UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 20-F
(Mark One)
|X| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from__________to__________
__________________________
Commission file number 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.
23,843,551 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 13(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such reporting
requirements for the past 90 days.
Yes | | No |X|
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |X| Item 18 | |
|_|
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes | | No | |
<PAGE>
<TABLE>
<CAPTION>
GLOSSARY OF TERMS
<S> <C>
ABITIBI BELT OF A vast area of ancient volcanic rocks extending from Kenora to Sudbury,
QUEBEC-ONTARIO 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 recording the magnetic
characteristics of rocks
AEROMAGNETIC SURVEY: 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.
2
<PAGE>
DIAMONDIFEROUS: Containing diamond.
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 of electromagnetic waves
at the earth's surface
(PROSPECTING): 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 determined by a trained
of a observer with the aid 10-power magnifying glass, and having a colour
DIAMOND: 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.
3
<PAGE>
KIMBERLITE/OLIVINE Uneven-grained, ultramafic rock in which the visible minerals may
include olivine, phlogopite, pyrope
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 (>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.
4
<PAGE>
PAYSTREAK: That portion of a vein which carries the profitable ore.
PENTLANDITE: Nickel iron sulphide, the most common nickel ore.
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.
5
<PAGE>
STRANGE LAKE: A lake near the Quebec/Labrador boundary.
SULPHIDE: A metallic mineral containing unoxidized sulphur.
TAILINGS: Reject products from a mineral treatment plant.
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 December 11, 1997, $0.7022 (U.S.$1.00 =
CDN$1.4241).
</TABLE>
6
<PAGE>
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. The 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 Belitung Island in
Indonesia. The Company also owns an 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 Waseco has completed a favourable
feasibility study in respect of its alluvial gold prospect on the Island of
Kalimantan, Indonesia.
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
7
<PAGE>
discharge of toxic chemicals and other hazards. Such occurrences, against
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 hold interests in mineral resource properties in Canada, the United
States, Nicaragua and Indonesia. Because the Company holds interest 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.
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
8
<PAGE>
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 a property that has yet been the
subject of a mine feasibility study 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 even that the Company does not
have the necessary funding to carry out future work required. 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
activites and would adversely affect the Company's financial position.
CONFLICT 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.
9
<PAGE>
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.
COMPETITION
Significant competition exists for available mineral acquisition properties. 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 and 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
10
<PAGE>
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"), in 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 Labour 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.
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 Pertambagan" 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.
DESCRIPTION OF MINERAL EXPLORATION AND DEVELOPMENT PROPERTIES
- -------------------------------------------------------------
UNITED STATES
(i) LEEK SPRINGS, ELDORADO 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
11
<PAGE>
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.
Mining Rights and Titles
- ------------------------
By Agreement dated November 6, 1995 between the Company and Silverstone, the
Company obtained a 10% interest in 215 recorded claims described below,
technical data and any other claims or mining rights acquired by Silversone
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") consists of 10 claims, the Susan Claims ("Susan") consists of 80
claims and the Michelle Claims ("Michelle") 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
Company currently holds a 40% interest in these claims as described below.
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
12
<PAGE>
$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 was 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. This
was completed and exercise of this option secured an option for the Company to
acquire an additional 15% interest in the 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 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
13
<PAGE>
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 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 Results
- -------------------
Based on the results of a 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
14
<PAGE>
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-conventional 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.
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.
15
<PAGE>
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.
Core drilling commenced in early November, 1995. 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 1995 drilling program 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 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.
In July 1996, the Company resumed drilling. A total of 42 rotary holes (8" in
diameter) and 10 diamond drill holes (HQ size) were completed during the year.
Cuttings from the rotary holes were screened to two (2) sizes and the undersized
fraction was concentrated on a shaking table at Jackson, California.
Both sizes were sent to a processing plant in Colorado owned by BHP/DiaMet
Minerals. This plant produced a concentrate and eliminated the -0.5 mm material.
This process eliminated most of the micro diamonds assumed to be present, since
they were considered economically unimportant. It also reduced the size of the
bulk sample and resulted in reduced costs for the next stage, caustic
dissolution of each metre sampled. The caustic dissolution was carried out by
the Saskatchewan Research Council laboratories between January and June of 1997.
The end result was that nine (9) holes of the 1996 drilling program contained
diamonds. This is in addition to the two holes in 1995's program, making a total
of 11 holes containing diamonds.
The drill program also outlined a huge 800-acre crater filled with volcanic
breccia. During the drilling program, the results of a previous ground
magnetometer survey were interpreted by Geophysicist, Dr. George Wahl who
plotted three (3) large circular anomalies plus several smaller ones within the
crater. It is significant that each of the 11 holes containing diamonds is
located on or near the circular features, thus indicating the circular features
to be the probable volcanic vents or pipes through which the explosions occurred
and delivered the diamonds.
Work to-date does not allow the Company to calculate a resource potential or
carat-weight-per-ton. However, it has established that the lamproite deposit
covers a large area containing gem-quality diamonds. It remains to be determined
where the concentration of diamonds in economic quantity exists on the property.
To date, a total of 247 diamonds have been recovered ranging in size from 0.06mm
to 0.68mm.
Current work is designed to discover additional vents or pipes on the 75% of the
property still unexplored. A due diligence report by Dr. Mousseau Tremblay
indicates that the volcanic breccia is an olivine lamproite. This is significant
since the largest diamond mine in the world, the Argyle Mine in Australia, is
from a lamproite deposit. On the basis that the diamond bearing pipes usually
occur in clusters. Dr. Tremblay has recommended further exploration to discover
additional pipes on the property. Following his recommendations, the Company is
carrying out geological mapping and has commenced an airborne magnetometer
survey to follow-up. After all anomalies are evaluated, the Company intends to
resume drilling of the ones deemed to be most favourable to contain the largest
diamonds. The ultimate purpose is to discover the pipe or pipes which were the
source of the large (up to 2.65 carats) diamond found in the rivers below Leek
Springs.
16
<PAGE>
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 Celsius, with very little fluctuation. The average annual rainfall is
approximately 170 centimetres, with a dry season between December and April. The
La India gold deposits are located approximately 80 kilometres 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.
Mining Rights and Titles
- ------------------------
The La Mestiza property is held under an Exploitation Permit by Empresa Minera
La Mestiza S.A. ("EMLM").The Company 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 EMLM. The terms of the Company's agreement,
as subsequently amended by amending letter agreement dated November 21, 1997 may
be summarized as set out below. The Company was required 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 deliver
to Archon 100,000 shares of the capital of Diadem within 175 days of December
11, 1996. Diadem also assumed the 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 by EMLM on the concessions. Within 350 days from
December 11, 1996, Diadem was required to pay Archon an additional U.S.$75,000
and deliver 200,000 common shares of Diadem. The Company has delivered the
shares and has paid U.S.$5,000; the US$70,000 balance is to be paid on or before
March 25, 1998. 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 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 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.
17
<PAGE>
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.
Exploration Results
- -------------------
There is no record of past production on the La Mestiza concession; however, a
program by Russian scientists working with the Nicaraguan government agency,
INMINE, describes underground workings including exploration drifts and shallow
shafts. These may have been excavated by Noranda in the 1940's in conjunction
with their production facility six (6) kilometres to the south of La Mestiza.
The INMINE group sampled these underground workings, drilled 31 diamond drill
holes and dug surface trenches to explore five (5) of the veins on the property.
Based on the results of the INMINE work, the Company's consultant has estimated
proven reserves of 455,000 tonnes grading 9.23 gm/tonne, probable reserves of
1,449,000 tonnes of 8.21 gm/tonne and possible reserves of 2,600,500 tonnes of
10.90gm/tonne. This makes a total of 4,962,098 short tons averaging 0.29 ounces
per ton containing 1,440,000 ounces of gold. Since the Company commenced
exploration on the property, an additional seven veins have been identified with
sample results varying from 5 gm/tonne to 19.50 gm/tonne.
The Company's consultant has assumed a mill throughput of a minimum of 500
tonnes per day and has estimated the mining and milling costs to be in the range
of US$170.00 to US$200.00 per ounce. The consultant's report states that the
Tatiana and Buenos Aires veins appear to be expanding in grade and thickness
with depth and if the expansion holds true for other veins, a larger mill
capacity will be warranted. The Company is driving a new adit to explore the
Buenos Aires Nos. 1 and 2 veins and the Jicaro vein. In addition, the Espinito
vein explored underground by the INMINE group, which established proven reserves
of 175,500 tonnes of 7.48 gm/tonne for a length of 800 metres on three levels,
is being opened up via an adit on one level. The Company intends to establish a
pilot plant to treat bulk samples from the veins and to establish the
metallurgical characteristics of the ore prior to installing a production plant.
