AAA.L Regulatory News (AAA)

17 Mar 2006 07:02

Adastra Minerals Inc17 March 2006 17 March 2006 Consolidated Financial Statements(Expressed in United States dollars) Adastra minerals inc. Three months ended January 31, 2006 and 2005(Unaudited - Prepared by Management) MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with theConsolidated Financial Statements of Adastra Minerals Inc. (the "Company") forthe three month periods ended January 31, 2006 and 2005, and related notes (the"Consolidated Financial Statements") prepared in accordance with Canadiangenerally accepted accounting principles. The following discussion and analysishighlights significant changes since the discussion and analysis in the 2005Annual Report, which should also be referred to for additional information. Thediscussion is based on events that have occurred up to March 10, 2006. Exceptas otherwise noted, all dollar amounts contained in this discussion and analysisand the Consolidated Financial Statements are stated in U.S. dollars.Additional information relating to the Company, including the Company's AnnualInformation Form ("AIF"), is available on SEDAR at www.sedar.com. Results of Operations The Company incurred a net loss for the three months ended January 31, 2006, of$3,192,793, or $0.04 per share, compared to a net loss of $741,817, or $0.01 pershare, for the three months ended January 31, 2005. The results for the three months ended January 31, 2006, reflect the followingfactors: • There were $2,741,627 of costs incurred as a result of the unsolicitedoffer by First Quantum Minerals Ltd. ("First Quantum") to acquire all the commonshares of the Company. In order to assess the unsolicited offer, the Companyappointed a special committee and engaged advisors, which resulted in thesecosts being incurred during the quarter. There were no equivalent expendituresin the first quarter of 2005. • Administration expenses have decreased on an overall basis, comparedto the first quarter ended January 31, 2005. The decrease of 19% (from $901,893for the quarter ended January 31, 2005, to $734,315 for the quarter endedJanuary 31, 2006) is principally due to decreased stock-based compensation andinvestor relations fees, partly offset by increases in salaries and wages,professional fees, and office and administration costs. • The decrease in stock-based compensation in the quarter ended January31, 2006, versus the corresponding quarter of 2005, partly reflects that nooptions were granted during the first quarter of 2006, whereas 30,000 optionswere granted in the first quarter of 2005. In addition, the stock-optionexpense relating to options granted in prior periods with vesting dates duringthe current or future quarters, was lower in the first quarter of 2006 than inthe comparative quarter of the previous year. • Investor relations fees decreased primarily because an investor visitto Kolwezi took place at the end of the first quarter in 2005, whereas thecorresponding visit in 2006 occurred at the beginning of the second quarter.Also, certain costs related to the annual report and Indaba conference that wereincurred in the first quarter of 2005 have not been incurred until after the endof the first quarter in 2006. • Salaries and wages increased primarily due to United Kingdom employertaxes associated with the exercise of stock options. No options were exercisedin the first quarter of 2005, and 582,500 options were exercised in the firstquarter of 2006. Reflecting the increasing workload of the Head Office, therewas also one additional staff member and more temporary help used compared tothe first quarter of the prior year. • The higher professional fees during the first quarter of 2006,compared to the corresponding period of 2005, are mainly due to higher generalcorporate legal fees, and fees associated with filing the Company's AnnualReport on Form 20-F. There were also surveyor and legal fees relating to themarketing and assignment of the lease on the Company's previous office inLondon, England. • Office and administration fees increased primarily due to theCompany's necessary relocation to larger offices. During the first quarter of2006, the Company incurred moving costs, as well as telephone, and additionalI.T. costs associated with the relocation. The increase was mitigated to someextent by he impact of an overall weakening of the British pound in comparisonto the U.S. dollar, which reduced the U.S. dollar expense reported in respect ofrent and other office costs at the London office that are incurred in Britishpounds. • Lower cash balances resulted in lower interest income during thequarter, compared with the corresponding period of 2005. The Company holds someof these cash balances in Canadian dollars and British pounds, in anticipationof expenditures to be incurred in these currencies. The foreign exchange gainof $210,830 during the quarter ended January 31, 2006 arose mainly because themajority of the proceeds of a private placement of shares were received andretained in British pounds, and the U.S. dollar weakened against the Britishpound between the closing of the placement on December 22, 2005, and the end ofthe quarter. Over the quarter ended January 31, 2006, as a whole, the U.S.dollar strengthened against the British pound and weakened against the Canadiandollar. Liquidity and Capital Resources As at January 31, 2006, the Company had cash and cash equivalents of$10,280,351, compared to $5,595,972 at October 31, 2005, and had working capitalof $6,090,755, compared to $3,794,668 at October 31, 2005. The increase in the cash balance during the quarter is mainly the result of aprivate placement in December 2005, which generated net cash proceeds equivalentto $8,160,214. Conventional exercises of 332,500 stock options during thequarter provided net cash proceeds of $172,189. There were no warrantsexercised during the quarter. Offsetting these cash inflows during the quarterwere expenditures on the Kolwezi, DRC quarries, and Kipushi properties, theacquisition of a lease and improvements to a new office in London, and the lossfrom operations excluding the non-cash stock based compensation and amortizationexpense. The Company's Consolidated Financial Statements have been prepared assuming theCompany will continue on a going-concern basis. The Company has incurred lossessince inception, and the ability of the Company to continue as a going concernover the long term depends upon its ability to develop profitable operations andto continue to raise adequate financing. Management believes that the Companyhas the ability to fund planned development activities for financial year 2006from existing and anticipated cash resources and, if necessary, will be able toraise financing in capital markets or from other third party participants in itsprojects. During the quarter ended January 31, 2006, there have been no material changesin the critical accounting estimates as compared to those disclosed in theCompany's latest annual Management's Discussion and Analysis for the year endedOctober 31, 2005 contained in its October 31, 2005 Annual Information Form, towhich the reader is referred. Tabular Disclosure of Contractual Obligations The Company is committed to payments under a number of operating leases forvarious office premises and other accommodation through to May 2011. Thefollowing table lists as of January 31, 2006 information with respect to theCompany's known contractual obligations. In addition to the above, once all financing arrangements for the KolweziTailings Project to proceed with construction have been completed, CMD and anyother participating parties are committed to pay to Gecamines the $10,000,000balance of the consideration for the Tailings Exploitations Rights ("TER").(The initial $5,000,000 of the $15,000,000 total was paid during the 2004financial year following the transfer of the TER to KMT). The Company has not accrued debts, aggregating approximately $246,000, claimedby certain former shareholders of IDAS, a subsidiary of the Company acquired in1998, as the Company has not been able to verify the debts. There remain 13,078common shares of the Company held in escrow for the same reason. Mineral Property Projects As at January 31, 2006, amounts capitalized in respect of mineral propertiesincreased to $24,320,208, from $21,760,738 at October 31, 2005, reflecting$2,538,806 in costs incurred on the Company's Kolwezi Project and $20,664 on theCompany's DRC quarry licences. Capitalized mineral property evaluation cost increased to $4,626,524, from$4,538,897 at October 31, 2005, reflecting $87,627 costs incurred on theCompany's Kipushi Project. Kolwezi Project, DRC During the three months ended January 31, 2006, the Company concentratedprimarily on advancing its Kolwezi Project. The Kolwezi Project DefinitiveFeasibility Study ("DFS") was completed in early March 2006. The projectedannual production capacities of approximately 5,900 tonnes of cobalt and 33,200tonnes of copper are more than 7% higher for cobalt, and 10% higher for copper,than the estimates Adastra announced in December 2004. Total project capitalcosts (including owners' costs, engineering, procurement and construction feesand contingencies, insurance, first-fill, and spares) are anticipated to be $306million in October 2005 terms. The higher projected production levels more thanoffset the operating and capital cost increases when calculating the net presentvalue of the Kolwezi Project. In parallel with the DFS, negotiations have continued on a long term electricitysupply contract for the Project, on long term sales agreements and marketingarrangements for the Project's output of cobalt and copper, and on preparationsfor project