AAA.L Regulatory News (AAA)

31 Jan 2006 07:01

Adastra Minerals Inc31 January 2006 Trading: TSX and AIM: AAA RESULTS FOR THE PERIOD ENDED OCTOBER 31, 2005 ADASTRA MINERALS INC.MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with theAudited Consolidated Financial Statements of the Company as at October 31, 2005and 2004 and for the years ended October 31, 2005, 2004, and 2003 and relatednotes (the "Consolidated Financial Statements") prepared in accordance withCanadian generally accepted accounting principles. The discussion is based onevents that have occurred up to December 22, 2005. Except as otherwise noted,all dollar amounts contained in this discussion and analysis and theConsolidated Financial Statements are stated in United States dollars.Additional information relating to the Company, including the Company's AnnualInformation Form ("AIF") is available on SEDAR at www.sedar.com. Board of Directors and Management's Responsibility The Consolidated Financial Statements, and all information in this annualreport, are the responsibility of management and have been approved by the Boardof Directors. The Board of Directors is responsible for reviewing and approving financialinformation contained in the annual report, including the management'sdiscussion and analysis, and overseeing management's responsibilities for thepresentation and preparation of the financial information, maintenance ofappropriate internal controls, management and control of major risk areas, andassessment of significant and related party transactions. The Board of Directors carries out its responsibility for the ConsolidatedFinancial Statements in this annual report principally through its AuditCommittee, whose members are all unrelated directors. The Audit Committeereviews the Company's Consolidated Financial Statements and other information inthe annual report, and recommends their approval by the Board of Directors. Financial information presented elsewhere in the annual report is consistentwith the audited Consolidated Financial Statements. Results of Operations - Year Ended October 31, 2005 Compared to Year EndedOctober 31, 2004 The Company incurred a net loss for the year ended October 31, 2005 of$2,618,476, or $0.04 per share, compared to a net loss of $4,210,173, or $0.06per share, in 2004. Stock-based compensation expense was $1,103,430 in 2005, compared with$3,004,106 in 2004. The year-on-year decrease was due both to fewer optionsbeing granted, and to fewer options vesting from grants that had been made inprior years. Administration expenses in 2005 of $3,000,577 decreased from $5,095,351 in 2004,due mainly to the decrease in stock-based compensation expense noted above.Eliminating the relevant stock-based compensation amount noted above from bothyears, administration expenses in 2005 totaled $1,897,147, compared to$2,091,245 in 2004. Decreases were noted in investor relations, salaries andwages, and transfer agent costs. These decreases were partly offset byincreases in professional fees and regulatory authority filing fees. Futureadministrative expenses are likely to increase as the Company's projectsprogress and the Company grows. Investor relations costs in 2005 decreased to $297,487 from $326,860 in 2004.This was primarily due to cost savings that resulted from advancing the date ofthe Company's annual general meeting ("AGM") in Toronto to coincide with one ofthe Company's major regular investor relations events in that city, and toreductions in other costs associated with the AGM. Investor relations costs areexpected to increase in preparation for the further financing that is expectedfor construction of the Kolwezi Project. Salaries and wages costs in 2005 decreased to $709,643 from $910,012 in 2004.The decrease was principally due to a higher proportion of salary costs beingcapitalized to mineral properties and mineral property evaluation costs, whichreflected the greater proportion of employees' time that was utilized on themining projects in 2005 than in the previous year. In addition, cash bonuseswere paid to officers of the Company in 2004, but none was paid during thecurrent year. Office and administration costs in 2005 decreased to $370,266 from $372,510 in2004. These costs are expected to increase when the Head Office moves to largerpremises in January 2006 to accommodate the additional staff needed as theCompany's activities grow. Transfer agent charges were $10,151 in 2005, compared with $15,217 in 2004 whenthere were some one-off costs relating to the Company's change of name. Professional fees in 2005 increased to $326,423 from $290,033 in 2004. Theincrease was attributed to both higher accounting and audit fees, and higherlegal expenditures due to the increased regulatory environment and a higherlevel of general business activity. Regulatory authority filing fees increased to $144,623 in 2005 from $134,339 in2004. This increase is due to the higher Ontario Securities Commission andToronto Stock Exchange ("TSX") fees that resulted from the increase in theCompany's market capitalization. The increase was partly offset by the lowerfees that resulted from the reduced number of share issuances during 2005. The benefit of higher interest rates obtained on cash deposits was more thanoffset by lower cash balances throughout the year, and, accordingly, interestincome decreased to $351,682 in 2005 from $364,569 in 2004. The Company recorded a foreign exchange gain in 2005 of $30,646, compared to aforeign exchange gain of $521,515 in 2004. The year-on-year decrease in thegain primarily reflects the reduction in the Company's cash balances held inBritish pounds and Canadian dollars, the overall strengthening of the US dollaragainst the British pound in 2005 (compared with a significant weakening in2004), and a smaller weakening of the US dollar against the Canadian dollar inthe current year than in 2004. The Company's functional currency is the US dollar. It also maintains bankaccounts in Canadian dollars and British pounds, as it incurs expenditures insuch currencies on an on-going basis. As at the end of its 2005 financial year,the Company's reported US$5.60 million cash balance was comprised of balances ofapproximately US$1.65 million, CDN$2.51 million, and £1.02 million. At that date, the exchange rates were approximately CDN$1.1771 = US$1.00 = £0.5637. Had the US dollar at that date been 10% lower against both the Canadian dollar and the British pound (i.e. the exchange rates to have been CDN$1.0701 = US$1.00 = £0.5125), then the Company's reported year end cash figure in US dollars would have been US$5.99 million. The Company's main priorities are its current Kolwezi and Kipushi Projects inthe Democratic Republic of Congo ("DRC") and the Angola Licences. In addition,during the last quarter of financial year 2005, the Company's 99.9% ownedsubsidiary Roan Prospecting & Mining sprl was awarded the subsurface explorationrights for cobalt and copper under the whole of the Kolwezi Tailings Projectlicence area. The Company will continue to evaluate new mineral propertyacquisition opportunities as they arise. Results of Operations - Year Ended October 31, 2004 Compared to Year EndedOctober 31, 2003 The Company incurred a net loss for the year ended October 31, 2004 of$4,210,173, or $0.06 per share, compared to a net loss of $3,538,579, or $0.10per share, in 2003. Stock-based compensation expense of $3,004,106 in 2004 (2003 - $1,870,310)accounted for the majority of the loss during the year. The expense resultedfrom the fair value of the granting of stock options during the year, as well asthe vesting of options that were granted in fiscal 2003 or earlier. The fairvalue of these options was, in each case, expensed in accordance with the newstandards of the Canadian Institute of Chartered Accountants ("CICA NewStandards"), which were adopted during fiscal 2003. The CICA New Standardsrequire that the fair value of all options granted or modified be expensedduring the period in which they vest. Administration expenses in 2004 of $5,095,351 increased from $3,732,468 in 2003,due mainly to the stock-based compensation expense noted above. Eliminating thestock-based compensation amount noted above, administration expenses in 2004totaled $2,091,245, compared to $1,862,158 in 2003, after the elimination ofstock-based compensation for that year. Increases were noted in investorrelations, office and administration, regulatory authorities filing fees, andsalaries and wages. These increases were partly offset by decreases inprofessional fees and travel and accommodation expenses. Investor relations costs in 2004 increased to $326,860, from $196,929 in 2003.The Company has devoted more resources to investor relations in 2004 as itsflagship Kolwezi project progresses towards major milestones and as theCompany's institutional shareholder base expands. The increase is also partlydue to the recording of a full year of consultancy costs for an externalinvestor relations firm that was engaged in late fiscal 2003. In addition, theCompany underwent a rebranding which included the changing of the Company nameand the redesign of its external website. Office and administration costs in 2004 increased to $372,510 from $321,650 in2003. The increase was mainly the result of higher insurance and rent costs.Insurance premiums have continued to rise as the Company increases in size,while the rise in rent costs is due mainly to weakening of the US dollar againstthe British pound. Office rent and many of the Company's other office andadministration costs are incurred in British pounds, and so the weakening of theUS dollar versus the British pound increased the reported US dollar amounts.The Company's functional currency is the US dollar. It also maintains bankaccounts in Canadian dollars and British pounds as it incurs expenditures insuch currencies on an on-going basis. As at the end of its 2004 financial year,the Company's reported US$16.3 million cash balance was comprised of balances ofapproximately US$7.1 million, CDN$5.2 million, and £2.7 million. At that date, the exchange rates were approximately CDN$1.2190 = US$1.00 = £0.5426. Were the US dollar at that date to have been 10% lower against both the Canadian dollar and the pound sterling (i.e. the exchange rates to have been CDN$1.1082 = US$1.00 = £0.4933), then the Company's reported year end cash figure in US dollars would have been US$17.2 million. Professional fees in 2004 decreased to $290,033, from $372,336 in 2003. Thisprimarily reflected a decrease in accounting costs. In financial year 2003, theCompany decided both to expense the 2002 audit fees and to accrue for the 2003audit fees, thus resulting in effectively a double expense in fiscal 2003. The2004 balance reflects only the accrual for the costs of the current (2004)year's audit. The decrease is also due to the 2003 amount having included theone-off costs for a financial model that was constructed for the Company. Regulatory authorities filing fees in 2004 increased to $134,339, from $15,600in 2003. This is due mainly to the costs of the Nomad agreement and otheron-going AIM costs that came into effect when the Company's shares were admittedfor trading on AIM. This occurred in late September 2003; and as such, only asmall portion of these costs was incurred during 2003, compared to a full yearcharge in 2004. TSX costs also increased, reflecting the Company's highermarket capitalization. Salaries and wages costs in 2004 increased to $910,012, from $887,739 in 2003.During 2004, acting on the Remuneration Committee's recommendations, the Boardawarded bonuses to, and revised the salaries of, a number of senior employees ofthe Company. There were no bonus awards in 2003. In addition, UK based HeadOffice staff are all now paid in British pounds and, as already mentioned, theUS dollar weakened against the British pound in 2004, thereby increasing theexpense amounts reported in US dollars. Travel and accommodation costs in 2004 decreased to $22,582, from $33,530 in2003, consistent with a decrease in the number of non-project related tripscompared to the previous year. Much higher average cash balances during most of the year resulted in anincrease in interest income to $364,569 in 2004, compared with $20,672 in 2003.Interest income is expected to be lower in financial year 2005 as cash balancesare expected to fall throughout the year, reflecting anticipated expenditures. Mineral property evaluation costs in 2004 decreased to $906, from $4,021 in2003, due to further