Micon International Limited was retained by the Company to carry out a due
diligence examination of the property. Micon concluded that La Mestiza has
excellent potential for becoming a low cost (500-800 tpd) mine. Furthermore, the
report concluded that there was potential for the outlining of further gold
resources and discovery of new gold mineralization.
CANADA
PEKAN RIVER AND SARAH LAKE, QUEBEC
Location and Access
- -------------------
The Pekan River Prospect is located in Courchesne Township, 50 kilometres south
of the nearest town, Fermont, Quebec. The Sarah Lake Project is located in
Desportes Township, 90 kilometres 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 the
18
<PAGE>
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 the 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.
Mining Rights and Titles
- ------------------------
The Company currently holds an 80% interest in the subject claims.
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 were 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, 1998 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 shares were issued within
the time required. Exercise of this option provided 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 was 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. The shares were issued within the time required. Exercise of this
option provided 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
19
<PAGE>
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, dipping fairly steeply into
the hill, only two of the 27 packsack holes succeeded in reaching their targets
since target depth exceeded the 25 metre 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 Results
- -------------------
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
20
<PAGE>
geophysical survey over this area showed a strong magnetometer response from the
ultramafic sill, extending for 4,1000 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 metre 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 metres in thickness. The content of both copper and
nickel increase as the lower content of the sill is approached. From the
information generated, there appears to be 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 kilometres 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 0.62% copper, 0.35% nickel and 0.03%
cobalt.
Geopysical surveys have indicated additional targets on the property. Further
drilling is required to bring this property to feasibility study stage. The
Company intends to joint venture the property to finance the next stage of
exploration and development.
The later drilling also outlined a zinc prospect, situated at three kilometres
north of the copper-nickel deposit. Mineralization was encountered in each of 13
drill holes put down to-date in the area roughly 250 metres by 100 metres in
size with values of 3% to 4% zinc over 2 to 10 metres in nine holes, and up to
9.4% zinc over 1 metre.
The zinc mineralization occurs within a series of marble units. The
mineralization has been traced on surface for 800 metres by drilling to a depth
of 250 metres. However a recent geochemical survey by Diadem indicated
mineralization may continue for 6 km north of the drilled area. A joint venture
partner is being sought to further develop this deposit.
THE SARAH LAKE PERIDOTITE
The Sarah Lake Permit, 5,200 hectares, is situated 7 km south-east of the Pekan
River permit, and was staked by the Beaver Syndicate on behalf of Diadem because
of an ultramafic sill similar to the one at Pekan River. Surface samples
analysed up to 2.15% copper, 0.3% nickel, 0.61 gm/tonne gold, 0.64 gm/tonne
platinum and 0.60gm/tonne palladium. Twelve short holes confirm an average metal
content of 0.35% copper, 0.03% nickel and 0.30gm/tonne of gold, equivalent over
an area of 1,000 metres by 400 metres. The most encouraging hole was No. 8,
which intersected 10.2 metres averaging 0.75% copper, 0.12% nickel and 0.35
gm/tonne of gold, platinum and palladium. The sill has not been explored at
depth and future work has been recommended to test the base of the sill where
the metal values are normally the highest in ultramafic sills. A joint venture
partner is being sought to further develop this deposit.
21
<PAGE>
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
kilometres.
Mining Rights and Titles
- ------------------------
The Company currently holds an 80% interest in this property as described below.
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, 1998, 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% was exercised by (i) delivering to Trinity $80,000 worth of
common shares of the Company, (ii) completing the first year's annual rentals on
the property and (iii) committing to complete a second year of assessment work.
Exercise of this option also secured 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 was required,
on or before May 16, 1997 to deliver to Trinity $80,000 worth of common shares
in the capital of the Company. This was completed and secured an option for the
Company to acquire a final 10% interest in the property.
To bring its aggregate interest in the Permit to 90%, the Company will 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.
Exploration Results
- -------------------
The property was optioned on the basis of seven known peridotite intrusive
bodies and on the border of one of these was found a boulder containing massive
sulphides assaying 0.5% copper, 0.3% nickel and 0.1% cobalt.
During the summer of 1997, the Company carried out magnetic and electromagnetic
surveys. Prior to winter shut-down, one hole was drilled in each of three
coincident electromagnetic/magnetic anomalies. The results are pending.
LAC DE GRAS AREA, NORTHWEST TERRITORIES
This property is located 300 kilometres by ski-equipped aircraft from the city
of Yellowknife, the capital of the Northwest Territories. There are no roads to
the property, but winter road access via Artillery Lake, 35 kilometres south of
Fletcher Lake is feasible. The climate is subarctic, with winter conditions
affecting field work from October to June.
22
<PAGE>
Mining Rights and Titles
- ------------------------
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 claim, 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.
This property has a potential for diamond-bearing kimberlite pipes. It is
located near Fletcher Lake, adjacent to Mountain Province Mining Inc.'s
announced diamond discovery. Reconnaissance sampling of soil for heavy minerals
reported the presence of kimberlite indicator minerals. Diadem contracted an
airborne magnetometer survey in June 1996 to identify the kimberlite sources of
the indicator minerals. Possible sources up-ice from the indicator minerals have
been identified. Follow-up soil sampling and mapping is recommended to confirm
whether these magnetic anomalies are due to kimberlite.
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 kilometres, located along the equator. The land area of
Indonesia is approximately 1.2 million square kilometres. The five largest
islands are Sumatra, Java, Kalimantan (formerly Borneo), Sulawesi and Irian
Jaya. Kalimantan 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.
23
<PAGE>
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, 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 extension
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 the 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.
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
24
<PAGE>
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 Terbates" ("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
partnership.
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 risk 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.
- --------------------------------------------------------------------------------
STAGE INITIAL PERIOD (+ CUMULATIVE PERCENTAGE
EXTENSIONS YEARS) OF ORIGINAL AREA TO BE
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 62,5000 hectares
- --------------------------------------------------------------------------------
Construction Schedule to be approved by the Mining Area identified in
Ministry of Mines and Energy feasibility report to be
approved by the 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.
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 to access
to minerals in the COW area and is responsible for assisting with the
25
<PAGE>
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 principal" 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
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. $0.25 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 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.
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 Panda, 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.
26
<PAGE>
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 rights to
earn a 90% interest in the property for an expenditure of $1,000,00 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 was
required to pay the first $100,000 U.S. of exploration expenditures on the
property.
From the work conducted to-date, Diadem has earned a 30% interest in this
zinc-lead-silver and tin property. The property was mined as a tin deposit by
Billiton Mining from 1905 until the war interrupted production in 1941. After
the COW system of permits was instituted by the government, BHP Minerals ("BHP")
acquired a second generation COW to mine tin in 1972. Its work led to the
identification of a zinc-lead-silver zone in three sedimentary beds parallel to
the tin bed. Although not explored for base metals, these beds were intersected
by drill holes and adits from surface. As a result of this exploration and a
subsequent geochemical survey, these beds were traced for a strike length of 7.5
kilometres. Tin mining ceased when the price of tin collapsed in the mid-1980's
and the C.O.W. reverted to the Indonesian partner, P.T. Gunung Ki-Kara Mining
("GKM").
Over US$2 million has been spent since mid 1996 by the joint venture partners. A
due diligence report by the Company's consultant summarized the results as
13,000,000 tonnes of indicated and inferred resources within a 1.5 kilometre
section of 7.5 kilometre indicated strike length averaging 8.5% zinc, 4.25% lead
and 2.00 ozs. silver per tonne.
Bresea was notified by the Indonesian govrenment in May, 1997 that all mineral
exploration activities of Bre- X Minerals Ltd. and its affiliated companies had
been suspended. Bresea is an affiliated company of Bre-X, owning more than 20%
of its issued common shares. As a consequence, Bresea has advised the Company of
its intention to divest itself of its interests in the joint venture. The
Company is currently looking for a joint venture partner to replace Bresea on
this project and the Company does not intend to allocate any exploration funding
for this project until a new joint venture relationship is formed.
The Company also formed joint ventures with Bresea to obtain 7th Generation COWS
on two other properties on Belitung Island. Tikus is a tin plus lead zinc and
copper prospect, while Lilangan is a gold prospect. The applications for the
COWs have not yet been approved by the Indonesian government. The Company is
currently looking for a joint venture partner(s) to replace Bresea on these
projects as well and the Company does not intend to allocate any exploration
funding for these projects until new joint venture relationships are formed for
each.
INTERESTS IN WASECO RESOURCES INC.