financing. In December 2005, the Company announced that it had mandated the Royal Bank ofScotland as a senior arranger for an untied commercial bank tranche of theKolwezi Project financing for US$60-75 million with an eight year maturity; and,in January 2006, that it had mandated Investec Bank Limited and the IndustrialDevelopment Corporation of South Africa Limited to co-arrange a South Africanexport credit tranche of the project financing for $80-120 million with a tenyear maturity. In addition, other bilateral and multilateral lenders haveprovided expressions of interest in providing senior and subordinated loansamounting in aggregate to more than $150 million. Advanced negotiations for acapital overrun facility of $30 million are underway with two public sectorlenders. The Company expects to start lender due diligence and detaileddocumentation during the second quarter of financial year 2006. Following the approval of the Environmental Assessment Plan by the DRC Ministryof Mines' Direction chargee de la Protection de l'Environnement Minier ("DPEM")in August 2005, work continued on an Environmental & Social Impact Assessment ("ESIA") meeting Equator Principles and World Bank Guidelines: key requirements ofproject finance lenders. (. The ESIA was completed and released in conjunctionwith the DFS in early March 2006. During fiscal 2005, the IDC and IFC both informed the Company that, subject tocertain conditions precedent, they would be exercising options under thatframework agreement to acquire interests in Kingamyambo Musonoi TailingsS.A.R.L. ("KMT") (the company incorporated earlier in 2004 in the DemocraticRepublic of Congo ("DRC") to own the mining title to the tailings and developthe Kolwezi Project), and the Company's subsidiary Congo Mineral DevelopmentsLimited ("CMD"); and on November 1, 2005 the IDC and IFC signed definitiveagreements to acquire, respectively, 10% and 7.5% interests in KMT. Oncompletion of these transactions the Company's interest in KMT will be reducedto 65%, and CMD is scheduled to receive approximately US$12 million in cash. Subsequent to quarter end, the Company announced it has reached an agreementunder which Mitsubishi Corporation will purchase a 14.9% state in the KolweziProject, in return for, among other things, payment to Adastra of $37.5 millionin cash, provision of $12.5 million of shareholder loans to the Kolwezi Projecton Adastra's behalf and extension of completion guarantees to project lenders.The agreement is subject to confirmatory due diligence, negotiation ofdefinitive documentation and approval of both companies' board of directors. Kipushi Project, DRC In fiscal year 2003, the Company and Gecamines agreed that priority should begiven to finalising the Kolwezi Contract of Association. Following theexecution of the latter in March 2004, negotiations on the proposed revisions tothe Kipushi Framework Agreement were planned to recommence. Meetings were,however, postponed until after the end of fiscal year 2004, pending Gecamines'detailed review of, and response to, the proposals previously submitted by theCompany. Gecamines' response was received during the quarter ended January 31, 2005, and,following discussion as to the appropriate way to take the Kipushi Projectforward, the Company began a technical and economic reassessment of the projectduring the quarter ended July 31, 2005. This was completed during the quarterended January 31, 2006, and the results of this reassessment will form the basisfor finalising negotiations on a revised framework agreement with Gecamines.Once agreement on the revisions has been reached, and necessary approvals havebeen obtained from the government of the DRC, the Company expects that a fullfeasibility study of the project will be undertaken. Kumba Base Metals Limitedcan earn up to 50% of the Company's interest in the Kipushi Project by incurring$3,500,000 (less already recognized expenditure by Kumba of $300,000) ofexpenditures on the Project, including the conducting of feasibility studies. Angolan Projects During the year ended October 31, 2004, the Company found it impossible toprogress matters further with Endiama in relation to its rights with regard totwo mineral properties in Angola. In September 2004, it became clear thatEndiama had repudiated its contractual obligations. Consequently, the Companyannounced that it would be seeking legal redress. The Company filed a legalsuit against Endiama in Texas, United States of America in May 2005 citingbreach of contract, negligent misrepresentations and other causes of action, andrequesting damages including loss of benefits, costs and expenses incurred inconnection with IDAS's efforts to acquire and develop the licences, andprofessional fees. The case was transferred from a Texas State court to a TexasFederal court on application by Endiama's lawyers: following