Indonesia. The properties are located 20
kilometres apart. The remaining interest in each property will be held
15% by an Indonesian company, 30% by Tandem Resources Ltd. and 25% by
Bresea Resources Ltd. All joint venture exploration expenditures are to
be incurred by each non-Indonesian joint venture party in proportion to
their interest in the property. Upon commencement of mining operations,
all costs and expenses incurred are to be borne by all parties on a pro
rata basis.
13
<PAGE> 60
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
(l) TEWAH, INDONESIA
The company entered into an agreement to participate with an Indonesian
mining company for the exploration and development of gold property in
the Kahayan River Valley in Indonesia. The agreement allows the company
to acquire a 60% interest for an expenditure of the greater of U.S.
$1,500,000 or the cost of completing a full feasibility study on the
property.
The company then entered into an agreement with Waseco Resources Inc.
whereby Waseco Resources Inc. could earn the company's interest in the
property by spending the U.S. $1,500,000 on the property and issuing
treasury shares to the company. The acquisition was to be accomplished
by Waseco Resources Inc. whereby it has three separate options to
purchase 20% at each option date satisfied by spending U.S. $500,000 by
each date and issuing a cumulative 7,000,000 common shares from treasury.
The agreement has been amended to state that Waseco Resources Inc. has
spent the first U.S. $500,000 and issued to the company 4,750,000 common
shares from treasury and a further 250,000 common shares were issued to
the company subsequent to the year end. Accordingly, Waseco Resources
Inc. has earned the first 20% interest in the property. However, the
company will fund the next U.S. $500,000 of expenditures and thereby
acquire a 20% interest in the property. Waseco Resources Inc. will have
the right to buy back this 20% up to December 31, 1996 by reimbursing the
company for expenditures incurred and funding the remaining required
expenditures to meet the U.S. $500,000 threshold if required. If Waseco
Resources Inc. does not repurchase this second 20% interest by December
31, 1996,the earlier agreement is considered terminated with the
following results:
1) Waseco Resources Inc.'s interest in the property is fixed at 20%
and the remaining 40% can be earned by the company; and
2) The 5,000,000 shares of Waseco Resources Inc. held by the company
are non-refundable and will remain the property of the company.
14
<PAGE> 61
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
5. INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Investment in mining syndicate 40,000 40,000
Investment in private mining company 137,978 -
--------- ---------
177,978 40,000
========= =========
</TABLE>
The company participated in a private placement during the current year
whereby it purchased 10,000 ordinary shares of Randgold Resources Limited
at a cost of $137,978. The company holds less than 1% of the outstanding
shares. Randgold Resources Limited is involved in the exploration of
gold mining properties in Africa.
Investment in mining syndicates consists of 4.0 units (1995 - 4.0 units)
in Silverstone Prospecting Syndicate with a cost of $20,000 (1995 -
$20,000) and 2.0 units (1995 - 2.0) in Beaver Syndicate with a cost of
$20,000 (1995 - $20,000). Silverstone Prospecting Syndicate is currently
exploring properties in the United States while Beaver Syndicate is
exploring properties in Northern Labrador and Quebec. As at May 31,
1996, the company holds 8% of the outstanding units in Silverstone
Prospecting Syndicate and 8% of the outstanding units in Beaver
Syndicate.
In addition, the company holds 4,750,000 common shares of Waseco
Resources Inc. This represents approximately 47% of the outstanding
shares. These shares were acquired pursuant to the transfer of the
mining options in the Tewah property in Indonesia (see note 4l) to Waseco
Resources Inc. No value has been attached to these shares for accounting
purposes as the company had not incurred any costs in obtaining these
option rights which were transferred in exchange for the shares. A
further 250,000 common shares of Waseco Resources Inc. were received
subsequent to the year end.
6. FIXED ASSETS
<TABLE>
<CAPTION>
MAY 31, MAY 31,
ACCUMULATED 1996 1995
COST AMORTIZATION NET NET
$ $ $ $
<S> <C> <C> <C> <C>
Furniture and fixtures 31,199 25,013 6,186 7,733
Computer and equipment 21,532 2,270 19,262 3,572
--------- --------- --------- --------
52,731 27,283 25,448 11,305
========= ========= ========= ========
</TABLE>
15
<PAGE> 62
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
7. RELATED PARTY INFORMATION
ACCOUNTS PAYABLE AND DEFERRED EXPLORATION COSTS
During the current year, the company incurred fees totalling
$73,141 (1995 - $27,395), related to exploration work from a
company in which a director holds a 49% interest. A balance of
$4,966 (1995 - $9,702) related to these fees is included in
accounts payable at the current year end date. In addition, a
company which is wholly owned by a director, charged $56,640 (1995
-nil) during the current year in consulting fees related to
exploration work.
These transactions are in the normal course of operations and are
measured at the exchange amount which is the amount of
consideration established and agreed to by the related parties.
PREPAID EXPENSES AND SUNDRY RECEIVABLES
Included in prepaid expenses and sundry receivables is the amount
of $37,449 (1995 - $nil) due from Waseco Resources Inc.
8. CAPITAL STOCK
(a) Authorized capital
Authorized capital stock of the company consists of an unlimited
number of special shares, redeemable and retractable at paid-up
value and an unlimited number of common shares.