In September 1995, Diadem acquired an option to acquire up to 60% of the shares
of P.T. Ashton Mercu Buana Mining ("AMBM"), an Indonesian company with a 4th
generation COW covering the Tewah alluvial deposit in Kalimantan.
This deposit was drilled in the late 1980's by a joint venture between Ashton
Mining and AMBM. A resource of 450 million cu. metres of river and terrace
gravels containing 2.8 million ounces of gold was established.
Ashton subsequently withdrew.
The aagreement between the Company and AMBM provided that the Company could earn
its 60% interest in the shares of AMBM by completing a bankable feasibility
27
<PAGE>
study. An option of this interest was transferred to Waseco in exchange for up
to 7,000,000 common shares of Waseco.
Waseco began its work by completing due diligence drilling of the Kahayan River
with lines of holes drilled between the lines of the previous joint venture. The
feasibility study, conducted by alluvial consultants Alcon Ltd., Thailand, was
completed in October 1997 and approximately U.S.$1,400,000 was spent by Waseco.
The study has confirmed proven, probable and possible reserves of 150,893,000
cu. metres of gravel in the river and associated meanders averaging 0.154 gm/cu.
metre containing over 700,000 ounces of gold mineable by a dredge at an average
cost of U.S.$158 per ounce.
It is recommended that initially a dredge capable of treating 5.5 million cu.
metres per year be installed to commence production immediately at a capital
cost of U.S.$14million. Subsequently, in year two, a second dredge of similar
size should be installed, thus producing 60,000 ounces of gold per year from the
two dredges. During year two a feasibility study is expected to be completed on
the terrace gravel deposit.
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. 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.
To-date, the Company has received 5,000,000 shares of Waseco and is scheduled to
receive 2,000,000 more for the completion of the Tewah alluvial feasibility
study. The Company has filed a notice of its intention to dispose of up to
1,000,000 of its Waseco shares in private and open market transactions with
third parties. The proceeds of sale are to be loaned to Waseco on a short term
basis to finance payables relating to the completion of the feasibilty study and
for working capital purposes. Repayment is to be made with funds to be received
by Waseco in the form of refundable security bond deposits previously lodged
with the Indonesian government. Assuming the successful completion of this sale
and the issuance to the Company of the 2,000,000 common shares in fulfilment of
the previous agreement, Diadem will hold 6,000,000 common shares, representing
approximately 40.3% of the issued shares of Waseco on a non-diluted basis.
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 also became an officer of the Company on May 17, 1996. The
Waseco board of directors currently has six members, three of whom are directors
and officers of the Company.
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 December 10, 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:
28
<PAGE>
(2)
(1) Identity of Person (3) (4)
Title of Class or Group Amount owned Percent of class
- -------------- -------------------- ------------ ----------------
Common Shares Directors and Senior
Officers as a group 1,851,651 7.7%
(ten persons)
(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
1st Quarter, 1997 5.85 2.85 8,299,445
2nd Quarter, 1997 3.15 1.00 8,590,404
3rd Quarter, 1997 1.45 0.90 2,879,179
October, 1997 1.19 0.80 574,492
November, 1997 0.79 0.40 1,561,454
December, 1997 (to December 10 ) 0.51 0.30 403,901
</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
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.
29
<PAGE>
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 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:
30
<PAGE>
(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 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
31
<PAGE>
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 "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
32
<PAGE>
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
<TABLE>
<CAPTION>
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."
As at As at As at As at As at
May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
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
[Canadian Dollars and Share Numbers in Thousands except per share amounts ]
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $1,706 $2,616 $1,249 $(60) $45
Cash and Term Deposits 1,647 2,863 1,264 34 116
Mineral Properties 12,053 3,172 507 82 15
Share Capital 17,142 8,001 3,563 1,227 1,154
Deficit (3,257) (1,810) (1,755) (1,193) (1,079)
Net Loss for the Year (800) (42) (160) (114) (41)
Interest Income 188 55 16 - 1
Administrative Expenses 785 270 122 101 44
Property Write Downs 238 35 58 23 -
Gain on Marketable
Securities and Investments 8 208 4 9 (4)
Net Loss per Share ($0.03) ($0.01) ($0.03) ($0.02) ($0.01)
Shares Outstanding 23,844 21,916 12,400 4,654 4,573
Fully Diluted Shares
Outstanding 26,389 23,391 21,022 4,894 4,906
Total Assets 14,702 6,423 1,927 194 173
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".
33
<PAGE>
As at As at As at As at As at
May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
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
[Canadian Dollars and Share Numbers in Thousands except per share amounts ]
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $1,103 $8,075 $1,249 $(60) $45
Cash and Term Deposits 1,647 8,161 1,264 34 116
Mineral Properties 12,053 3,172 507 82 15
Share Capital 16,010 12,654 3,090 1,157 1,083
Deficit (1,156) (356) (314) (154) (40)
Net Loss for the Year (800) (42) (160) (114) (41)
Interest Income 188 54 13 - 1
Administrative Expenses 785 270 122 101 44
Property Write Downs 238 35 58 23 -
Gain on Marketable
Securities and Investments 8 208 4 9 (4)
Net Loss per Share ($0.03) ($0.01) ($0.02) ($0.02) (0.01)
Shares Outstanding 23,844 22,916 12,400 4,654 4,573
Fully Diluted Shares
Outstanding 26,389 24,941 21,022 4,894 4,906
Total Assets 14,745 11,876 1,942 199 182
</TABLE>
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.
Year Ended May 31
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
End of Period .7247 .7297 .7300 .7223 .7870
- --------------------------------------------------------------------------------
Average for Period .7326 .7345 .7255 .7482 .8031
- --------------------------------------------------------------------------------
High for Period .7513 .7527 .7457 .7865 .8452
- --------------------------------------------------------------------------------
Low for Period .7151 .7224 .7023 .7166 .7761
- --------------------------------------------------------------------------------
On May 30, 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 $0.7247 (US$1.00 = CDN$1.3798). As of December 11, 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 $0.7022 (US$1.00 =
CDN$1.4241)
34
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT DISCUSSION OF RESULTS
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 Annual Report.
OPERATING RESULTS
The Company has incurred operating losses during the three year period ended May
31, 1997 as there have been no sources of operating revenue during this period.
The loss during the most recent fiscal year was much higher than experienced in
the past as operating activities were at their highest levels.
Operating expenses during the current year were approximately $1,022,000 which
represents a significant increase over the prior year's operating expenses of
approximately $305,000 and the fiscal 1995 operating expenses of approximately
$177,000. Included in operating expenses are costs associated with various
properties which are written off with the termination of mining interests.
During the current year the Company wrote off its interest in the Dihourse
Permit property in Quebec and the Kalimantan Island properties in Indonesia.
This resulted in the write-off of approximately $238,000 in acquisition and
deferred development expenses.
Other significant expenses during the current year were shareholder relations
costs of approximately $275,000 and legal, audit and accounting fees of
approximately $218,000. Shareholder relations costs increased from prior years
as the Company increased its efforts in this area. In addition this expense will
naturally increase as the number of shareholders and the volume of trading
activity increases. Shareholder relations expenses included the publication of
the annual report, the employment of a investor relations firm, transfer agent
fees, annual listing fees, press release expenses, and the expenses related to
the qualification of the Company with the Securities and Exchange Commission to
facilitate a listing in the United States. Legal, audit and accounting expenses
increased due to the increased complexity of the Company's business activities
and the expenses related to qualifying the Company through the Securities and
Exchange Commission in the United States for share listing. Capital taxes of
approximately $43,000 were incurred for the first time this year due to the fact
that the shareholder's equity has reached a level where it is now subject to a
capital tax levied by the Province of Ontario.
Offsetting the operating expenses during the current year was interest and
investment income of approximately $196,000 and foreign exchange income of
approximately $27,000. The investment income arose primarily from the interest
earned on term deposits derived from funds raised from the public offering
during the current year. The foreign exchange gain resulted from U.S. term
deposits and cash on hand as the U.S. dollar gained in value relative to the
Canadian dollar.
The net loss for the current year was approximately $800,000 or $0.03 per share.
LIQUIDITY AND CAPITAL RESOURCES
During the current year the Company completed a public offering for the sale of
common shares with net proceeds of approximately $5.1 million. In addition the
Company raised $147,200 through the exercising of share options. At the
beginning of the fiscal year the Company had approximately $2,863,000 on
deposit. These funds together with the funds raised during the year were used
primarily to fund property acquisitions in the amount of approximately $478,000
and exploration activities in the amount of approximately $5,376,000.