reductions in such activity as the Company continues tofocus its efforts on progressing its existing projects. The Company recorded a foreign exchange gain in 2004 of $521,515, compared to aforeign exchange gain of $171,863 in 2003. The increase in the foreign exchangegain is consistent with the decline in the US dollar against both the Britishpound and Canadian dollar. The Company completed a prospectus offering at theend of September 2003, a private placement in January 2004, and warrants andoptions were exercised at various times during the year. The proceeds fromthese were received and, in part, held in Canadian dollars and British pounds,both of which currencies increased in value in relation to the US dollar in thelatter part of the 2003 financial year and over the 2004 financial year. Owingto the large sums of money involved, this caused large foreign exchange gains. Mineral Property Projects As at October 31, 2005, amounts capitalized in respect of mineral propertieswere $21,760,738. The increase, from $12,129,625 as at October 31, 2004, is theresult of exploration and development costs incurred during the year.Capitalized mineral property evaluation costs increased to $4,538,897 at October31, 2005, from $4,397,126 at October 31, 2004, reflecting net costs incurred inrelation to the Company's Kipushi Project. Kolwezi Project, DRC Since October 1998, the Company's subsidiary Congo Mineral Developments Limited("CMD") (incorporated in the British Virgin Islands) has signed and/or initialedvarious agreements with La Generale des Carrieres et des Mines ("Gecamines") and/or the Government of the Democratic Republic of Congo ("GDRC"), governing theterms of the Kolwezi Project (the "Project"). In March 2004, CMD, the GDRC, andGecamines signed a Contract of Association ("CoA") governing the Project and theownership and management of Kingamyambo Musonoi Tailings S.A.R.L. ("KMT"), thecompany incorporated earlier that month in the Democratic Republic of Congo toown the mining title to the tailings and develop the Kolwezi Project. Inaccordance with the CoA, the Tailings Exploitation Rights ("TER") have beentransferred to KMT. The Company initially owned 82.5% of KMT, with Gecamines and GDRC owing 12.5%and 5.0% respectively. The CoA recognizes the framework agreement entered intoby the Company in February 2003 for the International Finance Corporation ("IFC") and the Industrial Development Corporation of South Africa Limited ("IDC") toparticipate in the Project. During fiscal 2005, the IDC and IFC both informedthe Company that, subject to certain conditions precedent, they would beexercising options under that framework agreement to acquire interests in KMTand CMD; and on November 1, 2005 the IDC and IFC signed definitive agreements toacquire, respectively, 10% and 7.5% interests in KMT. On completion of thesetransactions the Company's interest in KMT will be reduced to 65%, and CMD isscheduled to receive approximately US$12 million in cash as consideration. Under the CoA, KMT is to pay Gecamines a total of $15,000,000 as considerationfor the TER: $5,000,000 was paid following the transfer to KMT of the TER on May27, 2004, and $10,000,000 will be paid following the completion of all financingarrangements for the Project. The latter amount is to be provided to KMT by CMDand other participating parties such as the IDC and IFC, based on their pro rataownership of the Project excluding Gecamines' and GDRC's shareholdings. Underthe CoA, during each year from the start of production until senior debt andsubordinated loans (including all interest thereon) have been fully reimbursed,Gecamines is to receive an annual dividend of the greater of its pro ratadividend entitlement and 2.5% of free cash flow (as defined). Thereafter,Gecamines will be entitled to its pro rata annual dividend entitlement plus, ifapplicable, an additional dividend reflecting 10% of the excess above $10.00(adjusted for inflation) of the average price per pound realized for cobalt soldin that year. CMD and the participating parties are to complete technical and commercialstudies of feasibility, carry out an environmental impact study, draw up anenvironmental management plan, and obtain commitments for financing the Projectby November 27, 2007 (a time period of three years and six months from thetransfer date of the TER). During 2005, work continued on the second stage of the Environmental and SocialImpact Assessment, and, in May 2005, an Environmental Adjustment Plan ("EAP")was submitted to the regulatory authorities in the Democratic Republic of Congo("DRC"). During August 2005, the Company received approval of the EAP from theDRC Ministry of Mines' Direction chargee de la Protection de l'EnvironnementMinier ("DPEM"). The letter accompanying the "favourable environmental opinion"noted that the work on the EAP had been very substantial and "particularlydiligent". The approval of the EAP is the official acknowledgement that theproposed development of Kolwezi satisfies the requirements of the DRC MiningCode, and associated regulations, and may proceed. Much of the necessary feasibility study work has been completed. In particular,the resource is clearly established: as too is the process flowsheet, followinga substantial and fully integrated pilot plant programme in 2000 - 2001 and amajor programme of scale-up and other testwork and on impurity removaloptimisation carried out during financial year 2005. In November 2004, a joint venture of Murray & Roberts and GRD Minproc completedthe first phase of the Definitive Feasibility Study ("DFS"), a scoping studyanalyzing different production levels. It was concluded that the initial designcapacity of the plant should be to produce 5,500 tonnes of cobalt and 30,000tonnes of copper annually, and work is now underway to complete the DFS on thatbasis. The DFS, which will estimate capital and operating costs to within +15%and -5% based on these levels is expected to be completed in March 2006. 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, including the issuing of a Preliminary InformationMemorandum to potential lenders to the Kolwezi Project. Capital expenditures toconstruct the Project are expected to be approximately $325 million, which theCompany anticipates financing by way of a combination of project debt and equityinterests and/or the issuance of debt and equity interests of the Company. During 2005, the Company appointed Sullivan & Cromwell to advise on the legalaspects of the financing of the Kolwezi Project, and Aon to advise on theinsurance aspects of the project. During August 2005, the Board of Directors of KMT unanimously resolved that KMTbecome a signatory of the Extractive Industries Transparency Initiative ("EITI"). The EITI's objective is improved governance in resource-rich countries,through the full publication and verification of all payments to governments bycompanies in the oil, gas and mining sectors, and a corresponding publication ofall receipts from these natural resource sectors by governments. The DRCGovernment has endorsed the EITI, and is currently considering how best toimplement the initiative. KMT will be the first mining company in the DRC tojoin the EITI. The costs to complete the DFS and the ESIA, and to progress the Project to ago-ahead decision, are expected to be funded from the IDC and IFC paymentsmentioned above and from the Company's existing resources, including the fundsfrom a Private Placement that was completed after the end of the 2005 financialyear. Further funding will, as mentioned, need to be raised if a decision ismade to proceed with construction and commercial production. Kipushi Project, DRC 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 Democratic Republic of Congo (the "Kipushi Project").During the year ended October 31, 1998, the Company received confirmation fromGecamines that, because delays have occurred in the research of the definitionof the mining and metallurgical treatment phase of the project, requirements forthe completion of feasibility studies by the Company will be delayed until aperiod of up to 12 months after the completion of this definition phase. TheCompany expects this starting date to occur during 2006. 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 zinc-copperore, 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, andif satisfactory agreements can be negotiated with Gecamines and the GDRC. Theagreement 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 Limited ("Kumba"). Pursuant to the Option Agreement, Kumbahad an option to elect to earn up to a 50% interest in the Kipushi Project.During the year ended October 31, 2001, following the performance of duediligence, Kumba exercised its option to participate in the Kipushi Project. On January 30, 2002, the Company signed, and has since twice amended, a jointventure agreement with Kumba. Under this, Kumba can earn up to 50% of theCompany's interest in the Kipushi Project by incurring $3,500,000 (less alreadyrecognized expenditure by Kumba of $300,000) of expenditures on the Project,including the conducting of feasibility studies. Kumba is not obliged tocontinue with 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. Kumba'sexpenditures are required to be over a 28 month period commencing with thecompletion of these items, which must be no later than October 31, 2006,otherwise the joint venture agreement will terminate. In fiscal year 2003, the Company and Gecamines agreed that priority should begiven to finalising the Kolwezi Contract of Association ("Kolwezi CoA").Following the execution of the Kolwezi CoA in March 2004, negotiations on theproposed revisions to the Kipushi Framework Agreement were planned torecommence. Meetings were, however, postponed until after the end of fiscalyear 2004, pending Gecamines' detailed review of, and response to, the proposalspreviously submitted by the Company. 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. Direct expenditures on the reassessmentare being shared equally with Kumba. This reassessment will be followed bynegotiations to finalize the revisions to the Gecamines Agreement. Onceagreement on the revisions has been reached, and necessary approvals have beenobtained from the government of the DRC, the Company expects that a fullfeasibility study of the project will be undertaken. Angola Licences 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 km(2)in the Cuango River floodplain, and an adjacent exploitation licence ("Camutue"), which comprises approximately 246 km(2). Both licenses are in the Provincesof Luanda-Norte and Malange, Angola. IDAS had been acquired by the Company in 1998, and under the terms of the sharepurchase agreement, the vendors retained a net profits interest equal to 20% ofthe profits, to a maximum of $56,000,000, resulting from IDAS' share of incomefrom operations of its then Angola mineral properties. The covered propertiesinclude the licence areas mentioned above. "Profits" means the actual anddistributable proceeds received by IDAS from the properties, to be calculatedbased on international generally accepted accounting 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, thestructure, and the other obligations of these parties, in the joint venture tobe formed to exercise the rights of exploration and exploitation of the twolicences in Angola. These included the formation of a new company ("Luminas")to exercise these rights, in which IDAS was to own 51% of the share capital forthe period of time that any loans to Luminas by IDAS remained outstanding.Endiama was to own 38% and Twins 11% of Luminas' share capital. The financingof the project was to be undertaken by IDAS. Once the loans had been repaid infull, IDAS was to own 49%, Endiama 38% and Twins 13%. IDAS also verballyagreed, and subsequently completed formal drafting of, arrangements with Twinsto ensure IDAS' continued voting control of Luminas. The Heads of Agreement,and a subsequent agreement entered into by the parties in December, 2002, setout the repayment terms of the loans from cash flows, and called for a minimuminvestment of $1,500,000 by IDAS for each of the two licences. IDAS was to pay10% of its dividends to Endiama during the first eighteen months of production.The board of directors of Luminas was to be comprised of five members, three ofwhom were to be nominated by IDAS. However, IDAS was unable to progress mattersfurther, and the Company believes Endiama has repudiated its contractualobligations. Consequently, the Company filed