(b) Issued and outstanding shares
Details of issued and outstanding common shares are as follows:
<TABLE>
<CAPTION>
1996 1995
Shares $Amount Shares $Amount
<S> <C> <C> <C> <C>
Balance, beginning of year 12,399,581 3,562,799 4,653,581 1,226,999
Issued pursuant to:
Private placement - - 100,000 30,000
Initial public offering - - 7,236,000 2,170,800
Warrants exercised by shareholders 7,841,600 3,136,640 - -
Shares issued to related
to the purchase of mining properties 740,075 871,000 410,000 135,000
Exercise of share options 585,000 290,950 - -
Exercise of promoter's options 350,000 140,000 - -
----------- ---------- ----------- ----------
21,916,256 8,001,389 12,399,581 3,562,799
=========== ========== =========== ==========
</TABLE>
16
<PAGE> 63
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. CAPITAL STOCK (CONTINUED)
(c) Initial public offering
During the year ended May 31, 1995, the company completed an
initial public offering which resulted in the issuance of 7,236,000
common shares at a price of $0.30 per share for gross proceeds of
$2,170,800. In addition, a total of 6,752,000 warrants to purchase
additional common shares at $0.40 per share were issued pursuant to
the offering. In addition, 1,120,000 warrants were granted to
investors who had been issued shares through a private placement in
the year ended May 31, 1993. These warrants allowed the holder to
purchase additional common shares at $0.40 per share.
During the year ended May 31, 1996, 7,841,600 warrants were
exercised with gross proceeds of $3,136,640. All unexercised
warrants have expired.
A director, in his capacity as a promoter of the company, received
350,000 additional options to purchase common shares at $0.40 per
share pursuant to the initial public offering. During the year
ended May 31, 1996, these options were exercised with proceeds of
$140,000.
The costs associated with this offering which totalled $402,285
during the year ended May 31, 1995 and $12,660 during the year
ended May 31, 1996, have been charged directly against retained
earnings.
(d) Share Option Plan
The company has a share option plan under which options to purchase
common shares may be granted by the board of directors to
directors, officers employees and eligible service providers of the
corporation for terms up to five years at a price equal to the
market price prevailing on the date of the grant. The maximum
number of options available for grant under the plan is 1,215,000.
The following is a summary of the options which have been granted
by the board of directors:
<TABLE>
<CAPTION>
Expiry Date Option Price Number of Shares
$
<S> <C> <C>
June 5, 2000 0.62 575,000
November 28, 2000 1.27 80,000
January 26, 2001 1.86 200,000
June 7, 2001 5.50 620,000
---------
1,475,000
=========
</TABLE>
17
<PAGE> 64
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. CAPITAL STOCK (CONTINUED)
Included in the above are the following options which are pending
the shareholders' approval, including an increase in the maximum
number of share options available from 1,215,000 to 2,190,000:
<TABLE>
<CAPTION>
Expiry Date Option Price Number of Shares
$
<S> <C> <C>
November 28, 2000 1.27 25,000
January 26, 2001 1.86 200,000
June 7, 2001 5.50 620,000
</TABLE>
9. INCOME TAXES
As at May 31, 1996, the company had accumulated tax losses of $1,122,000
which may be applied against future taxable income. These losses expire
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending In: $
<S> <C>
1997 339,000
1998 114,000
1999 339,000
2000 30,000
2001 100,000
2002 190,000
2003 10,000
-----------
1,122,000
===========
</TABLE>
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in Canada, which
differ in certain material respects from GAAP in the United States. Had
the company followed GAAP in the United States, certain items in the
consolidated
18
<PAGE> 65
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
statements of income and consolidated balance sheets would have been
reported as follows:
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME 1996 1995 1994
$ $ $
<S> <C> <C> <C>
Primary loss per share as
per GAAP in Canada (note 10a) .01 .03 .02
Primary loss per share as
per GAAP in the United States (note 10a) .01 .02 .02
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS May 31,
1996 1995
$ $
<S> <C> <C>
Marketable securities (note 10c) 246,991 84,187
Interest in mining properties (note 10b)
Investment in mining syndicates 2,911,041 507,234
and mining companies (notes 10b and 3) 439,310 40,000
Accounts payable (notes 10b and 3) 301,266 118,898
Capital stock (note c) 7,516,235 3,090,305
Deficit (note c) (1,324,857) (1,282,675)
Difference between cost and market value
of marketable securities (note d) 107,500 16,052
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
During the year, the company issued 740,075 common shares (1995 -
410,000,. 1994 -40,000) of its share capital as consideration for the
acquisition of mining properties in the amount of $871,000 (1995 -
$135,000, 1994 - $62,500). These amounts have been included in the
consolidated statement of changes in financial position as financing and
investing activities. Under GAAP in the United States, these non-cash
transactions would not have been shown in the consolidated statement of
changes in financial position.
The net change in non-cash working capital balances related to
operations is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Prepaid expenses and sundry receivables (92,762) (29,463) (5,795)
Accounts payable and accrued charges 112,368 (15,650) 73,095
--------- --------- ---------
19,606 (45,113) 67,300
========= ========= =========
</TABLE>
19
<PAGE> 66
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
(a) LOSS PER SHARE
Under GAAP in the United States, the computation of primary income
(loss) per share considers the weighted average number of shares
outstanding during the year plus common share equivalents, such as
options and warrants. This method requires that primary income (loss)
per share be computed as if the common share equivalents were exercised
at the beginning of the year or at the date of issue and as if the funds
obtained thereby were used to purchase common shares of the company at
their average market price during the year.
