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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F/A
AMENDMENT NO. 2
(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
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Commission file number: 0-21799
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.
23,450,290 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 [ ]
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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.
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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
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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.
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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.
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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.
The rate of exchange, as reported by the Federal Reserve Bank of New York for
the conversion of United States dollars into Canadian dollars was, as at
March 27, 1997, $0.7262 (U.S.$1.00 = CDN$1.3770).
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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 El Dorado County, California; Northern Quebec/Labrador and the Northwest
Territories, Canada, the La India District, Nicaragua and on Kalimantan Island
and Belitung Island in Indonesia. The Company also owns a 39% 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. Diadem is a development stage company, and while it has not yet
determined that its properties contain economically recoverable reserves, Diadem
anticipates completing a favourable feasibility study in respect of its
Nicaragua gold property within the next 12 month period and it expects Waseco to
complete a favourable feasibility study in respect of its alluvial gold prospect
on the Island of Kalimantan, Indonesia during the second calendar quarter of
1997.
[DIADEM RESOURCES LTD.
(CANADA)
ORGANIZATION CHART]
<TABLE>
<CAPTION>
PROPERTY AND NATURE OF INTEREST ACQUISITION COST CONDITIONS REMAINING
LOCATION EARNED (CURRENT) OF EARNED INTEREST TO EARN FULL INTEREST
/MAXIMUM
<S> <C> <C> <C>
CALIFORNIA (APPROXIMATELY 46 EMPLOYEES):
1. Rancheria 13 placer claims optioned U.S.$100,000; U.S.$100,000;
from Silverstone 300,000 common 150,000 common shares
Prospecting Syndicate shares; U.S.$350,000 cumulative expenditures
30%/60% of expenditures of U.S.$2,000,000
2. Leek Springs 56 placer claims optioned U.S.$150,000; U.S.$200,000;
from Silverstone 350,000 common 400,000 common shares
25%/55% shares; U.S.$500,000 cumulative expenditures
of expenditures of U.S.$5,000,000
QUEBEC, CANADA (APPROXIMATELY 12 EMPLOYEES):
1. Pekan River 2 Mineral Exploration $9,200; $100,000 $120,000 worth
Permits optioned from worth of common shares; of common shares
Beaver Syndicate completion of yearly
70%/90% assessment work
2. Mercury 1 Mineral Exploration $16,300; $120,000 $160,000 worth
Permit optioned from worth of common shares; of common shares
Trinity Syndicate completion of yearly
70%/90% assessment work
3. Dihourse 1 Mineral Exploration N/A 50% share of costs
Permit owned by Ateba of exploration
Mines Inc., in joint venture
with the Company
45%/45%
INDONESIA (APPROXIMATELY 172 EMPLOYEES):
1. BELITUNG ISLAND
(i) Kelapa Kampit 2nd Generation Contract of 100,000 common shares Expenditures totalling
Work in Joint Venture - 1/3 of U.S.$1,000,000
Optioner is PT Gunung work program
Ki-Kara Mining ("GKM")
Diadem holds a 30%
participating interest (60%
participating interest can be
earned by Bresea Resources
Ltd., with 10% held by GKM)
(ii) Tikus 7th Generation Contract of
Work (approved in principle)
Diadem holds a 30%
participating interest (60%
participating interest can be
earned by Bresea, with 10%
held by the PMA, to be formed)
(iii) Lilangan 7th Generation Contract of
Work (approved in principle);
Preliminary Survey Permit ("SIPP")
granted; Diadem holds a 30%
participating interest
(60% participating interest
can be earned by Bresea, with
10% held by PMA, to be formed)
</TABLE>
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<TABLE>
<S> <C> <C> <C>
2. KALIMANTAN ISLAND
(i) Mirah North East, KPs; Diadem has entered into
(ii) Upper Mahakam A & B joint ventures in respect of
each property with Bresea and
PT Anjarsamba Kencana ("PTK"),
with Diadem having a 30%
interest (25% interest in
Mahakam), Bresea 55% and PTK
15%. Bresea has since assigned
a 30% interest to Tandem
Resources Ltd.
3. WASECO RESOURCES INC.
(i) Tewah Project 4th Generation Contract of To date, Waseco has Waseco to issue
Work; Diadem entered into issued 5,000,000 2,000,000 shares
a joint venture with PT Ashton shares to Diadem and to Diadem; incur
Mercu Buana Mining incurred expenditures cumulative expenditures
("AMBM") with Diadem of U.S.$1,000,000, to of U.S.$1,500,000
having the option to earn a earn a 40% interest in
60% interest. Diadem has the property
since optioned its earn-
in rights to Waseco
(ii) Seruyan 7th Generation Contract 60% interest earned Earn-in rights tied to
of Work (approval in principle); to date, with the the Tewah Project, with
Diadem entered into a joint issuance of 5,000,000 the exception of
venture with PT Framakadi Indos shares to Diadem cumulative expenditures
("PFI"), with Diadem having the of U.S.$200,000 by
option to earn a 90% interest. March 31, 1997
Diadem has since optioned its
earn-in rights to Waseco. Option
rights are tied to Tewah
Project, above.
(iii) Tikukur KP; Memorandum of Funding the property
Understanding with PT through the completion
Aneka Tambang of a feasibility study
("ANTAM"), the State
Mining Company. Option
to earn a 70% interest, with
ANTAM holding a 30% interest
(free carry on 20 of 30%)
(iv) Walang KP; Joint venture with PTK
and Blue Emerald Resources
Inc. Diadem and Blue
Emerald each have a 45%
interest, and PTK has
10%
(v) West Walang KP; Memorandum of 200,000 common
Understanding between Rianto shares of Waseco
Resources Ltd. and PT Sitrade to PSNG
Nusa Globus ("PSNG"),
where Rianto has a 90%
participating interest, with
PSNG a 10% participating
interest. Waseco recently
acquired all of the outstanding
shares of Rianto pursuant to a
securities exchange take-over
bid
NICARAGUA (APPROXIMATELY 15 EMPLOYEES):
La India District Option Agreement with U.S.$50,000 and U.S.$550,000,
"La Mestiza" Archon Prospecting Syndicate 100,000 common shares 700,000 shares
to earn up to a 68% interest in to Archon, as well as to Archon
the Espinito-Mendoza U.S.$110,000, in partial
Concessions, pursuant to a repayment of Mestiza's
Memorandum of Agreement prior expenditures
between Archon and Empresa
Minera La Mestiza S.A.
("Mestiza")
NORTHWEST TERRITORIES, CANADA;
Fletcher Lake Option Agreement with 200,000 common shares Additional
Noront Resources Limited, to Noront aggregate
whereby Diadem can earn expenditures of
up to a 60% interest in the $250,000 by
claim March 15, 1999
</TABLE>
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RISK FACTORS
MINING EXPLORATION AND DEVELOPMENT
The Company currently has no properties in production and its success will
depend upon its ability to generate revenues from its properties.
All of the mineral properties in which the Company holds interests are without a
known body of commercial ore and each of the proposed programs on these
properties is an exploratory search for ore. Development of these mineral
properties will only follow upon obtaining satisfactory exploration results.
Mineral exploration and development involves a high degree of risk, which even a
combination of experience, knowledge and careful evaluation may not be able to
avoid. There is no assurance that commercial quantities of ore will be
discovered. There is no assurance that even if commercial quantities of ore are
discovered that a mineral property will be brought into production. The
commercial viability of a mineral deposit once discovered is dependent upon a
number of other factors, some of which are the particular attributes of the
deposit, such as size, grade and proximity to infrastructure as well as metal
prices. Most of the above factors are beyond the control of the Company.
Furthermore, several years may pass between the discovery of a deposit and its
exploitation.
Mining operations generally involve a high degree of risk which even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. The business of mining is subject to a variety of risks such as
ground fall, explosions and other accidents, flooding, environmental hazards,
the discharge of toxic chemicals and other hazards. Such occurrences, against
which the Company cannot, or may elect not to, insure, may result in
destruction of mines and other production facilities, damage to life and
property, environmental damage, delayed production, increased production costs
and possible legal liability for any and all damages. Such liabilities may have
a material adverse effect on the Company's financial position.
FOREIGN GOVERNMENTS AND GOVERNMENTAL REGULATIONS
The Company holds interests in mineral resource properties in Canada, the United
States, Nicaragua and Indonesia. Because the Company holds interests in mineral
resource properties in foreign countries, the Company's mineral exploration,
development and mining activities may be affected in varying degrees by
political stability, government regulations relating to the mining industry and
foreign investment therein. Currently there are no restrictions on currency
movement within or from such countries. However, there is no assurance that
future political and economic conditions in these countries will not result in
their governments adopting different policies respecting foreign development and
ownership of mineral resources. Any such changes in regulations or shifts in
political conditions are beyond the control of the Company and may adversely
affect its business. Operations may be affected in varying degrees by
government regulations, including those with respect to restrictions on
production, price controls, export controls, income taxes, expropriation of
property, employment, land use, water use, environmental legislation and mine
safety. Operations may also be affected in varying degrees by political and
economic instability, economic or other sanctions imposed by other nations,
terrorism, military repression, crime and high inflation. It may be more
difficult for the Company to obtain any required project financing in these
countries from senior lending institutions because such lending institutions may
not be willing to finance projects in developing countries due to the possible
investment risk.
Government approvals and permits are currently, and may in the future be,
required in connection with the Company's operations. To the extent such
approvals are required and not obtained, the Company may be curtailed or
prohibited from proceeding with planned exploration or development of mineral
properties.
The Company believes it is currently in compliance with all applicable
government regulations. Failure to comply with applicable laws, regulations and
permitting requirements may result in enforcement actions thereunder, including
orders issued by regulatory or judicial authorities causing operations to cease
or be curtailed, and may include corrective measures requiring capital
expenditures, installation of additional equipment, or remedial actions.
Parties engaged in mining operations may be required to compensate those
suffering loss or damage by reason of the mining activities and may have civil
or criminal fines or penalties imposed for violations of applicable laws or
regulations.
Amendments to current laws, regulations and permits governing operations and
activities of mining companies, or more stringent implementation thereof, could
have a material adverse impact on the Company and cause increases in capital
expenditures or require abandonment or delays in development of new mining
properties.
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TITLE MATTERS
The Company has investigated its rights to explore and exploit its various
properties and, to the best of its knowledge, those rights are in good standing
and none of the Company's current mining and exploration rights are in doubt.
However no assurance can be given that applicable governments will not revoke,
or significantly alter the conditions of, the applicable exploration and mining
authorizations and that such exploration and mining authorizations will not be
challenged or impugned by third parties.
MARKET CONDITIONS
The mining industry is competitive and there is no assurance that, even if
commercial quantities of mineral resources are discovered, a profitable market
will exist for the sale of same. There can be no assurance that mineral prices
will be such that the Company's properties can be mined at a profit. Factors
beyond the control of the Company may affect the marketability of any minerals
discovered. The prices of gold and other precious metals and base metals have
historically experienced volatile and significant price movements over short
periods of time, and are affected by numerous factors beyond the control of the
Company, including international economic and political trends, expectations of
inflation, currency exchange fluctuations, interest rates and global or
regional consumption patterns, speculative activities and increased production
due to improved mining and production methods. The aggregate effect of all
these factors is impossible to predict.
CURRENCY AND FOREIGN EXCHANGE
The Company's operations in Indonesia and Nicaragua will make it subject to
fluctuations in currency exchange rates that may significantly impact the
Company's financial position and results. Precious metals are generally sold at
prices stated in U.S. dollars while costs incurred are paid in the currency of
the country in which the activities are undertaken. Any change in the ratio of
Indonesian or Nicaraguan currency to the U.S. dollar could affect
profitability. The Company does not intend to engage in currency hedging to
offset any risk of currency fluctuations.
FINANCIAL RESOURCES OF THE COMPANY
The Company currently does not have any revenues and has not paid any dividends
since its incorporation. The financial resources of the Company may not be
sufficient to bring into production any economic deposit which it might
discover. Given that the Company does not have any property with proven
reserves and given the above risk factors, it is unlikely that the Company will
make a profit in the near future. The work programs may be interrupted at any
time in the event that the Company does not have the necessary funding to carry
out future work required, that has not been included in the budgets described
in this prospectus. The further development and exploration of the various
mineral properties in which the Company holds interests depends upon the
Company's ability to obtain additional financing through any or all of the
joint venturing and syndication of projects, debt financing, equity financing
or other means. Such funding may dilute the interests of existing shareholders.
There is no assurance that the Company will be successful in obtaining such
additional financing. Furthermore, even if such financing is successfully
completed, there can be no assurance that it will be obtained on terms
favourable to the Company or providing the Company with sufficient funds to
meet its objectives, which may adversely affect the Company's business and
financial condition.