which the Company'slawyers have withdrawn the legal suit in Texas and, in early March 2006,re-filed it with a US Federal court in Washington D.C.. Although the Companyhas been advised by counsel that it has a strong case against Endiama, theoutcome of litigation can never be predicted with certainty. The Company's presence in Angola remains at a minimal level pending the outcomeof the legal action being taken against Endiama in the United States of America,and the Company is expensing all costs incurred in connection with Angola sincethe end of the 2005 Financial Year. DRC Quarries During the quarter ended January 31, 2006, the Company announced that it hadacquired ten quarry licences in the DRC (two for aggregates, located close toKolwezi; and eight for limestone, located approximately 45 km north-east ofKolwezi). Work has begun on evaluating these licences, and in particularregarding the quarries' potential to supply aggregate for use duringconstruction of the Kolwezi Tailings plant, and to supply limestone and limeduring the plant's operations. Related Party Transactions During the quarter ended January 31, 2006, the Company paid or accrued anaggregate of $109,660 (2005 - $57,453) for legal services to a law firm in whicha director of the Company is a partner. In addition, the Company has paid oraccrued $nil (2005 - $1,000) for consulting services to a non-executivedirector, and $nil (2005 - $ 5,860) for consulting services to a company inwhich a director has an interest. Risk Factors The risk factors affecting the Company are substantially unchanged from thosedisclosed in the October 31, 2005 annual Management's Discussion & Analysiscontained in its October 31, 2005 Annual Information Form , to which the readeris referred. Summary of quarterly results A summary of quarterly results for each of the eight most recently completedquarters is as follows: 2006 2005 2004 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Interest income $ 72,454 $ 61,045 $ 81,339 $ 99,126 $ 110,172 $ 101,794 $ 99,675 $ 111,048 Loss for period $ 3,192,793 $ 583,602 $ 485,774 $ 807,283 $ 741,817 $ 429,328 $ 601,173 $ 2,465,791 Basic and diluted $ 0.04 $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.04loss per share The main factors underlying the variations in these quarterly results are theunsolicited offer in the first quarter of 2006 for all the Company's commonshares (significant costs were incurred in evaluating the offer), exchange ratefluctuations (particularly in the value of the U.S. dollar against the Canadiandollar and British pound), and the timing of the granting of options (arelatively large grant of stock options was made in the second quarter of fiscal2004, with consequent increase in administration costs and losses in that andthe following four quarters). Forward Looking Statements This discussion contains forward-looking statements within the meaning of theUnited States Private Securities Litigation Reform Act of 1995 concerning theCompany's plans for its Kolwezi Project, the Kipushi Project and the AngolaProject and the resource size and economic potential of those projects. Theseforward-looking statements are subject to a variety of risks and uncertaintieswhich could cause actual events or results to differ materially from thosereflected in the forward-looking statements, including without limitation, risksand uncertainties relating to political risks involving the Company's operationsand the policies of other nations and organizations towards companies doingbusiness in such jurisdictions, the inherent uncertainty of production and costestimates and the potential for unexpected costs and expenses, commodity pricefluctuations, the inability or failure to obtain adequate financing on a timelybasis, and other risks and uncertainties, including those described in theCompany's Annual Report on Form 20-F for the year ended October 31, 2005 andReports on Form 6-K filed with the Securities and Exchange Commission. Contact us: London Tim Read Justine Howarth / Cathy MalinsChief Executive Officer Parkgreen CommunicationsT: +44 (0)20 7355 3552 T: +44 (0)20 7493 3713F: +44 (0)20 7355 3554 F: +44 (0)20 7491 3936E: london@adastramin.com E: justine.howarth@parkgreenmedia.com North America Martti KangasThe Equicom GroupT: +1 416 815 0700 x. 243 +1 800 385 5451 (toll free)F: +1 416 815 0080E: mkangas@equicomgroup.com ADASTRA MINERALS INC.