Under GAAP in Canada, basic income (loss) per share is calculated using
the weighted average number of shares outstanding during the year.
(b) INTEREST IN MINING PROPERTIES AND MINING COMPANIES
The company's investment in certain incorporated joint ventures has been
proportionately consolidated. Incorporated joint ventures are accounted
for by the equity method under GAAP in the United States.
(c) SHARE ISSUE EXPENSES
Share issue expenses are shown as an increase of deficit as provided
under GAAP in Canada. Under GAAP in the United States, these expenses
are shown as a reduction of share capital.
(d) INVESTMENTS IN SHARES OF PUBLIC COMPANIES
Under GAAP in the United States, the company's investments in shares of
public companies are carried at fair value. Changes in the market value
of investments are included as a component of shareholders' equity.
11. COMMITMENTS AND CONTINGENCIES
During the current year, the company entered into an agency agreement
with Brenark Securities Ltd. for the issuance of 1,000,000 Special
Warrants at a price of $5.75 per Special Warrant. Each Special Warrant
entitles the holder to be issued one common share and one-half of a
common share warrant. Each whole common share warrant entitles the
holder to acquire one common share of the company at a price of $6.75
per share until May 17, 1997.
20
<PAGE> 67
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The proceeds of $5,750,000 less $402,500 of commissions paid to Brenark
Securities Ltd. less $50,000 paid to the company to fund expenses
incurred to date by the company were held in escrow by Montreal Trust
Company of Canada. The release of the funds and the issuance of the
common shares were subject to the company obtaining a receipt for a
final prospectus from the necessary regulatory commissions by September
14, 1996. The necessary receipts were obtained within the required time
period and the proceeds were released to the company subsequent to the
year end.
Included in prepaid expenses are $35,494 of expenses related to this
offering. Included in accounts payable is the $50,000 advance on
expenses released from the escrowed funds.
In addition to the commission outlined above, Brenark Securities Ltd.
was also issued a Brokers Warrant which entitles it to purchase on or
before May 17, 1997, 50,000 common shares at an exercise price of $6.75
per share.
21
<PAGE> 68
<TABLE>
<S> <C>
For Ministry Use Only Ontario Corporation Number
a usage exclusil du ministre Numeric de is compagne en Onterio
[LOGO] Ministry of Ministere de
Consumer and la Consummation 841767
Relations et du Commerce ------------------------------------
CERTIFICATE CERTIFICAT
This is to clerify that these Ceci certife que les presents
articles are effective on statuts entrent en vigueur la
APRIL 20 AVRIL 1993
- -------------------------------------------------------------------
[SIG] TRANS
Director/Directeur CODE
Business Corporation Act / loi de sut less compaginies ------
C
-----
18
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ARTICLES OF AMENDMENT
STATUTS DE MODIFICATION
<S> <C>
Form 3 1. The present name of the corporation is: Denomination sociale actuette de la compagnie:
Business
Corporations H O W E E X P L O R A T I O N & D E V E L O P M E N T C O . L I M I T E D
Act.
1982
Formule
Numero 3
Loi de 1982
sur les 2. The name of the corporation is changed to (if Nuvelle denomination sociale de la compagnie (si'l y
Compagnies applicable): a lieu):
H O W E X E N T E R P R I S E S L . T . D .
3. Date of incorporation/amaigamation: Date de la constitution ou de la fusion:
01 - 06 - 1989
---------------------------------------------------------------------------------------------------------------
(Date, Month, Year)
(jour, mors, annee)
4. The articles of the corporation are amended as Les statuts de la compagnie sont modities de la facon
following: suivante:
</TABLE>
(a) The name of the Company is changed to Howex Enterprixes Ltd.;
(b) The provisions with respect to the restrictions on transfer of
ownership of shares as set out in paragraph 9 and paragraph 14(a) of
Schedule B of the Articles of Amalgamation are hereby deleted;
(c) The provision limiting the number of shareholders as set out in
paragraph 14(b) of Schedule B to the Articles of Amalgmation is hereby
deleted; and
(d) The provision prohibiting any invitation to the public to subscribe
for securities as set out in paragraph 14(c) of Schedule B to the
Articles of Amalgamation is hereby deleted.
<PAGE> 69
5. The amendment has been duly La modification a ete dument
authorized as received by Section autorisee conformement a l'article
167 and 169 (as applicable) of 167 et. sil y a lieu. a l article
the Business Corporations Act. 169 de la Loi surles compagines.
6. The resoultion authorizing the Les actionnaires ou less
amendment was approved by the administrateurs (le cas echeant,
shareholders/directors (as de la compaginie ont approuve la
applicable) of the corporation on resolution autorisen; la
modification
19 - 04 - 1993
----------------------------------------------------------------------------
(Day, Month, Year)
(jour, mois, annde)
These articles are signed in Les presents statuts sont signes en
duplicate. double exemplaire.