UNINSURED RISKS
The Company may become subject to liability for cave-ins, pollution or other
hazards against which it cannot insure or against which it may elect not to
insure because of high premium costs or other reasons. The payment of such
liabilities would reduce the funds available for exploration and mining
activities and would adversely affect the Company's financial position.
CONFLICTS OF INTEREST
Certain of the directors and officers of the Company also serve as directors
and officers of other companies involved in natural resource exploration,
development or production and, consequently there exists a possibility for any
such officer or director to be in a position of conflict. Any decision made by
such a director or officer involving the Company will be made in accordance
with his or her fiduciary duties and obligations to deal fairly and in good
faith with the Company and such other companies. In addition, all officers and
directors will declare, and refrain from voting on, any matter in which they
may have a conflict of interest.
DEPENDENCE ON KEY PERSONNEL
The development of the Company's business is and will continue to be dependent
on its ability to attract and retain highly qualified management and mining
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to attract and retain such personnel.
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COMPETITION
Significant and increasing competition exists for available mineral acquisition
properties, particularly in Southeast Asia. As a result of this competition,
some of which is large established mining companies with substantial
capabilities and greater financial and technical resources than the Company,
the Company may be unable to acquire rights to explore additional attractive
mining properties on terms it considers acceptable. Accordingly, there can be
no assurance that the Company will acquire any interest in additional
operations that would yield reserves or result in commercial mining operations.
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to environmental regulation in the various
jurisdictions in which it operates. Environmental legislation is evolving in a
manner which will require stricter standards and enforcement, increased fines
and penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their officers, directors and employees. Although the Company believes that
its exploration operations are currently carried out in accordance with all
applicable rules and regulations, there is no assurance that future changes in
environmental regulation, if any, will not be applied in a manner which could
limit or curtail production or development. Environmental hazards may exist on
the properties in which the Company holds interests which are presently unknown
to the Company and which have been caused by previous or existing owners or
operators of the properties. An overview of the environmental legislation
applicable to the Company's operations follows.
CANADA
The mining industry in Canada is subject to legislation at both the federal and
provincial levels relative to the protection of the environment. In particular,
such legislation imposes rigorous standards on the mining industry to reduce or
eliminate the effects of wastes generated by extraction and processing
operations and subsequently deposited on the ground or emitted into the air or
water. Accordingly, the design of mines and mills and the conduct of overall
extraction and processing operations are subject to the restrictions contained
in such legislation. In addition, the construction, development and operation
of a mine, mill and refinery typically entail compliance with applicable
environmental legislation and/or review processes and the obtaining of land use
and other permits, water licenses and similar authorizations from various
governmental agencies. In particular, legislation is in place for lands under
federal jurisdiction or located in certain provinces which provides for the
preparation of costly environmental impact assessment reports prior to the
commencement of any mining operations. These reports entail a detailed
technical and scientific assessment as well as a prediction of the impact on
the environment of proposed development.
Failure to comply with the legislation can have serious consequences. Orders
may be issued requiring operations to cease or be curtailed or requiring
installation of additional facilities or equipment. Violators may be required
to compensate those suffering loss or damage by reason of its mining activities
and may be fined if convicted of an offense under such legislation.
Provincial mining legislation establishes requirements for the decommissioning,
reclamation and rehabilitation of mining properties in a state of temporary or
permanent closure. Such closure requirements relate to the protection and
restoration of the environment and the protection of public safety. Some
former mining properties must be managed for long periods of time following
closure in order to fulfill closure requirements. The cost of closure of
mining properties, and, in particular, the cost of long term management of
mining properties can be substantial. The Company intends to progressively
rehabilitate its mining properties during their period of operation, should any
properties become operational, so as to reduce the cost of fulfilling closure
requirements after the termination or suspension of production.
UNITED STATES
Legislation and implementing regulations adopted or proposed by the United
States Environmental Protection Agency ("EPA"), the Bureau of Land
Management ("BLM") and by comparable agencies in various states directly and
indirectly affect the mining industry in the United States. These laws and
regulations address the environmental impact of mining and mineral processing,
including potential contamination of soil and water from tailings discharges
and other wastes generated by mining companies. In particular, legislation
such as the Clean Water Act, the Clean Air Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act and the National Environmental Policy Act and comparable state
statutes require analyses and/or impose effluent standards, new source
performance standards, air quality and emission standards, remediation
requirements and other design or operational requirements for various
contaminants of mining and mineral processing, including precious ore mining
and processing. Such statutes impose liability on owners and operators for the
remediation of waste.
Further, mine operators must comply with the Federal Mine Safety and Health Act
of 1977, as amended, which is enforced by the Mining Safety and Health
Administration ("MSHA"), an agency within the Department of Labor and by
comparable agencies in various states. All mines, both underground and
surface, are subject to inspections by MSHA. The Occupational Safety and
Health Administration also has jurisdiction over safety and health standards
not covered by the Federal Mine Safety and Health act of 1977.
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NICARAGUA
Under Nicaraguan law, the Ministry of the Environment and Natural Resources
("MARENA") is the government entity responsible for the preservation of the
environment. The Company intends to follow required procedures with respect to
the environment, including monitoring of the effluent from mining operations.
Further environmental permitting will be required from time to time to maintain
compliance with MARENA requirements as they evolve.
INDONESIA
The mining industry in Indonesia is subject to legislation regarding
environmental protection and preservation. The applicable legislation is set
out in each Mining Authorization ("Kuasa Pertambangan" or "KP") or Contract of
Work ("COW") document, and all contracting parties are required to comply with
these requirements. To assist in the determination of the impact a proposed
mining operation may have on the natural resources, biological resources and
human settlements in a particular area, the contracting party is required to
include an Environmental Impact Study with the feasibility study submitted for
each property.
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.
[MAP]
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
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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, August 12, 1996, November 1, 1996 and
January 28, 1997, the date by which the cash payment, share issue and
expenditure amount must be completed has been extended to February 1, 1998. The
extension was necessitated by the difficulties experienced in securing access to
suitable drilling equipment to commence the next stage of work and this
difficulty was resolved. 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. Pursuant to the extensions granted in the January 10,
1996 and February 27, 1996 letter agreements, the current deadline by which the
Company must complete the foregoing steps is October 4, 1997. In light of the
recent extension by Silverstone of the deadline to fulfill the conditions
necessary to increase the Company's interest from 30 to 45% to February 1,
1998, the Company anticipates that it will request an extension from
Silverstone of the October 4, 1997 deadline for fulfilling the conditions
necessary to increase the Company's interest from 45% to 60%.
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 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
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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
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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.
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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
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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. To date, steps (i) and (ii) have
been completed.
LEEK SPRINGS, EL DORADO COUNTY, CALIFORNIA
LOCATION AND ACCESS
The property is located in the El Dorado National Forest, in El Dorado County,
California, in Sierra Nevada, California. The property is made up of four 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 El Dorado County require a special use permit be issued for
open-pit mining or strip mining, for purposes of exploration or extraction
resulting in the removal of more than 1,000 cubic yards of overburden. Prior to
the issuance of the special use permit, the approving authority (the local Board
of Commissioners or Planning Authority) shall make a finding that all boundaries
of the proposed project shall be greater than a linear distance of 10,000 feet
from any existing residential use, hospital use, church use or school use, as
designated in the El Dorado County General Plan, or any community or specific
plan, or as permitted by the zoning code of El Dorado County.
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MINING RIGHTS AND TITLES
By agreement dated November 6, 1995 between the Company and Silverstone, the
Company optioned a 10% interest in 215 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 215 unpatented mining claims which cover approximately
2,500 acres. The Judy Claims ("Judy"), comprise 46 claims, the Adrienne Claims
("Adrienne") consist of 10 claims, the Susan Claims ("Susan") consist of 80
claims and the Michelle Claims consist of 79 claims. The Adrienne claims were
staked between June and September, 1994. The Judy claims, were staked during
November and December, 1995. The Susan and Michelle claims were staked between
June and July 1996. 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 Judy and Adrienne claims.
Mr. Derek Bartlett, a non-executive 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. 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 December 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
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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
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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.
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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
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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 780 acres for the diamondiferous
breccias or 8,000 feet in a northwest-southeast direction along its main axis
and a width of 5,000 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.
The drilling conducted during the period from July to November, 1996 extended
the known area of volcanic breccia containing diamond indicator minerals. The
area currently delineated is now in excess of 780 acres.
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 8,000 feet long with a width of 5,000 feet. It covers an area of
780 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.
During the 1996 exploration program, three circular features varying in size
from 800 feet to 2400 feet in diameter were identified by magnetic surveys
beneath the breccia body. These are presumed to be the volcanic vents from
which the diamond-bearing breccia rock came.
In order to confirm this, two cored drill holes from the 1996 drill program were
drilled in vent #1 to 525 and 595 feet respectively and one cored hole in each
of vents #2 and #3 to 456 and 800 feet respectively. In addition to the cored
drill holes, open rotary holes were drilled to delineate the extent of the
breccia and a number of these were drilled to shallow depths (160 to 300 feet)
across vents #1 and #3. The resultant rock chips samples from the open rotary
holes (approximately one and one-half tons per hole) were tested by grab samples
at 50-foot intervals to determine the character of the minerals. These samples,
representing a small fraction of the drill material, plus the spillage on
surface around the top of the hole, were sent to a laboratory in Saskatchewan,
Canada for caustic dissolution. To date, the laboratory has reported two white
diamond fragments and one broken dodecahedron in vent #1 and one pure white
fragment in vent #3. Initial analysis of the diamonds indicate they are
fragments from a larger stone, possibly broken by the drilling process. Vent #1
was drilled 2000 feet east of 1995 drill hole #1 and vent #3 was drilled 1500
feet northeast of drill hole #1.
The bulk of the rock chips and core samples, totalling 90 tons from the 52
holes drilled, were sent to Colorado for processing and the resultant
concentrate was sent to Saskatchewan for caustic dissolution. The results from
these samples are pending.
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.
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.
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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 issued the shares on November 26, 1996. Exercise
of this option provides 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,
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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 70 meters in true
thickness, with the western and northwestern sectors removed by erosion. 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. 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. After drilling resumed in July, 1996, 47
additional holes were drilled, resulting in a total of 71 holes drilled to date.
The assays returned from the drill holes can be separated into two zones,
aggregating from 2.5 to 64 meters in thickness. The content of both copper and
nickel increase as the lower content of the sill is approached. From the results
to date, there is an improvement in base metal grades and thickness of
mineralization to the south and east. The 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 approximately 1.5 kilometers to the east. 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. Overall, approximately 2 million tons
of copper-nickel-cobalt mineralization were indicated by drilling in 1996, which
were calculated to contain 0.66% copper, 0.31% nickel and 0.03% cobalt.
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<PAGE> 25
The later drilling also outlined a zinc deposit, which has now been traced for
a distance of 4 kilometers. To date, 13 holes have been drilled, testing a 250
meter long, 100 meter deep, 30 to 35 degree easterly dip. 10 of the 13 holes
encountered coarse zinc sulphide mineralization over mineable lengths, and
initial assays from these 10 holes reveal a zinc content range of 2.65% to
6.74%.
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.
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. Nine 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.
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<PAGE> 26
DIHOURSE, QUEBEC
Quebec Exploration Permit #1093, known as the Dihourse Prospect, lapsed on
September 19, 1996, the anniversary of the permit registration date. The
Company has no independent interest in Dihourse, Quebec, but maintains a joint
venture arrangement with Ateba Mines Inc. ("Ateba") with respect to another
claim in the area.
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.
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<PAGE> 27
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.
[MAP]
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%, had to 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 was 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 issued the shares on
November 26, 1996. 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.
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<PAGE> 28
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.
Under the Indonesian Constitution of 1945, the Government of Indonesia has
sovereignty over all natural resources. 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").
KPs and COWs
KPs
A KP is the principal mining right that is available to Indonesian miners. In
fact, KPs can only be held by Indonesian citizens or Indonesian owned companies
or partnerships, and the only way a foreign company can participate in a KP is
through a contract with the Indonesian owner. There are various levels of KPs,
and the appropriate KP depends on the stage of development of the area covered.
As work in an area progresses, A KP holder must apply for the next level of KP.
The first level KP is the "General Survey", which is valid for a period of one
year, with a one year extension available; The "Exploration" KP has a period of
three years, with a one year extension; The "Exploitation" and "Processing and
Refining" KPs are each valid for 30 years, with consecutive 10 year extensions
available; "Transportation" and "Sales" are both for 10 year periods with five
year extensions available. As the level of KP progresses, the maximum area per
KP and per KP holder decreases. The Director General of General Mining (the
"Director General") has the discretion to grant General Survey and Exploration
KPs covering an area greater than the respective areas stated above, in
consideration of technical and economic factors.