a legal suit against Endiama inTexas, United States of America in May 2005 citing breach of contract, negligentmisrepresentations and other causes of action, and requesting damages includingloss of benefits, costs and expenses incurred in connection with IDAS's effortsto acquire and develop the licences, and professional fees. Although theCompany has been advised by counsel that it has a strong case against Endiama,the outcome of litigation can never be predicted with certainty. Solwezi Property, Zambia The Company held a prospecting licence, covering approximately 950 km(2), in theSolwezi District in the Republic of Zambia, adjacent to the border of the DRCnear the Kipushi mine. A drilling and exploration programme carried out infinancial year 2000 concluded that, although economic grades were notencountered, the mineralization intersected was similar to the Kipushi depositand could indicate deeper mineralization. As the Company had not incurred anysignificant expenditures on the property since early in its 2000 fiscal year, itwrote down the property to $1 during the year ended October 31, 2002, inaccordance with Canadian generally accepted accounting principles. In 2004, the Company applied for a renewal of its then expiring licence inrelation to a reduced area of 441 km(2). This was received in October 2005,and is valid until September 30, 2006. Liquidity and Capital Resources As at October 31, 2005, the Company had cash and cash equivalents of $5,595,972,compared to $16,264,314 at October 31, 2004. Working capital as at October 31,2005 was $3,794,668, compared to $15,113,846 at October 31, 2004. Theyear-on-year decreases in cash and cash equivalents, and in working capital,were the result of the operating activities discussed above, and the investmentsmade in the Company's various Mineral Property Projects discussed below. Cash proceeds of $58,317 were received from exercises of stock options duringthe 2005 financial year. No warrants were exercised during the year.Subsequent to the balance sheet date, the Company completed a Private Placementof 6,000,000 common shares for gross proceeds of CDN$10,200,000. Total assets at October 31, 2005 were $32,581,947 (2004 - $33,278,894; 2003 -$26,396,636). The decrease in total assets during financial year 2005 is duemainly to cash expenses on administration costs exceeding the amount of interestearned, and minimal cash funding received, during the financial year. No cash dividends have been declared in any of the three most recently completedfinancial years. 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. However, management notes that its ability to finance additional exploration,other assessment and development work on its resource properties is contingenton the outcome of such activities, and the availability of financing in capitalmarkets: factors which may be beyond the Company's control. There can be noassurance that the Company will be able to continue to raise funds, in whichcase the Company may be unable to meet its obligations and commitments. Shouldthe Company be unable to realize on its assets and discharge its liabilities inthe normal course of business, the net realizable value of its assets may bematerially less than the amounts recorded on the Company's balance sheets, andinsolvency and liquidation, with a total loss to shareholders, could result. 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 March 2008. Thefollowing table lists as of October 31, 2005 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, and based ontheir pro rata ownership of the Project (excluding Gecamines and the GDRC), CMDand any other participating parties are committed to pay to Gecamines the$10,000,000 balance of the consideration for the TER. (The initial $5,000,000of the $15,000,000 total was paid during the 2004 financial year following thetransfer 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. Critical Accounting Estimates The Company follows the practice of capitalizing all costs related toacquisition, exploration and development of mineral properties and mineralproperty projects until such time as mineral properties are put into commercialproduction, sold or abandoned. If commercial production commences, thesecapitalized costs will be amortized on a unit-of-production basis. If themineral properties or projects are abandoned, the related capitalized costs areexpensed. On an ongoing basis, the Company evaluates each property and projecton results to date to determine the nature of exploration, other assessment anddevelopment work that is warranted in the future. If there is little prospectof future work on a property or project being carried out within a three yearperiod from completion of previous activities, the deferred costs related tothat property or project are written down to the estimated amount recoverableunless there is persuasive evidence that an impairment allowance is notrequired. The Company reviews its mineral properties and mineral property evaluation costsfor impairment based on results to date and when events or changes incircumstances indicate that the carrying value of the assets may not berecoverable. Canadian GAAP requires the Company to make certain judgments,assumptions, and estimates in identifying such events and changes incircumstances, and in assessing their impact on the valuations of the affectedassets. Impairments are recognized when the book values exceed management'sestimate of the net recoverable amounts associated with the affected assets.The values shown on the balance sheet for mineral properties and mineralproperty evaluation costs represent the Company's assumption that the amountsare recoverable. Owing to the numerous variables associated with the Company'sjudgments and assumptions, the precision and accuracy of estimates of relatedimpairment charges are subject to significant uncertainties, and may changesignificantly as additional information becomes known. There are currently noknown events that are believed to impact the Company's current assessment. The Company expenses all stock based payments using the fair value method.Under the fair value method and option pricing model used to determine fairvalue, estimates are made as to the volatility of the Company's shares and theexpected life of the options. Such estimates affect the fair value determinedby the option pricing model. The amounts that the Company records for future income tax assets andliabilities are based on various judgments, assumptions, and estimates. Theseinclude the tax rates and laws that will apply when the temporary differencesreverse, and the likelihood that the Company will generate sufficient taxableincome to utilize non-capital loss carry-forwards prior to their expiration.Owing to the numerous variables associated with such judgments, assumptions andestimates, and the effects of changes in circumstances on these valuations, theprecision and reliability of the resulting estimates are subject to substantialuncertainties and may change significantly as additional information becomesknown. There are currently no known events that are believed to impact theCompany's current assessment. Changes in Accounting Policies including initial Adoption During the year ended October 31, 2005, the Company adopted the CanadianInstitute of Chartered Accountants new Handbook Section 3110 "Asset RetirementObligations". The adoption of this accounting policy had no effect on theconsolidated financial statements; and there have been no other changes inaccounting policies that affect the October 31, 2005, consolidated financialstatements. Outstanding Share Data The Company has authorized an unlimited number of common shares without parvalue. Issued and outstanding shares as at October 31, 2005, were 70,940,022(2004 - 70,735,925) for a book value of $67,348,642 (2003 - $67,069,511). TheCompany also had a total of 1,690,122 (2004 - 1,679,656) share purchase warrantsoutstanding at October 31, 2005. All the warrants have an exercise price ofCDN$0.75 per share and an expiry date in February 2008. A total of 1,183,079(2004 - 1,175,755) share purchase warrants were vested as at October 31, 2005.In addition, as at October 31, 2005, the Company had 7,991,209 (2004 -6,126,000) share options outstanding, with a weighted average exercise price ofCDN$1.42 (2004 - CDN$1.46) per share, and a weighted average remaining life of3.53 years (2004 - 3.80 years). The weighted average exercise price of the6,025,401 (2004 - 3,961,000) options that were vested at October 31, 2005, wasCDN$1.50 (2004 - CDN$1.30). Related Party Transactions During the year ended October 31, 2005, the Company has paid or accrued anaggregate of $148,090 (2004 - $153,643; 2003 - $90,621) for legal services tolaw firms in which a director of the Company was a partner during the year. Inaddition, the Company has paid $3,000 (2004 - $3,000; 2003 - nil) for consultingservices to a non-executive director, and $9,860 (2004 - $5,607; 2003 - nil) forconsulting services and travel expenses to companies in which a director has aninterest or of which he is a director. Financial Instruments The carrying amounts of cash and cash equivalents, amounts receivable andaccounts payable and accrued liabilities approximate their fair values becauseof the short term to maturity of those instruments. Trend Information The Company is a natural resource company engaged in the acquisition,exploration and development of precious stones and precious and base metalmineral properties. The Company is in the process of exploring and evaluatingits mineral properties and projects, and has not yet determined whether itsproperties and projects contain ore reserves that are economically recoverable.Consequently, there is no production, sales, or inventory in the conventionalsense. The Company's financial success will be dependent upon the extent towhich it can discover mineralization, and the economic viability of developingsuch properties. Such development may take years to complete and the amount ofresulting income, if any, is difficult to determine with any certainty. Thesales value of any mineralization discovered by the Company is largely dependentupon factors beyond the Company's control such as the market value of the metalsor precious stones produced. The Company is not aware of any trends, uncertainties, demands, commitments orevents which are reasonably likely to have a material effect upon the Company'snet sales or revenues, income from continuing operations, profitability,liquidity or capital resources, or that would cause reported financialinformation not necessarily to be indicative of future operating results orfinancial condition. Off Balance Sheet Arrangements The Company has no off balance sheet arrangements. General Risk Factors The Company is exposed to a number of general risks that could impact its assetsand liabilities, financial position, and future prospects. Some risks aresubstantially outside the control of the Company. These include: • Changes in the general economic outlook may have an impact on the Company and its level of exploration and development activities. Such changes include: - adverse changes in cobalt, copper, zinc and diamond prices, and in exchange rates, reducing the economic viability of projects. - adverse changes in governmental regulations including those relating to prices, taxes, royalties, land tenure and use, the environment, remittability of foreign currency, and the importing and exporting of minerals. - weakness of the equity and share markets in Canada, the UK, and throughout the world. • Failure of counterparties to meet their obligations under sales contracts or joint venture agreements. • Civil unrest and armed conflicts, which have previously existed in the DRC and Angola. Exploration and Development Risk Factors Mineral exploration and development involves a high degree of risk, and fewproperties that are explored are ultimately developed into producing mines.There is no assurance that the Company's exploration and development activitieswill result in the establishing of commercial bodies of ore or minerals. Thelong-term profitability of the Company's operations will be in part directlyrelated to the cost and success of its exploration and subsequent evaluationprogrammes, which may be affected by a number of factors. These include: • The Angolan and Zambian resource properties in which the Company has an interest are in the exploration stages only, and are without a known body of commercial ore or