In addition the Company issued $3,244,000 of shares for the acquisition of
mining properties. The Company purchased approximately $378,000 in fixed assets
35
<PAGE>
consisting for the most part of exploration equipment and vehicles for the
Nicaraguan operations. As part of its acquisition of the Nicaraguan property the
Company was required to loan U.S.$4,240,000 to the existing owner of the
property, of which U.S.$120,000 was subsequent to year-end. The U.S.$110,000
payment due by Diadem to the co-venturer prior to December 20, 1997 will be
deducted from this loan. The balance of the loan will be repaid with gold
produced by the mine property. At the end of the fiscal year the Company had
cash and term deposits of approximately $1,648,000. Subsequent to the year end
the Company completed two separate private placements with net proceeds of
approximately $1,350.000.
As at May 31, 1997 the Company had $14,701,884 in assets of which the majority,
$12,053,053 relates to mining properties. The Company has $1,647,468 in cash and
term deposits as outlined above. The Company has marketable securities in the
amount of $136,601 which had a market value of $178,601 as at the year end date.
The Company's total investment in mining properties was approximately
$12,053,000 as at May 31, 1997, of which approximately $4,946,000 relates to
acquisition costs and the remainder relates to deferred exploration costs.
The Company holds an investment of $80,000 in mining syndicates which are
pursuing the exploration of properties in Quebec/Labrador, California and
Central America. During the current year the Company received income of
approximately $14,360 from these investments. The Company holds an interest in
Randgold Resources Limited with a cost of approximately $138,000 which were sold
subsequent to the year end for proceeds of approximately $225,000.
The Company also currently holds 5,000,000 common shares of Waseco Resources
Inc. ("Waseco"). This represents approximately 40% of the outstanding shares in
the publicly traded Company. If Waseco fulfills the remaining requirements to
earn a 60% working interest in the Tewah property the Company would receive a
further 2,000,000 common shares of Waseco, which when added to the Company's
current holdings, on a then issued basis, would represent approximately 47% of
the common shares of Waseco.
The Company's investment in fixed assets of approximately $373,000 consists
primarily of exploration equipment and vehicles currently being used for
exploration on its Nicaraguan property. The Company has accounts payable and
accrued charges of approximately $817,000.
The Company has total shareholders' equity of $13,885,108. The Company does not
have a credit facility with a financial institution. The Company will continue
to fund its exploration activities with its cash on hand, including the cash
raised subsequent to the current year end by way of two separate private
placements. The Company is currently looking to complete further financings,
particularly to fund the purchase of equipment and mining facilities needed in
Nicaragua to complete a pilot mill so that production activities can proceed.
EXPLORATION
During the fiscal year ended May 31, 1997, a total of approximately $5,376,000
was spent on exploration costs on all the Company's properties. Of this total,
$20,115 was spent on the Lac de Gras property ($48,598 in 1996) in the Northwest
Territories. In California, $150,831 ($361,897 in 1996) was spent on the
Rancheria property on exploration, sampling and drilling of the pay streaks,
while $2,189,801 ($292,127 in 1996) was spent on the Leek Springs on geological
mapping, geophysical surveying, and sediment sampling for indicator minerals,
and subsequent drilling and sample processing. $1,019 ($85,687 in 1996) was
spent on the property at Crystal Valley, Quebec. $17,885 was spent on the
Dihourse Permit, Quebec ($52,156 in 1996) which was subsequently abandoned
during the current year. On the Mercury Permit exploration cost $23,428 ($23,515
in 1996). Pekan River and Sarah Lake, Quebec incurred a cost a total of
$1,121,303 ($621,458 in 1996). In Indonesia, a total of $1,026,378 ($110,010 in
1996) has been spent during the year on the Belitung Island properties, while
$118,367 was spent on the properties on Kalimantan island ($NIL in 1996), which
were written off at year-end. A total of $710,288 ($NIL in 1996) was spent on
exploring its property in Nicaragua which was acquired during the current year.
36
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Principal
Name Title Occupation
---- ----- ----------
<S> <C> <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
Director Company 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 Managing Director, Merit
Investment Corporation.
Hank Reimer Director Independent Mining Consultant
and Analyst
Edward Thompson Director President of E.G. Thompson
Mining Consultants Inc.
James Wade Director President of World Wide
Minerals Ltd.
Michael Bird Vice President, Asian Independent Geologist, Vice
Development President of Waseco Resources Inc.,
Vice President of the Company
Paul Heney Assistant Secretary Lawyer, Heney & Associates
* Member - Audit Committee
</TABLE>
37
<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
(a) For the fiscal year ended May 31, 1997, the aggregate amount of
compensation paid by the Company and its subsidiaries to all officers and
directors as a group was CDN.$124,150. This figure excludes $226,246 paid
to a law firm of which the assistant secretary is a member for legal
services rendered during the period. This figure also excludes the payment
of 23,809 common shares valued at the time of issuance at $150,000 to an
officer of the Company fulfilling a finders fee commitment made prior to
the time the individual concerned became an officer of the Company.
(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
5,500,000 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, 1997 to the Named Executive Officer of the Company:
<TABLE>
<CAPTION>
=====================================================================================================================
Securities Under % of Total Exercise or Market Value of
Options/SARS Options/SARS Base Price Securities
Granted (#) Granted to ($/Security) Underlying Options/SARS Expiration Date
Name and Employees in on the Date of Grant
Principal Position Fiscal Year
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A.C.A. Howe 75,000/NIL (1) 6.6%/NIL $5.50 $5.50/NIL June 6, 2001(2)
President and Chief 100,000/NIL (1) 8.0%/NIL $5.30 $5.30/NIL February 20, 2002(2)
Executive Officer
=====================================================================================================================
</TABLE>
(1) These options were granted pursuant to the company's share option plan.
(2) These options were cancelled subsequent to year-end.
AGGREGATED OPTION EXERCISES
The following table sets forth details of all exercises of stock options
during the financial year ended May 31, 1997 by the Named Executive Officer, and
the fiscal year end values of unexercised options on an aggregated basis:
38
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Name and Principal Securities Acquired on Aggregate Value Unexercised Options At Value of Unexercised
Position Exercise Realized May 31, 1997 in the Money Options
(Exercisable/ at May 31, 1997
Unexercisable) (Exercisable/
Unexercisable)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A.C.A. Howe NIL NIL 190,000/NIL $95,450/NIL
President and Chief
Executive Officer
==================================================================================================================================
</TABLE>
(1) Value of unexercised in the money options calculated using the closing price
of common shares of the Company ($1.45) on the Montreal Exchange on May 31,
1997, less the exercise price of the in the money stock options ($0.62).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Date of Grant Expiry Date Number of Options Outstanding Exercise Price
(Held by Directors and Officers)(1) (CDN$/Security)
<S> <C> <C> <C>
June 5, 1995 June 5, 2000 440,000 $0.62
(440,000)
- --------------------------------------------------------------------------------------------------------------
November 28, 1995 November 28, 2000 30,000 $1.27
- --------------------------------------------------------------------------------------------------------------
January 26, 1996 January 26, 2001 200,000 $1.86
(200,000)
- --------------------------------------------------------------------------------------------------------------
June 7, 1996 June 7, 2001 80,000 $5.50
(50,000)
- --------------------------------------------------------------------------------------------------------------
October 18, 1996 October 18, 2001 5,000 $6.50
- --------------------------------------------------------------------------------------------------------------
October 21, 1996 October 21, 2001 5,000 $6.80
- --------------------------------------------------------------------------------------------------------------
October 21, 1996 October 21, 2001 2,500 $8.00
- --------------------------------------------------------------------------------------------------------------
February 20, 1997 February 20, 2002 15,000 $5.10
- --------------------------------------------------------------------------------------------------------------
July 16, 1997 July 16, 2002 300,000 $1.40
(300,000)
- --------------------------------------------------------------------------------------------------------------
September 25, 1997 September 25, 2002 100,000 $1.00
(100,000)
- --------------------------------------------------------------------------------------------------------------
October 30, 1997 October 30, 2002 250,000 $0.85
(250,000)
- --------------------------------------------------------------------------------------------------------------
November 26, 1997 November 26, 2002 125,000 $0.85
(125,000)
- --------------------------------------------------------------------------------------------------------------
November 26, 1997 November 26, 1997 500,000 $0.50
(500,000)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 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
39
<PAGE>
Limited. During the year ended May 31, 1997, A.C.A. Howe International Limited
received $7,893 in aggregate fees for geological consulting services rendered
during the period. No payments were made to A.C.A. Howe International Ltd. A
corporation wholly owned by Mr. Howe also received compensation directly in the
form of professional consulting fees during the year ended May 31, 1997
totalling $48,150. 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 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.
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 holds
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.