The formal procedure is for the KP holder to obtain approval from the Minister
of Mines and Energy, through the Director General regarding co-operative
arrangements with a foreign investor, although practically, this requirement is
applied only where there is a proposed direct investment by the formation of a
PMA company (see below) for the purpose of entering into a Contract of Work
relating to the KP area. It should be noted that a KP holder has rights to carry
out activities specified by the KP, but does not have title to the land, which
remains with the State, or private owner, as the case may be.
An applicant for a General Survey KP or an Exploration KP must pay a seriousness
bond of US$5 per hectare. If the area of the KP exceeds the maximum area
allowed, the cost of the bond increases to US$10 per hectare.
COWs
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, and the system has been progressively
refined, with each set of amendments being incorporated into successive
"generations" of COWs to reflect such things as changes in taxation, security
deposits, minimum expenditure requirements, changes in socio-economic benefits,
environmental concerns. The current COW applications (those submitted after
January, 1996) are for seventh generation agreements.
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<PAGE> 29
Foreign mining tenure in Indonesia can only be held through a COW. COWs are
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. The maximum area for a COW is 250,000 hectares, but
there is discretion to grant a COW that covers a larger area. A COW is formally
granted by the President of Indonesia, after negotiation with the appropriate
government agency, depending on the type of minerals being sought. A COW will
only be granted over areas with pre-existing KP's if the owner of the KP
consents to its incorporation in the COW. This usually involves the KP owner
becoming a minority shareholder in the PMA company (see below) established to
enter into the COW.
A COW is held by an Indonesian domiciled company, known as a Penanaman Model
Asing company ("PMA"), which is a foreign investment company established to
enter into a COW and to undertake the exploration and mining activities on
behalf of participating interests. The COW applicants must form a PMA company to
enter into a COW, which is executed by the PMA and not the applicant, who is not
a party to the COW. The PMA is classified as a "Perseroan Terbatas" ("PT"),
which is largely equivalent to a Canadian limited liability company. Most PMAs
involve direct equity investment by the foreign party in joint venture with a
minority Indonesian partner. Under first to fifth generation COWs, the maximum
foreign shareholding in a PMA was limited to 90% of the paid-up capital and the
foreign partner was obliged to provide the Indonesian partner with the
opportunity to increase its shareholding to more than 50% between the years 5 to
15 of the contract. Sixth and seventh generation COWs permit 100% foreign
ownership with no obligation to provide an Indonesian partner with increasing
participation.
A PMA can only enter into one COW and, as a contractor to the Indonesian
government, is responsible in the contract area for exploration, mine
construction, mine production and marketing and sales of product. The PMA is
responsible for the management of the operation, is entitled to all profits
derived from the operation and also bears the risks associated with such
operation.
COWs are divided into five separate stages, which are listed below. Each stage
has a specific initial period, and each initial is usually eligible for
extension upon application by the PMA. The PMA must commence the general survey
period within six months of the execution of the COW. Further, the PMA is
obligated to relinquish a certain portion of the original area covered by the
COW at the conclusion of each stage.
- --------------------------------------------------------------------------------
CUMULATIVE PER-
INITIAL PERIOD CENTAGE OF ORIGINAL
(+ EXTENSIONS) AREA TO BE
STAGE (YEARS) RELINQUISHED (%)
- --------------------------------------------------------------------------------
1
General Survey 1(+1) 25
- --------------------------------------------------------------------------------
Exploration 2(+1+1) 50, by the end of yr. 2
- --------------------------------------------------------------------------------
Feasibility Study 2(+1+1) 75, with remaining
area not more than
62,500 hectares
- --------------------------------------------------------------------------------
Construction Schedule to be Mining Area identified
approved by the in feasibility report
Minister of Mines to be approved by the
and Energy Minister.
- --------------------------------------------------------------------------------
2
Operating 30 -
- --------------------------------------------------------------------------------
1 Generally, any unexpired period relating to a SIPP may be added to the
general survey period
2 Seventh generation draft COWs require the operating period to begin within
seven years of the beginning of the general survey period.
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<PAGE> 30
At the end of the contract, the PMA has the right to apply for an extension,
which may be on different terms. The government guarantees sole rights of access
to minerals in the COW area and is responsible for assisting with the
acquisition of land required for development, and will resettle affected
residents if required, with compensation paid by the PMA. 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 payable to the Indonesian Government.
Obtaining a COW is a several step process. The first step is to file an
application with the Director General. A "seriousness" bond, which is refundable
within six months after receipt of the application, of US$5 per hectare of area
applied for must be deposited at the time of application. If the COW applied for
exceeds the maximum area prescribed above, the cost of the bond increases to
US$10 per hectare for the area in excess. If the ground is available and the
Director General has no objection, he will issue a document approving the COW
"in principle", which represents a preliminary title to the COW.
After an approval "in principle" has been granted by the Director General, the
applicant may apply for a SIPP, to begin preliminary survey activities pending
the processing of the application (see below). Also after the Director General
has given his approval "in principle", the Mines Department will give the
applicant a draft COW, and the parties negotiate the terms of it. When both
parties are satisfied, representatives from the applicant and the Mines
Department initial the draft COW.
The final step is the approval of the COW by the Indonesian Government,
particularly the Parliament, the Foreign Investment Co-ordinating Board and the
President. The Minister of Mines and Energy is then authorized by the President
to sign the COW on behalf of the Government of Indonesia.
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 only by applying for a Preliminary Survey Permit ("SIPP") and
posting the seriousness bond required at the time the application for the COW is
lodged, which replaces the former performance bond of U.S. $100,000.00 per COW
application and U.S. $0.025 per hectare. No mining is permitted under a SIPP,
but the applicant may conduct geological, geochemical and geophysical
investigations in the area reserved for the COW.
The grant of a SIPP is not a guarantee that a COW will be granted, but the Mines
Department will not issue other mining rights relating to areas covered by the
SIPP. A SIPP is valid for one year, but may be extended on application to the
Director General. The period of extension is included as part of the general
survey period under a subsequently granted COW. The SIPP holder must submit a
complete report of its activities under the SIPP following expiry of the SIPP.
Any expenditure incurred by the SIPP holder can be amortized and taken into
account when determining compliance with the minimum expenditure requirements
of any subsequently granted COW.
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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.
[MAP]
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
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.
The second generation COW was taken over by GKM in 1989 and production of tin
was carried out until 1991. The venture was not profitable and other sources of
tin-bearing mill feed were sought. These factors, coupled with quota
restrictions led to the cessation of all activities in 1993. Pursuant to the
terms of the COW, the validity of title and the rights and obligations of the
parties to the COW continue unaffected, as the property has been continuous
production in the past.
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<PAGE> 32
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
The Kelapa Kampit lead-silver-zinc deposits can be traced on either side of an
iron-bearing shale horizon called the Nam Salu member, for a distance of five
kilometers. The sulphides occur over 2 to 20 meter core lengths. In this area,
one open pit, four adits and 36 drill holes, spaced in random fashion, ranging
from 50 meters to 500 meters apart, have intersected one or both the hanging
wall and footwall sulphide bodies. All 36 holes cut mineralization along the
hanging wall and footwall linear trends, with 22 holes assaying in excess of 6%
combined lead-zinc content. For calculation purposes, eight segments were
selected from the mineralized zones where sufficient data is available to
estimate resources. The calculation outlines two classes of resources,
"Indicated", which included resources of 1,928,000 tons with 4.31% lead, 8.21%
zinc and 2.0 ounces/ton of silver, and "Inferred", which included 1,578,000
tons with a 4.03% lead, 7.22% zinc and 2.0 ounces/ton of silver. An Indicated
Resource may be defined as the part of a resource for which grade, tonnage, and
other characteristics such as geology and continuity are established so well
that they can serve as a base for decisions on major expenditures. An Inferred
Resource is appropriate to describe the result of sampling data and geologic
understanding which is only sufficient to outline a deposit of potential
economic merit.
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<PAGE> 33
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.
1996-1997 EXPLORATION RESULTS TO DATE
A total of 10 diamond drill holes (3,152.6m) were completed up to December 15,
1996, over 1 km strike length at 200 m fence line spacing with two holes at 150
m spacing along each line. Due to difficult drilling conditions several holes
were abandoned prior to reaching the favourable footwall zone target; however
when the footwall target was reached significant assays on drill intersections
resulted including: hole 96-4A: 19.6% Pb+Zn, 78gm/t Ag, and 0.22% Sn over 6.7m
and hole 96-9:5.1% Pb+Zn, 13.5 g,/t Ag over 28.5 m; including 9.73% Pb+Zn, 26
gm/t Ag and 0.22% Sn over 7m.
Interpretation of 1996 drilling results showed both the widths and values of
the polymetallic mineralization consisting of zinc (Zn), lead (Pb), silver (Ag)
and tin (Sn) encountered in each hole increased towards the regional central
Phiang-Ha fault zone. Therefore the ongoing scout drilling program will
evaluate an additional 1.5 km strike length from line 400W towards this
regional fault and beyond (between the Nam Salu open pit and Waterfall adit).
West of the open pit, a tunnel yielded footwall massive base metals over 24 m
assaying 16.23% Pb+Zn and 84 gm/t Ag.
The 1996 program was the deepest probe drilling ever undertaken on the property
and it has served to confirm that the economically significant mineralization
is hosted by a previously unrecognized thick calcareous flysh unit (impure
limestone) which is most prospective for polymetallic ore deposition and
particularly so in the general vicinity of regional cross-cutting faults.
RECENT EXPANSION OF BELITUNG ISLAND AREA OF INTEREST
The Company and Bresea have applied for two additional COWs in respect of two
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 hectares, 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.
1996-1997 EXPLORATION RESULTS TO DATE
Seven scout diamond drill holes totalling 2,861.5 m have been completed up to
December 15, 1996 over one of the three known targets. Four of these holes
(96-1, 96-9, 96-15 and 96-21) were drilled along section line 00 at 100 m
spacing. One hole was drilled at 100 m to south and two holes respectively 100
and 200 m north of line 00.
Mineralization is interpreted as porphry tin/tungsten with associated base
metals and silver hosted in elongated breccia pipe bodies. These breccia pipes
are not solitary features but occur in clusters. The first drill target was
centred over an area mined by the Dutch for six years from 1914 to 1920.
Results from the seven holes are considered to be very positive whereby
preliminary modelling shows an overall indicative average grade of 0.86%
tin/tungsten with significant base metals and 14.3 gm/t Ag. This target is
still open to the north and is considered to be mineable by open pit.
Soil sampling, trenching, and geological mapping has outlined two additional
similar targets within a two kilometer radius. These will be scout drill tested
by 14 diamond drill holes. Drilling is ongoing with one diamond drill rig.
33
<PAGE> 34
GOLD - LILANGAN PROJECT
A 58,590 hectare COW application has been approved in principle and a SIPP has
been granted. This application was designed to cover two prospective epithermal
gold areas. Initial activities will include regional and detailed geological
work. Field work will commence in the near future consisting of detailed
geological mapping and sampling followed by scout drilling program scheduled to
commence mid-1997.
(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. 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.
[MAP]
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. PTK holds a General Survey KP in respect of the
property. The parties have applied for a COW in respect of the property. 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.
34
<PAGE> 35
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
Representatives of the Company have visited the site for the purpose of
conducting their own inspections and gold mineralization has been identified 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
35
<PAGE> 36
Project "B". Each agreement provides 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. PTK holds a General Survey KP in respect of each of the
properties and the parties have applied for COWs for each property. 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, CANADA
LOCATION AND ACCESS
This property initially consisted of 100,000 acres including the south half of
Fletcher Lake. Fletcher Lake is 300 kilometers 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
kilometers 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-acquisition 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.
LA INDIA, NICARAGUA
LOCATION
Nicaragua is situated in the heart of Central America, and is its largest
republic. The temperature in Nicaragua is relatively stable at approximately
25 degrees Celcius, with very little fluctuation. The average annual rainfall
is approximately 170 centimeters, with a dry season between December and
April. The La India gold deposits are located approximately 80 kilometers
north of the capital city of Managua in the Santa Rosa municipality.
Nicaragua has excellent infrastructure, with easy access to major world markets
via the international airport in Managua, numerous ports located along both
coasts and an efficient road system that includes the Pan American Highway. As
well, the telecommunications system has recently been extensively modernized
throughout the country, with several international telecommunication companies
now providing services in Nicaragua.