minerals. Endiama has repudiated its obligations under the agreements with the Company regarding the Angolan interests. • Development of the Company's resource properties will only follow upon obtaining satisfactory results of property assessments. These assessments include the particular attributes of the mineral deposit (including, the quantity and quality of the ores, and the proximity to, or cost to develop, infrastructure for extraction); the cost of finance; mineral prices; and the competitive nature of the industry. • The economic feasibility of any individual project is based upon estimates of inter alia mineral reserves, recovery rates, production rates, capital and operating costs, and future mineral prices. Such estimates are based largely upon the interpretation of geological data and feasibility studies. It is possible that actual operating costs and economic returns may differ materially from those contained in feasibility studies. • The joint venture agreement on the Angolan project is subject to the ratification and approval of the Angolan Council of Ministers. • The agreement with Gecamines does not give the Company any interest in the Kipushi Project. The Company will only acquire an interest in the Kipushi Project if satisfactory agreements can be negotiated with Gecamines and the GDRC. • The Company's mineral operations are located in emerging nations, and consequently may be subject to a higher level of risk compared to developed countries. Operations, the status of mineral property rights, and the recoverability of investments would be affected by changing economic, regulatory and political situations in Angola and the DRC. Financing Risk Factors Substantial expenditures are required to establish reserves, to developprocesses to extract the resources and, in the case of new properties, todevelop the extraction and processing facilities and infrastructure at any sitechosen for extraction. In the absence of cash flow from operations, the Companyrelies on capital markets and joint venture and option agreements to fund itsexploration and evaluation and development activities. There can be noassurance that adequate funding will be available for these purposes whenrequired. The effects of all of these factors cannot be accurately predicted, but anycombination of them may result in the Company not receiving an adequate returnon invested capital. Outlook The Company's focus is on the evaluation of its existing Mineral PropertyProjects in the DRC and Angola. Subject to satisfactory exploration andfeasibility results and the availability of the required financing on acceptableterms, the Company intends then to develop the Mineral Property Projects. Specifically, the Company intends to: • complete a Definitive Feasibility Study including, inter alia, an Environmental and Social Impact Assessment on the Kolwezi Project, and progress negotiations with project financiers, engineering contractors, product off-takers and risk insurers, with the aim of being in a position to decide in the last quarter of Financial Year 2006 whether to proceed with construction; • negotiate, in association with Kumba, the necessary modifications to the framework agreement with Gecamines, and secure tenure with regard to the Kipushi Project; • through its joint venture with Kumba, conduct a feasibility study on a phased project for the Kipushi Project; • if Endiama remedies its repudiation of the agreements with IDAS, incorporate Luminas to commence evaluation of the Camutue exploitation licence and exploration of the Cuango River Floodplain prospecting licence at the earliest opportunity; failing which, continue to seek legal redress for such repudiation; • continue to evaluate new mineral property acquisition opportunities as they arise; • finance these activities through a combination of existing resources, debt or additional equity financings of the Company, and/or project debt or equity financings. Actual results in the future may differ materially from our present assessmentof the Company's position because future events and circumstances may not occuras expected. Evaluation of Disclosure Controls Management evaluated the effectiveness of the Company's disclosure controls andprocedures as of October 31, 2005, and concluded that, as of that date, theCompany's disclosure controls and procedures were effective. Cautionary Note Regarding Forward-Looking Statements This management's discussion and analysis contains forward-looking statements.These forward-looking statements are subject to a variety of risks anduncertainties which could cause actual events or results to differ materiallyfrom those reflected in the forward-looking statements, including, withoutlimitation, risks and uncertainties relating to political risks involving theCompany's operations in the DRC and the policies of other nations andorganizations towards companies doing business in such jurisdictions, theinherent uncertainty of production and cost estimates and the potential forunexpected costs and expenses, commodity price fluctuations, the inability orfailure to obtain adequate financing on a timely basis and other risks anduncertainties. Selected quarterly information and fourth quarter 2005 2004 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Administration $ $ $ $ $ $ $ $ $ $costs 901,893 894,322 397,080 807,282 3,000,577 867,828 2,321,152 973,368 933,003 5,095,351 Interest income $ $ $ $ $ $ $ $ $ $ 110,172 99,126 81,339 61,045 351,682 51,962 111,048 99,765 101,794 364,569 Other income $ $ $ $ $ $ $ $ $ $ - - - 288 288 - - - - - Mineral property $ $ $ $ $ $ $ $ $ $evaluation costs - 43 79 393 515 731 - 38 137 906 Foreign exchange $ $ $ $ $ $ $ $ $ $loss (gain) (49,904) 12,044 169,954 (162,740) (30,646) (102,716) 255,687 (272,468) (402,018) (521,515) Loss for period $ $ $ $ $ $ $ $ $ $ 741,817 807,283 485,774 583,602 2,618,476 713,881 2,465,791 601,173 429,328 4,210,173 Basic and diluted $ $ $ $ $ $ $ $ $ $loss per share 0.01 0.01 0.01 0.01 0.04 0.01 0.04 0.01 0.01 0.06 The principal factors underlying the variations in these quarterly results arethe timing of the granting of options, and exchange rate fluctuations(particularly in the value of the US dollar against the Canadian dollar andBritish pound). In addition, the Company made relatively large options grants inthe second quarter of the financial year 2004. There were no notable unusualevents or items in the fourth quarters of 2005 and 2004 that affected theCompany's results of operations for the respective quarters. Contact us:AdastraTim Read, President and Chief Executive OfficerTel.: +44 (0)20 7355 3552 Parkgreen CommunicationsJustine Howarth / Annabel LeatherTel.: +44 (0)20 7493 3713 EquicomMartti KangasTel.: +1 (416) 815 0700 Consolidated Financial Statements ADASTRA MINERALS INC.Consolidated Balance Sheets(Expressed in United States dollars) October 31, 2005 and 2004 2005 2004Assets Current assets: Cash and cash equivalents $ 5,595,972 $ 16,264,314 Amounts receivable and prepaid expenses 486,538 403,220 6,082,510 16,667,534 Equipment (note 3) 199,802 84,609 Mineral properties (note 4) 21,760,738 12,129,625 Mineral property evaluation costs (note 5) 4,538,897 4,397,126 $ 32,581,947 $ 33,278,894 Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities $ 2,287,842 $ 1,553,688 Non-controlling interest 8,750 8,750 Shareholders' equity: Share capital (note 6) 67,348,642 67,069,511 Contributed surplus (note 6(e)) 5,685,029 4,776,785 Deficit (42,748,316) (40,129,840) 30,285,355 31,716,456 $ 32,581,947 $ 33,278,894 Nature of operations (note 1)Commitments and contingencies (note 10)Subsequent events (notes 4(a) and 11) See accompanying notes to consolidated financial statements. ADASTRA MINERALS INC. Consolidated Statements of Operations and Deficit (Expressed in United States dollars) Years ended October 31, 2005, 2004 and 2003 2005 2004 2003 Administration costs: Amortization $ 11,783 $ 14,538 $ 17,065 Bank charges and interest 5,663 5,154 5,781 Investor relations 297,487 326,860 196,929 Office and administration 370,266 372,510 321,650 Professional fees 326,423 290,033 372,336 Regulatory authorities filing fees 144,623 134,339 15,600 Salaries and wages 709,643 910,012 887,739 Stock-based compensation (note 6(d)) 1,103,430 3,004,106 1,870,310 Transfer agent 10,151 15,217 11,528 Travel and accommodation 21,108 22,582 33,530 3,000,577 5,095,351 3,732,468 Other: Interest income (351,682) (364,569) (20,672) Gain on sale of property, plant and - - (375) equipment Other income (288) - (5,000) Mineral property evaluation costs 515 906 4,021 Foreign exchange gain (30,646) (521,515) (171,863) (382,101) (885,178) (193,889) Loss for the year (2,618,476) (4,210,173) (3,538,579) Deficit, beginning of year (40,129,840) (35,919,667) (32,381,088) Deficit, end of year $ (42,748,316) $ (40,129,840) $ (35,919,667) Basic and diluted loss per share $ (0.04) $ (0.06) $ (0.10) Weighted average number of common sharesoutstanding 70,724,737 68,690,978 37,116,816 See accompanying notes to consolidated financial statements. ADASTRA MINERALS INC.Consolidated Statements of Cash Flows(Expressed in United States dollars) Years ended October 31, 2005, 2004 and 2003 2005 2004 2003Cash provided by (used in): Operations: Loss for the year $ (2,618,476) $ (4,210,173) $ (3,538,579) Items not involving cash: Amortization 11,783 14,538 17,065 Gain on disposal of equipment - - (375) Stock-based compensation 1,103,430 3,004,106 1,870,310 Changes in non-cash operating working capital: Increase in amounts receivable and prepaid expenses (83,318) (114,323) (89,014) Increase in accounts payable and accrued liabilities 734,154 626,522 609,886 (852,427) (679,330) (1,130,707) Investments: Purchase of equipment (131,818) (78,659) (10,755) Proceeds on sale of equipment - - 375 Expenditures on mineral properties (9,577,322) (9,415,523) (1,647,028) Expenditures on mineral property evaluation (141,514) (65,486) (60,065) costs, net (9,850,654) (9,559,668) (1,717,473) Financing: Issue of share capital for cash, net 58,317 7,227,073 20,050,449 Cash settlement of taxes on option (23,578) - - exercises Investments by non-controlling interests - 8,750 - 34,739 7,235,823 20,050,449 Increase (decrease) in cash (10,668,342) (3,003,175) 17,202,269 Cash, beginning of year 16,264,314 19,267,489 2,065,220 Cash, end of year $ 5,595,972 $ 16,264,314 $ 19,267,489 Cash is defined as cash and cash equivalents and joint venture cash and cash equivalents. Supplementary information: Interest received, net $ 351,682 $ 364,569 $ 20,672 Warrants and stock-based compensation issued for mineral property consulting (note 6(e)), being a non-cash financing 49,206 225,980 225,000 and investing activity See accompanying notes to consolidated financial statements. Adastra Minerals Inc.Notes to Consolidated Financial Statements(Expressed in United States dollars)Years ended October 31, 2005, 2004 and 2003 1. Nature of operations: Adastra Minerals Inc., was incorporated under the laws of British Columbia and continued under the Business Corporations Act (Yukon) on August 11, 1995 and changed its name from America Mineral Fields Inc. to Adastra Minerals Inc. during the year ended October 31, 2004. The Company is a natural resource company engaged in the acquisition, exploration and development of precious and base metal mineral properties. The Company is in the process of exploring and evaluating its mineral properties and projects and has not yet determined whether its properties and projects contain ore reserves that are economically recoverable. The recoverability of amounts shown for mineral properties and mineral property evaluation costs is dependent upon the ability of the Company to obtain necessary financing (note 11) to complete the acquisition, exploration and development thereof, the Company entering into acquisition, joint venture or option agreements in respect of its projects, the discovery of economically recoverable reserves in the Company's mineral claims, confirmation of the Company's interest in the underlying mineral claims, and future profitable production or sufficient proceeds from the disposition thereof. A significant portion of the Company's assets and operations are located in emerging nations and consequently may be subject to a higher level of risk compared to developed countries. Operations, the status of mineral property rights, and the recoverability of investments in these emerging nations can be affected by changing economic, regulatory and political situations in Angola and the Democratic Republic of Congo. 