During the year, the Corporation issued 200,000 common shares to Silverstone
Prospecting Syndicate ("Silverstone") to increase its interest in the Leek
Springs Project from 25% to 40%. The Corporation owns a total of four of a total
of 50 units of Silverstone. Mr. George Silverman, a Director of the Corporation,
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
Mines Inc. ("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. The
Silverstone 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 Corporation 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 Corporation, and Mr. Silverman abstains from voting as a Director of the
Corporation on matters affecting Silverstone.
In November, 1996, the Corporation entered into an option agreement with Archon
Prospecting Syndicate ("Archon") for the acquisition of Archon's interest in an
option on the La Mestiza property located at La India, Nicaragua. The
Corporation owns a total of four of a total of 50 units of Archon. Mr. George
Silverman, a Director of the Corporation, owns four units of Archon,
representing eight percent of the total number of issued units. Mr. Silverman
also serves as the Manager of Archon. Ateba also owns two units or four percent
of Archon. The Archon syndicate agreement provides that no mining properties may
be acquired or disposed of by Archon without the prior consent of the holders of
two-thirds of Archon units. The Corporation, Ateba and Mr. George Silverman
abstain from voting as Archon unitholders in matters relating to transactions
with the Corporation, and Mr. Silverman abstains from voting as a Director of
the Corporation on matters affecting Archon.
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 votingright on the basis of one vote per common share. The common
40
<PAGE>
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.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not Applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
See Item 19 below for Financial Statements filed as part of this
Application.
ITEM 18. FINANCIAL STATEMENTS.
Not Applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The following documents are filed as Attachment A hereto and are
included as part of this Application on Form 20-F.
DIADEM RESOURCES LTD. CONSOLIDATED FINANCIAL STATEMENTS
Description of Document Page
- ----------------------- ----
Consent of Independent Auditors
Auditors Report
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Changes in Financial Position
Notes to Consolidated Financial Statements
(b) The following exhibits are filed as Attachment B hereto and are
included as part of this Application on Form 20-F.
41
<PAGE>
Exhibit
Number Description of Document Page
- ------ ----------------------- ----
3.1 By-Law No. 1, dated June 1, 1989 (1)
3.2 Articles of Amalgamation, dated June 1, 1989 (1)
3.3 Articles of Amendment dated April 20, 1993 (1)
3.4 Articles of Amendment dated September 23, 1994 (1)
4.1 Shareholder Rights Plan, adopted by the Board of Directors
on September 20, 1996 and ratified by the shareholders on
October 30, 1996 (1)
4.2 Warrant Indenture between Montreal Trust Company of Canada and
the Company, dated September 10, 1996. (1)
4.3 Stock Option Plan, as amended, dated October 30, 1996 (1)
Notes:
(1) Previously filed with Form 20-F filed March 31, 1997
DIADEM RESOURCES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
CONTENTS
Auditors' report F-1
Consolidated balance sheet F-2
Consolidated statement of income and deficit F-3
Consolidated statement of accumulated losses as
development stage company F-4
Consolidated statement of changes in financial position F-5
Consolidated statement of accumulated cash flow as
development stage company F-6
Notes to consolidated financial statements F-7 to F-27
42
<PAGE>
AUDITORS' REPORT
To the Shareholders of
Diadem Resources Ltd.:
We have audited the consolidated balance sheets of Diadem Resources Ltd.
as at May 31, 1996 and May 31, 1997 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, 1997. 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,
1996 and May 31, 1997 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, 1997 in accordance with generally accepted accounting
principles in Canada.
Toronto, Canada "Green Chencinski Starkman Eles"
October 16, 1997 Chartered Accountants
F-1
<PAGE>
DIADEM RESOURCES LTD.
CONSOLIDATED BALANCE SHEET
AS AT MAY 31, (IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1996
$ $
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and term deposits 1,647,468 2,863,181
Marketable securities (NOTE 3) 135,601 55,491
Prepaid expenses and sundry receivables 109,413 128,173
---------- ---------
1,892,482 3,046,845
INTEREST IN MINING PROPERTIES (NOTE 4) 12,053,053 3,172,373
INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES (NOTE 5) 217,978 177,978
LOAN RECEIVABLE (NOTE 6) 165,396 -
FIXED ASSETS (NOTE 7) 372,975 25,448
---------- ---------
14,701,884 6,422,644
========== =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued charges (NOTES 3 AND 8) 816,776 231,266
---------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (NOTE 9) 17,142,589 8,001,389
DEFICIT (3,257,481) (1,810,011)
---------- ----------
13,885,108 6,191,378
---------- ---------
14,701,884 6,422,644
========== =========
</TABLE>
ON BEHALF OF THE BOARD:
"A.C.A. Howe"
------------------------------------------------ Director
"G.C. Silverman"
------------------------------------------------ Director
F-2
<PAGE>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
YEAR ENDED MAY 31, (IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXPENSES
Amortization 7,317 2,669 2,648
Business development 42,966 28,110 7,224
Capital taxes 49,928 -- --
Expiration of mining interests (NOTE 4A) 237,652 35,382 57,545
General 21,269 10,405 (962)
Insurance 18,726 6,215 5,697
Legal, audit and accounting fees 218,014 57,482 5,000
Office expenses 54,245 30,346 18,038
Salaries and benefits 80,467 57,880 27,557
Search for new properties -- 1,479 3,779
Shareholder relations 274,904 62,496 36,389
Travel 16,975 12,451 13,678
---------- ---------- ----------
1,022,463 304,915 176,593
---------- ---------- ----------
INCOME
Interest 188,126 54,626 12,674
Gain on marketable securities and investments 7,762 208,107 4,217
Foreign exchange gain 27,015 -- --
---------- ---------- ----------
222,903 262,733 16,891
---------- ---------- ----------
NET LOSS (799,560) (42,182) (159,702)
DEFICIT, BEGINNING OF YEAR (1,810,011) (1,755,169) (1,193,182)
---------- ---------- ----------
(2,609,571) (1,797,351) (1,352,884)
Costs associated with issuance of shares (NOTE 9) (647,910) (12,660) (402,285)
---------- ---------- ----------
DEFICIT, END OF YEAR (3,257,481) (1,810,011) (1,755,169)
========== ========== ==========
NET LOSS PER COMMON SHARE (.03) (.01) (.03)
========== ========== ==========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED LOSSES AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (SEE NOTE 11)
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1997
(IN CANADIAN DOLLARS)
$
- --------------------------------------------------------------------------------
<S> <C>
EXPENSES
Advertising and promotion 1,349
Amortization 19,451
Business development 78,300
Capital taxes 49,928
Expiration of mining interests 352,854
General 39,931
Insurance 43,068
Legal, audit and accounting fees 312,239
Office expense 116,556
Salaries and benefits 224,480
Search for new properties 9,088
Shareholder relations 373,789
Travel 49,239
---------
1,670,272
---------
INCOME
Consulting and other income 33,215
Interest 256,747
Gain on securities and investments 224,420
---------
514,382
---------
ACCUMULATED LOSSES DURING DEVELOPMENT STAGE 1,155,890
=========
</TABLE>
F-4
<PAGE>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
YEAR ENDED MAY 31, (IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net loss (799,560) (42,182) (159,702)
Items not affecting cash
Amortization 7,317 2,669 2,648
Expiration of mining interests 237,652 35,382 57,545
Gain on marketable securities and investments (7,762) (208,107) (4,217)
---------- ---------- ----------
(562,353) (212,238) (103,726)
Net change in non-cash working capital
balances related to operations 604,270 19,606 (45,113)
---------- ---------- ----------
41,917 (192,632) (148,839)
---------- ---------- ----------
FINANCING ACTIVITIES
Costs associated with issuance of shares (NOTE 9) (645,410) (12,660) (402,285)
Issuance of common shares (NOTE 9) 9,141,200 4,438,590 2,335,800
---------- ---------- ----------
8,495,790 4,425,930 1,933,515
---------- ---------- ----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (9,097,960) (2,700,521) (482,512)
Acquisition of fixed assets (377,715) (16,812) (2,422)
Acquisition of marketable securities (86,709) -- (51,600)
Investment in mining syndicates and mining companies (40,000) (137,978) (27,500)
Loan receivable advance (165,396) -- --
Proceeds on gain on marketable securities and investments 14,360 220,751 9,655
---------- ---------- ----------
(9,753,420) (2,634,560) (554,379)
---------- ---------- ----------
Change in cash and term deposits (1,215,713) 1,598,738 1,230,297
CASH AND TERM DEPOSITS, BEGINNING OF YEAR 2,863,181 1,264,443 34,146
---------- ---------- ----------
CASH AND TERM DEPOSITS,END OF YEAR 1,647,468 2,863,181 1,264,443
========== ========== ==========
</TABLE>
F-5
<PAGE>
DIADEM RESOURCES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED CASH FLOW AS DEVELOPMENT STAGE COMPANY
PREPARED UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(SEE NOTE 11)
FOR THE PERIOD FROM JUNE 1, 1992 TO MAY 31, 1997
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------------------
<S> <C>
CASH PROVIDED BY (USED FOR):
Net accumulated losses (1,155,890)
Items not affecting cash
Amortization 19,451
Expiration of mining interests 352,854
Gain on marketable securities and investments (224,420)
-----------
(1,008,005)
Decrease in accounts receivable 1,761
Increase in prepaid expenses and sundry receivables (104,473)
Increase in accounts payable and accrued charges 799,628
-----------
(311,089)
-----------
FINANCING ACTIVITIES
Costs associated with issuance of shares (1,133,064)
Decrease in advances from shareholder (1,435)
Issuance of common shares 11,704,929
-----------
10,570,430
-----------
INVESTING ACTIVITIES
Acquisition of interest in mining properties (7,948,961)
Acquisition of fixed assets (399,098)
Acquisition of marketable securities (200,801)
Investment in mining syndicates and mining companies (217,978)
Loan receivable advance (165,396)
Proceeds on gain on marketable securities and investments 313,568
(8,618,666)
-----------
Change in cash and term deposits 1,640,675
CASH AND TERM DEPOSITS, BEGINNING OF PERIOD 6,793
-----------
CASH AND TERM DEPOSITS, END OF PERIOD 1,647,468
===========
</TABLE>
F-6
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (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%
Exploration and mining equipment 20%
Vehicles 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-7
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (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 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 proven and probable
reserves. Possible reserves will be excluded.