HOWE EXPLORATION & DEVELOPMENT
CO. LIMITED
-----------------------------------
(Name of Corporation)
(Denomintion sociale de la compagnie)
By/Par: [SIG] DIRECTOR
-------------------------------------
(Signature) (Description of Office)
<PAGE> 70
<TABLE>
<S> <C>
For Ministry Use Only Ontario Corporation Number
a usage exclusil du ministre Numeric de is compagne en Onterio
[LOGO] Ministry of Ministere de
Consumer and la Consummation 841767
Relations et du Commerce ------------------------------------
CERTIFICATE CERTIFICAT
This is to clerify that these Ceci certife que les presents
articles are effective on statuts entrent en vigueur la
SEPTEMBER 23 SEPTEMBRE, 1994
- -------------------------------------------------------------------
[SIG] TRANS
Director/Directeur CODE
Business Corporation Act / loi sur les par actions ------
C
-----
18
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ARTICLES OF AMENDMENT
STATUTS DE MODIFICATION
<S> <C>
Form 3 1. The present name of the corporation is: Denomination sociale actuelle de la compagnie:
Business ----------------------------------------------------------------------------------------------------------
Corporations H O W E X E N T E R P R I S E S L T D .
Act. ----------------------------------------------------------------------------------------------------------
1982 ----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Formule ----------------------------------------------------------------------------------------------------------
Numero 3 ----------------------------------------------------------------------------------------------------------
Loi de 1982 ----------------------------------------------------------------------------------------------------------
sur les 2. The name of the corporation is changed to (if Nuvelle denomination sociale de la compagnie (s'il
Compagnies applicable): y a lieu):
----------------------------------------------------------------------------------------------------------
D I A D E M R E S O U R C E S L T D .
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
3. Date of incorporation/amalgamation: Date de la constitution ou de la fusion:
01 - 06 - 1989
---------------------------------------------------------------------------------------------------------------
(Date, Month, Year)
(jour, mors, annee)
4. The articles of the corporation are amended as Les statuts de la compagnie sont modities de la facon
following: suivante:
</TABLE>
(i) The name of the corporation is changed in Diadem Resources Ltd;
and
(ii) The 11,633,934 issued and outstanding common shares of the
corporation are consolidted in 4,653,574 issued and outstanding
common shares, or such other number as may result from rounding,
on the basis of ONE (1) post-consolidation common share for each
TWO AND ONE HALF (2.5) issued and outstanding pre-consolidation
common shares of the Corporation; provided, however, that any
person who, on the date of these Articles of Amendment is the
registered holder of a number of pre-consolidation common shares
not divisible by TWO AND ONE HALF (2.5) shall not be entitled to
receive any fractional interests in a post-consolidation common
share following the consolidation, or any payment of any nature,
kind or description in lieu of such fractional post-consolidation
common share; provided furrther that fractional post-consolidation
common shares equal to or in excess of ONE HALF (.5) shall be
rounded to ONE (1) whole post-consolidation common share, while
fraction post-consolidation common shares less than ONE HALF (.5)
shall be rounded down.
<PAGE> 71
5. The amendment has been duly La modification a ete dument
authorized as received by Section autorisee conformement a l'article
167 and 169 (as applicable) of 167 et. s'il y a lieu, a l'article
the Business Corporations Act. 169 de la Loi sur les compagnies.
6. The resolution authorizing the Les actionnaires ou les
amendment was approved by the administrateurs (le cas echeant)
shareholders/directors (as de la compagnie ont approuve la
applicable) of the corporation on resolution autorisant la
modification
23 - 09 - 1994
----------------------------------------------------------------------------
(Day, Month, Year)
(jour, mons, annee)
These articles are signed in Les presents statuts sont signes en
duplicate. double exemplaire.
HOWEX ENTERPRISES LTD.
-----------------------------------
(Name of Corporation)
(Denomination societe de la compagnie)
By/Par: A.C.A. HOWE PRESIDENT
-------------------------------------
(Signature) (Description of Office)
(Signature) (Foncioni)
<PAGE> 72
<TABLE>
<S> <C>
For Ministry Use Only Ontario Corporation Number
a usage exclusil du ministre Numero de is compagnie en Ontario
[LOGO] Ministry of Ministere de
Consumer and commercial la Consommation 841767
Relations et du Commerce ------------------------------------
CERTIFICATE CERTIFICAT
This is to certify that these Ceci certifie que les presents
articles are effective on statuts entrent en vigueur la
JUNE 1 JUIN 1989 ??? ?? ??? ??? ??? ??? ???
- ------------------------------------------------------------------- ------ ------ ----- ----- ------ -----
[SIG] A O O A 3 S
Director/Directeur ------ ------ ----- ----- ------ -----
BUSINESS CORPORATION ACT / LOI DE SUR LES COMPAGNIES
??? ????????????
------ ---------------------- -----
N ONTARIO A
------ ---------------------- -----
1. JJ
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ARTICLES OF AMALGAMATION
STATUTS DE FUSION
<S> <C>
Form 3 1. The name of the amagamated corporation is: Denomination sociale de la compagnie issue de la fusion
Business
Corporations H O W E E X P L O R A T I O N & D E V E L O P M E N T C O . L I M I T E D
Act.