36
<PAGE> 37
[MAP]
MINING RIGHTS
Diadem entered into an option agreement with Archon Prospecting Syndicate
("Archon") on December 10, 1996, to acquire up to a 68% interest in the 200
hectare gold property known as the Espinito-Mendoza concessions (hereinafter
referred to as the "La Mestiza" property). Archon had acquired an interest in
the La Mestiza property when it entered into an option agreement on November 28,
1996 with Empresa Minera La Mestiza S.A. ("EMLM"). The terms of Diadem's
agreement may be summarized as follows: Diadem had to pay to Archon, by January
10, 1997, U.S.$50,000, in partial repayment of the approximately $300,000 Archon
had spent on exploration activities on the property, and, subject to regulatory
approval, deliver to Archon 100,000 common shares of Diadem within 175 days of
December 11, 1996. Diadem also assumed responsibilities of Archon in its option
agreement with EMLM, including a payment of U.S.$110,000 to EMLM in partial
repayment of prior expenditures on the concessions. Within 350 days from
December 11, 1996, Diadem will be expected to pay Archon an additional
U.S.$75,000 and deliver, subject to regulatory approval, 200,000 common shares
of Diadem. Within 500 days of December 11, 1996, Diadem will be expected to pay
Archon an additional U.S.$100,000 and deliver, subject to regulatory approval,
an additional 200,000 common shares of Diadem. Within 1,000 days of December
11, 1996, Diadem will be expected to pay Archon an additional U.S.$125,000 and
deliver, subject to regulatory approval, an additional 200,000 common shares of
Diadem. Further, Diadem will be required to fund all exploration and development
expenditures through to the commencement of production of La Mestiza. This
program is proposed to be completed in five phases, with Diadem earning a 13.5%
interest upon the completion of each of the phases, such that upon payment of
the foregoing fees and shares and completion of the phases, Diadem shall have
earned a 65.8% interest with a 2.5% interest retained by Archon. Diadem shall
have the option of increasing its interest to 68.25% by paying EMLM the sum of
$200,000 within two (2) years after the date of commencement of commercial
production.
REGIONAL HISTORY
Nicaragua was a major gold producer in the 1800's and 1900's, beginning with
the discovery of gold at La Libertad in central Nicaragua and Bonanza in the
northeast in 1880. Gold mining reached its peak in the 1940's and 1950's,
during which period Nicaragua ranked as the 14th largest gold producer in the
world, with an average annual output of over 300,000 oz. Despite this history
of production, it is believed that many of Nicaragua's known gold deposits
remain relatively unexploited.
The La India District was first mined by Noranda Mines Inc. during the period
of 1936-56, extracting approximately 800,000 metric tons of ore with an average
yield of 9.5 grams of gold per metric ton of ore and 10 grams of silver per
metric ton or ore.
In 1983, INMINE, the Nicaraguan Mining Institute, proposed an evaluation and
exploration program of the La India district, that was conducted by Russian
geologists from the Zarubezhgeologia organization. Their final report was
presented in 1991 and their calculations revealed a proven, probable and
possible reserve of 2.5 million tons with a probable average of 2.5 grams per
ton from four veins: Espinito, Tatiana, Buenos Aires and Jicaro.
ORE RESERVES AND MINERAL RESOURCES
The reserve calculations are based on the data obtained by geologists from
Zarubezhgeologia between 1986 and 1991, supplemented by data obtained by EMLM
as well as Diadem's geologists on inspections of work in progress on the
property:
PROVEN PROBABLE POSSIBLE
-------------- -------------- --------------
VEIN GRADE(1) TONS GRADE(1) TONS GRADE(1) TONS
- ---- -------- ---- -------- ---- ------ ----
Espinito 8.78 65,812 6.81 114,075 7.52 586,615
Buenos Aires 13.13 91,650 9.39 188,500 - -
Jicaro - - 10.29 509,534 - -
Tatiana - - 9.0 702,000 9.0 795,600
Bonanza#1 - - - - 10.3 464,750
Bonanza#2 - - - - 10.3 684,450
Naranjo - - - - 9.0 936,000
TOTALS 10.63 157,472 9.3 1,514,109 9.19 3,467,425
- ---------------
(1) Grams per metric ton
37
<PAGE> 38
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), which holds a
fourth generation Contract of Work. 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 could 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 could also 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 could also 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 expenditures 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. To date, the Company has received 5,000,000
Waseco common shares, with a market value of $4,500,000 ($.90/share) as at
February 4, 1997, which represents 39% of the outstanding common shares of
Waseco on a non-diluted basis as at February 4, 1997 and Waseco has expended in
excess of $1,000,000 U.S. in feasibility study expenditure. Should Waseco
complete the full earn-in, it will be required to issue an additional 2 million
common shares, which would have a value as at February 4, 1997 of $6,300,000.
Following the delivery of these shares, bringing the Company's holding to
7,000,000 shares, the Company would own 47.2% of the non-diluted common share
capital of Waseco (approximately 40% on a fully-diluted basis). The agreement
provided that the Company would act as operator on the property and Waseco would
fund all feasibility study expenditures as incurred.
Waseco reports that the current Tewah drilling program has confirmed a mineable
resource of 50,000,000 cubic meters at a grade of 0.16 grams per cubic meter,
within a previously drilled 450,000,000 cubic meter resource. This property is
expected to be in production by the end of 1997.
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") which
is held under a fourth generation Contract of Work (approval in principle), the
Company acquired, on Waseco's behalf, the right to acquire a 90% interest in a
25,270 hectare property with PT Framakadi Indos ("PFI") holding 10%. 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.
38
<PAGE> 39
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 KP 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 eight members, four of whom are
representatives of the Company.
Waseco has funded the initial $1,000,000 U.S. in Tewah Project feasibility
expenditures and has delivered to the Company an aggregate of 5,000,000 common
shares, (representing a 39% undiluted interest) and has thereby earned a 40%
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 surplus of approximately $500,000 as
at January 31, 1997. On September 30, 1996, Waseco acquired all of the issued
and outstanding shares and share purchase warrants of Rianto Resources Ltd.
("Rianto"), pursuant to a private share exchange agreement. The exchange was on
a share for share, warrant for warrant basis, with a total of 1,095,000 common
shares of Waseco and 547,500 common share purchase warrants of Waseco subject to
the exchange. The warrants have an exercise price of $1.25 per warrant and are
exerciseable at any time prior to 5:00 p.m. (Toronto time) June 30, 1997. As a
result of the transaction, 1,095,000 common shares and 547,500 share purchase
warrants were issued by Waseco. On August 16, 1996, Rianto entered into a
Memorandum of Understanding with PT Sitrade Nusa Globus ("PSNG") to acquire a
90% equity interest in a 4,000 hectare property, known as the West Walang
Property. PSNG currently holds title to the West Walang property under an
Exploration Status KP.
39
<PAGE> 40
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. The cost of the property
leases to the Company is less than fair market value based on the Company's
review of lease costs of comparable space.
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 March 27, 1997, 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 1,725,877(1) 7.4%
(six 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 (CALENDAR YEAR) HIGH LOW VOLUME
---------------------- ---- --- ------
<S> <C> <C> <C>
March 24-31, 1995 $0.60 $0.40 347,800
2nd Quarter, 1995 0.71 0.47 2,020,074
3rd Quarter, 1995 1.81 0.42 6,076,227
4th Quarter, 1995 3.25 0.75 12,478,847
1st Quarter, 1996 2.90 1.15 11,614,502
2nd Quarter, 1996 8.25 2.75 17,634,839
3rd Quarter, 1996 8.60 5.15 9,562,263
4th Quarter, 1996 8.30 4.70 6,071,083
January, 1997 5.25 3.95 2,020,882
February, 1997 5.85 4.05 3,516,929
March, 1997 (to March 27) 5.50 2.85 2,761,634
</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
40
<PAGE> 41
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
41
<PAGE> 42
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
42
<PAGE> 43
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
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<PAGE> 44
"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 presented in accordance with CDN GAAP and is qualified by
reference to the consolidated financial statements and notes thereto. See
"Financial Statements."
<TABLE>
<CAPTION>
[Canadian Dollars and Share Numbers in Thousands except per share amounts]
--------------------------------------------------------------------------------
As at As at As at As at As at
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
or the or the or the or the or the
Year then Year then Year then Year then Year then
Ended Ended Ended Ended Ended
<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) (1,795) (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
Securities and Investment 208 4 9 (4) (53)
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 Outstanding 23,391 21,022 4,894 4,906 4,080
Total Assets 6,423 1,927 194 173 40
</TABLE>
The following table sets forth selected historical information
concerning the Company presented in accordance with U.S. GAAP and is qualified
by reference to the consolidated financial statements and notes thereto. See
"Financial Statements".
<TABLE>
<CAPTION>
[Canadian Dollars and Share Numbers in Thousands except per share amounts]
--------------------------------------------------------------------------------
As at As at As at As at As at
May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993 May 31, 1992
or the or the or the or the or the
Year then Year then Year then Year then Year then
Ended Ended Ended Ended Ended
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) $8,075 $1,249 $(60) $45 $9
Cash and term deposits 8,161 1,264 34 116 8
Mineral properties 3,172 507 82 15 -
Share capital 12,654 3,090 1,157 1,083 990
Deficit accumulated during
development stage (356) (314) (154) (40) -
Net loss for the year (42) (160) (114) (41) (177)
Interest income (net of
interest expense) 54 13 - 1 -
Administrative expenses 270 122 101 44 137
Property write downs 35 58 23 - -
Gain (loss) on marketable securities
and investments 208 4 9 (4) (53)
Net loss per share $(0.01) $(0.02) $(0.02) $(0.01) $(0.04)
Shares outstanding 22,916 12,400 4,654 4,573 3,960
Fully diluted shares outstanding 24,941 21,022 4,894 4,906 4,080
Total assets 11,876 1,942 199 182 40
</TABLE>
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<PAGE> 45
EXCHANGE RATES
The following table sets out the exchange rates, based on the noon
buying rates in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York, for the
conversion of Canadian dollars into United States dollars in effect at the end
of the following periods, and the average exchange rates (based on the average
of the exchange rates on the last day of each month in such periods) and the
range of high and low exchange rates for such periods.
<TABLE>
<CAPTION>
Year Ended May 31
Six Months Ended ---------------------------------------------
November 30, 1996 1996 1995 1994 1993 1992
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
End of Period............ .7413 .7297 .7300 .7223 .7870 .8300
Average for Period....... .7352 .7345 .7255 .7482 .8031 .8614
High for Period.......... .7513 .7527 .7457 .7865 .8452 .8926
Low for Period........... .7260 .7224 .7023 .7166 .7761 .8290
</TABLE>
On November 30, 1996, the noon rate of exchange, as reported by the Federal
Reserve Bank of New York for the conversion of United States dollars into
Canadian dollars was $0.7413 (US$1.00 = CDN$1.3489). As of March 27, 1997,
the noon rate of exchange, as reported by the Federal Reserve Bank of New York
for the conversion of United States dollars into Canadian dollars was $0.7262
(US$1.00 = CDN$1.3770).
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, 1993, the Company was involved primarily in the
business of offering consulting services to the mining industry and investing in
the mining sector. During the year ended May 31, 1992, the Company had
consulting income of $12,300 and was in a reorganization stage whereby it was
redirecting its efforts toward disposing of its various marketable securities
and investments and incurred a loss on the disposal of securities and
investments of $53,470. Operating expenses for the year ended May 31, 1992
totalled $137,211 and included bad debts pertaining to outstanding uncollected
consulting fees in the amount of $30,429. Expenses also included travel expenses
relating to the cost of the president's travel to wind up the existing
operations. During the year ended May 31, 1993, the Company had further
consulting fees of $6,200 and operating expenses of $43,497. The largest
components of operating expenses during fiscal 1993 included salaries and
benefits of $13,148 ($12,205 in fiscal 1992) and professional fees of $11,500
($3,161 in 1992). The professional fees related to the audit and accounting fees
pursuant to a Revenue Canada tax audit and year end accounting and audit
services.
There have been no sources of operating revenue in the past three fiscal years.
Expenses during this period have increased from approximately $123,000 in fiscal
1994 to approximately $305,000 in fiscal 1996. Expenses which have changed
materially during this period are as follows:
- Business development expenses (1996 - $28,110, 1995 - $7,224, 1994
- $nil) have increased as general activities have increased. These
are expenses incurred by directors and employees in general
searches for new properties and business opportunities including
the cost of presentations to the investment community.
- Legal, audit and accounting (1996 - $57,482, 1995 - $5,000, 1994 -
$20,243). The fluctuations relate to the complexity of the
business affairs during the particular years involved. In 1994 the
company entered into many new property agreements requiring
increased legal and accounting fees. The following year was a
relatively slow year with respect to mining property acquisitions
as efforts were directed towards the initial public offering.
Legal, accounting and audit expenses related to the public
offering were charged directly against shareholders' equity
(against capital stock under United States generally accepted
accounting principles and against retained earnings under Canadian
generally accepted accounting principles).
- Office expenses (1996 - $30,346; 1995 - $18,038; 1994 - $9,523)
have risen in direct proportion to the level of activity of the
company.
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<PAGE> 46
- Salaries and benefits (1996 - $57,880; 1995 - $27,557; 1994 -
$45,428) decreased during fiscal 1995 as regulatory restrictions
limited amounts paid to officers. The amounts increased during
fiscal 1996 as part time office staff was added necessitated by an
increase in volume.