3. MARKETABLE SECURITIES
1997 1996
$ $
Marketable securities 135,601 55,491
======= ======
The estimated market value of the marketable securities is $178,601 (May
31, 1996 - $246,991).
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, 1997 is $30,000. 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-8
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
4. INTEREST IN MINING PROPERTIES
Interest in mining properties is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C>
Acquisition costs
Fletcher Lake, Northwest Territories (NOTE 4B) 10,355 10,355
Rancheria, California (NOTE 4C) 652,733 652,733
Leek Springs, California (NOTE 4D) 2,788,711 254,711
Crystal Valley Region, Quebec (NOTE 4E) 72,500 72,500
Dihourse Permit, Quebec (NOTE 4A) - 49,200
Pekan River and Sarah Lake, Quebec (NOTE 4F) 179,400 54,400
Mercury Permit, Quebec (NOTE 4G) 216,300 56,300
Nicaragua (NOTE 4H) 773,238 -
Belitung Island and Kalimantan Island, Indonesia (NOTES 4A AND 4I) 253,000 103,000
---------- ---------
4,946,237 1,253,199
Deferred exploration costs
Fletcher Lake, Northwest Territories 84,627 64,512
Rancheria, California 690,308 539,477
Leek Springs, California 2,481,928 292,127
Crystal Valley Region, Quebec 168,616 167,597
Dihourse Permit, Quebec (NOTE 4A) - 52,156
Pekan River and Sarah Lake, Quebec 1,742,761 621,458
Mercury Permit, Quebec 46,943 23,515
Nicaragua 710,288 -
Belitung Island and Kalimantan Island, Indonesia 1,137,388 111,010
Tewah, Indonesia (NOTE 4J) 43,457 47,322
---------- ---------
7,106,816 1,919,174
---------- ---------
12,053,053 3,172,373
========== =========
</TABLE>
(a) EXPIRATION OF MINING INTERESTS
During the year ended May 31, 1995, the company relinquished a portion of
the Fletcher Lake property (see note 4b) and, accordingly, wrote off
$57,545 of accumulated acquisition and deferred exploration costs.
F-9
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (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.
During the year ended May 31, 1997, the company relinquished its interest
in the Dihourse property with accumulated acquisition costs and deferred
exploration and development costs totalling $119,285, written off to the
income statement. An additional $118,367 in accumulated acquisition costs
and deferred exploration and development costs related to the Kalimantan
Island properties in Indonesia were written off during the current year
[see note 4(i)].
(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 common shares 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
F-10
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
4. INTEREST IN MINING PROPERTIES (Continued)
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.
During the year ended May 31, 1996, 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 $690,000 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 prior 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 28, 1999:
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
February 28, 1999.
The agreement also provides that if Silverstone Prospecting Syndicate is
successful in acquiring additional claims in the subject area, these claims
will also be included in the agreement. The company will be entitled to
earn a 60% interest in each additional claim without payment of additional
consideration except for the reimbursement of the actual costs of acquiring
these additional claims.
(d) LEEK SPRINGS, CALIFORNIA
The company has obtained an option to acquire up to a 55% interest in 56
unpatented mining claims covering approximately 1,120 acres in the Leek
Springs area of Eldorado County in California. This option was also granted
by Silverstone Prospecting Syndicate which will continue to hold the
remaining unearned interest in the property.
During the prior year, 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.
F-11
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
4. INTEREST IN MINING PROPERTIES (Continued)
During the current year, the company earned an additional 30% interest,
thereby increasing its interest to 40% by paying the sum of U.S. $200,000,
issuing 200,000 common shares valued at $6.45 per share, issuing 200,000
additional common shares valued at $4.85 per share, and by completing U.S.
$500,000 of cumulative exploration expenditures. As at May 31, 1997, the
company had completed approximately $2,484,000 in cumulative exploration
expenditures.
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
12, 1998.
(f) PEKAN RIVER AND SARAH LAKE, QUEBEC
The company entered into an option agreement which enables it to purchase a
90% mining 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 Pekan
River permit holder will retain a 1.5% net smelter return on production.
During the prior year, 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.
During the current year, the company earned an additional 29% interest,
thereby increasing its interest to 80%, by issuing a total of 55,587 common
shares valued at a total of $120,000, by completing the current year's
assessment work and by paying the annual renewal fees.
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.
F-12
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
4. INTEREST IN MINING PROPERTIES (Continued)
The company has been advised that the Pekan River permit is valid until May
23, 2000 and is in good standing until May 23, 1998, 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 October
25, 1998, at which time renewal fees are payable and assessment work is
due.
(g) MERCURY PERMIT, QUEBEC
The company has entered into an agreement with Beaver Syndicate to purchase
a 90% mining interest in 11,500 hectares of property in Quebec. Beaver
Syndicate will continue to hold the unearned interest and will retain a
1.5% net smelter return on production.
During the prior year, the company earned a 51% mining interest in the
property by paying the sum of $16,300 to Beaver Syndicate and issuing to
Beaver 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.
During the current year, the company earned an additional 29% interest,
thereby increasing its interest to 80% by issuing 62,899 common shares
valued at $160,000, by completing the current year's assessment work and by
paying the annual renewal fees.
The company can earn an additional 10% interest, thereby increasing its
interest to 90%, up to May 16, 1998, by issuing to Beaver Syndicate $80,000
worth of common shares or by paying $80,000 in cash, at the company's
option. Beaver Syndicate has advised the company that the permit is valid
to May 11, 2000 and the property is in good standing until May 11, 1998, at
which time renewal fees will be payable and assessment work will need to be
filed.
(h) NICARAGUA
The company has entered into an option agreement which enables it to
acquire a 68.25% mining interest in a 200 hectare property in Nicaragua,
known as "La Mestiza". This option was granted by Archon Prospecting
Syndicate which would hold a 1.75% interest if the company earns a 68.25%
interest in the property. The remaining 30% will be held by a Nicaraguan
joint venturer. The agreement requires the following cash payments and
common shares to be issued from treasury to Archon Prospecting Syndicate by
the noted dates:
Payment
Cash Shares
Date US $ Issued
---- ---- ------
January 9, 1997 50,000 100,000
June 3, 1997 - 100,000
November 25, 1997 75,000 200,000
April 24, 1998 100,000 200,000
September 6, 1999 125,000 200,000
------- -------
350,000 800,000
======= =======
F-13
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
4. INTEREST IN MINING PROPERTIES (Continued)
The company will earn a 13.16% mining interest in the property as it
completes each of five distinct exploration phases. At the completion of
the fifth phase, the company will have earned a 65.8% mining interest in
the property. The company was required to make a payment of U.S. $110,000
to reimburse the co-venturer for prior expenditures. A further payment of
U.S. $110,000 is required prior to December 20, 1997. In addition, the
company is required to fund all exploration and development expenditures
leading to the commencement of commercial production.