1982
Formule
numero 3
Loi de 1982
sur les 2. The address of the registered office is Adrese du siege social
compagnies
22 Front Street West, Suite 1406,
---------------------------------------------------------------------------------------------------------------
Toronto, Ontario |M|5|J|1|C|4|
---------------------------------------------------------------------------------------------------------------
Name of Municipality or Post Office {Postal Code)
(Code Postal)
Toronto
Municipality of Metropolitan/ in the Judicial District of York
----------------------------------------- dens le/la ----------------------------------------------------------
(County, District, Regional Municipality)
(Come, district, municipalite
regionale)
3. Number (or minimum and maximum number) Nombre (ou nombers minimal et maximal) d'admin-
of directors is: strateurs:
A minimum of 1 and a maximum of 15.
The director(s) is/are Administrateurs
Resident
Canadian
First name, middle and surname Residence address giving Street & No or R.R. State
Prenom initiates et nom de famille No. Municipality and Postal Code Yes or No
Address personnelle y compris la rue et le Reside of
mumero le numero de la R. R. ou le nom de la Canadien
municipalite et le code postal Oui ou Non
------------------------------------------------------------------------------------------------------------
A.C.A. HOWE Villa LePonant, Route de Tahiti No
53350 Ramatuelle, France
LINA NOBLE 110 Meadowvale Road, Scarborough, Yes
Ontario, MLC 151
</TABLE>
<PAGE> 73
2
---
5. A) The amalgamation agreement has X A) Les actionnaires de chaque
been duly adopted by the --- compagnie qui lusionno out
shareholders of each of the diment adopte la convention de
amalgamating corporations as fusion conformement au
required by subsection 175(4) paragraphe 175(4) de la Loi sur
of the Business Corporations les compagnies a la date
Act on the date set out below. ????????? ci-dessous.
-------------------------
Check Cocher
A or B A ou B
-------------------------
B) The amalgamation has been --- B) les ad?????????? de chaque
approved by the directors of each compagnie qui lusion oat
amalgamating corporation by a --- approuve la fusion par vore de
resolution as required by section resolution conformement a
176 of the Business Corporations l'article 176 de la Loi sur les
Act on the date set out below compagnins a la date ?????????
The articles of amalagamation in cidessous, les status de fusion
substance contain the provisions reprennent essoulielleomont les
of the articles of incorporation of dispositions des status
constitutits de
- --------------------------------------------------------------------------------
and are more particularly set out et sont enonces textuellemont
in these articles. aux presents status
Names of amalgamating Ontario Corporation Number Date of
corporations Numero de la compagnie en Adoption/Approval
Denomination sociale des Ontario Date d'adoption
compagnies qui fusionnent ou d'approbation
- --------------------------------------------------------------------------------
HOWE EXPLORATION & 140537 May 29, 1989
DEVELOPMENT CO.
LIMITED
MERIGOMISH INVESTMENTS 620372 May 29, 1989
LIMITED
<PAGE> 74
3
6. Restrictions, if any, on business Limites. s'il y a lieu, imposees
the corporation may carry on or aux activites commerciales ou aux
on powers the corporation exercise. puvoirs de la compagnie.
NONE
7. The classes and any maximum Categories et nombre maximal s'il y
number of shares that the a lieu, d'actions que la compagnie
corporation is authorized est autorisee a emettre:
to issue.
An unlimited number of common shares without nominal or par value and an
unlimited number of special shares without nominal or par value.
<PAGE> 75
8. Rights, privileges, restrictions Droits, privileges, restricitons et
and conditions (if any) attaching conditions sil y a lieu, rettaches
to each class of shares and a chaque categorie d'actions et
directors authority with respect pouyoirs des administrateurs relatifs
to any class of shares which is to a chaoue caregorie d'actions qui peul
be issued in series. etre emise en serie:
The following rights, privileges, restrictions and conditions are attached to
the common shares, the holders of which are entitled:
(i) To vote at all meetings of shareholders except meetings at which only
shareholders of a specified class of shares are antitled to vote;
(ii) To receive any dividends declared by the Corporation; and
(iii) Subject to the rights, privileges, restrictions and conditions
attaching to other class of shares of the Corporation, to receive the
remaining property of the Corporation upon dissolution; and
The following rights, privileges, restrictions and conditions are attached to
the special shares:
(i) The holders of the special shares shall, in the discretion of the
directors, always in priority and preference to any payment of dividends
on the common shares, be entitled, out of any or all profits or surplus
available for dividends, to non-cumulative dividends at a rate to be
determined by the board of directors on the amount paid up on the special
shares; if in any year after providing for the full dividend of the
special shares there shall remain any profits or surplus available for
dividends, such profits or surplus or any part thereof may in the
discretion of the directors be applied to dividends on the common shares;
the holders of the special shares shall not be entitled to any dividend
other than or in excess of the cumulative dividend hereinbefore provided;
(ii) The special shares shall rank both as regards to dividend and
repayment of capital in priority to the common shares, but shall not
confer any further right to participate in profits or assets;
(iii) The holders of the special shares shall not as such have any voting
rights to the election of directors or for any other purpose nor shall
they be entitled to attend shareholders' meetings. The holders of the
special shares shall however be entitled to notice of meetings of
shareholders called for the purpose of authorizing disolution of the
Corporation or the sale of its undertaking or a substantial part thereof;
<PAGE> 76
4A.