(Unaudited - Prepared by Management) Notice of no auditor review of interiM financial statements Under National Instrument 51-109 Part 4 Subsection 4.3(3)(a), if an auditor hasnot performed a review of interim financial statements, they must be accompaniedby a notice indicating that the financial statements have not been reviewed byan auditor. The unaudited interim financial statements of the Company as at January 31, 2006and for the three months ended January 31, 2006 and 2005, were prepared by, andare the responsibility of the Company's management. The Company's independent auditor did not perform a review of these interimfinancial statements in accordance with the standards established by theCanadian Institute of Chartered Accountants for a review of interim financialstatements by an entity's auditor. ADASTRA MINERALS INC. Consolidated Balance Sheets(Unaudited - Prepared by Management)(Expressed in United States dollars) January 31, October 31, 2006 2005 Assets Current assets:Cash and cash equivalents $ 10,280,351 $ 5,595,972Amounts receivable and prepaid expenses 573,430 486,538 10,853,781 6,082,510 Equipment 439,272 199,802 Mineral properties (note 2) 24,320,208 21,760,738 Mineral property evaluation costs (note 3) 4,626,524 4,538,897 $ 40,239,785 $ 32,581,947 Liabilities and Shareholders' Equity Current liabilities:Accounts payable and accrued liabilities $ 4,763,026 $ 2,287,842 Non-controlling interest 8,750 8,750 Shareholders' equity:Share capital (note 4(a)) 76,073,009 67,348,642Contributed surplus (note 4(d)) 5,336,109 5,685,029Deficit (45,941,109) (42,748,316) 35,468,009 30,285,355 $ 40,239,785 $ 32,581,947 Subsequent events (notes 6 and 7) See accompanying notes to consolidatedfinancial statements ADASTRA MINERALS INC. Consolidated Statements of Operations and Deficit(Unaudited - Prepared by Management)(Expressed in United States dollars) Three months ended January 31, 2006 and 2005 2006 2005 Administration costs:Amortization $ 4,154 $ 2,910Bank charges and interest 2,557 1,566Investor relations 54,171 78,135Office and administration 106,034 92,002Professional fees 144,834 75,426Regulatory authorities filing fees 70,773 57,231Salaries and wages 235,550 167,151Stock-based compensation (note 4) 103,011 419,053Transfer agent 4,842 1,260Travel and accommodation 8,389 7,159 734,315 901,893Other items:Interest income (72,454) (110,172)Mineral property evaluation costs 135 -Foreign exchange gain (210,830) (49,904)Offer assessment costs (note 6) 2,741,627 - 2,458,478 (160,076) Loss for the period (3,192,793) (741,817) Deficit, beginning of period (42,748,316) (40,129,840) Deficit, end of period $ (45,941,109) $ (40,871,657) Basic and diluted loss per share $ (0.04) $ (0.01) Weighted average number of common shares outstanding 74,568,755 70,735,925 See accompanying notes to consolidated financial statements ADASTRA MINERALS INC. Consolidated Statements of Cash Flows(Unaudited - Prepared by Management)(Expressed in United States dollars) Three months ended January 31, 2006 and 2005 2006 2005Cash provided by (used in): Operations:Loss for the period $ (3,192,793) $ (741,817)Items not involving cash:Amortization 4,154 2,910Stock-based compensation 103,011 419,053 (3,085,628) (319,854) Changes in non-cash operating working capital:Increase in amounts receivable and prepaid expenses (86,892) 72,429Increase in accounts payable and accrued liabilities 2,475,184 (276,091) (697,336) (523,516) Investments:Purchase of property, plant and equipment (245,352) (6,414)Expenditures on mineral properties (2,557,833) (1,684,798)Expenditures on mineral property evaluation costs (87,536) (25,241) (2,890,721) (1,716,453) Financing:Issue of share capital on private placement, net 8,160,214 -Issue of share capital on exercise of options 172,189 -Cash settlement of taxes on option exercises (59,967) - 8,272,436 - Increase (decrease) in cash 4,684,379 (2,239,969) Cash, beginning of period 5,595,972 16,264,314 Cash, end of period $ 10,280,351 $ 14,024,345 Cash is defined as cash and cash equivalents. Supplementary disclosure:Interest received, net $ 72,026 $ 110,172 See accompanying notes to consolidated financial statements ADASTRA MINERALS INC. Notes to Consolidated Financial Statements(Unaudited - Prepared by Management)(Expressed in United States dollars) Three months ended January 31, 2006 and 2005 1. Significant accounting policies: These consolidated financial statements of Adastra Minerals Inc. (the "Company")do not include all disclosures required by Canadian generally acceptedaccounting principles for annual financial statements, and accordingly, theseconsolidated financial statements should be read in conjunction with theCompany's most recent annual consolidated financial statements. Theseconsolidated financial statements follow the same accounting policies andmethods of application used in the Company's annual audited consolidatedfinancial statements as at and for the year ended October 31, 2005. 