The company can increase its interest from 65.8% to 68.25% by paying the
sum of U.S. $200,000 within two years after the date of commencement of
commercial production.
During the current year, the company made the initial payments of U.S.
$50,000 and U.S. $110,000, issued 100,000 common shares at a market value
of $4.20 per share and issued 100,000 common shares at a market value of
$1.34 per share.
(i) BELITUNG ISLAND AND KALIMANTAN ISLAND, INDONESIA
The company has entered into agreements to acquire mining interests in five
separate properties in Indonesia. Three of these properties are located on
Belitung Island while two are located on Kalimantan Island. The company has
a 30% interest in each of the properties. Effective May 8, 1997, the
company assumed the responsibility as the operator for exploration
activities on the properties. Subsequent to the year end, the company and
its two non-Indonesian joint venturers gave notice to the Indonesian
partner that they were withdrawing from the Kalimantan joint ventures.
Accordingly, all work ceased on these properties and no further
expenditures will be incurred. A total of $118,367 which represents
cumulative amounts that have been funded relating to the acquisition and
exploration of the Kalimantan properties has been written off to the
statement of income.
(j) 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 in exploration and
development expenditures by each date and issuing to the company a
cumulative 7,000,000 common shares from treasury. As at May 31, 1997,
Waseco Resources Inc. had spent in excess of U.S. $1,000,000 of
expenditures on the property and had earned a 40% interest in the property.
The balance as at May 31, 1997 relates to expenditures on the property
which to date have not been reimbursed by Waseco Resources Inc.
F-14
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
5. INVESTMENT IN MINING SYNDICATES AND MINING COMPANIES
1997 1996
$ $
Investment in mining syndicate 80,000 40,000
Investment in private mining company 137,978 137,978
------- -------
217,978 177,978
======= =======
The company participated in a private placement during the prior 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. These shares were sold subsequent to the year
end for cash proceeds of $224,548.
Investment in mining syndicates consists of 4.0 units (1996 - 4.0 units) in
Silverstone Prospecting Syndicate with a cost of $20,000 (1996 - $20,000);
2.0 units (1996 - 2.0) in Beaver Syndicate with a cost of $20,000 (1996 -
$20,000); 2.0 units (1996 - nil) in Crystal Valley Prospecting Syndicate
with a cost of $20,000; and 4.0 units (1996 - nil) in Archon Prospecting
Syndicate with a cost of $20,000. Silverstone Prospecting Syndicate is
currently exploring properties in the United States, Beaver Syndicate and
Crystal Valley Prospecting Syndicate are exploring properties in Northern
Labrador and Quebec while Archon Prospecting Syndicate is exploring
properties in Central America. As at May 31, 1997, the company holds 8% of
the outstanding units in each of these syndicates. The company has acquired
mining rights from certain of these mining syndicates as outlined in note
4.
In addition, the company holds 5,000,000 common shares of Waseco Resources
Inc. This represents approximately 40% of the outstanding shares. These
shares were acquired pursuant to the transfer of the mining option rights
in the Tewah, Walang, Tikukur, and Seruyan properties in Indonesia 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. LOAN RECEIVABLE
The loan receivable is equivalent to U.S. $120,000, bears interest at the
rate of 2.5% per month and is due from the Nicaraguan co-venturer in the La
Mestiza Project [see note 4(h)]. Subsequent to the year end, a further
advance of U.S. $120,000 was made increasing the loan balance to U.S.
$240,000. The borrower has granted the company a security interest in the
borrower's share of all gold produced by the project.
F-15
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
7. FIXED ASSETS
ACCUMULATED 1997 1996
COST AMORTIZATION NET NET
$ $ $ $
Furniture and fixtures 31,199 26,250 4,949 6,186
Computer and equipment 28,099 8,933 19,166 19,262
Exploration and mining equipment 227,585 753 226,832 -
Vehicles 143,562 21,534 122,028 -
------- ------ ------- ------
430,445 57,470 372,975 25,448
======= ====== ======= ======
8. RELATED PARTY INFORMATION
During the current year, the company incurred fees totalling $7,893 (1996 -
$73,141, 1995 - $27,395), related to exploration work charged by a company
in which a director holds a 49% interest. A balance of $1,730 (1996 -
$4,966) 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 $400 per month. In addition, a company which
is wholly owned by a director, charged $48,150 (1996 - $56,640, 1995 -$nil)
in consulting fees related to exploration and investor relations
activities. The company paid $24,000 (1996 - $17,000, 1995 - $nil) in fees
to a director for exploration activities.
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.
9. 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>
1997 1996
Shares $ Shares $
<S> <C> <C> <C> <C>
Balance, beginning of year 21,916,256 8,001,389 12,399,581 3,562,799
Issued pursuant to:
Public offering 1,000,000 5,750,000 -- --
Warrants exercised by shareholders -- -- 7,841,600 3,136,640
Shares issued related to the
purchase of mining properties 742,295 3,244,000 740,075 871,000
Exercise of share options 185,000 147,200 585,000 290,950
Exercise of promoter's options -- -- 350,000 140,000
---------- ---------- ---------- ----------
23,843,551 17,142,589 21,916,256 8,001,389
========== ========== ========== ==========
</TABLE>
F-16
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
9. CAPITAL STOCK (Continued)
The weighted average number of shares during the current year was
approximately 22,934,000 (1996 - 15,083,000, 1995 - 6,315,000).
(c) Public Offering
During the current year, the company completed a public offering for
the issuance of 1,000,000 Special Warrants at a price of $5.75 per
Special Warrant. Each Special Warrant entitled the holder to be
issued one common share and one-half of a common share warrant at a
price of $6.75 per share until May 17, 1997. The expiry date of
these warrants was later extended to November 17, 1997. To date,
none of these warrants has been exercised.
The total gross proceeds of $5,750,000 are included in share
capital. The total costs of $647,910 associated with the offering
have been charged to retained earnings. The broker handling the sale
of the offering was issued a Brokers Warrant which entitled it to
purchase on or before May 17, 1997, 50,000 common shares at an
exercise price of $6.75 per share. The expiry date of these warrants
was later extended to November 17, 1997. To date, none of these
warrants has been exercised.
(d) Share Option Plan
The company has a share option plan under which options to purchase
common shares may be granted by the board of directors to directors,
officers, employees and eligible service providers of the
corporation for terms up to five years at a price equal to the
market price prevailing on the date of the grant. The maximum number
of options available for grant under the plan is 5,500,000, subject
to the approval of the shareholders at the next annual general
meeting.
The following is a summary of the outstanding options which have
been granted by the board of directors:
Expiry Date Option Price Number of Shares
$
June 5, 2000 0.62 440,000
November 28, 2000 1.27 30,000
January 26, 2001 1.86 200,000
June 7, 2001 5.50 90,000
October 18, 2001 6.50 10,000
October 21, 2001 6.80 5,000
October 21, 2001 8.00 2,500
February 20, 2002 6.00 5,000
February 20, 2002 5.30 15,000
July 16, 2002 1.30 800,000
July 16, 2002 1.40 300,000
September 29, 2002 1.00 100,000
---------
1,997,500
=========
F-17
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
9. CAPITAL STOCK (Continued)
Included in the above are the following options which will not vest in
favour of the recipients until the shareholders have approved an
increase in the maximum number of share options available under the
plan from 2,190,000 to 5,500,000:
Expiry Date Option Price Number of Shares
$
July 16, 2002 1.30 800,000
July 16, 2002 1.40 300,000
September 29, 2002 1.00 100,000
10. INCOME TAXES
As at May 31, 1997, the company had accumulated income tax losses of
$1,793,000 which may be applied against future taxable income. These losses
expire as follows:
Fiscal Year Ending In: $
1998 114,000
1999 339,000
2000 30,000
2001 84,000
2002 220,000
2003 176,000
2004 830,000
---------
1,793,000
=========
In addition, the company has deferred exploration expenditures which are
deductible for tax purposes in the amount of approximately $6,200,000 which
have been capitalized for accounting purposes.