(iv) The Corporation may, upon giving
notice as hereinafter provided, redeem the whole or
any part of the special shares on payment for each
share to be redeemed of the amount paid up thereon
together with all dividends declared thereon together
with all dividends declared thereon and unpaid; not
less than 10 days' notice in writing of such
redemption shall be given by mailing such notice to
the registered holders of the said shares to be
redeemed specifying the date and place or places of
redemption. If notice of any such redemption is
given by the Corporation in the manner aforesaid, an
amount sufficient to redeem the shares shall be
deposited with any trust company or chartered bank in
Canada as specified in the notice, on or before the
date fixed for redemption, dividends on the said
special shares to be redeemed shall cease after the
date so fixed for redemption, and the shareholders
thereof shall thereafter have no rights against the
Corporation in respect thereof except upon the
surrender of certificates for such shares, to receive
payment therefor out of the monies so deposited;
(v) The holders of the special shares
may upon giving notice hereinafter provided require
the redemption of the whole or any part of their
special shares and receive payment for each share
redeemed of the amount paid up thereon together with
all dividends declared thereon and unpaid; not less
than 30 days' notice in writing of such requirement
for redemption shall be given by mailing such notice
to the secretary of the corporation specifying the
required date of redemption and upon surrender of
certificates for such shares, the holders shall
receive payment therefor by the Corporation.
(vi) The Corporation may at any time and
from time to time purchase for cancellation the whole
or any part of the special shares at the lowest price
at which in the opinion of the directors such shares
are obtainable, but not exceeding the amount paid up
thereon with all dividends declared thereon and
unpaid.
<PAGE> 77
4B.
(vii) In the event of the liquidation, dissolution
or winding up of the Corporation, whether voluntary
or involuntary, the holders of the special shares
shall be entitled to receive the amount paid up
thereon and any dividends declared thereon and
unpaid, but shall not be entitled to receive any
further amount.
<PAGE> 78
9. The issue transfer or ownership L'emission, le transfert ou le propriete
of shares vs/stock restricted d'actions est n'est pas restrante.
and the restrictions (if any) Les restrictions s'il y a lieu, sont les
are as follows: suivantes:
The right to transfer shares of the Corporation shall be restricted in that no
shares shall be transferred without either:
(a) the express sanction of the Directors, to be signified by
resolution or by instrument or instruments in writing signed by the
majority of the Directors; or
(b) The consent of the holders of the common shares of the Corporation
expressed either by resolution of such shareholders or by instrument
or instruments in writing signed by the holders of a majority of the
outstanding common shares in the capital stock of the Corporation.
10. Other promotion (if any) Auties dispositions s'il y a lieu
NONE
11. The statements required by Les declarations enigees aux termes
subsection 177(2) of the du paragraphs 177(2) de la Loi sur
Business Corporation Act are les compagnies constituent
attached as Schedule "A" l'annexe "A"
12. A copy of the amaigamation Une copie de la convention de fusion ou
agreement or directory les resolutions des administrateurs
resolutions (as the case (selon le cas) constituent)
may be) is/are attached l'annexe "B"
as Schedule "B"
<PAGE> 79
6
These articles are signed Les presents statuts sont signes
in duplicate en double exemplane
- --------------------------------------------------------------------------------
Names of the amalgomating Denomination sociale des compagnies qui
corporations and signatures ????signature et fonction de leurs
and descriptions of office ???regulierement designes
of their proper offices
HOWE EXPLARATION & DEVELOPMENT
CO. LIMITED
Per:
/s/ LINA NOBLE
---------------------------------------
Lina Noble - Secretary
MERIGOMISH INVESTMENTS LIMITED
Per:
/s/ LINA NOBLE
---------------------------------------
Lina Noble - Secretary
<PAGE> 80
SCHEDULE "A"
STATEMENT OF DIRECTOR OR OFFICER
PURSUANT TO SUBSECTION 177(2) OF
THE BUSINESS CORPORATIONS ACT, 1982
I, LINA NOBLE, of the City of Toronto, in the Province of
Ontario, HEREBY CERTIFY AND STATE as follows:
1. This statement is made pursuant to subsection 177(2) of The
Business Corporation Act, 1982.
2. I am the Secretary and a Director of MERIGOMISH INVESTMENTS
LIMITED and as such have knowledge of its affairs.
3. I am the Secretary and a Director of HOWE EXPLORATION &
DEVELOPMENT CO. LIMITED and as such have knowledge of its affairs.
4. I have conducted such examinations of the books and records of
MERIGOMISH INVESTMENTS LIMITED and HOWE EXPLORATION & DEVELOPMENT CO. LIMITED
(the "Amalgamating Corporations") as are necessary to enable me to make the
statements hereinafter set forth.
5. There are reasonable grounds for believing that:
(i) each of the Amalgamating Corporations is and the
Corporation to the formed by their amalgamation will be able
to pay its liabilities as they become due; and
(ii) the realizable value of such amalgamated Corporation's
assets will not be less than the aggregate of its liabilities
and stated capital of all classes.
6. There are reasonable grounds for believing that no creditor of
either of the Amalgamating Corporations will be prejudiced by the amalgamation.