2. Significant accounting policies: These consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles. A reconciliation of material measurement differences under accounting principles generally accepted in the United States and practices prescribed by the Securities and Exchange Commission is provided in note 12. (a) Basis of presentation and consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated on consolidation. (b) Foreign currency translation: The functional currency of the Company and its subsidiaries is the United States dollar as it represents the primary currency in which the Company operates. The Company follows the temporal method of translation for foreign currency transactions and translation of financial statements of operations that are denominated in a foreign currency. Under the temporal method, monetary items denominated in foreign currency are translated into US dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in income. 2. Significant accounting policies (continued): (c) Cash equivalents: Cash equivalents consist of highly liquid investments that are readily convertible to cash and generally have maturities of three months or less when acquired. (d) Equipment: Equipment is stated at cost. Amortization is provided using the straight-line method at the following annual rates: Asset Rate Exploration equipment 20% Office equipment 20% Automobiles 25% (e) Mineral properties: The Company follows the practice of capitalizing all costs related to acquisition, exploration and development of mineral properties until such time as mineral properties are put into commercial production, sold or abandoned. If commercial production commences, these capitalized costs will be amortized prospectively on a unit-of-production basis. If the mineral properties are abandoned, the related capitalized costs are expensed. On an ongoing basis, the Company evaluates each property based on results to date to determine the nature of exploration, other assessment and development work, if any, that is warranted in the future and the potential for recovery of the capitalized costs. If there is little prospect of future work on a property being carried out within a three year period from completion of previous activities, the deferred costs related to that property are written down to the estimated amount recoverable unless there is persuasive evidence that an impairment allowance is not required. The amounts shown for mineral properties represent costs incurred to date less write-downs and recoveries from third parties, and are not intended to reflect present or future values. Amounts recovered from third parties to earn an interest in the Company's mineral properties are applied as a reduction of the mineral property and deferred exploration costs. Overhead costs directly related to exploration are allocated to the mineral properties explored during the year and are deferred and are to be amortized using the same method applied to property-specific exploration costs. All other overhead and administration costs are expensed in the year they are incurred. (e) Mineral properties (continued): Under CICA Handbook Section 3061, "Property, Plant and Equipment", for a mining property, the cost of the asset includes exploration costs if the enterprise considers that such costs have the characteristics of property, plant and equipment. Emerging Issue Committee Abstract 126, " Accounting by Mining Enterprises for Exploration Costs", ("EIC-126") states that a mining enterprise that has not established mineral reserves objectively, and therefore does not have a basis for preparing a projection of the estimated cash flow from the property, is not precluded from considering the exploration costs to have the characteristics of property, plant and equipment. EIC-126 also sets forth the EIC's consensus that a mining enterprise in the development stage is not required to consider the conditions in Accounting Guideline No. 11 " Enterprises in the Development Stage" ("AcG 11") regarding impairment in determining whether exploration costs may be initially capitalized. With respect to impairment of capitalized exploration costs, EIC-126 sets forth the EIC's consensus that a mining enterprise in the development stage that has not established mineral reserves objectively, and, therefore, does not have a basis for preparing a projection of the estimated cash flow from the property, is not obliged to conclude that capitalized costs have been impaired. However, such an enterprise should consider the conditions set forth in AcG 11 and CICA Handbook Section 3061 in determining whether a subsequent write-down of capitalized exploration costs related to mining properties is required. The Company considers that its exploration costs have the characteristics of property, plant and equipment, and, accordingly, defers such costs. Furthermore, pursuant to EIC-126, deferred exploration costs would not automatically be subject to regular assessment of recoverability, unless conditions, such as those discussed in AcG 11, exist. The Company follows these recommendations and therefore the unproven mineral property claim costs are initially capitalized. Such assets are evaluated for impairment in accordance with the provisions of the CICA Handbook Section 3063, "Impairment of Long-Lived Assets". Mineral properties are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if, at the date it is tested for recoverability, the carrying amount of the mineral property exceeds the sum of the undiscounted cash flows expected to result from its production and/or eventual disposition. The impairment loss is measured as the amount by which the carrying amount of the mineral property exceeds its fair value. (f) Mineral property evaluation costs: The Company capitalizes costs related to evaluation of specified major mineral property projects to which the Company has contractual rights, but for which acquisition, joint venture or option agreements are not yet entered into, or which it is evaluating with a view to possible acquisition. These capitalized costs will be reclassified to mineral properties when acquisition, joint venture or option agreements are entered into or the Company otherwise secures its rights to the mineral properties. On an ongoing basis, the Company evaluates each mineral property project based on results to date to determine the nature of exploration, other assessment and development work that is warranted in the future, and the potential for recovery of the capitalized costs. If the Company is not successful in acquiring the mineral properties or in entering into joint venture or option agreements or abandons the project, the related capitalized costs are expensed. The amounts shown for mineral property evaluation costs represent costs incurred to date and are not intended to reflect present or future values. (g) Asset retirement obligations: During the year ended October 31, 2005, the Company adopted the Canadian Institute of Chartered Accountants new Handbook Section 3110 "Asset Retirement Obligations" ("HB 3110"). Under this new standard the Company recognizes the fair value of a future asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that results from the acquisition, construction, development, and/or normal use of the assets if a reasonable estimate of fair value can be made. The Company concurrently recognizes a corresponding increase in the carrying amount of the related long-lived asset that is depreciated over the life of the asset. The fair value of the asset retirement obligation is estimated using the expected cash flow approach that reflects a range of possible outcomes discounted at a credit-adjusted risk-free interest rate. Subsequent to the initial measurement, the asset retirement obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. Changes in the obligation due to the passage of time are recognized in income as an operating expense using the interest method. Changes in the obligation due to changes in estimated cash flows are recognized as an adjustment of the carrying amount of the related long-lived asset that is depreciated over the remaining life of the asset. Prior to the adoption of HB 3110, the Company had accounted for reclamation costs by accruing an amount associated with the retirement of tangible long-lived assets as a charge to operations over the life of the asset. The Company adopted HB 3110 retroactively with restatement of prior periods presented; however, the adoption of HB 3110 resulted in no changes to amounts previously presented. (h) Stock-based compensation: The Company has a stock option plan which is described in note 6(d). Effective November 1, 2002, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to the accounting for stock-based compensation and other stock-based payments. The new recommendations are applied prospectively. The Company expenses all stock-based payments granted on or after November 1, 2002, using the fair value method. Under the fair value method, stock-based payments are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable and are amortized over the vesting period. Consideration received on the exercise of stock options is recorded as share capital. (i) Income taxes: Future income tax assets and liabilities are determined based on temporary differences between the accounting and the tax bases of the assets and liabilities and for loss carry forwards, and are measured using the tax rates expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax asset if it is not more likely than not that the asset will be realized. At October 31, 2005, the Company's net future income tax assets are fully offset by a valuation allowance. (j) Loss per share: Basic loss per share is calculated based on the weighted average number of shares outstanding during the period. The treasury stock method is used for determining the dilutive effect of options and warrants issued in calculating diluted earnings per share. However, diluted loss per share is the same as basic loss per share when the Company is in a loss position. Shares held in escrow are excluded in the computation of loss per share until the conditions for their release are satisfied. (k) Disclosures about fair value of financial instruments: The carrying amounts of cash and cash equivalents, amounts receivable and accounts payable and accrued liabilities approximate their fair values because of the short term to maturity of those instruments. (l) Use of estimates: The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of estimates and measurement uncertainty include assessment of any valuation impairment of the mineral properties and projects and the determination of the existence and carrying value of future income tax assets and liabilities and the related valuation allowance. Actual results could differ from those estimates. 3. Equipment: Accumulated Net book 2005 Cost amortization value Exploration equipment $ 41,935 $ 41,935 $ - Office equipment 433,438 277,984 155,454 Automobiles 248,569 204,221 44,348 $ 723,942 $ 524,140 $ 199,802 Accumulated Net book 2004 Cost amortization value Exploration equipment $ 41,935 $ 41,935 $ - Office equipment 346,200 261,591 84,609 Automobiles 203,989 203,989 - $ 592,124 $ 507,515 $ 84,609 4. Mineral properties: Amounts deferred in respect of mineral properties consist of the following: 2005 DRC Kolwezi Angola Zambia Solwezi Total Deferred, net, October 31, $ 11,007,601 $ 1,122,023 $ 1 $ 12,129,625 2004 Capital equipment 4,625 - - 4,625 Consulting 5,344,925 1,200 - 5,346,125 Exploration office and 477,420 29,377 - 506,797 accounting Geology 214,949 - - 214,949 Interest received (15,583) - - (15,583) Legal 1,346,994 4,787 - 1,351,781 Salaries 1,405,160 55,724 - 1,460,884 Site management 6,042 - - 6,042 Travel 754,213 1,280 - 755,493 9,538,745 92,368 - 9,631,113 Balance, October 31, 2005 $ 20,546,346 $ 1,214,391 $ 1 $ 21,760,738 2004 DRC Kolwezi Angola Zambia Solwezi Total Deferred, net, October 31, $ 1,763,808 $ 719,595 $ 1 $ 2,483,404 2003 Capital equipment 4,718 - - 4,718 Consulting 1,830,284 6,233 - 1,836,517 Exploration office and 297,411 37,309 - 334,720 accounting Geology 172,071 - - 172,071 Interest received (43,142) - - (43,142) Legal 628,422 137,222 - 765,644 Salaries 853,780 136,674 - 990,454 Site management 8,777 - - 8,777 Tailings Exploitation Rights 5,000,000 - - 5,000,000 Travel 491,472 84,990 - 576,462 9,243,793 402,428 - 9,646,221 $ 11,007,601 $ 1,122,023 $ 1 $ 12,129,625 Balance, October 31, 2004 2003 DRC Kolwezi Angola Zambia Solwezi Total Deferred, October 31, 2002 $ 196,687 $ 402,738 $ 1 $ 599,426 Capital equipment 26,347 1,084 - 27,431 Consulting 457,820 40,413 - 498,233 Engineering 12,091 - - 12,091 Exploration office and 112,554 18,979 - 131,533 accounting Geology 27,452 23,573 - 51,025 Interest received (3,084) - - (3,084) Legal 435,832 72,534 - 508,366 Other 3,097 659 - 3,756 Salaries 364,217 32,644 - 396,861 Site management 31,802 42,864 - 74,666 Travel 98,993 84,107 - 183,100 1,567,121 316,857 - 1,883,978 $ 719,595 $ 1,763,808 $ 1 $ 2,483,404 Balance, net, October 31, 2003 (a) Democratic Republic of Congo: Since October 1998, the Company's subsidiary, Congo Mineral Developments Limited, (" CMD") has signed and/or initialled various agreements with La Generale des Carrieres et des Mines ("Gecamines") and/or the Government of the Democratic Republic of Congo ("GDRC"), governing the terms of the Kolwezi Tailings Project (the "Project"). In March 2004, CMD, GDRC and Gecamines signed a Contract of Association (the "CoA") governing the Project and the ownership and management of Kingamyambo Musonol Tailings S.A.R.L. ("KMT"), the company incorporated earlier that month in the Democratic Republic of Congo to own the mining title to the tailings and develop the Project. In accordance with the CoA, the Tailings Exploitation Rights to the Project have been transferred to KMT. 