- Search for new properties (1996 - $1,479; 1995 - $3,779; 1994 -
$3,830) relate to expenses incurred on specific new properties
which were not ultimately acquired.
- Shareholder relations (1996 - $62,496; 1995 - $36,389; 1994 -
$nil) relate to transfer agent fees, press release expenses,
listing fees and printing costs related to documents distributed
to shareholders. These amounts commenced in fiscal 1995 when the
Company went public. The amounts increased during fiscal 1996 due
to the fact that 1996 was the first full year that the company was
a reporting issuer.
- Travel expenses (1996 - $12,451; 1995 - $13,678, 1994 - $5,598)
have increased in fiscal 1996 and fiscal 1995 over fiscal 1994 as
business activities have increased.
Included in operating expenses is the expensing of capitalized costs associated
with mining interests that have either expired or have been abandoned. During
the year ended May 31, 1994, certain interests in mining claims in The Republic
of Central Africa were terminated by local authorities without prior notice.
Management of the Company believed that the claims were in good standing at the
time of termination and the action was taken without legal basis. An amount of
$22,275, representing accumulated expenditures related to the property, were
written off.
During the year ended May 31, 1995, the Company relinquished an interest in 85%
of the acreage in the Fletcher Lake property and, accordingly, wrote off 85% or
$57,545 of accumulated acquisition and deferred exploration costs.
During the year ended May 31, 1996, the mining rights to the property in The
Republic of Namibia were not renewed. A shareholder of the Company had acquired
the mining rights which were being held on behalf of the Company pursuant to a
declaration of trust. The rights were granted for an initial two year period
from September 11, 1992. The granting of the rights was subject to the following
commitments:
1) annual rental in the amount of 3,712 South African Rand; and
2) annual expenditures of not less than 22,500 South African rand.
The shareholders, on the Company's behalf, had applied for a two year renewal
but the Company ultimately did not pursue the renewal as it had other more
important properties to pursue with greater potential. Accordingly, the total
accumulated deferred exploration costs in the amount of $35,302 were written off
during the year ended May 31, 1996.
The Company had interest income of approximately $54,000 in fiscal 1996 and
$13,000 in fiscal 1995. These amounts relate to interest on cash deposits which
have been generated from the initial public offering and the exercising of
warrants and options and had not been utilized to date in its operations or
exploration activities. During the year ended May 31, 1996, the Company earned
investment income in the amount of $208,107. This amount includes 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.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended May 31, 1994, the Company had a net decrease in cash of
approximately $82,000. The Company had a net operating loss of approximately
$114,000 which was reduced on a cash basis to approximately $97,000 by non-cash
expense items which totalled approximately $17,000. Offsetting this cash outflow
was an increase in accounts payable of approximately $73,000 and an increase in
prepaid expenses of $6,000 (net effect of $67,000) resulting in a net outflow of
cash from operations of approximately $30,000. The Company generated
approximately $16,000 from financing activities through the issuance of common
shares. The Company used approximately $69,000 in investing activities through
the investment in mining properties and marketable securities offset by proceeds
from the sale of marketable securities.
During the year ended May 31, 1995, the Company had a net increase in cash of
approximately $1,230,000. The largest contributor to this increase was the cash
generated from financing activities of approximately $1,524,000 which was
entirely related to the net proceeds from the initial public offering. The net
cash used in investing activities was approximately $144,000. The major
component of this amount was the investment in mining properties ($73,000), the
acquisition of marketable securities ($52,000) and the investment in mining
syndicates ($27,000). The net cash outflow from operations was approximately
$149,000.
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<PAGE> 47
During the year ended May 31, 1996, the Company had a net increase in cash of
approximately $6,896,000 including cash held in escrow in the amount of
$5,297,500 relating to the public offering which closed after the year end. The
major contributor to this surplus was the cash generated from financing
activities of approximately $8,824,000. This amount relates to the public
offering proceeds held in escrow and exercise of share options and warrants
during the year. The net cash used in investing activities was approximately
$1,894,000 which was primarily related to investment in mining properties of
approximately $1,960,000 and private placement investment of approximately
$138,000. Offsetting this outflow from investing activities were the proceeds
from investments of approximately $221,000. The cash used for operations was
approximately $33,000.
As at May 31, 1996, the Company had $11,876,146 in assets of which $2,863,181
was in cash and term deposits and $5,297,500 was cash held in escrow pending the
closing of the public offering. This cash held in escrow was released to the
Company in September 1996. In addition, the Company holds marketable securities
which have a market value of $246,991. Included in the marketable securities are
marketable securities with a market value of $84,000 which may have to be
returned to a third party and, accordingly, an offsetting amount is included in
accrued charges. 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 39% of the shares in the publicly
traded company. If Waseco 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 approximately 40% 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 Company had accounts payable of approximately $425,000 as at May 31, 1996.
It has no bank indebtedness or any other form of debt other than regular
accounts payable. The Company does not have an existing credit facility with a
financial institution.
Total shareholders' equity as at May 31, 1996 was approximately $11,451,000
including the net proceeds of the public offering of approximately $5,138,000
which closed subsequent to the year end.
The Company maintains its cash in low risk term deposits with a Canadian bank.
The funds are typically maintained predominantly in Canadian currency. The
Company maintains sufficient quantities of U.S. cash and term deposits to meet
its funding requirements over the next several months. The Company does not
hedge its U.S. currency requirements over the long term.
With the existing cash available, the Company believes that its liquidity is
very solid on a short-term basis in that it can meet its obligations with
respect to its existing properties and administration expenses over the next
year. Other sources of cash during this period would include the potential
proceeds for the exercising of outstanding options and warrants which if
exercised in their entirety would generate approximately $7,934,000 in cash
proceeds. The key element, of course, in this exercising will be the market
price of the stock as the majority of these options are exercisable at a price
between $5.50 and $6.75.
The Company's main goal is to find sufficient quantities of minerals in its
various properties such that mining operations will be financially viable. If a
property is determined to be viable, the Company should have the ability to
obtain external financing or find a strategic partner with sufficient resources
to develop the mining infrastructure. Once established, mining operations should
generate cash to finance continuing exploration activities. At this point, the
Company is not in a position to determine whether any of its properties contain
sufficient reserves to become a viable mining operation. In the meantime, it has
sufficient cash resources to continue its exploration program.
OPERATING RESULTS - SIX MONTHS ENDED NOVEMBER 30, 1996
The net loss for the current six month period was approximately $276,000
compared to a loss of approximately $126,000 during the six months ended
November 30, 1995. Expenses during the current six month period were
approximately $404,000 which represents a substantial increase over the
previous year's six month total expenses of approximately $152,000. During the
current period, the accumulated costs in the amount of approximately $119,000
related to the Dihourse property in Quebec, were written off as the exploration
permit expired during the period. Shareholder relations expenses increased from
approximately $36,000 during the six months ended November 30, 1995 to
approximately $130,000 during the current period. The company has increased its
efforts during the current period in providing information to the investment
community including presentations, the hiring of a public relations firm
specializing in providing information to the U.S. investment community and the
preparation of an informative annual report. Business development expenses were
approximately $20,000 and related to the expenses involved in searching for new
business opportunities and new potential investors. Legal, audit and accounting
expenses were approximately $40,000 during the current period compared to
approximately $16,000 during the prior year. The increased costs relate
primarily to the costs associated with the preparation of the 20-F
registration statement. Salaries and benefits increased from approximately
$17,000 in the prior year to approximately $32,000 in the current year. This
increase relates to increased office staff costs to handle increased
administrative activities. The Company earned approximately $123,000 of
interest income on term deposits. The investment income of $6,080 relates to
profit distributions from the Beaver Syndicate in which the company continues
to hold an 8% interest.
LIQUIDITY AND CAPITAL RESOURCES - SIX MONTHS ENDED NOVEMBER 30, 1996
During the current six month period, cash decreased by approximately $3,172,000
which was almost entirely related to company's investment, including
exploration expenditures related to its mining properties. The company raised
$85,300 in equity through the exercising of options. Operating losses used
approximately $80,000 in cash. During the prior six month period ended
November 30, 1995, the company used $14,000 in cash. During the prior six month
period, the company raised approximately $763,000 in capital through the
exercising of warrants and options. The significant portion of this cash was
used to fund mining property expenditures of approximately $765,000 while
approximately $131,000 was consumed in operations.
As at November 30, 1996, the company had a working capital surplus of
approximately $4,714,000 which will be used to fund future operations and
mining property expenditures. The company's shareholders' equity as at November
30, 1996 was approximately $12,719,000, of which approximately $7,783,000
relates to the company's investment in mining 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
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
47
<PAGE> 48
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>
48
<PAGE> 49
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.
49
<PAGE> 50
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.
To the Company's knowledge, no single individual owns directly or
indirectly more than an eight per cent interest in Archon. Archon is managed by
Mr. George Silverman who is a director of the Company. Mr. Silverman owns less
than ten per cent of Archon. In addition, the Company itself owns an eight per
cent interest in Archon. No other officer or director of the Company owns an
interest in Archon. Archon was created under the Securities Act (Ontario) (the
"Act"), and the Act specifically provides that Archon may not dispose of
interests in mining properties without the approval of members of the syndicate
holding at least two-thirds of the issued units of the syndicate. Mr. Silverman
and the Company did not participate in the Archon unit holder vote to enter into
the Diadem-Archon agreement and both abstain from voting on all Archon matters
which relate to the Company. Negotiations on behalf of the Company were
conducted by Mr. Derek Bartlett, a non-management member of the Company's board
of directors. Negotiations on behalf of Archon were conducted by Mr. Silverman.
Mr. Silverman did not vote as a member of the Company board on the decision to
enter into the Diadem-Archon agreement of December 10, 1996, and abstains from
voting on Company matters affecting Archon.
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.
50
<PAGE> 51
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 Statement of Income and Deficit
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>
51
<PAGE> 52
<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>
52
<PAGE> 53
DIADEM RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
CONTENTS
<TABLE>
<S> <C>
Auditors' report F-2
Balance sheet F-3
Consolidated statement of income and deficit F-4
Consolidated statement of accumulated losses as
development stage company F-5
Consolidated statement of changes in financial position F-6
Consolidated statement of accumulated cash flow as
development stage company F-7
Notes to consolidated financial statements F-8 to F-28
</TABLE>
F-1
<PAGE> 54
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 in Canada.
Toronto, Canada Green Chencinski Starkman Eles
August 13, 1996 Chartered Accountants
(September 13, 1996 as to note 11)
F-2
<PAGE> 55
DIADEM RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
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>
F-3
<PAGE> 56
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
<TABLE>
<CAPTION>
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 -
Expiration of mining interests (note 4a) 35,382 57,545 22,275
General 10,405 (962) 6,607
Insurance 6,215 5,697 6,215
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
---------- ---------- ----------
304,915 176,593 122,939
---------- ---------- ----------
INCOME
Interest 54,626 12,674 531
Gain on marketable securities and investments 208,107 4,217 8,498
---------- ---------- ----------
262,733 16,891 9,029
---------- ---------- ----------
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>
F-4
<PAGE> 57
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED LOSSES AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 10)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1996
(IN CANADIAN DOLLARS) $
(UNAUDITED)
- ------------------------------------------------------------------------------------
<S> <C>
EXPENSES
Advertising and promotion 1,349
Amortization 12,134
Business development 35,334
Expiration of mining interest 115,202
General 18,662
Insurance 24,342
Legal, audit and accounting fees 94,225
Office expense 62,311
Salaries and benefits 144,013
Search for new properties 9,088
Shareholder relations 98,885
Travel 32,264
-------
647,809
-------
INCOME
Consulting 6,200
Interest 68,621
Gain on securities and investments 216,658
-------
291,479
-------
DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE 356,330
=======
</TABLE>
F-5
<PAGE> 58
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
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>
F-6
<PAGE> 59
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED CASH FLOW AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 10)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1996
(IN CANADIAN DOLLARS) $
(UNAUDITED)
- ------------------------------------------------------------------------------------
<S> <C>
CASH PROVIDED BY (USED FOR):
Net accumulated loss (356,330)
Items not affecting cash
Amortization 12,134
Expiration of mining interest 115,202
Loss (gain) on marketable securities and investments (216,658)
----------
(445,652)
Decrease in accounts receivable 1,761
Increase in prepaid expenses and sundry receivables (87,735)
Increase in accounts payable and accrued charges 322,040
----------
(209,586)
----------
FINANCING ACTIVITIES
Costs associated with issuance of shares (485,154)
Increase (decrease) in advances from shareholder 40,744
Issuance of common shares 10,945,630
----------
10,501,220
----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (2,097,500)
Acquisition of fixed assets (21,383)
Acquisition of marketable securities (140,093)
Investment in mining syndicates and mining companies (177,978)
Proceeds on gain on marketable securities and investments 299,208
----------
(2,137,746)
----------
Change in cash and cash equivalents 8,153,888
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,793
----------
CASH AND CASH EQUIVALENTS,END OF YEAR 8,160,681
==========
REPRESENTED BY:
Cash and term deposits 2,863,181
Cash held in escrow 5,297,500
----------
8,160,681
==========
</TABLE>
F-7
<PAGE> 60
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
Company 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:
Furniture and fixtures 20%
Computer and equipment 30%
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.