This statement is made this 25th day of May, 1985.
/s/ LINA NOBLE
--------------------------------
LINA NOBLE - Secretary
of MERIGOMISH INVESTMENTS
LIMITED and HOWE EXPLORATION
& DEVELOPMENT CO. LIMITED
<PAGE> 81
SCHEDULE "B"
THIS AMALGAMATION AGREEMENT made the 29th day of May, 1989.
B E T W E E N:
MERIGOMISH INVESTMENTS LIMITED, a Corporation
incorporated under the laws of the Province
of Ontario.
(hereinafter called "Merigomish")
OF THE FIRST PART,
- AND -
HOWE EXPLORATION & DEVELOPMENT CO. LIMITED, a
Corporation incorporated under the laws of
the Province of Ontario,
(hereinafter called "HOWE")
OF THE SECOND PART.
WHEREAS Merigomish and Howe were incorporated under the
Business Corporations Act. 1982 or predecessors of that legislation;
AND WHEREAS Merigomish and Howe acting under the authority
contained in the Business Corporations Act, 1982 have agreed to amalgamate upon
the terms and conditions hereinafter set out;
AND WHEREAS the parties have each made full disclosure to each
other of all their respective assets and liabilities;
AND WHEREAS A.C.A. Howe is the beneficial owner of 1,000
issued and outstanding common shares in the capital stock of Howe;
AND WHEREAS A.C.A. Howe is the beneficial owner of 1,000,000
issued and outstanding common shares in the capital stock of Merigomish;
AND WHEREAS it is desirable that the said amalgamation be
effected.
NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS:
<PAGE> 82
3
1. In this Agreement:
(a) "Amalgamating Corporation" means Merigomish and Howe;
(b) "Corporation" means the corporation continuing from
the amalgamation from the Amalgamating Corporations;
(c) "Amalgamation Agreement" or "Agreement" means this
Amalgamation Agreement; and
(d) "Act" means The Business Corporations Act, 1982.
2. The Amalgamating Corporations hereby agree to amalgamate as of
the June 1, 1989 under the provisions of Sections 173 and 174 of the Act and to
continue as one Corporation under the terms and conditions hereinafter set out.
3. The name of the Corporation shall be Howe Exploration &
Development Co. Limited.
4. The registered office of the Corporation shall be at the City
of Toronto, in the Province of Ontario.
5. The address and head office shall be 22 Front Street West,
Suite 1406, Toronto, Ontario, MSJ 1C4.
6. The Corporation is authorized to issue:
(a) An unlimited number of shares without nominal or par
value (common shares) the holders of which are entitled:
(i) To vote at all meetings of
shareholders except meetings at which only
shareholders of a specified class of shares are
entitled to vote;
(ii) To receive any dividends declared by
the Corporation; and
(iii) Subject to the rights, privileges,
restrictions and conditions attaching to other class
of shares of the Corporation, to receive the
remaining property of the Corporation upon
dissolution; and
<PAGE> 83
4
(b) An unlimited number of special shares without nominal
or par value (special shares) having attached thereto the
following rights, privileges, restrictions and conditions;
(i) The holders of the special shares
shall, in the discretion of the directors, always in
priority and preference to any payment of dividends
on the common shares, be entitled, out of any or all
profits or surplus available for dividends, to
non-cumulative dividends at a rate of be determined
by the board of directors on the amount paid up on
the special shares; if in any year after providing
for the full dividend of the special shares there
shall remain any profits or surplus available for
dividends, such profits or surplus or any part
thereof may in the discretion of the directors be
applied to dividends on the common shares; the
holders of the special shares shall not be entitled
to any dividend other than or in excess of the
cumulative dividend hereinbefore provided;
(ii) The special shares shall rank both
as regards to dividend and repayment of capital in
priority to the common shares, but shall not confer
any further right to participate in profits or
assets;
(iii) The holders of the special shares
shall not as such have any voting rights to the
election of directors or for any other purpose nor
shall they be entitled to attend shareholders'
meetings. The holders of the special shares shall
however be entitled to notice a meetings of
shareholders called for the purpose of authorizing
dissolution of the Corporation or the sale of its
undertaking or a substantial part thereof;
(iv) The Corporation may, upon giving
notice as hereinafter provided, redeem the whole or
any part of the special shares on payment for each
share to be redeemed of the amount paid upon thereon
together with all dividends declared thereon and
unpaid; not less than 10 days' notice in writing of
such redemption shall be given by mailing such notice
to the registered holders of the said shares to be
<PAGE> 84
5
redeemed specifying the date and place or places of
redemption. If notice of any such redemption is
given by the Corporation in the manner aforesaid, an
amount sufficient to redeem the shares shall be
deposited with any trust company or chartered bank in
Canada as specified in the notice, on or before the
date fixed for redemption, dividends on the said
special shares to be redeemed shall cease after the
date so fixed for redemption, and the shareholders
thereof shall thereafter have no rights against the
Corporation in respect thereof, except upon the
surrender of certificates for such shares, to receive
payment therefor out of the monies so deposited;
(v) The holders of the special shares
may upon giving notice hereinafter provided require
the redemption of the whole or any part of the their
special shares and receive payment for each share
redeemed of the amount paid up thereon together with
all dividends declared thereon and unpaid; not less
than 30 days' notice in writing of such requirement
for redemption shall be given by mailing such notice
to the secretary of the Corporation specifying the
required date of redemption and upon surrender of
certificates for such shares the holders shall
receive payment therefor by the Corporation.