2. Mineral properties: Amounts deferred in respect of mineral properties consist of the following: DRC Zambia DRC Kolwezi Quarries Angola Solwezi Total Balance, October 31, 2005 $ 20,546,346 $ - $ 1,214,391 $ 1 $ 21,760,738Capital equipment 1,637 - - - 1,637Consulting 1,497,027 19,264 - - 1,516,291Exploration office and accounting 174,437 - - - 174,437Interest received (1,907) - - - (1,907)Legal 176,285 1,400 - - 177,685Salaries 421,862 - - - 421,862Site management 6,715 - - - 6,715Travel 262,750 - - - 262,750 2,538,806 20,664 - - 2,559,470 Balance, January 31, 2006 $ 23,085,152 $ 20,664 $ 1,214,391 $ 1 $ 24,320,208 (a) Democratic Republic of Congo: Kolwezi Since October 1998, the Company's subsidiary, Congo Mineral DevelopmentsLimited, ("CMD") has signed and/or initialled various agreements with LaGenerale des Carrieres et des Mines ("Gecamines") and/or the Government of theDemocratic Republic of Congo ("GDRC"), governing the terms of the KolweziTailings Project (the "Project"). In March 2004, CMD, GDRC and Gecamines signeda Contract of Association (the "CoA") governing the Project and the ownershipand management of Kingamyambo Musonol Tailings S.A.R.L. ("KMT"), the companyincorporated earlier that month in the Democratic Republic of Congo to own themining title to the tailings and develop the Project. In accordance with theCoA, the Tailings Exploitation Rights to the Project have been transferred toKMT. 2. Mineral properties (continued): (a) Democratic Republic of Congo: Kolwezi (continued): The Company initially owned 82.5% of KMT, with Gecamines and GDRC owning 12.5%and 5.0% respectively. The CoA recognizes the framework agreement that wasentered into by the Company in February 2003 for the Industrial DevelopmentCorporation of South Africa Limited ("IDC") and the International FinanceCorporation ("IFC") to participate in the Project. During fiscal year 2005, theIDC and the IFC both informed the Company that, subject to certain conditionsprecedent, they would be exercising options under that framework agreement toacquire interests in KMT from CMD; and on November 1, 2005, the IDC and IFCsigned definitive agreements to acquire, respectively, 10% and 7.5% interests inKMT. Following the completion of these transactions, the Company's interest inKMT will be 65%. Under the CoA, KMT is to pay Gecamines a total of $15,000,000 as considerationfor the Tailings Exploitation Rights ("TER"): $5,000,000 was paid following thetransfer to KMT of the TER on May 27, 2004, and $10,000,000 will be paidfollowing the completion of all financing arrangements for the Project. The$15,000,000 is to be provided to KMT by CMD and other participating parties suchas the IDC and IFC based on their pro rata ownership of the Project excludingGecamines and GDRC's percentage ownership. Gecamines is to receive an annualdividend of the greater of its ordinary dividend and 2.5% of free cash flow (asdefined) for each year from start-up until senior debt and subordinated loans(including all interest thereon) have been fully reimbursed. Thereafter,Gecamines will be entitled to an annual dividend based on 10% of the averageprice realized for cobalt sold in a year in excess of $10.00 per pound (adjustedfor inflation) in addition to any ordinary dividend received by Gecamines,providing that ordinary dividends are paid in such year. CMD and the participating parties are to complete feasibility studies, carry outan environmental impact study, draw up an environmental management plan andobtain commitments for financing the Project by November 27, 2007 (a time periodof three years and six months from transfer date of the mining rights). (b) Democratic Republic of Congo: Quarries In 2005, the Company's subsidiary, Roan Prospecting and Mining Sprl, obtainedexploration rights for quarries in the DRC. The rights cover ten concessionareas: eight for limestone, and two for aggregates. The renewable licences havean initial term of one year. During the quarter ended January 31, 2006, theCompany began work on these licences. 2. Mineral properties (continued): (c) Angola: During the year ended October 31, 2001, the Government of Angola awarded twolicences to Endiama E.P. ("Endiama"), the Angola state mining company, forproperties to be explored and developed with the Company's wholly ownedsubsidiary, IDAS Resources N.V. ("IDAS"), a Netherlands Antilles company. Theseproperties are a prospecting licence which comprises approximately 2,690 km2 inthe Cuango River floodplain and an adjacent exploitation licence ("Camutue")which comprises approximately 246 km2. Both licences are in the Provinces ofLuanda-Norte and Malange, Angola. IDAS had been acquired by the Company in1998, and under the terms of the share purchase agreement, the vendors retaineda net profits interest equal to 20% of the profits, to a maximum of $56,000,000,resulting from IDAS' share of income from operations of its then Angola mineralproperties. The covered properties include the licence areas mentioned above."Profits" means the actual and distributable proceeds received by IDAS from theproperties, to be calculated based on international generally acceptedaccounting principles. During the year ended October 31, 2002, IDAS entered