11. 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
would have been reported as follows:
F-18
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(Continued)
<TABLE>
<CAPTION>
1997 1996
$ $
<S> <C> <C>
CURRENT ASSETS
Cash and term deposits 1,647,468 2,863,181
Cash held in escrow (NOTE 11A) - 5,297,500
Marketable securities (NOTE 11C) 178,601 246,991
Prepaid expenses and sundry receivables (NOTE 11A) 109,413 92,675
---------- ----------
1,935,482 8,500,347
INTEREST IN MINING PROPERTIES 12,053,053 3,172,373
INVESTMENT IN MINING SYNDICATES AND MINING
COMPANIES 217,978 177,978
LOAN RECEIVABLE 165,396 -
FIXED ASSETS 372,975 25,448
---------- ----------
14,744,884 11,876,146
========== ==========
CURRENT LIABILITIES
Accounts payable and accrued liabilities (NOTE 11A) 832,776 425,363
SHAREHOLDERS' EQUITY
Capital stock (NOTE 11B) 16,009,525 12,654,140
Deficit incurred prior to development stage activities (NOTE 11E) (968,527) (968,527)
Deficit accumulated during the development stage (NOTE 11E) (1,155,890) (356,330)
Difference between cost and market value of
marketable securities (NOTE 11C) 27,000 121,500
---------- ----------
14,744,884 11,876,146
========== ==========
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
During the year, the company issued 742,295 common shares (1996 - 740,075,
1995 - 410,000) of its share capital as consideration for the acquisition
of mining properties in the amount of $3,244,000 (1996 - $871,000, 1995 -
$135,000). These amounts have been included in the consolidated statement
of changes in financial position as financing and investing activities.
Under GAAP in the United States, these non-cash transactions would not have
been shown in the consolidated statement of changes in financial position.
F-19
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(Continued)
Accordingly, the U.S. GAAP subtotals are reconciled as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$ $ $
<S> <C> <C> <C>
CASH USED IN OPERATIONS PER CANADIAN GAAP 41,917 (192,632) (148,839)
Increase in net change in non-cash working capital
capital balances related to operations (NOTE 11A) (159,595) 159,595 -
---------- --------- ---------
CASH USED IN OPERATIONS PER U.S. GAAP (117,678) (33,037) (148,839)
---------- --------- ---------
CASH USED FOR
INVESTING ACTIVITIES PER CANADIAN GAAP (9,753,420) (2,634,560) (554,379)
Issuance of shares for the acquisition of
mining properties included above 3,244,000 740,075 410,000
---------- --------- ---------
CASH USED FOR
INVESTING ACTIVITIES PER U.S. GAAP (6,509,420) (1,894,485) (144,379)
---------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES
PER CANADIAN GAAP 8,495,790 4,425,930 1,933,515
Issuance of capital stock (NOTE 11A) (5,137,905) 5,137,905 -
Issuance of shares for the acquisition of
mining properties included above (3,244,000) (740,075) (410,000)
---------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES
PER U.S. GAAP 113,885 8,823,760 1,523,515
---------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER U.S. GAAP (6,513,213) 6,896,238 1,230,297
Cash held in escrow (NOTE 11A) 5,297,500 (5,297,500) -
---------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS
UNDER CANADIAN GAAP (1,215,713) 1,598,738 1,230,297
========== ========= =========
</TABLE>
F-20
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
11. 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>
1997 1996 1995
$ $ $
<S> <C> <C> <C>
Prepaid expenses and sundry receivables (16,738) (57,268) (29,463)
Accounts payable and accrued charges 461,413 236,469 (15,650)
------- ------- -------
444,675 179,201 (45,113)
======= ======= =======
CONSOLIDATED LOSS PER SHARE (NOTE 11F) 1997 1996 1995
$ $ $
Primary loss per share as per GAAP in Canada .03 .01 .03
Primary loss per share as per GAAP in the United States .03 .01 .02
</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 subsequent to the
fiscal 1996 year end would be included on the balance sheet. The
adjustments related to these funds would include the following, as at May
31, 1996:
- 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 market value. Changes in the market value of investments
are included as a component of shareholders' equity.
F-21
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
11. 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:
1997 1996
$ $
Net loss carryforwards 800,000 560,000
Exploration and development expenditures 2,800,000 1,130,000
Costs of raising capital 310,000 400,000
---------- ----------
3,910,000 2,090,000
Less: Valuation allowance (3,910,000) (2,090,000)
---------- ----------
- -
========== ==========
(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-22
<PAGE>
<TABLE>
<CAPTION>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
_________________________________________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
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
---------- ---------
F-23
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
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
---------- ---------
F-24
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
_____________________________________________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
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
========== =========
YEAR ENDED MAY 31, 1997
September 19, 1996 1,000,000 Shares issued pursuant to public offering 5,750,000
October 22, 1996 200,000 Shares issued pursuant to acquisition of interest in 1,290,000
Leek Springs property in California based on market
value of shares on date of exercising of option
October 27, 1996 23,809 Shares issued as finders fee related to acquisition of 150,000
Indonesian properties based on market value of shares
November 26, 1996 25,225 Shares issued pursuant to acquisition of interest in 140,000
Pekan River and Mercury Permit,
Quebec properties based on the
market value of shares on date of
exercising of option
January 30, 1997 100,000 Shares issued pursuant to acquisition of interest in 420,000
Nicaraguan property based on the market value of
shares of date of agreement
---------- ----------
Balance forward 23,265,290 15,751,389
---------- ----------
F-25
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
_____________________________________________________________________________________________________________________
11. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
Date Shares Issued Description $
<S> <C> <C> <C>
Subtotal from prior
page 23,265,290 15,751,389
March 18, 1997 200,000 Shares issued pursuant to acquisition of 970,000
interest in Leek Springs, California property
based on the market value of shares on date of
exercising of option
May 15, 1997 48,485 Shares issued pursuant to acquisition of interest 80,000
in Mercury Permit, Quebec property based on the
market value of shares on the date of
exercising of option
May 26, 1997 144,776 Shares issued pursuant to acquisition of interest 194,000
in Pekan River, Quebec property and
Nicaraguan property based on the market value
of shares on the date of exercising of options
During the fiscal year 185,000 Exercising of shares options pursuant to 147,200
share option plan at price ranging from
$0.62 to $1.27 per share
---------- ----------
23,843,551 17,142,589
========== ==========
</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.
12. COMMITMENTS AND CONTINGENCIES
During the current year, the company funded all requests made by the former
operator of the Belitung Island and Kalimantan Island properties in
Indonesia for cash advances to fund it's proportion of the exploration
expenditures. Subsequent to the year end, the company received a cash call
from its co-venturer on the five Indonesian properties for approximately
U.S. $900,000 representing it's alleged unfunded share of the costs to May
31, 1997. The company believes that the exploration activities carried on
by the former operator did not follow industry practices which resulted in
excessive costs and less verifiable geological information than would be
expected if standard industry practices had been followed. Accordingly, the
company has refused to make payment on the cash call and while discussions
have been held with the co-venturer, an agreement has not been reached. The
company has accrued in the accounts, an amount which it believes represents
its best estimate of the likely settlement, should the company wish to
reach a settlement with the co-venturer at this time.
F-26
<PAGE>
DIADEM RESOURCES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997 (IN CANADIAN DOLLARS)
________________________________________________________________________________
13. SUBSEQUENT EVENTS
Subsequent to the year end, the company completed the sale of two separate
debentures by way of private placement offerings.
The first sale consisted of a two-year $1.0 million unsecured debenture and
750,000 common share purchase warrants. The debenture is convertible at the
option of the holder into common shares of the company at any time in whole
or in part at a conversion price of $1.33 per share. Interest on the
debenture at an annual rate of 9.75% is payable quarterly in cash or at the
company's option, in common shares. The warrants will entitle the holder to
purchase an aggregate of 750,000 common shares of the company at a price of
$1.33 per share until July 17, 1999. The purchase price for the debenture
was satisfied by the payment of $700,000 in cash and a promissory note for
$300,000 due July 17, 1998. The broker is entitled to receive a commission
of $100,000 and a broker's warrant entitling the broker to purchase 25,000
common shares of the company at an exercise price of $1.33 per share until
July 17, 1999. The interest payment on September 30, 1997 was satisfied by
the issuance of 19,032 common shares.
Subsequent to the closing, $50,000 of the $1.0 million debenture was
retracted and was exchanged for the issuance of 54,104 common shares of the
company.
The second sale consisted of a three year $500,000 unsecured debenture, and
a right to acquire common share purchase warrants upon conversion. The
debenture is convertible at the option of the holder into common shares of
the company at any time on or after November 26, 1997, in whole or in part
at a conversion price equal to the ten-day average trading price of the
common shares traded on The Montreal Exchange at the time the conversion
rights are exercised. Interest on the debenture at an annual rate of 8% is
payable semi-annually in cash, or at the company's option, in common
shares. The warrants will entitle the holder to purchase common shares of
the company at a price of $1.07 per share, in a quantity to be determined
in conjunction with the determination of the conversion price, as described
above, until August 29, 1999. The broker received a commission of $50,000
and a broker's warrant entitling the broker to purchase 12,500 common
shares of the company at an exercise price of $1.07 per share until August
29, 1999.
F-27