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 was entered into by the Company in February 2003 for the Industrial Development Corporation of South Africa Limited ("IDC") and the International Finance Corporation ("IFC") to participate in the Project. During fiscal year 2005, the IDC and the IFC both informed the Company that, subject to certain conditions precedent, they would be exercising options under that framework agreement to acquire interests in KMT from CMD; and on November 1, 2005, the IDC and IFC signed definitive agreements to acquire, respectively, 10% and 7.5% interests in KMT. Following the completion of these transactions, the Company's interest in KMT will be 65%. Under the CoA, KMT is to pay Gecamines a total of $15,000,000 as consideration for the Tailings Exploitation Rights ("TER"): $5,000,000 was paid following the transfer to KMT of the TER on May 27, 2004, and $10,000,000 will be paid following 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 such as the IDC and IFC based on their pro rata ownership of the Project excluding Gecamines and GDRC's percentage ownership. Gecamines is to receive an annual dividend of the greater of its ordinary dividend and 2.5% of free cash flow (as defined) 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 average price realized for cobalt sold in a year in excess of $10.00 per pound (adjusted for inflation) in addition to any ordinary dividend received by Gecamines, providing that ordinary dividends are paid in such year. C CMD and the participating parties are to complete feasibility studies, carry out an environmental impact study, draw up an environmental management plan and obtain commitments for financing the Project by November 27, 2007 (a time period of three years and six months from transfer date of the mining rights). (b) Angola: During the year ended October 31, 2001, the Government of Angola awarded two licences to Endiama E.P. ("Endiama"), the Angola state mining company, for properties to be explored and developed with the Company's wholly owned subsidiary, IDAS Resources N.V. ("IDAS"), a Netherlands Antilles company. These properties are a prospecting licence which comprises approximately 2,690 km2 in the Cuango River floodplain and an adjacent exploitation licence ("Camutue") which comprises approximately 246 km2. Both licences are in the Provinces of Luanda-Norte and Malange, Angola. IDAS had been acquired by the Company in 1998, and under the terms of the share purchase agreement, the vendors retained a 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 mineral properties. The covered properties include the licence areas mentioned above. "Profits" means the actual and distributable proceeds received by IDAS from the properties, to be calculated based on international generally accepted accounting principles. During the year ended October 31, 2002, IDAS entered into a Heads of Agreement with Endiama and Twins Ltd. ("Twins"), a company representing private sector Angolan interests. The Heads of Agreement governed the ownership structure relating to the two licences in Angola and the obligations of the parties. The parties agreed to the formation of a new company (later agreed to be called " Luminas") which would exercise the mining rights. The financing of the project was to be undertaken by IDAS. IDAS was to own 51% of the share capital of Luminas for the period of time that any loans to Luminas by IDAS remained outstanding. Endiama was to own 38% and Twins 11%. Once the loans had been repaid in full, IDAS was to own 49%, Endiama 38% and Twins 13%. IDAS also verbally agreed, and subsequently completed formal drafting of, arrangements with Twins to ensure IDAS' continued voting control of Luminas. The Heads of Agreement and a subsequent agreement entered into by the parties set out the repayment terms of the loans from cash flows and called for a minimum investment of $1,500,000 by IDAS for each of the two licences. IDAS was to pay 10% of its dividends to Endiama during the first eighteen months of production. The board of directors of Luminas was to be comprised of five members of whom three were to be nominated by IDAS. However, IDAS was unable to progress matters further, and the Company believes that Endiama has repudiated its contractual obligations. Consequently, the Company filed a legal suit against Endiama in Texas, USA, on May 18, 2005 citing breach of contract, negligent misrepresentation and other causes of action, and requested damages including loss of benefits, costs and expenses incurred in connection with IDAS's efforts to acquire and develop the licences, and professional fees. (c) Zambia: The Company held a prospecting licence, which covered approximately 950 km2 in the Solwezi District in the Republic of Zambia. The Company applied for renewal of the licence in relation to a reduced area of 441 km2. This was received in October 2005 and is valid until September 30, 2006. Mineral property evaluation costs: 5. Amounts deferred in respect of mineral property evaluation costs consist of the following: Democratic Republic of Congo - Kipushi evaluation costs: 2005 2004 2003 Balance, beginning of year $ 4,397,126 $ 4,331,137 $ 4,269,478 Capital equipment 257 503 - Consulting 115,935 - - Exploration office and accounting 27,167 11,896 15,273 Legal 24,634 12,086 43,689 Salaries 83,527 40,055 41,689 Travel 6,219 1,449 11,008 257,739 65,989 111,659 Contribution from joint venture partner (115,968) - (50,000) Balance, end of year $ 4,538,897 $ 4,397,126 $ 4,331,137 Democratic Republic of Congo: During the year ended October 31, 1996, the Company entered into a two year exclusive framework agreement (the "Gecamines Agreement") with Gecamines relating to the rehabilitation of the Kipushi zinc and copper mine in the southern region of the Democratic Republic of Congo. During the year ended October 31, 1998, the Company received confirmation from Gecamines that because delays have occurred in the research of the definition of the mining and metallurgical treatment phase of the project, requirements for the completion of feasibility studies by the Company will be delayed until a period of up to 12 months after the completion of this definition phase, such starting date to be agreed upon by the Company and Gecamines, and which the Company now expects to be in 2006. As part of the Gecamines Agreement, the Company has agreed to prepare, at its expense, feasibility studies covering the rehabilitation and resumption of production at the Kipushi Mine, various options for processing the copper-zinc ore, and an examination of the viability of the re-treatment of existing tailings. The Gecamines Agreement gives the Company the exclusive right to examine the Kipushi Mine, to enter into joint ventures for ore processing and tailings processing, and to make suitable arrangements for the resumption of production. The Gecamines Agreement does not give the Company any interests in the Kipushi Project. The Company will only acquire interests in the Kipushi Project if satisfactory results are obtained from the feasibility studies and if agreements, both satisfactory and conforming with the New Mining Code, can be negotiated with Gecamines and the Government of the Democratic Republic of Congo. The agreement also specifies that the Company and Gecamines will collaborate on exploration and development over the area of certain Gecamines concessions. On July 17, 2000, the Company entered into an option agreement (the "Option Agreement") with the Zinc Corporation of South Africa Limited, since renamed Kumba Base Metals ("Kumba"). Pursuant to the Option Agreement, Kumba had an option to elect to earn up to a 50% interest in the Kipushi Project. During the year ended October 31, 2001, following the performance of due diligence, Kumba exercised its option to participate in the Kipushi Project. On execution of the option, Kumba deposited the option fee of $100,000 into a joint account to meet expenditures incurred in negotiating commercial agreements between the Company, Kumba and Gecamines. On January 30, 2002, the Company signed, and has since twice amended, a joint venture agreement with Kumba whereby Kumba can earn up to 50% of the Company's interest in the Kipushi Project by incurring $3,500,000 of expenditures on the Project, including the conducting of feasibility studies. Kumba is not obliged to conduct the feasibility studies until commercial agreements for the rehabilitation and resumption of the Kipushi Mine have been entered into between the Company, Kumba and Gecamines, security of tenure is achieved via an agreement with Gecamines, and Governmental approval is received. During 2003, Kumba deposited a further $100,000 into the joint venture account to meet expenditures incurred towards achieving such an agreement. Kumba will be required to fund the $3,500,000 of expenditures, less already recognized expenditures of $300,000 by Kumba, over a 28 month period commencing with the completion of these items, which must be no later than October 31, 2006, otherwise the agreement will terminate. 6. Share capital: (a) Authorized: Unlimited common shares without par value. (b) Issued: Number of shares Amount Balance, October 31, 2002 32,132,820 $ 39,243,378 For private placement, net of issuance costs 4,000,000 1,187,892 (i) For prospectus, net of issuance costs (ii) 25,212,000 18,470,503 For warrants exercised (i) 700,000 392,054 Balance, October 31, 2003 62,044,820 59,293,827 For warrants exercised (i) 3,300,000 1,877,480 For broker warrants exercised (ii) 1,260,600 1,049,512 For private placement, net of issuance costs 3,500,000 4,192,635 (iii) For options exercised conventionally (note 6 225,000 256,161 (d)) For options exercised cashlessly (note 6(d)) 405,505 399,896 Balance, October 31, 2004 70,735,925 67,069,511 For options exercised conventionally (note 6 115,000 147,540 (d)) For options exercised cashlessly (note 6(d)) 89,097 131,591 Balance, October 31, 2005 70,940,022 $ 67,348,642 (i) In May 2003, the Company completed the placement of 4,000,000 units at a price of CDN$0.45 each, for gross proceeds of CDN$1,800,000. A cash finder's fee of 5% of the financing was paid. Each unit comprised one common share and a warrant to purchase one additional common share at a price of CDN$0.75 each. The warrants were to expire after five years, but were subject to an accelerated expiry period of 45 days, should the Company's shares trade for 20 consecutive trading days commencing after November 21, 2003 at a weighted average trading price of CDN$1.10 or more. This was triggered in December 2003, with the accelerated expiry date being February 2, 2004. 