F-8
<PAGE> 61
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.
Property costs are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may
not be recoverable. These procedures include, but are not limited to,
the following:
a) determining that the value of the recoverable,
marketable resources does not justify continuance;
b) experiencing a significant adverse change in legal
factors or in the business climate that could affect the
property's value, or an adverse action or assessment by
a government unit or regulation; and
c) evaluating prospects for success. Inasmuch as the
advancements or mining efforts, based on a predetermined
timetable, are a clearer prediction than anticipated
cash flows, progress towards that success is the basis
for determining impairment. The use of cash flows would
be utilized to determine impairment at a much later
stage in the established mining property's life cycle.
All capitalized costs for each property will be amortized as depletion
to the statement of income when commercial production commences. The
units-of-depletion method will be applied based upon proven and
probable reserves. Possible reserves are excluded.
3. MARKETABLE SECURITIES
<TABLE>
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.
F-9
<PAGE> 62
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) EXPIRATION OF MINING INTERESTS
During the year ended May 31, 1994, certain interests in mining claims in
The Republic of Central Africa were terminated by local authorities
without prior notice. Management of the Company believed that the claims
were in good standing at the time of termination and the action was taken
without legal basis. An amount of $22,275, representing accumulated
expenditures related to the property, were written off.
During the year ended May 31, 1995, the company relinquished a portion of
the Fletcher Lake property (see note 10b) and, accordingly, wrote off
$57,545 of accumulated acquisition and deferred exploration costs.
F-10
<PAGE> 63
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
During the year ended May 31, 1996, the mining rights to the property in
The Republic of Namibia were not renewed. Accordingly, the total
accumulated deferred exploration in the amount of $35,382 was written
off.
(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;
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 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.
F-11
<PAGE> 64
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
(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.
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 El Dorado 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
F-12
<PAGE> 65
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
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.
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-13
<PAGE> 66
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
(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.
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.
F-14
<PAGE> 67
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
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.
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.
F-15
<PAGE> 68
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 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
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, KALIMANTAN, INDONESIA
The Company has entered into a joint venture arrangement to acquire a 30%
interest in a 10,300 hectare property in the Kalimantan 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.
F-16
<PAGE> 69
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
(k) MAHAKAM, KALIMANTAN, 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 Kalimantan, 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.
(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.
The balance as at May 31, 1996 relates to expenditures on the property
which to date have not been reimbursed.
F-17
<PAGE> 70
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>
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>
F-18
<PAGE> 71
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, 1994 - $nil), 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. The Company leases
registered head office space from the same company at a cost of
$300 per month. The Company also leases office space from a
director at a cost of $250 per month. In addition, a company which
is wholly owned by a director, charged $56,640 (1995 - $nil, 1994 -
$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>
F-19
<PAGE> 72
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. CAPITAL STOCK (CONTINUED)
The weighted average number of shares during the current year was
approximately 15,083,000 (1995 - 6,315,000, 1994 - 4,629,000).
(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
Company 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>
F-20
<PAGE> 73
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>
In addition, the Company has deferred exploration expenditures which are
deductible for tax purposes in the amount of approximately $2,500,000
which have been capitalized for accounting purposes.
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, the consolidated balance
sheet
F-21
<PAGE> 74
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)
would have been reported as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
CURRENT ASSETS
Cash and term deposits 2,863,181 1,264,443
Cash held in escrow (note 10a) 5,297,500 -
Marketable securities (note 10c) 246,991 84,187
Prepaid expenses and sundry receivables (notes 3 and 10a) 92,675 35,411
---------- ---------
8,500,347 1,384,041
INTEREST IN MINING PROPERTIES 3,172,373 507,234
INVESTMENT IN MINING SYNDICATES AND MINING
COMPANIES 177,978 40,000
FIXED ASSETS 25,448 11,305
---------- ---------
11,876,146 1,942,580
========== =========
CURRENT LIABILITIES
Accounts payable and accrued liabilities (notes 3 and 10a) 425,363 128,898
SHAREHOLDERS' EQUITY
Capital stock (note 10b) 12,654,140 3,090,305
Deficit incurred prior to development stage activities (note 10d) (968,527) (968,527)
Deficit accumulated during the development stage (note 10d) (356,330) (314,148)
Difference between cost and market value of
marketable securities (note 10c) 121,500 6,052
---------- ---------
11,876,146 1,942,580
========== =========
</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). In addition, during the year ended May 31,
1994, the Company issued 32,105 shares of the company valued at $13,484
in exchange for the equivalent value of marketable securities. These
amounts have been included in the consolidated statement of changes
F-22
<PAGE> 75
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)
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.
Accordingly, the U.S. GAAP subtotals are reconciled as follows:
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
CASH USED IN OPERATIONS PER CANADIAN GAAP (192,632) (148,839) 67,300
Increase in net change in non-cash working capital
capital balances related to operations (note 10a) 159,595 - -
---------- --------- --------
CASH USED IN OPERATIONS PER U.S. GAAP (33,037) 148,839 67,300
---------- --------- --------
CASH USED FOR
INVESTING ACTIVITIES PER CANADIAN GAAP (2,634,560) (554,379) (122,222)
Issuance of shares for the acquisition of
marketable securities included above - - 13,484
Issuance of shares for the acquisition of
mining properties included above 740,075 410,000 40,000
---------- --------- --------
CASH USED FOR
INVESTING ACTIVITIES PER U.S. GAAP (1,894,485) (144,379) (68,738)
---------- --------- --------
CASH PROVIDED BY FINANCING ACTIVITIES
PER CANADIAN GAAP 4,425,930 1,933,515 69,765
Issuance of shares for the acquisition of
marketable securities included above - - (13,484)
Issuance of capital stock (note 10a) 5,137,905 - -
Issuance of shares for the acquisition of
mining properties included above (740,075) (410,000) (40,000)
---------- --------- --------
CASH PROVIDED BY FINANCING ACTIVITIES
PER U.S. GAAP 8,823,760 1,523,515 16,281
---------- --------- --------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER U.S. GAAP 6,896,238 1,230,297 (82,070)
Cash held in escrow (note 10a) 5,297,500 - -
---------- --------- --------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER CANADIAN GAAP 1,598,738 1,230,297 (82,070)
========== ========= ========
</TABLE>
F-23
<PAGE> 76
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)
The net change in non-cash working capital balances related to
operations under Canadian and U.S. GAAP is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Prepaid expenses and sundry receivables (57,268) (29,463) (5,795)
Accounts payable and accrued charges 236,469 (15,650) 73,095
------- ------- ------
179,201 (45,113) 67,300
======= ======= ======
</TABLE>
<TABLE>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
CONSOLIDATED LOSS PER SHARE (note 10f)
Primary loss per share as per GAAP in Canada .01 .03 .02
Primary loss per share as per GAAP in the
United States .01 .02 .02
</TABLE>
(a) CASH HELD IN ESCROW
Under U.S. GAAP, the cash held in escrow in the amount of $5,297,500
related to the public offering which closed subsequent to the year end
would be included on the balance sheet. Other related adjustments
related to these funds would include the following:
- An increase in capital in the amount of $5,137,905 (gross proceeds
less costs of issuance of $612,095)
- A decrease in prepaids of $35,494
- An increase in accounts payable related to outstanding expenses
related to the offering in the amount of $124,101
(b) 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.
(c) INVESTMENTS IN SHARES OF PUBLIC COMPANIES
Under GAAP in the United States, the Company's investments in shares of
public companies would be classified as available for sale and would be
carried at fair value. Changes in the market value of investments are
included as a component of shareholders' equity.
F-24
<PAGE> 77
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)
(d) INCOME TAXES
Deferred tax assets under U.S. GAAP which are offset by a valuation
allowance are comprised of the following at May 31:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Net loss carryforwards 560,000 560,000
Exploration and development expenditures 1,130,000 160,000
Costs of raising capital 400,000 160,000
---------- --------
2,090,000 880,000
Less: Valuation allowance (2,090,000) (880,000)
---------- --------
- -
========== ========
</TABLE>
(e) DEVELOPMENT STAGE COMPANY DISCLOSURE
Under U.S. GAAP the Company would be considered a development stage
company commencing in the year ended May 31, 1993 when it ceased its
investment and consulting operations and became a mining development
company. As a development stage Company, the Company is required to
provide an income statement and statement of cash flow on a cumulative
basis from the date it became a development stage company which are
included separately in these financial statements.
In addition the cumulative loss as a development stage company would be
included as a separate portion of the balance sheet as "deficit
accumulated during the development stage." The accumulated deficit of
the Company at the commencement of its operations as a development stage
company was $968,527.
The capital stock issued during the period that the Company has been a
development stage company is as follows:
F-25
<PAGE> 78
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)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
YEAR ENDED MAY 31, 1993
Opening balance 9,900,000 990,101
January 31, 1993 1,500,000 Private placement for $150,000 cash 150,000
April 26, 1993 32,105 Issued in exchange for publicly traded shares of
Frankfield Consolidated Corporation based on the
estimated market value of the shares received 13,484
---------- ---------
Cumulative 11,432,105 1,153,585
YEAR ENDED MAY 31, 1994
June 17, 1993 100,000 Issued in exchange for consulting assistance 10,000
related to Frankfield take-over bid based on
agreed upon fee of $10,000
December 23, 1993 100,000 Issued pursuant to option to acquire a 60% 62,500
interest in Fletcher Lake property based upon
agreed upon price of $62,500
During the year 1,829 Exercise of warrants issued pursuant to 914
Frankfield take-over bid at $0.50 per share
---------- ---------
Cumulative 11,633,934 1,226,999
YEAR ENDED MAY 31, 1995
September 23, 1994 (6,980,353) Consolidation of shares on a one post-consolidation -
share for each two and one-half pre-consolidation
shares pursuant to Articles of Amendment
February 28, 1995 through
May 5, 1995 7,236,000 Initial public offering at $0.30 per share 2,170,800
---------- ---------
Balance forward 11,889,581 3,397,799
---------- ---------
</TABLE>
F-26
<PAGE> 79
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)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
Subtotal from prior
page 11,889,581 3,397,799
March 3, 1995 100,000 Private placement at $30,000 cash 30,000
March 6, 1995 150,000 Shares issued pursuant to acquisition of interest 45,000
in Rancheria property in California based on
price of shares issued to public
March 14, 1995 200,000 Shares issued pursuant to acquisition of interest 60,000
in Crystal Valley property in Quebec based on
price of shares issued to public
April 18, 1995 60,000 Shares issued pursuant to acquisition of interest 30,000
in Fletcher Lake property based on the market
value of shares on date of agreement
---------- ---------
12,399,581 3,562,799
YEAR ENDED MAY 31, 1996
September 19, 1995 150,000 Shares issued pursuant to acquisition of interest in 90,000
Rancheria property in California based on the market
value of shares on date of exercising of option
January 18, 1996 150,000 Shares issued pursuant to acquisition of interest in 186,000
Leek Springs property in California based on the market
value of shares on date of exercising of option
January 19, 1996 160,000 Shares issued pursuant to acquisition of interest 80,000
in Pekan River and Mercury Permit, Quebec properties
based on the market value of shares on date of
agreement
January 29, 1996 30,075 Shares issued pursuant to acquisition of interest 40,000
in Dihourse, Quebec property based on the market
value of shares on date of agreement
---------- ---------
Balance forward 12,889,656 3,958,799
---------- ---------
</TABLE>
F-27
<PAGE> 80
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)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
Subtotal from prior
page 12,889,656 3,958,799
February 27, 1996 150,000 Shares issued pursuant to acquisition of interest 372,000
in Rancheria property in California based on the
market value of shares on date of exercising of
option
February 29, 1996 100,000 Shares issued pursuant to acquisition of interest 103,000
in Belitung Island, Indonesia property based on
the market value of shares on date of agreement
April 15, 1996 350,000 Exercising of promoter's options at $0.40 per share 140,000
During the fiscal year 585,000 Exercising of share options pursuant to share 290,950
option plan at pricing ranging from $0.40 to $1.27
per share
During the fiscal year 7,841,600 Exercising of warrants issued pursuant to initial 3,136,640
---------- public offering at $0.40 per share ---------
21,916,256 8,001,389
========== =========
</TABLE>
(f) 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.