(vi) The Corporation may at any time and
from time to time purchase for cancellation the whole
or any part of the special shares at the lowest price
at which in the opinion of the directors such shares
are obtainable but not exceeding the amount paid up
thereon with all dividends declared thereon and
unpaid.
(vii) In the event of the liquidation
dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the special
shares shall be entitled to receive the amount paid
up thereon and any dividends declared thereon and
unpaid, but shall not be entitled to receive any
further amount.
7. The right to transfer shares of the Corporation shall be
restricted in that no shares shall be transferred
<PAGE> 85
6
without either:
(a) The express sanction of the Directors, to be
signified by resolution or by instrument or instruments in
writing signed by the majority of the Directors; or
(b) The consent of the holders of common shares of the
Corporation expressed either by resolution of such
shareholders or by instrument or instruments in writing signed
by the holders of a majority of the outstanding common shares
in the capital stock of the Corporation.
8. The minimum and maximum number of Directors is one (1) and
fifteen (15).
9. There shall be no restriction on the business that the
Corporation may carry on or on the powers the Corporation may exercise.
10. The Directors of the Corporation may from time to time in such
amounts and on such terms as they deem expedient, charge, mortgage, hypothecate
or pledge all or any of the currently owned or subsequently acquired real or
personal, moveable or immoveable property of the Corporation, including book
debts, rights, powers, franchises and undertaking, to secure any debt
obligations or any money borrowed, or other debt or liability of the
Corporation.
11. The first Directors of the Corporation shall be A.C.A. Howe
and Lina Noble who shall hold office until the first annual meeting of the
Corporation or until their respective successors are elected or appointed. The
subsequent directors shall be elected each year thereafter at either a general
meeting or annual meeting of the shareholders by a majority of the votes cast
at such meeting. The management and supervision of the business and affairs of
the Corporation shall be under the control of the Board of Directors from time
to time, subject to the provisions of the Act.
12. The issued and outstanding shares of the capital of the
Amalgamating Corporation shall be dealt with as follows:
(a) The 1,000,000 issued and outstanding common shares in
the capital of Merigomish shall be converted into 990 issued
and fully paid common shares without par value of the
Corporation.
(b) The 1,000 issued and outstanding common shares
<PAGE> 86
7
in the capital of Howe shall be converted into 10 issued and
fully paid common shares without par value of the Corporation.
After the endorsement of a Certificate of Amalgamation giving effect to the
amalgamation contemplated by this Agreement, the shareholders of Merigomish and
Howe shall, at the request of the Corporation, surrender the certificates
representing shares held by them and in return shall be entitled to receive
certificates representing shares of the Corporation on the basis aforesaid.
13. The by-laws of the Corporation, so far as applicable, shall be
the by-laws of Howe, until repealed, altered or added to.
14. Subject to the provisions of the act the following provisions
shall apply to the Corporation:
(a) No shares in the capital of the Corporation shall be
transferred without the consent of the Board of Directors of
the Corporation by resolution or in writing;
(b) The number of shareholders of the Corporation
exclusive of persons who are in its employment and exclusive of
persons, who, having been formally in the employment of the
Corporation, were, while in that employment, and have
continued after termination of that employment, to be
shareholders of the Corporation, is limited to not more than
fifty (50), two or more persons who are the registered owners
of one or more shares being counted as one shareholder;
(c) Any invitation to the public to subscribe for any
securities of the Corporation is strictly prohibited;
(d) At any time or times the Corporation may purchase the
whole or any part of the outstanding common shares.
15. Merigomish shall contribute to the Corporation all its
property and assets subject to its liabilities and Howe shall contribute to the
Corporation all its property and assets subject to all of its liabilities.
16. All rights of creditors against the property, rights and
assets of the Amalgamating Corporation, having liens upon their property,
rights and assets, shall be
<PAGE> 87
8
unimpaired by such amalgamation, and all debts, contracts, liabilities and
duties of the Amalgamating Corporations shall thenceforth attach to the
Corporation and may be enforced against it.
17. No action or proceeding by or against any of the Amalgamating
Corporations shall abate or be effected by such amalgamation.
18. Upon each of the Amalgamating Corporations approving this
agreement in accordance with the provisions of the Act, the Amalgamating
Corporations hereto shall jointly file in duplicate with the Minister of
Consumer and Commercial Relations, Articles of Amalgamation for the purpose of
bringing such amalgamation into effect.
IN WITNESS WHEREOF this Amalgamation Agreement has been duly
executed by the parties hereto under their respective corporate seals this 29th
day of May, 1989.
SIGNED, SEALED AND DELIVERED )
in the presence of ) MERIGOMISH INVESTMENTS
) LIMITED
) Per:
)
) /s/ LINA NOBLE
) --------------------------
) Lina Noble - Secretary
)
) HOWE EXPLORATION &
) DEVELOPMENT CO. LIMITED
) Per:
)
) /s/ LINA NOBLE
) --------------------------
) Lina Noble - Secretary
)
)