700,000 of these warrants were exercised in September 2003, for proceeds of CDN$525,000; and the remaining 3,300,000 were exercised during the year ended October 31, 2004 prior to the accelerated expiry date for proceeds of CDN$2,475,000. (ii) In September 2003, the Company completed a prospectus offering of 25,212,000 common shares of the Company at a price of CDN$1.10 per common share (or £0.50 per common share in the United Kingdom and other European jurisdictions) and applied for all the existing and to be issued common shares of the Company to be admitted to the Alternative Investment Market ("AIM") of the London Stock Exchange plc. The prospectus closed for net proceeds to the Company of $18,470,503. As part of the prospectus, the Company issued broker warrants to purchase an additional 1,260,600 common shares at a price of CDN$1.10 per common share exercisable until September 25, 2004. All of these broker warrants were exercised during the year ended October 31, 2004. (iii) In January 2004, the Company completed a private placement of 3,500,000 common shares at a price of CDN$1.60 per share, for gross proceeds of CDN$5,600,000. (c) Share purchase warrants: Balance, Balance, Exercise price October 31, 2004 October 31, $CDN Issued Expired Exercised 2005 Expiry date 1,679,656 10,466 - - 1,690,122 CDN$0.75 February 12, 2008 Balance, Balance, Exercise price October 31, October 31, $CDN Expiry date 2003 Issued Expired Exercised 2004 3,550,000 - (3,550,000) - - CDN$3.50 October 4, 2004 or earlier in certain circumstances 3,300,000 - - (3,300,000) - CDN$0.75 February 2, 2004 1,260,600 - - (1,260,600) - CDN$1.10 September 25, 2004 1,647,836 31,820 - - 1,679,656 CDN$0.75 February 12, 2008 9,758,436 31,820 (3,550,000) (4,560,600) 1,679,656 During the year ended October 31, 2003, the Company granted each of the IFC and the IDC (see note 4(a)) a warrant to purchase 823,918 common shares of the Company at a price of CDN$0.75 per share at any time between February 12, 2004 and February 12, 2008. The number of shares that may be purchased under each of the warrants had increased by 15,910 each by October 31, 2004 and a further 5,233 each by October 31, 2005 as a result of share purchase entitlements existing at February 12, 2003 that have since been exercised, and each may be increased further by a maximum 16,949 shares, assuming all share purchase entitlements existing at February 12, 2003 that were outstanding on October 31, 2005 are exercised in full. Warrants to purchase 329,567 shares for each of IFC and IDC vested on signing the agreement and a further 258,313 warrants vested for each during the year ended October 31, 2004 and 3,663 for each during the year ended October 31, 2005. The remaining warrants vest in one tranche upon reaching a certain milestone in the Kolwezi Tailings Project. The fair value of the warrants is being recorded upon their vesting using the Black-Scholes option pricing model. The warrants vested during the year ended October 31, 2003 had an estimated value of $225,000 assuming an expected life of 5 years, volatility of 136%, no dividend yield, and a risk free interest rate of 4.23%. The warrants vested during the year ended October 31, 2004 have an estimated value of $197,313 assuming an expected life of 3.83 years, volatility of 130%, no dividend yield, and a risk free interest rate of 2.28%. The warrants vested during the year ended October 31, 2005 have an estimated value of $5,346 assuming an expected life of 2.34 years, volatility of 84%, no dividend yield, and a risk free interest rate of 2.90%. These fair value amounts are included in consulting costs deferred in mineral properties and in contributed surplus. (d) Share options: On January 12, 1998 the Company adopted a stock option plan (the "Plan"), which was subsequently amended on April 29, 1999, on September 16, 2003, and on April 28, 2004. Under the Plan, the Board has sole discretion to award up to 13,100,000 options to directors and employees. The Plan states that: • the number of shares reserved for issuance pursuant to stock options granted to insiders may not exceed 10% of the Company's issued and outstanding share capital; • the issuance to any one insider and such insider's associates, within a one year period, of a number of shares cannot exceed 5% of the Company's issued and outstanding share capital; • the option exercise price shall not be less than the market value of the Company's shares at the date of grant; and • the maximum term of options granted is 10 years. Effective September 16, 2003, the Plan was amended to allow a cashless exercise of the options. Under this amendment, an option holder, rather than exercise options which he or she is entitled to exercise, may elect to terminate any such options, in whole or in part, and, in lieu of receiving shares to which the terminated options relate (the "Designated Shares"), receive that number of shares, which, when multiplied by the weighted average trading price of the shares on the Toronto Stock Exchange during the five trading days immediately preceding the day of termination (the "Fair Value" per share) of the Designated Shares, has a total dollar value equal to the number of Designated Shares multiplied by the difference between the Fair Value and the exercise price per share of the Designated Shares. The Plan terminates on March 19, 2007. However, the Board may terminate the Plan prior to this date providing that the termination does not alter the terms or conditions of any option granted prior to the termination. Details of options granted are as follows: Number Weighted average price of options (CDN$) Balance, October 31, 2002 2,270,000 $ 0.98 Granted 886,000 0.89 Cancelled / expired (225,000) (2.29) Balance, October 31, 2003 2,931,000 0.85 Granted 4,335,000 1.74 Exercised (1,065,000) 0.98 Cancelled / expired (75,000) 1.63 Balance, October 31, 2004 6,126,000 1.46 Granted 2,180,209 1.47 Exercised (315,000) 0.60 Balance, October 31, 2005 7,991,209 $ 1.42 The exercise price of all options granted equals or exceeds the market price of the stock at the close of the trading day immediately preceding the grant date. The following table summarizes information about the stock options outstanding at October 31, 2005: Weighted average Weighted average Exercise price (CDN$) remaining life exercise price (CDN$) Number $0.60 625,000 0.27 years $ 0.60 $0.75 586,000 2.47 years 0.75 $1.21 275,000 2.92 years 1.21 $1.35 1,885,209 4.98 years 1.35 $1.40 30,000 3.22 years 1.40 $1.50 610,000 3.07 years 1.50 $1.60 250,000 3.95 years 1.60 $1.80 3,495,000 3.53 years 1.80 $1.85 205,000 4.76 years 1.85 $1.95 30,000 4.18 years 1.95 7,991,209 3.53 years $ 1.42 As at October 31, 2005, 6,025,401 options were vested with a weighted average exercise price of CDN$1.50. Options vest at various dates over their period of grant. On January 4, 2005, the Company granted 30,000 options exercisable at CDN$1.95 per share expiring on January 3, 2010. A total of 15,000 options vested immediately on granting. The remaining 15,000 options will vest on January 4, 2006. On May 27, 2005, the Company granted 60,000 options exercisable at CDN$1.80 per share expiring on May 26, 2010. Of these, 40,000 have vested, and the remaining 20,000 options will vest on achieving a milestone related to the Kolwezi Tailings Project. On August 3, 2005, the Company granted 205,000 options exercisable at CDN$1.85 per share expiring on August 2, 2010. A total of 102,500 options vested immediately on granting, and the balance will vest on August 3, 2006. In September 2005, a total of 15,000 options were exercised in the conventional manner for total proceeds of CDN$9,000. In October 2005, 100,000 options were exercised in the conventional manner for total proceeds of CDN$60,000. In addition, a total of 200,000 options were exercised using the cashless exercise arrangement, and resulted in the issuing of a further 89,097 shares. On October 24, 2005, the Company granted 1,885,209 options exercisable at CDN$1.35 per share expiring on October 23, 2010. Of these, a total of 304,401 vested immediately, and a further 304,401 will vest on each of October 24, 2006, October 24, 2007, and October 24, 2008. The remaining 667,605 options will vest on October 24, 2008 according to the extent to which various performance objectives are achieved. The stock-based compensation reflected in the financial statements was calculated using the Black- Scholes option pricing model assuming risk free interest rates ranging from 2.23% to 3.57% (2004 - 2.23% to 3.44%), a dividend yield of nil, an expected volatility ranging from 84% to 133% (2004 - 105% to 133%), and expected lives of stock options ranging from three years to three and a half years (2004 - three years to three and a half years). The fair value of options existing as at September 16, 2003, the date of the amendment to the option plan to allow a cashless exercise, has been included in stock-based compensation as, for accounting purposes, these options are accounted for as new grants. (e) Contributed surplus: Granting of IFC and IDC warrants (note 6(c)) $ 225,000 Stock-based compensation (note 6(d)) 1,870,310 Balance, October 31, 2003 2,095,310 Granting of IFC and IDC warrants (note 6(c)) 197,313 Stock-based compensation (note 6(d)) 3,004,106 Stock-based compensation included in consulting costs deferred in mineral 28,667 properties Transferred to share capital on exercise of stock options for cash (148,715) Transferred to share capital on cashless exercise of stock options (399,896) Balance, October 31, 2004 4,776,785 Granting of IFC and IDC warrants (note 6(c)) 5,346 Stock-based compensation (note 6(d)) 1,103,430 Stock-based compensation included in consulting costs deferred in mineral 43,860 properties Transferred to share capital on exercise of stock options for cash (89,223) Transferred to share capital on cashless exercise of stock options (155,169) Balance, October 31, 2005 $ 5,685,029 Income taxes: 7 Substantially all of the difference between the actual income tax expense (recovery) of nil and the expected statutory corporate income tax recovery relates to losses not recognized. The tax effect of the significant temporary differences that would comprise future tax assets and liabilities at October 31, 2005 is estimated as follows: 2005 2004 Future income tax assets: Non-capital loss carry forwards $ 1,497,000 $ 805,000 Capital losses 386,000 384,000 Deferred mineral property expenditures 7,165,000 7,306,000 Property, plant and equipment 157,000 137,000 Share issue costs 146,000 220,000 Total gross future income tax asset, before valuation 9,351,000 8,852,000 allowance Valuation allowance (9,351,000) (8,852,000) Net future income tax assets - $ - The Company has non-capital losses carried forward in Canada of approximately $4.1 million (2004 - $1.9 million), which will expire in the year 2014 and 2015 that are available to reduce future years' income for income tax purposes, and capital losses of $2.1 million (2004 - $2.1 million) that are available indefinitely but can only be utilized against capital gains. In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The amount of the future tax asset considered realizable could change materially in the near term based on future taxable income during the carry forward period. 8. Related party transactions: During the year ended October 31, 2005, the Company has paid or accrued an aggregate of $148,090 (2004 - $153,643; 2003 - $90,621) for legal services to law firms in which a director of the Company was a partner during the year. In addition, the Company has paid $3,000 (2004 - $3,000; 2003 - nil) for consulting services to a non-executive director and has accrued $9,860 (2004 - $5,607; 2003 - nil) for consulting services and travel expenses to companies in which a director has an interest or of which he is a director. 9. Segmented information: The Company's operations are primarily directed towards the acquisition, exploration and development of mineral resource properties and represent a single reportable segment. All material revenue of the Company is attributable to the corporate head office. Property, plant and equipment, which includes mineral properties and mineral property evaluation costs, by geographic area are as follows: 2005 2004 Democratic Republic of Congo $ 25,250,214 $ 15,448,141 Angola 1,214,391 1,122,023 Zambia 1 1 United Kingdom 34,831 41,195 $ 26,499,437 $ 16,611,360 10. Commitments and contingencies: In addition to commitments and contingencies disclosed elsewhere in these consolidated financial statements, the Company is subject to the following items: (a) Commitments: The Company is committed to payments under a number of operating leases for various office premises and other accommodation through to March 2008. The following table lists as of October 31, 2005 information with respect to the operating leases: 2006 $ 161,000 2007 93,000 2008 30,000 $ 284,000 (b) Contingency: The Company agreed when it acquired IDAS (note 4(b)) to assume certain liabilities claimed by the former IDAS shareholders, subject to their verification by audit, agreement or arbitration. Certain of the Company's shares were issued to the former IDAS shareholders, as an advance payment on such debt and put in escrow, pending the outcome of the audit, agreement or arbitration. Although the Company issued shares as payment for part of this debt, the Company has disputed a significant portion of the amount claimed as owing to the former IDAS shareholders. As at October 31, 2005, 13,078 shares of the Company issued to settle this debt are held in escrow (2004 - 13,078) and the Company has not accrued in these financial statements for debts claimed by the former IDAS shareholders, aggregating approximately $246,000 (2004 - $246,000) as the Company has not been able to verify the debts. 