Contingent share outstanding as at May 31, 1996 were as follows: $
Contingent shares related to public offering 1,000,000
Warrants outstanding related to public offering 500,000
Brokers warrant related to public offering 50,000
---------
1,550,000
=========
The inclusion of these shares for the purpose of calculating the loss per share
would not affect the loss per share for the year ended May 31, 1996.
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.
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.
F-28
<PAGE> 81
DIADEM RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(UNAUDITED)
CONTENTS
<TABLE>
<S> <C>
Balance sheet F-30
Consolidated statement of income and deficit F-31
Consolidated statement of accumulated losses as
development stage company F-32
Consolidated statement of changes in financial position F-33
Consolidated statement of accumulated cash flow as
development stage company F-34
Notes to consolidated financial statements F-35 to F-54
</TABLE>
F-29
<PAGE> 82
DIADEM RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS AT NOVEMBER 30, 1996 1995
(IN CANADIAN DOLLARS) $ $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and term deposits 4,993,677 1,278,313
Marketable securities (note 3) 61,571 61,597
Prepaid expenses and sundry receivables (notes 5 and 10) 114,818 9,622
---------- ----------
5,170,066 1,349,532
INTEREST IN MINING PROPERTIES (note 4) 7,782,756 1,247,065
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (note 5) 197,978 40,000
FIXED ASSETS (note 5) 24,614 9,360
---------- ----------
13,175,414 2,645,957
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued charges (notes 3, 7 and 10) 456,517 51,240
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 8) 15,416,589 4,477,999
DEFICIT (2,697,692) (1,883,282)
---------- ----------
12,718,897 2,594,717
---------- ----------
13,175,414 2,645,957
========== ==========
</TABLE>
F-30
<PAGE> 83
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30, 1996 1995
(IN CANADIAN DOLLARS) $ $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EXPENSES
Amortization 3,507 987
Business development 20,867 2,203
Expiration of mining interest (note 4) 119,241 35,382
General 31,876 14,405
Insurance 3,108 3,108
Legal, audit and accounting fees 40,484 15,958
Office expenses 20,117 13,216
Salaries and benefits 31,755 17,203
Search for new properties - 1,212
Shareholder relations 130,229 36,321
Travel 3,165 12,285
---------- ----------
404,349 152,280
---------- ----------
(404,349) (152,280)
---------- ----------
OTHER INCOME (LOSS)
Interest 122,683 27,147
Gain (loss) on securities and investments 6,080 (668)
---------- ----------
128,763 26,479
---------- ----------
NET LOSS (275,586) (125,801)
DEFICIT, BEGINNING OF YEAR (1,810,011) (1,755,169)
---------- ----------
(2,085,597) (1,880,970)
Costs associated with issuance of shares (note 8) (612,095) (2,312)
---------- ----------
DEFICIT, END OF YEAR (2,697,692) (1,883,282)
========== ==========
NET LOSS PER COMMON SHARE .01 .01
========== ==========
</TABLE>
F-31
<PAGE> 84
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED LOSSES AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 10)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JUNE 1, 1992 TO NOVEMBER 30, 1996
(IN CANADIAN DOLLARS) $
- ----------------------------------------------------------------------------------------------------
<S> <C>
EXPENSES
Advertising and promotion 1,349
Amortization 15,641
Business development 56,201
Expiration of mining interest 234,443
General 50,538
Insurance 27,450
Legal, audit and accounting fees 134,709
Office expense 82,428
Salaries and benefits 175,768
Search for new properties 9,088
Shareholder relations 229,114
Travel 35,429
---------
1,052,158
---------
INCOME
Consulting 6,200
Interest 191,304
Gain on securities and investments 222,738
---------
420,242
---------
DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE (631,916)
=========
</TABLE>
F-32
<PAGE> 85
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30, 1996 1995
(IN CANADIAN DOLLARS) $ $
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net loss (275,586) (125,801)
Items not affecting cash
Amortization 3,507 987
Expiration of mining interest 119,241 35,382
Loss (gain) on marketable securities and investments (6,080) 668
---------- ---------
(158,918) (88,764)
Net change in non-cash working capital balances related to operations 238,607 (41,869)
---------- ---------
79,689 (130,633)
---------- ---------
FINANCING ACTIVITIES
Costs associated with issuance of shares (note 8) (612,095) (2,312)
Issuance of common shares (note 8) 7,415,200 915,200
---------- ---------
6,803,105 912,888
---------- ---------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (4,729,624) (775,213)
Disposition (acquisition) of fixed assets (2,674) 958
Acquisition of marketable securities (6,080) (1,606)
Investment in mining syndicates and mining companies (20,000) -
Proceeds on gain on marketable securities and investments 6,080 7,476
---------- ---------
(4,752,298) (768,385)
Change in cash and cash equivalents 2,130,496 13,870
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 2,863,181 1,264,443
---------- ---------
CASH AND TERM DEPOSITS, END OF YEAR 4,993,677 1,278,313
========== =========
</TABLE>
F-33
<PAGE> 86
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED CASH FLOW AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 10)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JUNE 1, 1992 TO NOVEMBER 30, 1996
(IN CANADIAN DOLLARS) $
- --------------------------------------------------------------------------------------------------------
<S> <C>
CASH PROVIDED BY (USED FOR):
Net accumulated loss (631,916)
Items not affecting cash
Amortization 15,641
Expiration of mining interest 234,443
Gain on marketable securities and investments (222,738)
----------
(604,570)
Decrease in accounts receivable 1,761
Increase in prepaid expenses and sundry receivables (109,878)
Increase in accounts payable and accrued charges 423,191
----------
(289,496)
----------
FINANCING ACTIVITIES
Costs associated with issuance of shares (1,097,249)
Increase (decrease) in advances from shareholder 40,744
Issuance of common shares 11,642,929
----------
10,586,424
----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (5,199,802)
Acquisition of fixed assets (24,057)
Acquisition of marketable securities (146,173)
Investment in mining syndicates and mining companies (245,300)
Proceeds on gain on marketable securities and investments 305,288
----------
(5,310,044)
----------
Change in cash and cash equivalents 4,986,884
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 6,793
----------
CASH AND TERM DEPOSITS,END OF YEAR 4,993,677
==========
</TABLE>
F-34
<PAGE> 87
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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:
Furniture and fixtures 20%
Computer and equipment 30%
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.
F-35
<PAGE> 88
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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.
Property costs are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may
not be recoverable. These procedures include, but are not limited to,
the following:
a) determining that the value of the recoverable, marketable
resources does not justify continuance;
b) experiencing a significant adverse change in legal factors or in
the business climate that could affect the propety's value, or
an adverse action or assessment by a government unit or
regulation; and
c) evaluating prospects for success, inasmuch as the advancements
of mining efforts, based on a predetermined timetable, are a
clearer prediction than anticipated cash flows, progress towards
that success is the basis for determining impairment. The use of
cash flows would be utilized to determine impairment at a much
later stage in the established mining property's life cycle.
All capitalized costs for each property will be amortized as depletion
to the statement of income when commercial production commences. The
units-of-depletion method will be applied based upon previous and
probable reserves. Possible reserves are excluded.
3. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Marketable securities 61,571 61,597
</TABLE>
The estimated market value of the marketable securities is $149,752 (1995
- $80,805). 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
$0.37 per share as at November 30, 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
November 30, 1996 was $48,000, (1995 - $35,000). 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.
F-36
<PAGE> 89
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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) 652,733 280,733
Leek Springs, California (note 4d) 1,681,711 -
Crystal Valley Region, Quebec (note 4e) 72,500 72,500
Dihourse Permit, Quebec (note 4a) - 9,200
Pekan River and Sarah Lake, Quebec (note 4f) 119,400 9,200
Mercury Permit, Quebec (note 4g) 136,300 16,300
Belitung Island, Indonesia (note 4h) 368,190 -
--------- ---------
3,041,189 398,288
--------- ---------
Deferred exploration costs
Fletcher Lake, Northwest Territories 78,607 5,914
Rancheria, California 689,308 506,973
Leek Springs, California 1,926,156 1,000
Crystal Valley Region, Quebec 168,151 167,596
Dihourse Permit, Quebec - 1,024
Pekan River and Sarah Lake, Quebec 1,667,420 101,187
Mercury Permit, Quebec 23,515 23,515
Belitung Island, Indonesia 141,088 -
Tewah, Indonesia (note 4k) 47,322 41,568
--------- ---------
4,741,567 848,777
--------- ---------
7,782,756 1,247,065
========= =========
</TABLE>
(a) EXPIRATION OF MINING INTEREST
During the current period, the exploration permit on the Dihourse
property in Quebec expired. Accordingly, the accumulated costs of
acquisition and exploration in the amount of $119,241 were written off as
an expense.
(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;
F-37
<PAGE> 90
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 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.
F-38
<PAGE> 91
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
During the six months ended November 30, 1995, 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 $506,000 on the property.
During the second half of the year ended May 31, 1996, 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, 1998:
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 Company is currently negotiating to extend this
deadline.
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 215
unpatented mining claims covering approximately 2,500 acres in the Leek
Springs area of El Dorado 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 second half of 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.
During the current six month period, the Company increased its interest
to 25% in the property by issuing 200,000 common shares valued at $6.45
per share and by paying U.S. $100,000 to Silverstone Prospecting
Syndicate.
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.
F-39
<PAGE> 92
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
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 currently in good
standing.
(f) 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 during the year ended
May 31, 1996 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.
The Company earned an additional 19% interest, during the current six
month period thereby increasing its interest to 70%, by issuing to Beaver
Syndicate $60,000 worth of common shares and paying $5,000 in annual
permit fees.
F-40
<PAGE> 93
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
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, provided the Company pays
annual renewal fees and files assessment work within the time required.
(g) 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 during the year ended
May 31, 1996 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.
The Company earned an additional 19% interest, thereby increasing its
interest to 70% during the six months ended November 30, 1996, by issuing
to Trinity Syndicate 14,404 common shares valued at a total of $80,000.
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.
F-41
<PAGE> 94
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
(h) 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.
(i) MIRAH NORTH EAST, KALIMANTAN, INDONESIA
The Company has entered into a joint venture arrangement to acquire a 30%
interest in a 10,300 hectare property in the Kalimantan 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.
(j) MAHAKAM, KALIMANTAN, 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 Kalimantan, 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.
(k) 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.
F-42
<PAGE> 95
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
4. INTEREST IN MINING PROPERTIES (CONTINUED)
Waseco has funded the initial U.S. $1,000,000 in Tewah Project
feasibility expenditures and has delivered to the Company an aggregate of
5,000,000 common shares and has thereby earned a 40% working interest in
the property. Waseco Resources Inc. has a further option to acquire an
additional 20% interest in the joint venture by issuing a further
2,000,000 common shares to the Company and by expending a further U.S.
$500,000 in proposed expenses. If the full 60% interest in the joint
venture is acquired by Waseco Resources Inc., the Company will own
7,000,000 common shares of Waseco Resources Inc. which would represent
less than 50% of the outstanding shares on a fully diluted basis. The
5,000,000 shares of Waseco Resources Inc. currently represent
approximately 39% of the outstanding shares. The cumulative expenditure
on the Tewah property represents unreimbursed expenditures to date.
5. INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Investment in mining syndicates 40,000 40,000
Investment in private mining company 157,978 -
------- ------
197,978 40,000
======= ======
</TABLE>
The Company participated in a private placement during the year ended May
31, 1996 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) and 2.0 units (1995 - nil) in Crystal Valley
Prospecting Syndicate. 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 and 4% of
the outstanding units in Crystal Valley Prospecting Syndicate.
F-43
<PAGE> 96
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
5. INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (CONTINUED)
In addition, the Company holds 5,000,000 common shares of Waseco
Resources Inc. This represents approximately 39% of the outstanding
shares. These shares were acquired pursuant to the transfer of the mining
options in the Tewah property in Indonesia (see note 4k) 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.
6. FIXED ASSETS
<TABLE>
<CAPTION>
ACCUMULATED 1996 1995
COST AMORTIZATION NET NET
$ $ $ $
<S> <C> <C> <C> <C>
Furniture and fixtures 31,199 25,632 5,567 7,043
Computer and equipment 24,205 5,158 19,047 2,317
------ ------ ------ -----
55,404 30,790 24,614 9,360
====== ====== ====== =====
</TABLE>
7. RELATED PARTY INFORMATION
ACCOUNTS PAYABLE AND DEFERRED EXPLORATION COSTS
During the current year, the Company incurred fees totalling
$17,357, (1995 - $46,309), related to exploration work from a
company in which a director holds a 49% interest. A balance of
$4,966, (1995 - $16,491) related to these fees is included in
accounts payable at the end of the current year period. The Company
leases registered head office space from the same company at a cost
of $300 per month. The Company also leases office space from a
director at a cost of $250 per month. In addition, a company which
is wholly owned by a director, charged $21,675, (1995 - $10,850)
during the current year in consulting fees related to exploration
work. A balance of $29,119 (1995 - nil) related to these fees is
included in accounts payable at the end of the current period.