into a Heads of Agreementwith Endiama and Twins Ltd. ("Twins"), a company representing private sectorAngolan interests. The Heads of Agreement governed the ownership structurerelating to the two licences in Angola and the obligations of the parties. Theparties agreed to the formation of a new company (later agreed to be called "Luminas") which would exercise the mining rights. The financing of the projectwas to be undertaken by IDAS. IDAS was to own 51% of the share capital ofLuminas for the period of time that any loans to Luminas by IDAS remainedoutstanding. Endiama was to own 38% and Twins 11%. Once the loans had beenrepaid in full, IDAS was to own 49%, Endiama 38% and Twins 13%. IDAS alsoverbally agreed, and subsequently completed formal drafting of, arrangementswith Twins to ensure IDAS' continued voting control of Luminas. The Heads ofAgreement and a subsequent agreement entered into by the parties set out therepayment terms of the loans from cash flows and called for a minimum investmentof $1,500,000 by IDAS for each of the two licences. IDAS was to pay 10% of itsdividends to Endiama during the first eighteen months of production. The boardof directors of Luminas was to be comprised of five members of whom three wereto be nominated by IDAS. However, IDAS was unable to progress matters further,and the Company believes that Endiama has repudiated its contractualobligations. Consequently, the Company filed a legal suit against Endiama inTexas, USA, on May 18, 2005 citing breach of contract, negligentmisrepresentation and other causes of action, and requested damages includingloss of benefits, costs and expenses incurred in connection with IDAS's effortsto acquire and develop the licences, and professional fees. Legal actioncontinues to be pursued in the United States of America. 2. Mineral properties (continued): (d) Zambia: The Company held a prospecting licence, which covered approximately 950 km2 inthe Solwezi District in the Republic of Zambia. The Company applied for renewalof the licence in relation to a reduced area of 441 km2. This was received inOctober 2005 and is valid until September 30, 2006. 3. Mineral property evaluation costs: Amounts deferred in respect of mineral property evaluation costs consist of thefollowing: Democratic Republic of Congo - Kipushi evaluation costs: Amount Balance, October 31, 2005 $ 4,538,897 Capital equipment 91Consulting 57,427Exploration office and accounting 6,193Legal 145Salaries 21,925Travel 1,846 87,627 Balance, January 31, 2005 $ 4,626,524 During the year ended October 31, 1996, the Company entered into a two yearexclusive framework agreement (the "Gecamines Agreement") with Gecaminesrelating to the rehabilitation of the Kipushi zinc and copper mine in thesouthern region of the DRC. During the year ended October 31, 1998, the Companyreceived confirmation from Gecamines that because delays have occurred in theresearch of the definition of the mining and metallurgical treatment phase ofthe project, requirements for the completion of feasibility studies by theCompany will be delayed until a period of up to 12 months after the completionof this definition phase, such starting date to be agreed upon by the Companyand Gecamines, and which the Company now expects to be in 2006. 3. Mineral property evaluation costs (continued): As part of the Gecamines Agreement, the Company has agreed to prepare, at itsexpense, feasibility studies covering the rehabilitation and resumption ofproduction at the Kipushi Mine, various options for processing the copper-zincore, and an examination of the viability of the re-treatment of existingtailings. The Gecamines Agreement gives the Company the exclusive right toexamine the Kipushi Mine, to enter into joint ventures for ore processing andtailings processing, and to make suitable arrangements for the resumption ofproduction. The Gecamines Agreement does not give the Company any interests inthe Kipushi Project. The Company will only acquire interests in the KipushiProject if satisfactory results are obtained from the feasibility studies and ifagreements, both satisfactory and conforming with the New Mining Code, can benegotiated with Gecamines and the Government of the Democratic Republic ofCongo. The agreement also specifies that the Company and Gecamines will collaborate onexploration and development over the area of certain Gecamines concessions. On July 17, 2000, the Company entered into an option agreement (the "OptionAgreement") with the Zinc Corporation of South Africa Limited, since renamedKumba Base Metals ("Kumba"). Pursuant to the Option Agreement, Kumba had anoption to elect to earn up to a 50% interest in the Kipushi Project. During theyear ended October 31, 2001, following the performance of due diligence, Kumbaexercised its option to participate in the Kipushi Project. On execution of theoption, Kumba