11. Subsequent events: (a) Subsequent to October 31, 2005, 165,000 options to purchase common shares for cash were exercised, resulting in CDN$99,000 proceeds to the Company and 250,000 options were exercised using the cashless exercise arrangement, resulting in the issuing of a further 80,309 common shares. (b) The directors of the Company approved the adoption of a shareholder rights plan, dated November 30, 2005, (the "Rights Plan") that is intended to ensure that all shareholders of the Company are treated fairly in any transaction involving a potential change of control of the Company. The rights become exercisable only when a person or party acquires or announces its intention to acquire 20 per cent or more of the outstanding shares of the Company without complying with certain provisions of the Rights Plan. Each right would entitle each holder of common shares (other than the acquiring person or party) to purchase additional common shares of the Company at a 50 per cent discount to the market price at the time. Although the Rights Plan took effect immediately, the Company will ask its shareholders to ratify it at the next meeting of shareholders. The Rights Plan will expire if shareholder ratification is not obtained within six months of its date. If approved, it will continue in effect until the annual general meeting of shareholders in 2009. (c) On December 22, 2005, the Company completed a private placement of 6,000,000 common shares at CDN$1.70 per share for gross proceeds of CDN$10,200,000. 12. Reconciliation to United States generally accepted accounting principles ("US GAAP"): These financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). A reconciliation of material measurement differences under US GAAP or from practices prescribed by the Securities and Exchange Commission ("SEC") follows: (a) Stock-based compensation: For Canadian GAAP, effective November 1, 2002, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to the accounting for stock-based compensation and other stock-based payments. The new recommendations are applied prospectively. The Company expenses all stock-based payments granted on or after November 1, 2002, using the fair value method. As a result of applying this method, the Company has recorded stock-based compensation expense under Canadian GAAP of $1,103,430 for the year ended October 31, 2005 (2004 - $3,004,106; 2003 - $1,870,310). For US GAAP, the Company accounts for stock-based compensation provided to employees by the intrinsic value method and to non-employees by the fair value method. Pursuant to the Financial Accounting Standards Board EITF 00-23, Issue 31, options to employees granted or modified after January 18, 2001, including those having the cashless exercise feature, are accounted for as variable options as the exercise price of the options is denominated in a currency (CDN$) other than the currency of the primary economic environment of either the employer or employee. This comprises all options the Company has outstanding at October 31, 2005. The effect of variable option accounting is that compensation expense is recorded in each period for these options to the extent that the market price of the Company's shares as at each period end exceeds the exercise price, with changes in value recognized in the determination of income. In respect of variable options under US GAAP, stock-based compensation for the year ended October 31, 2005, would be $128,921 credit (2004 - $138,409 expense; 2003 - $828,220 expense). As the market price at October 31, 2002 was not greater than the exercise price of these options, the compensation expense for the year ended October 31, 2002 for these options is nil for US GAAP purposes. Stock options granted to non-employees for services rendered to the Company have been accounted for under US GAAP commencing with the Company's 1997 fiscal year based on the fair value of the stock options granted and are measured and recognized as the services are provided and the options are earned. This method is consistent with the method used by the Company under Canadian GAAP commencing November 1, 2002. The additional stock-based compensation expense in respect of stock options to non-employees under US GAAP, based upon the fair value of the options using an option pricing model, was nil for the year ended October 31, 2002 and was a cumulative amount of $205,553 from the year of adoption of FAS 123 to October 31, 2002. The differences between the application of the fair value method for Canadian GAAP and the intrinsic value and fair value methods, as appropriate, for US GAAP would result in a reduction in stock-based compensation expense of $1,232,351 for the year ended October 31, 2005 (2004 - $2,865,697; 2003 - $1,042,090), and a cumulative reduction of $4,934,585 as at October 31, 2005 (2004 - $3,702,234; 2003 - $836,537). With respect to escrowed shares, US GAAP generally considers escrowed shares releasable based on individual or corporate performance to be a compensatory arrangement between the Company and an officer, employee or director who is the holder of the shares. Accordingly, the difference between the market value of escrowed shares at the time the shares are eligible for release from escrow and the issue price of the shares is recognized and charged to operations as compensation expense in the period the escrowed shares are eligible for release from escrow. 375,000 common shares of the Company in escrow at October 31, 1997 became eligible for release during fiscal 1997 and, therefore, their fair value of $1,593,989 was charged to operations for US GAAP purposes in 1997. No charge was made or required under Canadian GAAP. (b) Shareholder contributions: During the year ended October 31, 1999, long-term debt payable of $375,000 to a significant shareholder was settled by the issuance of common shares. For Canadian GAAP purposes, the carrying value of the debt has been assigned to the shares issued. For US GAAP purposes, the fair value of the shares at the settlement date, being $94,984, would be assigned to the shares issued. The resulting gain of $280,016 would be recognized as a capital contribution since the creditor was a significant shareholder. As the resulting effect is a transaction within shareholders' equity, this difference is not presented separately in the attached tables. (c) Impairment of long-lived assets and long-lived assets to be disposed of: US GAAP requires that the carrying value of long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company is to estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. SEC staff have interpreted US GAAP to require that mineral property evaluation, exploration and land use costs be expensed as incurred until commercially mineable deposits are determined to exist within a particular property as cash flows cannot be reasonably estimated prior to such determination. Accordingly, for US GAAP purposes, the Company has expensed all mineral property and mineral property exploration costs as incurred. For Canadian GAAP, cash flows relating to mineral property exploration and land use costs are reported as investing activities. For US GAAP, these costs would be characterized as operating activities. (d) Reconciliation: The effect of the measurement differences between Canadian GAAP and US GAAP (including practices prescribed by the SEC) on the consolidated balance sheets, statements of operations and cash flows is summarized as follows: (i) Assets: 2005 2004 Assets, under Canadian GAAP $ 32,581,947 $ 33,278,894 Adjustment for mineral properties and mineral property evaluation costs (c) (26,299,635) (16,526,751) Assets, under US GAAP $ 6,282,312 $ 16,752,143 (ii) Share capital and contributed surplus: 2005 2004 Share capital and contributed surplus, under Canadian GAAP $ 73,033,671 $ 71,846,296 Adjustment for stock-based compensation (a) (4,934,585) (3,702,234) Adjustment for escrow shares (a) 1,593,989 1,593,989 Share capital and contributed surplus, under US GAAP $ 69,693,075 $ 69,738,051 (iii) Deficit: 2005 2004 Deficit, under Canadian GAAP $ (42,748,316) $ (40,129,840) Adjustment for stock-based compensation (a) 4,934,585 3,702,234 Adjustment for escrow shares (a) (1,593,989) (1,593,989) Adjustment for mineral properties and mineral property evaluation costs (c) (26,299,635) (16,526,751) Deficit, under US GAAP $ (65,707,355) $ (54,548,346) (iv) Loss and loss per share for the year: Years ended October 31, 2005 2004 2003 Loss for the year, under $ (2,618,416) $ (4,210,173) $ (3,538,579) Canadian GAAP Adjustment for stock-based compensation (a) 1,232,351 2,865,697 1,042,090 Adjustment for mineral properties and mineral property evaluation costs (c) (9,772,884) (9,712,210) (1,945,637) Loss for the year, under US $ (11,158,949) $ (11,056,686) $ (4,442,126) GAAP Basic and diluted loss per share, $ (0.16) $ (0.16) $ (0.12) under US GAAP Weighted average number of common shares outstanding 70,724,737 68,690,978 37,116,816 (v) Cash used in operating activities: Years ended October 31, 2005 2004 2003 Cash used in operating activities, under Canadian GAAP $ (852,427) $ (679,330) $ (1,130,707) Mineral properties and mineral property evaluation costs (c) (9,718,836) (9,481,009) (1,707,093) Cash used in operating activities, under US GAAP $ (10,571,263) $ (10,160,339) $ (2,837,800) (vi) Cash used in investing activities: Years ended October 31, 2005 2004 2003 Cash used in investing activities, under Canadian GAAP $ (9,850,654) $ (9,559,668) $ (1,717,473) Mineral properties and mineral property evaluation costs (c) 9,718,836 9,481,009 1,707,093 Cash provided by (used in) investing activities, under US $ (131,818) $ (78,659) $ (10,380) GAAP (e) Recent pronouncements: In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R "), which replaces FASB's SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met; those conditions are much the same as the related conditions in SFAS No. 123. SFAS No. 123R is effective for the Company commencing November 1, 2005. The Company has not completed its evaluation of the effect of adopting SFAS No. 123R on its reconciliation of material measurement differences under US GAAP. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of Adastra Minerals Inc. We have audited the consolidated balance sheets of Adastra Minerals Inc.(formerly America Mineral Fields Inc.) as at October 31, 2005 and 2004 and theconsolidated statements of operations and deficit and cash flows for each of theyears in the three year period ended October 31, 2005. These financialstatements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform an audit toobtain reasonable assurance whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Adastra MineralsInc. as of October 31, 2005 and 2004 and the results of its operations and itscash flows for each of the years in the three year period ended October 31, 2005in accordance with Canadian generally accepted accounting principles. As discussed in notes 2(g) to the consolidated financial statements, the Companychanged its method of accounting for asset retirement obligations in the yearended October 31, 2005. Canadian generally accepted accounting principles vary in certain significantrespects from accounting principles generally accepted in the United States ofAmerica. Information relating to the nature and effect of such differences ispresented in note 12 to the consolidated financial statements. KPMG LLP Chartered Accountants Vancouver, CanadaDecember 22, 2005 This information is provided by RNS The company news service from the London Stock Exchange