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 $20,226 (1995 - $nil) due from Waseco Resources Inc.
F-44
<PAGE> 97
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
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 period 21,916,256 8,001,389 12,399,581 3,562,799
Public offering 1,000,000 5,750,000
Warrants exercised by shareholders - - 1,947,000 778,800
Shares issued to related
to the purchase of mining properties 249,034 1,580,000 150,000 90,000
Exercise of share options 85,000 85,200 116,000 46,400
---------- ---------- ---------- ---------
23,250,290 15,416,589 14,612,581 4,477,999
========== ========== ========== =========
</TABLE>
There was an average of approximately 22,400,000 outstanding common
shares (1995 - 12,920,000) during the current period.
(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 six months ended November 30, 1995, 1,947,000 warrants
were exercised with gross proceeds of $778,800. During the second
half of the year ended May 31, 1996, a further 5,894,600 warrants
were exercised for gross proceeds of $2,357,840. All unexercised
warrants have expired.
(d) Secondary public offering
During the six months ended November 30, 1996, the Company
completed a public offering with the issuance of 1,000,000 Special
Warrants at a price of $5.75 per Special Warrant for gross proceeds
of $5,750,000. Each Special Warrant entitled the holder to receive
one common share and one-half of a common share of the Company at a
price of $6.75 per share until May 17, 1997. An additional 50,000
warrants were issued to the broker at an exercise price of $6.75
per share expiring on May 17, 1997. None of the total of 550,000
warrants has been exercised.
F-45
<PAGE> 98
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
8. CAPITAL STOCK (CONTINUED)
The costs associated with this offering which totalled $612,095
have been charged directly against retained earnings during the six
months ended November 30, 1996.
(e) 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 2,190,000.
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 0.62 540,000
November 28, 2000 1.27 30,000
January 26, 2001 1.86 200,000
June 7, 2001 5.50 620,000
October 18, 2001 6.50 5,000
October 21, 2001 6.80 5,000
---------
1,400,000
=========
</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>
In addition, the Company has deferred exploration expenditures which are
deductible for tax purposes in the amount of approximately $5,400,000,
which has been capitalized for tax purposes.
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, the consolidated balance
sheet
F-46
<PAGE> 99
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
would have been reported as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
CURRENT ASSETS
Cash and term deposits 4,993,677 1,278,313
Marketable securities (note 10c) 149,752 80,805
Prepaid expenses and sundry receivables (notes 3 and 10a) 114,818 9,622
---------- ---------
5,258,247 1,368,740
INTEREST IN MINING PROPERTIES 7,782,756 1,247,065
INVESTMENT IN MINING SYNDICATES AND MINING
COMPANIES 197,978 40,000
FIXED ASSETS 24,614 9,360
---------- ---------
13,263,595 2,665,165
========== =========
CURRENT LIABILITIES
Accounts payable and accrued liabilities (notes 3 and 10a) 490,517 72,240
SHAREHOLDERS' EQUITY
Capital stock (note 10b) 14,319,340 4,003,193
Deficit incurred prior to development stage activities (note 10d) (968,527) (968,527)
Deficit accumulated during the development stage (note 10d) (631,916) (439,949)
Difference between cost and market value of
marketable securities (note 10c) 54,181 (1,792)
---------- ---------
13,263,595 2,665,165
========== =========
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
During the current six month period, the Company issued 249,034 common
shares (1995 - 150,000) of its share capital as consideration for the
acquisition of mining properties in the amount of $1,580,000 (1995 -
$90,000). These amounts have been included in the consolidated statement
of
F-47
<PAGE> 100
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
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.
Accordingly, the U.S. GAAP subtotals are reconciled as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
CASH USED IN OPERATIONS PER CANADIAN GAAP 79,689 (130,633)
Increase in net change in non-cash working capital
capital balances related to operations (note 10a) (159,595) -
---------- --------
CASH USED IN OPERATIONS PER U.S. GAAP (79,906) (130,633)
---------- --------
CASH USED FOR
INVESTING ACTIVITIES PER CANADIAN GAAP (4,752,298) (768,385)
Issuance of shares for the acquisition of
mining properties included above 1,580,000 150,000
---------- --------
CASH USED FOR
INVESTING ACTIVITIES PER U.S. GAAP (3,172,298) (618,385)
---------- --------
CASH PROVIDED BY FINANCING ACTIVITIES
PER CANADIAN GAAP 6,803,105 912,888
Issuance of capital stock (note 10a) (5,137,905) -
Issuance of shares for the acquisition of
mining properties included above (1,580,000) (150,000)
---------- --------
CASH PROVIDED BY FINANCING ACTIVITIES
PER U.S. GAAP 85,200 762,888
---------- --------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER U.S. GAAP (3,167,004) 13,870
Cash held in escrow, at beginning of year (note 10a) 5,297,500 -
---------- --------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER CANADIAN GAAP 2,130,496 13,870
========== ========
</TABLE>
F-48
<PAGE> 101
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
The net change in non-cash working capital balances related to
operations under Canadian and U.S. GAAP is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Prepaid expenses and sundry receivables (22,138) 25,789
Accounts payable and accrued charges 101,150 (67,658)
------- -------
79,012 (41,869)
======= =======
</TABLE>
(a) CASH HELD IN ESCROW
Under U.S. GAAP, the cash held in escrow, as at May 31, 1996, in the
amount of $5,297,500 related to the public offering which closed during
the current six month period would be included on the balance sheet as
at May 31, 1996. Other related adjustments as at May 31, 1996 related to
these funds would include the following:
- An increase in capital in the amount of $5,137,905 (gross
proceeds less costs of issuance of $612,095)
- A decrease in prepaids of $35,494
- An increase in accounts payable related to outstanding expenses
related to the offering in the amount of $124,101
(b) 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.
(c) INVESTMENTS IN SHARES OF PUBLIC COMPANIES
Under GAAP in the United States, the company's investments in shares of
public companies would be classified as available for sale and would be
carried at fair value. Changes in the market value of investments are
included as a component of shareholders' equity.
F-49
<PAGE> 102
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
(d) INCOME TAXES
Deferred tax assets under U.S. GAAP which are offset by a valuation
allowance are comprised of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Net loss carryforwards 660,000 590,000
Exploration and development expenditures 2,430,000 410,000
Costs of raising capital 300,000 160,000
---------- ----------
3,390,000 1,160,000
Less: Valuation allowance (3,390,000) (1,160,000)
---------- ----------
- -
========== ==========
</TABLE>
(e) DEVELOPMENT STAGE COMPANY DISCLOSURE
Under U.S. GAAP the company would be considered a development stage
company commencing in the year ended May 31, 1993 when it ceased its
investment and consulting operations and became a mining development
company. As a development stage company, the Company is required to
provide an income statement and statement of cash flow on a cumulative
basis from the date it became a development stage company which are
included separately in these financial statements.
In addition the cumulative loss as a development stage company would be
included as a separate portion of the balance sheet as "deficit
accumulated during the development stage." The accumulated deficit of
the Company at the commencement of its operations as a development stage
company was $968,527.
The capital stock issued during the period that the Company has been a
development stage company is as follows:
F-50
<PAGE> 103
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
YEAR ENDED MAY 31, 1993
Opening balance 9,900,000 990,101
January 31, 1993 1,500,000 Private placement for $150,000 cash 150,000
April 26, 1993 32,105 Issued in exchange for publicly traded shares of
Frankfield Consolidated Corporation based on the
estimated market value of the shares received 13,484
---------- ---------
Cumulative 11,432,105 1,153,585
YEAR ENDED MAY 31, 1994
June 17, 1993 100,000 Issued in exchange for consulting assistance 10,000
related to Frankfield take-over bid based on
agreed upon fee of $10,000
December 23, 1993 100,000 Issued pursuant to option to acquire a 60% 62,500
interest in Fletcher Lake property based upon
agreed upon price of $62,500
During the year 1,829 Exercise of warrants issued pursuant to 914
Frankfield take-over bid at $0.50 per share
---------- ---------
Cumulative 11,633,934 1,226,999
YEAR ENDED MAY 31, 1995
September 23, 1994 (6,980,353) Consolidation of shares on a one post-consolidation -
share for each two and one-half pre-consolidation
shares pursuant to Articles of Amendment
February 28, 1995 through
May 5, 1995 7,236,000 Initial public offering at $0.30 per share 2,170,800
---------- ---------
Balance forward 11,889,581 3,397,799
---------- ---------
</TABLE>
F-51
<PAGE> 104
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
Subtotal from prior
page 11,889,581 3,397,799
March 3, 1995 100,000 Private placement at $30,000 cash 30,000
March 6, 1995 150,000 Shares issued pursuant to acquisition of interest 45,000
in Rancheria property in California based on
price of shares issued to public
March 14, 1995 200,000 Shares issued pursuant to acquisition of interest 60,000
in Crystal Valley property in Quebec based on
price of shares issued to public
April 18, 1995 60,000 Shares issued pursuant to acquisition of interest 30,000
in Fletcher Lake property based on the market
value of shares on date of agreement
---------- ---------
12,399,581 3,562,799
YEAR ENDED MAY 31, 1996
September 19, 1995 150,000 Shares issued pursuant to acquisition of interest in 90,000
Rancheria property in California based on the market
value of shares on date of exercising of option
January 18, 1996 150,000 Shares issued pursuant to acquisition of interest in 186,000
Leek Springs property in California based on the market
value of shares on date of exercising of option
January 19, 1996 160,000 Shares issued pursuant to acquisition of interest 80,000
in Pekan River and Mercury Permit, Quebec properties
based on the market value of shares on date of
agreement
January 29, 1996 30,075 Shares issued pursuant to acquisition of interest 40,000
in Dihourse, Quebec property based on the market
value of shares on date of agreement
---------- ---------
Balance forward 12,889,656 3,958,799
---------- ---------
</TABLE>
F-52
<PAGE> 105
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
<TABLE>
<CAPTION>
Date Shares Issued Description $
<S> <C> <C> <C>
Subtotal from prior
page 12,889,656 3,958,799
February 27, 1996 150,000 Shares issued pursuant to acquisition of interest 372,000
in Rancheria property in California based on the
market value of shares on date of exercising of
option
February 29, 1996 100,000 Shares issued pursuant to acquisition of interest 103,000
in Belitung Island, Indonesia property based on
the market value of shares on date of agreement
April 15, 1996 350,000 Exercising of promoter's options at $0.40 per share 140,000
During the fiscal year 585,000 Exercising of share options pursuant to share 290,950
option plan at pricing ranging from $0.40 to $1.27
per share
During the fiscal year 7,841,600 Exercising of warrants issued pursuant to initial 3,136,640
public offering at $0.40 per share
---------- ---------
21,916,256 8,001,389
========== =========
SIX MONTHS ENDED NOVEMBER 30, 1996
September 19, 1996 1,000,000 Public share issue at $5.75 per share 5,750,000
October 22, 1996 200,000 Shares issued pursuant to acquisition of 1,290,000
additional interest in Leek Spring property
in California based on the market value of
shares on date of exercising of option
October 27, 1996 23,809 Shares issued in payment of a finder's fee 150,000
related to the Indonesian properties at agreed
amount of $150,000 and the market value of
$6.30 per share
--------- ---------
Balance forward 1,223,809 7,190,000
--------- ---------
</TABLE>
F-53
<PAGE> 106
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996 (IN CANADIAN DOLLARS)
- --------------------------------------------------------------------------------
10. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
<TABLE>
<S> <C> <C> <C>
Subtotal from prior
page 1,223,809 7,190,000
November 11, 1996 10,811 Shares issued pursuant to acquisition of 60,000
additional interest in the Pekan River property
based upon the agreement of $60,000 and the
market value of $5.55 per share
November 11, 1996 14,414 Shares isued pursuant to acquisition of 80,000
additional interest in the Mercury
Permit in Quebec based upon the
agreed amount of $80,000 and the
market value of $5.55 per share
During the period 85,000 Employee options exercised at prices ranging 85,200
from $0.62 per share to $1.27 per share
---------- ----------
23,250,290 15,416,589
========== ==========
</TABLE>
11. SUBSEQUENT EVENTS
The Company has reached an agreement to acquire a 68.25% interest in a
200 hectare gold prospect in Nicaragua known as "La Mestiza." The
company made an initial payment of U.S. $50,000 and issued 100,000
common shares at a market value of $4.20 per share. To earn its full
interest, the Company must make further payments totalling U.S.
$725,000, issue a further 700,000 common shares and complete a five
phase exploration and development program leading to the commencement of
commercial production.
F-54