deposited the option fee of $100,000 into a joint account to meetexpenditures incurred in negotiating commercial agreements between the Company,Kumba and Gecamines. On January 30, 2002, the Company signed, and in November 2004 amended, a jointventure agreement with Kumba whereby Kumba can earn up to 50% of the Company'sinterest in the Kipushi Project by incurring $3,500,000 of expenditures on theProject, including the conducting of feasibility studies. Kumba is not obligedto conduct the feasibility studies until commercial agreements for therehabilitation and resumption of the Kipushi Mine have been entered into betweenthe Company, Kumba and Gecamines, security of tenure is achieved via anagreement with Gecamines, and Governmental approval is received. During 2003,Kumba deposited a further $100,000 into the joint venture account to meetexpenditures incurred towards achieving such an agreement. Kumba will berequired to fund the $3,500,000 of expenditures, less already recognizedexpenditures of $300,000 by Kumba, over a 28 month period commencing with thecompletion of these items, which must be no later than October 31, 2006,otherwise the agreement will terminate. 4. Share capital: (a) Share capital: Number of shares Amount Balance, October 31, 2005 70,940,022 $ 67,348,642 For options exercised cashlessly 80,309 133,995For options exercised conventionally 332,500 430,158For private placement, net of issuance costs 6,000,000 8,160,214 Balance, January 31, 2006 77,352,831 $ 76,073,009 (b) Share purchase warrants: Warrants outstanding at January 31, 2006: Balance BalanceOctober 31, January 31, Exercise Expiry2005 Issued Exercised 2006 price date 1,690,122 21,170 - 1,711,292 CDN$ 0.75 February 12, 2008 (c) Share options: Weighted average price Options outstanding, October 31, 2005 7,991,209 CDN$ 1.47Cancelled / expired (237,500) 1.46Exercised (582,500) 0.60 Options outstanding, January 31, 2006 7,171,209 CDN$ 1.55 There were no stock options granted during the quarter. During the quarter there were 332,500 options exercised in the conventionalmanner for total proceeds of CDN$199,500. In addition, 250,000 options wereexercised using the cashless exercise arrangement, and resulting in the issuingof a further 80,309 shares. There were also 205,000 unvested share options cancelled with an exercise priceof CDN$1.60 per share and 32,500 unvested share options cancelled with anexercise price of CDN$0.60 per share during the quarter. The Company recorded stock-based compensation expense of $103,011 as a result ofthe vesting of options granted in previous periods. 4. Share capital (continued): (d) Contributed surplus: Balance, October 31, 2005 $ 5,685,029 Stock-based compensation (note 4(c)) 103,011Transferred to share capital on exercise of stock options for cash (257,969)Transferred to share capital on cashless exercise of stock options (193,962)Balance, January 31, 2006 $ 5,336,109 5. Segmented information: The Company's operations are primarily directed towards the acquisition,exploration and development of mineral resource properties and represent asingle reportable segment. All material revenue of the Company is attributableto the corporate head office. Property, plant and equipment, including mineral properties and mineral propertyevaluation costs, by geographic area are as follows: January 31, October 31, 2006 2005 Property, plant and equipment by geographic area: Democratic Republic of Congo $ 27,898,425 $ 25,250,214Angola 1,214,391 1,214,391Zambia 1 1United Kingdom 273,187 34,831 $ 29,386,004 $ 26,499,437 6. Offer assessment costs: On January 18, 2006 First Quantum Minerals Ltd. ("First Quantum") announced anunsolicited offer to acquire all the outstanding common shares of the Company.Under the terms of the offer, the Company's stockholders would receive one FirstQuantum share for every 17.5 of the Company's shares held. In order to assessthe unsolicited offer, the Company appointed a Special Committee and engagedadvisors, which has resulted in $2,741,627 in costs being incurred during thequarter ended January 31, 2006. Subsequent to January 31, 2006, the Company'sBoard of Directors formally recommended that shareholders reject First Quantum'soffer. 7. Subsequent event: Subsequent to January 31, 2006, the Company announced that it had reached anagreement (subject to confirmatory due diligence, negotiation of definitivedocumentation, and approval of both companies' boards of directors) withMitsubishi Corporation ("Mitsubishi") for Mitsubishi to purchase a 14.9% stakein KMT in return for, among other things, payment to the Company of $37,500,000in cash, provision of $12,500,000 of shareholder loans to the Kolwezi project onthe Company's behalf and extension of completion guarantees to project leaders. This information is provided by RNS The company news service from the London Stock Exchange